June 8, 2009

Dear Pershing Square Investor: The Pershing Square funds’ outperformed the major market indexes for the first quarter of 2009 and for the year to date as set forth below:1

Portfolio Update The first five months of this year were among the most productive periods of Pershing Square as measured by accomplishment rather than hours worked. Over the last few months, there was almost always something material going on at Pershing Square about which we would have liked to have written, but often could not because of confidentiality or strategic reasons. Unfortunately, we have to assume that each of our communications becomes available publicly so we can only share in writing what we are willing to share with the public at large. Since time was a particularly scarce resource over the last few months and because I do not delegate the writing of our quarterly letters, I deferred writing to you until we had some closure with respect to significant investments that we were either buying or selling, or with respect to material

Past performance is not necessarily indicative of future results. Please see the additional disclaimers and notes to performance results at the end of this letter.

developments with respect to current holdings. Let me bring you up to date on these situations. Target Corporation While we lost the vote, we achieved many of the objectives we identified prior to launching the proxy contest. Our principal objectives included: (1) catalyzing Target to exit the credit and funding risk associated with its credit card operation, (2) highlighting the undervaluation of the company, (3) improving the company’s governance and board composition, and (4) attempting to make Target a more open and responsive company. In the first few weeks of the contest on its proxy road show, Target management stated that it would revisit its initial credit card transaction and would be supportive of a more complete credit-risk and funding-transfer solution. While these statements from management took some of the wind out of the sails of our proxy contest (some holders felt that they did not need our nominees on the board in light of the company’s apparent commitment to act on our previous suggestions), our goal in the proxy contest was not principally to add directors to the board, but rather to increase the long-term value of our stake in the company. We invested approximately seventeen cents per Target share owned by the funds plus significant time and energy to run the proxy contest. Over the course of the election, Target stock increased about $14 per share, vastly outperforming its principal competitors – Wal-Mart and Kohl’s – and the retail index over the same period. As a result of the contest, we believe that shareholder value will be materially enhanced by the company’s new thinking about a credit card transaction along the lines of our original proposal to the company in mid 2007. We also believe that the proxy contest further energized management and the board who will likely work that much more diligently to address the company’s operating under-achievements and governance shortfalls that we highlighted during the contest. While we knew it would be a significant achievement to win the contest, we underestimated the difficulty of a so-called dissident shareholder getting board seats in a company with a successful long-term track record. The principal impediments to our success included the lack of a universal proxy card and the fact that proxy voting is not anonymous. While many of the shareholders wished to vote for some of our nominees – Jim Donald and I received a low 20s percentage of the vote according to Target – in order to do so shareholders had to give up their right to vote for some of the company’s nominees (they could only vote on the company’s proxy card or our card, not both) and risk their relationship with company management. We are strongly of the view that while boards are better today than they were a decade ago, they continue to be far from optimal. Many directors depend on the income they receive from serving on boards and, as a result, are reluctant to challenge management on strategy, risk-taking, or compensation. Often, there are business, social, and or charitable connections among the directors that reduce their independence or willingness to speak up. Many CEOs prefer directors with no experience in a company’s principal lines of business because it makes it more difficult for them to challenge the CEO. Often times, as is the case with Target, board member terms extend well beyond the period where they can continue to bring fresh perspectives to the board.


