BOMN - Boston Omaha Corporation

[AJB96]

The annual meeting will be held at Boston Marriott Long Wharf, 296 State Street, Boston, MA 02109, on Saturday, June 8, 2019 beginning at 9:00 a.m. 

 

https://www.sec.gov/Archives/edgar/data/1494582/000143774919007322/bomn20190410_def14a.htm

 

I will be at the annual meeting and I look forward to seeing other CoBF members there!

[cameronfen]

Did they acquire three billboards outside Ebbing, Missouri?

 

I think those burned down. 

[CorpRaider]

Jim McLaughlin (guy running link, the billboards bidness) retired.  Also, they keep issuing stock, running an ATM program. 

[Convexity]

Guy running link retired.  (see filings)  Also, they keep issuing stock, running an ATM program. 

 

From the release:

 

"Scott LaFoy, Head of Mergers and Acquisitions for Link, has been named as Interim Chief Executive Officer of Link. Mr. LaFoy will receive a base salary of $200,000 per annum and a bonus for 2020 to be determined based on Link and its subsidiaries EBITDA on a consolidated basis for 2020. The bonus will equal 20% of the amount by which Link's EBITDA in 2020 exceeds $11,000,000."

 

Continued stocked issuance and a 20% cash sweep excess of $11mm to the interim CEO.  A priori, these aren't great headline items.

 

 

[Gregmal]

This is just another mousetrap with value investors as the target audience. Its basically PLUG but for more intelligent folks who need a little bit more effort to be tricked into parting with their money.

[Guest Schwab711]

This is just another mousetrap with value investors as the target audience. Its basically PLUG but for more intelligent folks who need a little bit more effort to be tricked into parting with their money.

 

Agreed

[bci23]

Jim McLaughlin (guy running link, the billboards bidness) retired.  Also, they keep issuing stock, running an ATM program.

 

Issuing stock ain't a bad thing if the stock is overvalued here.

[cubsfan]

Jim McLaughlin (guy running link, the billboards bidness) retired.  Also, they keep issuing stock, running an ATM program.

 

Issuing stock ain't a bad thing if the stock is overvalued here.

 

This is an early stage company, and if they can find compelling acquisitions - it's a good thing. They are only $500M valuation.

Their success will depend on how they integrate and retain.

 

So far, they have made 35 acquisitions - and have an opportunity to continue rolling up some of the billboard business.

 

From what I have seen - I'm pretty happy. Not easy to value an early stage business.

 

[CorpRaider]

Jim McLaughlin (guy running link, the billboards bidness) retired.  Also, they keep issuing stock, running an ATM program.

 

Issuing stock ain't a bad thing if the stock is overvalued here.

 

Yeah, I suppose it depends on which pair of shoes you are in (I am not in the stock).  They are pretty forthright about it in the letters.  Not sure the ATM program is the most transparent way to do it.  I guess it's not wholly inconsistent with seeking maximizing CAGR rather than AUM...depending on the premium. 

 

[Spekulatius]

Jim McLaughlin (guy running link, the billboards bidness) retired.  Also, they keep issuing stock, running an ATM program.

 

Issuing stock ain't a bad thing if the stock is overvalued here.

Jim McLaughlin is pushing 70, so it is understandable that he retired. I agree that issuing stock when it is overvalued makes sense. I guess the knock on BOMN is that they try to benefit from the Berkshire aura. The guys running it seem to be competent and their incentives are reasonably well aligned with shareholders. I don’t own this because I think the stock is overvalued and I don’t think the billboard business is that great of a nucleus for a company to get started. They have an embryonic surety business,  up that will take years to grow into a meaningful size.

[cubsfan]

I guess the knock on BOMN is that they try to benefit from the Berkshire aura. The guys running it seem to be competent and their incentives are reasonably well aligned with shareholders.

 

That is a fair criticism - and I think some of you might have been at the last annual meeting. I've been to last 2 - never once has the

Berkshire name or Buffett name been mentioned. And of course, they stay out of the press, do no analyst meetings/calls or investor days or

any promotional investor work for the company.

 

To me, they appear to be totally aligned with shareholders. The key will be execution and the price they pay for buying new businesses.

 

I would agree with you that the surety business is not at all up to scale, and it definitely needs to have critical mass for the success.

But it's not been all that long and progress looks pretty good to me. The product margins, at scale, look very good.

 

Lastly,  no one, except outside investors, are pushing the Berkshire halo.

