January 27, 2017
By by Laura McCrystal, Staff Writer for Philly.com
When the Archdiocese of Philadelphia two years ago announced plans to lease its 13 cemeteries to a private company, the deal was heralded as one to help the church recover from a dire financial situation.
Now, the Bucks County-based StoneMor Partners LP could be facing money problems of its own.
Its stock plummeted in the fall after the company slashed its quarterly dividend to shareholders. Investors claim in lawsuits they have been misled. Some municipalities and school districts are locked in battles with StoneMor over property taxes on the cemeteries.
The changes are worrying investors and giving new ammunition to local Catholics and funeral directors who in the past complained about aggressive sales tactics by the company, which oversees about 7,000 Catholic burials a year in the Philadelphia region.
"We just don’t want to see consumers taken advantage of if this company gets in even more financial distress,” said Paul Cavanagh, a director at Cavanagh Family Funeral Homes in Delaware County.
StoneMor executives have acknowledged a cash-flow problem. But the archdiocese calls its relationship with StoneMor a positive one. And both sides declare the partnership, locked in for decades, to be a success.
“Other than the cash drain, which we had anticipated, it’s a terrific acquisition, and we’re hoping to find other archdioceses that are willing to partner up with us,” StoneMor CEO Larry Miller told investors during a conference call in December.
To bring in more cash, StoneMor has started burying empty vaults purchased by Philadelphia-area Catholics who have not yet died -- a move that allows it to access money otherwise held in a trust until someone is buried. And the company plans to open its cemetery gates to non-Catholics.
In 2013, the Archdiocese of Philadelphia, which had always run its cemeteries, handed operations over to StoneMor, a publicly traded firm that owns or manages 317 cemeteries nationwide.
The 60-year lease called for the company to pay the church $89 million over 30 years. In return, StoneMor maintains the cemeteries, arranges burials, and sells plots, vaults, and caskets.
Within months of the deal, some local Catholics and funeral directors began complaining that StoneMor was misleading or harassing mourners with aggressive sales tactics at a time when many are most fragile or vulnerable.
Miller maintains such complaints were stirred by funeral directors simply concerned about new competition in selling caskets and burial vaults.
Ken Gavin, a spokesman for the Philadelphia Archdiocese, said the number of complaints that come in are largely consistent with what the archdiocese saw before leasing the cemeteries. He said church officials maintain “a positive working relationship” with StoneMor and have a right to inspect its records and monitor compliance with terms of the deal. “We communicate with them regularly regarding the cemeteries,” Gavin said.
Last year, StoneMor reported a decrease in cash flow, cut its dividend, and became the target of investor lawsuits.
Seeking to ease shareholder concerns, StoneMor executives used the December conference call to lay out plans to bolster their sales force and increase cash flow.
One solution they explained: Getting more money from Philadelphia-area Catholics before they die.
State law requires funds from cemetery sales made ahead of a person’s death to be held in a trust until a vault is delivered and installed, which traditionally occurs after the death. StoneMor has a practice of burying those prepurchased vaults at the cemetery long before the intended occupant’s death, giving it access to the trust funds.
In its call to investors, the company said it would begin burying the 3,700 vaults it sold in the last two years to Philadelphia-area consumers to cash in on $8 million in trust funds.
Miller defended that practice in an interview last week as “the right thing to do” because, he said, buried vaults secure and reinforce the ground at the cemetery.
“We did make a very conscious decision that we were not going to install vaults (in the Philadelphia-area cemeteries) for two years,” Miller told investors in December, according to a recording of the call posted on the firm's website. "We wanted to make sure that we were supported by the Catholic families, and we are, and we’re now installing those.”
It's not a fine-print issue. When StoneMor customers sign prepurchase contracts, they also sign paperwork authorizing delivery and burial of their empty vaults before they die, the company says.
Still, State Sen. Tommy Tomlinson (R., Bucks), who is a funeral director, said he believespre-delivery of vaults does not follow the law’s intent: to protect the consumer and keep their money safe until they need to be buried “They certainly are violating the spirit of the law,” Tomlinson said, “and they are not being consumer friendly.”
Sen. Tom McGarrigle (R., Delaware) introduced a bill last session that would have required all prepurchase money be kept in a trust until a person’s death. It passed the Senate but stalled in the House. He plans to reintroduce it this year.
“My goal is to ensure that merchandise which consumers purchase is available to them and in the condition they expect it to be when the time comes for it to be used for its intended purpose,” McGarrigle said in a statement last week.
Miller dismissed the opposition over burying empty vaults as a tactic from funeral directors frustrated that StoneMor is cutting into their business.
“When we took over the archdiocese cemeteries, we started to sell the merchandise, and that inflamed a handful of funeral directors,” he said. “And they’ve been fighting it ever since, trying to protect their turf.”
Miller also told investors in December that additional cash would come from opening burial gardens in the Philadelphia area Catholic cemeteries for non-Catholic Christians. In the interview last week, he said he still had plans to do so but provided no timeline for that move.
Gavin, the archdiocesan spokesman, said any such move must be approved by the archdiocese, and StoneMor “has not yet sought permission to do so.”
Some investors have expressed skepticism about StoneMor’s plans.
“There’s been no specificity, it’s basically been trust us, things haven’t worked so well recently, but they’re going to get better,” one, Jeffrey Schwarz of Metropolitan Capital Advisors, said in the Dec. 14 call. “I could be wrong, but I for one would love to see a little bit more meat on the bones.”
One lawsuit, filed in Philadelphia on behalf of a shareholder by the Berwyn-based Weiser Law Firm, calls StoneMor’s business model “a financial shell game” based on making false and misleading statements.
That and other lawsuits allege that StoneMor had to amend its financial reports last year because the Securities and Exchange Commission required it to stop relying on flawed metrics, and that their new reports resulted in lower revenue and distributable cash flow.
Miller said last week the lawsuits had “no merit.” He characterized investors’ allegations as confusion over StoneMor’s business model, because it relies heavily on pre-need sales.
“We have an enormously strong balance sheet,” Miller said. “The company is a very, very strong company.”
Gavin, the spokesman for the archdiocese, said the lease with StoneMor allows church officials to monitor the company’s records and compliance.
It also requires StoneMor to pay property taxes on the cemeteries where they are taxed, although the archdiocese must shoulder some of the tax burden for the first 11 years.
One such battle is ongoing in Delaware County, where the Marple Newtown School District claims the $1.85 million assessment for the 321-acre SS. Peter and Paul cemetery should be millions more than it is, and StoneMor claims the property deserves tax exemption as a religious worship site.
Similar cases are underway in Montgomery County, where StoneMor is challenging the county board of assessment's decision to revoke cemeteries’ tax-exempt status after they were leased to StoneMor.
Miller attributes the company’s decrease in cash flow to leasing the Catholic cemeteries in Philadelphia and costs associated with building up a sales force here. Despite the ongoing litigation and criticism, he said StoneMor officials remain confident and hope to make similar deals with other Catholic cemeteries across the country.
“We make attempts periodically to reach out,” Miller said, “because there’s a lot of archdioceses in financial trouble.”