Document
Table of Contents

 
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 September 30, 2016
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 or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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
¨
ESH Hospitality, Inc.
Large accelerated filer
x
Accelerated filer
¨
 
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨

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
198,249,911 shares of common stock, par value $0.01 per share, of Extended Stay America, Inc., which are attached to and traded together with 198,249,911 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 October 21, 2016.
 



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


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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.
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 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 the Corporation and ESH REIT; and
Creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.
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.
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 report also includes separate Part I Item 4 – Controls and Procedures sections and 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.


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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” 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.
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. Such risks, uncertainties and other important factors include, but are not limited to:
failure to successfully implement our business strategies, including our hotel renovation program, growth initiatives, asset repositionings and asset sales;
changes in U.S. general and local economic activity and the impact of these changes on consumer demand for lodging and related services in general and for extended stay lodging in particular;
levels of spending in the business, travel and leisure industries, as well as consumer confidence;
increased competition, including the over-building of hotels in our markets and new sources of potential competition such as sharing platforms;
fluctuations in the supply and demand for hotel rooms;
changes in the tastes and preferences of our customers;
the seasonal and cyclical nature of the real estate and lodging businesses;
interruptions in transportation systems, which may result in reduced business or leisure travel;
events beyond our control, such as war, terrorist attacks, travel-related health concerns, natural disasters and severe weather;
our ability to implement our business or growth strategies profitably;
the availability of capital for reinvestments, including future hotel renovation, construction, development and/or acquisition;
our ability to integrate and successfully operate any hotel properties acquired, developed or built in the future and the risks associated with these hotel properties;
the high fixed cost of hotel operations;
our ability to retain the services of certain members of our management and to recruit qualified talent for new positions;
incidents or adverse publicity concerning our hotels or other extended stay hotels;
decreases in brand loyalty due to increasing use of internet reservation channels;
changes in distribution arrangements, such as those with internet travel intermediaries;
our ability to keep pace with improvements in technology utilized for reservations systems and other operating systems, including technology used in the delivery of guest services;
the occurrence of cybersecurity incidents;

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our ability to protect our trademarks and other intellectual property;
the ability of ESH REIT to qualify, and remain qualified, as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”);
actual or constructive ownership (including deemed ownership by virtue of certain attribution provisions under the Code) of Paired Shares by investors who we do not control, which may cause ESH REIT to fail to meet the REIT income tests;
amendments to or elimination of our current equity pairing arrangement and/or other changes to our organizational structure;
changes in federal, state or local tax law, including legislative, administrative, regulatory or other actions affecting REITs or changes in interpretations thereof or increased taxes resulting from tax audits;
our relationships with associates and changes in labor and employment laws;
the cost of compliance with and liabilities under environmental, health and safety laws;
changes in real estate and zoning laws and increases in real property tax rates;
changes in local market or neighborhood conditions which may diminish the value of real property;
our geographic concentration in California, Texas, Florida and Illinois, which collectively account for approximately 38.2% of our rooms;
increases in interest rates, hotel operating costs or other costs we incur in connection with operating our business;
our substantial indebtedness and debt service obligations, including material increases in our cost of borrowing, and our ability to refinance existing or future debt before or upon maturity;
our ability to access credit or capital markets;
rating agency downgrades or withdrawals;
inadequate insurance coverage;
adverse litigation judgments or settlements; and
our status as a “controlled company.”
There may be other factors that may cause our actual results to differ materially from the forward-looking statements, including factors disclosed in our combined annual report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on February 23, 2016 and in other filings with the SEC. 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. 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.

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PART I — FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements

EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2016 AND DECEMBER 31, 2015
(In thousands, except share and per share data)
(Unaudited)
 
 
September 30,
2016
 
December 31,
2015
ASSETS
 
 
 
PROPERTY AND EQUIPMENT - Net of accumulated depreciation of $926,358 and $781,929
$
3,913,465

 
$
3,921,341

RESTRICTED CASH
21,576

 
84,416

CASH AND CASH EQUIVALENTS
149,835

 
373,239

INTANGIBLE ASSETS - Net of accumulated amortization of $8,015 and $7,010
28,718

 
29,723

GOODWILL
53,531

 
53,531

ACCOUNTS RECEIVABLE - Net of allowance for doubtful accounts of $2,558 and $2,413
27,326

 
18,164

DEFERRED TAX ASSETS
16,380

 

OTHER ASSETS
46,105

 
48,486

TOTAL ASSETS
$
4,256,936

 
$
4,528,900

LIABILITIES AND EQUITY

 

LIABILITIES:

 

Term loan facilities payable - Net of unamortized deferred financing costs and debt discount
of $22,785 and $4,940
$
1,277,215

 
$
361,523

Senior notes payable - Net of unamortized deferred financing costs and debt discount
of $35,516 and $10,756
1,264,484

 
489,244

Mortgage loan payable - Net of unamortized deferred financing costs of $0 and $19,536

 
1,911,621

Revolving credit facilities
25,000

 

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
220,334

 
243,969

Deferred tax liabilities
1,008

 
12,984

Total liabilities
2,809,243

 
3,040,543

COMMITMENTS AND CONTINGENCIES (Note 12)

 

EQUITY:

 

Common stock - $0.01 par value, 3,500,000,000 shares authorized, 200,199,911 and
204,593,912 shares issued and outstanding
2,005

 
2,049

Additional paid in capital
781,003

 
784,194

Retained earnings
153,483

 
102,184

Accumulated other comprehensive loss
(8,071
)
 
(8,754
)
Total Extended Stay America, Inc. shareholders’ equity
928,420

 
879,673

Noncontrolling interests
519,273

 
608,684

Total equity
1,447,693

 
1,488,357

TOTAL LIABILITIES AND EQUITY
$
4,256,936

 
$
4,528,900


See accompanying notes to unaudited condensed consolidated financial statements.

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EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
(In thousands, except per share data)
(Unaudited)
 

Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
REVENUES:

 

 

 

Room revenues
$
349,076

 
$
355,445

 
$
960,046

 
$
974,127

Other hotel revenues
5,445

 
5,071

 
14,822

 
14,291

Total revenues
354,521

 
360,516

 
974,868

 
988,418

OPERATING EXPENSES:

 

 

 

Hotel operating expenses
149,860

 
159,049

 
444,498

 
450,543

General and administrative expenses
24,612

 
24,373

 
73,552

 
73,909

Depreciation and amortization
55,955

 
52,268

 
164,274

 
151,980

Impairment of long-lived assets
2,756

 
9,011

 
2,756

 
9,011

Total operating expenses
233,183

 
244,701

 
685,080

 
685,443

OTHER INCOME
2

 
3

 
20

 
44

INCOME FROM OPERATIONS
121,340

 
115,818

 
289,808

 
303,019

OTHER NON-OPERATING (INCOME) EXPENSE
(305
)
 
1,143

 
(1,069
)
 
2,035

INTEREST EXPENSE, NET
48,713

 
35,157

 
131,462

 
101,975

INCOME BEFORE INCOME TAX EXPENSE
72,932

 
79,518

 
159,415

 
199,009

INCOME TAX EXPENSE
15,867

 
21,293

 
26,211

 
48,119

NET INCOME
57,065

 
58,225

 
133,204

 
150,890

NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
(10,509
)
 
(20,569
)
 
(8,873
)
 
(33,703
)
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
$
46,556

 
$
37,656

 
$
124,331

 
$
117,187

 
 
 
 
 
 
 
 
NET INCOME PER COMMON SHARE:

 

 

 

Basic
$
0.23

 
$
0.18

 
$
0.62

 
$
0.57

Diluted
$
0.23

 
$
0.18

 
$
0.61

 
$
0.57

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING:

 

 

 

Basic
200,556

 
204,281

 
202,156

 
204,171

Diluted
200,696

 
204,685

 
202,252

 
204,538

See accompanying notes to unaudited condensed consolidated financial statements.