[CorpRaider]

Yeah, to be fair its not like they go hold a marketing meeting promoting their stock to BRK investors in Omaha (like another entity which shall remain unnamed). 

 

Also, it is preferable/more rational to issue at 2x book than to continue buying back "a little" like an automaton (to offset dilutive comp?), while mgmt. keeps papering their cottages with those forms 4.    ;D

[mwtorock]

Yeah, to be fair its not like they go hold a marketing meeting targeting BRK investors in Omaha (like another entity which shall remain unnamed). 

 

Also, it is preferable/more rational to issue at 2x book than to continue buying back "a little" like an automaton (to offset dilutive comp?), while mgmt. keeps papering their cottages with those forms 4.    ;D

 

Damn, i went to MKL meetings in Omaha which targets BKR investors directly... I did not realize until you mention this :)

[longterminvestor]

Interesting business.  Here are my thoughts:

 

Billboards.  After initial purchases in “faces”, BOMN management convinced a successful longtime manager to run it for them (unfortunately he is retiring) so BOMN management will be tested to find another manager of the billboard business, early headwind for a business looking to grow.  Could lightning strike twice – Adam Peterson cold called the guy – love that.  If they can continue to purchase Billboard assets that cashflow this can compound - yes at the expense of shareholder dilution however capital is not grown on trees so it has to come from somewhere.  Management has mentioned Billboard assets can be levered, recently modest leverage was applied (non-recourse to parent rhyming with Berkshire’s BNSF debt). 

 

Insurance.  BOMN is vertically integrating the surety business by owning both the retail agent selling and the insurance company underwriting.  BOMN is getting "two bites of the apple" as they say.  Really interesting line of business to start this strategy, surety, because surety bonds have a low, extremely low, loss ratio but one of the highest commissions in the industry.  Low loss ratio and high distribution expense to retail agents is a recipe for “disruption” for an enterprise who removes the commission expense and creates an online distribution channel that is friction-less.  From personal experience, writing 100 policies at $1000 premium paying $350 in commission is tough as a salesman and is even tougher for an insurance agency accounting team (accounting takes all the fun out of selling insurance).  The surety they are writing is high, very high volume and low low premium so there is a “moat” in the friction to make a change once the surety bond is in place and set on automatic payment – reoccurring revenue (tempted to say similar metrics to SaaS just to stir the pot but I wont…wait…I just did).  When reading the annual reports and letters, I get a sense surety is not the only line of business BOMN will be selling in the future.  Time will tell. 

 

Banking.  Subprime lending in the auto business is a tough way to make a living but the world needs it – in good times and bad.  There is always collateral.  Spreads on rates are high and the asset can be repo’ed with some cost however the auto auction will sell a car in hours if you have to (collateral is good, but liquid collateral is better).  There is a banking executive on the BOD of BOMN who must have insight and provide color for team.  This is a passive investment for BOMN.

 

HomeBuilding.  Seems as though they found a good builder in SouthEast(strong growth for retirement folks) and is considered a partner.  Don’t know much about home building – will be studying up.  Also passive investment for BOMN. 

 

RealEstate.  Logic has the look of any real estate company I have ever seen.  Brokerage is a great business when transactions are flowing, and when they are not overhead is low because it is a commission based model.  Property Management seems to be a growth opportunity of Logic and good/great margins with ding!ding! Reoccurring Revenue.  Property management revenue can hedge brokerage from cash flow perspective when sales are not happening.  And like any broker, they can provide financing as well (Great sales pitch - hey wanna buy some real estate?...i don’t have any money…don’t worry, we will find a bank to loan you the money).  Good news for BOMN the gentleman running the firm is purchasing shares with his own money and is on the BOD.  Lots of opportunity surrounding Real Estate transactions.  (I would hate to speculate into future but the title insurance business is ripe for disruption –  it is included in all transactions with high commission fees).  Also passive investment. 

 

Management.  These guys are barely 4 years in!  Hello – Rome was not built in a day.  Alex Rozek walked on to D1 North Carolina Tar Heels football team.  His middle name did nothing for him in the Tar Heel locker room – much respect for the effort and fight to make the squad.  Adam Peterson runs something like $700MM in his Magnolia Fund, no small feat for a young up and comer.  No analysts, no conference calls, no investor days, no guidance.  I solute them and hope other managements follow.  They also write a great letter, it is almost seductive how it is written.  The question I have is will this letter be written for the next 35-40 years?  Sure seems like they want to create a legacy – wonder if the font they picked was languished over similar to the Christian Bale American Psycho business card scene - silian rail font??  Long run rate – these guys are in their late 30’s/early 40’s and have years ahead of them.  Outlined above are 5 business sectors to allocate capital and grow.  BV is a metric all is watching closely and is closer to 1.3XBV.  Would love to see a female enter the board room – I believe woman are excellent allocators of capital on the whole and look at risk different than male counterparts - not better - just different. 

