Financial Information

PART II

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

North American Limited-Service includes AC Hotels by Marriott, Courtyard, Residence Inn, SpringHill Suites, Fairfield Inn & Suites, and TownePlace Suites located in the United States and Canada.

2015 Compared to 2014

In 2015, across our North American Limited-Service segment we added 173 properties (19,712 rooms) and 26 properties (2,820 rooms) left our system. The majority of the properties that left our system were Fairfield Inn & Suites and Residence Inn properties.

For the twelve months ended December 31, 2015, compared to the twelve months ended December 31, 2014, RevPAR for comparable systemwide North American Limited-Service properties increased by 5.6 percent to $94.99, occupancy for these properties increased by 0.5 percentage points to 74.4 percent, and average daily rates increased by 4.9 percent to $127.65.

The $77 million increase in segment profits, compared to 2014, reflected $73 million of higher base management and franchise fees, $13 million of higher incentive management fees, $2 million of lower general, administrative, and other expenses, and $1 million of lower depreciation, amortization, and other expense, partially offset by $5 million of lower owned, leased, and other revenue, net of direct expenses, $4 million of lower gains and other income, net, and $3 million of lower equity in earnings.

Base management and franchise fees were higher due to unit growth and stronger room rates, including $19 million of higher franchise licensing and application fees, partially offset by a $5 million reduction in previously deferred fees and $3 million of contract terminations. Increased incentive management fees were primarily driven by a few large portfolios of managed hotels whose improved net house profits allowed them to reach their owners priority threshold and begin to record incentive fees.

Lower owned, leased, and other revenue, net of direct expenses primarily reflected $7 million of lower termination fees, partially offset by $3 million of higher net earnings at several leased properties.

Gains and other income, net were lower due to a $4 million expected disposal loss on a plot of land. See Footnote No. 3, “Acquisitions and Dispositions” for more information.

Lower equity in earnings was driven by the redemption of our investment in an entity that owns two hotels.

Cost reimbursements revenue and expenses for our North American Limited-Service segment properties totaled $2,366 million in 2015, compared to $2,217 million in 2014.

2014 Compared to 2013

In 2014, across our North American Limited-Service segment we added 120 properties (13,928 rooms) and 32 properties (3,030 rooms) left our system. The majority of the properties that left our system were Fairfield Inn & Suites and Residence Inn properties.

For the twelve months ended December 31, 2014, compared to the twelve months ended December 31, 2013, RevPAR for comparable systemwide North American Limited-Service properties increased by 7.5 percent to $89.11, occupancy for these properties increased by 2.3 percentage points to 74.0 percent, and average daily rates increased by 4.2 percent to $120.36.

The $95 million increase in segment profits, compared to 2013, primarily reflected $80 million of higher base management and franchise fees, $11 million of higher owned, leased, and other revenue, net of direct expenses, and $7 million of higher incentive management fees.

Higher base management and franchise fees were primarily driven by higher RevPAR for comparable properties and unit growth, and included $15 million of higher deferred management fees and $10 million of higher relicensing fees. Increased incentive management fees resulted from net house profit growth at managed hotels.

The increase in owned, leased, and other revenue, net of direct expenses, primarily reflected $5 million of higher net earnings at several leased properties and $4 million of higher termination fees.

Cost reimbursements revenue and expenses for our North American Limited-Service segment properties totaled $2,217 million in 2014, compared to $1,939 million in 2013.