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EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
(In thousands)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
NET INCOME
$
57,065

 
$
58,225

 
$
133,204

 
$
150,890

FOREIGN CURRENCY TRANSLATION (LOSS) GAIN, NET OF TAX OF $(274), $0, $550 AND $0
(841
)
 
(4,172
)
 
1,831

 
(5,786
)
CASH FLOW HEDGE ADJUSTMENT, NET OF TAX OF $(123), $0, $(123) AND $0
(446
)
 

 
(446
)
 

COMPREHENSIVE INCOME
55,778

 
54,053

 
134,589

 
145,104

COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
(9,857
)
 
(18,968
)
 
(9,575
)
 
(30,878
)
COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
$
45,921

 
$
35,085

 
$
125,014

 
$
114,226

See accompanying notes to unaudited condensed consolidated financial statements.


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EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
(In thousands, except per share data)
(Unaudited)
 
 
Common Stock
 
Additional
Paid in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total Shareholders' Equity
 
Noncontrolling Interests
 
Total
Equity
 
Shares
 
Amount
 
 
 
 
 
 
BALANCE - January 1, 2015
204,517

 
$
2,048

 
$
779,447

 
$
13,833

 
$
(5,810
)
 
$
789,518

 
$
599,799

 
$
1,389,317

Net income

 

 

 
117,187

 

 
117,187

 
33,703

 
150,890

Foreign currency translation loss, net of tax

 

 

 

 
(2,961
)
 
(2,961
)
 
(2,825
)
 
(5,786
)
Corporation common distributions - $0.04 per common share

 

 

 
(8,216
)
 

 
(8,216
)
 

 
(8,216
)
ESH REIT common distributions - $0.45 per Class B common share

 

 

 

 

 

 
(92,337
)
 
(92,337
)
ESH REIT preferred distributions

 

 

 

 

 

 
(12
)
 
(12
)
Equity-based compensation
77

 
1

 
3,497

 

 

 
3,498

 
3,337

 
6,835

BALANCE - September 30, 2015
204,594

 
$
2,049

 
$
782,944

 
$
122,804

 
$
(8,771
)
 
$
899,026

 
$
541,665

 
$
1,440,691

 
Common Stock
 
Additional
Paid in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total Shareholders' Equity
 
Noncontrolling Interests
 
Total
Equity
 
Shares
 
Amount
 
 
 
 
 
 
BALANCE - January 1, 2016
204,594

 
$
2,049

 
$
784,194

 
$
102,184

 
$
(8,754
)
 
$
879,673

 
$
608,684

 
$
1,488,357

Net income

 

 

 
124,331

 

 
124,331

 
8,873

 
133,204

Foreign currency translation gain, net of tax

 

 

 

 
876

 
876

 
955

 
1,831

Cash flow hedge adjustment, net of tax

 

 

 

 
(193
)
 
(193
)
 
(253
)
 
(446
)
Issuance of common stock
4

 

 
6

 

 

 
6

 

 
6

Repurchase of common stock
(4,622
)
 
(46
)
 

 
(42,602
)
 

 
(42,648
)
 
(26,952
)
 
(69,600
)
Corporation common distributions - $0.15 per common share

 

 

 
(30,430
)
 

 
(30,430
)
 

 
(30,430
)
ESH REIT common distributions - $0.40 per Class B common share

 

 

 

 

 

 
(81,623
)
 
(81,623
)
ESH REIT preferred distributions

 

 

 

 

 

 
(12
)
 
(12
)
Adjustment to noncontrolling interest for change in ownership of ESH REIT

 

 
(6,090
)
 

 

 
(6,090
)
 
6,090

 

Equity-based compensation
224

 
2

 
2,893

 

 

 
2,895

 
3,511

 
6,406

BALANCE - September 30, 2016
200,200

 
$
2,005

 
$
781,003

 
$
153,483

 
$
(8,071
)
 
$
928,420

 
$
519,273

 
$
1,447,693

See accompanying notes to unaudited condensed consolidated financial statements.

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EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
(In thousands)
(Unaudited)
 
 
Nine Months Ended
September 30,
 
2016
 
2015
OPERATING ACTIVITIES:

 

Net income
$
133,204

 
$
150,890

Adjustments to reconcile net income to net cash provided by operating activities:

 

Depreciation
163,269

 
150,950

Amortization of intangible assets
1,005

 
1,030

Foreign currency transaction (gain) loss
(1,069
)
 
2,275

Amortization and write-off of deferred financing costs and debt discount
29,012

 
9,535

Amortization of above-market ground leases
(102
)
 
(102
)
Loss on disposal of property and equipment
7,255

 
3,326

Impairment of long-lived assets
2,756

 
9,011

Equity-based compensation
8,635

 
7,940

Deferred income tax benefit
(28,782
)
 
(8,173
)
Changes in assets and liabilities:

 

Accounts receivable, net
(9,137
)
 
181

Other assets
1,442

 
(5,108
)
Accounts payable and accrued liabilities
28,502

 
43,476

Net cash provided by operating activities
335,990

 
365,231

INVESTING ACTIVITIES:

 

Purchases of property and equipment
(166,454
)
 
(141,158
)
Proceeds from asset dispositions, net

 
852

Decrease (increase) in restricted cash and insurance collateral
62,945

 
(120,058
)
Proceeds from insurance recoveries
2,716

 
3,711

Net cash used in investing activities
(100,793
)
 
(256,653
)
FINANCING ACTIVITIES:

 

Principal payments on mortgage loan
(1,931,157
)
 
(500,777
)
Proceeds from term loan facilities, net of debt discount
1,293,500

 

Principal payments on term loan facilities
(366,463
)
 
(8,537
)
Proceeds from senior notes, net of debt discount
788,000

 
500,000

Proceeds from revolving credit facilities
50,000

 
65,000

Payments on revolving credit facilities
(25,000
)
 
(65,000
)
Payments of deferred financing costs
(33,060
)
 
(11,476
)
Tax withholdings related to restricted stock unit settlements
(2,229
)
 
(1,105
)
Issuance of common stock
6

 

Repurchase of common stock
(69,600
)
 

Corporation common distributions
(42,508
)
 
(8,185
)
ESH REIT common distributions
(120,116
)
 
