Idea Brunch with Gwen Hofmeyr of Maiden Financial
Idea Brunch with Gwen Hofmeyr of Maiden Financial
Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Gwen Hofmeyr!
Gwen runs Maiden Financial, a boutique research firm specializing in deep equity research that she launched in March. Before founding Maiden, Gwen did equity research at Folly Partners, the family office of Andrew Wilkinson. Gwen has received recent attention for reports on undervalued banks and hidden land assets at public companies.
Gwen, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background, your passion for markets, and why you decided to launch Maiden Financial?
Thank you for having me! As an off-the-beaten-path investor, I’m grateful for the opportunity to contribute to the community of innovative financial nomads that you have built.
I’m one of those lucky liberal arts expats who discovered finance out of chance. Back in 2017, I was in my final year studying political science at the University of Victoria, and I was in a state of total dread. The idea that the next thirty years of my life would likely be spent analyzing and coordinating policy proposals for ineffective governments had me as happy as a clam caught in the sun.
Desperate to escape the clutches of despair, I explored my options, and capital markets caught my attention. The internet told me that I needed to go to business school and to get a CFA charter to have a career, but instead I decided to save time by going to my local used bookstore, where I picked up my first ever book on investing: One Up on Wall Street, by Peter Lynch.
Reading that book felt like waking up for the first time, and on that June summer day, I bid farewell to my prospects as a policy cog and gave myself to all things investing.
Three dozen books later, an amateur finance blog, an authored book, and a “Put your MBA in your pipe and smoke it” attitude, I landed my first job as an equity research analyst at Tiny in October 2018.
As I evolved in my career as an analyst, it became clear that firms today do not generally commission the type of deep work necessary to inspire the rational pricing of securities. Instead, they are focused on peddling highly marketable quantitative and passive investing strategies that are overwhelmingly price-agnostic. Yet, time after time, when we conducted deep work at Tiny (and later Folly Partners, Andrew Wilkinson’s family office), we consistently made money and outperformed, and when we didn’t, we lost money and underperformed.
After Andrew was forced to downsize his family office in March of this year, I found myself unemployed in the small market of Vancouver, BC. Vancouver’s finance industry is everything that I don’t like about modern finance. It’s heavily focused on sales and relationships to prioritize enrichment for the firm and places little onus on conducting quality analysis and sporting sufficient position concentration to maximize client returns. I’m not interested in firms that perform work to market the appearance of merit; I’m interested in firms that demonstrate it.
That’s how Maiden Financial came to be. Following the publication of a report I wrote on Hingham Institution for Savings in April, a Massachusetts-based regional bank that I compared to 138 banks in the KRE, I suddenly had a six-month backlog of clients wanting to commission long-form research. Admittedly, I may press pause to explore working for a stand-up asset manager based in Charlotte, North Carolina, but it’s yet to materialize.
You recently published a phenomenal report on Ingles Markets (NASDAQ: IMKTA). Can you tell us a little about your research and why Ingles is a compelling opportunity?
I stumbled upon Ingles as part of a research project commissioned by Guernsey-based investor, Swen Lorenz, to identify North American companies that own land. I had never analyzed a land stock before, so my first instinct was to look at companies where land ownership might be expected. Think farming and livestock.
However, the universe of traditional land-owning securities in North America is small, and I quickly became skeptical that such a list would result in the production of differentiated work. In response, I expanded the original search to include 753 small caps in traditionally non-land industry categories. Then, I looked through the annual reports of each to identify if any owned land.
The exercise resulted in the identification of 61,033 disclosed acres, but as it turns out, companies do not always disclose the true nature of their real property. Nowhere was that more obvious than with Ingles Markets.
Ingles discloses 160 owned acres of commercial property adjacent to its distribution center, its warehouse, and its milk plant, along with 29 undeveloped sites. But the business also discloses 8.6 million square feet of owned leasable shopping center space, of which 4.1 million square feet is occupied by supermarkets operated by the company. That’s a lot of space for just 160 acres to sit on.
In Note 3 of Ingles’ annual report, “Property and Equipment,” the company accounts for the cost of its lease-adjusted land and buildings at a value of $1.5 billion. If the stated cost of land and improvements were true, then Ingles’ “160 acres” would be worth $9.2 million per acre, which was highly unlikely.
To test my suspicion, I pulled up a few of the company’s tax records, and quickly realized that the company owned far more land than disclosed. Some 1,000 county record searches later across 400 counties in North Carolina, South Carolina, Georgia, and Tennessee, and I had successfully identified almost 3,700 owned acres, $658 million in off-balance sheet real estate value, and a real estate portfolio with a fair market value of $1.4 billion.
The wild part is that Ingles Markets is an extremely competitive, inflation-resistant operator of supermarkets that even Kroger avoids competing with. Ingles’ business segments are not impaired and there is no evidence of fraud. Management is incrementally adding value every year, maintains the strongest balance sheet in the industry, opportunistically repurchases shares when Wall Street becomes apathetic, and hasn’t reported a net loss in 30 years as a publicly traded company.
Tying the real estate portfolio together with Ingles’ fast-growing, high-margin shopping center leasing business, Ingles’ flagship supermarket business, and Milkco, Ingles’ dairy manufacturing and distribution business, I came up with a valuation range of $4.7-$5.1 billion on a ten-year basis. Its current enterprise value is $1.6 billion.
