A Value Menu for McDonald’s

Pershing Square Capital Management

DISCLAIMER

Pershing Square Capital Management's ("Pershing") analysis and conclusions regarding McDonald's Corporation ("McDonald's") are based on publicly available information. Pershing recognizes that there may be confidential information in the possession of the Company and its advisors that could lead them to disagree with the approach Pershing is advocating. The analyses provided include certain estimates and projections prepared with respect to, among other things, the historical and anticipated operating performance of the Company. Such statements, estimates, and projections reflect various assumptions by Pershing 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. Actual results may vary materially from the estimates and projected results contained herein. Pershing manages funds that are in the business of trading - buying and selling - public securities. It is possible that there will be developments in the future that cause Pershing to change its position regarding the Company and possibly reduce, dispose of, or change the form of its investment in the Company. Pershing recognizes that the Company has a stock market capitalization of approximately $42bn, and that, accordingly it could be more difficult to exert influence over its Board than has been the case with smaller companies.
1

Table of Contents

I. II. III. IV. V.

Overview of McDonald's Pershing’s View of McDonald's Pershing’s Proposal to McDonald's: McOpCo IPO Company Response to Pershing Developing a Response to the Company Appendix A. Pershing’s Proposal: Assumptions B. PF McDonald's Financial Analysis C. McOpCo Financial Analysis

3 11 23 39 43 58 59 66 74

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I. Overview of McDonald's

I.

Overview of McDonald’s

Pershing’s Involvement with McDonald’s

On September 22nd, Pershing Square Capital Management (“Pershing”) presented a proposal for increasing shareholder value (“the Proposal”) to McDonald’s management Pershing commends McDonald’s management for its strong operational execution over the past two years Pershing appreciates the willingness and openness of McDonald’s management to discuss the Proposal Management has taken our Proposal seriously – our Proposal was presented to McDonald’s Board of Directors Pershing had a follow-up meeting with McDonald’s management on October 31 when the Company communicated its response to our Proposal Pershing is pleased to have the opportunity to share the details of our Proposal with the broader investment community

4

I.

Overview of McDonald’s

Review of McDonald’s

World’s largest foodservice franchisor and retailer $42 billion equity market value $55 billion in estimated system wide sales 32,000 system wide restaurants, globally Serves 50 million customers daily in 119 countries Everyday 1 out of 14 Americans eats at a McDonald’s One of the world’s most recognized brands Consistently named in the top 10 global brands along with Coke and Disney One of the largest retail property owners in the world Estimated owned and controlled real estate market value of $46 billion (1) Estimated 18,000 restaurants where McDonald’s owns land and/or building Significant free cash flow business

________________________________________________ (1) Based on Pershing’s assumptions. See

page 64 in the appendix.
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I.

Overview of McDonald’s

Historical Financial Performance

Following declines in same-store sales and profitability in 2001 and 2002, Management has improved operations through product innovation, capital discipline and strong execution. As a result, the Company’s profitability has increased.

McDonald’s Historical Revenue and EBITDA Performance
($ in millions)
$20,000

(1)

$19,065 $17,141 $14,243 $14,870 $15,406

30.0%

Revenue / EBITDA

$15,000

28.5% EBITDA Margin

$10,000

27.0%

$5,000 $4,144 $0 $4,041 $3,997 $4,512 $5,183

25.5%

24.0%

Same-store Sales Growth

2000

2001

2002

2003

2004

0.6%

(1.3%)
EBITDA

(2.1%)
Revenue
6

2.4%
EBITDA Margin

6.9%

________________________________________________ (1) EBITDA is adjusted for certain non-recurring

and non-cash items.

I.

Overview of McDonald’s

Historical Financial Performance (Cont’d)

As a result of the Company’s improved capital allocation, pre-tax unlevered free cash flow has increased from a five-year low of $2.0 billion in 2002 to $3.5 billion in 2004.
Historical Pre-Tax Unlevered Free Cash Flow(1) Performance
($ in millions)
$4,000 $3,483 $3,205 26%

$3,000 EBITDA – CapEx

22% Margin (%)

$2,000

$2,199

$2,134

$1,994

18.7%

18.3%

18%

$1,000

15.4%

14.4% 12.9%

14%

$0 2000A 2000 2001A 2001 EBITDA – CapEx 2002A 2002 2003A 2003 Margin % 2004A 2004

10%

_______________________________________________ (1)

Denotes Adjusted EBITDA – CapEx. Adjusted EBITDA is adjusted for certain non-recurring and non-cash expenses.
7

I.

Overview of McDonald’s

Stock Price Performance

Although McDonald's stock has rebounded from its 2003 lows, it has been range bound in the low $30s for the past five years and is significantly off of its high of $48 per share reached in 1999.

McDonald’s Stock Price Performance
($ per share)

$50.00

High of $48.32 11/12/99

$40.00

$30.00

$20.00

$10.00 11/12/99

07/12/00

03/12/01

11/10/01

07/11/02

03/11/03

11/09/03

07/09/04

03/09/05

11/07/05

8

I.

Overview of McDonald’s

5-Year Indexed Stock Performance

Over the past five years, McDonald’s has only slightly outperformed the S&P 500 while its QSR peer group has vastly outperformed the index.
McDonald's 2.4% S&P 500 (9.6%) QSR Index 177.3%

5-Year Indexed Stock Performance
350 300 250 200 150 100 50 0 11/10/00

5 Year Indexed Performance

QSR

MCD S&P

06/01/01

12/21/01

07/12/02

01/31/03

08/22/03 QSR Comp
(1)

03/12/04 S&P 500

10/01/04

04/22/05

11/11/05

McDonald's
________________________________________________ (1) Includes YUM and WEN.

9

I.

Overview of McDonald’s

McDonald’s versus its Peers

Despite McDonald’s strong real estate assets, number one QSR market position and leading brand, McDonald’s trades at a discount to its peers. We believe this discount is due to a fundamental misconception about McDonald’s business.

EV / ’06E EBITDA
10.0x 9.5x 9.0x 8.5x 8.0x 7.5x 30-Day Average Trailing
(1)

9.3x 8.7x 8.9x

W EN

YUM

P / ‘06E EPS
2 5 .0 x 2 0 .4 x 2 0 .0 x 1 5 .6 x 1 5 .0 x 1 0 .0 x 5 .0 x 0 .0 x 3 0 -D a y A v e ra g e T ra ilin g
(1 )

1 6 .7 x

W EN

YUM

Long-Term EPS Growth
________________________________________________ (1)

9%

12%

12%

McDonald’s stock price is based on a 30-day average trailing price as of 11/11/05.
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II. Pershing’s View of McDonald's

II.

Pershing’s View of McDonald's

McDonald’s: How the System Works…

Landlord, Franchisor, Restaurant Operator
Franchisor: Franchises brand and collects fee Operator: Operates 9,000 McDonald’s restaurants Landlord: Buys and develops real estate and leases to its franchisees Real Estate and Franchise estimated pre-tax ROI of 17.5%(1):
Cost of Land Cost of Building Total Cost Est. Average Unit Sales Rent as a % of Sales Franchise Income as % of sales Rental Income Franchise Income Total Income Unlevered Pre Tax ROIC
________________________________________________

Franchisees
Franchise Fee: 4% of restaurant sales Rent: greater of a minimum rent or a percentage of restaurant sales (current avg. ~9% of sales) Franchisee bears all maintenance capital costs

$650k 650k $1,300k $1,750k 9.0% 4.0% $158 70 $228 17.5%

(1)

Illustrative return based on Pershing’s assumptions for the cost of land and building and approximate average unit sales in 2004. 12

II.

Pershing’s View of McDonald's

A Landlord, Franchisor and Restaurant Operator

Real Estate and Franchise Business

McOpCo

Landlord
McDonald’s controls substantially all of its systemwide real estate Estimated 11,700 restaurants where McDonald’s owns both the land and buildings and 7,000 restaurants where McDonald’s owns only the buildings (1) Estimated $1.3 billion of income generated from subleases Estimated real estate value: $46 billion or ~94% of current Enterprise Value (2)
________________________________________________

Franchisor
Approximately 32,000 restaurants where McDonald’s receives 4% of unit sales

Restaurant Operator
Approximately 9,000 Companyoperated restaurants

Reported financials have overstated margins due to a lack of transfer pricing Currently not charged a franchise fee Currently not charged a market rent

(1) (2)

Assumes that McDonald’s owns the land and buildings of 37% of its system wide units and owns the buildings of 22% of its system wide units. Valuation based on Pershing estimates. See page 64 for more detail on real estate valuation. 13

II.

Pershing’s View of McDonald's

Characteristics of Cash Flow Streams

Real Estate and Franchise Business

McOpCo

Landlord
Maintenance Capital Requirements: Risk Profile Minimal Triple net leases Very Stable / Minimal Risk Generates the greater of a minimum rent or a % of sales (current average ~ 9%) 70%–90% Margins Some real estate development expenses Minimal: 5.75%-6.5% Real estate holding companies typical asset beta: ~.40 Hard asset collateral Low

Franchisor
High

Restaurants
Significant maintenance capex Medium Risk High operating leverage Sensitivity to food costs 7%–10% Margins (1) High food, paper and labor costs Rent Franchise fee Medium: 8%-9% Mature QSR typical asset beta: ~.80-.90

Limited remodel subsidies as well as corporate capex Stable / Low Risk Low operating leverage Diverse and global customer base 30%–50% Margins

Typical EBITDA Margin: Typical average cost of capital:(2)

________________________________________________

Low: 6.5%-7.5% Choice Hotels, Coke and Pepsi – typical asset beta: ~.50-.60 Highly leveragable

(1) (2)

Typical margins are illustrative restaurant EBITDA margins and assume the payment of a market rent and franchisee fee, similar to a franchisee. Typical betas are Pershing approximations based on selected companies’ Barra predictive betas. Average cost of capital estimates are illustrative estimates based on average asset betas. 14

II.

Pershing’s View of McDonald's

Adjusting for Market Rent and Franchise Fees

In 2004, McDonald’s company-operated restaurants appeared to contribute 46% of total EBITDA. However, once adjusted for a franchise fee and a market rent fee, McOpCo constituted only 22% of total EBITDA, with the higher multiple Real Estate and Franchise businesses contributing 78% of total EBITDA.

2004 Total EBITDA As Reported

2004 Total EBITDA Adjusted for Market Rent and Franchise Fees

46% 54%

McOpCo

22%

McOpCo

55%
78%
Real Estate and Franchise
2004 EBITDA $2.4bn 2.8bn $5.2bn   % 46% 54% 100%

Real Estate and Franchise
McOpCo Real Estate and Franchise Total

McOpCo Real Estate and Franchise Total

2004 EBITDA $1.1bn 4.0bn $5.2bn

  % 22% 78% 100%

________________________________________________

Note: The analysis assumes that 75% of the total G&A is allocated to the Real Estate and Franchise business and 25% is allocated to McOpCo. McDonald’s management has indicated this is a conservative assumption regarding the Real Estate and Franchise business. Analysis excludes $441 mm of non-recurring other net operating expenses. . 15

II.

Pershing’s View of McDonald's

Adjusting for Market Rent and Franchise Fees (Cont’d)

Once adjusted for market rent and franchise fees, McOpCo would be contributing only 14% of total EBITDA-Maintenance Capex, with the Real Estate and Franchise business contributing 86% of total EBITDA-Maintenance Capex ,based on FY 2005E projections.
2005E Total EBITDA – Capex As Reported
Real Estate and Franchise McOpCo

2005E Total EBITDA – Capex Adjusted for Market Rent and Franchise Fees
Real Estate and Franchise McOpCo

14%

53%

47% 86%
'05 EBITDAMaint. Capex $1.9bn 2.2bn $4.1bn '05 EBITDAMaint. Capex $0.6bn 3.5bn $4.1bn

McOpCo PF McDonald's Total

  % 47% 53% 100%

McOpCo PF McDonald's Total

  % 14% 86% 100%

________________________________________________

The analysis assumes that 75% of the total G&A is allocated to the Real Estate and Franchise business and 25% is allocated to McOpCo. McDonald’s management has indicated this is a conservative assumption regarding the real estate and franchise business. In addition, we note that 2005E maintenance capex includes certain one-time capital expenditures related to systemwide remodeling program. Please see appendix for full reconciliation .
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II.

Pershing’s View of McDonald's

Reconciling McDonald’s 2004A P&L

Set forth below is a table which reconciles McOpCo’s, the Real Estate and Franchise businesses’ and stand-alone McDonald’s FY 2004A income statements, assuming McOpCo pays a market rent and franchise fee. The analysis demonstrates that the Real Estate and Franchise business contributed approximately 78% of total EBITDA.
(U.S. $ in millions) 2004 Income Statement Sales by Company Operated Restaurants Rent from Franchise and Affiliate Rest. Rent From Company Operated Rest. Franchise Fees From Franchise and Affiliate Rest. Franchise Fees From Company Operated Rest. Total Revenue Company Operated Expenses: Food and Paper Compensation & Benefits Non-Rent Occupancy and Other Expenses (excl. D&A) Company Operated D&A Company-Operated Rent Expense Additional Rent Payable to PropCo Franchise Fee Payable to FranCo Total Company Operated Expenses Franchised Restaurant Occupancy Costs Franchise PPE D&A Corporate G&A EBIT Depreciation & Amortization EBITDA % of Total EBITDA
________________________________________________

McOpCo P&L $14,224

Real Estate and Franchise P&L 3,336 1,280 1,505 569 $6,690 347 583 $930 576 427 1,485 3,272 774 $4,046 78%

Inter-Company Eliminations

2004 Consolidated Sum of Parts $14,224 3,336 1,505 $19,065 4,853 3,726 2,164 774 583 $12,100 576 427 1,980 3,982 1,201 $5,183 100%

$14,224 3,336 1,505 $19,065 4,853 3,726 2,164 774 583 $12,100 576 427 1,980 3,982 1,201 $5,183 100%

(1,280) (569) ($1,849) (583) (697) (569) ($1,849) -

$14,224 4,853 3,726 2,164 427 583 697 569 $13,019 495 710 427 $1,137 22%

$0

.

The analysis assumes that 75% of the total G&A is allocated to the Real Estate and Franchise business and 25% is allocated to McOpCo. McDonald’s management has indicated this is a conservative assumption regarding the real estate and franchise business. Note: Analysis excludes $441 mm of non-recurring other net operating expenses. 17

II.

Pershing’s View of McDonald's

Historical EBITDA by Business Type: As Currently Reported

Assuming 75% of G&A is allocated to the Real Estate and Franchise business, an allocation that McDonald’s management indicates is conservative, we indicate below the EBITDA for McOpCo and the Real Estate and Franchise businesses, as depicted in the reported financials. We note that McOpCo has historically appeared to contribute approximately ~45% of consolidated EBITDA.
McDonald’s Consolidated EBITDA
($ in millions)
$6.0 $5.0 $4.0 $3.0 $2.0 $1.0 $0.0

$5,183 $4,144 $1,995 $4,041 $1,893 $3,997 $1,841 $4,512 $2,072 $2,403

McOpCo

~45%
$2,780

$2,149 2000

$2,148 2001

$2,156 2002
Real Estate and Franchise McOpCo

$2,440

Real Estate and Franchise

~55%
2003 2004

________________________________________________

Assumes McOpCo G&A to be 25% of consolidated G&A and Real Estate and Franchise G&A to be 75% of consolidated G&A. Management has indicated this is a conservative assumption regarding the Real Estate and Franchise business.
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II.

Pershing’s View of McDonald's

Historical EBITDA by Business Type: Adjusted for a Market Rent and Franchise Fee

Despite an economic recession in 2001-2003, significant dips in McDonald’s system wide samestore sales growth and declines in McDonald’s stock prices, the Real Estate and Franchise business has grown every year over the last five years.
McDonald’s Consolidated EBITDA ($ in millions)
$6.000 $5.000 $4.000 $3.000 $2.000 $1.000 $0.000 Real Estate and Franchise McOpCo

$5,183 $4,041 $900 $3,997 $828 $4,512 $944 $1,137

$4,144 $1,006

$3,138

$3,142

$3,169

$3,568

$4,046

Real Estate and Franchise ~80%

2000
Samestore sales McOpCo Growth 0.6% (1.1%)

2001

2002

2003

2004

(1.3%) (10.6%) 0.1%

(2.1%) (7.9%) 0.9%

2.4% 14.0% 12.6%

6.9% 20.4% 13.4%

RE/Franchise Growth (0.5)%
________________________________________________

Notes: Assumes McOpCo G&A to be 25% of consolidated G&A and Real Estate and Franchise G&A to be 75% of consolidated G&A. Assumes McOpCo pays franchise fees of 4% of sales and rent of 9% of sales. 19

II.

Pershing’s View of McDonald's

Real Estate and Franchise Business: Stable and Growing

McDonald’s Consolidated EBITDA
($ in billions)

Based on Pershing Assumptions
$6.0 $5.0 $4.0 $3.0 $2.0 $1.0 $0.0

Based on Reported Financials

$0.5 $1.5 1990

$0.5 $1.6 1991
2.3%

$0.6 $1.8 1992
18.1%

$0.6 $1.9 1993
(2.2%)

$0.7 $2.1

$0.7 $2.5

$0.8

$0.8

$1.0

$1.0

$1.0

$0.9

$0.8

$0.9

$1.1
McOpCo

$2.6

$2.7

$2.9

$3.2

$3.1

$3.1

$3.2

$3.6

$4.0

Real Estate and Franchise

1994
17.0%

1995
14.1%

1996
3.6%

1997
6.3%

1998
18.0%

1999
5.1%

2000
(1.1%)

2001
(10.6%)

2002
(7.9%)

2003
14.0%

2004
20.4%

McOpCo EBITDA Growth Real Estate & Franchise EBITDA Growth: Change in Year-End Stock Price: (15.6%)

4.9%

11.7%

8.5%

10.4%

15.3%

4.0%

4.3%

10.1%

7.4%

(0.5%)

0.1%

0.9%

12.6%

13.4%

30.5%

28.3%

16.9%

2.6%

54.3%

0.6%

5.2%

60.9%

5.0%

(15.7%)

(22.1%)

(39.3%)

54.4%

29.1%

________________________________________________

Notes: Assumes McOpCo G&A to be 25% of consolidated G&A and Real Estate and Franchise G&A to be 75% of consolidated G&A. Assumes McOpCo pays franchise fees of 4% of sales and rent of 9% of sales. 20

II.

Pershing’s View of McDonald's

Historical Perspectives on McOpCo

McDonald’s did not historically operate restaurants The Company initially entered the business of operating restaurants only as a defensive measure
Limited number of restaurants “The idea emerged that we should operate a base of ten or so stores as a company. This would give us a firm base of income in the event the McDonald brothers claimed default on our contract…” (1) --Ray Kroc / Founder

Expansion of McOpCo units first occurred in the late 1960s
Veteran franchisees were approaching retirement and needed liquidity McDonald’s stock was provided as a tax-free exchange for the restaurants “Some of our operators had tremendous wealth but no money. And we were using McDonald’s stock that was trading at 25 times earnings to buy restaurants for seven times earnings” (2) --Fred Turner / Former President and CEO

Turner realized in the mid 70s that owning too many McOpCo units was not in the best interest of the Company
________________________________________________

(1) (2)

From Grinding It Out: The Making of McDonald’s, p. 108. From McDonald’s: Behind the Golden Arches, pgs. 288 - 291.

21

can inherently do a better job than a chain manager. Illustrative leverage and equity return figures.II.30% Low teens Salaried employee/ corporate manager 22 LLC / Partnership No corporate level tax 75% .” (1) --Fred Turner / Former President and CEO Illustrative Characteristics of Company Operated versus Franchisee Operated Restaurants (2) Company Operated Structure Taxes Leverage Levered Returns General manager ________________________________________________ Franchisee Operated C-Corporation Corporate level tax 10% . Not based on company data.291.90% 40% and higher Owner / Entrepreneur (1) (2) From McDonald’s: Behind the Golden Arches. 288 . pgs. with his personal interests and incentives. Pershing’s View of McDonald's Superior Franchisee Economics “Running a McDonald’s is a 363-day-a-year business and an owner/operator. .

Pershing’s Proposal to McDonald's: McOpCo IPO .III.

III.35 bn of Net Debt allocated to McOpCo Step 2: Issue Debt and Pursue Leveraged Self Tender Issue $14.27bn of after tax proceeds Assumes a 7x EV/FY’06E EBITDA multiple Assumes $1. Pershing’s Proposal to McDonald's: McOpCo IPO Pershing’s Proposal: McOpCo IPO Step 1: IPO of 65% McOpCo IPO 65% of McOpCo IPO generates estimated $3.7bn of financing secured against PF McDonald’s real estate Debt financing and IPO proceeds used to Refinance all of the existing $5 bn of net debt at Pro Forma McDonald’s Repurchase 316mm shares at $40 per share Pay $300mm in fees and transaction costs 24 .

III. McOpCo signs market lease and franchise agreements with Pro Forma McDonald’s (“PF McDonald’s”) PropCo FranCo Resulting Pro Forma McDonald’s is a world-class real estate and franchise business McOpCo financials deconsolidated from PF McDonald’s Leverage is placed only on PropCo FranCo is unlevered. maximizing its credit rating 25 . Pershing’s Proposal to McDonald's: McOpCo IPO Pershing’s Proposal: McOpCo IPO (cont’d) Pro Forma IPO 65% McOpCo At the time of IPO.

attractive FCF profile (35% levered FCF margins) and world-class real estate/franchise assets Separation of McOpCo highlights the significant value of rental income and franchise fees currently eliminated in consolidation Enhances management focus and incentives at both entities Enhances ability to attract and retain top McOpCo management Allows PF McDonald’s management team to focus on new product innovation.III. Significant value creation for shareholders PF McDonald’s would trade at an approximate 37%–52% premium over where it trades today. stronger real estate development programs and higher quality franchisee performance monitoring / training ________________________________________________ (1) Based on recent stock price of $33 per share. improved marketing efforts. 26 . Pershing’s Proposal to McDonald's: McOpCo IPO McOpCo IPO: A Transformational Transaction An IPO of McOpCo would have several positive strategic and financial implications for both Pro Forma McDonald’s as well as McOpCo. in the range of approximately $45–50 per share (1) Creates investor transparency Deconsolidation provides investors with transparent insight into PF McDonald’s profitability (60% EBITDA margins).

20% 7.7% 27 $7.816 5.440 33.059 14.5% .15% (1) 5% .8% 4.Maint.10% We note that CapEx projections are net of proceeds obtained from store closures.651 22.III.739 50.5% 10% .3% 3.393 4. (1) Typical QSR margin based on Wall Street estimates for YUM! Brands and Wendy’s.594 26.12.6% 4.9% 4.335 20.025 54.4% 3. Capex Margin FCF FCF Margin ________________________________________________ $20.4% 2. .0% 15% .464 60. Pershing’s Proposal to McDonald's: McOpCo IPO A Transformational Transaction (Cont'd) Improves operating and financial metrics at every level Significantly improves PF McDonald’s EBITDA and free cash flow margins Enhances return on capital and overall capital allocation for the PF McDonald’s Improves ability of PF McDonald’s to pay significant ongoing dividends Typical Standalone $ in millions Pro Forma FY 2006E Mature QSR FY 2006E Revenue EBITDA EBITDA Margin EBITDA-Capex EBITDA-Capex Margin EBITDA-Maintenance Capex EBITDA .

28 . Pershing’s Proposal to McDonald's: McOpCo IPO A Transformational Transaction (Cont'd) An IPO of McOpCo would have several positive strategic and financial implications for both Pro Forma McDonald’s as well as McOpCo. the holding company.III. remains investment grade Improves alignment with franchisees (1) Allows for share buybacks of higher return business Separation of McOpCo allows for share buybacks to be targeted predominantly at PF McDonald’s. the stronger free cash flow business ________________________________________________ (1) Will be discussed at length later in the presentation. Will likely lead to improved operating margins at McOpCo Separation from PF McDonald’s will make margin improvement an imperative Improves capital structure while maintaining investment grade credit rating Low-cost secured debt to replace current debt or issued incrementally on current structure Cheap CMBS structured financing issued at PropCo could judiciously utilize strong real estate collateral CMBS financing is non-recourse to McDonald’s (parent) FranCo remains unlevered and is at least a AA credit PF McDonald’s.

III. with unanimous support from the Wall Street research analyst community Allows for an accelerated McOpCo refranchising program Increases overall size of PF McDonald’s investor base Strong potential to attract both dividend / income-focused investors and real estate-focused investors 29 . which will help in: managing the McDonald’s brand extending new products through the franchisee system remaining in touch with unit-level economics and issues Supported by highly similar. successful precedent transactions Coca Cola Company carved-out its owned bottling operations in 1986 in what is widely viewed as one of the most successful restructurings of all time PepsiCo followed suit in a similar transaction in 1999. Pershing’s Proposal to McDonald's: McOpCo IPO A Transformational Transaction (Cont'd) An IPO of McOpCo would have several positive strategic and financial implications for both McDonald’s as well as McOpCo. Allows for a voice in McOpCo through governance Given its 35% stake in McOpCo post spin-off. PF McDonald’s will be able to elect several Board seats to the new entity Governance affords visibility in McOpCo operations.

3x 24.75% NA High Branded Intangible Property Choice Hotels 66% 61% 16% 23% 18% 11% 31% 27% 9% 2005E Operating Metrics: EBITDA Margins EBITDA – CapEx Margins EPS Growth Trading Multiples Adjusted Enterprise Value CY 2006E EBITDA CY 2006E EBITDA – CapEx Price / CY 2006E EPS CY 2006E FCF (3) (2) 60% 50% 9% / ~8.60% 1.5 % . Pershing’s Proposal to McDonald's: McOpCo IPO Publicly Traded Comparable Companies PF McDonald’s operating metrics are much closer to a typical Real Estate C-Corporation or a high branded intellectual property business such as PepsiCo or Coca-Cola than they are a typical mature QSR.7x 11% 0.20x NA ~20x . Projections based on Wall Street estimates.15x ~13x .6x 14.1x 16.9x Leverage Multiples Net Debt / EBITDA Total Debt / Enterprise Value ________________________________________________ ~0.8x 18.10x ~35% . (2) Adjusted for unconsolidated assets.2x ~15x .8x ~7.20x 15.5% ~10% .1.3x 15.16x ~17x .1x 20.0x 20. 30 .5x 12.5x . (1) Typical mature QSR based on YUM! Brands and Wendy’s.5x ~12x .19x ~16x .20% ~5x . Pro Forma Typical Mature (1) QSR ~15% .20% ~7.5x .9.12.12% Typical Real Estate C-Corp ~70% .III.25x 24.80% ~65% .0x 4% NM 4% Stock prices as of 11/11/05.5% .0x 12.8x 18. (3) FCF denotes Net Income plus D&A less CapEx.

1x 15.9x 16.0x 15.2x 19. Pershing’s Proposal to McDonald's: McOpCo IPO REITs: Typical Trading Multiples We believe REITs trade in the range of 13x-17x EV/’06E EBITDA.4x 12.8% 4.8% 3.2% 4.7x Div.4x 16.8x 14.4% 4. EBITDA 14.9x 18. depending on the type of real estate and the businesses the properties support.8x ________________________________________________ Based on Wall Street research estimates at the time of Pershing’s initial Proposal to the Company.5x 15.4x P / '06E AFFO 13.7x 14.4x 19.7% 3.8% P / '06E FFO 12.3x 17.5x 13.3% 4.3x 17.6x 13.5% 6.2x 16.2x 16. EV / '06E Company Health Care Industrial Multifamily Office Regional Mall Self Storage Strip Center Triple Net Lease REIT Industry Total / Wtd.6x 13.8x 14. Avg. 31 .8% 4.6x 16. Yield 6.3x 16.3x 17.7x 16.5x 13.III.

Low 12.5x $55. Assumes a recent stock price of $33.263 14. assumes $9.247 957.3% 22.097 $43.3 $50 52.2x EV/'06E EBITDA Multiple Range Enterprise Value Less: Net Debt (12/31/05E) Equity Value Ending Shares Outstanding (12/31/05E) (3) Price Per Share Premium to recent price (4) Implied P/FY 2006 EPS Multiple 14.493 $48.650 2.5x– 13.35 bn of net debt allocated (2) (3) (4) (5) to McOpCo and $5.0 bn of net debt allocated to PF McDonald’s. 32 .9x Plus: Remaining Stake in McOpCo (2) Implied P/FY 2006 FCF Multiple (5) Implied FCF / Dividend Yield 19. P / FY ’06E FCF multiple adjusted for Pro Forma McDonald’s 35% stake in McOpCo. We believe PF McDonald’s would trade at a 37%–52% premium over where it trades today.5x $60. Assumes incremental leverage and the after-tax proceeds from McOpCo IPO (net of fees and expenses) are used to buy back approximately 316 mm shares at an average price of $40. In addition.5x EV/CY ’06E EBITDA. Represents 35% of the market equity value of McOpCo.9% 19.1% 21.650 2.7 bn of incremental leverage placed on PF McDonald’s.8x 5.III.799 (1) High 13. Pershing’s Proposal to McDonald's: McOpCo IPO Significant Value Creation for Shareholders $ in millions Based on relevant publicly traded comparable companies. including several real estate holding CCorporations.6% ________________________________________________ (1) Assumes $1.3 $45 36.106 957.9x 4. Pro Forma McDonald’s would trade in the range of 12.

5x EV/’06E EBITDA.350 $5.III.042 High 7.1 billion of equity market value or 6.274 $4. McOpCo Financial Summary $ in millions McOpCo Financial Summary Company operated revenues Segment EBITDA.122 1.130 7.0% $1.350 $7. 33 .690 11.0% 560 25.993 1.497 EV/'06E EBITDA Multiple Range McOpCo Enterprise Value Net Debt (12/31/05) Equity Value of McOpCo Ending Shares Outstanding Price per share Estimated After-Tax IPO Proceeds (1) See appendix for after-tax IPO proceeds schedule ________________________________________________ (1) See appendix for McOpCo IPO after-tax proceeds schedule.5x $8. Pershing’s Proposal to McDonald's: McOpCo IPO McOpCo Valuation Summary and Potential IPO Proceeds McOpCo would likely be valued at $6.70 $3.5x–7.24 $ in millions McOpCo Valuation Summary Low 6.274 $5.429 1.59 $3.3% $308 $0.0 billion to $7. pre G&A Assumed G&A for McOpCo Assumed G&A as a Percentage of Total G&A EBITDA post G&A EBITDA Margins Net Income EPS FY 2006E $15. pre G&A EBITDA Margin.5x $7.343 1.472 1.

685 ($300) $3.275 3.1% 21.9x 4. In addition. PF McDonald’s could be worth $47.7 billion of incremental leverage placed on PF McDonald’s.141 $2. Pre G&A Real Estate EBITDA.0 billion of net debt allocated to PF McDonald’s.650 2. Based on the midpoint of the valuation analysis.275 5.35 billion of net debt allocated to McOpCo and $5. Represents 35% of the market equity value of McOpCo. PF McDonald's Summary Financials $ in millions Financial Summary Franchise Revenue Real Estate Revenue Total Revenue Franchise EBITDA. P / FY ’06E FCF multiple adjusted for Pro Forma McDonald’s 35% stake in McOpCo. Assumes a recent stock price of $33.5x $55.650 2.0% $4. Pre G&A Less: Allocated G&A Assumed G&A as a Percentage of Total G&A Total EBITDA EBITDA Margins Net Income EPS FY 2006E $2.263 14.118 $7.869 1.4% 2.8x 5.5x $60.9% 19.2x EV/'06E EBITDA Multiple Range Enterprise Value Less: Net Debt (12/31/05E) Equity Value Ending Shares Outstanding (12/31/05E) Price Per Share Premium to recent price (4) Implied P/FY 2006 EPS Multiple (3) 14.9x Plus: Remaining Stake in McOpCo Implied P/FY 2006 FCF Multiple Implied FCF / Dividend Yield (5) 19. Fees and expenses associated with the IPO and financing transactions.3% 22. Pershing’s Proposal to McDonald's: McOpCo IPO Pro Forma McDonald’s: Valuation Summary The valuation of PF McDonald’s suggests a valuation range of $45–$50 per share.3 $50 52. Assumes incremental leverage and the after-tax proceeds from McOpCo IPO (net of fees and expenses) are used to buy back approximately shares 316 million shares at an average price of $40.393 $2.247 957.097 $43.III.680 75.106 957. a 44% premium over where it trades today.3 $45 36.493 $48. 34 .6% Memo:Share Buyback: Incremental Debt Issued Less Transaction Fees and Expenses (6) Approximate Cash Received From IPO.464 60.27 $ in millions PF McDonald's Valuation Low 12. assumes $9.654 316 $40 ________________________________________________ (1) (2) (3) (4) (5) (6) Assumes $1.50 per share. after Tax Total Funds Available for Repurchase # of shares repurchased (mm) Average price of stock purchased $9.270 $12.799 (1) (2) High 13.

4x Investment Grade 24.350) $4.535 150 $14.685 $14. buyback shares and pay financing fees and expenses. Pro Forma McDonald’s would be leveraged approximately 3. We have assumed a 5% fixed rate for this collateralized financing.650 35 .5x Total Debt/EBITDA or at a 25% Debt to Enterprise Value ratio.650 3.7 of net debt.650 PF McDonald's Capital Structure Total Net Debt at Stand-alone McDonalds Less: Net Debt Allocated to McOpCo Net Debt at PF McDonalds Incremental Debt Issued through CMBS Total Net Debt Total Debt / EBITDA Net Debt / EBITDA Assumed Corporate Credit Total Debt / Total Capitalization FY2005E $6.965 9.315 (1. $ in millions Sources New CMBS Financing (net of cash) Percentage Loan to Value Total $14.7 bn issuance of secured collateralized financing (net of cash on hand).III. Proceeds from this issuance would be used to repay existing debt. or an incremental $9. Pershing’s Proposal to McDonald's: McOpCo IPO Capitalization and Credit Profile of Pro Forma McDonald’s Set forth below are the sources and uses of proceeds associated with a $14.5% Uses Repay Existing Net Debt at PF McDonald's Buyback Shares Fees and Expenses Total $4. After this transaction.5x 3. based on expected net debt as of FY 2005E.650 44% $14.965 9.

0x 0.0x 9.3x 8. .8x (2) 2.5x BBB 2.2x Brookfield Properties British Land Land Securities Forest City Enterprises Pro Forma Debt / Enterprise Value 100% 75% 50% 25% 0% Brookfield Properties British Land Land Securities Forest City Enterprises 25% 48% 56% 35% 59% Pro Forma EBITDA/Interest: Rating: ________________________________________________ (1) (2) 5. Pro Forma McDonald’s EV assumes a valuation multiple of 13x EV/FY’06 EBITDA. Pershing’s Proposal to McDonald's: McOpCo IPO Total Debt / ’05E EBITDA 12.1x 6.0x 3.0x 6.0x 3.5x NR NA BB+ Based on Wall Street research estimates. Assumes an average 5% fixed rate on PF McDonald’s debt.III.3x BBB 36 1.5x (1) Comparing PF McDonald’s Credit Stats with Comparable Real Estate Holding C-Corporations 11.1x 10.

Kimco Realty Corp.4% 31.4% 38.5% 33.2% 50. 37 . Company Name Simon Property Group Inc. Equity Office Properties Trust Vornado Realty Trust Equity Residential Prologis Archstone-Smith Trust Boston Properties Inc.5% 36.0% 25. PF McDonald’s EV assumes a valuation multiple of 13x EV/FY’06 EBITDA.9% 37.III. AvalonBay Communities Inc. Pershing’s Proposal to McDonald's: McOpCo IPO Credit Ratings of Large Public REITs A review of large REITs indicates that these businesses support investment grade ratings with a debt to enterprise value of 36% on average. Total Debt/ Enterprise Value 47. Total Debt includes Preferred.2% 27. as compared to Pro Forma McDonald’s which would have a debt to enterprise value of 25%.3% Moody's Rating Baa2 Baa3 Baa3 Baa1 Baa1 Baa1 NR Baa1 Baa1 Moody's Outlook Stable Stable Stable Stable Stable Stable NR Stable Stable S&P Rating BBB+ BBB+ BBB+ BBB+ BBB+ BBB+ BBB+ ABBB+ S&P Outlook Stable Stable Stable Stable Stable Stable Stable Stable Stable Median Total Debt/EV Average Total Debt/EV PF McDonald's Total Debt/EV 36% 36% 25% ________________________________________________ Notes: Stock prices as of 11/11/2005.

whereas Pro Forma McDonald’s has much more credit flexibility PF McDonald’s has significant brand value to support its cash flows and overall credit 38 .III. Pershing’s Proposal to McDonald's: McOpCo IPO Pro Forma McDonald’s Has A Superior Credit Profile to a Typical REIT Despite being a C-Corp and lacking the tax advantages of a REIT. PF McDonald’s has several superior credit characteristics REITs are required to pay 90% of earnings through dividends.

Company Response to Pershing .IV.

IV. Company Response to Pershing Company Response to Pershing McDonald’s asked its Advisors to help review the Proposal Goal was to review the proposal to assess 4 critical areas: Advisors reported back with judgments on (1) Valuation (2) Credit Impact McDonald’s Management reviewed the Proposal to assess (3) Friction Costs (4) Governance / Alignment Issues 40 .

none of these issues would prevent a restructuring 41 . but not a gating issue Credit Impact Incremental $9bn of leverage as proposed may put pressure on credit rating Alignment Issues Separation of McOpCo from PF McDonald’s may cause alignment issues in the system Potential property tax revaluations Legal costs Large transaction for CMBS market Mostly driven by CMBS financing Rating agency consolidation of McOpCo Lease commitments viewed as leverage McDonald’s management stated that.IV. Company Response to Pershing Management Concerns: Friction Costs. assuming adequate value creation. Credit Impact and Governance Issues Friction Costs Some friction costs associated with the CMBS financing structure.

Company Response to Pershing Valuation: Judgments Made by Advisors Advisors were assigned to review the Proposal In general. their judgment was that PF McDonald’s would not enjoy significant multiple expansion “PF McDonald’s would trade like a restaurant stock” 42 . Advisors agreed with Pershing on: McOpCo valuation Relative allocation of EBITDA between McOpCo and PF McDonald’s However.IV.

V. Developing a Response to the Company .

Developing a Response to the Company Pershing’s Response Regarding Friction Costs and Credit Impact Friction Costs Friction costs immaterial in the context of value creation Friction costs and transaction delays were driven by CMBS financing Similar transaction could be effected with corporate debt Credit Impact Stability of PF McDonald’s cash flow stream and robust asset base should allow it to incur additional debt without a material adverse change in rating YUM’s credit rating is BBB- 44 .V.

35% shareholder and board member. leaves them with ample skin in the game 45 . Developing a Response to the Company Franchisee Alignment: “Skin in the Game” Franchisor/Franchisee Conflict Top Line (percent of sales) vs. franchisor. many of the most successful franchisors operate few. Bottom Line Some believe this conflict is mitigated by owning and operating units However. if any. units Historical McDonald’s Subway Dunkin’ Donuts Tim Hortons McDonald’s current “skin in the game” is overstated due to lack of transfer pricing We believe McOpCo represents ~10% of McDonald’s total value PF McDonald’s role as landlord.V.

Big Mac.V. Developing a Response to the Company Franchisee Alignment: Benefits to Franchisees of an independent McOpCo McOpCo IPO would shift some power to the franchise base—A good thing Franchisees know what’s best operationally Franchisees have been the source of most product innovations (i. Filet-o-Fish. Egg McMuffin.e. Apple Pie) Driving force behind current process innovations (call centers at drivethru) IPO would sharpen focus on being best in class franchisor Level the playing field: McOpCo should compete on the same basis as franchisees Pay market rent and franchise fees Be focused on bottom-line profitability Be run by equity compensated management Opportunity for Franchisees to expand unit count Heavy demand among operators to acquire/manage additional units McOpCo should refranchise units better managed by franchisees 46 .

the key disparity between Pershing and the Company’s views was regarding the Valuation of Pro Forma McDonald’s… 47 .V. leverage and potential alignment issues. Developing a Response to the Company What It Boils Down To: Valuation of PF McDonald’s Although there are some differences in opinion regarding friction costs.

V. Developing a Response to the Company PF McDonald’s FY2005E EBITDA pre-G&A Contribution Pro Forma McDonald’s is Not a Restaurant Company Brand Royalty 37% 63% Real Estate 48 .

1x 20.5 % .0x 4% NM 4% ~0.9.2x ~8.V.8x ~7.5% . (1) Typical mature QSR based on YUM! Brands and Wendy’s.10x ~35% .19x ~16x .5x ~12x .25x 24.5x .3x 15. (2) Adjusted for unconsolidated assets.12. (3) FCF denotes Net Income plus D&A less CapEx.8x 18.0x 20.15x 21.16x ~17x .5x ~13x .20% Stock prices as of 11/11/05. Developing a Response to the Company Comparable Companies PF McDonald’s operating metrics are much closer to a typical Real Estate C-Corporation or a high branded intellectual property business such as PepsiCo or Coca-Cola than they are a typical QSR.75% NA High Branded Intangible Property Choice Hotels 66% 61% 16% 23% 18% 11% 31% 27% 9% Typical Mature QSR ~15% .12% 60% 50% 9% 13.4x 24% ~5x .20% ~7.0x 12.7x 11% 0.1x 20. Projections based on Wall Street estimates.0x 15.5x . Assumes PF McDonald’s price of ~$47. 49 .5% ~10% .5x 12.20x Leverage Multiples Net Debt / EBITDA Total Debt / Enterprise Value ________________________________________________ 3.1x 16.9x ~15x .6x 14.1.20x 15.9x NA ~20x .50 2005E Operating Metrics: EBITDA Margins EBITDA – CapEx Margins EPS Growth Trading Multiples Adjusted Enterprise Value (2) / CY 2006E EBITDA CY 2006E EBITDA – CapEx Price / CY 2006E EPS CY 2006E FCF (3) Pro Forma Typical Real Estate C-Corp ~70% .3x 24.80% ~65% .8x 18.60% 1.

85 6.7% $49.15 47.V.0 1.85 3.7) $2. (1) McDonald's Stock Price McOpCo Share Price (7x EV / EBITDA Multiple) Implied Pro Forma McDonald's Share Price Yield on Pro Forma McDonald's Memo: Pro Forma McDonald's Free Cash Flow 2006E EBITDA Less: Maintenance Capital Expenditures Less: Growth Capital Expenditures Plus / Less: Decreases / (Increases) in Working Capital Less: Interest (1) Less: Cash Taxes Free Cash Flow PFMcDonald's Shares Out (assuming no self-tender) Free Cash Flow per Share ________________________________________________ (1) $33.464.00 $5.15 31.00 $5.2% $45.112.00 $5.15 35.6% $4. 50 .383. (2) Assumes no incremental leverage and an average cost of debt of 5% on the existing $5 bn of net debt at Pro Forma McDonald’s.85 5.00 $5.85 5.15 43.15 27.7 $1.7%.6) (285.9) 6.7% $37.273.85 4.2 (250.0) (1. we estimate Pro Forma McDonald’s dividend / FCF yield would be approximately 6.9% $57.00 $5.85 3.15 51.87 Assuming PF McDonald’s pays out 100% of its FCF as dividends.85 4.00 $5. Developing a Response to the Company Significant Free Cash Flow Yield / Dividend Yield Assuming No Incremental Debt At McDonald’s current price of approximately $33 per share.15 39.00 $5.9% $41.0 (438.3% $53.

0% 1997 4.1% 1999 7.0 $1.5 $0.3% 1998 10.8 $1.0 1990 Real Estate & Franchise EBITDA Growth: ________________________________________________ 1991 4.0 $1.7 $2.1 $3.0 $1.V.6% 2004 13. Real Estate and Franchise EBITDA ($ in billions) Based on Pershing Assumptions $4.9 $2. 51 .1 $2.7% 1993 8. Developing a Response to the Company Pro Forma McDonald’s: Stable and Growing Pershing believes the best way to think about Pro Forma McDonald’s is as a growing annuity. Assumes McOpCo pays franchise fees of 4% of sales and rent of 9% of sales.2 $3.5%) 2001 0.5 $2.0 $2.6 $2.9% 2003 12.6 $4.4% 2000 (0.1 $3.9% 1992 11.4% Notes: Assumes McOpCo G&A to be 25% of consolidated G&A and Real Estate and Franchise G&A to be 75% of consolidated G&A.4% 1995 15.3% 1996 4.6 $1.2 $3.1% 2002 0.9 $3.5% 1994 10.0 Based on Reported Financials $3.

15 $50.6% Scenario 2 Proposed Sharebuyback PF McDonald's Stock Price Pre-Tax Yield (4) $28.9% 6.7% 5.1% 4. (2) Assumes full payout of free cash flows for PF McDonald’s.00 7. 52 .9% $55.9% 3.7% 3% . (3) Assumes 15% tax rate on PF McDonald’s dividend and a 35% tax rate on the REIT dividend.00 6.0% 2.00 3.00 8.00 4.0% $40.6% 3.9% $45.00 6.15 $35.5% After-Tax Investor Yield (4) Estimated LT Dividend Growth ________________________________________________ Note: Assumes a 7x EV / FY ’06E EBITDA multiple on McOpCo.1% Typical Large Retail REIT (1) 4.00 3.15 $45. Illustrative LT Dividend growth based on Pershing’s estimates.7% 5.15 5.00 4.15 5.00 4.6% $55.0% $50. Developing a Response to the Company Which Would You Rather Own: Pro Forma McDonald’s or a Large Retail REIT? McDonald's Stock Price McOpCo Stock Price PF McDonald's Stock Price Scenario 1: No Sharebuyback No Incremental Leverage Pre-Tax Yield (2) After-Tax Investor Yield (3) Estimated LT Dividend Growth $33.V.6% 3%.00 5.15 $28.7% 4.4% $45.1% 3.7% $35.4% 3% .00 5.15 5.15 5. (4) Scenario 2 Pre-Tax and After-Tax Yields are adjusted for a 35% stake in McOpCo.3% 3.2% $30.15 5.7% $35.8% 4.15 $40.9% 5.2% 4.3% $50.00 5.6% 3.15 $55. (1) Retail / REIT dividend yield based on Simon Property Group.00 5.3% $60.15 5.4% $40.15 $30.15 5.00 4.5% 7.

S. Treasury? McDonald's Stock Price McOpCo Stock Price PF McDonald's Stock Price Scenario 1: No Sharebuyback No Incremental Leverage Pre-Tax Yield (1) $33.6% 3.15 $28.00 5.9% 5.00 3.4% $40.8% 4.00 5.00 8.15 $40.15 5.2% $30.15 $30.15 $45.7% 5.9% 6.6% 3.9% $45.1% 3.00 5.00 5.2% 4.00 7.15 5.00 4.15 5.15 5.7% 4. (1) Assumes full payout of free cash flows for PF McDonald’s.15 5. (2) Assumes 15% tax rate on PF McDonald’s dividend and a 35% tax rate on the 10-Year Treasury dividend.5% 7.3% $50.7% $35.9% 3.15 $50.7% $35. 53 .5% 3% .00 4.3% $60.00 4.4% 3% . Developing a Response to the Company Which Would You Rather Own: Pro Forma McDonald’s or 10-Year U.0% $50.00 6.9% $55.V.0% $40.15 $35.4% 10 Year Treasury 4.4% After-Tax Investor Yield (3) Estimated LT Dividend Growth ________________________________________________ Note: Assumes a 7x EV / FY ’06E EBITDA multiple on McOpCo.15 $55.15 5.00 6.6% $55.3% 3.4% $45.7% 5.1% 4. (3) Scenario 2 Pre-Tax and After-Tax Yields are adjusted for a 35% stake in McOpCo.00 4.1% 3% .0% 0% After-Tax Investor Yield (2) Estimated LT Dividend Growth Scenario 2 Proposed Sharebuyback PF McDonald's Stock Price Pre-Tax Yield (3) $28.7% 3% .15 5.00 3.6% 3.

(2) Assumes 15% tax rate on PF McDonald’s dividend and a 35% tax rate on the TIPS dividend.5% After-Tax Investor Yield (3) Estimated LT Dividend Growth ________________________________________________ Note: Assumes a 7x EV / FY ’06E EBITDA multiple on McOpCo.00 7.15 5.3% $60.0% $50.00 5.V.1% 3.00 3.15 $45.15 $50.00 4.3% $50.8% 4.9% 6.15 $40.00 4.6% 3.00 5.7% $35.00 5.6% $55.9% $55.00 6.1% 3.00 4.9% $45.3% 3.6% 3.15 5.1% 10 Year TIPS 2.15 5.5% 7.00 8.0% $40.15 $35.9% 5.7% 5.4% $45.7% $35. (1) Assumes full payout of free cash flows for PF McDonald’s.15 $28.00 3.15 $55. Developing a Response to the Company Which Would You Rather Own: Pro Forma McDonald’s or a Treasury Inflation Protected Security (TIPS)? McDonald's Stock Price McOpCo Stock Price PF McDonald's Stock Price Scenario 1: No Sharebuyback No Incremental Leverage Pre-Tax Yield (1) After-Tax Investor Yield (2) Estimated LT Dividend Growth $33.5% Scenario 2 Proposed Sharebuyback PF McDonald's Stock Price Pre-Tax Yield (3) $28.15 5.7% 3% . (3) Scenario 2 Pre-Tax and After-Tax Yields are adjusted for a 35% stake in McOpCo.4% $40.15 5.15 5.00 6.4% 3% .2% 4.15 5.15 $30.00 5.7% 5.00 4.0% 2.2% $30. 54 .1% 4.7% 4.9% 3.

5.25% .25% 23. As such. Estimated Discount Rate Implied Perpetuity Growth Rate Implied FCF Yield Implied FCF Multiple FY'06E Free Cash Flow per Share (1) (Note: FCF Assumes Proposal Scenario) Low 7.5x $2. $2 per share). we believe that Pro Forma McDonald’s levered FCF could have a discount rate in the area 7.25% 19. we believe PF McDonald’s would have a FCF Yield of 4.00% 4.75%. 55 . Assumes a 7x EV / FY ’06E EBITDA McOpCo valuation multiple. Includes the value of PF McDonald’s 35% equity stake in McOpCo (approx.7.17 High 7.0x $2.25% .17 Midpoint of PF McDonald’s Equity Value per Share(2): $48 ________________________________________________ (1) (2) Assumes no dividend paid in FCF calculation.75% 2. Developing a Response to the Company Valuation of McDonald’s as a Growing Annuity Based on a review of the cost of capital of Real Estate holding corporations and Intangible Property / Franchise businesses like Coca Cola and Choice Hotels.V.25%.50% 5. This implies a midpoint equity valuation range of $48 per share.25% 3.

Developing a Response to the Company Conclusions McDonald’s is significantly undervalued today Over 80% of its cash flows comes from real estate income and franchise income Proposal creates value for several reasons Increases shareholder value Improves management focus Increases transparency Improves capital allocation Improves franchise alignment There are multiple ways to unlock value Pershing’s Initial Proposal Variations on Pershing’s Initial Proposal 56 .V.

Developing a Response to the Company Next Steps Engage constituents regarding proposal Shareholders Franchisees Broad investment community Incorporate your feedback Consider revised proposal 57 .V.

Developing a Response to the Company Q&A 58 .V.

Appendix .

A. Pershing’s Proposal: Assumptions .

15bn of total debt $150mm of cash and cash equivalents McOpCo’s tax basis is assumed to be approximately $1.65 billion Tax basis is equal to $3 billion of initial assumed basis (based on an assessment of net equipment and other property at McDonald’s) less $1. 65% of McOpCo shares are IPO’ed in the transaction 35% stake retained by PF McDonald’s allows for McOpCo’s business to be deconsolidated McOpCo is assumed to be essentially a debt free subsidiary Immediately prior to the IPO.A. $1.5 billion of total debt allocated $150mm of cash and cash equivalents allocated The remaining $5bn of FY ’05E net debt is allocated to PF McDonald’s $5. then the tax cost for the IPO would be the amount by which the IPO distribution exceeds McDonald's basis multiplied by McDonald’s corporate and state/local tax rate 61 .35 billion of allocated net debt To the extent that the IPO distribution exceeds PF McDonald’s tax basis in McOpCo.35bn of McDonald’s consolidated FY ’05E net debt is allocated to McOpCo $1. Pershing’s Proposal: Assumptions McOpCo IPO: General Assumptions Pershing has assumed the following structural and tax assumptions with respect to an IPO spin-off of McOpCo.

2 bn Note to McDonald’s PropCo Issues CMBS financing.2 billion of distribution less $1.2bn Note McOpCo McDonald’s retains 35% stake McOpCo McOpCo repays $4. after tax proceeds of the McOpCo IPO will be approximately $3.2bn.2 bn cash received $4. the tax cost would be approximately $1bn Tax cost equals $4.2 billion 62 PF McDonald’s is organized as a real estate business (“PropCo”) and a franchise business (“FranCo”) PropCo issues secured financing with proceeds used for Repaying existing debt at PF McDonald’s Buying back shares PF McDonald’s performs a self tender using proceeds from: New CMBS financings After tax proceeds of IPO .7bn of incremental debt FranCo No debt at FranCo McOpCo declares and pays a dividend to McDonald’s (parent) in the form of a Note in an amount equal to the anticipated proceeds from an initial public offering of McOpCo For illustrative purposes.2bn of IPO distribution.2bn Note to McDonald’s (parent) Step 2: IPO of McOpCo and Tax Costs Equity Markets IPO of McOpCo Shares Step 3: Leveraged Self-Tender at Pro Forma McDonald’s Pro Forma PF McDonald’s performs a leveraged self-tender $4.A. or $9. we assume the Note is for $4. The tax cost for the IPO would be the amount by which the IPO distribution exceeded McDonald's basis in the McOpCo stock multiplied by McDonald’s corporate and state/local tax rate Assuming a $4. Pershing’s Proposal: Assumptions McOpCo IPO: Structural And Tax Observations Step 1: McOpCo dividends a $4.5bn) McOpCo undertakes the IPO and uses the proceeds to repay the dividend note.65 billion of basis multiplied by the tax rate of 38% As such. or 65% of the equity market value of McOpCo (assumed to be $6.

270 .262 (993) $3.042 $4.262 High Average Book Basis of McOpCo Net Debt Allocated to McOpCo Adjusted Basis in McOpCo 3.630 $6.650 Taxable Gain Tax Rate Taxes payable $2.000 (1.000 (1.132) $3.980 38% $1.350) 1.630 (1.650 3.132 $2.000 (1.993 65% $3.350) 1.558 65% $4.245 38% $853 $2.A.350) 1.895 $7. Low Taxes payable McOpCo Equity Market Value IPO Percentage Distribution to PF McDonald's $5.612 38% $993 After Tax Proceeds Distribution Taxes Payable After Tax Distributions 63 $3.895 (853) $3. Pershing’s Proposal: Assumptions McOpCo IPO Proceeds McOpCo IPO After Tax Proceeds Set forth herein is a schedule of the after-tax proceeds from the McOpCo IPO.122 65% $4.497 $4.650 3.

Market Rent % Est.346 $6. # of Units Est.0% 8.0% $13.10 12.8 Estimated Leasehold Value 10.228 $46.428 Total Real Estate Collateral Value 64 . Rent Income Cap Rate Total Real Estate Value $ in million Property Value Owns Land and Building Owns Building (Leases Land) 1.0% 4. Rent Spread Per Avg unit Est.322.75 1. Market Rent $ Est.2 548.844. Rent Income.0% $26.08 11. # of Units Est.228 $13. then a preliminary valuation of McDonald’s real estate suggests a value of $33 billion. Annual Rev. Per Unit Est.200 $ in million Est.5% 0.16 0.975 1.962 1.A. Avg.3 Estimated Property Value 7.854 $33. Pershing’s Proposal: Assumptions Collateralized Financing Assuming PF McDonald’s owns the land and building of 37% of its system wide units and owns the buildings of 22% of its system wide units.709 6. Net Cap Rate Total Real Estate Value Leasehold Value Leaseholds 0.75 9.

66 0.484.0% 38.38 Total Debt & Preferred / TEV 56.6% 52.412.9 2.9 Total Debt $4.49 0.A.35 0.0 Preferred Stock 41. Factset.0% 38. Utilized treasury stock method.6 4.8% 4.86 0. Pepsico Inc.8% 60.498.208.7% 8.9% 7.7% 6.0% 9.9 3.0% 38.1 99.913.3% 34.034.2% 7.45 0.0% 38.3 Marginal Tax Rate 38.0 296.1 6.39 0.863.80 0.7 $67. Pershing’s Proposal: Assumptions PF McDonald’s: Cost of Capital We estimated the asset betas of several Real Estate holding C-Corporations and several high branded intellectual property businesses.2 $7.34 0.9 12.5% 59.0% Unlevered Beta 0.279.8% 58.859. High Branded Intangible Property Business Betas (Dollar values in millions) Adjusted Equity Beta 0.7 7.7 Marginal Tax Rate 38.2% 4.0 $369.49 Cost of Equity 7.1% Equity Value $8. 65 .64 Cost of Equity 8. company reports.3% 7.477. and Wall Street Equity research.965.0% 38.853.55 0.0% Unlevered Beta 0.346.2 $7.0% 8.7% 11.9 Total Debt $11.9 6.285.200.6 99.60 0.7 $3.0% 38.498.0% Company British Land Brookfield Properties Forest City Enterprises Land Securities Mean Median Note: Market information as of 11/10/05.200. Choice Hotels Mean Median Real Estate Business Betas (Dollar values in millions) Adjusted Equity Beta 0.776.0% 38.79 0.1 Preferred Stock 1.805.0% 38.7% Company Coca Cola Co.607.48 Total Debt & Preferred / TEV 4.0 $13.2% 8.66 0.45 0.391.0 5.62 0.2% 9.0 6.42 0.3 6.0 4.46 0. Sources: Barra.566.3% 7.3% Equity Value $101.57 0.48 0.0% 38.

7% 7.0% 35.9% 7.0% 20.4% 6.8% 7.3% 7.6% 6.9% Levered Beta 0.5% 6.1% 0.1% 6.50 6.60 7. company reports.46 0.6% 6.6% 0.6% 5.45 0.3% 7.8% 15.0% 6.3% 6.3% Equity Risk Premium 0.2% 6.0% 6.1% 5.1% 5. Sources: Barra. / TEV Implied Debt / Equity WACC % Contribution from Real Estate 60.1% 6.4% 6. Factset.2% 6.0% 3.4% 75.0% 38.9% 5.5% 6.A.9% 6.5% 6.60 6.50 5.5% Debt / TEV 4.3% 6.7% 7.65 6.45 6.0% 0.8% 0.4% 6. and Wall Street Equity research.55 6.0% 7.0% Asset Beta Average High Branded Intellectual Property Unlevered Asset Beta 0.3% 6. Pershing’s Proposal: Assumptions PF McDonald’s: Cost of Capital (Cont’d) Based on a blended asset beta calculation we determined a range of values for the WACC of PF McDonald’s.0% Blended Average Unlevered Asset Beta 0. Utilized treasury stock method.1% 7.0% 6.0% 0.7% 6.4% Note: Market information as of 11/10/05.0% 6.6% 6.0% 25.4% 6.65 7.45 5.8% 0.3% 0.8% 6. Blended Asset Beta Calculation Asset Beta Average Real Estate Unlevered Asset Beta Main Target Assumptions PreTax Cost of Debt Risk-Free Rate Equity Risk Premium Tax Rate WACC Calculation Unlevered Asset Beta Releverd Beta Levered Cost of Equity Equity Weight AfterTax Cost of Debt Target Debt & Pref.0% 33.57 % Contribution from High Branded Intellectual Property 40.8% 6.8% 6.3% 6.8% 6.0% 4.0% 0.0% 30.55 6. 66 .0% 5.38 WACC Sensitivity Analysis Levered Beta 0.56 7.7% 25.

B. PF McDonald's Financial Analysis .

growing at 2% Allocation of 75% of consolidated McDonald’s corporate CapEx Consolidated corporate CapEx held constant at 0.5% of systemwide unit growth Revenue drivers: Average systemwide same-store sales CAGR of ~2.0% .0% of McOpCo sales Cost drivers: Franchise rental expense based on a historical % of rental revenue from franchisees McOpCo rental expense based on a historical % of rental revenue from McOpCo D&A calculated assuming a 20-year useful life for existing net depreciable PP&E of approximately $12.0% of total franchise system unit growth annually or 1.3 million of CapEx for each new unit where Pro Forma McDonald’s owns the land and the building in 2005 and 2006.8 billion (net debt of $14.B.0% of franchise & affiliated system sales Franchise revenue from McOpCo of 4.5% annually Rental revenue from franchisees of 9.5% .0% of McOpCo sales Franchise revenue from franchisees of 4. and a 20-year useful life for depreciable PP&E purchased in the future 75% of SG&A allocated to Pro Forma McDonald’s Net CapEx drivers: All CapEx is net of proceeds received from store closures $1.2.7 billion.0% of franchise & affiliated system sales Rental revenue from McOpCo of 9.5 billion (excluding land).65bn) Free cash used to buy back shares and pay dividends $150 mm minimum cash balance Tax rate of 32% Minimal working capital requirements 25% Debt to Cap ratio increasing to 30% in 2008 Assumes an illustrative 30% dividend payout ratio to match current consolidated McDonald’s 68 . growing at an inflationary rate of 2. PF McDonald's Financial Analysis Pro Forma McDonald’s: Model Key Drivers Set forth herein are the assumptions for the Pro Forma McDonald’s business.0% thereafter $650K million of CapEx for each new unit where Pro Forma McDonald’s owns the building but not the land in 2005 and 2006. growing at an inflationary rate of 2. resulting in total debt of approximately $14.0% thereafter Run-rate maintenance CapEx of approximately $320 million. Net Unit Growth Approximates 1.1.7% of sales Other Incremental total debt of $9. implying approximately $10K per system wide unit.

183 100% $14.726 2.336 1.505 $19.780 54% 2004 Consolidated Sum of Parts $14. the Real Estate and Franchise businesses’ and stand-alone McDonald’s FY 2004 income statements. PF McDonald's Financial Analysis 2004 McDonald’s P&L As Reported McDonald’s Set forth below is table which reconciles McOpCo’s.505 $19.224 Real Estate and Franchise P&L 3.853 3.403 46% . The analysis demonstrates how McOpCo is paying neither a market rent nor a franchise fee.853 3.100 576 427 1.505 $4.976 427 $2.841 347 $347 576 427 1.982 1.224 4.336 1.753 495 1.982 1.224 3.485 2.726 2.065 4.B.980 3. D&A) Company Operated D&A Total Company Operated Expenses Franchised Restaurant Occupancy Costs Franchise PPE D&A Corporate G&A EBIT Depreciation & Amortization EBITDA % of Total EBITDA ________________________________________________ McOpCo P&L $14.201 $5. The analysis assumes that 75% of the total G&A is allocated to the Real Estate and Franchise business and 25% is allocated to McOpCo. as they are currently reported.747 774 $12.747 774 $12.853 3. Franchise Fees From Franchise and Affiliate Rest.183 100% $14. (U.100 576 427 1.726 2.065 4. then there would be a greater percentage of total EBITDA at the Real Estate and Franchise business than what is shown here.224 3.336 1.006 774 $2. Total Revenue Company Operated Expenses: Food and Paper Compensation & Benefits Occupancy and Other Expenses (excl. To the extent that there should be more G&A allocated to McOpCo. 69 .201 $5.980 3. $ in millions) 2004 Income Statement Sales by Company Operated Restaurants Rent from Franchise and Affiliate Rest.747 427 $11.S. Note: Analysis excludes $441 mm of non-recurring other net operating expenses.

211 5.354) (602) ($1.086 20% 501 585 14% $0 Assumes total PF McDonald’s D&A of approximately $712 million. (U.400 576 616 737 602 $13.956) (616) (737) (602) ($1.288 $5.362 100% 1.250 4.631 3.113 100% $15.Maintenance Capex % of Total EBITDA .174 4.578 1.354 1.578 1.113 100% (1.042 5.042 Pro Forma McDonald's P&L 3.863 600 499 2. 70 .578 1.277 80% 749 3.211 5.132 3.590 $20. which is composed of $499 million (or 70%) of franchise PP&E and $214 million (or 30%) of D&A associated with company-operated units.288 $5.075 1.590 $20. $ in millions) 2005 Projected Income Statement Sales by Company Operated Restaurants Rent from Franchise and Affiliate Rest.590 602 $7. D&A) Company Operated D&A Company-Operated Rent Expense Additional Rent Payable to PropCo Franchise Fee Payable to FranCo Total Company Operated Expenses Franchised Restaurant Occupancy Costs Franchise PPE D&A Corporate G&A EBIT Depreciation & Amortization EBITDA % of Total EBITDA Maintenance Capex EBITDA .989 544 510 576 $1. Franchise Fees From Company Operated Rest.926 2.564 712 $4. Rent From Company Operated Rest.362 100% 1. The analysis demonstrates the flow of rent income.B.Maintenance Capex ________________________________________________ (1) McOpCo P&L $15.956) - $15.926 2.174 4.926 2. Pro Forma McDonald’s and standalone McDonald’s FY 2005E income statements.075 1.042 3. franchise income and rent expense upon separation of the businesses.132 3.S. Total Revenue Company Operated Expenses: Food and Paper Compensation & Benefits Non-Rent Occupancy and Other Expenses (excl.250 4.124 214 616 $830 600 499 1. PF McDonald's Financial Analysis 2005E P&L Reconciliation Set forth below is a table which reconciles McOpCo’s. Franchise Fees From Franchise and Affiliate Rest.528 86% Inter-Company Eliminations 2005 Consolidated Sum of Parts $15.400 789 616 $12.863 600 499 2.400 789 616 $12.042 3.132 3.

389) (617) ($2. Franchise Fees From Company Operated Rest.429 3.006) (632) (756) (617) ($2.458 808 632 $13.264 4.429 5. .012 2. D&A) Company Operated D&A Company-Operated Rent Expense Additional Rent Payable to PropCo Franchise Fee Payable to FranCo Total Company Operated Expenses Franchised Restaurant Occupancy Costs Franchise PPE D&A Corporate G&A EBIT Depreciation & Amortization EBITDA from Operations % of Total EBITDA Maintenance Capex EBITDA .658 $20.012 2. Total Revenue Company Operated Expenses: Food and Paper Compensation & Benefits Non-Rent Occupancy and Other Expenses (excl.269 1.680 3.240 4. which is composed of $516 million (or 70%) of franchise PP&E and $221 million (or 30%) of D&A associated with 71 company-operated units. Franchise Fees From Franchise and Affiliate Rest.816 5. $ in millions) (U. PF McDonald's Financial Analysis 2006E P&L Reconciliation Set forth below is a table which reconciles McOpCo’s.727 737 $4.816 5.324 $5.S.174 617 516 2.B.006) $0 2006 Consolidated Sum of Parts $15. franchise income and rent expense upon separation of the businesses.Maintenance Capex ________________________________________________ (1) Assumes total PF McDonald’s D&A 2006 Projected Income Statement $15.458 587 632 756 617 $14. $ in millions) Sales by Company Operated Restaurants Rent from Franchise and Affiliate Rest.389 1.130 20% 504 626 13% Pro Forma McDonald's P&L 3.658 $20.S. Pro Forma McDonald’s and standalone McDonald’s FY 2006E income statements.264 4.651 100% of approximately $737 million.012 2.324 $5.464 80% 439 4. The analysis demonstrates the flow of rent income.269 1.327 560 542 587 $1.025 87% Inter-Company Eliminations (1.429 3.240 4.264 4.651 100% McOpCo P&L $15. (U. Rent From Company Operated Rest.658 617 $7.730 1.174 617 516 2.458 808 632 $13.730 1.594 100% 943 4.429 $15.Maintenance Capex % of Total EBITDA .594 100% 943 4.730 1.393 221 632 $853 617 516 1.

PF McDonald's Financial Analysis 2006E Net Capital Expenditures Reconciliation Set forth herein is a table which demonstrates net capital expenditures by category for McOpCo.B.S.$400mm of proceeds annually from closings. We note that the Company typically generates $300 . Net Existing Restaurants Corporate/Other Net Capital Expenditures $316 787 156 $1. Note: Our Free Cash Flows are derived using Net Capital Expenditures. PF McDonald’s and the standalone (consolidated) McDonald’s. $ in millions) Consolidated McDonald's New Restaurants. 2006E Net Capital Expenditures (U. net of proceeds received from closures.259 McOpCo $30 465 39 $534 Pro Forma McDonald's $286 322 117 $724 72 .

9% $3.0 11.24 773.739.276. except per share data) 2002A Income Statement Data Revenue % Growth EBITDA % Margin EBITDA .0 48.289.6% 4.6 51.CapEx % Margin D&A EBIT % Margin Net Interest Expense Equity Income from OpCo Net Income EPS Average Shares Outstanding 35. PF McDonald's Financial Analysis PF McDonald’s: Summary Income Statement Below are the summary projections for Pro Forma McDonald’s based on the assumptions detailed on page 68.0 2003A $6.8% $4.4% 2004A $6.9% $5.5 50.2% $3.596.9 61.9 $3.6% 736.4% (971.9 3.401.168.7) 137.8% $5.5 $4.054.8% $4.0 51.141.046.0 $3.97 806.4 47.7) 171.8% 4.3 2011E $8.5 $3.9% $5.7% 4.270.276.497.5% 774.008.9 $3.2 3.969.0% 2006E $7.5 51.2 51.4 60.0% $5.4 51.9% 768.218.618.258.564.909.4 2007E $7.2% $2.5% 4.9 $2.5% 821.1 51.0 60.233.9 3.8 2009E $8.47 897.9 $2.568.72 842.690.676.1% 4.124.6% (801.507.2% (932.5) 151.6% 3.1 51.7 46.5) 121.3% 794.312.7% 849.9% (889.393.272.630.5 11.3% $4.849.54 741.0 50.7% (1.396.7 58.9 $3.492.653.3% 4.B.623. ($ in millions.727.3% 2006 .4% (736.7 46.3 $3.046.4% 3.4% 73 .2 50.421.4% $2.2 59.8% $4.0 60.3 60.6 $4.4 $2.6 $2.884.054.9 50.5 $2.9 $2.1% 9.930.3% 4.8) 162.8 $2.8% 878.5 61.4 $2.827.085.7 60.5% 712.440.6) 107.0% 3.8 61.1 6.2011 CAGR 3.4 50.2 3.8 2008E $7.27 945.4 2010E $8.8 4.0 60.3 $2.7 3.7 $2.5 $4.1% 4.9% 2005E $7.8 50.464.5% $4.012.1 3.8 $4.

0 0.8) 6.7 $3.8 (1.40 2008E $4.9% 74 .4x 150.4 30.0) (513.63 2006 .0 26.800.0 17.4) 7.82 $56.7 2.B.7x 2003A 2004A 2005E 2006E $4.8) (889.37 $47.2 (333.0 19.6) (653. PF McDonald's Financial Analysis PF McDonald’s: Summary Cash Flow and Balance Sheet Below are the summary cash flow projections for Pro Forma McDonald’s based on the assumptions detailed on page 68.5x 3.0 (314.670.0% 3.3x 3.0 $1.7) (698.0% 3.904.17 $43.7 2.740.7 (297.9) (736.103.450.7) (801.7) (800.153.8 2.0 14.800.849.054.0% 3.052.4 30.7x 150.0 $1.4) (466.0 $1.490.5% 3.7x 3.9 2.7x 150.0 $3.9 (1.2) 6. ($ in millions.5) 6.0 30.0 18.0 $14.8) (971.270.2 (285.0 $1.8x 3.393.2 $2.9) 0.95 2009E $5.7) (481.4 (986.276.606.3x 150.8x 3.0 (956.189.6 $2.0 $1.5) (731.1 $2.5 (354.0 0.6) 0.60 $51.07 $61.3) (932.9) (438.5 (1.47 2010E $5.7 $2.8% 3.471.3 (1.0 24.6) (452.7 2.0 19.331.9) (1.0) 7.653.104.5) (676.4) 0.5 30.0) 7.8x 3.0 0.545.0 20.0% 3.012.5 (291.0 $1.398.6) 0.497.6 30.33 $66.371.2011 CAGR 8.7) 0.0 0.0 0.8x 3.7x 150.127.464.0% 3.6 2.0 0.8) (765.5) (497. except per share data) 2002A Cash Flow Data EBITDA less: Cash Taxes less: Cash Interest Expense less: Dividends less: Change in Working Capital less: Growth CapEx less: Maintenance CapEx plus: After-tax Dividends from McOpCo Free Cash Flow (post dividends) Free Cash Flow (pre dividends) FCF per Share (pre dividends) Illustrative Stock Price at 20x LTM FCF 20 Balance Sheet Data Cash Revolver Long-Term Debt Total Debt / Capitalization Total Debt / EBITDA Net Debt / EBITDA 150.34 2011E $5.056.41 2007E $4.012.0 0.7x 150.2) 0.

C. McOpCo Financial Analysis .

5% -2.6mm on a global basis in FY 2005 Cost drivers: Food and paper costs held constant at 34.0% of sales paid to Pro Forma McDonald’s as a franchise fee 25% of consolidated SG&A allocated to McOpCo CapEx drivers: Average maintenance CapEx per unit of approximately $50k in 2005 and 2006. based on historicals Payroll and employee costs of 26.0% thereafter Allocation of 25% of consolidated McDonald’s corporate CapEx Consolidated corporate CapEx held constant at 0. growing at an inflationary rate of 2. Net Unit Growth 90 net new owned restaurants in 2005 Net unit growth thereafter only in the franchised system.1% in 2005. Assumes 200 new gross units and 200 closed units annually.5% percent by 2011 Occupancy and other costs (excluding D&A) held constant at 20.35bn) Free cash used to pay down debt and then buy back shares $150 mm minimum cash balance Tax rate of 32% Minimal working capital requirements 76 . Revenue drivers: Average same-store sales growthof 2. stepping down to 25.C.7% annually on a total company basis Average unit sales of $1.5% of sales D&A calculated as 110% of capex in 2006 trailing to approximately 107% of CapEx by 2015 4. McOpCo Financial Analysis McOpCo: Model Key Drivers Set forth herein are the assumptions for the McOpCo business.1% of sales.5 billion allocated (Net Debt of $1.7% of sales Other No dividends Total Debt of $1.

9 9.7% $1.273.5 $0.259.9 7.24 1.41 1.9 2.2 $461.2% 622.30 1.3 4.6 $573.7 8.33 1.7% 734.9) $306.129.4% 2006E $15.8 $0.0 $643.4 7.9% 587.2 $0.CapEx % Margin D&A EBIT % Margin Net Interest Expense Net Income EPS Average Shares Outstanding $14.0% 599.1% 609.2 3.9 2.191.6 7.4 $542.3 7.085.7% 575.4 2.5) $343.0% 2005E $15.7 8.273.7% $1. $ in millions) 2004A Income Statement Data Revenue % Growth EBITDA % Margin EBITDA .136.9% (17.265.1 4.7 2008E $16.9 $0.4% 628.4 $491.8% 772.7% $1.173.5% (90.2 7.5 $510.0% 1.8 11.8% 5.3 3.7 5.692.4 5.9 $0.313.6 3.2 $718.3% 595.C.3% 2006 .2 3.3 $609.3 2.0) $425.0 $709.9 4.9 4.5% 662.042.0 4.428.3% 5.218.6% $1.4% 645. (U.7% $1.0% 0.0 2.0 4.37 1.273.4 $0.7 2010E $17.7 2009E $16.6 3.7 7.0 $678.7% (43.9) $384.2 2.594.1 2011E $17.2011 CAGR 2.8% 77 .838.223.273.6% 697.2 4.136.364.9% 11.7 2007E $15.248.2 3.27 1.1% 3.6% (68.7% 3.136.2% 562.S.8% $1.5 7. McOpCo Financial Analysis McOpCo Summary Income Statement Set forth below are the summary projections for McOpCo based on the assumptions detailed on page 76.5 3.0% 427.3% 635.2% $1.7% $1.

364.0x -0.C.1x 150.2x 0.0 1.3 $0. 2006 .1) 0.3) 3. McOpCo Financial Analysis McOpCo Summary Cash Flow and Balance Sheet Set forth below are the summary cash flow projections for McOpCo based on the assumptions detailed on page 76.0 $0.9 (218.9) (31.0 0.36 2009E $1.0 0.5) 0.5) (547.0) (504.0x 0.0 0.0 7.0 0.0 0.6x 0.8) $552.9) (6.0 (31.9) (61.1x 78 .0 0.4 (203.0 6.4x 1.1) (558.500.2011 CAGR 2004A Cash Flow Data EBITDA less: Cash Taxes less: Cash Interest Expense less: Dividends less: Change in Working Capital less: Growth CapEx less: Maintenance CapEx Free Cash Flow (after dividends) Free Cash Flow per share (before dividends) Balance Sheet Data Cash Revolver Long-Term Debt Total Debt / EBITDA Net Debt / EBITDA 2005E 2006E $1.7 (31.0 0.3 (163.39 2010E $1.0 6.2x 150.9 $0.0x -0.0 1.0 7.3 0.1x 150.5 (30.0 1.5 (184.2) $494.5% 11.218.0 0.129.313.29 2007E $1.0 0.6) (514.4 0.1% 150.0 0.0 722.2) (525.6 (145.4 0.44 2011E $1.173.0) $367.4) $526.2 (231.2 (30.9x 150.0 7.5) $409.32 2008E $1.0 0.4) 0.1 1.132.1) (88.1) 3.1x 150.5x 150.3 $0.5 (33.0 6.0 0.49 8.0 0.265.3) $452.2 (32.0x -0.5 $0.7) 0.8 0.0 270.3 $0.8) (536.

2006 Pershing Square Capital Management Confidential .ppt A Plan to Win / Win January 18.Final Revised Proposal.

ppt DISCLAIMER Pershing Square Capital Management's ("Pershing") analysis and conclusions regarding McDonald's Corporation ("McDonald's” or the “Company”) are based on publicly available information. Pershing manages funds that are in the business of trading . dispose of.public securities. it could be more difficult to exert influence over its Board than has been the case with smaller companies. or change the form of its investment in the Company. among other things. 2 . and other uncertainties and contingencies and have been included solely for illustrative purposes. It is possible that there will be developments in the future that cause Pershing to change its position regarding the Company and possibly reduce. The analyses provided include certain estimates and projections prepared with respect to. estimates. and that.Final Revised Proposal. and projections reflect various assumptions by Pershing concerning anticipated results that are inherently subject to significant economic. are made as to the accuracy or completeness of such statements. express or implied. Actual results may vary materially from the estimates and projected results contained herein. estimates or projections or with respect to any other materials herein. Pershing recognizes that the Company has a stock market capitalization in excess of $40bn. the historical and anticipated operating performance of the Company. competitive.buying and selling . Such statements. Pershing recognizes that there may be confidential information in the possession of the Company and its advisors that could lead them to disagree with Pershing’s conclusions or the approach Pershing is advocating. No representations. accordingly.

ppt A Revised Proposal for Creating Value at McDonald’s Agenda Background of our involvement What are our objectives? Brief review of our Initial Proposal Our Revised Proposal Benefits of our Revised Proposal Company Franchisees Shareholders Q&A 3 .Final Revised Proposal.

and (3) could create system issues McDonald’s believed. (2) could have an unfavorable credit impact. 2005: Pershing Square Capital Management (“Pershing”) presented a proposal for increasing shareholder value (“Initial Proposal”) to McDonald’s management October 31. 2005: McDonald’s management communicated its response to our Initial Proposal Management believed that our Initial Proposal (1) would result in potential “frictional costs”.Final Revised Proposal. that there was not enough value creation to outweigh frictional costs and other concerns November 15. we have had numerous discussions with shareholders and franchisees from around the world Today we would like to share our Revised Proposal for Creating Significant Value at McDonald’s which incorporates feedback from McDonald’s management. 2005: Pershing presented the Initial Proposal to the investment community Since November 15. based on its advisors’ valuation. franchisees and other shareholders 4 .ppt A Revised Proposal for Creating Value at McDonald’s Pershing’s Involvement with McDonald’s September 22.

ppt A Revised Proposal for Creating Value at McDonald’s What Are Our Objectives? In developing our Revised Proposal.Final Revised Proposal. our objectives are to: Improve McOpCo’s operating performance Strengthen the McDonald’s System Unlock significant shareholder value We believe our Revised Proposal will: Achieve these objectives Address all of the Company’s concerns regarding our first proposal Increase McDonald’s share price to $46-$50 per share (before considering any operational benefits) Minimize execution risk and management distraction 5 .

Final Revised Proposal.ppt Objective 1: Improve McOpCo’s Operating Performance Confidential .

Final Revised Proposal.S.ppt A Revised Proposal for Creating Value at McDonald’s Objective 1: Improve McOpCo’s Operating Performance McOpCo. is not achieving its full business and financial potential McOpCo does not pay a market rent or a franchise fee. unlike a typical franchisee Adjusting for a market rent and a franchise fee. franchisee “Corporate subsidies” in the form of uncharged rent and uncharged franchisee fees have led to McOpCo being run inefficiently over time Uneconomical capital allocation decisions Suboptimal pricing policy 7 . McOpCo has lower average unit margins than those of an average U. as a wholly owned subsidiary.

ppt A Revised Proposal for Creating Value at McDonald’s Objective 1: Improve McOpCo’s Operating Performance (cont’d) McOpCo’s Estimated Average Unit EBITDA margins versus U. Franchisees’ Estimated Average Unit EBITDA margins(1) Estimated 4-Wall EBITDA Margins 16% Estimated 4-Wall EBITDA Margin % 14.S. U.7% (1) (2) 12% 8. McOpCo Avg.Final Revised Proposal.S. Intl. 8 . U.8% 8% (1) 4% 0% Avg. McDonald’s does not provide average unit data for McOpCo or McDonald’s franchisees in its public financials. 2) Based on $260k of average EBITDA per franchised store and average revenues per franchised store of approximately $1. Franchise Adjusted for a Market Rent and Franchise Fee Note: See page 57 of the Appendix for Pershing’s detailed assumptions.760k.8% 12. 1) Analysis is based on Pershing’s estimates using 2004 financial data. McOpCo ________________________________________________ Avg.S. Assumes a market rent of 9% of sales and a franchise fee of 4% of sales.

Final Revised Proposal.ppt A Revised Proposal for Creating Value at McDonald’s Objective 1: Improve McOpCo’s Operating Performance (cont’d) McOpCo managers do not have appropriate compensation incentives No direct equity compensation in McOpCo’s business No market-based performance measurement system “Farm Team” mentality whereby the best McOpCo managers are promoted to corporate McDonald’s If they don’t join corporate McDonald’s. they sometimes leave to become a franchisee Top restaurant operators need more incentive to stay at McOpCo 9 .

g. Canada and U. U.K. China and Russia McOpCo increases focus on emerging markets growth 10 McOpCo should increase its focus on profitable emerging markets growth .Final Revised Proposal.S.ppt A Revised Proposal for Creating Value at McDonald’s Objective 1: Improve McOpCo’s Operating Performance (cont’d) “Earn the Right to Own” McOpCo’s restaurant portfolio needs to be optimized in order to improve margins and capital allocation Refranchise select units in mature markets Because of their developed franchise systems..g. mature markets do not need the same capital or resources as emerging markets e. McOpCo Redeploy capital and resources in emerging markets Capital and freed-up resources from refranchising should be redeployed in fast growing / high return emerging QSR markets Regions where franchise laws are still in infancy and McDonald’s franchise base is not yet sufficient to drive growth e...

Final Revised Proposal.ppt Objective 2: Strengthen the McDonald’s System Confidential .

Here’s what they told us: (1) Inherent conflict between McDonald’s and the Franchisees: McDonald’s “Top-line” focus versus Franchisees’ “Bottom-line” focus McDonald’s makes the bulk of its profits from the franchisees’ top line However. top line same-store sales growth does not always translate into improving franchisees’ bottom line Stock market often rewards McDonald’s for higher same store sales growth even though the franchisees are sometimes pressured to sacrifice margin for discount pricing (2) McOpCo.ppt A Revised Proposal for Creating Value at McDonald’s Objective 2: Strengthen the McDonald’s System Pershing spoke with franchisees from around the world. magnifies this conflict McOpCo does not compete on equal footing because it does not pay a market rent or franchisee fee Suboptimal pricing or capital allocation decisions do not impact McOpCo’s financials as dramatically as those of franchisees Perception among franchisees is that McOpCo is not held to the same degree of accountability 12 . with its subsidized economics.Final Revised Proposal.

ppt A Revised Proposal for Creating Value at McDonald’s Strengthening the McDonald’s System: What Franchisees Had to Say (3) Capital allocation criteria / decision-making process varies between McOpCo and the franchisee community Low ROIC investments are occasionally forced upon franchisees McOpCo regional managers often make capital investment decisions they will not have to live with.Final Revised Proposal. it has led to decreased profitability. increased wait times and increased staffing requirements Testing at McOpCo did not reveal the true economic impact of the program “Made for You” problems could have been prevented if the system had the appropriate “checks and balances” 13 . given their status as salaried employees with limited tenure in any one position “Made for You” program is an example of a historical capital investment decision that may have been amended or prevented by an arm's-length McOpCo Hundreds of millions of dollars of capital invested in a kitchen system that is widely considered inefficient For many franchisees.

Final Revised Proposal. as of 2004. approximately 27% (1) of the McDonald’s system currently does not price optimally Reduces the profitability of the entire system Underpricing at McOpCo pressures franchisees to sacrifice “penny profits” for traffic and sales volume (5) McDonald’s should retain control of McOpCo Franchisees generally agreed that control of McOpCo should remain with McDonald’s Keeps the franchisee vote democratic and dispersed ________________________________________________ (1): Based on approximately 8. 14 .ppt A Revised Proposal for Creating Value at McDonald’s Strengthening the McDonald’s System: What Franchisees Had to Say (cont’d) (4) McOpCo undercuts on pricing McOpCo’s subsidized economics reduce the impact of lower margin product pricing decisions As such.119 McOpCo restaurants out of 30.516 systemwide McDonald’s restaurants.

the only opportunity for franchisees to materially increase their wealth is to own more McDonald’s units A refranchising program would create an attractive incentive system Would allow the top quartile performing operators to be rewarded with an opportunity to increase units McOpCo’s current portfolio of restaurants needs to be rationalized through refranchising. in order to Increase McOpCo’s profitability Improve systemwide same-store sales growth Satisfy considerable franchisee demand 15 .ppt A Revised Proposal for Creating Value at McDonald’s Strengthening the McDonald’s System: What Franchisees Had to Say (cont’d) (6) Strong interest in owning new units / McOpCo refranchising program Franchisees have a strong interest in buying McOpCo restaurants Given McDonald’s exclusivity requirements for franchisees.Final Revised Proposal.

Final Revised Proposal.ppt Objective 3: Unlock Shareholder Value Confidential .

Final Revised Proposal.ppt

A Revised Proposal for Creating Value at McDonald’s

Objective 3: Unlock Shareholder Value at McDonald’s

Brand McDonald’s Collects a royalty of 13% of systemwide sales Real Estate
McDonald’s controls substantially all of its systemwide real estate Earns 9% of systemwide unit sales as rent For real estate it does not own, it pays a rent expense and generates income through subleases

McOpCo Restaurant Operations
Over 8,000 McDonald’s company operated restaurants

Franchise
Approximately 32,000 restaurants where McDonald’s receives 4% of unit sales

17

Final Revised Proposal.ppt

A Revised Proposal for Creating Value at McDonald’s

Objective 3: Unlock Shareholder Value at McDonald’s (cont’d)

There are very few businesses in the world with all the attractive business characteristics of
Brand McDonald’s

Brand McDonald’s Collects a royalty of 13% of systemwide sales Real Estate Franchise
World-leading brand ~ 60% EBITDA Margins (1) Low maintenance capital requirements ~ 55% EBITDA – maintenance capex margins (1) Low operating leverage / high earnings stability High ROIC Low cost of capital Valuable fixed asset base 50 year track record Global and diverse customer base
18

________________________________________________

(1) .

Based on Pershing’s estimates. Assumes McOpCo pays a market rent and franchise fee.

Final Revised Proposal.ppt

A Revised Proposal for Creating Value at McDonald’s

Objective 3: Unlock Shareholder Value at McDonald’s (cont’d)

Financial statements are not transparent

The first step to unlocking shareholder value is to introduce transparent segment financials.

McOpCo does not pay an “arm's-length” rent or franchise fee to Brand McDonald’s As such, reported financials do not make apparent that approximately 80% of McDonald’s EBITDA is derived from the higher multiple Brand McDonald’s Issuing transparent segment financials for McOpCo and Brand McDonald’s would demonstrate True profitability of Brand McDonald’s True operating margins and capital requirements at McOpCo
19

Final Revised Proposal.ppt

A Revised Proposal for Creating Value at McDonald’s

Objective 3: Unlock Shareholder Value at McDonald’s (cont’d)

In 2004, McDonald’s company-operated restaurants appeared to contribute 46% of total EBITDA. However, once adjusted for a franchise fee and a market rent fee, McOpCo constituted only 22% of total EBITDA, with Brand McDonald’s contributing 78% of total EBITDA.
2004 Total EBITDA As Reported 2004 Total EBITDA Adjusted for Market Rent and Franchise Fees

46% 54%

McOpCo

22%

McOpCo

55%
78%
Brand McDonald's
2004 EBITDA $2.4bn 2.8bn $5.2bn   % 46% 54% 100%

Brand McDonald's

McOpCo Brand McDonald's Total

McOpCo Brand McDonald's Total

2004 EBITDA $1.1bn 4.1bn $5.2bn

  % 22% 78% 100%

________________________________________________

Note: The analysis assumes that 75% of the total G&A is allocated to Brand McDonald’s business and 25% is allocated to McOpCo. McDonald’s management has indicated this is a conservative assumption regarding Brand McDonald’s. Analysis excludes $441 mm of non-recurring other net operating expenses. . 20

Final Revised Proposal.ppt

A Revised Proposal for Creating Value at McDonald’s

Objective 3: Unlock Shareholder Value at McDonald’s (cont’d) McDonald’s is fundamentally Not a restaurant company
McDonald’s FY 2005E EBITDA – Maintenance CapEx, Adjusted for a Market Rent and Franchise Fee(1)

McOpCo

14%

86%
Brand McDonald's

Why is it valued as such?
_________________________________________ (1) FY’05E EBITDA- Maintenance CapEx contribution is based on Pershing’s estimates. CapEx is net of proceeds from restaurant closings. We note that the Company does not provide EBITDA and Maintenance CapEx allocation by segment.
21

Final Revised Proposal.ppt

A Revised Proposal for Creating Value at McDonald’s

Objective 3: Unlock Shareholder Value at McDonald’s (cont’d)

Lack of transparency had created an undervaluation by the market
McDonald’s currently trades at roughly 8.9x EV/2006E EBITDA(1), despite over 85% of its pre-tax unlevered cash flows being generated by Brand McDonald’s (2) We believe Brand McDonald’s, valued independently, is worth 12.5x – 13.5x EV/’06E EBITDA High branded intellectual property/franchise businesses such as Choice Hotels, PepsiCo and Coca-Cola trade in the range of 12x – 19x EV/’06E EBITDA Real Estate C-Corporations and REITs typically trade in the range of 13x-16x EV/’06E EBITDA Only when Pershing’s ideas regarding transparency became public did Wall Street analysts begin deriving sum-of-the parts valuations in the mid $40s per share Recent UBS sum of the parts valuation: $46 per share (3) Recent Goldman Sachs sum of the parts valuation: $44 per share (4)
_________________________________________ (1) Based on McDonald’s recent stock price of $34 per share. (2) Pre-tax unlevered cash flows calculated as FY’05E EBITDA- Maintenance CapEx. We note that FY’05E EBITDA- Maintenance CapEx contribution is based on Pershing’s estimates. CapEx is net of proceeds from restaurant closings. The Company does not provide EBITDA and Maintenance CapEx allocation by segment. (3) UBS research report dated 11/10/2005. (4) Goldman Sachs research report dated 11/18/2005. McDonald’s sum-of-the-parts valuation of $44 is before estimated frictional costs.
22

Final Revised Proposal.ppt

Review of our Initial Proposal

Confidential

Final Revised Proposal.ppt

A Revised Proposal for Creating Value at McDonald’s

Review of Our Initial Proposal

Our Initial Proposal called for… Step 1: McOpCo to be organized as an independent entity
Signs “arm's-length” rent and franchise agreements with McDonald’s

Step 2:

IPO of 65% of McOpCo
McOpCo is deconsolidated and transparent financials are released to investors

Step 3:

Issue $14.7bn of financing secured against real estate
Implies approximately $9.7bn of incremental debt

Step 4:

Use Debt financing and IPO proceeds to
Refinance all of the existing net debt (approximately $5bn ) at Brand McDonald’s (1) Repurchase shares and pay transaction fees and expenses
Our Initial Proposal is available on the internet at http://www.valueinvestingcongress.com/Final-Pres.pdf
24

________________________________________________ (1) Assumes $6.35bn of net debt on

12/31/05 at consolidated McDonald’s of which $1.35 bn of net debt is allocated to McOpCo and $5.0 bn of net debt allocated to Brand McDonald’s.

Final Revised Proposal.ppt

A Revised Proposal for Creating Value at McDonald’s

Mischaracterizations of Our Initial Proposal…

There have been several mischaracterizations of our Initial Proposal which we believe need to be cleared up.

Our Initial Proposal did NOT:

Provide for the sale of any real estate by McDonald’s Put franchisees in danger of having a new landlord Involve the creation of a REIT Require a real estate financing to create significant value Hinge on a leveraged share buyback as its primary method of value creation
Our Initial Proposal did:

Assume significant value would be unlocked once McOpCo was IPO’ed and investors had access to transparent financials for Brand McDonald’s, demonstrating that it is fundamentally NOT a restaurant company
25

Final Revised Proposal.ppt

A Revised Proposal for Creating Value at McDonald’s

Concerns Regarding Initial Proposal

Frictional Costs
Frictional costs associated with the CMBS financing and taxes due to the 65% McOpCo IPO Concerns regarding a potential new landlord (rent hikes)

Credit Impact
$9.7bn of incremental leverage may put pressure on credit rating

Alignment Issues
Brand risk due to a loss of McOpCo control

Management

Franchisees

Concerns regarding any potential increase in borrowing costs

McOpCo will compete for new units Fear of preferential treatment of McOpCo

Shareholders

Management distraction Execution risk

26

Final Revised Proposal.ppt

Our Revised Proposal

Confidential

Final Revised Proposal.ppt

A Revised Proposal for Creating Value at McDonald’s

Our Revised Proposal

Step 1: Issue Transparent Segment Financials
McOpCo signs arm’s-length lease and franchise agreements with McDonald’s Corporation McDonald’s Corporation requires McOpCo to pay a market rent and franchise fee McDonald’s Corporation issues transparent segment financials for arm's-length McOpCo and Brand McDonald’s

Step 2: IPO 20% of McOpCo
McOpCo creates a separate Board of Directors At least one Board member appointed from the franchisee community IPO 20% of McOpCo 20% IPO will generate no tax costs given existing tax basis McDonald’s retains full control of McOpCo Minimal execution risk Frictional costs of roughly 5 cents per share (1) (versus management estimates of $4-$5 per share for the Initial Proposal)

________________________________________________ (1) Assumes IPO transaction fees and expenses

of 5% of IPO proceeds.

Continued
28

Final Revised Proposal.ppt

A Revised Proposal for Creating Value at McDonald’s

Our Revised Proposal

(cont’d)

Step 3: Commence McOpCo Refranchising Program
McOpCo commences refranchising 1,000 units in mature markets (U.S., Canada and U.K.) over the next two to three years Proceeds from refranchising can be redeployed in fast growing, high return emerging markets (China and Russia)

Step 4: Dividend Increase and Share buybacks
McDonald’s increases its dividend payout to 90% of after-tax free cash flow from roughly 35% of free cash flow currently (1) Implies a dividend of $1.93 per share in FY 2006E versus 0.67 per share in 2005 At a recent price of $34 per share, implies a new dividend yield of 5.7%, versus current yield of ~ 2% McDonald’s Corporation initiates incremental share buybacks using existing cash on hand and IPO proceeds

________________________________________________ (1) Assumes $843mm of dividends paid

in FY2005E. FY2005E dividend payout ratio based on 9/30/2005 Last Twelve Months after-tax free cash flows, calculated as operating cash flows less cash flows from investing activities.

