The following segment was excerpted from this fund letter.
Boston Omaha (NYSE:BOC) is a holding company that divides itself into four main segments: Billboard, Insurance, Broadband, and Asset Management. It is our third largest position in the fund and now has a market cap of $410m.
When River Oaks invested in Boston Omaha in 2021, I expected it to be a quiet, uneventful investment that would slowly compound capital at above average returns for years and decades to come.
So far, it has been anything but that!
This May, Co-CEO Alex Rozek stepped down from Boston Omaha and immediately sold all his shares. It is hard to say what exactly lead to Alex stepping down – press release attached here- but it was apparent a few months before that something wasn’t right within the company.
Abruptly, in April, Boston Omaha announced they were winding down their asset management business – which they had raised over $125m for – and temporarily changed their annual meeting to a virtual meeting.
Boston Omaha has had a co-CEO structure since starting in 2015, but it was becoming apparent through my conversations with companies owned by Boston Omaha that over the past year or two co-CEO Adam Peterson was becoming the leader and key decision maker.
Alex leaving didn’t change my investment thesis on Boston Omaha much at all.
However, the way Alex exited the company was a situation that gave me pause in whether my investment thesis was still intact.
Alex owned 49% of the super voting shares – Adam owns the other 51% . Since the super voting shares are not actively traded on a stock exchange, it was deemed through legal action that a valuation firm needed to determine fair value of Alex’s super voting shares plus regular shares.
The third-party valuation firm decided Alex’s super voting shares plus regular shares were worth just over $25 per share – while regular shares were trading just below $16 per share at the time.
So, Boston Omaha was forced to buy back $19 million worth of shares from Alex Rozek – 4-5% of the market cap – at a 60+% premium to the share price at the time.
This, on top of other activities mentioned in previous letters that were poorly communicated to shareholders, made many investors run for the door – the share price temporarily fell to ~$12.
After taking a few weeks to digest the information, talking to Boston Omaha team members and reading Adam’s letter to shareholders, I started to realize that – despite the frustration of having to pay an inappropriately large premium for Alex’s shares – a much needed second chapter of Boston Omaha had begun.
It was the time for Adam Peterson to become the sole CEO of Boston Omaha.
Adam is one of the most driven, talented, and reasonable businessman I have invested alongside and him becoming sole CEO is a necessary development for long-term Boston Omaha shareholders.
As mentioned in previous letters, each CEO of companies that Boston Omaha owns that I have spoken with has said how impressed they are with Adam and how hands off he is – allowing them to run their own company.
Adam has made it clear the next chapter of Boston Omaha will not stray away from their core competencies as they did with their asset management program.
They will solely focus on growing their broadband internet, billboard and insurance business alongside their investments in Sky Harbour, Crescent Bank and a few other smaller investments.
The Boston Omaha team plans to enhance shareholders relationships by providing quarterly supplemental slides, perhaps doing a call with shareholders 1-2 times a year, and a more straightforward bonus plan.
On top of that, Adam and his team are buying a significant amount of shares themselves and a $20m share buyback program has been announced.
All this turmoil has forced Adam and his team to become hyper focused on growing their current businesses and soon entering the significant free cash flow period of their life cycle that I have referred to numerous times in the past.
Looking forward, over the past six months I have caught up with various CEOs of Boston Omaha owned companies as well as other industry experts and have gained a much deeper appreciation of how valuable the core assets Boston Omaha owns are.
Billboards
Link Media – run by Scott Lafoy – is the sixth largest billboard company in the U.S with 7,600 billboards. A billboard company of this size is incredibly valuable. Due to the governmental restrictions on building new billboards, organically growing a large billboard company in the U.S is impossible. Another large billboard owner made it clear to me that Link Media’s appraised value is probably $325+m value – $300m equity value ($25m of debt). A strategic buyer such as Lamar, OutFront, or Clearchannel would pay a significant premium to the $325m appraisal value as not only does Link Media own billboards in more rural areas of the country – an area that the major players haven’t penetrated- but Link Media is one of the last of-size acquisition targets left. Link Media is currently generating ~$20+m of free cash flow to equity with the ability to significantly grow their free cash flow as they convert some of their traditional billboards into digital billboards and reduce existing land lease costs.
