Bill Ackman's Pershing Square Semiannual 2024 Letter: A Review

To the Shareholders of Pershing Square Holdings, Ltd.:

2024 has been a productive year for Pershing Square despite PSH's modest negative performance year-to-date through August 13, 2024. Our core portfolio companies continue to generate strong business performance, which we expect over time to be reflected in their long-term stock price performance. We summarize their progress in our Portfolio Update which follows on page 8.

The Current Stock Market Environment

The stock market has increasingly been characterized by a growing percentage of the market capitalization of companies being held by effectively permanent owners, principally index funds. We believe that the growing index ownership as a percentage of stock market float has increased the impact that short-term, highly leveraged investors can have on price discovery as they now comprise a growing percentage of the market cap and daily trading of companies, and are important marginal buyers and sellers of a security. These shorter-term investors – which include so-called market-neutral and quantitative funds – use large amounts of margin, derivative, and total return swap leverage in their strategies. As highly leveraged market participants, these investors' tolerance for mark-to-market losses is small, which contributes to stock price volatility as they can become effectively forced sellers when companies disappoint, even in the short term.

Equity markets have exhibited an enormous amount of single-name stock price volatility for even the largest companies when they surprise investors with even minimally below-expectation overall results or small misses on certain closely followed business metrics, with Universal Music Group being one such example in our portfolio. Markets are also exhibiting an enormous amount of volatility when macro data surprises occur.

Greater stock market volatility is the long-term friend of the active investor with permanent capital who seeks to identify high quality companies which are not dependent on the capital markets to implement their business strategies. While an earnings' miss or other business metric disappointment in a quarter could reflect the beginning of deterioration in fundamentals, in many cases the impact of the disappointment has only a marginal effect on long-term intrinsic value. Pershing Square has been a large, long-term beneficiary of market overreactions to short-term bad news as they can drive business valuations to levels well below long-term intrinsic value, and create buying opportunities coupled with a high degree of liquidity.

Amendments to the Investment Management Agreement

As previously disclosed, on February 7^th, PSH announced certain amendments to the Investment Management Agreement (“IMA”) that will have the effect of reducing PSH's 16% performance fee. The amendments to the IMA include:

1. An amendment to the Variable Performance Fee (“VPF”) provision of the IMA which will now provide that the Additional Reduction will no longer exclude fees paid to the Investment Manager by Pershing Square funds that are publicly traded in the United States.

2. An amendment to the VPF provision of the IMA which provides that the Additional Reduction will also include an amount equal to 20% of any management fees that the Investment Manager earns from non-PSH, Pershing Square funds that invest in public securities that do not have performance fees.

3. The waiver by the Investment Manager of the right to receive the $36 million outstanding balance of unrecovered IPO costs before the Additional Reduction under the VPF provision takes effect.

As a result of the above amendments, PSH's 16% annual performance fee will now also be reduced by 20% of any management fees earned from any non-PSH Pershing Square funds that invest in public securities and do not have performance fees. The benefits of reduced fees include better long-term performance and, we also believe, greater demand for shares from investment managers who are required to report the ‘look-through' fees of funds in which they invest.

We believe the Key Information Document (“KID”), which requires disclosure of the proportion of fees and (illogically) the interest expense of any fund an asset manager invests in – is one of the principal factors driving reduced demand for PSH. Despite PSH's best-in-class, net of fees performance, the requirement that asset managers who invest in PSH include a pro-rata interest in PSH's fees and interest expense has discouraged investment in our company, contributing to PSH's discount to NAV. By reducing PSH's performance fees, PSH will generate higher net returns, report lower fees on our KID disclosure document, and therefore become a more attractive investment for asset managers as well as other investors.

Pershing Square USA, Ltd. (“PSUS”)

On February 7^th, we announced our intention to launch a U.S. closed-ended fund called Pershing Square USA, Ltd., which will largely mirror PSH in its investment strategy and hedging/asymmetric investment approach. With the benefit of the newly modified VPF arrangement, our long-term goal is to reduce PSH's performance fees to zero with the launch of new funds and strong long-term performance.