 

Execution.  Taking the cash flow from Billboards and allocating to business opportunities – new faces, insurance, or otherwise.  They like doing deals - that is clear. Overtime there will be float inside the surety business (or future insurance businesses) to provide self leverage and this could be the catalyst that puts BOMN in the running for a compounding machine.  Management has to execute on model and time is on their side if they can be patient and not listen to the noise.  Biggest risk here is dilution, I do not see management vaporizing capital (famous last words…).  I am still looking for the motivation of Alex and Adam – some have discussed steep rewards for management on comp – I speculate both already are independently wealthy and want for nothing so IMO money is not motivating them.  They speak to incentives in their letter, in my experience there are 2 ways to incentivise people – money and public recognition.  So if they already have money – they want public recognition.  How do they do that?  Build an enduring company that compounds book value and fosters a culture of excellence.  At least that’s the hope.  Still very early days.  Like I said, I love this story. 

 

Why did Chuck Akre sell? Curious if anyone has insight there – probably dilution risk.  Or he found something he liked better.  Or he thinks BOMN will blow up.  Very curious there. 

 

This is not investment advice and written more for feedback from group.  I am growing to enjoy the community and value lessons learned on the corner of berk.  Look forward to watching the BOMN story unfold over time and learning more from group.  Thanks!

 

[CorpRaider]

Good post.  Thanks for taking the time.  I like the letters a lot too. 

 

Interesting on Mr. Rozek's Tarhole connection.  I was wondering how they came to be associated with the Keenan gent on the BOD.  As you may know, Henry Flagler was a (chief) partner of the robber-baron Rockefeller (also a bunch of stuff in florida named after him...he built a RR and did some stuff down there...haha).  Flagler married a (much) younger lady who was a member of the Keenan clan (I think some historians allege he had his second wife declared insane and carried on an affair with her before marrying her)...and the Keenan name is now on a lot of buildings at UNC (maybe the foolsball stadium and Keenan-Flagler is the bidness school, I think).  I wondered if they met a some prep school for scions or a regatta in Grand Cayman or something.

 

Seems they've had a spot of trouble in executing the vision in insurance, no?  On the home builder I would add that they (as I'm sure you noted) admire NVR and the use of land options a lot and they cite the emulation of these practices by their investee favorably. 

 

Curious about Akre as well.  It corresponded with the first secondary, didn't it?  He says he never sells unless the business fundies change...

 

Been mulling over incentives and what we can infer by the issuance.  I struggle with why one would issue keep issuing a lot more stock even at the market multiple to book (especially kind of dribbling it out ATM versus being real up front about things), if you were primarily motivated by posting a huge career CAGR...(versus goosing the size of the performance fee).

 

Magnolia is interesting but the fact that they are keeping their public equity hedge funds means (I think they said this) they won't hold public equities in the company which takes an arrow out of the quiver, and maybe divides attention.  I also note WEB has said public equities are offering better opportunities than private companies, generally, at the current time.

[Sombunall]

What's the executive incentive comp look like? It's been awhile since I looked, but I believe they are paid a hedge fund like incentive on book value... not book value per share, but book value... I just remember the incentive comp structure being terrible and so I passed. But maybe it's different now.

[cubsfan]

What's the executive incentive comp look like? It's been awhile since I looked, but I believe they are paid a hedge fund like incentive on book value... not book value per share, but book value... I just remember the incentive comp structure being terrible and so I passed. But maybe it's different now.

 

The first 3 years or so, the 2 CEO's took $24K salaries. Pretty hard not to admire that.

[longterminvestor]

I'm a FL boy so I know Keenan/Flagler.  Big fan of the Breakers Hotel in Palm Beach.  Yeah, prep school/UNC for sure, I saw Deerfield in the mix.  That could be through Rozek's wife (her family goes back to the Firestone name - rubber co.)