29

Revised Proposal requires no incremental debt to be issued over total debt position as of 9/30/05

Final Revised Proposal.ppt

A Revised Proposal for Creating Value at McDonald’s

Addressing Concerns Regarding the Initial Proposal Credit Impact
No incremental debt Transparency improves credit profile

Frictional Costs
No CMBS financing

Alignment Issues
Maintain control of McOpCo Retain flexibility

Management

Minimal transaction costs No taxes No transfer of property No rent hikes

Franchisees

No increase in borrowing cost for operators

Preserves highly “democratic” franchisee system McOpCo will be a net seller of units in mature markets

Shareholders

Minimal management distraction Minimal execution risk

30

Final Revised Proposal.ppt

A Revised Proposal for Creating Value at McDonald’s

Improving McOpCo’s Operating Performance

Current Issue
McOpCo is not reaching its full business and financial potential

Benefits of the Revised Proposal
IPO of McOpCo would make margin improvement a key focus No more corporate subsidies to buttress operating margins McOpCo management can run its business based on the most appropriate operating strategy Publicly traded arm’s-length McOpCo would force improved capital allocation decisions and optimal pricing policy Refranchising and redeploying capital/resources would better position McDonald’s in the most attractive growth markets Investors will respond well to margin and capital allocation improvement as well as the emerging markets growth story

Managerial focus and incentives

McOpCo’s management can be compensated based on the market performance of its business McOpCo managerial focus will improve as a result of having greater accountability, increased responsibility, a better performance measuring yardstick via the public markets and more direct incentives
31

Final Revised Proposal.ppt

A Revised Proposal for Creating Value at McDonald’s

Strategic Benefits to the McDonald’s System

Pershing believes that a publicly traded arm's-length McOpCo, which remains controlled by McDonald’s, would strengthen the McDonald’s System. McOpCo makes optimal pricing, capital allocation and refranchising decisions Arm's-length McOpCo’s decision-making criteria on product pricing and capital allocation will be substantially similar to that of the franchisee community McOpCo, no longer subsidized by Corporate McDonald’s, will review its restaurant portfolio more closely for refranchising rationalization / opportunities Refranchising program would create an incentive system whereby the best operators would be rewarded with an opportunity to own new units Poor performing operators will be motivated to improve performance to earn the right to own more restaurants Franchisees would recognize that the new McOpCo competes on equal footing McOpCo, required to pay arm's-length rent and franchise fees, would face the same economic consequences as franchisees, thus creating a better aligned system Improves fairness and accountability throughout the system
32

Final Revised Proposal.ppt

A Revised Proposal for Creating Value at McDonald’s

Strategic Benefits to the McDonald’s System (cont’d)

Would increase McDonald’s credibility in the system and allow it to better understand the true impact of new product introductions

Testing products at arm's-length McOpCo would provide McDonald’s with A better understanding of the true economic impact of its new products on the typical owner/operator’s bottom line More credibility when communicating impact of new products to franchisees Franchisee participation on the McOpCo Board will temper any perception that McOpCo receives “preferential treatment” from McDonald’s 80% ownership of McOpCo would preserve McDonald’s “skin in the game” Bottom-lined focused McOpCo would be influential in endorsing new products

33

Final Revised Proposal.ppt

A Revised Proposal for Creating Value at McDonald’s

Addressing Potential Franchisee Questions

Question: Would a publicly traded McOpCo be an aggressive competitor to franchisees,

given its need to grow its business for the benefit of its new shareholders? Answer: No, quite the opposite. We believe a more likely scenario is the following: McOpCo, no longer supported by corporate subsidies, will price more optimally Refranchising program will remove McOpCo as a competitor in many key markets McOpCo’s most attractive growth plan is to focus on emerging markets where the franchise base is still in its infancy, such as China and Russia
Question: Under your Revised Proposal, is there any risk that McDonald’s real estate will

be sold or that franchisees will experience unexpected rent hikes? Answer: No. We have never endorsed the sale of real estate or the creation of a REIT. We don’t believe it’s the right operational move We are confident management is not inclined to sell the real estate
34

Final Revised Proposal.ppt

A Revised Proposal for Creating Value at McDonald’s

Addressing Potential Franchisee Questions

Question: How will this change a franchisee’s day-to-day interaction with McDonald’s

Corporation? Answer: There will be no changes. A franchisee’s day-to-day interaction with McDonald’s will not be affected by the creation of a publicly traded McOpCo. However, the franchisee community may find a strong ally in a publicly traded McOpCo McOpCo’s management will be able to push back on lower margin / low return new products introduced by Corporate McDonald’s McOpCo will improve the check and balance mechanisms in the system Testing at McOpCo on new products will be a better benchmark for how a product will perform throughout the system Many McOpCo stores in the U.S., Canada and U.K. will be up for refranchising Franchisee representation on McOpCo’s Board will improve McOpCo’s credibility and communication with the system
35

Final Revised Proposal.ppt

A Revised Proposal for Creating Value at McDonald’s

Addressing Potential Company Questions

Question: Would a publicly traded McOpCo hinder the current “Farm Team” system or

inhibit McDonald’s ability to recruit top McOpCo managers to work at Corporate? Answer: No. We believe the creation of a publicly traded McOpCo will actually improve the talent pool at both Brand McDonald’s and McOpCo. Offering direct equity compensation in McOpCo will Attract “best-in-class” operators Improve retention Arm’s-length, publicly traded McOpCo is better training ground than the current wholly owned McOpCo Better “real world” business discipline for managers, once corporate subsidies are removed Teaches restaurant operators how to run a public business With 80% ownership, Brand McDonald’s will still be able to leverage its deep relationship with McOpCo for recruiting purposes
36

Final Revised Proposal.ppt

A Revised Proposal for Creating Value at McDonald’s

Unlocking Shareholder Value

A publicly traded McOpCo would increase financial transparency and would allow investors to appropriately value McDonald’s on a sum-of-the-parts basis.

Current Issue Transparent financials

Benefits of the Revised Proposal
Separate arm’s-length McOpCo financials would be made available to investors Transparent segment financials would be made available at McDonald’s, demonstrating the operating cash flows generated by Brand McDonald’s

Dividends and Equity Options Valuation

Ability to increase dividends Reduce option dilution at McDonald’s through the use of McOpCo currency McOpCo IPO would allow Wall Street analysts and the broad investment community to value McDonald’s on a sum-of-the parts basis Investors would focus more on the value of Brand McDonald’s
37

Final Revised Proposal.ppt

A Revised Proposal for Creating Value at McDonald’s

Revised Proposal: Allows Investors to Value on a Sum-of-the-Parts Basis

Brand McDonald’s operating metrics and business characteristics (100% royalty-based revenues, low cost of capital and high earnings stability) are much closer to high branded intellectual property businesses such as PepsiCo, Coca-Cola or Choice Hotels or a typical Real Estate C-Corporation than they are to a typical QSR. We believe Brand McDonald’s could be worth 12.5x – 13.5x EV/2006E EBITDA.
Based on an approximate $48 sum-of-the-parts value for McDonald’s
2005E Operating Metrics: EBITDA Margins EBITDA – CapEx Margins Long-term EPS Growth
(2)

Brand

Typical Real Estate C-Corp
~70% - 80% ~65% - 75% NA

Choice Hotels
66% 61% 16% 23% 18% 11% 31% 27% 9%

Typical Mature QSR
(1)

60% 50% 9%

~15% - 20% ~7.5 % - 12.5% ~10% - 12%

Business Characteristics: Maint. Capital Requirements Earnings Stability Average Cost of Capital Fixed Asset Value Trading Multiples Adjusted Enterprise Value (3) / CY 2006E EBITDA CY 2006E EBITDA – CapEx
________________________________________________

Low
High

Low High Low High

Low High Low Low

Low High Low Low

Low High Low Low

Medium Medium Medium Low

Low
High

13.0x 15.5x

~13x - 16x ~17x - 20x

19.1x 20.3x

12.2x 15.4x

12.0x 13.6x

~8.5x - 9.5x ~12x - 15x

Stock prices as of 1/13/2006. Projections based on Wall Street research estimates. Analysis assumes a 7x EV/EBITDA valuation multiple for McOpCo. (1) Typical mature QSR business characteristics based on YUM! Brands and Wendy’s. (2) Brand McDonald’s long-term EPS growth rate is based on the Company’s current dividend payout ratio and assumes excess free cash flow after dividends is used for share buybacks. 38 (3) Adjusted for unconsolidated assets.

Analysis is pro forma for a McOpCo spin-off and McDonald’s share buyback on 12/31/05. Capital structure assumptions are detailed on page 56 of the Appendix.799 $63.00 Implied Share Price Premium to Unaffected Price (1) $46 45% $50 57% Implied multiple.60.464 5.908 41. based on a $34 stock price ________________________________________________ Note: Assumes $1. ($ in millions) As Reported Segment 2006E EBITDA Adjusting for a Market Rent and Franchise Fee 2006E EV/'06E EBITDA EBITDA Multiple Enterprise Value IPO of 20% of McOpCo and Transparency Drives Revaluation EV/'06E EBITDA Multiple Low High Enterprise Value Low High McOpCo Brand McDonald's Total $2.Final Revised Proposal.130 4.090 $5.594 7.5x 7.0x 12.594 $1.707 $7.675 $49.9x $7. (1) Based on 10/31 closing price of $31.ppt A Revised Proposal for Creating Value at McDonald’s Revised Proposal: Allows Investors to Value on a Sum-of-the-Parts Basis We believe a minority IPO of McOpCo would force a market revaluation of McDonald’s.503 3.25bn of proceeds from IPO and $1.908 60.5x $7.3x 8.0x 9.263 $68. 39 .75bn of existing cash on hand used to repurchase shares.582 7.0x 13.908 55.171 Recent Stock Price $34.

40 12.1bn. 40 .3bn.Final Revised Proposal.57 50. Minority Interest in McOpCo of $1.5x $48. we have modeled McOpCo FY ’06E EBITDA of $1.0x 7. Based on these assumptions.05 13.62 49. ________________________________________________ Assuming Transparent Segment Financials McDonald's Equity Value per Share Brand McDonald's EV/2006E EBITDA 12.0x McOpCo EV / '06E EBITDA Multiple 6.5x 7.10 49. Assumes McDonald’s FY ’05E Net Debt of $8. and FY’05E Diluted Shares Outstanding of 1.5x $48.0x $46. we believe McDonald’s stock price would trade in the range of approximately $46 $50 per share.1 billion and Brand McDonald’s FY ’06E EBITDA of $4.5x 43.5x $44.17 13.86 45.45 43.05 Note: Assumes 75% of consolidated G&A is allocated to Brand McDonald’s. with the rest allocated to McOpCo.5 billion.57 50.186mm. all pro forma for Pershing’s Revised Proposal.0x $42.28 13.ppt A Revised Proposal for Creating Value at McDonald’s McDonald’s Sum-of-the-Parts Analysis at Various Multiples Assuming McOpCo pays a market rent and franchisee fee.97 6.10 49.62 49.69 48.74 47.81 46.33 45.21 47. as a result of a 20% IPO of McOpCo.93 44.

4% $50 4.4.3% $46 4.5% $49 4.3% ________________________________________________ (1) FCF Yield is based on Attributable Free Cash Flow before dividend payments. We note our Free Cash Flow calculation is based upon our estimates of 2006E After-Tax Levered Operating Cash Flow less Growth and Maintenance Capital Expenditures. See Appendix page 54 for a calculation of FY 2006E Attributable Free Cash Flow.7% at stock price in the range of $46 . would have a 2006E Free Cash Flow yield of 4.Final Revised Proposal.ppt A Revised Proposal for Creating Value at McDonald’s McDonald’s Free Cash Flow Yield Analysis Pershing believes that McDonald’s. 41 .7% Projected $47 4. pro forma for the McOpCo 20% IPO. (1) McDonald's 2006E FCF/Dividend Yield at Varous Stock Prices Current Stock Price 2006E FCF Yield $34 6.3 % .6% $48 4.$50 per share.

ppt A Revised Proposal for Creating Value at McDonald’s Minimal Execution Risk A minority IPO of McOpCo would have minimal execution risk and negligible frictional costs McOpCo Simple transaction Many successful value creating precedent transactions Minimal management distraction Frictional costs of roughly 5 cents per share Preserves current structure’s control of McOpCo McDonald’s would maintain the flexibility to repurchase minority McOpCo stake …if desired improvements were not obtained Minority buyouts are simple and common transactions with minimal transaction costs 42 .Final Revised Proposal.

Pershing has assumed no incremental operational improvements as part of its valuation We also see potential G&A improvement as an additional opportunity Standalone McDonald’s LTM 9/30/05 G&A per systemwide unit of $68k versus YUM! Brands LTM 9/30/05 G&A per systemwide unit of approximately $35k We have not included an IPO / potential spin-off of Chipotle as part of our analysis IPO and potential spin-off of Chipotle will create additional value for investors ________________________________________________ (1) McOpCo EBITDA margins are after adjusting for a market rent and franchise fee and allocating 25% of McDonald’s consolidated G&A to McOpCo. 43 . we believe McOpCo is capable of achieving at least 10% EBITDA margins However.3% (post corporate allocation) (1) Based on comparable restaurant businesses.Final Revised Proposal. assuming no further operational improvements.ppt A Revised Proposal for Creating Value at McDonald’s Further Upside to Our Valuation Pershing’s valuation is based on the business as it exists today. Pershing believes that creating a publicly traded arm's-length McOpCo will substantially improve both top-line and bottom-line performance of McDonald’s We believe that McOpCo has EBITDA margins of roughly 7.

can create significant additional value based only on incremental operating improvements. we believe McDonald’s strong management team.Final Revised Proposal. . In addition. running a world-leading brand. 275bps improvement) 44 Improve G&A to $50k per systemwide unit (~$500mm of G&A savings)(2) Improve G&A to YUM! levels of $35k per systemwide unit (~$1bn of G&A savings)(2) (1) (2) See Appendix page 55 for more detail regarding our assumptions on operating improvements.(1) McDonald’s Potential Stock Price $61 $56 $52 Upside $60 $50 $50 $40 Pershing Proposal Recent: $34 $30 Pershing Proposal: McOpCo 20% IPO and Market Revaluation of McDonald’s _______________________________________________ McOpCo improves EBITDA margins to 10% (approx. of which 75% is allocated to Brand McDonald’s and 25% is allocated to McOpCo.ppt A Revised Proposal for Creating Value at McDonald’s Further Upside to Our Valuation (cont’d) We believe our Proposal can potentially increase McDonald’s share price to $50 per share. Total savings denotes consolidated G&A.

ppt A Revised Proposal for Creating Value at McDonald’s A Plan to Win / Win Addresses concerns of all stakeholders Creates financial transparency for investors Will lead to substantial value creation for McDonald’s shareholders Simple transaction Minimal execution risk.Final Revised Proposal. management distraction and frictional costs Positions McOpCo to make optimal capital allocation and business execution decisions Improves the System’s “checks and balances” Allows McDonald’s maximum control and flexibility regarding future strategic alternatives Significant upside. given strong Management team 45 .

Final Revised Proposal.ppt Q&A Confidential .

ppt Appendix Confidential .Final Revised Proposal.

976 427 $2. The analysis demonstrates how McOpCo is paying neither a market rent nor a franchise fee.201 $5.336 1. To the extent that there should be more G&A allocated to McOpCo.747 774 $12.853 3.403 46% The analysis assumes that 75% of the total G&A is allocated to the Brand McDonald’s and 25% is allocated to McOpCo.726 2. as they are currently reported.505 $4.753 495 1.780 54% 2004 Consolidated Sum of Parts $14. Total Revenue Company Operated Expenses: Food and Paper Compensation & Benefits Occupancy and Other Expenses (excl.982 1. 2004 Income Statement Sales by Company Operated Restaurants Rent from Franchise and Affiliate Rest.853 3.336 1.183 100% $14.100 576 427 1.ppt Appendix 2004 McDonald’s P&L As Reported Set forth below is a table which reconciles McOpCo’s.224 3.224 Brand McDonald's P&L 3. D&A) Company Operated D&A Total Company Operated Expenses Franchised Restaurant Occupancy Costs Franchise PPE D&A Corporate G&A EBIT Depreciation & Amortization EBITDA % of Total EBITDA ________________________________________________ McOpCo P&L $14. 48 .224 3.485 2.505 $19. Brand McDonald’s and stand-alone McDonald’s FY 2004 income statements.747 774 $12.183 100% $14. then there would be a greater percentage of total EBITDA at Brand McDonald’s than what is shown here.505 $19.065 4.726 2.841 347 $347 576 427 1.224 4.982 1.747 427 $11.201 $5.Final Revised Proposal.980 3.006 774 $2.853 3. Franchise Fees From Franchise and Affiliate Rest.100 576 427 1.065 4.980 3. Note: Analysis excludes $441 mm of non-recurring other net operating expenses.726 2.336 1.

726 2. Brand McDonald’s and stand-alone McDonald’s FY 2004A income statements.980 3.336 1. The analysis assumes that 75% of the total G&A is allocated to Brand McDonald’s and 25% is allocated to McOpCo.164 774 583 $12.224 Brand McDonald's P&L 3.505 $19.690 347 583 $930 576 427 1.853 3.849) (583) (697) (569) ($1. Rent From Company Operated Rest.019 495 710 427 $1.505 569 $6.982 1. 49 .137 22% $0 .Final Revised Proposal.224 4.100 576 427 1. McDonald’s management has indicated that this is a conservative assumption regarding the real estate and franchise business. D&A) Company Operated D&A Company-Operated Rent Expense Additional Rent Payable to PropCo Franchise Fee Payable to FranCo Total Company Operated Expenses Franchised Restaurant Occupancy Costs Franchise PPE D&A Corporate G&A EBIT Depreciation & Amortization EBITDA % of Total EBITDA ________________________________________________ McOpCo P&L $14.485 3.100 576 427 1. assuming McOpCo pays a market rent and franchise fee. The analysis demonstrates that the Brand McDonald’s contributed approximately 78% of total EBITDA. Note: Analysis excludes $441 mm of non-recurring other net operating expenses.065 4.726 2.183 100% (1. Total Revenue Company Operated Expenses: Food and Paper Compensation & Benefits Non-Rent Occupancy and Other Expenses (excl. Franchise Fees From Franchise and Affiliate Rest.ppt Appendix Reconciling McDonald’s 2004A P&L Set forth below is a table which reconciles McOpCo’s.336 1.224 3.726 2.164 427 583 697 569 $13.849) - $14. 2004 Income Statement Sales by Company Operated Restaurants Rent from Franchise and Affiliate Rest.980 3.982 1.853 3.505 $19.280 1.164 774 583 $12.280) (569) ($1.336 1.224 3.201 $5.183 100% $14.853 3.201 $5.065 4.272 774 $4.046 78% Inter-Company Eliminations 2004 Consolidated Sum of Parts $14. Franchise Fees From Company Operated Rest.

65bn Tax basis is equal to $3 billion of initial assumed basis (based on an assessment of net equipment and other property at McDonald’s) less $1. which includes $3bn of debt required for the repatriation of foreign earnings FY’05E cash balance of $3bn.25bn of IPO proceeds. $1.1bn FY’05E Total Debt of $11. we have assumed a 20% IPO of McOpCo and the proposed share repurchases occurred on 12/31/2005. In addition to our IPO assumptions. capital structure and dividend policy. excluding a $3bn term loan required to repatriate earnings Assumes FY’05E Net Debt at consolidated McDonald’s of $8.ppt Appendix Revised Proposal: Preliminary Transaction Assumptions IPO assumptions 20% IPO of McOpCo generates $1.1bn).1bn. net of fees Capital structure post share repurchases Per management guidance. set forth herein are assumptions regarding share repurchases. .25bn of cash proceeds after expenses (on 12/31/2005) Assumes a 7x EV/’06E EBITDA multiple for McOpCo No taxes paid given McOpCo’s basis which is assumed to be approx. assumes McDonald’s issues a $3bn term loan to repatriate foreign earnings No incremental debt issued at McDonald’s over total debt at 9/30/2005 ($8.35 billion of net debt Share repurchases Approximately 7% of the share base repurchased using ~ $1.75bn of expected cash on hand at the end of the year (after paying dividends) ~ $1. based on proceeds received from repatriation Increase dividend payout Increase dividend payout ratio to 90% 50 For modeling purposes.Final Revised Proposal.

ppt Appendix McOpCo IPO: Mechanics Step 1: McOpCo dividends a $1.6bn) McOpCo undertakes the IPO and uses the proceeds to repay the dividend note.Final Revised Proposal. Any tax cost for the IPO would be the amount by which the IPO distribution exceeded McDonald's basis in the McOpCo stock multiplied by McDonald’s corporate and state/local tax rate Assuming a $1. or 20% of the equity market value of McOpCo (assumed to be $6.3bn Note to McDonald’s (parent) Step 2: IPO of McOpCo Step 3: Share Repurchases using Cash on Hand and IPO Proceeds Equity Markets Pays $3.3 bn cash received McOpCo repays $1.0 billion Repurchases shares Equity Markets IPO of McOpCo Shares $1.3bn.3 bn Note to McDonald’s McDonald’s performs a self-tender post the IPO McOpCo declares and pays a dividend to McDonald’s (parent) in the form of a Note in an amount equal to the anticipated proceeds from an initial public offering of McOpCo For illustrative purposes.65 billion of tax basis No incremental leverage issued PF McDonald’s repurchases approximately 7% of the fully diluted share base using Excess cash on hand After tax proceeds of IPO 51 .3bn of IPO distribution. we assume the Note is for $1. there would be no tax cost associated with the IPO Assume a $1.3bn Note McOpCo McDonald’s retains 80% stake McOpCo $1.

000 (1.312 3.350) 1.000 (1.993 20% $1.312 0 $1.000 (1.122 20% $1.199 (60) $1.350) 1.650 $7.424 (71) $1.558 20% $1.350) 1.139 $1.Final Revised Proposal.ppt Appendix McOpCo IPO: Proceeds Given the estimated tax basis in McOpCo.424 0 $1.424 3.353 $1.246 .650 $6. McOpCo IPO After Tax Proceeds Low Taxes payable McOpCo Equity Market Value IPO Percentage Distribution to PF McDonald's Estimated Book Basis of McOpCo Net Debt Allocated to McOpCo Adjusted Basis in McOpCo $5.199 3.650 High Average Taxable Gain Tax Rate Taxes payable $0 38% $0 $0 38% $0 $0 38% $0 After Tax Proceeds Distribution Taxes Payable After Tax Distributions Estimated IPO fees Net Proceeds 52 $1.199 0 $1. we believe that no taxes would need to paid in an IPO of McOpCo.312 (66) $1.

net of fees Less: Share buybacks Plus: Proceeds from Repatriation FY 2005E Ending Cash Balance FY 2005E Net Debt 53 $1.351 (1.Final Revised Proposal.065 $1.380 2.000 $11.000 $8.000 $3.220 (1.ppt Appendix McDonald’s Cash and Debt Schedules: No Incremental Debt Issued Post 9/30/2005 $ in millions Set forth herein are the schedules for (1) FY 2005E funds available for proposed share buybacks.380 2.979) 3. We have assumed that no incremental debt would be issued at McOpCo as of 9/30/2005 on top of the estimated $3 billion required to repatriate earnings from foreign territories.246 ($2.155) 3.351 (1.155) (843) $1. and (3) ’05E Cash Balances. Pre-IPO Cash Available to Fund Share Buybacks: Beginning Cash Balances 1/1/2005 Plus: FY'05E Free Cash Flow Before Dividends and Debt Pay Down Less: FY'05E Debt Reduction Less: FY'05E Dividends Equals: FY 2005E Cash on Books Available for Share Buybacks FY 2005E Total Debt Balance: Beginning Total Debt Balances 1/1/2005 Less: FY'05E Debt Reduction Estimated New Term Loan to Fund Repatriation Total Debt FY 2005E Post IPO FY 2005E Cash Balance: Beginning Cash Balances 1/1/2005 Plus: FY'05E Free Cash Flow Before Dividends and Debt Paydown Less: FY'05E Debt Reduction Less: FY'05E Dividends Plus: Estimated IPO Proceeds.155) (843) 1.733 $9. (2) ’05E Total Debt Balances.065 .

272 $1.594 (1.Final Revised Proposal.ppt Appendix McDonald’s 2006E Free Cash Flow Assuming a 20% IPO of McOpCo Set forth herein is a schedule for 2006E Free Cash Flow based on our estimates.176 $2. Attributable free cash flow per share deducts the minority interest free cash flow pertaining to the 20% stake of McOpCo’s no longer owned by McDonald’s.93 less: Cash Interest Expense less: Growth CapEx (Net of Proceeds from Closings) less: Maintenance CapEx less: Change in Working Capital less: Minority Interest Free Cash Flow Attributable Free Cash Flow Before Financing Activities FY 2006E Average Shares Outstanding (mm) Attributable Free Cash Flow per Share Dividends Paid at 90% of Attributable FCF Dividend Paid per Share 54 . FY2006E shares outstanding is pro forma for the proposed share buyback.186) (563) (316) (943) 12 (74) $2. 2006E Cash Flow Data EBITDA less: Cash Taxes ($ in mm except per share data) $5.525 1.15 2.

141 8.5x Pro Forma Enterprise Value $10.388 $83.065 2.065 1.171 1.186 $52 Segment McOpCo Brand McDonald's Total EBITDA $1.0% 75.554 4.5x $12.326 $77.906 $61.Final Revised Proposal.1% 1.753 65.018 7.554 Set forth herein is a table which details our assumptions regarding potential operating improvements.5x $11.0% 75.429 $1.ppt Appendix Assumptions: Upside Operating Improvements Pr Forma 2006E Transaction / Assumptions McOpCo EBITDA Improvement 275bps FY 2006E Financial Data: McOpCo Revenue McOpCo EBITDA Current EBITDA Margin New Margins New McOpCo EBITDA $15.256 $72.186 $61 Brand McDonald's Savings ($ in mm) McOpCo Brand McDonald's Less: FY'05E Net Debt Less: Minority Interest (Market Value) Equals: Market Value of Equity PF FY'05E Diluted Shares Outstanding (mm) Estimated Share Price 55 .0% $125 $375 McOpCo Brand McDonald's Total $1.696 1. Estimated EV/'06E EBITDA Multiple 7.0x 13.518 7.878 60.018 Less: FY'05E Net Debt Less: Minority Interest (Market Value) Equals: Market Value of Equity PF FY'05E Diluted Shares Outstanding (mm) Estimated Share Price G & A Savings: Improving to $50k per unit Unit Level Assumption: ~50k per unit G&A Allocation Assumptions: McOpCo 25.214 7.839 6.679 4.186 $56 Brand McDonald's Savings ($ in mm) McOpCo Brand McDonald's Less: FY'05E Net Debt Less: Minority Interest (Market Value) Equals: Market Value of Equity PF FY'05E Diluted Shares Outstanding (mm) Estimated Share Price G & A Savings: Improving to YUM! Levels Unit Level Assumption: ~35k per unit G&A Allocation Assumptions: McOpCo 25.0x 13.3% 10.0x 13.130 7.263 $71.804 5.081 $66.464 6.0% $250 $750 McOpCo Brand McDonald's Total $1.628 70.078 8.016 8.065 2.933 1.

908 60.638 6.ppt Appendix Valuation Assumptions Set forth herein is a table which details our sum-of-the-parts valuation.332 $43.3x 8. 56 .0x 9.274 7.130 4.312 $54.60.730 $49.171 8. as proposed.0x 12.908 41.5x 7.9x $7.799 $63.331 1. occurring on 12/31/05.5x $7.065 1.794 1.186 Recent Stock Price Recent Stock Price $34.00 Implied Share Price Premium to Unaffected Price (1) $46 45% $50 57% ________________________________________________ Note: Assumes $1.312 $58.707 8. ($ in millions) Adjusting for a Market Rent and Franchise Fee 2006E EV/'06E EBITDA EBITDA Multiple Enterprise Value IPO of 20% of McOpCo and Transparency Drives Revaluation EV/'06E EBITDA Multiple Low High Enterprise Value Low High Segment McOpCo Brand McDonald's Total Less: FY'05E Net Debt Less: Minority Interest (Market Value) Equals: Market Value of Equity PF FY05E Diluted Shares Outstanding $1.Final Revised Proposal.263 $68.25bn of proceeds from IPO and $1.0x 13.186 $7.464 5.306 1. (1) Based on 10/31 closing price of $31.594 7.75bn of existing cash on hand used to repurchase shares. Analysis is pro forma for a McOpCo spin-off and McDonald’s share buyback.908 55.065 1.

762 100. Intl.0% 18. Franchisees.0% 22.0% $260 (1) 14.7% 3. Unit Sales Operating Income Before Rent Expense Less: Market Rent & Franchisee Fee Operating Income after Rent and Franchise Fee Plus: Estimated D&A 4-Wall EBITDA (w/ Mkt. President of McDonald’s North America.7% Avg. McOpCo units and 6. US McOpCo Unit $1.912 $433 249 $185 57 $242 100.0% 8. at McDonald’s Analyst Meeting at Oak Brook.117 International McOpCo units. ($ in thousands) Avg. McOpCo Unit $1.8% Avg.ppt Appendix Average Unit Level EBITDA Margins Set forth herein is a table which details our assumptions regarding average unit level 4-Wall EBITDA margins for McOpCo and U.8% ________________________________________________ Note: McOpCo estimates based on FY 2004 financial data and assumes 2. 57 .002 U.0% 5. .S. (1) As presented by Ralph Alvarez.8% 3. IL on 9/21/05.0% 12.S. US Franchisee Unit $1.0% 9.494 $281 194 $87 45 $132 100. Fees) Avg.8% 13.Final Revised Proposal.7% 13.

Final Revised Proposal. Case Studies McDonalds 7 Year Stock Price Performance: January 1999 to present $50 $45 $40 $35 $30 $25 $20 $15 $10 1/19/99 $48 11/12/1999 10/1/99 6/12/00 2/22/01 11/4/01 7/17/02 3/29/03 12/9/03 8/20/04 5/2/05 1/13/06 58 .ppt III.

L. .Don’t Judge a Book By Its Cover November 9. 2006 Pershing Square Capital Management.P.

1 . estimates. Inc. are made as to the accuracy or completeness of such statements. dispose of. It is possible that there will be developments in the future that cause such funds to change their positions regarding the Company and possibly increase.P.public securities. The analyses provided include certain estimates and projections prepared with respect to. ("Pershing") regarding Borders Group. the historical and anticipated operating performance of the Company. among other things. estimates or projections or with respect to any other materials herein. No representations. express or implied. reduce. (“Borders” or the “Company”) are based on publicly available information. Such statements. and projections reflect various assumptions by Pershing concerning anticipated results that are inherently subject to significant economic. Pershing recognizes that there may be confidential information in the possession of the Company that could lead the Company to disagree with Pershing’s conclusions. Pershing advises funds that are in the business of trading .Disclaimer The analysis and conclusions of Pershing Square Capital Management. and other uncertainties and contingencies and have been included solely for illustrative purposes. or change the form of their investment in the Company.buying and selling . L. competitive. Actual results may vary materially from the estimates and projected results contained herein.

6bn and Equity Value of $1.1bn (1) Note: BGP fiscal year ends on January 31. 2 .S.8x P / ’06 EPS: 27.Borders Group 2nd largest U.9x EV / ’06 EBITDA – Maint. Capex: 8. book retailer Ticker: BGP Recent price: $21 13% of U. retail book market (versus Barnes and Noble at 17% and Amazon at 10%) 2006E Rev of $4. Assumes a $21 current stock price for BGP throughout this presentation. (1) Based on management’s guidance for Net Debt and shares outstanding at year end 2006. Presentation based on a Calendar year. EV / ’06 EBITDA: 6.2x Forward estimates based on Pershing estimates.S.1bn and EBITDA of $235mm Year-end Enterprise Value of $1.

and Australia ■ 90 units / mix of large / small format stores ■ Declining profitability 68% 92% 10% 15% 3% -2% .K.What is Borders? Superstores ■ Large format (25.000 sq ft) ■ Large selection ■ 476 units ■ Most profitable segment ■ Positive sales trends % LTM Rev. % LTM EBITDA % LTM ROA Mall Stores ■ Waldenbooks ■ Small format. mall-based ■ Limited selection ■ 600 units ■ Negative sales trends and declining profitability 17% 5% -1% 3 International ■ U.

50 $27.50 1 /5/01 1 5/5/02 1 /5/02 1 5/5/03 1 /5/03 1 5/5/04 1 /5/04 1 5/5/05 1 /5/05 1 5/5/06 1 /5/06 1 4 .47 $ 26.50 per share in February 2005 but has since traded down primarily due to weakening margins and same store sales trends $ 28.50 Recent price: $21 $ 18.Five Year Stock Price Performance Borders was trading at approximately $27.50 $ 22.50 $ 20.50 $ 14.50 $ 12.50 $ 16.50 $ 24.

4% from the previous four-year average of approximately 8.0% 8.6% 8.0% 9.0% 2001 2002 2003 5 2004 2005 .0% 7.4% 8.5% 7.4% 8.0% 3.Borders Historical Financial Performance In 2005.0% 4.0% 6.8% 8.6% Adjusted EBITDA and Margins $350 $300 $250 $200 $150 $100 $50 $0 $294 $308 ($ in millions) $333 $318 $300 10.0% 5. Borders’ consolidated Adjusted EBITDA margins fell to 7.

) Low margin. legacy mall stores Limited free cash flow due to large. recent cap ex initiatives Consolidating distribution centers Significant store remodel program 6 .Traditional Sentiment on Borders Unattractive industry “Amazon risk” Consumer interest in books is declining Difficult SSS comparisons with Harry Potter Second place operator behind Barnes and Noble More exposure to declining Music category Worse execution (lower working capital turns and sales / sq.ft.

Why Do We Like Borders? .

The book superstore industry is misunderstood “Amazon risk” is largely exaggerated for superstores Book superstores are valuable franchises Minimal inventory risk because inventory is returnable at cost Maintenance capital is significantly less than depreciation because long-lived leasehold improvements are depreciated over initial lease term 8 .Why Do We Like Borders? 1.

including (1) Remodel program. within the Superstores segment. and (3) Distribution center consolidation. Borders is a mix of high-quality businesses and several low-ROI.Why Do We Like Borders? 2. value is being masked by a declining category as well as several recent management initiatives Rapid decline of Music sales (music was 22% of sales in 2001. (2) Rewards program. money-losing businesses which are in the process of being rationalized Value of core Superstores business is obscured by declining profitability in the Mall Stores and International Stores In addition. have reduced reported Superstores profitability 9 . now roughly 11%) Recent initiatives.

growing and improving Stable EBITDA margins (9.5% .10+%) with high ROIC Expected annual square footage growth of ~6% Remodeling program will reduce Music category exposure Opportunity to increase working capital turns Mall and International segments are low ROIC businesses that can be monetized with minimal disruption Estimated ~$200mm of Net Working Capital on an estimated ~$15mm of EBITDA contribution Potentially “worth more dead than alive” New Management is focused on rationalizing business 10 .Why Do We Like Borders? (cont’d) Superstores are healthy.

5 years Common shares outstanding reduced by ~ 20% Company is repurchasing ~14% of market cap in the second half of 2006 New CEO George Jones joined in July 11 . Extensive share repurchase program and newly hired CEO should help drive value creation ~$500mm of share repurchases in the past 2.Why Do We Like Borders? 3.

“Misunderstood Industry” .1.

“Amazon Risk?” Superstores have increased share in tandem with Amazon by focusing on selection and quality of experience Losers have been Independents. mass merchants) U. Mall stores. Consumer Book Industry 2005 Independents 19% Malls 10% Internet 0% Superstores 27% Other (book clubs. Mass Merchants and Book Clubs with limited selection U. mass merchants) 66% 48% Independents 12% Internet 12% Malls 1% 13 Source: Borders Group management presentation. .S.S. Consumer Book Industry 1993 Superstores 5% Other (book clubs.

high-income customers Superstores are “Mini Malls” with books as the anchor High-quality customer experience Borders ranked #2 in Overall Quality for Retailers in 2006 Harris Poll Not just a book store: café. meeting place Customer spends an average of one hour in the store Opportunity to sell more than books Barnes and Noble is the second-largest retailer of coffee in U. Borders achieving success with Seattle’s Best and Paperchase 14 .Books Superstores Are Valuable Franchises Book Superstores are attractive “anchor” tenants Favorable customer demographic – book buyers are well-educated.S. community events.

yet they represent less than 5% of typical superstore sales Nearly all (~97%) book inventory is returnable to the publishers at cost Increases gross profit margin stability Book inventory is non-perishable and generally has limited “fad” risk 15 .Gross Margin Stability at Superstores Best sellers are ubiquitous and extremely price competitive.

. Capex is less than Depreciation Reported earnings for Book Retailers understates true cash flow Borders Group ($ in mm) D&A Maintenance Capex Difference Net Income 2006E $130 50 80 $43 $123 27.Industry Maint. Assumes a $21 stock price for BGP.2x 9.4x Book retailers depreciate store assets over initial lease term ~ typically 10-15 years Maintenance capital requirements are lower than depreciation expense Fixed assets (book shelves) last longer than lease terms Maintenance costs typically limited to paint and carpeting 16 Maintenance FCF (after-tax) Price to Earnings Price to Maint FCF (after-tax) Maintenance FCF = NI + D&A – Maintenance Capex Based on Pershing estimates.

High-Quality Businesses Obscured by Money-Losing Businesses .Superstores Mall Stores International 2.

2002 2003 18 2004 2005 .0% 2001 Note: EBITDA Adjusted for non-cash asset impairment associated with store closures.Healthy Superstores Obscured by Bad Businesses Superstores profitability and stability have been obscured by the Mall and International businesses.0% 6.0% Mall Stores 2.0% Superstores 8.0% Adjusted EBITDA Margins 10.0% International 4.0% 0. which are currently being rationalized 12.

Within Superstores. launching rewards program and remodeling store base Superstores EBITDA could increase by 40+% by 2008 as result of improved product mix. unit growth and elimination of these one-time expenses 19 . there is Opportunity… Superstores performance has also been masked by declining music sales and certain one-time costs in 2006 Company has initiated a Store Remodel Program Reduce exposure to declining Music sales Increase high-margin Paperchase and Coffee sales Newly launched Rewards program and several one-time expenses have created noise in reported 2006 financials. obscuring results Expenses for consolidating distribution centers.

Borders Superstores .

Superstores: “Mini Mall” with several “Tenants” Books Café Paperchase Music DVD “Anchor tenant.” High margin + growing Specialty paper like Kate’s Paperie. High margin + growing Deteriorating rapidly Growth slowing 21 . “Mini-Starbucks.” Stable business Seattle’s Best.

4-Wall EBITDA – Maint.000 titles of books. music. $1.7mm Avg. Capex contribution of ~$700k ~29% “stabilized” unlevered ROI $700 Based on Pershing estimates. 22 $2. movies plus a Cafe Attractive unit growth 476 superstores Current plan is to grow 30 units / year (~6% annually) Unit economics: $2.000 sq.Superstores: Operating Data Typical store has 25.2mm of fixed assets.4mm of invested capital ($1.2mm of NWC) Average unit sales of $5. ft Up to 200.400 = 29% .

589 4.5% 242 9. 23 .6% 2.3% 8.0% 2.1% 2.Superstores Historical Financials Over the last five years.6% .3% -1.1% 1.710 4.319 3. EBITDA margins between 9.2% 2004 462 3.1% 8. EBITDA Margin Growth 2001 363 2002 404 11.2% 2003 445 10.470 6.8% 262 10.8% 239 10.3% ($ in millions) Operating Data: Units Growth Reported SSS Financial Data Sales Growth Adj.6% 220 9.2% 2.4% 1.8% 1. the Superstores segment has generated steady Adj.10.6% -0.6% 2005 473 2.5% 2.7% 261 9.8% EBITDA adjusted for non-cash asset impairment associated with store closures.234 2.8% 0.

0. 2.0% (4.4%) 0.8%) 3. based on our estimates 2001 Reported Superstore SSS Estimated Music SSS Music % of Sales Music Impact on Reported SSS Est.1% (12.0%) 11.6% (12.4% 1.2% (11.2%) (8. Superstore SSS (ex-music) Difference 2.0%) 15.9%) 2.0% (1.7% 24 .0%) 22.0% (1.8% 2005 1.4% 2003 1.3% Avg.0% (1.8%) 2.5% more than average reported comparable sales.Music Category Exposure Has Hurt Excluding Music sales.2% 1.0% (0.0%) 17.9% 0.0% 1.9% 2002 (1.3%) 2.2% Avg.4%) 16.4% 1.0% (1. Superstores same store sales (“SSS”) trends have averaged 1.8% 2004 0.

6% sales lift 40bps of margin improvement due to mix shift to higher-margin products with minimal maintenance capital requirements Remodels one year after conversion continue to outperform 25 .Remodeling: Improving the Superstore Remodeling program will reduce Music category exposure by ~50% and improve Coffee and Paperchase sales Reducing Music category exposure and replacing with high-margin Paperchase category Music margins are ~20% versus Paperchase margins of ~50% Paperchase has higher sales per square foot than Music Upgrading Café offering to Seattle’s Best Coffee (Starbuck’s subsidiary) Significant financial benefits in Year 1 Estimated storewide 2.

0% $52 40 bps $23 $75 $335 22.848 2.5% Commentary Note: 40% current contribution margin Seattle's Best Coffee / Specialty Paper Based on Pershing estimates and management guidance. the New Format Superstores should have over 22% return on remodel cap ex $ in thousands Revenue Sales Lift (Year 1) Incremental Sales Contribution Margin Profit on Incremental Sales Margin Benefit from Mix (Year 1) Margin Increase from Mix Combined Margin Benefit Remodel Cost (net of W/C reduction of $15k) ROIC (Year 1) Old Format $5.Remodeling: Attractive Use of Cash Flow Based on the first year of remodel activity.6% $148 35. 26 .700 New Format $5.

Rewards Program Creating “Noise” in Financials Newly launched Rewards Program has created noise in Superstores financials What is the Rewards Program? 5% of all purchases (triggered at $200 per Rewards customer) are credited towards a Holiday Spending Account “Use it or lose it” What is the impact? Accrual assuming 100% redemption Launch and accrual expenses have reduced YTD Superstores segment EBITDA compared to prior years Rewards accruals of $8.4mm Advertising and payroll for launch of $4.2mm Reduced YTD EBITDA by 18% 27 .

Rewards Program Creating “Noise” in Financials
What will be the impact of Rewards going forward?
Q3 reported earnings will feel the most impact Accrual amount likely to accelerate as larger member base exceeds $200 spending level Q3 is historically the weakest quarter, usually breakeven to slightly negative earnings We expect that Q4 will see a positive impact from Rewards We believe Q4 guidance conservatively assumes high redemption rate and no incremental sales Prior year test markets showed positive impact Comparable sales in test markets were higher – implying incremental sales Avg. ticket w/ rewards credit was 2x avg. ticket w/o rewards credit
28

One-Time Costs Expected in 2006E

Superstores Segment Financials
($ in millions)

Redundant distribution center costs: YTD $7.8mm

Same store sales Revenue EBITDA Margins One time costs: Redundant Distribution Center Costs Advertising / G&A for Launch of Rewards Impact of Remodels Total Pro Forma EBITDA Pro Forma Margins

2005A 1.1% $2,710 261 9.6%

2006E 0.0% $2,795 228 8.2%

Launch of Rewards: YTD: $4.2mm

$10 5 5 $20 $249 8.9%

One time P&L impact of Remodels: YTD $2.5mm

Based on Pershing estimates.
29

What Could Superstores EBITDA be in 2008?
Assuming 2% comps and the Company’s unit growth plan, if EBITDA margins were to improve 100bps by 2008 (returning to 5-year average levels), EBITDA could increase by 41% from “reported” levels

$340 $320 $300

EBITDA $ in millions

$280 $260 $240 $220 $200 $180

$289 8.9% $249 8.9%

$322 9.9% Margin
Avg. 5 year margins: 9.9%

41%
increase

$228 8.2% EBITDA Margin
Superstores 2006E EBITDA

One-time expenses in 2006 of ~$20mm
30

2% comps and 30 new units annually

Remodeling & SSS leverage: 100bps margin increase

Working Capital Opportunity
Potential for $130mm of cash flow generation (or ~12% of the current equity market value) through working capital improvements at Superstores over the next 2 years
Net Working Capital at Superstores currently at ~$550M Company can reduce working capital by 10-15% near term and 30-40% in the long term Consolidating distribution centers and new merchandising system Increasing “face outs” / decreasing stock Current Superstores inventory turns of ~1.7x We have assumed Superstores segment achieves inventory turns equal to 2.2x, a discount to Barnes and Nobles at ~2.4x Equals approximately ~$130mm of free cash flow generation
31

Mall Stores

Mall Stores: Obsolete Format
Obsolete Format: Mall stores have difficulty competing with Mass Merchants on price and with book superstores on selection / “experience”
~600 Waldenbooks stores Typical store has 3,000 sq. ft and 30,000 titles Best sellers are a higher % of sales Weak margins / deteriorating business 2006E Revenues of $615mm and EBITDA of $5m Seasonal Calendar Kiosk business is the main EBITDA contributor Barnes and Noble has exited nearly all mall locations…
33

Mall Stores: Deteriorating Business
Mall segment Adjusted EBITDA margins in 2005 were 3%, having fallen ~60% since 2003
$80 $70

7.4% $67

7.2% $61

7.5%

8.0% 7.0%

$61 5.6%
6.0% 5.0%

Adjusted EBITDA
($ in millions)

$60 $50

$44
$40 $30 $20 $10 4.0%

Adjusted EBITDA Margins

3.0% $23

3.0% 2.0% 1.0% 0.0%

Note: EBITDA Adjusted for non-cash asset impairment associated with store closures.

$0 2001 2002 2003
34

2004

2005

Mall Stores: Rationalization Plan

410 Mall Stores (~70% of total) have leases expiring in 2006 Management says that 200 are profitable, 200 are marginal, and 200 are losing money Plan to close unprofitable stores as leases expire Remaining stores negotiate rent reductions with 1-year renewals

35

Mall Stores: “Worth More Dead than Alive”
Assuming $150,000 of Net Working Capital on average per Waldenbooks store, we believe there is $90mm of total Net Working Capital trapped in the Mall segment

Waldenbooks Total Units Net Working Capital per store ($000) Total Net Working Capital ($ in mm) 2006E EBITDA

600 $150k $90mm ~$5mm

36

International

U.K.

Australia

International Stores
U.K. stores 37 Borders Superstores 31 Books, Etc. (small format) 90 Paperchase Australia / New Zealand: 18 Superstores 2005 EBITDA margins of 4.3% Significantly lower than 2005 Superstore margins of 9.6% We estimate International 2006E EBITDA margins of 1.5% (assuming revenue of $650mm and EBITDA $10mm)
38

International May Be Sold if Not Fixed Soon
Management has indicated it would sell the International business (franchising) if it can’t be fixed in a timely manner
International Segment has seen dramatic deterioration UK Business is struggling Books, Etc. (small format) stores are obsolete and have negative EBITDA UK Superstores challenged, contributing <$10mm of EBITDA Aus/NZ business is healthy, contributing ~$10mm of EBITDA Management sees no synergy to operating international markets, has ceased additional development
39

International: Worth More Dead than Alive?
Based on our assumptions, we believe there is approximately $110mm of Net Working Capital in the International Stores
NWC / Store
UK Superstores Books, Etc. (small format) Australia / NZ Superstores $2.2mm $285k $900k

# of Units
37 31 18 4

Net Working Capital (mm)
$80 9 16 5 $110 ~$10

Other (Puerto Rico, Singapore, etc…) $1.2mm Total (in mm)

2006E International Stores EBITDA (mm)

40

3. Other Factors: Share Repurchase Activity and New CEO

Strong Share Repurchase Focus
Borders management guidance implies ~55mm common shares outstanding by January 2007. This is an approximate 30% reduction from its common share count in March 2004 of 78mm. Borders common share outstanding
90 80 70 60 50 40 30 20 10 0

78 73 65 55

March 2004

March 2005
42

March 2006

January 2007E

New CEO: Focused on Returns
New CEO, George Jones Joined in July Purchased ~$1mm of stock Retail merchandising and operations expertise (Target, Warner Bros., Saks) Renewed sense of urgency Fixing / rationalizing the business Emphasis on returns
43

Valuation

Valuation Assumptions
We believe our valuation assumptions are conservative
No EV / EBITDA multiple expansion Mall and International Segments value based on NWC The least these segments are worth Upside at International segment -- it was generating $40mm of EBITDA in 2004 (versus ~$10mm in 2006E) Reduced share repurchase rate Current rate of ~$250mm/year We assume $80mm/year (proceeds from Superstores net working capital improvements and FCF after capex) No incremental leverage to fund share repurchases
45

Borders Group: What’s It Worth?
With no multiple expansion, Borders could be worth $36 in the next 18 months, a 72% premium to the current price (of $21).
Segment Superstores Mall Stores International Unallocated G&A Methodology 7.0x '08E EBITDA of $322 Commentary Assumes no multiple expansion The least it's worth The least it's worth Value $2,257 90 110 ($175) $2,282 (450) $1,832 55 (4) 51 $36.17 72.2%

Value of Net Working Capital Value of Net Working Capital 7.0x '08E EBITDA of ($25)

Enterprise Value Less: Net Debt expected at Year End 2006 Equals: Equity Value FD shares outstanding expected at year end 2006 Less: Shares repurchased using $130mm from NWC improvement at Superstores, net of options (1) Equals: FD shares outstanding
$ in millions, except per share data

Share price Premium to current price

(1) Assumes $130mm of proceeds from Net Working Capital improvement and $30mm of FCF generated between 2007 – 2008 used to repurchase shares at $30 per share. Fully diluted calculation based on the treasury stock method and assumes ~7mm of options outstanding by FYE 2008.
46

Trading Multiples at Target Valuation
At a $36 share price (adjusting for ~$4 of equity value ascribed to the NWC at the Mall and International Stores), Borders would trade at 7x ’08E EBITDA, 7.5x ’08E EBITDAR and approximately 11x ’08E Maintenance Free Cash Flow
BGP Trading Multiple EV / EBITDA EV / (EBITDA - Maint Capex) Adj EV / EBITDAR Price / Earnings Price / Maint Free Cash Flow 2008E 7.0 x 8.4 x 7.5 x 14.7 x 10.9 x

47

Recent LBO Leverage Levels
At a $36 price, Borders would trade at 7.5x ’08E EBITDAR, only a slight premium to 6.8x, the average of total leverage levels used in several recent retail LBO transactions

Transaction: Linens 'n Things Burlington Coat Factory The Sports Authority Michael's Stores Average

Purchase Price EV / EBITDA 7.7 x 7.4 x 7.7 x 11.0 x 8.5 x

Total Leverage Adj. Debt/ EBITDAR 6.2 x 6.5 x 6.8 x 7.8 x 6.8 x

48

Concluding Thoughts

Concluding Thoughts Borders is similar to other investments where we have had success Value of high-quality segment obscured by performance of low-return segments Traditional sentiment on the Company is “negative” or neutral at best Market is more focused on consolidated same store sales rather than the underlying business quality New CEO is focused on making changes to fix the business 50 .

etc…) Near-term risk is somewhat mitigated by an upcoming slate of strong book releases We believe it will take time for management to realize full opportunity 51 . Remodeling.Concluding Thoughts… Investment requires a long-term view… Near-term performance impacted by current business structure and initiatives (Rewards.

.

P.A TIP for Target Shareholders October 29. . L. 2008 Pershing Square Capital Management.

The Information includes certain forward-looking statements. including those described under the caption “Risk Factors” in Target’s filings with the Securities and Exchange Commission as well as general economic. nor any representative of Pershing. The sole purpose of presenting the Information is to inform analysts and shareholders about the transaction described in this presentation (the “Transaction”). express or implied. estimates and projections may prove to be substantially inaccurate. shareholders and others should conduct their own independent investigation and analysis of Target. None of Pershing Square Capital Management. and (iii) you should seek advice from an independent advisor. we inform you that (i) any discussion of U.S. Pershing is in the business of buying and selling securities. Such statements. sell or change the form of its position in Target for any or no reason. 1 . competitive pressures. Pershing and its representatives expressly disclaim any and all liability relating to or resulting from the use of the Information or any errors therein or omissions therefrom. its affiliates and any of their respective officers. tax matters contained in this communication (including any attachments) is not intended or written to be used. L. Neither Pershing nor any of its representatives undertakes any obligation to correct. and may in the future. buy. The preparation and distribution of this presentation should not be taken as any form of commitment on the part of Pershing to take any action in connection with the Transaction.P. the Transaction. “Pershing”).. Target. This presentation does not constitute an offer or a solicitation of any kind. directors and employees (collectively. including under applicable securities laws. and should not be considered a recommendation with respect to. operating and stock market performance of Target in the absence of the Transaction and the two public companies that may result if the Transaction is completed. inflation. and are subject to significant uncertainties and contingencies beyond Pershing’s control. and cannot be used. credit. Except where otherwise indicated. The Information is not intended to provide the basis for fully evaluating. the Information speaks as of the date hereof. the Transaction and the Information. Neither Pershing nor any of its representatives makes any representation or warranty. IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS.Disclaimer The information contained in this presentation (the “Information”) is based on publicly available information about Target Corporation (“Target”). Pershing recognizes that there may be confidential or otherwise non-public information in Target’s possession that could lead others to disagree with Pershing’s conclusions. the securities of Target or any other matter. as to the accuracy or completeness of the Information or any other written or oral communication made in connection with this presentation or the Transaction. (ii) any such discussion of tax matters is written in connection with the promotion or marketing of the matters addressed. It has. Thus. capital and stock market conditions. interest rate fluctuations. regulatory and tax matters and other factors. geopolitical conditions. has independently verified any of the Information. The Information does not purport to include all information that may be material with respect to the Transaction or Target. update or revise the Information or to otherwise provide any additional materials. estimates and projections with respect to the anticipated future financial. reflect significant assumptions and judgments that may prove to be substantially inaccurate. for the purpose of avoiding penalties under the Internal Revenue Code.

we are presenting this revised Transaction to the Company. and members of the investment community 2 . Today. we have been discussing a potential Transaction with Target management Pershing has improved its initial Transaction to address issues raised by the Company.Pershing’s Investment in Target Pershing initiated its investment in Target (“Company”) in April 2007 We currently have beneficial ownership of slightly less than 10% of the Company Since May 2008. its shareholders.

and its shareholders 3 .Pershing’s Relationship with Target Since our first meeting with management in the summer of 2007. Pershing has enjoyed a very constructive relationship with Target We view Target’s management as the best in the Retail Industry We appreciate management’s willingness to listen to and evaluate ideas proposed by shareholders Our goal is to work with management and other shareholders to find the best strategic and valuemaximizing outcome for the Company. its employees.

Pershing thought it would be beneficial to share the idea publicly with Target stakeholders and the investment community The Transaction is important enough to warrant “testing” with shareholders We think the insights gained by sharing the Transaction publicly will be of tremendous benefit to Target as well as other stakeholders Target is currently evaluating the Transaction By going public with our presentation in advance of Target’s decision regarding the Transaction.Why Are We Going Public? Given the materiality of the Transaction. shareholders and the investment community can provide their input on the Transaction’s merits 4 .

Significant Preparation and Analysis To assist in preparing this presentation. and tax advisory services Note: All financials in this presentation are based on Calendar Year 5 . structural. Pershing retained UBS Investment Bank (“UBS”) and Sullivan & Cromwell LLP (“S&C”) as financial and legal advisors Pershing and its advisors’ analyses are based on publicly available information UBS has provided financial advisory services S&C has provided legal.

Agenda Objectives The Transaction Transaction Rationale Valuation Appendix ■ Detailed Valuation Analysis ■ Credit Rating Analysis ■ Structural and Legal Considerations 6 .

Objectives .

Target: Retail and Real Estate Operations Retail Operations ■ Iconic U. retail brand ■ Best-in-class operator with distinctive merchandising strategy ■ 1. not accounted for in public market valuation ■ Owns ~95% of its retail buildings and ~85% of the land under its retail locations ■ Owns ~84% of its distribution centers (“DCs”) and ~81% of the land under its DCs ■ Facilities Management Services comprising hundreds of employees responsible for property maintenance 8 .S.685 stores in 48 states ■ Best management team in the retail industry ■ Attractive growth profile. driven by mid-tohigh single-digit square footage growth and market share gains ■ Recently sold an undivided interest in credit card receivables Real Estate Operations ■ High-quality owned real estate in attractive suburban and urban locations ■ Significant value embedded in real estate.

Significant Real Estate Ownership Target owns the highest percentage of its real estate compared to other big box retailers 100 90 % Units Owned (Buildings)1 80 70 60 50 40 30 20 10 0 34% 34% 68% 63% 58% 95% 92% 87% 87% % owned units/land(2): 85% % DCs owned(3): 84% 79% ND ND 2% ND 84% 55% 76% ND 55% 35% 89% ND 54% 27% ND “ND” represents Not Disclosed (1) Represents % owned stores (includes owned stores on leased land) (2) Represents % owned stores on owned land only (3) Represents % owned DCs (includes owned DCs on leased land) 9 .

Target would pay an additional rent of $2.4bn and that Target retains $150mm of credit card income 10 .8bn (1) Implied cap rate of 8.9 4. ft.9 Target’s resulting EBITDA after rent expense would be $3.4 0.5bn in 2008 Target Real Estate Co $ in billions Target Retail Sales Implied Retail Rent as % of Sales Percentage of Owned Real Estate Retail Rental Income Dist. valued at $50 per square foot (2) Assumes for illustrative purposes that the remaining 53% interest in credit card receivables is sold to an Investment Partner for $4..25/sq. ft.25% of store sales (or approximately $13/sq.0x $26.25% 85% $2.What if Target Were to Rent its Real Estate? Assuming that Target were to rent all of its owned store locations at an estimated market rent of 4.5) $3.2 $2. Facilities Rental Income Real Estate 4-Wall EBITDA 2008E $64.8 (1) Implied EV of '08E EBITDA Pro Forma Target Corp 7.5% on 35mm square feet of distribution facilities.3 (2.5 Pro Forma Target Corp $ in billions Existing Retail EBITDA (2) Less: Additional Rent Equals: PF Retail EBITDA 2008E $6.) and its owned distribution facilities at $4.

Ft. ft.8 Estimated % Owned 85% Owned Sq. and DCs & WHs size of 1.438 stores. $50 Total Value ($bn) $1. Ft.5bn of Estimated Market Rent $39. (mm) 35 Value / Sq. Ft.4% (1) Based on average store size of 132k square feet. (1). develop and build or approximately $197/sq. ft. (mm) 44 Estimated % Owned 81% Owned Sq. (1) and that each Distribution Facility costs $70mm or approximately $50/sq. Ft. Ft. (mm) 222 2008E DCs and WHs: 2008E Total Sq. (3) 2008E Retail Real Estate: 2008E Total Sq. the replacement cost of Target’s owned real estate (excluding the value of its buildings on ground leased land and its existing leases) is approximately $39bn Replacement Value of Owned Land and Buildings (2).$39 Billion of Real Estate Replacement Value Assuming that on average. $197 Total Value ($bn) $37.4 Total Real Estate Replacement Value ($bn) Implied Cap Rate @ $2.1 6.4mm square feet (2) Analysis excludes the value of owned buildings on third-party ground leased land. a new store costs $26mm to zone. assumes cost of a Target store of $26mm ($13mm building and $13mm land) and cost of distribution facility and warehouse of $70mm ($50mm building and $20mm land) (3) Assumes 1. Ft. and 25 distribution facilities and warehouses on owned land in 2008E 11 . (mm) 189 Value / Sq.

0x ’08E EBITDA multiple on the pro forma retail business.Market Assigns Little Value to Target’s Real Estate Assuming Target were to rent its owned real estate and using a 7.2 47% $39. the 20-day trading average stock price of $40 implies only $13bn of value for Target’s owned real estate. a significant discount to book and replacement value $ in billions Current TGT Enterprise Value @ $40/Share Less : PF Target Corp Less : Credit Card Receivables Equals : Implied Real Estate Value Gross Book Value of Land and Buildings Discount to Gross Book Value Replacement Value of Owned Real Estate Discount to Replacement Value $48.4bn and that Target retains $150mm of credit card income 12 .4 $25.0) $13.1 66% (1) (1) Based on 2008 Q2 company filings and a 20-day trading average stock price as of 10/24/08 (2) Assumes for illustrative purposes that the remaining 53% interest in credit card receivables is sold to an Investment Partner for $4.9) (2) (8.3 (1) (26.

and relocation plans Improve the Company’s free cash flow and access to capital Increase the Company’s ROIC and lower its cost of capital Maintain an investment grade credit rating Increase the Company’s EPS growth rate Minimize tax leakage and friction costs 13 . Pershing Square’s objective was to eliminate the stock market’s ascribed discount to the intrinsic value of Target’s real estate and allow the Company to: Retain complete control of its buildings and its brand Retain 100% flexibility with respect to its construction. remodeling.Objectives In considering alternatives for the Company.

Several Alternatives Were Reviewed In the course of our work. we reviewed several structures: Transaction Alternatives 1. both at the corporate and shareholder levels Value destruction due to tax leakage at the corporate level Transaction execution may be difficult 3. given the Company’s strategy and objectives 14 . Taxable Spin-off of all owned land and buildings Large sale-leaseback transaction Value destruction due to tax leakage. Tax-Free Spin-off of all owned land and buildings Gating Items Difficult to maintain sufficient control over buildings and achieve tax-free status Lease life (including fixed rate renewals) limited to 75% of the useful life of the buildings 2. Pershing concluded that the above alternatives were not optimal.

Pershing has identified a Transaction which will achieve all of the stated objectives The Transaction is consistent with the way Target owns some of its real estate today The Transaction will create tremendous shareholder value 15 .

The Transaction .

becomes Target Corp’s Preferred Vendor for land procurement .The Transaction Tax-free spin of Target Inflation Protected REIT (or “TIP REIT”) as Groundlessor and Facility Manager Pre–Spin TARGET Shareholders Post–Spin TARGET Shareholders TARGET TARGET Corp Ground Leases Target Inflation Protected REIT Facilities Mgmt. Services Existing Retail Business Owned Buildings 1 Land New Target Corp owns its buildings on 75-year ground leases Outsources Facilities Management Services Continues to maintain properties Leases back land to Target Corp through a Master Lease for a 75-year term Elects REIT status at the time of spin-off Becomes Target Corp’s outsourced facilities management provider Becomes Target’s exclusive land developer for the first two years (1) Includes third-party ground leases 17 After two years.

remodeling. Services Land under Stores and DCs Question: How can a Retailer unlock the value of its real estate without losing control of its buildings? Answer: Tax-free spin-off of an active business that ground leases the land back to the Retailer Retailer retains ownership of its buildings and 100% control with respect to its construction.Solving a Retailer’s Real Estate Dilemma TIP REIT Facilities Mgmt. and relocation plans Retailer becomes a 75-year ground lessee for its owned properties on attractive terms with no financial covenants Retailer gets an unlevered business partner (a land-only REIT) that can more efficiently finance future land development 18 .

Unlocking Immense Real Estate Value REITs. and inflation-protected securities all trade at much higher valuation multiples than Target’s multiple.0x ‘09E EV/EBITDA.3x Inflation Protected Treasury Securities (TIPS) (3) The Transaction creates immense and instant value because 22% of Target’s current EBITDA will be valued at a significantly higher multiple than where Target trades today (1) Based on a 20-day trading average as of 10/24/08 (2) Based on mid-point precedent cap rate of 5.9% (3) Based on current 20-year TIP yield of 3.0x Recent “Big Box” Ground Lease (2) 33. based on a 20-day trading average stock price of $40 Target’s Market Valuation (1) 2009E EV / EBITDA Inflation Protected Securities / REIT Market Valuations 2009E EV / EBITDA 6. private market ground leases.7x Large Cap REITs (1) 17. at only 6.0x $40/Share (1) 15.0% 19 .

Execution is Not Impacted by the Current Markets Target does not need access to the capital markets to consummate this Transaction Given the global credit markets today. the only strategic transactions that can take place are those that do not require access to capital: Spin-offs Stock-for-stock mergers / acquisitions Acquisitions by cash-rich acquirors The Transaction is structured as a spin-off where each current shareholder will receive pro rata shares in TIP REIT No equity or debt capital is required to spin off TIP REIT 20 .

and the owned land under the distribution facilities Land TIP REIT 1 Facilities Management Services Land Lease 2 75-year Target Corp Master Lease Step 2: TIP REIT leases the land back to Target Corp through a Master Lease for a 75-year term TIP REIT Land Facilities Management Services 21 . the owned land under the stores.Transaction Plan: How Would it Happen? Asset Contribution Target Corp Transaction Description Step 1: The existing company (“Target Corp”) forms a new subsidiary (“TIP REIT”) and transfers to it the Facilities Management Services business.

estimated to be $8bn based on the implied mid-point valuation of TIP REIT/Target Corp 20% of the dividend ($1. a taxable REIT subsidiary (TRS) Step 5: TIP REIT pays a taxable dividend (at the 15% dividend tax rate to non-corporate taxpayers) to shareholders equal to its allocated portion of Target’s $16bn of retained Earnings and Profits (“E&P”).6bn) may be paid in cash with the remaining paid in TIP REIT common stock This cash dividend can be deferred until the end of the calendar year in which the REIT election occurs 3 Tax-Free Spin-off Target Corp TIP REIT 4 Facilities Mgmt Services (TRS) Land E&P Purge Shareholders 5 $8bn Taxable Dividend (E&P Purge) TIP REIT Target Corp Land Facilities Mgmt Services (TRS) 75-year Lease 22 . TIP REIT drops the Facilities Management Services business into a new corporation.Transaction Plan (cont’d) Spin-off and REIT Election Shareholders Transaction Description Step 3: Target Corp spins off TIP REIT to its shareholders pro rata and tax-free Step 4: TIP REIT elects REIT status effective immediately Simultaneously.

TIP REIT will become Target Corp’s preferred vendor for future land procurement / development needs Target Corp will have the right to re-model or tear down and rebuild stores as it sees fit Target Corp may sublease one or more sites but no sublease would release Target Corp from its obligations under the lease The lease is intended to be treated as a lease for tax purposes. TIP REIT will be Target Corp’s exclusive land developer Thereafter.Illustrative Master Lease Term Sheet Lessee Lessor Leased Property Term Target Corp TIP REIT Land in fee under stores and distribution centers 75-year term Rate Financial Covenants Preferred Vendor Agreement Maintenance of Buildings Sublease Flat dollar amounts per year with annual increases For this Transaction we have assumed annual increases based on CPI increases None For the first 2 years post-Transaction. lessor will be treated as the owner Note: The lease is assumed to be treated as an operating lease for accounting purposes 23 Lease Structure .

but on an arm’s-length basis TIP REIT will provide Facilities Management Services to Target Corp under a long-term agreement Arm’s-length terms TIP REIT expected to continue to perform Facilities Management Services for third parties after the spin-off Target Corp agrees to use TIP REIT as its land procurement developer for the first two years after the spin-off on agreed-upon terms Creates a contractual 2-year development pipeline for TIP REIT and a funding source for Target Corp Afterwards. it is anticipated that TIP REIT will be Target Corp’s land procurement developer in the future After the spin-off. Target Corp will grant TIP REIT preferred vendor status for Target Corp’s land procurement needs on market terms for future Target stores Under this Preferred Vendor Agreement.Ongoing Relationships Post separation. TIP REIT and Target Corp may also share overlapping board members The number of overlapping board members would comprise a minority of each board There may be restrictions on the duration of the overlap 24 . Target Corp and TIP REIT will continue to be closely aligned.

4bn of proceeds used to pay down debt (including all securitized debt) Elimination of $3..60/share Assumes $20mm of G&A allocated to TIP REIT and incremental $15mm of standalone costs in ’08E 25 .5%) Target sells 53% remaining interest of credit card portfolio $4.6bn JPMorgan financing Target retains $150mm of pre-tax earnings stream from its credit card business in partnership transaction Target Corp funds all maintenance capex as well as all building development TIP REIT funds all new Target store land procurement. development and improvement costs ($100/sq. ft. ft.25/sq. ft.) Assumes $125mm of ’09E internal Facilities Management Services expense at Target Corp Assumes TIP REIT receives $144mm in revenues from Target Corp and third parties.Transaction Assumptions The following transaction assumptions were used for an illustrative 01/01/09 transaction: ’09E rent/square foot on land for stores — $7/sq. equals to 7% of $100/sq.86/share in PF2009E vs. Lease Terms Credit Card Business (Both Transaction and Standalone) ’09E rent/square foot on land for distribution centers and warehouses — $1. implying a 13% EBIT margin in 2009E After reducing $4. we have assumed all existing debt stays at Target Corp Flexibility to re-allocate debt between Target Corp and TIP REIT Capital Expenditures Facilities Management Services Capital Structure Dividends TIP REIT G&A 100% of AFFO distributed at TIP REIT Results in total dividends to shareholders of $1. Rental rate grows based on CPI (assumes CPI = 2. expenses $125mm of costs and earns $19mm in EBIT. current $0. ft.4bn of debt from the sale of the remaining 53% interest of CC business (and accordingly eliminating the JPMorgan credit card liability).

4bn EBITDA in 2009E to TIP REIT 2009E Target Corp ($mm.599 1.16/share) of incremental interest expense due to CY2009 cash E&P distribution 26 18% EPS accretion from tax efficiencies and improved free cash flow .Selected 2009E Income Statement Data Based on the assumptions provided.674 1.659 1.23 $1.02 (1) $6.011 $4.528 $3.427 56 1.79 (2) $6.884 3. except per share) 2009E TIP REIT 2009E "Combined" 2009E Target Standalone 22% of total EBITDA to TIP REIT Minimal D&A at TIP REIT and no maintenance capex EBITDA D&A EBIT Taxes EPS $5.004 $2.614 1.172 1.288 1.940 4.372 7 $1.40 TIP REIT pays almost no taxes (1) Includes incremental $15mm of standalone costs at TIP REIT (2) Normalized to exclude $112mm (approximately $0.940 4. the Transaction would result in $1.

587 100.814) – (19) 150 $5.777) 20.0% (173) – (13. on DCs and WHs land for CY 2009E Incremental standalone cost of TIP REIT Assumes the sale of the remaining 53% interest on credit card receivables on 01/01/09. with Target retaining $150mm of credit card EBITDA 27 .427 21.587 – 1.472 30.834) (15) – 150 $6.249 – – $68.25/sq.940) $4.0% (1) (2) (3) (4) Reflects payment to TIP REIT of $144mm less assumed expense of $125mm Assumes rent of $7. on store land and $1.4% (1.6% (56) $1.472 30.2009E Detailed Income Statement Data The table below sets forth the Income Statements for the two entities ($mm) P&L Data: Retail Revenue Rental Revenue 1 Facilities Management Revenue Total Revenue COGS Gross Margin Gross Margin (%) Less: Existing Rent Expense 2 Less: Incremental Ground Lease Expense payable to TIP REIT Less: SG&A (excluding rent expense) 3 Less: Incremental Standalone Cost 1 Less: Facilities Management Expense 4 Plus: Credit Card EBITDA Equals: EBITDA % of Total Less: Depreciation and Amortization Equals: EBIT % of Total 2009E Target Corp $68.444 – – 144 – – – – 2009E "Combined" $68. ft.4% Intercompany Adjustments – (1.249 (47.249 (47.0% (173) (1.444) (144) ($1.00/sq.884) $3.444 144 $1.6% 2009E TIP REIT – 1. ft.0% – – (20) (15) (125) – $1.587) – 1.777) 20.0% (1.249 – – $68.444) (13.372 29.587) – (1.172 78.659 100.599 100.288 70.

16/share) of incremental interest expense due to CY2009 cash E&P distribution 28 . normalized to exclude $112mm (approximately $0.2009E Maintenance Free Cash Flows The Transaction achieves significant cash flow savings given the taxefficient structure for owning land 2009E Maintenance Free Cash Flow per Share (1) $6 Maintenance FCF/Share $5 16% $3.54 TIP REIT $1.68 $4 $3 $2 $1 $0 Target Target "Combined" (1) Includes cost of store remodeling.92 Target Standalone $4.86 Target Corp $2.

599 (1.714) (673) (1.528) 79 73 $2. normalized to exclude $112mm of incremental interest expense due to CY2009 cash E&P distribution (3) Assumes tax rate of 38% for Target Corp and TIP REIT Facilities Management Services business 29 .278 $4.0% at TIP REIT.830 721 $3.Detailed 2009E Maintenance Free Cash Flows The Transaction achieves significant cash flow savings given the taxefficient structure for owning land ($mm.011) 79 73 $3.92 Maintenance FCF/share accretion ($) Maintenance FCF/share accretion (%) $0.54 2009E Standalone 1 $6.2% at Target Corp and 7.172 (1.714) (694) (1. except per share data) Cash Flow Data: EBITDA Less: Maintenance Capex 2 Less: Interest Expense 3 Less: Taxes Plus: Change in Net Working Capital Plus: Other Equals: Maintenance Free Cash Flow Weighted Average Shares Outstanding Maintenance FCF/Share 2009E Target Corp 1 $5.714) (748) (1.933 722 $2.68 2009E TIP REIT $1.86 2009E "Combined" $6.004) 79 73 $1.344 722 $1.4bn on 01/01/09 with Target retaining $150mm of credit card EBITDA (2) Assumes interest rate on debt of 6.427 – (76) (7) – – $1.62 16% (1) Assumes sale of remaining 53% interest on credit card receivables for $4.614 (1.

this Transaction would result in total combined value of $70 per share for Target shareholders (74% premium to the 20-day average trading price) and $83 per share twelve months later $83 $80 $70 TIP REIT $60 $/Share 74% $40 Target Standalone TIP REIT $42 $40 $38 Target Corp Target Corp $20 $32 $0 Target (20-Day Avg. Price) ¹ Target REIT Spin-Off ² $42 12-Month Price Target ² For illustrative purposes. assumes Transaction occurs on 01/01/09 (1) Based on a 20-day trading average as of 10/24/08.Valuation Summary Based on the assumptions provided and using the mid-point of the valuation analysis. assumes sale of remaining 53% interest on credit card business with proceeds used to pay down debt (2) Based on mid-point of valuation analysis 30 .

Even ignoring valuation benefits. there are important strategic reasons to consummate the Transaction… 31 .

Transaction Rationale .

16/share) of incremental interest expense due to CY2009 cash E&P distribution 33 .60/share today to $1.Transaction Rationale Target Corp retains control over its buildings and brand Improves Target’s access to capital and decreases its capital needs Creates a non-cash currency for tax-efficient real estate acquisitions Improves management focus on core operations Tax-free spin-off Optimizes ownership of land Increases total free cash flow Improves store-level ROIC and Target’s EPS growth rate Maintains investment grade credit ratings profile Increases total dividends from $0.86/share in 2009E (1) Enormous value creation (1) Excludes $112mm (approximately $0.

remodeling.Retains Control Over its Buildings and Brand Flexible lease structure will allow Target Corp to retain control of its brand and stores Target Corp maintains control over its real estate construction. and relocation efforts All economic benefits of construction / remodeling of stores stay with Target Corp Ground lease provides Target Corp with a high degree of control and flexibility 75-year lease term with the ability to relocate and sublease Lease term flexibility on a store-by-store basis Contingent rent eliminates GAAP straight-line rent leveling requirements Unique landlord / tenant relationship benefits both TIP REIT and Target Corp TIP REIT and Target Corp have a mutual vested interest in maintaining the strong viability of the Target brand and retail business 34 .

in-demand tenant Diversified real estate geography 35 TIP REIT will have better and cheaper access to the capital markets than any retailer. only the most stable and unlevered businesses can freely access the debt and equity capital markets. TIP REIT will be one of the most stable companies in the world today TIP REIT Simple. predictable business High margins and strong cash flows Unlevered balance sheet 75-year lease No transaction income Inflation-protected income stream Tremendous security No maintenance capital requirements No currency or commodity risk High-quality. As such. Target will have a stable strategic and financial partner to fund future growth .Improves Overall Access to Capital Today.

ft. it costs Target approximately $100/sq. In 2009. legal. engineering. to procure and develop land for its stores. this is expected to amount to roughly 50% of growth capital or $1.1bn Land Cost of raw land Permits / Zoning Professional fees (title search. appraisal. etc…) Surveying and environmental assessments Real estate taxes Land Improvements Land excavation (fill.Decreases Target Corp’s Capital Needs Today. on average. grading) Drainage Demolition costs of existing properties (1) Sewage systems (1) Parking lots (1) Lights (1) Fencing (1) Sidewalks (1) Landscaping (1) Depreciable asset 36 Outsourcing these capital requirements to TIP REIT would increase Target Corp’s cash flows and decrease its need for growth capital .

Decreases Target Corp’s Capital Needs (cont’d) The Transaction enables Target Corp to generate more free cash flow after growth capex than Target today.933 (1.112) – $821 2009E TIP REIT $1.087 2009E Standalone (1) $2.079) $1.112) (1. except per share data) Maintenance Free Cash Flow Less: New Building Development/Other Capex Less: New Land Development Capex Equals: Free Cash Flow after Total Capex 2009E Target Corp (1) $1. As such.079) $266 2009E "Combined" $3.344 – (1.112) (1.079) $639 Target Corp would have approximately $200mm of incremental FCF after growth capex versus Target Standalone as a result of not funding new land development and reduced taxes (1) Assumes sale of remaining 53% interest on credit card receivables for $4. Target Corp will not need to access the capital markets because TIP REIT will provide future growth capital and taxes will be reduced ($mm.278 (1.830 (1.4bn on 01/01/09 with Target retaining $150mm of credit card EBITDA in '09E 37 .

Creates Currency for Tax Efficient Acquisitions Utilization of an UPREIT structure would provide TIP REIT with an attractive acquisition currency that allows selling landowners to access liquidity. and yield without triggering tax An UPREIT owns some or all of its assets through an Operating Partnership (“OP”) and can make acquisitions by exchanging OP units for real property OP units are convertible. diversification. on a one-for-one basis. into TIP REIT shares 38 .

Creates Currency for Tax Efficient Acquisitions There are several benefits to an UPREIT structure To TIP REIT: OP units are an attractive acquisition currency in transactions with landowners who typically have a very low basis in their properties OP units do not require any capital market access TIP REIT may be able to acquire land from current Target landowners who historically would not sell for tax reasons To Land Owners: Defers tax on sale of land to OP Conversion right gives seller liquidity OP unit represents a diversified real estate investment Structure allows a diverse group of property owners to manage individual tax. liquidity. and other needs 39 .

and zoning Environmental planning Target Corp can better focus on retailing while TIP REIT can focus on facilities management and land acquisitions 40 .Improves Management Focus Management will be able to focus on retail operations Target’s core competency is retailing (i. and designing a unique shopping experience) Management will increase focus on Target’s core competencies and outsource certain other functions: Facilities management (lawn care. etc.) Land development. marketing. branding. planning.e. parking lot maintenance. merchandising.

widely-held ownership of Target Corp and TIP REIT. in addition to its retail business. and absence of plan by shareholders to sell stake in either company evidence that transaction is not a device Leases are structured to ensure TIP REIT is treated as tax owner of land Business Purpose Active Trade or Business Both Parent and SpinCo must each be engaged in an active trade or business immediately after the spin-off The business must also have been conducted throughout the 5-year period ending on the date of the spin-off The spin-off cannot be principally used as a device for the distribution of earnings and profits Device Distribution of Control Parent must have control of SpinCo immediately prior to the distribution Control means 80% of total voting power and 80% of the number of shares of each class of non-voting stock 41 Target Corp will have control of 100% of TIP REIT prior to spin-off . for the past five years TIP REIT expected to continue to offer Facilities Management Services to customers other than Target Corp Non-tax business purpose for separation.Tax-free Spin-off The Transaction satisfies all of the requirements for a tax-free spin-off Requirements The spin-off must be motivated by a non-tax corporate business purpose Application Improved access to capital and capital allocation Improved currency for future real estate acquisitions Improved management focus on retail operations Enhanced equity-based management compensation Leases are structured to ensure TIP REIT is treated as tax owner of land Facilities Management Services business is an active trade or business that has been conducted by Target Corp.

ground rent is tax deductible As such. covenant-free ground lease On the other hand. long-term ground leases are a more tax-efficient way for a tax-paying entity to control real estate than outright land ownership Unless it is in the business of land speculation.Optimizes Land Ownership: Depreciation Considerations Raw land (and the majority of the capitalized costs associated with land procurement / development) cannot be depreciated Unlike buildings. a REIT should own land since (1) it is not a taxpaying entity and does not get any benefits from depreciation and (2) it is in the business of owning real estate 42 . there is no distinct strategic advantage for a retailer to own land versus a very longterm. which are depreciable and remain at Target Corp. land development has minimal offsetting tax deductibility However.

cash or cash items and Government securities REIT can conduct non-real estate related activities through a taxable REIT subsidiary (TRS). TRS shares could be up to 25% of the gross asset value of all the REIT’s assets At least 75% of REIT’s gross income must consist of rents. REIT must distribute C-Corp earnings and profits by end of taxable year At least 90% of REIT taxable income must be distributed annually (undistributed income would remain subject to corporate-level tax) 43 Income Test Distribution Requirements TIP REIT will make a taxable distribution of stock and cash by December 31 of year of spin-off to purge retained Earnings and Profits TIP REIT will distribute ≥ 100% of its REIT taxable income . rental income and dividends will satisfy the 95% income test New 9. thus optimizing the ownership of land for Target shareholders REIT Requirements Ownership REIT must have 100 or more shareholders Five or fewer individual shareholders may hold no more than 50% Application TIP REIT will be widely held by the public Restrictions will be placed on the ownership of TIP REIT shares to ensure no single shareholder may own > 9.9% TIP REIT ownership restriction will ensure that rents from Target Corp are not relatedparty rents Asset Test At least 75% of assets must be comprised of real estate.Optimizes Land Ownership: REIT Conversion The Transaction satisfies all the requirements of a REIT conversion.9% of its shares Land satisfies the asset test The Facilities Management Services business will be placed in a TRS and its income will be taxed at the corporate level The value of TIP REIT’s TRS shares will be less than 25% of the total value of TIP REIT Rental income from leases will satisfy the 75% income test. gain from disposition of real property and income from other REITs Rents from related parties are disqualified under the income test (parties are related if there is a 10% or greater ownership by vote or value of the tenant by the REIT) At least 95% of gross income must consist of (i) income that satisfies the 75% income test and (ii) dividends and interest from any source In the year of election.

23 $1.40 Using Target’s ’09 P/E multiple of 11.79 $4.54 $4.02 $3.68 $2.86 $1.62 2009E Maintenance FCF/Share 2009E EPS 1 1 $2.8x (based on $40/share).16/share) of incremental interest expense due to CY2009 cash E&P distribution 44 .62 $0.Increases Total FCF via REIT Conversion The Transaction allows for greater free cash flow generation for Target’s shareholders than the Standalone company provides Most D&A remains at tax-paying entity (Target Corp) Ground lease expense at Target Corp is tax deductible REIT does not pay taxes TARGET Corp TIP REIT 2 TARGET “Combined” TARGET Standalone Differential $0.92 $3. the incremental earnings accretion from this Transaction creates $7 per share of value ignoring other valuation benefits (1) Assumes sale of remaining 53% interest on credit card business is sold in both Standalone and Transaction scenarios (2) Normalized to exclude $112mm (approximately $0.

8% (1) Assumes $0. Store Margin (%) New Land Capex New Building Capex Total Investment Estimated Returns on Investment (%) $40 34 -$6 15. Store Estimated Four-Wall Operating Costs Ground Lease Expense per Avg. Store Estimated Four-Wall EBIT per Avg. ft.0% -13 $13 39.0% $40 35 1(1) $5 13.Improves Store-level ROIC at Target Corp Assuming the average store real estate costs $26mm. on average 45 .8% Owned Store Level Operating Data and Assumptions ($mm) Standalone 2007A Pro Forma 2007A Retail Sales per Avg. store-level return on investment increases from 23. lease cost and 131k of store square footage. based on $7/sq. of which $13mm is allocated to the land and $13mm to the building.9mm of ground lease rent expense.0% $13 13 $26 23.0% to 39.

2 EPS Growth (%) $3.89 13.6% Target Standalone 1.40 3.2% 20.23 2010 $2.67 19.18 13.0% 30.90 14.27 15.8% $4.70 15.1% 30.5% 7.7% 30. ft.5% 2011 $3. growth Gross Margin SG&A as % of sales 0.5% 4.0% 20.29 $3.3% 17. and more efficient capital structure.2% 20.0% (1) Assumes remaining 53% interest of credit card business sold for $4.0% 3.3% 4.5% 30. improved free cash flow profile.5% 6.5% $3.2% 3.7% Memo: Operating Assumptions: Same-store sales Sq.0% 30.2% 2012 $3.5% 2013 $4.Increases Target Corp’s EPS Growth Rate Because of its higher ROIC.1% 3.0% 3.57 17.4% $5.5% 6.20 20.4bn on 01/01/09 and all proceeds used to pay down debt (2) Assumes Target Standalone maintains existing dividend policy 46 .2% 20.1% 20. Target Corp’s EPS growth will exceed that of Target Standalone Earnings per Share ($) '09-'13 CAGR (%) 2008 PF Target Corp 1 EPS Growth (%) 2009 $2.8% 14.0% $5.

(2).0% 12 9 6 3 0 Whole Foods Corp Kohl's Standalone CVS Lowe's Staples Walgreens TJX Costco Safeway Home Depot Best Buy Wal-Mart Sears BJ's Kroger JCPenney SUPERVALU Macy’s (1) Represents 2009–2013 EPS CAGR (2) Assumes additional future share buyback at a constant forward P/E of 16.4bn on 1/1/09 and uses proceeds to pay down debt (4) Excludes Target Source: FactSet and Company filings for Retailers.9% 13.0x (3) Assumes sale of credit card business for $4. excluding Target 47 .0% 11.0% 10.(2).0% 9.0% 15.0% 8.9% 12.0% 12.Increases Target Corp’s EPS Growth Rate (cont’d) Pro forma for the Transaction.(3) 14.0% 12.7%(1).(3) 16.0% Average(4) = 11.5% 14.0% 12.0% 14.0% 8.0% 10.5% 13.6%(1).0% 15 18 14.0% 9. Target Corp’s long-term EPS growth rate would be at the top of its peer group Long-term EPS Growth (%) 21 17.

4x 2./ A3 To be conservative.Maintains Investment Grade Credit Ratings Post-transaction.2x 9. depending on whether the rating agencies take a “De-consolidated” or “Consolidated” view.7x 2. effectively cancelling TIP REIT’s rent payments. we have assumed that the agencies will take a “De-consolidated View” and Target will maintain solid investment grade ratings in the Mid . we believe Target Corp will be rated investment grade. This is similar to how the agencies rate Coca Cola and its bottlers Target Corp "De-consolidated View" PF 2008E Credit Metrics: Lease Adj.High BBB or Low A categories. Debt/EBITDAR Debt/EBITDA EBITDAR/(Interest + Rent) EBITDA/(Interest) 3.High BBB/Baa A. A “Consolidated” view would assess the credit profile of the Target system.3x 7. either in the Mid .6x 2.8x Target Combined "Consolidated View" Expected Rating Mid .3x 3. leading to a higher rating.3x 8.High BBB/Baa category (versus A+/A2 rating today) 48 .

600) – – – $11.322 – $2.400) (3.655 (200) – 19.2x 6. Total Debt / EBITDAR EBITDAR / (Interest+Rent) 2.353 $15.764 TIP REIT – – – – – – 1.377 1.655 (200) 0 $19.3x (1) Assumes remaining 53% interest of credit card business sold for $4.2x 2.309 $23.600 1.3x 3.2x 2.730 ($mm) Balance Sheet Data: 8/2/08 Debt 1 Less: Debt Paydown with H2 '08 Cash Flow Less: Debt Paydown from Excess Cash CY2008E Debt Less: Debt Paydown from Credit Card Proceeds Less: Elimination of JPMorgan Financing 2 Plus: Debt Issued for E&P Distribution at TIP REIT 3 Plus: Debt Issued to Fund Land Development at TIP REIT Less: Debt Paydown PF2008E Ending Debt Plus: Lease Adjusted Debt (8x 2008E Total Lease Expense) PF2008E Lease Adj.3x 2. Total Debt PF 2008E Credit Metrics: Debt / EBITDA Lease Adj.4bn on 01/01/09 and all proceeds used to pay down debt (2) $1.600 1.956) Consol.322 $14.922 – $2.Pro Forma 2008E Balance Sheets The table below sets forth the Balance Sheets for the two entities "Combined" Target Corp $19.455 (4.956) ($10. Rating Angencies View $19.6bn of debt issued to fund E&P dividend.6x 3.455 12.6x – – – 2.455 (4. which must be paid by December 31 of the year REIT status is elected (3) Assumes that 1st year land acquisitions financed solely with debt 49 .600) 1.400) (3.4x 7.922 Intercompany Adjustments – – – – – – – – – – (10.

5 12.1x High BBB/Baa 8.5 3.8 23.3 8.8 6./ A3 2009E 2010E 2011E Despite temporarily having a lower credit rating than today. TIP REIT will be Target Corp’s land developer through its Preferred Vendor Agreement. Target Corp will generate significant free cash flow and will likely deleverage to an A-/A3 ratings profile after two years PF 2008E ($bn.5x Mid .6 13. Debt Balance EBITDAR Target Corp Adj.8x A.8 12.6x Mid .0 23. As such. except where noted) End of Year Debt Balance Lease Adj.Target Corp: Deleveraging to an “A” Ratings Profile after 2 Years TIP REIT will be required to fund land capex for the first two years after the spin-off.High BBB/Baa 10.8 6.4 2. Debt End of Year Adj.5 3. (1) Target Corp will not need access to capital because it will be significantly free cash flow positive after growth capex and (2) it will be able to deleverage back to an “A” category credit rating in a short time frame 50 . Debt/EBITDAR Expected Ratings Profile 11.8 3.High BBB/Baa 9. Thereafter.9 23.3 23.4 7.3 15.

2008 Debt Less: Credit Card Proceeds Less: Debt Paydown from H2 '08E CY2008E Debt Less: Debt Paydown in '09E Less: Debt Paydown in '10E Less: Debt Paydown in '11E CY2011E Debt Debt $16.3) $8.6) (1.4bn comes from selling the remaining 53% interest in credit card receivables and $3.8bn.5 (0.8 (1) Cash $1. $4.8 $0.4) (0.Target Corp: Bondholders’ Perspective The Transaction allows for meaningful debt paydown by 2011E of $7.2) (1.7 0.3 0.5 Comments Debt excludes JP Morgan GAAP liability of $3.6bn Sale of 53% interest of credit card receivables for $4.5 0.1 (4.4bn Assumes $1bn of stock buyback (1) 78% of Free Cash Flow generated 96% of Free Cash Flow generated 95% of Free Cash Flow generated (1) (1) (1) (1) Assumes a minimum cash balance of 1% of sales 51 .2) 11. Of this amount.2bn from free cash flow after operating and investing activities Target Corp Balance Sheet Data ($bn) August 2.7 0.

3% for 10-year bond (20-day average cost) 52 . ft.What’s Better: Debt or a TIP REIT Master Lease? TIP REIT’s Master Lease is much more attractive than long-term debt Debt Liquidity Risk Financial Covenants Holders Yes Many covenants Unrelated investors TIP REIT Master Lease None None Strategic partner / “Friendly landlord” Spin-off will obviate requiring access 75 years 7% (Rent / cost sq.) Market access? Currently difficult to access Duration Target’s cost 30 year maximum 7.

Strong Similarities with a Credit Card Partnership Credit Card Partnership Control Target can control its credit card business without the need to own receivables Receivables ownership is transferred to a party with a lower cost of capital Primarily to return capital to shareholders (via buyback) Minimal Credit Card Partner funds future receivables growth CC ROIC improves significantly TIP REIT Spin-off Target can control its buildings and retailing strategy without the need to own land Land (and land improvements) ownership is transferred to a party with a lower cost of capital Return capital to shareholders (via spin-off of TIP REIT) None TIP REIT funds future land procurement and development Store-level ROIC nearly doubles Capital Allocation Use of Proceeds Taxable Gains Improved Access To Capital ROIC 53 .

9% 5.2x $27.6x $30 $31 4. Price) ¹ Target REIT Spin-Off ² $23 $34 6.3x Equity Value ($bn) Enterprise Value ($bn) ‘09E Dividend Yield Cap Rate '09E P/AFFO '09E EV/EBITDA Target Corp Equity Value ($bn) Enterprise Value ($bn) '09E EV/EBITDA '09E P/E $29 $40 6.5x 19.7% 5.3% 20.0x 11.5x 14.0x 15.8x Equity Value ($bn) Enterprise Value ($bn) '10E EV/EBITDA '10E P/E Equity Value ($bn) Enterprise Value ($bn) ‘10E Dividend Yield Cap Rate '10E P/AFFO '10E EV/EBITDA For illustrative purposes.0% 21.5 4.5 $27.4x 20. assumes Transaction occurs on 01/01/09 (1) Based on 20-day trading average as of 10/24/08.Valuation Summary $83 $80 $70 TIP REIT $60 $/Share 74% $40 Target Standalone TIP REIT $42 $40 $38 Target Corp Target Corp $20 $32 $0 Target (20-Day Avg. assumes sale of remaining 53% interest on credit card business with proceeds used to pay down debt (2) Based on mid-point of valuation analysis 54 TIP REIT .3x $42 12-Month Price Target ² $30 $40 7.

2x Multiple Expansion $2.23 14.6x Value Creation from Incremental EPS ($/share) $7 TIP REIT ($/share) $38 $17 (1) Normalized to exclude $112mm of incremental interest expense due to CY2009 cash E&P distributions (2) Implied P/E multiple of 21.4x Target Corp ($/share) TIP REIT 2009E EPS (2) Implied P/E Multiple (1) $32 $1.Sources of Value The main sources of value creation are incremental earnings generation via the REIT structure and multiple expansion at TIP REIT and Target Corp 100 $5/share $17/share $40/share $7/share $/Share 80 60 40 20 0 Target Standalone Value/Share (Assuming 20-Day Avg.02 $3.23 2.79 9.8x Multiple Expansion Target Corp 2009E EPS Implied P/E Multiple Valuation $2.3x $5 $1.3% cap rate 55 .40 $0.5bn.3x based on the mid-point of today’s estimated market value of $27.9% dividend yield and 5.5x 2009E AFFO multiple.62 11.79 21. implying a 20. Price Multiples) Incremental Earnings Generation $70/share TIP REIT Multiple Expansion Target Corp Multiple Expansion Pro Forma Value/Share Incremental EPS Generation "Target Combined" 2009E EPS Target Standalone 2009E EPS Difference Target Current EPS Multiple $4. 4.

Hypothetical Value Creation over Time (1) The implied hypothetical future value per share post-transaction for Target shareholders is $109 in three years $109 $110 $100 $90 $/Share $80 $70 $70 $60 $50 Today TRANSACTION Target Corp .Cumulative Dividend Total Hypothetical Value/Share ($) $32 $38 $0 $70 $42 $40 $2 $83 $50 $43 $4 $97 $58 $45 $6 $109 $97 PostTransaction Hypothetical Valuation $83 1 Year 2 Year 3 Year (1) Future values post 1-year are based on constant multiples (2) Excludes one-time dividend from E&P distribution 56 .Hypothetical Value/Share (2) TIP REIT .Hypothetical Value/Share TIP REIT .

Valuation: Potential Questions and Answers .

Potential Questions What’s so special about TIP REIT? Why are TIPS the best comparable security to TIP REIT? Why is TIP REIT more valuable than a private ground lease? Why is TIP REIT unlike any existing REIT today? Why would this Transaction improve Target Corp’s valuation? Why is this Transaction ideally suited for Target? What are the risks? Other potential questions 58 .

What’s So Special About TIP REIT? .

