10-Q 1 hq133117.htm FORM 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549 

Form 10-Q

 (Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
OR
¨
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. 001-34521
HYATT HOTELS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

Delaware
 
20-1480589
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
71 South Wacker Drive
12th Floor, Chicago, Illinois
 
60606
(Address of Principal Executive Offices)
 
(Zip Code)
(312) 750-1234
(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  x    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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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. (Check One):
Large accelerated filer
x
 
Accelerated filer
¨
 
Non-accelerated filer  
¨
 
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 check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  x
As of April 28, 2017, there were 35,162,851 shares of the registrant’s Class A common stock, $0.01 par value, outstanding and 90,323,839 shares of the registrant’s Class B common stock, $0.01 par value, outstanding.



HYATT HOTELS CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2017

TABLE OF CONTENTS




PART I. FINANCIAL INFORMATION
 
Item 1.    Financial Statements.
HYATT HOTELS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions of dollars, except per share amounts)
(Unaudited)
 
 
Three Months Ended
 
March 31, 2017
 
March 31, 2016
REVENUES:
 
 
 
Owned and leased hotels
$
572

 
$
516

Management and franchise fees
122

 
107

Other revenues
22

 
9

Other revenues from managed properties
471

 
457

Total revenues
1,187

 
1,089

DIRECT AND SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES:
 
 
 
Owned and leased hotels
427

 
389

Depreciation and amortization
91

 
81

Other direct costs
19

 
6

Selling, general, and administrative
99

 
88

Other costs from managed properties
471

 
457

Direct and selling, general, and administrative expenses
1,107

 
1,021

Net gains and interest income from marketable securities held to fund operating programs
15

 
1

Equity earnings (losses) from unconsolidated hospitality ventures
(3
)
 
2

Interest expense
(21
)
 
(17
)
Other income (loss), net
40

 
(4
)
INCOME BEFORE INCOME TAXES
111

 
50

PROVISION FOR INCOME TAXES
(41
)
 
(16
)
NET INCOME
70

 
34

NET INCOME AND ACCRETION ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

NET INCOME ATTRIBUTABLE TO HYATT HOTELS CORPORATION
$
70

 
$
34

EARNINGS PER SHAREBasic
 
 
 
Net income
$
0.54

 
$
0.25

Net income attributable to Hyatt Hotels Corporation
$
0.54

 
$
0.25

EARNINGS PER SHAREDiluted
 
 
 
Net income
$
0.54

 
$
0.25

Net income attributable to Hyatt Hotels Corporation
$
0.54

 
$
0.25









See accompanying Notes to condensed consolidated financial statements.

1

HYATT HOTELS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions of dollars)
(Unaudited)



 
Three Months Ended
 
March 31, 2017
 
March 31, 2016
Net income
$
70

 
$
34

Other comprehensive income (loss), net of taxes:
 
 
 
Foreign currency translation adjustments, net of tax expense of $- for the three months ended March 31, 2017 and March 31, 2016
41

 
24

Unrealized gains (losses) on available-for-sale securities, net of tax expense (benefit) of $21 and $(3) for the three months ended March 31, 2017 and March 31, 2016, respectively
34

 
(4
)
Other comprehensive income
75

 
20

COMPREHENSIVE INCOME
145

 
54

COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO HYATT HOTELS CORPORATION
$
145

 
$
54






















See accompanying Notes to condensed consolidated financial statements.


2

HYATT HOTELS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions of dollars, except share and per share amounts)
(Unaudited)

 
March 31, 2017
 
December 31, 2016
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
374

 
$
482

Restricted cash
64

 
76

Short-term investments
52

 
56

Receivables, net of allowances of $18 at March 31, 2017 and December 31, 2016
367

 
304

Inventories
16

 
28

Prepaids and other assets
157

 
153

Prepaid income taxes
18

 
40

Total current assets
1,048

 
1,139

Investments
169

 
186

Property and equipment, net
4,472

 
4,270

Financing receivables, net of allowances
19

 
19

Goodwill
147

 
125

Intangibles, net
658

 
599

Deferred tax assets
303

 
313

Other assets
947

 
1,098

TOTAL ASSETS
$
7,763

 
$
7,749

LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Current maturities of long-term debt
$
299

 
$
119

Accounts payable
155

 
162

Accrued expenses and other current liabilities
552

 
514

Accrued compensation and benefits
103

 
129

Total current liabilities
1,109

 
924

Long-term debt
1,445

 
1,445

Other long-term liabilities
1,480

 
1,472

Total liabilities
4,034

 
3,841

Commitments and contingencies (see Note 11)


 


Redeemable noncontrolling interest in preferred shares of a subsidiary
9

 

EQUITY:
 
 
 
Preferred stock, $0.01 par value per share, 10,000,000 shares authorized and none outstanding at March 31, 2017 and December 31, 2016

 

Class A common stock, $0.01 par value per share, 1,000,000,000 shares authorized, 35,137,361 issued and outstanding at March 31, 2017, and Class B common stock, $0.01 par value per share, 422,857,621 shares authorized, 90,323,839 shares issued and outstanding at March 31, 2017. Class A common stock, $0.01 par value per share, 1,000,000,000 shares authorized, 39,952,061 issued and outstanding at December 31, 2016, and Class B common stock, $0.01 par value per share, 422,857,621 shares authorized, 90,863,209 shares issued and outstanding at December 31, 2016
1

 
1

Additional paid-in capital
1,352

 
1,686

Retained earnings
2,563

 
2,493

Accumulated other comprehensive loss
(202
)
 
(277
)
Total stockholders’ equity
3,714

 
3,903

Noncontrolling interests in consolidated subsidiaries
6

 
5

Total equity
3,720

 
3,908

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY
$
7,763

 
$
7,749




See accompanying Notes to condensed consolidated financial statements.

3

HYATT HOTELS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
(Unaudited)


 
Three Months Ended
 
March 31, 2017
 
March 31, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
70

 
$
34

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
91

 
81

Deferred income taxes
(16
)
 
(1
)
Realized losses from marketable securities
40

 

Working capital changes and other
(35
)
 
(63
)
Net cash provided by operating activities
150

 
51

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of marketable securities and short-term investments
(111
)
 
(85
)
Proceeds from marketable securities and short-term investments
119

 
83

Contributions to investments
(8
)
 
(15
)
Return of investments
200

 
23

Acquisitions, net of cash acquired
(245
)
 

Capital expenditures
(50
)
 
(38
)
Sales proceeds transferred from escrow to cash and cash equivalents

 
29

Other investing activities
1

 
(9
)
Net cash used in investing activities
(94
)
 
(12
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from long-term debt, net of issuance costs of $- and $4, respectively
180

 
426

Repayments of long-term debt
(3
)
 
(95
)
Repurchase of common stock
(348
)
 
(63
)
Proceeds from redeemable noncontrolling interest in preferred shares of a subsidiary
9

 

Other financing activities
(3
)
 
(4
)
Net cash (used in) provided by financing activities
(165
)
 
264

EFFECT OF EXCHANGE RATE CHANGES ON CASH
1

 
11

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(108
)
 
314

CASH AND CASH EQUIVALENTS—BEGINNING OF YEAR
482

 
457

CASH AND CASH EQUIVALENTS—END OF PERIOD
$
374

 
$
771

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Cash paid during the period for interest
$
37

 
$
33

Cash paid during the period for income taxes
$
10

 
$
16

Non-cash investing and financing activities are as follows:
 
 
 
Change in accrued capital expenditures
$
17

 
$
4


















See accompanying Notes to condensed consolidated financial statements.

4


HYATT HOTELS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions of dollars, unless otherwise indicated)
(Unaudited)
 
1.    ORGANIZATION
Hyatt Hotels Corporation, a Delaware corporation, and its consolidated subsidiaries (collectively "Hyatt Hotels Corporation") provide hospitality services on a worldwide basis through the development, ownership, operation, management, franchising and licensing of hospitality related businesses. We develop, own, operate, manage, franchise, license or provide services to a portfolio of properties consisting of full service hotels, select service hotels, resorts and other properties, including timeshare, fractional and other forms of residential or vacation properties. At March 31, 2017, (i) we operated or franchised 318 full service hotels, comprising 123,684 rooms throughout the world, (ii) we operated or franchised 346 select service hotels, comprising 48,577 rooms, of which 316 hotels are located in the United States, and (iii) our portfolio of properties included 6 franchised all inclusive Hyatt-branded resorts, comprising 2,401 rooms, and 3 owned destination wellness resorts, comprising 386 rooms. At March 31, 2017, our portfolio of properties operated in 56 countries around the world.
As used in these Notes and throughout this Quarterly Report on Form 10-Q, (i) the terms "Company," "we," "us" or "our" mean Hyatt Hotels Corporation and its consolidated subsidiaries and (ii) the term "portfolio of properties" refers to hotels and other properties or residential ownership units that we develop, own, operate, manage, franchise, license or provide services to, including under our Park Hyatt, Miraval, Grand Hyatt, Hyatt Regency, Hyatt, Andaz, Hyatt Centric, The Unbound Collection by Hyatt, Hyatt Place, Hyatt House, Hyatt Ziva, Hyatt Zilara and Hyatt Residence Club brands.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information or footnotes required by GAAP for complete annual financial statements. As a result, this Quarterly Report on Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying Notes in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the "2016 Form 10-K").
We have eliminated all intercompany accounts and transactions in our condensed consolidated financial statements. We consolidate entities under our control, including entities where we are deemed to be the primary beneficiary.
Management believes the accompanying condensed consolidated financial statements reflect all adjustments, which are all of a normal recurring nature, considered necessary for a fair presentation of the interim periods.

