EDGAR 10-K Filing

Company CIK: 1581164
Filing Year: 2021
Filename: 1581164_10-K_2021_0001628280-21-003326.json

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ITEM 1. BUSINESS
Item 1. Business
Our Company
Extended Stay America-branded hotels are designed to provide an affordable and attractive alternative to traditional lodging or apartment accommodations and are targeted toward self-sufficient, value-conscious guests who need lodging for a week or longer. Guests include business travelers, leisure travelers, professionals on temporary work or training assignments, persons relocating, the temporarily displaced, those purchasing a home and anyone else in need of temporary housing.
We are the largest integrated owner/operator of company-branded hotels in North America. Our business operates in the extended-stay segment of the lodging industry, and we have the following reportable operating segments:
•Owned hotels-Earnings are derived from the operation of Company-owned hotel properties and include room and other hotel revenues, which accounted for 98.1% of total revenues for the year ended December 31, 2020.
•Franchise and management-Earnings are derived from fees under various franchise and management agreements with third parties, which accounted for 1.9% of total revenues for the year ended December 31, 2020. These contracts provide us the ability to earn compensation for licensing the Extended Stay America brand name, providing access to shared system-wide platforms and/or management services.
We are also the only major hotel company focused solely on the extended stay segment. We target our product and service offering to an underserved customer base within the lodging industry and the extended stay segment. In addition to owning and operating hotels, we have increased and seek to continue to increase our fee-based income stream, which is driven by franchising our brand to third parties. Our core operations include intense focus on the delivery of a consistent, quality guest experience; the efficiency of our scalable marketing and distribution platforms; maximizing the value of our brand, in-part through rebranding our hotels to the Extended Stay America Suites brand or the Extended Stay America Premier Suites brand, each of which we expect will operate under the Extended Stay America umbrella brand; and maximizing the value of our owned real estate through investment in our hotels. We intend to continue to (i) maximize and grow our core operations, (ii) create and curate value within our real estate portfolio, (iii) increase the number of franchised hotels under the Extended Stay America umbrella brand and (iv) optimize capital deployment on behalf of key stakeholders.
As of December 31, 2020, we owned and operated 563 hotel properties in 40 U.S. states, consisting of approximately 62,700 rooms, and franchised 83 hotel properties for third parties, consisting of approximately 8,500 rooms. All 646 system-wide hotels currently operate under the Extended Stay America brand, which serves the mid-price extended stay segment and accounts for approximately 43% of the segment by number of rooms in the United States.
For the year ended December 31, 2020, we had total revenues of $1.0 billion, net income of $96.3 million and Adjusted EBITDA of $374.1 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Financial Measures” for a definition of Adjusted EBITDA and a reconciliation of net income to Adjusted EBITDA.
Our History
We were founded in 1995 as a developer, owner and operator of extended stay hotels. Following a period focused on new development, we became a consolidator of hotel properties by selectively acquiring extended stay companies and hotels, ultimately creating the largest mid-price extended stay company in North America. We were acquired in October 2010 and in November 2013, we reorganized and completed an initial public offering. We currently operate our extended stay hospitality platform with approximately 7,400 employees and are led by a management team with public company experience in hospitality, consumer retail and other service businesses.
Under our structure, ownership of a Paired Share represents an ownership interest in our hotel properties through ESH REIT and an ownership interest in our franchising and hotel management business, including the operation of our owned hotels, through the Corporation. This structure permits us to enjoy some, though not all, of the benefits of a REIT (i.e., while ESH REIT is taxed as a REIT for U.S. federal income tax purposes, all distributions paid by ESH REIT to the Corporation are subject to corporate level tax, effectively eliminating approximately 59% of the tax benefit of REIT status). See “-Our Corporate Structure.”
The Corporation
Extended Stay America, Inc. was incorporated in Delaware on July 8, 2013. As of December 31, 2020, the Corporation leased and operated 563 hotels, consisting of approximately 62,700 rooms, and franchised 83 hotels for third parties, consisting of approximately 8,500 rooms. The 563 hotels are owned by ESH REIT and are leased to, operated and managed by wholly-owned subsidiaries of the Corporation. All hotels currently operate under the Extended Stay America brand. In the near future, we expect to rebrand our hotels to the Extended Stay America Suites brand or the Extended Stay America Premier Suites brand, each of which will operate under the Extended Stay America umbrella brand. Wholly-owned subsidiaries of the Corporation own the brand and intellectual property related to our business and license them to third-party franchisees.
ESH REIT
ESH Hospitality, Inc. was formed as a limited liability company in Delaware on September 16, 2010, and was converted to a corporation on November 5, 2013. ESH REIT owns 563 hotel properties, five of which are subject to ground leases, that are leased to and operated by subsidiaries of the Corporation as described above. ESH REIT has elected and expects to continue to be taxed as a REIT.
Our Brand
We currently operate all our hotels under the Extended Stay America brand. All Extended Stay America-branded hotels feature in-room kitchens, free WiFi, flat screen TVs with premium cable channels and on-site guest laundry.
We recently conducted robust, guest-centric research to more deeply understand extended stay guest segments and establish a brand architecture that best resonates with our guests. Through these efforts, we identified a large, immediately adjacent, higher-rated extended stay target segment. This finding, in combination with industry data available to us, informed our decision to launch a step-up brand.
Later this year, we expect to launch our new step-up brand, Extended Stay America Premier Suites. The launch will include 32 existing newly constructed or recently renovated hotels. The brand will be defined by upgraded amenities, such as signature bedding, a free healthy breakfast bar, larger TVs, upgraded kitchens and spacious apartment-style room layouts. The hotels chosen for inclusion in the launch will require no additional capital investment beyond signage. This new brand is designed to increase our penetration of higher-rated extended stay guests, and we expect that Extended Stay America Premier Suites will grow by investing in select existing assets and through franchise development. All owned, newly constructed Extended Stay America hotels will be part of the Extended Stay America Premier Suites brand.
Our core offering will be re-branded to Extended Stay America Suites. We believe the addition of this modifier is a better fit for our product and expect it will result in a higher intent to stay and willingness to pay. We will refresh all marketing and distribution channels with our new branding, but in the interest of minimizing capital investment, the logo will remain largely intact and physical on-property changes will be contained to only the most visible signage.
This marks an important transition for us from a single-branded company to a multi-brand portfolio of Extended Stay America Suites and Extended Stay America Premier Suites under the Extended Stay America umbrella. A key finding from our research is that although we intend to expand our brand architecture, it is important to preserve the foundational Extended Stay America brand name, as it enjoys significant brand awareness as the category leader and high familiarity.
Our Corporate Structure
The following chart summarizes our corporate structure as of December 31, 2020.
1.Management and certain members of the Boards of Directors of each of the Corporation and ESH REIT hold approximately 0.7% of the Paired Shares.
2.Obligor under the Corporation Revolving Credit Facility and the Corporation Intercompany Facility, as defined. Each share of common stock of the Corporation is attached to and trades together with a share of Class B common stock of ESH REIT.
3.Shares of Class B common stock of ESH REIT, which are generally entitled to one vote per share. ESH REIT’s Class A and Class B common stock are generally entitled to the same distributions. Each share of Class B common stock of ESH REIT is attached to and trades together with a share of common stock of the Corporation.
4.Shares of Class A common stock of ESH REIT, which are entitled to the greater of (x) one vote per share or (y) the number of votes per share that would entitle the Class A common stock to approximately 59% of the total voting power of ESH REIT. ESH REIT’s Class A and Class B common stock are generally entitled to the same distributions.
5.Obligor under the ESH REIT Credit Facilities, as defined, and the ESH REIT Intercompany Facility, as defined. Issuer of the 2025 and 2027 Notes, as defined.
Our Industry
U.S. Lodging Industry
The lodging industry is a significant part of the U.S. economy and consists of over five million hotel rooms, according to AHLA. Lodging industry performance is generally tied to both macro and micro-economic trends in the United States and, similar to other industries, experiences both positive and negative operating cycles. Following a growth cycle of more than ten years, the lodging industry entered into a recession in early 2020 resulting from the COVID-19 pandemic, particularly due to certain government-imposed regulations and changes in customer behavior. For the first time since 2010, RevPAR declined for the U.S. lodging industry. According to PwC, RevPAR for the overall U.S. lodging industry declined 47.3% in 2020, and is expected to grow 19.1% in 2021. According to PWC, room supply declined 8.6% in 2020 and is expected to grow 5.2% in 2021.
U.S. Extended Stay Segment
Extended stay hotels represent a growing segment within the U.S. lodging industry, with approximately 545,000 rooms for the year ended December 31, 2020, according to Highland. The extended stay segment tends to follow the cyclicality of the overall lodging industry. Extended stay hotels are differentiated by price point into economy, mid-price and upscale segments. Our business is focused on the mid-price extended stay segment, which accounted for approximately 31% of the supply of extended stay rooms in 2020, approximately 43% of which are branded Extended Stay America.
Seasonality
The lodging industry is seasonal in nature. The Company’s revenues are generally lower during the first and fourth quarters of each calendar year as is typical in the U.S. lodging industry. Because many of the Company’s hotel operating and general and administrative expenses are fixed and do not fluctuate with changes in revenues, declines in revenues can cause disproportionate fluctuations or decreases in the Company’s quarterly earnings and operating cash flows during these periods.
ESH REIT’s revenues and earnings are generally highest during the fourth quarter of each calendar year as rental revenues contingent upon lessee hotel revenues are not deemed as earned for accounting purposes until certain lessee hotel revenue thresholds are achieved, which typically occurs in the fourth quarter. ESH REIT’s cash flows generally remain consistent each quarter.
Cyclicality
The lodging industry is cyclical and its fundamental performance tends to follow the general economy, albeit on a lagged basis. There is a history of increases and decreases in demand for hotel rooms, occupancy levels and rates realized by owners and operators of hotel properties through economic cycles. Variability of results through some economic cycles in the past has been more severe due to changes in the supply of hotel rooms in given markets or in given categories of hotels. The combination of changes in economic conditions and in the supply of hotel rooms can result in significant volatility in results of operations for owners, operators and/or franchisors of hotel properties. The costs of running a hotel, and in particular an extended stay hotel, tend to be more fixed than variable. Because of this, in an environment of either increasing or decreasing revenues, the rate of change in earnings will likely be greater than the rate of change in revenues. See “Risk Factors-Risks Related to the Lodging Industry-The lodging industry, including the extended stay segment, is cyclical and a worsening of general economic conditions or low levels of economic growth could materially adversely affect our business, financial condition, results of operations and our ability to pay distributions to our shareholders.”
Competition
We operate in a highly competitive industry, with sources of competition including other extended stay hotel brands, transient-oriented hotel brands that compete for both transient and extended stay guests and alternative lodging (including serviced apartments and private homes and rooms and apartments rented on the internet, also referred to as “peer-to-peer inventory sources”). In addition, we face competition for both quality acquisition opportunities and locations to build new hotels and for hotel owners and developers as potential franchisees. We also face competition from third-party intermediaries and, increasingly, from new channels of distribution, such as large companies that offer online travel services as part of their business model and search engines. See “Risk Factors-Risks Related to the Lodging Industry-We operate in a highly competitive industry and our inability to effectively compete for hotel guests or franchise contracts could have a material
adverse effect on our business, results of operations or financial condition.”
Cultivation of the Best People and Evolution of Our Culture
Extended Stay America focuses on caring for people who are building a better future for themselves and their families. We work to achieve this mission by collectively and individually acting in ways that exemplify our key values: (i) put people first, (ii) do what’s right, (iii) create opportunity for growth and (iv) care for our community. While we understand that our values make the Company special, we believe that our behaviors make these values real.
We employ approximately 7,400 employees. Approximately 7,000 of these employees are hotel property-level employees, comprised of approximately 4,200 full-time employees and approximately 2,800 part-time employees. We believe our relationship with employees is good. None of our employees are currently represented by unions or covered by collective bargaining agreements.
Integral to the Company being able to fulfill its mission, including being able to deliver on operational and financial objectives, is ensuring we have the human capital necessary to execute our strategies to deliver results. Our human capital strategy includes the following elements:
•Effective recruitment and retention - it is critical that our hotels are staffed with skilled associates who are well supported; we utilize expansive recruitment strategies to select and train capable, experienced talent.
•Engaged performance review and management - we perform training and talent reviews regularly in order to ensure we have the appropriate capability and capacity to deliver expected levels of performance; we identify planned and contingency successors for positions at multiple levels in the organization.
•Engaged and inspired workforce - in order to meet and exceed the expectations of our guests, our workforce needs to clearly understand the Company’s mission and what is expected daily; our compensation programs aim to incentivize the achievement of individual and enterprise-wide objectives.
•Leveraging diversity, equity and inclusion - we are focused on ensuring the Company’s culture and practices reflect our commitment to diversity, equity and inclusion; we seek to create process and discipline which drive behaviors that are committed to building a more inclusive culture, valuing differences, fostering personal belonging, accountability for performance and supporting the improvement of the lives or our associates, guests and their families.
Sales, Marketing and Reservations
Approximately 43.2% of our total revenues in 2020 were derived from accounts managed by our sales team. This team is focused on growing the value of existing accounts, developing new business and partnering with our operations team to drive local and regional sales. We focus on customers with extended stay lodging needs, including major Fortune 500 companies, small and medium sized businesses, construction and project-based work, relocation and staffing consultants, as well as medical, technology, military and government organizations. In 2020, our sales organization focused on industry segments and accounts where workers must be physically present, such as construction, supply chain logistics and temporary medical workers. We expect the emphasis on these industries and accounts to continue.
We seek to maximize revenue in each hotel through our revenue management function, which determines prices and manages the availability of room inventory to different channels and customer segments. Our automated revenue management system allows us to automatically price against demand. Our objective with increases in occupancy is to achieve ADR growth by increasing our mix of 7-29 night customers and capturing a greater portion of retail and corporate rates with guests who stay 30 nights or longer.
Our marketing strategy is focused on growing awareness of our brand, including the recent announcement and forthcoming implementation of our new brand architecture, as well as driving demand for our hotels through a combination of media channels. We place a significant emphasis on digital marketing, buying search engine placement, internet display advertising and other media to drive traffic to our proprietary website and call center. We made enhancements to our website in 2020 and in 2021, expect to launch a redesigned website in order to increase traffic, conversion and ultimately revenue through simplifying the booking process, improving speed and reliability and employing a mobile-first strategy. We maintain a customer database and use it for targeted marketing activity. Our customer loyalty program, called Extended Perks, had more than 3.7 million members as of December 31, 2020. We believe this program has helped, and will continue to help, us generate repeat business and market directly to more of our customers.
We use a central reservation system to provide access to our hotel inventory through a wide variety of channels, including property-direct, our central call center, our website, travel agency global distribution systems and third-party intermediaries. We outsource our central reservation system and call center. In 2020, we facilitated a significant channel shift toward our most valuable and profitable proprietary channels. The proportion of owned hotel revenues from each of our distribution channels during the years ended December 31, 2020 and 2019, was as follows:
Year Ended December 31,
2020 2019 % Change
Property direct 25.9 % 24.5 % 1.4 %
Central call center 31.5 % 26.7 % 4.8 %
Proprietary website 21.3 % 19.2 % 2.1 %
Third-party intermediaries 18.8 % 26.2 % (7.4) %
Travel agency global distribution systems 2.5 % 3.4 % (0.9) %
100.0 % 100.0 %
We aim to improve channel profitability in 2021 by accelerating direct revenue through the redesign of our website, continued improvement of call center performance and better definition of the loyalty program. We also intend to continue to leverage our core strategic competitive advantage, a uniquely singular focus on extended stay guests, by targeting and driving business with guests who stay seven nights or longer.
Environmental, Health and Safety Matters
Our hotel properties are subject to various federal, state and local environmental laws relating to environmental protection. Under these laws, governmental entities have the authority to require us, as the current or former owner of a property, to perform or pay for the clean-up of contamination (including hazardous substances, waste or petroleum products) at or emanating from the property and to pay for natural resource damage arising from contamination. These laws often impose liability without regard to whether the owner or operator knew of or caused the contamination. Such liability can be joint and several, so that each covered person can be responsible for all of the costs involved, even if more than one person may have been responsible for the contamination. We can also be liable to private parties for costs of remediation, personal injury and death and/or property damage resulting from contamination at or emanating from our owned hotel properties. Moreover, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow funds using the property as collateral or to sell the property on favorable terms or at all. Furthermore, persons who sent waste to a waste disposal facility, such as a landfill or an incinerator, may be liable for costs associated with cleanup of that facility.
Phase I environmental assessments were obtained for substantially all of our owned hotel properties in 2012 and for all hotel properties that we have purchased since that time. The Phase I environmental assessments were intended to identify potential contamination, but did not include any invasive sampling procedures, such as soil or ground water sampling. The Phase I environmental assessments identified a number of known or potential environmental conditions associated with historic uses of the hotel properties or adjacent properties. However, the Phase I environmental assessments did not identify any environmental liability that we believe would have a material adverse effect on our business, assets, results of operations or liquidity. It is possible that these environmental assessments did not reveal all potential environmental liabilities, such as the presence of former underground tanks for the storage of petroleum-based or waste products, that could create a potential for release of hazardous substances. In addition, it is possible that environmental liabilities have arisen since the assessments were completed. No assurances can be given that (i) future regulatory requirements will not impose any material environmental liability, or (ii) the current environmental condition of our hotel properties will not be affected by the condition of properties in the vicinity of our hotel properties (such as the presence of leaking underground storage tanks) or by third parties unrelated to us.
In addition, our hotels (including our real property, operations and equipment) are subject to various federal, state and local environmental, health and safety regulatory requirements that address a wide variety of issues, including, but not limited to, the use, management and disposal of hazardous substances and wastes, air emissions, discharges of waste materials (such as refuge or sewage), the registration, maintenance and operation of our boilers and storage tanks, asbestos and lead-based paint. Some of our hotels also routinely handle and use hazardous or regulated substances and wastes as part of their operations, which are subject to regulation (i.e., swimming pool chemicals or biological waste). Our hotels incur costs to comply with these environmental, health and safety laws and regulations, and if these regulatory requirements are not met or become more stringent in the future, or unforeseen events result in the discharge of dangerous or toxic substances at our hotel properties, we could be subject to materially increased costs of compliance, fines and penalties for non-compliance, and material liability from
third parties for harm to the environment, damage to real property or personal injury and death. We are aware of no past or present environmental liability for non-compliance with environmental, health and safety laws and regulations that we believe would have a material adverse effect on our business, assets or results of operations. However, additional operating cash and capital expenditures could be incurred if new or more stringent requirements are enacted in the future.
Certain hotels we own or those we may acquire in the future contain, may contain, or may have contained asbestos-contaminating material (“ACM”). Environmental, health and safety laws require that ACM be properly managed and maintained, and include requirements to undertake special precautions, such as removal or abatement if ACM would be disturbed during maintenance, renovation or demolition of a building. These laws regarding ACM may impose fines and penalties on building owners, employers and operators for failure to comply with these requirements or expose us to third-party liability. We are not presently aware of ACM at our hotel properties that would result in a material adverse effect on our business, assets or results of operations.
When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold at any of our owned hotel properties could require us to undertake a costly remediation program to contain or remove the mold from the affected property. In addition, the presence of significant mold could expose us to liability from our guests, employees and others if or when property damage or health concerns arise. We are not presently aware of any indoor air quality issues at our owned hotel properties that would result in a material adverse effect on our business, assets or results of operations.
We have obtained environmental insurance subject to limits, deductibles and exclusions customarily carried for similar businesses. We believe that our environmental insurance policy is appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice; however, our environmental insurance coverage may not be sufficient to fully cover our losses. Although our franchise and management agreements include broad indemnity provisions that encompass environmental claims resulting from franchised or managed properties, there can be no assurance that the indemnifying counterparties would be solvent or otherwise able to indemnify us if we were found liable for those claims.
Intellectual Property
In the highly competitive hospitality industry in which we operate, trademarks, service marks, trade names, logos and other proprietary rights are very important to the success of our business. The Corporation has a significant number of trademarks, service marks, trade names, logos, other proprietary rights and pending registrations and expends significant resources on their surveillance, registration and protection.
Regulation
A number of states and local governments regulate the licensing of hotels by requiring registration, disclosure statements and compliance with specific standards of conduct. We believe that each of our owned hotels has the necessary permits and approvals to operate its respective business and we intend to continue to obtain these permits and approvals for any new hotels. We are also subject to laws governing our relationship with our employees, including minimum wage requirements, overtime, meal and rest periods, working conditions and work permit requirements. An increase in the minimum wage rate, employee benefit costs or other costs associated with employees could materially adversely affect our business, including our results of operations. There are frequently proposals under consideration at the federal, state and local levels to increase the minimum wage and to expand overtime pay and benefits requirements. Compliance with new laws and regulations can affect the profitability of hotels franchised or owned and could adversely affect our operations.
Under the Americans with Disabilities Act of 1990 (“ADA”), all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. We attempt to satisfy ADA requirements in the designs for and operation of our hotels, websites and other facilities subject to the ADA, but we cannot assure you that we will not be subjected to a material ADA claim. If that were to happen, we could be ordered to spend substantial sums to achieve compliance, fines could be imposed against us and we could be required to pay damage awards to private litigants. The ADA and other regulatory initiatives could materially adversely affect our business as well as the lodging industry in general.
The Federal Trade Commission and numerous states regulate the sale and termination of franchises and business opportunities. These regulations generally impose registration and filing requirements and in some cases control specific terms of franchise agreements. Failure to comply with these regulations could result in franchisees having the right to rescind their franchise agreements as well as fines, penalties and injunctive relief imposed by regulating authorities.
Insurance
Properties that we manage, franchise and own outright are insured under different insurance programs depending on whether the property participates in our insurance programs or in the insurance programs of the property owner. We maintain insurance coverage for our owned hotels under our insurance programs for liability, property, workers compensation and other risks with respect to our business. Our liability insurance provides coverage for most claims, including terrorism, our operations and automobiles. Our property insurance provides coverage for risks to our properties including fire, windstorm, flood, earthquake and terrorism. Property insurance also includes business interruption coverage. Our workers compensation insurance provides coverage for employee injuries in the course and scope of employment. We also maintain cyber-risk insurance for systems and data controlled by us. Cyber-risk insurance generally covers all Company-controlled systems and Company-controlled data in properties that we manage, franchise and own. We believe our insurance policies, as well as those maintained by third-party owners are adequate for foreseeable losses and on terms and conditions that are reasonable and customary with solvent insurance carriers. Our franchise agreements require our franchisees to maintain liability, property, business interruption, workers compensation and other insurance at our franchised properties. While we believe that our insurance coverage is adequate, our business, results of operations and financial condition could be materially adversely affected if we were held liable for amounts exceeding the limits of our insurance coverage or for claims outside the scope of our insurance coverage.
Available Information
Our website address is www.esa.com. Our combined annual reports on Form 10-K, combined quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available free of charge through our website under “Investor Relations” or at www.aboutstay.com as soon as reasonably practicable after the electronic filing of these reports is made with the SEC. The information contained on, or that can be accessed through, our website is expressly not incorporated by reference in this combined annual report on Form 10-K.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
You should carefully consider the following risks as well as the other information included in this combined annual report on Form 10-K in the evaluation of our Company and business. Any of the following risks could materially and adversely affect our business, financial condition or results of operations, including our ability to pay distributions to our shareholders. It is not possible to predict or identify all such factors. As such, you should not consider any such list to be a complete statement of all potential risks and uncertainties. The risks summarized below highlight some of the factors that have affected or could affect us in the future.
Risks Related to Economic Conditions and COVID-19
•The continuing crisis resulting from the COVID-19 pandemic has negatively affected and will likely continue to negatively affect our business, results of operations, financial condition and cash flows.
•The effects of the COVID-19 pandemic could negatively impact our liquidity position, limit or restrict our ability to access new sources of capital and negatively impact our ability to maintain compliance with the financial covenants and other terms of the agreements governing our existing indebtedness.
Risks Related to the Lodging Industry
•We operate in a highly competitive industry and our inability to effectively compete for hotel guests or franchise contracts could have a material adverse effect on our business, results of operations or financial condition.
•The lodging industry, including the extended stay segment, is cyclical and a worsening of general economic conditions or low levels of economic growth could materially adversely affect our business, financial condition or results of operations, including our ability to pay distributions to our shareholders.
Risks Related to Our Business Strategy
•Some of our business strategies depend upon skills and capabilities that are being further developed.
•Our capital expenditures may not result in expected returns on investment.
•Access to capital, timing, budgeting and other risks associated with the ongoing need for capital expenditures at our hotel properties could materially adversely affect our financial condition and limit our ability to compete effectively and pay distributions to our shareholders.
•Some of our existing third party and owned development pipeline may not be completed on our expected timeline or at all, which could materially adversely affect our growth prospects.
Risks Relating to Our Operations
•Our business depends on the quality and reputation of our brand, and any deterioration in the quality or reputation of our brand or the lodging industry could materially adversely affect our market share, reputation, business, financial condition or results of operations.
•Our business is subject to risks relating to doing business with third-party owners, including franchisees, that could materially adversely affect our reputation, financial condition or results of operations.
•The geographic concentration of our owned portfolio may make us particularly susceptible to adverse developments in geographic areas in which we own and operate a substantial portion of our hotels.
•An increase in the use of third-party intermediaries to book online hotel reservations could materially adversely affect our business, financial condition and results of operations.
•We are reliant upon technology and the disruption or malfunction in our information technology systems could materially adversely affect our business.
•Cyber risk and the failure to maintain the integrity of internal or customer data could harm our reputation or subject us to costs, fines or lawsuits, or limit our ability to accept credit cards
•We are exposed to a variety of risks associated with safety, security and crisis management.
•Labor shortages or employment regulation could restrict our ability to operate our hotels or implement our business strategies or result in increased labor costs that could reduce our profitability.
Risks Related to Legal and Regulatory Compliance
•Compliance with the laws and regulations, including those related to environmental, health and safety, that apply to our hotel properties and our franchise relationships could materially adversely affect our ability to complete future developments, acquisitions or renovations, result in significant costs or delays and adversely affect our business strategies.
•Compliance with the American with Disabilities Act and similar laws could require us to incur substantial costs.
•Changes to accounting rules or regulations may adversely affect our reported financial condition and results of operations.
•Recent changes in tax law pursuant to the TCJA and the CARES Act affected the taxation of the Corporation.
•Adverse judgments or settlements resulting from legal proceedings in which we may be involved in the normal course of our business could reduce our profitability or limit our ability to operate our business.
Risks Related to Our Indebtedness
•We have a significant amount of debt and debt service obligations that could adversely affect our financial condition and limit operational flexibility.
•Our indebtedness is subject to restrictive covenants that could limit our ability to conduct our operations and have a material negative impact on our business, financial condition and operations if we are unable to comply with these covenants.
Risks Related to ESH REIT and its Status as a REIT
•Failure of ESH REIT to qualify as a REIT or remain qualified as a REIT would cause it to be taxed as a regular C corporation, which would expose it to substantial tax liability and substantially reduce the amount of cash available to pay distributions to its shareholders.
•Our structure has been infrequently utilized by public companies and the IRS could challenge ESH REIT’s qualification as a REIT.
•The ownership limits that apply to REITs, as prescribed by the Internal Revenue Code (the “Code”) and by ESH REIT’s charter, may inhibit market activity in our Paired Shares and restrict our business combination opportunities.
•The REIT distribution requirements could materially adversely affect ESH REIT’s liquidity and may force ESH REIT to borrow funds or sell assets during unfavorable market conditions or make taxable distributions of its capital stock.
•Dividends paid by REITs do not qualify for the reduced tax rates available for certain “qualified dividends,” but would generally qualify for a partial deduction with respect to certain taxpayers.
•Applicable REIT laws may restrict certain business activities and increase our overall tax liability.
•The prohibited transactions tax can limit our ability to sell properties.
•Recent changes in tax law pursuant to the TCJA and the CARES Act affected the taxation of ESH REIT and may affect the desirability of investing in a REIT relative to a regular non-REIT corporation.
Risks Relating to Economic Conditions and COVID-19
The continuing crisis resulting from the COVID-19 pandemic has negatively affected and will likely continue to negatively affect our business, results of operations, financial condition and cash flows.
The COVID-19 pandemic has significantly affected the global economy and strained the lodging industry due to travel restrictions, stay-at-home directives and changing consumer patterns in response to the pandemic, all of which have resulted in reduced travel and increased cancellations. As such, COVID-19 had a negative impact on our results of operations for the year ended December 31, 2020, resulting in a decline in the Company’s RevPAR and Adjusted EBITDA of 16.1% and 30.1%, respectively, and it may continue to negatively affect future results in the short to medium term. Currently, the timing of widespread immunization and long-term efficacy of currently-available vaccines is uncertain. The current and uncertain future impact of the COVID-19 pandemic, including its effect on the ability or desire of people to travel and use our hotel properties, may to continue to negatively affect our business, results of operations, financial condition and cash flows.
As a result of recent surges in COVID-19 throughout the United States, we have been and expect to continue to be negatively affected by government regulations and travel advisories to fight the pandemic, including occupancy limits for certain business establishments, which may in the future include our hotels, and requirements that individuals self-quarantine when traveling from one state to another. Lodging demand may remain weak for an undetermined length of time and we cannot predict if or when ADR and occupancy rates will return to pre-outbreak levels. Adverse changes in the perceived or actual economic climate, including higher unemployment rates, declines in income levels and loss of personal wealth resulting from the impact of COVID-19, are expected to continue to negatively affect travel and lodging demand.
Our operating margins declined during the year ended December 31, 2020, as a result of the COVID-19 pandemic. In an effort to limit such decline, we sought to reduce certain variable operating costs, a component of which included a decline in labor hours for certain employees on staff at certain of our hotels. The steps we have taken to reduce operating costs and additional steps we may take in the future to reduce operating costs may negatively affect our brand reputation or our ability to attract and retain employees. Even after the pandemic subsides, we could experience unfavorable long-term impacts on our operating costs as a result of attempts to counteract future outbreaks of COVID-19 or other viruses due to, for example, enhanced health and hygiene requirements in one or more regions or other such measures. Should any corporate or other team members become ill from COVID-19 and unable to work, the attention of management could be diverted. Such disruptions to our businesses could ultimately increase overall operating costs and decrease operating efficiencies.
It continues to be a challenge to predict the ultimate impact that COVID-19 will have on third-party owners, service providers, travel agencies, suppliers and other vendors. In particular, if third-party owners of our hotels are unable to maintain their hotels and service indebtedness secured by their hotels, our results of operations and reputation could suffer. Bankruptcies, sales or foreclosures involving our hotels could, in some cases, result in the termination of our franchise agreements, which would negatively affect our results of operations. Hotel owners with financial difficulties may be unable or unwilling to pay us amounts that we are entitled to on a timely basis or at all. Current and ongoing economic conditions also could affect our ability to enter into management and franchise agreements with potential third-party owners of our hotels, who may be unable to obtain financing or face other delays in developing hotel projects. As a result, some properties in our development pipeline may not enter our system when we anticipated or at all.
The performance of the lodging industry, including the extended stay segment, is closely linked to the performance of the general economy and is sensitive to business and personal discretionary spending levels, which may continue to be impacted even after the COVID-19 pandemic subsides. Declines in corporate budgets and spending and in consumer demand, concerns over recessionary economic conditions, risk affecting or reducing travel patterns, lower consumer confidence, increases in unemployment or adverse political conditions may have a material adverse effect on revenues and profitability of our hotels, including the amount of franchise and management fee revenues we are able to generate. We rely on the strength of regional and local economies with respect to the performance of each of our properties.
The extent of the effects of COVID-19 on our business and the overall lodging industry is highly uncertain and will ultimately depend on future developments, including, but not limited to, the duration and severity of additional outbreaks, the timing and availability of vaccinations and other treatments, and the length of time it takes for lodging demand and pricing to stabilize. Given this uncertainty, we are presently unable to estimate the full impact to our future results of operations, cash flows and financial condition.
The effects of the COVID-19 pandemic could negatively impact our liquidity position, limit or restrict our ability to access new sources of capital and negatively impact our ability to maintain compliance with the financial covenants and other terms of the agreements governing our existing indebtedness.
We must maintain, renovate and improve our hotel properties in order to remain competitive, maintain the value and brand standards of our hotel properties and comply with applicable laws and regulations. Maintenance, renovations and improvements to our hotel properties create an ongoing need for cash for us or our franchisees, and to the extent this need cannot be funded from cash generated by operations, funds must be borrowed or otherwise obtained. Our hotels are our primary source of income and cash flow from operations. Although we generated cash flow from operations of $218.8 million during the year ended December 31, 2020, such amount represents a decrease of $181.2 million compared to the year ended December 31, 2019. In light of this decrease, in March 2020 we fully drew on $399.8 million under our revolving credit facilities. In August 2020, we repaid the full outstanding balance of $350.0 million under the ESH REIT Revolving Credit Facility. As of December 31, 2020, $49.8 million remains outstanding on the Corporation Revolving Credit Facility, with no remaining available borrowing capacity, and $350.0 million in borrowing capacity remains available under the ESH facilities.
We may be required to raise additional capital in the future and our access to and cost of financing will depend on, among other things, economic conditions, conditions in financial markets, the availability of sufficient amounts of financing, our prospects and credit ratings. If our credit ratings are downgraded, or general market conditions ascribe higher risk to our rating levels, our industry or us, then our access to capital and the cost of any debt financing will likely be negatively affected. In addition, the terms of future debt agreements may include more restrictive covenants or require incremental collateral, which may further restrict our business operations. There is no guarantee that debt financings will be available in the future to fund our obligations, including the maturity of existing debt facilities, or that they will be available on terms consistent with our expectations.
The negative impact to our operations as a result of the pandemic has substantially reduced RevPAR due to declines in occupancy rates and ADR. If we are unable to generate sufficient revenues from our hotels or if we experience declines in demand, this could negatively impact our ability to remain in compliance with our debt covenants or meet our payment obligations. We may not be able to meet our debt covenants or pay our obligations as they become due and could risk default under the agreements governing our indebtedness, including our credit facilities and indentures governing our senior notes, which could give lenders the right to accelerate the amounts outstanding, and therefore raise substantial doubt about our ability to continue as a going concern.
In May 2020, we amended the Corporation Revolving Credit Facility to, among other things, suspend the quarterly tested leverage covenant for the fiscal quarters ending June 30, 2020, September 30, 2020, December 31, 2020 and March 31, 2021. In addition, for the quarter ended June 30, 2021 through the quarter ended December 31, 2021, the leverage covenant calculation has been modified to use annualized EBITDA as opposed to trailing twelve-month EBITDA. Throughout the suspension period (i.e., through March 31, 2021), the Company has agreed to maintain minimum liquidity of $150.0 million and to limit share repurchases and dividend payments made by the Corporation. We cannot assure you that the Corporation Revolving Credit Facility amendment will be the only covenant suspension, waiver or amendment required by us, or that this amendment will prevent us from future covenant breaches and/or the acceleration of our indebtedness.
In response to reductions in cash flow from operations at the Corporation due to the COVID-19 pandemic and reductions in distribution income in respect of its ownership of 100% of the Class A common stock of ESH REIT, in July 2020 we executed an intercompany facility between the Corporation, as borrower, and ESH REIT, as lender, in an effort to further ensure the Corporation’s current and future liquidity. See “Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-the Corporation.”
We hold a significant amount of long-lived assets, including goodwill and certain intangible assets. We evaluate our tangible and intangible assets quarterly for impairment, or more frequently based on various triggers, including when a property has current or projected operating losses or when other material trends, contingencies or changes in circumstances indicate that a triggering event has occurred such that an asset’s value may not be recoverable. See Note 2 to each of the consolidated financial statements of Extended Stay America, Inc. and ESH Hospitality, Inc., included in Item 8 of this combined annual report on Form 10-K. Times of economic distress and/or uncertainty, declining demand and declining earnings often result in declining real estate and real property values. The Company incurred impairment charges totaling $1.1 million during the year ended December 31, 2020. We may incur future impairment charges which could have a material adverse effect on our results of operations and earnings.
Risks Related to the Lodging Industry
We operate in a highly competitive industry and our inability to effectively compete for hotel guests or franchise contracts could have a material adverse effect on our business, results of operations or financial condition.
Competition for hotel guests-The lodging industry is highly competitive. We compete primarily with other purpose-built extended stay hotels (including those owned and operated by major hospitality chains with well-established, recognized brands and loyalty programs and individually-owned extended stay hotels), as well as traditional hotels and lodging facilities (including limited service hotels), alternative lodging (including serviced apartments and private homes, rooms and apartments rented on the internet, also referred to as “peer-to-peer inventory sources”) and other franchisors in the lodging industry. Many of the major hospitality chains own multiple brands that provide them substantial economies of scale. We also face increased competition due to the ease of access to search engines and third-party intermediaries, particularly as those intermediaries continue to consolidate, and the growing acceptance of alternative lodging sources, particularly peer-to-peer inventory sources. We compete based on a number of factors, including room rates, quality of accommodations, service levels, convenience of location, reputation, loyalty programs, reservation systems, brand recognition, supply and availability of alternative lodging and ability to reach potential guests through multiple distribution channels. See “Business-Competition.” If we are unable to compete successfully, our revenues or profits may decline.
To maintain or increase our rates, we may face pressure to offer increased services and amenities at our hotel properties, which are purpose-built, comparable to those offered at traditional hotels, which could increase our operating costs and reduce our profitability. We do not expect to increase our rates to match all of our competitors, and a number of our competitors have a significant number of members in well-established guest loyalty programs which may enable them to attract more customers and more effectively retain such customers. Our competitors may also have greater financial and marketing resources than we do, which could allow them to reduce their rates, offer greater convenience, services or amenities, build new hotels in direct competition with our existing hotels, improve their properties, achieve additional economies of scale, replace older properties with new ones at a faster pace than we can, invest in more sophisticated technology and expand and improve their marketing efforts, all of which could have a material adverse effect on our business, financial condition and results of operations.
Competition for franchise contracts-We compete with other lodging brands and products for franchisees. Franchisees choose franchise systems based on a variety of reasons, including potential returns on investment, brand name recognition and reputation, brand standard requirements, franchisors’ ability and willingness to invest capital, fees and other contract terms, availability of suitable hotels in certain geographic areas, sales support, marketing support, reservations systems, information technology systems, operational support, purchasing programs and other support systems. Some of our competitors have both size and scale advantages that enable them to spread the fixed costs of these systems over many properties and brands. To the extent that our investments to support a competitive franchise platform are not offset by other advantages of our franchise offering, our franchise operations could be negatively affected. Our ability to compete effectively for new franchise agreements could be reduced if our franchised hotels perform less successfully than those of our competitors, if we are unable to offer terms as favorable as those offered by our competitors or if new brands are launched.
The lodging industry, including the extended stay segment, is cyclical and a worsening of general economic conditions or low levels of economic growth could materially adversely affect our business, financial condition or results of operations, including our ability to pay distributions to our shareholders.
The performance of the lodging industry, including the extended stay segment, is closely linked to the performance of the general economy and is sensitive to business and personal discretionary spending levels. Declines in corporate budgets and spending and consumer demand, including due to adverse general economic conditions, concerns over a potential recession, governmental conditions, risks affecting or reducing travel patterns, lower consumer confidence, increases in unemployment or adverse political conditions, may have a material adverse effect on the revenues and profitability of our hotels, including the amount of franchise and management fee revenues we are able to generate from franchised properties. In particular, the effects of the pandemic, including the responses from local, state and federal governments, have further exacerbated risks to the performance within the lodging industry and we cannot predict if and when the effects of the COVID-19 pandemic will subside.
Changes in consumer demand and general business cycles can subject and have subjected our revenues to significant volatility. The majority of our expenses are relatively fixed. These fixed expenses include labor costs, interest, real estate taxes and insurance premiums, all of which may increase at a greater rate than our revenues. The expenses of owning and operating hotels are not significantly reduced when circumstances such as market and economic factors and competition cause a reduction in revenues. Where cost-cutting efforts and capital expenditure reductions are insufficient to offset declines in revenues, we could experience a material decline in operating margins, reduced operating cash flows or losses. If we are unable to decrease our expenses significantly or rapidly when demand for our hotels decreases, the decline in our revenues could have a material adverse effect on net operating cash flows and profitability. This effect can be especially pronounced during periods of economic contraction or slow economic growth. Economic downturns generally affect the results derived from owned hotel properties more significantly than those derived from franchised properties given the greater exposure owners have to the properties’ performance. Our proportion of owned hotel properties, compared to the number of properties we franchise for third
parties, is larger than many of our competitors and, as a result, an economic downturn could have a greater adverse effect on our results of operations.
New hotel room supply is an important factor that can affect the lodging industry’s performance and overbuilding has the potential to further exacerbate the negative effect of an economic downturn or precipitate a cycle turn. Room rates and occupancy, and thus RevPAR, tend to increase when demand growth exceeds supply growth. A decline in hotel room demand, or a continued growth in hotel room supply, could result in revenues that are substantially below expectations or result in losses, which could have a material adverse effect on our business, financial condition or results of operations, including our ability to pay distributions to our shareholders. See “Business-Our Industry” for a description of increases in hotel room supply.
The extended stay segment has tended to follow the overall cyclicality of the lodging industry. In periods of declining demand, including throughout the COVID-19 pandemic, competition for guests may result in more reliance on longer-term guests, who generally pay lower rates than shorter-term guests, or on lowering room rates to induce shorter-term demand, either of which could reduce revenues, margins and profitability. Equally, in periods of increasing demand, a transition to shorter-term guests paying higher rates might result in increased hotel expenses for amenities considered necessary to attract those guests, such as daily rather than weekly housekeeping, and greater operating and amenity costs, such as increased volume of check-ins and check-outs, all of which may reduce operating margins.
Uncertainty regarding the future rate, pace and duration of economic growth makes it difficult to predict future profitability levels, and such uncertainty has become more challenging due to the effects of the COVID-19 pandemic. A slowing of the current economy or sustained or new economic weakness could adversely affect demand and our ability to execute on our strategies and could materially adversely affect operating revenues and our overall profitability.
Our revenues are subject to seasonal fluctuations.
The lodging industry is seasonal in nature. The Company’s occupancy rates and revenues, as well as those of our third-party owners, vary from property to property, depending principally upon their location and competitive mix within the specific location; however, generally occupancy rates and revenues are lower during the first and fourth quarters of each calendar year. Quarterly variations could materially adversely affect the Company’s near-term revenues and cash flows, which in-turn could have a material adverse effect on the Company’s business, financial condition and results of operations.
Risks Related to Our Business Strategy
Some of our business strategies depend upon skills and capabilities that are being further developed.
Several of our business strategies, including franchising hotels for third-party owners, brand creation and diversification and real estate construction and development are relatively new to us. Real estate construction and development involves large deployments of capital and inherent timing and market risks, while franchising and managing hotels for third-party owners involves reputational risks as well as the ability of us and our franchisees to meet contractual obligations. Brand creation and diversification involves marketing risks as well as operational engagement and understanding of customer needs. Our ability to manage these risks and successfully execute these strategies will depend on our continuing ability to attract and retain qualified and experienced personnel and consultants, contractors and others with the necessary expertise and to develop that expertise internally over time, and we can provide no assurance that we will be able to do so. Our inability to develop or acquire necessary and complementary skills and capabilities to effectively and successfully execute our business strategies could have a material adverse effect on our business.
Our capital expenditures may not result in expected returns on investment.
The realization of returns on capital investments in line with our expectations is dependent on a number of factors, including, but not limited to, general economic conditions, including the effects of the COVID-19 pandemic and other events beyond our control, whether our assumptions in making the investments were correct and changes in the factors underlying investment decisions, such as changes in the tastes and preferences of our customers or overall lodging demand. We can provide no assurance that we will realize our expected returns on current investments or any returns at all, or that our future investments, including ongoing or future hotel renovations and investments in the new step-up brand, will result in expected returns, returns consistent with prior investments or any returns at all. Growth we realize as a result of capital expenditures or other investments may stabilize over time. A failure to realize expected returns could materially adversely affect our business, financial condition and results of operations.
Access to capital, timing, budgeting and other risks associated with the ongoing need for capital expenditures at our hotel properties could materially adversely affect our financial condition and limit our ability to compete effectively and pay distributions to our shareholders.
Real estate ownership in the lodging industry is a capital intensive business that requires significant capital expenditures. We must maintain, renovate and improve our hotel properties in order to remain competitive, maintain the value and brand standards of our hotel properties and comply with applicable laws and regulations. Maintenance, renovations and improvements to our hotel properties create an ongoing need for cash for us or our franchisees, and, to the extent they cannot be funded from cash generated by operations, funds must be borrowed or otherwise obtained. We also intend to continue to pay regular distributions to our shareholders and for ESH REIT 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, which may constrain our ability to retain cash for future capital expenditures. Access to the capital that we need to renovate and maintain our existing hotel properties as well as to develop, construct or acquire new hotel properties and to grow our franchise business is critical to the continued growth of our business and our revenues. The availability of capital or the conditions under which we can obtain capital can have a significant impact on the overall level, cost and pace of future maintenance, renovations and improvement plans, as well as development, construction or acquisitions of hotel properties and therefore the ability to meaningfully execute our business strategies. In the past, reduced ongoing maintenance and/or capital investment in our hotel properties resulted in declining performance of our business.
Our ongoing operations, capital expenditures and business strategies subject us to the following risks:
•potential environmental problems, such as the need to remove or abate mold or asbestos-containing materials;
•design defects, construction cost overruns (including labor and materials) and delays;
•difficulty obtaining zoning, occupancy and other required permits or authorizations;
•changes in laws and regulation and the related costs of compliance with new regulatory requirements;
•the possibility that revenues will be reduced temporarily while rooms are out of service due to capital improvement projects; and
•a possible shortage of available cash to fund capital improvements and the possibility that financing for these capital improvements may not be available on affordable terms or at all.
If the cost of funding maintenance, renovations or improvement plans exceeds budgeted amounts and/or the time period for renovation or development is longer than initially anticipated, our profits could be reduced. If we are forced to spend larger amounts of cash from operations than anticipated to operate, maintain or renovate existing hotel properties, then our ability to use cash for other purposes, including distributions to our shareholders or the development, construction, franchise or acquisition of hotel properties, could be limited. Similarly, if we cannot access the capital we need to fund our operations, we may need to postpone, defer or cancel planned maintenance, renovations, improvement plans or other components of our business strategy, which could impair our ability to compete effectively and harm our business, financial condition and results of operations.
We are exposed to the risks resulting from real estate ownership, which could increase our costs, reduce our profitability and limit our ability to respond to market conditions.
Our principal assets consist of real property. Our real estate ownership subjects us to additional risks not applicable to competitors that only franchise or managed hotel properties, including:
•the illiquid nature of real estate, which may limit our ability to sell one or more hotels in our portfolio promptly in response to changing financial conditions;
•real estate, insurance, zoning, tax, environmental and eminent domain laws, including the condemnation of our properties;
•fluctuations in real estate values or impairments in the value of our assets;
•the ongoing need for capital improvements and expenditures to maintain, renovate or improve hotel properties;
•the average age of hotels in our portfolio, which is approximately 21.1 years, and the potential cost and difficulty in replacing obsolete hotels with new hotels;
•the possibility that expense increases will outpace revenue increases and that in the event of an economic downturn, our high proportion of fixed expenses will make it difficult to reduce our expenses to the extent required to offset declining revenues;
•changes in laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance;
•events beyond our control, such as acts of war, armed hostilities, terrorist attacks, travel-related health concerns, public health crises (including pandemics such as the COVID-19 pandemic) government shutdowns, interruptions in transportation systems, travel-related accidents, fires, natural and man-made disasters and severe weather events;
•contingent liabilities that exist after we have exited a property; and
•increased potential civil liability for accidents, unrest or other occurrences on owned properties.
Some of our existing third party and owned development pipeline may not be completed on our expected timeline or at all, which could materially adversely affect our growth prospects.
Our business strategy includes the expansion of our hotel portfolio through franchising of our brand to third-party hotel owners, as well as through the development, construction and/or acquisition of owned hotels. As of December 31, 2020, we had eight hotels in our owned development pipeline, including owned hotel sites where we have initiated permitting or site work and owned hotel sites where we are under construction. Also as of December 31, 2020, we had 48 hotels in our third-party pipeline. These include 21 hotels where we have commitments to build or convert and 27 hotels for which franchise applications are approved that are in various stages of conversion, pre-development or construction. Due to the macroeconomic impact of the COVID-19 pandemic on the overall lodging industry, the timeline for certain owned hotel development and/or franchise pipeline activities has been extended and may be unpredictable. Commitments are subject to numerous conditions and the eventual development and completion of construction of our owned and third-party pipeline is subject to numerous risks, including our or the third-party owner’s ability to obtain adequate financing and governmental or regulatory approvals, design defects, construction delays and cost overruns and force majeure events. As a result, we cannot assure you that every hotel in our owned and franchise pipeline will develop into a new hotel that enters our system or that new hotels will open on our expected timing.
The success of expanding our business through franchising is dependent on the strength of our brand and our ability to attract new franchisees. See “-Our business is subject to risks relating to doing business with third-party owners, including franchisees, that could materially adversely affect our reputation, financial condition or results of operations.”
Acquisitions of companies or hotel properties are subject to risks that could affect our business, including risks related to:
•inability to successfully identify or complete future acquisitions at acceptable prices or terms and obtain financing on acceptable terms;
•issuing Paired Shares that could dilute the interests of our existing shareholders;
•spending cash and incurring significant debt;
•contributing hotel properties or related assets to ventures that could result in the recognition of losses;
•assuming unknown and contingent liabilities; and
•creating additional expenses.
The success of any acquisition will depend, in part, on our ability to integrate the acquisition with our existing operations. We may experience difficulty with integrating acquired companies, hotel properties or other assets, including difficulties relating to:
•acquiring hotel properties with undisclosed defects in design or construction or requiring unanticipated capital improvements;
•entering new markets;
•integrating corporate personnel, offices and support systems;
•coordinating sales, distribution, marketing and other functions;
•integrating operating processes and information technology systems;
•transitioning to our brand standards; and
•preserving important licensing, distribution, marketing, customer, labor and other relationships of the acquired company, hotel properties or other assets.
Any failure to integrate completed acquisitions in an efficient and timely manner could result in reputational harm or have a material adverse effect on our financial condition or results of operations, and we may not realize the benefits that were expected at the time of acquisition. Integration efforts may take longer than we anticipate and involve unexpected costs. In
addition, as a result of any acquisition, we may assume franchise or management agreements with terms that are less favorable than our existing franchise or management agreements.
We expect to continue to divest hotel properties or other assets. Divestitures may be unsuccessful and/or divert our management’s attention.
We expect to continue to divest certain hotel properties as part of our long-term business strategy. For example, we recently completed a hotel disposition of one of our hotel properties in Northern California for $65.0 million. There are numerous risks commonly encountered in asset divestitures, including diversion of management’s attention, loss of key employees, difficulties in the separation of operations, services and personnel and damage to existing customer, vendor and other business relationships. Assets sales may yield lower than expected returns. In some circumstances, sales of properties or other assets may result in losses. In addition, sellers typically retain certain liabilities or indemnify buyers for certain matters such as lawsuits, tax liabilities and environmental matters. The magnitude of any such retained liability or indemnification obligation may be difficult to quantify at the time of the transaction, may involve conditions outside our control and ultimately have a material adverse effect on our results of operations and earnings.
Risks Relating to Our Operations
Our business depends on the quality and reputation of our brand, and any deterioration in the quality or reputation of our brand or the lodging industry could materially adversely affect our market share, reputation, business, financial condition or results of operations.
Our brand and our reputation are among our most important assets. We currently operate and franchise all of our hotels under the Extended Stay America brand. In the near future, we expect to rebrand our hotels to the Extended Stay America Suites brand or the Extended Stay America Premier Suites brand, each of which we expect will operate under the Extended Stay America umbrella brand. Our ability to attract and retain guests and franchisees depends, in part, upon the external perceptions of Extended Stay America, the quality of our hotels and services and our corporate and management integrity. Negative reviews of our hotels or our franchisees’ hotels, an incident involving the potential safety or security of our guests or employees, cyber-attacks or security breaches, crime, hotel property-level notoriety, lawsuits, negative publicity regarding safety or security at our competitors’ properties or regarding our third-party vendors, franchisees or the industry, and any media coverage resulting therefrom, may harm our brand and our reputation, and cause a loss of consumer confidence that could result in a material adverse effect on our results of operations. Additionally, our reputation could be harmed if we fail to act responsibly or are perceived as not acting responsibly or fail to or are perceived to not comply with regulatory requirements in a number of areas such as safety and security, accessibility, data security, employment, sustainability and environmental management. A negative incident at one hotel could have far-reaching effects, including lost revenues, guest boycotts, loss of development or franchise opportunities and employee difficulties. Such an incident could also subject us to legal actions, including litigation, governmental investigations or penalties, along with the resulting additional negative publicity. The considerable expansion in the use of social media and online review sites over recent years has compounded the potential scope and speed of negative publicity, whether or not the description of any events or conditions by social media is accurate. Adverse incidents have occurred in the past and are likely to occur in the future.
Our business relies on the maintenance and protection of our trademarks and other intellectual property.
We believe that the Corporation’s trademarks and other intellectual property are fundamental to the reputation of our brand. The Corporation develops, maintains, licenses and polices a substantial portfolio of trademarks and other intellectual property rights. From time to time, the Corporation applies to have certain trademarks registered. There is no guarantee that such trademark registrations will be granted. To the extent necessary, the Corporation enforces its intellectual property rights to protect the value of its trademarks, protect our good name, promote brand recognition, enhance our competitiveness and otherwise support our business goals and objectives. The Corporation relies on trademark laws to protect its proprietary rights. Monitoring for unauthorized use of the Corporation’s intellectual property is difficult. Litigation may be necessary to enforce the Corporation’s intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation of this type could result in substantial costs and diversion of resources, may result in counterclaims or other claims against the Corporation and could significantly harm our results of operations. We cannot assure you that all of the steps the Corporation has taken to protect its trademarks will be adequate to prevent imitation of its trademarks by others. The unauthorized reproduction of the Corporation’s trademarks could diminish the value of our brand and its market acceptance, competitive advantages or goodwill, which could materially adversely affect our business and financial condition.
Our business is subject to risks relating to doing business with third-party owners, including franchisees, that could materially adversely affect our reputation, financial condition or results of operations.
We earn fees for franchising hotel properties owned by third parties and expect our franchise business to increase over time. As of December 31, 2020, 83 hotels in our system were owned by third parties and operated under franchise and/or management agreements. Our revenues and operating results are dependent upon the ability of these third-party owners to generate revenues at their franchised properties. If the revenues of our third-party owners decrease, or our third party-owners close their hotels, our results of operations may be materially adversely affected.
The viability of our franchise business also depends on our ability to establish and maintain long-term, positive relationships with third-party owners and our ability to enter into and renew franchise agreements. The effectiveness of our management, the value of our brand and the rapport we maintain with our third-party owners impact the renewal of existing agreements and are also important factors for current or new third-party owners considering doing business with us. Although our franchise contracts are typically long-term arrangements, hotel owners may be able to terminate the agreements under certain circumstances, including the failure of us or the owner to meet specified financial or performance criteria. Our ability to meet these financial and performance criteria is subject to, among other things, risks common to the overall hotel industry, including factors outside of our control. If a third-party owner breaches the terms of their franchise agreement, we may elect to exercise our termination rights. If a franchise agreement terminates prematurely, we would lose the revenues we derive from that agreement and could incur expenses related to terminating our relationship with the third party and exiting the hotel property. In addition, negative franchise pricing trends could adversely affect our ability to negotiate fees and other matters with hotel owners. If we fail to maintain and renew agreements on terms similar to our existing arrangements, or enter into new agreements on less favorable or unfavorable terms, we may be unable to expand our presence and our franchise business and our financial condition and results of operations may suffer.
The continued growth of our franchise business may be affected, and may potentially be limited, by factors influencing real estate development generally, including site availability, construction costs, financing, planning, zoning and other local approvals. In addition, market factors such as projected room occupancy, changes in demand growth compared to projected supply and anticipated room rate structure, if not managed effectively by third-party owners, as well as geographic area restrictions, could adversely affect the growth of our franchise business.
Many of our third-party owners pledged their hotel properties as collateral under loans. If our third-party owners are unable to repay or refinance maturing indebtedness on favorable terms or at all, their lenders could declare a default, accelerate the related debt and repossess the property. A repossession could result in the termination of our franchise and/or management agreement or eliminate royalty and other fee-based revenues from the property. In addition, third-party owners depend on financing to acquire, develop and improve hotels and, in some cases, fund operations during down cycles. Our third-party owners’ inability to obtain adequate funding could materially adversely affect the maintenance and improvement plans of existing hotels, result in the delay or stoppage of the development of our existing pipeline and limit future pipeline development. In addition, if a third-party owner files for bankruptcy, our franchise or management agreements may be terminable under applicable law.
Third-party owners are required to comply with our brand quality and reputation standards, which include requirements related to the physical condition, safety standards and appearance of the properties as well as use of technology and service levels provided by hotel employees. These standards may evolve with guest preference or we may introduce new requirements over time. Guest preference for our brand may diminish if we or our third-party owners fail to make investments necessary to maintain or improve the hotel properties and services in accordance with our standards. If third-party owners fail to observe our brand standards, we may elect to exercise our termination rights, which would eliminate royalty and other fee-based revenues from these properties and cause us to incur expenses related to terminating these contracts.
Our franchise agreements require us and third-party owners to comply with certain provisions that are subject to interpretation and could result in disagreements. We cannot predict the outcome of any arbitration or litigation, the effect of any negative judgment against us or the amount of any settlement that we may enter into with any third-party owner.
We plan to continue expanding our franchise business with third-party franchisees. We expect that the development and expansion of our franchise system will require additional significant expenditures, including investments in human capital, marketing and information technology, and could divert management’s attention from other business concerns, each of which could have a material adverse effect on our business, financial condition and results of operations. The viability of our franchise business will depend on our ability to establish and maintain good relationships with franchisees and deliver services and franchisee returns. See “-Our business is subject to risks relating to doing business with third-party owners, including franchisees, that could materially adversely affect our reputation, financial condition or results of operations.”
Third-party claims that we infringe intellectual property rights of others could subject us to damages and other costs and expenses.
Third parties may make claims against us for infringing their patent, trademark, copyright or other intellectual property rights or for misappropriating their trade secrets. Any such claims, even those without merit, could:
•be expensive and time consuming to defend, and result in significant damages;
•force us to stop using the intellectual property that is being challenged or to stop providing products or services that use the challenged intellectual property;
•force us to redesign or rebrand our products or services;
•require us to enter into royalty, licensing, co-existence or other contracts to obtain the right to use a third party’s intellectual property;
•limit our ability to develop new intellectual property; and
•limit the use or the scope of our intellectual property or other rights.
In addition, we may be required to indemnify third-party owners of the hotels for any losses they incur as a result of any infringement claims against them. Royalty, licensing or other contracts may not be available to us on acceptable terms. Any adverse results associated with third-party intellectual property claims could negatively affect our business.
The geographic concentration of our hotel portfolio may make us particularly susceptible to adverse developments in geographic areas in which we own and operate a substantial portion of our hotels.
The concentration of our owned hotel properties in a particular geographic area may materially impact our operating results if that area is impacted by negative economic developments or other unfavorable factors. As of December 31, 2020, 15.8% of our rooms were in California, 10.4% of our rooms were in Florida, 7.5% of our rooms were in Texas and 5.5% of our rooms were in Illinois. We are particularly susceptible to adverse economic or other conditions in these markets (such as periods of economic slowdown or recession, business layoffs or downsizing and industry slowdowns, all of which have become subject to increased risk due to the effects of the COVID-19 pandemic, as well as relocations of businesses, increases in real estate and other taxes and the cost of complying with governmental regulations or increased regulations), as well as to severe weather events, man-made and natural disasters or terrorist events that occur in these markets. Our business, financial condition and results of operations would be materially adversely affected by any significant adverse developments in any of those markets. Our operations may also be materially adversely affected if competing hotels are built in these markets. Furthermore, local markets within any of these larger geographic areas may be dependent on the economic performance of a limited number of industries, or in some instances single businesses, that drive those markets.
An increase in the use of third-party intermediaries to book online hotel reservations could materially adversely affect our business, financial condition and results of operations.
For the year ended December 31, 2020, 18.8% of our total hotel revenues were booked through third-party intermediaries, to whom we commit to pay various commissions and transaction fees for sales of our rooms through their systems. These intermediaries primarily focus on shorter-stay leisure travel and also provide offerings for corporate travel and group meetings. Some third-party intermediaries have extensive financial resources and use a variety of marketing methods to attract customers and develop brand loyalties. The costs of distribution through these channels is higher than through our proprietary booking channels, and while shorter-term business is sometimes at higher rates, due to the higher cost of servicing those customers the profitability to us may be lower than with our core extended stay customers. Many of the major hospitality chains own multiple brands that provide them substantial economies of scale and are able to negotiate lower commissions and transaction fees with third-party intermediaries. Accordingly, our business, financial condition and results of operations could be harmed if a disproportionate amount of our business is distributed by third-party intermediaries.
During the year ended December 31, 2020, revenue bookings through our proprietary, lower cost distribution channels increased by 8%. In the future, if we are unable to maintain the increase of revenues booked through our proprietary distribution channels, our operating margins could decline.
A failure by third-party intermediaries to attract or retain customers could lower demand for our hotel rooms and, in turn, reduce our revenues from these distribution channels. Alternatively, if demand for third-party intermediaries by competing hotels increases, these intermediaries may be able to obtain higher commissions or other significant contract concessions from us by giving favorable placement on their website to the highest bidder, increasing the overall cost of these distribution channels. Increased size and scale resulting from continuing consolidation among third-party intermediaries may increase their
pricing power in negotiating commissions and other contract concessions. The third-party intermediaries also may reduce our bookings by de-ranking our hotels in search results on their platforms. Some of our distribution agreements with these companies are not exclusive, have a short term, are terminable at will or subject to early termination provisions. The loss of distributors, increased distribution costs or the renewal of distribution agreements on less favorable terms could adversely impact our business.
We are reliant upon technology and the disruption or malfunction in our information technology systems could materially adversely affect our business.
The lodging industry depends upon the use of sophisticated information technology systems, including those utilized for reservations, distribution, revenue, yield and pricing management, marketing, property management, procurement, finance, human resources and operation of administrative and business intelligence systems. For example, we depend on our central reservation system, which allows bookings of hotel rooms directly, via telephone through our call centers, by travel agents, online through our website and mobile applications and through third-party intermediaries. We operate third-party systems, making us reliant on third-party service providers, data communication and digital marketing networks and software upgrades, maintenance and support. Also, our guests depend on network technology at each hotel for WiFi/internet access, as well as TV content and streaming services, that are an essential part of our product offering. Some of our information technology systems are outdated and require substantial upgrades, and we are in the process of upgrading our website software and mobile applications. These technologies are costly and are expected to require refinements that may cause disruptions to many of our key information and technology systems. If we are unable to replace or introduce information technology systems as quickly as our competitors, within budgeted costs or schedules, or if we are unable to achieve the intended benefits of any information technology or other systems, our results of operations could be adversely affected and our ability to compete effectively could be diminished.
We have from time to time experienced disruptions of these systems. Disruptions of the operation of these systems as a result of failures related to our systems or service provider systems and support may occur in the future. Information technology systems that we rely upon are also vulnerable to damage or interruption from:
•events beyond our control, such as acts of war, armed hostilities, terrorist attacks, severe weather and force majeure events, including earthquakes, tornadoes, blizzards, hurricanes, fires or floods;
•power losses, computer systems, data center or other technical failures, internet and telecommunications or data network failures, service provider negligence, improper operation by or supervision of employees, user error, physical and electronic losses of data and similar events; and
•computer viruses, cyber-attacks, penetration by individuals seeking to disrupt operations or misappropriate information and other breaches of security.
We are particularly vulnerable to these risks and uncertainties as we upgrade our website software and mobile applications, and we may experience downtime and other technical failures, costs and issues related to these upgrades.
Some of our product and brand positioning strategies depend on information technology systems that we intend to continue to license or purchase from third-party providers, including property management systems, in-room entertainment systems and supporting internet bandwidth and data communications equipment and software. The success of these initiatives depends on the ability of the third-party providers to deliver on their contractual commitments as to product quality, service and cost.
The occurrence of any of these events at any of our information technology facilities, any of our call centers or by any third-party service providers could cause significant interruptions or delays in our business or loss of data, or render us unable to process reservations. In addition, if our technology systems are unable to provide the information communications capacity that we need, or if our technology systems suffer problems caused by installing system enhancements, we could experience similar failures or interruptions. If our information technology systems fail and our redundant systems or disaster recovery plans are not adequate to address such failures, or if our property and business interruption insurance does not sufficiently compensate us for any losses that we may incur, our revenues and profits could materially reduce and the reputation of our brand and our business could be harmed.
Cyber risk and the failure to maintain the integrity of internal or customer data could harm our reputation or subject us to costs, fines or lawsuits, or limit our ability to accept credit cards.
Our businesses require the collection, transmission and retention of large volumes of employee, customer or other sensitive data, including credit card numbers and other personally identifiable information of our customers, in various information technology systems that we maintain and in those maintained by third parties with whom we contract to provide services. We and our service providers also maintain personally identifiable information about our employees. From time to time we, our third-party owners and third parties who serve us experience attempted and actual breaches or disabling of our or their information technology systems and networks or similar events, which could result in a loss of sensitive business data, employee or customer information, systems interruption or the disruption of our operations. The integrity and protection of our customer, employee and Company data, as well as the continuous operation of our systems, is critical to us. Further, our customers and employees have a high expectation that we, our third-party owners and our service providers will adequately protect their personal information and that our services will be continuously available. The information, security and privacy requirements imposed by governmental regulation and certain of our contractual obligations are increasingly demanding. Our systems may not be able to satisfy these changing requirements and customer and employee expectations, or may require significant additional investments or time in order to do so. Even if we are fully compliant with legal standards and contractual requirements, we still may not be able to prevent cyber-attacks or security breaches involving sensitive data or the operation of our systems.
Efforts to hack or breach security measures, failures of systems or software to operate as designed or intended, viruses, operator error or inadvertent releases of data all threaten our, our third-party owners’ and our service providers’ information systems and records, and we expect such systems to be subject to ongoing attempts to gain unauthorized access. Moreover, our reliance on computer, internet-based and mobile systems and communications and the frequency and sophistication of efforts by hackers to gain unauthorized access to such systems continue to increase significantly. The techniques that are used to obtain unauthorized access, disable or degrade service or sabotage systems can change frequently, can be difficult to detect for long periods of time, and can involve prolonged assessment or remediation periods even once detected, and we are accordingly unable to anticipate and prevent all data security events. A breach in the security of our information technology systems or those of our third-party owners or service providers could lead to an interruption in the operation of our systems, resulting in operational inefficiencies and a loss of profits. Additionally, a significant theft, loss or misappropriation of, or access to, customers’ or other proprietary or personal data or other breach of our information technology systems could cause consumers to lose confidence in the security of our websites, mobile applications, customer and email databases, point of sale systems and other technology systems. Such loss of confidence could influence consumers to choose not to stay at our hotels and could also result in negative publicity, lost sales, fines, legal claims or legal proceedings, including regulatory investigations and actions, liability for failure to comply with privacy and information security laws, or restrictive contractual requirements, each of which could disrupt our operations, damage our reputation and have a material adverse effect on our business, financial condition and results of operations.
We believe our primary exposure to cyber-attacks includes forms of social engineering, such as phishing, as well as ransomware and credential theft. Our incident response plan provides details on data security threat detection and prevention and includes response procedures to be followed in the event of a cyber-attack of any magnitude. Such a response plan, however, cannot provide assurance of our ability to prevent cyber events. In addition, although we carry insurance that we believe is adequate for cyber risk related to theft, loss and fraudulent or unlawful use of customer or Company data, in the event of a substantial loss resulting from a cyber-attack, the insurance coverage that we carry may not be sufficient to pay the full value of financial obligations or liabilities with respect to loss. Furthermore, in the future such insurance may not be available to us on commercially reasonable terms, or at all.
