TIDMPSH
Pershing Square Holdings, Ltd. (LN:PSH) (LN:PSHD) (NA:PSH) today
released its Semiannual Financial Statements which includes the
Investment Manager's Report to Shareholders. The report is now
available on PSH's website,
https://www.pershingsquareholdings.com/company-reports/financialstatements/.
In addition, please find the full text of the report below.
Media:MaitlandSeda Ambartsumian/Sam Turvey +44 20 7379
5151Media-pershingsquareholdings@maitland.co.uk
About Pershing Square Holdings, Ltd.
Pershing Square Holdings, Ltd. (LN:PSH) (NA:PSH) is an
investment holding company structured as a closed ended fund that
makes concentrated investments principally in North American
companies.
This is a disclosure according to Article 17 of the EU Market
Abuse Regulation (Regulation 596/2014/EU)
Contents
Chairman's Statement 1
Investment Manager's Report 3
Statement of the Directors and Statement ofPrincipal Risks 12
Independent Review Report 14
Unaudited Interim Financial Statements
Condensed Interim Statement of Financial Position 15
Condensed Interim Statement of ComprehensiveIncome 16
Condensed Interim Statement of Changes in NetAssets 17
Attributable to Management Shareholders
Condensed Interim Statement of Changes in Equity 18
Condensed Interim Statement of Cash Flows 19
Notes to the Condensed Interim Financial Statements 20
Chairman's Statement
INTRODUCTION
This interim financial report of Pershing Square Holdings, Ltd.
("PSH" or the "Company") covers the period from January 1, 2018 to
June 30, 2018.
INVESTMENT PERFORMANCE
I am pleased to report that for the half year and year-to-date,
the Company's NAV1 per share increased by 6.7%2,3 and 12.7%2,3,
respectively, outpacing both the S&P 500 and FTSE 250 indices.
The returns were principally generated from investment performance,
and were enhanced by the Company's recently completed own-share
tender offer.
This positive investment performance follows a number of
important steps taken by Pershing Square Capital Management, L.P.
(the "Investment Manager", or "PSCM") to refocus the firm on its
core investment principles. The Investment Manager's Report on page
3 provides a detailed discussion about developments in the
portfolio since our last communication. For an up-to-date NAV,
please refer to our website at www.pershingsquareholdings.comwhere,
on a weekly basis, we publish the Company's NAV and
performance.
As a reminder, the terms of PSH's investment management
agreement with PSCM have a "high water mark" feature such that
investors in PSH only pay performance fees on increases in the NAV
above the highest NAV at which a performance fee has previously
been charged. As a result, PSH investors will not incur performance
fees until PSH's NAV exceeds $26.37 per share. It is now $19.62 per
share as of August 7. 2018.
NEW INVESTMENTS
In the first half of 2018, the Company announced two new
investments in United Technologies Corporation ("UTX") and Lowe's
Companies, Inc. ("LOW"). Both investments have been positive
contributors to year-to-date performance and are well aligned with
PSCM's core investment principles.
CORPORATE ACTIONS
PSH shares have traded at a substantial discount to NAV over the
last two or so years. In order to take advantage of the discount
for the benefit of long term shareholders of PSH and to provide
liquidity for shareholders seeking to sell their holdings, the
Company sought approval from shareholders at the 2018 Annual
General Meeting ("AGM") for a $300 million own-share tender offer
(the "Tender Offer"). The Company also required approval from
shareholders to remove the 4.99% ownership limit. The Tender Offer
was executed at a 20.5% discount to NAV, which caused NAV per share
to accrete by 2.1% and reduced the free float (which we define as
shares held by owners not affiliated to the Investment Manager) by
9.5%.
The Company also introduced a U.S. dollar share quotation on the
London Stock Exchange ("LSE)", which should reduce transaction
costs for shareholders who wish to trade PSH on the LSE in U.S.
dollars. While none of these actions is a panacea for reducing or
eliminating the current discount, the Board expects that, when
combined with sustained strong investment performance, they will
assist in creating shareholder value.
ACQUISITION OF PSH SHARES BY WILLIAM ACKMAN AND AFFILIATES
On July 10, 2018, the Company announced that, since the Tender
Offer was completed in May 2018, PSCM CEO William Ackman, PSH Board
Member and PSCM President Nicholas Botta, all members of the
Pershing Square Investment Team, other PSCM employees and members
of the PSCM advisory board combined purchased more than $300
million of PSH Public Shares. When added to the own-share tender,
this has had the effect of reducing PSH's effective free float by
18.3% since May 2018. This is one of the largest insider purchases
ever of a FTSE company. The Board is pleased to see such a strong
commitment from the Investment Manager.
I look forward to reporting to you again in our 2018 Annual
Report.
/s/ Anne FarlowAnne FarlowChairman of the BoardAugust 9,
2018
___________________________
1 "NAV" means the value of the Company's portfolio securities, cash and
other assets less its liabilities (including any accrued performance
fees andthe accrued portion of the Potential Offset Amount), as
determined by PSCM in accordance with its valuation policy
and procedures, and inaccordance with applicable accounting principles
(except that the net asset value of the Company attributable
to Management Shares issued fromtime to time will not be classified
as liabilities for purposes of calculating NAV).
2 Calculated with respect to Public Shares only.
In May 2018, the Company purchased
and cancelled 22,271,714 Public Shares pursuant to the tenderoffer
announced on April 25, 2018 (the "Tender Offer"). The positive impact
on performance due to the Tender Offer is reflected herein.
3 Past performance is not a guarantee of future results. Net
returns include the reinvestment of all dividends,
interest, and capital gains and reflect thededuction
of, among other things, brokerage
commissions, administrative expenses, management fees
and performance fees (if any). Performanceresults
provided herein also assume an investor has been
invested in the Company since inception.
Investment Manager's Report
HISTORICAL PERFORMANCE
Pershing Square Holdings, Ltd.
Performance vs. the S&P 500
PSH Net Return(1) S&P 500(3)
2013 9.6% 32.4%
2014 40.4% 13.7%
2015 (20.5)% 1.4%
2016 (13.5)% 11.9%
2017 (4.0)% 21.8%
YTD through June 30, 2018 6.7% 2.6%
Q3 through August 7, 2018 5.6% 5.3%
YTD through August 7, 2018 12.7% 8.1%
January 2013 - August
7, 2018(2)
Cumulative (Since 14.4% 124.8%
Inception)
Compound Annual Return 2.4% 15.4%
PERFORMANCE ATTRIBUTION(4)
Below are the attributions to gross performance of the portfolio
of the Company through June 30, 2018.
Contributors Detractors
Chipotle Mexican Grill, Inc. 5.6% Herbalife Ltd. (3.3)%
Automatic Data Processing, Inc. 5.1% Federal National Mortgage (2.3)%
Association
Lowe's Companies Inc. 1.3% Federal Home Loan Mortgage (1.0)%
Corporation
Platform Specialty Products 0.7% All Other Detractors (1.4)%
Corporation
Accretion (Relating to Share 2.1%
Buyback and Tender Offer)
All Other Contributors 0.7%
Total Contributors 15.5% Total Detractors (8.0)%
Total Contributors and Detractors 7.5%
through June 30, 2018
Past performance is not a guarantee of future results. All
investments involve risk, including the loss of principal. Please
see accompanying footnotes on page 11.
Positions with performance attributions of 50 basis points or
more are listed above separately, while positions with performance
attributions of less than 50 basis points are aggregated.
The table below reflects the net performance of Pershing Square,
L.P. ("PSLP"), the Pershing Square fund with the longest track
record, since inception. We present the PSLP track record using its
historical performance fee of 20%.
Pershing Square, L.P. Performance vs. the S&P 500
PSLP Net Return(1,5) S&P 500(3)
2004 42.6% 10.9%
2005 39.9% 4.9%
2006 22.5% 15.8%
2007 22.0% 5.5%
2008 (13.0)% (37.0)%
2009 40.6% 26.5%
2010 29.7% 15.1%
2011 (1.1)% 2.1%
2012 13.3% 16.0%
2013 9.7% 32.4%
2014 36.9% 13.7%
2015 (16.2)% 1.4%
2016 (9.6)% 11.9%
2017 (1.6)% 21.8%
YTD through June 30, 2018 5.5% 2.6%
Q3 through August 7, 2018 4.3% 5.3%
YTD through August 7, 2018 10.1% 8.1%
2004 - August 7, 2018(2)
Cumulative (Since Inception) 553.3% 246.7%
Compound Annual Return 13.7% 8.8%
Past performance is not a guarantee of future results. All
investments involve risk, including the loss of principal. Please
see accompanying footnotes on page 11.
LETTER TO SHAREHOLDERS
Dear Pershing Square Holdings, Ltd. Shareholder:
We made substantial progress in the first half of 2018 which has
continued year-to-date. Our portfolio companies continue to report
strong results, leading to significant share price appreciation and
improved NAV per share performance. Driven by positive second
quarter performance, NAV in the first half of 2018 increased from
$17.41 to $18.58, a 6.7% increase. Year-to-date performance,
through August 7th, has increased to 12.7% (NAV per share is now
$19.62) compared with 8.1% for the S&P 500 and 1.3%(6) for the
FTSE 250 over the same period. In May, the Company completed an
own-share tender for $300 million of PSH public shares which was
followed by insider purchases of more than $300 million of PSH
shares. It is clear from these actions that we and the Board
believe that PSH is undervalued. Management's increased ownership
means that our interests are now aligned with yours to an even
greater extent.
Our portfolio is comprised of long-term investments in large
capitalization, simple, predictable, free-cash-flow-generative,
high-quality, dominant companies with catalysts for shareholder
value creation. Often, we are the catalyst for value recognition,
using our influential position as a large, or the largest,
shareholder often with representation on the board of directors to
effectuate necessary changes.
We have disclosed new investments in United Technologies
Corporation (UTX) and Lowe's Companies, Inc. (LOW). UTX is a
leading industrial holding company which owns a number of
high-quality businesses in three distinct divisions: (i) Aerospace
systems (UTAS) and engines (Pratt & Whitney), (ii) Otis
Elevator Company, and (iii) Climate, Controls and Security
(CC&S), which all benefit from favorable long-term growth
trends and recurring long-term cash flows. Each of these businesses
has materially different capital requirements, competitive
characteristics, and investor constituencies, and we believe that
they will be more likely to achieve fair value as independent
companies. We have had a constructive engagement with UTX
management who are considering various strategic alternatives to
unlock value.
Lowe's, which we discuss in greater detail below, is a leading
U.S. home improvement retailer whose performance deteriorated
versus Home Depot, its direct competitor, over the last decade. The
company recently named Marvin Ellison president and CEO, effective
July 2, 2018. As a senior executive at Home Depot - Mr. Ellison was
head of U.S. stores - he helped lead Home Depot's operational
improvements and outperformance versus Lowe's over the last decade.
Lowe's profit margins and sales productivity are substantially
lower than Home Depot's, and it trades at a substantially lower
earnings multiple. We expect that Mr. Ellison can close the
performance gap, and the market will revalue Lowe's
accordingly.
PORTFOLIO UPDATE
Automatic Data Processing, Inc. (ADP)
ADP hosted its first Analyst Day since 2015 this past quarter.