(92,244
)
ESH REIT preferred distributions
(8
)
 
(16
)
Net cash used in financing activities
(458,635
)
 
(122,340
)
CHANGES IN CASH AND CASH EQUIVALENTS DUE TO CHANGES IN FOREIGN CURRENCY EXCHANGE RATES
34

 
(56
)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(223,404
)
 
(13,818
)
CASH AND CASH EQUIVALENTS - Beginning of period
373,239

 
121,324

CASH AND CASH EQUIVALENTS - End of period
$
149,835

 
$
107,506

SUPPLEMENTAL CASH FLOW INFORMATION:

 

Cash payments for interest, excluding prepayment and other penalties
$
74,134

 
$
75,544

Cash payments for income taxes, net of refunds of $1,068 and $92
$
61,581

 
$
56,751

NONCASH INVESTING AND FINANCING ACTIVITIES:

 

Capital expenditures included in accounts payable and accrued liabilities
$
20,600

 
$
16,093

Deferred financing costs included in accounts payable and accrued liabilities
$
1,146

 
$

Corporation common distributions included in accounts payable and accrued liabilities
$
327

 
$
31

ESH REIT common distributions included in accounts payable and accrued liabilities
$
1,241

 
$
458

See accompanying notes to unaudited condensed consolidated financial statements.

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EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2016 AND DECEMBER 31, 2015 AND FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2016 AND 2015
(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 55% 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.
As of September 30, 2016 and December 31, 2015, 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.
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 $100 million to up to $200 million of Paired Shares. The program expires on December 31, 2016. 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 September 30, 2016, the Corporation and ESH REIT repurchased and retired approximately 4.6 million Corporation common shares and ESH REIT Class B common shares for approximately $42.6 million and $27.0 million, respectively.
As of September 30, 2016, the Corporation had approximately 200.2 million shares of common stock outstanding, approximately 35.6% of which were owned by the public and approximately 64.4% of which were owned by Centerbridge Partners, L.P., Paulson & Co. Inc. and the Blackstone Group, L.P. and their affiliates (collectively, the “Sponsors”) and senior management, including certain directors.  As of September 30, 2016, ESH REIT’s common equity consisted of the following: (i) approximately 250.5 million shares of Class A common stock outstanding (approximately 55% of its common equity), all of which were owned by the Corporation, and (ii) approximately 200.2 million shares of Class B common stock outstanding (approximately 45% of its common equity), approximately 35.6% of which were owned by the public and approximately 64.4% of which were owned by the Sponsors and senior management, including certain directors. 

As of December 31, 2015, the Corporation had approximately 204.6 million shares of common stock outstanding, approximately 36.9% of which were owned by the public and approximately 63.1% of which were owned by the Sponsors and senior management, including certain directors.  As of December 31, 2015, ESH REIT’s common equity consisted of the following: (i) approximately 250.5 million shares of Class A common stock outstanding, all of which were owned by the Corporation, and (ii) approximately 204.6 million shares of Class B common stock outstanding, approximately 36.9% of which were owned by the public and approximately 63.1% of which were owned by the Sponsors and senior management, including certain directors. 
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,

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comprehensive income, changes in equity and cash flows of the Corporation and its consolidated subsidiaries.  Third party equity interests in consolidated subsidiaries are presented as noncontrolling interests.  Despite the fact that each share of Corporation common stock is paired on a 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, 2015 included in the combined annual report on Form 10-K filed with the U.S. Securities and Exchange Commission ("SEC") on February 23, 2016.
The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal and recurring items) necessary to present fairly the Company’s financial position as of September 30, 2016, the results of the Company’s operations and comprehensive income for the three and nine months ended September 30, 2016 and 2015 and changes in equity and cash flows for the nine months ended September 30, 2016 and 2015. 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 estimate the useful lives of tangible assets as well as 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 at least annually, 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 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 $2.8 million for the three and nine months ended September 30, 2016 and $9.0 million for the three and nine months ended September 30, 2015 (see Note 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 reduce the carrying value of a hotel property could occur in a future period in which conditions change.
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

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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
Statement of Cash Flows—In August 2016, the Financial Accounting Standards Board ("FASB") issued an accounting standards update which provides 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. The update is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods, with early application permitted. The adoption of this update will require cash outflows related to debt prepayment and extinguishment costs to be classified as financing activities. For the nine months ended September 30, 2016, debt prepayment and extinguishment costs included within net cash provided by operating activities totaled approximately $3.9 million.
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 update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods, with early application permitted. The Company does not expect the adoption of this update to have a material effect on its consolidated financial statements.

Derivatives and Hedging—In March 2016, the FASB issued an accounting standards update which clarifies 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 update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods, with early application permitted. The Company does not expect the adoption of this update to have a material effect on its consolidated financial statements.
Leases— In February 2016, the FASB issued an accounting standards update which introduces a lessee model that requires a right-of-use asset and lease obligation to be presented on the balance sheet for all leases, whether operating or financing. The update eliminates the requirement in current U.S. GAAP for an entity to use bright-line tests in determining lease classification. The update also requires lessors to increase the transparency of their exposure to changes in value of their residual assets and how they manage that exposure. This update will be effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted, and must be applied using a modified retrospective approach, which will require adjustment to all comparative periods presented. The adoption of this update will require the recognition of a right-of-use asset and a lease obligation for the Company’s ground leases and office lease (see Note 12). As of September 30, 2016, the future minimum lease payments under these operating leases totaled approximately $95.0 million.
Intangibles—Goodwill and Other—Internal-Use Software—In April 2015, the FASB issued an accounting standards update which clarifies the accounting for fees paid by a customer in a cloud computing arrangement. This update provides guidance to customers regarding whether a cloud computing arrangement includes the sale or license of software or, alternatively, the sale of a service. The Company adopted this update on January 1, 2016. The adoption of this update did not have a material effect on the Company’s unaudited condensed consolidated financial statements.
Consolidation—Amendments to the Consolidation Analysis—In February 2015, the FASB issued an accounting standards update which amends the consolidation requirements under U.S. GAAP, changing the analysis performed by a company to determine whether it has a variable interest in an entity and when to consolidate such entities. The Company adopted this update on January 1, 2016. The adoption of this update did not have a material effect on the Company’s unaudited condensed consolidated financial statements.
Income Statement-Extraordinary and Unusual Items—In January 2015, the FASB issued an accounting standards update to simplify income statement presentation by eliminating the concept of extraordinary items. The Company adopted this update on January 1, 2016. The adoption of this update did not have a material effect on the Company’s unaudited condensed consolidated financial statements.

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Contractual Revenue—Since May 2014, the FASB has issued several accounting standards updates which amend existing revenue recognition accounting standards. These updates are based on the principle that revenue is recognized when an entity transfers 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 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 is currently assessing the impact these updates will have on its consolidated financial statements.

