CONSOLIDATED MANAGEMENT REPORT

For the financial year ending 31 December 2017

EVOLUTION OF BUSINESS AND GROUP'S SITUATION

NH Hotel Group is an international hotel operator and one of the leading urban hotel companies worldwide in terms of number of rooms. The Group operates nearly 380 hotels and 60,000 rooms in 31 countries, and has a significant presence in Europe.

The centralised business model allows it to offer a consistent level of service to its customers in different hotels in different regions. The corporate headquarters and regional offices offer hotels a wide range of functions such as sales, reservations, marketing and systems.

In 2017, world economic activity grew at a pace of +3.5% (Data and estimates provided by the E.C. “European Economic Forecast – Autumn 2017” November 2017), greater than the previous year (+3.0%). More specifically in the Eurozone, the provisional growth rate for 2017 was 2.2% (+1.7% in 2016). Global growth has led to a positive cycle of trade and investment. Likewise, European economies continue to grow, although the recovery has not ended, which suggests there is room for further growth. In line with the above data, when comparing the growth rates of the four countries that bring together the largest proportion of revenues and results of the Group, it is observed that in Holland (+3.2% in 2017 vs +1.7% 2016), Germany (+2.2% in 2017 vs +1.9% in 2016), and Italy (+1.5% in 2017 vs +0.7% in 2016) growth increased compared with the previous year, while in Spain (+3.1% in 2017 vs +3.2% in 2016) growth was similar to the previous year.

According to the World Tourism Organization (“UNWTO”) in 2017, international tourist arrivals globally reached 1,322 million, representing an increase of + 7.0% over the previous year, a rate much higher than the sustained and constant trend of 4% or more which had been recorded since 2010 and represents the best result in seven years. More specifically, the arrival of international tourists to Europe reached 671 million in 2017, recording remarkable growth of 8% after a comparatively weaker 2016 which was headed by destinations in the Mediterranean. The growth was driven by the extraordinary results of Southern and Mediterranean Europe (+13%). Western Europe (+7%), Northern Europe and Central and Eastern Europe (both +5%) also posted solid growth. In this European context, Spain has established itself as the second tourist power in the world only behind France but ahead of the United States, and managed to break its record with 82 million foreign tourists due to an increase of 9% in the number of international arrivals.

In this context, in 2017, as a result of the favourable trend in the hotel business throughout the year and the effect of the initiatives it carried out, particularly the repositioning of its brands and hotels, the Group recorded a significant increase in price per room (“ADR”, average daily rate).

As part of its asset repositioning plan, NH Hotel Group invested almost 200 million euros from 2014 to 2017 to fully renovate or remodel its mid-range hotels with the greatest potential for improvement. With the aim of continuing to improve the quality and strengthen the NH Collection brand, the repositioning investment phase in Germany which began in the previous year was completed during 2017, after the investment made in Benelux in 2016 and in Spain and Italy in 2015.

Additionally, new repositioning opportunities have been selectively identified for 2018 and 2019, where the Group will additionally have contributions from the owners of hotels that are leased by the Group.

Among the main milestones reached over the last years of transformation, the appearance of a new NH Hotel Group value proposition stands out based on the improvement of the quality, experience and the new brand architecture with the NH Collection, NH Hotel, nhow and Hesperia brands. In this vein, the Group improved the customer experience thanks to implementing a solid operational vision, including the new elements making up the hotels’ basic product range, known as Brilliant Basics, which are already in place in all of the establishments and which are contributing to a better experience and higher average quality score of the customers.

The trend in quality indicators confirms the improvement in user ratings for the Group’s hotels throughout 2017. At Group level, 35% of the portfolio is positioned in the top 10 of the city’s TripAdvisor (45% for NH Collection hotels) (34% and 45% respectively in 2016) and 55% of the hotels are in the top 30 (63% for NH Collection hotels) (52% y 62% respectively in 2016), which demonstrates the highest levels of quality perceived by customers.

Also, the NH Rewards loyalty programme now has over 8.4 million members (6.8 millon members in 2016), 18% of whom joined in 2017, and 23% of the total are active.

Meanwhile, in 2017, another 6 hotels began operating in Marseilles, Eindhoven, Curitiba, Puebla, San Luis de Potosí and Shijiazhuang with a total of 799 rooms, giving 380 hotels operating with 58,926 rooms at 31 December 2017.

In addition, in 2017 the Group signed 7 hotels with 1,762 rooms. All the signings were under lease and management contracts, many of them in the top brand segment and in primary cities (Frankfurt, Valencia, Lima, Brussels).

