Boston Omaha Annual Meeting & Report (Issue #61)

The Boston Omaha Annual Meeting did not disappoint. If you have not already read the annual report yet I highly recommend it. It is pretty short and a fun read. In any case, let’s jump into the annual report and annual meeting takeaways and thoughts:

Billboards:

For most billboard owners the core of their business is digital. The average of the big three (ClearChannel, OutdoorMedia, and Lamar) is 67% digital billboards versus not. Link (Boston Omaha’s billboard subsidiary) is only 1.3% digital. This is a product of often more rural locations of the billboard but is still a major for the business unit. As this serves as more of a cash cow and legacy business for Boston Omaha there is no new capital being invested here except for some moderate or small acquisitions that make sense. In 2022 the company did 4 acquisitions that totaled $17m.

Insurance:

General Indemnity Group (GIG) operates in surety insurance. The managers chose this field for its low loss ratios and lowering production costs as a percentage of premiums. Their focus here is on the controlled premium which grew 36% year/year to $7.5m. The Co-CEOs talked about the seemingly brutal process over the last 3 years or so to build this business unit. Now it is a complete and working business after the “construction” process. I personally talked with Co-CEO Adam Peterson (no relation) about their moats within the space. He essentially said that they have a vertical integration from agent to underwriter where some fintechs and other companies will only have agents or one part of the surety insuring process. While this is not the largest growth engine for the company it has plenty of room to expand with a reported total addressable market (TAM) of $6-7b (well above where they currently operate).

Asset Management:

There are many businesses, funds, and other holdings under the Boston Omaha Asset Management (BOAM) branch. A recent addition was the other half of 24th Street being bought by BOAM (they previously only owned about half). 24th Street alone has $100m in AUM. BOAM is unique in how it’s financed and operated. Along with Boston Omaha capital BOAM manages outside private investor capital. It receives management fees that are passed on to Boston Omaha as a whole. Consolidating multiple investments into the umbrella of BOAM slightly reduces the chance of a ’40 Act* violation.

The largest portion of BOAM accounting for over $100m of the branch’s $156.8m in assets is the company’s holding in SkyHarbour Group (NYSE: SKYH) a private aircraft hangar rental business that went public through a Boston Omaha-sponsored SPAC last year. They also surprisingly mentioned a sale price target for SkyHarbour, it was $18 per share. I was surprised they disclosed this, but I would put my price target pretty similarly.

“Never do a SPAC again ever.”

- Alex Rozek on learnings from running Boston Omaha

BOAM sold its position in Dream Finders Homes (DFH). This was because they already made a massive return on the stock and wanted to reallocate that capital as well as reduce risk of being in violation of you guessed it the ’40 Act*. Even though the position was sold they still maintain the Dream Fiber Homes which is a partnership that puts Boston Omaha fiber optic cables into new DFH Homes. Further, Boston Omaha is continuing to underwrite DFH projects beyond just fiber.

One comfort for Adam and Alex’s (mainly Adam) ’40 Act concerns is a story they told about the meeting about Daily Journal run by Charlie Munger which has been in violation of the ’40 Act for many years without being forced to be reformed. Typically, you receive a one-time 1 yearlong grace period to resolve the problem otherwise you are reformed into a fund or other type of business. This reforming is not advantageous to Boston Omaha’s operation or growth.

A last side note for this section is that many of BOAM’s real estate holdings got appraised higher than their value reflected on the balance sheet. The company opted to not update this figure. This is just one example of how they use accounting strategies to seem less valuable than they actually are. If you take a closer look into each piece this quickly becomes clear.

Broadband:

Now what you’ve all been waiting for: Boston Omaha Broadband (BOB – cleverly recently renamed by the Co-CEOs). BOB is the only fully equity financed Broadband business and one of the only ones with low to no debt (most Broadband companies have tons of debt). This speaks to the safety and caution-based mentality Adam and Alex have.

Currently, BOB has ~40k broadband customers and ~5k fiber customers, both of these are over 100% year/year growth. They are in the process of adding 10k new contracted fiber customers. Boston Omaha has decided to expense a lot of significant customer acquisition costs on the front end instead of trying to depreciate or amortize them. This is one of the reasons BOB operated at a $2.7m loss in 2022. $3.6m in expenses were from new contracted customers that will produce revenue in the near future.

BOB was one of the main areas of capital allocation by Boston Omaha with $25m on new capital invested in the branch not including the acquisitions of 3 traditional broadband businesses that added to their footprint.

When I asked about their biggest current and future the main point was on difficulty financing growth, especially with broadband. They previously saw their market within fiber and traditional broadband at ~$500m in potential expansion, but now see another ~$500m (a total of ~$1b in potential for expansion). For safety and security, they haven’t opted to finance through debt very much even though you can borrow at a rate of $5000-6000 in debt per available new subscriber. In addition, they can allocate debt to other business units (i.e. burden Link with debt) and use the capital difference to build more broadband. Alternatively, to the dismay of shareholders, they can do private fundraising. Most of these are not great which is why they rarely if ever pursue them.

For some numbers on the potential for expansion, there are ~130-140m US households. ~60m have fiber, ~62-63m without fiber getting scooped up by big fiber, and finally ~16m not supplied for fiber. The latter group is the majority of BOB’s market to get along with many new construction deals. It is predicted that about 10m homes a year with get fiber put in them in the US. This means that this is a 6-7 year rush to get market share because once a cable (or should I say glass wire) is in the ground no one is going to pay to have another or different company’s put in. Going along with that Boston Omaha is in the process of acquiring a construction company. This is not an increase revenue play, instead, it is a lower cost play and increase quality and swiftness of service when installing fiber and broadband. The construction business is one Adam knows very well because before he was running Boston Omaha and Magnolia Fund, he worked for Kiewit an Omaha based large scale construction company.

*The 1940 “40 Act” Act – An act limiting the number of different types of minority holdings a company can have at one time without being listed and taxed as a fund.

Until Sunday,

Soren

Disclaimer: Soren Peterson and Pillars and Profits Newsletter are not responsible for any investment results. Soren Peterson and Pillars and Profits Newsletter may have holdings in securities discussed within this and/or other publications. None of this constitutes investment advice. Always do your own research.