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 results of operations for 2019, 2018, and 2017.

Our 2017 results were favorably impacted by the non-recurring gain on the disposition of our ownership interest in Avendra, discussed in Note 3. We committed to the owners of the hotels in our system that the benefits derived from Avendra, including any dividends or sale proceeds above our original investment, would be used for the benefit of the hotels in our system. Accordingly, in 2019 we used $118 million ($87 million after-tax) and in 2018 we used $115 million ($85 million after-tax) of the net proceeds, and we intend to use the remainder of the net proceeds, for the benefit of our system of hotels. Spending under those plans is, and will be, expensed in the “Reimbursed expenses” caption of our Income Statements, causing a reduction in our profitability in the periods it is expensed.

Fee Revenues

2019 Compared to 2018

The $40 million increase in base management fees primarily reflected $31 million from unit growth and $15 million from RevPAR growth.

The $157 million increase in franchise fees primarily reflected $88 million from unit growth, $30 million of higher co-brand credit card fees, $23 million from AC Hotels by Marriott properties previously presented in the “Equity in earnings” caption of our Income Statements, $16 million of higher application, relicensing, and other fees, and $15 million from properties that converted from managed to franchised, partially offset by $17 million of lower residential branding fees.

In 2019 and 2018, we earned incentive management fees from 72 percent of our managed properties worldwide. We earned incentive management fees from 57 percent of managed properties in North America and 81 percent of managed properties outside North America in 2019, compared to 59 percent in North America and 82 percent outside North America in 2018. In addition, 65 percent of our total incentive management fees in 2019 came from our managed properties outside North America versus 63 percent in 2018.

2018 Compared to 2017

The $38 million increase in base management fees primarily reflected $29 million from unit growth and $28 million from RevPAR growth, partially offset by lower fees of $17 million from properties that converted from managed to franchised and $14 million from properties that were terminated.

The $263 million increase in franchise fees primarily reflected $143 million of higher branding fees, driven by $138 million of higher fees from our co-brand credit card agreements, $82 million from unit growth, $21 million from RevPAR growth, and $15 million from properties that converted from managed to franchised.

The $42 million increase in incentive management fees primarily reflected net higher profits at managed hotels and $14 million from unit growth.

In 2018, we earned incentive management fees from 72 percent of our managed properties worldwide versus 71 percent in 2017. We earned incentive management fees from 59 percent of managed properties in North America and 82 percent of managed properties outside North America in 2018, compared to 60 percent in North America and 80 percent outside North America in 2017. In addition, 63 percent of our total incentive management fees in 2018 came from our managed properties outside North America versus 62 percent in 2017.

Owned, Leased, and Other

2019 Compared to 2018

Owned, leased, and other revenue, net of direct expenses decreased by $33 million, primarily due to $21 million of lower termination fees and $8 million net unfavorable impact from acquisitions and dispositions.

2018 Compared to 2017

Owned, leased, and other revenue, net of direct expenses decreased by $12 million, primarily due to $81 million of lower owned and leased profits attributable to properties sold, partially offset by $51 million of higher termination fees and $17 million of net stronger results at our remaining owned and leased properties.