Pershing Square Holdings, Ltd.

Hello and welcome to the first quarter 2024 investor call for Pershing Square Capital Management. At this time, all callers are in listen-only mode. Today's call is being recorded. It is now my pleasure to turn the call over to your host, Mr. William Ackman, CEO and Portfolio Manager.

Thank you, operator. So welcome to our Q1 investor call. As usual, we distribute a legal disclaimer, which hopefully someone reads. And we're going to do our best to answer questions that we've received in advance, sort of in the context of the conference call, to the extent we don't get them during the call, or at least the beginning part of the call. We have extra time. We will address any unanswered questions separately. If we don't get to them then, please contact the IR team to follow up. I think relatively strong start to the year, Q1, plus really up through the present. Most significant events since our annual letter, which really covered a lot of the previous year and even the early part of the year history. As we have actually added, as you know, we sold our position in Lowe's, which freed up a fair amount of capital. We've reinvested those proceeds in now two new investments, that we are not yet prepared to discuss, but I think it sort of speaks to what has been a somewhat idea-rich environment for us, you know, in the context of markets which on a headline basis have performed very well, really driven by a handful of very, you know, sort of mega-cap tech companies principally, and sort of beneath the surface there's been sufficient volatility that I think has enabled businesses that we've tracked for some period of time to get to price levels that we find interesting. And to that end, two reasonably full-sized new investments in the portfolio that we look forward to discussing, perhaps by sometime next quarter. With that, why don't we just cover the events on a company-by-company basis. With that, maybe, Ryan, you can walk us through developments at Universal News. Sure. Thanks, Bill.

So Universal reported results earlier this month, and they continue their streak of reporting very good overall results. From perspective, their organic revenues grew about 8% this quarter, and the highlight was really the subscription and streaming business, which went up again about 12% consistent last quarter, which was a very good result. I think one of the more interesting data points, though, was they were able to expand margins very strongly. Part of that was due to the streaming business being the highest margin part of the business that performed better than everything else. At the same time, though, they're exhibiting very good cost control, which has been part of our thesis. And that allowed their EBITDA to grow at about 16% versus the prior year, which is just a very strong result. I think one of the things that's interesting, if you step back a little bit and look under the hood, though, is the results were actually in the business momentum. It's actually a little stronger than that. This quarter had very negligible results from TikTok as they were in the middle of trying to renegotiate a new deal after the prior one expired, which they did at the end of the quarter. but they did not really have the benefit of that revenue stream during the quarter, so the underlying momentum was a little stronger. And then secondly, as we've talked about on prior calls, the company announced a 250 million euro cost savings program to be implemented over the next several years, 75 of that this year. The first quarter did not actually incorporate that, so we actually expect a continued cost leverage and cost savings in the future quarter. So we didn't get the benefit of either of those things, which will be in future quarters, yet we still got a very strong result. Very good financial performance But I would also say, as we've talked about on prior calls, the company has done a very good job of really leading the industry on a lot of kind of the future things that will be very important, such as AI. So we've talked about they've developed an artist-centric model and really took the lead with Spotify for the industry in that and how that's been very beneficial to artists. But I think the TikTok deal, which they announced in conjunction with their earnings call at the beginning of the month, that's going to be a very big positive for the overall artist community and as a result for UMG as well. And clearly the deal that they've struck is going to allow them to better monetize their business with TikTok versus what it had been and help over time. We think a lot of these services will be better monetized as they get a little bit more advanced in their own ability to advertise the revenues. But most importantly, we really think this is about protecting the artists from AI. One of the dynamics that had happened on Spotify that was also happening on TikTok is you get a lot of fake artist AI that is flooding the system and not allowing true artist content to be able to take its appropriate share of the royalty pool. And the deal with TikTok, much like with Spotify, is helping remove some of those headwinds for artists. And in particular in TikTok, there had been a lot of AI that was coming on that was really taking advantage of the artist's intellectual property and creating something through AI, which really was misusing. the artist's IP, and they've also in this new agreement been able to solve that. So I think in multiple deals now we've seen partners of UMG where they've taken the lead to really protect their artists. We think it's going to be very foundational for the future growth and making sure that as we get into this new digital world, artists are protected, and we think both artists and ultimately UMG will benefit as well. We remain very pleased with the financial performance, but as well as strategically a lot of the deals that they're doing with their partners.

Excellent. Why don't we jump to Chipotle. Anthony.

