UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| | | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 20202021
Or
| | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
| | | | | | | | | | | |
| Commission File Number: | 001-36190 | Commission File Number: | 001-36191 |
| | | | | |
| 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) |
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
| 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.
| | | | | | | | | | | | | | |
| Extended Stay America, Inc. | Yes | ☒ | No | ☐ |
| ESH Hospitality, Inc. | Yes | ☒ | No | ☐ |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
| | | | | | | | | | | | | | |
| Extended Stay America, Inc. | Yes | ☒ | No | ☐ |
| ESH Hospitality, Inc. | Yes | ☒ | 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 growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
| Extended Stay America, Inc. | Large Accelerated Filer | ☒ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| Emerging growth company | ☐ | | |
| ESH Hospitality, Inc. | Large Accelerated Filer | ☒ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | 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).
| | | | | | | | | | | | | | |
| Extended Stay America, Inc. | Yes | ☐ | No | ☒ |
| ESH Hospitality, Inc. | Yes | ☐ | No | ☒ |
177,482,082177,730,773 shares of common stock, par value $0.01 per share, of Extended Stay America, Inc., which are attached to and traded together with 177,482,082177,730,773 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 May 1, 2020.6, 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 1934, as amended (the “Exchange Act”), which are publicly traded and listed on 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 Extended Stay America, Inc. and ESH Hospitality, 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 Extended Stay America, Inc. and ESH Hospitality, Inc. are compliant with Rule 13a-15 or Rule 15d-15 of 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 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 registrants; and
•Creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.
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, 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 dispositions, our plans, objectives, goals, beliefs, business strategies, business conditions, results of operations, financial position and business outlook, business trends and future events, as well asincluding the COVID-19 pandemic, its effects on the foregoing, government actions taken in response to the COVID-19 pandemic and actions that we have or plan to take in response to the pandemic and 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 be achieved and actual results may differ 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 26, 202025, 2021 (the “2019“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 effect on us, our business, our operations or operationsthe 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 MARCH 31, 20202021 AND DECEMBER 31, 20192020
(In thousands, except share and per share data)
(Unaudited)
| | | March 31,
2020 | | December 31,
2019 | | March 31,
2021 | | December 31,
2020 |
| ASSETS | ASSETS | | | | ASSETS | | | |
| PROPERTY AND EQUIPMENT - Net of accumulated depreciation of $1,414,471 and $1,373,950 | $ | 3,492,821 | | | $ | 3,493,549 | | |
| 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 | 14,878 | | | 14,858 | | RESTRICTED CASH | 13,152 | | | 13,151 | |
| CASH AND CASH EQUIVALENTS | CASH AND CASH EQUIVALENTS | 710,131 | | | 346,812 | | CASH AND CASH EQUIVALENTS | 357,857 | | | 396,770 | |
| INTANGIBLE ASSETS - Net of accumulated amortization of $13,774 and $13,133 | 33,551 | | | 34,183 | | |
| 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 | GOODWILL | 45,192 | | | 45,192 | | GOODWILL | 44,921 | | | 45,055 | |
| ACCOUNTS RECEIVABLE - Net of allowance for doubtful accounts of $1,941 and $2,749 | 15,427 | | | 14,020 | | |
| DEFERRED TAX ASSETS | 19,585 | | | 16,157 | | |
| 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 | OTHER ASSETS | 61,420 | | | 65,825 | | OTHER ASSETS | 140,885 | | | 140,416 | |
| TOTAL ASSETS | TOTAL ASSETS | $ | 4,393,005 | | | $ | 4,030,596 | | TOTAL ASSETS | $ | 4,020,348 | | | $ | 4,089,149 | |
| LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | | | | LIABILITIES AND EQUITY | | | |
| LIABILITIES: | LIABILITIES: | | LIABILITIES: | |
Term loan facility payable - Net of unamortized deferred financing costs and debt discount of $10,584 and $10,993 | $ | 617,170 | | | $ | 618,338 | | |
Senior notes payable - Net of unamortized deferred financing costs and debt discount of $34,233 and $35,702 | 2,015,767 | | | 2,014,298 | | |
| Revolving credit facilities | 399,765 | | | — | | |
Mandatorily redeemable preferred stock - $0.01 par value, $1,000 redemption value, 8.0%, 350,000,000 shares authorized, 7,130,000 shares issued and outstanding | 7,130 | | | 7,130 | | |
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 | 3,707 | | | 3,379 | | Finance lease liabilities | 3,611 | | | 3,668 | |
| Deferred tax liabilities | | Deferred tax liabilities | 8,835 | | | 11,218 | |
| Accounts payable and accrued liabilities | Accounts payable and accrued liabilities | 238,582 | | | 211,181 | | Accounts payable and accrued liabilities | 229,318 | | | 253,198 | |
| Total liabilities | Total liabilities | 3,282,121 | | | 2,854,326 | | Total liabilities | 2,885,693 | | | 2,951,706 | |
| COMMITMENTS AND CONTINGENCIES (Note 12) | COMMITMENTS AND CONTINGENCIES (Note 12) | | | | COMMITMENTS AND CONTINGENCIES (Note 12) | 0 | | 0 |
| EQUITY: | EQUITY: | | EQUITY: | |
Common stock - $0.01 par value, 3,500,000,000 shares authorized, 177,466,325 and 179,483,397 shares issued and outstanding | 1,775 | | | 1,795 | | |
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 | Additional paid in capital | 723,285 | | | 742,397 | | Additional paid in capital | 726,070 | | | 725,865 | |
| Accumulated deficit | Accumulated deficit | (63,394) | | | (48,283) | | Accumulated deficit | (42,729) | | | (44,664) | |
| Accumulated other comprehensive (loss) income | (512) | | | 383 | | |
| Accumulated other comprehensive loss | | Accumulated other comprehensive loss | (95) | | | (206) | |
| Total Extended Stay America, Inc. shareholders’ equity | Total Extended Stay America, Inc. shareholders’ equity | 661,154 | | | 696,292 | | Total Extended Stay America, Inc. shareholders’ equity | 685,024 | | | 682,771 | |
| Noncontrolling interests | Noncontrolling interests | 449,730 | | | 479,978 | | Noncontrolling interests | 449,631 | | | 454,672 | |
| Total equity | Total equity | 1,110,884 | | | 1,176,270 | | Total equity | 1,134,655 | | | 1,137,443 | |
| TOTAL LIABILITIES AND EQUITY | TOTAL LIABILITIES AND EQUITY | $ | 4,393,005 | | | $ | 4,030,596 | | TOTAL LIABILITIES AND EQUITY | $ | 4,020,348 | | | $ | 4,089,149 | |
See accompanying notes to condensed consolidated financial statements.
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 20202021 AND 20192020
(In thousands, except per share data)
(Unaudited)
| | | | Three Months Ended
March 31, | | | | Three Months Ended
March 31, |
| | | | 2020 | | 2019 | | | 2021 | | 2020 |
| REVENUES: | REVENUES: | | | | | REVENUES: | | | | |
| Room revenues | Room revenues | | $ | 254,464 | | | $ | 267,046 | | Room revenues | | $ | 249,868 | | | $ | 254,464 | |
| Other hotel revenues | Other hotel revenues | | 6,768 | | | 5,303 | | Other hotel revenues | | 6,680 | | | 6,768 | |
| Franchise and management fees | Franchise and management fees | | 1,279 | | | 1,225 | | Franchise and management fees | | 1,218 | | | 1,279 | |
| | | 262,511 | | | 273,574 | | | | 257,766 | | | 262,511 | |
| Other revenues from franchised and managed properties | Other revenues from franchised and managed properties | | 3,790 | | | 4,095 | | Other revenues from franchised and managed properties | | 1,805 | | | 3,790 | |
| Total revenues | Total revenues | | 266,301 | | | 277,669 | | Total revenues | | 259,571 | | | 266,301 | |
| OPERATING EXPENSES: | OPERATING EXPENSES: | | | | | OPERATING EXPENSES: | | | | |
| Hotel operating expenses | Hotel operating expenses | | 145,295 | | | 137,291 | | Hotel operating expenses | | 146,338 | | | 145,295 | |
| General and administrative expenses | General and administrative expenses | | 23,938 | | | 23,027 | | General and administrative expenses | | 24,124 | | | 23,938 | |
| Depreciation and amortization | Depreciation and amortization | | 50,520 | | | 48,778 | | Depreciation and amortization | | 49,408 | | | 50,520 | |
| | Merger transaction expenses | | Merger transaction expenses | | 4,782 | | | 0 | |
| | | 219,753 | | | 209,096 | | | | 224,652 | | | 219,753 | |
| Other expenses from franchised and managed properties | Other expenses from franchised and managed properties | | 4,207 | | | 4,647 | | Other expenses from franchised and managed properties | | 2,444 | | | 4,207 | |
| Total operating expenses | Total operating expenses | | 223,960 | | | 213,743 | | Total operating expenses | | 227,096 | | | 223,960 | |
| | | GAIN ON SALE OF HOTEL PROPERTIES (Note 4) | | GAIN ON SALE OF HOTEL PROPERTIES (Note 4) | | 12,018 | | | 0 | |
| OTHER INCOME | OTHER INCOME | | 2 | | | 27 | | OTHER INCOME | | 1 | | | 2 | |
| INCOME FROM OPERATIONS | INCOME FROM OPERATIONS | | 42,343 | | | 63,953 | | INCOME FROM OPERATIONS | | 44,494 | | | 42,343 | |
| OTHER NON-OPERATING EXPENSE (INCOME) | | 703 | | | (178) | | |
| OTHER NON-OPERATING (INCOME) EXPENSE | | OTHER NON-OPERATING (INCOME) EXPENSE | | (84) | | | 703 | |
| INTEREST EXPENSE, NET | INTEREST EXPENSE, NET | | 32,685 | | | 29,604 | | INTEREST EXPENSE, NET | | 31,462 | | | 32,685 | |
| INCOME BEFORE INCOME TAX EXPENSE | INCOME BEFORE INCOME TAX EXPENSE | | 8,955 | | | 34,527 | | INCOME BEFORE INCOME TAX EXPENSE | | 13,116 | | | 8,955 | |
| INCOME TAX EXPENSE | INCOME TAX EXPENSE | | 1,110 | | | 6,123 | | INCOME TAX EXPENSE | | 750 | | | 1,110 | |
| NET INCOME | NET INCOME | | 7,845 | | | 28,404 | | NET INCOME | | 12,366 | | | 7,845 | |
| NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | | (3,291) | | | (6,470) | | NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | | (10,445) | | | (3,291) | |
| NET INCOME ATTRIBUTABLE TO EXTENDED STAY AMERICA, INC. COMMON SHAREHOLDERS | NET INCOME ATTRIBUTABLE TO EXTENDED STAY AMERICA, INC. COMMON SHAREHOLDERS | | $ | 4,554 | | | $ | 21,934 | | 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: | | | | | NET INCOME PER EXTENDED STAY AMERICA, INC. COMMON SHARE: | | | | |
| Basic | Basic | | $ | 0.03 | | | $ | 0.12 | | Basic | | $ | 0.01 | | | $ | 0.03 | |
| Diluted | Diluted | | $ | 0.03 | | | $ | 0.12 | | Diluted | | $ | 0.01 | | | $ | 0.03 | |
| WEIGHTED-AVERAGE EXTENDED STAY AMERICA, INC. COMMON SHARES OUTSTANDING: | WEIGHTED-AVERAGE EXTENDED STAY AMERICA, INC. COMMON SHARES OUTSTANDING: | | | | | WEIGHTED-AVERAGE EXTENDED STAY AMERICA, INC. COMMON SHARES OUTSTANDING: | | | | |
| Basic | Basic | | 177,990 | | | 188,348 | | Basic | | 177,827 | | | 177,990 | |
| Diluted | Diluted | | 178,171 | | | 188,576 | | Diluted | | 178,549 | | | 178,171 | |
See accompanying notes to condensed consolidated financial statements.
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 20202021 AND 20192020
(In thousands)
(Unaudited)
| | | | Three Months Ended
March 31, | | | | Three Months Ended
March 31, |
| | | | 2020 | | 2019 | | | 2021 | | 2020 |
| NET INCOME | NET INCOME | | $ | 7,845 | | | $ | 28,404 | | NET INCOME | | $ | 12,366 | | | $ | 7,845 | |
| OTHER COMPREHENSIVE INCOME: | OTHER COMPREHENSIVE INCOME: | | | OTHER COMPREHENSIVE INCOME: | | |
| | | | | |
| DERIVATIVE ADJUSTMENT: | | | |
INTEREST RATE CASH FLOW HEDGE LOSS, NET OF TAX OF $(307) and $(248) | | (1,747) | | | (1,438) | | |
| | INTEREST RATE CASH FLOW HEDGE GAIN (LOSS), NET OF TAX OF $40 and $(307) | | INTEREST RATE CASH FLOW HEDGE GAIN (LOSS), NET OF TAX OF $40 and $(307) | | 218 | | | (1,747) | |
| | | | |
| COMPREHENSIVE INCOME | COMPREHENSIVE INCOME | | 6,098 | | | 26,966 | | COMPREHENSIVE INCOME | | 12,584 | | | 6,098 | |
| COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | | (2,439) | | | (5,746) | | COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | | (10,552) | | | (2,439) | |
| COMPREHENSIVE INCOME ATTRIBUTABLE TO EXTENDED STAY AMERICA, INC. COMMON SHAREHOLDERS | COMPREHENSIVE INCOME ATTRIBUTABLE TO EXTENDED STAY AMERICA, INC. COMMON SHAREHOLDERS | | $ | 3,659 | | | $ | 21,220 | | COMPREHENSIVE INCOME ATTRIBUTABLE TO EXTENDED STAY AMERICA, INC. COMMON SHAREHOLDERS | | $ | 2,032 | | | $ | 3,659 | |
See accompanying notes to condensed consolidated financial statements.
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 20202021 AND 20192020
(In thousands, except per share data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | | Additional
Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total Extended Stay America, Inc.
Shareholders’
Equity | | Noncontrolling Interests | | Total
Equity |
| | Shares | | Amount | | | | | | | | | | | | |
| BALANCE - January 1, 2019 | 188,219 | | | $ | 1,882 | | | $ | 749,219 | | | $ | 32,432 | | | $ | 2,488 | | | $ | 786,021 | | | $ | 524,618 | | | $ | 1,310,639 | |
| Net income | — | | | — | | | — | | | 21,934 | | | — | | | 21,934 | | | 6,470 | | | 28,404 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Interest rate cash flow hedge loss, net of tax | — | | | — | | | — | | | — | | | (714) | | | (714) | | | (724) | | | (1,438) | |
| | | | | | | | | | | | | | | |
| Corporation common distributions - $0.07 per common share | — | | | — | | | — | | | (13,250) | | | — | | | (13,250) | | | — | | | (13,250) | |
| ESH REIT common distributions - $0.15 per Class B common share | — | | | — | | | — | | | — | | | — | | | — | | | (28,398) | | | (28,398) | |
| ESH REIT preferred distributions | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | (4) | |
| Adjustment to reflect changes in book value of noncontrolling interests | — | | | — | | | 475 | | | — | | | — | | | 475 | | | (475) | | | — | |
| Equity-based compensation | 184 | | | 2 | | | 441 | | | — | | | — | | | 443 | | | 255 | | | 698 | |
| BALANCE - March 31, 2019 | 188,403 | | | $ | 1,884 | | | $ | 750,135 | | | $ | 41,116 | | | $ | 1,774 | | | $ | 794,909 | | | $ | 501,742 | | | $ | 1,296,651 | |
| | | | Common Stock | | | Additional
Paid in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive (Loss) Income | | Total Extended Stay America, Inc.
Shareholders’
Equity | | Noncontrolling Interests | | Total
Equity | | 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 | | | | | | | | | | | | | | | | Noncontrolling Interests | | Total
Equity |
| BALANCE - January 1, 2020 | BALANCE - January 1, 2020 | 179,483 | | | $ | 1,795 | | | $ | 742,397 | | | $ | (48,283) | | | $ | 383 | | | $ | 696,292 | | | $ | 479,978 | | | $ | 1,176,270 | | 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 | | |
| Net Income | | Net Income | — | | | — | | | — | | | 4,554 | | | — | | | 4,554 | | | 3,291 | | | 7,845 | |
| | Interest rate cash flow hedge loss, net of tax | Interest rate cash flow hedge loss, net of tax | — | | | — | | | — | | | — | | | (895) | | | (895) | | | (852) | | | (1,747) | | 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) | 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) | | 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 | Corporation common distributions - $0.09 per common share | — | | | — | | | (15,981) | | | — | | | — | | | (15,981) | | | — | | | (15,981) | | 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 | ESH REIT common distributions - $0.14 per Class B common share | — | | | — | | | — | | | — | | | — | | | — | | | (24,842) | | | (24,842) | | ESH REIT common distributions - $0.14 per Class B common share | — | | | — | | | — | | | — | | | — | | | — | | | (24,842) | | | (24,842) | |
| ESH REIT preferred distributions | ESH REIT preferred distributions | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | (4) | | ESH REIT preferred distributions | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | (4) | |
| Adjustment to reflect changes in book value of noncontrolling interests | Adjustment to reflect changes in book value of noncontrolling interests | — | | | — | | | (3,319) | | | — | | | — | | | (3,319) | | | 3,319 | | | — | | Adjustment to reflect changes in book value of noncontrolling interests | — | | | — | | | (3,319) | | | — | | | — | | | (3,319) | | | 3,319 | | | 0 | |
| Equity-based compensation | Equity-based compensation | 220 | | | 2 | | | 188 | | | — | | | — | | | 190 | | | 246 | | | 436 | | Equity-based compensation | 220 | | | 2 | | | 188 | | | — | | | — | | | 190 | | | 246 | | | 436 | |
| BALANCE - March 31, 2020 | BALANCE - March 31, 2020 | 177,466 | | | $ | 1,775 | | | $ | 723,285 | | | $ | (63,394) | | | $ | (512) | | | $ | 661,154 | | | $ | 449,730 | | | $ | 1,110,884 | | 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 | | 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 condensed consolidated financial statements.
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 20202021 AND 20192020
(In thousands)
(Unaudited)
| | | Three Months Ended
March 31, | | | Three Months Ended
March 31, |
| | | 2020 | | 2019 | | 2021 | | 2020 |
| OPERATING ACTIVITIES: | OPERATING ACTIVITIES: | | | | OPERATING ACTIVITIES: | | | |
| Net income | Net income | $ | 7,845 | | | $ | 28,404 | | Net income | $ | 12,366 | | | $ | 7,845 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | |
| Depreciation and amortization | Depreciation and amortization | 50,520 | | | 48,778 | | Depreciation and amortization | 49,408 | | | 50,520 | |
| Foreign currency transaction loss (gain) | 703 | | | (178) | | |
| Foreign currency transaction (gain) loss | | Foreign currency transaction (gain) loss | (84) | | | 703 | |
| Amortization of deferred financing costs and debt discount | Amortization of deferred financing costs and debt discount | 2,052 | | | 1,996 | | Amortization of deferred financing costs and debt discount | 2,058 | | | 2,052 | |
| | Loss on disposal of property and equipment | Loss on disposal of property and equipment | 3,343 | | | 1,376 | | Loss on disposal of property and equipment | 1,232 | | | 3,343 | |
| | Gain on sale of hotel properties | | Gain on sale of hotel properties | (12,018) | | | 0 | |
| | Equity-based compensation | Equity-based compensation | 1,126 | | | 2,109 | | Equity-based compensation | 2,348 | | | 1,126 | |
| Deferred income tax benefit | Deferred income tax benefit | (3,122) | | | (50) | | Deferred income tax benefit | (2,423) | | | (3,122) | |
| Changes in assets and liabilities: | Changes in assets and liabilities: | | Changes in assets and liabilities: | |
| Accounts receivable, net | Accounts receivable, net | (1,407) | | | (1,586) | | Accounts receivable, net | (323) | | | (1,407) | |
| Other assets | Other assets | 1,760 | | | 3,208 | | Other assets | 57 | | | 1,760 | |
| Accounts payable and accrued liabilities | Accounts payable and accrued liabilities | 29,465 | | | 17,982 | | Accounts payable and accrued liabilities | 38,725 | | | 29,465 | |
| Net cash provided by operating activities | Net cash provided by operating activities | 92,285 | | | | 102,039 | | Net cash provided by operating activities | 91,346 | | | 92,285 | |
| INVESTING ACTIVITIES: | INVESTING ACTIVITIES: | | INVESTING ACTIVITIES: | | | |
| Purchases of property and equipment | Purchases of property and equipment | (34,452) | | | (45,197) | | Purchases of property and equipment | (22,549) | | | (34,452) | |
| | Development in process payments | Development in process payments | (19,769) | | | (7,982) | | Development in process payments | (6,246) | | | (19,769) | |
| Payment for intangible assets | Payment for intangible assets | (358) | | | (2,109) | | Payment for intangible assets | (1,641) | | | (358) | |
| | Proceeds from sale of hotel properties | | Proceeds from sale of hotel properties | 21,867 | | | 0 | |
| Proceeds from insurance and related recoveries | Proceeds from insurance and related recoveries | 956 | | | 156 | | Proceeds from insurance and related recoveries | 56 | | | 956 | |
| Net cash used in investing activities | Net cash used in investing activities | (53,623) | | | | (55,132) | | Net cash used in investing activities | (8,513) | | | (53,623) | |
| FINANCING ACTIVITIES: | FINANCING ACTIVITIES: | | FINANCING ACTIVITIES: | | | |
| Principal payments on term loan facility | Principal payments on term loan facility | (1,577) | | | (2,842) | | Principal payments on term loan facility | (1,577) | | | (1,577) | |
| Proceeds from revolving credit facilities | Proceeds from revolving credit facilities | 399,765 | | | — | | Proceeds from revolving credit facilities | 0 | | | 399,765 | |
| Payments on revolving credit facilities | | Payments on revolving credit facilities | (40,000) | | | 0 | |
| | Payments of deferred financing costs | Payments of deferred financing costs | (17) | | | — | | Payments of deferred financing costs | 0 | | | (17) | |
| Principal payments on finance leases | Principal payments on finance leases | (37) | | | (29) | | Principal payments on finance leases | (38) | | | (37) | |
| | Tax withholdings related to restricted stock unit settlements | Tax withholdings related to restricted stock unit settlements | (815) | | | (1,571) | | 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) | Repurchase of Corporation common stock and ESH REIT Class B common stock (Paired Shares) | (31,093) | | | — | | Repurchase of Corporation common stock and ESH REIT Class B common stock (Paired Shares) | 0 | | | (31,093) | |
| | Corporation common distributions | Corporation common distributions | (16,177) | | | (13,334) | | Corporation common distributions | (91) | | | (16,177) | |
| ESH REIT common distributions | ESH REIT common distributions | (25,222) | | | (28,562) | | ESH REIT common distributions | (78,401) | | | (25,222) | |
| | Net cash provided by (used in) financing activities | 324,827 | | | | (46,338) | | |
| Net cash (used in) provided by financing activities | | 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 | CHANGES IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH DUE TO CHANGES IN FOREIGN CURRENCY EXCHANGE RATES | (150) | | | 31 | | CHANGES IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH DUE TO CHANGES IN FOREIGN CURRENCY EXCHANGE RATES | 0 | | | (150) | |
| NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | 363,339 | | | 600 | | |
| NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | (38,912) | | | 363,339 | |
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH - Beginning of period | CASH, CASH EQUIVALENTS AND RESTRICTED CASH - Beginning of period | 361,670 | | | 303,336 | | CASH, CASH EQUIVALENTS AND RESTRICTED CASH - Beginning of period | 409,921 | | | 361,670 | |
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH - End of period | CASH, CASH EQUIVALENTS AND RESTRICTED CASH - End of period | $ | 725,009 | | | $ | 303,936 | | CASH, CASH EQUIVALENTS AND RESTRICTED CASH - End of period | $ | 371,009 | | | $ | 725,009 | |
| SUPPLEMENTAL CASH FLOW INFORMATION: | | | | |
| Cash payments for interest, excluding modification, prepayment and other penalties, net of capitalized interest of $859 and $313 | $ | 5,455 | | | $ | 12,028 | | |
| Cash (refunds) payments for income taxes, net of refunds of $18 and $0 | $ | (18) | | | $ | 341 | | |
| Operating cash payments for finance leases | $ | 59 | | | $ | 61 | | |
| Operating cash payments for operating leases | $ | 714 | | | $ | 690 | | |
| NONCASH INVESTING AND FINANCING ACTIVITIES: | | |
| Capital expenditures included in accounts payable and accrued liabilities | $ | 22,400 | | | $ | 24,555 | | |
| | Additions to finance lease right-of-use assets and liabilities | $ | 364 | | | $ | 109 | | |
| | Corporation common distributions included in accounts payable and accrued liabilities | $ | 238 | | | $ | 274 | | |
| ESH REIT common distributions included in accounts payable and accrued liabilities | $ | 387 | | | $ | 629 | | |
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)
| | | | | | | | | | | |
| 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 condensed consolidated financial statements.
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 20202021 AND DECEMBER 31, 20192020 AND FOR THE THREE MONTHS ENDED
MARCH 31, 20202021 AND 20192020
(Unaudited)
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. 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 March 31, 2020,2021, represents 59%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 March 31, 20202021 and December 31, 2019,2020, the Company owned and operated 558563 and 557558 hotel properties, respectively, in 40 U.S. states, consisting of approximately 62,10062,700 and 61,90062,100 rooms, respectively, and franchised or managed88 and 74 and 73 hotel properties for third parties, respectively, consisting of approximately 7,6009,000 and 7,5007,600 rooms, respectively. As of March 31, 2020,2021, all 632651 system-wide hotels were operated under the Extended Stay America brand.
Owned hotel properties are owned by subsidiaries of ESH REIT and are operated by 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 subsidiary of the Corporation, which also manages 25 hotels on behalf of third parties.Corporation. The Extended Stay America brand is owned by ESH Hospitality Strategies LLC (“ESH Strategies”), also a subsidiary of the Corporation. ESH Strategies licenses the brand and intellectual property to its subsidiaries, which license them to the Operating Lessees and third parties.
As ofPending Merger—On March 31, 2020 and December 31, 2019, the Corporation had 177.5 million shares and 179.5 million shares of common stock outstanding, respectively. As of March 31, 2020 and December 31, 2019, ESH REIT’s common equity consisted of the following: (i) 250.5 million shares of Class A common stock outstanding (59% and 58%, respectively, of its common equity), all of which were owned by the Corporation, and (ii) 177.5 million shares and 179.5 million shares of Class B common stock outstanding, respectively (41% and 42%, respectively, of its common equity).
Paired Share Repurchase Program—In December 2015, the Boards of Directors of14, 2021, the Corporation and ESH REIT authorizedentered into an Agreement and Plan of Merger (the “Merger Agreement”) with Eagle Parent Holdings L.P. (“Parent”), a combined Paired Share repurchase program. As a resultjoint venture of several increases in authorized amountsBlackstone Real Estate Partners IX L.P. and program extensions,Starwood Distressed Opportunity Fund XII Global, L.P. Upon completion of the combined Paired Share repurchase program currently authorizesproposed transactions, the Corporation and ESH REIT will become wholly-owned subsidiaries of Parent. Pursuant to purchasethe 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”).
