Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
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
Charlotte, North Carolina 28277
11525 N. Community House Road, Suite 100
Charlotte, North Carolina 28277
(Address of principal executive offices, zip code)
(Address of principal executive offices, zip code)
(980) 345-1600
(980) 345-1600
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
 
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  x    No  ¨
ESH Hospitality, Inc.
Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Extended Stay America, Inc.
Yes  x    No  ¨
ESH Hospitality, Inc.
Yes  x    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
x
Accelerated filer
¨
 
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting 
company
¨
 
Emerging growth company
¨ 
 
¨
ESH Hospitality, Inc.
Large accelerated filer
x
Accelerated filer
¨
 
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting 
company
¨
 
Emerging growth company
¨ 
 
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Extended Stay America, Inc.
Yes  ¨    No  x
ESH Hospitality, Inc.
Yes  ¨    No  x
194,080,121 shares of common stock, par value $0.01 per share, of Extended Stay America, Inc., which are attached to and traded together with 194,080,121 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 April 25, 2017.
 




EXTENDED STAY AMERICA, INC.
ESH HOSPITALITY, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
 
 
Page No.
 
 



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 Act of 1933, as amended (the “Securities Act”), which are publicly traded and listed on the New York Stock Exchange (the “NYSE”) 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, Consolidations, 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 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. §1350.
We believe combining the quarterly reports on Form 10-Q of the Corporation and ESH REIT into this single report results in the following benefits:
Enhances investors’ understanding of the Corporation and ESH REIT by enabling investors, whose ownership of Paired Shares, as defined herein, gives them an ownership interest in our hotel properties through ESH REIT and in the operation of the hotels and other aspects of our business through the Corporation, to view the business as a whole;
Eliminates duplicative and potentially confusing disclosure and provides a more streamlined presentation, since a substantial amount of our disclosure applies to both the Corporation and ESH REIT; and
Creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.



1


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This combined quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of the federal securities laws. All statements other than statements of historical facts included in this combined quarterly report on Form 10-Q may be forward-looking.
Statements herein regarding our ongoing hotel renovation program, our ability to meet our debt service obligations, our future capital expenditures, our distribution policies, growth opportunities, anticipated benefits or use of proceeds from any dispositions, our plans, objectives, goals, beliefs, business strategies, future events, business conditions, results of operations, financial position and our business outlook, business trends and other information referred to under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this combined quarterly report on Form 10-Q include forward-looking statements. When used in this combined quarterly report on Form 10-Q, the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “will,” “look forward to” and variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not historical facts, and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs, estimates and projections will result or be achieved and actual results may vary 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”) on February 28, 2017 and in other filings with the SEC, 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.
We caution you that the risks, uncertainties and other factors referenced above 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 result in the consequences or affect us or our business in the way expected. In particular, no assurance can be given that any of our planned or expected strategic initiatives 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.

2


PART I — FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2017 AND DECEMBER 31, 2016
(In thousands, except share and per share data)
(Unaudited)
 
 
March 31,
2017
 
December 31,
2016
ASSETS
 
 
 
PROPERTY AND EQUIPMENT - Net of accumulated depreciation of $1,001,870 and $973,669
$
3,837,189

 
$
3,905,304

RESTRICTED CASH
21,292

 
21,614

CASH AND CASH EQUIVALENTS
64,809

 
84,158

INTANGIBLE ASSETS - Net of accumulated amortization of $8,685 and $8,350
28,048

 
28,383

GOODWILL
49,011

 
53,531

ACCOUNTS RECEIVABLE - Net of allowance for doubtful accounts of $2,036 and $2,634
20,376

 
20,837

DEFERRED TAX ASSETS
11,808

 
16,376

OTHER ASSETS
52,685

 
50,101

ASSETS HELD FOR SALE (Note 4)
41,512

 

TOTAL ASSETS
$
4,126,730

 
$
4,180,304

LIABILITIES AND EQUITY

 

LIABILITIES:

 

Term loan facilities payable - Net of unamortized deferred financing costs and debt discount
of $21,169 and $21,994
$
1,272,339

 
$
1,274,756

Senior notes payable - Net of unamortized deferred financing costs and debt discount
of $33,447 and $34,482
1,266,553

 
1,265,518

Revolving credit facilities
35,000

 
45,000

Mandatorily redeemable preferred stock - $0.01 par value, $1,000 redemption value,
8.0%, 350,000,000 shares authorized, 21,202 shares issued and outstanding
21,202

 
21,202

Accounts payable and accrued liabilities
196,087

 
193,303

Deferred tax liabilities
3,286

 
3,286

Liabilities related to assets held for sale (Note 4)
231

 

Total liabilities
2,794,698

 
2,803,065

COMMITMENTS AND CONTINGENCIES (Note 12)

 

EQUITY:

 

Common stock - $0.01 par value, 3,500,000,000 shares authorized, 194,282,370 and
195,406,944 shares issued and outstanding
1,943

 
1,957

Additional paid in capital
772,467

 
774,811

Retained earnings
24,274

 
23,679

Accumulated other comprehensive loss
(5,643
)
 
(5,615
)
Total Extended Stay America, Inc. shareholders’ equity
793,041

 
794,832

Noncontrolling interests
538,991

 
582,407

Total equity
1,332,032

 
1,377,239

TOTAL LIABILITIES AND EQUITY
$
4,126,730

 
$
4,180,304

See accompanying notes to unaudited condensed consolidated financial statements.

3


EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016
(In thousands, except per share data)
(Unaudited)
 

Three Months Ended
March 31,
 
2017
 
2016
REVENUES:

 

Room revenues
$
285,808

 
$
283,137

Other hotel revenues
5,183

 
4,421

Total revenues
290,991

 
287,558

OPERATING EXPENSES:

 

Hotel operating expenses
141,660

 
145,560

General and administrative expenses
26,307

 
24,952

Depreciation and amortization
57,671

 
53,308

Impairment of long-lived assets
12,423

 

Total operating expenses
238,061

 
223,820

OTHER INCOME
1

 
18

INCOME FROM OPERATIONS
52,931

 
63,756

OTHER NON-OPERATING INCOME
(1,221
)
 
(878
)
INTEREST EXPENSE, NET
33,606

 
46,985

INCOME BEFORE INCOME TAX EXPENSE
20,546

 
17,649

INCOME TAX EXPENSE
4,483

 
2,896

NET INCOME
16,063

 
14,753

NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
7,038

 
2,293

NET INCOME ATTRIBUTABLE TO EXTENDED STAY AMERICA, INC. COMMON SHAREHOLDERS
$
23,101

 
$
17,046

NET INCOME PER EXTENDED STAY AMERICA, INC. COMMON SHARE:

 

Basic
$
0.12

 
$
0.08

Diluted
$
0.12

 
$
0.08

WEIGHTED-AVERAGE EXTENDED STAY AMERICA, INC. COMMON SHARES OUTSTANDING:

 

Basic
195,097

 
204,310

Diluted
195,386

 
204,370

See accompanying notes to unaudited condensed consolidated financial statements.


4


EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016
(In thousands)
(Unaudited)
 
 
Three Months Ended
March 31,
 
2017
 
2016
NET INCOME
$
16,063

 
$
14,753

FOREIGN CURRENCY TRANSLATION GAIN, NET OF TAX OF $(125) AND $0
405

 
3,358

INTEREST RATE CASH FLOW HEDGE LOSS, NET OF TAX
OF $(128)
(456
)
 

COMPREHENSIVE INCOME
16,012

 
18,111

COMPREHENSIVE LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
7,061

 
957

COMPREHENSIVE INCOME ATTRIBUTABLE TO EXTENDED STAY AMERICA, INC. COMMON SHAREHOLDERS
$
23,073

 
$
19,068

See accompanying notes to unaudited condensed consolidated financial statements.


5


EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016
(In thousands, except per share data)
(Unaudited)
 
 
Common Stock
 
Additional
Paid in Capital
 
Retained Earnings
(Accumulated Deficit)
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Extended Stay
America, Inc. Shareholders' Equity
 
Non-
controlling Interests
 
Total
Equity
 
Shares
 
Amount
 
 
 
 
 
 
January 1, 2016
204,594

 
$
2,049

 
$
784,194

 
$
102,184

 
$
(8,754
)
 
$
879,673

 
$
608,684

 
$
1,488,357

Net income (loss)

 

 

 
17,046

 

 
17,046

 
(2,293
)
 
14,753

Foreign currency translation gain, net of tax

 

 

 

 
2,022

 
2,022

 
1,336

 
3,358

Repurchase of Corporation common stock and ESH REIT Class B common stock (Paired Shares)
(1,917
)
 
(19
)
 

 
(17,329
)
 

 
(17,348
)
 
(11,425
)
 
(28,773
)
Corporation common distributions - $0.02 per common share

 

 

 
(4,124
)
 

 
(4,124
)
 

 
(4,124
)
ESH REIT common distributions - $0.15 per Class B common share

 

 

 

 

 

 
(30,928
)
 
(30,928
)
ESH REIT preferred distributions

 

 

 

 

 

 
(4
)
 
(4
)
Equity-based compensation
200

 
2

 
(2,342
)
 

 

 
(2,340
)
 
2,955

 
615

BALANCE - March 31, 2016
202,877

 
$
2,032

 
$
781,852

 
$
97,777

 
$
(6,732
)
 
$
874,929

 
$
568,325

 
$
1,443,254

 
Common Stock
 
Additional
Paid in Capital
 
Retained Earnings
(Accumulated Deficit)
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Extended Stay
America, Inc. Shareholders' Equity
 
Non-
controlling Interests
 
Total
Equity
 
Shares
 
Amount
 
 
 
 
 
 
BALANCE - January 1, 2017
195,407

 
$
1,957

 
$
774,811

 
$
23,679

 
$
(5,615
)
 
$
794,832

 
$
582,407

 
$
1,377,239

Net income (loss)

 

 

 
23,101

 

 
23,101

 
(7,038
)
 
16,063

Foreign currency translation gain, net of tax

 

 

 

 
173

 
173

 
232

 
405

Interest rate cash flow hedge loss, net of tax

 

 

 

 
(201
)
 
(201
)
 
(255
)
 
(456
)
Repurchase of Corporation common stock and ESH REIT Class B common stock (Paired Shares)
(1,408
)
 
(17
)
 

 
(14,561
)
 

 
(14,578
)
 
(8,546
)
 
(23,124
)
Corporation common distributions - $0.04 per common share

 

 

 
(7,945
)
 

 
(7,945
)
 

 
(7,945
)
ESH REIT common distributions - $0.15 per Class B common share

 

 

 

 

 

 
(29,588
)
 
(29,588
)
ESH REIT preferred distributions

 

 

 

 

 

 
(4
)
 
(4
)
Adjustment to noncontrolling interest for change in ownership of ESH REIT

 

 
(746
)
 

 

 
(746
)
 
746

 

Equity-based compensation
283

 
3

 
(1,598
)
 

 

 
(1,595
)
 
1,037

 
(558
)
BALANCE - March 31, 2017
194,282

 
$
1,943

 
$
772,467

 
$
24,274

 
$
(5,643
)
 
$
793,041

 
$
538,991

 
$
1,332,032

See accompanying notes to unaudited condensed consolidated financial statements.

