Hi, it's Bill Ackman. We lost our moderator, so that's, there will be no moderation in this presentation. So, welcome to our third quarter conference call. As usual, we're gonna walk through the portfolio in some degree of detail. We've received a number of questions in advance that we will address. We'll try to address in our responses, because most of the questions are about individual names. Just kind of high level, I think we're having a very solid year, up mid to higher teens, depending on where the market is at this very moment. Performance being driven by, you know, basically our core holdings of 10 equity investments and some nice gains on hedges, which we'll discuss as well. Why don't we just begin with our biggest investment on Universal Music, and I'll turn it over to Ryan, who's gonna update you on the quarter.
Thanks, Bill. So Universal Music Group reported earnings a couple of weeks ago and had a really strong quarter. Their organic revenue growth was about 11%, and that was really driven by growth in streaming, which grew 13%. And that's really coming by one of our core theses when we made the investment, which is that music is just incredibly valuable and is continuing to appeal to a wider and wider set of audiences who continue to subscribe to a lot of the digital service providers. So that's driving the growth of revenue. And because revenues were growing so rapidly, EBITDA, this quarter, actually grew at a low teens rate, a little bit faster than revenue.
I think one of the things that really excites us is that the company is performing very well now, but we actually think there's a lot more to come in the future, really, from three areas that are not yet impacting the current results. So the first is pricing. One of the things that we talked about several years ago, and the company started talking more recently about, is because music is so undervalued, there really haven't been many price increases taken over the last 10 or 15 years. And when you compare that to video streaming, they really now have a cadence for the companies like Netflix, of increasing price every year or two years. Music hasn't done that, and we've really started seeing all the digital service providers, YouTube Music, Amazon, Apple, Spotify, start increasing price.
That hasn't really had much of an impact yet on UMG's revenues, but starting next quarter and over the coming year, we think it's gonna have a material impact, which could further improve the revenue growth of the company. The second thing is this artist-centric model. UMG, earlier this year, really started talking about how when you think about what's happening on platforms, for example, Spotify or other digital service providers, artists like Taylor Swift are providing enormous value for every song that they listen. They get billions of streams, yet they're actually paid the same rate per stream as, for example, a white noise music that's 31 seconds long. And so when you think about it, this was something that probably wasn't 15 years ago when Spotify was first gaining traction, something that would have existed if they would have anticipated.
But it's actually become quite a problem because effectively you're compensating non-artist music or music that people really never listen to, the same per stream, as you're compensating Taylor Swift, Drake, some of the most popular artists on the planet who are adding a lot of value. And so UMG's had this thesis over time, that we should really make these digital service platforms better compensating the most valuable music to the fans. And it actually gained a lot of traction this year with a lot of the agreements they've started signing with several of the largest music streaming platforms.
From a UMG stock perspective and a business perspective, what we like about this as well is, as the artist does better, because platforms like Spotify are going to try to cut out the royalties that go to non-music or fraudulent, or just music that does not really get very many streams, that leaves a larger revenue pool for the artists. And because UMG gets a percentage of those royalties, we think that's going to uplift UMG's results over time. We've done some work on this. There's been a lot of sell-side analysts have talked about it, and we actually think that could be anywhere between 5%-10% uplift to revenues over kind of a medium-term period of time. But that should also accelerate the growth of the business.
And then last thing is a cost savings program that was announced on the most recent call. The company CFO talked about how now that they've gotten through COVID, they're taking a look at their expense base, and they expect to have meaningful savings that will improve margins, when they complete this diligence, and they're likely to announce something over the coming months. But we think these are all positive things, as they're just additive to the margin expansion the company's talked about before. So in short, the results have been very good, in terms of the near-term performance, and we're excited about the things we think will continue to deliver strong results in the future.
Maybe you could speak to the potential for operating leverage in this business. Is this a business that should have substantial operating potential? How do we think about it?
Sure. Yeah, I think, I think what's interesting about UMG's model, and one of the things that attracted us to other types of investments in our portfolio we like, is the capital-light nature. You know, effectively, UMG, much like Hilton or Restaurant Brands or others, effectively, the capital-light royalty model. Now, UMG does need to invest in the artists to bring them up before they start generating revenues, and they do need to promote the artists and spend some dollars to make sure that fans around the world know who these up-and-coming artists are.
But fundamentally, if your revenues are growing at a double-digit rate, like 11%, like they were last quarter, you would think that if you're the largest music player by almost a factor of two, that you would be able to, over time, be able to grow your cost base at a much lower rate than your revenue rate. So I, I think the company has committed, over time to expanding its margins at about 100 basis points annually. And they've done a pretty good job of that. They've got this cost savings program that we think will be additive to that. But over time, you know, our perspective is that there should be meaningful operating leverage just in the nature of the business model.
I think that, you know, over time, our hope is that will ultimately be the case.
Thank you. Just, in terms of detail, Universal is up about 11.5% in Euro terms, for this year to date. Let's talk about Chipotle, big contributor this year. Stock's up about 32% year to date. That's at least what it says on the sheet. Is it more?
Yeah, it's up about 55%. That might be through the end of September.
Ah,
Let's not shortchange ourselves.
Apologies, sir. Hold on. Okay, it's up 56%. That's a lot better.
Okay.
Universal, up 10.3% year to date. Okay, go ahead. Now you can talk about Chipotle.
Okay, thanks, Bill. So, you know, as evidenced by the stock price increase this year, Chipotle's robust business performance just continues, you know, quarter after quarter. They reported Q3 in late October. That quarter featured same-store sales growth of 5%, which was driven really by transaction growth, since transactions grew 4%, so minimal contribution for average check. That mid-single-digit transaction growth continued into October, so this current quarter is off to a great start. The four-year stacked growth, so the cumulative growth since before COVID, in Q3, was over 40%, which is up almost 1 percentage point from what they were run-rate at in Q2. The company also issued guidance for the fourth quarter of mid- to high-single-digit same-store sales growth.
This was significantly above what people were expecting before the call of just over 5% growth. We believe that the fourth quarter should comfortably come in, in the high single-digit range due to a few factors, two of which are, one, an easy comparison versus the prior year quarter, since this quarter features the return of the popular limited time offering, Carne Asada, and last year had a less successful offering in Garlic Guajillo Steak. The company has also taken a 3% price increase in mid-October, which is to offset moderating but ongoing cost inflation in both food and labor. Importantly, this is Chipotle's first price increase in more than a year. So I think that's, you know, they've waited appropriate amount of time before taking more price.
