November 3, 2008

Dear Pershing Square Investor:

The Pershing Square funds’ outperformed the major market indexes for the third quarter of 2008
and for the year to date as set forth below:1
For the Quarter Year to Date
July 1 - September 30 January 1 - September 30 Since Inception
Pershing Square, L.P. 01/01/04 - 09/30/08
Gross Return 1.0% 3.5% 312.1%
Net of All Fees 0.5% 1.9% 204.0%

Pershing Square II, L.P. 01/01/05 - 09/30/08

Gross Return 2.5% 5.2% 186.8%
Net of All Fees 1.7% 3.2% 127.8%

Pershing Square International, Ltd. 01/01/05 - 09/30/08

Gross Return 1.0% 4.1% 158.6%
Net of All Fees 0.5% 2.4% 108.9%

Indexes (including dividend reinvestment) 01/01/04 - 09/30/08

S&P 500 Index -8.4% -19.3% 14.7%
NASDAQ Composite Index -8.6% -20.6% 8.1%
Russell 1000 Index -9.3% -19.5% 16.5%
Dow Jones Industrial Average -3.7% -16.6% 15.8%

Recent Events

These are extraordinary times particularly for active participants in the capital markets. While I
do not normally choose to write about macro and regulatory events, I thought it would be useful
for you to understand how we think about recent events and their impact on our portfolio.

We are currently witnessing the greatest deleveraging event in history. What began as a credit
bubble bursting has now spread to the equity markets as banks, investment banks, hedge funds,
structured products, mutual funds, pension funds, endowments and other leveraged and
unleveraged market participants have been forced to liquidate assets by their counterparties,
leverage providers, redeeming clients, and as a result of downgrades, other debts or other
commitments that need to be funded.
1
Past performance is not necessarily indicative of future results. Please see the additional disclaimers and notes to performance results at the end
of this letter.
These actions have led to forced and indiscriminate selling in security markets around the world,
which in turn has caused other investors to panic or simply to sell, to get out of the way of other
forced sellers.

As a fund which is generally substantially more long than short, we have also suffered large
mark-to-market declines in our long investments. Year to date, however, our performance has
substantially exceeded that of the broader equity markets, which at this writing have seen a more
than 34% decline. Our outperformance is largely due to large gains on our investments in Longs
Drugs and Wachovia Corporation as well as profits on our credit default swap and other short
exposures. Our market losses have been further mitigated because we operate unleveraged and
have substantial cash balances. Currently, we have cash and near-cash (Longs Drugs and
Wachovia/Wells Fargo long/short) equal to approximately 39% of our capital.

When, you might ask, will the selling end? While I don’t proclaim to be a market
prognosticator, I will make a few observations. Unlike the deleveraging that takes place when
banks and other financial institutions sell assets to meet regulatory requirements, which is
typically a longer term process, the forced deleveraging that is now taking place in the equity
markets is being implemented largely by the prime brokerage firms and margin account
managers at broker dealers around the world. Prime brokers are not known to be laggardly in
their approach to liquidating an account that no longer meets margin requirements. This is likely
to be even more true in the current environment. As such, it may be reasonable to conclude that
the forced liquidation that is now taking place may not be a prolonged process.

Security prices around the world have come down tremendously. In the larger capitalization
U.S. markets, which are the focus of our strategy, the reductions have been substantial. As of the
market close on October 31st, the S&P 500 is down 34.0%, year to date, and down by 37.5%
from its high on October 31, 2007; and this is after last week’s rally in which the S&P 500 rose
more than 12% from the lows. Unlike the bear market of 1973 and 1974, in which stocks
declined by 45% from the highs, this bear market was not preceded by the “Nifty 50” bubble in
which large capitalization growth stocks traded at extraordinary valuations. While valuations
were not cheap one year ago, in a long-term historical context, the market as a whole
(particularly if one were to exclude financials) was not particularly expensive either.

As such, in today’s market, we are finding extraordinary bargains, the kinds of opportunities that
are normally associated with market bottoms. While there are still weak and poorly capitalized
businesses that are likely still overvalued, the high quality, well-capitalized, larger capitalization
businesses which are the focus of our strategy look very cheap to us.

While this means that now is likely to be a much better time to be a buyer rather than a seller, it
does not mean that the market will not continue to decline, even substantially, from current
levels, particularly in the short term. In fact, because of tax-loss selling over the next 60 or so
days, there will likely be additional selling pressure. At some point, however, the forced selling
will come to an end. Large amounts of cash are sitting on the sidelines waiting to be deployed
when investors feel the coast is clear. In the event the market were to start to rise again, it would
not be a surprise to see institutional, retail, and hedge fund investors rapidly deploy capital so as
not to miss a, perhaps, explosive market rally.

