Boston Omaha (NYSE: BOC) pivoted in its business model, and it caught the attention of investors. In this clip from “The Rank” on Motley Fool live, recorded on May 2Motley Fool contributor Matt Frankel explains how he ranked Boston Omaha and why it could be a great long-term investment.
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Matt Frankel: Boston Omaha is often compared to an early stage Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), but that’s kind of a lazy explanation, in my opinion. They are a small business. Their market cap is about 0.1% the size of Berkshire’s, so that’s not even really a fair comparison. There are two main parts of their business. They have subsidiaries. It’s in billboards, insurance. They carry bond insurance, which a lot of businesses have to carry to protect their customers and things like that.
Jason Hall: So if someone comes to your house and they are related.
Frankel: To the right. Many financial advisors purchase bond insurance. And then there’s rural broadband Internet infrastructure, fiber optics, things like that. He just announced a big acquisition on that side — InfoWest they’re acquiring, which will double that part of their business. And then the other side of their business is what they recently reclassified into Boston Omaha Asset Management, where all of their other non-core businesses are. To name just a few of the great parts. They hold 26% of Celestial Port (NYSEMKT: SKYH) which recently became public. It’s an aviation infrastructure company, and they have mandates to buy another 6%, so they could end up owning a third if they want to. This one was recently made public through their SPAC. It’s been volatile to say the least. But that one could be a big one if it’s a winner. They sold part of their Dreamfinder homes (NASDAQ:DFH) investment. They were one of the first investors in this company before it went public. They reduced that stake a bit to help fund their investment in Sky Harbor, but they still own over $50 million of Dreamfinders Homes, which I mentioned is the whole company worth less than $700 million dollars, so that’s a big chunk of them. They have a bunch of other minority investments, including a bank, a commercial real estate agency, and a few others. And their most recent: they start a house-to-rent business, which was originally going to be their fourth business segment. But they recently announced a really big pivot. I don’t know if Jason is already familiar with that. They announced it in their annual letter published about a week ago. They’re going to run it like a fund, which means they’re going to put in 10% of the capital, that’s what they said. And they’re going to bring in outside investors to help build the fund. There are several reasons why they do this. First, it allows them to build that business, scale it faster, and make it bigger than it otherwise could. They cap the initial fund, which they call Fund 1, at $115 million in initial commitments. They wouldn’t have invested this out of their own capital right away, allowing them to make it a bigger business than originally planned. By the way, this “Fund 1” implies that it could be the first of a long series. And the economy is much better in this fund model. It’s a bit like the SPAC model in many ways. They benefit from their own participation in the fund, of which I said that they contribute 10% of the capital. So on $150 million they put $15 [million]. And because they are the fund manager, they get a share of the profits they generate for all the other investors. So they get a percentage of the profits generated on the remaining $140 million. [Editor’s note: $135 million] in addition to the profits generated by their own capital. So if it succeeds, it could be a very, very profitable arrangement for Boston Omaha. And here’s a really interesting point: the $150 [million] are only initial commitments. They want to continue to scale this fund and eventually spit it out as a real estate investment trust as it reaches scale. It’s definitely a big pivot in their business model, and it’s one I’m a big fan of. So that’s kind of one of the reasons why I’ve ranked this as high as I am and why I’ve added a lot of my own capital to it over the last two years, actually.
Jason Hall holds positions at Boston Omaha Corporation and Dream Finders Homes, Inc. Matthew Frankel, CFP® holds positions at Berkshire Hathaway (B shares), Boston Omaha Corporation, Dream Finders Homes, Inc. and Sky Harbor Group Corporation. The Motley Fool has positions and recommends Berkshire Hathaway (B shares), Boston Omaha Corporation and Dream Finders Homes, Inc. The Motley Fool recommends the following options: long January 2023 $200 call on Berkshire Hathaway (B shares), short January 2023 Put options of $200 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.