Pershing Square Holdings, Ltd. (OTCPK:PSHZF) Q3 2020 Results Earnings Conference Call November 19, 2020 11:00 AM ET

Company Participants

William Ackman – Chief Executive Officer and Portfolio Manager

Charles Korn – Investment Team Member

Feroz Qayyum – Investment Team Member

Anthony Massaro – Investment Team Member

Ryan Israel – Investment Team Member

Bharath Alamanda – Investment Team Member

Ben Hakim – Investment Team Member

Conference Call Participants


Hello. And welcome to the Third Quarter 2020 Investor Call for Pershing Square Capital Management. At this time all callers are in listen-only mode. Today’s call is being recorded.

It is now my pleasure to turn the call over to your host, Mr. William Ackman, CEO and Portfolio Manager.

William Ackman

Thank you, Operator. Welcome to the call. Just a few disclaimers, there’s actually a detailed legal disclaimer that’s been distributed to participants. It’s also available on our website. We’re going to — we’ve received a lot of questions. More so, I would say, this quarter than any previous one. So what we’ve done is, in our remarks, we’re going to attempt to address as many of these questions as possible. Some we may take individually if we have more time. At the end, if we don’t get to your question, feel free to email the IR team at We’re not permitted to answer questions about Pershing Square Holdings. If you have questions about Pershing Square Holdings, you can ask them directly to the IR team.

So just — we report performance on a weekly basis, so most of you are aware of our performance. It’s been an extraordinary year, I would say, our best year ever on a gross return basis and nearly our best return year on a net return basis. Performance ranges from 44% to 56%, depending upon private funds versus the public fund. That’s a 3100-basis-point to 4400-basis-point margin over the S&P during the same period. That’s the period up through Tuesday night’s performance.

A big part of our performance this year came from a large hedge we entered into in February. The unwinding of that hedge in early March and the redeployment of that capital in the market begin [Technical Difficulty] 12 largely in companies that we owned or we knew well, because we had previously owned and those businesses have proven quite well during this very challenging period of time.

And again, it’s hard to talk about success at a time when a lot of people are suffering and unfortunately a lot of people have died and many more. So we’re obviously pleased to hear about the vaccine progress and are just looking forward to an end of the pandemic.

Our approach on the call is just to walk through our individual names. I’ll discuss, give a brief update on Pershing Square Tontine Holdings at the end and we’ll do our best to answer your questions.

But why don’t we start with Lowe’s. They announced results recently. Charles, want to bring us up to date on Lowe’s. Negative stock price reaction, what seemed like an extraordinary quarter. Maybe you’ll — maybe you can give us the details and explain your thought.

Charles Korn

Sure. Sure. Thanks, Bill. Yes. So as we’ve previously discussed, Lowe’s is fairly unique amongst our holdings and that Lowe’s has experienced substantial demand acceleration in response to COVID-19. So as Americans are spending more time in their homes, be that working from home, homeschooling, et cetera. This has manifested itself in a greater propensity to engage in repair and other home-related upgrades. So these trends saw Lowe’s once again realize extremely robust Q3 USA same-store sales growth of 30%.

And notably, comparable sales strength has proven relatively persistent in recent months, as compared to demand levels from earlier this year. So comparable sales growth was 29% in August, plus 32% in September and plus 30% in October, and strong sales trends have translated into significant year-over-year gross profit, operating profit and earnings growth in the quarter and for contexts earnings per share was up 40%.

Now this is despite significant investment by Lowe’s in Q3 in the form of COVID-related costs and associates special bonuses, supply chain investments and merchandising investments to support store resets.

The other thing we note about Q3 is a company restarted their share buyback program this quarter and guided to $3 billion of purchases in Q4, which is more than 10% of Lowe’s market cap on an annualized basis. And following a very strong Q3, Lowe’s is now poised to earn between $8.60 and $8.70 of earnings per share this year, which is roughly a 50% increase versus 2019 earnings. So just doing phenomenally well.

In Q3, Lowe’s also continue to experience robust omnichannel growth, which grew more than 100% year-over-year. And earlier this year, Lowe’s completed the re-platforming of its technology stack to Google Cloud and continues to enhance online features and functionality, thereby improving the overall user experience. These are important initiatives as unlocking ecommerce represents a substantial future revenue opportunity for the company.

And for context, omnichannel sales are roughly 7% of revenue for Lowe’s, but this compares roughly 14% to 15% for Home Depot, which is on a significantly larger revenue base, so a huge opportunity for them.

On the store, Lowe’s announced this quarter that they are accelerating investment and merchandising resets. These resets, we’ll see Lowe’s store shift from a product focus to a project focus layout and this will create a more intuitive shopping experience for customers, improve product adjacencies and a productivity collectively driving higher sales productivity on a square foot basis.

And so while it’s difficult to know how long the current demand environment will persist, we believe Lowe’s is appropriately investing against critical work streams, which will position Lowe’s to improve its competitive position and help close the revenue productivity gap with Home Depot over time. And we believe the single greatest value driver for Lowe’s is the successful execution of its business transformation.

