StoneMor Partners' CEO Hosts Investor Day Conference (Transcript)

Nov.19.13 | About: StoneMor Partners (STON)

StoneMor Partners LP (NASDAQ:STON)

Investor Day Call

November 18, 2013 09:30 ET

Executives

Lawrence Miller - Chairman, President and Chief Executive Officer

Tim Yost - Chief Financial Officer

Bill Shane - Vice Chairman

Ray Smith - Vice President, Marketing

John McNamara - Director, Investor Relations

David Spungen - Chief Executive Officer, Hillview Capital Advisors

Lawrence Miller - Chairman, President and Chief Executive Officer

Thank you, John. Thank you all for coming today. John was supposed to read this, but he didn’t, so I will just flash it up here, our forward operating looking statement whatever and we may say some things that might get us in trouble, so we will try and be careful.

With me today just sort of kind of brief introductions, Tim Yost is our Chief Financial Officer. Tim will give a presentation after me on the financial statements. Bill Shane is currently one of our directors. Bill was my partner since the late 70s. He was our Chief Financial Officer till a year or so ago. Bill is going to talk a little bit about acquisitions. He and I have done so many acquisitions. We thought he would be really appropriate to come up and tell you a little bit about our acquisition strategy since it’s such an important part of the company. I think then David Spungen will – yes, David will be up, we get a lot of questions. Obviously, one of our biggest assets, the biggest asset is our investment in our trust funds, which is well over $700 million today. So we often get questions on the company’s philosophy, strategies and as you have heard us before, you know that the management does not manage those bonds. We have subcommittee on our board. The board is responsible, but we have a trust committee that they delegate to and they work closely with David’s firm Hillview Capital to help the company determine the appropriate investments. They help us with the reporting. And then they also stay on top of all of the managers that we have managing our money to make sure that things are still going the way they are supposed to go.

After that, Ray Smith, again, Ray is our Vice President of Marketing. This is a big day for Ray. We normally don’t give him more than two or three minutes, but we thought we would – again, we get a lot of questions. We generate a lot of revenue and earnings from our trust funds, but 40% of our revenue comes from our pre-need funerals, pre-need cemetery sales. And we do get a lot of questions on how the company markets. So we thought it would be very helpful to have Ray here give a brief presentation. And then he is not speaking today, but over on the far left is David Meyers we give a chance to say hello to David. As you know, we announced a short time ago that Mike Stache, our current Chief Operating Officer will be retiring at the end of the year and after an excruciatingly painful search process, we hired David and David will be – he is full-time now in Philadelphia and he will take over January 1.

And then one other fellow from the company is here, Bob Hellman. Bob is our lead director. Bob’s firm was actually our original sponsor back in 1999. Bob has in addition to staying very active and helpful to the StoneMor, has put together some funds where they are investing in other companies today and actually doing what StoneMor did and taking a traditional C-Corp and turning it into a successful MLP and hopefully generating lots of return for shareholders. Though if we do get any questions on the MLP world, I think Bob is considered an expert today, so we can defer to him.

I am going to give you a brief overview on the company kind of high level stuff. As I said, Tim will talk about some financial – some of the financial aspects and then we will talk about acquisitions, trust funds and marketing. Again, we will do questions at the end of each segment. If you really have a burning question or I have misstated something or you don’t really understand what one to us are saying, it’s okay to raise your hand. We are pretty comfortable with the middle of presentation.

So with that, StoneMor Partners, StoneMor is the second largest owner and operator of cemeteries in the United States. Currently, we have 277 cemeteries and 90 funeral homes. We are in 28 states in the Island of Puerto Rico. As of December 31, we have 12,300 acres of undeveloped land. And when you calculate our current rate of sales, we actually have an aggregate weighted average sales life of almost 250 years. And the important point there is to understand we don’t have to continue to buy inventory. If we wanted to sustain what we were and continue to sell at the current rate, we have the inventory in hand to do that. We have to make no more financial commitments for that.

Typical products that that we sell here on the pre-need and at-need now, for those of you that don’t know the company, pre-need is advanced selling, it’s like an insurance sale. It’s selling to someone generally 55 to 65 years of age, they purchase it in advance and then we deliver the goods and services at the time of need. The at-need is obviously relates to the time of death. There is a quick look to where we are. You can see, we are in 28 states. You see our concentration over here. We are opportunistic when it comes to our acquisitions. There is a few states, where the regulations are not real conducive to pre-need selling. So we are not likely to go into those states, but for the most part, we hope ultimately that light green area to fill that in over time.

Why you should invest in StoneMor? 10% yield which is superior to most MLPs; strong historical performance; proven acquisition track record; favorable demographic trends; high barriers to entry; and a very experienced management team. We talk about our quarterly distributions. We went public in September 2004 and you can see that since then we have had 37 consecutive quarterly distributions. We have never cut the distribution. You can see out here on the right hand side how we have grown the distribution every year. And what we like to point out on this slide is if you look at 2009 and ‘10 when so many companies were cutting their distribution, we actually increased ours. And it goes to the kind of the heart of the issue with the company is we are not a company that’s going to grow our distributions at 9%, 10% a year, but we are, but what we are is very stable and we have a very stable and predictable business. And that’s just the function and nature of death care.

I will show you some slides where you will see how the demographics are actually favoring the future for death care. I am not going to spend much time on the financial stuff. I don’t steal Tim’s thunder, but again, we just want to point out you can see the nice trend growth in our accrual earnings, which Tim will explain in our operating profit. This is a real interesting slide. One of the things if you focus there it’s a little bit on the left hand side you will see that 60% of our revenue is pretty much guaranteed at the beginning of each year. And that comes because our at-need business and again the death rate, there is subtle changes in the death rate, but it doesn’t vary a whole lot.

So you will see that from our at-need sales, our funeral homes sales, which again are on an at-need basis. Investment income that we get off the trust fund, which again is highly predictable at the beginning of the year given the nature of the investments that we invest in and David can explain that a little bit and our interest income. So the real variable in the company is that on the right hand side, there is our pre-need sales and that’s where one of the reasons why we have rate here today is to kind of give you a sense as to how we support our 800 plus sales staff into generating the pre-need sales. I think, yes, we currently have over 800 100% commissioned sales people. There is no draws, there is no salaries, it’s all incentive-based, performance-based compensation. We have demonstrated a consistent track record of growth. Since we went public in 2004, we have acquired 145 cemeteries. Our GAAP revenue was increased from $145 million to $243 million and our adjusted operating profit is grown at over 15% compounded growth rate. So again, nice, solid, steady performance in the company.

I talked about the demographics, the future. And this is a really interesting slide. If you – this is a measure of birth and if you come back into this little dip in this period over and here, you will see that was actually during the depression and it was during the depression that the number of births actually dropped. So if you project that a lifetime ahead, you are in this time period. So when people are trying to figure out, why the death rate hasn’t kind of just continued to go straight up and sort of went down a little bit and it’s bouncing around a little bit, it really goes back, not because of improved healthcare or people not tying anymore, it’s simply because of the number of births. So as you can see, as we start to move through the generation of the baby-boomers and then you can see how the death rate really accelerates. So it’s one of the reasons why you will see the other death care companies trying to expand their footprint, so that they can capture what will be a fairly significant increase in the number of deaths.

Mentioned our pre-need sales, 40% of our revenue is the pre-need sales. And this slide is showing you the population that’s between age of 55 and 65 years. And this is our primary demographic for pre-need. And when you compare that to the general population these are people that are either retired or close to retirement, so they – most of them have a very low unemployment risk, their mortgages have either been fully paid or primarily paid and their children are probably out of the house so they are no longer burdened with the college tuition. So they have discretionary income, which allows them to then go ahead and purchase their cemetery products.

Barriers to entry, one of the reasons Bill and I like to stay on the cemetery side of the business was the really strong barriers to entry. And when you think about it where are you – if you are going start a cemetery today you probably need 40 acres of ground, where are you going to find 40 acres of ground in highly populated areas when you can get them at affordable prices, you then have to go through all the zoning entitlement issues and if you are going to take that ground off of the tax rolls you are not likely to get a lot of support from the taxing authorities. So in my 40-year career I think I have only seen two new cemetery startups, so it’s not that’s likely to happen. The funeral homes don’t have quite the same barriers but what they do have is family heritage. So if someone in your family was buried or was used the local funeral home, really difficult for the family to choose to go to someone else, so they still have a pretty strong hold on the local marketplace.

Highly fragmented industry, you can see over here on the left hand side funeral homes obviously there is 22,000 active funeral homes today, they are somewhere in the range of 8,000 to 10,000 cemeteries, so there is plenty of opportunities for the company to make acquisitions in the future. Look over there on the right hand side, you can see that the – it’s still it’s only about 20% consolidated. So again no we do make a lot of acquisitions, we are able to (indiscernible) or cherry pick but we are very careful, we are very selective and Bill can give you some more information on that. Interesting here if you look on the green side that’s we have been talking about this for a number of years now that’s municipal and church-owned cemeteries and it’s a market that desperately needs someone like StoneMor and if any of you are involved in church municipal cemetery, I think when I say that they are – most of them are losing money you would have to agree with me. They are not assets that they manage the way we would manage them, so there is a real opportunity the municipal cemeteries, the struggle for us getting to a decision maker.

When we go out and we do we go to some other conventions with the mayors and city managers and they are all excited about it, but when they go back home and then they try to get 10 or 15 people in a room to agree to something, it’s been a challenge. Fortunately, we just really broke ground with the Archdiocese of Philadelphia. We announced that there that relationship a month or so ago. We are just waiting for some final regulatory approval. They have to go through the Orphans’ Court in Philadelphia to get final approval, there should be no issue with that, it should go through and hopefully early next year we will actually close on the transaction. And we are excited for a lot of reasons. It’s a large, large operation. They do over 7,000 interments today. We will be able to open the properties up to not only the owners or people of the Catholic faith, but also open the cemeteries up to anyone of the Christian faith. So that’s going to give us an enormous opportunity in Philadelphia.

And the other thing that’s really exciting is these cemeteries have for the most part never sold the merchandise or the other services. All they have sold on an advanced basis is the interment right. And there is – we don’t know exactly, but somewhere between 60,000, 70,000, 80,000 living members of the Catholic community in Philadelphia that own their interment rights, but they don’t own their vault, they don’t own their marker, they don’t own their casket and they don’t own the opening and closing. So there is going to be the enormous opportunity for the company to market just to their own lot owners and then obviously we will go on and expand with new families. And in and of itself, it’s a fabulous acquisition, but what it’s going to do for us to open us up and we are already fielding calls from other Archdioceses. So hopefully over the next 12, 18 months we will have opportunities to bring our expertise to other Archdioceses. And our management team it’s a very experienced strong management team. We have been together a long time. We have done a lot of acquisitions together. We are kind of just replicating the same process. We are really good at identifying properties, negotiating them, paying fair value for them and then ultimately integrating them. And then the real magic source consumer will bring in the pre-need sales force.