We are subject to the Payment Card Industry Data Security Standard (“PCI DSS”), a set of requirements administered by the Payment Card Industry Security Standards Council, an independent body created by the major credit card brands designed to ensure that companies handling credit card information maintain a secure environment. As of December 31, 2020, we were in compliance with the PCI DSS. From time to time in prior years, we failed to maintain compliance with the PCI DSS and were subject to monthly penalties imposed by VISA. Failure to maintain PCI DSS compliance could subject us to additional penalties, the severity of which may include the loss of our ability to accept credit card payments. As approximately 92% of our hotel revenues for the year ended December 31, 2020 were paid by credit card, loss of the ability to accept credit cards for payment would significantly disrupt our operations, reduce our occupancy levels and likely have a material adverse effect on our business, financial condition and results of operations.
Changes in privacy and data security laws could increase our operating costs, increase our exposure to fines and litigation, and adversely affect our ability to market effectively.
Our business operations, in particular our collection and use of personal data, are subject to various privacy and data protection laws and regulations. Increasingly, there is potential for exposure to fines, penalties and civil judgments as a result of new privacy and data protection laws and regulations. We rely on a variety of direct marketing techniques, including
telemarketing, email and postal mailings. Restrictions in laws such as the Telemarketing Sales Rule, CAN-SPAM Act, various state laws or new federal laws and regulations and applicable international laws and regulations regarding marketing and solicitation or privacy and data protection that govern these activities could adversely affect the continuing effectiveness of telemarketing, email and postal mailing techniques and could force changes in our marketing strategies. If this occurs, we may not be able to develop adequate alternative marketing strategies, which could impact the amount and timing of our revenues. We also obtain access to potential customers from travel service providers and other companies with whom we have substantial relationships and market to some individuals on these lists directly or by including our marketing message in their marketing materials. If access to these lists was prohibited or otherwise restricted, our ability to develop new customers and introduce them to our services and brand could be materially impaired.
Any future changes or restrictions in privacy and data protection and security laws and regulations could also adversely affect our ability to transfer, use, or retain guest data, which could adversely impact guest bookings. For example, the California Consumer Protection Act created new compliance regulations on businesses that collect information from California residents, conferred a private right of action for violations on certain individuals and associations, and is enforced by the state attorney general. Moreover, a new privacy law, the California Privacy Rights Act (“CPRA”), certified by the California Secretary of State to appear as a ballot initiative, was passed by Californians during the November 3, 2020 election. The CPRA, which is scheduled to take effect on January 1, 2023 (with a lookback to January 1, 2022), will significantly modify the CCPA, and will impose additional data protection obligations on companies such as ours doing business in California. Any violation of these laws or regulations could result in reputational harm, legal and regulatory proceedings or significant penalties, while compliance with these laws and regulations, or any future changes in such laws and regulations or additional restrictions, could result in significant costs and require us to change some of our business practices.
We are exposed to a variety of risks associated with safety, security and crisis management.
There is a constant need to protect the safety and security of our guests, employees and assets against natural and man-made threats. These threats include, but are not limited to, severe weather events, civil or political unrest, violence and terrorism, pandemic disease (including the effect of the COVID-19 pandemic), acts of God, fraud, employee dishonesty, cyber-crime, fire, day-to-day accidents, incidents and criminal activity, all of which may impact the guest or employee experience, cause loss of life, sickness or injury and result in compensation claims, fines from regulatory bodies, litigation and negative publicity that could impact our reputation. Serious incidents or a combination of events could escalate into a crisis, which if managed poorly by us could further expose our brand to reputational damage, which could have a material adverse effect on our business, financial condition and results of operations.
Labor shortages or employment regulation could restrict our ability to operate our hotels or implement our business strategies or result in increased labor costs that could reduce profitability.
Our success depends in large part on our ability to attract, retain, train, manage and engage our employees. Our hotels have historically been and will continue to be staffed 24 hours a day, seven days a week by approximately 7,000 employees. If we are unable to attract, retain, train, manage and engage skilled employees, our ability to manage and staff our hotels adequately could be impaired, which could impede hotel operations, reduce customer satisfaction and harm our reputation and profitability. Staffing shortages or changes in employment regulation could also hinder our ability to implement our business strategy. Because payroll costs are a significant component of hotel operating and general and administrative expenses, a shortage of skilled labor or changes in employment regulation, including changes in federal and state minimum wage laws, could also require higher wages that would increase our labor costs, which could reduce our profitability and therefore may limit our ability to pay distributions to shareholders.
We may become subject to collective bargaining agreements, similar agreements or regulations enforced by governmental entities in the future. Changes in the federal regulatory scheme could make it easier for unions to organize groups of our employees. If relationships with our employees or other hotel personnel deteriorate or become adverse, our hotel properties could experience labor disruptions such as strikes, lockouts and public demonstrations. Additionally, if such changes take effect, our employees or other hotel personnel could be subject to organizational efforts, which could potentially lead to disruptions or require management’s time to address unionization issues. Labor regulation that leads to higher wage and benefit costs would increase operating expenses and legal costs and limit our ability to implement cost saving measures during economic downturns. These or similar agreements, legislation or changes in regulations could disrupt our operations, hinder our ability to cross-train and cross-promote our employees due to prescribed work rules and job classifications, reduce our profitability or interfere with the ability of management to focus on executing our business strategies.
We are dependent upon our ability to attract and retain key officers and other highly qualified personnel.
Our success and our ability to implement our business strategies depends in large part upon the efforts and skills of our senior management and our ability to attract and retain key officers and other highly qualified personnel. Competition for such personnel is intense. In recent years, we have experienced turnover in several senior executive roles, including our Chief Executive Officer and Chief Financial Officer. Future executive and senior management turnover or the unexpected loss of one or more of our key personnel, including the time and resources spent on attempting to foster a seamless transition or any negative public perception with respect to changes in our management, could adversely impact our brand and reputation. If we lose or suffer an extended interruption in the services of one or more of our key personnel or members of senior management, our business, financial condition and results of operations could be materially adversely affected.
Our insurance may not fully compensate us for damage to or losses involving our hotel properties.
We operate in certain areas where the risk of natural or man-made disasters or other catastrophic losses vary, and the occurrence of such an event could cause substantial damage to us, third-party owners, other impacted parties or the surrounding area. We use our discretion in determining amounts, coverage limits and deductibility provisions of insurance, with a view toward obtaining appropriate insurance at a reasonable cost and on suitable terms. We carry, and we require our third-party owners to carry, insurance that we believe is adequate for foreseeable first- and third-party losses and with terms and conditions that are reasonable and customary. Nevertheless, market forces beyond our control, such as natural and man-made disasters that occurred over the last three years in North America, could limit the scope of the insurance coverage that we and our third-party owners can obtain or may otherwise restrict our or our third-party owners’ ability to buy insurance coverage at reasonable rates.
In the event of a substantial loss, the insurance coverage that we and/or our third-party owners carry may not be sufficient to pay the full value of financial obligations, liabilities or the replacement cost of any loss. Because certain types of losses are uncertain, they may be uninsurable or prohibitively expensive. There are other risks that may fall outside the general coverage terms and limits of our policies. We anticipate the cost of property insurance and general liability insurance will increase in 2021 due to significant losses that insurers incurred in 2020 and the loss of certain insurers that previously underwrote hospitality property risks.
Inflation, changes in building codes and zoning ordinances, environmental considerations and other factors might make it impossible or impractical to use insurance proceeds to replace or repair a property that has been damaged or destroyed. Under these and other circumstances, insurance proceeds may not be adequate to restore our economic position with respect to a damaged or destroyed property. Accordingly, ESH REIT could lose some or all of the capital it has invested in a property, as well as the anticipated future revenue from the property, and ESH REIT could remain obligated for guarantees, debt or other financial obligations of the property.
Our debt instruments contain customary covenants requiring us to maintain insurance, and there can be no assurance that the lenders under our debt instruments will not take the position that we do not have sufficient insurance coverage and therefore are in breach of these instruments, allowing the lenders to potentially declare an event of default and accelerate repayment of debt.
Risks Relating to Legal and Regulatory Compliance
Compliance with the laws and regulations, including those related to environmental, health and safety, that apply to our hotel properties and our franchise relationships could materially adversely affect our ability to complete future developments, acquisitions or renovations, result in significant costs or delays and adversely affect our business strategies.
Owned and franchised hotels are subject to various local laws and regulatory requirements that address their ability to obtain licenses to operate the property as a hotel. In particular, we are subject to permitting and licensing requirements which can restrict the use of our hotel properties and increase the cost of development, construction, acquisition, renovation, franchising or operation of our hotels. Our hotel properties are subject to various federal, state and local environmental laws that impose liability for contamination as well as numerous environmental, health and safety laws and regulations. See “Business-Environmental, Health and Safety Matters.” Failure to comply with these laws and regulations could expose us to material fines, penalties, injunctive relief and damages that could materially and adversely affect our business and financial condition.
Compliance with the American with Disabilities Act and similar laws could require us to incur substantial costs.
Federal and state laws and regulations, including laws such as the ADA, impose further restrictions on our operations. Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. We may be subject to audits or investigations of all of our hotels to determine our compliance. Some of our hotels, websites and other facilities may not be fully compliant with the ADA. If one or more of these facilities is not in compliance with the ADA
or any other regulatory requirements, we may be required to incur additional costs to bring the facility into compliance and we may be required to pay damages or governmental fines. In addition, the obligation to make readily achievable accommodations is an ongoing one. Existing requirements may change and future requirements may require us to make significant unanticipated capital expenditures that could materially adversely affect our business, financial condition, liquidity, results of operations and cash flows.
We are subject to Federal Trade Commission and state laws regarding franchising.
Our franchising business is subject to various state laws, as well as to regulations enacted by the Federal Trade Commission (“FTC”). A number of states require franchisors to register with the state or to make extensive disclosures to potential franchisees in connection with offers and sales in those states. The FTC also regulates the manner and substance of our disclosures to prospective franchisees. Compliance with these laws and regulations, including changing federal and state franchise laws, may increase our costs, limit our rights and negatively impact our profitability. In addition, several states have “franchise relationship laws” or “business opportunity laws” that limit the ability of franchisors to terminate franchise agreements or withhold consent to the renewal or transfer of those agreements.
Changes to accounting rules or regulations may adversely affect our reported financial condition and results of operations.
New accounting rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and are likely to occur in the future. A change in accounting rules or regulations may require retrospective application and affect our reporting of transactions completed before the change is effective, and future changes to accounting rules or regulations may adversely affect our reported financial condition and results of operations. See Note 2 to each of the consolidated financial statements of Extended Stay America, Inc. and ESH Hospitality, Inc., included in Item 8 of this combined annual report on Form 10-K, for a summary of recently issued accounting standards.
We are subject to federal, state and local laws and regulations regarding employment.
We are subject to numerous laws and regulations at federal, state and local levels concerning the employer/employee relationship, including, but not limited to, wages, meal and rest periods, working conditions, hiring practices and discrimination. Compliance with these laws and regulations, including changing federal and state minimum wage laws, may increase our labor costs and negatively impact our profitability. Violations of these laws and regulations could affect numerous employees whose claims might be asserted through class action lawsuits or through government action. Lawsuits of this nature, including meal and rest period, wage and hour and Federal Credit Reporting Act class action lawsuits, have been filed against us from time to time, and in certain instances we have incurred substantial damages and expense resulting from lawsuits of this nature. We cannot assure you that we will not incur additional substantial damages and expenses resulting from lawsuits of this nature or other employment claims, which could have a material adverse effect on our business, financial condition and results of operations.
Changes in federal, state, local or foreign tax law or disputes with tax authorities could materially adversely affect our business, financial condition and profitability by increasing our tax or tax compliance costs.
The determination of our provision for income taxes and other tax liabilities requires estimations and significant judgments and there are many transactions and calculations where the ultimate tax determination is uncertain. We are subject to taxation at the federal, state or provincial and local levels in the United States and Canada. Our future tax rates could be materially adversely affected by changes in the composition of our earnings in jurisdictions with differing tax rates, changes in the valuation of or valuation allowances against our deferred tax assets and liabilities and substantive changes to tax rules, including those contemplated by the new presidential administration in the United States, and changes to the application of existing tax rules by United States federal, state, local and foreign governments, all of which could result in materially higher corporate income taxes than would be incurred under existing tax law or interpretation and could adversely affect our profitability.
On December 20, 2017, the U.S. Congress passed H.R. 1, known as the “Tax Cuts and Jobs Act” (the “TCJA”), which was signed into law on December 22, 2017. The enactment of the TCJA has given rise to numerous interpretive issues and ambiguities and future legislation may be enacted to clarify or modify the TCJA. In addition, federal legislation intended to mitigate the economic impact of the COVID-19 pandemic has been enacted that makes technical corrections to, or modifies on a temporary basis, certain provisions of the TCJA, including the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) which was signed into law on March 27, 2020. It is possible that additional legislation may be enacted in the future, including legislation that reverses some or all of the tax benefits provided to taxpayers in the TCJA or the CARES Act,
such as the ability to carry back net operating losses (“NOLs”) arising in 2018, 2019 and 2020 to the five years preceding the year of the loss, potentially even on a retroactive basis. Future legislation, as well as any regulations or other interpretive guidance, may have a material and adverse impact on us.
Further, our determination of our income tax liability is subject to audit and review by applicable tax authorities. Any adverse outcome of any such audit or review could have an adverse effect on our business and reduce our profits to the extent potential tax liabilities exceed our reserves and may materially affect our financial results in the period in which such determination is made, as well as future periods. The Company’s federal income tax returns for the years 2017 to present may be subject to examination by the Internal Revenue Service ("IRS") and other taxing authorities. In November 2018, we received notice that a subsidiary of ESH REIT was subject to an audit by the Canadian Revenue Agency for the years 2014 through 2017. As the Canadian Revenue Agency audit is still in process, the timing of the resolution and any payments that may be required cannot be determined at this time.
The Corporation is subject to tax at the regular corporate rate.
The Corporation is subject to U.S. federal income tax on its taxable income at the regular corporate rate (currently 21%). Distributions to holders of Corporation common stock are not deductible by the Corporation in computing its taxable income. In calculating its taxable income, the Corporation must include as income any distributions received from ESH REIT. Distributions to holders of Corporation common stock are taxable as dividends to the extent of the Corporation’s current and accumulated earnings and profits. Distributions paid by the Corporation to noncorporate U.S. shareholders that constitute qualified dividend income will be taxable to the shareholder at the preferential rates applicable to long-term capital gains provided the shareholder meets certain holding period requirements. Distributions in excess of the Corporation’s current and accumulated earnings and profits would generally be considered a return of capital for U.S. federal income tax purposes to the extent of the holder’s adjusted tax basis in their shares. A return of capital is not taxable, but it has the effect of reducing the holder’s adjusted tax basis in their shares. If distributions exceed the adjusted tax basis of a holder’s shares, they will be treated as gain from the sale or exchange of such stock.
Recent changes in tax law pursuant to the TCJA and the CARES Act affected the taxation of the Corporation.
As a result of the TCJA, the Corporation is subject to U.S. federal income tax at a maximum rate of 21% for taxable years beginning after December 31, 2017 (as compared to 35% for prior taxable years). However, the Corporation is also subject to a new limitation on the deduction of “business interest” (i.e., interest paid or accrued on indebtedness allocable to a trade or business) in excess of a specified percentage (50% for taxable years beginning in 2019 and 2020 and 30% for subsequent taxable years) of adjusted taxable income. The CARES Act temporarily increased the limitation on adjusted taxable income to 50% for 2020 and allows companies to elect to use 2019 adjusted taxable income when determining any limitation for 2020. In addition, for losses generally incurred after 2017, the TCJA limits the utilization of net operating loss carryforwards to 80% of taxable income in the taxable year in which the carryforward is applied, which could cause the Corporation in certain circumstances to have greater taxable income, although the CARES Act temporarily removes this 80% limit for taxable years beginning before January 1, 2021. While the TCJA disallowed net operating losses to be carried back to prior tax years, the CARES Act provided relief in 2020 for taxpayers impacted adversely by the COVID-19 pandemic. For tax year 2020, companies are allowed to carry back net operating losses to the proceeding five tax years, which include higher tax rate years prior to the TCJA, and seek tax refunds provided there is sufficient taxable income to utilize the net operating loss. As a result of the TCJA, the Corporation (and ESH REIT) is unable to deduct certain executive compensation in excess of $1 million per covered employee. On the other hand, the TCJA generally permits taxpayers to immediately expense (rather than depreciate over a period of years) 100% of the cost of certain tangible personal property that has a depreciable life of 20 years or less that was acquired and placed into service after September 21, 2017 but before January 1, 2023 (with the 100% expensing allowance phased down by 20% per calendar year for qualified property placed into service in taxable years beginning after 2022).
Adverse judgments or settlements resulting from legal proceedings in which we may be involved in the normal course of our business could reduce our profitability or limit our ability to operate our business.
In the normal course of our business, we are often involved in various legal proceedings. We cannot predict with certainty the cost of defense, the cost of prosecution or the ultimate outcome of these legal proceedings. Additionally, we could become the subject of future claims by third parties, including hotel guests, employees, third-party owners, shareholders, suppliers and other contractual counterparties or regulators. In recent years, several hospitality companies have been subject to lawsuits, including class action lawsuits alleging violations of federal and state employment law, human trafficking, consumer protection claims, negligent security claims and privacy breach claims. A number of these lawsuits have resulted in payment of significant damages by the defendants. Similar lawsuits have been and may be instituted against us from time to time and we have incurred and may in the future incur significant damages and expenses resulting from such lawsuits. Any future significant adverse
determinations, judgments or settlements, as well as negative publicity relating to such matters, could have a material adverse effect on our business, financial condition and results of operations, limit our ability to operate our business and negatively impact our brand reputation. Further, we may incur costs related to claims for which we have appropriate third-party indemnity, but such third parties may fail to fulfill their contractual obligations. See “Legal Proceedings.”
Risks Related to Our Indebtedness
We have a significant amount of debt and debt service obligations that could adversely affect our financial condition and limit operational flexibility.
We have a significant amount of debt. As of December 31, 2020, we had total indebtedness of $2.7 billion, net of unamortized deferred financing costs and discounts of $39.2 million, and the Company had a debt-to-equity ratio of 2.4x. In the future, subject to compliance with the covenants included in our current indebtedness, we may incur significant additional indebtedness and intercompany indebtedness to finance future hotel acquisition, development, construction, renovation and improvement activities and for other corporate purposes, including capital returns to shareholders. Our substantial level of indebtedness could have a material adverse effect on our business, results of operations and financial condition because it could, among other things:
•require us to dedicate a substantial portion of our cash flows to make principal and interest payments, thereby reducing our cash flows available to fund working capital, capital expenditures and other general corporate purposes, including our ability to pay cash distributions to our shareholders;
•increase our vulnerability to general adverse economic and industry conditions and limit our flexibility in planning for, or reacting to, changes in our business and our industry;
•limit our ability to borrow additional funds or refinance indebtedness on favorable terms or at all to expand our business or ease liquidity constraints; and
•place us at a competitive disadvantage relative to competitors that have less indebtedness or greater resources.
Certain of our variable rate indebtedness uses LIBOR as a benchmark for establishing the rate of interest and may also be hedged with LIBOR-based interest rate derivatives. LIBOR has been the subject of recent regulatory guidance and proposals for reform, and it is currently expected that LIBOR will be discontinued after 2021. In July 2017, the Chief Executive of the U.K. Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. Such announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. The Alternative Reference Rates Committee (ARRC), which was convened by the Federal Reserve Board and the New York Fed, has identified the Secured Oversight Financing Rate (SOFR) as the recommended risk-free alternative rate for USD LIBOR. At this time, it is not possible to predict the effect any discontinuance, modification or other reforms to LIBOR, or the establishment of alternative reference rates such as SOFR, or any other reference rate, will have on the Company. However, if LIBOR ceases to exist or if the methods of calculating LIBOR change from their current form, our borrowing costs may be adversely affected.
We cannot assure you that our business will generate sufficient cash flows to enable us to pay our indebtedness, fund our other liquidity needs, including existing or future capital needs, fund our growth strategies or pay distributions to our shareholders. If we are unable to meet our debt service obligations, our indebtedness may prevent us from paying cash distributions with respect to our stock. In such case, in order to satisfy the REIT distribution requirements imposed by the Code, ESH REIT may distribute taxable stock dividends to its shareholders in the form of additional shares of its stock.
We will need to refinance all or a portion of our debt on or before maturity, which principally occurs in 2024, 2025, 2026 and 2027. We cannot assure you that we will be able to refinance any of our debt on attractive terms at or before maturity or on commercially reasonable terms or at all, particularly because of our substantial levels of debt and because of restrictions on debt prepayment and additional debt incurrence contained in the agreements governing our existing debt. Our future results of operations and our ability to service, extend or refinance our existing indebtedness are subject to distributions from our subsidiaries to us, future economic conditions and to financial, business and other factors, many of which are beyond our control.
Our indebtedness is subject to restrictive covenants that could limit our ability to conduct our operations and have a material negative impact on our business, financial condition and operations if we are unable to comply with these covenants.
Our indebtedness includes certain restrictive covenants and our failure to comply with any of these could put us in default, which would have an adverse effect on our business, including our current and future prospects. These covenants may restrict, among other activities, our ability to:
•sell assets or merge, consolidate or transfer all or substantially all of our assets;
•incur additional debt;
•incur certain liens;
•enter into, terminate or modify leases and/or management agreements for our owned hotel properties;
•make certain investments and other restricted payments;
•pay distributions on or repurchase our capital stock; and
•enter into certain transactions with affiliates.
Under both the Corporation Revolving Credit Facility and the ESH REIT Revolving Credit Facility (each as defined herein), the occurrence of a Default or an Event of Default (each as defined) would require the Corporation or ESH REIT, as the case may be, to prepay advances existing under its revolving credit facility and cash collateralize any outstanding letters of credit. During a Default or an Event of Default, the Corporation or ESH REIT, as the case may be, would be restricted from making certain cash distributions. For a more detailed description of the financial and other covenants imposed by the agreements governing our indebtedness, see Note 7 to each of the consolidated financial statements of Extended Stay America, Inc. and ESH Hospitality, Inc., included in Item 8 of this combined annual report on Form 10-K.
These covenants could impair our ability to grow our business, take advantage of attractive business opportunities, successfully compete or pay distributions to shareholders. A breach of any of the covenants under any of the agreements governing our indebtedness could result in an event of default. Cross-default provisions in the debt agreements could cause an event of default under one debt agreement to trigger an event of default under other debt agreements. Upon the occurrence of an event of default under any of our debt agreements, the lenders could elect to declare all outstanding debt under such agreements to be immediately due and payable. If we are unable to repay or refinance the accelerated debt, the lenders could proceed against any assets pledged to secure that debt. Furthermore, the agreements governing any future indebtedness will likely contain covenants that place additional restrictions on us.
In May 2020, we amended the Corporation Revolving Credit Facility to, among other things, suspend the quarterly tested leverage covenant for the fiscal quarters ending June 30, 2020, September 30, 2020, December 31, 2020 and March 31, 2021. In addition, for the quarter ended June 30, 2021 through the quarter ended December 31, 2021, the leverage covenant calculation has been modified to use annualized EBITDA as opposed to trailing twelve-month EBITDA. Throughout the suspension period (i.e., through March 31, 2021), the Company has agreed to maintain minimum liquidity of $150.0 million and to limit share repurchases and dividend payments made by the Corporation. We cannot assure you that the Corporation Revolving Credit Facility amendment will be the only covenant suspension, waiver or amendment required by us, or that this amendment will prevent us from future covenant breaches and/or the acceleration of our indebtedness. See Note 7 to the consolidated financial statements of Extended Stay America, Inc., included in Item 8 of this combined annual report on Form 10-K.
Rating agency downgrades or withdrawals may increase our future borrowing costs and reduce our access to capital.
Our debt currently has a non-investment grade rating and there can be no assurance that any strong rating assigned by the rating agencies will remain for any given period of time or that a strong rating will not be lowered or withdrawn entirely by a rating agency in its judgment. A lowering or withdrawal of our credit rating is likely to increase our future borrowing costs and reduce our access to capital, which could have a material adverse impact on our financial condition and results of operations.
Risks Related to ESH REIT and its Status as a REIT
Failure of ESH REIT to qualify as a REIT or remain qualified as a REIT would cause it to be taxed as a regular C corporation, which would expose it to substantial tax liability and substantially reduce the amount of cash available to pay distributions to its shareholders.
ESH REIT elected to be taxed as a REIT for U.S. federal income tax purposes effective as of October 7, 2010. We believe ESH REIT has been organized and operated in such a manner so as to qualify as a REIT and ESH REIT currently intends to continue to operate as a REIT. However, qualification as a REIT involves the application of highly technical and complex provisions of the Code, for which only a limited number of judicial and administrative interpretations exist. The complexity of
these provisions is greater in the case of a REIT that owns hotels and leases them to a corporation with which a portion of its stock is paired. As a result, ESH REIT is likely to encounter a greater number of interpretive issues under the REIT qualification rules, and more such issues which lack clear guidance, than are other REITs. An inadvertent or technical mistake could jeopardize ESH REIT’s REIT qualification.
In connection with our initial public offering in November 2013, subsequent secondary offerings and ESH REIT’s May 2015, March 2016 and September 2019 notes offerings, the Company received opinions that ESH REIT should have qualified as a REIT as of the respective date. We believe ESH REIT has continued to operate in conformity with the requirements to qualify as a REIT and that ESH REIT continues to satisfy all requirements to maintain its REIT status. One of the requirements unique to our structure is that, in order for ESH REIT to qualify as a REIT, no shareholder may actually or constructively own 10% or more of the value of shares of ESH REIT or the Corporation. While we do not regularly monitor share ownership for purposes of this test, in the event that a shareholder crosses the 10% threshold, we believe that the excess share provisions of the ESH REIT and Corporation charters should be triggered to reduce the relevant shareholder’s ownership and insulate the Company from risk with respect to this issue.
If ESH REIT failed to qualify as a REIT in any taxable year, and no available relief provision applied, it would be subject to U.S. federal income tax on its taxable income at the regular corporate income tax rate (currently 21%), and distributions to holders of its stock would not be deductible by it in computing its taxable income. ESH REIT may also be subject to additional state and local taxes if it fails to qualify as a REIT. Any such corporate tax liability could be substantial and would reduce the amount of cash available for investment, debt service and distribution to holders of its stock, which in turn could have a material adverse effect on the value and market price of our Paired Shares. To the extent that distributions to shareholders by ESH REIT have been made on the belief that ESH REIT qualified as a REIT, ESH REIT might be required to borrow funds or liquidate certain of its investments to pay the applicable tax. If, for any reason, ESH REIT failed to qualify as a REIT and it was not entitled to relief under certain Code provisions, it would be subject to a material tax liability and unable to elect REIT status for the four taxable years following the year during which it ceased to so qualify, which would materially adversely affect our business, cash flows, strategies and the market value of our Paired Shares.
Failure to qualify as a REIT could result from a number of factors, including, without limitation:
•the leases of ESH REIT’s hotels to the Corporation are not respected as true leases for U.S. federal income tax purposes;
•rents received from the Corporation are treated as rents received from a “related party tenant”;
•ESH REIT is not respected as an entity separate from the Corporation or the REIT qualification tests are applied to ESH REIT on a combined basis with the Corporation; or
•failure to satisfy the REIT distribution requirements due to restrictions under ESH REIT’s indebtedness.
If ESH REIT fails to qualify as a REIT, it will no longer be required to make distributions as a condition to REIT qualification and all of its distributions to holders of its common stock, after payment of corporate level tax as noted above, would be taxable as regular C corporation dividends to the extent of ESH REIT’s current and accumulated earnings and profits. Thus, if ESH REIT failed to qualify as a REIT, dividends paid to ESH REIT’s shareholders currently taxed as individuals would be qualified dividend income, currently taxed at preferential rates, and ESH REIT’s shareholders currently taxed as corporations (including the Corporation) would be entitled to the dividends received deduction with respect to such dividends, subject in each case to applicable limitations under the Code. As a result of all these factors, ESH REIT’s failure to qualify as a REIT would impair our business, cash flows, strategies and materially adversely affect the market price of our Paired Shares.
The Corporation receives, and is expected to continue to receive, a substantial portion of its income in the form of distributions from ESH REIT. If ESH REIT was not treated as a REIT, it would be subject to U.S. federal income tax on its taxable income at the regular corporate rate, and distributions to holders of its stock, including the Corporation, would not be deductible by it in computing its taxable income. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to holders of its stock, including the Corporation, and would likely reduce the value of the ESH REIT Class A common stock held by the Corporation, which in-turn could have a material adverse effect on the value of the Corporation’s common stock and our Paired Shares.
If rents received by ESH REIT do not meet certain criteria, ESH REIT will fail to qualify as a REIT.
To qualify as “rents from real property” for purposes of the two gross income tests applicable to REITs, ESH REIT must not own, actually or constructively (by virtue of certain attribution provisions of the Code), 10% or more (by vote or value) of the stock of any corporate lessee or 10% or more of the assets or net profits of any non-corporate lessee (a “related party
tenant”). The Corporation will be treated as a related party tenant for purposes of the gross income tests if ESH REIT owns, actually or constructively (by virtue of certain attribution provisions of the Code), 10% or more of the stock (by vote or value) of the Corporation. The Corporation does not believe that it is a related party tenant of ESH REIT.
However, events beyond our knowledge or control could result in a shareholder owning or being deemed to own 10% or more of the paired common stock. The ownership attribution rules that apply for purposes of the 10% threshold are complex and may cause the outstanding shares owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity. As a result, for instance, the acquisition of less than 10% of the outstanding paired common stock (or the acquisition of an interest in an entity which owns paired common stock) by an individual or entity could cause that individual or entity to be treated as owning in excess of 10% of ESH REIT. Although ESH REIT intends to make timely annual demands of certain shareholders of record to disclose the beneficial owners of Paired Shares issued in their name, as required by the Treasury Regulations, monitoring actual or constructive ownership of the Paired Shares on a continuous basis is not feasible. The charters of the Corporation and ESH REIT contain restrictions on the amount of shares of stock of either entity so that no person can own, actually or constructively (by virtue of certain attribution provisions of the Code), more than 9.8% of the outstanding shares of any class or series of stock of either ESH REIT or the Corporation. The Class A common stock of ESH REIT and the 125 shares of preferred stock of ESH REIT are not subject to the 9.8% ownership limitation under the charter of ESH REIT. However, given the breadth of the Code’s constructive ownership rules and the fact that it is not feasible for ESH REIT and the Corporation to continuously monitor actual and constructive ownership of paired common stock, there can be no assurance that such restrictions will be effective in preventing any person from actually or constructively acquiring 9.8% or more of the outstanding shares of any class or series of stock of the Corporation or ESH REIT. If the Corporation were treated as a “related party tenant” of ESH REIT, ESH REIT would not be able to satisfy either of the two gross income tests applicable to REITs and would fail to qualify for REIT status. In addition, it is unlikely ESH REIT would avail itself of certain relief provisions under the Code customarily available to a REIT that has failed to satisfy a REIT requirement but wants to retain its REIT status. If a REIT fails to satisfy either of the two gross income requirements, such relief provisions require payment of a punitive tax in an amount equal to 100% of the estimated profits of the REIT attributable to the amount of gross income by which the REIT failed the gross income tests. Since substantially all of ESH REIT’s gross income is generated by rent paid to it pursuant to the operating leases with the Corporation, substantially all of ESH REIT’s total profits could become subject to such 100% tax under such relief provisions of the Code if this rent failed to qualify under the two gross income tests. In that event, ESH REIT would not likely pursue any of the relief provisions available to REITs under certain provisions of the Code.
The rates of rent payable by the Corporation to ESH REIT under the operating leases are intended to reflect arm’s-length terms. However, transfer pricing is an inherently subjective matter, and the IRS could, under Section 482 of the Code, assert that the rates of rent between the Corporation and ESH REIT do not reflect arm’s-length terms. If the IRS was successful in asserting that the rates of rent were not on arm’s-length terms, it could adversely impact ESH REIT’s REIT qualification. The initial term of the operating leases expired in October 2018. In connection with the five-year renewal of the operating leases, amended and restated leases were executed effective November 1, 2018. At such time, minimum and percentage rents were adjusted to reflect then-current market rates.
Pursuant to two gross income tests, specified percentages of ESH REIT’s gross income must be passive income, such as rent. For the rent paid pursuant to the operating leases with the Corporation, which generates substantially all of ESH REIT’s gross income, to constitute qualifying rental income for purposes of the gross income tests, the leases must be respected as true leases for U.S. federal income tax purposes and must not be treated as service contracts, joint ventures or some other type of arrangement. ESH REIT has structured the leases, and intends to structure any future leases, so that the leases will be respected as true leases for U.S. federal income tax purposes, but there can be no assurance that the IRS will not challenge this treatment or that a court would not sustain such a challenge. If the leases were not respected as true leases for U.S. federal income tax purposes, ESH REIT would not be able to satisfy either of the two gross income tests applicable to REITs and would fail to qualify for REIT status.
Our structure has been infrequently utilized by public companies and the IRS could challenge ESH REIT’s qualification as a REIT.
Our structure has been infrequently utilized by public companies and there is little guidance on the tax treatment of a paired share arrangement. Section 269B of the Code provides that the determination of whether an entity qualifies as a REIT must be made on a combined basis if the entity is “stapled” to another entity. ESH REIT and the Corporation will be considered “stapled entities” if more than 50% of the value of the beneficial ownership of shares of ESH REIT is paired with the shares of the Corporation. We believe that the value of the Class B common stock does not represent more than 50% of the value of all of the shares of stock of ESH REIT and, accordingly, that ESH REIT and the Corporation are not “stapled entities” for purposes of Section 269B of the Code. There are, in addition, other challenges to the REIT status of ESH REIT that the IRS could make
based on the Paired Share structure, which, if successful, would result in the loss of ESH REIT’s REIT status. If ESH REIT failed to qualify as a REIT under any of these theories and it was not entitled to relief under certain Code provisions, it would be subject to a material tax liability and unable to elect REIT status for the four taxable years following the year during which it ceased to so qualify. Finally, the IRS could also assert that the Corporation should be treated as owning all of the common stock of ESH REIT. If upheld, such an assertion would effectively eliminate the benefit of REIT status for ESH REIT. We did not seek an advance ruling from the IRS regarding ESH REIT’s qualification as a REIT.
The ownership limits that apply to REITs, as prescribed by the Code and by ESH REIT’s charter, may inhibit market activity in our Paired Shares and restrict our business combination opportunities.
In order for ESH REIT to qualify to be taxed as a REIT, not more than 50% in value of the outstanding shares of its stock may be owned, beneficially or constructively, by five or fewer individuals, as defined in the Code to include certain entities, at any time during the last half of each taxable year after the first year for which it elected to qualify to be taxed as a REIT. Subject to certain exceptions, ESH REIT’s charter authorizes its Board of Directors to take such actions as are necessary and desirable to preserve its qualification to be taxed as a REIT. ESH REIT’s charter also provides that, unless exempted by the Board of Directors, no person may own more than 9.8% of the outstanding shares of any class or series of its stock. The constructive ownership rules are complex and may cause shares of stock owned directly or constructively (by virtue of certain attribution provisions of the Code) by a group of related individuals or entities to be constructively owned by one individual or entity. These ownership limits could delay or prevent a transaction or a change in control of us that might involve a premium price for our Paired Shares or otherwise be in the best interests of our shareholders.
Even if ESH REIT continues to qualify as a REIT, it may face other tax liabilities that could reduce our cash flows.
Even if ESH REIT continues to qualify for taxation as a REIT, it may be subject to certain U.S. federal, state and local taxes on its income and assets including, but not limited to, taxes on any undistributed income and property and transfer taxes. In order to maintain its status as a REIT, each year ESH REIT must distribute to holders of its common stock at least 90% of its REIT taxable income, determined before the deductions for distributions paid and excluding any net capital gain. To the extent that ESH REIT satisfies this distribution requirement, but distributes less than 100% of its taxable income and net capital gain, it will be subject to U.S. federal corporate income tax on its undistributed REIT taxable income and net capital gain. In addition, ESH REIT will be subject to a 4% nondeductible excise tax if the actual amount that it pays out to holders of its common stock in a calendar year is less than a minimum amount specified under the Code. Any of these taxes would decrease cash available for distributions to holders of its common stock, and lower cash distributions could adversely affect the market price of our Paired Shares. 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.
The REIT distribution requirements could materially adversely affect ESH REIT’s liquidity and may force ESH REIT to borrow funds or sell assets during unfavorable market conditions or make taxable distributions of its capital stock.
In order to meet the REIT distribution requirements and avoid the payment of income and excise taxes, ESH REIT may need to borrow funds on a short-term basis or sell assets, even if the then-prevailing market conditions are not favorable for these borrowings or asset sales, or to make taxable distributions of its capital stock. ESH REIT’s cash flows may be insufficient to fund required REIT distributions as a result of differences in timing between the actual receipt of income and the recognition of income for U.S. federal income tax purposes, or the effect of non-deductible capital expenditures or other non-deductible expenses, the creation of reserves or required debt service obligations or amortization payments. The insufficiency of ESH REIT’s cash flows to cover its distribution requirements could have a material adverse effect on its ability to incur additional indebtedness or sell equity securities in order to fund distributions required to maintain its qualification as a REIT.
ESH REIT may from time to time make distributions to its shareholders in the form of taxable stock dividends, which could result in shareholders incurring tax liability without receiving sufficient cash to pay such tax.
Although it has no current intention to do so, ESH REIT may in the future distribute taxable stock dividends to its shareholders in the form of additional shares of its stock. ESH REIT might distribute additional shares of its Class A common stock, shares of its Class B common stock and/or shares of its preferred stock to the Corporation and/or shares of its Class B common stock to the holders of its Class B common stock. Taxable shareholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of ESH REIT’s current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, shareholders may be required to pay income taxes with respect to such dividends in excess of the cash distributions received. If a U.S. shareholder sells ESH REIT common or preferred shares that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our Paired Shares at the time of the sale. Furthermore, with respect to certain
non-U.S. shareholders, ESH REIT may be required to withhold U.S. federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in its common stock.
Dividends paid by REITs do not qualify for the reduced tax rates available for certain “qualified dividends,” but would generally qualify for a partial deduction with respect to certain taxpayers.
Certain dividends known as qualified dividends payable to U.S. shareholders that are individuals, trusts or estates currently are subject to the same tax rates as long-term capital gains, which are significantly lower than the maximum rates for ordinary income. Dividends paid by REITs, however, generally are not eligible for such reduced rates. Although these rules do not adversely affect the taxation of REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs and our Paired Shares. For taxable years beginning after December 31, 2017 and ending before January 1, 2026, a U.S. shareholder that is an individual, trust or estate would generally be entitled to deduct up to 20% of certain ordinary REIT dividends, effectively reducing the rate at which such ordinary REIT dividends are subject to tax. U.S. shareholders should consult their own tax advisors regarding all aspects of such rules and their potential application to dividends from ESH REIT.
Applicable REIT laws may restrict certain business activities and increase our overall tax liability.
As a REIT, ESH REIT is subject to various restrictions on the types of income it can earn, assets it can own and activities in which it can engage. Business activities that could be impacted by applicable REIT laws include, but are not limited to, activities such as developing alternative uses of real estate, including the development, construction and/or sale of hotel properties. Due to these restrictions, we conduct certain business activities, including certain of those mentioned above, through the Corporation. The Corporation is taxable as a regular C corporation and is subject to U.S. federal, state, local and, if applicable, foreign taxation on its taxable income. To qualify as a REIT, ESH REIT must satisfy certain asset, income, organizational, distribution, shareholder ownership and other requirements on an ongoing basis. In order to meet these tests, ESH REIT may be required to forego investments it might otherwise make. Thus, ESH REIT’s compliance with the REIT requirements may hinder our business and operating strategies, financial condition and results of operations.
Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code substantially limit ESH REIT’s ability to hedge its assets and liabilities. Any income from a hedging transaction that ESH REIT enters into primarily to manage risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets, or to partially or completely terminate previous hedges that are no longer serving as hedges, does not constitute “gross income” for purposes of the 75% or 95% gross income tests that apply to REITs, provided that certain identification requirements are met. To the extent that ESH REIT enters into other types of hedging transactions or fails to properly identify such transaction as a hedge, the income is likely to be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, ESH REIT may be required to limit its use of advantageous hedging techniques or implement those hedges through a taxable REIT subsidiary (“TRS”). This could increase the cost of ESH REIT’s hedging activities because its TRS may be subject to tax on gains or expose ESH REIT to greater risks associated with changes in interest rates than it would otherwise choose to bear. In addition, losses in a TRS will generally not provide any tax benefit, except that such losses in some cases may be carried back against past taxable income in the TRS and may be carried forward against future taxable income in the TRS (subject to certain limitations).
Non-U.S. holders of Class B common stock of ESH REIT may be subject to tax under FIRPTA on distributions, and the application of FIRPTA to non-U.S. holders of ESH REIT Class B common stock is not clear.
A non-U.S. person disposing of a U.S. real property interest (“USRPI”), including shares of a U.S. corporation whose assets consist principally of USRPIs, is generally subject to tax under the Foreign Investment in Real Property Tax Act (“FIRPTA”) on the gain recognized on the disposition, in which case such non-U.S. person would also be required to file U.S. tax returns with respect to such gain. FIRPTA does not apply, however, to the disposition of stock in a REIT if the REIT is a “domestically controlled REIT.” We intend to take the position that ESH REIT is a domestically controlled REIT under the Code. There can be no assurance that the IRS will not challenge this treatment or that a court would not sustain such a challenge. A publicly traded REIT is permitted to treat all owners of 5% or less of its stock as U.S. persons unless it has actual knowledge to the contrary. If ESH REIT were to fail to qualify as a “domestically controlled REIT,” gains realized by a non-U.S. holder on a sale of Class B common stock would be subject to tax under FIRPTA unless the Class B common stock was regularly traded on an established securities market (such as Nasdaq) and the non-U.S. holder (other than a qualified foreign pension fund, as defined in Section 897(1)(2) of the Code (a “Qualified Foreign Pension Fund”), or any entity all of the interests of which are held by a Qualified Foreign Pension Fund) did not at any time during a specified testing period directly or
indirectly own more than 10% of the value of the outstanding Class B common stock. While there is no authority addressing whether a component of a paired interest will be considered to be regularly traded on an established securities market by virtue of the paired interest being considered to be regularly traded on an established securities market, we intend to take the position that the Class B common stock of ESH REIT is traded on an established securities market.
Non-U.S. holders of Class B common stock may incur tax on distributions that are attributable to gain from a sale or exchange of a USRPI by ESH REIT under FIRPTA. A USRPI includes certain interests in real property and stock in corporations at least 50% of whose assets consist of USRPIs. Under FIRPTA, a non-U.S. shareholder is taxed on distributions attributable to gain from sales of USRPIs as if such gain were effectively connected with a U.S. trade or business of the non-U.S. shareholder, in which case such non-U.S. shareholder would also be required to file U.S. tax returns with respect to such gains. A non-U.S. shareholder thus would be taxed on such a distribution at the normal capital gains rates applicable to U.S. shareholders, subject to applicable alternative minimum tax and a special alternative minimum tax in the case of a nonresident alien individual. A non-U.S. corporate shareholder not entitled to treaty relief or exemption also may be subject to the 30% branch profits tax on such a distribution.
If the Class B common stock is regularly traded on an established securities market located in the United States, capital gain distributions on the Class B common stock that are attributable to ESH REIT’s sale of a USRPI will be treated as ordinary dividends rather than as gain from the sale of a USRPI as long as the non-U.S. shareholder did not own more than 10% of the Class B common stock at any time during the one-year period preceding the distribution. As a result, non-U.S. shareholders generally will be subject to withholding tax on such capital gain distributions in the same manner as they are subject to withholding tax on ordinary dividends. As noted above, we intend to take the position that the Class B common stock is regularly traded on an established securities market located in the United States. If the Class B common stock is not considered to be regularly traded on an established securities market located in the United States or the non-U.S. shareholder owned more than 10% of the Class B common stock at any time during the one-year period preceding the distribution, capital gain distributions that are attributable to ESH REIT’s sale of a USRPI would be subject to tax under FIRPTA, as described in the preceding paragraph. In such case, ESH REIT must withhold 35% of any distribution that ESH REIT could designate as a capital gain dividend. A non-U.S. shareholder may receive a credit against its tax liability for the amount ESH REIT withholds. Moreover, if a non-U.S. shareholder disposes of ESH REIT common stock during the 30-day period preceding a distribution payment, and such non-U.S. shareholder (or a person related to such non-U.S. shareholder) acquires or enters into a contract or option to acquire the Class B common stock within 61 days of the first day of the 30-day period described above, and any portion of such distribution payment would, but for the disposition, be treated as a USRPI capital gain to such non-U.S. shareholder, then such non-U.S. shareholder shall be treated as having USRPI capital gain in an amount that, but for the disposition, would have been treated as USRPI capital gain.
Qualified Foreign Pension Funds are not subject to tax (including withholding tax) under FIRPTA with respect to distributions attributable to gain from sale or exchange of a USRPI.
The prohibited transactions tax can limit our ability to sell properties.
A REIT’s income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Although we do not intend to hold assets primarily for sale to customers in the ordinary course of our business, the characterization of an asset sale as a prohibited transaction depends on the particular facts and circumstances of such transaction. The Code provides a safe harbor that, if met, allows a REIT to avoid being treated as engaged in a prohibited transaction. We cannot assure you that we will comply with all of the safe harbor requirements in connection with our property sales, and we may sell properties outside the safe harbor in transactions that, based on the facts and circumstances, we believe should not be prohibited transactions. If the IRS were to successfully argue that a sale outside the safe harbor was in fact a prohibited transaction, we would be subject to a 100% penalty tax on the gain recognized on that sale. In addition, in order to avoid the prohibited transactions tax, we may choose not to engage in certain sales, even though the sales might otherwise be beneficial to us.
Recent changes in tax law pursuant to the TCJA and the CARES Act affected the taxation of ESH REIT and may affect the desirability of investing in a REIT relative to a regular non-REIT corporation.
The TCJA reduced the relative competitive advantage of operating as a REIT as compared with operating as a regular non-REIT corporation by reducing the maximum tax rate applicable to regular corporations from 35% to 21% beginning on January 1, 2018. On the other hand, the TCJA also decreased the U.S. federal income tax rate applicable to non-corporate shareholders on ordinary REIT dividends by lowering the maximum applicable individual rate from 39.6% to 37.0% and permitting non-corporate shareholders of REITs to deduct 20% of ordinary REIT dividends from taxable income for the taxable
years beginning after December 31, 2017 and ending before January 1, 2026, as discussed above. The TCJA also limited the utilization of net operating loss carryforwards generally incurred after December 31, 2017 by a REIT and any TRS of a REIT to 80% of taxable income in the taxable year in which the carryforward is applied, although the CARES Act temporarily removes this 80% limit for taxable years beginning before January 1, 2021. While the TCJA disallowed net operating losses to be carried back to prior tax years, the CARES Act provided relief in 2020 for taxpayers impacted adversely by the COVID-19 pandemic. For tax year 2020, companies are allowed to carry back net operating losses to the proceeding five tax years, which include higher tax rate years prior to the TCJA, and seek tax refunds provided there is sufficient taxable income to utilize the net operating loss. This limitation could cause a REIT in certain circumstances to have greater taxable income and thus increase the amount of distributions needed to satisfy the 90% distribution requirement and avoid incurring REIT-level tax. The TCJA also provided a new limitation on the deduction of “business interest” (i.e., interest paid or accrued on indebtedness allocable to a trade or business) in excess of a specified percentage (50% for taxable years beginning in 2019 and 2020 and 30% for subsequent taxable years) of a business’s adjusted taxable income. The CARES Act temporarily increased the limitation on adjusted taxable income to 50% for 2020 and allows companies to elect to use 2019 adjusted taxable income when determining any limitation for 2020. A taxpayer engaged in certain businesses relating to real property may elect out of the business interest provision; however, the requirements of this election may be onerous to implement and would require the REIT to utilize potentially disadvantageous depreciation methods on some or all of its assets, including certain “qualified improvement property.” ESH REIT will determine whether or not to make such an election in its sole discretion and based on all the facts and circumstances.
Risks Related to our Paired Shares
If our stock price fluctuates, you could lose a significant part of your investment.
The market price of our Paired Shares may be influenced by many factors including:
•announcements of new hotels, brands, products, services or strategies or significant price reductions by us, our third-party owners or our competitors;
•changes in tax law or interpretations thereof;
•the failure of securities analysts to cover our Paired Shares or changes in analysts’ financial estimates;
•variations in quarterly results of operations compared to market expectations;
•default on our indebtedness or foreclosure of our hotel properties;
•economic, political, legal and regulatory factors unrelated to our performance;
•increased competition;
•the timing and volume of repurchases of Paired Shares pursuant to our combined Paired Share repurchase program;
•future sales of our Paired Shares or the perception that such sales may occur;
•investor perceptions of us, our third-party owners and the lodging industry;
•events beyond our control, such as acts of war, armed hostilities, terrorist attacks, travel-related health concerns, government shutdowns, interruptions in transportation systems, travel-related accidents, fires, natural and man-made disasters and severe weather events; and
•the other factors listed in this “Risk Factors” section.
As a result of these factors, investors in Paired Shares may not be able to resell their Paired Shares at or above their purchase price. In addition, our stock price has been and may continue to be volatile. The stock market in general, and in the lodging industry in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of market participants. Accordingly, these broad market and industry factors may significantly reduce the market price of our Paired Shares, regardless of our operating performance. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Litigation of this type could result in substantial costs and diversion of management’s attention, which could adversely impact our business. An adverse determination in litigation could subject us to significant liabilities.
Future sales or the possibility of future sales of a substantial amount of our Paired Shares may depress the price of our Paired Shares.
Future sales or the availability for sale of substantial amounts of our Paired Shares in the public market could adversely affect the prevailing market price of our Paired Shares and could impair our ability to raise capital through future sales of equity
securities. We cannot predict the size of future issuances of our Paired Shares or the effect, if any, that future issuances and sales of our Paired Shares will have on the market price of our Paired Shares.
The charters of the Corporation and ESH REIT authorize us to issue 3,500,000,000 Paired Shares, of which 177,560,635 Paired Shares are outstanding as of February 22, 2021. We may issue Paired Shares or other securities from time to time, including as consideration for future acquisitions and investments. If any such acquisition or investment is significant, the number of Paired Shares, or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be substantial. We may also grant registration rights covering those Paired Shares or other securities, including in connection with any such acquisitions and investments.
We have also filed a registration statement on Form S-8 covering 8,000,000 Paired Shares issuable under our employee benefit plans. Paired Shares registered and ultimately issued under such registration statement may become available for sale in the open market.
Our combined Paired Share repurchase program may not enhance long-term shareholder value and could increase the volatility of the market price of the Paired Shares and diminish our cash reserves.
The combined Paired Share repurchase program authorized by our Boards of Directors does not obligate the Corporation or ESH REIT to repurchase any specific dollar amount, or to acquire any specific number, of Paired Shares, and there can be no guarantee that our Boards of Directors will authorize any further increases to, or extensions of, our existing combined Paired Share repurchase program. The timing and amount of repurchases, if any, will depend upon several factors, including market conditions, business conditions, statutory and contractual restrictions, the trading price of our Paired Shares and the nature of other investment opportunities available to us. The combined Paired Share repurchase program may be limited, suspended or discontinued at any time without prior notice. In addition, repurchases of our Paired Shares pursuant to our repurchase program could affect our stock price and increase its volatility. The existence of a combined Paired Share repurchase program could cause our stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our Paired Shares. Additionally, our combined Paired Share repurchase program could diminish our cash reserves, which may impact our ability to finance or pursue our business strategies and/or discharge liabilities. Our Paired Share repurchases may not enhance shareholder value because the market price of our Paired Shares may decline below the prices at which we repurchased Paired Shares and short-term stock price fluctuations could reduce the program’s effectiveness. In December 2020, the Board of Directors of the Corporation and ESH REIT authorized an extension in the Paired Share repurchase program, effective January 1, 2021, to December 31, 2021.
Under our equity incentive plans, the granting entity will need to compensate the non-granting entity for the issuance of its component of our Paired Shares.
The Amended and Restated Extended Stay America, Inc. Long-Term Incentive Plan and the Amended and Restated ESH Hospitality, Inc. Long-Term Incentive Plan (each an “LTIP”) contemplate grants of Paired Shares to employees, officers and directors of the Corporation and ESH REIT (each a “Granting Entity”), as applicable. Each Granting Entity makes awards to eligible participants under its respective LTIP in respect of Paired Shares, subject to the non-Granting Entity’s approval of the terms of each award made under the Granting Entity’s LTIP, and the non-Granting Entity’s agreement to issue its component of the Paired Share (i.e., with respect to the Corporation, a share of common stock, and with respect to ESH REIT, a share of Class B common stock) to the grantee at the time of delivery of its component of the Paired Share.
The Granting Entity will compensate the non-Granting Entity generally in cash for its issuance of its component of the Paired Share for the fair market value at the time of issuance. In some cases, the applicable Granting Entity may have to pay more for a share of the non-Granting Entity than it would have otherwise paid at the time of grant as the result of an increase in the value of a Paired Share between the time of grant and the time of exercise or settlement. In addition, the Corporation may need to acquire additional shares of Class A common stock of ESH REIT at the time of issuance of the shares of Class B common stock of ESH REIT in order to maintain its majority ownership interest in ESH REIT.
Delaware law and our organizational documents may impede or discourage a takeover, which could deprive our shareholders of the opportunity to receive a premium for their Paired Shares.
The Corporation and ESH REIT are Delaware corporations, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change of control would be beneficial to our existing shareholders. In addition, provisions of the Corporation’s and ESH REIT’s charters and bylaws may make it more difficult for, or prevent a third party from, acquiring control of us without the approval of our Boards of Directors. These provisions include, among others:
•the ability of our Boards of Directors to designate one or more series of preferred stock and issue shares of preferred stock without shareholder approval;
•actions by shareholders may not be taken by written consent and shareholders may not call special meetings;
•the sole power of a majority of the Boards of Directors to fix the number of directors;
•advance notice requirements for nominating directors or introducing other business to be conducted at shareholder meetings; and
•the affirmative supermajority vote of our shareholders to amend anti-takeover provisions in our charters and bylaws.
The foregoing factors, as well as the restrictions on ownership and transfer of equity stock contained in the charters of the Corporation and ESH REIT, and certain covenant restrictions under our indebtedness could impede a merger, takeover or other business combination or discourage a potential investor from making a tender offer for our Paired Shares, which, under certain circumstances, could reduce the market price of our Paired Shares.
The Corporation and ESH REIT may each issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our Paired Shares, which could depress the price of our Paired Shares.
ESH REIT has 125 shares of 12.5% preferred stock outstanding as of December 31, 2020. The Corporation’s charter authorizes the Corporation to issue up to 350,000,000 shares of one or more additional series of preferred stock. ESH REIT’s charter authorizes ESH REIT to issue up to 350,000,000 shares of one or more additional series of preferred stock. The Boards of Directors of the Corporation and ESH REIT have the authority to determine the preferences, limitations and relative rights of shares of preferred stock and to fix the number of shares constituting any series and the designation of such series without any further vote or action by shareholders. Preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our Paired Shares. The potential issuance of preferred stock may delay or prevent a change in control of us, discouraging bids for our Paired Shares at a premium over the market price and adversely affect the market price and the voting and other rights of the holders of our Paired Shares.
ESH REIT may be subject to adverse legislative or regulatory tax changes that could adversely affect the market price of our Paired Shares.
At any time, the U.S. federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. We cannot predict when or if any new U.S. federal income tax law, regulation, or administrative interpretation, or any amendment to any existing U.S. federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation or interpretation may take effect retroactively. ESH REIT, the Corporation and holders of Class B common stock could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation, including the TCJA or the CARES Act, which could effectively eliminate our structure or certain benefits of our structure and adversely affect the market price of our Paired Shares.
There may be amendments to or elimination of the pairing arrangement.
Each share of common stock of the Corporation is attached to and trades together with the Class B common stock of ESH REIT. Under the Corporation’s and ESH REIT’s charters, each of the respective Board of Directors may modify or eliminate this pairing arrangement without the consent of its respective shareholders at any time if that Board of Directors no longer deems it in the best interests of the Corporation or ESH REIT, as the case may be, for their shares to continue to be attached and trade together. With respect to such determination, the respective board must fulfill at all times its respective fiduciary duties and, therefore, it is not possible to predict at this time the circumstances under which the respective board would terminate the pairing arrangement. In addition, holders of Paired Shares have the option, by the vote of a majority of Paired Shares then outstanding, to eliminate the pairing arrangement in accordance with the respective charters of the Corporation and ESH REIT. The pairing arrangement will be automatically terminated upon bankruptcy of either of the Corporation or ESH REIT.
The Corporation and ESH REIT each have the right, at their option and without the consent of the holders of Paired Shares, to acquire shares of Class B common stock of ESH REIT from the holders of such shares in exchange for cash, securities of the Corporation or ESH REIT, as the case may be, and/or any other property with a fair market value, as determined by a valuation firm or investment bank, at least equal to the fair market value of the Class B common stock of ESH REIT being exchanged. The Corporation and ESH REIT each have the right, at their option and without the consent of the holders of Paired Shares, to acquire shares of the Corporation’s common stock from the holders of such shares in exchange for cash, securities of the Corporation or ESH REIT, as the case may be, and/or any other property with a fair market value, as determined by a valuation firm or investment bank, at least equal to the fair market value of the Corporation’s common stock
being exchanged. Holders of Paired Shares could be subject to U.S. federal income tax on the exchange of shares of Class B common stock of ESH REIT or shares of common stock of the Corporation and may not receive cash to pay the tax from the Corporation or ESH REIT.
After any such acquisition, shares of the Corporation’s common stock may be paired with shares of Class B common stock of ESH REIT in a different proportion, but such shares will continue to be attached and trade together. Further, the Corporation’s charter and ESH REIT’s charter allow the respective Boards of Directors of the Corporation and ESH REIT to, in their sole discretion, issue unpaired shares of their capital stock. Trading in unpaired shares of the Corporation or ESH REIT may reduce the liquidity or value of Paired Shares. The Class A common stock of ESH REIT owned by the Corporation is also freely transferable and if transferred, the transferee will hold unpaired shares of common stock of ESH REIT.
ESH REIT’s Board of Directors could terminate its status as a REIT, subjecting ESH REIT’s taxable income to U.S. federal income taxation, which would increase its liabilities for taxes.
Under ESH REIT’s charter, its Board of Directors may terminate its REIT status without the consent of its shareholders at any time if the board no longer deems it in the best interests of ESH REIT to continue to qualify under the Code as a REIT. Circumstances that the board may consider in making such a determination may include, for example:
•the enactment of new legislation that would significantly reduce or further eliminate the benefits of being a REIT or having a paired share arrangement;
•to facilitate a transaction whose benefits outweigh the benefits of maintaining ESH REIT’s status as a REIT; and
•ESH REIT no longer being able to satisfy the REIT requirements.
With respect to this determination, ESH REIT’s board must fulfill at all times its fiduciary duties and, therefore, it is not possible to predict at this time the circumstances under which the board would terminate ESH REIT’s status as a REIT. If ESH REIT’s status as a REIT is terminated, its taxable income will be subject to U.S. federal income taxation at the regular corporate rate. If ESH REIT’s status was terminated and it was not entitled to relief under certain Code provisions, it would be unable to elect REIT status for the four taxable years following the year during which it ceased to so qualify.
The requirements of being a public company, including compliance with the reporting requirements of the Exchange Act and the requirements of the Sarbanes-Oxley Act and Nasdaq, may strain our resources, increase our costs and divert management’s attention, and we may be unable to comply with these requirements in a timely or cost-effective manner.
As a public company, we are subject to the reporting requirements of the Exchange Act and the corporate governance standards of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and Nasdaq. These requirements place a strain on our management, systems and resources. The Exchange Act requires us to file annual, quarterly and current reports with respect to our business and financial condition within specified time periods and to prepare proxy statements with respect to the annual meetings of shareholders of the Corporation and ESH REIT. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. Nasdaq requires that we comply with various corporate governance requirements. To comply with the Exchange Act, Sarbanes-Oxley Act and Nasdaq requirements, significant resources and management oversight are required. This requires significant management attention and significant costs associated with compliance, which could have a material adverse effect on us and the price of Paired Shares. Advocacy efforts by shareholders and third parties may also prompt additional changes in governance and reporting requirements. We cannot predict or estimate the amount of additional costs we may incur or the timing of these costs.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results. We are required to provide reliable financial statements and reports to our shareholders. To monitor the accuracy and reliability of our financial reporting, we have established an internal audit function that oversees our internal controls. We have developed policies and procedures with respect to company-wide business processes and cycles in order to implement effective internal control over financial reporting. We have established controls and procedures designed to ensure that all revenues and expenses are properly recorded and reported as required. While we have undertaken substantial work to comply with Section 404 of the Sarbanes-Oxley Act, we cannot be certain that we will be successful in maintaining effective internal control over our financial reporting and may determine in the future that our existing internal controls need improvement. In addition, preparing our financial statements requires us to have access to information regarding the financial condition and results of operations of our third-party owners. Any deficiencies in the internal controls over financial reporting of our third-party owners may affect our ability to report our financial results accurately or in a timely manner or prevent fraud. Such deficiencies could also result in restatements of, or other adjustments to, our previously reported or announced operating results. If we fail to comply with or maintain proper internal controls, or if our third-party owners are not able to provide their financial information for any
meaningful period or fail to meet expected deadlines, we could be materially harmed or fail to meet our reporting obligations in a timely manner, or at all. In addition, the existence of a material weakness in our internal controls could result in errors in our financial statements that could require a restatement, cause us to fail to meet our reporting obligations, result in or cause us to incur remediation costs, attract regulatory scrutiny or lawsuits and cause investors to lose confidence in our reported financial information, each of which could result in a substantial decline in the market price of Paired Shares.
The application of FIRPTA could adversely affect non-U.S. holders of our Paired Shares.
The Corporation is a United States real property holding corporation under the Code. As a result, under FIRPTA, certain non-U.S. holders of Corporation common stock may be subject to U.S. federal income tax on gain from the disposition of such stock, in which case such non-U.S. holder would also be required to file U.S. tax returns with respect to such gain. Whether these FIRPTA provisions apply depends on the amount of Corporation common stock that such non-U.S. holder holds and whether, at the time they dispose of their shares, Corporation common stock is regularly traded on an established securities market (such as Nasdaq) within the meaning of the applicable Treasury Regulations. While there is no authority addressing whether a component of a paired interest will be considered to be traded on an established securities market by virtue of the paired interest being considered to be traded on an established securities market, we intend to take the position that the common stock of the Corporation is traded on an established securities market. So long as the Corporation common stock is regularly traded as noted above, only a non-U.S. holder who has held, actually or constructively, more than 5% of the Corporation’s common stock at any time during the applicable testing period may be subject to U.S. federal income tax on the disposition of such common stock under FIRPTA. In addition, a separate valuation of the Class B common stock of ESH REIT and common stock of the Corporation may not be available. As a result, the portion of any gain on the disposition of a Paired Share that is attributable to shares of common stock of the Corporation, and subject to FIRPTA, may be difficult to determine. Qualified Foreign Pension Funds are not subject to tax (including withholding tax) under FIRPTA with respect to gain from the disposition of stock in a United States real property holding corporation.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties
As of December 31, 2020, we owned 563 hotels. The average age of our hotel properties at December 31, 2020 was 21.1 years. We are under long-term ground leases at five of our hotel properties with initial terms terminating at various dates between 2023 and 2096, with several of the leases including multiple renewal options for generally five or ten year periods. Other than the ground leases described above, all hotel properties and grounds are wholly-owned. The following table provides certain information regarding our hotels.
State Number of Hotels Number of Rooms % of Total Rooms
California 82 9,901 15.8%
Florida 58 6,522 10.4%
Texas 40 4,672 7.5%
Illinois 30 3,444 5.5%
Virginia 30 3,291 5.3%
North Carolina 31 3,168 5.1%
Georgia 22 2,261 3.6%
Washington 19 2,182 3.5%
New Jersey 18 2,098 3.3%
Maryland 19 2,066 3.3%
Michigan 18 1,989 3.2%
Tennessee 17 1,778 2.8%
Pennsylvania 16 1,711 2.7%
Arizona 14 1,612 2.6%
Ohio 14 1,378 2.2%
Massachusetts 12 1,334 2.1%
New York 11 1,326 2.1%
South Carolina 13 1,321 2.1%
Colorado 11 1,266 2.0%
Minnesota 10 1,044 1.7%
Missouri 8 858 1.4%
Alabama 7 694 1.1%
Wisconsin 6 666 1.1%
Oregon 5 643 1.0%
Indiana 7 616 1.0%
Kentucky 6 573 0.9%
Connecticut 5 570 0.9%
Nevada 4 529 0.8%
Utah 4 484 0.8%
Louisiana 4 429 0.7%
Alaska 4 419 0.7%
Rhode Island 4 402 0.6%
Arkansas 3 306 0.5%
Mississippi 3 274 0.4%
Montana 2 208 0.3%
Iowa 2 190 0.3%
Delaware 1 142 0.2%
Idaho 1 107 0.2%
New Hampshire 1 101 0.2%
Maine 1 92 0.1%
Total 563 62,667 100%
We lease our corporate headquarters in Charlotte, North Carolina. The lease term expires in August 2021, with two additional 5-year renewal terms. We are currently negotiating an extension of the lease term. Our offices are sufficient to meet our present needs and we do not anticipate any difficulty in securing additional office space, as needed, on terms acceptable to us.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
We are from time to time subject to various litigation and claims incidental to our business. We recognize a liability when we believe a loss is probable and can be reasonably estimated. However, the ultimate result of litigation and claims cannot be predicted with certainty.
As of December 31, 2020, the following six purported class action lawsuits have been filed against the Company:
Date of Filing Plaintiff(s) Defendant(s) Court
March 27, 2018 D’Erica Washington (substituted for Tracy Reid), on behalf of herself, all others similarly situated ESA Management, LLC US District Court, Northern District of California
June 8, 2018 Franisha Beasley and Stephanie Randall, individually and on behalf of others similarly situated ESA Management, LLC US District Court, Northern District of California
July 13, 2018 Adrienne Liggins, individually and on behalf of others similarly situated and aggrieved ESA Management, LLC, Extended Stay America - Anaheim Convention Center US District Court, Northern District of California
July 13, 2018 Bridget Liggins, individually and on behalf of others similarly situated and aggrieved ESA Management, LLC State of California, Orange County Superior Court
August 21, 2018 Sandra Arizmendi, an individual, on behalf of the State of California, as private attorney general, and on behalf of all others similarly situated ESA Management, LLC US District Court, Northern District of California
January 18, 2019 Lisa M. Sanchez, individually and on behalf of all others similarly situated Extended Stay America, Inc. and ESA Management, LLC State of California, Orange County Superior Court
The complaints above allege, among other things, failure to provide meal and rest periods, wage and hour violations and violations of the Fair Credit Reporting Act. The complaints seek, among other relief, collective and class certification of the lawsuits, unspecified damages, costs and expenses, including attorneys’ fees, and such other relief as the court might find just and proper.
With respect to the Fair Credit Reporting Act violations alleged in the lawsuits described above, the parties reached a tentative settlement agreement in May 2019, which is subject to certain conditions, including court approval. During the year ended December 31, 2019, the Company recorded a payable and a corresponding insurance receivable for the amount of the tentative settlement. The expected resolution of the alleged Fair Credit Reporting Act violations in the lawsuits did not have, and is not expected to have, a material adverse impact on the Company’s consolidated financial statements, results of operations or liquidity.
With respect to the meal and rest period and the wage and hour violations alleged in the lawsuits described above, excluding the Sanchez lawsuit, the parties reached a tentative settlement agreement in January 2020, which is subject to certain conditions, including court approval. During the fourth quarter of 2019, the Company incurred a loss and recorded a charge equal to the amount of the tentative settlement. The expected resolution of the alleged meal and rest period and wage and hour violations in the lawsuits did not have, and is not expected to have, a material adverse impact on the Company’s consolidated financial statements, results of operations or liquidity.
