8-K: Boston Omaha Corporation Reports 2023 Growth and Strategic Shift

Boston Omaha's 2023 annual letter highlights growth in its core businesses, a change in leadership, and a strategic shift towards internal reinvestment and cost efficiencies.

Summary

• Boston Omaha Corporation's 2023 annual letter details the company's growth from a single real estate holding to a diversified business with over $500 million in capital raised and deployed.
• The company's three main operating businesses, billboards, broadband, and surety insurance, all experienced growth in 2023.
• The billboard business, Link Media Holdings, grew revenue organically by approximately 4% and reduced land costs to 18.6% of revenue.
• The broadband business, Boston Omaha Broadband, increased its subscriber base to 43,000, including 9,600 fiber subscribers, and now has over 26,000 fiber passings.
• The surety insurance business, General Indemnity Group, achieved record profits while growing premium and setting the stage for scalable growth.
• The company's stock price has not kept pace with the business value created, according to management.
• Boston Omaha is shifting its focus from new investments to cost savings and efficiencies within its current businesses.
• The company is winding down its asset management business due to challenges in raising a broadband fund and limited investment opportunities in its real estate fund.
• The company's management incentive plan was fully realized in 2022 due to significant investment gains, and future bonuses will likely be lower due to the change to a single CEO.
• The company plans to hold an in-person annual meeting in Omaha and provide more supplemental information to shareholders on a quarterly basis.

Sentiment

Score: 6

Explanation: The document presents a mixed picture with positive growth in core businesses but also challenges in profitability, stock price performance, and the winding down of the asset management business. The strategic shift towards internal reinvestment and cost efficiencies is a positive sign, but the overall sentiment is cautiously optimistic.

Positives

• The billboard business, Link Media Holdings, achieved record performance with organic revenue growth and reduced land costs.
• The broadband business, Boston Omaha Broadband, significantly increased its subscriber base and fiber passings.
• The surety insurance business, General Indemnity Group, had a record year in terms of revenue, gross written premium, and operating income.
• The company has a strong foundation built over the past nine years, allowing for continued growth.
• The company has identified opportunities to lower costs and improve efficiencies in its current businesses.
• The company has a disciplined approach to capital allocation, focusing on organic growth and strategic investments.
• The company's investments in real estate funds have generated good returns, with further proceeds expected in 2024.
• The company is committed to providing more transparency to shareholders through quarterly updates.
• The company has a substantial percentage of shares owned by employees, investment partners, family, and friends.

Negatives

• The company's stock price has not kept pace with the business value created.
• The company made some mistakes in underwriting at Crescent Bank & Trust during the post-COVID credit environment.
• The company invested capital in fixed wireless that may not have been a good use of funds relative to fiber.
• The company has experienced delays in achieving scale in some broadband projects.
• The company was unable to raise a broadband fund or deploy all capital in its real estate fund, leading to the wind down of the asset management business.
• The company's management incentive plan was fully realized in 2022, which was unexpected.
• The company experienced losses in its FFH broadband segment.

Risks

• The company faces risks related to the competitive nature of the industries in which it operates.
• The company's ability to acquire and integrate suitable businesses is a risk.
• The company's investments in both publicly traded securities and privately held businesses carry risks.
• The company has a history of losses and may not maintain profitability in the future.
• The company's estimates regarding the potential market opportunity for its products and services may not be accurate.
• The company may experience cost overruns and delays during construction of broadband projects.
• The company's investments in real estate funds are subject to changes in real estate markets.
• The company's reliance on key personnel and management is a risk.

Future Outlook

The company expects organic growth in its three wholly owned businesses without the need for large capital investments. They also anticipate opportunities to lower costs and plan to reinvest cash flows into new assets. The company will continue to evaluate the broadband opportunity and adjust capital allocation as needed.

Management Comments

• I could not be more excited to lead Boston Omaha forward on behalf of shareholders.
• I firmly believe that having Co-CEOs was advantageous throughout these early years at the Company.
• Our focus in the near term will be less on new investments; instead, our team will concentrate on cost savings and efficiencies in our current businesses.
• We believe our present revenue and cash flow run-rate in our three wholly owned businesses will grow organically.
• We believe that the overall intrinsic value of the investments listed above is higher than our current carrying value.
• We are now achieving scale so, going forward, we will focus less on controlled premium and more on revenue growth while maintaining positive operating income.
• We will not always hit our return goals as cost overruns and delays will inevitably occur during construction.
• The broadband opportunity will be finite, and if we see returns either not meeting our expectations or declining as new projects are evaluated over time, we will alter our capital allocation course.

Industry Context

The announcement reflects a broader trend in the telecommunications industry where companies are focusing on fiber optic infrastructure to meet increasing broadband demand. The company's shift towards internal reinvestment and cost efficiencies is also a common strategy in the current economic environment. The company's focus on surety bonds is a niche market within the insurance industry.

Comparison to Industry Standards

• Link Media's organic revenue growth of 4% is in line with industry averages for outdoor advertising, but its land cost reduction to 18.6% of revenue is a positive sign of operational efficiency.
• Boston Omaha Broadband's growth to 43,000 subscribers is a strong performance compared to smaller regional broadband providers, but still lags behind major national players like Comcast and Charter.
• The company's focus on fiber deployment aligns with industry trends, but the challenges in achieving scale and profitability are common among smaller fiber providers.
• General Indemnity Group's record profits and premium growth are a positive sign, but the surety bond market is relatively small compared to other insurance lines.
• Sky Harbour's growth in hangar locations and equity raises are consistent with the increasing demand for private aviation infrastructure, but the company faces competition from other airport developers.
• The decision to wind down the asset management business is a reflection of the challenges in raising capital for alternative investments, a trend seen across the industry.

Management Changes

Stakeholder Impact

• Shareholders will be impacted by the company's strategic shift, the winding down of the asset management business, and the potential for future growth.
• Employees will be impacted by the company's focus on cost savings and efficiencies.
• Customers of the company's broadband and insurance businesses will be impacted by the company's growth and service improvements.
• Suppliers and creditors will be impacted by the company's financial performance and capital allocation decisions.

Next Steps

• The company will focus on cost savings and efficiencies in its current businesses.
• The company will continue to scale its businesses through internal investment and tuck-in acquisitions.
• The company will wind down its asset management business.
• The company will hold an in-person annual meeting in Omaha.
• The company will provide more supplemental information to shareholders on a quarterly basis.

Key Dates

Keywords

broadband, billboards, surety insurance, capital allocation, asset management, fiber, real estate, investments, growth, cost savings