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How To Make A Fortune*
November 3, 2010
* My compliance team cautions you that this is a tongue in cheek title

Pershing Square Capital Management, L.P.

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

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We Believe We’ve Identified an Investment with:
A low valuation Lowest valuation in at least a generation Forced sellers A large number of distressed transactions Extremely attractive financing available High LTV, low-rate, fixed-rate, long-dated, non-recourse debt, pre-payable without penalty Favorable long-term supply dynamics Short-term oversupplied market, but long-term supply is controlled Favorable long-term demand dynamics Demographically driven demand growth Out-of-favor Currently, this is a somewhat shunned asset class
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So… How Can You Make A Fortune?

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The American Dream - On Sale

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What Happened?

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What Happened in the Credit Markets?
More Leverage / More Buyers Increasing Asset Values

Freely Available Credit
Relaxed lending standards Financial “innovation” CDO Demand

Decreasing Defaults
Source: “Who’s Holding the Bag?,” PSCM, May 2007 7

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Leverage Increased
The second lien market allowed borrowers to layer additional leverage
Total Second Lien & Piggyback Second Lien Issuance

Source: Standard & Poor’s, and “Who’s Holding the Bag?,” PSCM, May 2007 8

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Financial “Innovation”
The popularity of Interest Only and Negative Amortization loans grew rapidly

IO and Neg. Amortization Originations (% of dollar volume)
35% 30% 25% 25% 20% 15% 10% 6% 5% 0% 2000
Source: Loan Performance, Credit Suisse

29%

23%

4% 2% 1% 2001 2002 2003 2004 2005 2006

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The ABS Market Provided Liquidity for Originators
Sub-prime and Second-lien ABS Issuance Volume

Facilitated by Rating Agencies and Bond Insurers

Source: Thompson Financial, Deutsche Bank, “Who’s Holding the Bag?,” PSCM, May 2007 10

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Asset Values Went Up
Between January 2001 and June 2006 home prices rose at a 13% CAGR
Home Price Appreciation (Case-Shiller 10-City Index)
250 230 210 190 170 150 130 110 90 70 50 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
Source: Case-Shiller Home Price Indices
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Valuation

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Asset Values Have Declined Meaningfully
Home prices are down 28% nationwide
Home Price Appreciation (Case-Shiller 10-City Index)
250 230 210 190 170 150 130 110 90 70 50 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
Source: Case-Shiller Home Price Indices
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Housing is More Affordable Today
Falling home prices and lower interest rates dramatically improved affordability¹. Median family income is now 78% higher than what is required to qualify for a loan to purchase the median price single family home using 80% loan-to-value, fixed-rate financing
NAR National Housing Affordability Index – Fixed Rate Composite
200 180 160 140 120 100 80 60
19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10
Source: National Association of Realtors
¹Affordability = Median Income/Qualifying Income

178 170 150 134 117 109 122 127 117 134 130 133 137 125 126 127 128 124 128 120 109 110

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Cheap Compared to Renting
The breakeven appreciation rate for rental equivalent value is the best since the 1970s

Housing as a hedge: Home ownership with fixed-rate financing protects buyers from asset and rent inflation
Source: Beracha and Johnson, “Lessons from Over 30 Years of Buy versus Rent Decision: Is the American Dream Always Wise?” Assumptions in appendix 15

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Forced Sellers

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Foreclosures and Short Sales
Nationwide, ~30% of sellers are in or are approaching foreclosure
Distressed Sales (% of total re-sales)

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

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Short Sales
Short sale transactions are increasing
Number of Short Sales Per Month

Source: HUD, Core Logic

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Distressed Sales are an Opportunity for Buyers
REO sales tend to be priced below the broader market
Houston REO vs. Overall Pricing ($ thousand)

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

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A Sellers’ Race to the Bottom in Vegas
Buyers benefit when conventional sellers compete with distressed sales. Las Vegas is an extreme example, where distressed and non-distressed sale prices have nearly converged
Las Vegas REO vs. Overall Pricing ($ thousand)

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

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Financing

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Mortgage Rates are Very Low
Mortgage rates have fallen to historically low levels. Fixed 30-year rates are now below 4.5% for the first time in the history of the Freddie Mac lender survey
30-Year Fixed-Rate 80% LTV Mortgage
19% 17% 15% 13% 11% 9% 7% 5% 3% 1973
Source: Freddie Mac

1977

1982

1987

1992
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1997

2002

2007

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What Makes a Home Mortgage So Attractive?
Typical Conforming Mortgage Term Sheet

