2017 annual report
the property level - which leads to significant free cash
flow generation.
Additionally, at our price point, supply growth has
been low and is expected to remain that way for the
foreseeable future as the larger hotel companies focus
on upper midscale and upscale brand growth. This year,
I am re-dedicating ESA’s internal efforts to target and
cater to our core guest, both for our existing operations
and new ESA 2.0 hotels that ESA and franchisees will
build in the future.
Balance Sheet, Capital Investment and
Capital Allocation
In 2017, we reduced debt outstanding by more than
$70 million, in turn reducing our net debt to Adjusted
EBITDA ratio to 3.9X from 4.2X at the end of 2016. We
further improved our balance sheet by refinancing our
term loan to reduce our LIBOR spread by 75 bps. At
the end of 2017, we had approximately $2.6 billion in
debt outstanding and an average maturity of 6.5 years
with a weighted average interest rate of 4.5%. Our
balance sheet is flexible, long dated and low cost with
approximately two-thirds of our debt at fixed rates.
We returned more than $220 million to shareholders in
2017 through our dividend, which we increased again
last May – now at $0.84 per Paired Share annualized
– and share repurchases. Since the beginning of 2016
and through the first quarter of 2018, we have returned
over $640 million to shareholders through dividends
and share repurchases, illustrating our commitment
to shareholder friendly capital allocation, all while
continuing to de-lever the Company and invest in future
growth.
ESA invested $166 million in capital expenditures in
2017, a reduction from recent years as we completed a
5 year renovation program in May 2017. In total, in 2017
we spent over $450 million on debt retirement, capital
investments and returns to shareholders, and nearly
$1.2 billion in 2016 and 2017 combined, highlighting
once again the strong operating model and cash flow
characteristics of ESA.
Looking Ahead
Looking to 2018 and beyond, we believe ESA is well
positioned to deliver against our 5 year growth plan.
This year and next, we expect to complete additional
asset sales similar to the recently completed 25 hotel
J O N AT H A N H A L K YA R D
President & Chief Executive Officer
To Our Shareholders
2017 was a good year for Extended Stay America (ESA),
both in terms of our operating performance and progress
in executing our five year plan.
ESA increased comparable hotel RevPAR by 1.9% in
2017. We increased Adjusted EBITDA to $623 million,
a new record for the Company, despite selling 5 hotels
at attractive multiples during the year. In turn, Adjusted
FFO per Paired Share, EPS, and Adjusted Paired Share
Income per Paired Share all increased in 2017 1. Along
the way, we returned more than $220 million to our
shareholders through dividends and share repurchases,
invested over $160 million in capital expenditures and
retired over $70 million in debt, illustrating the powerful
operating model and cash flow characteristics of our
Company.
We also announced in late 2017 that we were under
contract to sell 25 hotels to our first third party ESA
hotel owners, which we completed in February 2018
at an accretive free cash flow multiple. The buyer also
signed an agreement to build 15 additional new ESA
hotels over the next few years.
Having been with the Company for over 4 years first as
COO, then as CFO and now embarking upon my first
year as CEO, I would like to highlight the factors I think
make ESA and the extended stay segment so attractive.
The extended stay segment of the lodging industry
represents less than 10% of total hotel room supply but
more than 20% of room night demand. Our core guests
– business guests staying 5 nights or longer on projects,
training programs or in a transition – are self-sufficient
and value conscious. Their long length of stay and self-
sufficiency allows very high margins for ESA – 55% at
re-franchise sale and expect to receive additional
commitments for new units, both from buyers of ESA
hotels as well as other developers and franchisees.
We have completed 3 land purchases for our own
balance sheet development and expect to close on
an additional 8 to 12 sites this year for future growth,
with new units beginning to open in 2019. We remain
excited about our segment and our growth prospects,
both for the core business and our ability to grow unit
count.
Thank you for your continued interest in our Company.
J O N AT H A N H A L K YA R D
President & Chief Executive Officer
This letter contains forward-looking statements within the meaning of the federal securities laws. All statements other than statements of historical fact included in this letter are forward-
looking. For a description of the risks associated with forward-looking statements and the important factors that could cause the Company’s actual results or performance to differ
materially from those implied in the forward-looking statements contained in this letter, please review the information under the headings “Cautionary Note Regarding Forward-Looking
Statements” and “Risk Factors” included in our combined Form 10-K for the year ended December 31, 2017. All forward-looking statements made in this letter are qualified by these
cautionary statements. In particular, no assurance can be given that any of our planned or expected strategic initiatives will be initiated or completed on our expected timing or at all.
1 See pages 57-62 for additional information regarding Adjusted EBITDA, Adjusted FFO per Paired Share and Adjusted Paired Share Income per Paired Share, which are non-GAAP
measures, including reconciliations to the most comparable GAAP measures, our reasons for providing these measures and limitations on their use.
Comparable Hotels include the 624 hotels the Company owned and operated for the years ended December 31, 2017 and 2016.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________
Form 10-K
__________________________________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2017
-OR-
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
__________________________________________________
Commission file number 001-36190
Extended Stay America, Inc.
Commission file number 001-36191
ESH Hospitality, Inc.
(Exact name of registrant as specified in its charter)
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
46-3140312
(I.R.S. Employer
Identification Number)
Delaware
(State or other jurisdiction of
incorporation or organization)
27-3559821
(I.R.S. Employer
Identification Number)
11525 N. Community House Road, Suite 100
Charlotte, North Carolina 28277
(Address of principal executive offices, including zip code)
(980) 345-1600
(Registrants’ telephone number, including area code)
__________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.01 per share, of Extended
Stay America, Inc. and Class B Common Stock, par value
$0.01 per share, of ESH Hospitality, Inc., which are
attached and trade together as a Paired Share.
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
None
__________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Extended Stay America, Inc.
ESH Hospitality, Inc.
Yes
Yes
No
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Extended Stay America, Inc.
ESH Hospitality, Inc.
Yes
Yes
No
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Extended Stay America, Inc.
ESH Hospitality, Inc.
Yes
Yes
No
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Extended Stay America, Inc.
ESH Hospitality, Inc.
Yes
Yes
No
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is
not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K
Extended Stay America, Inc.
ESH Hospitality, Inc.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Extended Stay America, Inc.
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Emerging growth company
Accelerated filer
Smaller reporting company
ESH Hospitality, Inc.
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Emerging growth company
Accelerated filer
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Extended Stay America, Inc.
ESH Hospitality, Inc.
Yes
Yes
No
No
As of June 30, 2017, the aggregate value of the registrants’ Paired Shares held by non-affiliates was approximately
$3,726.9 million, based on the number of shares held by non-affiliates as of June 30, 2017 and the closing price of the
registrants’ Paired Shares on the New York Stock Exchange on June 30, 2017.
As of February 23, 2018, Extended Stay America, Inc. had 191,110,012 shares of common stock outstanding and ESH
Hospitality, Inc. had 250,493,583 shares of Class A common stock and 191,110,012 shares of Class B common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our proxy statements relating to the 2018 Annual Meetings of Shareholders are incorporated by reference into
Part III of this combined annual report on Form 10-K.
Page
ii
ii
iii
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30
31
32
32
33
37
44
72
74
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159
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TABLE OF CONTENTS
ABOUT THIS COMBINED ANNUAL REPORT
CERTAIN DEFINED TERMS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
PART I
PART II
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
PART III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
Item 15.
Exhibits and Financial Statement Schedule
Item 16.
Form 10-K Summary
PART IV
i
ABOUT THIS COMBINED ANNUAL REPORT
This combined annual report on Form 10-K is filed by Extended Stay America, Inc., a Delaware corporation (the
“Corporation”), and its controlled subsidiary, ESH Hospitality, Inc., a Delaware corporation (“ESH REIT”). Both the Corporation
and ESH REIT have securities that have been registered under the Securities Act of 1933, as amended (the “Securities Act”),
which are publicly traded and listed on the New York Stock Exchange (the “NYSE”) as Paired Shares, as defined below. As
further discussed below, unless otherwise indicated or the context requires, the terms “Company,” “Extended Stay,” “Extended
Stay America,” “we,” “our” and “us” refer to the Corporation, ESH REIT and their subsidiaries considered as a single enterprise.
As required by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810,
Consolidations, due to the Corporation’s controlling financial interest in ESH REIT, the Corporation consolidates ESH REIT’s
financial position, results of operations, comprehensive income and cash flows with those of the Corporation. The Corporation’s
stand-alone financial condition and related information is discussed herein where applicable. In addition, with respect to other
financial and non-financial disclosure items required by Form 10-K, any material differences between the Corporation and ESH
REIT are discussed herein.
This combined annual report on Form 10-K presents the following sections or portions of sections separately for each of the
Company, on a consolidated basis, and ESH REIT, where applicable:
•
•
•
•
•
•
Part II Item 5 – Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Part II Item 6 – Selected Financial Data
Part II Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Part II Item 7A – Quantitative and Qualitative Disclosures About Market Risk
Part II Item 8 – Financial Statements and Supplementary Data
Part II Item 9A – Controls and Procedures
This report also includes separate Exhibit 31 and 32 certifications for each of Extended Stay America, Inc. and ESH
Hospitality, Inc. in order to establish that the Chief Executive Officer and the Chief Financial Officer of each registrant has made
the requisite certifications and that Extended Stay America, Inc. and ESH Hospitality, Inc. are compliant with Rule 13a-15 or
Rule 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. §1350.
We believe combining the annual reports on Form 10-K of the Corporation and ESH REIT into this single report results in
the following benefits:
• Enhances investors’ understanding of the Corporation and ESH REIT by enabling investors, whose ownership of Paired
Shares, as defined below, gives them an ownership interest in our hotel properties through ESH REIT and in the
development, operation and franchising of hotels and other aspects of our business through the Corporation, to view the
business as a whole;
• Eliminates duplicative and potentially confusing disclosure and provides a more streamlined presentation, since a
substantial amount of our disclosure applies to both the Corporation and ESH REIT; and
• Creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.
CERTAIN DEFINED TERMS
The following defined terms, which relate to the corporate structure of the Corporation and ESH REIT, company-wide
initiatives and lodging industry operating metrics, are used throughout this combined annual report on Form 10-K:
• ADR or average daily rate means hotel room revenues divided by total number of rooms sold in a given period.
• Company means the Corporation, ESH REIT and their subsidiaries considered as a single enterprise.
• Corporation means Extended Stay America, Inc., a Delaware corporation, and its subsidiaries (excluding ESH REIT
and its subsidiaries), which include the Operating Lessees (as defined below), ESH Strategies (as defined below) and
ESA Management (as defined below). The Corporation controls ESH REIT through its ownership of ESH REIT’s
ii
Class A common stock, which currently represents approximately 57% of the outstanding common stock of ESH
REIT.
• ESA Management means ESA Management LLC and its subsidiaries, which manage the Extended Stay America-
branded hotel properties on behalf of the Operating Lessees and unaffiliated third-party hotel owners.
• ESH REIT means ESH Hospitality, Inc., a Delaware corporation that has elected to be taxed as a real estate investment
trust (“REIT”), and its subsidiaries. ESH REIT is a majority-owned subsidiary of the Corporation, which leases all of
its hotel properties to the Operating Lessees.
• ESH Strategies means ESH Hospitality Strategies LLC, a Delaware limited liability company and wholly-owned
subsidiary of the Corporation, and one of its subsidiaries, ESH Strategies Branding LLC, which owns the intellectual
property related to our business.
• ESH Strategies Franchise means ESH Strategies Franchise LLC, a Delaware limited liability company and wholly-
owned subsidiary of ESH Strategies, that licenses the Extended Stay America brand name from ESH Strategies and
plans to relicense it to unaffiliated third-party franchisees.
• Extended stay market means the market of hotels with a fully equipped kitchenette in each guest room, which accept
reservations and do not require a lease, as defined by The Highland Group.
• Hotel renovation means, when used in connection with our Company-wide initiative to renovate our hotel properties
that was completed during the second quarter of 2017, upgrades that typically included remodeling of common areas,
new paint, carpet, signage, tile or vinyl flooring and counters in bathrooms and kitchens, as well as the refurbishment
of furniture, replacement of aged mattresses and installation of new flat screen televisions, artwork, lighting and
bedspreads.
• Mid-price extended stay segment means the segment of the extended stay market that generally operates at a daily rate
between $55 and $105.
• Occupancy or occupancy rate means the total number of rooms sold in a given period divided by the total number of
rooms available during that period.
• Operating Lessees means the wholly-owned subsidiaries of the Corporation that each lease a group of hotels from
ESH REIT and, as stipulated under each lease agreement, operate the hotels.
• Paired Share means one share of common stock, par value $0.01 per share, of the Corporation together with one share
of Class B common stock, par value $0.01 per share, of ESH REIT, which are attached and trade as a single unit.
• RevPAR or Revenue per Available Room means the product of average daily room rate charged and the average daily
occupancy achieved for a hotel or group of hotels in a given period. RevPAR does not include ancillary revenues, such
as food and beverage revenues, or parking, pet, telephone or other guest service revenues.
•
•
Sponsors means, collectively, Centerbridge Partners, L.P., Paulson & Co. Inc. and The Blackstone Group L.P.
and their funds or affiliates (each of Centerbridge Partners, L.P., Paulson & Co. Inc. and The Blackstone Group L.P.,
together with its funds and affiliates is individually referred to as a Sponsor). After giving effect to multiple secondary
offerings during 2015, 2016 and 2017, funds or affiliates of Centerbridge Partners, L.P. and The Blackstone Group
L.P. no longer own any Paired Shares, and funds or affiliates of Paulson & Co. Inc. own approximately 1.8 million
Paired Shares, which represent less than 1.0% of the Company's issued and outstanding Paired Shares, as of December
31, 2017.
Third-party intermediaries are unaffiliated third-party distribution channels that sell hotel inventory, including ours,
for a fee on the internet. Third party intermediaries currently include Expedia.com and Booking.com (and their
respective affiliated brands and distribution channels, such as Priceline, Hotwire, Kayak and Trivago) and may in the
future include search engines such as Google and alternative lodging suppliers such as Airbnb and HomeAway. Third
party intermediaries also include specialized intermediaries that locate and reserve hotel rooms for corporate lodgers.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This combined annual report on Form 10-K contains “forward-looking statements” within the meaning of the federal
securities laws. All statements other than statements of historical facts included in this combined annual report on Form 10-K
may be forward-looking.
Statements herein regarding our ability to meet our debt service obligations, future capital expenditures (including future
hotel renovation programs), distribution policies, development, growth and franchise opportunities, anticipated benefits or use
of proceeds from any dispositions, plans, objectives, goals, beliefs, business strategies, future events, business conditions,
iii
results of operations, financial position and business outlook, business trends and other information referred to under
“Business,” “Risk Factors,” “Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities – Distribution Policies” and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” include forward-looking statements. When used in this combined annual report on Form 10-K, the words
“believe,” “expect,” “anticipate,” “intend,” “estimate,” “will,” “look forward to” and variations of such words or similar
expressions are intended to identify forward-looking statements. The forward-looking statements are not historical facts, and
are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their
nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates and projections are expressed in
good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s
expectations, beliefs, estimates and projections will result or be achieved and actual results may vary materially from what is
expressed in or indicated by the forward-looking statements.
There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could
cause our actual results to differ materially from the forward-looking statements contained in this combined annual report on
Form 10-K. Such risks, uncertainties and other important factors include, but are not limited to the risk factors disclosed in Item
1A of this combined annual report on Form 10-K in the context of these risks and uncertainties.
We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks,
uncertainties and other factors that may be important to you. In addition, we cannot assure you that we will realize the results,
benefits or developments that we expect or anticipate or, even if substantially realized, that they will have the results or affect
on us or our business in the way expected. In particular, no assurance can be given that any of our planned or expected strategic
initiatives or objectives discussed herein or in other filings with the SEC will be initiated or completed on our expected timing
or at all. Estimates and forward-looking statements speak only as of the date they were made and we undertake no obligation to
publicly update or revise any forward-looking statements to reflect subsequent events or circumstances, except as required by
law.
iv
Item 1.
Business
Our Company
PART I
We are the largest integrated owner/operator of company-branded hotels in North America. Our business operates in the
extended stay segment of the lodging industry, and as of December 31, 2017, we owned and operated 624 hotel properties
comprising approximately 68,600 rooms located in 44 states across the United States. We currently operate all of our hotels
under the Extended Stay America brand, which serves the mid-price extended stay segment and accounts for approximately
45% of the segment by number of rooms in the United States. For the year ended December 31, 2017, we had total revenues of
approximately $1.3 billion, net income of approximately $172.2 million and Adjusted EBITDA of approximately $622.9
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 extended stay hotels are designed to provide an affordable and attractive alternative to traditional lodging or
apartment accommodations and are targeted toward self-sufficient, value-conscious guests who need lodging for more than a
week. Our hotels feature fully-furnished rooms with in-room kitchens, complimentary grab-and-go breakfast, free WiFi, flat
screen TVs and on-site guest laundry. Our guests include business travelers, leisure travelers, professionals on temporary work
or training assignments, persons relocating, temporarily displaced or purchasing a home and anyone else in need of temporary
housing. For the year ended December 31, 2017, approximately 37.1%, 21.8% and 41.1% of our total revenues were derived
from guests with stays from 1-6 nights, from 7-29 nights, and for 30 or more nights, respectively.
We seek to drive our competitive advantage by targeting our product offering to an underserved market segment and by
driving economies of scale through our national distribution and concentration of multiple hotels in individual markets. We
focus on continually improving our product and service, improving marketing efforts and driving ADR. In addition to owning
and operating hotels, we plan to increase our distribution and create a fee-based income stream by franchising our brand name
to unaffiliated third-parties and, in some instances, managing these hotels on behalf of our franchisees. We also plan to increase
our efficiency and the overall quality of our real estate portfolio by selling non-strategic hotels over time, in some cases
franchising our brand name to, or managing sold hotels for, the buyers. Through the combination of our business model, which
we believe maximizes cost efficiency, our efficient capital structure and the below real estate and development initiatives, we
intend to drive superior cash flow and return value to our shareholders.
During the second quarter of 2017, we completed a hotel renovation program which began in 2011 and included each of
our 624 hotels. In order to achieve our strategic objectives, our current and future plans include some or all of the following:
•
•
•
•
•
•
•
continuing to invest capital in our hotels, both on an ongoing basis and through future cyclical renovation programs,
where justified by anticipated returns on investment;
repurposing and/or rebuilding certain of our hotel properties;
building new Extended Stay America hotel properties which we expect to own and operate;
selling non-strategic hotels to buyers that will franchise the Extended Stay America brand from us and for whom we
may perform management or other services;
converting existing hotels to the Extended Stay America brand, either as franchises or on our own balance sheet;
franchising the Extended Stay America brand to newly-constructed hotel properties owned by unaffiliated third parties
for whom we may perform management or other services; and
acquiring additional hotel properties.
Our History
We were founded in 1995 as a developer, owner and operator of extended stay hotels. Following a period focused
primarily 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 the United States. We were acquired out of
bankruptcy by the Sponsors on October 8, 2010. In November 2013, we completed an initial public offering and restructured
and reorganized our then-existing business. We believe that the restructuring created a more operationally efficient business
because all of the assets, operations and management of our business, other than ownership of the hotel properties, are housed
in one entity.
1
Ownership of Paired Shares gives investors an ownership interest in our hotel properties through ESH REIT and in the
franchising and hotel management business, including the operation of our own hotels, and other aspects of our business
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 57% of the tax benefit of REIT status for the consolidated
enterprise).
We currently operate an extended stay hospitality platform with approximately 8,400 employees and are led by a
management team with public company experience in hospitality, consumer retail and service businesses.
The Corporation
Extended Stay America, Inc. was incorporated in Delaware on July 8, 2013. As of December 31, 2017, the Corporation
manages all 624 hotels owned by ESH REIT as well as two hotels in Canada owned by an unaffiliated third party and one hotel
in Denver, CO owned by an unaffiliated third party. The hotels owned by ESH REIT are leased to and operated by the
Operating Lessees, wholly-owned subsidiaries of the Corporation and are managed by ESA Management, a wholly-owned
subsidiary of the Corporation, pursuant to management agreements with the Operating Lessees. ESA Management also
manages the third party-owned hotels. All of the hotels in the United States operate under the Extended Stay America brand.
ESH Strategies, a wholly-owned subsidiary of the Corporation, owns the brand and intellectual property related to our business
and licenses them to its subsidiary, ESH Strategies Franchise, which licenses them to unaffiliated third parties.
Our Brands
During 2013, we completed a program to consolidate hotels that operated under the former brands Homestead Studio
Suites, Studio Plus and Extended Stay Deluxe to the Extended Stay America brand. We operate all of our hotels under the
Extended Stay America brand, other than the disposed Canadian hotels. We continue to own the intellectual property rights in
the former brands. All Extended Stay America-branded hotels feature in-room kitchens, free WiFi, free grab-and-go breakfast,
flat screen TVs with premium cable channels and on-site guest laundry.
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 has elected to be taxed as a REIT. ESH REIT owns all of the Company’s 624
hotel properties, which are leased and operated by subsidiaries of the Corporation as described in the preceding paragraph.
2
Our Corporate Structure
The chart below summarizes our corporate structure as of December 31, 2017.
3
Our Industry
U.S. Lodging Industry
The lodging industry is a significant part of the U.S. economy, generating over $156.2 billion of room revenues in 2017
and comprising approximately 5.1 million hotel rooms as of December 31, 2017, according to STR, Inc. (“STR”)(1). Lodging
industry performance is generally tied to both macro-economic and micro-economic trends in the United States and, similar to
other industries, experiences both positive and negative operating cycles. Following the 2008 to 2009 recession, demand in the
U.S. lodging industry has experienced an eight-year growth cycle in which demand growth has exceeded supply growth, even
as supply growth has returned to long-term average rates. According to PricewaterhouseCoopers LLP (“PwC”)(2), room supply
grew 1.8% in 2017 and is expected to grow 2.0% in 2018, in line with historical rates of annual supply growth. RevPAR has
grown in the U.S. lodging industry each year starting in 2010. According to PwC, RevPAR for the overall U.S. lodging industry
grew 3.0% in 2017, and is expected to grow 2.7% in 2018.
U.S. Extended Stay Segment
Extended stay hotels represent a growing segment within the U.S. lodging industry, with approximately 443,600 rooms
for the year ended December 31, 2017, according to The Highland Group(3). 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 35% of
the supply of extended stay rooms in 2017, approximately 44% of which belonged to 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 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 Operating Lessee hotel revenues are not earned for accounting purposes until certain lessee hotel
revenue thresholds are achieved, which typically occur in the fourth quarter. ESH REIT’s cash flows generally remain
consistent each quarter of the calendar year, except as noted above.
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 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 and/
or operators 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 brands, transient-
oriented brands that compete for both transient and extended stay guests, serviced apartments and private homes and rooms and
apartments rented on the internet. 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. See “Risk Factors—Risks Related to the Lodging Industry—We operate in a highly competitive industry.”
(1) STR does not endorse or provide any guidance as to any proposed investment in Extended Stay America, Inc. or ESH Hospitality, Inc.
(2) PwC does not endorse or provide any guidance as to any proposed investment in Extended Stay America, Inc. or ESH Hospitality, Inc.
(3) The Highland Group does not endorse or provide any guidance as to any proposed investment in Extended Stay America, Inc. or ESH Hospitality, Inc.
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Employees
We employ approximately 8,400 employees. Approximately 8,000 of these employees are hotel property-level
employees, comprised of approximately 4,000 full-time employees and approximately 4,000 part-time employees. None of our
employees are currently represented by unions or covered by collective bargaining agreements. We consider our relations with
our employees to be good.
