BOMN - Boston Omaha Corporation

[John Hjorth]

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?

 

rkbabang, & off topic,

 

You're killing me.

[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 (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.

 

Ok, yeah I feel you. I'm not hammering it, it does sound good on paper.  I was just responding to some pretty bulled-up comments (citing big revenue/premium growth figures for what is kind of a roll-up). Also, I think the guy running GIG bailed or was fired in August 2019.

 

@longterminvestor Re: Flagler  Yeah he seems like he was an odd man from what I've read.  The original "Florida man?"

[longterminvestor]

@Corpraider: One of Flagler's quips as quoted from a great book Last Train to Paradise - "I would have been a rich man if it hadn't been for Florida". 

 

I researched further on Akre/BOMN.  Last filing in 2017 for entity named Spencer Capital Holdings LTD (private fund with interests in insurance and car financing/dealer services) has the following Board Members - Charles Akre and Alex Rozek.  So the two sat (or still sit) on a BOD together.  Wonder if there was a conflict and that's why Akre had to sell BOMN.  Interesting side note, none other than famous value investor Michael Burry MD was (is) on same BOD.  Mr. Rozek finds himself rubbing elbows with some super value investors Akre & Burry. 

 

One of the subsidiaries of Spencer Capital is SouthWest Dealer Services is a full-service finance and insurance (F&I) company.  So Rozek is seeing lots of things related to auto lending, auto dealers, and auto insurance sitting on the BOD of Spencer Capital.  I'm almost positive that SWDS is selling United Casualty & Surety products (wholly owned by BOMN). 

 

Lastly, Adam Peterson is on the BOD and major shareholder of Nicholas Financial (NICK) which is a thrift lending to sub-prime auto customers. 

 

Above furthers the thought of BOMN's deep knowledge of sub-prime auto loan industry with passive equity purchase of bank doing sub-prime auto loans AND insurance distribution.  All of this may mean nothing, or may mean something.  Deep value comes from deep understanding. 

[cubsfan]

Longterminvestor -great input, thanks for sharing.

[CorpRaider]

@Corpraider: One of Flagler's quips as quoted from a great book Last Train to Paradise - "I would have been a rich man if it hadn't been for Florida". 

 

I researched further on Akre/BOMN.  Last filing in 2017 for entity named Spencer Capital Holdings LTD (private fund with interests in insurance and car financing/dealer services) has the following Board Members - Charles Akre and Alex Rozek.  So the two sat (or still sit) on a BOD together.  Wonder if there was a conflict and that's why Akre had to sell BOMN.  Interesting side note, none other than famous value investor Michael Burry MD was (is) on same BOD.  Mr. Rozek finds himself rubbing elbows with some super value investors Akre & Burry. 

 

One of the subsidiaries of Spencer Capital is SouthWest Dealer Services is a full-service finance and insurance (F&I) company.  So Rozek is seeing lots of things related to auto lending, auto dealers, and auto insurance sitting on the BOD of Spencer Capital.  I'm almost positive that SWDS is selling United Casualty & Surety products (wholly owned by BOMN). 

 

Lastly, Adam Peterson is on the BOD and major shareholder of Nicholas Financial (NICK) which is a thrift lending to sub-prime auto customers. 

 

Above furthers the thought of BOMN's deep knowledge of sub-prime auto loan industry with passive equity purchase of bank doing sub-prime auto loans AND insurance distribution.  All of this may mean nothing, or may mean something.  Deep value comes from deep understanding.

 

I will have to check that book out.  Thanks!  Yeah I remember coming across that NICK position when they made the investment in the LA subprime auto bank.  I saw financials on a couple of sub-prime auto dealers back when I was a commercial banker and they were...killing it.  I'm not a fan tho.  Much more interested in the billboards (have CCO, LAMR, and OUT in a watchlist and look at JDDecaux every once in a while) surety bonds, even the uber-levered home builder with the land options.

[longterminvestor]

Additional commentary on Insurance Business of BOMN.  They have 2 line items for Insurance - Premium Earned and Insurance Commission.  Below are FY 2017, 2018 and Estimated FY 2019.

 

FY 2017

Premium Earned: $2,031,597

Insurance Commission: $1,586,200

 

FY 2018

Premium Earned: $3,184,312 (57% Increase YOY)

Insurance Commission: $2,606,031 (64% Increase YOY)

 

ESTIMATED FY 2019 (Q4 est. is increase of Q3 by 10% - very conservative)

Premium Earned: ~$10,807,428 (239% Increase YOY)

Insurance Commission: ~$1,688,033 ( -35% Decrease YOY)

 

The mechanics of their vertically integrated system from what I see is taking as much of the existing book of business from the agency brokerage and funnel through wholly owned insurance risk bearing business.  That is probably where the jump in premium earned came from and there for a drop in insurance commissions as a broker.  Whatever commission being paid is probably from 3rd party surety companies not owned by BOMN where the risks do not fit the underwriting box and have to be brokered to other surety companies.  My expectation is this commission line item will level off and hopefully see small organic growth over time.  Question I would have for management is exactly that – what happened to books of business purchased?  Were they re-written with UCS as much as possible?  How much surety business is written with other risk bearing sureties?