And my final slide is when we went public back in 2004 as an MLP, had you been fortunate enough to buy the units then and compare it to the New York Stock Exchange, if you got to an index of stocks on the exchange, you would have gotten about 2.5 times greater return from StoneMor. So the models worked, it’s challenging to be an MLP when you are not an energy company, it’s further complicated because of the novelty of the industry, not that many people follow death care. And we are also relatively small company in the world. So and as Tim will talk about a little the differences in our accrual accounting and our GAAP accounting it makes the story a little bit harder to understand, but at the end of the day 37 consecutive quarterly distributions. We have to be doing something right. So I think it’s a story that is worth your time and I will if there is any questions right now, I’ll take a couple, otherwise I will give it to Tim. Okay, yes.

Question-and-Answer Session

Unidentified Analyst

(Question Inaudible)

Lawrence Miller

Well, they do own a lot of cemeteries. I am sorry repeat question, he was saying that we have a much greater ratio of cemeteries to funeral homes and our competitors are pretty much the inverse of that they have a lot more funeral homes and cemeteries. A lot of it was just the evolution of the way the industry grew up. Service Corp was started by funeral directors and they were doing roll-ups in funeral homes. Our company was started by people that had owned cemeteries. So they kind of followed the cemetery route. Stewart was right in the middle, they started as a cemetery company, but they believe in the combinations. Many of our funeral homes are actually on the grounds of our cemeteries and that’s the trend that the public seems to want and embrace. They like the idea of having everything located at one facility. Our expertise is the pre-need sales. And if you really want to maximize the value on a cemetery you probably should have a fairly assertive or aggressive pre-need sales program. The SCI and Stewart terrific companies, slightly different model, they like to own the large properties in the major metropolitan markets where like the funeral home with the at-need the families can come to them. They are more comfortable creating opportunities for families to commence at their facilities, where we are much more comfortable and our expertise really – and we have been the beneficiary. We have purchased a lot of properties from SCI over the years that didn’t fit their big company criteria. And we have done terrific with them. Okay, Tim?

John McNamara - Director, Investor Relations

I forgot to mention, in the Q&A we are webcasting this event, so I will have the microphone in the back of the room, wouldn’t mind we give the microphone to the questions, I appreciate it.

Tim Yost - Chief Financial Officer

Thank you, John and thank you, Larry. As Larry mentioned I am going to go over the financial overview. I wanted to start by talking about some significant transactions that we have done in 2013 so far. The first of which it was the acquisition of the Seawind Funeral Homes in Florida, this is a bit significant. It follows on the heel of another large acquisition that we did last year in Florida also primarily funeral homes. We wanted to start with the base in Florida which is a very attractive market purely from a demographic standpoint and be able to build out our company from there. So what we did was we acquired the largest private operator in Florida last year and this year we followed on with this Seawind’s acquisition, who also fills the strategic need for us.

The Seawind’s operation focuses a lot on low-cost provider and helps us bring expertise into our company that’s really helpful. We have done well with both and we will look to fill in cemeteries around these funeral homes where they exist. In order to carry out our acquisition philosophy, what we do is we borrow money on a short-term on our revolver and then use equity offerings to de-lever and to free up our balance sheet to go out and do more acquisitions. That’s our growth strategy and has been since we started. So that end this year, we raised an additional $40 million in equity to pay down some existing debt for previous acquisitions and we have worked forward from there.

We also were able to due to the advantageous conditions in the market refinance our existing high-yield debts. And we exchanged a 10.25% note for $175 million note at 7.875%. The up shoot of that as we saved about $1.6 million in cash annually in interest expense and was a great transaction for us to get done. More recently and in the third quarter, we acquired Forest Lawn Cemetery in Richmond, Virginia. And we bought that Carriage, who is another public competitor if you are not familiar with the space. And it was a great deal for us, its 500 more interments. We have much more presence in Virginia than they did and it worked for both of us. So one thing that I skipped over a little bit quickly was that we increased our distribution to $0.60 a unit and continue along the trends that Larry discussed earlier. And finally and Larry mentioned that we have signed the operating agreement with the Archdiocese of Philadelphia. After we clear the regulatory approvals, we hope it closes fairly shortly.

So during the first nine months of the year, we continue to grow our business and continue to grow our company, some through acquisitions some through organic growth. We increased our distributable free cash flow by 34.3%. We increased our production-based revenue by 7.8%. We increased the value of our pre-need contracts that we wrote by 6%. We increased our funeral revenue obviously through acquisitions by 36.4%. And we increased our adjusted operating profits by 11.1%.

Now, I see some familiar faces in the crowd and some unfamiliar faces, so I am not sure if you are new to our story or not, I will get into the accounting a little bit more later on this part of the presentation, but if you notice, what we are doing is we are reporting on operational metrics that conform to old GAAPs, not new GAAP consistent with SAB 101. These measures we believe are much more accurate reflection of the current activity of the company and how we are doing on a current basis. I guess I will discuss the accounting a little bit more in a minute.

As Larry mentioned, we are a Master Limited Partnership. That differentiates us certainly from our other competitors as well as our bias towards cemeteries. So again, this will be brief, but for anybody who is not familiar with what MLP is or how it impacts us. We make our distributions to our unitholders. We make them on a quarterly basis. We make them from available cash. The MLP structure is predominately tax-free to us at least 90% of the gross income have to come from qualifying sources. So to the extent that we sell items that are non-qualifying and what we feel primarily is land and improved land, which meets all the requirements for qualification with the MLP. One thing we did go through here and we don’t mentioned in this presentation was earlier in the year we had an IRS audit who questioned our use of the MLP structure. The MLP audit resulted in no adjustment on our part, which from the IRS standpoint is the same as you do qualify as an MLP and everything is fine. And we run to that question before, it’s now clear to something that we have dealt with.

To the extent that we sell anything that’s non-qualifying, that’s held in the C-Corp, so each of our locations has two entities, qualified to non-qualified entity. The non-qualified entity sells non-qualified goods. The qualified entity sells qualifying goods. The non-qualifying entity would pay taxes or not for the fact that we have significant NOLs. So our cash taxes are very low that we pay and they come through in the K-1 at the end of the year. Little bit on accounting, the difficult part about our company what makes our story a little harder to tell is that what we are required to recognize as revenues are the goods and services that we delivered during the period not the ones that we sold. So there can be a great lag between when we sell pre-need contract and when we deliver the goods and services there on that pre-need contract. This is very different from all of our other public competitors.

As you noted, they are primarily a cemetery company or excuse me funeral home companies. Funeral home revenue recognition is more akin to multi-unit retail, where ours is very different. That’s one of the reasons we want to make that very clear is that although they are incomparable industries, the components of their income are very different from ours and show up in their financial statements, very different. Usually, a company with deferred revenues makes sense. It’s easily earned in over time. Ours is very different. Again it’s based on an event that happened in the future that may or may not be defined, well it’s not defined. I am sorry one more point on that slide. In working with the SEC, when we talk to them about our how we manage our business and what’s important to us and how we measure our success within, we started talking about our segment and reporting. The SEC requires us to not only report our segmented reporting on the current GAAP basis, but also the old GAAP basis. Again, historically, we referred to that as accrual. But if you look at our MD&A and all of our filings, it’s presented in both ways and we talk about both.

These are some of the items that relate to revenue recognition. And this is sort of a little primer about when things are recognized when they are sold. So burial lots, interment rights, basis themselves, they are a little bit more logical, they follow real estate accounting, so once we received 10% of the purchase price in advance we are able to recognize those revenues. The grave markers, once they are purchased and they are in risk and reward title has transferred to the ultimate consumer we can recognize those revenues. Same with caskets, grave openings and grave openings initial and grave closings final are the digging of the hole.

So what we can do is in advance of the time of need, we can dig the hole, put the burial vault on the ground and recognize the revenue for that. We don’t do it necessarily for revenue recognition purposes. It’s important to our MLP status and structure, improve ground as qualifying, not improve ground as not. So it gets a little bit convoluted as to what the timing of our recognition of revenues is from a GAAP process. And sort of the best way to talk about that is burial vaults. Burial vaults are something that we can bind eventually at the time of need. We can stack them up on our properties. We can hold them. We can collect all the money from the customer. We have delivered the vault, but we still can’t recognize revenue. For trusting purposes, we are able to take whatever within trust for that product out. We still have not recognized revenue. What ultimately has to happen is that burial vault has to be put in the ground before we recognized the revenue. So there is a big dis-aggregation between cash flow, timing, delivery timing and revenue recognition and that’s what makes our statements a little tougher to read and a little different than our other industry competitors.

So if you look and Larry pointed this slide before and he was talking about general trends when he talked about it, but if you compare the orange line, which is our gap recognized revenue to the green line which is how much we actually sold, you can see that we have been growing consistently over the last eight years and that gap widens when we grow. Obviously, you are selling more pre-need things in advance you are waiting to deliver them in the future. What that really happens that has the most impact on is our operating profit, because there are fixed costs involved on our business and our margins are relatively high on the products that we sell. As we grow and add locations in all the fixed costs with the administration, the maintenance, with all those pieces of the cemetery, the impact on our operating profit from a GAAP standpoint is negative, but it’s very positive when you look at what we are actually selling what our current results are.

This comes up most when we are talking about distributions. We have a very large retail investor base. And one of the questions that we get quite frequently is you don’t have very much operating profit, how can you pay distributions so far in excess of that. So if you look the orange is our GAAP operating profit and the grey bars are the amount that we distributed during each period. The green bars are how much we have actually earned, how much current revenue, current expenses, all those things. And we always have a significant amount of coverage over the amount that we distributed during the quarter. I mean this is a very powerful slide when we talk to a lot of people. They then start to understand that our distribution is earned currently and this is how we pay it.

Here is a quick snapshot of our balance sheet, the strength of our balance sheet and the strength of the assets we had is quite different than most companies. We have obviously on this balance sheet our $20 million in cash. Our cemetery property which is land is over $300 million and that’s value the historical cost. In recent years the accounting for acquisitions has changed, it’s now fair value but the large, vast majority of them in that basis at historical cost. We have over $128 million in accounts receivable that’s fully reserved for non-collectability, our cancellation rates have not varied significantly in good times and in bad times. We reserved 10% of all sales as uncollectible and in the best times, its mid-8s. In the worst times, it gets up around 10%. So that’s something that we are very proud of in our collection history.

We also have a significant amount over $700 million held in trust; two types of trust, one to allow for the delivery of goods and services in the future and one for the perpetual care and maintenance of the cemeteries. David again will talk more later about how those trusts are invested and where our investment philosophy is around those but suffice to say that it is filled with – they are filled with all readily marketable securities. The other thing the interesting part on our balance sheet and if you look at these two together and I will have another slide on this later is we have something called the merchandise liability. So we have a liability to deliver goods and services in the future of about $130 million.

Again the next slide does a better job of breaking down what portion of trusted fund go to satisfy that liability and I will talk that when we head to it. So this is the slide I was referring to. If you add together our cash, our accounts receivable and merchandise trust subtract that – from that all of the liabilities that we have to pay anything in the future including merchandise liability, all of our debt, all of our accounts payable and accrued expenses. After you have paid off all those things, even if you re assuming a liquidation scenario, we have over $120 million cash left over. Not only we would have $120 million cash left over, we had 277 cemeteries, 90 funeral homes, which operate as going concerns. They have over $300 million worth of land and we have a perpetual care trust to provide maintenance well into the future. So we are well positioned in any event to continue trends in cash flow.

