All statements in this report are made as of the date this Form 10-Q is filed with the
U.S. Securities and Exchange Commission(the "SEC"). We undertake no obligation to publicly update or revise these statements, whether as a result of new information, future events or otherwise. We make forward-looking statements in Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report based on the beliefs and assumptions of our management and on information available to us through the date this Form 10-Q is filed with the SEC. Forward-looking statements include information related to the future effects on our business of the coronavirus pandemic ("COVID-19"); Revenue per Available Room("RevPAR"), average daily rate ("ADR"), occupancy and other future demand and recovery trends and expectations; our expectations regarding rooms growth; our expectations regarding our ability to meet our liquidity requirements; our capital expenditures and other investment spending expectations; the timing of future dividends and share repurchases; and other statements that are preceded by, followed by, or include the words "believes," "expects," "anticipates," "intends," "plans," "estimates," "foresees," or similar expressions; and similar statements concerning anticipated future events and expectations that are not historical facts. We caution you that these statements are not guarantees of future performance and are subject to numerous evolving risks and uncertainties that we may not be able to accurately predict or assess, including the risks and uncertainties we describe in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021("2021 Form 10-K"), Part II, Item 1A of this report, and other factors we describe from time to time in our periodic filings with the SEC.
COMPANY AND OVERVIEW
We are a worldwide operator, franchisor, and licensor of hotel, residential, and timeshare properties under numerous brand names at different price and service points. Consistent with our focus on management, franchising, and licensing, we own very few of our lodging properties. We discuss our operations in the following reportable business segments:
U.S.& Canadaand International. We earn base management fees and, under many agreements, incentive management fees from the properties that we manage, and we earn franchise fees on the properties that others operate under franchise agreements with us. In most markets, base management and franchise fees typically consist of a percentage of property-level revenue, or certain property-level revenue in the case of franchise fees, while incentive management fees typically consist of a percentage of net house profit after a specified owner return. For our hotels in the Middle Eastand Africa, Asia Pacificexcluding China, and Greater Chinaregions, incentive management fees typically consist of a percentage of gross operating profit without adjustment for a specified owner return. Net house profit is calculated as gross operating profit (also referred to as "house profit") less non-controllable expenses such as property insurance, real estate taxes, and furniture, fixtures, and equipment ("FF&E") reserves. Additionally, we earn franchise fees for use of our intellectual property, including fees from our co-brand credit card, timeshare, and residential programs.
We believe RevPAR, which we calculate by dividing room sales for comparable properties by room nights available for the period, is a meaningful indicator of our performance because it measures the period-over-period change in room revenues for comparable properties. RevPAR may not be comparable to similarly titled measures, such as revenues, and should not be viewed as necessarily correlating with our fee revenue. We also believe occupancy and ADR, which are components of calculating RevPAR, are meaningful indicators of our performance. Occupancy, which we calculate by dividing occupied rooms by total rooms available (including rooms in hotels temporarily closed due to issues related to COVID-19), measures the utilization of a property's available capacity. ADR, which we calculate by dividing property room revenue by total rooms sold, measures average room price and is useful in assessing pricing levels. Comparisons to prior periods are on a systemwide constant
U.S.dollar basis for comparable properties, unless otherwise stated. We calculate constant dollar statistics by applying exchange rates for the current period to the prior comparable period. 15
We define our comparable properties as our properties that were open and operating under one of our brands since the beginning of the last full calendar year (since
January 1, 2021for the current period) and have not, in either the current or previous year: (1) undergone significant room or public space renovations or expansions, (2) been converted between company-operated and franchised, or (3) sustained substantial property damage or business interruption, with the exception of properties closed or otherwise experiencing interruptions related to COVID-19, which we continue to classify as comparable. The RevPAR, ADR, and occupancy comparisons between 2022 or 2021 and 2019, which we discuss under the "Impact of COVID-19" caption below, reflect properties that are defined as comparable as of March 31, 2022or December 31, 2021, respectively, even if in 2019 they were not open and operating for the full year or did not meet all the other criteria listed above.