Over the last two months, we educated potential investors about PSUS and launched the PSUS IPO. When we concluded that these initial IPO efforts would likely lead to a closed end investment company with a market cap below our goals for PSUS and for PSH (the larger the PSUS IPO, the larger the incentive fee reduction for PSH), we withdrew the offering. Notably, PSH's discount to NAV narrowed substantially during the IPO process and has widened somewhat since we pulled the offering. We are in the process of redesigning the PSUS IPO transaction and we are limited in what we can share about these plans due to regulatory reasons, but we will do our best to keep you informed bearing in mind the regulatory constraints.⁶

We are mindful of the fact that time spent on the operations of an investment business can come at the expense of the mission critical activity of investing. Since our restructuring away from open-end fund management in 2017, the investment team has been able to allocate substantially all of its time to investing as closed end investment companies do not require the constant fundraising and marketing of open-end funds.

The launch of PSUS is one of a number of strategic initiatives we plan to undertake which we believe will increase the long - term sustainability of Pershing Square Capital Management, L.P., (“PSCM” or the “Investment Manager”), and will benefit PSH by reducing the performance fees that it pays. To this end, in June, we sold a 10% interest in PSCM, the proceeds of which will be used to anchor new fund launches including PSUS.

In connection with the stake sale, the Investment Manager established an independent board of directors which will oversee PSCM and provide strategic advice, assuming a role that was historically performed by our board of advisors. Our new independent directors include long-term investors in PSH and the Pershing Square funds as well as new investors in the management company. We are delighted to formalize the new governance structure of Pershing Square as we prepare it for the long term. PSCM's new independent board members are Kerry Murphy Healey, Orion Hindawi, Marco Kheirallah, Nick Lamotte and Christine Todd. Their bios can be found here: www.pershingsquareholdings.com/pershing-square-holdings-ltd-notes-the-sale-by-pershing-square-capital-management-l-p-of-a-10-common-equity-interest-to-strategic-investors/

Over the last 20 years, we have greatly benefited from the wise advice and counsel of our advisory board members who have had a keen interest in our long-term success. Our advisory board included Steve Fraidin, Dawn Lepore, the late Ed Meyer, Allen Model, Ali Namvar, Matt Paull, Marty Peretz and Michael Porter. We are extremely grateful for their support and contribution to our success. We expect our new board to serve in a similarly valuable capacity to Pershing Square going forward.

New Investments

During the second quarter, we made two new equity investments, Nike (NKE, Financial) and Brookfield Corp. (BN, Financial). We intend to defer discussion about these new investments for now.

Thank you for your long-term commitment to Pershing Square Holdings, Ltd.

Sincerely,

William A. Ackman

PORTFOLIO UPDATE

Performance Attribution

Below are the contributors and detractors to gross performance of the portfolio of the Company for the six-month period ended June 30, 2024 and year-to-date 2024.⁸

January 1, 2024 – June 30, 2024

January 1, 2024 – August 13, 2024

Contributors or detractors to performance of 50 basis points or more are listed above separately, while contributors or detractors to performance of less than 50 basis points are aggregated, except for bond interest expense and share buyback accretion, if any. Past performance is not a guarantee of future results. All investments involve risk, including the loss of principal. Please see accompanying endnotes and disclaimers on pages 44-47.

New Equity Positions:

The Investment Manager initiated positions in Nike, Inc. and Brookfield Corporation during the second quarter. We intend to discuss these new investments at a later date.

Current Equity Positions:

Universal Music Group (“UMG”)

UMG's (XAMS:UMG, Financial) shares experienced a sharp drop when the company reported results last month. While the company's overall revenue growth of 10% and operating income growth of 11% were both strong, subscription and streaming revenue growth, a key metric, decelerated during the quarter from its recent double-digit growth rate to mid-single digit growth.

We believe the quarter's disappointing subscription and streaming growth is due to certain idiosyncratic factors unique to UMG combined with some weakening in the overall economic environment. As evidenced by UMG's peers' results however, music streaming is still growing at a healthy rate. We believe that UMG's underperformance this quarter will prove to be short-term in nature and does not impact our view of UMG's medium and long-term growth prospects. We continue to believe that music has a long runway of future growth, as it remains under-monetized relative to history and when compared to other forms of media. We expect the industry to improve monetization through new products and services, with better segmentation of customers including higher-priced tiers and increased subscription prices.