As Larry mentioned, we have grown significantly since the day we went public and we will continue to that is our strategy. If you look we have increased since 2008 we have increased the size of our balance sheet, the assets on our balance sheet by over $700 million, while only taking on approximately $100 million more in debt. Like I said what we do is we manage our acquisition program by borrowing short-term on our lines and then refinance that with equity in the future.

So if I leave you with anything I want to repeat here that the accounting is not representative of our current sales activity, it’s a different measure which differentiates us from other public peers. We have had continuing growth in operations and growth in the business as a whole. We have a very strong balance sheet with solid assets. Our cash and investments far exceeding liabilities that we will have in the future and we are uniquely positioned to take advantage of rising interest rate environment with the money that’s in our trust. And again, David will talk about that more later. Are there any questions? Sir?

Question-and-Answer Session

Unidentified Analyst

Just a balance sheet question to make sure I understand the cemetery property you said that was valued at historical cost but the M&A transactions that’s put on the books at fair market value?

Tim Yost

The recent ones, there was a change to the accounting requirements about two years ago, three years ago that required a fair value assessment of anything you acquired. So any properties that we have acquired in the last two or three years the land has been valued at fair value. Prior to that it was all historical cost that’s how it worked.

Unidentified Analyst

Yes, Tim when you look at that merchandise liability number the $130 million, is that entirely a fixed number by that I mean this is going to be stuff delivered in the future or service or I guess this is not services, it just would be a casket of burial, etcetera. My point is can that increase with time because you don’t know when that service is going to be delivered or merchandise?

Tim Yost

Well, Jack it actually is predominately services. The majority of it is services. We deliver in advance the time of need whenever we can and whenever possible, so probably within a year or two of signing a contract, we deliver all of the goods that we can therefore fixing the price and reduce some liability at that time.

Unidentified Analyst

So – but there is some – could be some variability inflation, etcetera has served by its services – types of services presuming they are not delivered?

Tim Yost

Again the price of the main service that we provide and that we deliver and that we reserve for is the opening and closing, the digging of the hole if you will. The interesting aspect of that is that we already bear all of those expenses in our financial statements. There is no incremental cost to us to deliver a vault. We have those maintenance people full-time. So we reserve a liability for it as part of an accounting transaction, but the reality is there is no economic future cost. If you are asking about other items, yes, but it’s very small, because I guess that we deliver anything we can in the events of need.

Unidentified Analyst

Okay. Tim, on Slide 25, you talked about the bad – 10% percent bad debt reserve which is currently 8.8%, how do you arrive at that why isn’t 15% versus 5% and can you tell us where this bad debt reserve is on the balance sheet?

Tim Yost

Okay, so several things. The bad debt reserve is the accounts receivable and I work backwards our shown net of that debt reserve, if you look at the footnotes to our financial statements you can see all of the details I believe it’s note two. The details of how much we reserve, how much we have charged off, how much the balance is, so that exists in the footnotes to our financial statements and it can be there. We have a very strong hold with our customers, I mean first of let’s talk about what our accounts receivable is. We have an accounts receivable from customers who have not gotten the goods or services from us yet. We are in somewhat of an enviable position and we are willing to work with any of our customers to help them maintain their accounts and keep them current. In tough times when people turn to us and say we can’t make a payment, we can’t we say can you make half the payment, can you do that. So we are able to work with people to a great degree, because we aren’t essentially out to go to services until that time of need. At the time of need there is no further longer any accounts receivable everybody have to pay in full before the services are delivered. So we have some flexibility that we have been able to manage our business effectively and make sure that our cancellation rates don’t climb in any scenario.

Unidentified Analyst

Could you tell us what the IDR is the tax shelter on the distribution and the coverage ratio please?

Tim Yost

The incentive distribution right, do you what know where we are in the incentive distribution, right?

Unidentified Analyst

And what schedule is?

Tim Yost

I am sorry.

Unidentified Analyst

And what the ramp-up is, if there is one?

Tim Yost

Yes, we just – we are in the 25% splits now with the general partner. We are $0.05 a year or a dollar or a $0.01 in a quarter. Into that split I believe that the next break is at $0.715 and we are at $0.60 right now. I am sorry there were three questions in there.

Unidentified Analyst

The tax shelter on the distribution?

Tim Yost

Historically our shield has been about 30%-35%.

Unidentified Analyst

And the coverage ratio?

Tim Yost

The coverage ratio is in excess of 1.1, 1.2 and variable. One more question.

Unidentified Analyst

Just a sense and I hope it’s a good time to ask the question, but and I know every funeral home itself is different size, location, everything, but generally in the industry what is a range of what a funeral home’s value might be if you were to go purchase one?

Tim Yost

Historically the historical value has been in the four to six times EBITDA range or 1.5 to 2 times revenue, that’s the historically what it’s been.

Unidentified Analyst

Okay I mean just and I think everything is different but on a portfolio basis would a $1.5 million to $2 million valuation per funeral home be in the range, low in the range, high in the range, and we are just trying to get a sense?

Tim Yost

Yes. I mean, you hit on that pretty quickly that they are all unique and individual. And I don’t think that you can say with any certainty that a value per funeral home would make sense. Right, I mean, some of them do 50 services a year, some of them do 1,000, there is wide ranging is anything that’s out there.

Unidentified Analyst

Yes, so I am trying to get a sense on a portfolio basis?

Tim Yost

You mean ours?

Unidentified Analyst

Yes.

Tim Yost

I got to be honest with you, I have never actually thought about it in those terms. Again, we look to pay somewhere in the industry historical and industry averages, we look at acquisitions I am not going to say (indiscernible) about second. On a discounted cash flow basis and that’s how we purchased them, the individual cost of each one is not, I think about another term, I think about it in cash flow and return, not dollar value of the absolute location.

Unidentified Analyst

Okay.

Tim Yost

Alright, so with that I am going to turn it over to Bill and he can talk some more about the acquisitions on our philosophy and strategy today.

Bill Shane - Vice Chairman

My hands are full, please put it down. Thank you, Tim. I will answer that question first. Gentlemen, I am going to answer that question first. Of the funeral homes that we see 1 million, 2 million in hands is in the low range and that’s because we are seeing funeral homes that have a greater amount of cash flow, $1 million, $2.5 million funeral home would have cash flow somewhere around $250,000 a year and generally the ones we see are larger

Well, I am going to talk about acquisitions. And with respect to StoneMor, our overall philosophy is acquisitions have significantly contributed to our overall growth. Basically what we do is we identify a target acquisition through a number of finders out in the field through our own people that belong to our company and we have taken a very disciplined strategy. We have a model that we have developed that’s years old that has 700 or 800 different assumptions that we have come to develop over the years and with our knowledge and information at a industry. And one of the things that we try to do is take a very, very disciplined approach to acquisitions and we don’t break our mind. So if we see an acquisition and somebody comes back and says it’s trading at 10 times cash flow or 12 times cash flow or 10 times EBITDA generally that will not be within our purchase range.

We also focused on acquisitions that generate incremental cash flow in excess of the financing. One of the criteria that we have is that an acquisition over a 10-year period needs to pay for itself and generate positive cash flow. And that’s one of the items in our model that we do not break. The other thing is they have to be accretive from day one. So as you probably all know, StoneMor has significantly grown through acquisitions over the years. This is just the list of the number of acquisitions and the total purchase price that we have paid both in cemetery and funeral homes since we have gone public in 2004. As you can see, there is almost – there is almost $215 million of purchase price that we have paid over the last eight or nine years in acquisitions. So this has contributed significantly to our overall growth. I went the wrong way sorry.

Again, when you look at compared 2004 to 2012 with respect to significant items on our balance sheet, significant selective information, you can see that we have had substantial growth. Our cemetery property, as Tim said, was over $300 million and started out $150 million, so that’s more than doubled. Our trust funds now at September 30 are a little bit in excess of $700 million predominantly in cash and marketable securities. And that’s more than doubled. We have now far over $1.25 billion in total assets. Our revenues are significantly increased. And you can see the significant increase in number of cemeteries that we have that are under ownership and the number of funeral homes that we now have. Originally, we started with the very small number of funeral homes and now we have grown to 86 and it’s actually 90 now.

One of the things that’s important to note on the previous slide is in the last couple of years, there has been a slight change in the focus of our acquisitions towards an increasing number of funeral homes. We have done that and as you can see funeral homes in the 2004-2005 were 2% of our revenue and now they are 15% of our revenue and we have grown from 7 to 86 funeral homes. And you can see the other number of selected financial information that has increased. As we have discussed in a number of cases with respect to cemeteries, our philosophy is to buy and build. And by buying and building, I mean, that we acquire cemeteries that are not fully developed. So we have to put a significant amount of funds into the cemetery to develop the pre-need program, to build the accounts receivable, to build the trust funds and they are all significant items when you look at our annual cash flows. That is not the same with funeral homes.

Funeral homes are generally fully developed when we acquired. So they do not require a significant capital investment. Funeral homes also, I was going to the word, generally, but I think pretty much every single case, are cash flow positive from year one. So, that’s the reason why we decided a couple of years ago that we will acquire individual freestanding funeral homes, which prior to a couple of years ago the only way that we acquired funeral homes are if they were included within a larger package that we acquired.

Now, we have certain criteria. So I mentioned that we have a model and we step specifically to that model, to the discipline of the model. And in that model, one of the things that we have is an internal rate of return greater than our cost of capital. We have a 10-year discounted cash flow model that I said has a number of assumptions with the terminal value equal to five times your cash flow. And that’s just an assumption that we use. Again, the main criteria is positive cash flow after repaying your acquisition price over a 10-year period. So in our acquisitions, we assume we are going to repay the debt over a 10-year period. We assume we are going to put in whatever funds are required in order to build the cemetery under this buy and build philosophy.

And then from the beginning, one of the requirements is after those things generated cash flow towards an increased distribution on each and every deal. We also look at a minimum of 25 years worth of useful life. That’s a inventory available to be sold on a very conservative basis. And way we look at that is one grave per space. Now, in reality, we very doubled that or tripled that. We build liens to get significantly greater ground utilization, but are in our initial evaluation of cemeteries, in our model we take a very conservative approach and make sure that we have at least a 25-year life. And if you remember in the original slide that Larry presented, our growth on current years, our amount of inventory, excuse me, on current year sales was over 200 years.

The other important point, which is significant within our acquisition philosophy, is that it reasonably has to fit into our leverage calculation with our banks. So we keep that again on a very conservative basis. Now, generally properties that meet that proceeding criteria have these attributes up here. They generally have large trust funds. And while large trust funds is not a main attribute when we meet all the financial criteria within the other acquisitions that I had just mentioned, we get these usually come with it. So they have a large trust fund. They have significant available inventory as I mentioned before. They generally are in a city. We are close to a city. Now, we do have a lot of smaller properties that are in rural areas, but every one of those or the majority of those was acquired within a larger baggage. Generally, we don’t like to buy cemeteries that are not in or more around cities. They normally bury historical interments is how many people they bury a year, they normally bury more than 200 people a year. And they have significant at-need volume. So again the cemeteries that we look at that met the preceding financial criteria and in our model generally come with these positive attributes.

