ANNUAL REPORT & ACCOUNTS 2018

Welcome,

We are delighted to report another year of good performance and strategic progress. Our operations delivered year-on-year revenue and EBITDA growth. This was achieved against a backdrop of some operational cost headwinds in the period and a record year in 2017, which provided a strong benchmark to outperform. The Group has been transformed over the last two years. We have reshaped the business from a highly seasonal domestic company to a yearround international hospitality group and the synergies between our Croatian, German and Hungarian operations are becoming evident. The business is well funded to support investment projects within our existing portfolio to strengthen our offer and market position. In addition, we continue to seek acquisition opportunities to extend our presence in the CEE region.

Financial performance

Reported total revenue increased by 5.6% to HRK 757.7 million (2017: HRK 717.2 million), as we benefited from an improved trading performance across our operations in Croatia, Germany and Hungary. It is worthwhile highlighting that the first half of the year reflected an improvement in trading outside the summer season which resulted in a positive EBITDA performance in the period for the first time. Accommodation revenue grew by 6.7% to HRK 615.1 million (2017: HRK 576.4 million), driven by an 80 bps improvement in occupancy to 54% and a higher average daily rate of HRK 576.2 up 2.9% year-on-year. Croatia’s tourism industry goes from strengthto-strength as it continues to grow in popularity, with a record number of passengers (715,000) travelling through Pula Airport in the year. We once again worked hard to extend the high season period by ensuring we have hotels and facilities that can cater for the shoulder months of the year.

Our strategy of operating both hotels and resorts, self-catering holiday apartments and campsites as well as city hotels is working well and complementing each other. Germany has benefited from increased demand and the ramp-up of Park Plaza Nuremberg was the most significant contributor to our revenue growth in the region. We discontinued the management of art’otel dresden effective from 31 July 2018, which resulted in the loss of revenue in the form of management fees from this property. Reported EBITDA increased by 0.8% to HRK 214.7 million (2017: HRK 212.9 million). This increase was primarily driven by an increase in revenue and lower rental expenses following the acquisition of two hotels; art’otel berlin kudamm and art’otel cologne in Germany in February 2017. In Hungary, our lease for art’otel budapest, which was due to expire in 2020, has been renewed for a further 20 years with effect from 1 January 2019. This hotel continued to perform well in 2018, reporting double digit year-on-year growth. We plan to invest in the renovation of the public areas (bar, spa and meeting rooms) in early 2019.

There were industry-wide headwinds in the period which put pressure on margins. This includes the growth of labour costs resulting from a shortage of workforce, increased cost of cleaning services, and increased waste management costs due to a new policy that is required for introducing a better quality system and protection of the environment as a fundamental social value. As a result, EBITDA margin in 2018 was 28.3% (2017: 29.7%). Financial results represent our eighth year of consecutive EBITDA and revenue growth.

Corporate activity

In December 2018, we were proud to become the first hospitality company listed on the Zagreb Stock Exchange’s Prime Market, a significant milestone and yet another important step forward for our Group. We began the Company’s transformation in 2016 and this migration from the Official Market to the Prime Market clearly shows our constant strive towards excellence, both in our core business and other corporate aspects fundamental to our Group. In 2017 we raised equity via a Public Offering with the aim of growing the Group further, refurbishing existing assets and expanding our presence regionally and internationally. We have started deploying the proceeds raised by investing in our campsites with the launch of Arena One 99 Glamping – a campsite dedicated to glamping. We have several investment plans for 2019 some of which have already commenced and some of which we are actively reviewing. Details of our 2018 investment projects and planned investments for 2019 are set out in the Group’s capital investments plan on page 28 and in the Operating review on page 50.

Our strategy

We have a clear strategy to drive growth and create long term value through our property portfolio and our hospitality operations. In our property portfolio, we take a disciplined, yield-focused approach to capital deployment. We look to optimise the value of our existing portfolio and where appropriate extract value to fund longer-term sustainable growth. In our hospitality operations, we are consistently working to deliver a refreshed guest experience across our portfolio and leverage our scale and inter-regional synergies. This will drive growth and maintain high-operating margins. We will continue to build a portfolio of hotels in the upscale, upper upscale and lifestyle markets in major gateway cities and select resort destinations. We also intend to increase our portfolio of campsites and self-catering holiday apartment complexes in tourist destinations around the Adriatic Sea. Our unique business model combines coastal hotels, self-catering holiday apartment complexes and campsites with prime city hotels. This business model has proven to be the way forward; the seasonality of our business in Croatia has been complemented with an all-year-round operation in Germany and Hungary, where we were able to employ some of our seasonal team members from Croatia. This enabled the Group to have dedicated and in-house trained staff, at all properties, and offered the team members international working experience. We remain focused on investing in renovation and repositioning programs at several of our hotels, self-catering holiday apartments and complexes, as well as our sizeable campsite portfolio. These investments will drive additional growth through an enhanced overall guest experience and create value in our real estate portfolio.

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 social media awareness and cultivating strong partner relationships with key customers. As well as dedicated in-house teams located in Croatia and Germany who provide communications and marketing support, the Group benefits from the sales and marketing services provided through its partnership with PPHE Hotel Group. This partnership includes access to the Radisson Hotel Group’s central reservation system, a global reservation and distribution system, for the Park Plaza and art’otel brands and its loyalty programme, Radisson Rewards, which has more than 20 million members worldwide. Alongside this, the Group also has its own loyalty program in place for guests at the Arena Campsites. This multi-brand approach enables us to develop and operate properties across several segments of the hospitality market and benefit from the solid infrastructure offered and provided by our partners.