Sure. Thanks, Bill. So Chipotle's off to another fantastic start in 2024. Game store sales in the first quarter grew 7%. That was really mostly driven by transaction growth of 5.4%. So virtually the entire comp came from transaction growth with minimal pricing. Five-year stash growth or cumulative growth since COVID was 57%. That was up slightly sequentially from the fourth quarter and That represents a 9.4% compound annual growth rate since 2019, and management commented that the strength in the business has continued into April. Management raised their guidance only one quarter into the year for full year 2024 same-store sales from mid-single digits to mid-to-high single digits. I think this speaks to management's confidence in the current business momentum continuing for the foreseeable future. If the current momentum continues just based on kind of prior year comparisons, you know, we think that management should comfortably be able to hit the high end of that range, so kind of solidly in the high single digits. Q2 looks like it could be in the double digits given a one-point tailwind from the timing of Easter shifting into Q1 this year. Chipotle stores are closed on Easter. There's clear drivers of robust same-store sales for the rest of the year. One is continued share gains amongst all the income cohorts. So they continue to gain share amongst low-income consumers, high-income consumers, middle-income. And we think that just speaks to the fact that Chipotle's offering is fantastic value for money. The company is very focused on improving throughput. That means getting customers through the line faster. And that's a combination of Some operational training programs, they've been rolling out a live dashboard that lets the workers in the store see how they're doing on throughput every day, kind of fosters the competitive juices amongst the team there. And then there's been lower turnover in the stores, which really helps with the efficiency of labor. The immensely popular chicken alpa store came back in March. It looks like that's doing really well again. And it seems that brisket is potentially on docket for the fall. The company did take pricing in California at the beginning of April. That's going to be a one-point comp tailwind. So putting all that together, we think, solidly in the high single digits is eminently achievable for the balance of the year. Given the company's powerful economic model, this robust same-store sales growth translates into very attractive margin expansion, and restaurant margins were up about 185 basis points in the first quarter to 27.5%. New store openings are continuing at a robust pace. You know, 8 to 9% is forecast for this year, and management believes that they can increase that growth rate to 10% starting in 2025, assuming that current construction and development headwinds don't worsen from here. So they don't need it to get better. They just need it not to get worse, which it's been kind of slowly improving very, very incrementally since COVID. Just stepping back from the quarterly results, the pushback on Chipotle since we first invested at around $405 a share was that the multiple was high. It's interesting. High earnings growth buys down your multiple really quickly. That $405 purchase price in the summer of 2016 was an entry multiple of about 35 times our view of next 12-month earnings at the time. $405 now is about between six and six and a half times our view of next 12 months earnings just shows you how powerfully the multiple can be bought down with a business that grows rapidly. You know, so how did investors kind of get this wrong in the stock seven and a half times our purchase price from about eight years ago? I think they missed three big things. One underestimated same store sales. So consensus has this, tendency to assume everything will revert to the mean. And if you look beyond 2024, it's like, okay, the company is going to go to 5% same-store sales and maintain that going forward. And that's just wrong. I mean, in the 10 years prior to the food safety crisis, so, you know, 10 years ending 2015, the company averaged 8.8% annual same-store sales growth. It's interesting in the six years that Brian Nichols has been CEO, that average same-store sales growth has been 8.7%. So, you know, this is a high single-digit same-store sales growth brand. Second thing that investors underestimated was the power of the economic model. So there was a lot of pushback when management introduced this 40% incremental margin framework a few years ago. A lot of skepticism, oh, can they really hit it, blah, blah, blah. Well, it turns out they've delivered almost exactly at this level. So Q1 was right at 40%. 2023 full year was 42%. And the average over the last three years was 39%. So is that below 40%? Sure, but I'll call it 40 just in the interest of funding. You know, you look forward, consensus is forecasting kind of restaurant margins just flatlining in the 28% range. I don't think that's reasonable. The third thing that has been underestimated is unit growth. So the view kind of in the market of Chipotle's store potential in North America when we invested in 2016 was 5,000 store, you know, total addressable market. That's since been increased by management to 6,000. in October of 2020, then 7,000 at the beginning of 2022, you know, 8,000 is the next step. You know, we look forward to that. And, uh, growth overseas, uh, beyond the U S and Canada presents upside to that figure. Um, none of our forecasts or kind of anticipations that I've mentioned take into account, um, massive upside levers that are potentially on the horizon. Um, the most exciting to me being automation. So, uh, The company has various initiatives, including a machine that can cut and core avocados. They have these dual-sided grills that can reduce the cooking time of chicken from, you know, 12 minutes to three minutes, something like that. And they, perhaps most excitingly, they have a fully automated digital make line, which would ensure much faster throughput on the digital line, as well as portion consistency, which would be kind of a big hot mark. If automation is successful and they can push food prep from kind of 7 a.m. to 10 a.m. for lunch, I think that opens the door longer term to breakfast, which would be really exciting. And then, as I mentioned, a large international success story beyond Canada is also not factored into our estimates. So we see kind of after this year a very long runway of 25% annual earnings per share growth for this company, and that can produce some really attractive returns even from the current valuation, which is up nicely from the beginning of the year.

Very bullish take. What makes this a 8.7% or 8.8% same-store sales? Past isn't necessarily prologue. What is it? Obviously, every restaurant brand. Is it the uniqueness of the franchise, really the lack of a direct competitor? What's driving that?

Yeah, so I'd call it a few things. So obviously, they're gaining a lot of market share in the restaurant industry, right? And the way they're doing that is, first and foremost, I think it's fully aligned with how consumers want to eat. If you look at kind of traditional fast food brands, most of them were invented in the 1950s. It was based on kind of dietary preferences at that time. Chipotle was invented in the 90s. We've learned a lot from the 50s to the 90s in terms of what's how to eat healthy, the importance of protein, the importance of fresh whole ingredients, et cetera. And I think Chipotle is kind of hitting right on the mark in terms of how consumers want to eat and how younger generations especially want to eat. Secondly, I would call out the resonance of Mexican and Latin Latino culture in the U.S. is a huge, powerful driver. You see that in music. A lot of the top artists are you know, reggaeton or Latino artists, which wasn't the case certainly 10 or 20 years ago. You see that in beverage alcohol. You know, tequila is one of the fastest growing categories and up-growing kind of traditional categories like vodka has for a long time. So, and you see that in terms of preference for spicy foods and kind of markets as well. So, I It's really fully aligned with how consumers want to eat. I think it is phenomenal, phenomenal value for money. So when you look at what you're paying for the quality of the meal that you're getting, and you know that there's only 53 ingredients in the entire restaurant, there's no kind of artificial preservatives or any junk added to the food, that's really hard to find at scale. And no one's been able to do what Chipotle does at scale and make it kind of good for you, good value for money, and most importantly, great taste and craveable, I think. You know, there are some other concepts out there. Scale is way less. You know, you're talking a few hundred restaurants. The food is not that craveable. It's not great value for money in terms of perhaps hungry a couple hours later. So all those things, I think, are reasons why Chipotle just continues to gain a ton of share over time. And I think that's set to continue for, you know.

One last question. You see the occasional meme On social media about portion size at Chipotle, these are anomalies? What's going on there?

