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 5,284 properties comprising 856,115 rooms in 105 countries and territories as of December 31, 2017. 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, Tapestry Collection 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; and our timeshare brand, Hilton Grand Vacations. As of December 31, 2017, we had approximately 71 million members in our award-winning guest loyalty program, Hilton Honors, a 20 percent increase from December 31, 2016.

Recent Events

On January 3, 2017, we completed the spin-offs of Park and HGV. The historical financial results of Park and HGV are reflected in our consolidated financial statements as discontinued operations. See Note 3: "Discontinued Operations" in our consolidated financial statements for additional information.

On January 3, 2017, we completed a 1-for-3 reverse stock split of Hilton's outstanding common stock. See Note 1: "Organization" in our consolidated financial statements for additional information.

Segments and Regions

Management analyzes our operations and business by both operating segments and geographic regions. Our operations consist of two reportable segments that are based on similar products or services: (i) management and franchise; and (ii) ownership. The management and franchise segment provides services, including hotel management and licensing of our brands. This segment generates its revenue from: (i) management and franchise fees charged to third-party hotel owners; (ii) license fees for the exclusive right to use certain Hilton marks and intellectual property; and (iii) affiliate fees charged to owned and leased hotels. As a manager of hotels, 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 ownership segment primarily derives earnings from providing hotel room rentals, food and beverage sales and other services at our owned and leased hotels.

Geographically, management conducts business through three distinct geographic regions: (i) the Americas; (ii) Europe, Middle East and Africa ("EMEA"); and (iii) 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 represented 74 percent of our system-wide hotel rooms as of December 31, 2017; therefore, the U.S. is often analyzed separately and apart from the Americas geographic region overall 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 Iceland 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 and, as such, are presented separately within the analysis herein. The Asia Pacific region includes the eastern and southeastern nations of Asia, as well as India, Australia, New Zealand and the Pacific island nations.

System Growth and Pipeline

Our strategic objectives include the continued expansion of 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, since the capital required to build and maintain hotels is typically provided by the third-party owner of the hotel with whom we contract to provide management or franchise services. Additionally, prior to approving the addition of new properties to our management and franchise development pipeline, we evaluate the economic viability of the property based on its geographic location, the credit quality of the third-party owner and other factors. By increasing the number of management

and franchise contracts with third-party owners, we expect to increase overall return on invested capital and cash available for return to stockholders.

As of December 31, 2017, we had a total of 2,257 hotels in our development pipeline, representing approximately 345,000 rooms under construction or approved for development throughout 107 countries and territories, including 39 countries and territories where we do not currently have any open hotels. All of the rooms in the pipeline are within our management and franchise segment. Over 182,000 of the rooms in the pipeline, or more than half, were located outside the U.S. Additionally, over 174,000 rooms in the pipeline, or more than half, 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

We primarily derive our revenues from the following sources:

•

Franchise fees. Represents fees received in connection with the licensing of our brands. Under our franchise contracts, franchisees typically pay us franchise fees that include: (i) application, initiation and other fees for when new hotels enter the system, when there is a change of ownership or a contract is extended; and (ii) monthly royalty fees, generally calculated as a percentage of gross room revenue, and, for our full service brands, a percentage of gross food and beverage revenues and other revenues, as applicable. We also earn license fees from a license agreement with HGV and co-brand credit card arrangements for the use of certain Hilton marks and intellectual property.

•

Base and incentive management fees. Represents fees received in connection with the management of hotels. Terms of our management contracts vary, but our fees generally consist of a base fee, which is typically a percentage of the hotel's gross revenue and, in some cases, an incentive fee, which is based on hotel operating profits and may be subject to a stated return threshold to the owner, normally measured over a one-calendar year period. 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.

•

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.

•	Other revenues. Represents revenue generated by the incidental support of hotel operations for owned, leased, managed and franchised properties, including our supply management business, and other operating income.

•

Other revenues from managed and franchised properties. These revenues represent contractual reimbursements to us by property owners for the payroll and related costs of 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. We have no legal responsibility for employees at franchised properties. Hotel franchisees and property owners of hotels we manage also pay a monthly fee based on a percentage of the hotel's gross room revenue, or other usage fees, which covers the costs of advertising and marketing programs; the costs of internet, technology and reservation systems; and quality assurance program expenses. The corresponding expenses incurred by us are presented as other expenses from managed and franchised properties in our consolidated statements of operations, resulting in no effect on operating income (loss) or net income (loss).