In recent quarters, Lowe’s management had described their 12% operating margin target as a quote, stop along the journey. And on this past call yesterday, as a quote, milestone, from which they’ll continue to derive improve productivity. And we expect management to further detail Lowe’s longer term structural potential at its recently announced December Investor update.

And as Lowe’s drives revenue productivity and margins closer to best-in-class peers, it’ll generate significant increases in profit, which when coupled with the company’s large share repurchase program should lead to accelerated future earnings per share growth.

We believe Lowe’s has the potential to appreciate substantially over time, because the company currently makes progress on its business transformation and the stock has returned 25% year-to-date, it currently trades at approximately 18 times our estimate of lows next 12 months earnings, which notably do not fully incorporate the potential for significant future profit improvement. And for context, this compares to Home Depot, which currently trades at 23 times Tontine earnings.

So in summation on Lowe’s, we see the opportunity at the revenue line, at the margin line and there’s also potential for multiple expansion. And that combination is a factor is very attractive to us. Thank you.

William Ackman

So Charles, the obvious question is the announced results stock was down a lot. Why?

Charles Korn

So Q3 results were pretty fantastic and the business continues to be performing exceptionally well. I think what the company has done is they’ve made a decision to pull forward some investments, which sounds like they were scheduled for 2021 into calendar year 2020. Notably these merchandising resets and there’s $100 million of cost in Q3 and $150 million of cost plan for Q4. And it seems that that, that pressured margins and it seems like perhaps some investors were a little disappointed with the flow through on the very strong topline didn’t materialize in more robust margins.

Now, the reality is, these were planned investments, these are the right long-term things for the business. So we’re very supportive of these types of investments, as they should position the company for a strong 2021 and beyond. I think that’s perhaps part of the reaction.

I’d say, the other thing that was left a little bit unanswered is the business has been trending with extremely strong same-store sales growth 30% kind of exit growth in October and the guidance they provided, which was a little bit, I don’t think people were expecting guidance, but the guidance they provided was for sales or sales growth of 15% to 20%.

Now the reality is, it’s very early into November and it’s — I think it’s difficult to predict what demand is going to look like, just given how fluid the current environment is. But I think that perhaps left some question as to what the comp trajectory looks like over the next few months.

But I’d say, as we think longer term, we focus on the earnings power of the business into 2023, 2024 and beyond. We see enormous opportunity both to closed revenue productivity gap and to expand margins beyond the 12% target. And the way we think about the business is its long-term earnings power and we see a huge amount of opportunity from current levels.

William Ackman

Thank you. We think Lowe’s is extremely cheap and we thought it was cheap at $175 a share. So it’s back now at $149. We’re happy about that, because the company is aggressively buying shares.

So restaurant brands. Feroz, why don’t you bring us up to date on the quarter?

Feroz Qayyum

Sure. Thanks, Bill. So during the third quarter, restaurant brands continued to make sequential improvement in sales trends at each of its brands. Thanks to swift actions by management and the company’s franchisees, as well as the benefits from the company’s off-premise and value focused business model and the general easing of the shelter-in-place orders that have been in place.

We believe that the recent resurgence of COVID-19 cases in various parts of the world and the resulting restrictions are likely to impact sales trends temporarily. However, in the meantime, the company is continuing to take actions to position itself for strength in a post-COVID world.

First, the company is accelerating efforts to drive adoption of digital and delivery across his businesses. Digital sales in the U.S. and Canada grew triple digits from last year and double-digit compared to the last quarter. They now represent about 8% of sales at Burger King, 15% at Popeye’s and 20% at Tim Hortons in their respective home markets.

One of the more ambitious launches that accelerated digital sales at Tim Hortons was the launch of Tims Rewards. And while still early, the personalized offers and targeting allowed the company to drive a positive benefit to sales and we think this will be a powerful tool that the company has in engaging with guests going forward.

Secondly, as dining rooms closed, the company saw increasing demand at drive-thrus due to their inherently social distancing friendly method of serving guests. In the third quarter, drive-thru sales increased double digits across North America, and so do provide an even better and quicker service for customers, the company is modernizing over 10,000 restaurants across North America with so called Outdoor Digital Menu Boards. These digital drive-thru menu boards will allow for predictive selling, integrated loyalty programs, contactless payment, and generally, a faster better service for the customer.

Third, the pandemic and resulting social distancing measures have had a materially negative impact on smaller competitors without some of these digital efforts and without the off-premise business model at restaurant brands. We continue to believe that restaurant brands’ franchisees will benefit from likely an easier competitive environment going forward, with lower input and labor prices and favorable real estate locations being made available to them over the next year or so. The company is working with its franchisees to optimize its own footprint and building its pipeline to capitalize on dislocations caused by the pandemic.

In light of these competitive dynamics, strong franchisee health and improving unit economics, we believe the company actually has a stronger competitive position today than it did prior to the crisis.