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 $550 million$1.75 per share of Corporation common stock, in Paired Shares through December 31, 2020. Repurchases may be made at management’s discretion from time to timewhich case the cash 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). As of March 31, 2020, the Corporation and ESH REIT had repurchased and retired 28.6 million Paired Shares for $283.0 million and $166.4 million, including transaction fees, respectively, and $101.1 million remained available under the combined Paired Share repurchase program.Merger Agreement will be completed.
Basis of Consolidation
The accompanying 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-party equity interests in consolidated subsidiaries are presented as noncontrolling interests. Despite the fact that
each share of Corporation common stock is paired on a 1-for-one basis with each share of ESH REIT Class B common stock, the Corporation does not own ESH REIT Class B common stock; therefore, ESH REIT Class B common stock represents a
third-party equity interest. As such, the rights associated with ESH REIT Class B common stock, along with other third-party equity interests in ESH REIT, are presented as noncontrolling interests in the accompanying 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.
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 condensed consolidated financial statements. The Company believes the disclosures made are adequate to prevent the information presented from being misleading. However, the condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 20192020 included in the combined annual report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on February 26, 2020.25, 2021.
The accompanying 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 March 31, 2020 and2021, the results of the Company’s operations, comprehensive income, changes in equity and cash flows for the three months ended March 31, 20202021 and 2019.2020. Interim results are not necessarily indicative of full year performance because of the impact of seasonal, short-term or other market variations, including the impact of the COVID-19 pandemic, as well as the impact of hotel acquisitions and dispositions, hotel renovations and financing or other capital transactions.
Use of Estimates—The preparation of the accompanying condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and 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 for impairment and estimated liabilities for insurance reserves and 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 21 to 49 years.
Management assesses 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 the 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 the hotel 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 estimated fair value is recognized as an impairment 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 continue 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. Based on market conditions and the Company's plans with respect to its hotel properties as of March 31, 2020, the Company believes that the carrying amounts of the hotel properties are recoverable
and 0 impairment charges were recorded during the three months ended March 31, 2020. However, actual results are subject to a high degree of uncertainty due to the volatility of macroeconomic trends and the evolving nature of the COVID-19 pandemic.
Intangible Assets and Goodwill—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. 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.
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, including goodwill, 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 has two2 reportable operating segments, owned hotels and franchise and management. There is no goodwill associated with ourthe Company's franchise and management segment. ManagementAs a result, management only analyzes goodwill associated with all 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.
As of March 31, 2020, the Company believes that the carrying amount of its intangible assets, including goodwill, are recoverable and there are no changes in circumstances that would more likely than not reduce the fair value of its reporting units below their carrying amount; therefore, no impairment charges were recorded during the three months ended March 31, 2020. However, ifIf the effects of the COVID-19 pandemic or other factors cause economic and market conditions to continue to deteriorate, in particular if the market price of the Company's Paired Shares further declines, these events could result in impairment charges with respect to goodwill in the future. Actual results are subject to a high degree of uncertainty due to the volatility of macroeconomic trends and the evolving nature of the COVID-19 pandemic.trends.
Revenue from Owned and Operated 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 Company 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 price concessions made upon guest checkout.
In evaluating its performance obligation, the Company bundles the obligation to provide the guest the room itself with other obligations (such as free WiFi, grab and go breakfast, 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 has 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 basis 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 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). Third-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 the following:
•Franchise fees, which consist of an initial fee and an ongoing 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 management 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 direct and an indirect basis, as follows:
◦Direct costs incurred with respect to managementfranchise and franchisemanagement agreements include on-site hotel personnel and incremental reservation and distribution costs for which 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.
◦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 is reimbursed for indirect costs through a system 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 license 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 system services to break-even, but the timing of system service fee revenues will typically not align with expenses incurred to operate the programs.
The promise 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 services 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 system 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 are typically available and obtained monthly.
Recently Issued Accounting Standards
Reference Rate Reform—In March 2020, the FASB issued an accounting standards update that provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships that reference LIBOR, subject to meeting certain criteria. The Company adopted this update on March 12, 2020 and the update isupdates 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, 2020,2021, the Company had not applied 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 condensed consolidated financial statements.
Income Taxes—In December 2019, the FASB issued an accounting standards update which simplifies the accounting for income taxes. The update amends several topics including interim period accounting for enacted changes in tax law and year-
to-dateyear-to-date loss limitation in interim-period tax accounting. This update will be effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2020, and may be early adopted. The Company does not expect the adoption of this update to have a material effect on its condensed consolidated financial statements.
Fair Value Measurement—In August 2018, the FASB issued an accounting standards update which modifies the disclosure requirements for fair value measurements in Topic 820, Fair Value Measurement. The Company adopted this update on January 1, 2020.2021. The adoption of this update did not have a material effect on the Company's condensed consolidated financial statements.
Intangibles-Goodwill and Other—Internal-Use Software—In August 2018, the FASB issued an accounting standards update which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. The Company adopted this update on January 1, 2020, using a prospective transition method. The adoption of this update did not have a material effect on the Company's condensed consolidated financial statements.
Goodwill—In January 2017, the FASB issued an accounting standards update in which the guidance on testing for goodwill was updated to eliminate Step 2 in the determination on whether goodwill should be considered impaired. Annual and/or interim assessments are still required. The Company adopted this update on January 1, 2020, using a prospective transition method. The adoption of this update did not have a material effect on the Company's condensed consolidated financial statements.
Financial Instruments—Credit Losses—In June 2016, the FASB issued an accounting standards update which requires the measurement of an impairment allowance for certain financial assets based on a company’s current estimate of all contractual cash flows it does not expect to collect. The new standard primarily impacts the manner in which the Company estimates its allowance for uncollectible trade receivables. The standard requires the Company to measure its allowance for doubtful accounts based on current conditions, historical experience and reasonable and supportable forecasts for each pool of receivables with similar risk characteristics. The Company adopted this update on January 1, 2020, using a modified retrospective method. The adoption of this update did not have a material effect on the Company's condensed consolidated financial statements and had no effect on or impact to retained earnings.
3. NET INCOME PER SHARE
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 unrestricted common stock outstanding plus potentially dilutive securities. Dilutive securities include certain equity-based awards (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, | | | | Three Months Ended
March 31, |
| | | 2020 | | 2019 | | | 2021 | | 2020 |
| Numerator: | Numerator: | | | | | Numerator: | | | | |
| Net income available to Extended Stay America, Inc. common shareholders - basic | Net income available to Extended Stay America, Inc. common shareholders - basic | | $ | 4,554 | | | $ | 21,934 | | Net income available to Extended Stay America, Inc. common
shareholders - basic | | $ | 1,921 | | | $ | 4,554 | |
| Income attributable to noncontrolling interests assuming conversion | Income attributable to noncontrolling interests assuming conversion | | (2) | | | (4) | | Income attributable to noncontrolling interests assuming conversion | | (25) | | | (2) | |
| Net income available to Extended Stay America, Inc. common shareholders - diluted | Net income available to Extended Stay America, Inc. common shareholders - diluted | | $ | 4,552 | | | $ | 21,930 | | Net income available to Extended Stay America, Inc. common
shareholders - diluted | | $ | 1,896 | | | $ | 4,552 | |
| Denominator: | Denominator: | | | | | Denominator: | | | | |
| Weighted-average number of Extended Stay America, Inc. common shares outstanding - basic | Weighted-average number of Extended Stay America, Inc. common shares outstanding - basic | | 177,990 | | | 188,348 | | Weighted-average number of Extended Stay America, Inc. common shares outstanding - basic | | 177,827 | | | 177,990 | |
| Dilutive securities | Dilutive securities | | 181 | | | 228 | | Dilutive securities | | 722 | | | 181 | |
| Weighted-average number of Extended Stay America, Inc. common shares outstanding - diluted | Weighted-average number of Extended Stay America, Inc. common shares outstanding - diluted | | $ | 178,171 | | | $ | 188,576 | | 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 | Net income per Extended Stay America, Inc. common share - basic | | $ | 0.03 | | | $ | 0.12 | | Net income per Extended Stay America, Inc. common share - basic | | $ | 0.01 | | | $ | 0.03 | |
| Net income per Extended Stay America, Inc. common share - diluted | Net income per Extended Stay America, Inc. common share - diluted | | $ | 0.03 | | | $ | 0.12 | | Net income per Extended Stay America, Inc. common share - diluted | | $ | 0.01 | | | $ | 0.03 | |
|
4. HOTEL DISPOSITIONS
The table below summarizes hotel dispositions during the three months ended March 31, 2021 and the year ended December 31, 2020 (in thousands, except number of hotels and number of rooms). No dispositions were reported as discontinued operations.
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
4. HOTEL ACQUISITIONS
NaN hotels were acquired duringDuring the three months ended March 31, 2020. On November 12, 2019, the Company acquired a 121-room2021 and 2020, disposed hotel properties contributed total room and other hotel revenues, total operating hotel from Crestwood Suites of Lakeland, LLC for $10.0 million. Other than ordinary components of prorated net working capital, no liabilities were assumed in the purchase. The majority of the purchase price was allocated to buildingexpenses and improvements, with estimated useful lives ranging from 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 | | |
five to 44 years.
5. PROPERTY AND EQUIPMENT
Net investment in property and equipment as of March 31, 20202021 and December 31, 2019,2020, consists of the following (in thousands):
| | | March 31,
2020 | | December 31, 2019 | | March 31,
2021 | | December 31, 2020 |
| Hotel properties: | Hotel properties: | | | | Hotel properties: | | | |
Land and site improvements (1) | Land and site improvements (1) | $ | 1,231,474 | | | $ | 1,228,231 | | Land and site improvements (1) | $ | 1,249,785 | | | $ | 1,246,441 | |
| Building and improvements | Building and improvements | 2,814,840 | | | 2,792,579 | | Building and improvements | 2,895,078 | | | 2,881,855 | |
Furniture, fixtures and equipment (2) | Furniture, fixtures and equipment (2) | 749,815 | | | 745,145 | | Furniture, fixtures and equipment (2) | 782,465 | | | 783,414 | |
| Total hotel properties | Total hotel properties | 4,796,129 | | | 4,765,955 | | Total hotel properties | 4,927,328 | | | 4,911,710 | |
Development in process (3) | Development in process (3) | 80,269 | | | 70,864 | | Development in process (3) | 28,527 | | | 46,496 | |
| Corporate furniture, fixtures, equipment, software and other | Corporate furniture, fixtures, equipment, software and other | 30,894 | | | 30,680 | | Corporate furniture, fixtures, equipment, software and other | 29,803 | | | 29,735 | |
| | Total cost | Total cost | 4,907,292 | | | 4,867,499 | | Total cost | 4,985,658 | | | 4,987,941 | |
| Less accumulated depreciation: | Less accumulated depreciation: | | | | Less accumulated depreciation: | |
| Hotel properties | Hotel properties | (1,393,347) | | | (1,353,772) | | Hotel properties | (1,546,732) | | | (1,518,236) | |
| Corporate furniture, fixtures, equipment, software and other | Corporate furniture, fixtures, equipment, software and other | (21,124) | | | (20,178) | | Corporate furniture, fixtures, equipment, software and other | (24,439) | | | (23,750) | |
| Total accumulated depreciation | Total accumulated depreciation | (1,414,471) | | | (1,373,950) | | Total accumulated depreciation | (1,571,171) | | | (1,541,986) | |
| Property and equipment — net | Property and equipment — net | $ | 3,492,821 | | | $ | 3,493,549 | | Property and equipment — net | $ | 3,414,487 | | | $ | 3,445,955 | |
(1)Includes finance lease asset of $3.2$4.0 million as of March 31, 20202021 and December 31, 2019.2020.
(2)Includes finance lease asset of $0.4 million and $0 as of March 31, 20202021 and December 31, 2019, respectively.
(3)Includes finance lease asset of $0.8 million as of March 31, 2020 and December 31, 2019.2020.
As of March 31, 20202021 and December 31, 2019,2020, development in process consisted of 146 and 158 land parcels, respectively, that were in various phases of construction and/or development. The Company expects to delay commencement of construction at four4 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 Company completed construction of a 120-room hotel in Florida. The hotelfollowing owned, newly constructed hotels were opened in March 2020. During 2019,under the Company completed construction of a 124-room hotel in Florida and a 136-room hotel in Arizona. The hotels opened in December 2019. 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, thesenewly-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, 2020 | | |
Total room and other hotel revenues | $ | 1,683 | | | |
Total operating expenses | 1,153 | | | |
Income before income tax expense | 530 | | | |
| | | | | | | | | | | | | | | |
| | | 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
The Company’s intangible assets and goodwill as of March 31, 20202021 and December 31, 2019,2020, consist of the following (dollars in(in thousands):
| | | March 31, 2020 | | | March 31, 2021 |
| | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Book Value | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Book Value |
| Definite-lived intangible assets—customer relationships | $ | 26,800 | | | $ | (12,705) | | | $ | 14,095 | | |
| Definite-lived intangible assets—software licenses | 10,362 | | | (1,069) | | | 9,293 | | |
| | Definite-lived intangible assets | | Definite-lived intangible assets | | | | | |
| Customer relationships | | Customer relationships | $ | 26,800 | | | $ | (14,045) | | | $ | 12,755 | |
| Software development and licenses | | Software development and licenses | 14,024 | | | (2,367) | | | 11,657 | |
| Software development in process | | Software development in process | 439 | | | 0 | | | 439 | |
| Indefinite-lived intangible assets—trademarks | Indefinite-lived intangible assets—trademarks | 10,163 | | | — | | | 10,163 | | Indefinite-lived intangible assets—trademarks | 10,163 | | | — | | | 10,163 | |
| Total intangible assets | Total intangible assets | 47,325 | | | (13,774) | | | 33,551 | | Total intangible assets | 51,426 | | | (16,412) | | | 35,014 | |
| Goodwill | Goodwill | 45,192 | | | — | | | 45,192 | | Goodwill | 44,921 | | | — | | | 44,921 | |
| Total intangible assets and goodwill | Total intangible assets and goodwill | $ | 92,517 | | | $ | (13,774) | | | $ | 78,743 | | Total intangible assets and goodwill | $ | 96,347 | | | $ | (16,412) | | | $ | 79,935 | |
| | | December 31, 2019 | | | December 31, 2020 |
| | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Book Value | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Book Value |
| Definite-lived intangible assets—customer relationships | $ | 26,800 | | | $ | (12,370) | | | $ | 14,430 | | |
| Definite-lived intangible assets—software licenses | 10,353 | | | (763) | | | 9,590 | | |
| | Definite-lived intangible assets | | Definite-lived intangible assets | | | | | |
| Customer relationships | | Customer relationships | $ | 26,800 | | | $ | (13,710) | | | $ | 13,090 | |
| Software licenses | | Software licenses | 10,546 | | | (2,005) | | | 8,541 | |
| Software development in process | | Software development in process | 2,299 | | | — | | | 2,299 | |
| Indefinite-lived intangible assets—trademarks | Indefinite-lived intangible assets—trademarks | 10,163 | | | — | | | 10,163 | | Indefinite-lived intangible assets—trademarks | 10,163 | | | — | | | 10,163 | |
| Total intangible assets | Total intangible assets | 47,316 | | | (13,133) | | | 34,183 | | Total intangible assets | 49,808 | | | (15,715) | | | 34,093 | |
| Goodwill | Goodwill | 45,192 | | | — | | | 45,192 | | Goodwill | 45,055 | | | — | | | 45,055 | |
| Total intangible assets and goodwill | Total intangible assets and goodwill | $ | 92,508 | | | $ | (13,133) | | | $ | 79,375 | | Total intangible assets and goodwill | $ | 94,863 | | | $ | (15,715) | | | $ | 79,148 | |
The remaining weighted-average amortization period for amortizing intangible assets is approximately nineeight years as of March 31, 2020.2021. Estimated future amortization expense for amortizing intangible assets is as follows (in thousands):
| | Years Ending December 31, | Years Ending December 31, | | Years Ending December 31, | |
| Remainder of 2020 | $ | 1,924 | | |
| 2021 | 2,565 | | |
| Remainder of 2021 | | Remainder of 2021 | $ | 2,463 | |
| 2022 | 2022 | 2,565 | | 2022 | 3,279 | |
| 2023 | 2023 | 2,565 | | 2023 | 3,279 | |
| 2024 | 2024 | 2,565 | | 2024 | 3,279 | |
| 2025 | 2025 | 2,565 | | 2025 | 3,279 | |
| 2026 | | 2026 | 2,723 | |
| Thereafter | Thereafter | 8,639 | | Thereafter | 6,110 | |
| Total | Total | $ | 23,388 | | Total | $ | 24,412 | |
7. DEBT
Summary - The Company’s outstanding debt, net of unamortized debt discounts and unamortized deferred financing costs, as of March 31, 20202021 and December 31, 2019,2020, consists of the following (dollars in thousands):
| | | | Stated
Amount | | Carrying Amount | | | Unamortized Deferred Financing Costs | | | | | | | | Stated
Amount | | Carrying Amount | | Unamortized Deferred Financing Costs | | | | | |
| Loan | Loan | | | March 31, 2020 | | December 31, 2019 | | March 31, 2020 | | December 31, 2019 | | Stated Interest Rate | | Maturity Date | | Loan | Stated
Amount | | March 31, 2021 | December 31, 2020 | | March 31, 2021 | | December 31, 2020 | | Stated Interest Rate | | Maturity Date | |
| Term loan facility | Term loan facility | | | | | | | | | | | | | Term loan facility | | | | | | | | | | |
| ESH REIT Term Facility | ESH REIT Term Facility | $ | 630,909 | | | $ | 625,863 | | (1) | $ | 627,368 | | (1) | $ | 8,693 | | | $ | 9,030 | | | LIBOR (2) + 2.00% | | 9/18/2026 | (3) | 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 | Senior notes | | | | | | | | | Senior notes | |
| 2025 Notes | 2025 Notes | 1,300,000 | | | 1,293,315 | | (4) | 1,292,986 | | (4) | 14,349 | | | 15,055 | | | 5.25% | | 5/1/2025 | | 2025 Notes | 1,300,000 | | | 1,294,630 | | (4) | 1,294,301 | | (4) | 11,526 | | | 12,232 | | | 5.25% | | 5/1/2025 | |
| 2027 Notes | 2027 Notes | 750,000 | | | 750,000 | | | 750,000 | | | 13,199 | | | 13,633 | | | 4.63% | | 10/1/2027 | | 2027 Notes | 750,000 | | | 750,000 | | | 750,000 | | | 11,439 | | | 11,879 | | | 4.63% | | 10/1/2027 | |
| Revolving credit facilities | Revolving credit facilities | | | | | | | | | | | | | Revolving credit facilities | |
| ESH REIT Revolving Credit Facility | ESH REIT Revolving Credit Facility | 350,000 | | | 350,000 | | | — | | | 2,472 | | (5) | 2,606 | | (5) | LIBOR (2) + 2.00% | | 9/18/2024 | | 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 | Corporation Revolving Credit Facility | 50,000 | | | 49,765 | | | — | | | 531 | | (5) | 556 | | (5) | LIBOR (2) + 2.25% | | 9/18/2024 | | Corporation Revolving Credit Facility | 50,000 | | | 9,765 | | | 49,765 | | | 485 | | (5) | 520 | | (5) | LIBOR (2) + 2.25% | | 9/18/2024 | |
| Unsecured Intercompany Facility | | | | | | | | | | | |
Unsecured Intercompany Facility(6) | 75,000 | | | — | | | — | | | — | | | — | | | 5.00% | | 9/18/2026 | | |
| | Total | Total | | $ | 3,068,943 | | | $ | 2,670,354 | | | $ | 39,244 | | | $ | 40,880 | | | Total | | $ | 2,674,242 | | | $ | 2,715,417 | | | $ | 32,721 | | | $ | 34,376 | | |
(1)The ESH REIT Term Facility (defined below) is presented net of an unamortized debt discount of $1.9$1.6 million and $2.0$1.7 million as of March 31, 20202021 and December 31, 2019,2020, respectively.
(2)As of March 31, 20202021 and December 31, 2019,2020, one-month LIBOR was 0.99%0.11% and 1.76%0.14%, respectively. As of March 31, 20202021 and December 31, 2019, $150.02020, $50.0 million and $200.0$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 commencing withunder the year ending December 31, 2020.ESH REIT Term Facility. Annual mandatory prepayments for a given fiscalthe year are due during the first quarter of the following fiscal 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 $6.7$5.4 million and $7.0$5.7 million as of March 31, 20202021 and December 31, 2019,2020, respectively.
(5)Unamortized deferred financing costs related to revolving credit facilities are included in other assets in the accompanying condensed consolidated balance sheets.
(6)Any outstanding debt balances and interest expense, as applicable, owed from ESH REIT to the Corporation eliminate in consolidation of the Company's condensed consolidated financial statements.
ESH REIT Credit Facilities
ESH REIT’s credit agreement, as may be amended and supplemented from time to time, provides for senior secured credit facilities (collectively, the “ESH REIT Credit Facilities”) which consist of a $630.9 million senior secured term loan facility (the “ESH REIT Term Facility”) and a $350.0 million senior secured revolving credit facility (the “ESH REIT Revolving Credit Facility”). Subject to the satisfaction of certain criteria, borrowings under the 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, ESH REIT’s pro-forma senior loan-to-value ratio is less than or equal to 45%.
ESH REIT Term Facility—The ESH REIT Term Facility bears interest at a rate equal to (i) LIBOR plus 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 0.75% during a Level 1 Period or 1.00% for any period other than a Level 1 Period. ESH REIT has the option to prepay outstanding loans under the ESH REIT Term Facility without penalty.
ESH REIT Revolving Credit Facility—Borrowings under the ESH REIT Revolving Credit Facility bear interest at a rate equal to (i) LIBOR plus a spread that ranges from 1.50% to 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 0.50% to 1.00% based on ESH REIT’s Consolidated Total Net Leverage Ratio, as defined. ESH REIT incurs a fee of 0.30% or 0.175% on the unutilized revolver balance.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 March 31, 2020,2021, ESH REIT had 0 letters of credit outstanding and no available borrowing capacity under the facility.
In March 2020, ESH REIT borrowed the full available borrowing capacity of $350.0 million under the ESH REIT Revolving Credit Facility as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of uncertainty in business markets resulting from the COVID-19 pandemic. These proceeds may in the future be used for working capital, general corporate or other purposes permitted under the agreement.
The 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 credit under the ESH REIT Revolving Credit Facility, excluding up to $30.0 million of letters of credit, is equal to or greater than 35% of the aggregate available principal amount of the ESH REIT Revolving Credit Facility on the applicable fiscal quarter end date.facility.
ESH REIT 2025 Notes
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 (the “2025 Notes”) under an indenture with Deutsche Bank Trust Company Americas, as trustee, in private placements pursuant to Rule 144A of the Securities Act of 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. Prior to May 1, 2020, ESH REIT may redeem the 2025 Notes, in whole or in part, at a redemption price equal to 100% of the principal amount, plus a “make-whole” premium, as defined, plus accrued and unpaid interest. Upon a Change of Control, as defined, holders of the 2025 Notes have the right to 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 2027 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” premium, as defined, plus accrued and unpaid interest. Prior to October 1, 2022, subject to certain conditions, ESH REIT may redeem up to 35% of the aggregate principal amount of the 2027 Notes at a redemption price equal to 101% of the aggregate principal amount, 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 2027 Notes have the right to require ESH REIT to redeem the 2027 Notes at 101% of the principal amount, plus accrued and unpaid interest.
Corporation Revolving Credit Facility
The Corporation’s revolving credit facility, as may be amended and supplemented from time to time (the “Corporation Revolving Credit 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 Corporation Revolving Credit Facility bear interest at a rate equal to (i) LIBOR plus 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 plus 1.00%) plus 1.25%. In addition to paying interest on outstanding principal, the Corporation incurs a fee of 0.30% or 0.175% on the unutilized revolver balance based on the amount outstanding under the facility.
During the three months ended March 31, 2021, the Company repaid $40.0 million under the Corporation Revolving Credit Facility, and as of March 31, 2021, the outstanding balance under the facility was $9.8 million. As of March 31, 2020,2021, the Corporation had 1 letter of credit outstanding of $0.2 million and no$40.0 million available borrowing capacity under the facility.
In March 2020, the Company borrowed the then-remaining available borrowing capacity of $49.8 million under the Corporation Revolving Credit Facility as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of uncertainty in business markets resulting from the COVID-19 pandemic. The proceeds may in the future be used for working capital, general corporate or other purposes permitted under the agreement.
Obligations under the 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 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 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 (the "Leverage Covenant")“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 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 Corporation Revolving Credit Facility on the applicable fiscal quarter end date.
Unsecured Intercompany Facility
In August 2016, ESH REIT, as borrower, andMay 2020, the Corporation, as lender,Company entered into an unsecured intercompany credit facility,amendment to the Corporation Revolving Credit Facility and 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 may be amended and supplemented from timeopposed to time (the “Unsecured Intercompany Facility”). Undertrailing twelve-month EBITDA. Additionally, the Unsecured Intercompany Facility, ESH REIT mayamendment provides for the Corporation to borrow up to $300.0$150.0 million plus additional amounts, in each case subject to certain conditions. Loans under the Unsecured Intercompany Facility bear interest at an annual rate of 5.0%.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 option to prepay outstanding balances under the facility without penalty. As of March 31, 2020 and December 31, 2019, the amount outstanding under the facility was $0.Corporation.
Covenants
The ESH REIT Credit Facilities, the 2027 Notes, the 2025 Notes, the Corporation Revolving Credit Facility and the Unsecured Intercompany Facilitycertain intercompany loan facilities contain a number of restrictive covenants that, among other things and subject to certain exceptions, limit the Corporation’s or ESH REIT’s ability and the ability of their respective subsidiaries to engage in certain transactions. In addition, the ESH REIT Revolving Credit Facility and the Corporation Revolving Credit Facility contain financial covenants that, subject to certain conditions, require compliance with certain senior loan-to-value and consolidated leverage ratios. The agreements governing the Corporation’s and 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 Unsecured Intercompany Facility,certain intercompany loan facilities, certain material operating leases and management agreements. As of March 31, 2020,2021, the Corporation and ESH REIT were 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 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. On May 6, 2020, theThe Company executed an amendment to the Corporation Revolving Credit Facility (See Note 14).may seek additional covenant waivers or amendments, though there is no certainty that it would be successful in such efforts.
Interest Expense, net—The components of net interest expense during the three months ended March 31, 20202021 and 2019,2020, are as follows (in thousands):
| | | | Three Months Ended March 31, | | | | Three Months Ended
March 31, |
| | | 2020 | | 2019 | | | 2021 | | 2020 |
Contractual interest (1) | | $ | 31,326 | | | $ | 28,717 | | |
Contractual interest, net (1) | | Contractual interest, net (1) | | $ | 29,067 | | | $ | 31,326 | |
| Amortization of deferred financing costs and debt discount | Amortization of deferred financing costs and debt discount | | 2,052 | | | 1,997 | | Amortization of deferred financing costs and debt discount | | 2,058 | | | 2,052 | |
Other costs (2) | Other costs (2) | | 293 | | | 401 | | Other costs (2) | | 338 | | | 293 | |
| Interest Income | | (986) | | | (1,511) | | |
| Interest income | | Interest income | | (1) | | | (986) | |
| Total | Total | | $ | 32,685 | | | $ | 29,604 | | Total | | $ | 31,462 | | | $ | 32,685 | |
______________________
(1)IncludesNet 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. Net of capitalized interest of $0.9 million and $0.3 million, respectively.