TIP REIT Investment Highlights “Land-only” structure is extremely secure ■ $39bn of “Lease Security”. including $20bn of unencumbered buildings Long-term lease provides bond-like stability and inflation-protection ■ 75-year. inflation-protected “Master Lease” with Target Corp Significant growth opportunity ■ Formal arrangement with Target Corp provides long-term growth pipeline High quality locations and superb tenant profile De minimis maintenance capex allows for strong FCF generation Tremendous size and scale – a “must-own” REIT 60 .

ft. a tenant is highly motivated to make its ground lease payments. ft. Rent Significant cushion for rents to fall in the event of default Because it will lose its building in the event of default. making the ground lease extremely secure 61 . $13 sq. ft. ft. a landowner can re-lease the land and the building at significantly lower rent than market and still maintain its current lease payments Event of default Illustrative Example: Today Ground lessor leases land at $7 / sq. Rent Ground lessor re-leases land AND building at $13/sq. $7 sq. the building and improvements revert to the landowner As such. in the event of tenant default.“Land-only” Structure is Tremendously Secure TIP REIT’s land-only leases are the most secure form of real estate investment Ground leases are the most secure form of real estate investment In the event of a default on a ground lease. The unencumbered building acts as collateral.

and 25 DCs and WHs on owned land in 2008E (3) Although the buildings are not pledged as security.438 Stores in '08E: Estimated Replacement Cost per Square Foot 2008E Owned Square Feet (mm) (1) 222 85% 189 $197 37. Total Value ($bn) (1). Ft. Based on replacement cost. assumes cost of a Target store of $26mm ($13mm building and $13mm land) and cost of DC and WH of $70mm ($50mm building and $20mm land) (2) Assumes 1.3 Total Real Estate Replacement Value ($bn) $39. Ft.8 Value of Owned DC and WH Buildings ($bn) $36 35 $1.9 (1) Analysis excludes the value of owned buildings on third-party ground leased land. (2) Unencumbered “Collateral”: $20bn (3) Value of Buildings Only (on the Owned Land) Retail Buildings . Ft. Total Value ($bn) DC and WH Buildings .7 2008E DCs and WHs: 2008E Total Sq. (mm) Estimated % Owned Owned Sq. As such.1 Total Value of Buildings on Owned Land ($bn) $19.$39 Billion of “Lease Security” Although the buildings are not pledged as security.25 DCs and WHs in '08E: Estimated Replacement Cost per Square Foot 2008E Owned Square Feet (mm) 44 81% 35 $50 1.4 Value of Owned Store Buildings ($bn) $99 189 $18. Ft. Ft. (mm) Value / Sq. (mm) Estimated % Owned Owned Sq. we define TIP REIT’s “Lease Security” as the value of the land and unencumbered buildings. Ft. they will revert to the landowner upon a ground lease default. (mm) Value / Sq. the effective result is that they act like “collateral” in the event of tenant default 62 . this “Lease Security” is valued at $39bn Total “Lease Security”: $39bn Replacement Value of Owned Land and Buildings 2008E Retail Real Estate: 2008E Total Sq. illustratively.1.438 stores.

No other REIT in the world today has this level of asset coverage in the event of a tenant default $ in billions "Lease Security" Value of Land and Unencumbered Buildings TIP REIT Enterprise Value at 4.” if TIP REIT trades at a dividend yield of 4. its “Lease Security” would still be worth 142% of the enterprise value of TIP REIT.9% Dividend Yield Illustrative Asset Coverage "Lease Security" / EV $39.Unencumbered Assets Provide Significant Coverage Based on our illustrative definition of “Lease Security.1 $27.5 (1) 142% (1) Based on the implied mid-point of valuation 63 .9%.

Benefits of a Master Lease A Master Lease has a number of structural advantages that will enhance the stability and security of TIP REIT Under a master lease. all of the sites will be subject to a single lease agreement The master lease provides for an aggregate amount due for all of the sites Under the master lease. Target Corp must continue making lease payments to maintain ownership of all buildings and other improvements 64 . a failure to pay full rent due on a single site will cause all of the leases covered by the master lease to be in default TIP REIT’s rights under the master lease require Target Corp to satisfy its lease obligations under all events As the tenant.

senior secured. TIP REIT’s risk profile will be similar to that of a long-term.9% dividend yield Effectively “over collateralized” by $20bn of buildings 65 . highly-rated. and inflation-protected bond 75-year Master Lease Long-term lease 100% occupancy Highly rated.Long-term Lease Provides Bond-like Stability Given its long-term lease arrangement and its land-only structure. high-quality tenant in Target Inflation protection Extremely low probability of lease default TIP REIT Risk profile: Long-term Senior Secured Highly-rated Inflationprotected Bond Land-only REIT structure $39bn of “lease security” or 142% asset coverage at a 4.

S.000 stores Significant square footage growth at TIP REIT will translate into strong NOI growth 2009E – 2013E retail square footage CAGR of 6.Significant Growth Opportunity In addition to its incredibly stable and secure cash flows. TIP REIT has strong growth prospects. given its initial 2-year exclusive right as Target Corp’s land developer and its formal Preferred Vendor Agreement with Target Corp thereafter TIP REIT’s Preferred Vendor Agreement with Target Corp will provide it with a strong pipeline of land development opportunities Target Corp believes that in the U. alone it can double its store count to more than 3.3% 2009E – 2013E NOI CAGR of 9.3% 66 .8% 2009E – 2013E top-line CAGR of 9.

High Quality Locations and Superb Tenant TIP REIT’s high quality locations and strong tenant profile will support its premium valuation Attractive urban / suburban locations with strong demographics Geographically diversified portfolio of approximately 1. enhancing value of ground leases as sites evolve into in-fill locations Strong tenant in Target Corp Leading brand. market share winner and “in demand” tenant Investment grade tenant with strong financial outlook Strong focus on maintaining and improving buildings 100% occupancy for 75 years Low store churn rate (1) Represents 2008E Target Corp stores on TIP REIT land 67 .438 stores (1) in 48 states Multiple opportunities for alternative use of land sites Ability to attract shadow development.

0 5.0 7.9 5.3 5.I. and investors seeking inflation-protected assets (1) Represents non-financial companies in the S&P 500 with market caps greater than $20bn (2) Based on 2009E dividends 68 . yield-oriented investors.5 6.656 26. real estate index funds.382 29. E.386 26.6 5.6 5. DuPont de Nemours Merck Philip Morris International Caterpillar TIP REIT (2) Home Depot Southern Co.9 4.674 28.7 6. DuPont de Nemours & Co. Market Cap.291 27.0 6.466 S&P 100 Non-Financials Ranked by Dividend Yield (1) Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Company Pfizer Verizon Communications Dow Chemical Bristol-Myers Squibb General Electric Altria Group AT&T Carnival Eli Lilly E.898 27.3 7. Dividend Yield (%) 7.Large Market Cap — Must Own Yield Stock TIP REIT will be the 62nd largest company in the S&P 500 S&P 500 Ranked by Market Cap Rank Company 55 Home Depot 56 57 58 59 60 61 62 63 64 65 Devon Energy Lockheed Martin Union Pacific Colgate-Palmolive American Express UnitedHealth Group TIP REIT Burlington Northern Santa Fe Southern Co.9 4.I.0 7.500 27. large cap funds. ($mm) 31.0 4.9 Given its market cap. TIP REIT will be owned by S&P 500 index funds.7 7.439 30.896 27.851 30.

Why are Treasury Inflation Protected Securities (“TIPS”) the Best Comparable Security to TIP REIT? .

principal) Backed by highly-rated Target Corp $39bn of “Lease Security” or ~140% TIP REIT’s EV at 4.9% dividend yield Rent income adjusted for CPI 75-year lease term REIT dividend payment required by law $28bn market cap Yes No .How is TIP REIT Similar to TIPS? TIP REIT has many of the same features of Treasury Inflation Protected Securities (TIPS). TIP REIT has the added benefit of a growth platform and no “Phantom tax” TIP REIT Extremely low probability of default Inflation protection Long-term duration with required payments Liquidity Growth platform “Phantom tax” (1) Size of total TIPS market 70 20-Year TIPS Backed by federal government Payment based on CPI adjusted principal 20 years Interest payment required by law Over $450bn market (1) No Yes (tax on inflation adj. However.

inflation-adjusted nature of the Master Lease Inflation-linked rents based on the same CPI measure as used for TIPS Semi-annual dividend payments on the same date as TIPS interest payments Highly liquid 71 Land Developer Cash flows generated as the Preferred Land Developer of new Target stores Exclusive right to be Target’s land developer for the first two years post Transaction Preferred Land Developer after two years Attractive 6% – 8% square footage growth for the foreseeable future Provide Facilities Management services as part of land developer platform . “static” ground lease portfolio Nearly identical to TIPS.TIP REIT Can Be Valued As Two Entities TIP REIT stock can be valued as two entities: (1) an Inflation-Protected Secured Bond that is nearly identical to TIPS and (2) a Land Developer with a stable growth platform TIP REIT TIP-like Security Cash flows from the rental income generated by the existing. security and the long-term. given stability.

4%.15% 165 bps — 215 bps TIP REIT: TIP-like Security 4.4% and TIP REIT would yield 4.65% — 5.TIP REIT: (1) Valuing the TIP-like Security The TIP-like Security should trade at a small spread to TIPS of 165 – 215 bps Rate / Yield 20-year TIP Yield Today 3.0% implies an expected 20-year inflation rate of only 1.0% Spread to TIPS — Current TGT Unsecured CDS @ 190bps ± 25 bps 1. If the expected 20-year inflation rate increased to 2.55%.15% 165 bps — 215 bps The current TIPS yield of 3. The higher the inflation rate.65% — 2. the more valuable TIP REIT will be 72 .05% – 4. then the 20-year TIPS would yield 2.0% and the 20-year Treasury rate remained constant.

we use Target’s unsecured CDS spreads as the measure of credit risk under the TIP REIT Master Lease.TIP REIT: (1) Valuing the TIP-like Security (cont’d) Importantly. it also has $20bn of unencumbered buildings that would revert to TIP REIT in the event of tenant default. We estimate that Target’s ground lease credit risk should be materially lower than Target’s unsecured CDS spread 73 . We believe this is conservative because while TIP REIT has Target’s (unsecured) credit. we believe our TIPS-based valuation analysis conservatively measures TIP REIT’s credit risk In the preceding analysis.

3bn 2009 Incremental Rental Revenues After-tax Facilities Management Income Platform Value G&A Expense Total Capex Free Cash Flow from Platform Terminal Value Discount Rate Terminal Cap Rate Present Value of Platform 12.15% – 10.65% $2.013) 2010 $145 12 (21) (1. Terminal Value (1) 2029 $55.0bn – $2.293 $74 12 (20) (1.5% – 12.TIP REIT: (2) Valuing the Land Developer TIP REIT’s land development opportunity can be valued based on its growth platform value Growth Platform Valuation Based on 20-year DCF analysis Implied valuation at 4.560mm and 4..15% cap rate and 10.863) ($1.047 (1) Based on 2029E NOI of $2.5% 4.079) ($1.644) .5% discount rate 2029E terminal NOI: $2.190) ($1.65% cap rate 74 .008) ($872) 2011 $257 14 (21) (1.65% – 5..478) 2013 $551 17 (22) (2.5% 5.582) ($1.560mm Valuation range of $0.332) 2012 $391 15 (22) (1.

15% $2/share Discount rate on 20-yr DCF: 10.560mm Land Developer Terminal cap rate: 4. or $40/share today Equity Value (1) TIP-like Security $38/share Implied Cap Rate (2) 4.15% Valuation: $26bn – $29bn 2029E NOI: $2.Valuation: TIP REIT in Total Based on “TIPS”-based valuation of TIP REIT.65% – 5.65% – 5.5% Valuation: $0. the implied TIP REIT valuation is $29bn.5% – 12.462mm Valuation: $26bn – $31bn or $36/share – $44/share (1) At mid-point valuation (2) Implied yield calculated based on NOI / Implied value 75 .0bn – $2.9% Valuation 2008E Existing dividends: $1.3bn Total TIP REIT $40/share 5.354mm Dividend yield: 4.1% 2009E NOI of $1.

9% dividend yield for the TIPS-like security and (2) excludes the value of the Land Developer $70 TIP REIT $38 Using a “TIPS”-based valuation analysis. our mid-point valuation price of $38/share excludes the value of TIP REIT’s development platform Target Corp $32 TIP REIT Spin-off Equity Value / Share 76 .Conservative Approach to Valuation Our mid-point valuation price for TIP REIT of $38 (1) implies a 4.

TIP REIT Presents an Attractive Arbitrage Long: TIP REIT @ $38 (mid-point of valuation analysis) – implies a ~490 bps dividend yield TIPS @ 300 bps yield 190 bps (1) Keep the 190 bps spread (nearly risk-free. or hedge Target unsecured risk with CDS Get the Land Developer for free. given the security offered by $20bn of unencumbered buildings). worth $2/share 77 Short: = Spread: Value: (2) .

How is this Trade Possible? This arbitrage trade is feasible for several reasons: The TIPS market is highly liquid TIP REIT would be a highly liquid security with an initial market capitalization of approximately $28 billion TIPS trade. approximately $1 – $2 billion per day Normal volume is typically $3 – $5 billion or more per day TIPS are readily borrowable and easily shortable TIP REIT would pay semi-annual dividends on the exact same day that TIPS pay interest payments (Jan 15th and July 15th ) 78 . even in the current low liquidity environment.

inflation-protected. endowments. incomeoriented securities that offer higher yields than TIPS Pensions. retirement funds Income-oriented institutional funds Retail / individual investors TIP REIT solves the “phantom tax” problem for individual investors Depository institutions Arbitrage / hedge funds Insurance companies Strong international demand generated by recent European pension reforms requiring returns linked to inflation 79 .High Demand for Inflation-Protected Securities There is a strong demand for liquid.

Why is TIP REIT More Valuable than a Private Ground Lease? .

PA Cap Rate 6. Five-Year 4.25% 5. Five-Year Mean Median High Low Source: LoopNet and other public filings 81 6.July 2007 Tenant Lowe's Kohl's Lowe's Lowe's Wal-Mart Kohl's Target Lowe's Home Depot Kohl's Lowe's Lowe's Location Princeton. PA Austell.47 13.50% 5. Five-Year na 15. Five-Year 8. Five-Year 6.00% 6.27 12.416 152.933 40. PA Derby.890 137.75% 6.25% 5.16 4. CT Eugene. NM Fort Gratiot.46 9.10% 6.402 166.25% Precedent private ground lease transactions support cap rates of approximately 5.09 11. MI Fairlawn.March 23.05% 5.50% – 6.371 Lot Size (Acres) 14. Five-Year 8.03% 6.30 5.) 116.000 89.948 94.000 68.October 2007 Sold .50% to 6.008 99. OR Albuquerque. CA Sayre.24 14.00% 6.61% 6. Ft.10 12.50% . 2008 Sold .75 5.61% 5. NV Escondido.September 2007 Sold . GA Reno.Ground Leases Typically Trade from 5.50 Lease Term 20 Years 20 Years 20 Years 20 Years 20 Years 20 Years 20 Years 20 Years 20 Years na 20 Years 20 Years Total Lease Term with Options 50 Years 60 Years 60 Years na 95 Years 40 Years 50 Years na na na 50 Years 60 Years Transaction For Sale For Sale For Sale For Sale For Sale For Sale Sold Sold .00% 6. Five-Year 8.25% Options 6.25% for a typical ground lease with no development pipeline Building Size (Sq.609 130.712 111.March 27.213 178.50% 6. OH Whitehall. WV Selinsgrove.75% 6.28 14. 2008 Sold .15 14. Five-Year na na na 6.

438 retail properties (1) in 48 states Inflation-protected rental stream with annual adjustments Best-in-class retail tenant Geographic diversity Unlike a static ground lease. TIP REIT also has growth. liquid public ownership 75-year Master Lease term (longer than most private ground leases) 1. TIP REIT will trade at a lower cap rate than an individual private ground lease (1) Represents 2008E Target Corp stores on TIP REIT land 82 . given its dependable new store growth pipeline Given the above factors.Why is TIP REIT Better than a Private Ground Lease? TIP REIT offers better value to investors than a typical private ground lease TIP REIT has several qualities which make it more attractive than a private ground lease Large cap.

Why is TIP REIT Unlike Any Existing REIT Today? .

given “land-only” structure 84 . Owns both land buildings “Lease Security” $20bn of unencumbered buildings. typically 8% of EBITDA No preferred arrangement None. typically 10% or more of leases up for renewal annually Yes.TIP REIT: Unlike Any Existing REIT Today TIP REIT Leverage Refinancing Risk / Earnings Pressure Transaction Income Re-leasing Risk Maintenance Capital Growth None None Large Cap REITs High: 63% Debt-to-TMC Average: 47% Debt-to-TMC High – REITs have borrowed at low rates and are facing much higher rates and refinancing risk for debt maturities Sometimes None / 100% rental income None / 75-year lease None Preferred vendor arrangement Yes.

not the “FFO” metric (1) By equity market value (2) Source: Wall Street research.7% 8.0% 8.4% 11.8% 6.TIP REIT: No Maintenance Capital Requirements TIP REIT’s “land-only” structure maximizes cash flow.2% 1 2 3 4 6 5 7 8 9 10 Given TIP REIT’s de minimis maintenance capital requirements. 2008E maintenance Capex / EBITDA 85 . Inc. Unlike large cap real estate companies that spend on average 8% of EBITDA to maintain depreciable properties. Kimco Realty Corporation ProLogis AvalonBay Communities Average (Excluding TIP REIT) Maint.5% 5. TIP REIT requires virtually no maintenance capital 10 Largest REITs (1) TIP REIT Simon Property Group Public Storage Vornado Realty Trust Boston Properties Equity Residential HCP.9% 6. Capex / EBITDA (2) 0.9% 6. TIP REIT’s free cash flow should be compared to a real estate investment trust’s AFFO.5% 13.7% 5.7% 8.

450 7. TIP REIT would have a larger equity market capitalization than any real estate company in the U.023 10. distribution facilities and warehouses on TIP REIT land (2) By equity market value.679 10.451 7.106 Total Owned GLA (3) (mm) 225 160 125 81 41 na na 74 487 na 1 2 3 4 6 5 7 8 9 10 10 Largest REITs (2) TIP REIT (1) Simon Property Group Public Storage Vornado Realty Trust Boston Properties Equity Residential HCP. based on a 20-day trading average as of 10/24/08 (3) Based on company filings as of Q2 2008A 86 .500 20. Kimco Realty Corporation ProLogis AvalonBay Communities Given its size and scale.479 8.891 13. TIP REIT will be a “must own” stock for any real estate equity investor (1) Represents 2008E Target Corp stores.836 13. of distribution facilities. today Equity Market Value ($mm) 27.TIP REIT: Tremendous Size and Scale TIP REIT owns land under 225mm square feet of buildings (1). ft. Inc.170 6. including 35mm sq.S.

often specialty retail Size and Scale Growth Largest market equity cap Preferred Vendor Agreement with a fast-growing. faster growing and higher quality business than any Triple Net Lease REIT TIP REIT Lease Type and Terms Land-only Master Lease Highly secure given unencumbered buildings worth $20bn 75-year lease term Triple Net Lease REIT Fee simple individual leases No “over-collateralization” and often unmarketable specialty use properties ~13-year avg. leading retailer 87 Small equity market cap Limited growth / no formal arrangement (1) Extension option detail not disclosed in company filings . remaining lease term (1) Individual leases have re-leasing risk Asset Quality Tenant Quality High quality / Multiple alternative uses Investment grade credit and improving Leading GM Retailer Mixed quality / Limited alternative use Generally below investment grade credit and deteriorating Unproven.TIP REIT versus Triple Net Lease REITs TIP REIT is a much more stable.

ft.4% ( 4) Size: Equity Market Value ($mm) Enterprise Value ($mm) (2) Gross Leasable Area (mm sq.0 0.Side-by-Side Comparison with Triple Net Lease REITs TIP REIT Leases: Leased Property Lease Type Unencumbered Assets of the Tenants Effective “Over-collateralization” Avg.500.5% 43.0% Land and Building Individual Leases None None 13.405.) (2) $27.428.500.0 $27.5 11 $1. distribution facilities and warehouses on TIP REIT land (2) Triple net lease REITs are based on a 20-day trading average stock price as of 10/24/08 (3) Extension option detail not disclosed in company filings (4) Based on 2007A (5) Based on 2009E 88 .9 $2.8% 50.7% Growth Opportunity: Preferred Vendor Agreement Yes No No No Source: Company filings (1) Represents 2008E Target Corp stores.3 $2.6 19 $1.0 ( 3) Land and Building Individual Leases None None 13.0 225 (1) $2.8% ( 4) 35.6% (3) (4) Land and Building Individual Leases None None 13.0 ( 3).934.4 9 (4) Leverage: (Net Debt + Preferred) / EV 8.438 Stores and 25 Distribution Facilities (1) $20 billion of Buildings 75.6% (5) 42.5 $4.0 45. (4) 34. Remaining Lease Terms (Yrs) Estimated Lease Turnover (‘08–’17) @ $38/share Land-only Master Lease 1.714.523.183.

24 lube shop. very consumer sensitive and suffering secular pressures from at-home-entertainment Movie theatres have limited alternative uses The Pantry ♦ Convenience store operator with bankruptcy concerns ♦ Junk credit with bonds Caa1 rated by Moody’s trading at 14.Triple Net Lease REIT Tenants: A Closer Look Leading tenants for triple net lease REITs are predominantly junk credits with some in bankruptcy. real estate has limited alternative uses Five Leading Tenants: (23% of Revenues) (1) Buffets ♦ Filed for bankruptcy in January 2008 ♦ Buffets restaurants have limited alternative use Kerasotes ShowPlace Theatres ♦ Mid-west movie theatre chain ♦ Junk credit rated B1 / B♦ Real estate has poor alternative use Five Leading Tenants: (32% of Gross Assets) (1) The Pantry ♦ Convenience store operator with bankruptcy concerns ♦ Junk credit with bonds Caa1 rated by Moody’s trading at 14.5% Circle K (Susser Holdings) ♦ Struggling owner of convenience stores ♦ Susser is B+ rated by S&P with a negative outlook ♦ Senior Unsecured Debt is B3 rated by Moody’s Kerasotes ShowPlace Theatres ♦ Mid-west movie theatre chain ♦ Junk credit rated B1 / B♦ Real estate has poor alternative use Mister Car Wash ♦ Conveyor car wash chain started in Houston. and 3 convenience stores Road Ranger ♦ Private Mid-west convenience store operator ♦ Portfolio of 73 locations in seven states 89 Movie theatre REIT with AMC Entertainment representing over 50% of gross leasable area AMC has ~6. TX ♦ Portfolio of 60 car washes.4x rent adjusted leverage and its bonds trade at a 14.1% yield The movie theatre industry is highly competitive.5% La Petite Academy ♦ Child care/learning center operator ♦ Operate 570+ education centers in 36 states Children’s World ♦ Child care/learning center operator ♦ Mostly operating in the Mid-west (1) Source: Wall Street research .

and Triple Net Lease REITs stock prices based on 20-day trading average as of 10/24/08 90 .REIT Multiples TIP REIT will trade at a significant premium to any REIT because of its stability. Large Cap REITs. security. and certain growth 2009E EV/EBITDA 2009E EBITDA (x) 19.0x TIP REIT '09E Dividend Yield Cap Rate 4.7x 12.3x 15.7x 6.9% 5.3% Large Cap REIT Average Triple Net Lease REIT Average Target Standalone Note: Target Standalone.

TIP REIT’s only commonality with other REITs is its Tax-Exempt structure 91 .

Why Would this Transaction Improve Target Corp’s Valuation? .

we believe store level return on investment would increase from 23. Store Margin (%) New Land Capex New Building Capex Total Investment Estimated Returns on Investment (%) $40 34 -$6 15. Store Estimated Four-Wall Operating Costs Ground Lease Expense per Avg. Store Estimated Four-Wall EBIT per Avg. based on $7/sq.0% $13 13 $26 23.8% Owned Store Level Operating Data and Assumptions ($mm) Standalone 2007A Pro Forma 2007A Retail Sales per Avg. ft.0% -13 $13 39.0% to 39.0% $40 35 1(1) $5 13. on average 93 . of which $13mm is allocated to the land and $13mm to the building.8% (1) Assumes $0. lease cost and 131k of store square footage.Improves Store-level ROIC at Target Corp Assuming the average store real estate costs $26mm.9mm of ground lease rent expense.

8% 14.27 15.6% Target Standalone 1.67 19.70 15.20 20.3% 17.2% 20.1% 30.3% 4.5% 7.8% $4. 2 EPS Growth (%) $3.0% 30. improved free cash flow profile.5% 30.7% 30.18 13.5% 4.0% 3.0% 20.2% 3. Target Corp’s EPS growth will exceed that of Target Standalone Earnings per Share ($) '09-'13 CAGR (%) 2008 PF Target Corp 1 EPS Growth (%) 2009 $2.5% 6.0% (1) Assumes remaining 53% interest of credit card business sold for $4. and more efficient capital structure.40 3.5% 2013 $4. ft.0% 3.57 17.0% 30. growth Gross Margin SG&A as % of sales 0.4bn on 01/01/09 and all proceeds used to pay down debt (2) Assumes Target Standalone maintains existing dividend policy 94 .1% 3.2% 20.0% $5.90 14.2% 20.5% $3.7% Memo: Operating Assumptions: Same-store sales Sq.5% 2011 $3.5% 6.89 13.29 $3.2% 2012 $3.23 2010 $2.4% $5.1% 20.Increases Target Corp’s EPS Growth Rate Because of its higher ROIC.

0% 12 9 6 3 0 Whole Foods Corp Kohl's Standalone CVS Lowe's Staples Walgreens TJX Costco Safeway Home Depot Best Buy Wal-Mart Sears BJ's Kroger JCPenney SUPERVALU Macy’s (1) Represents 2009–2013 EPS CAGR (2) Assumes additional future share buyback at a constant forward P/E of 16.0% 8. Target Corp’s long-term EPS growth rate would be at the top of its peer group Long-term EPS Growth (%) 21 17.Increases Target Corp’s EPS Growth Rate (cont’d) Pro forma for the Transaction.(2).0% 14.0% 12.0% Average(4) = 11.0% 11.0% 8.4bn on 1/1/09 and uses proceeds to pay down debt (4) Excludes Target Source: FactSet and Company filings for Retailers.0% 12.0% 10.0% 10.(3) 14.(3) 16.0% 15.7%(1).5% 13.0% 15 18 14.0% 9.0% 12.9% 13.(2).0% 9.6%(1).5% 14. excluding Target 95 .0x (3) Assumes sale of credit card business for $4.9% 12.

) 96 . but only when combined with a healthy return on invested capital. resulting in substantial economic value added Increased returns and more efficient cash flow generation allow for additional share buybacks that foster EPS growth “Growth does indeed drive multiples. McKinsey & Co.Multiple Expansion at Target Corp Target Corp will trade at a higher multiple than current Target Standalone due to a powerful combination of improved ROIC and EPS growth ROIC and EPS Growth – key value drivers with a direct impact on multiples Improving both metrics concurrently is a powerful value creating combination which should lead to multiple expansion More efficient cash generation results in higher ROIC at virtually same level of risk.” (Tim Koller et. al.

Why is this Transaction Ideally Suited for Target? .

S.3x EBITDA Target is a market share winner with leading retail operations. Retail Sales Low EV / EBITDA Multiple Relative to REITs Retailers trading at low EV / EBITDA multiples can release the greatest value from the “Land-only” REIT spin-off Retailers with strong and stable operations will be a high-quality tenant 98 Strong. Target meets ALL of these criteria Retailer Criteria: High Land Ownership Commentary: Retailers that own most of their land and buildings are ideally suited for a “Landonly” REIT spin-off Retailers with strong growth opportunities in the U.S.S.S.S. stable FCF and strong management Strong Square Footage Growth Opportunity in the U. and low valuation multiples. big box retailers in the country with mid-to-high single digit expected sq.-based real estate and retail sales. Target’s EBITDA is generated exclusively from U. Real Estate and U.S. Target is one of the fastest growing U. a retailer must meet certain criteria including very high land ownership. predominantly U.“Land-only” REIT Spin-off is Value Maximizing for Retailers Meeting Certain Criteria To create the most value from a “Land-only” REIT spin-off.S. ft. strong square footage growth in the U..S.-based sales Target trades at 6.0x ’09E EBITDA versus large cap REITs at 15.S. enhancing the REIT’s value International real estate is not well suited for a tax-free REIT spin-off.7x EBITDA and TIP REIT at 19.S. long-term growth for the foreseeable future Target’s real estate is exclusively based in the U. can provide a dependable development pipeline for the “Land-only” REIT. given regulatory issues and tax complications Application to Target: Target owns more of its store land and buildings than any other big box retailer in the U. Stable Retail Operations with Attractive Credit Profile . Predominantly U.

Stable Tenant Target is ideally suited as a tenant for TIP REIT because of its high business quality and stable operations.High Quality. even during a recession High Business Quality Best management team in the retail industry Leading brand and strong marketing capabilities Best-in-class merchandisers Quality suburban and urban infill locations Solid infrastructure. leadingedge retailing systems ~10% EBITDAR margins Stable Cash Flows Even Today Discount retailer with prices within approximately 1% – 3% of Wal-Mart on comparable goods Beneficiary of trade down Nearly 40% of sales are consumables / non-discretionary Less fashion risk than a department store Less cyclicality than a home improvement retailer Higher margins than grocery stores and warehouse clubs 99 .

came more for the spectacle. 10/25/2008 100 .M.. I thought I would reform.m. 10/24/2008 Indeed.235 patent-leather satchel with golden hardware designed by Anya Hindmarch. “In the current economy. made out of polyvinyl chloride. Kim Calloway. Others. of Wexford. cosmetics and skin care products. but I probably won't. in Redondo Beach. the “recessionista.200 worth of jeans. "I probably should.B. Wall Street Journal. Price: $49. Then she went to Target to purchase a similarly shiny purse. by the same designer. a marketing manager at I. a 38-year-old senior accountant. New York Times." she said.495 Valentino handbags. "I'm about the bargains. heard its siren call. an affluent suburb.” the new name for the style maven on a budget. Hall said. many diehard Nordstrom fans came prepared to open up their purses for $545 Moschino shoes and $1. Welcome to “recession chic” and its personification. Mary Hall. warier about the economy.” Ms. Lately. noting that she hasn't cut back on her spending. didn't buy anything but enjoyed looking. arrived at 7:50 a.Target: Beneficiary of Trade Down Consider the $1." she said.99. she has been shopping more at discounter Target for her daughter's clothes. and walked out with $1. Charlene Stone. Calif. 49.

7x Large Cap REITs (1) Even if Target’s valuation multiples normalized over the next 12 – 18 months to historical levels.What if TGT’s Valuation Normalizes to Historical Levels? When reviewing Target’s historical EV / EBITDA multiples.2x Last 5 year average REIT Forward EV / EBITDA Multiple 19. Target’s Standalone valuation multiples would never reach the expected EV/EBITDA multiples of TIP REIT TIP REIT does not pay taxes and has no maintenance capital requirements Importantly.3x TIP REIT @ 38/share 6. on average. the separation of TIP REIT would allow for significant shareholder value creation for Target shareholders (1) Based on a 20-day trading average as of 10/24/08 101 .0x @ $40 (1) 15. with 22% of Target’s existing EBITDA representing the ground lease rents available to TIP REIT. Target has not been afforded the valuation levels of a typical Large Cap REIT or the expected valuation multiple of TIP REIT Target’s EV / Forward EBITDA Multiple 8.

What are the Risks? .

Potential Concerns: Credit Ratings Concern Mitigating Factor First two years of land development capital will be contractually funded by TIP REIT. Target Corp will not need access to long-term capital because it will generate $2bn of FCF after all capex in the first two years alone Cash flow will be primarily used to delever to an “A” category rating after two years 103 Long-term Credit Rating Target Corp’s rating could be temporarily lowered to a midto-high BBB category . Thereafter. TIP REIT will be the preferred land developer The Transaction’s tax efficiencies improve free cash flow at Target Corp (ground lease is expensed while land is not depreciable) As such.

9% $4.500 3 1. Incremental costs (pre tax) Estimated annual cost (after tax) Estimated annual cost/share $1. ground rent expense could increase 104 Based on the current TIPS yield.006 Inflationadjusted Rent In periods of high inflation. Target can hedge 20-year inflation risk at ~140bps .4 $0. except per share data: Short-term Credit Rating Target’s commercial paper ratings could be temporarily lowered to A2 / P2 category L+14bps L-175bps 190bps Short-term working capital needs Months / year Est.Potential Concerns: Credit Ratings / Inflation Concern Mitigating Factor $2bn untapped line of credit which expires in April 2012 Is the value creation worth the higher cost of short–term financing using the line of credit? Line of credit financing cost Est. A1 commercial paper cost Approximate Spread $ in millions.

FCF/share) Improves ROIC and EPS growth at Target Corp Reduces taxes by ~$520mm in ’09E More than triples dividends: $0.Pros and Cons of this Transaction Pros Instantly and meaningfully accretive on all key measures (EPS. As such.60/share today to $1. Post-Transaction.86/share in ’09E Improves capital access and decreases the need for growth capital at Target Corp Increases the stock price from $40/share to $70/share today Cons ⌧ Temporarily lowers Target Corp’s ratings from A+ / A2 to Mid . credit ratings will be less material to Target Corp going forward 105 .High BBB/Baa Mitigating Factors: Target Corp remains investment grade Target Corp can pay down debt and regain an “A” category credit rating profile in two years We believe the Pros of doing this Transaction far outweigh the Cons of having a temporarily lower rating. the Company will have improved access to capital and lower capital needs.

Another way to pose the question: Would you pursue this Transaction if it were a Strategic Acquisition? 106 .

What If this Were an Acquisition? Acquisition Rationale Instantly and meaningfully accretive on all key measures (EPS.60/share today to $1.High BBB/Baa Mitigating Factors: Target Corp remains investment grade Target Corp can pay down debt and achieve a higher credit rating in two years It is common for a company to pursue an acquisition that greatly increases shareholder value and temporarily lowers ratings to an acceptable investment grade level 107 .86/share in ‘09 Improves capital access and decreases the need for growth capital at Target Corp Increases the stock price from $40/share to $70/share today Acquisition Risks ⌧ Temporarily lowers Target Corp’s ratings from A+ / A2 to Mid . FCF/share) Improves ROIC and EPS growth at Target Corp Reduces taxes by ~$520mm in ’09E More than triples dividends: $0.

TIP REIT could be collapsed back into the current structure In the highly unlikely event that a recombination of Target’s real estate with its retail operation would become desirable at some point in the future. unforeseen circumstances dictate otherwise. an unwind the structure can be effectuated: Post REIT Spin-off: An unwind of the structure could be accomplished with an agreed-upon tax-free merger by the two companies 108 .Mitigating Risk However. if in the future.

Other Potential Questions .

9% actual and constructive ownership limit and other provisions customary for REITs to assure compliance with REIT ownership and related-party rent rules Other Governance Provisions: Similar to Target Corp’s existing governance rules except as the Board may otherwise determine in connection with the Transaction 110 .What is the Governance Structure of TIP REIT? TIP REIT would be incorporated where most REITs are incorporated: Maryland Jurisdiction: We believe Maryland is the most favorable jurisdiction for TIP REIT Ownership Restrictions: The certificate of incorporation of TIP REIT would include a customary 9.

Will Consents Be Needed? No Shareholder or Bondholder consents are needed Minnesota Corporate Statute Requiring Shareholder Vote for Transfer of All or Substantially All Assets The Transaction meets Minnesota’s safe harbor for not being a transfer of “all or substantially all assets” and therefore does not trigger shareholder vote Bond Indenture Covenants Covenant restricting transfer of assets substantially as an entirety: The Transaction – which only involves Target’s land – is not a transfer of assets “substantially as an entirety” and therefore does not breach this covenant Covenant restricting sale (or transfer) and leaseback of an “Operating Property” with an entity other than a restricted subsidiary: The transfer/leaseback is with an entity that at the time of the transfer/leaseback is a restricted subsidiary and it is therefore exempt from this covenant (the subsequent spin off is permitted since the indenture does not include any dividend stopper) In addition. none of the land parcels being transferred is an Operating Property subject to this covenant since none has a net book value greater than 0. if the Board designates subsidiaries currently holding land to be unrestricted subsidiaries as permitted by the indenture.35% of Consolidated Net Tangible Assets Also. the covenant will not apply to a transfer / leaseback by those subsidiaries No other indenture issues identified 111 .

Q&A .

Appendix .

Detailed Valuation Analysis .

5 $27.2x $27.3% 20.0x 15.9% 5.5x 19.5 4.0% 21.3x Equity Value ($bn) Enterprise Value ($bn) ‘09E Dividend Yield Cap Rate '09E P/AFFO '09E EV/EBITDA Target Corp Equity Value ($bn) Enterprise Value ($bn) '09E EV/EBITDA '09E P/E $29 $40 6.4x 20.5x 14.7% 5.Valuation Summary $83 $80 $70 TIP REIT $60 $/Share 74% $40 Target Standalone TIP REIT $42 $40 $38 Target Corp Target Corp $20 $32 $0 Target (20-Day Avg.6x $30 $31 4. assumes Transaction occurs on 01/01/09 (1) Based on 20-day trading average as of 10/24/08.3x $42 12-Month Price Target ² $30 $40 7. assumes sale of remaining 53% interest on credit card business with proceeds used to pay down debt (2) Based on mid-point of valuation analysis 115 TIP REIT .0x 11.8x Equity Value ($bn) Enterprise Value ($bn) '10E EV/EBITDA '10E P/E Equity Value ($bn) Enterprise Value ($bn) ‘10E Dividend Yield Cap Rate '10E P/AFFO '10E EV/EBITDA For illustrative purposes. Price) ¹ Target REIT Spin-Off ² $23 $34 6.

Valuation Analysis – TIP REIT .

344 1. or $35 – $42/share today Valuation Range ($25bn – $30bn) Net Asset Value (TIPS) – – – – – 4.0% – 10.3% $30.0 40.344 1.0 25.50% – 12.5% 4.3 31.4 Net Asset Value (Precedents) – – – – – 5.7 25.65% – 5.15% Terminal Cap Rate 27.0 22.0 18.50% – 12.9% 5.5x 19.65% – 5.6 15.8 33.354mm 20-year DCF Analysis of Platform 10.354mm 20-year DCF Analysis of Platform 10.4% 5.50% – 6.0 35.6x 17.427 1.0 30.TIP REIT Summary of Valuation Analysis: Today Various methodologies imply a TIP REIT reference range of $25 – $30bn.3x 4.0 Implied Multiples: CY2009 AFFO CY2009 EBITDA CY2009 Div.50% Discount Rate on Platform 21.8 Discounted Cash Flow – 8.25% Cap Rate on Existing Ground Lease Cap Rate Range Based on Precedent Transactions CY2009 Existing NOI: $1.5 20.9% 117 .8% Equity Value ($bn) $27. Yield Cap Rate ($mm) 1.0 20.0x 4.5x 5.50% Discount Rate on Platform 26.3x 21.0% WACC – 4.462 $25.15% Dividend Yield on Existing Ground Lease Dividend Yield Based on Sum of CDS Spread and TIPS Yield CY2008 Existing Dividends: $1.

400 $1.344 $1.9 $1.63 $1.1% 4.438 721.268 1.304 1.94 1.853 (111) (428) (9) 1.090 (22) (17) 2.9 $1.141 1.TIP REIT Summary Income Statement ($mm.304 1.68 1.0% Pro Forma CY2008 1.5% 38% 3.342 1.1% 170 (147) 22 1.8% 3.063 2.18 CAGR '09 .5% 9.3% 9.7% 4.'13 9. Income Net Income Normalized Net Income (1) Ending Shares Outstanding Earnings per Share Normalized Earnings per Share (1) Dividends on Common Special Dividends Normalized Dividends (1) Normalized Dividends per Share (1) % AFFO 100.444 1.369 2.866 2.211 721.051 (139) (559) (10) 1.8% 4.3% 9.444 2.3% 2.452 $2.369 1.289 721.890 (22) (16) 1.063 2.481 1.9 $1.462 (20) (15) 1.79 1.89 1.76 $1.388 (20) (15) 1.811 55 1.71 $1.3% 9.681 (88) (316) (8) 1.177 1.235 1.325 44 1.696 2.004 59 2.9 $1.549 2.549 1.099 1.718 (21) (16) 1.427 (56) (188) (7) 1.9 $1.86 $1.577 $2.364 721.3% 2.99 1.501 1.3% 9.1% 155 (134) 20 1.533 (68) (221) (8) 1.398 46 1.600 1.4% 6.1% 144 (125) 19 1.353 (42) (205) (7) 1.645 48 51 1.94 1.331 721.569 (21) (15) 1.232 1.1% 144 (125) 19 1.253 $1.09 2013 2.74 2009 1.415 1.866 1.84 1.1% 187 (162) 24 1.86 Calendar Year.9 $1.400 721.1% (1) Normalized to exclude incremental interest expense due to CY2009 cash E&P distribution 118 .356 1.52 $1.511 $2. except as noted) Gross TIP REIT Revenues from Ground-leased Store Land Gross TIP REIT Revenues from Ground-leased DCs & WHs Land Total Gross TIP REIT Revenues Total TIP REIT Net Rental Revenues % of Target Corp Retail Sales Plus: Facilities Management Income Less: Facilities Management Expense Net Facilities Management Income Net Operating Income Less: G&A Expense Less: Incremental G&A Cost EBITDA Less: Depreciation & Amortization Less: Interest Expense Less: Taxes on Facilities Mgmt.696 1. 2010 2011 1.01 2012 1.81 $1.1% 207 (180) 27 2.

7x 27.3x 18.325 4.135 3. 2010 2011 1. except as noted) EBITDA Less: Interest Expense Less: Taxes on Facilities Mgmt.9x 14.1% 722 Calendar Year.5x 3.1x 5.3x 22.427 (188) (7) (1. Income Less: Development Capex Total Free Cash Flow Total Cash Total Debt Total Debt / EBITDA EBITDA / Interest Expense Total Debt / Total Real Estate Value Ending Shares Outstanding 2009 1.0% 722 119 .690 2.582) (226) 295 3 3.2% 722 3 5.6% 722 2012 1.079) 154 3 2.272 3.853 (428) (9) (1.682 1.533 1.051 (559) (10) (2.008) (1.9x 7.TIP REIT Summary Balance Sheet/CF Statement ($mm.681 (221) (316) (8) (8) (1.9% 722 2013 2.6x 11.190) (709) 3 9.9x 4.4x 6.863) (447) 3 7.

9 Metrics 1.1x 21.1x 18.50 $38.6% 5.344 1.4% (1) Normalized to exclude incremental interest expense due to CY2009 cash E&P distributions 120 .452 1.1x 22.076 1.9% 4.1% 4.09 $40.400 1.452 24.8x 21.4% 4.351 27.500 29.3% 4.50 $42.7% 4. Ft.8x 17.9x 20.50 $36.6x 18.1x 19.344 1.6x 18.6x 18.9x 20.8x 18.907 26.5x 19.9x 20.6x 18.5x 17.8x 21.5x 17.400 1.9x 21.1% 3.9% 4.9x 21.9x 21.4% 4.50 721. 225 $111 $117 $122 $130 $137 1.9% 5.210 1.344 4.1x 22.5% 3.5x 19.6% 3.7x 20.1x CY 2009 AFFO CY 2010 AFFO CY 2011 AFFO Dividend Yield Assuming Payout Ratio of: 80% of CY 2009 AFFO 90% of CY 2009 AFFO 100% of CY 2009 AFFO Implied Value: Implied Value of Land / Blended Sq.8x 17.682 18.238 30.8x 18.1% 4.1x 20.TIP REIT Valuation Matrix Set forth below is a valuation matrix that demonstrates TIP REIT’s trading multiples at various values within the reference range Value per Share ($mm) Shares O/S EQUITY VALUE Multiples of: CY 2009 FFO CY 2010 FFO CY 2011 FFO (1) (1) (1) (1) (1) (1) $34.1x 19.9% 3.7x 20.

65% – 2.00% + Target unsecured CDS of 1.15% cap rate and 10.354mm Valuation range of $26bn – $29bn Platform Valuation Based on 20-year DCF analysis Implied valuation at 4.15% Implied valuation at 4.15% dividend yield range 2008E dividend: $1.0bn – $2.3bn 121 .65% – 5. or $36 – $44/share today Existing Lease Valuation Inflation-indexed rent growth allows for a “TIPS-like” risk/return Dividend yield range based on theoretical analysis: TIPS yield of 3.15% = Total yield of 4.5% discount rate 2029E terminal NOI: $2.560mm Valuation range of $0.65% – 5.TIP REIT NAV (TIPS) Analysis The implied TIP REIT valuation range on TIPS-based NAV analysis is $26 – $31bn.65% – 5.5% – 12.

300 $36 $29. except per share data) Existing Ground Lease Rental Revenues .190) ($1.478) 2013 $551 17 (22) (2.15% – $74 12 (20) (1.293 $31.013) 2010 $145 12 (21) (1.300 – $26.Store Land Rental Revenues . Terminal Value (1) 2029 $55.332) 2012 $391 15 (22) (1.TIP REIT NAV (TIPS) Analysis (cont’d) The implied TIP REIT valuation range on TIPS-based NAV analysis is $26 – $31bn.128 + 2009 Incremental Rental Revenues After-tax Facilities Management Income Platform Value G&A Expense Total Capex Free Cash Flow from Platform Terminal Value Discount Rate Terminal Cap Rate Present Value of Platform 12.008) ($872) 10. or $36 – $44/share today ($mm.047 – Existing Ground Lease Platform Value Total TIP REIT Value Implied Enterprise Value Net Debt Implied Equity Value Value per Share $26.354 5.644) .300 – $26.293 2011 $257 14 (21) (1.421 $44 (1) Based on 2029E NOI of $2..128 2.65% $2.5% 4.DCs & WHs Land Incremental Standalone Costs Rental Revenues from Existing Ground Lease Dividend Yield Present Value of Existing Ground Lease 2008 $1.5% 5.560mm and 4.863) ($1.421 – $31.65% $29.325 44 (15) $1.079) ($1.300 4.65% cap rate 122 .582) ($1..15% $26.

TIP REIT NAV (Ground Lease Precedents) Analysis The implied TIP REIT valuation range on Ground Lease Precedents-based NAV analysis is $22 – $26bn.5% discount rate 2029E terminal NOI: $2.50% – 6.1bn 123 .25% cap rate range 2009E NOI: $1.50% – 6.25% cap rate and 10.0bn – $1.354mm Valuation range of $22bn – $25bn Platform Valuation Based on 20-year DCF analysis Implied valuation at 5.5% – 12. or $30 – $36/share today Existing Lease Valuation Cap rate range based on ground lease precedents: 5.25% Implied valuation at 5.560mm Valuation range of $0.50% – 6.

.25% – $74 12 (20) (1.354 6.138 $25.671 – $21. except per share data) Existing Ground Lease Rental Revenues .DCs & WHs Land Incremental Standalone Costs Rental Revenues from Existing Ground Lease Cap Rate Present Value of Existing Ground Lease 2009 $1.TIP REIT NAV (Ground Lease Precedents) Analysis (cont’d) The implied TIP REIT valuation range on Ground Lease Precedents-based NAV analysis is $22 – $26bn.644) .50% $24.671 $30 $24.332) 2012 $391 15 (22) (1.671 – $21.764 $36 (1) Based on 2029E NOI of $2.478) 2013 $551 17 (22) (2. or $30 – $36/share today ($mm.626 + 2009 Incremental Rental Revenues After-tax Facilities Management Income Platform Value G&A Expense Total Capex Free Cash Flow from Platform Terminal Value Discount Rate Terminal Cap Rate Present Value of Platform 12.079) ($1.50% $1.138 2011 $257 14 (21) (1.50% cap rate 124 .325 44 (15) $1.190) ($1.540 – Existing Ground Lease Platform Value Total TIP REIT Value Implied Enterprise Value Net Debt Implied Equity Value Value per Share $21.764 – $25.5% 5.560mm and 5.25% $21.Store Land Rental Revenues .582) ($1.671 5.013) 2010 $145 12 (21) (1.863) ($1. Terminal Value (1) 2029 $46..5% 6.626 1.008) ($872) 10.

811 48 51 55 20 22 24 (36) (37) (38) 1.427 (7) (1.863) (19) 2013 2.582) 91 (9) (1.4% 6.008) 517 (8) (1.645 1.836 29.15% 4.00% 27.00% 3.5 4.TIP REIT DCF Analysis The implied TIP REIT valuation range based on DCF analysis is $28 – $34bn. 2010 2011 2012 1.5% 2.529 30.DCs & WHs Land ² Terminal Cap Rate .0 (1) Assumes store land 2014E NOI growth equal to 9.3% 9.00% 29.195 30.00% 2.501 1.398 46 19 (35) 1.700 Implied Perpetuity Growth Rate (%) ⁴ Terminal Store Cap Rate 5.Store Land Rent (Cash) .9 3.5% 19.190) (149) CAGR '09 .4%: NOI includes store related net facilities management income (2) Assumes DCs & WHs land 2014E NOI growth equal to 6.450 31.529 32.6 3.00% 4.DCs & WHs Land Net Facilities Management Income Less: G&A Expense EBITDA Less: Taxes on Facilities Mgmt. or $39 – $47/share today ($mm) Rent (Cash) .DCs & WHs Land Present Value of TV Sum of Discounted Cash Flows (2009-2013) ³ Implied Enterprise Value Less: Debt (01/01/09) Plus: Cash (01/01/09) Implied Equity Value 2009 1.00% 30.65% Discount Rate 9.15% 4.107 30.7 5. except per share amounts) Terminal NOI .90% 4.9% 45.1 8.8 4.3% NOI includes DCs & WHs related net facilities management income (3) Assumes mid-year convention (4) Normalized to exclude impact of development Capex in exit year 125 .072 65 8.939 33.5% 9.004 59 27 (39) 2.Store Land Terminal Value .104 8.65% Discount Rate 9.681 1.529 Terminal Store Cap Rate 5.079) 341 Projected Calendar Year.90% 4.4% na na Implied Equity Value 2.Store Land Terminal NOI .DCs & WHs Land Terminal Value .6 2.853 (8) (1.209 4.Store Land ¹ Terminal Cap Rate .533 1.5% 764 29. Income Less: Development Capex Less: Maintenance Capex UNLEVERED FREE CASH FLOWS ILLUSTRATIVE VALUATION ($ in millions.5% 9.051 (10) (2.791 739 30.'13 9.1 10.588 10.

2 37.50% Discount Rate on Platform Includes normalized dividends of $1.2x 21.3% 4.533 1.429mm 20-year DCF Analysis of Platform 10.0 21.344mm in CY2009 28.25% Cap Rate on Existing Ground Lease Cap Rate Range Based on Precedent Transactions CY2010 Existing NOI: $1.9x 4.5 37.0% $32.7% 5.6x 5.5 19.15% Dividend Yield on Existing Ground Lease Dividend Yield Based on Sum of CDS Spread and TIPS Yield CY2009 Existing Dividends: $1.344mm in CY2009 17. or $38 – $45/share 12 months from today Valuation Range ($27.7% 126 .0% – 10.0 Discounted Cash Flow – 8.5bn) Net Asset Value (TIPS) – – – – – – 4.50% – 12.5 27.5 Implied Multiples: CY2010 AFFO CY2010 EBITDA CY2010 Div.5 23.4 32.4x 20.569 $27.50% – 6.0% WACC – 4.400 1.5bn – $32.50% Discount Rate on Platform Includes normalized dividends of $1.5bn.464mm 20-year DCF Analysis of Platform 10.344mm in CY2009 23.6x 18.5 42. Yield Cap Rate ($mm) 1.0 33.TIP REIT Valuation—12-Month Price Target Various methodologies imply a TIP REIT reference range of $27.400 1.1% 5.7 28.5 31.50% – 12.65% – 5.3 Net Asset Value (Precedents) – – – – – – 5.5 – $32.5% Equity Value ($bn) $30.3x 4.65% – 5.15% Terminal Cap Rate – Includes normalized dividends of $1.5 22.

Valuation Analysis – Target Corp .

6 31.5x EBITDA – CY2009 EBITDA: $5.0 35.3 36.8x 17.8 33.3 – $25.8 17.0x Terminal EBITDA Multiple 15.5x EPS – CY2009 EPS: $2.3bn–$25.8x and current EV/EBITDA is 6.0 25.5–7.0x 5.9x 0.3 $35 15.2x 11.23 – Current Multiple is 11.3 $28 12.23 and CY2009 EBITDA: $5.4 25.3bn.0–11.7 23. or $28 – $35/share today Valuation Range ($20.0x Discounted Cash Flow – 9.9x 25.1x 0.8 $32 14.5x 5.6x 0.5 26.0% WACC – 6.9x and 5 Year EV/EBITDA of 8.6x 6.4 Trading Data – – 5 Year P/E of 15.2x Target 5 Year Historical – CY2009 EPS: $2. 2008 20.7x 13.8x 0.7x 6.4 35.7x 0.0x – 11.0 Equity Value ($bn) ($bn) Equity Value Enterprise Value Share Price ($/Share) '09 P/E '10 P/E '09 PEG '10 PEG (1) Based on 20-day average as of October 24.3 31.3bn) Trading Data – Retailers 1 (EV/EBITDA) Trading Data – Retailers 1 (P/E) – 5.0–7.3x '09 EV/EBITDA '10 EV/EBITDA 128 .5 27.172mm (P/E and EV/EBITDA) – Current P/E is 11.8x 0.172mm – Current Multiple is 6.0x 6.Target Corp Summary Valuation Analysis: Today The implied valuation range for Target Corp based on several methodologies outlined below is $20.0–14.6x 10.7x 7.4x 22.

241 10.479 9.9% (47.410 509 1.6% 68.9% 2.802 2.7% 9.063 7.1% (56.312 2.866 7.2% (68.337 10.051 10.777) 30.208 10.23 722 $2.444 5.919) 30.9% 161 (20) 7.8% Current Rent Expense Additional Rent Expense Pro Forma EBITDA EBITDA Margin (%) 169 1.611 2.0% (17.2% 73.710 10.222 10.751 7.67 722 $3.549 5.924 2.169 8.9% 6.696 6.0% 2.8% 182 1.037 1.7% 766 $2.395 9.249 5.017 611 1.663 2.4% 2.789 9.4% 195 (24) 9.6% 178 1.739) 20.980 7.363 10.093) 20.441 2.0% (19.6% Earnings per Share ($) 129 .Target Corp Summary Income Statement ($mm) PF2008 2009E Projected Calendar Year.27 17.172 7.7% 88.2% 10.968 8.6% 1.356 7.2% 98.478 10.654 623 1.2% SG&A SG&A as % of Sales (13.0% Retail EBITDAR Retail EBITDAR Margin (%) 6.1% (13.9% 15.814) 20. 2010E 2011E 2012E 2013E CAGR '09-'13 Retail Sales Retail Sales Growth(%) 64.177) 30.20 707 $3.2% 9.004 1.199 1.1% (16.70 677 $4.4% Depreciation & Amortization Net Interest (Income) / Expense Income Tax Provision Net Income Net Income Margin (%) Weighted Average Shares Outstanding 1.369 4.221 10.2% (14.199 531 1.0% (51.1% 191 2.038) 20.0% 150 (19) 6.7% 173 1.6% 2.2% (61.5% COGS Gross Margin (%) (45.279) 30.17 722 $2.485 8.892 5.657 9.2% Credit EBITDAR Incremental Facility Management Services Expense EBITDAR EBITDAR Margin (%) 143 (19) 6.563) 30.0% 8.519 10.618 3.459) 29.033 10.1% 11.890 2.5% 80.4% 10.632 2.765 515 1.646) 20.4% 216 (27) 10.8% 7.740) 20.1% 187 1.884 673 1.2% 177 (22) 8.

8x 1.967 (1.004) 79 73 (1. Debt/EBITDAR Projected Calendar Year. 2010E 2011E ($mm) PF2008 2009E 2012E 2013E EBITDA Less: Interest Expense Less: Taxes Plus: Decrease in Net Working Capital Plus: Other Less: Maintenance Capex Maintenance Free Cash Flow Less: Growth Capex Total Free Cash Flow Total Cash Total Debt Lease Adj.455 3.199) 120 73 (1.2x 9.303 2.023) 1.938 2.172 (673) (1.3x 3.6x 14.425 982 10.179) 3.817 3.1x 693 707 7.284 734 9.7x 3.980 (515) (1.8x 1.0x 7.485 (531) (1.112) 754 500 11.8x 662 677 130 .785) 2.8x Lease Adj.441) 167 73 (1.4x 722 722 6.615) 1.802) 224 73 (2.968) 3.6x 12.5x 12.866 (1.037) 79 73 (1.662 (2.424 887 8.2x 3.2x 9.112) 821 682 10.1x 1.169 (509) (1.352 805 8.3x 3.8x 1.902) 1.307 (1.327 (1.6x 2.7x 722 722 5.237) 1.3x 3.714) 1.632) 193 73 (1.1x 3.714) 1.2x 722 722 7.584 3.Target Corp Summary Balance Sheet/CF Statement Significant Free Cash Flow generation allows Target Corp to de-leverage to 2.827) 2.078 2.933 (1. Debt/EBITDAR Debt/EBITDA EBITDAR/(Interest+Rent) EBITDA/Interest Ending Shares Outstanding Weighted Average Shares Outstanding 4.7x 722 766 5.751 (611) (1.968 (623) (1.5x 2.

00 $35.67 17.2x 11.955 31.6x 14.6% 17.8x 12.1x 15.7x 15.5x 14.800 10.00 CY 2008 Earnings CY 2009 Earnings CY 2010 Earnings CY 2009 PEG CY 2010 PEG $2.3x 5.955 32.658 10.751 6.00 $31.0x 6.9x 0.3x 7.7x 6.5x 5.4x 0.824 10.8x 0.9x 12.00 $30.8x 0.613 22.6x 13.955 34.58 $33.4x 11.268 10.172 5.5x 0.8x 0.1x 0.169 21.7x 131 .8x 0.980 5.0x 6.7x 16.779 25.0x 7.7x 0.955 33.6% 12.3x 0.17 $2.8x 13.0x 5.9 20.8x 6.3x 721.7x 13.5x 6.955 36.223 $28.3x 6.7x 6.9x 7.4x 6.Target Corp Valuation Matrix Set forth below is a valuation matrix that demonstrates Target Corp’s trading multiples at various stock prices Value per Share Valuation Range ($mm) Shares O/S EQUITY VALUE Net Debt (1/1/09) ENTERPRISE VALUE Multiples of: CY 2008 EBITDA CY 2009 EBITDA CY 2010 EBITDA Metrics 4.2x 14.5x 10.214 10.23 $2.755 23.

63 63.6 5.2 5.30 0.31 36.9 0.3 1.5 14.6 10.8 5.1 0.7 1.9 5.5 12.5 6.4 6.168 255.9 1.0 2.1 2.7 4.9 0.346 24.4 2.4 5.463 17.2 4.32 0.7 (5) 17.8 4.8 3.48 0.4 Mean Median Mean(6) (6) Median (6) High Low (6) (1) (2) (3) (4) (5) (6) 216.0 6.38 0.30 0.Trading Data For Other Retailers (1) Company name Stock (2 ) Price ($) % of 52wk High Equity Value ($mm) EV/CY08E EV ($mm) Sales (x) EBITDA (x) EV/CY09E Sales (x) EBITDA (x) EV/CY10E Sales (x) EBITDA (x) P/E Ratio CY09E (x) CY10E (x) PEG Ratio CY09E (x) CY10E (x) IBES LTG (%) Total Debt/ CY08E EBITDA (x) Adj.4 1.34 0.0 1.48 0.33 0.0 0.9 1.2 13.8 4.5 32.3 0.64 0.5 5.3 1.7 4.98 31. except for Target Corp Assumes sale of credit card business for $4.0 3.5 2.8 0.8 5.3 6.4 4.26 0.85 69.37 0.28 0.69 0.196 9.9 2.5 9.49 0.66 0.9 7.72 0.7 Mean Median Department Stores Macy's 12.7 TJX 27.31 0.9 1.7 14.4 5.7 9.3 5.49 0.2 12.32 0.39 0.4 12.4 6.5 2.0 0.20 0.29 0.9 5.0 2.69 0.7 8.0 5.7 5.4 12.8 6.1 6.0 16.13 68.6 5.61 0.8 6.1 10.47 0.0 3.1 6.1 5.9 0.91 86.67 30.45 0.0 Staples 18.2 6.2 8.37 0.0 11.0 12.9 6.1 0.28 0.7 2.2 SUPERVALU 18.3 6.9 0.2 8.5 1.46 0.2 5.51 0.1 11.176 10.58 0.0 1.3 10.3 2.769 8.0 13.3 43.013 5.260 12. Debt/CY08E EBITDAR (x) Target (3) Standalone Target Corp( 4) 39.089 25.52 0.5 7.0 1.2 0.5 3.7 6.2 0.0 Best Buy 28.37 0.0 2.5 1.64 0.3 10.8 15.39 0.618 15.5 2.2 10.9 0.58 0.5 8.5 15.4 7.7 9.4 6.16 79.6 10.7 0.3 Discounters Wal-Mart 54.55 0.0 3.3 3.1 4.0 5.9 7.0 15.8 1.9 8.4 3. 2008 Assumes 20-day average stock price.9 1.5 14.310 12.897 5.8 Lowe's 19.0 8.58 0.17 0.2 13.7 1.755 3.4 5.1 5.4 7.59 67.8 13.8 1.1 BJ's 35.589 12.2 0.879 2.9 13.8 2.1 1.4 3.65 0.0 8.08 84.32 42.3 Mean Median Other Large Cap Retailers CVS 30.8 1.42 0.34 0.3 5.2 Safeway 22.63 0.9 1.1 10.8 1.61 0.105 12.08 68.6 1.8 5.3 32.1 9.6 4.0 5.6 1.5 5.3 3.686 2.59 0.7 7.7 6.3 1.0 2.0 14.7 0.652 14.48 0.0 16.5 5.682 36.2 6.994 As of October 24.2 3.8 1.2 1.5 Kohl's 35.800 39.5 12.8 2.0 9.31 60.5 10.43 73.7 1.47 0.4 17.7 0.61 0.9 5.3 5.9 6.8 9.9 3.9 0.8 1.5 6.6 10.17 5.9 4.3bn–$25.75 0.249 43.4 0.1 4.7 1.2 9.5 8.5 4.72 0.8 2.2 1.0 0.38 50.2 1.20 6.755 0.4 0.2 1.108 52.2 0.4 0.2 6.8 1.33 0.5 1.33 0.7 0.0 10.2 3.5 JCPenney 25.0 6.8 0.8 3.55 0.4 8.6 4.7 0.8 4.0 11.0 6.55 0.718 11.8 0.6 13.8 Sears 70.0 Mean/Median Supermarkets Kroger 26.4 7.4 0.52 0.0 1.58 0.8 5.8 5.2 43.45 44.6 (5) 11.43 0.8 1.8 11.57 0.0 9.7 5.0 0.75 0.1 11.5 5.198 24.8 8.7 4.5 1.1 0.8 7.3 1.69 0.57 0.0 11.4 1.5 9.0 10.3 6.72 0.9 3.18 0.61 0.61 0.5 15.5 10.63 0.9 14.1 6.8 2.95 77.31 0.9 3.7 Walgreens 25.47 0.18 6.28 0.818 33.8 0.5 8.0 12.640 47.58 0.1 4.4 7.57 0.7 0.8 14.0 9.5 12.7 4.30 0.0 Home Depot 21.6 17.678 29.68 0.369 25.3 9.617 3.0 10.4 2.863 22.7 6.0 2.9 12.9 11.37 0.28 0.2 2.24 0.545 11.2 11.25 0.0 8.40 0.1 0.1 1.9 11.41 0.4 2.7 0.4bn on 1/1/09 and uses proceeds to pay down debt Implied multiples from midpoint of Target Corp valuation ($20.25 0.7 0.581 7.699 26.58 – – 28.8 0.1 0.3 1.200 14.54 0.0 11.45 0.8 5.9 11.4 0.5 1.2 14.52 0.8 5.900 17.2 4.936 11.4 Costco 57.0 12.0 4.42 52.6 11.0 11.2 6.0 13.33 0.32 0.4 14.3 Whole Foods 15.2 3.47 0.0 5.0 0.4 8.4 11.1 6.0 13.0 9.1 0.4 2.3bn) Represents 2009–2013 EPS CAGR Excludes Target 132 .0 10.8 11.28 0.5 9.30 0.5 5.32 0.8 0.023 1.4 5.0 0.0 10.6 2.58 0.9 9.4 0.282 33.7 1.39 62.2 5.1 0.

5 17.23 5.7 – – 27.172 $2.5x 11.0x Multiple Range – – 7.Implied Valuation Based on Other Retailers The implied Target Corp valuation range based on other publicly traded retailers is $18 – $28bn.4 Implied Reference Range 133 . or $24 – $39/share today 2009E Multiple EV/EBITDA P/E 2009E Metric ($mm) 5.5x 14.5x Implied Value ($bn) 17.8 23.

2 12.4 14.3 Average(4) = 6.6 10.8 5.0 5.4 8 7.8 9.3bn–$25.2(2) 14.3 10.1 6.5(2) 6.4 14.6 9.3bn) Represents fiscal year ending January Excludes Target 134 .8 4.1 4 0 Costco Wal-Mart Sears Staples Home Depot CVS Lowe's BJ's TJX Kroger Kohl's Walgreens Macy's Whole Foods Best Buy Safeway SUPERVALU JCPenney Corp Standalone 2009E P/E Multiples (x) 35 30 25 20 15 10 5 0 Sears Costco BJ's Wal-Mart Whole Foods Lowe's Home Depot Kroger Staples TJX Kohl's CVS Walgreens Macy's Safeway Best Buy JCPenney SUPERVALU 17.0 8. 2008 Implied multiple from midpoint of Target Corp valuation ($20.4 Average(4) = 12.Target Corp Comparable Companies-Trading Multiples(1) Target is currently trading near the midpoint of its peer group 2009E EV/EBITDA Multiples (x) 12 8.7 6.2 7.8 4.0 5.1 13.9 13.2 4.5 5.3 11.4 6.8 7.5 11.8 15.3 9.8(3) 11.8 4.7 5.1 6.6 32.9 5.5 11.8 6.5 Corp (1) (2) (3) (4) Standalone As of October 24.0(3) 6.

826) 79 1.8 4.2 4.884) 3.434) 2. 2010E 2011E 2012E 5.472 11.400) 167 1.0x 9.017 (2.041) 3.4bn.162 Projected Calendar Year.169 (2. except per share amounts) 2 Terminal EBITDA Terminal EV/EBITDA Multiple Terminal Value 3 Present Value of TV 3 Sum of Discounted Cash Flows (2009-2013) Implied Enterprise Value 4 Less: Debt (1/1/09) 4 Plus: Cash (1/1/09) Implied Equity Value 2009E 5.5x 7.403 Discount Rate 10.606 4.022 31.993 30.262) 2.654 (4.3 Discount Rate 10.1 Notes: 2 3 4 5 1 Assumes sale of remaining 53% interest on credit card receivables for $4.357 35.025 1.645) 2.732 Terminal Multiple 6.7 5.751 6.759 (1.274 2.641 Implied Perpetuity Growth Rate (%) 5 Terminal Multiple 6.687 (11. ongoing royalty stream of $150mm Assumes 2014E EBITDA growth equal to 2013E growth Assumes mid-year convention Assumes $4.00% 3.850) 120 1.668 32.9 3.00% 26.172 (1.314 (2.614 6.884 (2.073 41.485 7.404 29.017) (2.0x 9.931 2.3 3.735 (1.654) 5.827) 2.285 (1.00% 4.2 11.4bn of proceeds from sale of remaining 53% interest on credit card receivables used to pay down debt Assumes capital expenditures equal to depreciation and amortization in perpetuity 135 .665 2013E 7.416) 224 1.588 4. or $37 – $49/share today ($mm) 1 EBITDA Less: Depreciation and Amortization EBIT Less: Taxes @ 38% After-Tax EBIT Plus: Depreciation and Amortization Less: Net Capital Expenditures Plus: Decrease in Working Capital UNLEVERED FREE CASH FLOWS ILLUSTRATIVE VALUATION ($ in millions.199) (2.410 (3.536 35.5x 7.736 Implied Equity Value 8.00% 2.0x 6.288 (1.00% 27.732 33.870) 193 1.5x 57.410) 3.00% 29.968 (2.4 2.640 2.301 2.0x 6.199 (3.455) 500 30.824 6.Target Corp Discounted Cash Flow Analysis The implied Target Corp valuation range based on DCF analysis is $26 – $35bn.

9x and 5 Year EV/EBITDA of 8.9x 7.5 – $32.5 42.0 27.5–7.8x 24.9 25.3x 0.8x 6.67 and CY2010 EBITDA: $5.8 Trading Data – – 5 Year P/E of 15.751mm – Current Multiple is 6.0 37.6 $38 14.6 $45 16.67 – Current Multiple is 11.0 33.0x 32.9x 1.8x and current EV/EBITDA is 6.0 30.2x Target 5 Year Historical – CY2010 EPS: $2.6x 0.0x Discounted Cash Flow – 9.5bn) Trading Data – Retailers (EV/EBITDA) Trading Data – Retailers (P/E) – 6.5bn.5x 30.5x Terminal EBITDA Multiple 22.6 37.0 Equity Value ($bn) ($bn) Equity Value Enterprise Value Share Price ($/Share) '10 P/E '10 PEG '10 EV/EBITDA 27.0–8.4 35.0x – 13.0–11.1 $42 15.0x EPS – CY2010 EPS: $2.5 37.0 32.5bn–$32.0x 7.4x 136 .0x EBITDA – CY2010 EBITDA: $5.Target Corp—12-Month Price Target The implied valuation range for Target Corp based on several methodologies outlined below is $27.0–16. or $38 – $45/share 12 months from today Valuation Range ($27.751mm (P/E and EV/EBITDA) – Current P/E is 11.0 42.0 30.0 40.3 42.0% WACC – 6.

Credit Rating Analysis .

or a ‘De-consolidated’ analysis of the two separate entities on a standalone basis. mutually dependent business models Vast majority of TIP REIT revenues will be based on Target Corp land leases for many years Lease arrangements and large size of land portfolio lead to high correlation of credit quality between TIP REIT and Target Corp TIP REIT will also provide facility management services to Target Corp Target Corp and TIP REIT will be separate legal entities with common public ownership at the onset. except for shareholders initially Agencies may not unanimously take the same analytical approach when assessing Target Corp and TIP REIT profile Leading to potential for one or more agency taking a ‘consolidated’ approach and another taking a ‘deconsolidated’ approach 138 . but with some linkage A ‘Consolidated’ approach is supported by the integrated. ‘De-consolidated’ Target Corp and TIP REIT will have integrated. economically inter-twined business relationship between Target Corp as lessor and TIP REIT as landowner A ‘De-consolidated’ approach is supported by the fact that the companies will be separate legal entities with no common ownership. we believe that the Rating Agencies will adopt one of either two possible analytical approaches for their analysis of Target Corp and TIP REIT: a ‘Consolidated’ analysis of the combined group/system. shareholder base expected to diverge over time due to differing business profiles of the two entities Based on this structure.Maintains Investment Grade Credit Rating We believe the Rating Agencies will adopt one of two possible analytical approaches when assessing the credit profiles of the ‘new’ Target Corp and TIP REIT – ‘Consolidated’ vs.

Agencies are expected: To review Target Corp and TIP REIT independently To assign independent ratings to both Target Corp and TIP REIT. we believe: Target Corp will maintain solid Investment Grade credit ratings Between Mid-High BBB/Baa to A-/A3 TIP REIT will achieve Investment Grade credit ratings Under any scenario. we believe that Target Corp will maintain Investment Grade credit ratings Under a ‘Consolidated’ methodology. although we anticipate that there will be some ratings linkage between the two Regardless of the analytical approach. we anticipate that Target Corp will generate significant free cash flows with ability to deleverage to credit metrics supportive of stronger Investment Grade ratings over the near to intermediate term 139 . Agencies are expected: To review metrics of the consolidated group where lease payments between Target Corp and TIP REIT are expected to ‘cancel out’ To assign the consolidated group’s rating to both Target Corp and TIP REIT Under a ‘De-consolidated’ methodology.Maintains Investment Grade Credit Rating (cont’d) Regardless of the analytical approach adopted by the Agencies.

Structural and Legal Considerations .

Target Corp may secure the services of another party or undertake the land procurement development services on its own 141 . the parties will discuss terms over a standard period (e. TIP REIT enters into a two-year exclusive agreement to develop land for Target Corp Afterwards. Target Corp will have a Preferred Vendor Agreement with TIP REIT It is anticipated that TIP REIT will act as the land procurement developer for Target Corp Target Corp will notify TIP REIT when it identifies a place to build a store and will inquire about TIP REIT’s interest in providing land procurement development services for the specified area (assembling. upon reaching terms. or the parties do not agree upon terms within the specified standard period. 10+ days). TIP REIT will commence land procurement development services If TIP REIT decides not to pursue the opportunity offered by Target Corp.g. clearing and entitling one or more parcels of land) If TIP REIT expresses interest.Land Development / Procurement Set forth below is an illustrative example of how Target Corp and TIP REIT can work together on future land procurement Immediately after spin-off.

either TIP REIT or Target Corp may terminate the Preferred Vendor Agreement Store development: Target Corp will retain its store development function and will be solely responsible for developing its owned stores 142 .Land Development / Procurement (cont’d) Target Corp will have the right to purchase land for the store directly. but in that case Target Corp must notify TIP REIT to determine whether TIP REIT wishes to purchase the land from Target Corp and lease it back to Target Corp If TIP REIT expresses interest and agrees on market terms within the specified standard period. TIP REIT will purchase the land from Target Corp. clear and entitle it and lease it back to Target Corp on the agreed terms Target Corp will be under no obligation to accept any terms if it determines in good faith that doing so would not be in the best interest of Target Corp and its shareholders The agreement will contain customary confidentiality and standstill provisions that will prevent TIP REIT from misusing the information that Target Corp is looking to build a particular site After the fifth anniversary of the spin-off.

the transfer may trigger a reassessment of the property value which would impose higher ongoing property taxes 143 .Property Transfer Taxes Transfer of property to TIP REIT may be subject to property transfer tax Tax imposed at the state and local level in jurisdictions where property is located Rate of tax will vary among the jurisdictions Transfer may qualify for an exemption in some jurisdictions whereby beneficial ownership of property is deemed unchanged In some states such as California.

Supporting Data .

Store Ground Lease Expense per Avg.0% 1.0% $9.459 4.040 Standalone 2007A $61.576 $4.505 4. based on $1. on average 145 .4mm of square footage per DC & WH and 26 DCs & WHs.235) (1) (46) (2) 615 1.471 19. Store Estimated Four-Wall EBIT per Avg.321 (1. implying a cap rate of 7. lease cost. Store Memo: Avg. on average. 131k of square footage per store and 1.2bn of ground lease rent expense from stores.0% $13 13 $26 23.0% (2) Assumes $46mm of ground lease rent expense from DCs & WHs. based on $7/sq.7 1 $5.471 19.9 1.0% 2.970 Pro Forma 2007A Retail Sales per Avg.0% -13 $13 39.350 stores. 1.213 598 1. lease cost.0 15.25/sq.0% 2.321 --615 1.8% (1) Assumes $1.540 $39.Store–level ROIC P&L Data: ($mm) Standalone 2007A Pro Forma 2007A Retail Sales Retail Gross Margin Retail EBIT Plus: Advertising (50% of Consolidated) Plus: Buying Group Expense and Occupancy Expense Less: Incremental Ground Lease Rent (Stores) Less: Incremental Ground Lease Rent (DCs & WHs) Plus: Estimated Corporate G&A % of Revenues Plus: Estimated Distribution Center Costs % of Revenues Estimated Four-Wall Retail EBIT Store Level Operating Data and Assumptions: ($mm) $61.213 598 1.1% $7. ft.9 $34.2 13. # of Stores Estimated Four-Wall Operating Costs per Avg.540 $33. Pre-Tax Unlevered Returns on Investment $39. Store Margin New Land Capex New Building Capex Total Investment Est. ft.9 -$6.576 $4.

7 na na na ♦ ♦ 35 Real industry revenue is expected to decline at an average annual rate of 1. 2008 Company filings Yield to Maturity of the most liquid security with the largest outstanding amount based on Interactive Data Rent Expense as of last fiscal year reported Wall Street research as of May 5.8 0.Triple Net Lease REIT Tenants: Detailed Review Tenant % of Revenue Industry Moody's / S&P ¹ Adj. April 9. 2008: Buffets files for bankruptcy Moody’s does not expect Kerasotes to become free cash flow positive until after 2009 July 17.9 2.3 In default ♦ ♦ March 31. 2008: Morgan Stanley Private Equity acquires a 60% stake in Learning Care Group Inc.5 ♦ ♦ La Petite Academy 4 Education Services WR/NR na na na na ♦ Children's World 4 Education Services na / na na Adj. Company filings and Wall Street research Bloomberg as of October 24. 2008: Susser reports earnings. 2008: Merrill Lynch reduces its investment rating on The Pantry to “Sell” June 26.4 1.1 4 2.3 na na na 0.2 14.4 5.4 14.. Debt/ LTM EBITDAR (x) na na na LTM EBITDA/ Interest (x) na na na LTM EBIT/ Interest (x) na na na Yield ³ (%) ♦ Tenant Industry Moody's / S&P ¹ Commentary AMC Entertainment Regal (NYSE: RGC) Rave Motion Pictures Consolidated Theaters Muvico Source: (1) (2) (3) (4) (5) 51 7 6 5 5 Movie Theater Movie Theater Movie Theater Movie Theater Movie Theater WR / NR B2 / BBna / na na / na na / na 6.7 na na na 14.3 ♦ ♦ See above August 6.8 0. the parent company of La Petite Academy na Kerasotes ShowPlace Theatres 5 Movie Theater B1/ B- na na na na ♦ The Pantry (NASDAQ: PTRY) 4 Convenience Store WR / B+ 6. Debt/ LTM EBITDAR (x) na LTM EBITDA/ Interest (x) na LTM EBIT/ Interest (x) na Yield ³ (%) ♦ Tenant % of Gross Assets Industry Moody's / S&P ¹ Commentary The Pantry (NASDAQ: PTRY) Circle K – Susser Holdings (NASDAQ: SUSS) 11 9 Convenience Store Convenience Store WR / B+ B3 / B+ 6. 2008: Moody's downgrades Pantry's Corporate Family Rating to B2 and assigned a negative rating outlook. Free Cash Flow for Susser Holdings deteriorates 19.5 6.8% over the next 5 years The industry is in a mature phase of its development.2 1.7 1.6 4. as witnessed by the recent significant operator site and screen consolidation process associated with the filing for Chapter 11 Bankruptcy protection by most major operators in the early 2000s.5 4 2.7 na na na 2.5 14. Debt/ LTM EBITDAR ² (x) LTM EBITDA/ Interest (x) ² LTM EBIT/ Interest (x) ² Yield ³ (%) Commentary Buffets 6 Restaurant WR / NR 9. 2008: Buffets auditor raises "going concern" doubt January 22. 2008 146 .1 10.4 2.1% See above Kerasotes ShowPlace Theatres Mister Car Wash Road Ranger 5 4 4 % of Total GLA Movie Theater Conveyor Car Wash Convenience Store B1/ Bna / na na / na na na na Adj.

Model – Standalone .

9% 56.461 3.0) 0.0% 8.8% Operating Income Net Interest (Income) / Expense Income Tax Provision Tax Rate (%) 5.8% 1.459 70.158 38% 7.9% 169 6.1% Credit Card Adj.1 668.4 721.8% 2.177 69.3 (18.0 720.2% 8.0 (97.5% 177 9.8% 2.541 555 1.2% Calendar Year.1% 16.0% Credit Expenses % of Credit Revenue 950 50.9% 7.2% 2013 98.0 819.1% 187 9.0 (97) 0.8% Status Quo CY2008 64.2% 216 10.058 20.936) 150 5.348 9.316 10.038 10.4% Rent Expense EBITDA EBITDA Margin (%) 165 6.517 10.0) 0.1% 1.659 2.940 2.5% Credit Revenue Credit Sales Growth (1.9 765.215 722 1.469 37% 4.272 647 1.364 10.224 10.0% 0.2 $5.8% (476) 143 100.57 677.517 7.8 $3.9% 2.2% 9.375 9.0) 0.6) 0.7% Total Revenue Total Revenue Growth 68.8% 6.6% 2.637 9.844 3.457 10.5% 2.0% 216 100.0% 0.187 10.0% EBITDAR EBITDAR Margin (%) 7.2 $5.0% 195 100.896 63.4% 9.7% CAGR '09 .096 11.483 37% 4.139 3.761 20.3 687.725 38% 5.787 9.300 9.9% 11.614 9.0 850.957 38% 6.0% 17.0 677.849 4.29 721.0% 161 100.0% Retail EBITDAR Retail EBITDAR Margin (%) 6.7% 178 7.2% 6.2% 73.0% 19.0% 150 100.243 1.3 (20.036 10.058 20.8% 173 6.8% 61.0 721.929 69.919 69.793 2.2 652.011 10.375 9.767 3.1 (14.8% 2.5% 9.8% 68.478 10.5% 9.0 721.71 14.776 38% 5.8% 3.288 2.Standalone Model – Income Statement ($mm) Retail Sales Base Sales Growth (%) Status Quo CY2007 61.8% 2.392 20.90 697.6 (63.085 2.150 10.2% 98.279 69.2% 13.8% Credit EBITDAR Credit EBITDAR Margin (%) 946 49.3 $4.4 (23.834 20.824 10.40 720.563 69.517 3.18 659.0% 0.807 2.9% 3.0 645.993 10.33 819.2) 0.7) 0.003 2.2% 191 10. Pro Forma CY2008 64. 2010 2011 73.539 3.078 66.8% 2.777 70.396 38% 11.8% 9.8% 6.367 42.0% 0.459 70.8% SG&A (excluding D&A and Rent Expense) % of Retail Sales 12.029 10.2% 161 7.9% Current Diluted Shares Outstanding Shares Repurchase Share Repurchase from Options Total Shares Outstanding Weighted Average Shares Outstanding 882.1) 0.9 $3.5% 10.522 2.017 995 1.227 10.034 45.460) 0.6% Net Income Net Income Margin (%) 2.241 10.710 10.7% COGS % of Retail Sales 47.5% 9.452 3.3 708.674 694 1.0% 177 100.182 10.7% 2012 88.89 Earnings per Share ($) 6.668 20.356 80.761 20.516 897 2.8% 1.479 7.399 5.9 (1.4% 10.807 2.1% 2009 68.460 70.0 697.7% 195 10.471 1.9 765.7% 1.2% (1.7% 7.931 10.9% 182 8.1 $3.2% 169 6.32 819.115 20.9% 3.894 798 1.3% 14.528 38% 5.7% 148 .0% 6.0 659.0% 0.0% Depreciation & Amortization % of Retail Sales 1.4% 6.1% 13.2% 10.905 10.249 5.9% 619 29.970 45.892 2.7% 88.2% 10.9 $3.8 $3.892 143 65.5% 80.0% 6.0% 51.2% 11.655 9.1% 13.'13 9.

497 (13.313 2.840 1.450 48.392 32.160 2. gross Accumulated Depreciation Property.000) Adj.455 10.867 19.307 44.Standalone Model – Balance Sheet Status Quo ($mm) Cash & Equivalents Trade Receivables Other Current Assets Property.368 46.375) 30.368 56.368 40.350 2012 790 12.579 12.705 14.663) 32.757 2.663 46.710 39.604 12.455 16.560 17.579 2011 716 11.805 15. 0 (8.383) Pro Forma CY2008 500 9.757 2.054 8.867 (383) (8.687 16. Plant & Equipment.479 (15.132 19.887) 24.484 11.559 44.455 11.340 2.402 31.160 14.027 1.368 45.264 45.368 37.977) 39.734 (9.927 56.818 2.450 8.977 60.572 42.185) 36.873 40.455 12.090 9.033 Calendar Year.384 1.436 43.059 149 .122 1.348 1.455 10.059 17.392 24.350) 26.392 25.604 13.290) 28.095 1.816 1.285 2.392 32.350 13.982 (7.955 13.232 35.805 2013 874 13.232 35.560 Status Quo CY2008 500 8.368 50.484 2009 607 9.212 (18.004 50.734 (9. Plant & Equipment.253 15.639 (11.350) 26.621 54.392 29. net Other Non-Current Assets Total Assets Debt Other Current Liabilities Other Non-Current Liabilities Total Liabilities Total Equity Total Equity & Liabilities CY2007 2.880 37.817 (20.705 2.384 1.007 15.383 9.802 18.392 27.033 11.392 36.345 29.368 42. 2010 653 10.

905) (3.605) 1.667 (3.858) 1.142) 607 45 653 630 19 (4.750 0 (1.003) (2.614 (694) (1.905) 0 0 (99) (433) (532) 500 107 607 554 17 2012 9.249 (5.045 5.498) (496) (243) 790 85 874 832 25 3. 2010 2011 7.0% 150 .396) 73 224 0 6.038 (897) (2.713) (481) (444) 716 73 790 753 23 2013 10.982) 1.300 8.000 0 (1.Standalone Model – Cash Flow Statement Calendar Year.732) (5.500 0 (1.528) 73 79 0 4.858) (3.036 (1.688) (454) (1.982) (4.957) 73 73 120 167 0 0 5.732) 1.654) (467) (621) 653 63 716 685 21 ($mm) EBITDA less: Interest Expense less: Taxes Share-based Compensation less: Increase in Net Working Capital less: Increase Funding of CC Growth Cash Flow from Operating Activities Capital Expenditures Cash Flow from Investing Activities Issuance of Debt Repayment of Debt Issuance of Equity / (Buy Back) Issuance of Dividends to Common Cash Flow from Financing Activities Beginning Cash Balance Change in Cash Ending Cash Balance Average Cash Balance Interest Income 2009 6.544 (3.725) (1.933 (6.605) (6.158) 73 193 0 6.750 0 (1.182 (722) (798) (1.

808 2.7% 6.493 15.7 x 8.0% 3.410 2.471 Pro Forma CY2008 222 293 64.369 7.7 x Status Quo CY2008 1.605 6. 2010 2011 241 256 304 314 73.905 5.9 x Pro Forma CY2008 1.5 x 1.1% 3.2% 2008 4.986 1.1 x 1.9 x 1.6% (0.876 1.112 6.5% 2013 6.9%) 2007 4.4 x 1.353 11.9 x 6.955 15.320 17.710 10.6 x 10.0 x 151 .455 20.7% 0.Standalone Model – Build-ups and Credit Metrics Status Quo CY2007 208 296 61.842 1.6% 6.7 x 8.0 x 2.5% 2011 4.9 x 1.5% 4.353 19.412 1.808 3.455 12.241 10.3% Credit Metrics Lease Adjusted Debt Actual Debt Total Lease Adjusted Debt Total Lease Adjusted Debt/EBITDAR Total Debt / EBITDA EBITDAR / (Interest + Rent) EBITDA / Interest 8x Status Quo CY2007 1.198 1.9 x 1. Footage Growth (%) SSS Growth (%) CapEx Buildup Total System CapEx CapEx as % of Retail Sales 2009 232 294 68.7% Calendar Year.5 x 10.479 7.249 5. Ft.982 6.5% 2009 3.5% 2012 5.0% 3.2% 6.7 x 7.0 x 1.5% 3.387 11.090 18.705 17.455 18.3% 2012 273 325 88.7 x 8.858 5.7 x 10.3 x 1.9 x 1.892 5.5 x 8.0 x 11.421 12.6 x 2.732 6.455 13.2% 4.7 x 8.457 13.531 17.0 x 6.1 x 1.8 x 1.1% Sales Buildup Square Feet (mm) $ / Sq. Retail Sales Implied Retail Sales Growth (%) Sq.7% 7.356 80.3% 2010 3.5% 2013 292 337 98.455 12.3 x 10.5 x 10.8 x 9.8 x 9.7% 9.

Model – TIP REIT .

1% 170 (147) 22 1.79 1.342 1.866 1.235 1.1% (1) Normalized to exclude incremental interest expense due to CY2009 cash E&P distribution 153 .364 721.444 1. Income Net Income Normalized Net Income (1) Ending Shares Outstanding Earnings per Share Normalized Earnings per Share (1) Dividends on Common Special Dividends Normalized Dividends (1) Normalized Dividends per Share (1) % AFFO 100.9 $1.369 1.1% 144 (125) 19 1.1% 4.94 1.8% 3.511 $2.051 (139) (559) (10) 1. 2010 2011 1.177 1.681 (88) (316) (8) 1.9 $1.304 1.1% 144 (125) 19 1.9 $1.3% 2.81 $1.600 1.090 (22) (17) 2.71 $1.289 721.415 1.890 (22) (16) 1.331 721.696 2.09 2013 2.501 1.7% 4.3% 9.400 $1.268 1.3% 2.8% 4.52 $1.427 (56) (188) (7) 1. except as noted) Gross TIP REIT Revenues from Ground-leased Store Land Gross TIP REIT Revenues from Ground-leased DCs & WHs Land Total Gross TIP REIT Revenues Total TIP REIT Net Rental Revenues % of Target Corp Retail Sales Plus: Facilities Management Income Less: Facilities Management Expense Net Facilities Management Income Net Operating Income Less: G&A Expense Less: Incremental G&A Cost EBITDA Less: Depreciation & Amortization Less: Interest Expense Less: Taxes on Facilities Mgmt.9 $1.645 48 51 1.444 2.3% 9.718 (21) (16) 1.533 (68) (221) (8) 1.549 2.232 1.9 $1.398 46 1.304 1.369 2.84 1.3% 9.353 (42) (205) (7) 1.0% Pro Forma CY2008 1.3% 9.89 1.004 59 2.063 2.452 $2.141 1.253 $1.1% 187 (162) 24 1.68 1.86 $1.438 721.569 (21) (15) 1.696 1.344 $1.063 2.9 $1.1% 207 (180) 27 2.866 2.'13 9.1% 155 (134) 20 1.5% 9.549 1.811 55 1.01 2012 1.462 (20) (15) 1.356 1.74 2009 1.76 $1.211 721.388 (20) (15) 1.577 $2.63 $1.400 721.4% 6.94 1.481 1.86 Calendar Year.5% 38% 3.99 1.099 1.18 CAGR '09 .325 44 1.853 (111) (428) (9) 1.TIP REIT Model – Income Statement ($mm.

325 11.7% 154 . 2010 2011 12.079 (901) 12.382 2009 12.656) 9.382 11.382 (1.644 3 9.669 (1.593 3 7.382 11.320 18.593 2013 12.272 11.727 12.063) 9.'13 10.570 14.269 5.382 11.382 11.228 5.228 (846) 11.Land & Improvements Accumulated Depreciation Net Real Estate Asset Cash Total Assets Debt: Revolver New Debt Total Debt Common Equity Retained Earnings (Deficit) Total Equity Total Liabilities & Equity Pro Forma CY2008 12.228 3.679 2.135 11.641 3 18.924) 9.590 3 16.382 (1.132 7.839 3 14.842 3 5.382 (1.7% 10.348 12.345 3 13.382 (2.644 CAGR '09 .348 3 3.459 16.532 (1.724) 9.TIP REIT Model – Balance Sheet ($mm.308) 18.087 (970) 13.682 11.058) 14.812) 9.322 9.408 Calendar Year.842 2012 12.687 3.228 1.169) 16.722 (1.228 2.658 13.Land & Improvements Maintenance Capex Development Properties .228 7.382 (1.405 3 12. except as noted) Real Estate: Gross Existing Properties .408 3 2.690 11.

582 (1.415) 447 3 3 2.582) 2012 1.481) 709 3 3 - 155 .079) Calendar Year.141 1. 2010 2011 1.415 (1.'13 4.232) (1. Income Net Cash Flow from Operating Activities Cash Flow from Investing Activities: Development Capex Maintenance Capex Net Cash Flow from Investing Activities Cash Flow from Financing Activities: Debt Financing: Increase (Decrease) in Revolver Increase (Decrease) in New Debt Equity Financing: Increase (Decrease) in Common Equity Dividends on Common Special Dividends Net Cash Flow from Financing Activities Beginning Cash Balance Net Change in Cash Ending Cash Balance 2009 1.4% 3 2.008) 1.427 (188) (7) 1.582) (1.304) (295) 3 3 1.190) (2.TIP REIT Model – Cash Flow Statement ($mm.7% 19.079) (1.008) (1.190) CAGR '09 .481 (2.863 (1.190 (1.863) 2013 2.008 (1.681 (316) (8) 1. except as noted) Cash Flow from Operating Activities: EBITDA Less: Interest Expense Less: Taxes on Facilities Mgmt.232 (1.304 (1.051 (559) (10) 1.356 (1.353 (205) (7) 1.679 (1.600) (151) 3 3 1.853 (428) (9) 1.863) (1.141) (1.356) 226 3 3 1.533 (221) (8) 1.

5% 240 240 7.325 $1.5% 2.1% 3.25 2.5% 2.9% 189 189 6.8% 37 1 7 46 19.38 2.9% 39 1 7 47 18.4% 41 1 7 49 18.5% 2. Ft.9% $7.5% 39 39 3.Sq.Sq.28 2.5% 51 1.5% 2.4% $7. Owned Stores Total TIP REIT Stores Square Footage Total TIP REIT Stores Square Footage Growth Count 1.DCs & WHs Land CPI Growth Average Growth TIP REIT Revenues from Ground-leased DCs & WHs Total TIP REIT Gross Revenues Yes 35 1 7 44 19.00 1.4% CAGR '09 .TIP REIT Model – Rent Build-up Assumptions ($mm.5% 2. Count Owned DCs & WHs 25 Combined (Ground-leased) DCs & WHs 1 Third-party Leased DCs & WHs 5 Total Combined DCs & WHs Square Footage Total DCs & WHs Sq.369 156 . Total Combined Stores Sq.3% 9.4% 37 1 7 45 19.Sq. Count Owned DCs & WHs 25 Total TIP REIT DCs & WHs Square Footage Total TIP REIT DCs & WHs Square Footage Growth Rent / Square Foot .1% 209 209 4.5% 46 1.9% $7.5% 2.5% 1.549 224 23 10 256 6.25 44 1.645 $1. Ft.438 Combined (Ground-leased) Stores 172 Third-party Leased Stores 73 Total Combined Stores Square Footage Total Combined Stores Square Footage Growth TIP REIT Stores .811 $1.063 6.31 2.5% 1.00 2.0% 41 41 4.398 $1.8% Total Combined DCs & WHs . vs.5% 1.0% 37 37 1.Sq. Count Owned Stores 1.5% 2.5% 2.3% 9. Ft.5% 55 1.0% 224 224 6.501 $1.5% 43 43 4.Store Land CPI Growth Average Growth TIP REIT Revenues from Ground-leased Land Rent / Square Foot .5% 37 37 4. Ft.7% 35 35 3.004 $1.5% 2.7% $7.5% 59 2.438 Yes Pro Forma CY2008 189 23 10 222 2009 200 23 10 232 4.4% $7.5% 2.444 Calendar Year. 2010 2011 209 23 10 241 4.35 2. TIP REIT DCs & WHs .73 2.35 2.0% 259 259 7.18 2.54 2.5% 2.696 2012 240 23 10 273 6.5% 1. except as noted): Total Combined Stores .8% $7.866 2013 259 23 10 292 7.9% 43 1 7 51 17. Ft. Ft.'13 5.5% 48 1.7% 200 200 5.