At the Analyst Day, the company committed to achieving 7% to 9%
revenue growth and pre-tax operating margins of 23% to 25% by FY
2021. These projections represent substantial increases to
management's prior guidance. The new margin targets imply annual
earnings-per-share growth of 16% to 19% over the next three fiscal
years, with a FY 2021 earnings target of approximately $7 per
share. We believe there continues to be a significant opportunity
for ADP to exceed the new FY 2021 $7 guidance, and for future
accelerated progress thereafter, which we discussed in detail in a
letter we published following the Analyst Day, available
here:https://www.businesswire.com/news/home/20180619006504/en/Pershing-Square-Sends-Communication-Investors-ADP
Earlier this month, ADP reported fiscal Q4 results and
introduced FY 2019 guidance. Fiscal Q4 results were strong,
evidenced by accelerating year-over-year bookings growth (+18%),
robust top-line growth (+8% as reported, +6% organic growth) and
significant margin expansion. EPS was up 39% year-over-year, helped
by 400 basis points of net-economic margin expansion (excluding
pass-throughs and float income growth) and the benefits of
corporate tax reform.
More significantly, the company introduced FY 2019 guidance. ADP
projected "economic" revenue growth of 5% to 7% (excluding
non-economic Professional Employer Organization ("PEO")
pass-throughs), continued operational margin expansion, and
increased float income, with EPS projected to grow 13% to 15% over
FY 2018 (pro forma for a recently adopted accounting change, ASC
606). Based on current guidance, ADP should realize $5.12 to $5.21
of Adjusted EPS for FY 2019. While we believe current guidance is a
positive step towards ADP's long-term FY 2021 targets, there
continues to be a significant opportunity for additional
operational margin expansion in the coming years as ADP closes the
gap in Employer Service relative to its structural potential.
At the June Analyst Day, CFO Jan Siegmund, who is held in high
regard by shareholders, announced that he would be leaving the
company when a replacement is identified. We believe the hiring of
a new CFO with operational expertise in executing business
transformations would be well received by shareholders.
Chipotle Mexican Grill, Inc. (CMG)
Chipotle held a special investor call in late June during which
the new management team, led by CEO Brian Niccol, outlined its
strategic plan to drive both a successful turnaround and long-term
growth. To enable the organization to deliver on its new strategy,
management is undertaking a people and culture transformation with
the aim of making the company more disciplined, results-focused,
and "scrappy." The initial stages of this transformation include
the establishment of a new corporate headquarters in Southern
California and the closure of the Denver and New York offices, the
elimination of two management layers to streamline decision-making,
and the addition of experienced external talent in marketing, menu,
digital, analytics, and human resources.
Management is also revamping the company's approach to
innovation and marketing. New initiatives will pass through a
"stage-gate" process in which the company tests, learns, and
iterates on each initiative so that management is highly confident
in the probability of each new initiative's success before a
national rollout. The company will shift its marketing from an
inefficient field-based, promotion-driven approach to a centralized
strategy that aims to elevate Chipotle from a food brand to a
purpose-driven lifestyle brand. Management is investing in a
foundational customer research project, the results of which will
inform various innovation and marketing initiatives including
Chipotle's first-ever ongoing loyalty program that the company
plans to test later this year and launch nationally in 2019.
In the near-term, management is focused on improving operational
execution as well as accelerating progress in digital, both of
which contributed to the second quarter 2018 results that Chipotle
reported on July 26th. Same-store sales increased 3.3% in Q2, an
improvement from the prior quarter, driven by 5.1% average check
growth and a 1.8% decline in transactions. Management raised its
outlook for full year same-store sales growth from low-single
digits growth to low to mid-single digits growth. Restaurant
margins were 19.7%, up nearly one percentage point from the prior
year quarter, as decreased food costs as a percentage of sales more
than offset wage inflation. Progress in improving both the crew
member and guest experience was evident from lower hourly employee
turnover, a meaningful decline in guest complaints, and higher
guest satisfaction scores. To further improve throughput and
consistency of execution, management is continuing to roll out new
training materials and is redesigning its sales forecasting and
labor scheduling tools.
Chipotle's digital sales grew 33% in Q2, up from 20% in Q1, and
now account for 10.3% of total sales. Delivery sales quadrupled in
the quarter as the company launched a new national partnership with
third-party delivery provider DoorDash and added the ability to
order delivery in the Chipotle mobile app. The company will further
expand its delivery and catering capabilities over the coming
quarters and is accelerating the rollout of its technology-enabled
second make-line over the entire store base by the end of 2019, up
from roughly 500 stores today, and 1,000 stores by the end of 2018.
The second make-line is a competitive advantage for Chipotle as it
enables the business to handle rapid growth in digital sales
without any impact on front-line throughput or the in-restaurant
experience. Chipotle experienced its highest digital sales day ever
on July 31st thanks to robust consumer demand for its National
Avocado Day promotion, which also helped to increase awareness and
downloads of Chipotle's mobile app.
Restaurant Brands International Inc. (QSR)
Restaurant Brands' second quarter results showed continued
earnings growth as performance at Burger King and Popeyes remained
strong, offset somewhat by muted results at Tim Hortons. QSR
reported strong unit growth of 6%, as Burger King units increased
6%, Popeyes 7% and Tim Hortons 3%. QSR announced a master franchise
agreement to open 1,500 Tim Hortons restaurants in China over the
next decade (30% of current Tim's units), which should accelerate
the brand's long-term unit growth. Same-store sales this quarter
grew 2% at Burger King due to strength in promotional offers and
product innovation. Popeyes' same-store sales grew 3% as the brand
is experiencing the benefits of a more value-focused menu. Tim
Hortons' same-store sales were flat as growth in breakfast foods
and cold beverages was offset by weakness in baked goods and brewed
coffee.
QSR is working on a variety of initiatives that should improve
same-store sales at Tim Hortons. Recently, the brand launched
all-day breakfast. The company's consumer surveys suggest this
could have a meaningful impact on sales as 60% of guests said they
would likely buy a breakfast sandwich after 12pm, and one-third
said they would likely increase the frequency of their visits. Tim
Hortons is also developing a kids' menu and a loyalty program which
management expects to introduce within the next few quarters.
Organic EBITDA grew 4%, as Burger King's grew 6%, Popeyes' grew
28%, and Tim Hortons' declined 1%. Growth at Burger King continues
to reflect progress in strong same-store sales, net unit growth and
margin enhancement. Popeyes' growth primarily reflects improved
cost efficiencies. The decline at Tim Hortons resulted from lapping
the prior year's sales of new equipment related to the launch of
the espresso-based drinks platform, which will no longer be a
headwind in future quarters. Overall, QSR's reported EBITDA grew 6%
due to organic growth and a 2% benefit from a weaker USD. EPS grew
more than 30% due primarily to the lower financing costs associated
with the repayment of the Berkshire preferred stock at the end of
last year.
Lowe's Companies, Inc.(LOW)
Lowe's is a leading U.S. home improvement retailer with an
advantaged business model in a category that is positioned for
continued growth. The home improvement category operates as an
oligopoly, and Lowe's significant market presence results in a
scale advantage that allows it to be a convenient and low-cost
provider of home improvement products across its more than 2,000
stores and fully integrated mobile and online platform. We believe
that Lowe's has strong future growth prospects as continued growth
of the housing market should drive home improvement spending over
the next several years. The increasing repair and maintenance
requirements of the aging U.S. housing stock should contribute to
sales growth over the longer term.
We have avoided investing in retail for nearly five years, but
we believe the home improvement category is well insulated from the
threat of online competitors, as a significant amount of the
company's products are either difficult and/or expensive to ship
due to their size (e.g., lumber and building materials, live
plants), regulatory constraints (e.g., paint), installation
requirements (e.g., appliances) or are uneconomic to ship due to
the combination of their low price point and heavy weight (e.g.,
nuts and bolts, concrete). Moreover, a physical store presence is a
competitive advantage in the home improvement category as customers
frequently consult with store employees as part of their purchase
process. Customers often prefer to see the product before they
purchase it, or they drive to the store because they have an
immediate need for the product. As a result, the home improvement
category has one of the lowest levels of e-commerce penetration in
retail. While we expect overall e-commerce competition in the
category to remain relatively limited in the future, Lowe's online
business is growing rapidly with a market share similar to its
overall market share.
We previously invested in Lowe's in 2011 due to our belief that
the market did not appreciate the rapid earnings growth that would
likely result from an improvement in the housing market following
the financial crisis. Shortly after we initiated our investment in
2011, the stock price appreciated significantly, and we exited our
position to allocate capital to other opportunities. While Lowe's
earnings and share price continued to increase thereafter, since
that time, Lowe's has materially underperformed its closest
competitor, Home Depot.
Prior to the financial crisis, Lowe's same-store sales growth
outpaced Home Depot's and had similar profit margins to its direct
competitor. Since the crisis, Lowe's has fallen far behind. Lowe's
has averaged 3% same-store sales growth compared with 5% at Home
Depot, resulting in a sales gap which has widened to nearly 20%.
Lowe's profit margins are now nearly 500 basis points less than
Home Depot.
In response to growing shareholder dissatisfaction earlier this
year, Lowe's appointed three new directors to its board, and
announced a search for a new CEO. One of the new directors, David
Batchelder, formerly a board member at Home Depot, was appointed to
lead the CEO search committee. We initiated our investment shortly
after Lowe's announced the CEO search process, premised on our
belief that there were several strong CEO candidates available,
including a number with experience in the Home Depot
transformation. At the end of May, Lowe's announced that Marvin
Ellison, a former senior executive at Home Depot, would become CEO.
Marvin was the leading candidate on our list of potential CEO
recruits as we believe he has the relevant experience leadership
qualities, and skill set to close the operational gap. Marvin
started at Lowe's in July and has already redesigned the
organizational structure to more closely resemble Home Depot's, and
has hired several former senior Home Depot executives for key
roles. We expect Marvin will announce a detailed plan to improve
performance, likely at the company's Analyst Day in December.
After appreciating 15% from our cost, Lowe's currently trades at
18 times our estimate of this year's earnings, which do not yet
reflect any impact from the management change. Home Depot trades at
more than 21 times analyst estimates of this year's earnings, as
the market has rewarded the company's historically strong execution
with a premium multiple. We believe there is large upside potential
to Lowe's if it can narrow the performance gap with Home Depot as
it is likely that closing the performance gap will cause the market
to reward the company with an increased multiple on higher earnings
that reflect the company's underlying business quality and growth
potential.
We believe that the Lowe's situation is reminiscent of our
investment in Canadian Pacific. At the time of our investment in
CP, it had underperformed Canadian National for more than a decade,
and management claimed that structural differences and weather
explained the company's underperformance. We disagreed, believing
that a different management approach would substantially improve
the company's performance. We were able to recruit Hunter Harrison,
the former CEO of CN, to CP, who in a few short years turned CP
into one of the best performing railroads in North America,
rivalling CN. Mr. Ellison is off to a fast start assembling a new
senior executive team to organize the Lowe's turnaround. We look
forward to watching him perform.
United Technologies Corporation (UTX)
UTX's second quarter earnings showed strong organic revenue
growth of 6%, led by growth in the aerospace businesses of 10%.
Organic revenue growth has been above 5% for the last four
consecutive quarters. The company raised its guidance for 2018 EPS
for the second time this year. UTX now expects full year organic
revenue growth of between 5% and 6% and EPS growth (before the
impact of the Rockwell Collins acquisition) of 7% to 9%.
Despite significant profit growth in its aerospace businesses,
UTX's operating profit was roughly flat compared with the prior
year due to a decline in earnings from the commercial businesses
(CC&S and Otis). In the aerospace businesses, UTAS organic
revenues increased 8% and operating profits grew 17%. Pratt &
Whitney organic revenues increased 12% and operating profit grew 8%
due to the initial losses associated with ramp-up of the GTF engine
program.
