Cautionary Statement All statements in this report are made as of the date this Form 10-Q is filed with theU.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 theSEC . Forward-looking statements include information related to the expected effects on our business of COVID-19, including the performance of the Company's hotels; RevPAR and occupancy trends; the nature and impact of contingency plans, restructuring plans and cost reduction plans; rooms growth; our liquidity expectations; our capital expenditures and other investment spending expectations; other statements throughout this report that are preceded by, followed by, or include the words "believes," "expects," "anticipates," "intends," "plans," "estimates," 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 below and other factors we describe from time to time in our periodic filings with theSEC . Risks that could affect our results of operations, liquidity and capital resources, and other aspects of our business discussed in this Form 10-Q include the duration and scope of COVID-19, including whether, where and to what extent resurgences of the virus occur; its short and longer-term impact on the demand for travel, transient and group business, and levels of consumer confidence; actions governments, businesses and individuals have taken or may take in response to the pandemic, including limiting or banning travel and/or in-person gatherings or imposing occupancy or other restrictions on lodging or other facilities; the impact of the pandemic and actions taken in response to the pandemic on global and regional economies, travel, and economic activity, including the duration and magnitude of its impact on unemployment rates and consumer discretionary spending; the ability of our owners and franchisees to successfully navigate the impacts of COVID-19; the pace of recovery when the pandemic subsides or effective treatments or vaccines become available; general economic uncertainty in key global markets and a worsening of global economic conditions or low levels of economic growth; the effects of steps we and our property owners and franchisees take to reduce operating costs and/or enhance certain health and cleanliness protocols at our hotels; the impacts of our employee furloughs and reduced work week schedules, our voluntary transition program and our other restructuring activities; competitive conditions in the lodging industry; relationships with clients and property owners; the availability of capital to finance hotel growth and refurbishment; the extent to which we experience adverse effects from data security incidents; and changes in tax laws in countries in which we earn significant income. In addition, see the "Item 1A. Risk Factors" caption in the "Part II-OTHER INFORMATION" section of this report. COVID-19, and the volatile regional and global economic conditions stemming from it, and additional or unforeseen effects from the COVID-19 pandemic, could also give rise to or aggravate the other risk factors that we identify under the "Item 1A. Risk Factors" caption in the "Part II-OTHER INFORMATION" section of this report, which in turn could materially adversely affect our business, financial condition, liquidity, results of operations (including revenues and profitability) and/or stock price. Further, COVID-19 may also affect our operating and financial results in a manner that is not presently known to us or that we currently do not consider to present significant risks to our operations. BUSINESS AND OVERVIEW We are a worldwide operator, franchisor, and licensor of hotel, residential, and timeshare properties under 30 brands at the end of the 2020 second quarter. Under our asset-light business model, we typically manage or franchise hotels, rather than own them. We discuss our operations in the following reportable business segments:North America ;Asia Pacific ; andEurope ,Middle East andAfrica ("EMEA"). OurCaribbean andLatin America ("CALA") operating segment does not meet the criteria for separate disclosure as a reportable segment. 18
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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 theMiddle East andAfrica and in theAsia Pacific region, 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 capital spending reserves. Additionally, we earn franchise fees for use of our hotel system intellectual property, including fees from our co-brand credit card, timeshare, and residential programs. Starwood Data Security Incident OnNovember 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. InJuly 2019 , the ICO issued a formal notice of intent under theU.K. Data Protection Act 2018 proposing a fine in the amount of £99 million against the Company in relation to the Data Security Incident (the "Proposed ICO Fine"). We mutually agreed with the ICO to an extension of the regulatory process untilSeptember 30, 2020 and the ICO proceeding is ongoing. In the 2019 second quarter, we recorded an accrual in the full amount of the Proposed ICO Fine for this loss contingency, which we recorded in the "Accrued expenses and other" caption of our Balance Sheets and in the "Restructuring and merger-related charges" caption of our Income Statements, and we subsequently reduced the accrual to$65 million based on the ongoing proceeding. Our accrual for this loss contingency of$65 million atDecember 31, 2019 remained unchanged atJune 30, 2020 . See Note 7 for additional information. 