Longer term, we believe the company’s unit growth opportunity is still very much intact and we expect unit growth to return to its mid single-digit growth rate next year. So as investors begin to see the results of the company’s efforts and gain clarity generally around the long-term impact of the Coronavirus on consumer habits broadly and as underlying sales trends at each of the company’s brands continue to improve, we believe that its share price will more accurately reflect our view of what we think is improving business fundamentals.

William Ackman

So Feroz, you mentioned that the companies are putting in Digital Menu Boards. Did you mean to say the company or the franchisees who’s paying for the Digital Menu Boards?

Feroz Qayyum

The company and the franchisees are working together to put these Outdoor Digital Menu Boards together. Some of the funds will be coming from the ad funds that the franchisees fund, but it will be a combined effort.

William Ackman

And could you comment on, Tim Hortons, obviously, enormous Canadian presence, Canada’s taken a pretty conservative approach to COVID. What has been the impact on Tim Hortons, particularly in a lot of their high density in major Canadian cities like Toronto?

Feroz Qayyum

Sure. So Tim Hortons by far has been the slowest to recover of — out of all the three brands at restaurant brands and part of it is what Tim Hortons sells. The end product is obviously very habitual in nature that people consume while going to work, and obviously, as workplaces have been shut down in particularly locations like Downtown Toronto, that hasn’t been as quick to recover.

Now the Coronavirus hasn’t been as impactful to Canada at least when compared to the U.S. But generally Canadians have been a lot more conservative about their approach in restrictions. And so as people go back to work as restriction ease the sales trends at Tim Hortons should come back.

Interestingly, a fair bunch of stores at Tim Hortons in Canada are also in Ontario and specific the GTA, where a lot of the Coronavirus impact has been and where a lot of people commute to work. And so the benefit or as the effect has been hit a larger at Tim Hortons because of that reason. But we think as the restrictions ease, as we have dependent into the background, Tim Hortons in Canada should continue to improve.

William Ackman

Okay. Great. Thank you, Feroz. Anthony, can you give us an update on Chipotle?

Anthony Massaro

Sure. Thanks, bill. Chipotle’s sales trajectory has largely returned to pre-COVID levels, as robust digital sales growth has more than offset in store softness as a result of work-from-home routines. Same-store sales grew 8% in Q3 on a one year basis or 20% on a two-year stacked basis, which is roughly the same level as the fourth quarter of 2019, the last quarter before the pandemic.

Same-store sales then moderated to mid single-digit growth starting in mid-September and continuing into October, as the company began to last 2019 carne asada launch. Then same-store sales dropped down 35% in late March, Chipotle has been able to retain 80% to 85% of digital sales gains, while recovering 50% to 55% of in-store sales. Both of these metrics are improved From q2 levels, which saw 70% to 80% digital retention with 40% to 50% in-store recovery.

Digital continues to account for nearly half of sales and a split roughly equally between order ahead and pick up, the company’s highest margin channel, and delivery. These digital sales gains are proving highly incremental as they’re more weighted towards the dinner occasion versus the legacy in-store walk in business, which is more weighted towards lunch.

The company’s margin recovery is now coming into focus, with restaurant margins of 19.5% in Q3, on average unit volumes of $2.2 million. Not far from management’s heuristic that calls for a 22% restaurant margin at the sales level.

Chipotle is starting to implement the industry standard practice of differential pricing for delivery to offset the margin headwind from delivery fees. While management remains confident in fully realizing their margin potential over the medium-term, they are appropriately managing the business to optimize sales growth and meet customer demand in the near-term.

We believe Chipotle is well on track to emerge even stronger in a post-COVID world for several reasons. First, the potential to recover in-store sales more fully as customers return to work sites and schools.

Second, the transformation in digital mix from 20% of the business pre-COVID to nearly half the business today enabled digital-only innovations such as the quesadilla the most requested item by customers. The quesadilla is currently in test with management optimistic about nationwide rollout.

Third, the real estate environment is right for new restaurant openings. And Chipotle is set to take advantage of this with 200 openings planned for next year versus about 140 per year in each of the last three years. The company’s digital drive-thru format, Chipotlane, will be featured in over 70% of these new restaurants. The Chipotlane will have a significant impact on new unit productivity, given that they feature higher sales volumes, higher margins and higher returns on capital than non- Chipotlane units.

Fourth, the company’s loyalty program enrollment has doubled since the pandemic and now has nearly 17 million members. Data utilization to drive customer frequency and check size is still in the early innings.

And finally, Chipotle is best-in-class customer value proposition in terms of the quality and quantity of food the customers are getting for the price remains unparalleled in the industry and has only gotten stronger over the last few months. Thank you.

William Ackman

Anthony, some people look at Chipotle today that stock at $1,300 a share and they say, how can this be a cheap stock? Question is in our valuation of the company, what — what’s changed and how we in our model in the post-COVID world? Could you speak to how we get to this being an attractive value at the current valuation? What are the drivers that get us there? How do we think about it?