Impact of COVID-19
While COVID-19 continues to have a material impact on our business and industry, global demand surged during the latter part of the 2022 first quarter in every region except
Greater China, after the emergence of the COVID-19 Omicron variant dampened demand globally early in the year. In March 2022, worldwide RevPAR was only 9.4 percent below March 2019, with occupancy reaching 63.6 percent and ADR exceeding 2019 levels by 4.6 percent. The global recovery continues to be led by robust leisure demand, which we expect to continue throughout 2022, and travelers who continue to embrace multi-purpose trips, mixing remote work and vacation time. The decline in business transient and group demand from pre-pandemic 2019 levels improved meaningfully during the latter part of the 2022 first quarter when compared to the 2021 fourth quarter, though this demand continues to lag in recovery. We have been encouraged by the strength of ADR, which was at or above pre-pandemic 2019 levels in certain U.S.and International markets during the 2022 first quarter, and we are optimistic about sustaining strong ADR throughout 2022. RevPAR in the 2022 first quarter compared to the 2021 first quarter improved 99.1 percent in our U.S.& Canadasegment, 88.5 percent in our International segment, and 96.5 percent worldwide. RevPAR in the 2022 first quarter compared to pre-pandemic 2019 first quarter levels declined 14.5 percent in our U.S.& Canadasegment, 31.7 percent in our International segment, and 19.4 percent worldwide. Compared to the 2019 first quarter, 2022 first quarter worldwide occupancy was down 13.6 percentage points, while worldwide ADR was higher by 0.8 percent. In the U.S.& Canada, the COVID-19 Omicron variant dampened demand at the beginning of the quarter, though occupancy quickly improved, resulting in our U.S.& Canada RevPAR in March 2022being down only 3.9 percent when compared to March 2019levels. Leisure demand continued to be strong during the 2022 first quarter, particularly at our luxury and resort hotels and in tertiary markets. In urban destinations, where we have a large presence in the U.S.& Canada, the decline in demand compared to 2019 levels improved by the end of the 2022 first quarter when compared to the decline seen in the 2021 fourth quarter, though these destinations continue to lag in recovery. In other parts of the world, RevPAR continues to vary greatly by geographic market, and demand is heavily impacted by the number of COVID-19 cases, vaccination rates, and the nature and degree of government restrictions. We continue to take measures to mitigate the negative financial and operational impacts of COVID-19 for our hotel owners and our own business. At the property level, we continue to work with owners and franchisees by adjusting renovation requirements for certain properties and supporting owners and franchisees who are working with their lenders to utilize FF&E reserves to meet working capital needs. At the corporate level, we remain focused on managing our corporate general and administrative costs and are being disciplined with respect to our capital expenditures and other investment spending. As a result of our focus on maximizing cash flow, managing expenses, and improving our credit profile, combined with our strong 2022 first quarter results, we are resuming a cash dividend sooner than anticipated. On May 2, 2022, our Board of Directors declared a $0.30per share quarterly cash dividend payable during the 2022 second quarter. Assuming the global demand environment continues to improve and we are within our target leverage ratio range, we also would expect to resume share repurchases in 2022.
As housing demand recovers from the lows seen in the early months of the pandemic, we have seen and continue to see industry-wide labor shortages, which pose challenges for hiring or rehiring for certain positions,
mainly in some
The impact of COVID-19 on the Company remains fluid, as does our corporate and property-level response. We believe COVID-19 will continue to have a material negative impact on our future results for a period of time that we are currently unable to predict. The overall operational and financial impact is highly dependent on the risk factors disclosed under the heading "Risks Relating to COVID-19" in Part I, Item 1A, "Risk Factors," of our 2021 Form 10-K and could be affected by other factors we are not currently able to predict.