4x 14.268 68 88 1.6x 7.0% and 8.0% Sq.400 721.6% 1.3x 3. Credit Statistics and Implied Metrics FFO & AFFO Reconciliations: Net Income Plus: Depreciation & Amortization Funds from Operations Ending Shares Outstanding FFO / Share Less: Maintenance Capex Adjusted Funds from Operations Normalized AFFO (1) Pro Forma CY2008 1. Ft.304 1.9x 22.577 CAGR '09 .1x 18.2% 5.7% 4. / SuperTarget 239 10 5 29 41.0% Implied New Combined GM Stores 0.9x 6.177 56 1.9 $2.0% Implied New Combined SuperTarget Stores 0.Maintenance Capex) / Interest Expense Leverage: Total Debt / EBITDA Capitalization: Total Debt / Total Real Estate Value (NOI capped at 6.141 721.6% 4.3x 5.232 721.05 1.5x 27.304 111 1.1% 6. respectively) Implied Metrics: Incremental Stores Square Footage SuperTarget Stores 50. Ft.818 1 0 0 33 14 7 41 41.356 721. 2010 2011 1.8% 1.511 2013 1.415 1.4% 336 7 58 58.9 $1.725 131 2.7x 3.523 65 1.304 1.683 31 1 32 (1) Normalized to exclude incremental interest expense due to CY2009 cash E&P distribution 157 .031 2 1 1 35 19 10 54 41.3x 4.408 1.9 $1.71 1.9 $1.6% 1. / GM % of Total New Stores Built Combined Total Number of General Merchandise Stores Total Implied New Stores Cumulative Combined Total Implied Stores Incremental DCs & WHs Square Footage Implied Combined New DCs & WHs Total Implied New DCs & WHs Cumulative Combined Total Implied DCs & WHs 1.7% 4.9 $1.481 721.9x 11.3x 3.9% 3.481 1.5% 295 5 38 58.648 114 2.753 2 1 10 5 27 41.917 1 1 1 34 17 8 47 41.253 2009 1.177 % of Total New Stores Built Combined Total Number of SuperTarget Stores 7.96 1.8% 1.7% 4.232 1.9 $1.2% 437 10 77 58.7x 4.5% 1.2% 383 8 67 58.444 1.1% Credit Statistics: Coverage: EBITDA / Interest Expense (EBITDA .5% for store land and DCs & WHs land.81 1.235 1.356 1.124 Sq.344 Calendar Year.TIP REIT Model – FFO & AFFO Reconciliations.141 1.58 1.099 42 1.9x 2.452 2012 1.162 2 1 1 36 General Merchandise Stores 50.6x 1.581 99 1.485 70 1.'13 4.342 139 1.4% 268 5 41 58.415 721.88 1.

45 1.'13 6.179 4.4% 158 .605 2.4% 28.008 1.0% 2009 3.582 1.836 26 1.902 1.615 1.00 19.827 2.112 1.14 31 $15.982 1.079 1.50 22 $14.190 2.863 1.TIP REIT Model – Capex Schedule ($mm.079 1.2% $14.714 2.827 1.785 1.863 - 2013 6.426 2.785 3. 2010 2011 3. except as noted) Total Combined Expenditures Maintenance / Retail Capital Expenditures Target Corp .158 $113.582 - 2012 5.DCs & WHs Total Development Capex Development Financing Sources: Debt Financing Equity Financing 100% 0% Yes Yes 71.84 2.38 26 $15.023 1.836 $110.190 2.2% 19.905 1.179 2.858 4.Other TIP REIT Land .198 1.Store and DCs & WHs Target Corp .765 1.079 - Calendar Year.06 10 $14.560 22 1.71 999 10 1.031 1.191 1.Store and DCs & WHs TIP REIT Land .DCs & WHs DCs & WHs Land Cost per Square Foot TIP REIT Land .08 1.714 1.Store TIP REIT Land .968 1.008 1.69 22 $15.008 999 $105.158 31 2.863 1.582 1.968 3.056 22 1.Store Buildings TIP REIT Development Capital Expenditures Target Corp Building .560 $107.732 1.35 1.Store Store Land Cost per Square Foot TIP REIT Land .6% 0.237 2.056 $102.190 - CAGR '09 .

Model – Target Corp .

9 (29.9 0.051 10.'13 9.078 66.369 4.038 20.9 721.0% (162) 187 187 1.1% 68.67 721.4% Depreciation & Amortization % of Retail Sales 1.6 677.459 70.7% COGS % of Retail Sales 47.8% Net Income Net Income Margin (%) 2.0% 0.777 70.618 2. Payments to TIP REIT Current Rent Expense Additional Rent Expense Pro Forma EBITDA (Post-spin) EBITDA Margin (%) (125) 144 169 6.093 20.312 2.033 10.375 9.655 9.5% Credit Revenue Credit Sales Growth (1.199 38% 4.177 69.654 2.92 17.2% 8. 2010 2011 73.0% 51.2% 98.7% 88.539 3.395 9.2% 10.765 2.7% 2.460) 13.2% 0.6% 1.7% 1.751 7.441 38% 4.0% 19.9% 15.735 611 1.444 5.8% 7.2% 73.1% 6.663 2.9 0.356 80.0% 0.8% (147) 170 182 1.7% 195 10.0% Retail EBITDAR Retail EBITDAR Margin (%) 6.017 2.980 7.9% 2.8% SG&A (excluding D&A and Rent Expense) % of Retail Sales 13.0% 17.884 2.5% 80.970 45.993 10.058 20.034 45.17 721.4% 10.759 509 1.0) 693.9% 6.0% Credit Expenses % of Credit Revenue 1.483 37% (42) 1.1% REIT Adj.537 10.208 10.802 38% 12.696 6.199 2.215 515 1.8% 61.892 2.0) 721.824 10.279 69.2% (125) 144 169 1.2% 216 10.0% 0.8% 6.924 2.9 $2.485 8.0 721.479 7.0% 7.9 0.517 7.892 143 na 2009 68.0 707.4% 9.1% (20) (1.5% 10.249 5.8% (476) 143 na 150 na 161 na 177 na 195 na 216 na EBITDAR (Pre-spin) EBITDAR Margin (%) 6.6% (134) 155 178 1.2% 9.169 8.2% 10.23 721.936) 150 5.6% 160 .0% 0.2% 2013 98.0% 8.0 (31.004 38% 3.172 7.1% (180) 207 191 2.611 2.Target Corp Model – Income Statement ($mm) Retail Sales Base Sales Growth (%) Status Quo CY2008 64.5 $3.385 10.5% 9.7% Total Revenue Total Revenue Growth 65.549 5.2% 14.285 531 1.498 10.807 5.4% Current Embedded Facility Management Costs External Facility Mgmt.6% 2.7% 2.1% 13.9 $3.905 10.4% 1.246 10.5% 9.7% 2.9 $2.7% 2.2% 161 7.5% 177 9.017 995 1.890 2.288 673 1.0 (97.739 20.968 8.710 10.410 2.70 693.20 721.7% 2012 88.3 $4.5% 9.1% 16.7% Operating Income Net Interest (Income) / Expense Income Tax Provision Tax Rate (%) 3.646 20.460 70.337 10.037 38% 3.740 20.063 7.4% 6.4) 661.9 721.8% 9.0% 0.27 Earnings per Share ($) 4.7% CAGR '09 .2% Calendar Year.314 623 1.241 10.1% 11.9 721.0 721.919 69.9 $2. Pro Forma CY2008 64.866 7.459 70. Credit Card Adj.807 10.0 721.8% 1.657 9.457 10.563 69.7% Current Diluted Shares Outstanding Shares Repurchase Total Shares Outstanding Weighted Average Shares Outstanding 819.9% 56.249 10.632 38% 5.399 5.814 20.7% (125) 144 173 1.9 765.8% 68.9% 2.8% Credit EBITDAR Credit EBITDAR Margin (%) 619 29.

757 2.582 (14.312 8.776 1.977 40.455 10.734 (9.312 2013 982 13.817 11.564 31. 0 (8.621 36.977 1.506 (8.383 9.392 32.340 2.101 2009 682 9.938 14. Plant & Equipment.232 23. net Other Non-Current Assets Total Assets Debt Other Current Liabilities Other Non-Current Liabilities Total Liabilities Total Equity Total Equity & Liabilities CY2008 500 8.526 10.035 8.368 31.232 35.868 (19.703 10.584 12.703 Calendar Year.705 2.332 (10.182 (12.368 26.368 29.389) 15.382) (383) 0 (8.015) 19.264 45.522 3.285 2.392 26.000) (12.669) 21.526 161 .001 1.599 2012 887 12.757 2.392 28.078 16. gross Accumulated Depreciation Property.392 24.505) 15.135 5.771 37.392 24.179 29.452 (17.383) Pro Forma CY2008 500 9.710 26.303 13.368 34. 2010 734 10.313 2.160 2.498 26.182 27.436 29.392 24.867 (11.455 10. Plant & Equipment.384 1.450 32.368 45.604 1.314 2011 805 11.605) 17.406) 16.314 9.392 24.035 7. Credit Card Adj.199 1.368 37.350) 26.604 13.278 34.599 8.437 1.368 27.755 8.228) 846 (11.Target Corp Model – Balance Sheet Status Quo ($mm) Cash & Equivalents Trade Receivables Other Current Assets Property.101 11.943 1.382) REIT Adj.867 19.

330) (2.977 (1.441) 73 73 120 167 0 0 4.400) 0 (1.826) 0 (638) 0 0 (638) 500 182 682 591 18 Calendar Year.Target Corp Model – Cash Flow Statement ($mm) EBITDA less: Interest Expense less: Taxes Share-based Compensation less: Increase in Net Working Capital less: Increase Funding of CC Growth Cash Flow from Operating Activities Capital Expenditures Cash Flow from Investing Activities Issuance of Debt Repayment of Debt Issuance of Equity / (Buy Back) Issuance of Dividends to Common Cash Flow from Financing Activities Beginning Cash Balance Change in Cash Ending Cash Balance Average Cash Balance Interest Income 2009 5.802) 73 224 0 5.850) (2.134 4.826) (2.281) 0 0 (1.416) (4.330) 887 95 982 935 28 4.841 (4.977) 0 (1.233) 682 51 734 708 21 (3.281) 734 71 805 769 23 2012 7.294 (3.470) 0 (1.169 (509) (1.752 (2.980 (515) (1.342) 805 82 887 846 25 2013 7.416) 2.400) (3. 2010 2011 5.968 (623) (1.870) 1.470 (1.233) 0 0 (1.342) (1.751 6.647 (2.850) 0 (1.632) 73 193 0 5.199) (1.501 0 3.037) 73 0 3.485 (611) (531) (1.004) 73 79 0 3.0% 162 .172 (673) (1.870) (3.

968 1.5% 2013 6.9 x 12.827 1.7 x 12.033 10.615 1.582 0 1.2% 4.2 x 16.6 x 12.863 0 2.808 3.0 x 2.079 0 1.5 x 2.023 1.5% 4.3 x 3.7% 15% 207 8x 1.785 1.935 10.8 x 163 .752 3.190 0 % of total 50% 50% 65.905 5.031 1.5% 15% 155 147 9.1% 3.582 0 1.0 x 7.439 1.785 0 3.0 x 6.179 0 4.0% 1.732 6.0% 3. 2010 2011 241 256 304 314 73.3% 2010 3.5% 2013 292 337 98.785 1.Target Corp Model – Build-ups and Credit Metrics Sales Buildup Square Feet (mm) $ / Sq.327 2.764 3.7% 15% 170 162 10.827 0 2.863 0 1.2 x 9.079 0 1.2 x 3.2% 15% 187 180 10.9 x 6.421 8.179 2.627 200 1.6 x 2.0% 3.7% 7.303 23. Retail Sales Implied Retail Sales Growth (%) Sq.7 x 3.902 1.455 23.7% 6.179 2.5 x 12.584 23.811 9.1 x 18.1 x 3.455 20.190 0 2.8 x 1.479 7.605 6.6 x 14.359 2.241 10.8 x 1.5% Calendar Year.0% % of Development 0% Facilities Management Business ($mm) Total Current Costs Growth % Markup to TIP REIT Facilities Management Revenue to TIP REIT Credit Metrics Lease Adjusted Debt Actual Debt Total Lease Adjusted Debt Total Lease Adjusted Debt/EBITDAR Total Debt / EBITDA EBITDAR / (Interest + Rent) EBITDA / Interest 125 15% 144 125 0.7% Maintenance/Retail CapEx Additional Cap Ex TOTAL Maintenance/Retail CapEx – Target Corp – TIP REIT (Existing DC & WH) Development CapEx Buildings (Tgt Corp) Land – Target Corp – TIP REIT Other (Target Corp) % of Development % of Development % of total 35.858 5.078 28.514 200 1.714 1. Ft.353 19.0% 15% 144 134 7.024 8.2% 6.111 2.5% 3.3 x 3.8 x 1.5% 2011 4.7% 9.710 10.008 0 1.938 25.817 23.112 1.112 6.4 x 15.968 0 3.356 80.008 0 1.765 1.892 2009 232 294 68.968 1.7 x 13.394 3.198 1.3% 2012 273 325 88.5% 2012 5.1 x 1. Footage Growth (%) SSS Growth (%) CapEx Buildup Total System CapEx CapEx as % of Retail Sales Pro Forma CY2008 222 293 64.426 2.249 5.3% 2009 3.191 1.309 11.237 2.2% 2008 4.3 x 3.714 0 2.982 6.2 x 9.7% 0.

Target: A Revised Transaction November 19.P. 2008 Pershing Square Capital Management. L. .

buy. estimates and projections with respect to the anticipated future financial.P. operating and stock market performance of Target in the absence of the Transaction and the two public companies that may result if the Transaction is completed. estimates and projections may prove to be substantially inaccurate. (ii) any such discussion of tax matters is written in connection with the promotion or marketing of the matters addressed. None of Pershing Square Capital Management. Neither Pershing nor any of its representatives undertakes any obligation to correct. and cannot be used. “Pershing”). The Information does not purport to include all information that may be material with respect to the Transaction or Target. inflation. It has. The preparation and distribution of this presentation should not be taken as any form of commitment on the part of Pershing to take any action in connection with the Transaction. and are subject to significant uncertainties and contingencies beyond Pershing’s control. competitive pressures. as to the accuracy or completeness of the Information or any other written or oral communication made in connection with this presentation or the Transaction. 1 . reflect significant assumptions and judgments that may prove to be substantially inaccurate. Thus. The Information is not intended to provide the basis for fully evaluating. shareholders and others should conduct their own independent investigation and analysis of Target. the securities of Target or any other matter. nor any representative of Pershing. and may in the future. for the purpose of avoiding penalties under the Internal Revenue Code. Such statements. interest rate fluctuations. sell or change the form of its position in Target for any or no reason. IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS. credit.S. the Transaction and the Information. The Information includes certain forward-looking statements. the Transaction. This presentation does not constitute an offer or a solicitation of any kind. capital and stock market conditions. update or revise the Information or to otherwise provide any additional materials. and (iii) you should seek advice from an independent advisor. including those described under the caption “Risk Factors” in Target’s filings with the Securities and Exchange Commission as well as general economic. Neither Pershing nor any of its representatives makes any representation or warranty. directors and employees (collectively. express or implied. its affiliates and any of their respective officers. and should not be considered a recommendation with respect to. Target. Pershing recognizes that there may be confidential or otherwise non-public information in Target’s possession that could lead others to disagree with Pershing’s conclusions. has independently verified any of the Information. Pershing and its representatives expressly disclaim any and all liability relating to or resulting from the use of the Information or any errors therein or omissions therefrom. Pershing is in the business of buying and selling securities. Except where otherwise indicated. The sole purpose of presenting the Information is to inform interested parties about the transaction described in this presentation (the “Transaction”). regulatory and tax matters and other factors. we inform you that (i) any discussion of U. tax matters contained in this communication (including any attachments) is not intended or written to be used. geopolitical conditions. the Information speaks as of the date hereof.Disclaimer The information contained in this presentation (the “Information”) is based on publicly available information about Target Corporation (“Target”). L. including under applicable securities laws..

incorporates feedback from the investment community. we will present a Revised Transaction that addresses Target’s concerns. and creates great value for Target shareholders 2 . as well as Retail and Real Estate investors We have received valuable feedback from these meetings Today. members of its Board. Target expressed concerns regarding the October 29th Transaction Since then.” which detailed a potential Transaction (“October 29th Transaction”) that would create long-term value for Target Corporation and its shareholders After the presentation. Pershing presented “A TIP for Target Shareholders. 2008. Pershing has met with Target.Recent Events On October 29.

Agenda Review of the October 29th Transaction Target’s Concerns A Revised Transaction Benefits of the Revised Transaction Appendix 3 .

Review of the October 29th Transaction .

Updating Our Model We have updated our model to reflect Q3 2008 results as well as revised guidance provided by Target management on its earnings call on Monday. 2008 Reduced Q4 ’08E same-store-sales expectations to negative 5% Lowered capital expenditures in 2009 by approximately $1bn Slowed square footage growth in 2010E Halted share buybacks in Q4 2008 and for the full year 2009 Used a 20-day average stock price of $37 per share for Target The analyses provided in this presentation reflect the updated model 5 . November 17.

Pershing Square’s objective was to eliminate the stock market’s ascribed discount to the intrinsic value of Target’s real estate and allow the Company to: Retain complete control of its buildings and its brand Retain 100% flexibility with respect to its construction. remodeling. and relocation plans Improve the Company’s free cash flow and access to capital Increase the Company’s ROIC and lower its cost of capital Maintain an investment grade credit rating Increase the Company’s EPS growth rate Minimize tax leakage and friction costs 6 .Objectives In reviewing alternatives for Target.

October 29th Transaction Tax-free spin of Target Inflation Protected REIT (or “TIP REIT”) as Groundlessor and Facility Manager Pre–Spin TARGET Shareholders Post–Spin TARGET Shareholders TARGET TARGET Corp Ground Leases Target Inflation Protected REIT Facilities Mgmt. becomes Target Corp’s Preferred Vendor for land procurement . Services Existing Retail Business Owned Buildings 1 Land New Target Corp owns its buildings on 75-year ground leases Outsources Facilities Management Services Continues to maintain properties Leases back land to Target Corp through a Master Lease for a 75-year term Elects REIT status at the time of spin-off Becomes Target Corp’s outsourced facilities management provider Becomes Target’s exclusive land developer for the first two years (1) Includes third-party ground leases 7 After two years.

Unlocking Immense Real Estate Value REITs. with Target retaining $150mm of credit card EBITDA (1) Based on a 20-day trading average as of 11/14/08 (2) Based on mid-point precedent cap rate of 5.5x Large Cap REITs (1) 17.4bn.8% as of 11/14/08 .7x Inflation Protected Treasury Securities (TIPS) (3) The Transaction creates immense and instant value because 22% of Target’s current EBITDA will be valued at a significantly higher multiple than where Target trades today Note: Target valuation assumes sale of remaining 53% interest on credit card receivables for $4.9% 8 (3) Based on current 20-year TIP yield of 2. and inflation-protected securities all trade at much higher valuation multiples than Target’s multiple. at only 5.8x $37/Share (1) 14.0x Recent “Big Box” Ground Lease (2) 35. based on a 20-day trading average stock price of $37 Target’s Market Valuation 2009E EV / EBITDA (1) Inflation Protected Securities / REIT Market Valuations 2009E EV / EBITDA 5. private market ground leases.8x ‘09E EV/EBITDA.

assumes sale of remaining 53% interest on credit card business with proceeds used to pay down debt (2) Based on mid-point of valuation analysis 9 TIP REIT .5x 14.4x Equity Value ($bn) Enterprise Value ($bn) '10E EV/EBITDA '10E P/E Equity Value ($bn) Enterprise Value ($bn) ‘10E Dividend Yield Cap Rate '10E P/AFFO '10E EV/EBITDA Note: Target valuation assumes sale of remaining 53% interest on credit card receivables for $4.8% 5.0% 5.0x 20.8x 11.4% 20.Valuation Summary $80 $80 $67 $60 $/Share TIP REIT 81% $37 Target Standalone TIP REIT $39 $40 $36 Target Corp Target Corp $20 $31 $0 Target (20-Day Avg.0x 16. assumes Spin-off Transaction occurs on 01/01/09 (1) Based on 20-day trading average as of 11/14/08.1x $29 $30 4.0x 19.4bn For illustrative purposes.7x $27 $27 5.1x Equity Value ($bn) Enterprise Value ($bn) ‘09E Dividend Yield Cap Rate '09E P/AFFO '09E EV/EBITDA Target Corp Equity Value ($bn) Enterprise Value ($bn) '09E EV/EBITDA '09E P/E $28 $37 5.1x $41 12-Month Price Target ² $31 $39 7. Price) ¹ TIP REIT Spin-Off ² $24 $33 6.1% 21.

Even ignoring valuation benefits. there are important strategic reasons to consummate the Transaction… 10 .

stability. and unleveraged balance sheet TIP REIT can use non-cash currency (OP units) for tax-efficient real estate acquisitions 11 .Benefits of the October 29th Transaction 1. Improves Target’s overall access to capital There is risk to Target’s status quo. Retailers’ access to capital has been called into question TIP REIT is one of the most stable companies in the world TIP REIT is better able to access capital for future land acquisitions than Target today. given TIP REIT’s immense security. Allows Target Corp to retain control over its buildings and brand 2.

thereby decreasing Target’s capital needs After-tax rent expense of ~$890mm is offset by land development capex of ~$890mm.15/share to Target shareholders ($mm. except per share data) Memo: Incremental Rent Expense 2009E Standalone (1) – 2009E Target Corp (1) 1.433 Net Incremental Cash Flow Cash Flow Impact on Key Affected Metrics Incremental After-Tax Rent Expense Dividends Paid Land Development Capex Net Impact to Cash Flow – 483 890 $1. which is funded by TIP REIT TIP REIT pays all of Target’s 2009E dividends of 64 cents/share as well as an incremental $1.373 888 – – $888 (888) 483 890 $484 (1) Assumes sale of remaining 53% interest on credit card receivables for $4.4bn on 01/01/09. Increases free cash flow at Target Corp by nearly $500mm.Benefits of the October 29th Transaction (cont’d) 3. with Target retaining $150mm of credit card EBITDA in ’09E 12 .

except where noted) Target Corp Adj./ A3 2009E 2010E 2011E 6.Benefits of the October 29th Transaction (cont’d) 4. Debt/EBITDAR Expected Ratings Profile 3. Provides a clear path back to an “A” category credit rating PF 2008E (1) ($bn. through a REIT structure (1) Assumes sale of remaining 53% interest on credit card receivables for $4. Maintains an investment grade credit ratings profile 5. Creates over $510mm of tax savings in the first year post transaction Optimizes ownership of land./ A3 2. with proceeds used to pay down debt 13 .High BBB/Baa 2.8x A.4x Mid . a non-depreciable asset.High BBB/Baa 3.8x A.4bn on 01/01/09.2x Mid .

Benefits of the October 29th Transaction (cont’d) 7. Creates enormous shareholder value.64/share to $1. Improves store-level ROIC and increases Target’s EPS growth rate 9.15/share) of incremental interest expense due to CY2009 cash E&P distribution 14 . Achieves a tax-free spin-off 10. potentially increasing Target’s stock price from $37 to $67 per share (1) Excludes $112mm (approximately $0.79/share in 2009E (1) 8. Increases total dividends for Target’s current shareholders from $0.

TIP REIT Investment Highlights “Land-only” structure is extremely secure ■ $39bn of “Lease Security”. including $20bn of unencumbered buildings Long-term lease provides bond-like stability and inflation-protection ■ 75-year. inflation-protected “Master Lease” with Target Corp Significant growth opportunity ■ Formal arrangement with Target Corp provides long-term growth pipeline High quality locations and superb tenant profile De minimis maintenance capex allows for strong FCF generation Tremendous size and scale – a “must-own” yield stock 15 .

3 6.6 5. Liquid.948 27.7 6.Large.1 6.9 7. yield-oriented investors.0 5.257 27. Caterpillar Home Depot Dominion Resources Dividend Yield (%) 7.960 30. real estate index funds. DuPont de Nemours Eli Lilly AT&T Philip Morris International Merck TIP REIT (3) Southern Co.5 4.9 5.965 26. 2008 (2) Represents non-financial companies in the S&P 500 with market caps greater than $20bn (3) Based on 2009E dividends 16 .323 30.0 4.9 7.6 5.3 Given its market cap.4 4.821 31. “Must-Own” Yield Stock TIP REIT will be the 58th largest company in the S&P 500 S&P 500 Ranked by Market Cap (1) Rank Company 50 Time Warner 51 52 53 54 55 56 57 58 59 60 Colgate-Palmolive Devon Energy Boeing Union Pacific Lockheed Martin Southern Burlington Northern Santa Fe TIP REIT Celgene Lowe’s Market Cap (1) ($mm) 32.I.8 5.689 S&P 100 Non-Financials Ranked by Dividend Yield (2) Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Company Altria Group Pfizer General Electric Bristol-Myers Squibb Verizon Communications E.000 26.129 29.8 4. TIP REIT will be owned by S&P 500 index funds.160 28. and investors seeking inflation-protected assets (1) As of November 14.273 27. large cap funds.

typically 8% of EBITDA No preferred arrangement None. given “land-only” structure 17 . Owns both land buildings “Lease Security” $20bn of unencumbered buildings. typically 10% or more of leases up for renewal annually Yes.TIP REIT: Unlike Any Existing REIT Today TIP REIT Leverage Refinancing Risk / Earnings Pressure Transaction Income Re-leasing Risk Maintenance Capital Growth None None Large Cap REITs High: 54% Debt-to-TMC Average: 44% Debt-to-TMC High – REITs have borrowed at low rates and are facing much higher rates and refinancing risk for debt maturities Sometimes None / 100% rental income None / 75-year lease None Preferred vendor arrangement Yes.

TIP REIT has the added benefit of a growth platform and no “Phantom tax” TIP REIT Extremely low probability of default Inflation protection Long-term duration with required payments Liquidity Growth platform “Phantom tax” (1) Size of total TIPS market 18 20-Year TIPS Backed by federal government Payment based on CPI adjusted principal 20 years Interest payment required by law Over $450bn market (1) No Yes (tax on inflation adj.How is TIP REIT Similar to TIPS? TIP REIT has many of the same features of Treasury Inflation Protected Securities (TIPS).0% dividend yield Rent income adjusted for CPI 75-year lease term REIT dividend payment required by law $27bn market cap Yes No . However. principal) Backed by highly-rated Target Corp $39bn of “Lease Security” or 145% TIP REIT’s EV at 5.

liquid REITs Interest in an independent TIP REIT Board and management Valuation benefits of an “A” category credit rating at Target 19 .Feedback from REIT Investors Since the October 29th presentation. Pershing Square has met or held calls with several of the largest REIT investors and received valuable feedback regarding TIP REIT Feedback from REIT investors Appreciation of the security and stability offered by land-only structure Agreement on a valuation premium for land-only REIT (versus a land and building REIT) Strong interest in an unlevered REIT Desire for more large cap.

stability. long-term inflation-protection. Pershing Square has received strong interest in TIP REIT from a broad category of large investor groups beyond traditional REIT investors Pensions Endowments Income-oriented funds These investors are seeking security.Interest from a Broad Group of Investors In addition. and a higher yield than that offered by TIPS 20 .

Target’s Concerns Regarding the October 29th Transaction .

Target’s Concerns Target expressed the following concerns regarding the October 29th Transaction: Concern 1. Valuation Management’s Commentary “The validity of assumptions supporting Pershing Square's market valuation of Target and the separate REIT entity” “The reduction in Target's financial flexibility due to the conveyance of valuable assets to the REIT and the large expense obligation created by the proposed lease payments which are subject to annual increase” “The adverse impact that the company believes the proposed structure would have on Target's debt ratings. and liquidity 22 . Reduction in Target’s financial flexibility and inflation risk 3. exacerbated by current market conditions” 2. borrowing costs. Credit ratings. borrowing costs and liquidity.

Frictional costs and operational risks Management’s Commentary “The frictional costs and operational risks. particularly in the current environment” 23 . Management diversion “The risk of diverting management's focus away from core business operations over an extended time period to execute such a complex transaction. including tax implications. of executing Pershing Square's ideas” 5.Target’s Concerns (cont’d) Target expressed the following concerns regarding the October 29th Transaction: Concern 4.

A Revised Transaction .

g.. TIP REIT will elect REIT status (3) IPO does not trigger any capital gains taxes Target retains >80% interest in TIP REIT Immediate valuation benefits: Allows investors to value Target on a sum-of-the-parts basis (1) TIP REIT assumes a portion of Target liabilities.Revised Transaction: <20% IPO of TIP REIT Step 1: Formation of Target Inflation-Protected Real Estate Investment Trust Target contributes land and Facilities Management Services to a new subsidiary (“TIP REIT”) (1) TIP REIT leases the land back to Target Corp through a Master Lease for a 75-year term (2) Step 2: Primary IPO of <20% of TIP REIT shares At the time of the IPO. the parent company) (3) Non-REIT assets (e. This could include a portion of Target’s debt (2) TIP REIT will lease land to Target Corp (i.e. the Facilities Management Services) will be placed in a taxable REIT subsidiary (TRS) 25 Credit ratings impact: Target Corp will maintain its A+/A2 credit rating .

4 $1.5 $4.9 2.Post IPO: Pay Down ~$9bn of Debt Step 3: Sale of the remaining 53% interest in Target’s Credit Card Receivables Step 4: Pay down ~$9bn of Target debt using all of the credit card proceeds.2 $4.4 3. and free cash flow ($bn) Paydown using Proceeds from Credit Card Sale Securitized Debt Unsecured Debt Total Paydown using IPO Proceeds (1) Paydown using Free Cash Flow Total Debt Paydown $1.6bn of cash proceeds from the IPO is left on TIP REIT’s balance sheet (1) Assumes TIP REIT funds land development capital expenditures of approximately $0. we have assumed $4. a portion of the IPO proceeds.8) $8.9bn post-IPO using debt 26 . Target sells remaining 53% interest in its credit card receivables For this analysis.4bn of proceeds from the sale $ in billions Gross Receivables CY 2008E Allowance Net Receivables CY 2008E 53% Interest at Net Book Value $9.2 At an opportune time (either pre.0 1.0 (0.8 $9.or post-IPO).

Target enters into an inflationswap agreement to hedge inflation (alternative is to buy swaption today) Target’s >80% interest in TIP REIT is distributed tax-free to shareholders Post spin-off. this rule would reduce the cash portion of TIP REIT’s E&P dividend to as little as $400mm 27 .6bn cash E&P dividend to TIP REIT shareholders Note: Cash E&P dividend could be materially lower than $1. Target maintains its “A” category credit rating Step 6: TIP REIT purges retained Earnings and Profits By December 31 of the calendar year of spin-off.6bn The REIT industry group has requested the Treasury Department to issue a rule allowing low-cash stock-cash dividends If granted.Post IPO: Spin-off TIP REIT and Purge E&P Step 5: Spin-off of remaining interest in TIP REIT to Target shareholders Immediately prior to spin-off. TIP REIT pays a $1.

6bn will remain at TIP REIT $ in billions TIP REIT Equity Value Implied 2009E Dividend Yield Captive TIP REIT Equity Value Discount New Issuance TIP REIT Post-IPO Equity Value TIP REIT Gross IPO Proceeds Use of IPO Proceeds: Retire Target Debt Cash Remaining at TIP REIT Pay Frictional Costs and Fees Total IPO Proceeds 15% 19.5 $28.9% $27.1bn in gross proceeds. the IPO would generate roughly $5.6 0. net of paying $500mm after-tax frictional costs and fees.0bn. assumes cash balance of $1.9% IPO of TIP REIT at a 15% IPO discount.0 20.9% IPO of TIP REIT at a 15% IPO discount.6bn at TIP REIT upon IPO (3) Assumes a 19. After frictional costs and expenses.6bn to captive TIP REIT equity value of $24.6bn (4) Assumes approximately $350mm of after-tax frictional costs and $150mm of IPO fees 28 .0bn will be paid to retire Target debt and $1. IPO proceeds of $3.6 $5.1 (4) (1) Calculation based on allocating and subsequently paying down $3.0 5.4 25.0 1.TIP REIT IPO Proceeds Assuming a 19. IPO proceeds are $4.0% $24.0bn of debt (2) Calculation based on adding net proceeds of $4.5 $5.1 (1) (2) (3) $3.

9 7.8 $9.Sources and Uses of Cash at Target Corp Proceeds from the IPO and the sale of the remaining interest in the credit card receivables can be used to pay down debt Cash Sources ($bn) IPO Proceeds to Retire Target Debt Credit Card Sale Proceeds 1-Yr Cash Flow Generated at Target Corp (1) Total Cash Sources $3.3 (1) Reflects cash flow generated after working capital.2 Cash Uses ($bn) Paydown of Securitized Debt Paydown of Unsecured Debt $1.0 4. assumes maintenance of $500mm minimum cash balance.2 Total Cash Uses (Debt Paydown) $9.9bn by issuing debt during the first year post-IPO 29 . and dividends.4 1. capex. assumes TIP REIT funds land development capital expenditures of approximately $0.

3bn and 2010E Rent Expense of $1.7 2.8) Pro Forma Target Corp Post Spin-off 5.6) (1.Post Spin-off: Target Corp Credit Ratings Post Spin-off.8bn of unsecured debt as of Q3 ’08A.5bn through debt pay down with free cash flow and cash on balance sheet (while maintaining $500mm minimum cash balance) (2) Based on 2008E EBITDAR for Target Standalone of $6.7bn 30 .2bn (3) Based on 2010E EBITDAR for Target Corp post spin-off of $7.9 12.9bn and 2008E Rent Expense of $0.3) ($12.2 2.6 $18.3 $17.6 1.6x (3) "A" Category 0.0 $5.7 (3) $9.0 13.8 1.2 (2) "A" Category 1. reduced in 4Q ’08E by $2.9) (7. Total Debt / EBITDAR Expected Ratings Profile Memo: Rent Expense Adjustments ($3. Debt Lease Adj.4 $19.8x (2) ($bn) JPMorgan GAAP Liability Credit Card Securitized Debt Unsecured Debt (1) Ending Debt Plus: Lease Adjusted Debt (8x Total Lease Expense) Ending Lease Adj.2bn of Total Debt Paydown (1) Based on $14. Target Corp will maintain an “A” category credit ratings profile Target Standalone 2008E $3.

Illustrative Timeline 2009CY Q1 Q2 Q3 Q4 2010CY Jan – Nov Dec Step 1: TIP REIT Formation Contribute Land & Facilities Management Services to TIP REIT Execute 75-year Master Lease with Target Corp Step 2: TIP REIT IPO TIP REIT elects REIT status Primary IPO of <20% of TIP REIT shares Step 3: Sale of 53% Interest in CC Receivables Step 4: Debt Paydown Step 5: Spin-off of TIP REIT Target enters into inflation-swap agreement Tax-free spin-off of remaining >80% interest in TIP REIT Step 6: TIP REIT E&P Purge 31 .

8x 11.8% 5.Valuation Analysis $79 $80 $65 TIP REIT $60 $/Share 77% $37 TIP REIT (Captive) $33 $40 $30 Target Corp Target Corp $20 Target Standalone $35 TIP REIT IPO ² $26 $33 6.4bn. Price) ¹ Note: Target valuation assumes sale of remaining 53% interest on credit card receivables for $4.4x Equity Value ($bn) Enterprise Value ($bn) '10E EV/EBITDA '10E P/E Equity Value ($bn) Enterprise Value ($bn) (3) ‘10E Dividend Yield Cap Rate (3) '10E P/AFFO '10E EV/EBITDA . assumes sale of remaining 53% interest on credit card business with proceeds used to pay down debt (2) Based on mid-point of valuation analysis (3) Based on Adjusted Equity Value excluding cash balance of $1.8x $31 $30 4.4% 20. with Target retaining $150mm of credit card EBITDA For illustrative purposes.6bn reserved for E&P distribution in 2010E 32 TIP REIT Equity Value ($bn) Enterprise Value ($bn) (3) ‘09E Dividend Yield Cap Rate (3) '09E P/AFFO '09E EV/EBITDA Target Corp Equity Value ($bn) Enterprise Value ($bn) '09E EV/EBITDA '09E P/E $28 $37 5.0% 5.1x $0 Target (20-Day Avg.5x 15.0x 16.0x 20.1% 21.9% REIT IPO occurs on 01/01/09 and full REIT Spin-off occurs on 01/01/10 (1) Based on 20-day trading average as of 11/14/08.1x $46 12-Month Future Price / TIP REIT Spin-Off ² $35 $39 7. assumes 19.0x 19.1x $29 $27 5.

0% 45% 55% 63% 72% 81% 6.0% $54 57 60 64 67 6.0% $57 61 64 67 70 5.0% 54% 64% 72% 81% 90% 5.5% 67% 76% 77% 85% 85% 94% 94% 103% 103% 112% .0x 7.0x 6.5% $52 56 59 62 66 7.5% 49% 59% 67% 76% 85% 33 6.5x 7. the Transaction results in a significant premium to the stock price of $37 / per share Value/Share ($) Target Corp EV/ ’09E EBITDA TIP REIT ‘09E Dividend Yield 6.5% $65 69 72 75 78 Premium to $37 stock price (%) Target Corp EV/ ’09E EBITDA TIP REIT ‘09E Dividend Yield 6.5x 7.0x 6.5% 60% 70% 78% 87% 96% 5.0% $62 65 68 72 75 4.0x 7.0x 7.5% $55 59 62 65 69 6.5x 8.5% 41% 51% 59% 68% 77% 7.0x 7.Tremendous Upside at Various Assumptions At any plausible valuation of TIP REIT and Target Corp.5x 8.0% 4.5% $59 63 66 69 73 5.

Benefits of the Revised Transaction .

given ~$5bn of IPO proceeds <20% IPO is a tax-free transaction Maintains Target’s current “A” category credit rating Provides funds for debt paydown Preserves an “unwind” mechanism in the form of a buyback of the public minority stake of TIP REIT 35 .Advantages of a Minority IPO of TIP REIT A <20% IPO of TIP REIT would have several important advantages Immediate value creation for Target shareholders Force a market revaluation of Target Enable investors to value Target based on a sum-of-the-parts basis. using the public valuation of TIP REIT Immediately improves Target’s access to capital through TIP REIT Increases Target’s liquidity.

6bn of cash in the calendar year of TIP REIT spin-off) While maintaining control of TIP REIT. Target has the opportunity to: “Test” the valuation of TIP REIT Fine tune the relationship between Target / TIP REIT on land development issues 36 .Advantages of a Minority IPO of TIP REIT (cont’d) A Minority IPO would offer Target significant control and flexibility in executing the Revised Transaction Offers flexibility as to when Target: Sells remaining interest in credit card receivables Completes TIP REIT spin-off Pays an E&P dividend ($1.

the increased flexibility afforded to Target will significantly reduce execution risks .Pros and Cons of the Revised Transaction Assuming the spin-off of the remaining >80% interest in TIP REIT occurs in 2010. versus the October 29th Transaction proposal.64/share today to $1.50 per share in total value (2) Certain benefits such as reduced taxes and increased dividends won’t be fully achieved until the spinoff is complete ⌧ Delay of certain benefits: Mitigating Factors: In the context of total value creation from Target’s $37 stock price.9% IPO which increases TIP REIT’s shares outstanding to approximately 940mm shares from 755mm shares pre-IPO (2) Assumes a 15% IPO discount and a 19.49 (1) share in 2010 Improves capital access and decreases the need for growth capital at Target Corp Reduces taxes by over $510mm Improves Target’s ROIC and EPS growth Increases the total stock price from $37/share to $79/share by 2010 (1) Assumes a 19. FCF/share) Maintains “A” category credit rating More than doubles dividends: $0. the Revised Transaction offers many pros and few cons Pros Meaningfully accretive on all key measures (EPS. equivalent to ~$1.9% IPO 37 Cons ⌧ Dilution: <20% IPO of TIP REIT results in some dilution to Target shareholders. the dilution is minimal Despite the longer transaction plan.

0% 4.0x 7. effectively seasoning the market and attracting long-term investors Potential “unwind” mechanism Should the Company not be satisfied with TIP REIT’s Transaction.5% 5.Addressing Management’s Concerns Concern 1) Valuation Total Stock Price at Various ’09E Dividend Yields and ’09E Multiples TIP REIT ’09E Dividend Yield 7.8x.5x 7.5% 6.0% 5. the Revised Transaction offers tremendous upside to Target’s stock price of $37 At Target’s current stock price of $37 and EV / ’09E EBITDA multiple of 5.0x . the implied dividend yield of TIP REIT is an improbable 16% IPO provides a seasoning period for TIP REIT An IPO would give the investment community several quarters to value TIP REIT before it is spun off. effectively “unwinding” the structure 38 Target Corp EV/’09E EBITDA 6. Target can repurchase TIP REIT’s public minority stake.0x $52 56 59 62 66 $54 57 60 64 67 $55 59 62 65 69 $57 61 64 67 70 $59 63 66 69 73 $62 65 68 72 75 $65 69 72 75 78 Benefits of the Revised Transaction Under any plausible valuation of TIP REIT.0% 6.5% 7.5x 8.5% 6.

Addressing Management’s Concerns (cont’d) Concern 2) Reduction in Target’s financial flexibility and inflation risk Benefits of the Revised Transaction Target pays down ~$9bn of debt. in many ways. eliminating significant interest expense obligations <20% IPO of TIP REIT provides the Company with the proceeds and flexibility to deleverage before the spin-off of the remaining interest in TIP REIT Ground lease is more attractive than debt TIP REIT ground lease is. more attractive than Target’s debt given the 75-year term. the lack of financial covenants. which implies an annual aftertax cost of approximately $0.03/share 39 . and the lack of refinancing risk Inflation risk can be hedged out cheaply Target can lock in 20-year inflation protection today at ~250 bps per year.

and liquidity Benefits of the Revised Transaction Target will maintain its “A” category credit ratings at all times Post spin-off of TIP REIT. Target Corp will maintain its “A” category credit rating as a result of deleveraging Borrowing costs will not be impacted by the Revised Transaction The Revised Transaction offers several key credit benefits: Target’s liquidity is significantly increased given IPO proceeds Target’s access to and cost of capital is improved by the formation of TIP REIT 40 .Addressing Management’s Concerns (cont’d) Concern 3) Credit ratings. borrowing costs.

Addressing Management’s Concerns (cont’d) Concern 4) Frictional costs and operational risks Benefits of the Revised Transaction After-tax frictional costs are small in light of total value creation of $28-plus dollars per share Main frictional costs are professional fees (investment banking. legal. and accounting) and property taxes After-tax frictional costs will likely be less than $1 per share Operational risks are mitigated by the Revised Transaction given: The presence of an “unwind” mechanism The ability to “test drive” the Target / TIP REIT relationship during the IPO period Tax-free nature of spin-off 41 .

.Addressing Management’s Concerns (cont’d) Concern 5) Management diversion Benefits of the Revised Transaction The formation of TIP REIT will require a modest amount of retail operating management’s time Predominantly third-party legal and accounting work CFO. It will be completely transparent and seamless to Target’s core business IPO and eventual spin-off of TIP REIT will not distract Target’s core business teams: Merchandising / purchasing Vast majority of Target’s team Marketing members will be Regional and store-level uninvolved IT / systems / administration 42 . EVP of Property Dev. and GC oversight required Other members of senior operating management largely uninvolved The Transaction is akin to placing a master ground lease on Target’s stores.

far better than any retailer TIP REIT will be able to issue OP units for tax-efficient land acquisitions This Transaction will best position Target to benefit from a weak competitive environment Given potential retailer bankruptcies. Target can use the liquidity provided by TIP REIT to acquire real estate that might be for sale at substantial discounts in the next 12-18 months The risk of the status quo is that Target may lose access to capital and not be able take advantage of the current environment 43 .Risk of the Status Quo In today’s world. even the best retailers may lose access to capital The TIP REIT IPO transaction would immediately increase Target’s access to capital TIP REIT will have strong access to the debt and equity capital markets.

work on this Revised Transaction will need to begin shortly Formation of TIP REIT and the issuance of pro forma financials will take several months Predominantly legal (lease structuring) and accounting work Search for a management team and new board of directors for TIP REIT To achieve a TIP REIT IPO in Q3 2009. there could be opportunities for Target to benefit from a weak competitive landscape TIP REIT needs to be in place for the Company to best do so 44 . the Company will need to authorize work on this Revised Transaction in the beginning of 2009 In 2009. To complete an IPO even a year from now.Why Is Now the Time? The Transaction requires several months of planning before an IPO is achievable.

the Revised Transaction offers explosive potential upside in 2010E and beyond A turn in the economy would lead to Potentially explosive earnings growth at Target Corp.Fast Forward: 2010E and Beyond For investors with a longer-term view. given inflationprotected income stream . particularly given recent expense reductions Improved retail sales Heightened inflation expectations 45 Increased demand for TIP REIT.

we have continually improved upon the transaction in an effort to create an outcome that satisfies Target’s strategic goals and concerns We believe our Revised Transaction addresses all of Target’s concerns and achieves enormous value creation 46 .Pershing’s Relationship with Target Pershing has been in discussions with Target since May 2008 about a potential real estate transaction We appreciate Target’s candid feedback and respect the Company’s concerns Throughout this process.

Questions and Answers .

Appendix

The Revised Transaction
Tax-free IPO and spin of Target Inflation Protected REIT (or “TIP REIT”) as Groundlessor and Facility Manager
Pre–Transaction
TARGET Shareholders

Post–Transaction
TARGET Shareholders >80%

Public Shareholders <20%

TARGET

TARGET Corp

Ground Leases

Target Inflation Protected REIT
Facilities Mgmt. Services

Existing Retail Business

Owned Buildings 1

Land

New Target Corp owns its buildings on 75-year ground leases Outsources Facilities Management Services Continues to maintain properties

Leases back land to Target Corp through a Master Lease for a 75-year term Elects REIT status at the time of IPO Becomes Target Corp’s outsourced facilities management provider Becomes Target Corp’s Preferred Vendor for land procurement

(1) Includes third-party ground leases
49

Revised Transaction: Steps 1 - 2
Step1: Formation of TIP REIT
Target Corp

Transaction Description Step 1a: The existing company (“Target Corp”) forms a new subsidiary (“TIP REIT”) and transfers to it the Facilities Management Services business, the owned land under the stores, and the owned land under the distribution facilities TIP REIT will assume a portion of Target’s liabilities Step 1b: TIP REIT leases the land back to Target Corp (i.e. the parent company) through a Master Lease for a 75-year term

Land

TIP REIT 1a

Facilities Management Services

Target Corp 1b 75-year TIP REIT

Master Lease

Land

Facilities Management Services

Step 2: IPO / REIT Election
Target Corp Cash 2a 2b TIP REIT <20% of TIP REIT Shares Public

Step 2a: After some period of time, TIP REIT offers up to 19.9% of its shares in a primary IPO for cash Cash proceeds could be retained for corporate business purposes or used to reduce TIP REIT debt Step 2b: TIP REIT elects REIT status effective immediately Simultaneously, TIP REIT drops the Facilities Management Services business into a new corporation, a taxable REIT subsidiary (TRS)
50

Land

Facilities Mgmt Services (TRS)

Revised Transaction: Steps 3 - 6
Step 5: Spin-off
Target Shareholders

Transaction Description
Step 3: Target Corp sells the remaining 53% interest in the credit card receivables business to an Investment Partner Step 4: Target Corp pays down debt using proceeds from the credit card receivables and the TIP REIT pays down assumed debt using proceeds from the TIP REIT IPO Step 5: Target Corp spins off its remaining >80.1% interest in TIP REIT to its shareholders pro rata and tax-free Step 6: TIP REIT pays a taxable dividend (at the dividend tax rate to non-corporate taxpayers) to shareholders equal to its allocated portion of Target’s $16bn of retained Earnings and Profits (“E&P”), estimated to be $8bn based on the implied mid-point valuation of TIP REIT/Target Corp 20% of the dividend ($1.6bn) may be paid in cash with the remaining paid in TIP REIT common stock This cash dividend can be deferred until the end of the calendar year in which the spin-off occurs
51

5
Tax-free Spin-off of TIP REIT shares held by Target

Target Corp
>80%

TIP REIT Shareholders

<20%

TIP REIT

Land

Facilities Mgmt Services (TRS)

Step 6: E&P Purge
TIP REIT Shareholders Target Shareholders

<20%

>80%

6

$8bn Taxable Dividend (E&P Purge)

TIP REIT

Target Corp

Land

Facilities Mgmt Services (TRS)

75-year Lease

Why are Treasury Inflation Protected Securities (“TIPS”) the Best Comparable Security to TIP REIT?

TIP REIT: (1) Valuing the TIP-like Security
The TIP-like Security should trade at a small spread to TIPS of 195 – 245 bps
Rate / Yield 20-year TIP Yield Today 2.8% Spread to TIPS —

Current TGT Unsecured CDS @ ~220bps ± 25 bps

1.95% — 2.45%

195 bps — 245 bps

TIP REIT: TIP-like Security

4.75% — 5.25%

195 bps — 245 bps

The current TIPS yield of 2.8% implies an expected 20-year inflation rate of only 1.6%. If the expected 20-year inflation rate increased to 2.0% and the 20-year Treasury rate remained constant, then the 20-year TIPS would yield 2.4% and TIP REIT would yield 4.35% – 4.85%. The higher the inflation rate, the more valuable TIP REIT will be
53

TIP REIT: (2) Valuing the Land Developer
TIP REIT’s land development opportunity can be valued based on its growth platform value
Growth Platform Valuation Based on 20-year DCF analysis Implied valuation at 4.75% – 5.25% cap rate and 10.5% – 12.5% discount rate 2029E terminal NOI: $2,503mm Valuation range of $0.0bn – $2.4bn
2009 Incremental Rental Revenues After-tax Facilities Management Income Platform Value G&A Expense Total Capex Free Cash Flow from Platform Terminal Value Discount Rate Terminal Cap Rate Present Value of Platform 12.5% 5.25% – 10.5% 4.75% $2,387 $62 12 (20) (890) ($836)

2010
$122 12 (21) (830) ($716)

2011
$233 14 (21) (1,539) ($1,313)

2012
$366 15 (22) (1,801) ($1,442)

2013
$524 17 (22) (2,117) ($1,599)

...

Terminal Value (1) 2029

$52,694

(1) Based on 2029E NOI of $2,503mm and 4.75% cap rate
54

Valuation: TIP REIT in Total
Based on “TIPS”-based valuation of TIP REIT, the implied TIP REIT valuation is $28bn, or $38/share today
Equity Value (1) TIP-like Security $36/share Implied Cap Rate (2) 5.0% Valuation
2008E Existing dividends: $1,356mm Dividend yield: 4.75% – 5.25% Valuation: $26bn – $29bn

2029E NOI: $2,503mm

Land Developer

Terminal cap rate: 4.75% – 5.25%

$2/share

Discount rate on 20-yr DCF: 10.5% – 12.5% Valuation: $0.0bn – $2.4bn

Total TIP REIT

$38/share

5.1%

2009E NOI of $1,452mm Valuation: $26bn – $31bn or $34/share – $41/share

(1) At mid-point valuation (2) Implied yield calculated based on NOI / Implied value

55

Conservative Approach to Valuation
Our mid-point valuation price (pre-IPO) for TIP REIT of $36 (1) implies a 5.0% dividend yield for the TIPS-like security and (2) excludes the value of the Land Developer

$67
TIP REIT

$36

Target Corp

Using a “TIPS”-based valuation analysis, our mid-point valuation price of $36/share excludes the value of TIP REIT’s development platform

$31
TIP REIT Spin-off Equity Value / Share
56

Why is TIP REIT More Valuable than a Private Ground Lease?

Ground Leases Typically Trade from 5.50% to 6.25%
Precedent private ground lease transactions support cap rates of approximately 5.50% – 6.25% for a typical ground lease with no development pipeline
Building Size (Sq. Ft.) 116,000 68,416 152,890 137,933 40,000 89,008 99,402 166,609 130,948 94,213 178,712 111,371 Lot Size (Acres) 14.16 4.47 13.10 12.30 5.15 14.75 5.28 14.24 14.46 9.09 11.27 12.50 Lease Term 20 Years 20 Years 20 Years 20 Years 20 Years 20 Years 20 Years 20 Years 20 Years na 20 Years 20 Years Total Lease Term with Options 50 Years 60 Years 60 Years na 95 Years 40 Years 50 Years na na na 50 Years 60 Years

Transaction For Sale For Sale For Sale For Sale For Sale For Sale Sold Sold - March 27, 2008 Sold - March 23, 2008 Sold - October 2007 Sold - September 2007 Sold - July 2007

Tenant Lowe's Kohl's Lowe's Lowe's Wal-Mart Kohl's Target Lowe's Home Depot Kohl's Lowe's Lowe's

Location Princeton, WV Selinsgrove, PA Derby, CT Eugene, OR Albuquerque, NM Fort Gratiot, MI Fairlawn, OH Whitehall, PA Austell, GA Reno, NV Escondido, CA Sayre, PA

Cap Rate 6.61% 6.25% 5.50% 6.25% 5.50% 5.75% 6.00% 6.05% 5.75% 6.10% 6.00% 6.25%

Options 6, Five-Year 8, Five-Year 8, Five-Year na 15, Five-Year 4, Five-Year 6, Five-Year na na na 6, Five-Year 8, Five-Year

Mean Median High Low
Source: LoopNet and other public filings 58

6.00% 6.03% 6.61% 5.50%

Why is TIP REIT Better than a Private Ground Lease?
TIP REIT offers better value to investors than a typical private ground lease
TIP REIT has several qualities which make it more attractive than a private ground lease Large cap, liquid public ownership 75-year Master Lease term (longer than most private ground leases) 1,435 retail properties (1) in 48 states Inflation-protected rental stream with annual adjustments Best-in-class retail tenant Geographic diversity Unlike a static ground lease, TIP REIT also has growth, given its dependable new store growth pipeline

Given the above factors, TIP REIT will trade at a lower cap rate than an individual private ground lease
(1) Represents 2008E Target Corp stores on TIP REIT land
59

Revised Transaction: Financial Models

Key Revised Assumptions in Models
For illustrative purposes, we have assumed the sale of remaining 53% interest in the credit card business and the 19.9% IPO of TIP REIT occurring 1/1/09, to be followed by a full spin-off of TIP REIT on 1/1/10
We have updated our model to reflect Q3 2008 results as well as new guidance provided by Target management on its earnings call on Monday, November 17, 2008 Consolidated Model Assume TIP REIT is captive and fully consolidated with the retailer for accounting purposes For illustrative purposes, financials show full consolidation of the captive REIT throughout the entire projection period (such consolidation would cease upon full spin-off on 1/1/10) TIP REIT Model $1.6bn of cash E&P distribution now funded with proceeds from the 19.9% IPO of TIP REIT instead of additional debt Target Corp Model Adjustments to opening balance sheet reflect de-consolidation of TIP REIT from Consolidated Model
61

Model – Consolidated

Consolidated Model – Income Statement
($mm)
Retail Sales Base Sales Growth (%) Credit Revenue Credit Sales Growth

Status Quo CY2007 61,471 1,896 63,367 42,929
69.8%

Status Quo CY2008 63,720 2,087 65,807 44,531
69.9%

Credit Card Adj.

20% IPO TIP REIT

Pro Forma CY2008 63,720 144 63,863 44,531
69.9%

2009
66,600 4.5%

Calendar Year, 2010 2011
71,171 6.9% 78,082 9.7%

2012
86,068 10.2%

2013
95,316 10.7%

CAGR '09 - '13 9.4% 9.4% 9.4%

(1,944)

150
4.5%

160
6.9%

176
9.7%

194
10.2%

215
10.7%

Total Revenue
Total Revenue Growth COGS % of Retail Sales SG&A (excluding D&A and Rent Expense) % of Retail Sales Credit Expenses % of Credit Revenue

66,750
4.5% 46,544 69.9%

71,331
6.9% 49,632 69.7%

78,258
9.7% 54,373 69.6%

86,262
10.2% 60,075 69.8%

95,530
10.7% 66,521 69.8%

12,392
20.2%

12,899
20.2%

15 (1,520)

12,914
20.3% 0.0%

13,596
20.4%

14,423
20.3%

15,744
20.2%

17,352
20.2%

19,213
20.2%

950
50.1%

1,520
72.8%

0.0%

0.0%

0.0%

0.0%

0.0%

Retail EBITDAR
Retail EBITDAR Margin (%)

6,150
10.0%

6,290
9.9%

6,275
9.8% (424)

6,460
9.7%

7,117
10.0% 160 100.0%

7,965
10.2% 176 100.0%

8,641
10.0% 194 100.0%

9,582
10.1% 215 100.0%

10.4% 9.4% 10.3%

Credit EBITDAR
Credit EBITDAR Margin (%)

946
49.9%

567
27.2%

144
100.0%

150
100.0%

EBITDAR
EBITDAR Margin (%) Rent Expense

7,096
11.2%

6,857
10.4%

6,418
10.1%

6,610
9.9% 173

7,277
10.2% 178

8,140
10.4% 182

8,834
10.2% 187

9,796
10.3% 191

EBITDA
EBITDA Margin (%)

165 6,931
10.9%

169 6,688
10.2%

169 6,249
9.8%

6,436
9.6%

7,099
10.0%

7,958
10.2%

8,648
10.0%

9,605
10.1%

10.5%

Depreciation & Amortization
% of Retail Sales

1,659
2.7%

1,819
2.9%

1,819
2.9%

1,940
2.9%

2,073
2.9%

2,274
2.9%

2,507
2.9%

2,776
2.9%

Operating Income
Net Interest (Income) / Expense Income Tax Provision Tax Rate (%) Minority Interest Expense

5,272 647 1,776
38%

4,870 942 1,545
39% 259

4,431 (440) (232) 270 1,519
36%

4,496
333 1,469 35% 257

5,026 352 1,659
35%

5,684 422 1,879
36%

6,141 469 2,032
36%

6,829 515 2,272
36%

11.0%

Net Income
Net Income Margin (%) Current Diluted Shares Outstanding Shares Repurchase Share Repurchase from Options Total Shares Outstanding Weighted Average Shares Outstanding

2,849
4.5%

2,383
3.6%

259 2,383
3.7%

2,438
3.7%

266 2,750
3.9% 754.7

273 3,110
4.0% 702.1 (13.8)

280 3,360
3.9% 688.3 (10.0)

289 3,753
3.9% 678.3 (7.2)

11.4%

882.6 (63.7) 0.0 819.0
850.8 $3.33

819.0 (64) 0.0 754.7
773.7 $3.08

819.0 (64.3) 0.0 754.7 773.7
$3.08

754.7 0.0 0.0
754.7

(52.5) 0.0
702.1 728.4 $3.78

0.0
688.3 695.2 $4.47

0.0
678.3 683.3 $4.92

0.0
671.1 674.7 $5.56

754.7
$3.23

Earnings per Share ($)

6.29

14.6%

63

Consolidated Model – Balance Sheet

($mm)
Cash & Equivalents Trade Receivables Other Current Assets Property, Plant & Equipment, gross Accumulated Depreciation Property, Plant & Equipment, net Other Non-Current Assets

Status Quo CY2007 2,450 8,054 8,402 31,982 (7,887) 24,095 1,559 44,560 17,090 9,818 2,345 29,253 0 15,307 44,560

Status Quo CY2008 500 8,249 8,903 35,316 (9,265) 26,051 1,277 44,980 17,811 10,373 2,521 30,705 0 14,275 44,980

Credit Card Adj. 0 (8,249)

20% IPO TIP REIT 1,600

Pro Forma CY2008 2,100
-

8,903 35,316 (9,265) 26,051 1,277 38,331 (8,000) (2,974) 6,837 10,373 2,521 19,731 4,574 14,026 38,331

2009 2,100 9,305
38,427 (11,205) 27,223

Calendar Year, 2010 2011 500 500 9,944 10,909
41,510 (13,278) 28,233 46,271 (15,552) 30,719

2012 500 12,025
51,715 (18,059) 33,656

2013 500 13,317
57,993 (20,836) 37,157

Total Assets
Debt Other Current Liabilities Other Non-Current Liabilities

1,277 39,905 5,925 10,842 2,521 19,288
4,563 16,054

1,277 39,953 6,675 11,586 2,521 20,782
4,550 14,622

1,277 43,405 7,425 12,711 2,521 22,657
4,533 16,215

1,277 47,458 8,175 14,011 2,521 24,707
4,511 18,239

1,277 52,251 8,925 15,516 2,521 26,963
4,485 20,804

Total Liabilities
Minority Interest Total Equity

4,574 (249)

Total Equity & Liabilities

39,905

39,953

43,405

47,458

52,251

64

Consolidated Model – Cash Flow Statement

($mm) EBITDA less: Interest Expense less: Taxes less: Dividends Paid to Minorities
Share-based Compensation less: Increase in Net Working Capital less: Increase Funding of CC Growth

Pro Forma CY2008
6,688 (270) (1,545) (268)

2009
6,436 (333) (1,469) (268)

Calendar Year, 2010 2011
7,099 (352) (1,659) (279) 7,958 (422) (1,879) (289)

2012
8,648 (469) (2,032) (302)

2013
9,605 (515) (2,272) (315)

Cash Flow from Operating Activities
Capital Expenditures

73 54 0 4,733 (3,820) (3,820)

73 66 0 4,506 (3,111) (3,111) 0 (912) 0 (483) (1,395) 2,100 0 2,100 2,100 63

73 105 0 4,988 (3,083) (3,083) 750 (0)
(3,760)

73 159 0 5,600 (4,761) (4,761)
750

73 184 0 6,103 (5,444) (5,444)
750

73 213 0 6,789 (6,277) (6,277)
750

Cash Flow from Investing Activities
Issuance of Debt Repayment of Debt Issuance of Equity / (Buy Back) Issuance of Dividends to Common

0
(1,089)

0
(890)

0
(722)

Cash Flow from Financing Activities
Beginning Cash Balance Change in Cash

(495) (3,505) 2,100 (1,600) 500 1,300 39

(501) (839) 500 0 500 500 15

(519) (659) 500 0 500 500 15

(540) (512) 500 0 500 500 15

Ending Cash Balance Average Cash Balance Interest Income

3.0%

65

Consolidated Model – Build-ups and Credit Metrics
Status Quo CY2007 208 296
61,471

Sales Buildup Square Feet (mm) $ / Sq. Ft. Retail Sales Implied Retail Sales Growth (% ) Sq. Footage Growth (% ) SSS Growth (% ) CapEx Buildup Total System CapEx
CapEx as % of Retail Sales

Pro Forma CY2008 222
286

2009
231 288 66,600 4.5% 4.0% 0.5%

Calendar Year, 2010 2011
239 297 71,171 6.9% 3.5% 3.3% 254 308 78,082 9.7% 6.0% 3.5%

2012
270 318 86,068 10.2% 6.5% 3.5%

2013
289 330 95,316 10.7% 7.0% 3.5%

63,720
3.7% 7.0% (3.1%)

2007 4,369
7.1%

2008 3,820
6.0%

2009 3,111
4.7%

2010 3,083
4.3%

2011
4,761 6.1%

2012
5,444 6.3%

2013
6,277 6.6%

Credit M etrics Lease Adjusted Debt Actual Debt Total Lease Adjusted Debt Total Lease Adjusted Debt/EBITDAR Total Debt / EBITDA EBITDAR / (Interest + Rent) EBITDA / Interest

8x

Status Quo CY2007 1,320 17,090 18,410 2.6 x 2.5 x 8.7 x 10.7 x

Status Quo CY2008 1,353 17,811 19,164 2.8 x 2.7 x 6.2 x 7.1 x

Pro Forma CY2008
1,353 1,387 1,421 1,457 1,493 1,531

6,837 8,190 1.3 x 1.1 x 14.6 x 23.2 x

5,925 7,312 1.1 x 0.9 x 13.1 x 19.3 x

6,675 8,097 1.1 x 0.9 x 13.7 x 20.2 x

7,425 8,882 1.1 x 0.9 x 13.5 x 18.9 x

8,175 9,669 1.1 x 0.9 x 13.5 x 18.5 x

8,925 10,456 1.1 x 0.9 x 13.9 x 18.6 x

66

Consolidated Model – Tax Adjustments
($mm)
Profit Before Taxes Tax Rate (%) Taxes Less: State Tax Savings Less: Tax Adj. for Public REIT Shareholders Less: Facilities Mgmt Tax Adj. Net Consolidated Taxes

Pro Forma CY2008
4,161 39% 1,636 (16) (102) (0) 1,519

2009
4,164 38% 1,582 (16) (98) (0) 1,469

Calendar Year, 2010 2011
4,674 38% 1,776 (16) (101) (0) 1,659 5,262 38% 1,999 (16) (104) (0) 1,879

2012
5,672 38% 2,155 (17) (106) (0) 2,032

2013
6,313 38% 2,399 (17) (110) (0) 2,272

Adjustment Calculations: State Tax Savings: Total REIT Net Income Net Income to Other Shareholders Net Income to Target Assumed Tax Rate (150bps less than current rate) Total State Tax Savings Facilities Management Adjustments: Facilities Mgmt Income Facilities Mgmt Taxes Minority Interest on Taxes Target Share of Facilities Mgmt Income Adjustment for Dividend Received Deduction Incremental Facilities Mgmt Adj. Total Facilities Management Tax Adj. 1,303 259 1,044 38% (16) 1,292 257 1,035 37% (16) 1,334 266 1,069 37% (16) 1,370 273 1,097 37% (16) 1,408 280 1,128 37% (17) 1,450 289 1,161 37% (17)

19 7 (1) 10 12% 1 (0)

19 7 (1) 10 11% 1 (0)

20 8 (2) 11 11% 1 (0)

22 8 (2) 12 11% 1 (0)

24 9 (2) 13 11% 2 (0)

27 10 (2) 15 11% 2 (0)

67

Model – TIP REIT

TIP REIT Model – Income Statement
($mm, except as noted) Gross TIP REIT Revenues from Ground-leased Store Land Gross TIP REIT Revenues from Ground-leased DCs & WHs Land Total Gross TIP REIT Revenues Total TIP REIT Net Rental Revenues % of Target Corp Retail Sales Plus: Facilities Management Income Less: Facilities Management Expense Net Facilities Management Income Net Operating Income Less: G&A Expense Less: Incremental Standalone Cost EBITDA Less: Depreciation & Amortization Less: Interest Expense Less: Taxes on Facilities Mgmt. Income Net Income Normalized Net Income (1) Ending Shares Outstanding Earnings per Share Normalized Earnings per Share (1) Dividends on Common Special Dividends (2) Normalized Dividends (1) Normalized Dividends per Share (1) % AFFO 100.0% Pro Forma CY2008 1,327 44 1,371 1,371 2.2% 144 (125) 19 1,389 (20) (15) 1,354 (44) (7) 1,303 1,303 942.1 $1.38 $1.38 1,347 1,347 $1.43 2009 1,389 44 1,433 1,433 2.2% 144 (125) 19 1,452 (20) (15) 1,417 (55) (62) (7) 1,292 1,292 942.1 $1.37 $1.37 1,347 1,347 $1.43 Calendar Year, 2010 2011 1,482 1,625 45 49 1,527 1,673 1,527 2.1% 154 (134) 20 1,547 (21) (15) 1,511 (66) (103) (8) 1,334 1,334 942.1 $1.42 $1.42 1,400 1,400 $1.49 1,673 2.1% 169 (147) 22 1,695 (21) (16) 1,659 (85) (196) (8) 1,370 1,370 942.1 $1.45 $1.45 1,455 1,455 $1.54 2012 1,789 52 1,842 1,842 2.1% 186 (162) 24 1,866 (22) (16) 1,828 (108) (304) (9) 1,408 1,408 942.1 $1.49 $1.49 1,515 1,515 $1.61 2013 1,980 56 2,037 2,037 2.1% 206 (179) 27 2,063 (22) (17) 2,025 (134) (431) (10) 1,450 1,450 942.1 $1.54 $1.54 1,584 1,584 $1.68

38%

(1) Normalized to exclude incremental interest expense due to CY2010 cash E&P distribution (2) $1.6bn of proceeds from a 19.9% IPO of TIP REIT used to pay cash E&P distribution in CY 2010 69

677 3 17.634 15.092) 14.693 3 15.680 70 .948 (206) 10.720 1.000 3 14.948 10.892 11.680 3 7.742 14.007) 12.948 (121) 10.003 3 3.948 (55) 10.948 10.Land & Improvements Maintenance Capex Development Properties .782 3 11.833 3.785 Calendar Year.059 (1.785 3 890 893 10.261 10.696 2013 11.176 7.948 (448) 10.833 (885) 10. 2010 2011 11.258 3.549 11.723 10.258 (1.179 10.549 3 1.833 890 (941) 11.062 10.833 5.948 (314) 10.827 12.TIP REIT Model – Balance Sheet ($mm.546 3 12.720 (1.003 2012 11.948 10.199) 15.696 3 5.948 2009 11.Land & Improvements Accumulated Depreciation Net Real Estate Asset Cash Total Assets Debt: Revolver New Debt Total Debt Common Equity Retained Earnings (Deficit) Total Equity Total Liabilities & Equity Pro Forma CY2008 11.948 10.176 (1.333) 17.059 5.833 7.833 1. except as noted) Real Estate: Gross Existing Properties .500 17.

347 (890) (890) Calendar Year.584 (2.400 (830) (830) 1.455 (1. except as noted) Cash Flow from Operating Activities: EBITDA Less: Interest Expense Less: Taxes on Facilities Mgmt.539) 2012 1.539) (1.801) 2013 2.455) 84 3 3 1.511 (103) (8) 1.353 (205) (7) 1.141 1.828 (304) (9) 1.141) (1. Income Net Cash Flow from Operating Activities Cash Flow from Investing Activities: Development Capex Maintenance Capex Net Cash Flow from Investing Activities Cash Flow from Financing Activities: Debt Financing: Increase (Decrease) in Revolver Increase (Decrease) in New Debt Equity Financing: Increase (Decrease) in Common Equity Dividends on Common Special Dividends Net Cash Flow from Financing Activities Beginning Cash Balance Net Change in Cash Ending Cash Balance 2009 1.117) 3 890 (1.539 (1.515 (1.801) (1. 2010 2011 1.347) (455) 3 3 830 (1.025 (431) (10) 1.659 (196) (8) 1.801 (1.400) (570) 3 3 1.584) 533 3 3 - 71 .417 (62) (7) 1.515) 285 3 3 2.117 (1.117) (2.TIP REIT Model – Cash Flow Statement ($mm.

435 Combined (Ground-leased) Stores 176 Third-party Leased Stores 73 Total Combined Stores Square Footage Total Combined Stores Square Footage Growth TIP REIT Stores .0% 37 1 7 46 18.5% 2.9% 35 35 0.433 Calendar Year.371 72 .5% 1. Owned Stores Total TIP REIT Stores Square Footage Total TIP REIT Stores Square Footage Growth Count 1.527 221 23 10 254 6.5% 1.0% $7.Sq.7% $7. Total Combined Stores Sq. TIP REIT DCs & WHs .0% 3.0% 256 256 8.25 2.2% 35 35 0. except as noted): Total Combined Stores .980 $1.5% 1.5% 2. 2010 2011 207 23 10 239 3. Ft.5% 2.673 2012 237 23 10 270 6. Count Owned DCs & WHs 25 Combined (Ground-leased) DCs & WHs 1 Third-party Leased DCs & WHs 5 Total Combined DCs & WHs Square Footage Total DCs & WHs Sq.0% $7.482 $1.DCs & WHs Land CPI Growth Average Growth TIP REIT Revenues from Ground-leased DCs & WHs Total TIP REIT Gross Revenues Yes 35 1 7 44 19.0% 221 221 7.3% CAGR '09 .389 $1.38 2.'13 5.789 $1.7% $7.037 6.435 Yes Pro Forma CY2008 190 23 10 222 2009 198 23 10 231 4.5% 2.5% 2.0% 41 1 7 49 17. Count Owned Stores 1. Count Owned DCs & WHs 25 Total TIP REIT DCs & WHs Square Footage Total TIP REIT DCs & WHs Square Footage Growth Rent / Square Foot .35 2.5% 44 1.5% 39 39 4.1% 35 1 7 44 18.625 $1.25 44 1.Sq. Ft.Sq.0% 37 37 5.31 2. Ft. Ft.5% 49 1.7% 190 190 6.73 2.5% 2.0% 41 41 4.5% 1.5% 207 207 4. Ft.5% 2.5% 45 1.TIP REIT Model – Rent Build-up Assumptions ($mm.5% 2.0% 198 198 4.Store Land CPI Growth Average Growth TIP REIT Revenues from Ground-leased Land Rent / Square Foot .5% 39 1 7 47 17.28 2.5% 2.35 2. vs. Ft.3% $7.00 1.00 2.Sq.5% 1.5% 52 1.18 2.842 2013 256 23 10 289 7.2% 9.327 $1.8% $7.3% 9.5% 2.54 2.7% 35 1 7 44 18.6% 35 35 3.5% 237 237 7.6% Total Combined DCs & WHs .5% 56 2.

43 1.347 Calendar Year.54 1.7x 4.4% 4.584 942.177 % of Total New Stores Built Combined Total Number of SuperTarget Stores 22.5x 2. Ft. respectively) Implied Metrics: Incremental Stores Square Footage SuperTarget Stores 50.347 942.4% 1.347 1.6% 375 8 66 58.8% 287 4 32 58.400 1.142 2 1 1 35 General Merchandise Stores 50.334 1.1 $1.1 $1. / GM % of Total New Stores Built Combined Total Number of General Merchandise Stores Total Implied New Stores Cumulative Combined Total Implied Stores Incremental DCs & WHs Square Footage Implied Combined New DCs & WHs Total Implied New DCs & WHs Cumulative Combined Total Implied DCs & WHs (1) Normalized to exclude incremental interest expense due to CY2010 cash E&P distribution 73 1.5% for store land and DCs & WHs land.347 1.0x 11.49 1.Maintenance Capex) / Interest Expense Leverage: Total Debt / EBITDA Capitalization: Total Debt / Total Real Estate Value (NOI capped at 6.1x 6.0% Implied New Combined SuperTarget Stores 0.7% 14.5x 8.445 1.408 108 1. 2010 2011 1.513 55 1.6x 3.800 0 0 31 14 7 41 41.0% 1.450 134 1.370 66 85 1.408 31 0 31 .2% 1.684 1.347 2009 1.0x 6.515 1.6x 14.8x 16.481 61 1. / SuperTarget 239 9 4 25 41.43 1.713 130 2.7% 8.1% Sq.584 1.125 Sq.347 942.400 942.571 99 1.4% 328 7 58 58.515 2013 1.5x 21.5% 1.6x 1.6% 1. Ft.5% 429 9 76 58.1 $1.1 $1.1 $1.292 55 1.7x 3.455 2012 1.6% 6.61 1.899 2 1 1 32 16 8 47 41.455 942.1 $1.400 1.012 2 1 1 34 19 9 54 41.0% and 8.7x 0.TIP REIT Model – FFO & AFFO Reconciliations.7x 22.637 113 2.584 Credit Statistics: Coverage: EBITDA / Interest Expense (EBITDA .745 0 8 4 23 41.0% Implied New Combined GM Stores 0.455 1.303 44 1.0x 2. Credit Statistics and Implied Metrics FFO & AFFO Reconciliations: Net Income Plus: Depreciation & Amortization Funds from Operations Ending Shares Outstanding FFO / Share Less: Maintenance Capex Adjusted Funds from Operations Normalized AFFO (1) Pro Forma CY2008 1.68 1.0% 264 4 36 59.515 942.

509 $105.Store Buildings TIP REIT Development Capital Expenditures Target Corp Building .539 1.444 1.45 2.000 2.638 3.117 - $14.761 1.509 30 1.837 1.4% 28.539 1.278 2.423 1. 2010 2011 3.6% 2009 3.111 1.779 890 890 890 $100.423 1.660 830 830 830 $102.083 4.122 1. except as noted) Total Combined Expenditures Maintenance / Retail Capital Expenditures Target Corp .277 2.801 1.Store Store Land Cost per Square Foot TIP REIT Land .71 1.50 $14.00 74 .801 1.332 1.539 - 2012 5.00 $14.000 4.638 1.638 1.00 890 890 890 - Calendar Year.TIP REIT Model – Capex Schedule ($mm.Store and DCs & WHs TIP REIT Land .DCs & WHs Total Development Capex Development Financing Sources: Debt Financing Equity Financing 100% 0% Yes Yes 71.160 2.332 1.Other TIP REIT Land .DCs & WHs DCs & WHs Land Cost per Square Foot TIP REIT Land .08 1.583 1.801 - 2013 6.088 29 2.Store and DCs & WHs Target Corp .117 2.088 $110.06 30 $14.69 24 $15.806 3.117 2.38 29 $15.776 $107.806 1.35 830 830 830 1.776 24 1.Store TIP REIT Land .

Model – Target Corp .

171 6.1% 215 na 10.3 $4.4% 0.66 0.0 683.8% Operating Income Net Interest (Income) / Expense Income Tax Provision Tax Rate (%) Minority Interest 3.5) 0.1% 0.8% 2.3% (162) 186 187 1.0% 6.3% (179) 206 191 2.177 10.7% 78.4 $2.9% 13.037 Current Embedded Facility Management Costs External Facility Mgmt.436 9.1% 0. 2011 2012 78.3% Credit EBITDAR Credit EBITDAR Margin (%) EBITDAR (Pre-spin) EBITDAR Margin (%) 6.2% 194 10.580 7.7 0.8% 0 2.175 20.521 69.8% 657.8% 150 na 71.1% 0.2% 60.0% Net Income Net Income Margin (%) Current Diluted Shares Outstanding Shares Repurchase Share Repurchase from Options Total Shares Outstanding Weighted Average Shares Outstanding 257 2.819 7.7 642.0% 6.527 8.750 46.0 670.4% (147) 169 182 1.6% 5.1% 76 .7% (257) 1.460 9.8% 2.2% 2013 95.600 150 REIT Adj.9% 13.'13 9.2 740.331 6.72 (42.2% 176 na 8.0% (35) 14.453 2.665 38% 12.0% 726.544 69.23 Earnings per Share ($) 16.082 9.9% 10.3) 11.020 7.Target Corp Model – Income Statement ($mm) Retail Sales Base Sales Growth (%) Credit Revenue Credit Sales Growth Status Quo CY2009 66.8% 2.673 8.373 69.632 69.258 9.7 $2.0% 7.495 9.0 754.2 0 2.068 10.8 705.189 2.750 46.0% Retail EBITDAR Retail EBITDAR Margin (%) 6.9% 160 6.0 657.153 10.708 20.31 0.544 69.110 346 1. Pro Forma CY2009 66. Payments to TIP REIT Current Rent Expense Additional Rent Expense Pro Forma EBITDA (Post-spin) EBITDA Margin (%) 6.420 463 1.504 38% 4.938 555 1.530 10.0 $3.9% 49.4% Total Revenue Total Revenue Growth COGS % of Retail Sales SG&A (excluding D&A and Rent Expense) % of Retail Sales Credit Expenses % of Credit Revenue 66.7% 86.678 10.496 333 1.7 (28.842 9.8) 0 2.4% 0.8% 6.9% Calendar Year.0% 86.3% (134) 154 178 1.7% 176 9.6% 2.433 7.007 2.334 3.8% 19.015 2.0% (125) 144 173 1.6% 15.5% 5.7 754.4) 0.077 38% 0 3.4 $3.9% 7.4% 10.8 (26.469 35% (55) 1.0 627.757 2.9% Depreciation & Amortization % of Retail Sales 1.8% 17.596 20.8% 683.8% 2.581 330 1.620 10.001 10.0% 160 na 8.316 10.313 10.7% CAGR '09 .7% 66.314 20.135 (31) 302 1.717 2.885 2.387 20.2% 0.4% 9.7% 215 10.430 38% 4.642 2.7% 150 100.5% 754.4% 9.400 2.872 10.0 (29.561 20.300 8.645 10.3% 9.940 4.0% 66.0 0.588 7.075 69.7% 54.262 10.33 754.0 726.1% 194 na 9.9% (125) 144 173 6.610 9.235 38% 0 4.835 10.0% 95.438 3.600 150 na 2010 71.

711 2.521 1.823 (16.930) 0 8.427 (11.305 38.723) 941 (11.860) 17.962 2013 500 13.277 2010 500 9.271) 15. net Other Non-Current Assets REIT Adj.521 24. gross Accumulated Depreciation Property.405 5.179 (14.782) Total Assets Debt Other Current Liabilities Other Non-Current Liabilities 1.521 19.909 12.563) (7.983 (19.765 34.521 22.842 2.Target Corp Model – Balance Sheet Status Quo CY2009 2.702 0 8.398 (4.958 (12.440 1.521 20.735 0 9.521 18.036 10.544 12. Plant & Equipment.842 2.586 2.905 26.264) 15.905 5.719 34.480 (12.277 27.407 29.277 39.776 0 8.704 (10.523 27.503) 19.405 31.011 2.840 Total Liabilities Minority Interest Total Equity 18.944 27.516 2.205) 27.697 15.892 14.523 (890) 5.100 9.054 26. (1.629 1.277 31.686 Calendar Year.600) Pro Forma CY2009 500 9. Plant & Equipment.407 4. 2011 2012 500 500 10.765 5.277 29.574 77 .025 31.340 1.124 Total Equity & Liabilities 39.424 0 9.223 ($mm) Cash & Equivalents Trade Receivables Other Current Assets Property.574 6.563 16.705 1.461) 16.595 11.317 38.925 10.305 25.288 4.277 34.

467) (1.291 Cash Flow from Investing Activities Issuance of Debt Repayment of Debt Issuance of Equity / (Buy Back) Issuance of Dividends to Common (1.815 73 213 0 5.253) 1.534) (2.077) 73 0 3.819 (463) (1.534) 500 0 500 500 15 0 (1.300 (346) (1.948) 500 0 500 500 15 0 (1.486) (2.643) (3.756 (3.486) 500 0 500 500 15 Ending Cash Balance Average Cash Balance Interest Income 3.235) Calendar Year.291) 0 Cash Flow from Financing Activities Beginning Cash Balance Change in Cash 0 (1.665) Cash Flow from Operating Activities Capital Expenditures 73 105 0 4.201 (2.580 (555) (1.504) 2013 7.222) (3.643) 1.222) 2.467) 500 0 500 500 15 0 (1.483 73 184 0 5.Target Corp Model – Cash Flow Statement ($mm) EBITDA less: Interest Expense less: Taxes Share-based Compensation less: Increase in Net Working Capital less: Increase Funding of CC Growth 2010 5.020 (302) (1.0% 78 .430) 6.815) (1.160) 2.646 (4.110 (3.253) (2.714 5.588 (330) (1.948) (1.483) (1.160) (4.507 73 159 0 4.507) (1. 2011 2012 6.

3% 2011 4.Target Corp Model – Build-ups and Credit Metrics Sales Buildup Square Feet (mm) $ / Sq.801 0 2.171 6.000 2.3% 2013 6.082 9.083 4.0% 3.801 0 1.000 2.000 0 % of total 50% 50% 65.8 x 3.117 0 2. 2011 2012 254 308 78.844 16.278 2.1% 2012 5.892 22. Ft.0 1.7 x 18.697 24.7% 2010 3.160 1.232 2.5% 2013 289 330 95.332 1.595 18.3% Calendar Year.806 0 2.2% 6.1 x 19.5 x 16. Footage Growth (% ) SSS Growth (% ) Pro Forma CY2009 231 288 2010 239 297 71.388 2.583 3.7% 15% 206 Credit M etrics Lease Adjusted Debt Actual Debt Total Lease Adjusted Debt Total Lease Adjusted Debt/EBITDAR Total Debt / EBITDA EBITDAR / (Interest + Rent) EBITDA / Interest 8x 1.0 % of total 35.637 14.122 1.2 x 5.0% 1.5 x 0.887 2.638 0 1.9 x 5.332 0.638 1.111 4. Retail Sales Implied Retail Sales Growth (% ) Sq.6 x 16.7% 15% 169 162 10.9 x 3.600 CapEx Buildup Total System CapEx CapEx as % of Retail Sales 2009 3.7% 6.5 x 13.423 0.7 x 6.1 x 0.228 17.277 6.312 1.5% 3.851 13.2% 15% 186 179 10.120 2.544 20.6 x 4.0% 1.5% 3.6 x 14.0 x 3.9 x 13.3 x 5.387 12.7 x 79 .7 x 1.444 6.779 890 890 0 890 0 1.5% 270 318 86.837 4.925 7.761 6.539 0 1.117 0 % of Development 0% Facilities M anagement Business ($mm) Total Current Costs Growth % Markup to TIP REIT Facilities Management Revenue to TIP REIT 125 15% 144 134 6.5% 66.823 5.5 x 0.068 10.806 1.539 0 1.423 0 1.7% 7.316 10.036 17.9 x 3.6% Maintenance/Retail CapEx Additional Cap Ex TOTAL M aintenance/ Retail CapEx – Target Corp – TIP REIT (Existing DC & WH) Development CapEx Buildings (Tgt Corp) Land – Target Corp – TIP REIT Other (Target Corp) % of Development % of Development 1.9% 3.9% 15% 154 147 9.638 1.806 1.423 1.9 x 3.660 830 830 0 830 0 3.5 x 0.0% 3.5 x 0.520 2.638 1.

.P. L.The Nominees for Shareholder Choice May 11. 2009 Pershing Square Capital Management.

James L. The definitive proxy statement and other relevant documents relating to the solicitation of proxies by Pershing Square are available at no charge on the SEC’s website at http://www. Pershing Square and certain of its members and employees and Michael L.TGTtownhall. Inc.” “estimate. SHAREHOLDERS OF TARGET ARE URGED TO READ THE PROXY STATEMENT CAREFULLY BECAUSE IT CONTAINS IMPORTANT INFORMATION. Pershing Square does not assume any obligation to update any forward-looking statements contained in this presentation. Ashner.” “plan. Gilson and Richard W. King & Co. and should not be taken as advice on the merits of any investment decision. financial situation. which opinions may change at any time and are based on publicly available information with respect to Target. Ronald J. Shareholders can also obtain free copies of the definitive proxy statement and other relevant documents at www. 2009. is available in Pershing Square’s definitive proxy statement. “Pershing Square”) filed a definitive proxy statement on Schedule 14A with the Securities and Exchange Commission (the “SEC”) on May 1. They are not guarantees of future performance. 1 . This presentation contains forward-looking statements. Vague (collectively.sec. including by security ownership or otherwise. Certain financial information and data used herein have been derived or obtained from filings made with the Securities and Exchange Commission (“SEC”) by Target or other companies that Pershing Square considers comparable or relevant. Detailed information regarding the names.gov.” “expect. These statements are based on current expectations of Pershing Square and currently available information. or the particular need of any specific person who may receive this presentation. the “Participants”) are deemed to be participants in the solicitation of proxies with respect to Pershing Square’s nominees. involve certain risks and uncertainties that are difficult to predict and are based upon assumptions as to future events that may not prove to be accurate. affiliations and interests of the Participants.” and similar expressions are generally intended to identify forward-looking statements. D.com or by calling Pershing Square’s proxy solicitor. L. F. Pershing Square Capital Management.. The views expressed herein represent the opinions of Pershing Square. The definitive proxy statement and the GOLD proxy card were first disseminated to shareholders of Target on or about May 2. at 1 (800) 290-6427.” “believe. and certain of its affiliates (collectively. and the words “anticipate. This presentation is for general informational purposes only. All statements contained in this presentation that are not clearly historical in nature or that necessarily depend on future events are forward-looking. It does not have regard to the specific investment objective. Donald.Disclaimer In connection with the 2009 Annual Meeting of Shareholders of Target Corporation (“Target”). suitability. 2009 containing information about the solicitation of proxies for use at the 2009 Annual Meeting of Shareholders of Target.P..

whether derived or obtained from filings made with the SEC or from any third party. concentration of positions in the portfolios managed by Pershing Square. conditions in the securities market and general economic and industry conditions. Pershing Square and its affiliates currently hold a substantial amount of common stock and options of Target and may in the future take such actions with respect to its investments in Target as it deems appropriate including. Neither Pershing Square nor any of its affiliates shall be responsible or have any liability for any misinformation contained in any SEC filing or third party report. Pershing Square is in the business of trading — buying and selling — securities and other financial instruments. Any such statements or information should not be viewed as indicating the support of such third party for the views expressed herein. purchasing additional shares of Target common stock or related financial instruments or selling some or all of its beneficial and economic holdings. Pershing Square’s beneficial ownership of Target common stock and options will vary over time depending on various factors. are accurate. other investment opportunities available to Pershing Square. engaging in any hedging or similar transaction with respect to such holdings and/or otherwise changing its intention with respect to its investments in Target. 2 . Consequently.Disclaimer (cont’d) Pershing Square has not sought or obtained consent from any third party to the use of previously published information as proxy soliciting material. This presentation does not recommend the purchase or sale of any security. Pershing Square disclaims any obligation to update the information contained herein. including without limitation. with or without regard to Pershing Square’s views of Target’s business. There is no assurance or guarantee with respect to the prices at which any securities of Target will trade. without limitation. Under no circumstances is this presentation to be used or considered an offer to sell or a solicitation of an offer to buy any security. Pershing Square may also change its beneficial or economic holdings depending on additions or redemptions of capital. prospects or valuation (including the market price of Target common stock). No warranty is made that data or information.

Agenda Situation Overview Why Board Change is Warranted The Nominees for Shareholder Choice Food Retailing: Jim Donald Credit Cards: Richard Vague Real Estate: Michael Ashner Shareholder Value: Bill Ackman Corporate Governance: Ron Gilson Target’s Board: Avoiding the Real Issues Corporate Elections and Shareholder Choice 3 .

Situation Overview .

the underlying shares do not carry voting rights.3% of the company) ~$280 million in stock options (4. 5 .Pershing Square Pershing Square is a long-term Target shareholder Pershing Square initiated its investment in Target in April 2007 We are the third largest beneficial owner of Target We have ownership of 7.5% of the company)(1) Target is the largest investment in Pershing Square’s portfolio (1) Unless and until these options are exercised.8% of Target ~$1 billion of common stock (3.

in two separate presentations to Target. emphasizes the importance of credit risk transfer in any contemplated partnership transaction May 2008: Target announces a sale of a 47% interest in it receivables. and increase Target’s valuation September 2007: Target announces a review of ownership alternatives for its credit card receivables and an analysis of its capital structure December 2008: Pershing Square. despite credit risk and funding risk remaining on its balance sheet 6 . primarily to retain underwriting control Target share repurchase program is principally funded with debt. proposes that Target pursue a credit card partnership transaction to minimize credit risk.Pershing’s Background with Target April 2007: Pershing Square becomes a Target shareholder Retail Business Credit Card Business Real Estate Assets August 2007: Pershing Square. in its first meeting with Target management. eliminate funding risk. but retains credit risk MISTAKE: Board elects not to transfer credit risk in the transaction.

primarily with respect to credit ratings impact and valuation assumptions 7 .Pershing’s Background with Target (cont’d) May 2008: Pershing Square meets with management to discuss value creation opportunities regarding Target’s real estate Pershing Square proposes a spin-off of a land-only REIT to Target shareholders Transaction would preserve Target’s flexibility in controlling its buildings/brand and allow the market to appropriately value the company’s ~200 million square feet of real estate Management agrees that the transaction is worthy of further exploration July 2008: Pershing Square meets with Target and Goldman Sachs to discuss real estate transaction September 2008: Board raises concerns regarding Pershing Square’s real estate proposal.

Target issues a press release expressing concerns November 2008: Pershing Square presents “A Revised Transaction” which addresses Target’s concerns regarding credit ratings and valuation Within 48 hours of Pershing’s presentation.Pershing’s Background with Target (cont’d) Fall 2008: Pershing Square encourages Target to halt buyback program due to credit market conditions October 2008: Pershing Square seeks shareholder input by publicly presenting “A TIP for Target Shareholders” Immediately after the presentation. board rejects the Revised Transaction without seeking rating agency review Pershing defers discussion of the Revised Transaction until 2009 to allow Target to focus on its business 8 .

three without explanation Board did not even meet with two of them (Richard Vague. Michael Ashner) 9 . four candidates – Bill Ackman and three independent nominees Board rejects all four candidates. rather than fully investigating all potential value creating alternatives for real estate Pershing Square concludes that the Revised Transaction was not adequately explored by the board or its advisors February 2009: Pershing Square requests one board seat and one additional independent director March 2009: Pershing Square presents.Pershing’s Background with Target (cont’d) February 2009: Pershing Square meets with Target and Goldman Sachs to discuss the assumptions behind the board’s decision Pershing Square learns that the board restricted Goldman Sachs to the narrow task of evaluating Pershing Square’s proposal. in total.

2009. and more valuable company 10 .Situation Overview On March 17. more profitable. Pershing Square announces the nomination of five independent directors for the open seats on Target’s board We did so principally because we believe that the incumbent Target board has: Suboptimal composition Made significant strategic mistakes that have destroyed shareholder value Performed key corporate governance duties poorly Our goal in this election: Improve Target’s board and help make Target a stronger.

Why Board Change is Warranted .

12 . but also on the extent.Why Board Change is Warranted in Our View Board’s Suboptimal Composition ⌧ Lacks senior operating experience in key business lines and assets (1) ⌧ Lacks significant shareholder representation ⌧ Average tenure of independents nearly a decade ⌧ 12 incumbent directors serve on 18 other boards (including Citi. Wells Fargo and Goldman) Board’s Mistakes in Assessing Strategic Transactions Board’s Faulty Corporate Governance ⌧ Board lacks a fair and open ⌧ Board did not exit the nominating process credit card business before meeting Pershing Square ⌧ Compensation plan fails to foster a culture of equity ⌧ The board-approved credit ownership card transaction structure was a mistake that we believe cost shareholders ⌧ Board rejected the request for Universal Proxy thereby dearly limiting shareholder choice ⌧ Board did not authorize a full review of all real estate ⌧ Interlocking directorships and affiliate transactions ownership alternatives for maximizing shareholder value (1) Pershing Square defines senior operating experience as experience in a specific line of business with the director having served as the CEO of a company in that business for a meaningful period of time during his or her career. Pershing Square’s view is not only based on the length of time served by a specific director in the relevant business line. nature and specialization of each director’s service and the principal responsibilities during that service.

Board Lacks Sufficient Relevant Experience Our view of Target’s Current Board Retail Business NO Retail senior operating experience Credit Card Business NO Credit Card senior operating experience Real Estate Assets Over 200 million sq ft of retail real estate NO Real Estate senior operating experience 13 .

446 29.192 0. owning less than 0.300 124.114 0 27. Independent directors own only 0.671 9.02% of the company in common stock Board Members Austin Darden Dillon Johnson Kovacevich Minnick Mulcahy Rice Sanger Tamke Trujillo Steinhafel Total Board % of common shares outstanding Total Independent Directors % of common shares outstanding Issued shares beneficially owned 2.135 128.181 1.116 61.058 120.058 97.424 591.352 0.309.840 1.996.09% Common Shares Outstanding Source: Target proxy 14 752.440 0.699 .672.388 2.Board Lacks Significant Shareholder Representation Target’s board lacks significant shareholder representation.02% Total beneficial ownership 48.569 886 7.3% of the company.699 86.683 10.781 3.487 35.536 3.016 0.901 0 11.08% 162.27% 686.025 429.334 38.

. Inc. a private investment and consulting firm Vice Chairman of Perseus. an urban revitalization project for the City of Atlanta CEO and Chairman of the Board of Xerox Corp. Dubilier & Rice. LLC. Inc President of Austin Investment Advisors. Previously. a document management company Retired. The average tenure of the incumbent nominees is approximately 10 years 15 . Inc. a private investment firm Senior Vice President and CFO of Eli Lilly and Company Years on Board 2 13 15 10 6 12 13 7 13 4 2 Incumbent Nominees The average tenure of the independent directors is approximately 9 years. CEO and Chairman of the Board of General Mills. an Australian telecommunications company Partner with Clayton. a merchant banking private equity firm Partner of Lion Capital... a private investment firm Chairman of the Atlanta Beltline.Average Tenure of Nearly a Decade Board Member Mary Dillon Richard Kovacevich Solomon Trujillo George Tamke Calvin Darden Anne Mulcahy Stephen Sanger Roxanne Austin James Johnson Mary Minnick Derica Rice Current Occupation (Title) Executive Vice President and Global Chief Marketing Officer of McDonald’s Corporation Chairman of the Board of Wells Fargo & Company CEO of Telstra Corporation Limited.

