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Interpreting Marriott International’s Growing Reliance on Debt

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Jan. 26 2016, Updated 7:26 a.m. ET

Marriott International’s total and net debt

Total debt and net debt obligations are some of the most important factors for a hotel company. The hotel sector is cyclical, which means that there is a heightened risk that a company in that industry might fail to meet its obligations during a downturn.

Marriott International’s (MAR) total debt has increased from approximately $7.4 billion in 2010 to about $9.1 billion in 2014. Meanwhile, the company’s net debt has increased from approximately $2.3 billion in 2010 to around $3.7 billion in 2014. According to the company, it is focusing on diversifying its financing sources and is optimizing its long-term debt. The company borrowed $394 million in senior notes and $238 million in commercial paper borrowings in 2014.

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Marriott’s net debt-to-EBITDA

Marriott had an average net debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple compared to its peers, coming in at 2.8 by the end of 2014. The ratio increased from 2.7 in 2010 due to increased borrowing. By comparison, Hilton Worldwide Holdings (HLT) had the highest number at 4.7 as of December 31, 2014, followed by Wyndham Worldwide Corporation (WYN) at 4.2, Starwood Hotels & Resorts Worldwide (HOT) at 1.7, and Hyatt Hotels Corporation (H) at 0.84.

Marriott’s interest coverage ratio

Interest coverage ratio is the measure of how easily a company can pay off its interest expense. Marriott’s interest coverage ratio is the second-highest among its peers at 11.4. Starwood had the highest interest coverage ratio at 12.0, followed by Wyndham Worldwide Corporation (WYN) at 10.4, Hyatt Hotels Corporation (H) at 9.6, and Hilton Worldwide Holdings (HLT) at 2.7.

This ratio is calculated by dividing a company’s earnings before interest and taxes, or EBITDA (earnings before interest, taxes, depreciation, and amortization), recorded during a period by the interest expenses in that period. EBITDA is typically used instead of net income to check a company’s interest coverage, in order to avoid deducting interest expenses twice, as well as tax expense changes, depending on the interest paid during a given period. Using EBITDA serves both purposes.

Credit rating of Marriott versus peers

Marriott has increased its leverage since 2010. The company is changing its capital financing by increasing its reliance on debt and is also returning capital to shareholders. The company has an investment-grade rating from all major credit rating agencies such as Standards and Poor’s, Moody’s, and Fitch. Hyatt also has an investment-grade rating. Hilton, Starwood, and Wyndham have stable outlook ratings as well.

Investors can gain exposure to the lodging sector by investing in the First Trust Consumer Discretionary AlphaDEX Fund (FXD), which has approximately 9.3% of its total portfolio holdings in the sector.

Continue to the next part of this series for a look at Marriott International’s share buyback and dividend strategies.

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