Thank you, Operator. So welcome to our Q1 2021 investor conference call.

Just as a reminder, we provided disclaimer to people on the call that's available on the web. If you have any questions about that, please contact investor relations.

In terms of our commentary, we are going to be somewhat limited with respect to companies where we sit on the board. Obviously, we have to stay within what has been publicly disclosed.

In terms of answering questions, we've received a number of questions in advance. If you have a question during the call, please email it to [email protected], we'll do our best to answer.

If we don't get to it, please feel free to contact the IR team. A replay of today's call will be available for two weeks until June 8th, and to access the audio webcast, please visit www.persiansquareholdings.com.

Sure. Thanks, Bill.

So last week, Lowe's reported another fantastic quarter with robust same store sales growth and strong expense control, which resulted in significant margin expansion and earnings growth. And as we've previously discussed with you all is Lowe's has experienced kind of robust demand since the start of COVID-19 really as American consumers have focused on the critically important role that the home continues to play in their everyday lives, and this level of strength continued into Q1 of this year.

The macro environment continues to remain very attractive for Lowe's, which is informed by consumers’ enhanced focus and appreciation on the importance of the home higher asset utilization, rising home prices, historically low mortgage rates and aging housing stock, general lack of new housing inventory and strong consumer balance sheets, which is in part informed by the government stimulus programs. This past quarter, the company reported same store sales growth of 24%.

And notably this same store sales growth decelerated throughout the quarter as Lowe’s begin to lap over the COVID effected months from spring of 2020. And despite the year-over-year deceleration, demand remained extremely elevated relative to baseline 2019 levels with April same store sales up 37% on a two year stack basis.

Management additionally noted on the call that that level of relative strength has persisted into the first couple of weeks of May. So continued kind of exceptional demand and strength relative to 2019 baseline levels.

Recall that Lowe’s laid out a of different market scenarios as of December 2020 analyst update. The company this quarter announced that they are currently trending above their most bullish scenario what they call the robust market scenario.

And that scenario if you recall, for reminder, it had an outlook where the sales would decline 2%, which was a combination of negative 6% market growth but 400 basis points of market share gains. So they're kind of trending above that level.

And then the scenario they laid out, they were projecting 12% EBIT margins, which would translate to roughly $9.90 of EPS or 14% earnings growth. And this quarter they didn't revise that framework, they just said, they're trending above that kind of absolute level.

And so it's unclear how future demand will evolve, but it seems increasingly likely at this vantage point that Lowe's will experience positive same store sales for full year 2021 as demand continues to surprise to the upside, and there would be an associated margin flow through benefit from that.

Okay. So obvious question, trading at 16 times earnings, if a company buying back 6% of its stock, so 5% during the quarter.

You know it's a very conservative finance company. So retailer owns all its own real estate.

It's trading at 6 or 7 turn lower multiple than its direct competitor, yet has more margin opportunity we believe that it's better. Why?

Why is it trading where it is or why so cheap?

I mean, this is why it's our largest position. You know if you look at where the stock is today, we see a combination of both substantial there's a separate question of what's going to happen to the market and kind of is there some deceleration or a cool down that seems likely, but there's a large and persistent revenue productivity gap between Lowe's and Home Depot, both in terms of in the store kind of a physical delta but then also a huge opportunity in terms of pro penetration, which they're chipping away at and their kind of online e-commerce penetration, which is another opportunity.

So there's a question is how much of the productivity gap can you close on the top line. Today, their margins are roughly 12% but moving higher, Home Depot is 14.5% and moving higher, so we see a couple of hundred basis points of opportunity there, but we'll probably never fully close the gap.

But you know there's a substantial opportunity and they're targeting roughly at 13% level. And then as you said they're buying back you know 5% to 6% of their shares each year in a normalized kind of environment.

I don't know why it trades where it does and we would agree that it should trade at a premium just given the opportunity for accelerated earnings growth off the current base.

Thanks Charles. So Feroz, what don’t you update us on Restaurant Brands, you know, the next four names, Restaurant Brands, Hilton, Chipotle, Ashland, all have similar size kind of positions, but Restaurant Brands, we've owned it now for -- approaching a decade.

What don’t you tell us how they're doing.

