Monday, February 10, 2014

Dying for attention: Park Lawn Company Limited

I enjoy the oddities of the market.  I find companies that don't conform interesting.  The exceptions are what keep me interesting in investing.  If investing were merely a formula I would lose interest quickly.  Good companies increase in value, bad companies fall.  It's the strange little companies that don't neatly fit into a classification where fascination is found.  These ugly ducklings aren't the mega-corporations everyone is familiar with, they are local companies that we can relate to.

Cemeteries develop like cities.  At first the plots are rural, plenty of open land and distance between neighbors.  Then the place becomes popular, demand increases, and the plots become much cozier.  Eventually the place is mobbed and skyscrapers of marble are built to house residents.

I doubt many people think about cemeteries.  They're as popular a thought as death itself, something most would like to forget exists.  So it was interesting to me when I found out that there is a listed cemetery company in Canada; The Park Lawn Corporation (PLC).  I was enthralled by the prospect of investing in a cemetery company.  Finally a business where customer service didn't matter.  A business with unlimited pricing power.  If Aunt Hilda's will says she's being buried at Heaven's Gate then that's where she's going to be buried no matter the cost.

But as it often happens in my research I didn't stop at The Park Lawn Corporation, I ended up finding  the Park Lawn Company Limited (PRL).  I don't imagine cemetery directors being a very creative group, so the similarity in names is not unexpected.

Park Lawn Company Limited is a small spin-off from Park Lawn Corporation that owns half of a duplex and 2.9 acres of land in North York, a suburb of Toronto.  Initially Park Lawn Corporation intended to build a two story mausoleum on their property.  The company had the property re-zoned from residential to accommodate the mausoleum.  Sometime in the past twenty years the Park Lawn Corporation decided they didn't want to build a mausoleum at the site and let it sit dormant.  They spun off the property into the Park Lawn Company Limited.

The Park Lawn Company Limited might be the smallest traded company I've ever encountered.  I'm not referring to market capitalization, I mean in terms of what it actually owns.  The company owns a 2.9 acre plot of land and half of a duplex next-door which they rent out.  A picture of their holdings is below:


The company has petitioned the City of Toronto to re-zone their property back to its original residential zoning.  The company would like to fill their property with one detached home, two semi-detached homes, and 23 town homes.  The company's re-development plan sounded promising until I realized that right beyond the line of trees in the picture is a giant freeway junction.

The company's balance sheet is somewhat interesting.  They have a mortgage on the house they rent out for $278k.  Otherwise they have no debt, just a few payables.

The company's asset picture is a bit murkier.  They own the house and property discussed above, and both are held as assets.  The company also has a small amount of cash.  The most intriguing is their $5m promissory note to Park Lawn Corporation, on which Park Lawn Corporation is paying 5.5% interest with a ten year term.  The loan is very generous to Park Lawn Corporation allowing them to extend it indefinitely, and to repay it at any time without a penalty.

Park Lawn Company Limited's book value is $7.6m, which is more than double the current market cap for the shares.

The company's balance sheet is in great shape and holds a lot of potential value for shareholders.  Their income statement is a different story altogether.  The company's source of income is rent from their residential property, and from interest payments on the note they hold from Park Lawn Corporation.  Their expenses should be related to upkeep of their property, and a skeleton staff required to move the redevelopment project forward.  Instead the company has found a way to spend $250k to date on SG&A.  At their current run-rate SG&A will exceed $300,000 for the year with ease.

It's hard to fathom what a tiny company that owns half a duplex and an empty lot is spending $300k on in SG&A until you read the footnotes.  Park Lawn Company Limited's SG&A appears to be a bill sent from a Director at Park Lawn Corporation for their service to the company.  The company has been able to operate at a loss presumably in an effort to avoid taxes, which they've been successful with so far.

I wouldn't expect Park Lawn Company Limited to ever turn a profit, unless their housing development progressed to completion.  If they are able to re-zone their property and build the residences they desire it's likely their asset value could increase dramatically.  It's possible in theory that their income would increase as well, if they don't find a way to drain it via a consulting agreement.

Park Lawn Company Limited is both a bet on Toronto real estate, and a bet on their zoning board.  If the bet works out shareholders would profit, if not they'd continue to own a piece of empty land next to a freeway.

Disclosure: No position

5 comments:

  1. Is it legal to register expenses that probably don't exist not to pay any taxes? And is their deferred taxes worth something, can they get acquired by a company who wants to use their deferred taxes?

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    1. Good question regarding the legality. I would think it's legal, they hired him as a 'consultant'. The Canadian securities commission probably doesn't have the authority to say that it's a stupid hire, or they're overpaying.

      Acquisition is a fascinating question. The company is listed on the Canadian National Exchange, an OTC like market. The company is required to file statements of progress monthly, yet there is no mention of ownership interest.

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  2. It likely is not illegal to register those expenses, but you also have to remember that a consulting expense of $250k paid by PRL to PLC will increase PLC's income by $250k, and therefore increase their tax liability as well, so not necessarily the best way to do it...

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  3. I've researched this company in the past, and didn't buy any or write it up. I'm very surprised to find someone else who has looked at it. The biggest reason I didn't buy any was the G&A you mentioned, which is obviously excessive. There is really no way for an activist to get involved here, as insiders own 40.5% of the company, so they can continue to take 100% of the economic value if they so choose. Illiquidity doesn't bother me, but there is no ask here at all...

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  4. Have you ever look in markets where it is more difficult for americans or international investors to trade shares, while at the same time is not a completely undeveloped country or have no stability like Zimbabwe.
    For example, in thailand there's several companies with large land holdings and lots of cash.
    I am a current investor in one, and one was brought out after a few years of operating losses made them decided to just shut down the business and sell the land, which was worth 3 times the stock price.

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