But what do we do to improve on the basic cemeteries and this is how we pay for the purchase price. One of the things we do is we put in the pre-need sales program, some of the cemeteries that we acquire already have the pre-need sales program such as we have acquired cemeteries from SCI and we have acquired cemeteries from Carriage, but we had an innate ability to improve the sales program. And in fact I think in almost every single acquisition that we have made since we have become public, no matter who we have acquired the property from, we have been able to significantly improve top line revenue growth. We put in seasonal professional management. We now have over 800 sales people and over 3,000 employees in our company and we are developing experienced managers in our training programs everyday, so we have seasoned management. And usually when we make an acquisition we are able to put seasoned management in from day one.

We are also able to significantly reduce product costs we buy because of our volume purchases, cheaper than the individual cemeteries or a funeral home as the case maybe owner can. And if we made an acquisition from the company like SCI or like Carriage I think our prices are pretty much in line with theirs. We consolidate home office functions. Many of the individual cemeteries and funeral homes that we buy have an accounting staff and they have people that do their collection of accounts receivable and their accounts doing a new payment of bills. From day one those people are not necessary for us. We usually have those discussions with the previous owner who makes a decision as to what’s going to happen to those people that are in the cemetery or a funeral home. But we don’t take them over, so those home office functions of the accounting, the bill paying, the credit and collections are all consolidated as of day one.

The other item which is really significant is every cemetery comes with a perpetual care and a merchandise trust fund. Many funeral homes come with pre-need funeral trust fund. Many times the individual cemeteries or individuals funeral homes do not have professional manager. We have professional managers and we are going to hear from them very shortly who have been managing our trust funds for a number of years. And they are able to generate returns that are generally and I was going to say almost in all cases greater than the individual returns that can be generated by individual cemeteries or funeral homes that we acquire.

One thing that we don’t do is justify purchase price to increase in revenue items, increase in price of the cemetery. When we take a cemetery over we will only have normal price increases or annual price increases. There is no significant price increase in any of the products sold as a result of trying to support the purchase price. We gain our purchase price through professional management improve returns on the trust and reduction in costs from volume purchasing. There has been a lot of discussion with respect to working capital borrowings in cemeteries. We get asked that question every single time we make a presentation so we thought we would handle it straight on in this presentation.

As I mentioned previously when we make a cemetery, we operate on a buy and build philosophy. We generally do not buy cemeteries that are significantly (indiscernible) from day one which would require us not to build. But generally we put in a pre-need sales force. In that aspect, we build accounts receivable from capturing market share which is the main criteria that we want to do by instituting pre-need sales. Many of the individual cemeteries that we are in do not have a pre-need sales force and do not capture local market share. By instituting the pre-need sales force and putting in a professional pre-need program we are able to capture market share. So when people die in the future, if they have already purchased pre-need from us, they will come to us, their families will come to us and we will start generating the heritage for the future, but that comes out of cost and that caused us to build the accounts receivable because we finance the sale of cemetery property and services over periods from 24 to 48 months and depending upon the size of the sale maybe a little bit larger that we build accounts receivable.

In every state that we are require – that we are in we are required to put a percentage of the selling price of the products in a merchandise trust front. And basically all that does that’s our money. All that does is as consumer protection and it ensures the customer that money will be available to purchase the products when we need to purchase the products. And that requirement is usually and in fact I think in every single state it’s greater than the cost of the product. So when you will go to our financial statements you see we build those trust funds. And as you can see our trust funds are now almost $700 million and it’s sitting in cash and marketable securities. And it’s over 50% of our entire assets.

If you look Tim had that slide and if you look at the cash and the marketable securities in our merchandise trust fund and our accounts receivable, you can see what a significant portion of our total assets that is. I mean that’s really the overwhelming majority of assets. So we build them and they are the items that are built when we buy a new cemetery and we institute our by and build philosophy. The other thing that we do is we construct inventory if necessary, which is usually in terms of the mausoleums and low encrypts. So they are the three major items that we use cash for in our buy and build philosophy and those are the three major items that we borrow for to fund (indiscernible). Basically these borrowings as I said are really deferred acquisition for us, right. If we would buy cemeteries that are already built and we have done models on this two things would happen. Number one, we pay more for it than we would buy the purchase price that we pay now and all the money that we put into buy and build. The initial upfront costs would be greater than that cumulative total.

But on the other hand we wouldn’t be required to borrow. We determined that in our corporate philosophy that it works out much better for us to buy and build even though we borrow and create that deferred acquisition price. Now these are the things that our acquisition philosophy has really helped us to build. Number one, we have grown the company substantially. Number two, we have been able to as Larry and Tim both said significantly increase our distributions from $1.85 to $2.40 as it exists now. Number three, we currently – we have been able to increase our assets by over $800 million in the last five or six years, the majority of which is sitting on our balance sheet in net receivables, cash and marketable securities related to our investment trust.

And with that, that’s the end of our acquisition presentation and I will be glad to take any questions that anybody might ask. Yes.

Question-and-Answer Session

Unidentified Analyst

It’s relating to the relationship with archdiocese in Philadelphia what kind of restrictions do the religious transactions they put on you in the future in terms of what you can or cannot do in terms of pricing…

Bill Shane

I am sorry to interrupt you, but I can’t hear you I am having a hard time here.

Unidentified Analyst

My apologies, as it relates to the relationship with the – in Philadelphia with archdiocese, in those sorts of religious type transactions what kind of restrictions if any do they put on you going forward and in terms of which you can or cannot do?

Bill Shane

Okay Ray will take that one.

Ray Smith

Yes, there are absolutely no restrictions at all. We – as far as we are concerned this is an acquisition. It has all the criteria in acquisition. The – actually when we started the process, when the archdioceses started the process to find a buyer, it was as a buyer they wanted to sell the assets outright and help to fund their liabilities. We actually felt that for marketing it was better to have the church still perceived. They are the actual owner, but with the 60-year lease, we have all the rights of ownership and obviously all the risks that we are in it for the rights. The only sharing that would come down is there is a substantial amount of undeveloped real estate. Some of the properties have as much as 300 acres of real estate in fairly prime areas. After a period of two years, we have the right to actually sell some of that property to developers. And our agreement is that we share that 50:50 with the Archdiocese. But it’s pretty much unfettered as far as we are concerned. We are going to treat them as if we own 100% of them.

Unidentified Analyst

Great, thank you.

Ray Smith

Sure.

Bill Shane

Yes.

Unidentified Analyst

Yes. Bill, you are talking about the money you put into our cemetery in terms of working capital for those three needs, if you looked over the last couple of years and we had that chart was how much we spent on acquisitions, is there a ratio? So I will makeup a number, you pay 5 million for a cemetery and you have to put in 1 million over one or two years. I mean, what should we kind of think about our acquisitions in terms of the drawdown on working capital to kind of make that acquisition successful over the first couple of years?

Bill Shane

Okay. First of all, there is not a ratio. And it depends on a lot of factors in the individual acquisition in (indiscernible), if they have accounts receivable or not. So if they have accounts receivable, we are going to collect accounts receivable, our build was going and our requirement for working capital is going to be less, then if they never had a pre-need sales program. So there is not a ratio, but what I can tell you is that one of our criteria for acquisitions is that over a 10-year period, the acquisition pays for itself. So there is two significant factors that go into our model. The first factor that goes into it is with respect to the building accounts receivable and investment in trust, where we are required to borrow to build them. Those borrowings have to be completely repaid, borrowed and then completely repaid over that 10-year period. That’s number one criteria. The second criteria, is that the purchase price has to be completely repaid over a 10-year period. And the third criteria is after repaying those two items to generate positive cash flow to enable us to be able to increase our distribution.

Normally, the borrowings only occur in the first two to three years maybe four years, but the amount at the end of four is significantly reduced. And then either in year four or five going forward in our cash flow, we repay all those borrowings, including all the interest costs on that. So at the end of 10 years, the acquisition price is completely paid for, the working capital borrowings are completely repaid for and then we have in theory a debt free cemetery. And that again, there is a really important point with respect to this is that we choose in our corporate philosophy to buy and build. So we choose to do that. If we would buy cemeteries that are already built, we wouldn’t have any working capital borrowings. And we choose to do that, because number one we determined and we have demonstrated the fact that we are experts and have been very successful doing that. And number two, it’s cheaper for us. The initial purchase price plus all the working capital borrowings before the operation repays them is cheaper, then if we would buy that cemetery already still and not have to borrow anything. So it is totally deferred acquisition price.

Unidentified Analyst

It’s not that we wouldn’t borrow, we would borrow it day one rather than as needed right. You would pay more for that?

Bill Shane

Yes, that’s what we would do if it was deferred acquisition.

Unidentified Analyst

Right.

Bill Shane

So in total, it’s been a lot cheaper for us to do it. We constantly answer questions about the build in working capital and that’s we thought we do if it’s great on here, yes.

Unidentified Analyst

I apologize if you have addressed it before, because I know it’s come up twice that you mentioned that you have done acquisitions from SCI, but with the pending merger later this year or early next year between Stewart and SCI, what do you know of or what do you think of the requirements if they are going to have to divest some overlapping properties to get clearance in everything that will create opportunities. In other words, what are you looking at, what kind of game plan that you guys thinking of right now that post this merger, a) you have a bigger competitor in some of your markets probably, but b) it probably opens up some opportunities for you elsewhere, I am just curious if you could talk to that about a little bit from the acquisition point of view?

Bill Shane

Yes, I will tell you what we know and let me send me backup. I will tell you what we have heard. I think that’s better, because we don’t know anything for sure, but we do believe that they are going to divest a significant number of properties. So its cemeteries and funeral homes and they are obviously in the markets that they overlap with Stewart, but we don’t know where they are we can guess, but we have heard that, that will become available before the end of the year. And we definitely will be in the market. We have talked to them. And they have indicated to us that they would set preferences to sell them in one group. So if there is 50 properties, they don’t want to sell them to 50 different people, they rather sell them in one deal and we are one of the few people that can afford to do that. So we are waiting for them. We will be involved in it. We believe that could be of significant benefit to us, but I am going to put this in quotes. “No matter what, we are not going to break our discipline to reach for them.” So we will see before the end of the year.

Unidentified Analyst

Through your experience….

Bill Shane

Okay, I got it.

Unidentified Analyst

What have been the largest drivers of valuations and is it fair to kind of think of the growth of the company as capital market dependent if I look at your number of transactions during different periods of the capital markets, it seems to have a high correlation to liquidity and availability within the financial markets?

Bill Shane

Okay. So the first one was what are the largest drivers?

Unidentified Analyst

Of valuations of the cemeteries and the funeral homes?

Bill Shane

Yes, okay. In the funeral home, it’s pretty straightforward, because it’s the number of cases that they do and the average revenue that they have per case and the cases and number of funerals. So that’s the basic driver for funeral homes. And the cost structure for us is pretty standard. There is industry standard, then we have our own standards with respect to the percentage of wages and benefits to revenues in the cost of sales. We know what it cost us to buy cash, because Walton provides the other services, we know what funeral directors cost. So the cost structure of it is standard. So it’s revenues and it’s the revenue per case. And then it would be the case mix, number of full services to the number of cremations or so forth, but that will term into the average revenue per case is the main driver. With respect to cemeteries, there is three or four items that I had mentioned there. It’s a size of the trust funds. It’s the number of interments. It’s whether or not they have sold pre-needs. And it’s the amount of inventory that they have remaining available for sale. So they are the four key drivers in the market. I probably should have put market first, because we do an evaluation of the market. That’s why I said we want to be close to city, so we have a large population base and we actually do a test to see how saturated the market is with people who have already purchased pre-need. So we go into a market that seems saturated, then that will affect purchase price as opposed to going to a market that has not been saturated with people buying pre-need. So the latter is generally the case. And the second question with respect to capital markets, I didn’t get the whole thing.

