10-Q 1 mar-q32017x10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________ 
FORM 10-Q
_______________________________________ 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File No. 1-13881
_________________________________________________ 
miblk.jpg
MARRIOTT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
 _______________________________________
Delaware
 
52-2055918
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
10400 Fernwood Road, Bethesda, Maryland
(Address of principal executive offices)
 
20817
(Zip Code)
(301) 380-3000
(Registrant’s telephone number, including area code) 
_______________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
 
Smaller Reporting Company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 364,581,283 shares of Class A Common Stock, par value $0.01 per share, outstanding at October 26, 2017.




MARRIOTT INTERNATIONAL, INC.
FORM 10-Q TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
Part I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.



Item 6.
 
 
 
 



1


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements

MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
($ in millions, except per share amounts)
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30, 2017

September 30, 2016
 
September 30, 2017
 
September 30, 2016
REVENUES
 
 
 
 
 
 
 
Base management fees
$
269

 
$
180

 
$
818

 
$
538

Franchise fees
426

 
290

 
1,207

 
813

Incentive management fees
136

 
81

 
437

 
276

 
831

 
551

 
2,462

 
1,627

Owned, leased, and other revenue
452

 
239

 
1,349

 
650

Cost reimbursements
4,380

 
3,152

 
13,208

 
9,339

 
5,663

 
3,942

 
17,019

 
11,616

OPERATING COSTS AND EXPENSES
 
 
 
 
 
 
 
Owned, leased, and other - direct
356

 
194

 
1,069

 
533

Reimbursed costs
4,380

 
3,152

 
13,208

 
9,339

Depreciation, amortization, and other
68

 
36

 
218

 
97

General, administrative, and other
199

 
161

 
635

 
470

Merger-related costs and charges
28

 
228

 
100

 
250

 
5,031

 
3,771

 
15,230

 
10,689

OPERATING INCOME
632

 
171

 
1,789

 
927

Gains and other income, net
6

 
3

 
31

 
3

Interest expense
(73
)
 
(55
)
 
(216
)
 
(159
)
Interest income
9

 
9

 
24

 
22

Equity in earnings
6

 
3

 
29

 
8

INCOME BEFORE INCOME TAXES
580

 
131

 
1,657

 
801

Provision for income taxes
(188
)
 
(61
)
 
(486
)
 
(265
)
NET INCOME
$
392

 
$
70

 
$
1,171

 
$
536

EARNINGS PER SHARE
 
 
 
 
 
 
 
Earnings per share - basic
$
1.05

 
$
0.26

 
$
3.09

 
$
2.08

Earnings per share - diluted
$
1.04

 
$
0.26

 
$
3.06

 
$
2.04

CASH DIVIDENDS DECLARED PER SHARE
$
0.33

 
$
0.30

 
$
0.96

 
$
0.85

See Notes to Condensed Consolidated Financial Statements.

2


MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Net income
$
392

 
$
70

 
$
1,171

 
$
536

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
107

 
2

 
457

 
27

Derivative instrument adjustments, net of tax
(5
)
 
1

 
(13
)
 
(3
)
Unrealized gain (loss) on available-for-sale securities, net of tax
1

 

 
(1
)
 

Reclassification of losses, net of tax
4

 
1

 
5

 
3

Total other comprehensive income, net of tax
107

 
4

 
448

 
27

Comprehensive income
$
499

 
$
74

 
$
1,619

 
$
563

See Notes to Condensed Consolidated Financial Statements.


3


MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions)

 
(Unaudited)
 
 
 
September 30,
2017
 
December 31,
2016
ASSETS
 
 
 
Current assets
 
 
 
Cash and equivalents
$
508

 
$
858

Accounts and notes receivable, net
1,914

 
1,695

Prepaid expenses and other
225

 
230

Assets held for sale
297

 
588

 
2,944

 
3,371

Property and equipment, net
1,894

 
2,335

Intangible assets
 
 
 
Brands
5,898

 
6,509

Contract acquisition costs and other
2,860

 
2,761

Goodwill
9,182

 
7,598

 
17,940

 
16,868

Equity and cost method investments
720

 
728

Notes receivable, net
228

 
245

Deferred tax assets
110

 
116

Other noncurrent assets
400

 
477

 
$
24,236

 
$
24,140

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Current portion of long-term debt
$
398

 
$
309

Accounts payable
733

 
687

Accrued payroll and benefits
1,133

 
1,174

Liability for guest loyalty programs
1,959

 
1,866

Accrued expenses and other
1,385

 
1,111

 
5,608

 
5,147

Long-term debt
8,271

 
8,197

Liability for guest loyalty programs
2,824

 
2,675

Deferred tax liabilities
927

 
1,020

Other noncurrent liabilities
2,094

 
1,744

Shareholders’ equity
 
 
 
Class A Common Stock
5

 
5

Additional paid-in-capital
5,744

 
5,808

Retained earnings
7,310

 
6,501

Treasury stock, at cost
(8,498
)
 
(6,460
)
Accumulated other comprehensive loss
(49
)
 
(497
)
 
4,512

 
5,357

 
$
24,236

 
$
24,140

See Notes to Condensed Consolidated Financial Statements.

4


MARRIOTT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
(Unaudited)

 
Nine Months Ended
 
September 30, 2017
 
September 30, 2016
OPERATING ACTIVITIES
 
 
 
Net income
$
1,171

 
$
536

Adjustments to reconcile to cash provided by operating activities:
 
 
 
Depreciation, amortization, and other
218

 
97

Share-based compensation
139

 
117

Income taxes
73

 
1

Liability for guest loyalty programs
236

 
179

Merger-related charges
(117
)
 
172

Working capital changes
98

 
27

Other
98

 
77

Net cash provided by operating activities
1,916

 
1,206

INVESTING ACTIVITIES
 
 
 
Acquisition of a business, net of cash acquired

 
(2,412
)
Capital expenditures
(155
)
 
(132
)
Dispositions
482

 
53

Loan advances
(85
)
 
(24
)
Loan collections
91

 
61

Contract acquisition costs
(129
)
 
(55
)
Other
(14
)
 
22

Net cash provided by (used in) investing activities
190

 
(2,487
)
FINANCING ACTIVITIES
 
 
 
Commercial paper/Credit facility, net
455

 
1,657

Issuance of long-term debt
1

 
1,483

Repayment of long-term debt
(305
)
 
(296
)
Issuance of Class A Common Stock
4

 
22

Dividends paid
(362
)
 
(257
)
Purchase of treasury stock
(2,105
)
 
(248
)
Share-based compensation withholding taxes
(144
)
 
(74
)
Other

 
(24
)
Net cash (used in) provided by financing activities
(2,456
)
 
2,263

(DECREASE) INCREASE IN CASH AND EQUIVALENTS
(350
)
 
982

CASH AND EQUIVALENTS, beginning of period
858

 
96

CASH AND EQUIVALENTS, end of period
$
508

 
$
1,078

See Notes to Condensed Consolidated Financial Statements.


