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 our consolidated revenues, operating income, and non-operating income for 2016, 2015, and 2014. In accordance with GAAP, we include the business that we acquired in the Starwood Combination starting from the Merger Date through year-end 2016.

Revenues

2016 Compared to 2015.

The table below presents the impact of the Starwood Combination starting from the Merger Date, with additional information on the factors attributable to our Legacy-Marriott brands discussed following the table.

The $5 million increase in base management fees for Legacy-Marriott operations primarily reflected the impact of stronger sales at existing properties ($22 million) and unit growth across our system ($15 million), partially offset by the impact of unfavorable foreign exchange rates ($15 million), lower deferred fee recognition ($11 million), and lower fees from properties that converted from managed to franchised ($8 million).

The $48 million increase in franchise fees for Legacy-Marriott operations reflected the impact of unit growth across our system ($48 million), stronger sales at existing properties ($16 million), and higher fees from properties that converted from managed to franchised ($11 million), partially offset by lower relicensing fees ($22 million) and the impact of unfavorable foreign exchange rates ($7 million).

The $34 million increase in incentive management fees for Legacy-Marriott operations reflected higher net house profit and unit growth, higher incentive fees earned from a few limited-service portfolios ($10 million), and higher deferred fee recognition ($8 million), partially offset by the impact of unfavorable foreign exchange rates ($7 million).

In 2016, 69 percent of our Legacy-Marriott managed properties paid incentive management fees to us versus 68 percent in 2015. In North America, 65 percent of Legacy-Marriott managed properties paid incentive fees in 2016 compared to 63 percent in 2015. Outside North America, 74 percent of Legacy-Marriott managed properties paid incentive fees in both 2016 and 2015, representing 48 percent of our total incentive management fees in 2016 from Legacy-Marriott managed properties compared to 51 percent of our total fees in 2015.

The $25 million increase in owned, leased, and other revenue for Legacy-Marriott operations reflected $38 million of higher other revenue predominantly from branding fees, partially offset by $13 million of lower owned and leased revenue. The decrease in owned and leased revenue primarily reflected lower revenues from properties that converted to managed ($60 million) and the impact of unfavorable foreign exchange rates ($15 million), partially offset by improved sales from several properties following renovations ($29 million), stronger sales at other existing properties across our segments ($28 million), and favorable results at two new owned properties ($9 million).

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 Loyalty 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 $568 million increase in cost reimbursements revenue for Legacy-Marriott operations reflected the impact of higher property occupancies, unit growth across our system, and growth in the Marriott Rewards program membership and activity.

2015 Compared to 2014.

The following discussion presents our analysis of our revenues for 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 acquisition, partially offset by $15 million in unfavorable foreign exchange rates and $7 million of lower incentive fees from properties under renovation.

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 primarily 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.

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 3 “Acquisitions and Dispositions.”

The $575 million increase in total cost reimbursements revenue reflected the impact of higher occupancies and growth across our system. In 2015, 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.