Factors Affecting our Revenues

The following factors affect the revenues we derive from our operations:

•

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 amount of management and franchise fee revenues we are able to generate from our managed and franchised properties and the revenues and profitability of our owned and leased operations. 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. 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.

•

Contracts with third-party owners and franchisees and relationships with developers. We depend on our long-term management and franchise contracts 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 contracts 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.

Expenses

Principal Components

We primarily incur the following expenses:

•

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, as well as 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.

•	Depreciation and amortization. These are non-cash expenses that primarily consist of amortization of our management and franchise intangibles and capitalized software, as well as depreciation of fixed assets, such as buildings and furniture and equipment that are used in corporate operations or at our consolidated owned and leased hotels.

•

General and administrative. 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 administrative and related expenses.

•	Other expenses. Consists of expenses incurred by our supply management and other ancillary businesses, along with other operating expenses of the business.

•

Other expenses from managed and franchised properties. These expenses represent certain costs and expenses that are contractually reimbursed to us by property owners for payroll and related costs for properties that we manage where the property employees are legally our responsibility, or paid from fees collected in advance from properties for certain other operating costs of the managed and franchised properties' operations, marketing expenses and other expenses associated with our brands and shared services. 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 (loss) or net income (loss).

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 and leasing hotels 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 franchise 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 fully 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, while continuing to optimize the overall customer experience or the value of our hotels or brands.

•

Changes in depreciation and amortization expense. We capitalize costs associated with certain software development projects and, as those projects are completed and placed into service, amortization expense will increase. We also capitalize cash consideration paid to incentivize hotel owners as contract acquisition costs and the costs incurred to obtain certain management and franchise contracts as development commissions. As we enter into new management and franchise contracts for which these costs are incurred and capitalized, amortization expense will also increase. Additionally, 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.

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. We hedge foreign exchange-based cash flow variability in certain of our foreign currency denominated management and franchise fees using forward contracts.

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 type during the current or comparable periods reported, excluding the hotels distributed in the spin-offs; 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 5,236 hotels in our system as of December 31, 2017, 3,909 hotels have been classified as comparable hotels. Our 1,327 non-comparable hotels included 284 hotels, or approximately five 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.

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 for a given period. 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 average daily rate levels as demand for hotel rooms increases or decreases.

Average Daily Rate ("ADR")

ADR represents hotel room revenue divided by total number of room nights sold for 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.

Revenue per Available Room ("RevPAR")

RevPAR is calculated 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, unless otherwise noted. As such, comparisons of these hotel operating statistics for the years ended December 31, 2017 and 2016 use the exchange rates for the year ended December 31, 2017, and comparisons for the years ended December 31, 2016 and 2015 use the exchange rates for the year ended December 31, 2016.

EBITDA and Adjusted EBITDA

EBITDA reflects income (loss) from continuing operations, net of taxes, excluding interest expense, a provision for income taxes and depreciation and amortization.

Adjusted EBITDA is calculated as EBITDA, as previously defined, further adjusted to exclude certain items, including gains, losses and expenses in connection with: (i) asset dispositions for both consolidated and unconsolidated investments; (ii) foreign currency transactions; (iii) debt restructurings and retirements; (iv) furniture, fixtures and equipment ("FF&E") replacement reserves required under certain lease agreements; (v) reorganization costs; (vi) share-based compensation expense; (vii) non-cash impairment losses; (viii) severance, relocation and other expenses; and (ix) other items.

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 the provision for income taxes 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) FF&E replacement reserve to be consistent with the treatment of FF&E for 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 are not recognized terms under U.S. generally accepted accounting principles ("GAAP") and should not be considered as alternatives to net income (loss) or other measures of financial performance or liquidity

derived in accordance with GAAP. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered as alternatives, either in isolation or as a substitute, for net income (loss), cash flow or other methods of analyzing our results as reported under 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 a provision for income taxes 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

The hotel operating statistics by region for our system-wide comparable hotels for the year ended December 31, 2017 compared to the year ended December 31, 2016 were as follows:

