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How To Make A Fortune*

November 3, 2010
* My compliance team cautions you that this is a tongue in cheek title

Pershing Square Capital Management, L.P.

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Disclaimer
The analyses and conclusions of Pershing Square Capital Management,
L.P. ("Pershing Square") contained in this presentation are based on
publicly available information.
The analyses provided may include certain statements, estimates and
projections prepared with respect to, among other things, historical and
anticipated performance of certain assets, and the values of assets and
liabilities. Such statements, estimates, and projections reflect various
assumptions by Pershing Square concerning anticipated results that are
inherently subject to significant economic, competitive, and other
uncertainties and contingencies and have been included solely for
illustrative purposes. No representations, express or implied, are made as
to the accuracy or completeness of such statements, estimates or
projections or with respect to any other materials herein.
This presentation and the information contained herein is not a
recommendation or solicitation to buy or sell any securities.
Pershing Square hereby disclaims any duty to provide any updates or
changes to the analyses contained in this presentation.
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What We Look for in Our Investments

f Low valuation

f Forced Sellers

f Attractive capital structure

f Favorable long-term supply dynamics

f Favorable long-term demand dynamics

f Out-of-favor

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We Believe We’ve Identified an Investment with:

f A low valuation
  Lowest valuation in at least a generation

f Forced sellers
  A large number of distressed transactions

f Extremely attractive financing available

  High LTV, low-rate, fixed-rate, long-dated, non-recourse debt,
pre-payable without penalty

f Favorable long-term supply dynamics

  Short-term oversupplied market, but long-term supply is controlled

f Favorable long-term demand dynamics

  Demographically driven demand growth

f Out-of-favor
  Currently, this is a somewhat shunned asset class
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So… How Can You Make A Fortune?

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The American Dream - On Sale

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What Happened?
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What Happened in the Credit Markets?

More
Leverage /
More
Freely
Buyers
Available
Credit Increasing
Asset
9 Relaxed lending
standards
Values
9 Financial
“innovation”
9 CDO Demand
Decreasing
Defaults
Source: “Who’s Holding the Bag?,” PSCM, May 2007
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Leverage Increased

The second lien market allowed borrowers to layer additional leverage

Total Second Lien & Piggyback Second Lien Issuance

Source: Standard & Poor’s, and “Who’s Holding the Bag?,” PSCM, May 2007
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Financial “Innovation”

The popularity of Interest Only and Negative Amortization loans grew rapidly

IO and Neg. Amortization Originations (% of dollar volume)

35%

30% 29%

25%
25% 23%

20%

15%

10%
6%
5% 4%
2%
1%
0%
2000 2001 2002 2003 2004 2005 2006

Source: Loan Performance, Credit Suisse

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The ABS Market Provided Liquidity for Originators

Sub-prime and Second-lien ABS Issuance Volume

Facilitated by Rating
Agencies and Bond
Insurers

Source: Thompson Financial, Deutsche Bank, “Who’s Holding the Bag?,” PSCM, May 2007

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Asset Values Went Up

Between January 2001 and June 2006 home prices rose at a 13% CAGR

Home Price Appreciation (Case-Shiller 10-City Index)

250

230

210
190

170

150

130

110
90

70

50
Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09

Source: Case-Shiller Home Price Indices 11

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Valuation
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Asset Values Have Declined Meaningfully

Home prices are down 28% nationwide

Home Price Appreciation (Case-Shiller 10-City Index)

250

230

210

190

170

150

130

110

90

70

50
Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09

Source: Case-Shiller Home Price Indices 13

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Housing is More Affordable Today

Falling home prices and lower interest rates dramatically improved affordability¹.
Median family income is now 78% higher than what is required to qualify for a
loan to purchase the median price single family home using 80% loan-to-value,
fixed-rate financing
NAR National Housing Affordability Index – Fixed Rate Composite
200

178
180
170

160
150

134 137
140 134 133
130
127 125 126 127 128 124 128
122 120
117 117
120
109 109 110

100

80

60
89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10
19

19

19

19

19

19

19

19

19

19

19

20

20

20

20

20

20

20

20

20

20

20
Source: National Association of Realtors
¹Affordability = Median Income/Qualifying Income
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Cheap Compared to Renting