5


MARRIOTT INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.    BASIS OF PRESENTATION
The condensed consolidated financial statements present the results of operations, financial position, and cash flows of Marriott International, Inc. and subsidiaries (referred to in this report as “we,” “us,” “Marriott,” or “the Company”). In order to make this report easier to read, we also refer throughout to (i) our Condensed Consolidated Financial Statements as our “Financial Statements,” (ii) our Condensed Consolidated Statements of Income as our “Income Statements,” (iii) our Condensed Consolidated Balance Sheets as our “Balance Sheets,” (iv) our Condensed Consolidated Statements of Cash Flows as our “Statements of Cash Flows,” (v) our properties, brands, or markets in the United States (“U.S.”) and Canada as “North America” or “North American,” and (vi) our properties, brands, or markets outside of the U.S. and Canada as “International.” In addition, references throughout to numbered “Footnotes” refer to the numbered Notes in these Notes to Condensed Consolidated Financial Statements, unless otherwise noted.
These Financial Statements have not been audited. We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. generally accepted accounting principles (“GAAP”). The financial statements in this report should be read in conjunction with the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (“2016 Form 10-K”). Certain terms not otherwise defined in this Form 10-Q have the meanings specified in our 2016 Form 10-K.
Preparation of financial statements that conform with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods, and the disclosures of contingent liabilities. Accordingly, ultimate results could differ from those estimates.
The accompanying Financial Statements reflect all normal and recurring adjustments necessary to present fairly our financial position as of September 30, 2017 and December 31, 2016, the results of our operations for the three and nine months ended September 30, 2017 and September 30, 2016, and cash flows for the nine months ended September 30, 2017 and September 30, 2016. Interim results may not be indicative of fiscal year performance because of seasonal and short-term variations. We have eliminated all material intercompany transactions and balances between entities consolidated in these Financial Statements.
Beginning in the 2017 first quarter, we reclassified branding fees for third-party residential sales and credit card licensing to the “Franchise fees” caption from the “Owned, leased, and other revenue” caption on our Income Statements, as we believe branding fees are more akin to franchise royalties than owned and leased hotel profits. Branding fees totaled $68 million for the three months ended September 30, 2017 and $195 million for the nine months ended September 30, 2017. We reclassified the prior period amounts, which totaled $40 million for the three months ended September 30, 2016 and $121 million for the nine months ended September 30, 2016, to conform to our current presentation.
In the 2017 first quarter, our Asia Pacific operating segment met the applicable accounting criteria to be a reportable segment. Our Europe, Middle East and Africa, and Caribbean and Latin America operating segments do not individually meet the criteria for separate disclosure as reportable segments, and accordingly we combined them into an “all other category” which we refer to as “Other International.” We reclassified prior period amounts to conform to our current presentation. See Footnote 11Business Segments.”
Acquisition of Starwood Hotels & Resorts Worldwide
On September 23, 2016 (the “Merger Date”), we completed the acquisition of Starwood Hotels & Resorts Worldwide, LLC, formerly known as Starwood Hotels & Resorts Worldwide, Inc. (“Starwood”), through a series of transactions (the “Starwood Combination”), after which Starwood became an indirect wholly-owned subsidiary of the Company. Accordingly, our Income Statements include Starwood’s results of operations from the Merger Date.

6


We refer to our business associated with brands that were in our portfolio before the Starwood Combination as “Legacy-Marriott” and to the Starwood business and brands that we acquired as “Legacy-Starwood.” See Footnote 2Acquisitions and Dispositions” for more information on the Starwood Combination.
New Accounting Standards
Accounting Standards Update No. 2014-09 - “Revenue from Contracts with Customers” (“ASU 2014-09”)
ASU 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, as well as most industry-specific guidance, and enhances comparability of revenue recognition practices across entities and industries by providing a principles-based, comprehensive framework for addressing revenue recognition issues. ASU 2014-09 also specifies the accounting for some costs to obtain or fulfill a contract with a customer and provides enhanced disclosure requirements. The standard will be effective for us beginning in our 2018 first quarter. We are permitted to use either the full retrospective or the modified retrospective method when adopting ASU 2014-09, and we are evaluating the available adoption methods.
We are still assessing the potential impact that ASU 2014-09 will have on our financial statements and disclosures, but we believe that recognition of base management fees, franchise royalty fees, and owned and leased revenues will remain largely unchanged. We expect to recognize gains from the sale of real estate assets when control of the asset is transferred to the buyer, generally at the time the sale closes. Under current guidance, we defer gains on sales of real estate assets if we maintain substantial continuing involvement. We do not expect that this change will have a material impact on our Financial Statements, as we typically do not have real estate sale transactions that require us to defer significant gains. There likely will be changes to our revenue recognition policies related to the following:
We expect to recognize franchise application and relicensing fees over the term of the franchise contract rather than at hotel opening or relicensing.
We expect to present the amortization of contract acquisition costs paid to customers as a reduction of revenue rather than including such costs in “Depreciation, amortization, and other” on our Income Statements.
We expect to capitalize fewer contract acquisition costs as certain costs will not meet the capitalization criteria specified by ASU 2014-09.
We expect to recognize incentive management fees throughout the year to the extent that we determine that it is probable that a significant reversal will not occur as a result of future hotel profits or cash flows. This may result in a different pattern of recognition for incentive management fees from quarter to quarter than under the current guidance, but we do not expect a material impact on the total incentive management fees we will recognize during the full fiscal year.
Under the new guidance, we will generally be considered an agent in the transaction when loyalty program awards are redeemed. As a result, we will only recognize revenue for the net amount of consideration to which we are entitled for arranging for the redemption award, rather than the gross amount. While we have not yet fully quantified the impact of this change, it will have no impact on our operating or net income.
We expect to recognize temporary timing differences between costs incurred for centralized programs and services and the related reimbursement from hotel owners in our operating and net income in the period they occur. We operate these programs with the objective of breaking even, and under current guidance, we record any temporary timing differences on our Balance Sheets.
Accounting Standards Update No. 2016-02 - “Leases” (“ASU 2016-02”)
ASU 2016-02 introduces a lessee model that brings substantially all leases onto the balance sheet. Under the new standard, a lessee will recognize on its balance sheet a lease liability and a right-of-use asset for most leases, including operating leases. The new standard will also distinguish leases as either finance leases or operating leases. This distinction will affect how leases are measured and presented in the income statement and statement of cash flows. The standard is effective for us beginning in our 2019 first quarter, and we will be required to use a modified

7


retrospective transition approach, which means that we will apply the provisions of ASU 2016-02 to each lease that existed at the beginning of the earliest comparative period presented in the financial statements, as well as leases entered into after that date. We are still assessing the potential impact that ASU 2016-02 will have on our financial statements and disclosures, but we expect that it will have a material effect on our Balance Sheets.
Accounting Standards Update No. 2016-09 - “Stock Compensation” (“ASU 2016-09”)
We adopted ASU 2016-09 in the 2017 first quarter, which involves several aspects of the accounting for share-based payments. The new guidance had the following impacts on our Financial Statements:
We now record excess tax benefits (or deficiencies) as income tax benefit (or expense) in our Income Statements. Previously, we recorded excess tax benefits (deficiencies) in additional paid-in-capital in our Balance Sheets. As required, we prospectively applied this amendment in our Income Statements, which resulted in a benefit of $62 million to our provision for income taxes, approximately $0.16 per diluted share, for the nine months ended September 30, 2017.
We now classify excess tax benefits (or deficiencies) along with other income taxes in operating activities in our Statements of Cash Flows. ASU 2016-09 allowed for this amendment to be applied either prospectively or retrospectively. For consistency with our application of ASU 2016-09 in our Income Statements, we applied this amendment prospectively in our Statements of Cash Flows. For the nine months ended September 30, 2017, operating activities in our Statements of Cash Flows include $62 million from excess tax benefits. For the nine months ended September 30, 2016, we classified $21 million of excess tax benefits as financing inflows.
We now classify cash paid to taxing authorities when we withhold shares for employee tax-withholding purposes as a financing activity. As required, we retrospectively applied this amendment in our Statements of Cash Flows, and accordingly we reclassified $74 million of cash outflows from operating activities to financing activities for the nine months ended September 30, 2016.
Accounting Standards Update No. 2016-16 - “Accounting for Income Taxes: Intra-Entity Transfers of Assets Other than Inventory” (“ASU 2016-16”)
ASU 2016-16 requires companies to recognize the income tax effects of intercompany sales of assets other than inventory when the transfer occurs. Under current GAAP, the tax effects of intercompany sales are deferred until the transferred asset is sold to a third party or otherwise recovered through use. ASU 2016-16 will be effective for us beginning in our 2018 first quarter, and we will be required to use a modified retrospective transition approach with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. We are still assessing the potential impact that the standard will have on our financial statements and disclosures.
Accounting Standards Update No. 2017-01 - “Clarifying the Definition of a Business” (“ASU 2017-01”)
We prospectively adopted ASU 2017-01 in the 2017 first quarter, which clarifies the definition of a business to help companies evaluate whether transactions should be accounted for as acquisitions or disposals of assets or businesses. We expect that under this new guidance, our hotel sales will generally qualify as asset disposals, with the result that no goodwill of the reporting unit will be assigned to the carrying value of the asset when calculating the gain or loss on sale.