Sales, Marketing and Reservations
Our sales team is focused on growing the value of our existing accounts, developing business from new customers and
partnering with our operations team to drive local sales. We are organized regionally and by account, and our team focuses on
the following customers with extended stay lodging needs: major Fortune 500 companies; small and medium sized businesses;
travel agencies; relocation and staffing consultants; and medical, technology, government and educational organizations.
Approximately 40.0% of our total revenues in 2017 were derived from accounts managed by this team.
We seek to maximize revenue in each hotel through our revenue management team. This team is responsible for
determining prices and managing the availability of room inventory to different channels and customer segments. Our
automated revenue management system was put in place across our entire portfolio in 2016. This system allows us to
automatically price against demand from short- and long-term guests. We believe that this system has favorably impacted, and
will continue to favorably impact, our revenue team’s efficiency and effectiveness.
Our marketing strategy is focused on growing awareness of our brand, Extended Stay America, and demand for our
hotels through a combination of media channels, including print, public relations and email marketing. We also put a significant
emphasis on our internet activity, buying search engine placement, internet display advertising and other media to drive traffic
to our website. We maintain a customer database and use it for targeted marketing activity. Our customer loyalty program,
called Extended Perks, had more than 2.1 million members as of December 31, 2017. The program is built around the idea of
“instant rewards – no points required,” with members receiving discounts on our rooms and offers and discounts from our
merchandise partners. 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 desktop and mobile websites, travel agency global distribution systems and third-
party intermediaries. We outsource our central reservation system, call center and management of our website. For the year
ended December 31, 2017, approximately 31.4% of our total revenues were derived from property-direct reservations,
approximately 24.5% were derived from our central call center, approximately 16.3% were derived from our own proprietary
website, approximately 23.4% were derived from third party intermediaries and approximately 4.4% were derived from travel
agency global distribution systems. We believe we have an opportunity to increase the power and reach of our distribution
network through enhanced partnerships with additional agency, merchant and wholesale partners.
Environmental, Health and Safety Matters
Our hotel properties are subject to various federal, state and local environmental laws that impose liability for
contamination. 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. Our
franchise and management agreements include broad indemnity provisions that would encompass environmental claims
resulting from contamination at or emanating from franchised or managed properties but 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.
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
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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.
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.
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 (for example, 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.
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 any ACM at our hotel properties that would result in a material adverse effect on our
business, assets or results of operations.
In addition, 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.
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 each year on surveillance, registration and protection of its trademarks, service marks, trade names, logos and other
proprietary rights.
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,
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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 requirements.
Under the Americans with Disabilities Act of 1990 (the “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
We currently have the types and amounts of insurance coverage that we consider appropriate for a company in our
business. 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 Securities and Exchange Commission (“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
You should carefully consider the following risks as well as the other information included in this combined annual report
on Form 10-K. Any of the following risks could materially and adversely affect our business, financial condition or results of
operations and our ability to pay distributions to our shareholders.
Risks Related to the Lodging Industry
We operate in a highly competitive industry.
The lodging industry is highly competitive. We currently compete with traditional hotels and lodging facilities (including
limited service hotels), other purpose built extended stay hotels (including those owned and operated by major hospitality
chains with well-established, recognized brands and individually-owned extended stay hotels) and alternative lodging
(including serviced apartments and private homes, rooms and apartments rented on the internet) and expect to compete with
other franchisors in the lodging industry. See “Risks Related to Our Business—Some of our business strategies depend upon
skills and capabilities that we have not previously demonstrated.” Many of the major hospitality chains own multiple brands
that provide substantial economies of scale. We expect that competition within the mid-price segment of the extended stay
lodging market and the chain-scale segment of the overall lodging industry will continue as we face increased competition due
to the ease of access to third-party intermediaries, particularly as those intermediaries continue to consolidate. We compete
based on a number of factors, including room rates, quality of accommodations, service levels, convenience of location,
reputation, reservation systems, brand recognition, supply and availability of alternative lodging and ability to reach potential
guests through multiple distribution channels. See “Business—Competition.”
To maintain our rates, we may face pressure to offer increased services and amenities at our hotel properties, 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, 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.
We also compete with other lodging brands and products for potential franchisees. Franchisees choose franchise systems
based on a variety of reasons including potential returns on investment, brand name recognition and reputation, brand standard
requirements, fees and other contract terms, sales support, marketing support, reservations systems, information technology
systems, operational support, purchasing programs, and other support systems. Some of our competitors have 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
inability to make commensurate investments to support a competitive franchise platform is not offset by other advantages of
our franchise offering, our franchise sales could be negatively affected, which could have a material adverse effect on our
ability to execute on our business strategies and on our business, financial condition and results of operations.
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.
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 due to adverse general economic conditions, risks affecting or reducing travel patterns, lower
consumer confidence and high unemployment or adverse political conditions may have a material adverse affect on the
revenues and profitability of our hotels.
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 margins and 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
8
material adverse effect on our net operating cash flows and profitability. This effect can be especially pronounced during
periods of economic contraction or slow economic growth.
In addition to general economic conditions, 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, results of operations and 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, 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 costs, such as increased volume of check-ins and check-outs, potentially reducing
operating margins.
Uncertainty regarding the rate, pace and duration of recovery from the last economic downturn and the impact any such
recovery may have on the lodging industry makes it difficult to predict future profitability levels. The current eight-year growth
cycle is historically long for the lodging industry. A slowing of the current economic recovery or new economic weakness could
adversely affect our ability to execute on our development and franchising strategies and could materially adversely affect
operating revenues and our overall profitability.
We are subject to the operating risks common to the lodging industry.
Changes in general and local economic and market conditions and other factors beyond our control as well as the
business, financial, operating and other risks common to the lodging industry and inherent to the ownership, management and
franchising of hotels could materially adversely affect demand for lodging products and services. This includes demand for
rooms at hotel properties that we own, operate, franchise and potentially develop, construct or acquire. These factors include:
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changes in the relative mix of extended stay brands in various industry price categories;
over-building of hotels in our markets;
changes in the desirability of particular geographic locations, lodging preferences and travel patterns of customers,
including corporate customers;
new sources of potentially competitive supply, such as private homes, rooms or apartments rented on the internet;
increases in customer price sensitivity, making it more difficult to achieve planned ADR increases;
dependence on corporate and commercial travelers and on tourism;
decreased demand for longer-term lodging or lodging facilities;
decreased corporate budgets and spending and cancellations, deferrals or renegotiations of group business;
high levels of unemployment and depressed housing prices;
ability to accept customer payments through credit card transactions;
increases in real property tax rates;
increases in insurance premiums or narrowed coverage;
increases in operating costs due to inflation and other factors that may not be offset by increased room rates;
increases in the cost, or the lack of availability, of capital to operate, maintain and renovate our existing hotel
properties or to potentially develop, construct or acquire new hotel properties;
increases in labor costs, including as a result of increases to federal and state minimum wage levels, changes to
overtime eligibility, unionization of the labor force and increasing health care insurance expense;
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increases in land, construction and material costs;
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ability to maintain relationships with third-party intermediaries, developers and potential franchisees;
quality of services provided by potential franchisees;
changes in taxes and governmental regulations that influence or set wages, prices, interest rates or construction and
maintenance procedures and costs;
the costs and administrative burdens associated with compliance with applicable laws and regulations; and
events beyond our control that may disproportionately affect the travel industry, such as war, terrorist attacks, travel-
related health concerns, transportation and fuel prices, interruptions in transportation systems, travel-related
accidents, fires, natural disasters and severe weather.
These factors can adversely affect, and from time to time have materially adversely affected, individual hotel properties,
particular regions or our business as a whole. How we manage any one or more of these factors, or any crisis, could limit or
reduce demand and the rates we are able to charge for rooms or services, which could materially adversely affect our operating
results and future growth, including our ability to pay distributions to our shareholders. These factors may be exacerbated by
the relatively illiquid nature of our real estate holdings, which limits our ability to vary our portfolio in response to changes in
economic and other conditions.
Our revenues are subject to seasonal fluctuations.
The lodging industry is seasonal in nature. The Company’s occupancy rates and revenues generally are lower during the
first and fourth quarter of each calendar year. Quarterly variations in hotel revenues could materially adversely affect the
Company’s near term operating 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
If we fail to implement our business strategies, our business, financial condition and results of operations could be
materially adversely affected.
Our financial performance and success depend in large part on our ability to successfully implement our business
strategies. We cannot assure you that we will be able to successfully implement our business strategies, realize any benefit from
our strategies or continue improving our results of operations. We may spend significant amounts in connection with our
business strategies, which would result in increased costs but may not result in expected increased revenues or improved results
of operations.
Implementation of our business strategies could be affected by a number of factors beyond our control, such as increased
competition, legal and regulatory developments, general economic conditions or increases in our operating costs. Any failure to
successfully implement our business strategies could materially adversely affect our business, financial condition and results of
operations. We may, in addition, decide to alter or discontinue certain aspects of our business strategies at any time.
Some of our business strategies depend upon skills and capabilities that we have not previously demonstrated.
We will undertake several of our business strategies, including real estate development, franchising and managing hotels
for third-party owners, either for the first time or the first time in many years. Real estate development in particular involves
large deployments of capital and inherent timing and market risks. Our ability to manage these risks and successfully execute
these strategies will depend on our continuing ability to attract and retain qualified, experienced personnel and third party
consultants, contractors and others with the necessary expertise and to develop that expertise internally over time. While we
believe the pursuit of these changes will have a positive impact on our business in the long term, we cannot provide any
assurance that these changes will lead to the desired results. If we do not effectively and successfully execute on these changes,
it could have a material adverse effect on our business.
Our capital expenditures may not result in our expected improvements or growth in our business.
The realization of returns on our capital investments in line with our expectations is dependent on a number of factors,
including, but not limited to, general economic conditions, other events beyond our control, whether our assumptions in making
the investment were correct and changes in the factors underlying our investment decision, such as changes in the tastes and
preferences of our customers. We can provide no assurance that we will continue to see the types of returns that we have
achieved in connection with our hotel renovation program, that we will realize our expected returns on our current investments,
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or any returns at all, or that our future investments will result in our expected returns on investments, returns that are consistent
with our prior returns on capital expenditure investments, or any returns at all. Growth that we do realize as a result of our
capital expenditures is expected to stabilize over time. A failure to realize our expected returns on capital investments 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.
In addition, 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, for us or franchisees, create an ongoing need for
cash 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, 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 renovation, development, construction or acquisition and therefore the ability to meaningfully grow our
revenues or complete our business strategy. As of December 31, 2017, we had total indebtedness of approximately $2.5 billion,
net of unamortized deferred financing costs and discounts of approximately $49.0 million. Our substantial indebtedness may
impair our ability to borrow additional amounts. Our ability to access additional capital could also be limited by the terms of
our indebtedness and any future indebtedness, which restrict or will restrict our ability to incur debt under certain
circumstances. In the past, reduced ongoing maintenance and/or capital investment in our hotel properties resulted in declining
performance of our business.
Additionally, our ongoing operations and capital expenditures and business strategy subject us to the following risks:
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potential environmental problems, such as the need to remove or abate asbestos-containing materials;
design defects, construction cost overruns (including labor and materials) and delays;
difficulty obtaining zoning, occupancy and other required permits or authorizations;
the possibility that revenues will be reduced temporarily while rooms offered are out of service due to capital
improvement projects; and
a possible shortage of available cash to fund capital improvements and the related possibility that financing for these
capital improvements may not be available on affordable terms or at all.
If the cost of funding renovations or enhancements 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 paying distributions to our shareholders or the potential development, construction, franchise or acquisition
of hotel properties, could be limited and our profits could be reduced. Similarly, if we cannot access the capital we need to fund
our operations, we may need to postpone, defer or cancel planned maintenance, renovations, improvements 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
those competitors in the lodging industry that only manage or franchise hotel properties, including:
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the illiquid nature of real estate, which may limit our ability to promptly sell one or more hotels in our portfolio in
response to changing financial conditions;
real estate, insurance, zoning, tax, environmental and eminent domain laws, including the condemnation of our
properties;
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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 upgrade hotel properties;
the average age of hotels in our portfolio, which is approximately 18.7 years, and the potential difficulty in replacing
obsolete hotels with new hotels;
risks associated with 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; and
events beyond our control, such as war, terrorist attacks, travel-related accidents, extreme weather and force majeure
events, including earthquakes, tornadoes, hurricanes, fires or floods.
Economic and other conditions may materially adversely affect the valuation of our hotel properties resulting in
impairment charges that could have a material adverse effect on our business, results of operations and earnings.
We hold a significant amount of long-lived assets, including goodwill and 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., both of which are included in Item 8 in this combined
annual report on Form 10-K. Times of economic distress and/or uncertainty, declining demand and declining earnings often
result in declining asset values for real estate and real property. As a result, we have incurred, and are likely to incur in the
future, impairment charges which may have a material adverse effect on our results of operations and earnings.
We have a significant amount of debt and debt service obligations that could adversely affect our financial condition
and reduce operational flexibility.
We have a significant amount of debt. As of December 31, 2017, we had total indebtedness of approximately $2.5 billion,
net of unamortized deferred financing costs and discounts of approximately $49.0 million, and the Company had a debt-to-
equity ratio of 1.9x. 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 acquisitions, developments,
renovation and improvement activities and for other corporate purposes. 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:
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require us to dedicate a substantial portion of our cash flows to make principal and interest payments on
indebtedness, 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
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place us at a competitive disadvantage relative to competitors that have less indebtedness or greater resources.
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, 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 2023 and 2025.
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 will be subject to future economic
conditions and to financial, business and other factors, many of which are beyond our control.
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The terms of the agreements governing our indebtedness have 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:
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sells 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 the management agreements for our owned hotel properties;
• make certain investments and other restricted payments;
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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), 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 the 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 the consolidated financial statements of Extended Stay America, Inc. and Note 6 to
the consolidated financial statements of ESH Hospitality, Inc., both of which are included in Item 8 in 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. Our ability to comply with the financial and other restrictive
covenants may be affected by events beyond our control, including general economic, financial and industry conditions. 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.
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 rating assigned by the rating
agencies will remain for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency
if, in that rating agency’s judgment, future circumstances relating to the basis of the rating, such as adverse changes, so warrant.
A lowering or withdrawal of our credit ratings may 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.
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 and results of operations.
Our brand and our reputation are among our most important assets. We operate and franchise all of our hotels in the
United States under the Extended Stay America brand. Our ability to attract and retain guests 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 an incident involving the potential safety or security of our guests or employees, or
negative publicity regarding safety or security at our competitors’ properties or regarding our third-party vendors and the
industry, and any media coverage resulting therefrom, may harm our brand and our reputation, cause a loss of consumer
confidence in Extended Stay America and the industry and materially adversely affect our results of operations. The
considerable expansion in the use of social media and online review sites over recent years has compounded the potential scope
and speed of any 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.
In addition, 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. To the extent necessary, the Corporation enforces its intellectual property rights to protect the value
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of its trademarks, to protect our good name, to promote brand recognition, to enhance our competitiveness and to 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. From time to time, the Corporation applies to have certain
trademarks registered. There is no guarantee that such trademark registrations will be granted. 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.
We could incur significant costs related to government regulation over environmental, health and safety matters.
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 “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.
The geographic concentration of our portfolio may make us particularly susceptible to adverse developments in those
geographic areas in which we operate a substantial portion of our hotels.
The concentration of our 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, 2017,
approximately 14.7% of our rooms were in California, approximately 10.0% of our rooms were in Texas, approximately 8.4%
of our rooms were in Florida and approximately 5.6% 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, industry slowdowns, relocations of businesses, increases in real estate and other taxes and the cost of complying
with governmental regulations or increased regulation), as well as to extreme weather, 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, submarkets within any of these markets may be dependent on the
economic performance of a limited number of industries, or in some instances single businesses, that drive those markets.
We intend to expand through development or acquisitions of other companies and hotel properties, and we also intend
to divest of some of our hotel properties and other assets and diversify through franchising; these activities may be
unsuccessful or divert our management’s attention.
We may consider strategic and complementary acquisitions of other companies and hotel properties. In many cases, we
will be competing for these opportunities with third parties that may have substantially greater financial resources than we do.
Acquisitions of companies or hotel properties are subject to risks that could affect our business, including risks related to:
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failing to consummate acquisitions after incurring significant transaction costs;
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; or
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:
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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;
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coordinating sales, distribution, marketing and other functions;
integrating operating processes and information technology systems; and
preserving the important licensing, distribution, marketing, customer, labor and other relationships of the acquired
assets.
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. In the future, we expect to divest additional hotel properties or assets. Any such
divestments 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 affect on our results of operations and earnings.
We own and operate substantially all of the hotel properties associated with our brand. We plan to realize the benefits of
franchising and franchise certain of our hotel properties, in some cases managing them, in both cases pursuant to agreements
with third-party franchisees. We currently do not have experience operating a significant franchising business and expect that
the development and implementation of any franchise system will require significant expenditures 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 any franchising business will depend on our ability to establish
and maintain good relationships with franchisees. The franchising business exposes us to additional risks, including, but not
limited to, the financial condition and access to capital of franchisees, reputational harm and legal exposure due to the action of
franchisees, cybersecurity risks created by franchisees and litigation as a result of disagreements with franchisees.
We plan to develop and/or construct new hotels. We do not have significant real estate development experience and
expect that a development program will require significant expenditures 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. Hotel development projects are underwritten based on numerous assumptions including: current and projected hotel
supply and demand; land costs; materials and labor availability and costs; financing availability and costs; permitting and
entitlement costs; land acquisition, entitlement, permitting, and construction schedules; and projected operating performance of
the completed project. Many of these assumptions and projections are made months or years in advance, are subject to
macroeconomic factors outside of our control and may vary greatly from actual results. We cannot assure you that returns on
invested capital will be consistent with our objectives, which may have a material adverse effect on our results of operations
and earnings.
We cannot assure you that we will be able to successfully identify strategic growth opportunities or complete transactions
on commercially reasonable terms or at all, or that we will actually realize any anticipated benefits from such transactions.
There may be, as applicable, high barriers to entry, including restrictive zoning laws, limited availability of hotel properties and
higher costs of land, in many key markets and scarcity of available acquisition, disposition, development, construction or
franchise opportunities in desirable locations. Similarly, we cannot assure you that we will be able to obtain financing for
developments or acquisitions on attractive terms or at all, or that the ability to obtain such financing will not be restricted by the
terms of our current or future indebtedness. In addition, our pairing arrangement may prevent our use of common tax-free
acquisition structures, which may increase the cost and difficulty of acquiring other businesses and hotel properties and inhibit
our ability to expand through acquisitions in which consideration other than cash is contemplated. In addition, any such
acquisition, disposition, development, construction or franchising activity could demand significant attention from our
management that would otherwise be available for our current ongoing operations, which could have a material adverse effect
on our existing or future business.
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, 2017, approximately 23.4% of our total hotel revenues were booked through third-party
intermediaries. 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 to their reservation system. The costs of distribution through these
channels is ordinarily 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
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extended stay customers. Accordingly, our business, financial condition and results of operations could be harmed if a
disproportionate amount of our business is diverted to third-party intermediaries.
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. Some of our distribution agreements with these
companies may not be exclusive, have a short term, be terminable at will or be 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 and systems, including those utilized
for reservations, revenue and property management, procurement and operation of administrative 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 through third-party intermediaries. We operate third-party systems,
making us reliant on third-party service providers, data communication networks and software upgrades, maintenance and
support. Some of our information technology systems are outdated and require substantial upgrade. 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 and other systems as quickly as our competitors,
within budgeted costs or schedules, or if we are unable to achieve the intended benefits of any new information technology or
other systems, our results of operations could be adversely affected and our ability to compete effectively could be diminished.
Further, 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 internal or our 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:
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events beyond our control, such as war, terrorist attacks, extreme weather and force majeure events, including
earthquakes, tornadoes, blizzards, hurricanes, fires or floods;
power losses, computer systems 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.
The occurrence of any of these problems at any of our information technology facilities, any of our call centers or 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 information technology systems are unable to provide the information
communications capacity that we need, or if our information 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 be
reduced and the reputation of our brand and our business could be harmed.
Some of our product and brand positioning strategies depend on information technology infrastructure that we intend 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 may depend
on the ability of the third-party providers to deliver on their contractual commitments as to product quality, service and cost.
Cyber risk and the failure to maintain the integrity of internal or customer data could result in faulty business
decisions and 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 internal and customer 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
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and our service providers also maintain personally identifiable information about our employees. The integrity and protection
of that customer, employee and company data is critical to us. If that data is inaccurate or incomplete, we could make faulty
decisions. Further, our customers and employees have a high expectation that we and our service providers will adequately
protect their personal information. The information, security and privacy requirements imposed by governmental regulation 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. 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 and our service providers’ information systems and records. 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. A breach in the security of our information technology systems or those of our
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 data or
other breach of our information technology systems could result in fines, legal claims or legal proceedings, including regulatory
investigations and actions, or liability for failure to comply with privacy and information security laws, which could disrupt our
operations, damage our reputation and expose us to claims from customers, financial institutions, regulators, payment card
associations, employees and other persons, any of which could have a material adverse effect on our financial condition and
results of operations.
In addition, we are subject to the Payment Card Industry Data Security Standard (the “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,
2017, 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 have been 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 89.6% of our hotel revenues for the year ended December 31, 2017 were paid by credit card. Loss of the ability
to accept credit cards for payment would significantly disrupt our operations, would reduce our occupancy levels and would
likely have a material adverse effect on our business, financial condition and results of operations.
Changes in privacy laws could adversely affect our ability to market effectively.
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 applicable
international laws and regulations regarding marketing and solicitation or data protection laws 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. In addition, any violation of these laws could result in significant penalties. 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 the other
company’s 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.
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, exceptional events such as extreme weather, civil or political unrest,
violence and terrorism, serious and organized crime, fraud, employee dishonesty, cyber crime, fire and day-to-day accidents,
incidents and petty crime, which impact the guest or employee experience, could cause loss of life, sickness or injury and result
in compensation claims, fines from regulatory bodies, litigation and 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.
Compliance with the laws and regulations that apply to our hotel properties could materially adversely affect our
ability to make future developments, acquisitions or renovations, result in significant costs or delays and adversely affect
our business strategies.
Our hotels are subject to various local laws and regulatory requirements that address our ability to obtain licenses for our
operations. 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. In
addition, federal and state laws and regulations, including laws such as the ADA, impose further restrictions on our operations.
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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
might 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, state and local laws and regulations regarding employment.
We are subject to numerous laws and regulations at federal, state, provincial and local levels concerning the employer/
employee relationship, including wages, working hours, working conditions, hiring practices and discrimination. 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 have been instituted against us from time to time, and we cannot assure you
that we will not incur substantial damages and expenses resulting from lawsuits of this type or other 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 and
the application thereof by United States federal, state, local and foreign governments, all of which could result in materially
higher corporate 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” (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. Any such 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 tax
liability is always subject to audit and review by applicable domestic and foreign 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 the ultimate tax outcome may differ from the amounts recorded in our financial statements and may
materially affect our financial results in the period or periods for which such determination is made, as well as future periods.
Increases in ESH REIT’s real estate taxes could materially adversely affect our profitability and ability to pay
distributions to our shareholders.
Hotel properties are subject to real and personal property taxes. These taxes may increase as tax rates change and as ESH
REIT’s hotel properties continue to be assessed and reassessed by taxing authorities. In particular, ESH REIT’s real estate taxes
could increase following acquisitions as acquired properties are reassessed. If real estate taxes increase, our business, financial
condition, results of operations and ESH REIT’s ability to make distributions to its shareholders could be materially adversely
affected.
Our insurance may not fully compensate us for damage to or losses involving our hotel properties.