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. As we expected, the cost of such insurance again increased for our current policy period, and the cost of such insurance could continue to increase for future policy periods. 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 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 7 for information related to expenses incurred in the 2020 second quarter and 2020 first half, insurance recoveries, and legal proceedings and governmental investigations related to the Data Security Incident. Performance Measures We believe Revenue perAvailable Room ("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 average daily rate ("ADR"), which are components of calculating RevPAR, are meaningful indicators of our performance. Occupancy, which we calculate by dividing occupied rooms by total rooms available (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 the prior year period are on a constantU.S. dollar basis. We calculate constant dollar statistics by applying exchange rates for the current period to the prior comparable period. 19
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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 (sinceJanuary 1, 2019 for the current period) and have not, in either the current or previous year: (i) undergone significant room or public space renovations or expansions, (ii) been converted between company-operated and franchised, or (iii) sustained substantial property damage or business interruption, with the exception of properties closed or otherwise experiencing interruptions related to COVID-19, which we continue to classify as comparable. Impact of COVID-19 COVID-19, which first impacted our business inGreater China beginning inJanuary 2020 , continues to have a material impact on our business, our company, and our industry. This impact started inGreater China , moved quickly into the rest ofAsia Pacific and the European markets, and spread globally byMarch 2020 . As the pandemic accelerated around the world, worldwide comparable systemwide constant dollar RevPAR fell sharply, with declines of 90 percent or greater in most markets inApril 2020 , compared toApril 2019 . As a result, our fee revenue and revenue from owned and leased properties declined significantly during the 2020 first half, and we expect year-over-year declines to continue for the remainder of 2020. We expect that prior levels of business will not return until at least after 2021. Although conditions remain volatile around the world, in many markets occupancy and RevPAR are beginning to make a slow recovery from the extremely low levels reached inApril 2020 as quarantine measures and travel restrictions ease. Worldwide comparable systemwide constant dollar RevPAR declined 90 percent inApril 2020 , 85 percent inMay 2020 , 78 percent inJune 2020 , and 70 percent inJuly 2020 , compared to the same periods in 2019.Greater China experienced improving demand beginning inMarch 2020 , and all of our hotels that had been closed inGreater China due to COVID-19 are currently re-opened, though occupancies remain weaker than last year.Europe is just beginning its recovery. In theU.S. , occupancies have started to rise from their absolute lows in April, primarily driven by leisure travel and by travelers within driving range of their destinations. Many of our hotels around the globe that were temporarily closed due to COVID-19 have re-opened. Worldwide, approximately 9 percent of our hotels were closed as ofAugust 6, 2020 , compared to 25 percent as ofMay 8, 2020 . However, this progress is fluid. Subsequent increases in COVID-19 cases in many parts of the world have constrained the speed of recovery, and we have not seen meaningful demand return from business and group travelers. We continue to take substantial measures to mitigate the negative financial and operational impacts for our hotel owners and our own business. Business contingency plans have been implemented around the world, and we continue to adjust these in response to the global situation. At the corporate level, our actions to date have substantially reduced the current monthly run rate of corporate general and administrative costs compared to the monthly costs initially budgeted for 2020, excluding our provision for credit losses. We reduced spending on capital expenditures and other investments, and as previously announced, we suspended share repurchases and cash dividends. We have taken a number of steps to adapt our organization in response to the decline in lodging demand caused by COVID-19 and our expectation that it will be some time before lodging demand and RevPAR levels recover. We implemented temporary furloughs and reduced work week schedules for