10-K 1 hot-10k_20151231.htm 10-K hot-10k_20151231.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2015

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 Number: 1-7959

 

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

(Exact name of registrant as specified in its charter)

 

Maryland

(State or other jurisdiction of incorporation or organization)

52-1193298

(I.R.S. employer identification no.)

One StarPoint

Stamford, CT 06902

(Address of principal executive offices, including zip code)

(203) 964-6000

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, par value $0.01 per share

 

New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   x     No   o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   o     No   x

Note: Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

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   o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 than the registrant was required to submit and post such files).    Yes   x     No   o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and smaller reporting company in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

  

x

 

 

  

Accelerated filer

 

o

 

 

 

 

 

 

 

 

 

Non-accelerated filer

  

o

 

(Do not check if smaller reporting company)

  

Smaller reporting company

 

o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   o     No   x

As of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2015, the aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the closing sales price as quoted on the New York Stock Exchange was approximately $13.8 billion.

As of February 19, 2016, the registrant had 168,759,931 shares of common stock outstanding.

Documents Incorporated by Reference: None

 

 

 

 

 


TABLE OF CONTENTS

 

 

 

 

 

Page

PART I

 

 

Forward-Looking Statements

  

1

Item 1.

 

Business

  

1

Item 1A.

 

Risk Factors

  

9

Item 1B.

 

Unresolved Staff Comments

  

23

Item 2.

 

Properties

  

23

Item 3.

 

Legal Proceedings

  

23

Item 4.

 

Mine Safety Disclosures

  

23

PART II

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  

24

Item 6.

 

Selected Financial Data

  

26

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

27

Item 7A.

 

Quantitative and Qualitative Disclosures about Market Risk

  

50

Item 8.

 

Financial Statements and Supplementary Data

  

51

Item 9.

 

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

  

51

Item 9A.

 

Controls and Procedures

  

51

Item 9B.

 

Other Information

  

51

PART III

Item 10.

 

Directors, Executive Officers and Corporate Governance

  

52

Item 11.

 

Executive Compensation

  

52

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  

52

Item 13.

 

Certain Relationships and Related Transactions and Director Independence

  

52

Item 14.

 

Principal Accounting Fees and Services

  

52

PART IV

Item 15.

 

Exhibits and Financial Statement Schedules

 

53

 

 

 

 


This Annual Report is filed by Starwood Hotels & Resorts Worldwide, Inc., a Maryland corporation (the Corporation). Unless the context otherwise requires, all references to “we,” “us,” “our,” “Starwood,” or the “Company” refer to the Corporation and include those entities owned or controlled by the Corporation.

PART I

Forward-Looking Statements

This Annual Report contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are any statements other than statements of historical fact, including statements regarding the intent, belief or current expectations of Starwood, its directors or its officers with respect to the matters discussed in this Annual Report. In some cases, forward-looking statements can be identified by the use of words such as “may,” “will,” “expects,” “should,” “believes,” “plans,” “anticipates,” “estimates,” “predicts,” “potential,” “continue,” or other words of similar meaning. Such forward-looking statements appear in several places in this Annual Report, including, without limitation, Item 1. Business and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. All forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those discussed in, or implied by, the forward-looking statements. Factors that might cause such a difference include, but are not limited to, general economic conditions, our financial and business prospects, our capital requirements, our financing prospects, our relationships with associates and labor unions, our ability to consummate the Planned Reverse Morris Trust Transaction (as defined below), our ability to consummate the Planned Marriott Merger (as defined below), or realize the anticipated benefits of such transactions and the other risks and uncertainties disclosed under Item 1A. Risk Factors. We caution readers that any such statements are based on currently available operational, financial and competitive information, and they should not place undue reliance on these forward-looking statements, which reflect management’s opinion only as of the date on which they were made. Except as required by law, Starwood undertakes no obligation to publicly update or revise any forward-looking statement to reflect current or future events or circumstances.

 

 

Item 1.

Business

General

We are one of the largest hotel and leisure companies in the world, with 1,297 properties providing approximately 370,000 rooms in approximately 100 countries and approximately 188,000 employees under our management at our owned and managed properties, vacation ownership resorts and corporate offices. We conduct our hotel and leisure business both directly and through our subsidiaries. We also own Starwood Vacation Ownership, Inc., a premier provider of world-class vacation experiences through villa-style resorts and privileged access to Starwood brands.

On October 27, 2015, we entered into definitive agreements with Interval Leisure Group, Inc. (ILG) pursuant to which our vacation ownership business, to be held by Vistana Signature Experiences, Inc., our wholly-owned subsidiary (Vistana), will be spun-off to our stockholders and immediately thereafter Vistana will merge with a wholly-owned subsidiary of ILG (which is referred to in this Annual Report as the Planned Reverse Morris Trust Transaction). Please see Note 27, Planned Reverse Morris Trust Transaction, of the Notes to our Financial Statements for additional information.

On November 15, 2015, we entered into a definitive agreement to combine with Marriott International, Inc. (Marriott) (which is referred to in this Annual Report as the Planned Marriott Merger). Please see Note 28, Planned Marriott Merger, of the Notes to our Financial Statements for additional information.

The Starwood Preferred Guest (SPG) program is our award-winning proprietary frequent traveler, customer loyalty, and multi-brand marketing program that encourages our members to concentrate their stays within Starwood’s ten brands and to try new hotels in the Starwood family, allowing members to earn and redeem points for room stays, room upgrades and airline flights, with no blackout dates. Since its introduction in 1999, the SPG program has been one of the most innovative and rewarding loyalty program in the hospitality industry. In 2015, SPG members purchased approximately 50% of our room nights.

Our revenue and earnings are derived primarily from hotel operations, which include management fees and other fees earned from hotels we manage pursuant to management contracts, the receipt of franchise fees and other fees pursuant to franchise agreements and the operation of our owned hotels. We consider our hotels and resorts, including vacation ownership resorts, generally to be premier establishments with respect to desirability of location, size, facilities, physical condition, quality and variety of services offered in the markets in which they are located. Although obsolescence attributable to age, condition of facilities and style may adversely affect our hotels and resorts, we and the third-party owners of the managed and franchised hotels expend substantial funds to renovate and maintain our facilities in order to remain competitive. For further information see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources in this Annual Report.

1


Our hotel business is largely focused on the global operation of hotels and resorts primarily in the luxury and upper upscale segments of the lodging industry. We seek to acquire management or franchise rights with respect to, or interests in, properties in these segments. At December 31, 2015, our hotel business included 1,282 owned, managed or franchised hotels with approximately 362,300 rooms, comprising 32 hotels that we own or lease or in which we have a majority equity interest, 608 hotels managed by us on behalf of third-party owners (including entities in which we have a minority equity interest) and 642 hotels for which we receive franchise fees. Additionally, our vacation ownership and residential business included 15 stand-alone vacation ownership resorts and residential properties at December 31, 2015. All brands (other than the Four Points by Sheraton, the Aloft and Element brands) represent full-service properties that range in amenities from luxury hotels to more moderately priced hotels. Our Four Points by Sheraton, Aloft and Element brands are mostly select-service properties that cater to more value-oriented consumers.

Our operations are in geographically diverse locations around the world. The following tables reflect our hotel and vacation ownership and residential properties by type of revenue source and geographical presence by major geographic area as of December 31, 2015:

 

 

 

Number of

Properties

 

 

Rooms

 

Managed and unconsolidated joint venture hotels

 

 

608

 

 

 

199,900

 

Franchised hotels

 

 

642

 

 

 

150,100

 

Owned hotels (a)

 

 

32

 

 

 

12,300

 

Vacation ownership resorts and stand-alone properties

 

 

15

 

 

 

7,700

 

Total properties

 

 

1,297

 

 

 

370,000

 

 

(a)

Includes wholly-owned, majority owned and leased hotels.

 

 

 

Number of

Properties

 

 

Rooms

 

North America

 

 

622

 

 

 

186,200

 

Latin America (and Mexico and Caribbean)

 

 

97

 

 

 

20,900

 

Americas

 

 

719

 

 

 

207,100

 

Europe

 

 

174

 

 

 

40,200

 

Africa and the Middle East

 

 

87

 

 

 

24,400

 

Europe, Africa and the Middle East

 

 

261

 

 

 

64,600

 

Greater China

 

 

159

 

 

 

57,300

 

Rest of Asia

 

 

158

 

 

 

41,000

 

Asia Pacific

 

 

317

 

 

 

98,300

 

Total properties

 

 

1,297

 

 

 

370,000

 

 

We manage and operate our hotel business in three separate hotel segments: (i) the Americas, (ii) Europe, Africa and the Middle East (EAME), and (iii) Asia Pacific. Our vacation ownership and residential business is a separate segment. Note 25 to the consolidated financial statements presents further information about our segments.

For a discussion of our revenues, profits, assets and reportable segments, see our consolidated financial statements of this Annual Report, including the notes thereto.

The Corporation was incorporated in 1980 under the laws of Maryland. Sheraton and Westin, Starwood’s largest brands, have been serving guests for more than 60 years.

Our principal executive offices are located at One StarPoint, Stamford, Connecticut 06902, and our telephone number is (203) 964-6000.

Hotel Business

Branded Hotel Management Business. Hotel and resort properties are often owned by entities that do not manage hotels or own a brand name. Hotel owners typically enter into management contracts with hotel management companies to operate their hotels. When a management company does not offer a brand affiliation, the hotel owner often chooses to pay separate franchise fees to secure the benefits of branding, including marketing, centralized reservations, loyalty programs, and other centralized services, particularly in the sales and marketing area. We believe that companies, such as Starwood, that offer both hotel management services and well-established global brand names appeal to hotel owners by providing the full range of management, marketing, sales and reservation services.

2


Managed Hotels. We manage hotels worldwide, usually under a long-term agreement with the hotel owner (including entities in which we have a minority equity interest). Our responsibilities under hotel management contracts typically include hiring, training and supervising the managers and employees that operate these facilities. For additional fees, we provide centralized reservation services, loyalty program services and coordinate national and international sales, advertising, marketing and other promotional services. We prepare and implement annual budgets for the hotels we manage and allocate property-owner funds for periodic maintenance and repair of buildings and furnishings. In addition to our owned and leased hotels, at December 31, 2015, we managed 608 hotels with approximately 199,900 rooms worldwide.

During the year ended December 31, 2015, we generated management fees by geographic area as follows:

 

North America (a)

 

 

38

%

Latin America (and Mexico and Caribbean)

 

 

4

%

Americas

 

 

42

%

Europe

 

 

12

%

Africa and the Middle East

 

 

13

%

Europe, Africa and the Middle East

 

 

25

%

Greater China

 

 

19

%

Rest of Asia

 

 

14

%

Asia Pacific

 

 

33

%

Total

 

 

100

%

 

(a)

Management fees generated in the United States were 36% of total worldwide management fees.

Management contracts typically provide for base fees tied to gross revenue and incentive fees tied to profits as well as fees for other services, including centralized reservations, loyalty program, national and international advertising and sales and marketing. In our experience, owners seek hotel managers that can provide attractively priced base, incentive and marketing fees combined with demonstrated sales and marketing expertise and operations-focused management designed to enhance profitability. Some of our management contracts permit the hotel owner to terminate the agreement when the hotel is sold or otherwise transferred to a third party, as well as if we fail to meet established performance criteria. In addition, some hotel owners seek equity, debt or other investments from us to help finance hotel renovations or conversions to a Starwood brand, so as to align the interests of the owner and Starwood. Our ability or willingness to make such investments may determine, in part, whether we will be offered, will accept or will retain a particular management contract. During the year ended December 31, 2015, we opened 48 managed hotels with approximately 10,500 rooms, and 12 managed hotels with approximately 2,400 rooms exited our system. In addition, during 2015, we signed management agreements for 114 hotels with approximately 27,100 rooms, a small portion of which opened in 2015 and the majority of which will open in the future.

Brand Franchising and Licensing. We franchise our Luxury Collection, Tribute Portfolio, Westin, Le Méridien, Sheraton, Four Points by Sheraton, Aloft and Element brands and generally derive licensing and other fees from franchisees based on a fixed percentage of the franchised hotel’s room revenue, as well as fees for other services, including centralized reservations, loyalty program, national and international advertising and sales and marketing. We also review certain plans for the location and design of franchised hotels to conform to our brand standards. At December 31, 2015, there were 642 franchised properties with approximately 150,100 rooms.

During the year ended December 31, 2015, we generated franchise fees by geographic area as follows:

 

North America (a)

 

 

82

%

Latin America (and Mexico and Caribbean)

 

 

5

%

Americas

 

 

87

%

Europe

 

 

6

%

Africa and the Middle East

 

 

 

Europe, Africa and the Middle East

 

 

6

%

Greater China

 

 

2

%

Rest of Asia

 

 

5

%

Asia Pacific

 

 

7

%

Total

 

 

100

%

 

(a)

Franchise fees generated in the United States were 75% of total worldwide franchise fees.

3


In addition to the franchise contracts we retained in connection with the sale of hotels during the year ended December 31, 2015, we opened 57 franchised hotels with approximately 11,000 rooms, and 18 franchised hotels with approximately 3,800 rooms exited our system. In addition, during 2015 we signed franchise agreements for 106 hotels with approximately 18,400 rooms, a portion of which opened in 2015 and a portion of which will open in the future.

Owned, Leased and Consolidated Joint Venture Hotels. Historically, we derived the majority of our revenues and operating income from our owned, leased and consolidated joint venture hotels and a significant portion of these results were driven by the hotels in North America. However, in 2006, we embarked upon our asset-light strategy and decided to sell a significant number of our owned hotel portfolio. The majority of these hotels were sold subject to long-term management or franchise contracts.

Total revenues generated from our owned, leased and consolidated joint venture hotels worldwide for the years ended December 31, 2015, 2014 and 2013 were $1,293 million, $1,541 million and $1,612 million, respectively (total revenues from our owned, leased and consolidated joint venture hotels in North America were $722 million, $776 million and $829 million for 2015, 2014 and 2013, respectively).

During the years ended December 31, 2015 and 2014, we earned revenues at our owned and leased hotels by geographic area as follows (1):

 

 

 

2015

Revenues

 

 

2014

Revenues

 

United States

 

 

43

%

 

 

39

%

Europe

 

 

24

%

 

 

27

%

Americas (Latin America & Canada) *

 

 

27

%

 

 

25

%

Asia Pacific

 

 

6

%

 

 

9

%

Total

 

 

100

%

 

 

100

%

 

(1)

Includes the revenues of hotels sold for the period prior to their sale.

*

Includes U.S. territories

During the years ended December 31, 2015 and 2014, we invested approximately $132 million and $166 million, respectively, for capital expenditures at owned hotels.