Anthony Massaro

Sure, Bill. So I think the drivers are several fold. I think, one, is the retention — the explosion of digital sales during the pandemic was not something that we anticipated at the beginning of the year and the potential to recover in-store sales more fully, while still retaining that 80% to 85% of the digital sales that they’ve gained, provides the opportunity for, frankly, a step change in average unit volumes once people returned to offices and schools and those in-store sales come back. That’s one lever.

The second lever, I think, is new unit productivity is actually quite an impactful input into the discounted cash flow analysis and Chipotlanes, you’re looking at new unit productivity that’s significantly higher than what the company has been able to achieve historically, because these units open at much higher sales volumes, they have higher margins, they have higher returns on capital. So those two were quite impactful.

And then, thirdly, I think, some of the — looking at out year margins, management is already taking steps to sort of correct and protect the economic model, the largest lever of which is differential menu pricing on delivery. So charging more for items on the delivery menu versus in-store, which all major competitors do and which only has — so far has resulted in a net two to three price increase to the consumer versus what Chipotle was charging for delivery before COVID.

So I think all these factors combined with the longer this management team is there, the more we’ve been impressed with how they perform as their tenure continues to increase. So I think the team continues to impress, frankly, above our expectations and I think there are some key financial drivers that I highlighted that make the stock still quite an attractive investment at today’s levels.

William Ackman

Thank you so much, Anthony. Okay. Ryan, Hilton, hotel company, how can this possibly be a good investment in a — in the — in a world in which Bill Gates says business travel is going to be down 50%?

Ryan Israel

Sure. So he’s certainly been right. It’s actually been done more than 50% in the short-term. But I think the key and really the couple of reasons we’re excited about Hilton is, longer term our belief is that things will return to normal, people will be traveling the way that they used to travel, maybe slightly less, but we really think that people will want to revert to their routines.

We think that, as much as we’ve all done zoom recently, it is not providing sort of the same level of intimacy in terms of the human kind of people to people contact, we think it’s going to be very important for businesses and for individuals to get back to being able to travel to meet their customers, to be able to get back to having a leisure activity they like. And so we really think there actually will be a lot of pent-up demand once a vaccine is available and widely distributed. So our view and one of the tenants of our thesis with Hilton is that ultimately the world will go back to normal habits will go back to normal.

Now, I think, you can ask yourself the question, why would it be the case, though, that we’re so excited about Hilton in today’s environment until it happens? I think the way we thought about it’s really twofold. First, we think that the crisis has actually validated the attractiveness of the company’s franchise business model. And second, we actually think Hilton will emerge much stronger from this crisis. And so actually, in a way, the crisis will be very helpful to Hilton’s long-term value.

In regards to its business model, we’ve long argued that the asset like franchise nature is very special model and that it will insulate businesses from downturns in the environment, you could argue COVID is the 100-year proverbial flood in which a lot of companies are struggling, but Hilton has managed to make it through this crisis, even though it is in a category that is very negatively impacted. It’s made through very well.

Just give you a data point, last quarter, Hilton’s rev par, which is their term for same-store sales growth is down about 60%, as a result of COVID, in the lack of travel, yet Hilton actually still managed to generate a slight profit. So when you think about the number of companies that could be profitable, when their revenues are down close to 60%, it really highlights why this is a special model that has a flexible cost structure and the advantage of not having a large degree of fixed costs that you can’t cut. So we think that it really validates the model, and ultimately, when we get through the crisis, that’ll be something people are more willing to put an even higher multiple on.

And then secondly, we think the company itself is going to emerge stronger. If you think about it from the franchisees perspective, the value proposition of belonging to Hilton franchise is even much stronger than people thought it was before.

At the beginning of the crisis, Hilton was leading the effort to come up with sort of safety and cleanliness initiative and immediately partnered with Mayo Clinic and Lysol to develop standards are very important and giving anybody who could travel the confidence to stay at Hilton Hotel and also got a lot of cleaning supplies to make sure that things were safe for employees and for guests. That’s something that a hotel on its own would certainly not be able to do and they certainly wouldn’t be able to market that benefit vary widely to anybody that was available to travel.

Now, after that Hilton is really reengineer the processes that their franchisees use in order to make sure that they can reduce their costs and stay profitable during a low demand environment. So the value proposition we would argue has gotten even stronger during this crisis.

In terms of Hilton itself, they’ve taken out about 30% of their costs at the corporate level and they’re indicating that they do not think they need to replace those costs after the crisis, which means that the company will return the prior levels of profitability well before it actually recovers all the revenue that lost during COVID.

So, stepping back the way we think about it is at today’s price, Hilton the more valuable business in terms of the multiple you can place on it, but at the same time, it’s going to recover its earnings profile a lot more quickly than it recovers revenue. And we think Hilton is a very good investment from here, even if it takes four years to five years to recover to prior levels of business travel pre-COVID.

