Pestana International Holdings S.A. Consolidated Annual Report 31 December 2019 Index Consolidated management report for 2019 3 Message to stakeholders 4 1. Overview of the world economy 8 2. Tourism 11 3. Key figures 19 4. Pestana Hotel Group 21 5. Investment 26 6. Activity of Pestana Hotel Group 31 7. The near future 41 8. Other relevant facts occurred in the period 44 9. Objectives and policies of Pestana Hotel Group regarding risk 46 10. Relevant issues that occurred after the year end 49 11. Recognitions 51 Consolidated financial statements 54 Auditor’s Report 192 Pestana International Holdings S.A. Consolidated Annual Report 2019 2 Consolidated management report for 2019 Message to Stakeholders Consolidated management report 2019 was a challenging and important year in Pestana Hotel Group’s history. Financially speaking consolidated net income was the highest in the Group’s history even though some indicators were slightly worse than in the previous year which had been the Group’s best year ever. Even more important than the record net income, Pestana Hotel Group fulfilled other very important goals. First off, the Group issued the first green bond in the Hospitality sector with great success both in terms of demand, which was substantial and which resulted in an increase in the amount issued, as well as in respect of the actual interest rate which was substantially lower than initially foreseen. The Group’s sustainability plan also showed remarkable progress in 2019 in terms of a 60% reduction in the use of single use plastic when compared with the previous year as well as investment in clean energy which led to an important decrease in the overall energy bill. In this period Pestana Hotel Group opened three new units: Pestana Blue in Algarve, Pestana Churchill Bay on the bay of Câmara de Lobos and Pestana Plaza Mayor in Madrid. The Group also ended the year with the conclusion on the construction of Pestana Park Avenue in Manhattan, New York which resulted in the opening of the Group’s 100th unit. 2019 ended with a pipeline of 20 new projects, ten of which are expected to open in 2020 and another ten which are expected to open between 2021 and 2023. Pestana Hotel Group rendered services to more than 3,5 million clients and employed throughout the year about 7.000 employees. The Group also had a meaningful and positive impact on some communities through its social responsibility actions. Therefore, the Group’s aim to provide personal growth opportunities for its employees, to provide a service of excellence to our customers and to be attentive and listen to the surrounding communities’ concerns will continue to be an integral part of Pestana Hotel Group’s corporate mission alongside the Group’s financial goals. Pestana International Holdings S.A. Consolidated Annual Report 2019 5 Consolidated management report In 2020 the Group pursued the defined strategic goals of becoming increasingly competitive through an operating model adapted to the constant changes in business models and uncertainty of the surrounding economic environment. In addition to responding to the digital transformation of those economic and business models the main challenges and goals were focused on key areas such as People, Customers, Technology and Knowledge. The following areas can be highlighted: ▰ Revenue Management improvement – a new system (Duetto) was introduced, the training of several Revenue Managers was promoted and a Corporate Revenue Management area was created which has already performed several relevant projects such as a survey of all existing procedures from tariff creation and promotions, to overbooking management, as well as providing advice on specific operations which allowed for increased results; ▰ Business Intelligence improvement – several different dashboards in Power BI and periodic reports or “deep dives” on specific issues or units were created and made available to the different decision makers in the organization, which provided very relevant and important information to allow for better decision making; ▰ SAP success factors was introduced in Human Resources management – Teamer project – which allowed for much-improved resource and talent visibility and, consequently, has allowed for a better management of the most important resource in the Hospitality business, our employees; ▰ Pestana Priority Guest (PPG) was redesigned – next month the new loyalty program will be launched which will continue to allow for point accumulation but, more importantly, aims for a better recognition of our customers and what they value to guarantee that each of the Group’s units improves its service quality and therefore improve our customer’s experience during their stay in our units; Pestana International Holdings S.A. Consolidated Annual Report 2019 6 Consolidated management