Yeah, look, I think it's an interesting situation. The benefit to it is it's something that's imminently fixable, right? If there is, it is likely more anecdotal than not. And I think because the food is freshly prepared and because it's not kind of like an assembly line making it, you know, I mean, you go into a Chipotle and you watch someone make your bowl, it's a human being, you know, scooping rice, scooping chicken, scooping beans into your bowl, and there's going to be some inconsistency there. So I think there's probably a range in terms of is an individual worker more or less generous than others? You know, I've seen this myself. You know, usually the workers are very friendly and accommodative and willing to give you extra. If you say, hey, there's a little kind of light on the rice, they'll throw some more in, no problem. So I think What's likely happening is in that spectrum of kind of there's obviously some variation around portioning. You know, the smaller portion occasions are getting called out on social media, particularly in light of, you know, the substantial pricing that we've seen across the industry. So I think the good news there is it's a really easy fix. You know, management can reiterate to the front line the importance of giving the true portion sizes. The company has definitely not change their portion sizes, so it is not at all comparable to the shrinkflation that we see, you know, certain individuals in the country calling out in, like, grocery stores, where, like, obviously if there's a package of Oreos and there's less Oreos in there, as an example, that's a conscious decision on the brand to change the portion size. There has been no change in the portion standards at Chipotle. They're the same as they always were. What I think is happening is there's a little bit of inconsistency in terms of execution, and that's going to be fixed, so...

Thanks so much. Let me go to Alphabet. Bharath.

Sure. So it's been a little over a year since we initiated our position in Alphabet. And just as a quick reminder, our investment thesis was really predicated on, one, the company's underappreciated competitive positioning in AI, and, two, its high earnings growth potential, which is backed by a large margin expansion opportunity and its robust capital return program. Google's results both this quarter, and if you look more broadly over the last few months, it's steady cadence. of product innovation continue to validate both elements of our investment thesis. So starting with AI, the company's leadership in this space was on full display earlier this month at their annual developer conference, Google IO Day. The most exciting announcement at the event was the broad rollout of AI-powered responses for their core search product, which the company is calling AI Overviews. And the early results from the introduction of AI Overviews has been highly promising. with management specifically calling out three very encouraging user trends. One, it's just higher frequency of search. So users who are shown these AI overview results are searching more. Two, their conversions are much higher quality. So when they click through into websites from these AI overview results, they're spending more time on the websites that they could click through into. And thirdly, their search queries are getting much more detailed. So if you look at the volume of search queries with five plus words, it's increasing at one and a half times the rate of much shorter queries. These early findings help counter a key bear concern around the company that, you know, generative AI responses reduce the efficacy of search and reduce the potential for ad monetization. I think instead what these results highlight is that thoughtful integration of AI not only enhances the user experience, but also paves the way for better ad monetization through more context-rich responses and higher quality more frequent conversions and click-throughs. Equally importantly, the company announced that they're rolling out AI overviews to over a billion users around the world by year end. That ambitious scaling plan is enabled by Google's unique technical infrastructure, which has been optimized for these machine learning AI applications for the better part of a decade and continues to improve very rapidly. So as a proof point, the compute cost associated with serving these AI overview results is down 80% from just a year ago. And when you look at the competitive landscape and look at peers and other upstart competitors, we think this deep technical expertise combined with their wide distribution reach is going to be a durable competitive advantage that differentiates their ability to launch AI products at scale to over a billion plus user bases. And moving on to operating results, the company's financial performance this quarter is very characteristic of its high earnings growth outlook. So revenue growth in both Search and YouTube accelerated to 15% and 21%, respectively, on the back of a recovery in the broader digital ad market, as well as very company-specific tailwinds like increasing adoption of advertiser automation tools on the advertiser end and YouTube's success in the connected TV format. On profitability, margins expanded an impressive 390 basis points this quarter as the company's headcount discipline and various cost control initiatives are starting to bear fruit. Looking forward, we think operating leverage in some of their under-earning segments like YouTube and cloud as they scale will be another powerful driver for continued margin expansion. And then finally on capital return, they initiated a quarterly dividend of 20 cents last quarter, which equates to about a 50 basis point dividend yield. In addition to that, they reaffirmed their buyback authorization for $70 billion, which reflects another 3% reduction in their share count. So between the newly initiated dividend and their ongoing share buybacks, their capital return program is yielding close to 4% of the market cap in a year. Stepping back, we're very pleased with the way the business has performed since we made our investment. The share price has nearly doubled from our initial cost. but we still think there's a significant upside just from earnings growth and continued multiple expansion. So at today's levels, the stock is trading around 22 times NTM earnings, which we think is a very attractive valuation for a business of that quality that can grow earnings at a mid to high teens rate.

Just in the last couple of days, Musk announced that XAI raised $6 billion and an $18 billion free money valuation. Another, you know, and again, this is a in effect, a joint venture between X.com and, you know, Musk Enterprises. Infinite ability to raise capital, in effect, at a very, you know, pretty attractive valuation, I would say, for a Series B pre-revenue company. What are your thoughts on the AI landscape?

Yeah, yeah. So whether it's XAI or, you know, the rumored Apple OpenAI partnership or other, you know, the Bing OpenAI partnership that took place a year ago, you know, This is a very nascent technology with a lot of transformative potential. So it's understandably attracting a lot of attention from investors and partnerships from the big tech companies. And we do expect sort of a cadence of well-capitalized competitors to enter the space. I think any potential new entrant will really need to overcome certain very durable advantages that Google currently benefits from. One is scalability, and this goes back to my discussion on their technical infrastructure. And the company spent almost a decade optimizing not only the hardware, including developing their own proprietary chips, but also the software and algorithms required to route these machine learning applications in the most efficient way possible. And the software innovation is not something that a large capital investment alone can overcome. So I think that's a pretty critical barrier to entry for other players. Two is just their distribution and reach. I mean, I think there's a big difference between serving 10 million or even 100 million consumers with a $20 per month subscription model versus serving 2 billion users with basically free product for consumers that you've created an incredible advertising auction engine to monetize that platform. And Google has six different products with over 2 billion users each, right? I think replicating that distribution will be another barrier to entry. And then lastly, just the brand and the trust the company has developed. The consumer habit of Googling has been ingrained for more than two decades. And that's why even when Google has these occasional missteps, consumers give them the benefit of the doubt, and they can fall back on the trust that they've built over time, which other competitors don't necessarily have the benefit of. So we're monitoring the competitive landscape closely, but we're very optimistic about their longer-term differentiation.