8


2.    ACQUISITIONS AND DISPOSITIONS
Starwood Combination
The following table presents the fair value of each type of consideration that we transferred in the Starwood Combination:
(in millions, except per share amounts)
 
Equivalent shares of Marriott common stock issued in exchange for Starwood outstanding shares
134.4

Marriott common stock price as of Merger Date
$
68.44

Fair value of Marriott common stock issued in exchange for Starwood outstanding shares
9,198

Cash consideration to Starwood shareholders, net of cash acquired of $1,116
2,412

Fair value of Marriott equity-based awards issued in exchange for vested Starwood equity-based awards
71

Total consideration transferred, net of cash acquired
$
11,681

Fair Values of Assets Acquired and Liabilities Assumed. The following table presents our estimates of fair values of the assets that we acquired and the liabilities that we assumed on the Merger Date as preliminarily reported at year-end 2016 and as finalized at the end of the 2017 third quarter:
($ in millions)
September 23, 2016
(as reported at
December 31, 2016)
 
Adjustments (2)
 
September 23, 2016
(as finalized)
Working capital
$
(180
)
 
$
(56
)
 
$
(236
)
Property and equipment, including assets held for sale
1,999

 
(293
)
 
1,706

Identified intangible assets
7,957

 
(719
)
 
7,238

Equity and cost method investments
579

 
(42
)
 
537

Other noncurrent assets
224

 
(24
)
 
200

Deferred income taxes, net
(1,516
)
 
52

 
(1,464
)
Guest loyalty program
(1,631
)
 
(7
)
 
(1,638
)
Debt
(1,871
)
 
(6
)
 
(1,877
)
Other noncurrent liabilities
(654
)
 
(323
)
 
(977
)
Net assets acquired
4,907

 
(1,418
)
 
3,489

Goodwill (1)
6,774

 
1,418

 
8,192

 
$
11,681

 
$

 
$
11,681

(1) 
Goodwill primarily represents the value that we expect to obtain from synergies and growth opportunities from our combined operations, and it is not deductible for tax purposes. See Footnote 11Business Segments” for our assignment of goodwill by reportable segment.
(2) 
Adjustments primarily reflect refinements of our valuation models related to certain acquired IT systems, our assumptions for capital expenditures of owned and leased hotels, discount rates, certain assumptions related to operating lease agreements, and our assumptions related to certain brands and management and franchise agreements, including contract terms (including renewal assumptions), tax rates, and royalty and growth rates used in the relief-from-royalty valuation models.
We estimated the value of the acquired property and equipment using a combination of the income, cost, and market approaches, which are primarily based on significant Level 2 and Level 3 assumptions, such as estimates of future income growth, capitalization rates, discount rates, and capital expenditure needs of the hotel properties. Our equity method investments consist primarily of partnership and joint venture interests in entities that own hotel real estate. We estimated the value of the underlying real estate using the same methods as for property and equipment described above. We primarily valued debt using quoted market prices, which are considered Level 1 inputs as they are observable in the market.

9


The following table presents our estimates of the fair values of Starwood’s identified intangible assets and their related estimated useful lives:
 
 
Estimated Fair Value
($ in millions)
 
Estimated Useful
Life (in years)
Brands
 
$
5,664

 
indefinite
Management agreements and lease contract intangibles
 
751

 
10 - 25
Franchise agreements
 
746

 
10 - 80
Loyalty program marketing rights
 
77

 
30
 
 
$
7,238

 
 
We estimated the value of Starwood’s brands using the relief-from-royalty method, which applies an estimated royalty rate to forecasted future cash flows, discounted to present value. We estimated the value of management and franchise agreements using the multi-period excess earnings method, which is a variation of the income approach. This method estimates an intangible asset’s value based on the present value of the incremental after-tax cash flows attributable to the intangible asset. We valued the lease contract intangibles using an income approach. These valuation approaches utilize Level 3 inputs.
In connection with the Starwood Combination, we are currently assessing various regulatory compliance matters at several foreign Legacy-Starwood locations, including compliance with the U.S. Foreign Corrupt Practices Act (“FCPA”). The results of this assessment may give rise to contingencies that could require us to accrue expenses. While any such amounts are not currently estimable, we will continue to evaluate potential contingencies as we gather more information.
Pro Forma Results of Operations. For the nine months ended September 30, 2016, pro forma revenues totaled $17,033 million, and pro forma net income totaled $878 million. Pro forma net income includes $54 million of integration costs, and it excludes $295 million of transaction and employee termination costs. As required by GAAP, these unaudited pro forma results assume we completed the Starwood Combination on January 1, 2015, use our estimates of the fair values of assets and liabilities as of the Merger Date, and do not reflect any cost saving synergies from operating efficiencies. They are not necessarily indicative of what the actual results of operations of the combined company would have been if the Starwood Combination had occurred on January 1, 2015, nor are they indicative of future results of operations.
Dispositions and Planned Dispositions
In the 2017 fourth quarter, we announced that the owners of Avendra LLC have reached a binding agreement to sell Avendra LLC to Aramark. We expect to receive approximately $650 million for our 55 percent interest in Avendra LLC. We committed to the owners of the hotels in our system that the benefits derived from Avendra LLC, including any dividends or sale proceeds above our original investment, would be used for the benefit of the hotels in our system. Accordingly, our share of the proceeds will be invested for the benefit of our system of hotels. We are currently developing these investment plans.
At the end of the 2017 third quarter, we held $297 million of assets classified as “Assets held for sale” on our Balance Sheets related to a North American Full-Service hotel acquired in the Starwood Combination and the remaining Miami Beach EDITION residences. In the 2017 fourth quarter, we sold the North American Full-Service hotel and received C$337 million ($269 million) in cash.
In the 2017 second quarter, we sold a North American Full-Service hotel and received $169 million in cash. We recognized a $24 million gain in the “Gains and other income, net” caption of our Income Statements.
In the 2017 first quarter, we sold a North American Full-Service hotel, which we had acquired in the Starwood Combination and previously classified as “Assets held for sale,” and received $306 million in cash. In conjunction with the sale, we also transferred the associated ground lease, as a result of which our future minimum operating lease obligations decreased by approximately $194 million as of the date of the sale as follows: $3 million in 2017, $4 million in 2018, $4 million in 2019, $4 million in 2020, $4 million in 2021, and $175 million thereafter.