6


EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016
(In thousands)
(Unaudited)
 
 
Three Months Ended
March 31,
 
2017
 
2016
OPERATING ACTIVITIES:
 
 
 
Net income
$
16,063

 
$
14,753

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
57,336

 
52,973

Amortization of intangible assets
335

 
335

Foreign currency transaction loss (gain)
21

 
(878
)
Mark-to-market gain on interest rate swap
(889
)
 

Amortization and write-off of deferred financing costs and debt discount
2,025

 
11,121

Amortization of above-market ground leases
(34
)
 
(34
)
Loss on disposal of property and equipment
3,470

 
2,896

Impairment of long-lived assets
12,423

 

Equity-based compensation
2,683

 
2,680

Deferred income tax expense (benefit)
4,572

 
(18,399
)
Changes in assets and liabilities:
 
 
 
Accounts receivable, net
328

 
(1,340
)
Other assets
(1,832
)
 
(2,969
)
Accounts payable and accrued liabilities
12,463

 
21,636

Net cash provided by operating activities
108,964

 
82,774

INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(48,447
)
 
(56,907
)
Decrease (increase) in restricted cash and insurance collateral
322

 
(101,751
)
Proceeds from insurance recoveries
140

 
2,376

Net cash used in investing activities
(47,985
)
 
(156,282
)
FINANCING ACTIVITIES:
 
 
 
Principal payments on mortgage loan

 
(433,537
)
Principal payments on term loan facilities
(6,492
)
 
(366,463
)
Proceeds from senior notes, net of debt discount

 
788,000

Interest proceeds from senior notes

 
15,983

Proceeds from revolving credit facilities
65,000

 

Payments on revolving credit facilities
(75,000
)
 

Payments of deferred financing costs

 
(14,243
)
Tax withholdings related to restricted stock unit settlements
(3,245
)
 
(2,071
)
Issuance of common stock

 
6

Repurchase of common stock
(23,124
)
 
(28,773
)
Corporation common distributions
(7,957
)
 
(16,398
)
ESH REIT common distributions
(29,579
)
 
(69,810
)
ESH REIT preferred distributions

 
(8
)
Net cash used in financing activities
(80,397
)
 
(127,314
)
CHANGES IN CASH AND CASH EQUIVALENTS DUE TO CHANGES IN FOREIGN CURRENCY EXCHANGE RATES
69

 
13

NET DECREASE IN CASH AND CASH EQUIVALENTS
(19,349
)
 
(200,809
)
CASH AND CASH EQUIVALENTS - Beginning of period
84,158

 
373,239

CASH AND CASH EQUIVALENTS - End of period
$
64,809

 
$
172,430

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
Cash payments for interest, excluding prepayment and other penalties
$
18,073

 
$
18,173

Cash payments for income taxes, net of refunds of $26 and $113
$
931

 
$
14,260

NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Capital expenditures included in accounts payable and accrued liabilities
$
15,719

 
$
14,751

Deferred financing costs included in accounts payable and accrued liabilities
$

 
$
1,020

Corporation common distributions included in accounts payable and accrued liabilities
$
543

 
$
137

ESH REIT common distributions included in accounts payable and accrued liabilities
$
1,273

 
$
852

See accompanying notes to unaudited condensed consolidated financial statements.

7


EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2017 AND DECEMBER 31, 2016 AND FOR THE THREE MONTHS ENDED
MARCH 31, 2017 AND 2016
(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. On November 18, 2013, the Corporation and ESH REIT completed an initial public offering of 32.5 million Paired Shares. A "Paired Share" consists of one share of common stock, par value $0.01 per share, of the Corporation, that is attached to and trades as a single unit with one share of Class B common stock, par value $0.01 per share, of ESH REIT. The Corporation owns, and is expected to continue to own, all of the issued and outstanding Class A common stock of ESH REIT, which currently represents approximately 56% 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, presented on a consolidated basis.
As of March 31, 2017 and December 31, 2016, the Company owned and operated 626 hotel properties in 44 U.S. states, consisting of approximately 68,900 rooms, and three hotels in Canada, consisting of 500 rooms. The hotel properties are owned by wholly-owned subsidiaries of ESH REIT and are operated by wholly-owned subsidiaries of the Corporation (the “Operating Lessees”) pursuant to leases between ESH REIT and the Operating Lessees. The hotels are managed by ESA Management LLC (“ESA Management”), a wholly-owned subsidiary of the Corporation. The substantial majority of the hotels are operated under the core brand, Extended Stay America. The three hotels in Canada are operated under the brand Extended Stay Canada. The brands are owned by ESH Hospitality Strategies LLC (“ESH Strategies”), also a wholly-owned subsidiary of the Corporation.
As of March 31, 2017, the Corporation had approximately 194.3 million shares of common stock outstanding, approximately 69.0% of which were owned by the public and approximately 31.0% of which were owned by Centerbridge Partners, L.P., Paulson & Co. Inc. and The Blackstone Group L.P. and their funds or affiliates (collectively, the “Sponsors”) and senior management, including certain directors. As of March 31, 2017, ESH REIT’s common equity consisted of the following: (i) approximately 250.5 million shares of Class A common stock outstanding (approximately 56% of its common equity), all of which were owned by the Corporation, and (ii) approximately 194.3 million shares of Class B common stock outstanding (approximately 44% of its common equity), approximately 69.0% of which were owned by the public and approximately 31.0% of which were owned by the Sponsors and senior management, including certain directors. 

As of December 31, 2016, the Corporation had approximately 195.4 million shares of common stock outstanding, approximately 55.9% of which were owned by the public and approximately 44.1% of which were owned by the Sponsors and senior management, including certain directors. As of December 31, 2016, ESH REIT’s common equity consisted of the following: (i) approximately 250.5 million shares of Class A common stock outstanding (approximately 56% of its common equity), all of which were owned by the Corporation, and (ii) approximately 195.4 million shares of Class B common stock outstanding (approximately 44% of its common equity), approximately 55.9% of which were owned by the public and approximately 44.1% of which were owned by the Sponsors and senior management, including certain directors. 
Paired Share Repurchase Program
In December 2015, the Boards of Directors of the Corporation and ESH REIT authorized a combined Paired Share repurchase program for up to $100 million of Paired Shares. In February 2016, the Boards of Directors of the Corporation and ESH REIT authorized an increase of the combined Paired Share repurchase program from up to $100 million to up to $200 million of Paired Shares. In December 2016, the Boards of Directors of the Corporation and ESH REIT authorized an increase of the combined Paired Share repurchase program from up to $200 million to up to $300 million of Paired Shares and extended the maturity of the program through December 31, 2017, each effective January 1, 2017. Repurchases 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). Depending on market conditions and other factors, these repurchases may be commenced or suspended without prior notice. As of March 31, 2017, the Corporation and ESH REIT repurchased and retired approximately 10.8 million Paired Shares for approximately $100.8 million and $62.2 million, respectively, of which 4.475 million Paired Shares were repurchased and retired from certain entities affiliated with the Sponsors.

8


2017 Secondary Offering
In March 2017, certain selling stockholders (the "Selling Stockholders") sold approximately 25.0 million Paired Shares, pursuant to an automatic shelf registration statement as part of a secondary offering, of which the Corporation and ESH REIT repurchased and retired 0.625 million Paired Shares for approximately $6.6 million and $3.8 million, respectively. The Selling Stockholders consisted solely of entities affiliated with the Sponsors and did not include officers or directors of the Corporation or ESH REIT. Neither the Corporation nor ESH REIT sold Paired Shares in the secondary offering and neither received proceeds from the secondary offering. The Corporation and ESH REIT did, however, incur professional fees in connection with the secondary offering totaling approximately $0.4 million for the three months ended March 31, 2017.
Basis of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”), and include the financial position, results of operations, comprehensive income, changes in equity and cash flows of the Corporation and its consolidated subsidiaries, including ESH REIT. Third party equity interests in the Corporation's consolidated subsidiaries are presented as noncontrolling interests.  Despite the fact that each share of Corporation common stock is paired on a one-for-one basis with each share of ESH REIT Class B common stock, the Corporation does not own the ESH REIT Class B common stock; therefore, ESH REIT Class B common stock represents a third party equity interest. As such, the rights associated with the ESH REIT Class B common stock, along with other third party equity interests in ESH REIT, which include 125 shares of preferred stock, are presented as noncontrolling interests in the accompanying unaudited condensed consolidated financial statements. Changes in ownership interests in a consolidated subsidiary that do not result in a loss of control are accounted for as equity transactions. All intercompany accounts and transactions have been eliminated.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Presentation—Certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP have been condensed or omitted in the accompanying unaudited condensed consolidated financial statements. The Company believes the disclosures made are adequate to prevent the information presented from being misleading. However, the unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2016 included in the combined annual report on Form 10-K filed with the U.S. Securities and Exchange Commission ("SEC") on February 28, 2017.
The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal and recurring items) necessary to present fairly the Company’s financial position as of March 31, 2017, the results of the Company’s operations and comprehensive income for the three months ended March 31, 2017 and 2016 and changes in equity and cash flows for the three months ended March 31, 2017 and 2016. Interim results are not necessarily indicative of full year performance because of the impact of seasonal and short-term variations, including the impact of our hotel renovation program.
Use of Estimates—The preparation of the accompanying unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Management used significant estimates to determine the estimated useful lives of tangible assets as well as in the assessment of tangible and intangible assets, including goodwill, for impairment, estimated liabilities for insurance reserves and the grant-date fair value of certain equity-based awards. 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 three to 49 years.
Management assesses the performance of long-lived assets for potential impairment quarterly, as well as when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of property and equipment is measured by a comparison of the carrying amount of a hotel property to the estimated future undiscounted cash flows expected to be generated by each hotel property. Impairment is recognized when estimated future undiscounted cash flows, including proceeds from disposition, are less than the carrying value of each hotel property. To the extent that a hotel property is impaired, the excess carrying amount over its estimated fair value is recognized as an impairment charge and

