Financial Information

PART II

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

CONSOLIDATED RESULTS

The following discussion presents an analysis of results of our operations for 2015, 2014, and 2013.

Revenues

2015 Compared to 2014

The $26 million increase in base management fees reflected stronger RevPAR ($29 million) and the impact of unit growth across our system ($25 million), partially offset by the impact of unfavorable foreign exchange rates ($11 million), lower fees due to properties that converted from managed to franchised ($7 million), and decreased recognition of previously deferred fees ($8 million).

The $108 million increase in total franchise fees reflected the impact of unit growth across our system ($55 million), stronger RevPAR due to increased demand ($31 million), increased relicensing and application fees ($22 million), and higher fees from properties that converted to franchised from managed ($7 million), partially offset by the impact of unfavorable foreign exchange rates ($7 million).

The $17 million increase in incentive management fees reflected higher RevPAR and house profit margins primarily at company-managed North American properties, particularly at 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. Higher incentive fees also reflected the addition of hotels included in the Delta Hotels and Resorts acquisition, partially offset by $15 million in unfavorable foreign exchange rates and $7 million of lower incentive fees from properties under renovation.

The $36 million decrease in owned, leased, and other revenue reflected $44 million of lower owned and leased revenue, partially offset by $8 million in higher other revenue predominantly from branding fees and hotel service programs that we acquired as part of our acquisition of Protea Hotels in the 2014 second quarter. Lower owned and leased revenue reflected net weaker performance impacted by unfavorable foreign exchange rates, a decrease of $27 million attributable to properties that converted to managed or franchised or left our system, and $16 million net unfavorable impact of properties under renovation, partially offset by increases of $10 million from Protea Hotel leases we acquired in the 2014 second quarter and $6 million from The Miami Beach EDITION hotel, which opened in the 2014 fourth quarter and which we subsequently sold in the 2015 first quarter as discussed in Footnote No. 3, “Acquisitions and Dispositions.”

Cost reimbursements revenue represents reimbursements of costs incurred on behalf of managed and franchised properties and relates, predominantly, to payroll costs at managed properties where we are the employer but also includes reimbursements for other costs, such as those associated with our rewards programs, reservations, and marketing programs. As we record cost reimbursements based upon costs incurred with no added markup, this revenue and related expense has no impact on either our operating or net income. The $575 million increase in total cost reimbursements revenue reflected the impact of higher occupancies and growth across our system. Since the end of 2014, our managed rooms increased by 12,668 rooms and our franchised rooms increased by 31,883 rooms, net of rooms at hotels exiting our system.

2014 Compared to 2013

The $51 million increase in total base management fees, largely reflected stronger RevPAR due to increased demand ($34 million), the impact of unit growth across our system ($21 million), and increased recognition of previously deferred fees ($16 million), partially offset by a decrease in fees from terminated units ($8 million), decreased fees due to properties that converted from managed to franchised ($8 million), unfavorable foreign exchange rates ($6 million), and three fewer days of activity ($2 million).

The $79 million increase in total franchise fees, reflected stronger RevPAR due to increased demand ($35 million), new unit growth across our system ($35 million), increased relicensing fees ($10 million), and fees from properties that converted to franchised from managed ($7 million), partially offset by a decrease in fees from terminated units ($4 million) and three fewer days of activity ($3 million).

The $46 million increase in incentive management fees largely reflected higher net house profit at our North American and International managed hotels in addition to unit growth in International markets, partially offset by the impact of unfavorable foreign exchange rates ($5 million) and higher North American Full-Service deferred fees recognized in 2013 ($5 million). We estimate that the three fewer days of activity in 2014 compared to 2013 reduced fee revenues by approximately $5 million.

The $72 million increase in owned, leased, and other revenue, predominantly reflected $56 million of higher owned and leased revenue, $17 million in revenue from various Protea Hotels programs, $9 million in higher branding fees, and $2 million in other program revenue, partially offset by $14 million lower termination fee revenue in 2014. Higher owned and leased revenue reflected $43 million from Protea Hotel leases associated with the acquisition, $30 million in revenue from a North American Full-Service managed property that we acquired in the 2013 fourth quarter, and stronger performance across our new and existing owned and leased International properties, partially offset by $37 million attributable to five International properties that converted to managed or franchised properties. Combined branding fees for credit card endorsements and the sale of branded residential real estate by others totaled $127 million in 2014 and $118 million in 2013.

The $764 million increase in total cost reimbursements revenue reflected the impact of higher occupancies at our properties and growth across our system.