Low Fixed Rate – 4.43% APR Long Term – 30-Year Amortization High LTV – 80% (97% for FHA loans) Non-Recourse – Loans are explicitly or effectively non-recourse Adequate Financing Available – $417k to $730k, depending on location No Prepayment Penalties – Creates refinancing optionality Tax Deductible Interest – More valuable with coming tax increases
No other business or investor can get financing on such favorable terms
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The Mortgage Market Benefits from Government Support
Support from the federal government provides qualified borrowers with access to credit on favorable terms

GSE and FHA mortgages are now >90% of the origination market The target Fed Funds rate is 0% The Fed has purchased more than one trillion dollars of Mortgage Backed Securities FHA high LTV refinancing programs are helping distressed borrowers

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What Are the True Economics of Home Ownership?
Our Assumptions:
Conventional Loan Down Payment Mortgage Interest Rate FHA Loan Down Payment Mortgage Interest Rate Upfront Mtge Insurance (Financed) Annual Mtge Insur. Premium (First 5yrs) 20% 30yr Fixed Rate 4.40% Transaction Costs Closing Costs (% of Purchase Price) Selling Fees (% of Sale Price) 2% 6%

3.5% 30yr Fixed Rate 4.25% 1.00% 0.90%

Annual Fees Property Taxes (% of Home Value) 1.50% Maint. + Insurance (% of Home Value) 2.00% Annual expenses grow with home appreciation Tax Rate Income Tax Rate

25%

Rent Implied rent grows with home appreciation Holding Period 10 Years

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What Are the True Economics of Home Ownership? (cont.)

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After a small down payment, a buyer’s monthly after-tax cost of carry is at or below the monthly rental expense
Average Two Bedroom Home in Baltimore:

Conventional Home Price Equivalent Monthly Rent Owner's Monthly Out of Pocket Downpayment + Closing Costs LTV $ 187,998 $ 1,300 1,072 41,360 80%

FHA 187,998 1,300 1,362 10,406 96.5%

Source: Trulia - home price and rent expense data
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The Benefits of Low-Cost, High-LTV Financing
Homebuyers can make an excellent after-tax return on their equity investment, even under modest appreciation assumptions

Conventional 80% Financing
Annual Appreciation 1% 2% 3% 4% 5% 6% IRR Assuming 10yr Hold Residual Current Return Return Total 3.8% 6.6% 10.4% 6.9% 6.8% 13.7% 9.5% 7.0% 16.5% 11.8% 7.3% 19.1% 14.0% 7.5% 21.5% 15.9% 7.8% 23.7% Multiple of Equity 2.7x 3.6x 4.6x 5.7x 7.0x 8.4x

If the borrower has the opportunity to refinance at better rates, returns would be even higher
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The Benefits of Low-Cost, High-LTV Financing (Cont’d)
Homebuyers can make an excellent after-tax return on their equity investment, even under modest appreciation assumptions

FHA 96.5% Financing
Annual Appreciation 1% 2% 3% 4% 5% 6% IRR Assuming 10yr Hold Residual Current Return Return Total 16.3% 0.4% 16.7% 20.5% 1.7% 22.2% 24.0% 2.8% 26.8% 27.0% 3.8% 30.8% 29.7% 4.7% 34.4% 32.1% 5.6% 37.7% Multiple of Equity 5x 7x 11x 15x 19x 25x

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

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Favorable Long-Term Demand Dynamics

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Household Formation Trends
Household Formation has been positive, with some degree of cyclicality, since at least the 1970s. Household growth will likely accelerate as the recovery gains traction
Annual Household Formation (% growth)
5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%
76 19 79 19 82 19 85 19 88 19 91 19 94 19 97 19 00 20 03 20 06 20 09 20

Household growth is cyclically depressed

Source: US Census Bureau
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Homeownership Rates have Normalized
Homeownership rates have declined to pre-bubble levels. While ownership is above pre-2000 rates, higher affordability and an aging population should support an ownership rate near today’s level
Homeownership (% of households)
70 69 68 67 66 65 64 63 62 61 60 1983
Source: US Census 31

1986

1989

1992

1995

1998

2001

2004

2007

2010

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The Number of Owner Households Will Rebound
Accelerating household formation and a stabilization of the homeownership rate should lead to growth in owner households

Change in Owner Households =
(Household Formation x Homeownership Rate) + [Number of Households x (Change in Homeownership Rate)]
Source: US Census Bureau, BLS, Maximus Advisors
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Long-Term Demand for Housing
Projected Long-Term Demand for New Housing Units (single and multi-family)

