HBC TAKE-PRIVATE BID SIGNIFICANTLY UNDERVALUED AND OPPORTUNISTIC June 19, 2019 DISCLAIMER The author of this report has a long position in Hudson’s Bay Company (TSX:HBC). Positions can change at any time without notice. By reading this report you agree to the terms of this disclaimer. This report, provided by Perceptive Investment Research Ltd. (“PIRL”), represents the opinions of PIRL. The information contained herein is provided for general informational purposes only and does not take into account the specific risk/return objectives, suitability, or other important characteristics of your specific investment situation. Accordingly, this information does not constitute individually tailored advice on the merits of any investment decision or related matters. Some securities mentioned herein may not be suitable for all investors. You should seek guidance from professional advisors in relation to securities transactions. 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PIRL and its Officers, Directors, Employees, or Agents (collectively, the “Parties”) cannot be held responsible for any errors, omissions, or inaccuracies in this report. The Parties may have a financial interest in the securities referenced herein. These Parties will not report when a position is initiated, closed or altered. Positions can change at any time without notice. 2 OVERVIEW • HBC recently received a proposal from a group of HBC shareholders for the privatization of the company at a price of C$9.45 per share, payable in cash. • In our opinion, this proposal significantly undervalues HBC and is highly opportunistic: • We believe the offer meaningfully undervalues HBC based on our view that the assets that are readily visible [proceeds from the sale of European business, the real estate joint ventures (“JV’s”), the Saks Flagship store, the stake in the Lord & Taylor New York Flagship, and the retail business] alone are worth more than the offer price. Moreover, this valuation fails to take into account the possibility of significant value embedded – but largely hidden – in HBC’s leased properties outside of the JV’s. • The take-private bid also fails to consider the possibility of selling the entire retail operations to a strategic acquirer – an action that we believe is possible given our expectation that an acquirer would benefit from significant synergies through consolidation of technology, logistics, advertising & marketing, any other infrastructure, as well as the possibility of store consolidation. • The take private offer comes at a time when HBC is suffering from depressed earnings due to (i) self described merchandising missteps at Hudson’s Bay while trying to cater to past Sear’s customers(see recent conference call transcripts); and (ii) construction related headwinds at Saks Fifth Avenue’s flagship New York store. We expect earnings to improve through 2019 (which corresponds with Management’s view) as the company benefits from improved merchandising, less construction related disruptions, and the commencement of operations of the Queen Street WeWork location. In addition, initiatives at Lord & Taylor could drive earnings improvement. • Notably, the proposing shareholders expressly reject any alternative proposal, writing in their letter to the Board: Finally, we would like to take this opportunity to confirm that, while we are interested in continuing to pursue the privatization transaction that we have outlined to you, none of the Continuing Shareholders are, in their capacity as shareholders, interested at this time in an alternative transaction which would result in the sale of our interest in HBC or the acquisition by a third party of HBC or any of its material assets, and that we are not supportive of any alternative distribution to shareholders of the proceeds from the European transaction. • The proposing shareholder group includes individuals and entities who are very familiar with the company, including Richard Baker (Governor and Executive Chairman of HBC); Rhône Capital L.L.C.; WeWork Property Advisors; Hanover Investments (Luxembourg) S.A.; and Abrams Capital Management, L.P., These shareholders are refusing to even consider an alternative to their proposal! Moreover, they expressly refuse to sell their interest in HBC but are asking minority shareholders to do just that. In our view, this is because they understand the proposal meaningfully undervalues HBC. • We believe HBC should consider a Dutch Auction buyback that would enable existing shareholders to tender their shares if they wish while allowing those who wish to remain shareholders the opportunity to do so. However, we acknowledge the possibility the company will pursue this route is low given the wording in their letter to the Board. 3 HBC’S ASSET OVERVIEW • We estimate HBC’s assets including its owned real estate (comprised of its JV’s, Saks Fifth Avenue flagship store and stake in the Lord & Taylor flagship location, proceeds from the sale of its European assets, and related retail operations) are worth meaningfully more than the current C$9.45 bid, even while utilizing assumptions that are significantly more conservative than the third-party valuations/transactions that have previously underpinned the previous real estate values provided by HBC in past investor presentations (such as http://investor.hbc.com/static-files/911a35cc-48ce-4fa3-a82e-29fffebdef9a; our estimate has been adjusted for dispositions). We acknowledge that the liabilities associated with the Netherlands business are difficult to quantify without additional information; however, our estimate assumes a large charge to restructure these operations in an attempt to achieve EBITDA break-even. • Importantly, our estimate does not incorporate any value for HBC’s leased properties outside of the JV’s, many of which are in truly exceptional transit-connected locations which can benefit from residential densification. Previous Management presentations also exclude any value for these leased locations. • As of the date of the date of HBC’s fiscal 2017 Annual Information Form, the company’s average years of lease control for its leased and ground leased properties was 65 years and 45 years for Hudson’s Bay and Saks Fifth Avenue, respectively. This includes JV leases. Given their long tenure, these leases effectively represent quassi-ownership claims. • We believe HBC’s exceptional real estate assets that are outside of the JV’s provide it with considerable leeway to repurpose, right-size and/or monetize its store base. • The amendment to HBC’s Oakridge Centre lease highlights the tremendous value embedded in some of these leased store locations. HBC received C$151.5 million plus C$21 million in store outfitting incentives in exchange for, among other things, agreeing to relocate the store to a new location within the redeveloped Oakridge Centre. Importantly – like so many shopping mall redevelopment projects – the Oakridge Centre redevelopment will see an influx of residential buildings, leading to increased population density and hence more potential shoppers. • The value of HBC’s leased real estate outside of the JV’s is difficult for an outsider to quantify because it is dependent on (i) the degree to which the property owner desires to recapture the space; and (ii) the duration and terms of the leases on individual properties. These attributes are not generally available to outsiders. However, while difficult to quantify, we believe these leases have very significant value – which is not factored into the current proposal, in our view. • On the following slides, we provide additional information on some of these leased locations outside of the JV’s. 4 HUDSON’S BAY OAKRIDGE CENTRE, VANCOUVER BC • Oakridge Centre is a large, (28.4 acre) transit-connected mall in close proximity to downtown Vancouver (approximately 20 minute transit ride). • The mall was purchased by QuadReal Property Group from Ivanhoe Cambridge in a transaction that closed in June 2017.(1) • Ivanhoe Cambridge planned to redevelop the property as per the illustration on the next slide; however, the unexpected discovery of a shallow aquifer necessitated project revisions(1). • QuadReal has announced that it has chosen a development partner and intends to move forward on a project that retains many of the features of the 2014 plan including a nine-acre public park, 70,000-square-foot civic centre with a new library, daycare, seniors centre, and community centre, and 290 affordable homes(2). • On October 9, 2018 HBC announced that it entered into an agreement to amend the lease at Oakridge. HBC received C$151.5 million plus C$21 million in store outfitting incentives in exchange for, among other things, agreeing to relocate the store to a new location within the redeveloped