(2)Includes interest expense on finance leases (see Note 12) and unused facility fees.
Mandatorily Redeemable Preferred Stock—The Corporation has authorized 350.0 million shares of preferred stock, $0.01 par value, of which 7,130 shares of mandatorily redeemable voting preferred stock were issued and outstanding as of March 31, 2020 and December 31, 2019. Dividends on these mandatorily redeemable voting preferred shares are payable quarterly in arrears at a rate of 8.0% per year. With respect to dividend, distribution and liquidation rights, the 8.0% voting preferred stock ranks senior to the Corporation’s common stock. Holders of the 8.0% voting preferred stock have 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.
Fair Value of Debt and Mandatorily Redeemable Preferred Stock—As of March 31, 20202021 and December 31, 2019,2020, the estimated fair value of the Company’s debt was $2.7 billion and the estimated fair value of the Corporation’s 8.0% mandatorily redeemable preferred stock was $7.2 million and $7.1 million,$2.8 billion, respectively. Estimated fair values are determined by comparing current borrowing rates and risk spreads offered in the market (Level 2 fair value measures) or quoted market prices (Level 1 fair value measures), when available, to the stated interest rates and spreads on the Company’s debt and the Corporation’s 8.0% mandatorily redeemable preferred stock.debt. As of March 31, 20202021 and December 31, 2019,2020, the estimated fair value of each of the Corporation and ESH REIT revolving credit facilities isfacility was equal to its carrying value due to its short-term nature and frequent settlement.
8. DERIVATIVE INSTRUMENTS
ESH REIT is 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 to manage its exposure to interest rate risk on a portion of the ESH REIT Term Facility. The notional amount of the interest rate swap as of March 31, 20202021 was $150.0 million. The notional amount decreases by an additional $50.0 million, every six months untiland the swap’s maturityswap matures in September 2021.
For the three months ended March 31, 2020 and 2019,2021, 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 and $1.0 million, respectively, that offset interest expense. As of March 31, 2020, $1.02021, $0.3 million of interest expense is expected to be recognized over the following twelve months.six months until the swap's maturity.
The table below presents the amounts and classification of the interest rate swap on the Company’s condensed consolidated financial statements (in thousands):
| | | | | | | | | | | | | | | | |
| (Accrued liabilities) other assets | Accumulated other comprehensive (loss) income, net of tax | | | | Interest (income) expense, net |
| As of March 31, 2020 | $ | (1,224) | | $ | (1,042) | | (1) | | | |
| As of December 31, 2019 | $ | 831 | | $ | 706 | | (2) | | | |
| For the three months ended March 31, 2020 | | | | | | $ | (257) | |
| For the three months ended March 31, 2019 | | | | | | $ | (975) | |
| | | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | |
| 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 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 $(2.1) million.
(2)Changes during the year ended December 31, 2019, on a pre-tax basis, consisted of changes in fair value of $(5.0)$(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, 20202021 and 20192020 (in thousands):
| | | | Three Months Ended
March 31, | | | | Three Months Ended
March 31, |
| | | 2020 | | 2019 | | | | 2021 | | 2020 |
| Property direct | Property direct | | $ | 60,024 | | | $ | 69,829 | | (2) | Property direct | | $ | 68,052 | | | $ | 60,024 | |
| Central call center | Central call center | | 77,191 | | | 68,108 | | (2) | Central call center | | 77,980 | | | 77,191 | |
| Proprietary website | Proprietary website | | 52,939 | | | 50,398 | | (2) | Proprietary website | | 53,589 | | | 52,939 | |
| Third-party intermediaries | Third-party intermediaries | | 57,820 | | | 69,097 | | | Third-party intermediaries | | 44,929 | | | 57,820 | |
| Travel agency global distribution systems | Travel agency global distribution systems | | 6,490 | | | 9,614 | | | Travel agency global distribution systems | | 5,318 | | | 6,490 | |
Total room revenues from owned hotels (1) | Total room revenues from owned hotels (1) | | $ | 254,464 | | | $ | 267,046 | | | Total room revenues from owned hotels (1) | | $ | 249,868 | | | $ | 254,464 | |
(1)In addition to room revenues, the Company’s owned hotels earned $6.8$6.7 million and $5.3$6.8 million of other hotel revenues during the three months ended March 31, 2021 and 2020, and 2019, respectively.
(2)As a result of the correction of a classification error, $3.7 million of room revenues that were previously classified as revenues generated from property direct have been reclassified and reported as $2.6 million of revenues generated from central call center and $1.1 million of revenues generated from proprietary website. The Company concluded that the effect of the error is immaterial to previously issued financial statements but has made the correction for consistent presentation.
The following table disaggregates room revenues from owned hotels by length of guest stay for the three months ended March 31, 20202021 and 20192020 (in thousands):
| | | | Three Months Ended
March 31, | | | | Three Months Ended
March 31, |
| | | 2020 | | 2019 | | | 2021 | | 2020 |
| 1-6 nights | 1-6 nights | | $ | 84,594 | | | $ | 101,424 | | 1-6 nights | | $ | 64,288 | | | $ | 84,594 | |
| 7-29 nights | 7-29 nights | | 54,831 | | | 55,100 | | 7-29 nights | | 55,053 | | | 54,831 | |
| 30+ nights | 30+ nights | | 115,039 | | | 110,522 | | 30+ nights | | 130,527 | | | 115,039 | |
Total room revenues from owned hotels (1) | Total room revenues from owned hotels (1) | | $ | 254,464 | | | $ | 267,046 | | Total room revenues from owned hotels (1) | | $ | 249,868 | | | $ | 254,464 | |
(1)In addition to room revenues, the Company’s owned hotels earned $6.8$6.7 million and $5.3$6.8 million of other hotel revenues during the three months ended March 31, 20202021 and 2019,2020, respectively.
The following table disaggregates revenues from franchised and managed hotels for the three months ended March 31, 20202021 and 20192020 (in thousands):
| | | | Three Months Ended
March 31, | | | | Three Months Ended
March 31, |
| | | 2020 | | 2019 | | | 2021 | | 2020 |
Management fees | Management fees | | $ | 235 | | | $ | 293 | | Management fees | | $ | 0 | | | $ | 235 | |
| Franchise fees | Franchise fees | | 1,044 | | | 932 | | Franchise fees | | 1,218 | | | 1,044 | |
| Indirect reimbursements (system service fees) | Indirect reimbursements (system service fees) | | 1,190 | | | 1,185 | | Indirect reimbursements (system service fees) | | 1,471 | | | 1,190 | |
| Direct reimbursements | Direct reimbursements | | 2,600 | | | 2,910 | | Direct reimbursements | | 334 | | | 2,600 | |
| Total revenues from franchised and managed hotels | Total revenues from franchised and managed hotels | | $ | 5,069 | | | $ | 5,320 | | 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 December 31, 2020.
Outstanding Contract Liabilities
Contract liabilities relate to advance deposits with respect to owned hotels and, 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 time of installation. Contract liabilities are included in accounts payable and accrued liabilities on the accompanying condensed consolidated balance sheets. The following table presents changes in outstanding contract liabilities as of March 31, 20202021 and January 1, 2020, and the amount of outstanding January 1, 2020 contract liabilities recognized as revenue during the three months ended March 31, 2020 (in thousands):
| | | | | | | | | | | |
| Outstanding Contract Liabilities | | Outstanding Contract Liabilities as of January 1, 2020 Recognized as Revenue |
As of March 31, 2020 | $ | 16,111 | | | |
As of January 1, 2020 | 16,231 | | | |
For the three months ended March 31, 2020 | | | $ | 10,172 | |
| | | |
| | | | | | | | | | | |
| 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, 2020, $10.72021, $12.4 million of outstanding contract liabilities related to owned hotels and $5.4$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 income from operations. Selected financial data is provided below (in thousands):
| | | | Three Months Ended
March 31, | | | | Three Months Ended
March 31, |
| | | 2020 | | 2019 | | | 2021 | | 2020 |
| Revenues: | Revenues: | | | Revenues: | | |
| Owned hotels | Owned hotels | | $ | 261,232 | | | $ | 272,349 | | Owned hotels | | $ | 256,548 | | | $ | 261,232 | |
Franchise and management (1) | Franchise and management (1) | | 2,062 | | | 2,042 | | Franchise and management (1) | | 1,981 | | | 2,062 | |
| Total segment revenues | Total segment revenues | | 263,294 | | | 274,391 | | Total segment revenues | | 258,529 | | | 263,294 | |
Corporate and other (2) | Corporate and other (2) | | 19,992 | | | 19,514 | | Corporate and other (2) | | 18,109 | | | 19,992 | |
Other revenues from franchised and managed properties (3) | Other revenues from franchised and managed properties (3) | | 3,790 | | | 4,095 | | Other revenues from franchised and managed properties (3) | | 1,805 | | | 3,790 | |
Intersegment eliminations (4) | Intersegment eliminations (4) | | (20,775) | | | (20,331) | | Intersegment eliminations (4) | | (18,872) | | | (20,775) | |
| Total | Total | | $ | 266,301 | | | $ | 277,669 | | Total | | $ | 259,571 | | | $ | 266,301 | |
| | Income (loss) from operations: | | | |
| Income from operations: | | Income from operations: | | |
Owned hotels | Owned hotels | | $ | 48,551 | | | $ | 69,695 | | Owned hotels | | $ | 56,763 | | | $ | 48,551 | |
Franchise and management (1) | Franchise and management (1) | | 2,062 | | | 2,042 | | Franchise and management (1) | | 1,981 | | | 2,062 | |
| Total segment income from operations | Total segment income from operations | | 50,613 | | | 71,737 | | Total segment income from operations | | 58,744 | | | 50,613 | |
Corporate and other (2) | Corporate and other (2) | | (7,853) | | | (7,232) | | Corporate and other (2) | | (13,611) | | | (7,853) | |
Other expenses from franchised and managed properties, net (3) | Other expenses from franchised and managed properties, net (3) | | (417) | | | (552) | | Other expenses from franchised and managed properties, net (3) | | (639) | | | (417) | |
| Total | Total | | $ | 42,343 | | | $ | 63,953 | | Total | | $ | 44,494 | | | $ | 42,343 | |
(1)Includes intellectual property fees charged to the owned hotels segment of $0.8 million for each of the three months ended March 31, 20202021 and 2019,2020, that are eliminated in the condensed consolidated statements of operations.
(2)Includes revenues generated and operating expenses incurred in connection with the overall support of owned, franchised and managed hotels and related operations. Corporate and other revenues are comprised of management fees earned by and cost 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, 2021.
Total assets for each of the Company’s operating segments are provided below (in thousands):
| | | March 31, 2020 | | December 31, 2019 | | March 31, 2021 | | December 31, 2020 |
| Assets: | Assets: | | | | Assets: | | | |
| Owned hotels | Owned hotels | $ | 3,687,800 | | | $ | 3,661,609 | | Owned hotels | $ | 3,809,233 | | | $ | 3,802,896 | |
| Franchise and management | Franchise and management | 13,332 | | | 14,576 | | Franchise and management | 13,400 | | | 13,319 | |
| Total segment assets | Total segment assets | 3,701,132 | | | 3,676,185 | | Total segment assets | 3,822,633 | | | 3,816,215 | |
| Corporate and other | Corporate and other | 750,602 | | | 397,568 | | Corporate and other | 199,003 | | | 274,039 | |
| Intersegment eliminations | Intersegment eliminations | (58,729) | | | (43,157) | | Intersegment eliminations | (1,288) | | | (1,105) | |
| Total | Total | $ | 4,393,005 | | | $ | 4,030,596 | | Total | $ | 4,020,348 | | | $ | 4,089,149 | |
Total capital expenditures for each of the Company's operating segments are provided below (in thousands):
| | | Three Months Ended
March 31, | | | Three Months Ended
March 31, |
| | 2020 | | 2019 | | 2021 | | 2020 |
| Capital Expenditures: | | | | |
| Capital expenditures: | | Capital expenditures: | | | |
| Owned hotels | Owned hotels | $ | 54,368 | | | $ | 54,762 | | Owned hotels | $ | 28,607 | | | $ | 54,368 | |
| | Corporate and other | Corporate and other | 211 | | | 526 | | Corporate and other | 1,829 | | | 211 | |
| Total | Total | $ | 54,579 | | | $ | 55,288 | | 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 59%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”). 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 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. 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. 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.
The Company recorded a provision for federal, state and foreign income taxes of approximately $1.1$0.8 million, an effective tax rate of 5.7%, for the three months ended March 31, 2020,2021, as compared to a provision of $1.1 million, an effective tax rate of approximately 12.4%, as compared with a provision of approximately $6.1 million for the three months ended March 31, 2019, an effective tax rate of approximately 17.7%.2020. The Company's effective rate differs from the federal statutory rate of 21% primarily due to ESH REIT's status as a REIT under the provisions of the Code and, specifically during the three months ended March 31, 2020, due to the ability of the Company to carry back and utilize projected losses to higher tax rate years. The decrease in the Company's effective tax rate is substantially due to circumstances caused by business disruption from the COVID-19 pandemic. As of March 31, 2020, the Company projects a taxable loss for the year ending December 31, 2020, and due to the passage of the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"), the Company is able to carry back the projected loss and fully utilize it in a higher tax rate year, providing an expected federal tax benefit. The expected federal tax benefit due to the projected loss for the year ending December 31, 2020, corresponded to a decrease in the effective tax rate used to measure income tax expense recognized for the three months ended March 31, 2020.
As of March 31, 2020, the Company has not completed its accounting for all tax effects related to the enactment of the CARES Act, including the ability to carry back losses to higher federal marginal rate tax years. The Company is still analyzing the CARES Act and refining its calculations, including the CARES Act's impact on state income taxes, all of which are complex and subject to continued interpretation. The Company expects to complete its analysis prior to year-end 2020.Code.
The Company's income tax returns for the years 20162017 to present are subject to examination by the Internal Revenue Service ("IRS"(“IRS”) and other taxing authorities. As of March 31, 2020,2021, a subsidiary of ESH REIT was under examination by the Canadian Revenue Agency for the tax years 2014 through 2017. As the examinationthis audit is still in process, the timing of the resolution 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 appropriately reservednot material as of March 31, 2020.2021.
12. COMMITMENTS AND CONTINGENCIES
Lease Commitments—The Company is a tenant under long-term ground leases at 5 of its hotel properties, including 1 hotel site for which development is in process.properties. NaN of these leases are operating leases and 2 are finance leases. The ground lease agreements terminate at various dates between 2023 and 2096 and several of the agreements include multiple renewal options for generally five or ten year periods. The Company is also a tenant under an operating lease for its corporate office, which terminates in August 2021 and includes renewal options for 2 five-year terms.December 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 lease liabilities. Payments associated with the option to extend the corporate office lease are not included in the measurement of the right-of-use asset and lease liability, as the associated payments cannot be reasonably estimated. Additionally, as of March 31, 2020, the Company leasedleases certain technology equipment located at its hotel sites under finance leases.
Operating lease costs related to ground leases are included in hotel operating expenses whileand operating lease costs related to the Company’s office lease are included in general and administrative expenses in the 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). No amortization costs were incurred during the three months ended March 31, 2020 and 2019 for finance leases pertaining to land or land in development. The Company has no variable lease costs or short-term leases.
For the three months ended March 31, 2021 and 2020, the components of the Company’s total lease costs are as follows (in thousands):
| | | Three Months Ended March 31, | | | | Three Months Ended
March 31, |
| | 2020 | | 2019 | | | 2021 | | 2020 |
| Operating lease costs | Operating lease costs | $ | 769 | | | $ | 768 | | Operating lease costs | | $ | 869 | | | $ | 769 | |
| Finance lease costs - interest | 61 | | | 61 | | |
| Finance lease costs | | Finance lease costs | | 125 | | | 61 | |
| Total lease costs | Total lease costs | $ | 830 | | | $ | 829 | | Total lease costs | | $ | 994 | | | $ | 830 | |
The Company’s right-of-use assets and lease liabilities are as follows (in thousands):
| | | March 31, 2020 | | December 31, 2019 | | | March 31, 2021 | | December 31, 2020 | |
| Right-of-use assets: | Right-of-use assets: | | | | | Right-of-use assets: | | | | |
Operating(1) | Operating(1) | $ | 4,298 | | | $ | 4,863 | | | Operating(1) | $ | 5,390 | | | $ | 2,538 | | |
Finance(2) | Finance(2) | 4,343 | | | 3,979 | | | Finance(2) | 4,323 | | | 4,354 | | |
| | | Lease liabilities: | Lease liabilities: | | | Lease liabilities: | | |
Operating(3) | Operating(3) | 12,077 | | | 12,590 | | | Operating(3) | 13,304 | | | 10,442 | | |
| Finance | Finance | 3,707 | | | 3,379 | | | Finance | 3,611 | | | 3,668 | | |
|
(1)Included in other assets on the accompanying condensed consolidated balance 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 lease liabilities as of March 31, 2020,2021, are as follows (in thousands):
| | Years Ending December 31, | Years Ending December 31, | | Operating Leases | | Finance Leases | | Years Ending December 31, | | Operating Leases | | Finance Leases | |
| Remainder of 2020 | | $ | 2,182 | | | $ | 479 | | | |
| 2021 | | 2,220 | | | 585 | | | |
| Remainder of 2021 | | Remainder of 2021 | | $ | 2,358 | | | $ | 297 | | |
| 2022 | 2022 | | 806 | | | 397 | | | 2022 | | 3,449 | | | 853 | | |
| 2023 | 2023 | | 552 | | | 400 | | | 2023 | | 552 | | | 400 | | |
| 2024 | 2024 | | 503 | | | 402 | | | 2024 | | 503 | | | 402 | | |
| 2025 | 2025 | | 503 | | | 429 | | | 2025 | | 503 | | | 429 | | |
| 2026 | | 2026 | | 503 | | | 439 | | |
| Thereafter | Thereafter | | 77,091 | | | 2,671 | | | Thereafter | | 76,588 | | | 2,232 | | |
| Total | Total | | $ | 83,857 | | | $ | 5,363 | | | Total | | $ | 84,456 | | | $ | 5,052 | | |
| | Total discounted lease liability | Total discounted lease liability | | $ | 12,077 | | | $ | 3,707 | | | Total discounted lease liability | | $ | 13,304 | | | $ | 3,611 | | |
| Difference between undiscounted cash flows and discounted cash flows | Difference between undiscounted cash flows and discounted cash flows | | $ | 71,780 | | | $ | 1,656 | | | Difference between undiscounted cash flows and discounted cash flows | | $ | 71,152 | | | $ | 1,441 | | |
| | Weighted-average remaining lease term | Weighted-average remaining lease term | | 45 years | | 11 years | | Weighted-average remaining lease term | | 41 years | | 10 years | |
| Weighted-average discount rate | Weighted-average discount rate | | 6.4 | % | | 6.8 | % | | 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, 2020,2021, the Company does not have any material leases that have not yet commenced.
Letter of Credit—As of March 31, 2020,2021, the Company had 1 outstanding letter of credit, issued by the Corporation, for $0.2 million, which is collateralized by the Corporation Revolving Credit Facility.
Legal Contingencies—As of March 31, 2020,2021, 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. During the three months ended June 30, 2019,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. We believeThe Company believes that we haveit has meritorious defenses and areis 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
additional litigation and claims, individually or in the aggregate, will not have a material adverse effect on the Company's condensed consolidated financial statements, its business, results of operations andor financial condition.
13. EQUITY-BASED COMPENSATION
The Corporation and ESH REIT each maintain a long-term incentive plan (“LTIP”), approved by their shareholders. Under each LTIP, the Corporation and ESH REIT may issue to eligible employees or directors 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 LTIPs has a share reserve of an equivalent number of shares of Corporation common stock and ESH REIT Class B common stock. As of March 31, 2020, 4.32021, 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 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, which is included in general and administrative expenses in the accompanying condensed consolidated statements of operations, was $1.1$2.3 million and $2.1$1.1 million for the three months ended March 31, 20202021 and 2019,2020, respectively.
As of March 31, 2020,2021, 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 March 31, 2020,2021, is presented in the following table. Total unrecognized compensation expense will be adjusted for forfeitures and the achievement of certain market-based conditions.as they occur.
| | | Unrecognized Compensation Expense Related to Outstanding Awards (in thousands) | | Remaining Weighted-Average Amortization Period (in years) | | Unrecognized Compensation Expense Related to Outstanding Awards (in thousands) | | Remaining Weighted-Average Amortization Period (in years) |
| RSUs with service vesting conditions | RSUs with service vesting conditions | $ | 8,689 | | | 1.9 | RSUs with service vesting conditions | $ | 9,579 | | | 2.0 |
| | RSUs with market vesting conditions | RSUs with market vesting conditions | 3,963 | | | 2.4 | RSUs with market vesting conditions | 5,269 | | | 2.3 |
| Total unrecognized compensation expense | Total unrecognized compensation expense | $ | 12,652 | | | Total unrecognized compensation expense | $ | 14,848 | | |
RSU activity during the three months ended March 31, 2020,2021, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Performance-Based Awards - | | | |
| Service-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, 2020 | 928 | | | $ | 16.77 | | | | | | | 255 | | | $ | 16.56 | |
| Granted | 248 | | | $ | 13.07 | | | | | | | 281 | | | $ | 11.67 | |
| Settled | (280) | | | $ | 17.73 | | | | | | | (46) | | | $ | 18.58 | |
| Forfeited | (182) | | | $ | 16.99 | | | | | | | (93) | | | $ | 15.39 | |
| Outstanding at March 31, 2020 | 714 | | | $ | 15.05 | | | | | | | 397 | | | $ | 13.15 | |
| | | | | | | | | | | |
| Vested at March 31, 2020 | 28 | | | $ | 14.50 | | | | | | | — | | | $ | — | |
| Nonvested at March 31, 2020 | 686 | | | $ | 15.08 | | | | | | | 397 | | | $ | 13.15 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 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 three years, subject to the grantee’s continued employment or service. The grant-date fair value of awards with market vesting conditions is based on an independent valuation. These awards vest at the end of a three-yearthree-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 three months ended March 31, 2020,2021, the grant-date fair value of awards with market vesting conditions were calculated using a Monte Carlo simulation model with the following key assumptions:
| | | | | |
| Expected holding period | 2.923.0 years |
| Risk–free rate of return | 1.430.17 | % |
| Expected dividend yield | 7.013.17 | % |
14. SUBSEQUENT EVENTS
In April 2020, 6,422 shares of the Corporation's 8.0% mandatorily redeemable voting preferred stock were redeemed for $6.4 million, plus accrued and unpaid dividends.
On May 6, 2020, the Board of Directors of ESH REIT declared a cash distribution of $0.01 per share for the first quarter of 2020 on its Class A and Class B common stock. This distribution is payable on June 4, 2020 to shareholders of record as of May 21, 2020.
Corporation Revolving Credit Facility Amendment
On May 6, 2020, the Company executed an amendment to the Corporation Revolving Credit Facility and 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 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.
COVID-19 Pandemic Update
In December 2019, an outbreak of a novel strain of coronavirus (“COVID-19”) originated in Wuhan, China and has since spread worldwide, posing public health risks that, by March 2020, reached pandemic proportions. The COVID-19 pandemic has significantly affected the global economy and strained the lodging industry due to travel restrictions, stay-at-home directives and shelter-in-place ordinances that have resulted in cancellations and reduced travel around the world. The impact on the lodging industry and other macroeconomic effects has resulted in materially reduced occupancy, ADR, RevPAR and subsequent decreases in hotel room revenues. All of our hotel properties remain open through the COVID-19 pandemic and we expect that our hotels will remain open, subject to government ordinances requiring their closure.
We expect our business and operational outlook to be materially negatively impacted by the COVID-19 pandemic. As the COVID-19 pandemic evolves, we will continue to monitor the impacts of the pandemic on our operations and financial condition and implement mitigation strategies while working to preserve our liquidity. As of April 30, 2020, the Company had unrestricted and restricted cash and cash equivalents of $678.0 million. Based on a preliminary assessment of our performance for the first four weeks of the second quarter and current trends, we expect a decline in total revenues in the second quarter of 2020 compared to the second quarter of 2019, in addition to declines in RevPAR and Adjusted EBITDA. Because our second quarter results are not complete and the actual performance of the remaining portion of the quarter could deviate from current trends, our expectations with respect to any of the foregoing quarterly measures or metrics are subject to change. The Company does not expect to, and undertakes no obligation to, announce any change in expectations prior to the announcement of actual second quarter results.
In response to the continuing negative impact on our business, results of operations and financial condition, we have taken, or intend to take, additional steps to reduce operating costs and maintain financial and liquidity flexibility, such as, but not limited to the following:
•increasing effort and focus for the remainder of 2020 to attract guests staying for one month or longer at a time, which has proven significantly more resilient to date than typical transient and group guests in the broader lodging industry;
•reducing labor hours at hotels in response to the decline in occupancy and longer length of stay guests at a number of our properties;
•reducing planned capital expenditures related to non-guest facing capital investments, as well as hotel renovations and construction of new hotels;
•drawing the full $400 million of borrowing capacity under our revolving credit facilities (see Note 7);
•reducing the quarterly dividend to holders of Paired Shares for the first quarter of 2020 and likely reducing it in future periods; and
•suspending Paired Share repurchases until the RevPAR environment stabilizes.
On March 27, 2020, President Trump signed into law the CARES Act. The CARES Act, among other things, includes provisions relating to net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company continues to examine the impacts the COVID-19 pandemic and the CARES Act may have on its business; however, it is impossible to predict the complete effect and ultimate impact of the COVID-19 pandemic at this time as the situation is continuously evolving.
We may implement further discretionary changes as needed to address the volatility and changing dynamics of hotel and travel demand and the impact of revenue changes, regulatory and public health directives and prevailing government policy and economic conditions.
ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 20202021 AND DECEMBER 31, 20192020
(In thousands, except share and per share data)
(Unaudited)
| | | March 31,
2020 | | December 31,
2019 | | March 31,
2021 | | December 31,
2020 |
| ASSETS | ASSETS | | | | ASSETS | | | |
| PROPERTY AND EQUIPMENT - Net of accumulated depreciation of $1,412,562 and $1,372,595 | $ | 3,505,633 | | | $ | 3,506,020 | | |
| PROPERTY AND EQUIPMENT - Net of accumulated depreciation of $1,569,166 and $1,540,358 | | 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 | CASH AND CASH EQUIVALENTS | 628,887 | | | 296,134 | | CASH AND CASH EQUIVALENTS | 287,989 | | | 375,715 | |
| RENTS RECEIVABLE FROM EXTENDED STAY AMERICA, INC. (Note 10) | RENTS RECEIVABLE FROM EXTENDED STAY AMERICA, INC. (Note 10) | 666 | | | 1,572 | | RENTS RECEIVABLE FROM EXTENDED STAY AMERICA, INC. (Note 10) | 11,108 | | | 3,941 | |
| DEFERRED RENTS RECEIVABLE FROM EXTENDED STAY AMERICA, INC. (Note 10) | DEFERRED RENTS RECEIVABLE FROM EXTENDED STAY AMERICA, INC. (Note 10) | 31,429 | | | 28,917 | | DEFERRED RENTS RECEIVABLE FROM EXTENDED STAY AMERICA, INC. (Note 10) | 38,536 | | | 39,135 | |
| INTANGIBLE ASSETS - Net of accumulated amortization of $1,069 and $763 | 9,293 | | | 9,590 | | |
| INTANGIBLE ASSETS - Net of accumulated amortization of $2,312 and $2,005 | | INTANGIBLE ASSETS - Net of accumulated amortization of $2,312 and $2,005 | 8,285 | | | 8,541 | |
| GOODWILL | GOODWILL | 44,012 | | | 44,012 | | GOODWILL | 43,748 | | | 43,878 | |
| OTHER ASSETS | OTHER ASSETS | 18,896 | | | 21,209 | | OTHER ASSETS | 19,143 | | | 18,695 | |
| TOTAL ASSETS | TOTAL ASSETS | $ | 4,238,816 | | | $ | 3,907,454 | | TOTAL ASSETS | $ | 3,838,860 | | | $ | 3,951,117 | |
| LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | | | | LIABILITIES AND EQUITY | | | |
| LIABILITIES: | LIABILITIES: | | LIABILITIES: | |
Term loan facility payable - Net of unamortized deferred financing costs and debt discount of $10,584 and $10,993 | $ | 617,170 | | | $ | 618,338 | | |
Senior notes payable - Net of unamortized deferred financing costs and debt discount of $34,233 and $35,702 | 2,015,767 | | | 2,014,298 | | |
| Revolving credit facility | 350,000 | | | — | | |
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 | |
| | | Finance lease liabilities | Finance lease liabilities | 3,707 | | | 3,379 | | Finance lease liabilities | 3,611 | | | 3,668 | |
| Unearned rental revenues from Extended Stay America, Inc. (Note 10) | Unearned rental revenues from Extended Stay America, Inc. (Note 10) | 58,023 | | | 38,770 | | Unearned rental revenues from Extended Stay America, Inc. (Note 10) | 23,743 | | | 0 | |
| Due to Extended Stay America, Inc., net (Note 10) | Due to Extended Stay America, Inc., net (Note 10) | 10,828 | | | 11,838 | | Due to Extended Stay America, Inc., net (Note 10) | 5,405 | | | 92,791 | |
| Accounts payable and accrued liabilities | Accounts payable and accrued liabilities | 99,062 | | | 71,453 | | Accounts payable and accrued liabilities | 89,190 | | | 125,519 | |
| Deferred tax liabilities | 11 | | | 11 | | |
| | Total liabilities | Total liabilities | 3,154,568 | | | 2,758,087 | | Total liabilities | 2,756,113 | | | 2,855,835 | |
| COMMITMENTS AND CONTINGENCIES (Note 11) | COMMITMENTS AND CONTINGENCIES (Note 11) | | | | COMMITMENTS AND CONTINGENCIES (Note 11) | 0 | | 0 |
| EQUITY: | EQUITY: | | 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, 177,466,325 and 179,483,397 shares issued and outstanding | 4,280 | | | 4,300 | | |
| 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 | | 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 | Additional paid in capital | 1,051,076 | | | 1,050,740 | | 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 | Preferred stock—no par value, $1,000 liquidation value, 125 shares authorized, issued and outstanding | 73 | | | 73 | | Preferred stock—no par value, $1,000 liquidation value, 125 shares authorized, issued and outstanding | 73 | | | 73 | |
| Retained earnings | Retained earnings | 30,043 | | | 93,424 | | Retained earnings | 25,584 | | | 39,075 | |
| Accumulated other comprehensive (loss) income | (1,224) | | | | 830 | | |
| Accumulated other comprehensive loss | | Accumulated other comprehensive loss | (268) | | | (526) | |
| Total equity | Total equity | 1,084,248 | | | | 1,149,367 | | Total equity | 1,082,747 | | | 1,095,282 | |
| TOTAL LIABILITIES AND EQUITY | TOTAL LIABILITIES AND EQUITY | $ | 4,238,816 | | | $ | 3,907,454 | | TOTAL LIABILITIES AND EQUITY | $ | 3,838,860 | | | $ | 3,951,117 | |
See accompanying notes to condensed consolidated financial statements.
ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 20202021 AND 20192020
(In thousands, except per share data)
(Unaudited)
| | | | | Three Months Ended
March 31, | | | | | Three Months Ended
March 31, |
| | | | 2020 | | 2019 | | | | 2021 | | 2020 |
| REVENUES - Rental revenues from Extended Stay America, Inc. (Note 10) | REVENUES - Rental revenues from Extended Stay America, Inc. (Note 10) | | $ | 119,190 | | | $ | 118,005 | | REVENUES - Rental revenues from Extended Stay America, Inc. (Note 10) | | | $ | 120,392 | | | $ | 119,190 | |
| OPERATING EXPENSES: | OPERATING EXPENSES: | | | OPERATING EXPENSES: | | |
| Hotel operating expenses | Hotel operating expenses | | 24,527 | | | 21,308 | | Hotel operating expenses | | | 21,405 | | | 24,527 | |
| General and administrative expenses (Note 10) | General and administrative expenses (Note 10) | | 4,167 | | | 3,981 | | General and administrative expenses (Note 10) | | | 3,960 | | | 4,167 | |
| Depreciation and amortization | Depreciation and amortization | | 49,588 | | | 47,867 | | Depreciation and amortization | | | 48,381 | | | 49,588 | |
| | Merger transaction expenses | | Merger transaction expenses | | | 2,373 | | | 0 | |
| Total operating expenses | Total operating expenses | | 78,282 | | | 73,156 | | Total operating expenses | | | 76,119 | | | 78,282 | |
| | OTHER INCOME | | — | | | 15 | | |
| GAIN ON SALE OF HOTEL PROPERTIES (Note 4) | | GAIN ON SALE OF HOTEL PROPERTIES (Note 4) | | | 11,930 | | | 0 | |
| | INCOME FROM OPERATIONS | INCOME FROM OPERATIONS | | 40,908 | | | 44,864 | | INCOME FROM OPERATIONS | | | 56,203 | | | 40,908 | |
| OTHER NON-OPERATING EXPENSE (INCOME) | | 560 | | | (139) | | |
| OTHER NON-OPERATING (INCOME) EXPENSE | | OTHER NON-OPERATING (INCOME) EXPENSE | | | (84) | | | 560 | |
| INTEREST EXPENSE, NET | INTEREST EXPENSE, NET | | 32,428 | | | 29,934 | | INTEREST EXPENSE, NET | | | 31,135 | | | 32,428 | |
| INCOME BEFORE INCOME TAX EXPENSE | INCOME BEFORE INCOME TAX EXPENSE | | 7,920 | | | 15,069 | | INCOME BEFORE INCOME TAX EXPENSE | | | 25,152 | | | 7,920 | |
| INCOME TAX EXPENSE | INCOME TAX EXPENSE | | 2 | | | 3 | | INCOME TAX EXPENSE | | | 2 | | | 2 | |
| NET INCOME | NET INCOME | | $ | 7,918 | | | $ | 15,066 | | NET INCOME | | | $ | 25,150 | | | $ | 7,918 | |
| NET INCOME PER ESH HOSPITALITY, INC. COMMON SHARE: | NET INCOME PER ESH HOSPITALITY, INC. COMMON SHARE: | | | | | NET INCOME PER ESH HOSPITALITY, INC. COMMON SHARE: | | | | | |
| Class A - basic | Class A - basic | | $ | 0.02 | | | $ | 0.03 | | Class A - basic | | | $ | 0.06 | | | $ | 0.02 | |
| Class A - diluted | Class A - diluted | | $ | 0.02 | | | $ | 0.03 | | Class A - diluted | | | $ | 0.06 | | | $ | 0.02 | |
| Class B - basic | Class B - basic | | $ | 0.02 | | | $ | 0.03 | | Class B - basic | | | $ | 0.06 | | | $ | 0.02 | |
| Class B - diluted | Class B - diluted | | $ | 0.02 | | | $ | 0.03 | | Class B - diluted | | | $ | 0.06 | | | $ | 0.02 | |
| WEIGHTED-AVERAGE ESH HOSPITALITY, INC. COMMON SHARES OUTSTANDING: | WEIGHTED-AVERAGE ESH HOSPITALITY, INC. COMMON SHARES OUTSTANDING: | | | | | WEIGHTED-AVERAGE ESH HOSPITALITY, INC. COMMON SHARES OUTSTANDING: | | | | | |
| Class A - basic | Class A - basic | | 250,494 | | | 250,494 | | Class A - basic | | | 250,494 | | | 250,494 | |
| Class A - diluted | Class A - diluted | | 250,494 | | | 250,494 | | Class A - diluted | | | 250,494 | | | 250,494 | |
| Class B - basic | Class B - basic | | 177,990 | | | 188,348 | | Class B - basic | | | 177,827 | | | 177,990 | |
| Class B - diluted | Class B - diluted | | 178,171 | | | 188,576 | | Class B - diluted | | | 178,549 | | | 178,171 | |
See accompanying notes to condensed consolidated financial statements.
ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | |
| | | | 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 condensed consolidated financial statements.
ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020
(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 |
| Class A
Shares | | Class B
Shares | | Amount | | Shares | | Amount | | | | |
| BALANCE - January 1, 2020 | 250,494 | | | 179,483 | | | $ | 4,300 | | | 125 | | | $ | 73 | | | $ | 1,050,740 | | | $ | 93,424 | | | $ | 830 | | | $ | 1,149,367 | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | 7,918 | | | — | | | 7,918 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Interest rate cash flow hedge loss, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,054) | | | (2,054) | |
| Repurchase of Class B common stock | — | | | (2,237) | | | (22) | | | — | | | — | | | — | | | (11,384) | | | — | | | (11,406) | |
| Common distributions - $0.14 per Class A and Class B common share | — | | | — | | | — | | | — | | | — | | | — | | | (59,911) | | | — | | | (59,911) | |
| Preferred distributions | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | — | | | (4) | |
| Equity-based compensation | — | | | 220 | | | 2 | | | — | | | — | | | 336 | | | — | | | — | | | 338 | |
| 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 | | 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 condensed consolidated financial statements.
ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMECASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 20202021 AND 20192020
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | | | | | |
| | 2020 | | 2019 | | | | |
| NET INCOME | $ | 7,918 | | | $ | 15,066 | | | | | |
| OTHER COMPREHENSIVE INCOME: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| DERIVATIVE ADJUSTMENT: | | | | | | | |
| INTEREST RATE CASH FLOW HEDGE LOSS, NET OF TAX OF $1 | (2,054) | | | (1,687) | | | | | |
| | | | | | | |
| COMPREHENSIVE INCOME | $ | 5,864 | | | $ | 13,379 | | | | | |
See accompanying notes to condensed consolidated financial statements. | | | | | | | | | | | |
| 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 CHANGES IN EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019
(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 | | Total
Equity |
| Class A
Shares | | Class B
Shares | | Amount | | Shares | | Amount | | | | | | | | |
| BALANCE - January 1, 2019 | 250,494 | | | 188,219 | | | $ | 4,387 | | | 125 | | | $ | 73 | | | $ | 1,090,809 | | | $ | 114,096 | | | $ | 5,789 | | | $ | 1,215,154 | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | 15,066 | | | — | | | 15,066 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Interest rate cash flow hedge loss, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,687) | | | (1,687) | |
| | | | | | | | | | | | | | | | | |
| Common distributions - $0.15 per Class A and Class B common share | — | | | — | | | — | | | — | | | — | | | — | | | (65,973) | | | — | | | (65,973) | |
| Preferred distributions | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | — | | | (4) | |
| Equity-based compensation | — | | | 184 | | | 2 | | | — | | | — | | | 647 | | | — | | | — | | | 649 | |
| BALANCE - March 31, 2019 | 250,494 | | | 188,403 | | | $ | 4,389 | | | 125 | | | $ | 73 | | | $ | 1,091,456 | | | $ | 63,185 | | | $ | 4,102 | | | $ | 1,163,205 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | | | | Preferred Stock | | | | Additional
Paid in Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive Income (Loss) | | Total
Equity |
| Class A
Shares | | Class B
Shares | | Amount | | Shares | | Amount | | | | | | | | |
| BALANCE - January 1, 2020 | 250,494 | | | 179,483 | | | $ | 4,300 | | | 125 | | | $ | 73 | | | $ | 1,050,740 | | | $ | 93,424 | | | $ | 830 | | | $ | 1,149,367 | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | 7,918 | | | — | | | 7,918 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Interest rate cash flow hedge loss, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,054) | | | (2,054) | |
| Repurchase of Class B common stock | — | | | (2,237) | | | (22) | | | — | | | — | | | — | | | (11,384) | | | — | | | (11,406) | |
| Common distributions - $0.14 per Class A and Class B common share | — | | | — | | | — | | | — | | | — | | | — | | | (59,911) | | | — | | | (59,911) | |
| Preferred distributions | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | — | | | (4) | |
| Equity-based compensation | — | | | 220 | | | 2 | | | — | | | — | | | 336 | | | — | | | — | | | 338 | |
| BALANCE - March 31, 2020 | 250,494 | | | 177,466 | | | $ | 4,280 | | | 125 | | | $ | 73 | | | $ | 1,051,076 | | | $ | 30,043 | | | $ | (1,224) | | | $ | 1,084,248 | |
See accompanying notes to condensed consolidated financial statements.
ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020 AND 2019(CONTINUED)
(In thousands)
(Unaudited)
| | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| | 2020 | | 2019 |
| OPERATING ACTIVITIES: | | | |
| Net income | $ | 7,918 | | | $ | 15,066 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization | 49,588 | | | 47,867 | |
| Foreign currency transaction loss (gain) | 560 | | | (139) | |
| Amortization of deferred financing costs and debt discount | 2,022 | | | 1,969 | |
| | | |
| | | |
| Loss on disposal of property and equipment | 3,343 | | | 1,376 | |
| | | |
| | | |
| Equity-based compensation | 134 | | | 155 | |
| | | |
| Changes in assets and liabilities: | | | |
| Deferred rents receivable from Extended Stay America, Inc. | (2,512) | | | (5,144) | |
| Due to Extended Stay America, Inc., net | (1,588) | | | (3,008) | |
| Other assets | (798) | | | (3,595) | |
| Unearned rental revenues/rents receivable from Extended Stay America, Inc., net | 20,159 | | | 26,893 | |
| Accounts payable and accrued liabilities | 29,469 | | | 20,926 | |
| Net cash provided by operating activities | 108,295 | | | 102,366 | |
| INVESTING ACTIVITIES: | | | |
| Purchases of property and equipment | (33,786) | | | (43,739) | |
| | | |
| Development in process payments | (19,769) | | | (7,982) | |
| Payment for intangible assets | (358) | | | (2,100) | |
| | | |
| Proceeds from insurance and related recoveries | 956 | | | 156 | |
| Net cash used in investing activities | (52,957) | | | (53,665) | |
| FINANCING ACTIVITIES: | | | |
| Principal payments on term loan facility | (1,577) | | | (2,842) | |
| | | |
| Proceeds from revolving credit facility | 350,000 | | | — | |
| Payments of deferred financing costs | (11) | | | — | |
| Principal payments on finance leases | (37) | | | (29) | |
| | | |
| Repurchase of Class B common stock | (11,406) | | | — | |
| Issuance of Class B common stock related to issuance of Paired Shares | 737 | | | 1,213 | |
| Common distributions | (60,291) | | | (66,137) | |
| | | |
| Net cash provided by (used in) financing activities | 277,415 | | | (67,795) | |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 332,753 | | | (19,094) | |
| CASH AND CASH EQUIVALENTS - Beginning of period | 296,134 | | | 178,538 | |
| CASH AND CASH EQUIVALENTS - End of period | $ | 628,887 | | | $ | 159,444 | |
| SUPPLEMENTAL CASH FLOW INFORMATION: | | | |
| Cash payments for interest, excluding modification, prepayment and other penalties, net of capitalized interest of $859 and $313 | $ | 5,239 | | | $ | 11,841 | |
| Cash (refunds) payments for income taxes, net of refunds of $18 and $0 | $ | (18) | | | $ | 4 | |
| Operating cash payments for finance leases | $ | 59 | | | $ | 61 | |
| Operating cash payments for operating leases | $ | 189 | | | $ | 177 | |
| NONCASH INVESTING AND FINANCING ACTIVITIES: | | | |
| Capital expenditures included in due to/from Extended Stay America, Inc. and accounts payable and accrued liabilities | $ | 21,873 | | | $ | 24,034 | |
| Additions to finance lease right-of-use assets and liabilities | $ | 364 | | | $ | 109 | |
| | | |
| | | |
| Common distributions included in accounts payable and accrued liabilities | $ | 387 | | | $ | 629 | |
| Net payable related to RSUs not yet settled or issued included in due to/from Extended Stay America, Inc. | $ | (230) | | | $ | (340) | |
| | | | | | | | | | | |
| 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 condensed consolidated financial statements.
ESH HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 20202021 AND DECEMBER 31, 20192020 AND FOR THE THREE MONTHS ENDED
MARCH 31, 20202021 AND 20192020
(Unaudited)
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. 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 March 31, 2020,2021, represents 59%58% of the outstanding common stock of 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 ESH REIT Class B common stock is attached to and trades with 1 share of Corporation common stock.
As of March 31, 20202021 and December 31, 2019,2020, ESH REIT and its subsidiaries owned and leased 558563 and 557558 hotel properties, respectively, in 40 U.S. states, consisting of approximately 62,10062,700 and 61,90062,100 rooms, respectively. All hotels are leased to wholly-owned subsidiaries of the Corporation (the “Operating Lessees”).
Paired Share Repurchase ProgramPending Merger—In December 2015, the Boards of Directors ofOn March 14, 2021, the Corporation and ESH REIT authorizedentered into an Agreement and Plan of Merger (the “Merger Agreement”) with Eagle Parent Holdings L.P. (“Parent”), a combined Paired Share repurchase program. As a resultjoint venture of several increases in authorized amountsBlackstone Real Estate Partners IX L.P. and program extensions,Starwood Distressed Opportunity Fund XII Global, L.P. Upon completion of the combined Paired Share repurchase program currently authorizesproposed transactions, the Corporation and ESH REIT will become wholly-owned subsidiaries of Parent. Pursuant to purchase upthe terms and conditions of the Merger Agreement, each issued and outstanding Paired Share will be converted into a right to $550 millionreceive (1) $19.50 in Paired Shares through December 31, 2020. Repurchases may be made at management’s discretioncash, 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 timeand 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 time in the open market, in privately negotiated transactions orCorporation’s and ESH REIT’s use of commercially reasonable efforts to carry on their business consistent with past practice prior to completion of the transactions. The Merger Agreement is subject to customary closing conditions, including approval by other means (including through Rule 10b5-1 trading plans). As of March 31, 2020,the Corporation shareholders, ESH REIT had repurchasedshareholders and retired 28.6 millionreceipt of certain regulatory approvals. Neither the Corporation nor ESH REIT Class B common shares for $166.4 million, including transaction fees, and $101.1 million remained available undercan provide assurance that the combined Paired Share repurchase program.transactions contemplated by the Merger Agreement will be completed.
Basis of Consolidation
The accompanying 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
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 condensed consolidated financial statements. ESH REIT believes the disclosures made are adequate to prevent the information presented from being misleading. However, the condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2019,2020, included in the combined annual report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on February 26, 2020.25, 2021.
The accompanying 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 March 31, 2020 and2021, the results of ESH REIT’s operations, comprehensive income, changes in equity and cash flows for the three months ended March 31, 20202021 and 2019.2020. Interim results are not necessarily indicative of full year performance because of hotel acquisitions and dispositions, financing or other capital
transactions, and the impact of accounting for variable rental payments under lease arrangements.arrangements and the impact of the COVID-19 pandemic.
Use of Estimates—The preparation of the accompanying condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the 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 for 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 21 to 49 years.
Management assesses 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. 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 (grouped under ESH REIT’s leases) to the estimated future undiscounted cash flows expected to be generated by the 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 the hotel 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 estimated fair value is recognized as an impairment 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 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. Based on market conditions and ESH REIT's plans with respect to its hotel properties as of March 31, 2020, ESH REIT believes that the carrying amounts of the hotel properties are recoverable and 0 impairment charges were recorded during the three months ended March 31, 2020. However, actual results are subject to a high degree of uncertainty due to the volatility of macroeconomic trends and the evolving nature of the COVID-19 pandemic.
Intangible Assets and Goodwill —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 that 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.
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. 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 reporting unit below its carrying amount. ESH REIT has one1 operating segment, which is its reporting unit; therefore, management analyzes goodwill associated with all 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 its reporting unit is less than its carrying amount.
ESH REIT believes that the carrying amount of its intangible assets, including goodwill, are recoverable and there are no changes in circumstances that would more likely than not reduce the fair value of its reporting unit below its carrying amount; therefore, no impairment charges were recorded during the three months ended March 31, 2020. However, if
If the effects of the COVID-19 pandemic or other factors cause economic and market conditions to continue to deteriorate, in particular if the market price of Paired Shares further declines, these events could result in impairment charges with respect to goodwill in the future. Actual results are subject to a high degree of uncertainty due to the volatility of macroeconomic trends and the evolving nature of the COVID-19 pandemic.trends.
Revenue Recognition—ESH REIT’s sole source of revenues is rental revenue derived from operating leases with subsidiaries of the Corporation (i.e., all revenues are generated from agreements with related parties (see Note 10)). Rental
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 condensed consolidated balance sheets represent monthly rental amounts contractually due. Deferred rents receivable from Extended Stay America, Inc. on the accompanying condensed consolidated balance sheets represent the cumulative difference between straight-line rental revenues recognized and rental revenues contractually due. Lease rental payments received prior to rendering services are included in unearned rental revenues from Extended Stay America, Inc. on the accompanying condensed consolidated balance sheets. Variable 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).
Recently Issued Accounting Standards
Reference Rate Reform—In March 2020, the FASB issued an accounting standards update that provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships that reference LIBOR, subject to meeting certain criteria. ESH REIT adopted this update on March 12, 2020 and the update isupdates 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, 2020,2021, ESH REIT had not applied 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 condensed consolidated financial statements.
Income Taxes—In December 2019, the FASB issued an accounting standards update which simplifies the accounting for income taxes. The update amends several topics including interim period accounting for enacted changes in tax law and year-to-date loss limitation in interim-period tax accounting. This update will be effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2020, and may be early adopted. ESH REIT does not expect the adoption of this update to have a material effect on its condensed consolidated financial statements.
Fair Value Measurement—In August 2018, the FASB issued an accounting standards update which modifies the disclosure requirements for fair value measurements in Topic 820, Fair Value Measurement. ESH REIT adopted this update on January 1, 2020. The adoption of this update did not have a material effect on ESH REIT's condensed consolidated financial statements.
Intangibles-Goodwill and Other—Internal-Use Software—In August 2018, the FASB issued an accounting standards update which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. ESH REIT adopted this update on January 1, 2020, using a prospective transition method. The adoption of this update did not have a material effect on ESH REIT's condensed consolidated financial statements.
Goodwill—In January 2017, the FASB issued an accounting standards update in which the guidance on testing for goodwill was updated to eliminate Step 2 in the determination on whether goodwill should be considered impaired. Annual and/or interim assessments are still required. ESH REIT adopted this update on January 1, 2020, using a prospective transition method.2021. The adoption of this update did not have a material effect on ESH REIT's condensed consolidated financial statements.
3. NET INCOME PER SHARE
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 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 unrestricted Class A and Class B common stock outstanding, respectively, plus potentially dilutive securities. Dilutive securities include certain equity-based awards 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, | | |
| | | | | 2020 | | 2019 |
| Numerator: | | | | | | | |
| Net income | | | | | $ | 7,918 | | | $ | 15,066 | |
| Less preferred dividends | | | | | (4) | | | (4) | |
| Net income available to ESH Hospitality, Inc. common shareholders | | | | | $ | 7,914 | | | $ | 15,062 | |
| Class A: | | | | | | | |
Net income available to ESH Hospitality, Inc. Class A common
shareholders - basic | | | | | $ | 4,627 | | | $ | 8,598 | |
Amounts attributable to ESH Hospitality, Inc. Class B
shareholders assuming conversion | | | | | (2) | | | (4) | |
Net income available to ESH Hospitality, Inc. Class A common
shareholders - diluted | | | | | $ | 4,625 | | | $ | 8,594 | |
| Class B: | | | | | | | |
Net income available to ESH Hospitality, Inc. Class B common
shareholders - basic | | | | | $ | 3,287 | | | $ | 6,464 | |
Amounts attributable to ESH Hospitality, Inc. Class B
shareholders assuming conversion | | | | | 2 | | | 4 | |
Net income available to ESH Hospitality, Inc. Class B common
shareholders - diluted | | | | | $ | 3,289 | | | $ | 6,468 | |
| 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 | | | | | 177,990 | | | 188,348 | |
| Dilutive securities | | | | | 181 | | | 228 | |
Weighted-average number of ESH Hospitality, Inc. Class B common
shares outstanding - diluted | | | | | 178,171 | | | 188,576 | |
| Net income per ESH Hospitality, Inc. common share - Class A - basic | | | | | $ | 0.02 | | | $ | 0.03 | |
| Net income per ESH Hospitality, Inc. common share - Class A - diluted | | | | | $ | 0.02 | | | $ | 0.03 | |
| Net income per ESH Hospitality, Inc. common share - Class B - basic | | | | | $ | 0.02 | | | $ | 0.03 | |
| Net income per ESH Hospitality, Inc. common share - Class B - diluted | | | | | $ | 0.02 | | | $ | 0.03 | |
| | | | | | | |
| | | | | | | | | | | | | | | |
| | | 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 ACQUISITIONSDISPOSITIONS
NaN hotels were acquiredThe table below summarizes hotel dispositions during the three months ended March 31, 2020. On November 12, 2019, ESH REIT acquired a 121-room2021, and the year ended December 31, 2020 (in thousands, except number of hotels and number of rooms). No dispositions were reported as discontinued 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 2020, disposed hotel properties contributed total rental revenues, total operating hotel from Crestwood Suites of Lakeland, LLC for $10.0 million. Other than ordinary components of prorated net working capital, no liabilities were assumed in the purchase. The majority of the purchase price was allocated to buildingexpenses and improvements, with estimated useful lives ranging from five to 44 years.income before income tax expense as follows (in thousands):
| | | | | | | | | | |
| 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 | | |
5. PROPERTY AND EQUIPMENT
Net investment in property and equipment as of March 31, 20202021 and December 31, 2019,2020, consists of the following (in thousands):
| | | March 31,
2020 | | December 31,
2019 | | March 31,
2021 | | December 31,
2020 |
| Hotel properties: | Hotel properties: | | | | Hotel properties: | | | |
Land and site improvements (1) | Land and site improvements (1) | $ | 1,233,841 | | | $ | 1,230,598 | | Land and site improvements (1) | $ | 1,252,151 | | | $ | 1,248,807 | |
| Building and improvements | Building and improvements | 2,846,322 | | | 2,824,061 | | Building and improvements | 2,927,906 | | | 2,914,683 | |
Furniture, fixtures and equipment (2) | Furniture, fixtures and equipment (2) | 756,088 | | | 751,417 | | Furniture, fixtures and equipment (2) | 789,633 | | | 790,584 | |
| Total hotel properties | Total hotel properties | 4,836,251 | | | 4,806,076 | | Total hotel properties | 4,969,690 | | | 4,954,074 | |
Development in process (3) | Development in process (3) | 80,269 | | | 70,864 | | Development in process (3) | 28,527 | | | 46,496 | |
| Other | Other | 1,675 | | | 1,675 | | Other | 1,000 | | | 1,000 | |
| Total cost | Total cost | 4,918,195 | | | 4,878,615 | | Total cost | 4,999,217 | | | 5,001,570 | |
| Less accumulated depreciation | (1,412,562) | | | (1,372,595) | | |
| Less accumulated depreciation: | | Less accumulated depreciation: | (1,569,166) | | | (1,540,358) | |
| Property and equipment — net | Property and equipment — net | $ | 3,505,633 | | | $ | 3,506,020 | | Property and equipment — net | $ | 3,430,051 | | | $ | 3,461,212 | |
(1)Includes finance lease asset of $3.2$4.0 million as of March 31, 20202021 and December 31, 2019.2020.
