Financial Information

PART II

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

Operating Income

2016 Compared to 2015.

Operating income increased by $18 million to $1,368 million in 2016 from $1,350 million in 2015. The increase in operating income reflected a $349 million increase in fee revenue, which we discuss in the preceding “Revenues” section, a $386 million increase in merger-related costs and charges which we discuss in Footnote 4 “Merger-Related Costs and Charges,” as well as the following changes. 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.

Owned, leased, and other revenue, net of direct expenses for Legacy-Marriott operations increased by $65 million. The increase was largely attributable to $39 million in higher branding fees and $25 million of higher owned and leased revenue, net of direct expenses. The $25 million of higher owned and leased revenue, net of direct expenses primarily reflected $17 million of net stronger performance at several properties following renovations, $15 million overall favorable results across our segments, and $4 million of lower pre-opening costs, partially offset by $10 million of lower profits from properties that converted from owned to managed.

Depreciation, amortization, and other expense for Legacy-Marriott operations decreased by $14 million. The decrease primarily reflected a favorable variance to the 2015 impairment charges on the EDITION hotels ($12 million) and corporate equipment ($4 million).

General, administrative, and other expenses for Legacy-Marriott operations decreased by $9 million. The decrease primarily reflected $15 million in lower reserves for guarantee funding, and $9 million in lower foreign exchange losses, partially offset by $15 million of higher administrative costs to grow our brands globally, $4 million of higher bad debt reserves, and $3 million net unfavorable impact to our legal expenses associated with 2015 litigation resolutions.

2015 Compared to 2014.

Operating income increased by $191 million to $1,350 million in 2015 from $1,159 million in 2014. The increase in operating income reflected a $151 million increase in fee revenue, which we discuss in the preceding “Revenues” section, as well as the following changes.

The $6 million 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.

The $9 million decrease in depreciation, amortization, and other expense 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 and a $4 million impairment charge on corporate equipment.

The $25 million decrease in general, administrative, and other expenses 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 acquisition.