In its commercial businesses, CC&S organic revenues grew 4%
but operating profit was flat as input costs and new product
investments increased. Otis organic revenues grew 3% but operating
profit declined 11%, partly due to continued price and mix pressure
in China and one-time costs. Offsetting these weaker results were
strong growth in equipment orders, a leading indicator of future
revenue, which grew 8% for CC&S and 10% for Otis.
We believe the divergent performance of the aerospace and
commercial businesses further reinforces the logic of a business
separation of UTX's subsidiaries, as the strength in the aerospace
business is not being appropriately reflected in UTX's stock price,
which trades at only 16 to 17 times our estimate of this year's
earnings (pro-forma for the Rockwell Collins acquisition). UTX's
CEO, Greg Hayes, stated on the earnings call that "all options are
on the table" to maximize long-term shareholder value including a
three-way split of the company and/or potential business
divestitures. Management reiterated that the acquisition of
Rockwell Collins is expected to close in the third quarter and that
the company will announce the results of its strategic review in
the fourth quarter.
Mondelez International, Inc. (MDLZ)
Mondelez reported second quarter 2018 results on July 25th, with
sales growth, margins, and earnings all ahead of consensus
expectations. Underlying organic sales growth was approximately 2%
excluding a net benefit from lapping volume declines related to a
cyberattack in the prior year quarter and other one-time items.
Volume and product mix contributed 50 basis points to underlying
growth, with the balance coming from pricing. Global sales growth
for the snacks categories in which Mondelez operates has improved
from approximately 2% in 2017 to just over 3% in the first half of
this year. The company attributed the gap between the 3% growth of
its categories and its 2% underlying organic growth to share losses
in their Brazil and US gum businesses, as well as an inventory
trade reduction in US cookies and crackers that should be
transitory. Management sees this gap closing as it implements
strategies to address its share losses in Brazil and the US, and as
net share gains in all other markets accelerate.
Operating profit margin expanded by 130 basis points to 16.7%,
driven by a 60 basis point improvement in gross margin due to
productivity savings, volume leverage, and lower input costs, as
well as a 70 basis point reduction in overhead costs as a
percentage of sales due to continued implementation of zero-based
budgeting. EPS grew 17% as reported, or 15% on a constant-currency
basis, driven primarily by operating performance as well as share
repurchases and higher income from the company's coffee joint
ventures. Management raised full year organic sales growth guidance
from an increase of 1% to 2% to the high end of that range, and
reiterated guidance for a 17% operating profit margin including an
increase in gross margin, and double-digit EPS growth on a
constant-currency basis. As we have noted previously, MDLZ is one
of the few CPG companies that is still able to deliver relatively
strong performance in the current operating environment.
The Howard Hughes Corporation (HHC)
The Howard Hughes Corporation (HHC) continues to make progress
creating long-term value across its collection of unique and
irreplaceable real estate assets.
In its Operating Asset segment, HHC increased its estimated
stabilized net operating income (NOI) target to $309 million, which
represents a compound annual growth rate of 29% over the past three
years. The growth in NOI has come from organic development
opportunities on HHC's existing land assets. To date, HHC has only
developed a fraction of its 50 million sq. ft. of vertical
development entitlements, providing a development pipeline for
decades to come. As a growing percentage of HHC's enterprise value
is represented by stabilized, cash-flow-generative real estate
assets, it should become easier for investors to underwrite the
value of its assets, which we believe will attract more traditional
real estate-oriented investors to the HHC story.
In its Ward Village Hawaii 60-acre coastal development, HHC has
nearly sold all of its condo inventory at its four existing condo
towers. These four towers have a total projected cost of $1.5
billion and an estimated 30% profit margin. HHC launched pre-sales
of its new 751-unit condo tower offering (A'ali'i) in January and
has already pre-sold 67% of the units at July month end,
highlighting the significant future opportunity at Ward Village as
75% of its entitlements remain.
At the South Street Seaport in NYC, HHC launched its summer 2018
concert series at its spectacular rooftop venue, which we believe
will enhance the visibility of this unique and valuable asset to
the community. In Summerlin Las Vegas, HHC continued its pace of
strong land sales at its master planned community (MPC). HHC's MPCs
in Houston, Texas, and Columbia, Maryland, continue to perform well
with ongoing commercial real estate development generating
attractive yields on cost. Lastly, HHC celebrated the ground
breaking of its 53-story, 1.4 million sq. ft. Class A office
development at 110 North Wacker in Chicago. The total estimated
cost of the project is over $750 million, more than $700 million of
which is financed with third-party debt and equity, structured so
that HHC retains the majority of the equity upside while minimizing
risk.
Platform Specialty Products Corporation (PAH)
In July, Platform announced the sale of its Ag Solutions
business for $4.2 billion in cash to UPL Corp. Limited, an Indian
agrochemical company, a price which represents full value for the
business. The transaction will significantly reduce the company's
leverage levels from six times EBITDA to less than 2.5 times and
will result in a more focused business with attractive growth and
cash flow characteristics. Platform also announced a $750 million
share repurchase authorization (20% of company's current market
value) conditioned upon the closing of the transaction, which it
expects to occur in late 2018 or early 2019.
In August, Platform reported another quarter of strong earnings
growth. Organic revenue increased 7% and organic EBITDA grew 8%.
Performance Solutions organic revenue grew 5% due to broad-based
growth across its regions and end markets. Organic EBITDA grew 10%
due to margin expansion resulting from strong sales growth of
higher margin products and cost savings from supply chain
initiatives. Ag Solutions organic revenue grew 10% due to strength
in the Latin and North American markets. Organic EBITDA grew 6% as
margins declined due to input cost inflation that was partially
offset by price increases and cost savings. Overall, Platform's
EBITDA grew 10% due to a 2% boost from foreign exchange and EPS
grew 30%.
While Platform's share price has increased 25% this year, it
still trades at a discount to the peer set in light of its high
leverage and transaction uncertainty until deal closure. If
Platform were to trade at a multiple that is similar to its peers
after the closing of the Ag Solutions sale, the company's shares
should appreciate significantly from current levels.
Fannie Mae (FNMA) / Freddie Mac (FMCC)
Fannie and Freddie reported continued earnings growth in their
core single-family guarantee businesses in the second quarter.
Guarantee fees charged on newly issued mortgage backed securities
continued to increase along with the size of their guarantee
portfolios, while underlying credit losses remained modest. Both
enterprises have now increased their capital reserves to the $3
billion per entity limit imposed by Treasury in December, and plan
to pay a combined $6.1 billion in dividends to Treasury under the
net worth sweep by September 30th. Inclusive of these upcoming
payments, Treasury will have received a total of $286 billion in
dividends on its Senior Preferred Stock investment, which is $94
billion more than its cumulative cash investment of $191 billion.
This represents an annualized cash-on-cash return to the government
of nearly 11%, above the bargained for 10% interest rate. This
return reflects no value for Treasury's warrants to purchase 79.9%
of the common stock of both entities, which we believe should be
worth in excess of $150 billion if Fannie and Freddie exit
conservatorship and are recapitalized.
In June, FHFA, Fannie and Freddie's primary regulator, released
draft proposed capital rules for the enterprises that would apply
once they exit conservatorship. Overall, we are encouraged that
FHFA is soliciting feedback from market participants regarding
adequate capital levels for the entities, which have been near zero
since conservatorship began nearly a decade ago. In order to raise
the large amount of private capital that will eventually be needed
to recapitalize the enterprises, we believe that all final capital
rules should avoid complexity and procyclicality, as well as
balance the requirement for a fortress balance sheet with the need
to deliver market returns to investors, and affordable mortgage
rates to consumers.
Other than the draft capital rules, the last three months were
relatively uneventful with regard to housing finance reform
efforts, but we expect activity to resume in earnest after midterm
elections in November. Last week, the government filed an omnibus
motion to dismiss in 12 cases asserting an unconstitutional taking
and related claims. Given the lengthy briefing schedule, we would
expect a decision sometime in the late spring or summer of
2019.
We are pleased with the progress of our portfolio companies and
the markets' growing recognition of their undervaluation. While a
few months of strong performance is too short a period to judge our
performance, we believe that PSH is back on track.
Please contact the investor relations team at ir@persq.com if
you have any questions about any of the above. Thank you for your
continued support.
Sincerely,
William A. Ackman
FOOTNOTES TO INVESTMENT MANAGER'S REPORT
1 Net returns include the reinvestment of all dividends, interest, and capital gains and reflect the deduction of, among other things,
brokerage commissions, administrative expenses, management fees and historical or accrued performance fees (if any). Performance
results provided herein also assume an investor that has been invested in the Company since inception. Depending on the timing of a
specific investment, net performance for an individual investor may vary from the net performance stated herein. Net performance
is a geometrically linked, time-weighted calculation. From May 2, 2017 to January 2, 2018, the Company engaged in a share buyback
program whereby its buyback agent repurchased Public Shares subject to certain limitations. In May 2018, the Company purchased
and cancelled 22,271,714 Public Shares pursuant to the Tender Offer announced on April 25, 2018. Any positive impact on performance due to these share buybacks and the Tender Offer is reflected herein. Performance data for 2018 is estimated and unaudited.
2 The inception date for the Company is December 31, 2012 and the inception date for PSLP is January 1, 2004. The performance data presented on
pages 3 to 4 for the S&P 500 under "Cumulative (Since Inception)" is calculated from December 31, 2012 or January 1, 2004, as applicable.
3 The S&P 500 ("index") has been selected for purposes of comparing the performance of an investment in the Company with a well-known, broad-based equity benchmark. The statistical
data regarding the index has been obtained from Bloomberg and the returns are calculated assuming all dividends are reinvested. The index is not subject to any
of the fees or expenses to which the Company is subject. The Company is not restricted to investing in those securities which comprise this index, its performance may or
may not correlate to this index and it should not be considered a proxy for this index. The volatility of an index may materially differ from the volatility of the
Company's portfolio. The S&P 500 is comprised of a representative sample of 500 U.S. large cap companies. The index is an unmanaged, float-weighted index with each stock's
weight in the index in proportion to its float, as determined by Standard & Poor's. The S&P 500 index is proprietary to and is calculated, distributed and marketed
by S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC), its affiliates and/or its licensors and has been licensed for use. S&P®and S&P 500®, among other famous marks,
are registered trademarks of Standard & Poor's Financial Services LLC. © 2018 S&P Dow Jones Indices LLC, its affiliates and/or its licensors. All rights reserved.
4 This table reflects the attributions to performance of the portfolio of the Company. Positions with performance attributions of at 50 basis
points or more are listed above separately, while positions with performance attributions of less than 50 basis points are aggregated.
The attributions presented herein are based on gross returns which do not reflect deduction of certain fees or expenses charged to the Company, including, without
limitation, management fees and accrued performance fee (if any). Inclusion of such fees and expenses would produce lower returns than presented here.
In addition, at times, PSCM may engage in hedging transactions to seek to reduce risk in the portfolio, including investment specific hedges that do
not relate to the underlying securities of an issuer in which the Company is invested. The gross returns reflected herein (i) include only returns
on the investment in the underlying issuer and the hedge positions that directly relate to the securities that reference the underlying issuer (e.g.,
if the Company was long Issuer A stock and also purchased puts on Issuer A stock, the gross return reflects the profit/loss on the stock and the
profit/loss on the put); (ii) do not reflect the cost/benefit of hedges that do not relate to the securities that reference the underlying issuer (e.g.,
if the Company was long Issuer A stock and short Issuer B stock, the profit/loss on the Issuer B stock is not included in the gross returns attributable
to the investment in Issuer A); and (iii) do not reflect the cost/benefit of portfolio hedges. Performance with respect to currency hedging related
to a specific issuer is included in the overall performance attribution of such issuer. All other currency positions are aggregated.