 

I do not see where insurance is falling at all, on the contrary – BOMN is firing on cylinders. BOMN makes money in 2 ways – premium as the risk bearer and commission as the retail agent (no balance sheet risk on a claim – sales/service only).  FY Premiums are growing organically pretty nicely.  There was a drop in insurance commissions but I speculate because BOMN basically is not paying a commission to the wholly owned agent to sell it - just put them on salary and the carrier keeps 100% of premium rather than expensing 35% to the retail broker.  Overall, my model shows 100% top line revenue growth in 2019.  That’s after  122% growth in 2018, 134% growth in 2017, 431% growth in 2016. 

 

What I am really trying to investigate and figure out is why is this public??  A public enterprise IS NOT the most efficient vehicle to do what they are doing.  Would have been less costly for them to keep money in their funds and buy billboards/insurance companies/ect do what they are doing without answering to shareholders.  Why is this thing public?  Most of the money purchased the public shares when offered were controlled by 2 head guys.  Berkshire was a mistake being held inside a public vehicle.  BOMN was not a mistake, looks like this was intentionally from the beginning.  Only thing I can think of is if its public, employees can buy into business and that’s pretty cool as an incentive.  We will see. 

 

 

[mwtorock]

I'm a FL boy so I know Keenan/Flagler.  Big fan of the Breakers Hotel in Palm Beach.  Yeah, prep school/UNC for sure, I saw Deerfield in the mix.  That could be through Rozek's wife (her family goes back to the Firestone name - rubber co.)

 

I do not see where insurance is falling at all, on the contrary – BOMN is firing on cylinders. BOMN makes money in 2 ways – premium as the risk bearer and commission as the retail agent (no balance sheet risk on a claim – sales/service only).  FY Premiums are growing organically pretty nicely.  There was a drop in insurance commissions but I speculate because BOMN basically is not paying a commission to the wholly owned agent to sell it - just put them on salary and the carrier keeps 100% of premium rather than expensing 35% to the retail broker.  Overall, my model shows 100% top line revenue growth in 2019.  That’s after  122% growth in 2018, 134% growth in 2017, 431% growth in 2016. 

 

What I am really trying to investigate and figure out is why is this public??  A public enterprise IS NOT the most efficient vehicle to do what they are doing.  Would have been less costly for them to keep money in their funds and buy billboards/insurance companies/ect do what they are doing without answering to shareholders.  Why is this thing public?  Most of the money purchased the public shares when offered were controlled by 2 head guys.  Berkshire was a mistake being held inside a public vehicle.  BOMN was not a mistake, looks like this was intentionally from the beginning.  Only thing I can think of is if its public, employees can buy into business and that’s pretty cool as an incentive.  We will see.

 

I think i heard either in Q&A or somewhere - they want to do long term investments so the assets side is pretty much permanent if everything goes well. So they need permanent capital to avoid hf like squeeze in down turns. That is the primary reason I think. They might also offer shares for acquisitions (not likely very often but possible) if the right opportunity comes. 

[Sombunall]

The incentive plan is posted below... basically 20% of shareholders equity over a 6% hurdle. I realize there are off-setting factors (as cubsfan pointed out, their salaries are very low) but stuff like this makes me wonder. Feels like buying a hedge fund at a 40% premium to NAV. Too simple, I know, just saying...

 

Rozek and Peterson Employment Agreements

 

On August 1, 2015, we entered into employment agreements with each of Alex B. Rozek and Adam K. Peterson. Mr. Rozek and Mr. Peterson each serve as a Co-Chief Executive Officer and as a Co-President. Each of the employment agreements has a one-year term, with automatic successive one-year renewal terms unless we or the executive decline to renew the agreement. Each of the employment agreements provides for a base salary at federal minimum wage per year through December 31, 2015, and an annualized base salary of $275,000 thereafter. However, each of these agreements was amended to delay an increase in the base salary from federal minimum wage until such time as approved by the Compensation Committee of the Board. On January 2, 2019, the Compensation Committee approved compensating Mr. Rozek at the base salary of $275,000 per year. Mr. Peterson has requested that he continue to receive nominal base salary at this time. Each of the employment agreements also provides for certain severance payments to the executives in the event their employment is terminated by us without “cause” or if the executive terminates his employment for “good reason.”