With respect to the Sanchez lawsuit, although the Company believes it is reasonably possible that it may incur losses associated with such matter, it is not possible to estimate the amount of loss or range of loss, if any, that might result from adverse judgments, settlements or other resolution based on the early stage of the lawsuit, the uncertainty as to the certification of a class or classes and the size of any certified class, if applicable, and the lack of resolution of significant factual and legal issues. However, depending on the amount and timing, an unfavorable resolution of the lawsuit or a change in the Company's assessment of the likelihood of loss could have a material adverse effect on the Company’s consolidated financial statements, results of operations or liquidity in a future period. We believe that we have meritorious defenses and are prepared to vigorously defend the lawsuit.
We are also subject to various other litigation and claims incidental to our business. We believe we have adequate reserves against such matters. In the opinion of management, such matters, individually or in the aggregate, will not have a material
adverse effect on the Company’s consolidated financial statements, results of operations or liquidity or on ESH REIT’s consolidated financial statements, results of operations or liquidity.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
None.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for Registrant’s Common Equity
Our Paired Shares are traded on the Nasdaq Global Select Market under the symbol “STAY.” Before June 25, 2018, our Paired Shares were traded on the New York Stock Exchange.
All issued and outstanding shares of Class A common stock of ESH REIT are held by the Corporation and have never been publicly traded.
Holders of Record
As of February 22, 2021, there were four holders of record of our Paired Shares and the Corporation was the only holder of ESH REIT’s Class A common stock. Because the substantial majority of our Paired Shares are held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of beneficial owners represented by these record holders.
Distribution Policies
In 2021, we intend to increase our recent recurring distribution rate of $0.01 per Paired Share declared during each of the second, third and fourth quarters of 2020, excluding the special distribution declared in the fourth quarter of 2020 and paid in January 2021, unless our consolidated results of operations, net income, Adjusted EBITDA, liquidity, cash flows, financial condition or prospects, economic conditions or other factors, including future capital expenditures and asset dispositions, differ materially from our current assumptions. We intend to continue to make a significant portion of our expected total annual distributions in respect of the Class B common stock of ESH REIT. In the event distributions in respect of the Class B common stock of ESH REIT are not sufficient to meet our expected Paired Share distributions and/or additional tax efficiency opportunities exist, expected Paired Share distributions may include, as they have in prior periods, distributions in respect of the common stock of the Corporation using funds distributed to the Corporation in respect of the Class A common stock of ESH REIT, after allowance for tax, if any, on those funds. For the year ended December 31, 2020, the Corporation’s common distributions were classified as 100% qualified dividends and ESH REIT’s distributions per Class A and Class B common shares were classified as 100% ordinary income.
The Corporation’s and ESH REIT’s Boards of Directors are independent of one another and owe separate fiduciary duties to the Corporation and ESH REIT. Each Board of Directors will separately determine the form, timing and amount of any distributions to be paid by the respective entities for any period. For a description of the Corporation’s distribution policy, please see “-Corporation Distribution Policy” and for ESH REIT’s distribution policy, see “-ESH REIT Distribution Policy.”
Corporation Distribution Policy
The Corporation may pay distributions on its common stock to meet a portion of the expected distribution rate on our Paired Share distributions. The Corporation’s ability to pay distributions is dependent upon a number of factors, including but not limited to, its results of operations, net income, liquidity, cash flows, financial condition or prospects, economic conditions, all of which have been negatively impacted as a result of the COVID-19 pandemic, as well the ability to effectively execute certain tax planning strategies, compliance with applicable law, the receipt of distributions from ESH REIT in respect of the Class A common stock, level of indebtedness, capital requirements, contractual restrictions, restrictions in any existing and future debt agreements and other factors. The payment of future distributions is at the discretion of the Corporation’s Board of Directors. In light of these factors, the Corporation will continue to approach its future capital allocation, including returning capital to its investors through dividends, share repurchases and debt retirement, with the goal of balancing the need to preserve cash and maintain liquidity. See Note 7 to each of the consolidated financial statements of Extended Stay America, Inc. and ESH Hospitality, Inc., included in Item 8 of this combined annual report on Form 10-K, for a description of restrictions on the Corporation’s and ESH REIT’s ability to pay distributions under their respective existing debt agreements and/or obligations.
ESH REIT Distribution Policy
In order to qualify and maintain its status as a REIT, ESH REIT must distribute annually to its shareholders an amount at least equal to:
•90% of its REIT taxable income, computed without regard to the deduction for dividends paid and excluding any net capital gain; plus
•90% of the excess of its net income, if any, from foreclosure property over the tax imposed on such income by the Code; less
•the sum of certain items of non-cash income that exceeds a percentage of ESH REIT’s income.
ESH REIT intends to distribute its taxable income to the extent necessary to optimize its tax efficiency including, but not limited to, maintaining its REIT status, while retaining sufficient capital for its ongoing needs. ESH REIT is subject to income tax on taxable income that is not distributed and to an excise tax to the extent that certain percentages of its taxable income are not distributed by specified dates. Taxable income as computed for purposes of the foregoing tax rules will not necessarily correspond to ESH REIT’s income before income taxes as determined under accounting principles generally accepted in the United States (“U.S. GAAP”) for financial reporting purposes.
The timing and frequency of ESH REIT’s distributions will be authorized by ESH REIT’s Board of Directors in its sole discretion and are based on a variety of factors, including: consolidated results of operations, debt service requirements, capital expenditure requirements for existing hotel properties, capital expenditure requirements for newly constructed hotels, taxable income, annual distribution requirements under the REIT provisions of the Code, contractual restrictions, restrictions in any current or future debt agreements and in any preferred stock, and other factors that ESH REIT’s Board of Directors may deem relevant.
Holders of ESH REIT Class A and Class B common stock are entitled to any common stock distributions that ESH REIT’s Board of Directors may declare. Approximately 59% of ESH REIT’s distributions are paid to the Corporation on account of its ownership of all of the outstanding Class A common stock. Each share of Class A and Class B common stock is entitled to the same amount of distributions per share, subject to one exception; ESH REIT may declare and pay taxable stock dividends in respect of the Class A common stock that differ from dividends paid in respect of the Class B common stock in order to maintain its REIT status.
ESH REIT’s ability to pay distributions is, in certain cases, restricted by the terms of its indebtedness. In cases in which the terms of any of ESH REIT’s existing or future indebtedness prohibits the payment of cash dividends, ESH REIT may declare and pay taxable stock dividends in order to maintain its REIT status. See Note 7 to the consolidated financial statements of ESH Hospitality, Inc., included in Item 8 of this combined annual report on Form 10-K, for a description of the restrictions on ESH REIT’s ability to pay distributions under its existing debt agreements and/or obligations. In cases where ESH REIT distributes additional shares of its Class B common stock to the holders of its Class B common stock, the Corporation may correspondingly distribute a number of additional shares of its common stock, which together with the shares of Class B common stock distributed by ESH REIT would form Paired Shares.
On February 25, 2021, the Board of Directors of ESH REIT declared a cash distribution of $0.09 per share on ESH REIT’s Class A and Class B common stock. This distribution is payable on March 25, 2021 to shareholders of record as of March 11, 2021.
Stock Performance Graph
The following graph compares the total shareholder return on our Paired Shares to the cumulative total returns of the S&P 500 Stock Index (“S&P 500”) and the S&P 500 Hotels, Resorts & Cruise Lines Index (“S&P Hotel Index”) for the period from December 31, 2015 through December 31, 2020. The graph assumes an initial investment of $100 on December 31, 2015, in our Paired Shares and in each of the indices and also assumes the reinvestment of dividends where applicable. The results shown in the graph below are not necessarily indicative of future performance.
This performance graph and related information shall not be deemed “soliciting material” or to be “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any future filing under the Securities Act or Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.
Recent Sales of Unregistered Equity Securities and Use of Proceeds from Registered Securities
None.
Purchases of Equity Securities by the Issuers and Affiliated Purchasers
No Paired Shares were repurchased during the three months ended December 31, 2020.
In December 2015, the Boards of Directors of the Corporation and ESH REIT authorized a combined Paired Share repurchase program. As a result of several increases in authorized amounts and program extensions, the combined Paired Share repurchase program currently authorizes the Corporation and ESH REIT to purchase up to $550 million in Paired Shares through December 31, 2021. Repurchases may be made at management’s discretion from time to time in the open market, in privately negotiated transactions or by other means (including through Rule 10b5-1 trading plans). As of December 31, 2020, $101.1 million remained available under the combined Paired Share repurchase program.
During the year ended December 31, 2020, the remaining outstanding 7,130 shares of the Corporation’s 8% mandatorily redeemable voting preferred stock were redeemed for $7.1 million.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data
Reserved.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
For discussion and analysis of our financial condition and results of operations, including sources and uses of cash, for the year ended December 31, 2019 compared to the year ended December 31, 2018, refer to “Part II-Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations” and “-Liquidity and Capital Resources” in our combined annual report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on February 26, 2020 (the “2019 Form 10-K”).
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s and ESH REIT’s consolidated financial statements, each of which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our significant estimates and judgments, including those relating to property and equipment (including the estimated useful lives of tangible assets and in the assessment of tangible and intangible assets for impairment), goodwill, revenue recognition, income taxes and investments. Our significant estimates and judgments are based on information that is then available to us, our experience and various matters that we believe are reasonable and appropriate for consideration under the circumstances. Actual results may differ significantly from these estimates under different assumptions and conditions.
The following discussion contains forward-looking statements. Actual results may differ materially from results suggested by our forward-looking statements for various reasons, including those discussed in “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” Those sections expressly qualify any subsequent oral and written forward-looking statements attributable to us or persons acting on our behalf.
The following discussion should be read in conjunction with “About this Combined Annual Report-Certain Defined Terms,” “Business-Our Company,” and each of the consolidated financial statements and related notes of Extended Stay America, Inc. and ESH Hospitality, Inc., included in Item 8 of this combined annual report on Form 10-K. Unless otherwise defined in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for definitions related to our indebtedness, see Note 7 to each of the consolidated financial statements of Extended Stay America, Inc. and ESH Hospitality, Inc., included in Item 8 of this combined annual report on Form 10-K.
We present below separate results of operations for each of the Company and ESH REIT. Our assets and operations, other than ownership of our real estate assets (which are owned by ESH REIT), are held directly by the Corporation and operated as an integrated enterprise. The Corporation owns all of the issued and outstanding shares of Class A common stock of ESH REIT, representing 59% of the outstanding common stock of ESH REIT. Due to its controlling interest in ESH REIT, the Corporation consolidates the financial position, results of operations, comprehensive income and cash flows of ESH REIT.
Overview
Extended Stay America-branded hotels are designed to provide an affordable and attractive alternative to traditional lodging or apartment accommodations and are targeted toward self-sufficient, value-conscious guests who need lodging for a week or longer. Guests include business travelers, leisure travelers, professionals on temporary work or training assignments, persons relocating, the temporarily displaced, those purchasing a home and anyone else in need of temporary housing.
We are the largest integrated owner/operator of company-branded hotels in North America. Our business operates in the extended stay segment of the lodging industry, and we have the following reportable operating segments:
•Owned hotels-Earnings are derived from the operation of Company-owned hotel properties and include room and other hotel revenues, which accounted for 98.1% of total revenues for the year ended December 31, 2020.
•Franchise and management-Earnings are derived from fees under various franchise and management agreements with third parties, which accounted for 1.9% of total revenues for the year ended December 31, 2020. These contracts provide us the ability to earn compensation for licensing the Extended Stay America brand name, providing access to shared system-wide platforms and/or management services.
We are also the only major hotel company focused solely on the extended stay segment. We target our product and service offering to an underserved customer base within the lodging industry and the extended stay segment. In addition to owning and operating hotels, we have increased and seek to continue to increase our fee-based income stream, which is driven by franchising our brand to third parties. Our core operations include intense focus on the delivery of a consistent, quality guest experience; the efficiency of our scalable marketing and distribution platforms; maximizing the value of our brand, in-part through rebranding our hotels to the Extended Stay America Suites brand or the Extended Stay America Premier Suites brand, each of which we expect will operate under the Extended Stay America umbrella brand; and maximizing the value of our
owned real estate through investment in our hotels. We intend to continue to (i) maximize and grow our core operations, (ii) create and curate value within our real estate portfolio, (iii) increase the number of franchised hotels under the Extended Stay America umbrella brand and (iv) optimize capital deployment on behalf of key stakeholders.
As of December 31, 2020, we owned and operated 563 hotel properties in 40 U.S. states, consisting of approximately 62,700 rooms, and franchised 83 hotel properties for third parties, consisting of approximately 8,500 rooms. All 646 system-wide hotels currently operate under the Extended Stay America brand, which serves the mid-price extended stay segment and accounts for approximately 43% of the segment by number of rooms in the United States. See “Business” for additional information on our Company.
RevPAR for owned hotels was $43.76 and $52.16 for the year ended December 31, 2020 and 2019, respectively. RevPAR for comparable system-wide hotels, which includes hotels owned, franchised or managed for the full year ended December 31, 2020 and 2019, was $42.91 and $50.51, respectively.
During the year ended December 31, 2020, 28.3%, 21.2% and 50.5% of our owned hotel room revenues were derived from guests with stays from 1-6 nights, from 7-29 nights and for 30 or more nights, respectively. For the year ended December 31, 2020, 25.9% of our owned hotel room revenues were derived from property-direct reservations, 31.5% were derived from our central call center, 21.3% were derived from our own proprietary website, 18.8% were derived from third party intermediaries and 2.5% were derived from travel agencies using global distribution systems.
Franchisees typically pay an initial application fee, along with monthly royalty and system service fees for the licensing of our brand and the use of our shared system-wide platforms, such as marketing, technology infrastructure, central reservations, national sales and revenue management systems. The standard term for our franchise agreements is generally 20 years.
Recent Updates
COVID-19 Pandemic
During the year ended December 31, 2020, primarily as a result of the COVID-19 pandemic, the Company experienced significant declines in RevPAR, net income, Adjusted EBITDA and cash flow from operations. For the year ended December 31, 2020, the Company’s RevPAR and Adjusted EBITDA declined 16.1% and 30.1%, respectively, compared with the year ended December 31, 2019. As a result of the pandemic and its impact on our business, we have focused on attracting guests staying for one week or longer. Additionally, we have implemented certain reductions to expenses in order to reduce costs and maintain liquidity. While the resulting impact of this pandemic is highly uncertain and unpredictable, we believe our business model has been resilient in absorbing the impact of the COVID-19 pandemic as compared to the broader lodging industry. See “Item 1A. Risk Factors.”
Hotel Acquisitions and New Hotel Openings
The table below summarizes hotel acquisitions and owned, newly constructed hotel openings during the years ended December 31, 2020 and 2019. All hotels were converted to or opened under the Extended Stay America brand.
Date Location Number of Hotels Number of Rooms Acquisition /
New-Build
December 2020 Florida 1 124 New-Build
November 2020 Florida 1 144 New-Build
August 2020 Florida 1 124 New-Build
June 2020 Various 2 248 New-Build
April 2020 South Carolina 1 120 New-Build
March 2020 Florida 1 120 New-Build
December 2019 Various 2 260 New-Build
November 2019 Florida 1 121 Acquisition
Hotel Disposition
In November 2020, the Company disposed of a 146-room hotel located in California. Net proceeds totaled $63.6 million and the Company recorded a gain on sale of $52.5 million. No hotel dispositions occurred during the year ended December 31, 2019.
Franchised Hotels
The following table summarizes the number of third-party owned hotels in our franchise and management segment during the years ended December 31, 2020 and 2019.
Date Number of franchised hotels added (removed) Number of rooms
added (removed) Number of franchised hotels(1)
Number of franchised rooms(1)
January 2019 - - 73 7,516
April 2019 1 115 74 7,631
July 2019 (1) (160) 73 7,471
August 2019 (1) (101) 72 7,370
November 2019 1 102 73 7,472
January 2020 1 113 74 7,585
May 2020 1 92 75 7,677
August 2020 1 75 76 7,752
November 2020 7 707 83 8,459
December 2020 - - 83 8,459
____________________
(1)As of period end.
Hotel Pipeline
As of December 31, 2020, the Company had a pipeline of 56 hotels, which consisted of the following:
Company-Owned Pipeline & Recently Opened Hotels as of December 31, 2020
Under Option Pre-Development Under Construction Total Pipeline Opened YTD
# Hotels #Rooms # Hotels #Rooms # Hotels #Rooms # Hotels #Rooms # Hotels #Rooms
- - 4 504 4 496 8 1,000 7 880
Third Party Pipeline & Recently Opened Hotels as of December 31, 2020
Commitments Applications Executed Total Pipeline Opened YTD
# Hotels #Rooms # Hotels #Rooms # Hotels #Rooms # Hotels #Rooms # Hotels #Rooms
21 2,604 - - 27 3,184 48 5,788 10 988
Definitions
Under Option Locations with a signed purchase and sale agreement
Pre-Development Land purchased, permitting and/or site work
Under Construction Hotel is under construction
Commitments Signed commitment to build or convert a certain number of hotels by a third party, generally associated with a prior portfolio sale
Applications Third party filed franchise application with deposit
Executed Franchise and development application approved, geography identified and deposits paid, various stages of pre-development and/or construction
The Company expects to delay commencement of construction of four pre-development locations as a result of current market uncertainty. We also expect delays in certain third-party pipeline activity. The length of such delays and severity of the impact on our business, financial position, results of operations and liquidity, is highly uncertain.
Key Metrics Evaluated by Management
We evaluate the performance of our business through the use of certain non-GAAP financial measures and lodging industry operating metrics. Each non-GAAP financial measure should be considered as a supplemental measure to a U.S. GAAP financial measure, such as total revenues, net income, net income per share or cash flow provided by operating activities. Non-GAAP financial measures include Hotel Operating Profit, Hotel Operating Margin, EBITDA, Adjusted EBITDA, FFO, Adjusted FFO, Adjusted FFO per diluted Paired Share, Paired Share Income, Adjusted Paired Share Income
and Adjusted Paired Share Income per diluted Paired Share. We provide a more detailed discussion of these non-GAAP financial measures, how management uses such measures to evaluate our financial and operating performance, a discussion of certain limitations of such measures and a reconciliation of such measures to the nearest U.S. GAAP measures under “-Non-GAAP Financial Measures.”
Average daily rate (“ADR”) is a commonly used measure within the lodging industry. ADR represents hotel room revenues divided by total number of rooms sold in a given period. ADR measures average room price attained by a hotel or group of hotels and ADR trends provide useful information concerning pricing policies and the nature of the customer base of a hotel or group of hotels because changes in room rates have an impact on revenues and profitability.
Occupancy is a commonly used measure within the lodging industry. Occupancy represents the total number of rooms sold in a given period divided by the total number of rooms available during that period. Occupancy measures the utilization of a hotel's or a group of hotels’ available capacity. Management uses occupancy to gauge demand at a specific hotel or group of hotels in a given period. Occupancy levels also help us determine achievable ADR levels as demand for hotel rooms increases or decreases.
Revenue per available room (“RevPAR”) is a commonly used measure within the lodging industry. RevPAR represents the product of average daily room rate charged and the average daily occupancy achieved for a hotel or group of hotels in a given period. RevPAR does not include ancillary revenues, such as food and beverage revenues, or parking, pet, WiFi upgrade or other guest service revenues. Although RevPAR does not include these ancillary hotel revenues, it generally is considered a key indicator of core revenues for hotels. For the year ended December 31, 2020, room revenues represented 95% of our owned hotel revenues. RevPAR changes that are driven predominately by occupancy typically have different implications on incremental operating profitability than do changes that are driven predominately by ADR. For example, increases in occupancy at a hotel would lead to increases in room revenues and other hotel revenues, as well as incremental operating costs, including housekeeping services and amenity costs. RevPAR increases due to higher room rates, however, would generally not result in additional operational room-related costs, with the exception of those charged or incurred as a percentage of revenue, such as credit card fees. As a result, changes in RevPAR driven by increases or decreases in ADR generally have a greater effect on operating profitability than changes in RevPAR driven by occupancy.
Understanding Our Results of Operations - The Company
Revenues and Expenses. The following table presents the components of the Company’s revenues as a percentage of our total revenues for the year ended December 31, 2020:
Percentage of 2020 Total Revenues
• Room revenues. Room revenues relate to owned hotels and are driven primarily by ADR and occupancy. Pricing policy and customer mix are significant drivers of ADR. Room revenues are presented and/or discussed with respect to owned hotels only as opposed to on a system-wide basis. System-wide hotels include all owned and franchised hotels.
95.5%
• Other hotel revenues. Other hotel revenues relate to owned hotels and include ancillary revenues such as laundry revenues, vending commissions, additional housekeeping fees, purchased WiFi upgrades, parking revenues and pet charges. Occupancy and customer mix, as well as the number and percentage of guests that have longer-term stays, have been historical drivers of our other hotel revenues.
2.6%
• Franchise and management fees. Franchise and management fees include royalty and other fees charged to third party hotel owners for use of our brand name and hotel management services. The substantial majority of these fees are based on a percentage of hotel revenues.
0.5%
• Other revenues from franchised and managed properties. Other revenues from franchised and managed properties include the direct reimbursement of specific costs, such as on-site personnel, incremental reservation costs and other distribution costs incurred by us for which we are reimbursed on a dollar-for-dollar basis by third party hotel owners. Additionally, these revenues include fees charged, based on a percentage of revenue of the franchised hotel, as reimbursement for indirect costs incurred by us associated with certain shared system-wide platforms (i.e., system services), such as marketing, technology infrastructure, central reservations, national sales and revenue management systems.
1.4%
The following table presents the components of the Company’s operating expenses as a percentage of our total operating expenses for the year ended December 31, 2020:
Percentage of 2020 Total Operating Expenses
• Hotel operating expenses. Hotel operating expenses relate to owned hotels and have both fixed and variable components. Operating expenses that are relatively fixed include personnel expense, real estate tax expense and property insurance premiums. Occupancy is a key driver of expenses that have a high degree of variability, such as housekeeping services. Other variable expenses include marketing costs, reservation costs, property insurance claims and repairs and maintenance expense.
64.6%
• General and administrative expenses. General and administrative expenses include expenses associated with corporate overhead. Costs consist primarily of compensation expense of our corporate staff, including equity-based compensation and severance costs, and professional fees, including audit, tax and consulting fees, legal fees and legal settlement costs.
10.3%
• Depreciation and amortization. Depreciation and amortization relates primarily to the acquisition and usage of hotels and other property and equipment, including capital expenditures incurred with respect to renovations and other capital expenditures.
23.1%
• Impairment of long-lived assets. Impairment of long-lived assets is a charge recognized when events and circumstances indicate that the carrying value of a real estate asset, including an individual hotel asset or a group of hotel assets, may not be recoverable. The estimation and evaluation of future cash flows, which is a key factor in determining the amount and/or timing of impairment charges, in particular the holding period for real estate asset composition and/or concentration within real estate portfolios, relies on judgments and assumptions regarding holding period, current and future operating and economic performance and current and future market conditions. It is possible that such judgments and/or estimates will change; if this occurs, we may recognize additional impairment charges reflecting either changes in estimate, circumstance or the estimated market value of our assets.
0.1%
• Other expenses from franchised and managed properties. Other expenses from franchised and managed properties include specific costs, such as on-site hotel personnel expense, incremental reservation costs and other distribution costs, incurred by us in the delivery of services for which we are reimbursed on a dollar-for-dollar basis. Additionally, these expenses include costs associated with shared system-wide platforms (i.e., system services), such as marketing, technology infrastructure, central reservations, national sales and revenue management systems for which we are reimbursed over time through system service (i.e., program) fees.
1.9%
Understanding Our Results of Operations - ESH REIT
Revenues. ESH REIT's sole source of revenues is rental revenues. ESH REIT’s rental revenues are generated from leasing its hotel properties to subsidiaries of the Corporation. Rental revenues consist of fixed minimum rental payments recognized on a straight-line basis over the lease terms plus variable rental payments based on specified percentages of total hotel revenues over designated thresholds.
Expenses. The following table presents the components of ESH REIT’s operating expenses as a percentage of ESH REIT’s total operating expenses for the year ended December 31, 2020:
Percentage of 2020 Total Operating Expenses
• Hotel operating expenses. ESH REIT’s hotel operating expenses include expenses directly related to hotel ownership, such as real estate tax expense, property insurance premiums and loss on disposal of capital assets.
29.8%
• General and administrative expenses. General and administrative expenses include overhead expenses incurred directly by ESH REIT and certain administrative service costs reimbursed to the Corporation.
4.9%
• Depreciation and amortization. Depreciation and amortization relate primarily to the acquisition and usage of hotels and other property and equipment, including capital expenditures incurred with respect to renovations and other capital expenditures.
65.1%
• Impairment of long-lived assets. Impairment of long-lived assets is a charge recognized when events and circumstances indicate that the carrying value of a real estate asset, including an individual hotel asset or a group of hotel assets, may not be recoverable. The estimation and evaluation of future cash flows, which is a key factor in determining the amount and/or timing of impairment charges, in particular the holding period for real estate asset composition and/or concentration within real estate portfolios, relies on judgments and assumptions regarding holding period, current and future operating and economic performance and current and future market conditions. It is possible that such judgments and/or estimates will change; if this occurs, we may recognize additional impairment charges reflecting either changes in estimate, circumstance or the estimated market value of our assets.
0.2%
Results of Operations
Results of Operations discusses the Company’s and ESH REIT’s consolidated financial statements, each of which have been prepared in accordance with U.S. GAAP. The consolidated financial statements of the Company include the financial position, results of operations, comprehensive income, changes in equity and cash flows of the Corporation and its subsidiaries, including ESH REIT. Third-party equity interests in ESH REIT, which consist primarily of the Class B common stock of ESH REIT and represent 41% of ESH REIT’s total common equity, are not owned by the Corporation and therefore are presented as noncontrolling interests. The consolidated financial statements of ESH REIT include the financial position, results of operations, comprehensive income, changes in equity and cash flows of ESH REIT and its subsidiaries.
Results of Operations - The Company
Comparison of Years Ended December 31, 2020 and December 31, 2019
As of December 31, 2020, the Company owned and operated 563 hotels, consisting of approximately 62,700 rooms, and franchised or managed 83 hotel properties for third parties, consisting of approximately 8,500 rooms. As of December 31, 2019, the Company owned and operated 557 hotels, consisting of approximately 61,900 rooms, and franchised or managed 73 hotel properties for third parties, consisting of approximately 7,500 rooms. See Note 4 to the consolidated financial statements of Extended Stay America, Inc., included in Item 8 of this combined annual report on Form 10-K.
The following table presents our consolidated results of operations for the years ended December 31, 2020 and 2019, including the amount and percentage change in these results between the periods (in thousands):
Year Ended December 31,
2020 2019 Change ($) Change (%)
Revenues:
Room revenues $ 994,896 $ 1,171,726 $ (176,830) (15.1) %
Other hotel revenues 27,170 24,365 2,805 11.5 %
Franchise and management fees 5,389 5,412 (23) (0.4) %
1,027,455 1,201,503 (174,048) (14.5) %
Other revenues from franchised and managed properties 14,861 16,716 (1,855) (11.1) %
Total revenues 1,042,316 1,218,219 (175,903) (14.4) %
Operating expenses:
Hotel operating expenses 576,719 582,321 (5,602) (1.0) %
General and administrative expenses 92,173 95,155 (2,982) (3.1) %
Depreciation and amortization 206,013 197,400 8,613 4.4 %
Impairment of long-lived assets 1,095 2,679 (1,584) (59.1) %
876,000 877,555 (1,555) (0.2) %
Other expenses from franchised and managed properties 17,041 18,870 (1,829) (9.7) %
Total operating expenses 893,041 896,425 (3,384) (0.4) %
Gain on sale of hotel properties 52,525 - 52,525 n/a
Other income 8 32 (24) (75.0) %
Income from operations 201,808 321,826 (120,018) (37.3) %
Other non-operating income (81) (391) 310 (79.3) %
Interest expense, net 130,133 127,764 2,369 1.9 %
Income before income tax (benefit) expense 71,756 194,453 (122,697) (63.1) %
Income tax (benefit) expense (24,500) 29,315 (53,815) (183.6) %
Net income 96,256 165,138 (68,882) (41.7) %
Net income attributable to noncontrolling interests (1)
(72,989) (95,470) 22,481 (23.5) %
Net income attributable to Extended Stay America Inc. common shareholders $ 23,267 $ 69,668 $ (46,401) (66.6) %
________________________
(1)Noncontrolling interests in Extended Stay America, Inc. include approximately 41% and 42% of ESH REIT’s common equity as of December 31, 2020 and 2019, respectively, and 125 shares of ESH REIT preferred stock.
The following table presents key operating metrics, including occupancy, ADR, RevPAR and hotel inventory for our owned hotels for the years ended December 31, 2020 and 2019:
Year Ended December 31,
2020 2019 Change
Number of hotels (as of December 31) 563 557 6
Number of rooms (as of December 31) 62,667 61,933 734
Occupancy 73.1% 76.7% (360) bps
ADR $59.83 $67.97 (12.0)%
RevPAR $43.76 $52.16 (16.1)%
Room revenues. Room revenues decreased by $176.8 million, or 15.1%, to $994.9 million for the year ended December 31, 2020 compared to $1,171.7 million for the year ended December 31, 2019, due to a 12.0% decrease in ADR and a 360 basis point decline in occupancy, resulting in a 16.1% decrease in RevPAR, due to significant business disruption resulting from the COVID-19 pandemic. This business disruption most significantly impacted operating results for the second quarter of 2020, with the negative impact of the pandemic on operating results easing as the year progressed.
Other hotel revenues. Other hotel revenues increased by $2.8 million, or 11.5%, to $27.2 million for the year ended December 31, 2020, compared to $24.4 million for the year ended December 31, 2019, due to reimbursements from certain third-party intermediaries of $1.4 million and increases in laundry and internet access revenue that totaled $1.1 million.
Franchise and management fees. Franchise and management fees remained consistent at $5.4 million for each of the years ended December 31, 2020 and 2019. We expect franchise and management fees to increase over time as additional franchised hotels open in the future.
Other revenues from franchised and managed properties. Other revenues from franchised and managed properties decreased by $1.9 million, or 11.1%, to $14.9 million for the year ended December 31, 2020, compared to $16.7 million for the year ended December 31, 2019, due to a decrease in direct reimbursable costs resulting from the termination of two short-term management agreements in 2019.
Hotel operating expenses. Hotel operating expenses decreased by $5.6 million, or 1.0%, to $576.7 million for the year ended December 31, 2020 compared to $582.3 million for the year ended December 31, 2019. The decrease in hotel operating expenses was primarily due to declines in certain variable costs, including reservation costs of $14.9 million, credit card fees of $7.4 million, $6.9 million in costs related to the temporary suspension of our grab-and-go breakfast and marketing costs of $3.3 million. These decreases were partially offset by increases in allowance for uncollectible guest balances of $9.5 million, property insurance expense of $4.3 million, hotel-level payroll expense of $3.7 million, repairs and maintenance costs of $3.7 million, loss on disposal of assets of $2.9 million and personal protective equipment and related safety costs of $2.5 million.
General and administrative expenses. General and administrative expenses decreased by $3.0 million, or 3.1%, to $92.2 million for the year ended December 31, 2020, compared to $95.2 million for the year ended December 31, 2019. This decrease was primarily due to a decrease in severance and other corporate transition costs and legal settlements of $6.9 million, as well as a decrease in travel and entertainment expense of $1.0 million, partially offset by an increase in compensation expense of $3.4 million and professional fees of $0.5 million.
Depreciation and amortization. Depreciation and amortization increased by $8.6 million, or 4.4%, to $206.0 million for the year ended December 31, 2020, compared to $197.4 million for the year ended December 31, 2019, due to nine hotel openings and a hotel acquisition that occurred during the year ended December 31, 2020, and the fourth quarter of 2019.
Impairment of long-lived assets. During the year ended December 31, 2020, we recognized impairment charges of $1.1 million related to one hotel in Illinois and an undeveloped land parcel. During the year ended December 31, 2019, we recognized impairment charge of $2.7 million related to one hotel in New York. The hotel-related impairment charges were incurred as a result of a decline in the respective hotels’ estimated future operating cash flows.
Other expenses from franchised and managed properties. Other expenses from franchised and managed properties decreased by $1.8 million, or 9.7%, to $17.0 million for the year ended December 31, 2020, compared to $18.9 million for the year ended December 31, 2019, due to a decrease in direct costs resulting from the termination of two short-term management agreements in 2019. We generally expect the cost to provide certain shared system-wide platforms to franchisees to be recovered through system service fees. System services fees are included in other revenues from franchised and managed properties.
Gain on sale of hotel properties. During the year ended December 31, 2020, the Company recognized a $52.5 million gain related to the sale of one hotel. No hotels were sold during the year ended December 31, 2019.
Other income. Other income remained consistent at less than $0.1 million for each of the years ended December 31, 2020 and 2019.
Other-non operating income. During the years ended December 31, 2020 and 2019, we recognized foreign currency transaction gains of $0.1 million and $0.4 million, respectively, related to a residual Canadian dollar-denominated deposit as a result of the prior sale of Canadian hotels.
Interest expense, net. During the year ended December 31, 2019, the Company incurred debt extinguishment and modification costs of $6.7 million. Excluding debt extinguishment and modification costs, net interest expense increased by $9.1 million, or 7.5%, to $130.1 million for the year ended December 31, 2020. In March 2020, the Company borrowed $399.8 million under its revolving credit facilities, of which $350.0 million was repaid in August 2020, and in September 2019, ESH REIT issued $750.0 million of its 2027 Notes and repaid $500.0 million of the ESH REIT Term Facility. The Company's total debt outstanding increased to $2.7 billion as of December 31, 2020, compared to $2.6 billion as of December 31, 2019, net of
unamortized deferred financing costs and debt discounts, respectively. The Company's weighted average interest rate decreased to 4.4% as of December 31, 2020, compared to 4.7% as of December 31, 2019, due to a decline in LIBOR.
Income tax (benefit) expense. The Company recorded a benefit for federal, state and foreign income taxes of $24.5 million, an effective tax rate of (34.1)%, for the year ended December 31, 2020, compared to a provision of $29.3 million, an effective tax rate of 15.1%, for the year ended December 31, 2019. The Company's effective rate differs from the federal statutory rate of 21% primarily due to ESH REIT's status as a REIT under the provisions of the Code. For the year ended December 31, 2020, passage of the CARES Act provides the Company the ability to carry back and utilize the Corporation’s federal tax loss generated in 2020 to higher tax rate years. See Note 11 to the consolidated financial statements of Extended Stay America, Inc., included in Item 8 of this combined annual report on Form 10-K, for a reconciliation of the Company’s income tax expense at the statutory U.S. federal income tax rate to its income tax benefit.
Results of Operations-ESH REIT
Comparison of Years Ended December 31, 2020 and December 31, 2019
As of December 31, 2020, ESH REIT owned and leased 563 hotels, consisting of approximately 62,700 rooms. As of December 31, 2019, ESH REIT owned and leased 557 hotels, consisting of approximately 61,900 rooms. See Note 4 to the consolidated financial statements of ESH Hospitality, Inc., included in Item 8 of this combined annual report on Form 10-K.
The following table presents ESH REIT’s results of operations for the years ended December 31, 2020 and 2019, including the amount and percentage change in these results between the periods (in thousands):
Year Ended December 31,
2020 2019 Change ($) Change (%)
Revenues - Rental revenues from Extended Stay America, Inc.
$ 562,809 $ 649,898 $ (87,089) (13.4) %
Operating expenses:
Hotel operating expenses 92,429 86,019 6,410 7.5 %
General and administrative expenses 15,259 15,189 70 0.5 %
Depreciation and amortization 202,263 193,798 8,465 4.4 %
Impairment of long-lived assets 675 - 675 n/a
Total operating expenses 310,626 295,006 15,620 5.3 %
Gain on sale of hotel properties 52,196 - 52,196 n/a
Other income - 15 (15) (100.0) %
Income from operations 304,379 354,907 (50,528) (14.2) %
Other non-operating income (148) (310) 162 (52.3) %
Interest expense, net 128,492 128,955 (463) (0.4) %
Income before income tax expense 176,035 226,262 (50,227) (22.2) %
Income tax expense 167 375 (208) (55.5) %
Net income $ 175,868 $ 225,887 $ (50,019) (22.1) %
Rental revenues from Extended Stay America, Inc. Rental revenues decreased by $87.1 million, or 13.4%, to $562.8 million for the year ended December 31, 2020, compared to $649.9 million for the year ended December 31, 2019. The decrease in rental revenues was due to a $93.8 million decrease in variable rental revenues, partially offset by a $6.7 million increase in fixed rental revenues related to newly opened hotels during 2020. The decline in variable rental revenues was a result of a decline in Operating Lessee hotel revenues due to significant business disruption resulting from the COVID-19 pandemic.
Hotel operating expenses. Hotel operating expenses increased by $6.4 million, or 7.5%, to $92.4 million for the year ended December 31, 2020, compared to $86.0 million for the year ended December 31, 2019. This increase was due to increases in loss on disposal of assets of $2.9 million, property insurance related costs of $1.9 million and repairs and maintenance costs of $1.5 million.
General and administrative expenses. General and administrative expenses increased by $0.1 million to $15.3 million for the year ended December 31, 2020, compared to $15.2 million for the year ended December 31, 2019.
Depreciation and amortization. Depreciation and amortization increased by $8.5 million, or 4.4%, to $202.3 million for the year ended December 31, 2020, compared to $193.8 million for the year ended December 31, 2019, due to nine hotel openings and a hotel acquisition that occurred during the year ended December 31, 2020, and the fourth quarter of 2019.
Impairment of long-lives assets. During the year ended December 31, 2020, ESH REIT recognized an impairment charge of $0.7 million related to an undeveloped land parcel. No impairment charges were recognized during the year ended December 31, 2019.
Gain on sale of hotel properties. During the year ended December 31, 2020, ESH REIT recognized a $52.2 million gain related to the sale of one hotel. No hotels were sold during the year ended December 31, 2019.
Other-non operating income. During the years ended December 31, 2020 and 2019, ESH REIT recognized foreign currency transaction gains of $0.1 million and $0.3 million, respectively, related to a residual Canadian dollar-denominated deposit as a result of the prior sale of Canadian hotels.
Interest expense, net. During the year ended December 31, 2019, ESH REIT incurred debt extinguishment and modification costs of $6.7 million. Excluding debt extinguishment and modification costs, net interest expense increased by $6.3 million, or 5.1%, to $128.5 million for the year ended December 31, 2020. In March 2020, ESH REIT borrowed $350.0 million under its revolving credit facility, which was fully repaid in August 2020, and in September 2019, ESH REIT issued $750.0 million of its 2027 Notes and repaid $500.0 million of the ESH REIT Term Facility. ESH REIT's total debt outstanding as of December 31, 2020 and 2019, was $2.6 billion, net of unamortized deferred financing costs and debt discounts. ESH REIT's weighted average interest rate decreased to 4.4% as of December 31, 2020, compared to 4.7% as of December 31, 2019, due to a decline in LIBOR.
Income tax expense. ESH REIT’s effective income tax rate decreased to 0.1% for the year ended December 31, 2020 compared to 0.2% for the year ended December 31, 2019. ESH REIT’s effective rate differs from the federal statutory rate of 21% primarily due to its status as a REIT under the provisions of the Code.
Non-GAAP Financial Measures
Hotel Operating Profit and Hotel Operating Margin
Hotel Operating Profit and Hotel Operating Margin measure hotel-level operating results prior to certain items, including debt service, income tax expense, impairment charges, depreciation and amortization and general and administrative expenses. The Company believes that Hotel Operating Profit and Hotel Operating Margin are useful measures to investors regarding our operating performance as they help us evaluate aggregate owned hotel-level profitability, specifically owned hotel operating efficiency and effectiveness. Further, these measures allow us to analyze period over period operating margin flow-through, defined as the change in Hotel Operating Profit divided by the change in total room and other hotel revenues.
We define Hotel Operating Profit as net income excluding: (1) income tax (benefit) expense; (2) net interest expense; (3) other non-operating (income) expense; (4) other income; (5) gain on sale of hotel properties; (6) impairment of long-lived assets; (7) depreciation and amortization; (8) general and administrative expenses; (9) loss on disposal of assets; (10) franchise and management fees; and (11) system services (profit) loss, net. We define Hotel Operating Margin as Hotel Operating Profit divided by the sum of room and other hotel revenues. We believe that Hotel Operating Profit and Hotel Operating Margin are not meaningful or useful measures for ESH REIT on a stand-alone basis due to the fact that a Paired Share represents an investment in the Company, as a single, consolidated enterprise, which is reflected in the consolidated Company results of operations; therefore, we believe these performance measures are meaningful for the consolidated Company only.
Hotel Operating Profit and Hotel Operating Margin as presented may not be comparable to similar measures calculated by other companies. This information should not be considered as an alternative to net income of the Company, the Corporation or ESH REIT, or any other measure of the Company, the Corporation or ESH REIT calculated in accordance with U.S. GAAP. Interest expense and other items have been and will continue to be incurred and are not reflected in Hotel Operating Profit or Hotel Operating Margin. Management separately considers the impact of these excluded items to the extent they are material to operating decisions and assessments of operating performance. The Company’s condensed consolidated statements of operations include excluded items, each of which should be considered when evaluating our performance in addition to our non-GAAP financial measures. Hotel Operating Profit and Hotel Operating Margin should not solely be considered as measures of our profitability.
The following table provides a reconciliation of Hotel Operating Profit and Hotel Operating Margin for the Company for the years ended December 31, 2020, 2019 and 2018 (in thousands):
Year Ended December 31,
2020 2019 2018
Net income $ 96,256 $ 165,138 $ 211,756
Income tax (benefit) expense (24,500) 29,315 42,076
Interest expense, net 130,133 127,764 124,870
Other non-operating income (81) (391) (765)
Other income (8) (32) (669)
Gain on sale of hotel properties, net (52,525) - (42,478)
Impairment of long-lived assets 1,095 2,679 43,600
Depreciation and amortization 206,013 197,400 209,329
General and administrative expenses 92,173 95,155 91,094
Loss on disposal of assets(1)
9,001 6,072 3,413
Franchise and management fees (5,389) (5,412) (3,310)
System services loss, net 2,180 2,154 650
Hotel Operating Profit $ 454,348 $ 619,842 $ 679,566
Room revenues $ 994,896 $ 1,171,726 $ 1,237,311
Other hotel revenues 27,170 24,365 21,871
Total room and other hotel revenues $ 1,022,066 $ 1,196,091 $ 1,259,182
Hotel Operating Margin 44.5 % 51.8 % 54.0 %
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(1)Included in hotel operating expenses in the consolidated statements of operations.
EBITDA and Adjusted EBITDA
EBITDA is defined as net income excluding: (1) net interest expense; (2) income tax (benefit) expense; and (3) depreciation and amortization. EBITDA is a commonly used measure of performance in many industries. The Company believes that EBITDA provides useful information to investors regarding our operating performance as it helps us and investors evaluate the ongoing performance of our hotels and our franchise and management operations after removing the impact of our capital structure, primarily net interest expense, our corporate structure, primarily income tax expense, and our asset base, primarily depreciation and amortization. We believe that the use of EBITDA facilitates comparisons between us and other lodging companies, hotel owners and capital-intensive companies. Additionally, EBITDA is a measure that is used by management in our annual budgeting and compensation planning processes.
The Company uses Adjusted EBITDA when evaluating our performance because we believe the adjustment for certain additional items, described below, provides useful supplemental information to investors regarding ongoing operating performance and that the presentation of Adjusted EBITDA, when combined with the U.S. GAAP presentation of net income, net income per share and cash flow provided by operating activities, is beneficial to the overall understanding of ongoing operating performance. We adjust EBITDA for the following items where applicable for each period presented, and refer to this measure as Adjusted EBITDA:
•Equity-based compensation-We exclude charges related to equity-based compensation expense with respect to awards issued under long-term incentive compensation plans to employees and certain directors.
•Impairment of long-lived assets-We exclude the effect of impairment losses recorded on property and equipment and intangible assets, as we believe they are not reflective of ongoing or future operating performance.
•Gain on sale of hotel properties, net-We exclude the net gain on sale of hotel properties, as we believe it is not reflective of ongoing or future operating performance.
•System services (profit) loss, net-We exclude direct and indirect reimbursable expenses from franchised and managed properties, net of other revenues, because although the timing of system service fee revenues will typically not align
with expenses incurred to operate these programs, the Company manages system services to break even over time. This policy was implemented on January 1, 2020, due to the growth of our franchise business; no adjustments have been made to prior periods.
•Other expenses-We exclude the effect of other expenses or income that we do not consider reflective of ongoing or future operating performance, including the following: loss on disposal of assets, non-operating expense (income), including foreign currency transaction costs, and certain costs associated with acquisitions, dispositions and/or capital transactions.
EBITDA and Adjusted EBITDA as presented may not be comparable to similar measures calculated by other companies. This information should not be considered as an alternative to net income of the Company, the Corporation or ESH REIT, or any other measure of the Company, the Corporation or ESH REIT calculated in accordance with U.S. GAAP. Cash expenditures for capital expenditures, interest expense and other items have been and will continue to be incurred and are not reflected in EBITDA or Adjusted EBITDA. Management separately considers the impact of these excluded items to the extent they are material to operating decisions and assessments of operating performance. The Company’s consolidated statements of operations and cash flows include capital expenditures, net interest expense and other excluded items, all of which should be considered when evaluating our performance in addition to our non-GAAP financial measures. EBITDA and Adjusted EBITDA should not solely be considered as measures of our profitability or indicative of funds available to fund our cash needs, including our ability to pay shareholder distributions.
We believe that EBITDA and Adjusted EBITDA are not meaningful or useful measures for ESH REIT on a stand-alone basis due to the fact that a Paired Share represents an investment in the Company, as a single, consolidated enterprise, which is reflected in the consolidated Company results of operations; therefore, we believe these performance measures are meaningful for the consolidated Company only.
The following table provides a reconciliation of net income to EBITDA and Adjusted EBITDA for the Company for the years ended December 31, 2020, 2019 and 2018 (in thousands):
Year Ended December 31,
2020 2019 2018
Net income $ 96,256 $ 165,138 $ 211,756
Interest expense, net 130,133 127,764 124,870
Income tax (benefit) expense (24,500) 29,315 42,076
Depreciation and amortization 206,013 197,400 209,329
EBITDA 407,902 519,617 588,031
Equity-based compensation 6,510 6,913 7,724
Impairment of long-lived assets 1,095 2,679 43,600
Gain on sale of hotel properties, net (52,525) - (42,478)
System services loss, net(1)
2,180 - -
Other expense(2)
8,936 5,829 2,860
Adjusted EBITDA $ 374,098 $ 535,038 $ 599,737
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(1)In light of the growth of our franchise business and in order to enhance comparability, effective January 1, 2020, the Company adopted the practice of other lodging companies with franchise businesses of excluding system services (profit) loss, net from Adjusted EBITDA; no adjustments have been made to prior period results. System services loss, net, for the years ended December 31, 2019 and 2018 was $2.2 million and $0.7 million, respectively.
(2)Includes loss on disposal of assets, non-operating income, including foreign currency transaction costs, and certain costs associated with acquisitions, dispositions and/or capital transactions. Loss on disposal of assets totaled $9.0 million, $6.1 million and $3.4 million, respectively.
FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share
FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share are metrics used by management to assess our operating performance and profitability and to facilitate comparisons between us and other hotel and/or real estate companies that include a REIT as part of their legal entity structure. Funds From Operations (“FFO”) is defined by the National Association of Real Estate Investment Trusts (“NAREIT”) as net income (computed in accordance with U.S. GAAP), excluding gains from sales of real estate, impairment charges, the cumulative effect of changes in accounting principle, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures following the same approach. FFO is a commonly used measure among other hotel and/or real estate companies that include a REIT as a part of their legal entity
structure. Since real estate depreciation and amortization, impairment of long-lived assets and gains from sales of hotel properties, net are dependent upon the historical cost of the real estate asset bases and generally not reflective of ongoing operating performance or earnings capability, the Company believes FFO is useful to investors as it provides a meaningful comparison of our performance between periods and between us and other companies and/or REITs.
Consistent with our presentation of Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share, as described below, our reconciliation of FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share begins with net income attributable to Extended Stay America, Inc. common shareholders, which excludes net income attributable to noncontrolling interests, and adds back earnings attributable to ESH REIT’s Class B common shares, presented as noncontrolling interest of the Company as required by U.S. GAAP. We believe that including earnings attributable to ESH REIT’s Class B common shares in our calculations of FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share provides investors with useful supplemental measures of the Company’s operating performance since our Paired Shares, directly through the pairing of the common stock of the Corporation and Class B common stock of ESH REIT, and indirectly through the Corporation’s ownership of the Class A common stock of ESH REIT, entitle holders to participate in 100% of the common equity and earnings of both the Corporation and ESH REIT. Based on the limitation on transfer provided for in each of the Corporation’s and ESH REIT’s charters, shares of common stock of the Corporation and shares of Class B common stock of ESH REIT are transferable and tradable only in combination as units, each unit consisting of one share of the Corporation’s common stock and one share of ESH REIT Class B common stock.
The Company uses Adjusted FFO and Adjusted FFO per diluted Paired Share when evaluating our performance because we believe the adjustment for certain additional items, described below, provides useful supplemental information to investors regarding our ongoing operating performance and that the presentation of Adjusted FFO and Adjusted FFO per diluted Paired Share, when combined with the U.S. GAAP presentation of net income and net income per common share, is beneficial to the overall understanding of our ongoing performance.
The Company adjusts FFO for the following items, net of tax, as applicable, that are not addressed in NAREIT’s definition of FFO, and refers to this measure as Adjusted FFO:
•Debt modification and extinguishment costs-We exclude charges related to the write-off of unamortized deferred financing costs, prepayment penalties and other costs associated with the modification and/or extinguishment of debt as we believe they are not reflective of our ongoing or future operating performance.
•Other non-operating income-We exclude the effect of expenses or income that we do not consider reflective of ongoing or future operating performance.
Adjusted FFO per diluted Paired Share is defined as Adjusted FFO divided by the weighted average number of Paired Shares outstanding on a diluted basis. Until such time as the number of outstanding common shares of the Corporation and Class B common shares of ESH REIT differ, we believe Adjusted FFO per diluted Paired Share is useful to investors, as it represents a measure of the economic risks and rewards related to an investment in our Paired Shares.
FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share as presented may not be comparable to similar measures calculated by other REITs or real estate companies that include a REIT as part of their legal entity structure. In particular, due to the fact that we present these measures for the Company on a consolidated basis (i.e., including the impact of franchise fees, management fees and income taxes), FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share, may be of limited use to investors comparing our results only to REITs. This information should not be considered as an alternative to net income of the Company, the Corporation, or ESH REIT, net income per share of common stock of the Corporation, net income per share of Class A or Class B common stock of ESH REIT or any other measure of the Company, the Corporation or ESH REIT calculated in accordance with U.S. GAAP. Real estate related depreciation and amortization expense will continue to be incurred and is not reflected in FFO, Adjusted FFO or Adjusted FFO per diluted Paired Share. Additionally, impairment charges, gains or losses on sales of hotel properties and other charges or income incurred in accordance with U.S. GAAP may occur and are not reflected in FFO, Adjusted FFO or Adjusted FFO per diluted Paired Share. Management separately considers the impact of these excluded items to the extent they are material to operating decisions and assessments of operating performance. The Company’s consolidated statements of operations include these items, all of which should be considered when evaluating our performance, in addition to our non-GAAP financial measures.
We believe that FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share are not meaningful or useful measures for ESH REIT on a stand-alone basis due to the fact that a Paired Share represents an investment in the Company, as a single, consolidated enterprise, which is reflected in the consolidated Company results of operations; therefore, we believe these performance measures are meaningful for the consolidated Company only.
The following table provides a reconciliation of net income attributable to Extended Stay America, Inc. common shareholders to FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share for the Company for the years ended December 31, 2020, 2019 and 2018 (in thousands, except per Paired Share data):
Year Ended December 31,
2020 2019 2018
Net income per Extended Stay America, Inc. common share - diluted $ 0.13 $ 0.37 $ 0.59
Net income attributable to Extended Stay America, Inc. common shareholders $ 23,267 $ 69,668 $ 112,864
Noncontrolling interests attributable to Class B common shares of ESH REIT 72,973 95,454 98,876
Real estate depreciation and amortization 199,535 191,560 204,095
Impairment of long-lived assets 1,095 2,679 43,600
Gain on sale of hotel properties, net (52,525) - (42,478)
Tax effect of adjustments to net income attributable to Extended Stay America, Inc. common shareholders(1)
(23,809) (27,582) (34,517)
FFO 220,536 331,779 382,440
Debt modification and extinguishment costs - 6,733 1,621
Other non-operating income - - (1,208)
Tax effect of adjustments to FFO - (956) (70)
Adjusted FFO $ 220,536 $ 337,556 $ 382,783
Adjusted FFO per Paired Share - diluted $ 1.24 $ 1.81 $ 2.02
Weighted Average Paired Shares outstanding - diluted 178,103 186,822 189,821
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(1)The tax effect of adjustments to net income attributable to Extended Stay America, Inc. common shareholders for the third and fourth quarters of 2020 was computed using a statutory rate due to the fact that the consolidated effective tax rate for both quarters was negative.
Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share
We present Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share as supplemental measures of the Company’s performance. We believe that these are useful measures for investors since our Paired Shares, directly through the pairing of the common stock of the Corporation and Class B common stock of ESH REIT, and indirectly through the Corporation’s ownership of the Class A common stock of ESH REIT, entitle holders to participate in 100% of the common equity and earnings of both the Corporation and ESH REIT. As required by U.S. GAAP, net income attributable to Extended Stay America, Inc. common shareholders excludes earnings attributable to ESH REIT’s Class B common shares, a noncontrolling interest. Based on the limitation on transfer provided for in each of the Corporation’s and ESH REIT’s charters, shares of common stock of the Corporation and shares of Class B common stock of ESH REIT are transferable and tradable only in combination as units, each unit consisting of one share of the Corporation’s common stock and one share of ESH REIT Class B common stock. As a result, we believe that Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share represent useful measures to holders of our Paired Shares.
Paired Share Income is defined as the sum of net income attributable to Extended Stay America, Inc. common shareholders and noncontrolling interests attributable to Class B common shares of ESH REIT. Adjusted Paired Share Income is defined as Paired Share Income adjusted for items that, net of income taxes, we believe are not reflective of ongoing or future operating performance. We adjust Paired Share Income for the following items, net of tax, as applicable, and refer to this measure as Adjusted Paired Share Income: debt modification and extinguishment costs, impairment of long-lived assets, gain on sale of hotel properties, net, system services (profit) loss, net and other expenses such as loss on disposal of assets, non-operating expense (income), including foreign currency transaction costs and certain costs associated with acquisitions, dispositions and/or capital transactions. With the exception of equity-based compensation, an ongoing charge, and debt modification and extinguishment costs, these adjustments (other than the effect of income taxes) are the same as those used in the reconciliation of net income calculated in accordance with U.S. GAAP to EBITDA and Adjusted EBITDA.
Adjusted Paired Share Income per diluted Paired Share is defined as Adjusted Paired Share Income divided by the number of Paired Shares outstanding on a diluted basis. Until such time as the number of outstanding common shares of the Corporation and Class B common shares of ESH REIT differ, we believe Adjusted Paired Share Income per diluted Paired Share is useful to investors, as it represents one measure of the economic risks and rewards related to an investment in our
Paired Shares. We believe that Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share provide meaningful indicators of the Company’s operating performance in addition to separate and/or individual analyses of net income attributable to common shareholders of the Corporation and net income attributable to Class B common shareholders of ESH REIT, each of which is impacted by specific U.S. GAAP requirements, including the recognition of contingent lease rental revenues and the recognition of fixed minimum lease rental revenues on a straight-line basis, and may not reflect how cash flows and/or earnings are generated on an individual entity or total enterprise basis. Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share should not be considered as an alternative to net income of the Company, the Corporation or ESH REIT, net income per share of common stock of the Corporation, net income per share of Class A or Class B common stock of ESH REIT or any other measure of the Company, the Corporation or ESH REIT calculated in accordance with U.S. GAAP.
We believe that Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share are not meaningful or useful measures for ESH REIT on a stand-alone basis due to the fact that a Paired Share represents an investment in the Company, as a single, consolidated enterprise, which is reflected in the consolidated Company results of operations; therefore, we believe these performance measures are meaningful for the consolidated Company only.
The following table provides a reconciliation of net income attributable to Extended Stay America, Inc. common shareholders to Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share for the years ended December 31, 2020, 2019 and 2018 (in thousands, except per Paired Share data):
Year Ended December 31,
2020 2019 2018
Net income per Extended Stay America, Inc. common share - diluted $ 0.13 $ 0.37 $ 0.59
Net income attributable to Extended Stay America, Inc. common shareholders $ 23,267 $ 69,668 $ 112,864
Noncontrolling interests attributable to Class B common shares of ESH REIT 72,973 95,454 98,876
Paired Share Income 96,240 165,122 211,740
Debt modification and extinguishment costs - 6,733 1,621
Impairment of long-lived assets 1,095 2,679 43,600
Gain on sale of hotel properties, net (52,525) - (42,478)
System services loss, net(1)
2,180 - -
Other expense(2)
8,936 5,829 2,860
Tax effect of adjustments to Paired Share Income(3)
10,266 (2,163) (937)
Adjusted Paired Share Income $ 66,192 $ 178,200 $ 216,406
Adjusted Paired Share Income per Paired Share - diluted $ 0.37 $ 0.95 $ 1.14
Weighted average Paired Shares outstanding - diluted 178,103 186,822 189,821
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(1)In light of the growth of our franchise business and in order to enhance comparability, effective January 1, 2020, the Company adopted the practice of other lodging companies with franchise businesses of excluding system services (profit) loss, net from Adjusted Paired Share Income; no adjustments have been made to prior period results. System services loss, net, for the years ended December 31, 2019 and 2018 was $2.2 million and $0.7 million, respectively.
(2)Includes loss on disposal of assets, non-operating income, including foreign currency transaction costs, and certain costs associated with acquisitions, dispositions and/or capital transactions. Loss on disposal of assets totaled $9.0 million, $6.1 million and $3.4 million, respectively.
(3)The tax effect of adjustments to net income attributable to Extended Stay America, Inc. common shareholders for the third and fourth quarters of 2020 was computed using a statutory rate due to the fact that the consolidated effective tax rate for both quarters was negative.
Liquidity and Capital Resources
Overview
We have historically generated significant cash flow from operations and have financed our ongoing business as well as the execution of our strategic objectives with existing cash, cash flow generated from operations, borrowings under our revolving credit facilities, as needed, and, in certain instances, proceeds from asset dispositions. We generated cash flows from operations of $218.8 million and $400.0 million for the years ended December 31, 2020 and 2019, respectively. Similar to our decreases in RevPAR and Adjusted EBITDA, the decrease in our cash flow from operations was due to significant business disruption and the macroeconomic effects of the COVID-19 pandemic.
Current liquidity requirements consist primarily of funds necessary to pay for (i) hotel operating expenses, (ii) capital expenditures, including capital expenditures incurred to complete the construction of new hotels and hotel renovations, (iii) investments in franchise and other fee-based programs, (iv) general and administrative expenses, (v) debt service obligations, including interest expense, (vi) income taxes, (vii) Corporation and required ESH REIT distributions and (viii) continued focus on our core operations and business strategy, including rebranding our hotels to the Extended Stay America Suites brand or the Extended Stay America Premier Suites brand, each of which we expect to operate under the Extended Stay America umbrella brand. We expect to fund our current liquidity requirements from a combination of cash on hand, cash flow generated from operations and, in certain instances, proceeds from asset dispositions. We may fund a portion of our current liquidity requirements with the borrowings under our revolving credit facilities.
The COVID-19 pandemic has had, and is expected to continue to have, a material adverse effect on the Company's cash flows from operations. Despite this impact, the Company continues to generate positive cash flow from operations, net of interest and capital expenditures. We believe there are opportunities in the current environment to serve additional extended stay guests, including new demand from temporary medical staff and student housing, as well as certain business travelers whose travel requirements have not been impacted by the pandemic. However, it is difficult to predict when pre-pandemic demand and pricing for our hotels will resume, if at all, as the number of cases in the U.S. and future conditions remain uncertain. See “Part I. Item 1A. Risk Factors - Risks Relating to Economic Conditions and COVID-19.”
In response to the current macroeconomic environment, we may choose to delay the execution of certain of our business strategies or reduce operating costs and certain capital expenditures in order to preserve liquidity. In March 2020, the Company drew the $399.8 million available borrowing capacity under its revolving credit facilities as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of uncertainty in the global markets. In August 2020, ESH REIT repaid the full outstanding balance under its facility and as of December 31, 2020, had $350 million of available borrowing capacity. As of December 31, 2020, the Corporation had borrowed $49.8 million on its revolving credit facilities and had no remaining available borrowing capacity.
Long-term liquidity requirements consist of funds necessary to (i) make future hotel renovations (ii) acquire additional hotel properties and/or other companies, (iii) execute our business strategy and strategic initiatives, including rebranding our hotels to the Extended Stay America Suites brand or the Extended Stay America Premier Suites brand, (iv) pay Corporation and required ESH REIT distributions, (v) repay and/or refinance outstanding amounts under our existing debt obligations, including the Corporation Revolving Credit Facility due in September 2024, the 2025 Notes due in May 2025, the ESH REIT Term Facility due in September 2026 and the 2027 Notes due in October 2027. See Note 7 to each of the consolidated financial statements of Extended Stay America, Inc. and ESH Hospitality, Inc., included in Item 8 of this combined annual report on Form 10-K, for additional detail related to our debt obligations.
With respect to our long-term liquidity requirements, specifically our ability to refinance our existing outstanding debt obligations, we cannot assure you that the Corporation and/or ESH REIT will be able to refinance any debt on attractive terms at or before maturity, on commercially reasonable terms or at all, or the timing of any such refinancing. We expect to meet our long-term liquidity requirements through various sources of capital, including future debt financings or equity issuances by the Corporation and/or ESH REIT, existing working capital, cash flow generated from operations and, in certain instances, proceeds from asset dispositions. However, there are a number of factors that may have a material adverse effect on our ability to access these capital sources, including the current and future state of overall capital and credit markets generally and as a result of the COVID-19 pandemic, our degree of leverage, which increased as of December 31, 2020 with the drawdown of $49.8 million of borrowing capacity under the Corporation's Revolving Credit Facility, the value of our unencumbered assets, borrowing restrictions imposed by existing or prospective lenders, general market conditions for the lodging industry, our operating performance and liquidity and market perceptions about us. The success of our business strategies will depend, in part, on our ability to access these various capital sources. There can be no assurance that we will be able to raise any such financing on terms acceptable to us or at all.
Cash Balances. The Company had unrestricted cash and cash equivalents of $396.8 million at December 31, 2020. Based upon the current level of operations, management believes that our cash flow from operations, together with our cash balances, including $49.8 million of borrowings under the Corporation's Revolving Credit Facility, is expected to be adequate to meet the Company’s anticipated funding requirements and business objectives for the foreseeable future. However, the length and severity of the COVID-19 pandemic and its economic impact continues to be highly uncertain and unpredictable and the potential future worsening of macroeconomic conditions could require the Company to reassess its liquidity position and take additional measures of liquidity preservation to ensure it can satisfy financial obligations as they come due.
Debt Obligations. In May 2020, the Company entered into an amendment to the Corporation Revolving Credit Facility whereby it obtained a suspension of the quarterly tested leverage covenant from the beginning of the second quarter of 2020 through the end of the first quarter of 2021 (the “Four Quarter Suspension Period”). For the second quarter of 2021 through the fourth quarter of 2021, the leverage covenant calculation was modified to use annualized EBITDA as opposed to trailing
twelve-month EBITDA. Throughout the Four Quarter Suspension Period, the Company has agreed to maintain minimum liquidity of $150.0 million and to limit share repurchases and dividend payments made by the Corporation. Additionally, the amendment provides for the Corporation to borrow up to $150.0 million from ESH REIT through an intercompany loan facility.
The Company’s compliance with financial covenants under its debt obligations could be impacted by current or future economic conditions associated with the pandemic. We may not be able to maintain compliance with our debt covenants or pay debt obligations as they become due and could risk default under the agreements governing the Company's indebtedness, upon which the amount outstanding could be accelerated and may raise substantial doubt about our ability to continue as a going concern.
See Note 7 to each of the consolidated financial statements of Extended Stay America, Inc. and ESH Hospitality, Inc., included in Item 8 of this combined annual report on Form 10-K, for additional detail related to our debt obligations and related covenants and “Item 1A. Risk Factors - The COVID-19 pandemic could negatively impact our current liquidity position, limit or restrict our ability to access new sources of capital and negatively impact our ability to maintain compliance with the financial covenants and other terms of the agreements governing our existing indebtedness."
Paired Share Repurchase Program. In December 2015, the Boards of Directors of the Corporation and ESH REIT authorized a combined Paired Share repurchase program. As a result of several increases in authorized amounts and program extensions, including a program extension authorized in December 2020, effective January 1, 2021, the combined Paired Share repurchase program authorizes the Corporation and ESH REIT to purchase up to $550.0 million in Paired Shares through December 31, 2021. Repurchases may be made at management’s discretion from time to time in the open market, in privately negotiated transactions or by other means (including through Rule 10b5-1 trading plans). As of December 31, 2020, the Corporation and ESH REIT repurchased and retired 28.6 million Paired Shares for $283.0 million and $166.4 million, including transaction fees, respectively, and $101.1 million remained available under the combined Paired Share repurchase program.
Distributions. On February 25, 2021, the Board of Directors of ESH REIT declared a cash distribution of $0.09 per share on its Class A and Class B common stock. This distribution is payable on March 25, 2021 to shareholders of record as of March 11, 2021.
The following table outlines distributions declared or paid during the years ended December 31, 2020, 2019 and 2018:
Declaration Date Record Date Date Paid ESH REIT Distribution Corporation Distribution Total Distribution
12/22/2020 1/6/2021 1/20/2021 $0.35 $- $0.35
11/9/2020 11/24/2020 12/8/2020 $- $0.01 $0.01
8/10/2020 8/25/2020 9/8/2020 $0.01 $- $0.01
5/6/2020 5/21/2020 6/4/2020 $0.01 $- $0.01
2/26/2020 3/12/2020 3/26/2020 $0.14 $0.09 $0.23
11/6/2019 11/20/2019 12/4/2019 $0.11 $0.12 $0.23
8/6/2019 8/21/2019 9/4/2019 $0.15 $0.08 $0.23
5/1/2019 5/16/2019 5/30/2019 $0.14 $0.09 $0.23
2/27/2019 3/14/2019 3/28/2019 $0.15 $0.07 $0.22
10/31/2018 11/15/2018 11/29/2018 $0.14 $0.08 $0.22
7/25/2018 8/9/2018 8/23/2018 $0.18 $0.04 $0.22
4/26/2018 5/11/2018 5/25/2018 $0.16 $0.06 $0.22
2/27/2018 3/13/2018 3/27/2018 $0.15 $0.06 $0.21
In 2021, we intend to increase our recent recurring distribution rate of of $0.01 per Paired Share declared during each of the second, third and fourth quarters of 2020, excluding the special distribution declared in the fourth quarter of 2020 and paid in January 2021, unless our consolidated results of operations, net income, Adjusted EBITDA, liquidity, cash flows, financial condition or prospects, economic conditions or other factors, including future capital expenditures and asset dispositions, differ materially from our current assumptions. We intend to continue to make a significant portion of our expected total annual distributions in respect of the Class B common stock of ESH REIT. In the event distributions in respect of the Class B common stock of ESH REIT are not sufficient to meet our expected Paired Share distributions and/or additional tax efficiency
opportunities exist, expected Paired Share distributions may include, as they have in prior periods, distributions in respect of the common stock of the Corporation using funds distributed to the Corporation in respect of the Class A common stock of ESH REIT, after allowance for tax, if any, on those funds. For the year ended December 31, 2020, the Corporation’s common distributions were classified as 100% qualified dividends and ESH REIT’s distributions per Class A and Class B common shares were classified as 100% ordinary income. See “Item 5 - Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Distribution Policies” elsewhere in this combined annual report on Form 10-K for a description of our distribution policies.