2.    RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Adopted Accounting Standards—In March 2016, the Financial Accounting Standards Board ("FASB") released Accounting Standards Update No. 2016-09 (“ASU 2016-09”), Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The provisions of ASU 2016-09 are effective for interim periods and fiscal years beginning after December 15, 2016. We adopted ASU 2016-09 on January 1, 2017, which resulted in recognition of excess tax benefits from share-based payment transactions on the condensed consolidated statements of income and within operating activities on the condensed consolidated statements of cash flows, on a prospective basis. ASU 2016-09 did not materially impact our condensed consolidated financial statements and prior periods have not been adjusted.
Future Adoption of Accounting Standards—In May 2014, the FASB released Accounting Standards Update No. 2014-09 ("ASU 2014-09"), Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and provides a single, comprehensive revenue recognition model for contracts with customers. In August 2015, the FASB released Accounting Standards Update No. 2015-14 ("ASU 2015-14"), Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. ASU 2015-14 delays the effective date of ASU 2014-09 by one year, making it effective for interim

5


periods and fiscal years beginning after December 15, 2017, with early adoption permitted as of the original effective date under ASU 2014-09.
The standard permits the use of either the full retrospective or modified retrospective (cumulative effect) transition method. We currently expect to adopt ASU 2014-09 utilizing the full retrospective transition method on January 1, 2018.
While we continue to evaluate possible impacts on our condensed consolidated financial statements, ASU 2014-09 is expected to impact either the amount or timing of revenue recognition as follows:
Under existing guidance, gains on sales of real estate when we maintain substantial continuing involvement are deferred and amortized into management and franchise fees revenues. Upon adoption of ASU 2014-09, gains on sales of real estate will be recognized when control of the property transfers to the buyer. We expect any remaining unamortized deferred gains as of our date of adoption will be included as an adjustment to retained earnings. For the three months ended March 31, 2017 and March 31, 2016, Hyatt recognized $5 million of management fee revenues related to the amortization of these deferred gains.
Under existing guidance, amortization of certain management and franchise agreement intangibles is recorded within depreciation and amortization on our condensed consolidated statements of income. Upon adoption of ASU 2014-09, certain management and franchise agreement intangibles may meet the definition of consideration paid to a customer and therefore, would be recorded as contra-revenue within management and franchise fee revenues in our condensed consolidated statements of income.
Under existing guidance, incentive fees are recognized in the amount that would be due as if the contract were to terminate at that time. Under ASU 2014-09, variable consideration is included in the transaction price only if it is probable that a significant reversal in the cumulative amount of revenue recognized would not occur when the uncertainty associated with the variable consideration is subsequently resolved. This may result in a different pattern of recognition for incentive fees for certain contracts. We do not anticipate a material impact to incentive fees on a full year basis.
Under existing guidance, franchise application fees are recognized at a point in time. Upon adoption of ASU 2014-09, initial franchise application fees will be recognized over time.
We do not expect the standard to materially affect the amount or timing of revenue recognition for royalty fees from our franchised properties or base management fees from our managed properties. We are continuing to evaluate other possible impacts to our condensed consolidated financial statements, including the impact related to our loyalty program.
In January 2016, the FASB released Accounting Standards Update No. 2016-01 ("ASU 2016-01"), Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 revises the accounting for equity investments and financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. The provisions of ASU 2016-01 are effective for interim periods and fiscal years beginning after December 15, 2017. Upon adoption, the unrealized gains (losses) on available-for-sale ("AFS") equity securities reported in accumulated other comprehensive loss at December 31, 2017 will be reclassified to retained earnings, and any subsequent changes in fair value will be recognized in net income on our condensed consolidated statements of income. We are currently evaluating the impacts of adopting ASU 2016-01. 
In February 2016, the FASB released Accounting Standards Update No. 2016-02 ("ASU 2016-02"), Leases (Topic 842). ASU 2016-02 requires lessees to record lease contracts on the balance sheet by recognizing a right-of-use asset and lease liability. The provisions of ASU 2016-02 are effective for interim periods and fiscal years beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact of adopting ASU 2016-02.
In June 2016, the FASB released Accounting Standards Update No. 2016-13 ("ASU 2016-13"), Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaces the existing impairment model for most financial assets from an incurred loss impairment model to a current expected credit loss model, which requires an entity to recognize an impairment allowance equal to its current estimate of all contractual cash flows the entity does not expect to collect. ASU 2016-13 also requires credit

6


losses relating to AFS debt securities to be recorded through an allowance for credit losses. The provisions of ASU 2016-13 are effective for interim periods and fiscal years beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the impact of adopting ASU 2016-13.
In October 2016, the FASB released Accounting Standards Update No. 2016-16 (“ASU 2016-16”), Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The provisions of ASU 2016-16 are effective for interim periods and fiscal years beginning after December 15, 2017, with early adoption permitted. ASU 2016-16 requires an entity to adopt the amendments on a modified retrospective basis, recognizing the effects in retained earnings as of the beginning of the year of adoption. Upon adoption, we do not expect ASU 2016-16 to have a material impact on our condensed consolidated financial statements.
In January 2017, the FASB released Accounting Standards Update No. 2017-01 (“ASU 2017-01”), Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The provisions of ASU 2017-01 are effective for interim periods and fiscal years beginning after December 15, 2017. We are currently evaluating the impact of adopting ASU 2017-01.
In January 2017, the FASB released Accounting Standards Update No. 2017-04 (“ASU 2017-04”), Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates Step 2 from the impairment test which requires entities to determine the implied fair value of goodwill to measure if any impairment charge is necessary. Instead, entities will record an impairment charge based on the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The provisions of ASU 2017-04 are effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the impact of adopting ASU 2017-04.

3.    EQUITY AND COST METHOD INVESTMENTS
 
March 31, 2017
 
December 31, 2016
Equity method investments
$
163

 
$
180

Cost method investments
6

 
6

Total investments
$
169

 
$
186

During the three months ended March 31, 2017, an unconsolidated hospitality venture, which is classified as an equity method investment within our owned and leased hotels segment, sold a Hyatt Place hotel. We received proceeds of $4 million and recorded a gain of $2 million in equity earnings (losses) from unconsolidated hospitality ventures on our condensed consolidated statements of income.
The following table presents summarized financial information for all unconsolidated hospitality ventures in which we hold an investment accounted for under the equity method:
 
Three Months Ended March 31,
 
2017
 
2016
Total revenues
$
274

 
$
284

Gross operating profit
78

 
70

Income (loss) from continuing operations
(18
)
 
20

Net income (loss)
(18
)
 
20


4.    MARKETABLE SECURITIES
We hold marketable securities to fund certain operating programs and for investment purposes. We periodically transfer cash and cash equivalents to time deposits, highly liquid and transparent commercial paper, corporate notes and bonds, U.S. government obligations and obligations of other government agencies for investment purposes.

7


Marketable Securities Held to Fund Operating Programs—Marketable securities held to fund operating programs, which are recorded at fair value and included on the condensed consolidated balance sheets, were as follows:
 
March 31, 2017
 
December 31, 2016
Marketable securities held to fund our loyalty program
$
397

 
$
394

Marketable securities held to fund deferred compensation plans held in rabbi trusts (Note 9)
364

 
352

Marketable securities held to fund our captive insurance companies
72

 
65

Total marketable securities held to fund operating programs
$
833

 
$
811

Less current portion of marketable securities held to fund operating programs included in cash and cash equivalents, short-term investments, and prepaids and other assets
(123
)
 
(109
)
Marketable securities held to fund operating programs included in other assets
$
710

 
$
702

Net gains and interest income from marketable securities held to fund operating programs on the condensed consolidated statements of income included realized and unrealized gains and losses and interest income related to the following:
 
Three Months Ended March 31,
2017
 
2016
Loyalty program
$

 
$
1

Deferred compensation plans held in rabbi trusts
15

 

Total net gains and interest income from marketable securities held to fund operating programs
$
15

 
$
1

Our captive insurance companies hold marketable securities which are classified as AFS and are invested in U.S. government agencies, time deposits and corporate debt securities. We classify these investments as current or long-term, based on their contractual maturity dates, which range from 2017 through 2021.
Marketable Securities Held for Investment Purposes—Marketable securities held for investment purposes, which are recorded at fair value and included on the condensed consolidated balance sheets, were as follows:
 
March 31, 2017
 
December 31, 2016
Interest bearing money market funds
$
56

 
$
106

Time deposits
45

 
45

Preferred shares

 
290

Common shares
126

 

Total marketable securities held for investment purposes
$
227

 
$
441

Less current portion of marketable securities held for investment purposes included in cash and cash equivalents and short-term investments
(101
)
 
(151
)
Marketable securities held for investment purposes included in other assets
$
126

 
$
290


8


Fair Value—We measured the following financial assets at fair value on a recurring basis:
 
March 31, 2017
 
Cash and cash equivalents
 
Short-term investments
 
Prepaids and other assets
 
Other assets
Level One - Quoted Prices in Active Markets for Identical Assets
 
 
 
 
 
 
 
 
 
Interest bearing money market funds
$
72

 
$
72

 
$

 
$

 
$

Mutual funds
364

 

 

 

 
364

Common shares
126

 

 

 

 
126

Level Two - Significant Other Observable Inputs
 
 
 
 
 
 
 
 
 