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What does this all mean for Pershing Square? Despite the fact that we occasionally have an
opinion, we spend little time trying to outguess market prognosticators about the short-term
future of the markets or the economy for the purpose of deciding whether or not to invest. Since
we believe that short-term market and economic prognostication is largely a fool’s errand, we
invest according to a strategy that makes the need to rely on short-term market or economic
assessments largely irrelevant.

Our strategy is to seek to identify businesses and occasionally collections of assets which trade in
the public markets for which we can predict with a high degree of confidence their future cash
flows – not precisely, but within a reasonable band of outcomes. We seek to identify companies
which offer a high degree of predictability in their businesses and are relatively immune to
extrinsic factors like fluctuations in commodity prices, interest rates, and the economic cycle.
Often, we are not capable of predicting a business’ earnings power over an extended period of
time. These investments typically end up in the “Don’t Know” pile.

Because we cannot predict the economic cycles with precision, we look for businesses which are
capitalized to withstand difficult economic times or even the normal ups and downs of any
business. If we can find such a business and it trades at a deep discount to our estimate of fair
value, we have found a potential investment for the portfolio. Next we look for the factors that
have led to the business’ undervaluation, and judge – based on our assessment of the company’s
governance structure, management team, ownership, and other factors – whether we can
effectuate change in order to unlock value. When the price is right, the business is high quality,
the management is excellent, and there are no changes to be made, we are willing to make a
passive investment.

Our assessment of the short-term supply and demand for securities plays almost no role in our
determining whether to invest capital, long or short. If we believed that it was possible to
accurately predict short-term market or individual stock price movements and we had the
capability to do so ourselves, we might have a different approach. Below I quote Warren Buffett
in his 1994 Letter to shareholders where he perhaps says it best:

We will continue to ignore political and economic forecasts, which are an expensive distraction for many
investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the
Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the
Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8%
and 17.4%.

But, surprise - none of these blockbuster events made the slightest dent in Ben Graham's investment
principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices.
Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of
capital. Indeed, we have usually made our best purchases when apprehensions about some macro event
were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.

A different set of major shocks is sure to occur in the next 30 years. We will neither try to predict these nor
to profit from them. If we can identify businesses similar to those we have purchased in the past, external
surprises will have little effect on our long-term results…

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 Stock prices will continue to fluctuate – sometimes sharply – and the economy will have its ups and down.
Over time, however, we believe it is highly probable that the sort of businesses we own will continue to
increase in value at a satisfactory rate.

I believe we will look at the current U.S. stock market valuations for high quality mid and large
capitalization businesses as presenting perhaps the best investment opportunities of our lifetimes.

Portfolio Update

The last quarter and, in particular, the last few weeks have been an extraordinarily busy and
productive time for Pershing Square. During this time, we have made considerably more buy
and sell decisions than usual, taking advantage of the liquidity of our holdings, the enormous
volatility of the market, and new opportunities that have presented themselves in recent weeks.

In the third quarter, we disposed of our investments Cadbury PLC, Canadian Tire, and Austrian
Post at prices generally higher than current levels. We also disposed of the substantial majority
of our investment in Sears Holdings. We hold a residual interest in Sears (which represents
approximately 1.5% of fund capital) as its price declined to a level at which it made no sense to
continue to sell. We redeployed the capital from these sales into Wachovia Corporation, which I
will discuss further below, as well as a new investment in which we are in the process of
accumulating a position.

We sold these positions not because we thought they would be poor investments, but rather
because we believed that we could redeploy the capital in investments that offered a more
attractive risk-reward profile. As we have often stated, we are always willing to sell an existing
holding at a profit or a loss, if we can find a better use for the funds. For our taxable investors,
sales at a loss have the additional benefit of offsetting taxable gains.

Our sales were also motivated by the fact that three of the above companies – Sears, Canadian
Tire, and Austrian Post – each have a controlling shareholder. Because we believe that one of
our important competitive advantages is our ability to effectuate change at companies in our
portfolio, other than in special circumstances, we do not expect to make investments in
controlled companies in the future.

As a result of recent changes in the portfolio and strategic developments with respect to Longs
Drugs and Wachovia Corporation, our long portfolio is now comprised of higher quality, more
economically resilient businesses, companies for which we can be a catalyst to create value, and
a large amount of cash and soon-to-be cash that we can redeploy in new opportunities.

On the short side of the portfolio, we have been opportunistic in unwinding single-name credit
default swaps in cases where spreads have increased significantly, and have covered certain short
positions where stocks have declined substantially as a result of company-specific as well as
market-related events. We recently repurchased CDS on the investment grade credit index as
certain technical factors have made this investment/hedge attractive once again.