The Corporation
Typically, the Corporation’s primary source of liquidity is distribution income it receives in respect of its ownership of 100% of the Class A common stock of ESH REIT, which as of December 31, 2020, represents 59% of the outstanding common stock of ESH REIT. Distribution income from ESH REIT declined significantly during 2020 as a result of the business impact of the COVID-19 pandemic. Distributions are subject to uncertainty due to the volatility of macroeconomic trends, including the evolving nature of the pandemic. Other sources of liquidity include income from the operations of the Operating Lessees, ESA Management, ESH Strategies and ESH Strategies Franchise. In March 2020, the Corporation fully drew the available capacity under the Corporation Revolving Credit Facility and borrowed $49.8 million to preserve flexibility and its current and long-term liquidity. As of December 31, 2020, this balance remains outstanding and the Corporation has no available borrowing capacity under this facility.
The Corporation’s current liquidity requirements consist primarily of funds necessary to pay for or fund (i) hotel operating expenses, (ii) general and administrative expenses, (iii) debt service obligations, (iv) income taxes, (v) investments in its franchise and other fee programs and (vi) Corporation distributions. The Corporation expects to fund its current liquidity requirements from a combination of cash on hand, including funds borrowed under the Corporation Revolving Credit Facility or borrowings from ESH REIT, as lender, under the Corporation Intercompany Facility (defined below), as well as cash flow generated from operations, including distribution income it receives in respect of its ownership of 100% of the Class A common stock of ESH REIT.
The Corporation’s long-term liquidity requirements include the repayment of outstanding amounts under the Corporation Revolving Credit Facility, and the repayment of outstanding amounts, if any, under the Corporation Intercompany Facility. See Note 7 to the consolidated financial statements of Extended Stay America, Inc., included in Item 8 of this combined annual report on Form 10-K, for additional detail.
The Corporation may continue to pay distributions on its common stock to meet a portion of the expected distribution rate on our Paired Share distributions. The Corporation’s ability to pay distributions is dependent upon a number of factors, including but not limited to, its results of operations, net income, liquidity, cash flows, financial condition or prospects, economic conditions, all of which have been negatively impacted as a result of the COVID-19 pandemic, as well the ability to effectively execute certain tax planning strategies, compliance with applicable law, the receipt of distributions from ESH REIT in respect of the Class A common stock, level of indebtedness, capital requirements, contractual restrictions, restrictions in any existing and future debt agreements and other factors. The payment of future distributions is at the discretion of the Corporation’s Board of Directors. In light of these factors, the Corporation will continue to approach its future capital allocation, including returning capital to its investors through dividends, share repurchases and debt retirement, with the goal of balancing the need to preserve cash and maintain liquidity.
In July 2020, the Corporation, as borrower, and ESH REIT, as lender, entered into an unsecured credit facility (the “Corporation Intercompany Facility”). Under the Corporation Intercompany Facility, the Corporation may borrow up to $150.0 million from ESH REIT. Loans under the facility bear interest at an annual rate of 4.5%. In addition to paying interest on outstanding principal, the Corporation is required to pay a commitment fee to ESH REIT of 0.25% on the unutilized facility balance. There is no scheduled amortization under the facility and the facility matures on July 2, 2025. Obligations under the Corporation Intercompany Facility and guarantees thereof are unsecured and fully subordinated to the obligations of the Corporation under the Corporation Revolving Credit Facility. The Corporation has the option to prepay outstanding balances under the facility without penalty. During 2020, the Corporation borrowed $20.0 million from ESH REIT and fully repaid the amount drawn under the facility. As of December 31, 2020, the outstanding balance under the Corporation Revolving Credit Facility was $0.
ESH REIT may return additional cash to the Corporation for the Corporation to fund its current and long-term liquidity requirements or for other corporate purposes. ESH REIT may transfer cash to the Corporation through the redemption of shares of Class A common stock, which would decrease the Corporation's ownership of ESH REIT. Such redemption would likely be inefficient from a tax perspective because the redemption would be taxed as an ordinary dividend. Additionally, ESH REIT
may loan funds to the Corporation under the Corporation Intercompany Facility, subject to the conditions contained in the Corporation Revolving Credit Facility and other existing debt agreements.
Based upon the current level of operations, we believe that the Corporation’s cash position and cash flow generated from operations will be adequate to meet all the Corporation’s funding requirements and business objectives for the foreseeable future.
ESH REIT
ESH REIT’s primary source of liquidity is rental revenues derived from leases. The leases expire in October 2023 and at such time we expect minimum and percentage rents to be adjusted to reflect then-current market terms. Percentage rents decreased by $93.8 million, or 52.9%, for the year ending December 31, 2020, compared with the year ended December 31, 2019, as a result of a decline in Operating Lessee hotel revenues due to macroeconomic conditions related to the COVID-19 pandemic. Future results are subject to uncertainty due to the volatility of macroeconomic trends. In March 2020, as a precautionary measure in order to increase its cash position and preserve financial flexibility, ESH REIT fully drew the available capacity of $350.0 million under the ESH REIT Revolving Credit Facility. In August 2020, ESH REIT repaid the full balance under the facility. As of December 31, 2020, the outstanding balance under the ESH REIT Revolving Credit Facility was $0 and available borrowing capacity was $350.0 million.
ESH REIT’s current liquidity requirements include funds necessary to pay (i) costs associated with ownership of hotel properties, (ii) debt service obligations, including interest expense, and with respect to the ESH REIT Term Facility, scheduled principal payments on outstanding borrowings, (iii) real estate tax expense, (iv) property insurance expense, (v) general and administrative expense, including administrative service costs reimbursed to the Corporation, (vi) capital expenditures, including those capital expenditures incurred to complete hotel renovations, the construction of new hotels and rebranding hotels to the Extended Stay America Suites brand or the Extended Stay America Premier Suites brand, (vii) draws made by the Corporation on the Corporation Intercompany Facility and (viii) the payment of required REIT distributions.
ESH REIT’s long-term liquidity requirements consist of funds necessary to (i) complete future hotel renovations, including at those hotels which may rebrand to the Extended Stay America Premier Suites brand, (ii) acquire additional hotel properties and/or other lodging companies, (iii) pay required REIT distributions, (iv) fund draws made by the Corporation on the Corporation Intercompany Facility, (v) repay outstanding amounts under the ESH REIT Revolving Credit Facility, if any, and (vii) refinance (including prior to or in connection with debt maturity payments) the 2025 Notes, the ESH REIT Term Facility and the 2027 Notes maturing in May 2025, September 2026 and October 2027, respectively. See Note 7 to the consolidated financial statements of ESH Hospitality, Inc., included in Item 8 of this combined annual report on Form 10-K for additional detail on ESH REIT’s debt obligations.
In order to qualify and maintain its status as a REIT, ESH REIT must distribute annually to its shareholders an amount at least equal to:
•90% of its REIT taxable income, computed without regard to the deduction for dividends paid and excluding any net capital gain; plus
•90% of the excess of its net income, if any, from foreclosure property over the tax imposed on such income by the Code; less
•the sum of certain items of non-cash income that exceeds a percentage of ESH REIT’s income.
ESH REIT intends to distribute its taxable income to the extent necessary to optimize its tax efficiency including, but not limited to, maintaining its REIT status, while retaining sufficient capital for its ongoing needs. ESH REIT is subject to income tax on its taxable income that is not distributed and to an excise tax to the extent that certain percentages of its taxable income are not distributed by specified dates. To the extent distributions in respect of the Class B common stock of ESH REIT are not sufficient to meet our expected Paired Share distributions, Paired Share distributions may be completed through distributions in respect of the common stock of the Corporation, as they have been in certain prior periods, using funds distributed to the Corporation in respect of the Class A common stock of ESH REIT, after allowance for tax, if any, on those funds.
ESH REIT will continue to approach its future capital allocation, including returning capital to its shareholders (including the Corporation) through dividends, share repurchases and debt retirement, with the goal of balancing the need to preserve cash, maintain liquidity and compliance with REIT distribution rules.
We expect that ESH REIT will need to refinance all or a portion of its outstanding debt, including the 2025 Notes, the ESH REIT Credit Facilities and the 2027 Notes, on or before maturity. See Note 7 to the consolidated financial statements of ESH Hospitality, Inc., included in Item 8 of this combined annual report on Form 10-K for additional detail. We cannot assure
you that ESH REIT will be able to refinance any of its debt on attractive terms at or before maturity, on commercially reasonable terms or at all.
In August 2016, ESH REIT, as borrower, and the Corporation, as lender, entered into an unsecured intercompany credit facility (the “ESH REIT Intercompany Facility”). Under the ESH REIT Intercompany Facility, ESH REIT may borrow up to $300.0 million, plus additional amounts, in each case subject to certain conditions. There is no scheduled amortization under the facility and the facility matures in September 2026. As of December 31, 2020, the outstanding balance under the ESH REIT Intercompany Facility was $0.
The Corporation may return additional cash to ESH REIT in order for ESH REIT to pay for or fund (i) its current and long-term liquidity requirements, (ii) capital expenditures, (iii) outstanding debt obligations or (iv) for other corporate purposes. The Corporation may transfer cash to ESH REIT through the purchase of additional shares of Class A common stock, which would increase its ownership of ESH REIT and reduce the Company’s overall tax efficiency. Additionally, the Corporation may loan funds to ESH REIT under the ESH REIT Intercompany Facility, subject to the conditions contained in existing debt agreements. The Corporation does not expect to return additional cash to ESH REIT in the foreseeable future to the extent it is not required under existing agreements or applicable law.
Based upon the current level of operations, we believe that ESH REIT’s cash position, cash flow generated from operations and, in certain circumstances, proceeds from asset sales, will be adequate to meet all of ESH REIT’s funding requirements and business objectives for the foreseeable future.
Sources and Uses of Cash - The Company
The following cash flow tables and comparisons are provided for the Company:
Comparison of Years Ended December 31, 2020 and December 31, 2019
We had total cash, cash equivalents and restricted cash of $409.9 million and $361.7 million at December 31, 2020 and 2019, respectively. The following table summarizes the changes in our cash, cash equivalents and restricted cash as a result of operating, investing and financing activities for the years ended December 31, 2020 and 2019 (in thousands):
Year Ended December 31,
2020 2019 Change ($)
Cash provided by (used in):
Operating activities $ 218,751 $ 399,950 $ (181,199)
Investing activities (127,769) (259,809) $ 132,040
Financing activities (42,680) (81,879) $ 39,199
Effects of changes in exchange rate on cash, cash equivalents and restricted cash (51) 72 (123)
Net increase in cash, cash equivalents and restricted cash $ 48,251 $ 58,334 $ (10,083)
Cash Flows provided by Operating Activities
Cash flows provided by operating activities totaled $218.8 million for the year ended December 31, 2020, compared to $400.0 million for the year ended December 31, 2019, a decrease of $181.2 million. Cash flows provided by operating activities decreased due to a decline in hotel operating performance, specifically a 16.1% decrease in RevPAR driven by the negative impact of the COVID-19 pandemic on our business and results of operations.
Cash Flows used in by Investing Activities
Cash flows used in investing activities totaled $127.8 million for the year ended December 31, 2020, compared to $259.8 million for the year ended December 31, 2019, a decrease of $132.0 million. Cash flows used in investing activities decreased due to a net decrease in investment in property and equipment, including hotel acquisitions, development in process and intangible assets, of $68.6 million. In addition, cash flows used in investing activities decreased as a result of $63.6 million in proceeds received from a hotel disposition during the year ended December 31, 2020, whereas no hotel properties were sold during the year ended December 31, 2019.
Cash Flows used in Financing Activities
Cash flows used in financing activities totaled $42.7 million for the year ended December 31, 2020, compared to $81.9 million for the year ended December 31, 2019, a decrease of $39.2 million. Cash flows used in financing activities decreased due to a decrease in Paired Share distributions of $123.6 million and a decrease of $99.6 million in Paired Share repurchases. These decreases in cash flows used in financing activities were partially offset by a $178.7 million decrease in net proceeds from financing transactions.
Sources and Uses of Cash - ESH REIT
The following cash flow tables and comparisons are provided for ESH REIT:
Comparison of Years Ended December 31, 2020 and December 31, 2019
ESH REIT had cash and cash equivalents of $375.7 million and $296.1 million at December 31, 2020 and 2019, respectively. The following table summarizes the changes in ESH REIT’s cash, cash equivalents and restricted cash as a result of operating, investing and financing activities for the years ended December 31, 2020 and 2019 (in thousands):
Year Ended December 31,
2020 2019 Change ($)
Cash provided by (used in):
Operating activities $ 288,491 $ 436,752 $ (148,261)
Investing activities (123,110) (253,398) $ 130,288
Financing activities (85,800) (65,758) $ (20,042)
Net increase in cash and cash equivalents $ 79,581 $ 117,596 $ (38,015)
Cash Flows provided by Operating Activities
Cash flows provided by operating activities totaled $288.5 million for the year ended December 31, 2020, compared to $436.8 million for the year ended December 31, 2019, a decrease of $148.3 million. The decrease was due to a substantial decline in percentage rent payments received due to the decline in Operating Lessee hotel revenues resulting from the COVID-19 pandemic on our business and results of operations. The decrease also related to a $38.8 million decline in prepaid fixed minimum rent due to the timing of rental payments from Extended Stay America, Inc.
Cash Flows used in Investing Activities
Cash flows used in investing activities totaled $123.1 million for the year ended December 31, 2020, compared to $253.4 million for the year ended December 31, 2019, a decrease of $130.3 million. Cash flows used in investing activities decreased due to a net decrease in investment in property and equipment, including hotel acquisitions, development in process and intangible assets, of $66.8 million. In addition, cash flows used in investing activities decreased due to $63.6 million in proceeds received from a hotel disposition during the year ended December 31, 2020, whereas no hotel properties were sold during the year ended December 31, 2019.
Cash Flows used in Financing Activities
Cash flows used in financing activities totaled $85.8 million for the year ended December 31, 2020, compared to $65.8 million for the year ended December 31, 2019, an increase of $20.0 million. Cash flows used in financing activities increased due to a $228.8 million decrease in net proceeds from financing transactions, partially offset by a $172.1 million decrease in Class A and Class B common stock distributions and a $36.1 million decrease in ESH REIT Class B common stock repurchases.
Capital Expenditures
We maintain each of our hotels in good repair and condition and in conformity with applicable laws and regulations. The cost of all improvements and significant alterations are generally made with cash flow from operations. During the years ended December 31, 2020, 2019 and 2018, the Company incurred capital expenditures, including development in process, of $192.7 million, $261.3 million and $209.3 million, respectively. These capital expenditures related to land and hotel acquisitions, development and construction in process, ordinary hotel capital improvements, investments in information technology and hotel renovations.
With respect to our current hotel renovation program, as of December 31, 2020, we have substantially completed renovations at 28 hotels for $63.0 million. We are in the process of completing renovations at six additional hotels, with total costs incurred to date of $13.8 million. After completion of the current renovation program, we generally expect each hotel to be on a seven to eight-year renovation cycle. We expect future hotel renovations to focus on strict underwriting standards intended to maximize returns on investment through the renovation of our highest potential assets, which may include renovations to conform certain existing, core-branded Extended Stay America Suites hotels to our new step-up brand, Extended Stay America Premier Suites.
Funding requirements for future capital expenditures, including hotel rebranding, hotel renovations, completing construction of new hotels we expect to own and operate and acquiring and converting existing hotels will be significant and are expected to be provided primarily from cash flows generated from operations or, to the extent necessary, the Corporation or ESH REIT revolving credit facilities, including intercompany facilities and, in certain instances, proceeds from asset sales.
In 2021, we expect to incur capital expenditures between $155 and $175 million. As part of these capital expenditures, we expect to spend approximately $15 to $20 million for construction of new hotels, $3 to $5 million for hotel renovations, $12 to $15 million for information technology investments and $125 to $135 million for ordinary hotel capital improvements and related projects, including signage replacement related to brand conversions. Additional capital expenditures may be incurred for other core hotels that may be rebranded as Extended Stay America Premier Suites in conjunction with renovations later in 2021.
Our Indebtedness
As of December 31, 2020, the Company’s total indebtedness was $2.7 billion, net of unamortized deferred financing costs and debt discounts. ESH REIT’s total indebtedness at December 31, 2020 was $2.6 billion, net of unamortized deferred financing costs and debt discounts. For additional detail related to our debt obligations, see Note 7 to each of the consolidated financial statements of Extended Stay America, Inc. and ESH Hospitality, Inc., included in Item 8 of this combined annual report on Form 10-K.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2020 (in thousands):
Payments Due by Period
Total 2021 2022 2023 2024 2025 Thereafter
ESH REIT Term Facility (1)
$ 623,022 $ 6,309 $ 6,309 $ 6,309 $ 6,309 $ 6,309 $ 591,477
2025 Notes (2)
1,300,000 - - - - 1,300,000
2027 Notes (3)
750,000 - - - - - 750,000
Corporation Revolving Credit Facility 49,765 - - - 49,765 - -
Operating lease obligations (4)
81,676 2,221 806 552 503 503 77,091
Finance lease obligations (5)
5,149 850 397 400 402 429 2,671
Interest payments on outstanding debt obligations (6)(7)(8)
630,237 118,156 117,499 117,362 116,920 81,755 78,545
Purchase obligations (9)
67,562 17,438 18,245 18,330 12,924 625 -
Total contractual obligations $ 3,507,411 $ 144,974 $ 143,256 $ 142,953 $ 186,823 $ 1,389,621 $ 1,499,784
_________________
(1)The ESH REIT Term Facility is included on the Company’s consolidated balance sheet net of unamortized deferred financing costs and debt discount of $9.4 million. Contractual obligations exclude mandatory prepayments related to ESH REIT’s Excess Cash Flow for future years as they are not currently known. Annual mandatory prepayments for a given fiscal year are due during the first quarter of the following fiscal year. No mandatory prepayments are required in the first quarter of 2021 based on ESH REIT's Excess Cash Flow for the year ended December 31, 2020.
(2)The 2025 Notes are included on the Company’s consolidated balance sheet net of unamortized deferred financing costs and debt discount of $17.9 million. ESH REIT may redeem the 2025 Notes at any time at specified redemption prices.
(3)The 2027 Notes are included on the Company’s consolidated balance sheet net of unamortized deferred financing costs of $11.9 million. ESH REIT may redeem the 2027 Notes at any time at specified redemption prices.
(4)Includes long-term ground leases at three of the Company’s hotel properties and lease for the Company’s corporate headquarters.
(5)Includes finance lease obligations at two of the Company’s hotel properties and leased technology equipment located at the Company's hotels.
(6)Floating rate interest calculated using current LIBOR plus 2.0% for the portion of the ESH REIT Term Facility not subject to an interest rate swap.
(7)Interest calculated using base rate of 2.0% plus 1.175% for portion of the ESH REIT Term Facility subject to interest rate swap.
(8)Floating rate interest calculated using current LIBOR plus 2.25% for the outstanding balance on the Corporation Revolving Credit Facility.
(9)Commitments to vendors for information technology services and subscriptions at our hotels.
Critical Accounting Policies
Several accounting policies, described in detail in Note 2 to each of the consolidated financial statements of Extended Stay America, Inc. and ESH Hospitality, Inc., included in Item 8 of this combined annual report on Form 10-K, require material subjective or complex judgment and have a significant impact on the Company’s and ESH REIT’s financial condition and results of operations, as applicable. The following represent certain critical accounting policies that require us to exercise our business judgment or make significant estimates:
•Property and equipment-Policies related to property and equipment include significant judgment related to the assessment and measurement of impairment and estimates with respect to assets’ useful lives, which materially impact impairment of long-lived assets and depreciation expense, respectively. Significant judgments related to the assessment and measurement of impairment of long-lived assets include asset holding period, future operating performance (i.e., projections of future cash flow) and current and/or future market conditions.
•Investments-Policies related to accounting for investments, specifically the consolidation of subsidiaries and other entities, including variable interest entities, have the potential to materially impact the presentation of the Company's and ESH REIT's consolidated financial statements.
•Rental revenue recognition-For ESH REIT, policies related to rental revenues generated from leases involve judgment that materially impacts total revenues due to the contingent nature of a significant portion of lease rental revenues.
•Income taxes-Policies related to income taxes involve judgment and complexity, including analysis of the Corporation’s ownership in ESH REIT, the valuation of deferred tax assets and liabilities and the execution and performance of all matters related to REIT compliance.
Recent Accounting Pronouncements
For discussion of recently issued accounting standards, see Note 2 to each of the consolidated financial statements of Extended Stay America, Inc. and ESH Hospitality, Inc., included in Item 8 of this combined annual report on Form 10-K.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Corporation and ESH REIT may seek to reduce earnings and cash flow volatility associated with changes in interest rates and commodity prices by entering into financial arrangements to provide a hedge against a portion of the risks associated with such volatility, when applicable. We have exposure to such risks to the extent they are not hedged. We may enter into derivative financial arrangements to the extent they meet the foregoing objectives. We do not use derivatives for trading or speculative purposes.
The Corporation
The Corporation currently has limited exposure to market risk from changes in interest rates. As of December 31, 2020, the Corporation's variable rate debt consisted of $49.8 million drawn on its revolving credit facility. If market rates of interest were to fluctuate by 1.0%, interest expense would increase or decrease by $0.5 million annually, assuming that the amount of outstanding Corporation variable rate debt remains at $49.8 million.
ESH REIT
As of December 31, 2020, $623.0 million of ESH REIT’s outstanding gross debt of $2.7 billion had a variable interest rate. ESH REIT is a counterparty to an interest rate swap at a fixed rate of 1.175%. The notional amount of the interest rate swap as of December 31, 2020 was $100.0 million, which is reduced by $50.0 million every six months until the swap matures in September 2021. The remaining $523.0 million of outstanding variable interest rate debt not subject to the interest rate swap remains subject to interest rate risk. If market rates of interest were to fluctuate by 1.0%, interest expense would increase or decrease by $5.2 million annually, assuming that the amount outstanding under ESH REIT’s unhedged variable interest rate debt remains at $523.0 million.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
Page
Number
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
ESH HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
FINANCIAL STATEMENT SCHEDULE
Schedule III-Real Estate and Accumulated Depreciation
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Extended Stay America, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Extended Stay America, Inc. and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Property and Equipment- Identification of Impairment Indicators for Hotel Properties- Refer to Note 2 to the financial statements
Critical Audit Matter Description
Management assesses long-lived assets, including hotel properties, for potential impairment quarterly, as well as when events or changes in circumstances indicate the carrying amount of an asset or group of assets may not be recoverable. The identification of events or circumstances that indicate the carrying value of assets may not be recoverable requires significant judgment. The Company reviews for impairment indicators at the lowest level of identifiable cash flows based on quantitative, qualitative and certain industry-related factors. Quantitative factors include, but are not limited to, historical, current or projected operating performance. Qualitative factors include a change in physical condition, economic environment, regulatory environment or primary use.
We identified the evaluation of impairment indicators for hotel properties as a critical audit matter because of the significant assumptions management makes when evaluating whether events or changes in circumstances have occurred indicating that the
carrying amounts of hotel properties may not be recoverable. This required a high degree of auditor judgment when performing audit procedures to evaluate whether management appropriately identified impairment indicators, including the appropriateness of the criteria used to aid in the identification of such impairment indicators.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the evaluation of the identification of impairment indicators and the criteria, including both quantitative and qualitative factors, used to aid in the identification of impairment indicators included the following, among others:
•We tested the effectiveness of controls related to management’s assessment of hotel properties for impairment indicators.
•We tested the mathematical accuracy of management’s calculations and tested the accuracy and completeness of the underlying data used in their analysis to aid in the evaluation of potential impairment indicators.
•We evaluated management’s analysis of impairment indicators, which included the consideration of both quantitative and qualitative factors.
•We inquired of operational personnel responsible for oversight of the hotel properties in order to identify any other potential impairment indicators not previously identified.
•We held discussions with members of management and read Board of Directors meeting minutes to understand if there were any other qualitative factors that would represent potential impairment indicators.
•We assessed information obtained in other aspects of our audit as potential evidence.
Property and Equipment - Assumptions Used in Impairment Tests for Hotel Properties - Refer to Notes 2 and 5 to the financial statements
Critical Audit Matter Description
Recoverability of a hotel property or group of hotel properties is measured by a comparison of the carrying amount of a hotel property or group of hotel properties to the estimated future undiscounted cash flows expected to be generated by the hotel property or group of hotel properties. Impairment is recognized when estimated future undiscounted cash flows, including expected proceeds from disposition, are less than the carrying value of the hotel property or group of hotel properties. To the extent that a hotel property or group of hotel properties is impaired, the excess carrying amount over estimated fair value is recognized as an impairment charge. The estimation and evaluation of future cash flows from hotel properties relies on significant judgments and assumptions regarding holding period, current and future operating performance and current and future market conditions. Fair value is determined based upon the estimated discounted cash flows of the hotel property or group of hotel properties, bids, quoted market prices or independent appraisals.
We identified the determination of assumptions used in the Company’s impairment tests for hotel properties as a critical audit matter because of the significant estimates and assumptions management makes to evaluate the recoverability of hotel properties and, if necessary, to determine estimated fair value for hotel properties. This required a high degree of auditor judgment when performing audit procedures to evaluate the reasonableness of management’s judgments regarding the assumptions noted above.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the assumptions noted above used in the Company’s impairment tests for hotel properties included the following, among others:
•We tested the effectiveness of controls related to management’s assumptions used in the impairment tests for hotel properties.
•We challenged and assessed the reasonableness of management’s forecasts used to estimate future cash flows from hotel properties.
•We inquired of management to understand the status of any properties identified for potential disposition to determine whether the holding period assumptions regarding the future use of such properties, as used in the recoverability test, were reasonable.
•We evaluated the reasonableness of the determination of fair market values used in the Company’s impairment tests by:
◦Testing the source information underlying the assumptions used to determine estimates of fair market values.
◦Considering third-party market data and comparable sales.
•We evaluated whether the assumptions used in the Company’s impairment tests were consistent with evidence obtained in other areas of the audit.
Property and Equipment- Cost Capitalization- Refer to Notes 2 and 5 to the financial statements
Critical Audit Matter Description
The Company incurs a significant amount of capital expenditures. In addition to ordinary hotel capital improvements, the Company also incurs capital expenditures related to hotel renovations, development and construction in process, and investments in information technology. The Company incurred $192.7M in capital expenditures for the year ended December 31, 2020. The Company records property and equipment additions 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.
We identified the capitalization of property and equipment additions as a critical audit matter because of the significant level of capital expenditures. This required an increased extent of audit effort to evaluate whether capital expenditures were recorded in accordance with accounting principles generally accepted in the United States of America (US GAAP).
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the evaluation of the appropriateness of the capitalization of property and equipment additions included the following, among others:
•We tested the effectiveness of controls related to the capitalization of property and equipment additions, including management’s controls over the coding of items within the Company’s procurement systems, the approval and coding of invoices, the recording of capitalized costs, and placing of capital projects into service.
•We read the Company’s property and equipment accounting policies and inquired of those involved in the determination of the capitalization of property and equipment in order to understand the Company’s capitalization policies and evaluate consistency with US GAAP.
•We selected a sample of property and equipment additions recorded during the year from a schedule of additions, which we agreed to the rollforward of property and equipment, and performed the following to evaluate whether the selected assets were appropriately capitalized in accordance with US GAAP:
◦Vouching the recorded costs to supporting documents and relevant payment support (e.g., capital expenditure approvals, vendor invoices, check or wire details, and bank statements), in addition to inquiring of property management personnel, to evaluate proper approval and existence of those costs.
◦Evaluating the related vendor invoices to assess whether any embedded costs required further evaluation (e.g., additional inquiry and/or supporting documentation) regarding appropriate capitalization in accordance with US GAAP.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
February 25, 2021
We have served as the Company's auditor since 2010.
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2020 AND 2019
(In thousands, except share and per share data)
December 31, 2020 December 31, 2019
ASSETS
PROPERTY AND EQUIPMENT - Net of accumulated depreciation of $1,541,986 and $1,373,950
$ 3,445,955 $ 3,493,549
RESTRICTED CASH 13,151 14,858
CASH AND CASH EQUIVALENTS 396,770 346,812
INTANGIBLE ASSETS - Net of accumulated amortization of $15,715 and $13,133
34,093 34,183
GOODWILL 45,055 45,192
ACCOUNTS RECEIVABLE - Net of allowance for credit losses of $7,963 and $2,749
13,709 14,020
DEFERRED TAX ASSETS - 16,157
OTHER ASSETS 140,416 65,825
TOTAL ASSETS $ 4,089,149 $ 4,030,596
LIABILITIES AND EQUITY
LIABILITIES:
Term loan facility payable - Net of unamortized deferred financing costs and debt discount
of $9,355 and $10,993
$ 613,667 $ 618,338
Senior notes payable - Net of unamortized deferred financing costs and debt discount
of $29,810 and $35,702
2,020,190 2,014,298
Revolving credit facility 49,765 -
Mandatorily redeemable preferred stock - $0.01 par value, $1,000 redemption value,
8.0%, 350,000,000 shares authorized, 0 and 7,130 shares issued and outstanding
- 7,130
Finance lease liabilities 3,668 3,379
Deferred tax liabilities 11,218 -
Accounts payable and accrued liabilities 253,198 211,181
Total liabilities 2,951,706 2,854,326
COMMITMENTS AND CONTINGENCIES (Note 13)
EQUITY:
Common stock - $0.01 par value, 3,500,000,000 shares authorized, 177,560,635 and
179,483,397 shares issued and outstanding
1,776 1,795
Additional paid in capital 725,865 742,397
Accumulated deficit (44,664) (48,283)
Accumulated other comprehensive (loss) income (206) 383
Total Extended Stay America, Inc. shareholders’ equity 682,771 696,292
Noncontrolling interests 454,672 479,978
Total equity 1,137,443 1,176,270
TOTAL LIABILITIES AND EQUITY $ 4,089,149 $ 4,030,596
See accompanying notes to consolidated financial statements.
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
(In thousands, except per share data)
Year Ended December 31,
2020 2019 2018
REVENUES:
Room revenues $ 994,896 $ 1,171,726 $ 1,237,311
Other hotel revenues 27,170 24,365 21,871
Franchise and management fees 5,389 5,412 3,310
1,027,455 1,201,503 1,262,492
Other revenues from franchised and managed properties 14,861 16,716 12,567
Total revenues 1,042,316 1,218,219 1,275,059
OPERATING EXPENSES:
Hotel operating expenses 576,719 582,321 583,029
General and administrative expenses 92,173 95,155 91,094
Depreciation and amortization 206,013 197,400 209,329
Impairment of long-lived assets 1,095 2,679 43,600
876,000 877,555 927,052
Other expenses from franchised and managed properties 17,041 18,870 13,217
Total operating expenses 893,041 896,425 940,269
GAIN ON SALE OF HOTEL PROPERTIES, NET (Note 4)
52,525 - 42,478
OTHER INCOME 8 32 669
INCOME FROM OPERATIONS 201,808 321,826 377,937
OTHER NON-OPERATING INCOME (81) (391) (765)
INTEREST EXPENSE, NET 130,133 127,764 124,870
INCOME BEFORE INCOME TAX (BENEFIT) EXPENSE 71,756 194,453 253,832
INCOME TAX (BENEFIT) EXPENSE (24,500) 29,315 42,076
NET INCOME 96,256 165,138 211,756
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS (72,989) (95,470) (98,892)
NET INCOME ATTRIBUTABLE TO EXTENDED STAY AMERICA, INC. COMMON SHAREHOLDERS $ 23,267 $ 69,668 $ 112,864
NET INCOME PER EXTENDED STAY AMERICA, INC. COMMON SHARE:
Basic $ 0.13 $ 0.37 $ 0.60
Diluted $ 0.13 $ 0.37 $ 0.59
WEIGHTED-AVERAGE EXTENDED STAY AMERICA, INC. COMMON SHARES OUTSTANDING:
Basic 177,708 186,546 189,389
Diluted 178,103 186,822 189,821
See accompanying notes to consolidated financial statements.
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
(In thousands)
Year Ended December 31,
2020 2019 2018
NET INCOME $ 96,256 $ 165,138 $ 211,756
OTHER COMPREHENSIVE INCOME:
FOREIGN CURRENCY TRANSLATION ADJUSTMENT:
FOREIGN CURRENCY TRANSLATION LOSS - - (52)
DERIVATIVE ADJUSTMENT:
INTEREST RATE CASH FLOW HEDGE LOSS, NET OF TAX OF $(204), $(731) AND $(204)
(1,152) (4,228) (394)
COMPREHENSIVE INCOME 95,104 160,910 211,310
COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS (72,426) (93,347) (98,647)
COMPREHENSIVE INCOME ATTRIBUTABLE TO EXTENDED STAY AMERICA, INC. COMMON SHAREHOLDERS $ 22,678 $ 67,563 $ 112,663
See accompanying notes to consolidated financial statements.
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
(In thousands, except per share data)
Common Stock Additional
Paid in
Capital Retained
Earnings
(Accumulated
Deficit) Accumulated
Other
Comprehensive
(Loss) Income Total Extended Stay America, Inc.
Shareholders’
Equity Non-controlling
Interests Total
Equity
Shares Amount
BALANCE - January 1, 2018 192,100 $ 1,921 $ 768,679 $ 6,917 $ 3,066 $ 780,583 $ 565,264 $ 1,345,847
Net income - - - 112,864 - 112,864 98,892 211,756
Foreign currency translation loss, net of tax - - - - (52) (52) - (52)
Cumulative effect adjustment of ASU 2017-12 - - - 377 (377) - - -
Interest rate cash flow hedge loss, net of tax - - - - (149) (149) (245) (394)
Repurchase of Corporation common stock and ESH REIT Class B common stock (Paired Shares) (4,307) (43) - (54,303) - (54,346) (31,059) (85,405)
Corporation common distributions - $0.24 per common share
- - (12,196) (33,423) - (45,619) - (45,619)
ESH REIT common distributions - $0.63 per Class B common share
- - - - - - (119,818) (119,818)
ESH REIT preferred distributions - - - - - - (16) (16)
Equity-based compensation 426 4 2,028 - - 2,032 2,308 4,340
Adjustment to reflect changes in book value of noncontrolling interests - - (9,292) - - (9,292) 9,292 -
BALANCE - December 31, 2018 188,219 1,882 749,219 32,432 2,488 786,021 524,618 1,310,639
Net income - - - 69,668 - 69,668 95,470 165,138
Interest rate cash flow hedge loss, net of tax - - - - (2,105) (2,105) (2,123) (4,228)
Repurchase of Corporation common stock and ESH REIT Class B common stock (Paired Shares) (9,020) (90) - (83,124) - (83,214) (47,507) (130,721)
Corporation common distributions - $0.36 per common share
- - - (67,259) - (67,259) - (67,259)
ESH REIT common distributions - $0.55 per Class B common share
- - - - - - (103,186) (103,186)
ESH REIT preferred distributions - - - - - - (16) (16)
Equity-based compensation 284 3 3,301 - - 3,304 2,599 5,903
Adjustment to reflect changes in book value of noncontrolling interests - - (10,123) - - (10,123) 10,123 -
BALANCE - December 31, 2019 179,483 1,795 742,397 (48,283) 383 696,292 479,978 1,176,270
Net income - - - 23,267 - 23,267 72,989 96,256
Interest rate cash flow hedge loss, net of tax - - - - (589) (589) (563) (1,152)
Repurchase of Corporation common stock and ESH REIT Class B common stock (Paired Shares) (2,237) (22) - (19,665) - (19,687) (11,406) (31,093)
Corporation common distributions - $0.10 per common share
- - (17,768) 17 - (17,751) - (17,751)
ESH REIT common distributions - $0.51 per Class B common share
- - - - - - (91,067) (91,067)
ESH REIT preferred distributions - - - - - - (16) (16)
Equity-based compensation 315 3 3,686 - - 3,689 2,307 5,996
Adjustment to reflect changes in book value of noncontrolling interests - - (2,450) - - (2,450) 2,450 -
BALANCE - December 31, 2020 177,561 $ 1,776 $ 725,865 $ (44,664) $ (206) $ 682,771 $ 454,672 $ 1,137,443
See accompanying notes to consolidated financial statements.
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
(In thousands)
Year Ended December 31,
2020 2019 2018
OPERATING ACTIVITIES:
Net income $ 96,256 $ 165,138 $ 211,756
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 206,013 197,400 209,329
Foreign currency transaction (gain) loss (81) (391) 443
Amortization and write-off of deferred financing costs and debt discount 8,237 13,687 8,614
Amortization and write-off of above-market ground leases - - (1,427)
Debt modification and extinguishment costs - 1,084 1,183
Loss on disposal of property and equipment 9,001 6,072 3,413
Gain on sale of hotel properties, net (52,525) - (42,478)
Impairment of long-lived assets 1,095 2,679 43,600
Equity-based compensation 6,510 6,913 8,318
Deferred income tax expense (benefit) 27,580 (8,116) 1,019
Changes in assets and liabilities:
Accounts receivable, net 311 5,749 2,244
Other assets (74,039) 739 (10,214)
Accounts payable and accrued liabilities (9,607) 8,996 14,050
Net cash provided by operating activities 218,751 399,950 449,850
INVESTING ACTIVITIES:
Purchases of property and equipment (117,988) (182,364) (158,709)
Acquisition of hotel properties - (10,136) (12,729)
Development in process payments (72,434) (59,670) (34,790)
Payments for intangible assets (2,309) (9,124) (3,046)
Proceeds from sale of hotel properties 63,556 - 309,062
Proceeds from insurance and related recoveries 1,406 1,485 6,488
Net cash (used in) provided by investing activities (127,769) (259,809) 106,276
FINANCING ACTIVITIES:
Principal payments on term loan facility (6,309) (507,261) (147,215)
Proceeds from issuance of senior notes - 750,000 -
Proceeds from revolving credit facilities 399,765 - -
Payments on revolving credit facility (350,000) - -
Payments of deferred financing costs (128) (20,689) -
Principal payments on finance leases (137) (117) -
Debt modification and extinguishment costs - (1,084) (1,183)
Tax withholdings related to restricted stock unit settlements (860) (1,598) (3,989)
Repurchase of Corporation common stock and ESH REIT Class B common stock (Paired Shares) (31,093) (130,721) (85,405)
Repurchase of Corporation mandatorily redeemable preferred stock (7,130) - (3)
Corporation common distributions (17,972) (67,182) (45,791)
ESH REIT common distributions (28,800) (103,211) (120,005)
ESH REIT preferred distributions (16) (16) (16)
Net cash used in financing activities (42,680) (81,879) (403,607)
CHANGES IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH DUE TO CHANGES IN FOREIGN CURRENCY EXCHANGE RATES (51) 72 (157)
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 48,251 58,334 152,362
CASH, CASH EQUIVALENTS AND RESTRICTED CASH-Beginning of period 361,670 303,336 150,974
CASH, CASH EQUIVALENTS AND RESTRICTED CASH-End of period $ 409,921 $ 361,670 $ 303,336
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
(In thousands)
Year Ended December 31,
2020 2019 2018
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest, excluding modification, prepayment and other penalties, net of capitalized interest of $2,859, $2,247 and $473
$ 124,196 $ 108,515 $ 118,509
Cash payments for income taxes, net of refunds of $547, $8 and $351
$ 23,509 $ 39,622 $ 38,577
Operating cash payments for finance leases $ 249 $ 242 $ -
Operating cash payments for operating leases $ 2,896 $ 2,779 $ -
NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital expenditures included in accounts payable and accrued liabilities $ 13,735 $ 23,446 $ 27,850
Additions to finance lease right-of-use assets and liabilities $ 427 $ 109 $ -
Corporation common distributions included in accounts payable and accrued liabilities $ 212 $ 434 $ 357
ESH REIT common distributions included in accounts payable and accrued liabilities $ 63,034 $ 767 $ 792
See accompanying notes to consolidated financial statements.
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2020 AND 2019 AND FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
1. BUSINESS, ORGANIZATION AND BASIS OF CONSOLIDATION
Extended Stay America, Inc. (the “Corporation”) was incorporated in the state of Delaware on July 8, 2013. ESH Hospitality, Inc. (“ESH REIT”) was formed as a limited liability company in the state of Delaware on September 16, 2010 and was converted to a corporation on November 5, 2013. The Corporation owns, and is expected to continue to own, all of the issued and outstanding Class A common stock of ESH REIT, which, as of December 31, 2020 and 2019, represents 59% and 58% of the outstanding common stock of ESH REIT, respectively. Due to its controlling interest in ESH REIT, the Corporation consolidates the financial position, results of operations, comprehensive income and cash flows of ESH REIT. The term, “the Company,” as used herein refers to the Corporation and its consolidated subsidiaries, including ESH REIT.
A “Paired Share” consists of 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. Each outstanding share of Corporation common stock is attached to and trades with one share of ESH REIT Class B common stock.
The Company is an integrated owner/operator of Extended Stay America-branded hotels and is also engaged in franchising, and in certain cases managing, extended stay hotels for third parties in the U.S. As of December 31, 2020 and 2019, the Company owned and operated 563 and 557 hotel properties, respectively, in 40 U.S. states, consisting of approximately 62,700 and 61,900 rooms, respectively, and franchised or managed 83 and 73 hotel properties for third parties, consisting of approximately 8,500 and 7,500 rooms, respectively. As of December 31, 2020, all 646 system-wide hotels are operated under the Extended Stay America brand.
Owned hotel properties are owned by subsidiaries of ESH REIT and are operated by subsidiaries of the Corporation (the “Operating Lessees”) pursuant to leases between ESH REIT and the Operating Lessees. The hotels are managed by ESA Management LLC (“ESA Management”), a subsidiary of the Corporation. The Extended Stay America brand is owned by ESH Hospitality Strategies LLC (“ESH Strategies”), also a subsidiary of the Corporation. ESH Strategies licenses the brand and intellectual property to the Operating Lessees and third parties.
Basis of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) and include the financial position, results of operations, comprehensive income, changes in equity and cash flows of the Corporation and its consolidated subsidiaries, including ESH REIT. Third-party equity interests in consolidated subsidiaries are presented as noncontrolling interests. Despite the fact that each share of Corporation common stock is paired on a one-for-one basis with each share of ESH REIT Class B common stock, the Corporation does not own ESH REIT Class B common stock; therefore, ESH REIT Class B common stock represents a third-party equity interest. As such, the rights associated with ESH REIT Class B common stock, along with other third-party equity interests in ESH REIT, are presented as noncontrolling interests in the accompanying 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. With respect to the income taxes disclosure (see Note 11), certain prior period amounts have been reclassified for comparability to current period presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates-The preparation of the accompanying consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and amounts of revenues and expenses during the reporting period. Management used significant estimates to determine the estimated useful lives of tangible assets, as well as in the assessment of tangible and intangible assets for impairment and estimated liabilities for insurance reserves and income taxes. Actual results could differ from those estimates.
Cash and Cash Equivalents-The Company considers all cash on hand, demand deposits with financial institutions, credit card receivables, and short-term, highly liquid investments with original maturities of three months or less to be cash equivalents. The Company has deposits in excess of $250,000 with financial institutions that are not insured by the Federal Deposit Insurance Corporation. The Company does not believe cash and cash equivalents expose it to significant credit risk.
Restricted Cash-Restricted cash consists of deposits held for insurance collateral.
Accounts Receivable and Allowance for Credit Losses-Accounts receivable consists of receivables due from current hotel guests, corporate customers and third-party intermediaries with respect to owned hotels, as well as royalty and other receivables due from franchisees. An allowance for credit losses is made when collection is considered doubtful. Balances are considered past due when payment is not received by the contractual due date. When management determines that accounts receivable are uncollectible, they are written off against the allowance for credit losses. The Company considers historical collection activity and business forecasts in estimating allowance for credit losses. During the year ended December 31, 2020, we revised our estimated rate of credit loss due to the macro-economic impact of the COVID-19 pandemic on actual and forecasted results.
The table below summarizes the changes in the allowance for credit losses for the years ended December 31, 2020, 2019 and 2018 (in thousands):
December 31, 2020 December 31, 2019 December 31, 2018
Allowance for credit losses - beginning of year $ 2,749 $ 2,075 $ 2,206
Bad debt expense 13,109 7,078 5,551
Write-offs (7,895) (6,404) (5,682)
Allowance for credit losses - end of year $ 7,963 $ 2,749 $ 2,075
Property Acquisitions-Identifiable net assets and liabilities acquired in an asset acquisition are recorded at cost, allocated based on their relative fair values on the date of acquisition. Identifiable net assets and liabilities acquired in a business combination are recorded based on their fair value on the date of acquisition. The fair value of acquired land, site improvements, building and improvements and furniture, fixtures and equipment are determined on an “if-vacant” basis considering a variety of factors, including the physical condition and quality of the hotels, estimated rates and valuation assumptions consistent with current market conditions, independent appraisals and other relevant market data obtained in connection with the acquisition of the hotels. Results of operations of acquired hotel properties are included in the accompanying consolidated statements of operations since their dates of acquisition.
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 the following estimated useful lives:
Hotel buildings 7-49 years
Hotel building improvements 4-39 years
Hotel site improvements 3-20 years
Hotel furniture, fixtures and equipment 1-10 years
Corporate furniture, fixtures equipment 3-15 years
Management assesses long-lived assets for potential impairment quarterly, as well as when events or changes in circumstances indicate the carrying amount of an asset or group of assets may not be recoverable. The identification of events or changes in circumstances that indicate the carrying value of assets may not be recoverable requires significant judgment. The Company reviews for impairment indicators at the lowest level of identifiable cash flows based on quantitative, qualitative and certain industry-related factors. Quantitative factors include, but are not limited to, hotel property EBITDA, EBITDA margins and EBITDA multiples, and serve to screen assets with historical, current or projected operating cash flow losses or deterioration. Qualitative factors include a change in physical condition, economic environment, regulatory environment or primary use, including the evaluation of the asset for disposition.
Recoverability of property and equipment is measured by a comparison of the carrying amount of a hotel property or group of hotel properties to the estimated future undiscounted cash flows expected to be generated by the hotel property or group of hotel properties. Impairment is recognized when estimated future undiscounted cash flows, including expected proceeds from disposition, are less than the carrying value of the hotel property or group of hotel properties. To the extent that a hotel property or group of hotel properties is impaired, the excess carrying amount over estimated fair value is recognized as an impairment charge. Fair value is determined based upon the discounted cash flows of the hotel property or group of hotel properties, bids, quoted market prices or independent appraisals, as considered necessary.
The estimation and evaluation of future cash flows, in particular the holding period for real estate assets and asset composition and/or concentration within real estate portfolios, relies on significant judgments and assumptions regarding holding period, current and future operating performance and current and future market conditions. It is possible that such judgments and/or estimates will change; in particular, the effects of the COVID-19 pandemic could cause economic and market conditions to deteriorate, and if this occurs, or if the Company's expected holding period for real estate assets changes, the Company may recognize impairment charges or losses on sale in future periods reflecting either changes in estimate, circumstance or the estimated market value of assets. During the year ended December 31, 2020, the Company recognized impairment charges of $1.1 million (see Note 5).
Intangible Assets-Intangible assets include trademarks, corporate customer relationships and licenses related to certain internal-use software. Corporate customer relationships and software licenses are amortized using the straight-line method over their estimated useful lives; the estimated useful life of customer relationships is 20 years, and the estimated useful life of software licenses is the remaining non-cancellable term of each respective contract. Trademarks and licenses related to software in process are not amortized.
Definite-lived intangible assets are reviewed for impairment quarterly and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Indefinite-lived intangible assets are reviewed for impairment quarterly, and the Company tests for impairment more frequently if events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. At such time their classification as indefinite-lived intangible assets is reassessed. The Company first assesses qualitative factors to determine if it is more likely than not that the fair value of its indefinite-lived intangible assets is less than its carrying amount.
The Company believes that the carrying amount of its intangible assets are recoverable and there are no changes in circumstances that would more likely than not reduce the fair value of its reporting units below their carrying amount. Therefore, no impairment charges related to intangible assets were recognized during the years ended December 31, 2020, 2019 or 2018. However, if the effects of the COVID-19 pandemic cause economic and market conditions to deteriorate, these events could result in impairment charges in the future. Actual results are subject to a high degree of uncertainty due to the volatility of macroeconomic trends.
Goodwill-Goodwill represents the purchase price in excess of the fair value of net assets acquired in conjunction with the acquisition of the Company's predecessor in 2010. Goodwill is reviewed for impairment quarterly and more frequently if events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company has two reportable operating segments, owned hotels and franchise and management. There is no goodwill associated with the franchise and management segment. Management analyzes goodwill associated with owned hotels when analyzing for potential impairment. The Company first assesses qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
The Company believes that the carrying amount of its goodwill is recoverable and there are no changes in circumstances that would more likely than not reduce the fair value of its reporting units below their carrying amount. Therefore, no impairment charges related to goodwill were recognized during the years ended December 31, 2020, 2019 or 2018. However, if the effects of the COVID-19 pandemic cause economic and market conditions to deteriorate, these events could result in impairment charges in the future. Actual results are subject to a high degree of uncertainty due to the volatility of macroeconomic trends.
Assets Held For Sale-The Company classifies assets as held for sale when management commits to a formal plan to sell the assets, actively seeks a buyer for the assets and the consummation of a sale is considered probable and is expected within one year. The Company takes into consideration when determining whether the consummation of a sale is probable the following criteria: (i) whether a purchase and sale agreement has been executed, (ii) whether the buyer has a significant non-refundable deposit at risk and (iii) whether significant financing contingencies exist. Upon designating an asset as held for sale, the Company stops recognizing depreciation expense and records the asset at the lower of its carrying value, including allocable goodwill, or its estimated fair value less estimated costs to sell. Any such adjustment to the carrying value is recognized as an impairment charge.
Discontinued Operations-The Company classifies hotel properties sold or held for sale as discontinued operations when the disposal represents a strategic shift that has (or will have) a major effect on its operations and financial results. No hotel properties were classified as discontinued operations during the years ended December 31, 2020, 2019 or 2018.
Deferred Financing Costs-Costs incurred in obtaining financing are amortized over the terms of the related loans on a straight-line basis, which approximates the effective interest method. Deferred financing costs are presented in the accompanying consolidated balance sheets as a direct deduction of the carrying amount of the related debt liability, except those
incurred under a revolving-debt arrangement, which are presented as a component of other assets. Upon repayment, or in conjunction with a material change in the terms of the underlying debt agreement, remaining unamortized costs are written off as a component of net interest expense. Amortization of deferred financing costs is included as a component of net interest expense (see Note 7).
Revenue from Owned and Operated Hotels-Revenue generated from owned and operated hotels consists of room and other hotel revenues recognized when services are provided. When a reservation is made, the Company deems that the parties have approved a contract in accordance with customary business practices and are committed to perform their respective obligations. At such time, each party’s rights regarding the services to be transferred are identified, payment terms are specified, the contract has commercial substance and, in most instances, it is probable the Company will collect substantially all consideration to which it will be entitled in exchange for services.
Each room night consumed by a guest with a cancellable reservation represents a contract whereby the Company has a performance obligation to provide the room night at an agreed upon price. For cancellable reservations, the Company recognizes revenue as each performance obligation (i.e., each room night) is met. Such contract is renewed if the guest continues their stay. If at any time during a guest’s stay the Company believes it is not probable it will collect substantially all consideration to which it will be entitled, revenue is recognized on a cash basis until such time as collection is considered probable.
For room nights consumed by a guest with a non-cancellable reservation, the entire reservation period represents the contract term whereby the Company has a performance obligation to provide the room night or nights at an agreed upon price. For non-cancellable reservations, the Company recognizes revenue over the term of the performance period (i.e., the reservation period) as room nights are consumed. For these reservations, the room rate is typically fixed over the reservation period. The Company uses an output method based on performance completed to date (i.e., room nights consumed) to determine the amount of revenue it recognizes on a daily basis if the length of a non-cancellable reservation exceeds one night since consumption of room nights indicates when services are transferred to the guest. In certain instances, variable consideration may exist with respect to the transaction price, such as discounts, coupons and price concessions made upon guest checkout.
In evaluating its performance obligation, the Company bundles the obligation to provide the guest the room itself with other obligations (such as free WiFi, access to on-site laundry facilities and parking), as the other obligations are not distinct and separable because the guest cannot benefit from the additional amenities without the consumed room night. The Company’s obligation to provide the additional items or services is not separately identifiable from the fundamental contractual obligation (i.e., providing the room and its contents). The Company has no performance obligations once a guest’s stay is complete.
Certain revenues are generated through third-party intermediaries or distribution channels (i.e., online travel agents). Regardless of the basis on which the Company is compensated (i.e., gross or net), the Company is responsible for fulfilling the promise to provide the hotel room and related services to the guest and retains inventory risk. Since the Company controls the inventory and services provided and because third party intermediaries are typically not contractually required to guarantee room night consumption, the Company is the principal in these transactions. As such, the Company is required to record revenue at an amount equal to the price charged to the guest (i.e., on a gross basis). Third-party intermediaries that pay the Company directly (i.e., on a net basis) typically charge the guest additional fees, blend the room offering with other offerings at amounts which are not allocable and may adjust the price without the Company’s approval. As such, the Company is unable to calculate the room rate charged to the guest. Since any estimate the Company would make has significant uncertainty that ultimately would not be resolved, despite its role as principal, in these instances the Company records revenue equal to the amount paid by the third-party intermediaries (i.e., the net amount).
Revenue from Franchise and Management Fees-Revenue generated from franchise and management fees consists of the following:
•Franchise fees, which consist of an initial fee and an ongoing royalty fee based on a percentage of a hotel’s monthly revenue in exchange for the access to and use of the Company’s brand name and other intellectual property. Initial fees are deferred and recognized over the expected contract or customer life. Royalty fees are recognized over time as franchisees derive value from the license to use the intellectual property.
•Management fees, which consist of an ongoing base fee calculated as a percentage of a hotel’s monthly revenue in exchange for on-site hotel management services. Management fees are recognized over time as third-party hotel owners derive value from on-site personnel and related services.
•Other revenues from franchised and managed properties, which include the reimbursement of costs incurred on behalf of third-party hotel owners on a direct and an indirect basis, as follows:
◦Direct costs incurred with respect to franchise and management agreements include on-site hotel personnel and incremental reservation and distribution costs for which the Company is reimbursed on a dollar-for-dollar basis. Since the Company employs the hotel personnel and has discretion over reservation and distribution costs, it is the principal with respect to these services and revenue is recognized on a gross basis.
◦Indirect costs incurred with respect to franchise agreements include costs associated with certain shared system-wide platforms (i.e., system services), such as marketing, technology infrastructure, central reservations, national sales and revenue management systems. The Company is reimbursed for indirect costs through a system service fee, or program fee, based on a percentage of a hotel’s monthly revenue. System service fees are recognized over time as franchisees derive value from the license to use these processes and systems. The Company has discretion over how it spends system service fees and is the principal with respect to these services. Revenue is recognized on a gross basis; expense is recognized as incurred. Over time, the Company manages system services to break-even, but the timing of system service fee revenues will typically not align with expenses incurred to operate the programs.
The promise to provide access to the Company’s intellectual property is combined with the promise to provide system services to form a single performance obligation since the promises generally accompany one another. Hotel management services form a single performance obligation. As noted above, each identified performance obligation is considered to be a series of services transferred over time. Revenue is recognized on an output method based on performance completed to date. The Company recognizes revenue in the amount to which it has a right to bill third parties under their respective franchise or management agreements, as it has a right to consideration in an amount that corresponds directly with the third parties’ hotel revenues. Franchise, management and system service fees are characterized as variable consideration and vary from period to period. In the event that fees include variables that extend beyond the current period, the Company uses the most likely amount method to determine the amount of revenue to record based on a reasonable revenue forecast for the applicable hotel. In most instances, the Company does not have constraining estimates, as third-party hotel revenues are typically available and obtained monthly.
Advertising Costs-Advertising costs are expensed as incurred. For the years ended December 31, 2020, 2019 and 2018, total advertising costs were $26.0 million, $29.4 million and $25.9 million, respectively, and are classified as hotel operating expenses in the accompanying consolidated statements of operations.
Fair Value of Financial Instruments-U.S. GAAP establishes a three-level valuation hierarchy based upon observable and unobservable inputs for fair value measurement of financial instruments:
Level 1-Observable inputs, such as quoted prices in active markets at the measurement date for identical assets or liabilities
Level 2-Significant inputs that are observable, directly or indirectly, such as other quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability
Level 3-Significant unobservable inputs for which there is little to no market data and for which the Company makes its own assumptions about how market participants would price the asset or liability
Fair value is defined as the price that would be received when selling an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., exit price). In instances where inputs used to measure fair value fall into different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety has been determined is based on the lowest-level input significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The Company’s financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, deposits, accounts payable and accrued liabilities, term loans, senior notes and revolving credit facilities. The carrying values of cash and cash equivalents, restricted cash, accounts receivable, deposits, accounts payable and accrued liabilities and revolving credit facilities are representative of their fair values due to the short-term nature or frequent settlement of these instruments. The fair values of term loans and senior notes are determined by comparing current borrowing rates and risk spreads offered in the market to the stated interest rates and spreads on the Company’s instruments or from quoted market prices, when available (see Note 7).
Derivative Instruments-The Company from time to time uses derivative instruments to manage its exposure to interest rate and commodity price risks. The Company’s primary objective in holding derivatives is to reduce the volatility of cash flows and earnings associated with changes in interest rates and commodity prices. The Company’s derivatives expose it to credit risk to the extent that counterparties may be unable to meet the terms of the agreement. The Company seeks to mitigate such risks by limiting its counterparties to major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored. Management does not expect material losses as a result of defaults by counterparties. Derivative instruments, including derivative instruments embedded in other contracts, are recorded in the accompanying consolidated balance sheets as either assets or liabilities measured at fair value, unless the transactions qualify and are designated as normal purchases and sales. Changes in fair value are recognized currently in earnings unless specific hedge accounting criteria are met (see Note 8). The Company does not enter into derivative instruments for trading or speculative purposes.
Insurance Reserves-The Company utilizes various insurance programs for workers’ compensation, general liability and health insurance claims. Retained losses require estimates in determining the liability for claims arising under these programs. Workers’ compensation, general liability and health insurance liabilities are estimated using actuarial evaluations based on historical and projected claims and medical and other cost trends. Corresponding receivables are recorded for losses that will be reimbursed by insurance. As of December 31, 2020 and 2019, $42.9 million and $40.6 million, respectively, of liabilities for such insurance programs are included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets. As of December 31, 2020 and 2019, $15.8 million and $14.8 million, respectively, of insurance-related reimbursements receivable are included in other assets on the consolidated balance sheets.
Investments-The Company consolidates a subsidiary when it has the ability to direct the activities that most significantly impact the economic performance of the subsidiary. Judgment is required with respect to the consolidation of investments, including partnership and joint venture entities, in terms of the evaluation of control, including assessment of the importance of rights and privileges of the partners based on voting rights, as well as financial interests that are not controllable through voting interests. Third party equity interests in consolidated subsidiaries are presented as noncontrolling interests.
If a subsidiary, affiliate or other entity is a variable interest entity (“VIE”), it is subject to the consolidation framework specifically for VIEs. The Company considers an entity a VIE if equity investors own an interest therein that does not have the characteristics of a controlling financial interest or if such investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. In accordance with Financial Accounting Standards Board (“FASB”) ASC 810, Consolidations, the Company reviews subsidiaries and affiliates, as well as other entities, to determine if (i) they should be considered VIEs, and (ii) whether their consolidation determinations should change based on changes in their characteristics.
Income Taxes-The Corporation’s taxable income includes the taxable income or loss of its wholly-owned subsidiaries and distribution income related to its ownership of approximately 59% of ESH REIT. As a result, approximately 59% of ESH REIT’s distributions are subject to corporate income tax.
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. ESH REIT’s deferred tax rates are adjusted to reflect expected future distributions and the deduction allowed upon distribution. The Corporation’s deferred tax assets and liabilities include the estimated impact of the future reversal of ESH REIT’s deferred tax assets and liabilities which affect future dividend income to be recognized by the Corporation upon distribution.
The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position, and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
ESH REIT has elected to be taxed as and expects to continue to qualify as a real estate investment trust (“REIT”) under provisions of the Internal Revenue Code (the “Code”). A REIT is a legal entity that holds real estate assets and is generally not subject to federal and state income taxes. In order to maintain qualification as a REIT, ESH REIT is required to distribute at least 90% of its taxable income, excluding capital gains, to its shareholders each year. In addition, ESH REIT must meet a number of complex organizational and operational requirements. If ESH REIT were to fail to qualify as a REIT in any taxable year, it would be subject to federal income taxes at regular corporate rates and generally would be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which it lost its REIT qualification. 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.
During the years ended December 31, 2020, 2019 and 2018, ESH REIT distributed approximately 100% of its taxable income and, as a result, incurred minimal current federal income tax. In the future, ESH REIT intends to distribute its taxable income to the extent necessary to optimize its tax efficiency including, but not limited to, maintaining its REIT status, while retaining sufficient capital for its ongoing needs. ESH REIT will incur federal and state income tax at statutory rates if its taxable income is not distributed. Accordingly, ESH REIT expects to distribute approximately 100% of its taxable income for the foreseeable future.
Comprehensive Income-Comprehensive income includes net income and other comprehensive income (loss), which consists of foreign currency translation adjustments and interest rate cash flow hedge adjustments. Comprehensive income is presented in the accompanying consolidated statements of comprehensive income. Foreign currency translation adjustments and interest rate cash flow hedge adjustments are presented as separate components of consolidated equity.
Equity-Based Compensation-The Corporation and ESH REIT each maintain a Long-Term Incentive Plan (“LTIP”), approved by their shareholders. Under the LTIPs, the Corporation and ESH REIT may issue to eligible employees or directors equity-based awards in respect of Paired Shares with service, performance or market vesting conditions. The Company recognizes costs related to equity-based awards over their vesting periods. The issuing entity classifies equity-based awards granted in exchange for employee or director services as either equity awards or as liability awards. The classification of an award either as an equity award or a liability award is generally based upon cash settlement options. Equity awards are measured based on their fair value on the date of grant. Liability awards are re-measured to fair value each reporting period. The value of all awards is recognized over the requisite service period, which is the period during which an employee or director is required to provide services in exchange for the award (usually the vesting period). No compensation expense is recognized for awards for which employees or directors do not render the requisite services. All outstanding awards granted are classified as equity awards, except those equity-based awards issued by ESH REIT to its directors, which are classified as liability awards.
Segments-The Company has two reportable operating segments based on the manner in which it evaluates its business: (i) owned hotels and (ii) franchise and management. The Company assesses the performance of these segments on an individual basis (see Note 9).
Recently Issued Accounting Standards
Reference Rate Reform-In March 2020, the FASB issued an accounting standards update that provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships that reference LIBOR, subject to meeting certain criteria. The Company adopted this update on March 12, 2020, and the update is effective through December 31, 2022, during which time the Company may elect to apply the optional expedients and exceptions offered under the standard. As of December 31, 2020, the Company's variable rate debt and interest rate swap are tied to rates that reference LIBOR (see Notes 7 and 8) and the Company had not applied any of these optional expedients or exceptions. The adoption of this update did not, and is not expected to, have a material effect on the Company's consolidated financial statements.
Income Taxes-In December 2019, the FASB issued an accounting standards update which simplifies the accounting for income taxes. The update amends several topics including interim period accounting for enacted changes in tax law and year-to-date loss limitation in interim-period tax accounting. The Company adopted this update on January 1, 2021. The adoption of this update is not expected to have a material effect on the Company's consolidated financial statements.
Fair Value Measurement-In August 2018, the FASB issued an accounting standards update which modifies the disclosure requirements for fair value measurements in Topic 820, Fair Value Measurement. The Company adopted this update on January 1, 2020. The adoption of this update did not have a material effect on the Company's consolidated financial statements.
Intangibles-Goodwill and Other-Internal-Use Software-In August 2018, the FASB issued an accounting standards update which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. The Company adopted this update on January 1, 2020, using a prospective transition method. The adoption of this update did not have a material effect on the Company's consolidated financial statements.
Goodwill-In January 2017, the FASB issued an accounting standards update in which the guidance on testing for goodwill was updated to eliminate Step 2 in the determination on whether goodwill should be considered impaired. Annual and/or interim assessments are still required. The Company adopted this update on January 1, 2020, using a prospective transition method. The adoption of this update did not have a material effect on the Company's consolidated financial statements.
Financial Instruments-Credit Losses-In June 2016, the FASB issued an accounting standards update which requires the measurement of an impairment allowance for certain financial assets based on a company’s current estimate of all contractual cash flows it does not expect to collect. The new standard primarily impacts the manner in which the Company estimates its allowance for uncollectible trade receivables. The standard requires the Company to measure its allowance for credit losses based on current conditions, historical experience and reasonable and supportable forecasts for each pool of receivables with similar risk characteristics. The Company adopted this update on January 1, 2020, using a modified retrospective method. The adoption of this update did not have a material effect on the Company's consolidated financial statements and had no effect on or impact to retained earnings.
3. NET INCOME PER SHARE
Basic net income per share is computed by dividing net income available to common shareholders by the weighted-average number of shares of the Corporation’s unrestricted common stock outstanding. Diluted net income per share is computed by dividing net income available to common shareholders, as adjusted for potentially dilutive securities, by the weighted-average number of shares of unrestricted common stock outstanding plus potentially dilutive securities. Dilutive securities include certain equity-based awards (see Note 14) and are included in the calculation provided that the inclusion of such securities is not anti-dilutive.
The calculations of basic and diluted net income per share, including a reconciliation of the numerators and denominators, are as follows (in thousands, except per share data):
Year Ended December 31,
2020 2019 2018
Numerator:
Net income available to Extended Stay America, Inc.
common shareholders - basic $ 23,267 $ 69,668 $ 112,864
Income attributable to noncontrolling interests assuming
conversion (95) (82) (128)
Net income available to Extended Stay America, Inc.
common shareholders - diluted $ 23,172 $ 69,586 $ 112,736
Denominator:
Weighted-average number of Extended Stay America, Inc.
common shares outstanding - basic 177,708 186,546 189,389
Dilutive securities 395 276 432
Weighted-average number of Extended Stay America, Inc.
common shares outstanding - diluted 178,103 186,822 189,821
Net income per Extended Stay America, Inc.
common share - basic $ 0.13 $ 0.37 $ 0.60
Net income per Extended Stay America, Inc.
common share - diluted $ 0.13 $ 0.37 $ 0.59
4. HOTEL ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
2019 Acquisition-On November 12, 2019, the Company acquired a 121-room operating hotel from Crestwood Suites of Lakeland, LLC for $10.0 million. Other than ordinary components of prorated net working capital, no liabilities were assumed in the purchase. The majority of the purchase price was allocated to building and improvements, with estimated useful lives ranging from five to 44 years.
2018 Acquisition-On May 30, 2018, the Company acquired a 115-room operating hotel from Legacy Rock Hill, LLC for $13.0 million. Other than ordinary components of prorated net working capital, no liabilities were assumed in the purchase. The majority of the purchase price was allocated to building and improvements, with estimated useful lives ranging from four to 49 years. Prior to its acquisition by the Company, the hotel opened in late 2017.
No hotels were acquired during the year ended December 31, 2020. During the years ended December 31, 2020, 2019 and 2018, acquired hotel properties contributed total room and other hotel revenues, total operating expenses and income before income tax expense as follows (in thousands):
Year Ended December 31,
2020 2019 2018
Total room and other hotel revenues $ 4,213 $ 2,003 $ 1,106
Total operating expenses 3,424 1,868 966
Income before income tax expense 789 135 140
DISPOSITIONS
The table below summarizes hotel dispositions for the prior three years (in thousands, except number of hotels and number of rooms). No dispositions were reported as discontinued operations.