The breakeven appreciation rate for rental equivalent value is the best since the 1970s

Housing as a hedge: Home ownership with fixed-rate financing protects

buyers from asset and rent inflation
Source: Beracha and Johnson, “Lessons from Over 30 Years of Buy versus Rent Decision: Is the American Dream Always Wise?”
Assumptions in appendix
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Forced Sellers
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Foreclosures and Short Sales

Nationwide, ~30% of sellers are in or are approaching foreclosure

Distressed Sales (% of total re-sales)

Long-term the foreclosure crisis is good for housing. Over-priced and over-
leveraged homes will be transitioned to new, stable owners at more reasonable
prices and on more favorable financing terms
Source: Deutsche Bank, “Whither the distressed inventory flood” 17
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Short Sales

Short sale transactions are increasing

Number of Short Sales Per Month

Source: HUD, Core Logic 18

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Distressed Sales are an Opportunity for Buyers

REO sales tend to be priced below the broader market

Houston REO vs. Overall Pricing ($ thousand)

Source: Deutsche Bank, “Whither the distressed inventory flood” 19

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A Sellers’ Race to the Bottom in Vegas

Buyers benefit when conventional sellers compete with distressed sales. Las
Vegas is an extreme example, where distressed and non-distressed sale prices
have nearly converged

Las Vegas REO vs. Overall Pricing ($ thousand)

Source: Deutsche Bank, “Whither the distressed inventory flood” 20

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Financing
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Mortgage Rates are Very Low

Mortgage rates have fallen to historically low levels. Fixed 30-year rates are
now below 4.5% for the first time in the history of the Freddie Mac lender survey

30-Year Fixed-Rate 80% LTV Mortgage

19%

17%

15%

13%

11%

9%

7%

5%

3%
1973 1977 1982 1987 1992 1997 2002 2007
Source: Freddie Mac 22
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What Makes a Home Mortgage So Attractive?

Typical Conforming Mortgage Term Sheet

Low Fixed Rate – 4.43% APR

Long Term – 30-Year Amortization

High LTV – 80% (97% for FHA loans)

Non-Recourse – Loans are explicitly or effectively non-recourse

Adequate Financing Available – $417k to $730k, depending on location

No Prepayment Penalties – Creates refinancing optionality

Tax Deductible Interest – More valuable with coming tax increases

No other business or investor can get financing on such favorable terms

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The Mortgage Market Benefits from Government Support

Support from the federal government provides qualified borrowers with

access to credit on favorable terms

f GSE and FHA mortgages are now >90% of the origination market

f The target Fed Funds rate is 0%

f The Fed has purchased more than one trillion dollars of Mortgage
Backed Securities

f FHA high LTV refinancing programs are helping distressed

borrowers

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What Are the True Economics of Home Ownership?

Our Assumptions:
Conventional Loan Transaction Costs
Down Payment 20% Closing Costs (% of Purchase Price) 2%
Mortgage 30yr Fixed Rate Selling Fees (% of Sale Price) 6%
Interest Rate 4.40%
Annual Fees
FHA Loan Property Taxes (% of Home Value) 1.50%
Down Payment 3.5% Maint. + Insurance (% of Home Value) 2.00%
Mortgage 30yr Fixed Rate Annual expenses grow with home appreciation
Interest Rate 4.25%
Upfront Mtge Insurance (Financed) 1.00% Tax Rate
Annual Mtge Insur. Premium (First 5yrs) 0.90% Income Tax Rate 25%

Rent
Implied rent grows with home appreciation

Holding Period
10 Years

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What Are the True Economics of Home Ownership?

(cont.)