As a result, revenue in 2017 amounted to 1,546.1 million euros, representing growth of +6.8% (+98.1 million euros), well above the increase in operating costs. As a result of the operational improvement, the profit for the year attributable to the Parent Company stood at 35.5 million euros compared to 30.8 million euros in 2016.

In this year gross indebtedness decreased from 861.8 million euros in December 2016 to 716.9 million euros in December 2017. At 31 December 2017, cash and cash equivalents amounted to 80.2 million euros (136.7 million euros at 31 December 2016). Additionally, this liquidity was complemented by credit lines at the end of the year amounting to 316.3 million euros, of which 250 million euros corresponded to a long-term syndicated credit line, compared to 308.9 million euros at 31 December 2016.

As indicated in the Note 13 of the annual accounts, the Company has refinanced or early redeemed the debt corresponding to senior secured obligations due in 2019.

Likewise, as a consequence of these operations, the syndicated credit line signed in 2016 for a limit of 250 million euros will continue to be available in full, and its maturity will automatically extend to 2021.

This value optimisation of the Company has recently been reflected in the improvement of the corporate credit outlooks assigned by the main rating agencies. Fitch improved the corporate rating outlook from “B with a stable outlook” to “B with a positive outlook” based on greater liquidity and operational improvement. In turn, Moody’s improved the corporate rating outlook from “B2 with a stable outlook” to “B2 with a positive outlook”, due to the operational improvement, the hotel repositioning plan which has allowed NH to increase its revenues and profitability, its cost saving plan and the significant improvement of its liquidity position. Additionally, Standard & Poors improved its opinion on the Group’s business profile, mainly due to its successful repositioning plan which has resulted in improved sales and profitability.

On 28 September 2017, the Group presented its strategic plan for 2018-2019 to the investment community. After a phase marked by a strong investment in repositioning and improvement of the experience, NH Hotel Group is in a favourable position to face future growth in the coming years. The Company defined its priorities until 2019, focused on revenue management through a dynamic pricing strategy, a continued focus on efficiency and debt reduction, whilst, at the same time, taking advantage of its current strengths for new repositioning opportunities and organic expansion as a means of additional growth.

The results of the plan will be reflected in the significant improvement in the Company’s cash generation and in the reduction of its financial indebtedness.

At the General Shareholders’ Meeting in June 2017, shareholders approved the payment of an interim dividend from 2016 results amounting to 17 million euros, representing five cents per outstanding share (gross). Additionally, the Group has established a shareholder remuneration policy in line with its debt reduction plans, defining a medium-term shareholder remuneration close to 50% of the recurring net profit. In the short term, it foresees a dividend proposal of ten cents per share in 2018 and fifteen cents in 2019.

Finally, the Company has a diverse workforce of 22,789 employees made up with 134 different nationalities, of which 11.4% work in countries other than their home country. The percentage of employees between 25 and 40 years old reached 49.6%, while that of those under 25 stood at 14.8% and those over 40 at 35.7%. Further detail on this matter is to be found in the Corporate Social Responsibility report available on the corporate website of NH Group (https://www.nh-hoteles.es/corporate/es) in the shareholders and investors section within financial information section, included in the annual reports segment.

THE ENVIRONMENT

For the NH Hotel Group, sustainability drives innovation, seeking to surprise our guests as well as achieving efficiencies in the use of water and energy. In our responsible commitment to the planet, we work to minimise our impact on climate change, increase the efficiency of resources and develop more sustainable products. All this minimises our environmental footprint with responsible consumption of natural resources.

In 2017, the implementation of the sustainability initiative continued. This initiative gives continuity to the environmental achievements of recent years. Thus, compared to 2008, per Average Daily Room energy consumption has been reduced by 28%, water consumption by 29% and our carbon footprint by 74%. NH Hotel Group is committed to renewable energy, which reduces its carbon footprint. Certified green energy consumption is available in 78% of hotels in Spain, Italy, Germany, Holland, Belgium and Luxembourg.

The Group is certified by internationally recognised standards such as ISO 50001, which certifies the efficiency of the hotel network’s energy management on an international scale, and ISO 14001, related to environmental management. A total of 132 hotels have achieved their own external certification for their sustainable management.

NH Hotel Group has reported its climate change commitment and strategy to the Carbon Disclosure Project (CDP) since 2010. In 2017, the Company obtained a B Management rating, which places NH Hotel Group among the leading companies adopting measures to efficiently reduce emissions, which is indicative of advanced environmental management.

Likewise, the NH Hotel Group forms part of FTSE4 Good, an index on the London Stock Exchange which recognises the socially responsible behaviour of companies worldwide.