Starwood Data Security Incident
November 30, 2018, we announced a data security incident involving unauthorized access to the Starwood reservations database (the "Data Security Incident"). The Starwood reservations database is no longer used for business operations. We are currently unable to estimate the range of total possible financial impact to the Company from the Data Security Incident in excess of the expenses already incurred. However, we do not believe this incident will impact our long-term financial health. Although our insurance program includes coverage designed to limit our exposure to losses such as those related to the Data Security Incident, that insurance may not be sufficient or available to cover all of our expenses or other losses (including fines and penalties) related to the Data Security Incident. In addition, certain expenses by their nature (such as, for example, expenses related to enhancing our cybersecurity program) are not covered by our insurance program. We expect to incur significant expenses associated with the Data Security Incident in future periods, primarily related to legal proceedings and regulatory investigations (including possible additional fines and penalties), increased expenses and capital investments for information technology and information security and data privacy, and increased expenses for compliance activities and to meet increased legal and regulatory requirements. See Note 5 for additional information related to legal proceedings and governmental investigations related to the Data Security Incident.
System growth and pipeline
At the end of the 2022 first quarter, our system had 8,048 properties (1,487,681 rooms), compared to 7,989 properties (1,479,179 rooms) at year-end 2021 and 7,662 properties (1,429,171 rooms) at the end of the 2021 first quarter. The increase compared to year-end 2021 reflects gross additions of 75 properties (11,799 rooms) and deletions of 16 properties (3,494 rooms). Approximately 22 percent of our 2022 first quarter gross room additions were conversions from competitor brands. We expect full-year 2022 total gross rooms growth to approach 5.0 percent and net rooms growth of 3.5 to 4.0 percent. At the end of the 2022 first quarter, we had more than 489,000 rooms in our development pipeline, which includes approximately 201,400 hotel rooms under construction and roughly 20,800 hotel rooms approved for development but not yet under signed contracts. Over half of the rooms in our development pipeline are outside
U.S.& Canada. Properties and Rooms At March 31, 2022, we operated, franchised, and licensed the following properties and rooms: Managed Franchised/Licensed Owned/Leased Residential Total Properties Rooms Properties Rooms Properties Rooms Properties Rooms Properties Rooms U.S. & Canada 636 218,211 5,026 720,230 26 6,483 64 6,807 5,752 951,731 International 1,308 333,745 818 166,821 38 9,199 40 3,484 2,204 513,249 Timeshare - - 92 22,701 - - - - 92 22,701 Total 1,944 551,956 5,936 909,752 64 15,682 104 10,291 8,048 1,487,681 Lodging Statistics
The following table shows RevPAR, occupancy and ADR statistics for comparable properties. System-wide statistics include data from our franchise properties, in addition to our company-operated properties.
Three Months Ended
RevPAR Occupancy Average Daily Rate 2022 vs. 2021 2022 vs. 2021 2022 vs. 2021 Comparable Company-Operated Properties U.S. & Canada
$ 131.59154.7 % 54.4 % 25.4 % pts. $ 242.0535.7 % Greater China $ 53.80(6.9) % 41.9 % (5.7) % pts. $ 128.305.7 % Asia Pacific excluding China $ 58.2966.6 % 45.0 % 11.7 % pts. $ 129.5923.4 % Caribbean & Latin America $ 130.79152.4 % 57.5 % 26.7 % pts. $ 227.3935.5 % Europe $ 81.16401.9 % 42.7 % 30.3 % pts. $ 190.2045.7 % Middle East & Africa $ 128.7197.7 % 66.1 % 23.5 % pts. $ 194.8227.3 % International - All (1) $ 78.4775.1 % 48.2 % 13.0 % pts. $ 162.8828.0 % Worldwide (2) $ 102.61114.1 % 51.0 % 18.6 % pts. $ 201.2536.0 % Comparable Systemwide Properties U.S. & Canada $ 96.7899.1 % 58.0 % 17.4 % pts. $ 166.8239.3 % Greater China $ 51.21(6.2) % 41.3 % (5.4) % pts. $ 123.876.0 % Asia Pacific excluding China $ 58.3262.0 % 45.1 % 11.2 % pts. $ 129.18