Unidentified Analyst

(Question Inaudible)

Bill Shane

No, in fact, absolutely not. Our growth is not related to capital markets. Well, I won’t say at all, it’s related to capital markets to the extent in the past that we have packed up our debt and went out and taken debt into the capital markets or had equity offerings that we have into capital markets, but we have enough what we have done is we have set our credit lines to allow us to go forward and continue to make acquisitions and then package that up and put it out is either equity or debt like we have, but the acquisitions, the initial acquisitions and our acquisition philosophy is definitely not dependent on capital markets. But one more, yes. Okay sorry.

Unidentified Analyst

Hey, Bill. Just looking in the perfect world with your discipline and maybe put this big transaction and maybe something that comes up aside in a perfect world are you guys more, is the needle more focused on homes, cemeteries geographies, and then what’s kind of sweet spot maybe per year is it 10 to 20 of each, could you go bigger kind of what would the company be focused over the next year, two or three inside of your disciplined approach and maybe there is a big property that’s for sale?

Bill Shane

Okay, as far as the philosophy and again we have mentioned at the funeral home, buying funeral homes is somewhat new for us. It’s not likely that would become a major component of the company unless it’s part of the cemetery or part of the same community. So the acquisitions even though we made some sizable funeral home acquisitions, which is kind of out of our sweet spot, they dominate their respective markets, a big one that dominates is Daytona Beach area, the Seawind that Tim mentioned dominates the Palm Beach area. So we have a very strong presence where we can get a lot of efficiencies in economies and ultimately our goal will be – the Daytona Beach acquisition actually had three cemeteries part of it. The Palm Beach one, we were clearly looking now to acquire some cemeteries so that we get the benefit of the combination which is what we want. So there won’t ever be a real significant part of the company.

Lawrence Miller - Chairman, President and Chief Executive Officer

Okay I would like to give to David now.

David Spungen - Chief Executive Officer, Hillview Capital Advisors

Thank you. Thank you, Larry. Fortunately, I don’t have to explain the difference between GAAP and accrual accountings that to tell you when the Fed is going to taper on what Chinese GDP is going to be next year which is much easier. (Technical Difficulty) So I would like to first tell a little bit about Hillview Capital Advisors, which is an independent registered investment advisor who works essentially as an outsourced Chief Investment Officer to its clients including StoneMor. The company was established in 1999 actually I started the predecessor company, which is part of a larger company in Philadelphia in 1989. So 15 years as an independent company, 25 years as it going into the – and we have a lot of clients and partners and employees that date back to those early days in the late 80s early 90s. I would like to tell you I started when I was 17-years-old, but it’s not the case.

We have 25 employees. We have five partners of the firm. We have no outside ownership. We are 100% employee owned. We have two offices roughly equal in terms of employees. We have offices in Midtown Manhattan which is we are on based. We also have offices in suburban Philadelphia. Roughly speaking we have investment research business and development senior management in New York. We have a lot of the operational and administrative functions based out of Philadelphia. We have client service capabilities in both offices.

And as I said we work essentially as an independent outsourced Chief Investment Officer to our clients. We have about 90 clients primarily anywhere the seller runs is sort of our footprint. We do a little bit in Florida and Chicago and then we have had some refugee clients moved to places like Texas and Honolulu by and large it’s Boston, Washington with the large concentration in the New York Metropolitan area, Philadelphia, Boston, Princeton, Baltimore is really where we traffic. I can go through this, but we just gave you the bios on all myself and the senior management of the firm. We have been doing this for a long time. And we think we provide a great service to StoneMor where their expertise as you can see is on the acquisition the operations of cemeteries and funeral homes, investing the capital in the trust funds is not their area of expertise, it’s ours and we can provide them with a higher level of service at a lower cost. And we think they would be able to if they have to do it directly and internally and have it be potentially distraction from what their forces are good at.

Though I would like to tell you a little bit about how we work with the company, so basically we come up with – there is an investment policy statement that we have developed and revised over the years of working with StoneMor that we – that’s basically agreed to by the trust and compliance committee of the board. So we developed this investment policy statement which outlines the specific goals, objectives, limitations and constraints of the trust fund portfolios. Those are modified from time to time. If we think we need some more latitude, if there is a new area of investments that we want to consider that’s not in there, those changes are reviewed and recommended and then either agreed to or not by the trust and compliance committee. The allocation – the asset allocation inherent in that investment policy statement is developed based on the forward-looking long-term expectations for risk and return correlations between different asset classes.

We implement those asset allocations through independent investment advisors. One thing to understand, this is a large pool of capital made up of many, many, many trust funds to 900 to point that. So if you think about it we are trying to come up with a consistent asset allocation strategy. We develop a sub-strategy for the merchandise trust and the perpetual care trust and then for the two on a combined basis. The accounting treatment of the two is different and so those differences as well as the differences and the purposes for those trusts perpetual care obviously being to take care of the maintenance of the properties in perpetuity merchandise trust as Tim and Larry and Bill have explained. So those differences are reflected in the differences in the strategies. But essentially those each trust has to stand on its own. So we can’t say okay we want to put 10% on a particular area and say here is a larger trust, what’s allocated there because that trust has to stand on it’s own for the beneficiary to that trust. So the asset allocation strategy has to be able to be implemented at the trust fund level and then we have to be able to aggregate it up to reflect the asset allocation strategy that we want to accomplish overall.

The trust funds in general are below the thresholds of qualified investor status, so a lot of times folks will approach people of the company say we have got a great private equity fund that we think would be great for the trust funds. They would say call David to call me and say sorry we can’t do it. So everything that we invest in is liquid and is either a registered investment company and we almost exclusively used institutional share classes of those. We have actually started funds in areas where we – they didn’t exist currently with outside managers. Again we don’t manage any money internally. We don’t buy stocks or bonds. We only look for outside managers, but it’s essentially everything that we invested is in a liquid security either a registered fund or a separately managed account. And we have worked with managers – high quality managers in specific asset classes where they have the capability to manage many, many, many relatively small size separately managed accounts.

We perform very stringent in depth due diligence on every investment manager that we put into the portfolio. There is a couple of folks in the room that have been on the receiving end of that process. And I think they would vouch for the fact that we do our homework, it’s both assessment of people, process, philosophy, history and we do very in-depth operational due diligence. We have a full-time Chief Compliance Officer who is part of that process. We want to make sure that the companies have the operational capability to do what needs to be done in today’s environment which is very highly regulated. Compliance is a much bigger part of the picture than it was 10 or 20 years ago.

We do research on approximately 500, I should say we do about 500 manager meetings a year, some of those are repeat meetings as we work through due diligence on a given manager a strategy. We have a full-time dedicated investment team. We have an investment committee that makes decisions on what we are recommending to clients. Those means are driven by our outbound research. We don’t tend to do a lot of meetings with inbound calls, because if we did we wouldn’t have time to do anything else, but we focus on those areas that we think are of interest and likely productive and potential to make its way into our client’s portfolios and then we go deep in those areas, use our network in a research to find good managers in each of those areas should they rise to the level of being included in the portfolios.

As far as monitoring and risk control of portfolios, we do a detailed rollup of the portfolios on a monthly basis down to the security level. So again, everything we invest in is completely transparent. So if we are investing in mutual fund, we can pull the holdings of those mutual funds on the separate accounts. We can pull those CUSIPs. We roll up the portfolios on a monthly basis. So we can see what all the exposures are. The portfolio is not equity, fixed income cash there is a number of strategies that have hybrid characteristics. And we need to be able to see what those exposures are. So if Tim calls up and says what happens if interest rates go up, we can look at what we have in fixed income, we can see what our exposure is, what our durations are, what our credit quality is. And that’s important as we work through what we think are continue to be challenging environments in the macro level, we can really get a sense of what our exposures, what our potential risks are. In addition to that, we run a detailed factor model that goes beyond that and looks at the portfolio and models its exposure to different risks like equity prices and valuations, credit spreads, interest rates and we can stress test the portfolio to understand what the impact is likely to be of different scenarios going forward and make adjustments and recommendations to the trust and compliance committee as we see fit.

So in terms of where we are now, this is a snapshot that is very high level of the asset allocation of the trust funds. In aggregate, this does not breakout care separate from merchandise. It looks at it on an overall basis. And so I think what you will see is the portfolio has been put together to generate a steady and attractive cash flow stream, which is obviously relevant to both trusts. There is needs for that cash flow to be distributed out subject to the rules around how interest dividends and capital gains are treated. And importantly, in building the portfolio, we have looked for cash flows that are sustainable and stable and likely to grow over time. And in fact, if you can see the largest slice to that pie is in real assets. Real assets are basically MLPs, which I presume everyone in the room is familiar with, the broader category of infrastructure equities on a global basis and real state REITs and other real estate related securities, which of the three is the smallest. Part of the attraction to those kinds of assets is not only the current cash flow, but the fact that those cash flows are growing and expected to grow and in an attractive rate that’s higher than inflation. And if in fact inflation increases, which we certainly think there is a risk that it will, the cash flows of those securities we think will grow faster than they are currently due to the direct inflation adjustment certainly in the MLPs and in the infrastructure equities.

So one thing to understand is these are long-lived assets, both kinds of trust funds despite the fact that there is need to distribute some cash over time. We have the ability to think long-term and to hold through challenging market environments. And obviously, 2008 was not a pleasant environment for any of us, but the cash flows on the trust fund portfolios held up incredibly well. And as you know from following the company through that time, there is really not a material impact on the cash flows. Prices fluctuated. We are able to wade through that, that period of time make adjustments and see the following of the subsequent recovery, but the cash flows proved to be very stable and we expect that to be the case going forward. We also have and you can see in the pie chart displays of the portfolio that’s invested in equities. In general, we invested in larger cap equities on a global basis, again dividend payers and growers with the focus on the growth of the dividend. So we are not trying to clip the highest dividend that we can find out there. We are looking for companies that are generating lots of cash flow can grow that cash flow over time and that serve the portfolio well.

In terms of fixed income and obviously this is the environment that people are thinking about interest rates going higher and what the impact might be in traditional fixed income with the yields where they are, we generally find them to be unattractive. And most of the exposure in the fixed income sector is through some form of credit on either to agency or really non-agency mortgages we do have some agency mortgages as part of the broader mortgage strategy and we do have exposure primarily to emerging market debt on a local currency level. There is some hard currency opportunistically, but it’s primarily on a local currency level. So in answer to the question, what’s the exposure to higher interest rates, we think the portfolio is very well-positioned to maintain and grow its cash flow and provide long-term growth in an environment of higher interest rates.

We have been positioned that way or in moving towards that over the last several years obviously until the second quarter this year we really do not see rates moving up in a material way. Obviously, it’s not certain when they are going to move up or how far they are going to move up, but we clearly are looking at this portfolio in saying what happens if they do. And again we feel comfortable with the way the portfolio is positioned today. We have eliminated most of the allocations to areas that have long durations. We had some preferreds in this portfolio, it serves the portfolio well particularly post ‘08 going forward. But as the spread attributable to the credit risk has diminished, you are sitting with lot of interest rate risk and we just didn’t think the payoff was attractive. So those have been mostly eliminated from the portfolio. So that was the extent of my prepared remarks. I am happy to take questions.