report ▰ Customer relationship management was improved – using data from several different systems a unique data base was compiled which has allowed for improved customer communication which in turn translated to an increase in sales in the direct channel through the Group’s newsletter; a Salesforce module is being implemented which should improve the relationship management process which is crucial to the Group’s competitiveness; ▰ The Group’s innovation level was increased and the participation in the process was extended to a wider number of employees through Envision, a corporate innovation program initiated in 2019 which is expected to be widened and which currently includes more than 2.000 employees, to listen and obtain ideas from both operational and shared service employees in a more structured process. These challenges represent a significant investment in systems and teams and is a process which is not yet finished but on track. The correct steps will continue to be taken to increase Pestana Hotel Group’s competitiveness. Pestana International Holdings S.A. Consolidated Annual Report 2019 7 1 Overview of the World Economy Consolidated management report According to the World Bank’s Global Economic Prospects 2020 report issued in January, following a year during which weak trade and investment dragged the world economy to its weakest performance since the global financial crisis, economic growth was poised for a modest rebound this year. However, for even that modest uptick to occur, many things would have to go right. Global growth was set to rise by 2.5 percent this year, a small rise from an estimated 2.4 percent in 2019, as trade and investment gradually recover. Emerging market and developing economies were anticipated to see growth accelerate to 4.1 percent from 3.5 percent last year. However, that acceleration would not be broad-based: the pickup was anticipated to come largely from a handful of large emerging economies stabilizing after deep recessions or sharp slowdowns. Even this tepid global rally could be disrupted by any number of threats. Trade tensions could re-escalate. A sharper-than-expected growth slowdown in major economies could reverberate widely. A resurgence of financial stress in large emerging markets, an escalation of geopolitical tensions, or a series of extreme weather events could all have adverse effects on economic activity. These comments were applicable before the fall-out from COVID-19, which is starting to have a meaningful impact across the board. This slowdown in growth is happening at the same time as monetary policy has eased across most markets, leading to significant debt accumulation. The absence of inflationary pressures led major central banks to prevent de-anchoring of inflation expectations and support optimistic financial conditions. Pestana International Holdings S.A. Consolidated Annual Report 2019 9 Consolidated management report REAL GDP PERCENTAGE CHANGE FROM PREVIOOUS YEAR 2017 2018 2019e 2020f 2021f 2022f WORLD 3,2 3,0 2,4 2,5 2,6 2,7 ADVANCED ECONOMIES 2,4 2,2 1,6 1,4 1,5 1,5 EUA 2,4 2,9 2,3 1,8 1,7 1,7 EURO AREA 2,5 1,9 1,1 1,0 1,3 1,3 JAPAN 1,9 0,8 1,1 0,7 0,6 0,4 EMERGING MARKET & DEVELOPING ECONOMIES 4,5 4,3 3,5 4,1 4,3 4,4 CHINA 6,8 6,6 6,1 5,9 5,8 5,7 RUSSIA 1,6 2,3 1,2 1,6 1,8 1,8 BRAZIL 1,3 1,3 1,1 2,0 2,5 2,4 Source: World Bank Global Economic Prospects Jan/2020 The US economy has suffered negative impacts on investment as a result of the trade uncertainty resulting from the tensions between the US and China and Europe, however, employment and consumption continue robust as a result of the existing policy stimulus. The recent trade agreement with China increased tariffs and therefore trade costs. Consequently, growth rate is expected to slow down to 1,8% in 2020 as a consequence of the fiscal changes being promoted since the second half of 2019. In the Eurozone growth decreased as a result of weak exports and a decrease in industrial production resulting in an expected growth of 1,0% in 2020. The United Kingdom continues to suffer with Brexit which has a significant impact in economic growth, especially through a decrease in exports, due to the uncertainty associated with the process and the respective consequences. China continues to be the main engine of world economy, but growth is decreasing as a result of escalating tariffs and weakening external demand which was exacerbated by the slowdown resulting from the accumulation of debt. Policy stimulus are expected to continue to support activity against external shocks resulting in an expected growth rate of 5,9% for 2020. The exponential rise of people infected by COVID-19 led the World Health Organization to declare a global pandemic status on March 11, 2020. As a result, many countries have implemented quarantine measures to prevent the spread.