This is also a business that has the power to generate substantial operating leverage. So the same-store sales growth that I mentioned drove restaurant margins up about one percentage point in Q3 to just over 26%. Management continues to make steady progress on a host of growth and operational initiatives. On the unit growth front, the current rate of growth in North America of 8% is set to accelerate to 10% in 2025, even if the current environment around construction and permitting headwinds doesn't improve. That's really due to the unit development team's exceptional job in building a pipeline of new sites that they can go after. Over 80% of these new stores will feature a Chipotlane, which is a digital drive-through that is present in about 21% of stores today.
Management is also focused on international growth. Europe, their, the sales are great in the European stores. They just need to fix the store P&Ls. They did the same thing in Canada, which now has a unit economic model in line with the U.S. So we have every confidence that they'll be able to do the same in Europe, which should unlock another leg of growth there. The company's first franchise units in the Middle East are set to open in 2024. On the operational front, staffing and turnover are now back to or below pre-COVID levels. The company has made some progress on throughput, but the bulk of gains there really lies ahead.
And that's evidenced by, you know, the select handful of stores that has implemented two recent throughput initiatives, are showing a gain of four to five entrees in their peak 15-minute period. If that's kind of cascaded throughout the day and throughout the store base, you know, that could be a driver of several points of same-store sales growth. There's also promising operational technologies, such as dual-sided grills, that can cut cooking times for proteins by 75%, and an automated digital make line. These are in the earlier stages of the Stage -Gate process, but they're quite promising, and they could be real game changers in the years to come for both throughput and labor efficiency. Just gonna conclude my remarks by spending a minute discussing the recent frenzy around weight loss drugs, the GLP-1s. There's a lot of investor focus on this issue.
I think Brian Niccol, CEO of Chipotle, did a great job addressing it on the earnings call, but just wanted to give kind of our perspective as we have done some work around the issue. So when you're thinking about the long-term impacts of these drugs, obviously, no company is showing a material impact today because they're so new and such a small percentage of the population has access to them. But when you think about what impact are they gonna have long term, you really need to think about, one, you know, what percentage of the population is going to stay on these drugs permanently? Since the minute you go off them, their appetite-suppressing effects cease.
Of the people that stay on the drugs, what portion of those people are going to modify what they eat and, and how much they eat, you know, over the long term? I think modifying how much you eat is easy on those drugs. Modifying what you eat is harder. Like, do we really... The drugs don't, like, increase your desire for grilled chicken and salad over something that's delicious. And the reality is,
What's wrong with grilled chicken and salad?
It's perfectly fine, but, you know, I think if you see what foods kind of are craveable and delicious and drive people back for more, you know, you can have that in a healthy offering, and I think Chipotle presents that. But, you know, ultimately, certain foods are craveable and delicious, and certain foods are less so, and that's, I think, will persist over time. It doesn't change your appetite preferences in terms of what you eat. It does make certain foods harder to process, like fried foods, in some cases, but, you know, you're gonna crave what you're gonna crave. And I think history is replete with, you know, diets and diet preferences that come and go. Initial stages, very strong. You have early adopters, super passionate. It's easy to stay on a diet for a few weeks. Once...
Changing what you eat permanently is much harder. But if in a big way, you know, restaurants are going to be able to respond. They can respond with innovations around ingredients that they use, around menu, and around portion sizes. And, these companies are excellent at innovating in those areas, and we expect that to continue. When you think about the impact on restaurants versus cooking at home, it's important to remember and take a step back. There's been a massive move, steady, like, over the last few decades in favor of food at home, gaining food away from home, excuse me, gaining share from food at home. It's just a steady climb every year. And, that's really driven by powerful secular forces that we don't see changing anytime soon. You know, those include urbanization.
It's much easier to cook if you're living, like, on a farm versus in a city. You have access to better ingredients, et cetera. Dual income households, so both parents are at work, harder to cook. Smaller household sizes. Cooking is most efficient when you're cooking for a lot of people. Cooking for one is not nearly as fun. Across consumer, in general, do it for me has been gaining share for a very long time from do it yourself. People don't necessarily have the expertise or desire to do things themselves, and grandma's recipes just aren't being passed down at the rate that some people would like. There's a massive convenience factor to restaurants, so... And that's only enhanced in the last couple of years from digital ordering and delivery.
Finally, taste, very hard to match the deliciousness of something like Chipotle or, you know, our other holdings. Then amongst restaurant companies, we think Chipotle is one of the best positioned brands. You know, their food's fully customizable. It has clean ingredients, so they only use 53 natural ingredients in all of their food, which is pretty incredible. And their entrees are not fried. They have experience offering diet-oriented fare successfully. You know, they introduced something called Lifestyle Bowls a few years ago that were geared towards various diets, including Keto and Whole30, et cetera. Their average consumer is younger. We believe their average consumer is healthier. You know, it's, it's a favorite brand of many top athletes, high in protein, low in processed ingredients, et cetera. And, you know, finally, Mexican cuisine is just a winner.
You know, we have a growing Hispanic population in the U.S., and there's just a growing resonance of Hispanic culture in the U.S. and globally, I would argue, both in food and in other areas such as music, which we see through, you know, the top artists at Universal. So, you know, we are thoughtful around the impact of GLP-1 drugs, but we certainly don't see them as a headwind long term for really restaurants or Chipotle. And in fact, in Chipotle's case, I think this company could actually be, come out the winner.
Sure. In light of our... Thank you, Anthony, you know, kind of general view that we see some weakening in the economy, how do we think that impacts Chipotle's business?
Yeah. So, so far, I mean, the company has seen strength across all income cohorts, you know, whether it's low income, medium income, or high income. They haven't really seen weakness on the low income side. Not all companies are experiencing the same kind of uniform momentum. So I think what that shows is the company's food is exceptional value. I mean, for what you pay of just over $9 on average for an entree from Chipotle, you know, across the country, the quality of the food that you're getting, the portion that you're getting, is just unmatched. And, you know, their entrees, if like for like, are priced, you know, anywhere from a 15%-30% discount to their competitors.
So if people, you know, do wanna eat better over time, which we think they probably will, Chipotle is an exceptional value, and, you know, that's, that's gonna be true in a softer economy or a stronger economy.
Great. Thank you. So Alphabet, we initiated our position in March. We added to it in Q-- sometime in early Q3 or it's early, like Q2. Maybe you, Bharath, you know.
Yeah.
Want to just update us on the company in terms of performance since the initiation? It's up about 50%.
Yeah. So when we initiated our position in Google, our investment thesis was really predicated on four key elements. One, was the company's strong revenue growth profile, which was then obscured by a slowdown in the ad market and the lapping of tough pandemic-era growth comparables. Two, was a significant margin expansion opportunity, both in its core business and its underearning cloud segment. Three, was an underappreciated capital return program, and four, was the company's leadership in AI. And when we look at Google's results to date, their business performance has really reinforced each element of our original thesis. So starting with revenue growth, in its core advertising business, both Search and YouTube grew at 11% rate this quarter, accelerating from low to mid-single digit growth in Q1 and Q2.
