2015 Annual Report

Financial Information

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PART I

Item 1. Business.

Corporate Structure and Business

We are a worldwide operator, franchisor, and licensor of hotels and timeshare properties under numerous brand names at different price and service points. Consistent with our focus on management, franchising, and licensing, we own very few of our lodging properties. We also operate, market, and develop residential properties and provide services to home/condominium owner associations.

We were organized as a corporation in Delaware in 1997 and became a public company in 1998 when we were “spun off” as a separate entity by the company formerly named “Marriott International, Inc.” We operate, franchise, or license 4,424 properties worldwide, with 759,330 rooms as of year-end 2015. We believe that our portfolio of brands is the broadest of any lodging company in the world. Our principal brands are listed in the following table:

  • The Ritz-Carlton®
  • Bulgari® Hotels & Resorts
  • EDITION®
  • JW Marriott®
  • Autograph Collection® Hotels
  • Renaissance® Hotels
  • Marriott Hotels®
  • Delta Hotels and Resorts®
  • Marriott Executive Apartments®
  • Marriott Vacation Club®
  • Gaylord Hotels®
  • AC Hotels by Marriott®
  • Courtyard by Marriott® (“Courtyard®”)
  • Residence Inn by Marriott® (“Residence Inn®”)
  • SpringHill Suites by Marriott® (“SpringHill Suites®”)
  • Fairfield Inn & Suites by Marriott® (“Fairfield Inn & Suites®”)
  • TownePlace Suites by Marriott® (“TownePlace Suites®”)
  • Protea Hotels®
  • Moxy Hotels®

As of year-end 2015, we group operations into three business segments: North American Full-Service, North American Limited-Service, and International, and provide financial information by segment for 2015, 2014, and 2013 in Footnote No. 16, “Business Segments” and Footnote No. 12, “Property and Equipment.”

Pending Combination with Starwood Hotels & Resorts Worldwide, Inc.

On November 15, 2015, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) to combine with Starwood Hotels & Resorts Worldwide, Inc. (“Starwood”). The Merger Agreement provides for the Company to combine with Starwood in a series of transactions after which Starwood will be an indirect wholly owned subsidiary of the Company (the “Starwood Combination”). If these transactions are completed, shareholders of Starwood will receive 0.920 shares of our Class A Common Stock, par value $0.01 per share, and $2.00 in cash, without interest, for each share of Starwood common stock, par value $0.01 per share, that they own immediately before these transactions. We expect that the combination will close in mid-2016, after customary conditions are satisfied, including shareholder approvals, required antitrust approvals, and the completion of Starwood's previously announced spin-off of its vacation ownership business, or another spin-off, split-off, analogous disposition, or sale of its vacation ownership business.

Company-Operated Properties

At year-end 2015, we operated 1,116 properties (300,305 rooms) under long-term management agreements with property owners, 41 properties (9,206 rooms) under long-term lease agreements with property owners (management and lease agreements together, “the Operating Agreements”), and six properties (1,437 rooms) that we own. In addition, we operated under long-term management agreements 41 home and condominium products (4,203 units) for which we manage the related owners' associations.

Terms of our management agreements vary, but we earn a management fee that is typically composed of a base management fee, which is a percentage of the revenues of the hotel, and an incentive management fee, which is based on the profits of the hotel. Our management agreements also typically include reimbursement of costs of operations (both direct and indirect). Such agreements are generally for initial periods of 20 to 30 years, with options for us to renew for up to 50 or more additional years. Our lease agreements also vary, but may include fixed annual rentals plus additional rentals based on a percentage of annual revenues in excess of a fixed amount. Many of our Operating Agreements are subordinated to mortgages or other liens securing indebtedness of the owners. Many of our Operating Agreements also permit the owners to terminate the agreement if we do not meet certain performance metrics and financial returns fail to meet defined levels for a period of time and we have not cured such deficiencies. In certain circumstances, some of our management agreements allow owners to convert company-operated properties to franchised properties under our brands.

For lodging facilities that we operate, we generally are responsible for hiring, training, and supervising the managers and employees who are needed to operate the facilities and for purchasing supplies, and owners are required to reimburse us for those costs. We provide centralized reservation services and national advertising, marketing, and promotional services, as well as various accounting and data processing services, and owners are also required to reimburse us for those costs.

Franchised, Licensed, and Unconsolidated Joint Venture Properties

We have franchising, licensing, and joint venture programs that permit other hotel owners and operators and Marriott Vacations Worldwide Corporation (“MVW”), our former timeshare subsidiary that we spun off in 2011, to use many of our lodging brand names and systems. Under our franchising program, we generally receive an initial application fee and continuing royalty fees, which typically range from four to six percent of room revenues for all brands, plus two to three percent of food and beverage revenues for certain full-service hotels. We are a partner in unconsolidated joint ventures that manage hotels. Some of these joint ventures also provide services to franchised hotels. We recognize our share of these joint ventures' net income or loss in the “Equity in earnings (losses)” caption of our Income Statements. Franchisees and joint ventures contribute to our national marketing and advertising programs and pay fees for use of our centralized reservation systems. Under license agreements with us, MVW is both the exclusive developer and operator of timeshare, fractional, and related products under the Marriott brand and the exclusive developer of fractional and related products under The Ritz-Carlton brand. We receive license fees under licensing agreements with MVW consisting of a fixed annual fee, adjusted for inflation, of $50 million plus two percent of the gross sales price paid to MVW for initial developer sales of interests in vacation ownership units and residential real estate units and one percent of the gross sales price paid to MVW for resales of interests in vacation ownership units and residential real estate units, in each case that are identified with or use the Marriott or The Ritz-Carlton marks.

At year-end 2015, we had 3,074 franchised properties (420,562 rooms), 88 unconsolidated joint venture properties (10,810 rooms), and 58 licensed timeshare, fractional, and related properties (12,807 units).

Residential

We use or license our trademarks for the sale of residential real estate, typically in conjunction with hotel development and receive branding fees for sales of such branded residential real estate by others. Residences are typically constructed and sold by third-party owners with limited amounts, if any, of our capital at risk. We have used or licensed our The Ritz-Carlton, Bulgari Hotels & Resorts, EDITION, Autograph Collection Hotels, JW Marriott, and Marriott Hotels brand names and trademarks for residential real estate sales. While the worldwide residential market is very large, we believe the luxurious nature of our residential properties, the quality and exclusivity associated with our brands, and the hospitality services that we provide, all serve to make our residential properties distinctive.

Seasonality

In general, business at company-operated and franchised properties fluctuates only moderately with the seasons and is relatively stable. Business at some resort properties may be seasonal depending on location.

Relationship with Major Customer

We operate a number of properties under long-term management agreements that are owned or leased by Host Hotels & Resorts, Inc. (“Host”). In addition, Host is a partner in several partnerships that own properties operated by us under long-term management agreements. See Footnote No. 18, “Relationship with Major Customer,” for more information.

Intellectual Property

We operate in a highly competitive industry and our brand names, trademarks, service marks, trade names, and logos are very important to the sales and marketing of our properties and services. We believe that our brand names and other intellectual property have come to represent the highest standards of quality, caring, service, and value to our customers and the traveling public. Accordingly, we register and protect our intellectual property where we deem appropriate and otherwise protect against its unauthorized use.

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