Sure. So Restaurant Brands continues to make progress on returning the brands to growth, while also making longer term investments that will set the business up for sustainable long term growth in a post COVID world.

So in terms of recovery each of the brands are in varying stages. So I would say Burger King U.S.

and Popeye have largely recovered, whereas Tim’s in Canada and Burger King internationally are a little further behind. So for Tim’s in Canada sames store sales improved to down 14% on a two year stock basis in the last quarter.

Now that's a sequential improvement, but again, a far cry from a full recovery, and that's really driven by COVID restrictions. So for example, Ontario, which has about half the units of Tim’s in Canada is currently in a mandatory stay-at-home order.

So offices are closed and transit mobility is down in excess of 60%. But if you look in the more rural and suburban parts of Canada where COVID restrictions are easier, Tim’s has already returned to growth.

So we think that gives you a better sense of where Tim’s would be had it not been for COVID restrictions. Canada is making progress on vaccinations and Ontario itself is in a multi-stage reopening plan.

So ultimately, I think even the habitual nature of the product itself the recovery in Tim’s sales will be tied to a mobility increasing and Canadians going back to work. At Burger King internationally COVID case counts have caused somewhat pressure on and face temporary closure during the quarter, but other areas where COVID is less of an issue.

So for example, Australia or New Zealand, the business is already growing quite nicely. In the meantime, the company is making longer term investments.

So if you look at digital sales, they're increasing quite rapidly and now represent about 9% of sales at Burger King in the US, 17% of Popeye's, and more than 30% of Tim’s in Canada. And after seeing great results with the Tim’s rewards loyalty program, the company is also launching dedicated loyalty programs for both Burger King and Popeye's in the US.

Also to help kick start the recovery at Tim's Canada, the company announced that it’ll be investing CAD80 million this year in the advertising fund. And then starting next year, franchisees will be taking their ad fund contributions from 3.5% today to 4% of sales.

The company is also making progress on modernizing its drive-thrus and is already seeing a quantifiable uplift from these outdoor digital menu boards, and is hoping to complete its 10,000 installations by the middle of next year.

Feroz, what we've been hearing from some of our restaurant companies is issues in terms of attracting -- getting people go back to work. Can you comment at all with respect to the Restaurant Brands, is that an issue for them as well?

That's certainly an issue for all of our restaurant companies, particularly in Canada where stimulus has also been strong. Clearly, people are choosing to stay home because it's a more advantageous way for them to sort of stay at home but still collect the paycheck.

Now a lot of the restaurants happened to be closed or are in limited service. But as the company reopen stores, this will certainly be an issue.

And that's frankly, I think, we're seeing that not only in restaurant companies but other consumer oriented companies as well.

Okay, great or not so great. But hopefully, as the stimulus wanes come September, we'll see meaningful change.

Ryan, Hilton?

Sure. So over the last year, the travel industry has really been one of the hardest hit industries by COVID overall.

But despite that, Hilton has actually done a very good job of navigating during the pandemic. And I think this really speaks to both the quality of the business model, having an asset light model that's based on royalties in franchise concept, as well as just the industry leading management team that’s done a great job of pivoting to be able to reduce expenses and also introduce a lot of technological features that have reduced cost for franchisees, as well as really in the new world things that consumers are looking for.

And so if you kind of go back about a year when there were lockdowns that were widespread, Hilton's RevPAR, which is its metric for same store sales at a given hotel, was down about 80%. But since that time, every quarter the results are improving as things are slowly starting to open back up in the latest quarter, which reflected to the end of March from the beginning of the year when there were still a fair amount of lockdowns, particularly in the US and some parts of Europe, RevPAR was down about 50%.

But at this point in the cycle, they were able to actually keep the losses to a minimum and even earned a couple of dollars of profit. So really operating about a breakeven level off of a very reduced revenue base.

Okay, great. And on the issue of recruiting staff?

So on this call, much like you know sort of Restaurant Brands and others in the restaurant industry, Hilton CEO said it was the number one challenge that all of its franchisees are making. And so I think what you're going to see, both at Hilton and probably across the service industry more broadly is wages are going to have to go up to compensate.

Now one thing Hilton is doing, for example, to offset that is they're introducing more technology, which really started pre COVID, which is great. So for example, they have things like digital key, which allows you to bypass the check-in desk, go directly to your room without having to get a key.