Great. Thank you, Bharath.

Charles, Hilton. Sure. Thank you, Bill. So Hilton's off to a very solid start to the year. And I'd characterize this as kind of the first normal quarter that they've really had since the start of COVID. And so to that end, you know, Q1 results featured 2% growth in revenue per available room, or REVPAR, 5.5% growth in net unit room count, or NUG as they call it, and exceptionally strong ancillary licensing fee growth for combined revenue growth of 12%. Combined with strong cost control, adjusted EBITDA grew 17% year over year, and earnings per share grew 23% year over year. Shares declined roughly 5% due to Hilton's best-in-class capital return program, which sees them repurchase approximately $3 billion of stock per year. And in the current environment, what you're seeing is strong demand from both group and international and continued sequential improvement in the large corporate accounts with resiliency in the small and medium-sized business accounts. You know, offsetting that, although in line with expectations, you are seeing some moderation in the leisure transient customer. which is normalizing from very high levels, which were affected during COVID really in the 2021 and 2022 period. And those are kind of normalizing into kind of a more steady state pattern. On the back of strong Q1 results, the company, they increased full year guidance. So overall, I'd say it's a very kind of strong start to the year. And what I'd really kind of want to highlight and double click is what this quarter reminded me again is like how unique Hilton's business model is. And by that, I mean, even in a quarter which saw very modest rev par growth and minimal capital investment, Hilton is still able to generate exceptionally strong earnings growth. And this is really driven by their best in class net unit growth and strong growth in ancillary fee revenues. And so to double click on this, you know, this past March, Hilton hosted their first analyst day since 2016. And to just spend a moment reminding everyone how unique Hilton's business is and kind of this economic flywheel that they've generated, which is really central to their ability to sustainably generate attractive financial returns. So again, what makes Hilton so unique? So first, Hilton owns, and with very limited exception, organically has created best-in-class category killer brands, where they consistently meet their customers in every geography around the globe and at every price point. Second, they take these brands and this hard product, i.e. the hotels, and they wrap them with authentic and consistent products hospitality and customer service experiences. That generates best-in-class customer satisfaction. And once you have best-in-class customer satisfaction, that translates very directly into customers affirmatively seeking out Hilton properties and brands and stay occasions. And critically, this translates into an average rev par premium of 116%. So said another way, like for like, customers are willing to spend 16% more to stay at a Hilton property than a comparative chain scale but unbranded or competitive branded property. And that's very, very powerful. So this Revpar premium, combined with Hilton's obsessive focus on value engineering hotel operations, drives best-in-class economics for the owner and developer communities. So as such, owners are enthusiastic to allocate their incremental dollar of capital behind Hilton's growing network. Now, this dynamic in totality causes Hilton to have best-in-class net unit growth, which is roughly 6% to 7% over long periods of time. And this is a premium to its large competitors. They are truly unique in the scale at which they're able to grow their room count at that level. And this NUG growth rate of 6% to 7%, it anchors a superior top-line growth algorithm, which cascades into best-in-class financial performance for shareholders. So it's truly this flywheel of economic activity, which generates best-in-class experiences, best-in-class unit economics, and then a best-in-class growth rate. Now, at their analyst day, Hilton spent most of their time qualitatively coloring in how they create these authentic and unique customer experiences and why that translates into premium rev part indexes across their brand portfolio. I could go into great detail on this topic, but suffice it to say we came away incrementally confident in Hilton's unique value proposition, both for its customers, but also for the owner community. And to that end, we continue to have great confidence in Hilton's ability to generate high single-digit to low double-digit revenue growth over the long term, driven primarily by best-in-class net unit growth and ancillary fee revenue growth. In mind with their excellent cost control, periodic re-leveraging of their balance sheet, and best-in-class capital return, Hilton should sustainably be able to grow earnings at a mid to high teens rate for the foreseeable future. And we continue to view Hilton as a best-in-class business run by an exceptional management team. The stock is currently up roughly 10% year-to-date for context.

Speak to the impact of a weakening economy on Hilton. Let's assume we find ourselves in a recession as we turn the year after the election, let's say. Sure. How does that impact the business?

Sure. So, I mean, this has kind of been a concern that has been floating out there for Hilton in particular for probably about a year and a half.

And the reality... Actually, I would say longer. I remember when we bought the stock, there was concern about the economy, and that's what enabled us to buy it at a very attractive price.

Yes. And I'm sorry, I'd say in the post-COVID era, there has been a narrative that, okay, there's going to be a deceleration, there's going to be moderation. You are seeing that in pockets of their business right now. So leisure is kind of decelerating somewhat to a more normal cadence. Now, offsetting that, if you take a step back, aggregate occupancy is actually still slightly below or just right around where normalized occupancy would have looked like pre-COVID. So there are still other segments, namely large corporates and then the group business, which has not fully recovered. Group this year is now for the first time set to exceed the pre-COVID period. And these are very long. It's a small piece of the business, but it's a very long lead time. You know, you plan a major group event, a major conference, you're planning it a year and a year and a half out. So in the near term, there are kind of locked in large conferences, large events, which will provide a tailwind for the business. You also have this structural opportunity to continue to close the occupancy gap in the large corporate accounts. And then you've also had a number of years of ADR or pricing growth, which is It's actually slightly below or roughly in line with broad inflation, which should also over time be a tailwind to the business. So absolutely, there can be volatility in rev par, and we've seen this over time. Over long periods of time, rev par generally grows at a slight premium to GDP growth. And then why we like Hilton so much is mathematically, even if you said, okay, rev par declined one year by 2%, If you have an algorithm where they can still grow net units by 6% to 7% and ancillary fees at 15% to 20%, which is what they're doing right now, you can still generate high single-digit revenue growth even in a year which would see a rev par pullback. And because they're so tight on their expenses, their cash expenses, you can get into an environment where even in a recessionary period or a modest recession, I think Hilton could generate earnings growth in the high single-digit or even double-digit rate, depending on the specific ancillary fee revenue growth and net unit growth in that particular year. So volatility, it exists in this industry, but over long periods of time, I think we're very confident in their ability to kind of CAGR into a mid-to-high-teens earnings growth algorithm.

