Washington, D.C. 20549
For the quarterly period ended September 30, 2017March 31, 2021
Or
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¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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Commission File Number: 001-36190 | 001-36190 | Commission File Number: | 001-36191 |
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| Extended Stay America, Inc. | ESH Hospitality, Inc. |
| (Exact name of registrant as specified in its charter) | (Exact name of registrant as specified in its charter) |
| | | | | |
| Delaware | Delaware |
(State or other jurisdiction of incorporation or organization) | (State or other jurisdiction of incorporation or organization) |
| 46-3140312 | 27-3559821 |
(I.R.S. Employer Identification No.) | (I.R.S. Employer Identification No.) |
| 11525 N. Community House Road, Suite 100 | 11525 N. Community House Road, Suite 100 |
| Charlotte | Charlotte |
| North Carolina | North Carolina |
| 28277 | 28277 |
| (Address of principal executive offices, zip code) | (Address of principal executive offices, zip code) |
| | | | | | | | | | | |
| (980) | 345-1600 | (980) | 345-1600 |
| (Registrant’s telephone number, including area code) | (Registrant’s telephone number, including area code) |
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| |
Delaware | Delaware |
(State or other jurisdiction of
incorporation or organization)
| (State or other jurisdiction of
incorporation or organization)
|
46-3140312 | 27-3559821 |
(I.R.S. Employer
Identification No.)
| (I.R.S. Employer
Identification No.)
|
11525 N. Community House Road, Suite 100
Charlotte, North Carolina 28277
| 11525 N. Community House Road, Suite 100
Charlotte, North Carolina 28277
|
(Address of principal executive offices, zip code) | (Address of principal executive offices, zip code) |
(980) 345-1600 | (980) 345-1600 |
(Registrant’s telephone number, including area code) | (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| Common Stock, par value $0.01 per share, of Extended Stay America, Inc. | | STAY | | Nasdaq Global Select Market |
| and Class B Common Stock, par value $0.01 per share, of ESH Hospitality, Inc., which are attached and trade together as Paired Shares | | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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| Extended Stay America, Inc. | Yesx | ☒ | No¨ | ☐ |
| ESH Hospitality, Inc. | Yesx | ☒ | No¨ | ☐ |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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| Extended Stay America, Inc. | Yesx | ☒ | No¨ | ☐ |
| ESH Hospitality, Inc. | Yesx | ☒ | No¨ | ☐ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.
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| Extended Stay America, Inc. | Large accelerated filerAccelerated Filer | x☒ | Accelerated filer | ¨☐ |
| Non-accelerated filer | ¨ (Do not check if a smaller reporting company)
☐ | Smaller reporting company | ¨☐ |
| Emerging growth company | ¨
☐ | | ¨ |
| ESH Hospitality, Inc. | Large accelerated filerAccelerated Filer | x☒ | Accelerated filer | ¨☐ |
| Non-accelerated filer | ¨ (Do not check if a smaller reporting company)
☐ | Smaller reporting company | ¨☐ |
| Emerging growth company | ¨
☐ | | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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| Extended Stay America, Inc. | Yes ¨ | ☐ | No x | ☒ |
| ESH Hospitality, Inc. | Yes ¨ | ☐ | Nox | ☒ |
192,293,933177,730,773 shares of common stock, par value $0.01 per share, of Extended Stay America, Inc., which are attached to and traded together with 192,293,933177,730,773 shares of Class B common stock, par value $0.01 per share, of ESH Hospitality, Inc., and 250,493,583 shares of Class A common stock, par value $0.01 per share, of ESH Hospitality, Inc., were all outstanding as of November 3, 2017.May 6, 2021.
EXTENDED STAY AMERICA, INC.
ESH HOSPITALITY, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
ABOUT THIS COMBINED QUARTERLY REPORT
This combined quarterly report on Form 10-Q is filed by Extended Stay America, Inc., a Delaware corporation (the “Corporation”), and its controlled subsidiary, ESH Hospitality, Inc., a Delaware corporation (“ESH REIT”). Both the Corporation and ESH REIT have securities that have been registered under the Securities Exchange Act of 1933,1934, as amended (the “Securities“Exchange Act”), which are publicly traded and listed on the New York Stock Exchange (the “NYSE”The Nasdaq Global Select Market (“Nasdaq”) as Paired Shares, as defined herein. As further discussed herein, unless otherwise indicated or the context requires, the terms “Company,” “Extended Stay,” “Extended Stay America,” “we,” “our” and “us” refer to the Corporation, ESH REIT and their subsidiaries considered as a single enterprise.
As required by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation, due to the Corporation’s controlling financial interest in ESH REIT, the Corporation consolidates ESH REIT’s financial position, results of operations, comprehensive income and cash flows with those of the Corporation. The Corporation’s stand-alone financial condition and related information is discussed herein where applicable. In addition, with respect to other financial and non-financial disclosure items required by Form 10-Q, any material differences between the Corporation and ESH REIT are discussed herein.
This combined quarterly report on Form 10-Q presents the following sections or portions of sections separately for each of the Company, on a consolidated basis, and ESH REIT, where applicable:
•Part I Item 1 – Unaudited Financial Statements
•Part I Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
•Part I Item 3 – Quantitative and Qualitative Disclosures About Market Risk
•Part I Item 4 – Controls and Procedures
This combined quarterly report also includes separate Exhibit 31 and 32 certifications for each of the CorporationExtended Stay America, Inc. and ESH REITHospitality, Inc. in order to establish that the Chief Executive Officer and the Chief Financial Officer of each registrant has made the requisite certifications and that the CorporationExtended Stay America, Inc. and ESH REITHospitality, Inc. are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. §1350.
We believe combining the quarterly reports on Form 10-Q of the Corporation and ESH REIT into this single report results in the following benefits:
•Enhances investors’ understanding of the Corporation and ESH REIT by enabling investors, whose ownership of Paired Shares, as defined herein, gives them an ownership interest in our hotel properties through ESH REIT and in the operation, management, development and franchising of the hotels and other aspects of our business through the Corporation, to view the business as a whole;
•Eliminates duplicative and potentially confusing disclosure and provides a more streamlined presentation, since a substantial amount of our disclosure applies to both the Corporationregistrants; and ESH REIT; and
•Creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.
ADDITIONAL INFORMATION AND WHERE TO FIND IT
This quarterly report on Form 10-Q may be deemed to be solicitation material in respect of the proposed acquisition of the Company by a joint venture of Blackstone Real Estate Partners IX L.P. and Starwood Distressed Opportunity Fund XII Global, L.P. In connection with the proposed transaction, the Company filed with the United States Securities and Exchange Commission (“SEC”) on April 26, 2021, a definitive joint proxy statement, accompanying WHITE proxy cards and other relevant documents. SHAREHOLDERS OF THE COMPANY ARE ADVISED TO READ THE DEFINITIVE JOINT PROXY STATEMENT (INCLUDING ALL AMENDMENTS AND SUPPLEMENTS THERETO) BECAUSE IT CONTAINS OR WILL CONTAIN IMPORTANT INFORMATION. Investors may obtain a free copy of the definitive joint proxy statement and other relevant documents filed by the Company with the SEC at the SEC’s website at http://www.sec.gov. The definitive joint proxy statement, the WHITE proxy cards accompanying the definitive joint proxy statement and such other documents filed with the SEC may also be obtained for free from the Investor Relations section of the Company’s website (https://www.aboutstay.com/investor-relations) or by directing a request to the Company at ir@esa.com.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This combined quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of the federal securities laws. All statements other than statements of historical facts included in this combined quarterly report on Form 10-Q may be forward-looking.
Statements hereinforward-looking, including statements regarding, among other things, our ability to meet our debt service obligations, future capital expenditures (including future acquisitions and hotel renovation programs), our distribution policies, our development, growth and franchise opportunities, anticipated benefits or use of proceeds from any dispositions, our plans, objectives, goals, beliefs, business strategies, future events, business conditions, results of operations, financial position and our business outlook, business trends and other information referredfuture events, including the COVID-19 pandemic, its effects on the foregoing, government actions taken in response to under “Management’s Discussionthe COVID-19 pandemic and Analysis of Financial Conditionactions that we have or plan to take in response to the pandemic and Results of Operations” and elsewhere in this combined quarterly report on Form 10-Q include forward-looking statements. such effects.
When used in this combined quarterly report on Form 10-Q, the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “will,” “look forward to” and variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not historical facts, and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs, estimates and projections will result or be achieved and actual results may varydiffer materially from what is expressed in or indicated by the forward-looking statements.
As disclosed in our combined annual report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”)SEC on February 28, 201725, 2021 (the “2020 Form 10-K”) and in other filings with the SEC, including this combined quarterly report on Form 10-Q, there are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this combined quarterly report on Form 10-Q. You should evaluate all forward-looking statements made in this combined quarterly report on Form 10-Q in the context of these risks and uncertainties.uncertainties, and you are cautioned not to place undue reliance on such forward looking statements.
We caution you that the risks, uncertainties and other factors referenced above and throughout this combined quarterly report on Form 10-Q may not contain all of the risks, uncertainties and other factors that may be important to you. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will have the results or affecteffect on us, or our business, our operations or the market price of our Paired Shares in the way expected. In particular, no assurance can be given that any of our ongoing, planned or expected strategic initiatives or objectives discussed herein or in other filings with the SEC will be initiated or completed on our expected timing or at all. Estimates and forward-looking statements speak only as of the date they were made and we undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances, except as required by law.
PART I — FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2017MARCH 31, 2021 AND DECEMBER 31, 20162020
(In thousands, except share and per share data)
(Unaudited)
| | | | September 30,
2017 | | December 31,
2016 | | March 31,
2021 | | December 31,
2020 |
| ASSETS | | | | ASSETS | | | |
| PROPERTY AND EQUIPMENT - Net of accumulated depreciation of $1,094,064 and $973,669 | $ | 3,790,365 |
| | $ | 3,905,304 |
| |
| PROPERTY AND EQUIPMENT - Net of accumulated depreciation of $1,571,171 and $1,541,986 | | PROPERTY AND EQUIPMENT - Net of accumulated depreciation of $1,571,171 and $1,541,986 | $ | 3,414,487 | | | $ | 3,445,955 | |
| RESTRICTED CASH | | RESTRICTED CASH | 13,152 | | | 13,151 | |
| CASH AND CASH EQUIVALENTS | 116,660 |
| | 84,158 |
| CASH AND CASH EQUIVALENTS | 357,857 | | | 396,770 | |
| RESTRICTED CASH | 21,370 |
| | 21,614 |
| |
| INTANGIBLE ASSETS - Net of accumulated amortization of $9,355 and $8,350 | 27,378 |
| | 28,383 |
| |
| INTANGIBLE ASSETS - Net of accumulated amortization of $16,412 and $15,715 | | INTANGIBLE ASSETS - Net of accumulated amortization of $16,412 and $15,715 | 35,014 | | | 34,093 | |
| GOODWILL | 48,910 |
| | 53,531 |
| GOODWILL | 44,921 | | | 45,055 | |
| ACCOUNTS RECEIVABLE - Net of allowance for doubtful accounts of $2,598 and $2,634 | 27,418 |
| | 20,837 |
| |
| DEFERRED TAX ASSETS | 11,913 |
| | 16,376 |
| |
| ACCOUNTS RECEIVABLE - Net of allowance for credit losses of $8,668 and $7,963 | | ACCOUNTS RECEIVABLE - Net of allowance for credit losses of $8,668 and $7,963 | 14,032 | | | 13,709 | |
| | OTHER ASSETS | 67,140 |
| | 50,101 |
| OTHER ASSETS | 140,885 | | | 140,416 | |
| TOTAL ASSETS | $ | 4,111,154 |
| | $ | 4,180,304 |
| TOTAL ASSETS | $ | 4,020,348 | | | $ | 4,089,149 | |
| LIABILITIES AND EQUITY |
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| LIABILITIES AND EQUITY | | | |
| LIABILITIES: |
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| LIABILITIES: | |
Term loan facilities payable - Net of unamortized deferred financing costs and debt discount
of $19,520 and $21,994 | $ | 1,267,504 |
| | $ | 1,274,756 |
| |
Senior notes payable - Net of unamortized deferred financing costs and debt discount
of $31,379 and $34,482 | 1,268,621 |
| | 1,265,518 |
| |
| Revolving credit facilities | — |
| | 45,000 |
| |
Mandatorily redeemable preferred stock - $0.01 par value, $1,000 redemption value,
8.0%, 350,000,000 shares authorized, 7,133 and 21,202 shares issued and outstanding | 7,133 |
| | 21,202 |
| |
Term loan facility payable - Net of unamortized deferred financing costs and debt discount of $8,946 and $9,355 | | Term loan facility payable - Net of unamortized deferred financing costs and debt discount of $8,946 and $9,355 | $ | 612,499 | | | $ | 613,667 | |
Senior notes payable - Net of unamortized deferred financing costs and debt discount of $28,335 and $29,810 | | Senior notes payable - Net of unamortized deferred financing costs and debt discount of $28,335 and $29,810 | 2,021,665 | | | 2,020,190 | |
| Revolving credit facility | | Revolving credit facility | 9,765 | | | 49,765 | |
| | Finance lease liabilities | | Finance lease liabilities | 3,611 | | | 3,668 | |
| Deferred tax liabilities | | Deferred tax liabilities | 8,835 | | | 11,218 | |
| Accounts payable and accrued liabilities | 219,481 |
| | 193,303 |
| Accounts payable and accrued liabilities | 229,318 | | | 253,198 | |
| Deferred tax liabilities | — |
| | 3,286 |
| |
| Total liabilities | 2,762,739 |
| | 2,803,065 |
| Total liabilities | 2,885,693 | | | 2,951,706 | |
| COMMITMENTS AND CONTINGENCIES (Note 12) |
| |
| COMMITMENTS AND CONTINGENCIES (Note 12) | 0 | | 0 |
| EQUITY: |
| |
| EQUITY: | |
Common stock - $0.01 par value, 3,500,000,000 shares authorized, 192,293,933 and
195,406,944 shares issued and outstanding | 1,923 |
| | 1,957 |
| |
Common stock - $0.01 par value, 3,500,000,000 shares authorized, 177,730,773 and 177,560,635 shares issued and outstanding | | Common stock - $0.01 par value, 3,500,000,000 shares authorized, 177,730,773 and 177,560,635 shares issued and outstanding | 1,778 | | | 1,776 | |
| Additional paid in capital | 770,314 |
| | 774,811 |
| Additional paid in capital | 726,070 | | | 725,865 | |
| Retained earnings | 80,038 |
| | 23,679 |
| |
| Accumulated other comprehensive income (loss) | 1,980 |
| | (5,615 | ) | |
| Accumulated deficit | | Accumulated deficit | (42,729) | | | (44,664) | |
| Accumulated other comprehensive loss | | Accumulated other comprehensive loss | (95) | | | (206) | |
| Total Extended Stay America, Inc. shareholders’ equity | 854,255 |
| | 794,832 |
| Total Extended Stay America, Inc. shareholders’ equity | 685,024 | | | 682,771 | |
| Noncontrolling interests | 494,160 |
| | 582,407 |
| Noncontrolling interests | 449,631 | | | 454,672 | |
| Total equity | 1,348,415 |
| | 1,377,239 |
| Total equity | 1,134,655 | | | 1,137,443 | |
| TOTAL LIABILITIES AND EQUITY | $ | 4,111,154 |
| | $ | 4,180,304 |
| TOTAL LIABILITIES AND EQUITY | $ | 4,020,348 | | | $ | 4,089,149 | |
See accompanying notes to unaudited condensed consolidated financial statements.
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2021 AND 20162020
(In thousands, except per share data)
(Unaudited)
| |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, | | | Three Months Ended
March 31, |
| | 2017 | | 2016 | | 2017 | | 2016 | | | 2021 | | 2020 |
| REVENUES: |
| |
| |
| |
| REVENUES: | | | | |
| Room revenues | $ | 345,089 |
| | $ | 349,076 |
| | $ | 963,505 |
| | $ | 960,046 |
| Room revenues | | $ | 249,868 | | | $ | 254,464 | |
| Other hotel revenues | 5,777 |
| | 5,445 |
| | 16,715 |
| | 14,822 |
| Other hotel revenues | | 6,680 | | | 6,768 | |
| Franchise and management fees | | Franchise and management fees | | 1,218 | | | 1,279 | |
| | | | 257,766 | | | 262,511 | |
| Other revenues from franchised and managed properties | | Other revenues from franchised and managed properties | | 1,805 | | | 3,790 | |
| Total revenues | 350,866 |
| | 354,521 |
| | 980,220 |
| | 974,868 |
| Total revenues | | 259,571 | | | 266,301 | |
| OPERATING EXPENSES: |
| |
| |
| |
| OPERATING EXPENSES: | | | | |
| Hotel operating expenses | 152,155 |
| | 149,860 |
| | 442,726 |
| | 444,498 |
| Hotel operating expenses | | 146,338 | | | 145,295 | |
| General and administrative expenses | 23,823 |
| | 24,612 |
| | 75,560 |
| | 73,552 |
| General and administrative expenses | | 24,124 | | | 23,938 | |
| Depreciation and amortization | 57,314 |
| | 55,955 |
| | 172,789 |
| | 164,274 |
| Depreciation and amortization | | 49,408 | | | 50,520 | |
| Impairment of long-lived assets | — |
| | 2,756 |
| | 20,357 |
| | 2,756 |
| |
| | Merger transaction expenses | | Merger transaction expenses | | 4,782 | | | 0 | |
| | | | 224,652 | | | 219,753 | |
| Other expenses from franchised and managed properties | | Other expenses from franchised and managed properties | | 2,444 | | | 4,207 | |
| Total operating expenses | 233,292 |
| | 233,183 |
| | 711,432 |
| | 685,080 |
| Total operating expenses | | 227,096 | | | 223,960 | |
| LOSS ON SALE OF HOTEL PROPERTIES (Note 4) | — |
| | — |
| | (1,897 | ) | | — |
| |
| | GAIN ON SALE OF HOTEL PROPERTIES (Note 4) | | GAIN ON SALE OF HOTEL PROPERTIES (Note 4) | | 12,018 | | | 0 | |
| OTHER INCOME | 344 |
| | 2 |
| | 2,400 |
| | 20 |
| OTHER INCOME | | 1 | | | 2 | |
| INCOME FROM OPERATIONS | 117,918 |
| | 121,340 |
| | 269,291 |
| | 289,808 |
| INCOME FROM OPERATIONS | | 44,494 | | | 42,343 | |
| OTHER NON-OPERATING INCOME | (278 | ) | | (305 | ) | | (426 | ) | | (1,069 | ) | |
| OTHER NON-OPERATING (INCOME) EXPENSE | | OTHER NON-OPERATING (INCOME) EXPENSE | | (84) | | | 703 | |
| INTEREST EXPENSE, NET | 31,651 |
| | 48,713 |
| | 96,958 |
| | 131,462 |
| INTEREST EXPENSE, NET | | 31,462 | | | 32,685 | |
| INCOME BEFORE INCOME TAX EXPENSE | 86,545 |
| | 72,932 |
| | 172,759 |
| | 159,415 |
| INCOME BEFORE INCOME TAX EXPENSE | | 13,116 | | | 8,955 | |
| INCOME TAX EXPENSE | 20,295 |
| | 15,867 |
| | 40,721 |
| | 26,211 |
| INCOME TAX EXPENSE | | 750 | | | 1,110 | |
| NET INCOME | 66,250 |
| | 57,065 |
| | 132,038 |
| | 133,204 |
| NET INCOME | | 12,366 | | | 7,845 | |
| NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (12,374 | ) | | (10,509 | ) | | (3,286 | ) | | (8,873 | ) | NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | | (10,445) | | | (3,291) | |
| NET INCOME ATTRIBUTABLE TO EXTENDED STAY AMERICA, INC. COMMON SHAREHOLDERS | $ | 53,876 |
| | $ | 46,556 |
| | $ | 128,752 |
| | $ | 124,331 |
| NET INCOME ATTRIBUTABLE TO EXTENDED STAY AMERICA, INC. COMMON SHAREHOLDERS | | $ | 1,921 | | | $ | 4,554 | |
| NET INCOME PER EXTENDED STAY AMERICA, INC. COMMON SHARE: |
| |
| |
| |
| NET INCOME PER EXTENDED STAY AMERICA, INC. COMMON SHARE: | | | | |
| Basic | $ | 0.28 |
| | $ | 0.23 |
| | $ | 0.67 |
| | $ | 0.62 |
| Basic | | $ | 0.01 | | | $ | 0.03 | |
| Diluted | $ | 0.28 |
| | $ | 0.23 |
| | $ | 0.66 |
| | $ | 0.61 |
| Diluted | | $ | 0.01 | | | $ | 0.03 | |
| WEIGHTED-AVERAGE EXTENDED STAY AMERICA, INC. COMMON SHARES OUTSTANDING: |
| |
| |
| |
| WEIGHTED-AVERAGE EXTENDED STAY AMERICA, INC. COMMON SHARES OUTSTANDING: | | | | |
| Basic | 192,357 |
| | 200,556 |
| | 193,399 |
| | 202,156 |
| Basic | | 177,827 | | | 177,990 | |
| Diluted | 193,331 |
| | 200,696 |
| | 194,001 |
| | 202,252 |
| Diluted | | 178,549 | | | 178,171 | |
See accompanying notes to unaudited condensed consolidated financial statements.
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2021 AND 20162020
(In thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| NET INCOME | $ | 66,250 |
| | $ | 57,065 |
| | $ | 132,038 |
| | $ | 133,204 |
|
| OTHER COMPREHENSIVE INCOME, NET OF TAX: | | | | | | | |
| FOREIGN CURRENCY TRANSLATION ADJUSTMENTS: | | | | | | | |
| FOREIGN CURRENCY TRANSLATION GAIN (LOSS), NET OF TAX OF $0, $(274), $(125) and $550 | 65 |
| | (841 | ) | | 470 |
| | 1,831 |
|
| RECLASSIFICATION ADJUSTMENT - SALE OF CANADIAN HOTEL PROPERTIES, NET OF TAX OF $0, $0, $(3,599) AND $0 | — |
| | — |
| | 10,913 |
| | — |
|
| TOTAL FOREIGN CURRENCY TRANSLATION ADJUSTMENTS | 65 |
| | (841 | ) | | 11,383 |
| | 1,831 |
|
| | | | | | | | |
| DERIVATIVE ADJUSTMENTS: | | | | | | | |
INTEREST RATE CASH FLOW HEDGE LOSS, NET OF TAX
OF $25, $(123), $57 and $(123) | (16 | ) | | (446 | ) | | (509 | ) | | (446 | ) |
| RECLASSIFICATION ADJUSTMENT - AMOUNTS RECLASSIFIED TO NET INCOME, NET OF TAX OF $0 | 103 |
| | — |
| | 706 |
| | — |
|
| TOTAL DERIVATIVE ADJUSTMENTS | 87 |
| | (446 | ) | | 197 |
| | (446 | ) |
| | | | | | | | |
| COMPREHENSIVE INCOME | 66,402 |
| | 55,778 |
| | 143,618 |
| | 134,589 |
|
| COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (12,423 | ) | | (9,857 | ) | | (7,271 | ) | | (9,575 | ) |
| COMPREHENSIVE INCOME ATTRIBUTABLE TO EXTENDED STAY AMERICA, INC. COMMON SHAREHOLDERS | $ | 53,979 |
| | $ | 45,921 |
| | $ | 136,347 |
| | $ | 125,014 |
|
| | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, |
| | | | | | 2021 | | 2020 |
| NET INCOME | | | | | $ | 12,366 | | | $ | 7,845 | |
| OTHER COMPREHENSIVE INCOME: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| INTEREST RATE CASH FLOW HEDGE GAIN (LOSS), NET OF TAX OF $40 and $(307) | | | | | 218 | | | (1,747) | |
| | | | | | | |
| COMPREHENSIVE INCOME | | | | | 12,584 | | | 6,098 | |
| COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | | | | | (10,552) | | | (2,439) | |
| COMPREHENSIVE INCOME ATTRIBUTABLE TO EXTENDED STAY AMERICA, INC. COMMON SHAREHOLDERS | | | | | $ | 2,032 | | | $ | 3,659 | |
See accompanying notes to unaudited condensed consolidated financial statements.
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2021 AND 20162020
(In thousands, except per share data)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Extended Stay America, Inc. Shareholders' Equity | | Non- controlling Interests | | Total Equity |
| | Shares | | Amount | | | | | | |
| January 1, 2016 | 204,594 |
| | $ | 2,049 |
| | $ | 784,194 |
| | $ | 102,184 |
| | $ | (8,754 | ) | | $ | 879,673 |
| | $ | 608,684 |
| | $ | 1,488,357 |
|
| Net income | — |
| | — |
| | — |
| | 124,331 |
| | — |
| | 124,331 |
| | 8,873 |
| | 133,204 |
|
| Foreign currency translation, net of tax | — |
| | — |
| | — |
| | — |
| | 876 |
| | 876 |
| | 955 |
| | 1,831 |
|
| Interest rate cash flow hedge loss, net of tax | — |
| | — |
| | — |
| | — |
| | (193 | ) | | (193 | ) | | (253 | ) | | (446 | ) |
| Issuance of common stock | 4 |
| | — |
| | 6 |
| | — |
| | — |
| | 6 |
| | — |
| | 6 |
|
| Repurchase of Corporation common stock and ESH REIT Class B common stock (Paired Shares) | (4,622 | ) | | (46 | ) | | — |
| | (42,602 | ) | | — |
| | (42,648 | ) | | (26,952 | ) | | (69,600 | ) |
| Corporation common distributions - $0.15 per common share | — |
| | — |
| | — |
| | (30,430 | ) | | — |
| | (30,430 | ) | | — |
| | (30,430 | ) |
| ESH REIT common distributions - $0.40 per Class B common share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (81,623 | ) | | (81,623 | ) |
| ESH REIT preferred distributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (12 | ) | | (12 | ) |
| Adjustment to noncontrolling interest for change in ownership of ESH REIT | — |
| | — |
| | (6,090 | ) | | — |
| | — |
| | (6,090 | ) | | 6,090 |
| | — |
|
| Equity-based compensation | 224 |
| | 2 |
| | 2,893 |
| | — |
| | — |
| | 2,895 |
| | 3,511 |
| | 6,406 |
|
| BALANCE - September 30, 2016 | 200,200 |
| | $ | 2,005 |
| | $ | 781,003 |
| | $ | 153,483 |
| | $ | (8,071 | ) | | $ | 928,420 |
| | $ | 519,273 |
| | $ | 1,447,693 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional
Paid in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total Extended Stay America, Inc.
Shareholders’
Equity | | Noncontrolling Interests | | Total
Equity |
| | Shares | | Amount | | | | | | |
| BALANCE - January 1, 2020 | 179,483 | | | $ | 1,795 | | | $ | 742,397 | | | $ | (48,283) | | | $ | 383 | | | $ | 696,292 | | | $ | 479,978 | | | $ | 1,176,270 | |
| Net Income | — | | | — | | | — | | | 4,554 | | | — | | | 4,554 | | | 3,291 | | | 7,845 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Interest rate cash flow hedge loss, net of tax | — | | | — | | | — | | | — | | | (895) | | | (895) | | | (852) | | | (1,747) | |
| Repurchase of Corporation common stock and ESH REIT Class B common stock (Paired Shares) | (2,237) | | | (22) | | | — | | | (19,665) | | | — | | | (19,687) | | | (11,406) | | | (31,093) | |
| Corporation common distributions - $0.09 per common share | — | | | — | | | (15,981) | | | — | | | — | | | (15,981) | | | — | | | (15,981) | |
| ESH REIT common distributions - $0.14 per Class B common share | — | | | — | | | — | | | — | | | — | | | — | | | (24,842) | | | (24,842) | |
| ESH REIT preferred distributions | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | (4) | |
| Adjustment to reflect changes in book value of noncontrolling interests | — | | | — | | | (3,319) | | | — | | | — | | | (3,319) | | | 3,319 | | | 0 | |
| Equity-based compensation | 220 | | | 2 | | | 188 | | | — | | | — | | | 190 | | | 246 | | | 436 | |
| BALANCE - March 31, 2020 | 177,466 | | | $ | 1,775 | | | $ | 723,285 | | | $ | (63,394) | | | $ | (512) | | | $ | 661,154 | | | $ | 449,730 | | | $ | 1,110,884 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Total Extended Stay America, Inc. Shareholders' Equity | | Non- controlling Interests | | Total Equity |
| | Shares | | Amount | | | | | | |
| BALANCE - January 1, 2017 | 195,407 |
| | $ | 1,957 |
| | $ | 774,811 |
| | $ | 23,679 |
| | $ | (5,615 | ) | | $ | 794,832 |
| | $ | 582,407 |
| | $ | 1,377,239 |
|
| Net income | — |
| | — |
| | — |
| | 128,752 |
| | — |
| | 128,752 |
| | 3,286 |
| | 132,038 |
|
| Foreign currency translation, net of tax | — |
| | — |
| | — |
| | — |
| | 7,507 |
| | 7,507 |
| | 3,876 |
| | 11,383 |
|
| Interest rate cash flow hedge gain, net of tax | — |
| | — |
| | — |
| | — |
| | 88 |
| | 88 |
| | 109 |
| | 197 |
|
| Repurchase of Corporation common stock and ESH REIT Class B common stock (Paired Shares) | (3,430 | ) | | (37 | ) | | — |
| | (37,253 | ) | | — |
| | (37,290 | ) | | (21,491 | ) | | (58,781 | ) |
| Corporation common distributions - $0.18 per common share | — |
| | — |
| | — |
| | (35,140 | ) | | — |
| | (35,140 | ) | | — |
| | (35,140 | ) |
| ESH REIT common distributions - $0.43 per Class B common share | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (83,975 | ) | | (83,975 | ) |
| ESH REIT preferred distributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (12 | ) | | (12 | ) |
| Adjustment to noncontrolling interest for change in ownership of ESH REIT | — |
| | — |
| | (6,627 | ) | | — |
| | — |
| | (6,627 | ) | | 6,627 |
| | — |
|
| Equity-based compensation | 317 |
| | 3 |
| | 2,130 |
| | — |
| | — |
| | 2,133 |
| | 3,333 |
| | 5,466 |
|
| BALANCE - September 30, 2017 | 192,294 |
| | $ | 1,923 |
| | $ | 770,314 |
| | $ | 80,038 |
| | $ | 1,980 |
| | $ | 854,255 |
| | $ | 494,160 |
| | $ | 1,348,415 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional
Paid in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Extended Stay America, Inc.
Shareholders’
Equity | | Noncontrolling Interests | | Total
Equity |
| | Shares | | Amount | | | | | | |
| BALANCE - January 1, 2021 | 177,561 | | | $ | 1,776 | | | $ | 725,865 | | | $ | (44,664) | | | $ | (206) | | | $ | 682,771 | | | $ | 454,672 | | | $ | 1,137,443 | |
| Net income | — | | | — | | | — | | | 1,921 | | | — | | | 1,921 | | | 10,445 | | | 12,366 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Interest rate cash flow hedge gain, net of tax | — | | | — | | | — | | | — | | | 111 | | | 111 | | | 107 | | | 218 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| ESH REIT common distributions - $0.09 per Class B common share | — | | | — | | | — | | | — | | | — | | | — | | | (16,092) | | | (16,092) | |
| ESH REIT preferred distributions | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | (4) | |
| Adjustment to reflect changes in book value of noncontrolling interests | — | | | — | | | (330) | | | — | | | — | | | (330) | | | 330 | | | 0 | |
| Equity-based compensation | 170 | | | 2 | | | 535 | | | 14 | | | — | | | 551 | | | 173 | | | 724 | |
| BALANCE - March 31, 2021 | 177,731 | | | $ | 1,778 | | | $ | 726,070 | | | $ | (42,729) | | | $ | (95) | | | $ | 685,024 | | | $ | 449,631 | | | $ | 1,134,655 | |
See accompanying notes to unaudited condensed consolidated financial statements.
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2021 AND 20162020
(In thousands)
(Unaudited)
| | | | | | | | | | | |
| Three Months Ended
March 31, |
| | 2021 | | 2020 |
| OPERATING ACTIVITIES: | | | |
| Net income | $ | 12,366 | | | $ | 7,845 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization | 49,408 | | | 50,520 | |
| Foreign currency transaction (gain) loss | (84) | | | 703 | |
| Amortization of deferred financing costs and debt discount | 2,058 | | | 2,052 | |
| | | |
| | | |
| Loss on disposal of property and equipment | 1,232 | | | 3,343 | |
| Gain on sale of hotel properties | (12,018) | | | 0 | |
| | | |
| Equity-based compensation | 2,348 | | | 1,126 | |
| Deferred income tax benefit | (2,423) | | | (3,122) | |
| Changes in assets and liabilities: | | | |
| Accounts receivable, net | (323) | | | (1,407) | |
| Other assets | 57 | | | 1,760 | |
| Accounts payable and accrued liabilities | 38,725 | | | 29,465 | |
| Net cash provided by operating activities | 91,346 | | | 92,285 | |
| INVESTING ACTIVITIES: | | | |
| Purchases of property and equipment | (22,549) | | | (34,452) | |
| | | |
| Development in process payments | (6,246) | | | (19,769) | |
| Payment for intangible assets | (1,641) | | | (358) | |
| Proceeds from sale of hotel properties | 21,867 | | | 0 | |
| Proceeds from insurance and related recoveries | 56 | | | 956 | |
| Net cash used in investing activities | (8,513) | | | (53,623) | |
| FINANCING ACTIVITIES: | | | |
| Principal payments on term loan facility | (1,577) | | | (1,577) | |
| Proceeds from revolving credit facilities | 0 | | | 399,765 | |
| Payments on revolving credit facilities | (40,000) | | | 0 | |
| | | |
| Payments of deferred financing costs | 0 | | | (17) | |
| Principal payments on finance leases | (38) | | | (37) | |
| | | |
| Tax withholdings related to restricted stock unit settlements | (1,638) | | | (815) | |
| Repurchase of Corporation common stock and ESH REIT Class B common stock (Paired Shares) | 0 | | | (31,093) | |
| | | |
| Corporation common distributions | (91) | | | (16,177) | |
| ESH REIT common distributions | (78,401) | | | (25,222) | |
| | | |
| Net cash (used in) provided by financing activities | (121,745) | | | 324,827 | |
| CHANGES IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH DUE TO CHANGES IN FOREIGN CURRENCY EXCHANGE RATES | 0 | | | (150) | |
| NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | (38,912) | | | 363,339 | |
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH - Beginning of period | 409,921 | | | 361,670 | |
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH - End of period | $ | 371,009 | | | $ | 725,009 | |
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (CONTINUED)
(In thousands)
(Unaudited)
|
| | | | | | | |
| | Nine Months Ended
September 30, |
| | 2017 | | 2016 |
| OPERATING ACTIVITIES: | | | |
| Net income | $ | 132,038 |
| | $ | 133,204 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation | 171,784 |
| | 163,269 |
|
| Amortization of intangible assets | 1,005 |
| | 1,005 |
|
| Foreign currency transaction gain | (782 | ) | | (1,069 | ) |
| Loss on interest rate swap | 709 |
| | — |
|
| Amortization and write-off of deferred financing costs and debt discount | 6,072 |
| | 29,012 |
|
| Amortization of above-market ground leases | (102 | ) | | (102 | ) |
| Loss on disposal of property and equipment | 8,065 |
| | 7,255 |
|
| Loss on sale of hotel properties | 1,897 |
| | — |
|
| Impairment of long-lived assets | 20,357 |
| | 2,756 |
|
| Equity-based compensation | 9,049 |
| | 8,635 |
|
| Deferred income tax benefit | (2,602 | ) | | (28,782 | ) |
| Changes in assets and liabilities: | | | |
| Accounts receivable, net | (6,754 | ) | | (9,137 | ) |
| Other assets | (4,212 | ) | | 1,442 |
|
| Accounts payable and accrued liabilities | 32,895 |
| | 28,502 |
|
| Net cash provided by operating activities | 369,419 |
| | 335,990 |
|
| INVESTING ACTIVITIES: | | | |
| Purchases of property and equipment | (132,875 | ) | | (166,454 | ) |
| Proceeds from sale of hotel properties | 47,952 |
| | — |
|
| Decrease in restricted cash and insurance collateral | 244 |
| | 62,945 |
|
| Proceeds from insurance and related recoveries | 471 |
| | 2,716 |
|
| Net cash used in investing activities | (84,208 | ) | | (100,793 | ) |
| FINANCING ACTIVITIES: | | | |
| Principal payments on mortgage loan | — |
| | (1,931,157 | ) |
| Proceeds from term loan facilities, net of debt discount | — |
| | 1,293,500 |
|
| Principal payments on term loan facilities | (12,976 | ) | | (366,463 | ) |
| Proceeds from senior notes, net of debt discount | — |
| | 788,000 |
|
| Proceeds from revolving credit facilities | 105,000 |
| | 50,000 |
|
| Payments on revolving credit facilities | (150,000 | ) | | (25,000 | ) |
| Payments of deferred financing costs | — |
| | (33,060 | ) |
| Tax withholdings related to restricted stock unit settlements | (3,548 | ) | | (2,229 | ) |
| Issuance of common stock | — |
| | 6 |
|
| Repurchase of common stock | (58,781 | ) | | (69,600 | ) |
| Repurchase of Corporation mandatorily redeemable preferred stock | (14,069 | ) | | — |
|
| Corporation common distributions | (34,978 | ) | | (42,508 | ) |
| ESH REIT common distributions | (83,616 | ) | | (120,116 | ) |
| ESH REIT preferred distributions | (16 | ) | | (8 | ) |
| Net cash used in financing activities | (252,984 | ) | | (458,635 | ) |
| CHANGES IN CASH AND CASH EQUIVALENTS DUE TO CHANGES IN FOREIGN CURRENCY EXCHANGE RATES | 275 |
| | 34 |
|
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 32,502 |
| | (223,404 | ) |
| CASH AND CASH EQUIVALENTS - Beginning of period | 84,158 |
| | 373,239 |
|
| CASH AND CASH EQUIVALENTS - End of period | $ | 116,660 |
| | $ | 149,835 |
|
| SUPPLEMENTAL CASH FLOW INFORMATION: | | | |
| Cash payments for interest, excluding prepayment and other penalties | $ | 77,346 |
| | $ | 74,134 |
|
| Cash payments for income taxes, net of refunds of $403 and $1,068 | $ | 37,192 |
| | $ | 61,581 |
|
| NONCASH INVESTING AND FINANCING ACTIVITIES: | | | |
| Capital expenditures included in accounts payable and accrued liabilities | $ | 17,132 |
| | $ | 20,600 |
|
| Deferred financing costs included in accounts payable and accrued liabilities | $ | — |
| | $ | 1,146 |
|
| Proceeds from sale of hotel properties included in other assets | $ | 12,675 |
| | $ | — |
|
| Corporation common distributions included in accounts payable and accrued liabilities | $ | 721 |
| | $ | 327 |
|
| ESH REIT common distributions included in accounts payable and accrued liabilities | $ | 1,623 |
| | $ | 1,241 |
|
| | | | | | | | | | | |
| Three Months Ended
March 31, |
| 2021 | | 2020 |
| SUPPLEMENTAL CASH FLOW INFORMATION: | | | |
| Cash payments for interest, excluding prepayment and other penalties, net of capitalized interest of $430 and $859 | $ | 3,611 | | | $ | 5,455 | |
| Cash payments (refunds) for income taxes, net of refunds of $152 and $18 | $ | 359 | | | $ | (18) | |
| Operating cash payments for finance leases | $ | 56 | | | $ | 59 | |
| Operating cash payments for operating leases | $ | 735 | | | $ | 714 | |
| NONCASH INVESTING AND FINANCING ACTIVITIES: | | | |
| Capital expenditures included in accounts payable and accrued liabilities | $ | 13,239 | | | $ | 22,400 | |
| | | |
| Additions to finance lease right-of-use assets and liabilities | $ | 0 | | | $ | 364 | |
| | | |
| | | |
| Corporation common distributions included in accounts payable and accrued liabilities | $ | 107 | | | $ | 238 | |
| ESH REIT common distributions included in accounts payable and accrued liabilities | $ | 725 | | | $ | 387 | |
See accompanying notes to unaudited condensed consolidated financial statements.
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2017MARCH 31, 2021 AND DECEMBER 31, 20162020 AND FOR THE THREE ANDNINE MONTHS ENDED
SEPTEMBER 30, 2017MARCH 31, 2021 AND 20162020
(Unaudited)
| |
1. | BUSINESS, ORGANIZATION AND BASIS OF CONSOLIDATION |
1. BUSINESS, ORGANIZATION AND BASIS OF CONSOLIDATION
Extended Stay America, Inc. (the “Corporation”) was incorporated in the state of Delaware on July 8, 2013. ESH Hospitality, Inc. (“ESH REIT”) was formed as a limited liability company in the state of Delaware on September 16, 2010 and was converted to a corporation on November 5, 2013. On November 18, 2013, the Corporation and ESH REIT completed an initial public offering of 32.5 million Paired Shares. A "Paired Share" consists of one share of common stock, par value $0.01 per share, of the Corporation, that is attached to and trades as a single unit with one share of Class B common stock, par value $0.01 per share, of ESH REIT. The Corporation owns and is expected to continue to own, all of the issued and outstanding Class A common stock of ESH REIT, which, as of September 30, 2017,March 31, 2021, represents approximately 57%58% of the outstanding common stock of ESH REIT. Due to its controlling interest in ESH REIT, the Corporation consolidates the financial position, results of operations, comprehensive income and cash flows of ESH REIT. The term, “the Company,” as used herein refers to the Corporation and its consolidated subsidiaries, including ESH REIT.
A “Paired Share” consists of 1 share of common stock, par value $0.01 per share, of the Corporation, that is attached to and trades as a single unit with 1 share of Class B common stock, par value $0.01 per share, of ESH REIT. Each outstanding share of Corporation common stock is attached to and trades with 1 share of ESH REIT Class B common stock.
The Company is an integrated owner/operator of Extended Stay America-branded hotels and is also engaged in franchising, and in certain cases managing, extended stay hotels for third parties in the U.S. As of September 30, 2017,March 31, 2021 and 2020, the Company owned and operated 625563 and 558 hotel properties, respectively, in 4440 U.S. states, consisting of approximately 68,800 rooms. As of December 31, 2016, the Company owned62,700 and operated 62662,100 rooms, respectively, and franchised 88 and 74 hotel properties in 44 U.S. states,for third parties, respectively, consisting of approximately 68,9009,000 and 7,600 rooms, and threerespectively. As of March 31, 2021, all 651 system-wide hotels in Canada, consisting of 500 rooms. Thewere operated under the Extended Stay America brand.
Owned hotel properties are owned by wholly-owned subsidiaries of ESH REIT and are operated by wholly-owned subsidiaries of the Corporation (the “Operating Lessees”) pursuant to leases between ESH REIT and the Operating Lessees. The hotels are managed by ESA Management LLC (“ESA Management”), a wholly-owned subsidiary of the Corporation. The hotels are operated under the core brand, Extended Stay America. The Extended Stay America brand is owned by ESH Hospitality Strategies LLC (“ESH Strategies”), also a wholly-owned subsidiary of the Corporation. ESH Strategies licenses the brand and intellectual property to the Operating Lessees and third parties.
As of September 30, 2017, the Corporation had approximately 192.3 million shares of common stock outstanding, approximately 99.3% of which were owned by the public and approximately 0.7% of which were owned by senior management and certain directors. As of September 30, 2017, ESH REIT’s common equity consisted of the following: (i) approximately 250.5 million shares of Class A common stock outstanding (approximately 57% of its common equity), all of which were owned by the Corporation, and (ii) approximately 192.3 million shares of Class B common stock outstanding (approximately 43% of its common equity), approximately 99.3% of which were owned by the public and approximately 0.7% of which were owned by senior management and directors.
As of December 31, 2016, the Corporation had approximately 195.4 million shares of common stock outstanding, approximately 55.9% of which were owned by the public and approximately 44.1% of which were owned by Centerbridge Partners, L.P., Paulson & Co. Inc. and The Blackstone Group L.P. and their funds or affiliates (individually, each a "Former Sponsor," or collectively, the “Former Sponsors”) and senior management and certain directors. As of December 31, 2016, ESH REIT’s common equity consisted of the following: (i) approximately 250.5 million shares of Class A common stock outstanding (approximately 56% of its common equity), all of which were owned by the Corporation, and (ii) approximately 195.4 million shares of Class B common stock outstanding (approximately 44% of its common equity), approximately 55.9% of which were owned by the public and approximately 44.1% of which were owned by the Former Sponsors and senior management and directors.
2017 Secondary Offerings
InPending Merger—On March May and June 2017, certain selling stockholders (the "Selling Stockholders") sold 25.0 million, 30.0 million and 25.0 million Paired Shares, respectively, pursuant to an automatic shelf registration statement as part of secondary offerings. In conjunction with these secondary offerings,14, 2021, the Corporation and ESH REIT repurchasedentered into an Agreement and retired, in the aggregate, approximately 2.0 million Paired Shares for approximately $21.4 millionPlan of Merger (the “Merger Agreement”) with Eagle Parent Holdings L.P. (“Parent”), a joint venture of Blackstone Real Estate Partners IX L.P. and $12.2 million, respectively (see Note 11). The Selling Stockholders consisted solely of entities affiliated with the Former Sponsors and did not include officers or directorsStarwood Distressed Opportunity Fund XII Global, L.P. Upon completion of the Corporation or ESH REIT. Neither the Corporation nor ESH REIT sold Paired Shares in the secondary offerings and neither received proceeds from the secondary offerings. The Corporation and ESH REIT incurred professional fees in connection with the secondary offerings totaling approximately $0.1 million and $1.1 million for the three and nine months ended September 30, 2017, respectively.
After giving effect to the June 2017 secondary offering, funds or affiliates of Paulson & Co. Inc. own approximately 1.8 million Paired Shares, while funds or affiliates of Centerbridge Partners, L.P. and The Blackstone Group L.P. no longer own any Paired Shares.
Paired Share Repurchase Program
In December 2015, the Boards of Directors ofproposed transactions, the Corporation and ESH REIT authorized a combinedwill become wholly-owned subsidiaries of Parent. Pursuant to the terms and conditions of the Merger Agreement, each issued and outstanding Paired Share repurchase programwill be converted into a right to receive (1) $19.50 in cash, plus (2) if the transactions are consummated after July 27, 2021 (or earlier, under certain circumstances), a per diem amount of $0.001 for each day from and after such date until, but not including, the closing date, without interest thereon (such sum, the “Merger Consideration”).
The Merger Agreement contains customary representations, warranties and covenants, including those related to the Company's use of commercially reasonable efforts to carry on its business consistent with past practice prior to completion of the transactions. Under the terms of the Merger Agreement, Parent may request that the Corporation pay a special distribution (the “Special Dividend”) immediately prior to the closing of up to $100 million$1.75 per share of Paired Shares. In February 2016,Corporation common stock, in which case the Boards of Directors of the Corporation and ESH REIT authorized an increase of the combined Paired Share repurchase program from up to $100 million to up to $200 million of Paired Shares. In December 2016, the Boards of Directors of the Corporation and ESH REIT authorized an increase of the combined Paired Share repurchase program from up to $200 million to up to $300 million of Paired Shares and extended the maturity of the program through December 31, 2017, each effective January 1, 2017. Repurchases may be made at management's discretion from time to timecash consideration paid in the open market,merger in privately negotiatedrespect of a share of Corporation common stock shall be reduced by the amount of such Special Dividend. The Merger Agreement is subject to customary closing conditions, including approval by the Company’s shareholders and receipt of certain regulatory approvals. The Company can provide no assurance that the transactions orcontemplated by other means (including through Rule 10b5-1 trading plans). Depending on market conditions and other factors, these repurchases maythe Merger Agreement will be commenced or suspended without prior notice. As of September 30, 2017, the Corporation and ESH REIT had repurchased and retired approximately 12.8 million Paired Shares for approximately $123.5 million and $75.2 million, respectively, of which 5.8 million Paired Shares were repurchased and retired from entities affiliated with the Former Sponsors.completed.
Basis of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”), and include the financial position, results of operations, comprehensive income, changes in equity and cash flows of the Corporation and its consolidated subsidiaries, including ESH REIT. Third partyThird-party equity interests in the Corporation's consolidated subsidiaries are presented as noncontrolling interests. Despite the fact that
each share of Corporation common stock is paired on a one-for-one1-for-one basis with each share of ESH REIT Class B common stock, the Corporation does not own the ESH REIT Class B common stock; therefore, ESH REIT Class B common stock represents a third partythird-party equity interest. As such, the rights associated with the ESH REIT Class B common stock, along with other third partythird-party equity interests in ESH REIT, which include 125 shares of preferred stock, are presented as noncontrolling interests in the accompanying unaudited condensed consolidated financial statements. Changes in ownership interests in a consolidated subsidiary that do not result in a loss of control are accounted for as equity transactions. All intercompany accounts and transactions have been eliminated.
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2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Presentation—Certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP have been condensed or omitted in the accompanying unaudited condensed consolidated financial statements. The Company believes the disclosures made are adequate to prevent the information presented from being misleading. However, the unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 20162020 included in the combined annual report on Form 10-K filed with the SECU.S. Securities and Exchange Commission (“SEC”) on February 28, 2017.25, 2021.
The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal and recurring items) necessary to present fairly the Company’s financial position as of September 30, 2017,March 31, 2021, the results of the Company’s operations, and comprehensive income, for the three and nine months ended September 30, 2017 and 2016 and changes in equity and cash flows for the ninethree months ended September 30, 2017March 31, 2021 and 2016.2020. Interim results are not necessarily indicative of full year performance because of the impact of seasonal, and short-term or other market variations, including the impact of the COVID-19 pandemic, as well as the impact of hotel renovations.acquisitions and dispositions, renovations and capital transactions.
Use of Estimates—The preparation of the accompanying unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Management used significant estimates to determine the estimated useful lives of tangible assets, as well as in the assessment of tangible and intangible assets including goodwill, for impairment and estimated liabilities for insurance reserves and the grant-date fair value of certain equity-based awards.income taxes. Actual results could differ from those estimates.