You can check in to the room on your phone and you'll be able to control a lot of things in your room. All of that goes to help make labor more efficient, because you're not going to need exactly the same number of people on staff that you did before.

So that creates, you know, more opportunity to be able to incentivize other people to come back, start working again. And that's what they're trying to accomplish for now.

Okay, great. Anthony, Chipotle?

Sure. Thanks, Bill.

So Chipotle reported another quarter of robust growth in sales, margins and cash flow. Same store sales for the first quarter grew 17% on a one year basis or 21% on a two year stacked basis, which is an acceleration of about 1 percentage point from the fourth quarter of 2020.

Management noted during the call that April was off to a good start. They gave guidance for Q2 of same store sales increase on two year stack basis, so from 2019 kind of normalizing the impact of the pandemic of 15% to 17%.

So a bit of a slowdown from Q1, but still a very robust level of sales growth and the slowdown really being driven by the stimulus waning a bit and the quesadilla moving from its launch phase, which generated a ton of excitement to its leverage phase where they're looking to kind of grow the platform. Digital continues to drive about half of the business with more than half of those sales coming from order ahead pickup, which is the company's highest margin channel.

And that includes their Chipotlane Digital drive thru formats in which you order ahead and just pick it up at the window with no delay, which are being rolled out in more than 70% of new openings going forward. The quesadilla was launched as a digital exclusive on March 11th, it's their first major entrée launch in 17 years.

So very exciting product launch for the company. It was the most requested item from consumers for a long time.

So the company is going to look to continue to grow that in the coming weeks and going forward. And this large sales increase in Q1 translated into a nice margin increase.

Margins were up 5 percentage points year-on-year to 22% at the restaurant level and management thinks they can continue to go higher over time. In the medium term, they think they can get average restaurant sales to $2.5 million and four wall restaurant margins to 25%.

Longer term they talked about on the call pathway to $3 million in average restaurant sales and margins in the high 20s. And they continue to believe that the US alone can support over 6,000 Chipotle restaurants, which is more than double today's level.

And the first international market, Canada is now entering its growth phase. So after a three year hiatus on opening new stores there, the management has now started to open new stores.

Going forward, they think they can open at least several hundred stores in Canada versus only a couple of dozen today. So a nice growth market for the company.

And obviously, all the other countries around the world remain an area of opportunity in which the company has basically no presence going forward. In terms of the cost headwinds that Bill had mentioned earlier, they're certainly impacting Chipotle as well.

The company recently put out a press release couple of weeks ago, stating that they're going to increase their average wage to $15 an hour. That will be a range of between $11 and $18 depending on the market because you have to be competitive with the local competition and regulations.

And joining Chipotle as a crew member also includes a carat if you continue to stay there and work hard and perform well, which is that within three and half years, you can reach the restaurateur, which is the top level general manager position in which you're running your own restaurant, which generates several million dollars in sales annually and provides a compensation package averaging $100,000. So it's a nice thing to aspire to for people who are joining the company today.

Delivery cost is another headwind the company is seeking to manage going forward. They've increased the menu pricing premium for delivery versus in store from 13% to 17%, and they're seeing what they characterize as acceptable resistance from consumers, including some shift of consumer orders from delivery to order ahead and pickup, which is desired because it's a much higher margin channel for the company and I think also a better experience for the customer, too.

Great. So the risks we need to be concerned about over the next several years with Chipotle?

I think it's the same as always. In the near to medium term, it's staffing the restaurants.

It’s a high class problem to have too much demand but that's kind of where they are today. So I think raising wages is going to help that and it will be cost hit nearer term but they'll see the benefit of it longer term in the form of better service to customers, better experience for the workers and more energized and engaged workforce, which should actually increase throughput as well it kind of becomes a sell fulfilling cycle.

Food safety is always a risk for this company as it is for all of our restaurant companies, but we're very confident in the steps that they've taken since the issues they had in 2015, 2016 both under the old management team and especially under the new management team to kind of get everything in order there, and it remains one of the safest places to eat today.

Okay. Great.

Bharath, why don't you update us on Agilent.

Sure. Thanks, Bill.