And we believe that revenue acceleration has really been driven both by recovery in the ad market as well as several company-specific growth initiatives. For example, they're driving increased adoption of Performance Max, which is a tool that advertisers use to automate and run unified campaigns across all the different Google properties, including Search and YouTube. Another driver of their growth has been YouTube's success on the Connected TV medium, where they're actually the number one overall streaming destination above Netflix and Hulu. Just in the U.S. alone, they have 150 million viewers on Connected TV screens. Turning to profitability, margins in the core Google Services business or core Google Services segment increased 440 basis points in Q3 as the company's cost control initiatives are beginning to bear fruit.
and the company is realizing significant operating leverage from its fixed headcount base, which has been flat over the last two quarters after they undertook a 6% workforce reduction at the beginning of the year. Likewise, in its cloud business, that segment booked its second consecutive quarter of profitability, and we think there's a long runway for margins to expand in that segment as it catches up to peers like AWS, who enjoyed nearly 30% margins at a similar scale. And then thirdly, on capital return, Google bought back $16 billion in shares this quarter, which represents about a 4% annualized reduction in its share count.
We think that robust buyback pace can easily be sustained by the company's free cash flow generation, as well as their nearly $110 billion of cash on balance sheet, which accounts for approximately 7% of its market cap. And then finally, on AI, the company's been making significant strides rolling out AI capabilities to consumers, advertisers, and Google Cloud customers. In its core search product, they're thoughtfully introducing generative AI responses to a broader range of queries and opening up availability to more users in more markets. And as part of that, specifically on commercial queries, they're innovating with new ad formats that are both enhancing the consumer journey to finding an answer, as well as improving conversion for advertisers.
And similarly, in its cloud business, customers are increasingly drawn towards the AI-optimized infrastructure offerings they have. And interestingly, more than 70% of generative AI startup unicorns are actually Google Cloud customers. So stepping back, we've been very pleased with the business performance since we initiated our position. The stock price has appreciated nearly 50% from our initial cost, but we still believe there's significant upside from earnings growth and multiple expansion. Even at today's price, the company only trades at a 20x forward earnings multiple, which we believe is a very attractive valuation for a business of that quality that can grow earnings at a mid-teens rate over time.
So when they announced the quarter, I think some people had a negative reaction, at least initially. The market people attributed it to sort of relative underperformance of their cloud business versus Microsoft. Any thoughts there that you can share?
Yeah, so the cloud business still grew revenues at 22%, and when you look at it on a pre-COVID CAGR, it's a 40% growth rate. So we still think growth in that segment is very robust. There's been sort of an industry-wide trend where customers are revisiting their cloud spend, and different players are going through that optimization cycle over different periods of time. Interestingly, when you actually look at the Google Cloud business's backlog, that had a meaningful jump this quarter. So. And the way the company addressed it on the quarterly call was that the company their customers are reevaluating their needs, but are very bullish long-term about the new offerings that Google is rolling out.
So we see it as a near-term period of volatility as customers go through this optimization trend, but expect it to revert to its high growth rate over time.
And again, maybe we should ask everyone to sort of address this question: economy, weakening of the economy, impact on the ad market.
Yeah.
Election, impact on the ad market. You know, what are your thoughts?
Yeah. So, Google's cyclicality to the broader economy is mitigated by, I think, three main factors. One, the ad market overall kind of went through a slowdown earlier in the year. So both Google and other players in the advertising market are benefiting from easy comps as they go through into Q4 and the following year. Secondly, digital advertising has been consistently taking share from the overall advertising market. In the U.S., digital advertising represents about 65% of the total market, and every single year, that digital advertising has been taking about 200-300 basis points of share. So even in a scenario where the ad market again, slows down due to economic weakness, we'd expect digital advertising to have much lower impact.
and then thirdly, Google's business, its core search business, mainly direct response advertising, which within the scope of different advertising formats, is the most trackable and offers the highest ROI. So it's sort of really the most economically resilient type of advertising. So that'll that should also help mitigate Google's impact of broader cyclicality.
You'd also think that we're starting to get into the big spend for the upcoming election. You would think the election year will be-
Yeah.
-a contributor.
Digital advertising overall has less of an impact than linear TV advertising with regards to election cycles, but on the margin, it should help as we-
I think this election will be more-
Yeah.
digital than previous ones.
Yeah.
Okay, great. Next, let's hear from Ryan on Hilton.
Thanks, Bill. So Hilton had another great quarter when it reported results a few weeks ago. So for example, its same-store sales metric, RevPAR, was up about 7%, and the company opened, you know, new, new units around the world at a rate just in excess of 4%. So its overall fee growth, which is the primary driver of revenue, was up about 12%. And the company exhibited very strong operating leverage and cost control, which is something they've done very, very well historically. So as a result, its EBITDA was at 14%, and earnings were up even more attractively than that. But overall, the company is growing at a very rapid rate.
I think to your point about in terms of thinking of our businesses, in terms of what happens if there's more of a slowdown or worse in the economy, we're very excited about how Hilton is positioned, both on a near-term basis, but also some of the longer-term trends. So for example, when I mentioned the 7% RevPAR growth, that's something that we would say is above the typical level we would expect for Hilton over an economic cycle. You know, our view is that that RevPAR rate is probably about 3%-4% annually in a kind of a stable economic environment. And the reason that it's growing more quickly now than that is effectively, there are certain parts of the business that are still recovering from the pandemic. So overall, RevPAR is above the pre-pandemic levels.
But when you disentangle that a little bit, it's really all pricing that is above the pre-pandemic levels. Occupancy is still slightly below. And therefore, the company, as it's getting its hotels more fully occupied to where they were pre-pandemic, is still exhibiting some of that extra growth. So we actually think for the better part of the next year or so, the company will get back to its normal levels of occupancy, but that should, over the shorter term, help the company grow at an outsized rate. And then longer term, we think a couple of the key drivers that should help them navigate any economic potential contraction or slowdown are still intact.
So, for example, one of the reasons why the stock has done so well over the last month is earlier in the year, people were concerned about the company's ability to continue growing its units at its historical 6%-7% rate. The company's grown closer to 4%-5% since it came out of COVID. That's really just because, like any other business that was trying to open restaurants, you had, you know, lags in getting workers able to do it. Materials were harder to procure. And then for Hilton, in particular, along with more, businesses where franchisees build some, you know, slightly more expensive structures, as interest rates went up, some of the marginal, builders of those things, had to either pace themselves or not do the projects.
