September 13, 2011

Company Snapshot 

Volume XXXVII, Issue VII & VIII 

 

       - 23 - 

Two Examples of Why HHC’s Book Value May Not Be a Good Indicator of The Company’s Intrinsic Value: 



 

Ward Centers (Honolulu, HI) 

Ward Centers is comprised of approximately 60 acres situated along Ala Moana Beach Park and is within 

one mile of Waikiki and downtown Honolulu. It is also a ten minute walk from Ala Moana Center. Ward Centers 

currently includes a 550,000 square foot shopping district containing six specialty centers and over 135 unique 

shops, a variety of restaurants and an entertainment center which includes a 16 screen movie theater. HHC is 

nearing completion of construction of a 732 stall parking deck that is expected to facilitate the leasing of additional 

space at Ward Centers. In January 2009, the Hawaii Community Development Authority approved a 15-year 

master plan, which entitles a mixed-use development encompassing a maximum of 9.3 million square feet, 

including up to 7.6 million square feet of residential (4,300 units), five million square feet of retail and four million 

square feet of office, commercial and other uses. Commenting on the residential opportunity of Ward Centers in a 

2011 letter to shareholders, CEO Weinreb stated, “It also presents an opportunity to develop thousands of 

residential units with unobstructed ocean views in one of the market’s most desirable residential locations.” In 

August 2011, HHC announced that it is partnering with the MacNaughton Group and Kayashi Group to evaluate the 

development of a luxury tower at Ala Moana Center.  

 

As of December 31, 2010, the net book value of Ward Centers was $336.3 million. It should be noted that 

land adjacent to the Ward Centers sold for $18 million an acre during 2007. Obviously, 2007 was a different 

environment, but assuming a 50% haircut to that valuation still values the Ward Centers $200 million above its book 

value. 



 

South Street Seaport (New York, NY) 

The South Street Seaport is comprised of three historic buildings and one pavilion shopping mall, which is 

located at Pier 17 on the East River in lower Manhattan. The property is subject to two ground leases with the city 

of New York. The property includes 298,759 square feet of retail space. Cobblestone streets, gas lamps, sailing 

ships and a museum make the South Street Seaport a unique experience in New York City. The Company’s 

redevelopment plan for South Street Seaport may ultimately include hotels, residential units, retail space and 

restaurants. The implementation of any redevelopment plan would require numerous permits and approvals, 

including the approval of HHC’s ground lessor, the City of New York. 

 

While South Street Seaport represents one of HHC’s more valuable assets, its “book value” as of 12/31/10 

was just $3.1 million. Last year, the South Street Seaport asset generated more than $5 million in cash net 

operating income, and management believes that this substantially understates the potential future cash generating 

potential of the property. According to Chairman Ackman in his April 2011 letter to shareholders, “Even using the 

$5 million NOI number, one can get to values approaching $100 million using cap rates appropriate for New York 

City retail assets, and we would likely leave a lot of money on the table if we sold it for this price.” 

 

 

---

Company Snapshot 

Volume XXXVII, Issue VII & VIII 

 

       - 24 - 

Wells Fargo & Company 

Ticker: WFC   $24.36 

Background: 



 

WFC provides retail, commercial, and corporate banking throughout the United States. The company’s net 

income is derived from 3 segments: Community Banking (48%), Wholesale Banking (44%), and Wealth, 

Brokerage and Retirement (8%).  The firm is one of the nation’s largest banks with over $1.2 trillion in 

assets. WFC’s branch network has a national footprint, bolstered by the 2009 acquisition of Wachovia. 



 

WFC has considerable exposure to the U.S housing market. The company is the nation’s largest mortgage 

originator (it originates 25% of all residential mortgages). As of the most recent quarter, it held $317 billion 

in residential mortgage loans on its balance sheet, representing 42% of the overall loan portfolio. We would 

expect the beaten-down California market to be among the primary beneficiaries of a national housing 

recovery. California continues to be WFC’s largest geographic market in terms of both loans and deposits. 

Recent Developments: 



 

WFC’s 2Q earnings report showed several encouraging signs. EPS of $0.70 was $0.01 above expectations 

and up 27% on a year over year basis. Importantly, credits metrics such as NPAs and NCOs were 

improved on both a year over year and sequential basis. The firm’s ROA of 1.27% represented a new high 

for the past 3 years. In addition, WFC announced a plan to cut another $1.5 billion in costs by the end of 

2012. 

Strategic Position: 



 

WFC has established itself as a top tier bank with a superior track record and management team. WFC 

achieved an average net interest margin of 4.9% during the 2001-2010 period, 150 basis points above the 

peer average. A key aspect of WFC’s profitability over the years stems from the Company’s strong sales 

culture. This culture has translated to superior levels of deposit growth and cross-selling. Importantly, this 

record has been achieved while maintaining a relatively conservative lending profile.  



  The Company’s acquisition of Wachovia should yield both strategic and financial benefits. In addition to 

expanding its geographic footprint, the deal should create meaningful revenue synergies as Wells Fargo 

integrates its sales culture within the Wachovia system. This deal, combined with smaller M&A, have 

allowed WFC to bolster its market share position during the economic downturn.   



  Assuming the housing market recovers to more normalized levels, WFC earnings should be poised for 

meaningful growth. WFC profits would likely benefit from key factors such as loan growth and reduced 

charge-offs.  

Financial Position: 



  As of the most recent quarter, the firm’s tier 1 capital ratio was 9.2% (well capitalized under Basel 1 

standards). During 2Q, the company repurchased 35 million shares and redeemed $3.4 billion in trust 

preferred securities. 



  During 1Q, WFC announced an increase in the annual dividend from $0.20 to $0.48 per share, and an 

increase to its share repurchase authorization by 200 million shares (4% of shares outstanding). These 

measures were part of a capital management plan submitted to the Federal Reserve, and further 

underscored the firm’s capital adequacy from a regulatory perspective. 

Valuation: 



 

Applying bottom of the range valuation multiples (12x EPS, 1.5x tangible book value), produces a fair value 

of approximately $40 per share, implying a potential total return of over 60%. From a longer-term 

perspective, potential appreciation could be even more substantial as housing fundamentals improve, and 

the company continues to build its book value and earnings power.  

Clients of Boyar Asset Management, Inc. do not own shares of Wells Fargo & Company. 

Analysts employed by Boyar’s Intrinsic Value Research LLC do not own shares of Wells Fargo & Company.

 

---