0% Source: Company filings 2007A 16 2008A . despite Pershing Square’s repeated requests.Board’s Strategic Mistake: Credit Card Target’s board decided not to transfer credit risk in a credit card transaction. In 2008.0% 3.0% 65% drop $322 8.0% 0. Target’s credit card operating profits fell 65% predominantly due to increased credit risk and bad debt expense Credit Card EBIT as a % of average receivables $1.000 $900 $ in millions $930 12.0% $300 $200 $100 $0 4.8% 14.7% 2.0% 6.0% 12.0% $800 Credit Card EBIT $700 $600 $500 $400 10.

Target’s board has been unwilling to examine alternatives to unlock real estate value Notably.Board Lacks Initiative: Real Estate Target owns over 200 million square feet of high-quality retail real estate We believe that Target’s real estate has a replacement cost of nearly $40 billion (based on management’s estimates of the current average cost to build its stores and distribution facilities) Despite this immense value. the board assigned its advisors the narrow task of only evaluating Pershing Square’s TIP REIT spin-off structure Board would not authorize Goldman Sachs to explore alternative real estate value creation opportunities 17 .

Governance: Faulty Nomination Process Is Target’s board nomination process fair. the board nomination process is insular. Wells Fargo ⌧ Nominating Committee Chair Sanger also serves on Wells Fargo’s compensation committee Conflict In our view. and thorough? ⌧ Independent nominees Ashner and Vague were never interviewed ⌧ Nomination Committee Chair Sanger would not give an explanation for the rejection of the nominees ⌧ Nominating Committee Chair Sanger received over $1. and unreceptive to shareholder input 18 .25 million in fees and equity compensation since 2003 from incumbent nominee Kovacevich’s company. conflicted. open.

Even now. this can still be achieved. Shareholders should press this issue with Target 19 .Board is Attempting to Limit Choice Request for a Universal Proxy card: Rejected Request to name Target Nominees on Gold card: Ignored Target’s Reasons Technology barrier Too Late Too expensive Causes delay and confusion Reality Feasibility confirmed by Broadridge. consent of parties is all that is needed Can be implemented at any time Pershing Square will pay the expense Mitigates confusion and allows shareholders to choose the best nominees from both slates No liability to Target or its nominees Liability concerns Shareholders have expressed disappointment with Target’s position. Target and its nominees should consent to have all nominees named on one proxy card.

(2) Includes only non-employee directors.0 mm $3.8) mm $(428.7) mm $(8. as senior management and the board have sold $429 million of stock in the last five years Last Five Years of Activity in Target Stock (1) Executive Management Total Open Market Purchases Total Sales Board (2) Total $0.5) mm How can we be sure that Target’s board and managers are truly focused on creating long-term shareholder value if they sell so much stock? (1) Based on the trailing five years prior to the announcement of Pershing Square’s nomination of the Nominees for Shareholder Choice on 3/17/2009. 20 .8 mm $3.8 mm $(419.Board Does Not Foster an Ownership Culture We believe that Target’s compensation plan does not foster an ownership culture at Target.

as witnessed by $429 million of Target stock sales by executive management in the last five years We question whether this board has sufficient expertise to advise management on running a retail and credit card company 21 Nominating directors Poor Executive compensation Advising management on existing strategies Poor N/A . and real estate experience Board refused to interview two of Pershing’s nominees Board refused a request for universal proxy Board has not fostered an ownership culture.Grading the Board: Key Duties Key Duties Hiring / firing management Assessing strategic transactions Pershing’s Grade Good Poor Commentary Strong management team Credit card transaction structure approved by the board was a mistake Board did not authorize a full review of Target’s real estate ownership alternatives Board’s decision to sell Mervyn’s and Marshall Fields took years of prodding by the investment community Independent directors have an average tenure of nearly a decade Board lacks non-executives with CEO-level retail. credit card.

We believe that Target’s suboptimal board has contributed to the company’s material underperformance during this recession 22 .

Target’s principal competitor.Underperformance Relative to Wal-Mart From the beginning of the fourth quarter of 2007 to the day prior to our announcement of our proposed slate. the stock of Wal-Mart. a ~62 percentage point outperformance Stock price returns 1 38.39 1 Wal-Mart Up 11% 98. Wal-Mart’s stock price outperformed Target’s stock price by approximately 18%. Target stock declined by 51%.39 Target 38.39 Down 51% Measured on a 10-year trailing basis ending on the day prior to the announcement of the Nominees for Shareholder Choice. Over the same period. appreciated 11%.39 58.39 78. 23 .39 1 8.

0%) 1Q08 2Q08 3Q08 4Q08 (4.0%) Target 24 Source: Company filings .0% 2.0%) (6.0% 4Q07 (2.0% Wal-Mart US 0.0% 4.Underperformance in Same Store Sales Growth We believe that Target’s substantial negative returns to its shareholders are reflective of its operating underperformance compared with Wal-Mart Year-over-Year Growth Rate of Quarterly Same Store Sales 6.

0% 10.0% 4Q07 1Q08 2Q08 3Q08 4Q08 Wal-Mart .0% -20.0% -30.Underperformance in Earnings Per Share Growth Since Q4 2007.0% 0.0% Source: Company filings 25 .10. Target’s earnings per share growth has been significantly less than Wal-Mart’s earnings per share growth Year-over-Year Growth Rate of Reported Quarterly EPS from Continuing Operations 20.0% Target -40.

Target’s retail margins have been deteriorating while Wal-Mart’s margins have remained higher and constant.8% 5.4% 7.2% 6.4% 6.3% 2008 Retail EBIT margin 2006 –2007: Why were Target’s retail margins weaker even during the strong economy? Target 6. despite Wal-Mart selling a greater mix of food and other lower margin goods 7.0% 5.8% 6.6% 7.6% 2005 2006 26 Retail EBIT Margins Wal-Mart US 7.3% 2008 Retail EBIT margin 2007 2008 Source: Company filings .0% 6.2% 7.6% 6.Target Retail Profitability Should Be Higher Even before the recession.

Relevant Experience Current Board Retail Business Allen Questrom. Australia’s leading retail company Real Estate Wal-Mart owns a lower percentage of its stores than Target Arne Sorenson. EVP and CFO of Marriott International We note that Wal-Mart partnered with a financial institution for its store credit card years ago.Wal-Mart’s Board Has Deep. former CEO of JCPenney. Federated Department Stores Roger Corbett. It does not own credit card receivables and has none of the material risks associated with these assets 27 . Neiman Marcus. retired CEO of Woolworths.

despite the lack of relevant senior operating experience ⌧ Ignored major shareholder regarding credit risk ⌧ Refused to authorize full review of alternatives for real estate ownership ⌧ Rejected major shareholder’s request to join the board without explanation ⌧ Refused to interview leading executives Richard Vague or Michael Ashner in its nominating process 28 .Is Target’s Board Too Insular? Pershing Square’s observations of Target’s incumbent board: ⌧ Chose board members without relevant senior operating experience in Target’s key business lines and assets ⌧ Rejected significant shareholder representation ⌧ Continually re-elects its own members.

Retailing is a Constantly Evolving Industry We believe that a key role of an independent board is to bring an outside perspective to challenge strategies that might have worked in the past but will likely need to evolve over time – contrary to Target’s board’s apparent instinct to maintain the status quo Competitive Landscape — 1993 3.500 1.601 Number of supercenters 2.000 2.500 Number of supercenters 2.000 500 500 239 185 128 77 0 76 68 17 0 55 0 29 .000 1.000 1.000 2.000 Competitive Landscape — Today 3.500 2.500 1.

major stock ownership.Time for Board Change In our view. and fresh perspectives 30 . the Nominees for Shareholder Choice will bring much needed “new life” to Target’s insular incumbent board The Nominees for Shareholder Choice offer deep and relevant experience.

Introducing the Nominees for Shareholder Choice Gold Proxy Card .

5% in stock options. 32 .3% in shares of common stock and 4.8% stake in Target (1) • Track record for creating value in consumer and retail businesses • Ron Gilson • World-renowned expert in the field of corporate governance • Professor of Law and Business at both Stanford Law School and Columbia University School of Law (1) Consisting of 3. the largest VISA credit card issuer before it was sold to Bank One (now JPMorgan Chase) • Michael Ashner • Established real estate CEO and investor • Currently manages over 20 million sq ft of commercial real estate • Has acquired more than $12 billion of real estate in 45 states • Bill Ackman • Founder of Pershing Square • Owner of a 7.The Nominees for Shareholder Choice Nominee for Shareholder Choice Significant Relevant Experience Commentary • Jim Donald Food Retailing Credit Cards Real Estate Shareholder Value Corporate Governance • 30 years of grocery experience • Former CEO of Starbucks and Pathmark • Oversaw the development and growth of Wal-Mart’s SuperCenter business • Richard Vague • Leading credit card operating executive • Former CEO and co-founder of First USA.

to serve on the board (1) The Nominees for Shareholder Choice have only one common goal: to help oversee the management of Target for the purpose of creating long-term value for all stakeholders If elected. background. 33 . the Nominees for Shareholder Choice will represent the interests of all shareholders using their own independent business judgment (1) Other than customary indemnifications and expense reimbursement arrangements. other than they have agreed. and ideas Pershing Square has no agreements. if elected. understandings. Michael Ashner. Richard Vague.Nominees Are Entirely Independent The Nominees for Shareholder Choice are entirely independent and have no preconceived agenda other than to maximize shareholder value Jim Donald. and Ron Gilson are independent nominees with no commercial relationships with Target or Pershing Square Each is a highly regarded leader in his area of expertise Each has his own unique perspective. or arrangements with the Nominees for Shareholder Choice.

8% of the company (1) Offer fresh perspectives while preserving board continuity Entirely independent (1) Consisting of 3.3% in shares (approximately $1bn in market value) and 4.Comparison of Slates The Incumbent Nominees ⌧ Lack senior operating experience in key business lines and assets ⌧ Beneficially own less than 0. 34 .05% of the company ⌧ Are accountable for strategic mistakes ⌧ Three out of four incumbent nominees have served for at least a decade The Nominees for Shareholder Choice CEO-level operating experience in: Retail Credit cards Real Estate Corporate governance expertise Beneficially own 7.5% in stock-settled call options (approximately $280mm in market value).

Food Retailing: Jim Donald .

We and the company believe that an expanded food presence can help Target increase the frequency of visits from its customers and generate higher and more predictable sales 36 .Food Retailing is A Critical Growth Initiative Food retailing represents a critical strategic growth initiative for Target.

. [W]e’ve nearly doubled our commitment to food over a five to sevenyear timeframe. 2/24/09 37 .” Gregg Steinhafel.” Gregg Steinhafel. and making Target a preferred shopping destination. increasing guest loyalty. CEO Target 4Q’08 Earnings Call.Food: Critical Strategic Growth Initiative “We continue to focus on food as a priority . . 8/21/07 “We also continue to invest in our food offering in recognition of its importance in driving greater frequency. CEO Target 2Q’07 Earnings Call.

but eventually emerged as a clear segment leader Competitive Landscape — 1993 3.500 2.000 Competitive Landscape — Today 3.500 1.500 2.Target: Slow to Innovate with Grocery/Superstores Wal-Mart was not always the dominant player in the supercenter / grocery space.601 Number of supercenters Number of supercenters 2.000 2.500 Did Target miss an important opportunity in food? 1.000 500 500 239 77 76 68 17 0 0 185 128 55 0 38 .000 1.000 2.000 1.

0% 2.Increasing Food Could Help Sales Significantly In our view.0%) (6.0%) Target (8. Target’s more limited food offering partially explains why Target’s same-store-sales growth rate has been considerably weaker than Wal-Mart’s in every quarter since Q4 2007 6.0% 4Q07 (2.0% Year-over-Year Growth Rate of Quarterly Same Store Sales 4.0%) Source: Company filings 39 .0%) 1Q08 2Q08 3Q08 4Q08 (4.0% Wal-Mart US 0.

2% 6. Target’s retail margins have been deteriorating while Wal-Mart’s margins have remained higher and constant.4% 7.0% 6.8% 6.8% 5.6% 2005 2006 40 Retail EBIT Margins Wal-Mart US 7. despite Wal-Mart selling a greater mix of food and other lower margin goods 7.2% 7.3% 2008 Retail EBIT margin 2007 2008 Source: Company filings .3% 2008 Retail EBIT margin 2006 –2007: Why were Target’s retail margins weaker even during the strong economy? Target 6.6% 7.0% 5.4% 6.We Believe Target Needs A Retailer on its Board Even before the recession.6% 6.

g.0% 59% 63. For Wal-Mart.. Includes Wal-Mart US only. home furnishings): Typically higher margin goods Source: Company filings. apparel. For Target. 41 . consumables incorporate “grocery” and “health & wellness” categories.Why Wasn’t Target More Profitable in the Boom Times? % of 2008 Sales 41% NonConsumables Consumables Consumables NonConsumables 37. consumables defined as consumables and commodities.0% Consumables: Typically lower margin goods Non-consumables (e.

we believe there are opportunities to improve Target’s retail margins.Opportunities to Make Target More Profitable Given the differences in profitability between Target and Wal-Mart. Having an experienced retail operator on the board can only help Target become a more profitable company in our view 42 .

He joined Starbucks in October 2002 as President. Inc. Jim was an executive at Wal-Mart Stores. Alabama and Texas divisions. Jim began his career in 1971 as a trainee with Publix Super Markets.5 billion business. North America. Inc.Jim Donald: Food Retailing Leader Jim Donald served as the CEO of Starbucks Corporation from April 2005 until January 2008. He was head of Albertson’s operations in Phoenix. He joined Albertson’s in 1976 and quickly rose through its managerial ranks in the Florida. were he worked on the development and expansion of the Wal-Mart Super Center. Jim served as President and Manager of Safeway Inc. Jim Donald Nominee for Shareholder Choice 43 . Inc. President and CEO of Pathmark Stores. distribution. from 1996 until joining Starbucks in 2005. He was responsible for a $2. comprised of 10. store design and real estate operations.’s 130-store Eastern Division from 1994 to 1996. Arizona.000 employees working at 130 stores and two distribution centers. Jim served as Chairman. supervising all merchandising. From 1991 until joining Safeway in 1994.

Dillon. the board will continue to have marketing expertise – Mary Minnick. Coca Cola’s former President of Marketing Target does business with McDonald’s 44 Over 30-years of food retailing experience Former CEO Of Pathmark and Starbucks Oversaw the development of Wal-Mart’s SuperCenters Helped build out Wal-Mart’s grocery business Entirely independent . Dillon is not a grocery store operator Without Ms.Compare Jim Donald with Mary Dillon Mary Dillon Target Incumbent Nominee EVP and Global Chief Marketing Officer for McDonald’s Jim Donald Nominee for Shareholder Choice Leading Food Retailing Operating Executive Is fast-food marketing experience highly relevant to Target? Ms.

Credit Cards: Richard Vague .

I don't understand why those attributes in combination would cause anyone to want to get into an active mode of analyzing a sale.Target Initially Resisted a Transaction for its Receivables “We have consistent performance . July 15.." Scovanner said. For the life of me. and we're enjoying double-digit growth rates. 2007 46 .” Doug Scovanner. CFO Star Tribune. "No one else in the credit-card arena has those attributes..

to retain substantially all of the credit risk and more than half of the funding risks associated with this business segment because of its insistence on retaining underwriting control We believe this decision was ill-advised. 2008. and shareholders have suffered as a result 47 . in multiple calls and meetings. Target sold a 47% interest in its credit card receivables to JPMorgan Chase Target elected. Pershing Square endeavored to convince Target to transfer the credit and funding risks associated with its credit card operation to a partnering financial institution In May.Pershing Square Urged Target to Transfer Credit Risk From August through December 2007. however.

Target converted a large portion of its private label Target card accounts (typically lower FICO score customers with lower credit limits) to Target VISA accounts. thereby giving lower quality credit customers significantly higher credit limits and lower rates.We Believe Target Made Poor Underwriting Decisions In the summer of 2007.6% over last year. faster than our pace of sales primarily due to changing the product features for yet another group of our higher credit quality Target card accounts to become higher limit Target Visa accounts. 11/20/2007 48 . We believe this was a mistake “Average receivables grew 19. CFO Q3’07 conference call.” Doug Scovanner.

8% $800 12.0% 65% drop 8.000 14.0% 3. as a result of poor underwriting decisions and exposure to credit risk.0% Credit Card EBIT $700 $600 $500 $400 10. Target’s credit card operating profits declined 65% in 2008 $ in millions $1.0% $322 $300 $200 $100 $0 0.0% 2007A 49 2008A .7% 2.The Results: Significant Profit Declines In our view.0% 6.0% 4.0% Credit Card EBIT as a % of average receivables $930 $900 12.

3% 5.0% 9.2% ~360 bps spread 5. BAC.9% 3.7% Credit Card Competitor Average (JPM.0% 1. This compares to 5.3% Target 7.0% 6.Underperforming Relative to Credit Card Peers In 2008.0% 8.0% 7.7% for Target’s credit card competitors in 2008 10.3% 5.0% 5.0% 0.0% 2.9% the year prior. Target’s net write-offs as a % of average receivables increased to 9.0% 3.0% 2005 2006 50 Net Write-offs as a % of Average Receivables 9.9% 5. DFS) 2007 2008 Source: Company filings .1% 3.3% from 5.0% 4. AXP. COF.

AXP.0% 2005 2006 2007 2008 8. Target’s bad debt expense as a % of average receivables increased to 14.5% Credit Card Competitor Average (JPM.3% for Target’s credit card competitors Bad Debt Expense as a % of Average Receivables 16.0% 4.5% 2.0% 12.1% 6. DFS) Source: Company filings 51 .0% 6.0% 14.0% 14. BAC.4% 7.6% the year prior. This compares to 7.6% 6.6% 4.0% 3.Underperforming Relative to Credit Card Peers In 2008.4% from 6.0% 8. COF.3% 5.4% Target ~710 bps spread 10.0% 0.

Richard served as the Chairman and CEO of Barclays Bank Delaware. From 2000 until its sale to Barclays PLC in 2004. independent Energy Service Company (ESCO) since 2007. Richard was President and then CEO and Chairman of First USA and Chairman of Paymentech. a direct consumer credit card bank that he co-founded. progressive. Richard Vague Nominee for Shareholder Choice 52 . From 1984 until 2000. a financial institution and credit card issuer. Richard co-founded First USA which grew from a start-up to the single largest Visa credit card issuer in the United States when it was sold to Bank One (now JPMorgan Chase) in 1997. From December 2004 until 2007. a Philadelphia-based. the merchant processing subsidiary of First USA.Richard Vague: Leading Credit Card Executive Richard Vague has served as CEO and co-founder of Energy Plus Holdings LLC. Richard was CEO of Juniper Financial.

Compare Richard Vague with Richard Kovacevich Richard Kovacevich Target Incumbent Nominee Chairman of Wells Fargo & Company Richard Vague Nominee for Shareholder Choice Veteran credit card industry executive Voted to retain the credit risk associated with Target’s credit card business We believe this decision ultimately led to dramatic profit declines for Target last year Given the financial crisis. serving as its CEO until it was sold to Bank One (now JPMorgan Chase) Founded and sold Juniper Financial Valuable operating experience can assist Target achieve recovery in its credit card business Strong transaction experience and relationships can help Target structure a risk-reducing transaction in the future Entirely independent 53 . does Mr. Kovacevich have the time to devote to being a Target director? Target does business with Wells Fargo Co-founder of First USA.

Real Estate: Michael Ashner .

Target: Significant Real Estate Ownership Target owns the highest percentage of its real estate compared to other big box retailers 100 90 % Units Owned (Buildings)1 80 70 60 50 40 30 20 10 0 34% 34% 68% 61% 58% 96% 92% 87% 87% % owned units/land(2): 86% % DCs owned(3): 82% 79% ND ND 2%(4) ND 84% 55% 71% 36% 90% ND 52% ND 54% 27% ND Represents data from latest 10-K filing “ND” represents Not Disclosed (1) Represents % owned stores (includes owned stores on leased land) (2) Represents % owned stores on owned land only (3) Represents % owned DCs (includes owned DCs on leased land) (4) Represents % owned DCs on a square footage basis 55 .

ft. Excludes international properties square footage (5) Includes square footage of properties which the company owns or has a majority and minority ownership interest (6) Based on pro rata share of GLA in shopping center portfolio (7) Includes total square footage of the anchors (whether owned or leased by the anchor) and mall stores.S. Excludes leased retail square footage and owned distribution centers square footage (2) Based on the latest company filings (3) Includes consolidated and unconsolidated GLA for the company (4) Based on U.S. today based on our estimates Estimated Total Owned GLA (sq.) (2) (mm) 1 2 3 4 5 6 7 8 9 10 Target Corporation General Growth Properties Simon Property Group The Macerich Company Kimco Realty Corporation CBL & Associates Properties Developers Diversified Realty Corporation Regency Centers Corporation Weingarten Realty Investors Pennsylvania Real Estate Investment Trust 213 168 153 76 74 73 67 37 34 26 (1) (3) (4) (5) (6) (7) (8) (9) (10) (11) (1) Includes owned and combined retail square footage. Represents GLA including anchor-owned stores (10) Based on retail GLA owned by the company (11) Includes owned GLA on consolidated and unconsolidated properties 56 . Excludes future expansion areas (8) Based on actual pro rata ownership of joint venture assets and excluding developments and redevelopments in process and scheduled to commence in 2009 (9) Based on wholly-owned and pro rata share of co-investment partnerships.Target: A Leading Owner of Retail Real Estate in the US Target currently owns approximately 213 million square feet of retail square footage (1). properties square footage which the company owns. more than any other publicly traded retail real estate company in the U.

The Market Does Not Appreciate Target’s Real Estate Real estate companies trade at substantially higher multiples of EBITDA compared to Target or other retailers Target’s Market Valuation (1) 2009E EV / EBITDA Real Estate Companies and Private Ground Lease Valuations 2009E EV / EBITDA 7.9%. (2) Based on mid-point precedent cap rate of 5.3x Large Cap REITs (1) 17. Large cap REITs multiples are based on Wall Street consensus estimates.2x $40/Share(1) 14. (1) Based on current stock price as of 05/01/09.0x Recent “Big Box” Ground Lease (2) Pershing Square believes that there may be more efficient ways for Target to structure its real estate business in order to highlight its strong value. however. Pershing Square. does not currently have any specific plans or proposals with respect to Target’s real estate Note: Target valuation excludes the net book value of the credit card receivables and the operating profit associated with such receivables in order to better compare Target with real estate companies which do not have credit card segments. 57 .

9% REIT IPO.Questions to Ask Given the stock market’s discounted valuation of Target’s vast real estate holdings. but why was Target’s board unwilling to explore other real estate strategic alternatives? 58 . shouldn’t the board be willing to investigate opportunities to create value? Pershing Square made several suggestions to Target. including a tax-free 19. which Pershing Square believed would Improve Target’s access to the capital markets Maintain its strong investment grade credit ratings Allow Target to maintain control over its buildings and brand Highlight the value of Target’s greater than 200 million sq ft of real estate Pershing Square’s past suggestions may not have been the perfect solution.

which owns a 2.000 hotel rooms. a REIT from December 31. Michael has served as the Managing Director of AP-USX LLC. 59 . L.000 apartment units.Michael Ashner: Experienced Real Estate Executive Michael Ashner Nominee for Shareholder Choice Michael Ashner has served as the CEO of Winthrop Realty Trust.P. Michael has been the President and principal shareholder of Exeter Capital Corporation. 50 million square feet of office. since 1998. President and CEO of Winthrop Realty Partners. Since 1981. 2006 through March 2008.4 million square foot office tower. including more than 85. Michael manages over 20 million square feet of commercial real estate and has acquired more than $12 billion of real estate in 45 states. 2003 and Chairman of the board of directors since April 2004. Inc. since December 31. (a real estate investment and management company) since 1996. retail and industrial space. a privately held real estate investment banking firm. He has also served as the Chairman. and 10. Michael served as the Executive Chairman of Lexington Realty Trust.

P.Compare Michael Ashner with Solomon Trujillo Solomon Trujillo Target Incumbent Nominee CEO of Telestra Corporation an Australian telecom company Michael Ashner Nominee for Shareholder Choice CEO and Chairman of Winthrop Property Trust We do not believe that Mr. Trujillo’s Australian telecommunications background brings relevant expertise to a US retail company Why has Mr. Trujillo been on Target’s board since 1994 or 15 years? Chairman and CEO of Winthrop Realty Partners. L. including over 11 million square feet owned by Michael and his affiliates Entirely independent 60 . Manages more than 20 million square feet of commercial real estate.

Shareholder Value: Bill Ackman .

5% ownership Third largest beneficial owner Fourth largest common stock holder Source: Company filings 62 .2% in stock options Independent directors own less than 0.1% in common stock and options Pershing Square Pershing Square beneficially owns 7.3% of Target in common stock and options comprised of: ~0.Board Lacks Significant Shareholder Representation Target’s incumbent board beneficially owns less than 0. Pershing Square beneficially owns 7.3% ownership ~$280 million in stock options. equal to 3.1% in common stock ~0. equal to 4.3% of Target.8% in common stock and options comprised of: ~$1 billion of common stock. By contrast.8% of Target Target’s Board Owns ~0.

L.P. typically focusing on large-cap and mid-cap companies.5% of the company) based on recent market prices. Bill Ackman Nominee for Shareholder Choice 63 .8% of the company. Bill has significant experience investing in multi-billion dollar retail and consumer companies. an investment adviser founded in 2003 and registered with the SEC. Pershing Square is a concentrated research-intensive fundamental value investor in long and occasionally short investments in the public markets.3% of the company) and $280 million in stock options (4.William Ackman: Leading Shareholder Bill Ackman is the founder and managing member of the general partner of Pershing Square Capital Management.. including approximately $1 billion in common stock (3. Pershing Square is the third largest beneficial shareholder of Target with 7.

Dubilier & Rice 64 Bill Ackman Nominee for Shareholder Choice Founder of Pershing Square. Dubilier & Rice. Dubilier & Rice portfolio companies How does Mr. .8% in common stock and options (1) Represents the third largest beneficial owner of Target Significant investment experience in multi-billion dollar retail and consumer companies (1) Consisting of 3. a leveraged buyout firm Owns 0. Tamke allocate his time? Target purchases products and services from “several companies” that are controlled by Clayton. a public equity investment firm Pershing Square beneficially owns 7.01% of Target in common stock and options Serves on the boards of Culligan (Chairman).5% in stock-settled call options (approximately $280mm in market value).3% in shares (approximately $1bn in market value) and 4. ServiceMaster (Chairman) and Hertz – all Clayton.Compare Bill Ackman with George Tamke George Tamke Target Incumbent Nominee Partner at Clayton.

consumer. and other businesses Canada 65 .Pershing Square: Track Record of Success In our view. Pershing Square has established a track record of creating shareholder value in retail.

Corporate Governance: Ron Gilson .

Stanford Law School (1979 to present) and the Marc and Eva Stern Professor of Law and Business.Ron Gilson: Corporate Governance Authority Ron Gilson is the Meyers Professor of Law and Business. managing over $26 billion in assets. Ron Gilson Nominee for Shareholder Choice 67 . since 1995 and has been the Chairman of the board of directors since 2005. Ron Gilson is one of our country’s preeminent thinkers on corporate governance. fair dealing. if elected. Columbia University School of Law (1992 to present). Ron is a fellow of the American Academy of Arts and Sciences and the European Corporate Governance Institute. and diligent care for the benefit of all shareholders. Ron has served on the board of directors of certain of the American Century Mutual Funds. We believe that. Ron’s extensive academic and real world experience as an independent board chair would ensure fair process.

Target’s Board: Avoiding the Real Issues .

its advisors.Target’s Board: Avoiding the Real Issues We believe the Real Issue of this election is that Target’s board is suboptimal Lacks significant relevant senior operating experience Lacks significant shareholder representation Has made expensive mistakes in assessing strategic transactions Has failed on key governance duties In our view. and PR team have publicly made what we believe to be misleading statements to dissuade investors from focusing on the CORE ISSUES 69 . the board. Target’s board has not addressed this issue satisfactorily Instead.

had not purchased one share of stock during the last five years until 3/18/09 – one day after we nominated directors for the board Board and executive management have sold $429 million of stock in the last five years 70 .“Favoring Risk Taking” Target’s misleading stance: Pershing Square’s sizeable derivative position creates an incentive for risk taking The ACTUAL FACTS: Target is Pershing Square’s largest investment Pershing Square owns $1 billion in common stock and $280 million in stock options Unlike the incumbent board. Pershing Square paid cash for its stock options and can extend the life of its options Target’s management and the board have a greater percentage of their ownership in derivatives than Pershing Square Pershing Square has been a major buyer of Target shares in recent years unlike members of senior management Gregg Steinhafel.

Michael Ashner. providing board room continuity Bill Ackman supports exploration of real estate ideas – if you don’t want Target to explore real estate alternatives. Richard Vague. You can still vote for Jim Donald.“Risky Agenda” Target’s misleading stance: Pershing Square has launched a proxy contest to push its real estate agenda “Bill Ackman’s slate of nominees…” The ACTUAL FACTS: The Nominees for Shareholder Choice are entirely independent There is no “Bill Ackman slate” The independent nominees have no pre-conceived real estate agenda Even if all of the Nominees for Shareholder Choice are elected. and Ronald Gilson This election is not about “Bill Ackman” but rather about choosing board members with the most relevant experience 71 . two-thirds of Target’s current board will remain. don’t vote for him.

Pershing Square encouraged Target to halt buyback program In Pershing Square’s view. Target’s board chose to maintain credit exposure to the credit card business Fall 2008. does not intend to support any action that will impair Target’s credit ratings Since our first meeting with management. if elected. Pershing Square has urged Target to decrease credit risk Instead.Credit Ratings and Risk Bill Ackman. Target can be an enormously valuable company without the need to over-leverage its business Pershing Square believes that positioning the company so that it can increase its access to capital may allow it to take advantage of distressed real estate opportunities that could result from the current shakeout in the retail industry 72 .

and integrity of the Nominees for Shareholder Choice speak for themselves Questions to Ask Target: Why are the current independent board members the most qualified to serve on the board of Target. and corporate governance The credibility. credit cards. experience. independence. reputation.“Hasty Selection” Target’s misleading stance: Hasty selection of candidates by Pershing Square is inconsistent with a professional search required by good corporate governance Our Response: The Nominees for Shareholder Choice are leaders in food retailing. real estate. a retail and credit card company? Why does Target’s board continue to nominate its own members and not conduct a professional search for new directors with senior operating experience? 73 . shareholder value.

” . 4/18/2009 74 .Target spokesperson “Ackman campaign for Target like prize fight” Reuters.Target Says: “We do not believe that Pershing Square's nominees would add value to the Board.

3% in shares of common stock and 4.5% in stock options. the largest VISA credit card issuer before it was sold to Bank One (now JPMorgan Chase) • Michael Ashner • Established real estate CEO and investor • Currently manages over 20 million sq ft of commercial real estate • Has acquired more than $12 billion of real estate in 45 states • Bill Ackman • Founder of Pershing Square • Owner of a 7.Really? Nominee for Shareholder Choice Significant Relevant Experience Commentary • Jim Donald Food Retailing Credit Cards Real Estate Shareholder Value Corporate Governance • 30 years of grocery experience • Former CEO of Starbucks and Pathmark • Oversaw the development and growth of Wal-Mart’s SuperCenter business • Richard Vague • Leading credit card operating executive • Former CEO and co-founder of First USA.8% stake in Target (1) • Track record for creating value in consumer and retail businesses • Ron Gilson • World-renowned expert in the field of corporate governance • Professor of Law and Business at both Stanford Law School and Columbia University School of Law (1) Consisting of 3. 75 .

Corporate Elections and Shareholder Choice .

shareholders would have no viable alternative other than to elect the incumbent nominees 77 . or Nominees from each of the two slates Had Pershing Square not nominated a slate.Pershing Square Offers Shareholder’s a Choice Pershing Square is bringing shareholders an important choice at the Annual Meeting In this election. or Target’s incumbent slate. you can choose to vote for: The Nominees for Shareholder Choice.

How We Think about Voting This is an election is about choosing the best directors for Target Considerations Incumbent Nominees vs. Shareholder Nominees Which candidates have the fewest commercial ties to Target? Is it possible that only incumbents are the best candidates? Are any incumbents accountable for underperformance? This contest is not a change of control At least 2/3rds of the incumbent directors will remain on the board Board continuity is preserved Both slates support management continuity Should shareholders be forced to simply choose from competing slates? Should shareholders have the option of choosing the best nominees from all available candidates? 78 How to Choose Choose candidates with no conflicting economic interests Choose fresh perspectives Choose the best nominees with the most relevant experience Choose continuity and fresh perspectives Choose the best nominees with the most relevant experience Maintaining Continuity How Should Elections Work? Shareholder choice is good for Target and good for corporate governance Support efforts to simplify the voting process and ensure that each vote is counted .

3% in shares of common stock and 4.8% stake in Target (1) • Track record for creating value in consumer and retail businesses • Ron Gilson • World-renowned expert in the field of corporate governance • Professor of Law and Business at both Stanford Law School and Columbia University School of Law (1) Consisting of 3. 79 . the largest VISA credit card issuer before it was sold to Bank One (now JPMorgan Chase) • Michael Ashner • Established real estate CEO and investor • Currently manages over 20 million sq ft of commercial real estate • Has acquired more than $12 billion of real estate in 45 states • Bill Ackman • Founder of Pershing Square • Owner of a 7.Vote for the Nominees for Shareholder Choice GOLD PROXY CARD • Jim Donald Food Retailing Credit Cards Real Estate Shareholder Value Corporate Governance • 30 years of grocery experience • Former CEO of Starbucks and Pathmark • Oversaw the development and growth of Wal-Mart’s SuperCenter business • Richard Vague • Leading credit card operating executive • Former CEO and co-founder of First USA.5% in stock options.

. 2009 Pershing Square Capital Management.P.The Buck’s Rebound Begins Here May 27. L.

It is possible that there will be developments in the future that cause such funds to change their positions regarding the Company and possibly increase. Pershing Square advises funds that are in the business of trading . 1 . reduce. estimates. and GGP unsecured debt. the historical and anticipated operating performance of the Company.Disclaimer The analysis and conclusions of Pershing Square Capital Management. ("Pershing Square") regarding General Growth Properties.public securities. or change the form of their investment in the Company.buying and selling . among other things. Actual results may vary materially from the estimates and projected results contained herein. No representations. Pershing Square recognizes that there may be confidential or otherwise non-public information in the possession of the Company that could lead the Company to disagree with Pershing Square’s conclusions. “GGP” or the “Company”) are based on publicly available information. express or implied. are made as to the accuracy or completeness of such statements. total return swaps. and its affiliates (collectively. and other uncertainties and contingencies and have been included solely for illustrative purposes. Inc. competitive. Such statements.P. dispose of. and projections reflect various assumptions by Pershing Square concerning anticipated results that are inherently subject to significant economic. estimates or projections or with respect to any other materials herein. L. Pershing Square owns GGP equity. The analyses provided include certain estimates and projections prepared with respect to.

Agenda Why We Like General Growth Properties A Brief History Not Your Typical Bankruptcy GGP’s Assets Are Greater Than Its Liabilities 2 .

Why Do We Like GGP? Ala Moana .

. MPC Master Planned Communities ■ Over 200 regional malls (>160mm sq ft) (1) / outdoor shopping centers ■ Over 30 grocery-anchored shopping centers ■ Office properties in Arizona.C. 4 . Summerlin. Nevada and near Maryland / Washington D. TX ■ ~18. >400. NV and Houston.000 employees including retail tenants.C. ■ 1. leasing and marketing services ■ Over 60% of revenue derived from third party (non-GGP) malls ■ Manages many of GGP’s JV malls ■ Develops and sells land for residential and commercial use ■ Land located near Maryland / Washington D.What is GGP? GGP REIT Includes Retail & Office Properties GGMI General Growth Management Inc.000 saleable acres Includes anchor GLA and the Company’s pro rata share of JV malls.000 tenants ■ >3.3bn mall visits per year ■ >24.700 employees (2) ________________________________________________ (1) (2) ■ Provides management.

Diverse Footprint GGP is geographically well-diversified with malls in 44 states. The Company also has interests in joint ventures in Brazil and Turkey 5 .

000 tenants.0bn 3. with its largest tenant accounting for only 2.4bn 1. 6 .0bn 2.Diverse Tenant Base GGP has over 24.0bn ________________________________________________ Source: GGP Q1’09 operating supplement. 2009 Memo: Market Cap $11.8bn 5.8bn 4.7% of revenue as of March 31.0bn Private Private Private 6.

High Quality Assets Green Street assigns an ‘A’ grade to 73 malls in GGP’s portfolio Not Included Other Examples: Faneuil Hall Marketplace South Street Seaport Ward Centers (Honolulu. HI) ________________________________________________ Source: Green Street. GGP’s portfolio consists of many of the best malls in America 7 .

This is one more example of the quality of our portfolio. Chairman and Former CEO. and quality will be more important than ever as we move forward in 2008 and 2009. Not only do these 50 centers produce tremendous sales per square foot. These properties generated average sales per square foot of approximately $648. July 31.High Quality Assets (Cont’d) “Indicative of the strength within our portfolio is the performance of our 50 most productive United States centers. they also represent approximately 50% of our total mall NOI. a substantial majority of GGP’s equity value is in the Company’s best assets 8 .” –John Bucksbaum. 2008 Because the NOI from GGP’s highest quality malls should be valued at materially lower cap rates than its lower quality malls.

0%) 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E 2011E 2012E 2013E ________________________________________________ 9 Source: Green Street.0% Apartment 4.Why We Like Malls Relative to other real estate asset classes.0% (2. Sector data represents weighted average of companies in coverage universe during the period in question.0% Mall 0.0%) (6.0%) (4.0% Office Industrial 2. . malls have historically generated the most stable cash flow Weighted-Average Same-Store NOI Growth Across Various Property Types 8.0% 6.

24 $56.7% 10. Expiration includes Company’s pro rata share of its unconsolidated segment. $36.16 $74.07 $47.7% More than 75% of GGP’s leases do not expire until 2012 or later Rent & Recov.0% 4. 10 .78 $53.9% 10.04 $64.0% 14.0% 8.4% 11. Percentage is weighted based on rent per square foot.000 square feet or more and tenants paying percentage rent in lieu of base minimum rent.0% 16.2% 9.8% 8.83 Per Sq Ft $41.47 $70. (1) Excludes leases on anchors of 30.1% 10.0% 8.70 $67.0% 9.2% 8.07 $56.Long Term Leases GGP’s business is far less cyclical than that of the retail industry because its revenues are insulated by long-term leases which are structurally senior claims GGP Lease Expiration Schedule (1) 20.75 ________________________________________________ Source: GGP Q1’09 operating supplement.0% 12.0% 5.0% 2.0% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 After 8.0% 18.9% 6. Excludes all international operations which combined represent ~1% of segment basis real estate property NOI. Also excludes community centers.0% 0. .1% 9.81 $61.

.00 $37 $35.00 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 After ________________________________________________ Source: GGP Q1’09 operating supplement.00 $70 $70.00 $30. (1) Data includes significant proportion of short-term leases on inline spaces that are leased for one year.00 $56 $55.and long-term leases.00 $41 $40. Rents and recoverable common area costs related to these short-term leases are typically much lower than those related to long-term leases.00 $65 $62 $60.00 $53 $56 $67 $65.00 Average: $56 Embedded Growth Opportunity $50.00 $48 $45. Expirations include company’s pro rata share of its unconsolidated segment. Any inferences the reader may draw regarding future rent spreads should be made in light of this difference between shrort. 11 .Embedded Growth GGP’s long term lease-based revenue model offers embedded growth in good times and mitigates revenue declines in bad times GGP Rent & Recoverable Per Sq Ft Expiration Schedule (1) $75 $75.

Inflation-Protected Approximately 82% of GGP’s debt is fixed rate ________________________________________________ Source: Q1’09 operating supplement. 12 .

Why Do We Like GGP? High Quality Assets Diversified Geographical Footprint Inflation-Protected Stable Cash Flows Diverse Tenant Mix Embedded Growth Opportunity 13 High Quality Business .

1954 .A Brief History Town and Country Center Cedar Rapids.

GGP never defaulted on a mortgage $70 April-2007: GGP achieves a market cap of ~$20bn $60 $50 $40 $30 1960: GGP opens Duck Creek Plaza. one of the first malls to have a department store anchor August-2004: Rouse acquisition April-1993: GGP goes public on the NYSE resulting in net cash proceeds of ~$383mm $20 $10 $0 1954 1960 1993 1995 1997 1999 2001 2003 2005 2007 15 .The Rise of GGP: 1954 – 2007 1954: Brothers Martin & Matthew Bucksbaum found GGP and open Town & Country Shopping Center in Cedar Rapids. IA During its time as a Public Company GGP paid ~$4bn in dividends GGP refinanced or paid down ~$32bn of debt Until Q1’09.

The Fall of GGP: 2008 – Current March 28. Market cap: ~$9bn $50 $40 $30 $20 June-July. 2008: GGP voluntarily files for bankruptcy $0 Jan-08 Oct-08 Feb-09 May-09 16 . 2008: GGP market cap hits ~$100mm Apr-08 Jul-08 $10 November 28. ~$100mm is purchased by an affiliate of the Bucksbaum family September 15. implying a market cap of ~$12bn. 2008: $900mm of GGP debt comes due April 16. 2008: The CMBS new issuance market grinds to a halt November 12. 2008: Lehman Brothers declares bankruptcy. 2008: GGP raises $822mm in a stock offering priced at $36 per share.

The Problem Over the past decade.S. CMBS New Issuance Market ($ in billions) $250 $230 $203 $200 $169 No market exists for refinancing GGP’s ~$15bn of CMBS debt $150 $100 $74 $67 $57 $51 $78 $93 $50 $47 $16 $0 $0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 ________________________________________________ Source: Bank of America equity research. In mid-2008. the CMBS market shut down U. GGP was a significant issuer of CMBS with ~$15bn of CMBS debt. 17 .

18 .The Problem (Cont’d) GGP’s bankruptcy is the result of the unprecedented disruption in the credit markets coinciding with large near-term debt maturities ________________________________________________ Source: GGP Q1’09 operating supplement.

GGP’s operating performance remains strong .Despite the turmoil in the credit markets.

5% 90.9% 83.1% 88.Occupancy as of Q1’09 GGP’s occupancy ranks among the top of its peer group Glimcher occupancy benefitted in Q1’09 from the signing of temporary tenants to one year leases that had previously been excluded from the occupancy calculation.8% 90.0% 84. (2) CBL figures are for stabilized regional malls only (excludes new developments and redevelopments). Occupancy was 90.0% 83. (1) SPG figures are for regional malls only.0% 87.0% 88.0% 85.0% 90.9% 90.6% as of Q3’07 92.2% 90.0% 91. 20 .2% 91.0% Glimcher ________________________________________________ 90.8% General Growth Simon Property Group Taubman Macerich Westfield CBL Pennsylvania REIT Note: Occupancy is defined as percent of mall shop and freestanding GLA leased.0% 89.0% 86.

211 $2.500 $2.7% 5.7% 9. Adjusting for lease termination income.211 $2.0% 7. non-cash ground rent expense and real estate tax stabilization.Trailing Twelve Month Cash NOI As of Q1’09.524 Cash NOI Growth (YoY) 6.750 $2.2% 9.328 $2.413 $2.554 $2.3% 1.000 $1.542 $2.6% 12. . GGP’s trailing twelve month cash NOI grew 1.1% 2.500 $1.6% 4.250 $1.4% on a year over year basis.1% 5. lease mark to market adjustments (FAS 141). Termination Income Adj.5% 5.4% ________________________________________________ Note: NOI figures exclude management fee income and NOI associated with the MPC segment.6% 9.9% 8.2% 12.250 $2. cash NOI grew 2. Cash NOI Growth (YoY) 5.0% 5.7% 5.000 $750 $500 $250 $0 Q4'06 Q1'07 Q2'07 Q3'07 Q4'07 Q1'08 Q2'08 Q3'08 Q4'08 Q1'09 $2.8% 10.255 $2.750 $1.1% 21 10.4% TTM Cash NOI ($ in millions) $2. Cash NOI adjusts for non-cash items such as straight-line rent.7% 7.542 $2.4% Excl.489 $2.

Not Your Typical Bankruptcy Water Tower Place .

and equity holders . we believe GGP’s bankruptcy provides the ideal opportunity for a fair and equitable restructuring of the Company that preserves value for all constituents: secured lenders. unsecured lenders. employees. of their value.Unlike most bankruptcies where equity holders lose most. if not all.

1992: Alexanders files a voluntary petition for bankruptcy Jul-94 Apr-95 Dec-95 . Alexanders’ stock price appreciated 358% $80 $70 $60 $50 $40 $30 $20 $10 $0 May-92 Jan-93 Oct-93 24 September 21. 1993: Alexanders’ Plan of Reorganization is confirmed March 1. 1995: Alexanders emerges from bankruptcy May 12.A Little Personal History While in bankruptcy.

2004: Amerco’s Plan of Reorganization is confirmed June 20.Amerco Bankruptcy While in bankruptcy. 2003: Amerco files a voluntary petition for bankruptcy March 15. 2004: Amerco emerges from bankruptcy Oct-04 May-05 Dec-05 . Amerco’s stock price appreciated 456% $80 $70 $60 $50 $40 $30 $20 $10 $0 Jan-03 Aug-03 Mar-04 25 February 2.

Amerco was attempting to negotiate and replace its revolving credit facility and complete a $275mm bond offering Ultimately.Why Did Amerco File for Bankruptcy? Amerco filed for bankruptcy as the result of a liquidity issue that arose even though the underlying business was solvent Following Enron in late 2002. it did not have sufficient funds to meet maturing debt obligations. which led to cross-defaults and an acceleration of substantially all of the Company’s other outstanding debt instruments 26 . and. as a result. which involved the consolidation of an off balance-sheet financing subsidiary (SAC Holdings). Amerco’s auditors advised the company that’s its financial results would have to be restated The restatement. Amerco was unable to complete the bond offering. resulted in a material decrease in reported net worth and an increase in reported leverage ratios. The restatement also required a time-consuming restatement of prior periods’ results that led to the delayed filing of quarterly reports with the SEC As this situation was developing.

” Joe Shoen. quite simply. Two of four major creditor groups have agreed to our plan and we’re working with the remaining persons to get agreement to our plan.Why Did Amerco Shareholders Retain Value? Analyst Question: “How can there be any value left for shareholders under your plan when in almost every bankruptcy stockholders receive no recovery? Have creditors signed on to your plan for a full recovery?” Answer: “Well. Q4’03 Conference Call Transcript 27 . Real estate appraisals showed the market value of Amerco’s unencumbered owned real estate is $550 million higher than stated book value. Amerco has more assets than liabilities. Amerco CEO.

Title 11. Chapter 11.S. as of the effective date of the plan. 28 . Bankruptcy Code. the condition that a plan be fair and equitable with respect to a class includes the following requirements: (A) With respect to a class of secured claims. the plan provides– (i)(I) that the holders of such claims retain the liens securing such claims. Subchapter II.Bankruptcy 101 § 1129. equal to the allowed amount of such claim Creditors are entitled to a “fair and equitable” plan of reorganization ________________________________________________ Source: U. whether the property subject to such liens is retained by the debtor or transferred to another entity. Confirmation of plan (b) (2) For the purpose of this subsection. to the extent of the allowed amount of such claim (B) With respect to a class of unsecured claims– (i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value.

equity holders are entitled to the residual value 29 . 1978 A “fair and equitable” plan only entitles creditors to recover 100% of the amount of their claims. a dissenting class should be assured that no senior class receives more than 100 percent of the amount of its claims.R. For example. When a debtor’s asset value exceeds the amount of its liabilities. 1st Sess. were omitted from the House amendment to avoid statutory complexity and because they would undoubtedly be found by a court to be fundamental to “fair and equitable” treatment of a dissenting class. 201 September 28. others..Bankruptcy 101 (Cont’d) “Although many of the factors interpreting ‘fair and equitable’ are specified in paragraph (2). which were explicated in the description of section 1129(b) in the House report.” Congressional Record – House Regarding the Bankruptcy Reform Act of 1978 H. 95th Cong. 7330.

.GGP Reminds Us of Amerco Typical Bankruptcy Year Founded Reason for Filing? High Quality Business? Assets Worth More Than Liabilities? Cash Flow Before Debt Maturities Stability of Cash Flows Insider Owns Large % of Company? Shareholder Advocate ________________________________________________ 1945 Extrinsic Factors Created Liquidity Crisis 1954 Extrinsic Factors Created Liquidity Crisis N/A Insolvency No No (Post-Filing TBV: Negative) Yes Yes (Post-Filing TBV: >$350mm) Yes Yes (Post-Filing TBV: >$1bn)* Positive Medium Yes Joe Shoen (CEO) 30 Positive High Yes Pershing Square Negative Low No None * We believe that Tangible Book Value materially understates the fair market value of GGP’s equity.

We could only find four bankruptcies that fit the bill What Happened To Equity Holders? Shareholders retained 100% of post-reorg equity Stock appreciated 456% during bankruptcy.-based non-financial companies with asset values in excess of $1bn. increased from $13 to $467 trough-to-peak Creditors repaid in full To be determined ________________________________________________ Shareholder Advocate? Joe Shoen Mgmt Steve Roth Pershing Square Note: Bankruptcies since 1999 in excess of $1bn as provided by Web BRD (Bankruptcy Research Database).Historical Bankruptcy Analysis We looked at 150 bankruptcies over the past decade to see if we could find any other examples of public companies entering bankruptcy with (i) positive cash flow before debt maturities and (ii) asset values in excess of liabilities. Our analysis was limited to U.S. increased from $4 to $105 trough-to-peak Creditors repaid in full Shareholders received warrants in ~30% of the post-reorg equity Personal recourse management loans largely forgiven Shareholders retained 100% of post-reorg equity Stock appreciated 358% in bankruptcy. 31 . Post-filing tangible book value used as a proxy for asset value in excess of liabilities. Asbestos liability bankruptcies excluded from the analysis.

<Equity Aim to receive 100% of postreorganization equity “Hit with your eyes closed” POR projections Low-struck options Minimize post-reorg leverage Conservative Post-reorganization equity is often underpriced as a result of the incentives of the various constituencies in a bankruptcy process 32 . equity holders require a shareholder advocate to protect their interests Liquidate? Secured Creditors Unsecured Creditors Management Valuation Rationale Full recovery of claim Loan to own Eliminate unsecured leverage Desire to be fulcrum security Depends No No Low >Secured .Incentives of Various Constituencies in a Typical Bankruptcy Given the incentives of the various parties involved in a typical bankruptcy.

employees. and equity holders? .Given the incentives of the various constituencies in bankruptcy. what is the best way for GGP to reorganize that preserves value for secured lenders. unsecured lenders.

A Simple Solution A seven-year extension of GGP’s secured and unsecured loans at their existing interest rates would provide the Company with sufficient time to use cash flow from operations to delever its balance sheet. we believe the Company would be able to repay existing creditors in full Benefits of this Approach: Secured and unsecured lenders receive 100% of the present value of their claims Prevents the liquidation of assets at “fire-sale” prices Preserves value for equity holders GGP platform remains intact Preserves jobs 34 . With a sevenyear extension.

35 . tenant allowances and restructuring costs as outlined in the Company’s 2009-2010 Cash Flow Forecast Maintenance capex and TAs in forecast are increased by ~20% to account for unconsolidated segment outlays ________________________________________________ (1) See Mall REITs: May 2009 Update.Deleveraging Analysis Assumptions All Debt maturities extended seven years at current interest rates Cash NOI projections per Green Street Same Store Mall NOI Projections (1) GGMI income declines / grows at 2x Cash NOI GGP suspends its cash dividend payment to common shareholders through year-end 2009 10% cash / 90% stock thereafter GGP maintains Future Development Spending as outlined in the Company’s Q1’09 supplement GGP maintenance capex. Note that this method is conservative in that it does not account for NOI generated by future development spending projects. page 6. Note that Simon is guiding for same store regional mall NOI to be up 0% to 1% in 2009e.

8%) (38) 92 (272) (112) (197) (99) (28) (1.12 $35.0% 75 108 (286) (210) (145) (30) (1.04% $1.575 $9.616) (47) $462 Total Cash Flow Available for Debt Repurchase Cash NOI (excl MPC) Growth Plus / Less: MPCs (1) Plus: Fee income Less: Overhead from recurring ops (2) Less: Restructuring / Strategic costs Less: Maint Capex / TAs Less: Development capex Less: Other (incl income taxes.372) (26.687) (6) $160 2012e $2.32 $23.119 (28.155 $31.411 0.648 Illustrative Equity Value Propco Enterprise Value (@ 7.9% 25 92 (277) (200) (138) (30) (1. except per unit data) 2008a 2009e $2.83 $31.412 (2.676) (6) $202 2013e $2.481 (2.649) (27.642) (29) $385 2015e $2.662) (15) $277 2014e $2. See valuation section for details.119 3.536 3. 36 .119 3.390 (0.74 Substantial Equity Cushion Bridgeland improve cash flow in 2009e.141 $7.119 3.698) $115 2010e $2. cash flows based on 2009-2010 Cash Flow Forecast filed by the Company.866 $32.4%) 73 98 (269) (180) (156) (183) (50) (1.612 3.827 3.059) (28.73 $22.9%) 15 91 (274) (200) (138) (30) (1.263 $7.119 3.944 $11.623 $8.47 $22.153 $32.119 3.85 $26.082 $32.542 5.011) (27.851) (27. Ignores the potential for incremental cost saves. Represents annualized Q1’09 overhead expense.134 $7.420 $25.828 $33.813 $34. pfd distributions) Less: Pro Forma Interest expense Less: Cash dividend (10% cash) Cash Flow Available for Debt Repurchase $2.1% 50 96 (280) (205) (140) (30) (1.0% 75 102 (283) (205) (140) (30) (1.5% cap rate) Plus: Cash / GGMI / Dvlpmt Pipeline / MPC (3) Less: Total Debt (EOP) Illustrative Equity Value Per Share ________________________________________________ (1) Assumes proceeds from ~$90mm sale of (2) (3) $33.3% 6.693) (16) $48 Seven Year Period 2011e $2. Adjusts for seasonality and $38mm of restructuring costs included in overhead line items.987) (26.462 2.119 3. Aside from Bridgeland adjustment.525) $8.Illustrative Deleveraging Analysis Seven-year maturity extensions coupled with a reduced cash dividend would allow GGP to delever its balance sheet and create a substantial equity cushion (US$ in millions.

4%) 73 98 (269) (180) (156) (183) (50) (1.119 3.866 $32.1% 49.119 (21.588) (21. Ignores the potential for incremental cost saves. (4) 37 See valuation section for details.588) (21.22 $21. GGP would be able to pay a 4.359 $15.588) (21.45% $3.153 $32.392) $658 4. cash flows based on 2009-2010 Cash Flow Forecast filed by the Company.119 3.344 $16.7% Seven Year Period 2011e $2.542 5.082 $32.588) (21.613 $13. GGP would be able to pay a meaningful cash dividend (US$ in millions. (1) Assumes proceeds from ~$90mm sale of Bridgeland improve cash flow in 2009e.4% Total Cash Flow Available for Debt Repurchase Cash NOI (excl MPC) Growth Plus / Less: MPCs (1) Plus: Fee income Less: Overhead from recurring ops (2) Less: Restructuring / Strategic costs Less: Maint Capex / TAs Less: Development capex Less: Other (incl income taxes.31 $22.12 $22.684 $14.390 (0.6% 2013e $2.40 $30.612 3.1% 48.4% dividend yield by year 7 In this scenario. pfd distributions) Less: Pro Forma Interest expense (3) Cash Flow Available for Dividend Cash Dividend Yield $2. (2) Represents annualized Q1’09 overhead expense.0% 75 108 (286) (210) (145) (35) (1.3% 2015e $2.32 $27.155 $31.392) $366 2.119 3.686 $13. (3) Assumes weighted average interest expense of unsecured debt is 4.58 Average 45. except per unit data) 2008a 2009e $2.9% 42.412 (2.3% 6.828 $33.481 (2.813 $34. Adjusts for seasonality and $38mm of restructuring costs included in overhead line items. Under this scenario.6% Note: Assumes $6.7%.392) $421 2.21 $24.392) $728 4.392) $487 3.462 2.588) (21.673 Using conservative assumptions.0% 75 102 (283) (205) (140) (35) (1. .8%) (38) 92 (272) (112) (197) (99) (28) (1.392) $457 3.9% 2010e $2.588) (21.Illustrative Deleveraging Analysis: Unsecured Debt Converts into Equity Alternatively.3% 45.119 3.1% 50 96 (280) (205) (140) (35) (1.411 0.536 3.9% 40.4% 2012e $2. Aside from Bridgeland adjustment.827 3.9%) 15 91 (274) (200) (138) (35) (1.1% 45.119 3.5% cap rate) Plus: Cash / GGMI / Dvlpmt Pipeline / MPC (4) Less: Total Debt (EOP) Illustrative Equity Value Per Share (Adj for dilution from debt conversion) % of Equity Required for Unsecureds to get 100% of Claim ________________________________________________ $33.397 $13.358 $25. Unsecureds would require ~45% of postreorg equity to be made-whole Illustrative Equity Value Propco Enterprise Value (@ 7.588) $14.9% 2014e $2.2% 48.6bn of GGP’s unsecured debt converts fully into equity.392) $557 3.9% 25 92 (277) (200) (138) (35) (1.119 3. 100% of GGP’s unsecured lenders could be converted into equity.

What if our “Simple Solution” cannot be achieved consensually? The Bankruptcy Code offers the ability for debtors to “cram down” creditors so long as each class of creditor receives the present value of their claims .

If a creditor is not paid in cash or property upon emergence. over time. SCS Credit Corp . Till v. the amount of each installment must be calibrated to ensure that. it must receive future payments. In such circumstances. the present value of which equals its bankruptcy claim “Plans that invoke the cram down power often provide for installment payments over a period of years rather than a single payment.” – Opinion of Justice Stevens. the creditor receives disbursements whose total present value equals or exceeds that of the allowed claim.

What interest rate must the debtor pay over time on its obligations to its creditors in a cram down? .

then the court may apply the “market rate. SCS Credit Corp. Supreme Court established a precedent upon which to adjust interest rates in the bankruptcy context: If There is an Efficient Market: If an “efficient” market exists for the debt. the U. (2004).S.The Till Precedent In the case of Till v. the court is to apply a “formula approach” involving setting the rate at the prevailing prime rate plus a “risk adjustment” rate generally between 1% and 3% 41 GGP falls into this category .” which is the rate that the market will bear for the proposed loan Absent an Efficient Market: Absent an efficient market.

familiar. 2004 42 . For these reasons. unlike the coerced loan. and minimizes the need for potentially costly additional evidentiary proceedings. the circumstances of the bankruptcy estate. the prime-plus rate best comports with the purposes of the Bankruptcy Code.The Logic of Till “Thus. SCS Credit Corp May 17. and objective inquiry. Moreover. presumptive contract rate. the formula approach entails a straightforward.” Opinion of Justice Stevens Supreme Court of the United States Till v. the resulting ‘prime-plus’ rate of interest depends only on the state of financial markets. not on the creditor’s circumstances or its prior interactions with the debtor. and the characteristics of the loan. and cost of funds approaches.

N.5% Prime + 1.2004) 321 B.R.0% Prime + 3.N.E.2004) 311 B.N.2006) Not Reported in B.R. Till has been applied in numerous bankruptcy proceedings Cases: In re Bivens In re Cachu In re Cantwell In re Flores In re Harken In re Pokrzywinski In re Prussia Associates ________________________________________________ Rate: Prime + 2.D. 44 (Bankr.Iowa. 688.R.2006) Not Reported in B.0% Prime + 1.E.D.Pa. 716.R.0% Prime + 1.J. (Bankr. 755. 45 (Bankr.2004) 336 B.E.J. (Bankr. 769 (Bankr.Cal.The Progeny of Till Since the Supreme Court ruling in 2004.2005) Note: The above list is not meant to be comprehensive. 43 .25% Prime + 0.N. 572.R.D.Ill. 846. 850-51 (Bankr.5% Source: 317 B.D.Wis.D.R.R.D.5% Prime + 1.2004) 322 B.D. 725 (Bankr.

shows that even if an efficient market is deemed to exist. as the preferred means for setting the interest rate herein. Pennsylvania In re Prussia Associates April 5. and the formula approach. The Court will thus fall back upon Till. PA. although this case presented an occasion upon which it indeed made sense to inquire as to what the relevant market rate of interest might be. E. the Court might still opt for a “prime-plus” formula approach “The Court is constrained. as described in Till. 2005 44 .In re Prussia Associates The Bankruptcy Court’s ruling in the case of Prussia Associates. will automatically be overcome. Put differently. a limited partnership that owns and operates one hotel in King of Prussia. to conclude that. this case demonstrates that the mere existence of an efficient market does not guarantee that the short-comings of the coerced loan approach to rate setting. therefore.D.” Opinion of Judge Raslavich United States Bankruptcy Court. the totality of the evidence presented did not permit a sufficiently informed conclusion to be drawn.

72% “The prime rate as of today is 5. will depend on factors such as the circumstances of the estate.25%).75%. The risk premium. In this instance.In re Prussia Associates (Cont’d) The Court ruled that the appropriate mortgage rate should be set at Prime + 1.” Opinion of Judge Raslavich United States Bankruptcy Court.5% (7. The creditor bears the burden of proof on this issue. Based upon this. will normally fluctuate between 1% and 3%. the Valley Forge Hilton . the Court will require the addition of a 1. per Till. The Court thus views the risks attendant to the proposed loan as neither negligible nor extreme. The appropriate size of the adjustment.5% risk premium to the aforesaid prime rate for the recast [Creditor] loan. and that the value of Fremont’s collateral is appreciating steadily. which owns one hotel. 2005 We note that GGP is a higher quality. per Till. the nature of the security and the duration and feasibility of the reorganization plan. [the Creditor] has raised certain legitimate questions as to the feasibility of the Debtor’s plan. Pennsylvania In re Prussia Associates 45 April 5. however it has done little to overcome the evidence which indicates both that the Debtor’s operations are improving apace. despite the Creditor’s contention that the “market rate” was 9. will be the applicable base rate. therefore. This rate. E.D. lower risk business than Prussia Associates.

Till v. though debt paydown begins day one Highly feasible POR Negiligible risk of nonpayment “The appropriate size of [the] risk adjustment depends.5% 1.0% Seven years. of course. the nature of the security. we believe the court could confirm a plan at a rate that is lower than GGP’s current weighted average interest rate Cash flow in excess of interest expense NOI has increased since the issuance of >95% of GGP’s outstanding loans In the process of deleveraging Cutting costs. lowering development spending and reducing cash dividend Circumstances of the Estate Appropriate RiskAdjustment Rate: Nature of the Security Duration and Feasibility of POR Oversecured Equivalent in value to the present value of the creditors’ claim Prime-plus 0. and the duration and feasibility of the reorganization plan” – Opinion of Justice Stevens. on such factors as the circumstances of the estate.What Factors Will the Court Consider in Determining the Appropriate Risk Adjustment Spread for GGP? Based on these precedents. SCS Credit Corp 46 .

SCS Credit Corp.The Prime Rate May be Sufficient In light of GGP’s highly diversified. the court may deem the Prime rate plus 0% to be a sufficient rate of interest on GGP’s secured debt Footnote 18: “We note that. the prime rate would be adequate to compensate any secured creditors forced to accept cram down loans” – Opinion of Justice Stevens. 47 . high quality portfolio. in a reorganization where the unsecured debt converts to equity. if the court could somehow be certain a debtor would complete his plan. Till v.

What If GGP’s Debt Were Re-Priced to Till-Mandated Rates? .

40 $40.462 2.099 Illustrative Equity Value Propco Enterprise Value (@ 7.612 3.134) (126) $498 Seven Year Period 2011e $2. Represents annualized Q1’09 overhead expense.82 $26.042) (137) $770 2014e $2.548 $10. Prime + 1.0% 75 102 (283) (205) (140) (35) (1.402) (25. Adjusts for seasonality and $38mm of restructuring costs included in overhead line items. cash flows based on 2009-2010 Cash Flow Forecast filed by the Company.119 3.060) (23.082 $32.953) (24.88 $34.583 $9.866 $32.0% 75 108 (286) (210) (145) (35) (958) (177) $985 Total Cash Flow Available for Debt Repurchase Cash NOI (excl MPC) Growth Plus / Less: MPCs (1) Plus: Fee income Less: Overhead from recurring ops (2) Less: Restructuring / Strategic costs Less: Maint Capex / TAs Less: Development capex Less: Other (incl income taxes.542 5.679 $8.161) $652 2010e $2. pfd distributions) Less: Pro Forma Interest expense (3) Less: Cash dividend (10% cash) Cash Flow Available for Debt Repurchase $2.Illustrative Deleveraging Analysis: Prime [3.75% for Secured.412 (2.25%] + 0.155 $31.119 3.390 (0.119 (27.86 $29.1% 50 96 (280) (205) (140) (35) (1.536 3.75% (4.75% and Prime + 1.813 $34.411 0.522) (27.119 3. Aside from Bridgeland adjustment.9%) 15 91 (274) (200) (138) (35) (1.107) (120) $622 2012e $2.119 3.8%) (38) 92 (272) (112) (197) (99) (28) (1.828 $33.119 3.153 $32.871 $27.50% for Unsecured A plan that sets GGP’s secured debt and unsecured debt to Prime + 0.002) (155) $893 2015e $2.5% cap rate) Plus: Cash / GGMI / Dvlpmt Pipeline / MPC (4) Less: Total Debt (EOP) Illustrative Equity Value Per Share ________________________________________________ (1) (2) (3) (4) $33.50% (4.75%).53 Assumes proceeds from ~$90mm sale of Bridgeland improve cash flow in 2009e.28 $46.076) (124) $679 2013e $2.3% $5. Ignores the potential for incremental cost saves.251 $8.119 3.723) (24.993 $12.871 $14.827 3. except per unit data) 2008a 2009e $2.024) (26.9% 25 92 (277) (200) (138) (35) (1. Sets secured debt interest rate at Prime + 0. 49 .16 $25.075) $8. See valuation section for details.50%.481 (2. respectively. would allow for substantial deleveraging and further increase the probability of a highly successful reorganization (US$ in millions.00%) and unsecured debt interest rate at Prime + 1.4%) 73 98 (269) (180) (156) (183) (50) (1.

What’s the Alternative? GGP is not the exception – many REITs have the same problem ________________________________________________ Source: Green Street estimates (5/14/09). A liquidation will lead to a windfall for the secured creditors It will destroy the GGP franchise A liquidation will put downward pressure on real estate values impairing other borrowers’ ability to refinance Nearly all REITs and other leveraged real estate owners will likely suffer the same fate if GGP is forced to liquidate 50 .

Valuation The Grand Canal Shoppes .

Because creditors are not entitled to get more than 100% of their claim. valuation will play an important role in determining the extent to which GGP equity holders receive value in the bankruptcy process .

2009). 53 . similarity of portfolio quality and relevant operating metrics. Simon represents the best comp for GGP Note that ~20% of Simon’s GLA relates to the Mills portfolio. These properties have lower occupancy and rent per square foot than traditional regional malls and deserve a lower valuation than typical GGP assets ________________________________________________ Source: Green Street (May 14.Simon is the Best Comp for GGP REIT Based on size.

983 (2.4% (1) Includes 23mm share issuance on 5/12. CIP (page 41 of operating supplement).598 24. Includes diluted shares as detailed on pg. (6) Applies 25% discount to Simon's share of U. (8) Excludes mgmt income.Simon Trades at an 8.285) (256) 38.218 $3.0x EBIT multiple.S.211 8. (2) Numbers as reported in pro-rata balance sheet. (4) Includes proceeds from 23mm share issuance and $600mm senior note issuance. (3) Includes $600mm senior note issuance on 5/12. (7) Applies 25% EBIT margin to LTM fee income of $130mm and a 13.641 (423) 38. net of 3% fees. Adjusts for non-cash revenue items such as straight-line rent and FAS 141.847) (2. except per share data) Share Price (as of 5/26/09) Shares & Units (1) Market Cap Pro Rata for JVs: (2) Plus: Total Debt (3) Plus: Preferred Debt Plus: Other Liabilities Less: Cash (4) Less: Other Assets (5) Less: Development Pipeline (6) TEV Less: Mgmt Business (7) Value of Simon's REIT LTM Cash NOI (8) Implied Cap Rate $51. (5) Excludes goodwill. 8 of Simon's operating supplement.4% Cap Rate ($ in millions. NOI calculation deducts interest income and land sale gains from other revenue to be apples to apples with GGP.172 276 1.32 343 $17. 54 .

we note that Simon has meaningful liquidity risk. 55 . We believe that Simon’s current valuation reflects a downward adjustment for liquidity risk and the likelihood of future equity dilution ________________________________________________ Source: Green Street (May 14.Simon Debt Maturity Schedule With ~$11bn of debt maturities coming due by 2012. 2009).

585) 722 1.689 (28.174) (121) (1. (6) Excludes goodwill. is somewhere between $9 and $22 per share. and non.911 $9.75% Retail Cap Rate in its calculation of Capitalization Value for covenant purposes (1) Excludes mgmt income.11 High $2.50 We believe the market assigns ≥100bp risk premium for Simon’s refinancing risk LTM Cash NOI (1) Cap Rate Implied Value of GGP's REIT Pro Rata for JVs: (2) Less: Total Debt (3) Less: Preferred Debt Less: Other Liabilities (4) Plus: Cash (5) Plus: Other Assets (6) Plus: Development Pipeline (7) Implied Equity Value Per Share Note that GGP’s 2006 Loan Agreement uses a 6. (2) Applies 50% share to condensed balance sheet of unconsolidated real estate affiliates in 10-Q.5% $33. (5) Includes $400mm DIP proceeds. These are taken into account when valuing the MPC segment. FAS 141. not including GGMI and MPC. ($ in millions. (3) Includes $400mm DIP loan. 56 . Adjusts for non-cash revenue items such as straight-line rent. (7) 40% discount to book value.524 8. (4) Excludes book value of deferred tax liabilities as these mostly relate to MPC.5% $29.777 603 6.777 603 2.524 7.Value of GGP REIT Simon’s cap rate suggests the value of GGP REIT. except per share data) Low $2.174) (121) (1.870 $21.cash ground rent expense.647 (28.585) 722 1.

19. we assume ~75% of GGP’s NOI is derived from ‘A’ assets ________________________________________________ (1) Illustrative Analysis: GGP’s ‘A’ Assets Alone are Greater than its Liabilities ($ in millions) This analysis suggests GGP’s ‘A’ mall assets alone validate GGP’s current market cap.'A' Assets $2.524 75. 7) Therefore.777 603 $260 See page 56 for details. GGP’s ‘A’ assets alone are worth more than its liabilities Assumptions: GGP’s top 50 assets generate 50% of NOI (see pg.5% 8.'A' assets Illustrative Cap Rate .0% $27.0% 1.'A' Assets Less: Total Debt (1) Less: Preferred Debt Less: Other Liabilities (1) Plus: Cash (1) Plus: Other Assets (1) Plus: Development Pipeline (1) Net Asset Value .0% cap rate and (ii) 75% of GGP’s NOI is derived from ‘A’ assets.893 7.'A' assets Asset Value . 57 .038 (28. one is getting the following for free: >130 non ‘A’ malls >30 grocery-anchored strip centers GGMI MPC Hidden Asset Value LTM Cash NOI (1) % of NOI from 'A' assets LTM Cash NOI . 8) We estimate GGP has >80 ‘A’ caliber assets (see pg.174) (121) (1.Why 7.5% is a Conservative Cap Rate Range Assuming that (i) GGP’s ‘A’ caliber assets deserve a 7. When buying the equity at ~$1.585) 722 1.

0% 8.0% Ja n86 Ja n87 Ja n88 Ja n89 Ja n90 Ja n91 Ja n92 Ja n93 Ja n94 Ja n95 Ja n96 Ja n97 Ja n98 Ja n99 Ja n00 Ja n01 Ja n02 Ja n03 Ja n04 Ja n05 Ja n06 Ja n07 Ja n08 Ja n09 ________________________________________________ 58 Source: Green Street.6%. Malls have traded at an average cap rate of 7.6% 6. 2009.0% Apartment Office Industrial Mall 5.Historical Mall Cap Rates Since 1986. Data from January. .0% 7.0% Mall Average: 7. and this average was achieved in much higher long-term interest rate markets Historical Cap Rate Across Various Property Types 10.0% 4. 1986 through February. Cap rates are weighted by (% NOI from primary property type times market cap).0% 9.

We estimate its value to be between $1 and $2 per share ($ in millions. 59 .87 CB Richard Ellis trades at ~15x NTM EBIT GGMI likely deserves a higher multiple given that CB Richard Ellis’s fee stream is more transaction driven ________________________________________________ (1) Pershing Square estimate.Value of GGMI GGMI is one of the few national platforms capable of providing management and leasing services to regional retail centers. except per share data) Low LTM Management Income & other fees EBIT Margin (1) LTM EBIT Multiple Value of GGMI Per Share $100 25.0x $596 $1.0x $326 $1.0% $35 17.02 High $100 35.0% $25 13.

72 As of 12/31/07.391 100. net of 3% transaction fees.280 (392) 2.27 High $3. High case represents Bridgeland net book value as of 3/31/09.559 1. except per share data) Low Estimated Value Per Share Gross Value of MPC as of 12/31/07 (1) Less: Estimated Bridgeland Portion (2) Gross Value of MPC as of 12/31/07 excl.Value of MPC We estimate the net value of GGP’s MPC segment to be anywhere between $0. net (3) Less: Present Value of Deferred Tax Liability (4) Net Value of MPC Per Share $3. Source: page 22 of Q3’08 operating supplement. Gross Value of MPC Plus: Estimated Proceeds from Sale of Bridgeland.888 1. (2) Low case trues up 3/31/09 net book value of Bridgeland as a % of management’s 12/31/07 gross value estimate. The present value of the tax liability will depend on the operating performance of the segment.0% 2.391 20. create meaningful dilution.0% 87 $87 $0.3bn. in certain circumstances. management estimated the gross value of these assets to be $3.148 $6. Bridgeland Memo: Net Book Value (as of 3/31/09) Haircut Adj.311 87 (250) $2. (4) Pershing Square estimate.72 per share ($ in millions.27 and $6. (3) Assumes Bridgeland is divested for $90mm. (1) Represents management’s valuation of the gross assets as of 12/31/07. 60 .280 (721) 2. which could. more than $10 per share This segment generated ~$150mm of net cash flow in 2005 and ~$190mm in 2006 ________________________________________________ Note: Does not reflect impact of Contingent Stock Agreement.

There are other things that we've been telling people for years that we're trying to get done there.” –Bernie Freibaum. including getting a certain portion of the project land in the Northeast corner under control.Hidden Asset Value: Las Vegas GGP’s Las Vegas assets have option value as future development sites “Fashion Show is a little bit of a different situation. given its highly lucrative location right on the strip. So we wanted that flexibility. The income there continues to grow very significantly. well ahead of our comp NOI average. Q1’08 earnings transcript 61 . Former CFO of GGP. and we expect that to continue. where we might be able to do additional development of that site.

shops. entertainment and offices The plan clears a path for GGP to bring to the oceanfront neighborhood as many as: * 4.Hidden Asset Value: Victoria Ward GGP recently received zoning approval to transform 60 acres of land in the heart of Honolulu into a vibrant and diverse neighborhood of residences. parks and public facilities 62 . restaurants and entertainment * 4 million square feet of offices and other commercial space * 700.000 square feet of industrial uses * 14 acres of open space.300 residential units. many of them in towers aligned to preserve mountain and ocean views * 5 million square feet of retail shopping.

There are likely other properties like Park West that are currently under-earning in GGP’s portfolio 63 . GGP spent $105mm developing its Park West property in Peoria. we estimate that this property has the potential to generate substantially more NOI.Hidden Asset Value: Park West In 2007. AZ. Based on the recent photograph below.

GGP’s capital structure consists of a high amount of non-recourse mortgage debt The substantial majority of GGP’s ~$22bn of secured financing is non-recourse 64 .Hidden Asset Value: Non-Recourse Financing GGP’s liabilities are one of its most valuable assets. Non-recourse debt gives the Company a put option at the mortgage amount on properties worth substantially less than their associated mortgage Relative to other REITs.

40 774% High $21.72 ? $30.50 1.GGP’s Assets are Greater than its Liabilities Value Per Share GGP REIT GGMI MPC Hidden Asset Value Low $9.08 2428% Value Per Share Premium to Current (as of 5/26/09) 65 .27 ? $10.11 1.02 0.87 6.

What’s the Downside? Using our most conservative assumptions.36 6.21 Cap Rate 8.83 8.20 9.54 10.69 3.54 8.70 26.40 15.04 14.24 9.73 18.0% $2.92 15.10 6.72 10.0% 7.17 7.5% of the post-reorganization company to break even at today’s stock price Illustrative Stock Price at Various Cap Rates and Post-Reorganization Ownership Levels: Ownership 5.68 13.01 3.53) Yes Yes Yes Yes Yes Yes Yes No Conservative Assumptions: Cap rate of 9.36 11.0% 60.19 stock price as of 5/26/09.5% $2.51 5.51 18.19 Does the Unsecured 10.27 per share No value assigned to hidden asset value opportunities ________________________________________________ Note: Current implied market cap based on $1.79 8.68 7.34 12.0% $1.41 22.25 (3.5% 9.0% 30.0% 50.40 $1. and assuming the conversion of all unsecured debt into equity at the cap rate implied by GGP equity’s current fair market value of $380mm.4% based on the current market cap of $380mm GGMI is worth $1.08 1.42 5.75 10.0% 20.71 3.09 16.18 4.0% 40.19 2.34 8.58 5.61 10.90 13.4% $1.04 22.12 6.0% 100.93 1.41 2.02 17.0% Convert? $0.5% 10.37 4.02 per share MPC is worth $0.30 12.36 21. 66 . equity need only retain 5.

Conclusion GGP equity offers an enormous potential reward for the risk taken High quality. recession-resistant assets Principal risks are bankruptcy court outcome and a further severe economic decline We believe bankruptcy law precedent and public policy will lead to a favorable outcome for shareholders Inflation is the friend of the leveraged mall company The nuisance value of the equity is meaningfully greater than zero 67 .

2009 Pershing Square Capital Management. . L.P.“O” No! October 6.

estimates or projections or with respect to any other materials herein. Inc. This presentation and the information contained herein is not a recommendation or solicitation to buy or sell any securities. are made as to the accuracy or completeness of such statements. Pershing Square hereby disclaims any duty to provide any updates or changes to the analyses contained here including.g. Pershing Square may buy. ("Pershing Square") contained in this presentation are based on publicly available information. Pershing Square manages funds that are in the business of trading . L. without limitation.Disclaimer The analyses and conclusions of Pershing Square Capital Management. and projections reflect various assumptions by Pershing Square concerning anticipated results that are inherently subject to significant economic. Funds managed by Pershing Square and its affiliates own investments in real estate investment trust including long investments (e. It is possible that there will be developments in the future that cause Pershing Square to change its position regarding the companies discussed in this presentation.. without limitation. credit-default swaps. express or implied. Actual results may vary materially from the estimates and projected results contained herein. Such statements. estimates. estimates and projections prepared with respect to. With respect to short investments. such investments may include. among other things. 1 . and other uncertainties and contingencies and have been included solely for illustrative purposes. General Growth Properties. competitive. cover or otherwise change the form of its investment regarding such companies for any or no reason. access to capital markets and the values of assets and liabilities.) as well as short investments (e.buying and selling – securities and financial instruments. sell.P.. No representations.g. Pershing Square recognizes that there may be confidential information in the possession of the companies discussed in the presentation that could lead these companies to disagree with Pershing Square’s conclusions. the historical and anticipated operating performance of the companies. equity put options and short sales of common stock. The analyses provided may include certain statements. the manner or type of any Pershing Square investment. Realty Income Corporation).

We Are Short Realty Income  Realty Income (“O”) is a Triple-Net-Lease REIT  Owns standalone retail properties which it triple-net- Ticker: “O” Stock price: $25 (1) leases to middle-market retailers  Provides sale / leaseback financing to below investment grade and unrated businesses  Capitalization:  Enterprise value: $4.3 billion  Equity market value: $2.8% 2 .  ‘09E Cap rate: 7.34 for the period 9/28/09 – 10/2/09. 2) Cap rate based on 2009E Cash NOI of $316mm.3% (2)  Annualized current dividend yield: 6.7 billion  Total Debt (and preferred) / Enterprise value: ~40%  Recent valuation multiples: 1) Based on a five-day average price of $25.

100 sq ft  Lease term typically 15 . typically specialty-use properties  19mm rentable sq ft in total  Average rentable space per property is ~8.Realty Income: Business Review  Owns 2. 3 .338 predominantly free-standing retail properties  Single-tenant.20 years  Top 15 tenants account for ~53% of rental revenues  Tenants:  Typically leased to regional or local retailers  Many large tenants have junk credit ratings  Many smaller tenants are unrated and compete in struggling sectors of the retail industry  Average remaining lease term is ~11.6 years  Occupancy rate is currently very high at 97%  We believe a decline in occupancy is likely as tenant quality deteriorates… Source: 6/30/09 10-Q.

132 sq ft 4 Alexandria. KS Former Restaurant 3. IN Former Audio / Video Store 6. TX Former Video Rental Store 7.129 sq ft Richmond.366 sq ft Tucker.449 sq ft Hurst. FL Former Day Care Center 5.371 sq ft Wichita.com) as for sale Spring Hill. GA Former Auto Repair Shop 24.Realty Income: Specialty-Use Properties Below are properties listed on Realty Income’s website (www.858 sq ft .realtyincome. LA Former Mexican Restaurant 5.

5 .313 19 $227 Recent share price Fully diluted shares Market Value of Equity Net Debt and Preferred Enterprise Value Rentable Square Feet (mm) Enterprise Value / Sq Ft (1) Cash NOI Cap Rate EV / EBITDA (2) 2009E 7.1x 7.Capitalization and Trading Multiples Realty Income trades at a 2009E Cap Rate of 7.4x 6.668 $1. 2) 2009E Cash NOI ($316mm) is based on estimates for recurring NOI adjusted for straight line rents.4x. Includes all unvested restricted stock.1% 14.645 4. an AFFO multiple of 14.9% 6.3%.6x 14.8%. 3) Recurring AFFO = Estimated recurring net income + D&A –recurring capital expenditures – straight line rent adjustment. 4) 2009E dividend yield annualized for current monthly dividend. and a dividend yield of approximately 6.3% 14. implying a valuation of $227 / rentable sq ft Capitalization $ in mm except per share and sq ft data Trading Multiples $25 105 $2.8% Price / Recurring FFO Yield Price / Recurring AFFO (3) Yield Dividend yield (4) 1) Based on the treasury stock method using all options outstanding.

It aggressively markets itself to retail investors as the “Monthly Dividend Company.” 6 .The “Monthly Dividend Company” Realty Income pays a dividend every month.

Realty Income’s stated business purpose is to maintain and grow its monthly dividend… 7 .

The First 9 Pages of the Annual Report… Cover Page 2 Page 3 8 .

First 9 Pages of the Annual Report (Cont’d)… Page 4 Page 5 Page 6 9 .

First 9 Pages of the Annual Report (Cont’d)… Page 7 Page 8 Page 9 10 .

Short Thesis: Investment Highlights .

Realty Income’s standalone locations generally lack anchor tenants to drive traffic and assist in re-leasing  O’s profitability is levered to occupancy  We believe the current 97% occupancy rate will decline due to tenant deterioration  Realty Income is responsible for all expenses (taxes. etc…)  Junk or unrated credits.Short Thesis: Investment Highlights  Poor tenant quality  High concentration of discretionary retail tenants (casual dining restaurants. day care centers. movie theaters. many with bankruptcy potential  Properties often have limited alternative use and high re-leasing risk  Unlike prime shopping center locations. insurance) and capital expenditures associated with a vacant property until it is re-leased  A decrease in occupancy could materially impact NOI 12 .

Realty Income would have a stock price of ~$14 (down ~46%) 13 .Investment Highlights (cont’d)    Balance sheet assets doubled from 1/1/05 – 12/31/07  O was a leveraged lender to private equity during the real estate and credit bubbles Dividend coverage is minimal  If O misses its dividend.5% decline in NOI. the Company’s reason for being is in question O trades at a substantial–and we believe unjustified–premium to private market valuations  Asking prices for properties similar to O’s are at a 10%-11% cap rate  We don’t believe that O shareholders are being paid appropriately for tenant risk   We believe that the “monthly dividend” marketing tactic has created demand for O stock from retail investors who may not value the company appropriately At a 9.5% Cap Rate and a 7.

but the Company has refused QUESTION: Why? ANSWER: We believe that O’s tenant quality is poor and the company is concerned about the impact of transparency on its stock price 14 .2% of its minimum rental income  Limited transparency as to:  Names of tenants  Credit of tenants  Average credit rating of total tenant pool  Individual tenant contribution to revenue Analysts and investors have asked for more tenant disclosure.Tenants: O Does Not Disclose Its Tenants  Unlike many other REITs. for example. Realty Income does not disclose its tenants  Simon Property Group. discloses tenants representing as little as 0.

And a lot of times on these calls. We do not discuss the individual business of tenants.” .” Company Representative: “Yes.” Company Representative: “And we never referred to them as that tenant. do you have any exposure? I mean it's obviously not their whole -. It's just a fraction of their system.22 didn't move.” 15 Analyst: “The other thing is Rite Aid announced that they're seeking rent relief on 500 stores earlier this quarter -.2 times. I'm just wondering if you have any exposure to that.” Analyst: “Okay. We have 118 tenants. 1.22 times [EBITDAR-to-rent coverage] at the low end.or I guess in the second quarter. so that's the policy we'll maintain. Camping World.their entire store base. people get mentioned who aren't our tenants. if they're one of the ones that only discloses annually? I was just surprised to see that that 1.” Company Representative: “Right. We could sit here all day. it's not our policy to comment on our individual tenants and what they're doing. Of the 24 Rite Aids that are in your portfolio. that's at that 1.Tenants: O Does Not Disclose Its Tenants Q1 2009 Earnings Call Q2 2009 Earnings Call Analyst: “I was just wondering if the RV dealer. so I wouldn't comment to that.

regional retailers Nearly 40% are restaurants (predominantly casual dining restaurants) and convenience stores .Tenants: Discretionary Consumer Risk Realty Income Tenant Industries Restaurants Convenience stores Theaters Child care Automotive tire services Health and fitness Automotive service Drug stores Motor vehicle dealerships Sporting goods Home improvement Other Total Source: 6/30/09 10-Q As of 6/30/09 21% 17% 9% 8% 7% 6% 5% 4% 3% 2% 2% 16% 100% 16 Although Realty Income does not disclose its tenants. it provides tenant industry information The vast majority of its tenants are discretionary.

75% yield Adj. 1) Source: Moody’s. Debt/ EBITDAR: 4.4x (3) Morgan Stanley Private Equity LBO Adj. O’s website. “Realty Income Corp (O): Non-Investment Grade Tenant Credit Weakness and Margin Pressure Add Risk. LTM ended June 2009.9x (4) Buffets (owns Ryan’s Grill Buffet Bakery) Pantry Junk: B+   Estimated ~20% of Realty Income’s revenues (6) La Petite Academy (Learning Care Group) Junk: B-   Kerasotes Showplace Theatres Movie theatre chain Junk: B-  Day care operator Knowledge Learning Corp. Debt/ EBITDAR: 7. 2) Source: Company filings. Debt/ EBITDAR: 5.0x (2) Bonds trade at 9. leverage estimate for LTM ended June 2009. leverage estimate for LTM ended June 2009.” dated 8/1/08. leverage estimate for LTM ended June 2009. 17 . O’s filings. Debt / EBITDAR: 5.5x (1) Emerged from bankruptcy in 2009 Adj. (Children’s World) Junk: B1  Adj. Capitalized operating rents calculated at 8x rent expense. They are all junk credits with high leverage Tenant Description Casual dining / steak-buffet restaurants Regional convenience store operator (Southeast US) Day care operator Credit Rating Junk: Caa1   Commentary Adj.Largest Tenants Are Poor Credits We list below some of Realty Income’s largest tenants that we have been able to identify. 3) Based on Learning Care Group (parent company) S&P corporate ratings. 6) Based on Citi sell-side report entitled. Based on Moody’s estimates post emergence from bankruptcy. 5) Source: Moody’s. various press reports and O’s earnings conference calls.7x (5) Sources for tenants: Compiled using Wall Street Research. Debt / EBITDAR: 6. April 2009. 4) Source: S&P.

Some tenants have already filed Chapter 11 and we believe many could be forced to liquidate Listed in no particular order Tenant Description Casual dining restaurants    Leverage / Commentary Largest Pizza Hut franchisee Adj.13%+ yield LTM EBITDA is negative Specialty retailer of home furnishings Specialty apparel retailer Convenience store operator     Leonard Green LBO (2006) Mezz.7x Merrill Lynch PE LBO (2006) Adj.Other Major Tenants Are Also a Major Concern… Other major tenants are mostly regional discretionary retailers. Loan implied yield of ~18% O provided $100.8x NPC International Midas Big 10 Tires Retail automotive services Tire retailer   Filed for Chapter 11 (4/2/09) Realty Income major tenants(1) Friendly’s Rite Aid Pier 1 Imports Sports Authority Circle K Casual dining / ice cream distributor Drug store chain  Sun Capital LBO (2007)   Adj. 1) We define a major tenant as renting 10 or more Realty Income properties OR involved in a sale/leaseback transaction with O for $30m or greater. various press reports and O’s earnings conference calls. Debt/ EBITDAR: 5. O’s website. O filings. Debt / EBITDAR: Company filings (capitalized operating rents calculated at 8x rent expense) and recent credit rating agency reports. including several 2005-2007 vintage LBOs. 18 . Sources for tenants: Compiled using Wall Street Research.5m of saleleaseback financing for Alimentation Couche-Tard acquisition of Circle K Source for Adj.6x Bonds trade between 10 . Debt / EBITDAR: 5. Debt/ EBITDAR: 9.

typically require significant capital investment and brokerage commissions. and may be re-leased at materially lower rents  Tenants armed with market and/or bankruptcy leverage will likely seek to renegotiate rents 19 .If a Tenant Files for Bankruptcy… Tenant bankruptcy filings raise a number of issues:  Tenants in Chapter 11 could choose to reject their lease(s)  Vacant properties have re-leasing risk.

500 $1.4bn to $3. Realty Income’s assets more than doubled from $1. .000 2006 $350mm $1.1bn as the company became a financing source for LBOs and corporate M&A Realty Income Total Assets $3.1 bn $2.500 $3.000 2007 Undisclosed amount $500 ~$340mm LBO of Friendly’s Sale/LB for 160 Restaurants restaurants 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20 2008 Note: Realty Income entered into a sale/leaseback transaction with Friendly’s in October 2007.Balance Sheet Doubled from 1/1/05 – 12/31/07 During the peak of the real estate and credit bubbles. shortly after the August 2007 LBO of Friendly’s by Sun Capital.4 bn $860mm LBO of Ryan’s Restaurants (acquired by Buffets) CaxtonIseman Capital (owner of Buffets) Sun Capital $1.000 1/1 / Cr 0 5 – 1 ed it B 2/31 ub /07 ble $3.500 Realty Income provided financing for the following LBOs: Year Financing Amount Transaction LBO Firm $2.

Small declines in NOI will stress the company’s ability to maintain its dividend Minimal room for error Decline in Recurring 2009E NOI (1) 0.76 $1.0% $1.71 103% NA -2.76 $1.5% $1. and $86mm of interest expense.0% $1.Dividend Coverage is Minimal Dividend coverage is minimal.71 94% -6% -7. $3mm of capex and straight line rent adjustments.71 89% -11% -10.71 85% -15% 1) Calculation of AFFO assumes $21mm of G&A expenses.61 $1.5% $1.53 $1.68 $1.0% Recurring AFFO/share (2) Current annualized dividend Dividend coverage Required Dividend Decrease $1.71 98% -2% -5.46 $1. 21 . 2) Recurring AFFO = Recurring Net Income + D&A – Cap Ex – straight line rent adjustment.

O’s Net PPE is approximately $2.8bn. we estimate that O must maintain a Tangible Net Worth of ~$1.6bn (as of 6/30/09) implying that O has an approximate $0.What Could Happen If…?  Despite having no debt maturities until 2013. 2) Minimum Tangible Net Worth covenant: Per the Credit Agreement (5/15/08). 22 .5 months of dividends  O may need to reduce its cash dividend which we expect would adversely impact its stock price  Many retail shareholders own the stock for its monthly dividend  We believe that O’s stock price depends on its ability to maintain its monthly dividend 1) Dividends and Other Restricted Payments covenant: Per the Credit Agreement (5/15/08). Realty Income could face significant problems if its tenants continue to go bankrupt  Even a small decline in NOI could prevent the company from funding its current dividend from operating cash flow  Liquidity from O’s current revolver may be at risk if there are sufficient asset writedowns or sufficient reductions in FFO(1) (2)  Asset writedowns could be caused by tenant bankruptcies and / or declines in real estate values  Current cash on hand represents only about 2.3bn cushion under that credit facility.3bn and that Tangible Net Worth is currently ~$1. quarterly dividends and share repurchases may not exceed 95% of FFO plus preferred dividends for each of the trailing four quarters.

Ability to issue equity at a valuation materially higher than private market values We believe that if Realty Income’s stock price were to decline meaningfully. its business model could be in jeopardy 23 .O’s Business Model and its Stock Price We believe that Realty Income’s ability to grow its dividend is a function of several factors including: 1. Performance and creditworthiness of its existing tenant portfolio 2.

82 Average price of equity offerings: $25.$26.79 . based on this history 24 .15 Denotes equity offering Given O’s recent stock price of ~$25. Realty Income has issued equity to the public five times at an average price of $25 and at ranges from $23.Equity Offerings: “Ceiling on Valuation” Since 2005. we would not be surprised if Realty Income issues equity soon.

TN 9.Properties Offered for Sale at a 11% Cap Rate Current asking prices for some Ryan’s restaurants (one of O’s largest tenants) is an 11% cap rate.601 Price / SqFt $178 Cap Rate 11% Ryan’s Grill Buffet Bakery Millington.3% cap rate Tenant Ryan’s Grill Buffet Bakery Location Indianapolis. IN 12.752 $176 11% Ryan’s Grill Buffet Bakery Springfield.066 $155 11% Source: All listings with Colliers International. AL 10.557 $148 11% Ryan’s Grill Buffet Bakery Simpsonville. IN Sq Ft 9. In comparison. MO 11.996 $156 11% Ryan’s Grill Buffet Bakery Gardendale. NC 10. Realty Income trades at a 7.403 $165 11% Ryan’s Grill Buffet Bakery Seymour.164 $169 11% Ryan’s Grill Buffet Bakery Oak Ridge. 25 . SC 10. TN 10. AL 11.607 $161 11% Ryan’s Grill Buffet Bakery Gastonia.331 $139 11% Ryan’s Grill Buffet Bakery Foley.

000 $500.860 6. In comparison.703 61.000 Price/ Bldg Sq Ft $49 $109 $95 $102 $106 $108 $199 $209 $58 $106 $68 $194 $166 $51 $140 $83 $98 $150 $95 Not one property is offered for sale at or above O’s valuation Avg Listing Price / Sq Ft Realty Income Valuation Enterprise Value / Sq Ft Premium 26 $115 $227 97% Source: www.892 0.000 $735.000 $440.588 8.327 20..880 9.75 Acres 31.743 58.400 4. a large tenant of O’s.625 4.206 8.000 $870.788 71.000 $925.000 $600.000 $500.000 105. Realty Income trades at $227/sq ft.149 23.com/xls/Real-Estate-Listings.990 22.000 $250.631 6.000 $1.25 Acres 34.166 6.335 4.380 5.351 39.000 $460.000 $850.130 7.312 Land Size 1 Acre 48. on average.xls . lists properties for sale on its website at $115/sq ft.000 $995.000 $990.3 Acres 23.000 $990.021 56.739 14.850 96.200.054 6.000 $650.947 0.982 4.182 6.204 1.365 4.000 $700.000 $900.225 Listing Price $299.000 $925.243 4.knowledgelearning.065 33. a 97% premium City Waterford Decatur Jonesboro Snellville Beverly Hattiesburg Glassboro Lawrenceville Desoto Garland Houston Sterling Kennewick West Allis Temecula Farmington Hills Indianapolis Sugarland Lebanon State CT GA GA GA MA MS NJ NJ TX TX TX VA WA WI CA MI IN TX PA Bldg Size(sq ft) 6.Unwarranted Premium to Private Market Value Knowledge Learning Corp.724 7.