Further detail on this matter is to be found in the Corporate Social Responsibility report available on the corporate website of NH Group (https://www.nh-hoteles.es/corporate/es) in the shareholders and investors section within financial information section, included in the annual reports segment.

RISK MANAGEMENT MODEL

Since November 2015, the NH Hotel Group has had a risk policy approved by the Board of Directors. The aim of this corporate policy is to define the basic principles and the general framework of action to identify and control risks of any nature which may affect NH. This policy applies to all companies over which the NH Hotel Group has effective control.

NH Hotel Group’s risk management system aims to identify events that may negatively affect achievement of the objectives of the Company’s Strategic Plan, providing the maximum level of assurance to shareholders and stakeholders and protecting the Group’s revenue and reputation.

The model set up to manage risks is based on the ERM (Enterprise Risk Management) methodology and includes a set of methodologies, procedures and support tools which enable the NH Hotel Group to:

1. Identify the most significant risks that could affect achievement of strategic objectives.

2. Analyse, measure and assess such risks depending on their probability of occurrence along with their impact, which is assessed from a financial and reputational point of view.

3. Prioritise such risks.

4. Identify measures to mitigate such risks based on the Group’s risk appetite. This is firmed up by defining risk managers and setting up action plans agreed by the Management Committee.

5. Monitor mitigation measures set up for the main risks.

6. Periodically update risks and their assessment.

The Company’s Risk Map is updated annually and, after validation by the Audit and Control Committee, approved by the Board of Directors. The 2017 Risk Map was approved by the Board at its meeting on 25 October 2017.

In general, the risks to which the Group is exposed can be classified into the following categories:

a) Financial Risks, such as fluctuation of interest rates, exchange rates, inflation, liquidity, non-compliance with financing undertakings, restrictions on financing and credit management.

b) Compliance Risks, arising from possible regulatory changes, interpretation of legislation, regulations and contracts, and non-compliance with internal and external regulations. Tax and environmental risks are included under this heading. It also covers Reputational Risks, arising from the company’s behaviour which negatively affects fulfilment of the expectations of one or more of its stakeholders (shareholders, customers, suppliers, employees, the environment and society in general).

c) Business Risks generated by inadequate management of procedures and resources, whether human, material or technological. This category encompasses difficulty in adapting to changes in customer demand, including those caused by

d) external Risks, arising from natural disasters, political instability or terrorist attacks.

e) Systems Risks, produced by attacks or faults in infrastructures, communication networks and applications that may affect security (physical and logical) and the integrity, availability or reliability of operational and financial information. This heading also includes business interruption risk.

f) Strategic Risks, produced by difficulty accessing markets and difficulties in asset disinvestment.

Finally, in May 2017, the creation of an Executive Committee on Risks was approved to support the periodic monitoring of risks (monitoring of action plans and key indicators), support initiatives and activities related to the implementation of action plans, as well as creating a culture of risks in the company. This Committee met twice during the year.

Further detail on this matter is to be found in the Corporate Social Responsibility report available on the corporate website of NH Group (https://www.nh-hoteles.es/corporate/es) in the shareholders and investors section within financial information section, included in the annual reports segment.

SHARES AND SHAREHOLDERS

NH Hotel Group, S.A. share capital at the end of 2017 comprised 350,271,788 fully subscribed and paid up bearer shares with a par value of €2 each. All these shares carry identical voting and economic rights and are traded on the Spanish Stock Exchange Market.

According to the latest notifications received by the Company and the notices given to the National Securities Market Commission before the end of every financial year, the most significant shareholdings at 31 December 2017 and 2016 were as follows:

	2017	2016
HNA CO LTD	29,34%*	29,50%
Oceanwood Capital Management LLP	12,06%	11,97%
Grupo Hesperia	9,27%**	9,27%**

Notwithstanding this list of shareholders, the following changes communicated to the CNMV by said shareholders are reported:
* Although in the CNMV Records it is recorded that the shareholding of Grupo HNA in NH is 29.50% at 31 December 2017, Grupo HNA reported a decrease to 29.34% in its shareholding in NH to the CNMV on 27 February 2017. In addition, on 3 November 2017, Grupo HNA notified the CNMV of the signing of a sales contract and repurchase agreement through which it would transfer NH shares representing approximately 1.14% of the capital. Depending on whether the sale has been formalised and the terms and conditions of it, Grupo HNA’s shareholding in NH could reach 28.20% of the share capital. Finally, on 19 January 2018, it notified the CNMV of the engagement to review its shareholding in the Group, including identify potential buyers of its shareholding.
** The shareholding of Grupo Hesperia consists of the direct shareholding held by Grupo Inversor Hesperia, S.A. (9.10%) and Eurofondo (0.17%).