After a small down payment, a buyer’s monthly after-tax cost of carry is at or

below the monthly rental expense

Average Two Bedroom Home in Baltimore:

Conventional FHA

Home Price $ 187,998 $ 187,998

Equivalent Monthly Rent 1,300 1,300
Owner's Monthly Out of Pocket 1,072 1,362
Downpayment + Closing Costs 41,360 10,406
LTV 80% 96.5%

Source: Trulia - home price and rent expense data

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The Benefits of Low-Cost, High-LTV Financing

Homebuyers can make an excellent after-tax return on their equity investment,

even under modest appreciation assumptions

Conventional 80% Financing

IRR Assuming 10yr Hold
Annual Residual Current Multiple
Appreciation Return Return Total of Equity
1% 3.8% 6.6% 10.4% 2.7x
2% 6.9% 6.8% 13.7% 3.6x
3% 9.5% 7.0% 16.5% 4.6x
4% 11.8% 7.3% 19.1% 5.7x
5% 14.0% 7.5% 21.5% 7.0x
6% 15.9% 7.8% 23.7% 8.4x

If the borrower has the opportunity to refinance at better rates, returns would be even higher

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The Benefits of Low-Cost, High-LTV Financing (Cont’d)

Homebuyers can make an excellent after-tax return on their equity investment,

even under modest appreciation assumptions

FHA 96.5% Financing

IRR Assuming 10yr Hold
Annual Residual Current Multiple
Appreciation Return Return Total of Equity
1% 16.3% 0.4% 16.7% 5x
2% 20.5% 1.7% 22.2% 7x
3% 24.0% 2.8% 26.8% 11x
4% 27.0% 3.8% 30.8% 15x
5% 29.7% 4.7% 34.4% 19x
6% 32.1% 5.6% 37.7% 25x

If the borrower has the opportunity to refinance at better rates, returns would be even higher

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Favorable Long-Term Demand

Dynamics
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Household Formation Trends

Household Formation has been positive, with some degree of cyclicality,

since at least the 1970s. Household growth will likely accelerate as the
recovery gains traction

Annual Household Formation (% growth)

5.0%

4.5%

4.0%

3.5% Household
growth is
3.0%
cyclically
2.5% depressed
2.0%

1.5%

1.0%

0.5%

0.0%
19

19

19

19

19

19

19

19

20

20

20

20
76

79

82

85

88

91

94

97

00

03

06

09
Source: US Census Bureau
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Homeownership Rates have Normalized

Homeownership rates have declined to pre-bubble levels. While ownership is

above pre-2000 rates, higher affordability and an aging population should
support an ownership rate near today’s level

Homeownership (% of households)

70

69

68

67

66

65

64

63

62

61

60
1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

Source: US Census
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The Number of Owner Households Will Rebound

Accelerating household formation and a stabilization of the homeownership

rate should lead to growth in owner households

Change in Owner Households =

(Household Formation x Homeownership Rate) + [Number of Households x (Change in Homeownership Rate)]

Source: US Census Bureau, BLS, Maximus Advisors 32

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Long-Term Demand for Housing

Projected Long-Term Demand for New Housing Units (single and multi-family)

Household
Formation

Growth needed to
maintain constant
vacancy rate

X Homeownership Rate Assumed: 66%¹

LT Annual Single Family Home Demand 1,101 1,253

Source: Joint Center for Housing Studies, Harvard University, “Updated 2010-2020 Household and New Home Demand Projections”
¹Applies 66% to all figures excluding: Vacant Rental (0%) and Second Homes (100%)
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Favorable Long-Term Supply

Dynamics
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Temporarily Elevated Inventory Levels

In the short-term, for-sale homes and shadow inventory will weigh on home
prices. This provides an opportunity to buy a long-term investment at an
attractive valuation in a market facing short-term distress

Change in Home Prices vs. Months of Inventory

-25%
Price 14

-20%
12

Months of Supply (6 Month Lead)

Home Prices (YoY%, Inverted)

-15%

10
-10%

8
-5%
Supply
0%
6

5%
4

10%

2
15%

20% 0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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Source: US Census Bureau
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New Supply Growth Will be Slow

Builders have sharply reduced their construction capacity, increasing lead
times when the market does recover

Community Counts for Public Builders

It can take three to seven years to get land permitted in many of the more
desirable markets¹
Sources: Deustche Bank, “Builder Community Analysis”
¹Toll Brothers Management 36
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Housing Starts are Now Below Long-Term Demand Growth

Housing starts have fallen sharply and are now lower than at any time in at least
the past 50 years. Starts today are less than half of average long-term demand