9


reduces income from operations. Fair value is determined based upon the discounted cash flows of the hotel property, quoted market prices or independent appraisals, as considered necessary. The Company recognized an impairment charge related to property and equipment of approximately $12.4 million for the three months ended March 31, 2017 and recognized no impairment charge for the three months ended March 31, 2016 (see Notes 4 and 5). The estimation of future undiscounted cash flows is inherently uncertain and relies upon assumptions regarding current and future economic and market conditions. If such conditions change, then an impairment charge to further reduce the carrying value of a hotel property could occur in a future period in which conditions change.
Assets Held For Sale—The Company classifies assets as held for sale when management commits to a formal plan to sell the assets, actively seeks a buyer for the assets and the consummation of a sale is considered probable and is expected within one year. The Company considers the consummation of a sale probable once a purchase and sale agreement has been executed, the buyer has a significant non-refundable deposit at risk and no significant financing contingencies exist. Upon designating an asset as held for sale, the Company stops recognizing depreciation expense and records the asset at the lower of its carrying value, which includes allocable goodwill and allocable accumulated other comprehensive income (loss), or its estimated fair value, less estimated costs to sell. Any such adjustment in the carrying value is recognized as an impairment charge. As of March 31, 2017, the Company classified certain assets and their related liabilities as assets held for sale and liabilities related to assets held for sale, respectively, in the accompanying unaudited condensed consolidated balance sheet (see Note 4).
Segments—The Company’s hotel operations represent a single operating segment based on the way the Company manages its business. The Company’s hotels provide similar services, use similar processes to sell those services and sell those services to similar classes of customers. The amounts of long-lived assets and net revenues outside the U.S. are not significant for any period presented.
Recently Issued Accounting Standards
Goodwill—In January 2017, the Financial Accounting Standards Board ("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 to be completed. This update will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company does not expect the adoption of this update to have a material effect on the Company’s unaudited condensed consolidated financial statements.
Statement of Cash Flows—In August and November 2016, the FASB issued accounting standards updates which provide additional clarity on the classification of specific events on the statement of cash flows. These events include debt prepayment and extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from settlement of insurance claims, distributions received from equity method investees, and beneficial interests in securitization transactions. These updates also require amounts generally described as restricted cash to be included with cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. These updates are effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods, with early adoption permitted. The adoption of these updates will require cash outflows related to debt prepayment and extinguishment costs to be classified as financing activities. Additionally, the effect of the adoption of these updates on the Company's consolidated statements of cash flows will be to include restricted cash in the beginning and end of period balances of cash, restricted cash and cash equivalents. The change in restricted cash is currently included in investing activities in the consolidated statements of cash flows.
Compensation—Stock Compensation—In March 2016, the FASB issued an accounting standards update which identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, and certain classifications on the statement of cash flows. The Company adopted this update on January 1, 2017. The adoption of this update did not have a material effect on the Company’s unaudited condensed consolidated financial statements.
Derivatives and Hedging—In March 2016, the FASB issued an accounting standards update to clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts and to clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The Company adopted this update on January 1, 2017. The adoption of this update did not have a material effect on the Company’s unaudited condensed consolidated financial statements.

10


Leases— In February 2016, the FASB issued an accounting standards update which introduces a lessee model that requires a right-of-use asset and lease obligation to be presented on the balance sheet for all leases, whether operating or financing. The update eliminates the requirement in current U.S. GAAP for an entity to use bright-line tests in determining lease classification. The update also requires lessors to increase the transparency of their exposure to changes in value of their residual assets and how they manage that exposure. This update will be effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted, and must be applied using a modified retrospective approach, which will require adjustment to all comparative periods presented.
As of March 31, 2017, using its incremental borrowing rate with respect to the future minimum lease payments under its operating leases (ground leases and corporate office lease), the Company has preliminarily determined that the lease liability would be between approximately $16.0 million and $20.0 million and the right of use asset would be between approximately $8.0 million and $12.0 million, which includes adjustments for accrued lease payments, above market lease liabilities and lease incentives.
The recording of a lease obligation may increase total indebtedness for purposes of financial covenants within certain of the Company’s existing debt agreements; however, the Company currently does not expect this increase to cause instances of non-compliance with any of these covenants. The Company does not expect the adoption of this update to have a material effect on its consolidated statements of operations or cash flows. The Company is in the process of evaluating which practical expedients it will choose to elect upon adoption.
Contractual Revenue—Since May 2014, the FASB has issued several accounting standards updates which replace existing revenue recognition accounting standards. These updates are based on the principle that revenue is recognized when an entity transfers control of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. These updates also require more detailed disclosure to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. These updates permit transition under the full retrospective method, the modified retrospective approach that utilizes certain practical expedients and the cumulative effect method. The Company is evaluating which transition approach it will take and expects to conclude during 2017. These updates are effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted for interim and annual periods beginning after December 15, 2016. The Company expects to adopt the new standard on January 1, 2018.
The Company is currently assessing the impact the adoption of these updates will have on the amount and/or timing of revenue recognition. The assessment process includes the following; (i) review of contracts in order to determine if a portfolio approach may be acceptable for concluding on performance obligations and delivery of such obligations under the contracts; (ii) analysis on the appropriateness of bundling delivered goods and services under the contracts; (iii) the determination as to whether the Company acts as either a principal or an agent under certain agreements; and (iv) other related matters, including the enhancement of revenue related disclosures.


11


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 the Corporation’s unrestricted common stock outstanding plus other potentially dilutive securities. Dilutive securities include certain equity-based awards issued under long-term incentive plans (see Note 13) and are included in the calculation, provided that the inclusion of such securities is not anti-dilutive.
The calculations of basic and diluted net income per share, including a reconciliation of the numerators and denominators, are as follows (in thousands, except per share data):
 
Three Months Ended
March 31,
 
2017
 
2016
Numerator:
 
 
 
Net income available to Extended Stay America, Inc. common shareholders - basic
$
23,101

 
$
17,046

Loss (income) attributable to noncontrolling interests assuming conversion
5

 

Net income available to Extended Stay America, Inc. common shareholders - diluted
$
23,106

 
$
17,046

Denominator:
 
 
 
Weighted average number of Extended Stay America, Inc. common shares outstanding - basic
195,097

 
204,310

Dilutive securities
289

 
60

Weighted average number of Extended Stay America, Inc. common shares outstanding - diluted
195,386

 
204,370

Net income per Extended Stay America, Inc. common share - basic
$
0.12

 
$
0.08

Net income per Extended Stay America, Inc. common share - diluted
$
0.12

 
$
0.08



12


4.
ASSETS HELD FOR SALE
On October 21, 2016, the Company executed a purchase and sale agreement to divest its three Extended Stay Canada hotels for $76.0 million Canadian dollars, subject to adjustment. As of March 31, 2017, the Company classified these assets and their related liabilities as assets held for sale and liabilities related to assets held for sale, respectively, in the accompanying unaudited condensed consolidated balance sheet. The Company recognized an impairment charge of approximately $12.4 million with respect to the anticipated asset sale and expects the transaction to close in the second quarter of 2017, subject to the satisfaction or waiver of customary closing conditions. Upon closing, the Company expects to manage these hotel properties for a short-term period. The results of operations of the assets held for sale are not reported as discontinued operations.
Assets held for sale and liabilities related to assets held for sale consist of the following as of March 31, 2017 (in thousands):
Property and equipment:
 
Land and site improvements
$
12,680

Building and improvements
19,510

Furniture, fixtures and equipment
4,333

Property and equipment
36,523

Other assets
469

Goodwill
4,520

Assets held for sale
$
41,512

 
 
Accounts payable and accrued liabilities
$
231

Liabilities related to assets held for sale
$
231


13


5.
PROPERTY AND EQUIPMENT
Net investment in property and equipment as of March 31, 2017, excluding assets held for sale (see Note 4), and December 31, 2016, consists of the following (in thousands):
 
March 31, 2017
 
December 31, 2016
Hotel properties:
 
 
 
Land and site improvements
$
1,289,015

 
$
1,303,752

Building and improvements
2,903,997

 
2,940,615

Furniture, fixtures and equipment
624,052

 
612,855

Total hotel properties
4,817,064

 
4,857,222

Corporate furniture, fixtures, equipment, software and other
20,320

 
20,076

Undeveloped land parcel
1,675

 
1,675

Total cost
4,839,059

 
4,878,973

Less accumulated depreciation:
 
 
 
Hotel properties
(989,832
)
 
(962,400
)
Corporate furniture, fixtures, equipment, software and other
(12,038
)
 
(11,269
)
Total accumulated depreciation
(1,001,870
)
 
(973,669
)
Property and equipment - net
$
3,837,189

 
$
3,905,304

During the three months ended March 31, 2017 and 2016, the Company, using Level 3 unobservable inputs, assessed property and equipment for potential impairment. The Company recognized an impairment charge of approximately $12.4 million for the three months ended March 31, 2017 related to its three Extended Stay Canada hotels and recognized no impairment charge for the three months ended March 31, 2016. Quantitative information with respect to unobservable inputs consists of internally developed cash flow models that include the following assumptions, among others: projections of revenues, expenses and hotel related cash flows based on assumed long-term growth rates, demand trends, expected future capital expenditures and estimated discount rates that range from 6% to 10% and terminal capitalization rates that range from 7% to 11%. These assumptions are based on the Company’s historical data and experience, the Company’s budgets, industry projections and micro and macro general economic condition projections.