Property and Equipment—Property and equipment additions are recorded at cost. Major improvements that extend the life or utility of property or equipment are capitalized and depreciated over a period equal to the shorter of the estimated useful life of the improvement or the remaining estimated useful life of the asset. Ordinary repairs and maintenance are charged to
expense as incurred. Depreciation and amortization are recorded on a straight-line basis over estimated useful lives which range from two1 to 49 years.
Management assesses the performance of long-lived assets for potential impairment quarterly, as well as when events or changes in circumstances indicate the carrying amount of an asset or group of assets may not be recoverable. The identification of events or changes in circumstances that indicate the carrying value of assets may not be recoverable requires significant judgment. The Company reviews for impairment indicators at the lowest level of identifiable cash flows based on quantitative, qualitative and certain industry-related factors. Quantitative factors include, but are not limited to, hotel property EBITDA, EBITDA margins and EBITDA multiples, and serve to screen assets with historical, current or projected operating cash flow losses or deterioration. Qualitative factors include a change in physical condition, economic environment, regulatory environment or primary use, including the evaluation of the asset for disposition.
Recoverability of property and equipment is measured by a comparison of the carrying amount of a hotel property or group of hotel properties to the estimated future undiscounted cash flows expected to be generated by eachthe hotel property.property or group of hotel properties. Impairment is recognized when estimated future undiscounted cash flows, including expected proceeds from disposition, are less than the carrying value of eachthe hotel property.property or group of hotel properties. To the extent that a hotel property or group of hotel properties is impaired, the excess carrying amount over its estimated fair value is recognized as an impairment charge and reduces income from operations.charge. Fair value is determined based upon the discounted cash flows of the hotel property or group of hotel properties, bids, quoted market prices or independent appraisals, as considered necessary.
The estimation and evaluation of future cash flows, in particular the holding period for real estate assets and asset composition and/or concentration within real estate portfolios, relies on significant judgments and assumptions regarding holding period, current and future operating performance and current and future market conditions. It is possible that such judgments and/or estimates will change; in particular, the effects of the COVID-19 pandemic could cause economic and market conditions to deteriorate, and if this occurs, or if the Company's expected holding period for real estate assets changes, the Company may recognize impairment charges or losses on sale in future periods reflecting either changes in estimate, circumstance or the estimated market value of assets.
Intangible Assets—Intangible assets include trademarks, corporate customer relationships and software development and licenses related to certain internal-use software. Corporate customer relationships and software development and licenses are amortized using the straight-line method over their estimated useful lives; the estimated useful life of customer relationships and software development is 20 and five years, respectively, and the estimated useful life of software licenses is the remaining non-cancellable term of each respective contract. Trademarks are not amortized.
Definite-lived intangible assets are reviewed for impairment quarterly and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Indefinite-lived intangible assets, are reviewed for impairment quarterly, and the Company tests for impairment more frequently if events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. At such time their classification as indefinite-lived intangible assets is reassessed, the Company first assesses qualitative factors to determine if it is more likely than not that the fair value of its indefinite-lived intangible assets is less than its carrying amount.
If the effects of the COVID-19 pandemic or other factors cause economic and market conditions to deteriorate, these events could result in impairment charges with respect to intangible assets in the future. Actual results are subject to a high degree of uncertainty due to the volatility of macroeconomic trends.
Goodwill—Goodwill represents the purchase price in excess of the fair value of net assets acquired in conjunction with the acquisition of the Company's predecessor in 2010. Goodwill is reviewed for impairment quarterly and more frequently if events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company recognizedhas 2 reportable operating segments, owned hotels and franchise and management. There is no goodwill associated with the Company's franchise and management segment. As a result, management only analyzes goodwill associated with owned hotels when analyzing for potential impairment. The Company first assesses qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
If the effects of the COVID-19 pandemic or other factors cause economic and market conditions to deteriorate, these events could result in impairment charges relatedwith respect to propertygoodwill in the future. Actual results are subject to a high degree of uncertainty due to the volatility of macroeconomic trends.
Revenue from Owned and equipmentOperated Hotels—Revenue generated from owned and operated hotels consists of room and other hotel revenues recognized when services are provided. When a reservation is made, the Company deems that the parties have approved a contract in accordance with customary business practices and are committed to perform their respective obligations. At such time, each party’s rights regarding the services to be transferred are identified, payment terms are specified, the contract has commercial substance and, in most instances, it is probable the Company will collect substantially all consideration to which it will be entitled in exchange for services.
Each room night consumed by a guest with a cancellable reservation represents a contract whereby the three months ended September 30, 2017Company has a performance obligation to provide the room night at an agreed upon price. For cancellable reservations, the Company recognizes revenue as each performance obligation (i.e., each room night) is met. Such contract is renewed if the guest continues their stay. If at any time during a guest’s stay the Company believes it is not probable it will collect substantially all consideration to which it will be entitled, revenue is recognized on a cash basis until such time as collection is considered probable.
For room nights consumed by a guest with a non-cancellable reservation, the entire reservation period represents the contract term whereby the Company has a performance obligation to provide the room night or nights at an agreed upon price. For non-cancellable reservations, the Company recognizes revenue over the term of the performance period (i.e., the reservation period) as room nights are consumed. For these reservations, the room rate is typically fixed over the reservation period. The Company uses an output method based on performance completed to date (i.e., room nights consumed) to determine the amount of revenue it recognizes on a daily basis if the length of a non-cancellable reservation exceeds one night since consumption of room nights indicates when services are transferred to the guest. In certain instances, variable consideration may exist with respect to the transaction price, such as discounts, coupons and recognized approximately $20.4 million of impairment charges forprice concessions made upon guest checkout.
In evaluating its performance obligation, the nine months ended September 30, 2017 (see Note 5)Company bundles the obligation to provide the guest the room itself with other obligations (such as free WiFi, access to on-site laundry facilities and parking), as the other obligations are not distinct and separable because the guest cannot benefit from the additional amenities without the consumed room night. The Company’s obligation to provide the additional items or services is not separately identifiable from the fundamental contractual obligation (i.e., providing the room and its contents). The Company recognized an impairment charge of approximately $2.8 million for eachhas no performance obligations once a guest’s stay is complete.
Certain revenues are generated through third-party intermediaries or distribution channels (i.e., online travel agents). Regardless of the threebasis on which the Company is compensated (i.e., gross or net), the Company is responsible for fulfilling the promise to provide the hotel room and nine months ended September 30, 2016 (see Note 5)related services to the guest and retains inventory risk. Since the Company controls the inventory and services provided and because third-party intermediaries are typically not contractually required to guarantee room night consumption, the Company is the principal in these transactions. As such, the Company is required to record revenue at an amount equal to the price charged to the guest (i.e., on a gross basis). The estimationThird-party intermediaries that pay the Company directly (i.e., on a net basis) typically charge the guest additional fees, blend the room offering with other offerings at amounts which are not allocable and may adjust the price without the Company’s approval. As such, the Company is unable to calculate the room rate charged to the guest. Since any estimate the Company would make has significant uncertainty that ultimately would not be resolved, despite its role as principal, in these instances the Company records revenue equal to the amount paid by the third-party intermediaries (i.e., the net amount).
Revenue from Franchise and Management Fees—Revenue generated from franchise and management fees consists of future undiscounted cash flows is inherently uncertainthe following:
•Franchise fees, which consist of an initial fee and relies upon assumptions regarding current and future economic and market conditions. If such conditions change, an impairment charge to further reduce the carrying valueongoing royalty fee based on a percentage of a hotel’s monthly revenue in exchange for the access to and use of the Company’s brand name and other intellectual property. Initial fees are deferred and recognized over the expected contract or customer life. Royalty fees are recognized over time as franchisees derive value from the license to use the intellectual property.
•Management fees, which consist of an ongoing base fee calculated as a percentage of a hotel’s monthly revenue in exchange for on-site hotel property could occur inmanagement services. Management fees are recognized over time as third-party hotel owners derive value from on-site personnel and related services.
•Other revenues from franchised and managed properties, which include the reimbursement of costs incurred on behalf of third-party hotel owners on a future period indirect and an indirect basis, as follows:
◦Direct costs incurred with respect to franchise and management agreements include on-site hotel personnel and incremental reservation and distribution costs for which conditions change.the Company is reimbursed on a dollar-for-dollar basis. Since the Company employs the hotel personnel and has discretion over reservation and distribution costs, it is the principal with respect to these services and revenue is recognized on a gross basis.
Segments—◦Indirect costs incurred with respect to franchise agreements include costs associated with certain shared system-wide platforms (i.e., system services), such as marketing, technology infrastructure, central reservations, national sales and revenue management systems. The Company’s hotel operations representCompany is reimbursed for indirect costs through a single operating segmentsystem service fee, or program fee, based on a percentage of a hotel’s monthly revenue. System service fees are recognized over time as franchisees derive value from the waylicense to use these processes and systems. The Company has discretion over how it spends system service fees and is the principal with respect to these services. Revenue is recognized on a gross basis; expense is recognized as incurred. Over time, the Company manages its business. The Company’s hotels provide similar services, use similar processes to sell those services and sell thosesystem services to similar classesbreak-even, but the timing of customers. system service fee revenues will typically not align with expenses incurred to operate the programs.
The amountspromise to provide access to the Company’s intellectual property is combined with the promise to provide system services to form a single performance obligation since the promises generally accompany one another. Hotel management services form a single performance obligation. As noted above, each identified performance obligation is considered to be a series of long-lived assetsservices transferred over time. Revenue is recognized on an output method based on performance completed to date. The Company recognizes revenue in the amount to which it has a right to bill third parties under their respective franchise or management agreements, as it has a right to consideration in an amount that corresponds directly with the third parties’ hotel revenues. Franchise, management and netsystem service fees are characterized as variable consideration and vary from period to period. In the event that fees include variables that extend beyond the current period, the Company uses the most likely amount method to determine the amount of revenue to record based on a reasonable revenue forecast for the applicable hotel. In most instances, the Company does not have constraining estimates, as third-party hotel revenues outside the U.S. are not significant for any period presented.typically available and obtained monthly.
Recently Issued Accounting Standards
Goodwill—Reference Rate Reform—In January 2017,March 2020, the FASB issued an accounting standards update in which the guidance on testingthat provides optional expedients and exceptions for goodwill was updatedapplying U.S. GAAP to eliminate Step 2 in the determination on whether goodwill should be considered impaired. Annual and/or interim assessments are still requiredcontract modifications and hedging relationships that reference LIBOR, subject to be completed. This update will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted.meeting certain criteria. The Company doesadopted this update on March 12, 2020 and the updates are effective through December 31, 2022, during which time the Company may elect to apply the optional expedients and exceptions offered under
the standard. The Company's variable rate debt and interest rate swap are tied to rates that reference LIBOR (see Notes 7 and 8). As of March 31, 2021, the Company had not expect theapplied any of these optional expedients or exceptions. The adoption of this update did not, and is not expected to, have a material effect on the Company’s unauditedCompany's condensed consolidated financial statements.
Statement of Cash Flows—IncomeTaxes—In August and November 2016, the FASB issued accounting standards updates which provide additional clarity on the classification of specific events on the statement of cash flows. These events include debt prepayment and extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from settlement of insurance claims, distributions received from equity method investees, and beneficial interests in securitization transactions. These updates also require amounts generally described as restricted cash to be included with cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. These updates are effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods, with early adoption permitted and should be applied using a retrospective transition method to each period presented. The adoption of these updates will require cash outflows related to debt prepayment and extinguishment costs to be classified as financing activities. For the nine months ended September 30, 2017 and 2016, debt prepayment and extinguishment costs included within net cash provided by operating activities totaled approximately $1.2 million and $3.9 million, respectively. Additionally, the effect of the adoption of these updates on the Company's consolidated statements of cash flows will be to include restricted cash in the beginning and end of period balances of cash, restricted cash and cash equivalents. The change in restricted cash is currently included in investing activities in the consolidated statements of cash flows.
Compensation—Stock Compensation—In March 2016,2019, the FASB issued an accounting standards update which identifies areas for simplification involving several aspects ofsimplifies the accounting for share-based payment transactions,income taxes. The update amends several topics including incomeinterim period accounting for enacted changes in tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur,law and certain classifications on the statement of cash flows.year-to-date loss limitation in interim-period tax accounting. The Company adopted this update on January 1, 2017 using a prospective transition method.2021. The adoption of this update did not have a material effect on the Company’s unauditedCompany's condensed consolidated financial statements.
In May 2017, the FASB issued an accounting standards update that provides guidance about which changes to the terms or conditions of a share-based payment award requires an entity to apply modification accounting. This update will be effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted and should be applied prospectively to awards modified on or after the adoption date. The Company does not expect the adoption of this update to have a material effect on the Company’s unaudited condensed consolidated financial statements.
3. NET INCOME PER SHARE
Derivatives and Hedging—In August 2017, the FASB issued an accounting standards update which changes the designation and measurement guidance for qualifying hedging relationships and the presentation of hedging results. This update expands and refines hedge accounting and aligns recognition and presentation of its effects within the financial statements. This update is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted, and will require a cumulative-effect adjustment to the balance of retained earnings as of the beginning of the fiscal year that an entity adopts this update. The Company is currently assessing the impact the adoption of the update will have on its consolidated financial statements. Expected impacts include, on a prospective basis, the elimination of hedge ineffectiveness related to designated interest rate swaps, the presentation of all interest rate hedge related items that impact earnings in the interest expense line item in the consolidated statement of operations and an election to perform qualitative assessments of hedge effectiveness.
In March 2016, the FASB issued an accounting standards update to clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts and to clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The Company adopted this update on January 1, 2017. The adoption of this update did not have a material effect on the Company’s unaudited condensed consolidated financial statements.
Leases— In February 2016, the FASB issued an accounting standards update which introduces a lessee model that requires a right-of-use asset and lease obligation to be presented on the balance sheet for all leases, whether operating or financing. The update eliminates the requirement in current U.S. GAAP for an entity to use bright-line tests in determining lease classification. The update also requires lessors to increase the transparency of their exposure to changes in value of their residual assets and how they manage that exposure. This update will be effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted, and must be applied using a modified retrospective approach, which will require adjustment to all comparative periods presented.
As of September 30, 2017, using its incremental borrowing rate with respect to the future minimum lease payments under its operating leases (ground leases and corporate office lease), the Company has preliminarily estimated that the lease liability would have been between approximately $15.0 million and $19.0 million and the right of use asset would have been between approximately $7.0 million and $11.0 million, which includes adjustments for accrued lease payments, above market lease liabilities and lease incentives.
The recording of a lease obligation may increase total indebtedness for purposes of financial covenants within certain of the Company’s existing debt agreements; however, the Company currently does not expect this increase to cause instances of non-compliance with any of these covenants. The Company does not expect the adoption of this update to have a material effect on its consolidated statements of operations or cash flows. The Company expects to elect the optional practical expedients which relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. The election to apply these practical expedients will, in effect, mean the Company will continue to account for leases that commenced before the effective date in accordance with previous GAAP unless the lease is modified, except that the Company will recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP.
Contractual Revenue—Since May 2014, the FASB has issued several accounting standards updates which replace existing revenue recognition accounting standards. These updates are based on the principle that revenue is recognized when an entity transfers control of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. These updates also require more detailed disclosure to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. These updates permit transition under the full retrospective method, the modified retrospective approach that utilizes certain practical expedients and the cumulative effect method. These updates are effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted for interim and annual periods beginning after December 15, 2016.
The Company will adopt the standard on January 1, 2018 using the modified retrospective transition method. The Company does not expect the standard to impact the amount or timing of revenue recognition from owned and managed hotels, which, other than sales of real estate, represents its sole revenue stream through September 30, 2017. The Company has generally not had continuing involvement with hotels it has sold and control of sold assets has transferred to their respective buyers at closing with no contingencies. Accordingly, the Company does not expect the standard to impact the amount or
timing of revenue (or gain/loss) recognition related to sales of real estate. The Company expects that upon adoption, the notes to its consolidated financial statements will include enhanced revenue-related disclosures. Additional disclosures are expected to include disaggregated revenue categories that highlight the nature of revenues impacted by specific economic factors, future performance obligations, such as future room reservations, and judgments or changes in judgments used in applying the new standard.
Basic net income per share is computed by dividing net income available to common shareholders by the weighted-average number of shares of the Corporation’s unrestricted common stock outstanding. Diluted net income per share is computed by dividing net income available to common shareholders, as adjusted for potentially dilutive securities, by the weighted-average number of shares of the Corporation’s unrestricted common stock outstanding plus other potentially dilutive securities. Dilutive securities include certain equity-based awards issued under long-term incentive plans (see Note 13) and are included in the calculation provided that the inclusion of such securities is not anti-dilutive.
The calculations of basic and diluted net income per share, including a reconciliation of the numerators and denominators, are as follows (in thousands, except per share data):
| | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
| Numerator: | | | | | | | |
Net income available to Extended Stay America, Inc. common
shareholders - basic | | | | | $ | 1,921 | | | $ | 4,554 | |
| Income attributable to noncontrolling interests assuming conversion | | | | | (25) | | | (2) | |
Net income available to Extended Stay America, Inc. common
shareholders - diluted | | | | | $ | 1,896 | | | $ | 4,552 | |
| Denominator: | | | | | | | |
| Weighted-average number of Extended Stay America, Inc. common shares outstanding - basic | | | | | 177,827 | | | 177,990 | |
| Dilutive securities | | | | | 722 | | | 181 | |
| Weighted-average number of Extended Stay America, Inc. common shares outstanding - diluted | | | | | 178,549 | | | 178,171 | |
| Net income per Extended Stay America, Inc. common share - basic | | | | | $ | 0.01 | | | $ | 0.03 | |
| Net income per Extended Stay America, Inc. common share - diluted | | | | | $ | 0.01 | | | $ | 0.03 | |
| | | | | | | |
| | | | | | | |
4. HOTEL DISPOSITIONS
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Numerator: | | | | | | | |
| Net income available to Extended Stay America, Inc. common shareholders - basic | $ | 53,876 |
| | $ | 46,556 |
| | $ | 128,752 |
| | $ | 124,331 |
|
| Income attributable to noncontrolling interests assuming conversion | (37 | ) | | (4 | ) | | (60 | ) | | (4 | ) |
| Net income available to Extended Stay America, Inc. common shareholders - diluted | $ | 53,839 |
| | $ | 46,552 |
| | $ | 128,692 |
| | $ | 124,327 |
|
| Denominator: | | | | | | | |
| Weighted average number of Extended Stay America, Inc. common shares outstanding - basic | 192,357 |
| | 200,556 |
| | 193,399 |
| | 202,156 |
|
| Dilutive securities | 974 |
| | 140 |
| | 602 |
| | 96 |
|
| Weighted average number of Extended Stay America, Inc. common shares outstanding - diluted | 193,331 |
| | 200,696 |
| | 194,001 |
| | 202,252 |
|
| Net income per Extended Stay America, Inc. common share - basic | $ | 0.28 |
| | $ | 0.23 |
| | $ | 0.67 |
| | $ | 0.62 |
|
| Net income per Extended Stay America, Inc. common share - diluted | $ | 0.28 |
| | $ | 0.23 |
| | $ | 0.66 |
| | $ | 0.61 |
|
On May 1, 2017, the Company sold its three Extended Stay Canada-branded hotels for gross proceeds of 76.0 million Canadian dollars, or approximately $55.3 million. The carrying value of the hotels, including net working capital and allocable goodwill, net of an impairment charge recordedtable below summarizes hotel dispositions during the three months ended March 31, 2017, was approximately 56.7 million Canadian dollars, or approximately $41.2 million, resulting in a gain on sale2021 and the year ended December 31, 2020 (in thousands, except number of approximately 17.3 million Canadian dollars, or approximately $12.6 million, prior to the evaluationhotels and number of existing accumulated foreign currency translation loss. Due to the fact that the Company's Canadian subsidiaries liquidated 100%rooms). No dispositions were reported as discontinued operations.
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| Date | Location | Number of Hotels | Number of Rooms | Net Proceeds | Gain on Sale | Franchised | |
| March 2021 | Texas | 2 | 241 | $ | 21,867 | | $ | 12,018 | | Yes | (1) |
| November 2020 | California | 1 | 146 | $ | 63,556 | | $ | 52,525 | | No | |
(1) Remaining term of their assets, approximately $14.5 million of accumulated foreign currency translation loss was recognized in the unaudited condensed consolidated statement of operations during the nine months ended September 30, 2017. This charge morefranchise agreement is less than fully offset the Canadian subsidiaries' gain on sale, which resulted in a loss on sale of the Canadian hotels of approximately $1.9 million, net of closing costs and adjustments, which is reported in loss on sale of hotel properties during the nine months ended September 30, 2017 in the accompanying unaudited condensed consolidated statement of operations.
On May 16, 2017, the Company sold one U.S.-based hotel for gross proceeds of $5.4 million. The carrying value of this hotel, including net working capital and allocable goodwill, net of an impairment charge recorded during 2016, was approximately $5.1 million, resulting in no gain or loss on sale, net of closing costs and adjustments.year.
During the three and nine months ended September 30, 2017March 31, 2021 and 2016, the four2020, disposed hotel properties contributed total room and other hotel revenues, total operating expenses and income before income tax expense as follows (in thousands):
| | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | 2020 | | |
| Total room and other hotel revenues | $ | 615 | | $ | 1,611 | | | |
| Total operating expenses | 548 | 1,125 | | |
| Income before income tax expense | 67 | 486 | | |
5. PROPERTY AND EQUIPMENT
Net investment in property and equipment as of March 31, 2021 and December 31, 2020, consists of the following (in thousands):
| | | | | | | | | | | |
| March 31,
2021 | | December 31, 2020 |
| Hotel properties: | | | |
Land and site improvements (1) | $ | 1,249,785 | | | $ | 1,246,441 | |
| Building and improvements | 2,895,078 | | | 2,881,855 | |
Furniture, fixtures and equipment (2) | 782,465 | | | 783,414 | |
| Total hotel properties | 4,927,328 | | | 4,911,710 | |
| Development in process | 28,527 | | | 46,496 | |
| Corporate furniture, fixtures, equipment, software and other | 29,803 | | | 29,735 | |
| Total cost | 4,985,658 | | | 4,987,941 | |
| Less accumulated depreciation: | | | |
| Hotel properties | (1,546,732) | | | (1,518,236) | |
| Corporate furniture, fixtures, equipment, software and other | (24,439) | | | (23,750) | |
| Total accumulated depreciation | (1,571,171) | | | (1,541,986) | |
| Property and equipment — net | $ | 3,414,487 | | | $ | 3,445,955 | |
(1)Includes finance lease asset of $4.0 million as of March 31, 2021 and December 31, 2020.
(2)Includes finance lease asset of $0.4 million as of March 31, 2021 and December 31, 2020.
As of March 31, 2021 and December 31, 2020, development in process consisted of 6 and 8 land parcels, respectively, that were in various phases of construction and/or development. The Company expects to delay commencement of construction at 4 of these locations as a result of current market uncertainty.
During the three months ended March 31, 2021 and the year ended December 31, 2020, the following owned, newly constructed hotels were opened under the Extended Stay America brand:
| | | | | | | | | | | | |
| Opening Date | Location | Number of Hotels | Number of
Rooms | |
| March 2021 | Florida | 2 | 248 | |
| December 2020 | Florida | 1 | 124 | |
| November 2020 | Florida | 1 | 144 | |
| August 2020 | Florida | 1 | 124 | |
| June 2020 | Various | 2 | 248 | |
| April 2020 | South Carolina | 1 | 120 | |
| March 2020 | Florida | 1 | 120 | |
| | | | |
| | | | |
During the three months ended March 31, 2021 and 2020, newly-built hotels contributed total room and other hotel revenues, total operating expenses and income (loss) before income tax expense as follows (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2021 | | 2020 |
| Total room and other hotel revenues | | | | | $ | 4,475 | | | $ | 108 | |
| Total operating expenses | | | | | 3,722 | | | 130 | |
| Income (loss) before income tax expense | | | | | 753 | | | (22) | |
6. INTANGIBLE ASSETS AND GOODWILL
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Total room and other hotel revenues | $ | — |
| | $ | 3,925 |
| | $ | 2,940 |
| | $ | 9,975 |
|
| Total operating expenses | — |
| | 2,746 |
| | 15,452 |
| (1) | 7,925 |
|
| Income (loss) before income tax expense | — |
| | 931 |
| | (12,199 | ) | (1) | 1,997 |
|
| |
(1) | Includes impairment charge recorded during the three months ended March 31, 2017 of approximately $12.4 million related to the three Canadian hotels that were sold. |
Net investment in property and equipment as of September 30, 2017 and December 31, 2016, consists of the following (in thousands):
|
| | | | | | | |
| | September 30,
2017 | | December 31, 2016 |
| Hotel properties: | | | |
| Land and site improvements | $ | 1,288,376 |
| | $ | 1,303,752 |
|
| Building and improvements | 2,922,672 |
| | 2,940,615 |
|
| Furniture, fixtures and equipment | 650,547 |
| | 612,855 |
|
| Total hotel properties | 4,861,595 |
| | 4,857,222 |
|
| Corporate furniture, fixtures, equipment, software and other | 21,159 |
| | 20,076 |
|
| Undeveloped land parcel | 1,675 |
| | 1,675 |
|
| Total cost | 4,884,429 |
| | 4,878,973 |
|
| Less accumulated depreciation: | | | |
| Hotel properties | (1,080,539 | ) | | (962,400 | ) |
| Corporate furniture, fixtures, equipment, software and other | (13,525 | ) | | (11,269 | ) |
| Total accumulated depreciation | (1,094,064 | ) | | (973,669 | ) |
| Property and equipment - net | $ | 3,790,365 |
| | $ | 3,905,304 |
|
During the three and nine months ended September 30, 2017 and 2016, the Company, using Level 3 unobservable inputs, assessed property and equipment for potential impairment. The Company recognized no impairment charges related to property and equipment for the three months ended September 30, 2017 and recognized approximately $20.4 million of impairment charges for the nine months ended September 30, 2017. The Company recognized an impairment charge of approximately $2.8 million for each of the three and nine months ended September 30, 2016.
Quantitative information with respect to unobservable inputs consists of internally developed cash flow models that include the following assumptions, among others: projections of revenues, expenses and hotel related cash flows based on assumed long-term growth rates, demand trends, expected future capital expenditures and estimated discount rates that range from 6% to 10% and terminal capitalization rates that range from 7% to 11%. These assumptions are based on the Company’s historical data and experience, the Company’s budgets, industry projections and micro and macro general economic condition projections.
| |
6. | INTANGIBLE ASSETS AND GOODWILL |
The Company’s intangible assets and goodwill as of September 30, 2017March 31, 2021 and December 31, 2016,2020, consist of the following (dollars in(in thousands):
| | | | | | | | | | | | | | | | | |
| March 31, 2021 |
| Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Book Value |
| Definite-lived intangible assets | | | | | |
| Customer relationships | $ | 26,800 | | | $ | (14,045) | | | $ | 12,755 | |
| Software development and licenses | 14,024 | | | (2,367) | | | 11,657 | |
| Software development in process | 439 | | | 0 | | | 439 | |
| Indefinite-lived intangible assets—trademarks | 10,163 | | | — | | | 10,163 | |
| Total intangible assets | 51,426 | | | (16,412) | | | 35,014 | |
| Goodwill | 44,921 | | | — | | | 44,921 | |
| Total intangible assets and goodwill | $ | 96,347 | | | $ | (16,412) | | | $ | 79,935 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Book Value |
| Definite-lived intangible assets | | | | | |
| Customer relationships | $ | 26,800 | | | $ | (13,710) | | | $ | 13,090 | |
| Software licenses | 10,546 | | | (2,005) | | | 8,541 | |
| Software development in process | 2,299 | | | — | | | 2,299 | |
| Indefinite-lived intangible assets—trademarks | 10,163 | | | — | | | 10,163 | |
| Total intangible assets | 49,808 | | | (15,715) | | | 34,093 | |
| Goodwill | 45,055 | | | — | | | 45,055 | |
| Total intangible assets and goodwill | $ | 94,863 | | | $ | (15,715) | | | $ | 79,148 | |
|
| | | | | | | | | | | | | |
| | September 30, 2017 |
| | Estimated
Useful Life | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Book Value |
| Definite-lived intangible assets—customer relationships | 20 years | | $ | 26,800 |
| | $ | (9,355 | ) | | $ | 17,445 |
|
| Indefinite-lived intangible assets—trademarks | | | 9,933 |
| | — |
| | 9,933 |
|
| Total intangible assets | | | 36,733 |
| | (9,355 | ) | | 27,378 |
|
| Goodwill | | | 48,910 |
| | — |
| | 48,910 |
|
| Total intangible assets and goodwill | | | $ | 85,643 |
| | $ | (9,355 | ) | | $ | 76,288 |
|
| | | | | | | | |
| | December 31, 2016 |
| | Estimated
Useful Life | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Book Value |
| Definite-lived intangible assets—customer relationships | 20 years | | $ | 26,800 |
| | $ | (8,350 | ) | | $ | 18,450 |
|
| Indefinite-lived intangible assets—trademarks | | | 9,933 |
| | — |
| | 9,933 |
|
| Total intangible assets | | | 36,733 |
| | (8,350 | ) | | 28,383 |
|
| Goodwill | | | 53,531 |
| | — |
| | 53,531 |
|
| Total intangible assets and goodwill | | | $ | 90,264 |
| | $ | (8,350 | ) | | $ | 81,914 |
|
In conjunction with the sale of four hotels in May 2017, the Company wrote off approximately $4.6 million of goodwill, which is included in loss on sale of hotel properties in the accompanying unaudited consolidated statement of operations for the nine months ended September 30, 2017.
The remaining weighted-average amortization period for definite-livedamortizing intangible assets is approximately 13.0eight years as of September 30, 2017.March 31, 2021. Estimated future amortization expense for definite-livedamortizing intangible assets is as follows (in thousands):
| | | | | |
| Years Ending December 31, | |
| Remainder of 2021 | $ | 2,463 | |
| 2022 | 3,279 | |
| 2023 | 3,279 | |
| 2024 | 3,279 | |
| 2025 | 3,279 | |
| 2026 | 2,723 | |
| Thereafter | 6,110 | |
| Total | $ | 24,412 | |
7. DEBT
|
| | | |
| Years Ending December 31, | |
| Remainder of 2017 | $ | 335 |
|
| 2018 | 1,340 |
|
| 2019 | 1,340 |
|
| 2020 | 1,340 |
|
| 2021 | 1,340 |
|
| Thereafter | 11,750 |
|
| Total | $ | 17,445 |
|
Summary - The Company’s outstanding debt, net of unamortized debt discount,discounts and unamortized deferred financing costs, as of September 30, 2017March 31, 2021 and December 31, 2016,2020, consists of the following (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Stated
Amount(1) | | Carrying Amount | | Unamortized Deferred Financing Costs | | | | Interest Rate | | | |
| Loan | | September 30, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 | | Stated Interest Rate | | September 30, 2017 | | December 31, 2016 | | Maturity Date | |
| Term loan facilities | | | | | | | | | | | | | | | | | | |
| ESH REIT 2016 Term Facility | $ | 1,300,000 |
| (2) | $ | 1,281,530 |
| (3) | $ | 1,290,560 |
| | $ | 14,026 |
| | $ | 15,804 |
| | LIBOR(4) + 2.50%(5) |
| | 3.71 | % | (5) | 3.75 | % | | 8/30/2023 | (7) |
| Senior notes | | | | | | | | | | | | | | | | | | |
| ESH REIT 2025 Notes | 1,300,000 |
| | 1,290,027 |
| (6) | 1,289,041 |
| | 21,406 |
| | 23,523 |
| | 5.25 | % | | 5.25 | % | | 5.25 | % | | 5/1/2025 | |
Revolving credit facilities (8) | | | | | | | | | | | | | | | | | | |
| ESH REIT 2016 Revolving Credit Facility | 350,000 |
| | — |
| | 45,000 |
| | 2,157 |
| (8) | 2,570 |
| (8) | LIBOR + 2.75% |
| | N/A |
| | 3.33 | % | | 8/30/2021 | |
| Corporation 2016 Revolving Credit Facility | 50,000 |
| | — |
| | — |
| | 429 |
| (8) | 511 |
| (8) | LIBOR + 3.00% |
| | N/A |
| | N/A |
| | 8/30/2021 | |
| Unsecured Intercompany Facility | | | | | | | | | | | | | | | | | | |
| Unsecured Intercompany Facility | 75,000 |
| (9) | — |
| | — |
| | — |
| | — |
| | 5.00 | % | | 5.00 | % | | 5.00 | % | | 8/30/2023 | |
| Total | | | $ | 2,571,557 |
| | $ | 2,624,601 |
| | $ | 38,018 |
| | $ | 42,408 |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Stated
Amount | | Carrying Amount | | Unamortized Deferred Financing Costs | | | | | |
| Loan | | March 31, 2021 | | December 31, 2020 | | March 31, 2021 | | December 31, 2020 | | Stated Interest Rate | | Maturity Date | |
| Term loan facility | | | | | | | | | | | | | | |
| ESH REIT Term Facility | $ | 630,909 | | | $ | 619,847 | | (1) | $ | 621,351 | | (1) | $ | 7,348 | | | $ | 7,684 | | | LIBOR (2) + 2.00% | | 9/18/2026 | (3) |
| Senior notes | | | | | | | | | | | | | | |
| 2025 Notes | 1,300,000 | | | 1,294,630 | | (4) | 1,294,301 | | (4) | 11,526 | | | 12,232 | | | 5.25% | | 5/1/2025 | |
| 2027 Notes | 750,000 | | | 750,000 | | | 750,000 | | | 11,439 | | | 11,879 | | | 4.63% | | 10/1/2027 | |
| Revolving credit facilities | | | | | | | | | | | | | | |
| ESH REIT Revolving Credit Facility | 350,000 | | | 0 | | | 0 | | | 1,923 | | (5) | 2,061 | | (5) | LIBOR (2) + 2.00% | | 9/18/2024 | |
| Corporation Revolving Credit Facility | 50,000 | | | 9,765 | | | 49,765 | | | 485 | | (5) | 520 | | (5) | LIBOR (2) + 2.25% | | 9/18/2024 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Total | | | $ | 2,674,242 | | | $ | 2,715,417 | | | $ | 32,721 | | | $ | 34,376 | | | | | | |
| |
(1) | Amortization is interest only, except for the 2016 Term Facility (as defined below) which amortizes in equal quarterly installments of $3.24 million. See (7) below. |
| |
(2) | ESH REIT is able to increase its borrowings under the 2016 ESH REIT Credit Facilities (as defined below) by an amount of up to $600.0 million, plus additional amounts, in each case subject to certain conditions. |
| |
(3) | (1)The 2016 Term Facility is presented net of an unamortized debt discount of approximately $5.5 million and $6.2 million as of September 30, 2017 and December 31, 2016, respectively. |
| |
(4) | As of December 31, 2016, the stated interest rate of the 2016 Term Facility was LIBOR + 3.00% and included a LIBOR floor of 0.75%. |
| |
(5) | $400.0 million of the 2016 Term Facility is subject to an interest rate swap at a fixed rate of 1.175% (see Note 8). |
| |
(6) | The 2025 Notes (as defined below) are presented net of an unamortized debt discount of approximately $10.0 million and $11.0 million as of September 30, 2017 and December 31, 2016, respectively. |
| |
(7) | In addition to scheduled amortization noted in (1) above, subject to certain exceptions, annual mandatory prepayments of up to 50% of Excess Cash Flow, as defined, may be required under the 2016 Term Facility commencing with the year ending December 31, 2017. Annual mandatory prepayments for the year ending December 31, 2017 and each year thereafter are due during the first quarter of the following year. |
| |
(8) | Unamortized deferred financing costs related to the revolving credit facilities are included in other assets in the accompanying unaudited condensed consolidated balance sheets. |
| |
(9) | As of September 30, 2017, the outstanding balance owed from ESH REIT to the Corporation under the Unsecured Intercompany Facility was $50.0 million. ESH REIT is able to increase its borrowings under the Unsecured Intercompany Facility to an amount of up to $300.0 million, plus additional amounts, in each case subject to certain conditions. The outstanding debt balance and interest expense owed from ESH REIT to the Corporation related to the Unsecured Intercompany Facility eliminate in consolidation. |
On March 1, 2017, ESH REIT entered into an amendment to the 2016 Term Facility with(defined below) is presented net of an unamortized debt discount of $1.6 million and $1.7 million as of March 31, 2021 and December 31, 2020, respectively.
(2)As of March 31, 2021 and December 31, 2020, one-month LIBOR was 0.11% and 0.14%, respectively. As of March 31, 2021 and December 31, 2020, $50.0 million and $100.0 million, respectively, of the lenders thereunder (such amendment,ESH REIT Term Facility was subject to an interest rate swap at a fixed rate of 1.175%.
(3)Amortizes in equal quarterly installments of $1.6 million. In addition to scheduled amortization, subject to certain exceptions, annual mandatory prepayments of up to 50% of Excess Cash Flow, as defined, may be required under the "Repricing Amendment"). The Repricing Amendment hadESH REIT Term Facility. Annual mandatory prepayments for the year are due during the first quarter of the following impactyear. No mandatory prepayments were required in the first quarter of 2021 based on the 2016 Term Facility: (i) decreased the interest rate spread on LIBOR based loans from 3.0% to 2.5%; (ii) decreased the interest rate spread on base rate loans from 2.0% to 1.5%; (iii) removed the floor of 0.75% on LIBOR based loans; (iv) removed the floor of 2.0% on base rate loans; (v) removed ranges on interest rate spreads for all loan types that were dependent upon ESH REIT’s Excess Cash Flow for the year ended December 31, 2020.
(4)The 2025 Notes (defined below) are presented net of an unamortized discount of $5.4 million and $5.7 million as of March 31, 2021 and December 31, 2020, respectively.
(5)Unamortized deferred financing costs related to revolving credit rating; and (vi) extendedfacilities are included in other assets in the 1% prepayment penalty through September 1, 2017 (prepayments made after September 1, 2017 are not subject to a prepayment penalty, other than customary “breakage” costs).accompanying condensed consolidated balance sheets.
ESH REIT Credit Facilities
On August 30, 2016, ESH REIT entered into aREIT’s credit agreement, as may be amended and supplemented from time to time, providingprovides for senior secured credit facilities (collectively, the "2016 ESH“ESH REIT Credit Facilities"Facilities”) consistingwhich consist of a $1,300.0$630.9 million senior secured term loan facility (the "2016“ESH REIT Term Facility"Facility”) and a $350.0 million senior secured revolving credit facility (the "2016 ESH“ESH REIT Revolving Credit Facility"Facility”). Subject to the satisfaction of certain criteria, borrowings under the 2016
ESH REIT Credit Facilities may be increased by an amount of up to $600.0 million, plus additional amounts, so long as, after giving effect to the incurrence of such incremental facility and the application of proceeds thereof, itsESH REIT’s pro-forma senior loan-to-value ratio is less than or equal to 45%.
Obligations under the 2016 ESH REIT Credit Facilities are guaranteed by certain existing and future material domestic subsidiaries ofTerm Facility—The ESH REIT other than those owning real property, subject to customary exceptions. Obligations under the 2016 ESH REIT Credit Facilities are secured, subject to certain exceptions, including an exception for real property, by a first-priority security interest in substantially all of the assets of ESH REIT and the guarantors.
The 2016 ESH REIT Credit Facilities contain a number of restrictive covenants that, among other things and subject to certain exceptions, limit ESH REIT’s ability and the ability of its subsidiaries to incur additional debt, modify existing debt, create certain liens, pay dividends and distributions, make certain investments and other restricted payments, enter into affiliate transactions, amend or modify certain material operating leases and management agreements, sell assets or merge, consolidate or transfer all or substantially all of their assets. The 2016 ESH REIT Credit Facilities contain certain customary representations and warranties, affirmative covenants and events of default, including, but not limited to, cross-defaults to certain other indebtedness and certain material operating leases and management agreements. If an event of default occurs, the administrative agent is entitled to take various actions, including the acceleration of amounts due under the 2016 ESH REIT Credit Facilities and additional actions that a secured creditor is permitted to take following a default. As of September 30, 2017, ESH REIT was in compliance with all covenants under the 2016 ESH REIT Credit Facilities.
2016 Term Facility—The 2016 Term Facility, as amended, bears interest at a rate equal to (i) LIBOR plus 2.50%1.75% for any period during which ESH REIT maintains a public corporate family rating better than or equal to BB (with a stable or better outlook) from S&P and Ba3 (with a stable or better outlook) from Moody’s (a “Level 1 Period”) or LIBOR plus 2.00% for any period other than a Level 1 Period; or (ii) a base rate (determined by reference to the highest of (A) the prime lending rate, (B)
the overnight federal funds rate plus 0.50% or (C) the one-month adjusted LIBOR rate plus 1.00%), plus 1.50%. The 2016 Term Facility amortizes in equal quarterly installments in annual amounts of 1.0% of the principal amount outstanding as of the Repricing Amendment,0.75% during a Level 1 Period or approximately $13.0 million, with the remaining balance payable at maturity. In addition to scheduled amortization, subject to certain exceptions, mandatory prepayments of up to 50% of annual Excess Cash Flow, as defined, may be required based on ESH REIT's Consolidated Leverage Ratio, each as defined. Annual mandatory prepayments are due during the first quarter of the following year. The 2016 Term Facility matures on August 30, 2023.
1.00% for any period other than a Level 1 Period. ESH REIT has the option to voluntarily prepay outstanding loans under the 2016ESH REIT Term Facility at any time upon three business days’ prior written notice for LIBOR loans or on one business day’s prior written notice for base rate loans. In addition to customary "breakage" costs with respect to LIBOR loans, amounts refinanced, substituted or replaced by indebtedness which has a lower all-in yield than the all-in yield under the 2016 Term Facility on or prior to September 1, 2017 (other than as a result of a transformative transaction) are subject to a prepayment penalty equal to 1.00% of the aggregate principal amount refinanced, substituted or replaced. Prepayments made after September 1, 2017 are not subject to a prepaymentwithout penalty.
2016 ESH REIT Revolving Credit Facility—The 2016Borrowings under the ESH REIT Revolving Credit Facility provides for the issuance of up to $50.0 million of letters of credit. Borrowings under the facility bear interest at a rate equal to (i) LIBOR plus a spread that ranges from 2.25%1.50% to 2.75%2.00% based on ESH REIT’s Consolidated Total Net Leverage Ratio, as defined, or (ii) a base rate (determined by reference to the highest of (A) the prime lending rate, (B) the overnight federal funds rate plus 0.50%, or (C) the one-month adjusted LIBOR rate plus 1.00%) plus a spread that ranges from 1.25%0.50% to 1.75%1.00% based on ESH REIT’s Consolidated Total Net Leverage Ratio, as defined. There is no scheduled amortization under the 2016 ESH REIT Revolving Credit Facility and the facility matures on August 30, 2021.
In addition to paying interest on outstanding principal, ESH REIT incurs a fee of 0.35%0.30% or 0.175% on the unutilized revolver balance based on the amount outstanding under the facility. ESH REIT is also required to pay customary letter of credit fees and agency fees. The ESH REIT Revolving Credit Facility provides for the issuance of up to $50.0 million of letters of credit. As of September 30, 2017,March 31, 2021, ESH REIT had no0 letters of credit outstanding under the facility, an outstanding balance of $0 and available borrowing capacity of $350.0 million.
The 2016 ESH REIT Revolving Credit Facility is subject to a springing financial covenant whereby the senior loan-to-value ratio may not exceed 45% when the aggregate principal amount of borrowings and letters of creditmillion under the 2016 ESH REIT Revolving Credit Facility, excluding up to $30.0 million of letters of credit, is equal to or greater than 25% of the aggregate available principal amount of the 2016 ESH REIT Revolving Credit Facility on the applicable fiscal quarter end date.facility.
ESH REIT Senior2025 Notes Due 2025
In May 2015 and March 2016, ESH REIT issued $500.0 million and $800.0 million, respectively, of its 5.25% senior notes due in May 2025 (together with the $800.0 million of additional notes discussed below, the(the “2025 Notes”) under an indenture (the “Indenture”) with Deutsche Bank Trust Company
Americas, as trustee, at 100% of par value in a private placementplacements pursuant to Rule 144A of the Securities Act ("Rule 144A"). In March 2016, ESH REIT issued an additional $800.0 million of the 2025 Notes under the Indenture at 98.5% of par value in a private placement pursuant to Rule 144A. The 2025 Notes mature on May 1, 2025 and bear interest at a fixed rate of 5.25% per annum, payable semi-annually in arrears on May 1 and November 1 of each year.
The 2025 Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis by each of ESH REIT’s subsidiaries that guarantee ESH REIT’s obligations under the 2016 ESH REIT Credit Facilities. The 2025 Notes rank equally in right of payment with ESH REIT’s existing and future senior unsecured indebtedness, and senior in right of payment to all future subordinated indebtedness, if any. The 2025 Notes are effectively junior to any of ESH REIT’s secured indebtedness to the extent of the value of the assets securing such indebtedness.
1933, as amended. ESH REIT may redeem the 2025 Notes at any time on or after May 1, 2020, in whole or in part, at a redemption price equal to 102.625% of the principal amount, declining annually to 100% of the principal amount from May 1, 2023 and thereafter, plus accrued and unpaid interest. PriorUpon a Change of Control, as defined, holders of the 2025 Notes have the right to May 1, 2020,require ESH REIT to redeem the 2025 Notes at 101% of the principal amount, plus accrued and unpaid interest.
ESH REIT 2027 Notes
In September 2019, ESH REIT issued $750.0 million of its 4.625% senior notes due in 2027 (the “2027 Notes”) under an indenture with Deutsche Bank Trust Company Americas, as trustee, at a price equal to 100% of par value in a private placement pursuant to Rule 144A of the Securities Act of 1933, as amended. ESH REIT may redeem the 20252027 Notes at any time on or after October 1, 2022, in whole or in part, at a redemption price equal to 102.313% of the principal amount, declining annually to 100% of the principal amount from October 1, 2024 and thereafter, plus accrued and unpaid interest. Prior to October 1, 2022, ESH REIT may redeem the 2027 Notes, in whole or in part, at a redemption price equal to 100% of the principal amount, plus a "make-whole"“make-whole” premium, as defined, in the Indenture, plus accrued and unpaid interest. Prior to MayOctober 1, 2018,2022, subject to certain conditions, ESH REIT may redeem up to 35% of the aggregate principal amount of the 20252027 Notes at a redemption price equal to 105.250%101% of the aggregate principal amount, thereof, plus accrued and unpaid interest, with the net cash proceeds from certain equity offerings, provided 65% of the original amount of the principal remains outstanding after the occurrence of each such redemption. Upon a Change of Control, as defined, holders of the 20252027 Notes have the right to require ESH REIT to redeem the 20252027 Notes at 101% of the principal amount, plus accrued and unpaid interest.
The Indenture contains a number of customary covenants that, among other things and subject to certain exceptions, limit ESH REIT’s ability and the ability of its subsidiaries to incur additional debt, create certain liens, pay dividends or distributions, make certain investments and other restricted payments, enter into affiliate transactions, sell assets or merge, consolidate or transfer all or substantially all of their assets. The Indenture also contains certain customary events of default, including, but not limited to, cross-defaults to certain other indebtedness. If an event of default occurs, the holders of the Notes and the Trustee are entitled to take various actions, including declaring the 2025 Notes immediately due and payable. As of September 30, 2017, ESH REIT was in compliance with all covenants set forth in the Indenture.
Corporation Revolving Credit Facility
On August 30, 2016, the Corporation entered into aThe Corporation’s revolving credit facility, as may be amended and supplemented from time to time (the "2016 Corporation“Corporation Revolving Credit Facility"Facility”) of $50.0 million. The facility, provides for the issuance of up to $50.0 million of letters of credit as well as borrowing on same day notice, referred to as swingline loans, in an amount of up to $20.0 million. Borrowings under the facilityCorporation Revolving Credit Facility bear interest at a rate equal to (i) LIBOR plus 3.00%2.25% or (ii) a base rate (determined by reference to the highest of (A) the prime lending rate, (B) the overnight federal funds rate plus 0.50% or (C) the one-month adjusted LIBOR rate plus 1.00%) plus 2.00%1.25%. There is no scheduled amortization under the 2016 Corporation Revolving Credit Facility and the facility matures on August 30, 2021.
In addition to paying interest on outstanding principal, the Corporation incurs a fee of 0.35%0.30% or 0.175% on the unutilized revolver balance based on the amount outstanding under the facility. The
During the three months ended March 31, 2021, the Company repaid $40.0 million under the Corporation is also required to pay customary letterRevolving Credit Facility, and as of credit fees and agency fees.March 31, 2021, the outstanding balance under the facility was $9.8 million. As of September 30, 2017,March 31, 2021, the Corporation had one1 letter of credit outstanding under this facility of $0.7$0.2 million an outstanding balance drawn of $0 and $40.0 million available borrowing capacity available of $49.3 million.under the facility.
Obligations under the 2016 Corporation Revolving Credit Facility are guaranteed by certain existing and future material domestic subsidiaries of the Corporation, excluding ESH REIT and its subsidiaries and subject to customary exceptions. The facility is secured, subject to certain exceptions, by a first-priorityfirst priority security interest in substantially all of the assets of the Corporation and the guarantors.
If obligations are outstanding under the facility during any fiscal quarter, the 2016 Corporation Revolving Credit Facility requires that the Consolidated Leverage Ratio, as defined, calculated as of the end of such fiscal
quarter for any consecutive four quarter period, be less than or equal to 8.75 to 1.00.1.00 (the “Leverage Covenant,” subject to the Four Quarter Suspension Period, as defined below). The facility is also subject to a springing financial covenant whereby the senior loan-to-value ratio may not exceed 45% when the aggregate principal amount of borrowings and letters of credit under the 2016 Corporation Revolving Credit Facility, excluding up to $30.0 million of letters of credit, is equal to or greater than 25% of the aggregate available principal amount of the 2016 Corporation Revolving Credit Facility on the applicable fiscal quarter end date.
