Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

114K characters. Original on sec.gov · Markdown

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

Overview

Our Business

Hilton is one of the largest and fastest growing hospitality companies in the world, with 4,922 hotels, resorts and timeshare properties comprising 804,097 rooms in 104 countries and territories as of December 31, 2016. Our premier brand portfolio includes: our luxury and lifestyle hotel brands, Waldorf Astoria Hotels & Resorts, Conrad Hotels & Resorts and Canopy by Hilton; our full service hotel brands, Hilton Hotels & Resorts, Curio - A Collection by Hilton, DoubleTree by Hilton and Embassy Suites by Hilton; our focused service hotel brands, Hilton Garden Inn, Hampton by Hilton, Tru by Hilton, Homewood Suites by Hilton and Home2 Suites by Hilton; our timeshare brand, Hilton Grand Vacations; and our new full service brand, Tapestry Collection by Hilton, launched in January 2017. We had approximately 60 million members in our award-winning customer loyalty program, Hilton Honors, as of December 31, 2016.

Recent Events

On January 3, 2017, we completed the previously announced spin-offs of a portfolio of hotels and resorts, as well as our timeshare business, into two independent, publicly traded companies: Park and HGV, respectively. The spin-offs were completed via a distribution to each of Hilton's stockholders of record, as of the close of business on December 15, 2016, of 100 percent of the outstanding common stock of Park and HGV. Each Hilton stockholder received one share of Park common stock for every five shares of Hilton common stock and one share of HGV common stock for every ten shares of Hilton common stock. Both Park and HGV have their common stock listed on the NYSE under the symbols "PK" and "HGV," respectively. Unless otherwise stated, disclosures herein reflect the results of Hilton, without giving effect to the spin-offs, for the years ended December 31, 2016, 2015 and 2014. See Item 1A. Risk Factors and Note 29: "Subsequent Events" in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional discussion. Refer to pro forma financial information included in our Current Report on Form 8-K filed with the SEC on January 4, 2017 for the historical results of operations and performance of Hilton giving effect to the spin-offs, and refer to the Registration Statements on Form 10 of Park and HGV and their subsequent periodic and other reports filed with the SEC for their respective historical financial results. Additionally, refer to our press release on our fourth quarter and full year 2016 results for our pro forma financial information for the year ended December 31, 2016 included in our Current Report on Form 8-K filed with the SEC on February 15, 2017.

On January 3, 2017, we completed a 1-for-3 reverse stock split of Hilton's outstanding common stock. The authorized number of shares of common stock was reduced from 30,000,000,000 to 10,000,000,000, and the authorized number of shares of preferred stock remains 3,000,000,000. All share and share-related information presented in this Annual Report on Form 10-K, including our consolidated financial statements, have been retroactively adjusted to reflect the decreased number of shares resulting from the Reverse Stock Split.

In January 2017, we launched our newest brand, Tapestry Collection by Hilton, which is a curated portfolio of original hotels in the upscale hotel segment that have recognizable features distinct to each hotel. Tapestry guests are looking for new experiences and choose to stay where they can expect to never see the same thing twice. The first property is expected to open by the third quarter of 2017.

Segments and Regions

During the periods covered by this report, management analyzed our operations and business by both operating segments and geographic regions, which consisted of three reportable segments that are based on similar products or services: ownership; management and franchise; and timeshare. The ownership segment primarily derives earnings from providing hotel room rentals, food and beverage sales and other services at our owned and leased hotels. The management and franchise segment provides services, which include hotel management and licensing of our brands to franchisees, as well as property management at timeshare properties. This segment generates its revenue from management and franchise fees charged to hotel owners, including our owned and leased hotels, and to homeowners' associations at timeshare properties. As a manager of hotels and timeshare resorts, we typically are responsible for supervising or operating the property in exchange for management fees. As a franchisor of hotels, we charge franchise fees in exchange for the use of one of our brand names and related commercial services, such as our reservation system, marketing and information technology services. The timeshare segment consists of

multi-unit vacation ownership properties and generates revenue by marketing and selling timeshare intervals owned by us and third parties, resort operations and providing consumer financing for the timeshare interests.

Geographically, management conducts business through three distinct geographic regions: the Americas; Europe, Middle East and Africa ("EMEA"); and Asia Pacific. The Americas region includes North America, South America and Central America, including all Caribbean nations. Although the U.S. is included in the Americas, it represents a significant portion of our system-wide hotel rooms, which was 75 percent as of December 31, 2016; therefore, the U.S. is often analyzed separately and apart from the Americas geographic region and, as such, it is presented separately within the analysis herein. The EMEA region includes Europe, which represents the western-most peninsula of Eurasia stretching from Ireland in the west to Russia in the east, and the Middle East and Africa ("MEA"), which represents the Middle East region and all African nations, including the Indian Ocean island nations. Europe and MEA are often analyzed separately by management. The Asia Pacific region includes the eastern and southeastern nations of Asia, as well as India, Australia, New Zealand and the Pacific island nations. Refer to "Part I—Item 2. Properties" for the specific properties and respective locations of the properties that were distributed to Park in connection with the spin-offs.

System Growth and Pipeline

We continue to expand our global footprint and fee-based business. As we enter into new management and franchise contracts, we expand our business with minimal or no capital investment by us as the manager or franchisor, as the capital required to build and maintain hotels is typically provided by the third-party owner of the respective hotel that we contract with to provide management or franchise services. Additionally, prior to approving the addition of new hotels to our management and franchise development pipeline, we evaluate the economic viability of the hotel based on the geographic location, the credit quality of the third-party owner and other factors. As a result, by increasing the number of management and franchise agreements with third-party owners, we expect to achieve a higher overall return on invested capital.

As of December 31, 2016, we had a total of 1,968 hotels in our development pipeline, representing approximately 310,000 rooms under construction or approved for development throughout 96 countries and territories, including 32 countries and territories where we do not currently have any open hotels. Over 99 percent of the rooms in the pipeline are within our management and franchise segment. Of the rooms in the pipeline, over 159,000 rooms, or more than half of the pipeline, were located outside the U.S. As of December 31, 2016, over 157,000 rooms, representing approximately half of our development pipeline, were under construction. We do not consider any individual development project to be material to us.

Principal Components and Factors Affecting our Results of Operations

Revenues

Principal Components

During the periods presented in this report, we primarily derived our revenues from the following sources:

•Owned and leased hotels. Represents revenues derived from hotel operations, including room rentals, food and beverage sales and other ancillary goods and services. These revenues are primarily derived from two categories of customers: transient and group. Transient guests are individual travelers who are traveling for business or leisure. Group guests are traveling for group events that reserve rooms for meetings, conferences or social functions sponsored by associations, corporate, social, military, educational, religious or other organizations. Group business usually includes a block of room accommodations, as well as other ancillary services, such as meeting facilities and catering and banquet services. A majority of our food and beverage sales and other ancillary services are provided to customers who are also occupying rooms at our hotel properties. As a result, occupancy affects all components of our owned and leased hotel revenues.
•Management and franchise fees and other. Represents revenues derived from management fees earned from hotels and timeshare properties managed by us, franchise fees received in connection with the franchising of our brands and other revenue generated by the incidental support of hotel operations for owned, leased, managed and franchised properties and other rental income.
•Terms of our management agreements vary, but our fees generally consist of a base fee, which is typically a percentage of each hotel's gross revenue, and in some cases an incentive fee, which is based on gross operating profits, cash flow or a combination thereof. Management fees from timeshare properties are generally a fixed amount as stated in the management agreement. Outside of the U.S., our fees are often more dependent on hotel

profitability measures, either through a single management fee structure where the entire fee is based on a profitability measure, or because our two-tier fee structure is more heavily weighted toward the incentive fee than the base fee. Additionally, we receive one-time upfront fees upon execution of certain management contracts, as well as a monthly fee based on a percentage of the total gross room revenue that covers the costs of advertising and marketing programs; internet, technology and reservation systems expenses; and quality assurance program costs. In general, the hotel owner pays all operating and other expenses and reimburses costs we incur in operating the hotel.

•Under our franchise agreements, franchisees pay us franchise fees which consist of initial application and initiation fees for new hotels entering the system and monthly royalty fees, generally calculated as a percentage of room revenues. Royalty fees for our full service brands may also include a percentage of gross food and beverage revenues and other revenues, where applicable. In addition to the franchise application and royalty fees, franchisees also generally pay a monthly program fee based on a percentage of the total gross room revenue that covers the cost of advertising and marketing programs; internet, technology and reservation system expenses; and quality assurance program costs. We also earn fees when certain franchise agreements are terminated early or there is a change in ownership.
•Timeshare. Represents revenues derived from the sale and financing of timeshare intervals and revenues from enrollments and other fees, rentals of timeshare units, food and beverage sales and other ancillary services at our timeshare properties, which we refer to as resort operations. Additionally, in recent years, we began a transformation of our timeshare business to a capital light model in which third-party timeshare owners and developers provided capital for development while we acted as the sales and marketing agent and property manager. Through these transactions, we received a sales and marketing commission and branding fees based on the total sales price of the timeshare interval, recurring fees to operate the homeowners' associations and revenues from resort operations.
•Other revenues from managed and franchised properties. These revenues represent the payroll and related costs for properties that we manage where the property employees are legally our responsibility, as well as certain other operating costs of the managed and franchised properties' operations, marketing expenses and other expenses associated with our brands and shared services that are contractually either reimbursed to us by the property owners or paid from fees collected in advance from these properties when the costs are incurred. We have no legal responsibility for employees at franchised properties. The corresponding expenses are presented as other expenses from managed and franchised properties in our consolidated statements of operations resulting in no effect on operating income or net income.