Memorable guest experiences

We are passionate about creating and delivering unique experiences for guests in vibrant destinations, whether staying at one of our properties or visiting our restaurants, bars or spa facilities. We aim to create valuable memories for our guests by delighting them every day through well invested, high quality products and operational excellence. Constantly striving to improve the guest experience, we have developed two new mobile apps that give all useful information about our hotels, campsites and its related facilities (restaurants, shopping, massage, sports etc.). Moreover, guests can contact the staff at all times directly through the mobile app which enables real-time interaction with staff from anywhere. Once again, we are proud of the high levels of guest satisfaction scores achieved across our properties. This reflects the appreciation for our ongoing investment in our operations and our commitment to delivering service above and beyond expectation. The collective satisfaction score at our branded operations in Croatia, Germany and Hungary is 88.4%. 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 were improved to 80.7.

Investing in our people

Our team members are at the heart of our business and like others in the hospitality sector having a highly engaged workforce and attracting and retaining the right talent is a key priority for us and imperative to our success. We are proud of our high performing culture where engaged team members deliver best in class operations through consistent service delivery. We remain focused on ensuring that they are fully supported, engaged, trained and motivated so we can consistently deliver a high service standard and a 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. This supports the development of all our teams, whilst creating the next generation of leaders. We have access to PPHE Hotel Group’s awardwinning Learning and Development programmes, which are part of the platform you:niversity which is used to train all our team members. During the year, a total of 89 training programs were held, and we trained a total of 1,844 team members. In 2018, all team members were trained on the implementation of General Data Protection Regulation (GDPR) and the consequences thereof to the business. In Germany, art’otel cologne hosted a speed dating event at a job fair held at the RheinEnergie-Stadion Köln. All hotels in Germany attended several large-scale job fairs organised by national employment agencies across the country. In Croatia, we continued to work closely with the local School of Hospitality, Tourism and Trade in Pula to offer practical work experiences for students. In 2018, we offered five scholarships to students that are studying to be chefs. This initiative is in collaboration with the Ministry of Tourism. Further outreach included a collaboration with the Faculty of Economics Juraj Dobrila, Pula. In 2018, a contract was signed between the Faculty and the Group pursuant to which training/ internship for students in Tourism were offered. The contract also allows our team members to be guest lecturers at the Faculty in their areas of expertise. As a result of this partnership, 12 students started their mandatory internship in December 2018. Together with the Croatian Ministry of Tourism, we have given one scholarship to a student from the Faculty of Economics. In addition, we have signed a contract with the Law Faculty in Rijeka to offer practical on the job training. During the year, we also welcomed two students from RIT Croatia, a division of Rochester Institute of Technology in New York. Arena Hospitality Group together with the Institute for Labour Market Development is a partner on the EduTurizam project run by Diopter – a training centre based in Pula. The project’s goal is to improve the educational system in Croatia for the tourism and hospitality sector. Some 40 unemployed individuals are included in the scheme with the goal to become qualified cooks, barmen, barristas and entertainment officers. During the period, we have also initiated a dual apprenticeship programme with the International University of Applied Sciences Bad Honnef (IUBH). While art’otel berlin mitte partnered with a refugee project in Berlin to help with recruitment across several of its operational roles. In total, the Company employed more than 1,440 people during the year, of whom 467 were permanent employees. Approximately five, 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 Index for the Group remained high at 84.1 (on a scale of 1-100), with 92% of team members completing the survey. Our teams are focused on consistently delivering exemplary service. I would like to take this opportunity to thank all our team members for these fantastic achievements and their continued devotion. Our Loyalty index according to the Climate analysis survey is 75.

Industry recognition

We are delighted to see that our hotels and campsites have been recognised through multiple industry awards and accolades. Arena One 99 Glamping and Arena Kažela Campsite were named as Croatia’s best campsites by the Croatian Camping Union; Arena One 99 Glamping was also awarded best glamping offer by the Croatian National Tourist Board and Croatian Chamber of Economy. Arena One 99 Glamping was awarded the “Golden Goat” by Istria Tourism Board as best tourist product of 2018. In addition, Arena Kažela Campsite was awarded 4.5 out of 5 stars for 2019 from the ANWB campsite inspectors. Across our portfolio, nine of our properties received the TripAdvisor Certificate of Excellence 2018, which is awarded to properties that consistently achieve outstanding traveler reviews on TripAdvisor. In addition, Park Plaza Verudela Pula won TripAdvisor’s Traveler’s Choice 2018 award. With ever more focus on sustainability, five of our hotels in Germany won GreenLeader recognition for their commitment and progress to green practices such as recycling, local and organic food, and electric car charging stations. I am also thrilled to announce that Milena Perković, Member of the Management Board and Chief Financial Officer, was named as the Most Successful Woman in Business in Croatia by the Croatian Association of Women in Business and Croatian Chamber of Economy.

Current trading and outlook

Trading in 2019 has started well and in line with the Management Board’s expectations. In the year ahead, we will continue to implement our strategy to drive growth through expansion in the CEE region with a focus on gateway cities; maintain and enhance operational efficiency; drive occupancy through innovation and marketing initiatives; remain focused on delivering a high-quality service; ensure our guests have a memorable experience during their stay; and create and deliver shareholder value. We are progressing various future investment projects for our properties in Croatia and our hotels in Germany and Hungary, as well as reviewing expansion opportunities in Croatia and the CEE region. I am excited about the opportunities ahead and firmly believe the Group is well-positioned to capitalise on its ambitious growth strategy.

Reli Slonim PRESIDENT OF THE MANAGEMENT BOARD