But as I mentioned at the beginning in my remarks, it’s very possible that due to the pent-up demand and doing people’s desire to get back to habits as soon as they can safely that Hilton recovers even a lot faster than that in which case Hilton will be even a better investment than we would underwritten.

William Ackman

If I had to share my point of view on this, I think that business travel will be different, but I think demand will be similar. And what I mean to say for hotels is for companies that are — and again, there are some technology companies that are going to go virtual — a pretty virtual, but when I’ve talked to those CEOs, what they tell me is that in order to keep the culture going, they’re going to have many more off-sites, so they can bring the sales teams together whatever once a quarter, they’re going to bring the technology teams together and an off-site.

They’re going to have people. They’re still going to have a headquarters. They’re going to have employees that are going to come, they spend a week, a month at headquarters that are going to stay in a hotel and maybe they’ll live somewhere else in the country.

So, I do think that business travel will change. I do think there is going to be a huge spike in business travel when people feel safe, anyone in any kind of business where they have, clients and customers, you don’t want to be the last guy to show up at your client versus your competitors.

And so I think there is going to be a fairly dramatic snapback in business travel. I think there is going to be an enormous snapback in consumer travel just the nature of being stuck at home. Again, I think there’ll be a huge positive impact. So I do think our assumptions ultimately will be conservative than we’ve been modeling in terms of the recovery of that.

Bharath, why don’t you talk about Agilent, bring us up-to-date.

Bharath Alamanda

Sure. Thanks Bill. And just as a quick reminder, Agilent reports earnings for its most recent quarter at fiscal Q4, which ends October 30th aftermarket closes next Monday. If you look at its prior quarter for fiscal Q3, Agilent reported highly resilient results, would just reinforce our investment pieces, that the company has a durable business model with a significant margin extension opportunity.

In what management expects has been the most challenging quarter of the year. Organic revenue only declined 3% and it was really supported by stable performance in the cross lab service and consumable segment, which actually grew 1%.

Now looking beyond sort of the ongoing disruption from the pandemic, Agilent is highly focused on new product innovation and sales efforts to drive market share gains. So for example, in a service business, the company has introduced new workflow solutions to capitalize on the trend of lives increasingly outsourcing multiple services to a single vendor and they recently won several large lab-wide enterprise service contracts.

Likewise, in their instrument portfolio, the company launched two new mass spectrometry product lines aimed at increasing testing throughput and reducing downtime. We expect these authentic product driven initiatives fill dividends for years to come, as they expand the install base of Agilent instruments and also increase the penetration of its service and consumables offerings.

Additionally, we continue to be encouraged by Agilent’s ability to expand margins over the last two quarters by 50 basis points and 95 basis points, respectively, despite facing modest revenue declines from the pandemic.

Most impressively, Agilent was able to deliver these cost savings without following a single employee. And the resulting stability has really allowed the Agilent team to remain solely focused on customers.

To that end, the company has made significant investments in online tools and communication channels to be able to remotely respond to customer service issues and sales requests in a very timely and reliable manner. And as a result, customer satisfaction scores in fiscal Q3 were the highest on record for the company.

As the business emerges from the pandemic, we expect Agilent to remain fully committed to its ongoing digital transformation, as it not only supports the higher standard of customer engagement, but also allows for a more efficient operating model.

The company’s recent margin expansion in light of the soft revenue environment through the COVID crisis, just further reinforced our belief that Agilent has an opportunity for significant margin expansion over time to narrow the gap that its closest peers.

In addition to reporting earnings next week, Agilent will host a Virtual Investor Meeting on December 9th, and we look forward to hearing the management team’s perspective on the company’s long-term strategic plan and their updated outlook on its revenue growth and margin expansion potential. Thank you.

William Ackman

Thanks, Bharath. What are your thoughts on what seems to be increased investment in biotechnology, pharma, et cetera? How impactful is that on Agilent?

Bharath Alamanda

Yeah. So coming out of the pandemic, there is a heightened focus on just safety standards across a bunch of different end markets from industrial end markets to energy end markets. And also within their pharma end marketers accounts for 40% of their revenue, there is just increased investment in new drug development. We believe that Agilent will benefit from those trends going forward, as it increases the demand for both their instruments and also for their service and consumables offerings.

William Ackman

Great. Anthony, bring us up to speed on Starbucks, please.

Anthony Massaro

Sure. Thanks Bill. Starbucks recovery is progressing extremely well in both…

William Ackman

And actually could you speak a little louder Anthony, you’re a little quiet.

Anthony Massaro

Sorry about that. Starbucks recovery is progressing extremely well in both of its key markets, the U.S. and China. U.S. same-store sales is down 4% in September, included a 2% headwind from closed stores and was a dramatic reversal from the Nadir of down 65% in the depths of the pandemic.

Management noted that the strong momentum they saw exiting September has continued to October, ops are solidly positive in drive-thru and suburban stores, but are being more than offset by negative comps in dense Metro areas, especially on weekdays.