Year Location Month Sold Number of
Hotels Number of Rooms Net Proceeds Gain (Loss) on Sale Franchised/Managed (1)
2020 California November 1 146 $ 63,556 $ 52,525 No
2018 Various November 14 1,386 $ 34,855 $ 1,331 (2)
Yes
2018 Various September 16 1,677 $ 60,710 $ 6,293 (2)
Yes
2018 Various September 16 1,772 $ 58,144 $ (3,014) (2)
Yes
2018 Various February 25 2,420 $ 111,156 $ 6,810 (2)
Yes
2018 Texas March 1 101 $ 44,090 $ 31,058 No (3)
____________________
(1)As of December 31, 2020.
(2)Net of impairment charges of $16.8 million, $24.3 million, $6.3 million and $2.1 million, respectively, recognized prior to sale.
(3)Management agreement terminated in 2019.
During the years ended December 31, 2020, 2019 and 2018, disposed hotel properties contributed total room and other hotel revenues, total operating expenses and income (loss) before income tax expense as follows (in thousands):
Year Ended December 31,
2020 2019 2018
Total room and other hotel revenues $ 1,832 $ 4,528 $ 58,069
Total operating expenses 1,429 1,746 85,102 (1)
Income (loss) before income tax expense 403 2,782 (27,033) (1)
_____________________
(1)Includes impairment charges of $37.4 million.
5. PROPERTY AND EQUIPMENT
Net investment in property and equipment as of December 31, 2020 and 2019, consists of the following (in thousands):
December 31,
2020 December 31, 2019
Hotel properties:
Land and site improvements (1)
$ 1,246,441 $ 1,228,231
Building and improvements 2,881,855 2,792,579
Furniture, fixtures and equipment (2)
783,414 745,145
Total hotel properties 4,911,710 4,765,955
Development in process (3)
46,496 70,864
Corporate furniture, fixtures, equipment, software and other 29,735 30,680
Total cost 4,987,941 4,867,499
Less accumulated depreciation:
Hotel properties (1,518,236) (1,353,772)
Corporate furniture, fixtures, equipment, software and other (23,750) (20,178)
Total accumulated depreciation (1,541,986) (1,373,950)
Property and equipment-net $ 3,445,955 $ 3,493,549
_________________________________
(1)Includes finance lease asset of $4.0 million and $3.2 million as of December 31, 2020 and 2019, respectively.
(2)Includes finance lease asset of $0.4 million and $0 as of December 31, 2020 and 2019, respectively.
(3)Includes finance lease asset of $0 and $0.8 million as of December 31, 2020 and 2019, respectively.
As of December 31, 2020 and 2019, development in process consisted of 8 and 15 land parcels, respectively, that were in various phases of construction and/or development. As of December 31, 2020, the Company expects to delay commencement of construction at four of these locations as a result of current market uncertainty.
During the years ended December 31, 2020, 2019 and 2018, the following owned, newly constructed hotels were opened under the Extended Stay America brand:
Opening Date Location Number of Hotels Number of Rooms
December 2020 Florida 1 124
November 2020 Florida 1 144
August 2020 Florida 1 124
June 2020 Various 2 248
April 2020 South Carolina 1 120
March 2020 Florida 1 120
December 2019 Various 2 260
September 2018 South Carolina 1 107
During the years ended December 31, 2020, 2019 and 2018, newly-built hotels contributed total room and other hotel revenues, total operating expenses and income (loss) before income tax expense as follows (in thousands):
Year Ended December 31,
2020 2019 2018
Total room and other hotel revenues $ 11,228 $ 2,199 $ 152
Total operating expenses 10,901 1,856 201
Income (loss) before income tax expense 327 343 (49)
During the year ended December 31, 2020, the Company recognized impairment charges totaling $1.1 million related to one hotel in Illinois and an undeveloped land parcel. During the year ended December 31, 2019, the Company recognized an impairment charge of $2.7 million related to one hotel in New York. The hotel-related impairment charges during the years
ended December 31, 2020 and 2019 were incurred as a result of a decline in the hotels' estimated future operating cash flows. During the year ended December 31, 2018, the Company recognized impairment charges totaling $43.6 million for 21 hotels generally located in the Midwestern U.S., the majority of which were incurred with evaluating the potential sale of certain non-core assets.
The Company used Level 3 unobservable inputs and in certain instances Level 2 observable inputs to determine the impairment on its property and equipment. Quantitative information with respect to observable inputs consists of non-binding bids or, in certain instances, binding agreements to sell a hotel or portfolio of hotels to one or more third parties. 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, estimated discount rates that range from 6% to 10% and terminal capitalization rates that range from 7% to 11%. These assumptions are based on the Company’s historical data and experience, the Company’s budgets, industry projections and overall micro and macro-economic projections.
6. INTANGIBLE ASSETS AND GOODWILL
The Company’s intangible assets and goodwill as of December 31, 2020 and 2019, consist of the following (in thousands):
December 31, 2020
Gross
Carrying
Amount
Accumulated
Amortization
Net Book
Value
Definite-lived intangible assets-customer relationships $ 26,800 $ (13,710) $ 13,090
Definite-lived intangible assets-software licenses 10,546 (2,005) 8,541
Definite-lived intangible assets-software license in process 2,299 - 2,299
Indefinite-lived intangible assets-trademarks 10,163 - 10,163
Total intangible assets 49,808 (15,715) 34,093
Goodwill 45,055 - 45,055
Total intangible assets and goodwill $ 94,863 $ (15,715) $ 79,148
December 31, 2019
Gross
Carrying
Amount
Accumulated
Amortization
Net Book
Value
Definite-lived intangible assets-customer relationships $ 26,800 $ (12,370) $ 14,430
Definite-lived intangible assets-software licenses 10,353 (763) 9,590
Indefinite-lived intangible assets-trademarks 10,163 - 10,163
Total intangible assets 47,316 (13,133) 34,183
Goodwill 45,192 - 45,192
Total intangible assets and goodwill $ 92,508 $ (13,133) $ 79,375
The remaining weighted-average amortization period for amortizing intangible assets is approximately nine years as of December 31, 2020. Estimated future amortization expense for amortizing intangible assets is as follows (in thousands):
Years Ending December 31,
2021 $ 2,590
2022 2,590
2023 2,590
2024 2,590
2025 2,590
Thereafter 8,681
Total $ 21,631
7. DEBT
During the years ended December 31, 2020 and 2019, the following debt transactions occurred (in thousands):
December 31, 2020 December 31, 2019
Debt, net of deferred financing costs and debt discounts - beginning of year (1)
$ 2,632,636 $ 2,395,507
Additions:
Proceeds from senior notes - 750,000
Proceeds from revolving credit facilities 399,765 -
Amortization and write-off of deferred financing costs and debt discount (2)
7,530 12,967
Deductions:
Payments on term loan facilities (6,309) (507,261)
Payments on revolving credit facilities (350,000) -
Payments of deferred financing costs (2)
- (18,577)
Debt, net of deferred financing costs and debt discounts - end of year (1)
$ 2,683,622 $ 2,632,636
______________________
(1)Excludes mandatorily redeemable preferred stock and finance lease obligations.
(2)Excludes amortization and payments of deferred financing costs related to revolving credit facilities.
Summary-The Company's outstanding debt, net of unamortized debt discount and unamortized deferred financing costs, as of December 31, 2020 and 2019, consists of the following (dollars in thousands):
Carrying Amount Unamortized Deferred
Financing Costs
Loan Stated
Amount December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019 Stated Interest
Rate
Maturity
Date
Term loan facility
ESH REIT Term Facility $ 630,909 $ 621,351 (1)
$ 627,368 (1)
$ 7,684 $ 9,030 LIBOR(2) + 2.00%
9/18/2026 (3)
Senior notes
2025 Notes 1,300,000 1,294,301 (4)
1,292,986 (4)
12,232 15,055 5.25% 5/1/2025
2027 Notes 750,000 750,000 750,000 11,879 13,633 4.63% 10/1/2027
Revolving credit facilities
ESH REIT Revolving Credit Facility 350,000 - - 2,061 (5)
2,606 (5)
LIBOR(2) + 2.00%
9/18/2024
Corporation Revolving Credit Facility 50,000 49,765 - 520 (5)
556 (5)
LIBOR(2) + 2.25%
9/18/2024
Total $ 2,715,417 $ 2,670,354 $ 34,376 $ 40,880
______________________
(1)The ESH REIT Term Facility (defined below) is presented net of an unamortized debt discount of $1.7 million and $2.0 million as of December 31, 2020 and 2019, respectively.
(2)As of December 31, 2020 and 2019, one-month LIBOR was 0.14% and 1.76%, respectively. As of December 31, 2020 and 2019, $100.0 million and $200.0 million, respectively, of the ESH REIT Term Facility was subject to an interest rate swap at a fixed rate of 1.175%.
(3)Amortizes in equal quarterly installments of $1.6 million. In addition to scheduled amortization, subject to certain exceptions, annual mandatory prepayments of up to 50% of Excess Cash Flow, as defined, may be required under the ESH REIT Term Facility. Annual mandatory prepayments for a given fiscal year are due during the first quarter of the following fiscal year. No mandatory prepayments are required in the first quarter of 2021 based on ESH REIT's Excess Cash Flow for the year ended December 31, 2020.
(4)The 2025 Notes (defined below) are presented net of an unamortized discount of $5.7 million and $7.0 million as of December 31, 2020 and 2019, respectively.
(5)Unamortized deferred financing costs related to revolving credit facilities are included in other assets in the accompanying consolidated balance sheets.
ESH REIT Credit Facilities
ESH REIT’s credit agreement, as may be amended and supplemented from time to time, provides for senior secured credit facilities (collectively, the “ESH REIT Credit Facilities”) which consist of a $630.9 million senior secured term loan facility (the “ESH REIT Term Facility”) and a $350.0 million senior secured revolving credit facility (the “ESH REIT Revolving Credit Facility”). Subject to the satisfaction of certain criteria, borrowings under the ESH REIT Credit Facilities may be increased by an amount of up to $600.0 million, plus additional amounts, so long as, after giving effect to the incurrence of such incremental facility and the application of proceeds thereof, ESH REIT’s pro-forma senior loan-to-value ratio is less than or equal to 45%.
Obligations under the 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 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.
ESH REIT Term Facility-The ESH REIT Term Facility bears interest at a rate equal to (i) LIBOR plus 1.75% for any period during which ESH REIT maintains a public corporate family rating better than or equal to BB (with a stable or better outlook) from S&P and Ba3 (with a stable or better outlook) from Moody’s (a “Level 1 Period”) or LIBOR plus 2.00% for any period other than a Level 1 Period; or (ii) a base rate, (determined by reference to the highest of (A) the prime lending rate, (B) the overnight federal funds rate plus 0.50% or (C) the one-month adjusted LIBOR rate plus 1.00%), plus 0.75% during a Level 1 Period or 1.00% for any period other than a Level 1 Period. ESH REIT has the option to prepay outstanding loans under the ESH REIT Term Facility without penalty.
ESH REIT Revolving Credit Facility-Borrowings under the ESH REIT Revolving Credit Facility bear interest at a rate equal to (i) LIBOR plus a spread that ranges from 1.50% to 2.00% based on ESH REIT’s Consolidated Total Net Leverage Ratio, as defined, or (ii) a base rate (determined by reference to the highest of (A) the prime lending rate, (B) the overnight federal funds rate plus 0.50%, or (C) the one-month adjusted LIBOR rate plus 1.00%) plus a spread that ranges from 0.50% to 1.00% based on ESH REIT’s Consolidated Total Net Leverage Ratio, as defined. ESH REIT incurs a fee of 0.30% or 0.175% on the unutilized revolver balance based on the amount outstanding under the facility. ESH REIT is also required to pay customary letter of credit fees and agency fees. The ESH REIT Revolving Credit Facility provides for the issuance of up to $50.0 million of letters of credit. As of December 31, 2020, ESH REIT had no letters of credit outstanding and available borrowing capacity of $350.0 million under the facility.
The ESH REIT Revolving Credit Facility is subject to a springing financial covenant whereby the senior loan-to-value ratio may not exceed 45% when the aggregate principal amount of borrowings and letters of credit under the ESH REIT Revolving Credit Facility, excluding up to $30.0 million of letters of credit, is equal to or greater than 35% of the aggregate available principal amount of the ESH REIT Revolving Credit Facility on the applicable fiscal quarter end date.
In March 2020, ESH REIT borrowed the full available capacity of $350.0 million under the ESH REIT Revolving Credit Facility as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of uncertainty in business markets. In August 2020, ESH REIT repaid the full outstanding balance under the ESH REIT Revolving Credit Facility. As of December 31, 2020, the outstanding balance under the facility was $0.
ESH REIT 2025 Notes
In May 2015 and March 2016, ESH REIT issued $500.0 million and $800.0 million, respectively, of its 5.25% senior notes due in May 2025 (the “2025 Notes”) under an indenture with Deutsche Bank Trust Company Americas, as trustee, in private placements pursuant to Rule 144A of the Securities Act of 1933, as amended. ESH REIT may redeem the 2025 Notes at any time, 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. 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 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 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 2027 Notes
In September 2019, ESH REIT issued $750.0 million of its 4.625% senior notes due in 2027 (the “2027 Notes”) under an indenture with Deutsche Bank Trust Company Americas, as trustee, at a price equal to 100% of par value in a private placement pursuant to Rule 144A of the Securities Act of 1933, as amended. ESH REIT may redeem the 2027 Notes at any time on or after October 1, 2022, in whole or in part, at a redemption price equal to 102.313% of the principal amount, declining annually to 100% of the principal amount from October 1, 2024 and thereafter, plus accrued and unpaid interest. Prior to October 1, 2022, ESH REIT may redeem the 2027 Notes, in whole or in part, at a redemption price equal to 100% of the principal amount, plus a “make-whole” premium, as defined, plus accrued and unpaid interest. Prior to October 1, 2022, subject to certain conditions, ESH REIT may redeem up to 35% of the aggregate principal amount of the 2027 Notes at a redemption price equal
to 101% of the aggregate principal amount, plus accrued and unpaid interest, with the net cash proceeds from certain equity offerings, provided 65% of the original amount of the principal remains outstanding after the occurrence of each such redemption. Upon a Change of Control, as defined, holders of the 2027 Notes have the right to require ESH REIT to redeem the 2027 Notes at 101% of the principal amount, plus accrued and unpaid interest.
The 2027 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 ESH REIT Credit Facilities. The 2027 Notes are not guaranteed by the Corporation or any of its subsidiaries that lease ESH REIT’s properties or its subsidiaries that engage in franchising or management activities or own intellectual property. The 2027 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 2027 Notes are effectively junior to any of ESH REIT’s secured indebtedness to the extent of the value of the assets securing such indebtedness.
Corporation Revolving Credit Facility
The Corporation’s revolving credit facility, as may be amended and supplemented from time to time (the “Corporation Revolving Credit Facility”), provides for the issuance of up to $50.0 million of letters of credit as well as borrowing on same day notice, referred to as swingline loans, in an amount of up to $20.0 million. Borrowings under the Corporation Revolving Credit Facility bear interest at a rate equal to (i) LIBOR plus 2.25% or (ii) a base rate (determined by reference to the highest of (A) the prime lending rate, (B) the overnight federal funds rate plus 0.50% or (C) the one-month adjusted LIBOR plus 1.00%) plus 1.25%. In addition to paying interest on outstanding principal, the Corporation incurs a fee of 0.30% or 0.175% on the unutilized revolver balance based on the amount outstanding under the facility.
In March 2020, the Company borrowed $49.8 million under the Corporation Revolving Credit Facility as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of uncertainty in business markets. The proceeds may in the future be used for working capital, general corporate or other purposes permitted under the agreement. As of December 31, 2020, the Corporation had one letter of credit outstanding of $0.2 million and no available borrowing capacity under the facility.
Obligations under the Corporation Revolving Credit Facility are guaranteed by certain existing and future material domestic subsidiaries of the Corporation, excluding ESH REIT and its subsidiaries and subject to customary exceptions. The facility is secured, subject to certain exceptions, by a first-priority security interest in substantially all of the assets of the Corporation and the guarantors. If obligations are outstanding under the facility during any fiscal quarter, the Corporation Revolving Credit Facility requires that the Consolidated Leverage Ratio, as defined, calculated as of the end of such fiscal quarter for any consecutive four quarter period, be less than or equal to 8.75 to 1.00. (the “Leverage Covenant,” subject to the Four Quarter Suspension Period, as defined below). The facility is also subject to a springing financial covenant whereby the senior loan-to-value ratio may not exceed 45% when the aggregate principal amount of borrowings and letters of credit under the Corporation Revolving Credit Facility, excluding up to $30.0 million of letters of credit, is equal to or greater than 25% of the aggregate available principal amount of the Corporation Revolving Credit Facility on the applicable fiscal quarter end date.
In May 2020, the Company entered into an amendment to the Corporation Revolving Credit Facility and obtained a suspension of the Leverage Covenant from the beginning of the second quarter of 2020 through the end of the first quarter of 2021 (the “Four Quarter Suspension Period”). For the second quarter of 2021 through the fourth quarter of 2021, the leverage covenant calculation has been modified to use annualized EBITDA, as opposed to trailing twelve-month EBITDA. Additionally, the amendment provides for the Corporation to borrow up to $150.0 million from ESH REIT through an intercompany loan facility. Throughout the Four Quarter Suspension Period, the Company has agreed to maintain minimum liquidity of $150.0 million and to limit share repurchases and dividend payments made by the Corporation.
Covenants
The ESH REIT Credit Facilities, the 2027 Notes, the 2025 Notes, the Corporation Revolving Credit Facility and certain intercompany loan facilities contain a number of restrictive covenants that, among other things and subject to certain exceptions, limit the Corporation’s or ESH REIT’s ability and the ability of their respective subsidiaries to engage in certain transactions. In addition, the ESH REIT Revolving Credit Facility and the Corporation Revolving Credit Facility contain financial covenants that, subject to certain conditions, require compliance with certain senior loan-to-value and consolidated leverage ratios. The agreements governing the Corporation’s and ESH REIT’s indebtedness also contain certain customary representations and warranties, affirmative covenants and events of default, including, but not limited to, cross-defaults to certain other indebtedness and, in the case of the ESH REIT Credit Facilities and certain intercompany loan facilities, certain material operating leases and management agreements. As of December 31, 2020, the Corporation and ESH REIT were in compliance with all covenants under their respective debt agreements.
The Company’s continued compliance with these covenants could be impacted by current or future economic conditions associated with the COVID-19 pandemic. The Company's failure to maintain compliance with its debt covenants or to pay debt obligations as they become due would give rise to default under one or more agreements governing the Company's indebtedness, and could entitle the lenders under the defaulted agreements to accelerate the maturity of the amounts thereunder, which could raise substantial doubt about the Company's ability to continue as a going concern. The Company may seek additional covenant waivers or amendments, though there is no certainty that it would be successful in such efforts.
Future Maturities of Debt-The future maturities of debt as of December 31, 2020, are as follows (in thousands):
Years Ending December 31,
2021 $ 6,309 (1)
2022 6,309 (1)
2023 6,309 (1)
2024 56,074 (1)
2025 1,306,309 (1)
Thereafter 1,341,477 (1)
Total $ 2,722,787
______________________
(1)Under the ESH REIT Term Facility, annual mandatory prepayments of up to 50% of Excess Cash Flow, as defined, may be required. Annual mandatory prepayments for a given fiscal year are due during the first quarter of the following fiscal year. No mandatory prepayments are required in the first quarter of 2021 based on ESH REIT's Excess Cash Flow for the year ended December 31, 2020.
Interest Expense, net-The components of net interest expense during the years ended December 31, 2020, 2019 and 2018 are as follows (in thousands):
Year Ended December 31,
2020 2019 2018
Contractual interest(1)
$ 122,296 $ 117,067 $ 116,348
Amortization of deferred financing costs and debt discount 8,237 8,059 8,005
Debt extinguishment and other costs(2)
917 8,301 3,030
Interest income (1,317) (5,663) (2,513)
Total $ 130,133 $ 127,764 $ 124,870
______________________
(1)Includes dividends on shares of mandatorily redeemable Corporation preferred stock. Net of capitalized interest of $2.9 million, $2.2 million and $0.5 million, respectively.
(2)Includes interest expense on finance leases (See Note 13) and unused facility fees.
Mandatorily Redeemable Preferred Stock-The Corporation has authorized 350.0 million shares of preferred stock, $0.01 par value, of which 0 and 7,130 shares of mandatorily redeemable voting preferred stock were issued and outstanding as of December 31, 2020 and 2019, respectively. During the year ended December 31, 2020, the remaining outstanding 7,130 shares of the 8% mandatorily redeemable voting preferred stock were redeemed for $7.1 million.
Due to the fact that the 8.0% mandatorily redeemable voting preferred stock was mandatorily redeemable by the Corporation, it was classified as a liability on the accompanying consolidated balance sheets. Dividends on these mandatorily
redeemable voting preferred shares, paid at a rate of 8.0% per year, are classified as net interest expense on the accompanying consolidated statements of operations.
Fair Value of Debt-As of December 31, 2020 and 2019, the estimated fair value of the Company’s debt was $2.8 billion and $2.7 billion, respectively, and the estimated fair value of the Corporation’s 8.0% mandatorily redeemable preferred stock was $0.0 million and $7.1 million, respectively. Estimated fair values are determined by comparing current borrowing rates and risk spreads offered in the market (Level 2 fair value measures) or quoted market prices (Level 1 fair value measures), when available, to the stated interest rates and spreads on the Company’s debt and the Corporation's 8.0% mandatorily redeemable preferred stock. The estimated fair value of the Corporation Revolving Credit Facility is equal to its carrying value due to its short-term nature and frequent settlement.
8. DERIVATIVE INSTRUMENTS
ESH REIT is a counterparty to a floating-to-fixed interest rate swap, at a fixed rate of 1.175% and a floating rate of one-month LIBOR to manage its exposure to interest rate risk on a portion of the ESH REIT Term Facility. The notional amount of the interest rate swap as of December 31, 2020 was $100.0 million. The notional amount decreases by an additional $50.0 million every six months until the swap’s maturity in September 2021.
For the year ended December 31, 2020, the Company paid interest of $0.6 million and for each of the years ended December 31, 2019 and 2018, the Company received proceeds of $2.8 million that offset interest expense. As of December 31, 2020, $0.5 million of interest expense is expected to be recognized through the swap’s maturity.
The table below presents the amounts and classification of the interest rate swap on the Company's consolidated financial statements (in thousands):
(Accrued liabilities) other assets Accumulated other comprehensive (loss) income, net of tax Interest expense (income), net
As of December 31, 2020 $ (525) $ (445) (1)
As of December 31, 2019 $ 831 $ 706 (2)
For the year ended December 31, 2020 $ 643
For the year ended December 31, 2019 $ (2,842)
For the year ended December 31, 2018 $ (2,765)
_______________________________
(1)Changes during the year ended December 31, 2020, on a pre-tax basis, consisted of changes in fair value of $(1.4) million.
(2)Changes during the year ended December 31, 2019, on a pre-tax basis, consisted of changes in fair value of $(5.0) million.
9. SEGMENTS
The Company’s operating segments are components of the business which are managed discretely and for which discrete financial information is reviewed regularly by its chief operating decision maker to assess performance and make decisions regarding the allocation of resources. The Company’s operating and reportable segments are defined as follows:
•Owned Hotels-Earnings are derived from the operation of Company-owned hotel properties and include room and other hotel revenues.
•Franchise and management-Earnings are derived from fees under franchise and management agreements with third parties. These contracts provide the Company the ability to earn compensation for licensing the Extended Stay America brand name, providing access to shared system-wide platforms and/or management services.
The performance of the Company’s operating segments is evaluated primarily on income from operations. Selected financial data is provided below (in thousands):
Year Ended December 31,
2020 2019 2018
Revenues:
Owned hotels $ 1,022,065 $ 1,196,091 $ 1,259,182
Franchise and management (1)
8,454 9,000 7,086
Total segment revenues 1,030,519 1,205,091 1,266,268
Corporate and other (2)
76,257 77,084 80,942
Other revenues from franchise and managed properties (3)
14,861 16,716 12,567
Intersegment eliminations (4)
(79,321) (80,672) (84,718)
Total $1,042,316 $1,218,219 $1,275,059
Income (loss) from operations:
Owned hotels (5)
$ 225,605 $ 346,999 $ 394,669
Franchise and management (1)
8,454 9,000 7,086
Total segment income from operations 234,059 355,999 401,755
Corporate and other (2)
(30,071) (32,019) (23,168)
Other expenses from franchise and managed properties, net(3)
(2,180) (2,154) (650)
Total $ 201,808 $ 321,826 $ 377,937
_________________________________
(1)Includes intellectual property fees charged to the owned hotels segment of $3.1 million, $3.6 million and $3.8 million for the years ended December 31, 2020, 2019 and 2018, respectively, that are eliminated in the consolidated statements of operations.
(2)Includes revenues generated and operating expenses incurred in connection with the overall support of owned, franchised and managed hotels and related operations. Corporate and other revenues are comprised of management fees earned by and cost reimbursements charged to the owned hotels segment that are eliminated in the consolidated statements of operations.
(3)Includes direct reimbursement of specific costs incurred under franchise and management agreements that the Company is reimbursed for on a dollar-for-dollar basis, as well as indirect reimbursement of certain costs incurred associated with the Company’s shared platform (i.e., system services) (see Note 2).
(4)Includes management fees, intellectual property fees and other cost reimbursements charged to the owned hotels segment that are eliminated in the consolidated statements of operations.
(5)Net of impairment charges of $1.1 million, $2.7 million and $43.6 million for the years ended December 31, 2020, 2019 and 2018, respectively. Also includes gain on sale of hotel properties, net of $52.5 million, $0 and $42.5 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Total assets for each of the Company’s operating segments are provided below (in thousands):
December 31, 2020 December 31, 2019
Assets:
Owned hotels $ 3,802,896 $ 3,661,609
Franchise and management 13,319 14,576
Total segment assets 3,816,215 3,676,185
Corporate and other 274,039 397,568
Intersegment eliminations (1,105) (43,157)
Total $ 4,089,149 $ 4,030,596
Total capital expenditures for each of the Company's operating segments are provided below (in thousands):
Year Ended December 31,
2020 2019 2018
Capital Expenditures:
Owned hotels $ 188,047 $ 260,155 $ 207,997
Franchise and management - - 250
Total segment capital expenditures 188,047 260,155 208,247
Corporate and other 4,684 1,139 1,027
Total $ 192,731 $ 261,294 $ 209,274
10. REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregation of Revenues
The following table disaggregates room revenues generated from owned hotels by booking source for the years ended December 31, 2020, 2019 and 2018 (in thousands):
Year Ended December 31,
2020 2019 2018
Property direct $ 257,999 $ 286,002 $ 360,718
Central call center 313,123 312,956 303,336
Proprietary website 212,328 225,393 220,734
Third-party intermediaries 187,015 307,478 300,965
Travel agency global distribution systems 24,431 39,897 51,558
Total room revenues from owned hotels(1)
$ 994,896 $ 1,171,726 $ 1,237,311
_________________________________
(1)In addition to room revenues, the Company’s owned hotels earned $27.2 million, $24.4 million and $21.9 million of other hotel revenues during the years ended December 31, 2020, 2019 and 2018, respectively.
The following table disaggregates room revenues generated from owned hotels by length of guest stay for the years ended December 31, 2020, 2019 and 2018 (in thousands):
Year Ended December 31,
2020 2019 2018
1-6 nights $ 281,390 $ 441,417 $ 457,380
7-29 nights 211,029 243,263 261,674
30+ nights 502,477 487,046 518,257
Total room revenues from owned hotels(1)
$ 994,896 $ 1,171,726 $ 1,237,311
_________________________________
(1)In addition to room revenues, the Company’s owned hotels earned $27.2 million, $24.4 million and $21.9 million of other hotel revenues during the years ended December 31, 2020, 2019 and 2018, respectively.
The following table disaggregates revenues generated from franchised and managed hotels for the years ended December 31, 2020, 2019 and 2018 (in thousands):
Year Ended December 31,
2020 2019 2018
Management fees $ 940 $ 1,239 $ 1,175
Franchise fees 4,449 4,173 2,135
Indirect reimbursements (system service fees) 5,062 5,221 2,444
Direct reimbursements 9,799 11,495 10,123
Total revenues from franchised and managed hotels $ 20,250 $ 22,128 $ 15,877
Outstanding Contract Liabilities
Contract liabilities relate to advance deposits with respect to owned hotels and, with respect to franchised hotels, advance consideration received, such as initial franchise fees paid when a franchise agreement is executed and certain system implementation fees paid at the time of installation. Contract liabilities are included in accounts payable and accrued liabilities on the accompanying consolidated balance sheets. The following table presents changes in outstanding contract liabilities as of December 31, 2020, 2019 and 2018, respectively, and the amount of outstanding contract liabilities that were recognized as revenue during the years ended December 31, 2020, 2019 and 2018, respectively (in thousands):
Year Ended December 31,
2020 2019
Contract liabilities - beginning of year $ 16,231 $ 13,829
Contract liabilities - end of year $ 17,197 $ 16,231
Portion of beginning balance recognized as revenue during the year $ 10,933 $ 9,233
Performance Obligations
As of December 31, 2020, $11.0 million of outstanding contract liabilities related to owned hotels and $6.2 million related to franchised hotels. The Company does not estimate revenues expected to be recognized related to unsatisfied performance obligations for royalty fees, system service fees or management fees, as they are considered either sales-based fees or allocated to wholly unsatisfied performance obligations in a series. Performance obligations related to owned hotels are expected to be satisfied within less than one year. Performance obligations related to franchised hotels are expected to be satisfied over the term of the respective franchise agreements, which are typically 20 years.
11. INCOME TAXES
The Corporation's taxable income includes the taxable income (loss) of its wholly-owned subsidiaries and distribution income related to its 59% ownership of ESH REIT.
Income (loss) before income tax expense for the years ended December 31, 2020, 2019 and 2018 consists of the following (in thousands):
Year Ended December 31,
2020 2019 2018
U.S. $ 71,610 $ 194,143 $ 254,172
Canada 146 310 (340)
Total $ 71,756 $ 194,453 $ 253,832
The components of income tax (benefit) expense for the years ended December 31, 2020, 2019 and 2018 are as follows (in thousands):
Year Ended December 31,
2020 2019 2018
Federal (including foreign):
Current $ (57,975) $ 28,297 $ 31,401
Deferred 30,877 (6,697) 711
State:
Current 5,895 9,134 9,656
Deferred (3,297) (1,419) 308
Total $ (24,500) $ 29,315 $ 42,076
The differences between income tax (benefit) expense at the effective tax rate and the statutory U.S. federal income tax rate for the years ended December 31, 2020, 2019 and 2018 are as follows (in thousands):
Year Ended December 31,
2020 2019 2018
Tax at statutory rate $ 15,069 21.0 % $ 40,835 21.0 % $ 53,305 21.0 %
State income tax 2,533 3.5 5,844 3.0 7,847 3.1
Nontaxable ESH REIT income (28,504) (39.7) (18,577) (9.6) (14,976) (5.9)
Equity-based compensation 704 1.0 (69) - (524) (0.2)
Other permanent differences 863 1.2 629 0.3 30 -
Estimate of future nontaxable distributions from ESH REIT - - - - 5,020 2.0
Change in ESH REIT temporary differences 15,396 21.5 475 0.3 (9,525) (3.7)
Valuation allowance 3 - (1) - (2) -
Tax credits (613) (0.9) (783) (0.4) (661) (0.3)
Benefit of NOL carryback to higher rate year (29,601) (41.3) - - - -
Other - net (350) (0.4) 962 0.5 1,562 0.6
Income tax expense (benefit) - net $ (24,500) (34.1) % $ 29,315 15.1 % $ 42,076 16.6 %
The significant components of deferred tax assets and deferred tax liabilities as of December 31, 2020 and 2019, consist of the following (in thousands):
December 31, 2020 December 31, 2019
Deferred tax assets:
Net operating loss carryforwards $ 13,417 $ 2,914
Accruals and allowances(1)(2)
23,418 19,327
Lease liabilities(1)
372 869
Equity-based compensation 561 972
Depreciable property - 2,890
Other 274 665
Total deferred tax assets 38,042 27,637
Valuation allowance (2,880) (2,914)
Net deferred tax assets 35,162 24,723
Deferred tax liabilities:
Depreciable property (17,941) -
Undistributed ESH REIT income (24,495) (5,074)
Right-of-use assets(1)
(302) (712)
Intangible assets (2,263) (2,112)
Prepaid expenses (1,377) (668)
Other (2) -
Total net deferred tax (liabilities) assets: $ (11,218) $ 16,157
_________________________________
(1)Deferred tax assets and liabilities pertaining to right-of-use assets and lease liabilities for leases with third-parties as of December 31, 2019, were previously reported net under accruals and allowances. Balances were reclassified to conform to current period presentation.
(2)Includes deferred tax assets and liabilities pertaining to intercompany right-of-use assets and lease liabilities recorded at the Corporation for leases between the Operating Lessees and ESH REIT, which eliminate in consolidation.
ESH REIT has elected to be taxed as and expects to continue to qualify as a 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 and generally would be precluded from qualifying as a REIT for the subsequent four
taxable years following the year during which it lost its REIT qualification. ESH REIT intends to distribute its taxable income to the extent necessary to optimize its tax efficiency including, but not limited to, maintaining its REIT status, while retaining sufficient capital for its ongoing needs. Even in qualifying as a REIT, ESH REIT may be subject to state and local taxes in certain jurisdictions, and is subject to federal income and excise taxes on undistributed income.
During the years ended December 31, 2020, 2019 and 2018, ESH REIT recognized a dividends paid deduction for 100% of its taxable income, incurring no federal income tax and minimal state and local income tax. The following table summarizes ESH REIT’s taxable income prior to distributions, cash distributions to its shareholders and the prior year deduction of cash distributions for the years ended December 31, 2020, 2019 and 2018 (in thousands):
Year Ended December 31,
2020 2019 2018
Taxable income prior to distribution $ 178,030 $ 233,433 $ 297,211
Cash distributions(1)
$ 218,263 $ 240,600 $ 277,075
Prior year deduction of cash distributions(2)
$ 20,225 $ 26,514 $ 2,829
_________________________________
(1)Excludes accumulated distributions on RSUs settled.
(2)Cash distributions that were previously deducted to offset taxable income in the prior year.
All cash distributions for the years ended December 31, 2020, 2019 and 2018 were considered ordinary taxable income. The 2020 distribution includes a special distribution of $149.8 million declared in December 2020 and paid in January 2021. Approximately $129.8 million of the special distribution was deductible to ESH REIT in 2020; the remaining $20.0 million will be deducted in 2021. The special distribution will be subject to current taxation to the Corporation as dividend income in 2021 at the time of receipt.
As of December 31, 2020, the book basis of ESH REIT’s property and equipment was $21.8 million greater than the tax basis.
As of December 31, 2020, the Company has recorded $13.4 million of tax net operating loss carryforwards related to its operations in Canada and various state jurisdictions. These operating loss carryforwards have varying expiration dates ranging from 5 years to indefinite. As of December 31, 2020, the Company recorded a valuation allowance of $2.9 million on the net operating loss carryforwards of its Canadian Operating Lessee and state net operating losses with respect to ESH REIT. The Company has concluded that, in light of available evidence, it is more likely than not that these net operating loss carryforwards will not be realized.
The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which was passed during the first quarter of 2020, allows the Company to carry back $211.4 million of 2020 tax net operating losses to offset taxable income for the years 2015 to 2017 and seek refund of taxes previously paid. As of December 31, 2020, the Company recorded a $74.0 million receivable for a tax refund expected as a result of the 2020 tax net operating loss carryback, which is included in other assets in the accompanying consolidated balance sheets.
The Company evaluates its open tax positions using the criteria established by ASC 740, Income Taxes. The Company has concluded that it has not taken any material tax positions that are not more likely than not to be sustained upon examination and has therefore not recorded any reserves for uncertain tax positions. The Company’s federal income tax returns for the years 2017 to present may be subject to examination by the Internal Revenue Service and other taxing authorities. As of December 31, 2020, a subsidiary of ESH REIT was under examination by the Canadian Revenue Agency for tax years 2014 through 2017. As this audit is still in process, the timing of the resolution and any payments that may be required cannot be determined at this time. The Company believes that, to the extent a liability may exist, it is not material as of December 31, 2020.
12. EQUITY
The Corporation
The Corporation has authorized 3,500.0 million shares of common stock, par value $0.01 per share, of which 177.6 million and 179.5 million shares were issued and outstanding as of December 31, 2020 and 2019, respectively. Each share of
the Corporation’s outstanding common stock 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 has authorized 350.0 million shares of preferred stock, $0.01 par value, of which 0 and 7,130 shares of mandatorily redeemable voting preferred stock were issued and outstanding as of December 31, 2020 and 2019, respectively. Dividends on these mandatorily redeemable voting preferred shares were paid quarterly in arrears at a rate of 8.0% per year. During the year ended December 31, 2020, the remaining outstanding 7,130 shares of the 8% mandatorily redeemable voting preferred stock were redeemed for $7.1 million. The 8.0% mandatorily redeemable voting preferred stock was classified as a liability on the accompanying consolidated balance sheets and is further described in Note 7.
The Corporation paid cash distributions totaling $18.0 million, $67.2 million and $45.8 million during the years ended December 31, 2020, 2019 and 2018, respectively, to its common shareholders, all of which were considered taxable dividends.
Paired Share Repurchase Program-In December 2015, the Boards of Directors of the Corporation and ESH REIT authorized a combined Paired Share repurchase program. As a result of several increases in authorized amounts and program extensions, including a program extension authorized in December 2020, effective January 1, 2021, the combined Paired Share repurchase program authorizes the Corporation and ESH REIT to purchase up to $550.0 million in Paired Shares through December 31, 2021. Repurchases may be made at management’s discretion from time to time in the open market, in privately negotiated transactions or by other means (including through Rule 10b5-1 trading plans). As of December 31, 2020, the Corporation and ESH REIT repurchased and retired 28.6 million Paired Shares for $283.0 million and $166.4 million, including transaction fees, respectively, and $101.1 million remained available under the combined Paired Share repurchase program.
Noncontrolling Interests
Third party equity interests in the Corporation consist of the outstanding shares of the Class B common stock of ESH REIT, which represent 41% and 42% of ESH REIT’s total common equity as of December 31, 2020 and 2019, respectively, and the outstanding 125 shares of 12.5% preferred stock of ESH REIT. These interests, which are not owned by the Corporation, are presented as noncontrolling interests.
ESH REIT
ESH REIT has authorized 4,300.0 million shares of Class A common stock, par value $0.01 per share, of which 250.5 million shares were issued and outstanding as of December 31, 2020 and 2019. All issued and outstanding shares of ESH REIT Class A common stock were held by the Corporation as of December 31, 2020 and 2019. ESH REIT has authorized 7,800.0 million shares of Class B common stock, par value $0.01 per share, of which 177.6 million and 179.5 million shares were issued and outstanding as of December 31, 2020 and 2019, respectively. Each share of ESH REIT’s outstanding Class B common stock is attached to and trades as a single unit with one share of the Corporation’s common stock.
ESH REIT has authorized 350.0 million shares of preferred stock, par value $0.01 per share, of which no shares were issued or outstanding as of December 31, 2020 and 2019. Additionally, ESH REIT has authorized 125 shares of preferred stock, no par value, all of which were issued and outstanding as of December 31, 2020 and 2019. The outstanding ESH REIT preferred stock pays dividends at a rate of 12.5% per year. With respect to dividends and distributions upon ESH REIT’s liquidation, winding-up or dissolution, the 12.5% preferred stock ranks senior to the ESH REIT Class A and Class B common stock. The liquidation preference of the 12.5% preferred stock is $1,000 per share plus any accumulated unpaid dividends. Shares of 12.5% preferred stock may be redeemed, in whole or in part, at any time for a per share amount equal to the liquidation preference plus all accumulated unpaid dividends.
ESH REIT paid cash distributions totaling $68.9 million (of which $40.1 million was paid to the Corporation), $241.0 million (of which $137.8 million was paid to the Corporation), and $277.8 million (of which $157.8 million was paid to the Corporation) during the years ended December 31, 2020, 2019 and 2018, respectively.
On December 22, 2020, the Board of Directors of ESH REIT declared a special cash distribution of $0.35 per share on its Class A and Class B common stock. The special distribution totals $149.8 million, $87.7 million of which is payable to the Corporation and is eliminated in consolidation, and $62.1 million of which is payable to Class B common shareholders and is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets. ESH REIT paid the distribution on January 20, 2021 to shareholders of record as of January 6, 2021.
13. COMMITMENTS AND CONTINGENCIES
Lease Commitments-The Company is a tenant under long-term ground leases at five of its hotel properties. Three of these leases are operating leases and two are finance leases. The ground lease agreements terminate at various dates between 2023 and 2096 and several of the agreements include multiple renewal options for generally five or ten year periods. The Company is also a tenant under an operating lease for its corporate office, which terminates in August 2021 and includes renewal options for two five-year terms. As the Company is reasonably certain that it will exercise the options to extend its ground leases, fixed payments associated with the extensions are included in the measurement of related right-of-use assets and lease liabilities. Payments associated with the option to extend the corporate office lease are not included in the measurement of the right-of-use asset and lease liability, as the associated payments cannot be reasonably estimated. Additionally, as of December 31, 2020, the Company leased certain technology equipment located at its hotel sites under finance leases.
Operating lease costs related to ground leases are included in hotel operating expenses, while operating lease costs related to the Company’s office lease are included in general and administrative expenses, in the consolidated statements of operations. Finance lease interest costs are included in interest expense, net in the consolidated statements of operations (see Note 7) or, when pertaining to assets under development, are capitalized and included in property and equipment, net on the consolidated balance sheets (see Note 5). The Company has no variable lease costs or short-term leases.
For the years ended in December 31, 2020 and 2019, components of the Company's total lease costs are as follows (in thousands):
Year Ended December 31,
2020 2019
Operating lease costs $ 3,076 $ 3,119
Finance lease costs 301 242
Total lease costs $ 3,377 $ 3,361
Rent expense on operating leases was $3.2 million for the year ended December 31, 2018, and was recognized on a straight-line basis.
The Company’s right-of-use assets and lease liabilities are as follows (in thousands):
December 31, 2020 December 31, 2019
Right-of-use assets:
Operating (1)
$ 2,538 $ 4,863
Finance (2)
4,354 3,979
Lease liabilities:
Operating (3)
10,442 12,590
Finance 3,668 3,379
_________________________________
(1) Included in other assets on the accompanying consolidated balance sheets.
(2) Included in property and equipment, net on the accompanying consolidated balance sheets.
(3) Included in accounts payable and accrued liabilities on the accompanying consolidated balance sheets.
Maturities of lease liabilities as of December 31, 2020, are as follows (in thousands):
Years Ending December 31, Operating Leases Finance Leases
2021 $ 2,221 $ 850
2022 806 397
2023 552 400
2024 503 402
2025 503 429
Thereafter 77,091 2,671
Total $ 81,676 $ 5,149
Total discounted lease liability $ 10,442 $ 3,668
Difference between undiscounted cash flows and discounted cash flows $ 71,234 $ 1,481
Weighted-average remaining lease term 52 years 10 years
Weighted-average discount rate 6.5 % 6.7 %
The Company's leases do not contain residual value guarantees and do not contain restrictions with respect to incurring additional financial obligations or paying dividends. As of December 31, 2020, the Company does not have any material leases that have not yet commenced.
Letter of Credit-As of December 31, 2020, the Company had one outstanding letter of credit, issued by the Corporation for $0.2 million, which is collateralized by the Corporation Revolving Credit Facility.
Legal Contingencies-As of December 31, 2020, six purported class action lawsuits in California have been filed against the Company. The complaints allege, among other things, failure to provide meal and rest periods, wage and hour violations and violations of the Fair Credit Reporting Act. The complaints seek, among other relief, collective and class certification of the lawsuits, unspecified damages, costs and expenses, including attorneys’ fees, and such other relief as the court might find just and proper.
With respect to the Fair Credit Reporting Act violations alleged in the lawsuits described above, the parties reached a tentative settlement agreement in May 2019, which is subject to certain conditions, including court approval. During the year ended December 31, 2019, the Company recorded a payable and a corresponding insurance receivable for the amount of the tentative settlement. The expected resolution of the alleged Fair Credit Reporting Act violations in the lawsuits did not have, and is not expected to have, a material adverse impact on the Company’s consolidated financial statements, results of operations or liquidity.
With respect to the meal and rest period and the wage and hour violations alleged in the lawsuits described above, excluding the one lawsuit described below, the parties reached a tentative settlement agreement in January 2020, which is subject to certain conditions, including court approval. During the three months ended December 31, 2019, the Company incurred a loss and recorded a charge equal to the amount of the tentative settlement. The expected resolution of the alleged meal and rest period and wage and hour violations in the lawsuits did not have, and is not expected to have, a material adverse impact on the Company’s consolidated financial statements, results of operations or liquidity.
With respect to one lawsuit, although the Company believes it is reasonably possible that it may incur losses associated with such matter, it is not possible to estimate the amount of loss or range of loss, if any, that might result from adverse judgments, settlements or other resolution based on the early stage of the lawsuit, the uncertainty as to the certification of a class or classes and the size of any certified class, if applicable, and the lack of resolution of significant factual and legal issues. However, depending on the amount and timing, an unfavorable resolution of the lawsuit or a change in the Company's assessment of the likelihood of loss could have a material adverse effect on the Company’s consolidated financial statements, results of operations or liquidity in a future period. The Company believes that it has meritorious defenses and is prepared to vigorously defend the lawsuit.
The Company is not a party to any additional litigation or claims, other than routine matters arising in the ordinary course of business that are incidental to the operation of the business of the Company. The Company believes that the results of all additional litigation and claims, individually or in the aggregate, will not have a material adverse effect on the Company's consolidated financial statements, its business, results of operations or financial condition.
14. EQUITY-BASED COMPENSATION
The Corporation and ESH REIT each maintain a LTIP, approved by their shareholders. Under each LTIP, the Corporation and ESH REIT may issue to eligible employees or directors restricted stock units (“RSUs”) or other equity-based awards in respect of Paired Shares with service, performance or market vesting conditions. The aggregate number of Paired Shares that may be the subject of awards under the LTIPs shall not exceed 8.0 million, of which no more than 4.0 million may be granted as incentive stock options. Each of the Corporation’s and ESH REIT’s LTIPs has a share reserve of an equivalent number of shares of Corporation common stock and ESH REIT Class B common stock. As of December 31, 2020, 4.8 million Paired Shares were available for future issuance under the LTIPs.
Equity-based compensation expense is recognized by amortizing the grant-date fair value on a straight-line basis over the requisite service period of each award. A portion of the grant-date fair value of all equity-based awards is allocated to a share of Corporation common stock and a portion is allocated to a share of ESH REIT Class B common stock. Equity-based compensation expense, which is included in general and administrative expenses in the accompanying consolidated statements of operations, was $6.5 million, $6.9 million and $7.7 million for the years ended December 31, 2020, 2019 and 2018, respectively.
As of December 31, 2020, 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 December 31, 2020, is presented in the following table. Total unrecognized compensation expense will be adjusted for forfeitures as they occur.
Unrecognized Compensation Expense Related to Outstanding Awards (in thousands) Remaining Weighted-Average Amortization Period (in years)
RSUs with service vesting conditions $ 8,964 2.0
RSUs with market vesting conditions 2,465 1.8
Total unrecognized compensation expense $ 11,429
RSU activity during the years ended December 31, 2020, 2019 and 2018, was as follows:
Performance-Based Awards
Service-Based Awards Performance Vesting Market Vesting
Number of
RSUs
(in thousands) Weighted-
Average Grant-
Date Fair
Value Number of
RSUs
(in thousands) Weighted-
Average Grant-
Date Fair
Value
Number of
RSUs
(in thousands) Weighted-
Average Grant-
Date Fair
Value(1)
Outstanding at January 1, 2018 602 $ 17.06 153 $ 17.45 211 $ 16.46
Granted 401 $ 19.42 57 $ 19.52 204 $ 17.41
Settled (399) $ 17.46 (153) $ 17.45 (41) $ 20.76
Forfeited (81) $ 18.05 (25) $ 19.52 (77) $ 15.36
Outstanding at December 31, 2018 523 $ 18.42 32 $ 19.52 297 $ 16.79
Granted 687 $ 16.02 24 $ 17.20 247 $ 15.35
Settled (249) $ 18.03 (33) $ 19.46 (53) $ 12.36
Forfeited (33) $ 17.86 (23) $ 17.20 (236) $ 16.52
Outstanding at December 31, 2019 928 $ 16.77 - $ - 255 $ 16.56
Granted 629 $ 13.17 - $ - 290 $ 11.52
Settled (353) $ 17.44 - $ - (46) $ 18.58
Forfeited (218) $ 16.66 - $ - (123) $ 14.96
Outstanding at December 31, 2020 986 $ 14.26 - $ - 376 $ 12.96
Vested at December 31, 2020 139 $ 14.84 - $ - 39 $ 17.41
Nonvested at December 31, 2020 847 $ 14.17 - $ - 337 $ 12.45
Vested at December 31, 2019 38 $ 15.52 - $ - 45 $ 18.58
Nonvested at December 31, 2019 890 $ 16.82 - $ - 210 $ 16.11
_____________________
(1)An independent valuation was performed contemporaneously with the issuance of grants.
The grant-date fair value of awards with service vesting conditions is based on the closing price of a Paired Share on the date of grant. Service-based awards vest over a period of one to three years, subject to the grantee’s continued employment or service. The grant-date fair value of awards with 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 vesting period to reflect the probability of achievement of performance targets defined in the award agreements. These awards vest over a one-year period, subject to the grantee’s continued employment, with the ability to earn Paired Shares in a range of 0% to 200% of the awarded number of RSUs based on the achievement of defined performance targets. The grant-date fair value of awards with market vesting conditions is based on an independent third-party valuation. These awards vest at the end of a three-year period, subject to the grantee’s continued employment, with the ability to earn Paired Shares in a range of 0% to 150% of the awarded number of RSUs based on the total shareholder return of a Paired Share relative to the total shareholder return of other publicly traded lodging companies identified in the award agreements. During the year ended December 31, 2020, the grant-date fair value of awards with market vesting conditions were calculated using a Monte Carlo simulation model with the following key assumptions:
Expected holding period 2.92 years
Risk-free rate of return 1.43 %
Expected dividend yield 7.01 %
15. DEFINED CONTRIBUTION BENEFIT 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. The plan has an employer-matching contribution of 50% of the first 6% of an employee’s contribution, which vests over an employee’s initial three-year service period. The plan also provides for contribution of up to 100% of eligible employee pretax salary, subject to the Code’s annual deferral limit of $19,500 during 2020, $19,000 during 2019 and $18,500 during 2018. Employer contributions, net of forfeitures, totaled $1.8 million, $1.9 million and $1.8 million for the years ended December 31, 2020, 2019 and 2018, respectively.
ESA Management has 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. The plan has an employer-matching contribution of 50% of the first 6%
of an employee’s contribution, which vests over a three-year service period. The plan is fully funded in a Rabbi Trust, which is subject to creditor claims in the event of insolvency, but the assets held in the Rabbi Trust are not available for general corporate purposes. As of December 31, 2020 and 2019, plan assets and liabilities of $2.2 million and $2.3 million, respectively, are included in other assets and accounts payable and accrued liabilities on the accompanying consolidated balance sheets.
16. SUBSEQUENT EVENTS
On February 25, 2021, the Board of Directors of ESH REIT declared a cash distribution of $0.09 per share on its Class A and Class B common stock. This distribution is payable on March 25, 2021 to shareholders of record as of March 11, 2021.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of ESH Hospitality, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of ESH Hospitality, Inc. and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Property and Equipment- Cost Capitalization- Refer to Notes 2 and 5 to the financial statements
Critical Audit Matter Description
The Company incurs a significant amount of capital expenditures. In addition to ordinary hotel capital improvements, the Company also incurs capital expenditures related to hotel renovations, development and construction in process, and investments in information technology. The Company incurred $188.1M in capital expenditures for the year ended December 31, 2020. The Company records property and equipment additions 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.
We identified the capitalization of property and equipment additions as a critical audit matter because of the significant level of capital expenditures. This required an increased extent of audit effort to evaluate whether capital expenditures were recorded in accordance with accounting principles generally accepted in the United States of America (US GAAP).
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the evaluation of the appropriateness of the capitalization of property and equipment additions included the following, among others:
•We tested the effectiveness of controls related to the capitalization of property and equipment additions, including management’s controls over the coding of items within the Company’s procurement systems, the approval and coding of invoices, the recording of capitalized costs, and placing of capital projects into service.
•We read the Company’s property and equipment accounting policies and inquired of those involved in the determination of the capitalization of property and equipment in order to understand the Company’s capitalization policies and evaluate consistency with US GAAP.
•We selected a sample of property and equipment additions recorded during the year from a schedule of additions, which we agreed to the rollforward of property and equipment, and performed the following to evaluate whether the selected assets were appropriately capitalized in accordance with US GAAP:
◦Vouching the recorded costs to supporting documents and relevant payment support (e.g., capital expenditure approvals, vendor invoices, check or wire details, and bank statements), in addition to inquiring of property management personnel, to evaluate proper approval and existence of those costs.
◦Evaluating the related vendor invoices to assess whether any embedded costs required further evaluation (e.g., additional inquiry and/or supporting documentation) regarding appropriate capitalization in accordance with US GAAP.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
February 25, 2021
We have served as the Company's auditor since 2013.
ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2020 AND 2019
(In thousands, except share and per share data)
December 31, 2020 December 31, 2019
ASSETS
PROPERTY AND EQUIPMENT - Net of accumulated depreciation of $1,540,358 and $1,372,595
$ 3,461,212 $ 3,506,020
CASH AND CASH EQUIVALENTS 375,715 296,134
RENTS RECEIVABLE FROM EXTENDED STAY AMERICA, INC. (Note 11)
3,941 1,572
DEFERRED RENTS RECEIVABLE FROM EXTENDED STAY AMERICA, INC. (Note 11)
39,135 28,917
INTANGIBLE ASSETS - Net of accumulated amortization of $2,005 and $763
8,541 9,590
GOODWILL 43,878 44,012
OTHER ASSETS 18,695 21,209
TOTAL ASSETS $ 3,951,117 $ 3,907,454
LIABILITIES AND EQUITY
LIABILITIES:
Term loan facility payable - Net of unamortized deferred financing costs and debt discount
of $9,355 and $10,993
$ 613,667 $ 618,338
Senior notes payable - Net of unamortized deferred financing costs and debt discount
of $29,810 and $35,702
2,020,190 2,014,298
Finance lease liabilities 3,668 3,379
Unearned rental revenues from Extended Stay America, Inc. (Note 11)
- 38,770
Due to Extended Stay America, Inc., net (Note 11)
92,791 11,838
Accounts payable and accrued liabilities 125,519 71,464
Total liabilities 2,855,835 2,758,087
COMMITMENTS AND CONTINGENCIES (Note 12)
EQUITY:
Common stock - Class A: $0.01 par value, 4,300,000,000 shares authorized, 250,493,583 shares issued and outstanding; Class B: $0.01 par value, 7,800,000,000 shares authorized, 177,560,635 and 179,483,397 shares issued and outstanding
4,281 4,300
Additional paid in capital 1,052,379 1,050,740
Preferred stock-no par value, $1,000 liquidation value, 125 shares authorized, issued and outstanding
73 73
Retained earnings 39,075 93,424
Accumulated other comprehensive (loss) income (526) 830
Total equity 1,095,282 1,149,367
TOTAL LIABILITIES AND EQUITY $ 3,951,117 $ 3,907,454
See accompanying notes to consolidated financial statements.
ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
(In thousands, except per share data)
Year Ended December 31,
2020 2019 2018
REVENUES - Rental revenues from Extended Stay America, Inc. (Note 11)
$ 562,809 $ 649,898 $ 667,428
OPERATING EXPENSES:
Hotel operating expenses 92,429 86,019 85,089
General and administrative expenses (Note 11)
15,259 15,189 15,245
Depreciation and amortization 202,263 193,798 207,313
Impairment of long-lived assets 675 - -
Total operating expenses 310,626 295,006 307,647
GAIN (LOSS) ON SALE OF HOTEL PROPERTIES, NET (Note 4)
52,196 - (5,624)
OTHER INCOME - 15 645
INCOME FROM OPERATIONS 304,379 354,907 354,802
OTHER NON-OPERATING INCOME (148) (310) (869)
INTEREST EXPENSE, NET 128,492 128,955 124,745
INCOME BEFORE INCOME TAX EXPENSE 176,035 226,262 230,926
INCOME TAX EXPENSE 167 375 797
NET INCOME $ 175,868 $ 225,887 $ 230,129
NET INCOME PER ESH HOSPITALITY, INC. COMMON SHARE:
Class A - basic $ 0.41 $ 0.52 $ 0.52
Class A - diluted $ 0.41 $ 0.52 $ 0.52
Class B - basic $ 0.41 $ 0.52 $ 0.52
Class B - diluted $ 0.41 $ 0.52 $ 0.52
WEIGHTED-AVERAGE ESH HOSPITALITY, INC. COMMON SHARES OUTSTANDING:
Class A - basic 250,494 250,494 250,494
Class A - diluted 250,494 250,494 250,494
Class B - basic 177,708 186,546 189,389
Class B - diluted 178,103 186,822 189,821
See accompanying notes to consolidated financial statements.
ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
(In thousands)
Year Ended December 31,
2020 2019 2018
NET INCOME $ 175,868 $ 225,887 $ 230,129
OTHER COMPREHENSIVE INCOME:
INTEREST RATE CASH FLOW HEDGE LOSS, NET OF TAX OF $0, $0 AND $(13)
(1,356) (4,959) (585)
COMPREHENSIVE INCOME $ 174,512 $ 220,928 $ 229,544
See accompanying notes to consolidated financial statements.
ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
(In thousands, except per share data)
Common Stock Preferred Stock Additional
Paid in
Capital Retained
Earnings Accumulated
Other
Comprehensive Income (Loss) Total
Equity
Class A
Shares Class B
Shares Amount Shares Amount
BALANCE - January 1, 2018 250,494 192,100 $ 4,426 125 $ 73 $ 1,088,793 $ 191,964 $ 7,038 $ 1,292,294
Net income - - - - - - 230,129 - 230,129
Cumulative effect adjustment of ASC 2017-12 - - - - - - 664 (664) -
Interest rate cash flow hedge loss, net of tax - - - - - - - (585) (585)
Repurchase of Class B common stock - (4,307) (43) - - - (31,016) - (31,059)
Common distributions - $0.63 per Class A and Class B common share
- - - - - - (277,629) - (277,629)
Preferred distributions - - - - - - (16) - (16)
Equity-based compensation - 426 4 - - 2,016 - - 2,020
BALANCE - December 31, 2018 250,494 188,219 4,387 125 73 1,090,809 114,096 5,789 1,215,154
Net income - - - - - - 225,887 - 225,887
Interest rate cash flow hedge loss, net of tax - - - - - - - (4,959) (4,959)
Repurchase of Class B common stock - (9,020) (90) - - - (47,417) - (47,507)
Common distributions - $0.55 per Class A and Class B common share
- - - - - (41,832) (199,126) - (240,958)
Preferred distributions - - - - - - (16) - (16)
Equity-based compensation - 284 3 - - 1,763 - - 1,766
BALANCE - December 31, 2019 250,494 179,483 4,300 125 73 1,050,740 93,424 830 1,149,367
Net income - - - - - - 175,868 - 175,868
Interest rate cash flow hedge loss, net of tax - - - - - - - (1,356) (1,356)
Repurchase of Class B common stock - (2,237) (22) - - - (11,384) - (11,406)
Common distributions - $0.51 per Class A and Class B common share
- - - - - - (218,817) - (218,817)
Preferred distributions - - - - - - (16) - (16)
Equity-based compensation - 315 3 - - 1,639 - - 1,642
BALANCE - December 31, 2020 250,494 177,561 $ 4,281 125 $ 73 $ 1,052,379 $ 39,075 $ (526) $ 1,095,282
See accompanying notes to consolidated financial statements.
ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
(In thousands)
Year Ended December 31,
2020 2019 2018
OPERATING ACTIVITIES:
Net income $ 175,868 $ 225,887 $ 230,129
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 202,263 193,798 207,313
Foreign currency transaction (gain) loss (148) (310) 340
Amortization and write-off of deferred financing costs and debt discount 8,091 13,562 8,505
Debt modification and extinguishment costs - 1,084 1,183
Amortization and write-off of above-market ground leases - - (1,426)
Loss on disposal of property and equipment 9,001 6,072 3,413
(Gain) loss on sale of hotel properties, net (52,196) - 5,624
Impairment of long-lived assets 675 - -
Equity-based compensation 498 545 836
Deferred income tax benefit - (9) (15)
Changes in assets and liabilities:
Deferred rents receivable from Extended Stay America, Inc. (10,551) (20,280) 15,044
Due (to) from Extended Stay America, Inc., net (6,666) 2,411 (2,323)
Other assets 1,082 (1,744) (3,541)
Unearned rental revenues/rents receivable from Extended Stay America, Inc., net (41,139) 3,790 (3,412)
Accounts payable and accrued liabilities 1,713 11,946 4,788
Net cash provided by operating activities 288,491 436,752 466,458
INVESTING ACTIVITIES:
Purchases of property and equipment (115,094) (175,933) (153,513)
Acquisition of hotel properties - (10,136) (12,733)
Development in process payments (72,434) (59,670) (34,790)
Payments for intangible assets (544) (9,144) (2,796)
Proceeds from sale of hotel properties 63,556 - 309,062
Proceeds from insurance and related recoveries 1,406 1,485 6,488
Credit facility draw to Extended Stay America, Inc. (20,000) - -
Credit facility repayment from Extended Stay America, Inc. 20,000 - -
Net cash used in by investing activities (123,110) (253,398) 111,718
FINANCING ACTIVITIES:
Principal payments on term loan facility (6,309) (507,261) (147,215)
Proceeds from issuance of senior notes - 750,000 -
Proceeds from revolving credit facility 350,000 - -
Payments on revolving credit facility (350,000) - -
Payments of deferred financing costs (18) (20,300) -
Principal payments on finance leases (137) (117) -
Debt modification and extinguishment costs - (1,084) (1,183)
Repurchase of Class B common stock (11,406) (47,507) (31,057)
Issuance of Class B common stock related to issuance of Paired Shares 964 1,510 2,732
Common distributions (68,878) (240,983) (277,814)
Preferred distributions (16) (16) (16)
Net cash used in financing activities (85,800) (65,758) (454,553)
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 79,581 117,596 123,623
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - Beginning of period 296,134 178,538 54,915
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - End of period $ 375,715 $ 296,134 $ 178,538
ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
(In thousands)
Year Ended December 31,
2020 2019 2018
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest, excluding modification, prepayment and other penalties, net of capitalized interest of $2,859, $2,247 and $473
$ 122,940 $ 107,768 $ 117,756
Cash payments for income taxes, net of refunds of $196, $211 and $6
$ 435 $ 576 $ 730
Operating cash payments for finance leases $ 249 $ 242 $ -
Operating cash payments for operating leases $ 777 $ 712 $ -
NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital expenditures included in due to/from Extended Stay America, Inc. and accounts payable and accrued liabilities $ 12,937 $ 23,020 $ 27,505
Additions to finance lease right-of-use assets and liabilities $ 427 $ 109 $ -
Common stock distributions included in accounts payable and accrued liabilities $ 63,034 $ 767 $ 792
Common stock distributions included in due to Extended Stay America, Inc. $ 87,673 $ - $ -
Net receivable related to RSUs not yet settled or issued included in due to/from Extended Stay America, Inc. $ 688 $ 323 $ 403
See accompanying notes to consolidated financial statements.
ESH HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2020 AND 2019 AND FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018
1. BUSINESS, ORGANIZATION AND BASIS OF CONSOLIDATION
ESH Hospitality, Inc. (“ESH REIT”) was formed as a limited liability company in the state of Delaware on September 16, 2010 and was converted to a corporation on November 5, 2013. Extended Stay America, Inc. (the “Corporation”), the parent of ESH REIT, was incorporated in the state of Delaware on July 8, 2013. The Corporation owns, and is expected to continue to own, all of the issued and outstanding Class A common stock of ESH REIT, which, as of December 31, 2020 and 2019, represents 59% and 58% of the outstanding common stock of ESH REIT, respectively.
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. Each outstanding share of ESH REIT Class B common stock is attached to and trades with one share of Corporation common stock.
As of December 31, 2020 and 2019, ESH REIT and its subsidiaries owned and leased 563 and 557 hotel properties, respectively, in 40 U.S. states, consisting of approximately 62,700 and 61,900 rooms, respectively. All hotels are leased to wholly-owned subsidiaries of the Corporation (the “Operating Lessees”).
Basis of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”), and include the financial position, results of operations, comprehensive income, changes in equity and cash flows of ESH REIT and its consolidated subsidiaries. Changes in ownership interests in a consolidated subsidiary that do not result in a loss of control are accounted for as equity transactions. All intercompany accounts and transactions have been eliminated. With respect to the consolidated balance sheets, certain prior period amounts have been reclassified for comparability to current period presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates-The preparation of the accompanying consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the amounts of revenues and expenses during the reporting period. Management used significant estimates to determine the estimated useful lives of tangible assets, as well as in the assessment of tangible and intangible assets for impairment. Actual results could differ from those estimates.
Cash and Cash Equivalents-ESH REIT considers all cash on hand, demand deposits with financial institutions and short-term, highly liquid investments with original maturities of three months or less to be cash equivalents. ESH REIT has deposits in excess of $250,000 with financial institutions that are not insured by the Federal Deposit Insurance Corporation. ESH REIT does not believe cash and cash equivalents expose it to significant credit risk.
Property Acquisitions-Identifiable net assets and liabilities acquired in an asset acquisition are recorded at cost, allocated based on their relative fair values on the date of acquisition. Identifiable net assets and liabilities acquired in a business combination are recorded based on their fair value on the date of acquisition. The fair value of acquired land, site improvements, building and improvements and furniture, fixtures and equipment are determined on an “if-vacant” basis considering a variety of factors, including the physical condition and quality of the hotels, estimated rates and valuation assumptions consistent with current market conditions, independent appraisals and other relevant market data obtained in connection with the acquisition of the hotels. Results of operations of acquired hotel properties are included in the accompanying consolidated statements of operations since their dates of acquisition.
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 the following estimated useful lives:
Hotel buildings 7-49 years
Hotel building improvements 4-39 years
Hotel site improvements 3-20 years
Hotel furniture, fixtures and equipment 1-10 years
Management assesses long-lived assets for potential impairment quarterly, as well as when events or changes in circumstances indicate the carrying amount of an asset or group of assets may not be recoverable. The identification of events or changes in circumstances that indicate the carrying value of assets may not be recoverable requires significant judgment. ESH REIT reviews for impairment indicators at the lowest level of identifiable cash flows based on quantitative, qualitative and certain industry-related factors. Quantitative factors include, but are not limited to, hotel property EBITDA, EBITDA margins and EBITDA multiples, and serve to screen assets or asset groups with historical, current or projected operating cash flow losses or deterioration. Qualitative factors include a change in physical condition, economic environment, regulatory environment or primary use, including the evaluation of the asset or group of assets for disposition.
Recoverability of property and equipment is measured by a comparison of the carrying amount of a hotel property or group of hotel properties (grouped under ESH REIT’s leases) to the estimated future undiscounted cash flows expected to be generated by the hotel property or group of hotel properties. Impairment is recognized when estimated future undiscounted cash flows, including expected proceeds from disposition, are less than the carrying value of the hotel property or group of hotel properties. To the extent that a hotel property or group of hotel properties is impaired, the excess carrying amount over estimated fair value is recognized as an impairment charge. Fair value is determined based upon the discounted cash flows of the hotel property or group of hotel properties, bids, quoted market prices or independent appraisals, as considered necessary.