14


6.
INTANGIBLE ASSETS AND GOODWILL
The Company’s intangible assets and goodwill as of March 31, 2017, excluding assets held for sale (see Note 4), and December 31, 2016, consist of the following (dollars in thousands):
 
March 31, 2017
 
Estimated
Useful Life
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Book Value
Definite-lived intangible assets—customer relationships
20 years
 
$
26,800

 
$
(8,685
)
 
$
18,115

Indefinite-lived intangible assets—trademarks
 
 
9,933

 

 
9,933

Total intangible assets
 
 
36,733

 
(8,685
)
 
28,048

Goodwill
 
 
49,011

 

 
49,011

Total intangible assets and goodwill
 
 
$
85,744

 
$
(8,685
)
 
$
77,059

 
 
 
 
 
 
 
 
 
December 31, 2016
 
Estimated
Useful Life
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Book Value
Definite-lived intangible assets—customer relationships
20 years
 
$
26,800

 
$
(8,350
)
 
$
18,450

Indefinite-lived intangible assets—trademarks
 
 
9,933

 

 
9,933

Total intangible assets
 
 
36,733

 
(8,350
)
 
28,383

Goodwill
 
 
53,531

 

 
53,531

Total intangible assets and goodwill
 
 
$
90,264

 
$
(8,350
)
 
$
81,914

The remaining weighted-average amortization period for definite-lived intangible assets is approximately 14 years as of March 31, 2017. Estimated future amortization expense for definite-lived intangible assets is as follows (in thousands):
Years Ending December 31,
 
Remainder of 2017
$
1,005

2018
1,340

2019
1,340

2020
1,340

2021
1,340

Thereafter
11,750

Total
$
18,115



15


7.
DEBT
Summary - The Company’s outstanding debt, net of unamortized debt discount, and unamortized deferred financing costs as of March 31, 2017 and December 31, 2016, consists of the following (dollars in thousands):
 
Stated
Amount
(1)
 
Carrying Amount
 
Unamortized Deferred Financing Costs
 
 
 
Interest Rate
 
 
 
Loan
 
March 31, 2017
 
December 31, 2016
 
March 31, 2017
 
December 31, 2016
 
Stated Interest Rate
 
March 31, 2017
 
December 31, 2016
 
Maturity Date
 
Term loan facilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ESH REIT 2016 Term Facility
$
1,300,000

(2) 
$
1,287,550

(3) 
$
1,290,560

 
$
15,211

 
$
15,804

 
LIBOR(4) + 2.50%(5)

 
3.56
%
(5) 
3.75
%
 
8/30/2023
(7) 
Senior notes
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ESH REIT 2025 Notes
1,300,000

 
1,289,370

(6) 
1,289,041

 
22,817

 
23,523

 
5.25
%
 
5.25
%
 
5.25
%
 
5/1/2025
 
Revolving credit facilities (8)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ESH REIT 2016 Revolving Credit Facility
350,000

 
35,000

 
45,000

 
2,433

 
2,570

 
LIBOR + 2.75%

 
3.73
%
 
3.33
%
 
8/30/2021
 
Corporation 2016 Revolving Credit Facility
50,000

 

 

 
483

 
511

 
LIBOR + 3.00%

 
N/A

 
N/A

 
8/30/2021
 
Unsecured Intercompany Facility
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unsecured Intercompany Facility
75,000

(9) 

 

 

 

 
5.00
%
 
5.00
%
 
5.00
%
 
8/30/2023
 
Total
 
 
$
2,611,920

 
$
2,624,601

 
$
40,944

 
$
42,408

 
 
 
 
 
 
 
 
 
_________________________________
(1)
Amortization is interest only, except for the 2016 Term Facility which amortizes in equal quarterly installments of $3.24 million as of March 31, 2017.
(2)
ESH REIT is able to increase its borrowings under the 2016 ESH REIT Credit Facilities by an amount of up to $600.0 million, plus additional amounts, in each case subject to certain conditions.
(3)
The 2016 Term Facility is presented net of an unamortized debt discount of approximately $6.0 million and $6.2 million as of March 31, 2017 and December 31, 2016, respectively.
(4)
As of December 31, 2016, the stated interest rate of the 2016 Term Facility was LIBOR + 3.00% and included a LIBOR floor of 0.75%.
(5)
$500.0 million of the 2016 Term Facility is subject to an interest rate swap at a fixed rate of 1.175% (see Note 8).
(6)
The 2025 Notes are presented net of an unamortized debt discount of approximately $10.6 million and $11.0 million as of March 31, 2017 and December 31, 2016, respectively.
(7)
In addition to scheduled amortization noted in (1) above, subject to certain exceptions, annual mandatory prepayments of up to 50% of Excess Cash Flow, as defined, may be required under the 2016 Term Facility commencing with the year ending December 31, 2017. Annual mandatory prepayments for the year ending December 31, 2017 and each year thereafter are due during the first quarter of the following year.
(8)
Unamortized deferred financing costs related to the revolving credit facilities are included in other assets in the accompanying unaudited condensed consolidated balance sheets.
(9)
As of March 31, 2017, the outstanding balance owed from ESH REIT to the Corporation under the Unsecured Intercompany Facility was $50.0 million. ESH REIT is able to increase its borrowings under the Unsecured Intercompany Facility to an amount of up to $300.0 million, plus additional amounts, in each case subject to certain conditions. The outstanding debt balance and interest expense owed from ESH REIT to the Corporation related to the Unsecured Intercompany Facility eliminate in consolidation.
On March 1, 2017, ESH REIT entered into an amendment to the 2016 Term Facility with the lenders thereunder (such amendment, the "Repricing Amendment"). The Repricing Amendment had the following impact on the 2016 Term Facility: (i) decreased the interest rate spread on LIBOR based loans from 3.0% to 2.5%; (ii) decreased the interest rate spread on base rate loans from 2.0% to 1.5%; (iii) removed the floor of 0.75% on LIBOR based loans; (iv) removed the floor of 2.0% on base rate loans; (v) removed ranges on interest rate spreads for all loan types that are currently dependent upon ESH REIT’s credit rating; and (vi) extended the 1% prepayment penalty through September 1, 2017 (prepayments made after September 1, 2017 are not subject to a prepayment penalty, other than customary “breakage” costs).
ESH REIT Credit Facilities
On August 30, 2016, ESH REIT entered into a credit agreement, as may be amended and supplemented from time to time, providing for senior secured credit facilities (collectively the "2016 ESH REIT Credit Facilities") consisting of a $1,300.0 million senior secured term loan facility (the "2016 Term Facility") and a $350.0 million senior secured revolving credit facility (the "2016 ESH REIT Revolving Credit Facility"). Subject to the satisfaction of certain criteria, borrowings under the 2016

16


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, its pro-forma senior loan-to-value ratio is less than or equal to 45%.
Obligations under the 2016 ESH REIT Credit Facilities are guaranteed by certain existing and future material domestic subsidiaries of ESH REIT, other than those owning real property, subject to customary exceptions. Obligations under the 2016 ESH REIT Credit Facilities are secured, subject to certain exceptions, including an exception for real property, by a first-priority security interest in substantially all of the assets of ESH REIT and the guarantors.

The 2016 ESH REIT Credit Facilities contain a number of restrictive covenants that, among other things and subject to certain exceptions, limit ESH REIT’s ability and the ability of its subsidiaries to incur additional debt, modify existing debt, create certain liens, pay dividends and distributions, make certain investments and other restricted payments, enter into affiliate transactions, amend or modify certain material operating leases and management agreements, sell assets or merge, consolidate or transfer all or substantially all of their assets. The 2016 ESH REIT Credit Facilities contain certain customary representations and warranties, affirmative covenants and events of default, including, but not limited to, cross-defaults to certain other indebtedness and certain material operating leases and management agreements. If an event of default occurs, the administrative agent is entitled to take various actions, including the acceleration of amounts due under the 2016 ESH REIT Credit Facilities and additional actions that a secured creditor is permitted to take following a default. As of March 31, 2017, ESH REIT was in compliance with all covenants under the 2016 ESH REIT Credit Facilities.
2016 Term FacilityThe 2016 Term Facility, as currently amended, bears interest at a rate equal to (i) LIBOR plus 2.50% or (ii) base rate (determined by reference to the highest of (A) the prime lending rate, (B) the overnight federal funds rate plus 0.50% or (C) the one-month adjusted LIBOR rate plus 1.00%) plus 1.50%. The 2016 Term Facility amortizes in equal quarterly installments in annual amounts of 1.0% of the principal amount outstanding as of the Repricing Amendment, or approximately $13.0 million as of March 31, 2017, with the remaining balance payable at maturity. In addition to scheduled amortization, subject to certain exceptions, mandatory prepayments of up to 50% of annual Excess Cash Flow may be required based on ESH REIT's Consolidated Leverage Ratio, each as defined. Annual mandatory prepayments are due during the first quarter of the following year. The 2016 Term Facility matures on August 30, 2023.
ESH REIT has the option to voluntarily prepay outstanding loans under the 2016 Term Facility at any time upon three business days’ prior written notice for LIBOR loans or on one business day’s prior written notice for base rate loans. In addition to customary "breakage" costs with respect to LIBOR loans, amounts refinanced, substituted or replaced by indebtedness which has a lower all-in yield than the all-in yield under the 2016 Term Facility on or prior to September 1, 2017 (other than as a result of a transformative transaction) are subject to a prepayment penalty equal to 1.00% of the aggregate principal amount refinanced, substituted or replaced. Prepayments made after September 1, 2017 are not subject to a prepayment penalty.