above-property associates. We also announced, and are currently implementing, a voluntary transition program for certain associates who may choose to leave the Company to pursue other opportunities. As part of our organizational realignment, we are eliminating a significant number of above-property positions, as further discussed under the "Item 5. Other Information" caption in the "Part II-OTHER INFORMATION" section of this report. We are also continuing to develop restructuring plans to achieve cost savings specific to each of our company-operated properties. See Note 2 and the "Item 5. Other Information" caption in the "Part II-OTHER INFORMATION" section of this report for more information about our restructuring activities. At the property level, we continue to work with owners and franchisees to lower their cash outlays. The steps we have taken include deferring renovations, certain hotel initiatives and brand standard audits for hotel owners and franchisees; reducing by 50 percent the amount of certain charges for systemwide programs and services in the 2020 second quarter and offering a delay in payment terms for a portion of the remaining 2020 second quarter charges; and supporting owners and franchisees who are working with their lenders to utilize furniture, fixtures, and 20
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equipment (FF&E) reserves to meet working capital needs. We also remain focused on significantly lowering the reimbursed expenses we incur on behalf of our owners and franchisees to provide centralized programs and services such as the Loyalty Program, reservations, marketing and sales, which we generally collect through cost reimbursement revenue on the basis of hotel revenue or program usage. The impact of COVID-19 on the Company remains dynamic, as does our corporate and property-level response, and we expect to continue to assess and may implement additional measures to adapt our operations and plans as we evaluate the implications of COVID-19 on our business. We expect the impact of COVID-19 to be material until at least beyond 2021. The overall operational and financial impact is highly dependent on the breadth and duration of COVID-19, including whether, where, and to what extent resurgences of the virus occur, and could be affected by other factors we are not currently able to predict. System Growth and Pipeline At the end of the 2020 second quarter, our system had 7,484 properties (1,400,693 rooms), compared to 7,349 properties (1,380,921 rooms) at year-end 2019 and 7,100 properties (1,345,906 rooms) at the end of the 2019 second quarter. COVID-19 will likely result in significantly lower new room openings than we had budgeted for 2020. We currently expect net rooms growth of 2 to 3 percent for full year 2020. At the end of the 2020 second quarter, we had approximately 510,000 rooms in our development pipeline, which includes hotel rooms under construction, hotel rooms under signed contracts, and roughly 28,000 hotel rooms approved for development but not yet under signed contracts. Over 230,000 rooms in our development pipeline were under construction at the end of the 2020 second quarter. Over half of the rooms in our development pipeline are outsideNorth America . Properties and Rooms AtJune 30, 2020 , we operated, franchised, and licensed the following properties and rooms: Managed Franchised/Licensed Owned/Leased Total Properties Rooms Properties Rooms Properties Rooms Properties RoomsNorth America 818 246,262 4,574 657,694 26 6,483 5,418 910,439Asia Pacific 669 192,687 130 33,810 2 407 801 226,904 EMEA 498 110,593 388 70,328 25 5,738 911 186,659 CALA 119 23,501 131 27,419 13 3,016 263 53,936 Timeshare - - 91 22,755 - - 91 22,755 Total 2,104 573,043 5,314 812,006 66 15,644 7,484 1,400,693 21
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Lodging Statistics The following tables present RevPAR, occupancy, and ADR statistics for comparable properties. Systemwide statistics include data from our franchised properties, in addition to our company-operated properties. Comparable
Three Months Ended June
30, 2020 and Change vs. Three Months Ended
RevPAR Occupancy Average Daily Rate 2020 vs. 2019 2020 vs. 2019 2020 vs. 2019 North America$ 13.84 (91.7) % 9.8 % (69.9) % pts.$ 141.44 (32.0) % Asia Pacific$ 23.54 (75.0) % 25.5 % (43.8) % pts.$ 92.33 (32.1) % CALA$ 5.47 (95.1) % 5.7 % (56.9) % pts.$ 95.39 (46.9) % Europe$ 3.23 (98.0) % 2.8 % (75.3) % pts.$ 114.41 (44.4) % Middle East & Africa$ 20.85 (77.3) % 17.8 % (45.2) % pts.$ 117.11 (19.6) % EMEA (1)$ 11.03 (91.5) % 9.5 % (62.0) % pts.$ 116.66 (36.0) % International - All (2)$ 17.10 (84.5) % 17.5 % (52.1) % pts.$ 97.62 (38.2) % Worldwide (3)$ 15.56 (88.6) % 13.9 % (60.5) % pts.$ 112.26 (38.8) % Comparable Systemwide Properties Three Months Ended June
30, 2020 and Change vs. Three Months Ended