10


3.    MERGER-RELATED COSTS AND CHARGES
The following table presents pre-tax merger-related costs and other charges that we incurred in connection with the Starwood Combination:
 
Three Months Ended
 
Nine Months Ended
($ in millions)
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Merger-related costs and charges
 
 
 
 
 
 
 
Transaction costs
$
4

 
$
18

 
$
14

 
$
31

Employee termination costs
(3
)
 
186

 
9

 
186

Integration costs
27

 
24

 
77

 
33

 
28

 
228

 
100

 
250

Interest expense

 
9

 

 
22

 
$
28

 
$
237

 
$
100

 
$
272

Transaction costs represent costs related to the planning and execution of the Starwood Combination, primarily for financial advisory, legal, and other professional service fees. Employee termination costs represent adjustments or charges for employee severance, retention, and other termination related benefits. Integration costs primarily represent integration employee salaries and share-based compensation, change management consultants, and technology-related costs. Merger-related interest expense in the 2016 first three quarters reflects costs that we incurred for a bridge term loan facility commitment and incremental interest expense for debt incurred related to the Starwood Combination.
In connection with the Starwood Combination, we initiated a restructuring program to achieve cost synergies from our combined operations. We did not allocate costs associated with our restructuring program to any of our business segments. The following table presents our restructuring reserve activity during the 2017 first three quarters:
($ in millions)
Liability for employee termination costs
Balance at year-end 2016
$
192

Charges
4

Cash payments
(110
)
Adjustments (1)
(13
)
Balance at September 30, 2017, classified in “Accrued expenses and other”
$
73

(1) 
Adjustments primarily reflect the reversal of accruals for certain employees who accepted other positions at the Company or resigned and the impact of cumulative translation adjustments.


11


4.    EARNINGS PER SHARE
The table below presents the reconciliation of the earnings and number of shares used in our calculations of basic and diluted earnings per share:
 
Three Months Ended
 
Nine Months Ended
(in millions, except per share amounts)
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Computation of Basic Earnings Per Share
 
 
 
 
 
 
 
Net income
$
392

 
$
70

 
$
1,171

 
$
536

Shares for basic earnings per share
372.3

 
266.2

 
378.5

 
258.3

Basic earnings per share
$
1.05

 
$
0.26

 
$
3.09

 
$
2.08

Computation of Diluted Earnings Per Share
 
 
 
 
 
 
 
Net income
$
392

 
$
70

 
$
1,171

 
$
536

Shares for basic earnings per share
372.3

 
266.2

 
378.5

 
258.3

Effect of dilutive securities
 
 
 
 
 
 
 
Share-based compensation
4.3

 
4.3

 
4.7

 
4.4

Shares for diluted earnings per share
376.6

 
270.5

 
383.2

 
262.7

Diluted earnings per share
$
1.04

 
$
0.26

 
$
3.06

 
$
2.04

5.    SHARE-BASED COMPENSATION
We recorded share-based compensation expense of $44 million in the 2017 third quarter and $39 million in the 2016 third quarter, $139 million for the 2017 first three quarters, and $98 million for the 2016 first three quarters. Deferred compensation costs for unvested awards totaled $209 million at September 30, 2017 and $192 million at December 31, 2016.
RSUs and PSUs
We granted 1.7 million RSUs during the 2017 first three quarters to certain officers, key employees, and non-employee directors, and those units vest generally over four years in equal annual installments commencing one year after the grant date. We granted 0.2 million PSUs in the 2017 first three quarters to certain executive officers, subject to continued employment and the satisfaction of certain performance conditions based on achievement of pre-established targets for Adjusted EBITDA, RevPAR Index, room openings, and/or net administrative expense over, or at the end of, a three-year performance period. RSUs, including PSUs, granted in the 2017 first three quarters had a weighted average grant-date fair value of $84.
SARs
We granted 0.3 million SARs to officers and key employees during the 2017 first three quarters. These SARs generally expire ten years after the grant date and both vest and may be exercised in four equal annual installments commencing one year following the grant date. The weighted average grant-date fair value of SARs granted in the 2017 first three quarters was $30, and the weighted average exercise price was $88.
We used the following assumptions as part of a binomial lattice-based valuation model to estimate the fair value of the SARs we granted during the 2017 first three quarters:
Expected volatility
30.9
%
Dividend yield
1.3
%
Risk-free rate
2.4
%
Expected term (in years)
8


12


6.    INCOME TAXES
Our effective tax rate decreased to 32.5% for the 2017 third quarter from 46.4% for the 2016 third quarter, primarily compared to the limited tax benefit we recognized in 2016 from certain merger-related costs that we incurred in jurisdictions with lower tax rates and a tax benefit of $6 million from our adoption of ASU 2016-09.
Our effective tax rate decreased to 29.3% for the 2017 first three quarters from 33.1% for the 2016 first three quarters, primarily due to a tax benefit of $62 million from the adoption of ASU 2016-09 and the release of a tax reserve of $12 million due to the favorable settlement of an uncertain tax position. The decrease was partially offset by an unfavorable comparison to the 2016 release of a valuation allowance of $15 million.
We paid cash for income taxes, net of refunds, of $413 million in the 2017 first three quarters and $243 million in the 2016 first three quarters.
7.    COMMITMENTS AND CONTINGENCIES
Guarantees
We present the maximum potential amount of our future guarantee fundings and the carrying amount of our liability for our debt service, operating profit, and other guarantees for which we are the primary obligor at September 30, 2017 in the following table:
($ in millions)
Guarantee Type
 
Maximum Potential Amount of Future Fundings
 
Recorded Liability for Guarantees
Debt service
 
$
136

 
$
19

Operating profit
 
248

 
117

Other
 
10

 
2

 
 
$
394

 
$
138

Contingent Purchase Obligations
Times Square EDITION. We granted the lenders the right, upon an uncured event of default by the hotel owner under, and an acceleration of, the mortgage loan, to require us to purchase the hotel component of the property for $315 million during a period of two years after opening, which the lenders may extend for up to three years to complete foreclosure if the loan has been accelerated and certain other conditions are met. We accounted for this contingent purchase obligation as a guarantee, and our recorded liability at September 30, 2017 was $2 million.
Sheraton Grand Chicago. We granted the owner a one-time right, exercisable in 2022, to require us to purchase the leasehold interest in the land and the hotel for $300 million in cash (the “put option”). If the owner exercises the put option, we have the option to purchase, at the same time the put transaction closes, the underlying fee simple interest in the land for an additional $200 million in cash. We accounted for the put option as a guarantee, and our recorded liability at September 30, 2017 was $57 million.
We concluded that the entity that owns the Sheraton Grand Chicago hotel is a variable interest entity. We did not consolidate the entity because we do not have the power to direct the activities that most significantly impact the entity’s economic performance. Our maximum exposure to loss related to the entity is equal to the difference between the purchase price and the fair value of the hotel at the time that the put option is exercised, plus the maximum funding amount of an operating profit guarantee that we provided for the hotel.
Other Contingencies
See a description of certain contingencies relating to the Starwood Combination in Footnote 2Acquisitions and Dispositions.”