Caribbean & Latin America
$ 100.83166.6 % 53.1 % 24.6 % pts. $ 190.0243.2 % Europe $ 63.76400.3 % 38.9 % 27.7 % pts. $ 163.8144.6 % Middle East & Africa $ 117.6199.4 % 64.5 % 23.2 % pts. $ 182.2027.7 % International - All (1) $ 71.1188.5 % 46.2 % 14.8 % pts. $ 153.8528.3 % Worldwide (2) $ 89.1896.5 % 54.5 % 16.6 % pts. $ 163.5636.5 %
(1)Includes Greater China,
Our results in the 2022 first quarter continued to be impacted by COVID-19. See the "Impact of COVID-19" section above for more information about the impact to our business during the 2022 first quarter, and the discussion below for additional analysis of our consolidated results of operations for the 2022 first quarter compared to the 2021 first quarter. Fee Revenues Three Months Ended Change ($ in millions) March 31, 2022 March 31, 2021 2022 vs. 2021 Base management fees $ 213 $ 106
$ 107101 % Franchise fees 500 306 194 63 % Incentive management fees 102 33 69 209 % Gross fee revenues 815 445 370 83 % Contract investment amortization (24) (17) (7) (41) % Net fee revenues $ 791 $ 428 $ 36385 %
The increase in base management fees in the first quarter of 2022 mainly reflects the increase in RevPAR due to the continued recovery in accommodation demand following the impacts of COVID-19.
The increase in franchise fees in the 2022 first quarter primarily reflected higher RevPAR due to the ongoing recovery in lodging demand from the impacts of COVID-19, higher co-brand credit card fees (
$36 million), and unit growth ( $25 million). The increase in incentive management fees in the 2022 first quarter primarily reflected higher profits at certain managed hotels due to the ongoing recovery in lodging demand from the impacts of COVID-19. 18
Table of Contents Owned, Leased, and Other Three Months Ended Change ($ in millions) March 31, 2022 March 31, 2021 2022 vs. 2021 Owned, leased, and other revenue $ 262 $ 108
$ 154143 % Owned, leased, and other - direct expenses 197 135 62 46 % Owned, leased, and other, net $ 65 $ (27) $ 92 nm*
* The percentage change is not significant.
Owned, leased, and other revenue, net of direct expenses increased in the 2022 first quarter primarily due to net stronger results at our owned and leased properties driven by the ongoing recovery in lodging demand from the impacts of COVID-19 and
$29 millionof subsidies under German government COVID-19 assistance programs for certain of our leased hotels. Cost Reimbursements Three Months Ended Change ($ in millions) March 31, 2022 March 31, 2021 2022 vs. 2021 Cost reimbursement revenue $ 3,146 $ 1,780 $ 1,36677 % Reimbursed expenses 3,179 1,833 1,346 73 % Cost reimbursements, net $ (33) $ (53) $ 20 38 % Cost reimbursements, net (cost reimbursement revenue, net of reimbursed expenses) varies due to timing differences between the costs we incur for centralized programs and services and the related reimbursements we receive from hotel owners and franchisees. Over the long term, our centralized programs and services are not designed to impact our economics, either positively or negatively. The increase in cost reimbursements, net in the 2022 first quarter primarily reflects higher revenue for our centralized programs and services and lower insurance expense, partially offset by Loyalty Program activity, primarily due to higher program expenses. Other Operating Expenses Three Months Ended Change ($ in millions) March 31, 2022 March 31, 2021 2022 vs. 2021 Depreciation, amortization, and other $ 48$ 52 $ (4)(8) % General, administrative, and other 208 211 (3) (1) % Restructuring, merger-related charges, and other 9 1 8 800 %
Non-operating income (expenses)
Three Months Ended March 31, Change ($ in millions) 2022 March 31, 2021 2022 vs. 2021 Gains and other income, net
$ 4$ 1 $ 3 300 % Interest expense (93) (107) 14 13 % Interest income 5 7 (2) (29) % Equity in earnings (losses) 2 (12) 14 117 % 19
Table of Contents Income Taxes Three Months Ended Change ($ in millions) March 31, 2022 March 31, 2021 2022 vs. 2021 (Provision) benefit for income taxes
$ (99)$ 16 $ (115)nm*
* The percentage change is not significant.