So if you look at Agilent's performance over the past few quarters, there's really reaffirmed our original investment thesis that the company has a really high quality business with strong revenue growth and margin expansion opportunity. Particularly this past year, despite the disruption from the pandemic, Agilent was able to both grow revenue and improve margins at the same time.

And we really believe that that resilient performance is a testament to the company's durable business model and their high degree of recurring revenue, which today accounts for more than 60% of the business. And most impressively, they were able to achieve these results without having to lay off a single employee.

That really allowed the company to focus solely on the customer and on driving new product innovation. So as an example of that, the pandemic had forced many of Agilent's customers to bolster their quality control processes and develop more scalable testing procedures.

Agilent recognize that need very early on and they launched several instrument lines and consumables kits that were specifically focused on high throughput testing use cases and on reducing downtime and automating as many workflows as possible. And we're seeing those customer centric initiatives start to bear out in the company's performance today.

So if you look last quarter, they were able to grow organic revenue by 11% and it was really broad based growth with double digit growth in both the instrument business and in the service and consumables piece. When you look at profitability, we're very encouraged by the progress the company has made on improving their margins.

So in addition to just realizing operating leverage off a strong top line growth, they've capitalized on the pandemic to accelerate their digital transformation. And that transformation has been a win-win for both customers and Agilent.

So from the customer's perspective, they appreciate the timeliness and flexibility that online engagement tools enable. And from Agilent's perspective, the digital capabilities just facilitate much more efficient internal operations.

And again, as a proof point, when you look at the most recent quarter, they were able to improve margins by 260 basis points. And we just believe that magnitude of margin expansion just highlights the future significant opportunity they have to continue to close their margin gap with their closest peers.

So overall, we really believe that Agilent is emerging out of the pandemic as a more competitive and a more profitable company. They're actually reporting their fiscal Q2 earnings for the quarter ended April 30 after market closed today, and we look forward to reviewing those results.

So I was on a call with a group of about 35 scientists. And I asked them how they were doing with the issues they had in their respective labs, and they say the single biggest issue they had was getting equipment and actually, the second biggest they have was staffing.

And what you're starting to hear is a consistent theme, whether you're in the scientific equipment business or you're in the food business or you're Lowe’s. You're seeing price inflation, you're seeing labor inflation.

You're seeing huge demand. But these are -- when I get to a discussion of why we put our hedge on, you'll understand why.

Let's finish the portfolio. Ben, Howard Hughes?

Sure. Thanks, Bill.

Importantly, Howard Hughes held an Investor Day in April, where the newly assembled management team showcased its uniquely advantaged business model. The company presented a net asset valuation framework and highlighted the vast opportunity to accelerate commercial development with 2 million square feet of development already in progress.

They also presented with Jay Cross, their new President and Karin Lafler, who's the CFO. So they now have their management team solidified and fully in place.

And even with this pretty significant share price performance over the last several months, management believes the company is still trading at a material discount intrinsic NAV the details of which can be found in their Investor Day presentation. In terms of recent business performance…

Ben, what is the number that they…

They put out $150 per share, which is, I think, still quite conservative in terms of their assumptions. And then they put out some scenarios, which are significantly higher than that, $180-plus, assuming some more aggressive assumptions.

And then in terms of recent business performance, the pandemic further highlighted the attractiveness of Howard Hughes’ master planned cities. Their MPCs in Houston and Las Vegas are situated in Tax advantaged states and are beneficiaries of the continuing trend of out of state migration from places like California, and because of that new homeowners are increasingly drawn to walkable urban centers integrated into natural open settings.

And as a result, new home sales, which are a leading indicator of future land sales grew an impressive 35% year-over-year in Q1. Howard Hughes’ net operating income within its operating asset segment also improved sequentially 10% with notable improvements in the assets that are most impacted by the pandemic.

And while its office and multifamily assets have been highly resilient, retail NOI increased 20% sequentially as retail rent collection steadily improved to 78%. Its hotel portfolio is not fully reopened.

And as Ryan had mentioned, hotels are coming back, and they're now operating at breakeven profitability. And their Las Vegas ballpark, which was closed in 2020 has begun hosting games and is now going to operate a full mine league season this year.