Factors Affecting our Revenues

The following factors affected the revenues we derived from our operations during the periods presented:

•Consumer demand and global economic conditions. Consumer demand for our products and services is closely linked to the performance of the general economy and is sensitive to business and personal discretionary spending levels. Declines in consumer demand due to adverse general economic conditions, risks affecting or reducing travel patterns, lower consumer confidence and adverse political conditions can lower the revenues and profitability of our owned and leased operations and the amount of management and franchise fee revenues we are able to generate from our managed and franchised properties. Further, competition for hotel guests and the supply of hotel services affect our ability to sustain or increase rates charged to customers at our hotels. Also, declines in hotel profitability during an economic downturn directly affect the incentive portion of our management fees, which is based on hotel profit measures. Our timeshare segment also is linked to cycles in the general economy, consumer discretionary spending and availability of financing. As a result, changes in consumer demand and general business cycles have historically subjected and could in the future subject our revenues to significant volatility.
•Agreements with third-party owners and franchisees and relationships with developers. We depend on our long-term management and franchise agreements with third-party owners and franchisees for a significant portion of our management and franchise fee revenues. The success and sustainability of our management and franchise business depends on our ability to perform under our management and franchise agreements and maintain good relationships with third-party owners and franchisees. Our relationships with these third parties also generate new relationships with developers and opportunities for property development that can support our growth. Growth and maintenance of our hotel system and earning fees relating to hotels in the pipeline are dependent on the ability of developers and owners to access capital for the development, maintenance and renovation of properties. We believe that we have good relationships with our third-party owners, franchisees and developers and are committed to the continued growth and

development of these relationships. These relationships exist with a diverse group of owners, franchisees and developers and are not significantly concentrated with any particular third party.

Additionally, we entered into sales and marketing agreements to sell timeshare intervals on behalf of third-party developers. We relied on these relationships to expand our timeshare interval supply without deploying capital for asset construction.

Expenses

Principal Components

We primarily incurred the following expenses during the periods presented:

•Owned and leased hotels. Reflects the operating expenses of our consolidated owned and leased hotels, including room expense, food and beverage costs, other support costs and property expenses. Room expense includes compensation costs for housekeeping, laundry and front desk staff and supply costs for guest room amenities and laundry. Food and beverage costs include costs for wait and kitchen staff and food and beverage products. Other support expenses consist of costs associated with property-level management, utilities, sales and marketing, operating hotel spas, telephones, parking and other guest recreation, entertainment and services. Property expenses include property taxes, repairs and maintenance, rent and insurance.
•Timeshare. Includes the cost of inventory sold during the period, sales and marketing expenses, resort operations expenses and other overhead expenses associated with our timeshare business.
•Depreciation and amortization. These are non-cash expenses that primarily consist of depreciation of fixed assets such as buildings, furniture, fixtures and equipment at our consolidated owned and leased hotels and certain corporate assets, as well as amortization of our management and franchise intangibles and capitalized software.
•General, administrative and other expenses. Consists primarily of compensation expense for our corporate staff and personnel supporting our business segments (including divisional offices that support our management and franchise segment), professional fees (including consulting, audit and legal fees), travel and entertainment expenses, bad debt expenses for uncollected management, franchise and other fees, contractual performance obligations and office administrative and related expenses. Expenses incurred by our supply management business, laundry facilities and other ancillary businesses are also included in general, administrative and other expenses.
•Impairment losses. We hold significant amounts of goodwill, amortizing and non-amortizing intangible assets and long-lived assets. We evaluate these assets for impairment as further discussed in "—Critical Accounting Policies and Estimates." These evaluations have resulted in impairment losses for certain of these assets based on the specific facts and circumstances surrounding the assets and our estimates of fair value. Based on economic conditions or other factors at a property-specific or company-wide level, we may be required to take additional impairment losses to reflect further declines in our asset values.
•Other expenses from managed and franchised properties. These expenses represent the payroll and related costs for properties that we manage where the property employees are legally our responsibility, as well as certain other operating costs of the managed and franchised properties' operations, marketing expenses and other expenses associated with our brands and shared services that are contractually either reimbursed to us by the property owners or paid from fees collected in advance from these properties when the costs are incurred. We have no legal responsibility for employees at franchised properties. The corresponding revenues are presented as other revenues from managed and franchised properties in our consolidated statements of operations resulting in no effect on operating income or net income.

Factors Affecting our Costs and Expenses

The following are principal factors that affect the costs and expenses we incur in the course of our operations:

•Fixed expenses. Many of the expenses associated with owning, leasing, managing and franchising hotels and timeshare resorts are relatively fixed. These expenses include personnel costs, rent, property taxes, insurance and utilities. If we are unable to decrease these costs significantly or rapidly when demand for our hotels and other properties decreases, the resulting decline in our revenues can have an adverse effect on our net cash flow, margins

and profits. This effect can be especially pronounced during periods of economic contraction or slow economic growth. Economic downturns generally affect the results of our ownership segment more significantly than the results of our management and franchising segment due to the high fixed costs associated with operating an owned or leased hotel. The effectiveness of any cost-cutting efforts is limited by the amount of fixed costs inherent in our business. As a result, we may not be able to offset revenue reductions through cost cutting. Employees at some of our owned and leased hotels are parties to collective bargaining agreements that may also limit our ability to make timely staffing or labor changes in response to declining revenues. In addition, any efforts to reduce costs, or to defer or cancel capital improvements, could adversely affect the economic value of our hotels and brands. We have taken steps to reduce our fixed costs to levels we believe are appropriate to maximize profitability and respond to market conditions without jeopardizing the overall customer experience or the value of our hotels or brands. Also, a significant portion of our costs to support our timeshare business relates to direct sales and marketing of these units. In periods of decreased demand for timeshare intervals, we may be unable to reduce our sales and marketing expenses quickly enough to prevent a deterioration of our profit margins on our timeshare business.

•Changes in depreciation and amortization expense. Changes in depreciation expense may be driven by renovations of existing hotels, acquisition or development of new hotels, the disposition of existing hotels through sale or closure or changes in estimates of the useful lives of our assets. As we place new assets into service, we will be required to recognize additional depreciation expense on those assets. Additionally, we capitalize costs associated with certain software development projects, and as those projects are completed and placed into service, amortization expense will increase.

Other Items

Effect of foreign currency exchange rate fluctuations

Significant portions of our operations are conducted in functional currencies other than our reporting currency, which is the U.S. dollar ("USD"), and we have assets and liabilities denominated in a variety of foreign currencies. As a result, we are required to translate those results, assets and liabilities from the functional currency into USD at market based exchange rates for each reporting period. When comparing our results of operations between periods, there may be material portions of the changes in our revenues or expenses that are derived from fluctuations in exchange rates experienced between those periods.

Seasonality

The lodging industry is seasonal in nature. However, the periods during which our hotels experience higher or lower levels of demand vary from property to property and depend upon location, type of property and competitive mix within the specific location. Based on historical results, we generally expect our revenue to be lower during the first calendar quarter of each year than during each of the three subsequent quarters.

Key Business and Financial Metrics Used by Management

Comparable Hotels

We define our comparable hotels as those that: (i) were active and operating in our system for at least one full calendar year as of the end of the current period, and open January 1st of the previous year; (ii) have not undergone a change in brand or ownership during the current or comparable periods reported; and (iii) have not sustained substantial property damage, business interruption, undergone large-scale capital projects or for which comparable results are not available. Of the 4,875 hotels in our system as of December 31, 2016, 3,740 have been classified as comparable hotels. Our 1,135 non-comparable hotels included 135 properties, or approximately three percent of the total hotels in our system, that were removed from the comparable group during the year because they sustained substantial property damage, business interruption, underwent large-scale capital projects or comparable results were not available. Of the 4,565 hotels in our system as of December 31, 2015, 3,624 were classified as comparable hotels for the year ended December 31, 2015.

Occupancy

Occupancy represents the total number of room nights sold divided by the total number of room nights available at a hotel or group of hotels. Occupancy measures the utilization of our hotels' available capacity. Management uses occupancy to gauge demand at a specific hotel or group of hotels in a given period. Occupancy levels also help us determine achievable ADR levels as demand for hotel rooms increases or decreases.

ADR

ADR represents hotel room revenue divided by total number of room nights sold in a given period. ADR measures average room price attained by a hotel and ADR trends provide useful information concerning the pricing environment and the nature of the customer base of a hotel or group of hotels. ADR is a commonly used performance measure in the industry, and we use ADR to assess pricing levels that we are able to generate by type of customer, as changes in rates have a different effect on overall revenues and incremental profitability than changes in occupancy, as described above.