Our tax provision changed in the 2022 first quarter, compared to our tax benefit in the 2021 first quarter, primarily due to the increase in operating income (
$101 million). BUSINESS SEGMENTS Our segment results in the 2022 first quarter continued to be impacted by COVID-19. See the "Impact of COVID-19" section above for more information about the impact to our business during the 2022 first quarter and the discussion below for additional analysis of the operating results of our reportable business segments. Three Months Ended Change ($ in millions) March 31, 2022 March 31, 2021 2022 vs. 2021 U.S.& CanadaSegment revenues $ 3,271 $ 1,721 $ 1,55090 % Segment profit 454 143 311 217 % International Segment revenues 675 391 284 73 % Segment profit (loss) 131 (23) 154 670 % Properties Rooms March 31, 2022 March 31, 2021 vs. March 31, 2021 March 31, 2022 March 31, 2021 vs. March 31, 2021 U.S. & Canada 5,752 5,519 233 4 % 951,731 921,498 30,233 3 % International 2,204 2,051 153 7 % 513,249 484,931 28,318 6 % U.S. & Canada
•$239 million of higher gross fee revenues, primarily reflecting higher comparable systemwide RevPAR driven by increases in both ADR and occupancy and higher profits at certain managed hotels due to the ongoing recovery in lodging demand from the impacts of COVID-19, as well as unit growth;
• $33 million in higher cost reimbursement revenues, net of reimbursed expenses; and
•$24 million of higher owned, leased, and other revenue, net of direct expenses, primarily reflecting net stronger results at owned and leased properties due to the ongoing recovery in lodging demand from the impacts of COVID-19.
International segment profit for the first quarter of 2022, compared to the segment loss for the first quarter of 2021, mainly reflects:
•$90 million of higher gross fee revenues, primarily reflecting higher comparable systemwide RevPAR driven by increases in both ADR and occupancy and higher profits at certain managed hotels due to the ongoing recovery in lodging demand from the impacts of COVID-19; and •$63 million of higher owned, leased, and other revenue, net of direct expenses, primarily reflecting net stronger results at owned and leased properties due to the ongoing recovery in lodging demand from the 20
COVID-19 impacts and subsidies under the German government’s COVID-19 assistance programs for some of our leased hotels.
See Note 3 for more information.
CASH AND CAPITAL RESOURCES
Our long-term financial objectives include diversifying our financing sources, optimizing the mix and maturity of our long-term debt, and reducing our working capital. At the end of the 2022 first quarter, our long-term debt had a weighted average interest rate of 3.4 percent and a weighted average maturity of approximately 6.6 years. Including the effect of interest rate swaps, the ratio of our fixed-rate long-term debt to our total long-term debt was 0.8 to 1.0 at the end of the 2022 first quarter.
We remain focused on preserving our financial flexibility and managing our debt maturities. We also remain focused on managing our general and administrative expenses as well as our capital and other capital expenditures.
