Annual Report & Accounts 2017

Welcome, 2017 was a record year as we continued to transform the Group in line with our strategy, whilst delivering a strong operational performance across the business.

We are proud of the significant progress we have made in achieving our key business priorities of driving growth through expansion of our portfolio in the CEE region whilst maintaining operational efficiency and a high EBITDA margin. We have also made headway in improving the guest experience, increasing employee engagement and delivering shareholder value.

Financial performance We are delighted to report a strong financial performance with record results. This performance was underpinned by the corporate activities and investments undertaken during the year, including the expansion of the Group’s portfolio outside of Croatia and the investment in refurbishment projects at our properties in Croatia ahead of the 2017 summer season.

Total reported revenue increased by 64.5% to HRK 717.2 million (2016: HRK 435.9 million), as the Group benefited from the first-time consolidation of results from our German and Hungarian operations and significant organic growth across our Croatian operations.

On a like-for-like basis, total revenue increased by 8.5% to HRK 669.6 million (2016: HRK 616.9 million).

Reported EBITDA increased by 61.3% to HRK 212.9 million (2016: HRK 132.0 million). This HRK 80.9 million improvement was primarily driven by the first-time consolidation of our German and Hungarian operations, as well as excellent trading throughout the 2017 season in Croatia.

Croatia’s tourism industry experienced a marked increase in visitors in 2017 compared with 2016, which generated considerable organic growth for our operations in Croatia. Year-on-year tourism in Croatia has increased by 10% and now accounts for approximately 24.0% of Croatian GDP. The number of visitors to the Istrian region is now estimated to be approximately a third of all tourism in Croatia. [Source: eVisitor] This growth has been supported by an increased number of airlines flying into Pula International Airport, with 16 carriers now offering direct flights from airports such as London Heathrow, Milan and Basel which are key target market areas for Croatia. In addition, many festivals such as the Pula Film Festival and the International Pula Bridge Festival, together with sporting events such as the Ironman 70.3 competition and the Arena Cup international football tournament, also attracted visitors to the region.

The strong financial results represent the seventh year of consecutive EBITDA and revenue growth.

Our strategy We have made significant strategic progress during the year through corporate activity and investments to position the Group as a leading hospitality company in the CEE region.

We have continued to renovate and develop our existing portfolio of properties; capitalise on the synergies between the Group’s operations in Croatia, Germany and Hungary; and pursue expansion through potential acquisitions and partnerships. We have also remained focused on improving and enhancing service quality and the overall guest experience through employee and technology initiatives, such as smartphone applications and team member and guest engagement and feedback.

The progress achieved in 2017 reflects our focus and commitment to the creation and realisation of shareholder value.

Continued transformation 2017 was a busy year of corporate activity:

• In February 2017, we completed the acquisition of the freehold interests of art’otel cologne and art’otel berlin kudamm in Germany.
• The Company was renamed Arena Hospitality Group d.d. in March 2017 to reflect and support our international operations and expansion ambitions.
• We successfully completed the first international public offering by a Croatian tourism company in June 2017. The public offering of 1,854,971 new shares, at a price of HRK 425 per new share, raised gross proceeds of HRK 788.4 million. The public offering increased the number of shares in issue by 56.7% to 5,128,721, of which approximately 20% were subscribed for by international investors.

The new capital raised will enable us to accelerate the Group’s investment plans aimed at upgrading existing properties and realising further growth through the expansion of the portfolio within the upscale, upper upscale and lifestyle markets in the CEE region.

The Management Board is actively looking for opportunities in key markets in the CEE region.Our flexible business model enables us to consider a range of investment opportunities, including expansion through asset-light projects where the Group enters into a long-term management contract; acquisition by way of joint venture and an associated management contract; and full ownership and management of a property.

Part of the proceeds from the public offering were used to acquire the remaining 12% interest in the German and Hungarian operations of PPHE Hotel Group held in Sugarhill for a consideration of €8.33 million. The acquisition added seven owned, co-owned and/or leased upscale hotels and one managed hotel (branded either Park Plaza® or art’otel®) to our portfolio alongside the exclusive right to operate and develop new hotels in 18 countries in the CEE region under the Park Plaza® brand.

Our expansion into Germany and Hungary has transformed the Group from a highly seasonal Croatian domestic operator to a dynamic international business which operates all year round.

In December 2017, the Group successfully refinanced bank loans of €64.0 million on more favourable terms with Zagrebačka banka d.d. (‘Zaba’), reducing the interest expense by an anticipated HRK 13.0 million per annum.