As discussed above, we have implemented a strategy of reducing our investment in owned real estate and increasing our focus on the management and franchise business. Since 2006, we have sold 91 hotels realizing cash proceeds of approximately $7.8 billion in numerous transactions, including cash proceeds net of closing costs of approximately $767 million from the sale of four hotels during the year ended December 31, 2015.

As a result, our primary business objective is to maximize earnings and cash flow by increasing the number of our hotel management contracts and franchise agreements, and until the recent plan to spin-off our vacation ownership business, selling VOIs, and investing in real estate assets where there is a strategic rationale for doing so, which may include selectively acquiring interests in additional assets and disposing of non-core hotels (including hotels where the return on invested capital is not adequate) and “trophy” assets that may be sold at significant premiums. We plan to meet these objectives by leveraging our global system, broad customer and owner base and other resources and by taking advantage of our scale to reduce costs. The implementation of our strategy and financial planning is impacted by the uncertainty relating to geopolitical and economic environments around the world and its consequent impact on travel.

4


Following the sale of a significant number of our hotels in the past few years, as of December 31, 2015, we own or lease 32 hotels as follows (not including vacation ownership properties):

 

U.S. Hotels:

 

Location

 

Rooms

 

The St. Regis, San Francisco

 

San Francisco, CA

 

 

260

 

The St. Regis, New York

 

New York, NY

 

 

238

 

W New York – Times Square

 

New York, NY

 

 

509

 

The Westin Peachtree Plaza, Atlanta

 

Atlanta, GA

 

 

1,073

 

The Westin Maui Resort & Spa, Ka’anapali

 

Maui, HI

 

 

759

 

Sheraton Kauai Resort

 

Koloa, HI

 

 

394

 

Sheraton Steamboat Resort

 

Steamboat Springs, CO

 

 

261

 

The Tremont Chicago Hotel at Magnificent Mile

 

Chicago, IL

 

 

135

 

 

 

 

 

 

 

 

International Hotels:

 

Location

 

Rooms

 

The St. Regis, Osaka

 

Osaka, Japan

 

 

160

 

The St. Regis, Florence

 

Florence, Italy

 

 

99

 

Park Tower, Buenos Aires

 

Buenos Aires, Argentina

 

 

180

 

Hotel Alfonso XIII, Seville

 

Seville, Spain

 

 

151

 

Hotel Imperial, Vienna

 

Vienna, Austria

 

 

138

 

Hotel Maria Cristina, San Sebastian

 

San Sebastian, Spain

 

 

136

 

Hotel Goldener Hirsch, Salzburg

 

Salzburg, Austria

 

 

70

 

W Barcelona

 

Barcelona, Spain

 

 

473

 

W London – Leicester Square

 

London, UK

 

 

192

 

The Westin Resort & Spa, Cancun

 

Cancun, Mexico

 

 

379

 

The Westin Resort & Spa, Puerto Vallarta

 

Puerto Vallarta, Mexico

 

 

280

 

The Westin Denarau Island Resort

 

Nadi, Fiji

 

 

246

 

The Westin Resort & Spa, Los Cabos

 

Los Cabos, Mexico

 

 

243

 

The Westin Excelsior, Florence

 

Florence, Italy

 

 

171

 

Sheraton Centre Toronto Hotel

 

Toronto, Canada

 

 

1,372

 

Le Centre Sheraton Montreal Hotel

 

Montreal, Canada

 

 

825

 

Sheraton Maria Isabel Hotel & Towers

 

Mexico City, Mexico

 

 

755

 

Sheraton Buenos Aires Hotel & Convention Center

 

Buenos Aires, Argentina

 

 

740

 

Sheraton Rio Hotel & Resort

 

Rio de Janeiro, Brazil

 

 

538

 

Sheraton Gateway Hotel in Toronto International Airport

 

Toronto, Canada

 

 

474

 

Sheraton Lima Hotel & Convention Center

 

Lima, Peru

 

 

431

 

Sheraton Fiji Resort

 

Nadi, Fiji

 

 

297

 

Sheraton Paris Airport Hotel & Conference Centre

 

Paris, France

 

 

252

 

Sheraton Diana Majestic Hotel, Milan

 

Milan, Italy

 

 

106

 

 

Vacation Ownership and Residential Business

We derive revenues and earnings from the development, ownership and operation of vacation ownership resorts, marketing and selling vacation ownership interests (VOIs) in the resorts and providing financing to customers who purchase such interests. Generally, these resorts are marketed under our brand names. Additionally, our revenues and earnings are derived from the development, marketing and selling of residential units at mixed use hotel projects owned by us as well as fees earned from the marketing and selling of residential units at mixed use hotel projects under our brands developed by third-party owners.

We develop, own and operate vacation ownership resorts, market and sell the VOIs in the resorts and, in many cases, provide financing to customers who purchase such ownership interests. Owners of VOIs can trade their ownership interest for stays at other Starwood vacation ownership resorts, or for stays at certain vacation ownership resorts not otherwise sponsored by Starwood through an exchange company, as well as for hotel stays at Starwood properties. From time to time, we securitize the receivables generated from our sale of VOIs.

We have also entered into arrangements with several third-party owners for mixed use hotel projects that include a residential component. We have entered into licensing agreements for the use of certain of our brands to allow the owners to offer branded residences to prospective purchasers. In consideration, we typically receive a licensing fee equal to a percentage of the gross sales revenue of the units sold.

5


In late 2011, we completed the development of a wholly-owned residential project at the St. Regis Bal Harbour Resort in Miami, FL (Bal Harbour). During the year ended December 31, 2014, we closed sales of the last four units and this project is now sold out.

At December 31, 2015, we had 22 owned vacation ownership resorts in the United States, Mexico and the Bahamas, consisting of 14 stand-alone, seven mixed-use and one unconsolidated joint venture. At December 31, 2015, we were actively selling VOIs at 19 sites in our portfolio, which includes Westin Nanea Ocean Villas that was not yet in operation.

During 2015 and 2014, we invested approximately $159 million and $84 million, respectively, for vacation ownership and residential capital expenditures, including construction at the Westin Nanea Ocean Villas in Maui, Hawaii, the Westin St. John in St. John, U.S. Virgin Islands and the Westin Desert Willow in Palm Desert, CA.

Our Brands

Through our brands, we are well represented in major markets around the world. The following table reflects our hotel properties, by brand, as of December 31, 2015:

 

 

(a)

Excludes three independent hotels, and 14 stand-alone and one unconsolidated joint venture vacation ownership properties totaling 8,100 rooms. Also excludes our ownership interest in Design Hotels, AG, pursuant to which in 2015 we announced an expanded partnership in which a subset of their independent hotels with design aesthetics distinct from our 10 brands participate as partner hotels in the SPG program and are available for booking through our websites and call centers.

Our brand names include the following:

St. Regis® (luxury full-service hotels, resorts and residences) is for connoisseurs who desire the finest expressions of luxury. They provide flawless and bespoke service to high-end leisure and business travelers. St. Regis hotels are located in the ultimate locations within the world’s most desired destinations, important emerging markets and yet to be discovered paradises, and they typically have individual design characteristics to capture the distinctive personality of each location.

The Luxury Collection® (luxury full-service hotels and resorts) is a group of unique hotels and resorts offering exceptional service to an elite clientele. From legendary palaces and remote retreats to timeless modern classics, these remarkable hotels and resorts enable the most discerning traveler to collect a world of unique, authentic and enriching experiences indigenous to each destination that capture the sense of both luxury and place. They are distinguished by magnificent decor, spectacular settings and impeccable service.

6


W® (luxury and upper upscale full-service hotels and residences) is where iconic design and cutting-edge lifestyle set the stage for exclusive and extraordinary experiences. Each hotel is uniquely inspired by its destination, where innovative design converges with local influences to create energizing spaces for guests to play or work by day or mix and mingle by night. Guests are invited into dynamic environments that combine entertainment, vibrant lounges, modern guestrooms, and innovative cocktail culture and cuisine. The beats per minute increase as the day transitions to night, amplifying the scene in every W Living Room for guests to socialize and see and be seen. W Hotels Worldwide, a global design powerhouse brought to life through W Happenings, exclusive partnerships and the signature Whatever/Whenever® service philosophy that grants its guests and local community access to what’s new and next.

Westin® (luxury and upper upscale full-service hotels, resorts and residences) provides innovative programs and instinctive services designed with our guests’ well-being in mind. Indulge in a deliciously wholesome menu, including exclusive SuperFoodsRx® dishes. Energize in the fitness studio with the industry-leading WestinWORKOUT®. Revive in the Heavenly® Bath where luxurious touches create a spa-like experience. And of course, experience truly restorative sleep in the world-renowned Heavenly® Bed—an oasis of lush sheets, down, and patented pillow-top mattress. Whether an epic city center location or a refreshing resort destination, Westin ensures guests leave feeling better than when they arrived. Westin. For A Better You.

Le Méridien® (luxury and upper upscale full-service hotels, resorts and residences) is a Paris-born global hotel brand, currently represented by 103 properties in 37 countries worldwide. Le Méridien aims to target the creative and curious-minded traveler: an audience eager to experience something new in every destination and discover things with a new perspective. A curated approach towards culture, the arts, and cuisine unlocks the destination for Le Méridien guests in special and inspiring ways. Signature to the experience is Le Méridien Hub – the brand’s unique lobby concept where a café inspired atmosphere and high impact art, music, and food & beverage experiences set the scene for guests to socialize and exchange ideas in a curated environment, and our Unlock Art program offering free access to local cultural institutions. Le Méridien is more than a hotel, it’s your key to unlocking unique destinations around the globe.

Sheraton® (luxury and upper upscale full-service hotels, resorts and residences) makes travel easier and more intuitive, so guests can experience more. With more than 440 properties across 75 countries and a strong global pipeline, Sheraton continues to establish itself as the global hospitality brand of choice. Signature elements include Sheraton Club, offering a superior guest experience through exclusive lounges, personalized service and enhanced guestroom features; innovative food & beverage showcasing culinary talent and local cuisine; meetings & events featuring flexible design, smart technology and intuitive meeting planner tools; the Sheraton Signature Sleep Experience, designed to eliminate pressure points and alleviate the stress of travel; and Sheraton Grand, a designation recognizing hotels and resorts with distinguished design, superior service and exemplary guest experiences in iconic destinations.

Four Points® (select-service hotels) delights the smart traveler with what is needed on the road for greater comfort and productivity. All at the honest value our guests deserve, with perks they don’t expect. Our guests start their day feeling energized and finish up relaxed, by kicking back with one of our Best Brews (local craft beer, coffee). Four Points is Best For Business.

Aloft® (select-service hotels) opened its first hotel in 2008 and has rapidly expanded to 104 properties in 17 countries by the end of 2015. Designed for global travelers who love open spaces, open thinking and open expression, Aloft is where travel creates possibilities. An affordable alternative for the tech-savvy and confidently social, Aloft caters to the global traveler. With a vibrant social scene at W XYZ® bar, modern authentic design throughout and technology that keeps up with the next gen traveler, Aloft is: Different. By Design.

Element® (extended stay hotels) first opened in 2008, providing a modern, upscale and intuitively designed hotel experience that allows travelers a place to thrive. Whether stopping by for a few days or settling in for a few weeks, Element hotels proves that time away from home doesn’t mean time away from life. All Element hotels pursue third-party sustainable certifications, furthering the green from the ground up sensibility of the brand. Extended Stay Reimagined.

Tribute PortfolioTM (independent hotels in distinct locations) our newest brand, gives guests access to exceptional independent hotels around the world. From boutique resorts to compelling hotels in choice urban locations, Tribute Portfolio hotels offer inspired style and superior service.

Competition

The hotel and timeshare industries are highly competitive. Competition is generally based on quality and consistency of room, restaurant and meeting facilities and services, attractiveness of locations, availability of a global distribution system, price, the ability to earn and redeem loyalty program points and other factors. We believe that we compete favorably in these areas.

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Our properties primarily compete with other hotels and resorts in their geographic markets, including facilities owned by local companies and facilities owned by national and international chains. Our principal competitors include other hotel operating companies, national and international hotel brands, and ownership companies (including hotel Real Estate Investment Trusts). While some of our competitors are private management firms, several are large national and international chains that own and operate their own hotels, as well as manage hotels for third-party owners and sell VOIs, under a variety of brands that compete directly with our brands.

Intellectual Property

We operate in a highly competitive industry and our intellectual property, including brands, logos, trademarks, service marks, and trade dress, is an important component of our business. The success of our business depends, in part, on the increased recognition of our brands and our ability to further develop our brands globally through the use of our intellectual property. To that end, we apply to register and renew our intellectual property, enforce our rights against the unauthorized use of our intellectual property by third parties, and otherwise protect our intellectual property through strategies and in jurisdictions where we reasonably deem appropriate.

Environmental Matters

We are subject to certain requirements and potential liabilities under various foreign and U.S. federal, state and local environmental laws, ordinances and regulations (Environmental Laws). Under such laws, we could be held liable for the costs of removing or cleaning up hazardous or toxic substances at, on, under, or in our currently or formerly owned or operated properties. Such laws may impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of hazardous or toxic substances may adversely affect the owner’s ability to sell or rent such real property or to borrow using such real property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic wastes may be liable for the costs of removal or remediation of such wastes at the treatment, storage or disposal facility, regardless of whether such facility is owned or operated by such person. We use certain substances and generate certain wastes that may be deemed hazardous or toxic under applicable Environmental Laws, and we from time to time have incurred, and in the future may incur, costs related to cleaning up contamination resulting from historic uses of certain of our current or former properties or our treatment, storage or disposal of wastes at facilities owned by others. Other Environmental Laws govern occupational exposure to asbestos-containing materials (ACMs) and require abatement or removal of certain ACMs (limited quantities of which are present in various building materials such as spray-on insulation, floor coverings, ceiling coverings, tiles, decorative treatments and piping located at certain of our hotels) in the event of damage or demolition, or certain renovations or remodeling. Environmental Laws also regulate polychlorinated biphenyls (PCBs), which may be present in electrical equipment. A number of our hotels have underground storage tanks (USTs) and equipment containing chlorofluorocarbons (CFCs); the operation and subsequent removal or upgrading of certain USTs and the use of equipment containing CFCs also are regulated by Environmental Laws. In connection with our ownership, operation and management of our properties, we could be held liable for costs of remedial or other action with respect to PCBs, USTs or CFCs.

U.S. Congress and some U.S. states are considering or have undertaken actions to regulate and reduce greenhouse gas emissions and/or other natural resources. New or revised laws and regulations or new interpretations of existing laws and regulations, such as those related to climate change, supply chain and water risk, could affect the operation of our hotels and/or result in significant additional expense and operating restrictions. The cost impact of such legislation, regulation, or new interpretations would depend upon the specific requirements enacted and cannot be determined at this time.