Question-and-Answer Session

Unidentified Analyst

I wonder if you could just talk about the benchmarks if you compare your performance to and maybe if you could tell us what the one, three, five-year performance numbers of the trust funds are? What benchmarks do you compare the trust funds to and maybe if you could tell us what the one, three and five-year performance numbers are?

David Spungen

What benchmarks we compare the portfolios to?

Unidentified Analyst

Yes.

David Spungen

Well, we actually look on an annual basis to a budget that we said at the beginning of the year based on our expectations for cash flows from the portfolio. And beyond that, we look to broader a mix of global equities and fixed income, roughly on a 60:40 basis. But again, we are very focused on a year-by-year basis on making sure that the cash flow from the portfolio meets the budget that’s set for the company. I don’t think we pushed those.

Unidentified Analyst

(Question Inaudible)

David Spungen

In our Qs, generally, our trusts after all fees, expenses, tax as returns, so we are in the 5%, 5.5% range on a gross basis closer to 8%.

Unidentified Analyst

But with what level of annualized volatility?

David Spungen

Pardon.

Unidentified Analyst

What’s the annualized volatility on average of this portfolio?

David Spungen

If you look at the breakdown of the assets in terms of real assets in equities, it’s going to put you in something like a 60:40 mix. I don’t have in the annualized volatility numbers off the top of my head, but we look at the risk characteristics that’s usually in the high single-digits 8% to 10%.

Unidentified Analyst

Are your fees that you received from the company, are they fixed on a sliding scale as the assets get bigger has the fees come down or what were the fees last year?

David Spungen

Yes. So the question is how do we get paid by the company? First of all, we only get paid by the company. We don’t receive any compensation from managers’ investment products. We don’t use mutual funds at 12b-1 fees or any other charges that would accrued our benefit. We charge a fee and this is true for all our clients that is a percentage of assets under management and that is on a sliding scale. And we are at the very low end of that scale with the trust funds.

Unidentified Analyst

Just remembering that all of these funds are held in trust, so there are trustee fees as well on top of the management fees (Question Inaudible)?

David Spungen

Our fees are total fees.

Unidentified Analyst

I can’t answer total fees. You fees were…

David Spungen

Around $1 million.

Unidentified Analyst

Yes, around $1 million. Having had portfolios invested at MLPs substantially for well over 10 years, they seem to be well-known now. The big question that I never am able to resolve and I am just curious what your thinking is law change that would affect the status of the MLPs because they are a big part of the portfolio and somehow we must have some thinking as far as risk should that occur

David Spungen

Yes, well I mean that’s a big question for anybody invested in MLPs. And it’s something we spend a fair amount of time doing research on. We know folks that spend time in Washington and look at that. So I couldn’t tell you that the risk is zero. We think that the risk is pretty low that there would be a substantial change in the tax treatment with the MLPs for a number of reasons. One, whatever your views on the development of energy infrastructure in this country, it’s creating a lot of jobs, it’s helped to create energy independence and we think it would be very hard for Washington to walk away from that. It would be it would be politically very difficult when we do that. MLPs have generally gotten very by bipartisan support, recent changes to the treatment or the ability to use the MLP treatments to a wider variety of assets including biofuels, ethanol.

The MLP Parity Act which as in the past that is in process seems to illustrate the fact that there is support in Washington for the MLP treatment. So it’s something that comes up from time to time certainly the end of 2012. Given the fiscal cliff and the concern around tax reform, the risk or the perception of risk was heightened which impacted the returns of MLPs during 2012. The other thing is we think there is a fundamentally good businesses and the question is what if they did away with the MLP tax treatment. And the fact of the matter is that we think these companies would be quite viable obviously will cause disruption in the market short-term. But we think they would be quite viable if tax treatment went away at some point. There are companies that the – where there are companies are in the high splits, increases our cost of capital if they were C-corps and they didn’t have that structure. In some cases that would mitigate the impact of the changes in the tax treatment. So it’s a risk I don’t think it’s ever going to go away, but we think the likelihood of the MLP tax treatment being changed for the worst is pretty low at this point.

Unidentified Analyst

(Question Inaudible) I don’t know if you have mentioned this, but how long have you had this relationship. And then I additionally had just a questions based on this might be a little bit more for Tim. The trust assets in relation to your liabilities what’s the regulation around each of them both the merchandising trust, the perpetual trust based on value of assets in relationship to liability. Could there be any time where you would have to have a capital contribution to these trusts in order to meet whatever sort of local regulations for each of these trusts, which you have 900 of them how do you keep of that?

Tim Yost

You answer the first one first.

David Spungen

Sure. So we had a relationship with StoneMor from the founding of the company. We actually had a relationship with the predecessor company. So my predecessor company and then StoneMor’s predecessor company it goes back about 20 years. So we are very familiar with the way cemetery trust work as a new one so. And the difficult answer by the merchandise trust is that it’s governed by Fed law in each state it’s different. So there are states that range from no trusting requirements where you are allowed to bond rather than put money into trust through states we are 100% trusting. For the most part we are not in those states that require 100% trusting that’s mostly New England states. But there are some states where we have significantly higher levels of trusting required, but they are also delivered – lag of delivering at that time if needed. So I mean I guess the range would be somewhere from 30% or 40% of the – sorry it’s obvious on selling price. So it’s 30% to 40% of the selling price which might be 100%, 110% to 120% of the liability all the way up to 75%, 80%, 90% of the selling price. And these are not actuarially determined. These are they come out of the legislature. Essentially, historically cemeteries and funeral homes have been committing somewhat to the same dollar. And the funeral home lobby is stronger than the cemetery lobby in every city and every town, funeral director if we don’t necessarily know who it is runs the cemetery. So those states require us to put full in excess the amount of the liability into trusts. And again I can’t give you great answer, but it is state and state and municipality by municipality, but did that answer your question.

Unidentified Analyst

Yes.

David Spungen

We have an parity trust department, we keep up on the legislation. We keep all of our systems our design with particular state, particular – within particular states different items of trust at different rates. It is a big part of our back office business and when Bill mentioned that we are able to eliminate the local that’s some of the things that we eliminate because we do it central.

Lawrence Miller - Chairman, President and Chief Executive Officer

Alright so I think we are going to turn it over to Ray who is going to discuss the company’s marketing programs at this point and help us to understand how we drive pre-need sales.

Ray Smith - Vice President, Marketing

Thanks Tim. Good morning everybody. I am excited to tell you how main stream advertising – excuse me and marketing techniques works extremely well in the death care industry. In fact I am going to show you in the next few minutes a number of programs that enable us to achieve marketplace advantage every day through an original portfolio of advertising and promotional programs that support our business units. Our marketing programs supports or generate business from three distinct customer groups. Number one of course, we are going after new customers, new families. Number two, very importantly we have a number of programs that maximize the long-term value from the families that already are pre-need customers with us. Going back to them and selling them – cross selling them the products they don’t already have even a suite of products on a post-burial basis to again maximize the lifetime value from our customers. And then of course winning back lost customers, you are probably wondering how does a cemetery customer actually win back customers that have start making payments, there is small percentage of customers that Tim had addressed and Bill had addressed. I will show you a program that’s extremely effective and actually winning back those lost customers.

Let me talk a couple of minutes about our flagship program we brand it Convenient Pre-Purchase with the tagline of and effortlessly purchase cemetery space by now. We found that a long time ago that in the death care industry whoever can make it easiest for the customer wins. And we found a way for the consumer to make it very easy to make their preplanning pre-purchase arrangements with us. With the advent of the Do Not Call legislation several years ago at this point created the situation for any company that was trying to generate a significant amount of its revenues from outbound telemarketing that created a tremendous risk that’s because give or take about 90% of all households are now listed on some type of do not call registry. Whether it’s the Federal Trade Commissions do not call registry on a national level or even on state do not call registries, considerable problem.

We actually found a way, we invented a way of being able to reach out to those 90% of households that are on the do not call list. And every day the week we are getting those consumers to raise their hand, give us permission to contact them by telephone and to bring them in as a customer. Essentially the program is a combination of targeted direct mail to households that fit the target demographics of the ideal pre-need customer from an income geographic standpoint, the age range and so forth. We have sophisticated modeling techniques that we use actually in our list building that enables us to increase the yield on our returns from our response rates from our direct mail advertising, similar to what a credit card company uses and being able to model a list of customers as far as their credit risk of paying back a credit card, we have models that are able to determine the propensity of a consumer to not only respond to direct mail, but to respond to direct mail for a cemetery company.

90% of the consumers that respond to the advertising that I just described actually give us a valid telephone number. This enables us to then provide those leads to a inside sales group, which is another part of the success formula. It’s the combination of the targeted direct mail given to a group of inside sales people that then contact these consumers follow up with the literature that they requested, nurture those individuals into a highly qualified lead for our outside sales force that are many cemetery locations. Why are they highly qualified? Well, they responded to our advertising number one, they actually requested a sales contract; and number three, they had one or even more than one or even several conversations with this inside sales group before actually making an appointment to speak with a cemetery representative.

This graphic shows the four components of our flagship programs. Number one, the highly targeted direct mail, 90% of those consumers send back a reply card requesting actually a purchase by mail kit, we then step number three is sent out those mail order kits already pre-populated, all they need to do is sign it and send back the check. And then number four is we couple the inside sales. Now, these folks are not telemarketers. These are highly knowledgeable consultative-based inside sales people that are extremely versed in our industry, are extremely good at getting the consumer comfortable with preplanning and motivating them to meet with a cemetery representative. 10% of the reply cards that come back to us, the consumer opted not to give us their telephone number. However, we are able to maximize the yield even from those leads, because we redistribute those reply cards out to our field sales force and they actually physically knock on the door which is permissible and we get a fair amount of business even from those replies.

There is a third advertising stream. Actually, many, many of the consumers that receive the targeted direct mail actually respond by just contacting the cemetery directly. We refer to that as the walk-in call-in volume. And it’s again a significant number of the people that receive the package will either call the respective cemetery or just will walk in. And then finally, the fourth revenue stream is some of the consumers will actually opt and purchase by mail. They will fill out the contract that they requested, send it back to us with either a check for the down payment or for payment in full. About 5% to 10% of all of the leads that we convert every year come from this mail order group.

In summary, with the flagship program, with the convenient pre-purchase program, we have combined highly targeted direct mail with inside sales to be able to turn a situation that do not call situation actually into a competitive advantage for StoneMor. Second program, let’s spend a couple of minutes on burial essentials. Convenient pre-purchase focus only on the space, burial essentials still goes after that first target market of brand new families. However, unlike convenient pre-purchase, burial essentials as it’s branded is promoting a package the three “essential items that anybody needs for a burial to take place, it’s a bundled space, vault and opening and closing offer. The third program we go after again that targeted segment of lost customers, we motivate these consumers to come back to us through a highly powerful incentive. We offer them full credit for all other previous payments and it’s applied toward their reinstated contract.