2016 ESH REIT Revolving Credit FacilityThe 2016 ESH REIT Revolving Credit Facility provides for the issuance of up to $50.0 million of letters of credit. Borrowings under the facility bear interest at a rate equal to (i) LIBOR plus a spread that ranges from 2.25% to 2.75% based on ESH REIT’s Total Net Leverage Ratio, as defined, or (ii) base rate (determined by reference to the highest of (A) the prime lending rate, (B) the overnight federal funds rate plus 0.50%, or (C) the one-month adjusted LIBOR rate plus 1.00%) plus a spread that ranges from 1.25% to 1.75% based on ESH REIT’s Total Net Leverage Ratio, as defined. There is no scheduled amortization under the 2016 ESH REIT Revolving Credit Facility and the facility matures on August 30, 2021.

In addition to paying interest on outstanding principal, ESH REIT incurs a fee of 0.35% or 0.175% on the unutilized revolver balance, based on the amount outstanding under the facility. ESH REIT is also required to pay customary letter of credit fees and agency fees. As of March 31, 2017, ESH REIT had no letters of credit outstanding under the facility, an outstanding balance of $35.0 million and available borrowing capacity of $315.0 million.

The 2016 ESH REIT Revolving Credit Facility is subject to a springing financial covenant whereby the senior loan-to-value ratio may not exceed 45% when the aggregate principal amount of borrowings and letters of credit under the 2016 ESH REIT Revolving Credit Facility, excluding up to $30.0 million of letters of credit, is equal to or greater than 25% of the aggregate available principal amount of the 2016 ESH REIT Revolving Credit Facility on the applicable fiscal quarter end date.
ESH REIT Senior Notes Due 2025
In May 2015, ESH REIT issued $500.0 million of its 5.25% senior notes due in 2025 (together with the $800.0 million of additional notes, the “2025 Notes”) under an indenture (the “Indenture”) with Deutsche Bank Trust Company Americas, as

17


trustee, at 100% of par value in a private placement pursuant to Rule 144A of the Securities Act ("Rule 144A"). In March 2016, ESH REIT issued an additional $800.0 million of the 2025 Notes under the Indenture at 98.5% of par value in a private placement pursuant to Rule 144A. The 2025 Notes mature on May 1, 2025 and bear interest at a fixed rate of 5.25% per annum, payable semi-annually in arrears on May 1 and November 1 of each year.
The 2025 Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis by each of ESH REIT’s subsidiaries that guarantee ESH REIT’s obligations under the 2016 ESH REIT Credit Facilities. The 2025 Notes rank equally in right of payment with ESH REIT’s existing and future senior unsecured indebtedness, and senior in right of payment to all future subordinated indebtedness, if any. The 2025 Notes are effectively junior to any of ESH REIT’s secured indebtedness to the extent of the value of the assets securing such indebtedness.
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 in the Indenture, plus accrued and unpaid interest. Prior to May 1, 2018, subject to certain conditions, ESH REIT may redeem up to 35% of the aggregate principal amount of the 2025 Notes at a redemption price equal to 105.250% of the aggregate principal amount thereof, plus accrued and unpaid interest, with the net cash proceeds from certain equity offerings, provided 65% of the original amount of the principal remains outstanding after the occurrence of each such redemption. Upon a Change of Control, as defined, holders of the 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.
The Indenture contains a number of customary covenants that, among other things and subject to certain exceptions, limit ESH REIT’s ability and the ability of its subsidiaries to incur additional debt, create certain liens, pay dividends or distributions, make certain investments and other restricted payments, enter into affiliate transactions, sell assets or merge, consolidate or transfer all or substantially all of their assets. The Indenture also contains certain customary events of default, including, but not limited to, cross-defaults to certain other indebtedness. If an event of default occurs, the holders of the Notes and the Trustee are entitled to take various actions, including declaring the 2025 Notes immediately due and payable. As of March 31, 2017, ESH REIT was in compliance with all covenants set forth in the Indenture.
Corporation Revolving Credit Facility
On August 30, 2016, the Corporation entered into a revolving credit facility (the "2016 Corporation Revolving Credit Facility") of $50.0 million. The facility provides for the issuance of up to $50.0 million of letters of credit as well as borrowing on same day notice, referred to as swingline loans, in an amount up to $20.0 million. Borrowings under the facility bear interest at a rate equal to (i) LIBOR plus 3.00% or (ii) base rate (determined by reference to the highest of (A) the prime lending rate, (B) the overnight federal funds rate plus 0.50% or (C) the one-month adjusted LIBOR rate plus 1.00%) plus 2.00%. There is no scheduled amortization under the 2016 Corporation Revolving Credit Facility and the facility matures on August 30, 2021.
In addition to paying interest on outstanding principal, the Corporation incurs a fee of 0.35% or 0.175% on the unutilized revolver balance, based on the amount outstanding under the facility. The Corporation is also required to pay customary letter of credit fees and agency fees. As of March 31, 2017, the Corporation had one letter of credit outstanding under this facility of $0.7 million, an outstanding balance drawn of $0 and borrowing capacity available of $49.3 million.
Obligations under the 2016 Corporation Revolving Credit Facility are guaranteed by certain existing and future material domestic subsidiaries of the Corporation, excluding ESH REIT and its subsidiaries and subject to customary exceptions. The facility is secured, subject to certain exceptions, by a first-priority security interest in substantially all of the assets of the Corporation and the guarantors.

If obligations are outstanding under the facility during any fiscal quarter, the 2016 Corporation Revolving Credit Facility requires that the Consolidated Leverage Ratio, as defined, calculated as of the end of such fiscal quarter, be less than or equal to 8.75 to 1.00. The facility is also subject to a springing financial covenant whereby the senior loan-to-value ratio may not exceed 45% when the aggregate principal amount of borrowings and letters of credit under the 2016 Corporation Revolving Credit Facility, excluding up to $30.0 million of letters of credit, is equal to or greater than 25% of the aggregate available principal amount of the 2016 Corporation Revolving Credit Facility on the applicable fiscal quarter end date.

The 2016 Corporation Revolving Credit Facility contains a number of restrictive covenants that, among other things and subject to certain exceptions, limit the Corporation’s ability and the ability of its subsidiaries to incur additional debt, modify

18


existing debt, create certain liens, pay dividends or distributions, make certain restricted payments, enter into affiliate transactions, amend or modify certain material operating leases and management agreements, merge, consolidate or transfer all or substantially all of its assets. The 2016 Corporation Revolving Credit Facility also contains certain customary affirmative covenants and events of default, including, but not limited to, cross-defaults to certain other indebtedness and certain material operating leases. If an event of default occurs, the administrative agent is entitled to take various actions, including the acceleration of amounts due under the facility and additional actions that a secured creditor is permitted to take following a default. As of March 31, 2017, the Corporation was in compliance with all covenants under the 2016 Corporation Revolving Credit Facility.
Unsecured Intercompany Facility
On August 30, 2016, ESH REIT and the Corporation entered into an unsecured intercompany credit facility (the "Unsecured Intercompany Facility"). As of March 31, 2017, the amount outstanding under the facility totaled $50.0 million. Subject to certain conditions, the principal amount of the Unsecured Intercompany Facility may be increased up to an amount that shall not exceed the greater of (i) $300.0 million and (ii) an unlimited amount so long as the incremental loan-to-value ratio, determined on a pro-forma basis as of the last day of the most recently ended test period, as if any incremental loans available under such incremental commitments had been outstanding on the last day of such period, and, in each case, without netting the cash proceeds of any such incremental loans, does not exceed 5.0%. Loans under the facility bear interest at 5.00% per annum. There is no scheduled amortization under the facility and the facility matures on August 30, 2023. ESH REIT has the option to voluntarily prepay outstanding loans at any time upon one business day’s prior written notice.

The Unsecured Intercompany Facility contains a number of restrictive covenants that, among other things and subject to certain exceptions, limit ESH REIT’s ability and the ability of its subsidiaries to incur additional debt, modify existing debt, create certain liens, pay dividends or distributions, make certain investments and other restricted payments, enter into affiliate transactions, amend or modify certain material operating leases and management agreements, sell assets or merge, consolidate or transfer all or substantially all of their assets. The facility contains certain customary representations and warranties, affirmative covenants and events of default, including, but not limited to, cross-defaults to certain other indebtedness and certain material operating leases and management agreements. If an event of default occurs, the Corporation is entitled to take various actions, including the acceleration of amounts due under the facility and all other actions that a creditor is permitted to take following a default. As of March 31, 2017, ESH REIT was in compliance with all covenants under the Unsecured Intercompany Facility.
Future Maturities of Debt—The future maturities of debt as of March 31, 2017, are as follows (in thousands):
Years Ending December 31,
 
 
Remainder of 2017
$
9,726

 
2018
12,968

 
2019
12,968

 
2020
12,968

 
2021
47,968

 
Thereafter
2,531,910

(1) 
Total
$
2,628,508

 
______________________
(1)
Under the 2016 Term Facility, annual mandatory prepayments of up to 50% of Excess Cash Flow, as defined, may be required commencing with the year ending December 31, 2017. Annual mandatory prepayments for the year ending December 31, 2017 and each year thereafter are due during the first quarter of the following year.
Fair Value of Debt—As of March 31, 2017 and December 31, 2016, the estimated fair value of the Company's debt was approximately $2.6 billion and $2.7 billion, respectively. Estimated fair values are determined by comparing current borrowing rates and risk spreads offered in the market to the stated interest rates and spreads on the Company's debt (Level 2 fair value measures) or quoted market prices (Level 1 fair value measures), when available.

