Boston Omaha: Baby Berkshire or Brookfield (Issue #20)
Boston Omaha Corp
BOC: $27.87
Market Cap: $827.69 million
Enterprise Value: $839.47 million
Boston Omaha was started by two former fund managers originally from, you guessed it, Boston and Omaha. The company went public in 2017. The Co-CEOs and Co-Chair Alex Rozek and Adam Peterson focus on capital allocation: the firm holds stocks, private holdings, whole companies, and even sponsored a SPAC that converted earlier this year.
Boston Omaha’s holdings span many sectors (from Billboards to Banks to Broadband) the company only likes to get involved in industries that only have a small number of variables and build incentives to optimize those variables. Boston Omaha started with commercial real estate and insurance, but in the last five years, more and more capital is being put towards broadband/fiber where there is a recurring cash flow payout. To fund these growth areas, Boston Omaha has done some private funding rounds below the public share price to the dismay of many shareholders, but this was explained by management that they would rather have the cash to be able to capitalize on opportunities sponsored by these funding rounds than losing out on the chance.
Billboards
Boston Omaha owns Link Billboards the fourth biggest billboard company in the country after Clear Channel, Outdoor Media, and Lamar. Boston Omaha owns over 7,400 billboard faces with the most recent round of tuck-in acquisitions.
The billboard business is pretty straightforward and is steadily growing. The company views billboards favorably because as they grow the maintenance costs only grow marginally. This means they can operate better at greater scale. The net return on each billboard should only increase with acquisitions and organic growth.
Billboards made $165.9 million in revenue last year accounting for 41% of all Boston Omaha revenue. On top of the organic growth, Boston Omaha acquired two additional billboard companies under Link, Keleher and Neon which added 1,400 billboard faces.
It is also interesting to note that the billboard branch of Boston Omaha is valued on the balance sheet at ~$165 million, but both Co-CEOs have said they wouldn’t sell the business for $300 million.
Fiber/Broadband
Fiber/Broadband has been the fastest growing part of Boston Omaha. They now own 4 Fiber/Broadband businesses–Utah Broadband, AireBeam, Fiber Fast Homes, and InfoWest–with over 40 thousand subscribers between them. Also, each subscriber is projected to pay $3,000-$7,000 in LTV (Life-Time Value) making each one quite valuable. All of the fiber holdings are under the Fiber is Fast (FIF) umbrella within Boston Omaha.
“Like buying billboards, building fiber networks requires investing large amounts of capital upfront. And like billboards, fiber assets generally last longer than the timeframe in which they are required to be depreciated on our income statement. If we are right about that timeframe, the depreciation expense we will incur annually exceeds, by some margin, the actual amount of capital expenditures necessary in the medium term to keep those assets producing growing cash flow.”
Alex Rozek, Co-CEO Boston Omaha
The Fiber business is favored by Boston Omaha because it creates recurring cash flow. There are multiple ways for FIF to grow. First, they can expand the reach of their existing companies to new areas. Second, they can easily add “last mile” fiber to areas their existing networks neighbor. Next, the company can continue to acquire fiber businesses like they did this past year with InfoWest which more than doubled its subscriber base, revenue, and cash flow. Finally, the company can route new homes with fiber. This is important because often new homes aren’t built with broadband or fiber and this presents an opportunity for FIF. This works especially well with their partnership with another of Boston Omaha’s holdings Dream Finders Homes. The service to route those homes is called Dream Fiber Homes.
General Indemnity Insurance
Boston Omaha is involved in Surety Insurance through General Indemnity Insurance. Surety Insurance is where for a fee an insurance company guarantees or backs a deal between two parties. Therefore, if a party doesn’t follow through on the deal the other party is insured. This is an area of Boston Omaha that is seeing practically no additional investment because insurance is a place where money can get “stuck.” In spite of this General Indemnity grew revenue by 12% year/year to $9.3 million. However, this is after a steep decline from 2019 when revenue was $14.6 million. Management believes that Surety Insurance at scale can produce a 40% return over time. General Indemnity also maintains an expense ratio of 88.6% and also grew its controlled premium over the last year to $5.5 million.
Boston Omaha Asset Management
Under the Boston Omaha umbrella is Boston Omaha Asset Management (BOAM). This houses multiple different investments for Boston Omaha and gives the company more optionality of where to invest because technically they are only holding an Asset Management Business, however, BOAM can invest in a much wider range of ventures than Boston Omaha by itself. BOAM has deployed over $500 million so far.
SkyHarbour
“Airports are beachfront property” -SkyHarbour Investor Relations
Part of SkyHarbour (now publicly traded under SKYH) was initially acquired through the Yellowstone Acquisition Company a Boston Omaha-sponsored SPAC. The SPAC converted in Q1 of this year. The SPAC was created by Boston Omaha to work around the 1940 Act which says that companies with too many different holdings are labeled as investment companies. This comes with regulations that Boston Omaha didn’t want to comply with so instead they sponsored a SPAC.
SkyHarbour is essentially a private aircraft hangar REIT. The main customers are companies that own executive jets. This is important because these businesses are often longer-term customers with low risk. The hangars are equipped with aircraft care services as well as fuel.
Space is limited and the demand is only increasing as more planes are being built than retired.
The company was founded by an ex-Israeli fighter pilot and investment banker, Tal Keinan, he was surprised by the atrocious private aircraft care in place in the US and started SkyHarbour to set a new standard.
Boston Omaha Asset Management owns 23% of SkyHarbour in Class A shares and their warrants holding converts to an additional 6%.
SkyHarbour secured a loan of $166 million with a 4.28% fixed interest rate to fund the production of more hangars. This was funding for the first 5 campuses.