RevPAR Occupancy Average Daily Rate 2020 vs. 2019 2020 vs. 2019 2020 vs. 2019 North America$ 21.08 (83.6) % 19.6 % (58.4) % pts.$ 107.70 (34.7) % Asia Pacific$ 22.59 (76.5) % 24.3 % (45.3) % pts.$ 93.06 (32.7) % CALA$ 4.65 (95.3) % 5.8 % (55.9) % pts.$ 80.40 (50.3) % Europe$ 3.90 (97.2) % 3.8 % (73.0) % pts.$ 103.21 (42.6) % Middle East & Africa$ 19.22 (78.0) % 17.2 % (45.8) % pts.$ 111.88 (19.3) % EMEA (1)$ 8.80 (92.8) % 8.1 % (64.3) % pts.$ 109.11 (35.2) % International - All (2)$ 14.32 (86.7) % 14.9 % (54.9) % pts.$ 96.27 (37.7) % Worldwide (3)$ 19.11 (84.4) % 18.2 % (57.4) % pts.$ 104.97 (35.3) % (1)Includes Europe andMiddle East &Africa . (2)Includes Asia Pacific, CALA, and EMEA. (3)Includes North America and International - All. 22
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Table of ContentsComparable Company-Operated Properties Six Months Ended June
30, 2020 and Change vs. Six Months Ended
RevPAR Occupancy Average Daily Rate 2020 vs. 2019 2020 vs. 2019 2020 vs. 2019 North America$ 65.54 (58.5) % 33.3 % (42.5) % pts.$ 196.84 (5.4) % Asia Pacific$ 40.04 (58.8) % 31.9 % (36.3) % pts.$ 125.42 (11.9) % CALA$ 67.52 (50.5) % 29.9 % (34.3) % pts.$ 226.12 6.4 % Europe$ 43.39 (68.3) % 25.5 % (45.9) % pts.$ 170.20 (11.2) % Middle East & Africa$ 55.09 (45.7) % 38.3 % (27.8) % pts.$ 143.89 (6.2) % EMEA (1)$ 48.59 (59.9) % 31.2 % (37.8) % pts.$ 155.84 (11.2) % International - All (2)$ 45.67 (58.4) % 31.5 % (36.8) % pts.$ 145.16 (9.8) % Worldwide (3)$ 55.09 (58.4) % 32.3 % (39.5) % pts.$ 170.39 (7.7) % Comparable Systemwide Properties Six Months Ended June
30, 2020 and Change vs. Six Months Ended
RevPAR Occupancy Average Daily Rate 2020 vs. 2019 2020 vs. 2019 2020 vs. 2019 North America$ 55.38 (53.9) % 38.1 % (35.4) % pts.$ 145.21 (11.0) % Asia Pacific$ 40.72 (58.7) % 31.9 % (36.5) % pts.$ 127.54 (11.4) % CALA$ 54.33 (53.2) % 28.9 % (34.2) % pts.$ 188.21 2.3 % Europe$ 38.47 (67.5) % 25.5 % (44.4) % pts.$ 151.11 (10.6) % Middle East & Africa$ 52.22 (45.9) % 37.8 % (28.0) % pts.$ 138.11 (5.8) % EMEA (1)$ 42.90 (61.4) % 29.4 % (39.1) % pts.$ 145.74 (10.1) % International - All (2)$ 43.36 (59.2) % 30.5 % (37.4) % pts.$ 142.34 (9.1) % Worldwide (3)$ 51.88 (55.3) % 35.9 % (36.0) % pts.$ 144.50 (10.5) % (1)Includes Europe andMiddle East &Africa . (2)Includes Asia Pacific, CALA, and EMEA. (3)Includes North America and International - All. 23
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CONSOLIDATED RESULTS Our results declined in the 2020 second quarter and first half compared to 2019 primarily due to the impact of COVID-19. See the "Impact of COVID-19" section above for more information about the impact to our business during the 2020 first half and to date, and the discussion below for additional analysis of our consolidated results of operations for the 2020 second quarter compared to the 2019 second quarter and for the 2020 first half compared to the 2019 first half. Fee Revenues Three Months Ended Six Months Ended Change 2020 vs. ($ in millions) June 30, 2020 June 30, 2019 Change 2020 vs. 2019 June 30, 2020 June 30, 2019 2019 Base management fees $ 40$ 309 $ (269) (87) %$ 254 $ 591 $ (337) (57) % Franchise fees 182 525 (343) (65) % 597 975 (378) (39) % Incentive management fees 12 165 (153) (93) % 12 328 (316) (96) % Gross fee revenues 234 999 (765) (77) % 863 1,894 (1,031) (54) % Contract investment amortization (21) (15) 6 40 % (46) (29) 17 59 % Net fee revenues$ 213 $ 984 $ (771) (78) %$ 817 $ 1,865 $ (1,048) (56) % The decreases in base management and franchise fees primarily reflected lower RevPAR and$42 million of lower co-brand credit card fees in both the 2020 second quarter and 2020 first half due to COVID-19. The 2020 first half decrease in franchise fees was partially offset by$19 million from unit growth. The decreases in incentive management fees were primarily due to COVID-19. In the 2020 first quarter, we did not recognize incentive management fees. In the 2020 second quarter, we recognized incentive management fees from certain hotels, primarily inAsia Pacific , for which we estimate that a reversal of such fees is not probable. Owned, Leased, and Other Three Months Ended Six Months Ended Change 2020 vs. ($ in millions) June 30, 2020 June 30, 2019 Change 2020 vs. 2019 June 30, 2020 June 30, 2019 2019 Owned, leased, and other revenue $ 49$ 418 $ (369) (88) %$ 329 $ 793 $ (464) (59) % Owned, leased, and other - direct expenses 121 331 (210) (63) % 393 656 (263) (40) %$ (72) $ 87$ (159) (183) %$ (64) $ 137 $ (201) (147) % Owned, leased, and other revenue, net of direct expenses decreased primarily due to lower demand at our owned and leased hotels resulting from COVID-19 and lower owned and leased profits attributable to hotels sold in the 2019 fourth and 2020 first quarters ($17 million ). 24
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Table of Contents Cost Reimbursements Three Months Ended Six Months Ended Change 2020 vs. ($ in millions) June 30, 2020 June 30, 2019 Change 2020 vs. 2019 June 30, 2020 June 30, 2019 2019
Cost reimbursement revenue