	Year Ended				Variance
	December 31, 2017				2017 vs. 2016
U.S.
Occupancy	76.3		%		0.4	%	pts.
ADR	$	146.78			1.0	%
RevPAR	$	111.93			1.5	%
Americas (excluding U.S.)
Occupancy	71.5		%		2.1	%	pts.
ADR	$	124.47			2.1	%
RevPAR	$	89.04			5.3	%
Europe
Occupancy	75.3		%		3.2	%	pts.
ADR	$	141.20			2.1	%
RevPAR	$	106.37			6.6	%
MEA
Occupancy	67.1		%		5.5	%	pts.
ADR	$	145.16			(5.0	)%
RevPAR	$	97.42			3.6	%
Asia Pacific
Occupancy	72.9		%		4.9	%	pts.
ADR	$	140.36			0.1	%
RevPAR	$	102.39			7.3	%
System-wide
Occupancy	75.5		%		1.2	%	pts.
ADR	$	144.78			0.9	%
RevPAR	$	109.27			2.5	%

For the year ended December 31, 2017, we experienced RevPAR growth across all regions, particularly in Asia Pacific, Europe and the Americas (excluding U.S.). Continued growth in Asia Pacific was primarily driven by high demand in China and Japan attributable to new hotels stabilizing in the system, resulting in increased occupancy. Strong performance in Europe was a result of both increases in occupancy and ADR, largely driven by continued recovery from the geopolitical and economic turmoil in 2016, particularly in Turkey. The RevPAR increase in the Americas (excluding U.S.) was driven by strong performance in Canada and Puerto Rico, which was a result of strong transient and group demand and steady demand resulting from the hurricanes, respectively. MEA experienced RevPAR growth due to increased occupancy, despite declines in ADR due to travel sanctions and increased geopolitical pressures. RevPAR growth in the U.S. was driven by increased demand in certain markets as a result of hurricane relief efforts.

The hotel operating statistics by region for our system-wide comparable hotels for the year ended December 31, 2016 compared to the year ended December 31, 2015 were as follows:

	Year Ended				Variance
	December 31, 2016				2016 vs. 2015
U.S.
Occupancy	75.9		%		(0.1	)%	pts.
ADR	$	143.75			2.0	%
RevPAR	$	109.14			1.8	%
Americas (excluding U.S.)
Occupancy	72.3		%		—	%	pts.
ADR	$	122.05			4.2	%
RevPAR	$	88.22			4.2	%
Europe
Occupancy	73.9		%		(0.7	)%	pts.
ADR	$	146.04			2.0	%
RevPAR	$	107.95			1.1	%
MEA
Occupancy	63.1		%		(3.3	)%	pts.
ADR	$	166.26			3.6	%
RevPAR	104.94				(1.5	)%
Asia Pacific
Occupancy	71.5		%		3.8	%	pts.
ADR	$	145.75			(2.1	)%
RevPAR	$	104.26			3.5	%
System-wide
Occupancy	75.0		%		—	%	pts.
ADR	$	143.63			1.9	%
RevPAR	$	107.65			1.8	%

The U.S., Americas and Europe all experienced RevPAR growth as a result of ADR growth, with Americas (excluding U.S.) 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.

The table below provides a reconciliation of income (loss) from continuing operations, net of taxes, to EBITDA and Adjusted EBITDA:

	Year Ended December 31,
	2017				2016				2015
	(in millions)
Income (loss) from continuing operations, net of taxes	$	1,264			$	(8	)		$	881
Interest expense	408				394				377
Income tax expense (benefit)	(334		)		564				(348		)
Depreciation and amortization	347				364				385
EBITDA	1,685				1,314				1,295
Gain on sales of assets, net	—				(8		)		(163		)
Loss (gain) on foreign currency transactions	(3		)		16				41
Loss on debt extinguishment	60				—				—
FF&E replacement reserve	55				55				46
Share-based compensation expense	121				81				147
Other adjustment items(1)	47				85				109
Adjusted EBITDA	$	1,965			$	1,543			$	1,475

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(1)	Includes adjustments for severance, impairment loss and other items. The year ended December 31, 2017 also includes transaction costs. Transaction costs for the years ended December 31, 2016 and 2015 are included in discontinued operations and, therefore, are excluded from the presentation above.

Revenues

	Year Ended December 31,												Percent Change
	2017				2016				2015				2017 vs. 2016		2016 vs. 2015
	(in millions)
Franchise fees	$	1,382			$	1,154			$	1,087			19.8		6.2
Base and other management fees	$	336			$	242			$	230			38.8		5.2
Incentive management fees	222				142				138				56.3		2.9
Total management fees	$	558			$	384			$	368			45.3		4.3

The increases in management and franchise fees for all periods were driven by the addition of new managed and franchised properties to our portfolio and the increases in RevPAR at our comparable managed and franchised hotels.