19


8.
DERIVATIVE INSTRUMENTS
The Company from time to time uses derivative instruments to manage its exposure to interest rate, foreign currency exchange rate and commodity price risks. The Company’s primary objective in holding derivatives is to reduce the volatility of cash flows and earnings associated with changes in interest rates, foreign currency exchange rates and commodity prices. The Company’s derivatives expose it to credit risk to the extent that counterparties may be unable to meet the terms of the agreement. The Company seeks to mitigate such risks by limiting its counterparties to major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored. Management does not expect material losses as a result of defaults by counterparties.
In September 2016, ESH REIT entered into a floating-to-fixed interest rate swap at a fixed rate of 1.175% and a floating rate of one-month LIBOR, subject to a LIBOR floor of 0.75%, to manage its exposure to interest rate risk on a portion of its variable rate debt. In February 2017, ESH REIT executed an amendment to its swap agreement, the impact of which was to remove the LIBOR floor on floating rate cash flows. The notional amount of the interest rate swap as of March 31, 2017 was $500.0 million. Beginning April 1, 2017, the notional amounts decreases to $450.0 million, and continues to decrease by an additional $50.0 million every six months until the swap's maturity in September 2021. Subsequent to February 2017, changes in the swap's fair value are recognized currently in earnings and are included in the line item other non-operating income on the accompanying unaudited condensed consolidated statements of operations. The fair value of the interest rate swap as of March 31, 2017 and December 31, 2016 was approximately $5.3 million and $5.0 million, respectively, and is included in other assets on the accompanying unaudited condensed consolidated balance sheets. The amounts recorded in accumulated other comprehensive income as of March 31, 2017 and December 31, 2016 were approximately $3.4 million and $3.9 million, net of tax, respectively, and the amounts recorded in other non-operating income for the three months ended March 31, 2017 and 2016 were approximately $1.3 million and $0, respectively.
9.
MANDATORILY REDEEMABLE PREFERRED STOCK
The Corporation has authorized 350.0 million shares of preferred stock, par value $0.01 per share, of which 21,202 shares of mandatorily redeemable voting preferred stock were issued and outstanding as of March 31, 2017 and December 31, 2016. Dividends on these 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 are generally entitled to one vote for each share and will vote together with the Corporation common stock as a single class on all matters that the Corporation’s common shareholders are entitled to vote upon. On or after November 15, 2018, a holder of the 8.0% voting preferred stock has the right to require the Corporation to redeem in cash the 8.0% voting preferred stock at $1,000 per share plus any accumulated unpaid dividends. On November 15, 2020, the Corporation shall mandatorily redeem all of the 8.0% voting preferred stock at $1,000 per share plus any accumulated unpaid dividends.
Due to the fact that the outstanding 8.0% voting preferred stock is mandatorily redeemable by the Corporation, it is classified as a liability on the accompanying unaudited condensed consolidated balance sheets. Dividends on these preferred shares are classified as net interest expense on the accompanying unaudited condensed consolidated statements of operations.
Fair Value of Mandatorily Redeemable Preferred Stock—As of March 31, 2017 and December 31, 2016, the estimated fair value of the 8.0% voting preferred stock was approximately $21.3 million. The estimated fair value of the 8.0% voting preferred stock is determined by comparing current borrowing rates and risk spreads offered in the market to the stated interest rates and spreads (Level 2 fair value measures).
10.
INCOME TAXES
The Corporation’s taxable income includes the taxable income of its wholly-owned subsidiaries and distribution income related to its ownership of approximately 56% of ESH REIT.
ESH REIT has elected to be taxed 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 (including any applicable alternative minimum tax) and generally would be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which it lost its REIT qualification. Even in qualifying as a REIT, ESH REIT may be

20


subject to state and local taxes in certain jurisdictions, and is subject to federal income and excise taxes on undistributed income.
ESH REIT intends to distribute its taxable income to the extent necessary to optimize its tax efficiency including, but not limited to, maintaining its REIT status, while retaining sufficient capital for its ongoing needs. Accordingly, ESH REIT expects to distribute approximately 100% of its taxable income for the foreseeable future. 
The Company recorded a provision for federal, state and foreign income taxes of approximately $4.5 million for the three months ended March 31, 2017, an effective rate of approximately 21.8%, as compared with a provision of approximately $2.9 million for the three months ended March 31, 2016, an effective rate of approximately 16.4%. The Company’s effective rate differs from the federal statutory rate of 35% primarily due to ESH REIT’s status as a REIT under the provisions of the Code. During the three months ended March 31, 2016, the Company recognized a benefit of approximately $1.8 million with respect to the reversal of net deferred tax liabilities which related to the previously estimated 5% of taxable income expected to be retained under ESH REIT's prior 95% distribution policy, which was changed during the three months ended March 31, 2016.
The Company’s income tax returns for the years 2013 to present are subject to examination by the Internal Revenue Service and other taxing authorities.

11.
RELATED PARTY TRANSACTIONS
Investment funds of the Sponsors held 21,105 shares of the Corporation's outstanding mandatorily redeemable preferred stock as of March 31, 2017 and December 31, 2016.
As of March 31, 2017 and December 31, 2016, the outstanding balance owed by ESH REIT under the Unsecured Intercompany Facility was $50.0 million. ESH REIT is able to increase its borrowings under the Unsecured Intercompany Facility to an amount of up to $300.0 million, plus additional amounts, in each case, subject to certain conditions. The outstanding debt balance and interest expense owed by ESH REIT to the Corporation related to this facility eliminate in consolidation (see Note 7).
During the three months ended March 31, 2017, the Corporation and ESH REIT repurchased and retired 0.625 million Paired Shares from the Selling Stockholders for approximately $6.6 million and $3.8 million, respectively. These Paired Shares were purchased in connection with the secondary offering consummated in the first quarter of 2017 and pursuant to, and counted toward, the combined Paired Share repurchase program.
In March 2016, in connection with ESH REIT's $800.0 million issuance of its 2025 Notes discussed in Note 7, an affiliate of one of the Sponsors acted as an initial purchaser and purchased $24.0 million of the 2025 Notes. As such, the affiliate of one of the Sponsors earned approximately $0.4 million in fees related to the transaction for the three months ended March 31, 2016.
12.
COMMITMENTS AND CONTINGENCIES
Lease Commitments—The Company is a tenant under long-term ground leases at four of its hotel properties. The initial terms of the ground lease agreements terminate at various dates between 2021 and 2096, and three leases include multiple renewal options for generally five or 10 year periods. The Company is a tenant under an office lease for its corporate office. The initial term of the office lease terminates in August 2021 and includes renewal options for two additional terms of five years each.
Rent expense on ground and office leases is recognized on a straight-line basis and was approximately $0.8 million for each of the three months ended March 31, 2017 and 2016. Ground lease expense is included in hotel operating expenses and office lease expense is included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.
Other Commitments—The Company has a commitment to make quarterly payments in lieu of taxes to the owner of the land on which one of its properties is located. The initial term of the agreement terminates in 2031. The cost related to this commitment was approximately $0.1 million for each of the three months ended March 31, 2017 and 2016, and is included in hotel operating expenses in the accompanying unaudited condensed consolidated statements of operations.
Letters of Credit—As of March 31, 2017, the Company had one outstanding letter of credit, issued by the Corporation, for $0.7 million, which is collateralized by the 2016 Corporation Revolving Credit Facility.

21


Paired Share Repurchase Commitment—As of March 31, 2017, the Corporation and ESH REIT agreed to repurchase approximately 0.1 million Paired Shares for approximately $0.5 million and $0.3 million, respectively, for which settlement had not yet occurred.
Legal Contingencies—The Company is not a party to any litigation or claims, other than routine matters arising in the ordinary course of business that are incidental to the operation of the business of the Company. The Company believes that the results of all claims and litigation, individually or in the aggregate, will not have a material adverse effect on its business or unaudited condensed consolidated financial statements.
13.
EQUITY-BASED COMPENSATION
The Corporation and ESH REIT each maintain a long-term incentive plan (“LTIP”), as amended and restated in 2015, approved by their shareholders. Under the LTIPs, the Corporation and ESH REIT may issue to eligible employees or directors restricted stock awards (“RSAs”), restricted stock units (“RSUs”) or other equity-based awards, in respect of Paired Shares, with service, performance or market vesting conditions. The aggregate number of Paired Shares that may be the subject of awards under the LTIPs shall not exceed 8.0 million, of which no more than 4.0 million may be granted as incentive stock options. Each of the Corporation’s and ESH REIT’s LTIP 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, 2017, approximately 3.8 million Paired Shares were available for future issuance under the LTIPs.
Equity-based compensation expense is recognized by amortizing the grant-date fair value of the equity-based awards, less estimated forfeitures, on a straight-line basis over the requisite service period of each award. A portion of the grant-date fair value of all equity-based awards is allocated to a share of Corporation common stock and a portion is allocated to a share of ESH REIT Class B common stock. Equity-based compensation expense was approximately $2.7 million for each of the three months ended March 31, 2017 and 2016 and is included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.
As of March 31, 2017, 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, 2017, is presented in the following table. Total unrecognized compensation expense will be adjusted for actual forfeitures.
 