And I'd probably estimate that we were 75 to 100 basis points in cap rate above where the one-off market was. were a function of the abundant and cheap financing that was out there. I went back and looked. and in those years bought about $1.4% to 8. And then going back and looking at transactions going all the way back before '94.Management’s View on Private Market Valuations “In talking about cap rates -. like a lot of assets in many different areas. and it shouldn't be too surprising to see cap rates moving up again. which was really a function of buying in bulk and you get a better price and a better cap rate. we were buying kind of in the 8. but I think it really is worthwhile saying -.5. and if you go back to when we went public in '94 and take it to 2003.I mentioned this last quarter. Realty Income. and the cap rates from during that period were always between 10 and 11.” “So I really think that kind of the 7 and 8 caps that you saw at retail and even some of the 9 caps on the institutional transaction. CEO Q2 2009 Conference Call 27 .” “From 2003 to 2004. cap rates were pretty much always up 11% or so.” --Tom Lewis.5 billion worth of property.and that is if you look back on the 40 years that we've been doing this and kind of follow cap rates. from 2005 to 2008. the caps were around 9.7% cap rate range.

then why should Realty Income trade at a 7.If private market cap rates today for Realty Income-type properties are between 10% .11%.3% cap rate? Why is a ~40% premium to NAV justified? 28 .

Realty income has outperformed the U. 2008 1) As measured by iShares Dow Jones Real Estate Index Fund 29 . real estate index (1) by ~35% since January 1.S.RE Index Versus Realty Income Since 1/1/2008 Despite its tenant exposure.

COO Gary Malino sold ~9% of his holdings 30 .69. CFO) own less than 1% of the company despite having an average tenure at the company of 18 years  CEO. COO. insiders own less than 1. COO and CFO have not made an open market stock purchase in over six years Material insider selling  On August 3. below today’s stock price  On the same day. 2009.5% of the company  The top three executives (CEO.Insider Ownership and Selling Realty Income does not foster an ownership culture  Despite restricted stock grants. CEO Tom Lewis sold ~20% of his holdings at $23.

Insider Ownership and Selling Are Insiders and Shareholders playing on an even field?  Why should Management be permitted to sell stock knowing the identity of all tenants and their creditworthiness while shareholders are kept in the dark?  We believe that the SEC should immediately require Realty Income to disclose to all shareholders a list of its tenants and financial information sufficient to assess their creditworthiness  We believe that there is no competitive or other business reason why Realty Income should not be required to do so 31 .

5% 11.0% 32 -2.5% 9.0% 10.0% 9.0% -29% -33% -36% -37% -40% -43% -43% -46% -49% -49% -52% -55% -54% -57% -60% -59% -62% -65% Cap rate 8.0% -7. if NOI drops only 5% to 10% and O’s cap rate increases to 9.5% 10.5% -5.5%.93 8.“Short” Sensitivity Analysis Stock price at various cap rates and decline rates in 2009E Cash NOI Assuming 2009E recurring Cash NOI of $316mm.0% $19 $18 $17 $16 $17 $16 $15 $14 $15 $14 $14 $13 $14 $13 $12 $11 $12 $12 $11 $10 $11 $10 $10 $9 -12.0% -7.5% 9.5% 10.0% 9.5% -10.5% 11.5% -10.5% to 10.0% 10.5% -40% -46% -53% -58% -63% -67% Cap rate .5% $15 $14 $12 $11 $9 $8 Stock price return (from $25) at various cap rates and decline rates in 2009E Cash NOI Decline in 2009E Cash NOI -5.0% Decline in 2009E Cash NOI -2.5% -26% -33% -40% -46% -52% -57% -12. Realty Income’s stock price could decline ~43% to ~60% from recent prices $17.

Collins Robert J. no options are granted  In 2001. Press 33 Title CEO. Pfeiffer Richard G. Vice Chairman COO CFO General Counsel EVP. Israel Laura S. King Michael K. Research SVP. Portfolio Management SVP. Lewis Gary M. Realty Income discontinued the practice of granting stock options in favor of only granting stock awards  O’s 2008 10-K: “We believe that stock awards are a more appropriate incentive to our executive officers given the focus of our business on monthly dividends”  Vesting program for restricted stock is highly unusual  Based on age rather than years of service  New program approved in August 2008 Employee Age at Grant Date 55 and below 56 57 58 59 60 and above Vesting period 5 years 4 years 3 years 2 years 1 year Immediate Executive Thomas A. Meurer Michael R.How is Management Compensated?  Management is compensated with restricted stock. Assistant GC SVP. Malino Paul M. Head of Acquisitions Age 56 51 43 48 60 49 47 35 .

3% cap rate. we believe there is little downside to the short  ~40% premium to current private market valuations  Company has historically issued stock at these levels  “Ceiling on valuation” 34 .Conclusion  We believe that Realty Income’s current shareholders are not being sufficiently compensated for the company’s tenant risk  Shareholders and investors should demand transparency from O’s management regarding its tenants  If tenant deterioration continues…  Realty Income’s cash flow may not be sufficient to pay its current dividend  We believe that the SEC should require Reality Income to disclose its tenants because without this information it is nearly impossible to value the company and its associated risks  At $25 and a 7.

.P. 2009 Pershing Square Capital Management.Prisons’ Dilemma October 20. L.

Such statements. the historical and anticipated operating performance of the companies. This presentation and the information contained herein is not a recommendation or solicitation to buy or sell any securities. are made as to the accuracy or completeness of such statements. estimates. ("Pershing Square") contained in this presentation are based on publicly available information. It is possible that there will be developments in the future that cause Pershing Square to change its position regarding CXW. Pershing Square hereby disclaims any duty to provide any updates or changes to the analyses contained here including. among other things. and other uncertainties and contingencies and have been included solely for illustrative purposes. Pershing Square may buy. access to capital markets and the values of assets and liabilities. The analyses provided may include certain statements. Pershing Square manages funds that are in the business of trading – buying and selling – securities and financial instruments.P. sell. Pershing Square recognizes that there may be confidential information in the possession of the companies discussed in the presentation that could lead these companies to disagree with Pershing Square’s conclusions. estimates or projections or with respect to any other materials herein. and projections reflect various assumptions by Pershing Square concerning anticipated results that are inherently subject to significant economic. No representations. Actual results may vary materially from the estimates and projected results contained herein.Disclaimer The analyses and conclusions of Pershing Square Capital Management. cover or otherwise change the form of its investment in CXW for any reason. without limitation. the manner or type of any Pershing Square investment. Funds managed by Pershing Square and its affiliates have invested in common stock and total return swaps on Corrections Corporation of America (“CXW”). estimates and projections prepared with respect to. L. express or implied. competitive. .

50 (1) Largest private prison company Fifth largest prison manager behind California.1 billion Equity market value: $2.2% ’09e P / Free Cash Flow Per Share: 13.Corrections Corporation of America Corrections Corp owns and operates private prisons Owns the land and building at most of its facilities Ticker: “CXW” Stock price: $24.3x 1) All financials in this presentation assume a share price of $24. 2 . the Bureau of Prisons. Texas and Florida Capitalization: Enterprise value: $4.9 billion Recent valuation multiples: ’09e Cap rate: 12.50.

916 beds ■ ~14% Facility EBITDA margin ■ Subject to higher competition ~90% of Facility EBITDA ________________________________________________ ~10% of Facility EBITDA Note: Facility EBITDA is before G&A. 3 . high-margin business Managed Facilities ■ CXW operates facilities on the government’s behalf. but does not own the underlying property ■ 20 managed facilities ■ 25.Overview of CXW CXW operates its business in two segments: Owned & Managed Facilities and Managed Facilities Owned & Managed Facilities ■ CXW owns the land and building for the vast majority of its owned & managed facilities ■ 44 owned & managed facilities ■ 61.054 beds ■ ~35% Facility EBITDA margin ■ High-multiple.

Aug. 2009. 4 .Strong National Footprint ________________________________________________ Source: CXW investor presentation.

the District of Columbia and multiple local agencies Other States Alaska Arizona Hawaii Kentucky Minnesota Oklahoma Vermont ________________________________________________ Source: CXW investor presentation. 2009. 5 .Tenants Unlikely to Default CXW provides services under management contracts to all three federal agencies. 19 state agencies. Aug.

________________________________________________ Source: CXW investor presentation.S. Spare Capacity (includes development projects not yet completed) He who has the beds gets the prisoners NA ~12.000 NA Source: Company filings and Pershing Square estimates. 6 .000 ________________________________________________ ~7.Market Leader CXW is the clear leader in privatized prisons. controlling approximately 46% of the private prison and jail beds in the U. 2009.000 ~2. Aug.

Large and Under-penetrated Market CXW addresses a total U. Aug.000 in 1990 to over 185.000 today (17% CAGR) ________________________________________________ Source: Bureau of Justice Statistic: Prison Inmates at Midyear 2008. 2009. of which only ~8% is outsourced. Privatized beds have grown from nearly 11.S. market that exceeds $65bn. 7 . CXW investor presentation.

Across the state of California. or in excess of. 2009.Supply / Demand Imbalance Public-sector correctional systems are currently operating at. design capacity ________________________________________________ Source: CXW investor presentation. Aug. facilities are running at 170% of designed capacity 8 .

9 . Private CXW has historically outperformed the public sector in safety and security ________________________________________________ Source: CXW investor presentation. 2009.Competitive Advantage: State vs. Aug.

Competitive Advantage: State vs. California had a $34k annual operating cost per inmate in 2005. States vary widely. for instance. Public Spending – Forecasting America’s Prison Population 2007 – 2011.5 yrs <$70k ~$16k New ________________________________________________ (1) Source: 2007 Pew Charitable Trusts report – “Public Safety.” Annual Operating Cost per Inmate for the year 2005. Private (Cont’d) As a private company. 10 . CXW has cost and efficiency advantages compared with its largest competitor State / Federal Lead Time for Prison Build Cost to Build / Bed Annual OpEx / Inmate (1) Average Age of Facility Private 5 to 8 yrs ~$100-$150k $24k Old ~1.

private prison operators were able to capture 49% of the incremental growth in U.S. inmate populations in 2007 11 .Increasing Market Penetration Because of constraints in new public prison construction.

have grown regardless of economic factors 12 . inmate populations in the U.Historical Prison Population Growth Historically.S.

Prison Populations Expected to Rise 13 .

000 7.000 14 Federal Demand Drivers BOP: Shift from 137% to 115% capacity (1) BOP: Undeveloped growth (2) USMS / ICE (3) Incremental Federal Demand CXW inventory (as of 8/1/09) (4) Incr.000 bed inventory over the coming years The Federal Bureau of Prisons (“BOP”) is currently operating at 137% of rated capacity. The BOP projects its inmate population will grow by ~19.000-65.000 new beds planned for development by 2012 The United States Marshals Service (“USMS”) has a population of about 60.Federal Demand Drives Growth Federal demand alone could fill CXW’s ~12. Federal Demand as % of Inventory Capture Rate Required to Fill Inventory ________________________________________________ (1) (2) Beds 28. Aug.827 inmates in BOP facilities as of 9/26/09. Assumes ~5% growth of USMS / ICE inmate populations over the next three years. with a stated desire to operate closer to 115% The BOP projects that between 2008 and 2011 its population will grow by ~19. Includes 2.572 beds not yet developed. . Assumes the shift from 137% to 115% takes place over the next three years.000 15.000 11. Immigration and Customs Enforcement (“ICE”) detainee populations have grown by over 300% to ~35.000 inmates. 2009. with just over 12. Source: BOP website.000 50.000 and has grown 8%-10% per annum over the last five years Since 1994.000 inmates from 2008 to 2011 but has only planned the development of ~12.979 417% 24% (3) (4) Based on 172. Source: CXW investor presentation.000 beds.

” – Damon Hininger.State Demand Drives Growth State prison populations are projected to increase by more than 90. CEO.000 over the next three years. If CXW can capture ~13% of this demand. it could achieve 100% occupancy “Of the 19 state customers that CCA does business with. we are currently estimating that those states will have an incremental growth that will be twice as much as their funded plan capacity by 2013. Q1 Earnings Call 15 .

5% 3.6% 4.9 86.6% 1.4 94.9% 1.0% 9 40.0 88.8% 35 25.6% 8.5 98.760 1. jail and ICE population.701 1.1 93.Supply / Demand Imbalance Drives Growth If private prisons can capture just 25% of the incremental growth in the U.7% 2.2% 26 25.5 95.2% 9.3% Memo: Pershing Square Forecast Incremental CXW Beds (Owned) Occupancy (Owned) 1.8% 7.7% 48 25.655 1.6% 1.5% 34 25. Excludes juvenile.9% 32 16.5 98.5% 1. Assumes 35% private capture rate in 2008 and 25% private capture rate going forward.3% 1.0% 6 40.4 87.5% 1.5 98.546 2.7% 8.0% 24 25.1% 5 27.0% 6 40.4 Occupancy (Owned) 90.3 88.3 91.3% 1. This analysis assumes an incremental 140.7% 7.000 prisoners by YE 2012.3% 147 5.1% 13 33.4 90.9% 4.2% 3.6% 7 18.1% 9.4 94. jail and ICE population.5% 1.3 88.5% 1.7% 139 10.000 prisoners by YE 2011.627 3.0% 126 10.580 2.0% 3.4% 153 4.5% 159 4. inmate population. Source ('08-'12): In 2007. Pew Charitable Trust estimated there will be an incremental 153.4% 4.0% 2.0% 3.6% 3.6% 4. Excludes juvenile.677 1.3% Potential upside to our estimates (1) Source ('04-'07): Bureau of Justice Statistics and Office of Detention Trustee Statistics.1% 107 5.0% 6.0% 8 40.5% 2005a Potential Growth Opportunity 2006a 2007a 2008a 2009e 2010e 2011e 2012e We estimate CXW’s owned beds represent >40% of the industry’s spare capacity Incremental CXW Beds (Owned) 1.0% 1.5% 12 33.0% 8 43.8% 2.S.726 1.2% 9.0% 177 5.4 93.3% 9.4% 27 49.2% 33 21.1 93. 16 .795 2.8% 22 35. Private prison operators captured 49% of the growth in 2007 as state budget pressures have postponed new prison construction (Beds in thousands) 2004a Market Analysis Total Inmate Population (MM) (1) Growth Private Inmate Pop'n (000s) (2) Growth % Private Incremental Private Inmates Incremental Total Inmates Private Capture Rate (2) Incremental Private Inmates CXW Capture Rate (Owned only) 1. (2) Source ('04-'07): Bureau of Justice Statistics and Office of Detention Trustee Statistics.9% 168 5. CXW should achieve >98% occupancy in its Owned & Managed business by 2012.2% 114 6.7% 1.0% 2.6 89.

S. recidivism rates drive post-recessionary inmate population growth Of 300. 67.5% were rearrested for a new offense within three years (1) 17 .000 prisoners released from 15 states in 1994.Near-Term Catalysts: Post-Recession Growth Inmate populations have historically grown at an accelerated rate after recessions Increased crime during times of economic weakness and high U.

Aug. 2009. 18 . CXW management estimates its inventory of existing beds could generate an additional ~$100mm of EBITDA ________________________________________________ Source: CXW investor presentation.Near-Term Catalysts: Increased Occupancy Drives EBITDA At current margins.

74) (10.88 (32. food. we believe the actual number will be somewhere between $100mm and $230mm ________________________________________________ Source: CXW Q2’09 financial supplement. 19 We further note that some of the beds in CXW’s inventory have not yet been developed. See page 33 of the CXW investor presentation for details of the assumptions used to derive management’s ~$100mm estimate. (3) This analysis is illustrative. insurance. property taxes. repairs & maintenance and other similar expenses.68) $23.46 35. and therefore do not yet have associated fixed expenses.1% $66. welfare and other similar expenses.88 (10. however.0% Implies ~$100mm of incremental EBITDA Implies ~$230mm of incremental EBITDA While this contribution margin analysis implies $230mm of incremental EBITDA.Near-Term Catalysts: Operating Leverage Management derives its ~$100mm estimate by applying CXW’s Q2’09 margin to the lease-up of its existing inventory. Also includes utilities.68) $56. (1) The vast majority of CXW’s fixed expense is labor. . approximately 84% of the costs in CXW’s Owned & Managed Facilities segment are fixed CXW Facilities (Owned-only) Revenue per man-day Less: Fixed expense per man-day (1) Less: Variable expense per man-day (2) Facility EBITDA per Man-Day Margin Contribution Margin Analysis: (3) Revenue per man-day Less: Variable expense per man-day Facility EBITDA per Incremental Man-Day Contribution Margin Q2'09 $66.20 84. (2) Includes legal. We note that there will be some amount of incremental fixed expense associated with the ramp-up of CXW’s inventory as staffing requirements increase with occupancy. medical.

3 (7. Q408a Q109a 126.7 (8.1 1.3%) Q409e 117.1 Q208a 126.6%) Q309e 117.5 Quarter Ended.5% of total shares) provides a tailwind for NTM free cash flow per share growth Recent Share Repurchases Timeframe November through December 31 January through February February through May Total Memo: Remaining Buyback Authorization Shares (mm) Amount (mm) 1.7 $16.6 (4.0 $125.5 Q308a 126.2 10.Near-Term Catalysts: Stock Buyback CXW’s repurchase of 10.0 $25.3 (7.68 Q108a WASO Growth (YoY) 126.4 87.61 $11.4%) Q209a 115.1 120.0%) 20 .4 8.7 million shares in Q4 ’08 – Q2 ’09 (~8.29 $10.09 $15.0 Per Share $15.6 21.

73 $1. depreciation expense meaningfully exceeds maintenance capex. .20 $0. 2009.00 $1.80 $1.40 $0.53 $0.07 Diluted EPS ________________________________________________ Normalized FCFPS 21 Source: CXW investor presentation.20 $1.00 2003a 2004a 2005a 2006a 2007a 2008a $1.40 $1.40 $1. Aug.40 $0. CXW’s free cash flow per share is substantially greater than earnings per share $2.06 $0.Strong Free Cash Flow Generation Because prisons are made of concrete and steel.20 $1.60 $0.61 $0.86 $1.59 $0. As a result.84 $0.00 $0.60 $1.64 $0.80 $0.

4x. Its cash interest expense is less than 6%. 2009. Aug. and more than 80% of its debt is fixed rate ________________________________________________ Source: CXW investor presentation. CXW’s interest coverage ratio was 5. Its next debt maturity is not until 2012. 22 .Strong Balance Sheet As of Q2’09.

Aug. 23 . 2009.High Returns on Capital ________________________________________________ Source: CXW investor presentation.

920 20. Jr. Seiter William K. (3) Based on 117. 2009.295 144. DeConcini John R.934 83.453. Mullenger G. Rusak (2) All Directors & Exexutive Officers as a Group Percent of Common Stock Beneficially Owned (3) ________________________________________________ Title Director Chairman Director Director Director Director Director Director Director Director Director Director Director Chief Executive Officer Chief Financial Officer General Counsel Chief Corrections Officer Chief of Human Resources Total Beneficial Ownership (1) 525. Michael Jacobi Thurgood Marshall.998 47. Puryear.Culture of Equity Ownership Board and management own more than 6 million shares of CXW (1) Name of Beneficial Owner William F.742 91. 2009 proxy and Bloomberg.410 1. Wedell Damon Hininger Todd J.455 50. Deems shares that could be purchased upon exercise of stock options as shares outstanding.984 6. Jr. (2) William Rusak was succeeded by Brian Collins on September 14. III John D.166 97.232 352. Prann.916 1.711.282. Charles L. 2009 or within 60 days thereafter.124 5.700 72. 24 .489 134. Joseph V. IV Richard P.308 5.012 shares outstanding as of March 1.500 100.681. Overby John R. Andrews John D.284 87. Burch. Correnti Dennis W. (1) Includes shares that could be purchased upon exercise of stock options at March 1.523 1. Ferguson Donna M.4% Source: CXW March 31.377.072 159. Alvarado Lucius E.A. Horne C. 2009. Russell Henri L.

Valuation .

95 5.2% 13.5x ________________________________________________ (1) (2) (3) Applies an 8.7% 470 24.5% $1.057 (400) $3.2x 2009e 10. NOI is defined as Facility EBITDA from CXW’s Owned & Managed segment (“owned only”).5% $1.8x 9.626 95.Maint Capex Margin 359 22.6% $1.1x 11.005 53.CXW Capitalization and Multiples CXW trades for ~13x free cash flow per share or at an implied cap rate of 12.9% $2.889 62.3x 2010e 9.2% 2010e 54.3x 11.7% 402 24.9% $2.990 94.5% $1.043 86. 26 .218 63.657 445 12.0x multiple to Facility EBITDA from the management business.626 91.650 3.7% 12.4% 2011e 58.6% Cap Rate Analysis TEV Less: Mgmt Business (1) PropCo TEV 2009e NOI (owned only) (2) Cap Rate $4.2% EBITDA Margin 395 24.3% Normalized FCFPS (3) Growth $1.8% EBITDA .868 61. except per share data) Capitalization Share Price FDSO Market Cap Plus: Debt Less: Cash & Equivalents TEV $24. Assumes a 38% cash tax rate.8x 8.0% 372 21.50 117 $2.6x 15.5% 362 22.1% 2012e 60.34 19.6% 8.7x 10.932 5.599 8.763 63. Assumes CXW uses future free cash flow to repurchase shares at a premium to market.2x 12.3% 518 26.6% 414 22.90 23.828 6.Maint Capex Implied Cap Rate P / Normalized FCFPS 10.0% 10.0% $1.0% 467 27.6x 2011e 8.8% 14.5x 2012e 7.6% $1.7% 51.723 4.4% $1.8% Trading Multiples 2008a TEV / EBITDA TEV / EBITDA .3% 419 24.84 6.212 (28) $4.8x 14.1% 571 29.3x 11.057 Summary Financials 2008a Avg Occupied Beds (owned only) Avg Total Beds (owned only) Occupancy (owned only) Revenue Growth 2009e 52.9x 12.73 23.3% 462 25.1% 514 28.1% NOI (owned only) (2) Margin 431 27.2% (US$ in mm.340 88.0% 445 27.873 1.

Historical Stock Chart $35 $30 $105.50 $25 $20 $15 $10 $5 $0 $85.054 Weighted Average Shares Outstanding 125.3 125.000 $45.000 Jan-07 Jul-07 Feb-08 Stock Price Sep-08 TEV / Bed Mar-09 Oct-09 Owned & Managed Available Beds 46.6 126.7 .000 $24.000 $95.6 115.909 53.5 120.184 61.464 59.1 27 126.681 48.000 $35.933 50.000 $55.000 $75.000 $65.

Opportunity for Multiple Expansion CXW’s earnings quality has improved since 2007 as its Owned & Managed segment now accounts for more than 90% of Facility EBITDA TEV / Forward EBITDA 14x 11x Pre-Lehman Average: 11.9% ________________________________________________ 87.9% 28 89.1% Source: Capital IQ.1% 88.6% 90.5x 9. Pershing Square estimates.8% 89.8x 8x 5x Jan-07 Jul-07 Feb-08 Sep-08 Mar-09 Oct-09 Owned & Managed as % of Facility EBITDA (TTM) 85. .

and enjoys excellent competitive dynamics – all features of a high quality real estate business .Key Attributes of Corrections Corp Principal Asset Primary Tenant Growth Opportunity Maint Capex as % of Revenue Tenant Allowances Return on New Development Competition for Existing Units Competition for New Construction Cyclicality Real Estate Government Secular ~2% None High Local Monopoly Oligopoly Low 29 CXW has creditworthy tenants. requires limited maintenance capex.

hospitals and life sciences.Health Care REITs are the Best Comp Typical Health Care REIT Primary Tenant Maint Capex as % of Revenue (2) Growth Tenant Allowances Cyclicality Competition for New Builds Competition for Existing Units Cap Rate ________________________________________________ (1) Government ~2% Supply / demand imbalance provides secular tailwind Government ~3. . skilled nursing.5% Aging baby boomers provide secular tailwind None Low Oligopoly Local Monopoly Minimal Low Medium Senior Housing: High MOBs / Hospitals: Local Monopoly Skilled Nursing / Life Sciences: Medium >12% ~7% Source: Green Street research and Pershing Square estimates. (2) Maintenance capex is low for health care REITs due to the triple-net leases associated with senior housing. 30 (1) We define typical health care REITs to include senior housing. skilled nursing and hospitals. MOBs.

8% $1.0% 386 $6.349 25.0% 362 $5.7% $337 $337 100.0% (10) 376 97.0% (10) 352 97.Illustrative Sum-Of-The-Parts Valuation CXW is composed of two businesses: an operating company (“OpCo”) and a real estate company (“PropCo”) Illustrative OpCo / PropCo Financials ($ in millions) 2010e OpCo CXW Revenue (owned-only) Rent as % of Revenue Illustrative Rent Per Bed CXW EBITDA Less: Rent PF EBITDA PF Margin PropCo Rental Revenue NOI Margin Less: Cash expenses AFFO Margin 31 2011e $1.692 462 (362) $100 5.0% 337 $5.0% $362 $362 100.543 25.5% 2012e $1.4% .449 25.2% $386 $386 100.0% (10) 327 97.062 518 (386) $132 6.411 419 (337) $82 4.

8% $7.822 7.485 $54 .057 $386 8.0% $6.8% $5.429 5.878 $40 $132 8.057 $386 6.Illustrative Sum-Of-The-Parts Valuation (Cont’d) An OpCo / PropCo analysis suggests the stock could be worth between $40 and $54 per share ($ in millions) OpCo Valuation: 2012e PF EBITDA Multiple OpCo Value PropCo Valuation: 2012e NOI Cap Rate PropCo Value Memo: Dividend yield Total Value Per Share 32 $132 8.0x $1.0x $1.0% $4.

CCA Prison Realty Trust purchased 9 correctional facilities from Old CCA for $308mm. noncancellable triple-net leases with built-in rent escalators Within five months of its IPO. CCA Prison Realty Trust’s stock had moved up to the $40s. CXW operated as two separate companies: CCA Prison Realty Trust (a REIT). trading at a ~5% cap rate and a ~4% dividend yield 33 . It then leased the facilities to Old CCA pursuant to long-term. CCA Prison Realty Trust used the remaining proceeds from its IPO and its revolver to purchase three additional facilities from Old CCA By December-97.CXW used to be a REIT… From 1997 through 1999. and Old CCA (the operating company) CCA Prison Realty Trust was a Huge Success IPO’d in July-97 at $21 per share and immediately traded up to $29 Upon its formation.

it had to spin off its management business (“OpCo”) $80 $70 $60 $50 $40 $30 $20 $10 $0 Jan-99 Feb-01 Mar-03 34 New Prison Realty was not a Success New Prison Realty saddled itself with debt to fund new prison builds Before the new prisons had been completed and could generate revenue. CXW was on the verge of default and had to raise dilutive capital to restructure and avoid bankruptcy May-05 Jun-07 Jul-09 . 1999. OpCo’s operating fundamentals began to decline and occupancy fell OpCo struggled to maintain profitability and rental payments to New Prison Realty soon had to be deferred As a result. New Prison Realty’s stock price declined precipitously. limiting its ability to raise liquidity. This was further exacerbated by a shareholder lawsuit stemming from the fall in the stock price By the Summer of 2000.” In order for New Prison Realty to qualify as a REIT. Old CCA and CCA Prison Realty Trust merged to form an even larger REIT.CXW used to be a REIT… (Cont’d) On January 1. “New Prison Realty.

Why Did New Prison Realty Fail? New Prison Realty did not fail because it was a REIT. was also over-leveraged (1) ________________________________________________ (1) “The rates on the Operating Company leases were set with the intention that the public stockholders of New Prison Realty would receive as much of the benefit as possible from owning and operating the correctional and detention facilities….” Source: CXW 2002 10-K. 35 . it failed because: It had too much leverage It had an overly aggressive development plan Its tenant. In fact. the Operating Company lease rates were set so that Operating Company was projected to lose money for the first several years of its existence. OpCo.

1% 22.NOLs CXW has not been a large taxpayer for the last eight years because of substantial NOLs that are now exhausted Total: $149mm Total: $165mm $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 2001a 2002a 2003a 2004a 2005a 2006a 2007a 2008a 2009e 2010e Cash Tax Rate 9.0% Going forward.4% 20.4% 3.2% 36 24.4% 8.4% 2. CXW expects to be a 38% cash tax payer .5% 37.6% 38.

CXW has increasingly shifted away from a business focused on the management of prisons toward a business focused on the ownership of prisons Managed EBITDA as a % of Facility EBITDA 30% 25.9% 10.3% 5% 0% 2001a 2002a 2003a 2004a 2005a 37 2006a 2007a 2008a 2009e 2010e .6% 10. Managed Since 2000.Owned vs.1% 10% 9.0% 25% 19.7% 26.7% 19.4% 20% 15% 14.9% 18.1% 11.

or highways selling at 50 times cash flow. I think these could be even sold and harvested in some fashion to avoid selling stock in the future.” – Irving Lingo. Former-CFO of Corrections Corp.Management Gets It “The other thing I would point out is before we'd even sell stock. So there are a number of things that we could do to finance our growth. that there's a lot of value in these assets. we could go quite a ways. but just with respect to cash flow and leverage. Q2’06 Earnings Call 38 . you think about prisons as infrastructure or some type of real estate asset. I hear people talking to me about regional malls selling at six cap rates or parking garages selling at five cap rates or 20 times cash flow and you think about -.

Conclusions Market Leader / Competitive Advantage Secular Growth Opportunity Several Near-Term Catalysts Stable Free Cash Flow in Excess of EPS Strong Management Strong Balance Sheet Attractive ROC / Low Cost of Capital 39 High Quality Business at a Substantial Discount to Intrinsic Value .

2009 Pershing Square Capital Management.P. . L. Spring Will Be Over* December 7.If You Wait For The Robins.

” New York Times (10/16/08). Actual results may vary materially from the estimates and projected results contained herein.P. L. Such statements. estimates and projections prepared with respect to. estimates or projections or with respect to any other materials herein. ________________________________________________ * Warren E. The analyses provided may include certain statements. among other things. No representations. ("Pershing Square") contained in this presentation are based on publicly available information. Pershing Square hereby disclaims any duty to provide any updates or changes to the analyses contained here including. without limitation. I am. Funds managed by Pershing Square and its affiliates have invested in long and short positions of certain mall REITs. estimates. sell. This presentation and the information contained herein is not a recommendation or solicitation to buy or sell any securities. express or implied.Disclaimer The analyses and conclusions of Pershing Square Capital Management. 1 . the historical and anticipated operating performance of the companies. Pershing Square may currently or in the future change its position regarding any of the securities it owns. Pershing Square reserves the right to buy. “Buy American. and projections reflect various assumptions by Pershing Square concerning anticipated results that are inherently subject to significant economic. are made as to the accuracy or completeness of such statements. and other uncertainties and contingencies and have been included solely for illustrative purposes. access to capital markets and the values of assets and liabilities. the manner or type of any Pershing Square investment. Buffett. cover or otherwise change the form of its investment in any company for any reason. Pershing Square manages funds that are in the business of actively trading – buying and selling – securities and financial instruments. Pershing Square recognizes that there may be confidential information in the possession of the companies discussed in the presentation that could lead these companies to disagree with Pershing Square’s conclusions. including long positions in General Growth Properties Inc. competitive.

economy was on the verge of a depression The U. The World was a Very Different Place for Mall REITs The U. consumer had hit the wall Credit markets were closed Mall REIT balance sheets were dangerously leveraged Cap rates increased and transactions stopped as bidask spreads widened Bankruptcy risk and tenant “right-sizing” initiatives were expected to result in massive store closures Rent relief was a serious concern Tenant sales were expected to fall off a cliff 2 Since Then… .S.At the Beginning of 2009.S.

The U. Economy has Recovered .S.

4%) (6.8% in Q3 and Federal Reserve Chairman Bernanke said the recession is “very likely over” Real GDP (% Change) 4.0% 2.The Recession is “Very Likely Over” GDP grew 2. .0% (0.0%) (6.0%) (5.0%) Q2’08 ________________________________________________ Q3’08 Q4’08 4 Q1’09 Q2’09 Q3’09 Source: Bureau of Economic Analysis (11/24/09).4%) (8.7%) (4.0% 1.5% 0.7%) (2.0%) (2.8% 2.

Unemployment Rate 10. .0% 9.Unemployment Down in November The U.8% 9.7% 9.5% July ________________________________________________ August September 5 October November Source: Bureau of Labor Statistics (12/4/09).5% 10.0% 8.5% 9.S.4% 9.S. unemployment rate improved 20bps in November U.2% 10.0% 10.

Barclays Capital (November 2009). 6 .Housing Market Showing Signs of Recovery New home inventories are falling sharply and are projected to continue to do so ________________________________________________ Source: Census Bureau. Haver Analytics.

Consumer is Beginning to Bounce Back .S.The U.

0 60.Consumer Confidence Improving The University of Michigan Survey of Consumer Confidence Sentiment Index has improved since the beginning of the year University of Michigan Consumer Confidence Index (Trailing Three Month Average) 80.0 67.9 75.0 61. Most recent data point available as of 11/25/09.7 55.0 74.5 65.2 63.0 70. .5 70.0 50.2 60.1 59.0 64.0 Dec-Feb 2008 ________________________________________________ Mar-May 2008 Jun-Aug 2008 Sept-Nov 2008 8 Dec-Feb 2009 Mar-May 2009 Jun-Aug 2009 Sept-Nov 2009 Source: University of Michigan / Bloomberg.

The Credit Markets Have Improved .

Haver Analytics. Barclays Capital (November 2009). 10 .Financial Markets Normalizing Overnight bank lending markets have stabilized and debt issuance is beginning to pick up ________________________________________________ Source: FRB. FDIC.

Stock Market has Rebounded The S&P 500 is up over 60% since March S&P 500 Index (YTD) 1200 1100 1000 900 800 700 600 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Dec-09 1. 11 .106 ________________________________________________ Source: Capital IQ (as of 12/4/09).

.REIT Stocks have Rebounded The IYR REIT Index has doubled since March IYR REIT Index (YTD) 50 45 40 35 30 25 20 Jan-09 ________________________________________________ $45 Mar-09 May-09 12 Jul-09 Sep-09 Dec-09 Source: Capital IQ (as of 12/4/09).

13 . 2009).REIT CDS Spreads Tightening REIT CDS spreads have meaningfully compressed year-to-date ________________________________________________ Source: Credit Suisse equity research (December 4.

Avalonbay (AVB). Kimco (KIM). Alexandria Real Estate (ARE). REITs have been able to issue large amounts of low-cost debt DDR TALF Deal Closed on October 8. if Simon were to issue debt today. 2009 14 . December 4. Includes AMB Property Corp (AMB). an issuance of five year unsecured debt could potentially be completed at a cost of 5% or less” – Credit Suisse Equity Research. Boston Properties (BXP). 2009). DDR Corp (DDR). Ventas (VTR) and Simon Property Group (SPG). Vornado (VNO). Brandywine Realty (BDN).225% ________________________________________________ Source: Goldman Sachs Global Investment Research (December 2. “Based on secondary market trading. ProLogis (PLD). 2009 $400mm loan Five year term Blended interest of 4.REIT Cost of Debt Improving Over the past three months.

Mall REIT Balance Sheets Have Strengthened .

REITs Have Raised over $18bn of Equity YTD REITs have raised equity capital equivalent to approximately 10% of the market cap of the entire industry ________________________________________________ Source: Goldman Sachs Global Investment Research (December 2. 2009). 16 .

(1) Total liabilities (including preferred shares) net of cash as a % of current value of assets.9% 53.7% 57.0% 56.5% 60.3% 57.5% 56.9% 55.7% 52. 17 .5% 52.0% 47. Mall average includes CBL. PREIT.5% May ________________________________________________ June July August September October November December Source: Green Street Real Estate Securities Monthly. GGP.2% 50. Macerich. Tanger. Glimcher.1% 57. Taubman and Westfield.Mall REITs have Delevered Mall REIT leverage ratios have decreased meaningfully since May Mall REIT Leverage Ratio (total liabilities net of cash as a % of current value of assets) (1) 62. Simon.0% 54.0% 59.

Cap Rates Have Declined Substantially .

5% 5.0% 7.5% 9. 19 .5% 7.0% Ja n0 M 5 ar -0 M 5 ay -0 5 Ju l-0 Se 5 p0 N 5 ov -0 Ja 5 n0 M 6 ar -0 M 6 ay -0 6 Ju l-0 Se 6 p0 N 6 ov -0 Ja 6 n0 M 7 ar -0 M 7 ay -0 7 Ju l-0 Se 7 p0 N 7 ov -0 Ja 7 n0 M 8 ar -0 M 8 ay -0 8 Ju l-0 Se 8 p0 N 8 ov -0 Ja 8 n0 M 9 ar -0 M 9 ay -0 9 Ju l-0 Se 9 p0 N 9 ov -0 9 ________________________________________________ Mall Implied Cap Rate Baa 7. they still trade at a wide spread to corporate Baa yields Mall Implied Cap Rate vs.0% 5.5% 8.3% Source: Green Street (as of November 2009).0% 8.0% 9.Mall REIT Cap Rates Have Declined and Should Decline Further Based on Historical Precedent Although mall REIT cap rates have come in from their double-digit highs. Baa Yields 10.8% 6.0% 6.5% 6.

Store Closure Fears were Overblown .

Crown Acquisition bid $22mm for Filene’s w/ plan to liquidate 8 stores In June. underperforming locations 21 . Jill Out of court Golden Gate Jun-09 At the beginning of 2009.4mm bid Vornado / Syms plan to operate Filene’s remaining 22 outlets and re-open a location in Boston J. a joint venture formed by Syms and Vornado beat out Crown w/ a $62. Golden Gate beat out CCMP w/ $286mm bid Golden Gate plans to keep “the substantial majority” of the company’s stores open Ritz Camera Feb-09 Filene’s May-09 David Ritz Jul-09 Vornado / Syms Jun-09 David Ritz and RCI Acquisition LLC beat out three liquidators at auction Ritz will attempt to keep all the remaining 375 stores open.White Knights Although there have been some tenant bankruptcies year-to-date. CCMP bid $202mm for Eddie Bauer w/ plan to liquidate 121 of 371 stores In August. Jill retail chain for $75mm Golden Gate plans to keep open 204 of the existing 279 locations open Store closures that have arisen in bankruptcy have tended to be in lowquality. Talbots had been considering winding down its J. though some closures still expected In May. Jill concept In June. Golden Gate acquired the J. white knight buyers have minimized store liquidations Selected Bankruptcies Eddie Bauer Jun-09 White Knight Golden Gate Aug-09 Comments In July.

Liquidations Could Be Good For Malls Retailers with successful concepts are acquiring leases from liquidating retailers. which will be opened by year-end In December. Great American Group 13 retail spaces sold to Forever 21 on June 10. 2009 Joe’s Sports sold to liquidator Gordon Brothers for $61mm 6 retail spaces sold to Dick’s Sporting Goods in July. Kohls and Forever 21 acquired 46 Mervyn’s leases for $6.25mm Forever 21 primarily focused on Mervyn’s mall-based locations Speculation that Forever 21 has acquired additional Mervyn’s spaces since December 22 . allowing malls to refresh their product offerings with concepts that should drive increased traffic Selected Liquidations Gottschalks Jan-09 Joe’s Sports Mar-09 Mervyn’s Jul-08 Strategic Acquirer(s) Forever 21 Jun-09 Dick’s Sporting Goods Jul-09 Forever 21 / Kohls Dec-08 Comments Gottschalks auctioned to liquidation company.

.A. many store counts include international stores or non mall-based locations. however. stores were counted from the store locator on the companies’ websites.S. (2) Beginning of Year 2009. (excl factory) Coldwater Creek Dick's Sporting Goods Dressbarn Maurices 20 BOY (2) (1) (3) Current Aeropostale American Eagle Bebe Bed. In some cases.673 Source: Company filings. Luxottica.S. 23 (3) Most store data is as of October 31. many mall-based tenants actually expanded certain concepts Stores Company Abercrombie & Fitch Concept abercrombie Hollister Gilly Hicks Aeropostale U. earnings transcripts. investor presentations. attempted to limit store count to U. This analysis is not meant to be comprehensive and is limited by its inability to get information for private or international based tenants (i. Most store data is as of January 31.Many Mall-Based Tenants Expanded in 2009 Although there have been some “right-sizing” initiatives in 2009. 2009 or November 2009.S.e. Forever 21. (1) Where available. P. mall-based locations. Bath & Beyond Charlotte Russe Cheesecake Factory Chico's Children's Place Coach Coldwater Creek Dick's Sporting Goods Dressbarn Subtotal ________________________________________________ 212 515 14 874 116 32 15 52 40 495 145 344 71 917 324 348 384 834 697 6. etc…) as well as many public companies.429 213 522 16 894 11 137 33 25 57 42 501 146 347 76 950 340 356 420 846 741 6. . company press releases. 2009. Aerie 2b bebe buybuy BABY CTS Harmon Face Values Charlotte Russe Cheesecake Factory WH|BM Soma Children's Place Coach N.

Most store data is as of January 31.158 Source: Company filings. This analysis is not meant to be comprehensive and is limited by its inability to get information for private or international based tenants (i. Luxottica. Forever 21. mall-based locations.093 62 113 898 589 109 12. however.Many Mall-Based Tenants Expanded in 2009 (Cont’d) Stores Company Foot Locker Gamestop Genesco GNC Guess Gymboree Concept CCS Gamestop U.e. Gymboree U. etc…) as well as many public companies.331 1.425 1.S. (1) Where available. In some cases.A.774 425 583 38 115 169 108 211 6 12 1. attempted to limit store count to U. Crazy 8 Janie & Jack H&M USA hhgregg J Crew (excl outlets) Crewcuts Madewell JC Penney Juicy Couture U.022 162 2.805 2 4. earnings transcripts. investor presentations. stores were counted from the store locator on the companies’ websites.. (2) Beginning of Year 2009.S.A. (excl franchise) Guess N. Journeys Johnston & Murphy GNC N. 2009.S.806 433 594 62 120 175 128 243 9 17 1.S. company press releases. 2009 or November 2009. 24 (3) Most store data is as of October 31. . (excl outlets) Luluemon Sephora New York & Co Nordstrom full-line 20 BOY (2) (1) (3) Current H&M hhgregg J Crew JC Penney Liz Claiborne Lululemon Athletica LVMH New York & Co Nordstrom Subtotal ________________________________________________ 4.109 65 119 963 592 112 13. many store counts include international stores or non mall-based locations.012 157 2.

(2) Beginning of Year 2009.104 25. however. company press releases. Forever 21. Victoria's Secret Henri Bendel Tiffany U. . attempted to limit store count to U. etc…) as well as many public companies.043 5 76 142 121 30 698 409 36 10 343 6. This analysis is not meant to be comprehensive and is limited by its inability to get information for private or international based tenants (i. (1) Where available.197 Source: Company filings. 2009. Palais Royal.366 26.S. 25 (3) Most store data is as of October 31. stores were counted from the store locator on the companies’ websites. mall-based locations.338 360 109 537 751 589 405 582 1.S. 2009 or November 2009. Most store data is as of January 31.. Luxottica. investor presentations. earnings transcripts.A. Goody's Talbots The Buckle Banana Republic N.046 9 78 151 133 34 733 420 40 11 378 6. Peebles.Many Mall-Based Tenants Expanded in 2009 (Cont’d) Stores Company Payless Restoration Hardware Rue21 Stage Stores Talbots The Buckle The Gap The Limited Tiffany & Co Urban Outfitters Concept Stride Rite Restoration Hardware (excl outlets) Rue21 Bealls. Urban Outfitters Anthropologie Free People VF-operated retail stores Wet Seal West Elm Williams-Sonoma Home Zumiez 18 58 BOY (2) (1) (3) Current VF Corp Wet Seal Williams-Sonoma Zumiez Subtotal Total ________________________________________________ 355 101 449 739 587 387 573 1. In some cases.e. many store counts include international stores or non mall-based locations.

5% In Q3’09.5% 92.0% 92.0% (1) 97.5% 85.6% 92. 26 .5% 90.9% 91. occupancy was up 40bps sequentially 95. Simon data Q2'08 Q3'08 Q4'08 Q1'09 Q2'09 Q3'09 excludes regional Mills malls.2% 92.4% 90.0% 91.5% 92.0% Q1'08 ________________________________________________ (1) Average of Simon and GGP.Mall Occupancy is Stable Occupancy is stable despite deterioration in lower-quality malls Mall REIT Occupancy (GGP & Simon) 100.0% 87.

7% 3. Excludes anchors.8% 85. MAC) 92.5% 87.9% 91.6% ________________________________________________ (1) Average regional mall occupancy.6% 87.5% 91.4% 3.5% 92.5% 87.7% 2.5% 92.7% 2.8% 89.0% Q1'08 Q2'08 Q3'08 Q4'08 Q1'09 Q2'09 Q3'09 Difference 2.8% 87.0% 89.Survival of the Largest Comparing the occupancy performance of Simon & GGP to that of smaller mall REITs shows the benefit of scale in leasing negotiations Large Mall REIT Occupancy vs.2% 92.4% 90.0% (1) Large Mall REITs (GGP & Simon) Small Mall REITs (TCO.4% 2.9% 90.0% 89. Glimcher is excluded from the analysis as its occupancy includes temporary tenants that are excluded from other mall REIT reported occupancy metrics.8% 89. 27 .3% 3. Small Mall REIT Occupancy 95. PEI.6% 92.

excluding MPCs and GGMI).41% 0. GGP data only includes revenue from the mall segment (i.e.32% 0.30% 0.50% 0.80% 0.47% 0. 28 .87% 0.82% 0.33% 0.00% 0.Bad Debt Expense Mall REIT provisions for doubtful accounts have not increased materially TTM Provision for Doubtful Accounts as a % of TTM Revenue (GGP & Simon) 2.47% 0.61% 0.00% (1) 1.00% Q4'06 Q1'07 Q2'07 Q3'07 Q4'07 Q1'08 Q2'08 Q3'08 Q4'08 Q1'09 Q2'09 Q3'09 ________________________________________________ (1) Average of Simon and GGP.50% 1.47% 0.46% 0.

Tenants Are Much Better Capitalized .

Stock price data through December 4. Limited. Abercrombie. (1) Market cap weighted average index of GGP’s publicly traded top 10 tenants (Gap. Foot Locker. 30 . Macy’s and Genesco).Tenant Stock Price Performance Mall REIT tenant stock prices have outperformed the S&P 500 by more than 30% year-to-date 180% 170% 160% 150% 140% 130% 120% 110% 100% 90% 80% 70% 60% Jan-09 Mar-09 May-09 S&P 500 ________________________________________________ +50% +19% Jul-09 Mall REIT Tenant Index (1) Sep-09 Dec-09 Source: Capital IQ. American Eagle. JC Penney. 2009.

398 (1. Banana Republic Victoria's Secret.881) NA (9.475) ($9.912) 472 300 466 NA (1. M+O Express JC Penney 4 Love. Bath & Body Works Abercrombie.306) (1. Gadzooks Macy's.534) (120) ($11. Net debt data is most recent as of December 4.520) 158 272 269 NA (1. Forever 21. Champs Sports American Eagle. 31 . Off Fifth Sears Subtotal ________________________________________________ Source: Capital IQ. Nordstrom Rack Saks.212) (900) (2.989) ($1. Lids Subtotal Net (Debt) / Cash Last Year Current Improvement $1.131) (512) (2. Hollister. Old Navy.674) (629) (3.263) NA (8.367 (2.Tenants have Delevered (Top Ten & Selected Anchor Tenants) On average.205) 75% 24% 198% 10% 73% NA 33% NA 14% 95% 35% 7% 35% 20% 19% 29% 24% Selected Anchor Tenants Bon-Ton Stores Dillard's Nordstrom Saks Incorporated Sears Holdings Bon-Ton Dillard's Nordstrom. Ruehl Foot Locker. (1) GGP’s top ten tenants as disclosed in its quarterly operating supplement.765) ($1. tenants have improved their net debt positions more than 30% since the same period last year ($ in millions) Tenants Top Ten Tenants The Gap Limited Brands Abercrombie & Fitch Foot Locker American Eagle Express JCPenney Company Forever 21 Macy's Genesco (1) Selected Concepts Gap. Underground Station.393) (2. 2009.477) $2.450) ($7. Aerie. Bloomingdale's Journeys.221) (5) ($7.

Wet Seal. Net debt data is most recent as of December 4. Anntaylor Loft Aeropostale.795) ($16. WH | BM Claire's. Bebe Sport. P.329) $136 286 201 (375) 94 423 (2.O. Piercing Pagoda Zumiez Subtotal Net (Debt) / Cash Last Year Current Improvement $73 107 120 (487) 118 256 (2.382) 101 407 60 (924) (38) 63 (661) 125 (329) 62 ($3.E. Arden B Zales. Icing The Children's Place Coach Hot Topic. Waldenbooks The Buckle Chico's. Soma. 2b bebe Borders. Wet Seal Zales Corporation Zumiez Selected Concepts Anntaylor. Kate Spade. Lucky Brand D. Pacsun Radioshack Tiffany & Co.Tenants have Delevered (Cont’d) (Selected In-line Tenants) On average. Torrid Juicy Couture. 2009.622) 33% Source: Capital IQ.M. kids Bebe. 32 .S.652) 87% 166% 68% 23% (21%) 65% 1% 1% 138% 52% 13% 141% 170% 43% 13% (34%) 33% 50% Total ________________________________________________ ($24. tenants have improved their net debt positions more than 30% since the same period last year ($ in millions) Tenants Selected In-line Tenants Anntaylor Aeropostale Bebe Stores Borders The Buckle Chico's Fas Claire's Stores The Children's Place Coach Hot Topic Liz Claiborne Pacfic Sunwear Stores RadioShack Tiffany & Co..364) 102 970 91 (803) 16 169 (378) 141 (442) 82 ($1. (1) GGP’s top ten tenants as disclosed in its quarterly operating supplement.

it secured a 3. In November.Case Study: Bon-Ton At the beginning of 2009. Today. 33 .5 year extension on its $750mm credit facility Bon-Ton Stock Price Performance (YTD) $16 $14 $12 $10 $8 $6 $4 $2 $0 Jan-09 ________________________________________________ $13 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Source: Capital IQ (as of 12/4/09). it’s stock has increased more than 10 times. Bon-Ton was perceived to be on the verge of bankruptcy.

its debt has traded up more than 4 times ________________________________________________ Source: Bloomberg. Year-to-date.Case Study: Claire’s Like Bon-Ton. many feared Claire’s would seek bankruptcy protection. 34 .

2009 We expect many other retailers will benefit from the Business Assistance Act 35 .. its liquidity should benefit from the recently passed Business Assistance Act of 2009.” – Matt Appel. which extended the carry-back period for net operating losses from two to five years. which extends the period for which companies can carry-back NOLs “The recently-enacted Business Assistance Act of 2009. CFO of Zales Corp. November 24. is expected to provide a significant cash refund and tax benefit to us in fiscal 2010.Case Study: Zales Zales’ net debt increased YoY primarily as the result of accelerating its payment of vendor merchandise receipts into Fiscal Q1. Going forward.

Rent Relief Has Been Minimal .

” – Steve Sterrett. 2009 37 . But as I think we said on the call last quarter. as in the $7 million to $8 million range.Rent Relief Less of an Issue than Originally Anticipated Simon expects to lose less than 2bps of total revenue as the result of rent relief concessions in 2009 “Our 2009 rent relief total will be under $10 million. So it’s a little back-end weighted. CFO of Simon Property Group. But it’s a small number in the context of the size of our income statements. October 30. we hadn’t seen much of it year-to-date. and as you look at the impact of average base rent it could have a nominal impact.

but Inventories are Down Even More While Retailer Cash Flows Have Improved Materially .Tenant Sales are Down.

retailers achieved high sales with bloated cost structures. retailers overspent to achieve high rates of same-store sales growth Even though mall REITs derive a small percentage of NOI from overage rent. retail real estate investors and landlords have focused disproportionately on tenant sales New Paradigm: Focus on Cash Flow In 2009.A New Paradigm: Sales vs. Driven by Wall Street’s insatiable demand for same-store sales growth. retailer profitability should accelerate 39 . retailers have used the economic crisis to re-shape their cost structures and improve inventory management to generate more cash flow at meaningfully lower sales levels Retailer focus has shifted from growing sales to improving profit margins and increasing cash flow As same-store sales again begin to increase. Cash Flow Old Paradigm: Focus on Sales From 2003 to 2007.

152 Inventories have declined more than same-store sales Source: Capital IQ. inventory data is most recent as of December 4. (1) GGP’s top ten tenants as disclosed in its quarterly operating supplement.805 $44.262 422 NA 4.193 799 10.425 $901 1.228 425 NA 4.224 1.It’s Hard to Increase Sales when there is Less on the Shelves (Top Ten & Selected Anchor Tenants) Comparing November same-store sales to October inventory levels partially explains why tenant sales were down in November ($ in millions) Tenants Top Ten Tenants The Gap Limited Brands Abercrombie & Fitch Foot Locker American Eagle Express JCPenney Company Forever 21 Macy's Genesco Subtotal / Wtd Avg Selected Anchor Tenants Bon-Ton Stores Dillard's Nordstrom Saks Incorporated Sears Holdings Subtotal / Wtd Avg ________________________________________________ Last Year (1) Inventory Current $1.622 360 $16.471 NA 7.072 $979 2.016 11.426 347 1.364 $49. 40 .648 505 1.278 1.752 1.161 380 $18.999 1.876 Decrease (10%) (13%) (31%) (3%) 1% NA (10%) NA (8%) (5%) (9%) (8%) (22%) (7%) (21%) (5%) (9%) Memo: Nov SSS 0% 3% (17%) NA (2%) NA (6%) NA (6%) NA (5%) (6%) (11%) 2% (26%) NA (9%) $2.018 NA 6. 2009.243 1.

It’s Hard to Increase Sales when there is Less on the Shelves (Selected In-line Tenants) Comparing November same-store sales to October inventory levels partially explains why tenant sales were down in November ($ in millions) Tenants Selected In-line Tenants Anntaylor Aeropostale Bebe Stores Borders The Buckle Chico's Fas Claire's Stores The Children's Place Coach Hot Topic Liz Claiborne Pacfic Sunwear Stores RadioShack Tiffany & Co. inventory data is most recent as of December 4.181 Inventory Current $211 222 37 1.639 41 985 82 $7. (1) GGP’s top ten tenants as disclosed in its quarterly operating supplement.542 40 902 76 $6.157 118 160 139 251 338 91 410 168 737 1. 41 . Wet Seal Zales Corporation Zumiez Subtotal / Wtd Avg Last Year $275 207 49 1.257 118 187 149 233 402 95 549 234 681 1. 2009.900 (9%) (6%) Inventories have declined more than same-store sales Source: Capital IQ.599 Decrease (23%) 7% (26%) (8%) 0% (15%) (7%) 8% (16%) (3%) (25%) (28%) 8% (6%) (3%) (8%) (7%) (8%) Memo: Nov SSS NA 7% NA NA 1% NA NA (13%) NA (10%) NA NA NA NA (5%) NA (9%) (4%) Total ________________________________________________ $74.406 $67.

Most Q3 periods ended in October. (1) GGP’s top ten tenants as disclosed in its quarterly operating supplement. This is all the more impressive given that Q3 is usually cash flow negative for retailers as they prepare for the holidays ($ in millions) Tenants Top Ten Tenants The Gap Limited Brands Abercrombie & Fitch Foot Locker American Eagle Express JCPenney Company Forever 21 Macy's Genesco Subtotal Selected Anchor Tenants Bon-Ton Stores Dillard's Nordstrom Saks Incorporated Sears Holdings Subtotal (1) Cash Flow from Operations Q3'08 Q3'09 Improvement $272 (244) NA NA 76 NA (189) NA (275) NA ($361) NA (69) 83 NA (962) ($1. coupled with cost reduction measures. has resulted in materially higher tenant cash flows ________________________________________________ Source: Capital IQ.Lower Inventory = Higher Cash Flow (Top Ten & Selected Anchor Tenants) Tenant cash flows have gone from materially negative to materially positive.697) $432 (114) NA NA 65 NA (30) NA (52) NA $301 NA 78 104 NA (35) $430 59% 53% NA NA (15%) NA 84% NA 81% NA 183% NA 214% 25% NA 96% 125% Inventory Decrease (10%) (13%) (31%) (3%) 1% NA (10%) NA (8%) (5%) (9%) (8%) (22%) (7%) (21%) (5%) (9%) Inventory declines. 42 .

953) $1. (1) GGP’s top ten tenants as disclosed in its quarterly operating supplement. Most Q3 periods ended in October. This is all the more impressive given that Q3 is usually cash flow negative for retailers as they prepare for the holidays ($ in millions) Tenants Selected In-line Tenants Anntaylor Aeropostale Bebe Stores Borders The Buckle Chico's Fas Claire's Stores The Children's Place Coach Hot Topic Liz Claiborne Pacfic Sunwear Stores RadioShack Tiffany & Co. has resulted in materially higher tenant cash flows Source: Capital IQ.Lower Inventory = Higher Cash Flow (Cont’d) (Selected In-line Tenants) Tenant cash flows have gone from materially negative to materially positive. Wet Seal Zales Corporation Zumiez Subtotal Cash Flow from Operations Q3'08 Q3'09 Improvement ($1) NA 15 NM NA 1 NA 61 77 14 (121) (7) 54 1 10 NA NA $104 $8 NA (10) NM NA 56 NA 79 241 17 (101) (7) (20) 99 7 NA NA $369 715% NA (168%) NM NA 3893% NA 29% 214% 22% 17% (5%) (137%) 8909% (36%) NA NA 253% Inventory Decrease (23%) 7% (26%) (8%) 0% (15%) (7%) 8% (16%) (3%) (25%) (28%) 8% (6%) (3%) (8%) (7%) (8%) Total ________________________________________________ ($1. 43 . coupled with cost reduction measures.100 156% (9%) Inventory declines.

Which is better for the landlord. tenant sales growth or tenant cash flow growth? .

2009 45 . October 30. And we are insecure about our ability to finance. And I think David gave you a list in his comments of those stores that are looking at that. COO of Simon Property Group. What we faced in 2009 was. Now that they have better cash margins and better cash on deposit. we are now hearing that they are allocating money for new open-to-buys. but they are far more focused today on profitability and cash flow. So I think it is going to be less correlated with sales and more correlated with profitability and cash flow generation.Simon Property Group’s Point of View “The retailers that we are dealing with are certainly focused on sales.” – Rick Sokolov. which leads to capital allocation for new stores or remodeled stores upon renewal. most retailers saying we are preserving our cash because we are unsure about our line [of credit].

Because it was totally unexpected from the retailer's viewpoint. and at the time. Made plans for their businesses to be down roughly 10 to 15%. we've had double digit sales declines. they even got into a cutback mode. major changes in their inventory levels and major changes in their business plan. we told you that we anticipated that for the first three quarters of this year. November 5. sales were off in general around 15% give or take. to things began to fall out in the second quarter of this year around ICSC. 2009 46 . They went from being in a freeze mode in the fourth quarter of last year. is improving dramatically. As a result of that. They are meeting their business plan. In fact. it's put our retailers into a mood where they're willing to talk about new leasing and we're able to look at beginning to have some pickup in store growth. the retailers made major changes in their cost structure. but more importantly. it put the retailers into a freeze mode. That was a disastrous comp sales decrease from a retailer's viewpoint. for most of the major mall owners including ourselves. But we're seeing a moderation in the decreases. So being off 10% when you plan to be off 10% and you keep your margin is a significantly different situation than being off 15% when it wasn't your plan and your margins were decimated. 9% in the third. and you've heard this on the other conference calls with our peers. I want to talk about sales and talk about our leasing activity and our leasing spread. – Art Coppola. is that you have to be careful about the comp sales. They are maintaining their margins. that was not a very thrilling prospect. not only into a freeze mode. Over the course of this year. Now we're really having positive conversations with our retailers about how they can grow their business and how we can grow our business together. frankly. because it was totally unexpected. because this year the difference between the first three quarters of this year and the fourth quarter of last year is that our retailers planned to have their sales be off at this level. In February this year. off 12% in the first quarter. that we anticipated double digit sales declines. As you know in the fourth quarter of last year. 11% in the second quarter.Macerich’s Point of View On the sales side. This was their business plan. Chairman & CEO of Macerich. The moods of the retailers. As a consequence of that. and I said this on the last call.

Summary .

economy was on the verge of a depression The U. consumer had hit the wall Credit markets were closed Mall REIT balance sheets were dangerously leveraged Cap rates increased and transactions stopped as bidask spreads widened Bankruptcy risk and tenant “right-sizing” initiatives were expected to result in massive store closures Rent relief was a serious concern Tenant sales were expected to fall off a cliff 48 Since Then… . The World was a Very Different Place for Mall REITs The U.S.At the Beginning of 2009.S.

S.The World has Improved Dramatically The U. but inventories are down even more while retailer cash flows have improved materially 49 . consumer is beginning to bounce back The credit markets have improved Mall REIT balance sheets have strengthened Cap rates have declined substantially Store closure fears were overblown Tenants are much better capitalized Rent relief has been minimal Tenant sales are down.S. economy has recovered The U.

Why We Are Optimistic About the Next Five Years .

public filings. earnings transcripts. investor presentations and press releases. mall REIT earnings transcripts.We Performed a Bottoms Up Analysis to Inform Our Outlook for Mall REITs Using public information we analyzed: Store expansion plans for 2010 and beyond New concepts either currently being rolled out or upcoming Revenue forecasts Profit forecasts Source of data for our analysis: Evaluated tenant websites. industry trade publications and news articles to develop a sense of tenant expansions and new concepts on tap for 2010 and beyond Gathered consensus equity research estimates for tenant revenue and EBITDA projections through 2010 and 2011 51 .

A.000s ________________________________________________ Note: This list is not meant to be comprehensive. More than half the companies we reviewed were either planning to add new stores or roll out new concepts Aeropostale A'gaci Rolling out 25-30 PS Kids new concept in '10 Growing store counts (per Simon) 25 Aeropostale stores in 2010 Apple 20-25 domestic stores in 2010 Best Buy Sees Best Buy Mobile as a growth vehicle going forward California Pizza Kitchen Growing store counts (per Simon) Chico's 40 new stores in 2010 Expanding Soma concept Coach 20 new stores in N.A. Cheesecake Factory Testing Grand Lux and Rock Pan Asian Kitchen concepts CJ Banks Will opportunistically pursue store expansions in 2010. there will be store openings as well. 52 . It is based off publicly disclosed expansion / new concept plans.Expansions / New Concepts Though there will continue to be store closures in 2010. incl jewelry concept Cotton On Australian retailer looking to expand store base from 600 to the 1. Some of these tenants are also considering selectively closing stores as well. in 2010 Bebe 6 new stores in 2010 Expanding 2b bebe & PH8 concepts The Buckle Continues to expand and has added 18 stores YTD Charlotte Russe On track to open 20 stores in F2009 Already signed 11 leases for 2010 The Children's Place Rolling out new Tech II store format Coldwater Creek Sees opportunity to grow store base when margins improve American Eagle Plans to expand 77kids pop-up concept to a permanent brick & mortar store in 2010 Bed Bath & Beyond Expects to continue to add buybuy Baby locations Build-A-Bear Sees potential for 350 stores in N.

53 .Expansions / New Concepts (Cont’d) Dave & Buster's Growing store counts (per Simon) Dressbarn 15 Dressbarn stores in 2010 35 Maurices in 2010 Forever 21 Rapid expansion in 2009 Rolling out Faith21 line GNC Testing new prototype store Plans to open more domestic stores in 2010 than 2009 (>30) H&M Flagged US as market where it plans to grow the most in 2010 Jones Apparel Group Rolling out 6 Shoe Woo test stores by end of F2009 Destination Maternity 12 to 17 stores in 2010 Opening new multi-brand store concept Five Below Aggressive growth plan -.100+ stores in the next 3 years Gamestop 300 US stores in 2010 Guess 60 accessory stores in 2010 (new concept) Dick's Sporting Goods Sees potential for 800 stores nationwide (~420 in Oct-09) Footlocker Plans to build out its CCS new concept in 2010 Genesco 60 to 70 stores in 2010. Some of these tenants are also considering selectively closing stores as well. incl recently acquired Sports Fanatic concept Gymboree Goal of opening a minimum of 50 Crazy 8 stores next year J Crew Considering rollout of Madewell concept hhgregg At least 45 new stores in 2010 Jos A Bank Limited Accelerating expansion plan to open 30 to 40 Expanding Henri Bendel in US stores in 2010 ________________________________________________ Note: This list is not meant to be comprehensive. It is based off publicly disclosed expansion / new concept plans.

It is based off publicly disclosed expansion / new concept plans. Some of these tenants are also considering selectively closing stores as well. (119 in Oct-09) Microsoft Rolling out retail store to compete with Apple (new concept) Payless Growing Sperry TopSider stores (per Simon) Looking to expand Stride Rite in 2010 Rue21 Sees opportunity to grow store base from 527 to >1. 54 .000 stores by 2014 TJ Maxx Growing store counts (per Simon) Wet Seal Sees opportunity to nearly double its US store base (~400 stores) Mattel Expects to open more American Girl stores stores over time Nordstrom 3 full-line stores in 2010 15 Rack stores in 2010 Red Robin Growing store counts (per Simon) Saks (Off Fifth) Growing store counts (per Simon) Sephora Pursuing expansions in US.000 in 5 yrs Rolling out Rue21! larger box concept Stage Stores Increase from ~750 to 1. but they are constrained by new shopping center dvlpmt Looking to move into existing malls Urban Outfitters 50 new stores next year Williams Sonoma Rolling out PBteen concept Note: This list is not meant to be comprehensive. smaller concept VF Corp Selectively opening stores Expects to open 80 stores in F2009 ________________________________________________ Target Looking to grow store base. France and China Tiffany Objective to open 14 stores (net) in F2009 Experimenting w/ new.Expansions / New Concepts (Cont’d) Liz Claiborne Rolling out LCNY new concept Michael Kors Growing store counts (per Simon) Pandora Jewelry Has expanded to 10 US stores since opening first store in NC in 2007 Restoration Hardware Rolling out Baby & Child concept Lululemon Sees potential for over 300 stores in N.A.

which are performing well in today’s market. to expand and replace underperforming tenants. This mall “refresh” creates a virtuous cycle Start Here Tenant Expansions / New Concepts Increased Mall Occupancy Higher Tenant Cash Flows Higher Mall Traffic 55 .Store Expansions / New Concepts Create a Virtuous Cycle for Mall REITs and their Tenants The current environment has set the stage for tenants with valuefocused concepts.

2009 ________________________________________________ Source: Goldman Sachs equity research November 2009. December 4.” – Rick Sokolov. COO of Simon Property Group. and the lack of new supply can only hopefully help the demand side for the existing product. We certainly anticipate it will remain there. 56 .Supply Constraints Enhance Virtuous Cycle “And frankly. when you look at the capital situation today. the construction in the retail sector is at a 20-year low.

Collective Brands.” – John Smith. October 6. So if you’re going to grow and open up stores. 2009 57 .Low Store Build-out Costs Enhance Virtuous Cycle “A lot of contractors out there. you have a lot of vendors that are doing fixtures. you have a lot of architect firms. a lot of them are very aggressive right now and doing deals. SVP of Development. there’s an opportunity to really drive down your build-out costs there .

Our business improved progressively each month during the period and we are entering the holiday season confident in our locally focused organizational structure and the high caliber of our talent” Bon-Ton Q3’09 Earnings Call “Our comparable store sales turned positive in the month of October with a 3. we had an excellent quarter.Positive Tenant Sales Momentum Though tenant sales are down year-to-date. sales momentum is starting to build Nordstrom Q3’09 Earnings Call “We experienced an improving sales trend in each month of the quarter and generated increases in year-over-year transactions in the months of September and October” Macy’s Q3’09 Earnings Release “Given the difficult economic climate. a good month following improvements in sales trends in August and September” 58 .1% increase as compared with last year.

2% 0.9% 2.3% 1. Lord & Taylor Journeys.583 NA 23.989 NA 18.093 NA 17.Wall Street Anticipates Tenant Revenue Growth Positive sales momentum has culminated in rising consensus revenue estimates for mall-based retailers.0%) (8.0% 7. Forever 21.526 9.8%) 2.7% 3.7%) (13.842 3.8% 4.5% 1. Inc. Footaction American Eagle.238 NA 18. Champs Sports.450 5.0% NA 1.1% 1.6% 2.552 2009e $14.533 4.7% NA 2.760 NA 23. Bath & Body Works Abercrombie.612 3.908 1. 2009.796 2. (1) Based on GGP’s top ten tenants as disclosed in its quarterly operating supplement.448 1.803 3.7% NA 1.2% 1. respectively ($ in millions) Tenants Top Ten Tenants (1) The Gap Limited Brands Abercrombie & Fitch Foot Locker. 59 . (2) Consensus revenue growth weighted average is weighted by each tenant as a % of GGP’s revenue (as disclosed in GGP’s quarterly operating supplement).528 3. An analysis of other publicly traded mall-based retailers results in similar growth expectations.5% revenue growth in 2010 and 2011.324 8. Wall Street is now forecasting 2.672 8.726 Consensus Revenue Growth 2009e (2.237 2. Underground Station.8%) 0.2% 1.8% 0.1%) NA (6.799 3.3% 6.115 NA 23.002 4. M+O Express JC Penney 4 Love. American Eagle Express JCPenney Company Forever 21 Macy's Genesco Selected Concepts Gap.024 $77.286 $78.892 1. Banana Republic Victoria's Secret.956 NA 17.621 2011e $14.5% 2. Lids Weight Factor (2) Consensus Revenue Estimates (CY) 2008a $14.1% 4.3% 1. Bloomingdale's.563 2010e $14.4%) (1.3% 1. Hollister. Ruehl Foot Locker.7% 2010e 1.6%) (5.235 4.2% 9.7%) NA (5.6% and 3.834 (5.6% $80.5% ________________________________________________ Source: Capital IQ consensus estimates as of December 5.6% 3.4% 2.043 3.534 $76.149 8.846 NA 24.3% 2.1% Total / Wtd Avg 17. Aerie.7% 2011e 2.838 1.0% NA 0. Gadzooks Macy's. Old Navy.

5% NA 10.7% 5. Lord & Taylor Journeys.6% 11.2% 14.2% NA 11.3% Comments 2011e '10e Margin > '08a? 16.2% 11.722 135 2011e $2.9% 11. Inc. (2) Consensus EBITDA margin weighted average is weighted by each tenant as a % of GGP’s revenue (as disclosed in GGP’s quarterly operating supplement).8% 7.995 $8.851 145 Consensus EBITDA Margin 2008a 14.1% 12. American Eagle Express JCPenney Company Forever 21 Macy's Genesco Selected Concepts Gap. Ruehl Foot Locker. Forever 21.7% 14.399 1.6% NA 10.3% 2.3% NA 6.132 $9.1% 12. An analysis of other publicly traded mall-based retailers results in similar margin expectations.6% NA 11. Footaction American Eagle. Old Navy. Underground Station.3% 1.3% 2009e 16.8% 6.0% NA 8.Wall Street Anticipates Tenant Margin Expansion Cost cutting and inventory management initiatives will help tenant margins expand despite lower 2009 sales ($ in millions) Tenants Top Ten Tenants (1) The Gap Limited Brands Abercrombie & Fitch Foot Locker. 2009.4% 13.116 1.1% 1.3% 1.0% Yes ________________________________________________ Source: Capital IQ consensus estimates as of December 5.9% 8.1% Consensus EBITDA Estimates (CY) 2008a $2.156 NA 2. Banana Republic Victoria's Secret.6% 7.2% 5. Aerie.182 477 269 486 NA 1. 60 . Gadzooks Macy's. (1) Based on GGP’s top ten tenants as disclosed in its quarterly operating supplement.382 1.5% 1.4% Yes Yes No Yes Yes NA No NA Yes Yes Total / Wtd Avg 17.026 $9.279 594 311 551 NA 1.5% 16.608 12. Bloomingdale's.061 695 286 440 NA 1.355 NA 2. Lids Weight Factor (2) 2.604 NA 2.7% NA 8.6% 15.680 113 2009e $2.5% 14.280 1.099 349 252 392 NA 1.6% $8.494 NA 2.3% 1.6% 2.2% 1.9% 2010e 16.4% 8.481 123 2010e $2. Champs Sports. M+O Express JC Penney 4 Love. Bath & Body Works Abercrombie.4% 17.3% 13.7% NA 7. Hollister.7% 20.6% 5.9% 2.8% 13.

2009e Holiday Same-Store Comps Citigroup performed a bottoms-up analysis to project 2009e holiday same-store sales of positive 2.5 percent 61 .

Mall Traffic Trending Up Citigroup also anticipates improving Holiday 2009 mall traffic 62 .

for $50mm July 2009: Macerich sells a 49% interest in Queens Center in NY to Cadillac Fairview for $150mm in cash plus $168mm in property level debt September 2009: Macerich sells a 75% interest in its Flatiron Crossing Mall in CO for $116mm in cash plus $136mm of assumed debt to private equity firm.Growing Strategic Interest in Malls October 2008 – June 2009: No material mall transactions that we have been able to identify July 2009: Vintage Real Estate acquires regional mall. GI Partners October 2009: Heitman pays $168mm in cash and assumes $167mm of property level debt to acquire a 49. South Bay Pavilion.9% interest in Macerich’s Freehold Raceway Mall in NJ and Chandler Fashion Center in AZ November 2009: Blackstone acquires a 60% interest in two of Glimcher’s best malls – Lloyd Center and WestShore Plaza – for $62mm in cash and $130mm in assumed debt November / December 2009: Simon Property Group hires advisers to evaluate a potential acquisition of GGP The Wall Street Journal announces Brookfield has acquired $1bn of GGP’s unsecured debt 63 .

4%. Tenant Creditworthiness Tenant stock prices are up over 50% year-to-date Tenant cash flows have improved and margins are projected to expand Tenant balance sheets have strengthened 64 . 10-yr TIPS yield 1.Mall REITs are Still Cheap All of the principal drivers of mall valuations are favorable in the current economic environment Principal Drivers of Mall Valuation 1. Risk-Free Rate 10-yr Treasury yield of 3. Occupancy Current Environment Store liquidations have been less than anticipated Many retailers are planning expansions in 2010 New mall construction is on hold Economics of new store openings are attractive 2. other inflation protected assets trade at very low yields Corporate BBBs yield ~6% Mall cap rates are estimated to be ~7 to 8% 3.3%.

Which would you rather own? 1) A 10-yr Treasury at a 3.0%.5%. or 3) Shares in a mall REIT at a 7.0% cap rate . 7. or even 6.4% yield 2) A 10-yr TIP at a 1.3% yield.

B+ to A+ ■ Established tenant relationships ■ Low in-place occupancy costs ■ Diverse footprint ■ Lease-up / redevelopment opportunities ■ Fixed-rate debt provides a hedge against inflation ■ Low interest rates ■ Long-dated maturities ■ A healthy amount of leverage provides upside for return on equity ■ Good liabilities are an asset 66 .What are the Characteristics of the Ideal Mall REIT Best Positioned to Perform in the Current Environment? Assets ■ Established national platform provides leverage when dealing with tenants who are looking to expand or reposition stores Liabilities ■ Secured. non-recourse debt a portfolio of options is more valuable than an option on a portfolio ■ High-quality malls.

Conclusion During one of the worst recessions in over 50 years. Retailers on the sidelines are just like those investors who didn’t buy stocks in the spring 67 . mall REITs and their tenants have proven to be highly resilient Consumer spending does not need to return to 2007 levels for mall REITs and their tenants to outperform Store closures of underperforming tenants is a long-term positive for the mall industry Tenant cash flows and balance sheets have massively improved over the last twelve months Many opportunistic retailers have substantial growth plans.

 2009 Hovde Capital Advisors LLC .General Growth Properties “Fool’s Gold” We Think Current Equity Investors Will Be  Disappointed in the Company’s  Reorganization December 14.

32‐35) Potential Roadblocks (p.36) Disclosures (p.15‐31) Commercial Real Estate Valuation (p.3) The Demise of Malls in America (p.12‐14) Valuation Analysis (p.4‐11) The Beginning of the End (p. 2009 .Table of Contents • • • • • • • Thesis (p.37‐38) Hovde Capital Advisors LLC  2 December 14.

In our view:   ‐‐ the company’s cash flows are insufficient to service the debt and pay for  maintenance capital at its malls. Despite recent upward move in the GGWPQ share price.Our Thesis • • Due to highly leveraged acquisitions near the peak of the cycle. a decline in  the overall economy. LLC AND ONE OF ITS PRINCIPALS HAVE  SHORT POSITIONS IN GGWPQ. we believe the assets  of General Growth no longer support the current capital structure. in  contrast to several recent analyses. it is a cash flow  and loan‐to‐value problem. and  ‐‐ the bankruptcy is not just the result of a liquidity problem. • • NOTE:   THAT FUNDS ADVISED BY HOVDE CAPITAL ADVISORS. and insufficient capital spending. December 14.  SEE ADDITIONAL IMPORTANT DISCLOSURES AT PAGES 26 AND 27. We believe the value of the assets no longer exceed the value of the debt. we believe current  equity investors are likely to be left with little in the restructured entity. 2009 Hovde Capital Advisors LLC 3 .

 2009 Hovde Capital Advisors LLC 4 .The Demise of Malls in America Structural Change in Retail  Consumption and Distribution December 14.

  December 14.Consumers Are Saving More and  Spending Less Personal Savings Rate  (% of Disposable Income) 16 14 12 10 Percentage 8 6 4 2 0 ‐2 ‐4 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Source: U. 2009 Hovde Capital Advisors LLC  5 . Bureau of Economic Analysis.S.

 2009 Hovde Capital Advisors LLC  6 .Consumers Have Less Access to  Credit Source: Federal Reserve.  December 14.

Consumers Have Less Home Equity  Available to Support Spending Source: Federal Reserve. 2009 Hovde Capital Advisors LLC  7 .  December 14.

• This is evident in the outperformance of discount retailers versus broader  retail sales.  These retailers tend to be discounters and in non‐mall  locations. 2009 Hovde Capital Advisors LLC  8 . typically stand alone or located in strip centers and power  centers.   • December 14.  The outlet business offers  consumers better value. • Online shopping has experienced tremendous growth in share of retail  spending as consumers seek value and efficiency. which we think is  demonstrated in the recently announced acquisition of Prime Outlets by  Simon Properties Group (NYSE:SPG). offers retailers lower occupancy costs. • In our view. outlets are also likely to gain share. we  believe consumers are seeking more value in their consumption habits. • These trends do not bode well for mall fundamentals since neither are  mall based.Consumers Are Focused on Value Given lower levels of discretionary income and higher savings rates. and  provides landlords with better margins.

0 2.2) (4.4) (2.9) 1.  9 .3 3.0 (31.5) 8.6) (13.5 6.5) 9.1) 10.2) 4.4) 2.9) 2.4 1.0 3.0 3.0) 5.0 4.7) (4.0) 2.0 0.9) (2.1) (16.0 (15.0) (25.6) (12.5) 4.7) 7.2) (8.8) 8.0) (0.0) (1.5) (8.0) (13.8 (3.Non‐Mall Retailers Are Seeing  Improving Performance Same-Store Retail Sales (% Chg.4) (1.0 (4.9) 6.0) (0.0 (6.8 4.0) 1.4) 8.3) 8.2) (1.2 3.0) 0.0) 1.9) (5.0 (27.8 6.0 (3.0) (1.2) 0.0 (6.0 2.8) 5.2) (4.0 1.1 (0.9 14.0 (1.0 (0.5 13.0 (17.0 (11.6) (5.0 (1.4) 2.9 2.2) (3.6 4.9) (8.5) (4.2 5.0 4.0 4.9) (0.0) 1.0 (5.0 (25.0 0.0 (9.5) (8.2) 1.6) 4.7) 3.4 (0.5) 7.0 (0.1) 5.7) 8.9) 5.4) (1.1) (31.0 2.2) December 14.8) (4.5 6.3) (4. 2009 Hovde Capital Advisors LLC  Source: Bloomberg.0 (0.0 5.4 5.0 (1.0 (16.6 (10.0 (13.5) (12.3 6.2 (6.) Nov-09 Oct-09 Sep-09 Aug-09 Jul-09 Jun-09 May-09 Apr-09 Mar-09 Feb-09 Jan-09 Dec-08 Non-Mall Average BJ's Wholesale Club Inc Cato Corp/The Costco Wholesale Corp Kohl's Corp Nordstrom: Rack Stores Old Navy North Amer Rite Aid Corp Ross Stores Inc Stage Stores Inc Stein Mart Inc Target Corp TJX Cos Inc Walgreen Co 1.2) (34.2 3.2) 4.0) (0.0 (2.0 (0.9) 11.9 (2.4) (6.0 (8.6) (0.1) (4.0) 1.3) 0.2 8.7) (3.5) (7.6) (0.0 (5.0) (1.6) (4.7 4.5) (4.0) (6.6 (7.1) (24.8 3.7 (3.3) 0.0) (1.0 (12.8) (16.2 1.3) 2.4 5.0 (12.0) (0.5) (6.6) 1.0 (0.0 (24.6) (8.6) 0.0 (23.0 (7.8) 4.0 (1.6) (2.0 1.3 3.

0) (9.1) (23.6 (12.5) (2.2 5.1) (16.0 (5.1) (5.0) (12.5) (17.0) (1.6) (13.9) (19.0) (5.0 (7.6) (12.6) (4.0) (15.0) (8.1) (7.0) 3.5 (6.0) (9.0) (11.0) (8.7) (5.8) 2.6) (8.0) 12.0 (3.2) (8.6) (11.2) 14.7 0.0) (4.3) (12.0) (5.6) (4.4 (9.1) (10.0) (4.0) (8.6) (20.  10 .7) (6.0) (14.1) 18.0) 3.0) (8.8) (8.8 (4.9) (8.0) (18.2) (6.3) (16.8) (6.0) (11.5) (20.6) (15.5) (4.0) 5.0) (8.5) (24.0) (9.0 (1.1 (12.6 (8.6) (19.0) (6.2) (7.0) (20.0) 7.9) (16.8) (12.9) (5.6) (4.1) (10.0) (8.8) 5.8) 13.0) 20.Mall‐Based Retailers are Performing  Poorly We Believe This Is Likely to Lead to Retail Bankruptcies and Store Closings Same-Store Retail Sales (% Chg.0) (7.2) (13.7 (1.3) (7.0) (10.0) (8.0) 9.0) (6.9) (0.9) (23.0) 12.5) (13.2) (29.0) 11.0) (8.1) 13.0) (5.0) 7.0) (8.2) (12.3) December 14.8 (8.8) (13.8) (9.5) (12.4) (20.3) (30.2) (12.0) (12.0 (2.0 (16.0 (16.1 (6.4) 1.7) (14.1) 3.0) (22.0) (27.4) (9.7) (14.5) 21.3 (2.6) (12.1) (19.9) (3.0) 11.0) (10.4) (11.0) (6.0) (8.0) (14.0) (10.0) (9.0) 6.4 (13.8) (11.7) (27.0) (10.1) (22.7 (11.) Nov-09 Oct-09 Sep-09 Aug-09 Jul-09 Jun-09 May-09 Apr-09 Mar-09 Feb-09 Jan-09 Dec-08 Mall-based Average Abercrombie & Fitch Co Aeropostale Inc American Eagle Outfitters Inc Banana Republic N.9) (11.5) (0.0 (7.5) (12.0) (8.0) (2.8) (7.1) (28.6) (6.6) (32.0) (4.4) (18.3) (7.0 (17.0) 4.0 (12.0) (4.0) (12.0) 5.0) (16.0) 10.9) (4.7) (26.0) (7.7) (14.0 (5.5) (28.9) (19.0 (22.3) (16.1) (19.4) (12.0 (11.4) (32.5) (13.8) (16.0) 19.0) 3.8) (19.5) (12.1 4.8) (10.3) (10.3 (8.0 (7.6) (26.0) (6.1 4.6) (12.7) (26.4) (10.8) (18.9) (20.0) (10.3) (29.0) 9.0) (9.0) 1.7) (17.9) (8.3) (8.0) (8.0) (6.0) 3.3) (12.0) (7.6) (34.2) (9.0) (2.2) 14.0) (7.0) (4.0) (0.0 (7.9) 3.7 (2.0 (11.0) 6.1) (22.1 (7. 2009 Hovde Capital Advisors LLC  Source: Bloomberg.0) (5.0) (4.0) (11.6) (24.1) (5.0) (5.0) (11.0) (8.0 (6.4) (8.0 (2.6) (11.9) (3.0 3.1) (23. Amer Bon-Ton Stores Inc/The Buckle Inc/The Childrens Place Retail Stores Inc/The Destination Maternity Corp Dillard's Inc Gap North America HOT Topic Inc JC Penney Co Inc Ltd Brands Inc Macy's Inc Neiman Marcus Group Nordstrom: Full-line Stores Saks Inc Wet Seal Inc/The Zumiez Inc (6.0) (16.0) 19.

 Retail E‐commerce Sales as a Percent of Total  Quarterly Retail Sales: 4th Quarter 1999  2nd Quarter 2009 Percent of Total Source: U.Online Sales Are Gaining Share Estimated Quarterly U.S.  December 14. Census Bureau. 2009 Hovde Capital Advisors LLC  11 .S.

 2009 Hovde Capital Advisors LLC 12 .The Rouse Company  Acquired November 2004 The Beginning of the End December 14.

  December 14. • Portfolio of 37 regional malls (and various office assets) and  $2 billion of land and lots.3% ‐ implies over $4 billion  destruction of estimated asset value at today’s market  prices. • $400 million of goodwill – not only do we believe it was  purchased at near‐peak values. 2009 Hovde Capital Advisors LLC  13 .The Rouse Company Acquisition • Purchase price: $14. • Capitalization rate of 5. it was overvalued when  they bought it! Source: Rouse Company SEC filings. assuming an 8% cap rate. the land has an implied  value of zero or even negative values. mostly in Summerlin (Las Vegas)  – reports from market participants as noted on the next  page suggest land prices in this market have fallen  dramatically. in some cases. and.3 billion.

• “…finished lots are trading at a discount and the underlying land at many  nonprime locations for residential development has virtually no value in  today’s distressed market. 2009. There is more pain to come in this  Vegas land market. December 14.  We think there is little value in the master  planned community assets of General Growth. director of Western operations of Philadelphia‐based American Land Fund as quoted in the  Las Vegas Sun. Cherney says. March 1.The Rouse Company Acquisition • Las Vegas land is now worth materially less than in  2004.” ‐ Craig Cherney. 2009 Hovde Capital Advisors LLC  14 . This washout is far from over. The fundamentals of supply and demand are alive and well  and will ensure further declines into 2009.

Valuation Analysis December 14. 2009 Hovde Capital Advisors LLC 15 .

 2009 Hovde Capital Advisors LLC  16 . 2009 and October 1st 2009.  which used data from 2008.  We are of the opinion that this very  dated analysis is flawed based on the deterioration in financial  performance at General Growth since 2008. Macerich conference call  November 5th. *Source: Macerich press releases on September 3.5% capitalization rate assumption as far too  optimistic relative to private market transaction values. and rents on new leases are down 33% versus  current in‐place rents as of the third quarter.Widely Relied Upon Analysis Is  Outdated • We believe many investors/speculators have relied upon a Pershing  Square Capital LP analysis of the company issued in May 2009. 2009.19) is now more than 20%  below 2008 levels.* • Bottom line: we believe the assets are worth less than the  liabilities.   • We view the 7. December 14. • The company’s actual cash flow (see p. Macerich  (NYSE:MAC) recently sold comparable and higher quality mall  assets at cap rates higher than 8% (after factoring in preferred  returns to investors).

December 14.   Clearly companies with less leverage trade at premium  valuations as shown on the following page. • There are no comparably leveraged public companies in  the mall sector.  with debt to EBITDA of 6x.  Source: General Growth third quarter 2009 supplemental package. and is an investment grade rated  credit.Leverage is a Significant Valuation  Factor  • Pershing Square uses Simon Properties Group (NYSE:SPG)  as a comparable in their analysis without giving  consideration to leverage. but those that are more highly leveraged  trade at a significant discount to those with less leverage.  General Growth’s leverage is in excess of 16x and  would still be in excess of 12x even if all of the unsecured  debt was converted to equity. Simon Property Group third quarter 2009 supplemental package.  Simon is moderately leveraged. 2009 Hovde Capital Advisors LLC  17 .

2x 6. 2009 Hovde Capital Advisors LLC  18 . General Growth third quarter 2009 supplemental package.0x General Growth Properties ? 16.Leverage Is a Significant Valuation  Factor  Leverage and Valuation Comparison Implied Cap Rate Average CBL & Associates Macerich Simon Property Group Average 9.3% 7.5x Average of analyst estimates from ISI and Deutsche Bank as of 12/4/09.9x 8.3% Leverage (Debt/EBITDA) Average 8. December 14.3% 8.8x 8.3% 8.

December 14. This is the  starting point  for Pershing  Square’s  analysis.Cash Flows Have Collapsed This is the  reality of today  (‐27% yr/yr). 2009 Hovde Capital Advisors LLC  19 . Source: Third quarter 2009 General Growth supplemental package.

  Source: Third quarter 2009 General Growth supplemental package. December 14.Rents Are Rolling Down Dramatically New lease rates are 33% lower  than in‐place rents.  This is not  good for the NOI outlook. 2009 Hovde Capital Advisors LLC  20 .

8‐$4. 2009 – Pershing Capital Management. 2009 Hovde Capital Advisors LLC  21 . December 14.3 billion under  the Pershing Square valuation framework.5% cap rate and  +$5.5% cap rate. Source: “The Buck’s Rebound Begins Here” dated May 27. • Applying Q3 annualized NOI to the Pershing  Square valuation analysis.NOI Sensitivity Drives Valuation • The decline in NOI since 2008 drives a decline  in enterprise value of $3. (p.73 at a 7.P. L.03 at an 8. 56) and Hovde Capital Advisors LLC analysis (see  page 30). the implied equity  value per share of the company today is  NEGATIVE $5.

 2009 Hovde Capital Advisors LLC  22 . 2009. NY) to Cadillac Fairview  Corporation at a “low 7% cap” – per company  management. Macerich conference call  November 5th. December 14. 2009.   *Source:  Macerich press release July 30. • This mall generates $876/square foot in sales  versus General Growth’s $409/square foot. third quarter 2009 General Growth  supplemental package.Recent Comparable Transactions Indicate  Cap Rates Are Higher • *Macerich’s (NYSE: MAC) sale of JV interest in  Queens Center (NYC.

 2009.5% cap rate  on average.  Thus we infer the effective  implied cap rate is in the 8.   *Source:  Macerich press releases on September 3. 2009 Hovde Capital Advisors LLC  23 .5% range. 2009 and October 1st. December 14. 2009.Recent Comparable Transactions  Indicate Cap Rates Are Higher • *Macerich’s (NYSE: MAC) sale of JV interests in  malls to Heitman and GI Partners at a “less  than 100 basis points over the 7.” – per Arthur Coppola (11/5/09  conference call). Macerich conference call  November 5th. • These malls generate $443‐$500/square foot  in sales versus General Growth’s $409/square  foot.0%‐8.

 titled “SPG Acquiring Prime Outlets.0%‐8. 2009 Hovde Capital Advisors LLC  24 .   (1) Deutsche Bank estimate 8.  however. outlet malls generally tend to generate  slightly higher NOI margins than regional mall  format in our view. SPG to Acquire Prime Outlets.” December 14. titled “SPG: Stocking Up Before the Holidays.”)  Sandler O’Neil estimates ~8% cap rate (report dated  12/8/09.(1) • These malls generate $370/square foot in sales  versus General Growth’s $409/square foot.4% (report dated 12/8/09.4% cap rate  on in‐place NOI based on some Wall Street  estimates.Recent Comparable Transactions  Indicate Cap Rates Are Higher • The recently announced acquisition of Prime  Outlets by Simon Property Group (NYSE:SPG) was  estimated to be priced at an 8.

 2009 Hovde Capital Advisors LLC  25 . • We would argue a cap rate in the 8.What Is the Appropriate Cap Rate? • Based on recent comparable transactions. the use of  a cap rate below 8% seems disconnected with reality  in our view. December 14. given the below average  productivity of its malls* and the fact that it is  experiencing significant declines in new rents that in  our opinion will drive lower revenues and NOI for  some period of time.  * Source: based on Q3-09 disclosures from Macerich and Simon Properties Group.5% range or  higher would be more appropriate for the General  Growth portfolio.

Interest Coverage Is Unsustainable (This is cash flow problem. not just a liquidity problem) Interest  coverage has  fallen to  minimal levels  (1. December 14. Source: Third quarter 2009 General Growth supplemental package. 2009 Hovde Capital Advisors LLC  26 .17x) – this is  before capital  expenditures.

December 14. increasing  amortization. third quarter 2009 General Growth supplemental  package.0x or below based on the  company’s trailing 12‐month EBITDA as of 9/09. which steps up over time.  • Based on the company’s projections. before considering mandatory principal  paydowns and other cash costs.0008. this will initially drive the company’s  debt service coverage ratio to 1. Source:  US_ACTIVE:\43244255\04\47658.0x in 2010. debt service  coverage for the properties secured by these loans will  be 1.Amortizing Secured Debt Will Further  Reduce Debt Service Capacity • Recent agreement with $9. • This will add over $300 million of annual debt service  initially. debtor’s plan filed 12/1/09.7 billion of secured creditors  requires that interest‐only debt now amortizes principal  on a 30 year schedule. • By our estimates. i. 2009 Hovde Capital Advisors LLC  27 .e.

• This is only related to the agreement on $9. 2009 Hovde Capital Advisors LLC  28 .  servicer fees and expenses. December 14. Source:  US_ACTIVE:\43244255\04\47658. the funding of certain escrows and other  expenses. filed 12/7/09. catch‐up amortization payments. Exhibit 3.7 billion of secured  loans. • According to documents recently filed in bankruptcy court.2 million in extension fees. we believe additional  claims will likely be settled in equity ownership. suggesting little if  any recovery for common shareholders. General  Growth will be forced to pay $423. so we believe the cost to secure agreements to restructure  the remaining $12 billion of debt will likely cost significantly more if  the costs are comparable to this agreement. • Given our view that the cash costs of the restructurings will likely  exceed the company’s current cash position.0008.Creditors Will Take the Cash • Cash ($2/share) will likely be paid out to creditors in the form of  fees and reimbursement of legal expenses.  accrued interest.

(28. 56) and Hovde Capital Advisors LLC  analysis.11 $ 21.694 $ This is Q3 annualized NOI. 2009 – Pershing Square Capital Management.777 603 1.618) $ (28.5% 29.174) (121) (1.P.585) 0 1.200 (1) 8.875 $ (28.833 Per Share (1) See calculation of NOI on the page 30. $ 9.73 Source: “The Buck’s Rebound Begins Here” dated May 27.524 8.882 $ 2.06) $ 5.777 603 6.777 603 (1.333 ($ in millions.5% 33.50 $ (5.174) (121) (1. L. 2009 Hovde Capital Advisors LLC  29 . More Realistic Scenario High 2.524 7. and rents  are rolling down sharply (‐33%).585) 722 1.174) (121) (1.585) 0 1.174) (121) (1.5% 25.916 $ (28.5% 29. (p.200 (1) 7.Valuation Pershing Square’s Analysis Uses Dated NOI Pershing Square Analysis Framework This is from  2008 Low $ 2.777 603 2. December 14. except per share data) LTM Cash NOI Cap Rate Implied Value of GGP's REIT Pro Rata for JVs: Less: Total Debt Less: Preferred Debt Less: Other Liabilities Plus: Cash Plus: Other Assets Plus: Development Pipeline Implied Equity Value $ Cash will be  paid to  creditors in  fees and  recovery of  legal expenses.  which will drive lower NOI.585) 722 1.653 $ 2.