There are two reasons why Ingles is flying under the radar:
One, with a market capitalization of $1.4 billion (yes, equal to the fair market appraisal of its real estate), the business is woefully under-analyzed. Following analysis, I failed to identify a single report, institutional or otherwise, that corroborated my dissection of Ingles’ real estate portfolio. Furthermore, no analysis seemed to truly convey an understanding of Ingles’ competitive prowess.
Two, like Berkshire, management doesn’t do earnings calls, and it’s a controlled company. GAMCO Asset Management (Mario Gabelli’s firm) engaged in an activist campaign in 2018 to try to restore better communication but failed under the weight of Chairman Bobby Ingles’ 72% voting power (GAMCO remains a 5% shareholder). A point of reassurance is that Bobby owns 22.1% of shares outstanding, and it’s hard to argue that he and CEO James Lanning are doing a poor job. Bobby just reportedly doesn’t answer questions at annual general meetings.
That said, as an investor who is constantly focused on my own behavior and the behavior of others, I don’t really mind that management won’t talk to Mr. Market about his feelings. The more likely the market is to be petulant or apathetic towards Ingles, the more likely the company is to be forgotten.
Bobby, who is 55 years old, will retire eventually. The company could easily be wedded to Publix, Kroger, or sold to a Berkshire-esque firm. But so long as management keeps incrementally improving the company’s value every year, who cares? Eventually something will happen to the assets, and GAMCO’s continued 5% holding validates that fact.
For anyone interested in learning more about Ingles and wants to supplement my work, you can find a dataset I created with over 10,000 data points on the company and its land holdings linked on page 6 of this PDF. The data includes land appraisals and links to their associated county tax records. Feel free to scrutinize, export, and critique at your leisure.
In your report, you highlight that Ingles, as well as a few other companies, underreport their land holdings. What’s the incentive for companies to do this? And what’s the best way for an investor to determine if a company has a hidden land asset?
Through analyzing Ingles, I have identified two incentives to underreport land. The first is to avoid unwanted attention from activist investors who may seek to wrest control to dispose of or spin off company real estate. In the case of Ingles, management uses real estate to serve the competitive interests of the company, and losing control could threaten its operating position.
On that note, the second incentive to underreport real property is to avoid regulatory scrutiny about using real property for anti-competitive purposes. As demonstrated in my report, there are multiple examples where Ingles’ management uses real estate to restrict available commercial space to advantageously position stores over peers. It’s not in the interest of management teams to accurately disclose property if drawing attention to it reveals their competitive playbook.
The practice of underreporting real property is quite common. Kroger, for example, shares the following information about its properties:
“As of February 3, 2024, we operated approximately 2,800 owned or leased supermarkets, distribution warehouses and food production plants through divisions, subsidiaries or affiliates … The total cost of our owned assets and finance leases at February 3, 2024, was $56.7 billion while the accumulated depreciation was $31.5 billion.”
The fact that management does not segregate leased and owned property values is not illegal, but it means that the only way that an investor may appraise and understand how much real estate Kroger owns is through tax records and GIS analysis (they also clearly own land, but do not disclose how much). Considering Kroger has a host of subsidiaries, it would not make a trip to county record tax land easy, and yet it’s the only way.
In terms of identifying hidden land, I would look for hints in company reporting. There are companies in the land prospect list I constructed to identify Ingles that do not disclose owned acres verbatim, but will say something like, “we own cemeteries,” despite not presenting as an operator of them. Nondescript disclosure like that is a great signal to pull up some tax records to see how many cemeteries a company owns, and to tabulate their sum market appraisal. Even if the resulting value is immaterial, the exercise is a great way for investors to become more intimately familiar with businesses they own or are interested in.
It seems like you are good at coming up with differentiated insights. What’s your general research process for finding new ideas?
I source ideas primarily through conducting what I call “archeological finance.”
The primary prerogative of an archeologist is to seek understanding. One of the ways they achieve this is to identify archeological sites of interest and to excavate them. In the case that a site has never been excavated, an archeologist relies on their training to guide them, for there is no advice to be had from other archaeologists who may have worked the same site before. Concerning investors, our training is the lessons we learn from industry practitioners, our experience in markets, and our knowledge of financial accounting.
When I begin the process of sourcing ideas, I chart an archeological dig site that takes the form of an industry, theme, or investment category, and I assume that the site has never been dug before. This forces me into a situation where I have no choice but to conduct an analysis that is wholly comprehensive and independent.
I apply this approach after years of paying attention to how I best behave throughout the investment and research process. When I take a no-one-has-dug-it-before approach, it inspires me to do my best work. I feel an increased sense of ownership and responsibility for the analysis that I produce, and that drive often results in my reports containing variant insights.
If I take the opposite approach and read third-party analyst reports before conducting my own analysis, I become lazy, complacent, and I end up depending on others to verify the quality of my investments. This behavior is unacceptable in my case, as the consequence is that I behave poorly both in analysis and throughout the course of investment. I also end up not learning or adding much to the canon of investment research, because my analysis is more likely to be influenced by previously cultivated views.
This is a long-winded way of saying that I usually take an entire industry and will spend a couple months or so analyzing it. If nothing is immediately actionable, in my experience it’s generally not long before something happens where leveraging that knowledge proves to be a behavioral advantage over others caught trying to find their feet. As Charlie Munger once said, “Opportunity comes to the prepared mind.” That single quote strongly influences how and why I research the way I do.
It also takes time to build a mosaic of good ideas, much as it takes time for the archeologist to acquire a rich knowledge of history. There is no need to be haphazard or impatient in the process.