Seasonally Adjusted Housing Starts (thousands)

3,000

2,500
Projected LT
Demand:
2,000 1.1-1.25mm new
single family
homes per year
1,500

1,000 Inventory
Depletion
500

New Supply
0
Growth Will be
1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 Slow
Source: Chart: US Census Bureau
37 New Home Demand Projections”
¹Joint Center for Housing Studies, Harvard University, “Updated 2010-2020 Household and
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Out-of-favor
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Everybody Else is Afraid

The best investments we have made are the ones no one else would touch

“So even at 89 cents a share, it still looks pretty bleak out there for
General Growth Shareholders”
- Businessweek, April 2009

“The U.S. housing market is headed for a complete and total nightmare”
- Business Insider, August 2010

“Now They Tell Us: Experts say housing is a lousy investment and it
always will be”
- Yahoo Finance, August 2010

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Concluding Thoughts
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Why Now?

f Interest rates won’t stay this low forever

f New monetary easing increases the risk of inflation

f Even with the current inventory levels, at today’s valuations, it is

unlikely we will see another substantial decline in prices

f Forced selling may abate as lenders’ balance sheets improve

f Generally, there is more liquidity on the way down than on the

way up

f An economic recovery could cause housing to recover faster

than many people think

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The Housing Purchase is One of the Most Emotional

Investment Decisions a Family Can Make

f Once a family is able to purchase a home, the decision is based on

psychological factors:
  Confidence in the, and one’s, future

  The fear of missing the opportunity to buy at the bottom

f These psychological factors have self-reinforcing qualities that are

similar to the forces that drive financial markets

Housing Increase in
Catalyst Prices Buyer
Increase Confidence

Decision to
Purchase
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An Institutionally Under-Owned Asset Class

f Institutional investors have almost no exposure to single-

family home rental properties (“SFHRPs”) as an asset class

f Low valuation, high current yield and long-term appreciation

potential make SFHRPs an intelligent investment for
institutional investors

f Despite these investment characteristics, we are unaware of

any large pools of capital that have been raised to pursue this
opportunity. This will change

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The SFHRP Investment Opportunity Is Best Understood By

Analogy

f For the vast majority of the 20th century, timber was never considered an
institutional asset class

f Led by forward thinking investors, institutional investments in timberland

emerged in the USA in the 1980s

f With the advent of timber institutional management organizations (TIMOs)

and timber REITs, institutional timberland investments have grown
significantly
  DANA Limited estimated that institutional investors had invested ~$50bn in
timberlands as of early 2008
  In 2007, the first timber ETF launched

f The same features that attracted institutional investors to timber:

current yield, inflation-protection, portfolio diversification, demand for “hard
assets,” and the ability to create long-term tax-deferred gains, also apply to
SFHRPs

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Potential Institutional Investment Demand is Material

If global institutions and private wealth funds allocated approximately 1% of

their assets under management to SFHRPs, it would absorb the entire U.S.
for-sale inventory of single-family homes

Median Priced Single Family Home $172,000

U.S. For-Sale Inventory of Single-Family Homes 3,970,000
U.S. For-Sale Housing Inventory ($Tn) $0.7

Global Institutional & Private Wealth AUM ($Tn)* $64.3

U.S. For-Sale Inventory as % of Global AUM 1.1%

* Source: IFSL, US Census Bureau 45

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Appendix
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Appendix – Buy vs. Rent Assumptions:

Home Buyer's Assumptions Renter's Assumptions

Down Payment 20% Down Payment seeds investment portfolio
Mortgage 30yr Fixed Rate Diff between mtge and rent is invested
Closing Costs 2% Portfolio is made of stocks and bonds
Holding Period 8 Years Rent Growth Same as home appreciation
Selling Fees 6% Income Tax Rate 25%
Income Tax Rate 25% Capital Gains 20%
Capital Gains 20%
Property Taxes - Annual 1.50%
Maint. + Insur - Annual 2.00%
Annual expenses grow with appreciation

Source: Beracha and Johnson, “Lessons from Over 30 Years of Buy versus Rent Decision: Is the American Dream Always Wise?”

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