The 2016In May 2020, the Company entered into an amendment to the Corporation Revolving Credit Facility containsand obtained a suspension of the Leverage Covenant from the beginning of the second quarter of 2020 through the end of the first quarter of 2021 (the “Four Quarter Suspension Period”). For the second quarter of 2021 through the fourth quarter of 2021, the leverage covenant calculation has been modified to use annualized EBITDA, as opposed to trailing twelve-month EBITDA. Additionally, the amendment provides for the Corporation to borrow up to $150.0 million from ESH REIT through an intercompany loan facility. Throughout the Four Quarter Suspension Period, the Company has agreed to maintain minimum liquidity of $150.0 million and to limit share repurchases and dividend payments made by the Corporation.
Covenants
The ESH REIT Credit Facilities, the 2027 Notes, the 2025 Notes, the Corporation Revolving Credit Facility and certain intercompany loan facilities contain a number of restrictive covenants that, among other things and subject to certain exceptions, limit the Corporation’s ability and the ability of its subsidiaries to incur additional debt, modify existing debt, create certain liens, pay dividends or distributions, make certain restricted payments, enter into affiliate
transactions, amend or modify certain material operating leases and management agreements, merge, consolidate or transfer all or substantially all of its assets. The 2016 Corporation Revolving Credit Facility also contains certain customary affirmative covenants and events of default, including, but not limited to, cross-defaults to certain other indebtedness and certain material operating leases. If an event of default occurs, the administrative agent is entitled to take various actions, including the acceleration of amounts due under the facility and additional actions that a secured creditor is permitted to take following a default. As of September 30, 2017, the Corporation was in compliance with all covenants under the 2016 Corporation Revolving Credit Facility.
Unsecured Intercompany Facility
On August 30, 2016, ESH REIT, as borrower, and the Corporation, as lender, entered into an unsecured intercompany credit facility (the "Unsecured Intercompany Facility"). As of September 30, 2017, the amount outstanding under the facility totaled $50.0 million. Subject to certain conditions, the principal amount of the Unsecured Intercompany Facility may be increased up to an amount that shall not exceed the greater of (i) $300.0 million and (ii) an unlimited amount so long as the incremental loan-to-value ratio, determined on a pro-forma basis as of the last day of the most recently ended test period, as if any incremental loans available under such incremental commitments had been outstanding on the last day of such period, and, in each case, without netting the cash proceeds of any such incremental loans, does not exceed 5.0%. Loans under the facility bear interest at 5.00% per annum. There is no scheduled amortization under the facility and the facility matures on August 30, 2023. ESH REIT has the option to voluntarily prepay outstanding loans at any time upon one business day’s prior written notice.
The Unsecured Intercompany Facility contains a number of restrictive covenants that, among other things and subject to certain exceptions, limit ESH REIT’s ability and the ability of itstheir respective subsidiaries to incur additional debt, modify existing debt, createengage in certain liens, pay dividends or distributions, maketransactions. In addition, the ESH REIT Revolving Credit Facility and the Corporation Revolving Credit Facility contain financial covenants that, subject to certain investmentsconditions, require compliance with certain senior loan-to-value and other restricted payments, enter into affiliate transactions, amend or modify certain material operating leasesconsolidated leverage ratios. The agreements governing the Corporation’s and management agreements, sell assets or merge, consolidate or transfer all or substantially all of their assets. The facility containsESH REIT’s indebtedness also contain certain customary representations and warranties, affirmative covenants and events of default, including, but not limited to, cross-defaults to certain other indebtedness and, in the case of the ESH REIT Credit Facilities and certain intercompany loan facilities, certain material operating leases and management agreements. If an eventAs of default occurs,March 31, 2021, the Corporation is entitled to take various actions, including the acceleration of amounts due under the facility and all other actions that a creditor is permitted to take following a default. As of September 30, 2017, ESH REIT waswere in compliance with all covenants under their respective debt agreements.
The Company’s continued compliance with these covenants could be impacted by current or future economic conditions associated with the Unsecured Intercompany Facility.COVID-19 pandemic. The Company's failure to maintain compliance with its debt covenants or to pay debt obligations as they become due would give rise to a default under one or more of the agreements governing the Company's indebtedness, and could entitle the lenders under the defaulted agreements to accelerate the maturity of the amounts thereunder, which could raise substantial doubt about the Company's ability to continue as a going concern. The Company may seek additional covenant waivers or amendments, though there is no certainty that it would be successful in such efforts.
Future Maturities of DebtInterest Expense, net—The future maturitiescomponents of debt as of September 30, 2017,net interest expense during the three months ended March 31, 2021 and 2020, are as follows (in thousands):
|
| | | | |
| Years Ending December 31, | | |
| Remainder of 2017 | $ | 3,242 |
| |
| 2018 | 12,968 |
| (1) |
| 2019 | 12,968 |
| (1) |
| 2020 | 12,968 |
| (1) |
| 2021 | 12,968 |
| (1) |
| Thereafter | 2,531,910 |
| (1) |
| Total | $ | 2,587,024 |
| |
| | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
Contractual interest, net (1) | | | | | $ | 29,067 | | | $ | 31,326 | |
| Amortization of deferred financing costs and debt discount | | | | | 2,058 | | | 2,052 | |
Other costs (2) | | | | | 338 | | | 293 | |
| Interest income | | | | | (1) | | | (986) | |
| Total | | | | | $ | 31,462 | | | $ | 32,685 | |
______________________
| |
(1) | Under the 2016 Term Facility, annual mandatory prepayments of up to 50% of Excess Cash Flow, as defined, may be required commencing with the year ending December 31, 2017. Annual mandatory prepayments for the year ending December 31, 2017 and each year thereafter are due during the first quarter of the following year. |
(1)Net of capitalized interest of $0.4 million and $0.9 million, respectively. For the three months ended March 31, 2020, includes dividends on shares of mandatorily redeemable Corporation preferred stock.
(2)Includes interest expense on finance leases (see Note 12) and unused facility fees.
Fair Value of Debt—As of September 30, 2017March 31, 2021 and December 31, 2016,2020, the estimated fair value of the Company'sCompany’s debt was approximately $2.6$2.7 billion and $2.7$2.8 billion, respectively. Estimated fair values are determined by comparing current borrowing rates and risk spreads offered in the market to the stated interest rates and spreads on the Company's debt (Level 2 fair value measures) or quoted market prices (Level 1 fair value measures), when available.
The Company from timeavailable, to time uses derivative instruments to manage its exposure to interest rate, foreign currency exchange rate and commodity price risks. The Company’s primary objective in holding derivatives is to reduce the volatility of cash flows and earnings associated with changes instated interest rates foreign currency exchange rates and commodity prices. Thespreads on the Company’s derivatives expose it to credit risk todebt. As of March 31, 2021 and December 31, 2020, the extent that counterparties may be unable to meet the termsestimated fair value of the agreement. The Company seeksCorporation revolving credit facility was equal to mitigate such risks by limiting its counterpartiescarrying value due to major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored. Management does not expect material losses as a result of defaults by counterparties.its short-term nature and frequent settlement.
8. DERIVATIVE INSTRUMENTS
ESH REIT entered intois a counterparty to a floating-to-fixed interest rate swap at a fixed rate of 1.175% and a floating rate of one-month LIBOR subject to a LIBOR floor of 0.75%, to manage its exposure to interest rate risk on a portion of its variable rate debt. In February 2017,the ESH REIT executed an amendment to its swap agreement, the impact of which was to remove the LIBOR floor on floating rate cash flows.Term Facility. The notional amount of the interest rate swap as of September 30, 2017March 31, 2021 was $400.0 million. On March 30, 2018, the notional amount decreases to $350.0$50.0 million, and the notional amount continuesswap matures in September 2021.
For the three months ended March 31, 2021, the Company paid interest of $0.3 million, and for the three months ended March 31, 2020, the company received proceeds of $0.3 million that offset interest expense. As of March 31, 2021, $0.3 million of interest expense is expected to decrease by an additional $50.0 million everybe recognized over the following six months until the swap's maturity in September 2021.
From September 2016 through the February 2017 amendment to ESH REIT's swap agreement, the swap was designated as an effective cash flow hedge and changes in fair value were recognized through accumulated other comprehensive income. Concurrent with the February 2017 swap amendment and through April 2017, the swap's designation as a cash flow hedge was reversed and changes in fair value were recognized in earnings and are included in the line item other non-operating income (expense) on the accompanying unaudited condensed consolidated statements of operations. In April 2017, ESH REIT re-designated the swap as an effective cash flow hedge. Subsequent to April 2017, the effective portion of changes in fair value are recognized through accumulated other comprehensive income and the ineffective portion is recognized in other non-operating income (expense) on the accompanying unaudited condensed consolidated statements of operations. Prior changes recognized through accumulated other comprehensive income are amortized over the remaining life of the swap through earnings and are included in the line item other non-operating income (expense) on the accompanying unaudited condensed consolidated statements of operations. As of September 30, 2017, approximately $1.1 million is expected to be recognized through earnings over the following twelve months.maturity.
The table below presents the amounts and classification on the Company's financial statements related toof the interest rate swap on the Company’s condensed consolidated financial statements (in thousands):
|
| | | | | | | | | | | | | | |
| | Other Assets | Accumulated other comprehensive income, net of tax | | Other non-operating expense (income) | | Interest Expense |
| As of September 30, 2017 | $ | 4,534 |
| $ | 4,079 |
| (1) | | | |
| As of December 31, 2016 | $ | 4,990 |
| $ | 3,898 |
| | | | |
| For the three months ended September 30, 2017 | | | | $ | 104 |
| (2) | $ | (66 | ) |
| For the three months ended September 30, 2016 | | | | $ | — |
| | $ | — |
|
| For the nine months ended September 30, 2017 | | | | $ | 356 |
| (3) | $ | 807 |
|
| For the nine months ended September 30, 2016 | | | | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | | |
| Accrued liabilities | Accumulated other comprehensive loss, net of tax | | | | Interest expense (income), net |
| As of March 31, 2021 | $ | (268) | | $ | (227) | | (1) | | | |
| As of December 31, 2020 | $ | (525) | | $ | (445) | | (2) | | | |
| | | | | | |
| | | | | | |
| For the three months ended March 31, 2021 | | | | | | $ | 262 | |
| For the three months ended March 31, 2020 | | | | | | $ | (257) | |
| |
(1) | Changes during the nine(1)Changes during the three months ended March 31, 2021, on a pre-tax basis, consisted of changes in fair value of $0.3 million. (2)Changes during the year ended September 30, 2017 consisted of changes in fair value of $(0.5) million (effective portion) and amortization of accumulated other comprehensive income prior to de-designation of $0.7 million. |
| |
(2) | Consists of amortization of accumulated other comprehensive income prior to de-designation of $0.1 million. |
| |
(3) | Consists of amortization of accumulated other comprehensive income prior to de-designation of $0.7 million and removal of the LIBOR floor of approximately $(0.3) million. |
| |
9. | MANDATORILY REDEEMABLE PREFERRED STOCK |
The Corporation has authorized 350.0 million shares of preferred stock, par value $0.01 per share, of which 7,133 and 21,202 shares of mandatorily redeemable voting preferred stock were issued and outstanding as of September 30, 2017 and December 31, 2016,2020, on a pre-tax basis, consisted of changes in fair value of $(1.4) million.
9. REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregation of Revenue
The following table disaggregates room revenues from owned hotels by booking source for the three months ended March 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
| Property direct | | | | | $ | 68,052 | | | $ | 60,024 | |
| Central call center | | | | | 77,980 | | | 77,191 | |
| Proprietary website | | | | | 53,589 | | | 52,939 | |
| Third-party intermediaries | | | | | 44,929 | | | 57,820 | |
| Travel agency global distribution systems | | | | | 5,318 | | | 6,490 | |
Total room revenues from owned hotels (1) | | | | | $ | 249,868 | | | $ | 254,464 | |
(1)In addition to room revenues, the Company’s owned hotels earned $6.7 million and $6.8 million of other hotel revenues during the three months ended March 31, 2021 and 2020, respectively. Dividends
The following table disaggregates room revenues from owned hotels by length of guest stay for the three months ended March 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
| 1-6 nights | | | | | $ | 64,288 | | | $ | 84,594 | |
| 7-29 nights | | | | | 55,053 | | | 54,831 | |
| 30+ nights | | | | | 130,527 | | | 115,039 | |
Total room revenues from owned hotels (1) | | | | | $ | 249,868 | | | $ | 254,464 | |
(1)In addition to room revenues, the Company’s owned hotels earned $6.7 million and $6.8 million of other hotel revenues during the three months ended March 31, 2021 and 2020, respectively.
The following table disaggregates revenues from franchised and managed hotels for the three months ended March 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
Management fees (1) | | | | | $ | 0 | | | $ | 235 | |
| Franchise fees | | | | | 1,218 | | | 1,044 | |
| Indirect reimbursements (system service fees) | | | | | 1,471 | | | 1,190 | |
| Direct reimbursements | | | | | 334 | | | 2,600 | |
| Total revenues from franchised and managed hotels | | | | | $ | 3,023 | | | $ | 5,069 | |
(1)The Company previously managed 25 hotels for a third-party franchise owner. The term of the management agreement for those 25 hotels expired on these preferred shares are payable quarterly in arrears at a rate of 8.0% per year. WithDecember 31, 2020.
Outstanding Contract Liabilities
Contract liabilities relate to advance deposits with respect to dividend, distributionowned hotels and, liquidation rights,with respect to franchised hotels, advance consideration received, such as initial franchise fees paid when a franchise agreement is executed and certain system implementation fees paid at the 8.0% voting preferred stock ranks senior to the Corporation’s common stock. Holderstime of the 8.0% voting preferred stockinstallation. Contract liabilities are generally entitled to one vote for each shareincluded in accounts payable and will vote together with the Corporation common stock as a single class on all matters that the Corporation’s common shareholders are entitled to vote upon. On or after November 15, 2018, a holder of the 8.0% voting preferred stock has the right to require the
Corporation to redeem in cash the 8.0% voting preferred stock at $1,000 per share plus any accumulated unpaid dividends. On November 15, 2020, the Corporation shall mandatorily redeem all of the 8.0% voting preferred stock at $1,000 per share plus any accumulated unpaid dividends.
Due to the fact that the outstanding 8.0% voting preferred stock is mandatorily redeemable by the Corporation, it is classified as a liabilityaccrued liabilities on the accompanying unaudited condensed consolidated balance sheets. DividendsThe following table presents changes in outstanding contract liabilities as of March 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | |
| Three Months Ended
March 31, |
| 2021 | | 2020 |
| Contract liabilities - beginning of period | $ | 17,197 | | | $ | 16,111 | |
| Contract liabilities - end of period | $ | 17,687 | | | $ | 16,231 | |
| Portion of beginning balance recognized as revenue during the period | $ | 10,422 | | | $ | 10,172 | |
Performance Obligations
As of March 31, 2021, $12.4 million of outstanding contract liabilities related to owned hotels and $5.3 million related to franchised hotels. The Company does not estimate revenues expected to be recognized related to unsatisfied performance obligations for royalty fees, system service fees or management fees, as they are considered either sales-based fees or allocated to wholly unsatisfied performance obligations in a series. Performance obligations related to owned hotels are expected to be satisfied within less than one year. Performance obligations related to third-party owned (i.e., franchised) hotels are expected to be satisfied over the term of the respective franchise agreements, which are typically 20 years.
10. SEGMENTS
The Company’s operating segments are components of the business which are managed discretely and for which discrete financial information is reviewed regularly by its chief operating decision maker to assess performance and make decisions regarding the allocation of resources. The Company’s operating and reportable segments are defined as follows:
•Owned Hotels—Earnings are derived from the operation of Company-owned hotel properties and include room and other hotel revenues.
•Franchise and management—Earnings are derived from fees under franchise and management agreements with third parties. These contracts provide the Company the ability to earn compensation for licensing the Extended Stay America brand name, providing access to shared system-wide platforms and/or management services.
The performance of the Company’s operating segments is evaluated primarily on these preferred sharesincome from operations. Selected financial data is provided below (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
| Revenues: | | | | | | | |
| Owned hotels | | | | | $ | 256,548 | | | $ | 261,232 | |
Franchise and management (1) | | | | | 1,981 | | | 2,062 | |
| Total segment revenues | | | | | 258,529 | | | 263,294 | |
Corporate and other (2) | | | | | 18,109 | | | 19,992 | |
Other revenues from franchised and managed properties (3) | | | | | 1,805 | | | 3,790 | |
Intersegment eliminations (4) | | | | | (18,872) | | | (20,775) | |
| Total | | | | | $ | 259,571 | | | $ | 266,301 | |
| | | | | | | |
| Income from operations: | | | | | | | |
Owned hotels(5) | | | | | $ | 56,763 | | | $ | 48,551 | |
Franchise and management (1) | | | | | 1,981 | | | 2,062 | |
| Total segment income from operations | | | | | 58,744 | | | 50,613 | |
Corporate and other (2) | | | | | (13,611) | | | (7,853) | |
Other expenses from franchised and managed properties, net (3) | | | | | (639) | | | (417) | |
| Total | | | | | $ | 44,494 | | | $ | 42,343 | |
(1)Includes intellectual property fees charged to the owned hotels segment of $0.8 million for the three months ended March 31, 2021 and 2020, that are classified as net interest expense oneliminated in the accompanying unaudited condensed consolidated statements of operations.
Fair Value(2)Includes revenues generated and operating expenses incurred in connection with the overall support of Mandatorily Redeemable Preferred Stock—Asowned, franchised and managed hotels and related operations. Corporate and other revenues are comprised of September 30, 2017management fees earned by and Decembercost reimbursements charged to the owned hotels segment that are eliminated in the condensed consolidated statements of operations.
(3)Includes direct reimbursement of specific costs incurred under franchise and management agreements that the Company is reimbursed for on a dollar-for-dollar basis as well as indirect reimbursement of certain costs incurred associated with the Company’s shared platform (i.e., system services, see Note 2).
(4)Includes management fees, intellectual property fees and other cost reimbursements charged to the owned hotels segment that are eliminated in the condensed consolidated statements of operations.
(5)Includes gain on sale of hotel properties of $12.0 million for the three months ended March 31, 2016, the estimated fair value2021.
Total assets for each of the 8.0% voting preferred stock was approximately $7.1 million and $21.3 million, respectively. The estimated fair valueCompany’s operating segments are provided below (in thousands):
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| Assets: | | | |
| Owned hotels | $ | 3,809,233 | | | $ | 3,802,896 | |
| Franchise and management | 13,400 | | | 13,319 | |
| Total segment assets | 3,822,633 | | | 3,816,215 | |
| Corporate and other | 199,003 | | | 274,039 | |
| Intersegment eliminations | (1,288) | | | (1,105) | |
| Total | $ | 4,020,348 | | | $ | 4,089,149 | |
Total capital expenditures for each of the 8.0% voting preferred stock is determined by comparing current borrowing rates and risk spreads offered in the market to the stated interest rates and spreads (Level 2 fair value measures).Company's operating segments are provided below (in thousands):
| | | | | | | | | | | |
| Three Months Ended
March 31, |
| 2021 | | 2020 |
| Capital expenditures: | | | |
| Owned hotels | $ | 28,607 | | | $ | 54,368 | |
| | | |
| | | |
| Corporate and other | 1,829 | | | 211 | |
| Total | $ | 30,436 | | | $ | 54,579 | |
11. INCOME TAXES
The Corporation’s taxable income includes the taxable income of its wholly-owned subsidiaries and distribution income related to its ownership of approximately 57%58% of ESH REIT.
ESH REIT has elected to be taxed as and expects to continue to qualify as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"“Code”). A REIT is a legal entity that holds real estate assets and is generally not subject to federal and state income taxes. In order to maintain qualification as a REIT, ESH REIT is required to distribute at least 90% of its taxable income, excluding net capital gain, to its shareholders each year. In addition, ESH REIT must meet a number of complex organizational and operational requirements. If ESH REIT were to fail to qualify as a REIT in any taxable year, it would be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and generally would be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which it lost its REIT qualification. Even in qualifying as a REIT, ESH REIT may be subject to state and local taxes in certain jurisdictions, and is subject to federal income and excise taxes on undistributed income.
ESH REIT intends to distribute its taxable income to the extent necessary to optimize its tax efficiency including, but not limited to, maintaining its REIT status, while retaining sufficient capital for its ongoing needs. Accordingly,Even in qualifying as a REIT, ESH REIT expectsmay be subject to distribute approximately 100% of its taxablestate and local taxes in certain jurisdictions, and is subject to federal income for the foreseeable future. and excise taxes on undistributed income.
The Company recorded a provision for federal, state and foreign income taxes of approximately $20.3$0.8 million, an effective tax rate of 5.7%, for the three months ended September 30, 2017, an effective rate of approximately 23.5%,March 31, 2021, as compared withto a provision of approximately $15.9$1.1 million, an effective tax rate of 12.4%, for the three months ended September 30, 2016, an effective rate of approximately 21.8%.March 31, 2020. The Company recorded a provision for federal, state and foreign income taxes of approximately $40.7 million for the nine months ended September 30, 2017, an effective rate of approximately 23.6%, as compared with a provision of approximately $26.2 million for the nine months ended September 30, 2016, an effective rate of approximately 16.4%. The Company’sCompany's effective rate differs from the federal statutory rate of 35% primarily21% due to ESH REIT’sREIT's status as a REIT under the provisions of the Code. During the three months ended September 30, 2016, the Company's effective rate was impacted by a benefit of approximately $0.8 million recognized for the reversal of a net deferred tax liability to reflect the Corporation's anticipated receipt of future ESH REIT nontaxable distributions; in addition to discrete provision to return adjustments of approximately $2.0 million recognized upon the filing of an income tax return. During the nine months ended September 30, 2016, the Company's effective rate was impacted by a benefit of approximately $8.5 million recognized for the reversal of a net deferred tax liability to reflect the Corporation's anticipated receipt of future ESH REIT nontaxable distributions. During the nine months ended September 30, 2016 the Company's effective tax rate was further impacted by a benefit of approximately $1.8 million with respect to the reversal of net deferred tax liabilities which related to the previously estimated 5% of taxable income expected to be retained under ESH REIT's prior 95% distribution policy, which was changed during the three months ended March 31, 2016.
The Company’sCompany's income tax returns for the years 20132017 to present are subject to examination by the Internal Revenue Service (“IRS”) and other taxing authorities.
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11. | RELATED PARTY TRANSACTIONS |
Investment funds and affiliates As of Paulson & Co. Inc.,March 31, 2021, a Former Sponsor, held 7,036 shares subsidiary of ESH REIT was under examination by the Canadian Revenue Agency for the tax years 2014 through 2017. As this audit is still in process, the timing of the Corporation's outstanding mandatorily redeemable preferred stockresolution and any payments that may be required cannot be determined at this time. The Company believes that, to the extent a liability may exist, it is not material as of September 30, 2017. Investment funds and affiliates of the Former Sponsors held 21,105 shares of the Corporation's outstanding mandatorily redeemable preferred stock as of December March 31, 2021.
2016. During the nine months ended September 30, 2017, the Corporation repurchased 14,069 preferred shares from funds or affiliates of Centerbridge Partners, L.P. and The Blackstone Group L.P. at par value, or approximately $14.1 million.12. COMMITMENTS AND CONTINGENCIES
As of September 30, 2017 and December 31, 2016, the outstanding balance owed by ESH REIT to the Corporation under the Unsecured Intercompany Facility was $50.0 million. ESH REIT is able to increase its borrowings under the Unsecured Intercompany Facility to an amount of up to $300.0 million, plus additional amounts, in each case, subject to certain conditions. The outstanding debt balance and interest expense owed by ESH REIT to the Corporation related to this facility eliminate in consolidation (see Note 7).
During the nine months ended September 30, 2017, the Corporation and ESH REIT repurchased and retired approximately 2.0 million Paired Shares from the Former Sponsors for approximately $21.4 million and $12.2 million, respectively. These Paired Shares were purchased in connection with the secondary offerings consummated in March, May and June of 2017 and pursuant to, and counted toward, the combined Paired Share repurchase program (see Note 1).
In March 2016, in connection with ESH REIT's $800.0 million issuance of its 2025 Notes discussed in Note 7, an affiliate of one of the Former Sponsors acted as an initial purchaser and purchased $24.0 million of the 2025 Notes. As such, the affiliate of one of the Former Sponsors earned approximately $0.4 million in fees related to the transaction during the nine months ended September 30, 2016.
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12. | COMMITMENTS AND CONTINGENCIES |
Lease Commitments—The Company is a tenant under long-term ground leases at four5 of its hotel properties. The initial termsNaN of thethese leases are operating leases and 2 are finance leases. The ground lease agreements terminate at various dates between 20212023 and 2096 and three leasesseveral of the agreements include multiple renewal options for generally five or 10ten year periods. The Company is also a tenant under an officeoperating lease for its corporate office. The initial term of the office, leasewhich terminates in August 2021December 2022. As the Company is reasonably certain that it will exercise the options to extend its ground leases, fixed payments associated with the extensions are included in the measurement of related right-of-use assets and includes renewal options for two additional terms of five years each.lease liabilities. Additionally, the Company leases certain technology equipment located at its hotel sites under finance leases.
Rent expense onOperating lease costs related to ground and office leases is recognized on a straight-line basis and was approximately $0.8 million for each of the three months ended September 30, 2017 and 2016, and approximately $2.4 million for each of the nine months ended September 30, 2017 and 2016. Ground lease expense isare included in hotel operating expenses and operating lease costs related to the Company’s office lease expense isare included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.
Other Commitments— Finance lease interest costs are included in interest expense, net in the condensed consolidated statements of operations (see Note 7) or, when pertaining to assets under development, are capitalized and included in property and equipment, net on the condensed consolidated balance sheets (see Note 5). The Company has a commitment to make quarterly payments in lieu of taxes to the owner of the land on which one of its properties is located. The initial term of the agreement terminates in 2031. The cost related to this commitment was approximately $0.1 million for each ofno variable lease costs or short-term leases.
For the three months ended September 30, 2017March 31, 2021 and 2016, and approximately $0.2 million for each2020, the components of the nine months ended September 30, 2017Company’s total lease costs are as follows (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
| Operating lease costs | | | | | $ | 869 | | | $ | 769 | |
| Finance lease costs | | | | | 125 | | | 61 | |
| Total lease costs | | | | | $ | 994 | | | $ | 830 | |
The Company’s right-of-use assets and 2016, and is includedlease liabilities are as follows (in thousands):
| | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 | |
| Right-of-use assets: | | | | |
Operating(1) | $ | 5,390 | | | $ | 2,538 | | |
Finance(2) | 4,323 | | | 4,354 | | |
| | | | |
| Lease liabilities: | | | | |
Operating(3) | 13,304 | | | 10,442 | | |
| Finance | 3,611 | | | 3,668 | | |
(1)Included in hotel operating expenses inother assets on the accompanying unaudited condensed consolidated statementsbalance sheets.
(2)Included in property and equipment, net on the accompanying condensed consolidated balance sheets.
(3)Included in accounts payable and accrued liabilities on the accompanying condensed consolidated balance sheets.
Maturities of operations.lease liabilities as of March 31, 2021, are as follows (in thousands):
Letters | | | | | | | | | | | | | | | |
| Years Ending December 31, | | Operating Leases | | Finance Leases | |
| Remainder of 2021 | | $ | 2,358 | | | $ | 297 | | |
| 2022 | | 3,449 | | | 853 | | |
| 2023 | | 552 | | | 400 | | |
| 2024 | | 503 | | | 402 | | |
| 2025 | | 503 | | | 429 | | |
| 2026 | | 503 | | | 439 | | |
| Thereafter | | 76,588 | | | 2,232 | | |
| Total | | $ | 84,456 | | | $ | 5,052 | | |
| | | | | |
| Total discounted lease liability | | $ | 13,304 | | | $ | 3,611 | | |
| Difference between undiscounted cash flows and discounted cash flows | | $ | 71,152 | | | $ | 1,441 | | |
| | | | | |
| Weighted-average remaining lease term | | 41 years | | 10 years | |
| Weighted-average discount rate | | 5.3 | % | | 6.6 | % | |
The Company’s leases do not contain residual value guarantees and do not contain restrictions with respect to incurring additional financial obligations or paying dividends. As of March 31, 2021, the Company does not have any material leases that have not yet commenced.
Letter of Credit—As of September 30, 2017,March 31, 2021, the Company had one1 outstanding letter of credit, issued by the Corporation, for $0.7$0.2 million, which is collateralized by the 2016 Corporation Revolving Credit Facility.
Legal Contingencies—As of March 31, 2021, 6 purported class action lawsuits in California have been filed against the Company. The complaints allege, among other things, failure to provide meal and rest periods, wage and hour violations and violations of the Fair Credit Reporting Act. The complaints seek, among other relief, collective and class certification of the
lawsuits, unspecified damages, costs and expenses, including attorneys’ fees, and such other relief as the court might find just and proper.
With respect to the Fair Credit Reporting Act violations alleged in the lawsuits described above, the parties reached a tentative settlement agreement in May 2019, which is subject to certain conditions, including court approval, and the Company recorded a payable and a corresponding insurance receivable for the amount of the tentative settlement. The expected resolution of the alleged Fair Credit Reporting Act violations in the lawsuits did not have, and is not expected to have, a material adverse impact on the Company’s condensed consolidated financial statements, results of operations or liquidity.
With respect to the meal and rest period and the wage and hour violations alleged in the lawsuits described above, excluding the one lawsuit described below, the parties reached a tentative settlement agreement in January 2020, which is subject to certain conditions, including court approval. During the three months ended December 31, 2019, the Company incurred a loss and recorded a charge equal to the amount of the tentative settlement. The expected resolution of the alleged meal and rest period and wage and hour violations in the lawsuits did not have, and is not expected to have, a material adverse impact on the Company’s condensed consolidated financial statements, results of operations or liquidity.
With respect to one lawsuit, although the Company believes it is reasonably possible that it may incur losses associated with such matter, it is not possible to estimate the amount of loss or range of loss, if any, that might result from adverse judgments, settlements or other resolution based on the early stage of the lawsuit, the uncertainty as to the certification of a class or classes and the size of any certified class, if applicable, and the lack of resolution of significant factual and legal issues. However, depending on the amount and timing, an unfavorable resolution of the lawsuit or a change in the Company's assessment of the likelihood of loss could have a material adverse effect on the Company’s condensed consolidated financial statements, results of operations or liquidity in a future period. The Company believes that it has meritorious defenses and is prepared to vigorously defend the lawsuit.
The Company is not a party to any additional litigation or claims, other than routine matters arising in the ordinary course of business that are incidental to the operation of the business of the Company. The Company believes that the results of all claimsadditional litigation and litigation,claims, individually or in the aggregate, will not have a material adverse effect on its business or unauditedthe Company's condensed consolidated financial statements.statements, its business, results of operations or financial condition.
| |
13. | EQUITY-BASED COMPENSATION |
13. EQUITY-BASED COMPENSATION
The Corporation and ESH REIT each maintain a long-term incentive plan (“LTIP”), as amended and restated in 2015, approved by their shareholders. Under the LTIPs,each LTIP, the Corporation and ESH REIT may issue to eligible employees or directors restricted stock awards (“RSAs”), restricted stock units (“RSUs”) or other equity-based awards in respect of Paired Shares with service, performance or market vesting conditions. The aggregate number of Paired Shares that may be the subject of awards under the LTIPs shall not exceed 8.0 million, of which no more than 4.0 million may be granted as incentive stock options. Each of the Corporation’s and ESH REIT’s LTIPLTIPs has a share reserve of an equivalent number of shares of Corporation common stock and ESH REIT Class B common stock. As of September 30, 2017, approximately 3.8March 31, 2021, 4.4 million Paired Shares were available for future issuance under the LTIPs.
Equity-based compensation expense is recognized by amortizing the grant-date fair value of the equity-based awards, less estimated forfeitures, on a straight-line basis over the requisite service period of each award. A portion of the grant-date fair
value of all equity-based awards is allocated to a share of Corporation common stock and a portion is allocated to a share of ESH REIT Class B common stock. Equity-based compensation expense, was approximately $2.7 million and $3.0 million for the three months ended September 30, 2017 and 2016, respectively, and approximately $9.0 million and $8.6 million for the nine months ended September 30, 2017 and 2016, respectively, andwhich is included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.operations, was $2.3 million and $1.1 million for the three months ended March 31, 2021 and 2020, respectively.
As of September 30, 2017,March 31, 2021, unrecognized compensation expense related to outstanding equity-based awards and the related weighted-average period over which it is expected to be recognized subsequent to September 30, 2017,March 31, 2021, is presented in the following table. Total unrecognized compensation expense will be adjusted for actual forfeitures.forfeitures as they occur.
| | | | | | | | | | | |
| Unrecognized Compensation Expense Related to Outstanding Awards (in thousands) | | Remaining Weighted-Average Amortization Period (in years) |
| RSUs with service vesting conditions | $ | 9,579 | | | 2.0 |
| | | |
| RSUs with market vesting conditions | 5,269 | | | 2.3 |
| Total unrecognized compensation expense | $ | 14,848 | | | |
|
| | | | |
| | Unrecognized Compensation Expense Related to Outstanding RSAs/RSUs (in thousands) | Remaining Weighted-Average Amortization Period (in years) |
| RSAs/RSUs with service vesting conditions | $ | 7,798 |
| 1.5 |
| RSUs with performance vesting conditions | 916 |
| 0.3 |
| RSUs with market vesting conditions | 4,372 |
| 1.1 |
| Total unrecognized compensation expense | $ | 13,086 |
| |
RSA/RSU activity during the ninethree months ended September 30, 2017,March 31, 2021, was as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Performance-Based Awards |
| | Service-Based Awards | | Performance Vesting | | Market Vesting |
| | Number of RSAs/RSUs (in thousands) | | Weighted- Average Grant- Date Fair Value | | Number of RSUs (in thousands) | | Weighted- Average Grant- Date Fair Value | | Number of RSUs (in thousands) | | Weighted- Average Grant- Date Fair Value(1) |
| Outstanding at January 1, 2017 | 892 |
| | $ | 16.93 |
| | 119 |
| | $ | 14.07 |
| | 972 |
| | $ | 9.01 |
|
| Granted | 269 |
| | $ | 17.50 |
| | 192 |
| | $ | 17.45 |
| | 104 |
| | $ | 18.58 |
|
| Settled | (417 | ) | | $ | 17.75 |
| | (119 | ) | | $ | 14.07 |
| | — |
| | $ | — |
|
| Forfeited | (40 | ) | | $ | 17.02 |
| | (12 | ) | | $ | 17.45 |
| | (37 | ) | | $ | 16.19 |
|
| Outstanding at September 30, 2017 | 704 |
| | $ | 16.66 |
| | 180 |
| | $ | 17.45 |
| | 1,039 |
| | $ | 9.71 |
|
| Vested at September 30, 2017 | 18 |
| | $ | 23.03 |
| | — |
| | $ | — |
| | — |
| | $ | — |
|
| Nonvested at September 30, 2017 | 686 |
| | $ | 16.50 |
| | 180 |
| | $ | 17.45 |
| | 1,039 |
| | $ | 9.71 |
|
| |
(1) | An independent third-party valuation was performed contemporaneously with the issuance of grants. |
Service-Based Awards | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Service-Based Awards | | | | Performance-Based Awards -
Market Vesting |
| Number of
RSUs
(in thousands) | | Weighted-
Average Grant-
Date Fair
Value | | | | | | Number of
RSUs
(in thousands) | | Weighted-
Average Grant-
Date Fair
Value |
| Outstanding at January 1, 2021 | 986 | | | $ | 14.26 | | | | | | | 376 | | | $ | 12.96 | |
| Granted | 183 | | | $ | 15.12 | | | | | | | 211 | | | $ | 17.26 | |
| Settled | (217) | | | $ | 15.43 | | | | | | | (39) | | | $ | 17.41 | |
| Forfeited | (31) | | | $ | 15.23 | | | | | | | (35) | | | $ | 13.34 | |
| Outstanding at March 31, 2021 | 921 | | | $ | 14.63 | | | | | | | 513 | | | $ | 14.37 | |
| | | | | | | | | | | |
| Vested at March 31, 2021 | 117 | | | $ | 14.46 | | | | | | | 0 | | | $ | 0 | |
| Nonvested at March 31, 2021 | 804 | | | $ | 14.65 | | | | | | | 513 | | | $ | 14.37 | |
The Corporation and ESH REIT granted approximately 243,000 and 26,000 service-based awards, respectively, during the nine months ended September 30, 2017, with a weighted-average grant-date fair value per award of $17.50 and $17.56, respectively.
The grant-date fair value of awards with service vesting conditions is based on the closing price of a Paired Share on the date of grant. Service-based awards vest over a period of one to fourthree years, subject to the grantee’s continued employment or service.
Performance-Based Awards
The Corporation granted approximately 192,000 awards with performance vesting conditions during the nine months ended September 30, 2017, with a grant-date fair value per award of $17.45. The grant-date fair value of awards with performance vesting conditions is based on the closing price of a Paired Share on the date of grant. Equity-based compensation expense with respect to these awards is adjusted over the remainder of the fiscal year to reflect the probability of achievement of performance targets defined in the award agreements. These awards vest over the remainder of the fiscal year, subject to the grantee’s continued employment, with the ability to earn Paired Shares in a range of 0% to 200% of the awarded number of RSUs based on the achievement of defined performance targets.
The Corporation granted approximately 104,000 awards with market vesting conditions during the nine months ended September 30, 2017, with a grant-date fair value per award of $18.58. The grant-date fair value of awards with market vesting conditions is based on an independent third-party valuation. These awards vest at the end of a three-year period, subject to the grantee’s continued employment, with the ability to earn Paired Shares in a range of 0% to 150%200% of the awarded number of
RSUs based on the total shareholder return of a Paired Share relative to the total shareholder return of other publicly traded lodging companies identified in the award agreements. During the ninethree months ended September 30, 2017,March 31, 2021, the grant-date fair value of awards with market vesting conditions waswere calculated using a Monte Carlo simulation model with the following key assumptions:
|
| | | | |
| Expected holding period | 2.863.0 years |
|
Risk-freeRisk–free rate of return | 1.460.17 | % |
| Expected dividend yield | 4.723.17 | % |
| |
14. | DEFINED CONTRIBUTION PLANS |
ESA Management has a savings plan that qualifies under Section 401(k) of the Code for all employees meeting the eligibility requirements of the plan. For the period from January 1, 2016 through September 9, 2016, the plan had an employer-matching contribution of 100% of the first 3% of an employee's contribution and 50% of the next 2% of an employee's contribution, which vested immediately. Beginning January 1, 2017, the plan has an employer-matching contribution of 50% of the first 6% of an employee's contribution, which vests over an employee's initial three-year service period. The plan also provides for contributions up to 100% of eligible employee pretax salary, subject to the Code’s annual deferral limit of $18,000 during 2017 and 2016. Employer contributions, net of forfeitures, totaled approximately $0.5 million and $0.8 million for the three months ended September 30, 2017 and 2016, respectively, and approximately $1.3 million and $2.6 million for the nine months ended September 30, 2017 and 2016, respectively.
In June 2016, ESA Management established a non-qualified deferred compensation plan to allow certain eligible employees an option to defer a portion of their compensation on a tax-deferred basis. Beginning January 2017, the plan had an employer-matching contribution of 50% of the first 6% of an employee's contribution, which vests over a three-year service period. The plan is fully funded in a Rabbi Trust, which is subject to creditor claims in the event of insolvency, but the assets held in the Rabbi Trust are not available for general corporate purposes. As of September 30, 2017, approximately $0.7 million is included in other assets and accounts payable and accrued liabilities related to this plan.
On November 7, 2017, the Board of Directors of the Corporation declared a cash distribution of $0.11 per share for the third quarter of 2017 on its common stock. The distribution is payable on December 5, 2017 to shareholders of record as of November 21, 2017. Also on November 7, 2017, the Board of Directors of ESH REIT declared a cash distribution of $0.10 per share for the third quarter of 2017 on its Class A and Class B common stock. This distribution is also payable on December 5, 2017 to shareholders of record as of November 21, 2017.
In October and November 2017, ESH REIT executed two purchase and sale agreements to divest twenty-six Extended Stay America-branded hotels for approximately $130.4 million, including approximately $1.9 million in initial franchise application fees, subject to adjustment. The Company expects to manage twenty-five of the hotels. These transactions are expected to close in 2018 upon and subject to the completion of customary due diligence and the satisfaction or waiver of certain closing conditions.
ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2017MARCH 31, 2021 AND DECEMBER 31, 20162020
(In thousands, except share and per share data)
(Unaudited)
|
| | | | | | | |
| | September 30,
2017 | | December 31,
2016 |
| ASSETS | | | |
| PROPERTY AND EQUIPMENT - Net of accumulated depreciation of $1,092,693 and $959,449 | $ | 3,808,125 |
| | $ | 3,914,569 |
|
| CASH AND CASH EQUIVALENTS | 65,013 |
| | 53,506 |
|
| RESTRICTED CASH | — |
| | 344 |
|
| RENTS RECEIVABLE FROM EXTENDED STAY AMERICA, INC. (Note 9) | 21,993 |
| | 2,609 |
|
| DEFERRED RENTS RECEIVABLE FROM EXTENDED STAY AMERICA, INC. (Note 9) | 28,192 |
| | 40,259 |
|
| GOODWILL | 47,627 |
| | 52,245 |
|
| DEFERRED TAX ASSETS | 244 |
| | — |
|
| OTHER ASSETS | 32,435 |
| | 13,973 |
|
| TOTAL ASSETS | $ | 4,003,629 |
| | $ | 4,077,505 |
|
| LIABILITIES AND EQUITY |
| |
|
| LIABILITIES: |
| |
|
Term loan facilities payable - Net of unamortized deferred financing costs and debt discount
of $19,520 and $21,994 | $ | 1,267,504 |
| | $ | 1,274,756 |
|
Senior notes payable - Net of unamortized deferred financing costs and debt discount
of $31,379 and $34,482 | 1,268,621 |
| | 1,265,518 |
|
| Revolving credit facility | — |
| | 45,000 |
|
| Loan payable to Extended Stay America, Inc. (Notes 6 and 9) | 50,000 |
| | 50,000 |
|
| Unearned rental revenues from Extended Stay America, Inc. (Note 9) | 192,124 |
| | 39,898 |
|
| Due to Extended Stay America, Inc. (Note 9) | 10,354 |
| | 11,608 |
|
| Accounts payable and accrued liabilities | 88,473 |
| | 69,520 |
|
| Deferred tax liabilities | — |
| | 3,286 |
|
| Total liabilities | 2,877,076 |
| | 2,759,586 |
|
| COMMITMENTS AND CONTINGENCIES (Note 10) |
|
| |
|
|
| EQUITY: |
|
| |
|
|
| Common stock - Class A: $0.01 par value, 4,300,000,000 shares authorized, 250,493,583 shares issued and outstanding; Class B: $0.01 par value, 7,800,000,000 shares authorized, 192,293,933 and 195,406,944 shares issued and outstanding | 4,428 |
| | 4,462 |
|
| Additional paid in capital | 1,087,276 |
| | 1,144,664 |
|
| Preferred stock - no par value, $1,000 liquidation value, 125 shares authorized, issued and outstanding | 73 |
| | 73 |
|
| Retained earnings | 29,548 |
| | 176,532 |
|
| Accumulated other comprehensive income (loss) | 5,228 |
| | (7,812 | ) |
| Total equity | 1,126,553 |
| | 1,317,919 |
|
| TOTAL LIABILITIES AND EQUITY | $ | 4,003,629 |
| | $ | 4,077,505 |
|
| | | | | | | | | | | |
| March 31,
2021 | | December 31,
2020 |
| ASSETS | | | |
| PROPERTY AND EQUIPMENT - Net of accumulated depreciation of $1,569,166 and $1,540,358 | $ | 3,430,051 | | | $ | 3,461,212 | |
| | | |
| CASH AND CASH EQUIVALENTS | 287,989 | | | 375,715 | |
| RENTS RECEIVABLE FROM EXTENDED STAY AMERICA, INC. (Note 10) | 11,108 | | | 3,941 | |
| DEFERRED RENTS RECEIVABLE FROM EXTENDED STAY AMERICA, INC. (Note 10) | 38,536 | | | 39,135 | |
| INTANGIBLE ASSETS - Net of accumulated amortization of $2,312 and $2,005 | 8,285 | | | 8,541 | |
| GOODWILL | 43,748 | | | 43,878 | |
| OTHER ASSETS | 19,143 | | | 18,695 | |
| TOTAL ASSETS | $ | 3,838,860 | | | $ | 3,951,117 | |
| LIABILITIES AND EQUITY | | | |
| LIABILITIES: | | | |
Term loan facility payable - Net of unamortized deferred financing costs and debt discount of $8,946 and $9,355 | $ | 612,499 | | | $ | 613,667 | |
Senior notes payable - Net of unamortized deferred financing costs and debt discount of $28,335 and $29,810 | 2,021,665 | | | 2,020,190 | |
| | | |
| | | |
| Finance lease liabilities | 3,611 | | | 3,668 | |
| Unearned rental revenues from Extended Stay America, Inc. (Note 10) | 23,743 | | | 0 | |
| Due to Extended Stay America, Inc., net (Note 10) | 5,405 | | | 92,791 | |
| Accounts payable and accrued liabilities | 89,190 | | | 125,519 | |
| | | |
| Total liabilities | 2,756,113 | | | 2,855,835 | |
| COMMITMENTS AND CONTINGENCIES (Note 11) | 0 | | 0 |
| EQUITY: | | | |
| Common stock - Class A: $0.01 par value, 4,300,000,000 shares authorized, 250,493,583 shares issued and outstanding; Class B: $0.01 par value, 7,800,000,000 shares authorized, 177,730,773 and 177,560,635 shares issued and outstanding | 4,283 | | | 4,281 | |
| Additional paid in capital | 1,053,075 | | | 1,052,379 | |
| Preferred stock—no par value, $1,000 liquidation value, 125 shares authorized, issued and outstanding | 73 | | | 73 | |
| Retained earnings | 25,584 | | | 39,075 | |
| Accumulated other comprehensive loss | (268) | | | (526) | |
| Total equity | 1,082,747 | | | 1,095,282 | |
| TOTAL LIABILITIES AND EQUITY | $ | 3,838,860 | | | $ | 3,951,117 | |
See accompanying notes to unaudited condensed consolidated financial statements.
ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2021 AND 20162020
(In thousands, except per share data)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| REVENUES- Rental revenues from Extended Stay America, Inc. (Note 9) | $ | 143,407 |
| | $ | 153,139 |
| | $ | 375,290 |
| | $ | 385,873 |
|
| OPERATING EXPENSES: | | | | | | | |
| Hotel operating expenses | 22,578 |
| | 22,155 |
| | 69,589 |
| | 68,757 |
|
| General and administrative expenses (Note 9) | 3,722 |
| | 3,476 |
| | 12,516 |
| | 10,677 |
|
| Depreciation | 56,523 |
| | 54,748 |
| | 169,916 |
| | 160,546 |
|
| Impairment of long-lived assets | — |
| | — |
| | 15,046 |
| | — |
|
| Total operating expenses | 82,823 |
| | 80,379 |
| | 267,067 |
| | 239,980 |
|
| LOSS ON SALE OF HOTEL PROPERTIES (Note 4) | — |
| | — |
| | (3,274 | ) | | — |
|
| OTHER INCOME | 5 |
| | — |
| | 640 |
| | — |
|
| INCOME FROM OPERATIONS | 60,589 |
| | 72,760 |
| | 105,589 |
| | 145,893 |
|
| OTHER NON-OPERATING INCOME | (211 | ) | | (84 | ) | | (271 | ) | | (858 | ) |
| INTEREST EXPENSE, NET | 32,116 |
| | 48,521 |
| | 97,779 |
| | 129,886 |
|
| INCOME BEFORE INCOME TAX EXPENSE (BENEFIT) | 28,684 |
| | 24,323 |
| | 8,081 |
| | 16,865 |
|
| INCOME TAX EXPENSE (BENEFIT) | 198 |
| | 671 |
| | 435 |
| | (3,128 | ) |
| NET INCOME | $ | 28,486 |
| | $ | 23,652 |
| | $ | 7,646 |
| | $ | 19,993 |
|
| NET INCOME PER ESH HOSPITALITY, INC. COMMON SHARE: | | | | | | | |
| Class A - basic | $ | 0.06 |
| | $ | 0.05 |
| | $ | 0.02 |
| | $ | 0.04 |
|
| Class A - diluted | $ | 0.06 |
| | $ | 0.05 |
| | $ | 0.02 |
| | $ | 0.04 |
|
| Class B - basic | $ | 0.06 |
| | $ | 0.05 |
| | $ | 0.02 |
| | $ | 0.04 |
|
| Class B - diluted | $ | 0.06 |
| | $ | 0.05 |
| | $ | 0.02 |
| | $ | 0.04 |
|
| WEIGHTED-AVERAGE ESH HOSPITALITY, INC. COMMON SHARES OUTSTANDING: | | | | | | | |
| Class A - basic | 250,494 |
| | 250,494 |
| | 250,494 |
| | 250,494 |
|
| Class A - diluted | 250,494 |
| | 250,494 |
| | 250,494 |
| | 250,494 |
|
| Class B - basic | 192,357 |
| | 200,556 |
| | 193,399 |
| | 202,156 |
|
| Class B - diluted | 193,331 |
| | 200,696 |
| | 193,399 |
| | 202,252 |
|
| | | | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | | 2021 | | 2020 |
| REVENUES - Rental revenues from Extended Stay America, Inc. (Note 10) | | | | | $ | 120,392 | | | $ | 119,190 | |
| OPERATING EXPENSES: | | | | | | | |
| Hotel operating expenses | | | | | 21,405 | | | 24,527 | |
| General and administrative expenses (Note 10) | | | | | 3,960 | | | 4,167 | |
| Depreciation and amortization | | | | | 48,381 | | | 49,588 | |
| | | | | | | |
| Merger transaction expenses | | | | | 2,373 | | | 0 | |
| Total operating expenses | | | | | 76,119 | | | 78,282 | |
| | | | | | | |
| GAIN ON SALE OF HOTEL PROPERTIES (Note 4) | | | | | 11,930 | | | 0 | |
| | | | | | | |
| INCOME FROM OPERATIONS | | | | | 56,203 | | | 40,908 | |
| OTHER NON-OPERATING (INCOME) EXPENSE | | | | | (84) | | | 560 | |
| INTEREST EXPENSE, NET | | | | | 31,135 | | | 32,428 | |
| INCOME BEFORE INCOME TAX EXPENSE | | | | | 25,152 | | | 7,920 | |
| INCOME TAX EXPENSE | | | | | 2 | | | 2 | |
| NET INCOME | | | | | $ | 25,150 | | | $ | 7,918 | |
| NET INCOME PER ESH HOSPITALITY, INC. COMMON SHARE: | | | | | | | |
| Class A - basic | | | | | $ | 0.06 | | | $ | 0.02 | |
| Class A - diluted | | | | | $ | 0.06 | | | $ | 0.02 | |
| Class B - basic | | | | | $ | 0.06 | | | $ | 0.02 | |
| Class B - diluted | | | | | $ | 0.06 | | | $ | 0.02 | |
| WEIGHTED-AVERAGE ESH HOSPITALITY, INC. COMMON SHARES OUTSTANDING: | | | | | | | |
| Class A - basic | | | | | 250,494 | | | 250,494 | |
| Class A - diluted | | | | | 250,494 | | | 250,494 | |
| Class B - basic | | | | | 177,827 | | | 177,990 | |
| Class B - diluted | | | | | 178,549 | | | 178,171 | |
See accompanying notes to unaudited condensed consolidated financial statements.
ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2021 AND 20162020
(In thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| NET INCOME | $ | 28,486 |
| | $ | 23,652 |
| | $ | 7,646 |
| | $ | 19,993 |
|
| OTHER COMPREHENSIVE INCOME, NET OF TAX: | | | | | | | |
| FOREIGN CURRENCY TRANSLATION ADJUSTMENTS: | | | | | | | |
| FOREIGN CURRENCY TRANSLATION (LOSS) GAIN, NET OF TAX OF $0 | — |
| | (899 | ) | | 531 |
| | 2,133 |
|
| RECLASSIFICATION ADJUSTMENT - SALE OF CANADIAN HOTEL PROPERTIES, NET OF TAX OF $0, $0, $(264) AND $0 | — |
| | — |
| | 12,256 |
| | — |
|
| TOTAL FOREIGN CURRENCY TRANSLATION ADJUSTMENTS | — |
| | (899 | ) | | 12,787 |
| | 2,133 |
|
| | | | | | | | |
| DERIVATIVE ADJUSTMENTS: | | | | | | | |
| INTEREST RATE CASH FLOW HEDGE (LOSS) GAIN, NET OF TAX OF $0 | 9 |
| | (569 | ) | | (453 | ) | | (569 | ) |
| RECLASSIFICATION ADJUSTMENT - AMOUNTS RECLASSIFIED TO NET INCOME, NET OF TAX OF $0 | 103 |
| | — |
| | 706 |
| | — |
|
| TOTAL DERIVATIVE ADJUSTMENTS | 112 |
| | (569 | ) | | 253 |
| | (569 | ) |
| | | | | | | | |
| COMPREHENSIVE INCOME | $ | 28,598 |
| | $ | 22,184 |
| | $ | 20,686 |
| | $ | 21,557 |
|
| | | | | | | | | | | | | | | |
| | | | Three Months Ended
March 31, |
| | | | | | 2021 | | 2020 |
| NET INCOME | | | | | $ | 25,150 | | | $ | 7,918 | |
| OTHER COMPREHENSIVE INCOME: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| INTEREST RATE CASH FLOW HEDGE GAIN (LOSS), NET OF TAX OF $0 and $1 | | | | | 258 | | | (2,054) | |
| | | | | | | |
| COMPREHENSIVE INCOME | | | | | $ | 25,408 | | | $ | 5,864 | |
See accompanying notes to unaudited condensed consolidated financial statements.
ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2021 AND 20162020
(In thousands, except preferred stock shares and per share data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | Common Stock | | Preferred Stock | | Additional
Paid in Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Total
Equity |
| | Common Stock | | Preferred Stock | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Equity | | Class A
Shares | | Class B
Shares | | Amount | | Shares | | Amount | |
| BALANCE - January 1, 2020 | | BALANCE - January 1, 2020 | 250,494 | | | 179,483 | | | $ | 4,300 | | | 125 | | | $ | 73 | | | $ | 1,050,740 | | | $ | 93,424 | | | $ | 830 | | | $ | 1,149,367 | |
| Net income | | Net income | — | | | — | | | — | | | — | | | — | | | — | | | 7,918 | | | — | | | 7,918 | |
| | Class A Shares | | Class B Shares | | Amount | | Shares | | Amount | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Equity | |
| BALANCE - January 1, 2016 | 250,494 |
| | 204,594 |
| | $ | 4,554 |
| | 125 |
| | $ | 73 |
| | |
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 19,993 |
| | — |
| | 19,993 |
| |
| Foreign currency translation, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,133 |
| | 2,133 |
| |
| | Interest rate cash flow hedge loss, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (569 | ) | | (569 | ) | Interest rate cash flow hedge loss, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,054) | | | (2,054) | |
| Issuance of common stock | — |
| | 224 |
| | 2 |
| | — |
| | — |
| | 1,531 |
| | — |
| | — |
| | 1,533 |
| |
| Repurchase of Class B common stock | — |
| | (4,622 | ) | | (46 | ) | | — |
| | — |
| | — |
| | (26,906 | ) | | — |
| | (26,952 | ) | Repurchase of Class B common stock | — | | | (2,237) | | | (22) | | | — | | | — | | | — | | | (11,384) | | | — | | | (11,406) | |
| Common distributions - $0.40 per Class A and Class B common share | — |
| | — |
| | — |
| | — |
| | — |
| | (26,933 | ) | | (154,888 | ) | | — |
| | (181,821 | ) | |
| Common distributions - $0.14 per Class A and Class B common share | | Common distributions - $0.14 per Class A and Class B common share | — | | | — | | | — | | | — | | | — | | | — | | | (59,911) | | | — | | | (59,911) | |
| Preferred distributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (12 | ) | | — |
| | (12 | ) | Preferred distributions | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | — | | | (4) | |
| Equity-based compensation | — |
| | 4 |
| | — |
| | — |
| | — |
| | 242 |
| | — |
| | — |
| | 242 |
| Equity-based compensation | — | | | 220 | | | 2 | | | — | | | — | | | 336 | | | — | | | — | | | 338 | |
| BALANCE - September 30, 2016 | 250,494 |
| | 200,200 |
| | $ | 4,510 |
| | 125 |
| | $ | 73 |
| | $ | 1,143,743 |
| | $ | 24,493 |
| | $ | (11,806 | ) | | $ | 1,161,013 |
| |
| BALANCE - March 31, 2020 | | BALANCE - March 31, 2020 | 250,494 | | | 177,466 | | | $ | 4,280 | | | 125 | | | $ | 73 | | | $ | 1,051,076 | | | $ | 30,043 | | | $ | (1,224) | | | $ | 1,084,248 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Preferred Stock | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Total Equity |
| | Class A Shares | | Class B Shares | | Amount | | Shares | | Amount | | | | |
| BALANCE - January 1, 2017 | 250,494 |
| | 195,407 |
| | $ | 4,462 |
| | 125 |
| | $ | 73 |
| | $ | 1,144,664 |
| | $ | 176,532 |
| | $ | (7,812 | ) | | $ | 1,317,919 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,646 |
| | — |
| | 7,646 |
|
| Foreign currency translation, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 12,787 |
| | 12,787 |
|
| Interest rate cash flow hedge gain, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 253 |
| | 253 |
|
| Repurchase of Class B common stock | — |
| | (3,430 | ) | | (37 | ) | | — |
| | — |
| | — |
| | (21,454 | ) | | — |
| | (21,491 | ) |
| Common distributions - $0.43 per Class A and Class B common share | — |
| | — |
| | — |
| | — |
| | — |
| | (58,523 | ) | | (133,164 | ) | | — |
| | (191,687 | ) |
| Preferred distributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (12 | ) | | — |
| | (12 | ) |
| Equity-based compensation | — |
| | 317 |
| | 3 |
| | — |
| | — |
| | 1,135 |
| | — |
| | — |
| | 1,138 |
|
| BALANCE - September 30, 2017 | 250,494 |
| | 192,294 |
| | $ | 4,428 |
| | 125 |
| | $ | 73 |
| | $ | 1,087,276 |
| | $ | 29,548 |
| | $ | 5,228 |
| | $ | 1,126,553 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Preferred Stock | | Additional
Paid in Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive Loss | | Total
Equity |
| Class A
Shares | | Class B
Shares | | Amount | | Shares | | Amount | | | | |
| BALANCE - January 1, 2021 | 250,494 | | | 177,561 | | | $ | 4,281 | | | 125 | | | $ | 73 | | | $ | 1,052,379 | | | $ | 39,075 | | | $ | (526) | | | $ | 1,095,282 | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | 25,150 | | | — | | | 25,150 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Interest rate cash flow hedge gain, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 258 | | | 258 | |
| | | | | | | | | | | | | | | | | |
| Common distributions - $0.09 per Class A and Class B common share | — | | | — | | | — | | | — | | | — | | | — | | | (38,637) | | | — | | | (38,637) | |
| Preferred distributions | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | — | | | (4) | |
| Equity-based compensation | — | | | 170 | | | 2 | | | — | | | — | | | 696 | | | — | | | — | | | 698 | |
| BALANCE - March 31, 2021 | 250,494 | | | 177,731 | | | $ | 4,283 | | | 125 | | | $ | 73 | | | $ | 1,053,075 | | | $ | 25,584 | | | $ | (268) | | | $ | 1,082,747 | |
See accompanying notes to unaudited condensed consolidated financial statements.
ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2021 AND 20162020
(In thousands)
(Unaudited)
| | | | | | | | | | | |
| Three Months Ended
March 31, |
| | 2021 | | 2020 |
| OPERATING ACTIVITIES: | | | |
| Net income | $ | 25,150 | | | $ | 7,918 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization | 48,381 | | | 49,588 | |
| Foreign currency transaction (gain) loss | (84) | | | 560 | |
| Amortization of deferred financing costs and debt discount | 2,023 | | | 2,022 | |
| | | |
| | | |
| Loss on disposal of property and equipment | 1,232 | | | 3,343 | |
| Gain on sale of hotel properties | (11,930) | | | 0 | |
| | | |
| Equity-based compensation | 117 | | | 134 | |
| | | |
| Changes in assets and liabilities: | | | |
| Deferred rents payable (receivable) from Extended Stay America, Inc. | 508 | | | (2,512) | |
| Due to Extended Stay America, Inc., net | (166) | | | (1,588) | |
| Other assets | 112 | | | (798) | |
| Unearned rental revenues/rents receivable from Extended Stay America, Inc., net | 16,576 | | | 20,159 | |
| Accounts payable and accrued liabilities | 26,236 | | | 29,469 | |
| Net cash provided by operating activities | 108,155 | | | 108,295 | |
| INVESTING ACTIVITIES: | | | |
| Purchases of property and equipment | (22,222) | | | (33,786) | |
| | | |
| Development in process payments | (6,246) | | | (19,769) | |
| Payment for intangible assets | (137) | | | (358) | |
| Proceeds from sale of hotel properties | 21,867 | | | 0 | |
| Proceeds from insurance and related recoveries | 56 | | | 956 | |
| Net cash used in investing activities | (6,682) | | | (52,957) | |
| FINANCING ACTIVITIES: | | | |
| Principal payments on term loan facility | (1,577) | | | (1,577) | |
| | | |
| Proceeds from revolving credit facility | 0 | | | 350,000 | |
| | | |
| Payments of deferred financing costs | 0 | | | (11) | |
| Principal payments on finance leases | (38) | | | (37) | |
| | | |
| Repurchase of Class B common stock | 0 | | | (11,406) | |
| Issuance of Class B common stock related to issuance of Paired Shares | 1,034 | | | 737 | |
| Common distributions | (188,618) | | | (60,291) | |
| | | |
| Net cash (used in) provided by financing activities | (189,199) | | | 277,415 | |
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (87,726) | | | 332,753 | |
| CASH AND CASH EQUIVALENTS - Beginning of period | 375,715 | | | 296,134 | |
| CASH AND CASH EQUIVALENTS - End of period | $ | 287,989 | | | $ | 628,887 | |
ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 (CONTINUED)
(In thousands)
(Unaudited)
|
| | | | | | | |
| | Nine Months Ended
September 30, |
| | 2017 | | 2016 |
| OPERATING ACTIVITIES: | | | |
| Net income | $ | 7,646 |
| | $ | 19,993 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation | 169,916 |
| | 160,546 |
|
| Foreign currency transaction gain | (627 | ) | | (858 | ) |
| Loss on interest rate swap | 709 |
| | — |
|
| Amortization of deferred financing costs and debt discount | 5,990 |
| | 28,281 |
|
| Amortization of above-market ground leases | (102 | ) | | (102 | ) |
| Loss on disposal of property and equipment | 8,065 |
| | 7,254 |
|
| Loss on sale of hotel properties | 3,274 |
| | — |
|
| Impairment of long-lived assets | 15,046 |
| | — |
|
| Equity-based compensation | 266 |
| | 242 |
|
| Deferred income tax benefit | (3,700 | ) | | (1,704 | ) |
| Changes in assets and liabilities: | | | |
| Deferred rents receivable from Extended Stay America, Inc. | 11,393 |
| | 966 |
|
| Due to Extended Stay America, Inc., net | (1,109 | ) | | (2,853 | ) |
| Other assets | (5,625 | ) | | 1,011 |
|
| Unearned rental revenues/rents receivable from Extended Stay America, Inc., net | 132,842 |
| | 133,915 |
|
| Accounts payable and accrued liabilities | 24,495 |
| | 28,562 |
|
| Net cash provided by operating activities | 368,479 |
| | 375,253 |
|
| INVESTING ACTIVITIES: | | | |
| Purchases of property and equipment | (130,899 | ) | | (164,188 | ) |
| Proceeds from sale of hotel properties | 42,005 |
| | — |
|
| Decrease in restricted cash | 344 |
| | 60,601 |
|
| Proceeds from insurance and related recoveries | 471 |
| | 2,716 |
|
| Net cash used in investing activities | (88,079 | ) | | (100,871 | ) |
| FINANCING ACTIVITIES: | | | |
| Principal payments on mortgage loan | — |
| | (1,931,157 | ) |
| Proceeds from term loan facilities, net of debt discount | — |
| | 1,293,500 |
|
| Principal payments on term loan facilities | (12,976 | ) | | (366,463 | ) |
| Proceeds from senior notes, net of debt discount | — |
| | 788,000 |
|
| Proceeds from revolving credit facility | 105,000 |
| | 50,000 |
|
| Payments on revolving credit facility | (150,000 | ) | | (25,000 | ) |
| Proceeds from loan payable to Extended Stay America, Inc. | — |
| | 75,000 |
|
| Payments of deferred financing costs | — |
| | (32,814 | ) |
| Net proceeds to Extended Stay America, Inc. | — |
| | (18,548 | ) |
| Repurchase of common stock | (21,488 | ) | | (26,952 | ) |
| Issuance of Class B common stock | 1,915 |
| | 1,134 |
|
| Common distributions | (191,328 | ) | | (267,907 | ) |
| Preferred distributions | (16 | ) | | (8 | ) |
| Net cash used in financing activities | (268,893 | ) | | (461,215 | ) |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 11,507 |
| | (186,833 | ) |
| CASH AND CASH EQUIVALENTS - Beginning of period | 53,506 |
| | 223,256 |
|
| CASH AND CASH EQUIVALENTS - End of period | $ | 65,013 |
| | $ | 36,423 |
|
| SUPPLEMENTAL CASH FLOW INFORMATION: | | | |
| Cash payments for interest, excluding prepayment and other penalties | $ | 78,234 |
| | $ | 73,023 |
|
| Cash payments for income taxes, net of refunds of $3 and $388 | $ | 2,388 |
| | $ | 1,377 |
|
| NONCASH INVESTING AND FINANCING ACTIVITIES: | | | |
| Capital expenditures included in due to/from Extended Stay America, Inc. and accounts payable and accrued liabilities | $ | 16,836 |
| | $ | 20,071 |
|
| Deferred financing costs included in accounts payable and accrued liabilities | $ | — |
| | $ | 1,146 |
|
| Proceeds from sale of hotel properties included in other assets | $ | 12,675 |
| | $ | — |
|
| Common distributions included in accounts payable and accrued liabilities | $ | 1,623 |
| | $ | 1,241 |
|
| | | | | | | | | | | |
| Three Months Ended
March 31, |
| 2021 | | 2020 |
| SUPPLEMENTAL CASH FLOW INFORMATION: | | | |
| Cash payments for interest, excluding prepayment and other penalties, net of capitalized interest of $430 and $859 | $ | 3,412 | | | $ | 5,239 | |
| Cash payments (refunds) for income taxes, net of refunds of $10 and $18 | $ | 1 | | | $ | (18) | |
| Operating cash payments for finance leases | $ | 56 | | | $ | 59 | |
| Operating cash payments for operating leases | $ | 196 | | | $ | 189 | |
| NONCASH INVESTING AND FINANCING ACTIVITIES: | | | |
| Capital expenditures included in due to/from Extended Stay America, Inc. and accounts payable and accrued liabilities | $ | 12,504 | | | $ | 21,873 | |
| Additions to finance lease right-of-use assets and liabilities | $ | 0 | | | $ | 364 | |
| | | |
| | | |
| Common distributions included in accounts payable and accrued liabilities | $ | 725 | | | $ | 387 | |
| Net receivable (payable) related to RSUs not yet settled or issued included in due to/from Extended Stay America, Inc. | $ | 235 | | | $ | (230) | |
See accompanying notes to unaudited condensed consolidated financial statements.
ESH HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2017MARCH 31, 2021 AND DECEMBER 31, 20162020 AND FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2017MARCH 31, 2021 AND 20162020
(Unaudited)
| |
1. | BUSINESS, ORGANIZATION AND BASIS OF CONSOLIDATION |
1. BUSINESS, ORGANIZATION AND BASIS OF CONSOLIDATION
ESH Hospitality, Inc. (“ESH REIT”) was formed as a limited liability company in the state of Delaware on September 16, 2010 and was converted to a corporation on November 5, 2013. Extended Stay America, Inc. (the “Corporation”), the parent of ESH REIT, was incorporated in the state of Delaware on July 8, 2013. On November 18, 2013,The Corporation owns all of the Corporationissued and outstanding Class A common stock of ESH REIT, completed an initial public offeringwhich, as of 32.5 million Paired Shares. March 31, 2021, represents 58% of the outstanding common stock of ESH REIT.
A "Paired Share"“Paired Share” consists of one1 share of common stock, par value $0.01 per share, of the Corporation, that is attached to and trades as a single unit with one1 share of Class B common stock, par value $0.01 per share, of ESH REIT. The Corporation owns, and is expected to continue to own, all of the issued andEach outstanding Class A common stockshare of ESH REIT which, as of September 30, 2017, represents approximately 57% of the outstandingClass B common stock is attached to and trades with 1 share of ESH REIT.Corporation common stock.
As of September 30, 2017,March 31, 2021 and 2020, ESH REIT and its subsidiaries owned and leased 625563 and 558 hotel properties, in 4440 U.S. states, consisting of approximately 68,800 rooms. As of December 31, 2016, ESH REIT62,700 and its subsidiaries owned and leased 626 hotel properties in 44 U.S. states, consisting of approximately 68,90062,100 rooms, and three hotels in Canada, consisting of 500 rooms. Therespectively. All hotels are leased to wholly-owned subsidiaries of the Corporation (the “Operating Lessees”).
As of September 30, 2017, ESH REIT’s common equity consisted of the following: (i) approximately 250.5 million shares of Class A common stock outstanding (approximately 57% of its common equity), all of which were owned by the Corporation, and (ii) approximately 192.3 million shares of Class B common stock outstanding (approximately 43% of its common equity), approximately 99.3% of which were owned by the public and approximately 0.7% of which were owned by senior management and directors ofPending Merger—On March 14, 2021, the Corporation and ESH REIT.
AsREIT entered into an Agreement and Plan of December 31, 2016, ESH REIT’s common equity consistedMerger (the “Merger Agreement”) with Eagle Parent Holdings L.P. (“Parent”), a joint venture of Blackstone Real Estate Partners IX L.P. and Starwood Distressed Opportunity Fund XII Global, L.P. Upon completion of the following: (i) approximately 250.5 million shares of Class A common stock outstanding (approximately 56% of its common equity), all of which were owned by the Corporation, and (ii) approximately 195.4 million shares of Class B common stock outstanding (approximately 44% of its common equity), approximately 55.9% of which were owned by the public and approximately 44.1% of which were owned by Centerbridge Partners, L.P., Paulson & Co. Inc. and The Blackstone Group L.P. and their funds or affiliates (individually, each a “Former Sponsor,” or collectively, the “Former Sponsors”) and senior management and directors ofproposed transactions, the Corporation and ESH REIT.REIT will become wholly-owned subsidiaries of Parent. Pursuant to the terms and conditions of the Merger Agreement, each issued and outstanding Paired Share will be converted into a right to receive (1) $19.50 in cash, plus (2) if the transactions are consummated after July 27, 2021 (or earlier, under certain circumstances), a per diem amount of $0.001 for each day from and after such date until, but not including, the closing date, without interest thereon (such sum, the “Merger Consideration”).
2017 Secondary Offerings
In March, MayThe Merger Agreement contains customary representations, warranties and June 2017, certain selling stockholders (the "Selling Stockholders") sold 25.0 million, 30.0 millioncovenants, including those related to the Corporation’s and 25.0 million Paired Shares, respectively, pursuantESH REIT’s use of commercially reasonable efforts to an automatic shelf registration statement as partcarry on their business consistent with past practice prior to completion of secondary offerings. In conjunction with these secondary offerings,the transactions. The Merger Agreement is subject to customary closing conditions, including approval by the Corporation shareholders, ESH REIT repurchasedshareholders and retired, in the aggregate, approximately 2.0 million ESH REIT Class B common shares from the Former Sponsors for approximately $12.2 million (see Note 9). The Selling Stockholders consisted solelyreceipt of entities affiliated with the Former Sponsors and did not include officers or directors of the Corporation or ESH REIT.certain regulatory approvals. Neither the Corporation nor ESH REIT sold Paired Shares incan provide assurance that the secondary offerings and neither received proceeds fromtransactions contemplated by the secondary offerings. The Corporation and ESH REIT incurred professional fees in connection with the secondary offerings. Total expenses incurred by ESH REIT were approximately $0.1 million and $0.6 million during the three and nine months ended September 30, 2017, respectively.
After giving effect to the June 2017 secondary offering, funds or affiliates of Paulson & Co. Inc. own approximately 1.8 million Paired Shares, while funds or affiliates of Centerbridge Partners, L.P. and The Blackstone Group L.P. no longer own any Paired Shares.
Paired Share Repurchase Program
In December 2015, the Boards of Directors of the Corporation and ESH REIT authorized a combined Paired Share repurchase program for up to $100 million of Paired Shares. In February 2016, the Boards of Directors of the Corporation and ESH REIT authorized an increase of the combined Paired Share repurchase program from up to $100 million to up to $200 million of Paired Shares. In December 2016, the Boards of Directors of the Corporation and ESH REIT authorized an increase of the combined Paired Share repurchase program from up to $200 million to up to $300 million of Paired Shares and extended
the maturity of the program through December 31, 2017, each effective January 1, 2017. Repurchases mayMerger Agreement will be made at management's discretion from time to time in the open market, in privately negotiated transactions or by other means (including through Rule 10b5-1 trading plans). Depending on market conditions and other factors, these repurchases may be commenced or suspended without prior notice. As of September 30, 2017, ESH REIT had repurchased and retired approximately 12.8 million ESH REIT Class B common shares for approximately $75.2 million, of which approximately 5.8 million Paired Shares were repurchased and retired from entities affiliated with the Former Sponsors.completed.
Basis of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”), and include the financial position, results of operations, comprehensive income, changes in equity and cash flows of ESH REIT and its consolidated subsidiaries. Changes in ownership interests in a consolidated subsidiary that do not result in a loss of control are accounted for as equity transactions. All intercompany accounts and transactions have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Interim Presentation—Certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP have been condensed or omitted in the accompanying unaudited condensed consolidated financial statements. ESH REIT believes the disclosures made are adequate to prevent the information presented from being misleading. However, the unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 20162020, included in the combined annual report on Form 10-K filed with the U.S. Securities and Exchange Commission ("SEC"(“SEC”) on February 28, 2017.25, 2021.
The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal and recurring items) necessary to present fairly ESH REIT’s financial position as of September 30, 2017,March 31, 2021, the results of ESH REIT’s operations, and comprehensive income, for the three and nine months ended September 30, 2017 and 2016 and changes in equity and cash flows for the ninethree months ended September 30, 2017March 31, 2021 and 2016.2020. Interim results are not necessarily indicative of full year performance because of hotel acquisitions and dispositions, capital
transactions, the impact of accounting for contingentvariable rental payments under lease arrangements.arrangements and the impact of the COVID-19 pandemic.
Use of Estimates—The preparation of the accompanying unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Management used significant estimates to determine the estimated useful lives of tangible assets, as well as in the assessment of tangible and intangible assets including goodwill, for impairment, estimated liabilities for insurance reserves and the grant-date fair value of certain equity-based awards.impairment. Actual results could differ from those estimates.
Property and Equipment—Property and equipment additions are recorded at cost. Major improvements that extend the life or utility of property or equipment are capitalized and depreciated over a period equal to the shorter of the estimated useful life of the improvement or the remaining estimated useful life of the asset. Ordinary repairs and maintenance are charged to expense as incurred. Depreciation and amortization are recorded on a straight-line basis over estimated useful lives which range from two1 to 49 years.
Management assesses the performance of long-lived assets for potential impairment quarterly, as well as when events or changes in circumstances indicate the carrying amount of aan asset or group of assets may not be recoverable. The identification of events or changes in circumstances that indicate the carrying value of assets may not be recoverable requires significant judgment. ESH REIT reviews for impairment indicators at the lowest level of identifiable cash flows based on quantitative, qualitative and certain industry-related factors. Quantitative factors include, but are not limited to, hotel property EBITDA, EBITDA margins and EBITDA multiples, and serve to screen assets or asset groups with historical, current or projected operating cash flow losses or deterioration. Qualitative factors include a change in physical condition, economic environment, regulatory environment or primary use, including the evaluation of the asset or group of assets for disposition.
Recoverability of property and equipment is measured by a comparison of the carrying amount of a hotel property or group of hotel properties (groups of hotel properties align with hotels as they are grouped(grouped under ESH REIT’s leases) to the estimated future undiscounted cash flows expected to be generated by eachthe hotel property or group of hotel properties. Impairment is recognized when estimated future undiscounted cash flows, including expected proceeds from disposition, are less than the carrying value of eachthe hotel property or group of hotel properties. To the extent that a hotel property or group of hotel properties is impaired, theirthe excess carrying amount over their estimated fair value is recognized as an impairment charge and reduces income from operations.charge. Fair value is determined based upon the discounted cash flows of athe hotel property or group of hotel properties, bids, quoted market prices or independent appraisals, as considered necessary. No impairment charges were recognized during the three months ended September 30, 2017. ESH REIT recognized impairment charges related to property and equipment of approximately $15.0 million for the nine months ended September 30, 2017 and no impairment charges for the three and nine months ended September 30, 2016 (see Note 5).
The estimation and evaluation of future undiscounted cash flows, is inherently uncertainin particular the holding period for real estate assets and asset composition and/or concentration within real estate portfolios, relies uponon significant judgments and assumptions regarding holding period, current and future operating performance and current and future market conditions. It is possible that such judgments and/or estimates will change; in particular, the effects of the COVID-19 pandemic could cause economic and market conditions. If suchconditions to continue to deteriorate, and if this occurs, or if ESH REIT's expected holding period for real estate assets changes, ESH REIT may recognize impairment charges or losses on sale in future periods reflecting either changes in estimate, circumstance or the estimated market value of assets.
conditionsIntangible Assets—Intangible assets include licenses related to certain internal-use software. Licenses are amortized using the straight-line method over their estimated useful life, which is the remaining non-cancellable term of each respective contract. Intangible assets are reviewed for impairment quarterly and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. ESH REIT tests for impairment more frequently if events or circumstances change an impairment charge to furtherthat would more likely than not reduce the fair value of its reporting unit below its carrying amount. Definite-lived intangible assets are reviewed for impairment quarterly and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
If the effects of the COVID-19 pandemic or other factors cause economic and market conditions to deteriorate, these events could result in impairment charges with respect to intangible assets in the future. Actual results are subject to a high degree of uncertainty due to the volatility of macroeconomic trends.
Goodwill—Goodwill represents the purchase price in excess of the fair value of net assets acquired in conjunction with the acquisition of ESH REIT's predecessor in 2010. Goodwill is reviewed for impairment quarterly, and ESH REIT tests for impairment more frequently if events or circumstances change that would more likely than not reduce the fair value of a groupreporting unit below its carrying amount. ESH REIT has 1 operating segment, which is its reporting unit; therefore, management analyzes goodwill associated with hotels when analyzing for potential impairment. ESH REIT first assesses qualitative factors to determine if it is more likely than not that the fair value of hotel propertiesits reporting unit is less than its carrying amount.
If the effects of the COVID-19 pandemic or other factors cause economic and market conditions to deteriorate, these events could occurresult in impairment charges with respect to goodwill in the future. Actual results are subject to a future period in which conditions change.high degree of uncertainty due to the volatility of macroeconomic trends.
Revenue Recognition—ESH REIT’s sole source of revenues is rental revenue derived from operating leases with subsidiaries of the Corporation (the Operating Lessees)(i.e., all revenues are generated from agreements with related parties (see Note 10)). ESH REIT records rentalRental revenues are recorded on a straight-line basis as they are earned during the lease terms. Rents receivable from Extended Stay America, Inc. on the accompanying unaudited condensed consolidated balance sheets represent monthly rental amounts contractually due. Deferred rents receivable from Extended Stay America, Inc. on the accompanying unaudited condensed consolidated balance sheets represent the cumulative difference between straight-line rental revenues recognized and rental revenues contractually due. As scheduled rent payments have begun to exceed straight-line rental revenue, this amount, approximately $28.2 million as of September 30, 2017, will gradually decrease through the remainder of the lease terms until it is zero at the end of the lease terms in October 2018. Lease rental payments received prior to rendering services are included in unearned rental revenues from Extended Stay America, Inc. on the accompanying unaudited condensed consolidated balance sheets. ContingentVariable rental revenues, specifically percentage rental revenues related to hotel revenues of the Operating Lessees, are recognized when such amounts are fixed and determinable (i.e., only when percentage rental revenue thresholds have been achieved).
Segments—ESH REIT’s business represents a single operating segment based on the way ESH REIT manages its business. ESH REIT leases the hotel properties in similar manners to similar customers. The amounts of long-lived assets and net revenues outside the U.S. are not significant for any period presented.
Recently Issued Accounting Standards
Goodwill—Reference Rate Reform—In January 2017,March 2020, the Financial Accounting Standards Board ("FASB")FASB issued an accounting standards update in which the guidance on testingthat provides optional expedients and exceptions for goodwill was updatedapplying U.S. GAAP to eliminate Step 2 in the determination on whether goodwill should be considered impaired. Annual and/or interim assessments are still requiredcontract modifications and hedging relationships that reference LIBOR, subject to be completed. This update will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted.meeting certain criteria. ESH REIT doesadopted this update on March 12, 2020 and the updates are effective through December 31, 2022, during which time ESH REIT may elect to apply the optional expedients and exceptions offered under the standard. ESH REIT's variable rate debt and interest rate swap are tied to rates that reference LIBOR (see Notes 7 and 8). As of March 31, 2021, ESH REIT had not expect theapplied any of these optional expedients or exceptions. The adoption of this update did not, and is not expected to, have a material effect on ESH REIT’s unauditedREIT's condensed consolidated financial statements.
Statement of Cash Flows—IncomeTaxes—In August and November 2016, the FASB issued accounting standards updates which provide additional clarity on the classification of specific events on the statement of cash flows. These events include debt prepayment and extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from settlement of insurance claims, distributions received from equity method investees, and beneficial interests in securitization transactions. These updates also require amounts generally described as restricted cash to be included with cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. These updates are effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods, with early adoption permitted and should be applied using a retrospective transition method to each period presented. The adoption of these updates will require cash outflows related to debt prepayment and extinguishment costs to be classified as financing activities. For the nine months ended September 30, 2017 and 2016, debt prepayment and extinguishment costs included within net cash provided by operating activities totaled approximately $1.2 million and $3.9 million, respectively. Additionally, the effect of the adoption of these updates on ESH REIT's consolidated statements of cash flows will be to include restricted cash in the beginning and end of period balances of cash, restricted cash and cash equivalents. The change in restricted cash is currently included in investing activities in the consolidated statements of cash flows.
Compensation—Stock Compensation—In March 2016,2019, the FASB issued an accounting standards update which identifies areas for simplification involving several aspects ofsimplifies the accounting for share-based payment transactions,income taxes. The update amends several topics including incomeinterim period accounting for enacted changes in tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur,law and certain classifications on the statement of cash flows.year-to-date loss limitation in interim-period tax accounting. ESH REIT adopted this update on January 1, 2017 using a prospective transition method.2021. The adoption of this update did not have a material effect on ESH REIT’s unauditedREIT's condensed consolidated financial statements.
In May 2017, the FASB issued an accounting standards update that provides guidance about which changes to the terms or conditions of a share-based payment award requires an entity to apply modification accounting. This update will be effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted and should be applied prospectively to awards modified on or after the adoption date. ESH REIT does not expect the adoption of this update to have a material effect on ESH REIT’s unaudited condensed consolidated financial statements.
3. NET INCOME PER SHARE
Derivatives and Hedging—In August 2017, the FASB issued an accounting standards update which changes the designation and measurement guidance for qualifying hedging relationships and the presentation of hedging results. This update expands and refines hedge accounting and aligns recognition and presentation of its effects within the financial statements. This update is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted, and will require a cumulative-effect adjustment to the balance of retained earnings as of the beginning of the fiscal year that an entity adopts this update. ESH REIT is currently assessing the impact the adoption of the update will have on its consolidated financial statements. Expected impacts include, on a prospective basis, the elimination of hedge ineffectiveness related to designated interest rate swaps, the presentation of all interest rate hedge related items that impact earnings in the interest expense line item in the consolidated statement of operations and an election to perform qualitative assessments of hedge effectiveness.
In March 2016, the FASB issued an accounting standards update to clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts and to clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. ESH REIT adopted this update on January 1, 2017. The adoption of this update did not have a material effect on ESH REIT’s unaudited condensed consolidated financial statements.
Leases—In February 2016, the FASB issued an accounting standards update which introduces a lessee model that requires a right-of-use asset and lease obligation to be presented on the balance sheet for all leases, whether operating or financing. The update eliminates the requirement in current U.S. GAAP for an entity to use bright-line tests in determining lease classification. The update also requires lessors to increase the transparency of their exposure to changes in value of their residual assets and how they manage that exposure. This update will be effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted, and must be applied using a modified retrospective approach, which will require adjustment to all comparative periods presented.
As of September 30, 2017, using its incremental borrowing rate with respect to the future minimum lease payments under its operating leases (ground leases), ESH REIT has preliminarily estimated that the lease liability would have been between approximately $7.5 million and $11.5 million and the right of use asset would have been between approximately $1.0 million and $5.0 million, which includes adjustments for accrued lease payments, above market lease liabilities and lease incentives.
The recording of a lease obligation may increase total indebtedness for purposes of financial covenants within certain of ESH REIT’s existing debt agreements; however, ESH REIT does not expect this increase to cause instances of non-compliance with any of these covenants. ESH REIT currently does not expect the adoption of this update to have a material effect on its consolidated statements of operations or cash flows. ESH REIT expects to elect the optional practical expedients which relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. The election to apply these practical expedients will, in effect, mean ESH REIT will continue to account for leases that commenced before the effective date in accordance with previous GAAP unless the lease is modified, except that ESH REIT will recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP.
Basic net income per share is computed by dividing net income available to Class A and Class B common shareholders by the weighted-average number of shares of ESH REIT’s unrestricted Class A and Class B common stock outstanding, respectively. Diluted net income per share is computed by dividing net income available to Class A and Class B common shareholders, as adjusted for potentially dilutive securities, by the weighted-average number of shares of ESH REIT’s unrestricted Class A and Class B common stock outstanding, respectively, plus other potentially dilutive securities. Dilutive securities include certain equity-based awards issued under long-term incentive plans (see Note 11) and are included in the calculation provided that the inclusion of such securities is not anti-dilutive.
The calculations of basic and diluted net income per share, including a reconciliation of the numerators and denominators, are as follows (in thousands, except per share data):
| | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
| Numerator: | | | | | | | |
| Net income | | | | | $ | 25,150 | | | $ | 7,918 | |
| Less preferred dividends | | | | | (4) | | | (4) | |
| Net income available to ESH Hospitality, Inc. common shareholders | | | | | $ | 25,146 | | | $ | 7,914 | |
| Class A: | | | | | | | |
Net income available to ESH Hospitality, Inc. Class A common
shareholders - basic | | | | | $ | 14,706 | | | $ | 4,627 | |
Amounts attributable to ESH Hospitality, Inc. Class B
shareholders assuming conversion | | | | | (25) | | | (2) | |
Net income available to ESH Hospitality, Inc. Class A common
shareholders - diluted | | | | | $ | 14,681 | | | $ | 4,625 | |
| Class B: | | | | | | | |
Net income available to ESH Hospitality, Inc. Class B common
shareholders - basic | | | | | $ | 10,440 | | | $ | 3,287 | |
Amounts attributable to ESH Hospitality, Inc. Class B
shareholders assuming conversion | | | | | 25 | | | 2 | |
Net income available to ESH Hospitality, Inc. Class B common
shareholders - diluted | | | | | $ | 10,465 | | | $ | 3,289 | |
| Denominator: | | | | | | | |
| Class A: | | | | | | | |
Weighted-average number of ESH Hospitality, Inc. Class A common
shares outstanding - basic and diluted | | | | | 250,494 | | | 250,494 | |
| Class B: | | | | | | | |
Weighted-average number of ESH Hospitality, Inc. Class B common
shares outstanding - basic | | | | | 177,827 | | | 177,990 | |
| Dilutive securities | | | | | 722 | | | 181 | |
Weighted-average number of ESH Hospitality, Inc. Class B common
shares outstanding - diluted | | | | | 178,549 | | | 178,171 | |
| Net income per ESH Hospitality, Inc. common share - Class A - basic | | | | | $ | 0.06 | | | $ | 0.02 | |
| Net income per ESH Hospitality, Inc. common share - Class A - diluted | | | | | $ | 0.06 | | | $ | 0.02 | |
| Net income per ESH Hospitality, Inc. common share - Class B - basic | | | | | $ | 0.06 | | | $ | 0.02 | |
| Net income per ESH Hospitality, Inc. common share - Class B - diluted | | | | | $ | 0.06 | | | $ | 0.02 | |
| | | | | | | |
| | | | | | | |
4. HOTEL DISPOSITIONS
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Numerator: | | | | | | | |
| Net income | $ | 28,486 |
| | $ | 23,652 |
| | $ | 7,646 |
| | $ | 19,993 |
|
| Less preferred dividends | (4 | ) | | (4 | ) | | (12 | ) | | (12 | ) |
| Net income available to ESH Hospitality, Inc. common shareholders | $ | 28,482 |
| | $ | 23,648 |
| | $ | 7,634 |
| | $ | 19,981 |
|
| Class A: | | | | | | | |
| Net income available to ESH Hospitality, Inc. common shareholders - basic | $ | 16,112 |
| | $ | 13,143 |
| | $ | 4,360 |
| | $ | 11,121 |
|
| Amounts attributable to ESH Hospitality, Inc. Class B shareholders assuming conversion | (37 | ) | | (4 | ) | | — |
| | (4 | ) |
| Net income available to ESH Hospitality, Inc. common shareholders - diluted | $ | 16,075 |
| | $ | 13,139 |
| | $ | 4,360 |
| | $ | 11,117 |
|
| Class B: | | | | | | | |
| Net income available to ESH Hospitality, Inc. common shareholders - basic | $ | 12,370 |
| | $ | 10,505 |
| | $ | 3,274 |
| | $ | 8,861 |
|
| Amounts attributable to ESH Hospitality, Inc. Class B shareholders assuming conversion | 37 |
| | 4 |
| | — |
| | 4 |
|
| Net income available to ESH Hospitality, Inc. common shareholders - diluted | $ | 12,407 |
| | $ | 10,509 |
| | $ | 3,274 |
| | $ | 8,865 |
|
| Denominator: | | | | | | | |
| Class A: | | | | | | | |
| Weighted average number of ESH Hospitality, Inc. common shares outstanding - basic and diluted | 250,494 |
| | 250,494 |
| | 250,494 |
| | 250,494 |
|
| Class B: | | | | | | | |
| Weighted average number of ESH Hospitality, Inc. common shares outstanding - basic | 192,357 |
| | 200,556 |
| | 193,399 |
| | 202,156 |
|
| Dilutive securities | 974 |
| | 140 |
| | — |
| | 96 |
|
| Weighted average number of ESH Hospitality, Inc. common shares outstanding - diluted | 193,331 |
| | 200,696 |
| | 193,399 |
| | 202,252 |
|
| Net income per ESH Hospitality, Inc. common share - Class A - basic | $ | 0.06 |
| | $ | 0.05 |
| | $ | 0.02 |
| | $ | 0.04 |
|
| Net income per ESH Hospitality, Inc. common share - Class A - diluted | $ | 0.06 |
| | $ | 0.05 |
| | $ | 0.02 |
| | $ | 0.04 |
|
| Net income per ESH Hospitality, Inc. common share - Class B - basic | $ | 0.06 |
| | $ | 0.05 |
| | $ | 0.02 |
| | $ | 0.04 |
|
| Net income per ESH Hospitality, Inc. common share - Class B - diluted | $ | 0.06 |
| | $ | 0.05 |
| | $ | 0.02 |
| | $ | 0.04 |
|
| Anti-dilutive securities excluded from net income per common share - Class B - diluted | — |
| | — |
| | 602 |
| | — |
|
On May 1, 2017, a subsidiary of ESH REIT, together with subsidiaries of the Corporation, sold its three Extended Stay Canada-branded hotels for 76.0 million Canadian dollars, or approximately $55.3 million, of which 67.4 million Canadian dollars, or approximately $49.0 million, related to ESH REIT assets. ESH REIT's carrying value of the hotels, including working capital and allocable goodwill, net of an impairment charge recordedThe table below summarizes hotel dispositions during the three months ended March 31, 2017, was approximately 51.2 million Canadian dollars, or approximately $37.3 million, resulting in a gain on sale2021, and the year ended December 31, 2020 (in thousands, except number of approximately 15.1 million Canadian dollars, or approximately $11.0 million, prior to the evaluationhotels and number of existing accumulated foreign currency translation loss. Due to the fact that ESH REIT's Canadian subsidiary liquidated 100% of its assets, approximately $12.5 million of accumulated foreign currency translation loss was recognized in the condensed consolidated statement of operations during the nine months ended September 30, 2017. This charge more than fully offset the Canadian subsidiary's gain on sale, which resulted in a loss on sale of the Canadian hotels of approximately $1.5 million, net of closing costs and adjustments, which isrooms). No dispositions were reported in loss on sale of hotel properties during the nine months ended September 30, 2017 in the accompanying unaudited condensed consolidated statements ofas discontinued operations.
On May 16, 2017, ESH REIT sold one U.S.-based hotel for gross proceeds of $5.4 million. The carrying value of this hotel, including net working capital and allocable goodwill, was approximately $6.8 million, which resulted in a loss on sale of approximately $1.8 million, net of closing costs and adjustments, which is reported in loss on sale of hotel properties during the nine months ended September 30, 2017 in the accompanying unaudited consolidated statements of operations.
| | | | | | | | | | | | | | | | | |
| Date | Location | Number of Hotels | Number of Rooms | Net Proceeds | Gain on Sale |
| March 2021 | Texas | 2 | 241 | $ | 21,867 | | $ | 11,930 | |
| November 2020 | California | 1 | 146 | $ | 63,556 | | $ | 52,196 | |
During the three months ended March 31, 2021 and nine month periods ended September 30, 2017 and 2016, the four2020, disposed hotel properties contributed total rental revenues, total operating expenses and income (loss) before income tax expense as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Rental revenues from Extended Stay America, Inc. | $ | — |
| | $ | 1,527 |
| | $ | 2,040 |
| | $ | 4,527 |
|
| Total operating expenses | — |
| | 603 |
| | 15,527 |
| (1) | 1,864 |
|
| Income (loss) before income tax expense | — |
| | 676 |
| | (13,173 | ) | (1) | 2,610 |
|
| | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2021 | 2020 | | |
| Total rental revenues from Extended Stay America, Inc. | $ | 289 | | $ | 933 | | | |
| Total operating expenses | 157 | 395 | | |
| Income before income tax expense | 132 | 538 | | |
| |
(1) | Includes impairment charge recorded during the three months ended March 31, 2017 of approximately $15.0 million related to the three Canadian hotels. |
5. PROPERTY AND EQUIPMENT
Net investment in property and equipment as of September 30, 2017March 31, 2021 and December 31, 2016,2020, consists of the following (in thousands):
| | | | | | | | | | | |
| March 31,
2021 | | December 31,
2020 |
| Hotel properties: | | | |
Land and site improvements (1) | $ | 1,252,151 | | | $ | 1,248,807 | |
| Building and improvements | 2,927,906 | | | 2,914,683 | |
Furniture, fixtures and equipment (2) | 789,633 | | | 790,584 | |
| Total hotel properties | 4,969,690 | | | 4,954,074 | |
| Development in process | 28,527 | | | 46,496 | |
| Other | 1,000 | | | 1,000 | |
| Total cost | 4,999,217 | | | 5,001,570 | |
| Less accumulated depreciation: | (1,569,166) | | | (1,540,358) | |
| Property and equipment — net | $ | 3,430,051 | | | $ | 3,461,212 | |
|
| | | | | | | |
| | September 30,
2017 | | December 31,
2016 |
| Hotel properties: | | | |
| Land and site improvements | $ | 1,290,312 |
| | $ | 1,304,503 |
|
| Building and improvements | 2,957,829 |
| | 2,960,158 |
|
| Furniture, fixtures and equipment | 651,002 |
| | 607,682 |
|
| Total hotel properties | 4,899,143 |
| | 4,872,343 |
|
| Undeveloped land parcel | 1,675 |
| | 1,675 |
|
| Total cost | 4,900,818 |
| | 4,874,018 |
|
| Less accumulated depreciation | (1,092,693 | ) | | (959,449 | ) |
| Property and equipment - net | $ | 3,808,125 |
| | $ | 3,914,569 |
|
As of March 31, 2021 and December 31, 2020, development in process consisted of 6 and 8 land parcels, respectively, that were in various phases of construction and/or development. ESH REIT expects to delay commencement of construction of 4 of these locations as a result of current market uncertainty.
During the three and nine months ended September 30, 2017March 31, 2021 and 2016, ESH REIT, using Level 3 unobservable inputs, assessed property and equipment for potential impairment. No impairment chargesthe year ended December 31, 2020, the following owned, newly constructed hotels were recognized duringopened under the Extended Stay America brand:
| | | | | | | | | | | | |
| Opening Date | Location | Number of
Hotels | Number of Rooms | |
| March 2021 | Florida | 2 | 248 | |
| December 2020 | Florida | 1 | 124 | |
| November 2020 | Florida | 1 | 144 | |
| August 2020 | Florida | 1 | 124 | |
| June 2020 | Various | 2 | 248 | |
| April 2020 | South Carolina | 1 | 120 | |
| March 2020 | Florida | 1 | 120 | |
During the three months ended September 30, 2017. March 31, 2021 and 2020, newly-build hotels contributed rental revenues, total operating expenses and income before income tax expense as follows (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2021 | | 2020 |
| Rental revenues from Extended Stay America, Inc. | | | | | $ | 1,975 | | | $ | 130 | |
| Total operating expenses | | | | | 1,901 | | | 62 | |
| Income before income tax expense | | | | | 74 | | | 68 | |
6. INTANGIBLE ASSETS AND GOODWILL
ESH REIT recognized impairment chargesREIT's intangible assets and goodwill as of approximately $15.0 million for the nine months ended September 30, 2017 related to the Canadian hotels that were sold. ESH REIT recognized no impairment charges during the three or nine months ended September 30, 2016.