Time deposits
58

 

 
46

 

 
12

U.S. government obligations
148

 

 

 
38

 
110

U.S. government agencies
48

 

 
4

 
8

 
36

Corporate debt securities
182

 

 
2

 
38

 
142

Mortgage-backed securities
19

 

 

 
5

 
14

Asset-backed securities
40

 

 

 
10

 
30

Municipal and provincial notes and bonds
3

 

 

 
1

 
2

Total
$
1,060

 
$
72

 
$
52

 
$
100

 
$
836


 
December 31, 2016
 
Cash and cash equivalents
 
Short-term investments
 
Prepaids and other assets
 
Other assets
Level One - Quoted Prices in Active Markets for Identical Assets
 
 
 
 
 
 
 
 
 
Interest bearing money market funds
$
114

 
$
114

 
$

 
$

 
$

Mutual funds
352

 

 

 

 
352

Level Two - Significant Other Observable Inputs
 
 
 
 
 
 
 
 
 
Time deposits
59

 

 
46

 

 
13

U.S. government obligations
142

 

 

 
33

 
109

U.S. government agencies
53

 

 
9

 
8

 
36

Corporate debt securities
181

 

 
1

 
35

 
145

Mortgage-backed securities
22

 

 

 
5

 
17

Asset-backed securities
34

 

 

 
8

 
26

Municipal and provincial notes and bonds
5

 

 

 
1

 
4

Level Three - Significant Unobservable Inputs
 
 
 
 
 
 
 
 
 
Preferred shares
290

 

 

 

 
290

Total
$
1,252

 
$
114

 
$
56

 
$
90

 
$
992

During the three months ended March 31, 2017 and March 31, 2016, there were no transfers between levels of the fair value hierarchy. We currently do not have non-financial assets or non-financial liabilities required to be measured at fair value on a recurring basis.

9


Preferred shares—During the year ended December 31, 2013, we invested $271 million in Playa Hotels & Resorts B.V. ("Playa") for convertible redeemable preferred shares which were classified as an AFS debt security. The fair value of the preferred shares was: 
 
2017
 
2016
Fair value at January 1
$
290

 
$
335

Gross unrealized losses
(54
)
 
(7
)
Realized losses
(40
)
 

Interest income
94

 

Cash redemption
(290
)
 

Fair value at March 31
$

 
$
328

In March 2017, Playa completed a business combination with Pace Holdings Corporation ("Pace"), and our preferred shares plus accrued and unpaid paid in kind ("PIK") dividends were redeemed in full for $290 million. Upon redemption, we recorded $94 million of interest income and $40 million of realized losses in other income (loss), net on our condensed consolidated statements of income. The realized losses were the result of a difference between the fair value of the initial investment and the contractual redemption price of $8.40 per share.
Common shares—Prior to the Playa business combination, we accounted for our common share investment in Playa as an equity method investment. As a result of the Playa business combination, Playa Hotels & Resorts N.V. is now publicly traded on the NASDAQ and our ownership percentage was diluted to 11.57%. As we no longer have the ability to significantly influence Playa, our investment was recharacterized as an AFS equity security in March 2017. The remeasurement of our investment at fair value resulted in unrealized gains recorded in other comprehensive income of $109 million at March 31, 2017. The fair value of the common shares is classified as Level One in the fair value hierarchy as we are able to obtain market available pricing information. Our investment is re-measured quarterly at fair value through accumulated other comprehensive loss on the condensed consolidated balance sheets. In conjunction with the Playa business combination, we also received 1,738,806 of founders’ warrants to purchase 579,602 additional shares of Playa’s common stock and 237,110 of earn-out warrants. The warrants were recorded at a fair value of $5 million within other assets on the condensed consolidated balance sheets at March 31, 2017.
Held-to-Maturity Debt Securities—At March 31, 2017 and December 31, 2016, we had investments in held-to-maturity ("HTM") debt securities of $27 million, which are investments in third-party entities that own certain of our hotels. The amortized costs of our investments approximate fair value and are classified as Level Three in the fair value hierarchy. The securities are mandatorily redeemable between 2020 and 2025.

5.    FINANCING RECEIVABLES

 
March 31, 2017
 
December 31, 2016
Unsecured financing to hotel owners
$
122

 
$
119

Less allowance for losses
(103
)
 
(100
)
Total long-term financing receivables, net
$
19

 
$
19


10


Allowance for Losses and Impairments—The following table summarizes the activity in our financing receivables allowance:
 
2017
 
2016
Allowance at January 1
$
100

 
$
98

  Provisions
2

 
1

  Other Adjustments
1

 
1

Allowance at March 31
$
103

 
$
100

Credit Monitoring—Our unsecured financing receivables were as follows:
 
March 31, 2017
 
Gross Loan Balance (Principal and Interest)
 
Related Allowance
 
Net Financing Receivables
 
Gross Receivables on Non-Accrual Status
Loans
$
13

 
$

 
$
13

 
$

Impaired loans (1)
58

 
(58
)
 

 
58

Total loans
71

 
(58
)
 
13

 
58

Other financing arrangements
51

 
(45
)
 
6

 
45

Total unsecured financing receivables
$
122

 
$
(103
)
 
$
19

 
$
103

(1) The unpaid principal balance was $44 million and the average recorded loan balance was $57 million at March 31, 2017.
 
December 31, 2016
 
Gross Loan Balance (Principal and Interest)
 
Related Allowance
 
Net Financing Receivables
 
Gross Receivables on Non-Accrual Status
Loans
$
13

 
$

 
$
13

 
$

Impaired loans (2)
56

 
(56
)
 

 
56

Total loans
69

 
(56
)
 
13

 
56

Other financing arrangements
50

 
(44
)
 
6

 
44

Total unsecured financing receivables
$
119

 
$
(100
)
 
$
19

 
$
100

(2) The unpaid principal balance was $43 million and the average recorded loan balance was $57 million at December 31, 2016.
Fair Value—We estimated the fair value of financing receivables, which are classified as Level Three in the fair value hierarchy, to be approximately $19 million at March 31, 2017 and December 31, 2016.

6.    ACQUISITIONS
Miraval—During the three months ended March 31, 2017, we acquired Miraval Group from an unrelated third party. The transaction included the Miraval Life in Balance Spa brand, Miraval Arizona Resort & Spa in Tucson, Arizona, Travaasa Resort in Austin, Texas, and the option to acquire Cranwell Spa & Golf Resort ("Cranwell") in Lenox, Massachusetts. We subsequently exercised our option and acquired approximately 95% of Cranwell during the three months ended March 31, 2017. These transactions are collectively referred to as "Miraval." Total cash consideration for Miraval was $239 million, subject to working capital adjustments.

11


The following table summarizes the fair value of the identifiable net assets acquired in the acquisition of Miraval, which is recorded within corporate and other:
 
 
Current assets, net of cash acquired
$
4

Property and equipment
173

Indefinite-lived intangibles (1)
37

Management agreement intangibles (2)
14

Goodwill (3)
20

Other definite-lived intangibles (4)
7

Total assets
$
255

 
 
Current liabilities
$
11

Deferred income tax liability
6

Total liabilities
17

Total net assets acquired attributable to Hyatt Hotels Corporation
238

Total net assets acquired attributable to noncontrolling interests
1

Total net assets acquired
$
239

 
 
(1) Includes an intangible attributable to the Miraval brand.
(2) Amortized over a useful life of 20 years.
(3) The goodwill, of which $8 million is deductible for tax purposes, is attributable to Miraval's reputation as a renowned provider of wellness and mindfulness experiences, the extension of the Hyatt brand beyond traditional hotel stays, and the establishment of deferred tax liabilities.
(4) Amortized over useful lives ranging from two to seven years.
Redeemable noncontrolling interest in preferred shares of a subsidiary—In conjunction with the acquisition of Miraval, a consolidated hospitality venture for which we are the managing member (the "Miraval Venture") issued $9 million of redeemable preferred shares to unrelated third-party investors. The preferred shares are non-voting, except as required by applicable law and certain contractual approval rights, and have liquidation preference over all other classes of securities within the Miraval Venture. The redeemable preferred shares earn a return of 12% and a redemption premium that increases over time depending on the length of time the redeemable preferred shares are outstanding. The preferred shares are redeemable at various time periods at the option of the Miraval Venture starting 12 months from the date of issuance. If not redeemed by the Miraval Venture prior to the two-year anniversary, the preferred shareholders have the option to require redemption of all preferred shares outstanding. The preferred shares are also redeemable upon the occurrence of certain change-in-control events. Under the current terms, the shares are classified as a redeemable noncontrolling interest in preferred shares of a subsidiary, which are presented between liabilities and equity on our condensed consolidated balance sheets and carried at the current redemption value.