We maintain comprehensive insurance on each of our hotel properties, including liability, fire and extended coverage, in
the types and amounts we believe are adequate and customary in our industry. Nevertheless, there are some types of losses,
generally of a catastrophic nature, such as hurricanes, earthquakes, fires, floods, terrorist acts or liabilities that result from
breaches in the security of our information technology systems, that may be uninsurable or too expensive to justify obtaining
insurance. Additionally, market forces beyond our control could limit the scope of insurance coverage that we can obtain or
restrict our ability to obtain insurance coverage at reasonable rates. As a result, we may not be successful in obtaining insurance
without increases in cost or decreases in coverage levels. We use our discretion in determining amounts, coverage limits and
deductibility provisions of insurance, with a view toward obtaining appropriate insurance on our hotel properties at a
reasonable cost and on suitable terms. In the event of significant damage or loss, our insurance coverage may not be sufficient
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to cover the full current market value or replacement value of our investment in a property, and in some cases could result in
certain losses being totally uninsured. In addition, 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. Although we believe that we currently maintain sufficient insurance coverage to
satisfy these obligations, there is no assurance that in the future we will be able to procure coverage at a reasonable cost or at
all. In addition, 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 declare an event of
default and accelerate repayment of debt.
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 will depend 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 executive and senior management roles and
we have focused time and resources on recruiting or promoting from within the new members of our current executive and
senior management team. Future turnover of executive and senior management or the unexpected loss of one or more of our
key personnel or any negative public perception with respect to these individuals could have a material adverse effect on our
business, results of operations and financial condition. There can be no assurance that we will be successful in attracting and
retaining qualified personnel. If we lose or suffer an extended interruption in the services of one or more of our key officers or
senior management, our business, financial condition and results of operations could be materially adversely affected.
Labor shortages could restrict our ability to operate our hotels or implement our business strategies or result in
increased labor costs that could reduce our profitability.
Our success depends in large part on our ability to attract, retain, train, manage and engage our employees. Our hotels are
staffed 24 hours a day, seven days a week by approximately 8,000 employees. If we are unable to attract, retain, train, manage
and engage skilled employees, our ability to manage and staff our hotel properties adequately could be impaired, which could
impede hotel operations, reduce customer satisfaction and harm our reputation and profitability. Staffing shortages could also
hinder our ability to implement our business strategy. Because payroll costs are a major component of our hotel operating
expenses and our general and administrative expenses, a shortage of skilled labor could also require higher wages that would
increase our labor costs, which could reduce our profitability and limit our ability to pay distributions to shareholders.
Attempts by labor organizations to organize groups of our employees or changes in labor laws could disrupt our
operations, increase our labor costs or interfere with the ability of our management to focus on implementing our business
strategies.
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 could also lead to higher wage and
benefit costs, changes in work rules that raise operating expenses and legal costs and limit our ability to take 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 and
operating strategies.
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 guests who use our hotels, our employees, our shareholders, our suppliers
and other contractual counterparties or regulators. Any significant adverse determinations, judgments or settlements could
reduce our profitability and could materially adversely affect our business, financial condition and results of operations or limit
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our ability to operate our business. Further, we may incur costs related to claims for which we have appropriate third party
indemnity, but such third parties fail to fulfill their contractual obligations. See “Item 3–Legal Proceedings.”
We may be liable for indemnification or similar payments relating to our Company’s predecessor in accordance with
the Fifth Amended Plan of Reorganization (the “Plan”), the bankruptcy court’s order confirming the Plan (the
“Confirmation Order”), and under certain agreements providing for indemnification in connection with the bankruptcy
and/or reorganization of our Company’s predecessor.
We were acquired out of bankruptcy by the Sponsors on October 8, 2010. We may be liable for indemnification or similar
payments relating to our Company’s predecessor. Under its constitutive documents, other agreements or applicable law, our
Company’s predecessor had obligations to defend, indemnify, reimburse, exculpate, advance fees and expenses, or limit the
liabilities of certain officers and employees for certain matters relating to our Company’s predecessor (the “Predecessor
Indemnification Obligations”). Under the Plan and the Confirmation Order, we retained Predecessor Indemnification
Obligations to those officers and employees who were officers and employees both prior to and after the effective date of the
Plan. We may, therefore, face liabilities with respect to such Predecessor Indemnification Obligations. In addition, we may face
liabilities arising from a separate agreement providing for Predecessor Indemnification Obligations to a former officer.
Currently, certain claims remain outstanding against several of our former officers and employees in litigation brought on
behalf of a litigation trust, which could trigger our Predecessor Indemnification Obligations, and new claims may arise in the
future against those we have agreed to indemnify. While we believe the likelihood that we will be required to fund any material
Predecessor Indemnification Obligations is remote and we are unable to quantify the potential exposure for which we may have
to provide indemnification in the future, to the extent that we are required to fund any Predecessor Indemnification Obligations,
our results of operations and our liquidity and capital resources could be materially adversely affected.
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. Even an inadvertent or technical
mistake could jeopardize ESH REIT’s REIT qualification.
In connection with our initial public offering in November 2013, each of our subsequent secondary offerings and ESH
REIT's May 2015 and March 2016 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
percent 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-percent 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, including any applicable alternative minimum tax, on its taxable income at regular corporate rates,
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 to 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, operating strategies and the market value of our Paired Shares.
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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.
In addition, 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, operating strategies and materially adversely affect the market price
of our Paired Shares.
If rents received by ESH REIT from the Corporation are treated as rent received from a “related party tenant,” 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. If 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. 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 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.
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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. 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.
If ESH REIT’s leases with the Corporation are not respected as true leases for U.S. federal income tax purposes, ESH
REIT would fail to qualify as a REIT.
To qualify as a REIT, ESH REIT is required to satisfy two gross income tests, pursuant to which specified percentages of
its gross income must be passive income, such as rent. For the rent paid pursuant to the operating leases with the Corporation,
which generates 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. If 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. The operating leases entered into between ESH REIT and
the Corporation are expected to be renewed in the near future and it is intended that the new leases will continue to be
structured so as to be respected as true leases for U.S. federal income tax purposes.
If rents received by ESH REIT from the Corporation do not reflect arm’s-length terms, the IRS could seek to
recharacterize the rents.
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 our REIT qualification, our effective
tax rate and our income tax liability.The operating leases are expected to be renewed in the near future and it is expected that
the new leases will continue to reflect arms-length terms.
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.
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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. 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 U.S. federal corporate income tax on its
undistributed REIT taxable income and net capital gain and may be subject to U.S. federal excise tax. 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.
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. 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, 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 its 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. However, 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 anticipate that we will conduct certain business activities, including those mentioned
23
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 currency fluctuations, 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 could theoretically be carried
back or forward against past or future taxable income in the TRS.
The application of FIRPTA to non-U.S. holders of Class B common stock of ESH REIT 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 they 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 the NYSE) 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 of ESH REIT may be subject to tax under FIRPTA on distributions.
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 they 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 real property 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
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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 real property 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.
Recent changes in tax law pursuant to the TCJA will affect the taxation of ESH REIT and may affect the desirability
of investing in a REIT relative to a regular non-REIT corporation.
The TCJA reduces 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 decreases the U.S. federal income tax rate applicable to non-corporate
shareholders on ordinary REIT dividends as compared to current law, 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 will also limit 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. This
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 provides a new
limitation on the deduction of “business interest” (i.e., interest paid or accrued on indebtedness allocable to a trade or business).
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 the Corporation
The Corporation is subject to tax at regular corporate rates.
The Corporation is subject to U.S. federal income tax on its taxable income at regular corporate rates (generally 35%
through the 2017 tax year and 21% thereafter). Distributions to holders of Corporation common stock are not deductible by it 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
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 will affect the taxation of the Corporation.
As a result of the TCJA, the Corporation will be 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 will also be
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 addition, as discussed above, for losses generally incurred after 2017, the TCJA will limit 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. On the other hand, the TJCA 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 and that was acquired and placed into service after September
25
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); this rule may accelerate the Corporation’s ability to take
into account certain expenses and may reduce taxable income.
As a result of the TCJA, the Corporation (and ESH REIT) will not be able to deduct certain executive compensation in
excess of $1 million per covered employee.
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 they 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 the
NYSE) 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
real property holding corporation.
If ESH REIT was to lose its REIT status, it could materially adversely affect the Corporation, and therefore materially
adversely affect the Company.
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, including
any applicable alternative minimum tax, on its taxable income at regular corporate rates, 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. See “—Risks
Related to ESH REIT and its Status as a REIT.”
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 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, legal and regulatory factors unrelated to our performance;
increased competition;
future sales of our Paired Shares or the perception that such sales may occur;
investor perceptions of us and the lodging industry;
events beyond our control, such as war, terrorist attacks, travel-related health concerns, transportation and fuel prices,
travel-related accidents, natural disasters and severe weather; and
26
•
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. Any adverse determination in litigation could also 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 191,110,012
Paired Shares are outstanding as of February 23, 2018. We may issue Paired Shares or other securities from time to time 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 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.
Under our equity incentive plans, the granting entity will need to compensate the non-granting entity for the issuance
of its component share 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.
Under the LTIPs, a grant of restricted stock units results in the recognition of total compensation expense equal to the
grant date fair value of such grant. Compensation expense related to a grant is generally recognized on a straight-line basis over
the requisite service period of each grant. As it relates to the Company’s financial statements, with respect to grants issued to
directors of ESH REIT, such compensation expense is recognized over the service period on a mark-to-market basis each
period rather than on a straight-line basis.
If our operating and financial performance in any given period does not meet the guidance that we provide to the
public, our stock price may decline.
We provide public guidance on our expected operating and financial results for future periods. Any such guidance will be
comprised of forward-looking statements subject to the risks and uncertainties described in this combined annual report on
27
Form 10-K and in our other public filings and statements. Our actual results may not meet or exceed any guidance we have
provided, especially in times of economic uncertainty. If, in the future, our operating or financial results for a particular period
do not meet any guidance we provide or the expectations of investment analysts or if we reduce our guidance for future
periods, as we have in the past, the market price of our Paired Shares may decline.
If securities analysts do not publish research or reports about the Company, or if they issue unfavorable commentary
about us, or our industry, or downgrade our Paired Shares, the price of our Paired Shares could decline.
The trading market for our Paired Shares depends in part on the research and reports that third-party securities analysts
publish about the Company and the lodging industry. One or more analysts could downgrade, and in the past have downgraded,
our Paired Shares or issue other negative commentary about the Company or our industry. In addition, we may be unable or
slow to maintain and attract additional research coverage. Alternatively, if one or more of these analysts cease coverage of the
Company, we could lose visibility in the market. As a result of one or more of these factors, the trading price of our Paired
Shares could decline.
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.
The Corporation has 7,133 shares of 8.0% voting preferred stock outstanding and ESH REIT has 125 shares of 12.5%
preferred stock outstanding as of December 31, 2017. 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 will 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,
28
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, which could effectively eliminate our structure, and in turn,
adversely affect the market price of our Paired Shares.
There is a possibility that there will 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 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; or
• 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
(including any applicable alternative minimum tax) at regular corporate rates. 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.
29
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 the NYSE, 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 the NYSE. 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. The NYSE requires that we comply with
various corporate governance requirements. To comply with the Exchange Act, Sarbanes-Oxley Act and NYSE 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.
We are exposed to risks relating to evaluations of our internal controls required by Section 404 of the Sarbanes-Oxley
Act.
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. In
addition, 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. If we fail to comply with proper overall controls, we could be materially harmed or fail to meet our reporting
obligations. 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, leading to a substantial decline in the market price of Paired Shares.
Item 1B.
Unresolved Staff Comments
None.
30
Item 2.
Properties
As of December 31, 2017, we owned and operated 624 hotels. The average age of our hotel properties at December 31,
2017 was 18.7 years. We are under long-term ground leases at four of our hotel properties with initial terms terminating at
various dates between 2021 and 2096 with three of the four leases including multiple renewal options for generally five or 10
year periods. Other than the four ground leases described above, all remaining hotel properties and grounds are fully owned.
The following table provides certain information regarding our hotels.
State/Country
California
Texas (1)
Florida
Illinois
North Carolina
Virginia
Ohio (1)
Georgia
Washington
Maryland
New Jersey
Michigan
Tennessee
Pennsylvania
Arizona
Indiana (1)
Massachusetts
New York
Missouri
Colorado
Minnesota
South Carolina
Kentucky (1)
Alabama
Kansas
Wisconsin
Oregon
Connecticut
Oklahoma
Nevada
Utah
Louisiana
Alaska
Rhode Island
New Mexico
Arkansas
Mississippi
Montana
Iowa
Delaware
Idaho
New Hampshire
Maine
Nebraska
Total
Number of Hotels
83
62
52
33
31
30
28
24
19
19
18
18
17
16
15
13
12
11
12
11
10
10
8
7
6
6
5
5
5
4
4
4
4
4
3
3
3
2
2
1
1
1
1
1
624
Number of Rooms
10,053
6,888
5,751
3,814
3,161
3,290
2,677
2,403
2,181
2,066
2,097
1,988
1,772
1,713
1,704
1,228
1,332
1,325
1,276
1,262
1,043
976
770
693
708
665
642
570
475
529
484
428
419
403
330
305
273
208
190
142
107
101
92
86
68,620
% of Total Rooms
14.7%
10.0%
8.4%
5.6%
4.6%
4.8%
3.9%
3.5%
3.2%
3.0%
3.1%
2.9%
2.6%
2.5%
2.5%
1.8%
1.9%
1.9%
1.9%
1.8%
1.5%
1.4%
1.1%
1.0%
1.0%
1.0%
0.9%
0.8%
0.7%
0.8%
0.7%
0.6%
0.6%
0.6%
0.5%
0.4%
0.4%
0.3%
0.3%
0.2%
0.2%
0.1%
0.1%
0.1%
100%
(1)
Includes 11 hotels and 11,067 rooms in Texas, six hotels and 553 rooms in Ohio, six hotels and 612 rooms in Indiana and two hotels and 198 rooms in
Kentucky that were sold in February 2018.
31
We lease our corporate headquarters in Charlotte, North Carolina. The initial lease term expires in August 2021 with two
additional five-year renewal terms. 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.
Item 3.
Legal Proceedings
On February 14, 2018, the Company learned that a default judgment had been entered against it and certain of its
affiliates on March 16, 2017 in the State Court of Gwinnett County, Georgia in an action entitled Sweeting v. Extended Stay
America, Inc. et al., Case No. 16-C-06630-S4. The Company has filed motions to open the default and set aside the judgment.
The Company believes that it is probable that the judgment will be set aside. The Company does not have sufficient
information on which to estimate the liability, if any, and therefore has not recorded a liability for this matter.
We are from time to time subject to various claims and lawsuits incidental to our business. In the opinion of management,
these claims and suits, 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.
Item 4.
Mine Safety Disclosures
None.
32
PART II
Item 5.
Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information
Our Paired Shares are listed on the New York Stock Exchange (“NYSE”) under the symbol “STAY.” Below is a quarterly
summary of the high and low prices of, and cash distributions declared on, our Paired Shares from January 1, 2016 through
December 31, 2017:
2017
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2016
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Price per Paired Share
High
Low
ESH REIT
Cash Distributions
Declared
Corporation
Cash Distributions
Declared
$
$
20.87
$
16.46
$
20.20
19.80
17.79
16.93
15.74
16.34
16.30
$
18.42
15.76
15.50
13.26
13.80
13.53
10.95
$
$
$
0.10
0.14
0.14
0.15
0.03
0.10
0.15
0.15
0.11
0.07
0.07
0.04
0.16
0.09
0.04
0.02
All issued and outstanding shares of Class A common stock of ESH REIT is held by the Corporation and has never been
publicly traded.
Holders of Record
As of February 23, 2018, there were 13 holders of record of our Paired Shares and the Corporation was the only holder of
ESH REIT’s Class A common stock. Because the 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 2018, we intend to maintain or increase our current distribution rate of $0.21 per Paired Share per quarter unless our
consolidated results of operations, net income, Adjusted EBITDA, liquidity, cash flows, financial condition or prospects,
economic conditions or other factors differ materially from our current assumptions. We intend to make a significant portion of
our expected total annual 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, the expected Paired Share distributions may be completed, as they have been in
prior periods, through distributions in respect of the common stock of the Corporation using funds distributed to the
Corporation in respect of the Class A common stock of ESH REIT, after allowance for tax, if any, on those funds. For the year
ended December 31, 2017, 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 payment of Corporation distributions is at the discretion of the Corporation’s Board of Directors. Any such
distributions will be made subject to the Corporation’s compliance with applicable law and will depend on, among other things,
the Corporation's results of operations, net income, liquidity, cash flows, financial condition or prospects, economic conditions,
the ability to effectively execute certain tax planning strategies, compliance with applicable law, the receipt by the Corporation
of distributions from ESH REIT in respect of the Class A common stock, level of indebtedness, capital requirements,
contractual restrictions, restrictions in any existing and future debt agreements of the Corporation and ESH REIT and other
33
factors. The Corporation’s ability to pay distributions depends on its receipt of cash distributions from ESH REIT in respect of
the Class A common stock, which may further restrict its ability to pay distributions. In particular, ESH REIT’s ability to pay
distributions is restricted by the terms of its indebtedness. See Note 7 to the consolidated financial statements of Extended Stay
America, Inc. and Note 6 to the consolidated financial statements of ESH Hospitality, Inc., both of which are included in Item 8
in 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.
On February 27, 2018, the Board of Directors of the Corporation declared a cash distribution of $0.06 per common share
for the fourth quarter of 2017. The distribution is payable on March 27, 2018 to shareholders of record as of March 13, 2018.
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 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. 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 declared based on a variety of factors, including: consolidated results of operations; debt service requirements;
capital expenditure requirements for its existing hotel properties; capital expenditure requirements for newly built Extended
Stay America-branded hotels; taxable income; the annual distribution requirement 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 57% 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 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 6 to the consolidated financial statements of ESH Hospitality,
Inc., which are included in Item 8 in 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 will form Paired Shares.
On February 27, 2018, the Board of Directors of ESH REIT declared a cash distribution of $0.15 per Class A and Class B
common share for the fourth quarter of 2017. This distribution is payable on March 27, 2018 to shareholders of record as of
March 13, 2018.
34
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 November 13, 2013, the date on which our Paired Shares commenced trading on the NYSE, through December 31, 2017.
The graph assumes an initial investment of $100 on November 13, 2013 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.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
The following table sets forth all purchases made by or on behalf of the Corporation and ESH REIT or any "affiliated
purchaser," as defined in Rule 10b-18(a)(3) under the Exchange Act, of Paired Shares during the fourth quarter of 2017.
35
Period
October 1- October 31, 2017
November 1- November 30, 2017
December 1- December 31, 2017
Total
Total number of
Paired Shares
purchased(1)
—
34,000
160,000
194,000
Average
price paid
per Paired
Share(2)
$
$
$
$
—
17.05
18.48
18.23
Total number of
Paired Shares
purchased as part
of publicly
announced
program(1) (3)
—
34,000
160,000
194,000
Maximum dollar
value that may yet
be purchased
under the
program(3)
$
$
$
$
101,354,561
100,774,872
97,817,472
97,817,472
________________________
(1) Represents an equal number of Corporation common shares and ESH REIT Class B common shares, which were paired together on a one-for-one basis
(2)
(3)
to form Paired Shares.
In the aggregate, the Corporation and ESH REIT paid approximately $2.2 million and $1.3 million, respectively, for their respective portion of the
Paired Shares that were repurchased and retired during the three months ended December 31, 2017.
In December 2015, the Boards of Directors of the Corporation and ESH REIT authorized a combined Paired Share repurchase program for up to $100
million of Paired Shares. In February 2016, the Boards of Directors of the Corporation and ESH REIT authorized an increase of the combined Paired
Share repurchase program from up to $100 million to up to $200 million of Paired Shares. In December 2016, the Boards of Directors of the Corporation
and ESH REIT authorized an increase of the combined Paired Share repurchase program from up to $200 million to up to $300 million of Paired Shares
and extended the maturity date of the program through December 31, 2017, each effective January 1, 2017. In January 2018, the Boards of Directors of
the Corporation and ESH REIT authorized an extension of the maturity date of the Share Repurchase Program through December 31, 2018, each
effective January 1, 2018. 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).
Subsequent to December 31, 2017, the Corporation and ESH REIT repurchased and retired their respective portion of
approximately 1.0 million Paired Shares for approximately $12.4 million and $7.1 million, respectively. In February 2018, the
Boards of Directors of the Corporation and ESH REIT authorized an increase to the amount of the combined Paired Share
repurchase program from up to $300 million to up to $400 million of Paired Shares, which expires on December 31, 2018.
Approximately $178.5 million is remaining under the Paired Share repurchase program as of February 23, 2018.
36
Item 6. Selected Financial Data
Selected Historical Financial and Other Data—The Company
The selected historical consolidated financial data of the Company for the years ended December 31, 2017, 2016 and
2015 and as of December 31, 2017 and 2016 have been derived from the audited consolidated financial statements of the
Company, which are included in Item 8 in this combined annual report on Form 10-K. The selected historical consolidated and
combined financial data of the Company for the years ended December 31, 2014 and 2013 and as of December 31, 2015, 2014
and 2013 have been derived from the audited consolidated and combined financial statements of the Company not included
elsewhere in this combined annual report on Form 10-K. The following information should be read in conjunction with, and is
qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the
historical audited consolidated financial statements of Extended Stay America, Inc. and related notes and other financial
information included herein.
In 2017, the Company sold three Extended Stay Canada-branded hotels and two additional hotels. Additionally, in
2015, the Company sold a portfolio of 53 hotels, 47 of which operated under our former Crossland Economy Studios brand and
six of which operated under our Extended Stay America brand. See Note 4 to the consolidated financial statements of Extended
Stay America, Inc., which is included in Item 8 in this combined annual report on Form 10-K. The selected historical
consolidated and combined financial and other data of the Company below and appearing elsewhere in this combined annual
report on Form 10-K includes the results of operations and key operating metrics related to these hotels prior to the completion
of these sales, unless otherwise indicated. See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” for certain results of operations, key operating metrics and non-GAAP measures.
In November 2013, the Corporation and ESH REIT completed an initial public offering and restructured and
reorganized our then-existing business and legal entities. For the period from January 1, 2013 through the initial public
offering, the consolidated and combined financial statements of the Company include the financial position and results of
operations of the Company’s predecessor, which included ESH REIT’s predecessor, ESH Strategies and a consolidated variable
interest entity, HVM LLC (“HVM”), our former management entity. Third party equity interests in HVM, which represented all
of HVM’s equity, were not owned and therefore were presented as noncontrolling interests.