Including new development and ownership type transfers, we added 744 managed and franchised properties from January 1, 2016 to December 31, 2017 and 600 managed and franchised properties from January 1, 2015 to December 31, 2016 on a net basis, providing an additional 133,921 rooms and 89,410 rooms, respectively, to our management and franchise segment. The increase from January 1, 2016 to December 31, 2017 included 67 properties that upon completion of the spin-offs were owned by Park and managed or franchised by Hilton. 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. Franchise fees also increased during the year ended December 31, 2017 as a result of a net increase in licensing and other fees of $148 million, which includes the effect of the license fees earned from HGV after the spin-offs.

On a comparable basis, our management fees increased during the years ended December 31, 2017 and 2016 compared to the years ended December 31, 2016 and 2015, respectively, as a result of increases in RevPAR at our managed hotels of 3.4 percent and 1.7 percent, respectively, primarily due to increased occupancy of 2.4 percentage points for the year ended December 31, 2017 and increased ADR of 1.6 percent for the year ended December 31, 2016. On a comparable basis, our franchise fees increased as a result of increases in RevPAR at our franchised hotels of 2.0 percent and 2.1 percent, respectively, primarily due to increases in ADR of 0.9 percent and 2.0 percent, respectively, as well as increased occupancy of 0.8 percentage points for the year ended December 31, 2017.

	Year Ended December 31,											Percent Change
	2017				2016				2015			2017 vs. 2016			2016 vs. 2015
	(in millions)
Owned and leased hotels	$	1,450			$	1,452			1,596			(0.1	)		(9.0	)

Owned and leased hotel revenues decreased during the year ended December 31, 2017 compared to the year ended December 31, 2016, as a result of unfavorable foreign currency changes, which decreased revenues by $41 million, offset by an increase in revenues on a currency neutral basis of $39 million. On a currency neutral basis, owned and leased hotel revenues increased primarily as a result of an increase at our comparable hotels of $41 million due to an increase in RevPAR of 4.8 percent, attributable to increases in ADR and occupancy of 3.2 percent and 1.2 percentage points, respectively. This increase was partially offset by a decrease in revenues of $5 million due to a net disposal of properties between January 1, 2016 and December 31, 2017.

Owned and leased hotel revenues decreased during the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily as a result of the effect of foreign currency changes and property disposals. Foreign currency changes accounted for $62 million of the decrease. On a currency neutral basis, revenues decreased $82 million, which was attributable to a net decrease in revenues of $85 million from properties disposed between January 1, 2015 and December 31, 2016. Excluding foreign currency changes and property disposals, revenues increased at our comparable owned and leased hotels due to an increase in RevPAR of 2.1 percent, primarily attributable to an increase in ADR of 2.9 percent.

	Year Ended December 31,												Percent Change
	2017				2016				2015				2017 vs. 2016		2016 vs. 2015
	(in millions)
Other revenues	$	105			$	82			$	71			28.0		15.5

The increases in other revenues during the years ended December 31, 2017 and 2016 compared to the years ended December 31, 2016 and 2015, respectively, were primarily the result of recoveries of $28 million and $9 million, respectively, from the settlement of a claim by Hilton to a third party relating to our defined benefit plans.

Operating Expenses

	Year Ended December 31,												Percent Change
	2017				2016				2015				2017 vs. 2016		2016 vs. 2015
	(in millions)
Owned and leased hotels	$	1,286			$	1,295			$	1,414			(0.7)		(8.4)

Owned and leased hotel expenses decreased during the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily as a result of the effect of foreign currency changes of $40 million. On a currency neutral basis, owned and leased hotel expenses increased $31 million as a result of an increase of $39 million at our comparable hotels, due to increased variable operating costs driven by increased occupancy. This increase in owned and leased hotel expenses was partially offset by a decrease at our non-comparable hotels, primarily attributable to a decrease of $10 million in expenses due to a net disposal of properties between January 1, 2016 and December 31, 2017.

Owned and leased hotel expenses decreased during the year ended December 31, 2016 compared to the year ended December 31, 2015 primarily as a result of the effect of foreign currency changes and property disposals. Foreign currency changes accounted for $65 million of the decrease. On a currency neutral basis, owned and leased hotel expenses decreased $54 million, primarily as a result of the decrease in expenses of $66 million from properties disposed between January 1, 2015 and December 31, 2016.

