Explanation
Because some PE routers might receive routing information they do not require, a basic requirement is to be able to filter the MP-iBGP updates at the ingress to the PE router so that the router does not need to keep this information in memory.
The Automatic Route Filtering feature fulfills this filtering requirement. This feature is available by default on all PE routers, and no additional configuration is necessary to enable it. Its function is to filter automatically VPN-IPv4 routes that contain a route target extended community that does not match any of the PE's configured VRFs. This effectively discards any unwanted VPN-IPv4 routes silently, thus reducing the amount of information that the PE has to store in memory -> Answer 'PE1 will reject the route due to automatic route filtering' is correct.
Reference: MPLS and VPN Architectures Book, Volume 1
The reason that PE1 dropped the route is there is no "route-target import 999:999" command on PE1 (so we see the "DENIED due to: extended community not supported" in the debug) so we need to type this command to accept this route -> Answer 'After you configure route-target import 999:999 for a VRF on PE1, the route will be accepted' is correct.

Cisco SD-WAN uses Overlay Management Protocol (OMP) which manages the overlay network. OMP runs between the vSmart controllers and WAN Edge routers (and among vSmarts themselves) where control plane information, such as the routing, policy, and management information, is exchanged over a secure connection.