Quantitative information with respect to unobservable inputs consistsMarch 31, 2021 and December 31, 2020, consist of internally developed cash flow models that include the following assumptions, among others: projections(dollars in thousands):
| | | | | | | | | | | | | | | | | |
| March 31, 2021 |
| Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Book Value |
| | | | | |
| Definite-lived intangible assets—software licenses | $ | 10,597 | | | $ | (2,312) | | | $ | 8,285 | |
| | | | | |
| | | | | |
| | | | | |
| Goodwill | 43,748 | | | — | | | 43,748 | |
| Total intangible assets and goodwill | $ | 54,345 | | | $ | (2,312) | | | $ | 52,033 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Book Value |
| | | | | |
| Definite-lived intangible assets—software licenses | $ | 10,546 | | | $ | (2,005) | | | $ | 8,541 | |
| | | | | |
| | | | | |
| | | | | |
| Goodwill | 43,878 | | | — | | | 43,878 | |
| Total intangible assets and goodwill | $ | 54,424 | | | $ | (2,005) | | | $ | 52,419 | |
The remaining weighted-average amortization period for amortizing intangible assets is approximately seven years as of lease revenues and expenses, demand trends, expectedMarch 31, 2021. Estimated future capital expenditures and estimated discount rates. These assumptions are based on ESH REIT’s historical data and experience, budgets, industry projections and micro and macro general economic condition projections.amortization expense for amortizing intangible assets is as follows (in thousands):
| | | | | |
| Years Ending December 31, | |
| Remainder of 2021 | $ | 944 | |
| 2022 | 1,259 | |
| 2023 | 1,259 | |
| 2024 | 1,259 | |
| 2025 | 1,259 | |
| 2026 | 1,259 | |
| Thereafter | 1,046 | |
| Total | $ | 8,285 | |
7. DEBT
Summary—ESH REIT’s outstanding debt, net of unamortized debt discount and unamortized deferred financing costs, as of September 30, 2017March 31, 2021 and December 31, 2016,2020, consists of the following (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Stated
Amount | | Carrying Amount | | Unamortized Deferred Financing Costs | | | | | |
| Loan | | March 31, 2021 | | December 31, 2020 | | March 31, 2021 | | December 31, 2020 | | Stated Interest Rate | | Maturity Date | |
| Term loan facility | | | | | | | | | | | | | | |
| ESH REIT Term Facility | $ | 630,909 | | | $ | 619,847 | | (1) | $ | 621,351 | | (1) | $ | 7,348 | | | $ | 7,684 | | | LIBOR (2) + 2.00% | | 9/18/2026 | (3) |
| Senior notes | | | | | | | | | | | | | | |
| 2025 Notes | 1,300,000 | | | 1,294,630 | | (4) | 1,294,301 | | (4) | 11,526 | | | 12,232 | | | 5.25% | | 5/1/2025 | |
| 2027 Notes | 750,000 | | | 750,000 | | | 750,000 | | | 11,439 | | | 11,879 | | | 4.63% | | 10/1/2027 | |
| Revolving credit facility | | | | | | | | | | | | | | |
| ESH REIT Revolving Credit Facility | 350,000 | | | 0 | | | 0 | | | 1,923 | | (5) | 2,061 | | (5) | LIBOR (2) + 2.00% | | 9/18/2024 | |
| Unsecured intercompany facility | | | | | | | | | | | | | | |
| ESH REIT Intercompany Facility | 75,000 | | | 0 | | | 0 | | | 0 | | | 0 | | | 5.00% | | 9/18/2026 | |
| Total | | | $ | 2,664,477 | | | $ | 2,665,652 | | | $ | 32,236 | | | $ | 33,856 | | | | | | |
| | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Stated Amount(1) | | Carrying Amount | | Unamortized Deferred Financing Costs | | | | Interest Rate | | | |
| Loan | | September 30, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 | | Stated Interest Rate | | September 30, 2017 | | December 31, 2016 | | Maturity Date | |
| Term loan facility | | | | | | | | | | | | | | | | | | |
| 2016 Term Facility | $ | 1,300,000 |
| (2) | $ | 1,281,530 |
| (3) | $ | 1,290,560 |
| | $ | 14,026 |
| | $ | 15,804 |
| | LIBOR(4) + 2.50% |
| (5) | 3.71 | % | (5) | 3.75 | % | | 08/30/2023 | (7) |
| Senior notes | | | | | | | | | | | | | | | | | | |
| 2025 Notes | 1,300,000 |
| | 1,290,027 |
| (6) | 1,289,041 |
| | 21,406 |
| | 23,523 |
| | 5.25 | % | | 5.25 | % | | 5.25 | % | | 05/01/2025 | |
Revolving credit facility | | | | | | | | | | | | | | | | | | |
| 2016 Revolving Credit Facility | 350,000 |
| | — |
| | 45,000 |
| | 2,157 |
| (8) | 2,570 |
| (8) | LIBOR + 2.75% |
| | N/A |
| | 3.33 | % | | 08/30/2021 | |
| Unsecured Intercompany Facility | | | | | | | | | | | | | | | | | | |
| Unsecured Intercompany Facility | 75,000 |
| (9) | 50,000 |
| | 50,000 |
| | — |
| | — |
| | 5.00 | % | | 5.00 | % | | 5.00 | % | | 08/30/2023 | |
| Total | | | $ | 2,621,557 |
| | $ | 2,674,601 |
| | $ | 37,589 |
| | $ | 41,897 |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| |
(1) | Amortization is interest only, except for the 2016 Term Facility (as defined below) which amortizes in equal quarterly installments of $3.24 million. See (7) below. |
| |
(2) | ESH REIT is able to increase its borrowings under the 2016 ESH REIT Credit Facilities (as defined below) by an amount of up to $600.0 million, plus additional amounts, in each case subject to certain conditions. |
| |
(3) | (1)The 2016 Term Facility is presented net of an unamortized debt discount of approximately $5.5 million and $6.2 million as of September 30, 2017 and December 31, 2016, respectively. |
| |
(4) | As of December 31, 2016, the stated interest rate of the 2016 Term Facility was LIBOR + 3.00% and included a LIBOR floor of 0.75%. |
| |
(5) | $400.0 million of the 2016 Term Facility is subject to an interest rate swap at a fixed rate of 1.175% (see Note 7). |
| |
(6) | The 2025 Notes (as defined below) are presented net of an unamortized debt discount of approximately $10.0 million and $11.0 million as of September 30, 2017 and December 31, 2016, respectively. |
| |
(7) | In addition to scheduled amortization noted in (1) above, subject to certain exceptions, annual mandatory prepayments of up to 50% of Excess Cash Flow, as defined, may be required under the 2016 Term Facility commencing with the year ending December 31, 2017. Annual mandatory prepayments for the year ending December 31, 2017 and each year thereafter are due during the first quarter of the following year. |
| |
(8) | Unamortized deferred financing costs related to the revolving credit facility are included in other assets in the accompanying unaudited condensed consolidated balance sheets. |
| |
(9) | As of September 30, 2017, the outstanding balance owed from ESH REIT to the Corporation under the Unsecured Intercompany Facility was $50.0 million. ESH REIT is able to increase its borrowings under the Unsecured Intercompany Facility to an amount of up to $300.0 million, plus additional amounts, in each case subject to certain conditions. |
On March 1, 2017, ESH REIT entered intoTerm Facility (defined below) is presented net of an amendmentunamortized debt discount of $1.6 million and $1.7 million as of March 31, 2021 and December 31, 2020, respectively.
(2)As of March 31, 2021 and December 31, 2020, one-month LIBOR was 0.11% and 0.14%, respectively. As of March 31, 2021 and December 31, 2020, $50.0 million and $100.0 million, respectively, of the ESH REIT Term Facility was subject to an interest rate swap at a fixed rate of 1.175%.
(3)Amortizes in equal quarterly installments of $1.6 million. In addition to scheduled amortization, subject to certain exceptions, annual mandatory prepayments of up to 50% of Excess Cash Flow, as defined, may be required under the ESH REIT Term Facility. Annual mandatory prepayments for the year are due during the first quarter of the following year. No mandatory prepayments were required in the first quarter of 2021 based on ESH REIT’s Excess Cash Flow for the year ended December 31, 2020.
(4)The 2025 Notes (defined below) are presented net of an unamortized discount of $5.4 million and $5.7 million as of March 31, 2021 and December 31, 2020, respectively.
(5)Unamortized deferred financing costs related to the 2016 Term Facility withrevolving credit facility are included in other assets in the lenders thereunder (such amendment, the "Repricing Amendment"). The Repricing Amendment had the following impact on the 2016 Term Facility: (i) decreased the interest rate spread on LIBOR based loans from 3.0% to 2.5%; (ii) decreased the interest rate spread on base rate loans from 2.0% to 1.5%; (iii) removed the floor of 0.75% on LIBOR based loans; (iv) removed the floor of 2.0% on base rate loans; (v) removed ranges on interest rate spreads for all loan types that were dependent upon ESH REIT’s credit rating; and (vi) extended the 1% prepayment penalty through September 1, 2017 (prepayments made after September 1, 2017 are not subject to a prepayment penalty, other than customary “breakage” costs).accompanying condensed consolidated balance sheets.
ESH REIT Credit Facilities
On August 30, 2016, ESH REIT entered into aREIT’s credit agreement, as may be amended and supplemented from time to time, providingprovides for senior secured credit facilities (collectively, the "2016 ESH“ESH REIT Credit Facilities"Facilities”) consistingwhich consist of a $1,300.0$630.9 million senior secured term loan facility (the "2016“ESH REIT Term Facility"Facility”) and a $350.0 million senior secured revolving credit facility (the "2016 ESH“ESH REIT Revolving Credit Facility"Facility”). Subject to the satisfaction of certain criteria, borrowings under the 2016 ESH REIT Credit Facilities may be increased by an amount of up to $600.0 million, plus additional amounts, so long as, after giving effect to the incurrence of such incremental facility and the application of proceeds thereof, itsESH REIT’s pro-forma senior loan-to-value ratio is less than or equal to 45%.
Obligations under the 2016 ESH REIT Credit Facilities are guaranteed by certain existing and future material domestic subsidiaries ofTerm Facility—The ESH REIT other than those owning real property, subject to customary exceptions. Obligations under the 2016 ESH REIT Credit Facilities are secured, subject to certain exceptions, including an exception for real property, by a first-priority security interest in substantially all of the assets of ESH REIT and the guarantors.
The 2016 ESH REIT Credit Facilities contain a number of restrictive covenants that, among other things and subject to certain exceptions, limit ESH REIT’s ability and the ability of its subsidiaries to incur additional debt, modify existing debt, create certain liens, pay dividends and distributions, make certain investments and other restricted payments, enter into affiliate transactions, amend or modify certain material operating leases and management agreements, sell assets or merge, consolidate or transfer all or substantially all of their assets. The 2016 ESH REIT Credit Facilities contain certain customary representations and warranties, affirmative covenants and events of default, including, but not limited to, cross-defaults to certain other indebtedness and certain material operating leases and management agreements. If an event of default occurs, the administrative agent is entitled to take various actions, including the acceleration of amounts due under the 2016 ESH REIT Credit Facilities and additional actions that a secured creditor is permitted to take following a default. As of September 30, 2017, ESH REIT was in compliance with all covenants under the 2016 ESH REIT Credit Facilities.
2016 Term Facility—The 2016 Term Facility, as amended, bears interest at a rate equal to (i) LIBOR plus 2.50%1.75% for any period during which ESH REIT maintains a public corporate family rating better than or equal to BB (with a stable or better outlook) from S&P and Ba3 (with a stable or better outlook) from Moody’s (a “Level 1 Period”) or LIBOR plus 2.00% for any period other than a Level 1 Period; or (ii) a base rate (determined by reference to the highest of (A) the prime lending rate, (B) the overnight federal funds rate plus 0.50% or (C) the one-month adjusted LIBOR rate plus 1.00%), plus 1.50%. The 2016 Term Facility amortizes in equal quarterly installments in annual amounts of 1.0% of the principal amount outstanding as of the Repricing Amendment,0.75% during a Level 1 Period or approximately $13.0 million, with the remaining balance payable at maturity. In addition to scheduled amortization, subject to certain exceptions, mandatory prepayments of up to 50% of annual Excess Cash Flow, as defined, may be required based on ESH REIT's Consolidated Leverage Ratio, each as defined. Annual mandatory prepayments are due during the first quarter of the following year. The 2016 Term Facility matures on August 30, 2023.
1.00% for any period other than a Level 1 Period. ESH REIT has the option to voluntarily prepay outstanding loans under the 2016ESH REIT Term Facility at any time upon three business days’ prior written notice for LIBOR loans or on one business day’s prior written notice for base rate loans. In addition to customary "breakage" costs with respect to LIBOR loans, amounts refinanced, substituted or replaced by indebtedness which has a lower all-in yield than the all-in yield under the 2016 Term Facility on or prior to September 1, 2017 (other than as a result of a transformative transaction) are subject to a prepayment penalty equal to 1.00% of the aggregate principal amount refinanced, substituted or replaced. Prepayments made after September 1, 2017 are not subject to a prepaymentwithout penalty.
2016 ESH REIT Revolving Credit Facility—The 2016Borrowings under the ESH REIT Revolving Credit Facility provides for the issuance of up to $50.0 million of letters of credit. Borrowings under the facility bear interest at a rate equal to (i) LIBOR plus a spread that ranges from 2.25%1.50% to 2.75%2.00% based on ESH REIT’s Consolidated Total Net Leverage Ratio, as defined, or (ii) a base rate (determined by reference to the highest of (A) the prime lending rate, (B) the overnight federal funds rate plus 0.50%, or (C) the one-month adjusted LIBOR rate plus 1.00%) plus a spread that ranges from 1.25%0.50% to 1.75%1.00% based on ESH REIT’s Consolidated Total Net Leverage Ratio, as defined. There is no scheduled amortization under the 2016 ESH REIT Revolving Credit Facility and the facility matures on August 30, 2021.
In addition to paying interest on outstanding principal, ESH REIT incurs a fee of 0.35%0.30% or 0.175% on the unutilized revolver balance based on the amount outstanding under the facility. ESH REIT is also required to pay customary letter of credit fees and agency fees. The ESH REIT Revolving Credit Facility provides for the issuance of up to $50.0 million of letters of credit. As of September 30, 2017,March 31, 2021, ESH REIT had no0 letters of credit outstanding under the facility, an outstanding balance of $0 and available borrowing capacity of $350.0 million.
The 2016 ESH REIT Revolving Credit Facility is subject to a springing financial covenant whereby the senior loan-to-value ratio may not exceed 45% when the aggregate principal amount of borrowings and letters of creditmillion under the 2016 ESH REIT Revolving Credit Facility, excluding up to $30.0 million of letters of credit, is equal to or greater than 25% of the aggregate available principal amount of the 2016 ESH REIT Revolving Credit Facility on the applicable fiscal quarter end date.facility.
ESH REIT Senior2025 Notes Due 2025
In May 2015 and March 2016, ESH REIT issued $500.0 million and $800.0 million, respectively, of its 5.25% senior notes due in May 2025 (together with the $800.0 million of additional notes discussed below, the(the “2025 Notes”) under an indenture (the “Indenture”) with Deutsche Bank Trust Company Americas, as trustee, at 100% of par value in a private placementplacements pursuant to Rule 144A of the Securities Act ("Rule 144A"). In March 2016, ESH REIT issued an additional $800.0 million of the 2025 Notes under the Indenture at 98.5% of par value in a private placement pursuant to Rule 144A. The 2025 Notes mature on May 1, 2025 and bear interest at a fixed rate of 5.25% per annum, payable semi-annually in arrears on May 1 and November 1 of each year.
The 2025 Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis by each of ESH REIT’s subsidiaries that guarantee ESH REIT’s obligations under the 2016 ESH REIT Credit Facilities. The 2025 Notes rank equally in right of payment with ESH REIT’s existing and future senior unsecured indebtedness, and senior in right of payment to all future subordinated indebtedness, if any. The 2025 Notes are effectively junior to any of ESH REIT’s secured indebtedness to the extent of the value of the assets securing such indebtedness.
1933, as amended. ESH REIT may redeem the 2025 Notes at any time on or after May 1, 2020, in whole or in part, at a redemption price equal to 102.625% of the principal amount, declining annually to 100% of the principal amount from May 1, 2023 and thereafter, plus accrued and unpaid interest. PriorUpon a Change of Control, as defined, holders of the 2025 Notes have the right to May 1, 2020,require ESH REIT to redeem the 2025 Notes at 101% of the principal amount, plus accrued and unpaid interest.
ESH REIT 2027 Notes
In September 2019, ESH REIT issued $750.0 million of its 4.625% senior notes due in 2027 (the “2027 Notes”) under an indenture with Deutsche Bank Trust Company Americas, as trustee, at a price equal to 100% of par value in a private placement pursuant to Rule 144A of the Securities Act of 1933, as amended. ESH REIT may redeem the 20252027 Notes at any time on or after October 1, 2022, in whole or in part, at a redemption price equal to 102.313% of the principal amount, declining annually to 100% of the principal amount from October 1, 2024 and thereafter, plus accrued and unpaid interest. Prior to October 1, 2022, ESH REIT may redeem the 2027 Notes, in whole or in part, at a redemption price equal to 100% of the principal amount, plus a "make-whole"“make-whole” premium, as defined, in the Indenture, plus accrued and unpaid interest. Prior to MayOctober 1, 2018,2022, subject to certain conditions, ESH REIT may redeem up to 35% of the aggregate principal amount of the 20252027 Notes at a redemption price equal to 105.250%101% of the aggregate principal amount, thereof, plus accrued and unpaid interest, with the net cash proceeds from certain equity offerings, provided 65% of the original amount of the principal remains outstanding after the occurrence of each such redemption. Upon a Change of Control, as defined, holders of the 20252027 Notes have the right to require ESH REIT to redeem the 20252027 Notes at 101% of the principal amount, plus accrued and unpaid interest.
The Indenture contains a number of customary covenants that, among other things and subject to certain exceptions, limit ESH REIT’s ability and the ability of its subsidiaries to incur additional debt, create certain liens, pay dividends or distributions, make certain investments and other restricted payments, enter into affiliate transactions, sell assets or merge, consolidate or transfer all or substantially all of their assets. The Indenture also contains certain customary events of default, including, but not limited to, cross-defaults to certain other indebtedness. If an event of default occurs, the holders of the Notes and the Trustee are entitled to take various actions, including declaring the 2025 Notes immediately due and payable. As of September 30, 2017, ESH REIT was in compliance with all covenants set forth in the Indenture.
Unsecured Intercompany Facility
OnIn August 30, 2016, ESH REIT, as borrower, and the Corporation, as lender, entered into an unsecured intercompany credit facility, as may be amended and supplemented from time to time (the "Unsecured“ESH REIT Intercompany Facility"Facility”). Under the ESH REIT Intercompany Facility, ESH REIT may borrow up to $300.0 million, plus additional amounts, in each case subject to certain conditions. Loans under the ESH REIT Intercompany Facility bear interest at an annual rate of 5.0%. ESH REIT has the option to prepay outstanding balances under the facility without penalty. As of September 30, 2017,March 31, 2021 and December 31, 2020, the amount outstanding under the facility totaled $50.0 million. Subject to certain conditions,was $0.
Covenants
The ESH REIT Credit Facilities, the principal amount of2027 Notes, the Unsecured2025 Notes, and the ESH REIT Intercompany Facility may be increased up to an amount that shall not exceed the greater of (i) $300.0 million and (ii) an unlimited amount so long as the incremental loan-to-value ratio, determined on a pro-forma basis as of the last day of the most recently ended test period, as if any incremental loans available under such incremental commitments had been outstanding on the last day of such period, and, in each case, without netting the cash proceeds of any such incremental loans, does not exceed 5.0%. Loans under the facility bear interest at 5.00% per annum. There is no scheduled amortization under the facility and the facility matures on August 30, 2023. ESH REIT has the option to voluntarily prepay outstanding loans at any time upon one business day’s prior written notice.
The Unsecured Intercompany Facility containscontain a number of restrictive covenants that, among other things and subject to certain exceptions, limit ESH REIT’s ability and the ability of its subsidiaries to incur additional debt, modify existing debt, createengage in certain liens, pay dividends or distributions, maketransactions. In addition, the ESH REIT Revolving Credit Facility contains a financial covenant that, subject to certain investments and other restricted payments, enter into affiliate transactions, amend or modifyconditions, requires compliance with a certain material operating leases and managementsenior loan-to-value ratio. The agreements sell assets or merge, consolidate or transfer all or substantially all of their assets. The facility containsgoverning ESH REIT’s indebtedness also contain certain customary representations and warranties, affirmative covenants and events of default, including, but not limited to, cross-defaults to certain other indebtedness and, in the case of the ESH REIT Credit Facilities and the ESH REIT Intercompany Facility, certain material operating leases and management agreements. If an event of default occurs, the Corporation is entitled to take various actions, including the acceleration of amounts due under the facility and all other actions that a creditor is permitted to take following a default. As of September 30, 2017,March 31, 2021, ESH REIT was in compliance with all covenants under its debt agreements.
ESH REIT’s continued compliance with these covenants could be impacted by current or future economic conditions associated with the Unsecured Intercompany Facility.COVID-19 pandemic. ESH REIT's failure to maintain compliance with its debt covenants or to pay debt obligations as they become due would give rise to a default under one or more of the agreements governing its indebtedness, and could entitle the lenders under the defaulted agreements to accelerate the maturity of the amounts thereunder, which could raise substantial doubt about ESH REIT's ability to continue as a going concern. ESH REIT may seek covenant waivers or amendments, though there is no certainty that it would be successful in such efforts.
Future Maturities of DebtInterest Expense, net—The future maturitiescomponents of debt as of September 30, 2017,net interest expense during the three months ended March 31, 2021 and 2020, are as follows (in thousands):
|
| | | | |
| Years Ending December 31, | | |
| Remainder of 2017 | $ | 3,242 |
| |
| 2018 | 12,968 |
| (1) |
| 2019 | 12,968 |
| (1) |
| 2020 | 12,968 |
| (1) |
| 2021 | 12,968 |
| (1) |
| Thereafter | 2,581,910 |
| (1) |
| Total | $ | 2,637,024 |
| |
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2021 | | 2020 |
Contractual interest, net (1) | | | | | $ | 28,879 | | | $ | 31,090 | |
| Amortization of deferred financing costs and debt discount | | | | | 2,023 | | | 2,022 | |
Other costs (2) | | | | | 327 | | | 262 | |
Interest income (3) | | | | | (94) | | | (946) | |
| Total | | | | | $ | 31,135 | | | $ | 32,428 | |
______________________
| |
(1) | Under the 2016 Term Facility, annual mandatory prepayments of up to 50% of Excess Cash Flow, as defined, may be required commencing with the year ending December 31, 2017. Annual mandatory prepayments for the year ending December 31, 2017 and each year thereafter are due during the first quarter of the following year. |
(1)Net of capitalized interest of $0.4 million and $0.9 million, respectively.
(2)Includes interest expense on finance leases (see Note 11) and unused facility fees.
(3)For the three months ended March 31, 2021, includes unused facility income from the Corporation Intercompany Facility (see Note 10).
Fair Value of Debt—As of September 30, 2017March 31, 2021 and December 31, 2016,2020, the estimated fair value of ESH REIT’s debt was approximately $2.7 billion. Estimated fair values are determined by comparing current borrowing rates and risk spreads offered in the market to the stated interest rates and spreads on ESH REIT’s debt (Level 2 fair value measures) or quoted market prices (Level 1 fair value measures), when available.
ESH REIT from timeavailable, to time uses derivative instruments to manage its exposure to interest rate and foreign currency exchange rate risks. ESH REIT’s primary objective in holding derivatives is to reduce the volatility of cash flows and earnings associated with changes instated interest rates and foreign currency exchange rates.spreads on ESH REIT’s derivatives expose it to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. debt.
8. DERIVATIVE INSTRUMENTS
ESH REIT seeksis a counterparty to mitigate such risks by limiting its counterparties to major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored. Management does not expect material losses as a result of defaults by counterparties.
In September 2016, ESH REIT entered into a floating-to-fixed interest rate swap at a fixed rate of 1.175% and a floating rate of one-month LIBOR subject to a LIBOR floor of 0.75%, to manage its exposure to interest rate risk on a portion of its variable rate debt. In February 2017,the ESH REIT executed an amendment to its swap agreement, the impact of which was to remove the LIBOR floor on floating rate cash flows.Term Facility. The notional amount of the interest rate swap as of September 30, 2017March 31, 2021 was $400.0 million. On March 30, 2018, the notional amount decreases to $350.0$50.0 million, and the notional amount continuesswap matures in September 2021.
For the three months ended March 31, 2021, ESH REIT paid interest of $0.3 million, and for the three months ended March 31, 2020, ESH REIT received proceeds of $0.3 million that offset interest expense. As of March 31, 2021, $0.3 million of interest expense is expected to decrease by an additional $50.0 million everybe recognized over the following six months until the swap's maturity in September 2021.
From September 2016 through the February 2017 amendment to ESH REIT's swap agreement, the swap was designated as an effective cash flow hedge and changes in fair value were recognized through accumulated other comprehensive income. Concurrent with the February 2017 swap amendment and through April 2017, the swap's designation as a cash flow hedge was reversed and changes in fair value were recognized in earnings and are included in the line item other non-operating income (expense) on the accompanying unaudited condensed consolidated statements of operations. In April 2017, ESH REIT re-designated the swap as an effective cash flow hedge. Subsequent to April 2017, the effective portion of changes in fair value are recognized through accumulated other comprehensive income and the ineffective portion is recognized in other non-operating income (expense) on the accompanying unaudited condensed consolidated statements of operations. Prior changes recognized through accumulated other comprehensive income are amortized over the remaining life of the swap through earnings and are included in the line item other non-operating income (expense) on the accompanying unaudited condensed consolidated statements of operations. As of September 30, 2017, approximately $1.1 million is expected to be recognized through earnings over the following twelve months.
maturity.
The table below presents the amounts and classification on ESH REIT's financial statements related toof the interest rate swap on ESH REIT’s condensed consolidated financial statements (in thousands):
|
| | | | | | | | | | | | | | |
| | Other Assets | Accumulated other comprehensive income, net of tax | | Other non-operating expense (income) | | Interest Expense |
| As of September 30, 2017 | $ | 4,534 |
| $ | 5,228 |
| (1) | | | |
| As of December 31, 2016 | $ | 4,990 |
| $ | 4,975 |
| | | | |
| For the three months ended September 30, 2017 | | | | $ | 104 |
| (2) | $ | (66 | ) |
| For the three months ended September 30, 2016 | | | | $ | — |
| | $ | — |
|
| For the nine months ended September 30, 2017 | | | | $ | 356 |
| (3) | $ | 807 |
|
| For the nine months ended September 30, 2016 | | | | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | | | |
| Accrued liabilities | Accumulated other comprehensive loss, net of tax | | | | | Interest expense (income), net |
| As of March 31, 2021 | $ | (268) | | $ | (268) | | (1) | | | | |
| As of December 31, 2020 | $ | (525) | | $ | (526) | | (2) | | | | |
| | | | | | | |
| | | | | | | |
| For the three months ended March 31, 2021 | | | | | | | $ | 262 | |
| For the three months ended March 31, 2020 | | | | | | | $ | (257) | |
| |
(1) | Changes during the nine months ended September 30, 2017 consisted of changes in fair value of $(0.5) million (effective portion) and amortization of accumulated other comprehensive income prior to de-designation of $0.7 million. |
| |
(2) | Consists of amortization of accumulated other comprehensive income prior to de-designation of $0.1 million. |
| |
(3) | Consists of amortization of accumulated other comprehensive income prior to de-designation of $0.7 million and removal of the LIBOR floor of approximately $(0.3) million. |
(1)Changes during the three months ended March 31, 2021, on a pre-tax basis, consisted of changes in fair value of $0.3 million. (2)Changes during the year ended December 31, 2020, on a pre-tax basis, consisted of changes in fair value of $(1.4) million.
9. INCOME TAXES
ESH REIT has elected to be taxed as and expects to continue to qualify as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"(“the Code”). A REIT is a legal entity that holds real estate assets and is generally not subject to federal and state income taxes. In order to maintain qualification as a REIT, ESH REIT is required to distribute at least 90% of its taxable income, excluding net capital gain, to its shareholders each year. In addition, ESH REIT must meet a number of complex organizational and operational requirements. If ESH REIT were to fail to qualify as a REIT in any taxable year, it would be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and generally would be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which it lost its REIT qualification. Even in qualifying as a REIT, ESH REIT may be subject to state and local taxes in certain jurisdictions, and is subject to federal income and excise taxes on undistributed income.
ESH REIT intends to distribute its taxable income to the extent necessary to optimize its tax efficiency including, but not limited to, maintaining its REIT status, while retaining sufficient capital for its ongoing needs. Accordingly,Even in
qualifying as a REIT, ESH REIT expectsmay be subject to distribute approximately 100% of its taxablestate and local taxes in certain jurisdictions and is subject to federal income for the foreseeable future.and excise taxes on undistributed income.
ESH REIT recorded a provision for state and foreign income taxes of approximately $0.2less than $0.1 million, an effective tax rate of 0.1%, for each of the three months ended September 30, 2017, an effective rate of approximately 0.7%, as compared with a provision of approximately $0.7 million for the three months ended September 30, 2016, an effective rate of approximately 2.8%.March 31, 2021 and 2020. ESH REIT recorded a provision for state and foreign incomes taxes of approximately $0.4 million for the nine months ended September 30, 2017, an effective rate of approximately 5.4%, as compared with a benefit of approximately $3.1 million for the nine months ended September 30, 2016, an effective rate of approximately (18.5)%. ESH REIT’s effectiveREIT's tax rate differs from the federal statutory rate of 35% primarily21% due to ESH REIT’sits status as a REIT under the provisions of the Code. During the three months ended September 30, 2016, ESH REIT recognized a discrete provision to return adjustment of approximately $0.5 million. During the nine months ended September 30, 2016, ESH REIT recognized a benefit of approximately $0.8 million related to current state and foreign payable adjustments and a benefit of approximately $2.3 million with respect to the reversal of net deferred tax liabilities which related to the previously estimated 5% of taxable income expected to be retained by ESH REIT under its prior 95% distribution policy, which was changed during the three months ended March 31, 2016.
ESH REIT’s income tax returns for the years 20132017 to present are subject to examination by the Internal Revenue Service and other taxing authorities. As of March 31, 2021, a subsidiary of ESH REIT was under examination by the Canadian Revenue Agency for the tax years 2014 through 2017. As this audit is still in process, the timing of the resolution and any payments that may be required cannot be determined at this time. ESH REIT believes that, to the extent a liability may exist, it is not material as of March 31, 2021.
| |
9. | RELATED PARTY TRANSACTIONS |
10. RELATED PARTY TRANSACTIONS
Revenues and Overhead Expenses
Leases and Rental Revenues—For the periodAll revenues are generated as a result of, and earned from, May 1, 2017 through September 30, 2017, ESH REIT’s revenues were derived from three leases. Prior to the sale of its Canadian hotels in May 2017, ESH REIT's revenues were derived from four leases.3 operating leases with related parties. The counterparty to each lease agreement is a subsidiary of the Corporation. Fixed and variable rental revenues are recognized on a straight-line basis. Forfor the three months ended September 30, 2017March 31, 2021 and 2016,2020 are as follows (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
| Fixed rental revenues | | | | | $ | 120,392 | | | $ | 119,190 | |
Variable rental revenues(1) | | | | | 0 | | | 0 | |
_________________________________
(1)Regardless of whether cash rental payments are received, ESH REIT recognizedonly recognizes revenue when a lessee’s revenue exceeds specific thresholds stated in the lease.
Each lease agreement has a five-year term that expires in October 2023 and contains an automatic five-year renewal, unless lessee provides notice that it will not renew no later than thirty months prior to expiration. Upon renewal, minimum and percentage rents will be adjusted to reflect then-current market terms. Future fixed rental revenues ofpayments to be received under current remaining noncancellable lease terms are as follows (in thousands):
| | | | | |
Years Ending December 31, | |
| Remainder of 2021 | $ | 362,564 | |
| 2022 | 496,448 | |
| 2023 | 424,031 | |
| |
| |
| |
| Total | $ | 1,283,043 | |
approximately $114.7 million and $116.4 million, respectively. For the nine months ended September 30, 2017 and 2016, ESH REIT recognized fixed rental revenues of approximately $346.4 million and $348.9 million, respectively. Due to the fact that percentage rental revenue thresholds specified in the leases were achieved during the second and third quarters of 2017 and 2016, ESH REIT recognized approximately $28.7 million and $36.8 million of percentage rental revenues during the three months ended September 30, 2017 and 2016, respectively, and approximately $28.9 million and $37.0 million during the nine months ended September 30, 2017 and 2016, respectively.
Overhead Expenses—ESA Management LLC, a wholly-owned subsidiary of theThe Corporation incurs costs under a services agreement withbetween the Corporation and ESH REIT for certain overhead services performed on the entities'each entities’ behalf. The services relate to executive management, accounting, financial analysis, training and technology. For the three months ended September 30, 2017March 31, 2021 and 2016,2020, ESH REIT incurred approximately $2.4$2.5 million and $2.1$2.9 million, respectively, related to this agreement and for the nine months ended September 30, 2017 and 2016, ESH REIT incurred approximately $7.4 million and $6.7 million, respectively, related to this agreement,these services, which is included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations. The expenses ESH REITExpenses incurred under this services agreement also include expenses related to applicablecertain employees that participate in the Corporation’s long-term incentive plan (as described in Note 11).plan. Such charges were approximately $0.6$0.2 million and $0.5 million for each of the three months ended September 30, 2017March 31, 2021 and 2016, respectively, and $1.6 million and $1.4 million for the nine months ended September 30, 2017 and 2016, respectively.2020.
Debt and EquityCapital Transactions
Share Repurchases—DuringCorporation Intercompany Facility—In July 2020, the nine months ended September 30, 2017,Corporation, as borrower, and ESH REIT, repurchasedas lender, entered into an unsecured credit facility (the “Corporation Intercompany Facility”). Under the Corporation Intercompany Facility, the Corporation may borrow up to $150.0 million. Loans under the facility bear interest at an annual rate of 4.5%. In addition to paying interest on outstanding principal, the Corporation is required to pay a commitment fee to ESH REIT of 0.25% on the unutilized facility balance. There is no scheduled amortization under the facility and retired 2.0 million Class B common shares from the Selling Stockholders for approximately $12.2 million. These shares were purchased in connection withfacility matures on July 2, 2025. Obligations under the secondary offerings consummated inCorporation Intercompany Facility and guarantees thereof are unsecured and fully subordinated to the first and second quarters of 2017 and pursuant to, and counted toward, the combined Paired Share repurchase program.
Senior Notes Due 2025—In March 2016, in connection with ESH REIT's $800.0 million issuance of its 2025 Notes discussed in Note 6, an affiliate of oneobligations of the Former Sponsors acted as an initial purchaser and purchased and resold $24.0 millionCorporation under its revolving credit facility. The Corporation has the option to prepay outstanding balances under the facility without penalty. As of March 31, 2021, the 2025 Notes. As such,outstanding balance under the affiliate of one of the Former Sponsors earned approximately $0.4 million in fees related to the transaction duringfacility was $0. For the three
months ended March 31, 2016.2021, ESH REIT recognized interest income of $0.1 million related to the unused facility balance (see Note 7).
UnsecuredESH REIT Intercompany Facility—Facility—As of September 30, 2017, theMarch 31, 2021 and December 31, 2020, there were 0 outstanding balancebalances owed by ESH REIT to the Corporation under the UnsecuredESH REIT Intercompany Facility, was $50.0 million.and ESH REIT incurred 0 interest expense during each of the three months ended March 31, 2021 and 2020 related to the ESH REIT Intercompany Facility. ESH REIT is able to increase its borrowingsborrow under the UnsecuredESH REIT Intercompany Facility to an amount of up to $300.0 million, plus additional amounts, in each case subject to certain conditions (see Note 6)7).
Distributions—During the three and nine months ended September 30, 2017, ESH REIT incurred approximately $0.6 million and $1.9 million, respectively, in interest expense related to the Unsecured Intercompany Facility.
Distributions—The Corporation owns all of the Class A common stock of ESH REIT, which represents approximately 57% of the outstanding shares of common stock of ESH REIT. During the three and nine months ended September 30, 2017,March 31, 2021, ESH REIT paid distributions of approximately $35.1$110.2 million and $107.7 million, respectively, to the Corporation in respect of the Class A common stock of ESH REIT. During the three and nine months ended September 30, 2016, ESH REITThe distributions paid distributions of approximately $25.0included an $87.7 million and $147.8 million (of which approximately $47.6 million had been declareddistribution that as of December 31, 2015), respectively,2020, was declared and payable to the Corporation and was included in respectDue to Extended Stay America, Inc. on the condensed consolidated balance sheet as of the Class A common stock of ESH REIT.December 31, 2020.
Issuance of Common Stock—In September 2017,During each of the three months ended March 31, 2021 and 2020, ESH REIT issued and was compensated approximately $0.2$1.0 million and $0.7 million, respectively, for approximately 26,000the issuance of 0.2 million shares of Class B common stock, each of which was attached to a share of Corporation common stock to form a Paired Share, used to settle vested restricted stock units. InRSUs.
As of March 2017,31, 2021, the Corporation has granted a total of 1.4 million RSUs whereby, as a counterparty to these outstanding RSUs, ESH REIT issuedis expected to issue and wasbe compensated approximately $1.7in cash for 1.4 million for approximately 283,000 shares of Class B common stock each of which was attached to a share of Corporation common stock to form a Paired Share, used to settle vested restricted stock units. In September 2016, ESH REIT issued approximately 25,000 shares of Class B common stock, each of which was attached to a share of Corporation common stock to form a Paired Share, used to settle vested restricted stock units. ESH REIT was compensated approximately $0.2 million for the issuance of these shares in the fourth quarter of 2016. In March 2016, ESH REIT issuedfuture periods, assuming market-based awards vest at 100% and was compensated approximately $1.1 million for approximately 199,000 shares of Class B common stock, each of which was attached to a share of Corporation common stock to form a Paired Share, used to settle vested restricted stock units.
no forfeitures.
Related Party Transaction Balances
Related party transaction balances as of September 30, 2017March 31, 2021 and December 31, 2016,2020, include the following (in thousands):
| | | | September 30,
2017 | | December 31,
2016 | | March 31,
2021 | | December 31,
2020 |
| Leases: | | | | Leases: | | | |
Rents receivable(1) | $ | 21,993 |
| | $ | 2,609 |
| Rents receivable(1) | $ | 11,108 | | | $ | 3,941 | |
Deferred rents receivable(2) | $ | 28,192 |
| | $ | 40,259 |
| Deferred rents receivable(2) | $ | 38,536 | | | $ | 39,135 | |
Unearned rental revenues(1) | $ | (192,124 | ) | | $ | (39,898 | ) | Unearned rental revenues(1) | $ | (23,743) | | | $ | 0 | |
| | | | | |
| Debt: | | | | |
Loan payable (Unsecured Intercompany Facility)(3) | $ | (50,000 | ) | | $ | (50,000 | ) | |
| | | | | |
| Working capital and other: | | | | Working capital and other: | |
Ordinary working capital(4) | $ | (10,367 | ) | | $ | (12,566 | ) | |
Equity awards receivable(5) | 13 |
| | 958 |
| |
Total working capital and other(6) | $ | (10,354 | ) | | $ | (11,608 | ) | |
Ordinary working capital(3) | | Ordinary working capital(3) | $ | (5,640) | | | $ | (5,806) | |
Equity awards receivable(4) | | Equity awards receivable(4) | 235 | | | 688 | |
Distribution payable (5) | | Distribution payable (5) | 0 | | | (87,673) | |
Total working capital and other, net(6) | | Total working capital and other, net(6) | $ | (5,405) | | | $ | (92,791) | |
______________________
| |
(1) | Fixed minimum rents are due one-month in advance. Percentage rents are due one-month in arrears. Rents receivable relate to September 2017 and December 2016 percentage rent, respectively. As of September 30, 2017, unearned rental revenues consisted of percentage rents of approximately $152.7 million and fixed minimum rents of approximately $39.4 million. As of December 31, 2016, unearned rental revenues consisted of fixed minimum rents of approximately $39.9 million. |
| |
(2) | Represents rental revenues recognized in excess of cash rents received. Amount will decrease over lease terms to zero. |
| |
(3) | The Unsecured Intercompany Facility bears interest at 5.0% per annum. ESH REIT is able to increase its borrowings under the Unsecured Intercompany Facility to an amount up to $300 million, plus additional amounts, in each case subject to certain conditions (see Note 6). |
| |
(4) | Represents disbursements and/or receipts made by the Corporation or ESH REIT on the other entity's behalf. Includes overhead costs incurred by the Corporation on ESH REIT's behalf. |
| |
(5) | Represents amounts related to restricted stock units not yet settled or issued. |
| |
(6) | Outstanding balances are typically repaid within 30 days. |
(1)Rents receivable relate to percentage rents. As of March 31, 2021 and December 31, 2020, unearned rental revenues related to percentage rent. | |
10. | COMMITMENTS AND CONTINGENCIES |
(2)Revenues recognized in excess of cash rents received.
(3)Disbursements and/or receipts made by the Corporation or ESH REIT on the other entity’s behalf and amounts payable/receivable for certain transactions between the Corporation and ESH REIT. Includes overhead costs incurred by the Corporation on ESH REIT’s behalf.
(4)Amounts related to restricted stock units not yet settled or issued.
(5)Distribution declared in December 2020 and paid in January 2021.
(6)Outstanding balances are typically repaid within 30 days.
11. COMMITMENTS AND CONTINGENCIES
Lease Commitments—ESH REIT is a tenant under long-term ground leases at four5 of its hotel properties. The initial termsNaN of thethese leases are operating leases and 2 are finance leases. The ground lease agreements terminate at various dates between 20212023 and 2096 and three leasesseveral of the agreements include multiple renewal options for generally five or 10ten year periods. Rent expense onAs ESH REIT is reasonably certain that it will exercise the options to extend its ground leases, is recognized on a straight-line basisfixed payments associated with the extensions are included in the measurement of related right-of-use assets and was approximately $0.4 million for each of the three months ended September 30, 2017 and 2016, and approximately $1.1 million for each of the nine months ended September 30, 2017 and 2016. Ground lease expense isliabilities. Additionally ESH REIT leases certain technology equipment located at its hotel sites under finance leases.
Operating lease costs related to ground leases are included in hotel operating expenses in the accompanying unaudited condensed consolidated statements of operations. Finance lease interest costs are included in interest expense, net in the condensed consolidated statements of operations (see Note 7) or, when pertaining to assets under development, are capitalized and included in property
and equipment, net on the condensed consolidated balance sheets (see Note 5). ESH REIT has a commitment to make quarterly payments in lieu of taxes to the owner of the land on which one of its properties is located. The initial term of the agreement terminates in 2031. The cost related to this commitment was approximately $0.1 million for each ofno variable lease costs or short-term leases.
For the three months ended September 30, 2017March 31, 2021 and 2016, respectively,2020, components of ESH REIT’s total lease costs are as follows (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
| Operating lease costs | | | | | $ | 326 | | | $ | 326 | |
| Finance lease costs | | | | | 125 | | | 61 | |
| Total lease costs | | | | | $ | 451 | | | $ | 387 | |
ESH REIT’s right-of-use assets and approximately $0.2 million for each of the nine months ended September 30, 2017 and 2016, respectively, and is includedlease liabilities are as follows (in thousands):
| | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 | |
| Right-of-use assets: | | | | |
Operating(1) | $ | 1,335 | | | $ | 1,388 | | |
Finance(2) | 4,323 | | | 4,354 | | |
| | | | |
| Lease liabilities: | | | | |
Operating(3) | 8,989 | | | 9,036 | | |
| Finance | 3,611 | | | 3,668 | | |
(1)Included in hotel operating expenses inother assets on the accompanying unaudited condensed consolidated statementsbalance sheets.
(2)Included in property and equipment, net on the accompanying condensed consolidated balance sheets.
(3)Included in accounts payable and accrued liabilities on the accompanying condensed consolidated balance sheets.
Maturities of operations.lease liabilities as of March 31, 2021, are as follows (in thousands):
| | | | | | | | | | | | | | | |
| Years Ending December 31, | | Operating Leases | | Finance Leases | |
| Remainder of 2021 | | $ | 588 | | | $ | 297 | | |
| 2022 | | 806 | | | 853 | | |
| 2023 | | 552 | | | 400 | | |
| 2024 | | 503 | | | 402 | | |
| 2025 | | 503 | | | 429 | | |
| 2026 | | 503 | | | 439 | | |
| Thereafter | | 76,588 | | | 2,232 | | |
| Total | | $ | 80,043 | | | $ | 5,052 | | |
| | | | | |
| Total discounted lease liability | | $ | 8,989 | | | $ | 3,611 | | |
| Difference between undiscounted cash flows and discounted cash flows | | $ | 71,054 | | | $ | 1,441 | | |
| | | | | |
| Weighted-average remaining lease term | | 60 years | | 10 years | |
| Weighted-average discount rate | | 6.6 | % | | 6.6 | % | |
ESH REIT’s leases do not contain residual value guarantees and do not contain restrictions with respect to incurring additional financial obligations or paying dividends. As of March 31, 2021, ESH REIT does not have any material leases that have not yet commenced.
Legal Contingencies—ESH REIT is not a party to any litigation or claims, other than routine matters arising in the ordinary course of business that are incidental to the operation of the business of ESH REIT.its business. ESH REIT believes that the results of all
litigation and claims, and litigation, individually or in the aggregate, will not have a material adverse effect on its business or unaudited condensed consolidated financial statements.
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11. | EQUITY-BASED COMPENSATION |
The Corporation and ESH REIT each maintain a long-term incentive plan (“LTIP”), as amended and restated in 2015, approved by their shareholders. Under the LTIPs, the Corporation and ESH REIT may issue to eligible employeesstatements, its business, results of operations or directors restricted stock awards ("RSAs"), restricted stock units ("RSUs") or other equity-based awards, in respect of Paired Shares, with service, performance or market vesting conditions. The aggregate number of Paired Shares that may be the subject of awards under the LTIPs shall not exceed 8.0 million, of which no more than 4.0 million may be granted as incentive stock options. Each of the Corporation’s and ESH REIT’s LTIP has a share reserve of an equivalent number of shares of Corporation
common stock and ESH REIT Class B common stock. As of September 30, 2017, approximately 3.8 million Paired Shares were available for future issuance under the LTIPs.
Equity-based compensation expense is recognized by amortizing the grant-date fair value of the equity-based awards, less estimated forfeitures, on a straight-line basis over the requisite service period of each award. The grant-date fair value of equity-based awards is based on the closing price of a Paired Share on the date of grant. A portion of the grant-date fair value of all equity-based awards is allocated to a share of Corporation common stock and a portion is allocated to a share of ESH REIT Class B common stock. Expense related to the portion of the grant-date fair value with respect to a share of Corporation common stock is recorded as a payable due to the Corporation. Expense related to the portion of the grant-date fair value with respect to a share of ESH REIT Class B common stock is recorded as an increase to additional paid in capital. During the three and nine months ended September 30, 2017, ESH REIT incurred approximately $0.1 million and $0.3 million, respectively, of equity-based compensation expense related to its equity-based awards. During the three and nine months ended September 30, 2016, ESH REIT incurred approximately $0.6 million and $1.5 million, respectively, of equity-based compensation expense related to its equity-based awards.
As of September 30, 2017, there was approximately $0.4 million of unrecognized compensation expense related to outstanding equity-based awards, which is expected to be recognized subsequent to September 30, 2017 over a weighted-average period of approximately 0.9 years. Total unrecognized compensation expense will be adjusted for actual forfeitures.
ESH REIT will have to pay more or less for a share of the Corporation common stock than it would have otherwise paid at the time of grant as the result of regular market changes in the value of a Paired Share between the time of grant and the time of settlement. An increase in the value allocated to a share of Corporation common stock due to market changes in the value of a Paired Share between the time of grant and the time of settlement is recorded as a distribution to the Corporation. A decrease in the value allocated to a share of Corporation common stock due to market changes in the value of a Paired Share between the time of grant and the time of settlement is recorded as additional paid in capital from the Corporation.
The Corporation accounts for awards issued under its LTIP in a manner similar to ESH REIT. For all LTIP awards granted by the Corporation, ESH REIT will receive compensation for the fair value of the Class B shares on the date of settlement of such Class B shares by ESH REIT. As of September 30, 2017, the Corporation has granted a total of approximately 3.2 million service-based, performance-based and market-based RSUs, of which approximately 1.3 million RSUs were either forfeited or settled. As a counterparty to these outstanding RSUs, ESH REIT is expected to issue and be compensated in cash for approximately 1.9 million shares of Class B common stock of ESH REIT in future periods, assuming performance-based and market-based awards vest at 100% and no forfeitures.
RSA/RSU activity during the nine months ended September 30, 2017, was as follows:financial condition.
|
| | | | | | |
| | Number of RSAs/RSUs (in thousands) | | Weighted- Average Grant-Date Fair Value |
| Outstanding at January 1, 2017 | 28 |
| | $ | 14.57 |
|
| Granted | 26 |
| | $ | 17.56 |
|
| Settled | (15 | ) | | $ | 13.66 |
|
| Forfeited | — |
| | $ | — |
|
| Outstanding at September 30, 2017 | 39 |
| | $ | 16.91 |
|
| Vested at September 30, 2017 | — |
| | $ | — |
|
| Nonvested at September 30, 2017 | 39 |
| | $ | 16.91 |
|
On November 7, 2017, the Board of Directors of ESH REIT declared a cash distribution of $0.10 per share for the third quarter of 2017 on its Class A and Class B common stock. The distribution is payable on December 5, 2017 to shareholders of record as of November 21, 2017.
In October and November 2017, ESH REIT executed two purchase and sale agreements to divest twenty-six Extended Stay America-branded hotels for approximately $128.5 million, subject to adjustment. These transactions are expected to close in 2018 upon and subject to the completion of customary due diligence and the satisfaction or waiver of certain closing conditions.
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements of Extended Stay America, Inc. (the "Corporation") and ESH Hospitality, Inc. ("ESH REIT"), included in Item 1 inof this combined quarterly report on Form 10-Q.
Background and Certain Defined Terms
The following defined terms relate to theour corporate structure of the Corporation and ESH REIT, company-wide initiatives and/or lodging industry operating metrics. Unless otherwise indicated or the context requires:
•ADR or average daily rate means hotel room revenues divided by total number of rooms sold in a given period.
•Company means the Corporation (as defined below), ESH REIT (as defined below) and their subsidiaries considered as a single enterprise.
•Corporation means Extended Stay America, Inc., a Delaware corporation, and its subsidiaries (excluding ESH REIT and its subsidiaries), which include the Operating Lessees (as defined below), ESH Strategies (as defined below) and ESA Management (as defined below). The Corporation controls ESH REIT through its ownership of ESH REIT’s Class A common stock, which currently represents approximately 57%58% of the outstanding common stock of ESH REIT.
•ESA Management means ESA Management LLC, a Delaware limited liability company and wholly-owned subsidiary of the Corporation, and its subsidiaries, which manage theExtended Stay America-branded hotel properties on behalf of the Operating Lessees.
Lessees and third parties.•ESH REIT means ESH Hospitality, Inc., a Delaware corporation that has elected to be taxed as a real estate investment trust (“REIT”), and its subsidiaries. ESH REIT, is a majority-owned subsidiary of the Corporation, which leases all of its hotel properties to the Operating Lessees.
