UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2018
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 1-13881
MARRIOTT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware | 52-2055918 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
10400 Fernwood Road, Bethesda, Maryland | 20817 |
(Address of Principal Executive Offices) | (Zip Code) |
Registrant’s Telephone Number, Including Area Code (301) 380-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Class A Common Stock, $0.01 par value (339,668,839 shares outstanding as of February 20, 2019) | Nasdaq Global Select Market Chicago 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 ý 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 ý
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ý | Accelerated filer | o | |
Non-accelerated filer | o | Smaller reporting company | o | |
Emerging growth company | o | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 ý
The aggregate market value of shares of common stock held by non-affiliates at June 29, 2018, was $36,386,234,246.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement prepared for the 2019 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.
MARRIOTT INTERNATIONAL, INC.
FORM 10-K TABLE OF CONTENTS
FISCAL YEAR ENDED DECEMBER 31, 2018
Page No. | ||
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Throughout this report, we refer to Marriott International, Inc., together with its consolidated subsidiaries, as “we,” “us,” “Marriott,” or “the Company.” In order to make this report easier to read, we also refer throughout to (i) our Consolidated Financial Statements as our “Financial Statements,” (ii) our Consolidated Statements of Income as our “Income Statements,” (iii) our Consolidated Balance Sheets as our “Balance Sheets,” (iv) our Condensed Consolidated Statements of Cash Flows as our “Statements of Cash Flows,” (v) our properties, brands, or markets in the United States (“U.S.”) and Canada as “North America” or “North American,” and (vi) our properties, brands, or markets in our Caribbean and Latin America, Europe, and Middle East and Africa regions as “Other International,” and together with those in our Asia Pacific segment, as “International.” In addition, references throughout to numbered “Footnotes” refer to the numbered Notes to our Financial Statements that we include in the Financial Statements section of this report.
PART I
Corporate Structure and Business
We are a worldwide operator, franchisor, and licensor of hotel, residential, and timeshare properties under numerous brand names at different price and service points. Consistent with our focus on management, franchising, and licensing, we own very few of our lodging properties. We were organized as a corporation in Delaware in 1997 and became a public company in 1998 when we were “spun off” as a separate entity by the company formerly named “Marriott International, Inc.”
We believe that our portfolio of brands, shown in the following table, is the largest and most compelling range of brands and properties of any lodging company in the world.
We discuss our operations in the following reportable business segments: North American Full-Service, North American Limited-Service, and Asia Pacific. Our Europe, Middle East and Africa, and Caribbean and Latin America operating segments do not individually meet the criteria for separate disclosure as reportable segments.
Acquisition of Starwood Hotels & Resorts Worldwide
On September 23, 2016 (the “Merger Date”), we completed the acquisition of Starwood Hotels & Resorts Worldwide, LLC, formerly known as Starwood Hotels & Resorts Worldwide, Inc. (“Starwood”), through a series of transactions (the “Starwood Combination”), after which Starwood became an indirect wholly-owned subsidiary of Marriott. Our Financial Statements and related discussions in this report include Starwood’s results of operations only from the Merger Date through year-end 2018 and reflect the financial position of our combined company at December 31, 2018 and 2017 except where we specifically state otherwise, such as certain statistics described under the caption “Performance Measures” in Part II, Item 7. We refer to our business associated with brands that were in our portfolio before the Starwood Combination as “Legacy-Marriott” and to the Starwood business and brands that we acquired as “Legacy-Starwood.” See Footnote 3. Dispositions and Acquisitions for more information.
Starwood Reservations Database Security Incident
On November 30, 2018, we announced a data security incident involving unauthorized access to the Starwood reservations database (the “Data Security Incident”). We have completed the planned phase out of the operation of the Starwood reservations database, effective as of the end of 2018. For further information about the Data Security Incident, see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Data Security Incident” in Footnote 7. Commitments and Contingencies in Part II, Item 8.
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Company-Operated Properties
At year-end 2018, we had 2,020 company-operated properties (566,759 rooms), which included properties under long-term management or lease agreements with property owners (management and lease agreements together, the “Operating Agreements”), properties that we own, and home and condominium communities for which we manage the related owners’ associations.
Terms of our management agreements vary, but we earn a management fee that is typically composed of a base management fee, which is a percentage of the revenues of the hotel, and an incentive management fee, which is based on the profits of the hotel. Our management agreements also typically include reimbursement of costs of operations (both direct and indirect). Such agreements are generally for initial periods of 20 to 30 years, with options for us to renew for up to 50 or more additional years. Our lease agreements also vary, but may include fixed annual rentals plus additional rentals based on a specified percentage of annual revenues that exceed a fixed amount. Many of our Operating Agreements are subordinated to mortgages or other liens securing indebtedness of the owners. Many of our Operating Agreements also permit the owners to terminate the agreement if we do not meet certain performance metrics and financial returns fail to meet defined levels for a period of time and we have not cured those deficiencies. In certain circumstances, some of our management agreements allow owners to convert company-operated properties to franchised properties under our brands.
For the lodging facilities we operate, we generally are responsible for hiring, training, and supervising the managers and employees needed to operate the facilities and for purchasing supplies, and owners are required to reimburse us for those costs. We provide centralized reservation services and advertising, marketing, and promotional services, as well as various accounting and data processing services, and owners are also required to reimburse us for those costs.
Franchised, Licensed, and Unconsolidated Joint Venture Properties
We have franchising, licensing, and joint venture programs that permit hotel owners and operators and Marriott Vacations Worldwide Corporation (“MVW”), our former timeshare subsidiary that we spun off in 2011, to use many of our lodging brand names and systems. Under our hotel franchising programs, we generally receive an initial application fee and continuing royalty fees, which typically range from four to six percent of room revenues for all brands, plus two to three percent of food and beverage revenues for certain full-service hotels. We are a partner in unconsolidated joint ventures that manage and, in some cases, own hotels. Some of these joint ventures also provide services to franchised hotels. We recognize our share of these joint ventures’ net income or loss in the “Equity in earnings” caption of our Income Statements. Franchisees and certain joint ventures contribute to our marketing and advertising programs and pay fees for use of our centralized reservation systems.
We also receive royalty fees under license agreements with MVW and its affiliates for certain brands, including Marriott Vacation Club, Grand Residences by Marriott, The Ritz-Carlton Destination Club, Westin, Sheraton, and for certain existing properties, St. Regis and The Luxury Collection. We receive license fees from MVW consisting of a fixed annual fee, adjusted for inflation, plus certain variable fees based on sales volumes.
At year-end 2018, we had 4,735 franchised and licensed properties (729,413 rooms) and 151 unconsolidated joint venture properties (21,196 rooms).
Residential
We use or license our trademarks for the sale of residential real estate, often in conjunction with hotel development, and receive branding fees for sales of such branded residential real estate by others. Third-party owners typically construct and sell residences with limited amounts, if any, of our capital at risk. We have used or licensed our JW Marriott, The Ritz-Carlton, Ritz-Carlton Reserve, W, The Luxury Collection, St. Regis, EDITION, Bulgari, Marriott, Sheraton, Westin, Four Points, Delta and Autograph Collection brand names and trademarks for residential real estate sales. While the worldwide residential market is very large, we believe the luxurious nature of our residential properties, the quality and exclusivity associated with our brands, and the hospitality services that we provide, all serve to make residential properties bearing our trademarks distinctive.
Seasonality
In general, business at company-operated and franchised properties fluctuates only moderately with the seasons and is relatively stable. Business at some resort properties may be seasonal depending on location.
Relationship with Major Customer
We operate or franchise properties that are owned or leased by Host Hotels & Resorts, Inc. (“Host”). In addition, Host is a partner in several partnerships that own properties that we operate under long-term management agreements. See Footnote 19. Relationship with Major Customer for more information.
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Intellectual Property
We operate in a highly competitive industry and our brand names, trademarks, service marks, trade names, and logos are very important to the sales and marketing of our properties and services. We believe that our brand names and other intellectual property have come to represent the highest standards of quality, care, service, and value to our customers, guests, and the traveling public. Accordingly, we register and protect our intellectual property where we deem appropriate and otherwise protect against its unauthorized use.
Brand Portfolio
We believe that our brand portfolio offers the largest and most compelling range of brands and properties in hospitality, with two overall styles of hotels -- Classic, offering time-honored hospitality for the modern traveler, and Distinctive, offering memorable experiences with a unique perspective -- each of which we group into three quality tiers: Luxury, Premium, and Select.
Luxury offers bespoke and superb amenities and services. Our Classic Luxury hotel brands include JW Marriott, The Ritz-Carlton, and St. Regis. Our Distinctive Luxury hotel brands include W Hotels, The Luxury Collection, EDITION, and Bulgari.
Premium offers sophisticated and thoughtful amenities and services. Our Classic Premium hotel brands include Marriott Hotels, Sheraton, Delta Hotels, Marriott Executive Apartments, and Marriott Vacation Club. Our Distinctive Premium hotel brands include Westin, Renaissance, Le Méridien, Autograph Collection, Gaylord Hotels, Tribute Portfolio, and Design Hotels.
Select offers smart and easy amenities and services with our longer stay brands offering amenities that mirror the comforts of home. Our Classic Select hotel brands include Courtyard, Residence Inn, Fairfield by Marriott, SpringHill Suites, Four Points, TownePlace Suites, and Protea Hotels. Our Distinctive Select hotel brands include Aloft, AC Hotels by Marriott, Element, and Moxy.
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The following table shows the geographic distribution of our brands at year-end 2018:
North America | Europe | Middle East & Africa | Asia Pacific | Caribbean & Latin America | Total | ||
Luxury | |||||||
JW Marriott® | Properties | 28 | 6 | 4 | 33 | 13 | 84 |
Rooms | 15,681 | 2,075 | 2,708 | 13,122 | 3,597 | 37,183 | |
The Ritz-Carlton® | Properties | 39 | 13 | 13 | 30 | 6 | 101 |
Rooms | 11,398 | 3,079 | 3,867 | 7,520 | 1,786 | 27,650 | |
W® Hotels | Properties | 25 | 6 | 3 | 15 | 6 | 55 |
Rooms | 7,474 | 1,253 | 1,221 | 4,021 | 1,074 | 15,043 | |
The Luxury Collection® | Properties | 17 | 44 | 7 | 30 | 12 | 110 |
Rooms | 5,084 | 6,566 | 1,962 | 7,286 | 1,058 | 21,956 | |
St. Regis® | Properties | 10 | 6 | 4 | 18 | 3 | 41 |
Rooms | 1,977 | 834 | 1,168 | 4,612 | 448 | 9,039 | |
EDITION® | Properties | 2 | 3 | 1 | 2 | — | 8 |
Rooms | 567 | 375 | 255 | 671 | — | 1,868 | |
Bulgari® | Properties | — | 2 | 1 | 3 | — | 6 |
Rooms | — | 143 | 120 | 260 | — | 523 | |
Premium | |||||||
Marriott Hotels® | Properties | 341 | 94 | 24 | 80 | 28 | 567 |
Rooms | 134,834 | 23,969 | 8,061 | 26,962 | 7,540 | 201,366 | |
Sheraton® | Properties | 190 | 61 | 31 | 123 | 36 | 441 |
Rooms | 72,674 | 16,580 | 10,408 | 46,073 | 9,882 | 155,617 | |
Westin® | Properties | 129 | 19 | 7 | 56 | 12 | 223 |
Rooms | 52,955 | 6,125 | 1,839 | 17,595 | 3,639 | 82,153 | |
Renaissance® Hotels | Properties | 88 | 36 | 4 | 39 | 8 | 175 |
Rooms | 29,104 | 8,564 | 1,233 | 13,633 | 2,565 | 55,099 | |
Le Méridien® | Properties | 19 | 15 | 24 | 47 | 2 | 107 |
Rooms | 3,987 | 5,010 | 6,612 | 12,154 | 271 | 28,034 | |
Autograph Collection® Hotels | Properties | 95 | 46 | 8 | 8 | 9 | 166 |
Rooms | 20,218 | 6,466 | 1,738 | 2,167 | 4,313 | 34,902 | |
Delta Hotels by MarriottTM (Delta Hotels®) | Properties | 61 | 1 | — | 1 | — | 63 |
Rooms | 14,905 | 223 | — | 339 | — | 15,467 | |
Gaylord Hotels® | Properties | 6 | — | — | — | — | 6 |
Rooms | 9,918 | — | — | — | — | 9,918 | |
Marriott Executive Apartments® | Properties | — | 4 | 7 | 17 | 2 | 30 |
Rooms | — | 361 | 823 | 3,016 | 240 | 4,440 | |
Tribute Portfolio® | Properties | 18 | 6 | — | 5 | 2 | 31 |
Rooms | 4,285 | 697 | — | 882 | 57 | 5,921 | |
Select | |||||||
Courtyard by Marriott® (Courtyard®) | Properties | 1,027 | 63 | 7 | 63 | 39 | 1,199 |
Rooms | 143,389 | 11,828 | 1,487 | 15,306 | 6,428 | 178,438 | |
Residence Inn by Marriott® (Residence Inn®) | Properties | 789 | 9 | 3 | — | 2 | 803 |
Rooms | 97,335 | 1,196 | 301 | — | 249 | 99,081 | |
Fairfield by Marriott® | Properties | 940 | — | — | 26 | 13 | 979 |
Rooms | 88,052 | — | — | 4,403 | 1,833 | 94,288 | |
SpringHill Suites by Marriott® (SpringHill Suites®) | Properties | 414 | — | — | — | — | 414 |
Rooms | 48,959 | — | — | — | — | 48,959 | |
Four Points® by Sheraton (Four Points®) | Properties | 152 | 20 | 12 | 67 | 20 | 271 |
Rooms | 23,015 | 3,042 | 3,451 | 16,951 | 2,685 | 49,144 | |
TownePlace Suites by Marriott® (TownePlace Suites®) | Properties | 388 | — | — | — | — | 388 |
Rooms | 39,231 | — | — | — | — | 39,231 | |
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North America | Europe | Middle East & Africa | Asia Pacific | Caribbean & Latin America | Total | ||
Aloft® Hotels | Properties | 108 | 7 | 8 | 27 | 9 | 159 |
Rooms | 16,296 | 1,310 | 2,012 | 6,240 | 1,494 | 27,352 | |
AC Hotels by Marriott® | Properties | 49 | 85 | 1 | — | 10 | 145 |
Rooms | 8,447 | 10,589 | 188 | — | 1,553 | 20,777 | |
Protea Hotels by Marriott® (Protea Hotels®) | Properties | — | — | 80 | — | — | 80 |
Rooms | — | — | 8,265 | — | — | 8,265 | |
Element® Hotels | Properties | 31 | 2 | 1 | 5 | — | 39 |
Rooms | 4,388 | 293 | 168 | 1,085 | — | 5,934 | |
Moxy® Hotels | Properties | 11 | 23 | — | 3 | — | 37 |
Rooms | 2,235 | 4,873 | — | 469 | — | 7,577 | |
Residences and Timeshare | |||||||
Residences | Properties | 59 | 6 | 2 | 14 | 8 | 89 |
Rooms | 6,959 | 256 | 197 | 2,144 | 401 | 9,957 | |
Timeshare | Properties | 70 | 5 | — | 5 | 9 | 89 |
Rooms | 18,313 | 919 | — | 471 | 2,483 | 22,186 | |
Total Properties 1 | 5,106 | 582 | 252 | 717 | 249 | 6,906 | |
Total Rooms 1 | 881,680 | 116,626 | 58,084 | 207,382 | 53,596 | 1,317,368 | |
(1) | Excludes Design HotelsTM properties, which participate as partner hotels in our Loyalty Program and are available for booking through our reservation channels. |
Other Activities
Loyalty Program, Sales and Marketing, and Reservation Systems. On August 18, 2018, Marriott launched one loyalty program with unified benefits under its three legacy loyalty brands — Marriott Rewards, The Ritz-Carlton Rewards, and Starwood Preferred Guest (“SPG”). On February 13, 2019, the combined program completed its integration under one name, Marriott BonvoyTM. Members have access to Marriott Bonvoy’s diverse brand portfolio, rich benefits, and travel experiences. We refer to Marriott Bonvoy throughout this report as our “Loyalty Program.”