Unrecognized Compensation Expense Related to Outstanding RSAs/RSUs (in thousands)
Remaining Weighted-Average Amortization Period (in years)
RSAs/RSUs with service vesting conditions
$
10,533

2.0
RSUs with performance vesting conditions
2,903

0.8
RSUs with market vesting conditions
6,047

1.9
Total unrecognized compensation expense
$
19,483

 
RSA/RSU activity during the three months ended March 31, 2017, was as follows:
 
 
 
 
 
Performance-Based Awards
 
Service-Based Awards
 
Performance Vesting
 
Market Vesting
 
Number of
RSAs/RSUs
(in thousands)
 
Weighted-
Average Grant-
Date Fair
Value
 
Number of
RSUs
(in thousands)
 
Weighted-
Average Grant-
Date Fair
Value
 
Number of
RSUs
(in thousands)
 
Weighted-
Average Grant-
Date Fair
Value(1)
Outstanding at January 1, 2017
892

 
$
16.93

 
119

 
$
14.07

 
972

 
$
9.01

Granted
196

 
$
17.45

 
190

 
$
17.45

 
99

 
$
14.19

Settled
(368
)
 
$
17.78

 
(118
)
 
$
14.07

 

 
$

Forfeited
(1
)
 
$
25.21

 

 
$

 

 
$

Outstanding at March 31, 2017
719

 
$
16.64

 
191

 
$
17.45

 
1,071

 
$
9.49

Vested at March 31, 2017

 
$

 

 
$

 

 
$

Nonvested at March 31, 2017
719

 
$
16.64

 
191

 
$
17.45

 
1,071

 
$
9.49

_________________________________
(1)
An independent third-party valuation was performed contemporaneously with the issuance of grants.

22


Service-Based Awards
The Corporation granted approximately 196,000 service-based awards during the three months ended March 31, 2017, with a weighted-average grant-date fair value per award of $17.45. 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 two to four years, subject to the grantee’s continued employment or service.
Performance-Based Awards
The Corporation granted approximately 190,000 awards with performance vesting conditions during the three months ended March 31, 2017, with a grant-date fair value per award of $17.45. The grant-date fair value of awards with performance vesting conditions is based on the closing price of a Paired Share on the date of grant. Equity-based compensation expense with respect to these awards is adjusted over the remainder of the fiscal year to reflect the probability of achievement of performance targets defined in the award agreements. These awards vest over the remainder of the fiscal year, subject to the grantee’s continued employment, with the ability to earn Paired Shares in a range of 0% to 200% of the awarded number of RSUs based on the achievement of defined performance targets. As of March 31, 2017, all awards with performance vesting conditions are expected to be satisfied at greater than 100% of their target level.
The Corporation granted approximately 99,000 awards with market vesting conditions during the three months ended March 31, 2017, with a grant-date fair value per award of $14.19. The grant-date fair value of awards with market vesting conditions is based on an independent third-party valuation. These awards vest at the end of a three-year period, subject to the grantee’s continued employment, with the ability to earn Paired Shares in a range of 0% to 150% 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, 2017, the grant-date fair value of awards with market vesting conditions was calculated using a Monte Carlo simulation model with the following key assumptions:
Expected holding period
2.86 years

Risk-free rate of return
1.46
%
Expected dividend yield
4.72
%
14.
DEFINED CONTRIBUTION PLANS
ESA Management has a savings plan that qualifies under Section 401(k) of the Code for all employees meeting the eligibility requirements of the plan. For the period from January 1, 2016 through September 9, 2016, the plan had an employer-matching contribution of 100% of the first 3% of an employee's contribution and 50% of the next 2% of an employee's contribution, which vested immediately. Beginning January 1, 2017, the plan has an employer-matching contribution of 50% of the first 6% of an employee's contribution, which vests over an employee's initial three-year service period. The plan also provides for contributions up to 100% of eligible employee pretax salary, subject to the Code’s annual deferral limit of $18,000 during 2017 and 2016. Employer contributions, net of forfeitures, totaled approximately $0.3 million and $1.0 million for the three months ended March 31, 2017 and 2016, respectively.
In June 2016, ESA Management established a non-qualified deferred compensation plan to allow certain eligible employees an option to defer a portion of their compensation on a tax-deferred basis. Beginning January 2017, the plan had an employer-matching contribution of 50% of the first 6% of an employee's contribution, which vests over a three-year service period. The plan is fully funded in a Rabbi Trust, which is subject to creditor claims in the event of insolvency, but the assets held in the Rabbi Trust are not available for general corporate purposes. As of March 31, 2017, approximately $0.3 million is included in other assets and accounts payable and accrued liabilities related to this plan.
15.
SUBSEQUENT EVENTS
Subsequent to March 31, 2017, the Corporation and ESH REIT repurchased and retired their respective portion of approximately 0.2 million Paired Shares for approximately $2.1 million and $1.2 million, respectively.
On April 27, 2017, the Board of Directors of the Corporation declared a cash distribution of $0.07 per share for the first quarter of 2017 on its common stock. The distribution is payable on May 25, 2017 to shareholders of record as of May 11, 2017. Also on April 27, 2017, the Board of Directors of ESH REIT declared a cash distribution of $0.14 per share for the first quarter of 2017 on its Class A and Class B common stock. This distribution is also payable on May 25, 2017 to shareholders of record as of May 11, 2017.

23


ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2017 AND DECEMBER 31, 2016
(In thousands, except share and per share data)
(Unaudited)
 
 
March 31,
2017
 
December 31,
2016
ASSETS
 
 
 
PROPERTY AND EQUIPMENT - Net of accumulated depreciation of $997,648 and $959,449
$
3,848,574

 
$
3,914,569

RESTRICTED CASH

 
344

CASH AND CASH EQUIVALENTS
5,091

 
53,506

RENTS RECEIVABLE FROM EXTENDED STAY AMERICA, INC. (Note 9)
19,733

 
2,609

DEFERRED RENTS RECEIVABLE FROM EXTENDED STAY AMERICA, INC. (Note 9)
35,796

 
40,259

GOODWILL
47,725

 
52,245

DEFERRED TAX ASSETS
401

 

OTHER ASSETS
18,179

 
13,973

ASSETS HELD FOR SALE (Note 4)
37,351

 

TOTAL ASSETS
$
4,012,850

 
$
4,077,505

LIABILITIES AND EQUITY

 

LIABILITIES:

 

Term loan facilities payable - Net of unamortized deferred financing costs and debt discount
of $21,169 and $21,994
$
1,272,339

 
$
1,274,756

Senior notes payable - Net of unamortized deferred financing costs and debt discount
of $33,447 and $34,482
1,266,553

 
1,265,518

Revolving credit facilities
35,000

 
45,000

Loan payable to Extended Stay America, Inc. (Note 6)
50,000

 
50,000

Unearned rental revenues from Extended Stay America, Inc. (Note 9)
75,272

 
39,898

Due to Extended Stay America, Inc. (Note 9)
10,137

 
11,608

Accounts payable and accrued liabilities
73,414

 
69,520

Deferred tax liabilities
3,286

 
3,286

Liabilities related to assets held for sale (Note 4)
70

 

Total liabilities
2,786,071

 
2,759,586

COMMITMENTS AND CONTINGENCIES (Note 10)


 


EQUITY:


 


Common stock - Class A: $0.01 par value, 4,300,000,000 shares authorized, 250,493,583 shares issued and outstanding; Class B: $0.01 par value, 7,800,000,000 shares authorized, 194,282,370 and 195,406,944 shares issued and outstanding
4,448

 
4,462

Additional paid in capital
1,145,401

 
1,144,664

Preferred stock - no par value, $1,000 liquidation value, 125 shares authorized, issued and outstanding
73

 
73

Retained earnings
84,721

 
176,532

Accumulated other comprehensive loss
(7,864
)
 
(7,812
)
Total equity
1,226,779

 
1,317,919

TOTAL LIABILITIES AND EQUITY
$
4,012,850

 
$
4,077,505

See accompanying notes to unaudited condensed consolidated financial statements.

24


ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended
March 31,
 
2017
 
2016
REVENUES- Rental revenues from Extended Stay America, Inc. (Note 9)
$
116,294

 
$
116,242

OPERATING EXPENSES:
 
 
 
Hotel operating expenses
23,955

 
24,371

General and administrative expenses (Note 9)
4,702

 
3,034

Depreciation
56,537

 
52,040

Impairment of long-lived assets
15,046

 

Total operating expenses
100,240

 
79,445

INCOME FROM OPERATIONS
16,054

 
36,797

OTHER NON-OPERATING INCOME
(1,164
)
 
(773
)
INTEREST EXPENSE, NET
33,752

 
46,290

LOSS BEFORE INCOME TAX BENEFIT
(16,534
)
 
(8,720
)
INCOME TAX BENEFIT
(418
)
 
(3,590
)
NET LOSS
$
(16,116
)
 
$
(5,130
)
NET LOSS PER ESH HOSPITALITY, INC. COMMON SHARE:
 
 
 
Class A - basic
$
(0.04
)
 
$
(0.01
)
Class A - diluted
$
(0.04
)
 
$
(0.01
)
Class B - basic
$
(0.04
)
 
$
(0.01
)
Class B - diluted
$
(0.04
)
 
$
(0.01
)
WEIGHTED-AVERAGE ESH HOSPITALITY, INC. COMMON SHARES OUTSTANDING:
 
 
 
Class A - basic
250,494

 
250,494

Class A - diluted
250,494

 
250,494

Class B - basic
195,097

 
204,310

Class B - diluted
195,097

 
204,310

See accompanying notes to unaudited condensed consolidated financial statements.

25


ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016
(In thousands)
(Unaudited)
 
 
Three Months Ended
March 31,
 
2017
 
2016
NET LOSS
$
(16,116
)
 
$
(5,130
)
FOREIGN CURRENCY TRANSLATION GAIN, NET OF TAX OF $0 AND $0
531

 
2,987

INTEREST RATE CASH FLOW HEDGE LOSS, NET OF TAX OF $0
$
(583
)
 
$

COMPREHENSIVE LOSS
$
(16,168
)
 
$
(2,143
)
See accompanying notes to unaudited condensed consolidated financial statements.