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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:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in thousands, except per share data)
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
Net income available to common shareholders - basic
$
46,556

 
$
37,656

 
$
124,331

 
$
117,187

Less amounts available to noncontrolling interests assuming conversion
(4
)
 
(22
)
 
(4
)
 
(35
)
Net income available to common shareholders - diluted
$
46,552

 
$
37,634

 
$
124,327

 
$
117,152

Denominator:
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding - basic
200,556

 
204,281

 
202,156

 
204,171

Dilutive securities
140

 
404

 
96

 
367

Weighted-average number of common shares outstanding - diluted
200,696

 
204,685

 
202,252

 
204,538

Net income per common share - basic
$
0.23

 
$
0.18

 
$
0.62

 
$
0.57

Net income per share common share - diluted
$
0.23

 
$
0.18

 
$
0.61

 
$
0.57



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4. HOTEL DISPOSITIONS
On December 8, 2015, the Company sold a portfolio of 53 hotel properties, 47 of which operated under the Crossland Economy Studios brand and six of which operated under the Extended Stay America brand, and certain intellectual property of Crossland Economy Studios (the "Portfolio Sale"), for gross proceeds of $285.0 million. The carrying value of this portfolio, including net working capital and allocable goodwill, was approximately $145.4 million, resulting in a gain, net of closing costs and adjustments, of approximately $130.9 million, which was reported in gain on sale of hotel properties in the consolidated statement of operations for the year ended December 31, 2015. This disposition was not reported as a discontinued operation.
During the three and nine months ended September 30, 2015, these hotel properties contributed total room and other hotel revenues, total operating expenses and income before income tax expense as follows (in thousands):
 
Three Months Ended
September 30, 2015
Nine Months Ended September 30, 2015
Total room and other hotel revenues
$
19,372

$
54,749

Total operating expenses
12,821

36,557

Income before income tax expense(1)
5,738

15,499

_________________________________
(1)
Included interest expense relates to approximately $86.1 million of ESH REIT's 2012 Mortgage Loan (as defined in Note 7) repaid in conjunction with the Portfolio Sale.


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5. PROPERTY AND EQUIPMENT
Net investment in property and equipment as of September 30, 2016 and December 31, 2015, consists of the following (in thousands):
 
September 30, 2016
 
December 31, 2015
Hotel properties:
 
 
 
Land and site improvements
$
1,302,681

 
$
1,296,918

Building and improvements
2,919,583

 
2,859,227

Furniture, fixtures and equipment
595,975

 
522,617

Total hotel properties
4,818,239

 
4,678,762

Corporate furniture, fixtures, equipment, software and other
19,909

 
22,833

Undeveloped land parcel
1,675

 
1,675

Total cost
4,839,823

 
4,703,270

Less accumulated depreciation:
 
 
 
Hotel properties
(914,277
)
 
(767,240
)
Corporate furniture, fixtures, equipment, software and other
(12,081
)
 
(14,689
)
Total accumulated depreciation
(926,358
)
 
(781,929
)
Property and equipment - net
$
3,913,465

 
$
3,921,341

During the nine months ended September 30, 2016 and 2015, the Company, using Level 3 unobservable inputs, assessed property and equipment for potential impairment. The Company recognized an impairment charge of approximately $2.8 million for the three and nine months ended September 30, 2016 and $9.0 million for the three and nine months ended September 30, 2015. 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. 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.

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6. INTANGIBLE ASSETS AND GOODWILL
The Company’s intangible assets and goodwill as of September 30, 2016 and December 31, 2015, consist of the following (dollars in thousands):
 
September 30, 2016
 
Estimated
Useful Life
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Book Value
Definite-lived intangible assets—customer relationships
20 years
 
$
26,800

 
$
(8,015
)
 
$
18,785

Indefinite-lived intangible assets—trademarks
 
 
9,933

 

 
9,933

Total intangible assets
 
 
36,733

 
(8,015
)
 
28,718

Goodwill
 
 
53,531

 

 
53,531

Total intangible assets and goodwill
 
 
$
90,264

 
$
(8,015
)
 
$
82,249

 
 
 
 
 
 
 
 
 
December 31, 2015
 
Estimated
Useful Life
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Book Value
Definite-lived intangible assets—customer relationships
20 years
 
$
26,800

 
$
(7,010
)
 
$
19,790

Indefinite-lived intangible assets—trademarks
 
 
9,933

 

 
9,933

Total intangible assets
 
 
36,733

 
(7,010
)
 
29,723

Goodwill
 
 
53,531

 

 
53,531

Total intangible assets and goodwill
 
 
$
90,264

 
$
(7,010
)
 
$
83,254

The remaining weighted-average amortization period for definite-lived intangible assets is approximately 14 years as of September 30, 2016. Estimated future amortization expense for definite-lived intangible assets is as follows (in thousands):
Years Ending December 31,
 
Remainder of 2016
$
335

2017
1,340

2018
1,340

2019
1,340

2020
1,340

Thereafter
13,090

Total
$
18,785



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7. DEBT
Summary - The Company’s outstanding debt, net of unamortized debt discounts, and unamortized deferred financing costs as of September 30, 2016 and December 31, 2015, consists of the following (dollars in thousands):
 
Stated
Amount
(1)
 
Outstanding Principal
 
Unamortized Deferred Financing Costs
 
 
 
Interest Rate
 
 
 
Loan
 
September 30, 2016
 
December 31, 2015
 
September 30, 2016
 
December 31, 2015
 
Stated Interest Rate
 
September 30, 2016
 
December 31, 2015
 
Maturity Date
 
Mortgage loan
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ESH REIT 2012 Mortgage Loan - Component B
$
350,000

 
$

 
$
111,157

 
$

 
$
784

 
3.4047
%
 
N/A

 
3.4047
%
 
N/A
 
ESH REIT 2012 Mortgage Loan - Component C
1,820,000

 

 
1,820,000

 

 
18,752

 
4.0547
%
 
N/A

 
4.0547
%
 
N/A
 
Term loan facilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ESH REIT 2016 Term Facility
1,300,000

(2) 
1,293,500

(3) 

 
16,285

 

 
LIBOR(4) + 3.00%(5)

 
3.75
%
(5) 
N/A

 
8/30/2023
(8) 
ESH REIT 2014 Term Loan
375,000

 

 
365,157

(6) 

 
3,635

 
LIBOR + 4.25%

 
N/A

 
5.00
%
 
N/A
 
Senior notes
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ESH REIT 2025 Notes
1,300,000

 
1,288,712

(7) 
500,000

 
24,228

 
10,756

 
5.25
%
 
5.25
%
 
5.25
%
 
5/1/2025
 
Revolving credit facilities(9)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ESH REIT 2016 Revolving Credit Facility
350,000

 
25,000

 

 
2,678

 

 
LIBOR + 2.75%

 
3.2744
%
 
N/A

 
8/30/2021
 
ESH REIT 2013 Revolving Credit Facility
250,000

 

 

 

 
1,431

 
LIBOR + 3.00%

 
N/A

 
N/A

 
N/A
 
Corporation 2016 Revolving Credit Facility
50,000

 

 

 
534

 

 
LIBOR + 3.00%

 
N/A

 
N/A

 
8/30/2021
 
Corporation 2013 Revolving Credit Facility
50,000

 

 

 