Our Loyalty Program is a low cost and high impact vehicle for our revenue generation efforts. It rewards members with points toward free hotel stays, experiences and other benefits, or miles with participating airline programs. We believe that our Loyalty Program generates substantial repeat business that might otherwise go to competing hotels. In 2018, Loyalty Program members purchased approximately 50 percent of our room nights. We continually enhance our Loyalty Program offerings and strategically market to this large and growing guest base to generate revenue. See the “Loyalty Program” caption in Footnote 2. Summary of Significant Accounting Policies for more information.
Marriott.com, our international website, and our mobile apps continued to grow significantly in 2018. Our web and mobile platforms allow for a seamless booking experience and easy enrollment in our Loyalty Program to book our exclusive Member Rates. Our Look No Further® Best Rate Guarantee ensures best rate integrity, strengthening consumer confidence in our brand, and gives guests greater access to the same rates when they book hotel rooms through our various direct channels. We also continue to grow engagement levels with millions of guests through our mobile guest services - check-in, check-out, service requests, mobile key, and more - across our hotel portfolio. In 2018, we significantly expanded the number of hotels across our portfolio that offer mobile key, enabling guests to use their mobile devices as a keycard for room entry and amenity access. We also expanded our mobile food ordering at selected properties, enabling guests to order food and beverages on-demand from hotel outlets. Our digital strategy continues to focus on creating a simple and efficient digital booking experience, while elevating the service experience through mobile guest services and generating superior guest satisfaction and more memorable stays at our properties.
At year-end 2018, we operated 22 hotel reservation centers, eight in the U.S. and 14 in other countries and territories, which handle reservation requests for our lodging brands worldwide, including franchised properties. We own two of the U.S. facilities and either lease the others or share space with a company-operated property. While pricing is set by our hotels, our reservation system manages inventory and allows us to utilize third party agents where cost effective. Economies of scale enable us to minimize costs per occupied room, drive profits for our owners and franchisees, and enhance our fee revenue.
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We believe our global sales and revenue management organizations are a key competitive advantage due to our unrelenting focus on optimizing our investment in people, processes, and systems. Our above-property sales deployment strategy aligns our sales efforts around how the customer wants to buy, reducing duplication of efforts by individual hotels and allowing us to cover a larger number of accounts. We also utilize innovative and sophisticated revenue management systems, many of which are proprietary, which we believe provide a competitive advantage in pricing decisions, increasing efficiency and producing higher property-level revenue for hotels in our portfolio. Most of the hotels in our portfolio utilize web-based programs to effectively manage the rate set-up and modification processes which provides for greater pricing flexibility, reduces time spent on rate program creation and maintenance, and increases the speed to market of new products and services.
As we further discuss in Part I, Item 1A “Risk Factors” later in this report, we utilize sophisticated technology and systems in our reservation, revenue management, and property management systems, in our Loyalty Program, and in other aspects of our business. We also make certain technologies available to our guests. Keeping pace with developments in technology is important for our operations and our competitive position. Furthermore, the integrity and protection of customer, guest, employee, and company data is critical to us as we use such data for business decisions and to maintain operational efficiency.
Credit Card Programs. We have multi-year agreements with JP Morgan Chase and American Express for our U.S.-issued, co-brand credit cards associated with our Loyalty Program. We also license credit card programs in Canada, the United Kingdom, United Arab Emirates, and Japan. We earn license fees based on card usage, and we believe that our co-brand credit cards contribute to the success of our Loyalty Program and reflect the quality and value of our portfolio of brands.
Sustainability and Social Impact. Guided by our 2025 Sustainability and Social Impact Goals, as well as the United Nations Sustainable Development Goals, we believe we have an opportunity to create a positive and sustainable impact wherever we do business. Our Sustainability and Social Impact Platform, Serve 360: Doing Good In Every Direction, is built around four focus areas: Nurture Our World; Sustain Responsible Operations; Empower Through Opportunity; and Welcome All and Advance Human Rights. Within each of these areas, we have identified a series of 2025 goals that we believe will help us to address the expectations of our stakeholders, increase our operational efficiency and excellence, and enhance our reputation while supporting the continued growth and resiliency of our business. Examples of these goals include commitments to volunteerism, building sustainably and striving to source responsibly while reducing carbon, water, and waste footprints, investing in our communities, and advancing human rights.
Global Design Division. Our Global Design division provides design, development, refurbishment, and procurement services to owners and franchisees of lodging properties on a voluntary basis outside the scope of and separate from our management or franchise contracts. Like third-party contractors, Global Design provides these services on a fee basis to owners and franchisees of our branded properties.
Competition
We encounter strong competition both as a lodging operator and as a franchisor. According to lodging industry data, there are over 1,400 lodging management companies in the U.S., including approximately 21 that operate more than 100 properties. These operators are primarily private management firms, but also include several large national and international chains that own and operate their own hotels, operate hotels on behalf of third-party owners, and also franchise their brands. Management contracts are typically long-term in nature, but most allow the hotel owner to replace the management firm if it does not meet certain financial or performance criteria.
We also compete for guests with large companies that offer online travel services as part of their business model, search engines such as Google and Bing, and online services including Airbnb and HomeAway that allow travelers to book short-term rentals of homes and apartments as an alternative to hotel rooms. We compete against lodging operators and other competitors for guests in many areas, including brand recognition and reputation, location, guest satisfaction, room rates, quality of service, amenities, quality of accommodations, security, and the ability to earn and redeem Loyalty Program points.
During the last recession, demand for hotel rooms declined significantly, particularly in 2009, and we took steps to reduce operating costs and improve efficiency. Due to the competitive nature of our industry, we focused these efforts on areas that had limited or no impact on the guest experience. While demand trends globally have improved since 2009, cost reductions could again become necessary if demand trends reverse. We would expect to implement any such efforts in a manner designed to maintain guest loyalty, owner preference, and associate satisfaction, to help maintain or increase our market share.
Affiliation with a national or regional brand is common in the U.S. lodging industry, and we believe that our brand recognition assists us in attracting and retaining guests, owners, and franchisees. In 2018, approximately 71 percent of U.S. hotel rooms were brand-affiliated. Most of the branded properties are franchises, under which the owner pays the franchisor a fee for use of its hotel name and reservation system. In the franchising business, we face many competitors that have strong
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brands and guest appeal, including Hilton, Intercontinental Hotels Group, Hyatt, Wyndham, Accor, Choice, Radisson, Best Western, and others.
Outside the U.S., branding is much less prevalent and most markets are served primarily by independent operators, although branding is more common for new hotel development. We believe that chain affiliation will increase in many overseas markets as local economies grow, trade barriers decline, international travel accelerates, and hotel owners seek the economies of centralized reservation systems and marketing programs.
Based on lodging industry data, we have an approximately 15 percent share of the U.S. hotel market (based on number of rooms) and we estimate less than a four percent share of the hotel market outside the U.S. We believe that our hotel brands are attractive to hotel owners seeking a management company or franchise affiliation because our hotels typically generate higher Revenue per Available Room (“RevPAR”) than our direct competitors in most market areas. We attribute this performance premium to our success in achieving and maintaining strong guest preference. We believe that the location and quality of our lodging facilities, our marketing programs, our reservation systems, and our emphasis on guest service and guest and associate satisfaction contribute to guest preference across all our brands.
Properties that we operate, franchise, or license are regularly upgraded to maintain their competitiveness. Most of our management agreements provide for the allocation of funds to be set aside, generally a fixed percentage of revenue, for periodic refurbishment and replacement of furnishings, fixtures, and equipment. These ongoing refurbishment programs, along with periodic brand initiatives, are generally adequate to preserve or enhance the competitive position and earning power of the properties. Properties converting to one of our brands typically complete renovations as needed in conjunction with the conversion.
Employee Relations
At year-end 2018, we had approximately 176,000 employees, approximately 22,000 of whom were represented by labor unions. These numbers do not include hotel personnel employed by our owners, franchisees, and management companies hired by our franchisees. Although we experienced labor disruptions in certain U.S. markets in 2018 in connection with our contract negotiations with unions representing certain of our organized associates in those markets, those contract negotiations and labor disruptions have been resolved and we believe relations with our employees are positive.
Environmental Compliance
The properties we operate or develop are subject to national, regional, state or provincial, and local laws and regulations that govern the discharge of materials into the environment or otherwise relate to protecting the environment. Those environmental provisions include requirements that address health and safety; the use, management, and disposal of hazardous substances and wastes; and emission or discharge of wastes or other materials. We believe that our operation and development of properties complies, in all material respects, with environmental laws and regulations. Compliance with such provisions has not materially impacted our capital expenditures, earnings, or competitive position, and we do not anticipate that it will have a material impact in the future.
Internet Address and Company SEC Filings
Our primary Internet address is Marriott.com. On the investor relations portion of our website, Marriott.com/investor, we provide a link to our electronic filings with the U.S. Securities and Exchange Commission (the “SEC”), including our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and any amendments to these reports. We make all such filings available free of charge as soon as reasonably practicable after filing. The information found on our website is not part of this or any other report we file with or furnish to the SEC.
Item 1A. Risk Factors.
Forward-Looking Statements
We make forward-looking statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report based on the beliefs and assumptions of our management and on information currently available to us. Forward-looking statements include information about our possible or assumed future results of operations, which follow under the headings “Business and Overview,” “Liquidity and Capital Resources,” and other statements throughout this report preceded by, followed by, or that include the words “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” or similar expressions.
Any number of risks and uncertainties could cause actual results to differ materially from those we express in our forward-looking statements, including the risks and uncertainties we describe below and other factors we describe from time to
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time in our periodic filings with the SEC. We therefore caution you not to rely unduly on any forward-looking statement. The forward-looking statements in this report speak only as of the date of this report, and we undertake no obligation to update or revise any forward-looking statement, whether due to new information, future developments, or otherwise.
Risks and Uncertainties
We are subject to various risks that could have a negative effect on us or on our financial condition. You should understand that these risks could cause results to differ materially from those we express in forward-looking statements contained in this report or in other Company communications. Because there is no way to determine in advance whether, or to what extent, any present uncertainty will ultimately impact our business, you should give equal weight to each of the following:
Our industry is highly competitive, which may impact our ability to compete successfully with other hotel properties and home and apartment sharing services for guests. We operate in markets that contain many competitors. Each of our hotel brands competes with major hotel chains and home and apartment sharing services in national and international venues, and with independent companies in regional markets. Our ability to remain competitive and attract and retain business and leisure travelers depends on our success in distinguishing the quality, value, and efficiency of our lodging products and services, including our Loyalty Program, direct booking channels, and consumer-facing technology platforms and services, from those offered by others. If we cannot compete successfully in these areas, our operating margins could contract, our market share could decrease, and our earnings could decline. Further, new lodging supply in individual markets could have a negative impact on the hotel industry and hamper our ability to increase room rates or occupancy in those markets.
Economic downturns could impact our financial results and growth. Weak economic conditions in one or more parts of the world, changes in oil prices and currency values, disruptions in national, regional, or global economies generally and the travel business in particular that might result from changing governmental policies in areas such as trade, travel, immigration, healthcare, and related issues, political instability in some areas, and the uncertainty over how long any of these conditions could continue, could have a negative impact on the lodging industry. Because of such uncertainty, we continue to experience weakened demand for our hotel rooms in some markets. Our future financial results and growth could be further harmed or constrained if economic or these other conditions worsen. U.S. government travel and travel associated with U.S. government operations are also a significant part of our business, and this aspect of our business has suffered and could in the future suffer due to U.S. federal spending cuts, or government hiring restrictions and any further limitations that may result from presidential or congressional action or inaction, including for example, a U.S. federal government shutdown, such as the partial shutdown that occurred in December 2018 and January 2019.