Environmental Laws are not the only source of environmental liability. Under common law, owners and operators of real property may face liability for personal injury or property damage because of various environmental conditions such as alleged exposure to hazardous or toxic substances (including, but not limited to, ACMs, PCBs and CFCs), poor indoor air quality, radon or poor drinking water quality.

Although we have incurred and expect to incur remediation and various environmental-related costs during the ordinary course of operations, management does not anticipate that such costs will have a material adverse effect on our operations or financial condition.

Seasonality and Diversification

The hotel industry is seasonal in nature; however, the periods during which our properties experience higher revenues vary from property to property and depend principally upon location. Generally, our revenues and operating income have been lower in the first quarter than in the second, third or fourth quarters.

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Comparability of Owned Hotel Results

We continually update and renovate our owned, leased and consolidated joint venture hotels. While undergoing renovation, these hotels are generally not operating at full capacity and, as such, these renovations can negatively impact our owned hotel revenues and operating income. Other events, such as the occurrence of natural disasters, may cause a full or partial closure or sale of a hotel, and such events can negatively impact our revenues and operating income. Finally, as we pursue our strategy of reducing our investment in owned real estate assets, the sale of such assets can significantly reduce our revenues and operating income from owned, leased and consolidated joint venture hotels.

Employees

At December 31, 2015, approximately 188,000 people were employed at our corporate offices, owned and managed hotels and vacation ownership resorts, of which approximately 27% were employed in the United States. At December 31, 2015, approximately 24% of the U.S.-based employees were covered by various collective bargaining agreements providing, generally, for basic pay rates, working hours, other conditions of employment and orderly settlement of labor disputes. Generally, labor relations have been maintained in a normal and satisfactory manner, and management believes that our employee relations are satisfactory.

Where You Can Find More Information

We file an annual report on a Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if necessary, amendments to those reports, a proxy statement and other information with the Securities and Exchange Commission (SEC). Our SEC filings are available to the public over the internet at the SEC’s website at http://www.sec.gov. Our SEC filings are also available on our website at http://www.starwoodhotels.com/corporate/investor_relations.html as soon as reasonably practicable after they are filed with or furnished to the SEC. You may also read and copy any document we file with the SEC at its public reference room located at 100 F Street, NE, in Washington, D.C. 20549 on official business days during the hours of 10 a.m. to 3 p.m. Please call the SEC at (800) SEC-0330 for further information. Our filings with the SEC are also available at the New York Stock Exchange. For more information on obtaining copies of our public filings at the New York Stock Exchange, you should call (212) 656-5060. You may also obtain a copy of our filings free of charge by calling Investor Relations at (203) 351-3500.

 

 

Item 1A.

Risk Factors

Risks Relating to Pending Transactions

We Will Be Subject to Various Uncertainties and Contractual Restrictions, Including the Risk of Litigation, While the Planned Marriott Merger is Pending that May Cause Disruption and May Make it More Difficult to Maintain Relationships with Employees, Hotel Owners, Hotel Franchisees, Suppliers or Customers. Uncertainty about the impact of the Planned Marriott Merger on employees, hotel owners, hotel franchisees, suppliers and customers may have an adverse effect on us. Although we intend to take steps designed to reduce any adverse effects, these uncertainties may impair our ability to attract, retain and motivate key personnel until the Planned Marriott Merger is completed, and could cause customers, suppliers and others that deal with us to seek to change existing business relationships with us. For a more detailed description of the Planned Marriott Merger, see Note 28.

Employee retention and recruitment may be challenging before the completion of the Planned Marriott Merger, as employees and prospective employees may experience uncertainty about their future roles with the combined company. If, despite our retention and recruiting efforts, key employees depart or prospective key employees fail to accept employment with us because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the combined company, our financial results could be adversely affected.

The pursuit of the Planned Marriott Merger and the preparation for the integration may place a significant burden on management and internal resources. The diversion of management’s attention away from day-to-day business concerns and any difficulties encountered in the transition and integration process could adversely affect our financial results.

In addition, the merger agreement restricts us, without Marriott’s consent, from making certain acquisitions and taking other specified actions until the Planned Marriott Merger closes or the merger agreement terminates. These restrictions may prevent us from pursuing otherwise attractive business opportunities and making other changes to our business before completion of the Planned Marriott Merger or termination of the merger agreement.

Between November 18, 2015 and December 18, 2015, seven lawsuits challenging the Planned Marriott Merger were filed on behalf of purported stockholders of us in the Circuit Court for Baltimore City, Maryland, captioned Smukler v. Marriott International, Inc., et al., Case No. 24-C-15-005744; Standen v. Starwood Hotels & Resorts Worldwide, Inc., et al., Case No. 24-C-15-006019; Joshua G. Kohnstamm Trust v. Starwood Hotels & Resorts Worldwide, Inc., et al., Case No. 24-C-15-006783; Himstreet v. Aron, et

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al., Case No. 24-C-15-006855; Christner v. Starwood Hotels & Resorts Worldwide, Inc., et al., Case No. 24-C-15-006959; French v. Starwood Hotels & Resorts Worldwide, Inc., et al., Case No. 24-C-15-006962; and Daftary v. Aron, et al., Case No. 24-C-15-006988. Mr. Smukler and Mr. Standen (the latter joined by Joshua G. Kohnstamm Trust and Messrs. Christner, French and Daftary) filed amended complaints on January 8, 2016 and January 11, 2016, respectively. The complaints name some combination of our directors, us, Solar Merger Sub 1, Inc., a wholly owned direct subsidiary of Starwood (Holdco), Solar Merger Sub 2, Inc., a wholly owned direct subsidiary of Holdco, Marriott, Mars Merger Sub, Inc., a wholly owned direct subsidiary of Marriott (Marriott Corporate Merger Sub), and Mars Merger Sub, LLC, a wholly owned direct subsidiary of Marriott (Marriott LLC Merger Sub), and others, as defendants.  On January 29, 2016, the court consolidated the seven actions.  On February 11, 2016, pursuant to a stipulation filed by the parties, the court issued an order dismissing, without prejudice, all claims and all counts against Marriott, Marriott Corporate Merger Sub and Marriott LLC Merger Sub.  On February 16, 2016, the court issued an order dismissing the derivative claims of the plaintiffs in the Christner and French actions against all remaining defendants without prejudice and dismissing all remaining claims against all remaining defendants with prejudice.  An adverse ruling in any possible appeal of the recent dismissals or any future actions may prevent or delay the Planned Marriott Merger from being completed. Our board of directors has also received demand letters from two purported stockholders alleging that our board of directors breached its fiduciary duties in connection with its approval of the Planned Marriott Merger and demanding that our board of directors conduct an investigation and take other actions. Similar lawsuits may be filed and similar demand letters may be received by us, our board of directors, Marriott and Marriott’s boards of directors in the future.

One of the conditions to the closing of the Planned Marriott Merger is the absence of any judgment, order, law or other legal restraint by a court or other governmental entity of competent jurisdiction that prevents the consummation of the Planned Marriott Merger. Accordingly, if any of the plaintiffs is successful in obtaining an injunction prohibiting the consummation of the Planned Marriott Merger, then such injunction may prevent the Planned Marriott Merger from becoming effective, or delay its becoming effective within the expected time frame.

Failure to Complete the Planned Marriott Merger Could Negatively Impact Our Stock Price and Our Future Business and Financial Results. If the Planned Marriott Merger is not completed, our ongoing business may be adversely affected, and we may be subject to several risks, including the following:

 

·

being required to pay a termination fee under certain circumstances as provided in the merger agreement;

 

·

having to pay certain costs relating to the Planned Marriott Merger, such as legal, accounting, financial advisor and other fees and expenses;

 

·

our stock price could decline to the extent that the current market price reflects a market assumption that the Planned Marriott Merger will be completed; and

 

·

having had the focus of our management on the Planned Marriott Merger instead of on pursuing other opportunities that could have been beneficial to us.

If the Planned Marriott Merger is not completed, we cannot assure you that these risks will not materialize and will not materially adversely affect our business, financial results and stock price.

The Merger Agreement Contains Provisions that Could Discourage a Potential Competing Acquirer of Us. The merger agreement contains “no shop” provisions that, subject to limited exceptions, restrict our ability to solicit, initiate, or knowingly encourage and facilitate competing third-party proposals for the acquisition of our stock or assets. In addition, before our board of directors withdraws, qualifies or modifies its recommendation on the Planned Marriott Merger or terminates the merger agreement to enter into a third-party acquisition proposal, Marriott generally has an opportunity to offer to modify the terms of the Planned Marriott Merger. In some circumstances, upon termination of the merger agreement, we will be required to pay a termination fee.

These provisions could discourage a potential third-party acquirer that might have an interest in acquiring all or a significant portion of us from considering or proposing that acquisition, even if it were prepared to pay consideration with a higher per share cash or market value than the market value proposed to be received or realized in the Planned Marriott Merger, or might otherwise result in a potential third-party acquirer proposing to pay a lower price to our stockholders than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable in certain circumstances.

If the merger agreement is terminated and we decide to seek another business combination, we may not be able to negotiate or consummate a transaction with another party on terms comparable to, or better than, the terms of the merger agreement.

Our Ability to Complete the Planned Marriott Merger is Subject to Certain Closing Conditions and the Receipt of Consents and Approvals from Government Entities Which May Impose Conditions That Could Adversely Affect Us or Cause the Planned Marriott Merger to be Abandoned. The merger agreement contains certain closing conditions, including, among others:

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·

the approval by the holders of a majority of all our outstanding shares of the transactions contemplated by the merger agreement;

 

·

the approval by the holders of a majority of the votes cast at a special meeting called by Marriott in favor of a proposal to issue shares of Marriott common stock to our stockholders pursuant to the merger agreement;

 

·

the absence of any judgment, order, law or other legal restraint by a court or other governmental entity of competent jurisdiction that prevents the consummation of the Planned Marriott Merger;

 

·

the approval for listing by NASDAQ of the shares of Marriott common stock issuable in the Planned Marriott Merger; and

 

·

the completion of the spin-off of our vacation ownership business or, if the Planned Reverse Morris Trust Transaction is not consummated, the completion of another spin-off, split-off or analogous distribution of our vacation ownership business or the sale of our vacation ownership business by us. For a more detailed description of the Planned Reverse Morris Trust Transaction, see Note 27.

We cannot assure you that the various closing conditions will be satisfied, or that any required conditions will not materially adversely affect the combined company following the Planned Marriott Merger or will not result in the abandonment or delay of the Planned Marriott Merger. For instance, the consummation of the disposition of our vacation ownership business may be delayed or not occur, which may cause the Planned Marriott Merger to be delayed or abandoned, or such disposition may occur on terms less favorable to us and our stockholders than the terms of the Planned Reverse Morris Trust Transaction.

In addition, before the Planned Marriott Merger may be completed, various approvals and declarations of non-objection must be obtained from certain regulatory and governmental authorities. These regulatory and governmental entities may impose conditions on the granting of such approvals. Such conditions and the process of obtaining regulatory approvals could have the effect of delaying completion of the Planned Marriott Merger or of imposing additional costs or limitations on the combined company following the completion of the Planned Marriott Merger. The regulatory approvals may not be received at all, may not be received in a timely fashion, or may contain conditions on the completion of the Planned Marriott Merger. In addition, the respective obligations of us and Marriott to complete the Planned Marriott Merger are conditioned on the receipt of certain regulatory approvals or waiver by the other party of such condition.

Any Delay in Completing the Planned Marriott Merger May Reduce or Eliminate the Benefits That We Expect to Achieve. The Planned Marriott Merger is subject to a number of conditions beyond our control that may prevent, delay or otherwise materially adversely affect the completion of the Planned Marriott Merger. We cannot predict whether and when these conditions will be satisfied. Any delay in completing the Planned Marriott Merger could cause the combined company not to realize some or all of the synergies that we and Marriott expect to achieve if the Planned Marriott Merger is successfully completed within the expected time frame.

The Proposed Separation of Our Vacation Ownership Business and Subsequent Merger May Not Be Consummated As or When Planned or At All, or Could Cause Unanticipated Issues. The proposed separation of our vacation ownership business, distribution of the shares of Vistana common stock to Starwood stockholders on a pro rata basis and subsequent merger of Vistana with a wholly-owned subsidiary of ILG may not be consummated as currently contemplated, including as a transaction that is tax-free to Starwood stockholders, may not be consummated at all, or may encounter delays or other roadblocks that we do not currently anticipate, including delays in obtaining necessary regulatory approvals. In addition, the transactions could create issues with our vacation ownership business prior to the consummation of the separation, distribution and subsequent merger with ILG’s wholly-owned subsidiary, or our other businesses, that we do not currently contemplate. Planning and executing the proposed separation, distribution and subsequent merger will require significant time, effort, and expense, and may divert management’s attention from other aspects of our business operations, and any delays in completion of the proposed separation, distribution and subsequent merger may increase the amount of time, effort, and expense that we devote to the transactions, which could adversely affect our operations.

Disruptions in either general market conditions or in the lodging or timeshare business, in particular, could affect our ability to complete the transactions at all, or to complete the transactions on the terms currently anticipated. The proposed separation, distribution and subsequent merger are also subject to customary closing conditions, including approval by ILG stockholders.

In addition, if we complete the proposed separation, distribution and subsequent merger, the actual impact on our business and financial results may differ materially from that which we anticipate. Specifically, the proposed transactions could adversely affect our relationships with our customers or employees (including those of the vacation ownership business) or disrupt our operations. ILG could also face unanticipated problems in integrating our vacation ownership business, and thus our stockholders may not achieve the anticipated benefits of the transactions.

Furthermore, completing the separation of our vacation ownership business, distribution of the shares of Vistana common stock to Starwood stockholders on a pro rata basis and subsequent merger of Vistana with ILG’s wholly-owned subsidiary, or an analogous separation or distribution of the vacation ownership business from Starwood or a sale of the vacation ownership business, is a closing condition to the Planned Marriott Merger. If we are unable to complete the separation, distribution and subsequent merger or a comparable transaction, we may be unable to complete the Planned Marriott Merger.