The estimation and evaluation of future cash flows, in particular the holding period for real estate assets and asset composition and/or concentration within real estate portfolios, relies on significant judgments and assumptions regarding holding period, current and future operating performance and current and future market conditions. It is possible that such judgments and/or estimates will change; in particular, the effects of the COVID-19 pandemic could cause economic and market conditions to continue to deteriorate, and if this occurs, or if ESH REIT's expected holding period for real estate assets changes, ESH REIT may recognize impairment charges or losses on sale in future periods reflecting either changes in estimate, circumstance or the estimated market value of assets. During year ended December 31, 2020, ESH REIT recognized an impairment charge of $0.7 million (see Note 5).
Intangible Assets-Intangible assets include licenses related to certain internal-use software. Licenses are amortized using the straight-line method over their estimated useful life, which is the remaining non-cancellable term of each respective contract. Intangible assets are reviewed for impairment quarterly and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. ESH REIT tests for impairment more frequently if events or circumstances change that would more likely than not reduce the fair value of its reporting unit below its carrying amount.
ESH REIT believes that the carrying amount of its intangible assets are recoverable and there are no changes in circumstances that would more likely than not reduce the fair value of its reporting unit below its carrying amount. Therefore, no impairment charges related to intangible assets were recognized during the years ended December 31, 2020, 2019 or 2018. However, if the effects of the COVID-19 pandemic cause economic and market conditions to deteriorate, these events could result in impairment charges in the future. Actual results are subject to a high degree of uncertainty due to the volatility of macroeconomic trends.
Goodwill-Goodwill represents the purchase price in excess of the fair value of net assets acquired in conjunction with the acquisition of ESH REIT's predecessor in 2010. Goodwill is reviewed for impairment quarterly and more frequently if events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. ESH REIT has one operating segment, which is its reporting unit; therefore, management analyzes goodwill associated with all hotels when analyzing for potential impairment. ESH REIT first assesses qualitative factors to determine if it is more likely than not that the fair value of its reporting unit is less than its carrying amount.
ESH REIT believes that the carrying amount of its goodwill is recoverable and there are no changes in circumstances that would more likely than not reduce the fair value of its reporting unit below its carrying amount. Therefore, no impairment charges related to goodwill were recognized during the years ended December 31, 2020, 2019 or 2018. However, if the effects of the COVID-19 pandemic cause economic and market conditions to deteriorate, these events could result in impairment charges in the future. Actual results are subject to a high degree of uncertainty due to the volatility of macroeconomic trends.
Assets Held For Sale-ESH REIT classifies assets as held for sale when management commits to a formal plan to sell the assets, actively seeks a buyer for the assets and the consummation of a sale is considered probable and is expected within
one year. ESH REIT takes into consideration when determining whether the consummation of a sale is probable the following criteria: (i) whether a purchase and sale agreement has been executed, (ii) whether the buyer has a significant non-refundable deposit at risk and (iii) whether significant financing contingencies exist. Upon designating an asset as held for sale, ESH REIT stops recognizing depreciation expense and records the asset at the lower of its carrying value, including allocable goodwill, or its estimated fair value less estimated costs to sell. Any such adjustment to the carrying value is recognized as an impairment charge.
Discontinued Operations-ESH REIT classifies hotel properties sold or held for sale as discontinued operations when the disposal represents a strategic shift that has (or will have) a major effect on ESH REIT’s operations and financial results. No hotel properties were classified as discontinued operations during the years ended December 31, 2020, 2019 or 2018.
Deferred Financing Costs-Costs incurred in obtaining financing are amortized over the terms of the related loans on a straight-line basis, which approximates the effective interest method. Deferred financing costs are presented in the accompanying consolidated balance sheets as a direct deduction of the carrying amount of the related debt liability, except those incurred under a revolving-debt arrangement, which are presented as a component of other assets. Upon repayment, or in conjunction with a material change in the terms of the underlying debt agreement, remaining unamortized costs are written off as a component of net interest expense. Amortization of deferred financing costs is included as a component of net interest expense (see Note 7).
Revenue Recognition-ESH REIT’s sole source of revenues is rental revenue derived from operating leases with subsidiaries of the Corporation (i.e., all revenues are generated from agreements with related parties (see Note 11)). Rental revenues are recorded on a straight-line basis as they are earned during the lease terms. Rents receivable from Extended Stay America, Inc. on the accompanying consolidated balance sheets represent monthly rental amounts contractually due, while deferred rents receivable from Extended Stay America, Inc. represent the cumulative difference between straight-line rental revenues recognized and rental revenues contractually due. Lease rental payments received prior to rendering services are included in unearned rental revenues from Extended Stay America, Inc. on the accompanying consolidated balance sheets. Variable rental revenues, specifically percentage rental revenues related to hotel revenues of the Operating Lessees, are recognized when such amounts are fixed and determinable (i.e., only when percentage rental revenue thresholds have been achieved).
Fair Value of Financial Instruments-U.S. GAAP establishes a three-level valuation hierarchy based upon observable and unobservable inputs for fair value measurement of financial instruments:
Level 1-Observable inputs, such as quoted prices in active markets at the measurement date for identical assets or liabilities
Level 2 -Significant inputs that are observable, directly or indirectly, such as other quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability
Level 3-Significant unobservable inputs for which there is little to no market data and for which ESH REIT makes its own assumptions about how market participants would price the asset or liability
Fair value is defined as the price that would be received when selling an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., exit price). In instances where inputs used to measure fair value fall into different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety has been determined is based on the lowest-level input significant to the fair value measurement. ESH REIT’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
ESH REIT’s financial instruments consist of cash and cash equivalents, deposits, accounts payable and accrued liabilities, term loans, senior notes, its revolving credit facility and certain intercompany facilities whose counterparty is the Corporation. The carrying values of cash and cash equivalents, deposits, accounts payable and accrued liabilities and ESH REIT’s revolving credit facility are representative of their fair values due to the short-term nature or frequent settlement of these instruments. The fair values of term loans and senior notes are determined by comparing current borrowing rates and risk spreads offered in the market to the stated interest rates and spreads on ESH REIT’s instruments or from quoted market prices, when available (see Note 7).
Derivative Instruments-ESH REIT from time to time uses derivative instruments to manage its exposure to interest rate risks. ESH REIT’s primary objective in holding derivatives is to reduce the volatility of cash flows and earnings associated with changes in interest rates. ESH REIT’s derivatives expose it to credit risk to the extent that counterparties may be unable to
meet the terms of the agreement. ESH REIT 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. Derivative instruments, including derivative instruments embedded in other contracts, are recorded in the accompanying consolidated balance sheets as either assets or liabilities measured at fair value. Changes in fair value are recognized currently in earnings unless specific hedge accounting criteria are met (see Note 8). ESH REIT does not enter into derivative instruments for trading or speculative purposes.
Investments-ESH REIT consolidates a subsidiary when it has the ability to direct the activities that most significantly impact the economic performance of the subsidiary. Judgment is required with respect to the consolidation of investments, including partnership and joint venture entities, in terms of the evaluation of control, including assessment of the importance of rights and privileges of the partners based on voting rights, as well as financial interests that are not controllable through voting interests.
If a subsidiary, affiliate or other entity is a variable interest entity (“VIE”), it is subject to the consolidation framework specifically for VIEs. ESH REIT considers an entity a VIE if equity investors own an interest therein that does not have the characteristics of a controlling financial interest or if such investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. In accordance with Financial Accounting Standards Board (“FASB”) ASC 810, Consolidations, ESH REIT reviews subsidiaries and affiliates, as well as other entities, to determine if (i) they should be considered VIEs, and (ii) whether their consolidation determinations should change based on changes in their characteristics.
Income Taxes-ESH REIT accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, ESH REIT determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. ESH REIT’s deferred tax rates are adjusted to reflect expected future distributions and the deduction allowed upon distribution.
ESH REIT recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, ESH REIT considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations. If ESH REIT determines that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, ESH REIT would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. ESH REIT records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) ESH REIT determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position, and (2) for those tax positions that meet the more-likely-than-not recognition threshold, ESH REIT recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
ESH REIT has elected to be taxed as and expects to continue to qualify as a real estate investment trust (“REIT”) under provisions of the Internal Revenue Code (the “Code”). A REIT is a legal entity that holds real estate assets and is generally not subject to federal and state income taxes. In order to maintain qualification as a REIT, ESH REIT is required to distribute at least 90% of its taxable income, excluding capital gains, to its shareholders each year. In addition, ESH REIT must meet a number of complex organizational and operational requirements. If ESH REIT were to fail to qualify as a REIT in any taxable year, it would be subject to federal income taxes at regular corporate rates and generally would be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which it lost its REIT qualification. 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.
During the years ended December 31, 2020, 2019 and 2018, ESH REIT distributed approximately 100% of its taxable income and, as a result, incurred minimal current federal income tax. In the future, ESH REIT intends to distribute its taxable income to the extent necessary to optimize its tax efficiency including, but not limited to, maintaining its REIT status, while retaining sufficient capital for its ongoing needs. ESH REIT will incur federal and state income tax at statutory rates if its taxable income is not distributed. Accordingly, ESH REIT expects to distribute approximately 100% of its taxable income for the foreseeable future.
Comprehensive Income-Comprehensive income includes net income and other comprehensive income, which consists of interest rate cash flow hedge adjustments. Comprehensive income is presented in the accompanying consolidated statements of comprehensive income. Interest rate cash flow hedge adjustments are presented as separate components of consolidated equity.
Equity-Based Compensation-ESH REIT maintains a Long-Term Incentive Plan (“LTIP”), approved by its shareholders. Under the LTIP, ESH REIT may issue to eligible employees or directors equity-based awards in respect of Paired Shares with service, performance or market vesting conditions. ESH REIT recognizes costs related to equity-based awards over their vesting periods. ESH REIT classifies equity-based awards granted in exchange for employee or director services as either equity awards or as liability awards. The classification of an award either as an equity award or a liability award is generally based upon cash settlement options. Equity awards are measured based on their fair value on the date of grant. Liability awards are re-measured to fair value each reporting period. The value of all awards is recognized over the requisite service period, which is the period during which an employee or director is required to provide services in exchange for the award (usually the vesting period). No compensation expense is recognized for awards for which employees or directors do not render the requisite services. All outstanding awards are classified as equity awards.
Segments-ESH REIT’s hotel ownership business represents a single operating segment based on the manner in which ESH REIT manages its business and operations.
Recently Issued Accounting Standards
Reference Rate Reform-In March 2020, the FASB issued an accounting standards update that provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships that reference LIBOR, subject to meeting certain criteria. ESH REIT adopted this update on March 12, 2020, and the update is effective through December 31, 2022, during which time ESH REIT may elect to apply the optional expedients and exceptions offered under the standard. ESH REIT's variable rate debt and interest rate swap are tied to rates that reference LIBOR (see Notes 7 and 8). As of December 31, 2020, ESH REIT had not applied any of these optional expedients or exceptions. The adoption of this update did not, and is not expected to, have a material effect on ESH REIT's consolidated financial statements.
Income Taxes-In December 2019, the FASB issued an accounting standards update which simplifies the accounting for income taxes. The update amends several topics including interim period accounting for enacted changes in tax law and year-to-date loss limitation in interim-period tax accounting. ESH REIT adopted this update on January 1, 2021. The adoption of this update is not expected to have a material effect on ESH REIT’s consolidated financial statements.
Fair Value Measurement-In August 2018, the FASB issued an accounting standards update which modifies the disclosure requirements for fair value measurements in Topic 820, Fair Value Measurement. ESH REIT adopted this update on January 1, 2020. The adoption of this update did not have a material effect on ESH REIT's consolidated financial statements.
Intangibles-Goodwill and Other-Internal-Use Software-In August 2018, the FASB issued an accounting standards update which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. ESH REIT adopted this update on January 1, 2020, using a prospective transition method. The adoption of this update did not have a material effect on ESH REIT's consolidated financial statements.
Goodwill-In January 2017, the FASB issued an accounting standards update in which the guidance on testing for goodwill was updated to eliminate Step 2 in the determination on whether goodwill should be considered impaired. Annual and/or interim assessments are still required. ESH REIT adopted this update on January 1, 2020, using a prospective transition method. The adoption of this update did not have a material effect on ESH REIT's consolidated financial statements.
3. NET INCOME PER SHARE
Basic net income per share is computed by dividing net income available to Class A and Class B common shareholders by the weighted-average number of shares of unrestricted Class A and Class B common stock outstanding, respectively. Diluted net income per share is computed by dividing net income available to Class A and Class B common shareholders, as adjusted for potentially dilutive securities, by the weighted-average number of shares of unrestricted Class A and Class B common stock outstanding, respectively, plus potentially dilutive securities. Dilutive securities include certain equity-based awards (see Note 13) and are included in the calculation provided that the inclusion of such securities is not anti-dilutive.
The calculations of basic and diluted net income per share, including a reconciliation of the numerators and denominators, are as follows (in thousands, except per share data):
Year Ended December 31,
2020 2019 2018
Numerator:
Net income $ 175,868 $ 225,887 $ 230,129
Less preferred dividends (16) (16) (16)
Net income available to ESH Hospitality, Inc. common shareholders $ 175,852 $ 225,871 $ 230,113
Class A:
Net income available to ESH Hospitality, Inc. Class A common
shareholders - basic $ 102,872 $ 129,460 $ 131,039
Less amounts available to ESH Hospitality, Inc. Class B
shareholders assuming conversion (95) (82) (128)
Net income available to ESH Hospitality, Inc. Class A common shareholders - diluted $ 102,777 $ 129,378 $ 130,911
Class B:
Net income available to ESH Hospitality, Inc. Class B common shareholders - basic $ 72,980 $ 96,411 $ 99,074
Amounts available to ESH Hospitality, Inc. Class B shareholders
assuming conversion 95 82 128
Net income available to ESH Hospitality, Inc. Class B common shareholders - diluted $ 73,075 $ 96,493 $ 99,202
Denominator:
Class A:
Weighted-average number of ESH Hospitality, Inc. Class A common shares outstanding - basic and diluted 250,494 250,494 250,494
Class B:
Weighted-average number of ESH Hospitality, Inc. Class B common shares outstanding - basic $ 177,708 $ 186,546 $ 189,389
Dilutive securities 395 276 432
Weighted-average number of ESH Hospitality, Inc. Class B common shares outstanding - diluted $ 178,103 $ 186,822 $ 189,821
Net income per ESH Hospitality, Inc. common share -
Class A - basic $ 0.41 $ 0.52 $ 0.52
Net income per ESH Hospitality, Inc. common share -
Class A - diluted $ 0.41 $ 0.52 $ 0.52
Net income per ESH Hospitality, Inc. common share -
Class B - basic $ 0.41 $ 0.52 $ 0.52
Net income per ESH Hospitality, Inc. common share -
Class B - diluted $ 0.41 $ 0.52 $ 0.52
4. HOTEL ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
2019 Acquisition-On November 12, 2019, ESH REIT acquired a 121-room operating hotel from Crestwood Suites of Lakeland, LLC for $10.0 million. Other than ordinary components of prorated net working capital, no liabilities were assumed in the purchase. The majority of the purchase price was allocated to building and improvements, with estimated useful lives ranging from five to 44 years.
2018 Acquisition-On May 30, 2018, ESH REIT acquired a 115-room operating hotel from Legacy Rock Hill, LLC for $13.0 million. Other than ordinary components of prorated net working capital, no liabilities were assumed in the purchase. The majority of the purchase price was allocated to building and improvements, with estimated useful lives ranging from four to 49 years. Prior to its acquisition by ESH REIT, the hotel opened in late 2017.
No hotels were acquired during the year ended December 31, 2020. During the years ended December 31, 2020, 2019 and 2018, acquired hotel properties contributed rental revenues, total operating expenses and income before income tax expense as follows (in thousands):
Years ended December 31,
2020 2019 2018
Rental revenues from Extended Stay America, Inc. $ 2,189 $ 1,087 $ 728
Total operating expenses 1,525 882 475
Income before income tax expense 664 205 253
DISPOSITIONS
The table below summarizes hotel dispositions for the prior three years (in thousands, except number of hotels and number of rooms). No dispositions were reported as discontinued operations.
Year Location Month Sold Number of
Hotels Number of Rooms Net Proceeds Gain (Loss) on Sale
2020 California November 1 146 $ 63,556 $ 52,196
2018 Various November 14 1,386 $ 34,855 $ (14,930)
2018 Various September 16 1,677 $ 60,710 $ (17,025)
2018 Various September 16 1,772 $ 58,144 $ (8,934)
2018 Various February 25 2,420 $ 111,156 $ 4,269
2018 Texas March 1 101 $ 44,090 $ 30,992
During the years ended December 31, 2020, 2019 and 2018, disposed hotel properties contributed total rental revenues, total operating expenses and income before income tax expense as follows (in thousands):
Year Ended December 31,
2020 2019 2018
Rental revenues from Extended Stay America, Inc. $ 2,358 $ 3,212 $ 23,595
Total operating expenses 679 736 16,518
Income before income tax expense 1,679 2,476 7,077
5. PROPERTY AND EQUIPMENT
Net investment in property and equipment as of December 31, 2020 and 2019, consists of the following (in thousands):
December 31,
2020 December 31,
Hotel properties:
Land and site improvements (1)
$ 1,248,807 $ 1,230,598
Building and improvements 2,914,683 2,824,061
Furniture, fixtures and equipment (2)
790,584 751,417
Total hotel properties 4,954,074 4,806,076
Development in process (3)
46,496 70,864
Other 1,000 1,675
Total cost 5,001,570 4,878,615
Less accumulated depreciation (1,540,358) (1,372,595)
Property and equipment-net $ 3,461,212 $ 3,506,020
_________________________________
(1)Includes finance lease asset of $4.0 million and $3.2 million as of December 31, 2020 and 2019, respectively.
(2)Includes finance lease asset of $0.4 million and $0 as of December 31, 2020 and 2019, respectively.
(3)Includes finance lease asset of $0.0 million and $0.8 million as of December 31, 2020 and 2019, respectively.
As of December 31, 2020 and 2019, development in process consisted of 8 and 15 land parcels, respectively, that were in various phases of construction and/or development. As of December 31, 2020, ESH REIT expects to delay commencement of construction at four of these locations as a result of current market uncertainty.
During the years ended December 31, 2020, 2019 and 2018, the following owned, newly constructed hotels were opened under the Extended Stay America brand:
Opening Date Location Number of Hotels Number of Room
December 2020 Florida 1 124
November 2020 Florida 1 144
August 2020 Florida 1 124
June 2020 Various 2 248
April 2020 South Carolina 1 120
March 2020 Florida 1 120
December 2019 Various 2 260
September 2018 South Carolina 1 107
During the years ended December 31, 2020, 2019 and 2018, newly-built hotels contributed rental revenues, total operating expenses and income before income tax expense as follows (in thousands):
Year Ended December 31,
2020 2019 2018
Rental revenues from Extended Stay America, Inc. $ 10,704 $ 1,385 81
Total operating expenses 5,730 909 79
Income before income tax expense 4,974 476 2
During the year ended December 31, 2020, ESH REIT recognized an impairment charge of $0.7 million related to an undeveloped land parcel. ESH REIT used Level 2 observable inputs, including a non-binding bid to sell the undeveloped land parcel, and Level 3 unobservable inputs, including estimated transaction costs, to determine the impairment charge. No impairment charges were recognized for the years ended December 31, 2019 and 2018.
6. INTANGIBLE ASSETS AND GOODWILL
ESH REIT’s intangible assets and goodwill as of December 31, 2020 and 2019, consist of the following (dollars in thousands):
December 31, 2020
Gross Carrying Amount Accumulated
Amortization Net Book
Value
Definite-lived intangible assets-software licenses $ 10,546 $ (2,005) $ 8,541
Goodwill 43,878 - 43,878
Total intangible assets and goodwill $ 54,424 $ (2,005) $ 52,419
December 31, 2019
Gross Carrying Amount Accumulated Amortization Net Book Value
Definite-lived intangible assets-software licenses $ 10,353 $ (763) $ 9,590
Goodwill 44,012 - 44,012
Total intangible assets and goodwill $ 54,365 $ (763) $ 53,602
The remaining weighted-average amortization period for amortizing intangible assets is approximately seven years as of December 31, 2020. Estimated future amortization expense for amortizing intangible assets is as follows (in thousands):
Years Ending December 31,
2021 $ 1,250
2022 1,250
2023 1,250
2024 1,250
2025 1,250
Thereafter 2,291
Total $ 8,541
7. DEBT
During the years ended December 31, 2020 and 2019, the following debt transactions occurred (in thousands):
December 31, 2020 December 31, 2019
Debt, net of deferred financing costs and debt discounts - beginning of year (1)
$ 2,632,636 $ 2,395,507
Additions:
Proceeds from senior notes - 750,000
Proceeds from revolving credit facility 350,000 -
Amortization and write-off of deferred financing costs and debt discount (2)
7,530 12,967
Deductions:
Payments on term loan facilities (6,309) (507,261)
Payments on revolving credit facility (350,000) -
Payments of deferred financing costs (2)
- (18,577)
Debt, net of deferred financing costs and debt discounts - end of year (1)
$ 2,633,857 $ 2,632,636
______________________
(1)Excludes finance lease obligations.
(2)Excludes amortization and payments of deferred financing costs related to the revolving credit facility.
Summary-ESH REIT’s outstanding debt, net of unamortized debt discount and unamortized deferred financing costs, as of December 31, 2020 and 2019, consists of the following (dollars in thousands):
Carrying Amount Unamortized Deferred
Financing Costs
Loan Stated
Amount December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019 Stated Interest
Rate
Maturity
Date
Term loan facility
ESH REIT Term Facility $ 630,909 $ 621,351 (1)
$ 627,368 (1)
$ 7,684 $ 9,030 LIBOR(2) + 2.00%
9/18/2026 (3)
Senior notes
2025 Notes 1,300,000 1,294,301 (4)
1,292,986 (4)
12,232 15,055 5.25% 5/1/2025
2027 Notes 750,000 750,000 750,000 11,879 13,633 4.63% 10/1/2027
Revolving credit facility
ESH REIT Revolving Credit Facility 350,000 - - 2,061 (5)
2,606 (5)
LIBOR(2) + 2.00%
9/18/2024
Unsecured Intercompany Facility
ESH REIT Intercompany Facility 75,000 - - - - 5.00% 9/18/2026
Total $ 2,665,652 $ 2,670,354 $ 33,856 $ 40,324
______________________
(1)The ESH REIT Term Facility (defined below) is presented net of an unamortized debt discount of $1.7 million and $2.0 million as of December 31, 2020 and 2019, respectively.
(2)As of December 31, 2020 and 2019, one-month LIBOR was 0.14% and 1.76%, respectively. As of December 31, 2020 and 2019, $100.0 million and $200.0 million, respectively, of the ESH REIT Term Facility was subject to an interest rate swap at a fixed rate of 1.175%.
(3)Amortizes in equal quarterly installments of $1.6 million. In addition to scheduled amortization, subject to certain exceptions, annual mandatory prepayments of up to 50% of Excess Cash Flow, as defined, may be required under the ESH REIT Term Facility. Annual mandatory prepayments for a given fiscal year are due during the first quarter of the following fiscal year. No mandatory prepayments are required in the first quarter of 2021 based on ESH REIT's Excess Cash Flow for the year ended December 31, 2020.
(4)The 2025 Notes (defined below) are presented net of an unamortized discount of $5.7 million and $7.0 million as of December 31, 2020 and 2019, respectively.
(5)Unamortized deferred financing costs related to the revolving credit facility are included in other assets in the accompanying consolidated balance sheets.
ESH REIT Credit Facilities
ESH REIT’s credit agreement, as may be amended and supplemented from time to time, provides for senior secured credit facilities (collectively, the “ESH REIT Credit Facilities”) which consist of a $630.9 million senior secured term loan facility (the “ESH REIT Term Facility”) and a $350.0 million senior secured revolving credit facility (the “ESH REIT Revolving Credit Facility”). Subject to the satisfaction of certain criteria, borrowings under the ESH REIT Credit Facilities may be increased by an amount of up to $600.0 million, plus additional amounts, so long as, after giving effect to the incurrence of such incremental facility and the application of proceeds thereof, ESH REIT’s pro-forma senior loan-to-value ratio is less than or equal to 45%.
Obligations under the 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 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.
ESH REIT Term Facility-The ESH REIT Term Facility bears interest at a rate equal to (i) LIBOR plus 1.75% for any period during which ESH REIT maintains a public corporate family rating better than or equal to BB (with a stable or better outlook) from S&P and Ba3 (with a stable or better outlook) from Moody’s (a “Level 1 Period”) or LIBOR plus 2.00% for any period other than a Level 1 Period; or (ii) a base rate (determined by reference to the highest of (A) the prime lending rate, (B) the overnight federal funds rate plus 0.50% or (C) the one-month adjusted LIBOR rate plus 1.00%), plus 0.75% during a Level 1 Period or 1.00% for any period other than a Level 1 Period. ESH REIT has the option to voluntarily prepay outstanding loans under the ESH REIT Term Facility at any time without penalty.
ESH REIT Revolving Credit Facility-Borrowings under the ESH REIT Revolving Credit Facility bear interest at a rate equal to (i) LIBOR plus a spread that ranges from 1.50% to 2.00% based on ESH REIT’s Consolidated Total Net Leverage Ratio, as defined, or (ii) a base rate (determined by reference to the highest of (A) the prime lending rate, (B) the overnight federal funds rate plus 0.50%, or (C) the one-month adjusted LIBOR rate plus 1.00%) plus a spread that ranges from 0.50% to 1.00% based on ESH REIT’s Consolidated Total Net Leverage Ratio, as defined. ESH REIT incurs a fee of 0.30% or 0.175% on the unutilized revolver balance based on the amount outstanding under the facility. ESH REIT is also required to pay customary letter of credit fees and agency fees. The ESH REIT Revolving Credit Facility provides for the issuance of up to $50.0 million of letters of credit. As of December 31, 2020, ESH REIT had no letters of credit outstanding and available borrowing capacity of $350.0 million under the facility.
The ESH REIT Revolving Credit Facility is subject to a springing financial covenant whereby the senior loan-to-value ratio may not exceed 45% when the aggregate principal amount of borrowings and letters of credit under the ESH REIT Revolving Credit Facility, excluding up to $30.0 million of letters of credit, is equal to or greater than 35% of the aggregate available principal amount of the ESH REIT Revolving Credit Facility on the applicable fiscal quarter end date.
In March 2020, ESH REIT borrowed the full available capacity of $350.0 million under the ESH REIT Revolving Credit Facility as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of uncertainty in business markets. In August 2020, ESH REIT repaid the full outstanding balance under the ESH REIT Revolving Credit Facility. As of December 31, 2020, the outstanding balance under the facility was $0.
ESH REIT 2025 Notes
In May 2015 and March 2016, ESH REIT issued $500.0 million and $800.0 million, respectively, of its 5.25% senior notes due in May 2025 (the “2025 Notes”) under an indenture with Deutsche Bank Trust Company Americas, as trustee, in private placements pursuant to Rule 144A of the Securities Act of 1933, as amended. ESH REIT may redeem the 2025 Notes at any time, 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. 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 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 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 2027 Notes
In September 2019, ESH REIT issued $750.0 million of its 4.625% senior notes due in 2027 (the “2027 Notes”) under an indenture with Deutsche Bank Trust Company Americas, as trustee, at a price equal to 100% of par value in a private placement pursuant to Rule 144A of the Securities Act of 1933, as amended. ESH REIT may redeem the 2027 Notes at any time on or after October 1, 2022, in whole or in part, at a redemption price equal to 102.313% of the principal amount, declining annually to 100% of the principal amount from October 1, 2024 and thereafter, plus accrued and unpaid interest. Prior to October 1, 2022, ESH REIT may redeem the 2027 Notes, in whole or in part, at a redemption price equal to 100% of the principal amount, plus a “make-whole” premium, as defined, plus accrued and unpaid interest. Prior to October 1, 2022, subject to certain conditions, ESH REIT may redeem up to 35% of the aggregate principal amount of the 2027 Notes at a redemption price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest, with the net cash proceeds from certain equity offerings, provided 65% of the original amount of the principal remains outstanding after the occurrence of each such redemption. Upon a Change of Control, as defined, holders of the 2027 Notes have the right to require ESH REIT to redeem the 2027 Notes at 101% of the principal amount, plus accrued and unpaid interest.
The 2027 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 ESH REIT Credit Facilities. The 2027 Notes are not guaranteed by the Corporation or any of its subsidiaries that lease ESH REIT’s properties or its subsidiaries that engage in franchising or management activities or own intellectual property. The 2027 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 2027 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 Intercompany Facility
In August 2016, ESH REIT, as borrower, and the Corporation, as lender, entered into an unsecured intercompany credit facility, as may be amended and supplemented from time to time (the “ESH REIT Intercompany Facility”). Subject to certain conditions, the principal amount of the ESH REIT Intercompany Facility may be increased up to an amount that shall not exceed the greater of (i) $300.0 million and (ii) an unlimited amount so long as the incremental loan-to-value ratio, determined on a pro-forma basis as of the last day of the most recently ended test period, as if any incremental loans available under such incremental commitments had been outstanding on the last day of such period, and, in each case, without netting the cash proceeds of any such incremental loans, does not exceed 5.0%. Loans under the ESH REIT Intercompany Facility bear interest at an annual rate of 5.0%. ESH REIT has the option to prepay outstanding balances under the facility without penalty. As of December 31, 2020 and 2019, the amount outstanding under the facility was $0.
Covenants
The ESH REIT Credit Facilities, the 2027 Notes, the 2025 Notes and the ESH REIT Intercompany Facility contain a number of restrictive covenants that, among other things and subject to certain exceptions, limit ESH REIT’s ability and the ability of its subsidiaries to engage in certain transactions. In addition, the ESH REIT Revolving Credit Facility contains a financial covenant that, subject to certain conditions, requires compliance with a senior loan-to-value ratio. The agreements governing ESH REIT’s indebtedness also contain certain customary representations and warranties, affirmative covenants and events of default, including, but not limited to, cross-defaults to certain other indebtedness and, in the case of the ESH REIT Credit Facilities and the ESH REIT Intercompany Facility, certain material operating leases and management agreements. As of December 31, 2020, ESH REIT was in compliance with all covenants under its debt agreements.
ESH REIT’s continued compliance with these covenants could be impacted by current or future economic conditions associated with the COVID-19 pandemic. ESH REIT's failure to maintain compliance with its debt covenants or to pay debt obligations as they become due would give rise to a default under one or more of the agreements governing its indebtedness, and could entitle the lenders under the defaulted agreements to accelerate the maturity of the amounts thereunder, which could raise substantial doubt about ESH REIT's ability to continue as a going concern. ESH REIT may seek covenant waivers or amendments, though there is no certainty that it would be successful in such efforts.
Future Maturities of Debt-The future maturities of debt as of December 31, 2020, are as follows (in thousands):
Years Ending December 31,
2021 $ 6,309 (1)
2022 6,309 (1)
2023 6,309 (1)
2024 6,309 (1)
2025 1,306,309 (1)
Thereafter 1,341,477 (1)
Total $ 2,673,022
______________________
(1)Under the ESH REIT Term Facility, annual mandatory prepayments of up to 50% of Excess Cash Flow, as defined, may be required under the ESH REIT Term Facility. Annual mandatory prepayments for a given fiscal year are due during the first quarter of the following fiscal year. No mandatory prepayments are required in the first quarter of 2021 based on ESH REIT's Excess Cash Flow for the year ended December 31, 2020.
Interest Expense, net-The components of net interest expense during the years ended December 31, 2020, 2019 and 2018, are as follows (in thousands):
Year Ended December 31,
2020 2019 2018
Contractual interest (1)
$ 121,032 $ 116,497 $ 115,778
Amortization of deferred financing costs and debt discount 8,091 7,947 7,895
Debt extinguishment and other costs (2)
883 8,112 2,847
Interest income(3)
(1,514) (3,601) (1,775)
Total $ 128,492 $ 128,955 $ 124,745
______________________
(1)Net of capitalized interest of $2.9 million, $2.2 million and $0.5 million, respectively.
(2)Includes interest expense on finance leases (See Note 12) and unused facility fees.
(3)For the year ended December 31, 2020, includes $0.3 million of interest income from the Corporation Intercompany Facility (see Note 11).
Fair Value of Debt-As of December 31, 2020 and 2019, the estimated fair value of ESH REIT’s debt was $2.7 billion. Estimated fair values are determined by comparing current borrowing rates and risk spreads offered in the market (Level 2 fair value measures) or quoted market prices (Level 1 fair value measures), when available, to the stated interest rates and spreads on ESH REIT’s debt.
8. DERIVATIVE INSTRUMENTS
ESH REIT is a counterparty to a floating-to-fixed interest rate swap at a fixed rate of 1.175% and a floating rate of one-month LIBOR to manage its exposure to interest rate risk on a portion of the ESH REIT Term Facility. The notional amount of the interest rate swap as of December 31, 2020 was $100.0 million. The notional amount decreases by an additional $50.0 million every six months until the swap’s maturity in September 2021.
For the year ended December 31, 2020, ESH REIT paid interest of $0.6 million and for each of the years ended December 31, 2019 and 2018, ESH REIT received proceeds of $2.8 million that offset interest expense. As of December 31, 2020, $0.5 million of interest expense is expected to be recognized through the swap’s maturity.
The table below presents the amounts and classification on ESH REIT’s consolidated financial statements (in thousands):
(Accrued liabilities) other assets Accumulated other comprehensive income, net of tax Interest expense (income), net
As of December 31, 2020 $ (525) $ (526) (1)
As of December 31, 2019 $ 831 $ 830 (2)
For the year ended December 31, 2020 $ 643
For the year ended December 31, 2019 $ (2,842)
For the year ended December 31, 2018 (2,765)
_______________________________
(1)Changes during the year ended December 31, 2020, on a pre-tax basis, consisted of changes in fair value of $(1.4) million.
(2)Changes during the year ended December 31, 2019, on a pre-tax basis, consisted of changes in fair value of $(5.0) million.
9. INCOME TAXES
Income (loss) before income tax expense for the years ended December 31, 2020, 2019 and 2018 consists of the following (in thousands):
Year Ended December 31,
2020 2019 2018
U.S. $ 175,887 $ 225,952 $ 231,266
Canada 148 310 (340)
Total $ 176,035 $ 226,262 $ 230,926
The components of income tax expense (benefit) for the years ended December 31, 2020, 2019 and 2018 are as follows (in thousands):
Year Ended December 31,
2020 2019 2018
Federal (including foreign):
Current $ - $ - $ 715
State:
Current 167 384 97
Deferred - (9) (15)
Total $ 167 $ 375 $ 797
The differences between income tax expense at the effective tax rate and the statutory U.S. federal income tax rate for the years ended December 31, 2020, 2019 and 2018 are as follows (in thousands):
Year Ended December 31,
2020 2019 2018
Tax at statutory rate $ 36,967 21.0 % $ 47,515 21.0 % $ 48,494 21.0 %
State income tax 167 0.1 375 0.2 82 -
Nontaxable ESH REIT income (36,920) (21.0) (47,509) (21.0) (48,116) (20.8)
Other permanent differences (47) - (6) - (378) (0.2)
Other - net - - - - 715 0.3
Income tax expense - net $ 167 0.1 % $ 375 0.2 % $ 797 0.3 %
The significant components of deferred tax assets and deferred tax liabilities as of December 31, 2020 and 2019, which are included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets, consist of the following (in thousands):
December 31,
2020 December 31,
Deferred tax assets:
Net operating loss carryforwards $ 747 $ 785
Other 8 2
Total deferred tax assets: 755 787
Valuation allowance (747) (785)
Net deferred tax assets: 8 2
Deferred tax liabilities:
Other (20) (13)
Total net deferred tax liabilities: $ (12) $ (11)
ESH REIT has elected to be taxed and expects to continue to qualify as a 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 and generally would be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which it lost its REIT qualification. ESH REIT intends to distribute its taxable income to the extent necessary to optimize its tax efficiency including, but not limited to, maintaining its REIT status, while retaining sufficient capital for its ongoing needs. Even in qualifying as a REIT, ESH REIT may be subject to state and local taxes in certain jurisdictions, and is subject to federal income and excise taxes on undistributed income.
During the years ended December 31, 2020, 2019 and 2018, ESH REIT recognized a dividend paid deduction for 100% of its taxable income, incurring no federal income tax and minimal state and local income taxes. The following table summarizes ESH REIT’s taxable income prior to distributions, cash distributions to its shareholders and the prior year deduction of cash distributions for the years ended December 31, 2020, 2019 and 2018 (in thousands):
Year Ended December 31,
2020 2019 2018
Taxable income prior to distribution $ 178,030 $ 233,433 $ 297,211
Cash distributions(1)
$ 218,263 $ 240,600 $ 277,075
Prior year deduction of cash distributions(2)
$ 20,225 $ 26,514 $ 2,829
_________________________________
(1)Excludes accumulated distributions on RSUs settled.
(2)Cash distributions that were previously deducted to offset taxable income in the year prior.
All cash distributions for the years ended December 31, 2020, 2019 and 2018 were considered ordinary taxable income. The 2020 distribution includes a special distribution of $149.8 million declared in December 2020 and paid in January 2021. Approximately $129.8 million of the special distribution was deductible to ESH REIT in 2020; the remaining $20.0 million will be deducted in 2021. The special distribution will be subject to current taxation to the Corporation as dividend income in 2021 at the time of receipt.
As of December 31, 2020, the tax basis of ESH REIT’s property and equipment was $21.8 million greater than the book basis.
ESH REIT evaluates its open tax positions using the criteria established by ASC 740, Income Taxes. ESH REIT has concluded that it has not taken any material tax positions that are not more likely than not to be sustained upon examination and has therefore not recorded any reserves for uncertain tax positions. ESH REIT’s federal income tax returns for the tax years 2017 to present may be subject to examination by the Internal Revenue Service and other taxing authorities. As of December 31, 2020, a subsidiary of ESH REIT was under examination by the Canadian Revenue Agency for the tax years 2014 through 2017. As this audit is still in process, the timing of the resolution and any payments that may be required cannot be determined at this time. ESH REIT believes that, to the extent a liability may exist, it is not material as of December 31, 2020.
10. EQUITY
ESH REIT has authorized 4,300.0 million shares of Class A common stock, par value $0.01 per share, of which 250.5 million shares were issued and outstanding as of December 31, 2020 and 2019. All issued and outstanding shares of ESH REIT Class A common stock were held by the Corporation as of December 31, 2020 and 2019. ESH REIT has authorized 7,800.0 million shares of Class B common stock, par value $0.01 per share, of which 177.6 million and 179.5 million shares were issued and outstanding as of December 31, 2020 and 2019, respectively. Each share of ESH REIT’s outstanding Class B common stock is attached to and trades as a single unit with one share of the Corporation’s common stock.
ESH REIT has authorized 350.0 million shares of preferred stock, par value $0.01 per share, of which no shares were issued or outstanding as of December 31, 2020 and 2019. Additionally, ESH REIT has authorized 125 shares of preferred stock, no par value, all of which were issued and outstanding as of December 31, 2020 and 2019. The outstanding ESH REIT preferred stock pays dividends at a rate of 12.5% per year. With respect to dividends and distributions upon ESH REIT’s liquidation, winding-up or dissolution, the 12.5% preferred stock ranks senior to the ESH REIT Class A and Class B common stock. The liquidation preference of the 12.5% preferred stock is $1,000 per share plus any accumulated unpaid dividends. Shares of 12.5% preferred stock may be redeemed, in whole or in part, at any time for a per share amount equal to the liquidation preference plus all accumulated unpaid dividends.
ESH REIT paid cash distributions totaling $68.9 million (of which $40.1 million was paid to the Corporation), $241.0 million (of which $137.8 million was paid to the Corporation) and $277.8 million (of which $157.8 million was paid to the Corporation) during the years ended December 31, 2020, 2019 and 2018, respectively.
On December 22, 2020, the Board of Directors of ESH REIT declared a special cash distribution of $0.35 per share on its Class A and Class B common shareholders. The special distribution totals $149.8 million, $87.7 million of which is payable to the Corporation and is included in Due to Extended Stay America, Inc., and $62.1 million of which is payable to Class B common shareholders and is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets as of December 31, 2020. ESH REIT paid the distribution on January 20, 2021 to shareholders of record as of January 6, 2021.
Paired Share Repurchase Program-In December 2015, the Boards of Directors of the Corporation and ESH REIT authorized a combined Paired Share repurchase program. As a result of several increases in authorized amounts and program extensions, including a program extension authorized in December 2020, effective January 1, 2021, the combined Paired Share repurchase program authorizes the Corporation and ESH REIT to purchase up to $550.0 million in Paired Shares through December 31, 2021. Repurchases may be made at management’s discretion from time to time in the open market, in privately negotiated transactions or by other means (including through Rule 10b5-1 trading plans). As of December 31, 2020, ESH REIT repurchased and retired 28.6 million ESH REIT Class B common shares for $166.4 million, including transaction fees, and $101.1 million remained available under the combined Paired Share repurchase program.
11. RELATED PARTY TRANSACTIONS
Revenues and Expenses
Leases and Rental Revenues-All revenues are generated as a result of, and earned from, three operating leases with related parties. The counterparty to each lease agreement is a subsidiary of the Corporation. Fixed and variable rental revenues for the years ended December 31, 2020, 2019 and 2018 are as follows (in thousands):
Years Ending December 31,
2020 2019 2018
Fixed rental revenues $ 479,211 $ 472,523 $ 450,277
Variable rental revenues (1)
83,598 177,375 217,151
______________________
(1)Regardless of whether cash rental payments are received, ESH REIT only recognizes revenue when a lessee's revenue exceeds specific thresholds stated in the lease.
Each lease agreement, which had an initial term that expired in October 2018, was renewed effective November 1, 2018, for a five-year term that expires in October 2023. Each lease contains an automatic five-year renewal, unless lessee provides notice that it will not renew no later than thirty months prior to expiration. Upon renewal, minimum and percentage rents will be adjusted to reflect then-current market terms. Future fixed rental payments to be received under current remaining noncancellable lease terms are as follows (in thousands):
Years Ending December 31,
2021 $ 483,113
2022 495,473
2023 423,106
Total $ 1,401,692
Overhead Expenses-The Corporation incurs costs under a services agreement between the Corporation and ESH REIT for certain overhead services performed on each entities’ behalf. The services relate to executive management, accounting, financial analysis, training and technology. For the years ended December 31, 2020, 2019 and 2018, ESH REIT incurred $10.2 million, $9.9 million and $9.8 million, respectively, which is included in general and administrative expenses in the accompanying consolidated statements of operations, related to these services. Expenses incurred under this services agreement include expenses related to certain employees that participate in the Corporation’s long-term incentive plan (as described in Note 13). Such charges were $1.1 million, $0.9 million and $0.9 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Capital Transactions
Corporation Intercompany Facility-In July 2020, the Corporation, as borrower, and ESH REIT, as lender, entered into an unsecured credit facility (the “Corporation Intercompany Facility”). Under the Corporation Intercompany Facility, the Corporation may borrow up to $150.0 million. Loans under the facility bear interest at an annual rate of 4.50%. In addition to paying interest on outstanding principal, the Corporation is required to pay a commitment fee to ESH REIT of 0.25% on the unutilized facility balance. There is no scheduled amortization under the facility and the facility matures on July 2, 2025. Obligations under the Corporation Intercompany Facility and guarantees thereof are unsecured and fully subordinated to the obligations of the Corporation under its revolving credit facility. The Corporation has the option to prepay outstanding balances under the facility without penalty. During the year ended December 31, 2020, the Corporation borrowed and fully repaid $20.0 million under the Corporation Intercompany Facility, and ESH REIT recognized $0.3 million of interest income related to the facility (see Note 7). As of December 31, 2020 the outstanding balance under the facility was $0.
ESH REIT Intercompany Facility-As of December 31, 2020 and 2019, there were no outstanding balances owed by ESH REIT to the Corporation under the ESH REIT Intercompany Facility, and no interest expense related to the ESH REIT Intercompany Facility was incurred during the years ended December 31, 2020, 2019 and 2018. ESH REIT is able to borrow under the ESH REIT Intercompany Facility up to $300.0 million, plus additional amounts, in each case, subject to certain conditions (see Note 7).
Distributions-During the years ended December 31, 2020, 2019 and 2018, ESH REIT paid distributions of $40.1 million, $137.8 million and $157.8 million, respectively, to the Corporation in respect of the Class A common stock of ESH REIT. As of December 31, 2020, a distribution of $87.7 million, declared on December 22, 2020, is payable to the Corporation and is included in Due to Extended Stay America, Inc. on the consolidated balance sheets (see Note 10).
Issuance of Common Stock-During the year ended December 31, 2020, 2019 and 2018, ESH REIT received $0.9 million, $1.4 million and $2.6 million, respectively, for the issuance of 0.2 million, 0.2 million and 0.4 million shares of Class B common stock, each of which was attached to a share of Corporation common stock to form a Paired Share, used to settle vested restricted stock units (“RSUs”).
As of December 31, 2020, approximately 178,000 equity-based awards issued by the Corporation have vested but have not been settled, for which ESH REIT has recognized a receivable of $0.7 million, which is included as a component of due to Extended Stay America, Inc., net on the accompanying consolidated balance sheets. In March 2021, in accordance with the awards’ settlement provisions, ESH REIT expects to issue and be compensated for the issuance of the corresponding shares of Class B common stock, each of which will be attached to a share of common stock of the Corporation to form a Paired Share.
As of December 31, 2019, approximately 83,000 equity-based awards issued by the Corporation had vested but had not been settled, for which ESH REIT had recognized a receivable of $0.3 million, which is included as a component of due to Extended Stay America, Inc. on the accompanying consolidated balance sheets. In March 2020, in accordance with the awards’ settlement provisions, ESH REIT issued and was compensated for the issuance of the corresponding shares of Class B common stock, each of which was attached to a share of common stock of the Corporation to form a Paired Share.
Related Party Transaction Balances
Related party transaction balances as of December 31, 2020 and 2019, include the following (in thousands):
December 31, 2020 December 31, 2019
Leases:
Rents receivable(1)
$ 3,941 $ 1,572
Deferred rents receivable(2)
$ 39,135 $ 28,917
Unearned rental revenues(1)
$ - $ (38,770)
Working capital and other:
Ordinary working capital(3)
$ (5,806) $ (12,160)
Equity awards receivable(4)
688 322
Distribution payable(5)
$ (87,673) -
Total working capital and other, net(6)
$ (92,791) $ (11,838)
______________________
(1)Rents receivable relate to percentage rents. As of December 31, 2019, unearned rental revenues relate to prepaid January 2020 fixed minimum rent.
(2)Revenues recognized in excess of cash rents received.
(3)Disbursements and/or receipts made by the Corporation or ESH REIT on the other entity’s behalf and amounts payable/receivable for certain transactions between the Corporation and ESH REIT. Includes overhead costs incurred by the Corporation on ESH REIT’s behalf.
(4)Amounts related to restricted stock units not yet settled or issued.
(5)Special distribution declared in December 2020 and paid in January 2021.
(6)Outstanding balances are typically repaid within 30 days.
12. COMMITMENTS AND CONTINGENCIES
Lease Commitments-ESH REIT is a tenant under long-term ground leases at five of its hotel properties. Three of these leases are operating leases and two are finance leases. The ground lease agreements terminate at various dates between 2023 and 2096 and several of the agreements include multiple renewal options for generally five or ten year periods. As ESH REIT is reasonably certain that it will exercise the options to extend its ground leases, fixed payments associated with the extensions are included in the measurement of related right-of-use assets and lease liabilities. Additionally, as of December 31, 2020, ESH REIT leased certain technology equipment located at its hotel sites under finance leases.
Operating lease costs related to ground leases are included in hotel operating expenses in the consolidated statements of operations. Finance lease interest costs are included in interest expense, net in the consolidated statements of operations (see Note 7) or, when pertaining to assets under development, are capitalized and included in property and equipment, net on the consolidated balance sheets (see Note 5). As ESH REIT's finance lease right-of-use assets pertain to land and land under development, and as ESH REIT elected the practical expedient to retain prior lease classification upon adoption of ASC 842, Leases, no amortization costs related to finance leases were incurred during the year ended December 31, 2020 and 2019. ESH REIT has no variable lease costs or short-term leases.
For the year ended in December 31, 2020 and 2019, components of ESH REIT's total lease costs are as follows (in thousands):
Year Ended December 31,
2020 2019
Operating lease costs $ 1,305 $ 1,348
Finance lease costs 301 242
Total lease costs $ 1,606 $ 1,590
Rent expense on operating leases was $1.5 million for the year ended December 31, 2018, and was recognized on a straight-line basis.
ESH REIT’s right-of-use assets and lease liabilities are as follows (in thousands):
December 31, 2020 December 31, 2019
Right-of-use assets:
Operating (1)
$ 1,388 $ 2,084
Finance (2)
4,354 3,979
Lease liabilities:
Operating (3)
9,036 9,207
Finance 3,668 3,379
_________________________________
(1) Included in other assets on the accompanying consolidated balance sheets.
(2) Included in property and equipment, net on the accompanying consolidated balance sheets.
(3) Included in accounts payable and accrued liabilities on the accompanying consolidated balance sheets.
Maturities of lease liabilities as of December 31, 2020, are as follows (in thousands):
Years Ending December 31, Operating Leases Finance Leases
2021 $ 784 $ 850
2022 806 397
2023 552 400
2024 503 402
2025 503 429
Thereafter 77,091 2,671
Total $ 80,239 $ 5,149
Total discounted lease liability $ 9,036 $ 3,668
Difference between undiscounted cash flows and discounted cash flows $ 71,203 $ 1,481
Weighted-average remaining lease term 60 years 10 years
Weighted-average discount rate 6.6 % 6.7 %
ESH REIT's leases do not contain residual value guarantees and do not contain restrictions with respect to incurring additional financial obligations or paying dividends. As of December 31, 2020, ESH REIT does not have any material leases that have not yet commenced.
Legal Contingencies-ESH REIT is not a party to any litigation or claims, other than routine matters arising in the ordinary course of business that are incidental to the operation of its business. ESH REIT believes that the results of all litigation and claims, individually or in the aggregate, will not have a material adverse effect on its consolidated financial statements, its business, results of operations or financial condition.
13. EQUITY-BASED COMPENSATION
The Corporation and ESH REIT each maintain an LTIP, as amended and restated in 2015, approved by their shareholders. Under each LTIP, the Corporation and ESH REIT may issue to eligible employees or directors RSUs or other equity-based awards in respect of Paired Shares with service, performance or market vesting conditions. The aggregate number of Paired Shares that may be the subject of awards under the LTIPs shall not exceed 8.0 million, of which no more than 4.0 million may be granted as incentive stock options. Each of the Corporation’s and ESH REIT’s LTIPs has a share reserve of an equivalent number of shares of Corporation common stock and ESH REIT Class B common stock. As of December 31, 2020, 4.8 million Paired Shares were available for future issuance under the LTIPs.
Equity-based compensation expense is recognized by amortizing the grant-date fair value on a straight-line basis over the requisite service period of each award. A portion of the grant-date fair value of all equity-based awards is allocated to a share of Corporation common stock and a portion is allocated to a share of ESH REIT Class B common stock. Equity-based compensation expense, which is included in general and administrative expenses in the accompanying consolidated statements of operations, was $0.5 million, $0.5 million and $0.6 million for the years ended December 31, 2020, 2019 and 2018, respectively.
As of December 31, 2020, there was $0.2 million of unrecognized compensation expense related to outstanding equity-based awards, which is expected to be recognized subsequent to December 31, 2020 over a weighted-average period of 0.4 years. Total unrecognized compensation expense will be adjusted for forfeitures as they occur.
ESH REIT will have to pay more or less for a share of the Corporation common stock at the time of settlement than it would have otherwise paid at the time of grant as the result of market changes in the value of a Paired Share between the time of grant and the time of settlement. An increase in the value allocated to a share of common stock of the Corporation due to market changes in the value of a Paired Share between the time of grant and the time of settlement is recorded as a distribution to the Corporation. A decrease in the value allocated to a share of common stock of the Corporation due to market changes in the value of a Paired Share between the time of grant and the time of settlement is recorded as additional paid in capital from the Corporation.
For LTIP awards granted by the Corporation, ESH REIT will receive compensation for the fair value of the Class B shares on the date of settlement of such Class B shares by ESH REIT. As of December 31, 2020, the Corporation had granted a total of 5.6 million service-based, performance-based and market-based RSUs, of which 4.3 million RSUs were either forfeited or settled. As a counterparty to the remaining outstanding RSUs, ESH REIT is expected to issue and be compensated in cash for 1.3 million shares of Class B common stock of ESH REIT in future periods, assuming market-based awards vest at 100% and no forfeitures.
RSU activity, all of which relates to awards with service vesting conditions, during the years ended December 31, 2020, 2019 and 2018, was as follows:
Number of
RSUs
(in thousands)
Weighted-
Average Grant-
Date Fair
Value
Outstanding at January 1, 2018 39 $ 16.91
Granted 28 $ 19.48
Settled (34) $ 17.32
Forfeited - $ -
Outstanding at December 31, 2018 33 $ 18.68
Granted 31 $ 17.32
Settled (33) $ 18.68
Forfeited - $ -
Outstanding at December 31, 2019 31 $ 17.32
Granted 41 $ 11.33
Settled (31) $ 17.32
Forfeited - $ -
Outstanding at December 31, 2020 41 $ 11.33
Vested at December 31, 2020 - $ -
Nonvested at December 31, 2020 41 $ 11.33
Vested at December 31, 2019 - $ -
Nonvested at December 31, 2019 31 $ 17.32
14. SUBSEQUENT EVENTS
On February 25, 2021, the Board of Directors of ESH REIT declared a cash distribution of $0.09 per share on its Class A and Class B common stock. The distribution is payable on March 25, 2021 to shareholders of record as of March 11, 2021.