While the principal objective of the Target proxy contest was to maximize the value of our investment in Target, we believe the follow-on impact of the contest will lead to board governance improvements at other companies as boards examine their practices to determine whether they are at risk to shareholder scrutiny and potential future challenges. We continue to believe that Target stock offers an attractive potential reward for the risk of ownership at current prices, particularly in light of the motivational impact on the company of the recent proxy contest. As a result, we anticipate that, subject to capital additions and redemptions, Target will remain a longer-term holding for the funds. We, of course, maintain the flexibility, as we do with most of our other holdings, to redeploy some or all of the capital we have invested depending on future developments at the company and in our portfolio, and based upon our continual assessment of Target’s relative attractiveness compared to other opportunities that we identify in the future. By next proxy season, we expect that the new SEC-mandated rules will materially reduce the cost of a proxy contest and level the playing field between incumbent boards and shareholder nominees. If made law, these changes will herald a new era in improved and more shareholderresponsive boards. More efficient proxy access will put us and others in a position to more easily to replace directors at Target or other companies that do not live up to commitments they have made to their owners. Borders Group At this year’s annual investor meeting in January, I predicted that Borders would either be the best performing stock on the New York Stock Exchange or the worst. Fortunately for us, yearto-date it appears to be the former as Borders stock has appreciated 985%. The appreciation of the stock can largely be attributed to the change in management that took effect at the beginning of the year and the business progress this team has made since that time. As you likely know, a former Pershing Square investment team member, Mick McGuire, became non-executive chairman of Borders. Mick found Ron Marshall, a world-class retail turnaround executive, and the board hired him as CEO. Ron has done a superb job in a short period of time to begin to right the ship. Since Ron joined the board, the company has significantly cut costs, reduced capital expenditures and investment in inventory while improving working capital management and in-store margins. Sales have continued to decline, but appear to have stabilized at a lower level than last year. We have an economic interest in Borders of approximately 40% of shares outstanding including common stock, warrants, and total return swaps. We received 14.7 million warrants originally struck at $7.00 per share in connection with a $42.5 million loan we made to the company in March of 2008 and our commitment to purchase Borders’ foreign subsidiaries in certain circumstances. Our commitment to purchase these subsidiaries could only be exercised at a price we believed to be materially below the fair value of these foreign subsidiaries and was subject to a no-material-adverse-change condition. Effective March 30, 2009, we agreed to extend our $42.5 million loan to the company for an additional year. In exchange for this extension, our commitment to purchase the foreign


subsidiaries was terminated, and the strike price of our warrants was reduced to the then-market price of $0.65. Since the restructuring on March 30th, Borders stock price has increased to $4.34. Taking into consideration our re-priced warrants, the average cost of our Borders position is $6.98 dollars per share. While the economic environment and digital book readers continue to be significant risks to Borders, we believe that there is still room for one or two profitable superstore book stores in the U.S. The business model of book superstores, however, is likely to change over time from primarily bookstores to merchants of a wider variety of products and services which are designed to appeal to the higher-income educated consumer that, on average, spends an hour or more in a book superstore. If Borders Group continues to make operational and strategic progress, this once-small investment could have a material positive impact on our funds’ future performance. General Growth Properties, Inc. (GGP) Beginning in November of last year, we acquired stock and cash-settled total return swaps giving us a nearly 25% economic stake in GGP at an average price of $0.83 per share. As such, we have the largest economic interest in GGP equity, with the founding Bucksbaum family owning about 20% of the company. GGP’s equity value declined from a peak of approximately $20 billion in late 2006 to approximately $100 million when we began accumulating our position. GGP is the second largest owner of malls in the country after Simon Property Group. The company’s assets continue to perform well with high occupancy and strong cash flows. GGP principally suffers from debt maturities that it cannot refinance as a result of the near-complete shutdown of the real estate capital markets. In addition to our equity stake, we own GGP unsecured debt which we purchased at a substantial discount from face value. We began to acquire our position in GGP equity and debt believing at the time of our investment that the company would have to file for bankruptcy in order to reorganize. Our investment in the equity is based on our belief that the company can successfully reorganize with the current equity holders receiving substantial value in excess of our purchase price in the newly reorganized company. Obviously, if we think the equity has value, we also believe the debt is likely to be money-good. Prior to GGP’s bankruptcy filing, the company sought debtor-in-possession financing of $375 million to provide the company with additional liquidity during the pendency of the bankruptcy. At the time GGP was seeking DIP financing, there were no lenders willing to provide financing on terms that GGP would accept. We negotiated a DIP financing proposal with the company shortly before GGP filed for chapter 11 which resulted in our committing to provide a $375 million loan on the following terms: a 4% commitment fee, 15% interest rate (LIBOR + 12% with a 3% floor), a 3% exit fee, and an 18-month term. In addition, we received zero-strike warrants to purchase 4.9% of the fully diluted equity of the newly reorganized post-bankruptcy company. The DIP loan was convertible at the company’s option into GGP post-reorganization equity at the lower of (1) plan of reorganization value, (2) third-party sale value, or (3) a market-based trading test. The DIP was mandatorily convertible in the event the company did a rights offering