7.    INTANGIBLES, NET
 
March 31, 2017
 
Weighted-
Average Useful
Lives in Years
 
December 31, 2016
Management and franchise agreement intangibles
$
611

 
25

 
$
589

Lease related intangibles
117

 
111

 
115

Brand and other indefinite-lived intangibles
53

 

 
16

Advanced bookings intangibles
12

 
6

 
11

Other definite-lived intangibles
12

 
11

 
6

 
805

 
 
 
737

Accumulated amortization
(147
)
 
 
 
(138
)
Intangibles, net
$
658

 
 
 
$
599


12


Amortization expense relating to intangible assets was as follows:
 
Three Months Ended March 31,
 
2017
 
2016
Amortization expense
$
7

 
$
7


8.    DEBT
Long-term debt, net of current maturities was $1,445 million at March 31, 2017 and December 31, 2016.
Revolving Credit Facility—During the three months ended March 31, 2017, we borrowed $180 million on our revolving credit facility at a weighted-average interest rate of 1.89%. At March 31, 2017 and December 31, 2016, we had $280 million and $100 million outstanding, respectively. At March 31, 2017, we had $1.2 billion available on our revolving credit facility.
Fair Value—We estimated the fair value of debt, excluding capital leases, which consists of $196 million of 6.875% senior notes due 2019 (the "2019 Notes"), $250 million of 5.375% senior notes due 2021 (the "2021 Notes"), $350 million of 3.375% senior notes due 2023 (the "2023 Notes") and $400 million of 4.850% senior notes due 2026 (the "2026 Notes"), collectively referred to as the Senior Notes, and other long-term debt. Our Senior Notes and bonds are classified as Level Two due to the use and weighting of multiple market inputs in the final price of the security. We estimated the fair value of other debt instruments using a discounted cash flow analysis based on current market inputs for similar types of arrangements. Based upon the lack of availability of market data, we have classified our revolving credit facility and other debt as Level Three. The primary sensitivity in these calculations is based on the selection of appropriate discount rates. Fluctuations in these assumptions will result in different estimates of fair value.
We had the following debt balances, excluding capital lease obligations:
 
March 31, 2017
 
Carrying Value
 
Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level One)
 
Significant Other Observable Inputs (Level Two)
 
Significant Unobservable Inputs (Level Three)
Debt (1)
$
1,745

 
$
1,834

 
$

 
$
1,462

 
$
372

(1) Excludes capital lease obligations of $15 million and unamortized discounts and deferred financing fees of $16 million.
 
December 31, 2016
 
Carrying Value
 
Fair Value
 
Quoted Prices in Active Markets for Identical Assets (Level One)
 
Significant Other Observable Inputs (Level Two)
 
Significant Unobservable Inputs (Level Three)
Debt (2)
$
1,565

 
$
1,642

 
$

 
$
1,450

 
$
192

(2) Excludes capital lease obligations of $15 million and unamortized discounts and deferred financing fees of $16 million.

9.    LIABILITIES
 
March 31, 2017
 
December 31, 2016
Deferred compensation plans
$
364

 
$
352

Deferred gains on sales of hotel properties
357

 
363

Loyalty program liability
288

 
296

Guarantee liabilities (Note 11)
118

 
124

Other
353

 
337

Total other long-term liabilities
$
1,480

 
$
1,472


13


Accrued expenses and other current liabilities included $143 million and $139 million of liabilities related to our loyalty program at March 31, 2017 and December 31, 2016, respectively.

10.    INCOME TAXES
The effective income tax rates for the three months ended March 31, 2017 and March 31, 2016, were 36.8% and 31.7%, respectively. Our effective tax rates increased for the three months ended March 31, 2017 compared to the three months ended March 31, 2016, primarily due to the impact of certain foreign unconsolidated hospitality venture losses not benefited in 2017.
Unrecognized tax benefits were $89 million and $86 million at March 31, 2017 and December 31, 2016, respectively, of which $9 million and $5 million, respectively, would impact the effective tax rates if recognized.
During the first quarter of 2017, the Internal Revenue Service ("IRS") issued a “Notice of Deficiency” for our 2009 through 2011 tax years. We disagree with the IRS’s assessment as it relates to the inclusion of loyalty program contributions as taxable income to the Company. In the second quarter of 2017, we intend to file a petition with the United States Tax Court for redetermination of the tax liability asserted by the IRS related to our loyalty program. If the IRS’s position is upheld, it would result in an income tax liability of $118 million (including $25 million of estimated interest, net of federal tax benefit) for the years under audit that would be primarily offset by a deferred tax asset, and therefore, only the related interest would have an impact on the effective tax rate if recognized. We believe we have adequate tax reserves in connection with this matter.

11.    COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, we enter into various commitments, guarantees, surety bonds, and letter of credit agreements, which are discussed below:
Commitments—At March 31, 2017, we are committed, under certain conditions, to lend or invest up to $433 million, net of any related letters of credit, in various business ventures.
Performance Guarantees—Certain of our contractual agreements with third-party owners require us to guarantee payments to the owners if specified levels of operating profit are not achieved by their hotels.
Our most significant performance guarantee relates to four managed hotels in France that we began managing in the second quarter of 2013 ("the four managed hotels in France"), which has a term of seven years, with approximately three and one-quarter years remaining. This guarantee has a maximum cap, but does not have an annual cap. The remaining maximum exposure related to our performance guarantees at March 31, 2017 was $349 million, of which €293 million ($312 million using exchange rates at March 31, 2017) related to the four managed hotels in France.
We had total net performance guarantee liabilities of $77 million and $79 million at March 31, 2017 and December 31, 2016, which included $52 million and $55 million recorded in other long-term liabilities, $26 million and $24 million in accrued expenses and other current liabilities, and $1 million and $0 in receivables on our condensed consolidated balance sheets, respectively. Our total performance guarantee liabilities are comprised of the fair value of the guarantee obligation liabilities recorded upon inception, net of amortization and any separate contingent liabilities, net of cash payments. Performance guarantee expense or income and income from amortization of the guarantee obligation liabilities are recorded in other income (loss), net on the condensed consolidated statements of income, see Note 17.

14


 
 
The Four Managed Hotels in France
 
Other Performance Guarantees
 
All Performance Guarantees
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Beginning balance, January 1
 
$
66

 
$
93

 
$
13

 
$
4

 
$
79

 
$
97

Amortization of initial guarantee obligation liability into income
 
(3
)
 
(8
)
 
(1
)
 

 
(4
)
 
(8
)
Performance guarantee expense, net
 
26

 
19

 

 

 
26

 
19

Net payments during the period
 
(22
)
 
(14
)
 
(4
)
 
(1
)
 
(26
)
 
(15
)
Foreign currency exchange, net
 
2

 
4

 

 

 
2

 
4

Ending balance, March 31
 
$
69

 
$
94

 
$
8

 
$
3

 
$
77

 
$
97

Additionally, we enter into certain management contracts where we have the right, but not an obligation, to make payments to certain hotel owners if their hotels do not achieve specified levels of operating profit. If we choose not to fund the shortfall, the hotel owner has the option to terminate the management contract. At March 31, 2017 and December 31, 2016, there were no amounts recorded on our condensed consolidated balance sheets related to these performance test clauses.
Debt Repayment Guarantees—We enter into various debt repayment guarantees related to our unconsolidated hospitality ventures and certain managed or franchised hotels. Typically, we enter into debt repayment guarantees in order to assist hotel owners in obtaining third-party financing or to obtain more favorable borrowing terms. Included within debt repayment guarantees are the following:
Property Description
 
Maximum Potential Future Payments
 
Maximum Exposure Net of Recoverability from Third Parties
 
Other Long-term Liabilities recorded at March 31, 2017
 
Other Long-term Liabilities recorded at December 31, 2016
 
Year of Guarantee Expiration
Hotel property in Washington State (1), (3), (4), (5)
 
$
215

 
$

 
$
33

 
$
35

 
2020
Hotel properties in India (2), (3)
 
185

 
185

 
21

 
21

 
2020
Hotel property in Brazil (1)
 
80

 
40

 
3

 
3

 
2020
Hotel property in Minnesota
 
25

 
25

 
2

 
2

 
2021
Hotel property in Arizona (1), (4)
 
25

 

 
2

 
2

 
2019
Hotel properties in California (1)
 
21

 
8

 
5

 
6

 
2020
Other (1)
 
24

 
8

 

 

 
2017
Total
 
$
575

 
$
266

 
$
66

 
$
69

 
 
(1) We have agreements with our unconsolidated hospitality venture partner, the respective hotel owners or other third parties to recover certain amounts funded under the debt repayment guarantee; the recoverability mechanism may be in the form of cash, financing receivable, or HTM debt security.
(2) Debt repayment guarantee is denominated in Indian rupees and translated using exchange rates at March 31, 2017. We have the contractual right to recover amounts funded from the unconsolidated hospitality venture, which is a related party. We expect our maximum exposure to be $93 million, taking into account our partner’s 50% ownership interest in the unconsolidated hospitality venture.
(3) Under certain events or conditions, we have the right to force the sale of the property(ies) in order to recover amounts funded.
(4) If certain funding thresholds are met or if certain events occur, we have the ability to assume control of the property.
(5) We are subject to a completion guarantee whereby the parties agree to substantially complete the construction of the project by a specified date. In the event of default, we are obligated to complete construction using the funds available from the outstanding loan. Any additional funds paid by us are subject to recovery through a HTM debt security.