	Year Ended December 31,												Percent Change
	2017				2016				2015				2017 vs. 2016		2016 vs. 2015
	(in millions)
Depreciation and amortization	$	347			$	364			$	385			(4.7)		(5.5)
General and administrative	434				403				537				7.7		(25.0)
Other expenses	56				66				49				(15.2)		34.7

The decrease in depreciation and amortization expenses during the year ended December 31, 2017 compared to the year ended December 31, 2016 was primarily a result of a decrease in amortization expense due to certain capitalized software costs being fully amortized between December 31, 2016 and December 31, 2017. The decrease in depreciation and amortization expenses during the year ended December 31, 2016 compared to the year ended December 31, 2015 was primarily a result of the recognition of $13 million in accelerated amortization in 2015 on a management contract intangible asset for a property that was managed by us prior to our acquisition of it and its transfer of ownership to Park upon completion of the spin-offs.

The increase in general and administrative expenses during the year ended December 31, 2017 compared to the year ended December 31, 2016 was primarily the result of increased share-based compensation expense of $29 million mainly due to an increase in retirement eligible participants, resulting in the acceleration of expense recognition, as well as additional expense recognized from a special equity grant to certain participants in connection with the spin-offs. Additionally, $18 million in costs associated with the spin-offs were incurred during the year ended December 31, 2017, while similar costs incurred during the year ended December 31, 2016 are included in discontinued operations. These increases were partially offset by a decrease of $10 million in severance costs related to the 2015 sale and continued management of the Waldorf Astoria New York (the "Waldorf Astoria New York sale").

The decrease in general and administrative expenses for the year ended December 31, 2016 compared to the year ended December 31, 2015 was primarily a result of a decrease of $73 million in severance costs related to the Waldorf Astoria New York sale and a decrease in share-based compensation expense due to $61 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 decrease in other expenses for the year ended December 31, 2017 compared to the year ended December 31, 2016 was primarily a result of decreased impairment losses of $11 million. The increase in other expenses for the year ended December 31, 2016 compared to the year ended December 31, 2015 related primarily to the consolidation of a management company in 2016, which increased other expenses by $8 million, as well as increased impairment losses of $6 million.

Gain on sales of assets, net

	Year Ended December 31,												Percent Change
	2017				2016				2015				2017 vs. 2016		2016 vs. 2015
	(in millions)
Gain on sales of assets, net	$	—			$	8			$	163			(100.0)		(95.1)

During the year ended December 31, 2016, we recognized a gain on the sale of one of our hotels held by a consolidated VIE. During the year ended December 31, 2015, we recognized a gain upon completion of the sale of the Hilton Sydney. Note 4: "Disposals" in our consolidated financial statements for additional information.

Non-operating Income and Expenses

	Year Ended December 31,												Percent Change
	2017				2016				2015				2017 vs. 2016		2016 vs. 2015
	(in millions)
Interest expense	$	(408	)		$	(394	)		$	(377	)		3.6		4.5
Gain (loss) on foreign currency transactions	3				(16		)		(41		)		NM(1)		(61.0)
Loss on debt extinguishment	(60		)		—				—				NM(1)		—
Other non-operating income, net	23				14				51				64.3		(72.5)
Income tax benefit (expense)	334				(564		)		348				NM(1)		NM(1)

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(1)	Fluctuation in terms of percentage change is not meaningful.

The increase in interest expense during the year ended December 31, 2017 compared to the year ended December 31, 2016 was primarily due to the issuances of the 4.625% Senior Notes due 2025 (the "2025 Senior Notes") and the 4.875% Senior Notes due 2027 (the "2027 Senior Notes") in March 2017 and the 4.25% Senior Notes due 2024 (the "2024 Senior Notes") in August 2016, as well as the reclassification of losses from accumulated other comprehensive loss related to the dedesignation of interest rate swaps in 2016. These increases were largely offset by decreases in interest expense due to the March 2017 repayment of the 5.625% Senior Notes due 2021 (the "2021 Senior Notes") and the refinancing of the senior secured term loan facility (the "Term Loans") in March 2017, which reduced the interest rate on this borrowing.

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 the 2024 Senior Notes, partially offset by decreases in interest expense on the Term Loans due to a reduction of principal from prepayments and an amendment in August 2016 that extended the maturity and reduced the interest rate on a portion of the outstanding balance. See Note 9: "Debt" and Note 11: "Derivative Instruments and Hedging Activities" in our consolidated financial statements for additional information on our indebtedness and interest rate swaps.