RevPAR

We calculate RevPAR by dividing hotel room revenue by total number of room nights available to guests for a given period. We consider RevPAR to be a meaningful indicator of our performance as it provides a metric correlated to two primary and key drivers of operations at a hotel or group of hotels: occupancy and ADR. RevPAR is also a useful indicator in measuring performance over comparable periods for comparable hotels.

References to RevPAR, ADR and occupancy are presented on a comparable basis and references to RevPAR and ADR are presented on a currency neutral basis (all periods use the same exchange rates), unless otherwise noted.

EBITDA and Adjusted EBITDA

For a discussion of our definition of Adjusted EBITDA, see Note 23: "Business Segments" in our consolidated financial statements.

EBITDA and Adjusted EBITDA are not recognized terms under U.S. GAAP and should not be considered as alternatives to net income (loss) or other measures of financial performance or liquidity derived in accordance with U.S. GAAP. In addition, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

We believe that EBITDA and Adjusted EBITDA provide useful information to investors about us and our financial condition and results of operations for the following reasons: (i) these measures are among the measures used by our management team to evaluate our operating performance and make day-to-day operating decisions; and (ii) these measures are frequently used by securities analysts, investors and other interested parties as a common performance measure to compare results or estimate valuations across companies in our industry. Additionally, these measures exclude certain items that can vary widely across different industries and among competitors within our industry. For instance, interest expense and income tax expense are dependent on company specifics, including, among other things, our capital structure and operating jurisdictions, respectively, and, therefore could vary significantly across companies. Depreciation and amortization are dependent upon company policies, including the method of acquiring and depreciating assets and the useful lives that are used. For Adjusted EBITDA, we also exclude items such as: (i) share-based compensation expense, as this could vary widely among companies due to the different plans in place and the usage of them; (ii) furniture, fixtures and equipment ("FF&E") replacement reserve to be consistent with the treatment of FF&E for its owned and leased hotels where it is capitalized and depreciated over the life of the FF&E; and (iii) other items that are not core to our operations and are not reflective of our performance.

EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered either in isolation or as a substitute for net income (loss), cash flow or other methods of analyzing our results as reported under U.S. GAAP. Some of these limitations are:

•EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;
•EBITDA and Adjusted EBITDA do not reflect our interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;
•EBITDA and Adjusted EBITDA do not reflect our tax expense or the cash requirements to pay our taxes;
•EBITDA and Adjusted EBITDA do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;
•EBITDA and Adjusted EBITDA do not reflect the effect on earnings or changes resulting from matters that we consider not to be indicative of our future operations;
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and
•other companies in our industry may calculate EBITDA and Adjusted EBITDA differently, limiting their usefulness as comparative measures.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business or as measures of cash that will be available to us to meet our obligations.

Results of Operations

Year Ended December 31, 2016 Compared with Year Ended December 31, 2015

The hotel operating statistics for our system-wide comparable hotels were as follows:

Year EndedVariance
December 31, 20162016 vs. 2015
Owned and leased hotels
Occupancy78.6%(0.9)%pts.
ADR$185.181.4%
RevPAR$145.490.3%
Managed and franchised hotels
Occupancy74.6%—%pts.
ADR$139.311.9%
RevPAR$103.922.0%
System-wide
Occupancy75.0%—%pts.
ADR$143.631.9%
RevPAR$107.651.8%

The hotel operating statistics by region for our system-wide comparable hotels were as follows:

Year EndedVariance
December 31, 20162016 vs. 2015
U.S.
Occupancy75.9%(0.1)%pts.
ADR$143.752.0%
RevPAR$109.141.8%
Americas (excluding U.S.)
Occupancy72.3%—%pts.
ADR$122.054.2%
RevPAR$88.224.2%
Europe
Occupancy73.9%(0.7)%pts.
ADR$146.042.0%
RevPAR$107.951.1%
MEA
Occupancy63.1%(3.3)%pts.
ADR$166.263.6%
RevPAR$104.94(1.5)%
Asia Pacific
Occupancy71.5%3.8%pts.
ADR$145.75(2.1)%
RevPAR$104.263.5%

In 2016, we experienced system-wide RevPAR growth from continued ADR growth at both of our hotel segments. Regionally, the U.S., Americas and Europe all experienced RevPAR growth as a result of ADR growth, with Americas outpacing all other regions, driven by strength in Canada and Mexico. The Asia Pacific increase in RevPAR was driven by increased occupancy, particularly in China. MEA performance continued to be negatively affected by geopolitical and terrorism concerns, resulting in a decrease in occupancy.

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

The hotel operating statistics for our system-wide comparable hotels were as follows:

Year EndedVariance
December 31, 20152015 vs. 2014
Owned and leased hotels
Occupancy79.1%1.3%pts.
ADR$184.782.5%
RevPAR$146.194.2%
Managed and franchised hotels
Occupancy75.1%1.3%pts.
ADR$136.603.6%
RevPAR$102.615.5%
System-wide
Occupancy75.4%1.3%pts.
ADR$141.193.6%
RevPAR$106.515.4%

The hotel operating statistics by region for our system-wide comparable hotels were as follows:

Year EndedVariance
December 31, 20152015 vs. 2014
U.S.
Occupancy76.2%1.0%pts.
ADR$140.313.8%
RevPAR$106.895.2%
Americas (excluding U.S.)
Occupancy73.1%1.2%pts.
ADR$126.144.8%
RevPAR$92.186.7%
Europe
Occupancy77.0%1.7%pts.
ADR$154.813.7%
RevPAR$119.246.1%
MEA
Occupancy66.0%2.3%pts.
ADR$153.91(1.9)%
RevPAR$101.531.7%
Asia Pacific
Occupancy68.8%5.0%pts.
ADR$140.821.3%
RevPAR$96.859.3%

All world regions experienced RevPAR growth in 2015 with nearly all growing in occupancy and ADR. Asia Pacific RevPAR growth led all regions at 9.3 percent, primarily through occupancy, which is a result of our portfolio ramping up in China. The MEA region continues to face geopolitical unrest and low oil prices, nonetheless RevPAR still increased as a result of improved year over year demand. U.S. RevPAR growth of 5.2 percent was primarily driven by ADR with demand outpacing supply growth, which is still below the long-term industry average.

Revenues

Owned and leased hotels

Year Ended December 31,Percent Change
2016201520142016 vs. 20152015 vs. 2014
(in millions)
U.S. owned and leased hotels$2,484$2,414$2,2272.98.4
International owned and leased hotels1,6421,8192,012(9.7)(9.6)
Total owned and leased hotels$4,126$4,233$4,239(2.5)(0.1)

Owned and leased hotels: 2016 compared with 2015

The following details the changes in revenues at our owned and leased hotels, giving effect to foreign currency ("FX") changes and acquired and disposed hotels:

Increase / (decrease)Net decrease due to FX changes(1)Net increase / (decrease) from acquired and disposed hotels(2)Net increase / (decrease) excluding FX changes and the effect of acquired and disposed hotels
Year Ended December 31,
20162015
(in millions)
U.S. owned and leased hotels
Comparable(3)$2,095$2,056$39$—$—$39
Non-comparable38935831—41(10)
U.S. owned and leased hotels$2,484$2,414$70$—$41$29
International owned and leased hotels
Comparable(3)$1,551$1,621$(70)$(67)$—$(3)
Non-comparable91198(107)(6)(95)(6)
International owned and leased hotels$1,642$1,819$(177)$(73)$(95)$(9)
(1)Unfavorable movements were a result of the strengthening of the USD compared to other currencies, primarily the British pound ("GBP"), partially offset by the strengthening of the Japanese Yen ("JPY") compared to the USD.
(2)From January 1, 2015 to December 31, 2016, five properties were added to our U.S. owned and leased portfolio on a net basis and six hotels were removed from our international owned and leased portfolio on a net basis.
(3)Represents comparable hotels for the year ended December 31, 2016.

The increase in comparable U.S. owned and leased hotel revenue during the year ended December 31, 2016 was primarily a result of an increase in food and beverage revenue, as well as an increase in RevPAR of 0.4 percent, attributable to an increase in ADR of 2.1 percent, largely offset by a decrease in occupancy of 1.4 percentage points. Additionally, U.S. owned and leased hotel revenue increased in 2016 as a result of increases in revenues from properties acquired in February and June of 2015, net of the decrease in revenues from the Waldorf Astoria New York, which was sold in February 2015. Excluding acquisitions and dispositions, revenues from non-comparable U.S. owned and leased hotels decreased for the year ended December 31, 2016, primarily as a result of renovations at one property during 2016.

The decrease in revenues at our international hotels during the year ended December 31, 2016 was primarily a result of the effect of FX changes and decreases in revenues from properties disposed of between January 1, 2015 and December 31, 2016.