15


At March 31, 2017, the hotel owners are current on their debt service obligations.
Guarantee Liabilities Fair Value—We estimated the fair value of our guarantees to be $229 million and $231 million at March 31, 2017 and December 31, 2016, respectively. Due to the lack of readily available market data, we have classified our guarantees as Level Three in the fair value hierarchy.
Insurance—We obtain commercial insurance for potential losses for general liability, workers' compensation, automobile liability, employment practices, crime, property and other miscellaneous coverages. A portion of the risk is retained on a self-insurance basis primarily through U.S. based and licensed captive insurance companies that are wholly owned subsidiaries of Hyatt and generally insure our deductibles and retentions. Reserve requirements are established based on actuarial projections of ultimate losses. Losses estimated to be paid within 12 months are $32 million and $30 million at March 31, 2017 and December 31, 2016, respectively, and are classified within accrued expenses and other current liabilities on our condensed consolidated balance sheets, while losses expected to be payable in future periods are $63 million and $62 million at March 31, 2017 and December 31, 2016, respectively, and are included in other long-term liabilities on our condensed consolidated balance sheets. At March 31, 2017, standby letters of credit of $7 million were issued to provide collateral for the estimated claims, which are guaranteed by us. For further discussion, see the "—Letters of Credit" section of this Note.
Collective Bargaining Agreements—At March 31, 2017, approximately 25% of our U.S. based employees were covered by various collective bargaining agreements, generally providing for basic pay rates, working hours, other conditions of employment and orderly settlement of labor disputes. Certain employees are covered by union sponsored multi-employer pension and health plans pursuant to agreements between us and various unions. Generally, labor relations have been maintained in a normal and satisfactory manner, and we believe our employee relations are good.
Surety Bonds—Surety bonds issued on our behalf were $25 million at March 31, 2017 and primarily relate to workers’ compensation, taxes, licenses and utilities related to our lodging operations.
Letters of Credit—Letters of credit outstanding on our behalf at March 31, 2017 were $236 million, which relate to our ongoing operations and securitization of our performance under our debt repayment guarantee associated with the hotel properties in India, which is only called upon if we default on our guarantee. The letters of credit outstanding do not reduce the available capacity under our revolving credit facility.
Capital Expenditures—As part of our ongoing business operations, significant expenditures are required to complete renovation projects that have been approved.
Other—We act as general partner of various partnerships owning hotel properties subject to mortgage indebtedness. These mortgage agreements generally limit the lender’s recourse to security interests in assets financed and/or other assets of the partnership(s) and/or the general partner(s) thereof.
In conjunction with financing obtained for our unconsolidated hospitality ventures and certain managed hotels, we may provide standard indemnifications to the lender for loss, liability or damage occurring as a result of our actions or actions of the other unconsolidated hospitality venture owners.
We are subject, from time to time, to various claims and contingencies related to lawsuits, taxes and environmental matters, as well as commitments under contractual obligations. Many of these claims are covered under the current insurance programs, subject to deductibles. We recognize a liability associated with commitments and contingencies when a loss is probable and reasonably estimable. Although the ultimate liability for these matters cannot be determined at this point, based on information currently available, we do not expect the ultimate resolution of such claims and litigation will have a material effect on our condensed consolidated financial statements.


16


12.    EQUITY
 
Stockholders’
equity
 
Noncontrolling interests
in consolidated
subsidiaries
 
Total equity
Balance at January 1, 2017
$
3,903

 
$
5

 
$
3,908

Net income
70

 

 
70

Other comprehensive income
75

 

 
75

Contributions from noncontrolling interests

 
1

 
1

Repurchase of common stock
(348
)
 

 
(348
)
Employee stock plan issuance
1

 

 
1

Share-based payment activity
13

 

 
13

Balance at March 31, 2017
$
3,714

 
$
6

 
$
3,720

 
 
 
 
 
 
 
Stockholders’
equity
 
Noncontrolling interests
in consolidated
subsidiaries
 
Total equity
Balance at January 1, 2016
$
3,991

 
$
4

 
$
3,995

Net income
34

 

 
34

Other comprehensive income
20

 

 
20

Repurchase of common stock
(63
)
 

 
(63
)
Employee stock plan issuance
1

 

 
1

Share-based payment activity
13

 

 
13

Balance at March 31, 2016
$
3,996

 
$
4

 
$
4,000

Accumulated Other Comprehensive Loss
 
Balance at
January 1, 2017
 
Current period other comprehensive income before reclassification
 
Amount reclassified from accumulated other comprehensive loss
 
Balance at March 31, 2017
Foreign currency translation adjustments
$
(299
)
 
$
41

 
$

 
$
(258
)
Unrealized gains on AFS securities
33

 
34

 

 
67

Unrecognized pension cost
(7
)
 

 

 
(7
)
Unrealized losses on derivative instruments
(4
)
 

 

 
(4
)
Accumulated other comprehensive income (loss)
$
(277
)
 
$
75

 
$

 
$
(202
)
 
 
 
 
 
 
 
 
 
Balance at
January 1, 2016
 
Current period other comprehensive income (loss) before reclassification
 
Amount reclassified from accumulated other comprehensive loss
 
Balance at
March 31, 2016
Foreign currency translation adjustments
$
(257
)
 
$
24

 
$

 
$
(233
)
Unrealized gains (losses) on AFS securities
39

 
(4
)
 

 
35

Unrecognized pension cost
(7
)
 

 

 
(7
)
Unrealized losses on derivative instruments
(5
)
 

 

 
(5
)
Accumulated other comprehensive income (loss)
$
(230
)
 
$
20

 
$

 
$
(210
)
 
 
 
 
 
 
 
 
Share RepurchasesDuring 2016 and 2015, our board of directors authorized the repurchase of up to $500 million and $400 million, respectively, of our common stock. These repurchases may be made from time to time in the open market, in privately negotiated transactions, or otherwise, including pursuant to a Rule 10b5-1 plan, at prices we deem appropriate and subject to market conditions, applicable law and other factors deemed relevant in our sole discretion. The common stock repurchase program applies to our Class A common stock and our Class B

17


common stock. The common stock repurchase program does not obligate us to repurchase any dollar amount or number of shares of common stock and the program may be suspended or discontinued at any time. On May 3, 2017, our board of directors authorized the repurchase of up to an additional $500 million of our common stock. See Note 18 for further details regarding the 2017 share repurchase plan.
In March 2017, we entered into an accelerated share repurchase program ("2017 ASR") with a third-party financial institution. Under the 2017 ASR agreement, we paid $300 million and received an initial delivery of 4,596,822 shares, which were repurchased at a price of $52.21 per share. This initial delivery of shares represents the minimum number of shares that we may receive under the agreement and was accounted for as a reduction to stockholders’ equity on the condensed consolidated balance sheets. Upon settlement of the 2017 ASR in a future period, the total number of shares ultimately delivered is determined based on the volume-weighted-average price of our common stock during that period. The remaining shares yet to be delivered, totaling $60 million, are accounted for as an equity-classified forward contract. The initial delivery of shares resulted in a reduction in the weighted-average common shares calculation for basic and diluted earnings per share. See Note 16.
During the three months ended March 31, 2017, we repurchased 5,480,636 shares, including shares repurchased pursuant to the 2017 ASR. The shares of common stock were repurchased at a weighted-average price of $52.48 per share for an aggregate purchase price of $288 million, excluding related insignificant expenses. Total shares repurchased during the three months ended March 31, 2017 represented approximately 4% of our total shares of common stock outstanding at December 31, 2016.
During the three months ended March 31, 2016, we repurchased 1,527,750 shares. The shares of common stock were repurchased at a weighted-average price of $41.37 per share for an aggregate purchase price of $63 million, excluding related insignificant expenses. The shares repurchased during the three months ended March 31, 2016 represented approximately 1% of our total shares of common stock outstanding at December 31, 2015.
The shares of Class A common stock repurchased on the open market were retired and returned to the status of authorized and unissued shares. At March 31, 2017, we had $9 million remaining under the share repurchase authorization.

13.    STOCK-BASED COMPENSATION
As part of our Long-Term Incentive Plan ("LTIP"), we award Stock Appreciation Rights ("SARs"), Restricted Stock Units ("RSUs"), Performance Share Units ("PSUs") and Performance Vesting Restricted Stock ("PSs") to certain employees. Compensation expense and unearned compensation presented below exclude amounts related to employees of our managed hotels and other employees whose payroll is reimbursed, as this expense has been and will continue to be reimbursed by our third-party hotel owners and is recorded in other revenues from managed properties and other costs from managed properties on our condensed consolidated statements of income. Stock-based compensation expense included in selling, general, and administrative expense on our condensed consolidated statements of income related to these awards was as follows:
 
Three Months Ended March 31,
 
2017
 
2016
SARs
$
8

 
$
7

RSUs
8

 
8

PSUs and PSs

 
1

Total stock-based compensation recorded within selling, general, and administrative expenses
$
16

 
$
16

SARs—During the three months ended March 31, 2017, we granted 605,601 SARs to employees with a weighted-average grant date fair value of $16.35.
RSUs— During the three months ended March 31, 2017, we granted 416,215 RSUs to employees with a weighted-average grant date fair value of $52.65.

18


PSUs and PSs—During the three months ended March 31, 2017, we granted a total of 102,115 PSUs to our executive officers, with a weighted-average grant date fair value of $52.65. The performance period applicable to such PSUs is a three year period beginning January 1, 2017 and ending December 31, 2019. During the three months ended March 31, 2017, we did not grant any PSs under our LTIP.
Our total unearned compensation for our stock-based compensation programs at March 31, 2017 was $8 million for SARs, $24 million for RSUs and $8 million for PSUs and PSs, which will primarily be recorded to compensation expense over the next three years with respect to SARs and RSUs, and over the next two years with respect to PSUs and PSs.