China underlying same-store sales were down 3% in September, which was another dramatic reversal from the low of down 78% in February. 97% of U.S. stores and 99% of China’s stores are now open, with China closer to normal operating procedures given how that country is containing the virus, as 90% of stores offer seating there versus only 63% in the U.S.

We do performance in both countries as exceptional, given the reliance on work and school commuting routines, as well as the brand’s emphasis on a third place. Management reported Q4 results at the end of October and issued admittedly conservative guidance for fiscal 2021.

Pat Grismer who has a well-earned reputation as someone who guides very conservatively, felt the need to issue an additional qualifier this time describing the guidance as hedged somewhat to be appropriately conservative in the current environment.

Management anticipates a full sales recovery in China, which means a return to positive same-store sales growth by the end of December of this year and in the U.S. by the end of March, which seems quite conservative when compared with current trends of only low single-digit declines in both markets.

The margin recovery will trail the sales recovery by about two quarters as management appropriately prioritizes long-term growth. The company store repositioning plan will be largely completed next year and will involve about 800 closed stores across the U.S. and Canada and the company will be back on track for 6% to 7% annual unit growth starting in fiscal 2022.

In the markets that are impacted by these closures, the company’s rolling out new pickup only locations, complement the existing fleet of conditional cafes. Much like our other restaurant holdings, we believe Starbucks will emerge even stronger in a post-COVID world. There’s tremendous pent-up consumer demand for socializing, with CEO, Kevin Johnson noting on the earnings call that he anticipates huge, huge demand for that third place experience once effective vaccines and therapeutics are rolled out.

The business has outstanding momentum in its most important market the United States, with innovation firing on all cylinders, including the Pumpkin Cream Cold Brew outselling, the famous Pumpkin Spice Latte this quarter and the pumpkin platform in its entirety at all time, average daily highs.

The refreshers and Cold Brew platforms growing double digits and even Frappuccino, which was a platform that was in decline when we first invested in Starbucks in the summer of 2018 now back to grow. Digital will forever be more important in the restaurant industry than it was pre-COVID and Starbucks Digital Ecosystem is the envy of all competitors.

China is back to opening 600 stores per year and is on track to hit their 6,000 store target by September 2022 and the company now faces no viable scales competitors in that country. Management is hosting a Virtual Investor Day on December 9th, where we look forward to learning more.

William Ackman

So I like all these Investor Days in December. It’s my experience is companies don’t like to report bad news right before the end of the year. I think that — when they want to get in front of shareholders, they have good things to talk about. So we’re looking forward to those Investor Days. So we have Starbucks, we have Agilent, Lowe’s, all are giving presentations.

Ben, why don’t you update us on Howard Hughes?

Ben Hakim

Sure. Howard Hughes continuing to demonstrate strong sales momentum in its master-planned communities and we are seeing encouraging signs for rebound and its income producing operating assets. Demand for residential land in Howard Hughes’s MPCs are accelerating, benefiting from out-of-state migration from higher cost of living in higher tax States.

New home buyers are increasingly drawn towards the walkable communities and expansive open spaces that can be found in Summerlin, Bridgeland and the Woodland Hills, which are the three master-planned communities, which represent the substantial majority of Howard Hughes remaining unsold land.

As a result, new home sales grew 30% year-over-year in Q3 and 9% on a year-to-date basis. Company remains confident that the continued strong momentum in new home sales will translate to robust land sales in the coming quarters.

Turning to its income producing operating assets, collection rates improved across the board, with retail and hospitality, the sectors most impacted by the pandemic, seeing promising signs of recovery.

Despite being negatively affected by pandemic-related traffic declines, the company saw an increase in retail leasing activity and robust demand for available retail space in areas such as downtown Summerlin, reaffirming the attractive quality of the company’s retail portfolio.

Likewise, stronger occupancy levels and the recently reopened hotels resulted in positive quarterly NOI sooner than expected. Office and multifamily assets continue to remain resilient in this challenging environment with collections in the high 90% range.

In Ward Village, Howard Hughes had robust sales activity despite the pandemic. 24 homes were pre-sold with a help of a digital sales platform, which provides home buyers with a completely online experience including Virtual 3D Condo Tours and live chat capabilities. And the company’s the latest luxury condo project Victoria Place is already 71% pre-sold after launching sales in December 2019.

At the South Street Seaport, which was largest shutdown in the second quarter, Howard Hughes has reopened most restaurants and activated the Rooftop at Pier 17with a creative outdoor picnic venue called the Greens, which has served over 42,000 guests.

Overall, Howard Hughes continuing to see positive business momentum built across its portfolio and we remain optimistic about the company’s long-term growth prospects. The company has also any strong liquidity position with $857 million of cash on hand, allowing the business to preserve financial flexibility and opportunistically accelerate development as it recovers from the crisis.