Owned and leased hotels: 2015 compared with 2014

The following details the changes in revenues at our owned and leased hotels, giving effect to FX changes and acquired and disposed hotels:

Increase / (decrease)Net decrease due to FX changes(1)Net increase / (decrease) from acquired and disposed hotels(2)Net increase / (decrease) excluding FX changes and the effect of acquired and disposed hotels
Year Ended December 31,
20152014
(in millions)
U.S. owned and leased hotels
Comparable(3)$2,020$1,913$107$—$—$107
Non-comparable39431480—81(1)
U.S. owned and leased hotels$2,414$2,227$187$—$81$106
International owned and leased hotels
Comparable(3)$1,448$1,572$(124)$(176)$—$52
Non-comparable371440(69)(38)(80)49
International owned and leased hotels$1,819$2,012$(193)$(214)$(80)$101
(1)Unfavorable movements were a result of the strengthening of the USD compared to other currencies, primarily the GBP and the euro.
(2)From January 1, 2014 to December 31, 2015, 10 properties were added to our U.S. owned and leased portfolio on a net basis and five hotels were removed from our international owned and leased portfolio on a net basis.
(3)Represents comparable hotels for the year ended December 31, 2015.

The increase in revenues at our comparable U.S. owned and leased hotels during the year ended December 31, 2015 was primarily a result of an increase in RevPAR of 4.2 percent, which was mostly attributable to increases in both transient and group business. The increase in revenues at our non-comparable U.S. owned and leased hotels in 2015 was the result of the increase in revenues from properties acquired during 2015, net of the decrease in revenues from properties disposed of in 2015.

The decrease in revenues at our international owned and leased hotels during the year ended December 31, 2015 was primarily a result of the effect of FX changes and decreases in revenues from properties disposed of between January 1, 2014 and December 31, 2015. On a currency neutral basis, comparable international owned and leased hotel revenues increased as a result of an increase in RevPAR of 4.2 percent, which was primarily a result of an increase in transient guest business. Additionally, excluding dispositions and FX changes, there was an increase in revenues at our non-comparable international owned and leased hotels during the year ended December 31, 2015, primarily as a result of the completion of large renovation projects at certain hotels, which had previously limited the availability of those properties to guests.

Management and franchise fees and other

Year Ended December 31,Percent Change
2016201520142016 vs. 20152015 vs. 2014
(in millions)
Management fees$414$395$3844.82.9
Franchise fees1,1921,1229276.221.0
Other95849013.1(6.7)
$1,701$1,601$1,4016.214.3

The increases in management and franchise fees for all periods were driven by increases in revenues from our non-comparable managed and franchised hotels due to the addition of new managed and franchised properties to our portfolio. Including new development and ownership type transfers, from January 1, 2015 to December 31, 2016, we added 600 managed and franchised properties on a net basis, and from January 1, 2014 to December 31, 2015, we added 501 managed and franchised properties on a net basis, providing an additional 89,410 rooms and 81,474 rooms, respectively, to our managed and franchised segment. As new hotels stabilize in our system, we expect the fees received from such hotels to increase as they are part of our system for full periods.

Additionally, our management and franchise fees increased during the years ended December 31, 2016 and 2015 compared to the years ended December 31, 2015 and 2014, respectively, as a result of increases in RevPAR at our comparable managed and franchised hotels due to increases in ADR. During the years ended December 31, 2016 and 2015, RevPAR increased 1.7

percent and 6.3 percent, respectively, at our comparable managed hotels, and 2.1 percent and 5.2 percent, respectively, at our comparable franchised hotels. Franchise fees also increased on a currency neutral basis as a result of increases in licensing fees of $16 million and $57 million during the years ended December 31, 2016 and 2015, respectively.

Timeshare

Year Ended December 31,Percent Change
2016201520142016 vs. 20152015 vs. 2014
(in millions)
Timeshare sales$997$959$8444.013.6
Resort operations23820719515.06.2
Financing and other1551421329.27.6
$1,390$1,308$1,1716.311.7

Timeshare sales revenue increased during the years ended December 31, 2016 and 2015 compared to the years ended December 31, 2015 and 2014, respectively, as a result of increases in commissions recognized from the sale of third-party developed timeshare intervals of $23 million and $136 million, respectively. During the year ended December 31, 2016, revenue from the sale of owned timeshare intervals increased $15 million due to increased sales volume. However, during the year ended December 31, 2015, sales volume of owned timeshare intervals decreased due to the shift in sales mix toward third-party developed interval sales, which resulted in a decrease of owned interval sales revenue of $21 million. Overall timeshare sales volume increased 10 percent and 18 percent, respectively, during the years ended December 31, 2016 and 2015, as a result of increased tour flow and net volume per guest. Additionally, revenues from our resort operations increased during the years ended December 31, 2016 and 2015 as a result of increases in fees earned related to our Hilton Grand Vacations Club, including fees generated by new members.

Operating Expenses

Owned and leased hotels

Year Ended December 31,Percent Change
2016201520142016 vs. 20152015 vs. 2014
(in millions)
U.S. owned and leased hotels$1,661$1,589$1,4974.56.1
International owned and leased hotels1,4391,5791,755(8.9)(10.0)
Total owned and leased hotels$3,100$3,168$3,252(2.1)(2.6)

Fluctuations in operating expenses at our owned and leased hotels relate to various factors, including changes in occupancy levels, labor costs, utilities, taxes, insurance costs and foreign currency. The change in the number of occupied room nights directly affects certain variable expenses, which include payroll, supplies and other operating expenses.

Owned and leased hotels: 2016 compared with 2015

The following details the changes in operating expenses at our owned and leased hotels, giving effect to FX changes and acquired and disposed hotels:

Increase / (decrease)Net decrease due to FX changes(1)Net increase / (decrease) from acquired and disposed hotels(2)Net increase / (decrease) excluding FX changes and the effect of acquired and disposed hotels
Year Ended December 31,
20162015
(in millions)
U.S. owned and leased hotels
Comparable(3)$1,413$1,363$50$—$—$50
Non-comparable24822622—25(3)
U.S. owned and leased hotels$1,661$1,589$72$—$25$47
International owned and leased hotels
Comparable(3)$1,356$1,409$(53)$(68)$—$15
Non-comparable83170(87)(6)(74)(7)
International owned and leased hotels$1,439$1,579$(140)$(74)$(74)$8
(1)Unfavorable movements were a result of the strengthening of the USD compared to other currencies, primarily the GBP, partially offset by the strengthening of the JPY, compared to the USD.
(2)From January 1, 2015 to December 31, 2016, five properties were added to our U.S. owned and leased portfolio on a net basis and six hotels were removed from our international owned and leased hotel portfolio on a net basis.
(3)Represents comparable hotels for the year ended December 31, 2016.

The increase in operating expenses at our U.S. owned and leased hotels during the year ended December 31, 2016 was primarily the result of increases at our comparable hotels due to increased wages and benefits and other operating expenses. Operating expenses at our non-comparable U.S. owned and leased hotels increased during the year ended December 31, 2016 primarily as a result of increases in operating expenses from properties acquired during 2015, net of the decrease in operating expenses from properties disposed of in 2015.

The decrease in operating expenses at our international owned and leased hotels during the year ended December 31, 2016 was primarily a result of the effect of FX changes and properties disposed of between January 1, 2015 and December 31, 2016.

Owned and leased hotels: 2015 compared with 2014

The following details the changes in revenues at our owned and leased hotels, giving effect to FX changes and acquired and disposed hotels:

Increase / (decrease)Net decrease due to FX changes(1)Net increase / (decrease) from acquired and disposed hotels(2)Net increase excluding FX changes and the effect of acquired and disposed hotels
Year Ended December 31,
20152014
(in millions)
U.S. owned and leased hotels
Comparable(3)$1,347$1,273$74$—$—$74
Non-comparable24222418—171
U.S. owned and leased hotels$1,589$1,497$92$—$17$75
International owned and leased hotels
Comparable(3)$1,298$1,407$(109)$(154)$—$45
Non-comparable281348(67)(32)(60)25
International owned and leased hotels$1,579$1,755$(176)$(186)$(60)$70
(1)Unfavorable movements were a result of the strengthening of the USD compared to other currencies, primarily the GBP and the euro.
(2)From January 1, 2014 to December 31, 2015, 10 properties were added to our U.S. owned and leased portfolio on a net basis and five hotels were removed from out international owned and leased portfolio on a net basis.
(3)Represents comparable hotels for the year ended December 31, 2015.

The increase in operating expenses at our U.S. owned and leased hotels during the year ended December 31, 2015 was primarily the result of increases at our comparable hotels due to higher variable operating costs due to increased occupancy. Operating expenses at our non-comparable U.S. owned and leased hotels increased during the year ended December 31, 2015 primarily as a result of the increase in operating expenses from properties acquired in 2015, net of the decrease in operating expenses from properties disposed of in 2015.

The decrease in operating expenses at our international owned and leased hotels during the year ended December 31, 2015 was primarily a result of the effect of FX changes and decreases in operating expenses from properties disposed of between January 1, 2014 and December 31, 2015. On a currency neutral basis, operating expenses increased at our international comparable owned and leased hotels during the year ended December 31, 2015, primarily as a result of increases in variable operating costs resulting from increased occupancy. Additionally, excluding dispositions and FX changes, the increase in operating expenses at our non-comparable international owned and leased hotels during the year ended December 31, 2015 was consistent with the increase in revenues for these hotels. The changes were primarily the result of the completion of large renovation projects at certain hotels in 2015. The renovations limited occupancy and, therefore, reduced revenues and operating expenses.