14.    RELATED-PARTY TRANSACTIONS
In addition to those included elsewhere in the Notes to the condensed consolidated financial statements, related-party transactions entered into by us are summarized as follows:
Leases—Our corporate headquarters have been located at the Hyatt Center in Chicago, Illinois, since 2005. A subsidiary of the Company holds a master lease for a portion of the Hyatt Center and has entered into sublease agreements with certain related parties. Future expected sublease income for this space from related parties is $3 million.
Equity Method Investments—We have equity method investments in entities that own properties for which we receive management or franchise fees. We recorded fees of $6 million for the three months ended March 31, 2017 and March 31, 2016. At March 31, 2017 and December 31, 2016, we had receivables due from these properties of $7 million. In addition, in some cases we provide loans (see Note 5) or guarantees (see Note 11) to these entities. During the three months ended March 31, 2017 and March 31, 2016, we recorded fees related to these guarantees of $1 million. Our ownership interest in these unconsolidated hospitality ventures generally varies from 24% to 70%.
Class B Share Conversion—During the three months ended March 31, 2017, 539,370 shares of Class B common stock were converted on a share-for-share basis into shares of our Class A common stock, $0.01 par value per share. The shares of Class B common stock that were converted into shares of Class A common stock were retired subsequent to March 31, 2017, thereby reducing the shares of Class B common stock authorized and outstanding.

15.    SEGMENT INFORMATION
Our reportable segments are components of the business which are managed discretely and for which discrete financial information is reviewed regularly by the chief operating decision maker to assess performance and make decisions regarding the allocation of resources. Our chief operating decision maker is our President and Chief Executive Officer. We define our reportable segments as follows:
Owned and leased hotels—This segment derives its earnings from owned and leased hotel properties located predominantly in the United States but also in certain international locations and for purposes of segment Adjusted EBITDA, includes our pro rata share of the Adjusted EBITDA of our unconsolidated hospitality ventures, based on our ownership percentage of each venture. Adjusted EBITDA includes intercompany expenses related to management fees paid to the Company's management and franchising segments, which are eliminated in consolidation. Intersegment revenues relate to promotional award redemptions at our owned and leased hotels related to our co-branded credit card, which are eliminated in consolidation.
Americas management and franchising—This segment derives its earnings primarily from a combination of hotel management and licensing of our portfolio of brands to franchisees located in the United States, Latin America, Canada and the Caribbean. This segment’s revenues also include the reimbursement of costs incurred on behalf of managed hotel property owners and franchisees with no added margin. These costs relate primarily to payroll costs at managed properties where the Company is the employer. These revenues and costs are recorded within other revenues from managed properties and other costs from managed properties, respectively. The intersegment revenues relate to management fees earned from the Company’s owned hotels, which are eliminated in consolidation.

19


ASPAC management and franchising—This segment derives its earnings primarily from a combination of hotel management and licensing of our portfolio of brands to franchisees located in Southeast Asia, as well as Greater China, Australia, South Korea, Japan and Micronesia. This segment’s revenues also include the reimbursement of costs incurred on behalf of managed hotel property owners and franchisees with no added margin. These costs relate primarily to reservations, marketing and technology costs. These revenues and costs are recorded within other revenues from managed properties and other costs from managed properties, respectively. The intersegment revenues relate to management fees earned from the Company’s owned hotels, which are eliminated in consolidation.
EAME/SW Asia management and franchising—This segment derives its earnings primarily from a combination of hotel management and licensing of our portfolio of brands to franchisees located in Europe, Africa, the Middle East, India, Central Asia and Nepal. This segment’s revenues also include the reimbursement of costs incurred on behalf of managed hotel property owners and franchisees with no added margin. These costs relate primarily to reservations, marketing and technology costs. These revenues and costs are recorded within other revenues from managed properties and other costs from managed properties, respectively. The intersegment revenues relate to management fees earned from the Company’s owned hotels, which are eliminated in consolidation.
Our chief operating decision maker evaluates performance based on each segment’s revenue and Adjusted EBITDA. Adjusted EBITDA, as we define it, is a non-GAAP measure. We define Adjusted EBITDA as net income attributable to Hyatt Hotels Corporation plus our pro rata share of unconsolidated hospitality ventures Adjusted EBITDA based on our ownership percentage of each venture, adjusted to exclude interest expense; provision for income taxes; depreciation and amortization; equity earnings (losses) from unconsolidated hospitality ventures; stock-based compensation expense and other income (loss), net.


20


The table below shows summarized consolidated financial information by segment. Included within corporate and other are unallocated corporate expenses, results related to Miraval, license fees related to Hyatt Residence Club and results related to our co-branded credit card.
 
Three Months Ended March 31,
 
2017
 
2016
Owned and leased hotels
 
 
 
Owned and leased hotels revenues
$
558

 
$
516

Other revenues
13

 

Intersegment revenues (a)
2

 

Adjusted EBITDA
143


131

Depreciation and amortization
74

 
68

Americas management and franchising
 
 
 
Management and franchise fees revenues
104

 
91

Other revenues from managed properties
428

 
421

Intersegment revenues (a)
22

 
20

Adjusted EBITDA
90

 
76

Depreciation and amortization
5

 
5

ASPAC management and franchising
 
 
 
Management and franchise fees revenues
25

 
22

Other revenues from managed properties
26

 
21

Intersegment revenues (a)

 

Adjusted EBITDA
15

 
12

Depreciation and amortization

 

EAME/SW Asia management and franchising
 
 
 
Management and franchise fees revenues
16

 
16

Other revenues from managed properties
17

 
15

Intersegment revenues (a)
2

 
2

Adjusted EBITDA
8

 
8

Depreciation and amortization
1

 
1

Corporate and other
 
 
 
Revenues
26

 
9

Adjusted EBITDA
(29
)
 
(33
)
Depreciation and amortization
11

 
7

Eliminations
 
 
 
Revenues (a)
(26
)
 
(22
)
Adjusted EBITDA (b)
1

 

Depreciation and amortization

 

TOTAL
 
 
 
Revenues
$
1,187

 
$
1,089

Adjusted EBITDA
228

 
194

Depreciation and amortization
91

 
81

(a)
Intersegment revenues are included in the management and franchise fees revenues and owned and leased hotels revenues and are eliminated in Eliminations.
(b)
Adjusted EBITDA elimination includes expenses recorded by our owned and leased hotels related to billings for depreciation on technology-related capital assets.

21


The table below provides a reconciliation of our net income attributable to Hyatt Hotels Corporation to EBITDA and a reconciliation of EBITDA to our consolidated Adjusted EBITDA: 
 
Three Months Ended March 31,
 
2017
 
2016
Net income attributable to Hyatt Hotels Corporation
$
70

 
$
34

Interest expense
21

 
17

Provision for income taxes
41

 
16

Depreciation and amortization
91

 
81

EBITDA
223

 
148

Equity (earnings) losses from unconsolidated hospitality ventures
3

 
(2
)
Stock-based compensation expense (see Note 13)
16

 
16

Other (income) loss, net (see Note 17)
(40
)
 
4

Pro rata share of unconsolidated hospitality ventures Adjusted EBITDA
26

 
28

Adjusted EBITDA
$
228

 
$
194


16.    EARNINGS PER SHARE
The calculation of basic and diluted earnings per share, including a reconciliation of the numerator and denominator, are as follows:
 
Three Months Ended March 31,
 
2017
 
2016
Numerator:
 
 
 
Net income
$
70

 
$
34

Net income and accretion attributable to noncontrolling interests

 

Net income attributable to Hyatt Hotels Corporation
$
70

 
$
34

Denominator:
 
 
 
Basic weighted average shares outstanding
129,746,644

 
135,128,860

Share-based compensation
1,250,891

 
796,029

Diluted weighted average shares outstanding
130,997,535

 
135,924,889

Basic Earnings Per Share:
 
 
 
Net income
$
0.54

 
$
0.25

Net income and accretion attributable to noncontrolling interests

 

Net income attributable to Hyatt Hotels Corporation
$
0.54

 
$
0.25

Diluted Earnings Per Share:
 
 
 
Net income
$
0.54

 
$
0.25

Net income and accretion attributable to noncontrolling interests

 

Net income attributable to Hyatt Hotels Corporation
$
0.54

 
$
0.25

The computations of diluted net income per share for the three months ended March 31, 2017 and March 31, 2016 do not include the following shares of Class A common stock assumed to be issued as stock-settled SARs, RSUs and an equity-classified forward contract because they are anti-dilutive.
 
Three Months Ended March 31,
 
2017
 
2016
SARs
39,200

 

RSUs

 
12,000

Equity-classified forward contract under the 2017 ASR
26,800

 


22



17.    OTHER INCOME (LOSS), NET
 
Three Months Ended March 31,
 
2017
 
2016
Interest income (Note 4)
$
95

 
$
1

Depreciation recovery
6

 
5

Performance guarantee liability amortization (Note 11)
4

 
8

Performance guarantee expense, net (Note 11)
(26
)
 
(19
)
Realized losses (Note 4)
(40
)
 

Other
1

 
1

Other income (loss), net
$
40

 
$
(4
)

18.    SUBSEQUENT EVENT
On May 3, 2017, our board of directors authorized the repurchase of up to an additional $500 million of our common stock. These repurchases may be made from time to time in the open market, in privately negotiated transactions, or otherwise, including pursuant to a Rule 10b5-1 plan, at prices we deem appropriate and subject to market conditions, applicable law and other factors deemed relevant in our sole discretion. The common stock repurchase program applies to our Class A common stock and our Class B common stock. The common stock repurchase program does not obligate us to repurchase any dollar amount or number of shares of common stock and the program may be suspended or discontinued at any time. At May 4, 2017, we had approximately $509 million remaining under our current share repurchase authorization.