All of those things together meant the company was producing units lower than its long-term potential. This quarter, the company grew at 4%. They actually said they would end the year at a 5% growth rate. Their line of sight, which is pretty good because they have about half of their units already under construction, that are supposed to come into the pipeline. They said they'll be back at 5% next year, and then really be able to... I'm sorry, 5% in this quarter, and then close to 6% next year, and then back to the historical trend thereafter.
And so when you think about a capital-like business like Hilton, that can add 6%-7% growth to its units, which is effectively gonna be growing its revenue and its earnings stream without any capital, that's a very, very strong driver over the long term in really any economic environment. And then the second thing is, typically, the way we think about the company's business is, its RevPAR growth plus its net unit growth should be roughly what its fee growth is. But the company has pointed out that one of the things they're experiencing, that they think will be a sustainable trend, is they're actually growing fee growth a little bit in excess of that algorithm, if you will, because of two factors.
The first is that the franchise fees that they're getting today are higher than the average in-place franchise fees they've had historically, because the value of the brand has grown so much over the last 20 years, that some of the people who used to have a franchisee at a lower rate, when they re-up or they roll off, people come in at a higher one. So that'll allow them to grow even more quickly on the fee side. And the second is their credit card program. They basically, you know, partner with companies like American Express, where you have a Hilton-branded credit card, and if you use it at Hilton, you get a lot of great value in terms of points and freebies and things like that, that consumers love.
But you also get some value when you spend on categories outside of staying at Hilton hotels as well. And those programs have been enormously successful, and given the strength of Hilton's brand, people are spending a lot of money. And that part of the business is actually growing at a much more rapid rate, even than Hilton's core lodging business. And so those trends, the company thinks, will continue and allow them to grow even faster than the typical RevPAR plus net unit growth. So you put it all together, we feel pretty confident that the company will do very well, both on a near-term basis, even if there's a slowdown or worse, but also on a long-term basis, because of the capital-like nature of the business and just the enormous growth opportunity ahead.
We think that Hilton's very well positioned to continue growing its earnings very strongly, like it did this last quarter.
Thank you. Just a quick point on Hilton and the leadership team there. We have really a lot of superb, really outstanding CEOs at each of our companies. Just to sort of highlight Chris, when I think about the challenges he's managed through, you know, talk about a business that was affected by COVID. They used that opportunity to take a lot of costs out of a business that we didn't think was particularly fat at the time. They've maintained that discipline. Now, they've used technology to sort of automate a lot of functions at the hotel level, which is, you know, a better experience for the customer and, of course, a higher margins for the franchisee, which, of course, makes the brand more profitable and valuable.
So I think just operationally, I think he's done an incredible job. And then when you've... You know, they've been also super aggressive about really buying back their shares, understanding the value of a royalty on a growing portfolio of hotels around the world. And we think it's one of the best businesses in the world. It's got a little bit of volatility because of just the nature of the hotel industry. But you know, superb team overseeing this asset has driven you know, sort of enormous value. So we thank all of our CEOs for their contribution, but let's say this quarter, let's highlight Chris and the team there for doing a superb job. Let's talk about Restaurant Brands, Feroz.
Sure. Thanks, Bill. So Restaurant Brands reported another quarter of improving underlying performance in its key home markets, while its international business continued its very strong streak of performance. So starting with Burger King in the U.S., the brand has seen consistently improving traffic trends throughout the year, with the latest quarter showing flat traffic on a year-over-year basis, while its largest competitors actually had negative traffic. This was all done in a quarter with virtually no help from its Reclaim the Flame advertising fund, the majority of which is yet to be deployed. The biggest driver of this year-to-date traffic improvement has actually been operational improvements, like low-hanging fruits, such as increased frequencies of franchisee trainings before new product launches.
So looking ahead, based on our work, franchisee sentiment is among the best it has been in years, and with the help of recent actions, as well as the remaining dry powder in their Reclaim the Flame program available to them, Burger King should see continued traffic improvement and more consistent same-store sales in this coming year. At Tim Hortons in Canada, the company's multi-year effort to grow both its afternoon foods business as well as its beverage platforms, led to about 8% same-store sales growth, which are now up about sort of low teen percentage above pre-COVID levels. The company has set up both of these as platforms, which they can further layer products onto, which we expect again in the coming year.
... Now looking outside its home markets, what often gets lost and forgotten about Restaurant Brands is its crown jewel international business, which represents about half of its unit count and the vast majority of its unit growth. Restaurant Brands recently began sharing more details about this great business, and we expect that it'll begin reporting its international segment as a separate business. We think this is a fantastic step for the company, as it'll highlight the rapid growth, the capital-like nature, and hence the immense value in this business. So despite all these positive business momentum points, the shares are still down about 9% from their peak in the summer, which is primarily due to what Anthony mentioned earlier. Some investors believe that the emergence of these weight loss drugs will have a negative impact on food and beverage consumption.
I think Anthony did a great job covering all the points, but I'd highlight a few more relevant to Restaurant Brands. First, this is largely a Western phenomenon and less of an issue in international markets, where both obesity and the ability to afford these drugs is lower. Restaurant Brands has four great brands, each at various stages of unlocking international growth, which, again, is outside the purview of this debate. Second, each of Restaurant Brands's concepts offer a diversified menu. Being longstanding brands, they have decades of experience tailoring and tweaking their menus to suit consumer preferences, including in low carb and low fat options. Third, as Anthony mentioned, many of the data points that have come out so far are from studies from early adopters and with people with access to the best care.
In reality, these drugs have serious side effects, and achieving these results requires very strict compliance. We don't believe that the average quick service restaurant consumer, which frankly skews lower income, will have the same compliance, will see the same results, or even have the same desire to fully cut out restaurant spending. And then fourth, remember, Restaurant Brands's P&L is also more insulated, given it's a franchise business model relative to, say, a company-owned concept. Look, ultimately, consumers come to Restaurant Brands concepts because of their cravable food, the convenience, and the value, and we think all of that is still a very compelling proposition, even if some small percentage of its consumer base permanently begin taking these drugs and curtailing some restaurant spending.
The good news is that, the company used its temporary weakness in its share price to resume its share repurchase program at a very advantageous time. So in just two months, in September and October, the company repurchased just under 2% of its shares outstanding. And so while the stock has partially recovered from these October lows, we still believe the shares are very cheap as they trade at less than 20 x next year's free cash flow. And this earnings base actually includes some of the investments they're making in the BK US system, so it's even cheaper on that, excluding those investments.