Risks Relating to Our Integration of Starwood
The continued diversion of resources and management’s attention to the integration of Starwood could still adversely affect our day-to-day business. While the integration of Starwood is largely complete, integration related matters still place a significant burden on our management and internal resources and may continue to do so for some time, which could have adverse effects on our business or financial results.
Some of the anticipated benefits of combining Starwood and Marriott may still not be realized. We decided to acquire Starwood with the expectation that the Starwood Combination would result in various benefits. Although we have already achieved substantial benefits, others remain subject to several uncertainties, including whether we can achieve certain revenue synergies.
Integration could also involve unexpected costs. Disruptions of each legacy company’s ongoing businesses, processes, and systems could adversely affect the combined company. We have encountered challenges in harmonizing our different reservations and other systems, our Loyalty Program, and other business practices, and we may encounter additional or increased challenges related to integration. Because of these or other factors, we cannot assure you when or that we will be able to fully realize additional benefits from the Starwood Combination in the form of enhancing revenues or achieving other operating efficiencies, cost savings, or benefits, or that challenges encountered with our harmonization efforts will not have adverse effects on our business or reputation.
Program changes associated with our integration efforts could have a negative effect on guest preference or behavior. Our integration efforts involved significant changes to certain of our guest programs and services, including our Loyalty Program, co-branded credit card arrangements, and consumer-facing technology platforms and services. While we believe such changes enhance these programs and services for our guests and will drive guest preference and satisfaction, these changes remain subject to various uncertainties, including whether the changes could be negatively perceived by certain guests and consumers, could affect guest preference or could alter reservation, spending or other guest or consumer behavior, all of which could adversely affect our market share, reputation, business, financial condition, or results of operations.
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Risks Relating to Our Business
Operational Risks
Premature termination of our management or franchise agreements could hurt our financial performance. Our hotel management and franchise agreements may be subject to premature termination in certain circumstances, such as the bankruptcy of a hotel owner or franchisee, or a failure under some agreements to meet specified financial or performance criteria that are subject to the risks described in this section, which we fail or elect not to cure. Some courts have also applied agency law principles and related fiduciary standards to managers of third-party hotel properties, including us (or have interpreted hotel management agreements to be “personal services contracts”). Property owners may assert the right to terminate management agreements even where the agreements provide otherwise, and some courts have upheld such assertions about our management agreements and may do so in the future. If terminations occur for these or other reasons, we may need to enforce our right to damages for breach of contract and related claims, which may cause us to incur significant legal fees and expenses. Any damages we ultimately collect could be less than the projected future value of the fees and other amounts we would have otherwise collected under the management or franchise agreement. A significant loss of agreements due to premature terminations could hurt our financial performance or our ability to grow our business.
Our lodging operations are subject to global, national, and regional conditions. Because we conduct our business on a global platform, changes in global and regional economies and governmental policies impact our activities. In recent years, decreases in travel resulting from weak economic conditions and the heightened travel security measures resulting from the threat of further terrorism have hurt our business. Our future performance could be similarly affected by the economic and political environment in each of our operating regions, the resulting unknown pace of both business and leisure travel, and any future incidents or changes in those regions.
The growing significance of our operations outside of the U.S. makes us increasingly susceptible to the risks of doing business internationally, which could lower our revenues, increase our costs, reduce our profits, disrupt our business, or damage our reputation. More than a third of the rooms in our system are located outside of the U.S. and its territories. We expect that our international operations, and resulting revenues, will continue to grow. This increasingly exposes us to the challenges and risks of doing business outside the U.S., many of which are outside of our control, and which could reduce our revenues or profits, increase our costs, result in significant liabilities or sanctions, disrupt our business, or damage our reputation. These challenges include: (1) compliance with complex and changing laws, regulations and government policies that may impact our operations, such as foreign ownership restrictions, import and export controls, and trade restrictions; (2) compliance with U.S. and foreign laws that affect the activities of companies abroad, such as competition laws, cybersecurity and privacy laws, currency regulations, and other laws affecting dealings with certain nations; (3) the difficulties involved in managing an organization doing business in many different countries; (4) uncertainties as to the enforceability of contract and intellectual property rights under local laws; (5) rapid changes in government policy, political or civil unrest, acts of terrorism, or the threat of international boycotts or U.S. anti-boycott legislation; and (6) currency exchange rate fluctuations, which may impact the results and cash flows of our international operations.
Any failure by our international operations to comply with anti-corruption laws or trade sanctions could increase our costs, reduce our profits, limit our growth, harm our reputation, or subject us to broader liability. We are subject to restrictions imposed by the U.S. Foreign Corrupt Practices Act (the “FCPA”) and anti-corruption laws and regulations of other countries applicable to our operations, such as the UK Bribery Act. Anti-corruption laws and regulations generally prohibit companies and their intermediaries from making improper payments to government officials or other persons to receive or retain business. These laws also require us to maintain adequate internal controls and accurate books and records. We have properties in many parts of the world where corruption is common, and our compliance with anti-corruption laws may potentially conflict with local customs and practices. The compliance programs, internal controls and policies we maintain and enforce to promote compliance with applicable anti-bribery and anti-corruption laws may not prevent our associates, contractors or agents from acting in ways prohibited by these laws and regulations. We are also subject to trade sanctions administered by the Office of Foreign Assets Control and the U.S. Department of Commerce. Our compliance programs and internal controls also may not prevent conduct that is prohibited under these rules. The U.S. may impose additional sanctions at any time against any country in which or with whom we do business. Depending on the nature of the sanctions imposed, our operations in the relevant country could be restricted or otherwise adversely affected. Any violations of anti-corruption laws and regulations or trade sanctions could result in significant civil and criminal penalties, reduce our profits, disrupt or have a material adverse effect on our business, damage our reputation, or result in lawsuits being brought against the Company or its officers or directors. In addition, the operation of these laws or an imposition of further restrictions in these areas could increase our cost of operations, reduce our profits or cause us to forgo development opportunities, or cease operations in certain countries, that would otherwise support growth.
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Exchange rate fluctuations and foreign exchange hedging arrangements could result in significant foreign currency gains and losses and affect our business results. We earn revenues and incur expenses in foreign currencies as part of our operations outside of the U.S. Accordingly, fluctuations in currency exchange rates may significantly increase the amount of U.S. dollars required for foreign currency expenses or significantly decrease the U.S. dollars we receive from foreign currency revenues. We are also exposed to currency translation risk because the results of our non-U.S. business are generally reported in local currency, which we then translate to U.S. dollars for inclusion in our Financial Statements. As a result, changes between the foreign exchange rates and the U.S. dollar affect the amounts we record for our foreign assets, liabilities, revenues and expenses, and could have a negative effect on our financial results. We expect that our exposure to foreign currency exchange rate fluctuations will grow as the relative contribution of our non-U.S. operations increases. We enter into foreign exchange hedging agreements with financial institutions to reduce exposures to some of the principal currencies in which we receive management and franchise fees, but these efforts may not be successful. These hedging agreements also do not cover all currencies in which we do business, do not eliminate foreign currency risk entirely for the currencies that they do cover, and involve costs and risks of their own in the form of transaction costs, credit requirements and counterparty risk.
Some of our management agreements and related contracts require us to make payments to owners if the hotels do not achieve specified levels of operating profit. Some of our contracts with hotel owners require that we fund shortfalls if the hotels do not attain specified levels of operating profit. We may not be able to recover any fundings of such performance guarantees, which could lower our profits and reduce our cash flows.
Our new programs and new branded products may not be successful. We cannot assure you that new or newly acquired brands, such as those we acquired as a result of the Starwood Combination, our investments in PlacePass and the joint venture with Alibaba, our pilot of a homesharing offering in certain European cities, or any other new programs or products we may launch in the future, will be accepted by hotel owners, potential franchisees, or the traveling public or other guests. We also cannot be certain that we will recover the costs we incurred in developing or acquiring the brands or any new programs or products, or that those brands, programs, or products will be successful. In addition, some of our new or newly acquired brands involve or may involve cooperation and/or consultation with one or more third parties, including some shared control over product design and development, sales and marketing, and brand standards. Disagreements with these third parties could slow the development of these brands and/or impair our ability to take actions we believe to be advisable for the success and profitability of such brands.
Risks relating to natural or man-made disasters, contagious disease, terrorist activity, and war could reduce the demand for lodging, which may adversely affect our revenues. So called “Acts of God,” such as hurricanes, earthquakes, tsunamis, floods, volcanic activity, wildfires, and other natural disasters, as well as man-made disasters and the potential spread of contagious diseases in locations where we own, manage, or franchise significant properties and areas of the world from which we draw a large number of guests, have in the past caused and could in the future cause a decline in business or leisure travel and reduce demand for lodging to an extent and for durations that we are not able to predict. Actual or threatened war, terrorist activity, political unrest, or civil strife, and other geopolitical uncertainty could have a similar effect. Any one or more of these events may reduce the overall demand for hotel rooms and corporate apartments or limit the prices that we can obtain for them, both of which could adversely affect our profits. If a terrorist event were to involve one or more of our branded properties, demand for our hotels in particular could suffer, which could further hurt our revenues and profits.
Disagreements with owners of hotels that we manage or franchise may result in litigation or delay implementation of product or service initiatives. Consistent with our focus on management and franchising, we own very few of our lodging properties. The nature of our responsibilities under our management agreements to manage each hotel and enforce the standards required for our brands under both management and franchise agreements may be subject to interpretation and will from time to time give rise to disagreements, which may include disagreements over the need for or payment for new product, service or systems initiatives, the timing and amount of capital investments, and reimbursement for certain system initiatives and costs. Such disagreements may be more likely when hotel returns are weaker. We seek to resolve any disagreements to develop and maintain positive relations with current and potential hotel owners and joint venture partners, but we cannot always do so. Failure to resolve such disagreements has resulted in litigation, and could do so in the future. If any such litigation results in an adverse judgment, settlement, or court order, we could suffer significant losses, our profits could be reduced, or our future ability to operate our business could be constrained.
Our business depends on the quality and reputation of our company and our brands, and any deterioration could adversely impact our market share, reputation, business, financial condition, or results of operations. Certain events, including those that may be beyond our control, could affect the reputation of one or more of our properties or more generally impact the reputation of our brands. Many other factors also can influence our reputation and the value of our brands, including service, food quality and safety, availability and management of scarce natural resources, supply chain management, diversity, human rights, and support for local communities. Reputational value is also based on perceptions, and broad access to social media makes it easy for anyone to provide public feedback that can influence perceptions of us, our brands and our hotels, and it may
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be difficult to control or effectively manage negative publicity, regardless of whether it is accurate. While reputations may take decades to build, negative incidents can quickly erode trust and confidence, particularly if they result in adverse mainstream and social media publicity, governmental investigations or penalties, or litigation. Negative incidents could lead to tangible adverse effects on our business, including lost sales, boycotts, reduced enrollment and/or participation in our Loyalty Program, disruption of access to our websites and reservation systems, loss of development opportunities, or associate retention and recruiting difficulties. Any decline in the reputation or perceived quality of our brands or corporate image could affect our market share, reputation, business, financial condition, or results of operations. The Data Security Incident could have a negative impact on our reputation, our corporate image and our relationship with our guests.
If our brands, goodwill or other intangible assets become impaired, we may be required to record significant non-cash charges to earnings. As of December 31, 2018, we had $17.4 billion of goodwill and other intangible assets. We review goodwill and indefinite-lived intangible assets for impairment annually or whenever events or circumstances indicate impairment may have occurred. Estimated fair values of our brands or reporting units could change if, for example, there are changes in the business climate, unanticipated changes in the competitive environment, adverse legal or regulatory actions or developments, changes in guests’ perception and the reputation of our brands, or changes in interest rates, operating cash flows, or market capitalization. Because of the significance of our goodwill and other intangible assets, any future impairment of these assets could require material non-cash charges to our results of operations, which could have a material adverse effect on our financial condition and results of operations.
Actions by our franchisees and licensees could adversely affect our image and reputation. We franchise and license many of our brand names and trademarks to third parties for lodging, timeshare, residential, and our credit card programs. Under the terms of their agreements with us, our franchisees and licensees interact directly with guests and other third parties under our brand and trade names. If these franchisees or licensees fail to maintain or act in accordance with applicable brand standards; experience operational problems, including any data breach involving guest information; or project a brand image inconsistent with ours, our image and reputation could suffer. Although our franchise and license agreements provide us with recourse and remedies in the event of a breach by the franchisee or licensee, including termination of the agreements under certain circumstances, it could be expensive or time consuming for us to pursue such remedies. We also cannot assure you that in every instance a court would ultimately enforce our contractual termination rights or that we could collect any awarded damages from the defaulting franchisee or licensee.
Collective bargaining activity and strikes could disrupt our operations, increase our labor costs, and interfere with the ability of our management to focus on executing our business strategies. A significant number of associates at our managed, leased, and owned hotels are covered by collective bargaining agreements. If relationships with our organized associates or the unions that represent them become adverse, the properties we operate could experience labor disruptions such as strikes, lockouts, boycotts, and public demonstrations, as we saw in the fourth quarter of 2018. Although we recently completed contract negotiations for 43 unionized hotels following multi-week strikes by our associates at 29 of those hotels, a number of collective bargaining agreements are expected to be negotiated in 2019. Labor disputes and disruptions have in the past, and could in the future, result in adverse publicity and adversely affect operations and revenues at affected hotels. In addition, labor disputes and disruptions could harm our relationship with our associates, result in increased regulatory inquiries and enforcement by governmental authorities, harm our relationships with our guests and customers, divert management attention, and reduce customer demand for our services, all of which could have an adverse effect on our reputation, business, financial condition, or results of operations.