The net gain and losses on foreign currency transactions for all periods were primarily related to changes in foreign currency rates on our short-term cross-currency intercompany loans. The changes were predominantly related to loans denominated in the Australian dollar ("AUD"), the British pound ("GBP") and the euro for the years ended December 31, 2017, 2016 and 2015, as well as the Brazilian real, for the year ended December 31, 2015.

The loss on debt extinguishment related to the repayment of the 2021 Senior Notes and included a redemption premium of $42 million and the accelerated recognition of $18 million of unamortized debt issuance costs during the year ended December 31, 2017.

Other non-operating income, net increased during the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily as a result of a $7 million gain recognized in 2017 related to an amendment of one of our capital leases. Other non-operating income, net decreased during the year ended December 31, 2016 compared to the year ended December 31, 2015 primarily as a result of a $24 million gain recognized in 2015 related to a capital lease liability reduction from one of our consolidated VIEs, as well as a pre-tax gain of $8 million recognized in 2015 on a sale of assets.

On December 22, 2017, H.R.1, known as the Tax Cuts and Jobs Act of 2017 (the "TCJ Act") was signed into law, which permanently reduces the corporate income tax rate from a graduated 35 percent to a flat 21 percent rate and imposes a one-time transition tax on earnings of foreign subsidiaries that were previously deferred. The income tax benefit during the year ended December 31, 2017 was primarily due to a benefit of $665 million for the estimated impact of the transition tax and the remeasurement of deferred tax assets and liabilities and other tax liabilities based on the rates at which they are expected to reverse in the future. The benefit recorded as a result of the provisions of the TCJ Act represents management's best estimates of the effect to the current period and are subject to refinement and revision over a one-year period, to be finalized in or before December 2018. This benefit was partially offset by an increase in tax expense attributable to an increase in income from continuing operations before income taxes compared to the year ended December 31, 2016.

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 year 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 subsidiaries. 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 increased. In total, these structuring transactions resulted in additional income tax expense of $482 million during the year ended December 31, 2016. See Note 14: "Income Taxes" in our consolidated financial statements for additional information.

Segment Results

We evaluate our business segment operating performance using operating income. Refer to Note 19: "Business Segments" in our consolidated financial statements for a reconciliation of segment operating income to income from continuing operations before income taxes and additional information on the evaluation of the performance of our segments using operating income. The following table sets forth revenues and operating income by segment:

	Year Ended December 31,												Percent Change
	2017				2016				2015				2017 vs. 2016		2016 vs. 2015
	(in millions)
Revenues:
Management and franchise(1)	$	1,983			$	1,580			$	1,496			25.5		5.6
Ownership	1,450				1,452				1,596				(0.1)		(9.0)
Segment revenues	3,433				3,032				3,092				13.2		(1.9)
Other revenues	105				82				71				28.0		15.5
Other revenues from managed and franchised properties	5,645				4,310				4,011				31.0		7.5
Intersegment fees elimination(1)	(43		)		(42		)		(41		)		2.4		2.4
Total revenues	$	9,140			$	7,382			$	7,133			23.8		3.5
Operating Income(1):
Management and franchise	$	1,983			$	1,580			$	1,496			25.5		5.6
Ownership	121				115				141				5.2		(18.4)
Segment operating income	$	2,104			$	1,695			$	1,637			24.1		3.5

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(1)	Includes management, royalty and intellectual property fees charged to our ownership segment by our management and franchise segment, which were eliminated in our consolidated financial statements.

Management and franchise segment revenues and operating income increased for all periods 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 2.4 percent and 2.0 percent for the years ended December 31, 2017 and 2016 compared to the years ended December 31, 2016 and 2015, respectively. For the year ended December 31, 2017 compared to the year ended December 31, 2016, the increase in management and franchise segment revenues and operating income was also due to an increase in licensing and other fees. Refer to "—Revenues" for further discussion of the increases in revenues from our managed and franchised properties.

Ownership segment revenues decreased for all periods primarily as a result of foreign currency changes and, for the year ended December 31, 2016 compared to the year ended December 31, 2015, the disposal of hotels. Ownership operating income increased for the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily as a result of decreases in owned and leased hotel operating expenses. Ownership operating income decreased 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 hotel operating expenses. Refer to "—Revenues" and "—Operating Expenses" for further discussion of the changes in revenues and operating expenses at our owned and leased hotels.