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Risks Relating to Our Business and Industry

We Are Subject to the Business, Financial and Operating Risks Common to the Hotel Business and Vacation Ownership and Residential Business, Any of Which Could Reduce Our Revenues and Limit Opportunities for Growth. Business, financial and operating risks common to the hotel business and vacation ownership and residential business include:

 

·

significant competition from hospitality providers in all parts of the world;

 

·

the costs and administrative burdens associated with complying with applicable laws and regulations in the U.S. and in all of the other countries in which we operate;

 

·

delays in or cancellations of planned or future development or refurbishment projects;

 

·

changes in desirability of geographic regions of the hotels or timeshare resorts in our business, geographic concentration of our operations and customers (including certain concentration in new and emerging markets), and shortages of desirable locations for development;

 

·

decreases in the demand for transient rooms, vacation ownership interests, residential products and related lodging services, including a reduction in business travel as a result of alternatives to in-person meetings (including virtual meetings hosted online or over private teleconferencing networks) or due to general economic conditions;

 

·

decreased corporate or governmental travel-related budgets and spending, as well as cancellations, deferrals or renegotiations of group business such as industry conventions;

 

·

negative public perception of corporate travel-related activities;

 

·

statements, actions, or interventions by governmental officials related to travel, meetings or other aspects of hotel business and operations;

 

·

the increasing influence and reliance on technology for distribution channels and the impact of internet intermediaries and other new industry entrants on supply, pricing and the value of our brands;

 

·

health, safety and environmental laws, rules and regulations and other governmental and regulatory action;

 

·

changes in operating costs including, but not limited to, energy, water, labor costs (including the impact of labor shortages and unionization), food costs, workers’ compensation and health-care related costs, insurance and unanticipated costs such as acts of nature and their consequences;

 

·

disputes with owners of properties which may lead to the termination of our management or franchise agreements or result in litigation;

 

·

the availability and cost of capital to allow us and hotel owners and franchisees to fund construction and renovations;

 

·

the financial condition of third-party owners, developers, franchisees and joint venture partners; and

 

·

cyclical over-building in the hotel business and residential and vacation ownership business.

Macroeconomic and Other Factors Beyond Our Control Can Adversely Affect and Reduce Demand For Our Products and Services. Macroeconomic and other factors beyond our control that could adversely affect and reduce demand for our products and services include, but are not limited to:

 

·

changes in general economic conditions, including low consumer confidence, unemployment levels and the severity and duration of downturns in the United States, Europe, Asia and elsewhere across the world;

 

·

war, political conditions and civil unrest, terrorist activities or threats and heightened travel security measures instituted in response thereto;

 

·

natural or man-made disasters, such as earthquakes, tsunamis, tornadoes, hurricanes, typhoons, floods, drought, volcanic eruptions, oil spills and nuclear incidents;

 

·

conditions which negatively shape public perception of travel, including travel-related accidents and travelers’ fears of exposures to contagious diseases;

 

·

the financial condition of the airline, automotive and other transportation-related industries;

 

·

the physical risks of climate change and/or availability and quality of natural resources, such as a secure and economical supply of water or energy in some locations; and

 

·

fluctuations in foreign exchange rates or stock markets of global economies particularly in markets in which we operate.

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If We Are Unable to Maintain Existing Management and Franchise Agreements or Obtain New Agreements on as Favorable Terms, Our Operating Results May Be Adversely Affected. We are impacted by our relationships with hotel owners and franchisees. Our hotel management and franchise contracts are typically long-term arrangements but most allow the hotel owner to terminate the agreement in certain circumstances. With respect to management agreements, such instances may include our failure to meet certain financial or performance criteria, the bankruptcy of the hotel owner and, in certain cases, the sale of the property. A significant loss of agreements due to premature terminations could adversely affect our operating results. In addition, the terms of our hotel management and franchise agreements can be impacted by contract terms offered by our direct or indirect competitors, among other things. We cannot assure you that any of our current arrangements will continue or that we will be able to enter into future collaborations, renew agreements, or enter into new agreements in the future on terms that are as favorable to us as those that exist today.

Macroeconomic and other factors outside of our control could also have a significant negative impact on the financial condition and viability of our hotel property owners. Additionally, the nature of responsibilities under these management and franchise arrangements may give rise to disagreements with the property owners. The resolution of any disputes with property owners could be very expensive for us, even if the outcome is ultimately decided in our favor. We cannot predict the outcome of any arbitration or litigation, the effect of any negative judgment against us or the amount of any settlement that we may enter into with any third party. An adverse result in any of these proceedings could materially adversely affect our results of operations. Furthermore, specific to our industry, some courts have applied principles of agency law and related fiduciary standards to managers of third-party hotel properties, which means that property owners may assert the right to terminate agreements even where the agreements do not expressly provide for termination. In the event of any such termination, we may need to enforce our right to damages for breach of contract and related claims and incur significant legal fees and expenses. Any damages we ultimately collect could be less than the projected value of the fees and other amounts we would have otherwise collected under the management agreement. Consequently, our operating results would be adversely affected if we could not maintain existing management or franchise agreements or obtain new agreements on as favorable terms as the existing agreements.

The Global Economy Generally May Continue to Impact Our Financial Results and Growth. Consumer demand for our services is closely linked to the performance of the general economy and specific performance of the lodging industry and is sensitive to business and personal discretionary spending levels. Weak economic conditions in Europe, Latin America, China and other parts of the world, potential disruptions in the U.S. economy, political instability, civil or economic strife, terrorist or other war-like activity, and changes in government policies in some areas throughout the world, and the uncertainty over how long any of these conditions will continue, could have a negative impact on the hotel business and vacation ownership and residential business by decreasing the revenues and profitability of our owned properties, limiting the amount of fee revenues we are able to generate from our managed and franchised properties, and reducing overall demand for timeshare intervals. Substantial increases in travel costs could also reduce demand for our hotel rooms and interval and fractional timeshare products. Accordingly, our financial results may be impacted by such economic conditions and both our future financial results and growth could be harmed if economic conditions worsen. In certain cases, we have entered into third-party hotel management contracts which contain performance guarantees specifying that certain operating metrics will be achieved. As a result of a global economic downturn, we may not meet the requisite performance levels, and we may be forced to loan or contribute monies to fund the shortfall of performance levels or terminate the management contract. For a more detailed description of our performance guarantees, see Note 24 of the consolidated financial statements.

Our Revenues, Profits, or Market Share Could Be Harmed If We Are Unable to Compete Effectively. The hotel, vacation ownership and residential industries are highly competitive. Our properties compete for customers with other hotel and resort properties, ranging from national and international hotel brands to independent, local and regional hotel operators, and, with respect to our vacation ownership resorts and residential projects, with owners reselling their VOIs, including fractional ownership, or apartments. We also compete with other vacation options such as cruises, as well as alternative lodging arrangements in which residential properties in locations throughout the world are marketed, reserved and rented in a manner consistent with hotels. Furthermore, new or existing competition that uses a business model that is different from our business model may challenge our ability to remain competitive. We compete based on a number of factors, including quality and consistency of rooms, restaurant and meeting facilities and services, attractiveness of locations, availability of a global distribution system, the ability to earn and redeem loyalty program points, and consumer facing technology platforms and services. Some of our competitors may have substantially greater marketing and financial resources than we do, and if we are unable to successfully compete in these areas, our operating results could be adversely affected.

Moreover, our present growth strategy for development of additional hotels entails entering into and maintaining various management agreements, franchise agreements, and leases with property owners. We compete with other hotel companies for this business primarily on the basis of fees, contract terms, brand recognition, and reputation. In connection with entering into these agreements, we may be required to make investments in, or guarantee the obligations of, third parties or guarantee minimum income to third parties. The terms of our management agreements, franchise agreements, and leases for each of our hotels are influenced by contract terms offered by our competitors, among other things. We cannot assure you that any of our current arrangements will continue or that we will be able to enter into future collaborations, renew agreements, or enter into new agreements in the future on terms that are as favorable to us as those that exist today.

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Degradation in the Quality or Reputation of Our Brands Could Adversely Affect Our Financial Results and Growth. For our owned, managed and franchised properties to remain attractive and competitive, the property owners and we have to spend money periodically to keep the properties well maintained, modernized and refurbished. This creates an ongoing need for cash. Third-party property owners may be unable to access capital or unwilling to spend available capital when necessary, even if required by the terms of our management or franchise agreements. To the extent that property owners and we cannot fund expenditures from cash generated by operations, funds must be borrowed or otherwise obtained. Failure to make the investments necessary to maintain or improve such properties, act in accordance with applicable brand standards or project a consistent brand image could adversely affect the quality and reputation of our brands. Moreover, third-party owners or franchisees may be unwilling or unable to incur the cost of complying with brand standards for new and existing brands as such brands may evolve from time to time. If the reputation or perceived quality of our brands declines, our market share, reputation, business, financial condition or results of operations could be affected.

External Perception of Our Hotels Could Harm Our Brands and Reputation As Well As Reduce Our Revenues and Lower Our Profits. Our brands and our reputation are among our most important assets. Our ability to attract development partners and franchisees and to attract and retain guests depends, in part, upon the external perceptions of Starwood and our ten brands, the quality of our hotels and services and our corporate and management integrity. There is a risk to our brands and our reputation if we fail to act responsibly or comply with regulatory requirements in a number of areas, such as safety and security, sustainability, responsible tourism, environmental management, human rights and support for local communities. The considerable increase in the use of social media over recent years has greatly expanded the potential scope and scale, and increased the rapidity of the dissemination of the negative publicity that could be generated by any such adverse incident or failure. An adverse incident involving our associates or our guests, or in respect of our third-party vendors or owners and the industry, and any media coverage resulting therefrom, may harm our brands and reputation, cause a loss of consumer confidence in Starwood, our brands or the industry, and negatively impact our results or operations.

Any Failure to Protect our Intellectual Property Could Have a Negative Impact on the Value of Our Brands and Adversely Affect Our Business. We believe our intellectual property is an important component of our business. We rely on trademark laws to protect our proprietary rights. The success of our business depends in part upon our continued ability to use our trademarks to increase brand awareness and further develop our brand in both domestic and international markets. From time to time, we apply to have certain trademarks registered and there is no guarantee that such trademark registrations will be granted. Further, monitoring the unauthorized use of our intellectual property is difficult. Litigation and similar proceedings have been and may continue to be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Actions of this type could result in substantial costs and diversion of resources, may result in counterclaims or other claims against us and could significantly harm our results of operations. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. We cannot assure you that all of the steps we have taken to protect our trademarks in the United States and foreign countries will be sufficient to prevent imitation of our trademarks by others. The unauthorized reproduction of our trademarks could diminish the value of our brand and its market acceptance, competitive advantages or goodwill, which could adversely affect our business. Third parties may also make claims against us for infringing their intellectual property, including patent, copyright, industrial design, trademarks or similar rights that could result in causing us to change our property designs or other branding and result in substantial costs and diversion of resources.

Our Dependence On Lodging Development Exposes Us to Timing, Budgeting and Other Risks. We participate in the development of lodging properties, as suitable opportunities arise, taking into consideration the general economic climate. In addition, the owners and developers of new-build hotel and mixed use properties that we have entered into management or franchise agreements with are subject to these same risks which may impact the amount and timing of fees we had expected to collect from those properties. New lodging project development has a number of risks, including risks associated with:

 

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construction delays or cost overruns that may increase project costs;

 

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receipt of zoning, occupancy and other required governmental permits and authorizations;

 

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development costs incurred for projects that are not pursued to completion;

 

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so-called acts of God such as earthquakes, hurricanes, floods or fires that could adversely impact a project;

 

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defects in design or construction that may result in additional costs to remedy or require all or a portion of a property to be closed during the period required to rectify the situation;

 

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ability to raise capital;

 

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funding that is dependent upon the pre-leasing, sell-out or completion of mixed-use project components other than the hotel; and

 

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governmental restrictions on the nature or size of a project or timing of completion.

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We cannot assure you that any development project, including sites held for development of vacation ownership resorts, will in fact be developed, and, if developed, the time period or the budget of such development may be greater than initially contemplated and the actual number of units or rooms constructed may be less than initially contemplated.

International Operations Are Subject to Unique Political and Monetary Risks that Could Adversely Affect Our Financial Results and Growth. We have significant international operations which as of December 31, 2015 included 174 owned, managed or franchised properties in Europe (including 10 properties with majority ownership); 87 managed or franchised properties in Africa and the Middle East; 97 owned, managed or franchised properties in Latin America (including eight properties with majority ownership); and 317 owned, managed or franchised properties in the Asia Pacific region (including three properties with majority ownership). Additionally, our current growth strategy is heavily dependent upon growth in international markets. As of December 31, 2015, 75% of our pipeline represented growth outside North America. Further, 52% of our pipeline represents new properties in Asia Pacific and 35% represents new growth in China alone.

International operations generally are subject to various political, geopolitical, and other risks that are not present in U.S. operations. These risks include the difficulties involved in managing an organization doing business in many different countries, exposure to local economic conditions, potential adverse changes in the diplomatic relations between foreign countries and the United States, including the threat of international boycott or U.S. anti-boycott legislation, hostility from local populations, including the risk of war, acts of terrorism, political instability and civil unrest in the Middle East, Eastern Europe, Southeast Asia and elsewhere, restrictions on the repatriation of non-U.S. earnings and withdrawal of foreign investments, restriction on the ability to pay dividends and remit earnings to affiliated companies and management or franchise fees to the United States, uncertainty as to the enforceability of contractual rights and intellectual property rights under local law, conflicts between local law and United States law and compliance with complex and changing laws, regulations and policies. In addition, as described below, sales in international jurisdictions typically are made in local currencies, which subject us to risks associated with currency fluctuations. Currency devaluations and unfavorable changes in international monetary and tax policies could have a material adverse effect on our profitability and financing plans, as could other changes in the international regulatory climate and international economic conditions. If our international expansion plans are unsuccessful, our financial results could be materially adversely affected.

Exchange Rate Fluctuations and Foreign Exchange Hedging Arrangements Could Result in Significant Foreign Currency Gains and Losses and Impact Our Business Results. Conducting business in currencies other than the U.S. dollar subjects us to fluctuations in currency exchange rates that could have a negative impact on financial results. We earn revenues and incur expenses in foreign currencies as part of our operations outside of the U.S. As a result, fluctuations in currency exchange rates may significantly increase the amount of translated U.S. dollars required for expenses outside the U.S. or significantly decrease the U.S. dollars received from foreign currency revenues. We also have exposure to currency translation risk because, generally, the results of our business outside of the U.S. are reported in local currency and then translated to U.S. dollars for inclusion in our consolidated financial statements. As a result, changes between the foreign exchange rates and the U.S. dollar will affect the recorded amounts of our foreign assets, liabilities, revenues and expenses and could have a negative impact on financial results. Our exposure to foreign currency exchange rate fluctuations will grow if the relative contribution of our operations outside the U.S. increases.

To attempt to mitigate foreign currency exchange rate exposure, we may enter into foreign exchange hedging agreements with financial institutions to reduce certain of our exposures to fluctuations in currency exchange rates. However, these hedging agreements may not eliminate foreign currency risk entirely and involve costs and risks of their own in the form of transaction costs, credit requirements and counterparty risk.