37
(Dollars in thousands, except ADR, RevPAR and
per share and per Paired Share data)
Statement of operations data:
Total revenues
Hotel operating expenses
Total operating expenses
Income from operations
Net income
Year
Ended
December 31,
2017
Year
Ended
December 31,
2016
The Company
Year
Ended
December 31,
2015
Year
Ended
December 31,
2014
Year
Ended
December 31,
2013
$
1,282,725
$ 1,270,593
$
1,284,753
$
1,213,475
$ 1,132,818
585,545
934,582
361,075
172,188
580,772
909,954
360,664
163,352
604,087
915,620
500,072
283,022
592,101
865,989
348,738
150,554
540,551
821,827
312,125
82,656
Net (income) loss attributable to noncontrolling
interests
Net income attributable to Extended Stay America,
Inc. common shareholders or members
Net income per Extended Stay America, Inc.
common share - basic
Net income per Extended Stay America, Inc.
common share - diluted
Cash distributions paid per Extended Stay America,
Inc. common share
Distributions declared per Extended Stay America,
Inc. common share
Other financial data:
Cash flows provided by (used in):
$
$
$
$
(93,341)
(93,420)
(169,982)
(110,958)
3,575
78,847
69,932
113,040
39,596
86,231
0.41
0.41
0.29
0.29
$
$
$
$
0.35
0.35
0.37
0.31
$
$
$
$
0.55
0.55
0.06
0.12
$
$
$
$
0.19
0.19
$
$
— $
— $
(1)
(1)
0.49
0.49
—
—
Operating activities
Investing activities
Financing activities
Capital expenditures
Hotel Operating Profit(a)
Hotel Operating Margin(a)
EBITDA(b)
Adjusted EBITDA(b)
FFO(c)
Adjusted FFO(c)
Adjusted FFO per Paired Share—diluted (c)
Paired Share Income(d)
Adjusted Paired Share Income(d)
Adjusted Paired Share Income per Paired Share—
diluted(d)
Operating data:
Rooms (at period end)
Occupancy
ADR
RevPAR
$
444,169
$
418,405
$
428,889
$
370,485
$
311,313
(115,157)
(300,120)
166,378
705,787
(159,464)
(547,946)
225,323
700,561
66,289
(243,180)
204,717
689,965
(182,243)
(127,160)
173,239
626,978
(165,259)
(188,977)
172,540
594,082
55.0%
55.1%
53.7%
51.7%
52.5%
$
590,690
$
583,549
$
701,237
$
532,182
$
480,178
622,905
355,044
357,070
615,658
339,386
359,333
603,081
336,531
338,923
556,660
292,039
299,224
1.84
$
1.79
$
1.66
$
1.46
$
518,610
239,417
263,192
(1)
1.49
172,172
192,945
163,336
199,007
283,006
194,699
150,538
169,711
81,926
121,829
1.00
$
0.99
$
0.95
$
0.83
$
(1)
0.69
68,620
74.5%
69,383
74.1%
69,383
73.7%
76,000
74.3%
67.19
50.09
$
$
66.43
49.23
$
$
62.22
45.89
$
$
57.93
43.02
$
$
76,219
74.2%
54.15
40.18
$
$
$
$
(1) Assumes that the restructuring and recapitalization of the Company as part of the initial public offering occurred as of January 1, 2013.
(In thousands)
Balance sheet data:
Total assets
Total debt, net of unamortized deferred
financing costs and discounts(e)
Mandatorily redeemable preferred stock
Noncontrolling interest
December 31,
2017
December 31,
2016
The Company
December 31,
2015
December 31,
2014
December 31,
2013
$
4,076,053
$
4,180,304
$
4,528,900
$
4,449,142
$
4,407,795
2,534,768
7,133
565,264
2,585,274
21,202
582,407
2,762,388
21,202
608,684
2,859,391
21,202
599,799
2,862,951
21,202
596,632
(a) Hotel Operating Profit and Hotel Operating Margin. Hotel Operating Profit and Hotel Operating Margin are important measures of aggregate hotel-level
profitability used by management to evaluate hotel operating efficiency and effectiveness. See “Management’s Discussion and Analysis of Financial
38
Condition and Results of Operations—Non-GAAP Financial Measures—Hotel Operating Profit and Hotel Operating Margin” for a definition and
discussion of Hotel Operating Profit and Hotel Operating Margin.
The following table provides a reconciliation of room revenues, other hotel revenues and hotel operating expenses (excluding loss on disposal of assets)
to Hotel Operating Profit and Hotel Operating Margin for the years ended December 31, 2017, 2016, 2015, 2014 and 2013 (in thousands):
Room revenues
Other hotel revenues
Total hotel revenues
Hotel operating expenses(1)
Hotel Operating Profit
Hotel Operating Margin
Year
Ended
December 31,
2017
Year
Ended
December 31,
2016
The Company
Year
Ended
December 31,
2015
Year
Ended
December 31,
2014
Year
Ended
December 31,
2013
$
1,260,868
$
1,250,865
$
1,265,653
$
1,195,816
$
1,113,956
21,857
1,282,725
576,938
19,728
1,270,593
570,032
19,100
1,284,753
594,788
17,659
1,213,475
586,497
$
705,787
$
700,561
$
689,965
$
626,978
$
17,787
1,131,743
537,661
594,082
55.0%
55.1%
53.7%
51.7%
52.5%
______________________
(1) Excludes loss on disposal of assets of approximately $8.6 million, $10.7 million, $9.3 million, $5.6 million and $2.9 million, respectively.
(b) EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA are key metrics used by management to assess our performance and facilitate
comparisons between us and other lodging companies, hotel owners and capital-intensive companies. EBITDA and Adjusted EBITDA as presented may
not be comparable to similar measures calculated by other companies. This information should not be considered as an alternative to net income of the
Company, net income of the Corporation, net income of ESH REIT or any other measure of the Company, the Corporation or ESH REIT calculated in
accordance with U.S. GAAP. Additionally, EBITDA and Adjusted EBITDA should not solely be considered as measures of our profitability or indicative
of funds available to fund our cash needs, including our ability to pay distributions. See “Management’s Discussion and Analysis of Financial Condition
and Results of Operations—Non-GAAP Financial Measures—EBITDA and Adjusted EBITDA” for a definition and discussion of EBITDA and Adjusted
EBITDA.
The following table provides a reconciliation of net income to EBITDA and Adjusted EBITDA for the years ended December 31, 2017, 2016, 2015, 2014
and 2013 (in thousands):
Year
Ended
December 31,
2017
Year
Ended
December 31,
2016
The Company
Year
Ended
December 31,
2015
Year
Ended
December 31,
2014
Year
Ended
December 31,
2013
$
Net income
Interest expense, net
Income tax expense (benefit)
Depreciation and amortization
EBITDA
Non-cash equity-based compensation
Other non-operating (income) expense
Impairment of long-lived assets
Gain on sale of hotel properties, net
Restructuring expenses
Acquisition transaction expenses
Other expenses
Adjusted EBITDA
$
172,188
129,772
59,514
229,216
590,690
7,552
(399) (1)
25,169
(9,973)
—
—
9,866 (5)
$
163,352
164,537
34,351
221,309
583,549
12,000
(1,576) (2)
9,828
—
—
—
11,857 (6)
$
283,022
137,782
76,536
203,897
701,237
10,500
2,732 (3)
9,011
(130,894)
—
—
10,495 (7)
$
150,554
149,364
45,057
187,207
532,182
8,803
3,763 (4)
2,300
(864)
—
—
10,476 (8)
82,656
234,459
(4,990)
168,053
480,178
20,168
—
3,330
—
605
235
14,094 (9)
$
622,905
$
615,658
$
603,081
$
556,660
$
518,610
______________________
(1)
(2)
(3)
(4)
(5)
Includes foreign currency transaction gain of approximately $0.7 million and loss related to interest rate swap of approximately $0.3 million.
Includes foreign currency transaction gain of approximately $1.6 million.
Includes foreign currency transaction loss of approximately $2.7 million.
Includes foreign currency transaction loss of approximately $3.8 million.
Includes loss on disposal of assets of approximately $8.6 million, costs incurred in connection with 2017 secondary offerings of approximately $1.1
million and transaction costs of approximately $0.2 million due to the revision of an estimate related to the sale of three hotel properties in 2017.
Includes loss on disposal of assets of approximately $10.7 million, costs incurred in connection with 2016 secondary offerings of approximately
$1.1 million and transaction costs of approximately $0.1 million due to the revision of an estimate related to the sale of a portfolio of 53 hotel
properties in 2015.
Includes loss on disposal of assets of approximately $9.3 million, costs incurred in connection with the preparation of a registration statement filed
in 2015 and a 2015 secondary offering of approximately $0.9 million and transaction costs of approximately $0.3 million related to the sale of a
portfolio of 53 hotel properties in 2015.
(6)
(7)
39
(8)
(9)
Includes loss on disposal of assets of approximately $5.6 million, public company transition costs of approximately $3.0 million, including
approximately $1.5 million in costs incurred in connection with a 2014 secondary offering, and consulting fees of approximately $1.9 million
related to the implementation of certain key strategic initiatives, including review of our corporate infrastructure.
Includes costs related to preparations for our initial public offering of approximately $11.2 million, consisting primarily of the restructuring and
reorganization of our then-existing business, and loss on disposal of assets of approximately $2.9 million.
(c) FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share. FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share are key metrics used
by management to assess our operating performance and profitability and to facilitate comparisons between us and other hotel and/or real estate
companies that include a REIT as part of their legal entity structure. 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, FFO, Adjusted FFO and Adjusted FFO per diluted
Paired Share may be of limited use to investors comparing our results only to REITs. This information should not be considered as an alternative to net
income of the Company, net income of the Corporation, net income of 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. Additionally, FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share 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 distributions. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures—Funds from Operations, Adjusted Funds from Operations
and Adjusted Funds from Operations per diluted Paired Share” for a definition and discussion of FFO, Adjusted FFO and Adjusted FFO per diluted Paired
Share.
The following table provides a reconciliation of net income attributable to Extended Stay America, Inc. common shareholders or members to FFO,
Adjusted FFO and Adjusted FFO per diluted Paired Share for the years ended December 31, 2017, 2016, 2015, 2014 and 2013 (in thousands, except per
Paired Share data):
Year
Ended
December 31,
2017
Year
Ended
December 31,
2016
The Company
Year
Ended
December 31,
2015
Year
Ended
December 31,
2014
Year
Ended
December 31,
2013
Net income per Extended Stay America, Inc.
common share - diluted
Net income attributable to Extended Stay
America, Inc. common shareholders or members
Noncontrolling interests attributable to Class B
common shares of ESH REIT
Real estate depreciation and amortization
Impairment of long-lived assets
Gain on sale of hotel properties, net
Tax effect of adjustments to net income
attributable to Extended Stay America, Inc.
common shareholders or members
FFO
Debt modification and extinguishment costs
Loss on interest rate swap
Restructuring expenses
Acquisition transaction expenses
Tax effect of adjustments to FFO
Adjusted FFO
Adjusted FFO per Paired Share—diluted
$
$
$
$
0.41
78,847
93,325
224,559
25,169
(9,973)
(56,883)
355,044
2,351
314
—
—
(639)
$
$
357,070
1.84
$
$
$
$
0.35
69,932
93,404
216,950
9,828
—
(50,728)
339,386
26,233
—
—
—
$
$
0.55
113,040
169,966
199,857
9,011
(130,894)
(24,449)
336,531
3,014
—
—
—
$
$
0.19
39,596
110,942
183,621
2,300
(864)
(43,556)
292,039
9,405
—
—
—
0.49 (1)
86,231
(4,305) (2)
164,646
3,330
—
(10,485)
239,417
25,941
—
605
235
(6,286)
359,333
1.79
$
$
(622)
338,923
1.66
$
$
(2,220)
299,224
1.46
$
$
(3,006)
263,192
1.49 (1)
Weighted average Paired Shares outstanding-
diluted
________________________
(1) Assumes that the restructuring and recapitalization of the Company as part of the initial public offering occurred as of January 1, 2013.
(2) Prior to the change in our legal and corporate structure in November 2013, which occurred in connection with the Corporation’s and ESH REIT’s initial
193,670
200,736
204,567
204,508
176,268
public offering, no portion of the Company’s (i.e., the Paired Shares’) noncontrolling interests represented interests attributable to Class B common shares
of ESH REIT.
(d) Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share. 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 analysis 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 and may not
necessarily 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 alternatives
to net income of the Company, net income of the Corporation, net income of 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
40
accordance with U.S. GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial
Measures—Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share” for a definition and
discussion of Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Income per diluted Paired Share.
The following table provides a reconciliation of net income attributable to Extended Stay America Inc. common shareholders or members to Paired Share
Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share for the years ended December 31, 2017, 2016, 2015,
2014 and 2013 (in thousands, except per Paired Share data):
Year
Ended
December 31,
2017
Year
Ended
December 31,
2016
The Company
Year
Ended
December 31,
2015
Year
Ended
December 31,
2014
Year
Ended
December 31,
2013
Net income per Extended Stay America, Inc.
common share - diluted
Net income attributable to Extended Stay
America, Inc. common shareholders or members
Noncontrolling interests attributable to Class B
common shares of ESH REIT
Paired Share Income
Debt modification and extinguishment costs
Other non-operating (income) expense
Impairment of long-lived assets
Gain on sale of hotel properties, net
Restructuring expenses
Acquisition transaction expenses
Other expenses
Tax effect of adjustments to Paired Share Income
Adjusted Paired Share Income
Adjusted Paired Share Income per Paired Share -
diluted
Weighted average Paired Shares outstanding -
diluted
$
$
$
$
0.41
78,847
93,325
172,172
2,351
(399) (3)
25,169
(9,973)
—
—
9,866 (7)
(6,241)
192,945
1.00
$
$
$
$
0.35
69,932
93,404
163,336
26,233
(1,576) (4)
9,828
—
—
—
11,857 (8)
(10,671)
199,007
0.99
$
$
$
$
0.55
113,040
169,966
283,006
3,014
2,732 (5)
9,011
(130,894)
—
—
10,495 (9)
17,335
194,699
0.95
$
$
$
$
0.19
39,596
110,942
150,538
9,405
3,763 (6)
2,300
(864)
—
—
10,476 (10)
(5,907)
169,711
0.83
$
$
$
$
0.49 (1)
86,231
(4,305) (2)
81,926
25,941
—
3,330
—
605
235
14,094 (11)
(4,302)
121,829
0.69 (1)
193,670
200,736
204,567
204,508
176,268
__________________________
(1) Assumes that the restructuring and recapitalization of the Company as part of the initial public offering occurred as of January 1, 2013.
(2) Prior to the change in our legal and corporate structure in November 2013, which occurred in connection with the Corporation’s and ESH REIT’s initial
(3)
(4)
(5)
(6)
(7)
(8)
(9)
public offering, no portion of the Company’s (i.e., the Paired Shares’) noncontrolling interests represented interests attributable to Class B common shares
of ESH REIT.
Includes foreign currency transaction gain of approximately $0.7 million and loss related to interest rate swap of approximately $0.3 million.
Includes foreign currency transaction gain of approximately $1.6 million.
Includes foreign currency transaction loss of approximately $2.7 million.
Includes foreign currency transaction loss of approximately $3.8 million.
Includes loss on disposal of assets of approximately $8.6 million, costs incurred in connection with 2017 secondary offerings of approximately $1.1
million and transaction costs of approximately $0.2 million due to the revision of an estimate related to the sale of three hotel properties in 2017.
Includes loss on disposal of assets of approximately $10.7 million, costs incurred in connection with 2016 secondary offerings of approximately $1.1
million and transaction costs of approximately $0.1 million due to the revision of an estimate related to the sale of a portfolio of 53 hotels in 2015.
Includes loss on disposal of assets of approximately $9.3 million, costs incurred in connection with the preparation of a registration statement filed in
2015 and a 2015 secondary offering of approximately $0.9 million and transaction costs of approximately $0.3 million related to the sale of a portfolio of
53 hotels in 2015.
(10) Includes loss on disposal of assets of approximately $5.6 million, public company transition costs of approximately $3.0 million, including approximately
$1.5 million in costs incurred in connection with a 2014 secondary offering, and consulting fees of approximately $1.9 million related to the
implementation of certain key strategic initiatives, including review of our corporate infrastructure.
(11) Includes costs related to preparations for our initial public offering of approximately $11.2 million, consisting primarily of the restructuring and
reorganization of our then-existing business as part of our initial public offering, and loss on disposal of assets of approximately $2.9 million.
(e) As discussed in Note 2 to the consolidated financial statements of Extended Stay America, Inc., which are included in Item 8 in this combined annual report
on Form 10-K, effective December 31, 2015, the Company early adopted FASB Accounting Standard Update (“ASU”) No. 2015-03 and ASU No. 2015-15.
Therefore, total debt is shown net of unamortized deferred financing costs and debt discounts in the selected financial data table. Because the adoption of these
updates required retrospective application, the historical financial information contained in this Item 6 and elsewhere in this report has been restated to reflect
the retrospective impact of our adoption.
41
Selected Historical Financial and Other Data—ESH REIT
The selected historical consolidated financial data of ESH REIT for the years ended December 31, 2017, 2016 and 2015
and as of December 31, 2017 and 2016 have been derived from the audited consolidated financial statements of ESH REIT,
which are included in Item 8 in this combined annual report on Form 10-K. The selected historical consolidated financial data
of ESH REIT for the years ended December 31, 2014 and 2013 and as of December 31, 2015, 2014 and 2013 have been
derived from the audited consolidated financial statements of ESH REIT not included elsewhere in this combined annual report
on Form 10-K. The following information should be read in conjunction with, and is qualified by reference to, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and the historical audited consolidated financial
statements of ESH Hospitality, Inc. and related notes and other financial information included herein.
In 2017, ESH REIT sold three Extended Stay Canada-branded hotels and two additional hotels. Additionally, in 2015,
ESH REIT sold a portfolio of 53 hotels, 47 of which operated under the former Crossland Economy Studios brand and six of
which operated under the Extended Stay America brand. See Note 4 to the consolidated financial statements of ESH
Hospitality, Inc., which are included in Item 8 in this combined annual report on Form 10-K. The selected historical
consolidated and combined financial and other data of ESH REIT below and appearing elsewhere in this combined annual
report on Form 10-K includes the results of operations related to the ownership of these hotels prior to the completion of these
sales, unless otherwise indicated.
In November 2013, the Corporation and ESH REIT completed an initial public offering and restructured and
reorganized our then-existing business and legal entities. For the period from January 1, 2013 through the initial public
offering, the consolidated financial statements of ESH REIT include the financial position and results of operations of ESH
REIT, which include ESH REIT’s predecessor, its subsidiaries, which included the Operating Lessees, and HVM. Third party
equity interests in HVM, which represented all of HVM’s equity, were not owned and therefore were presented as
noncontrolling interests.
(In thousands, except per share data)
Statement of operations data:
Year
Ended
December 31,
2017
Year
Ended
December 31,
2016
ESH REIT
Year
Ended
December 31,
2015
Year
Ended
December 31,
2014
Year
Ended
December 31,
2013
Rental revenues from Extended Stay America, Inc.
$
683,500
$
694,275
$
719,635
$
684,205
$
Hotel room revenues
Total revenues
Hotel operating expenses
Total operating expenses
Income from operations
Net income
Net income per ESH Hospitality, Inc. common share:
Class A-basic
Class A-diluted
Class B-basic
Class B-diluted
Cash distributions paid per ESH Hospitality, Inc. common
share
Class A
Class B
Distributions declared per ESH Hospitality, Inc. common
share
Class A
Class B
Other financial data:
Cash flows provided by (used in):
Operating activities
Investing activities
Financing activities
Capital expenditures
$
$
$
$
$
$
$
$
$
—
683,500
90,495
345,826
346,909
214,984
—
694,275
89,166
319,824
374,456
212,207
—
719,635
97,062
312,079
524,209
378,184
—
684,205
93,826
292,493
392,845
247,094
0.49
0.48
0.48
0.48
0.53
0.53
0.53
0.53
$
$
$
$
$
$
$
$
0.47
0.47
0.47
0.47
0.62
0.62
0.43
0.43
$
$
$
$
$
$
$
$
0.83
0.83
0.83
0.83
0.60
0.60
0.79
0.79
$
$
$
$
$
$
$
$
0.54
0.54
0.55
0.54
0.53
0.53
0.53
0.53
$
$
$
$
$
$
$
$
71,900
983,950
1,072,539
478,727
740,395
333,219
100,466
0.26 (1)
0.26 (1)
0.26 (1)
0.25 (1)
0.20
0.20
0.20
0.20
471,242
$
488,350
$
511,985
$
432,857
$
295,198
(118,147)
(367,671)
163,797
(158,698)
(499,402)
222,257
61,034
(383,579)
199,135
(153,307)
(264,355)
166,358
(164,078)
(215,679)
171,931
(1) Assumes that the restructuring and recapitalization of ESH REIT as part of the initial public offering occurred as of January 1, 2013.
42
(In thousands)
Balance sheet data:
Total assets
December 31,
2017
December 31,
2016
ESH REIT
December 31,
2015
December 31,
2014
December 31,
2013
$
3,935,433
$
4,077,505
$
4,316,549
$
4,268,970
$
4,286,440
Total debt, net of unamortized deferred financing
costs and discounts (a)
2,534,768
2,635,274
2,762,388
2,859,391
2,862,951
__________________________
(a) As discussed in Note 2 to the consolidated financial statements of ESH Hospitality, Inc., which are included in Item 8 in this combined annual report on
Form 10-K, effective December 31, 2015, ESH REIT early adopted FASB ASU No. 2015-03 and ASU No. 2015-15. Therefore, total debt is shown net of
unamortized deferred financing costs and debt discounts in the selected financial data table. Because the adoption of these updates required retrospective
application, the historical financial information contained in this Item 6 and elsewhere in this report has been restated to reflect the retrospective impact of
our adoption.
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 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 Company only.
43
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 reported
amounts of revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments,
including those relating to property and equipment, goodwill, revenue recognition, income taxes, equity-based compensation
and investments. Our 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 may contain forward-looking statements regarding our ability to meet our debt service
obligations, future capital expenditures (including future hotel renovation programs), distribution policies, development,
growth and franchise opportunities, anticipated benefits or use of proceeds from any dispositions, plans, objectives, goals,
beliefs, business strategies, future events, business conditions, results of operations, financial position and our business outlook,
business trends, among other topics. 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,” “Selected Historical Financial and Other Data—The Company,” “Selected Historical
Financial and Other Data—ESH REIT” and each of the consolidated financial statements and related notes of Extended Stay
America, Inc. and ESH Hospitality, Inc., both of which are 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 of our indebtedness, see Note 7 to the consolidated financial statements of Extended Stay America, Inc. and
Note 6 to the consolidated financial statements of ESH Hospitality, Inc., both of which are included in Item 8 in 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 approximately 57% of the outstanding common stock of ESH REIT. Due to its controlling interest in ESH REIT,
the Corporation consolidates the financial position, results of operations, comprehensive income and cash flows of ESH REIT.
Overview
We are the largest integrated owner/operator of company-branded hotels in North America. Our business operates in the
extended stay segment of the lodging industry, and as of December 31, 2017, we owned and operated 624 hotel properties
comprising approximately 68,600 rooms located in 44 states across the United States. We currently operate all of our hotels
under the Extended Stay America brand, which serves the mid-price extended stay segment and accounts for approximately
44% of the segment by number of rooms in the United States.
Our extended stay hotels are designed to provide an affordable and attractive alternative to traditional lodging or
apartment accommodations and are targeted toward self-sufficient, value-conscious guests who need lodging for more than a
week. Our guests include business travelers, leisure travelers, professionals on temporary work or training assignments, persons
relocating, temporarily displaced or purchasing a home and anyone else in need of temporary housing.
We seek to drive our competitive advantage by targeting our product offering to an underserved market segment and by
driving economies of scale through our national distribution and concentration of multiple hotels in individual markets. We
focus on continually improving our product and service, improving marketing efforts and driving ADR. In addition to owning
and operating hotels, we plan to increase our distribution and create a fee-based income stream by franchising our brand name
to unaffiliated third-parties and, in some instances, managing these hotels on behalf of our franchisees. We also plan to increase
our efficiency and the overall quality of our real estate portfolio by selling non-strategic hotels over time, in some cases
franchising our brand name to, or managing sold hotels for, the buyers. Through the combination of our business model, which
we believe maximizes cost efficiency, our efficient capital structure and the below real estate and development initiatives, we
intend to drive superior cash flow and return value to our shareholders. See “Item 1–Business” for additional information on
our Company.