Thank you. Feroz, restaurant brands.

Sure. Thanks, Bill. So over the last few years, I'd say restaurant brands have been in investment mode. And this strong first quarter reported by the company shows that those investments are starting to pay off. So same-store sales, revenue, and EBITDA were all ahead of investor expectations. And so at Burger King in the US, the turnaround is well underway, and the company is actually increasing its investment behind the brand. Comparable sales have continued to improve each quarter, with the most two recent quarters actually showing flat to positive traffic, despite the fact that the majority of their fuel-to-flame investment has yet to be spent. As I mentioned, the company announced its second round of royal reset spending, where it'll kick in about $300 million for an additional 1,100 remodels done by the franchisees. And the company also recently closed its acquisition of Carol's Restaurants, its largest franchisee, where it'll use all the cash flow the business generates to remodel and then eventually re-franchise those restaurants. With the help of these two Royal Reset programs and the Carol's remodels, we think that nearly 90% of the companies, namely Burger King's restaurant base in the U.S., will eventually be on the modern image by the end of 2028. And early results show that these remodels actually work. So for the, call it about 100 restaurants that have been remodeled and that are also open for the last six months, the company is seeing average uplifts of about high teens percent. Quite fantastic. And then at Tim Hortons in the U.S., despite softening economic conditions, it posted strong same-store sales growth of nearly 8%, basically driven by traffic, which is well above peers. Strong growth at Tim's is likely to continue as it builds credibility in both its afternoon foods program and also cold beverages. The company also recently launched its flatbread nationwide, which we think is going to bring in new consumers, particularly in the afternoon food segment. When you look abroad, particularly at Burger King, same-store sales are now well above 30% above pre-COVID levels, which actually outperformed McDonald's on both a one-year as well as a multi-year stack basis since COVID. Its strong value messaging, newer stores, and higher percent of business from digital channels are just some of the reasons why it does well internationally than it does in the U.S. Again, despite all these great business performance improvements, Why is the stock down for the year? Well, we think it's really driven by two things. Recent comments by peers that they're seeing a weakening low-end consumer and worries about a more competitive category. These have kind of weighed on all restaurant stocks, but namely restaurant brands. Let's talk about both. First, while the impact from a more discerning low-end consumer are likely to be felt by all quick service restaurants, as we just discussed, QSR's various brands, particularly in its home markets, have idiosyncratic levers that'll hopefully help it to continue to grow. And on the worries around a more competitive category, a lot of attention has been drawn to McDonald's recent $5 value menu offering, which they will supposedly run for about a month this summer. And the fear is that others will have to follow McDonald's in this value war. First, while details are very scant, we actually think the $5 value menu that McDonald's will be launching will not be honored by all the franchisees, particularly ones on the coastal areas where costs are quite high, which will both limit its impact, but then also its ability to return. Second, Burger King's actually invested quite a lot in building a value platform over the last few years, and it's seen as a good value destination by consumers. And so it can continue to build on that, including tweaking its own $5 value offering, which press reports suggest that it's actually working on in response to McDonald's. Third, the brand's actually built a lot of credibility from our work, specifically with franchisees, by helping them increase store-level profitability, which should put them in a better position to offer value price points to customers and still have ample profits. And lastly, the company still has a war chest of advertising funds, which should help it stay at the forefront of consumers' minds. Ultimately, we believe all of restaurant brands' concepts and their competitors are conscious of growing sustainably and in a very profitable manner for franchisees. So we see a very little risk of an all-out price war as some investors are worried about. So due to these fears, QSR now trades at only about 17 times next year's free cash flow when adjusted for these investments at Burger King, one of its lowest multiples in recent years. And we think the near-term and long-term setup for the business is great. So in the near-term, the business should show outsized profit growth as these ad investments on its P&L fall away from its P&L and are taken on by the franchisees. And longer term, we think the company has great building blocks in place to comfortably grow system-wide sales more than 8% and then profits well in excess of that. So with that, back to you, Bill.

Just maybe you can comment on their capacity for share buybacks and how management is thinking about balance sheet leverage.

Sure. So they've committed to taking down their leverage to about the mid-fours level, which we think is a prudent level for a franchise concept that is also investing behind its brands. And then more recently, they have stepped up and trying to revitalize the Burger King brand, both with dollars from the corporate side in helping franchises remodel, and also going out and acquiring Carol's Restaurant Group. And so we think that's actually a very good use of cash right now, It does pay a very healthy 3.5% to 4% dividend yield. And management's been pretty thoughtful about pulling the share repurchase lever at the right times, especially when the stock's been weak. So in particular, late last summer, when stock got very weak around GLP-1 fears, they actually went out and bought a bunch of stock. And so we think they're being very thoughtful about capital allocation. Right now, it may make a bit more sense to make sure that their brands are revitalized and growing well. And we think share repurchases are a very likely tool they will use to return capital to us as shareholders.

Just maybe comment on, it seems like Restaurant France has traded as kind of a structurally lower multiple than direct competitors for a very long time. One of the issues raised was, well, do they really have a true restaurant industry management team? I think the steps they've taken in the last year or so in upgrading to the team, recruitment of Patrick Doyle, etc., What are we hearing, what do analysts say as to why it deserves a sort of meaningful lower multiple than some of its logical comparables?

