Pinelawn: Forgotten but not Gone

For most people, their recollection of a cemetery is like my recent experience.  It was cold and overcast with a somber cloud hanging over everyone.  We weren't thinking of the real estate, but the deceased loved on, and making sure we could escape the maze of roads as we left.

Death, like real estate is a transaction most take part in a few times during their life.  When a parent or sibling passes we're confronted with the transactional details.  Where do they go, who pays for what, and possibly the consideration of whether the chosen cemetery is a worthy eternal resting place.

But cast in a different light a cemetery is a business with a limited and wasting asset.  It shouldn't come as a surprise to many that the cemetery business is sleepy and dated.  A friend of mine has a relative with a cemetery software start-up, and their business is booming.  These little cemeteries are dying to move off Windows 95 and Access to something more modern for their property management.  The level of outdatedness is hard to understand until you brush up against it.

Which in a way brings us to Pinelawn (PLWN), a mostly forgotten stretch of land on Long Island that's been paying owners for a century.

Have you ever considered the economics of a cemetery? It fits Buffett's businesses-that-will-be-around-in-a-decade filter because the organization has to purchase land, and then as people die slowly fill the land with residents.  The residents pay a one time admittance fee, but no recurring rental.  And while we can be a barbaric culture we do still have enough sense to honor the dignity of the dead, and because of that we don't re-use cemetery land.  Once a cemetery, always a cemetery.

At the end of the 19th century it was popular to be a founder of a startup cemetery.  You'd raise capital from future residents and then make a land purchase and live off the proceeds.  And just like the vaporware startups there were plenty of vaporware cemeteries with grand visions that were simply a vehicle to raise capital before disappearing into the Victorian crowd.

Pine Lawn raised their initial capital and purchased a plot of land in what eventually became Farmingdale, NY.  The way the cemetery was organized eventual residents pre-purchased shares for their plots and in return were promised that they'd receive 50% of the plot sale proceeds as dividends until the cemetery was full.

Initial management wasn't the most honest bunch, and refused to pay out dividends to plot-holders.  Plot holders sued and the court forced the cemetery to honor their initial obligation, and they've been doing so for the past 116 years.

In the past year the cemetery has paid out dividends that come out to around a 10% yield on the stock.  But I should note, it isn't really a stock, it's more of an association, or a royalty trust with proceeds from the land sales.

Shares were passed down from owners to heirs, and eventually found their way onto the OTC Markets.  From there it's anyone's guess.

Potential shareholders need to ask how many plots are left.  An exhaustion of plots means the revenue spigot is stopped.  One has to wonder if crematory services count towards plot sales as well.  A little Google Maps sleuthing shows that the cemetery isn't entirely full, but it's impossible to know how many empty plots have been pre-sold.

While the 10% dividend might be attractive the stock could still be overvalued if the land is close to exhaustion.  It's in cases like this where a discounted cash flow (DCF) valuation fits.  There is a terminal value of zero, and a finite period of time until that terminal value.  All one needs to do is determine the plots available, annual sale rate, and plug in the numbers to build out the rest.

The yield might seem great, but if the plots are completely sold in less than ten years then this is overvalued.  And in a case where information is impossible to find it's probably that retail investors are buying for the dividend and could be caught off guard if the trust stops paying.  Which brings up an interesting footnote.  The trust was sued 100 years ago for failing to pay the correct amount to shareholders.  Without audited financials, or any financial information from the cemetery how are shareholders to know if they're paying the correct amount not? Or whether they've been paying the correct amount for the last 100 years?

Without any special insight into the cemetery's capacity I will hold off on determining a valuation for now.  But without a doubt this is something worth looking into, and if you're on Long Island maybe take a drive past and consider whether you'd like to share in the profits as the cemetery fills up.

Pinelawn first appeared in the Oddball Stocks Newsletter.  The best information is available there before it ever appears here.  If you don't want to miss out subscribe today.

Disclosure: No position