44
During the second quarter of 2017, we completed a hotel renovation program which began in 2011 and included each
of our 624 hotels. In order to achieve our strategic objectives, our current and future plans include some or all of the following:
•
•
•
•
•
•
•
continuing to invest capital in our hotels, both on an ongoing basis and through future cyclical renovation programs,
where justified by anticipated returns on investment;
repurposing and/or rebuilding certain of our hotel properties;
building new Extended Stay America hotel properties which we expect to own and operate;
selling non-strategic hotels to buyers that will franchise the Extended Stay America brand from us and for whom we
may perform management or other services;
converting existing hotels to the Extended Stay America brand, either as franchises or on our own balance sheet;
franchising the Extended Stay America brand to newly-constructed hotel properties owned by unaffiliated third parties
for whom we may perform management or other services; and
acquiring additional hotel properties.
Changes in Hotel Ownership - Completed Asset Dispositions
In 2017, we sold three Extended Stay Canada-branded hotels for 76.0 million Canadian dollars and two additional hotels
for approximately $21.4 million. As a result of these transactions, the Corporation and ESH REIT recognized gains on sale of
approximately $1.4 million and $8.6 million, respectively, during the year ended December 31, 2017. Although we no longer
own or operate these hotels, the Corporation is party to separate management agreements for three of the hotels, each of which
is expected to terminate in 2018, after which the hotels are planned to be converted by the owners to different brands or uses.
In 2015, we sold a portfolio of 53 hotels, 47 of which operated under our former Crossland Economy Studios brand and
six of which operated under the Extended Stay America brand, and certain intellectual property of Crossland Economy Studios.
We no longer own, operate or manage these hotels, nor do we own intellectual property related to Crossland Economy Studios.
See Note 4 to each of the consolidated financial statements of Extended Stay America, Inc. and ESH Hospitality, Inc.,
both of which are included in Item 8 in this combined annual report on Form 10-K.
Changes in Hotel Ownership - Pending Asset Dispositions
In November 2017, we executed a purchase and sale agreement to divest twenty-five Extended Stay America-branded
hotels for approximately $114.0 million, including approximately $1.9 million in initial franchise application fees, subject to
adjustment. The transaction closed in February 2018 and we expect to recognize a gain on sale not to exceed $10 million. See
Note 17 of the consolidated financial statements of Extended Stay America, Inc. and Note 14 of the consolidated financial
statements of ESH Hospitality, Inc., both of which are included in Item 8 in this combined annual report on Form 10-K. We
manage these hotels under a twenty-year management agreement, with the option for the third-party owner to convert the hotels
to independently-managed franchises after two years.
In October 2016, we executed a purchase and sale agreement to divest one Extended Stay America-branded hotel for
approximately $44.8 million, subject to adjustment. Upon and subject to the completion of customary due diligence and the
satisfaction or waiver of certain closing conditions, this transaction is currently expected to close in 2018 or 2019. We expect to
manage the hotel on an interim basis after closing, after which the hotel is planned to be closed and converted by the third-party
owner to a different use.
Key Metrics Evaluated by Management
We evaluate the performance of our business through the use of certain non-GAAP financial measures and other lodging
industry operating metrics. U.S. GAAP refers to generally accepted accounting principles in the United States. Each of these
non-GAAP financial measures should be considered as a supplemental measure to a U.S. GAAP performance measure such as
total revenues, net income, net income per share or cash flow provided by operating activities. These 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
45
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 to evaluate hotel financial
performance. 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. Changes in room rates have an impact on overall
revenues and profitability.
Occupancy is a commonly used measure within the lodging industry to evaluate hotel financial performance. 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 our 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 to evaluate hotel
financial performance. 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, telephone or other guest service revenues. Although RevPAR does not include these other
hotel revenues, it generally is considered a key indicator of core revenues for many hotels. For the year ended December 31,
2017, room revenues represented approximately 98.3% of our total revenues. RevPAR changes that are driven predominately
by occupancy 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 levels.
Understanding Our Results of Operations – The Company
Revenues and Expenses. The Company’s revenues are derived from hotel ownership and operations. Hotel operating
expenses account for the largest portion of the Company’s operating expenses and reflect ongoing expenses associated with the
ownership and operation of our hotels.
The following table presents the components of the Company’s revenues as a percentage of our total revenues for the year
ended December 31, 2017:
• Room revenues. Room revenues are driven primarily by ADR and occupancy. Pricing
policy and customer mix are significant drivers of ADR. Due to our relatively high occupancy
levels, our primary focus is on increasing RevPAR by increasing ADR. For the year ended
December 31, 2017, we experienced RevPAR growth of approximately 1.7% compared to the
year ended December 31, 2016, due to an increase in shorter-stay business and leisure guests,
the collective impact of our recently completed hotel renovation program and focus on service
excellence.
• Other hotel revenues. Other hotel revenues include ancillary revenues such as laundry
revenues, vending commissions, additional housekeeping fees, purchased WiFi upgrades,
parking revenues and pet charges. Occupancy and customer mix, as well as the number and
percentage of guests that have longer-term stays, have been historical drivers of our other hotel
revenues. We experienced an increase in other hotel revenues of approximately $2.1 million, or
10.8%, for the year ended December 31, 2017 compared to the year ended December 31, 2016,
due to increases in guest purchased WiFi upgrades, parking revenues and other fees.
Percentage of
2017
Total Revenues
98.3%
1.7%
46
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, 2017:
• Hotel operating expenses. Hotel operating expenses have fixed and variable components.
Operating expenses that are relatively fixed include personnel expense, real estate tax expense
and property insurance premium expense. Occupancy is a key driver of expenses that have a
high degree of variability, such as housekeeping services and amenity costs. Other variable
expenses include marketing costs, reservation costs, property insurance claims expense and
repairs and maintenance expense. We experienced an increase in hotel operating expenses of
approximately $4.8 million for the year ended December 31, 2017 compared to the year ended
December 31, 2016, due to increases in personnel expense, real estate tax expense and credit
card disputes, partially offset by decreases in loss on disposal of assets, utilities expense,
amenity costs and repairs and maintenance expense.
• General and administrative expenses. General and administrative expenses include
expenses associated with corporate overhead. Costs consist primarily of compensation expense
of our corporate staff, which includes equity-based compensation, and professional fees,
including audit, tax, legal and consulting fees.
• Depreciation and amortization. Depreciation and amortization is a non-cash charge that
relates primarily to the acquisition and related usage of hotels and other property and
equipment, including capital expenditures incurred with respect to hotel renovations.
• Impairment of long-lived assets. Impairment of long-lived assets is a non-cash charge
recognized when events and circumstances indicate that the carrying value of individual hotel
assets, or group of hotel assets, may not be recoverable.
Percentage of
2017
Total Operating
Expenses
62.7%
10.1%
24.5%
2.7%
Understanding Our Results of Operations – ESH REIT
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
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, 2017:
• Hotel operating expenses. ESH REIT’s hotel operating expenses include expenses
directly related to hotel ownership, such as real estate tax expense, loss on disposal of assets
and property insurance premiums and claims expense.
• General and administrative expenses. General and administrative expenses include
overhead expenses incurred directly by ESH REIT and administrative service costs reimbursed
to ESA Management.
• Depreciation. Depreciation is a non-cash charge that relates primarily to the acquisition
and related usage of hotels and other property and equipment, including capital expenditures
incurred with respect to hotel renovations.
• Impairment of long-lived assets. Impairment of long-lived assets is a non-cash charge
recognized when events and circumstances indicate that the carrying value of individual hotel
assets, or group of hotel assets, may not be recoverable.
Results of Operations
Percentage of
2017
Total Operating
Expenses
26.2%
4.3%
65.2%
4.3%
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 consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
periods. On an ongoing basis, we evaluate our estimates and judgments, including those relating to property and equipment,
goodwill, revenue recognition, income taxes, equity-based compensation and investments. Our estimates and judgments are
47
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 from these estimates under different
assumptions and conditions.
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 the Operating Lessees, ESH
Strategies, ESA Management and ESH REIT. Third party equity interests in ESH REIT, which consist primarily of the Class B
common stock of ESH REIT and represent approximately 43% 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, 2017 and December 31, 2016
As of December 31, 2016, the Company owned and operated 629 hotels consisting of approximately 69,400 rooms. In
2017, the Company sold three Extended Stay Canada-branded hotels and two additional hotels. The Corporation is party to
separate management agreements for three of the hotels, each of which is expected to terminate in 2018, and after which the
hotels are planned to be converted by the third-party owner to different brands or uses. As a result, as of December 31, 2017,
the Company owned and operated 624 hotels, consisting of approximately 68,600 rooms. See Note 4 to the consolidated
financial statements of Extended Stay America, Inc., which are included in Item 8 in this combined annual report on Form 10-
K.
The following table presents our consolidated results of operations for the years ended December 31, 2017 and 2016,
including the amount and percentage change in these results between the periods (in thousands):
Revenues:
Room revenues
Other hotel revenues
Total revenues
Operating expenses:
Hotel operating expenses
General and administrative expenses
Depreciation and amortization
Impairment of long-lived assets
Total operating expenses
Gain on sale of hotel properties, net
Other income
Income from operations
Other non-operating income
Interest expense, net
Income before income tax expense
Income tax expense
Net income
Net income attributable to noncontrolling interests (1)
Net income attributable to Extended Stay America Inc.
common shareholders
Year Ended December 31,
2016
2017
Change ($)
Change (%)
$
1,260,868
$
1,250,865
$
21,857
1,282,725
19,728
1,270,593
585,545
94,652
229,216
25,169
934,582
9,973
2,959
361,075
(399)
129,772
231,702
59,514
172,188
(93,341)
580,772
98,045
221,309
9,828
909,954
—
25
360,664
(1,576)
164,537
197,703
34,351
163,352
(93,420)
10,003
2,129
12,132
4,773
(3,393)
7,907
15,341
24,628
9,973
2,934
411
1,177
(34,765)
33,999
25,163
8,836
79
$
78,847
$
69,932
$
8,915
0.8 %
10.8 %
1.0 %
0.8 %
(3.5)%
3.6 %
156.1 %
2.7 %
n/a
11,736.0 %
0.1 %
(74.7)%
(21.1)%
17.2 %
73.3 %
5.4 %
(0.1)%
12.7 %
________________________
(1) Noncontrolling interests in Extended Stay America, Inc. include approximately 43% and 44% of ESH REIT’s common equity as of December 31, 2017
and 2016, respectively, and 125 shares of ESH REIT preferred stock.
48
The following table presents key operating metrics, including occupancy, ADR, RevPAR, hotel inventory and renovation
displacement data for our hotels for the years ended December 31, 2017 and 2016, respectively:
Year Ended December 31,
2017
2016
Number of hotels (as of December 31)(1)
Number of rooms (as of December 31)(1)
Occupancy
ADR
RevPAR
Hotel Inventory (as of December 31)(2):
Renovated Extended Stay America
Unrenovated Extended Stay America and other
Total number of hotels
Renovation Displacement Data (in thousands, except percentages)(2):
Total available room nights
Room nights displaced from renovation
% of available room nights displaced
624
68,620
74.5%
$67.19
$50.09
624
—
624
25,170
101
0.4%
629
69,383
74.1%
$66.43
$49.23
584
45
629
25,399
328
1.3%
Change
(5)
(763)
40 bps
1.1%
1.7%
(3)
40
(45)
(5)
(229)
(227)
(90) bps
_______________________
(1)
In 2017, the Company sold five hotels, four of which were included in "Renovated Extended Stay America" and one of which was included in
"Unrenovated Extended Stay America and other" as of December 31, 2016. See Note 4 to the consolidated financial statements of Extended Stay
America, Inc. which is included in Item 8 in this combined annual report on Form 10-K.
(2) See “—Liquidity and Capital Resources – Capital Expenditures – Hotel Renovations.”
(3)
Includes three Extended Stay Canada-branded hotels.
Room revenues. Room revenues increased by approximately $10.0 million, or 0.8%, to approximately $1,260.9 million
for the year ended December 31, 2017 compared to approximately $1,250.9 million for the year ended December 31, 2016. The
increase in room revenues was due to a 40 bps increase in occupancy and a 1.1% increase in ADR, resulting in a 1.7% increase
in RevPAR. These increases were a result of an increase in shorter-stay business and leisure guests, the collective impact of our
recently completed hotel renovation program and focus on service excellence. This increase was partially offset by the sale of
five hotels in 2017.
Other hotel revenues. Other hotel revenues increased by approximately $2.1 million, or 10.8%, to approximately $21.9
million for the year ended December 31, 2017 compared to approximately $19.7 million for the year ended December 31, 2016.
This increase was due to an increase in guest purchased WiFi upgrades, parking revenues and other fees.
Hotel operating expenses. Hotel operating expenses increased by approximately $4.8 million, or 0.8%, to approximately
$585.5 million for the year ended December 31, 2017 compared to approximately $580.8 million for the year ended
December 31, 2016. The increase in hotel operating expenses was due to increases in personnel expense of approximately $4.9
million, real estate tax expense of approximately $4.4 million and credit card disputes of approximately $1.8 million. These
increases were partially offset by decreases in loss on disposal of assets of approximately $2.1 million, utilities expense of
approximately $1.8 million, amenity costs of approximately $1.5 million and repairs and maintenance expense of
approximately $1.3 million.
General and administrative expenses. General and administrative expenses decreased by approximately $3.4 million, or
3.5%, to approximately $94.7 million for the year ended December 31, 2017 compared to approximately $98.0 million for the
year ended December 31, 2016. This decrease was driven by a decrease in corporate personnel expense of approximately $3.2
million, primarily related to a decrease in equity-based compensation expense as a result of the forfeiture of a large number of
executive awards in December 2017. The decrease was partially offset by an increase in other consulting and professional fees
of approximately $0.2 million.
Depreciation and amortization. Depreciation and amortization increased by approximately $7.9 million, or 3.6%, to
approximately $229.2 million for the year ended December 31, 2017 compared to approximately $221.3 million for the year
ended December 31, 2016, due to an increase in investment in hotel assets.
49
Impairment of long-lived assets. Asset impairments are recorded as required based on an evaluation of property and
equipment and intangible assets for impairment. During the year ended December 31, 2017, we recognized impairment charges
of approximately $25.2 million related to property and equipment, $12.4 million of which related to our three Extended Stay
Canada-branded hotels sold in May 2017. The remainder of the 2017 impairment expense related to six hotel properties.
Impairment charges of approximately $9.8 million were recognized during the year ended December 31, 2016 related to three
hotel properties.
Gain on sale of hotel properties, net. During the year ended December 31, 2017, we recognized a gain on sale of two
hotel properties of approximately $11.9 million. This gain was partially offset by a loss of approximately $1.9 million related to
the sale of three Extended Stay Canada-branded hotels. No hotel properties were sold during the year ended December 31,
2016.
Other income. During the year ended December 31, 2017, we recognized other income of approximately $3.0 million,
which consisted of the settlement of a lawsuit, the receipt of funds related to temporary easements at several of our hotel
properties and management fees related to the three Extended Stay Canada-branded hotels sold in 2017 pursuant to separate
post-closing management agreements.
Other-non operating income. During the year ended December 31, 2017, we recognized a non-cash foreign currency
transaction gain of approximately $0.7 million, partially offset by non-cash charges related to our interest rate swap of
approximately $0.3 million. During the year ended December 31, 2016, we recognized a non-cash foreign currency transaction
gain of approximately $1.6 million related to the depreciation of the U.S. dollar versus the Canadian dollar at our Canadian
subsidiaries.
Interest expense, net. Excluding debt modification costs of approximately $2.4 million incurred during the year ended
December 31, 2017, related to the repricing of ESH REIT’s senior secured term loan facility and excluding debt extinguishment
costs of approximately $26.2 million incurred during the year ended December 31, 2016, related to the full repayment of the
balance outstanding under ESH REIT’s previous term loan facility and the full repayment of ESH REIT’s previous mortgage
loan, net interest expense decreased approximately $10.9 million, or 7.9%, to approximately $127.4 million for the year ended
December 31, 2017 compared to approximately $138.3 million for the year ended December 31, 2016. The Company’s
weighted average interest rate decreased to approximately 4.5% as of December 31, 2017 compared to approximately 4.6% as
of December 31, 2016. The Company’s total debt outstanding decreased to approximately $2.5 billion, net of unamortized
deferred financing costs and debt discounts, as of December 31, 2017, compared to approximately $2.6 billion, net of
unamortized deferred financing costs and debt discounts, as of December 31, 2016.
Income tax expense. Our effective income tax rate increased by approximately 8.3 percentage points to approximately
25.7% for the year ended December 31, 2017 compared to approximately 17.4% for the year ended December 31, 2016. The
Company’s effective tax rate is lower than the federal statutory rate of 35% due to ESH REIT’s status as a REIT under the
provisions of the Code during these periods. The increase in our effective tax rate for the year ended December 31, 2017, is due
to the impact of the TCJA, which was signed into law in December 2017 and caused additional deferred tax expense of
approximately $4.1 million in 2017, as well as benefits recognized in 2016 of approximately $(1.7) million related to a change
in ESH REIT's distribution policy and approximately $(9.4) million related to the reversal of a net deferred tax liability
associated with the Corporation's anticipated receipt of future ESH REIT nontaxable distributions. Also, in 2017, the Company
disposed of substantially all of its Canadian assets, incurring additional current tax expense on the Canadian gain realized upon
disposition of these assets. 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 on its taxable income not distributed.
Comparison of Years Ended December 31, 2016 and December 31, 2015
As of December 31, 2016 and 2015, we owned and operated 629 hotels consisting of approximately 69,400 rooms. In
December 2015, the Company sold a portfolio of 53 hotel properties, 47 of which operated under the Crossland Economy
Studios brand and six of which operated under the Extended Stay America brand. As such, for the period from January 1, 2015
through date of sale, we owned and operated 682 hotels consisting of approximately 76,000 rooms. See Note 4 to the
consolidated financial statements of Extended Stay America, Inc., which are included in Item 8 in this combined annual report
on Form 10-K.
50
The following table presents our consolidated results of operations for the years ended December 31, 2016 and 2015,
including the amount and percentage change in these results between the periods (in thousands):
Revenues:
Room revenues
Other hotel revenues
Total revenues
Operating expenses:
Hotel operating expenses
General and administrative expenses
Depreciation and amortization
Impairment of long-lived assets
Total operating expenses
Gain on sale of hotel properties
Other income
Income from operations
Other non-operating expense
Interest expense, net
Income before income tax expense
Income tax expense
Net income
Net income attributable to noncontrolling interests(1)
Net income attributable to common shareholders
Year Ended December 31,
2015
2016
Change ($)
Change (%)
$
1,250,865
$
1,265,653
$
(14,788)
19,728
1,270,593
19,100
1,284,753
580,772
98,045
221,309
9,828
909,954
—
25
360,664
(1,576)
164,537
197,703
34,351
163,352
(93,420)
604,087
98,625
203,897
9,011
915,620
130,894
45
500,072
2,732
137,782
359,558
76,536
283,022
(169,982)
628
(14,160)
(23,315)
(580)
17,412
817
(5,666)
(130,894)
(20)
(139,408)
(4,308)
26,755
(161,855)
(42,185)
(119,670)
76,562
$
69,932
$
113,040
$
(43,108)
(1.2)%
3.3 %
(1.1)%
(3.9)%
(0.6)%
8.5 %
9.1 %
(0.6)%
n/a
(44.4)%
(27.9)%
(157.7)%
19.4 %
(45.0)%
(55.1)%
(42.3)%
(45.0)%
(38.1)%
(1) Noncontrolling interests in Extended Stay America, Inc. include approximately 44% and 45% of ESH REIT’s common equity as of December 31, 2016
and 2015, respectively, and 125 shares of ESH REIT preferred stock.
The following table presents key operating metrics, including occupancy, ADR, RevPAR, hotel inventory and renovation
displacement data for our hotels for the years ended December 31, 2016 and 2015, respectively:
Number of hotels (as of December 31)
Number of rooms (as of December 31)
Occupancy
ADR
RevPAR
Hotel Inventory (as of December 31)(1):
Renovated Extended Stay America(2)
Unrenovated Extended Stay America and other
Total number of hotels
Renovation Displacement Data (in thousands, except percentages)(2):
Total available room nights
Room nights displaced from renovation
% of available room nights displaced
Year Ended December 31,
2015(3)
2016
629
69,383
74.1%
$66.43
$49.23
584
45
629
25,399
328
1.3%
629
69,383
73.7%
$62.22
$45.89
463
166
629
27,581
363
1.3%
Change
—
—
40 bps
6.8%
7.3%
121
(121)
—
(2,182)
(35)
—
________________________
(1) See “—Liquidity and Capital Resources – Capital Expenditures – Hotel Renovation Program.”
(2)
(3)
Includes three Extended Stay Canada-branded hotels.
In December 2015, the Company sold a portfolio of 53 hotel properties. See Note 4 to the consolidated financial statements of Extended Stay America,
Inc. which are included in Item 8 in this combined annual report on Form 10-K.
51
The following table presents key operating metrics, including occupancy, ADR, RevPAR, hotel inventory and renovation
displacement data of the 629 hotels owned and operated by the Company prior to the 2015 sale for the years ended
December 31, 2016 and 2015, respectively:
Number of hotels (as of December 31)
Number of rooms (as of December 31)
Occupancy of 629 hotel portfolio
ADR of 629 hotel portfolio
RevPAR of 629 hotel portfolio
Inventory of 629 hotel portfolio (1):
Renovated Extended Stay America(2)
Unrenovated Extended Stay America and other
Number of hotels
Renovation Displacement Data of 629 hotel portfolio
(in thousands, except percentages)(1):
Available room nights of 629 hotel portfolio
Room nights displaced from renovation of 629 hotel portfolio
% of available room nights displaced of 629 hotel portfolio
Year Ended December 31,
2015
2016
629
69,383
74.1%
$66.43
$49.23
584
45
629
25,399
328
1.3%
629
69,383
73.7%
$64.24
$47.36
463
166
629
25,325
363
1.4%
Change
—
—
40 bps
3.4%
3.9%
121
(121)
—
74
(35)
(10) bps
________________________
(1) See “—Liquidity and Capital Resources – Capital Expenditures – Hotel Renovation Program.”
(2)
Includes three Extended Stay Canada-branded hotels.
Room revenues. Room revenues decreased by approximately $14.8 million, or 1.2%, to approximately $1,250.9
million for the year ended December 31, 2016 compared to approximately $1,265.7 million for the year ended December 31,
2015, due to the sale of a portfolio of 53 hotel properties in December 2015. For the 629 hotels owned and operated by the
Company prior to the 2015 sale, room revenues increased by approximately $51.4 million or 4.3% primarily due to a 3.4%
increase in ADR and a 40 bps increase in occupancy, resulting in a 3.9% increase in RevPAR. These increases were a result of a
shift in our customer mix to a greater number of high yield, shorter-stay business and leisure guests, the collective impact of our
hotel renovation program and focus on service excellence.
Other hotel revenues. Other hotel revenues increased by approximately $0.6 million, or 3.3%, to approximately $19.7
million for the year ended December 31, 2016 compared to approximately $19.1 million for the year ended December 31, 2015.
For the 629 hotels owned and operated by the Company prior to the 2015 sale, other hotel revenues increased by approximately
$1.8 million, or 10.1%.
Hotel operating expenses. Hotel operating expenses decreased by approximately $23.3 million, or 3.9%, to approximately
$580.8 million for the year ended December 31, 2016 compared to approximately $604.1 million for the year ended
December 31, 2015, due to the sale of a portfolio of 53 hotel properties in December 2015. For the 629 hotels owned and
operated by the Company prior to the 2015 sale, hotel operating expenses increased by approximately $15.4 million, or 2.7%,
due to an increase in personnel expense of approximately $12.2 million, reservation costs of approximately $6.9 million related
to an increase in commissionable bookings through online travel agents, credit card fees of approximately $2.9 million and loss
on disposal of assets of approximately $1.7 million. These increases were partially offset by decreases in repairs and
maintenance expense of approximately $2.6 million, marketing costs of approximately $2.1 million, amenity costs of
approximately $2.0 million and utilities expense of approximately $1.5 million.