•ESH Strategies means ESH Hospitality Strategies LLC, a Delaware limited liability company and wholly-owned subsidiary of the Corporation, and one of its subsidiaries, ESH Strategies Branding LLC, a Delaware limited liability company, which ownowns the intellectual property related to our business.
businesses and licenses it to the Operating Lessees and ESH Strategies Franchise (as defined below).•ESH Strategies Franchise means ESH Strategies Franchise LLC, a Delaware limited liability company and wholly-owned subsidiary of ESH Strategies, that licenses the Extended Stay America brand name from ESH Strategies and in-turn relicenses it to third-party franchisees.
•Extended stay market means the market of hotels with a fully equipped kitchenette in each guest room, which accept reservations and do not require a lease, as defined by The Highland Group.
Former Sponsors means, collectively, Centerbridge Partners, L.P., Paulson & Co. Inc. and The Blackstone Group L.P. and their funds or affiliates. After giving effect to the 2017 Secondary Offerings, funds or affiliates of Centerbridge Partners, L.P. and The Blackstone Group L.P. no longer own any Paired Shares and funds or affiliates of Paulson & Co. Inc. (individually referred to as a Former Sponsor) own approximately 1.8 million Paired Shares, which represents approximately 0.9% of the Company's issued and outstanding Paired Shares as of September 30, 2017.
Hotel renovation means, when used in connection with our Company-wide initiative to renovate our hotel properties that were completed during the second quarter of 2017, upgrades that typically include remodeling of common areas, new paint, carpet, signage, tile or vinyl flooring and counters in bathrooms and kitchens, as well as the refurbishment of furniture, replacement of aged mattresses and installation of new flat screen televisions, artwork, lighting and bedspreads.
•Mid-price extended stay segment means the segment of the extended stay market that generally operates at a daily rate between $55 and $105.
•Occupancy or occupancy rate means the total number of rooms sold in a given period divided by the total number of rooms available during that period.
•Operating Lessees means the several wholly-owned subsidiaries of the Corporation that each lease a group of hotels from subsidiaries of ESH REIT and as stipulated under the respective lease agreement, operate theCompany-owned hotels.
•Paired Share means one share of common stock, par value $0.01 per share, of the Corporation together with one share of Class B common stock, par value $0.01 per share, of ESH REIT, which are attached and trade as a single unit.
•RevPAR or Revenue Perper Available Room means the product of average daily room rate charged and the average daily occupancy achieved for a hotel or group of hotels in a given period. RevPAR does not include ancillary revenues, such as food and beverage revenues, or parking, pet, telephoneWiFi upgrade or other guest service revenues.
For ease of presentation:
When we refer to our ownership of hotel properties, we•System-wide hotels means all hotels that are referring tooperated under the hotel propertiesExtended Stay America brand and that are owned, by subsidiaries of ESH REIT.
When we refer to the management and operation of our hotels, we are referring to the management of hotels by ESA Management and the operation of hotelsfranchised and/or managed by the Operating Lessees.Company. As of March 31, 2021, there were 651 system-wide hotels.
When we refer to our•Third-party intermediaries are unaffiliated distribution channels that sell hotel inventory, including ours, for a fee on the internet. Third-party intermediaries currently include Expedia.com and Booking.com (and their respective affiliated brands we are referring to intellectual property related to our business owned by ESH Strategies.and distribution channels, such as Priceline, Hotwire, Kayak and Trivago) and may in the future include search engines such as Google and alternative lodging suppliers such as Airbnb and HomeAway.
When we refer to our management team, executives or officers, we are referring to the management team, executives and officers of the Corporation and ESH REIT.
The following discussion may contain forward-looking statements regarding our ability to meet our debt service obligations, future capital expenditures (including future hotel renovation programs), distribution policies, growth opportunities, anticipated benefits or use of proceeds from any dispositions, plans, objectives, goals, beliefs, business strategies, future events, business conditions, results of operations, financial position and our business outlook, business trends, among other topics.statements. Actual results may differ materially from those suggested by ourany forward-looking statements for various reasons, including those discussed in “Risk Factors” in our combined annual report onthe 2020 Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on February 28, 2017,in “Item 1A. Risk Factors” contained in this quarterly report, and “Cautionary Note Regarding Forward-Looking
Statements” contained herein. Those sections expressly qualify any subsequent oral and written forward-looking statements attributable to us or persons acting on our behalf.
We present below separate results of operations for each of the Company and ESH REIT. Our assets and operations, other than ownership of our real estate assets, (whichwhich are owned by ESH REIT),REIT, are held directly by the Corporation and operated as an integrated enterprise.Corporation. The Corporation owns all of the issued and outstanding shares of Class A common stock of ESH REIT, representing approximately 57%58% of the outstanding common stock of ESH REIT. Due to its controlling interest in ESH REIT, the Corporation consolidates the financial position, results of operations, comprehensive income and cash flows of ESH REIT.
Overview
We are the largest integrated owner/operator of company-branded hotels in North America. Our business operates in the extended stay segment of the lodging industry, and as of September 30, 2017, we owned and operated 625 hotel properties comprising approximately 68,800 rooms located in 44 states across the United States. We currently operate all of our hotels under our core brand, Extended Stay America, which serves the mid-price extended stay segment, and accounts for approximately 46% of the segment by number of rooms in the United States.
Our extended stayAmerica-branded hotels are designed to provide an affordable and attractive alternative to traditional lodging or apartment accommodations and are targeted toward self-sufficient, value-conscious guests. Our hotels feature fully-furnished rooms with in-room kitchens, complimentary grab-and-go breakfast, free WiFi, flat screen TVs and on-site guest laundry. Our guests who need lodging for a week or longer. Guests include business travelers, leisure travelers, professionals on temporary work or training assignments, persons relocating, the temporarily displaced, orthose purchasing a home and anyone else in need of temporary housing.
We are the largest integrated owner/operator of company-branded hotels in North America. Our guests generally rent accommodationsbusiness operates in the extended-stay segment of the lodging industry, and we have the following reportable operating segments:
•Owned Hotels—Earnings are derived from the operation of Company-owned hotel properties and include room and other hotel revenues, which accounted for 98.8% of total revenues for the three months ended March 31, 2021.
•Franchise and management—Earnings are derived from fees under various franchise and, in certain cases, management agreements with third parties, which accounted for 1.2% of total revenues for the three months ended March 31, 2021. These contracts provide us the ability to earn compensation for licensing the Extended Stay America brand name, providing access to shared system-wide platforms and/or management services.
We are also the only major hotel company focused solely on the extended stay segment. We target our product and service offering to an underserved customer base within the lodging industry and the extended stay segment. In addition to owning and operating hotels, we have increased and seek to continue to increase our fee-based income stream, which is driven by franchising our brand to third parties. Our core operations include intense focus on the delivery of a weeklyconsistent, quality guest experience; the efficiency of our scalable marketing and distribution platforms; growing the value of our brand, in-part through rebranding our hotels to the Extended Stay America Suites brand or longer term basis. For theExtended Stay America Premier Suites step-up brand, each of which we expect will operate under the Extended Stay America umbrella brand; and maximizing the value of our owned real estate through investment in our hotels. We intend to continue to (i) maximize and grow our core operations, (ii) create and curate value within our real estate portfolio, (iii) increase the number of franchised hotels under the Extended Stay America umbrella brand and (iv) optimize capital deployment on behalf of key stakeholders.
As of March 31, 2021, we owned and operated 563 hotel properties in 40 U.S. states, consisting of approximately 62,700 rooms, and franchised 88 hotel properties to third parties, consisting of approximately 9,000 rooms. All 651 system-wide hotels operate under the Extended Stay America brand, which serves the mid-price extended stay segment and accounts for approximately 43% of the segment by number of rooms in the United States.
RevPAR for owned hotels was $44.60 and $45.23 for the three months ended March 31, 2021 and 2020, respectively. RevPAR for comparable system-wide hotels, which includes hotels owned and franchised for the full three months ended March 31, 2021 and 2020, was $43.56 and $44.30 for the three months ended March 31, 2021 and 2020, respectively.
During the trailing twelve months ended September 30, 2017, approximately 37.0%March 31, 2021, 26.1%, 22.0%21.4% and 41.0%52.5% of our totalowned hotel room revenues were derived from guests with stays from 1-6 nights, from 7-29 nights and for 30 or more nights, respectively.
We use a central reservation system to provide access to our hotel inventory through a wide variety of channels, including property-direct, our central call center, our desktop and mobile websites, travel agency global distribution systems and wholesale and online travel agents. We outsource our reservation system, call center and management of our website. For the trailing twelve months ended September 30, 2017, approximately 31.6%March 31, 2021, 26.9% of our totalowned hotel room revenues waswere derived from property-direct reservations, approximately 24.5% was31.8% were derived from our central call center, approximately 16.5% was21.5% were derived from our own proprietary website, approximately 23.0% was17.5% were derived from online travel agentsthird party intermediaries and approximately 4.4% was2.3% were derived from travel agencyagencies using global distribution systems.
We seekFranchisees typically pay an initial application fee, along with monthly royalty and system service fees for the licensing of our brand and the use of our shared system-wide platforms, such as marketing, technology infrastructure, central reservations, national sales and revenue management systems. The standard term for our franchise agreements is generally 20 years.
Recent Updates
Pending Merger
On March 14, 2021, the Corporation and ESH REIT entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Eagle Parent Holdings L.P. (“Parent”), a joint venture of affiliates of Blackstone Real Estate Partners IX L.P. and Starwood Distressed Opportunity Fund XII Global, L.P. The Merger Agreement provides that an acquisition subsidiary of Parent will merge with and into the Corporation (the “Corporation Merger”), with the Corporation surviving the Corporation Merger, and an indirect acquisition subsidiary of Parent will merge with and into ESH REIT (the “ESH Merger” and, together with the Corporation Merger, the “Mergers”), with ESH REIT surviving the ESH Merger.
Upon completion of the Mergers, holders of our paired shares will be entitled to drivereceive $19.50, subject to adjustments as described in the definitive joint proxy statement filed with the SEC on April 26, 2021 (the “joint proxy statement”), in exchange for each Paired Share, except for certain excluded shares as described in the joint proxy statement.
The management of the Company recommended the Corporation Merger to the Corporation’s board of directors (the “Corporation Board”) and the ESH Merger to ESH REIT’s board of directors (the “ESH Board”), and the Corporation Board and ESH Board approved the Mergers, based on their assessment that the certainty of $19.50 per Paired Share in cash today was superior to the risk-adjusted present value associated with management’s execution of its business plan for the Company. Moreover, the $19.50 per Paired Share price represents a 15.1% premium to the $16.94 closing price for our competitive advantage by becomingPaired Shares on the last trading day prior to the execution of the merger agreement. The foregoing closing price was near a dominant brand with national distribution. We focus on continually improving our product and service, improving marketing efforts and driving ADR.52-week high for the Paired Shares. In addition, the $19.50 price reflects a premium of 23%, 28%, and 44% to owningthe 30 trading day, 3-month and operating hotels with great locations, affordable6-month weighted average prices, respectively, for the Paired Shares prior to the execution of the Merger Agreement.
The holders of the Paired Shares will be asked, at a special meeting of Corporation stockholders, to vote their Corporation common stock on, among other things, the adoption of the Merger Agreement, and relevant amenities, we intendwill be asked, at a special meeting of ESH REIT stockholders, to build and franchise hotels with these same characteristics. A key componentvote their ESH REIT class B stock on, among other things, the adoption of our strategy includes increasing the total number of Extended Stay AmericaMerger Agreement.
branded hotels, which we expect will include owned and franchised hotel properties. Combined with our current business model, which we believe maximizes cost efficiency, and our efficient capital structure, our primary objectiveThe transaction is expected to drive superior cash flow while ultimately seeking to return value to our shareholders.
Duringclose during the second quarter of 2017,2021, subject to customary closing conditions, including approval by the Company’s shareholders and receipt of certain regulatory approvals. The Company, on the one hand, and Parent, on the other hand, may mutually agree to terminate and abandon the Merger Agreement at any time prior to the effective time, even after we completedhave obtained the requisite vote, and the Company, on the one hand, and Parent, on the other hand, may terminate the Merger Agreement under certain circumstances and such termination of the Merger Agreement may result in the payment of a hotel renovation program which begantermination fee by the Company, on the one hand, and Parent, on the other hand, as described in 2011 andthe joint proxy statement.
Further details of the Mergers are included in Note 1 to each of our 625 hotels. In order to achieve our strategic objectives, our current and future plans include some or all the following:
Performing future hotel renovations at our hotel properties;
Repurposing and/or rebuilding certaincondensed consolidated financial statements of our hotel properties;
Building new Extended Stay America, Inc. and ESH Hospitality, Inc., included in Item 1 of this combined quarterly report on Form 10-Q. The foregoing description of the Mergers and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by reference to, the full text of the Merger Agreement, which has been filed with the SEC as an exhibit to a Current Report on Form 8-K on March 16, 2021 and the joint proxy statement filed with the SEC on April 26, 2021.
During the three months ended March 31, 2021, the Company incurred $4.8 million of operating expenses in contemplation of the proposed transaction.
COVID-19 Pandemic
During the year ended December 31, 2020, primarily as a result of the COVID-19 pandemic, the Company experienced significant declines in RevPAR, net income, Adjusted EBITDA and cash flow from operations. As a result of the pandemic and its impact on our business, we have increased our focus on attracting guests staying for one week or longer. Additionally, we have implemented certain reductions to expenses in order to reduce costs and maintain liquidity. While the resulting impact of the pandemic remains uncertain, we believe our business model has been resilient in absorbing the impact of the COVID-19 pandemic as compared to the broader lodging industry.
We expect increases in RevPAR, net income, Adjusted EBITDA and cash flow from operations for the year ending December 31, 2021 compared to the year ended December 31, 2020, due to the negative impact the COVID-19 pandemic had on our 2020 operating results. The timing and extent of such increases are uncertain. For the month ended March 31, 2021, we experienced a year-over-year increase in Company-owned hotel properties which we expect to ownRevPAR for the first month since February 2020.
New Hotels
The table below summarizes owned, newly constructed hotel openings during the three months ended March 31, 2021 and operate;
Divesting certain of ourthe year ended December 31, 2020. All hotels to franchisees which we expect will remainwere opened under the Extended Stay America brand and for which we may perform management and/or other services;brand.
Converting existing hotels to the Extended Stay America brand, either as franchises or on our own balance sheet; | | | | | | | | | | | |
| Date | Location | Number of
Hotels | Number of
Rooms |
| March 2021 | Florida | 2 | 248 |
| December 2020 | Florida | 1 | 124 |
| November 2020 | Florida | 1 | 144 |
| August 2020 | Florida | 1 | 124 |
| June 2020 | Various | 2 | 248 |
| April 2020 | South Carolina | 1 | 120 |
| March 2020 | Florida | 1 | 120 |
Franchising newly constructed Extended Stay America branded hotel properties which we expect will be owned by franchisees and for which we may perform management and/or other services; and
Acquiring additional hotel properties and/or other lodging companies. Hotel Dispositions
In October 2016,March 2021, the Corporation and ESH REIT executed a purchase and sale agreement to divest three Extended Stay Canada-brandedCompany disposed of two hotels for 76.0located in Texas. Net proceeds totaled $21.9 million Canadian dollars. In March 2017, ESH REIT executed a purchase and sale agreement to divest one U.S.-based hotel for approximately $5.4 million. These transactions closed in May 2017 and the Corporation and ESH REIT recognizedCompany recorded a net lossgain on these sales duringsale of $12.0 million. In November 2020, the nine months ended September 30, 2017Company disposed of approximately $1.9a hotel located in California. Net proceeds totaled $63.6 million and $3.3 million, respectively. the Company recorded a gain on sale of $52.5 million.
Also in October 2016, ESH REIT executedHotel Pipeline
As of March 31, 2021, the Company had a purchase and sale agreement to divest one Extended Stay America-branded hotel for approximately $44.8 million, subject to adjustment. This transaction is expected to close upon and subject topipeline of 51 hotels, which consisted of the completion of customary due diligence and the satisfaction or waiver of certain closing conditions.following:
In October and November 2017, ESH REIT executed two purchase and sale agreements to divest twenty-six Extended Stay America-branded hotels for approximately $130.4 million, including approximately $1.9 million in initial franchise application fees, subject to adjustment. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Company-Owned Pipeline & Recently Opened Hotels as of March 31, 2021 |
| Under Option | Pre-Development | Under Construction | Total Pipeline | Opened YTD |
| # Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms |
| — | — | 4 | 504 | 2 | 248 | 6 | 752 | 2 | 248 |
| | | | | | | | | |
| Third-Party Pipeline & Recently Opened Hotels as of March 31, 2021 |
| Commitments | Applications | Executed | Total Pipeline | Opened YTD |
| # Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms |
| 21 | 2,604 | — | — | 24 | 2,893 | 45 | 5,497 | 3 | 291 |
| | | | | | | | | |
| | | | | | |
| Definitions | | |
| Under Option | Locations with a signed purchase and sale agreement | |
| Pre-Development | Land purchased, permitting and/or site work | |
| Under Construction | Hotel is under construction | |
| Commitments | Signed commitment to build or convert a certain number of hotels by a third party, generally associated with a prior portfolio sale | |
| Applications | Third party filed franchise application with deposit | |
| Executed | Franchise and development application approved, geography identified and deposits paid, various stages of pre-development and/or construction | |
| | |
The Company expects to manage twenty-fivedelay commencement of construction of four pre-development locations as a result of current market uncertainty. We also expect delays in certain third-party pipeline activity. The length of such delays and severity of the hotels. These transactions are expected to close in 2018 uponimpact on our business, financial position, results of operations and subject to the completion of customary due diligence and the satisfaction or waiver of certain closing conditions.liquidity, is highly uncertain.
Understanding Our Results of Operations—The Company
Revenues and Expenses. The Company’s revenues are derived from hotel ownership and operations. Hotel operating expenses account for the largest portion of the Company’s operating expenses and reflect ongoing expenses associated with the ownership and operation of our hotels.
The following table presents the components of the Company’s revenues as a percentage of our total revenues for the ninethree months ended September 30, 2017:
|
| | | | |
| Percentage of 2017 2021 Year to
Date Total Revenues |
• Room revenues. Room revenues relate to owned hotels and are driven primarily by ADR and occupancy. Pricing policy and customer mix are significant drivers of ADR. DueRoom revenues are presented and/or discussed with respect to our relatively high occupancy levels, our primary focus isowned hotels only as opposed to on increasing RevPAR by increasing ADR. For the nine months ended September 30, 2017, we experienced RevPAR growth of approximately 1.3% compared to the nine months ended September 30, 2016, mainly due to an increase in shorter-stay businessa system-wide basis. System-wide hotels include all owned and leisure guests, the collective impact of our recently completed hotel renovation program and focus on service excellence.franchised hotels. | 98.3%96.3% |
• Other hotel revenues. Other hotel revenues relate to owned hotels and include ancillary revenues such as laundry revenues, vending commissions, additional housekeeping fees, purchased WiFi upgrades, parking revenues and pet charges. Occupancy and customer mix, as well as the number and percentage of guests that have longer-term stays, have been historical drivers of our other hotel revenues. We experienced an increase in | 2.6% |
• Franchise and management fees. Franchise and management fees include royalty and other fees charged to third party hotel revenuesowners for use of approximately $1.9 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 due to increases in guest purchased Wifi upgradesour brand name and smoking, parking, and pet feehotel management services. The substantial majority of these fees are based on a percentage of hotel revenues. | 1.7%0.5% |
• Other revenues from franchised and managed properties. Other revenues from franchised and managed properties include the direct reimbursement of specific costs, such as on-site personnel, incremental reservation costs and other distribution costs incurred by us for which we are reimbursed on a dollar-for-dollar basis by third party hotel owners. Additionally, these revenues include fees charged, based on a percentage of revenue of the franchised hotel, as reimbursement for indirect costs incurred by us associated with certain shared system-wide platforms (i.e., system services), such as marketing, technology infrastructure, central reservations, national sales and revenue management systems. | 0.6% |
The following table presents the components of the Company’s operating expenses as a percentage of our total operating expenses for the ninethree months ended September 30, 2017:
|
| | | | |
| Percentage of 2017 2021 Year to
Date Total Operating Expenses |
• Hotel operating expenses. Hotel operating expenses relate to owned hotels and have both fixed and variable components. Operating expenses that are relatively fixed include personnel expense, real estate tax expense and property insurance premium expense.premiums. Occupancy is a key driver of expenses that have a high degree of variability, such as housekeeping services and amenity costs.services. Other variable expenses include marketing costs, reservation costs, property insurance claims expense and repairs and maintenance expense. We experienced a decrease in hotel operating expenses of approximately $1.8 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, mainly due to decreases in reservation costs, utilities expense, maintenance expense and amenity costs, partially offset by an increase in personnel costs and credit card disputes. | 62.2%64.4% |
• General and administrative expenses. General and administrative expenses include expenses associated with corporate overhead. These costsCosts consist primarily of compensation expense of our corporate staff, which includesincluding equity-based compensation and severance costs, and professional fees, including audit, tax legal and consulting fees.fees, legal fees and legal settlement costs. | 10.6% |
• Depreciation and amortization. Depreciation and amortization is a non-cash charge that relates primarily to the acquisition and related usage of hotels and otherrelated property and equipment, including capital expenditures incurred with respect to our recently completed hotel renovations.renovations and other capital expenditures. | 24.3%21.8% |
• Impairment of long-lived assets. Impairment of long-lived assets is a non-cash charge recognized when events and circumstances indicate that the carrying value of an individual asset, or group of assets, may not be recoverable.Merger transaction expenses. Merger transaction expenses include direct, incremental expenses incurred associated with our pending merger. | 2.9%2.1% |
• Other expenses from franchised and managed properties. Other expenses from franchised and managed properties include specific costs, such as on-site hotel personnel expense, incremental reservation costs and other distribution costs, incurred by us in the delivery of services for which we are reimbursed on a dollar-for-dollar basis. Additionally, these expenses include costs associated with shared system-wide platforms (i.e., system services), such as marketing, technology infrastructure, central reservations, national sales and revenue management systems for which we are reimbursed through system service (i.e., program) fees. | 1.1% |
Understanding Our Results of Operations—ESH REIT
Revenues. ESH REIT's sole source of revenues is lease rental revenues. ESH REIT’s rental revenues are generated from leasing its hotel properties.properties to subsidiaries of the Corporation. Rental revenues consist of fixed minimum rental payments recognized on a straight-line basis over the lease terms plus variable rental payments based on specified percentages of totalannual hotel revenues over designated thresholds. Although variable rental payments are received throughout the year, variable rental revenues are recognized in income when such amounts are fixed and determinable (i.e., only when percentage rental revenue thresholds have been achieved).
Expenses. The following table presents the components of ESH REIT’s operating expenses as a percentage of ESH REIT’s total operating expenses for the ninethree months ended September 30, 2017:
|
| | | | |
| Percentage of 2017 2021 Year to
Date Total Operating Expenses |
• Hotel operating expenses. ESH REIT’s hotel operating expenses include expenses directly related to hotel ownership, of the hotels, such as real estate tax expense, property insurance premiums and loss on disposal of assets and property insurance premium and claims expense.capital assets. | 26.1%28.1% |
• General and administrative expenses. General and administrative expenses include overhead expenses incurred directly by ESH REIT and certain administrative service costs reimbursed to ESA Management.the Corporation. | 4.7%5.2% |
• Depreciation.Depreciation is a non-cash charge that relatesand amortization. Depreciation and amortization relate primarily to the acquisition and related usage of hotels and otherrelated property and equipment, including capital expenditures incurred with respect to ESH REIT's recently completed hotel renovations.renovations and other capital expenditures. | 63.6% |
• Impairment of long-lived assets. Impairment of long-lived assets is a non-cash charge recognized when events and circumstances indicate that the carrying value of an individual asset or group of assets may not be recoverable.Merger transaction expenses. Merger transaction expenses include direct, incremental expenses incurred associated with our pending merger. | 5.6%3.1% |
| |
Results of Operations
Results of Operations discusses the Company’s and ESH REIT’s unaudited condensed consolidated financial statements, each of which have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”).GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those relating to property and equipment, goodwill, revenue recognition, income taxes, equity-based compensation and investments. We base our estimates and judgments on historical experience and various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions.
Thecondensed consolidated financial statements of the Company include the financial position, results of operations, comprehensive income, changes in equity and cash flows of the Corporation and its subsidiaries, including the Operating Lessees, ESH Strategies, ESA Management and ESH REIT. Third partyThird-party equity interests in ESH REIT, which consist primarily of the Class B common stock of ESH REIT and represent approximately 43%42% of ESH REIT’s total common equity, are not owned by the Corporation and therefore are presented as noncontrolling interests.
The condensed consolidated financial statements of ESH REIT include the financial position, results of operations, comprehensive income, changes in equity and cash flows of ESH REIT and its subsidiaries.
Results of Operations—The Company
As of March 31, 2021, the Company owned and operated 563 hotels, consisting of approximately 62,700 rooms, and franchised 88 hotels for third parties, consisting of approximately 9,000 rooms. As of March 31, 2020, the Company owned and operated 558 hotels, consisting of approximately 62,100 rooms, and franchised 74 hotels for third parties, consisting of approximately 7,600 rooms. See Notes 4 and 5to the condensed consolidated financial statements of Extended Stay America, Inc., included in Item 1 of this quarterly report on Form 10-Q,
Comparison of Three Months Ended September 30, 2017March 31, 2021 and September 30, 2016March 31, 2020
As of September 30, 2016, we owned and operated 629 hotels, consisting of approximately 69,400 rooms. In May 2017, we sold three Extended Stay Canada-branded hotels and one additional U.S.-based hotel. As a result, as of September 30, 2017, we owned and operated 625 hotels, consisting of approximately 68,800 rooms. The following table presents ourthe Company's consolidated results of operations for the three months ended September 30, 2017March 31, 2021 and 2016,2020, including the amount and percentage change in these results between the periods (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | | | |
| 2021 | | 2020 | | Change ($) | | Change (%) |
| Revenues: | | | | | | | |
| Room revenues | $ | 249,868 | | | $ | 254,464 | | | $ | (4,596) | | | (1.8)% |
| Other hotel revenues | 6,680 | | | 6,768 | | | (88) | | | (1.3)% |
| Franchise and management fees | 1,218 | | | 1,279 | | | (61) | | | (4.8)% |
| 257,766 | | | 262,511 | | | (4,745) | | | (1.8)% |
| Other revenues from franchised and managed properties | 1,805 | | | 3,790 | | | (1,985) | | | (52.4)% |
| Total revenues | 259,571 | | | 266,301 | | | (6,730) | | | (2.5)% |
| Operating Expenses: | | | | | | | |
| Hotel operating expenses | 146,338 | | | 145,295 | | | 1,043 | | | 0.7% |
| General and administrative expenses | 24,124 | | | 23,938 | | | 186 | | | 0.8% |
| Depreciation and amortization | 49,408 | | | 50,520 | | | (1,112) | | | (2.2)% |
| Merger transaction expenses | 4,782 | | | — | | | 4,782 | | | n/a |
| | | | | | | |
| 224,652 | | | 219,753 | | | 4,899 | | | 2.2% |
| Other expenses from franchised and managed properties | 2,444 | | | 4,207 | | | (1,763) | | | (41.9)% |
| Total operating expenses | 227,096 | | | 223,960 | | | 3,136 | | | 1.4% |
| Gain on sale of hotel properties | 12,018 | | | — | | | 12,018 | | | n/a |
| Other income | 1 | | | 2 | | | (1) | | | (50.0)% |
| Income from operations | 44,494 | | | 42,343 | | | 2,151 | | | 5.1% |
| Other non-operating (income) expense | (84) | | | 703 | | | (787) | | | (111.9)% |
| Interest expense, net | 31,462 | | | 32,685 | | | (1,223) | | | (3.7)% |
| Income before income tax expense | 13,116 | | | 8,955 | | | 4,161 | | | 46.5% |
| Income tax expense | 750 | | | 1,110 | | | (360) | | | (32.4)% |
| Net income | 12,366 | | | 7,845 | | | 4,521 | | | 57.6% |
Net income attributable to noncontrolling interests(1) | (10,445) | | | (3,291) | | | (7,154) | | | 217.4% |
| Net income attributable to Extended Stay America, Inc. common shareholders | $ | 1,921 | | | $ | 4,554 | | | $ | (2,633) | | | (57.8)% |
| | | | | | | |
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| | | | | | | |
________________________
(1)Noncontrolling interests in Extended Stay America, Inc. include 42% and 41% of ESH REIT’s common equity as of March 31, 2021 and 2020, respectively, and 125 shares of ESH REIT preferred stock.
|
| | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | |
| |
|
| | 2017 | | 2016 | | Change ($) | | Change (%) |
| Revenues: | | | | | | | |
| Room revenues | $ | 345,089 |
| | $ | 349,076 |
| | $ | (3,987 | ) | | (1.1 | )% |
| Other hotel revenues | 5,777 |
| | 5,445 |
| | 332 |
| | 6.1 | % |
| Total revenues | 350,866 |
| | 354,521 |
| | (3,655 | ) | | (1.0 | )% |
| Operating expenses: | | | | | | | |
| Hotel operating expenses | 152,155 |
| | 149,860 |
| | 2,295 |
| | 1.5 | % |
| General and administrative expenses | 23,823 |
| | 24,612 |
| | (789 | ) | | (3.2 | )% |
| Depreciation and amortization | 57,314 |
| | 55,955 |
| | 1,359 |
| | 2.4 | % |
| Impairment of long-lived assets | — |
| | 2,756 |
| | (2,756 | ) | | n/a |
|
| Total operating expenses | 233,292 |
| | 233,183 |
| | 109 |
| | — | % |
| Other income | 344 |
| | 2 |
| | 342 |
| | 17,100.0 | % |
| Income from operations | 117,918 |
| | 121,340 |
| | (3,422 | ) | | (2.8 | )% |
| Other non-operating income | (278 | ) | | (305 | ) | | 27 |
| | (8.9 | )% |
| Interest expense, net | 31,651 |
| | 48,713 |
| | (17,062 | ) | | (35.0 | )% |
| Income before income tax expense | 86,545 |
| | 72,932 |
| | 13,613 |
| | 18.7 | % |
| Income tax expense | 20,295 |
| | 15,867 |
| | 4,428 |
| | 27.9 | % |
| Net income | 66,250 |
| | 57,065 |
| | 9,185 |
| | 16.1 | % |
Net income attributable to noncontrolling interests (1) | (12,374 | ) | | (10,509 | ) | | (1,865 | ) | | 17.7 | % |
| Net income attributable to Extended Stay America, Inc. common shareholders | $ | 53,876 |
| | $ | 46,556 |
| | $ | 7,320 |
| | 15.7 | % |
50
________________________________ | |
(1)
| Noncontrolling interests in Extended Stay America, Inc. include approximately 43% and 45% of ESH REIT’s common equity as of September 30, 2017 and 2016, respectively. |
The following table presents key operating metrics, including occupancy, ADR, RevPAR and hotel inventory and renovation displacement data for ourthe Company's owned hotels for the three months ended September 30, 2017March 31, 2021 and 2016,2020, respectively:
| | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| 2021 | | 2020 | | Change |
| Number of hotels (as of March 31) | 563 | | 558 | | 5 |
| Number of rooms (as of March 31) | 62,674 | | 62,053 | | 621 |
| Occupancy | 74.5% | | 71.4% | | 310 bps |
| ADR | $59.86 | | $63.35 | | (5.5)% |
| RevPAR | $44.60 | | $45.23 | | (1.4)% |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | |
| | Three Months Ended September 30, | | |
| | 2017 | | 2016 | | Change |
Number of hotels (as of September 30)(1) | 625 | | 629 | | (4) |
Number of rooms (as of September 30)(1) | 68,780 | | 69,383 | | (603) |
| Occupancy | 79.0% | | 79.4% | | (40) bps |
| ADR | $69.01 | | $68.84 | | 0.2% |
| RevPAR | $54.55 | | $54.65 | | (0.2)% |
Hotel Inventory (as of September 30)(2): | | | | | |
| Renovated Extended Stay America | 625 | | 547 | (3) | 78 |
| Unrenovated Extended Stay America and other | — | | 82 | | (82) |
| Total number of hotels | 625 | | 629 | | (4) |
Renovation Displacement Data (in thousands, except percentages)(2): | | | | | |
| Total available room nights | 6,326 | | 6,383 | | (57) |
| Room nights displaced from renovation | 4 | | 64 | | (60) |
| % of available room nights displaced | 0.1% | | 1.0% | | (90) bps |
| |
(1)
| In May 2017, the Company sold 4 hotels, three of which were included in “Renovated Extended Stay America” and one of which was included in “Unrenovated Extended Stay America and other” as of September 30, 2016. |
| |
(2)
| See “—Liquidity and Capital Resources- Capital Expenditures- Hotel Renovation Program."
|
| |
(3)
| Includes three Extended Stay Canada-branded hotels that were sold. |
Room revenues. Room revenues decreased by approximately $4.0$4.6 million, or 1.1%1.8%, to approximately $345.1$249.9 million for the three months ended September 30, 2017March 31, 2021, compared to approximately $349.1$254.5 million for the three months ended September 30, 2016.March 31, 2020, due to a 1.4% decrease in RevPAR due to significant business disruption resulting from the COVID-19 pandemic that began in March 2020. The decrease in room revenuesRevPAR was primarily due to the sale of our three Extended Stay Canada-branded hotels and one additional hoteldriven by a 5.5% decrease in May 2017.ADR, partially offset by a 310 basis point increase in occupancy.
Other hotel revenues. Other hotel revenues increaseddecreased by approximately $0.3$0.1 million, or 6.1%1.3%, to approximately $5.8$6.7 million for the three months ended September 30, 2017March 31, 2021, compared to approximately $5.5$6.8 million for the three months ended September 30, 2016. This increase was mainly due to an increase in WiFi upgrades purchasedMarch 31, 2020.
Franchise and management fees. Franchise and management fees decreased by guests.
Hotel operating expenses. Hotel operating expenses increased by approximately $2.3$0.1 million, or 1.5%4.8%, to approximately $152.2$1.2 million for the three months ended September 30, 2017March 31, 2021, compared to approximately $149.9$1.3 million for the three months ended September 30, 2016.March 31, 2020. We expect franchise fees to increase over time as additional franchised hotels open in the future. As of March 31, 2021, the Company does not manage any third-party hotels.
Other revenues from franchised and managed properties. Other revenues from franchised and managed properties decreased by $2.0 million, or 52.4%, to $1.8 million for the three months ended March 31, 2021, compared to $3.8 million for the three months ended March 31, 2020, due to a decrease in direct reimbursable costs related to the management of 25 hotels whose management agreement expired on December 31, 2020. As of March 31, 2021, the Company does not manage any third-party hotels.
Hotel operating expenses. Hotel operating expenses increased by $1.0 million, or 0.7%, to $146.3 million for the three months ended March 31, 2021, compared to $145.3 million for the three months ended March 31, 2020. The increase in hotel operating expenses was partlyprimarily due to increases in personnel costsgeneral liability premiums and claims of approximately $2.1$2.3 million, marketing costshotel-level payroll expense of approximately $0.9$2.2 million, repair and maintenance costsallowance for uncollectible guest balances of $0.7$1.3 million and real estate taxesutilities expense of $0.7$1.2 million. These increases were partially offset by decreases of $2.1 million in insurance expensecosts related to the temporary suspension of $1.2our grab-and-go breakfast, loss on disposal of assets of $2.1 million and utilities expensereservation costs of approximately $0.8$2.1 million.
General and administrative expenses. General and administrative expenses decreasedincreased by approximately $0.8$0.2 million, or 3.2%0.8%, to approximately $23.8$24.1 million for the three months ended September 30, 2017March 31, 2021, compared to approximately $24.6$23.9 million for the three months ended September 30, 2016. The decrease was driven by lower consulting and professional fees of approximately $0.9 million and lower secondary offering costs of approximately $0.3 million, partially offset by an increase in personnel costs of approximately $0.3 million.March 31, 2020.
Depreciation and amortization. Depreciation and amortization increaseddecreased by approximately $1.4$1.1 million, or 2.4%2.2%, to approximately $57.3$49.4 million for the three months ended September 30, 2017March 31, 2021, compared to approximately $56.0$50.5 million for the three months ended September 30, 2016, which wasMarch 31, 2020, primarily due to an increasedeclines in investment in hotel assets.capital expenditures related to existing and newly-constructed hotels.
Impairment of long-lived assets. Asset impairments are recorded as required based on an evaluation of property and equipment and intangible assets for impairment. Merger transaction expenses. During the three months ended September 30, 2016, we recognized impairment charges of approximately $2.8 million related to one hotel property. No impairment charges were recognized during the three months ended September 30, 2017.
Other income. During the three months ended September 30, 2017, we recognized other income of approximately $0.3 million, which mainly consisted of management fees related to our Canadian hotels sold in May 2017 pursuant to separate management agreements which are expected to terminate on or before March 31, 2018.2021, the Company incurred $4.8 million in direct, incremental expenses associated with our pending merger.
Other non-operating expense. During the three months ended September 30, 2017, we recognized a non-cash foreign currency transaction gain of approximately $0.4 million, partially offset by non-cash charges related to our interest rate swap of approximately $0.1 million. During the three months ended September 30, 2016, we recognized a non-cash foreign currency transaction gain of approximately $0.3 million related to the depreciation of the U.S. dollar versus the Canadian dollar at our Canadian currency-based entities.
Interest expense, net. Net interest expenseexpenses from franchised and managed properties. Other expenses from franchised and managed properties decreased by approximately $17.1$1.8 million, or 35.0%41.9%, to approximately $31.6$2.4 million for the three months ended September 30, 2017March 31, 2021, compared to approximately $48.7$4.2 million for the three months ended September 30, 2016.March 31, 2020, due to a decrease in direct reimbursable costs related to the management of 25 hotels whose management agreement expired on December 31, 2020. We generally expect the cost to provide certain shared system-wide platforms to franchisees to be recovered through system service fees, which are included in other revenues from franchised and managed properties.
Gain on sale of hotel properties. During the three months ended September 30, 2016,March 31, 2021, the Company recognized a $12.0 million gain related to the sale of two hotels. No hotels were sold during three months ended March 31, 2020.
Other income. Other income remained consistent at less than $0.1 million for each of the three months ended March 31, 2021 and 2020.
Other non-operating (income) expense. During the three months ended March 31, 2021 and 2020, we incurred debt extinguishment costsrecognized a foreign currency transaction gain of approximately $14.1$0.1 million in connection withand loss of $0.7 million, respectively, related to a mortgage loan repayment. The Company’s weighted-averageresidual Canadian dollar-denominated deposit as a result of the prior sale of Canadian hotels.
Interest expense, net. Net interest rateexpense decreased by $1.2 million, or 3.7%, to approximately 4.5% as of September 30, 2017$31.5 million for the three months ended March 31, 2020, compared to approximately 4.6% as$32.7 million for the three months ended March 31, 2020. In March 2020, the Company borrowed $399.8 million under revolving credit facilities, of September 30, 2016. Additionally,which $350.0 million was repaid in August 2020 and $40.0 million was repaid during the Company’sthree months ended March 31, 2021. The Company's total outstanding debt balance decreased from approximately $2.6 billion,outstanding, net of unamortized deferred financing costs and debt discounts, decreased to $2.6 billion as of September 30, 2016March 31, 2021, compared to approximately $2.5$3.0 billion net of unamortized deferred financing costs and debt discounts, as of September 30, 2017.March 31, 2020. The Company’s weighted-average interest rate decreased to 4.4% as of March 31, 2021, compared to 4.7% as of March 31, 2020, due to a decline in LIBOR.
Income tax expense. Our The Company recorded a provision for federal, state, and foreign income taxes of $0.8 million, an effective income tax rate increased by approximately 1.7 percentage points to approximately 23.5%of 5.7%, for the three months ended September 30, 2017March 31, 2021, compared to approximately 21.8%a provision of $1.1 million, an effective tax rate of 12.4%, for the three months ended September 30, 2016.March 31, 2020. The Company’s effective tax rate is lower thandiffers from the federal statutory rate of 35%21% primarily due to ESH REIT’s status as a REIT under the provisions of the Internal Revenue Code of 1986 (as amended, the(the “Code”) during these periods. The increase in our effective income tax rate for the three months ended September 30, 2017 is primarily due to the fact that during the three months ended September 30, 2016, the Company recognized a benefit of approximately $0.8 million with respect to the reversal of a net deferred tax liability related to the Corporation's anticipated receipt of future ESH REIT nontaxable distributions in addition to discrete provision to return adjustments of approximately $2.0 million recognized upon filing of an income tax return..
Comparison of Nine Months Ended September 30, 2017 and September 30, 2016
As of September 30, 2016, we owned and operated 629 hotels consisting of approximately 69,400 rooms. In May 2017, we sold three Extended Stay Canada-branded hotels and one additional U.S.-based hotel. As a result, as of September 30, 2017, we owned and operated 625 hotels, consisting of approximately 68,800 rooms. The following table presents our consolidated results of operations for the nine months ended September 30, 2017 and 2016, including the amount and percentage change in these results between the periods (in thousands):
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| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | |
| | 2017 | | 2016 | | Change ($) | | Change (%) |
| Revenues: | | | | | | | |
| Room revenues | $ | 963,505 |
| | $ | 960,046 |
| | $ | 3,459 |
| | 0.4 | % |
| Other hotel revenues | 16,715 |
| | 14,822 |
| | 1,893 |
| | 12.8 | % |
| Total revenues | 980,220 |
| | 974,868 |
| | 5,352 |
| | 0.5 | % |
| Operating expenses: | | | | | | | |
| Hotel operating expenses | 442,726 |
| | 444,498 |
| | (1,772 | ) | | (0.4 | )% |
| General and administrative expenses | 75,560 |
| | 73,552 |
| | 2,008 |
| | 2.7 | % |
| Depreciation and amortization | 172,789 |
| | 164,274 |
| | 8,515 |
| | 5.2 | % |
| Impairment of long-lived assets | 20,357 |
| | 2,756 |
| | 17,601 |
| | 638.6 | % |
| Total operating expenses | 711,432 |
| | 685,080 |
| | 26,352 |
| | 3.8 | % |
| Loss on sale of hotel properties | (1,897 | ) | | — |
| | (1,897 | ) | | n/a |
|
| Other income | 2,400 |
| | 20 |
| | 2,380 |
| | 11,900.0 | % |
| Income from operations | 269,291 |
| | 289,808 |
| | (20,517 | ) | | (7.1 | )% |
| Other non-operating income | (426 | ) | | (1,069 | ) | | 643 |
| | (60.1 | )% |
| Interest expense, net | 96,958 |
| | 131,462 |
| | (34,504 | ) | | (26.2 | )% |
| Income before income tax expense | 172,759 |
| | 159,415 |
| | 13,344 |
| | 8.4 | % |
| Income tax expense | 40,721 |
| | 26,211 |
| | 14,510 |
| | 55.4 | % |
| Net income | 132,038 |
| | 133,204 |
| | (1,166 | ) | | (0.9 | )% |
Net loss attributable to noncontrolling interests(1) | (3,286 | ) | | (8,873 | ) | | 5,587 |
| | (63.0 | )% |
| Net income attributable to Extended Stay America, Inc. common shareholders | $ | 128,752 |
| | $ | 124,331 |
| | $ | 4,421 |
| | 3.6 | % |
________________________________
| |
(1)
| Noncontrolling interests in Extended Stay America, Inc. include approximately 43% and 45% as of September 30, 2017 and 2016, respectively. |
The following table presents key operating metrics, including occupancy, ADR, RevPAR, hotel inventory and renovation displacement data for our hotels for the nine months ended September 30, 2017 and 2016, respectively:
|
| | | | | |
| | Nine Months Ended September 30, | | |
| | 2017 | | 2016 | | Change |
Number of hotels (as of September 30)(1) | 625 | | 629 | | (4) |
Number of rooms (as of September 30)(1) | 68,780 | | 69,383 | | (603) |
| Occupancy | 76.1% | | 75.2% | | 90 bps |
| ADR | $67.15 | | $67.09 | | 0.1% |
| RevPAR | $51.13 | | $50.47 | | 1.3% |
Hotel Inventory (as of September 30)(2): | | | | | |
| Renovated Extended Stay America | 625 | | 547 | (3) | 78 |
| Unrenovated Extended Stay America and other | — | | 82 | | (82) |
| Total number of hotels | 625 | | 629 | | (4) |
Renovation Displacement Data (in thousands, except percentages) (2): | | | | | |
| Total available room nights | 18,845 | | 19,015 | | (170) |
| Room nights displaced from renovation | 101 | | 243 | | (142) |
| % of available room nights displaced | 0.5% | | 1.3% | | (80) bps |
_________________________________
| |
(1)
| In May 2017, the Company sold 4 hotels, three of which were included in “Renovated Extended Stay America” and one of which was included in “Unrenovated Extended Stay America and other” as of September 30, 2016. |
| |
(2)
| See “— Liquidity and Capital Resources - Capital Expenditures - Hotel Renovation Program."
|
| |
(3)
| Includes three Extended Stay Canada-branded hotels that were sold. |
Room revenues. Room revenues increased by approximately $3.5 million, or 0.4%, to approximately $963.5 million for the nine months ended September 30, 2017 compared to approximately $960.0 million for the nine months ended September 30, 2016. The increase in room revenues was primarily due to a 90 bps increase in occupancy, resulting in a 1.3% increase in RevPAR. These increases were primarily a result of an increase in shorter-stay business and leisure guests, the collective impact of our recently completed hotel renovation program and focus on service excellence. This increase was partially offset by a decrease in revenues as a result of the sale of our three Extended Stay Canada-branded hotels and one additional hotel in May 2017.
Other hotel revenues. Other hotel revenues increased by approximately $1.9 million, or 12.8%, to approximately $16.7 million for the nine months ended September 30, 2017 compared to approximately $14.8 million for the nine months ended September 30, 2016. This increase was mainly due to an increase in WiFi upgrades purchased purchased by guests and smoking, parking and pet fee revenues.
Hotel operating expenses. Hotel operating expenses decreased by approximately $1.8 million million, or 0.4%, to approximately $442.7 million for the nine months ended September 30, 2017 compared to approximately $444.5 million for the nine months ended September 30, 2016. The decrease in hotel operating expenses was partly due to a decrease in reservation costs of approximately $2.2 million, which related to a decrease in commissionable bookings through certain online travel agents as well as a shift in booking channels used by our guests, and decreases in utilities expense of approximately $1.7 million, maintenance expense of approximately $1.1 million and amenity costs of approximately $1.0 million. These decreases were partially offset by an increase in personnel expense of approximately $2.6 million, as well as an increase in credit card disputes of approximately $1.7 million.
General and administrative expenses. General and administrative expenses increased by approximately $2.0 million, or 2.7%, to approximately $75.6 million for the nine months ended September 30, 2017 compared to approximately $73.6 million for the nine months ended September 30, 2016. The increase was driven by an increase in personnel expense of approximately $1.7 million, including equity-based compensation expense of approximately $0.4 million, and an increase in consulting and professional fees of approximately $1.1 million, including an increase in secondary offering costs of approximately $0.7 million.
Depreciation and amortization. Depreciation and amortization increased by approximately $8.5 million, or 5.2%, to approximately $172.8 million for the nine months ended September 30, 2017 compared to approximately $164.3 million for the nine months ended September 30, 2016, which was primarily due to an increase in investment in hotel assets.
Impairment of long-lived assets. Asset impairments are recorded as required based on an evaluation of property and equipment and intangible assets for impairment. During the nine months ended September 30, 2017, we recognized impairment charges of approximately $20.4 million related to property and equipment, $12.4 million of which related to our three Extended Stay Canada-branded hotels which were sold in May 2017. The additional $7.9 million in impairment charges related to two hotel properties. Impairment charges of $2.8 million were recognized during the nine months ended September 30, 2016.
Loss on sale of hotel properties. During the nine months ended September 30, 2017, we recognized a loss on sale of hotel properties of approximately $1.9 million related to the sale of three Extended Stay Canada-branded hotels in May 2017. No hotels were sold during the nine months ended September 30, 2016.
Other income. During the nine months ended September 30, 2017, we recognized other income of approximately $2.4 million, which consisted of the settlement of a lawsuit, the receipt of funds related to a temporary easement at one of our hotel properties and management fees related to the Canadian hotels sold in May 2017 pursuant to separate management agreements which are expected to terminate on or before March 31, 2018.
Other non-operating income. During the nine months ended September 30, 2017, we recognized a non-cash foreign currency transaction gain of approximately $0.8 million, partially offset by non-cash charges related to our interest rate swap of approximately $0.4 million. During the nine months ended September 30, 2016, we recognized a non-cash foreign currency transaction gain of approximately $1.1 million related to the depreciation of the U.S. dollar versus the Canadian dollar at our Canadian currency-based entities.
Interest expense, net. Excluding debt modification costs of approximately $1.2 million incurred during the nine months ended September 30, 2017 related to the repricing of ESH REIT's senior secured term loan facility, and excluding debt extinguishment costs of approximately $26.2 million incurred during the nine months ended September 30, 2016 related to the full repayment of the balance outstanding under ESH REIT’s previous term loan facility and the partial repayment of ESH REIT's previous mortgage loan, net interest expense decreased by approximately $9.5 million, or 9.0%, to approximately $95.8 million for the nine months ended September 30, 2017 compared to approximately $105.3 million for the nine months ended September 30, 2016. The Company’s weighted-average interest rate decreased to approximately 4.5% as of September 30, 2017 compared to approximately 4.6% as of September 30, 2016. Additionally, the Company’s total outstanding debt balance decreased from approximately $2.6 billion, net of unamortized deferred financing costs and debt discounts, as of September 30, 2016 to approximately $2.5 billion, net of unamortized deferred financing costs and debt discounts, as of September 30, 2017.