Labor regulation and the negotiation of new or existing collective bargaining agreements 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 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 our third-party property owners and franchisees. Increased unionization of our workforce, new labor legislation or changes in regulations could disrupt our operations, reduce our profitability or interfere with the ability of our management to focus on executing our business strategies.
If we cannot attract and retain talented associates, our business could suffer. We compete with other companies both within and outside of our industry for talented personnel. If we cannot recruit, train, develop, and retain sufficient numbers of talented associates, we could experience increased associate turnover, decreased guest satisfaction, low morale, inefficiency, or internal control failures. Insufficient numbers of talented associates could also limit our ability to grow and expand our businesses. A shortage of skilled labor could also result in higher wages that would increase our labor costs, which could reduce our profits.
Damage to, or losses involving, properties that we own, manage, or franchise may not be covered by insurance, or the cost of such insurance could increase. Marriott requires comprehensive property and liability insurance policies for our
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managed, leased, and owned properties with coverage features and insured limits that we believe are customary. We require managed hotel owners to procure such coverage or we procure such coverage on their behalf. We also require our franchisees to maintain similar levels of insurance. Market forces beyond our control may nonetheless limit the scope of the insurance coverage we or our franchisees can obtain, or our or their ability to obtain coverage at reasonable rates. Certain types of losses, generally of a catastrophic nature, such as earthquakes, hurricanes and floods, terrorist acts, or liabilities that result from breaches in the security of our information systems, may result in high deductibles, low limits, or may be uninsurable or the cost of obtaining insurance may be unacceptably high. As a result, we and our franchisees may not be successful in obtaining insurance without increases in cost or decreases in coverage levels, or may not be successful in obtaining insurance at all. For example, in 2018 substantial increases in property insurance costs occurred due to the severe and widespread damage caused by the 2017 Atlantic hurricane season and other natural disasters. In addition, in the event of a substantial loss, the insurance coverage we or our franchisees carry may not be sufficient to pay the full market value or replacement cost of any lost investment or in some cases could result in certain losses being totally uninsured. As a result, we could lose some or all of any capital that we have invested in a property, as well as the anticipated future revenue from the property, and we could remain obligated for guarantees, debt, or other financial obligations for the property.
Development and Financing Risks
While we are predominantly a manager and franchisor of hotel properties, our hotel owners depend on capital to buy, develop, and improve hotels, and our hotel owners may be unable to access capital when necessary. Both we and current and potential hotel owners must periodically spend money to fund new hotel investments, as well as to refurbish and improve existing hotels. The availability of funds for new investments and improvement of existing hotels by our current and potential hotel owners depends in large measure on capital markets and liquidity factors, over which we exert little control. Obtaining financing on attractive terms may be constrained by the capital markets for hotel and real estate investments. In addition, owners of existing hotels that we franchise or manage may have difficulty meeting required debt service payments or refinancing loans at maturity.
Our growth strategy depends upon third-party owners/operators, and future arrangements with these third parties may be less favorable. Our growth strategy for adding lodging facilities entails entering into and maintaining various arrangements with property owners. The terms of our management agreements and franchise agreements for each of our lodging facilities 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.
Our ability to grow our management and franchise systems is subject to the range of risks associated with real estate investments. Our ability to sustain continued growth through management or franchise agreements for new hotels and the conversion of existing facilities to managed or franchised Marriott brands is affected, and may potentially be limited, by a variety of factors influencing real estate development generally. These include site availability, financing, planning, zoning and other local approvals, and other limitations that may be imposed by market and submarket factors, such as projected room occupancy and rate, changes in growth in demand compared to projected supply, territorial restrictions in our management and franchise agreements, costs of construction, and demand for construction resources.
Our development and renovation activities expose us to project cost, completion, and resale risks. We occasionally develop, or acquire and renovate, hotel and residential properties, both directly and through partnerships, joint ventures, and other business structures with third parties. As demonstrated by the impairment charges that we recorded in 2014 and 2015 in connection with our development and construction of three EDITION hotels and residences, our ongoing involvement in the development of properties presents a number of risks, including that: (1) any future weakness in the capital markets may limit our ability, or that of third parties with whom we do business, to raise capital for completion of projects that have commenced or for development of future properties; (2) properties that we develop or renovate could become less attractive due to decreases in demand for hotel and residential properties, market absorption or oversupply, with the result that we may not be able to sell such properties for a profit or at the prices or selling pace we anticipate, potentially requiring additional changes in our pricing strategy that could result in further charges; (3) construction delays or cost overruns, including those due to a shortage of skilled labor, lender financial defaults, or so called “Acts of God” such as earthquakes, hurricanes, floods, or fires may increase overall project costs or result in project cancellations; and (4) we may be unable to recover development costs we incur for any projects that we do not pursue to completion.
Our owned properties and other real estate investments subject us to numerous risks. Although we had relatively few owned and leased properties at the end of 2018, such properties are subject to the risks that generally relate to investments in real property. Although we have sold many properties in recent years and we are actively pursuing additional sales, equity real estate investments can be difficult to sell quickly, and we may not be able to do so at prices we find acceptable or at all. Moreover, the investment returns available from equity investments in real estate depend in large part on the amount of income
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earned and capital appreciation generated by the related properties, and the expenses incurred. A variety of other factors also 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 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. If our properties do not generate revenue sufficient to meet operating expenses, including needed capital expenditures, our income could be adversely affected.
Development and other investing activities that involve our co-investment with third parties may result in disputes and may decrease our ability to manage risk. We have from time to time invested, and may continue to invest, in partnerships, joint ventures, and other business structures involving our co-investment with third parties. These investments generally include some form of shared control over the development of the asset or operations of the business and create added risks, including the possibility that other investors in such ventures could become bankrupt or otherwise lack the financial resources to meet their obligations, could have or develop business interests, policies, or objectives that are inconsistent with ours, could take action without our approval (or, conversely, prevent us from taking action without our partner’s approval), or could make requests contrary to our policies or objectives. Should a venture partner become bankrupt we could become liable for our partner’s share of the venture’s liabilities. Actions by a co-venturer might subject the assets owned by the venture or partnership to additional risk, such as increased project costs, project delays, or operational difficulties following project completion. These risks may be more likely to occur in difficult business environments. We cannot assure you that our investments through partnerships or joint ventures will be successful despite these risks.
Risks associated with development and sale of residential properties associated with our lodging properties or brands may reduce our profits. We participate, through licensing agreements or directly or through noncontrolling interests, in the development and sale of residential properties associated with our brands, including residences and condominiums under many of our luxury and premium brand names and trademarks. Such projects pose further risks beyond those generally associated with our lodging business, which may reduce our profits or compromise our brand equity, including risks that (1) weakness in residential real estate and demand generally may reduce our profits and could make it more difficult to convince future development partners of the value added by our brands; (2) increases in interest rates, reductions in mortgage availability or the tax benefits of mortgage financing or residential ownership generally, or increases in the costs of residential ownership could prevent potential customers from buying residential products or reduce the prices they are willing to pay; and (3) residential construction may be subject to warranty and liability claims or claims related to purchaser deposits, and the costs of resolving such claims may be significant.
Some hotel openings in our development pipeline and approved projects may be delayed or not result in new hotels, which could adversely affect our growth prospects. We report a significant number of hotels in our development pipeline, including hotels under construction and under signed contracts, as well as hotels approved for development but not yet under contract. The eventual opening of such pipeline hotels and, in particular the approved hotels that are not yet under contract, is subject to numerous risks, including in some cases the owner’s or developer’s ability to obtain adequate financing or governmental or regulatory approvals. Competition for skilled construction labor and disruption in the supply chain for materials could cause construction timelines for pipeline hotels to lengthen. Accordingly, we cannot assure you that all of our development pipeline will result in new hotels entering our system, or that those hotels will open when we anticipate.
If we incur losses on loans or loan guarantees that we have made to third parties, our profits could decline. At times, we make loans for hotel development or renovation expenditures when we enter into or amend management or franchise agreements. From time to time we also provide third-party lenders with financial guarantees for the timely repayment of all or a portion of debt related to hotels that we manage or franchise, generally subject to an obligation that the owner reimburse us for any fundings. We could suffer losses if hotel owners or franchisees default on loans that we provide or fail to reimburse us for loan guarantees that we have funded.
If owners of hotels that we manage or franchise cannot repay or refinance mortgage loans secured by their properties, our revenues and profits could decrease and our business could be harmed. The owners of many of our managed or franchised properties have pledged their hotels as collateral for mortgage loans that they entered into when those properties were purchased or refinanced. If those owners cannot repay or refinance maturing indebtedness on favorable terms or at all, the lenders could declare a default, accelerate the related debt, and repossess the property. Such sales or repossessions could, in some cases, result in the termination of our management or franchise agreements and eliminate our anticipated income and cash flows, which could negatively affect our results of operations.
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Technology, Information Protection, and Privacy Risks
A failure to keep pace with developments in technology could impair our operations or competitive position. The lodging industry continues to demand the use of sophisticated technology and systems, including those used for our reservation, revenue management, property management, human resources and payroll systems, our Loyalty Program, and technologies we make available to our guests and for our associates. These technologies and systems must be refined, updated, and/or replaced with more advanced systems on a regular basis, and our business could suffer if we cannot do that as quickly or effectively as our competitors or within budgeted costs and time frames. We also may not achieve the benefits that we anticipate from any new technology or system, and a failure to do so could result in higher than anticipated costs or could impair our operating results.
An increase in the use of third-party Internet services to book online hotel reservations could adversely impact our business. Some of our hotel rooms are booked through Internet travel intermediaries such as Expedia.com®, Priceline.com®, Booking.com™, Travelocity.com®, and Orbitz.com®, as well as lesser-known online travel service providers. These intermediaries initially focused on leisure travel, but now also provide offerings for corporate travel and group meetings. Although our Best Rate Guarantee and Member Rate programs have helped limit guest preference shift to intermediaries and greatly reduced the ability of intermediaries to undercut the published rates at our hotels, intermediaries continue to use a variety of aggressive online marketing methods to attract guests, including the purchase, by certain companies, of trademarked online keywords such as “Marriott” from Internet search engines such as Google®, Bing®, Yahoo®, and Baidu® to steer guests toward their websites (a practice that has been challenged by various trademark owners in federal court). Although we have successfully limited these practices through contracts with key online intermediaries, the number of intermediaries and related companies that drive traffic to intermediaries’ websites is too large to permit us to eliminate this risk entirely. Our business and profitability could be harmed if online intermediaries succeed in significantly shifting loyalties from our lodging brands to their travel services, diverting bookings away from our direct online channels, or through their fees, increase the overall cost of Internet bookings for our hotels. In addition, if we are not able to negotiate new agreements on satisfactory terms when our existing contracts with intermediaries (which generally have 2- to 3- year terms) come up for renewal, our business and prospects could be negatively impacted in a number of ways. For example, if newly negotiated agreements are on terms less favorable to our hotels than the expiring agreements, or if we are not able to negotiate new agreements and our hotels no longer appear on intermediary websites, our bookings could decline, our profits (and the operating profits of hotels in our system) could decline, and customers and owners may be less attracted to our brands. We may not be able to recapture or offset any such loss of business through actions we take to enhance our direct marketing and reservation channels or to rely on other channels or other intermediary websites.
We are exposed to risks and costs associated with protecting the integrity and security of company, associate, and guest data. In the operation of our business, we collect, store, use, and transmit large volumes of data regarding associates, guests, customers, owners, licensees, franchisees, and our own business operations, including credit card numbers, reservation and loyalty data, and other personal information, in various information systems that we maintain and in systems maintained by third parties, including our owners, franchisees, licensees, and service providers. The integrity and protection of this data is critical to our business. If this data is inaccurate or incomplete, we could make faulty decisions.
Our guests and associates also have a high expectation that we, as well as our owners, franchisees, licensees, and service providers, will adequately protect and appropriately use their personal information. The information, security, and privacy requirements imposed by laws and governmental regulation, our contractual obligations, and the requirements of the payment card industry are also increasingly demanding in the U.S., the European Union, Asia, and other jurisdictions where we operate. Our systems and the systems maintained or used by our owners, franchisees, licensees, and service providers may not be able to satisfy these changing legal and regulatory requirements and associate and guest expectations, or may require significant additional investments or time to do so. We may incur significant additional costs to meet these requirements, obligations, and expectations, and in the event of alleged or actual noncompliance we may experience increased operating costs, increased exposure to fines and litigation, and increased risk of damage to our reputation and brand.
The Data Security Incident could have numerous adverse effects on our business. As a result of the Data Security Incident, we are a party to numerous class action lawsuits brought by consumers and others in the U.S. and Canada, one securities class action lawsuit in the U.S., and one shareholder derivative lawsuit in the U.S. We may be named as a party in additional lawsuits and other claims may be asserted by or on behalf of guests, customers, hotel owners, shareholders or others seeking monetary damages or other relief. A number of federal, state and foreign governmental authorities have also made inquiries or opened investigations related to the Data Security Incident, including under various data protection and privacy regulations, such as the European Union’s General Data Protection Regulation. In addition, the major payment card networks require the completion of a forensic investigation by a certified investigative firm, which is underway. Responding to and resolving these lawsuits, claims and investigations may result in material remedial and other expenses which may not be covered by insurance, including fines. Governmental authorities investigating the Data Security Incident also may seek to
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impose undertakings, injunctive relief, consent decrees, or other civil or criminal penalties, which could, among other things, materially increase our data security costs or otherwise require us to alter how we operate our business. Card issuers or payment card networks may seek to attribute losses or other expenses to the Data Security Incident, and we cannot currently determine to what extent those losses and expenses may be our legal responsibility. Significant management time and Company resources have been, and may continue to be, devoted to the Data Security Incident. The Data Security Incident and publicity related to it could have a range of other adverse effects on our business or prospects, including causing or contributing to loss of consumer confidence, reduced consumer demand, reduced enrollment and/or participation in our Loyalty Program, loss of development opportunities, and associate retention and recruiting difficulties. These expenses and other adverse effects could have a material effect on our market share, reputation, business, financial condition, or results of operations. Although we maintain insurance designed to limit our exposure to losses such as those related to the Data Security Incident, that insurance may not be sufficient or available to cover all of our expenses or other losses (including fines) related to the Data Security Incident. Further, as a result of the Data Security Incident and market forces beyond our control, relevant insurance coverage may not be available in the future on commercially reasonable terms or at all.