General and administrative expenses. General and administrative expenses decreased by approximately $0.6 million, or
0.6%, to approximately $98.0 million for the year ended December 31, 2016 compared to approximately $98.6 million for the
year ended December 31, 2015, mainly driven by a decrease in legal and other professional fees of approximately $3.0 million
as well as decreases in travel and entertainment and relocation costs of approximately $1.1 million. These decreases were
partially offset by an increase in corporate personnel expense of approximately $2.4 million, including equity-based
compensation expense, as well as expenses related to future growth initiatives of approximately $1.3 million.
52
Depreciation and amortization. Depreciation and amortization increased by approximately $17.4 million, or 8.5%, to
approximately $221.3 million for the year ended December 31, 2016 compared to approximately $203.9 million for the year
ended December 31, 2015, which was due to an increase in investment in hotel assets, partially offset by the sale of a portfolio
of 53 hotel properties in December 2015.
Impairment of long-lived assets. Asset impairments are recorded as required based on an evaluation of property and
equipment and intangible assets for impairment. During the years ended December 31, 2016 and 2015, we recognized
impairment charges of approximately $9.8 million and $9.0 million, respectively.
Gain on sale of hotel properties. During the year ended December 31, 2015, we recognized a gain on sale of hotel
properties of approximately $130.9 million related to the sale of a portfolio of 53 hotel properties. No hotel properties were sold
during the year ended December 31, 2016.
Other-non operating (income) expense. During the year ended December 31, 2016, we recognized a non-cash foreign
currency transaction gain of approximately $1.6 million, due to the depreciation of the U.S dollar versus the Canadian dollar at
one of our Canadian currency-based entities which had U.S. dollar denominated debt. This debt was repaid in August 2016.
During the year ended December 31, 2015, we recognized a non-cash foreign currency transaction loss of approximately $2.7
million, due to the appreciation of the U.S. dollar versus the Canadian dollar at one our Canadian currency-based entities which
had U.S. dollar denominated debt.
Interest expense, net. Excluding debt extinguishment costs of approximately $26.2 million incurred during the year ended
December 31, 2016 related to the full repayment of ESH REIT’s previous mortgage loan and ESH REIT's previous term loan
facility, and excluding debt extinguishment costs of approximately $3.0 million incurred during the year ended December 31,
2015 related to the partial repayment of ESH REIT's previous mortgage loan, net interest expense for the year ended December
31, 2016 increased approximately $3.5 million, or 2.6%, to approximately $138.3 million for the year ended December 31,
2016 compared to approximately $134.8 million for the year ended December 31, 2015, primarily due to an increase in the
Company's weighted-average interest rate. The Company’s weighted average interest rate increased to approximately 4.6% as
of December 31, 2016 compared to approximately 4.4% as of December 31, 2015, due to the issuance of an additional $800.0
million of ESH REIT’s 5.25% 2025 Notes (defined below) in March 2016. The Company’s total debt outstanding decreased to
approximately $2.6 billion, net of unamortized deferred financing costs and debt discounts, as of December 31, 2016, compared
to approximately $2.8 billion, net of unamortized deferred financing costs and debt discount, as of December 31, 2015.
Income tax expense. Our effective income tax rate decreased by approximately 3.9 percentage points to approximately
17.4% for the year ended December 31, 2016 compared to approximately 21.3% for the year ended December 31, 2015. The
Company’s effective tax rate is lower than the federal statutory rate of 35% due to ESH REIT’s status as a REIT under the
provisions of the Code during these periods. The decrease in our effective income tax rate for the year ended December 31,
2016 is due to the recognition of an income tax benefit of approximately $(1.7) million with respect to the reversal of net
deferred tax liabilities which related to the previously estimated 5% of taxable income expected to be retained under ESH
REIT's prior 95% distribution policy, which was changed in 2016. In addition, we recognized an income tax benefit of
approximately $(9.4) million with respect to the reversal of a net deferred tax liability associated with the Corporation’s
anticipated receipt of future ESH REIT nontaxable distributions. Further, during the year ended December 31, 2016, the
Company recognized a benefit of approximately $(2.0) million due to a revision of its current income tax payable estimate upon
filing income tax returns. These decreases were partially offset by the reversal of net deferred tax assets related to foreign
currency translation losses that were deemed unrealizable during the year ended December 31, 2016. 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 on its taxable income not distributed.
Results of Operations—ESH REIT
ESH REIT’s sole source of revenues is lease rental revenues and its hotel operating expenses reflect only those hotel
operating expenses incurred directly related to hotel ownership. Administrative service costs reimbursed to ESA Management
are included as a component of general and administrative expenses.
Comparison of Years Ended December 31, 2017 and December 31, 2016
As of December 31, 2016, ESH REIT owned and leased 629 hotels consisting of approximately 69,400 rooms. In 2017,
ESH REIT sold three Extended Stay Canada-branded hotels and two additional hotels. As a result, as of December 31, 2017,
53
ESH REIT owned and leased 624 hotels, consisting of approximately 68,600 rooms. See Note 4 to the consolidated financial
statements of ESH Hospitality, Inc., which are included in Item 8 in this combined annual report on Form 10-K.
The following table presents ESH REIT’s consolidated results of operations for the years ended December 31, 2017 and
2016, including the amount and percentage change in these results between the periods (in thousands):
Revenues - Rental revenues from Extended Stay
America, Inc.
Operating expenses:
Hotel operating expenses
General and administrative expenses
Depreciation
Impairment of long lived assets
Total operating expenses
Gain on sale of hotel properties, net
Other income
Income from operations
Other non-operating income
Interest expense, net
Income before income tax expense
Income tax expense
Net income
Year Ended December31,
2016
2017
Change ($)
Change (%)
$
683,500
$
694,275
$
(10,775)
(1.6)%
90,495
14,801
225,484
15,046
345,826
8,562
673
346,909
(227)
130,923
216,213
1,229
89,166
14,264
216,394
—
319,824
—
5
1,329
537
9,090
15,046
26,002
8,562
668
374,456
(27,547)
(1,245)
1,018
163,443
212,258
51
(32,520)
3,955
1,178
2,777
1.5 %
3.8 %
4.2 %
n/a
8.1 %
n/a
13,360.0 %
(7.4)%
(81.8)%
(19.9)%
1.9 %
2,309.8 %
1.3 %
$
214,984
$
212,207
$
Rental revenues from Extended Stay America, Inc. Rental revenues decreased by approximately $10.8 million, or 1.6%, to
approximately $683.5 million for the year ended December 31, 2017 compared to approximately $694.3 million for the year
ended December 31, 2016. The decrease in rental revenues was partly due to a decrease in fixed minimum rents related to the
sale of five hotels during the year. Additionally, percentage rental revenues decreased by approximately $6.8 million to
approximately $222.3 million during the year ended December 31, 2017 from approximately $229.1 million during the year
ended December 31, 2016.
Hotel operating expenses. Hotel operating expenses increased by approximately $1.3 million, or 1.5%, to approximately
$90.5 million for the year ended December 31, 2017 compared to approximately $89.2 million for the year ended December 31,
2016. This increase was due to an increase in real estate tax expense of approximately $5.0 million, partially offset by a
decrease in loss on disposal of assets of approximately $2.1 million and property insurance claims of approximately $1.1
million.
General and administrative expenses. General and administrative expenses increased by approximately $0.5 million, or
3.8%, to approximately $14.8 million for the year ended December 31, 2017 compared to approximately $14.3 million for the
year ended December 31, 2016. The increase was due to an increase in consulting and other professional fees of approximately
$0.6 million, partially offset by a decrease in reimbursable costs of approximately $0.3 million to ESA Management for
administrative services performed on ESH REIT’s behalf.
Depreciation. Depreciation increased by approximately $9.1 million, or 4.2%, to approximately $225.5 million for the
year ended December 31, 2017 compared to approximately $216.4 million for the year ended December 31, 2016, due to an
increase in investment in hotel assets.
Impairment of long-lived assets. Asset impairments are recorded as required based on an evaluation of property and
equipment and intangible assets for impairment. During the year ended December 31, 2017, ESH REIT recognized impairment
charges of approximately $15.0 million related to its three Extended Stay Canada-branded hotels sold in May 2017. No
impairment charges were recognized during the year ended December 31, 2016.
54
Gain on sale of hotel properties, net. During the year ended December 31, 2017, ESH REIT recognized a gain on sale of
hotel properties of approximately $11.8 million related to the sale of one hotel, partially offset by a loss on sale of
approximately $1.8 million related to the sale of a second hotel and a loss on sale of approximately $1.5 million related to the
sale of three Extended Stay Canada-branded hotels. No hotel properties were sold during the year ended December 31, 2016.
Other-non operating income. During the year ended December 31, 2017, ESH REIT recognized a non-cash foreign
currency transaction gain of approximately $0.5 million, partially offset by non-cash charges related to its interest rate swap of
approximately $0.3 million. During the year ended December 31, 2016, ESH REIT recognized a non-cash foreign currency
transaction gain of approximately $1.2 million related to the depreciation of the U.S dollar versus the Canadian dollar at its
Canadian subsidiary.
Interest expense, net. Excluding debt modification costs of approximately $2.4 million incurred during the year ended
December 31, 2017, related to the repricing of ESH REIT's senior secured term loan facility and excluding debt extinguishment
costs of approximately $26.2 million incurred during the year ended December 31, 2016, related to the full repayment of the
balance outstanding under ESH REIT's previous term loan facility and the full repayment of ESH REIT's previous mortgage
loan, net interest expense decreased approximately $8.6 million, or 6.3%, to approximately $128.6 million for the year ended
December 31, 2017 compared to approximately $137.2 million for the year ended December 31, 2016. ESH REIT's weighted
average interest rate decreased to approximately 4.5% as of December 31, 2017 compared to approximately 4.6% as of
December 31, 2016. ESH REIT's total debt outstanding decreased to approximately $2.5 billion, net of unamortized deferred
financing costs and debt discounts, as of December 31, 2017, compared to approximately $2.6 billion, net of unamortized
deferred financing costs and debt discounts, as of December 31, 2016.
Income tax expense. ESH REIT's effective income tax rate increased by approximately 0.5 percentage points to
approximately 0.6% for the year ended December 31, 2017 compared to approximately 0.1% for the year ended December 31,
2016. ESH REIT's effective tax rate is lower than the federal statutory rate of 35% due to its status as a REIT under the
provisions of the Code during these periods. The increase is due to the sale of Canadian assets in 2017, which triggered a gain
during the period and resulted in a Canadian income tax obligation. In addition, during the year ended December 31, 2016, a
benefit of approximately $2.4 million was recognized due to the reversal of net deferred tax liabilities related to a change in
ESH REIT's distribution policy.
Comparison of Years Ended December 31, 2016 and December 31, 2015
As of December 31, 2016 and 2015, ESH REIT owned and leased 629 hotels consisting of approximately 69,400 rooms.
In December 2015, ESH REIT sold a portfolio of 53 hotels. As such, for the period from January 1, 2015 through the date of
sale, ESH REIT owned and leased 682 hotels consisting of approximately 76,000 rooms. See Note 4 to the consolidated
financial statements of ESH Hospitality Inc., which are included in Item 8 in this combined annual report on Form 10-K.
55
The following table presents ESH REIT’s consolidated results of operations for the years ended December 31, 2016 and
2015, including the amount and percentage change in these results between the periods (in thousands):
Revenues - Rental revenues from Extended Stay
America, Inc.
Operating expenses:
Hotel operating expenses
General and administrative expenses
Depreciation
Total operating expenses
Gain on sale of hotel properties
Other income
Income from operations
Other non-operating (income) expense
Interest expense, net
Income before income tax expense
Income tax expense
Net income
Year Ended December 31,
2015
2016
Change ($)
Change (%)
$
694,275
$
719,635
$
(25,360)
(3.5)%
89,166
14,264
216,394
319,824
—
5
374,456
(1,245)
163,443
212,258
51
97,062
15,973
199,044
312,079
116,616
37
(7,896)
(1,709)
17,350
7,745
(116,616)
(32)
524,209
(149,753)
2,726
134,780
386,703
8,519
(3,971)
28,663
(174,445)
(8,468)
$
212,207
$
378,184
$
(165,977)
(8.1)%
(10.7)%
8.7 %
2.5 %
n/a
(86.5)%
(28.6)%
(145.7)%
21.3 %
(45.1)%
(99.4)%
(43.9)%
Rental revenues from Extended Stay America, Inc. Rental revenues decreased by approximately $25.4 million, or 3.5%, to
approximately $694.3 million for the year ended December 31, 2016 compared to approximately $719.6 million for the year
ended December 31, 2015. Rental revenues consist of fixed minimum rental payments recognized on a straight-line basis over
the terms of the lease plus specified percentages of total hotel revenues over designated thresholds. Percentage rental revenues
of approximately $229.1 million and $228.8 million were recognized during the years ended December 31, 2016 and 2015,
respectively. The decrease in rental revenues was due to the sale of 53 hotels in December 2015, partially offset by the
improved performance of the leased hotels and the depreciation of the U.S dollar relative to the Canadian dollar during the year
ended December 31, 2016.
Hotel operating expenses. Hotel operating expenses decreased by approximately $7.9 million, or 8.1%, to approximately
$89.2 million for the year ended December 31, 2016 compared to approximately $97.1 million for the year ended December 31,
2015. The decrease was due to the sale of the 53 hotel properties in December 2015, partially offset by an increase in loss on
disposal of assets of approximately $1.5 million as a result of ESH REIT’s hotel renovation program.
General and administrative expenses. General and administrative expenses decreased by approximately $1.7 million, or
10.7%, to approximately $14.3 million for the year ended December 31, 2016 compared to approximately $16.0 million for the
year ended December 31, 2015. The decrease was mainly due to a decrease in equity-based compensation expense of
approximately $1.0 million as well as decreases in reimbursable costs of approximately $0.7 million to ESA Management for
administrative services performed on ESH REIT’s behalf and other service charges and fees of approximately $0.5 million.
These decreases were partially offset by an increase in expenses related to future growth initiatives of approximately $0.6
million.
Depreciation. Depreciation increased by approximately $17.4 million, or 8.7%, to approximately $216.4 million for the
year ended December 31, 2016 compared to approximately $199.0 million for the year ended December 31, 2015. The increase
in depreciation was due to an increase in investment in hotel assets as a result of ESH REIT's hotel renovation program,
partially offset by the sale of the 53 hotels in December 2015.
Gain on sale of hotel properties. During the year ended December 31, 2015, ESH REIT recognized a gain on sale of hotel
properties of approximately $116.6 million, which related to the sale of 53 hotels. No hotel properties were sold during the year
ended December 31, 2016.
Other-non operating (income) expense. During the year ended December 31, 2016, ESH REIT recognized a non-cash
foreign currency transaction gain of approximately $1.2 million related to the depreciation of the U.S dollar versus the
Canadian dollar at one of its Canadian currency-based entities which had U.S. dollar denominated debt. The debt was repaid in
56
August 2016. During the year ended December 31, 2015, ESH REIT recognized a non-cash foreign currency transaction loss of
approximately $2.7 million related to the appreciation of the U.S. dollar versus the Canadian dollar at one of its Canadian
currency-based entities which had U.S. dollar denominated debt.
Interest expense, net. Excluding debt extinguishment costs of approximately $26.2 million incurred during the year ended
December 31, 2016 related to the full repayment of ESH REIT's previous mortgage loan and ESH REIT's previous term loan
facility, and excluding debt extinguishment costs of approximately $3.0 million incurred during the year ended December 31,
2015 related to the partial repayment of ESH REIT's previous mortgage loan, net interest expense for the year ended December
31, 2016 increased approximately $5.4 million, or 4.1%, to approximately $137.2 million for the year ended December 31,
2016 compared to approximately $131.8 million for the year ended December 31, 2015, primarily due to the increase in ESH
REIT's weighted average interest rate. ESH REIT's weighted average interest rate increased to approximately 4.6% as of
December 31, 2016 compared to approximately 4.4% as of December 31, 2015, due to the issuance of an additional $800.0
million of ESH REIT’s 5.25% 2025 Notes in March 2016. ESH REIT's total debt outstanding decreased to approximately $2.6
billion, net of unamortized deferred financing costs and debt discounts, as of December 31, 2016, compared to approximately
$2.8 billion, net of unamortized deferred financing costs and debt discount, as of December 31, 2015.
Income tax expense. ESH REIT's effective income tax rate decreased by approximately 2.1 percentage points to
approximately 0.1% for the year ended December 31, 2016 compared to approximately 2.2% for the year ended December 31,
2015. ESH REIT's effective tax rate is lower than the federal statutory rate of 35% due to it’s status as a REIT under the
provisions of the Code during these periods. The decrease in ESH REIT’s effective income tax rate for the year ended
December 31, 2016 is due to the recognition of an income tax benefit of approximately $(2.3) million with respect to the
reversal of net deferred tax liabilities which related to the previously estimated 5% of taxable income expected to be retained
under ESH REIT's prior 95% distribution policy, which was changed in 2016. This decrease was partially offset by the reversal
of net deferred tax assets related to foreign currency translation losses that were deemed unrealizable during the year ended
December 31, 2016. ESH REIT intends to distribute its taxable income to the extent necessary to optimize its tax efficiency
including, but not limited to, maintaining its status as a REIT, while retaining sufficient capital for its ongoing needs. ESH
REIT will incur federal and state income tax at statutory rates on its taxable income not distributed.
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 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 hotel-level profitability, specifically 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 hotel revenues.
We define Hotel Operating Profit as the sum of room and other hotel revenues less hotel operating expenses (excluding
loss on disposal of assets) and Hotel Operating Margin as the ratio of Hotel Operating Profit divided by total hotel revenues.
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 Company only.
57
The following table provides a reconciliation of room revenues, other hotel revenues and hotel operating expenses
(excluding loss on disposal of assets) to Hotel Operating Profit and Hotel Operating Margin for the Company for the years ended
December 31, 2017, 2016 and 2015 (in thousands):
Room revenues
Other hotel revenues
Total hotel revenues
Hotel operating expenses (1)
Hotel Operating Profit
Hotel Operating Margin
2017
Year Ended December 31,
2016
2015
1,260,868
$
1,250,865
$
1,265,653
21,857
1,282,725
576,938
19,728
1,270,593
570,032
705,787
$
700,561
$
19,100
1,284,753
594,788
689,965
55.0%
55.1%
53.7%
$
$
________________________
(1) Excludes loss on disposal of assets of approximately $8.6 million, $10.7 million, and $9.3 million, respectively.
EBITDA and Adjusted EBITDA
EBITDA is defined as net income excluding: (1) net interest expense; (2) income tax expense; and (3) depreciation and
amortization. EBITDA is a commonly used measure of performance in many industries. The Company believes that EBITDA
provides useful information to investors regarding our operating performance as it helps us and investors evaluate the ongoing
performance of our hotels 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 common 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:
• Non-cash equity-based compensation—We exclude non-cash charges related to equity-based compensation expense
with respect to awards issued under long-term incentive compensation plans to employees and directors.
• Other non-operating (income) expense —We exclude the effect of other non-operating income or expense, as we
believe non-cash gains and losses on interest rate hedges or other derivatives and foreign currency transaction gains or
losses are not reflective of ongoing or future operating performance.
•
•
Impairment of long-lived assets—We exclude the effect of impairment losses recorded on property and equipment and
intangible assets, as we believe they are not reflective of ongoing or future operating performance.
(Gain) loss on sale of hotel properties, net—We exclude the net gain or loss on sale of hotel properties, as we believe
it is not reflective of ongoing or future operating performance.
• Other expenses—We exclude the effect of expenses that we do not consider reflective of ongoing or future operating
performance including the following: loss on disposal of assets, costs incurred in connection with secondary offerings
and preparation of registration statements and transaction costs associated with the sale of hotel properties.
EBITDA and Adjusted EBITDA as presented may not be comparable to similar measures calculated by other companies.
This information should not be considered as an alternative to net income of the Company, net income of the Corporation, net
income of 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.
58
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 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, 2017, 2016 and 2015 (in thousands):
Net income
Interest expense, net
Income tax expense
Depreciation and amortization
EBITDA
Non-cash equity-based compensation
Other non-operating (income) expense
Impairment of long-lived assets
Gain on sale of hotel properties, net
Other expenses
Adjusted EBITDA
$
2017
Year Ended December 31,
2016
2015
$
172,188
129,772
59,514
229,216
590,690
7,552
(399) (1)
25,169
(9,973)
9,866 (4)
$
163,352
164,537
34,351
221,309
583,549
12,000
(1,576) (2)
9,828
—
11,857 (5)
283,022
137,782
76,536
203,897
701,237
10,500
2,732 (3)
9,011
(130,894)
10,495 (6)
$
622,905
$
615,658
$
603,081
________________________
(1)
(2)
(3)
(4)
Includes foreign currency transaction gain of approximately $0.7 million and loss related to interest rate swap of approximately $0.3 million.
Includes foreign currency transaction gain of approximately $1.6 million.
Includes foreign currency transaction loss of approximately $2.7 million.
Includes loss on disposal of assets of approximately $8.6 million, costs incurred in connection with 2017 secondary offerings of approximately $1.1 million
and transaction costs of approximately $0.2 million due to the revision of an estimate related to the sale of three hotel properties in 2017.
Includes loss on disposal of assets of approximately $10.7 million, costs incurred in connection with 2016 secondary offerings of approximately $1.1
million and transaction costs of approximately $0.1 million due to the revision of an estimate related to the sale of a portfolio of 53 hotel properties in 2015.
Includes loss on disposal of assets of approximately $9.3 million, costs incurred in connection with the preparation of a registration statement filed in 2015
and a 2015 secondary offering of approximately $0.9 million and transaction costs of approximately $0.3 million related to the sale of a portfolio of 53
hotel properties in 2015.
(5)
(6)
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 or loss (computed in accordance with U.S. GAAP), excluding gains or
losses from sales of real estate, impairment charges, the cumulative effect of changes in accounting principles, plus real estate
related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures following the
same approach. FFO is a commonly used measure among other hotel and/or real estate companies that include a REIT as a part
of their legal entity structure. Since real estate depreciation and amortization, impairment of long-lived assets and gains or losses
from sales of hotel properties are dependent upon 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 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
59
REIT’s charters, shares of common stock of the Corporation and shares of Class B common stock of ESH REIT are transferrable
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 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.
•
(Gain) loss on derivatives— We exclude non-cash gains or losses on interest rate hedges and other derivatives as we
believe they are not reflective of our ongoing or future operating performance.
Adjusted FFO per diluted Paired Share is defined as Adjusted FFO divided by the weighted average number of Paired
Shares outstanding on a diluted basis. Until such time as the number of outstanding common shares of the Corporation and Class
B common shares of ESH REIT differ, we believe Adjusted FFO per diluted Paired Share is useful to investors, as it represents a
measure of the economic risks and rewards related to an investment in our Paired Shares.
FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share as presented may not be comparable to similar
measures calculated by other REITs or real estate companies that include a REIT as part of their legal entity structure. In
particular, due to the fact that we present these measures for the Company on a consolidated basis, FFO, Adjusted FFO and
Adjusted FFO per diluted Paired Share, may be of limited use to investors comparing our results only to REITs. This information
should not be considered as an alternative to net income of the Company, net income of the Corporation, net income of 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.