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 Longs Drugs

In last quarter’s letter, I alluded to a new position on which we expected to file a Schedule 13D
shortly. That position was Longs Drugs, a West Coast based drugstore retailer. While Longs’
was valued in the market as an underperforming drug store retailer, we valued the business based
on its component parts which included: (1) owned and long-term, below-market, leasehold real
estate, (2) RxAmerica, a rapidly growing pharmacy benefit manager (“PBM”) which generated
more than 20% of the company’s trailing operating income, and (3) an underperforming, low-
margin drugstore retailer. At our cost, we believed that Longs real estate value alone more than
covered our purchase price and we were getting the PBM and the retailer for less than free. We
estimated the fair market value of the company to be $85 to $95 per share assuming each of the
company’s assets was sold to the buyer who could pay the highest price.

Unlike many of our previous active investments, we concluded that Longs had reached the end
of its strategic life and should be sold to one of its larger competitors, namely CVS or
Walgreens. While it has been rare for us to buy a stake in the company with a view that a
strategic sale was the right exit opportunity, we have done so in the past. For example, our
original investment in Sears Roebuck & Company was predicated on a strategic outcome at the
company which was ultimately achieved when it was acquired by Kmart.

In the current weak (to use a euphemism) credit environment, we are particularly wary of
investments which are predicated on a sale. However, in this case, we were comforted by the
fact that Longs Drugs would be a must-have acquisition for CVS and Walgreens and that both
companies, which are many times the size of Longs, could easily finance the acquisition. Even
in the event a sale did not go through, we had purchased Longs at an attractive price which
offered a substantial margin of safety against a permanent loss of capital.

Within one week of our 13D filing, Longs announced that it had entered into a transaction to be
sold to CVS for $71.50 per share in a cash tender offer, an approximately 44% premium to our
average cost. While we were happy with the deal, we were somewhat unhappy with the
purchase price, particularly when we learned that the company had not run a competitive auction.
Thereafter, we hired the Blackstone Group with whom we have worked successfully in past
transactions in an attempt to achieve a better outcome for all shareholders.

We and Blackstone were successful in attracting a bid of $75 per share from Walgreens;
however, the greater regulatory risk and potential time delay in a transaction with Walgreens led
Longs’ board to reject the transaction in favor of the CVS offer. Walgreens subsequently
withdrew its offer citing market conditions, and a day later, the CEO of Walgreens stepped
down. We anticipate that we will be fully cashed out of our investment in Longs’ by the close of
trading today.

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 Wachovia Corporation

Wachovia is a good example of the types of opportunities that have emerged in the current
highly volatile environment. On Monday morning September 29th, Wachovia Corporation
announced that it had entered into an agreement in principle to sell its banking subsidiaries to
Citigroup. The transaction was structured in an unusual manner. In the deal, Citi was paying
$2.1 billion of its own stock to Wachovia Corporation (the publicly traded holding company for
the Wachovia banking subsidiaries) and assuming $53 billion of senior and subordinate holding
company debt in addition to the debt and other liabilities of the Wachovia banking subsidiaries.
The description of the transaction was limited to a several paragraph press release and a
conference call presentation by Citigroup that morning. Wachovia stock opened later Monday
afternoon at approximately $1.80 per share, down 82% from Friday’s close.

The market’s reaction to the Citi transaction was severe, particularly as the transaction was
announced only four days after Washington Mutual’s subsidiary banks were seized by regulators
and sold to J.P. Morgan. In that transaction, WaMu’s holding company filed for bankruptcy,
wiping out shareholders and materially impairing holding company creditors.

The Wachovia transaction, however, was structured in a materially different manner from the
WaMu seizure. It appears that the government, in order to protect bank holding company
bondholders from losing their investment and perhaps to avoid triggering a CDS credit event,
structured this deal so that Citi would assume the holding company debts. Interestingly, as part
of the Citi transaction the government provided an excess-of-loss guarantee on Wachovia
mortgages to protect Citi, which the government could likely have avoided if it had not required
Citi to assume $53 billion of holding company debt. It appears that the government had
concluded that additional bank holding company debt defaults would create systemic risk or
reduce the ability for bank holding companies to access this important source of capital, and
therefore chose to protect the Wachovia banking subsidiary and the holding company
bondholders.