In Ward Village, the company continues to experience strong condo sales, its latest condo tower called Victoria Place, which launched in December is already 85% pre sold, representing the fastest pace of presales ever of the company. And at the Seaport, the company is also making significant progress on the development of the tin building, which they anticipate will open in early 2022 and is opening several new concepts that are positioning it to benefit from the rebound in New York City foot traffic.

Overall, we think Howard Hughes is seeing solid business momentum across its portfolio and remain confident that the impact of the pandemic is largely transitory.

Just to add to some events -- comments, I was talking yesterday to the CEO of a homebuilder, and I made the call because a friend desperately wanted to buy a townhome in one of their developments and was told that they -- was on allocation and they had to wait and there was going to be an auction. And he confirmed that there is a boom in housing that has not been seen in well more than a decade and maybe even stronger than that of the pre financial crisis era.

It does seem to be, however, much more fundamentally driven where people are buying homes as opposed to people flipping assets and the amount of leverage being used is much more conservative. All of that said, we think Howard Hughes is extremely well positioned.

There's meaningful integration into Texas, where Howard Hughes has substantial portion of its assets, Nevada, i.e., Las Vegas, where Howard Hughes has critical assets, and also Hawaii, while it's not a low tax environment, I think in the carpe diem post pandemic world, the notion of living in Hawaii and work from home or work from Island has become a very appealing notion. So we were very happy to help the company last year when they actually needed to raise some equity and the business performed even better than we anticipated over the past year -- our best performer this year.

Domino’s Anthony? New investments…

Sure. Thanks Bill.

So Domino's is a classic Pershing Square investment. It's a simple, predictable free cash flow generative high quality business.

It's a company in an industry that we've studied and admired for a long time. Domino's is one of the great turnarounds and success stories in the restaurant industry.

So in the 10 years prior to our initial investment, stock actually compounded at 37% annually for 10 years…

So what you're telling me is we missed it…

Well, it's better to be late than never. So you know it’s done okay since we bought it, which is good.

But you know, I think those results are just demonstrative of the power of the turnaround that the company embarked on in you know 2008, 2009 and they've never really wavered in their strategy since then, which is one of the reasons we love it. But the stock was actually flat in the year prior to our investment, during which the S&P 500 was up 31%.

So we found that period of significant under performance to be quite notable, you know, we diligence with the areas of concern and ultimately concluded much like our investments in other companies like Starbucks and Hilton that it was a temporary dislocation, and it was driven by investors being myopic on a couple of areas of concern and forgetting everything that makes the company great. So what makes the company great?

Well, firstly, it has the crown jewel digital and delivery infrastructure in the restaurant industry. Domino's generates over 75% of its sales through digital, which is by far the highest percentage out there.

They own all of the data, they control all the data, they don't partner with any third party providers. And they have the largest owned in house delivery network in the restaurant industry as well, and delivery accounts for about two thirds of their sales.

So they're a very well skilled machine in that business. They’ve consistently gained market share every year since the turnaround really.

The current market share in the US QSR pizza market is 22%, which is double 2012 levels. So they've doubled their market share over the last eight years or so.

And what's exciting about the pizza cuisines in particular is that it's quite fragmented still. So as the number one player in burgers, number one player in specialty coffee, those guys have way higher market share than Domino's at 22%, independence and small chains still drive close to half of sales in QSR pizza.

So there's a long runway to go. The unit economics are fantastic.

They're exceptional. New stores generate cash on cash returns of over 50% for franchisees, so it's less than two year payback, including like the royalties and technology fees that the franchisees have to pay to the parent company in which we're invested.

So that's on an asset level probably highest returns in the industry. And the company has a high single digit prospective unit growth outlook during which they can roll out more of these fantastic high return boxes through fortressing in the US.

And these are unlevered returns or levered returns?

Yes, unlevered returns. I think they're really, really exciting returns.

They’re fortressing in the US and then rapid expansion overseas in areas like India, China and others where they have low market share on a relative basis today. The company's track record of consistent same store sales growth is one of the best we've ever seen.

Over the last 10 years, they've averaged 7% same store sales growth in the US and 5% internationally. And remember, they're selling QSR pizza, it means pretty incredible when you think about the level of growth they've been able to generate in that industry.