Third-Party Internet Reservation or Booking Channels May Negatively Impact Our Revenues. Some of our hotel rooms are booked through third-party internet travel intermediaries such as Expedia.com® , Orbitz.com®, Booking.com®, and CTrip.com®, as well as lesser-known online travel service providers. In addition, travelers can book stays on websites that facilitate the short-term rental of homes and apartments from owners, thereby providing an alternative to hotel rooms. As the percentage of internet bookings increases, these intermediaries may be able to obtain more volume or better rates. Some internet reservation intermediaries are attempting to commoditize hotel rooms by increasing the importance of price and general indicators of quality (such as “three-star downtown hotel”) at the expense of brand identification, which is among our most important assets. Moreover, third-party reservation channels may be able to obtain higher commissions, reduced room rates or other significant contract concessions from us. Over time, consumers may develop loyalties to third-party internet reservations systems rather than to our online booking tools or our lodging brands. Although we expect to derive most of our revenues from traditional channels and our websites, our business and profitability could be adversely affected if customer loyalties significantly shift from our lodging brands to their travel services, diverting bookings away from our websites, or through their fees increasing the overall cost of internet bookings for our hotels.

A Failure to Keep Pace With Developments in Technology Could Impair Our Operations or Competitive Position. The hospitality industry continues to demand the use of sophisticated technology and systems including technology utilized for property management, brand assurance and compliance, procurement, reservation systems, operation of our Starwood Preferred Guest customer loyalty program, distribution, revenue management and guest amenities. These technologies can be expected to require refinements,

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including complying with legal requirements in connection with privacy and/or security regulations, requirements, and commitments established by third parties such as the payment card industry, and there is the risk that advanced new technologies will be introduced. Further, the development and maintenance of these technologies may require significant capital. There can be no assurance that as various systems and technologies become outdated or new technology is required, we will be able to replace or introduce them as quickly as our competition or within budgeted costs and timeframes. Further, there can be no assurance that we will achieve the benefits that may have been anticipated from any new technology or system.

Cyber Threats and the Risk of Data Breaches or Disruptions of Our Information Technology Systems Could Harm Our Brand and Adversely Affect Our Business. Our business involves the processing, use, storage and transmission of personal information regarding our employees, customers, hotel owners, and vendors for various business purposes, including marketing and promotional purposes. The protection of personal as well as proprietary information is critical to us. We are dependent on information technology networks and systems to process, transmit and store proprietary and personal information, and to communicate among our various locations around the world, which may include our reservation systems, vacation exchange systems, hotel/property management systems, point of sale systems, customer and employee databases, call centers, administrative systems, and third-party vendor systems. We store and process such proprietary and personal information both at onsite facilities and at third-party owned facilities, including for example, in a third-party hosted cloud environment. The complexity of this infrastructure and the shared control and management of hotel systems contributes to the potential risk of security breaches. We rely on the security of our information systems, and those of our vendors, owners and other authorized third parties, to protect our proprietary and personal information.

Despite our efforts, information networks and systems may be vulnerable to threats such as system, network or internet failures; computer hacking or business disruption; cyber-terrorism; viruses, worms or other malicious software programs; employee error, negligence, fraud, or misuse of systems; or other unauthorized attempts to access, acquire, misuse, modify or delete our proprietary and personal information, including payment card information. In November 2015, we first announced the point of sale systems of a limited number of our hotels in North America were infected with malware, enabling unauthorized parties to access payment card data of some customers. Based on extensive investigation, we determined that the malware affected certain restaurants, gift shops and other point of sale systems at the relevant Starwood properties. There is no indication that our guest reservation or Starwood Preferred Guest membership systems were impacted, nor is there any evidence that other customer information, such as contact information, social security numbers, or PINs, were affected by this issue. Although we have taken steps to address this issue, as well as related concerns, by implementing network security and internal controls, there can be no assurance that a system failure, unauthorized access, or breach will not occur again, including breaches of payment card information in point of sale systems as publicly disclosed by us.

Any compromise of our networks or systems, public disclosure, or loss or other compromise to our personal or proprietary information, non-compliance with contractual or legal obligations regarding personal information, or a violation of a privacy or security policy or requirement pertaining to personal information could result in a disruption to our operations; damage to our reputation and a loss of confidence from our customers, employees or others; legal claims or proceedings, liability under laws that protect personal information, regulatory penalties, and fines, assessments and other liabilities imposed by the payment card organizations or others, potentially resulting in significant monetary damages, regulatory enforcement actions, fines, and/or criminal or civil prosecution in one or more jurisdictions; and subjecting us to additional regulatory scrutiny, or additional costs and liabilities which could have a material adverse effect on our brand reputation, business, operations or financial condition.

Changes in Privacy Law Could Increase Our Operating Costs and/or Adversely Impact Our Ability to Market Our Products, Properties and Services Effectively. We are subject to numerous laws, regulations, and contractual obligations designed to protect personal information, including Member State implementation of the European Union Directive on Data Protection, other foreign data privacy laws, various U.S. federal and state laws, and credit card industry security standards and other applicable information security standards. We have established policies and procedures to help protect the privacy and security of our information. However, every year the number of laws, regulations, and information security requirements continue to grow, as does the complexity of such laws and requirements. Further, privacy regulations, on occasion, may be inconsistent from one jurisdiction to another. As of October 6, 2015, the European Union no longer recognizes the U.S. Safe Harbor program. In the event the European Union makes similar decisions regarding the validity of Binding Corporate Rules or Model Clauses, it may adversely impact our ability to transfer personal data from the European Economic Area. Compliance with applicable privacy regulations may increase our operating costs and/or adversely impact our ability to market our products, properties and services to our guests.

We Depend on Senior Management to Achieve Our Operating Strategies. Our future success depends in large part upon the efforts of our senior management. Competition for such personnel is intense. Furthermore, our headquarters are located in Stamford, Connecticut, an area where cost of living is higher than in other areas of the United States and as a result, we may need to pay more to attract senior talent than our competitors located elsewhere. There can be no assurance that we will continue to be successful in attracting and retaining top personnel. Accordingly, there can be no assurance that our senior management will be able to successfully execute and implement our operating strategies.

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Significant Owners of Our Properties May Concentrate Risks. There is potential for a concentration of ownership of hotels operated under our brands by any single owner. Following the acquisition of the Le Méridien brand business and a large disposition transaction to one ownership group in 2006, single ownership groups own significant numbers of hotels operated by us. While the risks associated with such ownership are no different than exist generally (i.e., the financial position of the owner, the overall state of the relationship with the owner and their participation in optional programs and the impact on cost efficiencies if they choose not to participate), they are more concentrated. If an owner with a considerable portfolio of hotels were to leave our system, it may have a significant impact in certain of our markets and on our financial condition and results of operations.

Our Real Estate Investments Subject Us to Numerous Risks. We are subject to the risks that generally relate to investments in real property because we own and lease hotels and resorts. The investment returns available from equity investments in real estate depend in large part on the amount of income earned and capital appreciation generated by the related properties, and the expenses incurred. In addition, a variety of other factors affect income from properties and real estate values, including governmental regulations, insurance, zoning, tax and eminent domain laws, interest rate levels and the availability of financing. For example, new or existing real estate zoning or tax laws can make it more expensive and/or time-consuming to develop real property or expand, modify or renovate hotels. When interest rates increase, the cost of acquiring, developing, expanding or renovating real property increases and real property values may decrease as the number of potential buyers decreases. Similarly, as financing becomes less available, it becomes more difficult both to acquire and to sell real property. Finally, under eminent domain laws, governments can take real property. Sometimes this taking is for less compensation than the owner believes the property is worth. Despite our asset-light strategy, our real estate properties could be impacted by any of these factors, resulting in a material adverse impact on our results of operations or financial condition. In addition, equity real estate investments are difficult to sell quickly and we may not be able to sell our owned hotels quickly in response to our plans or economic or other conditions. If our properties do not generate revenue sufficient to meet operating expenses, including debt service and capital expenditures, our income will be adversely affected.

We May Be Subject to Environmental Liabilities. Our properties and operations are subject to a number of Environmental Laws. Under such laws, we could be held liable for the costs of removing or cleaning up hazardous or toxic substances at, on, under, or in our currently or formerly owned or operated properties. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of hazardous or toxic substances may adversely affect the owner’s ability to sell or rent such real property or to borrow using such real property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic materials or wastes may be liable for the costs of extraction, removal or remediation of such wastes at the treatment, storage or disposal facility, regardless of whether such facility is owned or operated by such person. We use certain substances and generate certain wastes that may be deemed hazardous or toxic under applicable Environmental Laws, and we from time to time have incurred, and in the future may incur, costs related to cleaning up contamination resulting from historic uses at certain of our current or former properties or our treatment, storage or disposal of wastes at facilities owned by others. Other Environmental Laws govern occupational exposure to ACMs and require abatement or removal of certain ACMs (limited quantities of which are present in various building materials such as spray-on insulation, floor coverings, ceiling coverings, tiles, decorative treatments and piping located at certain of our hotels) in the event of damage or demolition, or certain renovations or remodeling. Environmental Laws also regulate PCBs, which may be present in electrical equipment. A number of our hotels have USTs and equipment containing CFCs; the operation and subsequent removal or upgrading of certain USTs and the use of equipment containing CFCs also are regulated by Environmental Laws. In connection with our ownership, operation and management of our properties, we could be held liable for costs of remedial or other action with respect to PCBs, USTs or CFCs.

U.S. Congress, some U.S. states and various countries are considering or have undertaken actions to regulate and reduce greenhouse gas emissions and/or other natural resources. New or revised laws, taxes and regulations, or new interpretations of existing laws and regulations, such as those related to climate change, supply chain and water risk, could affect the operation of our hotels and/or result in significant additional expense and operating restrictions on us. The cost impact of such legislation, regulation, tax or new interpretations would depend upon the specific requirements enacted and cannot be determined at this time.

The potential for changes in the frequency, duration and severity of extreme weather events that may be a result of climate change could lead to significant property damage at our hotels and other assets, impact our ability to obtain insurance coverage in areas that are most vulnerable to such events, such as the coastal resort areas where we operate and have a negative effect on revenues.

We Could Be Adversely Affected by Violations of the U.S. Foreign Corrupt Practices Act and Similar Anti-Corruption Laws. Our business operations in countries outside the United States are subject to anti-corruption laws and regulations, including restrictions imposed by the U.S. Foreign Corrupt Practices Act (FCPA). The FCPA and similar anti-corruption laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials or any other person for the purpose of obtaining or retaining business. We operate in many parts of the world where government corruption has existed to some degree and, in certain circumstances, our compliance with anti-corruption laws may conflict with local customs and practices. We train our employees concerning compliance with anti-corruption laws, and notify our third-party hotel and resort owners that we require strict compliance with the anti-corruption laws of the jurisdictions where we operate. We also have policies,

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procedures and controls in place applicable to our employees and third-party business partners and agents who work with us or on our behalf in order to enforce and monitor internal and external compliance with anti-corruption laws. We cannot provide assurance that our internal controls and procedures will always protect us from reckless or criminal acts committed by our employees or third-parties with whom we work. If we are found liable for violations of the FCPA or similar anti-corruption laws in other jurisdictions, either due to our own acts or out of inadvertence, or due to the acts or inadvertence of others, we could suffer criminal or civil penalties which could have a material and adverse effect on our results of operations, financial condition and cash flows.

Failure to Comply With Sanction Laws May Adversely Impact Our Business. From time to time, the United States imposes sanctions that restrict U.S. companies from engaging in business activities with certain persons or entities, foreign countries, or foreign governments that it determines are adverse to U.S. foreign policy interests.

For example, the United States has issued an executive order that prohibits U.S. companies from engaging in certain business activities with the government of Syria, a country that the United States has identified as a state sponsor of terrorism. During fiscal 2015, a foreign subsidiary of Starwood generated less than $15,000 of revenue from management and other fees from long standing relationships with hotels located in Syria. This amount constitutes significantly less than 1% of our worldwide annual revenues. We believe our activities in Syria are in full compliance with U.S. and local law. At any time, the United States may impose additional sanctions against Syria or any other country where we may have ongoing activities. If so, our existing activities may be adversely affected, depending on the nature of the sanctions that might be imposed.

Further, our activities in countries or with persons that are subject to U.S. sanction laws may reduce demand for our stock among certain investors. Any restrictions on Starwood’s ability to conduct its business operations across the world could negatively impact our financial results.

Our Insurance Policies May Not Cover All Potential Losses. We maintain insurance coverage for liability, property, business interruption, and other risks with respect to our corporate operations and owned and leased properties. In addition, we may make select insurance programs available to owners of properties we manage or franchise. These policies offer coverage terms and conditions that we believe are usual and customary for our industry. Generally, our “all-risk” property policies provide that coverage is available on a per occurrence basis and that, for each occurrence, there is a limit as well as various sub-limits on the amount of insurance proceeds we will receive in excess of applicable deductibles. In addition, there may be aggregate limits or sub-limits under the policies. Our property policies also provide coverage for earthquake, named windstorm and flood events. If an insurable event occurs that affects more than one of our owned hotels and/or managed or franchised hotels owned by third parties that participate in our insurance program, the claims from each affected hotel may be considered together per policy provisions to determine whether the per occurrence limit, annual aggregate limit or sub-limits, depending on the type of claim, have been reached. If the limits or sub-limits are exceeded, each affected hotel may only receive a proportional share of the amount of insurance proceeds provided for under the policy. In addition, under those circumstances, claims by third-party owners will reduce the coverage available for our owned and leased properties.

In addition, there are also other risks including but not limited to war, certain forms of terrorism such as nuclear, biological or chemical terrorism, political risks, some environmental hazards and/or “Acts of God” that may be deemed to fall completely outside the coverage of our policies or may be uninsurable or cost prohibitive to justify insuring against.

We may also encounter challenges with a Starwood and/or Third-Party Owners’ insurance provider regarding whether it can or will pay a claim(s) that we believe to be covered under the policy. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a hotel or resort, as well as the anticipated future revenue from the hotel or resort. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property.

Our Acquisitions/Dispositions and Investments in New Brands or Businesses May Ultimately Not Prove Successful and We May Not Realize Anticipated Benefits. We consider corporate as well as property acquisitions, dispositions and investments for our businesses. In many cases, we compete for these opportunities with third parties who may have substantially greater financial resources or different or lower acceptable financial metrics than we do. There can be no assurance that we will be able to identify acquisition, disposition or investment candidates or complete transactions on commercially reasonable terms or at all. If transactions are consummated, there can be no assurance that any anticipated benefits will actually be realized. Similarly, there can be no assurance that we will be able to obtain additional financing for acquisitions or investments, or that the ability to obtain such financing will not be restricted by the terms of our debt agreements.

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We periodically review our business to identify properties or other assets that we believe either are non-core, no longer complement our business, are in markets which may not benefit us as much as other markets during an economic recovery or could be sold at significant premiums. We are focused on restructuring and enhancing real estate returns and monetizing investments, and from time to time, may attempt to sell these identified properties and assets. There can be no assurance however, that we will be able to complete dispositions on commercially reasonable terms or at all or that any anticipated benefits will actually be received.