Extended Stay America, Inc. and Subsidiaries and ESH Hospitality, Inc. and Subsidiaries
Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2020
(dollars in thousands)
Cost Capitalized Subsequent to Gross Amount Carried at Close of
Initial Cost Acquisition (1)
Period December 31, 2020
Description Location Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Total (2)
Accumulated
Depreciation Date
Acquired Date of
Construction Depreciable
Lives
(Years) (3)
Hotel Properties:
Anchorage - Downtown Anchorage, AK (4) $ 723 $ 8,791 $ 137 $ - $ 107 $ 958 $ 1,297 $ - $ 830 $ 9,749 $ 1,434 $ - $ 12,013 $ (4,116) 10/8/2010 2003 43
Anchorage - Midtown Anchorage, AK (4) 2,600 20,740 240 - 103 1,106 1,661 - 2,703 21,846 1,901 - 26,450 (7,445) 10/8/2010 2004 45
Fairbanks - Old Airport Way Fairbanks, AK (4) 2,978 12,016 98 - 160 1,038 1,167 - 3,138 13,054 1,265 - 17,457 (5,096) 10/8/2010 2001 40
Juneau - Shell Simmons Drive Juneau, AK (4) 2,979 12,135 132 - 110 907 1,134 - 3,089 13,042 1,266 - 17,397 (4,794) 10/8/2010 2001 41
Birmingham - Inverness Birmingham, AL (4) 359 688 33 - 35 574 1,050 - 394 1,262 1,083 - 2,739 (1,377) 10/8/2010 1996 26
Birmingham - Perimeter Park South Birmingham, AL (4) 1,737 3,218 53 - 96 981 1,344 - 1,833 4,199 1,397 - 7,429 (2,597) 10/8/2010 1998 33
Birmingham - Wildwood Birmingham, AL (4) 385 1,890 33 - 124 482 1,188 - 509 2,372 1,221 - 4,102 (1,938) 10/8/2010 1996 26
Huntsville - U.S. Space and Rocket Center Huntsville, AL (4) 770 5,385 39 - 80 796 1,051 - 850 6,181 1,090 - 8,121 (2,994) 10/8/2010 1997 32
Mobile - Spring Hill Mobile, AL (4) 1,185 7,479 41 - 93 870 1,253 - 1,278 8,349 1,294 - 10,921 (3,961) 10/8/2010 1997 32
Montgomery - Carmichael Rd. Montgomery, AL (4) 1,045 - 35 - 118 516 1,005 - 1,163 516 1,040 - 2,719 (1,244) 10/8/2010 1996 (6)
Montgomery - Eastern Blvd. Montgomery, AL (4) 600 4,231 44 - 93 693 1,229 - 693 4,924 1,273 - 6,890 (2,639) 10/8/2010 1997 32
Phoenix - Chandler - Downtown Chandler, AZ (4) - - - - 3,284 11,337 1,802 - 3,284 11,337 1,802 - 16,423 (1,014) 12/16/2019 2019 40
Little Rock - Financial Centre Parkway Little Rock, AR (4) 1,630 2,916 46 - 97 1,106 1,401 - 1,727 4,022 1,447 - 7,196 (2,650) 10/8/2010 1996 31
Little Rock - West Little Rock Little Rock, AR (4) 1,708 1,931 39 - 69 709 1,183 - 1,777 2,640 1,222 - 5,639 (2,223) 10/8/2010 1997 27
Fayetteville - Springdale Springdale, AR (4) 1,460 - 55 - 132 747 1,061 - 1,592 747 1,116 - 3,455 (1,568) 10/8/2010 2001 (6)
Phoenix - Mesa Mesa, AZ (4) 1,098 2,347 38 - 87 1,003 1,224 - 1,185 3,350 1,262 - 5,797 (2,198) 10/8/2010 1997 37
Phoenix - Mesa - West Mesa, AZ (4) 1,305 2,589 44 - 101 1,225 1,350 - 1,406 3,814 1,394 - 6,614 (2,441) 10/8/2010 1997 32
Phoenix - Peoria Peoria, AZ (4) 1,229 3,741 38 - 51 583 1,001 - 1,280 4,324 1,039 - 6,643 (2,198) 10/8/2010 1998 39
Phoenix - Airport Phoenix, AZ (4) 1,764 408 38 - 62 930 1,095 - 1,826 1,338 1,133 - 4,297 (1,404) 10/8/2010 1998 40
Phoenix - Airport - E. Oak St. Phoenix, AZ (4) 1,623 1,109 57 - 176 1,323 1,914 - 1,799 2,432 1,971 - 6,202 (2,312) 10/8/2010 1997 36
Phoenix - Biltmore Phoenix, AZ (4) 1,191 1,372 50 - 125 755 1,441 - 1,316 2,127 1,491 - 4,934 (2,238) 10/8/2010 1997 37
Phoenix - Deer Valley Phoenix, AZ (4) 945 2,092 39 - 72 614 1,157 - 1,017 2,706 1,196 - 4,919 (1,992) 10/8/2010 1998 38
Phoenix - Midtown Phoenix, AZ (4) 1,195 3,918 59 - 195 1,552 1,922 - 1,390 5,470 1,981 - 8,841 (3,201) 10/8/2010 1998 39
Phoenix - Scottsdale Scottsdale, AZ (4) 1,655 3,691 46 - 146 696 1,412 - 1,801 4,387 1,458 - 7,646 (2,736) 10/8/2010 1997 37
Phoenix - Scottsdale - North Scottsdale, AZ (4) 1,476 4,266 43 - 55 1,036 1,097 - 1,531 5,302 1,140 - 7,973 (2,719) 10/8/2010 1997 32
Phoenix - Scottsdale - Old Town Scottsdale, AZ (4) 1,605 2,564 43 - 169 1,176 1,557 - 1,774 3,740 1,600 - 7,114 (2,754) 10/8/2010 1995 30
Phoenix - Airport - Tempe Tempe, AZ (4) 1,228 3,249 46 - 142 807 1,414 - 1,370 4,056 1,460 - 6,886 (2,520) 10/8/2010 1999 39
Tucson - Grant Road Tucson, AZ (4) 1,780 5,364 43 - 78 932 1,271 - 1,858 6,296 1,314 - 9,468 (3,325) 10/8/2010 1997 32
Oakland - Alameda Alameda, CA (4) 5,165 9,134 57 - 148 2,018 2,384 - 5,313 11,152 2,441 - 18,906 (3,769) 10/8/2010 2000 40
Oakland - Alameda Airport Alameda, CA (4) 3,197 3,067 55 - 40 825 1,380 - 3,237 3,892 1,435 - 8,564 (2,471) 10/8/2010 1999 40
San Jose - Santa Clara Alviso, CA (4) 5,036 2,681 64 - 118 682 1,051 - 5,154 3,363 1,115 - 9,632 (2,091) 10/8/2010 2001 41
Orange County - Anaheim Convention Center Anaheim, CA (4) 4,439 3,574 73 - 142 1,109 1,461 - 4,581 4,683 1,534 - 10,798 (2,859) 10/8/2010 2001 41
Orange County - Anaheim Hills Anaheim, CA (4) 4,779 2,040 98 - 47 911 1,294 - 4,826 2,951 1,392 - 9,169 (2,112) 10/8/2010 2002 42
Los Angeles - Arcadia Arcadia, CA (4) 4,577 3,647 45 - 240 965 1,548 - 4,817 4,612 1,593 - 11,022 (2,763) 10/8/2010 1998 38
Bakersfield - California Avenue Bakersfield, CA (4) 1,186 2,153 43 - 257 877 1,258 - 1,443 3,030 1,301 - 5,774 (2,349) 10/8/2010 1996 31
Bakersfield - Chester Lane Bakersfield, CA (4) 1,002 4,514 142 - 63 492 839 - 1,065 5,006 981 - 7,052 (2,363) 10/8/2010 2005 45
San Francisco - Belmont Belmont, CA (4) 2,910 7,236 103 - 61 1,780 1,928 - 2,971 9,016 2,031 - 14,018 (3,114) 10/8/2010 2003 43
Extended Stay America, Inc. and Subsidiaries and ESH Hospitality, Inc. and Subsidiaries
Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2020 (Continued)
(dollars in thousands)
Cost Capitalized Subsequent to Gross Amount Carried at Close of
Initial Cost Acquisition (1)
Period December 31, 2020
Description Location Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Total (2)
Accumulated
Depreciation Date
Acquired Date of
Construction Depreciable
Lives
(Years) (3)
Orange County - Brea Brea, CA (4) 5,199 4,778 50 - 130 1,235 1,749 - 5,329 6,013 1,799 - 13,141 (3,598) 10/8/2010 1998 33
Los Angeles - Burbank Airport Burbank, CA (4) 6,120 9,690 106 - 89 1,087 1,743 - 6,209 10,777 1,849 - 18,835 (4,665) 10/8/2010 2001 41
San Diego - Carlsbad Village by the Sea Carlsbad, CA (4) 4,783 7,618 96 - 136 772 1,298 - 4,919 8,390 1,394 - 14,703 (3,650) 10/8/2010 2002 42
Los Angeles - Carson Carson, CA (4) 5,430 2,173 138 - 262 553 1,187 - 5,692 2,726 1,325 - 9,743 (1,994) 10/8/2010 2004 44
Los Angeles - Chino Valley Chino, CA (4) 1,288 3,297 108 - 75 547 1,318 - 1,363 3,844 1,426 - 6,633 (2,230) 10/8/2010 2004 44
Orange County - Cypress Cypress, CA (4) 5,543 4,484 59 - 130 863 1,460 - 5,673 5,347 1,519 - 12,539 (3,080) 10/8/2010 1998 38
Dublin - Hacienda Dr. Dublin, CA (4) 3,377 4,243 52 - 86 782 1,264 - 3,463 5,025 1,316 - 9,804 (2,646) 10/8/2010 2000 40
Los Angeles - LAX Airport - El Segundo El Segundo, CA (4) 9,922 5,598 68 - 151 1,182 1,691 - 10,073 6,780 1,759 - 18,612 (4,048) 10/8/2010 1998 33
Sacramento - Elk Grove Elk Grove, CA (4) 941 2,290 89 - 66 565 983 - 1,007 2,855 1,072 - 4,934 (1,814) 10/8/2010 2003 43
Fairfield - Napa Valley Fairfield, CA (4) 1,490 6,066 135 - 133 567 952 - 1,623 6,633 1,087 - 9,343 (2,792) 10/8/2010 2004 44
Fremont - Fremont Blvd. South Fremont, CA (4) 2,928 5,364 56 - 140 1,255 1,694 - 3,068 6,619 1,750 - 11,437 (3,556) 10/8/2010 1999 39
Fremont - Newark Fremont, CA (4) 7,370 6,048 101 - 501 3,580 3,748 - 7,871 9,628 3,849 - 21,348 (3,858) 10/8/2010 1999 41
Fremont - Warm Springs Fremont, CA (4) 5,114 1,271 58 - 87 719 1,172 - 5,201 1,990 1,230 - 8,421 (1,596) 10/8/2010 2001 41
Fresno - North Fresno, CA (4) 1,988 6,753 43 - 126 807 1,135 - 2,114 7,560 1,178 - 10,852 (3,463) 10/8/2010 1997 32
Los Angeles - South Gardena, CA (4) 3,977 3,909 51 - 92 742 1,415 - 4,069 4,651 1,466 - 10,186 (3,215) 10/8/2010 1998 28
Los Angeles - Glendale Glendale, CA (4) 4,689 5,746 55 - 46 711 1,282 - 4,735 6,457 1,337 - 12,529 (3,096) 10/8/2010 1999 39
Orange County - Huntington Beach Huntington Beach, CA (4) 4,499 5,131 38 - 80 846 1,120 - 4,579 5,977 1,158 - 11,714 (2,952) 10/8/2010 1998 38
Orange County - Irvine Spectrum Irvine, CA (4) 7,355 5,703 54 - 239 945 1,688 - 7,594 6,648 1,742 - 15,984 (3,858) 10/8/2010 1997 32
Los Angeles - La Mirada La Mirada, CA (4) 3,681 2,557 39 - 36 1,005 1,283 - 3,717 3,562 1,322 - 8,601 (2,190) 10/8/2010 1998 38
Orange County - Lake Forest Lake Forest, CA (4) 5,530 2,182 43 - 100 871 1,168 - 5,630 3,053 1,211 - 9,894 (2,051) 10/8/2010 1997 37
Livermore - Airway Blvd. Livermore, CA (4) 2,553 3,576 44 - 78 1,014 1,334 - 2,631 4,590 1,378 - 8,599 (2,514) 10/8/2010 1998 38
Los Angeles - Long Beach Airport Long Beach, CA (4) 5,626 6,872 47 - 116 846 1,350 - 5,742 7,718 1,397 - 14,857 (3,415) 10/8/2010 1997 37
Los Angeles - LAX Airport Los Angeles, CA (4) 4,770 7,879 56 - 80 1,039 1,819 - 4,850 8,918 1,875 - 15,643 (4,168) 10/8/2010 1999 39
San Jose - Milpitas - McCarthy Ranch Milpitas, CA (4) 6,844 7,392 57 - 151 2,950 2,992 - 6,995 10,342 3,049 - 20,386 (4,137) 10/8/2010 1997 32
Los Angeles - Monrovia Monrovia, CA (4) 3,884 4,929 57 - 118 1,308 1,437 - 4,002 6,237 1,494 - 11,733 (3,238) 10/8/2010 1998 38
San Jose - Morgan Hill Morgan Hill, CA (4) 4,283 2,018 36 - 104 871 1,177 - 4,387 2,889 1,213 - 8,489 (2,034) 10/8/2010 1998 38
San Jose - Mountain View Mountain View, CA (4) 6,657 4,458 47 - 240 1,674 2,788 - 6,897 6,132 2,835 - 15,864 (2,919) 10/8/2010 1997 32
Orange County - John Wayne Airport Newport Beach, CA (4) 6,881 10,663 98 - 197 1,212 1,514 - 7,078 11,875 1,612 - 20,565 (4,883) 10/8/2010 2001 41
Los Angeles - Northridge Northridge, CA (4) 5,167 5,391 163 - 108 672 1,514 - 5,275 6,063 1,677 - 13,015 (2,897) 10/8/2010 2005 45
Oakland - Emeryville Oakland, CA (4) 3,927 9,132 117 - 847 780 1,803 - 4,774 9,912 1,920 - 16,606 (4,333) 10/8/2010 2001 41
San Diego - Oceanside Oceanside, CA (4) 4,271 5,999 43 - 135 829 1,404 - 4,406 6,828 1,447 - 12,681 (3,251) 10/8/2010 1999 39
Los Angeles - Ontario Airport Ontario, CA (4) 1,639 6,138 46 - 141 1,215 1,280 - 1,780 7,353 1,326 - 10,459 (3,222) 10/8/2010 1997 37
Orange County - Katella Ave. Orange, CA (4) 3,976 5,704 74 - 72 1,145 1,464 - 4,048 6,849 1,538 - 12,435 (3,240) 10/8/2010 2001 41
Palm Springs - Airport Palm Springs, CA (4) 1,955 3,506 98 - 208 948 1,368 - 2,163 4,454 1,466 - 8,083 (2,436) 10/8/2010 2003 43
Pleasant Hill - Buskirk Ave. Pleasant Hill, CA (4) 3,786 7,754 44 - 108 884 1,579 - 3,894 8,638 1,623 - 14,155 (3,615) 10/8/2010 1997 37
Pleasanton - Chabot Dr. Pleasanton, CA (4) 3,039 5,910 55 - 101 1,047 1,658 - 3,140 6,957 1,713 - 11,810 (3,449) 10/8/2010 1998 38
Extended Stay America, Inc. and Subsidiaries and ESH Hospitality, Inc. and Subsidiaries
Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2020 (Continued)
(dollars in thousands)
Cost Capitalized Subsequent to Gross Amount Carried at Close of
Initial Cost Acquisition (1)
Period December 31, 2020
Description Location Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Total (2)
Accumulated
Depreciation Date
Acquired Date of
Construction Depreciable
Lives
(Years) (3)
Sacramento - White Rock Rd. Rancho Cordova, CA (4) 1,301 2,717 47 - 182 1,155 1,578 - 1,483 3,872 1,625 - 6,980 (2,772) 10/8/2010 1997 32
Richmond - Hilltop Mall Richmond, CA (4) 2,232 4,124 51 - 80 764 1,452 - 2,312 4,888 1,503 - 8,703 (2,456) 10/8/2010 2000 40
Sacramento - Roseville Roseville, CA (4) 1,125 5,233 45 - 122 787 1,146 - 1,247 6,020 1,191 - 8,458 (2,833) 10/8/2010 1998 38
Sacramento - Arden Way Sacramento, CA (4) 888 2,349 45 - 173 1,330 1,368 - 1,061 3,679 1,413 - 6,153 (2,375) 10/8/2010 1997 32
Sacramento - Northgate Sacramento, CA (4) 932 2,359 44 - 246 1,403 1,468 - 1,178 3,762 1,512 - 6,452 (2,238) 10/8/2010 1997 32
Sacramento - South Natomas Sacramento, CA (4) 1,460 823 51 - 323 1,192 1,844 - 1,783 2,015 1,895 - 5,693 (2,225) 10/8/2010 1998 33
San Francisco - San Carlos San Carlos, CA (4) 4,233 5,299 49 - 118 994 1,353 - 4,351 6,293 1,402 - 12,046 (3,384) 10/8/2010 1998 38
San Diego - Hotel Circle San Diego, CA (4) 6,893 9,935 68 - 424 1,428 1,869 - 7,317 11,363 1,937 - 20,617 (5,039) 10/8/2010 1999 39
San Diego - Mission Valley - Stadium San Diego, CA (4) 6,978 1,797 85 - 47 799 1,052 - 7,025 2,596 1,137 - 10,758 (1,878) 10/8/2010 2002 42
San Diego - Fashion Valley San Diego, CA (4) 5,371 5,639 49 - 167 1,285 2,105 - 5,538 6,924 2,154 - 14,616 (3,827) 10/8/2010 1997 32
Los Angeles - San Dimas San Dimas, CA (4) 4,736 991 42 - 81 792 1,344 - 4,817 1,783 1,386 - 7,986 (1,634) 10/8/2010 1999 39
San Jose - Airport San Jose, CA (4) 8,118 5,912 75 - 404 2,403 2,965 - 8,522 8,315 3,040 - 19,877 (3,076) 10/8/2010 2000 40
San Jose - Downtown San Jose, CA (4) 6,480 6,070 53 - 355 1,430 1,884 - 6,835 7,500 1,937 - 16,272 (4,070) 10/8/2010 1998 38
San Jose - Edenvale - North San Jose, CA (4) 5,087 3,649 56 - 75 931 1,375 - 5,162 4,580 1,431 - 11,173 (2,591) 10/8/2010 2000 40
San Jose - Edenvale - South San Jose, CA (4) 5,359 3,832 83 - 120 920 1,635 - 5,479 4,752 1,718 - 11,949 (2,755) 10/8/2010 2000 41
San Francisco - San Mateo - SFO San Mateo, CA (4) 7,369 6,704 50 - 230 2,258 2,579 - 7,599 8,962 2,629 - 19,190 (3,461) 10/8/2010 1997 32
San Rafael - Francisco Blvd. East San Rafael, CA (4) 3,129 13,822 378 - 105 709 1,270 - 3,234 14,531 1,648 - 19,413 (5,242) 10/8/2010 2007 47
San Ramon - Bishop Ranch - East San Ramon, CA (4) 3,721 5,226 59 - 133 1,917 2,100 - 3,854 7,143 2,159 - 13,156 (2,768) 10/8/2010 2000 40
San Ramon - Bishop Ranch - West San Ramon, CA (4) 3,098 2,886 55 - 107 806 1,536 - 3,205 3,692 1,591 - 8,488 (2,836) 10/8/2010 1998 33
Santa Barbara - Calle Real Santa Barbara, CA (4) 3,301 8,709 41 - 110 854 1,187 - 3,411 9,563 1,228 - 14,202 (3,802) 10/8/2010 1998 38
Santa Rosa - North Santa Rosa, CA (4) 3,053 6,086 46 - 70 600 1,077 - 3,123 6,686 1,123 - 10,932 (2,695) 10/8/2010 2000 40
Santa Rosa - South Santa Rosa, CA (4) 1,592 4,998 41 - 169 903 1,359 - 1,761 5,901 1,400 - 9,062 (3,067) 10/8/2010 1997 32
Los Angeles - Simi Valley Simi Valley, CA (4) 3,088 7,175 113 - 188 691 1,264 - 3,276 7,866 1,377 - 12,519 (3,390) 10/8/2010 2004 44
San Diego - Sorrento Mesa San Diego, CA (4) 6,441 6,020 49 - 185 932 1,446 - 6,626 6,952 1,495 - 15,073 (3,759) 10/8/2010 1998 33
Los Angeles - Valencia Stevenson Ranch, CA (4) 9,414 - 20 - 102 1,115 1,269 - 9,516 1,115 1,289 - 11,920 (1,458) 10/8/2010 2000 (6)
Stockton - March Lane Stockton, CA (4) 2,299 3,558 55 - 121 546 1,084 - 2,420 4,104 1,139 - 7,663 (2,098) 10/8/2010 2001 41
San Jose - Sunnyvale Sunnyvale, CA (4) 6,051 5,019 50 - 194 1,485 1,499 - 6,245 6,504 1,549 - 14,298 (3,711) 10/8/2010 1997 32
Temecula - Wine Country Temecula, CA (4) 1,489 8,153 79 - 95 733 1,374 - 1,584 8,886 1,453 - 11,923 (3,633) 10/8/2010 2002 42
Los Angeles - Torrance - Del Amo Circle Torrance, CA (4) 5,953 4,361 78 - 97 833 1,467 - 6,050 5,194 1,545 - 12,789 (3,058) 10/8/2010 1999 39
Los Angeles - Torrance Blvd. Torrance, CA (4) 3,761 6,296 43 - 74 1,184 1,322 - 3,835 7,480 1,365 - 12,680 (3,324) 10/8/2010 1997 37
Los Angeles - Torrance Harbor Gateway Torrance, CA (4) 4,625 4,747 49 - 152 782 1,158 - 4,777 5,529 1,207 - 11,513 (2,654) 10/8/2010 1999 39
Stockton - Tracy Tracy, CA (4) 2,344 3,434 96 - 102 539 1,101 - 2,446 3,973 1,197 - 7,616 (2,121) 10/8/2010 2003 43
Union City - Dyer St. Union City, CA (4) 2,907 6,359 51 - 229 2,137 2,073 - 3,136 8,496 2,124 - 13,756 (3,152) 10/8/2010 1999 39
Sacramento - Vacaville Vacaville, CA (4) 809 3,179 76 - 96 797 1,141 - 905 3,976 1,217 - 6,098 (2,277) 10/8/2010 2002 42
Sacramento - West Sacramento West Sacramento, CA (4) 1,292 3,395 134 - 104 445 1,128 - 1,396 3,840 1,262 - 6,498 (2,228) 10/8/2010 2004 44
Extended Stay America, Inc. and Subsidiaries and ESH Hospitality, Inc. and Subsidiaries
Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2020 (Continued)
(dollars in thousands)
Cost Capitalized Subsequent to Gross Amount Carried at Close of
Initial Cost Acquisition (1)
Period December 31, 2020
Description Location Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Total (2)
Accumulated
Depreciation Date
Acquired Date of
Construction Depreciable
Lives
(Years) (3)
Los Angeles - Woodland Hills Woodland Hills, CA (4) 5,452 7,561 69 - 120 1,117 2,150 - 5,572 8,678 2,219 - 16,469 (4,502) 10/8/2010 2000 40
Orange County - Yorba Linda Yorba Linda, CA (4) 3,443 2,020 106 - 59 631 1,125 - 3,502 2,651 1,231 - 7,384 (1,970) 10/8/2010 2003 43
Denver - Aurora South Aurora, CO (4) 2,415 2,958 48 - 266 1,227 1,646 - 2,681 4,185 1,694 - 8,560 (2,993) 10/8/2010 1996 31
Denver - Aurora North Aurora, CO (4) 2,706 6,047 65 - 118 1,688 1,767 - 2,824 7,735 1,832 - 12,391 (3,972) 10/8/2010 1997 39
Colorado Springs - West Colorado Springs, CO (4) 3,338 1,325 41 - 136 569 931 - 3,474 1,894 972 - 6,340 (1,538) 10/8/2010 1998 39
Denver - Tech Center South Englewood, CO (4) 1,714 978 46 - 164 604 1,105 - 1,878 1,582 1,151 - 4,611 (1,447) 10/8/2010 1998 40
Denver - Tech Center South - Inverness Englewood, CO (4) 2,941 1,340 46 - 251 1,526 1,391 - 3,192 2,866 1,437 - 7,495 (2,309) 10/8/2010 1997 32
Denver - Cherry Creek Glendale, CO (4) 1,856 2,713 40 - 184 1,106 1,438 - 2,040 3,819 1,478 - 7,337 (2,800) 10/8/2010 1997 32
Denver - Tech Center - Central Greenwood Village, CO (4) 2,392 1,286 51 - 214 1,668 1,790 - 2,606 2,954 1,841 - 7,401 (2,862) 10/8/2010 1997 34
Denver - Tech Center South - Greenwood Village Greenwood Village, CO (4) 1,767 2,278 110 - 292 928 1,305 - 2,059 3,206 1,415 - 6,680 (2,219) 10/8/2010 2003 44
Denver - Lakewood South Lakewood, CO (4) 2,338 3,348 43 - 169 918 1,373 - 2,507 4,266 1,416 - 8,189 (2,765) 10/8/2010 1996 31
Denver - Park Meadows Lone Tree, CO (4) 1,578 3,467 78 - 151 700 1,073 - 1,729 4,167 1,151 - 7,047 (2,409) 10/8/2010 2002 42
Denver - Westminster Westminster, CO (4) 2,779 4,683 49 - 368 708 1,076 - 3,147 5,391 1,125 - 9,663 (2,368) 10/8/2010 2000 40
Hartford - Farmington Farmington, CT (4) 1,080 6,003 65 - 76 670 1,124 - 1,156 6,673 1,189 - 9,018 (2,817) 10/8/2010 1998 39
Hartford - Manchester Manchester, CT (4) 1,002 6,723 67 - 88 721 1,041 - 1,090 7,444 1,108 - 9,642 (3,203) 10/8/2010 2001 41
Hartford - Meriden Meriden, CT (4) 687 6,207 81 - 133 632 1,110 - 820 6,839 1,191 - 8,850 (3,010) 10/8/2010 2002 42
Norwalk - Stamford Norwalk, CT (4) 2,866 12,533 64 - 114 1,149 1,672 - 2,980 13,682 1,736 - 18,398 (5,295) 10/8/2010 1999 39
Shelton - Fairfield County Shelton, CT (4) 2,001 11,314 60 - 120 1,371 1,505 - 2,121 12,685 1,565 - 16,371 (5,045) 10/8/2010 1998 38
Newark - Christiana - Wilmington Newark, DE (4) 1,473 7,617 61 - 158 1,164 1,515 - 1,631 8,781 1,576 - 11,988 (4,077) 10/8/2010 1998 38
Orlando - Altamonte Springs Altamonte Springs, FL (4) 5,421 - 25 - 122 923 1,487 - 5,543 923 1,512 - 7,978 (1,687) 10/8/2010 1998 (6)
Boca Raton - Commerce Boca Raton, FL (4) 5,920 3,219 56 - 145 1,489 1,386 - 6,065 4,708 1,442 - 12,215 (3,030) 10/8/2010 1998 33
Tampa - Brandon Brandon, FL (4) 3,709 3,540 696 - 240 1,023 1,085 - 3,949 4,563 1,781 - 10,293 (3,843) 12/13/2012 1997 26
St. Petersburg - Clearwater - Executive Dr. Clearwater, FL (4) 1,951 3,062 39 - 60 665 1,073 - 2,011 3,727 1,112 - 6,850 (2,179) 10/8/2010 1998 38
Clearwater - Carillon Park Clearwater, FL (4) 1,679 2,926 489 - 162 1,282 1,097 - 1,841 4,208 1,586 - 7,635 (3,236) 12/13/2012 1997 22
Fort Lauderdale - Davie Davie, FL (4) 5,014 3,117 492 - 213 1,139 1,317 - 5,227 4,256 1,809 - 11,292 (3,388) 12/13/2012 1997 23
Daytona Beach - International Speedway Daytona Beach, FL (4) 987 3,972 45 - 100 518 1,367 - 1,087 4,490 1,412 - 6,989 (2,310) 10/8/2010 1998 41
Fort Lauderdale - Deerfield Beach Deerfield Beach, FL (4) 2,885 3,421 38 - 175 1,244 1,888 - 3,060 4,665 1,926 - 9,651 (1,706) 10/8/2010 1997 37
Destin - US 98 - Emerald Coast Pkwy. Destin, FL (4) 1,149 2,528 96 - 130 1,686 948 - 1,279 4,214 1,044 - 6,537 (2,536) 10/8/2010 2001 48
Fort Lauderdale - Convention Center - Cruise Port Fort Lauderdale, FL (4) 3,441 7,008 71 - 90 2,161 2,735 - 3,531 9,169 2,806 - 15,506 (3,764) 10/8/2010 1999 39
Fort Lauderdale - Cypress Creek - Andrews Ave. Fort Lauderdale, FL (4) 2,761 2,685 41 - 160 767 1,313 - 2,921 3,452 1,354 - 7,727 (2,364) 10/8/2010 1998 33
Fort Lauderdale - Cypress Creek - NW 6th Way Fort Lauderdale, FL (4) 2,480 751 62 - 89 845 1,200 - 2,569 1,596 1,262 - 5,427 (1,651) 10/8/2010 1999 42
Fort Lauderdale - Plantation Fort Lauderdale, FL (4) 6,352 2,252 61 - 199 860 2,568 - 6,551 3,112 2,629 - 12,292 (1,973) 10/8/2010 2000 40
Extended Stay America, Inc. and Subsidiaries and ESH Hospitality, Inc. and Subsidiaries
Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2020 (Continued)
(dollars in thousands)
Cost Capitalized Subsequent to Gross Amount Carried at Close of
Initial Cost Acquisition (1)
Period December 31, 2020
Description Location Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Total (2)
Accumulated
Depreciation Date
Acquired Date of
Construction Depreciable
Lives
(Years) (3)
Gainesville - I-75 Gainesville, FL (4) 846 6,416 44 - 59 795 1,116 - 905 7,211 1,160 - 9,276 (3,394) 10/8/2010 1997 32
Tampa - Gibsonton - Riverview Gibsonton, FL (4) - - - - 2,998 7,707 1,597 - 2,998 7,707 1,597 - 12,302 (808) 12/10/2019 2019 40
Jacksonville - Baymeadows Jacksonville, FL (4) 1,163 2,662 48 - 104 930 1,566 - 1,267 3,592 1,614 - 6,473 (2,435) 10/8/2010 1998 38
Jacksonville - Lenoir Avenue East Jacksonville, FL (4) 969 1,057 63 - 83 696 1,252 - 1,052 1,753 1,315 - 4,120 (1,786) 10/8/2010 1997 37
Jacksonville - Deerwood Park Jacksonville, FL (4) 943 3,910 66 - 161 1,165 2,012 - 1,104 5,075 2,078 - 8,257 (3,152) 10/8/2010 1999 40
Jacksonville - Lenoir Avenue South Jacksonville, FL (4) 842 1,862 47 - 71 605 1,069 - 913 2,467 1,116 - 4,496 (1,608) 10/8/2010 1998 44
Jacksonville - Riverwalk - Convention Center Jacksonville, FL (4) 593 3,693 52 - 113 761 1,087 - 706 4,454 1,139 - 6,299 (2,463) 10/8/2010 2000 40
Jacksonville - Salisbury Rd. - Southpoint Jacksonville, FL (4) 727 720 52 - 131 2,130 1,377 - 858 2,850 1,429 - 5,137 (2,789) 10/8/2010 1999 39
Jacksonville - Southside - St. Johns Towne Ctr. Jacksonville, FL (4) 925 2,679 47 - 141 1,346 1,572 - 1,066 4,025 1,619 - 6,710 (2,549) 10/8/2010 1997 32
Lakeland - I-4 Lakeland, FL (4) 1,121 8,036 843 - 58 299 308 - 1,179 8,335 1,151 - 10,665 (571) 11/12/2019 2007 44
Orlando - Lake Mary - 1036 Greenwood Blvd Lake Mary, FL (4) 2,229 - 19 - 78 613 926 - 2,307 613 945 - 3,865 (1,065) 10/8/2010 2000 (6)
Orlando - Lake Mary - 1040 Greenwood Blvd Lake Mary, FL (4) 2,685 - 25 - 155 998 1,290 - 2,840 998 1,315 - 5,153 (1,493) 10/8/2010 1998 (6)
Melbourne - Airport Melbourne, FL (4) 1,423 4,160 53 - 127 613 1,124 - 1,550 4,773 1,177 - 7,500 (2,426) 10/8/2010 1998 39
Miami - Airport - Blue Lagoon Miami, FL (4) 9,702 4,910 70 - 113 1,430 4,494 - 9,815 6,340 4,564 - 20,719 (3,896) 10/8/2010 1998 33
Miami - Airport - Doral Miami, FL (4) 10,164 4,188 1,131 - 425 1,410 3,458 - 10,589 5,598 4,589 - 20,776 (4,490) 12/13/2012 1997 26
Miami - Airport - Doral - 87th Avenue South Miami, FL (4) 4,451 7,542 92 - 69 1,002 3,214 - 4,520 8,544 3,306 - 16,370 (3,591) 10/8/2010 2001 41
Miami - Airport - Doral - 25th Street Miami, FL (4) 4,135 5,307 125 - 79 976 4,047 - 4,214 6,283 4,172 - 14,669 (3,332) 10/8/2010 2002 42
Miami - Airport - Miami Springs Miami, FL (4) 8,014 3,657 71 - 161 3,206 2,288 - 8,175 6,863 2,359 - 17,397 (2,781) 10/8/2010 1998 40
Miami - Downtown Brickell - Cruise Port Miami, FL (4) 3,323 7,312 85 - 111 1,598 2,136 - 3,434 8,910 2,221 - 14,565 (2,965) 10/8/2010 2001 41
Miami - Coral Gables Miami, FL (4) 2,866 7,211 76 - 85 1,713 1,711 - 2,951 8,924 1,787 - 13,662 (2,806) 10/8/2010 2001 41
Orlando - Convention Center - 6443 Westwood Orlando, FL (4) 2,472 2,071 68 - 117 869 1,329 - 2,589 2,940 1,397 - 6,926 (2,452) 10/8/2010 1999 43
Orlando - Convention Center - Universal Blvd. Orlando, FL (4) 3,326 3,097 58 - 197 1,084 1,864 - 3,523 4,181 1,922 - 9,626 (3,320) 10/8/2010 1998 38
Orlando - Convention Ctr - Sports Complex Orlando, FL (4) 2,767 1,466 43 - 111 888 1,254 - 2,878 2,354 1,297 - 6,529 (2,024) 10/8/2010 1997 37
Orlando - Lake Buena Vista Orlando, FL (4) 4,137 - 30 - 193 1,095 1,889 - 4,330 1,095 1,919 - 7,344 (2,419) 10/8/2010 1998 (6)
Orlando - Maitland - 1776 Pembrook Dr. Orlando, FL (4) 2,103 807 74 - 57 636 1,079 - 2,160 1,443 1,153 - 4,756 (1,478) 10/8/2010 2000 45
Orlando - Maitland - Summit Tower Blvd Orlando, FL (4) 3,577 - 65 - 126 1,077 1,670 - 3,703 1,077 1,735 - 6,515 (1,857) 10/8/2010 1998 (6)
Orlando - Maitland - 1760 Pembrook Dr. Orlando, FL (4) 2,133 1,347 41 - 62 528 1,076 - 2,195 1,875 1,117 - 5,187 (1,508) 10/8/2010 1999 39
Orlando - Southpark - Commodity Circle Orlando, FL (4) 3,483 2,051 64 - 129 1,047 1,788 - 3,612 3,098 1,852 - 8,562 (2,773) 10/8/2010 1999 40
Orlando - Southpark - Equity Row Orlando, FL (4) 2,854 432 49 - 93 934 1,565 - 2,947 1,366 1,614 - 5,927 (1,929) 10/8/2010 1998 38
Orlando - Orlando Theme Parks - Vineland Rd. Orlando, FL (4) 2,813 2,874 66 - 135 653 1,302 - 2,948 3,527 1,368 - 7,843 (2,369) 10/8/2010 1998 42
Orlando - Orlando Theme Parks - Major Blvd. Orlando, FL (4) 3,349 3,190 52 - 153 814 1,286 - 3,502 4,004 1,338 - 8,844 (2,562) 10/8/2010 1999 39
Extended Stay America, Inc. and Subsidiaries and ESH Hospitality, Inc. and Subsidiaries
Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2020 (Continued)
(dollars in thousands)
Cost Capitalized Subsequent to Gross Amount Carried at Close of
Initial Cost Acquisition (1)
Period December 31, 2020
Description Location Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Total (2)
Accumulated
Depreciation Date
Acquired Date of
Construction Depreciable
Lives
(Years) (3)
Pensacola - University Mall Pensacola, FL (4) 934 4,059 38 - 101 694 1,184 - 1,035 4,753 1,222 - 7,010 (2,411) 10/8/2010 1997 37
Port Charlotte - I-75 Port Charlotte, FL (4) - - - - 2,156 8,348 1,578 - 2,156 8,348 1,578 - 12,082 (627) 3/16/2020 2020 40
Fort Lauderdale - Cypress Creek - Park North Pompano Beach, FL (4) 3,567 2,828 65 - 158 3,389 3,648 - 3,725 6,217 3,713 - 13,655 (3,785) 10/8/2010 1998 38
Tallahassee - Killearn Tallahassee, FL (4) 356 1,769 29 - 87 1,117 888 - 443 2,886 917 - 4,246 (1,807) 10/8/2010 1998 28
Fort Lauderdale - Tamarac Tamarac, FL (4) 3,709 3,054 712 - 154 1,809 1,294 - 3,863 4,863 2,006 - 10,732 (3,829) 12/13/2012 1997 21
Tampa - Airport - Memorial Hwy. Tampa, FL (4) 2,513 1,342 69 - 161 695 1,359 - 2,674 2,037 1,428 - 6,139 (2,008) 10/8/2010 1999 42
Tampa - Airport - N. Westshore Blvd. Tampa, FL (4) 2,564 3,918 64 - 115 1,427 1,817 - 2,679 5,345 1,881 - 9,905 (3,488) 10/8/2010 1998 38
Tampa - Airport - Spruce Street Tampa, FL (4) 2,437 3,066 102 - 78 576 1,007 - 2,515 3,642 1,109 - 7,266 (2,081) 10/8/2010 2003 43
Tampa - North - USF - Attractions Tampa, FL (4) 2,028 845 37 - 172 732 1,274 - 2,200 1,577 1,311 - 5,088 (1,610) 10/8/2010 1997 37
Tampa - North Airport Tampa, FL (4) 1,294 2,236 490 - 154 1,081 1,111 - 1,448 3,317 1,601 - 6,366 (3,030) 12/13/2012 1997 20
Tampa - Fairgrounds - Casino Tampa, FL (4) - - - - 3,759 9,450 2,091 - 3,759 9,450 2,091 - 15,300 (145) 11/10/2020 2020 40
Titusville - Space Center Titusville, FL (4) - - - - 2,702 7,935 1,596 - 2,702 7,935 1,596 - 12,233 (321) 8/18/2020 2020 40
Melbourne - Palm Bay West Melbourne, FL (4) - - - - 2,413 8,419 1,625 8 2,413 8,419 1,625 8 12,465 (63) 12/14/2020 2020 40
West Palm Beach - Northpoint Corporate Park West Palm Beach, FL (4) 2,723 3,326 49 - 93 534 1,104 - 2,816 3,860 1,153 - 7,829 (2,123) 10/8/2010 1998 38
Atlanta - Alpharetta - Northpoint - East Alpharetta, GA (4) 717 591 42 - 125 833 1,501 - 842 1,424 1,543 - 3,809 (1,792) 10/8/2010 1997 27
Atlanta - Alpharetta - Northpoint - West Alpharetta, GA (4) 1,218 1,673 58 - 118 899 1,358 - 1,336 2,572 1,416 - 5,324 (1,973) 10/8/2010 1999 42
Atlanta - Alpharetta - Rock Mill Rd. Alpharetta, GA (4) 1,391 1,101 40 - 51 581 848 - 1,442 1,682 888 - 4,012 (1,413) 10/8/2010 1999 39
Atlanta - Clairmont Atlanta, GA (4) 1,142 3,284 40 - 92 664 1,016 - 1,234 3,948 1,056 - 6,238 (2,224) 10/8/2010 1998 38
Atlanta - Buckhead Atlanta, GA (4) 1,183 4,086 42 - 96 930 1,289 - 1,279 5,016 1,331 - 7,626 (2,712) 10/8/2010 1997 37
Atlanta - Marietta - Interstate N. Pkwy Atlanta, GA (4) 1,766 3,023 72 - 90 1,129 1,365 - 1,856 4,152 1,437 - 7,445 (2,393) 10/8/2010 1999 41
Atlanta - Marietta - Wildwood Atlanta, GA (4) 852 2,881 40 - 87 788 1,123 - 939 3,669 1,163 - 5,771 (2,247) 10/8/2010 1996 36
Atlanta - Perimeter - Hammond Drive Atlanta, GA (4) 1,921 3,398 45 - 216 881 1,428 - 2,137 4,279 1,473 - 7,889 (2,856) 10/8/2010 1997 32
Atlanta - Perimeter - Crestline Atlanta, GA (4) 1,562 1,581 46 - 83 590 1,175 - 1,645 2,171 1,221 - 5,037 (1,777) 10/8/2010 2000 40
Atlanta - Perimeter - Peachtree Dunwoody Atlanta, GA (4) 1,203 2,928 44 - 135 819 1,154 - 1,338 3,747 1,198 - 6,283 (2,263) 10/8/2010 1997 37
Atlanta - Vinings Atlanta, GA (4) 1,924 5,785 57 - 87 827 1,471 - 2,011 6,612 1,528 - 10,151 (3,051) 10/8/2010 1997 40
Atlanta - Duluth Duluth, GA (4) 1,177 1,252 61 - 74 579 800 - 1,251 1,831 861 - 3,943 (1,285) 10/8/2010 1997 49
Atlanta - Gwinnett Place Duluth, GA (4) 1,269 3,234 48 - 376 1,137 1,421 - 1,645 4,371 1,469 - 7,485 (2,756) 10/8/2010 1990 30
Atlanta - Kennesaw Chastain Rd. Kennesaw, GA (4) 1,092 1,560 38 - 108 790 1,436 - 1,200 2,350 1,474 - 5,024 (1,972) 10/8/2010 1997 27
Atlanta - Kennesaw Town Center Kennesaw, GA (4) 1,122 2,213 38 - 75 826 1,044 - 1,197 3,039 1,082 - 5,318 (1,854) 10/8/2010 1998 38
Atlanta - Marietta - Powers Ferry Rd. Marietta, GA (4) 2,718 1,891 58 - 65 944 1,442 - 2,783 2,835 1,500 - 7,118 (2,273) 10/8/2010 1998 38
Atlanta - Marietta - Windy Hill Marietta, GA (4) 1,645 2,192 41 - (104) 890 1,139 - 1,541 3,082 1,180 - 5,803 (1,964) 10/8/2010 1998 39
Atlanta - Morrow Morrow, GA (4) 1,713 2,276 41 - 94 714 1,193 - 1,807 2,990 1,234 - 6,031 (1,784) 10/8/2010 1998 39
Atlanta - Peachtree Corners Norcross, GA (4) 1,256 - 19 - 114 638 1,086 - 1,370 638 1,105 - 3,113 (1,146) 10/8/2010 1997 (6)
Savannah - Pooler Pooler, GA (4)
(7) - - - - 4,138 7,284 1,554 - 4,138 7,284 1,554 - 12,976 (427) 6/24/2020 2020 40
Extended Stay America, Inc. and Subsidiaries and ESH Hospitality, Inc. and Subsidiaries
Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2020 (Continued)
(dollars in thousands)
Cost Capitalized Subsequent to Gross Amount Carried at Close of
Initial Cost Acquisition (1)
Period December 31, 2020
Description Location Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Total (2)
Accumulated
Depreciation Date
Acquired Date of
Construction Depreciable
Lives
(Years) (3)
Savannah - Midtown Savannah, GA (4) 564 5,079 66 - 75 550 1,173 - 639 5,629 1,239 - 7,507 (2,663) 10/8/2010 2001 41
Atlanta - Cumberland Mall Smyrna, GA (4) 1,631 2,038 45 - 85 1,070 1,265 - 1,716 3,108 1,310 - 6,134 (2,261) 10/8/2010 1997 32
Des Moines - Urbandale Urbandale, IA (4) 1,119 2,684 41 - 143 782 921 - 1,262 3,466 962 - 5,690 (2,035) 10/8/2010 1999 39
Des Moines - West Des Moines West Des Moines, IA (4) 1,089 2,742 39 - 121 880 1,228 - 1,210 3,622 1,267 - 6,099 (2,744) 10/8/2010 1997 27
Boise - Airport Boise, ID (4) 862 1,647 39 - 91 950 1,159 - 953 2,597 1,198 - 4,748 (1,843) 10/8/2010 1997 37
Chicago - Midway Bedford Park, IL (4) 2,028 2,261 130 - 105 809 1,159 - 2,133 3,070 1,289 - 6,492 (2,268) 10/8/2010 2003 43
Bloomington - Normal Bloomington, IL (4) 941 3,404 61 - 64 600 967 - 1,005 4,004 1,028 - 6,037 (2,043) 10/8/2010 2001 41
Chicago - Buffalo Grove - Deerfield Buffalo Grove, IL (4) 2,264 4,986 44 - 77 927 1,155 - 2,341 5,913 1,199 - 9,453 (2,991) 10/8/2010 1998 38
Chicago - Burr Ridge Burr Ridge, IL (4) 2,033 4,406 43 - 125 1,036 1,205 - 2,158 5,442 1,248 - 8,848 (2,903) 10/8/2010 1996 36
Champaign - Urbana Champaign, IL (4) 1,221 4,043 35 - 89 537 808 - 1,310 4,580 843 - 6,733 (2,060) 10/8/2010 1998 38
Chicago - Darien Darien, IL (4) 1,754 4,286 42 - 129 730 987 - 1,883 5,016 1,029 - 7,928 (2,487) 10/8/2010 1999 39
Chicago - O'Hare Des Plaines, IL (4) 1,946 3,737 44 - 151 1,061 1,260 - 2,097 4,798 1,304 - 8,199 (2,676) 10/8/2010 1998 38
Chicago - O'Hare - Allstate Arena Des Plaines, IL (4) 2,122 1,434 71 - 99 899 1,301 - 2,221 2,333 1,372 - 5,926 (1,895) 10/8/2010 1999 40
Chicago - Downers Grove Downers Grove, IL (4) 2,592 3,321 53 - 150 1,712 1,796 - 2,742 5,033 1,849 - 9,624 (3,431) 10/8/2010 1996 36
Chicago - Elmhurst - O'Hare Elmhurst, IL (4) 1,728 2,769 42 - 131 663 1,093 - 1,859 3,432 1,135 - 6,426 (2,107) 10/8/2010 1997 37
Chicago - Gurnee Gurnee, IL (4) 1,557 2,759 37 - 161 925 1,148 - 1,718 3,684 1,185 - 6,587 (2,298) 10/8/2010 1997 37
Chicago - Hanover Park Hanover Park, IL (4) 4,217 1,081 38 - 65 746 853 - 4,282 1,827 891 - 7,000 (1,480) 10/8/2010 1999 39
Chicago - Hillside Hillside, IL (4) 1,661 1,134 49 - 101 816 1,194 - 1,762 1,950 1,243 - 4,955 (1,934) 10/8/2010 1999 39
Chicago - Itasca Itasca, IL (4) 1,419 2,764 46 - 121 891 1,147 - 1,540 3,655 1,193 - 6,388 (2,223) 10/8/2010 1996 36
Chicago - Lansing Lansing, IL (4) 1,778 2,399 44 - 186 764 1,177 - 1,964 3,163 1,221 - 6,348 (2,237) 10/8/2010 1998 38
Chicago - Lisle Lisle, IL (4) 1,908 2,176 42 - 142 572 966 - 2,050 2,748 1,008 - 5,806 (1,787) 10/8/2010 2000 40
Chicago - Lombard - Oakbrook Lombard, IL (4) 3,692 1,060 59 - 144 1,424 1,478 - 3,836 2,484 1,537 - 7,857 (2,206) 10/8/2010 1999 39
Chicago - Lombard - Yorktown Center Lombard, IL (4) 2,029 3,367 58 - 110 712 1,170 - 2,139 4,079 1,228 - 7,446 (2,309) 10/8/2010 1998 40
Chicago - Naperville - East Naperville, IL (4) 1,686 4,231 48 - 169 1,258 1,397 - 1,855 5,489 1,445 - 8,789 (3,181) 10/8/2010 1997 37
Chicago - Naperville - West Naperville, IL (4) 3,084 2,386 44 - 146 947 1,373 - 3,230 3,333 1,417 - 7,980 (2,241) 10/8/2010 1996 36
St. Louis - O' Fallon, IL O'Fallon, IL (4) 1,099 2,897 34 - 56 716 822 - 1,155 3,613 856 - 5,624 (1,811) 10/8/2010 1998 38
Peoria - North Peoria, IL (4) 1,063 3,528 63 - 58 414 851 - 1,121 3,942 914 - 5,977 (2,028) 10/8/2010 2001 41
Rockford - I-90 Rockford, IL (4) 1,046 1,989 38 - 99 612 1,048 - 1,145 2,601 1,086 - 4,832 (1,709) 10/8/2010 1997 47
Rockford - State Street Rockford, IL (4) 971 293 34 - 162 608 1,017 - 1,133 901 1,051 - 3,085 (1,548) 10/8/2010 1997 27
Chicago - Rolling Meadows Rolling Meadows, IL (4) 1,643 640 44 - 86 834 1,225 - 1,729 1,474 1,269 - 4,472 (1,682) 10/8/2010 1996 36
Chicago - Romeoville - Bollingbrook Romeoville, IL (4) 1,741 3,612 38 - 105 802 1,020 - 1,846 4,414 1,058 - 7,318 (2,282) 10/8/2010 1998 38
Chicago - Skokie Skokie, IL (4) 2,305 8,355 65 - 137 941 1,497 - 2,442 9,296 1,562 - 13,300 (4,033) 10/8/2010 2000 40
Chicago - Vernon Hills - Lake Forest Vernon Hills, IL (4) 2,471 4,030 60 - 55 510 1,083 - 2,526 4,540 1,143 - 8,209 (2,349) 10/8/2010 2000 40
Chicago - Vernon Hills - Lincolnshire Vernon Hills, IL (4) 2,467 1,053 66 - 130 873 1,324 - 2,597 1,926 1,390 - 5,913 (2,088) 10/8/2010 1999 39
Chicago - Westmont - Oak Brook Westmont, IL (4) 3,510 587 52 - 148 1,217 1,506 - 3,658 1,804 1,558 - 7,020 (2,207) 10/8/2010 1998 38
Evansville - East Evansville, IN (4) 387 2,295 34 - 121 481 1,009 - 508 2,776 1,043 - 4,327 (2,061) 10/8/2010 1997 27
Extended Stay America, Inc. and Subsidiaries and ESH Hospitality, Inc. and Subsidiaries
Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2020 (Continued)
(dollars in thousands)
Cost Capitalized Subsequent to Gross Amount Carried at Close of
Initial Cost Acquisition (1)
Period December 31, 2020
Description Location Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Total (2)
Accumulated
Depreciation Date
Acquired Date of
Construction Depreciable
Lives
(Years) (3)
Indianapolis - Castleton Indianapolis, IN (4) 558 2,108 40 - 96 643 997 - 654 2,751 1,037 - 4,442 (1,815) 10/8/2010 1999 39
Indianapolis - North - Carmel Indianapolis, IN (4) 812 851 29 - 120 583 850 - 932 1,434 879 - 3,245 (1,190) 10/8/2010 1990 30
Indianapolis - West 86th St. Indianapolis, IN (4) 581 2,330 40 - 208 972 1,237 - 789 3,302 1,277 - 5,368 (2,143) 10/8/2010 1998 39
Merrillville - US Rte. 30 Merrillville, IN (4) 693 3,923 39 - 146 726 1,053 - 839 4,649 1,092 - 6,580 (2,558) 10/8/2010 1996 36
South Bend - Mishawaka - North Mishawaka, IN (4) 497 1,929 62 - 102 717 1,028 - 599 2,646 1,090 - 4,335 (1,827) 10/8/2010 2001 41
South Bend - Mishawaka - South Mishawaka, IN (4) 457 1,146 34 - 119 525 1,067 - 576 1,671 1,101 - 3,348 (1,590) 10/8/2010 1997 27
Cincinnati - Covington Covington, KY (4) 880 5,352 38 - 63 817 1,145 - 943 6,169 1,183 - 8,295 (2,809) 10/8/2010 1997 37
Cincinnati - Florence - Meijer Dr. Florence, KY (4) 549 1,850 33 - 167 586 1,181 - 716 2,436 1,214 - 4,366 (1,979) 10/8/2010 1996 26
Cincinnati - Florence - Turfway Rd. Florence, KY (4) 827 2,575 37 - 109 656 1,012 - 936 3,231 1,049 - 5,216 (1,920) 10/8/2010 1997 37
Louisville - Alliant Avenue Louisville, KY (4) 812 2,628 48 - 94 676 1,139 - 906 3,304 1,187 - 5,397 (2,166) 10/8/2010 1998 39
Louisville - Dutchman Louisville, KY (4) 662 2,540 45 - 54 745 1,061 - 716 3,285 1,106 - 5,107 (2,033) 10/8/2010 1996 31
Louisville - Hurstbourne Louisville, KY (4) 656 439 30 - 326 684 1,022 - 982 1,123 1,052 - 3,157 (1,533) 10/8/2010 1988 28
Baton Rouge - Citiplace Baton Rouge, LA (4) 1,029 5,875 66 - 79 983 1,058 - 1,108 6,858 1,124 - 9,090 (2,799) 10/8/2010 2001 41
New Orleans - Kenner Kenner, LA (4) 1,028 6,843 79 - 120 1,089 1,135 - 1,148 7,932 1,214 - 10,294 (3,160) 10/8/2010 2001 41
Lafayette - Airport Lafayette, LA (4) 436 2,212 38 - 68 992 1,175 - 504 3,204 1,213 - 4,921 (2,071) 10/8/2010 1998 38
New Orleans - Metairie Metairie, LA (4) 559 5,559 41 - 68 739 1,162 - 627 6,298 1,203 - 8,128 (2,773) 10/8/2010 1998 38
Boston - Braintree Braintree, MA (4) 2,599 9,110 90 - 73 749 1,208 - 2,672 9,859 1,298 - 13,829 (3,700) 10/8/2010 2002 42
Boston - Burlington Burlington, MA (4) 2,533 6,944 58 - 81 1,290 1,617 - 2,614 8,234 1,675 - 12,523 (4,186) 10/8/2010 1998 38
Boston - Marlborough Marlborough, MA (4) 2,137 3,464 48 - 83 1,104 1,476 - 2,220 4,568 1,524 - 8,312 (2,884) 10/8/2010 1998 38
Foxboro - Norton Norton, MA (4) 2,153 4,729 98 - 44 660 948 - 2,197 5,389 1,046 - 8,632 (2,383) 10/8/2010 2003 43
Boston - Peabody Peabody, MA (4) 1,649 5,178 110 - 106 1,417 1,451 - 1,755 6,595 1,561 - 9,911 (3,315) 10/8/2010 1999 43
Boston - Tewksbury Tewksbury, MA (4) 1,547 4,378 58 - 72 649 1,241 - 1,619 5,027 1,299 - 7,945 (2,467) 10/8/2010 2001 41
Boston - Waltham - 52 4th Ave. Waltham, MA (4) 2,025 6,620 58 - 84 1,051 1,805 - 2,109 7,671 1,863 - 11,643 (3,947) 10/8/2010 1998 38
Boston - Waltham - 32 4th Ave. Waltham, MA (4) 1,851 7,411 72 - 294 855 1,702 - 2,145 8,266 1,774 - 12,185 (4,032) 10/8/2010 1999 39
Boston - Westborough - Computer Dr. Westborough, MA (4) 2,747 2,788 48 - 182 817 1,306 - 2,929 3,605 1,354 - 7,888 (2,580) 10/8/2010 1998 38
Boston - Westborough - Connector Road Westborough, MA (4) 3,154 1,519 57 - 60 679 877 - 3,214 2,198 934 - 6,346 (1,568) 10/8/2010 2001 41
Boston - Westborough - East Main Street Westborough, MA (4) 2,366 2,763 81 - 392 819 1,094 - 2,758 3,582 1,175 - 7,515 (2,193) 10/8/2010 2001 42
Boston - Woburn Woburn, MA (4) 1,879 4,426 48 - 115 740 1,266 - 1,994 5,166 1,314 - 8,474 (2,837) 10/8/2010 1998 39
Annapolis - Admiral Cochrane Drive Annapolis, MD (4) 2,121 5,919 52 - 58 669 1,293 - 2,179 6,588 1,345 - 10,112 (3,202) 10/8/2010 1999 39
Annapolis - Womack Drive Annapolis, MD (4) 1,376 4,684 131 - 74 452 886 - 1,450 5,136 1,017 - 7,603 (2,451) 10/8/2010 2004 45
Baltimore - Bel Air - Aberdeen Bel Air, MD (4) 1,768 5,344 110 - 38 464 978 - 1,806 5,808 1,088 - 8,702 (2,657) 10/8/2010 2004 44
Columbia - Columbia Parkway Columbia, MD (4) 1,785 6,287 38 - 128 734 1,004 - 1,913 7,021 1,042 - 9,976 (3,090) 10/8/2010 1997 37
Columbia - Columbia Corporate Park Columbia, MD (4) 3,056 10,874 81 - 148 1,321 1,538 - 3,204 12,195 1,619 - 17,018 (5,290) 10/8/2010 1998 39
Columbia - Gateway Drive Columbia, MD (4) 2,241 5,038 42 - 86 957 1,298 - 2,327 5,995 1,340 - 9,662 (3,777) 10/8/2010 1997 27
Frederick - Westview Dr. Frederick, MD (4) 1,891 5,522 41 - 73 557 912 - 1,964 6,079 953 - 8,996 (2,685) 10/8/2010 1999 39
Washington, D.C. - Gaithersburg - North Gaithersburg, MD (4) 2,088 3,973 42 - 54 495 933 - 2,142 4,468 975 - 7,585 (2,163) 10/8/2010 1999 39
Extended Stay America, Inc. and Subsidiaries and ESH Hospitality, Inc. and Subsidiaries
Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2020 (Continued)
(dollars in thousands)
Cost Capitalized Subsequent to Gross Amount Carried at Close of
Initial Cost Acquisition (1)
Period December 31, 2020
Description Location Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Total (2)
Accumulated
Depreciation Date
Acquired Date of
Construction Depreciable
Lives
(Years) (3)
Washington, D.C. - Gaithersburg - South Gaithersburg, MD (4) 2,233 4,128 59 - 106 673 1,109 - 2,339 4,801 1,168 - 8,308 (2,571) 10/8/2010 1999 40
Washington, D.C. - Germantown - Milestone Germantown, MD (4) 1,413 4,673 44 - 138 534 909 - 1,551 5,207 953 - 7,711 (2,384) 10/8/2010 1999 39
Washington, D.C. - Germantown - Town Center Germantown, MD (4) 5,541 2,269 698 - 137 1,115 869 - 5,678 3,384 1,567 - 10,629 (3,683) 12/13/2012 1997 19
Baltimore - Glen Burnie Glen Burnie, MD (4) 2,374 9,428 132 - 75 498 1,010 - 2,449 9,926 1,142 - 13,517 (3,694) 10/8/2010 2004 44
Columbia - Laurel - Ft. Meade Jessup, MD (4) 1,505 5,910 112 - 90 532 1,071 - 1,595 6,442 1,183 - 9,220 (2,919) 10/8/2010 2004 44
Washington, D.C. - Landover Landover, MD (4) 3,119 5,378 39 - 62 722 1,114 - 3,181 6,100 1,153 - 10,434 (2,939) 10/8/2010 1998 38
Lexington Park - Pax River Lexington Park, MD (4) 1,206 5,140 48 - 78 640 1,077 - 1,284 5,780 1,125 - 8,189 (2,670) 10/8/2010 2000 40
Baltimore - BWl Airport - International Dr. Linthicum Heights, MD (4) 3,801 5,663 1,003 - 299 1,160 999 - 4,100 6,823 2,002 - 12,925 (4,620) 12/13/2012 1997 32
Baltimore - BWI Airport - Aero Dr. Linthicum, MD (4) 2,316 8,515 43 - 139 678 1,039 - 2,455 9,193 1,082 - 12,730 (3,811) 10/8/2010 1997 37
Washington, D.C. - Rockville Rockville, MD (4) 5,800 9,696 64 - 117 1,104 1,506 - 5,917 10,800 1,570 - 18,287 (4,733) 10/8/2010 1999 39
Baltimore - Timonium Timonium, MD (4) 2,004 6,358 39 - 124 632 1,038 - 2,128 6,990 1,077 - 10,195 (3,157) 10/8/2010 1998 38
Portland - Scarborough Scarborough, ME (4) 828 4,601 52 - 121 639 1,137 - 949 5,240 1,189 - 7,378 (2,667) 10/8/2010 2001 41
Detroit - Ann Arbor - Briarwood Mall Ann Arbor, MI (4) 3,416 - 41 - 190 692 1,070 - 3,606 692 1,111 - 5,409 (1,446) 10/8/2010 1997 (6)
Detroit - Ann Arbor - University South Ann Arbor, MI (4) 955 1,139 42 - (150) 456 1,067 - 805 1,595 1,109 - 3,509 (1,605) 10/8/2010 1997 41
Auburn Hills - University Drive Auburn Hills, MI (4) 1,363 588 59 - 162 874 1,377 - 1,525 1,462 1,436 - 4,423 (2,057) 10/8/2010 1999 39
Detroit - Auburn Hills - Featherstone Rd. Auburn Hills, MI (4) 1,226 3,584 75 - 267 1,136 1,618 - 1,493 4,720 1,693 - 7,906 (3,217) 10/8/2010 1999 41
Detroit - Auburn Hills - I -75 Auburn Hills, MI (4) 1,948 - 47 - 192 684 1,198 - 2,140 684 1,245 - 4,069 (1,686) 10/8/2010 1997 (6)
Detroit - Canton Canton, MI (4) 1,501 - 59 - 184 831 1,065 - 1,685 831 1,124 - 3,640 (1,570) 10/8/2010 2001 (6)
Detroit - Dearborn Dearborn, MI (4) 1,018 2,051 77 - 136 787 1,082 - 1,154 2,838 1,159 - 5,151 (2,035) 10/8/2010 2002 42
Detroit - Farmington Hills Farmington Hills, MI (4) 1,084 570 41 - 160 623 1,022 - 1,244 1,193 1,063 - 3,500 (1,470) 10/8/2010 1997 37
Grand Rapids - Kentwood Kentwood, MI (4) 1,297 1,644 38 - 156 780 1,110 - 1,453 2,424 1,148 - 5,025 (1,818) 10/8/2010 1998 38
Detroit - Madison Heights Madison Heights, MI (4) 1,787 - 43 - 111 781 1,186 - 1,898 781 1,229 - 3,908 (1,340) 10/8/2010 1997 (6)
Detroit - Novi - Haggerty Road Novi, MI (4) 1,102 1,620 44 - 148 694 1,146 - 1,250 2,314 1,190 - 4,754 (1,860) 10/8/2010 1997 37
Detroit - Novi - Orchard Hill Place Novi, MI (4) 1,237 421 78 - 131 583 1,072 - 1,368 1,004 1,150 - 3,522 (1,331) 10/8/2010 2000 42
Detroit - Metropolitan Airport Romulus, MI (4) 1,161 2,462 83 - 160 582 1,060 - 1,321 3,044 1,143 - 5,508 (1,955) 10/8/2010 2001 41
Detroit - Roseville Roseville, MI (4) 1,204 2,742 71 - 132 790 1,203 - 1,336 3,532 1,274 - 6,142 (2,127) 10/8/2010 2001 41
Detroit - Southfield - I-696 Southfield, MI (4) 1,746 - 84 - 107 766 1,228 - 1,853 766 1,312 - 3,931 (1,728) 10/8/2010 2002 (6)
Detroit - Southfield - Northwestern Hwy. Southfield, MI (4) 1,952 - 58 - 181 1,108 1,454 - 2,133 1,108 1,512 - 4,753 (1,836) 10/8/2010 1999 (6)
Detroit - Sterling Heights Sterling Heights, MI (4) 998 1,550 42 - 155 901 1,169 - 1,153 2,451 1,211 - 4,815 (2,061) 10/8/2010 1997 37
Detroit - Warren Warren, MI (4) 1,448 - 37 - 141 765 895 - 1,589 765 932 - 3,286 (1,017) 10/8/2010 1997 (6)
Minneapolis - Bloomington Bloomington, MN (4) 1,440 3,092 39 - 110 634 1,060 - 1,550 3,726 1,099 - 6,375 (2,238) 10/8/2010 1998 38
Minneapolis - Brooklyn Center Brooklyn Center, MN (4) 1,367 2,491 38 - 149 831 1,261 - 1,516 3,322 1,299 - 6,137 (2,205) 10/8/2010 1998 38
Extended Stay America, Inc. and Subsidiaries and ESH Hospitality, Inc. and Subsidiaries
Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2020 (Continued)
(dollars in thousands)
Cost Capitalized Subsequent to Gross Amount Carried at Close of
Initial Cost Acquisition (1)
Period December 31, 2020
Description Location Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Total (2)
Accumulated
Depreciation Date
Acquired Date of
Construction Depreciable
Lives
(Years) (3)
Minneapolis - Airport - Eagan - South Eagan, MN (4) 1,517 2,133 51 - 107 657 1,061 - 1,624 2,790 1,112 - 5,526 (1,934) 10/8/2010 1997 37
Minneapolis - Airport - Eagan - North Eagan, MN (4) 1,888 2,331 60 - 151 1,204 1,458 - 2,039 3,535 1,518 - 7,092 (2,583) 10/8/2010 1998 38
Minneapolis - Eden Prairie - Technology Drive Eden Prairie, MN (4) 1,199 2,289 36 - 142 738 1,286 - 1,341 3,027 1,322 - 5,690 (2,007) 10/8/2010 1998 38
Minneapolis - Eden Prairie - Valley View Road Eden Prairie, MN (4) 1,614 3,658 39 - 102 739 1,152 - 1,716 4,397 1,191 - 7,304 (2,277) 10/8/2010 1998 38
Minneapolis - Maple Grove Maple Grove, MN (4) 2,543 560 38 - 109 691 1,113 - 2,652 1,251 1,151 - 5,054 (1,511) 10/8/2010 1998 38
Rochester - North Rochester, MN (4) 1,146 1,797 48 - 87 656 922 - 1,233 2,453 970 - 4,656 (1,818) 10/8/2010 2001 41
Rochester - South Rochester, MN (4) 1,119 1,439 50 - 97 652 915 - 1,216 2,091 965 - 4,272 (1,728) 10/8/2010 2001 41
Minneapolis - Woodbury Woodbury, MN (4) 1,805 2,559 43 - 80 653 1,164 - 1,885 3,212 1,207 - 6,304 (1,877) 10/8/2010 1999 39
St. Louis - Airport - Central Bridgeton, MO (4) 1,743 1,010 57 - 115 1,043 1,764 - 1,858 2,053 1,821 - 5,732 (2,116) 10/8/2010 1998 39
Columbia - Stadium Blvd. Columbia, MO (4) 734 2,511 91 - 98 563 914 - 832 3,074 1,005 - 4,911 (1,957) 10/8/2010 2003 43
St. Louis - Earth City Earth City, MO (4) 1,394 721 34 - 111 734 1,072 - 1,505 1,455 1,106 - 4,066 (1,627) 10/8/2010 1997 27
St. Louis - Westport - Central Maryland Heights, MO (4) 829 2,112 48 - 70 724 1,159 - 899 2,836 1,207 - 4,942 (2,061) 10/8/2010 1999 39
St. Louis - Westport - East Lackland Rd. Maryland Heights, MO (4) 1,334 2,692 53 - 291 962 1,281 - 1,625 3,654 1,334 - 6,613 (2,513) 10/8/2010 1996 31
Springfield - South Springfield, MO (4) 777 3,170 40 - 95 891 1,002 - 872 4,061 1,042 - 5,975 (2,199) 10/8/2010 1997 37
St. Louis - Westport - Craig Road St. Louis, MO (4) 982 220 33 - 148 625 1,111 - 1,130 845 1,144 - 3,119 (1,310) 10/8/2010 1994 24
St. Louis - St. Peters St. Peters, MO (4) 1,165 3,797 44 - 94 909 1,166 - 1,259 4,706 1,210 - 7,175 (2,348) 10/8/2010 1997 37
Jackson - East Beasley Road Jackson, MS (4) 265 3,884 49 - 92 786 1,285 - 357 4,670 1,334 - 6,361 (2,620) 10/8/2010 1999 39
Jackson - North Jackson, MS (4) 256 3,381 40 - 143 747 1,072 - 399 4,128 1,112 - 5,639 (2,504) 10/8/2010 1997 32
Jackson - Ridgeland Ridgeland, MS (4) 345 3,103 33 - 125 1,211 997 - 470 4,314 1,030 - 5,814 (2,618) 10/8/2010 1996 26
Billings - West End Billings, MT (4) 936 3,915 97 - 119 595 925 - 1,055 4,510 1,022 - 6,587 (2,315) 10/8/2010 2003 43
Great Falls - Missouri River Great Falls, MT (4) 834 5,105 70 - 71 750 1,000 - 905 5,855 1,070 - 7,830 (2,587) 10/8/2010 2002 42
Asheville - Tunnel Rd. Asheville, NC (4) 2,216 2,559 38 - 55 548 1,093 - 2,271 3,107 1,131 - 6,509 (1,954) 10/8/2010 1998 38
Raleigh - Cary - Harrison Ave. Cary, NC (4) 791 1,353 33 - 74 437 1,025 - 865 1,790 1,058 - 3,713 (1,684) 10/8/2010 1996 26
Raleigh - Cary - Regency Parkway North Cary, NC (4) 903 4,357 44 - 43 634 1,304 - 946 4,991 1,348 - 7,285 (2,589) 10/8/2010 1998 38
Raleigh - Cary - Regency Parkway South Cary, NC (4) 1,018 4,505 53 - 117 606 1,112 - 1,135 5,111 1,165 - 7,411 (2,559) 10/8/2010 1998 43
Charlotte - Airport Charlotte, NC (4) 1,982 636 67 - 173 1,499 2,045 - 2,155 2,135 2,112 - 6,402 (1,913) 10/8/2010 1998 33
Charlotte - Pineville - Park Rd. Charlotte, NC (4) 1,111 3,250 60 - 119 1,139 1,661 - 1,230 4,389 1,721 - 7,340 (2,219) 10/8/2010 1999 39
Charlotte - Pineville - Pineville Matthews Rd. Charlotte, NC (4) 1,859 3,965 52 - 218 1,657 1,854 - 2,077 5,622 1,906 - 9,605 (2,332) 10/8/2010 1999 43
Charlotte - Tyvola Rd. Charlotte, NC (4) 1,563 727 54 - 83 870 1,439 - 1,646 1,597 1,493 - 4,736 (1,303) 10/8/2010 1998 38
Charlotte - Tyvola Rd. - Executive Park Charlotte, NC (4) 1,232 - 19 - 106 1,028 1,214 - 1,338 1,028 1,233 - 3,599 (1,234) 10/8/2010 1995 (6)
Charlotte - University Place Charlotte, NC (4) 1,208 2,903 44 - (24) 1,004 1,711 - 1,184 3,907 1,755 - 6,846 (1,967) 10/8/2010 1998 39
Charlotte - University Place - E. McCullough Dr. Charlotte, NC (4) 1,045 - 35 - 90 739 1,366 - 1,135 739 1,401 - 3,275 (1,030) 10/8/2010 1996 (6)
Durham - Research Triangle Park - Hwy. 55 Durham, NC (4) 603 1,556 292 - 182 870 1,015 - 785 2,426 1,307 - 4,518 (2,380) 12/13/2012 1997 19
Extended Stay America, Inc. and Subsidiaries and ESH Hospitality, Inc. and Subsidiaries
Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2020 (Continued)
(dollars in thousands)
Cost Capitalized Subsequent to Gross Amount Carried at Close of
Initial Cost Acquisition (1)
Period December 31, 2020
Description Location Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Total (2)
Accumulated
Depreciation Date
Acquired Date of
Construction Depreciable
Lives
(Years) (3)
Durham - Research Triangle Park - Hwy. 54 Durham, NC (4) 63 984 33 - 867 607 1,119 - 930 1,591 1,152 - 3,673 (2,406) 10/8/2010 1996 26
Durham - RTP - Miami Blvd. - North Durham, NC (4) 1,215 2,397 54 - 73 607 1,053 - 1,288 3,004 1,107 - 5,399 (1,979) 10/8/2010 1998 40
Durham - RTP - Miami Blvd. - South Durham, NC (4) 1,405 2,370 107 - 138 1,010 1,721 - 1,543 3,380 1,828 - 6,751 (2,641) 10/8/2010 1998 42
Durham - University Durham, NC (4) 1,208 3,006 43 - 134 648 1,277 - 1,342 3,654 1,320 - 6,316 (2,289) 10/8/2010 1997 33
Durham - University - Ivy Creek Blvd. Durham, NC (4) 1,684 3,947 57 - 98 1,014 1,381 - 1,782 4,961 1,438 - 8,181 (2,746) 10/8/2010 1998 33
Fayetteville - Cross Creek Mall Fayetteville, NC (4) 3,725 9,586 56 - 92 469 1,077 - 3,817 10,055 1,133 - 15,005 (4,092) 10/8/2010 1999 39
Fayetteville - Owen Dr. Fayetteville, NC (4) 4,253 7,164 43 - 81 834 1,074 - 4,334 7,998 1,117 - 13,449 (3,893) 10/8/2010 1997 32
Greensboro - Airport Greensboro, NC (4) 1,017 1,618 56 - 86 639 983 - 1,103 2,257 1,039 - 4,399 (1,562) 10/8/2010 1999 42
Greensboro - Wendover Ave. Greensboro, NC (4) 1,047 - 33 - 121 613 1,017 - 1,168 613 1,050 - 2,831 (1,120) 10/8/2010 1995 (6)
Greensboro - Wendover Ave. - Big Tree Way Greensboro, NC (4) 1,220 1,866 46 - 158 891 1,279 - 1,378 2,757 1,325 - 5,460 (2,102) 10/8/2010 1996 31
Jacksonville - Camp Lejeune Jacksonville, NC (4) 4,815 10,609 38 - 110 1,315 1,023 - 4,925 11,924 1,061 - 17,910 (4,284) 10/8/2010 1998 38
Raleigh - RDU Airport Morrisville, NC (4) 833 3,939 43 - 66 744 1,153 - 899 4,683 1,196 - 6,778 (2,729) 10/8/2010 1997 32
Raleigh - Crabtree Valley Raleigh, NC (4) 1,276 2,350 493 - 119 914 1,146 - 1,395 3,264 1,639 - 6,298 (3,058) 12/13/2012 1998 20
Raleigh - North Raleigh - Wake Towne Dr. Raleigh, NC (4) 634 1,414 34 - 96 579 1,019 - 730 1,993 1,053 - 3,776 (1,867) 10/8/2010 1996 26
Raleigh - North Raleigh Raleigh, NC (4) 1,120 4,043 38 - 88 481 898 - 1,208 4,524 936 - 6,668 (2,180) 10/8/2010 1997 37
Raleigh - North Raleigh - Wake Forest Road Raleigh, NC (4) 956 2,771 43 - 114 1,676 1,423 - 1,070 4,447 1,466 - 6,983 (2,745) 10/8/2010 1997 32
Raleigh - Northeast Raleigh, NC (4) 1,219 2,471 40 - 91 585 1,356 - 1,310 3,056 1,396 - 5,762 (2,123) 10/8/2010 1999 38
Wilmington - New Centre Drive Wilmington, NC (4) 713 3,123 39 - 64 861 1,402 - 777 3,984 1,441 - 6,202 (2,117) 10/8/2010 1998 44
Winston-Salem - Hanes Mall Blvd. Winston-Salem, NC (4) 776 2,573 40 - 121 863 1,138 - 897 3,436 1,178 - 5,511 (2,044) 10/8/2010 1996 32
Nashua - Manchester Nashua, NH (4) 2,526 1,771 58 - 74 630 1,081 - 2,600 2,401 1,139 - 6,140 (1,878) 10/8/2010 2001 41
Mt. Olive - Budd Lake Budd Lake, NJ (4) 835 3,898 103 - 129 689 1,023 - 964 4,587 1,126 - 6,677 (2,446) 10/8/2010 2003 43
Philadelphia - Cherry Hill Cherry Hill, NJ (4) 337 2,660 32 - 93 603 946 - 430 3,263 978 - 4,671 (1,966) 10/8/2010 1998 38
Meadowlands - East Rutherford E.Rutherford, NJ (4) 957 6,141 61 - 229 1,439 1,688 - 1,186 7,580 1,749 - 10,515 (3,976) 10/8/2010 1999 39
Edison - Raritan Center Edison, NJ (4) 1,363 8,976 48 - 159 848 1,391 - 1,522 9,824 1,439 - 12,785 (4,278) 10/8/2010 1997 37
Elizabeth - Newark Airport Elizabeth, NJ (4)
(7) 202 11,175 119 - 3,289 1,109 1,492 - 3,491 12,284 1,611 - 17,386 (7,443) 10/8/2010 2002 42
Somerset - Franklin Franklin, NJ (4) 761 4,096 63 - 69 707 939 - 830 4,803 1,002 - 6,635 (2,182) 10/8/2010 2001 41
Philadelphia - Mt. Laurel - Pacilli Place Mt Laurel, NJ (4) 455 4,318 58 - 65 546 1,077 - 520 4,864 1,135 - 6,519 (2,436) 10/8/2010 1999 39
Philadelphia - Mt. Laurel - Crawford Place Mt Laurel, NJ (4) 313 2,632 31 - 54 629 900 - 367 3,261 931 - 4,559 (1,929) 10/8/2010 1998 38
Piscataway - Rutgers University Piscataway, NJ (4) 907 6,348 62 - 228 1,578 1,440 - 1,135 7,926 1,502 - 10,563 (3,696) 10/8/2010 1998 38
Princeton - West Windsor Princeton, NJ (4) 3,758 2,042 45 - 154 610 996 - 3,912 2,652 1,041 - 7,605 (1,871) 10/8/2010 2000 40
Ramsey - Upper Saddle River Ramsey, NJ (4) 704 5,013 64 - 101 711 1,073 - 805 5,724 1,137 - 7,666 (2,719) 10/8/2010 2001 41
Red Bank - Middletown Red Bank, NJ (4) 2,846 2,652 52 - 106 844 1,261 - 2,952 3,496 1,313 - 7,761 (2,287) 10/8/2010 2000 40
Meadowlands - Rutherford Rutherford, NJ (4) 1,972 4,661 49 - 86 1,034 1,452 - 2,058 5,695 1,501 - 9,254 (2,887) 10/8/2010 1999 39
Princeton - South Brunswick S. Brunswick, NJ (4) 761 3,728 50 - 129 714 1,210 - 890 4,442 1,260 - 6,592 (2,574) 10/8/2010 1999 39
Extended Stay America, Inc. and Subsidiaries and ESH Hospitality, Inc. and Subsidiaries
Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2020 (Continued)
(dollars in thousands)
Cost Capitalized Subsequent to Gross Amount Carried at Close of
Initial Cost Acquisition (1)
Period December 31, 2020
Description Location Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Total (2)
Accumulated
Depreciation Date
Acquired Date of
Construction Depreciable
Lives
(Years) (3)
Secaucus - Meadowlands Secaucus, NJ (4) 1,644 13,946 122 - 150 1,212 1,623 - 1,794 15,158 1,745 - 18,697 (5,521) 10/8/2010 2002 42
Secaucus - New York City Area Secaucus, NJ (4)
(7) 307 20,368 73 - 203 1,599 2,235 - 510 21,967 2,308 - 24,785 (19,659) 10/8/2010 2000 40
Hanover - Parsippany Whippany, NJ (4) 3,549 6,181 60 - 112 1,377 1,459 - 3,661 7,558 1,519 - 12,738 (3,649) 10/8/2010 1998 38
Newark - Woodbridge Woodbridge, NJ (4) 1,814 9,316 61 - 223 1,513 1,852 - 2,037 10,829 1,913 - 14,779 (4,843) 10/8/2010 1999 39
Las Vegas - East Flamingo Las Vegas, NV (4) 1,914 3,649 56 - 164 767 1,660 - 2,078 4,416 1,716 - 8,210 (2,828) 10/8/2010 1998 38
Las Vegas - Midtown Las Vegas, NV (4)
(7) 1,782 3,495 45 - 100 713 1,412 - 1,882 4,208 1,457 - 7,547 (2,536) 10/8/2010 1998 38
Las Vegas - Valley View Las Vegas, NV (4) 2,230 7,604 64 - 212 1,838 2,210 - 2,442 9,442 2,274 - 14,158 (4,767) 10/8/2010 1995 32
Reno - South Meadows Reno, NV (4) 1,771 4,821 84 - 88 444 954 - 1,859 5,265 1,038 - 8,162 (2,400) 10/8/2010 2002 42
Albany - SUNY Albany, NY (4) 1,246 6,462 47 - 199 1,403 1,543 - 1,445 7,865 1,590 - 10,900 (3,832) 10/8/2010 1996 36
Buffalo - Amherst Amherst, NY (4) 665 5,464 43 - 96 714 1,199 - 761 6,178 1,242 - 8,181 (3,044) 10/8/2010 1997 37
Long Island - Bethpage Bethpage, NY (4) 4,024 7,727 44 - 212 1,033 1,442 - 4,236 8,760 1,486 - 14,482 (3,759) 10/8/2010 1999 39
Syracuse - Dewitt East Syracuse, NY (4) 669 4,692 43 - 235 745 1,216 - 904 5,437 1,259 - 7,600 (3,007) 10/8/2010 1996 (6)
White Plains - Elmsford Elmsford, NY (4) 1,124 12,986 74 - 445 2,200 1,710 - 1,569 15,186 1,784 - 18,539 (6,319) 10/8/2010 2000 40
Fishkill - Route 9 Fishkill, NY (4) 1,616 6,316 47 - 51 1,018 1,500 - 1,667 7,334 1,547 - 10,548 (3,341) 10/8/2010 1998 38
Fishkill - Westage Center Fishkill, NY (4) 946 5,653 111 - 92 574 1,135 - 1,038 6,227 1,246 - 8,511 (2,795) 10/8/2010 2004 44
Long Island - Melville Melville, NY (4) 7,498 10,315 73 - 145 912 1,375 - 7,643 11,227 1,448 - 20,318 (4,561) 10/8/2010 2000 40
Rochester - Greece Rochester, NY (4) 1,005 4,662 45 - 96 983 1,245 - 1,101 5,645 1,290 - 8,036 (2,940) 10/8/2010 1996 36
Rochester - Henrietta Rochester, NY (4) 1,061 7,451 45 - 122 906 1,192 - 1,183 8,357 1,237 - 10,777 (3,574) 10/8/2010 1996 36
New York City - LaGuardia Airport Whitestone, NY (4) 8,634 14,468 84 - 167 1,026 1,783 - 8,801 15,494 1,867 - 26,162 (5,879) 10/8/2010 2001 41
Columbus - East Columbus, OH (4) 1,036 - 29 - 211 613 1,005 - 1,247 613 1,034 - 2,894 (1,191) 10/8/2010 1989 (6)
Columbus - Easton Columbus, OH (4) 1,185 4,416 50 - 170 865 986 - 1,355 5,281 1,036 - 7,672 (2,625) 10/8/2010 1999 39
Columbus - North Columbus, OH (4) 824 1,251 43 - 226 787 1,238 - 1,050 2,038 1,281 - 4,369 (1,778) 10/8/2010 1997 37
Columbus - Polaris Columbus, OH (4) 1,431 5,351 61 - 223 1,101 1,448 - 1,654 6,452 1,509 - 9,615 (3,460) 10/8/2010 1998 39
Columbus - Worthington Columbus, OH (4) 781 1,115 36 - 105 706 1,153 - 886 1,821 1,189 - 3,896 (1,504) 10/8/2010 1998 38
Columbus - Dublin Dublin, OH (4) 1,329 1,294 38 - 166 585 1,008 - 1,495 1,879 1,046 - 4,420 (1,739) 10/8/2010 1998 38
