BOC - Boston Omaha Financials Flag Warning Signs

2023-08-23 01:18:16 ET

Summary

• Boston Omaha's second quarter filing reveals widening financial losses, raising concerns about its commercial real estate and aviation investments.
• The company continues to dilute shareholders by issuing more shares, and general and administrative charges have increased significantly.
• The investment in aviation hangar developer Sky Harbour is trending in the wrong direction, with a 39% decline in equity value and potential impairment charges.

Boston Omaha ( BOC ) second quarter filing reveals a widening financial loss over 6 month period belies company optimism over commercial real estate and aviation holdings. Since company has recently entered and expanded these investments, I would certainly not dismiss this stock entirely, but instead wish to urge caution until positive definitive financial results emerge. An investment here is one of pure speculation.

This holding company invests in significantly different business entities which makes analysis particularly challenging. Billboard revenues increased 11% to $21 million over the first half of 2023 but cost to achieve increased 6%. Broadband business was up 42% but costs associated with this revenue growth, surged 62%. Net loss from operations widened to $4.6 million from $3.1 million during the same timeframe in 2022. A model of making increasingly costly investments to gain smaller percentage growth is not attractive to me.

BOC continues to dilute shareholders as it issued an additional 1.6 million shares of stock bringing total to 30.3 million outstanding versus 28.7 million at the beginning of 2023. This represents a significant 6% “charge” to shareholder value. Furthermore General and Administrative (G & A) charges surged to $8 million vs. $6 million a whopping 25% increase. This theme of ever higher costs is a major red flag for investors.

The Sky Harbour ( SKYH ) investment is also trending in the wrong direction at this early stage. BOC owns 13,118,474 shares (22.95% stake) of this aviation hangar developer for private aircraft. The carrying value equals $7.78 per share, which reveals their purchase price at $102 million. SKYH trades at only $4.47 per share today which translates to $62.6 million equity value-a 39% decline. Furthermore the company warns they may be forced to absorb an impairment charge should this investment continue to trade below its cost.

If Sky Harbour’s stock price drops below our carrying value of $7.78 per share for a sustained period of time, it will likely result in an impairment of our investment. There may also be a future impairment of our investment if our expectations of Sky Harbour’s prospective results of operations and cash flows decline which could be influenced by a variety of factors including adverse market conditions.

SKYH is an early stage aviation company with extremely high capital expenditures of approximately $40 million per hangar. After listening to its recent conference call, it will be several years of expenditures before this business can realize significant profitability and furthermore this model is new and untested.

Boston Omaha recently finalized full control in 24th Street Asset Management which holds various commercial real estate investments. If one is looking for a positive, the company reported $3.5 million net income from operations within this large “asset management” segment. On the down side, there was a $1 million loss in “other income” inside this table, with a note referencing a decline in “mark to market” fair value adjustments of commercial real estate within these assets.

The final red flag is that Boston Omaha reported a material weakness of internal control over financial reporting as of June 30, 2023 in sec filing . Investors can read the specific language within the filing above. This material weakness could lead to misstatement in recorded investment in unconsolidated entities as well as the income within these entities.

If BOC cannot accurately report the “value” of their holdings and the income from these complex commercial real estate investments, I would recommend investors sell this stock at this time. I note the company believes that there is long term intrinsic value in their holdings. I would look to see confirmation in future financial results.

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