Just a reminder, in terms of how we, our kind of favorite businesses in the world are what we call royalty growth annuity, growth royalty type businesses. Hilton, of course, a royalty on hotel rooms and F&B and hotels. Restaurant Brands are royalty on the underlying brands, 5% gross revenue royalty. Alphabet, you know, Google is basically a royalty on advertising spend on the internet. So these sort of capital light, you know, and then Universal, of course, a royalty on music streaming. Those are our favorite kinds of businesses, and they tend to be our larger positions as a result. I failed to mention Hilton's total return this year is 32.6%, I guess, through our last reporting period, which was Tuesday, and Restaurant Brands, 11.2% total return.
With that, let me turn it over to Charles, and Charles is gonna update us on Lowe's.
Sure. Thanks, Bill. So first note that Lowe's actually hasn't yet reported Q3 earnings. They shifted their reporting calendar by a week, so they're gonna be reporting next week. You know, therefore, I'm gonna limit my comments to kind of broader perspectives on Lowe's and the home improvement industry without specific reference, of course, to Q3 results. But to begin, just touching on the macroeconomic picture, which remains the core debate on Lowe's stock today. So in recent quarters, industry-wide sales have retrenched modestly from highs established in kind of late 2021, 2020, early 2022.
And specific to 2023, this has been driven by record lumber deflation, moderation in DIY discretionary demand, and in particular with big-ticket items, and a mix shift from large to small pro-specific projects and a general trend of consumers reallocating budgets from goods to services. You know, despite that, same-store sales growth when viewed in comparison to 2019 is still roughly 30% above the 2019 baseline levels, and now that captures a lot of underlying inflation in the kind of core retail dynamics in certain mix shift in ticket.
It also represents significant growth in Lowe's online business, which has more than tripled on a dollar value basis over that period of time, and share gains with the Pro customer, which has increased from roughly 19 to roughly 25% of their customer mix today. But that's kind of just setting the stage for the environment in which they're operating this year. You know, one observation we'd have about 2023 in particular is, and this should come as no surprise, but in response to kind of the interest rate tightening cycle and higher corresponding mortgage rates, existing home sales have declined precipitously over the last 18 months and is now sitting below 4 million annualized units. And this is relative to a normalized baseline of probably in the mid-5 million unit range.
Ordinarily, volatility in existing home sales would not have a meaningful impact on the home improvement industry. However, we believe that the pace and the severity of the recent decline is partially responsible for some of the acute pressure that the home improvement industry is experiencing in recent quarters. Moreover, given the lack of existing homes available for sale and high mortgage rates, the switching costs are much higher for existing homeowners, and there was an expectation that there would be higher levels of in-place renovations this year, and that has not really materialized. Now, against this backdrop, Lowe's same-store sales growth in recent quarters has been modestly negative, offset by material margin expansion and the benefit of Lowe's best-in-class share buyback program. We believe earnings are likely to end the year down roughly low single digits versus 2022.
In Q3, sales, in particular, when they're reported next week, are likely to be on a headline basis, the weakest headline number for the full year, as both Lowe's and Home Depot are growing over challenging prior year comparables. So for context, Home Depot the other day reported same-store sales growth of -3.5% in the United States, and they noted that their DIY customers were modestly weaker than the Pro customer base. And for Lowe's, the DIY customer is a larger share of their customer base, so you would expect them to underperform Home Depot in a quarter like this. We think that's already kind of priced into the market. You know, we'll talk about that in a moment.
But reflecting a little bit on 2024, which is what, you know, investor base is focused on, there does remain significant uncertainty as to when revenues are likely to positively inflect. You know, I'd note that key measures of industry spend, including retail sales data and personal consumption expenditures, have now largely normalized to pre-COVID averages. Particularly when you back out some of this existing home sales dynamic, you can see on an underlying basis, the core repair business is pretty close to 2019 averages. Now, this is despite a host of qualitative reasons, which would argue that relative spend on a go-forward basis should be actually structurally higher than pre-COVID averages.
and so, while the near-term macroeconomic picture remains uncertain, we continue to be very favorable on the medium-term outlook, and backdrop for the home improvement industry. These variables include, historically old housing stock. The median home is now older than 41 years old. Baby boomers increasingly aging in place, millennial cohorts entering homeownership for the first time, a national housing shortage and a general lack of new builder inventory, continued post-COVID-19 hybrid work from home, and still high levels of home equity when viewed in contrast to 2019. Moreover, for Lowe's in particular, we're very constructive on their ability to continue to execute against their transformation initiatives over the coming years.
And so to that end, Lowe's continues to make progress on various business initiatives that should aid the company's ability to improve market share, generate accelerated revenue growth, and expand margins. We remain optimistic about Lowe's ability to increase its earnings from current levels over the coming years. And in that context, we think the stock is very cheap. It's trading at roughly 15x earnings today, which is a low multiple for Lowe's relative to history and also a significant discount versus Home Depot at current levels. We believe that when investors, when some of these concerns on the near-term macroeconomic picture ease and people once again focus on Lowe's long-term earnings power, the share price will appreciate substantially.
What is the kind of rating gap between Home Depot and Lowe's on valuation?
Lowe's is trading at 15x, roughly. Depot is trading at roughly 20x today, so it's roughly a 23 percentage point delta in relative valuation.
And, what's the argument for that gap?
Yeah, I mean, the argument in the current environment is basically what you're seeing is that there's more weakness in the present environment with the DIY customer than the Pro customer. So if you look over the last number of years, Lowe's outperformed in 2020 because there was more DIY activity when, you know, people were locked down and sheltering in place. And then 2020, 20-- sorry, 2021 and 2022, you saw larger Pro projects, major remodels, deck extensions, redoing the backyard, where pros were very involved. Backlog, long backlogs, you know, difficulty getting labor. And so Home Depot outperformed in 2021 and 2022, and that trend has been kind of narrowing, and the delta between Pro and DIY has been narrowing, but still persists today. Depot also has higher share of pro. It's roughly 50/50 for Depot, where Lowe's is 75/25.
So when you have differential growth characteristics of the underlying customer base, that manifests itself in different same-store sales growth in the current environment. Now, what's interesting is if you look at it on a four-year stack basis relative to 2019 levels, the aggregate performance is, like, very similar. It's more the headline numbers, and then when you drill down a little deeper, you have Lowe's, which continues to expand margins in the current environment and has a significant opportunity to take margins up to, you know, 15%+ over time, which they've articulated, and best-in-class capital allocation, where they're buying in roughly 7%-8% of their share count.
Conversely, you know, Home Depot's margins have actually been moving in the wrong direction, you know, for the last year, and they've been making, you know, SG&A investments, and they're starting from a higher base. So, there's a total disconnect on earnings, but it seems that myopically, people are very focused on the same-store sales growth. And there's potential that-
It doesn't seem to be... I mean, we've had this multiple gap between the two companies since we made the investment. It's been a persistent 5-turn discount or something like that, 4- or 5-turn discount, right?