Sure, you're absolutely right. It's traded at a persistently frustrating discount to, I would say, similarly franchised peers. And unfortunately, the reasons have been that at any given point, one of the brands had not been working well. So previously it was Tim Hortons, and they've clearly done a great job in turning that around, and that's growing quite well above peers. And for now, it happens to be Burger King U.S. We think they're now entering an era of what I would say consistent growth, not that these investments are behind them. And to your point, they have really, I would say, upgraded their talent base, namely by recruiting what is probably the most celebrated executive in this industry with Patrick Doyle. He clearly led the turnaround at Domino's, took great results and made that a fantastic company that it is. And then even the tweaks that he's made since Josh becoming CEO, a lot more of the decision-making power has been left to the brands. So think of these as individual businesses that are being run with the help of the CEO, Josh, and overseen by the executive chair, Patrick. But really, we don't see any reason why a business like Restaurant Brands should trade at a discount to a more franchised business like Yum, Domino's, or McDonald's. when in fact it has much higher longer-term growth potential, especially in its international markets. So now that some of these investments are behind them, now that they have what we think is the best restaurant executive in the executive chair seat, and the business will hopefully continue to grow more sustainably, that discount should go away and maybe even shit at a premium.

Excellent. Thank you. So Ben's going to talk about Howard Hughes. Just a brief word on Ben. Ben's been with Pershing Square for now 12 years. Before that, he worked at Blackstone as a partner where he actually worked on a number of Pershing Square transactions. We made a decision recently to promote Ben to the president of Pershing Square title. Nick Botta, who has sat in that seat, is being promoted, if you will, to vice chair of the firm. Not a lot's going to change, but it's really a nice recognition For Ben, Ben plays, among other roles, as a member of the investment team, very involved in our capital markets transactions and other things of a more strategic nature for the firm. So congrats, Ben. But with that, actually, Ben took my seat, stole my seat on the Howard Hughes board. Some little confusion in the public domain there. I've been on that board for almost 14 years. and thought that some fresh blood and ideas could come in. Also, just in terms of personal business time management, it made sense for me to kind of step off that board. Ben took my seat. Ben's expertise, among other areas, is in real estate, and I think he'll make an important contribution to that board. Scott Sellers, longstanding member of that board. Scott's also on the Irvine board, one of the few I would argue comparable companies, albeit a private one, but a very, very successful version of Howard Hughes' business. Scott has been named chair, and we have enormous confidence in Scott's leadership, but it's really an excellent board of directors. It's an important investment for us. We own 38% of the company. We have no plans to sell any shares and tend to be a long-term big believer in the company. on a long-term basis, but it was the right time for me to step off and for Ben to join. With that, what did we learn, Ben, that we can share on the quarter?

Great. Well, first, thanks for the kind words. I'm excited to join the Howard Hughes Board. As Bill mentioned, I think it's a fantastic board. And I just had my first board meeting, and I was really impressed with the board and the management team at Howard Hughes. So as the country's premier developer of large-scale master plan communities, or MPCs, Howard Hughes has developed and cultivated really some of the most sought after communities in the nation. These MPCs continue to benefit from strong in-migration trends due to the low cost, low tax, and pro-business nature of its regions. And despite challenging market conditions relating to the higher for longer interest rate environment, Howard Hughes is actually producing some of the best financial results in its company's history. In its core MPC segment, the company saw a meaningful acceleration in the pace of new home sales, with the highest quarterly total sales in its community since 2021. That's because of the lack of resale home availability that continues to drive homebuyers to new construction as existing homeowners remain reluctant to give up their low rate mortgages. And while Q1 residential land sales were muted due to the timing of contracted SuperPAD sales, Howard Hughes reiterated its full-year MPC EBIT guidance of approximately $300 million, which would be close to another record level for the company. And in its newest 37,000-acre MPC in Arizona called Terra Vallis, Howard Hughes closed on its first residential land sales at prices that exceeded the company's expectations. What's interesting is that Howard Hughes' premier MPCs have been able to deliver long-term consistent appreciation in land value which has more than offset the value of its shrinking land bank. In its Ward Village, Hawaii community, Howard Hughes continues to experience exceptional demand for its condo towers, having launched pre-sales for its 11th tower and contracting nearly 40% of those units in the first six weeks. Howard Hughes now has five condo towers that are under construction or in pre-sales with nearly $3 billion of future contractor revenue at gross margins between 25% and 30%. Howard Hughes also launched its first condo project on the U.S. mainland with a Ritz-Carlton Residences in the woodlands. They were able to pre-sell more than 50% of the available units, totaling approximately $250 million in contracted revenue.

Actually, on this one, one of my last acts on the board was stopping the sales of the condominiums because I felt that the market, people would pay a much higher price once the building was delivered. We could have probably sold the whole thing.

Yeah, I was going to give you credit for that. In just the first week of sales, they accomplished all this well above their initial pricing expectations. It's a steal.

Anyone who wants to move to Woodlands, give us a call. Maybe we can get you a condo. But these are spectacular. Really, really beautiful architecture. Robert A. M. Stern, and an amazing site. Best piece of real estate in the state for high-rise. So, anyway. Moving to its operating assets segment, how are you... Actually, just a note, I personally took interest in the penthouse, one of the penthouses, and redesigned it, and it will be the highest sale price for any apartment in Houston. That still is. I'm holding that back for... Anyway, you get the point. A lot of value there.

A lot of value. So moving to the operating asset segment, Howard Hughes has strong leasing momentum across its office and multifamily portfolio, resulting in 7% year-over-year growth in its Q1 net operating income. And they reiterated its full-year operating asset NOI guidance of $250 million, which it expects to grow to over $350 million at stabilization. What's interesting is that this recurring cash flow stream from its operating asset more than covers its interest expense in G&A, which will enable Howard Hughes to generate meaningful future cash flows from its condo and MPC land sales. And lastly, the company has made significant progress on its anticipated spinoff of Seaport Entertainment with an estimated spinoff date in Q3 of this year. While the Seaport is one of the most exciting entertainment and dining neighborhoods in New York City, it continued to generate NOI losses which has been a distraction to the positive developments at Howard Hughes' core MPC business and has pressured the stock over the past year. But once this spinoff is completed, we expect it will redefine Howard Hughes as a pure play master plan company and allow Seaport Entertainment to operate independently as an entertainment-focused enterprise under a new and focused management team led by Anton Nicodemus. We're optimistic that the spinoff will highlight the significant value creation opportunities of both companies in the years ahead.