Timeshare

Year Ended December 31,Percent Change
2016201520142016 vs. 20152015 vs. 2014
(in millions)
Timeshare sales$739$701$5865.419.6
Resort operations1331301232.35.7
Financing and other76665815.213.8
$948$897$7675.716.9

Timeshare sales expense increased during the years ended December 31, 2016 and 2015 compared to the years ended December 31, 2015 and 2014, respectively, primarily as a result of higher sales and marketing expenses related to increases in sales volume of third-party developed timeshare intervals for both periods and in sales volume of owned intervals for the year ended December 31, 2016. Additionally, cost of product related to the reacquisition of owned timeshare inventory for customer upgrades into third-party developed properties decreased during the year ended December 31, 2016, partially offsetting the increase in sales and marketing expenses, and increased during the year ended December 31, 2015, contributing to the increase in timeshare sales expense.

Depreciation and amortization

Year Ended December 31,Percent Change
2016201520142016 vs. 20152015 vs. 2014
(in millions)
Depreciation$358$351$3132.012.1
Amortization328341315(3.8)8.3
$686$692$628(0.9)10.2

The increases in depreciation expense during the years ended December 31, 2016 and 2015 compared to the years ended December 31, 2015 and 2014, respectively, resulted primarily from the addition of property and equipment related to the properties acquired in 2015, partially offset by decreases as a result of disposed hotels. The decrease in amortization expense during the year ended December 31, 2016, compared to the year ended December 31, 2015, and the increase in amortization expense during the year ended December 31, 2015, compared to the year ended December 31, 2014, were primarily a result of $13 million in accelerated amortization that was recognized in 2015 on a management contract intangible asset for a property that was managed by us prior to our acquisition of it. The increase in amortization expense during the year ended December 31, 2015 was also related to capitalized software costs placed into service during 2014 and 2015.

General, administrative and other

Year Ended December 31,Percent Change
2016201520142016 vs. 20152015 vs. 2014
(in millions)
General and administrative$547$547$416—31.5
Other6964757.8(14.7)
$616$611$4910.824.4

General and administrative expense was unchanged during the year ended December 31, 2016 compared to the year ended December 31, 2015, however, there were significant offsetting increases and decreases during the year. These included a decrease of $73 million in severance costs related to the sale of the Waldorf Astoria New York, as well as a decrease in share-based compensation expense due to $66 million of additional expense recognized during the year ended December 31, 2015, when certain remaining awards granted in connection with our initial public offering vested. The decreases were offset by an increase of $133 million of costs associated with the spin-offs.

The increase in general and administrative expenses during the year ended December 31, 2015 compared to the year ended December 31, 2014 was primarily a result of the recognition of approximately $95 million in severance costs related to the sale of the Waldorf Astoria New York and the additional $66 million of share-based compensation expense recognized during the year, as previously discussed. The increase was also a result of the reversal of accruals in 2014 related to the termination of a cash-based, long-term incentive plan that was replaced with our 2013 Omnibus Incentive Plan, resulting in an $18 million reduction in general and administrative expense during the year ended December 31, 2014.

Gain on sales of assets, net

Year Ended December 31,Percent Change
2016201520142016 vs. 20152015 vs. 2014
(in millions)
Gain on sales of assets, net$9$306$—(97.1)NM(1)
(1)Fluctuation in terms of percentage change is not meaningful.

During the year ended December 31, 2016, we recognized a gain on the sale of one of our hotels held by a consolidated VIE. See Note 9: "Consolidated Variable Interest Entities" in our consolidated financial statements for additional discussion. During the year ended December 31, 2015, we recognized gains upon completion of the sales of the Hilton Sydney and the Waldorf Astoria New York.

Non-operating Income and Expenses

Year Ended December 31,Percent Change
2016201520142016 vs. 20152015 vs. 2014
(in millions)
Interest expense$587$575$6182.1(7.0)

The increase in interest expense during the year ended December 31, 2016 compared to the year ended December 31, 2015 was primarily due to the issuance of new debt, partially offset by the reduction of principal on certain debt from prepayments and the amendment of our senior secured term loan facility entered into in 2013 (the "2013 Term Loans"), which extended the maturity and reduced the interest rate. See Note 12: "Debt" in our consolidated financial statements for details of our issuances and repayments related to financing transactions that occurred during the year ended December 31, 2016, as well as the interest rates for each debt instrument.

The decrease in interest expense during the year ended December 31, 2015 compared to the year ended December 31, 2014 was primarily as a result of a decrease in our indebtedness due to debt prepayments of $775 million on our 2013 Term Loans during the year, which resulted in lower debt principal balances on which interest expense was calculated.

Year Ended December 31,Percent Change
2016201520142016 vs. 20152015 vs. 2014
(in millions)
Equity in earnings from unconsolidated affiliates$8$23$19(65.2)21.1

The decrease in equity in earnings from unconsolidated affiliates during the year ended December 31, 2016 compared to the year ended December 31, 2015 was primarily due to a $17 million impairment loss for the impairment of one of our investments in affiliates recognized in 2016.

The increase in equity in earnings from unconsolidated affiliates during the year ended December 31, 2015 compared to the year ended December 31, 2014 was primarily due to improved performance at our unconsolidated hotels, partially offset by $3 million in equity in earnings included in the year ended December 31, 2014 from unconsolidated affiliates that were involved in an equity investments exchange or sold during that year.

Year Ended December 31,Percent Change
2016201520142016 vs. 20152015 vs. 2014
(in millions)
Gain (loss) on foreign currency transactions$(13)$(41)$26(68.3)NM(1)
(1)Fluctuation in terms of percentage change is not meaningful.

The net loss on foreign currency transactions for the years ended December 31, 2016 and 2015 primarily related to changes in foreign currency rates on our short-term cross-currency intercompany loans, predominantly for loans denominated in Australian dollar ("AUD"), euro and GBP during the year ended December 31, 2016, and loans denominated in AUD, Brazilian real and GBP during the year ended December 31, 2015. The net gain on foreign currency transactions for the year ended December 31, 2014 was primarily a result of changes in foreign currency rates on our short-term cross-currency intercompany loans, predominantly those denominated in GBP and AUD.

Year Ended December 31,Percent Change
2016201520142016 vs. 20152015 vs. 2014
(in millions)
Other gain (loss), net$(26)$(1)$37NM(1)NM(1)
(1)Fluctuation in terms of percentage change is not meaningful.

The other loss, net for the year ended December 31, 2016 primarily related to the write-off of: (i) $20 million of unamortized debt issuance costs as a result of the full repayment of the commercial mortgage-backed securities loan entered into in 2013 (the "2013 CMBS Loan"); and (ii) $4 million of debt issuance costs incurred in connection with the amendment of the 2013 Term Loans that were not capitalized.

The other loss, net for the year ended December 31, 2015 was primarily related to $26 million of transaction costs from the acquisition of properties in connection with the tax deferred exchange, partially offset by a $24 million gain from the capital lease liability reduction from one of our consolidated VIEs.

The other gain, net for the year ended December 31, 2014 was primarily related to a pre-tax gain of $23 million resulting from an equity investments exchange, as well as pre-tax gains of $13 million resulting from the sale of two hotels and a vacant parcel of land.

Year Ended December 31,Percent Change
2016201520142016 vs. 20152015 vs. 2014
(in millions)
Income tax expense$891$80$465NM(1)(82.8)

Income tax expense for the year ended December 31, 2016 increased compared to the year ended December 31, 2015 primarily as a result of two corporate structuring transactions that were effected during the three months ended December 31, 2016 and included: (i) the organization of Hilton's assets and subsidiaries in preparation for the spin-offs; and (ii) a restructuring of Hilton's international assets and subsidiaries (the "international restructuring"). The international restructuring involved a transfer of certain assets, including intellectual property used in the international business, from U.S. subsidiaries to foreign subsidiaries and became effective in December 2016. The transfer of the intellectual property resulted in the recognition of tax expense representing the estimated U.S. tax expected to be paid in future years on income generated from the intellectual property transferred to foreign jurisdictions. Further, our deferred effective tax rate is determined based upon the composition of applicable federal and state tax rates. Due to the changes in the footprint of the Company and the expected applicable tax rates at which our domestic deferred tax assets and liabilities will reverse in future periods as a result of the described structuring activities, our estimated deferred effective tax rate has increased. In total, these structuring transactions resulted in additional income tax expense of $513 million during the three months ended December 31, 2016. See Note 18: "Income Taxes" in our consolidated financial statements for additional discussion.