(69) %$ 4,999 $ 7,659 $ (2,660) (35) % Reimbursed expenses 1,241 4,107 (2,866) (70) % 5,118 7,999 (2,881) (36) %$ (39) $ (204) $ 165 81 %$ (119) $ (340) $ 221 65 % 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 change in cost reimbursements (cost reimbursement revenue, net of reimbursed expenses) primarily reflects the performance of the Loyalty Program, which had lower program expenses and redemptions, partially offset by lower revenues, net of expenses, for our reservations and marketing activities due to lower costs charged to hotels and higher provision for credit losses as a result of COVID-19. Other Operating Expenses Three Months Ended Six Months Ended Change 2020 vs. ($ in millions) June 30, 2020 June 30, 2019 Change 2020 vs. 2019 June 30, 2020 June 30, 2019 2019 Depreciation, amortization, and other $ 72$ 56 $ 16 29 %$ 222 $ 110 $ 112 102 % General, administrative, and other 178 229 (51) (22) % 448 451 (3) (1) % Restructuring and merger-related charges 6 173 (167) (97) % 4 182 (178) (98) % Depreciation, amortization, and other expenses increased primarily due to operating lease impairment charges, which we discuss in Note 8. General, administrative, and other expenses decreased primarily due to lower administrative costs due to our cost reduction measures, partially offset by a higher provision for credit losses and higher guarantee reserves ($40 million in the 2020 second quarter and$125 million in the 2020 first half) primarily due to the negative current and expected economic impact of COVID-19. Restructuring and merger-related charges decreased primarily due to the 2019 second quarter accrual for the loss contingency related to the Proposed ICO Fine ($126 million ) and the 2019 second quarter impairment charge of a legacy-Starwood office building ($34 million ). Non-Operating Income (Expense) Three Months Ended Six Months Ended Change 2020 vs. ($ in millions) June 30, 2020 June 30, 2019
Change 2020 vs. 2019June 30, 2020
June 30, 2019 2019 Gains and other income, net$ 5 $ 1 $ 4 400 %$ 1 $ 6$ (5) (83) % Interest expense (127) (102) 25 25 % (220) (199) 21 11 % Interest income 8 6 2 33 % 14 12 2 17 % Equity in (losses) earnings (30) - (30) nm (34) 8 (42) (525) % nm means the percentage change is not meaningful. Interest expense increased, primarily due to higher interest on Senior Note issuances, net of maturities ($24 million in the 2020 second quarter and$26 million in the 2020 first half). Equity in earnings decreased, primarily due to losses as a result of COVID-19. 25
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Table of Contents Income Taxes Three Months Ended Six Months Ended Change 2020 vs. ($ in millions) June 30, 2020 June 30, 2019 Change 2020 vs. 2019 June 30, 2020 June 30, 2019 2019 Benefit (provision) for income taxes$ 64 $ (82) $ (146) (178) %$ 76 $ (139) $ (215) (155) % Our tax benefit in the 2020 second quarter, compared to our tax provision in the 2019 second quarter, primarily reflected the decrease in operating income ($118 million ), a shift in earnings to jurisdictions with lower tax rates ($16 million ), and the prior year tax expense incurred forU.S. tax on GILTI ($14 million ). Our tax benefit in the 2020 first half, compared to our tax provision in the 2019 first half, primarily reflected the decrease in operating income ($189 million ), the current year tax benefit from the operating lease impairment charges ($33 million ), and the prior year tax expense incurred forU.S. tax on GILTI ($23 million ). The change was partially offset by lower tax deductions for share-based payments ($13 million ) and higher tax expense resulting from finalizing prior years' returns ($7 million ). BUSINESS SEGMENTS Our segment results declined in the 2020 second quarter and first half compared to 2019 primarily due to the impact of COVID-19. See the "Impact of COVID-19" section above for more information about the impact to our business during the 2020 first half and to date and the discussion below for additional analysis of the operating results of our reportable business segments. Three Months Ended Six Months Ended Change 2020 vs. ($ in millions) June 30, 2020 June 30, 2019 Change 2020 vs. 2019 June 30, 2020 June 30, 2019 2019 North America Segment revenues$ 1,079 $ 4,304 $ (3,225) (75) %$ 4,899 $ 8,378 $ (3,479) (42) % Segment (loss) profits (36) 591 (627) (106) % 122 1,082 (960) (89) % Asia Pacific Segment revenues 86 310 (224) (72) % 255 580 (325) (56) % Segment (loss) profits (41) 92 (133) (145) % (51) 195 (246) (126) %
EMEA
Segment revenues 87 511 (424) (83) % 431 929 (498) (54) % Segment (loss) profits (96) 96 (192) (200) % (133) 153 (286) (187) % Properties Rooms vs. June 30, June 30, 2020 June 30, 2019 vs. June 30, 2019 June 30, 2020 June 30, 2019 2019 North America 5,418 5,161 257 5 % 910,439 880,039 30,400 3 % Asia Pacific 801 742 59 8 % 226,904 212,991 13,913 7 % EMEA 911 861 50 6 % 186,659 178,403 8,256 5 %North America quarterly segment loss, compared to prior year profits, primarily reflects$500 million of lower gross fee revenues (primarily reflecting lower RevPAR and net house profits),$59 million of lower owned, leased, and other revenue, net of direct expenses,$45 million of lower cost reimbursement revenue, net of reimbursed expenses, and$13 million of higher depreciation, amortization, and other expenses (primarily reflecting operating lease impairment charges). The decline inNorth