In the future, we may develop and launch additional brands or make investments in new businesses that complement our existing businesses. For example, in 2015 we launched our newest brand, Tribute Portfolio™.  In addition, leveraging our ownership interest in Design Hotels, AG, in 2015 we announced an expanded partnership pursuant to which a subset of their independent hotels with design aesthetics distinct from our 10 brands participate as partner hotels in the SPG program and are available for booking through our websites and call centers. There can be no assurance regarding the level of acceptance of new brands or our investments in new businesses by the development and consumer marketplaces, that the cost incurred in developing and integrating new brands or investments will be recovered or will not negatively impact our existing businesses, or that the anticipated benefits from these new brands or investments will be realized.

Investing Through Partnerships or Joint Ventures Decreases Our Ability to Manage Risk. In addition to acquiring or developing hotels and resorts or acquiring companies that complement our business directly, we have from time to time invested, and expect to continue to invest, as a co-venturer. Joint venturers often have shared control over the operation of the joint venture assets. Therefore, joint venture investments may involve risks such as the possibility that the co-venturer in an investment might become bankrupt or not have the financial resources to meet its obligations, and should a joint venture partner become bankrupt we could become liable for our partner’s share of joint venture liabilities. Also, our joint venture partner may have economic or business interests or goals that are inconsistent with our economic or business interests or goals, may be in a position to take action contrary to our instructions or may make requests contrary to our policies or objectives. Further, we may be unable to take action without the approval of our joint venture partners and, alternatively, our joint venture partners could take actions binding on the joint venture or partnership without our consent. Therefore, actions by a co-venturer might subject the assets owned by the joint venture or partnership to additional risk. There can be no assurance that our investments through partnerships or joint ventures will be successful despite these risks.

Our Vacation Ownership Business is Subject to Extensive Regulation and Risk of Default. We market and sell VOIs, which typically entitle the buyer to occupancy of a fully-furnished resort unit for a specific time period on either an annual or an alternate-year basis. We also acquire, develop and operate vacation ownership resorts, and provide financing to purchasers of VOIs. These activities are all subject to extensive regulation by the U.S. federal government, states or other jurisdictions in which vacation ownership resorts are located and in which VOIs are marketed and sold including regulation of our telemarketing activities under state and federal “Do Not Call” laws. In addition, the laws of most jurisdictions in which we sell VOIs grant the purchaser the right to rescind the purchase contract for any reason within a statutory rescission period. Laws in some of the jurisdictions would impose liability on us as the developer of the resort for certain construction related defects. Although we believe that we are in material compliance with all applicable federal, state, local and foreign laws and regulations to which vacation ownership marketing, sales and operations are currently subject, changes in these requirements, or a determination by a regulatory authority that we were not in compliance, could adversely affect us. In particular, increased regulations of telemarketing activities could adversely impact the marketing of our VOIs.

We bear the risk of defaults under purchaser mortgages on VOIs. If a VOI purchaser defaults on the mortgage during the early part of the loan amortization period, we will not have recovered the marketing, selling (other than commissions in certain events), and general and administrative costs associated with such VOI, and such costs will be incurred again in connection with the resale of the repossessed VOI. Accordingly, there is no assurance that the sales price will be fully or partially recovered from a defaulting purchaser or, in the event of such defaults, that our allowance for losses will be adequate.

Our Revenues are Highly Dependent on the Travel Industry and Declines in or Disruptions to the Travel Industry, Such as Those Caused by Natural or Man-Made Disasters, Contagious Disease, Terrorist Activity, Political or Civil Unrest and War, May Adversely Affect Us. Our financial and operating performance may be adversely affected by so called “Acts of God.” Hurricanes, earthquakes, tsunamis, and other man-made or natural disasters in recent years, such as Hurricane Odile in Mexico in 2014, the earthquake and tsunami in Japan in 2011, as well as the spread or fear of spread of contagious diseases like Zika or Ebola, could cause a decline in the level of business and leisure travel in certain regions or as a whole, and reduce the demand for lodging. Actual or threatened war, terrorist activity, political unrest, or civil strife, such as recent events in Paris, Jakarta, Turkey, Ukraine, Yemen, Syria and Egypt, and other geopolitical uncertainty could have a similar effect on our revenues or on our growth strategy. Any one or more of these events may reduce the overall demand for hotel rooms or limit the prices that we can obtain for them, both of which could adversely affect our profits.

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Changes in U.S. Federal, State and Local or Foreign Tax Law, Interpretations of Existing Tax Law, or Adverse Determinations by Tax Authorities, Could Increase Our Tax Burden or Otherwise Adversely Affect Our Financial Condition or Results of Operations. We are subject to taxation at the federal, state or provincial and local levels in the U.S. and various other countries and jurisdictions. Our future effective tax rate could be affected by changes in the composition of earnings in jurisdictions with differing tax rates, changes in statutory rates and other legislative changes, including those that may result from the Base Erosion Profit Shifting, or BEPS, initiative being conducted by the Organization for Economic Co-operation and Development, or OECD, and from the anti-tax avoidance package being proposed by the European Commission. Furthermore, changes in the valuation of our deferred tax assets and liabilities or changes in determinations regarding the jurisdictions in which we are subject to tax or the amount of income allocated to such jurisdictions could negatively impact our effective tax rate. From time to time, the U.S. federal, state and local and foreign governments make substantive changes to tax rules and their application, which could result in materially higher corporate taxes than would be incurred under existing tax law and could adversely affect our financial condition or results of operations.

Our effective tax rate includes benefits associated with tax incentives in Singapore and tax-exempt income earned from certain of our operations in Luxembourg. The Singapore tax incentive is based on a ruling subject to renewal and next expires in 2016. The tax-exempt income from our operations in Luxembourg is based on application of the current income tax laws and treaties. Provided that no significant changes in facts, laws or circumstances occur, we expect that we will be able to renew the Singapore ruling at similar terms and continue to benefit from the current tax laws and treaties that allow for tax-exempt treatment of the income earned in Luxembourg. If changes in facts, laws, circumstances or interpretations of law occur, our effective tax rate and deferred tax balances could be significantly impacted.

We record tax expense based in part on our estimates of expected future tax rates, reserves for uncertain tax positions in multiple tax jurisdictions, and valuation allowances related to certain net deferred tax assets, including net operating loss carryforwards. We are subject to ongoing and periodic tax audits and disputes relating to federal, state, local and foreign tax matters. For example, we are under regular audit by the Internal Revenue Service (IRS). We have received certain Notices of Proposed Adjustment from the IRS for years 2007 through 2009; however, we disagree with the IRS on certain of these adjustments and have filed a formal appeals protest to dispute them.

An unfavorable outcome from this or any other tax audit could result in higher tax costs, penalties and interest, thereby adversely impacting our financial condition or results of operations.

Failure to Compete Regarding Key Associates May Adversely Impact Our Business. Our success depends in large part on our ability to attract, retain, train, manage and engage our key associates. Our properties are staffed 24 hours a day, seven days a week by thousands of associates around the world. If we and our franchisees are unable to attract, retain, train and engage skilled associates, our ability to manage and staff our properties adequately could be impaired, which could reduce customer satisfaction. Staffing shortages in various parts of the world also could hinder our ability to grow and expand our businesses. Because payroll costs are a major component of the operating expenses at our hotels, a shortage of skilled labor could also require higher wages that would increase labor costs, which could adversely affect our results of operations.

Over the last few years, we have been pursuing a strategy of reducing our investment in owned real estate and increasing our focus on the management and franchise business. As a result, we are planning on substantially increasing the number of hotels we open every year and increasing the overall number of hotels in our system. This increase will require us to recruit and train a substantial number of new associates to work at these hotels, often in emerging markets where there are rising labor costs and strong competition in labor markets. Further, this will require us to increase our capabilities to enable hotels to open on time and successfully. There can be no assurance that we will be able to source and secure these new associates, or train and manage them, to the level required to make this strategy successful.

Collective Bargaining Activity Could Disrupt Our Operations, Increase Our Labor Costs or Interfere with the Ability of Our Management to Focus on Executing Our Business Strategies. Some of our properties are subject to collective bargaining agreements, similar agreements or regulations enforced by governmental authorities. If relationships with our associates or the unions that represent them become adverse, the properties we manage, franchise or own could experience labor disruptions such as strikes, lockouts and public demonstrations. Labor disruptions, which are generally more likely when collective bargaining agreements are being renegotiated, could harm our relationships with our associates or cause us to lose guests. Further, adverse publicity in the marketplace related to union messaging could further harm our reputation and reduce customer demand for our services. Labor regulation could lead to higher wage and benefit costs, changes in work rules that raise operating expenses, legal costs, and limitations on our ability or the ability of our third-party property owners and franchisees to take cost saving measures during economic downturns. We do not have the ability to control the negotiations of collective bargaining agreements covering unionized labor employed by third-party property owners and franchisees.

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We and our third-party property owners and franchisees may also become subject to additional collective bargaining agreements in the future. Potential changes in regulatory schemes across the world could make it easier for unions to organize groups of our associates. If such changes take effect, more of our associates or other field personnel could be subject to increased organizational efforts, which could potentially lead to disruptions or require more of our management’s time to address unionization issues. These or similar agreements, legislation or changes in regulations could disrupt our operations, hinder our ability to cross-train and cross-promote our associates due to prescribed work rules and job classifications, reduce our profitability, or interfere with the ability of our management to focus on executing our business strategies.

The Cost of Compliance with the Americans with Disabilities Act and Similar Legislation outside the United States Could Be Substantial. We are subject to the Americans with Disabilities Act (ADA) and similar legislation in certain jurisdictions outside of the United States. Under the ADA, all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. These regulations apply to accommodations first occupied after January 26, 1993; public accommodations built before January 26, 1993 are required to remove architectural barriers to disabled access where such removal is “readily achievable.” The regulations also mandate certain operational requirements that hotel operators must observe. The failure of a property to comply with the ADA could result in injunctive relief, fines, and awards of damages to private litigants or mandated capital expenditures to remedy such noncompliance. Any imposition of injunctive relief, fines, damage awards or capital expenditures could adversely affect the ability of an owner or franchisee to make payments under the applicable management or franchise agreement or negatively affect the reputation of our brands. If we fail to comply with the requirements of the ADA, we could be subject to fines, penalties, injunctive action, reputational harm and other business effects which could materially and negatively affect our performance and results of operations.

The Hospitality Industry is Subject to Seasonal and Cyclical Volatility, Which May Contribute to Fluctuations in Our Results of Operations and Financial Condition. The hospitality industry is seasonal in nature.  The periods during which our lodging properties experience higher revenues vary from property to property, depending principally upon location and the consumer base served.  We generally expect our revenues to be lower in the first quarter of each year than in each of the three subsequent quarters with the fourth quarter generally being the highest.  In addition, the hospitality industry is cyclical and demand generally follows the general economy on a lagged basis.  The seasonality and cyclicality of our industry may contribute to fluctuation in our results of operations and financial condition.

Changes to Accounting Rules or Regulations May Adversely Affect Our Financial Condition and Results of Operations. New accounting rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and may occur in the future. A change in accounting rules or regulations may even affect our reporting of transactions completed before the change is effective, and future changes to accounting rules or regulations or the questioning of current accounting practices may adversely affect our financial condition and results of operations.

Changes to Estimates or Projections Used to Assess the Fair Value of Our Assets, or Operating Results That are Lower Than Our Current Estimates at Certain Locations, May Cause Us to Incur Impairment Charges That Could Adversely Affect Our Results of Operations. Our total assets include goodwill, intangible assets with an indefinite life, other intangible assets with finite useful lives, and substantial amounts of long-lived assets, principally property and equipment, including hotel properties. We evaluate our goodwill and trademarks for impairment on an annual basis or at other times during the year if events or circumstances indicate that it is more likely than not that the fair value is below the carrying value. We evaluate intangible assets with finite useful lives and long-lived assets for impairment when circumstances indicate that the carrying amount may not be recoverable. Our evaluation of impairment requires us to make certain estimates and assumptions including projections of future results. After performing our evaluation for impairment, including an analysis to determine the recoverability of long-lived assets, we will record an impairment loss when the carrying value of the underlying asset, asset group or reporting unit exceeds its fair value. If the estimates or assumptions used in our evaluation of impairment change, we may be required to record additional impairment losses on certain of these assets. If these impairment losses are significant, our results of operations would be adversely affected.

We and Our Third-Party Licensees May Not Be Able to Sell Residential Properties Using Our Brands for a Profit or at Anticipated Prices. We license our brands to third parties in connection with the residential portions of certain properties that are using our brands. Residential properties using our brands may not ultimately be developed or receive governmental approvals for the sale of residences, and even if developed and approved for sale of residences could become less attractive due to changes in mortgage rates and the availability of mortgage financing generally, market absorption or oversupply in a particular market, changes in tax laws, or other factors affecting real estate markets. As a result, our third-party licensees may not be able to sell these residences, and we may not be able to license our brands for this purpose, for a profit or at the prices that they have anticipated.

21


If our Third-Party Property Owners are Unable to Repay or Refinance Loans Secured by the Mortgaged Properties, or to Obtain Financing Adequate to Fund Renovations or Growth Plans, Our Revenues, Profits and Capital Resources Could be Reduced and Our Business Could be Harmed.  Many of our third-party property owners have pledged their properties as collateral for mortgage loans entered into at the time of development, purchase or refinancing. If our third-party property owners are unable to repay or refinance maturing indebtedness on favorable terms or at all, their lenders could declare a default, accelerate the related debt and repossess the property. A repossession could result in the termination of our management or franchise agreement or eliminate revenues and cash flows from the property. In addition, the owners of managed and franchised hotels depend on financing to buy, develop and improve hotels and in some cases, fund operations during down cycles. Our hotel owners’ inability to obtain adequate funding could materially adversely affect the maintenance and improvement plans of existing hotels, as well as result in the delay or stoppage of the development of our existing pipeline.

Risks Relating to Debt Financing

Our Debt Service Obligations May Adversely Affect Our Cash Flow. As a result of our revolving credit facility and outstanding debt obligations, we are subject to: (i) the risk that cash flow from operations will be insufficient to meet required payments of principal and interest, (ii) restrictive covenants, including covenants relating to certain financial ratios, and (iii) interest rate risk. Although we anticipate that we will be able to repay or refinance our existing indebtedness and any other indebtedness when it matures, there can be no assurance that we will be able to do so or that the terms of such refinancing will be favorable. Our leverage may have important consequences including the following: (i) our ability to obtain additional financing for acquisitions, working capital, capital expenditures or other purposes, if necessary, may be impaired or such financing may not be available on terms favorable to us and (ii) a substantial decrease in operating cash flow, EBITDA (as defined in our credit facility) or a substantial increase in our expenses could make it difficult for us to meet our debt service requirements and restrictive covenants and force us to sell assets and/or modify our operations.

