Pershing Square Holdings enjoys strong performance thanks to Universal Music Group – Pershing Square Holdings (PSH) has posted its final results for the year to 31 December 2021. During the year, its NAV return including dividends was 26.9%, ending the year at $57.30 per share. Meanwhile, PSH’s total shareholder return was 18.6% over the same period as a result of the widening of the discount to NAV at which PSH shares traded from 23.0% to 28.3%. By comparison, the S&P 500 increased 28.7% during the year.
PSH’s growth in 2021 was driven by strong performance across its portfolio companies, most notably at Lowe’s, Universal Music Group, and from PSH’s interest rate hedge position. The most notable detractor from performance in 2021 was the decrease in value of PSH’s commitment to invest in Pershing Square Tontine Holdings. The PSTH share price declined from $27.72 to $19.72 during 2021, leading to a decrease in the value of PSH’s forward purchase agreements and Sponsor Warrants.
In 2021, PSH completed two new bond issuances, raising a total of $1.3bn of additional capital at attractive interest rates: €500m of 1.375% 6-year unsecured Bonds due October 2027, and $700m of 3.25% 10-year unsecured Bonds due October 2031. The proceeds from the sale of the 2027 Bonds and 2031 Bonds were used in part to fund PSH’s tender for its outstanding 5.5% unsecured bonds due in 2022. $369m of the 2022 bonds were redeemed in the tender.
On March 28, 2022, the company announced that beginning with the second quarter dividend and for the remainder of the calendar year 2022, PSH will increase its quarterly dividend by 25% to $0.125 per share. Its intended policy in future years will be to pay quarterly dividends in an amount determined by multiplying the average PSH NAV of all trading days in December of the prior year by 0.25%, subject to a cap whereby the total dividend for the year is not to exceed 125% of the average total dividend paid in each of the previous three years so that PSH does not make an excess distribution under the PFIC rules. Once the dividend is set for a specific year, PSH does not intend to decrease it from that level even in the event that NAV were to decline in a future year.
Extract from the manager, William Ackman’s report:
The war in Ukraine is a tragedy. Watching innocent people die due to the political and geopolitical objectives of one man is something one would hope would have never reoccurred. Ukraine is putting up a fierce fight and much of the Western world is helping with aggressive sanctions, military equipment and funding, but we need to do more. Russia’s horrific actions must be made to be extraordinarily expensive and punishing for its military and its economy so that we deter and hopefully eliminate such aggression, destruction, and loss of life in the future.
The economic implications of the war are significant in amplifying inflation in energy, agriculture, and other goods and services, and tempering the risk appetites of investors and corporations. The prospects of high inflation, deteriorating growth, and the potential for a U.S. and global recession have increased significantly. Russia has become uninvestable. China is not far behind due to their crackdown on corporations and high-profile CEOs, and their tacit approval of Russia’s actions. U.S. companies were already in the process of reshoring and near-shoring their supply chains, which will accelerate due to increasing geopolitical uncertainty. De-globalization is inherently inflationary. Risk premiums should also continue to rise.
Why then, you might ask, do we remain fully invested? For two principal reasons: first, we believe that the businesses we own have substantial pricing power that will enable them to cover the costs of inflation and are otherwise sufficiently robust and durable to continue to grow and withstand the test of time; and second, we believe that our hedges will likely generate substantial liquidity that would enable us to take advantage of opportunities in the event of a substantial market decline. We believe that hedging is a better alternative to keeping funds in cash while one is waiting for opportunities, particularly because high rates of inflation cause the purchasing power of cash to decline rapidly.
The industries and businesses in which we have invested are highly attractive and well positioned to withstand negative externalities. About 30% of our equity portfolio is invested in music and video streaming (UMG and Netflix); 26% in restaurants and restaurant franchising (Chipotle, Restaurant Brands and Domino’s); 15% in a home improvement retailer (Lowe’s); 10% in real estate in states with substantial in-migration (Howard Hughes) and in residential mortgages (Fannie Mae and Freddie Mac), 10% in hotel franchising (Hilton), and 8% in a railroad (Canadian Pacific). We expect that each of these companies will grow their revenues and profitability over the long term, regardless of recent events and the various other challenges that the world will face over the short, intermediate, and long-term.
While effectively all businesses are exposed to the global economy, we have chosen to invest close to home. Our portfolio is North American-centric with most to all of our companies’ profits generated in North America. While the U.S. has its share of problems including a highly litigious business environment, a complex regulatory regime, and political disharmony and divisiveness, we believe these factors are substantially outweighed by a legal regime where the rule of law is generally respected (more so than in most other places in the world), limited corruption, a world class military and defense, and a corporate and capital markets environment where capitalism can flourish. We believe that these attractive attributes will increase in importance to investors in light of recent events. Much the same way that the world is deglobalizing, deglobalization appears to be coming to the capital markets.
We expect our portfolio companies to continue to compound their intrinsic values at even higher rates than before due to their currently reduced valuations. We believe that all of our portfolio companies will generate long-term durable growth due to their dominant market positions, substantial free cash flow generation, high returns on capital, pricing power, and strong balance sheets. Furthermore, most of our companies use their free cash flow to repurchase their own shares so our portfolio companies and their shareholders are the long-term beneficiaries of their recently reduced stock prices. While most investment managers prefer to report consistent growing returns to their investors, we prefer to have intermittent periods of downward volatility as they create opportunities to plant the seeds for greater long-term outperformance.
PSH : Pershing Square Holdings enjoys strong performance thanks to Universal Music Group