Columbus - Sawmill Rd. Dublin, OH (4) 577 460 28 - 369 1,100 906 - 946 1,560 934 - 3,440 (1,330) 10/8/2010 1990 30
Columbus - Tuttle Dublin, OH (4) 863 3,396 50 - 135 795 985 - 998 4,191 1,035 - 6,224 (2,215) 10/8/2010 1998 40
Cincinnati - Fairfield Fairfield, OH (4) 459 1,293 28 - 173 667 983 - 632 1,960 1,011 - 3,603 (1,682) 10/8/2010 1989 29
Findlay - Tiffin Avenue Findlay, OH (4) 671 2,596 77 - 155 570 970 - 826 3,166 1,047 - 5,039 (1,800) 10/8/2010 1999 43
Toledo - Holland Holland, OH (4) 1,002 2,986 45 - 85 886 1,147 - 1,087 3,872 1,192 - 6,151 (2,209) 10/8/2010 1997 37
Toledo - Maumee Maumee, OH (4) 912 740 34 - 102 477 916 - 1,014 1,217 950 - 3,181 (1,268) 10/8/2010 1997 27
Cleveland - Beachwood - Orange Place - North Orange, OH (4) 1,288 2,514 59 - 136 965 1,433 - 1,424 3,479 1,492 - 6,395 (2,485) 10/8/2010 1999 39
Cincinnati - Springdale - I-275 Springdale, OH (4) 852 1,843 45 - 86 1,138 1,140 - 938 2,981 1,185 - 5,104 (1,985) 10/8/2010 1996 31
Portland - Beaverton Beaverton, OR (4) 3,210 4,410 50 - 133 1,197 1,555 - 3,343 5,607 1,605 - 10,555 (3,328) 10/8/2010 1997 32
Portland - Beaverton - Eider Court Beaverton, OR (4) 1,856 5,825 44 - 97 734 1,135 - 1,953 6,559 1,179 - 9,691 (3,047) 10/8/2010 1998 38
Portland - Hillsboro Hillsboro, OR (4) 4,174 8,101 63 - 119 1,302 1,459 - 4,293 9,403 1,522 - 15,218 (4,263) 10/8/2010 1998 40
Portland - Gresham Portland, OR (4) 2,009 2,822 38 - 408 691 1,159 - 2,417 3,513 1,197 - 7,127 (2,149) 10/8/2010 1998 38
Extended Stay America, Inc. and Subsidiaries and ESH Hospitality, Inc. and Subsidiaries
Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2020 (Continued)
(dollars in thousands)
Cost Capitalized Subsequent to Gross Amount Carried at Close of
Initial Cost Acquisition (1)
Period December 31, 2020
Description Location Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Total (2)
Accumulated
Depreciation Date
Acquired Date of
Construction Depreciable
Lives
(Years) (3)
Portland - Tigard Tigard, OR (4) 3,425 4,456 48 - 119 2,034 1,496 - 3,544 6,490 1,544 - 11,578 (3,480) 10/8/2010 1998 33
Philadelphia - Bensalem Bensalem, PA (4) 1,408 6,689 38 - 100 864 1,028 - 1,508 7,553 1,066 - 10,127 (3,192) 10/8/2010 1998 38
Allentown - Bethlehem Bethlehem, PA (4) 1,054 3,922 96 - 28 654 1,045 - 1,082 4,576 1,141 - 6,799 (2,427) 10/8/2010 2003 43
Pittsburgh - Carnegie Carnegie, PA (4) 697 6,689 41 - 153 810 1,011 - 850 7,499 1,052 - 9,401 (3,262) 10/8/2010 1997 37
Philadelphia - Exton Exton, PA (4) 2,343 2,198 44 - 160 919 1,004 - 2,503 3,117 1,048 - 6,668 (2,037) 10/8/2010 1999 39
Philadelphia - Horsham - Dresher Rd. Horsham, PA (4) 1,691 5,111 49 - 114 1,256 1,441 - 1,805 6,367 1,490 - 9,662 (3,391) 10/8/2010 1998 38
Philadelphia - Horsham - Welsh Rd. Horsham, PA (4) 1,815 2,708 68 - 90 883 1,154 - 1,905 3,591 1,222 - 6,718 (2,349) 10/8/2010 2001 41
Philadelphia - King of Prussia King of Prussia, PA (4) 2,871 7,293 58 - 189 1,193 1,650 - 3,060 8,486 1,708 - 13,254 (4,051) 10/8/2010 1998 38
Philadelphia - Malvern - Great Valley Malvern, PA (4) 1,772 2,699 44 - 89 778 920 - 1,861 3,477 964 - 6,302 (2,065) 10/8/2010 1999 39
Philadelphia - Malvern - Swedesford Rd. Malvern, PA (4)
(7) 78 4,384 40 - 87 915 981 - 165 5,299 1,021 - 6,485 (3,691) 10/8/2010 1999 39
Pittsburgh - Monroeville Monroeville, PA (4) 1,731 10,487 42 - 116 691 963 - 1,847 11,178 1,005 - 14,030 (4,137) 10/8/2010 1999 39
Philadelphia - Airport - Bartram Ave. Philadelphia, PA (4) 1,654 7,808 52 - 267 697 1,326 - 1,921 8,505 1,378 - 11,804 (3,720) 10/8/2010 1998 38
Philadelphia - Airport - Tinicum Blvd. Philadelphia, PA (4) 1,610 9,057 57 - 184 1,350 1,773 - 1,794 10,407 1,830 - 14,031 (4,743) 10/8/2010 1998 38
Pittsburgh - Airport Pittsburgh, PA (4) 806 6,583 53 - 109 755 1,170 - 915 7,338 1,223 - 9,476 (3,259) 10/8/2010 1998 39
Wilkes-Barre - Hwy. 315 Plains Township, PA (4) 852 3,670 108 - 156 648 773 - 1,008 4,318 881 - 6,207 (2,098) 10/8/2010 2003 43
Philadelphia - Plymouth Meeting Plymouth Meeting, PA (4) 1,111 7,505 120 - 78 2,150 1,480 - 1,189 9,655 1,600 - 12,444 (4,164) 10/8/2010 2003 43
Pittsburgh - West Mifflin West Mifflin, PA (4) 885 7,893 95 - 282 543 821 - 1,167 8,436 916 - 10,519 (3,201) 10/8/2010 2003 43
Providence - East Providence East Providence, RI (4) 1,632 6,713 70 - 106 3,055 1,502 - 1,738 9,768 1,572 - 13,078 (3,181) 10/8/2010 2002 42
Providence - Airport Warwick, RI (4) 1,104 2,403 116 - 91 1,011 1,183 - 1,195 3,414 1,299 - 5,908 (2,261) 10/8/2010 1997 44
Providence - Warwick Warwick, RI (4) 1,563 4,097 69 - 168 533 1,016 - 1,731 4,630 1,085 - 7,446 (2,452) 10/8/2010 2001 41
Providence - West Warwick West Warwick, RI (4) 1,245 5,104 66 - 85 665 978 - 1,330 5,769 1,044 - 8,143 (2,622) 10/8/2010 2001 41
Bluffton - Hilton Head Bluffton, SC (4) - - - - 2,863 9,069 1,505 - 2,863 9,069 1,505 - 13,437 (585) 4/29/2020 2020 40
Columbia - Ft. Jackson Columbia, SC (4) 1,397 4,865 44 - 95 777 1,320 - 1,492 5,642 1,364 - 8,498 (2,997) 10/8/2010 1997 32
Columbia - West - Interstate 126 Columbia, SC (4) 896 2,918 43 - 97 842 1,240 - 993 3,760 1,283 - 6,036 (2,479) 10/8/2010 1996 31
Columbia - West - Stoneridge Dr. Columbia, SC (4) 554 1,437 33 - 119 564 1,004 - 673 2,001 1,037 - 3,711 (1,628) 10/8/2010 1995 25
Greenville - Airport Greenville, SC (4) 727 3,464 40 - 40 549 1,453 - 767 4,013 1,493 - 6,273 (2,349) 10/8/2010 1996 36
Greenville - Haywood Mall Greenville, SC (4) 672 1,082 33 - 100 511 1,105 - 772 1,593 1,138 - 3,503 (1,672) 10/8/2010 1995 25
Greenville - Woodruff Road Greenville, SC (4) 2,023 9,105 1,265 - (5) 148 118 - 2,018 9,253 1,383 - 12,654 (1,022) 9/14/2018 2018 40
Columbia - Northwest/Harbison Irmo, SC (4) 816 3,607 59 - 274 881 859 - 927 4,652 1,515 - 7,094 (2,663) 10/8/2010 1999 44
Charleston - Mt. Pleasant Mt. Pleasant, SC (4) 1,713 5,571 39 - 93 860 1,203 - 1,806 6,431 1,242 - 9,479 (3,079) 10/8/2010 1998 38
Charleston - Northwoods Blvd. N. Charleston, SC (4) 563 2,087 35 - 88 663 1,141 - 651 2,750 1,176 - 4,577 (2,081) 10/8/2010 1996 26
Charleston - Airport N. Charleston, SC (4) 1,580 5,652 49 - 118 1,836 1,424 - 1,698 7,488 1,473 - 10,659 (3,475) 10/8/2010 1999 39
Charleston - North Charleston N. Charleston, SC (4) 1,124 4,483 46 - 128 1,448 1,324 - 1,252 5,931 1,370 - 8,553 (3,391) 10/8/2010 1996 31
Rock Hill Rock Hill, SC (4) 1,397 10,488 1,115 - 73 367 (45) - 1,470 10,855 1,070 - 13,395 (1,265) 5/30/2018 2018 39
Nashville - Brentwood Brentwood, TN (4) 668 1,588 33 - 111 1,045 1,456 - 942 2,469 892 - 4,303 (2,068) 10/8/2010 1990 20
Extended Stay America, Inc. and Subsidiaries and ESH Hospitality, Inc. and Subsidiaries
Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2020 (Continued)
(dollars in thousands)
Cost Capitalized Subsequent to Gross Amount Carried at Close of
Initial Cost Acquisition (1)
Period December 31, 2020
Description Location Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Total (2)
Accumulated
Depreciation Date
Acquired Date of
Construction Depreciable
Lives
(Years) (3)
Nashville - Brentwood - South Brentwood, TN (4) 1,271 3,746 44 - 114 863 1,231 - 1,385 4,609 1,275 - 7,269 (2,823) 10/8/2010 1996 31
Chattanooga - Airport Chattanooga, TN (4) 1,045 3,840 44 - 72 1,221 1,228 - 1,117 5,061 1,272 - 7,450 (2,713) 10/8/2010 1996 31
Nashville - Franklin - Cool Springs Franklin, TN (4) 1,898 3,263 46 - 218 1,622 1,474 - 2,116 4,885 1,520 - 8,521 (2,897) 10/8/2010 1998 33
Knoxville - Cedar Bluff Knoxville, TN (4) 768 3,224 36 - 59 811 1,003 - 827 4,035 1,039 - 5,901 (2,244) 10/8/2010 1997 32
Knoxville - West Hills Knoxville, TN (4) 570 1,826 29 - 54 561 980 - 624 2,387 1,009 - 4,020 (1,749) 10/8/2010 1990 30
Memphis - Airport Memphis, TN (4) 329 1,900 66 - 65 1,189 1,413 - 394 3,089 1,479 - 4,962 (2,366) 10/8/2010 1998 38
Memphis - Apple Tree Memphis, TN (4) 1,052 - 29 - 123 1,034 1,048 - 1,175 1,034 1,077 - 3,286 (1,296) 10/8/2010 1990 (6)
Memphis - Cordova Memphis, TN (4) 736 1,937 34 - 71 968 1,223 - 807 2,905 1,257 - 4,969 (2,060) 10/8/2010 1996 26
Memphis - Mt. Moriah Memphis, TN (4) 827 1,670 45 - 167 1,323 1,301 - 994 2,993 1,346 - 5,333 (2,113) 10/8/2010 1999 39
Memphis - Germantown Memphis, TN (4) 1,445 4,416 60 - 113 813 1,438 - 1,558 5,229 1,498 - 8,285 (3,011) 10/8/2010 1999 39
Memphis - Germantown West Memphis, TN (4) 849 3,071 42 - 67 760 1,112 - 916 3,831 1,154 - 5,901 (2,239) 10/8/2010 1999 39
Memphis - Wolfchase Galleria Memphis, TN (4) 1,137 5,177 75 - 104 869 1,572 - 1,241 6,046 1,647 - 8,934 (3,124) 10/8/2010 1999 41
Nashville - Airport Nashville, TN (4) 1,033 3,649 42 - 129 897 1,198 - 1,162 4,546 1,240 - 6,948 (2,664) 10/8/2010 1997 32
Nashville - Airport - Elm Hill Pike Nashville, TN (4) 812 1,543 33 - 293 744 941 - 1,105 2,287 974 - 4,366 (1,989) 10/8/2010 1993 23
Nashville - Airport - Music City Nashville, TN (4) 2,779 2,379 56 - 129 995 1,600 - 2,908 3,374 1,656 - 7,938 (2,532) 10/8/2010 1997 32
Nashville - Vanderbilt Nashville, TN (4) 1,918 9,993 78 - 192 2,319 2,164 - 2,110 12,312 2,242 - 16,664 (4,871) 10/8/2010 2002 42
Austin - Austin Airport Austin, TX (4) - - - - 3,815 7,426 1,585 - 3,815 7,426 1,585 - 12,826 (455) 6/30/2020 2020 40
Austin - Round Rock - South Austin, TX (4) 676 3,755 96 - 61 763 1,032 - 737 4,518 1,128 - 6,383 (2,384) 10/8/2010 2003 43
Austin - Arboretum - Capital of Texas Hwy. Austin, TX (4) 734 4,455 43 - 91 891 936 - 825 5,346 979 - 7,150 (2,696) 10/8/2010 1999 39
Austin - Arboretum - North Austin, TX (4) 1,080 5,322 56 - 128 1,038 1,669 - 1,208 6,360 1,725 - 9,293 (3,621) 10/8/2010 1998 40
Austin - Arboretum - South Austin, TX (4) 1,059 2,857 44 - 108 1,225 1,643 - 1,167 4,082 1,687 - 6,936 (3,098) 10/8/2010 1995 30
Austin - Downtown - Town Lake Austin, TX (4) 3,043 11,933 58 - 121 1,285 1,793 - 3,164 13,218 1,851 - 18,233 (5,694) 10/8/2010 1998 38
Austin - Metro Austin, TX (4) 677 1,768 53 - 100 514 1,080 - 777 2,282 1,133 - 4,192 (1,729) 10/8/2010 1998 41
Austin - North Central Austin, TX (4) 1,711 - 58 - 92 1,694 1,814 - 1,803 1,694 1,872 - 5,369 (2,307) 10/8/2010 1998 (6)
Austin - Northwest - Lakeline Mall Austin, TX (4) 601 2,842 75 - 143 574 1,254 - 744 3,416 1,329 - 5,489 (2,147) 10/8/2010 2002 42
Austin - Northwest - Research Park Austin, TX (4) 1,028 5,422 59 - 171 1,859 1,845 - 1,199 7,281 1,904 - 10,384 (3,910) 10/8/2010 1998 41
Austin - Round Rock - North Austin, TX (4) 604 3,676 50 - 175 1,075 1,315 - 779 4,751 1,365 - 6,895 (3,117) 10/8/2010 1998 28
Austin - Southwest Austin, TX (4) 4,628 3,811 84 - 74 949 1,161 - 4,702 4,760 1,245 - 10,707 (2,518) 10/8/2010 2002 42
Dallas - Bedford Bedford, TX (4) 540 2,600 53 - 115 661 1,156 - 655 3,261 1,209 - 5,125 (2,016) 10/8/2010 1998 41
Dallas - Coit Road Dallas, TX (4) 555 1,430 42 - 157 1,121 1,421 - 712 2,551 1,463 - 4,726 (2,297) 10/8/2010 1994 29
Dallas - Frankford Road Dallas, TX (4) 891 1,301 131 - 102 2,004 1,733 - 993 3,305 1,864 - 6,162 (3,012) 10/8/2010 2002 42
Dallas - Market Center Dallas, TX (4) 748 4,625 71 - 138 871 1,293 - 886 5,496 1,364 - 7,746 (2,732) 10/8/2010 1997 39
Dallas - Farmers Branch Farmers Branch, TX (4) 511 1,451 38 - 71 605 1,163 - 582 2,056 1,201 - 3,839 (1,810) 10/8/2010 1998 28
Houston - Galleria - Uptown Houston, TX (4) 890 9,696 66 - 65 1,299 1,490 - 955 10,995 1,556 - 13,506 (4,812) 10/8/2010 1998 38
Houston - Galleria - Westheimer Houston, TX (4) 729 9,020 45 - 66 894 1,156 - 795 9,914 1,201 - 11,910 (4,089) 10/8/2010 1999 39
Houston - Greenspoint Houston, TX (4) 381 840 39 - 171 823 1,286 - 552 1,663 1,325 - 3,540 (1,876) 10/8/2010 1998 28
Houston - Med. Ctr. - Greenway Plaza Houston, TX (4) 603 8,266 46 - 136 1,125 1,280 - 739 9,391 1,326 - 11,456 (4,035) 10/8/2010 1998 38
Houston - Katy Frwy - Beltway 8 Houston, TX (4) 304 2,701 44 - 76 762 1,190 - 380 3,463 1,234 - 5,077 (2,315) 10/8/2010 1999 39
Extended Stay America, Inc. and Subsidiaries and ESH Hospitality, Inc. and Subsidiaries
Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2020 (Continued)
(dollars in thousands)
Cost Capitalized Subsequent to Gross Amount Carried at Close of
Initial Cost Acquisition (1)
Period December 31, 2020
Description Location Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Total (2)
Accumulated
Depreciation Date
Acquired Date of
Construction Depreciable
Lives
(Years) (3)
Houston - Med. Ctr. - NRG Park - Braeswood Blvd. Houston, TX (4) 998 10,111 122 - 153 2,149 1,933 - 1,151 12,260 2,055 - 15,466 (5,483) 10/8/2010 1997 38
Houston - Med. Ctr. - NRG Park - Fannin St. Houston, TX (4) 1,311 7,833 53 - 168 1,645 1,765 - 1,479 9,478 1,818 - 12,775 (5,219) 10/8/2010 1995 30
Houston - Med. Ctr. - NRG Park - Kirby Houston, TX (4) 544 5,470 60 - 123 774 1,177 - 667 6,244 1,237 - 8,148 (2,910) 10/8/2010 1997 39
Houston - NASA - Johnson Space Center Houston, TX (4) 535 4,068 44 - 148 1,352 1,237 - 683 5,420 1,281 - 7,384 (2,877) 10/8/2010 1998 38
Houston - Sugar Land Houston, TX (4) 1,882 5,904 549 - 10 1,301 1,197 - 1,892 7,205 1,746 - 10,843 (3,494) 12/31/2013 1998 40
Houston - Willowbrook - HWY 249 Houston, TX (4) 329 3,432 38 - 68 1,192 1,161 - 397 4,624 1,199 - 6,220 (2,545) 10/8/2010 1998 38
Dallas - DFW Airport N. Irving, TX (4) 698 1,510 130 - 111 1,174 1,531 - 809 2,684 1,661 - 5,154 (2,450) 10/8/2010 2003 43
Dallas - Las Colinas - Carnaby St. Irving, TX (4) 1,220 3,061 51 - 251 1,518 1,342 - 1,471 4,579 1,393 - 7,443 (2,572) 10/8/2010 1996 31
Dallas - Las Colinas - Green Park Dr. Irving, TX (4) 875 2,338 98 - 177 1,185 1,278 - 1,052 3,523 1,376 - 5,951 (2,362) 10/8/2010 1998 43
Dallas - Las Colinas - Meadow Creek Dr. Las Colinas, TX (4) 844 3,605 84 - 140 529 1,428 - 984 4,134 1,512 - 6,630 (2,572) 10/8/2010 1998 40
Dallas - Lewisville Lewisville, TX (4) 564 1,020 38 - 87 1,031 1,044 - 651 2,051 1,082 - 3,784 (1,669) 10/8/2010 1998 38
Dallas - Plano Plano, TX (4) 735 4,386 90 - 107 1,509 1,711 - 842 5,895 1,801 - 8,538 (3,455) 10/8/2010 1999 41
Dallas - Richardson Richardson, TX (4) 1,014 5,535 144 - 144 1,183 2,273 - 1,158 6,718 2,417 - 10,293 (4,144) 10/8/2010 2002 42
San Antonio - Airport San Antonio, TX (4) 1,443 4,710 53 - 75 1,510 1,519 - 1,518 6,220 1,572 - 9,310 (3,396) 10/8/2010 1995 30
San Antonio - Colonnade San Antonio, TX (4) 865 5,060 52 - 111 670 1,133 - 976 5,730 1,185 - 7,891 (2,742) 10/8/2010 1998 40
Houston - The Woodlands Spring, TX (4) 455 5,700 55 - 94 1,303 1,298 - 549 7,003 1,353 - 8,905 (4,055) 10/8/2010 1998 26
Houston - Stafford Stafford, TX (4) 389 1,774 35 - 119 926 1,109 - 508 2,700 1,144 - 4,352 (1,900) 10/8/2010 1997 34
Houston - NASA - Bay Area Blvd. Webster, TX (4) 516 5,301 45 - 102 930 1,126 - 618 6,231 1,171 - 8,020 (2,905) 10/8/2010 1997 40
Salt Lake City - Union Park Midvale, UT (4) 1,236 4,122 47 - 130 964 1,437 - 1,366 5,086 1,484 - 7,936 (3,060) 10/8/2010 1997 37
Salt Lake City - Sugar House Salt Lake City, UT (4) 2,166 7,029 39 - 194 1,089 1,337 - 2,360 8,118 1,376 - 11,854 (4,011) 10/8/2010 1998 33
Salt Lake City - Sandy Sandy, UT (4) 977 3,949 45 - 163 1,145 1,302 - 1,140 5,094 1,347 - 7,581 (2,756) 10/8/2010 1998 38
Salt Lake City - West Valley Center West Valley, UT (4) 1,183 3,592 43 - 157 672 1,235 - 1,340 4,264 1,278 - 6,882 (2,639) 10/8/2010 1997 37
Washington, D.C. - Alexandria - Landmark Alexandria, VA (4) 3,627 10,696 44 - 107 1,141 1,630 - 3,734 11,837 1,674 - 17,245 (4,012) 10/8/2010 1999 39
Washington, DC - Alexandria - Eisenhower Ave. Alexandria, VA (4) 5,147 14,424 60 - 75 1,252 1,683 - 5,222 15,676 1,743 - 22,641 (6,014) 10/8/2010 1999 39
Washington, D.C. - Centreville - Manassas Centreville, VA (4) 1,542 4,922 105 - 92 787 1,299 - 1,634 5,709 1,404 - 8,747 (2,192) 10/8/2010 2004 44
Washington, D.C. - Chantilly Chantilly, VA (4) 2,655 3,015 511 - 198 1,262 845 - 2,853 4,277 1,356 - 8,486 (3,298) 12/13/2012 1998 22
Washington, D.C. - Chantilly - Airport Chantilly, VA (4) 1,402 3,390 40 - 41 722 957 - 1,443 4,112 997 - 6,552 (2,354) 10/8/2010 1998 38
Washington, D.C. - Chantilly - Dulles South Chantilly, VA (4) 1,166 5,159 46 - 137 643 972 - 1,303 5,802 1,018 - 8,123 (2,646) 10/8/2010 2000 40
Chesapeake - Churchland Blvd. Chesapeake, VA (4) 647 2,762 57 - 47 527 1,096 - 694 3,289 1,153 - 5,136 (1,924) 10/8/2010 2001 42
Chesapeake - Crossways Blvd. Chesapeake, VA (4) 1,171 4,773 47 - 157 906 1,358 - 1,328 5,679 1,405 - 8,412 (3,283) 10/8/2010 1996 32
Chesapeake - Greenbrier Circle Chesapeake, VA (4) 807 5,349 109 - 79 587 982 - 886 5,936 1,091 - 7,913 (2,707) 10/8/2010 2005 44
Washington, D.C. - Fairfax Fairfax, VA (4) 1,799 3,734 49 - 136 896 1,111 - 1,935 4,630 1,160 - 7,725 (2,600) 10/8/2010 1999 39
Washington, D.C. - Fairfax - Fair Oaks Mall Fairfax, VA (4) 936 5,713 61 - 61 611 1,010 - 997 6,324 1,071 - 8,392 (2,794) 10/8/2010 2000 40
Extended Stay America, Inc. and Subsidiaries and ESH Hospitality, Inc. and Subsidiaries
Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2020 (Continued)
(dollars in thousands)
Cost Capitalized Subsequent to Gross Amount Carried at Close of
Initial Cost Acquisition (1)
Period December 31, 2020
Description Location Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Total (2)
Accumulated
Depreciation Date
Acquired Date of
Construction Depreciable
Lives
(Years) (3)
Washington, D.C. - Fairfax - Fair Oaks Fairfax, VA (4) 4,167 4,053 693 - 206 1,044 759 - 4,373 5,097 1,452 - 10,922 (3,718) 12/13/2012 1998 26
Washington, D.C. - Falls Church - Merrifield Fairfax, VA (4) 4,389 6,653 910 - 263 1,049 901 - 4,652 7,702 1,811 - 14,165 (3,982) 12/13/2012 1998 33
Richmond - Innsbrook Glen Allen, VA (4) 1,069 1,991 45 - 92 648 1,223 - 1,161 2,639 1,268 - 5,068 (2,175) 10/8/2010 1997 27
Richmond - West End - I-64 Glen Allen, VA (4) 1,999 2,496 501 - 92 794 934 - 2,091 3,290 1,435 - 6,816 (2,951) 12/13/2012 1997 19
Hampton - Coliseum Hampton, VA (4) 1,049 2,120 97 - 82 546 1,177 - 1,131 2,666 1,274 - 5,071 (2,058) 10/8/2010 2003 43
Washington, D.C. - Herndon - Dulles Herndon, VA (4) 1,159 5,808 150 - 58 370 1,125 - 1,217 6,178 1,275 - 8,670 (2,753) 10/8/2010 2005 45
Lynchburg - University Blvd. Lynchburg, VA (4) 1,259 4,899 94 - 104 445 1,094 - 1,363 5,344 1,188 - 7,895 (2,678) 10/8/2010 2003 43
Newport News - I-64 - Jefferson Avenue Newport News, VA (4) 982 2,655 34 - 93 589 998 - 1,075 3,244 1,032 - 5,351 (2,204) 10/8/2010 1997 27
Newport News - Oyster Point Newport News, VA (4) 688 2,950 44 - 66 897 1,354 - 754 3,847 1,398 - 5,999 (2,404) 10/8/2010 1996 32
Washington, D.C. - Reston Reston, VA (4) 5,766 7,250 795 - 194 1,062 1,069 - 5,960 8,312 1,864 - 16,136 (4,048) 12/13/2012 1998 34
North Chesterfield - Arboretum Richmond, VA (4) 1,368 3,745 45 - 51 781 1,659 - 1,419 4,526 1,704 - 7,649 (2,620) 10/8/2010 1998 38
Richmond - W. Broad Street - Glenside - North Richmond, VA (4) 1,008 4,037 55 - 96 508 1,129 - 1,104 4,545 1,184 - 6,833 (2,207) 10/8/2010 1999 40
Richmond - W. Broad Street - Glenside - South Richmond, VA (4) 660 1,677 39 - 94 1,702 1,137 - 754 3,379 1,176 - 5,309 (2,171) 10/8/2010 1997 32
Roanoke - Airport Roanoke, VA (4) 844 1,949 35 - 47 710 1,021 - 891 2,659 1,056 - 4,606 (1,684) 10/8/2010 1998 34
Washington, D.C. - Springfield Springfield, VA (4) 3,417 15,207 134 - 93 837 1,547 - 3,510 16,044 1,681 - 21,235 (5,350) 10/8/2010 2004 44
Washington, D.C. - Sterling Sterling, VA (4) 1,375 5,167 39 - 97 657 986 - 1,472 5,824 1,025 - 8,321 (2,755) 10/8/2010 1998 38
Washington, DC - Sterling - Dulles Sterling, VA (4) 4,709 2,618 707 - 250 1,133 880 - 4,959 3,751 1,587 - 10,297 (3,344) 12/13/2012 1998 23
Washington, D.C. - Tysons Corner Vienna, VA (4) 3,716 12,425 49 - 86 1,228 1,620 - 3,802 13,653 1,669 - 19,124 (5,217) 10/8/2010 1999 39
Virginia Beach - Independence Blvd. Virginia Beach, VA (4) 1,769 6,115 43 - 161 1,074 1,345 - 1,930 7,189 1,388 - 10,507 (3,675) 10/8/2010 1996 31
Seattle - Bellevue - Downtown Bellevue, WA (4) 3,672 9,062 55 - 89 2,688 2,356 - 3,761 11,750 2,411 - 17,922 (4,097) 10/8/2010 1998 38
Seattle - Bellevue - Factoria Bellevue, WA (4) 2,697 8,912 55 - 103 1,492 1,885 - 2,800 10,404 1,940 - 15,144 (5,178) 10/8/2010 1997 32
Seattle - Redmond Bellevue, WA (4) 6,206 16,067 71 - 124 2,409 2,715 - 6,330 18,476 2,786 - 27,592 (6,946) 10/8/2010 1998 33
Seattle - Bothell - West Bothell, WA (4) 1,236 5,978 64 - 47 631 904 - 1,283 6,609 968 - 8,860 (2,668) 10/8/2010 2001 41
Seattle - Bothell - Canyon Park Bothell, WA (4) 2,266 7,932 57 - 104 1,121 1,222 - 2,370 9,053 1,279 - 12,702 (3,895) 10/8/2010 1998 39
Seattle - Everett - North Everett, WA (4) 1,175 6,615 38 - 201 1,021 1,309 - 1,376 7,636 1,347 - 10,359 (3,218) 10/8/2010 1997 37
Seattle - Everett - Silverlake Everett, WA (4) 4,008 9,000 54 - 92 824 1,315 - 4,100 9,824 1,369 - 15,293 (3,978) 10/8/2010 1999 40
Seattle - Federal Way Federal Way, WA (4) 761 4,918 38 - 205 773 1,096 - 966 5,691 1,134 - 7,791 (2,704) 10/8/2010 1999 39
Tacoma - Fife Fife, WA (4) 814 4,397 38 - 85 827 1,109 - 899 5,224 1,147 - 7,270 (2,727) 10/8/2010 1997 37
Seattle - Kent Kent, WA (4) 923 3,724 43 - 95 1,133 1,535 - 1,018 4,857 1,578 - 7,453 (2,754) 10/8/2010 1998 38
Seattle - Lynnwood Lynnwood, WA (4) 1,829 5,408 41 - 85 1,022 1,247 - 1,914 6,430 1,288 - 9,632 (2,981) 10/8/2010 1998 38
Seattle - Mukilteo Mukilteo, WA (4) 1,894 8,893 84 - 96 821 924 - 1,990 9,714 1,008 - 12,712 (3,261) 10/8/2010 2002 42
Seattle - Renton Renton, WA (4) 1,714 5,924 62 - 137 1,000 1,730 - 1,851 6,924 1,792 - 10,567 (3,736) 10/8/2010 1998 39
Seattle - Northgate Seattle, WA (4) 1,214 8,655 86 - 95 1,013 1,696 - 1,309 9,668 1,782 - 12,759 (3,809) 10/8/2010 2002 42
Tacoma - South Tacoma, WA (4) 1,162 6,871 40 - 147 793 1,185 - 1,309 7,664 1,225 - 10,198 (3,344) 10/8/2010 1998 40
Seattle - Southcenter Tukwila, WA (4) 1,005 4,129 35 - 76 1,903 1,310 - 1,081 6,032 1,345 - 8,458 (3,177) 10/8/2010 1998 33
Extended Stay America, Inc. and Subsidiaries and ESH Hospitality, Inc. and Subsidiaries
Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2020 (Continued)
(dollars in thousands)
Cost Capitalized Subsequent to Gross Amount Carried at Close of
Initial Cost Acquisition (1)
Period December 31, 2020
Description Location Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Land and
Improvements Building and
Improvements FF&E Development in Process Total (2)
Accumulated
Depreciation Date
Acquired Date of
Construction Depreciable
Lives
(Years) (3)
Seattle - Tukwila Tukwila, WA (4) 1,056 4,724 38 - 73 1,000 1,061 - 1,129 5,724 1,099 - 7,952 (2,862) 10/8/2010 1997 32
Olympia - Tumwater Tumwater, WA (4) 1,428 5,495 70 - 109 750 1,203 - 1,537 6,245 1,273 - 9,055 (2,819) 10/8/2010 2001 41
Portland - Vancouver Vancouver, WA (4) 1,122 5,671 42 - 163 822 1,252 - 1,285 6,493 1,294 - 9,072 (3,119) 10/8/2010 1997 37
Appleton - Fox Cities Appleton, WI (4) 1,129 3,042 39 - 150 601 1,024 - 1,279 3,643 1,063 - 5,985 (2,170) 10/8/2010 1997 37
Milwaukee - Brookfield Brookfield, WI (4) 2,579 5,647 49 - 58 1,195 1,388 - 2,637 6,842 1,437 - 10,916 (3,389) 10/8/2010 1998 38
Madison - Junction Court Madison, WI (4) 1,197 2,790 39 - 107 661 960 - 1,304 3,451 999 - 5,754 (2,035) 10/8/2010 1998 38
Madison - Old Sauk Rd. Madison, WI (4) 1,332 2,506 46 - 149 572 956 - 1,481 3,078 1,002 - 5,561 (1,914) 10/8/2010 1998 39
Milwaukee - Waukesha Waukesha, WI (4) 1,311 3,215 44 - 116 902 1,131 - 1,427 4,117 1,175 - 6,719 (2,413) 10/8/2010 1997 37
Milwaukee - Wauwatosa Wauwatosa, WI (4) 1,732 5,151 44 - 104 711 1,368 - 1,836 5,862 1,412 - 9,110 (2,953) 10/8/2010 1997 41
Land Available for Development Bloomington, MN (4) 1,821 - - - (821) - - - 1,000 - - - 1,000 - 10/8/2010
Development in Process (8) - - - - - - - 46,488 - - - 46,488 46,488 - various
ESH Hospitality, Inc. and Subsidiaries, Investment In Real Estate $ 1,147,766 $ 2,310,240 $ 45,198 $ - $ 102,041 $ 604,443 $ 745,386 $ 46,496 $ 1,249,807 $ 2,914,683 $ 790,584 $ 46,496 $ 5,001,570 $ (1,540,358)
Impairment charges (5) Various - - - (2,366) (35,745) (7,170) (2,366) (35,745) (7,170) - (45,281) 22,122
Management Business Charlotte, NC - - - - 2,917 28,735 - 2,917 28,735 31,652 (23,750) 9/1/2011
Extended Stay America, Inc. and Subsidiaries, Investment in Real Estate $ 1,147,766 $ 2,310,240 $ 45,198 $ - $ 99,675 $ 571,615 $ 766,951 $ 46,496 $ 1,247,441 $ 2,881,855 $ 812,149 $ 46,496 $ 4,987,941 $ (1,541,986)
(1)Costs capitalized subsequent to acquisition are presented net of disposals and impairment charges.
(2)The aggregate cost for federal income tax purposes as of December 31, 2020 for Extended Stay America, Inc. and ESH Hospitality, Inc. was $5,015,299 and $4,987,087, respectively.
(3)Depreciable lives are based on the largest asset - hotel building(s); however, a portion of the real estate at each hotel property consists of items with useful lives less than those of the building(s).
(4)Each of these properties serve as collateral for the ESH REIT Credit Facilities.
(5)These amounts represent cumulative impairment charges recognized by Extended Stay America, Inc. subsidiaries.
(6)The majority of the depreciable real estate at this property consists of furniture, fixtures and equipment, which have estimated useful lives that range between 1 and 10 years.
(7)Land is subject to ground lease.
(8)Includes 8 sites in various stages of development or construction.
Extended Stay America, Inc. and Subsidiaries and
ESH Hospitality, Inc. and Subsidiaries
Schedule III-Real Estate and Accumulated Depreciation
(in thousands)
A summary of activity of investment in real estate and accumulated depreciation is as follows:
The Company’s changes in investment in real estate for the years ended December 31, 2020, 2019 and 2018 were as follows:
December 31,
2020 December 31,
2019 December 31,
Balance, beginning of the period $ 4,867,499 $ 4,671,737 $ 4,895,933
Additions during period:
Capital expenditures 192,731 251,158 196,545
Acquisitions - 10,136 12,729
Deductions during period:
Dispositions and other 71,194 62,853 389,870
Impairment 1,095 2,679 43,600
Balance, end of period $ 4,987,941 $ 4,867,499 $ 4,671,737
The Company’s changes in accumulated depreciation for the years ended December 31, 2020, 2019 and 2018 were as follows:
December 31,
2020 December 31,
2019 December 31,
Balance, beginning of the period $ 1,373,950 $ 1,218,105 $ 1,142,799
Additions during period:
Depreciation 203,421 195,342 207,953
Deductions during period:
Dispositions and other 35,385 39,497 132,647
Balance, end of period $ 1,541,986 $ 1,373,950 $ 1,218,105
ESH REIT’s changes in investment in real estate for the years ended December 31, 2020, 2019 and 2018 were as follows:
December 31,
2020 December 31,
2019 December 31,
Balance, beginning of the period $ 4,878,615 $ 4,683,544 $ 4,918,804
Additions during period:
Capital expenditures 188,072 244,747 191,099
Acquisitions - 10,136 12,733
Deductions during period:
Dispositions and other 64,442 59,812 439,092
Impairment 675 - -
Balance, end of period $ 5,001,570 $ 4,878,615 $ 4,683,544
ESH REIT’s changes in accumulated depreciation for the years ended December 31, 2020, 2019 and 2018 were as follows:
December 31,
2020 December 31,
2019 December 31,
Balance, beginning of the period $ 1,372,595 $ 1,215,899 $ 1,143,164
Additions during period:
Depreciation 201,012 193,081 207,278
Deductions during period:
Dispositions and other 33,249 36,385 134,543
Balance, end of period $ 1,540,358 $ 1,372,595 $ 1,215,899

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Controls and Procedures (Extended Stay America, Inc.)
Disclosure Controls and Procedures
As of December 31, 2020, Extended Stay America, Inc. reviewed, under the direction of the Chief Executive Officer and Chief Financial Officer, the disclosure controls and procedures of Extended Stay America, Inc., as defined in Exchange Act Rule 13a-15(e). Based upon and as of the date of that review, the Chief Executive Officer and Chief Financial Officer of Extended Stay America, Inc. concluded that the disclosure controls and procedures of Extended Stay America, Inc. were effective to ensure that information required to be disclosed in the reports that Extended Stay America, Inc. files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the management of Extended Stay America, Inc., including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There were no changes in Extended Stay America, Inc.’s internal control over financial reporting that occurred during the most recent fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, Extended Stay America, Inc.’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
The management of Extended Stay America, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). The management of Extended Stay America, Inc., under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, carried out an assessment of the effectiveness of its internal control over financial reporting for Extended Stay America, Inc. as of December 31, 2020. The assessment was performed using the criteria for effective internal control reflected in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on the assessment of the system of internal control for Extended Stay America, Inc., management of Extended Stay America, Inc. determined that as of December 31, 2020, internal control over financial reporting of Extended Stay America, Inc. was effective.
Deloitte & Touche LLP, the independent registered public accounting firm that has audited the consolidated financial statements of Extended Stay America, Inc. included in this combined annual report on Form 10-K, has issued an attestation report on Extended Stay America, Inc.’s internal control over financial reporting as of December 31, 2020. The report appears in this Item 9A of this combined annual report on Form 10-K.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Extended Stay America, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Extended Stay America, Inc. and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the Company and our report dated February 25, 2021, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
February 25, 2021
Controls and Procedures (ESH Hospitality, Inc.)
Disclosure Controls and Procedures
As of December 31, 2020, ESH Hospitality, Inc. reviewed, under the direction of the Chief Executive Officer and Chief Financial Officer, the disclosure controls and procedures of ESH Hospitality, Inc., as defined in Exchange Act Rule 13a-15(e). Based upon and as of the date of that review, the Chief Executive Officer and Chief Financial Officer of ESH Hospitality, Inc. concluded that the disclosure controls and procedures of ESH Hospitality, Inc. were effective to ensure that information required to be disclosed in the reports that ESH Hospitality, Inc. files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the management of ESH Hospitality, Inc., including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There were no changes in ESH Hospitality, Inc.’s internal control over financial reporting that occurred during the most recent fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, ESH Hospitality, Inc.’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
The management of ESH Hospitality, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). The management of ESH Hospitality, Inc., under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, carried out an assessment of the effectiveness of its internal control over financial reporting for ESH Hospitality, Inc. as of December 31, 2020. The assessment was performed using the criteria for effective internal control reflected in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on the assessment of the system of internal control for ESH Hospitality, Inc., management of ESH Hospitality, Inc. determined that as of December 31, 2020, internal control over financial reporting of ESH Hospitality, Inc. was effective.
Deloitte & Touche LLP, the independent registered public accounting firm that has audited the consolidated financial statements of ESH Hospitality, Inc. included in this combined annual report on Form 10-K, has issued an attestation report on ESH Hospitality, Inc.’s internal control over financial reporting as of December 31, 2020. The report appears in this Item 9A of this combined annual report on Form 10-K.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of ESH Hospitality, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of ESH Hospitality, Inc. and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the Company and our report dated February 25, 2021, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
February 25, 2021

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The information regarding our directors and nominees for director required by Item 401 of Regulation S-K will be included under the headings “Proposal 1-Election of Directors” in the Proxy Statements for each of the Corporation and ESH REIT, each to be filed with the SEC within 120 days of the fiscal year ended December 31, 2020, prepared for the solicitation of proxies in connection with our Annual Meetings of Shareholders to be held May 26, 2021 (“Proxy Statements”), which information is incorporated by reference herein.
Information regarding our executive officers required by Item 401 of Regulation S-K will be included under the heading “Executive Officers” in our Proxy Statements, which information is incorporated by reference herein.
Information required by Item 405 of Regulation S-K will be included under the headings “Stock Ownership Information-Reporting Compliance” in our Proxy Statements, which information is incorporated by reference herein.
Information required by Item 406 of Regulation S-K will be included under the headings “Corporate Governance and Board Matters-Corporate Governance-Code of Business Conduct and Ethics” in our Proxy Statements, which information is incorporated by reference herein.
Information required by paragraphs (c)(3), (d)(4) and (d)(5) of Item 407 of Regulation S-K will be included under the headings “Frequently Asked Questions” and “Corporate Governance and Board Matters-Corporate Governance-Committees of the Board-Audit Committee” in our Proxy Statements, which information is incorporated by reference herein.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information required by Item 402 and paragraphs (e)(4) and (e)(5) of Item 407 of Regulations S-K regarding executive compensation will be presented under the headings “Executive Compensation-Compensation Discussion and Analysis” and “Corporate Governance and Board Matters-Compensation Committee Interlocks and Insider Participation” in our Proxy Statements, which information is incorporated by reference herein. Notwithstanding the foregoing, the information provided under the headings “Executive Compensation-Compensation Discussion and Analysis-Other Practices, Policies and Guidelines-Report of the Compensation Committee of the Board” in our Proxy Statements is furnished and shall not be deemed to be filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any future filing under the Securities Act or Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information regarding the security ownership of certain beneficial owners and management required by Item 403 of Regulation S-K will be presented under the headings “Stock Ownership Information-Security Ownership of Certain Beneficial Owners and Management” in our Proxy Statements, which information is incorporated by reference herein.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2020 with respect to the Paired Shares that may be issued under our existing equity compensation plans:
Plan Category Number of securities
to be issued upon
exercise of outstanding
options, warrants
and rights
(a) Weighted-average
exercise price of
outstanding
options, warrants
and rights
(b) Number of securities
remaining available
for future issuance
under equity
compensation plans
excluding securities
reflected in
column (a)
(c)
Equity compensation plans approved by security holders 1,362,129 (1)
- 4,774,766 (2)
Equity compensation plans not approved by security holders - - -
Total 1,362,129 (1)
- 4,774,766 (2)
________________________
(1)Includes 1,320,843 Paired Shares underlying restricted stock unit awards made under the amended and restated Extended Stay America, Inc. Long-Term Incentive Plan, assuming, as applicable, 100% vesting based on achievement of certain market-based conditions, and 41,286 Paired Shares underlying restricted stock unit awards made under the amended and restated ESH Hospitality, Inc. Long-Term Incentive Plan.
(2)Represents the aggregate number of securities available for future issuance under both the amended and restated Extended Stay America, Inc. Long-Term Incentive Plan and the amended and restated ESH Hospitality, Inc. Long-Term Incentive Plan.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information regarding certain relationships and related transactions required by Item 404 and Item 407(a) of Regulation S-K will be presented under the headings “Certain Relationships and Related Party Transactions” and “Corporate Governance and Board Matters-Corporate Governance-Board of Directors and Director Independence” in our Proxy Statements, which information is incorporated by reference herein.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services
The information regarding our principal accounting fees and services required by Item 9(e) of Schedule 14A will be presented under the headings “Independent Registered Public Accounting Firm’s Fees and Services” in our Proxy Statements, which information is incorporated by reference herein.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits, Financial Statement Schedules
(a)(1) Financial Statements
See “Item 8 - Financial Statements and Supplementary Data.”
(a)(2) Financial Statement Schedules
See “Schedule III-Real Estate and Accumulated Depreciation as of December 31, 2020” included in Item 8 of this combined annual report on Form 10-K.
All other schedules have been omitted because they are not required under the relevant instructions or because the required information is included in the consolidated financial statements or the related footnotes contained in this combined annual report.
(a)(3) List of Exhibits
Exhibit
Number
Description
3.1
Amended and Restated Certification of Incorporation of Extended Stay America, Inc. (filed as Exhibit 3.1 to the Registrants’ Current Report on Form 8-K (File No. 001-36190) filed November 18, 2013, and incorporated herein by reference).
3.2
Second Amended and Restated Bylaws of Extended Stay America, Inc. (filed as Exhibit 3.1 to the Registrants’ Current Report on Form 8-K (File No. 001-36190) filed February 26, 2018, and incorporated herein by reference).
3.3
Amended and Restated Certificate of Incorporation of ESH Hospitality, Inc. (filed as Exhibit 3.3 to the Registrants’ Current Report on Form 8-K (File No. 001-36190) filed November 18, 2013, and incorporated herein by reference).
3.4
Amended and Restated Bylaws of ESH Hospitality, Inc. (filed as Exhibit 3.2 to the Registrants’ Current Report on Form 8-K (File No. 001-36190) filed February 26, 2018, and incorporated herein by reference).
4.1
Specimen Stock Certificate of Extended Stay America, Inc. (filed as Exhibit 4.1 to the Registrants’ Amendment No. 5 to Registration Statement on Form S-1 (File No. 333-190052), and incorporated herein by reference).
4.2
Specimen Stock Certificate of ESH Hospitality, Inc. (filed as Exhibit 4.1.1 to the Registrants’ Amendment No. 5 to Registration Statement on Form S-1 (File No. 333-190052), and incorporated herein by reference).
4.3
Pairing Agreement between Extended Stay America, Inc. and ESH Hospitality, Inc., dated November 12, 2013 (filed as Exhibit 4.3 to the Registrants’ Current Report on Form 8-K (File No. 001-36190) filed November 18, 2013, and incorporated herein by reference).
4.4
Indenture, dated May 15, 2015, among ESH Hospitality, Inc., the guarantors party thereto, and Deutsche Bank Trust Company Americas (filed as Exhibit 4.1 to the Registrants’ Current Report on Form 8-K (File No. 001-36190) filed May 18, 2015, and incorporated herein by reference).
4.4.1
First Supplemental Indenture, dated March 18, 2016, among ESH Hospitality, Inc., the guarantors party thereto and Deutsche Bank Trust Company Americas (filed as Exhibit 4.2 to the Registrants’ Current Report on Form 8-K (File No. 001-36190) filed March 21, 2016, and incorporated herein by reference).
4.4.2
Second Supplemental Indenture, dated September 29, 2016, among ESH Hospitality, Inc., the guarantors party thereto and Deutsche Bank Trust Company Americas (filed as Exhibit 4.6.2 to the Registrants’ Annual Report on Form 10-K (File No. 001-36190) filed February 28, 2017, and incorporated herein by reference).
4.5
Form of 5.25% Senior Notes due 2025 (included as part of Exhibit 4.4 above).
4.6
Indenture, dated September 18, 2019, by and among ESH Hospitality, Inc., certain subsidiaries of ESH Hospitality, Inc. and Deutsche Bank Trust Company Americas (filed as Exhibit 4.1 to the Registrants’ Current Report on Form 8-K (File No. 001-36190) filed September 20, 2019, and incorporated herein by reference).
Exhibit
Number
Description
4.7
Form of 4.625% Senior Notes due 2027 (included as part of Exhibit 4.6 above).
4.8*
Description of Securities Registered under Section 12 of the Exchange Act.
10.1
Amended and Restated Management Agreement, dated as of August 30, 2016, between ESA P Portfolio Operating Lessee LLC, Lessee, and ESA Management, LLC, Manager, (filed as Exhibit 10.4 to the Registrants’ Quarterly Report on Form 10-Q (File No. 001-36190) filed October 25, 2016, and incorporated herein by reference).
10.1.1
First Amendment, dated as of May 30, 2018, to Amended and Restated Management Agreement, dated as of August 30, 2016, between ESA P Portfolio Operating Lessee LLC, as Lessee, and ESA Management, LLC, as Manager (filed as Exhibit 10.2 to the Registrants’ Quarterly Report on Form 10-Q (File No. 001-36190) filed July 25, 2018, and incorporated herein by reference).
10.2
Management Agreement, between ESA 2007 Operating Lessee LLC and ESA Management, LLC, dated November 11, 2013 (filed as Exhibit 10.4 to the Registrants’ Current Report on Form 8-K (File No. 001-36190) filed November 18, 2013, and incorporated herein by reference).
10.3
Amended and Restated Management Agreement, by and among ESA Canada Operating Lessee ULC, Lessee, ESA Management, LLC, Manager, and HVM Canada Hotel Management ULC, Canada Employer, dated as of August 30, 2016 (filed as Exhibit 10.5 to the Registrants’ Quarterly Report on Form 10-Q (File No. 001-36190) filed October 25, 2016, and incorporated herein by reference).
10.4
Management Agreement, between ESA LVP Operating Lessee LLC and ESA Management, LLC, dated December 31, 2013 (filed as Exhibit 10.4 to the Registrants’ Annual Report on Form 10-K (File No. 001-36190) filed March 20, 2014, and incorporated herein by reference).
10.5
Trademark License Agreement, dated as of October 8, 2010, by and between ESH Strategies Branding LLC and ESA P Portfolio Operating Lessee Inc. (filed as Exhibit 10.4 to the Registrants’ Registration Statement on Form S-1 (File No. 333-190052), and incorporated herein by reference).
10.5.1
First Amendment to Trademark License Agreement, dated as of November 30, 2012, by and between ESH Strategies Branding LLC and ESA P Portfolio Operating Lessee Inc. (filed as Exhibit 10.4.1 to the Registrants’ Registration Statement on Form S-1 (File No. 333-190052), and incorporated herein by reference).
10.5.2
Second Amendment to Trademark License Agreement, dated as of December 13, 2012, by and between ESH Strategies Branding LLC and ESA P Portfolio Operating Lessee Inc. (filed as Exhibit 10.4.2 to the Registrants’ Registration Statement on Form S-1 (File No. 333-190052), and incorporated herein by reference).
10.5.3
Third Amendment to Trademark License Agreement, dated as of July 28, 2014, by and between ESH Strategies Branding LLC and ESA P Portfolio Operating Lessee Inc. (filed as Exhibit 10.2 to the Registrants’ Quarterly Report on Form 10-Q (File No. 001-36190) filed November 7, 2014, and incorporated herein by reference).
10.5.4
Fourth Amendment to Trademark License Agreement, dated as of December 8, 2015, by and between ESH Strategies Branding LLC and ESA P Portfolio Operating Lessee Inc. (filed as Exhibit 10.5.4 to the Registrants’ Annual Report on Form 10-K (File No. 001-36190) filed February 23, 2016, and incorporated herein by reference).
10.6
Trademark License Agreement, dated as of October 8, 2010, by and between ESH Strategies Branding LLC and ESA 2007 Operating Lessee Inc. (filed as Exhibit 10.5 to the Registrants’ Registration Statement on Form S-1 (File No. 333-190052), and incorporated herein by reference).
10.7
Trademark License Agreement, dated as of December 31, 2013, by and between ESH Strategies Branding LLC and ESA LVP Operating Lessee (filed as Exhibit 10.7 to the Registrants’ Annual Report on Form 10-K (File No. 001-36190) filed March 20, 2014, and incorporated herein by reference).
10.8
Trademark License Agreement, effective as of July 31, 2017, by and between ESH Strategies Branding LLC and ESH Strategies Franchise LLC (filed as Exhibit 10.3 to the Registrants’ Quarterly Report on Form 10-Q (File No. 001-36190) filed November 7, 2017, and incorporated herein by reference).
10.9†
Amended and Restated Extended Stay America, Inc. Long-Term Incentive Plan (filed as Annex A to Extended Stay America, Inc.’s Definitive Proxy Statement on Schedule 14A (File No. 001-36190) filed April 21, 2015, and incorporated herein by reference).
Exhibit
Number
Description
10.10†
Amended and Restated ESH Hospitality, Inc. Long-Term Incentive Plan (filed as Annex A to ESH Hospitality, Inc.’s Definitive Proxy Statement on Schedule 14A (File No. 001-36190) filed April 21, 2015, and incorporated herein by reference).
10.11
Second Amended and Restated Lease Agreement, dated as of October 31, 2018, by and between ESA P Portfolio L.L.C., ESA P Portfolio MD Trust, and ESH/TN Properties L.L.C., individually and collectively as Landlord, and ESA P Portfolio Operating Lessee LLC, as Tenant (filed as Exhibit 10.1 to the Registrants’ Quarterly Report on Form 10-Q (File No. 001-36190) filed October 31, 2018, and incorporated herein by reference).
10.12
Amended and Restated Lease Agreement, dated as of October 31, 2018, by and between ESA UD Properties L.L.C., as Landlord, and ESA 2007 Operating Lessee Inc., as Tenant (filed as Exhibit 10.2 to the Registrants’ Quarterly Report on Form 10-Q (File No. 001-36190) filed October 31, 2018, and incorporated herein by reference).
10.13
Amended and Restated Lease Agreement, dated as of October 31, 2018, by and between ESA LVP Portfolio LLC, as Landlord, and ESA LVP Operating Lessee LLC, as Tenant (filed as Exhibit 10.3 to the Registrants’ Quarterly Report on Form 10-Q (File No. 001-36190) filed October 31, 2018, and incorporated herein by reference).
10.14
Credit Agreement, dated as of August 30, 2016, by and among Extended Stay America, Inc., as Borrower, the lenders from time to time party thereto and Deutsche Bank AG New York Branch, as Administrative Agent (filed as Exhibit 10.1 to the Registrants’ Current Report on Form 8-K (File No. 01-36190) filed September 1, 2016, and incorporated by reference herein).
10.14.1
First Amendment, dated as of September 18, 2019 to the Credit Agreement, dated as of August 30, 2016 among Extended Stay America, Inc., certain wholly-owned subsidiaries of Extended Stay America, Inc., the lenders party thereto and Deutsche Bank AG New York Branch, as administrative agent (filed as Exhibit 10.2 to the Registrants' Current Report on Form 8-K (File No. 001-36190) filed September 20, 2019, and incorporated herein by reference).
10.15
Credit Agreement, dated as of August 30, 2016, by and among ESH Hospitality, Inc., as Borrower, the guarantors party thereto from time to time, Deutsche Bank AG New York Branch, as Administrative Agent, Collateral Agent and L/C Issuer, and the other lenders party thereto from time to time (filed as Exhibit 10.2 to the Registrants’ Current Report on Form 8-K (File No. 01-36190) filed September 1, 2016, and incorporated by reference herein).
10.15.1
First Amendment, dated as of March 1, 2017, to the Credit Agreement, dated as of August 30, 2016, by and among ESH Hospitality, Inc., as Borrower, the guarantors party thereto from time to time, Deutsche Bank AG New York Branch, as Administrative Agent, Collateral Agent and L/C Issuer, and the other lenders party thereto from time to time (filed as Exhibit 10.1 to the Registrants’ Current Report on Form 8-K (File No. 01-36190) filed March 3, 2017, and incorporated by reference herein).
10.15.2
Second Amendment, dated as of November 21, 2017, to the Credit Agreement, dated as of August 30, 2016, by and among ESH Hospitality, Inc., as Borrower, the guarantors party thereto from time to time, Deutsche Bank AG New York Branch, as Administrative Agent, Collateral Agent and L/C Issuer, and the other lenders party thereto from time to time (filed as Exhibit 10.1 to the Registrants’ Current Report on Form 8-K (File No. 01-36190) filed November 21, 2017, and incorporated by reference herein).
10.15.3
Third Amendment, dated as of May 22, 2018, to the Credit Agreement, dated as of August 30, 2016, by and among ESH Hospitality, Inc., the guarantors party thereto from time to time, the lenders party thereto from time to time and Deutsche Bank AG New York Branch, as administrative agent (filed as Exhibit 10.1 to the Registrants’ Quarterly Report on Form 10-Q (File No. 01-36190) filed July 25, 2018, and incorporated by reference herein).
10.15.4
Fourth Amendment, dated as of September 18, 2019, to the Credit Agreement, August 30, 2016, among ESH Hospitality Inc., certain wholly-owned subsidiaries of ESH Hospitality, Inc., the lenders party thereto and Deutsche Bank AG New York Branch, as administrative agent and collateral agent (filed as Exhibit 10.1 to the Registrants’ Current Report on Form 8-K (File No. 001-36190) filed September 20, 2019, and incorporated herein by reference).
10.16
Credit Agreement, dated as of August 30, 2016, by and among ESH Hospitality, Inc., as Borrower, the guarantors party thereto from time to time and Extended Stay America, Inc., as Lender (filed as Exhibit 10.3 to the Registrants’ Current Report on Form 8-K (File No. 01-36190) filed September 1, 2016, and incorporated by reference herein).
Exhibit
Number
Description
10.16.1
First Amendment, dated as of September 18, 2019, to the Credit Agreement, dated as of August 30, 2016, by and among ESH Hospitality, Inc., certain wholly-owned subsidiaries of ESH Hospitality, Inc. and Extended Stay America, Inc., as the lender (filed as Exhibit 10.3 to the Registrants' Current Report on Form 8-K (Filed No. 001-36190) filed September 20, 2019, and incorporated herein by reference).
10.16.2
Second Amendment, dated as of May 6, 2020, to the Credit Agreement, dated as of August 30, 2016, by and among ESH Hospitality, Inc., certain wholly-owned subsidiaries of ESH Hospitality, Inc. and Extended Stay America, Inc., as the lender (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-36190) filed May 8, 2020, and incorporated by reference herein)
10.17
Credit Agreement, dated as of July 2, 2020, between Extended Stay America, Inc., as borrower, and ESH Hospitality, Inc., as lender (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-36190) filed July 6, 2020, and incorporated by reference herein).
\
10.18
Form of Indemnification Agreement between Extended Stay America, Inc. and Directors and Executive Officers (filed as Exhibit 10.27 to the Registrants’ Amendment No. 8 to Registration Statement on Form S-1 (File No. 333-190052) filed November 8, 2013, and incorporated herein by reference).
10.19
Form of Indemnification Agreement between ESH Hospitality, Inc. and Directors and Executive Officers (filed as Exhibit 10.28 to the Registrants’ Amendment No. 8 to Registration Statement on Form S-1 (File No. 333-190052) filed November 8, 2013, and incorporated herein by reference).
10.20†
Extended Stay America, Inc. Executive Severance Plan, adopted June 19, 2014 (file as Exhibit 10.1 to the Registrants’ Current Report on Form 8-K (File No. 001-36190) filed June 23, 2014, and incorporated herein by reference).
10.21†
Form of Participation Agreement under the Extended Stay America, Inc. Executive Severance Plan (Employees of ESA Management, LLC) (filed as Exhibit 10.2 to the Registrants’ Current Report on Form 8-K (File No. 001-36190) filed June 23, 2014, and incorporated herein by reference).
10.22†
Form of Amended and Restated Extended Stay America, Inc. Long-Term Incentive Plan Restricted Stock Unit Agreement (Time-Vesting & Performance-Vesting) (filed as Exhibit 10.1 to the Registrants’ Current Report on Form 8-K (File No. 001-36190) filed May 22, 2015, and incorporated herein by reference).
10.23†
Form of Amended and Restated Extended Stay America, Inc. Long-Term Incentive Plan Restricted Stock Unit Agreement (Time-Vesting) (filed as Exhibit 10.2 to the Registrants’ Current Report on Form 8-K (File No. 001-36190) filed May 22, 2015, and incorporated herein by reference).
10.24†
Form of Amended and Restated Extended Stay America, Inc. Long-Term Incentive Plan Restricted Stock Unit Agreement (Time-Vesting) for Directors (filed as Exhibit 10.6 to the Registrants’ Quarterly Report on Form 10-Q (File No. 001-36190) filed on July 30, 2015, and incorporated herein by reference).
10.25†
Form of Amended and Restated Extended Stay America, Inc. Long-Term Incentive Plan Restricted Stock Unit Agreement (Time-Vesting & TSR Performance- Vesting) for Directors (filed as Exhibit 10.1 to the Registrants' Current Report on Form 8-K (File No. 001-36190) filed March 1, 2018, and incorporated by reference herein.)
10.26†
Extended Stay America, Inc. Annual Incentive Plan (filed as Annex B to Extended Stay America, Inc.’s Definitive Proxy Statement on Schedule 14A (File No. 001-36190) filed April 21, 2015, and incorporated herein by reference).
10.27†
ESA Management, LLC Deferred Compensation Plan, effective June 9, 2016 (filed as Exhibit 10.1 to the Registrants’ Quarterly Report on Form 10-Q (File No. 001-36190) filed July 28, 2016, and incorporated herein by reference).
Exhibit
Number
Description
10.28†
Separation Agreement between Extended Stay America, Inc. and M. Thomas Buoy, dated as of August 9, 2019 (filed as Exhibit 10.1 to the Registrants’ Current Report on Form 8-K (File No. 001-36190) filed August 9, 2019, and incorporated herein by reference).
10.29†
Offer Letter between Extended Stay America, Inc., ESH Hospitality, Inc. and Bruce N. Haase effective as of November 22, 2019 (filed as Exhibit 10.2 to the Registrants’ Current Report on Form 8-K (File No. 01-36190) filed November 22, 2019, and incorporated by reference herein).
10.29.1†
Letter Agreement between Extended Stay America, Inc., ESH Hospitality, Inc. and Bruce N. Haase effective as of January 1, 2021 (filed as Exhibit 10.1 to the Registrants’ Current Report on Form 8-K (Filed No. 01-36190) filed February 9, 2021, and incorporated by reference herein)
10.30†
Offer Letter between Extended Stay America, Inc. and Randy Fox, effective as of November 22, 2019 (filed as Exhibit 10.32 to the Registrant's Annual Report on Form 10-K (File No. 001-36190) filed February 26, 2020, and incorporated herein by reference).
10.31†
Offer Letter between Extended Stay America, Inc. and Kelly Poling, effective as of January 13, 2020 (filed as Exhibit 10.33 to the Registrant's Annual Report on Form 10-K (File No. 001-36190) filed February 26, 2020, and incorporated herein by reference).
10.32†
Separation Agreement between Extended Stay America, Inc., ESH Hospitality, Inc. and Brian Nicholson, dated as of September 10, 2020 (filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K (File No. 001-36190) filed September 11, 2020, and incorporated herein by reference).
10.33†
Offer Letter by and between Extended Stay America, Inc., ESH Hospitality, Inc. and David Clarkson dated as of September 10, 2020 (filed as Exhibit 10.2 to the Registrant's Current Report on Form 8-K (File No. 001-36190) filed September 11, 2020, and incorporated herein by reference).
10.34†
Offer Letter of Continued Employment between Extended Stay America, Inc., ESH Hospitality, Inc. and Bruce N. Haase effective as of January 1, 2021 (filed as Exhibit 10.1 to the Registrants’ Current Report on Form 8-K (File No. 01-36190) filed February 9, 2021, and incorporated by reference herein).
21.1*
List of Subsidiaries of Extended Stay America, Inc.
23.1*
Consent of Deloitte & Touche LLP for Extended Stay America, Inc.
23.2*
Consent of Deloitte & Touche LLP for ESH Hospitality, Inc.
31.1*
Certification of the Chief Executive Officer of Extended Stay America, Inc. pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of the Chief Financial Officer of Extended Stay America, Inc. pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.3*
Certification of the Chief Executive Officer of ESH Hospitality, Inc. pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.4*
Certification of the Chief Financial Officer of ESH Hospitality, Inc. pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, and Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of the Chief Executive Officer and the Chief Financial Officer of Extended Stay America, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Certification of the Chief Executive Officer and the Chief Financial Officer of ESH Hospitality, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit
Number
Description
101.INS* XBRL Instance Document.
101.SCH* XBRL Taxonomy Extension Schema Document.
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB* XBRL Taxonomy Extension Label Linkbase Document.
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document.
104* Cover Page Interact Data File (embedded within the Inline XBRL document).
* Filed herewith.
† Management contract or compensatory plan or arrangement.