Our remediation efforts related to the Data Security Incident will be costly and may not be effective. Following the Data Security Incident, we implemented additional technical measures on our network designed to contain and remove the threats identified during our investigation, secure the Starwood reservations database, and monitor for any further unauthorized activity. We also accelerated ongoing security enhancements to our network. We have incurred costs in connection with these remediation efforts to date, and we could incur additional significant costs as we take further steps designed to prevent unauthorized access to our network. The technical measures we have taken are based on our investigation of the causes of the Data Security Incident, but additional measures may be needed to prevent a similar incident in the future and such measures may not be sufficient to prevent other types of incidents. We cannot assure you that all potential causes of the incident have been identified and remediated and will not occur again.
Additional cyber-security incidents could have adverse effects on our business. The Data Security Incident was significant, went undetected for a long period of time and could have numerous adverse effects on our business, as discussed above. If we experience additional cyber security incidents or fail to detect and appropriately respond to additional cyber security incidents, the severity of the adverse effects on our business could be magnified. We have implemented security measures to safeguard our systems and data, and we intend to continue implementing additional measures in the future, but, as with the Data Security Incident, our measures may not be sufficient to maintain the confidentiality, security, or availability of the data we collect, store, and use to operate our business. Measures taken by our service providers or our owners, franchisees, licensees, and their service providers also may not be sufficient. Efforts to hack or circumvent security measures, efforts to gain unauthorized access to data, failures of systems or software to operate as designed or intended, viruses, “ransomware” or other malware, “phishing” or other types of business email compromises, operator error, or inadvertent releases of data have impacted, and may in the future impact, our information systems and records or those of our owners, franchisees, licensees, or service providers. Our reliance on computer, Internet-based, and mobile systems and communications, and the frequency and sophistication of efforts by third parties to gain unauthorized access or prevent authorized access to such systems, have greatly increased in recent years. We have experienced cyber-attacks, attempts to disrupt access to our systems and data, and attempts to affect the integrity of our data, and the frequency and sophistication of such efforts could continue to increase. In addition to the consequences of the Data Security Incident discussed above, any significant theft of, unauthorized access to, loss of, loss of access to, or fraudulent use of guest, associate, owner, franchisee, licensee, or company data could adversely impact our reputation and could result in legal, regulatory and other consequences, including remedial and other expenses, fines, or litigation. Depending on the nature and scope of the event, compromises in the security of our information systems or those of our owners, franchisees, licensees, or service providers or other disruptions in data services could lead to an interruption in the operation of our systems, resulting in operational inefficiencies and a loss of profits, negative publicity, and other adverse effects on our business, including lost sales, boycotts, reduced enrollment and/or participation in our Loyalty Program, litigation, loss of development opportunities, or associate retention and recruiting difficulties, all of which could affect our market share, reputation, business, financial condition, or results of operations. The techniques used to obtain unauthorized access, disable or degrade service, or sabotage information systems change frequently, can be difficult to detect for long periods of time, and can involve difficult or prolonged assessment or remediation periods even once detected, which could magnify the severity of these adverse effects. In addition, although we carry cyber/privacy liability insurance that is designed to protect us against certain losses related to cyber risks, that insurance coverage may not be sufficient to cover all expenses or other losses (including fines) or all types of claims that may arise in connection with cyber-attacks, security compromises, and other related incidents, and until we renew our current policy and a new policy period begins, our policy coverage limits will be reduced by the amount of claims paid related to the Data Security Incident. Furthermore, in the future such insurance may not be available on commercially reasonable terms, or at all.
Changes in privacy and data security laws could increase our operating costs, increase our exposure to fines and litigation, and adversely affect our ability to market our products effectively. We are subject to numerous, complex, and
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frequently changing laws, regulations, and contractual obligations designed to protect personal information, including in the U.S., the European Union, Asia, and other jurisdictions. Non-U.S. data privacy and data security laws, various U.S. federal and state laws, payment card industry security standards, and other information privacy and security standards are all applicable to us. Significant legislative or regulatory changes could be adopted in the future, including in reaction to the Data Security Incident or data breaches experienced by other companies. Compliance with changes in applicable data privacy laws and regulations and contractual obligations, including responding to investigations into our compliance, may restrict our business operations, increase our operating costs, increase our exposure to fines and litigation in the event of alleged non-compliance, and adversely affect our reputation. Following the Data Security Incident, the Information Commissioner’s Office in the United Kingdom (“ICO”) notified us that it had opened an investigation into our online privacy policy and related practices. This investigation is separate from the ICO’s investigation specifically related to the Data Security Incident. As a result of this investigation, we could be exposed to significant fines and remediation costs in addition to any imposed as a result of the Data Security Incident, and adverse publicity related to the investigation could adversely affect our reputation.
Additionally, we rely on a variety of direct marketing techniques, including email marketing, online advertising, and postal mailings. Any further restrictions in laws such as the CANSPAM Act, and various U.S. state laws, or new federal laws on marketing and solicitation or international privacy, e-privacy, and anti-spam laws that govern these activities could adversely affect the continuing effectiveness of email, online advertising, and postal mailing techniques and could force further changes in our marketing strategy. If this occurs, we may not be able to develop adequate alternative marketing strategies, which could impact the amount and timing of our sales of certain products. We also obtain access to potential guests and customers from travel service providers or other companies with whom we have substantial relationships, and we market to some individuals on these lists directly or by including our marketing message in the other company’s marketing materials. If access to these lists were to be prohibited or otherwise restricted, our ability to develop new guests and customers and introduce them to our products could be impaired.
Any disruption in the functioning of our reservation systems could adversely affect our performance and results. We manage global reservation systems that communicate reservations to our branded hotels that individuals make directly with us online, through our mobile apps, through our telephone call centers, or through intermediaries like travel agents, Internet travel websites, and other distribution channels. The cost, speed, accuracy and efficiency of our reservation systems are critical aspects of our business and are important considerations for hotel owners when choosing our brands. Our business may suffer if we fail to maintain, upgrade, or prevent disruption to our reservation systems. In addition, the risk of disruption in the functioning of our global reservation systems could increase with the ongoing systems integration that is part of our integration of Starwood. Disruptions in or changes to our reservation systems could result in a disruption to our business and the loss of important data.
Other Risks
Ineffective internal control over financial reporting could result in errors in our financial statements, reduce investor confidence, and adversely impact our stock price. As discussed in Part II, Item 8 “Management’s Report on Internal Control Over Financial Reporting” later in this report, in the 2018 fourth quarter, we identified a material weakness in internal control related to our accounting for our Loyalty Program, which resulted in errors in our previously issued financial statements for the 2018 first, second, and third quarters. Internal controls related to the implementation of ASU 2014-09 and the accounting for our Loyalty Program are important to accurately reflect our financial position and results of operations in our financial reports. We are in the process of remediating the material weakness, but our efforts may not be successful. If we are unable to remediate the material weakness in an appropriate and timely manner, or if we identify additional control deficiencies that individually or together constitute significant deficiencies or material weaknesses, our ability to accurately record, process, and report financial information and consequently, our ability to prepare financial statements within required time periods, could be adversely affected. Failure to maintain effective internal control over financial reporting could result in violations of applicable securities laws, stock exchange listing requirements, and the covenants under our debt agreements, subject us to litigation and investigations, negatively affect investor confidence in our financial statements, and adversely impact our stock price and ability to access capital markets.
Changes in laws and regulations could reduce our profits or increase our costs. We are subject to a wide variety of laws, regulations, and policies in jurisdictions around the world, including those for financial reporting, taxes, healthcare, cybersecurity, privacy, climate change, and the environment. Changes to such laws, regulations, or policies could reduce our profits. We also anticipate that many of the jurisdictions where we do business will continue to review taxes and other revenue raising measures, and any resulting changes could impose new restrictions, costs, or prohibitions on our current practices or reduce our profits. In particular, governments may revise tax laws, regulations, or official interpretations in ways that could significantly impact us, and other modifications could reduce the profits that we can effectively realize from our operations or could require costly changes to those operations or the way in which they are structured.
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We could be subject to additional tax liabilities. We are subject to a variety of taxes in the U.S. (federal and state) and numerous foreign jurisdictions. We may recognize additional tax expense and be subject to additional tax liabilities due to changes in laws, regulations, administrative practices, principles, and interpretations related to tax, including changes to the global tax framework, competition, and other laws and accounting rules in various jurisdictions. Such changes could come about as a result of economic, political, and other conditions.
Our tax expense and liabilities may also be affected by other factors, such as changes in our business operations, acquisitions, investments, entry into new businesses and geographies, intercompany transactions, the relative amount of our foreign earnings, losses incurred in jurisdictions for which we are not able to realize related tax benefits, the applicability of special tax regimes, changes in foreign currency exchange rates, changes in our stock price, and changes in our deferred tax assets and liabilities and their valuation. Significant judgment is required in evaluating and estimating our tax expense and liabilities. In the ordinary course of our business, there are many transactions and calculations for which the ultimate tax determination is uncertain. For example, the legislation known as the U.S. Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) requires complex computations to be performed that were not previously required by U.S. tax law, significant judgments to be made in interpretation of the provisions of the 2017 Tax Act, significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the U.S. Internal Revenue Service, and other standard-setting bodies will continue to interpret or issue guidance on how provisions of the 2017 Tax Act will be applied or otherwise administered. As future guidance is issued, we may make adjustments to amounts that we have previously recorded that may materially impact our financial statements in the period in which the adjustments are made.
We are also currently subject to tax controversies in various jurisdictions, and these jurisdictions may assess additional tax liabilities against us. Developments in an audit, investigation, or other tax controversy could have a material effect on our operating results or cash flows in the period or periods for which that development occurs, as well as for prior and subsequent periods. We regularly assess the likelihood of an adverse outcome resulting from these proceedings to determine the adequacy of our tax accruals. Although we believe our tax estimates are reasonable, the final outcome of audits, investigations, and any other tax controversies could be materially different from our historical tax accruals.
Delaware law and our governing corporate documents contain, and our Board of Directors could implement, anti-takeover provisions that could deter takeover attempts. Under the Delaware business combination statute, a shareholder holding 15 percent or more of our outstanding voting stock could not acquire us without Board of Director consent for at least three years after the date the shareholder first held 15 percent or more of the voting stock. Our governing corporate documents also, among other things, require supermajority votes for mergers and similar transactions. In addition, our Board of Directors could, without shareholder approval, implement other anti-takeover defenses, such as a shareholder rights plan.
Item 1B. Unresolved Staff Comments.
None.
Item 2. | Properties. |
We describe our company-operated properties in Part I, Item 1. “Business” earlier in this report, and under the “Properties and Rooms” caption in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We believe our owned and leased properties are in generally good physical condition with the need for only routine repairs and maintenance and periodic capital improvements. Most of our regional offices, reservation centers, and sales offices, as well as our corporate headquarters, are in leased facilities, both domestically and internationally.