And a big reason for that is the customer value proposition is highly compelling. They've maintained their price points on their every day delivery and carry out platforms for many years now and their delivery execution is just unmatched and the consistency is unmatched as well.

So the odds of you having a horrible one hour plus delivery with Domino's are virtually nil. And we really like the management team.

They're an exceptional team. And the strategy is very, very focused.

They never waver and they want to be the dominant player in QSR pizza globally, and everything that they do is set out to help achieve that. And they return all free cash flow back to shareholders with regular recaps back towards the company's 6 times net leverage target, which is supportable given the pure royalty nature of the business.

So why don't we turn it over to Feroz who will give an update on why we think the near term concerns can be overcome and some recent developments.

Sure. So we think the stock was cheap for two reasons.

One, investors were focused myopically on the company lapping really strong results from 2020 and two, more longer term what will the company do in the face of increasing competition from aggregators. We think the company is well set up to both lap these strong results and is actually competitively advantaged versus aggregators.

So in the near term, I'll focus on four main areas. So first, success in 2020 was driven by delivery but is also driven by new product launches.

So the company launched three new products last year after no major launches in 2017, and it will continue that emphasis on new product development in 2021, which should help this year. Secondly due to the strong performance last year, the company did not run any boost weeks since Q1 of 2020.

For context, boost weeks are basically 50% off weeks that it typically runs once or twice a quarter and they both serve as a sales uplift, but also a customer acquisition tool. And thirdly, the company has been broadly categorized as a COVID winner by investors, but there's many parts of the business that actually suffered during 2020 as well.

So for example, take group occasions like children's birthday parties or Super Bowl parties or late night events, those all suffered. Secondly, carry out, which has been a pretty strong contributor to growth for the company over the last several years actually was only a modest positive in 2020.

So as the economy reopens in 2021 that should also benefit. And then lastly, thanks to the great performance of last year, the company did not need to have excessive advertising.

So it actually began the year and currently has its largest ever advertising , which it can strategically deeply deploy to grow the business in areas where it needs. And then longer term we believe that it's actually very well insulated relative to third party aggregators.

First and most importantly, it's a great product at a great price. With Domino's you can feed a family for under 20 bucks.

And with aggregators, including fees, you're likely to pay multiples of that. Number two, it's consistent and it's reliable.

So with Domino's, you can have confidence that as Anthony alluded to, that your pizza will arrive in about 30 minutes. With aggregators that really depends on a multitude of factors.

Did my driver show up on time, was the food ready on time, and was my order batched. And then lastly, it has superior unit economics.

So due to the product design, the store design, Domino's scale and the throughput that it's able to achieve through its stores, it's able to deliver pizza in an economically viable way for basically every party involved. Whereas the unit economics of an order through aggregators, frankly, could be profitable or unprofitable, depending on the location and the order itself.

And so looking at recent results, we think last quarter's results really reaffirmed our thesis, because same store sales accelerated both on a sequential basis, as well as two year stock basis. The company also announced that its average franchisee EBITDA per store reached new record level of 177,000 per store, that's 24% increase from last year.

The company also continues its best in class capital allocation. It raised about $1.5 billion in new debt and pretty advantageous rates of less than 3%.

It used the proceeds to pay down some debt but then also announced $1 billion accelerated share repurchase, which is currently in the market executing. So in short, we think we were able to capitalize on a temporary moment of sort of perceived weakness.

And we were able to build a stake in an iconic company. And while the shares have appreciated quite materially since our investment.

We continue to believe it's a fantastic investment at these prices.

Great. And we've had really wonderful success in the restaurant industry, it’s the only place I can say I have to check, but we've got a perfect track record and it's nice.

And just a little commentary on Starbucks versus Domino's, we actually really like and respect the Starbucks management team. It's also very high return on capital.

Although non-franchised business model with very long term potential. The problem was that the market recognized a lot of that potential upside in the share price and looking we’re always willing to trade an existing holding at a kind of full valuation for a business of similar quality at a much more attractive valuation and that was the thinking behind switch.

We sold a probably a low double digit returning asset to acquire a high teens, low-20s type returning assets on a long-term basis . Fannie and Freddie, really the big news here is we're kind of waiting for the Supreme Court to issue its decision.