Ongoing investment in our portfolio Ahead of the 2017 summer season, we invested HRK 52.2 million into upgrading our properties to further improve the quality of our offering and support our market position in Pula and Medulin in Croatia. Projects included accommodation improvements, the addition of facilities at our sports oriented hotel, Park Plaza Belvedere Medulin, as well as improved services and facilities at a number of campsites.

In addition, we switched our energy source at our centralised laundry site from oil to gas, which is more environmentally friendly and cost-efficient.

Sales and marketing Sales and marketing are key areas of focus. Activities are aimed at increasing revenues and profits, enhancing customer loyalty, driving brand recognition, expanding media awareness and cultivating strong partner relationships with key customers.

As well as a dedicated in-house team located in Croatia and Germany which provides communications and marketing support, the Group benefits from the sales and marketing services provided by its largest shareholder, PPHE Hotel Group. This partnership includes access to Carlson Hotels’ central reservation system, a global reservation and distribution system, and its various loyalty programmes which have a combined membership of more than 19 million customers worldwide. Alongside this, the Group also has its own loyalty programme in place for guests at its campsites.

Innovation and technology Innovation is at the heart of our activity and ensures our offering continues to stand out. Throughout 2017, the Group has continued to invest in new technology and digital innovations to ensure our facilities and operations continue to delight leisure and business travellers.

In anticipation of the recent summer season in Croatia, we rolled out mobile applications and travel devices which enhanced our guests’ experiences during their stay and improved operational efficiencies at our hotels and campsites:

• A complimentary smartphone specifically designed for hotel guests was piloted at all Park Plaza branded properties in Croatia during 2017. Guests were able to use this smartphone both within and outside the properties free of charge during their stay. It provided unlimited local and international calls, unlimited internet access, exclusive brand promotions and pre-set access to hotel services and room-to-room calls. Since the trial commenced, more than 900 hours of calls have been logged demonstrating high interest and usage. Guest feedback was positive and we plan to deploy the smartphone in all our hotels in Germany and Hungary during 2018.
• A bespoke mobile application (‘app‘) was developed for Park Plaza branded properties in Croatia. The smartphone app is used by both guests and hotel teams and provides an easy-to-use platform for guests to access services and even to use their mobile phone as a digital room key.
• An Arenaturist mobile app was developed for our campsites and non-branded properties. Key features for guests include ‘Find my pitch’ navigation, a tool to book excursions and notification of events and promotions driving ancillary revenue. This will be renamed as the ‘Arena mobile application’ in 2018.
• Hotel Operations app (‘Facility for hotels’) mobile app is an easy and intuitive app developed for hotel team members to transform working practices and improve productivity. By using a smartphone, team members can quickly and efficiently report and log issues, which are viewed by facility managers in real-time.

Guest experience We are proud of the high levels of guest satisfaction scores achieved across our properties, reflecting our investment in our product offering and our commitment to a service delivery above and beyond expectation.

Collective satisfaction scores at our branded operations in Croatia, Germany and Hungary improved by 1% year on year, with our Park Plaza operations in Croatia once again among the best performing Park Plaza branded hotels in Europe. Overall scores for our non-branded hotels, self-catering holiday apartment complexes and campsites have been maintained across the portfolio.

Investment in our people Our people are at the heart of our business and we remain focused on ensuring that they are fully supported, engaged, developed and motivated so we can consistently deliver a high service standard and memorable guest experience.

All team members are trained to deliver the highest levels of service. We are committed to attracting and nurturing talent within the business which supports the development of all our teams whilst creating the next generation of leaders.

During the year, a total of 253 training programmes were held and we trained a total of 2,278 team members.

PPHE Hotel Group’s Talent Management Programme and Learning and Development you:niversity programmes were launched with Park Plaza branded hotel operations teams. These programmes have been incredibly successful and, as a result, we have decided to roll them out to our non-branded hotels in order to enable our management teams to recognise talented individuals in their operations and develop these individuals’ skills and competencies. During the year, 55 team members were enrolled in the PPHE Hotel Group’s Talent Management Programme.

In total, the Company employed more than 1,400 people during the year, 371 of whom were permanent employees. Approximately 50 previously seasonal team members worked in Germany either before and/or after the Croatian summer season, highlighting the synergies between our operating regions.

Our employee engagement score for the Group remained high at 85.3 (on a scale of 1-100), an improvement on 2016 (84.9), with 90% of team members completing the survey.

I would like to take this opportunity to thank all our team members for their hard work and dedication during the year.

Industry recognition We are delighted to see that our hotels and campsites have been recognised through a number of industry awards and accolades.