upon exit. Based on our due diligence, we believed that the first-lien collateral, which was a portion of the DIP-loan’s security, amply covered the loan. In addition, we received second liens on other collateral which provided asset coverage that we estimated to be multiples of our $375 million loan amount. The terms and structure of our DIP loan, particularly its equity conversion feature, were unique and would have afforded the company a high degree of flexibility during bankruptcy. Unfortunately, the terms were deemed to be too attractive to Pershing Square by other participants in the process. Once GGP filed for chapter 11 and disclosed the terms of our deal, creditors who weeks earlier were unwilling to provide DIP financing made new more attractive financing proposals to the company. Ultimately, the company received nine or ten DIP-loan proposals after our commitment was disclosed publicly. Competition among these participants materially reduced the returns offered to the DIP lender and weakened the collateral package while preserving the flexibility and equity convertibility features of our DIP loan. As a result, we chose not to compete, and a group of hedge funds led by Farallon Capital Management made the loan. As a consolation prize, we get to keep our $15 million commitment fee, subject to the right of GGP stakeholders to successfully object to the fee. We do not expect any such objections to be successful because the DIP loan was negotiated at arm’s length and our participation in the process clearly added substantially more than $15 million of value to the bankruptcy estate. Our approach to the GGP DIP lending process should demonstrate to you that we think of Pershing Square’s capital as a scarce and expensive, higher-cost resource (we seek higher returns) than that of most other hedge funds and capital market participants. As a result, well before the GGP DIP-loan economics were reduced to an approximate 15% total return, we put our wallet back in our pocket. Had our original DIP loan closed, we anticipated that we could have made two to three times our $375 million investment with almost no downside risk, an appropriately high return in our view for what would have been an 18-month to two-year illiquid investment. In addition to our commitment fee, as one of the largest owners of equity and unsecured debt of GGP, we are the direct beneficiary of the highly favorable DIP loan that GGP ultimately obtained. We do not like to participate in auctions for the winner is typically the buyer or lender willing to make the highest-priced purchase or provide the lowest-cost financing. In this case, we participated in the DIP “auction” to increase the probability of GGP’s successful reorganization, but would only do so on terms that made this potential loan an attractive standalone investment while providing an appropriate break-up fee and expense reimbursement in the event we did not win. On Friday, I was appointed to the GGP board of directors. This is the first board that I have joined since the formation of Pershing Square. I am doing so because I believe that as a member of the board, I can have a materially positive impact on the outcome of our investment in GGP in assisting the company through the reorganization process and the company’s reemergence. As a member of the board, I will be restricted from making any public statements about GGP and will be limited in the communications I can make to investors.