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As of December 31, 2018, we owned or leased the following hotel properties:
Properties | Location | Rooms | |||
North American Full-Service | |||||
Owned Hotels | |||||
The St. Regis New York | New York, NY | 238 | |||
The Westin Peachtree Plaza, Atlanta | Atlanta, GA | 1,073 | |||
Sheraton Grand Phoenix | Phoenix, AZ | 1,000 | |||
Sheraton Gateway Hotel in Toronto International Airport | Mississauga, Canada | 474 | |||
Las Vegas Marriott | Las Vegas, NV | 278 | |||
Leased Hotels | |||||
W New York – Times Square | New York, NY | 509 | |||
Renaissance New York Times Square Hotel | New York, NY | 317 | |||
Anaheim Marriott | Anaheim, CA | 1,030 | |||
Kaua’i Marriott Resort | Lihue, HI | 356 | |||
North American Limited-Service | |||||
Owned Hotels | |||||
Courtyard Las Vegas Convention Center | Las Vegas, NV | 149 | |||
Residence Inn Las Vegas Convention Center | Las Vegas, NV | 192 | |||
Leased Hotels | |||||
Albuquerque Airport Courtyard | Albuquerque, NM | 150 | |||
Baltimore BWI Airport Courtyard | Linthicum, MD | 149 | |||
Baton Rouge Acadian Centre/LSU Area Courtyard | Baton Rouge, LA | 149 | |||
Chicago O'Hare Courtyard | Des Plaines, IL | 180 | |||
Des Moines West/Clive Courtyard | Clive, IA | 108 | |||
Fort Worth University Drive Courtyard | Fort Worth, TX | 130 | |||
Greensboro Courtyard | Greensboro, NC | 149 | |||
Indianapolis Airport Courtyard | Indianapolis, IN | 151 | |||
Irvine John Wayne Airport/Orange County Courtyard | Irvine, CA | 153 | |||
Louisville East Courtyard | Louisville, KY | 151 | |||
Mt. Laurel Courtyard | Mt Laurel, NJ | 151 | |||
Newark Liberty International Airport Courtyard | Newark, NJ | 146 | |||
Orlando Airport Courtyard | Orlando, FL | 149 | |||
Orlando International Drive/Convention Center Courtyard | Orlando, FL | 151 | |||
Sacramento Airport Natomas Courtyard | Sacramento, CA | 149 | |||
San Diego Sorrento Valley Courtyard | San Diego, CA | 149 | |||
Spokane Downtown at the Convention Center Courtyard | Spokane, WA | 149 | |||
St. Louis Downtown West Courtyard | St. Louis, MO | 151 | |||
Asia Pacific | |||||
Leased Hotels | |||||
The Ritz-Carlton, Tokyo | Tokyo, Japan | 250 | |||
The St. Regis Osaka | Osaka, Japan | 160 | |||
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Properties | Location | Rooms | |||
Other International | |||||
Owned Hotels | |||||
Sheraton Grand Rio Hotel & Resort | Rio de Janeiro, Brazil | 538 | |||
Sheraton Lima Hotel & Convention Center | Lima, Peru | 431 | |||
Sheraton Mexico City Maria Isabel Hotel | Mexico City, Mexico | 755 | |||
Courtyard by Marriott Toulouse Airport | Toulouse, France | 187 | |||
Courtyard by Marriott Aberdeen Airport | Aberdeen, UK | 194 | |||
Courtyard by Marriott Rio de Janeiro Barra da Tijuca | Barra da Tijuca, Brazil | 264 | |||
Residence Inn Rio de Janeiro Barra da Tijuca | Barra da Tijuca, Brazil | 140 | |||
Leased Hotels | |||||
Grosvenor House, A JW Marriott Hotel | London, UK | 496 | |||
The Ritz-Carlton, Berlin | Berlin, Germany | 303 | |||
W Barcelona | Barcelona, Spain | 473 | |||
W London – Leicester Square | London, UK | 192 | |||
Hotel Alfonso XIII, a Luxury Collection Hotel, Seville | Seville, Spain | 148 | |||
Hotel Maria Cristina, San Sebastian | San Sebastian, Spain | 139 | |||
Cape Town Marriott Hotel Crystal Towers | Cape Town, South Africa | 180 | |||
Frankfurt Marriott Hotel | Frankfurt, Germany | 587 | |||
Berlin Marriott Hotel | Berlin, Germany | 379 | |||
Leipzig Marriott Hotel | Leipzig, Germany | 231 | |||
Heidelberg Marriott Hotel | Heidelberg, Germany | 248 | |||
Sheraton Diana Majestic, Milan | Milan, Italy | 106 | |||
Renaissance Düsseldorf Hotel | Düsseldorf, Germany | 244 | |||
Renaissance Hamburg Hotel | Hamburg, Germany | 205 | |||
Renaissance Santo Domingo Jaragua Hotel & Casino | Santo Domingo, Dominican Republic | 300 | |||
15 on Orange Hotel, Autograph Collection | Cape Town, South Africa | 129 | |||
African Pride Melrose Arch, Autograph Collection | Johannesburg, South Africa | 118 | |||
Courtyard by Marriott Paris Gare de Lyon | Paris, France | 249 | |||
Protea Hotel by Marriott Cape Town Sea Point | Cape Town, South Africa | 124 | |||
Protea Hotel by Marriott Midrand | Midrand, South Africa | 177 | |||
Protea Hotel by Marriott Pretoria Centurion | Pretoria, South Africa | 177 | |||
Protea Hotel by Marriott O R Tambo Airport | Johannesburg, South Africa | 213 | |||
Protea Hotel by Marriott Roodepoort | Roodepoort, South Africa | 79 | |||
Protea Hotel Fire & Ice! by Marriott Cape Town | Cape Town, South Africa | 201 | |||
Protea Hotel Fire & Ice! by Marriott Johannesburg Melrose Arch | Johannesburg, South Africa | 197 | |||
Item 3. | Legal Proceedings. |
See the information under the “Litigation, Claims, and Government Investigations” caption in Footnote 7. Commitments and Contingencies, which we incorporate here by reference.
From time to time, we are also subject to other legal proceedings and claims in the ordinary course of business, including adjustments proposed during governmental examinations of the various tax returns we file. While management presently believes that the ultimate outcome of these other proceedings, individually and in aggregate, will not materially harm our financial position, cash flows, or overall trends in results of operations, legal proceedings are inherently uncertain, and unfavorable rulings could, individually or in aggregate, have a material adverse effect on our business, financial condition, or operating results.
Item 4. | Mine Safety Disclosures. |
Not applicable.
Executive Officers of the Registrant
See the information under “Executive Officers of the Registrant” in Part III, Item 10 of this report for information about our executive officers, which we incorporate here by reference.
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PART II
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities. |
Market Information
At February 20, 2019, 339,668,839 shares of our Class A Common Stock (our “common stock”) were outstanding and were held by 36,417 shareholders of record. Our common stock trades on the NASDAQ Global Select Market (“NASDAQ”) and the Chicago Stock Exchange under the trading symbol MAR.
Fourth Quarter 2018 Issuer Purchases of Equity Securities
(in millions, except per share amounts) | ||||||||||||
Period | Total Number of Shares Purchased | Average Price per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs (1) | ||||||||
October 1, 2018-October 31, 2018 | 1.9 | $ | 111.79 | 1.9 | 11.8 | |||||||
November 1, 2018-November 30, 2018 | 1.1 | $ | 117.64 | 1.1 | 10.7 | |||||||
December 1, 2018-December 31, 2018 | — | $ | — | — | 10.7 | |||||||
(1) | On November 9, 2017, we announced that our Board of Directors increased our common stock repurchase authorization by 30 million shares. At year-end 2018, 10.7 million shares remained available for repurchase under Board approved authorizations. In addition, on February 15, 2019, our Board of Directors further increased our common stock repurchase authorization by 25 million shares. We repurchase shares in the open market and in privately negotiated transactions. |
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Item 6. Selected Financial Data.
The following table presents a summary of our selected historical financial data derived from our last 10 years of Financial Statements. Because this information is only a summary and does not provide all of the information contained in our Financial Statements, including the related notes, you should read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Financial Statements for each year for more detailed information including, among other items, our adoption of ASU 2014-09 “Revenue from Contracts with Customers” in 2018, restructuring charges we incurred in 2016 and 2009, timeshare strategy-impairment charges we incurred in 2011 and 2009, and our 2011 spin-off of our former timeshare operations and timeshare development business. For 2016, we include Legacy-Starwood results from the Merger Date to year-end 2016.
Fiscal Year (1) | |||||||||||||||||||||||||||||||||||||||
($ in millions, except per share data) | 2018 | 2017 | 2016 | 2015 | 2014 | 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||||||||||||||
Income Statement Data: | |||||||||||||||||||||||||||||||||||||||
Revenues (6) | $ | 20,758 | $ | 20,452 | $ | 15,407 | $ | 14,486 | $ | 13,796 | $ | 12,784 | $ | 11,814 | $ | 12,317 | $ | 11,691 | $ | 10,908 | |||||||||||||||||||
Operating income (loss) (6) | $ | 2,366 | $ | 2,504 | $ | 1,424 | $ | 1,350 | $ | 1,159 | $ | 988 | $ | 940 | $ | 526 | $ | 695 | $ | (152 | ) | ||||||||||||||||||
Net income (loss) (6) | $ | 1,907 | $ | 1,459 | $ | 808 | $ | 859 | $ | 753 | $ | 626 | $ | 571 | $ | 198 | $ | 458 | $ | (346 | ) | ||||||||||||||||||
Per Share Data: | |||||||||||||||||||||||||||||||||||||||
Diluted earnings (losses) per share (6) | $ | 5.38 | $ | 3.84 | $ | 2.73 | $ | 3.15 | $ | 2.54 | $ | 2.00 | $ | 1.72 | $ | 0.55 | $ | 1.21 | $ | (0.97 | ) | ||||||||||||||||||
Cash dividends declared per share | $ | 1.5600 | $ | 1.2900 | $ | 1.1500 | $ | 0.9500 | $ | 0.7700 | $ | 0.6400 | $ | 0.4900 | $ | 0.3875 | $ | 0.2075 | $ | 0.0866 | |||||||||||||||||||
Balance Sheet Data (at year-end): | |||||||||||||||||||||||||||||||||||||||
Total assets (4) (6) | $ | 23,696 | $ | 23,846 | $ | 24,078 | $ | 6,082 | $ | 6,833 | $ | 6,794 | $ | 6,342 | $ | 5,910 | $ | 8,983 | $ | 7,933 | |||||||||||||||||||
Long-term debt (4) | 8,514 | 7,840 | 8,197 | 3,807 | 3,447 | 3,147 | 2,528 | 1,816 | 2,691 | 2,234 | |||||||||||||||||||||||||||||
Shareholders’ equity (deficit) (6) | 2,225 | 3,582 | 6,265 | (3,590 | ) | (2,200 | ) | (1,415 | ) | (1,285 | ) | (781 | ) | 1,585 | 1,142 | ||||||||||||||||||||||||
Other Data: | |||||||||||||||||||||||||||||||||||||||
Base management fees | $ | 1,140 | $ | 1,102 | $ | 806 | $ | 698 | $ | 672 | $ | 621 | $ | 581 | $ | 602 | $ | 562 | $ | 530 | |||||||||||||||||||
Franchise fees (5) (6) | 1,849 | 1,586 | 1,157 | 984 | 872 | 697 | 607 | 506 | 441 | 400 | |||||||||||||||||||||||||||||
Incentive management fees | 649 | 607 | 425 | 319 | 302 | 256 | 232 | 195 | 182 | 154 | |||||||||||||||||||||||||||||
Total gross fees (5) (6) | $ | 3,638 | $ | 3,295 | $ | 2,388 | $ | 2,001 | $ | 1,846 | $ | 1,574 | $ | 1,420 | $ | 1,303 | $ | 1,185 | $ | 1,084 | |||||||||||||||||||
Fee Revenue-Source: | |||||||||||||||||||||||||||||||||||||||
North America (2) (5) (6) | $ | 2,641 | $ | 2,388 | $ | 1,845 | $ | 1,586 | $ | 1,439 | $ | 1,200 | $ | 1,074 | $ | 970 | $ | 878 | $ | 806 | |||||||||||||||||||
Total Outside North America (3) (5) | 997 | 907 | 543 | 415 | 407 | 374 | 346 | 333 | 307 | 278 | |||||||||||||||||||||||||||||
Total gross fees (5) (6) | $ | 3,638 | $ | 3,295 | $ | 2,388 | $ | 2,001 | $ | 1,846 | $ | 1,574 | $ | 1,420 | $ | 1,303 | $ | 1,185 | $ | 1,084 | |||||||||||||||||||
(1) | In 2013, we changed to a calendar year-end reporting cycle. All fiscal years presented before 2013 included 52 weeks. |
(2) | Represents fee revenue from the U.S. (but not Hawaii before 2011) and Canada. |
(3) | Represents fee revenue outside of North America, as defined in footnote (2) above. |
(4) | In 2015, we adopted ASU No. 2015-03, which changes the presentation of debt issuance costs, and ASU No. 2015-17, which changes the classification of deferred taxes. Years before 2014 have not been adjusted for these new accounting standards. |
(5) | In 2017, we reclassified branding fees for third-party residential sales and credit card licensing to the “Franchise fees” caption from the “Owned, leased, and other revenue” caption on our Income Statements. We reclassified prior period amounts through 2013 to conform to our current presentation. We did not reclassify amounts for years before 2013. |
(6) | In 2018, we adopted ASU 2014-09, which impacted our annual recognition of revenues and certain expenses. Years before 2016 have not been adjusted for this new accounting standard. |
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
BUSINESS AND OVERVIEW
Overview
We are a worldwide operator, franchisor, and licensor of hotel, residential, and timeshare properties in 130 countries and territories under 30 brand names. Under our asset-light business model, we typically manage or franchise hotels, rather than own them. We discuss our operations in the following reportable business segments: North American Full-Service, North American Limited-Service, and Asia Pacific. Our Europe, Middle East and Africa, and Caribbean and Latin America operating segments do not individually meet the criteria for separate disclosure as reportable segments.
We earn base management fees and in many cases incentive management fees from the properties that we manage, and we earn franchise fees on the properties that others operate under franchise agreements with us. In most markets, base management and franchise fees typically consist of a percentage of property-level revenue, or certain property-level revenue in the case of franchise fees, while incentive management fees typically consist of a percentage of net house profit after a specified owner return. In our Middle East and Africa and Asia Pacific regions, incentive management fees typically consist of a percentage of gross operating profit without adjustment for a specified owner return. Net house profit is calculated as gross operating profit (also referred to as “house profit,” which we discuss under the “Performance Measures” section below) less non-controllable expenses such as insurance, real estate taxes, and capital spending reserves.
Our emphasis on long-term management contracts and franchising tends to provide more stable earnings in periods of economic softness, while adding new hotels to our system generates growth, typically with little or no investment by the Company. This strategy has driven substantial growth while minimizing financial leverage and risk in a cyclical industry. In addition, we believe minimizing our capital investments and adopting a strategy of recycling our investments maximizes and maintains our financial flexibility.
We remain focused on doing the things that we do well; that is, selling rooms, taking care of our guests, and making sure we control costs both at company-operated properties and at the corporate level (“above-property”). We provide our guests new and memorable experiences through our portfolio of brands, innovative technology, personalized guest recognition, and access to travel experiences through our Marriott Bonvoy Moments program. Our brands remain strong due to our skilled management teams, dedicated associates, superior guest service with an emphasis on guest and associate satisfaction, significant distribution, our Loyalty Program, multichannel reservation systems, and desirable property amenities. We strive to effectively leverage our size and broad distribution.
We, along with owners and franchisees, continue to invest in our brands by means of new, refreshed, and reinvented properties, new room and public space designs, and enhanced amenities, technology offerings, and guest experiences. We address, through various means, hotels in our system that do not meet our standards. We continue to enhance the appeal of our proprietary, information-rich, and easy-to-use websites, and of our associated mobile smartphone applications, through functionality and service improvements.
