Shifting Contract Metrics And Values At StoneMor Partners, L.P. by Luma Asset Management
Funds for which Luma Asset Management consults believe the limited partnership units of StoneMor Partners (which we refer to as the “partnership” or the “Company”) are substantially overvalued in the public market. We have taken a short position in the partnership units and will make money if the price of the limited partnership units decreases in the market.
On March 20, 2016, we published a comprehensive note – which is available here – that described our reasons for believing that an investment in StoneMor involves substantial investment risk. We updated this view after the Company announced its First Quarter 2016 results and added additional concerns in a report we published on May 16, 2016, which is available here.
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As a reminder, StoneMor operates both cemeteries and funeral homes. It sells products and services for both segments on both a pre-need basis (i.e. before death as people plan ahead) and an at-need basis (i.e. at the time of dealth).
This report covers yet another, new source of concern for us regarding StoneMor: its changing disclosures on the number and value of customer contracts.
StoneMor Partners, L.P.
Without any public announcement of which we are aware, StoneMor has now disclosed new calculation methods, substitute metrics and/or new numbers for a substantial number of historical financial and operating metrics. In each case, the prior number was filed in an SEC filing, presumably after a careful determination that it was a relevant metric for unit holders. The new numbers and metrics (which in some cases are a re-calculation of the old metric, now producing a new result, and in other cases is a new way to calculate a similar metric) have also been disclosed in documents filed with the SEC. Yet, no explanation of the rationale for changing the disclosure or calculation has been provided, in most cases.
In our experience, companies that shift their disclosures and calculation methods do so for a reason. Sometimes, that reason is that the old metric no longer represents a relevant metric because the business has changed or investors are focused on new drivers of success. But sometimes when companies change their disclosure they do so to obfuscate weak performance or complicate the ability of analysts to understand the operating performance of the business. We are concerned that StoneMor may be an example of the latter.
In fact, StoneMor has changed so many of its disclosures and metrics over time that it is nearly impossible, we submit, to fully analyze and comprehend the business. Rather than adding clarity or transparency, the continuous shift in disclosure and calculation methodologies merely complicates the task of understanding the performance of the Company.
In this report, we focus on just one area in which StoneMor has changed its disclosure format, leading to confusing and complex issues.
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For many years, StoneMor provided a table in its SEC filings that seemingly provided information on all the contracts it signed – the at-need contracts as well as the pre-need contracts, in both the funeral and the cemetery parts of its business. Beginning with its 2015 annual report, however, the Company shifted its disclosure and now (seemingly) only provides information on the contracts signed in the cemetery part of the business.
We have been unable to locate any explanation for why the Company now believes the aggregate contract counts and values are no longer relevant to unit holders. In removing the funeral side of the business from the disclosure, more than $230 million of contract value has suddenly disappeared from the table, making it difficult to analyze trends and the ongoing adjustments the Company makes in preparing its pro forma “production-based” revenue disclosures.
By comparing the tables from the last two annual reports, one can determine the number of contracts removed from the disclosure, and the value of those contracts. Presumably, the contracts that have been removed were removed because they are not “cemetery” contracts and are, instead, funeral home contracts.
The implied number of funeral contracts and the value of those contracts are a real head-scratcher. For example as highlighted above, the difference in the two annual report disclosures suggests that in 2011, StoneMor signed just 214 pre-need funeral home contracts (at its 60-odd funeral homes that year) but that those contracts had total value of $34.6 million (i.e. the difference between $157.4 million in “aggregate pre-need contracts” and $122.8 million in “pre-need cemetery contracts”). That implies that, on average, the 214 pre-need funeral contracts were each worth an astounding $161,000. (But, the average funeral call generates just $4000.) How could this be?
A line-by-line comparison of the disclosures from the 2015 annual report and the 2014 annual report (which is shown below) is striking in many respects. Presumably, the Company removed its funeral contracts from the table, so the contract counts and values that have been excluded in the 2015 annual report should represent the funeral business. And yet, the numbers make little sense.
In reviewing the contract numbers and values that have now been excluded from the StoneMor disclosures, there are a number of questions for investors and management:
- Why did StoneMor elect to exclude these contracts from its disclosures beginning with its 2015 Annual Report?