Fortunately, the bankruptcy process is highly transparent, so if you choose to, you can follow this investment with an even greater degree of scrutiny than our other positions. We will also be restricted to a great extent from trading our position in GGP as a result of becoming an insider. As you would expect, we considered carefully the sizing of our investment and the downside risks associated with joining the board versus the upside potential before making an affirmative decision to become an insider. Since the early days of the bankruptcy filing, GGP stock has increased in value by more than five times to $2.90 per share and the unsecured debt has increased in value by two to four times depending on the debt instrument. We continue to believe that there is substantial additional upside potential in GGP equity and debt. The principal risks for GGP equity and unsecured debt holders are the outcome of the bankruptcy process and the general state of the economy and consumers. To mitigate these risks, we have hedged some of the economic and retail real estate valuation risks of GGP through certain short equity and CDS investments in other companies. Exited Positions We sold Wendy’s, Visa, and Dr. Pepper Snapple Group as well as certain smaller commitments since the beginning of the year. Our sales of these equities were principally driven by valuation as well as the opportunity to redeploy capital from attractive investments to even more attractive ones. We have become increasingly conservative about the valuations of the businesses we are willing to own in light of the highly uncertain economic environment as well as the high degree of market volatility that may offer us a greater-than-usual opportunity to repurchase an investment in the future at a more attractive price. Hedges You will note from our recent sector report that over the last two months we have reduced the size of our CDS portfolio substantially. Most of this reduction has come from the sale of our investment grade CDS, which we viewed primarily as a hedge, and in the sale of some of our single-name CDS positions. We were motivated to reduce this hedge as some of the global financial crisis risk abated, while we liquidated substantial amounts of our equity exposure and we identified more efficient ways to hedge our exposures. Bank Holding Company CDS We continue to hold substantial single-name CDS positions in the holding company debts of financial institutions which we believe have a reasonable likelihood of requiring large amounts of additional equity capital. We believe that in the event these institutions require large amounts of capital that is not available from the private sector, there is a substantial probability that the FDIC and Federal Reserve will seek to compromise bank holding company creditors before investing hundreds of billions of additional taxpayer dollars. Our country cannot afford, nor in our opinion will taxpayers tolerate, any more AIGs. These CDS positions have low current carrying costs and offer the potential for large profits in the event our expectations are realized. These holdings also serve as attractive disaster protection for the funds. 6

Equity Shorts Historically, we have shorted equities in limited circumstances and principally as standalone investments. We have rarely hedged individual investments through short positions in other related equity securities. Currently, we are doing so in two circumstances, namely GGP and Target, where we believe correlated short equity opportunities exist which offer less upside stock price potential and have downside potential which is highly correlated with our corresponding long investments. Our desire to hedge certain of our investments is due to our inability to accurately forecast with confidence the duration and depth of the current recessionary environment. New Investments We have initiated two new long investments in large capitalization U.S.-based businesses with dominant global franchises which generate growing free cash flows. We anticipate these holdings are likely to be passive as both businesses are well managed and are trading at attractive valuations. Unfortunately, one of these holdings has appreciated substantially during our initial period of acquisition and therefore currently represents only a 3% position in the funds. The other is an approximate 7% fund holding which we are in the process of expanding if we can continue to purchase additional shares on a price-sensitive basis. The Media The nature of our investment approach has historically attracted large amounts of media attention which we have used to our advantage in negotiating with companies that are resistant to our ideas. Oftentimes, a public airing of issues is extremely effective in motivating a publicity-shy company to see the light on important shareholder and governance issues. We have also cooperated with the media occasionally to do our part on behalf of the hedge fund industry in attempting to remove some of the stigma surrounding what hedge funds actually do and who hedge fund managers actually are, and to help mitigate some of the negative attention that our industry, undeservedly for the most part, receives. Unlike with our typical investments where media attention is a natural outcome of our investments, in the case of Target, we actively sought to focus media attention on the company by participating on CNBC three times, including my hosting a two-hour morning segment on proxy contests and the future of corporate governance. We did so to reach the Target retail investor and smaller institutional holders that we did not have the manpower or time to meet or speak with directly. We did so knowing that some of you believe that media and the hedge fund industry are risky or unusual bedfellows. We also expect that some of you would rightly ask: “Is Pershing Square using the press for a profitable purpose or are we seeking publicity for its own sake.” While the answer to this question is better proven by example than answered with words, let us 7