121 11. 2009 Hovde Capital Advisors LLC  30 .362 1.Calculation of Today’s NOI Net Operating Income Calculation (as of Q3-09) (figures in 000s) Consolidated & JV Share NOI (as reported) Less: lease termination fees Less: above/below-market rents Less: straight lined rents Less: tenant allowances & leasing costs Less: capital expenditures Plus: non-cash ground rent expense Total NOI Total Annualized NOI (x4) $ $ $ $ $ $ $ $ $ 585. December 14.620 3.203 3.823 548.478 16.194.586 2.344 Source: Third quarter 2009 General Growth supplemental package.859 3.

200 7.777 603 5.833 $ (21.333 Best Case .882 Per Share $ 5.382 $ (21.62 Assumed conversion price:                                      $           5.00        $       6.5% 25.200 7.333 $ 2.00         $         4.585) 1.5% 29.39 $ 2.03 $ 2.174) (121) (1.777 603 8.00 (1) See calculation on page 24. (2) Assumes cash is paid out to creditors in forbearance fees and reimbursement of legal expenses. 2009 Hovde Capital Advisors LLC  31 .5% 25.174) (121) (1.585) 1.00                $         5.585) 1.200 8.200 8.174) (121) (1.60 $ 3.382 $ (21.382 $ 2.00                $        7.5% 29.00          $         6.5% 25. except per share data) Annualized Cash NOI (1) Cap Rate Implied Value of GGP's REIT Pro Rata for JVs: Less: Total Debt Less: Preferred Debt Less: Other Liabilities Plus: Cash (2) Plus: Other Assets Plus: Development Pipeline Implied Equity Value $ (21.00          December 14.833 $ (21.585) 1.585) 1.Assuming Conversion Conversion Price Range $3-$6 2.882 $ Realistic Case Realistic Scenario .333 $ 2.833 $ (21.200 7.174) (121) (1.777 603 8.333 $ 2.  Best Case ($ in millions.777 603 5.00               $          3.14 $ 5.585) 1.382 $ (21.174) (121) (1.69 $ 7.585) 1.174) (121) (1.174) (121) (1.882 $ 2.777 603 8. $         8.777 603 8.777 603 5.13 $ 3.94 $ 6.5% 29.777 603 5.585) 1.Valuation Assumes unsecured debt would require a moderate discount to convert.200 8.833 $ (21.200 7.882 $ 2.174) (121) (1.5% 25.200 8.Assuming Conversion Conversion Price Range $5-$8 $ 2. although it  is questionable in our view whether there will be any value for existing shareholders  given that we believe the value of the debt exceeds that of the assets.5% 29.

Commercial Real Estate  Valuation Analysis December 14. 2009 Hovde Capital Advisors LLC 32 .

December 14. Real Capital Analytics.Commercial Real Estate Values  Have Dropped 43% Since the Peak Source: Moodys/REAL Commercial Property Index. 2009 Hovde Capital Advisors LLC  33 .

00% 9.00% 7.00% 10.00% 5.00% 6.00% Oct‐01 Oct‐02 Apr‐01 Oct‐03 Jan‐01 Jul‐01 Apr‐02 Oct‐04 Jan‐02 Jul‐02 Apr‐03 Oct‐05 Jan‐03 Jul‐03 Apr‐04 Oct‐06 Jan‐04 Jul‐04 Apr‐05 Oct‐07 Jan‐05 Jul‐05 Apr‐06 Oct‐08 Jan‐06 Jul‐06 Apr‐07 Apr‐08 Apr‐09 Oct‐09 Jan‐07 Jul‐07 Jan‐08 Jul‐08 Jan‐09 Jul‐09 Apartment Industrial Office ‐ CBD Office ‐ Sub Strip All Core Source: Real Capital Analytics.Capitalization Rates Have Moved  Significantly Higher Since the Peak  Capitalization  Rates 11. 2009 Hovde Capital Advisors LLC  34 .00% 8. December 14.

000 296.000 25.000 633.000 387.000 1.210 148.442.000 49.612 650.325.243.083.333.352.733 24.333 16.400.000 171.000.229.148.000 306.278 372.573 1.140 1.791 64.000 1.079.000.812 668.000 722.2009 Mall Transaction Data 2009 Regional Mall Transactions Retail .339 Year Built 1984 1959 1967 2005 2001 1990 1988 1975 2000 1990 1984 1973 1966 1963 2004 Price in $ 15.000 476.450.000 347.059.250.855 966. December 14. 2009 Hovde Capital Advisors LLC  35 .000 $ $/sq ft 14 140 140 67 223 223 36 134 481 317 207 134 26 66 25 149 Average Source: Real Capital Analytics.790 43.000 35.666.505.281 370.751.750.117.Regional Malls | North America | Us Type Retail Retail Retail Retail Retail Retail Retail Retail Retail Retail Retail Retail Retail Retail Retail Property Name West Oaks Mall Lloyd Center Westshore Plaza Bridgewater Falls Chandler Fashion Center Freehold Raceway Mall New Orleans Centre Mall Cupertino Square FlatIron Crossing Queens Center Kohl's South Bay Pavilion Colonie Center Mall Westland Fair Shopping Center (portion) Cincinnati Mall sq ft 1.000 17.379 1.499 83.851.

 tax liens.7 billion of loans have been filed recently  by secured creditors who hold mechanics liens.Potential Roadblocks  • Objections to the company’s plan of emergence related to  assets securing $9. • Such creditors include: – – – – – Apple Dillard’s  Lewisville (TX) Independent School District Pima County (AZ) Travelers Casualty and Surety Company Source: United States Bankruptcy Court for the Southern District of New York. 2009 Hovde Capital Advisors LLC  36 . and claims securing surety  bonds. December 14.  claims relating to rent claw backs.

Disclosures • Funds advised by Hovde Capital Advisors.  Their positions in these  stocks and others may change without further notice. LLC and one  of its principals have established short positions in the  common stock of General Growth Properties (OTC:  GGWPQ) and in the common stock of Macerich (NYSE:  MAC).  One of the principals has established a short  position in Saks (NYSE: SKS). LLC hold positions in any other  companies mentioned in this document other than  those mentioned above. • Neither the funds advised by or any affiliates of Hovde  Capital Advisors. December 14. 2009 Hovde Capital Advisors LLC  37 .

 views or analysis. 2009 Hovde Capital Advisors LLC  38 . LLC is not undertaking to  update its opinions. Hovde  Capital Advisors. • Although the factual information contained in  this document is believed to be accurate. LLC does not warrant its  accuracy or completeness. • This document is not intended to be. December 14. investment advice or a  recommendation to buy or to sell any security. and should  not be construed as.Disclosures Continued • The opinions and views express in this document  and the analysis set forth therein may change and  Hovde Capital Advisors.

. 2010 Pershing Square Capital Management.P. L.GGP Part II May 26.

funds managed by Pershing Square and its affiliates have invested in long and short positions of certain mall REITs. cover or otherwise change the form of its investment in any company for any reason. and other commitments to recapitalize that company.P. ("Pershing Square") contained in this presentation are based on publicly available information. Such statements. sell. without limitation. and other uncertainties and contingencies and have been included solely for illustrative purposes. L. the manner or type of any Pershing Square investment. Pershing Square manages funds that are in the business of actively trading – buying and selling – securities and financial instruments. Pershing Square recognizes that there may be confidential information in the possession of the companies discussed in the presentation that could lead these companies to disagree with Pershing Square’s conclusions. Pershing Square hereby disclaims any duty to provide any updates or changes to the analyses contained here including. 1 . are made as to the accuracy or completeness of such statements. among other things. access to capital markets and the values of assets and liabilities. No representations. estimates and projections prepared with respect to. This presentation and the information contained herein is not a recommendation or solicitation to buy or sell any securities. the historical and anticipated operating performance of the companies. estimates. Pershing Square may currently or in the future change its position regarding any of the securities it owns. Pershing Square reserves the right to buy. In particular. The analyses provided may include certain statements. including long debt and equity positions in General Growth Properties Inc. estimates or projections or with respect to any other materials herein. express or implied.Disclaimer The analyses and conclusions of Pershing Square Capital Management. and projections reflect various assumptions by Pershing Square concerning anticipated results that are inherently subject to significant economic. competitive.

L.P. 2 .At Last Year’s Ira Sohn Conference. 2009 Pershing Square Capital Management. We Delivered a 67-page Presentation on General Growth Entitled: The Buck’s Rebound Begins Here May 27.

we believe the Company would be able to repay existing creditors in full Benefits of this Approach: Secured and unsecured lenders receive 100% of the present value of their claims Prevents the liquidation of assets at “fire-sale” prices Preserves value for equity holders GGP platform remains intact Preserves jobs ________________________________________________ Source: See page 34 of “The Buck’s Rebound Begins Here.On Page 34 of The Buck’s Rebound Begins Here.” May 27. 3 . With a sevenyear extension. 2009. We Proposed the Following Solution for GGP to Address Its Bankruptcy A seven-year extension of GGP’s secured and unsecured loans at their existing interest rates would provide the Company with sufficient time to use cash flow from operations to delever its balance sheet.

07%. the vast majority of it will be repaid at emergence ________________________________________________ (1) Source: GGP Press Release (4/29/10). which is lower than the original interest rate (1) The weighted average duration of the loans is 6. 4 . 2010 (1) GGP has avoided a “fire-sale” of its assets Equity value has been enhanced While we suggested a maturity extension of GGP’s unsecured debt.GGP’s Bankruptcy has Progressed Largely as We Expected All of GGP’s property-level debtors have consensually agreed to extend $15bn of secured debt The weighted average contract interest rate for these loans is 5.5 years from January 1.

GGP has Secured a Commitment for Enough Capital to Repay its Unsecured Creditors in Full at Par Plus Accrued ________________________________________________ (1) Source: GGP Press Release (5/3/10). 5 .

This compares to Simon Property Group (“SPG” or “Simon”) whose TEV has risen 29% over the same period GGP Stock Price Performance $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 Jan-09 ________________________________________________ GGP traded at $1.19 as of last year’s Ira Sohn Conference $14 Apr-09 Jul-09 Oct-09 Feb-10 May-10 Source: Capital IQ (as of 5/28/10).The Buck Has Rebounded Though GGP’s stock price has risen more than 1000% over the past year. 6 . its TEV has only increased 12%.

A Little Context… .

consumer had hit the wall Mall REITs had limited access to capital Cap rates increased and transactions stopped as bidask spreads widened Bankruptcy risk and tenant “right-sizing” initiatives were expected to result in massive store closures Rent relief was a serious concern Tenant sales were expected to continuously decline 8 Since Then… .S. economy was in a serious recession The U.At the Beginning of 2009.S. The World was a Very Different Place for Mall REITs The U.

0%) (2.2% 2.6% 6.0%) (5.7%) (4.U. Economy Recovering U.0%) (6. Real GDP growth has been positive the past three quarters Real GDP (% Change) 8.S.0%) Q2’08 ________________________________________________ Q3’08 Q4’08 Q1’09 9 Q2’09 Q3’09 Q4’09 Q1’10 Source: Bureau of Economic Analysis (5/27/10).0% 2.4%) (6.0% 1.0% (0.7%) (2.0% 0. .0% 4.5% 3.4%) (8.0% 5.S.

AAA 06-2 Index ________________________________________________ Source: Bloomberg (as of 5/28/10). has marched upward over the past year Markit ABX.The Housing Market is Showing Signs of Improvement The ABX AAA 06-2 Index.HE. 10 . which tracks pricing on a basket of 2006 vintage subprime loans.

0 50.5 70. .0 73.5 73.0 67.Consumer Confidence is Up The University of Michigan Survey of Consumer Confidence Sentiment Index has improved since the beginning of 2009 University of Michigan Consumer Confidence Index (Trailing Three Month Average) 75.2 63.5 65.0 61.7 55.1 70. Most recent data point available as of 5/28/10.0 Sept-Nov 2008 ________________________________________________ Dec-Feb 2009 Mar-May 2009 Jun-Aug 2009 11 Sept-Nov 2009 Dec-Feb 2010 Mar-May 2010 Source: University of Michigan / Bloomberg.1 60.0 59.

0% 4. Most recent data point as of Apr-10.0% 0.0% 3. Personal Saving as a Percentage of Disposable Personal Income 7. the U. .0% Average: 2.S.0% 2.0% 5.Personal Savings Rate Reverting After peaking in May 2009.6% 1. personal savings rate has reverted to near its 10-yr average U.S.8% 3.0% Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 12 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 ________________________________________________ Source: Bloomberg / Bureau of Economic Analysis (as of 5/28/10).0% LTM 6.

Mall Traffic Improving Consumers are returning to malls as evidenced by positive mall traffic trends year-to-date in 2010 ________________________________________________ Source: Jefferies equity research (4/22/10). 13 .

2009 ________________________________________________ Source: Goldman Sachs equity research November 2009. COO of Simon Property Group. the construction in the retail sector is at a 20-year low.” – Rick Sokolov. December 4. when you look at the capital situation today. and the lack of new supply can only hopefully help the demand side for the existing product. 14 .Retail Construction Remains at a 20-Year Low “And frankly. We certainly anticipate it will remain there.

15 .35% senior notes due 2019 On January 19. 2010. Simon announced the sale of $2. 2009.0% cap rate.70% Macerich Equity Issuance Macerich Issues Biggest Share Offer On Record – WSJ 4/15/10 Macerich raised $1.23bn in equity at a ~7.25bn of 5.65% notes yielding 5. representing the largest secondary stock offering by a REIT on record The 30mm share sale was 62% over-subscribed relative to the original 18.Mall REITs Have Regained Access to Capital Simon Debt Issuances On March 25. including: $400mm of 4. 4/15/10.5mm anticipated share sale announcement on April 14th ________________________________________________ Source: The Wall Street Journal.25% $1. more than 25% of its market cap. Simon announced the completion of the issuance of $650 million of 10.20% notes due 2015 yielding 4.25bn of senior unsecured notes.

mall REITs still trade at a discount to corporate Baa yields Mall Implied Cap Rate vs.5% 5. Baa Yields 10. 16 .1% ________________________________________________ Source: Green Street (as of 5/1/10).5% 6.Mall REIT Cap Rates Have Declined and Should Decline Further Based on Historical Precedent Although Mall REIT cap rates have come in from their double-digit highs.0% 7.0% 6.4% 6. Most recent available.5% 9.5% 8.0% 5.0% Ja nM 05 ar -0 M 5 ay -0 Ju 5 lSe 05 p0 N 5 ov -0 Ja 5 nM 06 ar -0 M 6 ay -0 Ju 6 l-0 Se 6 p0 N 6 ov -0 Ja 6 n0 M 7 ar -0 M 7 ay -0 Ju 7 lSe 07 p0 N 7 ov -0 Ja 7 nM 08 ar -0 M 8 ay -0 Ju 8 lSe 08 p0 N 8 ov -0 Ja 8 nM 09 ar -0 M 9 ay -0 9 Ju l-0 Se 9 p0 N 9 ov -0 Ja 9 nM 10 ar -1 M 0 ay -1 0 Mall Implied Cap Rate Baa 6.0% 9.5% 7.0% 8.

9% 0.0% 0.1% 0.5% 1.3% 0.8% 0.6% 0.0% 1.Tenant Bankruptcies Have Decreased Taubman’s reported tenant bankruptcies dropped to 0% in Q1’10 Taubman Reported Tenant Bankruptcy Filings as a % of Total Tenants 1.2% 1. .0% Q3'08 ________________________________________________ Q4'08 Q1'09 17 Q2'09 Q3'09 Q4'09 Q1'10 Source: Taubman quarterly financial supplements.1% 1.9% 0.1% 0.

Limited. which include Gap. Source: Bloomberg (5/28/10).Tenant CDS Spreads Have Narrowed Mall tenant CDS spreads have narrowed approximately 400 basis points from peak levels seen in 2009 GGP Top 10 Tenants CDS Basket 600bps 500bps 400bps 300bps 200bps 139bps 100bps 0bps Jan-09 ________________________________________________ Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Note: Represents an equal-weighted basket of CDS prices for GGP’s top 10 tenants (where CDS pricing is available). JC Penney and Macy’s. 18 .

we hadn’t seen much of it year-to-date. as in the $7 million to $8 million range.” – Steve Sterrett.Rent Relief Less of an Issue than Originally Anticipated Simon expects to lose less than 2bps of total revenue as the result of rent relief concessions in 2009 “Our 2009 rent relief total will be under $10 million. But as I think we said on the call last quarter. But it’s a small number in the context of the size of our income statements. 2009 19 . So it’s a little back-end weighted. October 30. CFO of Simon Property Group. and as you look at the impact of average base rent it could have a nominal impact.

the Company expects lease rates to reflect those increases over time. with total in-line and outparcel tenant leasing deals covering 1. representing new deal square footage of approximately 284 thousand square feet.” – GGP Q1’10 Operating Supplement 20 . the number of new lease deals grew 84%. an increase of 21% over the same period of last year.36 million square feet signed. As sales continue their upward trend. they have stabilized. Within total deals. Although rents remain below 2007 peak levels.Mall Leasing Activity Picking Up Substantially “Retail leasing activity increased significantly in the first quarter of 2010.

21 .Tenant Sales Growing Quickly Anchor tenant same store sales have turned from negative in late 2008 and 2009 to materially positive so far in 2010 ________________________________________________ Source: “Why the Sad Face Mall Sector?” Credit Suisse equity research (4/26/10).

0% 3. January 2010 comparable sales increased 2.6% 6.” 22 – GGP Q1’10 Operating Supplement .0% and 10.5% year-over-year. respectively.5% year-over-year. “On a quarterly basis. with momentum picking up over the course of the quarter.3% 4.4% 2.0% 5.Mall REIT Comp Tenant Sales Growth Positive in Q1’10 8. portfolio only.0% 7. with February and March showing accelerating increases of 6.0% 0. comparable tenant sales rose a healthy 7.5% 6.0%.S.0% Based on Westfield’s U.

economy has recovered The U. consumer is bouncing back Mall traffic is increasing Demand for mall REIT debt and equity capital is high Cap rates have declined substantially Store closure fears were overblown Tenants are much better capitalized Rent relief has been minimal Tenant sales have returned to growth 23 .S.S.The World has Improved Dramatically The U.

South St Seaport) ■ Non-income producing assets (i.e. Fashion Show air rights) ■ Other assets Estimated Value: ~$15 24 Estimated Value: ~$5 .What Will GGP Look Like When It Emerges? GGP will emerge as two separate companies: General Growth Properties (“PF GGP”) and General Growth Opportunities (“GGO”) PF GGP ■ Ownership or management of approximately 200 regional malls ■ Community / strip retail centers ■ Office properties ■ GGMI ■ 13 underperforming malls (“Special Consideration Properties” or “SCPs”) assumed to be transferred to lenders GGO ■ Master Planned Communities (“MPC”) ■ Development assets (i. Victoria Ward.e.

PF GGP .

“mini-monopolies” within their respective markets A disproportionate share of PF GGP’s NOI is generated by its top assets Events of the past two years have further confirmed that high quality mall assets are recession-resistant Recent Underperformance Creates Future Upside Two years of financial distress have caused GGP to underperform its peer group Investors get the benefit of a turnaround opportunity without the risk 26 . 200 regional malls and other assets ~80% of its financing will be single-property. and elimination of deferred tax liabilities High Quality Approximately 100 of PF GGP’s malls are high-quality.Why is PF GGP a Good Investment? Low Risk PF GGP will emerge with much less debt. non-recourse debt Removal of SCPs. settlement of Hughes claim. but similar NOI PF GGP will be a portfolio of approx.

the credit quality of the “bonds” has improved as tenant credit quality has strengthened and their CDS spreads have narrowed Leasing up the mall adds new “bonds” and incremental cash flow to the portfolio with minimal capital investment The “bonds” represent a diverse group of retailers. restaurants and entertainment concepts.Why is PF GGP a Good Investment? (Cont’d) A mall is like a trust which holds a portfolio of bonds Over the past twelve months. it can be replaced at little cost Malls have a 50-year track record of stability and strong performance This “bond” portfolio is inflation-protected due to percentage rent and the rollover of 10-15% of leases per annum 27 . and if a tenant defaults.

The Value of Non-Recourse Debt Non-recourse financing creates material value for all real estate portfolios. or be disintermediated by a better located mall. Simon or Westfield) is analogous to an investor’s portfolio with margin debt. then a mall REIT is a portfolio of portfolios of bonds On the other hand. a mall might lose key anchor tenants. recourse debt (i. if not 100%. which could cause a mall to lose 80% or more of its value If such events were to destroy the value of a mall. but mall portfolios in particular The reason is that B minus and lower malls have potential catastrophic risk. For example.e. the exposure to an investor with non-recourse financing is limited to its equity in the mall because the property can be “sold” to the lender for the mortgage amount If a mall is a portfolio of bonds. a mall REIT primarily financed with unsecured. of the equity value 28 . where the failure of a portion of the portfolio can destroy large amounts.

each worth $100 and each with a 60% LTV non-recourse mortgage $60 $40 $100 $60 $40 $60 $40 Total Mall Value $300 $60 $60 $60 $40 $40 $40 $100 Leverage 60% $100 - Total Debt $180 29 = Total Equity $120 .Illustrative Example: Non-Recourse Financed Mall Portfolio Imagine a portfolio of three malls.

Onethird of the equity value is lost. and leverage remains the same $0 $60 $40 $60 $40 Total Mall Value $200 $60 $60 $40 $40 Leverage 60% $100 $100 - Total Debt $120 30 = Total Equity $80 .Illustrative Example: Non-Recourse Financed Mall Portfolio (Cont’d) Now assume one of the malls suffers catastrophic risk.

Illustrative Example: Recourse Financed Mall Portfolio Imagine the same portfolio of malls financed with unsecured. recourse debt $100 $180 $100 $120 $120 $180 Leverage 60% $100 Total Mall Value $300 - Total Debt $180 31 = Total Equity $120 .

the destruction of value would likely be even more severe $0 $100 $180 $100 $180 $20 Leverage 90% Total Mall Value $200 - Total Debt $180 32 = Total Equity $20 . equity value is nearly wiped out. Given the covenants associated with recourse debt.Illustrative Example: Recourse Financed Mall Portfolio (Cont’d) If one of the malls dies.

9 2. Rio West. (2) See appendix for details. Landmark Mall. (3) Includes Victoria Ward. See Exhibit E docket #4874 for full list of GGO assets.3% Occup.PF GGP Operating Metrics The disposition of Special Consideration Properties (SCPs) and GGO assets materially enhances PF GGP’s operating metrics TTM Tenant Sales PSF $411 250 325 $424 GLA (4) GGP (1) Less: SCPs / Highland (2) Less: GGO Malls (3) PF GGP 65. Park West and Cottonwood Mall.5% 82.5% 82. Source for tenant sales. Riverwalk Marketplace. occupancy and occupancy cost: Pershing Square estimates.4 Occup. (4) Mall and freestanding gross leasable area (excludes anchors).6% 18. South Street Seaport.3% (1) Source: GGP Q1'10 supplement pgs. Units in millions of sq ft. 90.0% 17.0 59. Redlands Mall. 33 .0% 14. Cost 14.3 3.5% 91. 31-32.

(2) As of 9/30/09. (5) On 5/3/10 the property owned by the Highland JV was transferred to the lender (Source: 10-Q pg 40).PF GGP Debt PF GGP’s leverage will be meaningfully reduced upon emergence PF GGP Debt Buildup ($ in mms) Total GGP Debt (3/31/10) (1) Interest coverage ratio (2) Less: SCPs debt (3) Less: GGO debt (3) Less: Stonestown mezz (4) Less: Highland (5) Less: TopCo unsecured debt (6) Less: DIP (6) Plus: New Debt (7) PF GGP Debt (3/31/10) Less: Additional amortization through 9/30/10e (3) PF GGP Debt (9/30/10e) Interest coverage ratio (3) (1) Source: Q1'10 supplement pg 2. (7) Assumed to be issued as part of PF GGP's emergence.0x 34 . (6) Assumed to be paid down as part of PF GGP's emergence.478 2.691 (212) $20.373) (400) 1. See appendix for details. (3) See appendix for details.2x (948) (506) (57) (32) (6. the last time GGP published its interest coverage ratio in its operating supplement.500 $20. $27.506 1. (4) Paid down Apr-10.

35 . (3) One-time additional property upkeep costs. PF GGP’s net operating income will be relatively unaffected PF GGP Adj Cash NOI Buildup ($ in mms) LTM GGP Cash NOI (1) Plus: Bankruptcy claims revenue/expense impact (2) Plus: One-time R&M spend (3) Plus: Real estate tax expense from dvlpmt projects (4) Less: SCPs / GGO / Highland LTM cash NOI (5) LTM PF GGP Adj Cash NOI $2. (4) Represents drag to GGP NOI from PF GGP development projects. (2) One-time revenue/expense impacts arising due to the bankruptcy.PF GGP Cash NOI Despite the dispositions of SCPs and GGO assets.290 (1) Source: GGP operating supplements. Source: Pershing Square estimate. Assumes 2009 and LTM are equal. Assumes 2009 and LTM are equal. Excludes MPC NOI. (5) Represents LTM cash NOI attributable to the SCP malls and GGO assets that are assumed to not be included in PF GGP cash NOI post-emergence. Source: Pershing Square estimate. Source: GGP Q4'09 operating supplement pg 7. Source: GGP Q4'09 operating supplement pg 7. This reflects "catch-up" R&M spend. See appendix for detail.360 25 16 5 (115) $2. These are non-recurring items.

725 324 440 190 65 1. PF GGP would emerge with a ~$16bn market cap (units in mms.00 Current FDSO (1) BPF minimum commitment Clawback shares (2) Liquidity Equity Issuances (3) PF GGP FDSO (excl warrants) Warrants (share equivalent) (4) PF GGP FDSO (incl warrants) PF GGP Market Cap Memo: Warrant Translation Fair Value of warrants (5) Divided by: Share Price Warrants (share equivalent) 324 440 190 65 1.069 $14. except per share data) $10.612 324 440 190 65 1.00 324 440 190 65 1.843 324 440 190 65 1.019 36 1. and 7-yr duration.00 31 $399 11. Source: Q1'10 operating supplement. 60mm warrants at $10. 60mm warrants at $10. (3) Assumes GGP sells 65mm Liquidity Equity Issuances shares.056 $11. (4) Represents the share-equivalent amount of 120mm warrants at various PF GGP share prices.00 36 $492 12.019 31 1.PF GGP Shares Outstanding / Market Cap At $15 per share. (5) Black-Scholes warrant valuation.019 57 1.019 41 1.060 $12.00 53 $908 16.00 $12. pg 27.00 324 440 190 65 1.019 50 1.50 strike. (2) Assumes full clawback of 190mm Pershing Square and Fairholme shares.75 strike.065 $13.00 $14.051 $10.073 $16.00 $15.00 50 $799 15.00 45 $693 14. 36 .00 57 (1) Includes OP Units and options.090 $16.506 Illustrative PF GGP FDSO @ Various Share Prices $11.00 41 $590 13.076 $17.019 45 1.965 324 440 190 65 1.219 $312 10.019 53 1. Assumes 20 vol.00 $13.

456 12. Boston Properties 15.090 15. Vornado 3. 37 .341 5. Public Storage 5.PF GGP Would Be the Second Largest U.7% 0.016 13. REIT Top 5 REITs in the IYR REIT Index by Rank (as of 5/28/10) REIT 1.S.8% 1.297 15.0% 4.9% Mkt Cap $29.3% 3.782 At $15 per share. Simon Property Group PF GGP 2. PF GGP would be the second largest REIT in the index ________________________________________________ Source: Market cap data from Green Street Real Estate Securities Monthly (as of 6/1/10).0% 5.4% 4.987 16. Equity Residential 4. Macerich % of IYR 8.

it will once again be added to the real estate indexes. it was removed from REIT indexes When PF GGP emerges from bankruptcy. dedicated REIT investor universe Dedicated REIT investors closely track REIT indexes As a result of GGP’s bankruptcy. This will make it a “must-own” equity 38 .PF GGP Will Be A “Must-Own” REIT Stock Shareholder overlap among public REITs is extremely high due to a large.

which tend to rely solely on basic shares outstanding.117 965 789 761 660 657 852 529 346 547 416 387 266 325 310 291 328 265 436 250 241 218 Vornado Shares Value 14 13 6 8 7 6 7 5 5 4 5 5 1 3 3 1 2 2 2 1 2 1 2 2 2 $1. % of GGP market cap is based on PF GGP market cap at $15 per share.Simon Crossholdings Analysis There is enormous shareholder overlap among the top five REITs in the IYR. the same 25 holders own ~60% of the top five REITs. yet they currently own less than 1% of GGP. 39 .464 1. (1) % of market cap is based on Capital IQ market cap estimates. On average.209 66% 109 $8. Rowe Price Group Security Capital Research Frank Russell STB Asset Mgmt Northern Trust Principal Global Investors Dimensional Fund Advisors Goldman Sachs Asset Mgmt TIAA-CREF Nikko Asset Mgmt Adelante Capital Mgmt Simon Shares Value 25 20 17 13 11 9 9 8 8 10 6 4 7 5 5 3 4 4 3 4 3 5 3 3 3 $2.010 64% 88 $7.961 52% 90 $6.826 65% 74 $2.034 969 680 559 505 490 149 288 316 194 311 285 317 212 132 185 180 160 146 159 168 118 148 130 126 Boston Properties Shares Value 12 11 4 6 4 5 2 4 4 3 3 3 4 3 2 3 2 2 2 2 2 2 2 2 2 $922 833 336 481 286 400 145 299 290 213 213 200 335 236 155 231 125 171 129 151 116 178 127 137 117 Shares 9 9 6 3 6 2 12 1 4 3 1 3 2 3 2 2 2 0 1 1 1 0 1 0 1 Macerich Value $364 359 229 130 224 68 496 30 163 128 21 115 96 108 97 76 64 3 31 27 40 3 51 16 31 Shares 0 0 0 0 0 1 2 0 0 0 - GGP Value 0 2 5 0 0 17 24 0 6 3 - Top 25 Holders % of Mkt Cap (1) ________________________________________________ 193 $16.120 1.073 975 444 579 524 489 567 392 358 280 343 393 99 211 192 98 154 189 152 108 152 66 133 159 126 Equity Residential Shares Value 24 22 11 13 8 12 8 17 7 5 6 7 3 6 3 6 4 3 3 2 3 0 2 3 3 $1. In order to obtain similar ownership of PF GGP. they must buy 60% or $9bn of PF GGP (units in millions) Top 25 Holders The Vanguard Group BlackRock Cohen & Steers State Street Global Advisors Fidelity Investments Stichting Pensioenfonds ING Investment Mgmt Morgan Stanley Inv Mgmt Invesco PGGM LaSalle Investment Mgmt Old Mutual Asset Mgmt RREEF AEW Capital Mgmt T.668 1.971 57% 4 $57 0% Source: Capital IQ as of 5/21/10.255 60% 182 $8.068 977 476 555 341 519 332 734 311 225 251 312 150 285 149 254 168 139 150 102 134 14 106 118 142 Public Storage Shares Value 11 11 8 6 6 5 2 3 3 2 3 3 3 2 1 2 2 2 2 2 2 1 2 1 1 $1.

PF GGO can sell up to 255 million shares at prices of $10.50 or greater (1) ________________________________________________ (1) Assumes full clawback of 190mm Pershing Square and Fairholme shares. and Pershing Square agreement.Not Your Typical Public Offering PF GGP’s emergence from bankruptcy will be tantamount to an initial public offering (IPO) Unlike traditional IPOs where buyers have all the leverage. As a result. PF GGP can achieve a high value execution Under the terms of the Brookfield. Assumes GGP sells full amount of 65mm Liquidity Equity Issuances shares. 40 . PF GGP’s equity is already fully committed pre-offering. rather than be a forced seller. Fairholme.

41 .00 $3.090 60.PF GGP IPO Supply / Demand Dynamic Demand ($ and shares in millions) Anticipated Demand from the Dedicated REIT Universe PF GGP Market Cap (@$15) Top 25 REIT Investors average % of Mkt Cap (1) Anticipated Demand $ 16.825 (1) Based on Simon Crossholdings Analysis.654 Supply Anticipated PF GGP IPO Supply Clawback shares (2) Liquidity Equity Issuances (3) PF GGP IPO Share Supply PF GGP share price Anticipated Supply $ 190 65 255 15.0% $9. (2) Assumes full clawback of 190mm Pershing Square and Fairholme shares. (3) Assumes GGP sells 65mm Liquidity Equity Issuances shares.

219 Memo: $9. In addition.141 $34.076 $17.) GGP's share of this debt as of 3/31/10 was $95.7% 2.290 7. Excludes goodwill.729) (1. Debt estimate is derived from GGP's public filings and may not exactly reconcile to GGP's 9/30/10e estimate of such debt.00 $15.5bn of New Debt. See appendix for details.957 $31.971 $22.212 $35.287 $36.971 (948) (506) (32) (15) (1. (10) 9/30/10e PF GGP debt less $500mm of Proportionally Consolidated Unrestricted Cash.686) (1.780) (1.686) (1.00 $14.678) (1. (6) Includes GGP's other liabilities that are not accounted for as part of Target Net Debt.686) (1.965 $15.882) (1.345 1. in line with comparable mall REITs (units in mms.7% 66. (3) Debt associated with properties going to GGO needs to be removed from Target Net Debt to arrive at an estimate of PF GGP debt.060 $12.074 $33.00 $10.0% 69.4% 2. See appendix for details. PF GGP would trade at a 6.00 1.725 $13.00 1. such as accrued interest and Permitted Claims (i.971 $22.971 $22. GGP's headquarters leasehold. (8) Applies 25% EBIT margin assumption to LTM management income of $80mm.9% (1) Target Net Debt as of the original Cornerstone Investment Agreement.5x multiple to implied LTM EBIT.051 $10. Target Net Debt is an estimate of GGP's net debt as of 9/30/10e.012 $32.00 1. See appendix for details.2% 62. Fashion Place.00 $12.00 $10. Source: Q1'10 operating supplement.030 2.859 (151) (183) $28.686) (1.686) $28. (5) See Excess Sources appendix page for details. Source: pg 17 of Q1'10 10-Q. Therefore. to the extent GGO's IPO Participation is greater than permitted liabilities. This is a Pershing Square assumption as the outcome is TBD.971 $22.686) (1.00 $9. Source: pg 75 of docket #4874.6% cap rate. See appendix for details.5% 64. St Louis Galleria.0% 60. (9) PF GGP development assets including Christiana Mall.8% 58." Furthermore.6% 2.971 $22.831) (1. Target Net Debt includes the Company's estimate of bankruptcy "exit costs.00 1. debt associated with GGP's international subsidiaries.065 $13.678) 1. Bankruptcy "exit costs" are excluded from uses in the Excess Sources calculation because they are included as Permitted Claims in Target Net Debt.525 2. Target Net Debt includes PF GGP and GGO liabilities.290 6.069 $14. except per share data) Illustrative PF GGP Cap Rate @ Various Share Prices $11.740 $32. Excess Sources are treated as cash and offset Target Net Debt.345 1.045 $9.506 $11.00 $13.4mm (Source: Cornerstone Investment Agreement. Source: Q1'10 supplement pg 2.290 7.4% 54. GGO debt includes debt associated with Victoria Ward. This assumes GGP "hands back the keys" on SCP malls.Illustrative PF GGP Valuation at Various Share Prices At $15 per share. among other things. Target Net Debt includes the following: $1. Applies 7. Target Net Debt includes non-debt liabilities.290 6.345 1.408 $22.00 1.6% 56.2mm. (2) SCP debt needs to be removed from Target Net Debt to arrive at an estimate of PF GGP debt upon emergence (assumed to be 9/30/10e).00 1.290 8. . the KEIP).00 $16.678 $31.090 $16. (7) See appendix for details.953 $36.056 $11.290 6.e.971 (948) (948) (948) (948) (948) (948) (948) (506) (506) (506) (506) (506) (506) (506) (32) (32) (32) (32) (32) (32) (32) (15) (15) (15) (15) (15) (15) (15) (1.290 7.290 7.345 1.00 1.073 $16.686) (1.807 $33.345 (1. 42 (4) Brazil debt included in Target Net Debt is $110.843 $14.933) (1.686) $29.345 (1.984) 1.3% 2.623 $30.2% Price PF GGP FDSO (incl warrants) Market Cap Target Net Debt (1) Less: SCPs debt (2) Less: GGO debt (3) Less: Highland debt Less: Brazil adjustment (4) Less: Excess Sources (5) Plus: Other liabilities (6) Less: Other assets (7) TEV Less: GGMI (8) Less: Development assets (9) Adj TEV PF GGP LTM Adj Cash NOI Cap Rate Net Debt / TEV (10) $22.364 (151) (151) (151) (151) (151) (151) (151) (183) (183) (183) (183) (183) (183) (183) $29. Source for LTM fee income: GGP operating supplements.4% 2. and preferred stock.612 $12.345 1.345 1.00 1. the Bridgelands MPC and GGP's pro rata share of the Woodlands MPC debt.3% 2.971 $22. Excess Sources will likely be higher than presented.878 $34.

GGP Currently Trades at a Meaningful Cap Rate Spread to Simon At a $14 share price. PF GGP trades at an 8. 43 . (1) See previous page for details.0% implied cap rate net of GGO(1) ________________________________________________ Source: “Why the Sad Face Mall Sector?” Credit Suisse equity research (4/26/10).

especially if the debt is high-quality. it will have a long-dated. (3) Source: Westfield financial results. 2010 paydown of $24mm Carmel Plaza loan.49% 3. Assumes 100% of mortgage debt is non-recourse. 2010 paydown of $690mm line of credit and April 7. Adjusted to reflect April 25. Data as of Q4'09 if Q1'10 data is unavailable. (4) Source: Macerich operating supplements. .50% 5. is more of an asset than a liability Pro Forma (1) (2) (3) (4) Interest Rate Debt duration Non-Recourse Leverage Ratio (5) 5. laddered debt maturity profile. PF GGP Leverage Ratio represents Net Debt / Adj TEV at $15 per share. some of this debt is recourse but disclosure is unavailable.2 yrs < 52% 50% NA 7.0 yrs < 20% 49% 5. some of this debt is recourse but disclosure is unavailable. Most likely.PF GGP Will Have An Industry Leading Balance Sheet Although PF GGP will have slightly more leverage than its peers on an absolute basis. Adjusted to reflect refinancing and extension of Vintage Faire Mall loan.2 yrs < 89% 53% (1) See appendix for PF GGP balance sheet details.21% 5. Assumes 100% of mortgage debt is non-recourse. 44 (5) Source: Green Street Real Estate Securities Monthly (as of 6/1/10). We believe a reasonable amount of non-recourse leverage. Most likely. (2) Source: Simon operating supplements.3 yrs 78% 57% 5.

6% $400 92.3% 6.PF GGP Will Have Industry Leading Operating Metrics PF GGP will have the added benefit of near-term growth as it refocuses on its operations post-emergence and corrects for the underperformance that resulted from its bankruptcy Pro Forma (1) (2) (3) Sales per Sq Ft Occupancy Occup. See PF GGP Operating Metrics for PF GGP occupancy cost details. Includes regional mall portfolio.0% $416 91. See appendix for details on Simon's cap rate.0% 45 $420 91.2% 3. and malls included in Other Properties (excl Highland Mall).1% 6. mall portfolio only. (5) Source for Macerich / Westfield: Green Street Real Estate Securities Monthly (as of 6/1/10).1% 17.4% 7. Data as of Q4'09 if unavailable in Q1'10 financial results.S.0% 5.3% 14. . PF GGP cap rate based on implied share price of $9 net of GGO. Source: Westfield financial results.6% 6. Cost (4) $424 91. Mall REITs May '10 Update" Green Street 5/19/10.5% 8.2% 14.0% Tenants Sales Growth (Q1’10) Cap Rate (5) (1) Simon malls only. See later pages for Simon Malls operating metrics details. (3) Source: Macerich operating supplements. Source: Simon operating supplements and 10-K. See appendix for details on Simon's occupancy cost. the Mills.3% 7.S.0% 15. (2) Based on Westfield's U. Mills regional malls. (4) Source for Macerich / Westfield: "U.

4% 7.1% 6.0% 15.3% 6.2% 14. Pershing Square is the second largest owner with roughly 14% of the total shares outstanding (1) (2) (2) (2) Sales per Sq Ft Occupancy Occup.0% $416 91. a Brazilian mall developer.5% ~11% 46 $420 91.2% 3.0% 13.4% 16.1% 17. $540 98.6% 6.0% . which went public in January. Cost Tenants Sales Growth (Q1’10) Cap Rate (1) Source: Aliansce Q1'10 financial results and Pershing Square estimates.6% $400 92.0% 5.Aliansce GGP owns 35% of Aliansce. (2) See previous page for details.

. This caused its newly reported Regional Malls segment’s occupancy and sales per square foot to appear to increase meaningfully ________________________________________________ 47 Source: Simon operating supplements. Simon consolidated its Premium Outlets segment into its Regional Malls segment.A Word On Simon’s Reported Operating Metrics Beginning in Q1’10.

This further served to increase Simon’s reported Regional Mall occupancy and sales per square foot as of Q1’10 48 . but showed up in its Other Properties segment as of 12/31/09.A Word On Simon’s Reported Operating Metrics (Cont’d) We note that Simon’s Regional Mall portfolio excludes several regional malls in The Mills and Mills Regional Malls segments In our view. a joint venture between Simon and GGP that was 51% occupied as of 12/31/09. was recently transferred back to the lender Highland Mall was included in Simon’s Regional Mall portfolio as of 12/31/08. Highland Mall. these assets should be included in Simon’s Regional Malls portfolio Simon has also transferred certain of its underperforming malls into its Other Properties segment For example.

7% $373 20.6 89.8% $455 59.4% $410 8.6 Q1'09 Simon Property Group (1) Q2'09 Q3'09 90.3 87.8 89.2 89.6% $440 60. the best comp for Simon’s Premium Outlets segment.6 94.8 Simon Malls Occupancy Sales per Sq Ft Owned GLA (excl anchors) 91.9% $369 20.8 91.9% $442 59. Tanger Factory Outlet Centers.7 Q1'10 91. (4) Data not available.8 90.4% $369 20. Source: Pershing Square estimates. was trading at a higher cap rate than Simon* * Tanger traded at a 6.0% $420 89.9 Q4'09 92.3 92.2 87.2 88. which excludes its outlets.6 30. Other Properties Malls (excl Highland Mall) (3) Occupancy 30.6 30.3 (1) Source: Simon operating supplements.A Word On Simon’s Reported Operating Metrics (Cont’d) We believe the most appropriate way to compare Simon and PF GGP is to look at Simon’s true regional mall portfolio.8 90.5% $372 20. (3) Includes Mall at the Source.3 87. 49 .6 30.4% $410 8.1 93. but includes its Mills malls and the underperforming malls included in its Other Properties segment (GLA in millions) Q4'08 Regional Malls Occupancy (2) Sales per Sq Ft (2) Owned GLA (excl anchors) The Mills Occupancy Sales per Sq Ft Owned GLA (excl anchors) Mills Regional Malls Occupancy Sales per Sq Ft Owned GLA (excl anchors) 92.0% $250 0.9% $369 20.7 30.4% $438 60.4% $470 59.0% $250 0.3% $380 8.9% $388 8.8% $416 89.4% $418 8.0% $250 0. (2) Q1'10 data not available in Simon filings. Source: Pershing Square estimates.9% implied cap rate as of 6/1/10.8% $441 89.4% $397 8.7% $430 89.0% $250 0.1% $419 89.3% $372 20.3 As of 6/1/10.6 30. Nanuet Mall and Palm Beach Mall (at share).2 88.7 90.1% $433 60.0% Sales per Sq Ft (4) $250 Owned GLA (excl anchors) 0. Source: Green Street Real Estate Securities Monthly (as of 6/1/10).0% $250 0.1 93.3 91.7% $412 89.8 91.8 90.

GGO .

Seaport ■ Summerlin Center ■ Landmark Mall ■ Park West 51 Non-Income/Other ■ Fashion Show ■ Princeton Land ■ 110 N. We believe GGO will have the balance sheet and the intellectual and operating capital to take full advantage of these opportunities General Growth Opportunities (Select Assets) MPC ■ Summerlin ■ Columbia ■ Woodlands ■ Bridgeland Development ■ Victoria Ward ■ South St. Wacker .What is General Growth Opportunities? GGO’s portfolio features some of the best real estate development assets in the country.

275 GGO % Share 80% $ 80% $ GGO $ Share 760 260 1.020 $ $ 16.825 $ 1. This IPO Participation allows GGO to benefit from a successful PF GGP capital raise GGO IPO Participation at a $15/share GGP Offering ($ in millions.00 204 $ $ 12.00 1.00 - $ $ 11.224 .00 408 $ $ 13.020 Sensitivity of GGO IPO Participation to GGP Offer Price GGP Offer Price GGO IPO Participation (1) Assume 65mm Shares 52 $ $ 10. except per share data) Clawback Shares Liquidity Shares (1) GGP Shares Total Proceeds Issued Proceeds above $10 190 $ 2.00 1. up to the value of the ~$300mm deferred tax liabilities and the Hughes claim.00 612 $ $ 14.850 $ 950 975 325 65 255 $ 3.GGO IPO Participation Under the terms of the fully executed Cornerstone Investment Agreement.00 816 $ $ 15. GGO will retain 80% of every dollar PF GGP raises above $10 per share.

GGO IPO Participation (Cont. "Permitted Claims". We believe that cash from a PF GGP capital raise even at prices meaningfully lower than $15 per share is more than sufficient to satisfy these claims Permitted Use of IPO Participation ($ in millions. except per share data) Promissory Note (1) Deferred Tax Liabilities (2) Hughes Heirs' Claim Permitted Liabilities $ $ 304 X $304 + X The face value of the note is equal to overruns above a conservative projection of bankruptcy exit costs At $15 per share.) GGO’s use of proceeds from the PF GGP share offering is limited to satisfying permitted liabilities. substantially more than enough to satisfy these permitted liabilities (1) Projected bankrupcty exit costs. are $650mm per Pershing Square assumptions (2) Source: Cornerstone Investment Agreement 53 . the GGO IPO Participation will be ~$1bn.

Hughes Claim GGP can settle the claim in bankruptcy at an estimation hearing Settlement is based on a 12/31/09 valuation of Summerlin MPC We expect the company to settle this claim at a reasonable number Post settlement. GGO will have 100% ownership of Summerlin (from 50%) 54 .

80mm warrants at $5.00 per share strengthens GGO’s balance sheet Share Count (millions): Current GGO FDSO (1) Rights Offering Backstop Shares (2) PF GGO FDSO (excl warrants) Warrants (share equivalent) (3) GGO FDSO (incl warrants) (1) Includes OP Units and options. Includes 2. Assumes 20 vol. (3) Black-Scholes warrant valuation.5mm share backstop consideration. (2) Assumes only the backstop rights are exercised. Source: Q1'10 operating supplement.00 strike. pg 27. 55 324 53 377 23 400 .GGO Share Count A $250 million share backstop at $5.

Property Specific Debt (1) Permitted Liabilities. $250mm of balance sheet cash ensures GGO has ample liquidity to fund value creation opportunities GGO Capital Structure ($ in millions.00 400 2. net of GGO IPO Participation Cash (2) Net Debt Enterprise Value (1) See Appendix (2) Excludes property level cash balances because data is unavailable 56 $ 5.) GGO will have a strong balance sheet.GGO Capital Structure (Cont. except per share data) Price Shares (mm) Equity Value Non-Recourse.256 .000 506 (250) 256 $ 2. 100% of GGO’s debt is property level and non-recourse.

400 acres outside of Houston. MPCs Summerlin Woodlands ■ 11.MPC Portfolio MPC Portfolio Bridgeland Maryland.500 acre community west of Las Vegas ■ Successful JV MPC near Houston. TX ■ Collection of properties between DC and Baltimore ■ 22. TX 57 .

entertainment and offices The plan clears a path for GGP to bring to the oceanfront neighborhood as many as: 4. shops.Development Asset: Victoria Ward GGP recently received zoning approval to transform 60 acres of land in the heart of Honolulu into a vibrant and diverse neighborhood of residences. parks and public facilities 58 . restaurants and entertainment 4 million square feet of offices and other commercial space 700.000 square feet of industrial uses 14 acres of open space.300 residential units. many of them in towers aligned to preserve mountain and ocean views 5 million square feet of retail shopping.

59 .Development Asset: Victoria Ward (Cont’d) 1.43 acres of land sold for $26mm ($18mm / acre) here in June-07 (1) ________________________________________________ (1) See appendix for details.

GGP was exploring a billion dollar redevelopment of South St.000 square feet of retail space A 286 room hotel and a smaller 163 room boutique 103 residential units Nearly 5 acres of open space 60 . Seaport Highlights of the development include: 400. Seaport Before the market turned.Development Asset: South St.

Development Asset: South St. Seaport (Cont’d) 61 .

5/25/2007 62 . three-story property is located across from the Wynn and Encore.Non-Income Producing Asset: Fashion Show Air Rights GGO owns the air rights above the Fashion Show Mall in Las Vegas This 48 acre. the most lucrative part of the Las Vegas Strip In 2007. nearby North Vegas Strip land sold for $34mm/acre¹ Fashion Show’s location is within walking distance of 75% of the city’s more than 150. The Palazzo. Glenn Haussman.000 hotel rooms Located adjacent to Fashion Show is The Venetian. and Sands Expo Center – the largest hotel convention complex in the world ¹Source: "Vegas Land Values Soaring Sky High". Hotel Interactive.

The North Vegas Strip Encore Fashion Show Wynn Palazzo Venetian Caesars 63 .

Conclusion .

GGP Trades at a Meaningful Discount to Intrinsic Value At a $14 GGP share price. you are buying GGO for negative $1 GGP Valuation PF GGP GGO Combined GGP Share Price Implied Return at Emergence by Year-end ~$15 ~$5 ~$20 ~$14 43% 65 .

people have accused me of talking my book.Over the years. For my best investment idea… .

Buy Christine Richard’s Book. and Tell Your Friends 67 .

And one more thing… We have accumulated ~150mm shares of Citigroup during the past several weeks… 68 .

Appendix .

42% 6.4 3. Source for debt balance / interest rate / duration: 5/12/10 8-K.9 6.2 0.6 $250 51. pg 22.5 1.88% 5.4 3. Note: Occupancy costs are higher at underperforming malls because sales are low but rents are locked in.12% 5.9 Balance Sheet Data Interest Duration Debt Rate (yrs) $47 51 84 13 86 41 44 24 49 107 114 56 33 $750 66 134 $198 $948 32 $980 5.SCPs / Highland Mall (units in millions.1 0. 50% of the GLA is shown). 21-22. except per unit data) GLA (5) Consolidated Properties (1) Eagle Ridge Mall Oviedo Marketplace Grand Traverse Mall Country Hills Plaza Moreno Valley Mall Lakeview Square Northgate Mall Bay City Mall Mall St.4 4.2 0.3 1.3 0.3 0.98% 5.e. (4) Source: Pershing Square estimates. 70 (3) On 5/3/10 the property owned by the Highland JV was transferred to the lender (Source: 10-Q pg 40).95% 5.83% 5.97% 5.41% 5. Source for debt detail: Simon Q1'10 supplement.2 0.7 0.8 4. docket #3660.3 0.3 0.0% Operating Metrics (4) Sales Occup PSF Occup Cost (1) Source: Exhibit C.3 3.8 3. Source for occupancy: Simon 10-K.74% 5.2 3.30% 4.38% 4. Vincent Southland Center Chapel Hills Mall Chico Mall Piedmont Mall Subtotal Unconsolidated Properties (2) Silver City Montclair Subtotal SCPs Highland Mall (3) SCPs / Highland 0.8 6.1% 82.5 3.8 6.47% 5.2 3.2 0.3 0.8 3.2 3.3 0. Data presented pro rata (i. Source for subtotal debt balance (as of 3/31/10): Q1 10-Q.3 0. Source for duration: Q3'08 operating supplement.4 0.02% 6. (2) Source for malls: Q1 10-Q pg.57% 5.2 0.5 3. (5) Mall and freestanding gross leasable area (excludes anchor space).2 1.81% 5. if GGP owns 50%.04% 4.88% 5.8 5.7 1.30% 6.3 0.3 3. .5% 18.96% 5.04% 5. Source for debt balance / interest rate / duration: Q3'08 supplement.8 3.

Note: Excludes debt which may arise to the extent there is a GGO Promissory Note.987 Debt Balance as of: 3/31/10 9/30/08 12/31/09 9/30/08 Source 5/12/10 8-K Q3'08 supp 10-K Q3'08 supp Note: Most recent debt balance reported assumed to be 3/31/10 balance.812 216. True balance is actually less as amortization has occurred since most recent reported debt balance.GGP Debt Detail – GGO ($ in 000s) GGO Debt Victoria Ward Cmbd 110 N.943 29. We believe the amount of this note will be $0. Wacker Bridgelands MPC Woodlands MPC GGO Debt Debt Balance $213.343 $505. Note: All GGO debt sits at the property-level and is non-recourse. 71 .889 45.

187 68.932 84. 72 .785 55.268 21.147 55.754 71.952 2.826 44.600 105.795 83.623 42.175 88.400 39.556 235.441 166.691 24.A.543 24.320 1.620 78.311 92.400 215.505 57.088 278.885 381.670 97.884 6.772 138.325 96.214 68.085 182.869 11.478 40.074 78.105 23.597 249.054 174.764 36.758 $14.976 44.522 173.810 40.142 31.174 35.773 Debtor Entities: Mayfair Cmbd (offices included) Mondawmin Mall Cmbd Moreno Valley Mall Cmbd Neighborhood Stores Newgate Mall Cmbd Newpark Mall North Plains Mall Cmbd North Point Mall Cmbd North Star Mall North Town Cmbd Northgate Cmbd Northridge Fashion Ctr Cmbd Oakwood Center Cmbd Oakwood Cmbd Oglethorpe Cmbd Orem Plaza Center Street Orem Plaza State Street Oviedo Marketplace Cmbd Owings Mills Oxmoor Cmbd Park City Center Cmbd Park Place Cmbd Peachtree Cmbd Pecanland Mall Piedmont Cmbd Pierre Bossier Cmbd Pine Ridge Cmbd Pioneer Place Cmbd Prince Kuhio Plaza Providence Place Cmbd Red Cliffs Mall Cmbd Regency Square Cmbd Ridgedale Center Cmbd Ridgley Building River Hills Cmbd River Pointe Plaza Riverside Plaza Rivertown Cmbd Rogue Valley Cmbd Saint Louis Galleria Salem Center Cmbd Sikes Senter Cmbd Silver Lake Cmbd Debt 3/31/10 274. (2) Paid down in April-10.913 65.696 5.281 56.000 105.129 57.159 33.352 82.406 28.228 Debtor Entities: Sooner Cmbd Southlake Cmbd Southland Center Cmbd Southland Cmbd Southwest Plaza Cmbd Spring Hill Cmbd Staten Island Mall Steeplegate Mall Cmbd Stonestown Mezz Stonestown Notes A/B The Boulevard Cmbd The Crossroads (MI) Cmbd The Gallery at Harborplace Cmbd The Maine Mall Cmbd The Palazzo The Shoppes at Fallen Timbers Cmbd The Woodland Mall Three Rivers Cmbd Towneast Cmbd TRS-Fallbrook Cmbd TRS-Grand Canal Shoppes Cmbd Tucson Mall Tysons Galleria Cmbd University Crossing Valley Hills Cmbd Valley Plaza Cmbd Victoria Ward Center Victoria Ward Village/Gateway/Indust Victoria Ward Warehouse/Plaza Village of Cross Keys Cmbd Visalia Cmbd Vista Commons Vista Ridge Mall Cmbd Washington Park Mall Cmbd West Valley Cmbd Westwood Mall White Marsh Mall Cmbd White Mountain Cmbd Willowbrook Cmbd Woodbridge Center Cmbd Woodlands Village Debtor Entity Debt Debt 3/31/10 59.422 2.308 10.GGP Debt Detail – Debtor Entities ($ in 000s) Debtor Entities: 10 Columbia Corporate Center 10000 Chrlston/ 9901/21 Cvngton 10000 Covington Cross 10190 Covington Cross 1160/80 Town Center Drive 1201/41 Town Center Drive 1251/81 Town Center Drive 1551 Hillshire Drive 1635 Village Center Circle 1645 Village Center Circle 20 Columbia Corporate Center 30 Columbia Corporate Center 40 Columbia Corporate Center 50 Columbia Corporate Center 60 Columbia Corporate Center 9950/80 Covington Cross Ala-Moana .440 124.255 645.951 142.877 174.473 240.482.164 59.382 25. Note: Entities with no debt will be unencumbered upon emergence.487 118.704 69.Total Animas Valley Cmbd Apache Cmbd Arizona Center Cmbd Augusta Mall Cmbd Austin Bluffs Plaza Bay City Mall Cmbd Bayshore Cmbd Beachwood Place Cmbd Bellis Fair Cmbd Birchwood Cmbd Boise Towne Plaza Boise Towne Square Brass Mill Cmbd Burlington Town Center Cmbd Cache Valley Cmbd Capital Cmbd Chapel Hills Cmbd Chico Mall Cmbd Chula Vista Center Cmbd Collin Creek Combine Colony Square Cmbd Columbia Center-C.174 114.800 10. Vincent Cmbd Market Place Cmbd Debt 3/31/10 4. Building Columbia Center-Exhibit Bldg Columbia Mall Cmbd Columbiana Centre Cmbd Coronado Center Cmbd Debt 3/31/10 21.489 120.820 386.950 194.432 40.876 (1) (1) (1) (1) (2) (1) (1) (1) (1) (1) (1) (1) (1) (1) Source: GGP 5/12/10 8-K.066 53.919 43.386 1.121 56.893 54.745 30.345 39.128 146.117 186.948 25.290 115.588 175.669 91.143 10.390 41.500 10.194 11.028 Debtor Entities: Corporate Pointe #2 Corporate Pointe #3 Country Hill Plaza Crossing Business Center #6 Crossing Business Center #7 Crossroads (MN) Cmbd Deerbrook Mall Division Crossing Eagle Ridge Cmbd Eastridge (WY) Cmbd Eastridge Mall Cmbd Eden Prarie Cmbd Faneuil Hall Marketplace Cmbd Fashion Place Cmbd Fashion Show Cmbd Foothills Mall Cmbd Fort Union Four Seasons Cmbd Fox River Cmbd Gateway Cmbd Gateway Crossing Shopping Ctr Gateway Overlook Glenbrook Square Cmbd Grand Teton Cmbd Grand Traverse Cmbd Greenwood Cmbd Halsey Crossing Harborplace Cmbd Hulen Mall Cmbd Jordan Town Creek Cmbd Knollwood Mall Cmbd Lakeside Mall Cmbd Lakeview Square Cmbd Lansing Cmbd Lincolnshire Commons Lynnhaven Cmbd Mall at Sierra Vista Cmbd Mall of Louisiana Mall of Louisiana Power Center Mall of the Bluffs Cmbd Mall St.956 156. (1) Represents an SCP mall.477 51.939 233.257 40.202 5.994 2.567 228.401 239.395 18.873 99.974 203.942 38.008 49. Mathews Cmbd Mall St.775 93.689 86.232 95.127 79.458 4.148 14.775 84.672 76.884 25.931 54.114 46.728 60.503 49.227 39.788 142.207 67.219 23.884 111.656 155.758 2.000 75.397 88.043 19.189 35.239 89.262 48.674 254.772 8.918 50.656 212.807 105.799 106.712.132 102.253 78.966 233.975 113.940 79.332 176.458 13.512 212.771 23.831 3.497 169.081 27.

Wacker (headquarters) Baybrook Cmbd Bayside Marketplace Cmbd Coastland Center Cmbd Coral Ridge Cmbd Cumberland Cmbd Governor's Square Cmbd Lakeland Square Mall Cmbd Meadows Cmbd Oak View Cmbd Paramus Park Cmbd Pembroke Lakes Mall Cmbd The Mall in Columbia Cmbd The Parks at Arlington Cmbd The Shoppes @ Buckland Hills Cmbd West Oaks Mall 10450 W.756 12.250 103.GGP Debt Detail – Non-Debtor Entities ($ in 000s) Non-Debtor Entities: 110 N.319 68.103 117.964 Debt Balance as of: 9/30/08 12/31/09 12/31/09 12/31/09 12/31/09 12/31/09 12/31/09 12/31/09 12/31/09 12/31/09 12/31/09 12/31/09 12/31/09 12/31/09 12/31/09 12/31/09 9/30/08 9/30/08 9/30/08 Source Q3'08 supp 10-K 10-K 10-K 10-K 10-K 10-K 10-K 10-K 10-K 10-K 10-K 10-K 10-K 10-K 10-K Q3'08 supp Q3'08 supp Q3'08 supp 73 .943 168.000 174.676 $1.862 74. True balance is actually less as amortization has occurred since most recent reported debt balance.368 53.084 19.990.463 83.301 4.924 400.570 84.517 161.855 126. Charleston LLC Senate Plaza 70 Columbia Corporate Center Non-Debtor Entity Debt Note: Most recent debt balance reported assumed to be 3/31/10 balance.292 102.006 88.675 101. Debt Balance $45.

881 44.003 4.786 125.149 68.317 31.990 168. (1) On 5/3/10 the property owned by the Highland JV was transferred to the lender (Source: 10-Q pg 40).000 95.783 75.073 $3. (3) Represents a Joint Venture mall included in GGP's "Consolidated Debt" disclosure.000 70.000 25. 74 .000 42.034 89.052 84.020 129.820 47.825 175.259.893 46.119 45.000 Debt Balance as of: 9/30/08 9/30/08 9/30/08 9/30/08 9/30/08 9/30/08 9/30/08 9/30/08 9/30/08 9/30/08 9/30/08 3/31/10 9/30/08 3/31/10 9/30/08 9/30/08 9/30/08 9/30/08 9/30/08 9/30/08 3/31/10 9/30/08 Source Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Simon Q1'10 supp (1) Q3'08 supp Paid down (2) Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Paid down Q3'08 supp Joint Ventures (at share): Provo Towne Centre Cmbd Quail Springs Mall Riverchase Galleria Cmbd Silver City Galleria Cmbd Spokane Valley Cmbd Stonebriar Centre Cmbd Superstition Springs Center The Oaks Mall Cmbd The Shops at La Cantera Cmbd The Streets at Southpoint Towson Town Center Cmbd Village of Merrick Park Total Water Tower Place Cmbd Westlake Center Cmbd Westroads Mall Cmbd Whalers Village Cmbd Willowbrook Mall Owings Mills-One Corporate Ctr Center Pointe Plaza Lake Mead Blvd & Buffalo Trails Village Center Joint Venture Debt Debt Balance 43.514 68.281 56.409 152.GGP Debt Detail – Joint Ventures (at share) ($ in 000s) Joint Ventures (at share): Alderwood Mall Cmbd Altamonte Mall Cmbd Arrowhead Towne Center Bridgewater Commons Carolina Place Cmbd Christiana Mall Clackamas Town Center Cmbd First Colony Mall Cmbd Florence Mall Cmbd Galleria Tyler Cmbd Glendale Galleria Cmbd Highland Mall Cmbd Kenwood Towne Centre Cmbd Mizner Park Total Montclair Place Cmbd Natick Mall Cmbd Natick West Northbrook Court Cmbd Oakbrook Center Cmbd Park Meadows Cmbd Perimeter Mall Cmbd Pinnacle Hills Promenade / West Debt Balance $145.984 Debt Balance as of: 9/30/08 9/30/08 9/30/08 9/30/08 9/30/08 9/30/08 9/30/08 9/30/08 9/30/08 9/30/08 9/30/08 9/30/08 9/30/08 9/30/08 9/30/08 9/30/08 9/30/08 9/30/08 9/30/08 9/30/08 9/30/08 Source Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp Q3'08 supp (3) (2) (3) (3) (3) (3) Note: Most recent debt balance reported assumed to be 3/31/10 balance.000 70.513 103.528 41.402 242.754 80.846 2.302 37.498 52.838 100.010 126.518 64.947 8.119 6.760 76.095 133.500 65. (2) Represents an SCP mall.405 22.000 191. True balance is actually less as amortization has occurred since most recent reported debt balance.

000 590.713 57.343 245.245.372.987.115 93.000 1.500 206. True balance is actually less as amortization has occurred since most recent reported debt balance.221 400.904 3/31/10 3/31/10 3/31/10 3/31/10 5/12/10 8-K 5/12/10 8-K 5/12/10 8-K 5/12/10 8-K 3/31/10 5/12/10 8-K Note: Most recent debt balance reported assumed to be 3/31/10 balance.000 2.500 6.550. 75 .000 Source 10-K Q3'08 supp 5/12/10 8-K 5/12/10 8-K Q3'08 supp 5/12/10 8-K 1.812 216.GGP Debt Detail – Other Debt Debt Balance as of: 12/31/09 9/30/08 3/31/10 3/31/10 9/30/08 3/31/10 ($ in 000s) Other Debt Bridgelands MPC Woodlands MPC Homart I Ivanhoe Capital Turkey DIP Unsecured Debt: Exchangeable debt Rouse debt Revolver Senior term loan TopCo Unsecured Debt TRUPS Other Debt Debt Balance $29.200 $7.620.

Excludes GGP's share of Brazil debt ($95.259.406) $27. amortizes each month.GGP Debt Detail – 3/31/10 Reconciliation ($ in 000s) Total GGP Debt Debtor entity debt Non-Debtor entity debt Joint Venture debt Other debt Subtotal Less: Amortization (1) Total GGP Debt (3/31/10) (2) Note: Excludes mark-to-market debt discounts which would make the reported debt balance lower. much of GGP's JV debt. (2) Source: GGP Q1'10 operating supplement.2mm as of 3/31/10).984 7. Debt Balance $14. For example. (1) Represents amortization that has occurred since the most recent reported date of GGP's debt. pg 2.990.728 (78.876 1. GGP has no obligations for further contributions to its Brazilian subsidiary. reported as of 9/30/08.620. Data for which specific debt has been amortized. is unavailable.584.964 3. Aliansce. and in what amounts.322 76 .506.712.904 27.

(3) See appendix for details. (2) As of 9/30/09. the last time GGP published its interest coverage ratio in its operating supplement.691 (212) $20. (4) Paid down Apr-10. (5) On 5/3/10 the property owned by the Highland JV was transferred to the lender (Source: 10-Q pg 40).2x (948) (506) (57) (32) (6.506 1. 77 . (6) Assumed to be paid down as part of PF GGP's emergence.373) (400) 1.500 $20.0x (1) Source: Q1'10 supplement pg 2. (7) Assumed to be issued as part of PF GGP's emergence.PF GGP Debt Detail PF GGP Debt Buildup ($ in mms) Total GGP Debt (3/31/10) (1) Interest coverage ratio (2) Less: SCPs debt (3) Less: GGO debt (3) Less: Stonestown mezz (4) Less: Highland (5) Less: TopCo unsecured debt (6) Less: DIP (6) Plus: New Debt (7) PF GGP Debt (3/31/10) Less: Additional amortization through 9/30/10e (3) PF GGP Debt (9/30/10e) Interest coverage ratio (3) $27. See appendix for details.478 2.

9bn. (9) Source: 5/12/10 8-K. Homart and Ivanhoe.300 80 7 (260) $2.455 2.69% 6.691 $2.0% 100.5 14.50% 5.PF GGP Debt Detail – Interest / Duration / Non-Recourse ($ in millions) PF GGP Debt Detail Debtor entities (1) Plus: Oakwood (2) Less: Consolidated SCPs (3) Less: Victoria Ward (4) Less: Stonestown mezz (5) PF GGP Confirmed Debtors Non-debtor consolidated debt (6) Less: 110 N Wacker (4) Less: Bridgeland (4) PF GGP Non-Debtors JV Debt (excl Consolidated JVs) (7) Less: Woodlands (4) Less: Highland (8) Less: JV SCPs (Silver City / Montclair) PF GGP Pro Rata JV Debt Homart / Ivanhoe (9) TRUPs (9) New Debt (10) PF GGP Debt (3/31/10) PF GGP LTM Adj Cash NOI (11) Plus: LTM GGMI income (12) Plus: LTM interest income Less: Overhead (13) PF GGP LTM EBITDA PF GGP Cash Interest PF GGP Interest Coverage Amt $14.0 2.14% 6.5% 78 (1) Includes all Secured Assset Loans. (6) See Non-Debtor Consolidated Debt appendix page for details. Interest rate / duration assumptions from Q3'08 operating supplement.0% 100.21% Duration (Years) 6.9 3.61% 5.0x Cash Interest 5. (5) Paid down Apr-10.38% 5.946 (216) (32) (198) 2.499 339 206 1.70% 5.89% 1.68% 5.3 NonRecourse $11.500 $20.1 0. excluding Oakwood.2% 94.75% cash interest with 3 year duration.737 2. see "Management fees and other corporate revenues.68% 5.8 26. (8) On 5/3/10 the property owned by the Highland JV was transferred to the lender (Source: 10-Q pg 40).24% 5.57% 5.7% 100. Note "over the coming months.0% 100.0 2. (4) This debt will be going to GGO. This debt will be issued at market rates. Cash interest / duration as provided in GGP's 4/29/10 press release. Note Simon issued 5-yr notes in Jan-10 yielding 4.0 5.718 (710) (214) (57) 10. Source: docket #5225 and 5206.499 339 $16.0% 100. (7) See JV Debt (excluding Consolidated JVs) appendix page for details. (3) Assumes $40mm is recourse to GGP. (12) LTM GGMI income as of 3/31/10.0 3." .5 1.692 2.2 4.1 3. (11) See PF GGP Cash NOI slide for details.3 4.8 6.92% 5.530 (46) (30) 2.8 3.0% 100. Source: Q1'10 10-Q pg 29. [GGP] intend[s] to introduce many other innovations to improve the efficiency and effectiveness of the Company.946 (216) (32) (198) 2.75% 5.25%. (10) Assumes new debt issued at 5.79% 5.530 (46) (30) 2.4 2.3 4. (2) Interest rate assumed to be L+225.029 Pct NonRecourse 80.07% 2.618 95 (750) (214) (57) 13.59% 5.455 2.127 1. Source: 5/12/10 8-K.0% 77.0% 100.078 2.03% 5.3 1." (13) Source: 2009 Annual Letter to Shareholders. Source: operating supplements.4% 100.0% 100.0% 100.4 3.75% 5.0% 100.0% 100. Amount that is non-recourse deducts $2.0% 78.

530. (4) Source: Q1'10 supplement pg.06% 5.91% 5." The current interest rate is likely lower to the extent this debt is floating.006 88.463 83.3 3.030.368 53.79% 10. 5.5 3.302 41.0 0.5 14.8 3.75% 5.75% 5. (1) For loans with maturity dates preceding 3/31/10.14% 5.54% 5.75% 5.3 3.000 174.8 4.250 103. (2) Source: Q3'08 operating supplement.119 2.75% 6.68% 4/5/12 4/5/12 6/7/10 4/6/12 2/1/11 4/18/13 2.8 3. may have changed since 9/30/08. (5) Source: 5/12/10 8-K.301 4.91% 5. Wacker (headquarters) Baybrook Cmbd Bayside Marketplace Cmbd Coastland Center Cmbd Coral Ridge Cmbd Cumberland Cmbd Governor's Square Cmbd Lakeland Square Mall Cmbd Meadows Cmbd Oak View Cmbd Paramus Park Cmbd Pembroke Lakes Mall Cmbd The Mall in Columbia Cmbd The Parks at Arlington Cmbd The Shoppes @ Buckland Hills Cmbd West Oaks Mall 10450 W.8 2.530.862 74.560.369 79 .68% 4/18/13 3.0 2.3 0.01% 5. 29.1 Source: Interest rates per the Q3'08 GGP operating supplement.75% interest rates. we have assumed they were refinanced with 1/1/14 maturity dates and with 5.3 3.570 84.924 400. Source: Pershing Square assumption.545.75% 5.0 0.97% 5.84% 5.00% 5.5 3. Reported as "Houston Land Notes.5 3. Source: Maturities per the Q3'08 operating supplement.517 161.292 102.45% 8.29% 5.532 (15.5 3.GGP Debt Detail – Non-Debtor Consolidated Debt ($ in 000s) Non-Debtor Consolidated Debt 110 N.676 29.733 (22.8 (1) (1) (1) (1) (1) (1) 43.8 5.084 19.943 168. Maturity date assumption is the midpoint of 2017-2033. Many of these interest rates.0 2. especially to the extent loans have been refinanced or are floating.369 5.15% 6.8 3.855 126.364) 2.24% 5.756 12. Charleston LLC Senate Plaza 70 Columbia Corporate Center Bridgelands MPC (2) Consolidated JV Debt Provo Towne Centre Cmbd Spokane Valley Cmbd The Shops at La Cantera Cmbd The Streets at Southpoint Westlake Center Cmbd Non-Debtor Consolidated Debt Less: Amortization (3) Non-Debtor Consolidated Debt (3/31/10) Memo: Alternative Buildup Consolidated Debt (3/31/10) (4) Less: Total Debtor Debt (3/31/10) (5) Non-Debtor Consolidated Debt (3/31/10) Debt Balance 45.402 242.812 Interest 5.50% Maturity 10/11/10 1/1/14 7/1/14 1/1/14 1/1/14 1/1/14 1/1/14 10/1/13 8/1/13 1/1/14 10/1/15 4/11/13 10/1/12 1/1/14 7/2/12 8/1/13 12/31/18 7/1/13 10/1/10 1/1/25 Duration (Yrs) 0.103 117.3 8.2 2.319 68.87% 5.163) 2.36% 6.8 3.675 101.75% 5.881 68. (3) Represents amortization that has occurred since the most recent reported date of GGP's debt.8 3.1 24.00% 5.052 129.75% 4.8 3.

5 1.61% Maturity 6/5/15 10/3/11 6/10/11 12/11/12 9/9/11 12/3/12 1/1/14 8/8/11 9/1/10 12/3/12 11/8/10 4/1/11 12/1/11 1/2/17 7/15/23 7/10/23 10/9/13 1/1/18 4/27/12 Duration (Yrs) 5.000 70.3 2.17% 5.1 Interest 6.78% 4.69% 6.893 46.786 125. may have changed since 9/30/08.0 1.010 126. Source: Maturities per the Q3'08 operating supplement.92% 5.19% 6.82% 7.38% 7.45% 5.947 8.87% 5.409 152.5 1.073 216.61% 4/27/12 2.00% 5.3 13.3 1.589 5.000 25.7 1.27% 4.000 191.020 44. (2) Represents an SCP mall. (3) For loans with maturity dates preceding 3/31/10.4 2.94% 5.50% 6.5 2.820 47.30% 8.000 Interest 5.75% 5.12% 6.92% 5.8 1.24% 5.8 3.58% 5.5 2.46% 5.7 Joint Venture Debt (Excl Consolidated JVs) Quail Springs Mall Riverchase Galleria Cmbd Silver City Galleria Cmbd Stonebriar Centre Cmbd Superstition Springs Center The Oaks Mall Cmbd Towson Town Center Cmbd Village of Merrick Park Total Water Tower Place Cmbd Westroads Mall Cmbd Whalers Village Cmbd Willowbrook Mall Owings Mills-One Corporate Ctr Center Pointe Plaza Lake Mead Blvd & Buffalo Trails Village Center Woodlands MPC Turkey Joint Venture Debt Less: Amortization (4) Joint Venture Debt (3/31/10) (5) Debt Balance 37.04% 5.4 2.5975% in Jan-10.514 45.000 95.838 100. On 5/3/10 the property owned by the Highland JV was transferred to the lender (Source: 10-Q pg 40).95% 5.3 2.83% 5.00% 8.945.63% 7.2 2.61% 6. especially to the extent loans have been refinanced or are floating.5 1. (1) GGP extended this loan at 4.8 13.8 0.1 (2) (3) (2) (2) (3) Source: Interest rates per the Q3'08 GGP operating supplement. we have assumed they were refinanced with 1/1/14 maturity dates and with 5.2 1.034 89.5 2.498 52.008.4 0.72% 5.3 3.03% 5.760 76.8 1.7 0.3 0.500 65.783 75.317 31.7 3.095 133.405 22. 29.000 42.149 68.343 57.000 70.518 64.6 1.846 2. Many of these interest rates.5 2.04% 5.203) 2.68% 5. Source: Pershing Square assumption.5 1.30% 3.119 6.88% 5.754 80.01% 6.7 1.74% 5.8 2.792 (63.60% 4. 80 .4 1. (4) Represents amortization that has occurred since the most recent reported date of GGP's debt.4 2.528 84.513 103.5 7.7 6.990 168.GGP Debt Detail – Joint Venture Debt (excluding Consolidated JVs) ($ in 000s) Joint Venture Debt (Excl Consolidated JVs) Alderwood Mall Cmbd Altamonte Mall Cmbd Arrowhead Towne Center Bridgewater Commons Carolina Place Cmbd (1) Christiana Mall Clackamas Town Center Cmbd First Colony Mall Cmbd Florence Mall Cmbd Galleria Tyler Cmbd Glendale Galleria Cmbd Highland Mall Cmbd Kenwood Towne Centre Cmbd Mizner Park Total Montclair Place Cmbd Natick Mall Cmbd Natick West Northbrook Court Cmbd Oakbrook Center Cmbd Park Meadows Cmbd Perimeter Mall Cmbd Pinnacle Hills Promenade / West Debt Balance 145. (5) Source: Q1'10 supplement pg.5 1.84% Maturity 7/6/10 2/1/13 10/3/11 1/2/13 1/11/14 8/2/10 10/5/12 10/3/11 9/10/12 10/11/11 10/1/12 7/8/11 12/1/10 9/12/11 10/7/11 10/7/11 9/1/11 10/1/12 7/5/12 12/8/11 Duration (Yrs) 0.75% interest rates.87% 5. Source: 1/25/10 press release.003 4.825 175.221 3.35% 5.281 56.5 1.

Target Net Debt includes non-debt liabilities. Therefore. and preferred stock. among other things. Target Net Debt includes the Company's estimate of bankruptcy "exit costs. the KEIP). Pershing Square estimate. (3) Represents Pershing Square's estimate of bankruptcy "exit costs." Furthermore. Projected 9/30/10e balances included in Target Net Debt may differ than 3/31/10 actual debt balances due to interim amortization. Source: pg 75 of docket #4874. (4) Includes accrued interest on unsecured debt. (7) Source: Q1'10 supplement pg 2. (8) See appendix for details. In addition. Target Net Debt includes PF GGP and GGO liabilities. etc. Target Net Debt is an estimate of GGP's net debt as of 9/30/10e. (5) As of 3/31/10. such as accrued interest and Permitted Claims (i.971 500 (650) (625) (246) (110) (121) (980) (260) $20. 81 . (2) Source: Original Cornerstone Investment Agreement. Source: Q1'10 supplement pg 2. debt associated with GGP's international subsidiaries. pfd stock. GGP's share of this debt as of 3/31/10 was $95.2mm. TRUPs. (6) Per the Cornerstone Investment Agreement. Pershing Square estimates this $650mm estimate could be more than $200mm too high.5bn of New Debt." including the KEIP. DIP loan.691 ($212) (1) Target Net Debt as of the original Cornerstone Investment Agreement.e.PF GGP Debt Detail – 9/30/10e Reconciliation Target Net Debt Reconciliation ($ in mms) Target Net Debt (9/30/10e) (1) Plus: Proportionally Consolidated Unrestricted Cash (2) Less: Permitted Claims (3) Less: Accrued interest (4) Less: Bridgelands/Woodlands (5) Less: Brazil (6) Less: Pfd stock (7) Less: SCP debt / Highland (5) Less: Other GGO debt (5) PF GGP Debt (9/30/10e) PF GGP Debt (3/31/10) (8) Additional Amortization Through 9/30/10e $22. Target Net Debt includes the following: $1. transaction costs. and secured debt. Homart/Ivanhoe.478 20.

00 $1.00 $14.933 6.128 728 8.900 650 8.373 400 6.PF GGP Cap Rate Detail – Excess Sources ($ in mms. The estimated fee to raise the New Debt is also included as a Permitted Claim in the Target Net Debt amount.500 4. (5) TopCo unsecured debt.773 $1.00 Emergence Sources New Debt (1) BPF (pre-clawback) (2) Clawback (3) Liquidity Equity Issuances (4) Emergence Sources Emergence Uses TopCo unsecured debt (5) DIP loan (5) Emergence Uses Excess Sources $1. (2) Represents PF GGP's sale of 440mm shares to BPF at $10 per share. To the extent GGO's 80% IPO Participation exceeds permitted liabilities.773 $1. PF GGP will be entitled to keep more cash than presented above.500 4.373 400 6.976 676 8. (4) Assumes GGP sells 65mm Liquidity Equity Issuances shares. except per share data) $10.400 2.400 1.756 6.400 2.773 $1.00 $12.500 4.678 6.450 Illustrative PF GGP Equity Raise Price $11.052 702 8.014 689 8.729 6.373 400 6. which includes GGP's convert.500 4.500 4. (3) Subject to the 80/20 GGO IPO Participation.400 1.654 $1.831 6.882 6.00 $15.938 663 8. and revolver.552 $1.501 $1.773 $1.373 400 6.773 $1.400 1. and the DIP loan are treated as uses of funds because they are excluded from Target Net Debt as part of the Reinstatement Adjustment Amount.400 2.090 715 8.373 400 6. 190mm to PF).773 $1. Rouse debt.400 2. 82 .373 400 6.603 $1. (250mm to B.984 (1) New Debt is included as a source of funds because the corresponding liability is included in Target Net Debt.500 4. term loan.705 $16.00 $1.373 400 6.773 $1.780 6. PF GGP is entitled to keep 20% of excess proceeds raised above $10.500 4.00 $13. GGP is entitled to keep 20% of excess proceeds raised above $10.

Source: Pershing Square estimate. 83 . (6) Target Net Debt includes GGP's ultimate KEIP payment. (1) Includes unconsolidated other assets at 50% share. (3) Excluded from other liabilities as we assume this liability will be covered by the GGO IPO Participation. (5) Target Net Debt includes professional fees associated with GGP's bankruptcy. net (1) Prepaid expenses & other assets (1) PF GGP Other Assets $506 384 796 $1. As of 3/31/10. Source: pgs 3 and 23 of Q1'10 10-Q. Pershing Square estimates at least 85% of this amount needs to be deducted as it likely relates to accrued interest included in Target Net Debt.345 PF GGP Other Assets (as of 3/31/10) ($ in mms) Accounts & notes receivable. Source: 10-Q pg 12. net (1) Deferred expenses. $79mm of the KEIP had been accrued as a liability. Note: Excludes goodwill of $199. any amount of professional fees included in other liabilities need to be deducted. Source: 10-Q pg 34. As a result. GGP had $450mm of accrued interest included in other liabilities (Source: 10-Q pg 34). (2) Assumes pro rata GGP share of unsonsolidated other liabilities is 50%.PF GGP Cap Rate Detail – Other Assets / Other Liabilities PF GGP Other Liabilities (as of 3/31/10) ($ in mms) Consolidated other liabilities (1) Plus: Unconsolidated other liabilities (2) Less: Hughes participation payable (3) Less: Accrued interest accounted for in Target Net Debt (4) Less: Professional fees incl in other liabilities (5) Less: Accrued KEIP incl in other liabilities (6) Less: Other "Exit Costs" incl in other liabilities (7) PF GGP Adjusted Other Liabilities $1.774 219 (69) (383) (18) (79) (100) $1. Source: 10-Q pg 23. and certain mortgage notes. The vast majority of this is included in the Target Net Debt amount and therefore needs to be adjusted to avoid double-counting. partner loans. As of 3/31/10.7mm as of 3/31/10. DIP loan.686 (1) Source: GGP Q1 10-Q pg 34. which was estimated to be $165mm as of 3/31/10. Source: 10-Q pg 12. pfd stock. (7) Includes pre-petition vendor liabilities and mechanics' liens that should be covered by the $650mm Permitted Claims cushion in Target Net Debt. (4) Target Net Debt includes accrued and unpaid interest on GGP's unsecured debt.

84 .360 (1) Source: GGP operating supplements. Less: FAS 141 adj.GGP Detail – LTM Cash NOI ($ in millions) GGP Cash Net Operating Income (1) 2Q09a 3Q09a 4Q09a 1Q10a $596 263 7 35 $901 (81) (58) (8) (127) (11) $616 (13) (4) 2 1 $602 $584 257 12 32 $884 (82) (65) (9) (136) (7) $585 (11) (3) 2 1 $573 $605 248 30 48 $931 (81) (82) (16) (138) (7) $607 1 (2) 2 1 $609 $593 254 12 27 $885 (85) (41) (9) (157) (8) $586 (13) (1) 2 1 $575 LTM Minimum rents Tenant recoveries Overage rents Other Total Property Revenues Less: Real estate taxes Less: Repairs & maintenance Less: Marketing Less: Other property operating costs Less: Provision for doubtful accounts NOI Less: Straight-line rent adj. (lease mark to mkt) Plus: Non-cash ground rent expense Plus: Real estate tax stabilisation adj. GGP Cash NOI $2.

(2) Simon does not disclose the amount of interest income and gains on land sales from its unconsolidated segment.7% 36 57 35.302x results in assumed total share interest income of $10.194 (157) (114) (34) (25) 3 (35) $830 (5) (5) $821 LTM $3. (1) Simon includes interest income in other revenue.300 (164) (108) (43) (39) (2) (44) $901 (6) (6) $889 1Q10a $758 26 342 80 (10) (2) $1.2% Source: Simon operating supplements.284 62 92 32.047mm. For example.168 (168) (106) (30) (25) (9) (40) $791 (7) (13) $770 3Q09a $754 33 356 57 (10) (0) $1. Assumes the ratio of interest income and gains on land sales in other revenue is similar to the ratio of consolidated other income to total share.714mm. This needs to be backed out to create an apples to apples comparison with GGP.334 (172) (106) (47) (42) (10) (41) $916 (9) (9) $899 1Q09a $746 21 345 68 (9) (0) $1. Multiplying this by 1.191 (180) (99) (29) (29) (0) (36) $817 (8) (6) $803 4Q09a $806 58 376 92 (13) (19) $1. 85 .Simon Cap Rate Detail – LTM Cash NOI ($ in millions) Minimum rent Overage rent Tenant reimbursements Other income Less: Interest income (1) (2) Less: Gains on land sales (2) Total Revenue Less: Property operating costs Less: Real estate taxes Less: Repairs & maintenance Less: Advertising & promotion Less: Provision for credit losses Less: Other NOI Less: Straight-line rent adj.9% 56 80 30.171 (161) (112) (33) (24) (17) (35) $789 (11) (7) $772 2Q09a $754 26 345 56 (9) (3) $1. (lease mark to mkt) (3) Cash NOI Memo: Other income Consolidated portion Total share Ratio 4Q08a $807 63 393 92 (15) (5) $1.8% 71 92 22.2% 45 68 33. (3) Source: See Footnotes to Reconciliation of Consolidated Net Income to FFO in Simon's operating supplements for straight-line rent and FAS 141 adjustments.6% 35 56 37. Q1'10 reported consolidated interest income was $7. (3) Less: FAS 141 adj.

906 24.845 (3.Simon Cap Rate Detail – Cap Rate Buildup (units in millions.038 (229) $49. (2) As reported in Simon's pro rata balance sheet (Source: Simon Q1'10 operating supplement).445) (35) $50.03 352 $29. (4) Simon's share of U. (3) Excludes $20mm of goodwill (Source: Simon 2009 10-K). except per share data) Share Price (as of 5/28/10) Shares & Units (1) Market Cap Pro Rata for JVs: (2) Plus: Total Debt Plus: Preferred Debt Plus: Other Liabilities Less: Cash Less: Other Assets (3) Less: Development Pipeline (4) TEV Less: Mgmt Business (5) Value of Simon's REIT LTM Cash NOI (6) Implied Cap Rate $85. (6) See Simon LTM Cash NOI appendix page for details.609) (2. CIP (page 36 of Q1'10 operating supplement).5x EBIT multiple.284 6.809 $3.S. 86 . (5) Applies 25% EBIT margin to LTM fee income of $122mm and a 7.250 126 1.6% (1) Includes Series I preferred shares and options (Source: Simon Q1'10 operating supplement).

(6) Assumes Simon's ratio of rent and recoverable common area costs PSF / rent PSF is 1.90 1. (5) Source: Simon Q4'09 operating supplement.62 1. (2) GGP used to report rent per sq ft instead of rent & recoverable common area costs per sq foot before Q1'07. (4) Represents the ratio of Occupancy Cost to rent & recoverable common area costs / tenant sales. Source: GGP Q4'06 operating supplement.09 NA $393 12. Actual data may vary. Simon derives approximately 5% more of its revenue from tenant reimbursements than GGP.58 $44. excl unconsolidated). 87 .22x (8) (3) (5) (8) (3) (8) (7) Note: Unlike GGP.27x.04 13.5% 1.22x (6) NA NA $47. The exercise above uses historical reported GGP data to attempt to back into Simon's implied Regional Malls occupancy cost.0% 14. Represents GGP Q4'06 consolidated rent per sq ft of $34.34x based on GGP's historical ratio of 1.1% 1.6% 1. Simon does not disclose occupancy cost data.e.4% 15.32 9. (8) Source: GGP Q4'09 operating supplement. This is done because GGP does not disclose rent per sq ft metrics on a pro rata basis.27x $444 10. Cost Buildup (1) Simon GGP Q4'09 Q4'07 Rent per sq ft Recoverable common area costs per sq ft Rent & recoverable common area costs per sq ft Rent & recoverable common area costs PSF / rent PSF Reported Tenant Sales per Square Foot Rent & recoverable common area costs / tenant sales Occupancy Cost Adjustment Factor (4) $35.34x $433 12.1% 12.Simon Occupancy Cost Detail Occup. (7) Based on GGP's adjustment factor as of Q4'09.29 with assumed 3% YoY growth (same as Q4'06 reported growth). (3) Source: GGP Q4'07 operating supplement.24x (2) Memo: GGP Q4'09 (5) (3) $40.58 $53. (1) Represents Consolidated Portfolio (i.

GGO Detail – Victoria Ward Comp 88 .

Wait to Rate: How To Save The Rating Agencies (and the Capital Markets) May 26.P. 2010 Pershing Square Capital Management. . L.

sell. Pershing Square recognizes that there may be confidential information in the possession of the companies discussed in the presentation that could lead these companies to disagree with Pershing Square’s conclusions. 1 . 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 here including. Pershing Square manages funds that are in the business of actively trading – buying and selling – securities and financial instruments. estimates. Pershing Square may currently or in the future change its position regarding any of the securities it owns. cover or otherwise change the form of its investment in any company for any reason. Actual results may vary materially from the estimates and projected results contained herein. without limitation.P. competitive. the manner or type of any Pershing Square investment. estimates or projections or with respect to any other materials herein. are made as to the accuracy or completeness of such statements. Pershing Square reserves the right to buy. Such statements. and other uncertainties and contingencies and have been included solely for illustrative purposes. the historical and anticipated operating performance of the companies. L. access to capital markets and the values of assets and liabilities. among other things.Disclaimer The analyses and conclusions of Pershing Square Capital Management. Funds managed by Pershing Square and its affiliates have invested in long and short positions in various securities and financial instruments. The analyses provided may include certain statements. ("Pershing Square") contained in this presentation are based on publicly available information. express or implied. and projections reflect various assumptions by Pershing Square concerning anticipated results that are inherently subject to significant economic. No representations. estimates and projections prepared with respect to.

we believe that none will succeed as comprehensive reform 2 . ABK. As currently proposed. FNM. FRE and AIG Various proposals have been floated to address the problem.The Context Rating agencies were material contributors to the credit crisis as their inaccurate ratings allowed for the issuance of trillions of dollars of securities and derivatives which generated trillions of dollars of losses globally What they do well ■ Rating agencies are generally good at rating the debts of corporate issuers Where they have failed ■ Rating agencies overstated the ratings of structured finance securities and bond insurers like MBI.

without high ratings. agencies do not earn fees on new issue transactions “Success Fee” model leads to competition and grade inflation among NRSROs for new issuers and new product ratings 3 .What Are the Principal Problems? Problems are caused by corrupting incentives at the original issuance of a security or derivative by an issuer Investors – Overly relied on ratings rather than their own due diligence and are often subject to ratings-based investment limitations Issuers/Banks – Are incentivized to get highest ratings with highest yielding (riskiest) assets NRSROs – Are conflicted by how they are paid.

MBI. have acted as part of the underwriting team for new issues Are Slow to Downgrade – are incentivized to keep ratings stable so new issues can continue to be sold and rated Are Loath to Pass Judgment on Themselves – did initially forbear from downgrading financial guarantors (e. FNM. FRE..g.What Are the Principal Problems? (Cont’d) Regulators and investors with ratings-based mandates have been illserved by the NRSROs before and throughout the credit crisis Rating agencies have failed to meet expectations: Act as Underwriters – in substance. ABK. as simultaneous downgrades would be triggered on thousands of other securities. AIG). putting NRSROs in the uncomfortable position of questioning their own prior ratings 4 .

offering or sale of such securities during such period. Conduct due diligence based solely on publicly available information of the issuer or otherwise related to the security in respect of future ratings for such issuer or security. underwriting. or Otherwise participate in the structuring. it shall be unlawful for any NRSRO to: (1) (2) (3) Have any contact with issuers.How Do You Solve These Problems? Make a new law Our suggested rider to the Restoring American Financial Stability Act of 2010 “New Issue Ratings Moratorium. sponsors. or issue ratings regarding. and At all times broadly publish their ratings standards.” 5 Notwithstanding the foregoing. procedures and methodologies. any such security. Comment publicly on. trustees or underwriters of such security during such period. Prior to the date 60 days after the issuance of a new fixed income security. NRSROs shall at all times be permitted to: (a) (b) . servicers.

How Do You Solve These Problems? (Cont’d) Allow Non-NRSROs to Publish During New Issue Moratorium – Firms can (1) apply to be qualified as NRSROs and be subject to the new issue ratings moratorium or (2) choose to be non-NRSROs and compete for business from investors during the moratorium on the basis of the quality of their research Creates incentive for the development of an “Investor Pays” model for nonNRSRO rating agencies who will seek to fill the ratings void left by the New Issue Ratings Moratorium on NRSROs Insist on NRSRO Accountability – The SEC should be required to revoke a ratings agency’s NRSRO status if it consistently underperforms its peers While the SEC currently has the power to revoke NRSRO status. it has failed to exercise that power likely because of the lack of credible alternatives to NRSROs Bright line rules requiring the exercise of that power after material consistent underperformance could address the breakdown caused by the SEC’s past regulatory forbearance Buyside analysts will develop into credible alternatives and even new NRSROs 6 .

Repeal of the SEC’s Reg FD exemption would reduce reliance premised on information asymmetries Prospectus Delivery Requirements – Each issuer that seeks an NRSRO rating should be required to include in its bond offering prospectus all information that a reasonable investor would need to form an investment decision Any information that could reasonably be expected to impact ratings should be viewed – by definition – as material and therefore should be disclosed in prospectuses and in on-going public disclosures Improved disclosure requirements would improve the accuracy of fundamental analysis and level the playing field among market participants 7 .How Do You Solve These Problems? (Cont’d) Make a new law Repealing NRSRO legal exemptions will mitigate undue reliance on ratings Re-Thinking Reg FD – The SEC should repeal the NRSRO exemption from fair disclosure rules that currently allow rating agencies access to issuers’ material nonpublic information Investors justified their over-reliance on ratings in large part on account of NRSRO information advantages.

became an essential participant in underwriting process which was corrupted by the success fee payment scheme Investor Pay Research – “Investor Pays” ratings model is virtually nonexistent New Paradigm: Investors – will need to do their own due diligence and will benefit from truly independent ratings/research Issuers/Banks – ratings opinion uncertainty will force them to “underpromise and over-deliver” creating margins of safety above ratings targets NRSROs – will “call ‘em like they see ‘em” and will be completely removed from the structuring and underwriting process Investor Pay Research – creates opportunity for “Investor Pays” ratings and research to develop as non-NRSRO analysts will be permitted to publish preoffering and during the blackout period 8 .What Are the Impacts of Our Proposed Changes? Old Paradigm: Investors – overly relied on ratings and performed inadequate due diligence Issuers/Banks – structured deals to minimally achieve desired ratings thresholds through negotiations with rating agencies NRSROs – monopolized ratings.