 
956

 
LIBOR + 3.75%

 
N/A

 
N/A

 
N/A
 
Unsecured Intercompany Facility
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unsecured Intercompany Facility
75,000

(10) 

 

 

 

 
5.00
%
 
5.00
%
 
N/A

 
8/30/2023
 
Total
 
 
$
2,607,212

 
$
2,796,314

 
$
43,725

 
$
36,314

 
 
 
 
 
 
 
 
 
_________________________________
(1)
Amortization is interest only, except for the 2016 Term Facility which amortizes in equal quarterly installments of $3.25 million as of September 30, 2016.
(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 $6.5 million as of September 30, 2016.
(4)
The 2016 Term Facility includes a LIBOR floor of 0.75%.
(5)
$500.0 million of the 2016 Term Facility is subject to a floating-to-fixed interest rate swap at a fixed rate of 1.175% as of September 30, 2016 (see Note 8).
(6)
The 2014 Term Loan is presented net of an unamortized debt discount of approximately $1.3 million as of December 31, 2015.
(7)
The 2025 Notes are presented net of an unamortized debt discount of approximately $11.3 million as of September 30, 2016.
(8)
In addition to scheduled amortization noted in (1) above, subject to certain exceptions, mandatory annual 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. Mandatory annual prepayments are due during the first quarter of the following year.
(9)
Each revolving credit facility's unamortized deferred financing costs are included in other assets in the accompanying unaudited condensed consolidated balance sheets.
(10)
As of September 30, 2016, the outstanding balance owed by ESH REIT under the Unsecured Intercompany Facility was $75.0 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 related to the Unsecured Intercompany Facility eliminate in consolidation.
In August 2016, ESH REIT entered into the 2016 ESH REIT Credit Facilities (as defined below), pursuant to which it borrowed $1,300.0 million under the 2016 Term Facility (as defined below) at 99.5% of par value, or approximately $1,277.5 million net of debt issuance costs, and $50.0 million under the 2016 ESH REIT Revolving Credit Facility (as defined below). Also in August 2016, the Corporation and ESH REIT entered into the Unsecured Intercompany Facility (as defined below), pursuant to which ESH REIT borrowed $75.0 million from the Corporation. ESH REIT used the proceeds from the 2016 ESH REIT Credit Facilities and the Unsecured Intercompany Facility, together with cash on hand, to fully repay the outstanding

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balance of approximately $1,497.6 million under Component C of its 2012 Mortgage Loan (as defined below). ESH REIT incurred approximately $14.1 million of debt extinguishment costs in connection with the repayment of the 2012 Mortgage Loan, consisting of the write-off of unamortized deferred financing costs of approximately $12.8 million and other costs of approximately $1.3 million. Debt extinguishment costs are included as a component of net interest expense in the accompanying unaudited condensed consolidated statements of operations.
In March 2016, ESH REIT issued $800.0 million of additional 2025 Notes (as defined below) at 98.5% of par value. ESH REIT received net proceeds of approximately $772.8 million, which, together with cash on hand, were used to fully repay the balance of approximately $366.5 million outstanding under its 2014 Term Loan (as defined below) and repay approximately $433.5 million of the outstanding balance under its 2012 Mortgage Loan, which consisted of approximately $111.2 million of Component B and approximately $322.3 million of Component C. ESH REIT incurred approximately $12.1 million of debt extinguishment costs in connection with the repayments of the 2014 Term Loan and the 2012 Mortgage Loan, consisting of the write-off of unamortized deferred financing costs and debt discount of approximately $8.4 million and prepayment penalties and other costs of approximately $3.7 million.
Outstanding Indebtedness
ESH REIT Credit Facilities
On August 30, 2016, ESH REIT entered into a new credit agreement 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 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. If an event of default occurs, the administrative agent is entitled to take various actions, including the acceleration of amounts due under the 2016 ESH REIT Credit Facilities and additional actions that a secured creditor is permitted to take following a default. As of September 30, 2016, ESH REIT was in compliance with all covenants under the 2016 ESH REIT Credit Facilities.
2016 Term FacilityESH REIT borrowed $1,300.0 million under the 2016 Term Facility upon the closing of the 2016 ESH REIT Credit Facilities. The 2016 Term Facility bears interest at a rate equal to (i) LIBOR (subject to a floor of 0.75%) plus a spread which is applicable at such time by reference to the Rating Level Period, 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 (subject to a floor of 0.75%) plus 1.00%) plus a spread which is applicable at such time by reference to the Rating Level Period. Spreads range from 2.75% to 3.00% for LIBOR loans and 1.75% to 2.00% for base rate loans, and vary depending on ESH REIT's credit rating. The 2016 Term Facility amortizes in equal quarterly installments in annual amounts of 1.0% of the principal amount outstanding, or $13.0 million, commencing on December 31, 2016, 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. Mandatory annual 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 February 28, 2017 (other than as a result

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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 February 28, 2017 are not subject to a prepayment penalty.

2016 ESH REIT Revolving Credit FacilityESH REIT borrowed $50.0 million upon the facility's closing. The 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 plus0.50%, 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 September 30, 2016, ESH REIT had no letters of credit outstanding under the facility, an outstanding balance of $25.0 million and available borrowing capacity of $325.0 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
On May 15, 2015, ESH REIT issued $500.0 million of its 5.25% senior notes due in 2025 (the “2025 Notes”) under an indenture (the “Indenture”) with Deutsche Bank Trust Company Americas, as trustee, at 100% of par value in a private placement pursuant to Rule 144A of the Securities Act ("Rule 144A"). On March 18, 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. As of September 30, 2016, 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; no amounts were borrowed upon the facility's closing. 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

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$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 September 30, 2016, the Corporation had one letter of credit outstanding under this facility of $1.8 million, an outstanding balance drawn of $0 and borrowing capacity available of $48.2 million.
Obligations under the 2016 Corporation Revolving Credit Facility are guaranteed by certain existing and future material domestic subsidiaries of the Corporation 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 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 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. If an event of default occurs, the administrative agent is entitled to take various actions, including the acceleration of amounts due under the facility and additional actions that a secured creditor is permitted to take following a default. As of September 30, 2016, 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"), under which ESH REIT borrowed $75.0 million from the Corporation upon the facility's closing. 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. If an event of default occurs, the Corporation is entitled to take various actions, including the acceleration of amounts due under the facility and all other actions that a creditor is permitted to take following a default. As of September 30, 2016, ESH REIT was in compliance with all covenants under the Unsecured Intercompany Facility.