Rural Broadband Internet
Boston Omaha has invested ~$175+m in rural broadband internet by acquiring and growing InfoWest, Airebeam, Utah Broadband and Fiber Fast Homes (for a more in-depth discussion of rural fiber internet see the last letter). All of their rural broadband businesses are still in the growth phase as they build out their fiber internet network – which requires a lot of upfront capital. However, once their fiber internet network is fully built they will transition from breakeven free cash flow to equity now to potentially over $20+m of free cash to equity. I have spoken with a few of the CEOs of Boston Omaha’s fiber businesses and they are both impressive operators and excited for what the future holds in rural fiber. I talked about this in length in a previous letter but this is a once in a lifetime opportunity to build fiber to rural U.S locations – often coming with government grants – and if done correctly it will eventually generate low maintenance, durable free cash flow for decades. Equally as exciting, all four of Boston Omaha’s broadband internet companies are starting to work together – under the coordination of Adam and Frank DeJoy – to not only share ideas and avoid prior mistakes but also to reduce costs.
Sky Harbour (SKYH)
Sky Habour is a publicly traded company with 13 private aircraft hangars campus locations across the U.S and adding more locations almost every month. The current market cap of Sky Harbour is ~$675m valuing Boston Omaha’s ownership at ~$135m.
I wrote a full detailed explanation of Sky Harbour’s business in the H2 2022 letter – attached here- but suffice it to say that CEO Tal Keinan, CFO Francisco Gonzalez and their team have far exceeded my expectations in the first five years of the company.
It now looks as if they will achieve their short-term goal of getting into 20 airports within the next year, which is a truly incredible accomplishment! (their longer-term goal is 50 airports)
I have gotten to know Tal and Francisco well and their ability to execute the growth of Sky Harbour has been jaw dropping to watch. They have fulfilled a need that high-net – worth aircraft owners have wanted for years.
More importantly, they have been able to negotiate – at an astounding speed – airport land contracts that were thought to be impossible to get (as private airports are often run by slow, bureaucratic municipal governments).
Their private aircraft hangar campuses are receiving rave reviews from customers and they are selecting high quality airports.
For example, they recently agreed on a contract to build a hangar campus at the San Jose, CA airport which is considered an A+, top-tier airport.
Once Sky Harbour reaches 20+ airports they should have the ability to generate $50-$70m+ of free cash flow to equity per year. However, it will certainly be re-invested into the business as their long-term goal is to reach 50+ airports.
If Sky Harbour reaches their long-term goal they will be worth multiples of their market cap today. Adam and his team buying ~20% ownership in Sky Harbour in 2021 is turning into an exceptional investment.
If you simply add the conservative value of Boston Omaha’s billboard company – $300m – plus the value of their Sky Harbour ownership – $135m, you already get well more than Boston Omaha’s current market cap of $410m
This means that investors are essentially ascribing zero value to:
- $175+m of invested capital in their rural broadband internet businesses
- $35m Insurance Business
- 15.6% ownership of CB&T Bank – $25-30+m value
- $20+m in real estate and other investments
- $25+m of cash on the balance sheet
Using conservative estimates this gets you to a $720m market cap – which is 70+% above the current market cap.
From a free cash flow standpoint, Boston Omaha is generating a ~11-14% free cash flow to equity yield (7-9 P/E ratio) which doesn’t include the $20+m of free cash flow potential from their fiber businesses in the future.
Not only does Boston Omaha provide us with an unusually high downside protection for a company with so many valuable assets that have growth potential but the downside protection is now further backed by the announced $20m share buyback program.
Their annual meeting is now in person this September in Omaha. I will be attending and will make sure to send you all an updated report after catching up with the Boston Omaha team.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Read the full article here