How Should Ratings Agencies Be Compensated? New Fee Arrangements – Ratings fees should be “set aside” and paid over time by issuers to NRSROs and failure to pay fees would be deemed an “Event of Default” for issuers Base Fee – a minimum fee will be paid in quarterly increments over the life of the bond to those NRSROs that pre-commit to rate a new bond after the 60-day moratorium and to continue to update those ratings over the bond’s life Ranking Fee – a portion of the remaining set aside will be paid in annual increments based on investor-determined annual rankings of each NRSRO Performance Fee – the remaining set aside will be paid in annual increments to the NRSROs based on the performance of the bond relative to the ratings designated by each participating NRSRO 9 .

material consistent underperformance assures loss of NRSRO status Investor Pay Research – will create market opportunity which will improve independent research for buyside investors 10 .What Are the Impacts of Our Proposed Changes? Old Paradigm: Investors – had no impact on NRSRO compensation Issuers/Banks – had the ability to manipulate the process through NRSRO compensation to achieve desired ratings NRSROs – received full. closer to an “Investor Pays” model Issuers/Banks – will have no ability to set compensation or even choose which NRSROs will rate a bond NRSROs – will be paid over time. upfront payments which were unrelated to the ratings performance for that issue Investor Pay Research – “Investor Pays” ratings model is virtually nonexistent New Paradigm: Investors – will help allocate ratings fees. with a large percentage of compensation based on performance.

Conclusion The combination of increased buyside due diligence coupled with mitigation of conflicts of interest and a new payment scheme can restore the integrity of ratings The steps toward regaining confidence are deceptively simple: Exclude the NRSRO rating agencies from the initial offering and underwriting process Create incentives for fundamental research and valuation analysis by investors Create the market opportunity for “Investor Pays” research and ratings to develop Create a payment regime that focuses on NRSRO performance and the quality of their ratings over time and aligns their interest with investors Failure to address fundamental flaws in the legacy ratings system is not an option 11 .

Not for Public Distribution How To Make A Fortune* November 3.P. L. . 2010 * My compliance team cautions you that this is a tongue in cheek title Pershing Square Capital Management.

estimates and projections prepared with respect to. The analyses provided may include certain statements. and other uncertainties and contingencies and have been included solely for illustrative purposes. and projections reflect various assumptions by Pershing Square concerning anticipated results that are inherently subject to significant economic. ("Pershing Square") contained in this presentation are based on publicly available information. Pershing Square hereby disclaims any duty to provide any updates or changes to the analyses contained in this presentation. 1 . competitive. Such statements. This presentation and the information contained herein is not a recommendation or solicitation to buy or sell any securities. L. among other things. express or implied. estimates. are made as to the accuracy or completeness of such statements.Not for Public Distribution Disclaimer The analyses and conclusions of Pershing Square Capital Management. and the values of assets and liabilities. historical and anticipated performance of certain assets.P. estimates or projections or with respect to any other materials herein. No representations.

Not for Public Distribution 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 2 .

Not for Public Distribution 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. but long-term supply is controlled Favorable long-term demand dynamics Demographically driven demand growth Out-of-favor Currently. non-recourse debt. this is a somewhat shunned asset class 3 . low-rate. fixed-rate. long-dated. pre-payable without penalty Favorable long-term supply dynamics Short-term oversupplied market.

Not for Public Distribution So… How Can You Make A Fortune? .

On Sale 5 .Not for Public Distribution The American Dream .

Not for Public Distribution What Happened? .

May 2007 7 .” PSCM.Not for Public Distribution 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?.

Not for Public Distribution 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 .

Amortization Originations (% of dollar volume) 35% 30% 25% 25% 20% 15% 10% 6% 5% 2% 0% 2000 Source: Loan Performance.Not for Public Distribution Financial “Innovation” The popularity of Interest Only and Negative Amortization loans grew rapidly IO and Neg. Credit Suisse 29% 23% 4% 1% 2001 2002 2003 2004 2005 2006 9 .

Not for Public Distribution 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.” PSCM. May 2007 10 . Deutsche Bank. “Who’s Holding the Bag?.

Not for Public Distribution 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 11 .

Not for Public Distribution Valuation .

Not for Public Distribution 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 13 .

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 14 .Not for Public Distribution Housing is More Affordable Today Falling home prices and lower interest rates dramatically improved affordability¹.

“Lessons from Over 30 Years of Buy versus Rent Decision: Is the American Dream Always Wise?” Assumptions in appendix 15 .Not for Public Distribution 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.

Not for Public Distribution Forced Sellers .

~30% of sellers are in or are approaching foreclosure Distressed Sales (% of total re-sales) Long-term the foreclosure crisis is good for housing. “Whither the distressed inventory flood” 17 . stable owners at more reasonable prices and on more favorable financing terms Source: Deutsche Bank. Over-priced and overleveraged homes will be transitioned to new.Not for Public Distribution Foreclosures and Short Sales Nationwide.

Not for Public Distribution Short Sales Short sale transactions are increasing Number of Short Sales Per Month Source: HUD. Core Logic 18 .

Not for Public Distribution Distressed Sales are an Opportunity for Buyers REO sales tend to be priced below the broader market Houston REO vs. “Whither the distressed inventory flood” 19 . Overall Pricing ($ thousand) Source: Deutsche Bank.

Not for Public Distribution A Sellers’ Race to the Bottom in Vegas Buyers benefit when conventional sellers compete with distressed sales. Overall Pricing ($ thousand) Source: Deutsche Bank. Las Vegas is an extreme example. where distressed and non-distressed sale prices have nearly converged Las Vegas REO vs. “Whither the distressed inventory flood” 20 .

Not for Public Distribution Financing .

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 22 1997 2002 2007 . Fixed 30-year rates are now below 4.Not for Public Distribution Mortgage Rates are Very Low Mortgage rates have fallen to historically low levels.

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 23 .Not for Public Distribution 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.

Not for Public Distribution 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 24 .

5% 30yr Fixed Rate 4. Premium (First 5yrs) 20% 30yr Fixed Rate 4.25% 1.40% Transaction Costs Closing Costs (% of Purchase Price) Selling Fees (% of Sale Price) 2% 6% 3. + Insurance (% of Home Value) 2.90% Annual Fees Property Taxes (% of Home Value) 1.00% Annual expenses grow with home appreciation Tax Rate Income Tax Rate 25% Rent Implied rent grows with home appreciation Holding Period 10 Years 25 .00% 0.50% Maint.Not for Public Distribution 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.

360 80% FHA 187.406 96.What Are the True Economics of Home Ownership? (cont. 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 $ 187.300 1.362 10.998 1.) Not for Public Distribution After a small down payment.home price and rent expense data 26 .5% Source: Trulia .300 1.998 $ 1.072 41.

8% 23.8% 6.6x 5.9% 7.4% 6.7x 3.Not for Public Distribution The Benefits of Low-Cost.9% 6.0% 7.5% 11.7% Multiple of Equity 2. returns would be even higher 27 . 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 3.6x 4.0x 8.1% 14.0% 16.7% 9.4x If the borrower has the opportunity to refinance at better rates.7x 7.3% 19.5% 15.5% 21.5% 7.6% 10.8% 7. High-LTV Financing Homebuyers can make an excellent after-tax return on their equity investment.8% 13.

4% 16.1% 5.5% Financing Annual Appreciation 1% 2% 3% 4% 5% 6% IRR Assuming 10yr Hold Residual Current Return Return Total 16.3% 0.2% 24.7% 4.7% 20. returns would be even higher 28 .5% 1.8% 29. even under modest appreciation assumptions FHA 96.6% 37.0% 3.4% 32.Not for Public Distribution The Benefits of Low-Cost.7% 22.8% 26.8% 27.8% 30.7% Multiple of Equity 5x 7x 11x 15x 19x 25x If the borrower has the opportunity to refinance at better rates. High-LTV Financing (Cont’d) Homebuyers can make an excellent after-tax return on their equity investment.7% 34.0% 2.

Not for Public Distribution Favorable Long-Term Demand Dynamics .

0% 2. since at least the 1970s.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 30 .0% 1.5% 4.Not for Public Distribution Household Formation Trends Household Formation has been positive.5% 2. with some degree of cyclicality.5% 1.5% 3.5% 0.0% 4. Household growth will likely accelerate as the recovery gains traction Annual Household Formation (% growth) 5.0% 0.0% 3.

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 .Not for Public Distribution Homeownership Rates have Normalized Homeownership rates have declined to pre-bubble levels.

Maximus Advisors 32 . BLS.Not for Public Distribution 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.

Harvard University.253 Source: Joint Center for Housing Studies.Not for Public Distribution 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. “Updated 2010-2020 Household and New Home Demand Projections” ¹Applies 66% to all figures excluding: Vacant Rental (0%) and Second Homes (100%) 33 .

Not for Public Distribution Favorable Long-Term Supply Dynamics .

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 14 -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 35 Source: US Census Bureau Months of Supply (6 Month Lead) Home Prices (YoY%. Inverted) .Not for Public Distribution Temporarily Elevated Inventory Levels In the short-term.

Not for Public Distribution New Supply Growth Will be Slow Builders have sharply reduced their construction capacity. “Builder Community Analysis” ¹Toll Brothers Management 36 . 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.

Harvard University. Starts today are less than half of average long-term demand Seasonally Adjusted Housing Starts (thousands) 3.Not for Public Distribution 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.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.000 2.25mm new single family homes per year 2.500 Projected LT Demand: 1.000 1. “Updated 2010-2020 Household and New Home Demand Projections” .1-1.500 1.

Not for Public Distribution Out-of-favor .

Yahoo Finance. it still looks pretty bleak out there for General Growth Shareholders” .Not for Public Distribution 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. housing market is headed for a complete and total nightmare” . April 2009 “The U.Business Insider.S. August 2010 39 . August 2010 “Now They Tell Us: Experts say housing is a lousy investment and it always will be” .Businessweek.

Not for Public Distribution Concluding Thoughts .

it is unlikely we will see another substantial decline in prices Forced selling may abate as lenders’ balance sheets improve Generally. at today’s valuations. 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 41 .Not for Public Distribution Why Now? Interest rates won’t stay this low forever New monetary easing increases the risk of inflation Even with the current inventory levels.

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 42 . and one’s. the decision is based on psychological factors: Confidence in the.Not for Public Distribution The Housing Purchase is One of the Most Emotional Investment Decisions a Family Can Make Once a family is able to purchase a home.

high current yield and long-term appreciation potential make SFHRPs an intelligent investment for institutional investors Despite these investment characteristics. This will change 43 .Not for Public Distribution An Institutionally Under-Owned Asset Class Institutional investors have almost no exposure to singlefamily home rental properties (“SFHRPs”) as an asset class Low valuation. we are unaware of any large pools of capital that have been raised to pursue this opportunity.

” and the ability to create long-term tax-deferred gains. demand for “hard assets. also apply to SFHRPs 44 . the first timber ETF launched The same features that attracted institutional investors to timber: current yield. portfolio diversification.Not for Public Distribution The SFHRP Investment Opportunity Is Best Understood By Analogy For the vast majority of the 20th century. institutional investments in timberland emerged in the USA in the 1980s With the advent of timber institutional management organizations (TIMOs) and timber REITs. timber was never considered an institutional asset class Led by forward thinking investors. inflation-protection. institutional timberland investments have grown significantly DANA Limited estimated that institutional investors had invested ~$50bn in timberlands as of early 2008 In 2007.

7 $64.S.000 $0.Not for Public Distribution Potential Institutional Investment Demand is Material If global institutions and private wealth funds allocated approximately 1% of their assets under management to SFHRPs.000 3.1% * Source: IFSL.3 1. US Census Bureau 45 . it would absorb the entire U. for-sale inventory of single-family homes Median Priced Single Family Home U.S. For-Sale Inventory as % of Global AUM $172.S.970. For-Sale Inventory of Single-Family Homes U.S. For-Sale Housing Inventory ($Tn) Global Institutional & Private Wealth AUM ($Tn)* U.

Not for Public Distribution Appendix .

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. “Lessons from Over 30 Years of Buy versus Rent Decision: Is the American Dream Always Wise?” 47 .50% Maint.Not for Public Distribution Appendix – Buy vs.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. + Insur .

Linked to Win September 14. . L.P. 2011 Pershing Square Capital Management.

It is likely that there will be developments in the future that cause Pershing Square to change its position regarding such investments. economic. competitive. L. The analyses provided may include certain statements.S. without limitation. This presentation and the information contained herein is not investment advice or a recommendation or solicitation to buy or sell any securities. governments and other interested parties discussed in the presentation that could lead those constituents and other market participants to disagree with Pershing Square’s conclusions. Pershing Square recognizes that there may be confidential information in the possession of instruments of state. Pershing Square may buy. including the loss of principal. and projections reflect various assumptions by Pershing Square concerning anticipated results that are inherently subject to significant political. assets and liabilities. estimates or projections or with respect to any other materials herein and Pershing Square disclaims any liability with respect thereto.buying and selling – securities and other financial instruments. Funds managed by Pershing Square and its affiliates own U. estimates and projections prepared with respect to. . among other things. Pershing Square manages funds that are in the business of trading . currencies or other investment instruments. historical and anticipated events. cover or otherwise change the form of these investments for any or no reason. ("Pershing Square") contained in this presentation are based on publicly available information. Pershing Square hereby disclaims any duty to any recipient hereof or to provide any updates or changes to the analyses contained here including. are made as to the accuracy or completeness of such statements. All investments involve risk. Hong Kong dollars and options on the Hong Kong dollar. dollars. regulatory. and other uncertainties and contingencies and have been included solely for illustrative purposes. express or implied. the manner or type of any Pershing Square investment. Actual results may vary materially from the estimates and projected results contained herein. sell. No representations or warranties.Disclaimer The analyses and conclusions of Pershing Square Capital Management. estimates.P. access to and changes in capital markets and the values of currencies. Such statements.

II. The Context The History III. The Investment Opportunity VI. Why Now? . The Current State of Play IV. Our Prediction of What is Likely to Happen V.Structure of the Presentation I.

The Context .I.

The US Economy Today 4 .

U.S. . economic growth remains sluggish Real GDP Growth (%QoQ – Annualized. ) 5 ________________________________________________ Source: Bloomberg.S.GDP Growth – U. Seasonally Adj.

S. 2005 Dollars) Still below Q4 ’07 peak ________________________________________________ 6 Source: Bloomberg. GDP is still below the Q4 ’07 peak Annualized Real GDP (Billion USD. . U.S.GDP – U.

S. Unemployment in the U. remains stubbornly high at over 9% Unemployment Rate (%) ________________________________________________ 7 Source: Bloomberg. .S.Unemployment – U.

but seems to have leveled off and is forecast to decrease Consumer Price Index Growth (YoY) Median Bloomberg Forecast: 2011 +3.S. Inflation has picked up.1% ________________________________________________ 8 Source: Bloomberg.0% 2012 +2. .Inflation – U.

S.Home Prices – U. U. .S. Home Prices are down 32% from peak and have not recovered Home Price Index (Case Shiller Home Price 10-City Index) -32% from peak ________________________________________________ 9 Source: Bloomberg.

6% • Near 0% Short-Term Interest Rates through mid-2013 • Multiple Rounds of Quantitative Easing ________________________________________________ 10 Source: Based on the latest available Bloomberg data.S.5% 9. Monetary Policy Today To combat persistent weakness in the U. economy. the Federal Reserve has reduced short-term rates to zero and enacted two rounds of quantitative easing Economic Weakness Accommodative Monetary Policy Real GDP (YoY%) Unemployment Home Prices (YoY%) CPI (YoY%) +1.1% -3.S.8% 3. .U.

S.federalreserve.gov/newsevents/press/monetary/20110809a.htm).Federal Reserve statement. . 2011 – Board of Governors of the Federal Reserve System (http://www.U. Release August 9. Monetary Policy Will Remain Extremely Accommodative: “The committee currently anticipates that economic conditions – including low rates of resource utilization and a subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013” . August 2011 ________________________________________________ 11 Source: Press.

Compare with Economy X 12 .

GDP Growth – Economy X Economy X has recovered strongly from the global recession Real GDP Growth (YoY) ________________________________________________ Source: Bloomberg. .

.GDP – Economy X Economy X GDP is well above its peak LTM Real GDP (Billion Local Currency) ________________________________________________ 14 Source: Based on Bloomberg data (Cumulative Last 4Q’s).

Unemployment – Economy X Unemployment is 3.4% and back to pre-recession lows Unemployment Rate (%) ________________________________________________ 15 Source: Bloomberg. .

Bloomberg. home prices are up ~90% Home Price Index ________________________________________________ 16 Source: “Centaline Property Centa-City Leading HK Index” .Home Prices – Economy X Since January 2006. .

17 . Hong Kong SAR Government.jsp).gov.Inflation – Economy X Inflation is accelerating and is now nearly 6% Underlying Consumer Price Index Growth (YoY) ________________________________________________ Source: “Monthly Report on the Consumer Price Index” .Census and Statistics Department. (http://www.hk/products_and_services/products/publications/statistical_report/prices_household_expenditure/index_cd_B1060001_dt_detail.censtatd.

Hong Kong SAR Government (http://www.S.4% +18.8% +1.hk/press_release/press_releases_on_statistics/index.5% +5.1% 3. 18 Press Release. August 22.6% ________________________________________________ Source: Based on the latest available Bloomberg data. Real GDP (YoY%) Unemployment % Home Prices (YoY%) CPI (YoY%) +5. . Economy X’s monetary policy mirrors that of the United States with a near-zero interest-rate policy and large amounts of money printing Economy X U.gov.jsp?sID=2798&sSUBID=19062&displayMode=D).Economy X’s Monetary Policy Mirrors the US’s Despite surging growth and inflation. 2011 – Census and Statistics Department.8% +3.censtatd.5% 9.1% -3.

Who is Economy X? Why would Economy X have the same monetary policy as the United States? 19 .

Economy X = Hong Kong Why Does Hong Kong share U. Dollar (USD) forces Hong Kong to import the U. monetary policy? The Hong Kong Dollar’s (HKD) peg to the U.S.S. despite its much stronger economy .’s ultraaccommodative monetary policy.S.

II. The History .

htm). .The Hong Kong Dollar Over Time Hong Kong has implemented several different currency regimes.gov.hk/hkma/eng/public/hkmalin/index. p. demonstrating a pattern of change and adaptation during times of stress HKD/USD (inverted) Sterling Peg Free Floating Dollar Peg HKD Strength 7.34 (http://www.85 Band ’05 Strong Side Commitment ’98 Weak Side Commitment 22 ________________________________________________ Source: “Hong Kong’s Linked Exchange Rate System” – Hong Kong Monetary Authority.info.75 to 7.

HK was a British colony and Sterling was a major reserve currency 23 .Sterling Link Adopted (1935) By 1935. facing a dramatic rise in the price of silver and a shrinking money supply. Hong Kong abandoned silver as backing for its currency HK replaced the silver link with a Sterling-based currency board At the time.

p. Schenk. 1945-1992” .The Sterling Peg (1935-1972) Sterling’s role as an international reserve currency was displaced by the USD after WWII Denomination of Foreign Currency Reserves 1950-1982 Sterling ________________________________________________ Source: “The Decline of Sterling: Managing the Retreat of an International Currency. .23.Catherine R.

Sterling Link Abandoned (1972) In 1949 and in 1967. p.htm).hk/hkma/eng/public/hkmalin/index.gov.34 (http://www. Sterling was devalued. . Shortly after the 1967 devaluation.Hong Kong Monetary Authority. the HKD was revalued by 10% against Sterling to preserve its purchasing power HKD/USD (inverted) HKD Strength 1967 14% Sterling devaluation – Countered by +10% HKD revaluation ________________________________________________ 25 Source: “Hong Kong’s Linked Exchange Rate System” .info.

gov.hk/hkma/eng/public/hkmalin/index.Hong Kong Monetary Authority. .Sterling Link Abandoned (1972) In 1971.info. In 1972.htm). p. Nixon gave up the gold standard and devalued the USD.34 (http://www. Sterling broke its USD peg. Two weeks later HK announced a USD link HKD/USD (inverted) HKD Strength 1967 14% Sterling devaluation – Countered by +10% HKD revaluation Sterling ends USD peg and two weeks later HKD is pegged to USD 1971 USD devaluation ________________________________________________ 26 Source: “Hong Kong’s Linked Exchange Rate System” .

implying a 10% revaluation against USD Finally. in November 1974. USD was devalued against gold by 10% HK responded to this USD devaluation and adjusted its currency to maintain HKD’s price relative to gold. HK discarded the USD link and floated its currency 27 .First Dollar Link (1972-1974) In February 1973. with the US struggling with inflation and Vietnam war debt. without a reliable anchor.

The Float (1974-1983) Until 1982. the Float worked reasonably well despite HK’s lacking a formal central bank. . leaving the HKD vulnerable to a crisis HKD/USD HKD Weakness 28 ________________________________________________ Source: Bloomberg. The commercial banks were made responsible for managing the system.

negotiations over the UK’s agreement to transfer control of HK to the Mainland sparked a crisis of confidence in the HKD.The Float Ends in Crisis (1983) In September 1983.60 HKD Weakness ________________________________________________ 29 Source: Bloomberg. . leading to bank runs and food shortages. A rapid decline in the HKD ensued HKD/USD Black Saturday (9/24/1983) HKD hits an all time low: 9.

Panic Overwhelms the Streets Fear Grips Hong Kong ________________________________________________ 30 Source: “Hong Kong SAR’s Monetary and Rate Challenges” .Catherine Schenk. p149-50.The Float Ends in Crisis (1983) Cont. .

80 HKD/USD ’98 Weak Side Intervention Commitment ’05 Strong Side Intervention Commitment Floating Rate ________________________________________________ 31 Source: Bloomberg.75 to 7. this time at 7. While the initial workings of the currency board were basic. . the strength of the USD and the simplicity of the currency board made it credible HKD/USD HKD Weakness Creation of 7. authorities adopted a currency board and a USD peg.85 Band Resumption of the USD peg.The Dollar Link (1983 – Present) To stem the panic.

Tony Latter. Logic and Operation of the Currency Peg” .56. p.Why Did HK Choose the USD as an Anchor in 1983? US monetary policy established tremendous credibility in the Volcker era There was no other viable anchor – Precious metals had been discredited and Sterling was a secondary currency The US was a major HK trading partner The USD was commonly used in international trade and finance “The crucial factor is that there should be confidence that the anchor currency will be managed responsibly by its central bank.Tony Latter. .” . Former HKMA Deputy Chief Executive and coarchitect of the peg ________________________________________________ 32 Source: “Hong Kong’s Money: The History.

pdf).How do we know what the HK government was thinking when the peg was introduced in 1983? This publically available HK government policy memo details the HK government’s thinking at the time: We will get back to this memo later in the presentation… ________________________________________________ 33 Source: “Stabilization of the Exchange Rate” (http://www.sktsang. .com/ArchiveI/1983.

HK Has Been Responsive to Change Event: Silver appreciation (1935) Response: Sterling Peg Event: Sterling devaluation (1967. Switch to USD Peg Event: USD devaluation (1973. HKD Float Event: HKD Crisis (1983) Response: USD Peg 34 . 1972) Response: Revaluation. 1974) Response: Revaluation.

The Current State of Play .III.

gov. Transportation 9% Economic Freedom: Ranked #1 for 17 consecutive years by the Heritage Foundation History: •British colonial rule (18421997) •Reversion to Chinese sovereignty (1997) •“One Country.(http://www. p. 36 .49 (http://www. Public Administration 18%.Hong Kong Population: 7.html). Picture .1mm GDP by Sector: Finance 26%. Two Systems” (1997-2047) •Harmonization with the Mainland (2047 .html).hk/2010/en/index.expatify.com/hong-kong/navigating-the-residential-neighborhoods-of-hong-kong.Onward) ________________________________________________ Source: “Hong Kong Yearbook 2010” . Trade 27%.yearbook. Hong Kong SAR Government.Information Service Department.

Table 32.Census and Statistics Department. . Hong Kong SAR Government.The Hong Kong Economic Miracle Hong Kong’s real GDP has grown 21x over the last 50 years. This success is a product of its unique location and successful economic policy Real GDP ($HKD mm. 2005 dollars) ________________________________________________ Source: “National Income and Balance of Payments” .

allows for a broad range of currency regimes Consequently. HK’s constitution. the HKD system can be quickly and easily amended Any change would be made through an administrative process involving the Financial Secretary. the Chief Executive. and the Monetary Authority (HKMA).HK’s Currency Regime is Tremendously Flexible The Basic Law. with likely consultation with Mainland authorities . unlike many currency boards.

The Linked Exchange Rate System (LERS) 39 .

75 to 7.The LERS Since 1983.85 HKD/USD trading band for the currency The price of the HKD is kept within the trading band through a series of arbitrage and automatic intervention mechanisms . the LERS has kept the HKD pegged to the USD at a rate of ~7.80 HKD/USD The HKMA has established a 7.

How the LERS System Works Strong Side Defense: 7.75 Currency Board Buys HKD at 7.85 Monetary Base Expands Monetary Base Contracts Interest Rates Fall Interest Rates Rise Downward Pressure On Exchange Rate Back Towards 7.80 HKD/USD Upward Pressure On Exchange Rate Back Towards 7.75 HKD/USD Capital Inflow Weak Side Defense: 7.80 HKD/USD .85 HKD/USD Capital Outflow Market Participants Buy HKD Upward Pressure On Exchange Rate Market Participants Sell HKD Downward Pressure On Exchange Rate Currency Board Sells HKD at 7.

A Lot Has Changed Since 1983… .

.Peterson Institute for International Economics. p. ¹ “Estimates of Fundamental Equilibrium Exchange Rates” .3. Funding such deficits requires large corresponding capital inflows Trade Deficit as of GDP (%) Sustainable limit¹ ________________________________________________ 43 Source: Bloomberg.America’s Trade Deficit America’s trade deficit has grown enormously since 1983.

Hong Kong’s Trade Surplus Hong Kong’s large trade surplus reflects its position as a global trading and financial services center. as well as the relative cheapness of its currency Trade Surplus/ Deficit(% of GDP) ________________________________________________ 44 Source: “National Income and Balance of Payments” . Hong Kong SAR Government. . Table 42.Census and Statistics Department.

. has suffered from decades of chronic deficits Deficit/GDP (%) ________________________________________________ 45 Source: Bloomberg.America’s Debt Crisis The U.S.

.’s serious budget problems Debt/GDP (%) ________________________________________________ Source: Bloomberg. Treasury Direct (http://www. citing poor leadership from Washington in solving the U.S.S. 46 .gov/govt/reports/pd/histdebt/histdebt_histo4.htm).treasurydirect. S&P recently downgraded the U.America’s Debt Crisis – The US is No Longer AAA America’s fiscal position has worsened considerably since 1983.

“National Income and Balance of Payments” . Nominal GDP .“Public Account. 47 . Money and Finance” . Hong Kong SAR Government. Hong Kong SAR Government. Table 32.Hong Kong’s Fiscal Health is Solid Hong Kong has a history of budget surpluses HK Surplus (% of GDP) ________________________________________________ Source: Surplus . Table 192.Census and Statistics Department.Census and Statistics Department.

.Census and Statistics Department.Bloomberg (Adjusted for HKD). or $294bn (~126% of trailing GDP) including the funds backing the currency board and other assets Foreign Currency Assets (% of GDP) ________________________________________________ Source: Foreign Currency Assets .HK’s Fiscal Health is Strong – 2010 S&P AAA Upgrade HK has built a USD $77bn foreign currency fiscal reserve. Hong Kong SAR Government.“National Income and Balance of Payments” . Table 32. 48 Nominal GDP .

. resorting to massive quantitative easing and promises of extended ultra-low interest rates Fed Balance Sheet (Billion) Fed Funds (%) QE II ________________________________________________ 49 Source: Bloomberg.Evolving American Monetary Policy Since the recent financial crisis. the Federal Reserve has struggled to stimulate the US economy.

.Persistent US Dollar Weakness Accommodative monetary policy. a weak economy and large fiscal and trade deficits have driven the USD lower and the HKD with it Trade-Weighted Nominal USD Index Down 49% since Oct.Board of Governors of the Federal Reserve System (http://www.gov/releases/h10/summary/default.federalreserve. 1983 ________________________________________________ 50 Source: “Nominal Major Currency Index” .htm).

and its acceptability to local people and businesses.75.“The success of a currency board arrangement.” . .Tony Latter. Former HKMA deputy chief executive and co-architect of the peg ________________________________________________ 51 Source: “Hands On. p. Hands Off?: The Nature and Process of Economic Policy in Hong Kong” .Tony Latter. depend to a considerable extent on the anchor currency being reasonably stable.

Links with China are growing 52 .

53 . while trade with China is booming % of Hong Kong’s Total Trade ________________________________________________ Source: “External Trade“ . Table 60.Trade Links with China are Growing Hong Kong’s trade with America has fallen as a percentage of total trade.Census and Statistics Department. Hong Kong SAR Government.

especially via expanded usage in trade settlement. June 22. has led to a rapid increase in RMB deposits in Hong Kong. further deepening HK’s economic ties with the Mainland RMB Deposits (Billion in RMB) RMB Deposits (as % of Total HKD Deposits ) ~20% of all HK bank assets are now on the Mainland¹ ________________________________________________ Source: Bloomberg.Monetary Links with Beijing are Growing China’s increasing liberalization of the RMB market. 2011 54 . ¹RBS.

The USD Peg Has Materially Reduced the Market Value of the HKD 55 .

the HKD has lost ~35% of its value on a real (inflation-adjusted) trade-weighted basis over the last ten years Real Effective Exchange Rate (Trade Weighted) China Begins Revaluation ________________________________________________ 56 Source: “BIS Real Effective Exchange Rates” .HKD – Trade-Weighted Value Dragged down by a weak USD.htm).Bank of International Settlements. .bis.org/statistics/eer/index. Broad Index (http://www.

steadily strengthens its own undervalued currency.Yuan Strengthening Pressures HKD Lower HKD’s trade-weighted value will continue to fall as China. The Yuan’s strengthening recently accelerated after the July U.economictimes.Economic Times (http://articles.S. HK’s largest trading partner. credit downgrade Yuan and HKD/USD HKD Weakness The RMB has appreciated by 30% since 2005 and officials have indicated that it will continue to appreciate¹ ________________________________________________ 57 Source: Bloomberg.indiatimes. ¹ “China will stick to gradual appreciation of Yuan: Wen” . .com/2011-03-15/news/28691614_1_wen-jiabao-growth-rate-exchange-rate).

Goldman Sachs. p.Valuation Summary Economist models and changes in trade-weighted real exchange rates indicate that the HKD is materially undervalued relative to a basket of its trading partners Model Decline in Real Trade-Weighted Value . .3. 58 “Currency valuation from a macro perspective” .Barclays Capital. June 14. 2011. May 2011. “Estimates of Fundamental Equilibrium Exchange” – Peterson Institute for International Economics. Real Effective Exchange Rate.Last 10yrs Goldman Sachs DEER Model Barclays PPP Model % Undervalued (Multi‐Lateral) 54% 26% 33% Undervaluation % Undervalued: % Undervalued = (7.80/Fair Value) -1 26% ‐ 54% ________________________________________________ Source: “Economic Research: GS DEER” . Q2 2011 Trade Weighted Misalignment.

A Lot Has Changed Since 1983. .. ________________________________________________ Source: Bloomberg..

) ________________________________________________ Source: Bloomberg. .A Lot Has Changed Since 1983… (Cont.

the HK government recognized the risks of tying HK’s monetary policy to that of the US “[D]omestic interest rates and domestic inflation will be substantially influenced by the behavior of the economy to whose currency it is tied (the USA in this case).com/ArchiveI/1983.At the time the peg was introduced. the potential effect of such ties upon the Hong Kong economy which led to the abandonment of the sterling link in 1972 and then the US dollar link in 1974. 1983 But in the midst of crisis.Hong Kong government policy memo.sktsang. in essence. the government had no other choice ________________________________________________ 61 Source: “Stabilization of the Exchange Rate” (http://www.pdf). .” . It was.

Impact of the Peg on HK .

Hong Kong SAR Government.5% ________________________________________________ 63 Source: “Monthly Report on the Consumer Price Index” .Inflation – A growing concern Consumer price inflation in Hong Kong is accelerating Underlying Inflation (% YoY) The HKMA recently increased its 2011 inflation expectation to 5.Census and Statistics Department.5% from 4. .

Residential Real Estate Prices in Hong Kong’s residential real estate market are soaring HK Residential Price Index (Centaline Property Centa-City Leading Hong Kong Index) 222% Increase ________________________________________________ 64 Source: Bloomberg.Asset Bubbles Building . .

Citi. May 2011. . p.Asset Bubbles Building .Residential Real Estate Residential valuations are approaching Pre-Asian Financial Crisis levels HK Residential Price to Income Ratio ________________________________________________ 65 Source: “Hong Kong Property” .51.

htm). 66 . 1 CBRE Data – Prepared for Pershing Square. 38 (http://www.Hong Kong Economy.gov.March 2011” .Asset Bubbles Building . HK Commercial Price Index .Commercial Real Estate Prices in Hong Kong’s commercial real estate market are increasing rapidly HK Commercial Price Index Class A office market stats: Vacancy Rate: ~2% Rent (% yoy): ~+18% Cap Rates: ~3% ________________________________________________ Source: “Half-Yearly Monetary and Financial Stability Report .hk/en/reports/index.hkeconomy. p.

How the USD Link Contributes to Inflation .

How Does the Peg Cause Inflation The USD peg and the vastly divergent US and HK economies impact the HK economy through various channels Rapid Expansion of the Monetary Base Imported Low Short-Term Rates Diminished Purchasing Power .

Rapid Expansion of the Monetary Base 69 .

pushing the rate to 7. attracted by its safe-haven status and undervaluation.75 and forcing the HKMA to print money to defend the strong side of the band HKD/USD Weak-side Intervention Level HKD Weakness Strong-side Intervention Level Strong-side Intervention ________________________________________________ Source: Bloomberg. 70 . investors flooded into HKD.The Monetary Costs of Intervention In 2008 and 2009.

info.The Monetary Costs of Intervention (Cont. 2011 (http://www. HK has effectively no control over the size of its Monetary Base Monetary Base (HKD million) Strong-side Intervention ________________________________________________ 71 Source: “Monthly Statistical Bulletin .gov. HK’s Monetary Base increased HKD $671bn or ~200% over two years.htm).Hong Kong Monetary Authority.Table 1.hk/hkma/eng/statistics/msb/index.) As a result of strong side intervention.1” . September 5. .

Rapid Credit Growth Growth in base money supply has contributed to HK having one of the fastest rates of credit growth in the world Private Credit Growth less Nominal GDP Growth – 12 Months Same figure for the US: -3% ________________________________________________ 72 Source: “Overheating Emerging Markets: Temperature Gauge” .com/blogs/dailychart/2011/06/overheating-emerging-markets-0).economist. .The Economist (http://www.

The Strong Side Defense Risks Further Money Printing The HKD’s widely recognized undervaluation increases the likelihood that the HKMA will need to print more money to keep the HKD within the band With short-term interest rates already near zero. rates can’t fall any further to discourage investors from holding the HKD .

Imported Low Short-Term Interest Rates 74 .

Short-Term Interest Rates Arbitrageurs take advantage of the peg and keep Hong Kong short-term rates (HIBOR) in line with LIBOR.Tied to U.S. . irrespective of the suitability of such rates for Hong Kong 1-Month HIBOR and LIBOR Rates Home mortgage rates in HK today are only ~2% ________________________________________________ 75 Source: Bloomberg.

76 “Monthly Report on the Consumer Price Index” . Hong Kong SAR Government. .Census and Statistics Department.High Negative Real Interest Rates Today Interest-rate parity with the US means Hong Kong suffers frequently from inappropriately high and low real interest rates Real Interest Rates (1-Month HIBOR less Underlying CPI) +10% real interest rates post the Asian Financial crisis retarded Hong Kong’s recovery High negative real interest rates have contributed Hong Kong’s current and prior asset bubbles ________________________________________________ Source: Bloomberg. Underlying Inflation.

Diminished Purchasing Power 77 .

Census and Statistics Department. Hong Kong SAR Government. mainly from China HKD Weakness ________________________________________________ Source: “Nominal Effective Exchange Rate” – Bloomberg. Table 76. Hong Kong’s weak currency has led to a large increase in the cost of imports. “External Trade “ . particularly in the critical food sector Unit Cost of Imports Trade-Weighted HKD Inverted Hong Kong imports 90% of its food. 78 .Rising Cost of Imports Unable to revalue higher.

p.gov.pdf).Mainland Tourists Flocking to HK Partly attracted to HK by the cheap HKD.Yearly Economic Report” .hk/en/pdf/er_11q2.Hong Kong SAR Government. .111 (http://www. visitors from the Mainland are flocking to HK. ~4x the population of HK ________________________________________________ 79 Source: “Half . pressuring local prices upward Mainland visitors (% YoY) Mainland visits in 2011 is on pace for ~27mm.hkeconomy.

Home Price Inflation Rises with HKD Undervaluation Mainland Chinese home buyers are taking advantage of an undervalued HKD. 30% to 40% of luxury new home sales are to Mainland buyers HK Residential Price Index Trade Weighted HKD Inverted HKD Weakness ________________________________________________ 80 Source: Bloomberg. .

Underlying Inflation .Consumer Price Inflation Rises with HKD Undervaluation There is a direct correlation between weak HKD and HK inflation Underlying CPI Index (YoY) Trade Weighted HKD Inverted HKD Weakness ________________________________________________ Source: Bloomberg.Census and Statistics Department. . 81 “Monthly Report on the Consumer Price Index” . Hong Kong SAR Government.

33.HK’s Inflation Problem Will Likely Get Worse Near zero US short-term interest rates for two years or more Despite high inflation. p.Yearly Monetary and Financial Stability Report” . March 2010.Hong Kong Monetary Authority. the HKD is still undervalued by ~30% HKD’s undervaluation will only worsen as the RMB appreciates Broad money supply (M2) has not yet grown to reflect the full impact of the massive 2008/2009 Monetary Base expansion Undervaluation increases the risk that the HKMA will need to print more HKD to keep the currency within the band The HKMA estimates that HK has no spare resource capacity to absorb further demand growth¹ ________________________________________________ 82 Source: ¹ “Half . .

.com/blogs/dailychart/2011/06/overheating-emerging-markets-0).economist.Significant Risk of Overheating The Economist ranks HK near the top of its list of emerging-markets at risk of overheating Emerging-Market Overheating Index Countries were measured across six different economic indicators of overheating Inflation GDP Growth Employment Credit Interest Current Account ________________________________________________ 83 Source: “Overheating Emerging Markets: Temperature Gauge” .The Economist (http://www.

Growing Social Risks .

their global purchasing power deteriorates 85 .Social Consequences of Inflation The Middle Class. “Sandwich Class” Priced out of first time home ownership but too well-off to be comfortable in public housing The Elderly Value of their savings is eroded by inflation Low interest rates reduce fixed income investment returns The Poor Do not have the savings to absorb price shocks The Rich While some rich get richer speculating on real estate with lowcost credit.

com/HK-VerticalHousing/LC-HK_VerticalHousing.lcscapes.html).Hong Kong’s Wealth Gap Hong Kong’s rich-poor gap is Asia’s widest according to UN data ________________________________________________ 86 Source: Pictures . . Christopher DeWolf (http://jmsc. William McCallum.hku.Zoe Li.hk/hkstories/content/view/659/8786/) and (http://www.

United Nation Development Programme.0 25.195 (http://hdr.0 ________________________________________________ Source: “Human Development Report 2009” .0 35. Chinese Premier Wen Jiabao called on the Chief Executive of Hong Kong to address “deep rooted contradictions in Hong Kong” in reference to Hong Kong’s persistent and troubling wealth gap.0 40.org/en/contacts/about/undp/).0 The Gini Coefficient is a Measure of Wealth Inequality 30. Gini Coefficient (2007) 45. Japan Norway Czech Republic Germany France More Inequality 87 Switzerland Australia United Kingdom Italy New Zealand United States Hong Kong .Beijing Has Taken Notice of HK’s Inequality In 2009.undp. p.0 20.

Productivity Index. 88 . Average wages have been flat for many years despite very low unemployment and strong productivity growth Real Wages in Hong Kong – Indexed to 2003 = 100 ________________________________________________ Source: “Real Wages” . table 103.Flat Real Wages Gains from economic growth have not been evenly spread. “Census and Statistics Department” Hong Kong SAR Government.Bloomberg.

89 . With the home ownership rate at only ~53%. home price appreciation only benefits a small percentage of the population Housing Affordability Index – (Median Home Price/Median Annual Household Income) 12 10 8 6 4 2 0 Vancouver Hong Kong San Francisco San Diego Honolulu New York Los Angeles Montreal Sydney Toronto London NYC Housing is nearly twice as Affordable as Hong Kong’s ________________________________________________ Source: “7th Annual Demographic International Housing Affordability Survey: 2011” .10.Housing Affordability is Squeezing the Middle Class HK is one of the least affordable places in the world.Performance Urban Planning. p.

Apartment Rents Are Among the Highest in the World In 2010.eca-international.com/news/press_releases/show_press_release?ArticleID=7309).ECA International (http://www. . Hong Kong was the third most expensive market for two bedroom rental apartments. up from ninth place in 2009 World’s 20 most expensive locations to rent a two bedroom apartment Luxury rents in Hong Kong are up 23% YoY ________________________________________________ 90 Source: “15% Rental Increase Makes Singapore 5th Most Expensive Locations Globally” .

it will also become a political issue. . if dealt with inappropriately. 2011 (translation). However.A high-level Beijing official has expressed concern that the housing situation may become politically destabilizing: “Housing is of course a social and an economic issue.” -Wang Guangya Director of Hong Kong and Macau Affairs Office of the State Council of the People’s Republic of China ________________________________________________ 91 Source: “Wang Guangya Talking About Housing Market When Visiting HK: Housing Issues May Become a Political Issue if Inappropriately Deal With” – June 15.

Social Unrest – Pressure for Change
“Inflation, particularly in the price of food and housing; lack of democracy; public austerity followed by handouts, followed by howling protests, followed—some hope—by a change in government” –The Economist, May 2011

Tens of thousands of people are not satisfied with the level of political freedom in Hong Kong on July 1st, 2010

10,000 people protested against inflation (prices of food and housing) in March 2011

Several organizations protested against the dominance of property developers and high prices in May 2011

________________________________________________

Source: Picture - BBC (http://www.bbc.co.uk/news/10480116). Picture - The Economist (http://www.economist.com/blogs/banyan/2011/03/protests_hong_kong). 92 Picture - Macau Daily Times (http://www.macaudailytimes.com.mo/china/25180-residents-protest-high-property-prices.html).

More…Social Unrest
This year, 218,000 people, the most since the massive 2003 civil liberty protests, marched in Hong Kong's annual July 1st rally

“They aren’t happy with the fact that they do not see an improvement in living standards, despite the good economic statistics.” – Bloomberg July 1st , 2011
________________________________________________

93

Source: Pictures - Seattle Pi (http://www.seattlepi.com/news/article/Marchers-vent-anger-on-Hong-Kong-prices-policies-1448544.php).

Unpopular Government
Despite a surging economy and 3.4% unemployment, the Chief Executive of Hong Kong has a lower approval rating than President Obama
% Who Would Vote Yes for the Current Chief Executive? Trade-Weighted Nominal HKD

75% Approval Rating

24% Approval Rating

Source: Bloomberg. University of Hong Kong (http://hkupop.hku.hk/english/popexpress/ce2005/vote/poll/datatables.html). Gallup (http://www.gallup.com/poll/149114/obama-close-race-against-romney-perry-bachmann-paul.aspx).

94

The Call for Change is Growing Louder
Major business publications, prominent investors, local politicians, and economists have all recently questioned the suitability of the peg

Recent Headlines “Hong Kong Faces Heat on Dollar Peg” – Financial Times, November 2010 “Hong Kong Should End Peg to U.S. Dollar, Deutsche Bank Says” – Bloomberg, November 2010 “The Peg will be History” – The Standard, January 2010

________________________________________________

95

Source: Picture - Hong Kong Business (http://hongkongbusiness.hk/).

Diverse Voices are Calling for Change
Investor

“A link to a basket of currencies or ‘no link at all’ is ‘more desirable’”¹ – Marc Faber – March 2011 “Continuous appreciation of the Renminbi means diminishing purchasing power of the Hong Kong dollar…The problem cannot be tackled unless we abolish the linked rate in Hong Kong.”² – The Honourable Chan Kin-Por, Legislative Council Member & Chief Executive of Munich Re Hong Kong – January 2011 “I think it’s a case of a frog boiling in water…It could happen sooner than people think given the rapid rise in circulation of the currency [RMB]”³ – Peter Redward, Barclays Economist – October 2010 “The merits of reform are high and the cost of the relevant option is low.”4 – James Grant – May 2011

Politician

Economist

Analyst

Source: ¹“It’s time to end the HK$ peg” - Hong Kong Business, March 10, 2011. ² Legislative Council Transcript of January 6, 2011 meeting. 96 ³“Hong Kong May have to revalue in 2 years, Barclays says” - Bloomberg Businessweek, October 26, 2010. 4 Grant’s Interest Rate Observer, May 2011.

Fiscal and Regulatory Measures Have Been Inadequate
HK has implemented a series of unsuccessful “macro-prudential” reforms to deal with its inflation and wealth gap problems. These efforts do not address the underlying cause of the problems and in some cases are actually inflationary (e.g. cash handouts)

Housing – Efforts have failed to reduce prices meaningfully LTV caps on new mortgages Transaction tax on homes sold soon after purchase Home Supply – Increased land sales Introduction of a Minimum Wage Rent Relief Utility Subsidy Cash Handouts

Real Estate Market Intervention is Not Working
For example, the prevalence of cash buyers has reduced the impact of mortgage LTV caps
HK Residential Price Index

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Source: Bloomberg. “Hong Kong Property” – Morgan Stanley, September 2, 2011, p.19. “Asian Economics Analyst” – Goldman Sachs, June 23, 2011, p.4.

98

IV. Our Prediction of What is Likely to Happen

Reminder
The history demonstrates that Hong Kong has modified its exchange rate system to address major economic changes
HKD/USD (inverted)

Sterling Peg

Free Floating

Dollar Peg

HKD Strength

7.75 to 7.85 Band ’05 Strong Side Commitment ’98 Weak Side Commitment
100

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Source: “Hong Kong’s Linked Exchange Rate System” – Hong Kong Monetary Authority, p.34 (http://www.info.gov.hk/hkma/eng/public/hkmalin/index.htm).

The only effective way to mitigate inflation and a potential real estate bubble is to allow the HKD to appreciate

101

There are Four Principal Revaluation Alternatives 1. Allow the HKD to float 2. Repeg the HKD to a trade-weighted basket 3. Repeg the HKD to the RMB 4. Keep the USD peg, but revalue to an appropriate exchange rate

Alternative One – Float
Pros: Full monetary independence The exchange rate would absorb economic shocks Cons: Large trade flows make it difficult for the monetary authority to manage money supply A floating exchange rate could be volatile HK had a bad experience when it allowed its currency to float between 1974 and 1983

103

Alternative Two – Peg to a Trade-Weighted Basket Pros: Monetary policy would more closely match that of its trading partners Reduces HK’s real exchange rate volatility Singapore has successfully used this approach Cons: A basket is less transparent and more complicated than the Peg The average interest rates of HK’s trade partners is low today, which would mean continued low HK rates A basket introduces more discretion as trade weights can be adjusted and are subjective, increasing the risk of politicizing monetary policy
104

Alt. Three – A Direct or Basket RMB Link is Inevitable HK’s deepening economic ties with the Mainland make a direct or basket RMB link the widely understood best long-term solution to solving the pressures of the USD link While the HKMA has said that it does not support an RMB link now, it has laid out preconditions, which we believe will likely be met in the coming years The biggest impediment to an RMB peg today is the lack of capital account convertibility of the RMB But we believe full capital account convertibility is inevitable and coming soon…

The RMB is rapidly internationalizing in the current account and full convertibility is possible by 2015: “I should say it is quite possible for China to realise yuan convertibility by 2015.”
– Li Daokui, People’s Bank of China (PBOC) Monetary Policy Committee, September 2011

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Source: “Yuan Will Be Fully Convertible by 2015, Chinese Officials Tell EU Chamber” – Bloomberg, September 8, 2011 (http://www.bloomberg.com/news/2011-09-08/yuan-to-be-fully-convertible-by-2015-eu-chamber.html). “China Yuan Likely Convertible by 2015” – Thompson Reuters – September 9, 2011. 106

The extremely divergent economic characteristics of HK and the US make the status quo unsustainable, destructive, and a distortion to the HK economy

The HKD will likely be pegged to the RMB or to an RMB-led basket within the coming years. All that is needed is an interim solution…

107

We believe the HK government will repeg the HKD at a stronger exchange rate to the USD while leaving the LERS intact

Contemporaneous with this revaluation, we believe the HKMA may indicate that the HKD will eventually be pegged to the RMB or to an RMB-led basket when the RMB is fully convertible

108

Why Does This Make Sense? The current LERS is simple, transparent, and credible so a continuation of the current system makes sense A revaluation can be achieved quickly Only an interim solution is needed because the RMB will be convertible in coming years No other interim change will be necessary

How much should the HKD be allowed to appreciate?

110

Considerations
The exchange rate should be adjusted sufficiently to quell speculation about further appreciation But not so much that the currency would become overvalued A wider trading band could be introduced to provide greater flexibility in a volatile world

We Believe a 30% Revaluation to 6:1 is Likely
Would bring HKD back in line with fair value It would be sizeable enough to convince the market that this is a one-time event A revaluation is consistent with HK’s handling of prior Sterling and USD devaluations in the 1960s and 1970s Hong Kong would retain the simplicity and credibility of the USD peg and maintain the current currency board apparatus It would reinforce the HKMA’s and government’s credibility as responsible stewards of Hong Kong’s economy

Revaluation: How are Stakeholders Affected?
Citizens: The purchasing power of savings would instantly rise The cost of food imports (~30% of the poorest half’s spending)¹ would drop immediately Real estate appreciation would moderate and rents should stabilize over time The Banks: HKMA data show that banks would not suffer large FX or loan losses on a revaluation² The HKMA: Has sufficient foreign reserves to ensure that the Monetary Base is covered Mainland China: A revaluation could be seen as evidence that HK is addressing its social divide and political tensions

________________________________________________

Source: ¹ “Half-yearly Hong Kong Economic Report 2011” – Hong Kong SAR Government, p. 97. ² “Foreign Currency Position” and “Asset Quality of Retail Banks” – Hong Kong Monetary Authority (http://www.info.gov.hk/hkma/eng/statistics/msb/index.htm).

Investment Opportunity .V.

Three Ways to Make Money Buy HKD Outright Buy HKD with USD Leverage Buy HKD Call Options .

85 HKD/USD limits the downside to owning HKD to ~1%.2x the Monetary Base The HKMA’s successful defense of the HKD during the Asian Financial Crisis makes its credibility unquestioned . making the HKD effectively a one-way bet The HKMA’s 7.Buy HKD Outright The HKMA’s commitment to support HKD at 7. at ~2.85 HKD/USD defense is credible: The HKD is materially undervalued HK has substantial international reserves.

67% LIBOR 0.0x 10.24 5.85.0x 14.0x 20.0x 12. Institutional and individual investors will pay a higher rate (~35bps more) .0x 6.85 6.Purchase HKD with USD Leverage Similar short-term interest rates and the HKMA’s pledge to support HKD at 7.78 (Weak Side) (25% Reval) (35% Reval) -3% 100% 140% -5% 149% 209% -6% 199% 279% -8% 249% 349% -9% 298% 418% -11% 348% 488% -12% 398% 558% -14% 447% 627% -16% 497% 697% 12 Month Financing Cost (Fixed) HIBOR 0.82% Carry -0.80) 7.0x 18.0x 16.0x 8.0x 12-Month %Total Return (from 7. means investors can cheaply and safely purchase HKD on USD leverage Leverage: (Notional/Equity) 4.15% 117 Reflects the cost of financing for a bank.

000 Payoff Payoff/Premium $         300.667 1.000  Payouts at Exercise (Revaluation to 6.000 $ 7.650.000.300.000 1.000 $ 7.000.000 $         166.000 7.27% $             8.000 1.000.000.000.700.00) ________________________________________________ 118 Source: Indicative broker quote September 8.000.667 36x 44x 62x USD received = value of HKD purchased at strike price converted back at spot (6.300.250.000.000 $ 1.000.00 0. +30%) USD Received USD Spent (notional) $ 1.000.666. .000.00.166.80 0.57% 1.666.50 0. 2011.000.000 $             2.000 $               5.000.HKD Call Options HKD call options are extremely cheap Option Terms Notional Strike (HKD/USD rate) Premium (% of notional) Premium Dollars (USD) $ 1.83% 1.000.000 $         250.000.000.000 $ 1.000.

0x 20.0x . We think a ~30% revaluation is likely.0x 10% 15% 20% 25% 30% 35% 40% % Revaluation 119 .HKD Call Options are Cheap The HKD options market implies that the probability of a revaluation is extremely remote.0x 40.0x 60.0x 50.50 strike options Payout as Multiple of Premium 70.0x 10. giving investors a ~44x payout on one-year 7.0x 30.

8% 2.7x 44. HKD/USD volatility is very low We believe HKD call options should be priced based on expected value rather than volatility Expected Value = (Probability of Reval) X (Expected Amount of Reval) We think a revaluation is more likely than not.6% A revaluation will likely be in this range Payoff 18.50 Strike Expected HKD Stregthening 15% 20% 25% 30% 35% 40% Implied Probability of Revaluation 5.8x 61.7x 27.3% 1.The Market is Mispricing this Option Because of the peg.2x 52.7% 2.3% 3. but the market price implies extremely low probabilities One Year.3x Market implied probabilities are very low .9% 1.2x 35. 7.

The HKD is a cheap hedge against a weakening USD: A falling USD puts more pressure on HK authorities to act 121 .

VI. Why Now? .

.info.gov.htm).hk/hkma/eng/statistics/msb/index.Why Now? – Benefits Outweigh the Cost The benefits of acting now Consumer inflation could get materially worse It’s not too late to prevent a real estate bubble Social unrest is building The fiscal and economic divergence with the US will continue Revaluation is inevitable when the RMB peg is established The costs of acting today are low The credibility of the HKMA would be enhanced The HKMA has reserves to support a large revaluation HKMA data show the banks’ FX exposure is minimal and their real estate loans are well performing¹ HK’s lack of an export manufacturing sector reduces the economic risk of a stronger currency ________________________________________________ Source: ¹ “Foreign Currency Position” and “Mortgage Survey Results”– Hong Kong Monetary Authority (http://www.

.Why Now? – 2012 Election The March 2012 HK Chief Executive election increases the chances of a near-term revaluation Change tends to happen around political transitions: Outgoing politicians are often less risk averse Incoming politicians are often most bold when they first take office A revaluation may well materially increase the new Chief Executive’s approval ratings It would enhance HK’s citizens’ perception of China’s beneficence ________________________________________________ Source: ¹ “Previewing the Political Year Ahead: Article 23” – Suzanne Pepper (http://chinaelectionsblog.net/hkfocus/?p=168).

because a revaluation reduces the value of foreign assets on their balance sheet Printing money expands and leverages the CB’s balance sheet. printing money could severely limit the HKMA’s future revaluation options . making it more costly to revalue Printing money is highly inflationary Because the Basic Law requires the HKMA to back its Monetary Base 100% with international reserves.Revaluing Now Mitigates the Financial Risk to the HKMA The conventional wisdom is that central banks (CBs) can defend the strong side of their currency without limit by simply printing an unlimited amount of money The reality is different: The CB loses money on a revaluation.

Dec. July 2011 (http://www. July 2011 Source: “Monthly Statistical Bulletin – Table 8.hk/hkma/eng/statistics/msb/index. greatly increased the size and leverage of its balance sheet Pre-Intervention Post-Intervention Leverage: 75% Leverage: 56% Balance Sheet. .gov. 2007 ________________________________________________ Balance Sheet.htm).info.2” – Hong Kong Monetary Authority.Revaluing Now Mitigates Financial Risk to the HKMA The HKMA’s 2008/2009 intervention. in response to over HKD $600bn of money flows.

We believe it would be imprudent for Hong Kong to print more money 127 .

economically successful. We believe this is false for two reasons: 1) Reducing inflation and the risk of asset bubbles in HK enhances HK’s status as a stable. AAA rated region 2) Allowing the HKD to appreciate only increases the credibility of the HKD as a store of value 128 .The principal argument against a revaluation is that it might harm the HKMA’s credibility.

Some observers have suggested a revaluation would be inconsistent with the HKMA’s public statements 129 .

Internal Hong Kong government policy memo.com/ArchiveI/1983. an upward revaluation was explicitly contemplated in 1983 when the LERS was introduced: “It will be acceptable to indicate eventual possible appreciation in the event of confidence returning to such a degree as to produce unduly rapid monetary expansion.” . .However. but such an indication must carry complete conviction that the rate would only ever be adjusted in that direction. 1983 ________________________________________________ 130 Source: “Stabilization of the Exchange Rate” (http://www.pdf).sktsang.

.pdf).sktsang.A peg depends on confidence and credibility.com/ArchiveI/1983.Hong Kong government policy memo. 1983 ________________________________________________ 131 Source: “Stabilization of the Exchange Rate” (http://www.” . Any hint of devaluation would compromise the integrity of the link: “Any statement which can be interpreted as hinting at the possibility of depreciating the announced rate would sabotage the scheme from the onset.

the HKMA has issued a prompt statement to quell speculation "The Hong Kong dollar peg has been working well since its adoption in 1983.gov. anytime observers have questioned the link.As such.htm). It's the foundation for the stability of the currency and financial system in Hong Kong so we have no intention to make any change" – Norman Chan. . HKMA Chief – August 2011 ________________________________________________ 132 Sources: “Linked Exchange Rate System” – Hong Kong Monetary Authority.hk/hkma/eng/insight/20110815e.info. August 2011 (http://www.

. Financial Secretary (2001-2003) – Nov. 2002 (http://www.Press Release. facing SARS. deflation. and budget deficits the then Financial Secretary strongly defended the peg publically: “We have no plans to change the peg.info.hk/gia/general/200211/23/1123063.In 2002. November 23.gov.htm). One of the reasons the peg remains and people are confident about the Hong Kong dollar is that it has not changed in the last 19 years” – Antony Leung. 2002 But in private the story was very different… ________________________________________________ 133 Source: “Financial Secretary Transcript” .

2007 (http://www. Financial Secretary (2001-2003) Interview – “Hong Kong’s Peg Admission May Hurt its Future Defense” Bloomberg. and I did seriously evaluate the various options including unpegging” – Antony Leung.com/apps/news?pid=newsarchive&sid=akb5SpAzhFKg&refer=asia). June 8.bloomberg. June 2007 ________________________________________________ 134 Sources: “Hong Kong's Peg Admission May Hurt Its Future Defense” – Bloomberg. Joseph Yam.Behind the scenes… “The chief executive. .

html). “Hong Kong Dollar Peg’s Future Under Consideration by Government Advisory Body” – April 2006 ________________________________________________ 135 Sources: Wikileaks.org/cable/2006/04/06HONGKONG1383.We also know from a document WikiLeaks released August 30th. 2011 that in 2006 a float was seriously considered by members of an important HK government commission: “Numerous commission [HK’s Commission on Strategic Development – One of the HK government’s most prominent] members who. . August 30. ‘have the ear of senior officials’ are arguing that the HKD-USD peg should be floated shortly after the Chinese RMB surpasses the HKD in value. in Fung’s words. 2011 (http://wikileaks.” Internal US Treasury Memo.

Currency Board Sub-Committee ________________________________________________ 136 Source: “Commitment to Exit Strategies from a CBA” – Hong Kong Baptist University (http://sktsang.A prominent member of the HKMA committee responsible for advising on the peg suggests a revaluation could happen when the market least expects: “[T]he HKMA might choose a hot and boring Friday afternoon in mid-summer. and announce the floating of the Hong Kong dollar. .computancy.com/attrachment/Tsang20000506. when most fund managers and top government officials had gone vacationing.” -Shu-ki Tsang Academic Economist and HKMA Advisory Board Member.pdf).

We have every reason to believe HK decision makers will approach the HKD peg question with the same diligence and rationality they have used in the past 137 .

Economic and Monetary Policy Making in HK Since its inception in 1993. and prudent oversight of the economy and banking system Most importantly. the HKMA has built a reputation as one of the most credible monetary authorities in the world The HKMA is known for its intelligence. transparency. the HKMA and other important decision makers in Hong Kong have a track record of behaving in an economically rational manner .

No legislative action is required 139 . HK’s peg can be modified through a purely administrative process.Repegging is easy and quick to execute: Unlike some other currency regimes.

In Sum: A highly undervalued currency + A highly undervalued option = An extraordinary investment opportunity .

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2011 Pershing Square Capital Management. L. .P.A Homespun Fortune October 18.

Actual results may vary materially from the estimates and projected results contained herein. Pershing Square may buy. The analyses provided may include certain statements. It is possible that there will be developments in the future that cause Pershing Square to change its position regarding FBHS. estimates and projections prepared with respect to. estimates or projections or with respect to any other materials herein and Pershing Square disclaims any liability with respect thereto. Pershing Square hereby disclaims any duty to provide any updates or changes to the analyses contained here including. Pershing Square manages funds that are in the business of trading – buying and selling – securities and financial instruments. among other things. This presentation and the information contained herein is not investment advice or a recommendation or solicitation to buy or sell any securities. cover or otherwise change the form of its investment in FBHS for any reason. access to capital markets. express or implied. All investments involve risk. the historical and anticipated operating performance of the companies discussed in this presentation. including the loss of principal. Pershing Square recognizes that there may be confidential information in the possession of the companies discussed in this presentation that could lead these companies to disagree with Pershing Square’s conclusions. No representations. the manner or type of any Pershing Square investment. L. Such statements. Funds managed by Pershing Square and its affiliates are invested in Fortune Brands Home & Security. sell. estimates. market conditions and the values of assets and liabilities.Disclaimer The analyses and conclusions of Pershing Square Capital Management. are made as to the accuracy or completeness of such statements. without limitation. and projections reflect various assumptions by Pershing Square concerning anticipated results that are inherently subject to significant economic. Inc. competitive. ("Pershing Square") contained in this presentation are based on publicly available information. and other uncertainties and contingencies and have been included solely for illustrative purposes. 1 .P. (“FBHS”) common stock and cash settled derivative financial instruments based on the price of FBHS common stock.

0bn Enterprise valuation of ~$2. 2 . October 14 2011. 2011 (1) Based on stock price as of Friday.5bn Spun-off from Fortune Brands on October 4.Fortune Brands Home & Security FBHS (or the “Company”) is a leading North American residential building products company Ticker: “FBHS” Recent stock price: $13 (1) Manufacturer of: Faucets Kitchen and bath cabinets Security and storage products Windows and doors Equity market capitalization of ~$2.

American kitchen and bath cabinet maker Leveraged to housing recovery Security and Storage #1 Padlock brand in North America Stable. recurring cash flows Good growth potential Windows and Doors Leveraged to housing recovery 3 .Snapshot of FBHS Plumbing #1 Faucet brand in North America Stable business driven by replacement demand and “low ticket” remodeling projects Kitchen & Bath Cabinetry #1 N.

Investment Highlights Secular Winner… Industry leader with significant scale and strong market positions Winning new business and growing as financially leveraged competitors remain defensive Strong management team -.e. bath accessories) 4 . electronic security.highly experienced operators …And Cyclical Winner Well-positioned when the housing market normalizes Cyclical growth will not require capital investment above normal levels Immense operating leverage: EBITDA can be 3x in a normalized housing market Platform Business Highly fragmented industry is ripe for consolidation Opportunities to leverage scale and distribution through acquisitions in adjacent categories (i.

5 . up about 70%(1) Minimal downside If housing starts don’t improve.Investment Highlights Attractive Valuation Current valuation assumes minimal housing recovery over the next five years Immense upside potential If housing starts improve by 2016. FBHS can still shrink capacity to get to an attractive level of profitability Classic spin-off dynamics Orphaned stock: October 4th spin-off Most Fortune Brands shareholders owned it for Beam. stock is worth ~$18 to $27 today. a non-cyclical business Strong balance sheet Flexibility to make opportunistic acquisitions Limits downside risk as we wait for the housing markets to recover (1) See page 31 for valuation analysis. depending on the strength of recovery Midpoint of valuation analysis is ~$22 per share today.

FBHS: Business Overview .

0 % 28% 81% FY 2010 $924 11 % $133 14. accessories.3 % 29% 54% .6 % 26% 48% FY 2009 $835 (14)% $117 14. has performed exceptionally well in the downturn due to both marketplace gains and the “small ticket” aspect of the category Commentary Manufactures faucets.Plumbing The Plumbing segment. and kitchen sinks under the #1 Moen brand Large installed base helps win replacement sales Faucets are a “small ticket” remodeling expenditure – an affordable way to improve the look of the bathroom/kitchen Generally a stable category where branding and innovation can drive marketplace gains Variable-cost business model 7 Financials $ in millions Plumbing Revenue Growth EBIT Margin % of FBHS Revenues % of FBHS pre-corp EBIT FY 2008 $967 $171 17. which contributed 54% of FBHS pre-corporate 2010 EBIT.

but will allow for explosive growth when the housing markets recover #1 North American manufacturer of kitchen and bath cabinets Key brands include: Aristokraft. Omega. wholesalers. and large builders Highly geared to “big ticket” remodeling projects and new home construction Currently winning new business against competitors like Masco High fixed-cost business model 8 . which is pressuring margins today.126 (27)% $4 0.189 6% $31 2.4 % 37% 3% FY 2010 $1. home centers.6 % 37% 13% The segment has significant excess capacity.1 % 41% 40% FY 2009 $1.552 $141 9. and Diamond Well-balanced distribution channels and flexible supply chain allow for differentiated price points and multiple levels of cabinet customization Distributes through dealers.Kitchen & Bath Cabinets The Cabinets segment is barely profitable today as demand for new homes and “big ticket” remodeling projects has diminished drastically $ in millions Kitchen & Bath Cabinets Revenue Growth EBIT Margin % of FBHS Revenues % of FBHS pre-corp EBIT FY 2008 $1.

4 % 16% 29% FY 2010 $520 5% $61 11. stable cash flows.3 % 15% 17% FY 2009 $495 (13)% $42 8.7 % 16% 25% Security and Storage contributed 25% of FBHS’s 2010 EBIT .Security and Storage Masterlock is a great business with a strong marketplace position. minimal capex requirements and good growth potential in adjacent categories Commentary Manufactures Masterlock padlocks and Waterloo storage products Historically stable demand in core padlock market FBHS exploring opportunities to expand Masterlock brand through acquisitions Good potential to grow in adjacent categories (electronic security and monitoring) 9 Financials $ in millions Security & Storage Revenue Growth EBIT Margin % of FBHS Revenues % of FBHS pre-corp EBIT FY 2008 $571 $59 10.

6)% 18% (5)% FY 2009 $551 (18)% ($19) (3.Windows and Doors FBHS’s Windows and Doors segment contributed only 8% of total precorporate EBIT in 2010. Commentary $ in millions Financials Windows & Doors Revenue Growth EBIT Margin % of FBHS Revenues % of FBHS pre-corp EBIT FY 2008 $668 ($17) (2.4)% 18% (13)% FY 2010 $601 9% $21 3.4 % 19% 8% Manufactures fiberglass and steel residential and patio door systems and vinyl-framed windows Key brands include Therma-Tru Doors and Simonton Windows Currently lapping difficult comparisons driven by 2010 federal tax credits for energy efficiency EBIT Margins remain depressed as the segment is significantly leveraged to new home construction 10 .

5 % (44)% 24 % $81 2.2 % 100 % 1.9 % 37 % 35 % $180 5.6 % 107 % 27 % LTM $3.6 % (25)% 53 % $301 8. 2006 ($ in millions) 2007 $4.759 (17)% 80 % $435 11.261 1% 69 % $264 8.4 % (11)% 86 % $553 12.2 % (15)% 83 % 2008 $3.4 % 100 % $668 14.9 % (12)% 24 % Revenue Growth % of Peak EBITDA Margin Growth % of Peak EBIT Margin Growth % of Peak Memo: Housing Starts Growth $4.812 1. well below peak levels of 14% reached in 2006.234 8% 69 % $288 8.007 (20)% 64 % $195 6.342 (26)% 900 (33)% 555 (38)% 586 6% 569 (3)% 11 .694 100 % $816 17.551 (3)% 97 % $703 15.0 % (34)% 45 % 2009 $3.1 % (9)% 32 % $160 4.7 % (66)% 12 % 2010 $3.FBHS: Margins Significantly Depressed Consolidated EBIT margins are currently at ~5%.

in anticipation of a recovery 12 (1) Excludes corporate costs Explosive growth potential when housing markets recover .Segments: A Tale of Two Cities The company’s operating profit margin decline is primarily the result of comparatively weaker performance in the highly cyclical Cabinets and Windows/Doors segments… FBHS Segments Doing Well Today: % of FBHS 2010 Revenue % of FBHS 2010 EBIT (1) 54% 25% 79% FBHS Segments Under Pressure: % of FBHS 2010 Revenue % of FBHS (1) 2010 EBIT 13% 8% 21% Plumbing Security and Storage Total 29% 16% 45% Cabinets Windows / Doors Total 37% 19% 55% Strong and stable replacement demand Leveraged to “low-ticket” remodeling More variable-cost model Represents ~45% of FBHS sales and ~80% of FBHS EBIT today (1) Margins have held up nicely Leveraged to new home construction and big ticket remodeling More fixed-cost model Represents 55% of FBHS sales and ~20% of FBHS EBIT today (1) Currently at low capacity utilization rates.

409 (19)% (34)% 47 (16)% (27)% 2009 15. 2004 Employees Y-o-Y Change Change Since Peak Manufacturing Plants Y-o-Y Change Change Since Peak 48 21.Restructured the Business in the Downturn… The Company substantially improved its cost structure by reducing its footprint between 2006 and 2009.480 1% 2006 27.771 (18)% (18)% 2008 18. Manufacturing facilities and employee count have been reduced by roughly 40%.729 29 % 2007 22.171 2005 21.834 (14)% (43)% 41 (13)% (36)% 53 10 % 64 21 % 56 (13)% (13)% 13 .

in anticipation of a recovery Lower levels of capacity at highly cyclical segments (Cabinet and Window/Doors) Higher levels of capacity in more stable segments (Plumbing and Security) Footprint is currently right-sized to support $5bn in sales (at 1.5mm new housing starts) Current sales base is ~$3.3bn 14 .…But Kept Enough Capacity for a Recovery FBHS is well-positioned to accelerate profit growth as volumes grow in a recovery scenario Currently operating at ~60% capacity overall.

What If Capacity Were Reduced Further? If management becomes more bearish about a recovery.3 % Normalized Margins 10 % 15 % Capacity reduction 3.4)% 10 % 15 . it can reduce capacity further and shrink the cost base.4 % 11.6 % 14. We believe that if the business were right-sized to the current sales base of ~$3.7 % 7.3bn. Expense as % of Rev Total 37 % 29 % 19 % 16 % 2010 Margins 2.0)% 5.6 % (2. EBIT margins could be approximately 10% % of 2010 Revenue Cabinets Plumbing Windows Doors Security & Storage Segment Corp.6 % 8% 12 % 11 % (1.

FBHS has been aggressively winning new business and increasing its marketplace position through product innovations.Secular Winner: Growing in the Downturn Since the downturn. As a result.even in this difficult housing market Winning New Business: Martha Stewart Living cabinetry line at Home Depot In-stock cabinetry at Lowe’s rolling out in 2011 Waterloo storage products rolling out Husky Garage Organization at Home Depot Driving Sales through Innovation: Moen “Spot Resist” finish Developed new finish that eliminates water spotting and finger printing Strong product receptivity in the market Cabinetry: Paper laminate technology Fashionable color and textures at affordable prices 16 . the company has experienced organic growth in every quarter since Q1 2010 .

Mohawk.Strong Balance Sheet Allows for Flexibility The Company has significantly less financial leverage than its peers allowing it to acquire smaller building products companies that are currently operating at trough levels of profitability Total Debt / EBITDA (1): FBHS: $520mm of total debt LTM EBITDA . 17 . Lennox. Peers include Armstrong. Masco. Stanley Black & Decker and Whirlpool.Capex: $194mm No liquidity concerns (1) Peer average based on Moody’s. Owens Corning. FBHS leverage based on 12/31/2010 pro forma metrics.

Housing Market Review .

particularly homes > 12 years Existing home sales Economic factors that enable a recovery: Consumer confidence Unemployment—at the local market level Credit availability Stability in home prices Note: This page is taken from FBHS investor presentation dated September 6. 2011 19 .Long-term Housing Market Drivers New Home Construction Positive population / immigration growth Increased levels of household formation Favorable housing affordability Repair and Remodel Aging housing stock (average of 40 years).

5mm Source: Bloomberg 20 .5mm Average ~1.Historical Housing Starts: 1965 to Present Housing starts are currently at the lowest levels in the last 40 years and well below the long term annual average of ~1.

We are in Year Five of the Housing Recession Housing starts are currently at ~25% of peak levels achieved in 2006 and have been below the long-term trend of sustainable housing demand for nearly 4 years Peak: ~2.3mm Average ~1.5mm Current: ~0.5mm Source: Bloomberg 21 .6mm Trough: <0.

6 2.5 . we believe a recovery over the next several years is highly likely We believe that the current level of excess supply is ~2mm to 2.500 600 600 400 900 2.000 1.5 years if housing starts remain at ~600k At the depressed level of housing demand (~1m): Excess supply could be eliminated in ~ 5.250 2.What a Housing Recovery Might Look Like Although the pace of the housing recovery is difficult to predict.5mm At a normalized level of housing demand: Excess housing supply could be eliminated in roughly 2.5mm housing units and normalized housing demand is approximately 1. except years) Housing Demand Housing Starts Annual Reduction of Excess Supply Current Excess Supply Years to Zero Excess Supply 22 Depressed Normalized 1.250 5.5 years if housing starts remain at ~600k (Units in 000s.

roofing) Weak existing home sales are hurting the R&R market .Repair/Remodel Market Overview Repair / Remodeling projects are generally discretionary Certain replacement projects can wait: Cabinets. there is pent-up demand from an aging housing stock Today the ticket matters a lot Big ticket remodel items (cabinets. Repair / Remodel growth rates tend to trend in line with GDP 23 . paint) are showing strength Longer term. windows.new homeowners spend 2x the average repair/remodel level Despite the weak market. tiling) are weak Small ticket remodel items (faucets. tiling (versus more critical items such as doors.

5mm versus today of 600k Repair and remodel market is likely facing pent-up demand given aging housing stock Before housing starts return to their long-term trend. new homes will likely be smaller and more affordable (cheaper products) than in recent years FBHS’s market position may improve.Housing Market Summary Housing starts are currently at the lowest levels in 40 years Long-term average of housing starts is ~1. given the Company’s skew to more value-priced products 24 . we need to absorb the current excess supply of homes – a matter of time The current level of housing starts (~600k) is unsustainable over the longer term Historical levels of annual household formation are far in excess of 600k We think a meaningful recovery in housing starts could happen in the next several years However.

We've had it for quite a while.” --Warren Buffett (July 8. that means we're sopping up housing inventory.“The only way a correction takes place is to have household formation exceed new construction by a significant amount for a significant period of time. but it isn't five years from now.000 or 600.000. And when you see these figures of 500. I know that. And I don't know exactly when that hits equilibrium. And I think it actually could be reasonably soon. 2011 Bloomberg TV interview) 25 .

Valuation .

5mm.6M $3B 8% Full Recovery / Normalized Starts 1.5MM $5B ~17% Note: Partial Recovery assumes 2-3% Repair & Remodel CAGR and Full Recovery assumes 4-6% CAGR . EBITDA will be 2 to 3x current levels EBITDA: ~$850MM EBITDA: ~$550MM ~2X LTM EBITDA Partial Recovery 1MM $4B ~14% 27 ~3X LTM EBITDA EBITDA: ~$265MM Last Twelve Months Home Starts Revenue EBITDA Margin ~0.Upside Case: Housing Recovery Management estimates that when housing starts recover to ~1mm to 1.

Downside: What if there is No Housing Recovery? If housing starts were to stay at depressed levels (~600k) for the longer term. we believe management can right-size the cost structure and achieve a ~10% EBIT margin FY 2011E Revenue Normalized EBIT Margin EBIT Plus: D&A (reduced capacity) EBITDA $3.3bn 10% $330mm 70mm $400mm We estimate that FBHS can generate at least $400MM in EBITDA on today’s sales base by cutting capacity and excess cost 28 . we believe FBHS could right-size the business to achieve a more normalized level of profitability FBHS has maintained excess capacity to position itself for a housing rebound If it fails to materialize.

76 $1.4 x 7.3 x 10. 9.3 x 29 .7 x 5.565 Note: EPS and FCF per share based on a 35% normalized tax rate.00 Housing Starts (000s) EBITDA EBITDA .8 x 10.Current Trading Multiples FBHS currently trades ~9.045 Plus: Net Debt 520 Enterprise Value $2.4 x 4.7 x 13.0 x 3.00 $3.500 $850 $750 $3.4 x 7.000 $550 $450 $1. depending on the strength of recovery No Recovery (Cut Capacity) 600 $400 $330 $1.00 Diluted Shares (mm) 157 Market Cap $2.26 Recovery Partial 1.7 x 7.Capex EPS FCF per Share LTM 569 $264 $194 $0.7x LTM EBITDA and ~16. If a recovery occurs.3 x 4.5 x 6.5x LTM cash earnings. FBHS trades at ~4x to 7x our estimates of cash earnings.2 x 23.76 Full 1. FBHS is trading at ~10x our estimate of cash earnings.26 $1.57 $0.3 x 4.4 x 3.79 EV / EBITDA EV / EBITDA-Capex P/E P/FCF Memo: Market Capitalization Recent Stock Price $13.0 x 16. If no recovery occurs.

5m 30 . 3-4%.Valuing FBHS in a Recovery Assuming a 7x Forward EBITDA multiple. and 1.0m. we believe we will earn an attractive IRR at the current share price Total Return Housing Starts 1.3M EBITDA $550 $700 2014 83 % 139 % Recovery 2015 92 % 151 % Year 2016 101 % 162 % 2017 111 % 174 % IRR 1. Based on R&M CAGR of 2-3%.and 4-6% for housing starts of 1.0M $550 35 % 24 % 19 % 16 % 1.1.5M $850 72 % 46 % 34 % 28 % Note: Assumes 7x EBITDA exit multiple and includes the value of annual free cash flow generated until exit.3m.0M 1. even if the recovery is protracted or prolonged.3M $700 55 % 36 % 27 % 22 % 1.5M $850 196 % 209 % 223 % 237 % Housing Starts EBITDA Recovery Year 2014 2015 2016 2017 1.

which is up ~70% from the recent share price of $13. we believe FBHS is worth ~$18 to $27 per share today.5M 2016 $850 6. The midpoint valuation is $22/share today.5x Note: Assumes 157MM shares.0M 2016 $550 7x Full Recovery / Normalized Starts 1. and uses a 10% discount rate to discount the future stock price to today. 31 . If the housing market never recovers. we believe FBHS is still worth nearly $14 per share today What FBHS is worth today: ~$27 per share ~$18 per share ~40% upside ~$14 per share ~8% upside No Recovery (capacity reduction) Housing Starts Year EBITDA ($MM) EBITDA Multiple 0.6M 2014 $400 7x ~110% upside Partial Recovery 1.Stock Price at Various Levels of Recovery Assuming on a housing recovery over the next several years. $520MM of net debt. Includes the value of annual free cash flow generated until exit.

at some point. if necessary Upside potential is enormous. even in tough housing markets Many of its competitors are on the defensive No liquidity concerns and currently generating a healthy FCF yield of 6% Downside is limited.Conclusion Pace and strength of a housing recovery is difficult to predict However. as cyclical growth will not require capital investment above normal levels 32 . the housing markets will recover Investing in FBHS is a low-risk way to profit from an eventual housing market recovery Pure-play residential building products company Best operators in the business Improving marketplace position. given clean balance sheet and Company’s ability to reduce capacity.

2011 Pershing Square Capital Management.P. L. .Waiting for a Bounce from the Lowe’s November 8.

estimates and projections prepared with respect to. without limitation. express or implied. (“LOW”) common stock. cover or otherwise change the form of its investment in LOW for any reason. 1 . ("Pershing Square") contained in this presentation are based on publicly available information. The analyses provided may include certain statements. are made as to the accuracy or completeness of such statements. It is possible that there will be developments in the future that cause Pershing Square to change its position regarding LOW. access to capital markets. estimates. Funds managed by Pershing Square and its affiliates are invested in Lowe’s Companies. among other things. the manner or type of any Pershing Square investment. Inc.Disclaimer The analyses and conclusions of Pershing Square Capital Management. and other uncertainties and contingencies and have been included solely for illustrative purposes. sell. Actual results may vary materially from the estimates and projected results contained herein. Such statements. including the loss of principal. and projections reflect various assumptions by Pershing Square concerning anticipated results that are inherently subject to significant economic. All investments involve risk. market conditions and the values of assets and liabilities. Pershing Square hereby disclaims any duty to provide any updates or changes to the analyses contained here including. No representations. Pershing Square may buy. This presentation and the information contained herein is not investment advice or a recommendation or solicitation to buy or sell any securities. Pershing Square recognizes that there may be confidential information in the possession of the companies discussed in this presentation that could lead these companies to disagree with Pershing Square’s conclusions.P. Pershing Square manages funds that are in the business of trading – buying and selling – securities and financial instruments. L. the historical and anticipated operating performance of the companies discussed in this presentation. estimates or projections or with respect to any other materials herein and Pershing Square disclaims any liability with respect thereto. competitive.

Yield: ~2% Recent stock price: $21.Lowe’s (“LOW”) Lowe’s (or the “Company”) is a leading North American home improvement retailer Operates ~1.54 as of November 4.50 (1) Equity market capitalization of ~$29bn Enterprise valuation of ~$34bn Current free cash flow yield of ~8% (1) Based on stock price of $21.750 stores consisting of approximately 200mm ft² of selling space 99% of stores located in the US Ticker: “LOW” Div. 2011. 2 .

50 is nearly 40% below its peak of ~$35 in February 2007 3 .Stock Price Performance: Last 5 Years Lowe’s recent share price of $21.

given scale and leverage with suppliers Limited risk of new entrants Cheap Valuation Lowe’s trades at 6.Investment Highlights Attractive retail category Limited internet risk relative to other retailers High gross margin retail category and diversified commodity risk Limited fashion risk Service component = consumer value proposition Good barriers to entry Home Depot and Lowe’s are the central players in home center retail Home centers are low-cost providers.5x depressed EBITDA and less than 13.5x depressed EPS Lowe’s EBIT margin currently 7.8% Company believes normalized EBIT margins are 10% Company has maintained staffing to provide high service levels and be positioned for a recovery 4 .5% only 70bps higher than its trough in 2009 at 6.

750 buildings $23bn gross book value of land and buildings.Investment Highlights (cont’d) Extremely shareholder friendly capital allocation policy All free cash flow after dividends goes towards share repurchase Company is increasing leverage levels modestly to further accelerate buyback We expect the Company to buy back $10bn to $13bn of stock from 2012 to 2015 Equivalent to 35% to 45% of the current market cap of the Company Strong asset value and low financial leverage – limits downside Lease-Adjusted Net Debt / LTM EBITDAR = 1.6x Owns roughly 89% of its ~1. or ~65% of Lowe’s enterprise value 5 .

Business Overview .

Lowe’s Business Snapshot Overview of Lowe’s 2nd largest home improvement retailer Typical customer shops at Lowe’s three to four times per year and spends ~$62 per transaction Each store averages ~$28mm in revenue LTM Sales/ft² is $246 Repair & Maintenance Repair & Maintenance Revenue Mix 2010 Discretionary 30% 70% 2005 50% 50% Discretionary Sales today are significantly more Repair & Maintenance items than Discretionary items 7 .

g. states 8 . bathroom remodel) Consumers buy across categories (paint. plumbing.Why Do Consumers Shop at Home Centers? Valuable Customer Service Helps customers identify the exact products they need (e. flooring. replacement parts) Consults with customers on complex remodeling projects Provides installation services One-Stop Shopping Home improvement purchases are typically project-oriented (e.. etc.750 stores across 50 U.) making one-stop shopping ideal Home centers’ big-box layout allows for ~40.S..000+ SKUs Product selection can’t be matched by general merchandise retailers Instant Satisfaction Customers can purchase products and take them home from the store immediately Convenience Lowe’s has ~1.g.

Why Do Consumers Shop Online? Online retailing has become a headwind for most brick-and-mortar retailers over the recent years..e. Online shopping is most appealing to consumers when the following conditions apply: Product is relatively high-priced (i. sales tax savings are more material) Product is not needed immediately Shipping cost is low Shipping is unlikely to damage the product Professional installation is not needed Item is not purchased as part of a larger project End-user of the product is making the purchasing decision We believe that the home centers face limited risk from online shopping because the majority of products they sell do not meet most of these conditions 9 .

Small appliances Cabinets Limited-Moderate High Limited Kitchen Limited Risk Moderate Risk High Risk 82 % 8% 10 % 10 Note: Limited-Moderate category counts 50% towards limited. sinks Paint & Accessories Floor & Wall Flooring Wall Storage Wall Décor Closets storage Curtain rods Electric drills. nuts Front door knobs.Home Improvement Retail: Limited Internet Risk We believe that only 10% of Lowe’s revenues face a high risk of competition from online retailers Category Lawn & Garden Electrical Light Bulbs Technical Lighting Ceiling Fans Est. deadbolts Hardware Power Tools Handtools Hardware Accessories Door Lock Sets Windows & Doors Building Materials Appliances Installable Appliances Non-Installable Appliances Lumber. ships well Higher ticket. project-based High ticket. stove. insulation. shipping issues Service component High ticket. 13 % 1% 1% 2% 3% 2% 2% 9% 4% 2% 2% 3% 3% 6% 1% 11 % 20 % 8% 2% 5% Product Example Grills. project based. project-based High ticket. high ticket Low ticket Plumbing Pipes/Fitting Faucets Large Fixtures Contractor purchase. no service component. 50% towards moderate . dimmers New LED bulbs ship well. shipping issues Tubs. A/C. ships well. refrig. ships well Shipping issues Contractor purchase. ships well Installation. screwdriver Nails. garden chemicals Threat of Internet Competition Limited High Limited Moderate Limited Moderate Limited Limited Limited Limited High High Limited Limited High Limited Shipping issues Reason Switches. screwdrivers Manual hammer. project-based Low-ticket. not project-based Low-ticket. project-based Shipping issues Shipping issues Higher ticket. concrete Limited Washer/Dryer. ships well Paint not ship well. % of Rev. mowers. roofing. bolts.

8 3% LTM $48.2)% (6.7)% 1.2 19 % 2006 $46.9 % 6.4 % 7.534 11 % 11 1.1 % 0.753 0% .9 9% 2007 $48.8 % 7.234 14 % 1.2 (2)% 2010 $48.3 3% 2008 $48.385 12 % 1.8 % 11.710 4% 1.0 % 9.638 7% 1.3 % (0.8 (0)% EBIT Margin 10.0 % (5.1)% (7.1)% Units Growth 1.2 (0)% 2009 $47.Lowe’s Financials: Margins Down Significantly Lowe’s sales/ft² is 25% less than peak levels achieved nearly six years ago.749 2% 1.5 % Sales / Ft² Growth % of Peak $328 5% 100 % $316 (4)% 96 % $292 (8)% 89 % $267 (8)% 82 % $249 (7)% 76 % $250 1% 76 % $246 (1)% 75 % SSS Growth 6. EBIT margins are ~350bps below peak margins achieved nearly five years ago Revenue ($ in B) Growth 2005 $43.7 % 7.

-only same-store sales growth figures during the period from 2000 to 2008.2)% 3.4 % 6.S.8 % 1.7 % 3.Home Depot Note: Home Depot same-store sales growth figures are for the entire company only.5 % 2005 2006 2007 2008 6.1 % (2.8 % 0.8)% (6.5 % Lowe's Home Depot Lowe's .0 % 2.7)% 3.0 % (2.7)% (8.1 % 1.8)% 2001 2002 2.6 % 1.5)% 2.LOW Outperformed HD for Most of the Last Decade… Lowe’s level of same-store sales growth outpaced Home Depot’s each year from 2001 to 2008 Same-Store Sales Growth 2000 1.7 % 3.1 % 0. as Home Depot did not consistently disclose U.1)% (7.0 % (0. 12 .2 % 4.6 % 5.0 % (5.3 % 2003 6.0 % 2004 6.4 % 5.

8)% Potential Causes of Recent Underperformance: Strength of HD’s current operational execution Strong regional-level merchandising Post Bob Nardelli.3)% (0.U.6 % (1.6)% (9.4 % 1.3 % 1.2 % 1. Only (8.1 % (3.9)% (7.S.6)% 2.6)% (6.0 % 1.8 % (0.Home Depot 2.4)% (0.6)% (0.5)% (7.6)% (3.…But Now LOW is the Underperformer Lowe’s level of same-store sales growth has underperformed Home Depot’s for eight out of the last ten quarters Same-Store Sales Growth Q1 '09 Q2 '09 Q3 '09 Q4 '09 Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Lowe's (6.7)% 3.5)% (1.1)% (1.7)% (2. invigorated management team under CEO Frank Blake Lowe’s product mix is more discretionary than Home Depot’s Home Depot currently doing well with the basic repair customer versus Lowe’s more fashion-oriented customer 13 .6 % 0.9)% 0.5 % 4.5)% (0.3)% Home Depot .0 % (2.5 % Lowe's .1)% 3.3)% (3.

552 6.349 10.551) $66.0 % Home Depot $37. Cash & Investments are net of restricted cash balances. Lowe’s trades at a discount to Home Depot on both LTM and 2012 multiples LTM EV/EBITDA Lowe's 6.5 x P/E 13.2 x 7.775 (2.749 2.328 $28.8 x 13.577 $58.50 1.423) $33.7 % (1) For Lowe’s.Trading Multiples Reflect Underperformance Based on its recent underperformance.8 x Despite the valuation discount relative to HD.5 x Home Depot 8.3 x 16.3 x 12.573 2.1 x Consensus 2012E EV/EBITDA P/E 6.00 1.620 (1. we believe Lowe’s long history of same-store sales outperformance suggests that recent underperformance is more likely temporary rather than structural Memo: Capitalization Stock Price Diluted Shares Market Cap Plus: Debt Less: Cash & Investments (1) Enterprise Value Dividend Yield Lowe's $21. 14 .

a 10% EBIT margin. Red highlights added for emphasis.Lowe’s Management is Bullish… At last year’s analyst day.40 of EPS in 2015. 15 .3 x Note: This page is taken from Lowe’s investor presentation dated November 30. and an $18bn share repurchase program (2011 to 2015) Recent Price $21.50 2015 EPS $3. management guided to $3.40 Price / 2015 EPS 6. 2010. driven by a 4% average growth rate in same-store sales.

4B of shares at an average price of ~$25 Repurchased ~7% of the current share base Share repurchases may accelerate annual core earnings growth by 8% to 10% from 2012 to 2015 Current interest rate environment makes debt financing an attractive source of capital for share repurchases 16 . management could repurchase ~35% to 45% of the Company between 2012 and 2015 In the first half of 2011. We estimate share repurchases will be ~$10bn to $13bn from 2012 to 2015 At the current share price.8x Lease Adjusted Net Debt / EBITDAR from 1.6x.…And is Buying Back Stock Aggressively Management plans to use all free cash flow after dividends to repurchase stock and will increase leverage to 1. management repurchased nearly $2.

Valuation .

0 % 7.20 ~100% ~ 3.5 % 1.3 % $2.0 % 4.00 ~25% Pershing Square Estimates Mid High 1.0 % $3.0 % 1.Valuation Assumptions Our estimates are more conservative than management’s 2015 targets Management Targets 2012E to 2015E CAGR: Home Improvement Market Impact of Share Gains Same-Store Sales 2015 EBIT Margin 2015 EPS % Increase from LTM EPS Drivers of share gains: Growth from internet site Gains from Mom & Pop dealers Gains from Sears ⌦ Losses from cannibalization Low 0.0 % 0.0 % 9.3 % $2.0 % 4.0 % 10.0 % ~ 1.3 % $3.0 % 0.0 % 2.40 ~110% Pershing Square Mid and High cases reflect our view of the most likely outcomes Note: Management targets based on November 2010 analyst day and annualized same-store sales growth reflected management estimates for 2011E to 2015E.60 ~60% 3.5 % 8. 18 .

5% ~85% ~65% to 75% ~4% ~90% ~70% to 80% Note: Inflation-adjusted peak based on a 1% to 2% annual inflation rate. We believe sales/ft2 could increase materially by 2015 and still be meaningfully below inflation-adjusted peak levels reached in 2005 Sales/ft2: LTM Low 2015E Mid High 2005 Peak ~$275 $246 ~$245 ~$290 $328 2012E to 2015E Same-Store Sales CAGR % of 2005 Peak % of 2005 Inflation-Adjusted Peak 0% ~75% ~55% to 65% ~2.Sales/ft² Sales/ft² is still 25% below 2005 peak levels six years later. 19 .

if same-store sales remain flat. we believe Lowe’s can maintain current EBIT margins through cost reductions Low 0.0 % 9. Annual EBIT Margin Improvement 2011E EBIT Margin Plus: Total Est. offset by positive operating leverage.0 % 8. Management estimates each 1% of same store sales growth above 1% will result in 20bps of operating expense leverage.3 % Mid 2. In our Low case.0 % 7.3 % High 4.3 % 1. we expect a slight gross margin headwind. we believe EBIT margins could be ~8.3%.5% 25bps 7.3% to 9. 20 .3 % 0.3 % 2012E to 2015E Same Store Sales CAGR Est.0% 50bps 7.0% 0bps 7.EBIT Margins In our Mid and High cases. As sales recover. EBIT Margin Improvement 2015E EBIT Margin Note: Current gross margins are partially elevated by a favorable mix of higher-margin. lower-ticket items.3 % 2.

20. Includes ~$1.3% $3.80 of dividends received between 2012 and 2014.5% 8. driven largely by share repurchases Year End 2014 Total Value Per Share (includes dividends): ~$36 per share ~$28 per share ~30% Return 9% IRR Low 2012E to 2015E SSS CAGR 2015E EBIT Margin 2015 EPS P/E Multiple (based on current) 0% 7.Valuing Lowe’s We believe 2015 EPS will likely be between $2.3% $2. 21 . year end 2014 total value per share is $28. At a 13x P/E. If same-store sales remain flat for the next several years.3% $2.20 13x Note: Based on ~1% annual net unit growth.60 13x High ~4% 9. the total value per share at year end 2014 is $36 to $43.00 13x ~$43 per share ~100% Return 26% IRR ~65% Return 18% IRR Mid ~2.60 to $3.

sentiment is poor because of the Company’s more recent underperformance relative to Home Depot We think this underperformance is more temporary than structural The current stock price is not factoring in a sales recovery. limited lease leverage. we believe downside is limited Minimal financial leverage. but we believe one is likely in the next several years Even if no sales recovery occurs. cheap stock Aggressive share repurchase program is a catalyst Lowe’s has ~8% current cash earnings yield The Company is returning all cash earnings to shareholders in the form of buybacks and dividends Investors are effectively paid to wait for a recovery 22 .Conclusion We think Lowe’s is a good business in an attractive retail category However.

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