We Have Little Control Over the Availability of Funds Needed to Fund New Investments and Maintain Existing Hotels. In order to fund new hotel investments, as well as refurbish and improve existing hotels, both we and current and potential hotel owners must have access to capital. The availability of funds for new investments and maintenance of existing hotels depends in large measure on capital markets and liquidity factors over which we have little control. Current and prospective hotel owners may find hotel financing expensive and difficult to obtain. Delays, increased costs and other impediments to restructuring such projects may affect our ability to realize fees, recover loans and guarantee advances, or realize equity investments from such projects. Our ability to recover loans and guarantee advances from hotel operations or from owners through the proceeds of hotel sales, refinancing of debt or otherwise may also affect our ability to raise new capital. In addition, downgrades of our public debt ratings by rating agencies could increase our cost of capital. A breach of a covenant could result in an event of default that, if not cured or waived, could result in an acceleration of all or a substantial portion of our debt. For a more detailed description of the covenants imposed by our debt obligations, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Cash Used for Financing Activities in this Annual Report.

Volatility in the Credit Markets May Adversely Impact Our Ability to Sell the Loans That Our Vacation Ownership Business Generates. Our vacation ownership business provides financing to purchasers of our vacation ownership units, and we attempt to sell interests in those loans in the securities markets. Volatility in the credit markets may impact the timing and volume of the timeshare loans that we are able to sell. Although we expect to realize the economic value of our vacation ownership note portfolio even if future note sales are temporarily or indefinitely delayed, such delays may result in either increased borrowings to provide capital to replace anticipated proceeds from such sales or reduced spending in order to maintain our leverage and return targets.

Risks Relating to Ownership of Our Shares

Our Board of Directors May Issue Preferred Stock and Establish the Preferences and Rights of Such Preferred Stock. Our charter provides that the total number of shares of stock of all classes which the Corporation has authority to issue is 1,200,000,000, consisting of one billion shares of common stock and 200 million shares of preferred stock. Our Board of Directors has the authority, without a vote of stockholders, to establish the preferences and rights of any preferred shares to be issued and to issue such shares. The issuance of preferred shares having special preferences or rights could delay or prevent a change in control even if a change in control would be in the interests of our stockholders. Since our Board of Directors has the power to establish the preferences and rights of preferred shares without a stockholder vote, our Board of Directors may give the holders preferences, powers and rights, including voting rights, senior to the rights of holders of our shares.

Our Board of Directors May Implement Anti-Takeover Devices and Our Bylaws Contain Provisions Which May Prevent Takeovers. Certain provisions of Maryland law permit our Board of Directors, without stockholder approval, to implement possible takeover defenses that are not currently in place, such as a classified board. As permitted under the Maryland General Corporation Law, our Bylaws provide that directors have the exclusive right to amend our Bylaws.

22


We Cannot Provide Assurance That We Will Continue to Pay Dividends. There can be no assurance that we will continue to pay dividends. Our Board of Directors may suspend the payment of dividends if the Board deems such action to be in the best interests of us or stockholders. If we do not pay dividends, the price of our common stock must appreciate for you to realize a gain on your investment in our Company. This appreciation may not occur and our stock may, in fact, depreciate in value.

 

 

Item 1B.

Unresolved Staff Comments.

None.

 

 

Item 2.

Properties.

Our hotel properties and vacation ownership and residential business properties are described in Part I, Item 1. Business, earlier in this report.

Our corporate headquarters are located at One StarPoint, Stamford, Connecticut, which lease expires in May 2034. In addition to our corporate headquarters, we lease space for our divisional offices, service centers and sales offices, both domestically and internationally.

We believe that our corporate headquarters and other leased space are in good condition and are sufficient and suitable for the conduct of our business. In the event we need to expand our operations, we believe that suitable space will be available on commercially reasonable terms.

 

Item 3.

Legal Proceedings.

Information regarding Legal Proceedings is incorporated by reference from the “Litigation” section in Note 24, Commitments and Contingencies, of our consolidated financial statements set forth in Item 8. Financial Statements and Supplementary Data of this Annual Report, which is incorporated herein by reference.

 

 

Item 4.

Mine Safety Disclosures.

Not applicable.

 

 

23


PART II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock, par value $0.01 per share (Corporation Shares), is traded on the New York Stock Exchange (the NYSE) under the symbol “HOT”.

The following table sets forth the quarterly range of the high and low sale prices of the Corporation Shares for the fiscal periods indicated as reported on the NYSE Composite Tape:

 

 

 

High

 

 

Low

 

2015

 

 

 

 

 

 

 

 

Fourth quarter

 

$

82.83

 

 

$

65.40

 

Third quarter

 

$

86.96

 

 

$

63.99

 

Second quarter

 

$

87.99

 

 

$

80.06

 

First quarter

 

$

86.76

 

 

$

70.66

 

2014

 

 

 

 

 

 

 

 

Fourth quarter

 

$

82.80

 

 

$

68.53

 

Third quarter

 

$

86.11

 

 

$

76.84

 

Second quarter

 

$

81.82

 

 

$

72.97

 

First quarter

 

$

82.81

 

 

$

72.00

 

 

Approximate Number of Equity Security Holders

As of February 19, 2016, there were approximately 11,000 holders of record of Corporation Shares.

Dividends

We declared cash dividends to holders of Corporation Shares for the fiscal years ended December 31, 2015 and 2014 as follows:

 

 

 

Dividends

Declared

 

 

2015

 

 

 

 

 

Fourth quarter

 

$

0.375

 

(a)

Third quarter

 

$

0.375

 

(a)

Second quarter

 

$

0.375

 

(a)

First quarter

 

$

0.375

 

(a)

2014

 

 

 

 

 

Fourth quarter

 

$

1.00

 

(b)

Third quarter

 

$

1.00

 

(b)

Second quarter

 

$

1.00

 

(b)

First quarter

 

$

1.00

 

(b)

 

(a)

We declared regular quarterly dividends of $0.375 per share to stockholders of record on March 5, 2015, June 8, 2015, September 11, 2015, and December 9, 2015, respectively, which were paid in the corresponding periods of March, June, September and December 2015.

(b)

We declared regular quarterly dividends of $0.35 per share and special quarterly dividends of $0.65 per share in connection with cash realized from the completion of The St. Regis Bal Harbour residential project and sale of the hotel, to stockholders of record on March 11, 2014, June 6, 2014, September 5, 2014, and December 8, 2014, respectively, which were paid in the corresponding periods of March, June, September and December 2014.

In 2016, we expect to continue paying regular dividends on a quarterly basis.  In accordance with the merger agreement with Marriott, such quarterly dividends may not exceed $0.375 per share.

24


Conversion of Securities; Sale of Unregistered Securities

Units of SLC Operating Limited Partnership, our consolidated subsidiary, are convertible into Corporation Shares at the unit holders’ option, provided that we have the unilateral option to settle conversion demands in cash or Corporation Shares. During the year ended December 31, 2015, we redeemed approximately 54,000 of these units for approximately $4 million in cash. At December 31, 2015 and 2014 there were approximately 73,000 and 127,000, respectively, of these units outstanding.

Issuer Purchases of Equity Securities

In the first quarter of 2015, our Board of Directors authorized a $750 million increase to our share repurchase program. During the year ended December 31, 2015, we repurchased 4.7 million common shares at an average price of $78.39 for a total cost of approximately $371 million. Since 2011, we have repurchased 36.2 million common shares for a total cost of approximately $2.643 billion. As of December 31, 2015, $458 million remained available under the share repurchase authorization.

 

 

 

Total Number

of Shares

Purchased

 

 

Weighted

Average

Price Paid

per Share

 

 

Total Number of

Shares Purchased

as Part of Publicly

Announced Plans

 

 

Maximum Number

(or Approximate

Dollar Value) of

Shares that May

Yet Be Purchased

Under the Program

(in millions)

 

October 1 to October 31, 2015

 

 

509,683

 

 

$

68.85

 

 

 

509,683

 

 

$

465

 

November 1 to November 30, 2015

 

 

93,430

 

 

$

79.14

 

 

 

93,430

 

 

$

458

 

December 1 to December 31, 2015

 

 

 

 

$

 

 

 

 

 

$

458

 

Total

 

 

603,113

 

 

$

70.44

 

 

 

603,113

 

 

 

 

 

 

STOCK RETURN PERFORMANCE AND CUMULATIVE TOTAL RETURN

Set forth below is a line graph comparing the cumulative total stockholder return on the Corporation Shares against the cumulative total return on the S&P 500 and the S&P Hotels, Resorts & Cruise Lines Index (the S&P 500 Hotel) for the five fiscal years beginning after December 31, 2010 and ending December 31, 2015. The graph assumes that the value of the investments was $100 on December 31, 2010 and that all dividends and other distributions were reinvested. The comparisons are provided in response to SEC disclosure requirements and are not intended to forecast or be indicative of future performance.

 

 

 

 

 

12/31/10

 

 

12/31/11

 

 

12/31/12

 

 

12/31/13

 

 

12/31/14

 

 

12/31/15

 

Starwood

 

 

100.00

 

 

 

79.75

 

 

 

97.43

 

 

 

137.25

 

 

 

146.96

 

 

 

128.31

 

S&P 500

 

 

100.00

 

 

 

102.09

 

 

 

118.30

 

 

 

156.21

 

 

 

177.32

 

 

 

179.76

 

S&P 500 Hotel

 

 

100.00

 

 

 

80.78

 

 

 

100.97

 

 

 

130.02

 

 

 

160.91

 

 

 

167.06

 

 

Note: S&P 500 Hotel Index includes Carnival Corp, Marriott, Royal Caribbean, Starwood and Wyndham. Royal Caribbean was added in December 2014. S&P adjusts the weighting of the Index such that an addition or deletion of a company does not change the level of the Index and returns are only affected on a forward basis.

25


Item 6.

Selected Financial Data.

The following selected financial data should be read in conjunction with the information set forth under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes thereto beginning on page F-1 of this Annual Report.

 

 

 

Year Ended December 31,

 

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

2011

 

 

 

(In millions, except per share data)

 

Revenues

 

$

5,763

 

 

$

5,983

 

 

$

6,115

 

 

$

6,321

 

 

$

5,624

 

Operating income

 

$

740

 

 

$

883

 

 

$

925

 

 

$

912

 

 

$

630

 

Income from continuing operations (a)

 

$

489

 

 

$

643

 

 

$

565

 

 

$

470

 

 

$

502

 

Diluted earnings per share from continuing

   operations

 

$

2.88

 

 

$

3.46

 

 

$

2.92

 

 

$

2.39

 

 

$

2.57

 

Cash from operating activities

 

$

890

 

 

$

994

 

 

$

1,151

 

 

$

1,184

 

 

$

641

 

Cash from (used for) investing activities

 

$

467

 

 

$

421

 

 

$

(158

)

 

$

126

 

 

$

(176

)

Cash used for financing activities

 

$

(1,227

)

 

$

(1,087

)

 

$

(678

)

 

$

(1,456

)

 

$

(755

)

Aggregate cash distributions paid

 

$

259

 

 

$

735

 

 

$

256

 

 

$

242

 

 

$

99

 

Cash distributions and dividends declared per

   Share

 

$

1.50

 

 

$

4.00

 

 

$

1.35

 

 

$

1.25

 

 

$

0.50

 

 

(a)

Amounts represent income from continuing operations attributable to Corporation Shares (i.e., excluding non-controlling interests).

 

 

 

At December 31,

 

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

2011

 

 

 

(In millions)

 

Total assets

 

$

8,268

 

 

$

8,659

 

 

$

8,762

 

 

$

8,855

 

 

$

9,560

 

Long-term debt, net of current maturities

 

$

2,278

 

 

$

2,574

 

 

$

1,523

 

 

$

1,656

 

 

$

2,596

 

 

 

 

26


Item 7.

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and costs and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and judgments, including those relating to revenue recognition, bad debts, inventories, investments, plant, property and equipment, goodwill and intangible assets, income taxes, financing operations, frequent guest program liability, self-insurance claims payable, restructuring costs, retirement benefits and contingencies and litigation.

Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making decisions about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions and conditions.

 

 

27


RESULTS OF OPERATIONS

The following discussion presents an analysis of results of our operations for the years ended December 31, 2015, 2014 and 2013.

For the year ended December 31, 2015, we saw strong results in the Americas, while our international results were negatively impacted by foreign exchange rates. Worldwide Systemwide Same-Store REVPAR for the Americas segment increased 3.7% for the year ended December 31, 2015 compared to the prior year while the EAME and Asia Pacific segments experienced declines primarily due to the unfavorable impact of foreign currency exchange rates. Occupancies in every segment continued to rise.

At December 31, 2015, we had approximately 530 hotels in the active pipeline representing approximately 116,000 rooms. Of these rooms, 55% are in the upper upscale and luxury segments and 75% are outside of North America. During 2015, we signed 220 hotel management and franchise contracts (representing approximately 45,800 rooms). Also, during 2015, 105 new hotels and resorts (representing approximately 21,500 rooms) entered the system and 30 properties (representing approximately 6,300 rooms) exited the system.

In addition to our active pipeline, we have a 74% equity interest in Design Hotels AG (Design Hotels), a company that represents and markets a distinct selection of over 300 independent hotels with approximately 23,000 rooms globally. Starwood and Design Hotels entered into an agreement in 2014 that allows greater coordination and cooperation between the companies. Our REVPAR metrics do not include revenue from Design Hotels and, at this stage, Design Hotel’s operating results are insignificant to our results of operations.

An indicator of the performance of our hotels is REVPAR, as it measures the period-over-period change in room revenue for comparable properties. Along with REVPAR, we also evaluate our hotels by measuring the change in Average Daily Rate (ADR) and occupancy. This is particularly the case in the United States, where there is no impact on this measure from foreign currency exchange rates.

We continually update and renovate our owned, leased and consolidated joint venture hotels and include these hotels in our Same-Store Owned Hotel results. We also undertake major repositionings of hotels. While undergoing major repositionings, hotels are generally not operating at full capacity and, as such, these repositionings can negatively impact our hotel revenues and are not included in Same-Store Owned Hotel results.

Our SPG guest loyalty program continues to be an industry leader and innovator. The enhancements to the program in recent years, coupled with the introduction of programs like SPG Pro, help us to attract the next wave of global, elite travelers and continue to drive SPG occupancy rates to record levels. We continue to focus on digital innovation and personalization, which helps us better connect with guests and customers, sell through our own channels and deliver more personalized service, all while enhancing our brands.

On October 27, 2015, we entered into definitive agreements with ILG pursuant to which our vacation ownership business, to be held by Vistana, will be spun-off to our stockholders and immediately thereafter Vistana will merge with a wholly-owned subsidiary of ILG. In connection with the transactions, the consideration our stockholders are expected to receive is primarily based on the value of ILG’s common stock, which has declined in the last two months of 2015. If this decline is sustained, we could record a material impairment charge at the date of the Planned Reverse Morris Trust Transaction resulting from the difference between the carrying value of our investment in the vacation ownership business and the fair value of the consideration our stockholders will receive at the transaction date. Please see Note 27, Planned Reverse Morris Trust Transaction, of the Notes to our Financial Statements for additional information on the transaction.