Very interesting point, our data shows very strongly that these former defaulted customers when given the opportunity to come back actually remained very faithful to their new loan. In other words, the persistency rate is extremely high. Actually a couple of months ago, we launched a brand new website portal, burialplanning.com, positioned as the national network of cemeteries. It’s one cemetery website that you can go on to burialplanning.com and have access to every one of our cemetery locations. In addition, it’s also an additional lead generator for us and I will talk in a couple of minutes on how we are going to really catapult the volume of leads that are going to come from this website of burialplanning.com.

The fifth marketing program among many we do is in addition to the centralized programs that I went through with you with particularly some of our larger locations, we will actually develop customized advertising based upon the individual competitive advantages of that particular cemetery location and we will develop the messaging that is again personalized for that specific cemetery. I talked about winning back lost customers I talked about acquiring new families through the convenient pre-purchase program and the burial essentials program. That second customer group maximizing lifetime value, here is just a couple other programs that we employ all the time in order to again increase the lifetime value of the many, many customers that we already have. In the top, you will see the subheading of cross-selling. And just two programs of many, the first on the left hand side is a vault cross-sell program, on the right-hand side is advertising to cross-sell the casket.

Couple other programs. We go after high network extremely affluent targeted segment of the market to promote our private mausoleums, purchases that could run into the hundreds of thousands of dollars. We have targeted programs for that. And then I mentioned that we even have post burial revenue streams. One of those would be the gravesite decoration program. We market to the surviving families the opportunity for us to actually, it’s a turnkey program, we take care of everything that on a seasonal basis, we will place an appropriate gravesite decoration at that gravesite. And again, the family can choose to have it on a seasonal basis or any other situation. We also give them a choice of various bouquets to choose from.

We are always looking to develop additional programs at StoneMor marketing, because again, our vision or our mission at StoneMor marketing is to help StoneMor Partners maintain a marketplace advantage everyday. So, some of these programs include expanded funeral home marketing, a national direct response television and direct response radio campaign for burialplanning.com. Our vision is to make burialplanning.com to become the Angie’s List or the Cars.com or any website that has become a household name, where people would naturally migrate toward when they have that particularly need. Through the power of television, in particular, we believe we are going to achieve that vision. That should generate a significant incremental volume of leads for StoneMor.

We are in the final stages of developing a new sales productivity tool called Blockbuster that will help our field sales force become even more productive by getting a better sense on where the target consumer is reside in the particular neighborhoods that they are responsible for. We have increased our social media. We are about ready to launch a blog on our website as you probably know by now really the key point of most social media besides developing communities, the more pragmatic purpose is to increase your favorability of where you rank with Google, so by increasing our social media efforts that will increase our likelihood that all of our cemeteries will not only be listed on page one of the Google search, but ideally the first or the second link.

So in conclusion all of these programs that I went through with you this morning all work together to enable really StoneMor Partners to set itself apart from all the other cemeteries and funeral home competitors in the marketplace. Happy to address any questions.

Question-and-Answer Session

Unidentified Analyst

Yes, thanks. One of you could tell us a little bit about are there any trends in burial planning is cremation becoming more popular or mausoleums more popular or less popular or are there any trends at all that pretty much stay the same it’s always been?

Ray Smith

Great question, certainly cremation is on the rise, growing rapidly and we are developing targeted programs to address that group. And I am sorry.

Unidentified Analyst

I was just asking what was the cremation program look like?

Ray Smith

It would essentially be taking the same proven approach of targeting, messaging, but tailoring that so it’s more focused on talking about cremation versus traditional burial. Where we would have certainly combination funeral homes would be promoting the fact that it could be one-stop shop where there is the ability of the cremation as well as interesting point is a lot of times the consumer will opt for cremation, it doesn’t necessarily preclude them actually wanting a traditional ground burial. So there is – I guess the short answer is there is a lot of different messaging strategies that are being developed to reach out to the distinct types of the cremation customer.

Unidentified Analyst

Thanks.

Ray Smith

It’s definitely an increasing trend in cremation, there is no question, it’s about 40% of all the dispositions currently in the United States. And I am sure we are going to continue to migrate up towards what you see in Europe. But there is another interesting phenomenon that’s going along with the growth in cremation is people are looking for specialization for customization, for personalization and that’s creating a whole new way to approach the cemetery, to develop the cemetery garden, to have additional type of offerings it’s all – this industry which you have to understand about this industry is it’s about celebrating people’s lives. Creating legacies, creating memories and here in New York City I mean I just we just took the path over to the World Trade Center and you just reminded over and over again whenever there is a tragedy you see how our culture would we have to – we gravitate towards that. We want to remember that person 50 years of John F. Kennedy. I mean can’t turn you TV now without some show about Kennedy. We want to celebrate a lot.

And as the industry even though people are looking for cremation which is kind of taking them away from the casket, the focus historically has been in the casket for funeral site it’s now other kinds of services, other offerings, memorial books, website, virtual funerals, it’s just a whole new industry. And for the cemeteries and Stewart I would say if you have ever been to any of their presentations, they are kind of – they have been the leaders in this developing these magnificent peaceful, serene garden within the cemetery where people that choose the cremation whether they want to go below ground above ground. We sell boulders, literally boulders for $20,000 that people are having their remains to put in. And then they are part of a nature path that a nice wooded lovely serene area. So it’s really an interesting phenomenon, cremation is growing. But the average revenue for the overall event seems to be growing as well.

Unidentified Analyst

When you say the average revenue seems to be growing is that a revenue pie that you are going to be able to address mentioned a new industry is growing. I know you are going to be part of that new industry, but there are others that are sort of already serving it. It’s seem cremations would be a real headwind for you?

Ray Smith

I mean as I am going to look to the traditional funeral with the – an upscale casket and then compare that to someone that’s coming in just for similar products cremation to handle the funeral, handle the disposition. The average revenue per event is less, the margins are actually better. The revenue per event is less, but what’s happening then and I think Stewart again is a perfect example where they have their larger cemeteries and funeral homes. The way they describe it is a family will come in to make an at-need arrangement in the funeral. And they will spend less dollars than they would have spend 10 years ago. But then they walked out into the cemetery where there is this magnificent garden with lakes and streams, there is granite all kinds of structures, there is benches, there is just a lot of different ways to remember that person’s life. So they are actually spending more in the cemetery than they would have previously. So when you combine the two events they are actually seeing an improvement in the revenue and their earnings.

Unidentified Analyst

And you said in that it’s 40% here in the U.S. and you said it would migrate to the European amount…?

Ray Smith

Europe, it’s over 60%. Yes. And we are opened now, we are opened up to any questions now so.

Unidentified Analyst

Did you talk about the cost of the funeral and cremation today what is the inflation rate which you have seen in terms of those costs historically and what’s your expectation in terms of going forward for both those events?

Lawrence Miller

The death care industry has seen pretty much and a fairly consistent because they do publish the statistics on an annual basis. There has been about a 3% increase in the average price increases. What you are seeing in the funeral home is where people previously would have been sick $6,000, $7,000, $8,000 per a casket are actually spending a little bit less for – they are buying a different type of casket that is 18 gauge, they buying it 20 gauge. But what they are willing to buy and purchase are these other kinds of celebratory type of products and services.

People are going on the website. They are creating live capsules, putting a lot of – when we develop a mausoleum now an indoor building where before our niche banks would have been granite or marble that you can see through now. Now what we are putting is glass fronted niches. And people are putting little memorabilia of their loved ones, their reading glasses, the baseball that was the boy caught when Ted Williams hit a home run. There is all these kinds of things that help you visualize. So when you go visit the site you actually get a visual representation of who that person was and people telling those – these niches just to give you an example. They are about this big, this high (indiscernible) two arms. We sell the niche without earnest for about $20,000. So it’s remarkable how much people are willing to pay to really endure the memory of that level.

Unidentified Analyst

Okay and let’s try to beat the dead horse once and for all again and I apologize. Getting back to the funeral home business I mean you said you kind of think of it in terms of modeled EBITDA, do you guys and I don’t recall and that’s why I am asking if I can go check if you do disclose on like a segment basis for the funeral homes. What the combined EBITDA is either in the press releases on in the 10-Qs and 10-Ks if it is there.

Lawrence Miller

Funeral homes are a segment of themselves.

Unidentified Analyst

Okay great. So the information is there on a combined basis in total?

Lawrence Miller

Absolutely.

Unidentified Analyst

Perfect. Thank you.

Lawrence Miller

In the back, okay.

Unidentified Analyst

Larry if I – the first comment that you made was when you came to the podium was this was not an enterprise like a typical energy based MLP that’s going to grow its distribution at 9% to 10% per year. Your key raw material is capital and I was just calculating your – roughly your cost of capital is a little over 8% based on 66% debt and 33% equity, the stocks yielding 10% today. So your cost of capital is a little over 8%. And your business model, you are buying things that return 15% to 25% if you buy things at four to six times. So I am trying to understand historically I just look at the value line page and it indicates that over the last five years, the distribution has grown 3.5% per year. We know that there is a lot of upfront spending involved as you buy under managed cemeteries, invest in them. How do you titrate more distribution growth and more upfront cash flow to lower your cost of capital to the benefit of the unitholders versus the very long-term? I am trying to understand that?

Lawrence Miller

Well, part of what we are trying to do help mitigate, remember and you think of that one slide that we have up there, being look at our balance sheet and the strength is in our balance sheet and strength is in the marketable securities that we have. Obviously, we can accelerate to a point to receded those funds. We are always looking for additional ways to generate an earlier receipt of the money in those funds. We are working in states, where the income is not allowed to be just, a lot of the states where we get the income where we earned the income, the income is ours, it can’t be distributed. So we are working with lobbying group to try and change. There is no reason why when you have 2.5 times the cost of the item sitting in the trust that you can’t extract the income. There is no reason to be then obligated to allow the income to accrue until you actually service it. So that’s an area where we are trying to mitigate the growth in the trust funds. The second thing is the funeral homes, by moving into the funeral homes, which do not have the working capital issues, they don’t build the working capital the way the cemeteries do. It’s a simple accounting. So it changes the optics and it helps narrow that gap between accrual gap and I mean the way accrual and the way GAAP is. You got something?

Ray Smith

Yes. I mean one of the questions I think you were asking Nick is that as we continue to increase our distribution, the theory would be that our yield will go down and our cost of capital will go down. In our experience through time, that’s not always the case with our stock. I mean, we are simply traded we are small. We are having meetings like this to try and attract more interest. We are trying to measure our distribution growth and do it at a responsible rate that’s always sustainable. And if it comes time that we should pick that up again, I have a slide and I cut it from presentation that our growth in the balance sheet, our growth in number of assets in excess of how much we have borrowed and how much capital we have raised is significant every year. So as you know that we are growing our balance sheet, but not borrowing to accelerate the cash flow from those assets. If we continue to increase our distribution and again I am not projecting policy, I am not projecting any of those things. Historically, we haven’t seen that one-to-one relationship with decreasing yields, yes. Does that make sense?

Unidentified Analyst

(Question Inaudible)

Ray Smith

I agree, but you would be surprised to find what we talk about more than anything else to sustainability right with the investors and the people who want to come into the stock. The difficult part with the stock that’s yielding north of 9% is that raises people’s eyebrows and they want to know is that sustainable. When it gives some of the 7s where we have been, I get a lot fewer calls. People are – they just accepted the face value that a 7% distribution is sustainable and they somehow think that a 9% is not. I actually had many calls and believe it or not more calls from investors and sophisticated ones who have said please don’t raise your distribution, because it causes the sustainability into question and then you fight that more and that does more damage to your yield than otherwise. I know you are laughing, but that’s….