- Did non-cemetery contracts (presumably funeral home contracts) really grow more than seven-fold in three years from 992 contracts in 2011 to 7660 contracts in 2014? Over that period, the number of funeral homes operated by the Company grew by approximately 50%. If these contracts were indeed funeral home contracts, why didn’t management highlight this tremendous growth in the funeral segment over this period during its earnings calls? If, on the other hand, some of what is being left off the new table in contract counts or value is something other than funeral home contracts, why hasn’t the Company explained its methodology or updated approach to counting and valuing contracts it previously disclosed?
- In 2012, did the Company really sign 945 pre-need funeral home services contracts with an average value of $37,238? What services and products are these people buying? Why can’t this experience be replicated? Why has the average funeral home contract been dropping in value so precipitously from $37,238 in 2012 to a mere $9050 in the Second Quarter 2015? Why does the Company only generate $4000 per funeral call when the average contract signed from 2011 to the Second Quarter 2015 is for nearly $12,000 according to these disclosures?
- In 2011, the funeral home segment appears to have signed $42.6 million in contracts. Yet, in its earnings release for 2011, the Company said the “production-based” revenue for the funeral home segment was just $31.2 million. What explains the discrepancy?
- The Company has disclosed that in 2014, the Company performed 14,900 funeral calls. According to the contracts dropped from the annual report disclosures, however, only 2076 at-need, non-cemetery contracts were signed during 2014. Does that mean that more than 12,000 of the funerals performed were the result of pre-need contracts? If so, there does not appear to be sufficient volume of pre-need funeral contracts being signed, according to the changes in the tables, to sustain that level of activity.
Could it be that the contracts removed from the disclosure schedule are not all funeral home contracts? Or, perhaps, that some of the funeral contracts remain in the disclosure table? Or perhaps that funeral services are performed without a contract? Or that the Company has re-valued some of its cemetery contracts without telling unit holders that it was changing the valuation and without posting new “production-based” revenue numbers for prior periods? It is simply impossible to know – or at least very difficult to know – from the lack of disclosure and the shifting numbers.
With substantial questions about the contract counts and values that result from the shifting disclosure, it is extremely complicated to verify that the “production-based” revenue upon which management would have unit holders rely is calculated accurately or that it too has not been the subject of shifting definitions and measurement approaches. These “production-based” revenue numbers are not audited and, to the best of our knowledge, there is no third-party verification of the calculation methodology. With substantial questions raised about the way the Company is counting and valuing contracts, we do not believe unit holders should rely on the “production-based” system of accounting either.
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This is just one area in which the Company’s shifting disclosure raises serious questions. In later reports, we will cover more of the shifting disclosure tables, metrics and calculations that make analyzing StoneMor nearly impossible. (In our last report, we showed how the Company has calculated its so-called “Distribution Coverage Quarters” in different manners in different filings, yielding inconsistent results even for the same year.) Similar inconsistencies exist in other non-GAAP disclosure items.
We have a number of other concerns that we will further research and write about in the future that relate to the underlying business and financial practices at StoneMor. More on those concerns, later.
In the meantime, we remain highly skeptical that an investment in the partnership units is a good one. We believe one cannot properly analyze the partnership’s performance over time, given the lack of disclosures and the shifting disclosures. We encourage investors to be extremely cautious about investing in the units. As noted, we have a short position in the units and will profit if they decline in value.
Luma Asset Management and its clients have sold short the partnership units of StoneMor Partners. Luma will likely generate profits if the units go down in value. Please be advised that this report in issued solely for informational purposes and should not be construed as investment advice or as any solicitation, offer, or recommendation to buy or sell any of the securities referred to herein. All information contained in this report is impersonal and is not tailored to the investment strategy of any specific person. Moreover, all opinions and analyses included herein are based on publicly available information and on sources believed to be reliable and written in good faith, but no representations or warranties, expressed or implied, are made as to their accuracy, completeness, timeliness, or correctness. Neither Luma Asset Management nor its information providers shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or any delay or interruption in, the publication thereof. This report is for the internal use of Luma Asset Management’s clients only. Any external use, including, but not limited to, reproducing, copying, displaying, transmitting, distributing or selling this report is prohibited without express prior written consent; provided, however, that a client may share this report with its legal and financial advisors.