Our profitability, as well as that of owners and franchisees, has benefited from our approach to property-level and above-property productivity. Managed properties in our system continue to maintain tight cost controls. We also control above-property costs, some of which we allocate to hotels, by remaining focused on systems, processing, and support areas.
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Data Security Incident
On November 30, 2018, we announced a data security incident involving unauthorized access to the Starwood reservations database (the “Data Security Incident”). Working with leading security experts, we determined that there was unauthorized access to the Starwood network since 2014 and that an unauthorized party had copied information from the Starwood reservations database and taken steps towards removing it. The information copied from the Starwood reservations database over time included information about guests who made a reservation at a Starwood property, including names, mailing addresses, phone numbers, email addresses, passport numbers, payment card numbers and expiration dates, Starwood Preferred Guest account information, dates of birth, gender, arrival and departure information, reservation dates, and communication preferences. The combination of information varied by guest. Based on our analysis as of the date of this filing, we believe that the upper limit for the total number of guest records involved in this incident is approximately 383 million records. In many instances, there appear to be multiple records for the same guest, so we have concluded with a fair degree of certainty that information for fewer than 383 million unique guests was involved, although we are currently unable to quantify that lower number because of the nature of the data in the database. Based on our analysis as of the date of this filing, we believe that the information accessed by an unauthorized third party included approximately 5.25 million unencrypted passport numbers, approximately 18.5 million encrypted passport numbers and approximately 9.1 million encrypted payment card numbers (approximately 385,000 of which cards were unexpired as of September 2018). Certain data analytics work continues, including by the investigative firm engaged on behalf of the payment card networks, and based on the preliminary information we have as of the date of this filing, we believe that the information accessed by an unauthorized third party could include several thousand unencrypted payment card numbers.
Upon receiving information that an alert from an internal security tool was related to an attempt to access the Starwood reservations database, we quickly engaged leading security experts to conduct a comprehensive forensic review to determine the scope of the intrusion, including the specific data impacted, and assist with containment measures. While that forensic review of the incident is now complete, certain data analytics work continues. We reported this incident to law enforcement and continue to support their investigation. We have completed the planned phase out of the operation of the Starwood reservations database, effective as of the end of 2018.
Following the Data Security Incident, we began a guest outreach effort and offered certain services to help guests monitor and protect their information. Promptly following our announcement of the incident, we began sending emails on a rolling basis directly to various Starwood guests whose email addresses were in the Starwood reservations database, and we completed sending these emails on December 21, 2018. We also established a multi-language dedicated website and multi-language call center to answer guests’ questions about the incident. The dedicated website provides guests details of the incident, the information affected, the steps being taken to investigate, FAQs and information about how guests can monitor and protect their information. We are offering free web monitoring solutions for affected guests in certain jurisdictions where the monitoring services are available.
To date, we have not seen a meaningful impact on demand as a result of the Data Security Incident.
We are currently unable to estimate the range of total possible financial impact to the Company from the Data Security Incident. However, we do not believe this incident will impact our long-term financial health. We maintain insurance designed to limit our exposure to losses such as those related to the Data Security Incident. We expect that the cost of such insurance will increase significantly in 2019 and future years. We expect to incur significant expenses associated with the Data Security Incident in future periods, primarily related to legal proceedings and regulatory investigations, increased expenses and capital investments for IT and information security, incident response and customer care, and increased expenses for insurance, compliance activities, and to meet increased legal and regulatory requirements. See Footnote 7. Commitments and Contingencies for information related to expenses incurred in 2018, insurance recoveries, and legal proceedings and governmental investigations related to the Data Security Incident.
Performance Measures
We believe RevPAR, which we calculate by dividing room sales for comparable properties by room nights available for the period, is a meaningful indicator of our performance because it measures the period-over-period change in room revenues for comparable properties. RevPAR may not be comparable to similarly titled measures, such as revenues. We also believe occupancy and average daily rate (“ADR”), which are components of calculating RevPAR, are meaningful indicators of our performance. Occupancy, which we calculate by dividing occupied rooms by total rooms available, measures the utilization of a property’s available capacity. ADR, which we calculate by dividing property room revenue by total rooms sold, measures average room price and is useful in assessing pricing levels.
Our RevPAR statistics for 2018, 2017, and 2016, include Legacy-Starwood comparable properties for each of the full years even though Marriott did not own the Legacy-Starwood brands before the Merger Date. Therefore, our RevPAR statistics
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include Legacy-Starwood properties for periods during which fees from the Legacy-Starwood properties are not included in our Income Statements. We provide these RevPAR statistics as an indicator of the performance of our brands and to allow for comparison to industry metrics, and they should not be viewed as necessarily correlating with our fee revenue. Comparisons to the prior year period are on a constant U.S. dollar basis. We calculate constant dollar statistics by applying exchange rates for the current period to the prior comparable period.
We define our comparable properties as our properties, including those that we acquired through the Starwood Combination, that were open and operating under one of our Legacy-Marriott or Legacy-Starwood brands since the beginning of the last full calendar year (since January 1, 2017 for the current period) and have not, in either the current or previous year: (i) undergone significant room or public space renovations or expansions, (ii) been converted between company-operated and franchised, or (iii) sustained substantial property damage or business interruption. For 2018 compared to 2017, we had 4,109 comparable North American properties and 1,173 comparable International properties. For 2017 compared to 2016, we had 3,883 comparable North American properties and 1,030 comparable International properties.
We also believe company-operated house profit margin, which is the ratio of property-level gross operating profit to total property-level revenue, is a meaningful indicator of our performance because this ratio measures our overall ability as the operator to produce property-level profits by generating sales and controlling the operating expenses over which we have the most direct control. House profit includes room, food and beverage, and other revenue and the related expenses including payroll and benefits expenses, as well as repairs and maintenance, utility, general and administrative, and sales and marketing expenses. House profit does not include the impact of management fees, furniture, fixtures and equipment replacement reserves, insurance, taxes, or other fixed expenses.
Business Trends
Our 2018 full-year results reflected a year-over-year increase in the number of properties in our system, favorable demand for our brands in many markets around the world, and generally favorable economic conditions. Comparable worldwide systemwide RevPAR for 2018 increased 2.6 percent to $117.37, ADR increased 2.0 percent on a constant dollar basis to $160.37, and occupancy increased 0.4 percentage points to 73.2 percent, compared to 2017.
In North America, RevPAR increased in 2018, driven by both higher transient and group demand. RevPAR growth was partially constrained by new lodging supply in certain markets and comparisons to 2017 natural disasters. In our Asia Pacific segment in 2018, RevPAR grew in most markets, led by China, Indonesia and India. Our Europe region experienced higher demand in 2018, led by strong transient business in most countries and demand from the World Cup, partially constrained by lower RevPAR in Spain. In our Middle East and Africa region, RevPAR decreased due to geopolitical instability and supply growth in the Middle East, partially offset by strong growth in Africa. RevPAR grew across our Caribbean and Latin America region, driven by higher ADR, partially due to lower supply following 2017 hurricane activity in the Caribbean.
For our company-operated properties, we continue to focus on enhancing property-level house profit margins and making productivity improvements. In 2018 compared to 2017 at comparable properties, worldwide company-operated house profit margins increased by 40 basis points, primarily reflecting RevPAR growth, improved productivity, procurement cost savings, and synergy savings from the Starwood Combination. International company-operated house profit margins increased by 70 basis points, and North American company-operated house profit margins increased by 10 basis points.
System Growth and Pipeline
In 2018, we added 494 properties with 80,255 rooms around the world across our portfolio of brands. Approximately 45 percent of the added rooms are located outside North America, and 12 percent are conversions from competitor brands. In 2018, 107 properties (21,176 rooms) exited our system.
At year-end 2018, our development pipeline grew to a record 478,000 rooms, with more than half located outside of North America. The pipeline includes hotel rooms under construction and under signed contracts, and nearly 23,000 hotel rooms approved for development but not yet under signed contracts. In 2018, we signed management and franchise agreements for 816 properties (125,000 rooms), setting company records for rooms signings in Europe and Middle East and Africa and hotel signings in Asia Pacific. Contracts signed in 2018 also reflected the Company’s strength in the industry’s highest tier, with 29 properties (6,200 rooms) signed across six luxury brands.
In 2019, we expect the number of our open hotel rooms will increase approximately 5.5 percent net, reflecting room exits of 1.0 to 1.5 percent.
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Properties and Rooms
At year-end 2018, we operated, franchised, and licensed the following properties and rooms:
Managed | Franchised/Licensed | Owned/Leased | Other (1) | Total | |||||||||||||||||||||||||
Properties | Rooms | Properties | Rooms | Properties | Rooms | Properties | Rooms | Properties | Rooms | ||||||||||||||||||||
North American Full-Service | 413 | 184,541 | 705 | 202,204 | 9 | 5,275 | — | — | 1,127 | 392,020 | |||||||||||||||||||
North American Limited-Service | 408 | 64,372 | 3,432 | 395,522 | 20 | 3,006 | 49 | 8,447 | 3,909 | 471,347 | |||||||||||||||||||
Asia Pacific | 612 | 179,243 | 98 | 27,258 | 2 | 410 | — | — | 712 | 206,911 | |||||||||||||||||||
Other International | 524 | 121,508 | 411 | 82,243 | 32 | 8,404 | 102 | 12,749 | 1,069 | 224,904 | |||||||||||||||||||
Timeshare | — | — | 89 | 22,186 | — | — | — | — | 89 | 22,186 | |||||||||||||||||||
Total | 1,957 | 549,664 | 4,735 | 729,413 | 63 | 17,095 | 151 | 21,196 | 6,906 | 1,317,368 | |||||||||||||||||||
(1) | Other represents unconsolidated equity method investments, which we present in the “Equity in earnings” caption of our Income Statements. |
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Lodging Statistics
The following lodging statistics present RevPAR, occupancy, and ADR for comparable properties 2018, 2018 compared to 2017, 2017, and 2017 compared to 2016, including Legacy-Starwood comparable properties for the full years even though Marriott did not own the Legacy-Starwood brands before the Merger Date. Systemwide statistics include data from our franchised properties, in addition to our company-operated properties.
2018 Compared to 2017
Comparable Company-Operated Properties | ||||||||||||||||||||
RevPAR | Occupancy | Average Daily Rate | ||||||||||||||||||
2018 | vs. 2017 | 2018 | vs. 2017 | 2018 | vs. 2017 | |||||||||||||||
North American Luxury (1) | $ | 258.71 | 3.3 | % | 76.9 | % | (0.5 | )% | pts. | $ | 336.58 | 3.9 | % | |||||||
North American Upper Upscale (2) | $ | 151.44 | 1.9 | % | 76.0 | % | — | % | pts. | $ | 199.35 | 1.9 | % | |||||||
North American Full-Service (3) | $ | 169.44 | 2.2 | % | 76.1 | % | (0.1 | )% | pts. | $ | 222.60 | 2.3 | % | |||||||
North American Limited-Service (4) | $ | 109.72 | 0.3 | % | 74.9 | % | (0.4 | )% | pts. | $ | 146.55 | 0.8 | % | |||||||
North American - All (5) | $ | 150.42 | 1.8 | % | 75.7 | % | (0.2 | )% | pts. | $ | 198.66 | 2.0 | % | |||||||
Greater China | $ | 94.54 | 7.6 | % | 72.3 | % | 2.6 | % | pts. | $ | 130.77 | 3.7 | % | |||||||
Rest of Asia Pacific | $ | 129.25 | 7.3 | % | 75.6 | % | 1.6 | % | pts. | $ | 170.99 | 5.0 | % | |||||||
Asia Pacific | $ | 107.43 | 7.5 | % | 73.5 | % | 2.2 | % | pts. | $ | 146.14 | 4.2 | % | |||||||
Caribbean & Latin America | $ | 131.52 | 8.6 | % | 64.8 | % | 0.1 | % | pts. | $ | 202.84 | 8.5 | % | |||||||
Europe | $ | 151.86 | 4.8 | % | 74.0 | % | 0.7 | % | pts. | $ | 205.15 | 3.8 | % | |||||||
Middle East & Africa | $ | 102.39 | (1.8 | )% | 66.4 | % | 2.4 | % | pts. | $ | 154.17 | (5.3 | )% | |||||||
International - All (6) | $ | 118.86 | 5.2 | % | 71.6 | % | 1.7 | % | pts. | $ | 165.91 | 2.7 | % | |||||||
Worldwide (7) | $ | 134.58 | 3.3 | % | 73.7 | % | 0.8 | % | pts. | $ | 182.67 | 2.2 | % | |||||||
Comparable Systemwide Properties | ||||||||||||||||||||
RevPAR | Occupancy | Average Daily Rate | ||||||||||||||||||
2018 | vs. 2017 | 2018 | vs. 2017 | 2018 | vs. 2017 | |||||||||||||||
North American Luxury (1) | $ | 245.35 | 3.5 | % | 77.0 | % | (0.3 | )% | pts. | $ | 318.54 | 3.8 | % | |||||||
North American Upper Upscale (2) | $ | 132.64 | 1.8 | % | 73.5 | % | (0.1 | )% | pts. | $ | 180.54 | 1.9 | % | |||||||
North American Full-Service (3) | $ | 143.64 | 2.1 | % | 73.8 | % | (0.1 | )% | pts. | $ | 194.59 | 2.2 | % | |||||||
North American Limited-Service (4) | $ | 99.29 | 0.9 | % | 74.3 | % | — | % | pts. | $ | 133.61 | 1.0 | % | |||||||
North American - All (5) | $ | 118.51 | 1.5 | % | 74.1 | % | (0.1 | )% | pts. | $ | 159.94 | 1.6 | % | |||||||
Greater China | $ | 93.96 | 7.5 | % | 71.7 | % | 2.7 | % | pts. | $ | 131.07 | 3.5 | % | |||||||
Rest of Asia Pacific | $ | 128.40 | 7.0 | % | 75.3 | % | 1.6 | % | pts. | $ | 170.43 | 4.7 | % | |||||||
Asia Pacific | $ | 109.14 | 7.2 | % | 73.3 | % | 2.2 | % | pts. | $ | 148.90 | 4.0 | % | |||||||
Caribbean & Latin America | $ | 104.77 | 7.4 | % | 63.2 | % | 0.1 | % | pts. | $ | 165.71 | 7.3 | % | |||||||
Europe | $ | 134.10 | 5.8 | % | 73.0 | % | 1.4 | % | pts. | $ | 183.74 | 3.7 | % | |||||||
Middle East & Africa | $ | 98.38 | (1.6 | )% | 66.1 | % | 2.0 | % | pts. | $ | 148.87 | (4.6 | )% | |||||||
International - All (6) | $ | 114.56 | 5.5 | % | 70.9 | % | 1.7 | % | pts. | $ | 161.48 | 3.0 | % | |||||||
Worldwide (7) | $ | 117.37 | 2.6 | % | 73.2 | % | 0.4 | % | pts. | $ | 160.37 | 2.0 | % | |||||||
(1) | Includes JW Marriott, The Ritz-Carlton, W Hotels, The Luxury Collection, St. Regis, and EDITION. |
(2) | Includes Marriott Hotels, Sheraton, Westin, Renaissance, Autograph Collection, Delta Hotels, Gaylord Hotels, and Le Méridien. Systemwide also includes Tribute Portfolio. |
(3) | Includes North American Luxury and North American Upper Upscale. |
(4) | Includes Courtyard, Residence Inn, Fairfield by Marriott, SpringHill Suites, TownePlace Suites, Four Points, Aloft, Element, |
and AC Hotels by Marriott. Systemwide also includes Moxy.