(2)Includes finance lease asset of $0.4 million and $0 as of March 31, 20202021 and December 31, 2019, respectively
(3)Includes finance lease asset of $0.8 million as of March 31, 2020 and December 31, 2019.2020.
As of March 31, 20202021 and December 31, 2019,2020, development in process consisted of 146 and 158 land parcels, respectively, that were in various phases of construction and/or development. ESH REIT expects to delay commencement of construction of four4 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, ESH REIT completed construction of a 120-room hotel in Florida. The hotelthe following owned, newly constructed hotels were opened and was leased tounder the Corporation in March 2020. During 2019, ESH REIT completed construction of a 124-room hotel in Florida and a 136-room hotel in Arizona. The hotels opened and were leased to the Corporation in December 2019. 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, thesenewly-build hotels contributed rental revenues, total operating expenses and income before income tax expense as follows (in thousands):
| | | | | | | |
| Three Months Ended March 31, 2020 | | |
| | | |
Rental revenues | $ | 702 | | | |
Total operating expenses | 586 | | | |
Income before income tax expense | 115 | | | |
| | | | | | | | | | | | | | | |
| | | 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's intangible assets and goodwill as of March 31, 20202021 and December 31, 2019,2020, consist of the following (dollars in thousands):
| | | March 31, 2020 | | | March 31, 2021 |
| | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Book Value | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Book Value |
| | Definite-lived intangible assets—software licenses | Definite-lived intangible assets—software licenses | $ | 10,362 | | | $ | (1,069) | | | $ | 9,293 | | Definite-lived intangible assets—software licenses | $ | 10,597 | | | $ | (2,312) | | | $ | 8,285 | |
| | Goodwill | Goodwill | 44,012 | | | — | | | 44,012 | | Goodwill | 43,748 | | | — | | | 43,748 | |
| Total intangible assets and goodwill | Total intangible assets and goodwill | $ | 54,374 | | | $ | (1,069) | | | $ | 53,305 | | Total intangible assets and goodwill | $ | 54,345 | | | $ | (2,312) | | | $ | 52,033 | |
| | | December 31, 2019 | | | December 31, 2020 |
| | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Book Value | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Book Value |
| | Definite-lived intangible assets—software licenses | Definite-lived intangible assets—software licenses | $ | 10,353 | | | $ | (763) | | | $ | 9,590 | | Definite-lived intangible assets—software licenses | $ | 10,546 | | | $ | (2,005) | | | $ | 8,541 | |
| | Goodwill | Goodwill | 44,012 | | | — | | | 44,012 | | Goodwill | 43,878 | | | — | | | 43,878 | |
| Total intangible assets and goodwill | Total intangible assets and goodwill | $ | 54,365 | | | $ | (763) | | | $ | 53,602 | | Total intangible assets and goodwill | $ | 54,424 | | | $ | (2,005) | | | $ | 52,419 | |
The remaining weighted-average amortization period for amortizing intangible assets is approximately 8seven years as of March 31, 2020.2021. Estimated future amortization expense for amortizing intangible assets is as follows (in thousands):
| | Years Ending December 31, | Years Ending December 31, | | Years Ending December 31, | |
| Remainder of 2020 | $ | 919 | | |
| 2021 | 1,225 | | |
| Remainder of 2021 | | Remainder of 2021 | $ | 944 | |
| 2022 | 2022 | 1,225 | | 2022 | 1,259 | |
| 2023 | 2023 | 1,225 | | 2023 | 1,259 | |
| 2024 | 2024 | 1,225 | | 2024 | 1,259 | |
| 2025 | 2025 | 1,225 | | 2025 | 1,259 | |
| 2026 | | 2026 | 1,259 | |
| Thereafter | Thereafter | 2,249 | | Thereafter | 1,046 | |
| Total | Total | $ | 9,293 | | Total | $ | 8,285 | |
7. DEBT
Summary—ESH REIT’s outstanding debt, net of unamortized debt discount and unamortized deferred financing costs, as of March 31, 20202021 and December 31, 2019,2020, consists of the following (dollars in thousands):
| | | | Stated
Amount | | Carrying Amount | | | Unamortized Deferred Financing Costs | | | | | | | | Stated
Amount | | Carrying Amount | | Unamortized Deferred Financing Costs | | | | | |
| Loan | Loan | | | March 31, 2020 | | December 31, 2019 | | March 31, 2020 | | December 31, 2019 | | Stated Interest Rate | | Maturity Date | | Loan | Stated
Amount | | March 31, 2021 | December 31, 2020 | | March 31, 2021 | | December 31, 2020 | | Stated Interest Rate | | Maturity Date | |
| Term loan facility | Term loan facility | | | | | | | | | | | | | | | Term loan facility | | | | | | | | | | | |
| ESH REIT Term Facility | ESH REIT Term Facility | $ | 630,909 | | | $ | 625,863 | | (1) | $ | 627,368 | | (1) | $ | 8,693 | | | $ | 9,030 | | | LIBOR (2) + 2.00% | | 9/18/2026 | (3) | 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 | Senior notes | | | | | Senior notes | |
| 2025 Notes | 2025 Notes | 1,300,000 | | | 1,293,315 | | (4) | 1,292,986 | | (4) | 14,349 | | | 15,055 | | | 5.25% | | 5/1/2025 | | 2025 Notes | 1,300,000 | | | 1,294,630 | | (4) | 1,294,301 | | (4) | 11,526 | | | 12,232 | | | 5.25% | | 5/1/2025 | |
| 2027 Notes | 2027 Notes | 750,000 | | | 750,000 | | | 750,000 | | | 13,199 | | | 13,633 | | | 4.63% | | 10/1/2027 | | 2027 Notes | 750,000 | | | 750,000 | | | 750,000 | | | 11,439 | | | 11,879 | | | 4.63% | | 10/1/2027 | |
| Revolving credit facility | Revolving credit facility | | | | | Revolving credit facility | |
| ESH REIT Revolving Credit Facility | ESH REIT Revolving Credit Facility | 350,000 | | | 350,000 | | | — | | | 2,472 | | (5) | 2,606 | | (5) | LIBOR (2) + 2.00% | | 9/18/2024 | | 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 | | | | | | |
| Unsecured Intercompany Facility | 75,000 | | | — | | | — | | | — | | | — | | | 5.00% | | 9/18/2026 | | |
| Unsecured intercompany facility | | Unsecured intercompany facility | |
| ESH REIT Intercompany Facility | | ESH REIT Intercompany Facility | 75,000 | | | 0 | | | 0 | | | 0 | | | 0 | | | 5.00% | | 9/18/2026 | |
| Total | Total | | $ | 3,019,178 | | | $ | 2,670,354 | | | $ | 38,713 | | | $ | 40,324 | | | | | Total | | $ | 2,664,477 | | | $ | 2,665,652 | | | $ | 32,236 | | | $ | 33,856 | | |
| | | | | | | | | | | |
_________________________________
(1)The ESH REIT Term Facility (defined below) is presented net of an unamortized debt discount of $1.9$1.6 million and $2.0$1.7 million as of March 31, 20202021 and December 31, 2019,2020, respectively.
(2)As of March 31, 20202021 and December 31, 2019,2020, one-month LIBOR was 0.99%0.11% and 1.76%0.14%, respectively. As of March 31, 20202021 and December 31, 2019, $150.02020, $50.0 million and $200.0$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 commencing withunder the year ending December 31, 2020.ESH REIT Term Facility. Annual mandatory prepayments for a given fiscalthe year are due during the first quarter of the following fiscal 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 $6.7$5.4 million and $7.0$5.7 million as of March 31, 20202021 and December 31, 2019,2020, respectively.
(5)Unamortized deferred financing costs related to the revolving credit facility are included in other assets in the accompanying condensed consolidated balance sheets.
ESH REIT Credit Facilities
ESH REIT’s credit agreement, as may be amended and supplemented from time to time, provides for senior secured credit facilities (collectively, the “ESH REIT Credit Facilities”) which consist of a $630.9 million senior secured term loan
facility (the “ESH REIT Term Facility”) and a $350.0 million senior secured revolving credit facility (the “ESH REIT Revolving Credit Facility”). Subject to the satisfaction of certain criteria, borrowings under the 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, ESH REIT’s pro-forma senior loan-to-value ratio is less than or equal to 45%.
ESH REIT Term Facility—The ESH REIT Term Facility bears interest at a rate equal to (i) LIBOR plus 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 0.75% during a Level 1 Period or 1.00% for any period other than a Level 1 Period. The ESH REIT Term Facility 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. ESH REIT has the option to voluntarily prepay outstanding loans under the ESH REIT Term Facility at any time without penalty.
ESH REIT Revolving Credit Facility—Borrowings under the ESH REIT Revolving Credit Facility bear interest at a rate equal to (i) LIBOR plus a spread that ranges from 1.50% to 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 0.50% to 1.00% based on ESH REIT’s Consolidated Total Net Leverage Ratio, as defined. ESH REIT incurs a fee of 0.30% or 0.175% on the unutilized revolver balance.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 March 31, 2020,2021, ESH REIT had 0 letters of credit outstanding and no available borrowing capacity under the facility.
In March 2020, ESH REIT borrowed the full available borrowing capacity of $350.0 million under the ESH REIT Revolving Credit Facility as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of uncertainty in business markets resulting from the COVID-19 pandemic. These proceeds may in the future be used for working capital, general corporate or other purposes permitted under the agreement.facility.
The 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 credit under the ESH REIT Revolving Credit Facility, excluding up to $30.0 million of letters of credit, is equal to or greater than 35% of the aggregate available principal amount of the ESH REIT Revolving Credit Facility on the applicable fiscal quarter end date.
ESH REIT 2025 Notes
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 (the “2025 Notes”) under an indenture with Deutsche Bank Trust Company Americas, as trustee, in private placements pursuant to Rule 144A of the Securities Act of 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. Prior to May 1, 2020, ESH REIT may redeem the 2025 Notes, in whole or in part, at a redemption price equal to 100% of the principal amount, plus a “make-whole” premium, as defined, plus accrued and unpaid interest. Upon a Change of Control, as defined, holders of the 2025 Notes have the right to 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 2027 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” premium, as defined, plus accrued and unpaid interest. Prior to October 1, 2022, subject to certain conditions, ESH REIT may redeem up to 35% of the aggregate principal amount of the 2027 Notes at a redemption price equal to 101% of the aggregate principal amount, 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 2027 Notes have the right to require ESH REIT to redeem the 2027 Notes at 101% of the principal amount, plus accrued and unpaid interest.
UnsecuredESH REIT Intercompany Facility
In August 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”). Under the UnsecuredESH 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 UnsecuredESH 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 March 31, 20202021 and December 31, 2019,2020, the amount outstanding under the facility was $0.
Covenants
The ESH REIT Credit Facilities, the 2027 Notes, the 2025 Notes, and the UnsecuredESH REIT Intercompany Facility 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 engage in certain transactions. In addition, the ESH REIT Revolving Credit Facility contains a financial covenant that, subject to certain conditions, requires compliance with a certain senior loan-to-value ratio. The agreements governing 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 UnsecuredESH REIT Intercompany Facility, certain material operating leases and management agreements. As of March 31, 2020,2021, 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 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 attempt to amend its covenants,amendments, though there is no certainty that it would be successful in such efforts.
Interest Expense, net—The components of net interest expense during the three months ended March 31, 20202021 and 2019,2020, are as follows (in thousands):
| | | | Three Months Ended March 31, | | | | Three Months Ended March 31, |
| | | 2020 | | 2019 | | | 2021 | | 2020 |
Contractual interest (1) | | $ | 31,090 | | | $ | 28,575 | | |
Contractual interest, net (1) | | Contractual interest, net (1) | | $ | 28,879 | | | $ | 31,090 | |
| Amortization of deferred financing costs and debt discount | Amortization of deferred financing costs and debt discount | | 2,022 | | | 1,969 | | Amortization of deferred financing costs and debt discount | | 2,023 | | | 2,022 | |
Other costs (2) | Other costs (2) | | 262 | | | 356 | | Other costs (2) | | 327 | | | 262 | |
| Interest Income | | (946) | | | (966) | | |
Interest income (3) | | Interest income (3) | | (94) | | | (946) | |
| Total | Total | | $ | 32,428 | | | $ | 29,934 | | Total | | $ | 31,135 | | | $ | 32,428 | |
______________________
(1)Net of capitalized interest of $0.9$0.4 million and $0.3$0.9 million, respectively.
(2)Includes interest expense on finance leases (see Note 11)11) and unused facility fees.
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 March 31, 20202021 and December 31, 2019,2020, the estimated fair value of ESH REIT’s debt was $2.6 billion and $2.7 billion, respectively.billion. Estimated fair values are determined by comparing current borrowing rates and risk spreads offered in the market (Level 2 fair value measures) or quoted market prices (Level 1 fair value measures), when available, to the stated interest rates and spreads on ESH REIT’s debt. As of March 31, 2020 and December 31, 2019, the estimated fair value of the ESH REIT Revolving Credit Facility is equal to its carrying value due to its short-term nature and frequent settlement.
8. DERIVATIVE INSTRUMENTS
ESH REIT is 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 to manage its exposure to interest rate risk on a portion of the ESH REIT Term Facility. The notional amount of the interest rate swap as of March 31, 20202021 was $150.0 million. The notional amount decreases by an additional $50.0 million, every six months untiland the swap’s maturityswap matures in September 2021.
For the three months ended March 31, 20202021, ESH REIT paid interest of $0.3 million, and 2019,for the three months ended March 31, 2020, ESH REIT received proceeds of $0.3 million and $1.0 million, respectively, that offset interest expense. As of March 31, 2020, $1.02021, $0.3 million of interest expense is expected to be recognized over the following twelve months.six months until the swap's maturity.
The table below presents the amounts and classification of the interest rate swap on ESH REIT’s condensed consolidated financial statements (in thousands):
| | | | | | | | | | | | | | | | | |
| (Accrued liabilities) other assets | Accumulated other comprehensive (loss) income, net of tax | | | | | Interest (income) expense, net |
| As of March 31, 2020 | $ | (1,224) | | $ | (1,224) | | (1) | | | | |
| As of December 31, 2019 | $ | 831 | | $ | 830 | | (2) | | | | |
| For the three months ended March 31, 2020 | | | | | | | $ | (257) | |
| For the three months ended March 31, 2019 | | | | | | | $ | (975) | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | |
| 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 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 $(2.1) million.
(2)Changes during the year ended December 31, 2019, on a pre-tax basis, consisted of changes in fair value of $(5.0)$(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”). 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 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. 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. 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 recorded a provision for state income taxes of less than $0.1 million, an effective tax rate of less than 0.1%, for each of the three months ended March 31, 20202021 and 2019.2020. ESH REIT’s effectiveREIT's tax rate differs from the federal statutory rate of 21% due to ESH REIT’sits status as a REIT under the provisions of the Code.
ESH REIT’s income tax returns for the years 20162017 to present are subject to examination by the Internal Revenue Service and other taxing authorities. As of March 31, 2020,2021, a subsidiary of ESH REIT was under examination by the Canadian Revenue Agency for the tax years 2014 through 2017. As thethis 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 appropriately reservednot material as of March 31, 2020.2021.
10. RELATED PARTY TRANSACTIONS
Revenues and Expenses
Leases and Rental Revenues—All revenues are generated as a result of, and earned from, 3 operating leases with related parties. The counterparty to each lease agreement is a subsidiary of the Corporation. Fixed and variable rental revenues for the three months ended March 31, 20202021 and 20192020 are as follows (in thousands):
| | | | Three Months Ended
March 31, | | | | Three Months Ended
March 31, |
| | | 2020 | | 2019 | | | 2021 | | 2020 |
| Fixed rental revenues | Fixed rental revenues | | $ | 119,190 | | | $ | 118,005 | | Fixed rental revenues | | $ | 120,392 | | | $ | 119,190 | |
Variable rental revenues(1) | Variable rental revenues(1) | | — | | | — | | Variable rental revenues(1) | | 0 | | | 0 | |
_________________________________
(1)Regardless of whether cash rental payments are received, ESH REIT only recognizes revenue when a lessee’s revenue exceeds specific thresholds stated in the lease. Variable rental revenue thresholds were not achieved during the three months ended March 31, 2020 or 2019.
Each lease agreement has a five-yearfive-year term that expires in October 2023 and contains an automatic five-yearfive-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 payments to be received under current remaining noncancellable lease terms are as follows (in thousands):
| Years Ending December 31, | Years Ending December 31, | | Years Ending December 31, | |
| Remainder of 2020 | $ | 350,521 | | |
| 2021 | 479,830 | | |
| Remainder of 2021 | | Remainder of 2021 | $ | 362,564 | |
| 2022 | 2022 | 491,866 | | 2022 | 496,448 | |
| 2023 | 2023 | 419,911 | | 2023 | 424,031 | |
| | | Total | Total | $ | 1,742,128 | | Total | $ | 1,283,043 | |
Overhead Expenses—The Corporation incurs costs under a services agreement between the Corporation and ESH REIT for certain overhead services performed on each entities’ behalf. The services relate to executive management, accounting, financial analysis, training and technology. For the three months ended March 31, 20202021 and 2019,2020, ESH REIT incurred $2.5 million and $2.9 million, and $2.5 million, respectively, related to these services, which is included in general and administrative expenses in the accompanying condensed consolidated statements of operations, related to these services.operations. Expenses incurred under this services agreement also include expenses related to certain employees that participate in the Corporation’s long-term incentive plan. Such charges were $0.2 million and $0.3 million for each of the three months ended March 31, 20202021 and 2019, respectively.2020.
Debt and EquityCapital Transactions
UnsecuredCorporation Intercompany 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. 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 its 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. For the three
months ended March 31, 2021, ESH REIT recognized interest income of $0.1 million related to the unused facility balance (see Note 7).
ESH REIT Intercompany Facility—As of March 31, 20202021 and December 31, 2019,2020, there were 0 outstanding balances owed by ESH REIT to the Corporation under the UnsecuredESH REIT Intercompany Facility, and ESH REIT incurred 0 interest expense during each of the three months ended March 31, 20202021 and 20192020 related to the UnsecuredESH REIT Intercompany Facility. ESH REIT is able to borrow under the UnsecuredESH REIT Intercompany Facility up to $300.0 million, plus additional amounts, in each case subject to certain conditions (see Note 7).
Distributions—During the three months ended March 31, 2020 and 2019,2021, ESH REIT paid distributions of $35.1$110.2 million and $37.6 million, respectively, to the Corporation in respect of the Class A common stock of ESH REIT. The distributions paid included an $87.7 million distribution that as of December 31, 2020, was declared and payable to the Corporation and was included in Due to Extended Stay America, Inc. on the condensed consolidated balance sheet as of December 31, 2020.
Issuance of Common Stock—During each of the three months ended March 31, 20202021 and 2019,2020, ESH REIT was compensated $0.7$1.0 million and $1.2$0.7 million, respectively, for the 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 (“RSUs”).RSUs.
As of March 31, 2020,2021, the Corporation has granted a total of 1.11.4 million RSUs whereby, as a counterparty to these outstanding RSUs, ESH REIT is expected to issue and be compensated in cash for 1.11.4 million shares of Class B common stock of ESH REIT in future periods, assuming market-based awards vest at 100% and no forfeitures.
Related Party Transaction Balances
Related party transaction balances as of March 31, 20202021 and December 31, 2019,2020, include the following (in thousands):
| | | March 31,
2020 | | December 31,
2019 | | March 31,
2021 | | December 31,
2020 |
| Leases: | Leases: | | | | Leases: | | | |
Rents receivable(1) | Rents receivable(1) | $ | 666 | | | $ | 1,572 | | Rents receivable(1) | $ | 11,108 | | | $ | 3,941 | |
Deferred rents receivable(2) | Deferred rents receivable(2) | $ | 31,429 | | | $ | 28,917 | | Deferred rents receivable(2) | $ | 38,536 | | | $ | 39,135 | |
Unearned rental revenues(1) | Unearned rental revenues(1) | $ | (58,023) | | | $ | (38,770) | | Unearned rental revenues(1) | $ | (23,743) | | | $ | 0 | |
| | | |
| Working capital and other: | Working capital and other: | | Working capital and other: | |
Ordinary working capital(3) | Ordinary working capital(3) | $ | (10,598) | | | $ | (12,160) | | Ordinary working capital(3) | $ | (5,640) | | | $ | (5,806) | |
Equity awards (payable) receivable(4) | (230) | | | 322 | | |
Total working capital and other, net(5) | $ | (10,828) | | | $ | (11,838) | | |
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)Rents receivable relate to percentage rents. As of March 31, 2021 and December 31, 2020, unearned rental revenues related to April 2020 fixed minimum rent of $38.8 million and percentage rent of $19.2 million. As of December 31, 2019, unearned rental revenues related to January 2020 fixed minimum rent.
(2)Revenues recognized in excess of cash rents received.
(3)Represents disbursementsDisbursements and/or receipts made by the Corporation or ESH REIT on the other entity’s behalf.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)Represents amountsAmounts related to RSUsrestricted 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 5 of its hotel properties, including 1 hotel site for which development is in process.properties. NaN of these leases are operating leases and 2 are finance leases. The ground lease agreements terminate at various dates between 2023 and 2096 and several of the agreements include multiple renewal options for generally five or ten year periods. As ESH REIT 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 lease liabilities. Additionally as of March 31, 2020, ESH REIT leasedleases 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 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). No amortization costs were incurred during the three months ended March 31, 2020 and 2019 for finance leases pertaining to land or land in development. ESH REIT has no variable lease costs or short-term leases.
For the three months ended March 31, 2021 and 2020, components of ESH REIT’s total lease costs are as follows (in thousands):
| | | Three Months Ended March 31, | | | | Three Months Ended
March 31, |
| | 2020 | | 2019 | | | 2021 | | 2020 |
| Operating lease costs | Operating lease costs | $ | 326 | | | $ | 325 | | Operating lease costs | | $ | 326 | | | $ | 326 | |
| Finance lease costs - interest | 61 | | | 61 | | |
| Finance lease costs | | Finance lease costs | | 125 | | | 61 | |
| Total lease costs | Total lease costs | $ | 387 | | | $ | 386 | | Total lease costs | | $ | 451 | | | $ | 387 | |
ESH REIT’s right-of-use assets and lease liabilities are as follows (in thousands):
| | | March 31, 2020 | | December 31, 2019 | | | March 31, 2021 | | December 31, 2020 | |
| Right-of-use assets: | Right-of-use assets: | | | | | Right-of-use assets: | | | | |
Operating(1) | Operating(1) | $ | 1,916 | | | $ | 2,084 | | | Operating(1) | $ | 1,335 | | | $ | 1,388 | | |
Finance(2) | Finance(2) | 4,343 | | | 3,979 | | | Finance(2) | 4,323 | | | 4,354 | | |
| | | Lease liabilities: | Lease liabilities: | | | Lease liabilities: | | |
Operating(3) | Operating(3) | 9,173 | | | 9,207 | | | Operating(3) | 8,989 | | | 9,036 | | |
| Finance | Finance | 3,707 | | | 3,379 | | | Finance | 3,611 | | | 3,668 | | |
|
(1)Included in other assets on the accompanying condensed consolidated balance 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 lease liabilities as of March 31, 2020,2021, are as follows (in thousands):
| | | | | | | | | | | | | | | |
| Years Ending December 31, | | Operating Leases | | Finance Leases | |
| Remainder of 2020 | | $ | 588 | | | $ | 479 | | |
| 2021 | | 784 | | | 585 | | |
| 2022 | | 806 | | | 397 | | |
| 2023 | | 552 | | | 400 | | |
| 2024 | | 503 | | | 402 | | |
| 2025 | | 503 | | | 429 | | |
| Thereafter | | 77,091 | | | 2,671 | | |
| Total | | $ | 80,827 | | | $ | 5,363 | | |
| | | | | |
| Total discounted lease liability | | $ | 9,173 | | | $ | 3,707 | | |
| Difference between undiscounted cash flows and discounted cash flows | | $ | 71,654 | | | $ | 1,656 | | |
| | | | | |
| Weighted-average remaining lease term | | 58 years | | 11 years | |
| Weighted-average discount rate | | 6.6 | % | | 6.8 | % | |
| | | | | | | | | | | | | | | |
| 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, 2020,2021, 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 its business. ESH REIT believes that the results of all
litigation and claims, individually or in the aggregate, will not have a material adverse effect on its condensed consolidated financial statements, its business, results of operations andor financial condition.
12. SUBSEQUENT EVENTS
On May 6, 2020, the Board of Directors of ESH REIT declared a cash distribution of $0.01 per share for the first quarter of 2020 on its Class A and Class B common stock. This distribution is payable on June 4, 2020 to shareholders of record as of May 21, 2020.
COVID-19 Pandemic Update
In December 2019, an outbreak of a novel strain of coronavirus (“COVID-19”) originated in Wuhan, China and has since spread worldwide, posing public health risks that, by March 2020, reached pandemic proportions. The COVID-19 pandemic has significantly affected the global economy and strained the lodging industry due to travel restrictions, stay-at-home directives and shelter-in-place ordinances that have resulted in cancellations and reduced travel around the world.
ESH REIT's business and operational outlook is expected to be materially negatively impacted by the COVID-19 pandemic, specifically its ability to generate material, if any, percentage rental revenues under its leases due to material decreases in hotel revenues of the Operating Lessees. As the COVID-19 pandemic evolves, ESH REIT will continue to monitor the impacts of the pandemic on the operations of the Operating Lessees, including their ability to pay fixed minimum rents in accordance with the terms of the lease agreements. ESH REIT will also continue to monitor its financial condition and implement mitigation strategies while working to preserve liquidity. As of April 30, 2020, ESH REIT had unrestricted cash and cash equivalents of $608.4 million. Based on a preliminary assessment of our performance for the first four weeks of the second quarter and current trends, ESH REIT expects a decline in cash percentage rental payments in the second quarter of 2020 compared to the second quarter of 2019. Because second quarter results are not complete and the actual performance of the remaining portion of the quarter could deviate from current trends, ESH REIT's expectations with respect to any of the foregoing are subject to change. ESH REIT does not expect to, and undertakes no obligation to, announce any change in expectations prior to the announcement of actual second quarter results.
In response to the negative impact on ESH REIT's business and financial condition, ESH REIT has taken, or intends to take, additional steps to reduce operating costs and maintain financial and liquidity flexibility, such as, but not limited to the following:
•reducing planned capital expenditures related to non-guest facing capital investments, as well as hotel renovations and construction of new hotels;
•drawing the full $350 million of borrowing capacity under the ESH REIT Revolving Credit Facility (see Note 7);
•reducing the quarterly distribution to holders of ESH REIT's Class A and Class B common stock for the first quarter of 2020 and likely reducing it in future periods; and
•suspending Paired Share repurchases until the economic environment stabilizes.