Income tax expense. Our effective income tax rate increased by approximately 7.2 percentage points to approximately 23.6% for the nine months ended September 30, 2017 compared to approximately 16.4% for the nine months ended September 30, 2016. The Company’s effective tax rate is lower than the federal statutory rate of 35% due to ESH REIT’s status as a REIT under the provisions of the Code during these periods. The increase in our effective income tax rate for the nine months ended September 30, 2017 is primarily due to the fact that during the nine months ended September 30, 2016, the Company recognized a benefit of approximately $8.5 million with respect to the reversal of a net deferred tax liability related to the Corporation's anticipated receipt of future ESH REIT nontaxable distributions and a benefit of approximately $1.8 million with respect to the reversal of net deferred tax liabilities which related to the previously estimated 5% of taxable income expected to be retained under ESH REIT's prior 95% distribution policy, which was changed during the three months ended March 31, 2016. In addition, the Company recognized a provision to return a benefit of approximately $2.0 million during the nine months ended September 30, 2016.
Results of Operations—ESH REIT
As of March 31, 2021, ESH REIT’s sole sourceREIT owned and leased 563 hotels, consisting of revenues is lease rental revenuesapproximately 62,700 rooms. As of March 31, 2020, ESH REIT owned and its hotel operating expenses reflect only those hotel operating expenses incurred directly related leased 558 hotels, consisting of approximately 62,100 rooms. See Notes 4 and 5to ownershipthe condensed consolidated financial statements of the hotels. Administrative costs reimbursed to ESA Management areESH Hospitality, Inc., included as a componentin Item 1 of general and administrative expenses.this quarterly report on Form 10-Q,
Comparison of Three Months Ended September 30, 2017March 31, 2021 and September 30, 2016March 31, 2020
As of September 30, 2016, ESH REIT owned and leased 629 hotels, consisting of approximately 69,400 rooms. In May 2017, ESH REIT sold three Extended Stay Canada-branded hotels and one additional U.S.-based hotel. As a result, as of September 30, 2017, ESH REIT owned and leased 625 hotels, consisting of approximately 68,800 rooms. The following table presents ESH REIT’s consolidated results of operations for the three months ended September 30, 2017March 31, 2021 and 2016,2020, including the amount and percentage change in these results between the periods (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | | | |
| 2021 | | 2020 | | Change ($) | | Change (%) |
Revenues- Rental revenues from Extended Stay America, Inc. | $ | 120,392 | | | $ | 119,190 | | | $ | 1,202 | | | 1.0% |
| Operating expenses: | | | | | | | |
| Hotel operating expenses | 21,405 | | | 24,527 | | | (3,122) | | | (12.7)% |
| General and administrative expenses | 3,960 | | | 4,167 | | | (207) | | | (5.0)% |
| Depreciation and amortization | 48,381 | | | 49,588 | | | (1,207) | | | (2.4)% |
| | | | | | | |
| Merger transaction expenses | 2,373 | | | — | | | 2,373 | | | n/a |
| Total operating expenses | 76,119 | | | 78,282 | | | (2,163) | | | (2.8)% |
| Gain on sale of hotel properties | 11,930 | | | — | | | 11,930 | | | n/a |
| | | | | | | |
| Income from operations | 56,203 | | | 40,908 | | | 15,295 | | | 37.4% |
| Other non-operating (income) expense | (84) | | | 560 | | | (644) | | | (115.0)% |
| Interest expense, net | 31,135 | | | 32,428 | | | (1,293) | | | (4.0)% |
| Income before income tax expense | 25,152 | | | 7,920 | | | 17,232 | | | 217.6% |
| Income tax expense | 2 | | | 2 | | | — | | | 0.0% |
| Net income | $ | 25,150 | | | $ | 7,918 | | | $ | 17,232 | | | 217.6% |
|
| | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | |
| | 2017 | | 2016 | | Change ($) | | Change (%) |
Revenues- Rental revenues from Extended Stay America, Inc. | $ | 143,407 |
| | $ | 153,139 |
| | $ | (9,732 | ) | | (6.4)% |
| Operating expenses: | | | | | | | |
| Hotel operating expenses | 22,578 |
| | 22,155 |
| | 423 |
| | 1.9% |
| General and administrative expenses | 3,722 |
| | 3,476 |
| | 246 |
| | 7.1% |
| Depreciation | 56,523 |
| | 54,748 |
| | 1,775 |
| | 3.2% |
| Total operating expenses | 82,823 |
| | 80,379 |
| | 2,444 |
| | 3.0% |
| Other income | 5 |
| | — |
| | 5 |
| | n/a |
| Income from operations | 60,589 |
| | 72,760 |
| | (12,171 | ) | | (16.7)% |
| Other non-operating income | (211 | ) | | (84 | ) | | (127 | ) | | 151.2% |
| Interest expense, net | 32,116 |
| | 48,521 |
| | (16,405 | ) | | (33.8)% |
| Income before income tax expense | 28,684 |
| | 24,323 |
| | 4,361 |
| | 17.9% |
| Income tax expense | 198 |
| | 671 |
| | (473 | ) | | (70.5)% |
| Net income | $ | 28,486 |
| | $ | 23,652 |
| | $ | 4,834 |
| | 20.4% |
Rental revenues from Extended Stay America, Inc. Rental revenues decreasedincreased by approximately $9.7$1.2 million, or 6.4%1.0%, to approximately $143.4$120.4 million for the three months ended September 30, 2017March 31, 2021, compared to approximately $153.1$119.2 million for the three months ended September 30, 2016.March 31, 2020. The decreaseincrease in rental revenues was partly due to a decrease in fixed minimum rents related tonew hotel openings that occurred during 2020 and the salefirst quarter of the three Extended Stay Canada-branded hotels and one additional hotel in May 2017. Percentage2021, partially offset by asset sales. No variable rental revenues decreased by approximately $8.1 million to approximately $28.7 millionwere recognized during the three months ended September 30, 2017 from approximately $36.8 millionMarch 31, 2021 or 2020, as minimum percentage rental revenue thresholds were not achieved during the three months ended September 30, 2016.either of those periods.
Hotel operating expenses. Hotel operating expenses increaseddecreased by approximately $0.4$3.1 million, or 1.9%12.7%, to approximately $22.6$21.4 million for the three months ended September 30, 2017March 31, 2021, compared to approximately $22.2$24.5 million for the three months ended September 30, 2016.March 31, 2020. This increasedecrease was due to an increasedecreases in real estate tax expense of approximately $0.9 million, partially offset by a decrease in the loss on disposal of assets of approximately $0.2$2.1 million and a decrease in property insurance related costs that were obligations of ESH REIT due to its ownership of hotels, including property insurance claims, of approximately $0.2$0.9 million.
General and administrative expenses. General and administrative expenses increaseddecreased by approximately $0.2 million, or 7.1%5.0%, to approximately $3.7$4.0 million for the three months ended September 30, 2017March 31, 2021, compared to approximately $3.5$4.2 million for the three months ended September 30, 2016. The increase was mainlyMarch 31, 2020, due to an increasea decrease in reimbursable costs of approximately $0.3 millionpaid to ESA Management for administrative services performed on ESH REIT’s behalf (including executive management, accounting, financial analysis, trainingthe Corporation.
Depreciation and technology).
Depreciation.amortization. Depreciation increasedand amortization decreased by approximately $1.8$1.2 million, or 3.2%2.4%, to approximately $56.5$48.4 million for the three months ended September 30, 2017March 31, 2021, compared to approximately $54.7$49.6 million for the three months ended September 30, 2016, which wasMarch 31, 2020, primarily due to an increasedeclines in investment in hotel assets.capital expenditures related to existing and newly-constructed hotels.
Other non-operating income.Merger transaction expenses. During the three months ended September 30, 2017,March 31, 2021, ESH REIT incurred $2.4 million in direct, incremental expenses associated with our pending merger.
Other non-operating (income) expense. During the three months ended March 31, 2021 and 2020, ESH REIT recognized a non-cash foreign currency transaction gain of approximately $0.3$0.1 million partially offset by non-cash chargesand loss of $0.6 million, respectively, related to its interest rate swapa residual Canadian dollar-denominated deposit as a result of approximately $0.1 million. During the three months ended September 30, 2016, ESH REIT recognized a non-cash foreign currency transaction gainprior sale of less than $0.1 million.Canadian hotels.
Interest expense, net.Excluding debt extinguishment costs of approximately $14.1 million incurred during the three months ended September 30, 2016 related to the repayment of a mortgage loan, net Net interest expense decreased by approximately $2.4$1.3 million, or 7.0%4.0%, to approximately $32.1$31.1 million for the three months ended September 30, 2017March 31, 2021, compared to approximately $34.5$32.4 million for the three months ended September 30, 2016 due to a decreaseMarch 31, 2020. In March 2020, ESH REIT borrowed $350.0 million under its revolving credit facility, which was fully repaid in ESH REIT’s weighted-average interest rate to approximately 4.5% as of September 30, 2017 compared to approximately 4.6% as of September 30, 2016.August 2020. ESH REIT's total outstanding debt balance was approximately $2.6 billion,outstanding, net of unamortized deferred financing costs and debt discounts, decreased to $2.6 billion as of September 30, 2017 and 2016.March 31, 2021, compared to $3.0 billion as of March 31, 2020. ESH REIT’s weighted-average interest rate decreased to 4.4% as of March 31, 2021, compared to 4.6% as of March 31, 2020, due to a decline in LIBOR.
Income tax expense. ESH REIT’s effective income tax rate decreased by approximately 2.1 percentage points to 0.7%remained consistent at less than 0.1% for each of the three months ended September 30, 2017 compared to 2.8% for the three months ended September 30, 2016. Income tax
expense was approximately $0.2 millionMarch 31, 2021 and $0.7 million for the three months ended September 30, 2017 and 2016, respectively.2020. ESH REIT’s effective tax rate is lower thandiffers from the federal statutory rate of 35%21% primarily due to its status as a REIT under the provisions of the Code during these periods. During the three months ended September 30, 2016, ESH REIT recognized a discrete provision to return adjustment of approximately $0.5 million upon the filing of an income tax return. Code.
Comparison of Nine Months Ended September 30, 2017 and September 30, 2016
As of September 30, 2016, ESH REIT owned and leased 629 hotels, consisting of approximately 69,400 rooms. In May 2017, ESH REIT sold three Extended Stay Canada-branded hotels and one additional U.S.-based hotel. As a result, as of September 30, 2017, ESH REIT owned and leased 625 hotels, consisting of approximately 68,800 rooms. The following table presents ESH REIT’s consolidated results of operations for the nine months ended September 30, 2017 and 2016, including the amount and percentage change in these results between the periods (in thousands):
|
| | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | |
| | 2017 | | 2016 | | Change ($) | | Change (%) |
Revenues- Rental revenues from Extended Stay America, Inc. | $ | 375,290 |
| | $ | 385,873 |
| | $ | (10,583 | ) | | (2.7)% |
| Operating expenses: | | | | | | | |
| Hotel operating expenses | 69,589 |
| | 68,757 |
| | 832 |
| | 1.2% |
| General and administrative expenses | 12,516 |
| | 10,677 |
| | 1,839 |
| | 17.2% |
| Depreciation | 169,916 |
| | 160,546 |
| | 9,370 |
| | 5.8% |
| Impairment of long-lived assets | 15,046 |
| | — |
| | 15,046 |
| | n/a |
| Total operating expenses | 267,067 |
| | 239,980 |
| | 27,087 |
| | 11.3% |
| Loss on sale of hotel properties | (3,274 | ) | | — |
| | (3,274 | ) | | n/a |
| Other income | 640 |
| | — |
| | 640 |
| | n/a |
| Income from operations | 105,589 |
| | 145,893 |
| | (40,304 | ) | | (27.6)% |
| Other non-operating income | (271 | ) | | (858 | ) | | 587 |
| | (68.4)% |
| Interest expense, net | 97,779 |
| | 129,886 |
| | (32,107 | ) | | (24.7)% |
| Loss before income tax expense (benefit) | 8,081 |
| | 16,865 |
| | (8,784 | ) | | (52.1)% |
| Income tax expense (benefit) | 435 |
| | (3,128 | ) | | 3,563 |
| | (113.9)% |
| Net loss | $ | 7,646 |
| | $ | 19,993 |
| | $ | (12,347 | ) | | (61.8)% |
Rental revenues from Extended Stay America, Inc. Rental revenues decreased by approximately $10.6 million, or 2.7%, to approximately $375.3 million for the nine months ended September 30, 2017 compared to approximately $385.9 million for the nine months ended September 30, 2016. The decrease in rental revenues was partly due to a decrease in fixed minimum rents related to the sale of the three Extended Stay Canada-branded hotels and one additional hotel in May 2017. Percentage rental revenues decreased by approximately $8.1 million to approximately $28.9 million during the nine months ended September 30, 2017 from approximately $37.0 million during the nine months ended September 30, 2016.
Hotel operating expenses. Hotel operating expenses increased by approximately $0.8 million, or 1.2%, to approximately $69.6 million for the nine months ended September 30, 2017 compared to approximately $68.8 million for the nine months ended September 30, 2016. This increase was due to increases in real estate tax expense of approximately $1.6 million and the loss on disposal of assets of approximately $0.8 million. These increases were partially offset by a decrease of approximately $1.6 million in property related costs that were obligations of ESH REIT due to its ownership of the hotels, including property insurance claims.
General and administrative expenses. General and administrative expenses increased by approximately $1.8 million, or 17.2%, to approximately $12.5 million for the nine months ended September 30, 2017 compared to approximately $10.7 million for the nine months ended September 30, 2016. The increase was mainly due to an increase in consulting and other professional fees of approximately $1.1 million, including an increase in secondary offering costs of approximately $0.4 million, as well as an increase in reimbursable costs of approximately $0.7 million to ESA Management for administrative services performed on ESH REIT’s behalf (including executive management, accounting, financial analysis, training and technology).
Depreciation. Depreciation increased by approximately $9.4 million, or 5.8%, to approximately $169.9 million for the nine months ended September 30, 2017 compared to approximately $160.5 million for the nine months ended September 30, 2016, which was primarily due to an increase in investment in hotel assets.
Impairment of long-lived assets. Asset impairments are recorded as required based on an evaluation of property and equipment and intangible assets for impairment. During the nine months ended September 30, 2017, ESH REIT recognized an impairment charge of approximately $15.0 million related to its three Extended Stay Canada-branded hotels sold in May 2017. No impairment charges were recognized during the nine months ended September 30, 2016.
Loss on sale of hotel properties. During the nine months ended September 30, 2017, ESH REIT recognized a loss on sale of hotel properties related to the sale of its three Extended Stay Canada-branded hotels of approximately $1.5 million and a loss on sale of one additional hotel of approximately $1.8 million in May 2017. No hotels were sold during the nine months ended September 30, 2016.
Other income. During the nine months ended September 30, 2017, ESH recognized other income of approximately $0.6 million related to the receipt of funds for a temporary easement at one of its hotel properties.
Other non-operating income. During the nine months ended September 30, 2017, ESH REIT recognized a non-cash foreign currency transaction gain of approximately $0.6 million, offset by non-cash charges related to its interest rate swap of approximately $0.3 million. During the nine months ended September 30, 2016, ESH REIT recognized a non-cash foreign currency transaction gain of approximately $0.9 million related to the depreciation of the U.S. dollar versus the Canadian dollar at ESH REIT's Canadian subsidiary.
Interest expense, net. Excluding debt modification costs of approximately $1.2 million incurred during the nine months ended September 30, 2017 related to the repricing of ESH REIT's senior secured term loan facility, and excluding debt extinguishment costs of approximately $26.2 million incurred during the nine months ended September 30, 2016 related to the full repayment of the balance outstanding under ESH REIT's previous term loan facility and the partial repayment of ESH REIT's previous mortgage loan, net interest expense decreased by approximately $7.1 million, or 6.9%, to approximately $96.6 million for the nine months ended September 30, 2017 compared to approximately $103.7 million for the nine months ended September 30, 2016 due to a decrease in ESH REIT’s weighted-average interest rate to approximately 4.5% as of September 30, 2017 compared to approximately 4.6% as of September 30, 2016. ESH REIT's total outstanding debt balance was approximately $2.6 billion, net of unamortized deferred financing costs and debt discounts, as of September 30, 2017 and 2016.
Income tax expense (benefit). ESH REIT’s effective income tax rate increased by approximately 23.9 percentage points to 5.4% for the nine months ended September 30, 2017 compared to (18.5)% for the nine months ended September 30, 2016. Income tax expense (benefit) was approximately $0.4 million and $(3.1) million for the nine months ended September 30, 2017 and 2016, respectively. ESH REIT’s effective tax rate is lower than the federal statutory rate of 35% due to its status as a REIT under the provisions of the Code during these periods. The change in ESH REIT’s effective income tax rate for the nine months ended September 30, 2017 is due to the fact that during the nine months ended September 30, 2016, ESH REIT recognized a benefit of approximately $0.8 million related to current state and foreign payable adjustments and a benefit of approximately $2.3 million with respect to the reversal of net deferred tax liabilities for the previously estimated 5% of taxable income expected to be retained under ESH REIT's prior 95% distribution policy, which was changed during the three months ended March 31, 2016.
Non-GAAP Financial Measures
Hotel Operating Profit and Hotel Operating Margin
Hotel Operating Profit and Hotel Operating Margin measure hotel-level operating results prior to certain items, including debt service, income tax expense, impairment charges, depreciation and amortization and general and administrative expenses. The Company believes that Hotel Operating Profit and Hotel Operating Margin are useful measures to investors regarding our operating performance as they help us evaluate aggregate owned hotel-level profitability, specifically owned hotel operating efficiency and effectiveness. Further, these measures allow us to analyze period over period operating margin flow-through, (thedefined as the change in Hotel Operating Profit divided by the change in total room and other hotel revenues).revenues.
We define Hotel Operating Profit as net income excluding: (1) income tax expense; (2) net interest expense; (3) other non-operating (income) expense; (4) other income; (5) gain on sale of hotel properties; (6) impairment of long-lived assets; (7) depreciation and amortization; (8) merger transaction expenses (9) general and administrative expenses; (10) loss on disposal of assets; (11) franchise and management fees; and (12) system services (profit) loss, net. We define Hotel Operating Margin as Hotel Operating Profit divided by the sum of room and other hotel revenues less hotel operating expenses (excluding loss on disposal of assets) and Hotel Operating Margin as the ratio of Hotel Operating Profit divided by total hotel revenues. We believe that Hotel Operating Profit and Hotel Operating Margin are not meaningful or useful measures for ESH REIT on a stand-alone basis due to the fact that a Paired Share represents an investment in the Company, as a single, consolidated enterprise, which is reflected in the consolidated Company results of operations; therefore, we believe these performance measures are most meaningful for the consolidated Company only.
Hotel Operating Profit and Hotel Operating Margin as presented may not be comparable to similar measures calculated by other companies. This information should not be considered as an alternative to net income of the Company, the Corporation or ESH REIT, or any other measure of the Company, the Corporation or ESH REIT calculated in accordance with U.S. GAAP. Interest expense and other items have been and will continue to be incurred and are not reflected in Hotel Operating Profit or Hotel Operating Margin. Management separately considers the impact of these excluded items to the extent they are material to operating decisions and assessments of operating performance. The Company’s condensed consolidated statements of operations include excluded items, each of which should be considered when evaluating our performance in addition to our
non-GAAP financial measures. Hotel Operating Profit and Hotel Operating Margin should not solely be considered as measures of our profitability.
The following table provides a reconciliation of room revenues, other hotel revenues and hotel operating expenses (excluding loss on disposal of assets) to Hotel Operating Profit and Hotel Operating Margin for the Company for the three and nine months ended September 30, 2017March 31, 2021 and 20162020 (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
| Net income | | | | | $ | 12,366 | | | $ | 7,845 | |
| Income tax expense | | | | | 750 | | | 1,110 | |
| Interest expense, net | | | | | 31,462 | | | 32,685 | |
| Other non-operating (income) expense | | | | | (84) | | | 703 | |
| Other income | | | | | (1) | | | (2) | |
| Gain on sale of hotel properties | | | | | (12,018) | | | — | |
| | | | | | | |
| Depreciation and amortization | | | | | 49,408 | | | 50,520 | |
| Merger transaction expenses | | | | | 4,782 | | | — | |
| General and administrative expenses | | | | | 24,124 | | | 23,938 | |
Loss on disposal of assets (1) | | | | | 1,232 | | | 3,343 | |
| Franchise and management fees | | | | | (1,218) | | | (1,279) | |
| System services loss, net | | | | | 639 | | | 417 | |
| Hotel Operating Profit | | | | | $ | 111,442 | | | $ | 119,280 | |
| | | | | | | |
| Room revenues | | | | | $ | 249,868 | | | $ | 254,464 | |
| Other hotel revenues | | | | | 6,680 | | | 6,768 | |
| Total room and other hotel revenues | | | | | $ | 256,548 | | | $ | 261,232 | |
| | | | | | | |
| Hotel Operating Margin | | | | | 43.4 | % | | 45.7 | % |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Room revenues | $ | 345,089 |
| | $ | 349,076 |
| | $ | 963,505 |
| | $ | 960,046 |
|
| Other hotel revenues | 5,777 |
| | 5,445 |
| | 16,715 |
| | 14,822 |
|
| Total hotel revenues | 350,866 |
| | 354,521 |
| | 980,220 |
| | 974,868 |
|
Hotel operating expenses (1) | 150,108 |
| | 147,605 |
| | 434,661 |
| | 437,242 |
|
| Hotel Operating Profit | $ | 200,758 |
| | $ | 206,916 |
| | $ | 545,559 |
| | $ | 537,626 |
|
| Hotel Operating Margin | 57.2 | % | | 58.4 | % | | 55.7 | % | | 55.1 | % |
_________________________________ ________________________
(1) Excludes loss on disposal Included in hotel operating expenses in the condensed consolidated statements of assets of approximately $2.1 million, $2.2 million, $8.1 million and $7.2 million, respectively.operations.
EBITDA and Adjusted EBITDA
EBITDA is defined as net income excluding: (1) net interest expense; (2) income tax expense; and (3) depreciation and amortization. EBITDA is a commonly used measure of performance in many industries. The Company believes that EBITDA provides useful information to investors regarding our operating performance as it helps us and investors evaluate the ongoing performance of our hotels and our franchise and management operations after removing the impact of our capital structure, primarily net interest expense, our corporate structure, primarily income tax expense, and our asset base, primarily depreciation and amortization. We believe that the use of EBITDA facilitates comparisons between us and other lodging companies, hotel owners and capital-intensive companies. Additionally, EBITDA is a measure that is widely used by management in our annual budgeting and compensation planning processes.
The Company uses Adjusted EBITDA when evaluating our performance because we believe the adjustment for certain additional items, described below, provides useful supplemental information to investors regarding our ongoing operating performance and that the presentation of Adjusted EBITDA, when combined with the U.S. GAAP presentation of net income, net income per common share and cash flow provided by operating activities, is beneficial to the overall understanding of our ongoing operating performance. We adjust EBITDA for the following items where applicable for each period presented, and refer to this measure as Adjusted EBITDA:
•Equity-based compensation—We exclude non-cash charges related to the amortization of equity-based compensation expense with respect to awards issued under long-term incentive compensation plans to employees and certain directors.
Other non-operating (income) expense—We exclude the effect of other non-operating expense or income, as we believe non-cash gains or losses on interest rate swaps or other derivatives and foreign currency transaction gains or losses are not reflective of ongoing or future operating performance.
•Impairment of long-lived assets—We exclude the effect of impairment losses recorded on property and equipment and intangible assets, as we believe they are not reflective of ongoing or future operating performance.
(Gain) loss•Gain on sale of hotel properties—We exclude the gain or loss on sale of hotel properties, as we believe it is not reflective of ongoing or future operating performance.
•Merger transaction expenses—We exclude transaction expenses related to our pending merger, as we believe they are not reflective of ongoing or future operating performance.
•System services (profit) loss, net—We exclude direct and indirect reimbursable expenses from franchised and managed properties, net of other revenues, because although the timing of system service fee revenues will typically not align with expenses incurred to operate these programs, the Company manages system services to break even over time.
•Other expenses—We exclude the effect of other expenses or income that we do not consider reflective of ongoing or future operating performance, including the following: the loss on disposal of assets, non-operating (income) expense, including foreign currency transaction costs, incurred in connection with secondary offerings and transactioncertain costs associated with the sale of hotel properties.
acquisitions, dispositions and/or capital transactions.EBITDA and Adjusted EBITDA as presented may not be comparable to similar measures calculated by other companies. This information should not be considered as an alternative to net income of the Company, net income of the Corporation net
income ofor ESH REIT, or any other measure of the Company, the Corporation or ESH REIT calculated in accordance with U.S. GAAP. Cash expenditures for capital expenditures, interest expense and other items have been and will continue to be incurred and are not reflected in EBITDA or Adjusted EBITDA. Management separately considers the impact of these excluded items to the extent they are material to operating decisions and assessments of operating performance. The Company’s unaudited condensed consolidated statements of operations and cash flows include capital expenditures, net interest expense and other excluded items, all of which should be considered when evaluating our performance in addition to our non-GAAP financial measures. Additionally, EBITDA and Adjusted EBITDA should not solely be considered as measures of our profitability or indicative of funds available to fund our cash needs, including our ability to pay shareholder distributions.
We believe that EBITDA and Adjusted EBITDA are not meaningful or useful measures for ESH REIT on a stand-alone basis due to the fact that a Paired Share represents an investment in the Company, as a single, consolidated enterprise, which is reflected in the consolidated Company results of operations; therefore, we believe these performance measures are most meaningful for the consolidated Company only.
The following table provides a reconciliation of net income to EBITDA and Adjusted EBITDA for the Company for the three and nine months ended September 30, 2017March 31, 2021 and 20162020 (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
| Net income | | | | | $ | 12,366 | | | $ | 7,845 | |
| Interest expense, net | | | | | 31,462 | | | 32,685 | |
| Income tax expense | | | | | 750 | | | 1,110 | |
| Depreciation and amortization | | | | | 49,408 | | | 50,520 | |
| EBITDA | | | | | 93,986 | | | 92,160 | |
| Equity-based compensation | | | | | 2,348 | | | 1,126 | |
| | | | | | | |
| Gain on sale of hotel properties | | | | | (12,018) | | | — | |
| Merger transaction expenses | | | | | 4,782 | | | — | |
| System services loss, net | | | | | 639 | | | 417 | |
Other expense (1) | | | | | 1,149 | | | 4,046 | |
| Adjusted EBITDA | | | | | $ | 90,886 | | | $ | 97,749 | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2017 | | 2016 | | 2017 | | 2016 | |
| Net income | $ | 66,250 |
| | $ | 57,065 |
| | $ | 132,038 |
| | $ | 133,204 |
| |
| Interest expense, net | 31,651 |
| | 48,713 |
| | 96,958 |
| | 131,462 |
| |
| Income tax expense | 20,295 |
| | 15,867 |
| | 40,721 |
| | 26,211 |
| |
| Depreciation and amortization | 57,314 |
| | 55,955 |
| | 172,789 |
| | 164,274 |
| |
| EBITDA | 175,510 |
| | 177,600 |
| | 442,506 |
| | 455,151 |
| |
| Equity-based compensation | 2,720 |
| | 3,016 |
| | 9,049 |
| | 8,635 |
| |
| Other non-operating income | (278 | ) | (1) | (305 | ) | (2) | (426 | ) | (3) | (1,069 | ) | (4) |
| Impairment of long-lived assets | — |
| | 2,756 |
| | 20,357 |
| | 2,756 |
| |
| Loss on sale of hotel properties | — |
| | — |
| | 1,897 |
| | — |
| |
| Other expenses | 2,314 |
| (5) | 2,666 |
| (6) | 9,333 |
| (7) | 7,718 |
| (8) |
| Adjusted EBITDA | $ | 180,266 |
| | $ | 185,733 |
| | $ | 482,716 |
| | $ | 473,191 |
| |
_________________________________ (1)Includes loss on disposal of assets and non-operating (income) expense, including foreign currency transaction costs. Loss on disposal of assets totaled $1.2 million and $3.3 million, respectively.
| |
(1) | Includes foreign currency transaction gain of approximately $0.4 million and loss related to interest rate swap of approximately $0.1 million. |
| |
(2) | Includes foreign currency transaction gain of approximately $0.3 million. |
| |
(3) | Includes foreign currency transaction gain of approximately $0.8 million and loss related to interest rate swap of approximately $0.4 million. |
| |
(4) | Includes foreign currency transaction gain of approximately $1.1 million. |
| |
(5) | Includes loss on disposal of assets of approximately $2.1 million, transaction costs of approximately $0.1 million due to the revision of an estimate related to the sale of the three Canadian hotel properties in May 2017 and additional costs incurred in connection with the second quarter 2017 secondary offerings of approximately $0.1 million. |
| |
(6) | Includes loss on disposal of assets of approximately $2.2 million and costs incurred in connection with the October 2016 secondary offering of approximately $0.4 million. |
| |
(7) | Includes loss on disposal of assets of approximately $8.1 million, costs incurred in connection with the second quarter 2017 secondary offerings of approximately $1.1 million and transaction costs of approximately $0.1 million due to the revision of an estimate related to the sale of the three Canadian hotel properties in May 2017. |
| |
(8) | Includes loss on disposal of assets of approximately $7.2 million, costs incurred in connection with the October 2016 secondary offering of approximately $0.4 million and transaction costs of approximately $0.1 million due to the revision of an estimate related to the sale of the 53 hotel properties in December 2015. |
FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share
FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share are key metrics used by management to assess our operating performance and profitability and to facilitate comparisons between us and other hotel and/or real estate companies that include a REIT as part of their legal entity structure. Funds fromFrom Operations (“FFO”) is defined by the National Association of Real Estate Investment Trusts ("NAREIT"(“NAREIT”) as net income or loss (computed in accordance with U.S. GAAP), excluding gains or losses from sales of
real estate, impairment charges, the cumulative effect of changes in accounting
principle, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures following the same approach. FFO is a commonly used measure among other hotel and/or real estate companies that include a REIT as a part of their legal entity structure. Since real estate depreciation and amortization, impairment of long-lived assets and gains or losses from the salesales of hotel properties, net are dependent upon the historical cost of the real estate asset bases and generally not reflective of ongoing operating performance or earnings capability, the Company believes FFO is useful to investors as it provides a meaningful comparison of our performance between periods and between us and other companies and/or REITs.
Consistent with our presentation of Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share, as described below, our reconciliation of FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share begins with net income attributable to Extended Stay America, Inc. common shareholders, which excludes net income attributable to noncontrolling interests, and adds back earnings attributable to ESH REIT’s Class B common shares, presented as a noncontrolling interest of the Company as required by U.S. GAAP. We believe that including earnings attributable to ESH REIT’s Class B common shares in our calculations of FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share provides investors with useful supplemental measures of the Company’s operating performance since our Paired Shares, directly through the pairing of the common stock of the Corporation and Class B common stock of ESH REIT, and indirectly through the Corporation’s ownership of the Class A common stock of ESH REIT, entitle holders to participate in 100% of the common equity and earnings of both the Corporation and ESH REIT. Based on the limitation on transfer provided for in each of the Corporation’s and ESH REIT’s charters, shares of common stock of the Corporation and shares of Class B common stock of ESH REIT are transferable and tradable only in combination as units, each unit consisting of one share of the Corporation’s common stock and one share of ESH REIT Class B common stock.
The Company uses Adjusted FFO and Adjusted FFO per diluted Paired Share when evaluating our performance because we believe the adjustment for certain additional items, described below, provides useful supplemental information to investors regarding our ongoing operating performance and that the presentation of Adjusted FFO and Adjusted FFO per diluted Paired Share, when combined with the U.S. GAAP presentation of net income and net income per common share, is beneficial to the overall understanding of our ongoing performance.
The Company adjusts FFO for the following items, net of tax, as applicable, that are not addressed in NAREIT’s definition of FFO, where applicable for each period presented, and refers to this measure as Adjusted FFO:
•Debt modification and extinguishment costs—We exclude charges related to the write-off of unamortized deferred financing costs, prepayment penalties and other costs associated with the modification and/or extinguishment of debt as we believe they are not reflective of our ongoing or future operating performance.
(Gain) loss on derivatives•Merger transaction expenses—We exclude non-cash gains or losses on interest rate swaps or other derivativestransaction expenses related to our pending merger, as we believe they are not reflective of our ongoing or future operating performance.
Adjusted FFO per diluted Paired Share is defined as Adjusted FFO divided by the weighted average number of Paired Shares outstanding on a diluted basis. Until such time as the number of outstanding common shares of the Corporation and Class B common shares of ESH REIT differ, we believe Adjusted FFO per diluted Paired Share is useful to investors, as it represents a measure of the economic risks and rewards related to an investment in our Paired Shares.
FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share as presented may not be comparable to similar measures calculated by other REITs or real estate companies that include a REIT as part of their legal entity structure. In particular, due to the fact that we present these measures for the Company on a consolidated basis (i.e., including the impact of franchise fees, management fees and income taxes), FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share, may be of limited use to investors comparing our results only to REITs. This information should not be considered as an alternative to net income of the Company, net income of the Corporation, net income ofor ESH REIT, net income per share of common stock of the Corporation, net income per share of Class A or Class B common stock of ESH REIT or any other measure of the Company, the Corporation or ESH REIT calculated in accordance with U.S. GAAP. Real estate related depreciation and amortization expense will continue to be incurred and is not reflected in FFO, Adjusted FFO or Adjusted FFO per diluted Paired Share. Additionally, impairment charges, gains or losses on sales of hotel properties and other charges or income incurred in accordance with U.S. GAAP may occur and are not reflected in FFO, Adjusted FFO or Adjusted FFO per diluted Paired Share. Management separately considers the impact of these excluded items to the extent they are material to operating decisions and assessments of operating performance. The Company’s condensed consolidated statements of operations include these items, all of which should be considered when evaluating our performance, in addition to our non-GAAP financial measures.
We believe that FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share are not meaningful or useful measures for ESH REIT on a stand-alone basis due to the fact that a Paired Share represents an investment in the Company, as a single, consolidated
consolidated enterprise, which is reflected in the consolidated Company results of operations; therefore, we believe these performance measures are most usefulmeaningful for the consolidated Company only.
The following table provides a reconciliation of net income attributable to Extended Stay America, Inc. common shareholders to FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share for the Company for the three and nine months ended September 30, 2017March 31, 2021 and 20162020 (in thousands, except per Paired Share data):
| | | | | | | | | | | | | | | |
| | | Three Months Ended
March 31, |
| | | | | 2021 | | 2020 |
Net income per Extended Stay America, Inc.
common share - diluted | | | | | $ | 0.01 | | | $ | 0.03 | |
| | | | | | | |
| Net income attributable to Extended Stay America, Inc. common shareholders | | | | | $ | 1,921 | | | $ | 4,554 | |
| Noncontrolling interests attributable to Class B common shares of ESH REIT | | | | | 10,441 | | | 3,287 | |
| Real estate depreciation and amortization | | | | | 47,755 | | | 48,881 | |
| | | | | | | |
| Gain on sale of hotel properties | | | | | (12,018) | | | — | |
| Tax effect of adjustments to net income attributable to Extended Stay America, Inc. common shareholders | | | | | (3,038) | | | (1,608) | |
| FFO | | | | | 45,061 | | | 55,114 | |
| | | | | | | |
| Merger transaction expenses | | | | | 4,782 | | | — | |
| Tax effect of adjustments to FFO | | | | | (406) | | | — | |
| Adjusted FFO | | | | | $ | 49,437 | | | $ | 55,114 | |
| Adjusted FFO per Paired Share - diluted | | | | | $ | 0.28 | | | $ | 0.31 | |
| Weighted average Paired Shares outstanding - diluted | | | | | 178,549 | | | 178,171 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net income per Extended Stay America, Inc. common share - diluted | $ | 0.28 |
| | $ | 0.23 |
| | $ | 0.66 |
| | $ | 0.61 |
|
| | | | | | | | |
| Net income attributable to Extended Stay America, Inc. common shareholders | $ | 53,876 |
| | $ | 46,556 |
| | $ | 128,752 |
| | $ | 124,331 |
|
| Noncontrolling interests attributable to Class B common shares of ESH REIT | 12,370 |
| | 10,505 |
| | 3,274 |
| | 8,861 |
|
| Real estate depreciation and amortization | 56,145 |
| | 54,894 |
| | 169,327 |
| | 161,012 |
|
| Impairment of long-lived assets | — |
| | 2,756 |
| | 20,357 |
| | 2,756 |
|
| Loss on sale of hotel properties | — |
| | — |
| | 1,897 |
| | — |
|
| Tax effect of adjustments to net income attributable to Extended Stay America, Inc. common shareholders | (13,138 | ) | | (14,355 | ) | | (44,835 | ) | | (38,063 | ) |
| FFO | 109,253 |
| | 100,356 |
| | 278,772 |
| | 258,897 |
|
| Debt modification and extinguishment costs | — |
| | 14,058 |
| | 1,168 |
| | 26,161 |
|
| Loss on interest rate swap | 103 |
| | — |
| | 356 |
| | — |
|
| Tax effect of adjustments to FFO | (24 | ) | | (3,500 | ) | | (354 | ) | | (6,272 | ) |
| Adjusted FFO | $ | 109,332 |
| | $ | 110,914 |
| | $ | 279,942 |
| | $ | 278,786 |
|
| Adjusted FFO per Paired Share - diluted | $ | 0.57 |
| | $ | 0.55 |
| | $ | 1.44 |
| | $ | 1.38 |
|
| Weighted Average Paired Shares outstanding - diluted | 193,331 |
| | 200,696 |
| | 194,001 |
| | 202,252 |
|
Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share
We present Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share as supplemental measures of the Company’s performance. We believe that these are useful measures for investors since our Paired Shares, directly through the pairing of the common stock of the Corporation and Class B common stock of ESH REIT, and indirectly through the Corporation’s ownership of the Class A common stock of ESH REIT, entitle holders of our Paired Shares to participate in 100% of the common equity and earnings of both the Corporation and ESH REIT. As required by U.S. GAAP, net income attributable to Extended Stay America, Inc. common shareholders excludes earnings attributable to ESH REIT’s Class B common shares, a noncontrolling interest. Based on the limitation on transfer provided for in each of the Corporation’s and ESH REIT’s charters, shares of common stock of the Corporation and shares of Class B common stock of ESH REIT are transferable and tradable only in combination as units, each unit consisting of one share of the Corporation’s common stock and one share of ESH REIT Class B common stock. As a result, we believe that Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share represent useful measures to holders of our Paired Shares.
Paired Share Income is defined as the sum of net income attributable to Extended Stay America, Inc. common shareholders and noncontrolling interests attributable to Class B common shares of ESH REIT. Adjusted Paired Share Income is defined as Paired Share Income adjusted for items that, net of income taxes, we believe are not reflective of our ongoing or future operating performance. We adjust Paired Share Income for the following items, net of income taxes, wheretax, as applicable, for each period presented, and refer to this measure as Adjusted Paired Share Income: debt modification and extinguishment costs, other non-operating expense (income) (including gain or loss on interest rate swaps or other derivatives and foreign currency transaction gain or loss), impairment of long-lived assets, gain or loss on sale of hotel properties, merger transaction expenses, system services (profit) loss, net and other expenses such as the loss on disposal of assets, non-operating (income) expense, including foreign currency transaction costs incurred in connection with secondary offerings and transactioncertain costs associated with the sale of hotel properties.acquisitions, dispositions and/or capital transactions. With the exception of equity-based compensation, an ongoing charge, and debt modification and extinguishment costs, these adjustments (other than the effect of income taxes) are the same as those used in the reconciliation of net income calculated in accordance with U.S. GAAP to EBITDA toand Adjusted EBITDA.
Adjusted Paired Share Income per diluted Paired Share is defined as Adjusted Paired Share Income divided by the number of Paired Shares outstanding on a diluted basis. Until such time as the number of outstanding common shares of the
Corporation and Class B common shares of ESH REIT differ, we believe Adjusted Paired Share Income per diluted Paired Share is useful to investors, as it represents aone measure of the economic risks and rewards related to an investment in our
Paired Shares. We believe that Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share provide meaningful indicators of the Company’s operating performance in addition to separate and/or individual analyses of net income attributable to common shareholders of the Corporation and net income attributable to Class B common shareholders of ESH REIT, each of which is impacted by specific U.S. GAAP requirements, including the recognition of contingent lease rental revenues and the recognition of fixed minimum lease rental revenues on a straight-line basis, and may not reflect how cash flows and/or earnings are generated on an individual entity or total enterprise basis. Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share should not be considered as an alternative to net income of the Company, net income of the Corporation net income ofor ESH REIT, net income per share of common stock of the Corporation, net income per share of Class A or Class B common stock of ESH REIT or any other measure of the Company, the Corporation or ESH REIT calculated in accordance with U.S. GAAP.
We believe that Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share are not meaningful or useful measures for ESH REIT on a stand-alone basis due to the fact that a Paired Share represents an investment in the Company, as a single, consolidated enterprise, which is reflected in the condensed consolidated Company results of operations; therefore, we believe these performance measures are most meaningful for the consolidated Company only.
The following table provides a reconciliation of net income attributable to Extended Stay America, Inc. common shareholders to Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share for the three and nine months ended September 30, 2017March 31, 2021 and 20162020 (in thousands, except per Paired Share data): | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended
March 31, | |
| 2017 |
| 2016 |
| 2017 | | 2016 | | | 2021 | | 2020 | |
| Net income per Extended Stay America, Inc. common share - diluted | $ | 0.28 |
| | $ | 0.23 |
| | $ | 0.66 |
| | $ | 0.61 |
| | Net income per Extended Stay America, Inc. common
share - diluted | $ | 0.01 | | | $ | 0.03 | | |
| | | | | | | | | | | | | | |
| Net income attributable to Extended Stay America, Inc. common shareholders | $ | 53,876 |
| | $ | 46,556 |
| | $ | 128,752 |
| | $ | 124,331 |
| | Net income attributable to Extended Stay America, Inc. common shareholders | $ | 1,921 | | | $ | 4,554 | | |
| Noncontrolling interests attributable to Class B common shares of ESH REIT | 12,370 |
|
| 10,505 |
|
| 3,274 |
| | 8,861 |
| | Noncontrolling interests attributable to Class B common shares of ESH REIT | 10,441 | | | 3,287 | | |
| Paired Share Income | 66,246 |
|
| 57,061 |
|
| 132,026 |
| | 133,192 |
| | Paired Share Income | 12,362 | | | 7,841 | | |
| Debt modification and extinguishment costs | — |
|
| 14,058 |
|
| 1,168 |
| | 26,161 |
| | |
| Other non-operating income | (278 | ) | (1) | (305 | ) | (2) | (426 | ) | (3) | (1,069 | ) | (4) | |
| Impairment of long-lived assets | — |
|
| 2,756 |
|
| 20,357 |
| | 2,756 |
| | |
| Loss on sale of hotel properties | — |
|
| — |
|
| 1,897 |
| | — |
| | |
| Other expenses | 2,314 |
| (5) | 2,666 |
| (6) | 9,333 |
| (7) | 7,718 |
| (8) | |
| | Gain on sale of hotel properties | | Gain on sale of hotel properties | (12,018) | | | — | | |
| Merger transaction expenses | | Merger transaction expenses | 4,782 | | | — | | |
| System services loss, net | | System services loss, net | 639 | | | 417 | | |
Other expense (1) | | Other expense (1) | 1,149 | | | 4,046 | | |
| Tax effect of adjustments to Paired Share Income | (477 | ) |
| (4,775 | ) |
| (7,570 | ) | | (8,505 | ) | | Tax effect of adjustments to Paired Share Income | 464 | | | (147) | | |
| Adjusted Paired Share Income | $ | 67,805 |
|
| $ | 71,461 |
|
| $ | 156,785 |
| | $ | 160,253 |
| | Adjusted Paired Share Income | $ | 7,378 | | | $ | 12,157 | | |
| Adjusted Paired Share Income per Paired Share – diluted | $ | 0.35 |
|
| $ | 0.36 |
|
| $ | 0.81 |
| | $ | 0.79 |
| | Adjusted Paired Share Income per Paired Share – diluted | $ | 0.04 | | | $ | 0.07 | | |
| Weighted average Paired Shares outstanding – diluted | 193,331 |
|
| 200,696 |
|
| 194,001 |
| | 202,252 |
| | Weighted average Paired Shares outstanding – diluted | 178,549 | | | 178,171 | | |
| |
(1) | Includes foreign currency transaction gain of approximately $0.4 million and loss related to interest rate swap of approximately $0.1 million. |
| |
(2) | Includes foreign currency transaction gain of approximately $0.3 million. |
| |
(3) | Includes foreign currency transaction gain of approximately $0.8 million and loss related to interest rate swap of approximately $0.4 million. |
| |
(4) | Includes foreign currency transaction gain of approximately $1.1 million. |
| |
(5) | Includes loss on disposal of assets of approximately $2.1 million, transaction costs of approximately $0.1 million due to the revision of an estimate related to the sale of the three Canadian hotel properties in May 2017 and costs incurred in connection with the second quarter 2017 secondary offerings of approximately $0.1 million. |
| |
(6) | Includes loss on disposal of assets of approximately $2.2 million and costs incurred in connection with the October 2016 secondary offering of approximately $0.4 million. |
| |
(7) | Includes loss on disposal of assets of approximately $8.1 million, and costs incurred in connection with the second quarter 2017 secondary offerings of approximately $1.1 million and transaction costs of approximately $0.1 million due to the revision of an estimate related to the sale of the three Canadian hotel properties in May 2017. |
_________________________
| |
(8) | Includes loss on disposal of assets of approximately $7.2 million, costs incurred in connection with the October 2016 secondary offering of approximately $0.4 million and transaction costs of approximately $0.1 million due to the revision of an estimate related to the sale of 53 hotel properties in December 2015. |
(1)Includes loss on disposal of assets and non-operating (income) expense, including foreign currency transaction costs. Loss on disposal of assets totaled $1.2 million and $3.3 million, respectively.
Liquidity and Capital Resources
Company Overview
On a consolidated basis, weWe have historically generated significant cash flow from operations and have financed our ongoing business primarilyas well as the execution of our strategic objectives with existing cash, cash flow generated from operations, borrowings under our revolving credit facilities, as needed, and, in certain instances, proceeds from asset dispositions. We generated cash flow from operations of approximately $369.4$91.3 million and $92.3 million for the ninethree months ended September 30, 2017.March 31, 2021 and 2020, respectively.
Our currentCurrent liquidity requirements consist primarily of funds necessary to pay for or fund (i) hotel operating expenses, (ii) recurring maintenance and capital expenditures, necessaryincluding capital expenditures incurred to maintain ourcomplete the construction of two new hotels in process and certain hotel renovations, (iii) investments in franchise and other fee-based programs, (iv) general and administrative expenses, (iv)including expenses related to our pending merger, (v) debt service obligations, including interest expense, (v)(vi) income taxes, (vi) Paired Share repurchases, (vii) Corporation distributions and required ESH REIT distributions and (viii) certain phasescontinued focus on our core operations and business strategy,
including rebranding our hotels to the Extended Stay America Suites brand or the Extended Stay America Premier Suites brand, each of our growth and other strategic initiatives (See “Overview”).which we expect to operate under the Extended Stay America umbrella brand. We expect to fund our current liquidity requirements from a combination of cash on hand, cash flow generated from operations borrowings under our revolving credit facilities, as needed, and, in certain instances, proceeds from asset dispositions. We may also fund a portion of our current liquidity requirements with the borrowings under our revolving credit facilities.
The COVID-19 pandemic had a material adverse effect on the Company's cash flows from operations during the year ended December 31, 2020. Despite this impact, the Company continues to generate positive cash flow from operations, net of interest and capital expenditures. It remains difficult to predict when pre-pandemic demand and pricing for our hotels will resume. We may choose to delay the execution of certain of our business strategies and reduce operating costs and certain capital expenditures in order to preserve liquidity. As of March 31, 2021, the Company's total available borrowing capacity under its revolving credit facilities was $390.0 million.
Long-term liquidity requirements consist of funds necessary to (i) completemake future hotel renovations (ii) repurpose and/or rebuild certain hotels, (iii) construct new hotels, (iv) acquire additional hotel properties and/or other lodging companies, (iii) execute our business strategy and strategic initiatives, including rebranding our hotels to the Extended Stay America Suites brand or the Extended Stay America Premier Suites brand, each of which we expect to operate under the Extended Stay America umbrella brand, (iv) pay Corporation and required ESH REIT distributions, (v) repay and/or refinance (including prior to oroutstanding amounts under our existing debt obligations, including the Corporation Revolving Credit Facility due in connection with debt maturity payments)September 2024, the 2025 Notes due in May 2025, the ESH REIT’s 2016REIT Term Facility and ESH REIT’s 5.25% senior notes due in 2025 (the “2025 Notes”) maturingSeptember 2026 and the 2027 Notes due in August 2023 and May 2025, respectively.October 2027. See Note 7 to each of the unaudited condensed consolidated financial statements of Extended Stay America, Inc. and Note 6 to the unaudited condensed consolidated financial statements of ESH Hospitality, Inc., both of which are included in Item 1 inof this combined quarterly report on Form 10-Q, for additional detail related to our debt obligations.detail.
With respect to our long-term liquidity requirements, specifically our ability to refinance our existing outstanding debt obligations, we cannot assure you that the Corporation and/or ESH REIT will be able to refinance any of its debt on attractive terms at or before maturity, on commercially reasonable terms or at all, or the timing of any such refinancing. We expect to meet our long-term liquidity requirements through various sources of capital, including future debt financings or equity issuances by the Corporation and/or ESH REIT, existing working capital, cash flow generated from operations and in certain instances proceeds from asset dispositions. However, thereThere are a number of factors that may have a material adverse effect on our ability to access these capital sources,refinance our existing debt obligations, including the current and future state of overall capital and credit markets generally and as a result of the COVID-19 pandemic, our degree of leverage, the value of our unencumbered assets, and borrowing restrictions imposed by existing or prospective lenders, general market conditions for the lodging industry, our operating performance and liquidity and market perceptions about us. The success of our business strategies will depend, in part, on our ability to access these various capital sources. There can be no assurance that we will be able to raise any such financing on terms acceptable to us or at all.