The unusual structure of the transaction created an interesting investment opportunity. By

removing the holding company debts, Wachovia Corporation, now orphaned from its bank
subsidiaries was left with some very attractive assets. Based on our reading of the public filings,
conference call transcripts, and internet research over the course of Monday morning and
afternoon, we estimated that Wachovia was left with the following assets: approximately $2
billion or more of cash, $2.1 billion of Citigroup Stock, the Wachovia Securities wealth
management operation, A.G. Edwards (which had been purchased one year ago for
approximately $7 billion), Evergreen Asset Management (a mutual fund manager with $245
billion in assets under management), Wachovia Insurance Services, and other ancillary assets.

In light of the Citi debt assumption, the only material liability of Wachovia Corporation was $9.8
billion of non-cumulative, perpetual preferred stock. Because this preferred is both non-
cumulative and perpetual, Wachovia has no obligation to ever pay a dividend on these securities
making these liabilities effectively a free form of equity financing. These types of preferred
securities are typically structured to qualify as an attractive form of bank holding company
equity which gets favorable regulatory and rating agency treatment. Now that they were
orphaned by the transaction, at best these liabilities were worth less than 50 cents on the dollar.

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We also determined that the structure of the transaction would create a large tax asset for the
holding company. By selling the bank subsidiaries for less than their net tangible asset value, we
estimated that a $26 billion tax loss would be created. This tax loss could by carried back two
years enabling the holding company to recover approximately $7.5 billion of cash taxes that had
previously been paid.

Our conservative estimate of value of New Wachovia was in excess of $8 per share even
assuming that the preferred stock was redeemed or valued at par. We began buying the stock
shortly after it opened on Monday afternoon. My instructions to our traders Ramy Saad and
Erika Kreyssig were to buy every share we possibly could, including pre- and post-market
trading. They did a superb job.

Between Monday afternoon and late Thursday we acquired 178 million shares, or approximately
8.3% of the company, at an average price of $3.15. On Friday morning before the open, Wells
Fargo announced a definitive agreement to acquire Wachovia for 0.1991 shares of Wells
common stock, or more than $7.00 per share based on Friday’s trading price. We began selling
our Wachovia stock on Friday. We could not, however, hedge the Wells Fargo stock price
because the short selling ban was still in effect.

Citi, which thought it had an exclusive to complete the transaction with Wachovia, brought
litigation later that Friday to enjoin the Wells Fargo deal. By late the following week, Citi, likely
as a result of pressure from the government, had agreed to allow the Wells transaction to go
forward while retaining their lawsuit for damages against Wells Fargo.

As of this date, we have hedged 100% of our exposure to Wells Fargo shares, and have been
opportunistic in unwinding a substantial portion of the position. Assuming we waited until
transaction closure and taking into consideration Wachovia shares already sold, we have locked
in a 67% profit on this $560 million investment.

The government and all of the parties appear to be doing everything they can to consummate the
transaction promptly. The transaction received HSR approval in one day and the Treasury and
banking authority approvals over the following weekend. Wells has been issued 39% of the
voting stock of Wachovia and transaction closure is anticipated by year end. The transaction
requires the recently filed form S-4 to be approved by the SEC and the completion of the
mechanics of the shareholder meeting in order to be consummated. It is an excellent deal for
Wells Fargo and for Pershing Square.

A Mistake

While most of our long investments are comprised of great businesses or assets at fair prices with
a catalyst to create value, we occasionally are willing to invest a small amount of fund capital in
situations which offer the potential for a many-fold profit at the risk of a large or near-total loss
of capital invested. I typically call these investments mispriced options. Our CDS investments
fit this profile. While not all mispriced options will be profitable for the funds, I expect our
collective experience in these commitments to be quite favorable over time.

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We purchased stock in American International Group, Inc. (AIG) after the announcement of the
government bailout. In summary, we did so because at the price paid, we purchased AIG at a
substantial discount to book value, and we believed that book value was a conservative
estimation of the value of AIG’s underlying businesses net of derivative losses. We also
believed that there was the potential for a renegotiation of the government’s extremely harsh
financing commitment to AIG which provided for 80% dilution, enormous commitment fees,
and a high interest rate.

In particular, we believed that if AIG could pay back the government promptly through a
combination of asset sales, termination of certain CDS contracts at potentially less than fair
market value, and equity investments from existing and potentially other investors, that there was
a chance to renegotiate the 80% zero-strike warrant package to the government. If the warrant
dilution could be mitigated, it would be possible for AIG shareholders to make a many-fold
return on investment. Initially, we believed that the potential for return outweighed the risk of
loss. Because of the inherent leverage of AIG, the risk of a permanent loss of capital on this
investment was material. As such, we limited the size of our investment to 2.5% of fund capital.

After acquiring our position, we met with other large holders, policymakers and contacted
Berkshire Hathaway and other potential investors about a proposed recapitalization of AIG.
Unfortunately, the collection of shareholders that were attempting to restructure the government
deal was exceedingly disorganized and some large holders were conflicted by a desire to buy
certain assets from the company.