America comparable systemwide RevPAR was driven by an occupancy decrease of 58.4 percentage points and ADR decrease of 34.7 percent due to lower demand resulting from COVID-19.North America year-to-date segment profits decreased primarily due to$622 million of lower gross fee revenues (primarily reflecting lower RevPAR and net house profits, partially offset by$18 million from unit growth),$88 million of lower owned, leased, and other revenue, net of direct expenses (including$17 million from hotels sold in the 2019 fourth and 2020 first quarters),$105 million of higher depreciation, amortization, and other expenses (primarily reflecting operating lease impairment charges),$72 million of lower cost reimbursement revenue, net of reimbursed expenses, and$49 million of higher general, administrative, and other expenses 26
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(primarily reflecting higher provision for credit losses and reserves for guarantee funding). The decline inNorth America comparable systemwide RevPAR was driven by an occupancy decrease of 35.4 percentage points and ADR decrease of 11.0 percent due to lower demand resulting from COVID-19.Asia Pacific quarterly segment loss, compared to prior year profits, primarily reflects$87 million of lower gross fee revenues (primarily reflecting lower RevPAR and net house profits),$18 million of lower owned, leased, and other revenue, net of direct expenses, and$13 million of lower cost reimbursement revenue, net of reimbursed expenses. The decline inAsia Pacific comparable systemwide RevPAR was driven by an occupancy decrease of 45.3 percentage points and ADR decrease of 32.7 percent due to lower demand resulting from COVID-19.Asia Pacific year-to-date segment loss, compared to prior year profits, primarily reflects$173 million of lower gross fee revenues (primarily reflecting lower RevPAR and net house profits),$25 million of lower cost reimbursement revenue, net of reimbursed expenses,$21 million of lower owned, leased, and other revenue, net of direct expenses, and$18 million of lower equity in earnings. The decline inAsia Pacific comparable systemwide RevPAR was driven by an occupancy decrease of 36.5 percentage points and ADR decrease of 11.4 percent due to lower demand resulting from COVID-19. EMEA quarterly segment loss, compared to prior year profits, primarily reflects$101 million of lower gross fee revenues (primarily reflecting lower RevPAR and net house profits),$58 million of lower owned, leased, and other revenue, net of direct expenses, and$26 million of lower cost reimbursement revenue, net of reimbursed expenses. The decline in EMEA comparable systemwide RevPAR was driven by an occupancy decrease of 64.3 percentage points and ADR decrease of 35.2 percent due to lower demand resulting from COVID-19. EMEA year-to-date segment loss, compared to prior year profits, primarily reflects$139 million of lower gross fee revenues (primarily reflecting lower RevPAR and net house profits),$76 million of lower owned, leased, and other revenue, net of direct expenses,$50 million of lower cost reimbursement revenue, net of reimbursed expenses, and$13 million of higher general, administrative, and other expenses (primarily reflecting$29 million of higher provision for credit losses, partially offset by$16 million of lower administrative expenses). The decline in EMEA comparable systemwide RevPAR was driven by an occupancy decrease of 39.1 percentage points and ADR decrease of 10.1 percent due to lower demand resulting from COVID-19. SHARE-BASED COMPENSATION See Note 5 for more information. NEW ACCOUNTING STANDARDS See Note 1 for information on our adoption of new accounting standards. LIQUIDITY 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 2020 second quarter, our long-term debt had a weighted average interest rate of 3.3 percent and a weighted average maturity of approximately 4.7 years. Including the effect of interest rate swaps, the ratio of fixed-rate long-term debt to total long-term debt was 0.7 to 1.0 at the end of the 2020 second quarter. In response to the negative impact COVID-19 had on our cash from operations in our 2020 first half, which we expect to continue to be negatively impacted, we have taken, and are continuing to take, numerous actions to increase liquidity, strengthen our financial position, and manage our debt maturities, which include: •Substantially reducing our corporate general and administrative costs, reimbursed expenses we incur on behalf of our owners and franchisees, and our capital expenditures and other investment spending, as we discuss under the "Impact of COVID-19" section above, and implementing restructuring plans, as we discuss under the "Impact of COVID-19" section above and under the "Item 5. Other Information" caption in the "Part II-OTHER INFORMATION" section of this report; 27
