Value Investing

Ackman Letter: 2019 An “Optimal” Time For Fannie Mae Reform

Pershing Square 2018 letter to investors

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Following a difficult 2018 driven primarily by a lack of progress on housing finance reform, FNMA and FMCC common and
preferred shares have rebounded sharply in the first few months of this year as the probability of a favorable resolution to the
status of both companies has increased. Favorable recent developments include repeated comments from Treasury Secretary
Steven Mnuchin citing GSE reform as a key priority for 2019; the U.S. Treasury, on behalf of the taxpayer, achieving an
annualized return on its Senior Preferred Stock investment greater than the originally bargained for 10% rate; Democrats
winning control of one branch of Congress in the 2018 midterm elections increasing the odds of administration-led reform,
and, new leadership at FHFA, Fannie and Freddie’s primary regulator, with Joseph Otting serving as Acting Director while
Mark Calabria awaits Senate confirmation.
While we believe that Congress has an important role to play in housing finance reform efforts, we do not believe that the
administration will allow a gridlocked, divided Congress to cause it to miss the window for achieving an end to the current
untenable status quo. Completing one of the largest private capital raises in history necessitates favorable economic and
financial market conditions like the current environment, with GDP growth at robust levels, unemployment at record lows,
and national home prices and stock market indices at or near all-time highs. We believe that 2019 is the optimal time for
action, ahead of the next presidential election in 2020, and that Treasury has a unique opportunity to exercise its warrants in
Fannie and Freddie and utilize over $150 billion of these profits to fund key government priorities.
FNMA and FMCC common shares declined 60% and 58%, respectively, in 2018, but have since increased 149% and 136%
year-to-date in 2019. FNMA and FMCC preferred shares declined 20% and 6% during 2018 and have increased 28% and 26%
year-to-date in 2019.

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Restaurant Brands International (“QSR”)
QSR’s franchised business model is a high-quality, capital-light, growing annuity that generates high-margin brand royalty
fees from three leading brands: Burger King, Tim Hortons and Popeyes. The company’s unique business model allows it to
capitalize on its significant long-term unit growth opportunity with minimal capital investment. QSR’s strong overall business
performance continued during 2018 with 25% EPS growth, which reflects strong business progress and the benefits of the
refinancing of the 9% Buffett preferred. The company grew total net units by 5%, with 6% growth at Burger King, 2% at Tim
Hortons and 7% at Popeyes. Same-store-sales increased by 2% at both Burger King and Popeyes and 1% at Tim Hortons.
Since the end of 2017, QSR has taken several actions to combat the recent slowdown in same-store sales at Tim Hortons.
The company replaced Tim Hortons management with the team that had previously turned around weak same-store sales at
Burger King, improved relations with franchisees, and unveiled a new operating plan entitled “Winning Together,” which is
focused on improving the restaurant experience, new product development, and brand communications.
During 2018, Tim Hortons launched all-day breakfast, a kids menu, and a store reimaging program. This month, the
company also launched its loyalty program nationwide after successfully testing it in select markets. We believe the company’s
recent initiatives are already generating better results, as same-store sales momentum improved in each quarter throughout
2018, with a 2% increase in the fourth quarter. Earlier this year, QSR elevated Daniel Schwartz to Executive Chairman and
promoted Jose Cil to CEO. We believe Jose’s deep operational experience and successful 18-year track record at Burger King
position him well to lead QSR.
In 2018, QSR’s share price, including dividends, declined 12% due to concerns regarding soft same-store sales at Tim Hortons
earlier in the year and the broader market downturn in the fourth quarter. The share price is up 23% this year, primarily
reflecting significant improved fourth quarter results at Tim Hortons. QSR currently trades at 22 times our estimate of this
year’s free cash flow, which is a discount to lower-growth franchised peers and below our estimate of intrinsic value. We
believe that continued improvement at Tim Hortons, and the opportunity for the company to tell its story at its first QSR
investor day in May, will highlight the company’s significant long-term growth potential and serve as potential catalysts for
future share price appreciation.

PSH-2018-Annual-Report