23


Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.
This quarterly report contains "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements include statements about the Company's plans, strategies, financial performance, prospects or future events and involve known and unknown risks that are difficult to predict. As a result, our actual results, performance or achievements may differ materially from those expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as "may," "could," "expect," "intend," "plan," "seek," "anticipate," "believe," "estimate," "predict," "potential," "continue," "likely," "will," "would" and variations of these terms and similar expressions, or the negative of these terms or similar expressions. Such forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by us and our management, are inherently uncertain. Factors that may cause actual results to differ materially from current expectations include, but are not limited to: the factors discussed in our filings with the SEC, including our Annual Report on Form 10-K; general economic uncertainty in key global markets and a worsening of global economic conditions or low levels of economic growth; the rate and the pace of economic recovery following economic downturns; levels of spending in business and leisure segments as well as consumer confidence; declines in occupancy and average daily rate; limited visibility with respect to future bookings; loss of key personnel; hostilities, or fear of hostilities, including future terrorist attacks, that affect travel; travel-related accidents; natural or man-made disasters such as earthquakes, tsunamis, tornadoes, hurricanes, floods, oil spills, nuclear incidents and global outbreaks of pandemics or contagious diseases or fear of such outbreaks; our ability to successfully achieve certain levels of operating profits at hotels that have performance guarantees in favor of our third party owners; the impact of hotel renovations; risks associated with our capital allocation plans and common stock repurchase program, including the risk that our common stock repurchase program could increase volatility and fail to enhance stockholder value; the seasonal and cyclical nature of the real estate and hospitality businesses; changes in distribution arrangements, such as through Internet travel intermediaries; changes in the tastes and preferences of our customers, including the entry of new competitors in the lodging business; relationships with colleagues and labor unions and changes in labor laws; financial condition of, and our relationships with, third-party property owners, franchisees and hospitality venture partners; the possible inability of our third-party owners, franchisees or development partners to access capital necessary to fund current operations or implement our plans for growth; risks associated with potential acquisitions and dispositions and the introduction of new brand concepts; the timing of acquisitions and dispositions; failure to successfully complete proposed transactions (including the failure to satisfy closing conditions or obtain required approvals); unforeseen terminations of our management or franchise agreements; changes in federal, state, local or foreign tax law; increases in interest rates and operating costs; foreign exchange rate fluctuations or currency restructurings; lack of acceptance of new brands or innovation; our ability to successfully implement our new global loyalty platform and the level of acceptance of the new program by our guests; general volatility of the capital markets and our ability to access such markets; changes in the competitive environment in our industry, including as a result of industry consolidation, and the markets where we operate; cyber incidents and information technology failures; outcomes of legal or administrative proceedings; and violations of regulations or laws related to our franchising business. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made, and we do not undertake or assume any obligation to update publicly any of these forward-looking statements to reflect actual results, new information or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
The following discussion should be read in conjunction with the Company's condensed consolidated financial statements and accompanying Notes, which appear elsewhere in this Quarterly Report on Form 10-Q.
Executive Overview
We are a global hospitality company engaged in the development, ownership, operation, management, franchising and licensing of a portfolio of properties, including hotels, resorts and residential and vacation ownership properties around the world. At March 31, 2017, our worldwide hotel portfolio consisted of 664 hotels (172,261 rooms), including:

282 managed properties (92,399 rooms), all of which we operate under management agreements with third-party property owners;
310 franchised properties (51,041 rooms), all of which are owned by third parties that have franchise agreements with us and are operated by third parties;

24


35 owned properties (18,008 rooms) (including 1 consolidated hospitality venture), 1 capital leased property (171 rooms), and 7 operating leased properties (2,411 rooms), all of which we manage; and
23 managed properties and 6 franchised properties owned or leased by unconsolidated hospitality ventures (8,231 rooms).
Our worldwide property portfolio also included:
3 destination wellness resorts (386 rooms), all of which we own and operate (including 1 consolidated hospitality venture);
6 all inclusive resorts (2,401 rooms), all of which are owned by a third party in which we hold a common share investment and which operates the resorts under franchise agreements with us;
16 vacation ownership properties (1,038 units), all of which are licensed by Interval Leisure Group ("ILG") under the Hyatt Residence Club brand and operated by third parties, including ILG and its affiliates; and
19 residential properties (2,546 units), which consist of branded residences and serviced apartments. We manage all of the serviced apartments and those branded residential units that participate in a rental program with an adjacent Hyatt-branded hotel.
We report our consolidated operations in U.S. dollars. Tabular amounts are displayed in millions of U.S. dollars, or as otherwise specifically identified. Percentages may not recompute due to rounding and not meaningful percentage changes are presented as "NM". Constant currency disclosures throughout Management's Discussion and Analysis of Financial Condition and Results of Operations are non-GAAP measures. See "—Non-GAAP Measures" for further discussion of constant currency disclosures. We manage our business within four reportable segments as described below:     

Owned and leased hotels, which consists of our owned and leased full service and select service hotels and, for purposes of segment Adjusted EBITDA, our pro rata share of the Adjusted EBITDA of our unconsolidated hospitality ventures, based on our ownership percentage of each venture;

Americas management and franchising, which consists of our management and franchising of properties located in the United States, Latin America, Canada and the Caribbean;

ASPAC management and franchising, which consists of our management and franchising of properties located in Southeast Asia, as well as Greater China, Australia, South Korea, Japan and Micronesia; and

EAME/SW Asia management and franchising, which consists of our management and franchising of properties located in Europe, Africa, the Middle East, India, Central Asia and Nepal.
Within corporate and other, we include our unallocated corporate overhead, results of Miraval, license fees related to Hyatt Residence Club and results of our co-branded credit card. See Part I, Item 1 "Financial Statements—Note 15 to the Condensed Consolidated Financial Statements" for further discussion of our segment structure.
During the three months ended March 31, 2017, we entered into the following key transactions:
acquired Miraval, the renowned provider of wellness and mindfulness experiences, for $239 million, subject to working capital adjustments. The acquisition of Miraval extends the Hyatt brand beyond traditional hotel stays and forms a distinct new wellness category within the Hyatt portfolio of brands;
launched World of Hyatt, our new global loyalty platform which replaced our Gold Passport loyalty program; and
2017 ASR to repurchase $300 million of our Class A common stock to return capital to our shareholders.
Our financial performance for the quarter ended March 31, 2017 reflects an increase in net income of $36 million compared to the quarter ended March 31, 2016. Consolidated revenues increased $98 million, or 9.0% ($102 million or 9.5% excluding the impact of currency), during the quarter ended March 31, 2017, compared to the quarter ended March 31, 2016. Owned and leased hotels revenues for the quarter ended March 31, 2017, increased $56 million compared to the quarter ended March 31, 2016, which included a net unfavorable currency impact of $4 million. The increase in owned and leased hotels revenues resulted primarily from an increase in non-comparable owned and leased hotels revenues of $48 million, including an insignificant net unfavorable currency impact, which was primarily driven by new openings and acquisitions, partially offset by hotels sold in 2016. Additionally, comparable owned and leased hotels revenues increased $8 million, including a $4 million net

25


unfavorable currency impact, which was primarily driven by full service hotels in the United States as a result of improved group average daily rate ("ADR") and occupancy.
Our management and franchise fees for the quarter ended March 31, 2017 increased $15 million compared to the quarter ended March 31, 2016, which included an insignificant net unfavorable currency impact, primarily attributable to our Americas management and franchising segment.
Our consolidated Adjusted EBITDA for the first quarter of 2017 increased $34 million compared to the first quarter of 2016, which included $1 million in net unfavorable currency impact. The increase was primarily driven by our Americas management and franchising segment which increased $14 million and our owned and leased segment which increased $12 million. See "—Non-GAAP Measures" for an explanation of how we utilize Adjusted EBITDA, why we present it and material limitations on its usefulness, as well as a reconciliation of our net income attributable to Hyatt Hotels Corporation to EBITDA and a reconciliation of EBITDA to consolidated Adjusted EBITDA.
Hotel Chain Revenue per Available Room ("RevPAR") Statistics.
 
 
 
 
RevPAR
 
 
 
 
Three Months Ended March 31,
(Comparable Locations)
 
Number of Comparable Hotels (1)
 
2017
 
2016
 
Change
 
Change (in constant $)
Systemwide hotels
 
595
 
$
130

 
$
125

 
4.4
%
 
4.7
%
Owned and leased hotels
 
39
 
$
171

 
$
168

 
1.9
%
 
2.7
%
Americas full service hotels
 
153
 
$
149

 
$
142

 
5.0
%
 
5.1
%
Americas select service hotels
 
298
 
$
101

 
$
97

 
3.8
%
 
3.9
%
ASPAC full service hotels
 
70
 
$
139

 
$
133

 
5.0
%
 
5.2
%
EAME/SW Asia full service hotels
 
63
 
$
114

 
$
113

 
1.0
%
 
3.1
%
EAME/SW Asia select service hotels
 
10
 
$
70

 
$
65

 
7.8
%
 
8.6
%
(1) Comparable systemwide hotels include one select service hotel in ASPAC, which is not included in the ASPAC full service hotel statistics. The number of managed and franchised hotels presented above includes owned and leased hotels.
In the Americas management and franchising segment, group demand and ADR growth at our full service hotels helped drive RevPAR in the first quarter of 2017, compared to the first quarter of 2016. Demand from groups was higher while transient demand was softer in the first quarter of 2017 compared to the first quarter of 2016, both due in part to the timing of Easter. While transient demand decreased, higher transient rates helped minimize the impact to transient revenues. Our owned and leased hotels segment, which is made up primarily of hotels located in the Americas, also saw similar group demand and ADR growth in the first quarter of 2017, compared to same period in 2016. Group revenue booked in 2017 for stays in 2017 was lower compared to the same period last year. Group revenue booked in 2017 for stays in future years was also lower compared to the same period last year.
ASPAC management and franchising segment RevPAR increased during the first quarter of 2017 compared to the first quarter of 2016 driven by strong transient demand in Hong Kong, China and Southeast Asia as well as increased group demand in South Korea and Indonesia.
EAME/SW Asia management and franchising segment RevPAR increased during the first quarter of 2017 compared to the first quarter of 2016 driven by improved occupancy across the region. Western Europe, specifically Germany and the United Kingdom, and India experienced strong year-over-year occupancy and ADR growth. Increases in certain locations within Western Europe were partially offset by the impact of renovations at two properties in France, as well as soft demand in Switzerland. Additionally, our hotels in Turkey continued to be impacted by security concerns and lower demand.