William Ackman

Thanks very much, Ben. What is interesting about Howard Hughes is it stock prices down in most cases more than its competition. There really isn’t a direct comparable, but sort of looking at my screen various REITs look — even the New York City base REITs had better year-to-date stock price performance. But I would argue the Howard Hughes portfolio is more diversified in states that are more likely to see net inflows of population like Texas, Las Vegas, Hawaii. So very interesting company. We were in the process of a CEO search and I hope to have an announcement about that before the end of the year.

Fannie Freddie, Anthony, some significant developments in the very recent few days on show update to us.

Anthony Massaro

Sure. Thanks, Bill. So the most recent development for Fannie and Freddie was FHFAs publication of the final capital rule for those companies yesterday afternoon. The rule is largely consistent with what the regulator proposed earlier this year, but it’s a bit more conservative in that the risk-based capital requirement, which is a dynamic calculation was raised by about 30 basis points to 4.25%.

The fixed backstop leverage requirement was unchanged at 4% of assets. And under the rule the GSEs must always meet the higher of the two. So right now the risk-based capital requirement at 4.27% of assets is the governing metric.

What you see the market reacting to today is the fact that the capital rules finalization itself was a procedural hurdle that had to be cleared before any amendment to the preferred stock purchase agreement can be negotiated.

Treasury Secretary, Steven Mnuchin, and Director of the FHFA, Mark Calabria, have a two-month window ahead of them before President Trump’s term expires on January 20th in which they have a window to amend the preferred stock purchase agreement.

This amendment is of paramount importance to facilitating the exit of the enterprises from conservatorship as it could extinguish liquidation preference on treasury senior preferred stock, which has already been fully repaid with a return above the originally bargained for 10%, as well as permanently and the net worth sweep among other items.

On January 20th, President elect Joe Biden will take office, which will entail a changing of the guard. Biden is expected to name a new Treasury Secretary and also may be able to replace FHFA Director, Mark Calabria, whose term expires in April 2024 and is currently only terminable for cause, but may become terminable without cause, i.e. at role of the President, depending on the outcome of the Collins versus Mnuchin case, which is before the Supreme Court.

Oral arguments on this case have been set for December 9th, in which the parties will be arguing the lawfulness of the network sweep, the legality of FHFA structure and various other provisions. A final decision in the case is expected by June of 2021.

While these administrative and legal developments are pending Fannie and Freddie are continuing to build capital and remain one of the only major sources of mortgage capital for homeowners during the COVID-19 pandemic.

The GSCs now hold a combined $35 billion of on balance sheet equity capital, which is major progress from zero in early 2018, albeit only 12% of the required $283 billion under the new rule published yesterday.

The combined market share of Fannie and Freddie of new single-family mortgage backed securities issuances was 75% in Q3, up 9 percentage points year-over-year, reflecting the enterprises successfully playing their traditional role of stepping up to support homeowners during times of economic stress. Thank you.

William Ackman

Apologies. I was on mute. We own these investments now for seven years and I probably sound like a broken record in our view that they offer a very attractive risk reward. I think the events of the last few weeks and of the next 60 days, I think present really interesting opportunity.

But beyond, let’s assume, the Supreme Court case doesn’t go in the favor of Fannie and Freddie, let’s assume that Biden can replace Calabria. I think our view basically is — we’re not going to go back to a world in which Fannie and Freddie has zero capital. We think that they are on a trajectory to become well capitalized public companies. The question is, over what timeframe and how quickly, but we think both the common and preferred offer very interesting risk reward.

So Pershing Square Tontine Holdings, I’m not going to be able to say much here up for obvious reasons. This is an entity where the most material development is when and what company we ultimately end up merging with and I really can’t give you information about that.

But what I can say is when we took these entities public, our proposition was, if we could create the most investor-friendly spec in the world, we could recruit the best investors in the world or some of the best well-known investors in the world. And we get also — and we created the most merger friendly structure in the world, we could find an extremely attractive company that would want to go public by merging with us.

And you can now see a 13 app list of our investors. You can form your own view on the ones that have to file 13 apps, but there are many extraordinary investors that don’t file 13 apps, including sovereign wealth funds that own less than 5% of PSTH and the large number in the dozens of family offices globally kind of billionaire family offices that have — that bought stakes in the IPO and we think this shareholder list will be — and is actually will be an asset for us in finding a potential target.

In terms of timing, what we said at the time of the IPO is we said it would take us, we thought about six months to identify a target that we would be in a position to hopefully announce a deal by sometime in Q1 and then close the transaction in the ordinary course thereafter. Nothing that we have experienced to-date suggests that we won’t meet our expected timeframe.

So with that, let me go to a few other topics, one, the hedge. We obviously had a very large hedge in February because of a very, very barest view we had on the virus and the impact on the global economy, and the fact that the markets were really unprepared and governments were unprepared.

We unwound that hedge as spreads widened and as governments around the world including our government started to take steps to address the risks of the virus. And we reinvested the proceeds in the companies that we’ve been talking about today.

Recently we rebuilt a hedge in the investment grade — U.S. investment grade credit and I track European investment grade credit for different reasons. Basically because spreads have come all the way back to where they were when we initially put on original hedge and just spreads are at pretty close to all-time tight levels.