UMG's subscription revenue growth of 7% slowed from 13% last quarter, as the company began to lap last year's price increases. Slower growth at certain digital service providers (“DSPs”) offset strong growth at Spotify and YouTube. While quarterly performance can fluctuate, we believe that each of UMG's core DSPs has a healthy business and that UMG can further drive streaming and subscription growth by working with its DSP partners to improve their offerings. The company is now working with Spotify in launching a premium offering for superfans which UMG estimates could ultimately be adopted by as much as 20% of Spotify's subscriber base.

We believe there is ample room to increase pricing in the coming years as music subscriptions have been kept at flat prices for nearly a decade until some recent increases. As the industry matures in developed markets, ad-supported users who today receive free music can be charged a monthly subscription fee, as is typically the case in the video streaming industry. While each of the major DSPs increased prices for individual subscriptions from $9.99 to $10.99, only Spotify and Deezer have raised prices to $11.99 and only in certain geographies and for certain plans.

During the quarter, UMG's streaming revenues (revenues from ad-supported music) declined by 4%, a sharp deceleration from double-digit growth last quarter, as economic uncertainty caused a slowdown in advertising revenues from its largest partners. The decline was also caused by the absence of revenues from TikTok while a new deal was being negotiated which did not start until the beginning of May. UMG's revenues from Meta also decreased temporarily while the companies worked together on a more holistic deal that will grow other aspects of their relationship. While streaming revenues are less predictable because they are much more susceptible to economic conditions, we believe that over the long term they should grow at a similar or higher rate than subscription revenue growth.

UMG's management team led by Sir Lucian Grainge has a long track-record of growing and shaping the music market by working with its partners in innovating creative solutions to drive growth. For example, UMG's efforts led to the industry-wide adoption of “artist-centric” initiatives that will result in a greater share of streaming royalties for its artists. UMG is also leading the industry by working with partners to launch new products to harness AI's growth opportunities while also ensuring regulatory and legal protection for its artists.

Similar to how investors initially overreacted to concerns about the potential negative impact from AI, only to see UMG shares quickly recover as the market better understood the AI risk, we believe that as investors better understand UMG's path to higher revenue growth and regain confidence in the long-term health of the industry, the company's share price is likely to increase significantly from its current levels. To that end, the company is hosting a Capital Markets Day in September which is the ideal forum for management to provide investors with more details on its business and the long-term growth opportunity. Given UMG's strong market position and long runway for sustained earnings growth, we believe that the company's current valuation represents a deep discount to its intrinsic value.

Alphabet (“Google” or “GOOG”)

Alphabet (GOOG, Financial), the parent company of Google, delivered stellar business results in the first half of 2024. Revenues grew 14% powered by Google's dominant position in the fast-growing digital advertising market as well as certain company-specific tailwinds including the increasing adoption of AI automation tools by advertisers and YouTube's continued success in the Connected TV Medium. Strong revenue growth coupled with cost control initiatives and stable staffing levels (headcount has remained flat year-to-date), resulted in strong operating leverage. Operating profit margins expanded approximately 340 basis points, excluding one-time severance and real estate charges. In the second quarter, the company's Cloud segment outpaced its major competitors with 29% revenue growth and achieved 11% profit margins, after first reaching profitability just 18 months ago.

Amidst solid financial performance, Google is achieving notable milestones in its AI product development roadmap. At its annual developer conference in early May, the company unveiled the broad rollout of “AI Overviews”, which are AI-powered summary responses for certain types of queries. Early results from AI Overviews highlight how thoughtful integration of AI into Search not only improves the user experience, leading to more frequent and detailed queries, but also creates opportunities for greater ad monetization through context-rich responses and higher conversion rates.

Due to the encouraging initial success of its AI offerings, Google is meaningfully ramping up its AI investments and is on track to spend nearly $50 billion in capital expenditures in 2024, a more than 50% increase compared to the prior year. We believe this increased level of investment will further differentiate the company's technical infrastructure and cost-to-serve advantage relative to competitors. As a proof point, compute costs for Google's generative AI search responses are down 80% from just a year ago. Such step-function improvements uniquely position the company to scale its AI capabilities to a user base of more than two billion consumers.