13


8.    LONG-TERM DEBT
We provide detail on our long-term debt balances, net of discounts, premiums, and debt issuance costs, in the following table at the end of the 2017 third quarter and year-end 2016:
 
At Period End
($ in millions)
September 30, 2017
 
December 31, 2016
Senior Notes:
 
 
 
Series I Notes, interest rate of 6.4%, face amount of $293, matured June 15, 2017
(effective interest rate of 6.5%)
$

 
$
293

Series K Notes, interest rate of 3.0%, face amount of $600, maturing March 1, 2019
(effective interest rate of 4.4%)
598

 
597

Series L Notes, interest rate of 3.3%, face amount of $350, maturing September 15, 2022
(effective interest rate of 3.4%)
348

 
348

Series M Notes, interest rate of 3.4%, face amount of $350, maturing October 15, 2020
(effective interest rate of 3.6%)
348

 
347

Series N Notes, interest rate of 3.1%, face amount of $400, maturing October 15, 2021
(effective interest rate of 3.4%)
396

 
396

Series O Notes, interest rate of 2.9%, face amount of $450, maturing March 1, 2021
(effective interest rate of 3.1%)
447

 
446

Series P Notes, interest rate of 3.8%, face amount of $350, maturing October 1, 2025
(effective interest rate of 4.0%)
344

 
344

Series Q Notes, interest rate of 2.3%, face amount of $750, maturing January 15, 2022
(effective interest rate of 2.5%)
743

 
742

Series R Notes, interest rate of 3.1%, face amount of $750, maturing June 15, 2026
(effective interest rate of 3.3%)
743

 
742

Series S Notes, interest rate of 6.8%, face amount of $324, maturing May 15, 2018
(effective interest rate of 1.7%)
334

 
346

Series T Notes, interest rate of 7.2%, face amount of $181, maturing December 1, 2019
(effective interest rate of 2.3%)
199

 
206

Series U Notes, interest rate of 3.1%, face amount of $291, maturing February 15, 2023
(effective interest rate of 3.1%)
291

 
291

Series V Notes, interest rate of 3.8%, face amount of $318, maturing March 15, 2025
(effective interest rate of 2.8%)
338

 
340

Series W Notes, interest rate of 4.5%, face amount of $278, maturing October 1, 2034
(effective interest rate of 4.1%)
293

 
293

Commercial paper
2,791

 
2,311

Credit Facility

 

Capital lease obligations
172

 
173

Other
284

 
291

 
8,669

 
8,506

Less: Current portion of long-term debt
(398
)
 
(309
)
 
$
8,271

 
$
8,197

We paid cash for interest, net of amounts capitalized, of $171 million in the 2017 first three quarters and $99 million in the 2016 first three quarters.
We are party to a multicurrency revolving credit agreement (the “Credit Facility”) that provides for up to $4,000 million of aggregate effective borrowings. See the “Cash Requirements and Our Credit Facility” caption later in this report in the “Liquidity and Capital Resources” section for further information on our Credit Facility and available borrowing capacity at September 30, 2017.

14


9.    FAIR VALUE OF FINANCIAL INSTRUMENTS
We believe that the fair values of our current assets and current liabilities approximate their reported carrying amounts. We present the carrying values and the fair values of noncurrent financial assets and liabilities that qualify as financial instruments, determined under current guidance for disclosures on the fair value of financial instruments, in the following table:
 
September 30, 2017
 
December 31, 2016
($ in millions)
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Senior, mezzanine, and other loans
$
228

 
$
216

 
$
245

 
$
231

Total noncurrent financial assets
$
228

 
$
216

 
$
245

 
$
231

 
 
 
 
 
 
 
 
Senior Notes
$
(5,088
)
 
$
(5,161
)
 
$
(5,438
)
 
$
(5,394
)
Commercial paper
(2,791
)
 
(2,791
)
 
(2,311
)
 
(2,311
)
Other long-term debt
(226
)
 
(230
)
 
(280
)
 
(284
)
Other noncurrent liabilities
(186
)
 
(186
)
 
(59
)
 
(59
)
Total noncurrent financial liabilities
$
(8,291
)
 
$
(8,368
)
 
$
(8,088
)
 
$
(8,048
)
See the “Fair Value Measurements” caption of Footnote 2 “Summary of Significant Accounting Policies” of our 2016 Form 10-K for more information on the input levels we use in determining fair value.
10.    OTHER COMPREHENSIVE (LOSS) INCOME AND SHAREHOLDERS' EQUITY
The following tables detail the accumulated other comprehensive (loss) income activity for the 2017 first three quarters and 2016 first three quarters:
($ in millions)
Foreign Currency Translation Adjustments
 
Derivative Instrument Adjustments
 
Available-For-Sale Securities Unrealized Adjustments
 
Pension and Postretirement Adjustments
 
Accumulated Other Comprehensive Loss
Balance at year-end 2016
$
(503
)
 
$
(5
)
 
$
6

 
$
5

 
$
(497
)
Other comprehensive income (loss) before reclassifications (1)
457

 
(13
)
 
(1
)
 

 
443

Amounts reclassified from accumulated other comprehensive loss

 
5

 

 

 
5

Net other comprehensive income (loss)
457

 
(8
)
 
(1
)
 

 
448

Balance at September 30, 2017
$
(46
)
 
$
(13
)
 
$
5

 
$
5

 
$
(49
)
($ in millions)
Foreign Currency Translation Adjustments
 
Derivative Instrument Adjustments
 
Available-For-Sale Securities Unrealized Adjustments
 
Pension and Postretirement Adjustments
 
Accumulated Other Comprehensive Loss
Balance at year-end 2015
$
(192
)
 
$
(8
)
 
$
4

 
$

 
$
(196
)
Other comprehensive income (loss) before reclassifications (1)
27

 
(3
)
 

 

 
24

Amounts reclassified from accumulated other comprehensive loss

 
3

 

 

 
3

Net other comprehensive income
27

 

 

 

 
27

Balance at September 30, 2016
$
(165
)
 
$
(8
)
 
$
4

 
$

 
$
(169
)
(1) 
Other comprehensive income before reclassifications for foreign currency translation adjustments includes losses on intra-entity foreign currency transactions that are of a long-term investment nature of $142 million for the 2017 first three quarters and $1 million for the 2016 first three quarters.

15


The following table details the changes in common shares outstanding and shareholders’ equity for the 2017 first three quarters:
(in millions, except per share amounts)
 
 
Common
Shares
Outstanding
 
 
Total
 
Class A
Common
Stock
 
Additional
Paid-in-
Capital
 
Retained
Earnings
 
Treasury Stock,
at Cost
 
Accumulated
Other
Comprehensive
Loss
386.1

 
Balance at year-end 2016
$
5,357

 
$
5

 
$
5,808

 
$
6,501

 
$
(6,460
)
 
$
(497
)

 
Net income
1,171

 

 

 
1,171

 

 


 
Other comprehensive income
448

 

 

 

 

 
448


 
Dividends ($0.96 per share)
(362
)
 

 

 
(362
)
 

 

2.1

 
Employee stock plan
(2
)
 

 
(64
)
 

 
62

 

(21.8
)
 
Purchase of treasury stock
(2,100
)
 

 

 

 
(2,100
)
 

366.4

 
Balance at September 30, 2017
$
4,512

 
$
5

 
$
5,744

 
$
7,310

 
$
(8,498
)
 
$
(49
)
11.    BUSINESS SEGMENTS
We are a diversified global lodging company with operations in the following reportable business segments:
North American Full-Service, which includes our Luxury and Premium brands located in the United States and Canada;
North American Limited-Service, which includes our Select brands located in the United States and Canada;
Asia Pacific, which includes all brand tiers in our Asia Pacific region; and
Other International, which includes all brand tiers in our Europe, Middle East and Africa, and Caribbean and Latin America regions.
Our North American Full-Service, North American Limited-Service, and Asia Pacific segments meet the applicable accounting criteria to be reportable segments. Our Europe, Middle East and Africa, and Caribbean and Latin America operating segments individually do not meet the criteria for separate disclosure as reportable segments, and accordingly we combined them into an “all other category” which we refer to as “Other International.”
We evaluate the performance of our operating segments using “segment profits” which is based largely on the results of the segment without allocating corporate expenses, income taxes, indirect general, administrative, and other expenses, or merger-related costs and charges. We assign gains and losses, equity in earnings or losses from our joint ventures, and direct general, administrative, and other expenses to each of our segments. “Other unallocated corporate” represents a portion of our revenues, general, administrative, and other expenses, merger-related costs and charges, equity in earnings or losses, and other gains or losses that we do not allocate to our segments. It also includes license fees we receive from our credit card programs and fees from vacation ownership licensing agreements, which we present in the “Franchise fees” caption of our Income Statements.
Our President and Chief Executive Officer, who is our chief operating decision maker, monitors assets for the consolidated company but does not use assets by operating segment when assessing performance or making operating segment resource allocations.
We did not allocate Legacy-Starwood’s results to our segments for the eight days ended September 30, 2016. Therefore, in the tables below, for the three and nine months ended September 30, 2016, the impact of Legacy-Starwood operations after the Merger Date is included in “Other unallocated corporate” and not in the segment results.