The decrease in income tax expense during the year ended December 31, 2015 compared to the year ended December 31, 2014 was primarily the result of a $640 million deferred tax benefit resulting from transactions involving the conversion of certain U.S. subsidiaries from corporations to limited liability companies and the election to disregard certain foreign subsidiaries for U.S. federal income tax purposes. This benefit was offset by an increase in tax expense resulting from a $349 million increase in our income before income taxes. Further, income tax expense was affected by the reduction in goodwill in connection with the sales of the Waldorf Astoria New York and the Hilton Sydney, as well as compensation costs incurred for certain awards granted in connection with our initial public offering for which no tax benefits were recognized.

Segment Results

We evaluate our business segment operating performance using segment Adjusted EBITDA, as described in Note 23: "Business Segments" in our consolidated financial statements. For a discussion of how management uses EBITDA and Adjusted EBITDA to evaluate and manage our business and material limitations on their usefulness, refer to "—Key Business and Financial Metrics Used by Management."

The following table sets forth revenues and Adjusted EBITDA by segment, reconciled to consolidated amounts:

Year Ended December 31,Percent Change
2016201520142016 vs. 20152015 vs. 2014
(in millions)
Revenues:
Ownership$4,157$4,262$4,271(2.5)(0.2)
Management and franchise1,7861,6911,4685.615.2
Timeshare1,3901,3081,1716.311.7
Segment revenues7,3337,2616,9101.05.1
Other revenues from managed and franchised properties4,4464,1303,6917.711.9
Other revenues102919912.1(8.1)
Intersegment fees elimination(1)(218)(210)(198)3.86.1
Total revenues$11,663$11,272$10,5023.57.3
Adjusted EBITDA(1):
Ownership$1,029$1,064$1,000(3.3)6.4
Management and franchise1,7861,6911,4685.615.2
Timeshare3813523378.24.5
Corporate and other(221)(228)(255)(3.1)(10.6)
Adjusted EBITDA$2,975$2,879$2,5503.312.9
(1)Refer to Note 23: "Business Segments" in our consolidated financial statements for additional detail on our intersegment fees included in our segment revenues and segment Adjusted EBITDA.

The following table reconciles net income to EBITDA and Adjusted EBITDA:

Year Ended December 31,
201620152014
(in millions)
Net income$364$1,416$682
Interest expense587575618
Income tax expense89180465
Depreciation and amortization686692628
Interest expense, income tax and depreciation and amortization included in equity in earnings from unconsolidated affiliates303237
EBITDA2,5582,7952,430
Gain on sales of assets, net(9)(306)—
Loss (gain) on foreign currency transactions1341(26)
FF&E replacement reserve564846
Share-based compensation expense9116274
Impairment loss159—
Impairment loss included in equity in earnings from unconsolidated affiliates17——
Other loss (gain), net261(37)
Other adjustment items20812963
Adjusted EBITDA$2,975$2,879$2,550

Ownership

Ownership segment revenues decreased $105 million and $9 million for the years ended December 31, 2016 and 2015 compared to the years ended December 31, 2015 and 2014, respectively. The decrease in revenues at our owned and leased hotels was primarily a result of the disposal of international hotels and FX fluctuations, partially offset by the net effect of acquired and disposed hotels in the U.S. During the year ended December 31, 2015, the overall decrease in revenues was also offset by the increase in revenues at our comparable owned and leased hotels due to increased RevPAR of 4.2 percent. Ownership Adjusted EBITDA decreased $35 million for the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily as a result of the decrease in ownership segment revenues partially offset by decreases in owned and leased operating expenses of $68 million. Ownership Adjusted EBITDA increased $64 million for the year ended

December 31, 2015 compared to the year ended December 31, 2014, primarily as a result of the decrease in owned and leased operating expenses of $84 million, partially offset by the decrease in ownership segment revenues. Refer to "—Revenues—Owned and leased hotels" and "—Operating Expenses—Owned and leased hotels" for further discussion of the changes in revenues and operating expenses at our owned and leased hotels.

Management and franchise

Management and franchise segment revenues increased $95 million and $223 million for the years ended December 31, 2016 and 2015 compared to the years ended December 31, 2015 and 2014, respectively, primarily as a result of the net addition of hotels to our managed and franchised system, as well as increases in RevPAR at our comparable managed and franchised properties of 2.0 percent and 5.5 percent, respectively. The increase in segment revenues was also due to an increase in licensing and other fees. Refer to "—Revenues—Management and franchise fees and other" for further discussion on the increases in revenues from our managed and franchised properties. Management and franchise Adjusted EBITDA increased in line with the increases in management and franchise segment revenues.

Timeshare

Timeshare segment revenues increased $82 million and $137 million for the years ended December 31, 2016 and 2015 compared to the years ended December 31, 2015 and 2014, respectively, primarily as a result of increased timeshare sales revenue due to increases in commissions recognized from the sale of third-party developed intervals, as well as increased revenues from our resort operations. During the year ended December 31, 2016, timeshare sales revenue also increased from the sale of owned timeshare intervals. Refer to "— Revenues— Timeshare" for further discussion of the changes in revenues from our timeshare segment.

Timeshare Adjusted EBITDA increased $29 million and $15 million for the years ended December 31, 2016 and 2015 compared to the years ended December 31, 2015 and 2014, respectively, as a result of the increases in timeshare revenues, partially offset by the increases in timeshare operating expenses of $51 million and $130 million, respectively. Refer to "— Revenues—Timeshare" and "—Operating Expenses—Timeshare" for a discussion of the changes in revenues and operating expenses from our timeshare segment.

Supplemental Financial Data for Unrestricted U.S. Real Estate Subsidiaries

As of December 31, 2016, we owned majority or controlling financial interests in 56 hotels, representing 28,931 rooms. See "Part I—Item 2. Properties" for more information on each of our owned hotels. Of these owned hotels, 36 hotels representing an aggregate of 23,570 rooms as of December 31, 2016, were owned by subsidiaries that we collectively refer to as our "Unrestricted U.S. Real Estate Subsidiaries." The Unrestricted U.S. Real Estate Subsidiaries are not subject to any of the restrictive covenants in the indentures that govern our senior notes due 2021 and the 4.25% Senior Notes due 2024 (together, the "Senior Notes"), which are unsecured.

We have included this supplemental financial data to comply with certain financial information requirements regarding our Unrestricted U.S. Real Estate Subsidiaries set forth in the indenture that governs our Senior Notes. Upon completion of the spin-offs, our Unrestricted U.S. Real Estate Subsidiaries will not meet the threshold to constitute a "significant subsidiary" as defined by Regulation S-X and we will no longer be required to disclose this supplemental financial data.

For the year ended December 31, 2016, the Unrestricted U.S. Real Estate Subsidiaries represented 19.6 percent of our total revenues, 20.0 percent of income before income taxes, 43.1 percent of net income attributable to Hilton stockholders and 23.6 percent of our Adjusted EBITDA, and as of December 31, 2016, represented 34.4 percent of our total assets and 24.2 percent of our total liabilities.

The following tables present supplemental unaudited financial data, as required by the indenture, for our Unrestricted U.S. Real Estate Subsidiaries and all periods presented reflect the adoption of ASU No. 2015-03 and No. 2015-15:

Year Ended December 31,
201620152014
(in millions)
Revenues$2,288$2,239$2,060
Net income attributable to Hilton stockholders150222157
Capital expenditures for property and equipment185203152
Adjusted EBITDA(1)702702621
Cash provided by (used in):
Operating activities378415438
Investing activities(184)273(149)
Financing activities3(626)(317)

(1)The following table provides a reconciliation of our Unrestricted U.S. Real Estate Subsidiaries' net income to EBITDA and Adjusted EBITDA, which we believe is the most closely comparable U.S. GAAP financial measure:

Year Ended December 31,
201620152014
(in millions)
Net income$151$224$156
Interest expense167174173
Income tax expense100168110
Depreciation and amortization254244202
Interest expense and depreciation and amortization included in equity in earnings from unconsolidated affiliates3——
EBITDA675810641
Gain on sales of assets, net(1)(143)—
Share-based compensation expense12—
Other loss (gain), net2332(23)
Other adjustment items413
Adjusted EBITDA$702$702$621
December 31,
20162015
(in millions)
Assets$9,005$8,914
Liabilities4,9186,718

Liquidity and Capital Resources

Overview

As of December 31, 2016, we had total cash and cash equivalents of $1,684 million, including $266 million of restricted cash and cash equivalents. The majority of our restricted cash and cash equivalents balance related to cash collateral on our self-insurance programs, escrowed cash from our timeshare operations and cash restricted in accordance with our long-term debt and timeshare debt agreements.

Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating expenses and other expenditures, including corporate expenses, payroll and related benefits, legal costs, operating costs associated with the management of hotels, interest and scheduled principal payments on our outstanding indebtedness, costs associated with the spin-offs, contract acquisition costs and capital expenditures for renovations and maintenance at our owned and leased hotels. Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities, capital improvements at our owned and leased hotels, purchase commitments, dividends as declared, costs associated with potential acquisitions and corporate capital expenditures.

We finance our business activities primarily with existing cash and cash generated from our operations. We believe that this cash will be adequate to meet anticipated requirements for operating expenses and other expenditures, including corporate expenses, payroll and related benefits, legal costs and purchase commitments for the foreseeable future. The objectives of our cash management policy are to maintain the availability of liquidity and minimize operational costs. Further, we have an investment policy that is focused on the preservation of capital and maximizing the return on new and existing investments and returning available capital to stockholders.