Great. Thank you, Ben. Manning, Canadian Pacific. What's going on in the railroad industry?

All right. Thanks, Bill. So I'll touch on recent results in a minute. But first, you know, let's take a moment to kind of step back. Last month marked the one-year anniversary of Canadian Pacific's acquisition of Kansas City Southern, which created the combined company that we now own, CPKC. And it's been a really productive first year. We think the management team made really great progress on both realizing synergies as well as integrating the team networks. So firstly, on synergies, the team is actually ahead of its plan that it announced last year during its investor day in terms of synergy realization. They have line of sight to exiting 2024 with more than 700 million U.S. dollars of run rate business wins. And these business wins are really broad-based. They kind of range anywhere from the automotive segment to grain to cross-border intermodal, which really speaks to, I think, the really unique value proposition of CPKC's single-line network connecting Canada, the U.S., and Mexico. In terms of near-term results, the volumes in the first quarter were up 1%. despite kind of very severe winter weather in January. And what's more exciting is that Q2 volumes to date are trending very well, kind of above management's expectations at over 6% growth. And we think that, you know, the strong volume growth will kind of lead to strong margin expansion and earnings growth in the second half of the year. And then I guess secondly on integration. So the operations team has really hit its stride recently. The network is running very, very well. after overcoming some initial operating challenges in Mexico, kind of initially post-integration. So service metrics such as train velocity and terminal dwell are both up or improved, I guess, double digits year to date, which provides, you know, great service to customers, but more importantly also unlocks a lot of capacity for the company to kind of onboard all these new business ones. So, you know, it's been, I guess, one year in what CEO Keith Creel actually likes to call a forever story. So this isn't, you know, a one-year story. This is kind of a decades-long, you know, exciting growth opportunity. So we think the company is still in the very early innings of unlocking kind of the full potential of the combined network. And we expect kind of the continued realization of synergies and kind of the great operational performance to lead to, you know, strong double-digit earnings growth in the years to come.

So what do we take away about the economy from what's going on in kind of real volumes, pricing, et cetera?

Yeah, for sure. I would say it definitely varies by the segment, but I think in general, you know, we're seeing improvement in volume growth, especially at TPKC. So volumes were, you know, up 1% in the first quarter. That's improved to kind of over 6% in the second quarter. I think, you know, the consumer market related end markets, including intermodal, were a little bit softer last year, because a lot of the retailers had overstocked during the pandemic, they, you know, went through a long period of destocking, but we think inventories is actually quite normalized now, and intermodal is actually returning to growth, which is pretty exciting. And that, again, is, you know, consumer related end markets. I think in terms of the industrial end markets, it really depends. You know, CP had a headwind from the weaker kind of Canadian grain harvest this year. But you know, other industrial land markets, energy, kind of plastic production are actually growing quite strongly. So we think, you know, the macro environment, while not the most supportive to CPKC, is, you know, strong enough where, you know, the realization of kind of all these synergies, all these business wins will lead to earnings growth kind of regardless of what the macro does.

And do we have any concern about a change in government leadership in Mexico and what that, you know, any risk there to CP?

Yeah, sure. I would say, so the Mexican presidential election is happening in a few weeks, actually. It's very soon. The leading candidate is from the same party as the current president, EMLO. I would say CPKC, you know, has a very strong relationship with the Mexican government. They've actually already preemptively met with all the leading candidates, kind of shown them around, you know, the facilities, kind of telling them kind of the CPKC story and why supporting rail, freight rail in Mexico is so important to the economy. So I think we don't expect any major changes. I think in terms of the Mexico regulatory environment, as we talked about during prior calls, CPKC is currently conducting a feasibility study for running passenger rails on a certain kind of small section of the network. And that study is expected to be completed in the coming months. in the coming months. So other than that, kind of no real updates. We expect kind of business as usual.

Sure. So I'll just briefly comment on Fannie Freddie. I think the most, you know, probably our best performing stock for the last 18 months, largely driven by one, the decline in that stock during the initial years of the Biden administration. And then I would say the stock today is a proxy on the probability of President Trump being elected. And I think as that probability rises, so has the stock price. So if you're concerned about President Trump being your president, you can hedge that risk by buying Fannie and Freddie stock. If you're supportive of President Trump, then you can buy the stock because you're excited that he will help. But the thesis has always been that the right answer for Fannie and Freddie is once they are adequately capitalized, and you can make arguments that they already are there, but at least the very high standards have been set for their, you know, capitalization. These entities can be separated from government control, and we believe that will be a meaningful value-creating event. Obviously, the way that's done is important, and how it's done will take a keen interest in that, when and if the opportunity presents itself. But Steve Mnuchin, who was the last Treasury Secretary, took a number of important steps in that direction. I would expect that in the next Trump administration, if Trump is the president, either Mnuchin or a replacement Mnuchin will probably follow the same path. You know, alleviating this liability off of the government balance sheet is actually in light of the amount of outstanding debt we have on a direct basis. This is effectively another material indirect liability that could be removed. So there are a number of political and other economic reasons for its separation. Just briefly commenting on Pershing Square Spark Holdings. This is our new version of an acquisition company approved by the SEC. It went effective September 29th. We have not been sitting on our heels, so to speak. We've been aggressively looking for potential companies to take public by merging with Spark. Just to remind you, this is an entity where our previous Pershing Square Tontine Holdings shareholders who stayed to the end of the life of that vehicle received non-transferable rights that become rights to invest along with us in whatever company we identify to take public through a merger with, Pershing Square Spark Holdings. And the beauty of this entity versus typical SPACs are, number one, there are no underwriting fees. There's no founder stock, no shareholder warrants. So the dilutive securities and uncertainties associated with SPACs really don't exist here. We can identify a counterparty, we can negotiate, do our due diligence, negotiate a transaction, commit to the party, and they will know that subject only to the registration statement going effective, they will become a public company. They will know the valuation at which they will go public, obviously the price per share. They'll know they have Pershing Square as an anchor investor for $1 billion, $2 billion, $3 billion, whatever the commitment we make, and then the potential to raise a larger amount of additional capital from the exercise of rights. And once that prospectus is approved... the rights begin to trade for a 20-day period, and the rights holders can elect to sell or exercise. We think it's a great vehicle. We've met with, you know, a number of the big investment banks, all of which are pitching us ideas on occasion. But again, we're looking for a business that meets Pershing Square's, you know, quality and growth objectives. And there are, you know, those are fewer and far between, so to speak, in terms of what we're looking for. But if we find the right business, we think it's an excellent vehicle. It's a great vehicle for private equity firms that are today getting a fair amount of pressure from their LPs for liquidity, because unlike a typical IPO execution, where it's difficult to do more than a primary offering, and even a couple billion primary offering is considered a large deal. Here, we could literally buy a $10 billion secondary stake, enabling limited partners to get liquidity and the manager to, you know, send a very nice positive message to his or her investors. So we expect to do a transaction here. And, you know, when and if we have something to announce, we'll go ahead and do so. We've got a few minutes left. Maybe Ryan and or Bharath, why don't you give us a, it's kind of a confusing economic environment, you could argue, based on a mix of data, low income consumers, it's clearly having some challenges as we see in the quick service business, yet the economy seems to be moving along. What's the Fed going to do? What's going to happen with rates? What's going to happen with the economy? All in two minutes.