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Prior Indebtedness
ESH REIT 2012 Mortgage Loan
On August 30, 2016, ESH REIT fully repaid the balance of approximately $1,497.6 million outstanding under its $2.52 billion mortgage loan comprised of three components originally entered into in November 2012 (the “2012 Mortgage Loan”). Principal amounts, interest rates and maturities of the components of the 2012 Mortgage Loan outstanding as of December 31, 2015 are included in the table above. The outstanding balance of the 2012 Mortgage Loan, which was outstanding under Component C, was scheduled to mature in December 2019.
Substantially all of ESH REIT’s hotel properties served as collateral for the 2012 Mortgage Loan. ESH REIT guaranteed, under a customary recourse carve out guaranty (i) under certain limited circumstances, losses related to the 2012 Mortgage Loan plus enforcement costs incurred by the lenders and (ii) under certain other limited circumstances, repayment of the 2012 Mortgage Loan up to an aggregate liability under this clause (ii) of $252.0 million plus enforcement costs.
All receipts from the mortgaged properties were deposited into a domestic cash management account (“CMA”) for hotels in the U.S. and a Canadian CMA for hotels in Canada. Such CMAs were under the control of the loan service agent and were therefore classified as restricted cash on the accompanying unaudited condensed consolidated balance sheet as of December 31, 2015.
ESH REIT 2014 Term Loan
On March 18, 2016, using a portion of the net proceeds from its issuance of $800.0 million of additional 2025 Notes, together with cash on hand, ESH REIT fully repaid the remaining outstanding balance of approximately $366.5 million of its $375.0 million term loan facility (the “2014 Term Loan”) originally entered into in June 2014. The repayment of the 2014 Term Loan resulted in a prepayment penalty of approximately $3.7 million. The 2014 Term Loan was scheduled to mature in June 2019 and bore interest at the rate included in the table above as of December 31, 2015. There was no scheduled amortization; however, subject to certain exceptions, mandatory prepayments of up to 50% of Excess Cash Flow may have been required, based on ESH REIT’s Consolidated Leverage Ratio, each as defined. ESH REIT made a mandatory prepayment of approximately $8.5 million during the three months ended March 31, 2015.
2013 ESH REIT Revolving Credit Facility
On November 18, 2013, ESH REIT entered into a $250.0 million revolving credit facility (the “2013 ESH REIT Revolving Credit Facility”), which was terminated on August 30, 2016. Prior to its termination, the facility originally matured in November 2016. The facility provided for the issuance of up to $50.0 million of letters of credit as well as borrowings on same day notice, referred to as swingline loans, in an amount up to $20.0 million. ESH REIT incurred a fee of 0.35% or 0.175% on the unutilized revolver balance, based on the outstanding amount under the facility, and a fee of 3.125% on outstanding letters of credit. Borrowings under the facility bore interest at the rate included in the table above as of December 31, 2015. As of December 31, 2015, ESH REIT had no letters of credit outstanding under this facility, an outstanding balance drawn of $0 and borrowing capacity available of $250.0 million.
2013 Corporation Revolving Credit Facility
On November 18, 2013, the Corporation entered into a revolving credit facility (the “2013 Corporation Revolving Credit Facility”) of $75.0 million. On November 18, 2014, the borrowing availability under the facility decreased to $50.0 million. On August 30, 2016, the facility was terminated. Prior to its termination, the facility originally matured in November 2016. The facility provided for the issuance of up to $50.0 million of letters of credit as well as borrowings on same day notice, referred to as swingline loans, in an amount up to $20.0 million. The Corporation incurred a fee of 0.35% or 0.175% on the unutilized revolver balance, based on the outstanding amount under the facility, and a fee of 3.875% on outstanding letters of credit. Borrowings under the facility bore interest at the rates included in the table above as of December 31, 2015. As of December 31, 2015, the Corporation had one letter of credit outstanding under this facility of $1.8 million, an outstanding balance drawn of $0 and borrowing capacity available of $48.2 million.

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Future Maturities of Debt—The future maturities of debt as of September 30, 2016, are as follows (in thousands):
Years Ending December 31,
 
 
Remainder of 2016
$
3,250

 
2017
13,000

 
2018
13,000

 
2019
13,000

 
2020
13,000

 
Thereafter
2,569,750

(1) 
Total
$
2,625,000

 
(1)
Under the ESH REIT 2016 Term Facility, mandatory annual prepayments of up to 50% of Excess Cash Flow, as defined, may be required commencing with the year ending December 31, 2017. Mandatory annual prepayments are due during the first quarter of the following year.
Fair Value of Debt—As of September 30, 2016 and December 31, 2015, the estimated fair value of debt was approximately $2.6 billion and $2.8 billion, respectively. Estimated fair values are determined by comparing current borrowing rates and risk spreads offered in the market to the stated interest rates and spreads on debt (Level 2 fair value measures) or quoted market prices (Level 1 fair value measures), when available.

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8. DERIVATIVE INSTRUMENTS
The Company from time to time uses derivative instruments to manage its exposure to interest rate 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. 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% to manage its exposure to interest rate risk on a portion of its variable rate debt. The notional amount of the interest rate swap as of September 30, 2016 was $500.0 million, which reduces by $50.0 million every six months until September 2021. The swap is designated and accounted for as an effective cash flow hedge, as the notional amount, interest rate and payment dates in the interest rate swap match those of the hedged cash flows. The fair value of the interest rate swap as of September 30, 2016 was approximately $(0.6) million and is reported in accounts payable and accrued liabilities on the accompanying unaudited condensed consolidated balance sheets. There were no interest rate derivatives outstanding as of December 31, 2015.

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 September 30, 2016 and December 31, 2015. 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 September 30, 2016 and December 31, 2015, the estimated fair value of the 8.0% voting preferred stock was approximately $21.4 million and $21.2 million, respectively. 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 Company’s taxable income includes the taxable income of its wholly-owned subsidiaries and distribution income related to its ownership of approximately 55% 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 Code. A REIT is a legal entity that holds real estate assets and is generally not subject to federal and state income taxes. In order to maintain qualification as a REIT, ESH REIT is required to distribute at least 90% of its taxable income, excluding net capital gain, to its shareholders each year. In addition, ESH REIT must meet a number of complex organizational and operational requirements. If ESH REIT were to fail to qualify as a REIT in any taxable year, it would be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and generally would be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which it lost its REIT qualification. Even in qualifying as a REIT, ESH REIT may be subject to state and local taxes in certain jurisdictions, and is subject to federal income and excise taxes on undistributed income.
ESH REIT intends to distribute its taxable income to the extent necessary to optimize its tax efficiency including, but not limited to, maintaining its REIT status, while retaining sufficient capital for its ongoing needs. Accordingly, ESH REIT expects to distribute approximately 100% of its taxable income for the foreseeable future. As of December 31, 2015, the expectation was to distribute approximately 95% of ESH REIT’s taxable income. As a result of this change, 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