We and our affiliates, and/or our major stockholders and their respective affiliates, may from time to time purchase our outstanding debt through open market purchases, privately negotiated transactions or otherwise. Purchases or retirement of debt, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

In preparation of the spin-offs that occurred on January 3, 2017, we completed several financing transactions during the year ended December 31, 2016. For further information on these transactions, see Note 12: "Debt" in our consolidated financial statements.

Sources and Uses of Our Cash and Cash Equivalents

The following table summarizes our net cash flows and key metrics related to our liquidity:

As of and for the year ended December 31,Percent Change
2016201520142016 vs. 20152015 vs. 2014
(in millions)
Net cash provided by operating activities$1,350$1,407$1,307(4.1)7.7
Net cash provided by (used in) investing activities(478)414(310)NM(1)NM(1)
Net cash used in financing activities(29)(1,714)(1,075)(98.3)59.4
Working capital surplus(2)873142267NM(1)(46.8)
(1)Fluctuation in terms of percentage change is not meaningful.
(2)Total current assets less total current liabilities.

Our ratio of current assets to current liabilities was 1.33, 1.06 and 1.12 as of December 31, 2016, 2015 and 2014, respectively.

Operating Activities

Cash flow from operating activities is primarily generated from management and franchise fee revenue, operating income

from our owned and leased hotels and sales of timeshare units.

The $57 million decrease in net cash provided by operating activities during the year ended December 31, 2016 compared to the year ended December 31, 2015 was primarily as a result of an increase in net cash paid for taxes of $202 million, partially offset by improved operating results in our management and franchise and timeshare businesses.

The $100 million increase in net cash provided by operating activities during the year ended December 31, 2015 compared to the year ended December 31, 2014 was primarily as a result of improved operating results in each of our three business segments, as well as a decrease in cash paid for interest of $29 million, offset by an increase in net cash paid for income taxes of $46 million.

Investing Activities

For the year ended December 31, 2016, net cash used in investing activities was $478 million, and consisted primarily of capital expenditures, including contract acquisition costs and capitalized software costs.

During the year ended December 31, 2015, we generated $414 million in cash from investing activities primarily as a result of net proceeds from the tax deferred exchange of the Waldorf Astoria New York and the sale of the Hilton Sydney of $456 million and $331 million, respectively. This amount was partially offset by $409 million in capital expenditures, including contract acquisition costs and capitalized software costs.

During the year ended December 31, 2014, net cash used in investing activities was $310 million, and consisted primarily of capital expenditures, including contract acquisition costs and capitalized software costs.

Our capital expenditures for property and equipment primarily include expenditures related to the renovation of existing owned and leased properties and our corporate facilities. Our software capitalization costs relate to various systems initiatives for the benefit of our hotel owners and our overall corporate operations.

Financing Activities

The $1,685 million decrease in net cash used in financing activities during the year ended December 31, 2016 compared to the year ended December 31, 2015 was primarily attributable to an increase in proceeds from borrowings of $4,667 million, partially offset by an increase in repayments of debt of $2,735 million and an increase in cash dividends of $139 million. The borrowings comprised $4,415 million of long-term debt, of which $2,915 million was for Park and $500 million was for HGV, and $300 million of additional borrowings under our timeshare financing receivables credit facility (the "Timeshare Facility"). We used proceeds from the borrowings and available cash to repay the outstanding balance of the 2013 CMBS Loan of $3,418 million, $554 million of mortgage loans and $250 million on the 2013 Term Loans. For details of our issuances and repayments related to financing transactions that occurred during the year ended December 31, 2016, refer to Note 12: "Debt" in our consolidated financial statements. The increase in cash dividends was due to the declaration of quarterly cash dividends beginning in the third quarter of 2015 and continuing quarterly for the full year of 2016.

The $639 million increase in net cash used in financing activities during the year ended December 31, 2015 compared to the year ended December 31, 2014 was primarily attributable to a decrease in proceeds from borrowings of $302 million, an increase of repayments of debt of $200 million and the payment of cash dividends totaling $138 million in 2015. During the year ended December 31, 2015, we repaid a $525 million mortgage loan and made $775 million in prepayments on our 2013 Term Loans, while during the year ended December 31, 2014 we made prepayments of $1.0 billion on our 2013 Term Loans. Additionally, during the year ended December 31, 2014, we issued $350 million of notes backed by timeshare financing receivables, of which $300 million of the proceeds was used to reduce the outstanding balance on our Timeshare Facility.

Debt and Borrowing Capacity

As of December 31, 2016, our total indebtedness, excluding $224 million of our share of debt of our investments in affiliates, was approximately $10.8 billion, including $694 million of timeshare debt. For further information on our total indebtedness, debt repayments and guarantees refer to Note 12: "Debt" in our consolidated financial statements.

If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required to

reduce capital expenditures, issue additional equity securities or draw on our revolving credit facilities. Our ability to make scheduled principal payments and to pay interest on our debt depends on our future operating performance, which is subject to general conditions in or affecting the hotel and timeshare industries that are beyond our control.

Credit Facilities

As of December 31, 2016, we had three senior revolving credit facilities that provided for an aggregate of $2.2 billion in borrowings, including a $1.0 billion facility to remain with Hilton after the spin-offs, and a $1.0 billion facility and a $200 million facility for Park and HGV, respectively, to be transferred in connection with the spin-offs. These senior revolving credit facilities allowed for up to $230 million to be drawn in the form of letters of credit, with $50 million under Park's facility, $30 million under HGV's facility and $150 million under Hilton's facility. As of December 31, 2016, we had $45 million of letters of credit outstanding under Hilton's facility, leaving us with a borrowing capacity of $955 million and there were no letters of credit or borrowings outstanding under Park and HGV's facilities. For further information on our credit facilities and our guarantors' obligations thereunder, refer to Note 12: "Debt" in our consolidated financial statements.

In August 2016, we amended the terms of our Timeshare Facility to increase the borrowing capacity from $300 million to $450 million, allowing us to borrow up to the maximum amount until August 2018 and requiring all amounts borrowed to be repaid by August 2019. In December 2016, we borrowed an additional $300 million bringing our outstanding borrowings under the Timeshare Facility to $450 million as of December 31, 2016.

Letters of Credit

We had a total of $45 million in letters of credit outstanding as of December 31, 2016 and 2015, the majority of which were outstanding under one of our revolving credit facilities and related to our guarantees on debt and other obligations of third parties and self-insurance programs. The maturities of the letters of credit were within one year as of December 31, 2016.

Contractual Obligations

The following table summarizes our significant contractual obligations as of December 31, 2016:

Payments Due by Period
TotalLess Than 1 Year1-3 Years3-5 YearsMore Than 5 Years
(in millions)
Long-term debt(1)(2)$12,605$493$869$3,977$7,266
Timeshare debt(2)7308755687—
Capital lease obligations415195760279
Operating leases1,9912103683321,081
Purchase commitments33352253244
Total contractual obligations$16,074$861$2,103$4,480$8,630
(1)We have assumed all extensions, which are solely at our option, were exercised.
(2)Includes principal, as well as estimated interest payments. For our variable-rate debt, we have assumed a constant 30-day LIBOR rate of 0.72 percent as of December 31, 2016.

The total amount of unrecognized tax benefits as of December 31, 2016 was $253 million. These amounts are excluded from the table above because they are uncertain and subject to the findings of the taxing authorities in the jurisdictions where we are subject to tax. It is possible that the amount of the liability for unrecognized tax benefits could change during the next year. Refer to Note 18: "Income Taxes" in our consolidated financial statements for further discussion of our liability for unrecognized tax benefits.

In addition to the purchase commitments in the table above, in the normal course of business we enter into purchase commitments for which we are reimbursed by the owners of our managed and franchised hotels. These obligations have minimal or no effect on our net income and cash flow.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements as of December 31, 2016 included letters of credit of $45 million, guarantees of $5 million for debt and obligations of third parties, performance guarantees with possible cash outlays totaling approximately $69 million, of which we have accrued $28 million as of December 31, 2016 for estimated probable exposure, and construction contract commitments of approximately $43 million for capital expenditures at our owned, leased and consolidated VIE hotels. Our contracts contain clauses that allow us to cancel all or some portion of the work. If cancellation of a contract occurred, our commitment would be any costs incurred up to the cancellation date, in addition to any costs associated with the discharge of the contract. See Note 24: "Commitments and Contingencies" in our consolidated financial statements for further discussion.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, the reported amounts of revenues and expenses during the reporting periods and the related disclosures in the consolidated financial statements and accompanying footnotes. We believe that of our significant accounting policies, which are described in Note 2: "Basis of Presentation and Summary of Significant Accounting Policies" in our consolidated financial statements, the following accounting policies are critical because they involve a higher degree of judgment, and the estimates required to be made were based on assumptions that are inherently uncertain. As a result, these accounting policies could materially affect our financial position, results of operations and related disclosures. On an ongoing basis, we evaluate these estimates and judgments based on historical experiences and various other factors that are believed to reflect the current circumstances. While we believe our estimates, assumptions and judgments are reasonable, they are based on information presently available. Actual results may differ significantly from these estimates due to changes in judgments, assumptions and conditions as a result of unforeseen events or otherwise, which could have a material effect on our financial position or results of operations.