FFO, Adjusted FFO and Adjusted FFO per 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 most
useful for the consolidated Company only.
60
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, 2017, 2016 and 2015 (in thousands, except per Paired Share data):
Year Ended December 31,
2016
2017
Net income per Extended Stay America, Inc. common share - diluted
$
0.41
Net income attributable to Extended Stay America, Inc. common shareholders $
Noncontrolling interests attributable to Class B common shares of ESH REIT
Real estate depreciation and amortization
Impairment of long-lived assets
Gain on sale of hotel properties, net
Tax effect of adjustments to net income attributable to Extended Stay
America, Inc. common shareholders
FFO
Debt modification and extinguishment costs
Loss on interest rate swap
Tax effect of adjustments to FFO
Adjusted FFO
Adjusted FFO per Paired Share - diluted
Weighted Average Paired Shares outstanding - diluted
$
$
78,847
93,325
224,559
25,169
(9,973)
(56,883)
355,044
2,351
314
(639)
357,070
1.84
193,670
$
$
$
$
0.35
69,932
93,404
216,950
9,828
—
(50,728)
339,386
26,233
—
(6,286)
359,333
1.79
200,736
$
$
$
$
2015
0.55
113,040
169,966
199,857
9,011
(130,894)
(24,449)
336,531
3,014
—
(622)
338,923
1.66
204,567
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 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 transferrable and tradable
only in combination as units, each unit consisting of one share of the Corporation’s common stock and one share of ESH REIT
Class B common stock. As a result, we believe that Paired Share Income, Adjusted Paired Share Income and Adjusted Paired
Share Income per diluted Paired Share represent useful measures to holders of our Paired Shares.
Paired Share Income is defined as the sum of net income attributable to Extended Stay America, Inc. common shareholders
and noncontrolling interests attributable to Class B common shares of ESH REIT. Adjusted Paired Share Income is defined as
Paired Share Income adjusted for items that, net of income taxes, we believe are not reflective of ongoing or future operating
performance. We adjust Paired Share Income for the following items, net of income taxes, where applicable for each period
presented, and refer to this measure as Adjusted Paired Share Income: debt modification and extinguishment costs, other non-
operating (income) expense (including gain or loss on interest rate hedges or other derivatives and foreign currency transaction
gain or loss), impairment of long-lived assets, (gain) loss on sale of hotel properties and other expenses, such as loss on disposal
of assets, costs incurred in connection with secondary offerings and transaction costs associated with the sale of hotel properties.
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
61
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 lease rental revenues on a straight-line basis, and may not reflect how cash flows are generated
on an individual entity or a total enterprise basis. Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share
Income per diluted Paired Share should not be considered as an alternative to net income of the Company, net income of the
Corporation, net income of 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.
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, 2017, 2016 and 2015 (in thousands, except per Paired Share data):
Net income per Extended Stay America, Inc. common share - diluted
Net income attributable to Extended Stay America, Inc. common
shareholders
Noncontrolling interests attributable to Class B common shares of
ESH REIT
Paired Share Income
Debt modification and extinguishment costs
Other non-operating (income) expense
Impairment of long-lived assets
Gain on sale of hotel properties, net
Other expenses
Tax effect of adjustments to Paired Share Income
Adjusted Paired Share Income
Adjusted Paired Share Income per Paired Share – diluted
Weighted average Paired Shares outstanding – diluted
Year Ended December 31,
2017
2016
2015
0.41
78,847
93,325
172,172
2,351
(399) (1)
25,169
(9,973)
9,866 (4)
(6,241)
192,945
1.00
193,670
$
$
$
$
0.35
69,932
93,404
163,336
26,233
(1,576) (2)
9,828
—
11,857 (5)
(10,671)
199,007
0.99
200,736
$
$
$
$
0.55
113,040
169,966
283,006
3,014
2,732
9,011
(130,894)
10,495
17,335
194,699
0.95
204,567
(3)
(6)
$
$
$
$
________________________
(1)
(2)
(3)
(4)
Includes foreign currency transaction gain of approximately $0.7 million and loss related to interest rate swap of approximately $0.3 million.
Includes foreign currency transaction gain of approximately $1.6 million.
Includes foreign currency transaction loss of approximately $2.7 million.
Includes loss on disposal of approximately $8.6 million, costs incurred in connection with 2017 secondary offerings of approximately $1.1 million and
transaction costs of approximately $0.2 million due to the revision of an estimate related to the sale of the three hotel properties in 2017.
Includes loss on disposal of assets of approximately $10.7 million, costs incurred in connection with 2016 secondary offerings of approximately $1.1
million and transaction costs of approximately $0.1 million due to the revision of an estimate related to the sale of a portfolio of 53 hotel properties in 2015.
Includes loss on disposal of assets of approximately $9.3 million, costs incurred in connection with the preparation of a registration statement filed in 2015
and a 2015 secondary offering of approximately $0.9 million and transaction costs of approximately $0.3 million related to the sale of a portfolio of 53
hotel properties in 2015.
(5)
(6)
Inflation
We do not believe that inflation had a material effect on our business during the years ended December 31, 2017, 2016 or
2015. Although we believe that increases in the rate of inflation will generally result in comparable increases in hotel room
rates, severe inflation could contribute to a slowing of the national economy. Such a slowdown could result in a reduction in
room rates and fewer room reservations, negatively impacting our revenues and net income.
Liquidity and Capital Resources
62
Company Overview
On a consolidated basis, we have historically generated significant cash flow from operations and have financed our
ongoing business primarily with existing cash, cash flow generated from operations and in certain instances, proceeds from
asset dispositions. We generated cash flow from operations of approximately $444.2 million for the year ended December 31,
2017.
Our current liquidity requirements consist primarily of funds necessary to pay for or fund (i) hotel operating expenses, (ii)
recurring maintenance and capital expenditures necessary to maintain our hotels, (iii) investments in franchise and other fee
programs with respect to third party franchisees or other hotel owners, (iv) general and administrative expenses, (v), interest
expense, (vi) income taxes, (vii) Paired Share repurchases, (viii) Corporation distributions and required ESH REIT
distributions, and (ix) certain phases of our growth and other strategic initiatives (See "Overview"). We expect to fund our
current liquidity requirements from a combination of cash on hand, cash flow generated from operations, borrowings under our
revolving credit facilities, as needed, and in certain instances proceeds from asset dispositions.
Long-term liquidity requirements consist of funds necessary to (i) complete future hotel renovations, (ii) repurpose and/or
rebuild certain hotels (iii) construct new hotels, (iv) acquire additional hotel properties and/or other lodging companies, (v)
complete certain phases of our growth and other strategic initiatives, and (vi) refinance (including prior to or in connection with
debt maturity payments) ESH REIT’s 2016 Term Facility due in 2023 and ESH REIT's 5.25% senior notes due in 2025 (the
"2025 Notes") maturing in August 2023 and May 2025, respectively. See Note 7 to the consolidated financial statements of
Extended Stay America, Inc. and Note 6 to the consolidated financial statements of ESH Hospitality, Inc., both of which are
included in Item 8 in 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 of its debt on attractive
terms at or before maturity, on commercially reasonable terms or at all, or the timing of any such refinancing. We expect to
meet our long-term liquidity requirements through various sources of capital, including future debt financings or equity
issuances by the Corporation and/or ESH REIT, existing working capital, cash flow generated from operations and in certain
instances proceeds from asset dispositions. However, 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, our degree
of leverage, the value of our unencumbered assets and borrowing restrictions imposed by existing or prospective lenders,
general market conditions for the lodging industry, our operating performance and liquidity and market perceptions about us.
The success of our business strategies will depend, in part, on our ability to access these various capital sources. There can be
no assurance that we will be able to raise any such financing on terms acceptable to us or at all.
The Company had unrestricted cash and cash equivalents of approximately $113.3 million at December 31, 2017. Based
upon the current level of operations, management believes that our cash flow from operations, together with our cash balances
and available borrowings under our revolving credit facilities, will be adequate to meet our anticipated funding requirements
and business objectives for the foreseeable future. We regularly review our capital and corporate structure and at any time may
refinance or repay existing indebtedness, incur new indebtedness or purchase debt or equity securities.
In November 2017, ESH REIT entered into an amendment to the ESH REIT 2016 Term Facility, as amended, with the
lenders thereunder (such amendment, the “Second Repricing Amendment”). The Second Repricing Amendment had the
following impact on the ESH REIT 2016 Term Facility: (i) decreased the interest rate spread on term loans based on LIBOR
rate from (a) 2.50% to 2.00% 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”), and (b) 2.50% to 2.25% for any period other than a Level 1 Period; (ii) decreases the interest rate spread on base rate
term loans from (a) 1.50% to 1.00% during a Level 1 Period, and (b) 1.50% to 1.25% for any period other than a Level 1
Period; and (iii) extended the 1.00% prepayment penalty for refinancings in connection with certain repricing transactions
through May 21, 2018 (prepayments made after May 21, 2018 are not subject to a prepayment penalty, other than customary
“breakage” costs). The ESH REIT 2016 Term Facility was previously amended in March 2017 (such amendment, the
"Repricing Amendment"). The Repricing Amendment decreased the interest rate spread on LIBOR based loans from 3.0% to
2.5% and removed the floor of 0.75% on LIBOR based loans.
In June 2017, the Corporation repurchased 14,069 of 21,202 outstanding shares of 8.0% voting preferred stock
outstanding from our Sponsors at par value, or approximately $14.1 million. The repurchased shares included all
preferred stock held by funds or affiliates of Centerbridge Partners, L.P. and The Blackstone Group L.P.; funds or affiliates of
Paulson & Co. Inc., a Sponsor, hold 7,036 of the remaining 7,133 shares of 8.0% voting preferred stock outstanding.
On or after November 15, 2018, a holder of the 8.0% voting preferred stock has the right to require the Corporation to redeem
63
in cash the 8.0% voting preferred stock at $1,000 per share plus any accumulated unpaid dividends. On November 15, 2020,
the Corporation shall mandatorily redeem all of the 8.0% voting preferred stock at $1,000 per share plus any accumulated
unpaid dividends.
In August 2016, ESH REIT entered into a credit agreement providing for senior secured credit facilities (collectively,
the "2016 ESH REIT Credit Facilities,”) consisting of a $1,300.0 million senior secured term loan facility (the “2016 Term
Facility”) and a $350 million senior secured revolving credit facility (the “2016 ESH REIT Revolving Credit Facility”). ESH
REIT borrowed $1,300.0 million at 99.5% of par value under the 2016 Term Facility and $50.0 million under the 2016 ESH
REIT Revolving Credit Facility upon closing. Also in August 2016, the Corporation and ESH REIT entered into an agreement
providing for an unsecured intercompany credit facility (the "Unsecured Intercompany Facility"), under which ESH REIT
borrowed $75.0 million from the Corporation upon closing of the facility. ESH REIT used the proceeds from the 2016 Term
Facility, the 2016 ESH REIT Revolving Credit Facility and the Unsecured Intercompany Facility, together with cash on hand,
to fully repay the outstanding balance under ESH REIT's previous mortgage loan. As of December 31, 2017, ESH REIT had
repaid approximately $16.2 million of the outstanding balance on the 2016 Term Facility and had repaid the full balance
outstanding on both the Unsecured Intercompany Facility and the 2016 ESH REIT Revolving Credit Facility. For a description
of the 2016 ESH REIT Credit Facilities, the Unsecured Intercompany Facility and the Corporation revolving credit facility, see
Note 7 to the consolidated financial statements of Extended Stay America, Inc. and Note 6 to the consolidated financial
statements of ESH Hospitality, Inc., both of which are included in Item 8 in this combined annual report on Form 10-K.
In March 2016, ESH REIT issued $800.0 million of additional 2025 Notes at 98.5% par value. ESH REIT received net
proceeds of approximately $772.8 million which, together with cash on hand, were used to fully repay the balance outstanding
under its previous term loan facility and repay a portion of the outstanding balance under its previous mortgage loan. For a
description of the 2025 Notes, see Note 7 to the consolidated financial statements of Extended Stay America, Inc. and Note 6 to
the consolidated financial statements of ESH Hospitality, Inc., both of which are included in Item 8 in this combines annual
report on Form 10-K.
In December 2015, the Boards of Directors of the Corporation and ESH REIT authorized a combined Paired Share
repurchase program for up to $100 million of Paired Shares. In February 2016, the Boards of Directors of the Corporation and
ESH REIT authorized an increase of the combined Paired Share repurchase program from up to $100 million to up to $200
million of Paired Shares. In December 2016, the Boards of Directors of the Corporation and ESH REIT authorized an increase
of the combined Paired Share repurchase program from up to $200 million to up to $300 million of Paired Shares and extended
the maturity date of the program through December 31, 2017, each effective January 1, 2017. In January 2018, the Boards of
Directors of the Corporation and ESH REIT authorized an extension of the maturity date of the Paired Share repurchase
program through December 31, 2018, each effective January 1, 2018. In February 2018, the Boards of Directors of the
Corporation and ESH REIT authorized an increase to the amount of the combined Paired Share repurchase program from up to
$300 million to up to $400 million of Paired Shares, which expires on December 31, 2018. 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, 2017, the Corporation and ESH REIT repurchased and retired their
respective portion of approximately 13.0 million Paired Shares for approximately $202.2 million. Subsequent to December 31,
2017, the Corporation and ESH REIT repurchased and retired their respective portion of 1.0 million additional Paired Shares
for approximately $19.5 million. As of February 23, 2018, approximately $178.5 million is remaining under the Paired Share
repurchase program.
Distributions. On February 27, 2018, the Board of Directors of ESH REIT declared a cash distribution of $0.15 per Class
A and Class B common share for the fourth quarter of 2017. Additionally, the Board of Directors of the Corporation declared a
cash distribution of $0.06 per common share for the fourth quarter of 2017. These distributions, which total $0.21 per Paired
Share, will be payable on March 27, 2018 to shareholders of record as of March 13, 2018.
64
The following table outlines distributions declared or paid during the years ended December 31, 2017, 2016 and 2015:
Declaration
Date
Record Date
Date Paid
ESH REIT
Distribution
Corporation
Distribution
Total
Distribution
2017
2016
2015
11/7/2017
11/21/2017
12/5/2017
8/1/2017
8/15/2017
8/29/2017
4/27/2017
2/28/2017
5/11/2017
5/25/2017
3/14/2017
3/28/2017
10/25/2016
11/8/2016
11/22/2016
7/28/2016
4/26/2016
2/23/2016
8/11/2016
8/25/2016
5/10/2016
5/24/2016
3/8/2016
3/22/2016
12/10/2015
1/4/2016
1/18/2016
10/27/2015
11/10/2015
11/24/2015
7/30/2015
4/30/2015
2/26/2015
8/13/2015
8/27/2015
5/14/2015
5/28/2015
3/12/2015
3/26/2015
$0.10
$0.14
$0.14
$0.15
$0.03
$0.10
$0.15
$0.15
$0.19
$0.15
$0.15
$0.15
$0.15
________________________
(1) Special Distribution.
$0.11
$0.07
$0.07
$0.04
$0.16
$0.09
$0.04
$0.02
$0.06
$0.02
$0.02
$0.02
$—
$0.21
$0.21
$0.21
$0.19
$0.19
$0.19
$0.19
$0.17
$0.25
$0.17
$0.17
$0.17
$0.15
(1)
In the future, we intend to maintain or increase our current distribution of $0.21 per Paired Share per quarter unless our
consolidated results of operations, net income, Adjusted EBITDA, liquidity, cash flows, financial condition or prospects,
economic conditions or other factors differ materially from our current assumptions. We intend to make a significant portion of
our expected total annual 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, the expected Paired Share distributions may be completed, as they have in prior
periods, through distributions in respect of the common stock of the Corporation using funds distributed to the Corporation in
respect of the Class A common stock of ESH REIT, after allowance for tax, if any, on those funds. For the year ended
December 31, 2017, 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 “Market for Registrants’
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Distribution Policies” which is
included in Item 8 in this combined annual report on Form 10-K, for a description of our distribution policies.
The Corporation
The Corporation’s primary source of liquidity is distribution income it receives in respect of its ownership of 100% of the
Class A common stock of ESH REIT, which as of December 31, 2017, represents approximately 57% of outstanding common
stock of ESH REIT. Other sources of liquidity include income from the operations of the Operating Lessees, ESA Management
and ESH Strategies.
In August 2016, the Corporation loaned $75.0 million to ESH REIT under an unsecured intercompany credit facility (the
"Unsecured Intercompany Facility"). As of December 31, 2017, the outstanding balance under the Unsecured Intercompany
Facility was $0. Subject to certain conditions, the Corporation may loan up to an additional $300.0 million to ESH REIT under
the Unsecured Intercompany Facility. See Notes 7 and 16 to the consolidated financial statements of Extended Stay America,
Inc. and Notes 6 and 11 to the consolidated financial statements of ESH Hospitality, Inc., both of which are included in Item 8
in this combined annual report on Form 10-K, for additional detail on the Unsecured Intercompany 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) interest expense on its outstanding 8.0% voting preferred
stock, (iv) income taxes, (v) investments in its franchise and other fee programs with respect to third party franchisees or other
hotel owners, (vi) Paired Share repurchases, and (vii) Corporation distributions. The Corporation expects to
fund its current liquidity requirements from a combination of cash on hand, cash flow generated from operations (including
65
distribution income it receives in respect of its ownership of 100% of the Class A common stock of ESH REIT) and borrowings
under its revolving credit facility, as needed. The Corporation’s long-term liquidity requirements will also include the
repayment of any outstanding amounts under its revolving credit facility and the repayment of its 8.0% voting preferred stock
outstanding, the total par value of which is approximately $7.1 million. See Notes 7 and 9 to the consolidated financial
statements of Extended Stay America, Inc., which are included in Item 8 in this combined annual report on Form 10-K, for
additional detail on the Corporation’s debt obligations.
As discussed above, the Corporation’s primary source of liquidity is distribution income it receives in respect of its
ownership of the Class A common stock of ESH REIT. As a result of the TCJA signed into law in December 2017, the
Corporation will be 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). The Corporation expects that it would have paid between $17 million
and $19 million less in federal income tax for the fiscal year ended December 31, 2017. In the future, the Corporation
anticipates that these tax savings will allow it to fund current and long-term liquidity requirements.
The Corporation is expected to continue to pay distributions on its common stock to meet a portion of our expected
distribution rate on our Paired Shares. The Corporation's ability to pay distributions is dependent upon its results of operations,
net income, liquidity, cash flows, financial condition or prospects, economic conditions, the ability to effectively execute
certain tax planning strategies, compliance with applicable law, the receipt of distributions from ESH REIT in respect of the
Class A common stock, level of indebtedness, capital requirements, contractual restrictions, restrictions in any existing and
future debt agreements of the Corporation and ESH REIT and other factors. The payment of distributions in the future will be at
the discretion of the Corporation’s Board of Directors.
From time to time, the Corporation may return additional cash to ESH REIT in order for ESH REIT to pay for or fund (i)
capital expenditures (see "Liquidity and Capital Resources - ESH REIT"), (ii) outstanding debt obligations or (iii) 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 Unsecured Intercompany Facility (up to $300.0 million,
subject to certain conditions) or an additional intercompany facility, subject to the conditions contained in the 2016 ESH REIT
Credit Facilities, the 2025 Notes and the Unsecured Intercompany Facility. See Note 7 to the consolidated financial statements
of Extended Stay America, Inc., which are included in Item 8 in this combined annual report on Form 10-K.
Based upon the current level of operations, management believes that the Corporation’s cash position, cash flow generated
from operations and available borrowings under its revolving credit facility, as needed, will be adequate to meet all of the
Corporation’s funding requirements and business objectives for the foreseeable future.
ESH REIT
ESH REIT’s primary source of liquidity is rental revenues derived from leases. ESH REIT’s current liquidity
requirements include (i) fixed costs associated with ownership of hotel properties, including interest expense, (ii) scheduled
principal payments on its outstanding indebtedness, including the repayment of outstanding amounts, if any, under the 2016
ESH REIT Credit Facilities and the Unsecured Intercompany Facility, (iii) real estate tax expense, (iv) property insurance
premium and claims expense, (v) general and administrative expense (including administrative service costs reimbursed to the
Corporation), (vi) capital expenditures, including those capital expenditures incurred to perform hotel renovations, repurpose
and/or rebuild certain hotels, construct new hotels and acquire additional hotel properties and/or other lodging companies and
(vii) and the payment of distributions.
ESH REIT’s long-term liquidity requirements include funds necessary to (i) perform capital expenditures related to hotel
renovations, (ii) repurpose and/or rebuild certain of ESH REIT’s existing hotel properties, (iii) build new Extended Stay
America branded owned hotels, (iv) acquire additional hotel properties and/or other lodging companies, (v) pay distributions
and (vi) refinance (including prior to or in connection with debt maturity payments) ESH REIT’s 2016 Term Facility and the
2025 Notes maturing in August 2023 and May 2025, respectively. See Note 6 to the consolidated financial statements of ESH
Hospitality, Inc., which are included in Item 8 in 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
66
•
90% of the excess of its net income, if any, from foreclosure property over the tax imposed on such income by the
Code; less
•
the sum of certain items of non-cash income that exceeds a percentage of ESH REIT’s income.
ESH REIT intends to distribute its taxable income to the extent necessary to optimize its tax efficiency including, but not
limited to, maintaining its REIT status, while retaining sufficient capital for its ongoing needs. ESH REIT is subject to income
tax on its taxable income that is not distributed and to an excise tax to the extent that certain percentages of its taxable income
are not distributed by specified dates. To the extent distributions in respect of the Class B common stock of ESH REIT are not
sufficient to meet our expected Paired Share distributions, Paired Share distributions are expected to be completed through
distributions in respect of the common stock of the Corporation, as they have been in prior periods, using funds distributed to
the Corporation in respect of the Class A common stock of ESH REIT, after allowance for tax, if any, on those funds.
Due to REIT distribution requirements, ESH REIT has historically not accumulated significant amounts of cash. As a
result and as discussed above, we expect that ESH REIT will need to refinance all or a portion of its outstanding debt, including
the 2016 ESH REIT Credit Facilities and the 2025 Notes, on or before maturity. See Note 6 to the consolidated financial
statements of ESH Hospitality, Inc., which are included in Item 8 in this combined annual report on Form 10-K, for additional
detail on ESH REIT's debt obligations. We cannot assure you that ESH REIT will be able to refinance any of its debt on
attractive terms at or before maturity, on commercially reasonable terms or at all.
Based upon the current level of operations, management believes that ESH REIT’s cash position, cash flow generated
from operations and available borrowings under its revolving credit facility and the Unsecured Intercompany Facility, as
needed, 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, 2017 and December 31, 2016
We had unrestricted cash and cash equivalents of approximately $113.3 million and $84.2 million at December 31, 2017
and 2016, respectively. The following table summarizes the changes in our cash and cash equivalents as a result of operating,
investing and financing activities for the years ended December 31, 2017 and 2016 (in thousands):
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effects of changes in exchange rate on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash Flows provided by Operating Activities
Year Ended December 31,
2016
2017
Change ($)
$
$
444,169
$
418,405
$
(115,157)
(300,120)
293
(159,464)
(547,946)
(76)
29,185
$
(289,081) $
25,764
44,307
247,826
369
318,266
Cash flows provided by operating activities totaled approximately $444.2 million for the year ended December 31, 2017
compared to approximately $418.4 million for the year ended December 31, 2016, an increase of approximately $25.8 million.
Cash flows provided by operating activities increased for the year ended December 31, 2017 due to additional cash generated
from improved operating performance, specifically a 1.7% increase in RevPAR as well as a decrease in income tax payments of
approximately $23.2 million, partially offset by an increase in cash payments for interest of approximately $6.4 million.