26


ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016
(In thousands, except preferred stock shares and per share data)
(Unaudited)
 
 
Common Stock
 
Preferred Stock
 
Additional
Paid in Capital
 
Retained
Earnings
(Accumulated
Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Equity
 
Class A
Shares
 
Class B
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
BALANCE - January 1, 2016
250,494

 
204,594

 
$
4,554

 
125

 
$
73

 
$
1,168,903

 
$
186,306

 
$
(13,370
)
 
$
1,346,466

Net loss

 

 

 

 

 

 
(5,130
)
 

 
(5,130
)
Foreign currency translation gain, net of tax

 

 

 

 

 

 

 
2,987

 
2,987

Repurchase of Class B common stock

 
(1,917
)
 
(19
)
 

 

 

 
(11,406
)
 

 
(11,425
)
Common distributions - $0.15 per Class A and Class B common share

 

 

 

 

 

 
(68,502
)
 

 
(68,502
)
Preferred distributions

 

 

 

 

 

 
(4
)
 

 
(4
)
Equity-based compensation

 
200

 
2

 

 

 
1,483

 

 

 
1,485

BALANCE - March 31, 2016
250,494

 
202,877

 
$
4,537

 
125

 
$
73

 
$
1,170,386

 
$
101,264

 
$
(10,383
)
 
$
1,265,877

 
Common Stock
 
Preferred Stock
 
Additional
Paid in Capital
 
Retained
Earnings
(Accumulated
Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Equity
 
Class A
Shares
 
Class B
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
BALANCE - January 1, 2017
250,494

 
195,407

 
$
4,462

 
125

 
$
73

 
$
1,144,664

 
$
176,532

 
$
(7,812
)
 
$
1,317,919

Net loss

 

 

 

 

 

 
(16,116
)
 

 
(16,116
)
Foreign currency translation gain, net of tax

 

 

 

 

 

 

 
531

 
531

Interest rate cash flow hedge loss, net of tax

 

 

 

 

 

 

 
(583
)
 
(583
)
Repurchase of Class B common stock

 
(1,408
)
 
(14
)
 

 

 

 
(8,529
)
 

 
(8,543
)
Common distributions - $0.15 per Class A and Class B common share

 

 

 

 

 

 
(67,162
)
 

 
(67,162
)
Preferred distributions

 

 

 

 

 

 
(4
)
 

 
(4
)
Equity-based compensation

 
283

 

 

 

 
737

 

 

 
737

BALANCE - March 31, 2017
250,494

 
194,282

 
$
4,448

 
125

 
$
73

 
$
1,145,401

 
$
84,721

 
$
(7,864
)
 
$
1,226,779

See accompanying notes to unaudited condensed consolidated financial statements.


27


ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016
(In thousands)
(Unaudited)
 
 
Three Months Ended
March 31,
 
2017
 
2016
OPERATING ACTIVITIES:
 
 
 
Net loss
$
(16,116
)
 
$
(5,130
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation
56,537

 
52,040

Foreign currency transaction loss (gain)
78

 
(773
)
Mark-to-market gain on interest rate swap
(889
)
 

Amortization of deferred financing costs and debt discount
1,997

 
10,850

Amortization of above-market ground leases
(34
)
 
(34
)
Loss on disposal of property and equipment
3,470

 
2,896

Impairment of long-lived assets
15,046

 

Equity-based compensation
33

 
15

Deferred income tax benefit
(308
)
 
(2,254
)
Changes in assets and liabilities:
 
 
 
Deferred rents receivable from Extended Stay America, Inc.
3,833

 
322

Due from (to) Extended Stay America, Inc., net
916

 
(13,798
)
Other assets
(3,262
)
 
(4,202
)
Unearned rental revenues/rents receivable from Extended Stay America, Inc., net
18,250

 
(15,102
)
Accounts payable and accrued liabilities
9,560

 
14,205

Net cash provided by operating activities
89,111

 
39,035

INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(47,553
)
 
(56,351
)
Decrease (increase) in restricted cash
344

 
(100,750
)
Proceeds from insurance recoveries
140

 
2,376

Net cash used in investing activities
(47,069
)
 
(154,725
)
FINANCING ACTIVITIES:
 
 
 
Principal payments on mortgage loan

 
(433,537
)
Principal payments on term loan facilities
(6,492
)
 
(366,463
)
Proceeds from senior notes, net of debt discount

 
788,000

Interest proceeds from senior notes (Note 7)

 
15,983

Proceeds from revolving credit facility
65,000

 

Payments on revolving credit facility
(75,000
)
 

Payments of deferred financing costs

 
(14,243
)
Net proceeds from Extended Stay America, Inc.

 
110,288

Repurchase of common stock
(8,543
)
 
(11,425
)
Issuance of Class A and Class B common stock
1,731

 
1,134

Common distributions
(67,153
)
 
(154,977
)
Preferred distributions

 
(8
)
Net cash used in financing activities
(90,457
)
 
(65,248
)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(48,415
)
 
(180,938
)
CASH AND CASH EQUIVALENTS - Beginning of period
53,506

 
223,256

CASH AND CASH EQUIVALENTS - End of period
$
5,091

 
$
42,318

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
Cash payments for interest, excluding prepayment and other penalties
$
18,166

 
$
17,688

Cash payments for income taxes
$
936

 
$
418

NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Capital expenditures included in due to/from Extended Stay America, Inc. and accounts payable and accrued liabilities
$
15,258

 
$
14,442

Deferred financing costs included in accounts payable and accrued liabilities
$

 
$
1,020

Common distributions included in accounts payable and accrued liabilities
$
1,273

 
$
852

See accompanying notes to unaudited condensed consolidated financial statements.

28


ESH HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2017 AND DECEMBER 31, 2016 AND FOR THE THREE MONTHS ENDED
MARCH 31, 2017 AND 2016
(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 direct parent of ESH REIT, was incorporated in the state of Delaware on July 8, 2013. On November 18, 2013, the Corporation and ESH REIT completed an initial public offering of 32.5 million Paired Shares. A "Paired Share" consists of one share of common stock, par value $0.01 per share, of the Corporation, that is attached to and trades as a single unit with one share of Class B common stock, par value $0.01 per share, of ESH REIT. The Corporation owns, and is expected to continue to own, all of the issued and outstanding Class A common stock of ESH REIT, which currently represents approximately 56% of the outstanding common stock of ESH REIT.
As of March 31, 2017 and December 31, 2016, ESH REIT and its subsidiaries owned 626 hotel properties in 44 U.S. states, consisting of approximately 68,900 rooms, and three hotels in Canada, consisting of 500 rooms. The hotels are operated by wholly-owned subsidiaries of the Corporation (the “Operating Lessees”) pursuant to leases between ESH REIT and the Operating Lessees. The hotels are managed by ESA Management LLC (“ESA Management”), a wholly-owned subsidiary of the Corporation. The substantial majority of the hotels are operated under the core brand, Extended Stay America. The three hotels in Canada are operated under the brand Extended Stay Canada. The brands are owned by ESH Hospitality Strategies LLC (“ESH Strategies”), also a wholly-owned subsidiary of the Corporation.
As of March 31, 2017, ESH REIT’s common equity consisted of the following: (i) approximately 250.5 million shares of Class A common stock outstanding (approximately 56% of its common equity), all of which were owned by the Corporation, and (ii) approximately 194.3 million shares of Class B common stock outstanding (approximately 44% of its common equity), approximately 69.0% of which were owned by the public and approximately 31.0% of which were owned by Centerbridge Partners, L.P., Paulson & Co. Inc. and The Blackstone Group L.P. and their funds or affiliates (collectively, the “Sponsors”) and senior management, including certain directors.
  As of December 31, 2016, ESH REIT’s common equity consisted of the following: (i) approximately 250.5 million shares of Class A common stock outstanding (approximately 56% of its common equity), all of which were owned by the Corporation, and (ii) approximately 195.4 million shares of Class B common stock outstanding (approximately 44% of its common equity), approximately 55.9% of which were owned by the public and approximately 44.1% of which were owned by the Sponsors and senior management, including certain directors.
Paired Share Repurchase Program
In December 2015, the Boards of Directors of the Corporation and ESH REIT authorized a combined Paired Share repurchase program for up to $100 million of Paired Shares. In February 2016, the Boards of Directors of the Corporation and ESH REIT authorized an increase of the combined Paired Share repurchase program from up to $100 million to up to $200 million of Paired Shares. In December 2016, the Boards of Directors of the Corporation and ESH REIT authorized an increase of the combined Paired Share repurchase program from up to $200 million to up to $300 million of Paired Shares and extended the maturity of the program through December 31, 2017, each effective January 1, 2017. Repurchases 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). Depending on market conditions and other factors, these repurchases may be commenced or suspended without prior notice. As of March 31, 2017, ESH REIT repurchased and retired approximately 10.8 million ESH REIT Class B common shares for approximately $62.2 million, of which approximately 4.475 million Paired Shares were repurchased and retired from certain entities affiliated with the Sponsors.
2017 Secondary Offering
In March 2017, certain selling stockholders (the "Selling Stockholders") sold approximately 25.0 million Paired Shares, pursuant to an automatic shelf registration statement as part of a secondary offering, of which ESH REIT repurchased and retired 0.625 million ESH REIT Class B common shares from the Selling Stockholders for approximately $3.8 million. The Selling Stockholders consisted solely of entities affiliated with the Sponsors and did not include officers or directors of the Corporation or ESH REIT. Neither the Corporation nor ESH REIT sold Paired Shares in the secondary offering and neither

29


received proceeds from the secondary offering. The Corporation and ESH REIT did, however, incur professional fees in connection with the secondary offering. Total expenses incurred by ESH REIT were approximately $0.2 million during the three months ended March 31, 2017.
Basis of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”), and include the financial position, results of operations, comprehensive income, changes in equity and cash flows of ESH REIT and its consolidated subsidiaries. Changes in ownership interests in a consolidated subsidiary that do not result in a loss of control are accounted for as equity transactions. All intercompany accounts and transactions have been eliminated.

2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Presentation—Certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP have been condensed or omitted in the accompanying unaudited condensed consolidated financial statements. ESH REIT believes the disclosures made are adequate to prevent the information presented from being misleading. However, the unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2016 included in the combined annual report on Form 10-K filed with the U.S. Securities and Exchange Commission ("SEC") on February 28, 2017.
The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal and recurring items) necessary to present fairly ESH REIT’s financial position as of March 31, 2017, the results of ESH REIT’s operations and comprehensive income for the three