Management has discussed the development and selection of these critical accounting policies and estimates with the audit committee of the board of directors.

Property and Equipment and Intangible Assets with Finite Lives

We evaluate the carrying value of our property and equipment and intangible assets with finite lives for potential impairment by comparing the expected undiscounted future cash flows to the net book value of the assets if we determine there are indicators of impairment. If it is determined that the expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book value over the estimated fair value is recorded in our consolidated statements of operations as impairment losses.

As part of the process described above, we exercise judgment to:

•determine if there are indicators of impairment present. Factors we consider when making this determination include assessing the overall effect of trends in the hospitality industry and the general economy, historical experience, capital costs and other asset-specific information;
•determine the projected undiscounted future cash flows when indicators of impairment are present. Judgment is required when developing projections of future revenues and expenses based on estimated growth rates over the expected useful life of the asset group. These estimated growth rates are based on historical operating results, as well as various internal projections and external sources; and
•determine the asset fair value when required. In determining the fair value, we often use internally-developed discounted cash flow models. Assumptions used in the discounted cash flow models include estimating cash flows, which may require us to adjust for specific market conditions, as well as capitalization rates, which are based on location, property or asset type, market-specific dynamics and overall economic performance. The discount rate takes into account our weighted average cost of capital according to our capital structure and other market specific considerations.

We had $8,930 million of property and equipment, net and $1,526 million of intangible assets with finite lives as of December 31, 2016. Changes in estimates and assumptions used in our impairment testing of property and equipment and intangible assets with finite lives could result in future impairment losses, which could be material.

Investments in Affiliates

We evaluate our investments in affiliates for potential impairment when there are indicators that the fair value of our investment may be less than our carrying value. Our investments in affiliates consist primarily of our interests in entities that own or lease hotels. As such, the factors we consider when determining if there are indicators of potential impairment are similar to property and equipment discussed above. We record an impairment loss when we determine there has been an "other-than-temporary" decline in the investment’s fair value. If an identified event or change in circumstances requires an evaluation to determine if the value of an investment may have an other-than-temporary decline, we assess the fair value of the investment based on the accepted valuation methods, which include internally-developed discounted cash flow models. The principal factors used in our discounted cash flow models that require judgment are the same as the items discussed in property and equipment above. If an investment’s fair value is below its carrying value and the decline is considered to be other-than-temporary, we will recognize an impairment loss in equity in earnings (losses) from unconsolidated affiliates for equity method investments or impairment losses for cost method investments in our consolidated statements of operations.

We had $114 million of investments in affiliates as of December 31, 2016. Changes in estimates and assumptions used in our impairment testing of investments in affiliates could result in future impairment losses, which could be material.

Goodwill

We evaluate goodwill for potential impairment by comparing the carrying value of our reporting units to their fair value. Our reporting units are the same as our operating segments as described in Note 23: "Business Segments" in our consolidated financial statements. We perform this evaluation annually or at an interim date if indicators of impairment exist. In any given year we may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If we cannot determine qualitatively that the fair value is in excess of the carrying value, or we decide to bypass the qualitative assessment, we proceed to the two-step quantitative process. In the first step, we

compare the estimated fair value of the reporting unit to the carrying value. When determining estimated fair value, we utilize discounted future cash flow models, as well as market conditions relative to the operations of our reporting units. Under the discounted cash flow approach, we utilize various assumptions that require judgment, including projections of revenues and expenses based on estimated long-term growth rates, and discount rates based on weighted average cost of capital. Our estimates of long-term growth and costs are based on historical data, as well as various internal projections and external sources. The weighted average cost of capital is estimated based on each reporting units’ cost of debt and equity and a selected capital structure. The selected capital structure for each reporting unit is based on consideration of capital structures of comparable publicly traded companies operating in the business of that reporting unit. If the carrying amount of a reporting unit exceeds its estimated fair value, then the second step must be performed. In the second step, we estimate the implied fair value of goodwill, which is determined by taking the fair value of the reporting unit and allocating it to all of its assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination.

We had $5,822 million of goodwill as of December 31, 2016. Changes in the estimates and assumptions used in our goodwill impairment testing could result in future impairment losses, which could be material. Additionally, when a portion of a reporting unit is disposed, goodwill is allocated to the gain or loss on disposition based on the relative fair values of the business or businesses disposed and the portion of the reporting unit that will be retained. When determining fair value of the businesses disposed of and the reporting unit to be retained, we use estimates and assumptions similar to that of those used in our impairment analysis.

Brands

We evaluate our brand intangible assets for impairment on an annual basis or at other times during the year if events or circumstances indicate that it is more likely than not that the fair value of the brand is below the carrying value. When determining fair value, we utilize discounted future cash flow models. Under the discounted cash flow approach, we utilize various assumptions that require judgment, including projections of revenues and expenses based on estimated long-term growth rates and discount rates based on weighted average cost of capital. Our estimates of long-term growth and costs are based on historical data, as well as various internal estimates. If a brand’s estimated current fair value is less than its respective carrying value, the excess of the carrying value over the estimated fair value is recorded in our consolidated statements of operations within impairment losses.

We had $4,848 million of brand intangible assets as of December 31, 2016. Changes in the estimates and assumptions used in our brands impairment testing, most notably revenue growth rates and discount rates, could result in future impairment losses, which could be material.

Hilton Honors

Hilton Honors defers revenue received from participating hotels and program partners in an amount equal to the estimated cost per point of the future redemption obligation. We engage outside actuaries to assist in determining the fair value of the future award redemption obligation using statistical formulas that project future point redemptions based on factors that require judgment, including an estimate of "breakage" (points that will never be redeemed), an estimate of the points that will eventually be redeemed and the cost of the points to be redeemed. The cost of the points to be redeemed includes further estimates of available room nights, occupancy rates, room rates and any devaluation or appreciation of points based on changes in reward prices or changes in points earned per stay.

We had $1,432 million of guest loyalty liability as of December 31, 2016, including $543 million in accounts payable, accrued expenses and other liabilities. Changes in the estimates used in developing our breakage rate or other expected future program operations could result in a material change to our guest loyalty liability.

Allowance for Loan Losses

The allowance for loan losses is related to the receivables generated by our financing of timeshare interval sales, which are secured by the underlying timeshare properties. We determine our timeshare financing receivables to be past due based on the contractual terms of the individual mortgage loans. We use a technique referred to as static pool analysis as the basis for determining our general reserve requirements on our timeshare financing receivables. The adequacy of the related allowance is determined by management through analysis of several factors requiring judgment, such as current economic conditions and industry trends, as well as the specific risk characteristics of the portfolio, including assumed default rates.

We had $120 million of allowance for loan losses as of December 31, 2016. Changes in the estimates used in developing our default rates could result in a material change to our allowance.

Income Taxes

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities using currently enacted tax rates. We regularly review our deferred tax assets to assess their potential realization and establish a valuation allowance for portions of such assets that we believe will not be ultimately realized. In performing this review, we make estimates and assumptions regarding projected future taxable income, the expected timing of reversals of existing temporary differences and the implementation of tax planning strategies. A change in these assumptions may increase or decrease our valuation allowance resulting in an increase or decrease in our effective tax rate, which could materially affect our consolidated financial statements.

We use a prescribed more-likely-than-not recognition threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return if there is uncertainty in income taxes recognized in the financial statements. Assumptions and estimates are used to determine the amount of tax benefit to be recognized. Changes to these assumptions and estimates can lead to an additional income tax benefit (expense), which can materially change our consolidated financial statements.

Legal Contingencies

We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. An estimated loss from a loss contingency should be accrued by a charge to income if it is probable and the amount of the loss can be reasonably estimated. Significant judgment is required when we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially affect our consolidated financial statements.

Consolidations

We use judgment when evaluating whether we have a controlling financial interest in an entity, including the assessment of the importance of rights and privileges of the partners based on voting rights, as well as financial interests in an entity that are not controllable through voting interests. If the entity is considered to be a VIE, we use judgment determining whether we are the primary beneficiary, and then consolidate those VIEs for which we have determined we are the primary beneficiary. If the entity in which we hold an interest does not meet the definition of a VIE, we evaluate whether we have a controlling financial interest through our voting interest in the entity. Changes to judgments used in evaluating our partnerships and other investments could materially affect our consolidated financial statements.

Share-Based Compensation

The process of estimating the fair value of stock-based compensation awards and recognizing the associated expense over the requisite service period involves significant management estimates and assumptions. Refer to Note 20: "Share-Based Compensation" in our consolidated financial statements for additional discussion. Any changes to these estimates will affect the amount of compensation expense we recognize with respect to future grants.

Previous: Item 6. Selected Financial Data · Next: Item 7A. Quantitative and Qualitative Disclosures About Market Risk