On November 15, 2015, we entered into a definitive merger agreement with Marriott. Please see Note 28, Planned Marriott Merger, of the Notes to our Financial Statements for additional information.

In November 2015, we first announced the point of sale systems of a limited number of our hotels in North America were infected with malware, enabling unauthorized parties to access payment card data of some customers.  Following extensive investigation, there is no indication that our guest reservation or SPG membership systems were impacted, nor is there any evidence that other customer information, such as contact information, social security numbers, or PINs, were affected by this issue.  The costs of this investigation are not material to our results of operations, and we do not expect this data breach to have a material impact on our financial condition or results of operations.

We manage and operate our hotel business in three separate hotel segments: (i) the Americas, (ii) EAME, and (iii) Asia Pacific. Our vacation ownership and residential business is a separate segment. This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes discussion of our consolidated operating results as well as discussion about each of our four segments. Additionally, Note 25 to the consolidated financial statements presents further information about our segments.

 

28


Year Ended December 31, 2015 Compared with Year Ended December 31, 2014

Consolidated Results

 

 

 

Year Ended

December 31,

2015

 

 

Year Ended

December 31,

2014

 

 

Increase /

(decrease)

from prior

year

 

 

Percentage

change

from prior

year

 

 

 

(in millions)

 

Owned, Leased and Consolidated Joint

   Venture Hotels

 

$

1,293

 

 

$

1,541

 

 

$

(248

)

 

 

(16.1

)%

Management Fees, Franchise Fees and

   Other Income

 

 

1,047

 

 

 

1,057

 

 

 

(10

)

 

 

(0.9

)%

Vacation Ownership and Residential

 

 

687

 

 

 

674

 

 

 

13

 

 

 

1.9

%

Other Revenues from Managed and Franchised

   Properties

 

 

2,736

 

 

 

2,711

 

 

 

25

 

 

 

0.9

%

Total Revenues

 

$

5,763

 

 

$

5,983

 

 

$

(220

)

 

 

(3.7

)%

 

The decrease in revenues from owned, leased and consolidated joint venture hotels was primarily due to lost revenues from 13 owned hotels that were sold or closed and two leased hotels converted to managed or franchised hotels in 2015 and 2014. These sold, closed, or converted hotels had revenues of $108 million in the year ended December 31, 2015, compared to $337 million for the corresponding period in 2014. Revenues at our Same-Store Owned Hotels (28 hotels for the year ended December 31, 2015 and 2014, excluding the 13 hotels sold or closed, two hotels converted to managed or franchised, and four additional hotels undergoing significant repositionings or without comparable results in 2015 and 2014) increased 0.9%, or $9 million, to $1,007 million for the year ended December 31, 2015, when compared to $998 million in the corresponding period of 2014.

REVPAR at our worldwide Same-Store Owned Hotels was $184.26 for the year ended December 31, 2015, compared to $182.82 in the corresponding period in 2014. The increase in REVPAR at these worldwide Same-Store Owned Hotels resulted from an increase in occupancy rates to 75.9% for the year ended December 31, 2015, compared to 73.1% in the corresponding period in 2014, partially offset by a decrease in ADR to $242.90 for the year ended December 31, 2015, compared to $250.05 for the corresponding period in 2014. REVPAR and ADR were negatively affected by the unfavorable impact of foreign exchange rates. Growth in REVPAR was particularly strong in Mexico and in the United States in the South and West.

The decrease in management fees, franchise fees and other income was primarily due to the inclusion of significant termination fees associated with the exit of certain managed and franchised hotels from the system in 2014 and the negative impact of foreign exchange rates. For the year ended December 31, 2014, other management and franchise revenues included approximately $45 million of fees associated with the termination of certain management and franchise contracts compared to $11 million for the same period in 2015. Core fees (total management and franchise fees), which were negatively impacted by foreign exchange rates, increased $5 million to $832 million for the year ended December 31, 2015 compared to $827 million for the corresponding period in 2014. These increases included fees from the net addition of 75 managed or franchised hotels to our system since December 31, 2014 partially offset by a 0.4% decrease in Worldwide Systemwide REVPAR. As of December 31, 2015, we had 608 managed properties and 642 franchised properties with approximately 350,000 rooms.

Total vacation ownership and residential sales and services revenue increased $13 million to $687 million in the year ended December 31, 2015, compared to the corresponding period in 2014, primarily due to a $32 million increase in revenues from resort and other operations and an increase in originated contract sales of vacation ownership intervals of $28 million for the year ended December 31, 2015 compared to the corresponding period in 2014, as the average price per vacation ownership unit increased 3.9% to $15,400 and the number of contracts signed increased by 4.4%. These amounts were partially offset by a $24 million reduction in residential sales and services revenue, primarily due to the sellout of Bal Harbour in early 2014, and a decrease in revenues recognized under the percentage of completion method and other deferrals of $23 million.

Other revenues from managed and franchised properties increased primarily due to an increase in payroll costs commensurate with a rise in the overall cost of labor at our existing managed hotels and payroll costs for the new hotels entering the system. These revenues represent reimbursements of costs incurred on behalf of managed hotels, vacation ownership properties and franchisees and relate primarily to payroll costs at managed properties where we are the employer. Since the reimbursements are made based upon the costs incurred with no added margin, these revenues and corresponding expenses have no effect on our operating income or our net income.

29


 

 

 

Year Ended

December 31,

2015

 

 

Year Ended

December 31,

2014

 

 

Increase /

(decrease)

from prior

year

 

 

Percentage

change

from prior

year

 

 

 

(in millions)

 

Selling, General, Administrative and Other

 

$

388

 

 

$

402

 

 

$

(14

)

 

 

(3.5

)%

 

Selling, general, administrative and other expenses decreased $14 million to $388 million for the year ended December 31, 2015, when compared to the corresponding period in 2014, primarily due to the implementation of various cost savings initiatives and due to the favorable impact of foreign exchange rates, partially offset by an $11 million reserve for the potential funding of a performance guarantee at two hotels in Greece as a result of the economic crisis in Greece.

 

 

 

Year Ended

December 31,

2015

 

 

Year Ended

December 31,

2014

 

 

Increase /

(decrease)

from prior

year

 

 

Percentage

change

from prior

year

 

 

(in millions)

Restructuring and Other Special Charges (Credits), Net

 

$

100

 

 

$

(4

)

 

$

104

 

 

n/m

 

n/m = not meaningful

During the year ended December 31, 2015, restructuring and other special charges (credits), net include $20 million in net restructuring charges and $80 million of other special charges. The restructuring charges are primarily related to costs associated with our previously announced cost savings initiatives, partially offset by the reversal of an $8 million reserve as a result of the favorable resolution of a funding commitment associated with a vacation ownership project. Other special charges primarily consist of $36 million of costs associated with professional fees for the planned separation, distribution and subsequent merger of our vacation ownership business (see Note 27), $20 million of costs primarily associated with professional fees related to our strategic alternatives review which culminated in the proposed Marriott merger (see Note 28), $11 million of charges associated with the departures of our prior President and Chief Executive Officer and our interim Chief Executive Officer, a $6 million charge for technology related costs and expenses that we no longer deem recoverable and the establishment of $6 million of reserves related to potential liabilities associated with the 2005 acquisition of Le Méridien.

During the year ended December 31, 2014, we reversed a $3 million reserve related to a note receivable associated with a previous disposition, which was collected.

 

 

 

Year Ended

December 31,

2015

 

 

Year Ended

December 31,

2014

 

 

Increase /

(decrease)

from prior

year

 

 

Percentage

change

from prior

year

 

 

 

(in millions)

 

Depreciation and Amortization

 

$

280

 

 

$

283

 

 

$

(3

)

 

 

(1.1

)%

 

The decrease in depreciation and amortization expense for the year ended December 31, 2015, when compared to the same period of 2014, was primarily due to decreased depreciation expense related to sold hotels, partially offset by information technology capital expenditures in 2015.

 


30


 

 

Year Ended

December 31,

2015

 

 

Year Ended

December 31,

2014

 

 

Increase /

(decrease)

from prior

year

 

 

Percentage

change

from prior

year

 

 

 

(in millions)

 

Operating Income

 

$

740

 

 

$

883

 

 

$

(143

)

 

 

(16.2

)%

 

The decrease in operating income for the year ended December 31, 2015, compared to the corresponding period of 2014, was primarily due to an unfavorable variance in restructuring and other special charges (credits), net of $104 million, a $42 million decrease in operations (revenues less expenses) related to our owned, leased and consolidated joint venture hotels, and a $10 million decrease in management fees, franchise fees and other income, partially offset by a decrease in selling, general, administrative and other expenses of $14 million.

 

 

 

 

Year Ended

December 31,

2015

 

 

Year Ended

December 31,

2014

 

 

Increase /

(decrease)

from prior

year

 

 

Percentage

change

from prior

year

 

 

 

(in millions)

 

Equity Earnings and Gains and from

   Unconsolidated Ventures, Net

 

$

41

 

 

$

27

 

 

$

14

 

 

 

51.9

%

 

Equity earnings and gains from unconsolidated joint ventures, net increased $14 million for the year ended December 31, 2015, compared to the corresponding period in 2014, primarily related to a $4 million gain on the sale of a joint venture hotel and due to an improvement in the performance of the hotels owned by the joint ventures.

 

 

 

Year Ended

December 31,

2015

 

 

Year Ended

December 31,

2014

 

 

Increase /

(decrease)

from prior

year

 

 

Percentage

change

from prior

year

 

 

 

(in millions)

 

Net Interest Expense

 

$

111

 

 

$

94

 

 

$

17

 

 

 

18.1

%

 

Net interest expense increased $17 million for the year ended December 31, 2015, compared to the same period of 2014, primarily due to an increase in our average debt balance during 2015, compared to 2014, associated with borrowings in the second half of 2014, including the issuance of $650 million of senior notes.

Our weighted average interest rate was approximately 3.79% at December 31, 2015, compared to 3.90% at December 31, 2014.

 

 

 

Year Ended

December 31,

2015

 

 

Year Ended

December 31,

2014

 

 

Increase /

(decrease)

from prior

year

 

 

Percentage

change

from prior

year

 

 

 

(in millions)

 

Loss on Early Extinguishment of Debt, Net

 

$

 

 

$

1

 

 

$

(1

)

 

 

(100.0

)%

 

During the year ended December 2014, we recorded a loss of $1 million related to the write-off of certain deferred financing costs associated with the amendment of our Revolving Credit Facility (see Note 13).

 


31


 

 

 

Year Ended

December 31,

2015

 

 

Year Ended

December 31,

2014

 

 

Increase /

(decrease)

from prior

year

 

 

Percentage

change

from prior

year

 

 

 

(in millions)

 

Gain (Loss) on Asset Dispositions and Impairments, Net

 

$

(1

)

 

$

(33

)

 

$

32

 

 

 

97.0

%

 

During the year ended December 31, 2015, we recorded a net loss of $1 million, primarily related to $35 million of impairment charges for two owned hotels, whose book values exceeded their fair values, a $15 million charge related to an obligation associated with a previous disposition and a loss of $9 million, primarily related to asset dispositions and impairments associated with certain hotel renovations, partially offset by a $36 million gain related to property insurance settlement proceeds for a hotel damaged by a hurricane, a $20 million gain on the sale of a minority partnership interest in a hotel and a $4 million gain associated with the sale of one hotel sold subject to a long-term franchise agreement.

During the year ended December 31, 2014, we recorded a loss of $33 million, primarily due to a $23 million loss associated with four owned hotels which were sold subject to long-term franchise agreements, a $21 million loss associated with the conversion of a leased hotel to a managed hotel, a $13 million impairment charge on one owned hotel, whose book value exceeded its fair value, a $7 million impairment associated with one of our foreign unconsolidated joint ventures, and a loss of $7 million associated with the termination of our leasehold interest in a hotel which was converted to a franchised hotel. These losses were partially offset by approximately $31 million of previously deferred gains which were recognized primarily in connection with hotels that converted from managed hotels to franchised hotels, and a $10 million gain on the sale of our interest in an unconsolidated joint venture hotel (see Note 4).

 

 

 

 

Year Ended

December 31,

2015

 

 

Year Ended

December 31,

2014

 

 

Increase /

(decrease)

from prior

year

 

 

Percentage

change

from prior

year

 

 

 

(in millions)

 

Income Tax (Benefit) Expense

 

$

180

 

 

$

139

 

 

$

41

 

 

 

29.5

%

 

The increase in income tax expense in 2015 when compared to 2014 was primarily due to non-recurring tax benefits in 2014. Income tax expense increased approximately $51 million due to the impact of favorable tax settlements reached with foreign taxing authorities in 2014 compared to 2015, approximately $44 million due to the tax effects from asset dispositions recognized in 2014 compared to 2015 and approximately $15 million due to the tax impact of changes in indefinite reinvestment assertions in 2014 compared to 2015. This was partially offset by a $26 million decrease related to changes in uncertain tax positions in 2015 versus 2014, and lower pretax income and a lower overall effective tax rate primarily driven by a change in the mix of pretax income between tax jurisdictions.

 

 

 

Year Ended

December 31,

2015

 

 

Year Ended

December 31,

2014

 

 

Increase /

(decrease)

from prior

year

 

 

Percentage

change

from prior

year

 

 

 

(in millions)

 

Discontinued Operations Gain (Loss), Net

 

$

 

 

$

(10

)

 

$

10

 

 

 

100.0

%

 

During the year ended December 31, 2014, the loss was primarily due to liabilities associated with an unfavorable ruling, during 2014, in connection with a previous disposition.

 


32


Segment Results

The following table summarizes REVPAR, ADR and occupancy for our Same-Store Systemwide Hotels for the years ended December 31, 2015 and 2014. Same-Store Systemwide Hotels represent results for same-store owned, leased, managed and franchised hotels.

 

 

 

Year Ended

December 31,

 

 

 

 

 

 

 

2015

 

 

2014

 

 

Variance

 

Worldwide (996 hotels with approximately 291,900 rooms)

 

 

 

 

 

 

 

 

 

 

 

 

REVPAR (1)

 

$

121.57

 

 

$

122.02

 

 

 

(0.4

)%

ADR

 

$

172.11

 

 

$

176.56

 

 

 

(2.5

)%

Occupancy

 

 

70.6

%

 

 

69.1

%

 

 

1.5

 

Americas (565 hotels with approximately 163,000 rooms)

 

 

 

 

 

 

 

 

 

 

 

 

REVPAR (1)

 

$

129.82

 

 

$

125.17

 

 

 

3.7

%

ADR

 

$

176.26

 

 

$

173.06

 

 

 

1.8

%

Occupancy