Yeah, and I-
At some point in the cycle, they had an advantage from a DIY perspective. Now they, you could argue they have a disadvantage. Charles, it makes no sense.
I agree. I think when they had an advantage, it was so early in COVID that there was an element of like, this isn't sustainable, so they and no one ever, like, capitalized that advantage into perpetuity. I think in the current environment, Home Depot is viewed as a safer hiding stock. You know, they're also still much larger on a both market cap and on a revenue basis, and I think, you know, there is an element, too, where usually the market leader trades at a premium in many industries. I think there's some truth to that.
... You know, our view is that with just great execution and continuing to execute against their playbook, I think that over time, Lowe's will be more fairly valued. In the interim, they're buying back roughly 7%-8% of their market cap. You know, and so that's accrues to our benefit for now.
Okay, great. So Lowe's, a modest contributor at 3.6% total return, most of that being the dividend, you know, year to date.
Yep.
With that, let's go to Ben on Howard Hughes.
Great. Thank you, Bill. Howard Hughes continues to deliver strong financial results with resilient demand across its portfolio of master-planned communities or MPCs. As we've discussed, these MPCs are located and sought after in low-cost, low-tax, and pro-business states, which continue to benefit from strong in-migration trends. Howard Hughes had a sharp increase in new home sales in its communities, with new sales up 113% year-over-year in Q3, which serves as a leading indicator of future land sales. As Charles talked about, this surge in new home sales is driven by a lack of resale inventory, as existing homeowners remain reluctant to give up their low-rate mortgages. This dynamic led to robust demand from homebuilders and record average price per acre sold in its communities.
In Q3, average price per acre was up 16% year-over-year, driven by Summerlin, Las Vegas, and Bridgeland Houston communities. As a result, Howard Hughes substantially increased its full-year MPC EBIT guidance midpoint to $325 million, which would be a record level for the company. In its operating asset segment, Howard Hughes had positive leasing momentum across its three core property types: office, retail, and multifamily, with low single-digit net operating income growth across its portfolio. Given stronger than expected leasing activity, Howard Hughes also increased its full-year operating asset NOI growth guidance to 2%-4% for the year. And in its Ward Village Hawaii community, Howard Hughes continued to make tremendous progress in condo sales, with more than 98% of all of its condo units sold or under contract.
company has four condo projects under development, which they expect will generate $2.5 billion of future revenue between 2024 and 2027 at attractive gross margins. While the core MPC business is performing exceptionally well, results of the Seaport in New York remain challenging. Howard Hughes experienced continued losses at the Seaport as they try to stabilize the Jean-Georges operated Tin Building. Continued challenges of the Seaport led to an impairment analysis in Q3, which resulted in a non-cash after-tax charge of $555 million. Howard Hughes also announced the formation of a new division called Seaport Entertainment, which will own Howard Hughes's entertainment assets in New York and Las Vegas. In conjunction with an announcement, Howard Hughes hired Anton Nikodemus, a seasoned and senior executive at MGM, to run Seaport Entertainment, and they intend to complete a spin-off of these assets by year-end 2024.
This will allow the company to focus its attention on its extensive pipeline of growth opportunities within its MPC business, while Anton and his team will focus on unlocking the value of these unique assets in a standalone company. As with most real estate companies, a significant amount of investor focus is on the balance sheet, given the current interest rate environment. Howard Hughes ended Q3 with nearly $500 million of cash and only $256 million of remaining equity needed to fund current projects in development. Amidst the challenging capital markets environment, the company was able to extend or refinance loans in four properties, which extended its weighted average debt maturities to approximately six years, with limited maturities in 2024.
In summary, while the core MPC business continues to perform well, the stock has underperformed the market this year due to continued elevated interest rate environment and the near-term challenges around the Seaport. But we believe Howard Hughes is well positioned to navigate these challenges while taking advantage of the enormous future opportunities in its MPCs.
Thank you, Ben. I think another thing I would point out here is, you know, Howard Hughes has a fair amount of office exposure. That's an asset class that, you know, investors and real estate investors in particular today are very cautious about. I think the difference with Howard Hughes's portfolio is that the assets, we own—it owns, are in these little cities, and, where people actually like going to the office because the commute is easy, and the occupancy levels as a result, have remained high, and actually, leasing activity has been strong. So it's a really differentiated, kind of story. Obviously, we've been a very long-term investor in the company. We rec...
You know, we bought a lot of shares earlier in the year, and then over the course of this year, we've had an ongoing, you know, 10b5-1 buyback or buy-in program, which has increased our stake into the company, excuse me, increased our stake in the company to about 36%. We like the business. It is a complicated story for Wall Street, but should generate a lot of intrinsic value, and compound at a nice rate over a long period of time. Canadian Pacific, Manning.
Great. Thanks, Bill. So the CPKC team continues to make great progress on synergies and network integration as they start to unlock the vast potential of its Canada-US-Mexico single line network. At the combined company's inaugural Investor Day in late June, management established a set of very exciting financial targets, including a goal to more than double their earnings per share by 2028, while holding CapEx close to current levels, which implies that average free cash flow per share growth of nearly 20% per year, you know, through 2028. You know, to address one of the questions received on what the growth profile might look like beyond 2028, you know, we think robust growth will likely continue, you know, even beyond that period. As Keith likes to say, CPKC, you know, is only day one into their forever story, right?
The story doesn't obviously end in 2028. We think a lot of the secular growth drivers, for the business, you know, including taking trucks off the road, moving freight to rail, and increased nearshoring investment in Mexico, are just in their early innings and will definitely continue kind of beyond their projection period. You know, so while the long-term financial profile is obviously very exciting, Q3 results this quarter were impacted by several near-term challenges, including a port strike, in Vancouver, as well as the outage at a major customer facility. You know, as a result, revenues in the quarter were down 4%, which included a 3% decline in volumes, as well as a 1% headwind from price and mix, fuel and FX.
Management, however, did a great job controlling what they could on the cost side, with total expenses, you know, down 1% and earnings per share down 9%. You know, this was obviously a very challenging quarter for the company, but I think importantly, it doesn't change our view of the long-term growth story. You know, it doesn't also change our view, obviously, of the Investor Day financial targets. You know, in fact, the team has already delivered over $350 million of run rate revenue synergies. They're ahead of plan on their cost synergy realization, and we believe that the company's growth story remains very unique kind of in this industry.
You know, in addition to the challenging quarter, some Mexican regulatory headlines have made the news recently and have definitely contributed to the recent weakness in the share price. So, you know, as a little bit of background, the Mexican president recently announced his intention to start a passenger train system in Mexico that would run on tracks that are currently used by the freight railroads. I'll caveat all of this by saying that everything is highly preliminary. You know, the details of this plan, as well as the timeline for any implementation, are still, you know, to be determined. But I think there are, you know, several factors at play here that we believe, you know, if any changes do happen to how the system operates today, will be very manageable, from the CPKC side.