The average share price of NH Hotel Group, S.A. in 2017 was 5.05 euros per share (4.04 euros in 2016). The lowest share price of 3.84 euros per share was recorded in January (3.17 euros in February 2016) and the highest share price of 6.26 euros per share in December (4.95 euros in January 2016). The market capitalisation of the Group at the close of 2017 stood at 2,101.63 million euros (1,346.80 million euros at the close of 2016).

At 31 December 2017, the Group had 9,416,368 own shares of which 9,000,000 correspond to the loan of shares for the issue of the convertible bond in November 2013. Of these 9 million shares, at 31 December 2017, 7,615,527 have been returned, and are now controlled by NH, although they remain available to the financial entities. Additionally, in August 2016, the Company purchased 600,000 own shares and in 2017, delivered 183,632 shares to employees under the Incentive Plan.

A total of 237,704,360 shares in NH Hotel Group, S.A. were traded on the Continuous Market over the course of 2016 (316,419,296 shares in 2016), which accounted for 0.68 times (0.90 times in 2016) the total number of shares into which the Company’s share capital is divided. Average daily share trading on the Continuous Market amounted to 932,173 securities (1,231,203 in 2016).

FUTURE OUTLOOK

Forecasts indicate that the growth will continue in 2018, although at a more sustainable pace after eight years of constant expansion after the economic and financial crisis of 2009. Based on current trends, economic outlooks and the forecast of the UNWTO Panel of Experts, the Organisation expects global international tourist arrivals to grow at a rate of between 4% and 5% in 2018. By region, growth in the arrival of tourists to Europe and the Americas is expected to be between 3.5% and 4.5%.

On the other hand, GDP growth in Europe is expected to be +2.1% in 2018 (Data and estimates provided by the E.C. “European Economic Forecast – Autumn 2017” November 2017).

In this economic environment, the Group expects to benefit from the increase in sales associated with GDP growth expectations in 2018, together with the positive impact of the repositioning investments made in the last two years and supported by the implementation of price management tools which will allow us to continue to optimise this strategy.

EVENTS AFTER THE REPORTING PERIOD

On 28 December 2017, an agreement was announced with the German asset manager Deka Immobilien for the sale and leaseback of the property in which the NH Collection Barbizon Palace Amsterdam is located. The operation closed at the end of January 2018, involving the sale of the building for 155.5 million euros (584.5 thousand euros/room), which will bring about an estimated capital gain of 55 million euros in 2018 and net cash of 122.4 million euros. The variable income lease of the property will allow the Group to keep operating the hotel for an initial period of 20 years, with the option of exercising 2 extensions of 20 years each.

In relation to the unsolicited sign of interest received from Grupo Barceló in November 2017, the Company’s Board of Directors unanimously rejected the operation proposed on 10 January 2018.

The Board noted that its decision was made to defend both the social interest of the Company and the interests of all shareholders. It insisted that the unanimous rejection of this offer does not condition nor impede the analysis of other future strategic opportunities which will be assessed based on the real value they are able to generate to NH Hotel Group’s shareholders as a whole, within the framework of the consolidation trends prevailing in the sector.

In taking its decision, the Board assessed the fact that the contemplated structure (merger) would not allow shareholder value to be created above that of that project independently by NH. In its analysis, the Board did not consider the intrinsic value assigned to NH by Grupo Barceló’s offer appropriate, nor its scope, nor the exchange ratio offered by it.

Based on this analysis, the Board unanimously considered that the terms of the offer were inadequate and did not reflect the real value of NH in any way, but especially for the following reasons:

• The exchange ratio did not reflect the relative valuation of both companies (even less with a consolidation adjusted to the relevant hotel business of Grupo Barceló). It also did not offer a real control premium on the market valuation of NH, nor did it consider the potential for revaluation of NH independently (greater in any case to the relative value of 7.08 euros per share suggested in said offer).
• Grupo Barceló’s offer did not reflect the potential for growth in NH’s results, nor the value of its urban assets owned in Europe (as shown by the recent sale of the Barbizon hotel in Amsterdam), nor the opportunity to generate profits with its balanced mix of contracts in management and leases, nor the optimisation of its operational and financial structure.
• The Board assessed very negatively that Grupo Barceló’s offer lacked liquidity for NH shareholders.

Likewise, and regardless of its decision in this matter, the Board also ratified the full confidence in the current NH Strategic Plan with solid growth in revenues and significant operational improvement, together with the value of its hotel assets and the potential to benefit from the reduction of its indebtedness, which will allow for expansion opportunities and, in the future, participate in the consolidation trend of the hotel sector.