 

Each of Messrs. Rozek and Peterson participate in a management incentive bonus plan (which we refer to as the “MIBP”), effective as of August 1, 2015, under which participants of such plan are eligible to receive cash bonus awards based on achievement by the company of certain net growth target objectives. Each of Mr. Rozek and Mr. Peterson are eligible to participate in the MIBP pursuant to their respective employment agreements. The MIBP provides for a bonus pool, determined on an annual basis by the Compensation Committee of the Board, equal to up to 20% of the amount by which our stockholders’ equity for the applicable fiscal year (excluding increases in stockholders’ equity per share resulting from any issuances by the Company of its securities or securities of any subsidiary for cash consideration) exceeds 106% of our stockholders’ equity for the preceding fiscal year. On February 27, 2018, the Compensation Committee of the Board approved changes to the MIBP, effected through an amendment and restatement of the MIBP, including placing certain caps on the total payments under the MIBP through December 2032 and additional annual caps thereafter, as well as establishing a high water mark under the MIBP so that any decrease in adjusted stockholders’ equity per share in any prior year must be first recouped before the 6% hurdle test is applied. Previously, there were no caps on the amounts payable under the MIBP. No payments under the MIBP were earned during the fiscal year ended December 31, 2018.

 

In the event that Mr. Rozek or Mr. Peterson’s employment is terminated without cause or if either elects to terminate his employment for “Good Reason,” he is entitled to receive severance payments equal to the amounts which would have been payable to him under the MIBP if he had remained with us through the remainder of the fiscal year in which his employment terminated multiplied by a fraction equal to the number of days during the fiscal year that the executive remained employed by us divided by 365. Severance payments also will include an amount equal to four months’ base salary for each full 12 month period the executive is employed by us commencing August 1, 2015, except that in no event shall severance payments exceed the then current base salary on a monthly basis multiplied by 12.

 

 

[Gregmal]

Why buy Buffett imposters at a 40% premium to NAV when you can buy Buffett at a 25-30% premium to conservative book?

[Kuhndan]

Must have talked to Sandra Biglari rather than his grandfather about that bonus plan

[CorpRaider]

What's the executive incentive comp look like? It's been awhile since I looked, but I believe they are paid a hedge fund like incentive on book value... not book value per share, but book value... I just remember the incentive comp structure being terrible and so I passed. But maybe it's different now.

 

Bro. It's a clone of the Buffett partnership compensation model (his grand UNCLE with a little better split for the LP/SH).  Index?

 

w/r/t to insurance building challenges I think I was remembering this from the 2018 AL (discussing how the cost base is too high and building scale in the surety bidness):

 

"This all sounds great on paper, but in practice, consistent execution in our operations has been met with many challenges. For example, each agency GIG acquired used a different system to record the bonds sold, manage cash and reconcile carrier

submissions. Getting daily reporting across all companies required significant manual work from a number of employees. A large amount of the effort and cost associated with this daily time-consuming task was eventually replaced with software that now compiles and reports the information to GIG using more automation. Resources devoted to development and implementation of a back-office system are resources not deployed to other projects, and the list of other projects is long.

Whereas depreciation and amortization costs exceed likely capital expenditures in billboards, they underestimate capital required for the insurance businesses. Implementing a new system has been expensive and time consuming and there is much

more work to do."

[rkbabang]

Must have talked to Sandra Biglari rather than his grandfather about that bonus plan

 

Has Biglari transitioned?  I had no idea.  I wonder if she'll be on the cover of Maxim?

[cubsfan]

What's the executive incentive comp look like? It's been awhile since I looked, but I believe they are paid a hedge fund like incentive on book value... not book value per share, but book value... I just remember the incentive comp structure being terrible and so I passed. But maybe it's different now.

 

Bro. It's a clone of the Buffett partnership compensation model (with a little better split for the LP/SH).

 

w/r/t to insurance building challenges I think I was remembering this from the 2018 AL (discussing how the cost base is too high and building scale in the surety bidness):

 

"This all sounds great on paper, but in practice, consistent execution in our operations has been met with many challenges. For example, each agency GIG acquired used a different system to record the bonds sold, manage cash and reconcile carrier

submissions. Getting daily reporting across all companies required significant manual work from a number of employees. A large amount of the effort and cost associated with this daily time-consuming task was eventually replaced with software that now compiles and reports the information to GIG using more automation. Resources devoted to development and implementation of a back-office system are resources not deployed to other projects, and the list of other projects is long.

Whereas depreciation and amortization costs exceed likely capital expenditures in billboards, they underestimate capital required for the insurance businesses. Implementing a new system has been expensive and time consuming and there is much

more work to do."

 

The insurance business is almost like a startup, and should be viewed as such.  If I remember, I believe BOMN was licensed in 3 or 4 states as recently

as 2 years ago. Now, I believe,  they are ready to go in 49 states. So acquiring distributors and state licenses and consolidating systems have

been a large upfront effort and cost.  Don't be surprised if you see some rapid growth here in next few years.