Financial Information

PART II

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

North American Limited-Service

2016 Compared to 2015

In 2016, across our North American Limited-Service segment we added 451 properties (60,637 rooms), including 226 properties (34,294 rooms) from the Starwood Combination on the Merger Date, and 8 properties (880 rooms) left our system.

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 $38 million increase in segment profits for Legacy-Marriott operations, compared to 2015, reflected $14 million of higher base management and franchise fees, $10 million of higher incentive management fees, $5 million of lower general, administrative, and other expenses, $4 million of higher owned, leased, and other revenue, net of direct expenses, $3 million of higher gains and other income, net, and $2 million of lower depreciation, amortization, and other expense.

Base management and franchise fees for Legacy-Marriott operations were higher primarily reflecting $50 million from new units and stronger RevPAR, partially offset by $24 million of lower relicensing fees and an $11 million decrease in deferred fee recognition. Increased incentive management fees for Legacy-Marriott operations were primarily driven by $10 million of higher incentive fees earned from a few limited-service portfolios.

Higher owned, leased, and other revenue, net of direct expenses primarily reflected higher net earnings at several leased and owned properties.

Lower general, administrative, and other expenses for Legacy-Marriott operations were primarily due to $7 million of lower reserves for guarantee funding.

Higher gains and other income, net for Legacy-Marriott operations primarily reflected a favorable variance to the $4 million prior year disposal loss for a North American Limited-Service segment plot of land.

Cost reimbursements revenue and expenses for our Legacy-Marriott North American Limited-Service segment properties totaled $2,646 million in 2016, compared to $2,366 million in 2015.

2015 Compared to 2014

In 2015, across our North American Limited-Service segment we added 173 properties (19,712 rooms) and 26 properties (2,820 rooms) left our system. The majority of the properties that left our system were Fairfield Inn & Suites and Residence Inn properties.

For the twelve months ended December 31, 2015, compared to the twelve months ended December 31, 2014, RevPAR for comparable systemwide North American Limited-Service properties increased by 5.6 percent to $94.99, occupancy for these properties increased by 0.5 percentage points to 74.4 percent, and average daily rates increased by 4.9 percent to $127.65.

The $77 million increase in segment profits, compared to 2014, reflected $73 million of higher base management and franchise fees, $13 million of higher incentive management fees, $2 million of lower general, administrative, and other expenses, and $1 million of lower depreciation, amortization, and other expense, partially offset by $5 million of lower owned, leased, and other revenue, net of direct expenses, $4 million of lower gains and other income, net, and $3 million of lower equity in earnings.

Base management and franchise fees were higher due to unit growth and stronger room rates, including $19 million of higher franchise licensing and application fees, partially offset by a $5 million reduction in previously deferred fees and $3 million of contract terminations. Increased incentive management fees were primarily driven by 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.

Lower owned, leased, and other revenue, net of direct expenses primarily reflected $7 million of lower termination fees, partially offset by $3 million of higher net earnings at several leased properties.

Gains and other income, net were lower due to a $4 million expected disposal loss on a plot of land. See Footnote 3 “Acquisitions and Dispositions” for more information.

Lower equity in earnings was driven by the redemption of our investment in an entity that owns two hotels.

Cost reimbursements revenue and expenses for our North American Limited-Service segment properties totaled $2,366 million in 2015, compared to $2,217 million in 2014.