 

The large increase in premium earned has to have come from the fact the carrier UCS being licensed in all 50 states and DC and book being transferred.  Now this growth has large expense attached with relation to % of premium due to underwriting expense EE Cost and G&A.  The Startup nature and large learning curve going from $2MM premium to ~$10.8MM premium in 3 years will blow expense for any manager.  Management has discussed the integration of systems being difficult however technology will solve this problem over time.  Other important note is the lag of premium earned reported under GAAP.  I see this as a POSITIVE FOR GOOD CAPITAL ALLOCATORS.  For example, $1200 bond written and paid for in full on 1/1/2020.  UCS will pay agent $420 (35%) and have $780 of premium to recognize – BOMN will only report $195 of earned premium at quarter end however they have the use of the full $780 premium for allocation.  Different for the Insurance Commission revenue recognition, example above revenue for $420 will be recognized immediately.  My questions for management would be – How much UCS premium is written by 3rd party agents not wholly owned by BOMN?  How many new agents are you appointing to write business with UCS?  How much of the business is written direct vs through an agent?  How do you compensate internally for direct premium written?

 

Keep in mind the US Market for Surety is roughly $5Billion in premium.  Lets understand what that represents.  That means $3.25Billion in premium to risk bearing surety companies and $1.75Billion in insurance commissions to agent/brokers (35% Commission).  This IS NOT a large market.  But it’s the perfect market for disruption and learning with low loss ratios (UCS reported 12% loss ratio in 2018).  Lets assume that 80% of that $3.25Billion will stay where it is with the big boy carriers and 20% is up for grabs with regional players.  That’s $650MM premium available – UCS is at ~$10.8MM Premium.  That is opportunity for sure.  And I discount the distribution insurance commission because the mechanics of permanent capital there are not as good as risk bearing surety.  I consider it "icing on the cake" revenue. 

 

So in conclusion, BOMN purchased UCS for $13MM in cash and infused like $2MM in capital for total consideration of $15MM (rough#).  They are already at $11MM Premium and yes the net income has not materialized to earn back the $15MM they paid however they have use of funds for float allocation and in the capable hands of an allocator – they conceivably have all capital back and then some in 2-5 years for what they paid.  That is no lallapaloosa Private Equity IRR however it is good enough for me.

 

I’m sure they are hunting for surety agents to acquire and pump their books of business through UCS and hopefully that will materialize over time.  The TRUE TRICK is can they take this same business model to other lines of business in the insurance business.  If they can figure that out, BOMN has possibility of being a monster.  Time will tell. 

 

[AzCactus]

Is anyone giving this another look at these prices?  I would expect their advertising business to be effected here---while also allowing them to look for acquisitions on the cheap .  Leverage doesn't seem super crazy and the management team seems better than most.  Obviously that hasn't totally been reflected in the stock price since they took over but stock prices and business performance aren't always in tandem during the short term. 

[Guest roark33]

MIT Investment fund just bought 9% of this company recently, for whatever that is worth.  Might be the ultimate contra-signal...;)

[CorpRaider]

Is anyone giving this another look at these prices?  I would expect their advertising business to be effected here---while also allowing them to look for acquisitions on the cheap .  Leverage doesn't seem super crazy and the management team seems better than most.  Obviously that hasn't totally been reflected in the stock price since they took over but stock prices and business performance aren't always in tandem during the short term.

 

I bought a little bit below book last month.  I noted that they said they've been buying some stonks.  Would be interested to see those, but I'm not sure they will have to file, since I think those are held as part of the insurance portfolio (which I think was under $100MM).  I don't know about the rural broadband stuff.  I guess it makes sense if you are in an area that is not dense enough for big cable co's but also dense enough that you aren't getting smoked by SpaceX Starlink or another satelite service in a few years.

[johnny]

you aren't getting smoked by SpaceX Starlink or another satelite service in a few years.

 

Is there some recommended reading on this? Are there enough plausible numbers out there that we can handicap the offering's success reasonably well? I have a house in a "town" in a pretty rural area--maybe the biggest selling point about the place is that you can get gigabit fiber for $60/mo.

[CorpRaider]

Does anyone have access to the Magnolia (Peterson's fund) letters and/or return figures?  Thanks.

[Beekman]

Does anyone have access to the Magnolia (Peterson's fund) letters and/or return figures?  Thanks.

 

^Would be interested in this as well.

[skanjete]

I also would like to have a view on his investment philosophy, process and track record.

So if the information would be available, I too would be very interested...

[longterminvestor]

Magnolia Group, LLC does file 13F.  That's as close as I have come to seeing anything public.  Owns Banks and some other randoms (got the ole' BRK/B in there though!). 