16


Segment Revenues
 
Three Months Ended
 
Nine Months Ended
($ in millions)
September 30, 2017

September 30, 2016
 
September 30, 2017
 
September 30, 2016
North American Full-Service
$
3,436

 
$
2,222

 
$
10,631

 
$
6,903

North American Limited-Service
1,061

 
936

 
3,017

 
2,675

Asia Pacific
337

 
141

 
968

 
428

Other International
688

 
404

 
1,966

 
1,244

Total segment revenues
5,522

 
3,703

 
16,582

 
11,250

Other unallocated corporate
141

 
239

 
437

 
366

Total consolidated revenues
$
5,663

 
$
3,942

 
$
17,019

 
$
11,616

Segment Profits
 
Three Months Ended
 
Nine Months Ended
($ in millions)
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
North American Full-Service
$
258

 
$
148

 
$
879

 
$
506

North American Limited-Service
228

 
193

 
629

 
539

Asia Pacific
88

 
24

 
237

 
78

Other International
120

 
43

 
304

 
139

Total segment profits
694

 
408

 
2,049

 
1,262

Other unallocated corporate
(51
)
 
(231
)
 
(201
)
 
(324
)
Interest expense, net of interest income
(63
)
 
(46
)
 
(191
)
 
(137
)
Income taxes
(188
)
 
(61
)
 
(486
)
 
(265
)
Net income
$
392

 
$
70

 
$
1,171

 
$
536

Goodwill
($ in millions)
North American
Full-Service
 
North American
Limited-Service
 
Asia Pacific
 
Other International
 
Total
Goodwill
Year-end 2016 balance:
 
 
 
 
 
 
 
 
 
Goodwill
$
2,905

 
$
1,558

 
$
1,572

 
$
1,617

 
$
7,652

Accumulated impairment losses

 
(54
)
 

 

 
(54
)
 
2,905

 
1,504

 
1,572

 
1,617

 
7,598

 
 
 
 
 
 
 
 
 
 
Adjustments (1)
$
664

 
$
255

 
$
276

 
$
223

 
$
1,418

Foreign currency translation
19

 
12

 
54

 
81

 
166

 
 
 
 
 
 
 
 
 
 
September 30, 2017 balance:
 
 
 
 
 
 
 
 
 
Goodwill
$
3,588

 
$
1,825

 
$
1,902

 
$
1,921

 
$
9,236

Accumulated impairment losses

 
(54
)
 

 

 
(54
)
 
$
3,588

 
$
1,771

 
$
1,902

 
$
1,921

 
$
9,182

(1) 
The table reflects adjustments to our goodwill from the Starwood Combination during the measurement period. See Footnote 2Acquisitions and Dispositions” for more information.


17


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
We make forward-looking statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report based on the beliefs and assumptions of our management and on information currently available to us. Forward-looking statements include information about our possible or assumed future results of operations, which follow under the headings “Business and Overview,” “Liquidity and Capital Resources,” and other statements throughout this report preceded by, followed by, or that include the words “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” or similar expressions.
Any number of risks and uncertainties could cause actual results to differ materially from those we express in our forward-looking statements, including the risks and uncertainties we describe below and other factors we describe from time to time in our periodic filings with the U.S. Securities and Exchange Commission (the “SEC”). We therefore caution you not to rely unduly on any forward-looking statement. The forward-looking statements in this report speak only as of the date of this report, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments, or otherwise.
In addition, see the “Item 1A. Risk Factors” caption in the “Part II-OTHER INFORMATION” section of this report.
BUSINESS AND OVERVIEW
We are a worldwide operator, franchisor, and licensor of hotels and timeshare properties in 126 countries and territories under 30 brands at the end of the 2017 third quarter. We also develop, operate, and market residential properties and provide services to home/condominium owner associations. Under our business model, we typically manage or franchise hotels, rather than own them. We report our operations in four segments: North American Full-Service, North American Limited-Service, Asia Pacific, and Other International.
chart-e8475e9f396a5b9c922a05.jpgchart-bd5d515b9fcc5d86bcda05.jpg
We earn base management fees and in many cases incentive management fees from the properties that we manage, and we earn franchise fees on the properties that others operate under franchise agreements with us. In most markets, base fees typically consist of a percentage of property-level revenue while incentive fees typically consist of a percentage of net house profit adjusted for a specified owner return. In the Middle East and Asia, incentive fees typically consist of a percentage of gross operating profit without adjustment for a specified owner return. Net house profit is calculated as gross operating profit (house profit) less non-controllable expenses such as insurance, real estate taxes, and capital spending reserves.
Our emphasis on long-term management contracts and franchising tends to provide more stable earnings in periods of economic softness, while adding new hotels to our system generates growth, typically with little or no investment by the Company. This strategy has driven substantial growth while minimizing financial leverage and

18


risk in a cyclical industry. In addition, we believe minimizing our capital investments and adopting a strategy of recycling our investments maximizes and maintains our financial flexibility.
We remain focused on doing the things that we do well; that is, selling rooms, taking care of our guests, and making sure we control costs both at company-operated properties and at the corporate level (“above-property”). Our brands remain strong as a result of skilled management teams, dedicated associates, superior customer service with an emphasis on guest and associate satisfaction, significant distribution, our Loyalty Programs (Marriott Rewards and The Ritz-Carlton Rewards, and Starwood Preferred Guest, which we refer to collectively as “Loyalty Programs”), multichannel reservation systems, and desirable property amenities. We strive to effectively leverage our size and broad distribution.
We, along with owners and franchisees, continue to invest in our brands by means of new, refreshed, and reinvented properties, new room and public space designs, and enhanced amenities and technology offerings. We address, through various means, hotels in our system that do not meet standards. We continue to enhance the appeal of our proprietary, information-rich, and easy-to-use websites, and of our associated mobile smartphone applications, through functionality and service improvements.
Our profitability, as well as that of owners and franchisees, has benefited from our approach to property-level and above-property productivity. Managed properties in our system continue to maintain very tight cost controls. We also control above-property costs, some of which we allocate to hotels, by remaining focused on systems, processing, and support areas.
Performance Measures
We believe Revenue per Available Room (“RevPAR”), which we calculate by dividing room sales for comparable properties by room nights available for the period, is a meaningful indicator of our performance because it measures the period-over-period change in room revenues for comparable properties. RevPAR may not be comparable to similarly titled measures, such as revenues. We also believe occupancy and average daily rate (“ADR”), which are components of calculating RevPAR, are meaningful indicators of our performance. Occupancy, which we calculate by dividing occupied rooms by total rooms available, measures the utilization of a property’s available capacity. ADR, which we calculate by dividing property room revenue by total rooms sold, measures average room price and is useful in assessing pricing levels.
Our RevPAR statistics for the 2017 first three quarters and third quarter, and for 2017 periods compared to the corresponding 2016 periods, include Legacy-Starwood comparable properties for all periods even though Marriott did not own the Legacy-Starwood brands before the Starwood Combination. Therefore, our RevPAR statistics include Legacy-Starwood properties for periods during which fees from the Legacy-Starwood properties are not included in our Income Statements. We provide these RevPAR statistics as an indicator of the performance of our brands and to allow for comparison to industry metrics, and they should not be viewed as necessarily correlating with our fee revenue. For the properties located in countries that use currencies other than the U.S. dollar, the comparisons to the prior year period are on a constant U.S. dollar basis. We calculate constant dollar statistics by applying exchange rates for the current period to the prior comparable period.
We define our comparable properties as our properties, including those that we acquired through the Starwood Combination, that were open and operating under one of our Legacy-Marriott or Legacy-Starwood brands since the beginning of the last full calendar year (since January 1, 2016 for the current period) and have not, in either the current or previous year: (i) undergone significant room or public space renovations or expansions, (ii) been converted between company-operated and franchised, or (iii) sustained substantial property damage or business interruption.
We also believe company-operated house profit margin, which is the ratio of property-level gross operating profit to total property-level revenue, is a meaningful indicator of our performance because this ratio measures our overall ability as the operator to produce property-level profits by generating sales and controlling the operating expenses over which we have the most direct control. House profit includes room, food and beverage, and other revenue and the related expenses including payroll and benefits expenses, as well as repairs and maintenance,