The experts say that it will be momentarily or June timeframe before summer recess for the court. And so we are interested certainly to see what the Supreme Court has to say.

The stock price really did not reflect any meaningful upside, if you will, for a favorable outcome, the market is quite skeptical and we look forward to seeing what the court has to say. Pershing Square Tontine Holdings, I commented a couple of week or so ago there really has no change here and that we started working on a transaction in actually early November.

We've done our homework, we like the business, we love the management team, and we are working to complete a transaction, as I said within weeks. So hopefully, within couple of weeks or so, or if we cannot get this transaction done, we will move on to target number two, and there are other interesting opportunity for us to pursue.

So if we get a deal done, we'll make announcement. If this transaction doesn't happen, we will also make an announcement to that effect.

So that you were kept informed. With respect to hedging, in December, as you probably know, we purchased interest rate swaps.

And as you've heard from the commentary from talking about each of our companies; one, we had concerned about rates rising generally, the combination of the Trump stimulus, Biden stimulus, the inherent stimulus of people who are stuck inside and now released by virtue of a successful vaccine policy, upcoming trillion plus infrastructure bill; and then, just a lot of unspent savings where people are going to go spend money again. And we're certainly seeing that, we're seeing that in the performance for our businesses, we're seeing that in terms of prices.

And all while the federal reserve is taking a very accommodative approach to monetary policy, in fact, it changed its approach to preempting inflation. So waiting to see -- and perhaps as they say, the whites of the eyes of inflation, couple of quarters inflation before they have an adjustment policy.

And that approach may lead to a -- that combined with fiscal and monetary and just the Henneman stimulus we think has the potential to fairly significant increase in prices, inflation and ultimately higher rates. And we've chose to hedge that rate -- that risk by purchasing options that pay off in a very asymmetric way, and have reasonable enough term, or options extending to sort of the summer of next year.

And we think it's an interesting way to hedge the risk that we think has a risk for markets generally. We got a number of questions in advance, I will go through them.

Back in December when you entered the inflation hedge, how did you conclude that the market's forward looking estimate was less than your estimate of future CPI? The answer is, we've looked at the pricing of swaptions and what the payoffs would be in various scenarios and we will spend some time looking at the history of rates in scenarios, again, that are -- it’s just unprecedented the scenario we're in now but with a accommodated fed coming out of the pandemic, et cetera.

And then we tried to look at the various payoffs versus the amount of capital we put at risk. And clearly, the market was, compared to our views, underestimating our potential for a rising rates, because the payoffs are very large.

We've made about, if you call it, 3x or so on our investment to date, obviously, very volatile position, maybe 2.5x today and we still hold the full hedge. The interesting -- okay, you do have stocks, it's okay.

It will be also an interesting to get your thoughts on positioning the hedge as you do with stocks at Chipotle and Lowe’s that should be able to pass them higher price to customers and probable scenario, how do you arrive at the notion of now you want to hedge? So we hope that all of our businesses are businesses that can pass along increasing prices.

If you have a great company, a desirable brand, great products, a wonderful service, ideally you should be able to -- we don't like investing commodity businesses where you're a price taker. We like businesses where you can, in fact, cover increases in costs with demand from customers and higher prices.

In terms of sizing the hedge, it was sort of how much are we prepared to risk or how much we could gain. And the payoff numbers are very, very large relative to the -- about one and a half percent of the capital we invested.

In the long term purchase, a shareholder was wondering if the team could address their perspective on US and our global inflation risk and potential impacts in the funds holdings? I guess really the same question.

Again, the key for us is owning what we call simple, predictable free cash flow generatives, durable growth companies, should add to have pricing power. And that's how we intend to manage that risk absent this hedge.

Next as far as the implosion of Archegos goes, does this change your strategy of entering equity swaps while initiating a positioned in stock? So we use equity swaps, I would say, rarely and we use them for a very different reason, or reasons that Archegos use them, again, I'm not -- I wasn’t at the firm, but basically this was a method according to the press reports that they used to get a very, very large amount of leverage relative to the equity of the firm, you know, 5, 6x numbers like that, Pershing for really, as a general matter and the private funds operates unlevered and historically has kept decent size cash positions.