The performance attributions to the gross returns provided herein are for illustrative purposes only. The securities on these lists may not have been held
by the Company for the entire period. All investments involve risk including the loss of principal. It should not be assumed that investments made
in the future will be profitable or will equal the performance of the securities on these lists. It should not be assumed that investments made in the
future will be profitable. Past performance is not indicative of future results. Please refer to the net performance figures presented on page 3.
5 PSLP's performance results are presented as it is the Pershing Square fund with the longest track record and substantially the same investment strategy to the Company. The
inception date for PSLP is January 1, 2004. In 2004, Pershing Square earned a $1.5 million (approximately 3.9%) annual management fee and PSLP's general partner earned
a performance allocation equal to 20% above a 6% hurdle from PSLP, in accordance with the terms of the limited partnership agreement of PSLP then in effect. That limited
partnership agreement was later amended to provide for a 1.5% annual management fee and 20% performance allocation effective January 1, 2005. The net returns
for PSLP set out herein reflect the different fee arrangements in 2004, and subsequently, except that the tranche of interests subject to a 30% performance allocation and
a 5% hard hurdle (non-cumulative) issued on January 1, 2017 is not reflected in the returns. In addition, pursuant to a separate agreement, in 2004 the sole unaffiliated
limited partner paid Pershing Square an additional $840,000 for overhead expenses in connection with services provided unrelated to PSLP, which have not been taken
into account in determining PSLP's net returns. To the extent that such overhead expenses had been included as fund expenses, net returns would have been lower.
6 The return of the FTSE 250 is quoted in pound sterling as is customary, not in the Company's or S&P's base currency of USD.
Limitations of Performance Data
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 during 2018. PSCM 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. PSCM hereby disclaims any duty to provide any
updates or changes to the information contained here including,
without limitation, the manner or type of any PSCM investment.
Forward-Looking Statements
This report also contains forward-looking statements, which
reflect PSCM's views. These forward-looking statements can be
identified by reference to words such as "believe", "expect",
potential", "continue", "may", "will", "should", "seek",
"approximately", "predict", "intend", "plan", "estimate",
"anticipate" or other comparable words. These forward-looking
statements are subject to various risks, uncertainties and
assumptions. Accordingly, there are or will be important factors
that could cause actual outcomes or results to differ materially
from those indicated in these statements. Should any assumptions
underlying the forward-looking statements contained herein prove to
be incorrect, the actual outcome or results may differ materially
from outcomes or results projected in these statements. None of the
Company, PSCM or any of their respective affiliates undertakes any
obligation to update or review any forward-looking statement,
whether as a result of new information, future developments or
otherwise, except as required by applicable law or regulation.
Statement of the Directors and Statement of Principal Risks
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing this unaudited
report and condensed interim financial statements, which have been
reviewed but not audited by an independent auditor, and are
required to:
-- Prepare the unaudited condensed interim financial statements in
accordance with Disclosure and Transparency Rules ("DTR") 4.2.4R
and
International Accounting Standard 34: Interim Financial
Reporting;
-- Include a fair review of the information required by DTR 4.2.7R, being
important events that have occurred during the period and their
impact
on the unaudited report and condensed interim financial
statements and
a description of the principal risks and uncertainties for
the
remaining six months of the financial year;
-- Include a fair review of information required by DTR 4.2.8R, being
related party transactions that have taken place during the
period
which have had a material effect on the financial position
or
performance of the Company;
-- Prepare the unaudited report and condensed interim financial
statements in accordance with applicable Dutch law.
The Directors confirm that the unaudited report and condensed
interim financial statements comply with the above
requirements.
Conformity statement pursuant to section 5:25d paragraph 2(c) of
the Dutch Financial Supervision Act (Wet op het financieel
toezicht):
The Board of Directors is responsible for maintaining proper
accounting records, for safeguarding assets and for taking
reasonable steps to prevent and detect fraud and other
irregularities. It is responsible for:
-- Selecting suitable accounting policies and applying them consistently;
-- For making judgments and estimates that are reasonable; and
-- Establishing and maintaining internal procedures which ensure that all
major financial information is known to the Board of Directors,
so
that the timeliness, completeness and correctness of the
external
financial reporting are assured.
As required by section 5:25d paragraph 2(c) of the Dutch
Financial Supervision Act (Wet op het financieel toezicht), the
Directors confirm that to the best of their knowledge:
-- The Company's unaudited condensed interim financial statements for the
period ended June 30, 2018 give a true and fair view of the
assets,
liabilities, financial position and profit of the Company for
the
period; and
-- The interim report for the period ended June 30, 2018 includes a true
and fair review of the information for the Company required
pursuant
to article 5:25d, paragraphs 8 and 9 of the Dutch Financial
Supervision Act (Wet op het financieel toezicht).
STATEMENT OF PRINCIPAL RISKS
The Company is subject to a number of risks specific to its
investment activities, structure and operations, as well as risks
relating to general market conditions. The Board has adopted
procedures and controls for the ongoing assessment, monitoring and
mitigation of material risks and reviews the management of these
risks at each quarterly Board meeting. The Board believes that the
risks listed below are the principal risks faced by the
Company:
-- Risks related to Investment Activities
-- Use of leverage
-- Regulatory risks
-- Reputational risk
-- Business continuity
-- Shares trade at a significant discount to NAV
-- Market risk
-- Counterparty credit risk
Further details of each of these risks and how they are
mitigated are discussed in the Report of the Directors within the
Company's Annual Report for the year ended December 31, 2017. The
Board believes these risks are applicable to the six-month period
ended June 30, 2018 and the remaining six months of the current
financial year.
/s/ Anne FarlowAnne FarlowChairman of the BoardAugust 9,
2018
/s/ Richard BatteyRichard BatteyDirectorAugust 9, 2018
Independent Review Report to Pershing Square Holdings, Ltd.
INTRODUCTION
We have been engaged by the Company to review the condensed set
of financial statements in the interim financial report for the six
months ended June 30, 2018 which comprises the Condensed Interim
Statement of Financial Position, Condensed Interim Statement of
Comprehensive Income, Condensed Interim Statement of Changes in Net
Assets Attributable to Management Shareholders, Condensed Interim
Statement of Changes in Equity, Condensed Interim Statement of Cash
Flows and the related Notes 1 to 12. We have read the other
information contained in the interim financial report and
considered whether it contains any apparent misstatements or
material inconsistencies with the information in the condensed set
of financial statements.
This report is made solely to the Company in accordance with
guidance contained in International Standard on Review Engagements
2410 (UK and Ireland) "Review of Interim Financial Information
Performed by the Independent Auditor of the Entity" issued by the
Auditing Practices Board. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the
Company, for our work, for this report, or for the conclusions we
have formed.
DIRECTORS' RESPONSIBILITY
The interim financial report is the responsibility of, and has
been approved by, the Directors. The Directors are responsible for
preparing the interim financial report in accordance with the
Disclosure Guidance and Transparency Rules of the United Kingdom's
Financial Conduct Authority.
As disclosed in Note 2, the annual financial statements of the
Company are prepared in accordance with International Financial
Reporting Standards ("IFRS") as issued by the International
Accounting Standards Board ("IASB"). The condensed set of financial
statements included in this interim financial report has been
prepared in accordance with International Accounting Standards 34,
"Interim Financial Reporting".
OUR RESPONSIBILITY
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the interim financial
report based on our review.
SCOPE OF REVIEW
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not
express an audit opinion.
CONCLUSION
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the interim financial report for the six months ended June 30,
2018 is not prepared, in all material respects, in accordance with
International Accounting Standard 34 and the Disclosure Guidance
and Transparency Rules of the United Kingdom's Financial Conduct
Authority.
/s/ Ernst & Young LLPErnst & Young LLPGuernseyAugust 9,
2018
Condensed Interim Statement of Financial Position
(Stated in United States Dollars)
Notes June 30, 2018Unaudited December 31, 2017Audited
Assets
Cash and cash $ 1,122,177,458 $ 1,082,102,874
equivalents
Due from brokers 159,127,033 710,597,200
Trade and other 16,613,145 18,520,293
receivables
Financial assets
at fair value
through profit
or loss
Investments in 4 3,720,080,794 3,140,815,503
securities
Derivative financial 4 436,986,198 744,454,840
instruments
Total assets $ 5,454,984,628 $ 5,696,490,710
Liabilities
Due to brokers $ 290,720,000 $ 340,795,000
Trade and other 1,650,270 91,121,135
payables
Financial
liabilities
at fair
value through profit
or loss
Derivative financial 4 31,331,235 6,192,314
instruments
Bonds 10 1,016,369,873 1,015,427,736
Liabilities excluding 1,340,071,378 1,453,536,185
net
assets attributable
tomanagement
shareholders
Net 6 383,478,171 156,268,350
assets attributable
to
management
shareholders
Total liabilities 1,723,549,549 1,609,804,535
Equity
Share capital 6 5,407,330,220 5,927,042,332
Accumulated deficit (1,675,895,141) (1,840,356,157)
Total equity(1) 3,731,435,079 4,086,686,175
Total liabilities $ 5,454,984,628 $ 5,696,490,710
and equity
Net $ 3,731,316,780 $ 4,086,575,831
assets attributable
to Public Shares
Public Shares 200,822,397 234,716,810
in issue
Net assets per $ 18.58 $ 17.41
Public Share
Net $ 383,478,171 $ 156,268,350
assets attributable
to Management Shares
Management Shares 19,324,427 8,500,796
in issue
Net assets per $ 19.84 $ 18.38
Management
Share
Net $ 118,299 $ 110,344
assets attributable
to
Special Voting Share
Special Voting 1 1
Share in issue
Net assets per $ 118,299.24 $ 110,343.92
Special
Voting Share
(1) Total equity of the Company is comprised of
the aggregate net asset values of all
Public Shares and the Special Voting Share
as of June 30,2018 and December
31, 2017. Under IFRS, Management Shares
are classified as financial liabilities
rather than equity. See Note 2 on page22 for further details.
The accompanying notes form an integral part of these condensed
interim financial statements.
Condensed Interim Statement of Comprehensive Income
(Stated in United States Dollars)
Notes 2018 2017
Unaudited Unaudited
Investment gains and losses
Net gain/(loss) on $ 195,147,441 $ (41,014,177)
financial assets
and liabilities at fair
value through profit or loss
Net realized gain/(loss) (877,163) (12,717,493)
on commodity interests
Net change in unrealized 1,007,068 419,293
gain/(loss)
on commodity interests(net
of brokerage commissions
of $44,690 (2017: $0))
4 195,277,346 (53,312,377)
Income
Dividend income 43,287,822 26,720,018
Interest income 2,245,271 491,147
Other income 21,036 -
45,554,129 27,211,165
Expense
Interest expense (30,185,704) (31,917,276)
Management fees 8 (26,790,210) (32,214,384)
Professional fees (3,396,214) (6,939,704)
Other expenses (807,187) (1,185,334)
(61,179,315) (72,256,698)
Profit/(loss) before 179,652,160 (98,357,910)
tax attributable to
equity andmanagement
shareholders
Withholding tax (dividends) (6,833,852) (4,706,591)
Profit/(loss) attributable 172,818,308 (103,064,501)
to equity
and managementshareholders
Amounts attributable 8,357,292 (2,579,996)
to management
shareholders
Profit/(loss) attributable $ 164,461,016 $ (100,484,505)
to equity shareholders
Earnings per share (basic
& diluted) (1)
Public Shares $ 0.72 $ (0.42)
Special Voting Share $ 7,955.32 $ (2,684.25)
All the items in the above statement are derived from continuing
operations.
