Strong cash flows have certainly helped fund many of these acquisitions, although debt has also played a pivotal role. Total debt on Marriott’s balance sheet increased from $3.8 billion at the end of 2014 to $4.1 billion at the end of 2015 and $8.2 billion at the end of 4Q16. Almost half of this debt is a result of the Starwood acquisition.
However, increasing EBITDA[1. earnings before interest, tax, depreciation, and amortization] levels have allowed Marriott’s leverage ratios to remain stable. Its net debt-to-EBITDA ratio was 2.9x at the end of 2014, dropping to 2.8x at the end of 2015 and back again to 2.9x at the end of 2Q16.
Due to low cash on its balance sheet, Marriott’s net debt-to-EBITDA ratio has been at similar levels. Its net debt-to-EBITDA ratio was 11x at the end of 2014, 12x at the end of 2015, and 12x at the end of 4Q16.
At the end of 4Q16, MAR’s cash on its balance sheet totaled $858 million. Marriott generated $1.6 billion from its cash flow from operations in 2016.
Why is increasing leverage risky?
Growth prospects in the hotel industry seem to be getting dimmer. Also, the strong US dollar, uncertainties in the Eurozone and other economies, and unstable oil prices could subdue Marriott’s growth.
High leverage and interest costs could reduce the company’s ability to cope with unfavorable conditions, increasing its level of risk. In our view, investors should pay close attention to MAR’s increasing leverage.
Investors can gain exposure to hotel stocks by investing in the Consumer Discretionary Select Sector SPDR ETF (XLY), which holds 1.2% of its portfolio in Marriott and 0.39% in Wyndham Worldwide (WYN). Peers Hilton (HLT) and Hyatt (H) are included in this ETF.