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•Suspending share repurchases and dividends until conditions improve; •Drawing under the Credit Facility, as we discuss under the "Sources of Liquidity-Our Credit Facility" section below; •Amending the Credit Facility to, among other things, waive the quarterly-tested leverage covenant in the Credit Facility through and including the first quarter of 2021, as we discuss under the "Sources of Liquidity-Our Credit Facility" section below; •Issuing$1.6 billion aggregate principal amount of 5.750 percent Series EE Notes dueMay 1, 2025 and$1.0 billion aggregate principal amount of 4.625 percent Series FF Notes dueJune 15, 2030 , and repurchasing and retiring approximately$853 million aggregate principal amount of the Company's outstanding Series Q, Series L and Series DD Senior Notes maturing in 2022, which we discuss under the "Sources of Liquidity-Series EE Notes, Series FF Notes, and Senior Notes Tender Offer" section below; and •Raising$920 million of cash by entering into amendments to the existing agreements for ourU.S. -issued co-brand credit cards, which we discuss under the "Co-brand Credit Card Agreements" section below. We continue to evaluate the availability of credits and benefits under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and other legislation, which we expect would primarily inure to the benefit of our hotel owners. We have not recorded any such credits or benefits in our Financial Statements to date. 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 billion of aggregate borrowings to support our commercial paper program and general corporate needs. 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 as long-term based on our ability and intent to refinance the outstanding borrowings on a long-term basis. The Credit Facility expires onJune 28, 2024 . We borrowed$2.5 billion under the Credit Facility inMarch 2020 and another$2.0 billion in earlyApril 2020 , resulting in the Credit Facility being fully drawn as ofApril 2, 2020 , with a total of$4.5 billion outstanding. Our borrowings under the Credit Facility were to increase our cash position and preserve financial flexibility in light of the impact on global markets resulting from COVID-19. We have since repaid a portion of those borrowings, reducing the total outstanding borrowings under the Credit Facility to$1.55 billion as ofJune 30, 2020 . The Credit Facility contains certain covenants, including a financial covenant that limits our maximum Leverage Ratio (as defined in the Credit Facility, and generally consisting of the ratio of Adjusted Total Debt to EBITDA, each as defined in the Credit Facility, and subject to additional adjustments as described therein). OnApril 13, 2020 , we entered into an amendment to the Credit Facility (the "Credit Facility Amendment") under which the covenant governing the permitted Leverage Ratio is waived through and including the first quarter of 2021 (which waiver period may end sooner at our election), and the required leverage levels for such covenant are adjusted once re-imposed at the end of the waiver period (starting at 5.50 to 1.00 when the leverage test is first re-imposed and gradually stepping down to 4.00 to 1.00 over the succeeding seven fiscal quarters, as further described in the Credit Facility). The Credit Facility Amendment also imposes a monthly-tested minimum liquidity covenant for the duration of the period the Leverage Ratio is waived. Our outstanding public debt does not contain corresponding financial covenants or a requirement that we maintain certain financial ratios. We currently satisfy the applicable covenants in our Credit Facility, including the liquidity covenant under the Credit Facility. 28
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The Credit Facility Amendment also makes certain other amendments to the terms of the Credit Facility, including increasing the interest and fees payable on the Credit Facility for the duration of the period during which the waiver of the leverage covenant remains in effect, tightening certain existing covenants and imposing additional covenants for the duration of the waiver period, including restricting dividends and share repurchases. Series EE Notes, Series FF Notes and Senior Notes Tender Offer OnApril 16, 2020 , we issued$1.6 billion aggregate principal amount of 5.750 percent Series EE Notes dueMay 1, 2025 . We will pay interest on the Series EE Notes in May and November of each year, commencing inNovember 2020 . We received net proceeds of approximately$1.581 billion from the offering of the Series EE Notes, after deducting the underwriting discount and estimated expenses, which were made available for general corporate purposes. OnJune 1, 2020 , we issued$1.0 billion aggregate principal amount of 4.625 percent Series FF Notes dueJune 15, 2030 (the "Series FF Notes"). We will pay interest on the Series FF Notes in June and December of each year, commencing inDecember 2020 . We received net proceeds of approximately$985 million from the offering of the Series FF Notes, after deducting the underwriting discount and estimated expenses. We used the majority of these proceeds to repurchase Senior Notes with near term maturities, as discussed below and in Note 9. InJune 2020 , we completed a tender offer (the "Tender Offer") and