Household Formation Growth needed to maintain constant vacancy rate

X Homeownership Rate
LT Annual Single Family Home Demand

Assumed: 66%¹

1,101

1,253

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

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Temporarily Elevated Inventory Levels
In the short-term, for-sale homes and shadow inventory will weigh on home prices. This provides an opportunity to buy a long-term investment at an attractive valuation in a market facing short-term distress
Change in Home Prices vs. Months of Inventory
-25%

Price

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-20% 12 -15% 10 -10% 8

-5%

Supply
0% 6

5% 4 10% 2 15%

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

0 2011

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Source: US Census Bureau

Months of Supply (6 Month Lead)

Home Prices (YoY%, Inverted)

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New Supply Growth Will be Slow
Builders have sharply reduced their construction capacity, increasing lead times when the market does recover
Community Counts for Public Builders

It can take three to seven years to get land permitted in many of the more desirable markets¹
Sources: Deustche Bank, “Builder Community Analysis” ¹Toll Brothers Management 36

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Housing Starts are Now Below Long-Term Demand Growth
Housing starts have fallen sharply and are now lower than at any time in at least the past 50 years. Starts today are less than half of average long-term demand
Seasonally Adjusted Housing Starts (thousands)
3,000

2,500

Projected LT Demand:
1.1-1.25mm new single family homes per year

2,000

1,500

1,000

Inventory Depletion

500

0 1959

1963

1967

1971

1975

1979

1983

1987

1991

1995

1999

2003

2007

New Supply Growth Will be Slow

Source: Chart: US Census Bureau 37 ¹Joint Center for Housing Studies, Harvard University, “Updated 2010-2020 Household and New Home Demand Projections”

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Out-of-favor

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Everybody Else is Afraid
The best investments we have made are the ones no one else would touch

“So even at 89 cents a share, it still looks pretty bleak out there for General Growth Shareholders” - Businessweek, April 2009 “The U.S. housing market is headed for a complete and total nightmare” - Business Insider, August 2010 “Now They Tell Us: Experts say housing is a lousy investment and it always will be” - Yahoo Finance, August 2010

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Concluding Thoughts

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Why Now?
Interest rates won’t stay this low forever New monetary easing increases the risk of inflation Even with the current inventory levels, at today’s valuations, it is unlikely we will see another substantial decline in prices Forced selling may abate as lenders’ balance sheets improve Generally, there is more liquidity on the way down than on the way up An economic recovery could cause housing to recover faster than many people think

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The Housing Purchase is One of the Most Emotional Investment Decisions a Family Can Make
Once a family is able to purchase a home, the decision is based on psychological factors: Confidence in the, and one’s, future The fear of missing the opportunity to buy at the bottom These psychological factors have self-reinforcing qualities that are similar to the forces that drive financial markets

Catalyst

Housing Prices Increase

Increase in Buyer Confidence

Decision to Purchase
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An Institutionally Under-Owned Asset Class

Institutional investors have almost no exposure to singlefamily home rental properties (“SFHRPs”) as an asset class Low valuation, high current yield and long-term appreciation potential make SFHRPs an intelligent investment for institutional investors Despite these investment characteristics, we are unaware of any large pools of capital that have been raised to pursue this opportunity. This will change

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The SFHRP Investment Opportunity Is Best Understood By Analogy
For the vast majority of the 20th century, timber was never considered an institutional asset class Led by forward thinking investors, institutional investments in timberland emerged in the USA in the 1980s With the advent of timber institutional management organizations (TIMOs) and timber REITs, institutional timberland investments have grown significantly DANA Limited estimated that institutional investors had invested ~$50bn in timberlands as of early 2008 In 2007, the first timber ETF launched The same features that attracted institutional investors to timber: current yield, inflation-protection, portfolio diversification, demand for “hard assets,” and the ability to create long-term tax-deferred gains, also apply to SFHRPs

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Potential Institutional Investment Demand is Material
If global institutions and private wealth funds allocated approximately 1% of their assets under management to SFHRPs, it would absorb the entire U.S. for-sale inventory of single-family homes

Median Priced Single Family Home U.S. For-Sale Inventory of Single-Family Homes U.S. For-Sale Housing Inventory ($Tn) Global Institutional & Private Wealth AUM ($Tn)* U.S. For-Sale Inventory as % of Global AUM

$172,000 3,970,000 $0.7 $64.3 1.1%

* Source: IFSL, US Census Bureau

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Appendix

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

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

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