There is no other comprehensive income for the periods ended
June 30, 2018 and June 30, 2017.
(1) Earnings per share is calculated using the profit/(loss) for the
period attributable to equity shareholders divided by the
weighted averageshares outstanding with respect to such share
class over the period. See Note 11 for further details.
The accompanying notes form an integral part of these condensed
interim financial statements.
Condensed Interim Statement of Changes in Net Assets
Attributable to Management Shareholders
(Stated in United States Dollars)
Notes Net Assets Attributable to
Management Shareholders
As at December 31, 2017 $ 156,268,350
Amounts attributable to management 8,357,292
shareholders
Conversion from Management 6 (5,561,191)
Shares to Public Shares
Conversion from Public Shares 6 220,491,008
to Management Shares
Accretion from share buybacks(1) 3,922,712
As at June 30, 2018 (Unaudited) $ 383,478,171
Net Assets Attributable to
Management Shareholders
As at December 31, 2016 $ 161,137,460
Amounts attributable to management (2,579,996)
shareholders
As at June 30, 2017 (Unaudited) $ 158,557,464
(1) From May 2, 2017 to January 2, 2018, the Company engaged in a share
buyback program whereby its buyback agent repurchased PublicShares
subject to certain limitations. All repurchased Public Shares were
subsequently cancelled. In May 2018, the Company purchased
andcancelled 22,271,714 Public Shares pursuant to the Tender
Offer. See Note 6 for further details. This amount includes
the accretion relatingto both the share buyback program and the
Tender Offer that is allocated to the Management Shares.
The accompanying notes form an integral part of these condensed
interim financial statements.
Condensed Interim Statement of Changes in Equity
(Stated in United States Dollars)
Notes Share Capital Accumulated Deficit Total Equity
As $ 5,927,042,332 $ (1,840,356,157) $ 4,086,686,175
at December
31, 2017(1)
Total - 164,461,016 164,461,016
profit/(loss)
attributable
to
equityshareholders
Share (304,782,267) - (304,782,267)
buybacks(2)
Conversion 6 5,561,181 - 5,561,181
from
Management
Shares
toPublic
Shares
Conversion 6 (220,491,026) - (220,491,026)
from
Public Shares
toManagement
Shares
As at June $ 5,407,330,220 $ (1,675,895,141) $ 3,731,435,079
30, 2018
(Unaudited)(1)
Share Capital Accumulated Deficit Total Equity
As $ 6,003,372,824 $ (1,647,738,262) $ 4,355,634,562
at December
31, 2016(1)
Total - (100,484,505) (100,484,505)
profit/(loss)
attributable
to
equityshareholders
Share (16,348,204) - (16,348,204)
buybacks(2)
As at June $ 5,987,024,620 $ (1,748,222,767) $ 4,238,801,853
30, 2017
(Unaudited)(1)
(1) Total equity of the Company is comprised
of the aggregate net asset
values of all Public Shares and the Special Voting Share. Under
IFRS,Management Shares are classified
as financial liabilities rather
than equity. See Note 2 on page 22 for further details.
(2) From May 2, 2017 to January 2, 2018, the
Company engaged in a share buyback
program whereby its buyback agent repurchased
PublicShares subject
to certain limitations. All repurchased
Public Shares were subsequently
cancelled. In May 2018, the Company purchased andcancelled
22,271,714 Public Shares pursuant to the Tender Offer. See Note 6
for further details. This amount includes
the accretion relatingto
both the share buyback program and the Tender Offer that is
allocated to the Public Shares and the Special Voting Share.
The accompanying notes form an integral part of these condensed
interim financial statements.
Condensed Interim Statement of Cash Flows
(Stated in United States Dollars)
Notes 2018 2017
Unaudited Unaudited
Cash flows from operating
activities
Profit/(loss) for the $ 172,818,308 $ (103,064,501)
period attributable
to equity andmanagement
shareholders
Adjustments to reconcile
changes in profit/(loss)
for theperiod to
net cash flows:
Bond interest expense 10 28,442,137 28,388,276
Bond interest paid(1) 10 (27,500,000) (27,500,000)
(Increase)/decrease in
operating assets:
Due from brokers 551,470,167 (212,990,105)
Trade and other receivables 1,907,148 (337,287)
Investments in securities 4 (579,265,291) (366,987,815)
Derivative financial instruments 4 307,468,642 48,077,674
Increase/(decrease) in
operating liabilities:
Due to brokers (50,075,000) 241,691,182
Trade and other payables (89,470,865) 2,497,659
Securities sold, not 4 - 195,911,855
yet purchased
Derivative financial instruments 4 25,138,921 (169,576,385)
Net cash from/(used in) 340,934,167 (363,889,447)
operating activities
Cash flows from financing
activities
Purchase of Public Shares 6 (300,859,583) (16,348,204)
Net cash from/(used in) (300,859,583) (16,348,204)
financing activities
Net change in cash and 40,074,584 (380,237,651)
cash equivalents
Cash and cash equivalents 1,082,102,874 2,076,161,696
at beginning of period
Cash and cash equivalents $ 1,122,177,458 $ 1,695,924,045
at end of period
Supplemental disclosure of
cash flow information
Cash paid during the $ 28,984,806 $ 30,489,588
period for interest
Cash received during the $ 2,047,395 $ 381,793
period for interest
Cash received during the $ 44,406,907 $ 27,543,710
period for dividends
Cash deducted during the period $ 7,521,369 $ 4,977,818
for withholding taxes
(1) In accordance with the amendments to IAS 7,
the Company's net debt reconciliation
related to the Company's bonds (the "Bonds")
is furtherdetailed in Note 10.
The accompanying notes form an integral part of these condensed
interim financial statements.
Notes to the Condensed Interim Financial Statements
1. CORPORATE INFORMATION
Organization
The Company was incorporated with limited liability under the
laws of the Bailiwick of Guernsey on February 2, 2012. It became a
registered open-ended investment scheme, under the Protection of
Investors (Bailiwick of Guernsey) Law, 1987 and the Registered
Collective Investment Scheme Rules 2008 (issued by the Guernsey
Financial Services Commission, the "GFSC"), on June 27, 2012, and
commenced operations on December 31, 2012.
On October 2, 2014, the GFSC approved the conversion of the
Company into a registered closed-ended investment scheme under the
Protection of Investors Law and the 2008 Rules.
The Company's registered office is at 1st Floor, Royal Chambers,
St Julian's Avenue, St Peter Port, Guernsey, Channel Islands.
The latest traded price of the Public Shares is available on
Reuters, Bloomberg, Euronext Amsterdam and the London Stock
Exchange ("LSE").
A copy of the Prospectus of the Company is available from the
Company's registered office and on the Company's website
(www.pershingsquareholdings.com).
Investment Objective
The Company's investment objective is to preserve capital and to
seek maximum, long-term capital appreciation commensurate with
reasonable risk. The Company seeks to achieve its investment
objective through long (and occasionally short) positions in equity
or debt securities of public U.S. and non-U.S. issuers (including
securities convertible into equity or debt securities), derivative
instruments and any other financial instruments that the Investment
Manager believes will achieve the Company's investment
objective.
Investment Manager
The Company has appointed PSCM as its investment manager
pursuant to an investment management agreement (the "IMA"). The
Investment Manager has responsibility, subject to the overall
supervision of the Board of Directors, for the investment of the
Company's assets in accordance with the Company's investment policy
set forth in the Company's Annual Reportfor the year ended December
31, 2017. The Company delegates certain administrative functions
relating to the management of the Company to PSCM. William A.
Ackman is the managing member of PS Management GP, LLC, the general
partner of PSCM.
Board of Directors
The Company's Board of Directors is comprised of Nicholas Botta,
President and a partner of the Investment Manager, Anne Farlow,
Richard Battey, Bronwyn Curtis, William Scott and Richard Wohanka,
all of whom are non-executive Directors. Anne Farlow is the
Chairman of the Board. Bronwyn Curtis and Richard Wohanka were
elected by the Company's shareholders to the Board of Directors at
the Company's AGM on April 24, 2018. In addition, on February 12,
2018, Jonathan Kestenbaum retired as a non-executive Director of
the Company. Jonathan Kestenbaum had served as an independent
non-executive Director of the Company since 2014.
Audit Committee
The Audit Committee consists of the independent Directors of the
Company. Mr Battey is the Chairman of the Audit Committee.
Effective July 30, 2018, Ms Curtis and Mr Wohanka were appointed to
the Audit Committee. The principal duties of the Audit Committee
are to monitor the integrity of the financial statements of the
Company, including its annual and half-yearly reports and formal
announcements relating to the Company's financial performance, and
reviewing and reporting to the Board on significant financial
reporting issues and judgments communicated to the Committee by the
auditor. The Audit Committee's responsibilities also include, but
are not limited to, recommendations to the Board regarding the
appointment, reappointment and removal of the external auditor,
discussion and agreement with the external auditor as to the nature
and scope of the audit, and review of the results and cost
effectiveness of the audit and the independence and objectivity of
the external auditor. The Audit Committee reports regularly and
makes such recommendations as it deems appropriate to the Board on
any matter within its remit.
Management Engagement Committee
The Board has established a Management Engagement Committee to
adhere to the principles of the UK Corporate Governance Code in
connection with the listing of the Public Shares on the LSE. The
Management Engagement Committee reviews the performance of the
Investment Manager in the management of the Company's affairs and
the terms of engagement and performance of the Company's other key
service providers, and then reports and makes recommendations to
the full Board. It is comprised of the independent Directors of the
Company. Until his retirement as a Director on February 12, 2018,
Jonathan Kestenbaum was the Chairman of the Management Engagement
Committee. William Scott has been appointed to succeed Jonathan
Kestenbaum as the Chairman of the Management Engagement
Committee.
Nomination Committee
The Board has established a Nomination Committee to adhere to
the principles of the UK Corporate Governance Code in connection
with the listing of the Public Shares on the LSE. The Nomination
Committee is responsible for reviewing the structure, size and
composition of the Board, succession planning for Director
departures and identifying and nominating suitable candidates to
fill vacancies, taking into account the challenges and
opportunities facing the Company and the skills, knowledge and
experience needed on the Board. The Nomination Committee reports
its recommendations to the full Board. It is comprised of the
independent Directors of the Company. Effective July 30, 2018, Ms
Curtis and Mr Wohanka were appointed to the Nomination Committee.
Ms Farlow is the Chairman of the Nomination Committee.
Prime Brokers
Pursuant to prime broker agreements, Goldman Sachs & Co. and
UBS Securities LLC (the "Prime Brokers") both serve as custodians
and primary clearing brokers for the Company.
Administrator and Sub-Administrator
Pursuant to an administration and sub-administration agreement
dated April 2, 2012, Elysium Fund Management Limited (the
"Administrator") and Morgan Stanley Fund Services (Bermuda) Ltd.
(the "Sub-Administrator") have been appointed as administrator and
sub-administrator, respectively, to the Company.
The Administrator provides certain administrative and accounting
services including the maintenance of the Company's accounting and
statutory records. The Administrator delegates certain of these
services to the Sub-Administrator. The Administrator and
Sub-Administrator receive customary fees, plus out of pocket
expenses, based on the nature and extent of services provided.