On March 27, 2020, President Trump signed into law the CARES Act. The CARES Act, among other things, includes provisions relating to net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. ESH REIT continues to examine the impacts the COVID-19 pandemic and the CARES Act may have on its business; however, it is impossible to predict the complete effect and ultimate impact as the situation is continuously evolving.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the condensed consolidated financial statements of Extended Stay America, Inc. and ESH Hospitality, Inc., included in Item 1 of this combined quarterly report on Form 10-Q.
Background and Certain Defined Terms
The following defined terms relate to our corporate structure and 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 59%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 Extended Stay America-branded hotel properties on behalf of the Operating 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 owns the intellectual property related to our 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.
•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 wholly-owned subsidiaries of the Corporation that each lease a group of hotels from subsidiaries of ESH REIT and operate the Company-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 per 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, WiFi upgrade telephone or other guest service revenues.
•System-wide hotels means all hotels that are operated under the Extended Stay America brand and that are owned, franchised and/or managed by the Company. As of March 31, 2020,2021, there were 632651 system-wide hotels.
•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 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.
The following discussion may contain forward-looking statements. Actual results may differ materially from those suggested by any forward-looking statements for various reasons, including those discussed in “Risk Factors” in the 20192020 Form 10-K and 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, which are owned by ESH 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 59%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
Extended Stay America-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 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, those 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 business 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 98.1%98.8% of total revenues for the three months ended March 31, 2020.2021.
•Franchise and management—Earnings are derived from fees under various franchise and, in certain cases, management agreements with third parties, which accounted for 1.9%1.2% of total revenues for the three months ended March 31, 2020.2021. 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 consistent, 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 the Extended 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, 2020,2021, we owned and operated 558563 hotel properties in 40 U.S. states, consisting of approximately 62,10062,700 rooms, and franchised or managed 7488 hotel properties forto third parties, consisting of approximately 7,6009,000 rooms. All 632651 system-wide hotels operate under the Extended Stay America brand, which serves the mid-price extended stay segment and accounts for approximately 41%43% of the segment by number of rooms in the United States ("U.S."). States.
RevPAR for owned hotels was $45.23$44.60 and $48.20$45.23 for the three months ended March 31, 20202021 and 2019,2020, respectively. RevPAR for comparable system-wide hotels, which includes hotels owned and franchised or managed for the full three months ended March 31, 2021 and 2020, was $43.56 and 2019, was $43.98 and $46.67$44.30 for the three months ended March 31, 2021 and 2020, and 2019, respectively.
Extended Stay America-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 who need lodging for more than a week. Guests include business travelers, leisure travelers, professionals on temporary work or training assignments, persons relocating, the temporarily displaced, those purchasing a home and anyone else in need of temporary housing.
During the trailing twelve months ended March 31, 2020, 36.7%2021, 26.1%, 20.9%21.4% and 42.4%52.5% of our owned hotel room revenues were derived from guests with stays from 1-6 nights, from 7-29 nights and for 30 or more nights, respectively. For the trailing twelve months ended March 31, 2020, 23.8%2021, 26.9% of our owned hotel room revenues were derived from property-direct reservations, 27.8%31.8% were derived from our central call center, 19.7%21.5% were derived from our own proprietary website, 25.5%17.5% were derived from third party intermediaries and 3.2%2.3% were derived from travel agencies using global distribution systems.
During the trailing twelve months ended March 31, 2020, 53.0% of our franchise and management fees and related revenues were derived from franchising activities and 47.0% were derived from management activities. Franchisees 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 drive our competitive advantage by targeting our product and service offeringreceive $19.50, subject to an underserved customer base withinadjustments as described in the lodging industrydefinitive 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 extended stay segment,ESH Merger to ESH REIT’s board of directors (the “ESH Board”), and by driving economiesthe Corporation Board and ESH Board approved the Mergers, based on their assessment that the certainty of scale through$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 national distribution and concentration of hotels in individual markets. As the only major hotel company focused solelyPaired Shares on the extended stay segment, we focuslast trading day prior to the execution of the merger agreement. The foregoing closing price was near a 52-week high for the Paired Shares. In addition, the $19.50 price reflects a premium of 23%, 28%, and 44% to the 30 trading day, 3-month and 6-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, operational excellence in our core business, which includes deliveringamong other things, the adoption of the Merger Agreement, and will be asked, at a consistent guest experiencespecial meeting of ESH REIT stockholders, to vote their ESH REIT class B stock on, among other things, the adoption of the Merger Agreement.
The transaction is expected to close during the second quarter of 2021, subject to customary closing conditions, including approval by the Company’s shareholders and using commercial distribution channelsreceipt 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 have identifiedobtained 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 termination fee by the Company, on the one hand, and Parent, on the other hand, as described in the most effective to drive additional guests into our hotels. In addition to owning and operating hotels, we have increased, and intend to continue to increase, our fee-based income stream, which we receive when we franchise our brand to third parties and, in certain instances, manage hotels on behalfjoint proxy statement.
Further details of our franchisees. Additionally, we seek to maximize the value and increase the overall quality of our real estate portfolio by selling non-strategic hotels over time and in certain instances franchise our brand to those buyers.
As discussedMergers are included in Note 14 and Note 121 to each of the condensed consolidated financial statements of Extended Stay America, Inc. and ESH Hospitality, Inc., respectively, included in Item 1 of this combined quarterly report on Form 10-Q,10-Q. The foregoing description of the COVID-19Mergers 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.
COVID-19 Pandemic
pandemic has significantly impacted our business and results of operations andDuring the year ended December 31, 2020, primarily as a result we have taken measures to reduce operatingof the COVID-19 pandemic, the Company experienced significant declines in RevPAR, net income, Adjusted EBITDA and other costs and preserve liquidity. Our current and future plans included the following:
•continuing to invest capital in our hotels on an ongoing basis and through future cyclical hotel renovations where justified by anticipated returns on investment;
•constructing new Extended Stay America hotel properties we expect to own and operate;
•extracting valuecash flow from our real estate portfolio through the sale of non-strategic hotels to buyers that may franchise the Extended Stay America brand from us and for whom we may perform management or other services;
•franchising the Extended Stay America brand to newly constructed hotels built and owned by third parties for whom we may perform management or other services;
•converting existing hotels to the Extended Stay America brand, either as franchises or on our own balance sheet;
•repurposing and/or rebuilding certain of our hotel properties; and
•exploring acquisitions of additional hotel properties and/or companies.
operations. As a result of the pandemic and its impact on our business, we have de-emphasizedincreased our focus on attracting guests staying for one week or delayedlonger. Additionally, we have implemented certain of our strategiesreductions to expenses in order to reduce costs conserve financial and employee resources, and maintain short, medium and long-term liquidity. While the evolution and resulting impact of thisthe pandemic is highlyremains 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. Once the COVID-19 pandemic and its effects subside, we
We expect to refocus on our current and future plans to grow and improve our brand to drive shareholder value.
During the three months ended March 31, 2020, as a result of the COVID-19 pandemic, the Company experienced material adverse impacts onincreases in RevPAR, due to both ADR and occupancy, net income, Adjusted EBITDA and cash flowsflow from operations.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 three monthsmonth ended March 31, 2020, the Company’s2021, we experienced a year-over-year increase in Company-owned hotel RevPAR and Adjusted EBITDA declined 6.2% and 16.0%, respectively, compared with the three months ended March 31, 2019.
A disproportionate portion of the decreases in RevPar and Adjusted EBITDA for the three months ended March 31, 2020 was attributable to significantly deteriorating performance we experienced in the last three to four weeks of the first quarter. This deterioration continued and increased in the first weeks of the second quarter. As a result, we expect to experience a materially larger decrease in RevPAR and Adjusted EBITDA in the three months ended June 30, 2020 due to worsening macroeconomic conditions related to the COVID-19 pandemic. Actual results are subject to a high degree of uncertainty due to the volatility of macroeconomic trends and the evolving severity of the pandemic.month since February 2020.
New Hotel OpeningsHotels
The table below summarizes hotel acquisitions and new owned, newly constructed hotel openings during the three months ended March 31, 20202021 and the year ended December 31, 2019.2020. All hotels were converted or opened under the Extended Stay America brand.
| | | | | | | | | | | | | | |
| Date | Location | Number of
Hotels | Number of Rooms | Acquisition /
New-Build |
| November 2019 | Florida | 1 | 121 | Acquisition |
| December 2019 | Florida | 1 | 124 | New-Build |
| December 2019 | Arizona | 1 | 136 | New-Build |
| March 2020 | Florida | 1 | 120 | New-Build |
| | | | | | | | | | | |
| 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 |
In March 2021, the Company disposed of two hotels located in Texas. Net proceeds totaled $21.9 million and the Company recorded a gain on sale of $12.0 million. In November 2020, the Company disposed of a hotel located in California. Net proceeds totaled $63.6 million and the Company recorded a gain on sale of $52.5 million.
Hotel Pipeline
As of March 31, 2020,2021, the Company had a pipeline of 7351 hotels, which consisted of the following:
| | Company-Owned Pipeline & Recently Opened Hotels as of March 31, 2020 | | |
| Company-Owned Pipeline & Recently Opened Hotels as of March 31, 2021 | | Company-Owned Pipeline & Recently Opened Hotels as of March 31, 2021 |
| Under Option | Under Option | | Pre-Development | | Under Construction | | Total Pipeline | | Opened YTD | | Under Option | Pre-Development | Under Construction | Total Pipeline | Opened YTD |
| # Hotels | # Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms |
| — | — | 4 | 504 | 10 | 1,256 | 14 | 1,760 | 1 | 120 | — | 4 | 504 | 2 | 248 | 6 | 752 | 2 | 248 |
| | Third-Party Pipeline & Recently Opened Hotels as of March 31, 2020 | | |
| Third-Party Pipeline & Recently Opened Hotels as of March 31, 2021 | | Third-Party Pipeline & Recently Opened Hotels as of March 31, 2021 |
| Commitments | Commitments | | Applications | | Executed | | Total Pipeline | | Opened YTD | | Commitments | Applications | Executed | Total Pipeline | Opened YTD |
| # Hotels | # Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms | # Hotels | # Rooms |
| 27 | 3,348 | 5 | 588 | 27 | 3,132 | 59 | 7,068 | 1 | 113 | |
| 21 | | 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 delay commencement of construction of the 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 impact on our business, including our financial position, results of operations and liquidity, is highly uncertain.
Understanding Our Results of Operations—The Company
Revenues and Expenses.The following table presents the components of the Company’s revenues as a percentage of our total revenues for the three months ended March 31, 2020:2021:
| | | | | |
| | Percentage of
2020
|
• 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. Room revenues and similar measures or metrics are presented and/or discussed with respect to owned hotels only as opposed to on a system-wide basis. System-wide hotels include all owned and franchised and/or managed hotels. | 95.6%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. | 2.5%2.6% |
• Franchise and management fees. Franchise and management fees include royalty and other fees charged to third party hotel owners for use of our brand name and hotel management services. The substantial majority of these fees are based on a percentage of revenues of the franchised or managed hotels.hotel revenues. | 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. | 1.4%0.6% |
The following table presents the components of the Company’s operating expenses as a percentage of our total operating expenses for the three months ended March 31, 2020:2021:
| | | | | |
| | Percentage of
2020
|
• 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 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 and repairs and maintenance expense. | 64.9%64.4% |
• General and administrative expenses. General and administrative expenses include expenses associated with corporate overhead. Costs consist primarily of compensation expense of our corporate staff, including equity-based compensation and severance costs, and professional fees, including audit, tax and consulting fees, legal fees and legal settlement costs. | 10.7%10.6% |
• Depreciation and amortization. Depreciation and amortization relates primarily to the acquisition and usage of hotels and otherrelated property and equipment, including capital expenditures incurred with respect to renovations and other capital expenditures. | 22.6%21.8% |
• Merger transaction expenses. Merger transaction expenses include direct, incremental expenses incurred associated with our pending merger. | 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 over time through system service (i.e., program) fees. | 1.8%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 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 three months ended March 31, 2020:2021:
| | | | | |
| | Percentage of 20202021 Year to Date Total Operating Expenses |
• Hotel operating expenses. ESH REIT’s hotel operating expenses include expenses directly related to hotel ownership, such as real estate tax expense, property insurance premiums and loss on disposal of certain capital assets. | 31.3%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 the Corporation. | 5.3%5.2% |
• Depreciation and amortization. Depreciation and amortization relate primarily to the acquisition and usage of hotels and otherrelated property and equipment, including capital expenditures incurred with respect to renovations and other capital expenditures. | 63.4%63.6% |
• Merger transaction expenses. Merger transaction expenses include direct, incremental expenses incurred associated with our pending merger. | 3.1% |
| |
Results of Operations
Results of Operations discusses the Company’s and ESH REIT’s condensed consolidated financial statements, each of which have been prepared in accordance with U.S. GAAP. The condensed 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 ESH REIT. Third-party equity interests in ESH REIT, which consist primarily of the Class B common stock of ESH REIT and represent 41%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
ComparisonAs of Three Months Ended March 31, 20202021, the Company owned and March 31, 2019
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 or managed 74 hotels for third parties, consisting of approximately 7,600 rooms. AsSee 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 March 31, 2019, the Company owned2021 and operated 554 hotels, consisting of approximately 61,500 rooms, and franchised or managed 73 hotels for third parties, consisting of approximately 7,500 rooms.
The following table presents the Company's consolidated results of operations for the three months ended March 31, 20202021 and 2019,2020, including the amount and percentage change in these results between the periods (in thousands):
| | | Three Months Ended
March 31, | | | | Three Months Ended
March 31, | |
| | 2020 | | 2019 | | Change ($) | | Change (%) | | 2021 | | 2020 | | Change ($) | | Change (%) |
| Revenues: | Revenues: | | | | | | | | Revenues: | | | | | | | |
| Room revenues | Room revenues | $ | 254,464 | | | $ | 267,046 | | | $ | (12,582) | | | (4.7)% | Room revenues | $ | 249,868 | | | $ | 254,464 | | | $ | (4,596) | | | (1.8)% |
| Other hotel revenues | Other hotel revenues | 6,768 | | | 5,303 | | | 1,465 | | | 27.6% | Other hotel revenues | 6,680 | | | 6,768 | | | (88) | | | (1.3)% |
| Franchise and management fees | Franchise and management fees | 1,279 | | | 1,225 | | | 54 | | | 4.4% | Franchise and management fees | 1,218 | | | 1,279 | | | (61) | | | (4.8)% |
| | 262,511 | | | 273,574 | | | (11,063) | | | (4.0)% | | 257,766 | | | 262,511 | | | (4,745) | | | (1.8)% |
| Other revenues from franchised and managed properties | Other revenues from franchised and managed properties | 3,790 | | | 4,095 | | | (305) | | | (7.4)% | Other revenues from franchised and managed properties | 1,805 | | | 3,790 | | | (1,985) | | | (52.4)% |
| Total revenues | Total revenues | 266,301 | | | 277,669 | | | (11,368) | | | (4.1)% | Total revenues | 259,571 | | | 266,301 | | | (6,730) | | | (2.5)% |
| Operating Expenses: | Operating Expenses: | | | | | | | Operating Expenses: | | | | | | |
| Hotel operating expenses | Hotel operating expenses | 145,295 | | | 137,291 | | | 8,004 | | | 5.8% | Hotel operating expenses | 146,338 | | | 145,295 | | | 1,043 | | | 0.7% |
| General and administrative expenses | General and administrative expenses | 23,938 | | | 23,027 | | | 911 | | | 4.0% | General and administrative expenses | 24,124 | | | 23,938 | | | 186 | | | 0.8% |
| Depreciation and amortization | Depreciation and amortization | 50,520 | | | 48,778 | | | 1,742 | | | 3.6% | Depreciation and amortization | 49,408 | | | 50,520 | | | (1,112) | | | (2.2)% |
| Merger transaction expenses | | Merger transaction expenses | 4,782 | | | — | | | 4,782 | | | n/a |
| | | 219,753 | | | 209,096 | | | 10,657 | | | 5.1% | | 224,652 | | | 219,753 | | | 4,899 | | | 2.2% |
| Other expenses from franchised and managed properties | Other expenses from franchised and managed properties | 4,207 | | | 4,647 | | | (440) | | | (9.5)% | Other expenses from franchised and managed properties | 2,444 | | | 4,207 | | | (1,763) | | | (41.9)% |
| Total operating expenses | Total operating expenses | 223,960 | | | 213,743 | | | 10,217 | | | 4.8% | Total operating expenses | 227,096 | | | 223,960 | | | 3,136 | | | 1.4% |
| | Gain on sale of hotel properties | | Gain on sale of hotel properties | 12,018 | | | — | | | 12,018 | | | n/a |
| Other income | Other income | 2 | | | 27 | | | (25) | | | (92.6)% | Other income | 1 | | | 2 | | | (1) | | | (50.0)% |
| Income from operations | Income from operations | 42,343 | | | 63,953 | | | (21,610) | | | (33.8)% | Income from operations | 44,494 | | | 42,343 | | | 2,151 | | | 5.1% |
| Other non-operating expense (income) | 703 | | | (178) | | | 881 | | | (494.9)% | |
| Other non-operating (income) expense | | Other non-operating (income) expense | (84) | | | 703 | | | (787) | | | (111.9)% |
| Interest expense, net | Interest expense, net | 32,685 | | | 29,604 | | | 3,081 | | | 10.4% | Interest expense, net | 31,462 | | | 32,685 | | | (1,223) | | | (3.7)% |
| Income before income tax expense | Income before income tax expense | 8,955 | | | 34,527 | | | (25,572) | | | (74.1)% | Income before income tax expense | 13,116 | | | 8,955 | | | 4,161 | | | 46.5% |
| Income tax expense | Income tax expense | 1,110 | | | 6,123 | | | (5,013) | | | (81.9)% | Income tax expense | 750 | | | 1,110 | | | (360) | | | (32.4)% |
| Net income | Net income | 7,845 | | | 28,404 | | | (20,559) | | | (72.4)% | Net income | 12,366 | | | 7,845 | | | 4,521 | | | 57.6% |
Net income attributable to noncontrolling interests(1) | Net income attributable to noncontrolling interests(1) | (3,291) | | | (6,470) | | | 3,179 | | | (49.1)% | 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 | Net income attributable to Extended Stay America, Inc. common shareholders | $ | 4,554 | | | $ | 21,934 | | | $ | (17,380) | | | (79.2)% | Net income attributable to Extended Stay America, Inc. common shareholders | $ | 1,921 | | | $ | 4,554 | | | $ | (2,633) | | | (57.8)% |
|
________________________
(1)Noncontrolling interests in Extended Stay America, Inc. include 41%42% and 42%41% of ESH REIT’s common equity as of March 31, 20202021 and 2019,2020, respectively, and 125 shares of ESH REIT preferred stock.
The following table presents key operating metrics, including occupancy, ADR, RevPAR and hotel inventory for the Company's owned hotels for the three months ended March 31, 20202021 and 2019,2020, respectively:
| | | Three Months Ended
March 31, | | | | Three Months Ended
March 31, | |
| | 2020 | | 2019 | | Change | | 2021 | | 2020 | | Change |
| Number of hotels (as of March 31) | Number of hotels (as of March 31) | 558 | | 554 | | 4 | Number of hotels (as of March 31) | 563 | | 558 | | 5 |
| Number of rooms (as of March 31) | Number of rooms (as of March 31) | 62,053 | | 61,552 | | 501 | Number of rooms (as of March 31) | 62,674 | | 62,053 | | 621 |
| Occupancy | Occupancy | 71.4% | | 71.4% | | — | Occupancy | 74.5% | | 71.4% | | 310 bps |
| ADR | ADR | $63.35 | | $67.51 | | (6.2)% | ADR | $59.86 | | $63.35 | | (5.5)% |
| RevPAR | RevPAR | $45.23 | | $48.20 | | (6.2)% | RevPAR | $44.60 | | $45.23 | | (1.4)% |
|
Room revenues. Room revenues decreased by $12.6$4.6 million, or 4.7%1.8%, to $249.9 million for the three months ended March 31, 2021, compared to $254.5 million for the three months ended March 31, 2020, compared to $267.0 million for the three months ended March 31, 2019, due to a 6.2%1.4% decrease in RevPAR as a result of a 6.2% decrease in ADR due to significant business disruption as a result of the COVID-19 pandemic in March 2020. Occupancy decreased 8.8% for the month of March 2020 compared to March 2019, driven by declines greater than 20% near the end of the month. This decline in March was offset by occupancy increases in January and February 2020. We anticipate that continued disruption resulting from the COVID-19 pandemic as well as changesthat began in customer behavior, will result in a material adverseMarch 2020. The decrease in room revenues for the year ending December 31, 2020. The length and severity of such impact is highly uncertain.RevPAR was driven by a 5.5% decrease in ADR, partially offset by a 310 basis point increase in occupancy.
Other hotel revenues. Other hotel revenues increaseddecreased by $1.5$0.1 million, or 27.6%1.3%, to $6.7 million for the three months ended March 31, 2021, compared to $6.8 million for the three months ended March 31, 2020, compared2020.
Franchise and management fees. Franchise and management fees decreased by $0.1 million, or 4.8%, to $5.3$1.2 million for the three months ended March 31, 2019, due2021, compared to system and process improvements that improved billing efficiency, including the collection of cancellation and other fees.
Franchise and management fees. For$1.3 million for the three months ended March 31, 2020 and 2019, we earned franchise and management fees of $1.3 million and $1.2 million, respectively, as a result of the franchise and/or management of 74 and 73 third-party owned hotels, respectively.2020. We expect franchise and management fees to increase over time ifas 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 $0.3$2.0 million, or 7.4%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, compared to $4.1 million for the three months ended March 31, 2019, due to a decrease in direct reimbursable costs resulting fromrelated to the terminationmanagement of two25 hotels whose management agreements inagreement expired on December 31, 2020. As of March 31, 2021, the third quarter of 2019.Company does not manage any third-party hotels.
Hotel operating expenses. Hotel operating expenses increased by $8.0$1.0 million, or 5.8%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, compared to $137.3 million for the three months ended March 31, 2019.2020. The increase in hotel operating expenses was primarily due to increases in personnelgeneral liability premiums and claims of $2.3 million, hotel-level payroll expense of $4.9$2.2 million, repairallowance for uncollectible guest balances of $1.3 million and maintenanceutilities expense of $1.2 million. These increases were partially offset by decreases of $2.1 million in costs related to the temporary suspension of $2.3 million,our grab-and-go breakfast, loss on disposal of assets of $2.0$2.1 million and allowance for certain uncollectible guest balancesreservation costs of $1.0 million, partially offset by $2.0 million in reimbursed prior credit card fees during the three months ended March 31, 2020. We currently anticipate that certain variable costs such as personnel expense will decrease for the year ending December 31, 2020 as a result of the overall decline in occupancy related to the effects of the COVID-19 pandemic, while we expect other variable costs, such as costs incurred for personal protective equipment and other related safety measures taken in response to the COVID-19 pandemic, as well as certain fixed operating expenses, such as property insurance, to increase. The potential impact of changes in hotel operating expenses related to the COVID-19 pandemic is uncertain.$2.1 million.
General and administrative expenses. General and administrative expenses increased by $0.9$0.2 million, or 4.0%0.8%, to $24.1 million for the three months ended March 31, 2021, compared to $23.9 million for the three months ended March 31, 2020, compared to $23.0 million for the three months ended March 31, 2019. This increase was due to separation and corporate transition costs of $1.0 million. The Company expects to defer certain general and administrative costs for the remainder of 2020 in response to the COVID-19 pandemic. As the length and severity of the COVID-19 pandemic is highly uncertain, while we expect a decline in certain general and administrative expenses, we are unable to determine the full impact for the year ending December 31, 2020.
Depreciation and amortization. Depreciation and amortization increaseddecreased by $1.7$1.1 million, or 3.6%2.2%, to $49.4 million for the three months ended March 31, 2021, compared to $50.5 million for the three months ended March 31, 2020, comparedprimarily due to $48.8 million fordeclines in capital expenditures related to existing and newly-constructed hotels.
Merger transaction expenses. During the three months ended March 31, 2019, due to a hotel acquisition and new hotel openings that occurred during2021, the fourth quarter of 2019 and the first quarter of 2020.Company incurred $4.8 million in direct, incremental expenses associated with our pending merger.
Other expenses from franchised and managed properties. Other expenses from franchised and managed properties decreased by $0.4$1.8 million, or 9.5%41.9%, to $2.4 million for the three months ended March 31, 2021, compared to $4.2 million for the three months ended March 31, 2020, compared to $4.6 million for the three months ended March 31, 2019, due to a decrease in direct reimbursable costs resulting fromrelated to the terminationmanagement of two25 hotels whose management agreements in the third quarter of 2019.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.
Other non-operating expense (income).Gain on sale of hotel properties. During the three months ended March 31, 20202021, 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 2019,2020.
Other non-operating (income) expense. During the three months ended March 31, 2021 and 2020, we recognized a foreign currency transaction gain of $0.1 million and loss of $0.7 million and gain of $0.2 million, respectively, related to a residual Canadian dollar-denominated deposit as a result of the prior sale of Canadian hotels.
Interest expense, net. Net interest expense increaseddecreased by $3.1$1.2 million, or 10.4%3.7%, to $32.7$31.5 million for the three months ended March 31, 2020, compared to $29.6$32.7 million for the three months ended March 31, 2019, due to an increase2020. In March 2020, the Company borrowed $399.8 million under revolving credit facilities, of which $350.0 million was repaid in August 2020 and $40.0 million was repaid during the three months ended March 31, 2021. The Company's total debt outstanding, to $3.0 billion, net of unamortized deferred financing costs and debt discounts, decreased to $2.6 billion as of March 31, 2020,2021, compared to $2.4$3.0 billion net of unamortized deferred financing costs and debt discounts, as of March 31, 2019. In March 2020, the Company borrowed $399.8 million under the ESH REIT Revolving Credit Facility and the Corporation Revolving Credit Facility, and in September 2019, ESH REIT issued $750.0 million of its 2027 Notes and repaid $500.0 million of the ESH REIT Term Facility.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, compared to 4.8% as of March 31, 2019. Interest expense, net is expected to increase due to the drawdown of $399.8 million under our revolving credit facilities at the end of the three month period ended March 31, 2020.a decline in LIBOR.
Income tax expense. OurThe Company recorded a provision for federal, state, and foreign income taxes of $0.8 million, an effective income tax rate decreased to 12.4%of 5.7%, for the three months ended March 31, 20202021, compared to 17.7%a provision of $1.1 million, an effective tax rate of 12.4%, for the three months ended March 31, 2019.2020. The Company’s effective rate differs from the current federal
statutory rate of 21% primarily due to ESH REIT’s status as a REIT under the provisions of the Internal Revenue Code of 1986, as amended (the “Code”) and, specifically during the three months ended March 31, 2020, the ability of the Company to carry back and utilize projected losses to higher tax rate years. The decrease in the effective income tax rate for the three months ended March 31, 2020 was substantially due to circumstances caused by business disruption from the COVID-19 pandemic. As of March 31, 2020, the Company projects a taxable loss for the year ended December 31, 2020, and due to the passage of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Company is able to carry back the projected loss and fully utilize it in a higher tax rate year, providing an expected federal tax benefit. The expected federal tax benefit due to the projected loss for the year ending December 31, 2020, corresponded to a decrease in the effective tax rate used to measure income tax expense recognized for the three months ended March 31, 2020..