(5) | Includes North American Full-Service and North American Limited-Service. |
(6) | Includes Asia Pacific, Caribbean & Latin America, Europe, and Middle East & Africa. |
(7) | Includes North American - All and International - All. |
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2017 Compared to 2016
Comparable Company-Operated Properties | ||||||||||||||||||||
RevPAR | Occupancy | Average Daily Rate | ||||||||||||||||||
2017 | vs. 2016 | 2017 | vs. 2016 | 2017 | vs. 2016 | |||||||||||||||
North American Luxury (1) | $ | 244.19 | 2.5 | % | 77.5 | % | 1.1 | % | pts. | $ | 314.90 | 1.0 | % | |||||||
North American Upper Upscale (2) | $ | 149.68 | 2.3 | % | 76.2 | % | 0.6 | % | pts. | $ | 196.46 | 1.5 | % | |||||||
North American Full-Service (3) | $ | 166.28 | 2.4 | % | 76.4 | % | 0.7 | % | pts. | $ | 217.56 | 1.4 | % | |||||||
North American Limited-Service (4) | $ | 107.99 | 1.4 | % | 75.2 | % | 0.2 | % | pts. | $ | 143.65 | 1.1 | % | |||||||
North American - All (5) | $ | 148.40 | 2.2 | % | 76.0 | % | 0.5 | % | pts. | $ | 195.15 | 1.4 | % | |||||||
Greater China | $ | 90.26 | 8.4 | % | 71.5 | % | 6.0 | % | pts. | $ | 126.33 | (0.7 | )% | |||||||
Rest of Asia Pacific | $ | 119.10 | 6.1 | % | 75.4 | % | 3.1 | % | pts. | $ | 158.02 | 1.6 | % | |||||||
Asia Pacific | $ | 100.39 | 7.4 | % | 72.8 | % | 5.0 | % | pts. | $ | 137.85 | 0.1 | % | |||||||
Caribbean & Latin America | $ | 130.48 | 3.9 | % | 66.5 | % | 2.6 | % | pts. | $ | 196.31 | (0.2 | )% | |||||||
Europe | $ | 138.70 | 6.9 | % | 73.5 | % | 2.0 | % | pts. | $ | 188.69 | 3.9 | % | |||||||
Middle East & Africa | $ | 106.33 | 1.9 | % | 65.7 | % | 1.5 | % | pts. | $ | 161.95 | (0.5 | )% | |||||||
International - All (6) | $ | 113.32 | 6.0 | % | 71.2 | % | 3.5 | % | pts. | $ | 159.14 | 0.8 | % | |||||||
Worldwide (7) | $ | 131.14 | 3.8 | % | 73.7 | % | 2.0 | % | pts. | $ | 178.02 | 1.0 | % | |||||||
Comparable Systemwide Properties | ||||||||||||||||||||
RevPAR | Occupancy | Average Daily Rate | ||||||||||||||||||
2017 | vs. 2016 | 2017 | vs. 2016 | 2017 | vs. 2016 | |||||||||||||||
North American Luxury (1) | $ | 232.19 | 2.8 | % | 77.3 | % | 1.2 | % | pts. | $ | 300.34 | 1.2 | % | |||||||
North American Upper Upscale (2) | $ | 131.11 | 2.0 | % | 73.7 | % | 0.3 | % | pts. | $ | 177.87 | 1.5 | % | |||||||
North American Full-Service (3) | $ | 141.70 | 2.1 | % | 74.1 | % | 0.4 | % | pts. | $ | 191.25 | 1.6 | % | |||||||
North American Limited-Service (4) | $ | 98.29 | 2.0 | % | 74.6 | % | 0.7 | % | pts. | $ | 131.74 | 1.0 | % | |||||||
North American - All (5) | $ | 117.56 | 2.1 | % | 74.4 | % | 0.6 | % | pts. | $ | 158.05 | 1.3 | % | |||||||
Greater China | $ | 90.37 | 8.5 | % | 70.9 | % | 6.0 | % | pts. | $ | 127.47 | (0.7 | )% | |||||||
Rest of Asia Pacific | $ | 118.36 | 5.1 | % | 74.8 | % | 2.5 | % | pts. | $ | 158.21 | 1.6 | % | |||||||
Asia Pacific | $ | 102.27 | 6.8 | % | 72.6 | % | 4.5 | % | pts. | $ | 140.94 | 0.2 | % | |||||||
Caribbean & Latin America | $ | 104.10 | 4.0 | % | 64.3 | % | 2.1 | % | pts. | $ | 161.91 | 0.6 | % | |||||||
Europe | $ | 123.44 | 7.2 | % | 71.9 | % | 2.7 | % | pts. | $ | 171.72 | 3.2 | % | |||||||
Middle East & Africa | $ | 101.98 | 2.0 | % | 65.4 | % | 1.5 | % | pts. | $ | 155.90 | (0.4 | )% | |||||||
International - All (6) | $ | 108.78 | 5.9 | % | 70.3 | % | 3.2 | % | pts. | $ | 154.71 | 1.1 | % | |||||||
Worldwide (7) | $ | 115.02 | 3.1 | % | 73.2 | % | 1.4 | % | pts. | $ | 157.12 | 1.2 | % | |||||||
(1) | Includes JW Marriott, The Ritz-Carlton, W Hotels, The Luxury Collection, St. Regis, and EDITION. |
(2) | Includes Marriott Hotels, Sheraton, Westin, Renaissance, Autograph Collection, Delta Hotels, Gaylord Hotels, Le Méridien, and Tribute Portfolio. |
(3) | Includes North American Luxury and North American Upper Upscale. |
(4) | Includes Courtyard, Residence Inn, Fairfield by Marriott, SpringHill Suites, Four Points, TownePlace Suites, and AC Hotels by Marriott. Systemwide also includes Aloft and Element. |
(5) | Includes North American Full-Service and North American Limited-Service. |
(6) | Includes Asia Pacific, Caribbean & Latin America, Europe, and Middle East & Africa. |
(7) | Includes North American - All and International - All. |
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CONSOLIDATED RESULTS
The following discussion presents an analysis of our consolidated results of operations for 2018, 2017, and 2016. In accordance with U.S. generally accepted accounting principles (“GAAP”), our Income Statements include Legacy-Starwood’s results of operations from the Merger Date. All references to the effect of Legacy-Starwood operations on our 2017 results refer to the incremental amounts contributed by Legacy-Starwood operations in 2017 over the effect of Legacy-Starwood operations on our results for the period from the Merger Date through December 31, 2016.
The following discussion also reflects our adoption of several new accounting standards. See the “New Accounting Standards Adopted” caption in Footnote 2. Summary of Significant Accounting Policies for additional information.
Our 2017 results were favorably impacted by the non-recurring gain on the disposition of our ownership interest in Avendra, discussed in Footnote 3. Dispositions and Acquisitions. We committed to the owners of the hotels in our system that the benefits derived from Avendra, including any dividends or sale proceeds above our original investment, would be used for the benefit of the hotels in our system. Accordingly, in 2018 we used $115 million ($85 million after-tax) of the net proceeds, and we intend to use the remainder of the net proceeds, for the benefit of our system of hotels. Spending under those plans is, and will be, expensed in the “Reimbursed expenses” caption of our Income Statements, causing a reduction in our profitability in the periods it is expensed.
Fee Revenues
($ in millions) | 2018 | 2017 | 2016 | Change 2018 vs. 2017 | Change 2017 vs. 2016 | ||||||||||||||||||||
Base management fees | $ | 1,140 | $ | 1,102 | $ | 806 | $ | 38 | 3 | % | $ | 296 | 37 | % | |||||||||||
Franchise fees | 1,849 | 1,586 | 1,157 | 263 | 17 | % | 429 | 37 | % | ||||||||||||||||
Incentive management fees | 649 | 607 | 425 | 42 | 7 | % | 182 | 43 | % | ||||||||||||||||
Gross fee revenues | 3,638 | 3,295 | 2,388 | 343 | 10 | % | 907 | 38 | % | ||||||||||||||||
Contract investment amortization | (58 | ) | (50 | ) | (40 | ) | 8 | 16 | % | 10 | 25 | % | |||||||||||||
Net fee revenues | $ | 3,580 | $ | 3,245 | $ | 2,348 | $ | 335 | 10 | % | $ | 897 | 38 | % | |||||||||||
2018 Compared to 2017
The $38 million increase in base management fees primarily reflected $29 million from unit growth, $28 million from RevPAR growth, and $8 million from net favorable foreign exchange rates, partially offset by lower fees of $17 million from properties that converted from managed to franchised and $14 million from properties that were terminated.
The $263 million increase in franchise fees primarily reflected $143 million of higher branding fees, driven by $138 million of higher fees from our co-brand credit card agreements, $82 million from unit growth, $21 million from RevPAR growth, $15 million from properties that converted from managed to franchised, and $6 million of higher relicensing and application fees, partially offset by lower fees of $9 million from properties that were terminated.
The $42 million increase in incentive management fees primarily reflected net higher profits at managed hotels and $14 million from unit growth.
In 2018, we earned incentive management fees from 72 percent of our managed properties worldwide versus 71 percent in 2017. We earned incentive management fees from 59 percent of managed properties in North America and 82 percent of managed properties outside North America in 2018, compared to 60 percent in North America and 80 percent outside North America in 2017. In addition, 63 percent of our total incentive management fees in 2018 came from our managed properties outside North America versus 62 percent in 2017.
2017 Compared to 2016
The $296 million increase in base management fees primarily reflected $273 million of higher Legacy-Starwood fees, $18 million from stronger sales at Legacy-Marriott comparable properties primarily driven by RevPAR growth, and $14 million from Legacy-Marriott unit growth, partially offset by $6 million of lower fees from Legacy-Marriott properties that converted from managed to franchised and $4 million from Legacy-Marriott net unfavorable exchange rates.
The $429 million increase in franchise fees primarily reflected $341 million of higher Legacy-Starwood fees, $54 million from Legacy-Marriott unit growth, $18 million from Legacy-Marriott RevPAR growth, $14 million of higher Legacy-Marriott branding fees, and $7 million of higher fees from Legacy-Marriott properties that converted from managed to franchised.
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The $182 million increase in incentive management fees primarily reflected $159 million of higher Legacy-Starwood fees and $22 million from higher net house profits at Legacy-Marriott managed hotels.
The $10 million increase in contract investment amortization primarily reflected $5 million of higher contract write-offs related to terminated contracts at Legacy-Marriott hotels.
Owned, Leased, and Other
($ in millions) | 2018 | 2017 | 2016 | Change 2018 vs. 2017 | Change 2017 vs. 2016 | ||||||||||||||||||||
Owned, leased, and other revenue | $ | 1,635 | $ | 1,752 | $ | 1,125 | $ | (117 | ) | (7 | )% | $ | 627 | 56 | % | ||||||||||
Owned, leased, and other - direct expenses | 1,306 | 1,411 | 901 | (105 | ) | (7 | )% | 510 | 57 | % | |||||||||||||||
$ | 329 | $ | 341 | $ | 224 | $ | (12 | ) | (4 | )% | $ | 117 | 52 | % | |||||||||||
2018 Compared to 2017
Owned, leased, and other revenue, net of direct expenses decreased by $12 million, primarily due to $81 million of lower owned and leased profits attributable to properties sold, partially offset by $51 million of higher termination fees and $17 million of net stronger results at our remaining owned and leased properties.
2017 Compared to 2016
Owned, leased, and other revenue, net of direct expenses increased by $117 million, primarily due to $140 million of higher Legacy-Starwood owned and leased profits, partially offset by $15 million of lower Global Design profits and $7 million of net lower Legacy-Marriott owned and leased profits, primarily driven by lower RevPAR in Brazil and properties under renovation.
Cost Reimbursements
($ in millions) | 2018 | 2017 | 2016 | Change 2018 vs. 2017 | Change 2017 vs. 2016 | ||||||||||||||||||||
Cost reimbursement revenue | $ | 15,543 | $ | 15,455 | $ | 11,934 | $ | 88 | 1 | % | $ | 3,521 | 30 | % | |||||||||||
Reimbursed expenses | 15,778 | 15,228 | 11,834 | 550 | |||||||||||||||||||||