simply say that we feel that we have received more than our fair share of press in recent months. Rather than self-aggrandizement, we are well aware that a large amount of press is likely to lead to disappointing press, the Joe Nocera New York Times’ piece being the most glaring example. As a result, you should expect that we will do our best to fade into the sunset as far as the media is concerned until such time as an investment opportunity requires us to work more closely with the press. We hope such time is many moons from now. We write this paragraph knowing full well that when this letter eventually reaches the press, it may lead to further articles about our attempt to quietly go on our way. Shareholder Activism There have been a number of recent articles in the press that suggest that shareholder activism is likely to go the way of the buggy whip as a number of well-known shareholder activists have folded their tents. While some approaches to shareholder activism will hopefully be absent for some time (the file a 13D, sell-the-company approach), thoughtful and constructive engagement based on careful and detailed analysis focused on shareholder value creation will always, in our opinion, be an effective means to maximize value in the public markets. The fact that a number of our competitors have closed their doors or withdrawn from an activist approach obviously makes for a less competitive environment for the surviving participants. The key drivers for successful shareholder activism include a wide spread between price and value, a market environment in which shareholders and regulators are focused on improving corporate governance and creating value, and the identification of value-creating ideas by activist shareholders. Judged by these standards, the ingredients for profitable shareholder activism are more present than ever before, and we continue to be highly capable of implementation. As always, we seek to identify both passive and active investment opportunities, and prefer to generate large profits with less activity if such opportunities can be identified. Organizational Update We made a number of personnel changes since our last quarterly letter. Mick McGuire left Pershing Square to become Chairman of Borders. Erika Kreyssig, who reported to Ramy Saad our head trader, left the firm. We will miss her greatly. We are actively recruiting a replacement trader. We replaced Alex Song, a recent junior addition to the investment team, with two outstanding recruits from Goldman Sachs, Ryan Israel and Jordan Rubin. Ryan and Jordan were joint valedictorians at the Wharton School and began their careers at Goldman Sachs, which has proven to be a great education for them based on their initial contributions to the investment team. Leigh Piccolo has recently joined our accounting team as a controller, a team which currently includes Amy Stern, Adam Rapp, Amy Szeto, and Michael Gonnella. Finally, Nick Botta promises me that our accounting team has extra capacity allowing for fewer late nights for this 8

extremely hard-working department. We continue to enhance our administrative team as we have made some additional promotions. Dianna Hampton-Dawson has been promoted from our reception to support Nick Botta and our accounting team as an executive assistant. Bethany Norvell, after completing her paralegal degree, now reports to Halit Coussin as our Assistant Compliance Officer. Helena Tunner has been promoted from our reception to support Roy Katzovicz and our legal team as an executive assistant. Stephanie Conrad and Rhiannon Sanders are new admin team additions at reception.

Please feel free to contact me or any member of the investor relations team if you have any questions that I have not answered above. Sincerely,

William A. Ackman


Additional Disclaimers and Notes to Performance Results The performance results shown on the first page of this letter are presented on a net-of-fees basis and reflect the deduction of, among other things: management fees, brokerage commissions, administrative expenses, and accrued performance allocation, if any. Net performance includes the reinvestment of all dividends, interest, and capital gains; it assumes an investor that has been in the funds since their respective inception dates and participated in any “new issues.” Depending on the timing of a specific investment and participation in “new issues,” net performance for an individual investor may vary from the net performance as stated herein. Performance data for 2009 is estimated and unaudited. The inception date for Pershing Square, L.P. is January 1, 2004. The inception date for Pershing Square II, L.P. and Pershing Square International Ltd. is January 1, 2005. The performance data presented on the first page of this letter for the market indices under “since inception” is calculated from January 1, 2004. The market indices shown on the first page of this letter have been selected for purposes of comparing the performance of an investment in the Pershing Square funds with certain wellknown, broad-based equity benchmarks. The statistical data regarding the indices has been obtained from Bloomberg and the returns are calculated assuming all dividends are reinvested. The indices are not subject to any of the fees or expenses to which the funds are subject. The funds are not restricted to investing in those securities which comprise any of these indices, their performance may or may not correlate to any of these indices and it should not be considered a proxy for any of these indices. Past performance is not necessarily indicative of future results. All investments involve risk including the loss of principal. This letter is confidential and may not be distributed without the express written consent of Pershing Square Capital Management, L.P. and does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product. Any such offer or solicitation may only be made by means of delivery of an approved confidential private offering memorandum.


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