We ultimately concluded that the return on invested brain damage from this investment exceeded
the probability-weighted opportunity for profit, and we decided to fold the tent. We sold our
stock and incurred a modest loss to the funds.

Our Business Model

In order to achieve long-term success, Pershing Square must make good investments and operate
with a robust business model. With much media attention focused on hedge fund failures, I
thought it would be worthwhile reviewing the characteristics of our business model and
explaining why we will withstand industry-specific and overall environmental threats to the
investment and hedge fund businesses. The principle factors which contribute to the robustness
of our business model are as follows:

• Our portfolio management approach is inherently low risk (where risk is defined as the
probability of a permanent loss of capital), particularly when compared with other hedge
fund business models. An important distinguishing factor about Pershing Square
compared to most other hedge funds is that we do not generally use margin leverage in
our investment strategy. The lawyers prefer that I put in the word “generally” to give us
the flexibility to use margin to manage short-term capital flows, but, to-date, we have not
used any but an immaterial amount of margin, and only for a brief period of time, and we

8
 have no intention of changing this approach.2

• We generally invest in higher quality businesses with dominant and defensive market
positions that generate predictable free cash flow streams and that have modestly or
negatively leveraged (cash in excess of debt) balance sheets. We buy these businesses at
deep discounts to our estimate of intrinsic value giving us a margin of safety against a
permanent impairment of capital. I say “generally” again here because we do make
exceptions in certain limited circumstances; that is, we may buy a more leveraged or
lower quality business if we believe the price paid sufficiently discounts the risk.

• We often seek investments where we can effectuate positive change to catalyze the
realization of value. This serves to accelerate the recognition of value, helps us avoid
“dead money” situations, and protects us somewhat from managerial actions which can
destroy value.

• We are diversified to an adequate but not excessive extent. This has further benefits for
risk and operational management which I will discuss below.

• There is an inherent balance to our long/short investment approach. Historically, when

equity or credit markets weaken, our shorts become more valuable, and occasionally
materially more valuable, offsetting somewhat the mark-to-market declines in our long
portfolio. If we choose to unwind these short positions during market downturns, we can
generate capital to invest in a now less expensive market. These short investments
generally stand on their own in that they do not typically require a stock market or credit
market decline to be successful. That said, they have served as a useful hedging tool
during periods of dramatic market declines.

• We have been paranoid about counterparty risk since the inception of the firm. First, we
trade with counterparties which we believe to be creditworthy. Second, we have
negotiated ISDA agreements which provide us with daily mark-to-market cash and U.S.
Treasurys equal to the previous day’s market value of our derivative contracts. In cases
where we are required to post initial margin and therefore have some exposure beyond
the market value of our derivative contracts, we have typically purchased CDS on our
counterparties to further mitigate counterparty risk.3 While our approach to counterparty
risk has protected us from any counterparty losses to date, please be forewarned there is
no perfect approach to avoiding counterparty risk.

2
We have, however, used a modest amount of margin leverage in our co-investment vehicles. We do so in our co-
investment vehicles explicitly because these are single stock activist investment vehicles for which we believe a
small amount of margin leverage can be appropriate, and investors size their investment appropriately in light of
levered single-stock approach of these funds. For the most part, however, in our co-investment vehicles and, in
particular, Pershing Square IV, we have largely relied on the use of non-recourse leverage in the form of long-dated
stock options to limit the risk of getting a margin call.
3
Our co-investment vehicles like Pershing Square IV cannot generally get as favorable collateral terms as our main
funds so we use credit default swaps as a counterparty hedging mechanism to a greater extent for these vehicles.

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Our simple approach to investing also allows us to avoid complicated approaches to risk
management. Our investment strategy does not require us to open offices all over the globe. As
such, we don’t need traders working around the clock. We can go to sleep at night and sleep.
Our weekends are largely our own (Ok. I admit it. I am writing this letter in the office on
Sunday.) Our risk management approach is to: (1) put our eggs in a few very sturdy baskets,
(2) store those baskets in very safe places where they cannot be taken away from us and sold at
precisely the wrong time due to margin calls, and (3) to know and track those baskets and their
contents very carefully. We call this approach the sleep-at-night approach to risk management.
If I can’t, we won’t.

I am extremely skeptical of more automated, algorithmic, Value at Risk, and other business
school sanctioned approaches to risk management. None of these approaches saved Lehman,
Bear Stearns, Fannie, Freddie, AIG, WaMu, Wachovia or any of the other institutions that used
these and other ostensibly more sophisticated risk management strategies.