In the SPAC IPO, the goal was to have enough capital to fund the construction of 15 more campuses/hangars. The TAM for this market is approximately 50 campuses/hangars. These numbers seem small, but each campus can have many planes and the rate per plane annually can be from the high six figures to the mid seven figures.
Longer term, SkyHarbour should really be thought of as a REIT meaning in the long-term at scale dividends should become important. Connected to this at scale SkyHarbour targets a 12% NOI.
There have been multiple projections put out by SkyHarbour. Initially, the revenue projection for 2025 was $22.9 million now in a more recent investor presentation they have upped that to $103.4 million. The first projection was given to bondholders as a baseline derived from current construction and projects. What will be important for investors to watch is what new developments like new campuses or expansions to existing ones are announced because that will explain the gap between the two projections.
Broken down the initial projections expect to make $2.2 million from Houston, $6.9 million from Miami, $3.1 million from Nashville, $4.4 million from Phoenix, and $6.3 million from Denver all by 2025. This totals $22.9 million in revenue.
Dream Finders Homes (NASDAQ: DFH)
Although this is a publicly traded company it is not in the equity portfolio. The initial investment was $10 million in 2017 and had both realized and unrealized gains of $78 million at the end of last year. As the Co-CEOs commented in the 2021 Annual Report “not too shabby.” This return is very strong. This holding is currently just in public equity valued at $53.4 million, but past gains have been realized from Term loans and Preferred Shares.
Build For Rent
The first venture founded in 2021 and fully run by Boston Omaha Asset Management is Fund One: Build For Rent (BFR). There are a few important things here. First, the funding structure is different from their other ventures. This company is structured like a fund whereas most of Boston Omaha is structured like a holding company. This means that Boston Omaha isn’t the only funder. Outside funding will be selectively brought on. They plan on pursuing a REIT classification because although that entails restrictions it gives strong tax benefits and avenues to get cash flow back out of the business and into others. This is an attribute Boston Omaha looks for in most of its new investments (Fiber is a great example of this). So far Boston Omaha has invested $7 million of their own money into the development of residential rental properties in the Reno and Las Vegas areas. The next interesting piece, the name “Fund One” suggests there are more funds to come making this exciting for the future of Boston Omaha.
24th Street Asset Management is a commercial real estate firm that Boston Omaha Asset Management acquired in 2018 for $6 million. The company makes hard money loans and “direct investments in real estate.” The initial investment has so far paid out $300k in cash to Boston Omaha and appraised the position at a conservative valuation of $8 million. This means they have achieved a total return of 38% so far. Further, Boston Omaha holds a 50% stake in the management company that was purchased for $48k and is now valued at $1 million. This investment has also seen payouts of $304k so far.
Crescent Bank specializes in auto loans in 32 different states. They offer personal as well as business banking services in the Greater New Orleans Area. The bank was acquired by Boston Omaha Asset Management in 2018 for $19 million. It has returned $9.7 million in pretax income as of the end of last year. 2021 was an outlier strong year with a Return On Equity (ROE) of 29%. An extremely high figure for any bank. Management believes the bank can maintain a 15-20% ROE going forward (still comparatively very high). Since the acquisition in 2018 Crescent has retained all of its earnings, a decision Boston Omaha management supports.
There are also some other investments that were not included in my analysis. These are Logic Commercial Real Estate and Breezeway. Both of these investments are less than $1 million and not significant enough to go in-depth on.
Stock Portfolio
Boston Omaha has been very secretive about its equity portfolio. The company has even at times reduced it to stay under the $100 million disclosure threshold. At the 2021 annual meeting when in response to a question about the portfolio the Co-CEOs said there is only one holding in the portfolio. While we do not know definitively, with some research and speculation it can be deduced what the equity portfolio might consist of. First of Co-CEO Adam Peterson still runs his old fund Magnolia Capital. The fund’s number one holding is Nelnet which accounts for 24% of the fund. Nelnet is a capital allocator not dissimilar to Boston Omaha. They used to be in the broadband industry until they sold off their business. They do fee processing for colleges, student loans, some tech ventures, and more.
Valuation
The company historically used Price/Book as its main yardstick and advised investors to do the same. However, in last year's annual report the Co-CEOs announced that Price/Book was no longer the main valuation metric. This is in line with a similar recommendation given to investors by Berkshire Hathaway and Markel both are structured similarly to Boston Omaha, but on a much larger scale. Boston Omaha has also been known to reject the Berkshire comparison and lean more towards a Brookfield Asset Management comparison given its penchant for hard assets.
Based on the industry valuations for billboards, Link Media is worth ~$825 million. Using user numbers and typical subscription rates FIF (Broadband/Fiber) is worth ~$200 million, this is based on the LTV and total subscriber count. However, a 48% stake of a slightly larger cable business was sold off by Nelnet for $197 million in October 2020 meaning FIF could be even more valuable. With just these two pieces and the stock holdings, it values the company at over $1.1 billion and it is currently trading at a $827 million market cap.
Conclusion
Adam and Alex as strong capital allocators are the real bet here. They are both young but have proven to be capable operators so far. They each also ran funds before that were sizable. The investments are diversified for safety but seem to be all strong opportunities with high enough concentrations for real value to be earned from each venture. All the businesses have low debt, as well as the holding company and the Co-CEOs, seem to find businesses with good moats and cash flow. Their investments follow the pillars and so does their company. It is one of the most complicated companies owned and tracked by Pillars And Profits, but it is also one of the most interesting and promising.
Until Sunday,
Soren
Disclaimer: Soren Peterson and Pillars And Profits Newsletter are not responsible for any investment results. This is not financial advice. Always do your own research.