Results of Operations—ESH REIT
ComparisonAs of Three Months Ended March 31, 20202021, ESH REIT owned and March 31, 2019
leased 563 hotels, consisting of approximately 62,700 rooms. As of March 31, 2020, ESH REIT owned and leased 558 hotels, consisting of approximately 62,100 rooms. AsSee Notes 4 and 5to the condensed consolidated financial statements of ESH Hospitality, Inc., included in Item 1 of this quarterly report on Form 10-Q,
Comparison of Three Months Ended March 31, 2019, ESH REIT owned2021 and leased 554 hotels, consisting of approximately 61,500 rooms. March 31, 2020
The following table presents ESH REIT’s results of operations for the three months ended March 31, 20202021 and 2019,2020, including the amount and percentage change in these results between the periods (in thousands):
| | | Three Months Ended
March 31, | | | | Three Months Ended
March 31, | |
| | 2020 | | 2019 | | Change ($) | | Change (%) | | 2021 | | 2020 | | Change ($) | | Change (%) |
Revenues- Rental revenues from Extended Stay America, Inc. | Revenues- Rental revenues from Extended Stay America, Inc. | $ | 119,190 | | | $ | 118,005 | | | $ | 1,185 | | | 1.0% | Revenues- Rental revenues from Extended Stay America, Inc. | $ | 120,392 | | | $ | 119,190 | | | $ | 1,202 | | | 1.0% |
| Operating expenses: | Operating expenses: | | Operating expenses: | |
| Hotel operating expenses | Hotel operating expenses | 24,527 | | | 21,308 | | | 3,219 | | | 15.1% | Hotel operating expenses | 21,405 | | | 24,527 | | | (3,122) | | | (12.7)% |
| General and administrative expenses | General and administrative expenses | 4,167 | | | 3,981 | | | 186 | | | 4.7% | General and administrative expenses | 3,960 | | | 4,167 | | | (207) | | | (5.0)% |
| Depreciation and amortization | Depreciation and amortization | 49,588 | | | 47,867 | | | 1,721 | | | 3.6% | Depreciation and amortization | 48,381 | | | 49,588 | | | (1,207) | | | (2.4)% |
| | Merger transaction expenses | | Merger transaction expenses | 2,373 | | | — | | | 2,373 | | | n/a |
| Total operating expenses | Total operating expenses | 78,282 | | | 73,156 | | | 5,126 | | | 7.0% | Total operating expenses | 76,119 | | | 78,282 | | | (2,163) | | | (2.8)% |
| Gain on sale of hotel properties | | Gain on sale of hotel properties | 11,930 | | | — | | | 11,930 | | | n/a |
| | Other income | — | | | 15 | | | (15) | | | (100.0)% | |
| Income from operations | Income from operations | 40,908 | | | 44,864 | | | (3,956) | | | (8.8)% | Income from operations | 56,203 | | | 40,908 | | | 15,295 | | | 37.4% |
| Other non-operating expense (income) | 560 | | | (139) | | | 699 | | | 502.9% | |
| Other non-operating (income) expense | | Other non-operating (income) expense | (84) | | | 560 | | | (644) | | | (115.0)% |
| Interest expense, net | Interest expense, net | 32,428 | | | 29,934 | | | 2,494 | | | 8.3% | Interest expense, net | 31,135 | | | 32,428 | | | (1,293) | | | (4.0)% |
| Income before income tax expense | Income before income tax expense | 7,920 | | | 15,069 | | | (7,149) | | | (47.4)% | Income before income tax expense | 25,152 | | | 7,920 | | | 17,232 | | | 217.6% |
| Income tax expense | Income tax expense | 2 | | | 3 | | | (1) | | | (33.3)% | Income tax expense | 2 | | | 2 | | | — | | | 0.0% |
| Net income | Net income | $ | 7,918 | | | $ | 15,066 | | | $ | (7,148) | | | (47.4)% | Net income | $ | 25,150 | | | $ | 7,918 | | | $ | 17,232 | | | 217.6% |
Rental revenues from Extended Stay America, Inc. Rental revenues increased by $1.2 million, or 1.0%, to $120.4 million for the three months ended March 31, 2021, compared to $119.2 million for the three months ended March 31, 2020, compared to $118.0 million for the three months ended March 31, 2019.2020. The increase in rental revenues was due to a hotel acquisition and new hotel openings that occurred during the fourth quarter of 20192020 and the first quarter of 2020.2021, partially offset by asset sales. No variable rental revenues were recognized during the three months ended March 31, 20202021 or 2019,2020, as minimum percentage rental revenue thresholds were not achieved during either of thethose periods. Variable rental revenues are expected to decrease meaningfully for the year ended December 31, 2020 as a result of a decline in leased hotel revenues expected due to business disruption and changes in customer behavior resulting from the COVID-19 pandemic.
Hotel operating expenses. Hotel operating expenses increaseddecreased by $3.2$3.1 million, or 15.1%12.7%, to $21.4 million for the three months ended March 31, 2021, compared to $24.5 million for the three months ended March 31, 2020, compared to $21.3 million for the three months ended March 31, 2019.2020. This increasedecrease was primarily due to increasesdecreases in loss on disposal of assets of $2.0 million, real estate tax expense of $0.7$2.1 million and property insurance related costs of $0.3$0.9 million.
General and administrative expenses. General and administrative expenses increaseddecreased by $0.2 million, or 4.7%5.0%, to $4.0 million for the three months ended March 31, 2021, compared to $4.2 million for the three months ended March 31, 2020, compareddue to $4.0a decrease in reimbursable costs paid to the Corporation.
Depreciation and amortization. Depreciation and amortization decreased by $1.2 million, or 2.4%, to $48.4 million for the three months ended March 31, 2019. This increase was due to an increase in reimbursable costs paid to the Corporation of $0.5 million for administrative services, partially offset by a decrease in legal fees of $0.2 million.
Depreciation and amortization. Depreciation and amortization increased by $1.7 million, or 3.6%,2021, compared to $49.6 million for the three months ended March 31, 2020, compared to $47.9 million for the three months ended March 31, 2019,primarily due to a hotel acquisitiondeclines in capital expenditures related to existing and new hotel openings that occurred during the fourth quarter of 2019 and first quarter of 2020.newly-constructed hotels.
Other non-operating expense (income).Merger transaction expenses. During the three months ended March 31, 20202021, 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 2019,2020, ESH REIT recognized a foreign currency transaction gain of $0.1 million and loss of $0.6 million and gain of $0.1 million, respectively, related to a residual Canadian dollar-denominated deposit as a result of the prior sale of Canadian hotels.
Interest expense, net. Net interest expense increaseddecreased by $2.5$1.3 million, or 8.3%4.0%, to $31.1 million for the three months ended March 31, 2021, compared to $32.4 million for the three months ended March 31, 2020. In March 2020, compared to $29.9ESH REIT borrowed $350.0 million for the three months ended March 31, 2019, due to an increaseunder its revolving credit facility, which was fully repaid in August 2020. ESH REIT's total debt outstanding, to $3.0 billion, net of unamortized deferred financing costs and debt discounts, decreased to $2.6 billion as of March 31, 20202021, compared to $2.4$3.0 billion net of unamortized deferred financing costs and debt discounts, as of March 31, 2019. In March 2020, ESH REIT borrowed $350.0 million under the ESH REIT Revolving Credit Facility, and in September 2019, ESH REIT issued $750.0 million of its 2027 Notes and repaid $500.0 million of the ESH REIT Term Facility.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, compared to 4.8% as of March 31, 2019. Interest expense, net is expected to increase due to the drawdown of $350.0 million under the ESH REIT Revolving Credit Facility at the end of the three month period ended March 31, 2020.a decline in LIBOR.
Income tax expense. ESH REIT’s effective income tax rate remained consistent at less than 0.1% for each of the three months ended March 31, 20202021 and 2019.2020. ESH REIT’s effective rate differs from the federal statutory rate of 21% primarily due to ESH REIT’sits status as a REIT under the provisions of the Code.
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, defined as the change in Hotel Operating Profit divided by the change in total room and other hotel 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; (9)(10) loss on disposal of assets; (10)(11) franchise and management fees; and (11) other expenses from franchised and managed properties, net of other revenues.(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. 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 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 Hotel Operating Profit and Hotel Operating Margin for the Company for the three months ended March 31, 20202021 and 20192020 (in thousands):
| | | | Three Months Ended
March 31, | | | | Three Months Ended
March 31, |
| | | 2020 | | 2019 | | | 2021 | | 2020 |
| Net income | Net income | | $ | 7,845 | | | $ | 28,404 | | Net income | | $ | 12,366 | | | $ | 7,845 | |
| Income tax expense | Income tax expense | | 1,110 | | | 6,123 | | Income tax expense | | 750 | | | 1,110 | |
| Interest expense, net | Interest expense, net | | 32,685 | | | 29,604 | | Interest expense, net | | 31,462 | | | 32,685 | |
| Other non-operating expense (income) | | 703 | | | (178) | | |
| Other non-operating (income) expense | | Other non-operating (income) expense | | (84) | | | 703 | |
| Other income | Other income | | (2) | | | (27) | | Other income | | (1) | | | (2) | |
| | Gain on sale of hotel properties | | Gain on sale of hotel properties | | (12,018) | | | — | |
| | Depreciation and amortization | Depreciation and amortization | | 50,520 | | | 48,778 | | Depreciation and amortization | | 49,408 | | | 50,520 | |
| Merger transaction expenses | | Merger transaction expenses | | 4,782 | | | — | |
| General and administrative expenses | General and administrative expenses | | 23,938 | | | 23,027 | | General and administrative expenses | | 24,124 | | | 23,938 | |
Loss on disposal of assets (1) | Loss on disposal of assets (1) | | 3,343 | | | 1,376 | | Loss on disposal of assets (1) | | 1,232 | | | 3,343 | |
| Franchise and management fees | Franchise and management fees | | (1,279) | | | (1,225) | | Franchise and management fees | | (1,218) | | | (1,279) | |
| System services loss, net | System services loss, net | | 417 | | | 552 | | System services loss, net | | 639 | | | 417 | |
| Hotel Operating Profit | Hotel Operating Profit | | $ | 119,280 | | | $ | 136,434 | | Hotel Operating Profit | | $ | 111,442 | | | $ | 119,280 | |
| | | | | | | | | | |
| Room revenues | Room revenues | | $ | 254,464 | | | | $ | 267,046 | | Room revenues | | $ | 249,868 | | | $ | 254,464 | |
| Other hotel revenues | Other hotel revenues | | 6,768 | | | 5,303 | | Other hotel revenues | | 6,680 | | | 6,768 | |
| Total room and other hotel revenues | Total room and other hotel revenues | | $ | 261,232 | | | $ | 272,349 | | Total room and other hotel revenues | | $ | 256,548 | | | $ | 261,232 | |
| | | | | | | | | | |
| Hotel Operating Margin | Hotel Operating Margin | | 45.7 | % | | 50.1 | % | Hotel Operating Margin | | 43.4 | % | | 45.7 | % |
________________________
(1) Included Included in hotel operating expenses in the condensed consolidated statements of 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 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 ongoing operating performance and that the presentation of Adjusted EBITDA, when combined with the U.S. GAAP presentation of net income, net income per share and cash flow provided by operating activities, is beneficial to the overall understanding of 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 charges related to equity-based compensation expense with respect to awards issued under long-term incentive compensation plans to employees and certain directors.
•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 on sale of hotel properties net—We exclude the net gain 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.
This policy was implemented on January 1, 2020, due to the growth of our franchise business; no adjustments have been made to prior periods.
•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: loss on disposal of assets, non-operating (income) expense, (income), including foreign currency transaction costs, and certain costs associated with 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, the Corporation or 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 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. 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 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 months ended March 31, 20202021 and 20192020 (in thousands):
| | | | Three Months Ended
March 31, | | | | Three Months Ended
March 31, |
| | | 2020 | | 2019 | | | 2021 | | 2020 |
| Net income | Net income | | $ | 7,845 | | | $ | 28,404 | | Net income | | $ | 12,366 | | | $ | 7,845 | |
| Interest expense, net | Interest expense, net | | 32,685 | | | 29,604 | | Interest expense, net | | 31,462 | | | 32,685 | |
| Income tax expense | Income tax expense | | 1,110 | | | 6,123 | | Income tax expense | | 750 | | | 1,110 | |
| Depreciation and amortization | Depreciation and amortization | | 50,520 | | | 48,778 | | Depreciation and amortization | | 49,408 | | | 50,520 | |
| EBITDA | EBITDA | | 92,160 | | | 112,909 | | EBITDA | | 93,986 | | | 92,160 | |
| Equity-based compensation | Equity-based compensation | | 1,126 | | | 2,109 | | Equity-based compensation | | 2,348 | | | 1,126 | |
| System services loss, net (1) | | 417 | | | | — | | |
Other expense (2) | | 4,046 | | | | 1,293 | | |
| 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 | |
| Adjusted EBITDA | Adjusted EBITDA | | $ | 97,749 | | | $ | 116,311 | | Adjusted EBITDA | | $ | 90,886 | | | $ | 97,749 | |
________________________
(1)In light of the growth of our franchise business and in order to enhance comparability, effective January 1, 2020, the Company adopted the practice of other lodging companies with franchise businesses of excluding system services (profit) loss, net from Adjusted EBITDA; no adjustments have been made to prior period results. System services loss, net, for the three months ended March 31, 2019, was $0.6 million.
(2)Includes loss on disposal of assets and non-operating (income) expense, (income), including foreign currency transaction costs, and certain costs associated with dispositions.costs. Loss on disposal of assets totaled $3.3$1.2 million and $1.4$3.3 million, respectively.
FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share
FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share are 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”) as net income (computed in accordance with U.S. GAAP), excluding gains 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 from sales 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 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, 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.
•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.
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, the Corporation, or 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 enterprise, which is reflected in the consolidated Company results of operations; therefore, we believe these performance measures are meaningful 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 months ended March 31, 20202021 and 20192020 (in thousands, except per Paired Share data):
| | | Three Months Ended
March 31, | | | | Three Months Ended
March 31, |
| | 2020 | | 2019 | | | | 2021 | | 2020 |
| Net income per Extended Stay America, Inc. common share - diluted | Net income per Extended Stay America, Inc. common share - diluted | $ | 0.03 | | | $ | 0.12 | | | Net income per Extended Stay America, Inc.
common share - diluted | | $ | 0.01 | | | $ | 0.03 | |
| | | | | | | | | | |
| Net income attributable to Extended Stay America, Inc. common shareholders | Net income attributable to Extended Stay America, Inc. common shareholders | $ | 4,554 | | | $ | 21,934 | | | 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 | Noncontrolling interests attributable to Class B common shares of ESH REIT | 3,287 | | | 6,466 | | | Noncontrolling interests attributable to Class B common shares of ESH REIT | | 10,441 | | | 3,287 | |
| Real estate depreciation and amortization | Real estate depreciation and amortization | 48,881 | | | 47,433 | | | Real estate depreciation and amortization | | 47,755 | | | 48,881 | |
| | Gain on sale of hotel properties | | Gain on sale of hotel properties | | (12,018) | | | — | |
| Tax effect of adjustments to net income attributable to Extended Stay America, Inc. common shareholders | Tax effect of adjustments to net income attributable to Extended Stay America, Inc. common shareholders | (1,608) | | | (7,400) | | | Tax effect of adjustments to net income attributable to Extended Stay America, Inc. common shareholders | | (3,038) | | | (1,608) | |
| FFO | FFO | 55,114 | | | 68,433 | | | FFO | | 45,061 | | | 55,114 | |
| | Merger transaction expenses | | Merger transaction expenses | | 4,782 | | | — | |
| Tax effect of adjustments to FFO | | Tax effect of adjustments to FFO | | (406) | | | — | |
| Adjusted FFO | Adjusted FFO | $ | 55,114 | | | $ | 68,433 | | | Adjusted FFO | | $ | 49,437 | | | $ | 55,114 | |
| Adjusted FFO per Paired Share - diluted | Adjusted FFO per Paired Share - diluted | $ | 0.31 | | | $ | 0.36 | | | Adjusted FFO per Paired Share - diluted | | $ | 0.28 | | | $ | 0.31 | |
| Weighted Average Paired Shares outstanding - diluted | 178,171 | | | 188,576 | | | |
| Weighted average Paired Shares outstanding - diluted | | Weighted average Paired Shares outstanding - diluted | | 178,549 | | | 178,171 | |
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 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 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, impairment of long-lived assets, gain on sale of hotel properties, merger transaction expenses, system services (profit) loss, net and other expenses such as loss on disposal of assets, non-operating (income) expense, (income), including foreign currency transaction costs and certain costs associated with 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 and 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 one 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 or 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 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 months ended March 31, 20202021 and 20192020 (in thousands, except per Paired Share data):
| | | | Three Months Ended
March 31, | | | Three Months Ended
March 31, | |
| | | 2020 | | 2019 | | | 2021 | | 2020 | |
| Net income per Extended Stay America, Inc. common share - diluted | Net income per Extended Stay America, Inc. common share - diluted | | $ | 0.03 | | | $ | 0.12 | | | Net income per Extended Stay America, Inc. common
share - diluted | $ | 0.01 | | | $ | 0.03 | | |
| | Net income attributable to Extended Stay America, Inc. common shareholders | Net income attributable to Extended Stay America, Inc. common shareholders | | $ | 4,554 | | | $ | 21,934 | | | 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 | Noncontrolling interests attributable to Class B common shares of ESH REIT | | 3,287 | | | 6,466 | | | Noncontrolling interests attributable to Class B common shares of ESH REIT | 10,441 | | | 3,287 | | |
| Paired Share Income | Paired Share Income | | 7,841 | | | 28,400 | | | Paired Share Income | 12,362 | | | 7,841 | | |
| System services loss, net(1) | | 417 | | | — | | | |
Other expense(2) | | 4,046 | | | 1,293 | | | |
| 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 | Tax effect of adjustments to Paired Share Income | | (147) | | | (202) | | | Tax effect of adjustments to Paired Share Income | 464 | | | (147) | | |
| Adjusted Paired Share Income | Adjusted Paired Share Income | | $ | 12,157 | | | $ | 29,491 | | | Adjusted Paired Share Income | $ | 7,378 | | | $ | 12,157 | | |
| Adjusted Paired Share Income per Paired Share – diluted | Adjusted Paired Share Income per Paired Share – diluted | | $ | 0.07 | | | $ | 0.16 | | | Adjusted Paired Share Income per Paired Share – diluted | $ | 0.04 | | | $ | 0.07 | | |
| Weighted average Paired Shares outstanding – diluted | Weighted average Paired Shares outstanding – diluted | | 178,171 | | | 188,576 | | | Weighted average Paired Shares outstanding – diluted | 178,549 | | | 178,171 | | |
_________________________
(1)In light of the growth of our franchise business and in order to enhance comparability, effective January 1, 2020, the Company adopted the practice of other lodging companies with franchise businesses of excluding system services (profit) loss, net from Adjusted Paired Share Income; no adjustments have been made to prior period results. System services loss, net, for the three months ended March 31, 2019, was $0.6 million.
(2)Includes loss on disposal of assets and non-operating (income) expense, (income), including foreign currency transaction costs, and certain costs associated with dispositions.costs. Loss on disposal of assets totaled $3.3$1.2 million and $1.4$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 as 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 $92.3$91.3 million and $102.0$92.3 million for the three months ended March 31, 2021 and 2020, and 2019, respectively. Similar to our decreases in RevPAR and Adjusted EBITDA, the decrease in our cash flow from operations was disproportionately attributable to a significant deterioration in performance we experienced in the last three to four weeks of the three months ended March 31, 2020, due to the effects of the COVID-19 pandemic. We expect cash flow from operations to experience a materially larger decrease in the three months ended June 30, 2020 due to macroeconomic conditions related to the COVID-19 pandemic. Actual results are subject to a high degree of uncertainty due to the volatility of macroeconomic trends and the evolving nature of the pandemic.
Current liquidity requirements consist primarily of funds necessary to pay for (i) hotel operating expenses, (ii) capital expenditures, including capital expenditures incurred to complete the construction of two new hotels in process and select ongoingcertain hotel renovations, (iii) investments in franchise management and other fee-based programs, (iv) general and administrative expenses, including expenses related to our pending merger, (v) debt service obligations, including interest expense, (vi) income taxes, (vii) Corporation and required ESH REIT distributions and (viii) certain other growthcontinued focus on our core operations and strategic initiatives (see “—Overview”).business strategy,
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. We expect to fund our current liquidity requirements from a combination of cash on hand, cash flow generated from operations 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, which we fully drew down in March 2020.
The COVID-19 pandemic has given risehad 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 significant uncertainty with respect to liquidity andgenerate positive cash flow generation. As discussed above, in responsefrom operations, net of interest and capital expenditures. It remains difficult to the current crisis, we have chosenpredict 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. InAs of March 2020,31, 2021, the Company drew the $399.8 million then-availableCompany's total available borrowing capacity under each of its revolving credit facilities as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic. See “Item 1A. Risk Factors - The continuing crisis resulting from the spread of COVID-19 could negatively impact our current liquidity position, limit or restrict our ability to access new sources of capital and our ability to maintain compliance with the financial covenants and other terms of the agreements governing our existing indebtedness."was $390.0 million.
Long-term liquidity requirements consist of funds necessary to (i) make future hotel renovations (ii) construct new Extended Stay America-branded hotels, (iii) acquire additional hotel properties and/or other companies, (iv) repurpose or rebuild certain existing hotels (v)(iii) execute our other growthbusiness strategy and strategic initiatives, (vi)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, (vii)(v) repay and/or refinance outstanding amounts under our existing debt obligations, including our revolving credit facilitiesthe Corporation Revolving Credit Facility due in September 2024, the 2025 Notes due in May 2025, the ESH REIT Term Facility due in September 2026 and the 2027 Notes due in October 2027. 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 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 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, which substantially increased during the three months ended March 31, 2020 with the drawdown of approximately $400 million of borrowing capacity under our revolving credit facilities, the value of our unencumbered assets, 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.
Business and Regulatory Environment. The COVID-19 pandemic has had, and is expected to continue to have, a material adverse effect on the Company's cash flows from operations. The adverse impact of the pandemic on our cash flows from operations is likely to be more significant in three months ended June 30, 2020 than in the three months ended March 31, 2020. The length and severity of such economic impact is highly uncertain. See Notes 14 and 12 to the condensed consolidated financial statements of Extended Stay America, Inc. and ESH Hospitality, Inc., respectively, included in Item 1 of this combined quarterly report on Form 10-Q, for detail with respect to steps taken as a result of the pandemic and its impact.
Although we believe there is an opportunity to serve extended stay guests in the current environment, including new demand from doctors and other medical staff that have traveled throughout the U.S. to combat the COVID-19 pandemic, it is difficult to predict when the pre-pandemic demand and pricing for our hotels will resume, if at all.
Cash Balances. The Company had unrestricted cash and cash equivalents of $710.1$357.9 million and $346.8$396.8 million at March 31, 20202021 and December 31, 2019,2020, respectively. Based upon the current level of operations, management believes that our cash flow from operations, together with our cash balances, including the $399.8$9.8 million of borrowings byunder the Company in March 2020 under its revolving credit facilities,Corporation's Revolving Credit Facility, is expected to be adequate to meet the Company’s anticipated funding requirements and business objectives for the foreseeable future. Nonetheless,However, the length and severity of the COVID-19 pandemic and its economic impact continues to be highly uncertain and furtherthe 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.
Debt Obligations. During the three months ended March 31, 2021, the Company 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 and ESH REIT had $40.0 million and $350.0 million of available borrowing capacity, respectively, under each of their respective credit facilities.
In May 2020, the Company entered into an amendment to the Corporation 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 continued compliance with financial covenants under its debt obligations could be impacted by current or future economic conditions associated with the COVID-19 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 agreements governing the Company's indebtedness, upon which the amount outstanding could be accelerated and may raise substantial doubt about our ability to continue as a going concern.
On May 6, 2020, the Company executed an amendment to the Corporation Revolving Credit Facility and 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 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.
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 Form 10-Q, for additional detail related to our debt obligations and related covenants and “Item 1A. Risk Factors - The continuing crisis resulting from the spread of COVID-19 could negatively impact our current liquidity position, limit or restrict our ability to access new sources of capital and our ability to maintain compliance with the financial covenants and other terms of the agreements governing our existing indebtedness."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 extensions, the combined Paired Share repurchase program currently authorizes the Corporation and ESH REIT to purchase up to $550$550.0 million in Paired Shares through December 31, 2020.2021. 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 March 31, 2020,2021, the Corporation and ESH REIT had repurchased and retired 28.6 million Paired Shares for $283.0 million and $166.4 million, including transaction fees, respectively, and $101.1 million remained available under the combined Paired Share repurchase program. While the Company may continue to repurchase Paired Shares at management's discretion, due to the COVID-19 pandemic, we believe it is in the Company's best interest to preserve current liquidity for business and operational needs and, thus, we do not expect to make any repurchases of Paired Shares in the foreseeable future.
Distributions. On May 6, 2020, the Board of Directors of ESH REIT declared a cash distribution of $0.01 per Class A and Class B common share for the first quarter of 2020 payable on June 4, 2020 to shareholders of record as of May 21, 2020.
The following table outlines distributions declared or paid to date in 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Declaration Date | | Record Date | | Date Paid/Payable | | ESH REIT Distribution | | Corporation Distribution | | Total Distribution |
| 2/26/2020 | | 3/12/2020 | | 3/26/2020 | | $0.14 | | $0.09 | | $0.23 |
| 5/6/2020 | | 5/21/2020 | | 6/4/2020 | | $0.01 | | $— | | $0.01 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
| | | | | | | | | | |
| | | | | | | | | | |
ForWe do not expect to pay our regular quarterly distribution during the remainderpendency of 2020, duetransactions 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 impactclosing of up to $1.75 per share of Corporation common stock, in which case the COVID-19 pandemic on current and long-term liquidity, we intend to decrease our prior distribution ratecash consideration paid in the merger in respect of $0.23 per Paired Share per quarter, subject to continuing compliance witha share of Corporation common stock shall be reduced by the requirements to qualify and maintain the REIT statusamount of ESH REIT and our ongoing interest in delivering returns to our shareholders. We continue to monitor each of the preceding factors and expect further potential changes in our distribution amounts in each of the third and fourth quarters of 2020.such Special Dividend. See “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 March 31, 2020,2021, represents 59%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 Franchise. In March 2020, in response to the COVID-19 pandemic and the resulting macroeconomic volatility and economic impact, the Corporation fully drew the available capacity under the Corporation Revolving Credit Facility and borrowed $49.8 million to preserve flexibility and its current and long-term liquidity.
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) any debt service obligations, (iv) income taxes, (v) investments in its franchise management and other fee programs and (vi) Corporation distributions and (vii) repayment of its 8.0% mandatorily redeemable voting preferred stock due November 2020, which totaled $7.1 million as of March 31, 2020, and $0.6 million after the redemption of $6.4 million on April 27, 2020.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 andor borrowings from ESH REIT, as lender, under the Corporation Intercompany Facility (defined below), as well as cash flow generated from operations, including distribution income it receives in respect of its ownership of 100% of the Class A common stock of ESH REIT. As discussed above, the Company has taken steps to reduce both general and administrative and hotel operating expenses, as well as certain capital expenditures, in order to preserve current liquidity.
The Corporation’s long-term liquidity requirements include the repayment of outstanding amounts under its revolving credit facility, which was fully drawn in March 2020.the Corporation Revolving Credit Facility, and the repayment of outstanding amounts, if any, under the Corporation Intercompany Facility. See Note 7 to the condensed consolidated financial statements of
Extended Stay America, Inc., included in Item 1 of this combined quarterly report on Form 10-Q, for additional detail on the Corporation’s debt obligations.detail.