Liquidity and Capital Resources

Overview

As of December 31, 2017, we had total cash and cash equivalents of $670 million, including $100 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.

Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating and other expenditures, including costs associated with the management and franchising of hotels, corporate expenses, payroll and related benefits, legal costs, interest and scheduled principal payments on our outstanding indebtedness, contract acquisition costs and capital expenditures for renovations and maintenance at the hotels within our ownership segment. Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities, capital improvements to the hotels within our ownership segment, commitments to owners in our management and franchise segment, dividends as declared, share repurchases 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 and other expenditures, including corporate expenses, payroll and related benefits, legal costs and other 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 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 February 2017, our board of directors authorized a stock repurchase program of up to $1.0 billion of the Company's common stock and, in November 2017, an additional $1.0 billion was authorized. During the year ended December 31, 2017, we repurchased $891 million of common stock under the program, and, as of December 31, 2017, $1,109 million remained available for share repurchases. The repurchase program does not have an expiration date and may be suspended or discontinued at any time.

Sources and Uses of Our Cash and Cash Equivalents

The following table summarizes our net cash flows:

	Year Ended December 31,												Percent Change
	2017				2016(1)				2015(1)				2017 vs. 2016		2016 vs. 2015
	(in millions)
Net cash provided by operating activities	$	924			$	1,365			$	1,446			(32.3)		(5.6)
Net cash provided by (used in) investing activities	(222		)		(478		)		414				(53.6)		NM(2)
Net cash used in financing activities	(1,724		)		(44		)		(1,753		)		NM(2)		(97.5)

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(1)	Includes the cash flows from operating activities, investing activities and financing activities of Hilton, Park and HGV.

(2)	Fluctuation in terms of percentage change is not meaningful.

Operating Activities

Cash flows from operating activities were primarily generated from management and franchise fee revenue and operating income from our owned and leased hotels and, for the years ended December 31, 2016 and 2015, sales of timeshare units.

The $441 million decrease in net cash provided by operating activities during the year ended December 31, 2017 compared to the year ended December 31, 2016 was primarily as a result of a decrease in operating income from our owned and leased properties and sales of timeshare units as a result of the spin-offs.

The $81 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 income taxes of $202 million, partially offset by the improved operating results of our management and franchise segment and HGV's timeshare business.

Investing Activities

For the years ended December 31, 2017 and 2016, net cash used in investing activities consisted primarily of capital expenditures for property and equipment, contract acquisition costs and capitalized software costs.

During the year ended December 31, 2015, we generated cash from investing activities primarily as a result of net proceeds from the Waldorf Astoria New York sale, completed for the benefit of Park, 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 for property and equipment, contract acquisition costs and capitalized software costs.

Our capital expenditures for property and equipment primarily consisted of expenditures related to our corporate facilities and the renovation of hotels in our ownership segment which, for the years ended December 31, 2016 and 2015, included those owned by Park following completion of the spin-offs. Our capitalized software costs related to various systems initiatives for

the benefit of our hotel owners and our overall corporate operations. Our contract acquisition costs were incurred to incentivize hotel owners to enter into management and franchise contracts with us.

Financing Activities

The $1,680 million increase in net cash used in financing activities during the year ended December 31, 2017 compared to the year ended December 31, 2016 was primarily the result of cash transferred in connection with the spin-offs and $1.1 billion of capital returned to our stockholders, which includes dividends and share repurchases, compared to $277 million in 2016. In addition, during the year ended December 31, 2017, we received $1.5 billion in proceeds from the issuance of the 2025 Senior Notes and the 2027 Senior Notes, which we used with available cash to repay in full our 2021 Senior Notes, including a redemption premium of $42 million.

The $1,709 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, which were completed in preparation for the spin-offs, 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 $800 million was for HGV. We used proceeds from the borrowings and available cash to repay the outstanding balance of Park's commercial mortgage backed securities loan of $3,418 million, $550 million of Park's mortgage loans and $250 million on our Term Loans. 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.

Debt and Borrowing Capacity

As of December 31, 2017, our total indebtedness, excluding unamortized deferred financing costs and discount, was approximately $6.7 billion. For further information on our total indebtedness, debt issuances and repayments and guarantees on our debt, refer to Note 9: "Debt" and Note 23: "Condensed Consolidating Guarantor Financial Information" in our consolidated financial statements.