So first of all, the president's term expires in September of next year, and he is not eligible for re-election. You know, trains have been one of the priorities of his administration, but the new administration could very well, you know, obviously, have different priorities. Secondly, I'll say that it is in Mexico's economic interest to continue growing cross-border freight rail traffic between Mexico and the U.S. to grow their economy, and that interest is obviously highly aligned with CPKC's. Third point I'll make is there are plenty of examples across the continent of passenger trains and freight trains coexisting peacefully on the same tracks. For example, in the U.S., Amtrak actually operates primarily on tracks that they don't own. The tracks are actually owned by Class I freight railroads.
And then the last point I'd make on this topic is, CPKC's CFO spoke at an investor conference yesterday, where he made the point that there will be no near-term impact, whatsoever from this, you know, regulatory change, and that any long-term changes will definitely depend on the new administration, what the priorities are, as well as the result of a feasibility study that CPKC is currently conducting, on the feasibility of passenger trains on a very small portion of their network around Mexico City. So, you know, as with all these regulatory changes, you know, the devil is in the details, so we're definitely paying very close attention, but we don't believe this to be a major issue at this time.
Great. Thank you, Manning. We're huge fans of Keith Creel and the team here. We've known them a long time. We made our initial investment in Canadian Pacific in 2013, so, you know, I guess, decade ago, and then had the opportunity to meet Keith when we recruited him away from Canadian National. And, like with Hunter, he's a under-promiser, over-deliverer, so we look forward to his continued leadership of the company. Negative performance, it was a 4.4 percentage point detractor or total return for the year, and Howard Hughes down 2.5% year to date. Now let's just talk about 3Qs on the economy. I'll turn it over to Ryan and Bharath. Maybe I'll jump in.
What are our thoughts on the economy? We've done a number of hedges over time. Actually, interestingly, maybe not so interestingly, we have mark-to-market losses this year, more modest ones, on some of our interest rate hedges, because at year-end last year, our third-year hedge was worth approaching $500 million. We ended up exiting at a number closer to $300 million. So we actually had a meaningful mark-to-market loss there, although a very successful investment versus our original cost. But maybe you can speak to how we're positioned today and why.
Sure. So I think maybe just stepping back for a second, one of the things that we've been increasingly doing over the last handful of years is trying to really pay close attention to the economy across really three different buckets. So we've always... You know, we cover hundreds of companies here and really try to pay close attention to what they're saying about their businesses. But also, in looking at so many companies, you can get a pretty broad read-through from the companies about how they're thinking about what the future might hold, what they're seeing in their businesses on a real-time basis, and a lot of the concerns that they have.
I would say across that first vertical, really over the last 4-6 weeks, we've been hearing a lot of companies increasingly talking about how they think that consumer spending is starting to slow, and that they're also, when they look at their own employees, their wage gains are starting to slow, inflation is coming back down, pretty meaningfully and consistently. You've seen that a lot over the companies that have reported, in particular, in the last, you know, few weeks. Even Walmart this morning was talking about how it was becoming more cautious on the consumer because of things they've seen really within the last couple of weeks to last month.
... The second bucket is what they call the soft government data, which would really be surveys that the Federal Reserve and other government agencies put out, that really ask qualitative questions to businesses and to consumers and other folks about how they're feeling, how they're spending, and what their thoughts are. And I would say those first two verticals, they, they've indicated a slowdown in the economy. And that does not mean necessarily that there's going to be a recession or contraction, but rather that I think some people have thought that the economy might have the risk of re-accelerating. And to us, those first two kind of buckets that we look at suggest that there's more likely to be a slowdown in the economy. And then the question is: Does a slowdown turn into anything or more or not?
The history often suggests when inflation is as high as it was 1-2 years ago, when the unemployment rate starts rising above a certain level, the combination of both of those things generally make it difficult to navigate what people have now termed kind of to be the soft landing or getting inflation back to target without causing a recession. So I think we've started seeing some signs that things are a little weaker than what people may believe. And then there's a third bucket, which is the hard government data, and that's one where I think a lot of people are deriving comfort that things seem good: large retail spending, large GDP, some employment reports that historically have been, you know, very elevated.
But our view is even on those, when you look underneath the hood, for example, you know, unemployment, employment rates are starting to come down a little bit. If you look at what employment levels are, they look slow, modest, modest slowdown. But underneath the hood, there's not a lot of dispersion in sectors that are growing. In fact, there's actually just a handful of sectors that are driving a lot of that growth. And that may be because they're still catching up to their pre, you know, pandemic levels. And when that levels out, you could see more weakness than what it appears on a surface level. So at a high level, we've got a lot of different data points we look at. We think a lot of them are indicating a slowdown.
And so what's interesting about that to us is when we kind of think about what are we looking for to hedge the portfolio, we often ask ourselves: What are we most concerned in the economy? And really, for the last two to three years, it's been we were concerned that inflation was too high, that would cause interest rates to ultimately be significantly higher, and that interest rate increase could be something that would cause a markdown in our equities by causing a contraction in the PE multiples. I would say, you know, while we still think there are some reasons over time that, you know, fiscally, we have some challenges, which could impact long-term rates.
What's been, I think, more on our minds now is looking at where the consumer is, looking at where the economy might be, and we're starting to think for the first time, really, about some of the downside risks to the economy and if there are any hedges that we should put in place. In addition to consumer slowdown, there are, you know, growing risks overall, whether it's geopolitical risk, that we've seen, or even just the fact that long-term rates earlier, kind of this fall, have increased so rapidly, and a bank failure in the U.K. about a year ago, some very publicized pension failures. So I think we're mindful of those things, and we think a lot of the risks going forward could be to the downside in terms of hedges.
So one of the interesting things is, really for the first time since the Fed started hiking rates in last March, we kind of have most interest rate levels, both the federal funds rate is at a high, the 2-year note, you know, over the last month was close to a high, 5-year note was close to a high. So people were expecting that interest rate policy would remain very, very tight. And our view is that inflation was starting to come back down, still above target, and the economy was starting to slow, but we're making a lot of progress. And then the question is: Do we have a soft landing or something worse? And so against that backdrop, I think that, you know, the shorter term interest rates have been quite elevated relative to their history since the Fed had started raising rates.
Our view is that it may be the case, ultimately, that where the interest rates end up a couple of years from now could be a fair amount lower than what the market's pricing. And so we saw an opportunity to do what we always try to do, which is, you know, be able to buy instruments which protect our downside risk, but also have asymmetric upside if the scenario that we're concerned or think might play out ultimately comes to fruition.