retired$853 million aggregate principal amount of our Senior Notes consisting of: •$351 million of our 2.3% Series Q Notes maturingJanuary 15, 2022 ; •$176 million of our 3.3% Series L Notes maturingSeptember 15, 2022 ; and •$326 million of our 2.1% Series DD Notes maturingOctober 3, 2022 . We used proceeds from our Series FF Notes offering to complete the repurchase of such notes, including the payment of accrued interest and other costs incurred. Commercial Paper Due to recent demand constraints in the commercial paper market and 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 our outstanding commercial paper. We expect to be able to satisfy existing commercial paper maturities through our available cash resources, access to capital markets or borrowing capacity under the Credit Facility. Co-brand Credit Card Agreements InMay 2020 , we signed amendments to the existing agreements for ourU.S. -issued co-brand credit cards associated with our Loyalty Program. These amendments provided the Company with$920 million of cash from the prepayment of certain future revenues, the early payment of a previously committed signing bonus, and the pre-purchase ofMarriott Bonvoy points and other consideration. We recorded the amount of cash received primarily in the deferred revenue caption, and the remainder in the liability for guest loyalty program captions, on our Balance Sheet. Uses of Cash Cash, cash equivalents, and restricted cash totaled$2,300 million atJune 30, 2020 , an increase of$2,047 million from year-end 2019, primarily reflecting Senior Notes issuances, net of repayments ($1,713 million ), Credit Facility borrowings, net of repayments ($1,550 million ), net cash provided by operating activities ($1,505 million ), and dispositions ($260 million ). The following cash outflows partially offset these cash inflows: commercial paper repayments, net of borrowings ($2,377 million ), dividend payments ($156 million ), purchase of treasury stock 29
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($150 million ), financing outflows for employee share-based compensation withholding taxes ($99 million ), and capital expenditures ($79 million ). Net cash provided by operating activities increased by$767 million in the 2020 first half compared to the 2019 first half, primarily due to cash received under the amendments to our co-brand credit card agreements discussed in Note 12, a cash benefit from working capital changes, and lower cash paid for income taxes. The increase in cash provided by operating activities was partially offset by the net loss that we recorded in the 2020 first half (adjusted for non-cash items) due to COVID-19. Working capital changes primarily reflect lower accounts receivable due to lower fee and cost reimbursement revenues and a higher allowance for credit losses, lower accounts payable due to lower purchasing activity partially offset by extended payment terms from our vendors, as well as a delay in the payment of the Company's match of prior year retirement savings plan contributions. Our ratio of current assets to current liabilities was 0.7 to 1.0 at the end of the 2020 second quarter. Capital Expenditures We made capital expenditures of$79 million in the 2020 first half and$142 million in the 2019 first half. We expect capital expenditures and other investments will total approximately$400 to$450 million for the 2020 full year. Share Repurchases We did not repurchase any shares of our common stock in the 2020 second quarter. We purchased 1.0 million shares of our common stock in the 2020 first quarter at an average price of$145.42 per share. As ofJune 30, 2020 , 17.4 million shares remained available for repurchase under Board approved authorizations. We do not anticipate repurchasing additional shares until business conditions improve, and are prohibited from doing so for the duration of the waiver period under our Credit Facility, with certain exceptions. Dividends OnFebruary 14, 2020 , our Board of Directors declared a cash dividend of$0.48 per share to shareholders of record onFebruary 28, 2020 , which we paid onMarch 31, 2020 . We do not anticipate declaring further cash dividends until business conditions improve, and are prohibited from doing so for the duration of the waiver period under our Credit Facility. Contractual Obligations and Off-Balance Sheet Arrangements As of the end of the 2020 second quarter, there have been no significant changes to our "Contractual Obligations" table, "Other Commitments" table, or "Letters of Credit" paragraph in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our 2019 Form 10-K, other than the changes in debt described above. See Note 9 for more information on our total debt. AtJune 30, 2020 , future Transition Tax payments under the 2017 Tax Act totaled$447 million . 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 2019 Form 10-K. Since the date of our 2019 Form 10-K, we have made no material changes to our critical accounting policies or the methodologies or assumptions that we apply under them. 30
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