Our senior revolving credit facility provides for $1.0 billion in borrowings, including the ability to draw up to $150 million in the form of letters of credit. As of December 31, 2017, we had $41 million of letters of credit outstanding, leaving us with a borrowing capacity of $959 million. The maturities of the letters of credit were within one year as of December 31, 2017, and the majority of them related to our self-insurance programs.

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 senior secured revolving credit facility. 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 hospitality industry that may be beyond our control.

Contractual Obligations

The following table summarizes our significant contractual obligations as of December 31, 2017:

	Payments Due by Period
	Total				Less Than 1 Year				1-3 Years				3-5 Years				More Than 5 Years
	(in millions)
Long-term debt(1)	$	8,120			$	299			$	585			$	579			$	6,657
Capital lease obligations	334				24				59				59				192
Operating leases	1,861				192				349				295				1,025
Purchase commitments	200				52				87				57				4
Total contractual obligations	$	10,515			$	567			$	1,080			$	990			$	7,878

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(1)	Includes principal, as well as estimated interest payments. For our variable-rate debt, we have assumed a constant 30-day LIBOR rate of 1.55 percent as of December 31, 2017.

The total amount of unrecognized tax benefits as of December 31, 2017 was $283 million. This amount is excluded from the table above because these unrecognized tax benefits 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 14: "Income Taxes" in our consolidated financial statements for additional information on 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 (loss) and cash flows.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements as of December 31, 2017 included letters of credit of $41 million and performance guarantees with possible cash outlays of approximately $79 million, for which we accrued $21 million as of December 31, 2017 for estimated probable exposure. See Note 20: "Commitments and Contingencies" in our consolidated financial statements for additional information.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in accordance with 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, cash flows 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 the following critical accounting policies and estimates with the audit committee of the board of directors.

Goodwill

We evaluate goodwill for potential impairment annually and at an interim date if indicators of impairment exist. When using the quantitative process to evaluate goodwill for potential impairment, consistent with our early adoption of ASU No. 2017-04 in January 2017, we compare the estimated fair value of the reporting unit to the carrying value. When determining the 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.

We had $5,190 million of goodwill as of December 31, 2017. 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 those used in our impairment analysis.

Brands

We evaluate our brands intangible assets for impairment on an annual basis and 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 the 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.

We had $4,890 million of brands intangible assets as of December 31, 2017. 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.

Intangible Assets with Finite Lives and Property and Equipment

We evaluate the carrying value of our intangible assets with finite lives and property and equipment 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.

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 and regional performance and expectations, 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 $1,342 million of intangible assets with finite lives and $353 million of property and equipment, net as of December 31, 2017. Changes in estimates and assumptions used in our impairment testing of intangible assets with finite lives and property and equipment 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 a guest loyalty program liability of $1,461 million as of December 31, 2017, including $622 million reflected as a current liability in accounts payable, accrued expenses and other. Changes in the estimates used in developing our breakage rate or other expected future program operations could result in a material change to the guest loyalty program liability.

Income Taxes

On December 22, 2017, the TCJ Act was signed into law and includes widespread changes to the Internal Revenue Code including, among other items, a reduction to the federal corporate tax rate to 21 percent, a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred and the creation of new taxes on certain foreign earnings. As of December 31, 2017, we had not completed our accounting for the tax effects of enactment of the TCJ Act; however, where possible, we made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. In other cases, we were not able to make a reasonable estimate and continued to account for those items based on the provisions of the tax laws that were in effect immediately prior to enactment. See Note 14: "Income Taxes" for additional discussion on the provisional effects of the TCJ Act.

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying values 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. When determining the amount of tax benefit to be recognized, we assume, among other items, the position will be examined, the examiner will have all relevant information and the evaluation of the position should be based on its technical merits. Further, estimates based on the tax position’s technical merits and amounts we would ultimately accept in a negotiated settlement with the tax authorities, are used to measure the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. 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 an entity in which we hold an interest 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 share-based compensation awards and recognizing the associated expense over the requisite service period involves significant estimates and assumptions made by management. Refer to Note 16: "Share-Based Compensation" in our consolidated financial statements for additional information. Any changes to these estimates will affect the amount of share-based compensation expense we recognize with respect to future grants. Additionally, since we determined that the performance condition for our performance awards is probable of achievement, we recognize expense based on anticipated achievement percentages, which are based on internally-developed projections of future Adjusted EBITDA and free cash flow per share. Any changes to these estimates will affect the amount of share-based compensation expense we recognize in future periods.