Financial Information

PART II

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

Operating Income

2015 Compared to 2014

Operating income increased by $191 million to $1,350 million in 2015 from $1,159 million in 2014. The $191 million increase in operating income reflected a $108 million increase in franchise fees, a $26 million increase in base management fees, a $25 million decrease in general, administrative, and other expenses, a $17 million increase in incentive management fees, a $9 million decrease in depreciation, amortization, and other expense, and $6 million of higher owned, leased, and other revenue, net of direct expenses. We discuss the reasons for the increases in base management fees, franchise fees, and incentive management fees compared to 2014 in the preceding “Revenues” section.

The $6 million (2 percent) increase in owned, leased, and other revenue, net of direct expenses was largely attributable to $4 million in higher branding fees. Owned and leased revenue, net of direct expenses was unchanged as stronger results at several of our International properties, including $4 million of lower lease payments for properties that moved to managed, franchised, or left our system, were offset by $10 million of weaker performance due to renovations.

Depreciation, amortization and other expense decreased by $9 million (6 percent) to $139 million in 2015 from $148 million in 2014. The decrease reflected a $25 million favorable variance to the 2014 impairment charge on the EDITION hotels, partially offset by the 2015 impairment charges of $6 million for The Miami Beach EDITION residences and $6 million for The New York (Madison Square Park) EDITION, which are both discussed in Footnote No. 3, “Acquisitions and Dispositions,” and a $4 million impairment charge on corporate equipment.

General, administrative, and other expenses decreased by $25 million (4 percent) to $634 million in 2015 from $659 million in 2014. The decrease largely reflected a $28 million net favorable impact to our legal expenses associated with litigation resolutions, $24 million of development costs that we deferred in 2015 related to our growing franchise pipeline, and $5 million in lower foreign exchange losses compared to the 2014 devaluation of assets denominated in Venezuelan Bolivars, partially offset by $20 million of higher costs incurred to grow our brands globally, $5 million of transaction costs related to the Starwood Combination, and $5 million from the Delta Hotels and Resorts acquisition.

2014 Compared to 2013

Operating income increased by $171 million to $1,159 million in 2014 from $988 million in 2013. The $171 million increase in operating income reflected a $79 million increase in franchise fees, a $51 million increase in base management fees, a $46 million increase in incentive management fees, and $26 million of higher owned, leased, and other revenue, net of direct expenses, partially offset by a $21 million increase in depreciation, amortization, and other expense, and a $10 million increase in general, administrative, and other expenses. We discuss the reasons for the increases in base management fees, franchise fees, and incentive management fees compared to 2013 in the preceding “Revenues” section.

The $26 million (12 percent) increase in owned, leased, and other revenue, net of direct expenses was largely attributable to $23 million of higher owned and leased revenue, net of direct expenses, $9 million in higher branding fees, $4 million from various programs at Protea Hotels, and $2 million in other program revenue, partially offset by $14 million in higher termination fees in 2013. Higher owned and leased revenue, net of direct expenses of $23 million primarily reflects $14 million in net favorable results at several leased properties, $10 million of revenue, net of direct expenses for a North American Full- Service managed property that we acquired in the 2013 fourth quarter, and $7 million of revenue, net of direct expenses for new Protea Hotel leases, partially offset by $6 million attributable to International properties that converted to managed or franchised.

Depreciation, amortization and other expense increased by $21 million (17 percent) to $148 million in 2014 from $127 million in 2013. The increase reflected the $25 million net impairment charge on the EDITION hotels discussed in Footnote No. 3, “Acquisitions and Dispositions,” $5 million in accelerated amortization related to contract terminations, $5 million in higher contract amortization primarily from Protea Hotels, and $3 million in higher depreciation related to a North American Full-Service property that we acquired in the 2013 fourth quarter, partially offset by $13 million of accelerated amortization related to contract terminations in 2013 and $5 million of 2013 depreciation for two International properties that converted to managed contracts.

General, administrative, and other expenses increased by $10 million (2 percent) to $659 million in 2014 from $649 million in 2013. The increase largely reflected $9 million from the addition of Protea Hotels and related transition costs, $7 million from net unfavorable foreign exchange rates, primarily from the devaluation of assets denominated in Venezuelan Bolivars, and $6 million of increased guarantee funding, partially offset by $8 million litigation settlements recognized in 2013, and a $5 million performance cure payment in 2013 for an International property.