Financial Information

PART II

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

The following discussion reflects all three of our reportable segments. We consider total segment revenues and total segment profits (as defined in Footnote No. 16, “Business Segments”) to be meaningful indicators of our performance because they measure our growth in profitability and enable investors to compare the revenues and profits of our operations to our competitors.

2015 Compared to 2014

We added 300 properties (51,547 rooms) and 51 properties (6,328 rooms) exited our system in 2015.

Total segment revenues increased by $678 million to $14,218 million in 2015, a five percent increase from revenues of $13,540 million in 2014, and total segment profits increased by $111 million to $1,504 million in 2015, an eight percent increase from $1,393 million in 2014.

The year-over-year increase in segment revenues of $678 million was a result of a $572 million increase in cost reimbursements revenue, a $109 million increase in franchise fees, a $26 million increase in base management fees, and a $17 million increase in incentive management fees, partially offset by a $46 million decrease in owned, leased, and other revenue. The year-over-year increase of $111 million in segment profits reflected a $109 million increase in franchise fees, a $26 million increase in base management fees, and a $17 million increase in incentive management fees, partially offset by a $20 million decrease in gains and other income, net, a $12 million decrease in equity in earnings, a $6 million increase in general, administrative, and other expenses, and a $3 million decrease in owned, leased, and other revenue, net of direct expenses. For more information on the variances, see the preceding sections beginning with “Revenues.”

In 2015, 68 percent of our managed properties paid incentive management fees to us versus 50 percent in 2014. Managed properties that paid incentive management fees in 2015 represented 63 percent of properties in North America and 74 percent outside of North America, compared to 36 percent in North America and 73 percent outside of North America in 2014. The percentage of North American properties that paid incentive management fees to us increased compared to 2014 due to a few large North American Limited-Service portfolios of properties that paid incentive management fees in 2015 but did not do so in 2014. In addition, in 2015, 51 percent of our incentive fees came from properties outside of North America versus 56 percent in 2014.

Compared to 2014, worldwide comparable company-operated house profit margins in 2015 increased by 80 basis points and worldwide comparable company-operated house profit per available room (“HP-PAR”) increased by 7.5 percent on a constant U.S. dollar basis, reflecting higher occupancy, rate increases, improved productivity, and solid cost controls. These same factors contributed to North American company-operated house profit margins increasing by 80 basis points compared to 2014. HP-PAR at those same properties increased by 7.8 percent. International company-operated house profit margins increased by 70 basis points, and HP-PAR at those properties increased by 6.9 percent reflecting increased demand and higher RevPAR in most locations and improved productivity.

See “Statistics” below for detailed information on Systemwide RevPAR and Company-operated RevPAR by segment, region, and brand.

2014 Compared to 2013

We added 311 properties (46,050 rooms) and 52 properties (6,418 rooms) exited our system in 2014. These figures do not include residential units. During 2014, we also added two residential properties (30 units) and no residential properties or units exited our system.

Total segment revenues increased by $1,022 m/illion to $13,540 million in 2014, an 8 percent increase from revenues of $12,518 million in 2013, and total segment profits increased by $196 million to $1,393 million in 2014 from $1,197 million in 2013.

The year-over-year increase in segment revenues of $1,022 million was a result of a $787 million increase in cost reimbursements revenue, an $80 million increase in franchise fees, a $58 million increase in owned, leased, and other revenue, a $51 million increase in base management fees, and a $46 million increase in incentive management fees. The year-over-year increase of $196 million in segment profits reflected an $80 million increase in franchise fees, a $51 million increase in base management fees, a $46 million increase in incentive management fees, $19 million of lower joint venture equity losses, a $11 million increase in owned, leased, and other revenue, net of direct expenses, and $4 million of lower depreciation, amortization, and other expense, partially offset by a $16 million increase in general, administrative, and other expenses. For more information on the variances, see the preceding sections beginning with “Revenues.”

In 2014, 50 percent of our managed properties paid incentive management fees to us versus 38 percent in 2013. Managed properties that paid incentive management fees in 2014 represented 36 percent of properties in North America and 73 percent outside of North America, compared to 21 percent in North America and 70 percent outside of North America in 2013. In addition, in 2014, 56 percent of our incentive fees came from properties outside of North America versus 58 percent in 2013. Further, we earned $24 million in incentive management fees in 2014 from properties that did not earn any incentive management fees in 2013.

Compared to 2013, worldwide comparable company-operated house profit margins in 2014 increased by 120 basis points and HP-PAR increased by 9.7 percent on a constant U.S. dollar basis, reflecting higher occupancy, rate increases, improved productivity, and solid cost controls. These same factors contributed to North American company-operated house profit margins increasing by 150 basis points compared to 2013. HP-PAR at those same properties increased by 11.4 percent. International company-operated house profit margins increased by 70 basis points, and HP-PAR at those properties increased by 6.6 percent reflecting increased demand and higher RevPAR in most locations and improved productivity. Note that 2014 had three fewer days of activity when compared to 2013.

See “Statistics” below for detailed information on Systemwide RevPAR and Company-operated RevPAR by segment, region, and brand.

Development

In 2015, we added 300 properties with 51,547 rooms across our brands, including 9,590 rooms from the acquisition of Delta Hotels and Resorts, and 51 properties (6,328 rooms) left our system. No residential properties entered or left our system. Highlights of the year included:

• Converting 39 properties (7,301 rooms), or 14 percent of our gross room additions for the year, to our brands;
• Adding approximately 32 percent of all the new rooms outside North America; and
• Adding 173 properties (19,712 rooms) to our North American Limited-Service brands.

We have over 270,000 hotel rooms in our development pipeline as of year-end 2015, which includes hotel rooms under construction and under signed contracts, as well as nearly 27,000 hotel rooms approved for development but not yet under signed contracts. We expect the number of our open hotel rooms (gross) to increase approximately 8 percent in 2016. This development pipeline and expected hotel room growth information does not include rooms that will join our system through the Starwood Combination.

We believe that we have access to sufficient financial resources to finance our growth, as well as to support our ongoing operations and meet debt service and other cash requirements. Nonetheless, our ability to develop and update our brands and the ability of hotel developers to build or acquire new Marriott-branded properties, both of which are important parts of our growth plan, depend in part on capital access, availability and cost for other hotel developers and third-party owners. These growth plans are subject to numerous risks and uncertainties, many of which are outside of our control. See the “Forward- Looking Statements” and “Risks and Uncertainties” captions earlier in this report and the “Liquidity and Capital Resources” caption later in this report.