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tax liabilities recorded as of December 31, 2015, which represented the previously estimated 5% of taxable income to be retained by ESH REIT.
During the three and nine months ended September 30, 2016, the Company recognized a benefit of approximately $(0.8) million and $(8.5) million, respectively, attributable to a December 2015 statutory law change in the way earnings and profits are computed at ESH REIT. The effect of the change was the reversal of a deferred tax liability related to the Corporation’s anticipated receipt of future ESH REIT nontaxable distributions.
In January 2016, ESH REIT paid a special distribution of approximately $86.5 million. Approximately $77.4 million of the special distribution was deductible in 2015; the remaining approximately $9.1 million is deductible in 2016. The special distribution is subject to current taxation to the Corporation as a distribution in 2016 at the time of receipt.
In 2015, ESH REIT distributed approximately 95% of its taxable income and utilized its federal net operating loss carryforward of approximately $18.6 million. As a result, in 2015, ESH REIT incurred minimal current federal income tax in the form of alternative minimum tax.
The Company recorded a provision for federal, state and foreign income taxes of approximately $15.9 million for the three months ended September 30, 2016, an effective rate of approximately 21.8%, as compared with a provision of approximately $21.3 million for the three months ended September 30, 2015, an effective rate of approximately 26.8%. The Company recorded a provision for federal, state and foreign income taxes of approximately $26.2 million for the nine months ended September 30, 2016, an effective rate of approximately 16.4%, as compared with a provision of approximately $48.1 million for the nine months ended September 30, 2015, an effective rate of approximately 24.2%. 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. For the three months ended September 30, 2016, the Company’s effective rate was impacted by the approximate $(0.8) million benefit discussed above; in addition to discrete provision to return adjustments of approximately $(2.0) million recognized upon the filing of an income tax return. For the nine months ended September 30, 2016, the effective rate was impacted by the approximate $(1.8) million and $(8.5) million benefits discussed above; in addition to discrete provision to return adjustments of approximately $(2.0) million recognized upon the filing of an income tax return and $0.8 million of expense related to restricted stock units settled during the nine months ended September 30, 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 September 30, 2016 and December 31, 2015.
As of September 30, 2016, the outstanding balance owed by ESH REIT under the Unsecured Intercompany Facility was $75.0 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 related to this facility eliminate in consolidation (see Note 7).
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 nine months ended September 30, 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 in Charlotte, North Carolina.  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 and $0.9 million for the three months ended September 30, 2016 and 2015, respectively, and approximately $2.4 million and $2.5

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million for the nine months ended September 30, 2016 and 2015, respectively. 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 September 30, 2016 and 2015, and $0.2 million for each of the nine months ended September 30, 2016 and 2015, and is included in hotel operating expenses in the accompanying unaudited condensed consolidated statements of operations.
Letters of Credit—As of September 30, 2016, the Company had one outstanding letter of credit, issued by the Corporation, for $1.8 million, which is collateralized by the 2016 Corporation Revolving Credit Facility.
Paired Share Repurchase Commitment—As of September 30, 2016, the Corporation and ESH REIT agreed to repurchase 1.95 million Corporation common shares and ESH REIT Class B common shares for approximately $17.1 million and $10.5 million, respectively, for which settlement had not yet occurred (see Note 15).
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 8,000,000, of which no more than 4,000,000 may be granted as incentive stock options. Each of the Corporation’s and ESH REIT’s LTIP has a share reserve of an equivalent number of shares of Corporation common stock and ESH REIT Class B common stock. As of September 30, 2016, approximately 4,052,000 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 common stock of the Corporation and a portion is allocated to a share of ESH REIT Class B common stock. Equity-based compensation expense was approximately $3.0 million for each of the three months ended September 30, 2016 and 2015, and approximately $8.6 million and $7.9 million for the nine months ended September 30, 2016 and 2015, respectively, and is included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.
As of September 30, 2016, unrecognized compensation expense related to outstanding equity-based awards and the related weighted-average period over which it is expected to be recognized subsequent to September 30, 2016, 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
$
10,478

1.9
RSUs with performance vesting conditions
329

0.3
RSUs with market vesting conditions
6,235

2.1
Total unrecognized compensation expense
$
17,042

 

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RSA/RSU activity during the nine months ended September 30, 2016, 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 RSAs/RSUs - January 1, 2016
992

 
$
18.24

 
19

 
$
19.07

 
556

 
$
6.81

RSAs/RSUs granted in 2016
532

 
$
14.09

 
166

 
$
14.07

 
441

 
$
12.03

RSAs/RSUs settled in 2016
(579
)
 
$
21.41

 
(19
)
 
$
19.07

 

 
$

RSAs/RSUs forfeited in 2016
(48
)
 
$
15.54

 
(7
)
 
$
14.07

 
(21
)
 
$
12.78

Outstanding RSAs/RSUs - September 30, 2016
897

 
$
16.92

 
159

 
$
14.07

 
976

 
$
9.04

Vested RSAs/RSUs - September 30, 2016
18

 
$
23.20

 

 
$

 

 
$

Nonvested RSAs/RSUs - September 30, 2016
879

 
$
16.80

 
159

 
$
14.07

 
976

 
$
9.04

_________________________________
(1)
An independent third-party valuation was performed contemporaneously with the issuance of grants.
Service-Based Awards
The Corporation granted approximately 517,000 service-based awards during the nine months ended September 30, 2016, with a weighted-average grant-date fair value per award of $14.09. ESH REIT granted approximately 15,000 service-based awards during the nine months ended September 30, 2016, with a grant-date fair value per award of $14.08. 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 166,000 awards with performance vesting conditions during the nine months ended September 30, 2016, with a grant-date fair value per award of $14.07. 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 September 30, 2016, all awards with performance vesting conditions are expected to be satisfied at less than 100% of their target level.
The Corporation granted approximately 441,000 awards with market vesting conditions during the nine months ended September 30, 2016, with a grant-date fair value per award of $12.03. 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. The grant-date fair value of awards with market vesting conditions is based on an independent third-party valuation. During the nine months ended September 30, 2016, 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
2.85 years

Risk-free rate of return
0.88
%
Expected dividend yield
5.91
%

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. Through December 31, 2015, the plan had an employer-matching contribution of 50% of the first 6% of an employee’s contribution, which vested over an employee’s initial five-year service period. 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. The plan also

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provides for contributions up to 100% of eligible employee pretax salary, subject to the Code’s annual deferral limit of $18,000 during 2016 and 2015. Employer contributions, net of forfeitures, totaled approximately $0.8 million and $0.6 million for the three months ended September 30, 2016 and 2015, respectively, and approximately $2.6 million and $1.4 million for the nine months ended September 30, 2016 and 2015, respectively.
Effective June 9, 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. At this time, ESA Management does not offer a matching contribution. The plan is fully funded in a Rabbi Trust, which is subject to creditor claims in the event of insolvency, but the assets held in the Rabbi Trust are not available for general corporate purposes. As of September 30, 2016, approximately $0.1 million was deferred. 