19


utility, general and administrative, and sales and marketing expenses. House profit does not include the impact of management fees, furniture, fixtures and equipment replacement reserves, insurance, taxes, or other fixed expenses.
Business Trends
Our 2017 first three quarters results reflected a year-over-year increase in the number of properties in our system, including those from the Starwood Combination, favorable demand for our brands in many markets around the world, and slow but steady economic growth. For the three months ended September 30, 2017, comparable worldwide systemwide RevPAR increased 2.1 percent to $120.22, ADR increased 0.7 percent on a constant dollar basis to $157.02, and occupancy increased 1.1 percentage points to 76.6 percent, compared to the same period a year ago. For the nine months ended September 30, 2017, comparable worldwide systemwide RevPAR increased 2.6 percent to $115.99, ADR increased 0.9 percent on a constant dollar basis to $156.96, and occupancy increased 1.2 percentage points to 73.9 percent, compared to the same period a year ago.
In North America, RevPAR increased in the 2017 first three quarters, partially driven by higher demand in Washington, D.C. and growth in transient leisure business. RevPAR was somewhat enhanced by increased demand in impacted areas following the September hurricanes in Florida and Texas. RevPAR growth was constrained in certain markets by new lodging supply and only moderate GDP growth.
Our Europe region experienced higher demand in the 2017 first three quarters, led by strong transient business in most countries. In our Asia Pacific region in the 2017 first three quarters, RevPAR growth was strong in Greater China, India, and Indonesia with strong leisure demand. In our Middle East and Africa region, demand continued to be impacted by geopolitical instability, political sanctions on Qatar, and lower oil prices, offset by favorable results in South Africa. Growth in the Caribbean and Latin America regions reflected strength in Mexico and improving leisure demand in the Caribbean, but was partially constrained by weak economic conditions in many markets in South America. In September 2017, several managed and franchised Caribbean hotels closed due to significant damage from hurricanes in the region.
We monitor market conditions and provide the tools for our hotels to price rooms daily in accordance with individual property demand levels, generally adjusting room rates as demand changes. Our hotels modify the mix of business to improve revenue as demand changes. For our company-operated properties, we continue to focus on enhancing property-level house profit margins and making productivity improvements.
In the 2017 first three quarters compared to the 2016 first three quarters, worldwide company-operated house profit margins at comparable properties, including comparable Legacy-Starwood properties, increased by 70 basis points, and worldwide comparable house profit per available room (“HP-PAR”) increased by 4.2 percent on a constant U.S. dollar basis, reflecting improved productivity, solid cost controls and procurement savings, higher occupancy, and rate increases. North American company-operated house profit margins increased by 20 basis points, and HP-PAR increased by 1.4 percent. International company-operated house profit margins increased by 130 basis points, and HP-PAR increased by 8.3 percent.
System Growth and Pipeline
During the 2017 first three quarters, we added 341 properties (55,528 rooms) while 56 properties (10,166 rooms) exited our system, increasing our total properties to 6,401 (1,239,221 rooms). Approximately 37 percent of added rooms are located outside North America, and 16 percent of the room additions are conversions from competitor brands.
Since the end of the 2016 third quarter, we added 457 properties (77,571 rooms) while 66 properties (12,616 rooms) exited our system.
At the end of the 2017 third quarter, we had 450,000 rooms in our development pipeline, which includes hotel rooms under construction, hotel rooms under signed contracts, and roughly 41,000 hotel rooms approved for development but not yet under signed contracts. More than half of the rooms in our development pipeline are outside North America.

20


Properties and Rooms
At September 30, 2017, we operated, franchised, and licensed the following properties and rooms:
 
Managed
 
Franchised/Licensed
 
Owned/Leased
 
Other (1)
 
Total
 
Properties
 
Rooms
 
Properties
 
Rooms
 
Properties
 
Rooms
 
Properties
 
Rooms
 
Properties
 
Rooms
North American
Full-Service
421

 
187,073

 
660

 
193,112

 
11

 
6,607

 

 

 
1,092

 
386,792

North American
Limited-Service
414

 
65,306

 
3,138

 
359,988

 
20

 
3,006

 
25

 
4,423

 
3,597

 
432,723

Asia
Pacific
521

 
158,085

 
87

 
24,650

 
4

 
953

 

 

 
612

 
183,688

Other
International
519

 
121,012

 
364

 
71,962

 
33

 
9,071

 
96

 
12,086

 
1,012

 
214,131

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Timeshare

 

 
88

 
21,887

 

 

 

 

 
88

 
21,887

Total
1,875

 
531,476

 
4,337

 
671,599

 
68

 
19,637

 
121

 
16,509

 
6,401

 
1,239,221

(1) 
Other represents unconsolidated equity method investments, which we present in the “Equity in earnings” caption of our Income Statements.
Segment and Brand Statistics
The following tables present RevPAR, occupancy, and ADR statistics for comparable properties, including Legacy-Starwood comparable properties even though Marriott did not own the Legacy-Starwood brands before the Starwood Combination. Systemwide statistics include data from our franchised properties, in addition to our company-operated properties.

21


Comparable Company-Operated North American Properties
 
RevPAR
 
Occupancy
 
Average Daily Rate
 
Three Months Ended September 30, 2017
 
Change vs. Three Months Ended September 30, 2016
 
Three Months Ended September 30, 2017
 
Change vs. Three Months Ended September 30, 2016
 
Three Months Ended September 30, 2017
 
Change vs. Three Months Ended September 30, 2016
JW Marriott
$
149.62

 
(2.9
)%
 
75.4
%
 
(1.0
)%
pts.
 
$
198.35

 
(1.5
)%
The Ritz-Carlton
$
242.43

 
1.8
 %
 
73.4
%
 
 %
pts.
 
$
330.37

 
1.8
 %
W Hotels
$
241.20

 
(3.3
)%
 
84.6
%
 
(0.6
)%
pts.
 
$
284.93

 
(2.6
)%
Composite North American
Luxury
(1)
$
229.18

 
(0.9
)%
 
77.9
%
 
(0.6
)%
pts.
 
$
294.09

 
(0.1
)%
Marriott Hotels
$
145.20

 
(0.8
)%
 
78.1
%
 
 %
pts.
 
$
185.79

 
(0.8
)%
Sheraton
$
156.57

 
(0.5
)%
 
80.1
%
 
(0.6
)%
pts.
 
$
195.55

 
0.3
 %
Westin
$
179.58

 
(0.8
)%
 
80.6
%
 
(0.5
)%
pts.
 
$
222.86

 
(0.2
)%
Composite North American
Upper Upscale
(2)
$
150.81

 
(0.4
)%
 
78.7
%
 
(0.2
)%
pts.
 
$
191.62

 
(0.1
)%
North American
Full-Service
(3)
$
164.62

 
(0.6
)%
 
78.6
%
 
(0.3
)%
pts.
 