Our investment strategy and approach to counterparty risk serves to limit the risks inherent in our
individual investment selections, our counterparty risk, and the portfolio as a whole. There are,
however, other important risks to our business, principally operational, reputational, and
regulatory risk.

Operational Risk

Our investment approach is largely straightforward and relatively simple. This, coupled with the
concentrated nature of the portfolio, allows us to run our business with a limited number of
personnel. We have five senior investment professionals including myself. Shane Dinneen, still
officially a junior investment professional, is fast earning his stripes as an eventual senior
member of the team.

We could manage our portfolio with less human talent than we have. For members of the
investment team reading this letter, don’t be concerned because I have no intention of shrinking
the team, but I make the point nonetheless. Simplicity in our investment approach allows for a
simpler back office and a smaller overall staff. We have 31 people total at Pershing Square. It
could be fewer, but one of Tim Barefield’s (our COO) important risk management principles
provides for back-up talent for every role in the firm.

Our Noah’s Ark approach to personnel duplication makes for a good analogy for the ship we
have designed. We have worked hard to build a business that can withstand the Great Deluge,
and this goes beyond counterparty risk. For example, it is not yet clear this year whether there
will be any incentive allocation to be shared at the firm. That said, whether or not the funds’
finish the year in the black, it will be extremely unlikely that a member of our team leaves by
choice, and I have no intentions of letting anyone go. This is due to several factors:

• Pershing Square’s large amount of assets under management per investment principal and
per overall employee are important ratios to consider when evaluating the sustainability
of Pershing Square or any hedge fund for that matter. The economics of a high Asset per
Employee ratio attract and allow for the retention of top talent. Our team can be

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 compensated appropriately even in times of short-term underperformance. Hedge funds
which barely (or don’t even) cover their costs with management fees are inherently
unstable enterprises because in an unprofitable year they cannot pay their people and are
likely to lose their most talented professionals to other firms.

• Pershing Square is a nice place to work. While this sounds like an obvious approach to
retaining talent, many and perhaps most hedge funds don’t fit this description. We are
big believers in taking care of our team not just financially and with attractive benefits,
and we have those in spades. We consider every employee at the firm a member of our
extended family, and we treat and care for them appropriately. We do this not for
business reasons, but it has important long-term business benefits.

• Pershing Square is an extremely exciting place to work. We believe our work creates
value beyond the profits we historically have generated for our investors. Our approach
to value creation at businesses has created enormous value for investors who happened to
own companies to which we contributed to the creation of value. Similarly, investors and
counterparties who listened to our views on the bond insurers, Fannie Mae and Freddie
Mac, etc. saved themselves from large losses or perhaps profited by short sales. The fact
that our work creates value for the markets as a whole provides additional motivation to
the team.

Bottom line, we are built to last, and we will continue to work hard to deserve your continued
support.

Reputational and Regulatory Risk

Reputational risk is one of the key risk factors for a business that is subject to a high degree of
regulatory scrutiny in an industry that seems to generate considerable public scorn. Our
approach to assessing reputational risk is to apply the New York Times test. We ask ourselves
whether we would be comfortable having our family and friends read a front page New York
Times story about actions taken by Pershing Square written by a knowledgeable and intelligent
reporter who has access to all of the facts. If we are comfortable with such an article being read
by our close friends, our families, and the public at large, our action passes the test. If not, we
reconsider our potential action.

More recently, I have decided to participate in the public dialogue about hedge funds, agreeing to
occasional appearances on television or otherwise talking to the press, speaking at industry
events, meeting with Congressman, Senators, and other officials. I do so not for any desire for
public recognition, but rather because I believe that it is important for the hedge fund industry to
come out of the shadows and defend the importance of our work. If we and others (that includes
hedge fund investors in addition to the managers) don’t do so, the industry, in my view, is at
even greater risk of further regulatory, tax, and other legal changes that will materially harm our
business models and industry.

One does not need to look further than the recent short selling ban which was an extremely ill-
advised regulatory change that contributed to market turmoil and the recent market decline. By

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imposing a ban on an investment approach that has been legal for generations with no warning or
opportunity for public debate, the SEC caused a short squeeze and subsequent market disarray
that wiped out large amounts of hedge fund capital, caused forced selling as long/short, market
neutral, quantitative, and other managers had to sell long positions to rebalance their books.
More significantly, it cost the U.S. capital markets its highly respected position as an exemplar
free marketplace where the rule of law prevailed. It also contributed to hedge fund
underperformance, thereby leading to investor redemptions, further reducing industry capital.