We monitor the status of the capital markets and regularly evaluate the effect that changes in capital market conditions may have on our ability to fund our liquidity needs. We currently believe the Credit Facility, our cash on hand, and our access to capital markets remain adequate to meet our liquidity requirements. Sources of Liquidity Our Credit Facility Our Credit Facility provides for up to
$4.5 billionof aggregate borrowings for general corporate needs, including working capital, capital expenditures, letters of credit, acquisitions, and to support our commercial paper program if and when we resume issuing commercial paper. Borrowings under the Credit Facility generally bear interest at LIBOR (the London Interbank Offered Rate) plus a spread, based on our public debt rating. We also pay quarterly fees on the Credit Facility at a rate based on our public debt rating. We classify outstanding borrowings under the Credit Facility and outstanding commercial paper borrowings (if any) as long-term based on our ability and intent to refinance the outstanding borrowings on a long-term basis. The Credit Facility expires on June 28, 2024. As of March 31, 2022, we had total outstanding borrowings under the Credit Facility of $0.8 billionand remaining borrowing capacity of $3.7 billion. In April 2022, we repaid an additional $400 millionof outstanding borrowings under the Credit Facility, resulting in a borrowing capacity of $4.1 billion. We entered into amendments to the Credit Facility in April 2020and January 2021(the "Credit Facility Amendments"). The debt leverage covenant in the Credit Facility, which is tested each quarter and was waived pursuant to the Credit Facility Amendments through and including the fourth quarter of 2021, resumed beginning with the quarter that ended March 31, 2022. The Credit Facility Amendments adjusted the required leverage levels for this covenant starting at 5.50 to 1.00 for the test period that ended on March 31, 2022and gradually stepping down to 4.00 to 1.00 over the succeeding five fiscal quarters, as further described in the Credit Facility. The Credit Facility Amendments also amended certain other terms of the Credit Facility, including reducing the rate floor for the LIBOR Daily Floating Rate and the Eurocurrency Rate. Our outstanding public debt does not contain a corresponding financial covenant or a requirement that we maintain certain financial ratios. We currently satisfy the covenants in our Credit Facility.
Due to changes to our credit ratings as a result of the impact of COVID-19 on our business, we currently are not issuing commercial paper. As a result, we have had to rely more on borrowings under the Credit Facility and issuance of senior notes, which carry higher interest costs than commercial paper. 21
Uses of silver
Cash, cash equivalents, and restricted cash totaled
$1,067 millionat March 31, 2022, a decrease of $354 millionfrom year-end 2021, primarily reflecting Senior Notes repayments ( $399 million), Credit Facility repayments ( $250 million), financing outflows for employee stock-based compensation withholding taxes ( $78 million), and capital and technology expenditures ( $49 million), partially offset by net cash provided by operating activities ( $398 million). Net cash provided by operating activities increased by $371 millionin the 2022 first quarter compared to the 2021 first quarter, primarily due to the net income recorded in the 2022 first quarter (adjusted for non-cash items). In 2020, we received $920 millionof cash from the prepayment of certain future revenues under the amendments to our existing U.S.-issued co-brand credit card agreements, which reduced in the 2022 first quarter and 2021 first quarter, and will in the future reduce, the amount of cash we receive from these card issuers. Our ratio of current assets to current liabilities was 0.5 to 1.0 at the end of the 2022 first quarter. We have significant borrowing capacity under our Credit Facility should we need additional working capital.
Capital expenditure and other investments
We made capital and technology expenditures of
$49 millionin the 2022 first quarter and $30 millionin the 2021 first quarter. We expect capital expenditures and other investments will total approximately $600 millionto $700 millionfor the 2022 full year, including capital and technology expenditures, loan advances, contract acquisition costs, and other investing activities (including approximately $250 millionfor maintenance capital spending and our new headquarters). Share Repurchases We did not repurchase any shares of our common stock in the 2022 first quarter. At March 31, 2022, 17.4 million shares remained available for repurchase under Board approved authorizations. Assuming the global demand environment continues to improve and we are within our target leverage ratio range, we would expect to resume share repurchases in 2022.
We did not declare any cash dividends in the 2022 first quarter. However, our Board of Directors declared a quarterly cash dividend of
$0.30per share on May 2, 2022, payable on June 30, 2022to stockholders of record on May 16, 2022.
Material cash needs
As of the end of the 2022 first quarter, there have been no material changes to our cash requirements as disclosed in our 2021 Form 10-K. See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our 2021 Form 10-K for more information about our cash requirements. Also, see Note 6 for information on our long-term debt.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. We have discussed those policies and estimates that we believe are critical and require the use of complex judgment in their application in our 2021 Form 10-K. We have made no material changes to our critical accounting policies or the methodologies or assumptions that we apply under them.
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