Despite the material increase in infrastructure investments, the company remains committed to returning capital to shareholders and recently initiated a quarterly dividend of $0.20 per share, a ~0.5% dividend yield. The dividend supplements the company's ongoing share repurchase program of approximately $16 billion in quarterly buybacks, which represents capital return equivalent to ~3% of the company's market capitalization on an annualized basis.

The company also recently announced the appointment of Anat Ashkenazi as its new Chief Financial Officer. Anat had previously served as the CFO of Eli Lilly where she spent 23 years in various senior finance and operational leadership roles. We believe Anat's extensive experience at Eli Lilly managing a complex, multiline business through multiple investment cycles will prove highly valuable as Google invests behind long-term AI initiatives while maintaining its strong commitment to cost control.

Outgoing CFO, Ruth Porat, will take on a newly created role as President and Chief Investment Officer of Alphabet, including oversight of its portfolio of “Other Bets”. We look forward to Ruth's impact on scaling and commercializing the company's Other Bets ventures, including its promising autonomous driving subsidiary, Waymo.

We have been closely following the recent federal court ruling against Google in the Department of Justice's antitrust case on the company's default search agreements with Apple and Android OEMs. Google is appealing the decision and anticipates a resolution of the appeals process or a ruling on potential remedies to take at least several months, and potentially more than a year. We will continue to closely track developments in the case but believe that even in a scenario where Google loses its appeal, the company is well-positioned to navigate a range of likely potential remedy outcomes.

Hilton (“HLT”)

In the first half of 2024, Hilton (HLT, Financial) generated strong revenue growth as the lodging industry experienced solid global demand against a favorable supply backdrop. Near-term industry trends remain positive, with continued strong international growth, improving business transient demand and extremely robust group demand, which is poised to sequentially accelerate in the third quarter. Leisure travel continued to moderate from the high levels of recent years following the COVID-19 reopening.

In the second quarter, HLT's revenue per room (“RevPAR”), the industry metric for same-store sales, increased 3.5% as compared to 2023. Combined with strong 6% net unit growth, aggregate fee revenues grew 10%. Earnings per share grew 17% year-over-year, benefiting from Hilton's excellent cost control and continued best-in-class capital return. Reflecting an incrementally challenging macroeconomic picture, principally in China, the company slightly reduced the upper end of their prior RevPAR guidance, now estimated by management to be +2% to +3%, while modestly increasing full year's earnings guidance.

Net unit growth continues to accelerate towards Hilton's 6% to 7% long-term growth target supported by new brand concepts including Spark and LivSmart Studios by Hilton. Over the coming quarters net unit growth will be further boosted by Hilton's acquisition of Graduate Hotels and the on-boarding of properties from Hilton's partnership with Small Luxury Hotels of the World (“SLH”), which is seeing better-than-expected owner uptake with 400 hotels poised to join the Hilton system. The SLH partnership expands Hilton's network into a new category of hotel, while providing incremental sources of value for Hilton Honors members and travelers. While Hilton only earns fee revenue on the proportion of sales that comes through Hilton's channels, the comparatively higher average nightly rate of SLH hotels relative to Hilton's systemwide average means that even modest penetration levels could become a meaningful incremental fee stream to Hilton.

Over the medium -term, strong net unit growth combined with continued RevPAR growth (which has compounded at a 3% rate over the last 15 years) and a double-digit rate of growth from Hilton's non-RevPAR fee revenue, which comprises about 20% of revenues, all combine to generate strong high-single-digit revenue growth. Coupled with excellent cost control, high incremental margins, and a substantial capital return program Hilton should continue to realize robust mid-to-high-teens compounded earnings growth for the foreseeable future.