Lawrence Miller

The other thing that what was kind of buried in Ray’s presentation, we talked about this several earnings calls ago, we really have and actually we just this past week went through an all-day strategic planning session with our board and our senior management. You would think that over time we get away from constantly running uphill and fighting GAAP and people trying to put us in the same buckets as you know the midstream MLPs, because what we offer stability and predictability and I think we have proved that in 2008, ‘09 and ‘10 when we actually increased the distribution when so many other people cut, but recognizing that we are looking for ways to generate additional revenue and cash without using capital dollars. We have never really sold a lot of pre-need funeral plans. Pre-need funeral plans don’t have a big P&L benefit today, because they are pretty much deferred into this service, but if you fund them through an insurance company, you get the commission. And the way the products are being designed today, we can earn a commission greater than our actual cost to sell and market those products. So we think there is a big opportunity there.

The cross-selling that Ray talked about, the use of the internet, one of the things that we found is I don’t want to quote numbers, because I guess we haven’t released it, but when – somebody mentioned saturation and we have always accepted when we look at a cemetery and it’s doing 200 burials, we say, okay, let’s say, 205 next year and 210 the year after that kind of stuff. And we have actually gone back now. There is very detailed analysis to that. And we found out that there is a lot more market share potential in many of our communities and it’s just a question. One of the reasons we have put so much effort into the website to generate, it is the numbers – it’s always been a numbers game. I can tell you back in 1972, if you sat down as a salesman and ask me how much money you wanted to make, we work backwards to what it is. And for every 100 attempts you make, you are going to get 10 sales, every 100 legitimate attempts whether you knock on the door, putting the door hanger on, making the telephone calls, sending out piece of mail, every 100 you are going to close 10 sales. It hasn’t changed. It’s just a matter we have now realized that we can actually go out. So as a company focus and as a company strategy, we are looking for other products and services that we don’t have to go out and spend that we can generate from our same store today. So hopefully, over the next couple of years, you will see additional cash being generated per location that will allow us to get to where we used to – where we wanted to be, which was to pay a distribution of 5% to 6% a year to increase the distribution.

Unidentified Analyst

(Question Inaudible)

Lawrence Miller

Our general partner was actually here. Bob had to go. He had a meeting. I think as we get closer to the 50% split, I am sure something is going to happen, I am not sure which direction the company will go, but clearly it’s an issue that we are going to monitor and do something in the near future, not the near future, but it depends on the growth. As we get close to that 50% split, I don’t know that would be large enough to take the GP public, but certainly the opportunity to sell it back to the limited partners seems to make sense. So we haven’t formulated that yet. Yes.

Unidentified Analyst

Could you just compare your current deal with the Archdiocese of Philadelphia to the deal you had a couple of years ago with the Archdiocese in Detroit?

Lawrence Miller

Sure.

Unidentified Analyst

And what makes you confident that’s one will carry through?

Lawrence Miller

Two very, very different deals, with Detroit, it was, let’s try it out. There was a lot of hesitation from the Archdiocese that then current Archbishop was really struggling, because he had an enormous cash deficit for their Archdiocese. And this was an asset that we convinced them could generate cash for the Archdiocese, but there was a struggle from the beginning, that’s why there was an out clause in that deal and that’s why no money transfer. We pay no money to enter into that arrangement with them. It was let’s try it out, let’s see how it works. And what happened is while we were going through that process and we were doing really well and I’d like to be back there tomorrow and I have a feeling that in the not-too-distant future we may get another phone call to come back and talk to them, but they did a very successful capital raising campaign.

And I guess I think they were even surprised, they raised something like $135 million from their base, which pretty much took care of their deficit, took care of their operating deficit and put them on much more stable footing. So the Archbishop came back to us and said look, I am still struggling as he called it issues of the heart. They just felt that in Catholicism, it was really, really important for the church to be responsible for taking care of the body and in anticipation or having known that, that was the possibility we had structured the transaction, no money upfront and we were sure to get all of the profits that we had generated during our period of managing them to collect all of that. So it turned out to be for us a really good transaction for a couple of years. It was good for them. I think it helped them understand what they could do with their cemeteries. They obviously gave us, because I know the Archdiocese of Philadelphia went through a fair amount of due diligence on StoneMor. One of the calls obviously would be Cardinal to Cardinal, how were these guys and we got a very favorable endorsement from them, but very different transaction. That was just, let’s say, how it works out, no money exchange. This like I said is almost like an acquisition.

Unidentified Analyst

Just another question on the growth of the cash distributions, Larry, if you look at the chart you originally put up in terms of the out-performance of the stock, certainly since the IPO it’s outperformed the industry as you put up there. If you look at going back to 2010 until now it doesn’t look like it’s outperformed at all. If you look at the growth of the cash distributions, 2007 through 2010, it was about 4.5% on average. If you look at the growth of the cash distributions 2011, 2012 etcetera, it’s through this year it’s more like more than 0.5%, 1.7%. So it almost again, it can focus on any number that kind of make your case, but simplistically you could say yes, the stock outperformed when the distributions were single mid-digits and kind of went flat when you cut that growth in distributions in half. And I think you mentioned earlier, Tim, some people don’t want you to increase your distribution, because it makes the deal look too sustainable, but you see the point is if you do it, maybe the stock goes up, so it’s a chicken and egg. So I think just simply saying we are not going to do it, because the stock is up to higher yield, but you could argue the other way, maybe the stock was up and yield goes down?

Tim Yost

That wasn’t entirely my point either, but I mean, when you look at our stock performance, the analysis, since 2010 and prior to 2010, I think it makes the opposite point that you are making.

Unidentified Analyst

No, well if you look at the growth in distribution 2007, 2008 2009, that averaged 4.5%. If you look at the growth in distribution on average 2010 to 2011, 2012, it averaged 1.7%. Point is the stock seemed to outperform up until 2010 when (indiscernible) 4.5%. And since then you cut the growth of distribution roughly in half from that level, 1.7% and stock hasn’t done as well. So I mean there seems to be some correlation between the growth of the distribution and the stock. Tim, maybe that’s not the only thing drive…

Lawrence Miller

No. And if you think about it in the period, the latter periods that you are talking about unfortunately, the blogging site today, which so many companies are now under attack, we were up – we were close to that $30 number, which some of our analysts have actually put out is where they think the stock should be trading today and a lot of misinformation, a lot of mischaracterizations got thrown out through the SeekingAlpha website and I guess because we are so thinly traded and it’s a retail and you’ve got, you’ve got people putting in their stop loss orders and you get the computer trading and all that’s kicking in. I mean, we had violent that downturns. I mean, we went from the high 20s two summers ago on August to $20 before fortune came out with a buy rating on the company midday. And we sort of crawled our way back up. We were getting right back up into that range again and then this August, similar type of article, lots of misinformation, not as dramatic in impact, but is an impact and now we seem to be working our way back. And I think part, we have actually, if you track it to the layering index and what have you, you kind of see that we are following that same pattern. And I think it’s fair to say there has been, because of the rising interest rates, which I do want to touch on before, not to avoid your question, but I am not sure we made.

One of the things we are hearing as well, what’s going to happen as interest rates go up. You guys are going to get affected. Well, you have to remember on the asset side of the balance sheet, you heard David talk about the assets. We have over $700 million of assets that are relatively short duration. We have been talking about a rising interest rate environment for several years now. We are probably actually early. We thought it would have happened sooner. So we repositioned the portfolio. We have put $50 million of new money into those trusts every year. So that new money is going to immediately capture the higher yield. The money that’s in here today, which is of the short duration, can be converted fairly quickly into the higher yield. We charge on our $150 million block of receivables are the rate that we charge the consumer will go up immediately. So on the left-hand side it’s going to generate a very significant amount of additional income. And we only have on the liability side $100 million of floating debt. The rest of our debt is fixed. So this has been true, the entire 40 years that Bill and I have been running this company in a rising interest rate environment, our earnings actually go up.

Unidentified Analyst

My only point is that there is a lot of noise and I agree with the characterizations etcetera, etcetera, but I just think there is a very fundamental relationship between the growth and distribution in the stock price. And I wouldn’t attribute it necessarily to short sellers, etcetera. You look on that chart is stock peaked in 2010 and that’s when the growth rate and the cash distributions began to decline. So you just think there is some relationship there?

Lawrence Miller

You maybe right. I appreciate the input.

Unidentified Analyst

So I thought I heard you say earlier that the income that’s derived by that trust stays in the trust?

Lawrence Miller

Not all, but some of it’s – the perpetual care and the perpetual care funds, the company doesn’t benefit from any capital gains nor is it penalized for any capital losses. Okay, so gains and losses just stay with the corpus. So those funds are managed primarily for income and 100% of that income in the perpetual care funds is distributed to the cemeteries. The merchandise trust funds, there are some states that don’t allow the earned income to be distributed it has to continue to accrue until we actually service that account. That’s why when you look at our cash flow statement, it’s not only the new – it’s not only the new money that’s going in, the net new money going into the trust that affected, but it also may be the income that we reported up in the income statement that is being deferred. That can’t be distributed.

Unidentified Analyst

So what percentage of the income generated by the trust gets recognized by the partnership?

Lawrence Miller

Recognized and released from the trust is two different things. The amount that’s recognized on a GAAP basis every month is related solely to the products and services that are delivered. I mean, to the extent that we have deferred revenue for trust income, a large majority of – a large portion of that has already been distributed to us in the form of cash, but it's not recognized.

Unidentified Analyst

Okay. But from a cash flow point of view, if your gross portfolio yield or you said…

Lawrence Miller

I am sorry.

Unidentified Analyst

I am sorry you said the portfolio was yielding about 5% if I remember. So if you are that’s yielding 5%, what percent is, how much is getting – how much cash is being generated for the benefit of MLP holders?

Lawrence Miller

And the reason I am looking up it’s a difficult question for me to answer, because we are contributing more to the trust, to the merchandise trust than we are withdrawing. Right, we are increasing our pre-need sales program is requiring us to put more of cash into trust, I can’t…

Unidentified Analyst

But you are also…

Lawrence Miller

It’s a net number that’s on my head and I can’t…

Unidentified Analyst

I am just trying to understand you have $700 million on the balance sheet, I am trying to look at that as an asset and try to get a handle on how to think about that?

Lawrence Miller

About $400 million of it is in merchandise trust, the other $300 million is in perpetual care, that $300 million all that income is distributed currently the perpetual care trust – I am sorry the merchandise trust. There are certain states that allow you to take it. There happened to be states where we have actually larger trust balances. So I can’t work my way through real quickly what that, I understand we are going, I just can’t get through that quickly.

Unidentified Analyst

(Question Inaudible)

Lawrence Miller

Eventually, yes. I mean, all the income and gains are eventually distributed when the product is delivered.

Unidentified Analyst

Right.

Lawrence Miller - Chairman, President and Chief Executive Officer

Okay, well we thank you very much. We appreciate it. And if you have any additional questions, please give us a call and we would love to answer them. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!