15. SUBSEQUENT EVENTS
On October 4, 2016, certain selling stockholders (the "Selling Stockholders") sold 13.0 million Paired Shares as part of a secondary offering. The Selling Shareholders 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. For the nine months ended September 30, 2016, total incurred expenses were approximately $0.4 million.
In connection with the secondary offering, and also on October 4, 2016, the Corporation and ESH REIT repurchased 1.95 million Corporation common shares and ESH REIT Class B common shares from the Selling Stockholders for approximately $17.1 million and $10.5 million, respectively, pursuant to that certain share repurchase agreement, dated September 26, 2016, by and among the Corporation and ESH REIT and the Selling Stockholders. The share repurchase was funded from cash on hand. After completion of these transactions, the Sponsors owned approximately 57.0% of the total Paired Shares outstanding.
On October 6, 2016, ESH REIT executed a purchase and sale agreement to divest one property for approximately $44.8 million. The Company expects to lease and continue to operate the property for 18 to 24 months and expects to receive all operating income from this hotel in 2017. This transaction is expected to close in the fourth quarter of 2016, subject to the satisfaction or waiver of customary closing conditions.
On October 21, 2016, the Corporation and ESH REIT executed a purchase and sale agreement to divest three Extended Stay Canada hotels for $76.0 million Canadian dollars. This transaction is expected to close in the first quarter of 2017, subject to the satisfaction or waiver of customary closing conditions. Upon or prior to closing, approximately $12.9 million of foreign currency translation loss included in accumulated other comprehensive loss and noncontrolling interests on the accompanying condensed consolidated statement of changes in equity as of September 30, 2016 will be recorded as a charge against earnings.
On October 25, 2016, the Board of Directors of the Corporation declared a cash distribution of $0.16 per share for the third quarter of 2016 on its common stock. The distribution is payable on November 22, 2016 to shareholders of record as of November 8, 2016. Also on October 25, 2016, the Board of Directors of ESH REIT declared a cash distribution of $0.03 per share for the third quarter of 2016 on its Class A and Class B common stock. This distribution is also payable on November 22, 2016 to shareholders of record as of November 8, 2016.



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ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2016 AND DECEMBER 31, 2015
(In thousands, except share and per share data)
(Unaudited)
 
 
September 30,
2016
 
December 31,
2015
ASSETS
 
 
 
PROPERTY AND EQUIPMENT - Net of accumulated depreciation of $911,340 and $765,034
$
3,916,079

 
$
3,920,906

RESTRICTED CASH
344

 
60,945

CASH AND CASH EQUIVALENTS
36,423

 
223,256

RENTS RECEIVABLE FROM EXTENDED STAY AMERICA, INC. (Note 9)
23,431

 
4,299

DEFERRED RENTS RECEIVABLE FROM EXTENDED STAY AMERICA, INC. (Note 9)
40,581

 
41,546

DUE FROM EXTENDED STAY AMERICA, INC. (Note 9)
6,939



GOODWILL
52,245

 
52,245

OTHER ASSETS
11,721

 
13,352

TOTAL ASSETS
$
4,087,763

 
$
4,316,549

LIABILITIES AND EQUITY

 

LIABILITIES:

 

Term loan facilities payable - Net of unamortized deferred financing costs and debt discount
of $22,785 and $4,940
$
1,277,215

 
$
361,523

Senior notes payable - Net of unamortized deferred financing costs and debt discount
of $35,516 and $10,756
1,264,484

 
489,244

Mortgage loan payable - Net of unamortized deferred financing costs of $0 and $19,536

 
1,911,621

Revolving credit facilities
25,000

 

Loan payable to Extended Stay America, Inc. (Note 6)
75,000

 

Unearned rental revenues from Extended Stay America, Inc. (Note 9)
191,368

 
38,321

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

 
64,680

Accounts payable and accrued liabilities
92,674

 
101,997

Deferred tax liabilities
1,009

 
2,697

Total liabilities
2,926,750

 
2,970,083

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, 200,199,911 and 204,593,912 shares issued and outstanding
4,510

 
4,554

Additional paid in capital
1,143,743

 
1,168,903

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

 
73

Retained earnings
24,493

 
186,306

Accumulated other comprehensive loss
(11,806
)
 
(13,370
)
Total equity
1,161,013

 
1,346,466

TOTAL LIABILITIES AND EQUITY
$
4,087,763

 
$
4,316,549

See accompanying notes to unaudited condensed consolidated financial statements.

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ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
REVENUES - Rental revenues from Extended Stay America, Inc. (Note 9)
$
153,139

 
$
156,841

 
$
385,873

 
$
403,632

OPERATING EXPENSES:
 
 
 
 
 
 
 
Hotel operating expenses
22,155

 
20,109

 
68,757

 
65,465

General and administrative expenses (Note 9)
3,476

 
3,892

 
10,677

 
12,251

Depreciation
54,748

 
51,043

 
160,546

 
148,365

Total operating expenses
80,379

 
75,044

 
239,980

 
226,081

OTHER INCOME

 

 

 
37

INCOME FROM OPERATIONS
72,760

 
81,797

 
145,893

 
177,588

OTHER NON-OPERATING (INCOME) EXPENSE
(84
)
 
1,209

 
(858
)
 
2,275

INTEREST EXPENSE, NET
48,521

 
34,394

 
129,886

 
99,679

INCOME BEFORE INCOME TAX EXPENSE (BENEFIT)
24,323

 
46,194

 
16,865

 
75,634

INCOME TAX EXPENSE (BENEFIT)
671

 
424

 
(3,128
)
 
630

NET INCOME
$
23,652

 
$
45,770

 
$
19,993

 
$
75,004

NET INCOME PER COMMON SHARE:
 
 
 
 
 
 
 
Class A - basic
$
0.05

 
$
0.10

 
$
0.04

 
$
0.16

Class A - diluted
$
0.05

 
$
0.10

 
$
0.04

 
$
0.16

Class B - basic
$
0.05

 
$
0.10

 
$
0.04

 
$
0.17

Class B - diluted
$
0.05

 
$
0.10

 
$
0.04

 
$
0.16

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING:
 
 
 
 
 
 
 
Class A - basic
250,494

 
250,494

 
250,494

 
250,437

Class A - diluted
250,494

 
250,494

 
250,494

 
250,437

Class B - basic
200,556

 
204,281

 
202,156

 
204,171

Class B - diluted
200,696

 
204,685

 
202,252

 
204,538

See accompanying notes to unaudited condensed consolidated financial statements.

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ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
(In thousands)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
NET INCOME
$
23,652

 
$
45,770

 
$
19,993

 
$
75,004

FOREIGN CURRENCY TRANSLATION (LOSS) INCOME, NET OF TAX
(899
)
 
(3,562
)
 
2,133

 
(6,287
)
CASH FLOW HEDGE ADJUSTMENT, NET OF TAX
$
(569
)
 
$

 
$
(569
)
 
$

COMPREHENSIVE INCOME
$
22,184

 
$
42,208

 
$
21,557

 
$
68,717

See accompanying notes to unaudited condensed consolidated financial statements.


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ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
(In thousands, except preferred stock shares and per share data)
(Unaudited)
 
 
Common Stock
 
Preferred Stock
 
Additional
Paid in Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Equity
 
Class A
Shares
 
Class B
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
BALANCE - January 1, 2015
250,303

 
204,517

 
$
4,551

 
125

 
$
73

 
$
1,182,611

 
$
150,652

 
$
(5,854
)
 
$
1,332,033

Net income

 

 

 

 

 

 
75,004

 

 
75,004

Foreign currency translation loss, net of tax

 

 

 

 

 

 

 
(6,287
)
 
(6,287
)
Issuance of common stock
191

 
97

 
3

 

 

 
3,205

 

 

 
3,208

Common distributions - $0.45 per Class A and Class B common share

 

 

 

 

 
(17,698
)
 
(187,333
)
 

 
(205,031
)