PSH-Annual-Report

Annual Report Year Ended December 31, 2014LETTER TO SHAREHOLDERSDear Shareholder:As this is the first annual letter that will be read by the public Pershing Square Holdings, Ltd. investors aswell as one that is read by investors who have been our partners for years, I thought it would be useful toprovide an overview of our strategy as it has developed over the last eleven years.In preparation for writing this letter, I re-read our investor letters since inception and highlighted thesections which I thought would be most useful to an understanding of Pershing Square. I often read theannual reports of companies in which we invest for the ten or more years preceding our investment as away to understand the progress of a company and its strategy. To save you the effort of doing so forPershing Square, later in this report, I have included excerpts from our previous letters organized bytopic. Re-reading our investor letters was a useful exercise in that it has enabled me to better understandthe development of our strategy over time.While the core of our investment strategy remains unchanged, the growth of the firm, our increasing“reputational equity,” expanded relationships and experience have enabled us to intervene as an activeinvestor differently from our approach in the past. In Pershing Square 1.0, we took substantial stakes andpushed for corporate changes which we believed would create shareholder value. Our holding periodswere shorter. We achieved high rates of return, but required constant recycling of capital into new ideas.The changes we advocated were more structural and corporate than managerial and operating – thinkWendy’s spinning off Tim Hortons, or Ceridian being sold to private equity. 8 We proposed change fromoutside the board room as we did not generally become a member of the boards of target companies.In retrospect, the development of our investment in General Growth Properties (GGP) represents theinception of Pershing Square 2.0. In GGP, I joined my first board since the inception of Pershing Square,more than five years after we launched the firm. At the inception of our GGP investment, our originalstrategy was a financial restructuring of the company in bankruptcy. From the perspective of the board ofdirectors, we identified additional opportunities to create value which led to a recapitalization of GGPalong with a change in management which we played a role in identifying.It was the creation of The Howard Hughes Corporation (HHC) – which began as a spinoff of unrelatedassets or businesses to unlock value – where we chose to take a much deeper approach. Unlike TimHortons, HHC did not actually exist at the time of our investment in GGP. We created HHC by assemblinga pool of unrelated assets from GGP as a means to unlock the value of these principally non-incomeproducing assets. Unlike in Wendy’s where we were advocating for the Tim Hortons spinoff from outsidethe boardroom, with HHC, we had the benefit and the responsibility of seeing it through.By going beyond a financial restructuring and getting deeper into the creation of a new board and in therecruitment of management, we recognized the potential for greater board oversight to create substantiallonger-term value for Pershing Square and other stakeholders. HHC was not part of our original plan atthe time of our initial investment in GGP. Since we created HHC from idea to launch, we had to help builda board of directors. As the largest stakeholder with more than a 25% stake in the new spinoff company,we ended up with the right to appoint one third of the board.With these attributes came responsibility. I became chairman of HHC because there was no one elselogical to serve in this role. We then hired a new management team led by David Weinreb and GrantHerlitz. While we had input into GGP’s new management team – we recommended Sandeep Mathrani forthe job – at HHC, we identified and recruited the team and designed their compensation.12 PERSHING SQUARE HOLDINGS, LTD.