26


Results of Operations
Three Months Ended March 31, 2017 Compared with Three Months Ended March 31, 2016
Discussion on Consolidated Results
For additional information regarding our consolidated results below, please also refer to our condensed consolidated statements of income included in this quarterly report. The impacts from our investments in marketable securities held to fund operating programs, including securities held to fund our benefit programs funded through a rabbi trust and securities held to fund our loyalty program, were recorded on the various financial statement line items discussed below and have no impact on net income.
Owned and leased hotels revenues.    
 
Three Months Ended March 31,
 
2017
 
2016
 
Better / (Worse)
 
Currency Impact
Comparable owned and leased hotels revenues
$
511

 
$
503

 
$
8

 
1.5
%
 
$
(4
)
Non-comparable owned and leased hotels revenues
61

 
13

 
48

 
383.0
%
 

Total owned and leased hotels revenues
$
572

 
$
516

 
$
56

 
10.9
%
 
$
(4
)
 
The increase in comparable owned and leased hotels revenues for the three months ended March 31, 2017, compared to the three months ended March 31, 2016, was primarily driven by full service hotels in the United States, partially offset by decreases at certain of our international hotels driven by rate and occupancy declines in Switzerland, renovation activity in France and net unfavorable currency impact. The increase in non-comparable owned and leased hotels revenues was driven by acquisitions and openings, partially offset by hotels sold in 2016. See "—Segment Results" for further discussion of owned and leased hotels revenues.
Management and franchise fee revenues.    
 
Three Months Ended March 31,
 
2017
 
2016
 
Better / (Worse)
Base management fees
$
47

 
$
45

 
$
2

 
4.7
%
Incentive management fees
35

 
30

 
5

 
17.0
%
Franchise fees
27

 
23

 
4

 
16.2
%
Other fee revenues
13

 
9

 
4

 
47.2
%
Total management and franchise fees
$
122

 
$
107

 
$
15

 
14.2
%
 
The increase in management and franchise fees during the three months ended March 31, 2017, compared to the same period in the prior year, which included an insignificant net unfavorable currency impact, was primarily driven by new hotels and improved performance at existing hotels in the Americas management and franchising segment. The increase in other fee revenues was driven by a termination fee for a hotel that left the chain. See "—Segment Results" for further discussion of management and franchise fees by region.
Other revenues.    Other revenues increased $13 million during the three months ended March 31, 2017, compared to the three months ended March 31, 2016, driven by the sales of villas at Andaz Maui at Wailea Resort, in which we acquired our partners' share of the unconsolidated hospitality venture during the fourth quarter of 2016.    

27


Other revenues from managed properties.    
 
Three Months Ended March 31,
 
2017
 
2016
 
Better / (Worse)
Other revenues from managed properties excluding rabbi trust impact
$
464

 
$
457

 
$
7

 
1.3
%
Rabbi trust impact
7

 

 
7

 
NM

Other revenues from managed properties
$
471

 
$
457

 
$
14

 
2.8
%
 
Excluding the impact of rabbi trust, other revenues from managed properties increased during the three months ended March 31, 2017, compared to the three months ended March 31, 2016, due to increased reimbursements related to our loyalty program and technology costs. These increases were partially offset by decreased payroll and related costs at full service hotels driven by hotel conversions and a hotel that left the chain.
Owned and leased hotels expense.    
 
Three Months Ended March 31,
 
2017
 
2016
 
Better / (Worse)
Comparable owned and leased hotels expense
$
379

 
$
376

 
$
(3
)
 
(1.0
)%
Non-comparable owned and leased hotels expense
45

 
13

 
(32
)
 
(243.6
)%
Rabbi trust impact
3

 

 
(3
)
 
NM

Total owned and leased hotels expense
$
427

 
$
389

 
$
(38
)
 
(10.0
)%
 
The increase in comparable owned and leased hotels expense, which included $3 million net favorable currency impact, in the three months ended March 31, 2017, compared to the same period in the prior year was primarily driven by increased rent expense at certain properties. The increase in non-comparable owned and leased hotels expense, which included an insignificant net favorable currency impact in the three months ended March 31, 2017, compared to the same period in the prior year, was driven by acquisitions and openings, partially offset by hotels sold in 2016.
Depreciation and amortization.    Depreciation and amortization increased $10 million during the three months ended March 31, 2017, compared to the same period in the prior year, primarily driven by acquisitions and hotel openings, and assets placed in service mid-2016 related to technology projects, partially offset by decreased depreciation related to the sale of two hotels in 2016. A portion of the depreciation related to technology projects is recovered from our managed and franchised hotels and the corresponding recovery is included in other income (loss), net.
Other direct costs.    Other direct costs increased $13 million during the three months ended March 31, 2017, compared to the three months ended March 31, 2016, driven by the sales of villas at Andaz Maui at Wailea Resort.
Selling, general, and administrative expenses.    
 
Three Months Ended March 31,
 
2017
 
2016
 
Change
Selling, general, and administrative expenses
$
99

 
$
88

 
$
11

 
11.7
 %
Less: rabbi trust impact
(12
)
 

 
(12
)
 
NM

Less: stock-based compensation expense
(16
)
 
(16
)
 

 
(2.0
)%
Adjusted selling, general, and administrative expenses
$
71

 
$
72

 
$
(1
)
 
(2.3
)%
 
Adjusted selling, general, and administrative expenses excludes the impact of expenses related to benefit programs funded through rabbi trusts and stock-based compensation expense. Adjusted selling, general, and administrative expenses, as we define it, is a non-GAAP measure. See "—Non-GAAP Measures" for further discussion of adjusted selling, general, and administrative expenses.

28


Net gains and interest income from marketable securities held to fund operating programs.   
 
Three Months Ended March 31,
 
2017
 
2016
 
Better / (Worse)
Rabbi trust impact allocated to selling, general, and administrative expenses
$
12

 
$

 
$
12

 
NM

Rabbi trust impact allocated to owned and leased hotels expense
3

 

 
3

 
NM

Net gains and interest income from marketable securities held to fund our loyalty program allocated to owned and leased hotels revenues

 
1

 
(1
)
 
(69.9
)%
Net gains and interest income from marketable securities held to fund operating programs
$
15

 
$
1

 
$
14

 
NM

 
Equity earnings (losses) from unconsolidated hospitality ventures.    
 
Three Months Ended March 31,
 
2017
 
2016
 
Better / (Worse)
Equity earnings (losses) from unconsolidated hospitality ventures
$
(3
)
 
$
2

 
$
(5
)
 
(222.1
)%
 
The decrease during the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, was attributable to the following:
$7 million decrease due to equity earnings in 2016 related to a forfeited deposit on a sale of hotels by an unconsolidated hospitality venture that did not close; and
$2 million increase driven by the gain on sale of a hotel by an unconsolidated hospitality venture in 2017.
In March 2017, Playa entered into a business combination with Pace as discussed in Part I, Item 1 "Financial Statements—Note 4 to the Condensed Consolidated Financial Statements." As the retained Playa investment is no longer accounted for as an equity method investment, we will not have equity earnings or losses in future periods related to our investment in Playa.
Interest expense.    Interest expense increased $4 million during the three months ended March 31, 2017, compared to the same period in the prior year, driven by interest on the 2026 Notes which were issued in the first quarter of 2016 and interest on the outstanding balance on our credit revolver. These increases were partially offset by interest on the senior unsecured notes due in 2016, which were redeemed in the second quarter of 2016.
Asset Impairments.    During the three months ended March 31, 2017 and March 31, 2016, we did not record any asset impairments. However, a change in our assumptions and estimates by 4% could reduce the fair value of one of our reporting units at March 31, 2017, and could potentially result in an impairment of goodwill of up to $17 million.
Other income (loss), net.    Other income (loss), net increased $44 million during the three months ended March 31, 2017, compared to the same period in the prior year. The change was primarily attributable to the following:
$94 million of interest income and $40 million of realized losses related to the redemption of our Playa preferred shares; and
$7 million increase in performance guarantee expense and a $5 million decrease in performance guarantee income related to the four managed hotels in France. See Part I, Item 1 "Financial Statements—Note 11 to the Condensed Consolidated Financial Statements" for further details related to our performance guarantees.

29


Provision for income taxes.
 
Three Months Ended March 31,
 
2017
 
2016
 
Better / (Worse)
Income before income taxes
$
111

 
$
50

 
$
61

 
122.7
 %
Provision for income taxes
(41
)
 
(16
)
 
(25
)
 
(158.7
)%
Effective tax rate
36.8
%