Additional Quotation on LSE
On May 2, 2017, the Company announced that its Public Shares had
been admitted to the Official List of the UK Listing Authority and
had commenced trading on the Premium Segment of the Main Market of
the LSE. On May 29, 2018, the Company introduced an additional USD
quotation on the LSE alongside the Company's existing quotations.
As a result, shareholders are able to trade Public Shares on both
Euronext Amsterdam and the LSE with shares quoted and traded in USD
on Euronext Amsterdam and USD and Sterling on the LSE.
Amendments to the Company's Articles of Incorporation
At the AGM, shareholders voted to remove the 4.99% ownership
limit from the Company's Articles of Incorporation (the
"Articles"). Removal of the ownership limit provides the Company
with the flexibility to undertake Company share repurchases without
the concern that repurchases will cause any individual shareholder
who owns less than 5% of the Company prior to such repurchase to
own more than 5% afterwards.
Shareholders also voted at the AGM to amend the Articles to
permit the conversion of Public Shares acquired by persons who are
otherwise eligible to hold Management Shares into Management
Shares, on a net asset value for net asset value basis as at each
month end. Holders of Management Shares were already entitled to
convert Management Shares into Public Shares.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation
The condensed interim financial statements of the Company for
the six months ended June 30, 2018 have been prepared in accordance
with IAS 34 Interim Financial Reporting.
The accounting principles used to prepare these unaudited
condensed interim financial statements comply with IFRS as issued
by the IASB and are consistent with those set out in the notes to
the annual financial statements for the year ended December 31,
2017, with the exception of IFRS 9, Financial Instruments which
replaced IAS 39, Financial Instruments: Recognition and
Measurement, as discussed further in Note 3. The condensed interim
financial statements have been prepared on a historical-cost basis,
except for certain financial assets and financial liabilities
measured at fair value through profit or loss that have been
measured at fair value. The unaudited condensed interim financial
statements do not include all of the information and disclosures
required for full annual financial statements and should be read in
conjunction with the Company's annual financial statements for the
year ended December 31, 2017.
After making reasonable inquiries and assessing all data
relating to the Company's liquidity, particularly its holding of
cash and Level 1 assets, the Investment Manager and the Directors
believe that the Company is well placed to manage its business
risks, has adequate resources to continue in operational existence
for the foreseeable future and do not consider there to be any
threat to the going concern status of the Company. For these
reasons, they have adopted the going concern basis in preparing the
annual and condensed interim financial statements.
Net Assets Attributable to Management Shareholders
Management Shares can be converted into a variable number of
Public Shares based upon the net asset values as of the last day of
each calendar month and are therefore classified as financial
liabilities in accordance with IFRS. At no time can Management
Shares be redeemed in cash at the option of the management
shareholders. Net assets attributable to Management Shares are
measured at the redemption amount based on the net asset value of
the Company calculated in accordance with IFRS. The change in the
net assets attributable to Management Shares, other than that
arising from share issuances or conversions, is recognized in the
condensed interim statement of comprehensive income.
3. NEW STANDARDS, INTERPRETATIONS AND AMMENTS
The Company has adopted IFRS 9 as of its effective date of
January 1, 2018. Based on the Company's assessment and as discussed
in further detail in Note 4 of the annual financial statements for
the year ended December 31, 2017, the implementation of this new
standard does not have a significant impact on the Company's
financial statements. The Company has chosen to take advantage of
the option not to restate comparatives.
i) Classification and measurement
The Company will continue to measure all investments in
securities and derivatives at fair value through profit or loss in
accordance with the Solely Payments of Principal and Interest test
as required under IFRS 9. As discussed further in Note 10, the
Bonds are held at amortized cost.
ii) Impairment
IFRS 9 requires the Company to record expected credit losses on
all of its debt securities held at amortized cost, loans and trade
receivables, either on a 12-month or lifetime basis. The Company
expects to apply the simplified approach and record lifetime
expected losses on all receivables. Given that receivables'
balances are typically not material, the Company expects the impact
of future credit losses to be negligible.
iii) Hedge accounting
The Company does not currently designate any hedges as effective
hedging relationships which qualify for hedge accounting, therefore
this does not impact the financial statements.
4. FINANCIAL ASSETS AND FINANCIAL LIABILITIES AT FAIR VALUE
THROUGH PROFIT OR LOSS
Financial assets at fair value through profit or loss:
June 30, 2018 December 31, 2017
Financial assets at fair value
through profit or loss
Investments in securities $ 3,720,080,794 $ 3,140,815,503
Derivative financial instruments 436,986,198 744,454,840
Financial assets at fair value $ 4,157,066,992 $ 3,885,270,343
through profit or loss
Financial liabilities at fair value through profit or loss:
June 30, 2018 December 31, 2017
Financial liabilities at fair
value through profit or loss
Derivative financial instruments $ 31,331,235 $ 6,192,314
Financial liabilities at fair $ 31,331,235 $ 6,192,314
value through profit or loss
Net changes in fair value of financial assets and financial
liabilities through profit or loss:
6 Months Ended June 30, 2018 6 Months Ended June 30, 2017
Realized Unrealized Total Realized Unrealized Total
Gains/(Losses) Gains/(Losses)
Financial
assets
Measured $ 171,906,086 $ 109,371,081 $ 281,277,167 $ (1,529,014,253) $ 1,820,151,269 $ 291,137,016
at fair
valuethrough
profit or loss
Financial
liabilities
Measured - - - (1,274,665) (182,885,857) (184,160,522)
at fair
valuethrough
profit or loss
Derivative (88,904,439) 2,904,618 (85,999,821) 29,541,471 (189,830,342) (160,288,871)
financialinstruments
Net changes in $ 83,001,647 $ 112,275,699 $ 195,277,346 $ (1,500,747,447) $ 1,447,435,070 $ (53,312,377)
fair value
5. FAIR VALUE OF ASSETS AND LIABILITIES
Fair Value Hierarchy
IFRS 13 requires disclosures relating to fair value measurements
using a three-level fair value hierarchy. The level within which
the fair value measurement is categorized is determined on the
basis of the lowest level input that is significant to the fair
value measurement. Assessing the significance of a particular input
requires judgment and considers factors specific to the asset or
liability. Financial instruments are recognized at fair value and
categorized in the following table based on:
Level 1 - Inputs are unadjusted quoted prices in active markets
at the measurement date. The assets and liabilities in this
category will generally include equities listed in active markets,
treasuries (on the run) and listed options.
Level 2 - Inputs (other than quoted prices included in Level 1)
are obtained directly or indirectly from observable market data at
the measurement date. The assets and liabilities in this category
will generally include fixed income securities, OTC options, total
return swaps, credit default swaps, foreign currency forward
contracts and certain other derivatives. Also, included in this
category are the Company's investments in affiliated entities
valued at the net asset value, which can be redeemed by the Company
as of the measurement date, or within 90 days of the measurement
date.
Level 3 - Inputs, including significant unobservable inputs,
reflect the Company's best estimate of what market participants
would use in pricing the assets and liabilities at the measurement
date. The assets and liabilities in this category will generally
include private investments and certain other derivatives.
5. FAIR VALUE OF ASSETS AND LIABILITIES (CONTINUED)
Recurring Fair Value Measurement of Assets and Liabilities
June 30, 2018 December 31, 2017
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
$000 $000 $000 $000 $000 $000 $000 $000
Financial Assets:
Equity Securities
(Measured
at Fair Value):
Common Stock $ 3,353,096 $ - $ - $ 3,353,096 $ 2,872,982 $ - $ - $ 2,872,982
Investment in - 319,107 3 - 319,107 - 256,821 3 - 256,821
Affiliated
Entity
Preferred Stock 47,405 473 - 47,878 10,983 30 - 11,013
Derivative
Contracts
(Held
for Trading):
Currency Call/Put - 824 1 - 824 - 131 1 - 131
Options
Purchased
Equity Options - 403,272 1 - 403,272 - 686,227 1 - 686,227
Purchased
Foreign Currency - 6,737 1 - 6,737 - - - -
Forward
Contracts
Index Options - - - - - 402 1 - 402
Purchased
Total Return - 26,153 2 - 26,153 - 57,695 2 - 57,695
Swaps
Total $ 3,400,501 $ 756,566 $ - $ 4,157,067 $ 2,883,965 $ 1,001,306 $ - $ 3,885,271
June 30, 2018 December 31, 2017
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
$000 $000 $000 $000 $000 $000 $000 $000
Financial
Liabilities:
Derivative
Contracts
(Held
for Trading):
Foreign Currency $ - $ - $ - $ - $ - $ 741 1 $ - $ 741
Forward
Contracts
Total Return - 31,331 2 - 31,331 - 5,452 2 - 5,452
Swaps
Net - - 383,478 4 383,478 - - 156,268 4 156,268
assets
attributable
to
managementshareholders
Total $ - $ 31,331 $ 383,478 $ 414,809 $ - $ 6,193 $ 56,268 $ 162,461
1 Level 2 financial instruments may include OTC currency
call/put options, equity options, equity forwards, index options
and foreign currency forward contracts that are fair valued by the
Investment Manager using prices received from an independent
third-party pricing service. The fair values of these financial
instruments may reflect, but are not limited to, the following
inputs by the independent third-party pricing service: current
market and contractual prices from market makers or dealers,
volatilities of the underlying financial instruments and/or current
foreign exchange forward and spot rates. The independent
third-party pricing service uses widely recognized valuation models
for determining fair values of OTC derivatives. The most frequently
applied valuation techniques include forward pricing and option
models, using present value calculations. The significant inputs
into their valuation models are market observable and are included
within Level 2.
2 Level 2 financial instruments include total return swap
contracts that are fair valued by the Investment Manager using
market observable inputs. The fair values of these financial
instruments may reflect, but are not limited to, the following
inputs: market price of the underlying security, notional amount,
expiration date, fixed and floating interest rates, payment
schedules and/or dividends declared.
3 This figure relates to the Company's investment in Pershing
Square VI International, L.P. ("PS VI") as of the period ended June
30, 2018, as discussed in Note 9. The Company's investment in PS VI
included 42.41% and 46.05% of Level 1 financial instruments, 57.56%
and 53.01% of Level 2 financial instruments and 0.03% and 0.94% of
other assets and liabilities that are outside the scope of IFRS 13
as of the period ended June 30, 2018 and the year ended December
31, 2017, respectively. The level of underlying investments had no
impact in the level used for the investment held by the Company.
See the fair value measurement discussion in Note 2 of the
Company's annual financial statements for the year ended December
31, 2017 for the Company's valuation policy related to investments
in affiliated entities.
4 Net assets attributable to management shareholders are
classified as Level 3 and are valued based on their net asset value
which approximates carrying value. In assessing the appropriateness
of net asset value as a basis for fair value, consideration is
given to the need for adjustments to net asset value based on a
variety of factors including liquidity and the timeliness and
availability of accurate financial information. No such adjustments
were deemed necessary. The movements for the period are disclosed
in the condensed interim statement of changes in net assets
attributable to management shareholders.
5. FAIR VALUE OF ASSETS AND LIABILITIES (CONTINUED)
The Company's cash and cash equivalents and short-term
receivables and payables are recorded at carrying value which
approximates fair value. The Bonds are classified as Level 1
financial liabilities and the fair value of the Bonds is discussed
further in Note 10.
Some of the Company's investments in Level 1 securities
represent a significant proportion of the Company's portfolio. If
such investments were sold or covered in their entirety, it might
not be possible to sell them at the quoted market price which IFRS
requires to be used in determining their fair value. Many factors
affect the price that could be realized for large investments. The
Investment Manager believes that it is difficult to accurately
estimate the potential discount or premium to the quoted market
prices that the Company would receive or realize if investments
that represent a significant proportion of the Company's portfolio
were sold or covered.