I believe the short selling ban also contributed to continued market declines since the ban was
put into place. In that hedge funds are among the most opportunistic investors in the world,
destroying large amounts of hedge fund capital likely contributed to market declines because of a
dearth of opportunistic hedge fund buyers who would normally step in and purchase the
compelling values created by falling markets.

Even though the restriction on short selling has been eliminated, the longer-term consequences of
populist regulatory actions will continue to be felt by the markets and its participants until such
time as our securities regulator makes clear that the U.S. will never again change the rules of the
game mid play.

Specifically, the short selling ban was harmful to Pershing Square because we lost the
opportunity to lock in even greater gains on our Wachovia investment by not initially being able
to hedge our Wells Fargo exposure. I estimate this loss at approximately 3% to 4% of fund
performance. This loss was somewhat offset by our ability to sell certain investments into the
short squeeze at higher than anticipated prices. We were otherwise not materially affected
because short selling equities has not been a material part of our investment program, although
we did cover one large equity short at a loss which is now trading at a more than 40% lower
price, another 4% to 5% potential loss of profit assuming we had not covered at higher prices.

Hedge fund investors – the pension funds, state plans, charitable, healthcare and other
institutions and the individuals who invest in hedge funds – are a much more appealing
constituency to defend the industry than the managers themselves. I encourage you to consider
becoming part of the public debate on the industry. We collectively need one another’s support.

Investor Risk

The stability of a hedge fund’s capital base is critical to its long-term success. We have
endeavored to attract high quality investors who have a deep understanding of our investment
approach. We do our best to continually inform you of the progress of our holdings and
business, and remind you of the inherently volatile nature of our concentrated strategy. Our
investment strategy is also transparent. The nature of our approach requires most of our holdings
to eventually be disclosed publicly. As such, it is easier for you to understand how we have
made and lost money over the years, and to assess our ability to replicate our historic strategy
and performance.

Over the last nearly five years, we have delivered very little of the volatility that investors are
concerned about, that is, downward volatility. As such and with strong historical performance,

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we have not “tested” our investor base.

We hope never to “test” our investor base. While we have considered a longer-term lock-up
structure, we chose not to modify our existing liquidity terms because we did not want our terms
to be overly burdensome to investors and to present a hurdle to the reinvestment of capital,
particularly during a period of temporary underperformance. Year to date, we have had minimal
redemptions. New commitments have exceeded our redemption requests by approximately 3 to
1. We have a pipeline of new prospects that are in the process of completing their due diligence.
That said, the continuity of our investor base is a long-term success factor for the funds and for
this we are relying on you.

Is Now a Good Time to Invest in Pershing Square?

I have never before suggested that one time or another would be a better time to invest in
Pershing Square. I am going to take the risk of doing so now. At the risk of sounding
promotional, I believe that now is perhaps the best time in our history to increase your
investment in Pershing Square. A few thoughts to consider:

When one invests in Pershing Square today, with respect to our current portfolio and potential
opportunities in the market, the spread between price and value is the widest it has been since the
inception of Pershing Square and likely over the last 30 or more years in our opinion.
Investments like Target Corporation which we purchased initially in the mid to high $50s per
share now sell at approximately $40 per share and there has been no meaningful diminution in
the per-share value of Target since our initial purchase 18 months ago. In fact, the probability of
Target and other Pershing Square holdings implementing a value-creating transaction are higher
today than before because of management and shareholder frustration with current share price
levels. Consider that Target management options are nearly all out of the money, and a
meaningful number of vested options will soon likely expire worthless if there is no change in
the status quo.

An additional investment in Pershing Square today also purchases a pro rata interest in our cash
and near-cash investments. While purchasing cash indirectly is not an inherently attractive
proposition, we are currently analyzing a number of long and short investments that appear
extremely interesting, and subject to completion of our due diligence, may become large new
commitments. While for the first nearly five years of our business, we found only a limited
number of interesting opportunities, albeit a sufficient number to generate attractive returns, we
are now presented with tens of intriguing situations that are worthy of careful review. One could
reasonably conclude that the greater spread between price and value and a wider selection of
attractively priced opportunities will lead to higher rates of return on these commitments than
during previous periods of greater market efficiency which characterized the first four years of
the funds’ existence.

While many have portrayed the current environment as a highly risky time to invest, these
individuals are likely confusing risk with volatility. We believe risk should be determined based
on the probability that an investor will incur a permanent loss of capital. As market values have
declined substantially, this risk has actually diminished rather than increased. Risk is high now

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for the leveraged short-term investor, but actually much lower for the unleveraged, long-term
investor in high quality, mid and large capitalization, modestly leveraged businesses.