$
209.52

 
(0.2
)%
Courtyard
$
105.21

 
(0.5
)%
 
75.6
%
 
 %
pts.
 
$
139.10

 
(0.5
)%
Residence Inn
$
130.82

 
(0.8
)%
 
83.8
%
 
 %
pts.
 
$
156.16

 
(0.8
)%
Composite North American
Limited-Service
(4)
$
110.81

 
(0.5
)%
 
78.0
%
 
(0.1
)%
pts.
 
$
142.07

 
(0.3
)%
North American - All (5)
$
147.91

 
(0.5
)%
 
78.4
%
 
(0.2
)%
pts.
 
$
188.69

 
(0.2
)%
Comparable Systemwide North American Properties
 
RevPAR
 
Occupancy
 
Average Daily Rate
 
Three Months Ended September 30, 2017
 
Change vs. Three Months Ended September 30, 2016
 
Three Months Ended September 30, 2017
 
Change vs. Three Months Ended September 30, 2016
 
Three Months Ended September 30, 2017
 
Change vs. Three Months Ended September 30, 2016
JW Marriott
$
157.22

 
(0.7
)%
 
76.8
%
 
(0.4
)%
pts.
 
$
204.83

 
(0.1
)%
The Ritz-Carlton
$
242.43

 
1.8
 %
 
73.4
%
 
 %
pts.
 
$
330.37

 
1.8
 %
W Hotels
$
241.20

 
(3.3
)%
 
84.6
%
 
(0.6
)%
pts.
 
$
284.93

 
(2.6
)%
Composite North American
Luxury
(1)
$
220.67

 
(0.2
)%
 
78.2
%
 
(0.3
)%
pts.
 
$
282.23

 
0.2
 %
Marriott Hotels
$
128.24

 
(0.3
)%
 
75.1
%
 
(0.5
)%
pts.
 
$
170.87

 
0.4
 %
Sheraton
$
123.23

 
(0.9
)%
 
77.4
%
 
(0.8
)%
pts.
 
$
159.29

 
0.1
 %
Westin
$
162.47

 
(0.4
)%
 
80.0
%
 
(1.1
)%
pts.
 
$
203.02

 
0.9
 %
Composite North American
Upper Upscale
(2)
$
134.65

 
(0.3
)%
 
76.7
%
 
(0.6
)%
pts.
 
$
175.53

 
0.5
 %
North American
Full-Service
(3)
$
143.65

 
(0.3
)%
 
76.9
%
 
(0.6
)%
pts.
 
$
186.88

 
0.5
 %
Courtyard
$
108.12

 
0.8
 %
 
76.9
%
 
0.5
 %
pts.
 
$
140.53

 
0.1
 %
Residence Inn
$
125.47

 
0.4
 %
 
83.6
%
 
 %
pts.
 
$
150.14

 
0.4
 %
Fairfield Inn & Suites
$
89.87

 
2.5
 %
 
77.2
%
 
1.7
 %
pts.
 
$
116.37

 
0.3
 %
Composite North American
Limited-Service
(4)
$
105.89

 
1.2
 %
 
79.0
%
 
0.5
 %
pts.
 
$
134.10

 
0.6
 %
North American - All (5)
$
122.69

 
0.4
 %
 
78.0
%
 
 %
pts.
 
$
157.23

 
0.4
 %
(1) 
Includes JW Marriott, The Ritz-Carlton, W Hotels, The Luxury Collection, St. Regis, and EDITION.
(2) 
Includes Marriott Hotels, Sheraton, Westin, Renaissance Hotels, Autograph Collection Hotels, Delta Hotels, Gaylord Hotels, Le Méridien, and Tribute Portfolio.
(3) 
Includes Composite North American Luxury and Composite North American Upper Upscale.
(4) 
Includes Courtyard, Residence Inn, Fairfield Inn & Suites, SpringHill Suites, Four Points, TownePlace Suites, and AC Hotels by Marriott. Systemwide also includes Aloft Hotels and Element Hotels.
(5) 
Includes North American Full-Service and Composite North American Limited-Service.  


22


Comparable Company-Operated International Properties
 
RevPAR
 
Occupancy
 
Average Daily Rate
 
Three Months Ended September 30, 2017
 
Change vs. Three Months Ended September 30, 2016
 
Three Months Ended September 30, 2017
 
Change vs. Three Months Ended September 30, 2016
 
Three Months Ended September 30, 2017
 
Change vs. Three Months Ended September 30, 2016
Greater China
$
92.60

 
10.6
 %
 
75.1
%
 
6.6
%
pts.
 
$
123.30

 
0.9
 %
Rest of Asia Pacific
$
119.30

 
6.2
 %
 
77.0
%
 
3.5
%
pts.
 
$
154.99

 
1.4
 %
Asia Pacific
$
102.03

 
8.7
 %
 
75.8
%
 
5.5
%
pts.
 
$
134.67

 
0.8
 %
Caribbean & Latin America
$
109.80

 
 %
 
63.8
%
 
1.7
%
pts.
 
$
172.08

 
(2.6
)%
Europe
$
172.62

 
8.0
 %
 
79.9
%
 
3.0
%
pts.
 
$
216.16

 
3.9
 %
Middle East & Africa
$
84.98

 
(0.7
)%
 
62.9
%
 
0.9
%
pts.
 
$
135.13

 
(2.2
)%
Other International (1)
$
131.58

 
4.8
 %
 
71.2
%
 
2.1
%
pts.
 
$
184.69

 
1.7
 %
International - All (2)
$
116.77

 
6.5
 %
 
73.5
%
 
3.8
%
pts.
 
$
158.85

 
1.0
 %
Worldwide (3)
$
132.65

 
2.4
 %
 
76.0
%
 
1.7
%
pts.
 
$
174.54

 
 %
Comparable Systemwide International Properties
 
RevPAR
 
Occupancy
 
Average Daily Rate
 
Three Months Ended September 30, 2017
 
Change vs. Three Months Ended September 30, 2016
 
Three Months Ended September 30, 2017
 
Change vs. Three Months Ended September 30, 2016
 
Three Months Ended September 30, 2017
 
Change vs. Three Months Ended September 30, 2016
Greater China
$
92.38

 
10.6
 %
 
74.3
%
 
6.6
%
pts.
 
$
124.33

 
0.8
 %
Rest of Asia Pacific
$
120.83

 
5.3
 %
 
76.0
%
 
2.5
%
pts.
 
$
159.00

 
1.8
 %
Asia Pacific
$
104.50

 
7.9
 %
 
75.0
%
 
4.8
%
pts.
 
$
139.29

 
1.0
 %
Caribbean & Latin America
$
90.89

 
1.9
 %
 
62.6
%
 
1.9
%
pts.
 
$
145.10

 
(1.2
)%
Europe
$
153.25

 
8.7
 %
 
79.0
%
 
3.7
%
pts.
 
$
194.03

 
3.7
 %
Middle East & Africa
$
82.23

 
(0.3
)%
 
62.9
%
 
1.1
%
pts.
 
$
130.70

 
(2.1
)%
Other International (1)
$
121.56

 
5.9
 %
 
71.3
%
 
2.6
%
pts.
 
$
170.42

 
2.0
 %
International - All (2)
$
114.12

 
6.7
 %
 
72.9
%
 
3.6
%
pts.
 
$
156.46

 
1.5
 %
Worldwide (3)
$
120.22

 
2.1
 %
 
76.6
%
 
1.1
%
pts.
 
$
157.02

 
0.7
 %
(1) 
Includes Caribbean & Latin America, Europe, and Middle East & Africa.
(2) 
Includes Asia Pacific and Other International.
(3) 
Includes North American - All and International - All.