In Croatia, Park Plaza Verudela Pula, Park Plaza Histria Pula, Park Plaza Arena Pula, Park Plaza Belvedere Medulin and Sensimar Medulin all received the TripAdvisor Certificate of Excellence 2017, which is awarded to properties that consistently achieve outstanding traveller reviews on TripAdvisor.

Sensimar Medulin was recognised in three categories in TripAdvisor Travellers’ Choice 2017: ‘Top 25 Hotels – Croatia’; ‘Top 25 Hotels for Service – Croatia’; and ‘Top 25 Hotels for Romance – Croatia’. Park Plaza Arena Pula was also recognised in the ‘Top 25 Hotels for Romance – Croatia’ category.

The Company was recognised by the Istria Tourism Board for its marketing initiatives in the tourism industry in Istria. We won the ‘Golden Goat – Best Technological Innovation’ for the complimentary smartphone available at our Park Plaza branded properties in Croatia. Acknowledgements were also awarded in four categories: Innovative Products, Tourism Products, Visual Communications and Events.

In addition, Park Plaza Arena Pula was the first hotel in Istria and the first à la carte restaurant on the Adriatic coast to offer guests Croatia’s first gluten-free standard, known as BOSK.

Arena Kažela Campsite was awarded ‘Croatia’s Best Campsites 2017’ by the Croatian Camping Union, Croatian Chamber of Economy and Croatian Camping Association. The German Automobile Club recognised the campsite with ‘ADAC TIPP 2017 – 4*’ and The Netherlands Automobile Club & Camping Union ANWB gave it the ‘Erkende Camping 4,5 – 2017’. Additionally, Arena Stoja Campsite received the international certificate ‘Village for all – V4A‘ at the 2017 International Quality Brand Hospitality for all awards.

In Germany, two of our art’otels were also recognised; art’otel berlin kudamm and art’otel cologne both received ‘Guest Review Award Winner’ from booking.com. art’otel cologne also received the ‘Sunny Heart Award 2017’ accolade from UK tour operator, Thomas Cook.

Supporting our communities During the year, the Group supported cultural events in Pula and raised funds for a number of causes in the local community, including the Cerebral Palsy Association of the Istria County, which holds its summer camp for children and young people with cerebral palsy at Arena Medulin Camping; NINA, an association which provides assistance to families of children facing malignant diseases; and Mali Svijet, which raises awareness of the needs of children with developmental difficulties. In addition, we provided support to Paralympic athlete Mikela Ristoski from Medulin in her quest to participate in the European Championships.

In Germany and Hungary, a variety of initiatives were undertaken to engage with local communities and raise charitable funds. A key element was our support for local disadvantaged families including: MANNA in Berlin, a family centre committed to supporting children from socially disadvantaged families; Rummelsberger Diakonie, a non-profit society in Nuremberg which takes care of and supports children; and German language support for refugee families in Cologne. During the winter festive season, all hotels in Germany participated in ‘Chary-Tree‘, a charity project whose main goal is to support socially disadvantaged children and provide them with Christmas presents. Team members and our hotels also participated in ‘Movember‘ to raise funds and awareness for men’s health which is an international campaign.

Outlook for 2018 and current trading 2018 trading is in line with our expectations. Operations in Germany and Hungary are year-round, whereas trading in Croatia is seasonal with most of the hotels preparing to open their doors in early spring.

In the year ahead, we will continue to implement our strategy to drive growth through expansion in the CEE region; maintain and enhance operational efficiency; remain focused on delivering a high quality service; ensure our guests have a memorable experience during their stay; and create and realise shareholder value.

We are progressing a number of future investment projects for the 2018 summer season and beyond in Croatia. These include finalising plans for the major renovation of Hotel Brioni to reposition the property as a Park Plaza branded hotel. Within our camping operations, plans are being implemented to provide guests with an upscale ‘glamping’ experience at Arena Pomer Campsite for summer 2018. We believe the ‘glamping’ proposition has strong potential and are excited about progressing this new development opportunity.

In Germany and Hungary, we have identified and are reviewing several projects which would further upgrade our portfolio. We are currently working on plans to extensively renovate art’otel berlin kudamm and the public areas of art’otel cologne.

In addition, the Company continues to identify and review a number of specific opportunities in Croatia and the CEE region which meet its investment, development and shareholder objectives.

I am excited about the future and firmly believe the transformed Group is well-positioned to deliver its growth strategy.

Reuel ('Reli') Slonim PRESIDENT OF THE MANAGEMENT BOARD