In our public fund we have bonds outstanding that have been between 15% and 20% debt to total assets but bonds that don't have mark to market margin requirements. The problem with interest rate swaps was total return swaps is they’re full recourse mark to market instruments.

We have the post collateral as investment declines in value and we receive collateral back as increases in value. It's a way to get relatively low cost leverage without the right to vote the shares.

We have used swaps for tax related reasons and in other circumstances where owning it and the economics of an instrument, it could be perhaps a limitation on our purchasing more than a certain percentage of voting stock but we've not used them for leverage. So our view on that is not going to change.

We do not, I believe, own any total return swaps today. We had a portion of our Fannie Freddie position through total return swaps at one point.

I'm not even certain, I think, we've most of that since our equity holdings are actually outright ownership of common stock. In the last two plus years a combination of factors very well timed trades, exceptional performance, transparency holdings, Mr.

Ackman's visibility suggests a possible environment where there could be behavioral risks. What, if anything, does the PSH team do to guard against hubris, confirmation bias, the endowment effect, et cetera?

I think it's an excellent question. And the best test against hubris is experienced in particular bad experience.

And you know, mistakes, I guess, we treasure them. Meaning we study them, we learn from them and we make sure that we don't repeat them at a certain point after making a big mistake.

I said, look, that's it, I'm done making mistakes. I hope that's true.

But we're certainly working hard to make that true. The other thing we've done is we've taken our kind of core principles of the firm and we’ve codified them.

We have these little quasi stone tablets that sit on everyone's desk. And it's a bit like an investment checklist that we go through.

And we're thinking about does the company meet our criteria? If you were to take Domino's, for example, and you walk through each of those criteria squarely fits the criteria.

We've actually enumerated that many of the same or perhaps the same criteria in the PSTH perspectives. And you can be assured that the company that we've identified that we've been working on for like a seven months or so is one that meets all of our key criteria.

So we hope to complete that transaction. But if we don't, we'll find and we'll work on target number two that meets those criteria.

Also love to know more about predictions on SPAC in the future following SECs recent, crackdown on these. So what the SEC did is put out a press release where they questioned, I think rightfully, the accounting for SPACwarrants.

And SPAC warrants are designed to protect investors in certain circumstances, and I would say the circumstances are remote. But basically if someone were to make a tender offer to a company that had the SPAC warrants outstanding and that tender offer acquired more than half the outstanding shares with cash, the warrants have a provision that give people a cash alternative and they can in fact get cashed out.

And that provision was designed because imagine a scenario where someone bought a very high percentage of the outstanding shares with the company, therefore, the becomes very limited and the warrant holders might be concerned about the value of their investment. That little provision under gets a more careful reading of the accounting regs, converts that warrant from equity treatment to derivative liability treatment, which means that you have to mark to market the instrument and take a reduction in your equity for the market value of that liability.

We like, I would say, pretty much every other SPAC that has warrants and did the same analysis with our the audit committee and ultimately with an independent third party firm, as well as our auditors would approve the previous treatment. And that had been the treatment of these kinds of warrants for the last probably 20 years and also concluded the same approach made sense for us.

The good news is that this provision really has no economic effect. In fact, it's interestingly our forward contracts.

We have the largest forward purchase agreement of any spec with a minimum billion dollars. We also have to mark that instrument to market under this provision, because the forward contract entitles us to acquire not just common stock but also shareholder warrants and the pieces of shareholder warrants we have to mark-to-market that instrument as a liability.

So interestingly enough, at year end we booked about $1 billion loss as a result of the mark-to-market of these instruments and then we had a gain of 300 and something million dollars at the end of Q1, because the stock price of PSTH declined between December 31st and March 31st. So it's sort of acts inversely to what investors would expect, the better -- higher people value the stock, the more people value the liability.

At the end of the day, the outcome for Pershing Square Tontine Holdings based on the fact that we've got $4 billion in cash and trust with $1 billion commitment minimum from us, and these instruments will ultimately not have an impact or the accounting on that transaction. With that, I've covered all the questions that I've been handed.

The other ones that we've not addressed be happy to address your questions if you contact the IR team at [email protected]. Looking forward to reporting more to you as soon as we have information to report and appreciate your attending our quarterly conference call.

Thank you so much. Operator, you can disconnect.