Transfers Between Levels
Transfers between levels during the period are determined and
deemed to have occurred at each financial statement reporting date.
There were no transfers between Level 1 and Level 2 fair value
measurements, and no transfers into or out of Level 3 fair value
measurements of material significance since the last financial
statement reporting date.
Level 3 Reconciliation
The following table summarizes the change in the carrying
amounts associated with Level 3 investments for the period ended
June 30, 2018 and the year ended December 31, 2017.
Warrants
Balance at December 31, 2016 $ 44,660,268
Transfers* (49,193,147)
Total gains and losses in profit or loss 4,532,879
Balance at December 31, 2017 $ -
Balance at June 30, 2018 $ -
Total unrealized gains and losses for the yearincluded $ -
in profit or loss for assets held atDecember 31, 2017
Total unrealized gains and losses for theperiod included $ -
in profit or loss for assetsheld at June 30, 2018
* During the year ended December 31, 2017, the transfer from
Level 3 to Level 1 related to the cashless conversion of the
warrants to common stock shares of The Howard Hughes
Corporation.
All gains and losses from Level 3 securities during the
period/year are recognized in the net gain/(loss) on financial
assets and financial liabilities at fair value through profit or
loss in the condensed interim statement of comprehensive
income.
6. SHARE CAPITAL
Authorized and Issued Capital
The Board of the Company is authorized to issue an unlimited
number of shares, classes of shares or series as determined by the
Board. All of the Company's share classes participate pro rata in
the profits and losses of the Company based upon the share class's
ownership of the Company at the time of such allocation.
The Company currently has outstanding the Public Shares, the
Special Voting Share and the Management Shares.
In connection with the listing of the Public Shares on the LSE,
the Company exchanged the Class B Shares held by PS Holdings
Independent Voting Company Limited ("VoteCo"), a limited liability
company with the sole objective to vote in the best interest of the
Company's shareholders as a whole, for a Special Voting Share. The
Special Voting Share at all times carries 50.1% of the aggregate
voting power in the Company (except for certain matters set forth
in the LSE listing rules on which it may not vote). The Investment
Manager has no affiliation with VoteCo. VoteCo is wholly owned by a
trust established for the benefit of one or more charitable
organizations.
The Investment Manager waived the management fee and/or the
performance fee with respect to Management Shares, which were
issued to certain shareholders, including certain members,
partners, officers, managers, employees or affiliates of the
Investment Manager or certain other shareholders.
Lock-up
In connection with the Company's IPO, Mr. Ackman and other
members of the management team and officers of the Investment
Manager have each entered into a lock-up arrangement with the
Company (the "Lock-Up Deed") whereby their aggregate Management
Shares held at the time of the IPO are subject to a lock-up of ten
years commencing from October 1, 2014, other than sales of
Management Shares (i) required to pay taxes on income generated by
the Company; (ii) required due to regulatory constraints; or (iii)
following separation of employment from the Investment Manager.
Management Shares subject to the Lock-Up Deed may from time to time
be transferred to affiliates, provided that the transferee agrees
to be subject to the remaining lock-up period. On August 9, 2018,
the Company amended the Lock-Up Deed to clarify that parties to the
Lock-Up Deed may sell the specific Management Shares they held at
the time of the IPO, so long as they continue to hold at least as
many Management Shares in the aggregate as they held at the time of
the IPO (or, if the Management Shares have been converted, so long
as they hold at least as many shares of the class such Management
Shares were converted into). At the time of the IPO, 8,335,440
Management Shares were subject to the Lock-Up Deed.
Share Conversion
Subject to the terms of the lock-up agreements, holders of
Management Shares are entitled to convert into Public Shares at the
current NAV as of the last day of each calendar month upon such
days' prior written notice to the Company as the Board may
determine.
During the six month period ended June 30, 2018, a holder of
Management Shares converted 287,464 Management Shares into 306,738
Public Shares.
As a result of amendments to the Articles approved by
shareholders at the AGM, Public Shares acquired by persons who are
otherwise eligible to hold Management Shares can be converted into
Management Shares, on a net asset value for net asset value basis
as at each month end. The Management Shares resulting from these
conversions are not subject to the lock-up described above.
Since the AGM, holders of Management Shares (i.e., persons
associated with the Investment Manager) have converted 11,867,000
Public Shares into 11,111,095 Management Shares.
Voting Rights
The holders of Public Shares have the right to receive notice
of, attend and vote at general meetings of the Company.
Each Public Share and Management Share carries such voting power
so that the aggregate issued number of Public Shares and Management
Shares carries 49.9% of the total voting power of the aggregate
number of voting shares in issue. Each Public Share carries one
vote and each Management Share carries such voting power so that
the total voting power of the Public Shares and Management Shares
are pro-rated in accordance with their respective net asset values.
The Special Voting Share carries 50.1% of the aggregate voting
power in the Company. The Special Voting Share and the Management
Shares may not vote on certain matters specified in the LSE listing
rules.
Distributions
The Board may at any time declare and pay dividends (or interim
dividends) based upon the financial position of the Company. No
dividends shall be paid in excess of the amounts permitted by the
Companies (Guernsey) Law, 2008 and without the prior consent of the
Board and the Investment Manager. No dividends have been declared
or paid for the periods ended June 30, 2018 and June 30, 2017.
The Public Shares, Management Shares and Class B Shares /
Special Voting Share transactions for the six-month period ended
June 30, 2018 and the year ended December 31, 2017 were as
follows:
Management Public Shares Special
Shares VotingShare
Shares as of 8,500,796 234,716,810 1
December
31, 2017
Issuance of - - -
Shares
Share Buybacks* - (22,334,151) -
Conversion Out (287,464) (11,867,000) -
Conversion In 11,111,095 306,738 -
Shares as 19,324,427 200,822,397 1
of June
30, 2018
ManagementShares Public Shares Class B Shares Special
VotingShare
Shares as of 8,500,796 240,128,546 5,000,000,000 -
December
31, 2016
Issuance of - - - -
Shares
Share Buybacks - (5,411,736) - -
Conversion Out - - (5,000,000,000) -
Conversion In - - - 1
Shares as of 8,500,796 234,716,810 - 1
December
31, 2017
*Share Buybacks include 62,437 shares purchased in the original
share buyback program that commenced in May 2017 and 22,271,714
shares purchased in the Tender Offer in May 2018.
Capital Management
The Company's capital currently consists of Public Shares which
are listed on Euronext Amsterdam and the LSE, Management Shares
which can be converted into Public Shares, and the Special Voting
Share (as more fully described on page 25). The proceeds from the
Bonds which were issued on June 26, 2015 and are listed on the
Irish Stock Exchange are being used to make investments in
accordance with the Company's investment policy (as more fully
described in Note 10 of the annual financial statements for the
year ended December 31, 2017).
The Company's general objectives for managing capital are:
-- To continue as a going concern;
-- To maximize its total return primarily through the capital
appreciation of its investments; and
-- To minimize the risk of an overall permanent loss of capital.
To the extent the Investment Manager deems it advisable and
provided that there are no legal, tax or regulatory constraints,
the Company is authorized to manage its capital through various
methods, including, but not limited to: (i) repurchases of Public
Shares and (ii) further issuances of shares, provided that the
Board only intends to exercise its authority to issue new shares if
such shares are issued at a value not less than the estimated
prevailing NAV per share (or under certain other specified
circumstances). At the AGM, shareholders renewed the Company's
authority to engage in share buybacks up to a maximum of 14.99% of
the Public Shares in issue and, as part of this authority, approved
the Tender Offer. The Company launched the Tender Offer on April
25, 2018 and closed the Tender Offer on May 10, 2018. A total of
22,271,714 Public Shares were acquired by the Company in the Tender
Offer at a price of $13.47 per Public Share and subsequently were
cancelled. Depending on market conditions and other considerations,
the Company may decide to utilize the remaining amount of the share
buyback authority to acquire Public Shares in the market. If
utilized fully, the remaining authority would permit the Company to
purchase 12,902,976 Public Shares.
As discussed on page 25, the Investment Manager has also imposed
a ten-year lock-up on certain holders of Management Shares, subject
to certain exceptions. This lock-up does not affect the capital
resources available to the Company.
7. COMMITMENTS AND CONTINGENCIES
PSH, PSCM, PS Fund 1, LLC and other related parties (the
"Pershing Square Parties") and Valeant Pharmaceuticals
International, Inc. and other related parties (the "Valeant
Parties") are defendants in two class action lawsuits entitled In
Re Allergan, Inc. Proxy Violation Securities Litigation, Case No.
8:14-cv-2001- DOC ("Stock Class Action"), and In re Allergan, Inc.
Proxy Violation Derivatives Litigation, Case No. 2:17-cv-04776 DOC
("Derivatives Class Action"), both pending in the U.S. District
Court for the Central District of California, relating to the
investment by the Pershing Square Parties in Allergan, Inc.
("Allergan"), and alleging violations of federal securities laws
relating to trading in Allergan common shares and related
derivatives.
During the year ended December 31, 2016, the Company reserved
$29,176,480 towards any potential liability. On December 28, 2017,
in consultation with counsel and expert mediators, defendants
entered into full settlements in principle in both cases for a
total payment of $290 million, of which the Company and three
affiliated entities managed by the Investment Manager (the "Core
Funds") are to bear $193.75 million. PSH's allocable share of the
total amount was $86,396,342, leading it to reserve an additional
$57,219,862 as of December 31, 2017. These reserves are included in
Trade and Other Payables in the Company's statement of financial
position as of December 31, 2017. The settlements were paid by the
Core Funds during January 2018 and are held in escrow pending final
approval by the court. At a hearing on June 12, 2018, the Court
indicated that it will grant final approval of the full settlement,
subject to issuance of a written order which has not yet been
entered.
Other than the above and as noted in the annual financial
statements for the year ended December 31, 2017, there were no
other commitments or contingencies as of June 30, 2018 and December
31, 2017.
8. INVESTMENT MANAGEMENT AND PERFORMANCE FEES
The Investment Manager receives management fees and performance
fees, if any, from the Company pursuant to the IMA.
Management Fee
The Investment Manager receives a quarterly management fee
payable in advance each quarter in an amount equal to 0.375% (1.5%
per annum) of the net assets (before any accrued performance fee)
attributable to fee-paying shares. The fee-paying shares of the
Company are the Public Shares and the Special Voting Share.
For the period ended June 30, 2018 and the year ended December
31, 2017, the Investment Manager earned management fees from the
Company of $26,790,210 and $63,211,761, respectively.
The Investment Manager has chosen to reduce the management fees
paid by the Pershing Square funds which incurred litigation
expenses in connection with the settlement of the Allergan Stock
Class Action and Derivative Class Action for eight consecutive
quarters beginning with the management fee payable on April 1, 2018
by a total of $32.2 million. This amount accounts for the amount
that incentive fees would have been reduced by had Allergan-related
settlement expenses been incurred in 2014 contemporaneously with
gains from the Allergan investment. The reduced fees will be
allocated among the Core Funds based upon the amount of settlement
reserves previously recognized by the Core Funds at the year ended
2016 and the year ended 2017. The Company will be allocated $14.4
million of this reduction.