If you look at the individual single names in the indices, we were at all-time tights are pretty close to it for most of the companies in the index and so just as a standalone investment, it looks very asymmetric.

But when you can find a standalone investments that looks asymmetric, but it also has a hedging benefit if the unexpected and unfortunate happen, that’s actually an attractive thing to include in a portfolio.

So I would say we actually are quite — I’m pretty bullish on 2021. Well, we think the next couple months are unfortunately going to be tragic and very difficult for the globe and for our country in particular, could couple hundred thousand more people could die and these are extraordinary numbers. We have basically a 9/11 every day. We could head to that in terms of the number of people dying in our country. It’s a horrible tragedy.

But the progress of Moderna, Pfizer and the other vaccines suggests that in relative short order in the world will be vaccinated and we’ll return to something closer to a more normal existence. We’ve been saying the second half of next year is really when things start to return to normal. We think that is increasingly become a very good estimate.

As a result, we’re happy to very much long in terms of our equity exposure, but there does, we do think having a decent size hedge, very low cost hedge is just prudent in light of still uncertainty in the world. You can see the newspaper and on the Twitter feed every day.

That about 13 minutes let me see if there are questions that have not been addressed.

Question-and-Answer Session

A – William Ackman

Question about the all-male nature of the Pershing Square investment team, which is something I’ve been frustrated by for years and not with an effort, not without a strong full-quarter effort on behalf of the firm to find a candidate improve the gender diversity of the team. So I’m actually quite pleased to announce that, we shook hands I guess, over the phone with a truly outstanding candidate just this past — in the past few days, we’ll join the Persian Square investment team.

In September, she is absolutely superb candidate with a traditional Pershing Square background sort of investment banking, private equity, one of the top firms. And we give a test. We give two tests when we challenge our candidates. And we collectively concluded that she gave the first test, which is a take-home on a business. She gave the greatest presentation of anyone that we can remember in this firm, including the current members of the investment team in terms of her application for the job. So we couldn’t be more enthusiastic about her joining the team and we think she’ll be an important contributor.

Question on ESG investment criteria, do we have these issues? We think about the answer is yes. And our view is you want to invest, if putting aside moral ethical considerations, which we don’t put them aside, but I think if you — good news is you can put them aside and still have an economic rationale for investing in companies like Chipotle that source their products from smaller farms that don’t use antibiotics and other products that are bad for consumers.

That’s a very appealing proposition to a very large number of Americans. And as a big part of the success of Chipotle is the ethos of the company. I think the same can be said for Starbucks and how they treat their baristas, how they pay them, the health benefits, the opportunities for education. So I just think Lowe’s has a very kind of public minded ethos and I think it again it offers marketing and other kinds of benefits.

So we avoid industries, which we think are causing economic harm and societal harm, and we invest in companies that we think are great businesses that create value really for all of the stakeholders, customers, employees, and ultimately, shareholders. And we think that approach leads to the best economic outcome and also leads to the best of societal outcome.

A lot of the Pershing Square investments are currently in consumer discretionary stocks. Do you anticipate looking at more defensive ideas in the near future to mitigate some of the risk along with the current credit spread protection that you have? So we think that the nature of the businesses we own, we try to find companies that can survive the great flood or now we’ll say can survive the great pandemic.

We’re looking for businesses that regardless of the economic environment, regardless of what’s going on in the world that these businesses will succeed over the long-term and we value our companies based on our estimates of the cash flows, they’ll generate over their expected life, which is why we invest in businesses with strong balance sheets, with dominant market positions, great brands, kind of unique assets that provide them with a competitive advantage.

And the result of that is we were in our companies were prepared, if you will, surprised by, but prepared for the pandemic just the nature of their business models. And it’s — the story that — when the story went through the history is written the economic history of 2020, it will be fortunately for Pershing Square about the success of the dominant well-capitalized business, but unfortunate for the world, the challenges for the smaller less well-capitalized, less well-known businesses that are not as technologically enabled.

And I think the good news is coming out of the crisis will be one of the great — I think actually even mid middle crisis just read a piece today about the amount of entrepreneurship personal trainers that went are actually making more money now in the pandemic world, because they’ve built their practices differently and they’ve gone direct-to-consumer and they’re using social media to attract customers.

The people are — I think entrepreneurship is an inherent skill. This is one of the great times in the world in which to be an entrepreneur and it will — for all the restaurant owners that unfortunately might lose a particular restaurant. This will be the best time in history to start a restaurant coming out of a pandemic with low rents, enormous demand and minimal competition. So the world will recover, but our very dominant businesses will to continue to succeed.

William Ackman

With that, I’m going to end the call and I encourage you if your question was not addressed, there’s certain questions we could — we can’t answer on a public conference call because of regulatory considerations relating to some of our offshore funds. Please direct those questions to Tony Asnes, Alex Kosslyn at our Investor Relations team. You can reach at Thanks very much and Operator we are going to end the call.

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