I think we've kind of started seeing that recently, on some new investments that we've made to really protect ourselves against the risk that there could be either, interest rates come down a little bit, because the Fed just doesn't need policy to be so restrictive as inflation comes down, or if there's some sort of accident or other risk that really poses, you know, outside external risk to the economy and the Fed immediately needs to lower rates. So I think our portfolio now is well protected in an asymmetric way from some of the risks that we're starting to see that could be developing in the economy, really over the last kind of four to six weeks.
Great. You know, what I would say here is macro type, these sort of asymmetric hedges we've, you know, I would say, thought about and executed very, very episodically over the history of the firm. What's changed, I would say, beginning with the COVID hedge and then is really a dedicated focus to this, what you might call asymmetric macro type investments. And myself, Feroz, not Feroz, excuse me, Bharath and Ryan are sort of our little mini macro team in the firm. And I would say Ryan and Bharath have done an outstanding job really covering the space. We find it very synergistic with our day job, right? We're looking for the best businesses in the world, these sort of durable growth companies. But having a view on the economy can help us.
You know, we find a really great business we wanna own, can actually help us think about the right moment in which to enter, start buying shares, because markets, particularly stock markets, tend to be very short term, kind of oriented and, and move on the basis of, of economic data. So we find a lot of value in tracking what's going on in the economy, finding interesting, occasional asymmetric investments, of which we're, I would say, finding a lot more today. You know, some of that's a function of a very volatile world that we're living in.
But we really like the. It's very comforting to own a portfolio of these very well-capitalized, dominant growth companies, and then to own these sort of interesting asymmetric hedges that protect us from unexpected events, at least the market doesn't expect to happen, or what you might call, in some cases, black swan, you know, type risks. I failed to discuss Fannie and Freddie. Really nothing of substance to report in terms of the business operations during the quarter. These are remarkable, amazing businesses. They remain in conservatorship. All of that being said, they're the two best performing equities in the portfolio. Fannie, Freddie Mac and Fannie Mae, up 77% and 105% total return year to date.
I think what that can be attributed to is one of the major holders other than us, I believe, exited their position almost regardless of the price over the course of last year, going into the end of last year, which drove the prices down significantly. And I think, you know, these are very interesting options on their exit from conservatorship. I think we are by far the largest holder. And we've had the view that if, you know, Trump or a Republican president is elected, it is, you know, likely that conservatorship will end, the path to exit conservatorship begun by Treasury Secretary Mnuchin, will, we think, be continued in a Republican administration. So it's a bit of a play on who the next...
or at least what party the next president is coming from. And I think that's somewhat reflected, you know, as one of the more interesting options on the election outcome. We think it's inevitable they emerge from conservatorship. They're continuing to recapitalize themselves by just generating profits. Anthony, what's the latest? You have the capital levels end of quarter?
Yeah. So as of the end of Q3, they held total capital of, on a combined basis, about $102 billion. That excludes the value of some deferred tax assets, which they can't count as capital. The capital ratio as a percent of adjusted total assets is about 1.2%. Under the current capital rule, they need to get to 3.8%, so it's incremental capital of about $215 billion. So a ways to go, but they're making progress every quarter.
Okay, great. Last but not least, just wanna talk about Pershing Square SPARC Holdings. As you know, we invested or we created a SPAC called Pershing Square Tontine Holdings in the middle of 2021. I'm sorry, 2020. And then we entered into a deal to acquire a large stake in Universal Music in July or so, or mid-2021. And then unfortunately, we were not able to close that transaction in the SPAC as we could not get through an SEC review in time to close. We purchased that stake directly at Pershing Square in the funds, plus a co-investment vehicle. And we told our investors in the SPAC that we would give them, if you will, a free option on our next deal.
Kind of thank you for being our partner. Unfortunately, couldn't get that transaction done. We began a process that took two years and $10 million and 15 amendments with the SEC. But finally, the registration statement for Pershing Square SPARC Holdings went effective, which means we can start looking for potential companies to acquire. We then distributed rights to all of the holders who held Pershing Square Holdings, sorry, Pershing Square Tontine Holdings, to the end of its life. And that rights distribution is sort of underway. Many people have already received the rights, but we've kind of immediately, once it went effective, we started looking for potential companies. Actually, our approach has been to let the kind of banks know that we exist.
We've had some conversations with the major private equity firms. The good news is, we've, I would say, had a very positive reception and both, the investment banks as well as a number of private equity firms, are starting to show us, potential transactions. The phone, if you will, is ringing on our end, differently from the SPAC world, where you had to sort of make a lot of phone calls on your own. When people express an interest, they're already open to the idea of a, transaction. The really interesting thing about, SPARC is we can basically effectively guarantee someone they're gonna go public. We can guarantee that they're gonna raise a minimum amount of capital, the capital that Pershing Square commits.
We'll commit that capital at a fixed price per share, a fixed valuation, and then we can raise the, you know, up to an additional unlimited amount of capital. No underwriting fees, pure common stock capital structure. The only differential security we own is a, what's called a contingent warrant, that we paid $36 million for. That's 20% out of the money compared to the price, the transaction price for the merger. And we only receive that 20% out of the money warrant in the event the rights that are held by the former Pershing Square Tontine holders get exercised. So if all the rights get exercised, we get our 5.1% warrant. We get a little under 5%, the balance goes to some advisor, directors.
If half of those rights get exercised, we'll get warrants on 2.5% of the company. But we have very good reason to believe that, as long as we do a good transaction, ideally a great transaction, which we expect to do, all those rights will get exercised because it's a friction-free way to go public. We're gonna be committing a large amount of capital on the same terms, same price as the other rights holders. We will have the benefit of, you know, true private company or private equity style due diligence, which will be a foreign basis for our investment.
And we happen to be in a market environment which is effectively impossible for a company to, you know, if you decide you want to go public today, it's an enormously uncertain environment. And so we own this entity, and we're the only game in town if you wanna go public and know for a certainty you're gonna go public. And there is no public announcement until such time that you know it's a certainty you're going public. You're raising a minimum amount of capital from us, which could be a substantial amount of capital, a decent sized IPO on its own, and the potential to raise additional equity with the only contingency just the SEC review of the what effectively would be an IPO-like prospectus.
That has to go effective, so we have to go through a comment period, as you do for any IPO. So if you own or an investor in or know of an interesting large, I would say it's minimum size is probably in the $5 billion enterprise value range for company, bigger is probably easier. Minimum equity check from would be $1.5 billion, and you that could either be primary or secondary shares. You give us a call at Pershing Square. Anyway, went over a few minutes from our normal one-hour call. We are grateful for your long-term investment, and we thank you very, very much. Have a nice day.
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