 

https://www.sec.gov/Archives/edgar/data/1618376/000139834420008415/xslForm13F_X01/fp0052703_13fhr-table.xml

 

I reviewed quarter for BOMN and was pleased with progress.  Wanted to ask the group an accounting question regarding amortization.  This is a section found on page 35 of most recent filing:

 

"During the first quarter of fiscal 2020, we had total costs and expenses of $12,590,152, as compared to total costs and expenses of $13,898,675 in the first quarter of fiscal 2019. Total costs and expenses as a percentage of total revenues decreased from 152.6% in the first quarter of fiscal 2019 to 110.3% in the first quarter of fiscal 2020. This improvement reflects our increase in total revenues, a reduction in amortization expense due to extending the amortization period from 3 years to 10 years for customer relationships within our billboard segment and our continued focus on reducing professional fees and general and administrative expenses."

 

Is the increase in amortization from 3 to 10 years significant change and why the change?  Its a non-cash change but will boast reportable earnings over time as they continue purchasing billboard assets. 

[AzCactus]

I'm going to take a stab at this one (Disclosure-I own shares).  The biggest knock I have seen on this board is that one of the Co Ceo's is Buffett's grand nephew.  Two things I'll add here-The company doesn't publicize this in any fashion I have seen/heard.  Secondly and maybe more important, it doesn't mean much.  Jordan's kids don't automatically become NBA legends, Gretzkey's kids aren't necessarily in the NHL etc.  Point being is that these two Alex/Adam are going to need to make this work or fail on their own.  The biggest knock I could think of is that since the company went public (a while ago) the stock hasn't moved much. The other knock is the dilution which I also don't really like.  Long term however, this investment basically boils down to two things, do they have a good strategy and will they be able to executive it? 

 

I think the answer is yes and think that they will emerge stronger here. 

[BG2008]

Munger apparently has a grandson who manages money.  I don't think I have heard much about him or know of his track record.

[CorpRaider]

The biggest concern I have is continually issuing shares, usually as part of a lower profile "at the market" program, and then announcing a buyback with great fanfare when the stock sells down to book (all within one quarter). 

 

They had like 25% of the market cap in cash at EOQ, but sure go ahead and issue some more stock.  They also paid like 16x ebitda for their last material board acquisition, before the covid and I think they paid some portion in stock (too lazy to go back and look).

[Jurgis]

Well, it's a great business to issue shares at 1.5-2xbook and then buy back these shares at 1xbook.

 

Ten roundtrips or so and you're talking real money.

 

Where can I sign up for this?

[AzCactus]

@Jurgis:

 

https://bostonomaha.com/

[Tim Eriksen]

Magnolia Group, LLC does file 13F.  That's as close as I have come to seeing anything public.  Owns Banks and some other randoms (got the ole' BRK/B in there though!). 

 

https://www.sec.gov/Archives/edgar/data/1618376/000139834420008415/xslForm13F_X01/fp0052703_13fhr-table.xml

 

I reviewed quarter for BOMN and was pleased with progress.  Wanted to ask the group an accounting question regarding amortization.  This is a section found on page 35 of most recent filing:

 

"During the first quarter of fiscal 2020, we had total costs and expenses of $12,590,152, as compared to total costs and expenses of $13,898,675 in the first quarter of fiscal 2019. Total costs and expenses as a percentage of total revenues decreased from 152.6% in the first quarter of fiscal 2019 to 110.3% in the first quarter of fiscal 2020. This improvement reflects our increase in total revenues, a reduction in amortization expense due to extending the amortization period from 3 years to 10 years for customer relationships within our billboard segment and our continued focus on reducing professional fees and general and administrative expenses."

 

Is the increase in amortization from 3 to 10 years significant change and why the change?  Its a non-cash change but will boast reportable earnings over time as they continue purchasing billboard assets.

 

They explain why in the 10-Q

During the fourth quarter of 2019, we updated our analysis of economic lives of customer relationships and extended the amortization period to 10 years to better reflect the estimated economic lives of our billboard customers.

 

It is a non-cash change and will improve reportable earnings whether or not they make additional acquisitions since it impacts the remaining balance from prior deals as well.  If it better corresponds to reality it makes sense to do it.   

[AJB96]

The Boston Omaha annual meeting was held virtually on Saturday the 30th. They did not take questions from shareholders but they did give a thorough overview of Link Media, General Indemnity, AirBeam (their recently acquired a rural fiber-to-the-home and fixed wireless broadband internet provider) as well as their minority investments. They also discussed their rationale for raising more capital to invest in expanding AireBeam Communications.

 

Here is the link to the annual meeting recording: https://wcc.on24.com/webcast/previewlobby?e=2341114&k=A01E60F3B5A623BDDDA2795749242C47

[valueseek]

Thanks for the link.

[AzCactus]

I listened to the call and came away impressed with both the long term vision and strategy behind it. This doesn't have to be Berkshire 2.0 for it to be a reasonably good investment for a long time ahead. 

[OracleofCarolina]

getting into the SPAC game

 

https://www.sec.gov/ix?doc=/Archives/edgar/data/1494582/000143774920020210/bomn20200924b_8k.htm

[CorpRaider]

HMMM.  "You have to keep an inner SPAC-card."  @WarrenBuffet99