Sure. So I think high level, just to review kind of our overall hedging strategy, coming into this year, I think we were starting to see some indicia that the economy was starting to slow down. Inflation had gotten back very close to target towards the end of last year. And we thought that to the extent that there was a risk that needed to be hedged, it was really that the economy was starting to weaken. And so we had put on a position, which had made some money last year, that interest rates would be coming down. That has lost a lot of that value this year. But interestingly, our stocks have done incredibly well and the market has done really well because I think there was a view that as the Fed would be loosening monetary policy in response to a weakened environment, that companies would actually be able to navigate that environment fairly well. I think what we've had at the end of the year are a couple of data points that suggested that perhaps growth, particularly the job market, was not slowing down the way that it looked at the end of last year. It's a little difficult to tell because at the beginning of the year, there are always some anomalies based upon how the government estimates this data versus some very weird trends that have happened since COVID. Basically, you make adjustments on a seasonal basis, which are very steady over time, but COVID has thrown all this out of whack. So it takes more time now, unfortunately, to be able to determine if the government data you're getting is really indicative or not. We have seen a lot of private market data that shows that the labor market is starting to slow. At the same time, there's been some data from the government that shows that inflation was picking back up. And we actually think that some of that data is starting to show that inflation is not moderating as quickly as it was last year. It's nothing that is very troubling either. However, all this has put the Fed in a little bit more of a holding pattern where they're not as eager to cut rates as we thought that they were at the beginning. They really communicated they were at the end of last year and at the beginning of this year. So what I would say overall, we're observing both from the data that we're looking at from the government, from a lot of companies throughout the S&P 500, companies that we own, is that inflation is still continuing in moderation. The economy is starting to slow down. I think that our view right now is that companies, particularly the ones that we own, are very well positioned, whether it's an environment where things slow down a little bit or they slow down more than a little bit. I think we feel very good about the investments that we own. As Bill mentioned earlier on the call, we've actually found it to be a very fertile investment idea for stocks, and so we've added two new positions.

Fertile for us is finding two ideas in a quarter. Correct. That's fertile.

Yes. And we have a very large number of opportunities that we think are close to potential investments based upon kind of a variety of factors that could play out. But overall, I would say we're watching the macro environment. I think that we continue to evaluate opportunities, but sometimes the right answer, particularly when there are a different handful of ways things could play out, is to watch the data until we become very concerned about something that could hurt our stocks or or and or until there becomes a very large asymmetric opportunity. So I think right now we find ourselves from a macro standpoint and a little bit of a holding pattern. We still think that the more likely outcome, although we're not risking any meaningful amount of capital on this, is that things continue to slow down economically at a reasonable pace. Inflation continues to come down. And we think that while the Fed now is talking a lot about holding off on rate cuts for a little while, you know, they often change their mind when the data does change. So we're kind of looking to see how that will play out over the next several months.

And I think to add to what Ryan's saying, I think it is a structurally more expensive world today, and we've believed this for some time, right? Think about every country in the world increasing, whether it's Japan, other countries in Asia, United States, Europe, you know, increasing their defense budgets or, you know, that is going to be a significant inflationary cost to the world. You know, the desire to move supply chains close to home in light of, again, global uncertainty and risk, and it's just more expensive to produce things in the United States, even in Mexico, versus, you know, we had a very significant tailwind coming from outsourcing to Asia. over a couple of decades. And now that's really in the process of being reversed. You know, health care costs, which really have no capability going down. And then, you know, so I think the you know, the risk is the Fed keeps talking about a two percent target, which is unachievable. And to get there, they hold rates higher for too much longer because trying to achieve the unattainable goal. And then that leads to a more rapid deceleration in the economy. I think that's a risk. Another risk is the refinance overhang, I think, is a risk. You have a lot of people at a subsidized interest rate in the commercial world, real estate in particular, where that subsidy is going away, has gone away, will continue to go away. And that will have kind of step change effects on various businesses. So these are things we're quite mindful of. Obviously, if you look at the companies we own For the most part, they're very conservatively levered companies with long-dated liabilities to the extent they have them. With that, we're a little over, but a good overview of the portfolio. Look forward to being in touch next quarter. Thank you so much, and thank you, Operator.

Thank you, everyone. This concludes your conference call for today. You may now disconnect.