Cash Balances.The Company had unrestricted cash and cash equivalents of approximately $116.7$357.9 million and $396.8 million at September 30, 2017.March 31, 2021 and December 31, 2020, respectively. Based upon the current level of operations, management believes that our cash flow from operations, together with our cash balances, and availableincluding the $9.8 million of borrowings under our revolving credit facilities, willthe Corporation's Revolving Credit Facility, is expected to be adequate to meet ourthe Company’s anticipated funding requirements and business objectives for the foreseeable future. We regularly review our capital structureHowever, the length and at any time may refinance or repay existing indebtedness, incur new indebtedness or purchase debt or equity securities.severity of the COVID-19 pandemic and its economic impact continues to be highly uncertain and the potential future worsening of macroeconomic conditions could require the Company to reassess its liquidity position and take additional measures of liquidity preservation to ensure it can satisfy financial obligations as they come due.
On November 7, 2017,Debt Obligations. During the Boardthree months ended March 31, 2021, the Company repaid $40.0 million under the Corporation Revolving Credit Facility. As of Directors ofMarch 31, 2021, the outstanding balance under the Corporation Revolving Credit Facility was $9.8 million and the Corporation and ESH REIT declared a cash distributionhad $40.0 million and $350.0 million of $0.10 per Class A and Class B common share for the third quarteravailable borrowing capacity, respectively, under each of 2017. Additionally, the Board of Directors of the Corporation declared a cash distribution of $0.11 per common share for the third quarter of 2017. These distributions, which total $0.21 per Paired Share, will be payable on December 5, 2017 to shareholders of record as of November 21, 2017.
The following table outlines distributions declared or paid to date in 2017:
|
| | | | | | | | | | | |
| Declaration Date | Record Date | Date Paid/Payable | ESH REIT Distribution | Corporation Distribution | Total Distribution |
| | | | | | |
| 11/7/2017 | 11/21/2017 | 12/5/2017 | $ | 0.10 |
| $ | 0.11 |
| $ | 0.21 |
|
| 8/1/2017 | 8/15/2017 | 8/29/2017 | $ | 0.14 |
| $ | 0.07 |
| $ | 0.21 |
|
| 4/27/2017 | 5/11/2017 | 5/25/2017 | $ | 0.14 |
| $ | 0.07 |
| $ | 0.21 |
|
| 2/28/2017 | 3/14/2017 | 3/28/2017 | $ | 0.15 |
| $ | 0.04 |
| $ | 0.19 |
|
In June 2017, the Corporation repurchased 14,069 of 21,202 outstanding shares of 8.0% voting preferred stock outstanding from our Former Sponsors at par value, or approximately $14.1 million. The repurchased shares included all preferred stock held by funds or affiliates of Centerbridge Partners, L.P. and The Blackstone Group L.P.; funds or affiliates of Paulson & Co. Inc., a Former Sponser, hold 7,036 of the remaining 7,133 shares of 8.0% voting preferred stock outstanding. On or after November 15, 2018, a holder of the 8.0% voting preferred stock has the right to require the Corporation to redeem in cash the 8.0% voting preferred stock at $1,000 per share plus any accumulated unpaid dividends. On November 15,May 2020, the Corporation shall mandatorily redeem all of the 8.0% voting preferred stock at $1,000 per share plus any accumulated unpaid dividends.
In March 2017, ESH REITCompany entered into an amendment to the 2016 TermCorporation Revolving Credit Facility whereby it obtained a suspension of the quarterly tested leverage covenant from the beginning of the second quarter of 2020 through the end of the first quarter of 2021 (the “Four Quarter Suspension Period”). For the second quarter of 2021 through the fourth quarter of 2021, the leverage covenant calculation was modified to use annualized EBITDA as opposed to trailing twelve-month EBITDA. Throughout the Four Quarter Suspension Period, the Company has agreed to maintain minimum liquidity of $150.0 million and to limit share repurchases and dividend payments made by the Corporation. Additionally, the amendment provides for the Corporation to borrow up to $150.0 million from ESH REIT through an intercompany loan facility.
The Company’s compliance with financial covenants under its debt obligations could be impacted by current or future economic conditions associated with the lenders thereunder (such amendment,pandemic. We may not be able to maintain compliance with our debt covenants or pay debt obligations as they become due and could risk default under the "Repricing Amendment"). The Repricing Amendment hadagreements governing the following impactCompany's indebtedness, upon which the amount outstanding could be accelerated and may raise substantial doubt about our ability to continue as a going concern.
See Note 7 to each of the condensed consolidated financial statements of Extended Stay America, Inc. and ESH Hospitality, Inc., included in Item 1 of this combined quarterly report on the 2016 Term Facility: (i) decreased the interest rate spread on LIBOR based loans from 3.0%Form 10-Q, for additional detail related to 2.5%; (ii) decreased the interest rate spread on base rate loans from 2.0% to 1.5%; (iii) removed the floor of 0.75% on LIBOR based loans; (iv) removed the floor of 2.0% on base rate loans; (v) removed ranges on interest rate spreads for all loan types that were dependent upon ESH REIT’s credit rating;our debt obligations and (vi) extended the 1% prepayment penalty through September 1, 2017 (prepayments made after September 1, 2017 are not subject to a prepayment penalty, other than customary “breakage” costs).related covenants.
Paired Share Repurchase Program. In December 2015, the Boards of Directors of the Corporation and ESH REIT authorized a combined Paired Share repurchase program. As a result of several increases in authorized amounts and program for up to $100 million of Paired Shares. In February 2016, the Boards of Directors of the Corporation and ESH REIT authorized an increase ofextensions, the combined Paired Share repurchase program from up to $100 million to up to $200 million of Paired Shares. In December 2016, the Boards of Directors ofcurrently authorizes the Corporation and ESH REIT authorized an increase of the combined Paired Share repurchase program fromto purchase up to $200$550.0 million to up to $300 million ofin Paired Shares and extended the maturity date of the program through December 31, 2017, each effective January 1, 2017.2021. Repurchases may be made at management’s discretion from time to time in the open market, in privately negotiated transactions or by other means (including through Rule 10b5-1 trading plans). As of September 30, 2017, since the inception of the program,March 31, 2021, the Corporation and ESH REIT had repurchased and retired their respective portion of approximately 12.828.6 million Paired Shares for approximately $198.7 million. Approximately $101.4$283.0 million is remainingand $166.4 million, including transaction fees, respectively, and $101.1 million remained available under the repurchase program.
In the future, we intend to maintain or increase our current distribution of $0.21 percombined Paired Share repurchase program.
Distributions. The following table outlines distributions declared or paid to date in 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Declaration Date | | Record Date | | Date Paid/Payable | | ESH REIT Distribution | | Corporation Distribution | | Total Distribution |
| | | | | | | | | | |
| 2/25/2021 | | 3/12/2021 | | 3/26/2021 | | $0.09 | | $— | | $0.09 |
| 12/22/2020 | | 1/6/2021 | | 1/20/2021 | | $0.35 | | $— | | $0.35 |
| | | | | | | | | | |
| | | | | | | | | | |
We do not expect to pay our regular quarterly distribution during the pendency of transactions contemplated by the Merger Agreement. Under the terms of the Merger Agreement, Parent may request that the Corporation pay a special distribution (the “Special Dividend”) immediately prior to the closing of up to $1.75 per quarter unless our consolidated resultsshare of operations, net income, Adjusted EBITDA, liquidity,Corporation common stock, in which case the cash flows, financial condition or prospects, economic conditions or other factors differ materially from our current assumptions. We intend to make a significant portion of our expected total annual distributionsconsideration paid in the merger in respect of the Class Ba share of Corporation common stock shall be reduced by the amount of ESH REIT. In the event distributions in respect of the Class B common stock of ESH REIT are not sufficient to meet our expected Paired Share distributions and/or additional tax efficiency opportunities exist, expected Paired Share distributions may be completed through distributions in respect of the common stock of the Corporation using funds distributed to the Corporation in respect of the Class A common stock of ESH REIT, after allowance for tax, if any, on those funds.such Special Dividend. See “Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Distribution Policies” in our combined annual report on Form 10-K filed with the SEC on February 28, 2017 for a description of our distribution policies.“Overview—Pending Merger”.
The Corporation
The Corporation’s primary source of liquidity is distribution income it receives in respect of its ownership of 100% of the Class A common stock of ESH REIT, which as of September 30, 2017,March 31, 2021, represents approximately 57%58% of the outstanding common stock of ESH REIT. Distributions are subject to uncertainty due to the volatility of macroeconomic trends, including the evolving nature of the COVID-19 pandemic. Other sources of liquidity include income from the operations of the Operating Lessees, ESA Management, ESH Strategies and ESH Strategies.
In August 2016, the Corporation loaned $75.0 million to ESH REIT under an unsecured intercompany credit facility (the "Unsecured Intercompany Facility"). As of September 30, 2017, the outstanding balance under the Unsecured Intercompany Facility was $50.0 million. Subject to certain conditions, the outstanding balance under the Unsecured Intercompany Facility may be increased to up to $300.0 million. See Notes 7 and 11 to the unaudited condensed consolidated financial statements of
Extended Stay America, Inc. and Notes 6 and 9 to the unaudited condensed consolidated financial statements of ESH Hospitality, Inc., both of which are included in Item 1 in this combined quarterly report on Form 10-Q, for additional detail on the Unsecured Intercompany Facility.Strategies Franchise.
The Corporation’s current liquidity requirements consist primarily of funds necessary to pay for or fund (i) hotel operating expenses, (ii) general and administrative expenses, (iii) interest expense on its 8.0% voting preferred stock outstanding,debt service obligations, (iv) income taxes, (v) Paired Share repurchases,investments in its franchise and other fee programs and (vi) Corporation distributions. The Corporation expects to fund its current liquidity requirements from a combination of cash on hand, including funds borrowed under the Corporation Revolving Credit Facility or borrowings from ESH REIT, as lender, under the Corporation Intercompany Facility (defined below), as well as cash flow generated from operations, (includingincluding distribution income it receives in respect of its ownership of 100% of the Class A common stock of ESH REIT) and borrowings under its revolving credit facility, as needed. REIT.
The Corporation’s long-term liquidity requirements will also include the repayment of any outstanding amounts under its revolving credit facilitythe Corporation Revolving Credit Facility, and the repayment of its 8.0% voting preferred stock outstanding whose total par value is approximately $7.1 million.amounts, if any, under the Corporation Intercompany Facility. See NotesNote 7 and 9 to the unaudited condensed consolidated financial statements of Extended Stay America, Inc., which are included in Item 1 inof this combined quarterly report on Form 10-Q, for additional detail on the Corporation’s debt obligations.detail.
The Corporation is expected to continue to pay distributions on its common stock to meet a portion of our expected distribution rate on our Paired Shares. The Corporation'sCorporation’s ability to pay distributions is dependent upon a number of factors, including but not limited to, its results of operations, net income, liquidity, cash flows, financial condition or prospects, economic conditions, the ability to effectively execute certain tax planning strategies, compliance with applicable law, the receipt of distributions from ESH REIT in respect of the Class A common stock, level of indebtedness, capital requirements, contractual restrictions, restrictions in any existing and future debt agreements of the Corporation and ESH REIT and other factors. The payment of future distributions in the future will beis at the discretion of the Corporation’s Board of Directors.
FromDuring the three months ended March 31, 2021, the Corporation repaid $40.0 million under the Corporation Revolving Credit Facility. As of March 31, 2021, the outstanding balance under the Corporation Revolving Credit Facility was $9.8 million and the Corporation had $40.0 million of available borrowing capacity under the facility.
In July 2020, the Corporation, as borrower, and ESH REIT, as lender, entered into an unsecured credit facility (the “Corporation Intercompany Facility”). Under the Corporation Intercompany Facility, the Corporation may borrow up to $150.0 million from ESH REIT. Loans under the facility bear interest at an annual rate of 4.5%. In addition to paying interest on
outstanding principal, the Corporation is required to pay a commitment fee to ESH REIT of 0.25% on the unutilized facility balance. There is no scheduled amortization under the facility and the facility matures on July 2, 2025. Obligations under the Corporation Intercompany Facility and guarantees thereof are unsecured and fully subordinated to the obligations of the Corporation under the Corporation Revolving Credit Facility. The Corporation has the option to prepay outstanding balances under the facility without penalty. As of March 31, 2021, the outstanding balance under the facility was $0.
ESH REIT may return additional cash to the Corporation for the Corporation to fund its current and long-term liquidity requirements or for other corporate purposes. ESH REIT may transfer cash to the Corporation through the redemption of shares of Class A common stock, which would decrease the Corporation's ownership of ESH REIT. Such redemption would likely be inefficient from a tax perspective because the redemption would be taxed as an ordinary dividend. Additionally, ESH REIT may loan funds to the Corporation under the Corporation Intercompany Facility, subject to the conditions contained in the Corporation Revolving Credit Facility and other existing debt agreements.
Based upon the current level of operations, we believe that the Corporation’s cash position and cash flow generated from operations will be adequate to meet all the Corporation’s funding requirements and business objectives for the foreseeable future.
ESH REIT
ESH REIT’s primary source of liquidity is rental revenues derived from leases. The leases expire in October 2023, and at such time, we expect minimum and percentage rents to time,be adjusted to reflect then-current market terms.
ESH REIT’s current liquidity requirements include funds necessary to pay (i) costs associated with ownership of hotel properties, (ii) debt service obligations, including interest expense, and with respect to the ESH REIT Term Facility, scheduled principal payments on outstanding borrowings, (iii) real estate tax expense, (iv) property insurance expense, (v) general and administrative expense, including administrative service costs reimbursed to the Corporation, (vi) capital expenditures, including those capital expenditures incurred to complete certain hotel renovations, the completion of construction of two new hotels in-process and rebranding hotels to the Extended Stay America Suites brand or the Extended Stay America Premier Suites brand, vii) draws made by the Corporation on the Corporation Intercompany Facility and (viii) the payment of required REIT distributions.
ESH REIT’s long-term liquidity requirements consist of funds necessary to (i) complete future hotel renovations, including at those hotels which may rebrand to the Extended Stay America Premier Suites brand (ii) acquire additional hotel properties and/or other lodging companies, (iii) pay required REIT distributions, (iv) fund draws made by the Corporation on the Corporation Intercompany Facility, (v) repay any outstanding amounts under the ESH REIT Revolving Credit Facility and (vi) refinance (including prior to or in connection with debt maturity payments) the 2025 Notes, the ESH REIT Term Facility and the 2027 Notes maturing in May 2025, September 2026 and October 2027, respectively. See Note 7 to the condensed consolidated financial statements of ESH Hospitality, Inc., included in Item 1 of this combined quarterly report on Form 10-Q, for additional detail on ESH REIT’s debt obligations.
In order to qualify and maintain its status as a REIT, ESH REIT must distribute annually to its shareholders an amount at least equal to:
•90% of its REIT taxable income, computed without regard to the deduction for dividends paid and excluding any net capital gain; plus
•90% of the excess of its net income, if any, from foreclosure property over the tax imposed on such income by the Code; less
•the sum of certain items of non-cash income that exceeds a percentage of ESH REIT’s income.
ESH REIT intends to distribute its taxable income to the extent necessary to optimize its tax efficiency including, but not limited to, maintaining its REIT status, while retaining sufficient capital for its ongoing needs. ESH REIT is subject to income tax on its taxable income that is not distributed and to an excise tax to the extent that certain percentages of its taxable income are not distributed by specified dates.
We expect that ESH REIT will need to refinance all or a portion of its outstanding debt, including the 2025 Notes, the ESH REIT Credit Facilities and the 2027 Notes, on or before maturity. See Note 7 to the condensed consolidated financial statements of ESH Hospitality, Inc., included in Item 1 of this combined quarterly report on Form 10-Q, for additional detail. We cannot assure you that ESH REIT will be able to refinance any of its debt on attractive terms at or before maturity, on commercially reasonable terms or at all.
As of March 31, 2021, the outstanding balance under the ESH REIT Revolving Credit Facility was $0 and available borrowing capacity was $350.0 million.
In August 2016, ESH REIT, as borrower, and the Corporation, as lender, entered into an unsecured intercompany credit facility (the “ESH REIT Intercompany Facility”). Under the ESH REIT Intercompany Facility, ESH REIT may borrow up to $300.0 million, plus additional amounts, in each case subject to certain conditions. There is no scheduled amortization under the facility and the facility matures in September 2026. As of March 31, 2021, the outstanding balance under the ESH REIT Intercompany Facility was $0.
The Corporation may return additional cash to ESH REIT in order for ESH REIT to pay for or fund (i) its current and long-term liquidity requirements, (ii) capital expenditures, (see "Liquidity and Capital Resources - ESH REIT"), (ii)(iii) outstanding debt obligations or (iii)(iv) for other corporate purposes. The Corporation may transfer cash to ESH REIT through the purchase of additional shares of Class A common stock, which would increase its ownership of ESH REIT and reduce the Company’s overall tax efficiency. Additionally, the Corporation may loan additional funds to ESH REIT under the UnsecuredESH REIT Intercompany Facility, (whose principal amount, subject to certain conditions, may be increased to up to $300.0 million) or an additional intercompany facility, subject to the conditions contained in the 2016existing debt agreements. The Corporation does not expect to return additional cash to ESH REIT Credit Facilities,in the 2025 Notes andforeseeable future to the Unsecured Intercompany Facility.extent it is not required under existing agreements or applicable law.
Based upon the current level of operations, management believes that the Corporation’s cash position, cash flow generated from operations and available borrowings under its revolving credit facility, as needed, will be adequate to meet all of the Corporation’s funding requirements and business objectives for the foreseeable future.
ESH REIT
ESH REIT’s primary source of liquidity is rental revenues derived from leases. ESH REIT’s current liquidity requirements include (i) fixed costs associated with ownership of hotel properties, including interest expense, (ii) scheduled principal payments on its outstanding indebtedness, including the repayment of any outstanding amounts under the 2016 ESH REIT Credit Facilities and the Unsecured Intercompany Facility, (iii) real estate tax expense, (iv) property insurance premium and claims expense, (v) general and administrative expenses (including administrative costs reimbursed to the Corporation), (vi) capital expenditures, including capital expenditures incurred to perform hotel renovations, repurpose and/or rebuild certain hotels, construct new hotels and acquire additional hotel properties and/or other lodging companies and (vii) the payment of distributions.
ESH REIT’s long-term liquidity requirements include funds necessary to (i) perform capital expenditures related to hotel renovations, (ii) repurpose and/or rebuild certain of ESH REIT’s existing hotel properties, (iii) build new Extended Stay America branded owned hotels, (iv) acquire additional hotel properties and/or other lodging companies, and (v) refinance (including prior to or in connection with debt maturity payments) ESH REIT’s 2016 Term Facility and ESH REIT’s 2025 Notes maturing in August 2023 and May 2025, respectively. See Note 6 to the unaudited condensed consolidated financial statements of ESH Hospitality, Inc., which are included in Item 1 in this combined quarterly report on Form 10-Q, for additional detail on ESH REIT’s debt obligations.
In order to qualify and maintain its status as a REIT, ESH REIT must distribute annually to its shareholders an amount at least equal to:
90% of its REIT taxable income, computed without regard to the deduction for dividends paid and excluding any net capital gain; plus
90% of the excess of its net income, if any, from foreclosure property over the tax imposed on such income by the Code; less
the sum of certain items of non-cash income that exceeds a percentage of ESH REIT’s income.
ESH REIT intends to distribute its taxable income to the extent necessary to optimize its tax efficiency, including, but not limited to, maintaining its REIT status, while retaining sufficient capital for its ongoing needs. Accordingly, ESH REIT expects to distribute approximately 100% of its taxable income for the foreseeable future. ESH REIT is subject to income tax on its taxable income that is not distributed and to an excise tax to the extent that certain percentages of its taxable income are not distributed by specified dates. To the extent distributions in respect of the Class B common stock of ESH REIT are not sufficient to meet our expected Paired Share distributions, Paired Share distributions are expected to be completed through distributions in respect of the common stock of the Corporation using funds distributed to the Corporation in respect of the Class A common stock of ESH REIT, after allowance for tax, if any, on those funds.
Due to REIT distribution requirements, ESH REIT has historically not accumulated significant amounts of cash. As a result and as discussed above, we expect that ESH REIT will need to refinance all or a portion of its outstanding debt, including the 2016 ESH REIT Credit Facilities and the 2025 Notes, on or before maturity. See Note 6 to the unaudited condensed consolidated financial statements of ESH Hospitality, Inc., which are included in Item 1 in this combined quarterly report on Form 10-Q, for additional detail on ESH REIT’s debt obligations. We cannot assure you that ESH REIT will be able to refinance any of its debt on attractive terms at or before maturity, on commercially reasonable terms or at all.
Based upon the current level of operations, management believesbelieve that ESH REIT’s cash position, cash flow generated from operations and, available borrowings under its revolving credit facility and Unsecured Intercompany Facility, as needed,in certain circumstances, proceeds from asset sales, will be adequate to meet all of ESH REIT’s funding requirements and business objectives for the foreseeable future.
Sources and Uses of Cash – The Company
The following cash flow table and comparisons are provided for the Company:
Comparison of NineThree Months Ended September 30, 2017March 31, 2021 and September 30, 2016March 31, 2020
We had unrestrictedtotal cash, and cash equivalents and restricted cash of approximately $116.7$371.0 million and $149.8$725.0 million at September 30, 2017March 31, 2021 and 2016,2020, respectively. The following table summarizes the changes in our cash, and cash equivalents and restricted cash as a result of operating, investing and financing activities for the ninethree months ended September 30, 2017March 31, 2021 and 20162020 (in thousands): | | | | Nine Months Ended September 30, | | | | Three Months Ended March 31, | |
| | 2017 | | 2016 | | Change ($) | | 2021 | | 2020 | | Change ($) |
| Cash provided by (used in): |
|
|
|
|
| Cash provided by (used in): | | | | | |
| Operating activities | $ | 369,419 |
| | $ | 335,990 |
|
| $ | 33,429 |
| Operating activities | $ | 91,346 | | | $ | 92,285 | | | $ | (939) | |
| Investing activities | (84,208 | ) | | (100,793 | ) |
| 16,585 |
| Investing activities | (8,513) | | | (53,623) | | | 45,110 | |
| Financing activities | (252,984 | ) | | (458,635 | ) |
| 205,651 |
| Financing activities | (121,745) | | | 324,827 | | | (446,572) | |
| Effects of changes in exchange rate on cash and cash equivalents | 275 |
| | 34 |
|
| 241 |
| Effects of changes in exchange rate on cash and cash equivalents | — | | | (150) | | | 150 | |
| Net increase (decrease) in cash and cash equivalents | $ | 32,502 |
| | $ | (223,404 | ) |
| $ | 255,906 |
| |
| Net (decrease) increase in cash and cash equivalents | | Net (decrease) increase in cash and cash equivalents | $ | (38,912) | | | $ | 363,339 | | | $ | (402,251) | |
Cash Flows provided by Operating Activities
Cash flows provided by operating activities totaled approximately $369.4$91.3 million for the ninethree months ended September 30, 2017March 31, 2021, compared to approximately $336.0$92.3 million for the ninethree months ended September 30, 2016, an increaseMarch 31, 2020, a decrease of approximately $33.4$0.9 million. CashThe decrease in cash flows provided by operating activities were positively impacted duringwas a result of a slight decline in hotel operating income, primarily due to a 5.5% decrease in ADR driven by the nine months ended September 30, 2017negative impact of the COVID-19 pandemic, partially offset by additional cash generated from improved operating performance, specifically a 1.3% increase in RevPAR and a 60310 bps increase in Hotel Operating Margin, as well as a decrease in income tax payments of $24.4 million, partially offset by higher cash interest payments of $3.2 million.occupancy.
Cash Flows used in Investing Activities
Cash flows used in investing activities totaled approximately $84.2$8.5 million for the ninethree months ended September 30, 2017March 31, 2021, compared to approximately $100.8$53.6 million for the ninethree months ended September 30, 2016,March 31, 2020, a decrease of approximately
$16.6$45.1 million. CashThe decrease in cash flows used in investing activities was due to a net decrease in investment in property and equipment, including development in process and intangible assets, of $24.1 million. In addition, cash flows used in investing activities decreased during the nine months ended September 30, 2017 due to a decrease in purchases of property and equipment of $33.6 million as a result of $21.9 million in proceeds received from the completiondisposition of our hotel renovation programtwo hotels during the second quarter of 2017. Additionally,three months ended March 31, 2021, whereas no hotel properties were sold during the ninethree months ended September 30, 2017, the Company received net proceeds of approximately $48.0 million related to the sale of four hotels. These changes were offset by a decrease in restricted cash of approximately $62.7 million provided in 2016 by escrow accounts as a result of the repayment of ESH REIT’s mortgage loan in August 2016.March 31, 2020.
Cash Flows used in(used in) provided by Financing Activities
Cash flows used in financing activities totaled approximately $253.0$121.7 million for the ninethree months ended September 30, 2017March 31, 2021 compared to approximately $458.6 millioncash flows provided by financing activities of $324.8 million for the ninethree months ended September 30, 2016, a decrease of approximately $205.6 million.March 31, 2020. Cash flows used in
financing activities decreased mainlychanged due to lower net debt repayments of $152.1a $439.7 million a decrease in net proceeds received from financing transactions and an increase in Paired Share distributions paid toof $37.1 million, partially offset by a $31.1 million decrease in Paired Shareholders of approximately $44.0 million as a result of the special distribution paid in January 2016 and fewer shareShare repurchases.
Sources and Uses of Cash – ESH REIT
The following cash flow table and comparisons are provided for ESH REIT:
Comparison of NineThree Months Ended September 30, 2017March 31, 2021 and September 30, 2016March 31, 2020
ESH REIT had unrestrictedtotal cash and cash equivalents of approximately $65.0$288.0 million and $36.4$628.9 million at September 30, 2017March 31, 2021 and 2016,2020, respectively. The following table summarizes the changes in ESH REIT’s cash and cash equivalents as a result of operating, investing and financing activities for the ninethree months ended September 30, 2017March 31, 2021 and 20162020 (in thousands):
| | | | Nine Months Ended September 30, | | | | Three Months Ended March 31, | |
| 2017 | | 2016 | | Change ($) | | 2021 | | 2020 | | Change ($) |
| Cash provided by (used in): |
| |
|
|
| Cash provided by (used in): | | | | | |
| Operating activities | $ | 368,479 |
| | $ | 375,253 |
|
| $ | (6,774 | ) | Operating activities | $ | 108,155 | | | $ | 108,295 | | | $ | (140) | |
| Investing activities | (88,079 | ) | | (100,871 | ) |
| 12,792 |
| Investing activities | (6,682) | | | (52,957) | | | 46,275 | |
| Financing activities | (268,893 | ) | | (461,215 | ) |
| 192,322 |
| Financing activities | (189,199) | | | 277,415 | | | (466,614) | |
| Net increase (decrease) in cash and cash equivalents | $ | 11,507 |
| | $ | (186,833 | ) |
| $ | 198,340 |
| |
| | Net (decrease) increase in cash and cash equivalents | | Net (decrease) increase in cash and cash equivalents | $ | (87,726) | | | $ | 332,753 | | | $ | (420,479) | |
Cash Flows provided by Operating Activities
Cash flows provided by operating activities totaled approximately $368.5$108.2 million for the ninethree months ended September 30, 2017March 31, 2021 compared to approximately $375.3$108.3 million for the ninethree months ended September 30, 2016,March 31, 2020, a decrease of approximately $6.8 million. Cash flows provided by operating activities decreased due to an increase in cash interest expense of $5.2 million and an increase in income tax payments of approximately $1.0$0.1 million.
Cash Flows used in Investing Activities
Cash flows used in investing activities totaled approximately $88.1$6.7 million for the ninethree months ended September 30, 2017March 31, 2021 compared to approximately $100.9$53.0 million for the ninethree months ended September 30, 2016,March 31, 2020, a decrease of approximately $12.8$46.3 million. CashThe decrease in cash flows used in investing activities was due to a $25.3 million net decrease in investment in property and equipment, including development in process and intangible assets. In addition, cash flows used in investing activities decreased during the nine months ended September 30, 2017 due to a decrease in purchases of property and equipment of $33.3 million as a result of $21.9 million in proceeds received from the completiondisposition of our hotel renovation programtwo hotels during the second quarter of 2017. Additionally,three months ended March 31, 2021, whereas no hotel properties were sold during the ninethree months ended September 30, 2017, ESH REIT received net proceeds of approximately $42.0 million related to the sale of four hotels. These changes were offset by a decrease in restricted cash of approximately $60.2 million provided in 2016 as a result of the repayment of ESH REIT’s mortgage loan in August 2016.March 31, 2020.
Cash Flows used in(used in) provided by Financing Activities
Cash flows used in financing activities totaled approximately $268.9$189.2 million for the ninethree months ended September 30, 2017March 31, 2021 compared to approximately $461.2cash flows provided by financing activities of $277.4 million for the ninethree months ended September 30, 2016, a decrease of approximately $192.3 million.March 31, 2020. Cash flows used in financing activities decreased mainlychanged due to lowera $350.0 million decrease in net debt repaymentsproceeds received from financing transactions and an increase in ESH REIT Class A and Class B common distributions of $91.0$128.3 million, partially offset by a decrease of $11.4 million in distributions paid to ESH REIT shareholders of approximately $76.6 million as a result of the special distribution paid in January 2016 and fewer shareClass B common stock repurchases.
Capital Expenditures
We maintain each of our hotels in good repair and condition and in conformity with applicable laws and regulations. The cost of all improvements and significant alterations are generally made with cash flowsflow from operations. During the ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, the Company incurred capital expenditures, including development in process, of approximately $133.3$30.4 million and $166.5$54.6 million, respectively. These capital expenditures were primarily made as a result ofrelated to development and construction in process, ordinary hotel capital improvements, investments in information technology and hotel renovations.
With respect to our current hotel renovation program, which wasas of March 31, 2021, we have substantially completed renovations at 31 hotels for $71.7 million. We are currently in the second quarterprocess of 2017 and other capital projects. performing renovations at three additional hotels, with total costs incurred to date of $7.9 million. After completion of the current renovation program, we generally expect each hotel to be on a seven to eight-year renovation cycle. We expect future hotel renovations to focus on strict underwriting standards intended to maximize returns on investment through the renovation of our highest potential assets, which may include renovations to conform certain existing, core-branded Extended Stay America Suites hotels to our new step-up brand, Extended Stay America Premier Suites.
Funding requirements for future capital expenditures, isincluding hotel rebranding, hotel renovations, completing construction of new hotels we expect to own and operate, acquiring and converting existing hotels, will be significant and are expected to be provided primarily from cash flows generated from operations or, to the extent necessary, the Corporation or ESH REIT revolving credit facilities, including the Unsecured Intercompany Facility. In 2017, we expect to incur capital expenditures between $163 millionintercompany facilities and, $178 million, including amounts spent through the third quarter. As part of these capital expenditures, the Company expects to purchase land and incur additional capital expenditures related to new hotel development.
Hotel Renovations
In 2011, we began performing hotel renovations and executed a phased capital investment program across our portfolio in order to seek to drive increases in ADR and gain incremental market share. This hotel renovation program was undertaken in phases and by the second quarter of 2017, we had completed renovations across our entire 625-hotel portfolio. The renovations generally required approximately $1.0 million in capital spend per hotel. Hotel renovations typically included remodeling of common areas, new paint, carpet, signage, tile or vinyl flooring and counters in bathrooms and kitchens, as well as the refurbishment of furniture, replacement of aged mattresses and installation of new flat screen televisions, artwork, lighting and bedspreads. Total hotel renovation program expenditures were approximately $616.4 million.
Our next hotel renovation cycle is expected to begin in 2019, with each hotel on a seven-year renovation cycle. While management is currently assessing what future hotel renovations will entail, the next renovation cycle is not expected to include the same replacements and upgrades across the entire portfolio, but rather will be evaluated on a hotel by hotel basis in order to assess the potential return for eachcertain instances, proceeds from asset in our portfolio based on multiple market and hotel specific variables.sales.
Our Indebtedness
As of September 30, 2017,March 31, 2021, the Company’s total indebtedness was approximately $2.5 billion, net of unamortized deferred financing costs and debt discounts, including approximately $7.1 million of Corporation mandatorily redeemable preferred stock. ESH REIT's total indebtedness at September 30, 2017 was approximately $2.6 billion, net of unamortized deferred financing costs and debt discounts, including $50.0 million outstanding under the Unsecured Intercompany Facility. For a detailed discussiondiscounts. ESH REIT’s total indebtedness at March 31, 2021 was $2.6 billion, net of our indebtedness, see Notesunamortized deferred financing costs and debt discounts. See Note 7 and 9 to the unaudited condensed consolidated financial statements of Extended Stay America, Inc. and Note 6 to the unaudited condensed consolidated financial statements of ESH Hospitality, Inc., both of which are included in Item 1 inof this combined quarterly report on Form 10-Q.
Off-Balance Sheet Arrangements
Neither the Corporation nor ESH REIT have off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. See Note 12 to the unaudited condensed consolidated financial statements of Extended Stay America, Inc. and Note 10 to the unaudited condensed consolidated financial statements of ESH Hospitality, Inc., both of which are included in Item 1 in this combined quarterly report on Form 10-Q, for additional information with respectdetail related to commitments and contingencies, including leaseour debt obligations.
Critical Accounting Policies
Our discussion and analysis of our historical financial condition and results of operations is based on the Company’s and ESH REIT’s historical unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ significantly from these estimates and assumptions. We believe the following accounting policies, which are described in detail in Note 2 to each of the audited consolidated financial statements of Extended Stay America, Inc. and ESH Hospitality, Inc., both of which are included in Item 8 in our combined annual report onof the 2020 Form 10-K, filed with the SEC on February 28, 2017, require material subjective or complex judgments and have the most significant impact on the Company’s and ESH REIT’s financial condition and results of operations: property and equipment, goodwill,investments, rental revenue recognition and income taxes, equity-based compensation and investments.taxes. We evaluate estimates, assumptions and judgments on an ongoing basis, based on information
that is then available to us, our experience and various matters that we believe are reasonable and appropriate for consideration under the circumstances.
Recent Accounting Pronouncements
For a discussion of recently issued accounting standards, see Note 2 to each of the unaudited condensed consolidated financial statements of Extended Stay America, Inc. and ESH Hospitality, Inc., both of which are included in Item 1 inof this combined quarterly report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Corporation and ESH REIT may seek to reduce earnings and cash flow volatility associated with changes in interest rates, foreign currency exchange rates and commodity prices by entering into financial arrangements to provide a hedge against a portion of the risks associated with such volatility, when applicable. We have exposure to such risks to the extent they are not hedged. We may enter into derivative financial arrangements to the extent they meet the foregoing objectives. We do not use derivatives for trading or speculative purposes.
The Corporation
As of September 30, 2017, theThe Corporation had minimalcurrently has limited exposure to market risk from changes in interest rates because it had norates. As of March 31, 2021, the Corporation's variable rate debt as there were no outstanding amountsconsisted of $9.8 million drawn on the Corporationits revolving credit facility. The Corporation's exposureIf market rates of interest were to market risk from changes influctuate by 1.0%, interest rates mayexpense would increase in future periods shouldor decrease by $0.1 million annually, assuming that the amount of outstanding Corporation incur variable rate debt including draws on the Corporation's revolving credit facility. The Corporation has minimal exposure to market risk from changes in foreign currency exchange rates due to the sale of the three Extended Stay Canada-branded hotels in May 2017, for which the Corporation is party to separate management agreements that are expected to terminate on or before March 31, 2018.remains at $9.8 million.
ESH REIT
As of September 30, 2017, approximately $1.3 billionMarch 31, 2021, $621.4 million of ESH REIT’s outstanding gross debt of approximately $2.6$2.7 billion net of unamortized deferred financing costs and debt discounts, had a variable interest rate. ESH REIT is a counterparty to an interest rate swap at a fixed rate of 1.175%. The notional amount of the interest rate swap as of September 30, 2017March 31, 2021 was $400.0 million, which reduces by $50.0 million, every six months untiland the swap matures in September 2021. The remaining $571.4 million of outstanding variable interest rate debt of approximately $887.0 million, which is not subject to the interest rate swap remains subject to interest rate risk. If market rates of interest were to fluctuate by 1.0%, interest expense would increase or decrease by approximately $8.9$5.7 million annually, assuming that the net amount of outstanding ESH REIT’sREIT unhedged variable interest rate debt remains at approximately $887.0$571.4 million.
ESH REIT sold its three Extended Stay Canada-branded hotels during the nine months ended September 30, 2017. As a result, ESH REIT has minimal exposure to market risk from changes in foreign currency exchange rates due to the fact that its only remaining Canadian currency-based assets and liabilities relate to residual working capital. A fluctuation of 1% in the exchange rate between the U.S. dollar and the Canadian dollar would result in foreign currency transaction gain or loss of approximately $0.2 million.
Item 4. Controls and Procedures
Controls and Procedures (Extended Stay America, Inc.)
Disclosure Controls and Procedures
As of September 30, 2017,March 31, 2021, Extended Stay America, Inc. reviewed, under the direction of the Chief Executive Officer and Chief Financial Officer, the disclosure controls and procedures of Extended Stay America, Inc., as defined in Exchange Act Rule 13a-15(e). Based upon and as of the date of that review, the Chief Executive Officer and Chief Financial Officer of Extended Stay America, Inc. concluded that the disclosure controls and procedures of Extended Stay America, Inc. were effective to ensure that information required to be disclosed in the reports that Extended Stay America, Inc. files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the management of Extended Stay America, Inc., including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There were no changes in Extended Stay America, Inc.’s internal control over financial reporting that occurred during the most recent fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, Extended Stay America, Inc.’s internal control over financial reporting.
Controls and Procedures (ESH Hospitality, Inc.)
Disclosure Controls and Procedures
As of September 30, 2017,March 31, 2021, ESH Hospitality, Inc. reviewed, under the direction of the Chief Executive Officer and Chief Financial Officer, the disclosure controls and procedures of ESH Hospitality, Inc., as defined in Exchange Act Rule 13a-15(e). Based upon and as of the date of that review, the Chief Executive Officer and Chief Financial Officer of ESH Hospitality, Inc. concluded that the disclosure controls and procedures of ESH Hospitality, Inc. were effective to ensure that information required to be disclosed in the reports that ESH Hospitality, Inc. files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the management of ESH Hospitality, Inc., including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There were no changes in ESH Hospitality, Inc.’s internal control over financial reporting that occurred during the most recent fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, ESH Hospitality, Inc.’s internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
We are from time to time subject to various claimslitigation and lawsuitsclaims incidental to our business. We recognize a liability when we believe a loss is probable and can be reasonably estimated. However, the ultimate result of litigation and claims cannot be predicted with certainty.
As of March 31, 2021, the following six purported class action lawsuits have been filed against the Company:
| | | | | | | | | | | |
| Date of Filing | Plaintiff(s) | Defendant(s) | Court |
| March 27, 2018 | Tracy Reid, on behalf of himself, all others similarly situated | ESA Management, LLC | US District Court, Northern District of California |
| June 8, 2018 | Franisha Beasley and Stephanie Randall, individually and on behalf of others similarly situated | ESA Management, LLC | US District Court, Northern District of California |
| July 13, 2018 | Adrienne Liggins, individually and on behalf of others similarly situated and aggrieved | ESA Management, LLC, Extended Stay America - Anaheim Convention Center | US District Court, Northern District of California |
| July 13, 2018 | Bridget Liggins, individually and on behalf of others similarly situated and aggrieved | ESA Management, LLC | State of California, Orange County Superior Court |
| August 21, 2018 | Sandra Arizmendi, an individual, on behalf of the State of California, as private attorney general, and on behalf of all others similarly situated | ESA Management, LLC | US District Court, Northern District of California |
| January 18, 2019 | Lisa M. Sanchez, individually and on behalf of all others similarly situated | Extended Stay America, Inc. and ESA Management, LLC | State of California, Orange County Superior Court |
The complaints above allege, among other things, failure to provide meal and rest periods, wage and hour violations and violations of the Fair Credit Reporting Act. The complaints seek, among other relief, collective and class certification of the lawsuits, unspecified damages, costs and expenses, including attorneys’ fees, and such other relief as the court might find just and proper.
With respect to the Fair Credit Reporting Act violations alleged in the lawsuits described above, the parties reached a tentative settlement agreement in May 2019, which is subject to certain conditions, including court approval. During the second quarter of 2019, the Company recorded a payable and a corresponding insurance receivable for the amount of the tentative settlement. The expected resolution of the alleged Fair Credit Reporting Act violations in the lawsuits did not have, and is not expected to have, a material adverse impact on the Company’s condensed consolidated financial statements, results of operations or liquidity.
With respect to the meal and rest period and the wage and hour violations alleged in the lawsuits described above, excluding the Sanchez lawsuit, the parties reached a tentative settlement agreement in January 2020, which is subject to certain conditions, including court approval. During the fourth quarter of 2019, the Company incurred a loss and recorded a charge equal to the amount of the tentative settlement. The expected resolution of the alleged meal and rest period and wage and hour violations in the lawsuits did not have, and is not expected to have, a material adverse impact on the Company’s condensed consolidated financial statements, results of operations or liquidity.
With respect to the Sanchez lawsuit, although the Company believes it is reasonably possible that it may incur losses associated with such matter, it is not possible to estimate the amount of loss or range of loss, if any, that might result from adverse judgments, settlements or other resolution based on the early stage of the lawsuit, the uncertainty as to the certification of a class or classes and the size of any certified class, if applicable, and the lack of resolution of significant factual and legal issues. However, depending on the amount and timing, an unfavorable resolution of the lawsuit or a change in the Company's assessment of the likelihood of loss could have a material adverse effect on the Company’s condensed consolidated financial statements, results of operations or liquidity in a future period. We believe that we have meritorious defenses and are prepared to vigorously defend the lawsuit.
We are also subject to various other litigation and claims incidental to our business. We believe we have adequate reserves against such matters. In the opinion of management, these claims and suits,such matters, individually or in the aggregate, will not have a material
adverse effect on the Company’s unaudited condensed consolidated financial statements, results of operations or liquidity or on ESH REIT’s unaudited condensed consolidated financial statements, results of operations or liquidity.
Item 1A. Risk Factors
There have been no material changes
In addition to the other information set forth in this combined quarterly report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” in our principal2020 Form 10-K. These risks, which could materially affect our business, financial condition or future results, are not the only risks we face. Additional risks and uncertainties not currently known to us or that we believe arecurrently deem to be immaterial also may adversely affect our business, financial condition and/or operating results. In addition to the risk factors previously disclosed in our 2020 Form 10-K, the following risks relate to the proposed Mergers:
Failure to consummate the proposed Mergers within the expected timeframe or at all could have a material toadverse impact on our business, results of operations and financial condition,condition.
There can be no assurance that the Mergers will be consummated. Consummation of the Mergers is subject to various conditions, including approval by certain United States regulatory authorities, approval by the Company’s shareholders, and other customary closing conditions. There can be no assurance that these and other conditions to closing will be satisfied in a timely manner or at all.
The Merger Agreement also provides that it may be terminated by the Company, on the one hand, or the Parent, on the other hand, under certain circumstances, and in certain specified circumstances the Company will be required to pay Parent a termination fee of $105 million. If we are required to make such payment, doing so may materially adversely affect our business, results of operations and financial condition.
There can be no assurance that a remedy will be available to us in the event of a breach of the Merger Agreement by Parent or its affiliates or that we will wholly or partially recover any damages incurred by us in connection with the proposed Mergers. In addition, we could be subject to litigation related to any failure to complete the Mergers or related to any enforcement proceeding commenced against us to perform our obligations under the Merger Agreement. A failed transaction may result in negative publicity and a negative impression of us among our customers or in the investment community or business community generally. Further, any disruptions to our business resulting from the risk factors previously disclosedannouncement and pendency of the proposed Mergers, including any adverse changes in our relationships with our customers, partners, suppliers and employees, could continue or accelerate in the combined annual report on Form 10-K filedevent of a failed transaction. Also, we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the SECproposed Mergers, for which we will have received little or no benefit if the proposed Mergers are not completed. Many of these fees and costs will be payable by us even if the proposed Mergers are not completed and may relate to activities that we would not have undertaken other than to complete the proposed Mergers.
The announcement and pendency of the proposed Mergers may adversely affect our business, results of operations and financial condition.
Uncertainty about the effect of the proposed Mergers on February 28, 2017,our employees, customers and other parties may have an adverse effect on our business, results of operation and financial condition. These risks to our business include the following, all of which is accessible oncould be exacerbated by a delay in the SEC’s website at www.sec.gov.completion of or failure to consummate the proposed Mergers:
•the impairment of our ability to attract, retain and motivate our employees, including key personnel; •the diversion of significant management time and resources towards the completion of the proposed Mergers that could otherwise have been devoted to pursuing other beneficial opportunities for us;
•difficulties maintaining relationships with customers, suppliers and other business partners;
•delays or deferments of certain business decisions by our customers, suppliers and other business partners;
•the inability to pursue alternative business opportunities or make appropriate changes to our business because the Merger Agreement requires us to conduct our business in the ordinary course consistent with past practice and not engage in certain types of transactions prior to the completion of the proposed Mergers;
•litigation relating to the proposed Mergers and the costs related thereto; and
•the incurrence of significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed Mergers.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuers and Affiliated Purchasers
No Paired Share Repurchase ProgramShares were repurchased during the three months ended March 31, 2021.
The following table sets forth all purchases made by or on behalfIn December 2015, the Boards of Directors of the Corporation and ESH REIT or any “affiliated purchaser,” as definedauthorized a combined Paired Share repurchase program. As a result of several increases in Rule 10b-18(a)(3) underauthorized amounts and program extensions, the Exchange Act, of Paired Shares during each month in the third quarter of 2017.
|
| | | | | | | | | | | | | |
| Period | Total number of Paired Shares purchased (1) | | Average price paid per Paired Share (2) | | Total number of Paired Shares purchased as part of publicly announced program (1) | | Maximum dollar value that may yet be purchased under the program(3) |
| July 1 - July 31, 2017 | 169,926 |
|
| $ | 19.49 |
|
| 169,926 |
|
| $ | 102,841,881 |
|
| August 1 - August 31, 2017 | 76,000 |
| | $ | 19.57 |
|
| 76,000 |
| | $ | 101,354,561 |
|
| September 1 - September 30, 2017 | — |
|
| $ | — |
|
| — |
|
| $ | 101,354,561 |
|
| Total | 245,926 |
| | $ | 19.51 |
| | 245,926 |
| | $ | 101,354,561 |
|
_________________________________ | |
(1) | Represents an equal number of Corporation common shares and ESH REIT Class B common shares, which were paired together on a one-for-one basis to form Paired Shares. |
| |
(2) | In the aggregate, the Corporation and ESH REIT paid approximately $3.1 million and $1.7 million, respectively, for their respective portion of the Paired Shares that were repurchased and retired during the three months ended September 30, 2017. |
| |
(3) | In December 2015, the Boards of Directors of the Corporation and ESH REIT authorized a combined Paired Share repurchase program for up to $100 million of Paired Shares. In February 2016, the Boards of Directors of the Corporation and ESH REIT authorized an increase of the combined Paired Share repurchase program from up to $100 million to up to $200 million of Paired Shares. In December 2016, the Boards of Directors of the Corporation and ESH REIT authorized an increase of the combined Paired Share repurchase program from up to $200 million to up to $300 million of Paired Shares and extended the maturity date of the program through December 31, 2017, each effective January 1, 2017. Repurchases may be made at management’s discretion from time to time in the open market, in privately negotiated transactions or by other means (including through Rule 10b5-1 trading plans). |
Approximately $101.4 million is remaining under the Paired Share repurchase program ascurrently authorizes the Corporation and ESH REIT to purchase up to $550 million in Paired Shares through December 31, 2021. Repurchases may be made at management’s discretion from time to time in the open market, in privately negotiated transactions or by other means (including through Rule 10b5-1 trading plans). As of November 7, 2017.March 31, 2021, $101.1 million remained under the combined Paired Share repurchase program.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
| | | | | |
| |
Exhibit Number | Description |
| DescriptionAgreement and Plan of Merger, dated as of March 14, 2021, by and among Eagle Parent Holdings L.P., Eagle Merger Sub 1 Corporation, Eagle Merger Sub 2 Corporation, Extended Stay America, Inc. and ESH Hospitality, Inc. (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K (File No. 001-36190) filed March 16, 2021, and incorporated by reference herein). |
| Addendum to Management Agreement, dated September 18, 2017, by and |
| Termination |
| Trademark License Agreement, effective as of July 31, 2017, by and between ESH Strategies Branding LLC and ESH Strategies Franchise LLC. |
| Certification of the Chief Executive Officer of Extended Stay America, Inc. pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| 101.1.INS | XBRL Instance Document |
| 101.1.SCH | XBRL Taxonomy Extension Schema Document |
| 101.1.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.1.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.1.LAB | XBRL Taxonomy Extension Label Linkbase Document |
| 101.1.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document). |
_________________________________
* Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule will be
furnished supplementally to the SEC upon request: provided, however, that the parties may request confidential
treatment pursuant to Rule 24b-2 of the Exchange Act for any document so furnished.
** Filed herewith.
† Management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| EXTENDED STAY AMERICA, INC. |
| | |
| Date: May 10, 2021 | EXTENDED STAY AMERICA, INC.By: | /s/ Bruce N. Haase |
| | Bruce N. Haase |
Date: November 7, 2017 | By: | /s/ Gerardo I. Lopez |
| | Gerardo I. Lopez |
| | President and Chief Executive Officer |
| | |
Date: November 7, 2017May 10, 2021 | By: | /s/ Jonathan S. HalkyardDavid A. Clarkson |
| | Jonathan S. HalkyardDavid A. Clarkson |
| | Chief Financial Officer |
| | |
| ESH HOSPITALITY, INC. |
| | |
Date: November 7, 2017May 10, 2021 | By: | /s/ Gerardo I. LopezBruce N. Haase |
| | Gerardo I. LopezBruce N. Haase |
| | President and Chief Executive Officer |
| | |
Date: November 7, 2017May 10, 2021 | By: | /s/ Jonathan S. HalkyardDavid A. Clarkson |
| | Jonathan S. HalkyardDavid A. Clarkson |
| | Chief Financial Officer |