Unlike levered hedge funds whose risk increases as NAV declines, Pershing Square’s risk has
declined with the recent decline in the value of our portfolio. Why? This is due to the fact that a
leveraged manager’s probability of being sold out by its prime broker increases as its portfolio’s
equity declines. Many hedge fund strategies are confidence and credit sensitive because they
require continued access to low-cost financing. Recent declines may also require leveraged
hedge funds to post additional collateral on trades which did not require an initial down payment.
Because our investment strategy does not require leverage to operate, recent increases in
financing costs and reductions in leverage afforded to hedge funds have no impact on our current
or future prospects. In our case, the margin of safety of our investments actually increases, the
greater the decline in our holdings’ share prices. We, of course, also have no margin leverage
creating the risk of a forced sale. So yes, I believe now is a good time.

Pershing Square Advisory Board Addition

Matt Paull joined the Pershing Square Advisory Board on September 1st. For some of you,
Matt’s name may be familiar for he was formerly the CFO of McDonald’s Corporation before
his retirement earlier this year. I have known Matt for about 10 years, and interacted with him
intensively in mid to late 2005 and in early 2006 when Pershing was advocating for change at
McDonald’s.

As CFO of McDonald’s, Matt was one of the most highly regarded public company CFOs in the
country. Shareholders were the beneficiaries of superb capital allocation and strong share price
appreciation during his tenure as CFO. I consider it one of Pershing Square’s greatest
accomplishments that we were able to garner Matt’s respect and friendship even though there
were occasionally contentious moments during our engagement with McDonald’s.

Matt has already proved enormously helpful in our interactions with Target Corporation. As a
former CFO, particularly one that has been on the other side of one of Pershing Square’s most
significant engagements, Matt brings a uniquely valuable perspective to the firm and to the
management teams of our portfolio companies.

In addition to his Pershing Square advisory role, Matt is currently serving on the business school
faculty of University of San Diego.

Organizational Update

We completed our move to the 42nd floor of 888 Seventh Avenue in August. The second time
round, we really got it right. The space is beautiful, promotes communication, and is
extraordinarily well organized and efficient.

After the move, we made several additions to the team. Courtney Leonardo and David Robinson
joined the IR team in administrative roles, roles which had previously been filled by temporary
employees. Alex Song joined us from Goldman Sachs as the newest junior member of the

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investment team. Amy Stern joined the Finance and Accounting team from Tiger Global, and
will focus her efforts on management company accounting. Amy is also attending the NYU
Stern School of Business where she is working on a business school degree. Jill Skousen
replaced Whitney Stodtmeister as the administrative assistant for the investment team after
Whitney moved to Santa Barbara. Helena Tunner joined us to work with Dianna Baitinger at
front desk reception.

On other news, Alex Kaufmann of our IR team will be attending Columbia University’s
Executive MBA program on Fridays and weekends. We are big believers in continuing
education for our personnel.

As always, we are extremely appreciative of your support, particularly during uncertain times. If
there are any questions I have failed to answer above, please call Doreen, Alex, Ashley or
myself.

Sincerely,

William A. Ackman

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 Additional Disclaimers and Notes to Performance Results

The performance results shown on the first page of this letter are presented on a net-of-fees basis
and reflect the deduction of, among other things: management fees, brokerage commissions,
administrative expenses, and accrued performance allocation, if any. Net performance includes
the reinvestment of all dividends, interest, and capital gains; it assumes an investor that has been
in the funds since their respective inception dates and participated in any “new issues.”
Depending on the timing of a specific investment and participation in “new issues,” net
performance for an individual investor may vary from the net performance as stated herein.
Performance data for 2008 is estimated and unaudited.

The inception date for Pershing Square, L.P. is January 1, 2004. The inception date for Pershing
Square II, L.P. and Pershing Square International Ltd. is January 1, 2005. The performance data
presented on the first page of this letter for the market indices under “since inception” is
calculated from January 1, 2004.

The market indices shown on the first page of this letter have been selected for purposes of
comparing the performance of an investment in the Pershing Square funds with certain well-
known, broad-based equity benchmarks. The statistical data regarding the indices has been
obtained from Bloomberg and the returns are calculated assuming all dividends are reinvested.
The indices are not subject to any of the fees or expenses to which the funds are subject. The
funds are not restricted to investing in those securities which comprise any of these indices, their
performance may or may not correlate to any of these indices and it should not be considered a
proxy for any of these indices.

Past performance is not necessarily indicative of future results. All investments involve risk
including the loss of principal. This letter is confidential and may not be distributed without the
express written consent of Pershing Square Capital Management, L.P. and does not constitute an
offer to sell or the solicitation of an offer to purchase any security or investment product. Any
such offer or solicitation may only be made by means of delivery of an approved confidential
private offering memorandum.

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