Financial Information

PART II

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

Investing Activities Cash Flows

Acquisition of a Business, Net of Cash Acquired. Cash outflows of $2,412 million in 2016 reflect cash consideration to Starwood shareholders, net of cash acquired in the Starwood Combination. Cash outflows of $137 million in 2015 primarily reflect the acquisition of Delta Hotels. See Footnote 3 “Acquisitions and Dispositions” for more information.

Capital Expenditures and Other Investments. We made capital expenditures of $199 million in 2016, $305 million in 2015, and $411 million in 2014. These included expenditures related to the development and construction of new hotels, improvements to existing properties, and systems initiatives. Capital expenditures in 2016 decreased by $106 million compared to 2015, primarily due to lower spending for our EDITION hotels. Capital expenditures in 2015 decreased by $106 million compared to 2014, primarily related to the 2014 development of two EDITION hotels, partially offset by 2015 renovations at a North American Full-Service property and investments in our reservations system.

We expect 2017 investment spending will total approximately $500 million to $700 million, including approximately $175 million for maintenance capital spending. Consolidated investment spending also includes other capital expenditures, loan advances, contract acquisition costs, acquisitions, and equity and other investments.

Over time, we have sold lodging properties, both completed and under development, subject to long-term management agreements. The ability of third-party purchasers to raise the debt and equity capital necessary to acquire such properties depends in part on the perceived risks inherent in the lodging industry and other constraints inherent in the capital markets as a whole. We monitor the status of the capital markets and regularly evaluate the potential impact of changes in capital market conditions on our business operations. In the Starwood Combination, we acquired various hotels and joint venture interests in hotels, which we have sold or may seek to sell. We also expect to continue making selective and opportunistic investments to add units to our lodging business, which may include new construction, loans, and noncontrolling equity investments.

Fluctuations in the values of hotel real estate generally have little impact on our overall business results because: (1) we own less than one percent of hotels that we operate or franchise; (2) management and franchise fees are generally based upon hotel revenues and profits rather than current hotel property values; and (3) our management agreements generally do not terminate upon hotel sale or foreclosure.

Dispositions. Property and asset sales generated $218 million cash proceeds in 2016 and $673 million in 2015. See Footnote 3 “Acquisitions and Dispositions” for more information on completed dispositions and planned dispositions.

Loan Activity. From time to time, we make loans to owners of hotels that we operate or franchise. Loan collections, net of loan advances, amounted to $35 million in 2016 compared to net collections of $26 million in 2015. At year-end 2016, we had $248 million of senior, mezzanine, and other loans ($245 million noncurrent and $3 million current) outstanding, compared to $221 million ($215 million noncurrent and $6 million current) outstanding at year-end 2015. Our notes receivable balance for senior, mezzanine, and other loans increased by $27 million, primarily due to $65 million in loans acquired in the Starwood Combination on the Merger Date and loan advances of $32 million, partially offset by loan collections of $67 million.

Equity and Cost Method Investments. Cash outflows of $14 million in 2016, $7 million in 2015, and $6 million in 2014 for equity and cost method investments primarily reflects our investments in a number of joint ventures.