Restaurant Brands (“QSR”)

QSR's (QSR, Financial) two largest brands delivered impressive results this quarter. Tim Hortons' same-store sales in Canada grew by nearly 5%, outpacing all competitors and the broader industry. These strong results are due to the multi-year investment the company has made in broadening its food platform and expanding its lead in cold beverages. Burger King International reported same-store sales of more than 2%, despite ongoing boycotts of western brands. Burger King is outperforming McDonald's on a one-year basis and relative to pre-covid levels. Its success in international markets provides a blueprint for its ongoing turnaround in the U.S., where the company is focused on modernizing its store base and growing its digital business. As part of that effort, the company acquired Carrols, Burger King's largest franchisee, which will allow the company to accelerate remodels and help shift the franchise system towards smaller more entrepreneurial operators, setting the brand up for long-term success. The company intends to refranchise the Carrols restaurants to smaller operators once the stores are performing at strong levels.

In light of weakening economic conditions and ongoing boycotts, the company lowered its net restaurant and system-wide sales growth outlook this year. In response, the company is enacting a cost savings program which will enable it to grow operating profits by more than 8%. While an uncertain environment may impact unit growth in the near-term, we believe each of the company's brands will benefit in a slower economic environment with consumers trading down.

Despite strong performance at its largest brands, consistent operating profit growth, and a business model that benefits in a recessionary environment, QSR still trades at a meaningful discount to its peers. As the company returns to its historic mid-single-digit unit growth and delivers consistent performance at each of its brands, we believe the company's share price will more accurately reflect its improving fundamentals.

Chipotle (“CMG”)

On August 13^th , Chipotle (CMG, Financial) announced that CEO Brian Niccol would be leaving the company to become the CEO of Starbucks. Brian has led a superb turnaround at Chipotle, which has put the company firmly on the path of sustainable long-term growth. While we are disappointed to see Brian go, one of the measures of a great CEO is the company that he leaves behind. Brian has built an extraordinary team at Chipotle that we expect will not lose a step in his departure. We are grateful to Brian for the extraordinary value he has created for CMG shareholders and Pershing Square.

Chipotle delivered outstanding results in the first half of 2024 as the brand's industry-leading value proposition of fresh food, customization, and convenience at fair prices continues to resonate with customers. During the second quarter, same-store sales grew an impressive 11%, or 55% from 2019 levels. Successful marketing, including the return of the fan-favorite Chicken Al Pastor limited time offering, and faster throughput drove transaction growth of over 8%, with gains across all income cohorts. Although sales growth has moderated in the summer amid a broader deceleration in the restaurant industry, Chipotle continues to gain share. The launch of Smoked Brisket for a limited time starting in September, one of the company's most requested menu items, should further improve trends.

Strong sales growth and more efficient operations led to restaurant-level margin expansion of 140 basis points in the second quarter. We believe that Chipotle's attractive economic model remains firmly intact despite several near-term headwinds, including higher avocado costs and investments in improving portion consistency, the latter of which is already producing improvements in customer survey scores. Management has several exciting initiatives underway to simplify operations and improve throughput, including optimization of staff deployment as well as new equipment and automation technology. The dual-sided grill, which can cook chicken and steak in less than half the time as the current plancha with more consistent execution, will be deployed in 84 restaurants by the end of this year, ahead of a broader rollout. Longer-term, the fully automated digital make-line, which will be installed in a restaurant for the first time this summer, has the potential to have a transformational impact on throughput and the customer and employee experience.

Chipotle is on track to open approximately 300 new restaurants this year, and expects to more than double its store base to at least 7,000 locations in North America over time. International expansion beyond Canada remains a largely untapped opportunity. The new leadership team in Europe is making good progress on improving unit economics of the company-owned stores, while Chipotle's first franchised restaurant in Kuwait is off to a great start.

Howard Hughes (“HHH”)

HHH's (HHH, Financial) results through the first half of 2024 demonstrate solid business momentum across all segments of its portfolio, highlighting its uniquely advantaged business model of owning master planned communities (“MPC”).

In its land sales segment, the company is on track to generate nearly $300 million in full-year profits. New home sales, a leading indicator for future homebuilder demand for land, continues to be supported by limited supply of resale housing inventory and the highly desirable qualities of HHH's amenity-rich MPCs, which are well -located in growth markets with favorable demographic trends. The strength of this demand is most clearly evident in the pricing the company is able to command for its residential land, with its average price per acre reaching an all-time high of $1.0 million in the most recent quarter.