The Corporation may continue to pay distributions on its common stock to meet a portion of our Paired Share distributions. The Corporation’s ability to pay distributions on its common stock 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, all of which have been negatively impacted as a result of the COVID-19 pandemic, as well 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 will continue to beis at the discretion of the Corporation’s Board of Directors. Due to
During the impactthree months ended March 31, 2021, the Corporation repaid $40.0 million under the Corporation Revolving Credit Facility. As of March 31, 2021, the COVID-19 pandemic, foroutstanding balance under the remainderCorporation 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, expects that such distributions will be materially reduced in orderas 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 preserve current$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 long-term liquiditythe facility matures on July 2, 2025. Obligations under the Corporation Intercompany Facility and in lightguarantees thereof are unsecured and fully subordinated to the obligations of the unknown duration and severity of the COVID-19 pandemic,Corporation under the Corporation will continueRevolving Credit Facility. The Corporation has the option to approach its future capital allocation, including returning capital to its investors through dividends, share repurchases and debt retirement, withprepay outstanding balances under the goalfacility without penalty. As of balancingMarch 31, 2021, the need to preserve cash and maintain liquidity.outstanding balance under the facility was $0.
ESH REIT may in the future 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, although no intercompany credit facility currently exists between ESH REIT as lender, andmay loan funds to the Corporation as borrower,under the entities are currently assessingCorporation Intercompany Facility, subject to the benefits and requirements of entering into such a facilityconditions contained in the future, which would provide an additional cash movement alternative for providing the Corporation funding for its cash needs, including the Corporation’s required operating lease payments to ESH REIT. The entry into an intercompany loan may require certain waivers under ourRevolving Credit Facility and other existing credit facilities and we cannot assure you that the lenders under our existing credit facilities will provide such waivers.debt agreements.
Based upon the current level of operations, management believeswe believe that the Corporation’s cash position which includes the proceeds of the fully drawn Corporation Revolving Credit Facility, 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 existing amended and restated leases expire in October 2023, and at such time, we expect minimum and percentage rents to be adjusted to reflect then-current market terms. Percentage rents from the Operating Lessees are expected to decrease meaningfully for the year ending December 31, 2020 as a result of a decline in leased hotel revenues expected due to macroeconomic conditions related to the COVID-19 pandemic. In March 2020, as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic, ESH REIT fully drew the then-available capacity of $350.0 million under the ESH REIT Revolving Credit Facility.
ESH REIT’s current liquidity requirements include funds necessary to pay (i) fixed 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 performcomplete certain hotel renovations, constructthe completion of construction of two new hotels in-process and acquire additional hotel properties and/rebranding hotels to the Extended Stay America Suites brand or other lodging companiesthe Extended Stay America Premier Suites brand, vii) draws made by the Corporation on the Corporation Intercompany Facility and (vii)(viii) the payment of required REIT distributions.
ESH REIT’s long-term liquidity requirements consist of funds necessary to (i) complete future hotel renovations, (ii) repurpose and/or rebuild certain of ESH REIT’s existing hotel properties, (iii) construct new including at those hotels which may rebrand to the Extended Stay America-branded owned hotels, (iv)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) pay distributions (vi) repay any outstanding amounts under its revolving credit facilitythe ESH REIT Revolving Credit Facility and (vii)(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. 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, as they have been in prior periods, 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.
In light of the unknown duration and severity of the COVID-19 pandemic, ESH REIT will continue to approach its future capital allocation, including returning capital to its shareholders (including the Corporation) through dividends, share repurchases and debt retirement, with the goal of balancing the need to preserve cash, maintain liquidity as well as compliance with REIT distribution rules.
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 on ESH REIT’s debt obligations.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 as may be amended and supplemented from time to time (the “Unsecured“ESH REIT Intercompany Facility”). Under the UnsecuredESH 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, 2020,2021, the outstanding balance under the UnsecuredESH REIT Intercompany Facility was $0.
From time to time, theThe 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, (iii) outstanding debt obligations or (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 funds to ESH REIT under the UnsecuredESH REIT Intercompany Facility, or an additional intercompany facility, subject to the conditions contained in the ESH REIT Credit Facilities, the 2027 Notes, the 2025 Notes and the Unsecured Intercompany Facility. See Note 7 to the condensed consolidated financial statements of ESH Hospitality, Inc., included in Item 1 of this quarterly report on Form 10-Q, for additional detail on ESH REIT’sexisting debt obligations. In light of the effect of the COVID-19 pandemic, theagreements. The Corporation does not expect to return additional cash to ESH REIT in the foreseeable future to the extent it is not required under existing agreements or applicable law.
Based upon the current level of operations, management believeswe believe that ESH REIT’s cash position, which includes the proceeds of the fully drawn ESH REIT Revolving Credit Facility, cash flow generated from operations and, 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 Three Months Ended March 31, 20202021 and March 31, 20192020
We had total cash, cash equivalents and restricted cash of $725.0$371.0 million and $303.9$725.0 million at March 31, 20202021 and 2019,2020, respectively. The following table summarizes the changes in our cash, cash equivalents and restricted cash as a result of operating, investing and financing activities for the three months ended March 31, 20202021 and 20192020 (in thousands):
| | | Three Months Ended March 31, | | | | Three Months Ended March 31, | |
| | 2020 | | 2019 | | Change ($) | | 2021 | | 2020 | | Change ($) |
| Cash provided by (used in): | Cash provided by (used in): | | | | | | Cash provided by (used in): | | | | | |
| Operating activities | Operating activities | $ | 92,285 | | | $ | 102,039 | | | $ | (9,754) | | Operating activities | $ | 91,346 | | | $ | 92,285 | | | $ | (939) | |
| Investing activities | Investing activities | (53,623) | | | (55,132) | | | 1,509 | | Investing activities | (8,513) | | | (53,623) | | | 45,110 | |
| Financing activities | Financing activities | 324,827 | | | (46,338) | | | 371,165 | | Financing activities | (121,745) | | | 324,827 | | | (446,572) | |
| Effects of changes in exchange rate on cash and cash equivalents | Effects of changes in exchange rate on cash and cash equivalents | (150) | | | 31 | | | (181) | | Effects of changes in exchange rate on cash and cash equivalents | — | | | (150) | | | 150 | |
| Net increase in cash and cash equivalents | $ | 363,339 | | | $ | 600 | | | $ | 362,739 | | |
| 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 $91.3 million for the three months ended March 31, 2021, compared to $92.3 million for the three months ended March 31, 2020, compared to $102.0 million for the three months ended March 31, 2019, a decrease of $9.8$0.9 million. The decrease in cash flows provided by operating activities was due to a result of a slight decline in hotel operating performance, specificallyincome, primarily due to a 6.4%5.5% decrease in RevPAR,ADR driven by the negative impact of the COVID-19 pandemic, as well as moderate increasespartially offset by a 310 bps increase in hotel operating expenses.occupancy.
Cash Flows used in Investing Activities
Cash flows used in investing activities totaled $8.5 million for the three months ended March 31, 2021, compared to $53.6 million for the three months ended March 31, 2020, compared to $55.1 million for the three months ended March 31, 2019, a decrease of $1.5$45.1 million. The 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 $0.7$24.1 million. In addition, cash flows used in investing activities decreased as a result of $21.9 million as well as an $0.8 million increase in proceeds received from insurance recoveries.the disposition of two hotels during the three months ended March 31, 2021, whereas no hotel properties were sold during the three months ended March 31, 2020.
Cash Flows (used in) provided by (used in) Financing Activities
Cash flows used in financing activities totaled $121.7 million for the three months ended March 31, 2021 compared to cash flows provided by financing activities totaledof $324.8 million for the three months ended March 31, 2020 compared to cash2020. Cash flows used in financing activities of $46.3 million for the three months ended March 31, 2019. Cash flows provided by financing activities increased due to the Company borrowing $399.8 million under the ESH REIT and ESA revolving credit facilities, partially offset by $31.1 million in Paired Share repurchases.
financing activities changed due to a $439.7 million decrease in net proceeds received from financing transactions and an increase in Paired Share distributions of $37.1 million, partially offset by a $31.1 million decrease in Paired Share repurchases.
Sources and Uses of Cash – ESH REIT
The following cash flow table and comparisons are provided for ESH REIT:
Comparison of Three Months Ended March 31, 20202021 and March 31, 20192020
ESH REIT had total cash and cash equivalents of $628.9$288.0 million and $159.4$628.9 million at March 31, 20202021 and 2019,2020, respectively. The following table summarizes the changes in ESH REIT’s cash and cash equivalents as a result of operating, investing and financing activities for the three months ended March 31, 20202021 and 20192020 (in thousands):
| | | Three Months Ended March 31, | | | | Three Months Ended March 31, | |
| | 2020 | | 2019 | | Change ($) | | 2021 | | 2020 | | Change ($) |
| Cash provided by (used in): | Cash provided by (used in): | | | | | | Cash provided by (used in): | | | | | |
| Operating activities | Operating activities | $ | 108,295 | | | $ | 102,366 | | | $ | 5,929 | | Operating activities | $ | 108,155 | | | $ | 108,295 | | | $ | (140) | |
| Investing activities | Investing activities | (52,957) | | | (53,665) | | | 708 | | Investing activities | (6,682) | | | (52,957) | | | 46,275 | |
| Financing activities | Financing activities | 277,415 | | | (67,795) | | | 345,210 | | Financing activities | (189,199) | | | 277,415 | | | (466,614) | |
| | Net increase (decrease) in cash and cash equivalents | $ | 332,753 | | | $ | (19,094) | | | $ | 351,847 | | |
| 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 $108.2 million for the three months ended March 31, 2021 compared to $108.3 million for the three months ended March 31, 2020, compared to $102.4 million for the three months ended March 31, 2019, an increasea decrease of $5.9$0.1 million. This increase in cash flows from operating activities was due to contractual increases in fixed minimum rents, the addition of four hotel properties to the leased assets and the management of short-term working capital.
Cash Flows used in Investing Activities
Cash flows used in investing activities totaled $6.7 million for the three months ended March 31, 2021 compared to $53.0 million for the three months ended March 31, 2020, compared to $53.7 million for the three months ended March 31, 2019, a decrease of $0.7$46.3 million. The decrease in cash flows used in investing activities was due to a $0.8 million increase in proceeds from insurance recoveries, partially offset by a $0.1$25.3 million net increasedecrease in investment in property and equipment, including development in process and intangible assets. In addition, cash flows used in investing activities decreased as a result of $21.9 million in proceeds received from the disposition of two hotels during the three months ended March 31, 2021, whereas no hotel properties were sold during the three months ended March 31, 2020.
Cash Flows (used in) provided by (used in) Financing Activities
Cash flows used in financing activities totaled $189.2 million for the three months ended March 31, 2021 compared to cash flows provided by financing activities totaledof $277.4 million for the three months ended March 31, 2020 compared to cash2020. Cash flows used in financing activities of $67.8changed due a $350.0 million for the three months ended March 31, 2019. Cash flows provided bydecrease in net proceeds received from financing activities increased due totransactions and an increase in ESH REIT borrowing $350.0Class A and Class B common distributions of $128.3 million, under the ESH REIT Revolving Credit Facility, partially offset by a decrease of $11.4 million in ESH REIT Class 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 three months ended March 31, 20202021 and 2019,2020, the Company incurred capital expenditures, including development and construction in process, of $54.6$30.4 million and $55.3$54.6 million, respectively. These capital expenditures related to development and construction in process, ordinary hotel capital improvements, investments in information technology and cyclical hotel renovations. Each hotel is generally on a seven-year renovation cycle. We completed our prior cyclical hotel renovation program in mid-2017. In the fourth quarter of 2018, the Company commenced its current cyclical hotel renovation program.
With respect to our current cyclical hotel renovation program, as of March 31, 2020,2021, we have substantially completed renovations at 2231 hotels for $47.6$71.7 million. We are currently in the process of performing renovations at onethree additional hotel,hotels, with total costs incurred for this andto 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 planned hotel renovations (consisting primarilyto focus on strict underwriting standards intended to maximize returns on investment through the renovation of advance materials purchases) of $11.7 million.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, including current and future cyclicalhotel rebranding, hotel renovations, buildingcompleting construction of new hotels we expect to own and operate, acquiring and converting existing hotels, to the Extended Stay America brand and repurposing and/or rebuilding certain of our hotel properties, 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 Facilityintercompany facilities and, in certain instances, proceeds from asset sales.
Additionally, in response to the COVID-19 pandemic, the Company, specifically ESH REIT, has delayed certain non-guest facing capital investments, as well as hotel renovations in the Southeastern U.S. and construction of four new hotels (see "—Liquidity and Resources—Company Overview"). In 2020, we expect to incur capital expenditures between $160 million and $190 million. As part of these capital expenditures, we expect to spend approximately $65 to $75 million for construction of new hotels, $20 to $25 million for hotel renovations and $10 to $15 million for incremental information technology investments.
Our Indebtedness
As of March 31, 2020,2021, the Company’s total indebtedness was $3.0$2.6 billion, net of unamortized deferred financing costs and debt discounts, including $7.1 million of Corporation mandatorily redeemable preferred stock.discounts. ESH REIT’s total indebtedness at March 31, 20202021 was $3.0$2.6 billion, net of unamortized deferred financing costs and debt discounts. See Note 7 to the condensed consolidated financial statements of Extended Stay America, Inc. and ESH Hospitality, Inc., included in Item 1 of this quarterly report on Form 10-Q, for additional detail related to our debt obligations.
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 condensed consolidated financial statements of Extended Stay America, Inc. and Note 11 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 information with respect to commitments and contingencies, including lease 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 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 amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the 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., included in Item 8 of the 20192020 Form 10-K, 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, investments, rental revenue recognition and income 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 condensed consolidated financial statements of Extended Stay America, Inc. and ESH Hospitality, Inc., included in Item 1 of 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 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
The Corporation currently has limited exposure to market risk from changes in interest rates. As of March 31, 2020,2021, the Corporation's variable rate debt consisted of $49.8$9.8 million drawn on its revolving credit facility. If market rates of interest were to fluctuate by 1.0%, interest expense would increase or decrease by $0.5$0.1 million annually, assuming that the amount of outstanding Corporation variable rate debt remains at $49.8$9.8 million.
ESH REIT
As of March 31, 2020, $1.0 billion2021, $621.4 million of ESH REIT’s outstanding gross debt of $3.0$2.7 billion 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 March 31, 20202021 was $150.0 million, which is reduced by $50.0 million, every six months untiland the swap matures in September 2021. The remaining $827.8$571.4 million of outstanding variable interest rate debt 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 $8.3$5.7 million annually, assuming that the amount of outstanding ESH REIT unhedged variable interest rate debt remains at $827.8$571.4 million.
Item 4. Controls and Procedures
Controls and Procedures (Extended Stay America, Inc.)
Disclosure Controls and Procedures
As of March 31, 2020,2021, 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 March 31, 2020,2021, 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 litigation and claims 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, 2020,2021, 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 three months ended June 30,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, 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,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, such matters, individually or in the aggregate, will not have a material
adverse effect on the Company’s condensed consolidated financial statements, results of operations or liquidity or on ESH REIT’s condensed consolidated financial statements, results of operations or liquidity.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Reportcombined quarterly report on Form 10-Q, you should carefully consider the risk factors discussed in “Part I.Part I, Item 1A. Risk1A “Risk Factors” in our combined annual report on2020 Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on February 26, 2020 (the "2019 Form 10-K"), as well as the risk factors below, which supplement and should be read in conjunction with the risk factors disclosed in our 2019 Form 10-K, any and all of10-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 currently deem to be immaterial also may adversely affect our business, financial condition and/or operating results. The potential effects of COVID-19 could intensify or otherwise affect many of our otherIn addition to the risk factors that are includedpreviously disclosed in our 20192020 Form 10-K, including, but not limited to,the following risks inherentrelate to the lodging industry, macroeconomic factors beyond our control,proposed Mergers:
Failure to consummate the proposed Mergers within the expected timeframe or at all could have a material adverse impact on our business, strategy, competition for hotel guestsresults of operations and managementfinancial 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 franchise contractsother customary closing conditions. There can be no assurance that these and risks relatedother conditions to doing business with third-party hotel owners. Because the COVID-19 situation is inherently continuously evolving, additional impacts to our risk factors that are further describedclosing will be satisfied in our 2019 Form 10-K are uncertain.
The ongoing COVID-19 pandemic has negatively affectedMerger 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 likely continuebe required to negativelypay 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 conditioncondition.
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 cash flows.
The COVID-19 pandemic has significantly affected the global economyannouncement and strained the lodging industry due to travel restrictions and stay-at-home directives that have resulted in cancellations and reduced travel. Currently, there are no fully effective vaccines, the timing and efficacy of any future vaccine is uncertain and there is no widespread treatment for COVID-19. As such, COVID-19 has had a negative impact on our results for the three months ended March 31, 2020, and we expect it to continue to negatively affect future results. The current and uncertain future impactpendency of the COVID-19 pandemic, including its effect on the ability or desire of people to travel and use our hotel properties, is expected to continue to negativelyproposed Mergers may adversely affect our business, results of operations and financial condition and cash flows.condition.
The U.S. federal governmentUncertainty about the effect of the proposed Mergers on our employees, customers and other nationalparties may have an adverse effect on our business, results of operation and local governments have restricted travel andfinancial condition. These risks to our business include the following, all of which could potentially expand those restrictions. We have been, and expect to continue to be negatively affectedexacerbated by government regulations and travel advisories to fight the pandemic. Even once travel advisories and restrictions are lifted, lodging demand may remain weak for an undetermined length of time and we cannot predict if or when our ADR and occupancy rates will return to pre-outbreak levels. Adverse changesa delay in the perceivedcompletion of or actual economic climate, including higher unemployment rates, declines in income levels and lossfailure to consummate the proposed Mergers:
•the impairment of personal wealth resulting from the impact of COVID-19, will likely continue to negatively affect travel and lodging demand. If efforts to mitigate the spread of COVID-19 fail, government officials may order closures of our properties or impose further restrictions on travel or we may elect on a voluntary basis to close certain of our properties.Any of these events could result in significant disruptions to our operations and a further decrease in demand for our hotels. If the value of our properties significantly declines, we may incur impairment charges, which would adversely impact our results of operations.
We have reduced operating costs, including the labor hours for employees on staff at our properties. The steps we have taken to reduce operating costs and further steps we may take in the future to reduce costs may negatively affect our brand reputation and ability to attract, retain and retain employees. Even after the COVID-19 pandemic subsides, we could still experience long-term impacts onmotivate our operating costs as a result of attempts to counteract future outbreaks of COVID-19 or other viruses through, for example, enhanced health and hygiene requirements in one or more regions or other such measures.In addition, we have currently adopted a policy for corporate employees, to work from home to the extent possible and our operations could be negatively affected by such policy to the extent certain operational resources are not available and efficiency declines as a result. Should additional team members become ill from COVID-19 and unable to work, the attention of management could be diverted. Such disruptions to our businesses could increase our operating costs and further decrease our operating efficiencies.including key personnel;
We cannot predict the impact that COVID-19 will have on third-party owners, service providers, travel agencies,•difficulties maintaining relationships with customers, suppliers and other vendors. business partners;
•In particular, if third-party ownersdelays or deferments of certain business decisions by our hotels are unablecustomers, suppliers and other business partners;
•the inability to maintain their hotels and service indebtedness secured by their hotels,pursue alternative business opportunities or make appropriate changes to our results of operations and reputation could suffer. Bankruptcies, sales or foreclosures involvingbusiness because the Merger Agreement requires us to conduct our hotels could, in some cases, resultbusiness in the terminationordinary course consistent with past practice and not engage in certain types of our management or franchise agreements, which would negatively affect our resultstransactions prior to the completion of operations. Hotel owners with financial difficulties may be unable or unwilling to pay us amounts that we are entitled to on a timely basis or at all. Current and ongoing economic conditions also could affect our ability to enter into management and franchise agreements with potential third-party owners of our hotels, who may be unable to obtain financing or face other delays in developing hotel projects. As a result, some properties in our development pipeline may not enter our system when we anticipated, or at all, and new hotels may enter our pipeline at a slower rate than in the past.
The performance of the lodging industry, including the extended stay segment, is closely linked•litigation relating to the performance of the general economy and is sensitive to business and personal discretionary spending levels, which may continue to be impacted even after the COVID-19 pandemic subsidies. Declines in corporate budgets and spending and consumer demand, concerns over a potential recession, risks affecting or reducing travel patterns, lower consumer confidence, increases in unemployment or adverse political conditions may have a material adverse effect on the revenues and profitability of our hotels, including the amount of franchise and management fee revenues we are able to generate. Moreover, we rely on the strength of regional and local economies for the performance of each of our properties.
The extent of the effects of COVID-19 on our businessproposed Mergers and the lodging industry at large is highly uncertaincosts related thereto; and will ultimately depend on future developments, including, but not limited to,
•the durationincurrence of significant costs, expenses and severity of the outbreak, the timing and availability of vaccinationsfees for professional services and other treatments to combat COVID-19, and the length of time it takes for demand and pricing to stabilize. Given the uncertainty as to the extent and timing of the potential future spread or mitigation of COVID-19 and the imposition or relaxation of protective measures, we are presently unable to estimate the full impact to our future results of operations, cash flows and financial condition.
The continuing crisis resulting from the spread of COVID-19 could negatively impact our current liquidity position, limit or restrict our ability to access new sources of capital and negatively impact our ability to maintain compliance with the financial covenants and other terms of the agreements governing our existing indebtedness.
We must maintain, renovate and improve our hotel properties in order to remain competitive, maintain the value and brand standards of our hotel properties and comply with applicable laws and regulations. Maintenance, renovations and improvements to our hotel properties create an ongoing need for cash for us or our franchisees, and, to the extent they cannot be funded from cash generated by operations, funds must be borrowed or otherwise obtained. Our hotels are our primary source of income and cash flow from operations. Due to the COVID-19 pandemic, our operations have been negatively impacted, which has resulted in cash flow from operations of $92.3 million for the three months ended March 31, 2020, which was a decrease of $9.8 million compared to the three months ended March 31, 2019. In light of this decrease in cash flows and the expectation that our cash flows will continue to decrease substantially for a period of time that cannot be predicted with certainty, in March 2020, we fully drew on approximately $400 million in borrowing capacity under our revolving credit facilities, leaving us no borrowing availability under such credit facilities.
We may be required to raise additional capital in the future and our access to and cost of financing will depend on, among other things, global economic conditions, conditions in the global financing markets, the availability of sufficient amounts of financing, our prospects and our credit ratings. If our credit ratings were to be downgraded, or general market conditions were to ascribe higher risk to our rating levels, our industry or us, our access to capital and the cost of any debt financing would likely be negatively affected. In addition, the terms of future debt agreements could include more restrictive covenants, or require incremental collateral, which may further restrict our business operations. There is no guarantee that debt financings will be available in the future to fund our obligations, or that they will be available on terms consistent with our expectations.
Although we believe we have sufficient resources to fund our operations for a period of time beyond the expected duration of the COVID-19 crisis, we have no control over and cannot predict the length of the crisis nor any government response to the crisis.The negative impact to our operations as a result of the COVID-19 pandemic has substantially reduced RevPAR, due to both the significant decrease in occupancy rates and ADR. If we are unable to generate sufficient revenues from our hotels or if we continue to experience significant declines in demand for our hotels, this would negatively impact our ability to remain in compliance with our debt covenants or meet our payment obligations. We may not be able to meet our debt covenants or pay our obligations as they become due and could risk default under the agreements governing our indebtedness, including our credit facilities and indentures governing our senior notes, upon which the amount outstanding could be accelerated, and raise substantial doubt about our ability to continue as a going concern.
In light of these concerns, we have amended the Corporation Revolving Credit Facility to, among other things, suspend the quarterly tested leverage covenant for the Four Quarter Suspension Period. In addition, 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. 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. We cannot assure you that the Corporation Revolving Credit Facility amendment will be the only covenant suspension, waiver or amendment needed by us or that this amendment will prevent us from future covenant breaches and the acceleration of our indebtedness.
Since the outbreak, the market price of our Paired Shares has declined. If the share price continues to be depressed or decreases further, it may cause a trigger event for impairment testing of certain tangible and intangible assets, including
goodwill, long-lived assets and our trademark, which could have an impact on the value of collateral pledgedtransaction costs in connection with our credit facilities.
As a result of and in response to the COVID-19 pandemic, the Corporation and ESH REIT expect to, subject to compliance with the requirements for qualification as a REIT, materially reduce the amount of cash distributions paid to holders of our Paired Shares during fiscal year 2020.proposed Mergers.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuers and Affiliated Purchasers
The following table sets forth all purchases made by or on behalf of the Corporation and ESH REIT or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Exchange Act, ofNo Paired Shares during the first quarter of 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| 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)(3) | | Maximum dollar value that may yet be purchased under the program(3)(4) |
| January 1 - January 31, 2020 | 1,617,674 | | | $ | 14.20 | | | 1,617,674 | | | $ | 109,207,433 | |
| February 1 - February 29, 2020 | 619,280 | | | $ | 13.02 | | | 619,280 | | | $ | 101,143,967 | |
| March 1 - March 31, 2020 | — | | | $ | — | | | — | | | $ | 101,143,967 | |
| 2,236,954 | | | | | 2,236,954 | | | $ | 101,143,967 | |
________________________
(1)Represents an equal number of Corporation common shares and ESH REIT Class B common shares, which are paired together on a one-for-one basis to form Paired Shares.
(2)In the aggregate, the Corporation and ESH REIT paid $19.8 million and $11.3 million, including transaction fees, respectively, for their respective portion of the Paired Shares that were repurchased and retired during the three months ended March 31, 2020.2021.
(3)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 extensions, the combined Paired Share repurchase program currently authorizes the Corporation and ESH REIT to purchase up to $550 million in Paired Shares through December 31, 2020.2021. 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).
(4)As of month end.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
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Exhibit Number | Description |
| Separation Agreement betweenand 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 Ames Flynn, dated as of January 30, 2020ESH Hospitality, Inc. (filed as Exhibit 10.12.1 to the Registrant’sRegistrant's Current Report on Form 8-K (File No. 001-36190) filed January 31, 2020, and incorporated by reference herein). Agreement between Extended Stay America, Inc. and Ames Flynn, dated as of January 30, 2020 (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-36190) filed January 31, 2020,March 16, 2021, and incorporated by reference herein). |
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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.
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| EXTENDED STAY AMERICA, INC. | |
| | |
Date: May 6, 202010, 2021 | By: | /s/ Bruce N. Haase |
| | Bruce N. Haase |
| | President and Chief Executive Officer |
| | |
Date: May 6, 202010, 2021 | By: | /s/ Brian T. NicholsonDavid A. Clarkson |
| | Brian T. NicholsonDavid A. Clarkson |
| | Chief Financial Officer |
| | |
| ESH HOSPITALITY, INC. | |
| | |
Date: May 6, 202010, 2021 | By: | /s/ Bruce N. Haase |
| | Bruce N. Haase |
| | President and Chief Executive Officer |
| | |
Date: May 6, 202010, 2021 | By: | /s/ Brian T. NicholsonDavid A. Clarkson |
| | Brian T. NicholsonDavid A. Clarkson |
| | Chief Financial Officer |