Performance Fee
Generally, the Investment Manager receives an annual performance
fee in an amount equal to 16% of the net profits attributable to
the fee-paying shares of the Company (the "16% performance fee")
minus the Additional Reduction (defined below). Such annual
performance fee is defined as the "Variable Performance Fee" in the
IMA. The Variable Performance Fee cannot be higher than the 16%
performance fee, but it may, as a result of the Additional
Reduction, be lower (although it can never be a negative
amount).
The "Additional Reduction" is an amount equal to (i) the lesser
of the 16% performance fee and the Potential Reduction Amount
(defined below), offset (up to such lesser amount) by (ii) the then
current portion of the Potential Offset Amount.
The "Potential Reduction Amount" is equal to (i) 20% of the
aggregate performance fees and allocation earned by the Investment
Manager and its affiliates in respect of the same calculation
period on the gains of current and certain future funds managed by
the Investment Manager or any of its affiliates plus (ii) if the
Potential Reduction Amount for the previous calculation period
exceeded the 16% performance fee, the excess amount (which is in
effect carried forward).
The "Potential Offset Amount" refers to the fees and other costs
of the offering and admission on Euronext Amsterdam of the Public
Shares and the commissions paid to placement agents and other
formation and offering expenses incurred prior to the IPO of the
Company that were, in each case, borne by the Investment Manager
pursuant to the IMA. The Potential Offset Amount will be reduced by
each dollar applied to reduce the Additional Reduction, until it is
fully reduced to zero.
The Potential Offset Amount equalled $120 million in the
aggregate at the time of the IPO. As of June 30, 2018 and December
31, 2017, after giving effect to the offset of the Potential
Reduction Amount in the year ended December 31, 2014, the Potential
Offset Amount was approximately $100.8 million.
The Potential Offset Amount is not a Company obligation but
instead is a component used in the calculation of the Variable
Performance Fee. Thus, if the Company or the Investment Manager
terminates the IMA or the Company liquidates and the Company pays
the Variable Performance Fee that may crystallize in connection
therewith, the Company has no obligation to pay any remaining
portion of the Potential Offset Amount.
For the period ended June 30, 2018 and the year ended December
31, 2017, the Investment Manager did not earn any performance fee
from the Company.
Since the Company has no performance fee accrued for the period
ended June 30, 2018 and the year ended December 31, 2017, but the
Potential Reduction Amount was $2.9 million and $2.9 million,
respectively, in those periods/years, those amounts will be carried
forward to calculate the Additional Reduction and reduce any
Variable Performance Fee in future years, subject to any offset by
the Potential Offset Amount.
Termination
The IMA automatically renews annually, except that it may be
terminated (a) as of December 31st of any year upon four months'
prior written notice by either party, subject, in the case of
termination by the Company, to approval by a 66 2/3% vote (by
voting power) of the holders of the then outstanding voting shares
of the Company, together with a 66 2/3% vote (by voting power) of
the holders of the then outstanding Public Shares; and (b) in case
of dissolution or liquidation of either party or if a receiver or
provisional liquidator or administrator or similar officer is
appointed over any of the assets of such party or if either party
commits a material breach of its obligations under the IMA and such
breach remains uncured for more than 30 calendar days after the
notice thereof delivered to the party in breach by the other party
in accordance with the IMA.
The termination of the IMA at any time will be a crystallisation
event, which will result in the Variable Performance Fee described
above being payable.
9. RELATED PARTY DISCLOSURES
The relationship between the Company and the Investment Manager
and the fees earned are disclosed in Note 8. In addition, the
Investment Manager and related parties to the Investment Manager
hold Management Shares, the rights of which are disclosed in Note
6.
The Investment Manager may seek to effect rebalancing
transactions from time to time pursuant to policies that are
intended to result in the Company and the affiliated entities
managed by the Investment Manager generally holding investment
positions on a proportionate basis relating to their respective
adjusted net asset values, which are equal to each of the entities'
net asset values plus any accrued (but not crystallized)
performance fees, and the net proceeds of any outstanding long-term
debt, including the current portion thereof (which in the case of
the Company, includes the net proceeds from the bond offering as
further discussed below in Note 10). Rebalancing transactions
involve either the Company purchasing securities or other financial
instruments held by one or more affiliated entities or selling
securities or other financial instruments to one or more affiliated
entities. These transactions are subject to a number of
considerations including, but not limited to, cash balances and
liquidity needs, tax, regulatory, risk and other considerations,
which may preclude these transactions from occurring or limit their
scope at the time of the transactions.
The Company has an investment in PS VI as discussed in Note 3 of
the annual financial statements for the year ended December 31,
2017. As of June 30, 2018 and December 31, 2017, the Company's
capital balance in PS VI was $319,107,237 and $256,820,746,
respectively, and represents an ownership in PS VI of 37.05% and
36.43%, respectively. The Company's investment in PS VI is included
in investments in securities in the condensed interim statement of
financial position. The Company is not charged a management fee or
performance fee in relation to its investment in PS VI.
In the normal course of business, the Company and its affiliates
make concentrated investments in portfolio companies where the
aggregate beneficial holdings of the Company and its affiliates may
be in excess of 10% of one or more portfolio companies' classes of
outstanding securities. At such ownership levels, a variety of
securities laws may, under certain circumstances, restrict or
otherwise limit the timing, manner and volume of disposition of
such securities. In addition, with respect to such securities, the
Company and its affiliates may have disclosures or other public
reporting obligations with respect to acquisitions and/or
dispositions of such securities.
At June 30, 2018 the Company and its affiliates had beneficial
ownership in excess of 10% of the outstanding common equity
securities of Chipotle Mexican Grill, Inc., and Platform Specialty
Products Corporation. At December 31, 2017, in addition to the
above companies, the Company and its affiliates had beneficial
ownership in excess of 10% of Restaurant Brands International Inc.
and The Howard Hughes Corporation. William A. Ackman is the
chairman of the board of The Howard Hughes Corporation. Ali Namvar,
a member of PSCM's investment team until April 1, 2018, is a board
member of Chipotle Mexican Grill, Inc. Ryan Israel, a member of
PSCM's investment team, is a board member of Platform Specialty
Products Corporation.
William A. Ackman, Nicholas Botta, and other PSCM affiliates
purchased 14,640,723, 850,000 and 141,809 Public Shares,
respectively, in the market after completion of the Tender Offer
and prior to June 30, 2018. Of these amounts, 11,000,000, 850,000
and 17,000, respectively, were converted into Management Shares as
of June 30, 2018, as discussed in Note 6. William A. Ackman and
members of PSCM's investment team and advisory board have since
purchased an additional 5,009,748 and 17,349 Public Shares,
respectively.
For the six-month period ended June 30, 2018, the independent
Directors' fees in relation to their services for the Company were
$154,893, none of which were payable as of June 30, 2018. For the
six-month period ended June 30, 2017, the independent Directors'
fees in relation to their services for the Company were $146,185 of
which $74,422 were payable as of June 30, 2017.
10. BONDS
On June 26, 2015, the Company issued at par $1,000,000,000 in
Senior Notes at 5.5% due 2022. The Bonds will mature at par on July
15, 2022 and pay a fixed rate interest coupon of 5.5% per annum,
which is paid semi-annually. The Bonds are listed on the Irish
Stock Exchange. The proceeds from the offering were in U.S. Dollars
and were used to make investments or hold assets in accordance with
the Company's investment policy.
The Company has the option to redeem all or some of the Bonds
prior to June 15, 2022, at a redemption price equal to the greater
of (1) 100% of the principal amount of the Bonds to be redeemed or
(2) the sum of the present values of the remaining scheduled
principal and interest payments (exclusive of accrued and unpaid
interest to the date of redemption) on the Bonds to be redeemed,
discounted to the redemption date on a semi-annual basis using the
applicable U.S. treasury rate plus 50 basis points, plus accrued
and unpaid interest. If the Company redeems all or some of the
Bonds on or after June 15, 2022, the redemption price will equal
100% of the principal amount of the Bonds to be redeemed plus
accrued and unpaid interest.
The fair value of the Bonds as of June 30, 2018 and December 31,
2017, based upon market value at that time, was $1,006,250,000 and
$1,042,500,000, respectively. In accordance with IFRS 9, the Bonds'
carrying value as of June 30, 2018 and December 31, 2017, in the
amount of $1,016,369,873 and $1,015,427,736, respectively, in the
condensed interim statement of financial position is representative
of amortized cost and the transaction costs of the Bonds issued.
The transaction costs of $14,502,332 were capitalized and are to be
amortized over the life of the Bonds using the effective interest
method.
2018
At December 31, 2017 $ 1,015,427,736
Finance costs for the period 28,442,137
Bond coupon payment during the period (27,500,000)
At June 30, 2018 $ 1,016,369,873
Finance costs for the period:
Bond interest expense $ 27,416,446
Amortization of Bond issue costsincurred as finance costs 1,025,691
Interest expense $ 28,442,137
2017
At December 31, 2016 $ 1,013,552,905
Finance costs for the year 56,874,831
Bond coupon payment during the year (55,000,000)
At December 31, 2017 $ 1,015,427,736
Finance costs for the year:
Bond interest expense $ 54,823,788
Amortization of Bond issue costsincurred as finance costs 2,051,043
Interest expense $ 56,874,831
The Bonds are subject to the following transfer restrictions:
(i) each holder of the Bonds is required to be either (a) a
qualified institutional buyer ("QIB") as defined in Rule 144A under
the U.S. Securities Act of 1933, as amended (the "Securities Act")
who is also a qualified purchaser ("QP") as defined in Section
2(a)(51) of the U.S. Investment Company Act, as amended or (b) a
non-U.S. person, provided that, in each case, such holder can make
the representations set forth in the Listing Particulars, dated
June 24, 2015, (ii) the Bonds can only be transferred to a person
that is a QIB/QP in a transaction that is exempt from the
registration requirements of the Securities Act pursuant to Rule
144A or to a non-U.S. person in an offshore transaction that is not
subject to the registration requirements of the Securities Act
pursuant to Regulation S, or to the Company, and (iii) the Company
has the right to force any holder who is not a QIB/QP or a non-U.S.
person to sell its Bonds.
11. EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") is calculated by
dividing the profit/(loss) for the period/year attributable to the
Public Shares and the Special Voting Share over the weighted
average number of Public Shares and the Special Voting Share
outstanding, respectively (noting that the calculation for the
Special Voting Share EPS in 2017 includes the Class B Shares prior
to the conversion into the Special Voting Share). In accordance
with IFRS, the weighted average shares outstanding calculated for
the Public Shares and the Special Voting Share were 228,307,055 and
1, respectively for the period ended June 30, 2018, and the
weighted average shares outstanding calculated for the Public
Shares and the Special Voting Share were 239,947,210 and 1,
respectively for the period ended June 30, 2017.
As discussed in Note 1, all Class B Shares converted to 1
Special Voting Share on May 2, 2017. Therefore, the profit/(loss)
of the Class B Shares for the period from January 1, 2017 to May 1,
2017, including the profit/(loss) of the Special Voting Share from
May 2, 2017 to June 30, 2017, was divided over 1 Special Voting
Share as presented on the condensed interim statement of
comprehensive income to show one EPS as a whole for the six months
ended June 30, 2017.
12. EVENTS AFTER THE REPORTING PERIOD
The Investment Manager has evaluated the need for disclosures
and/or adjustments resulting from subsequent events during the
period between the end of the reporting period and the date of
authorization of the condensed interim financial statements. This
evaluation together with the Directors' review thereof did not
result in any additional subsequent events that necessitated
disclosures and/or adjustments.
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(END) Dow Jones Newswires
August 10, 2018 02:00 ET (06:00 GMT)
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