In the company's portfolio of stabilized income-producing operating assets, net operating income (“NOI”) grew 4% on a same-store basis during the first half of the year driven by strong leasing momentum and steady rental rate increases. In its Ward Village development in Hawaii, HHH continues to experience robust sales momentum. The company has pre-sold 51% of inventory at its newest condominium tower, The Launiu, despite only having launched sales in February. Outside of Ward Village, the company is developing its first condominium project in the Woodlands, the Ritz-Carlton Residences. As the first-of-its-kind luxury development in Houston, the Ritz-Carlton Residences has been met with tremendous demand and has already pre-sold 65% of its available units, representing future revenue of $313 million.

On August 1^st, the company successfully completed its spin-off of Seaport Entertainment Group (SEG, Financial), which is comprised of the Seaport District in New York City, the Las Vegas Aviators minor league baseball team and certain other non-core entertainment assets. Under the leadership of CEO Anton Nikodemus, former President & COO of MGM CityCenter and an entertainment industry veteran with over 30 years of experience, we are optimistic that SEG will unlock the significant embedded upside potential in its unique collection of assets.

PSH is retaining its shares of SEG received from the spin-off and, along with the other Pershing Square funds, has entered into a standby purchase agreement to backstop a $175 million rights offering which SEG intends to launch shortly. Proceeds from the rights offering will provide SEG with the required liquidity to execute on its growth plan. Pershing Square is the largest shareholder of SEG. Anthony Massaro, a member of the investment team, has joined the Board of SEG.

We believe the separation of SEG further positions HHH as a streamlined, pure-play MPC company with a decades-long runway for growth.

On August 6^th, we filed an amended 13D which can be found here: www.sec.gov/Archives/edgar/data/1981792/000093041324002260/c109726_sc13da.htm the relevant portion of which says that:

“The Investment Manager intends to continue evaluating the possibility of various potential alternatives with respect to its investment in HHH, including a possible transaction in which the Investment Manager and/or one or more of its affiliates (either alone or together with one or more potential co-investors) may acquire all or substantially all of the shares of HHH not owned by them and their affiliates and in connection therewith take HHH private. In the event the Investment Manager explores such a potential transaction, there can be no guarantee that an agreement regarding such potential transaction can be reached and/or consummated.”

Canadian Pacific Kansas City (“CPKC”)

In 2023, Canadian Pacific's (CP, Financial) transformative acquisition of Kansas City Southern established the only railroad with a direct route linking Canada, the United States, and Mexico. The combined network connects shippers to new markets and enables nearshoring in North America while creating significant shareholder value. CPKC celebrated the one-year anniversary of this historic combination in 2024 with strong results, building momentum in the second year of this multi-year growth story.

Volume growth of 6% in the second quarter was well ahead of management's expectations, driven by synergy wins and solid Canadian grain shipments. CPKC has made considerable progress on realizing revenue synergies despite a challenging freight environment, and now expects to exit 2024 with C$800 million of new business. These wins span a wide variety of end-markets from automotive to corn, demonstrating the unique value proposition of CPKC's network.

Cost synergies are also tracking ahead of plan as CPKC realizes savings from combining procurement and general and administrative functions. These cost savings together with strong operations across the network led to a 280 basis point year-over-year improvement in CPKC's adjusted operating ratio in the second quarter.

We believe that CPKC's one-of-a-kind network and industry-leading management team are well positioned to deliver continued synergy wins and excellent operations, which should generate strong double-digit earnings growth in the coming years.

Fannie Mae and Freddie Mac

Fannie Mae (FNMA, Financial) and Freddie Mac (FMCC, Financial) remain valuable effectively perpetual options on the companies' exit from conservatorship. There have been no material updates about the companies since our 2023 Annual Report.

Past performance is not necessarily indicative of future results. All investments involve risk including the loss of principal. This report does not constitute a recommendation, an offer to sell or a solicitation of an offer to purchase any security or investment product. This report contains information and analyses relating to all publicly disclosed positions above 50 basis points in the Company's portfolio from January 1, 2024 to June 30, 2024. Pershing Square may currently or in the future buy, sell, cover or otherwise change the form of its investment in the companies discussed in this report for any reason. Pershing Square hereby disclaims any duty to provide any updates or changes to the information contained here including, without limitation, the manner or type of any Pershing Square investment.