Cash Flows used in Investing Activities
Cash flows used in investing activities totaled approximately $115.2 million for the year ended December 31, 2017
compared to approximately $159.5 million for the year ended December 31, 2016, a decrease of approximately $44.3 million.
Cash flows used in investing activities decreased due to a decrease in the Company's investment in property and equipment of
approximately $58.9 million as a result of the completion of our hotel renovation program during 2017. Additionally, the
Corporation and ESH REIT received proceeds of approximately $63.9 million related to the sale of four hotels during the year
67
ended December 31, 2017. These changes in cash flows used in investing activities were partially offset by a decrease in
restricted cash of approximately $78.9 million as a result of the repayment of ESH REIT’s previous mortgage loan in 2016,
which required substantially all hotel revenues to be deposited into cash management accounts under control of the loan service
agent. Restricted cash as of December 31, 2017 included approximately $16.0 million held by a qualified intermediary as part
of future designated tax-free exchanges under Section 1031 of the Internal Revenue Code ("1031 exchanges").
Cash Flows used in Financing Activities
Cash flows used in financing activities totaled approximately $300.1 million for the year ended December 31, 2017
compared to approximately $547.9 million for the year ended December 31, 2016, a decrease of approximately $247.8 million.
Cash flows used in financing activities changed mainly due to a decrease in net debt repayments of approximately $144.4
million, including payments on deferred financing costs, a decrease in Paired Share repurchases of approximately $77.6
million, as well as a decrease in Paired Share distributions of approximately $41.2 million as a result of the special distribution
paid in January 2016.
Comparison of Years Ended December 31, 2016 and December 31, 2015
We had unrestricted cash and cash equivalents of approximately $84.2 million and $373.2 million at December 31, 2016
and 2015, respectively. The following table summarizes the changes in our cash and cash equivalents as a result of operating,
investing and financing activities for the years ended December 31, 2016 and 2015 (in thousands):
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effects of changes in exchange rate on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash Flows provided by Operating Activities
Year Ended December 31,
2015
2016
Change ($)
$
$
418,405
$
428,889
$
(159,464)
(547,946)
(76)
66,289
(243,180)
(83)
(10,484)
(225,753)
(304,766)
7
(289,081) $
251,915
$
(540,996)
Cash flows provided by operating activities totaled approximately $418.4 million for the year ended December 31, 2016
compared to approximately $428.9 million for the year ended December 31, 2015, a decrease of approximately $10.5 million.
Cash flows provided by operating activities decreased for the year ended December 31, 2016 due to the sale of a portfolio of 53
hotel properties in December 2015, an increase in interest expense, which included approximately $5.0 million in prepayment
penalties and other costs in connection with the repayment of ESH REIT’s former term loan facility, an increase in income tax
payments of approximately $9.1 million and increases in the use of short-term working capital. The decrease was partially
offset by our improved performance for the 629 hotels owned and operated by the Company prior to the 2015 sale, specifically
a 3.9% increase in RevPAR.
Cash Flows (used in) provided by Investing Activities
Cash flows used in investing activities totaled approximately $159.5 million for the year ended December 31, 2016
compared to cash flows provided by investing activities of approximately $66.3 million for the year ended December 31, 2015.
Cash flows used in investing activities increased due to the fact that during the year ended December 31, 2015, the Company
received net proceeds of approximately $276.3 million related to the sale of a portfolio of 53 hotel properties in December
2015. Additionally, the Company increased its investment in property and equipment by approximately $20.6 million, partly
due to our hotel renovation program as well as other capital improvement projects. These increased uses of cash were partially
offset by a decrease in restricted cash of approximately $74.3 million as a result of the repayment of ESH REIT’s previous
mortgage loan, which required substantially all hotel revenues to be deposited into cash management accounts under the control
of the loan service agent.
Cash Flows used in Financing Activities
Cash flows used in financing activities totaled approximately $547.9 million for the year ended December 31, 2016
compared to approximately $243.2 million for the year ended December 31, 2015, an increase of approximately $304.8 million.
Cash flows used in financing activities increased due to Paired Share repurchases of approximately $139.9 million as well as an
68
increase in net loan repayments of approximately $98.7 million and an increase in Paired Share distributions of approximately
$65.1 million.
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, 2017 and December 31, 2016
ESH REIT had unrestricted cash and cash equivalents of approximately $38.9 million and $53.5 million at December 31,
2017 and 2016, respectively. The following table summarizes the changes in ESH REIT’s cash and cash equivalents as a result
of operating, investing and financing activities for the years ended December 31, 2017 and 2016 (in thousands):
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net decrease in cash and cash equivalents
Cash Flows provided by Operating Activities
Year Ended December 31,
2016
2017
Change ($)
$
$
471,242
$
488,350
$
(118,147)
(367,671)
(158,698)
(499,402)
(14,576) $
(169,750) $
(17,108)
40,551
131,731
155,174
Cash flows provided by operating activities totaled approximately $471.2 million for the year ended December 31, 2017
compared to approximately $488.4 million for the year ended December 31, 2016, a decrease of approximately $17.1 million.
Cash flows provided by operating activities decreased due to an increase in cash payments for interest of approximately $8.1
million as well as the sale of five hotel properties during 2017. In addition, percentage rental revenues decreased approximately
$6.8 million for the year ended December 31, 2017 compared to the year ended December 31, 2016.
Cash Flows used in Investing Activities
Cash flows used in investing activities totaled approximately $118.1 million for the year ended December 31, 2017
compared to approximately $158.7 million for the year ended December 31, 2016, a decrease of approximately $40.6 million.
Cash flows used in investing activities decreased due to a decrease in ESH REIT's investment in property and equipment of
approximately $58.5 million as a result of the completion of our hotel renovation program during 2017. Additionally, ESH
REIT received proceeds of approximately $58.0 million related to the sale of four hotels during the year ended December 31,
2017. These changes in cash flows used in investing activities were partially offset by an increase in restricted cash of
approximately $76.2 million as a result of the repayment of ESH REIT’s previous mortgage loan in 2016, which required
substantially all hotel revenues to be deposited into cash management accounts under control of the loan service agent.
Restricted cash as of December 31, 2017 included approximately $16.0 million held by a qualified intermediary as part of
future designated 1031 exchanges.
Cash Flows used in Financing Activities
Cash flows used in financing activities totaled approximately $367.7 million for the year ended December 31, 2017
compared to approximately $499.4 million for the year ended December 31, 2016, a decrease of approximately $131.7 million.
Cash flows used in financing activities changed due to a decrease in ESH REIT Class A and Class B common stock of
approximately $45.8 million as a result of the special distribution paid in January 2016, a decrease in net debt repayments of
approximately $44.1 million, including payments of deferred financing costs, as well as a decrease in ESH REIT Class B
common stock repurchases of approximately $30.9 million.
69
Comparison of Years Ended December 31, 2016 and December 31, 2015
ESH REIT had unrestricted cash and cash equivalents of approximately $53.5 million and $223.3 million at
December 31, 2016 and 2015, respectively. The following table summarizes the changes in ESH REIT’s cash and cash
equivalents as a result of operating, investing and financing activities for the years ended December 31, 2016 and 2015 (in
thousands):
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net (decrease) increase in cash and cash equivalents
Cash Flows provided by Operating Activities
Year Ended December 31,
2015
2016
Change ($)
$
$
488,350
$
511,985
$
(158,698)
(499,402)
61,034
(383,579)
(169,750) $
189,440
$
(23,635)
(219,732)
(115,823)
(359,190)
Cash flows provided by operating activities totaled approximately $488.4 million for the year ended December 31, 2016
compared to approximately $512.0 million for the year ended December 31, 2015, a decrease of approximately $23.6 million.
Cash flows from operations decreased for the year ended December 31, 2016 due to the sale of a portfolio of 53 hotel
properties in December 2015 and an increase in interest expense, which included approximately $5.0 million in prepayment
penalties and other costs in connection with the repayment of ESH REIT’s former term loan facility.
Cash Flows (used in) provided by Investing Activities
Cash flows used in investing activities totaled approximately $158.7 million for the year ended December 31, 2016
compared to cash flows provided by investing activities of approximately $61.0 million for the year ended December 31, 2015.
Cash flows used in investing activities increased due to the fact that during the year ended December 31, 2015, ESH REIT
received net proceeds of approximately $265.0 million related to the sale of a portfolio of 53 hotel properties in December
2015. Additionally, this increase was driven by an increase in ESH REIT’s investment in property and equipment of
approximately $23.1 million partly due to its hotel renovation program as well as other capital improvement projects. These
increases were partially offset by a decrease in restricted cash of approximately $71.5 million as a result of the repayment of
ESH REIT’s previous mortgage loan, which required substantially all hotel revenues to be deposited into cash management
accounts under the control of the loan service agent.
Cash Flows used in Financing Activities
Cash flows used in financing activities totaled approximately $499.4 million for the year ended December 31, 2016
compared to approximately $383.6 million for the year ended December 31, 2015, an increase of approximately $115.8 million.
Cash flows used in financing activities increased due to ESH REIT Class B common stock repurchases of approximately $53.7
million, an increase in net loan repayments of approximately $48.4 million, including payments of deferred financing costs, and
an increase in ESH REIT Class A and Class B common stock distributions of approximately $8.2 million.
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 flows from operations. During the years ended
December 31, 2017, 2016 and 2015, we incurred capital expenditures of approximately $166.4 million, $225.3 million and
$204.7 million, respectively. These capital expenditures were primarily made as a result of our hotel renovation program, which
was completed in the second quarter of 2017 and other capital projects. Funding for future capital expenditures, including
future hotel renovations, repurposing and/or rebuilding certain of our hotel properties, building new hotels we expect to own
and operate and acquiring and converting existing hotels to the Extended Stay America brand, either as a franchise or on our
balance sheet, is expected to be provided primarily from cash flows generated from operations or, to the extent necessary, the
Corporation or ESH REIT revolving credit facilities, including the Unsecured Intercompany Facility and, in certain instances,
proceeds from asset sales.
In 2018, we expect to incur capital expenditures between $180 million and $210 million. As part of these capital
expenditures, we expect to spend approximately $40 to $60 million for construction of new hotels, land acquisitions and other
70
future growth initiatives. Additionally, we plan to spend approximately $30 to $40 million in incremental information
technology capital investments.
Hotel Renovations
In 2011, we began performing hotel renovations and executed a phased capital investment program across our portfolio in
order to seek to drive increases in ADR and gain incremental market share. The hotel renovations were undertaken in
phases and by the second quarter of 2017, we had completed renovations across our entire 624-hotel portfolio. The renovations
generally required approximately $1.0 million in capital per hotel. Hotel renovations typically included remodeling of
common areas, new paint, carpet, signage, tile or vinyl flooring and counters in bathrooms and kitchens, as well as the
refurbishment of furniture, replacement of aged mattresses and installation of new flat screen televisions, artwork, lighting and
bedspreads. Total hotel renovation expenditures were approximately $616.5 million.
Our next hotel renovation cycle is expected to begin in in the next twelve months, with each hotel generally on a seven-
year renovation cycle. While management is currently assessing what future hotel renovations will entail, the next renovation
cycle is not expected to include the same replacements and upgrades across the entire portfolio, but rather will be evaluated on
a hotel by hotel basis in order to assess the potential return for each asset in our portfolio based on multiple market and hotel
specific variables.
Our Indebtedness
As of December 31, 2017, the Company’s total indebtedness was approximately $2.5 billion, net of unamortized deferred
financing costs and debt discounts, including approximately $7.1 million of Corporation mandatorily redeemable preferred
stock. ESH REIT's total indebtedness at December 31, 2017 was approximately $2.5 billion, net of unamortized deferred
financing costs and debt discounts. For a detailed discussion of our outstanding indebtedness, see Notes 7 and 9 to the
consolidated financial statements of Extended Stay America, Inc. and Note 6 to the consolidated financial statements of ESH
Hospitality, Inc., both of which are included in Item 8 in this combined annual report on Form 10-K.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2017 (in thousands):
ESH REIT 2016 Term Facility(1)
ESH REIT 2025 Notes(2)
Corporation mandatorily redeemable
preferred stock
Interest payments on outstanding debt
obligations(3)(4)(5)
Operating lease obligations(6)
Other commitments(7)
Total contractual obligations
_________________
Total
$ 1,283,806
2018
$ 12,870
Payments Due by Period
2020
$ 12,870
2021
$ 12,870
2019
$ 12,870
1,300,000
7,133
—
—
—
—
—
—
7,133
2022
$ 12,870
Thereafter
$ 1,219,456
—
—
1,300,000
—
784,081
91,567
4,521
$ 3,471,108
116,916
2,788
299
$ 132,873
116,813
2,843
299
$ 132,825
116,746
2,964
321
$ 140,034
116,036
2,288
329
$ 131,523
115,735
876
329
$ 129,810
201,835
79,808
2,944
$ 2,804,043
(1) The 2016 Term Facility is included on the Company’s consolidated balance sheet net of unamortized deferred financing costs and debt discount of
approximately $13.4 million and $5.3 million, respectively. 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 commenced during the year ended December 31, 2017 and
are due each year thereafter in the first quarter of the following year. No mandatory prepayments are required in the first quarter of 2018 based on ESH
REIT's Excess Cash Flow for the year ended December 31, 2017.
(2) The 2025 Notes are included on the Company’s consolidated balance sheet net of unamortized deferred financing costs and debt discount of
approximately $20.7 million and $9.6 million, respectively. ESH REIT may redeem the 2025 Notes at any time at specified redemption prices.
(3) Floating rate interest calculated using current LIBOR plus 2.25% for the portion of the 2016 Term Facility not subject to an interest rate swap.
(4)
(5)
(6)
Interest calculated using base rate of 2.25% plus 1.175% for portion of the 2016 Term Facility subject to interest rate swap.
Includes dividends payable on the Corporation’s mandatorily redeemable preferred stock and ESH REIT's preferred stock.
Includes long-term ground leases at four of the Company's hotel properties as well as lease for the Company's corporate headquarters. The initial terms
of the ground lease agreements terminate at various dates between 2021 and 2096, with three of the leases including multiple renewal options for
generally five to 10-year periods while the lease for the corporate headquarters terminates in August 2021. The Company expects to renew certain of
these lease agreements upon the expiration of the initial lease agreement, resulting in an increase in our operating lease obligation.
(7) The Company has a commitment to make quarterly payments in lieu of taxes to the owner of the land on which one of the properties is located. The
initial term of the agreement terminates in 2031.
71
Off-Balance Sheet Arrangements
Neither the Corporation nor ESH REIT have off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources. See Note 13 to the consolidated financial statements of Extended Stay America, Inc. and Note 12 to the
consolidated financial statements of ESH Hospitality, Inc., both of which are included in Item 8 in this combined annual report
on Form 10-K, for additional information with respect to commitments and contingencies, including lease obligations.
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., both of which are 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. For the Company, policies related to equity-based compensation include judgment and
complexity due to the fact that the Corporation and ESH REIT are each compensated for their respective portion of equity-
based awards granted and settled in Paired Shares, as well as the fact that a portion of these equity-based awards have
historically been market-based and include complexity with respect to the determination of grant-date fair value. For ESH
REIT, policies related to revenue recognition, more specifically, rental revenues generated from leases, involve judgment that
materially impacts total revenues due to the contingent nature of a significant portion of ESH REIT’s lease rental revenues. For
both the Company and ESH REIT, 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
REIT-related compliance matters. Also with respect to the Company and ESH REIT, policies related to property and equipment
include significant judgment related to the assessment of impairment and estimates with respect to assets’ useful lives, which
materially impact depreciation expense. 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.
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., both of which are included in Item 8 in this combined annual report on
Form 10-K.
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, foreign currency exchange rates and commodity prices by entering into financial arrangements to provide a hedge against
a portion of the risks associated with such volatility, when applicable. We have exposure to such risks to the extent they are not
hedged. We may enter into derivative financial arrangements to the extent they meet the foregoing objectives. We do not use
derivatives for trading or speculative purposes.
The Corporation
As of December 31, 2017, the Corporation had minimal exposure to market risk from changes in interest rates because it
had no variable rate debt as there were no outstanding amounts drawn on the Corporation revolving credit facility. The
Corporation’s exposure to market risk from changes in interest rates may increase in future periods should the Corporation
incur variable rate debt, including draws on the Corporation's revolving credit facility. The Corporation has minimal exposure
to market risk from changes in foreign currency exchange rates due to the sale of the three Extended Stay Canada-branded
hotels in 2017.
ESH REIT
As of December 31, 2017, approximately $1.3 billion of ESH REIT’s outstanding debt of approximately $2.5 billion, net
of unamortized deferred financing costs and debt discounts, had a variable interest rate. ESH REIT is a counterparty to an
interest rate swap at a fixed rate of 1.175%. The notional amount of the interest rate swap as of December 31, 2017 was $400.0
million, which is reduced by $50.0 million every six months until the swap matures in September 2021. The remaining
outstanding variable interest rate debt of approximately $883.8 million, which is not subject to the interest rate swap, remains
subject to interest rate risk. If market rates of interest were to fluctuate by 1.0%, interest expense would increase or decrease by
approximately $8.8 million annually, assuming that the amount outstanding under ESH REIT’s unhedged variable interest rate
debt remains at approximately $883.8 million.
72
ESH REIT sold its three Extended Stay Canada-branded hotels in 2017. As a result, ESH REIT has minimal exposure to
market risk from changes in foreign currency exchange rates due to the fact that its only remaining Canadian currency-based
assets and liabilities relate to residual working capital. A fluctuation of 1% in the exchange rate between the U.S. dollar and the
Canadian dollar would result in foreign currency transaction gain or loss of approximately $0.1 million.
73
Item 8.
Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL
STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Operations for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016
and 2015
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2017, 2016 and
2015
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015
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, 2017 and 2016
Consolidated Statements of Operations for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016
and 2015
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2017, 2016 and
2015
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
FINANCIAL STATEMENT SCHEDULE
Schedule III—Real Estate and Accumulated Depreciation
Page
Number
75
76
77
78
79
80
81
108
109
110
111
112
113
114
137
74
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, 2017 and 2016, 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, 2017, 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, 2017 and 2016, and
the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, 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, 2017, 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 27, 2018, 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.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
February 27, 2018
We have served as the Company's auditor since 2010.
75
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2017 AND 2016
(In thousands, except share and per share data)
ASSETS
PROPERTY AND EQUIPMENT - Net of accumulated depreciation of $1,142,799 and $973,669
$
3,753,134
$
3,905,304
December 31,
2017
December 31,
2016
RESTRICTED CASH
CASH AND CASH EQUIVALENTS
INTANGIBLE ASSETS - Net of accumulated amortization of $9,690 and $8,350
GOODWILL
ACCOUNTS RECEIVABLE - Net of allowance for doubtful accounts of $2,206 and $2,634
DEFERRED TAX ASSETS
OTHER ASSETS
TOTAL ASSETS
LIABILITIES AND EQUITY
LIABILITIES:
Term loan facilities payable - Net of unamortized deferred financing costs and debt discount
of $18,695 and $21,994
Senior notes payable - Net of unamortized deferred financing costs and debt discount
of $30,344 and $34,482
Revolving credit facilities
Mandatorily redeemable preferred stock - $0.01 par value, $1,000 redemption value,
8.0%, 350,000,000 shares authorized, 7,133 and 21,202 shares issued and outstanding
Accounts payable and accrued liabilities
Deferred tax liabilities
Total liabilities
COMMITMENTS AND CONTINGENCIES (Note 13)
EQUITY:
Common stock - $0.01 par value, 3,500,000,000 shares authorized, 192,099,933 and
195,406,944 shares issued and outstanding
Additional paid in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total Extended Stay America, Inc. shareholders’ equity
Noncontrolling interests
Total equity
TOTAL LIABILITIES AND EQUITY
See accompanying notes to consolidated financial statements.
37,631
113,343
27,043
48,866
21,578
8,125
66,285
21,614
84,158
28,383
53,531
20,837
16,376
50,101
$
$
4,076,005
$
4,180,304
1,265,112
$
1,274,756
1,269,656
—
7,133
188,257
—
1,265,518
45,000
21,202
193,303
3,286
2,730,158
2,803,065
1,921
768,679
6,917
3,066
780,583
565,264
1,345,847
$
4,076,005
$
1,957
774,811
23,679
(5,615)
794,832
582,407
1,377,239
4,180,304
76
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
(In thousands, except per share data)
REVENUES:
Room revenues
Other hotel revenues
Total revenues
OPERATING EXPENSES:
Hotel operating expenses
General and administrative expenses
Depreciation and amortization
Impairment of long-lived assets
Total operating expenses
GAIN ON SALE OF HOTEL PROPERTIES, NET (Note 4)
OTHER INCOME
INCOME FROM OPERATIONS
OTHER NON-OPERATING (INCOME) EXPENSE
INTEREST EXPENSE, NET
INCOME BEFORE INCOME TAX EXPENSE
INCOME TAX EXPENSE
NET INCOME
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
NET INCOME ATTRIBUTABLE TO EXTENDED STAY AMERICA, INC.
COMMON SHAREHOLDERS
NET INCOME PER EXTENDED STAY AMERICA, INC. COMMON SHARE:
Basic
Diluted
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Year Ended
December 31,
2015
$
1,260,868
$
1,250,865
$
1,265,653
21,857
1,282,725
19,728
1,270,593
19,100
1,284,753
585,545
94,652
229,216
25,169
934,582
9,973
2,959
361,075
(399)
129,772
231,702
59,514
172,188
(93,341)
78,847
0.41
0.41
$
$
$
580,772
98,045
221,309
9,828
909,954
—
25
360,664
(1,576)
164,537
197,703
34,351
163,352
604,087
98,625
203,897
9,011
915,620
130,894
45
500,072
2,732
137,782
359,558
76,536
283,022
(93,420)
(169,982)
$
$
$
69,932
0.35
0.35
$
$
$
113,040
0.55
0.55
204,211
204,567
WEIGHTED-AVERAGE EXTENDED STAY AMERICA, INC. COMMON
SHARES OUTSTANDING:
Basic
Diluted
193,101
193,670
200,572
200,736
See accompanying notes to consolidated financial statements.
77
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
(In thousands)
NET INCOME
OTHER COMPREHENSIVE INCOME, NET OF TAX:
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS:
FOREIGN CURRENCY TRANSLATION GAIN (LOSS), NET OF
TAX OF $(125), $1,207 AND $2,516
RECLASSIFICATION ADJUSTMENT - SALE OF CANADIAN
HOTEL PROPERTIES, NET OF TAX OF $(3,599), $0 AND $0
TOTAL FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
DERIVATIVE ADJUSTMENTS:
INTEREST RATE CASH FLOW HEDGE GAIN, NET OF TAX OF
$(46), $1,109 AND $0
RECLASSIFICATION ADJUSTMENT - AMOUNTS
RECLASSIFIED TO NET INCOME, NET OF TAX OF $0
TOTAL DERIVATIVE ADJUSTMENTS
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Year Ended
December 31,
2015
$
172,188
$
163,352
$
283,022
430
10,913
11,343
1,447
663
2,110
1,713
—
1,713
3,882
—
3,882
(6,321)
—
(6,321)
—
—
—
COMPREHENSIVE INCOME
COMPREHENSIVE INCOME ATTRIBUTABLE TO
NONCONTROLLING INTERESTS
COMPREHENSIVE INCOME ATTRIBUTABLE TO EXTENDED
STAY AMERICA, INC. COMMON SHAREHOLDERS
185,641
168,947
276,701
(98,113)
(95,876)
(166,605)
$
87,528
$
73,071
$
110,096
See accompanying notes to consolidated financial statements.
78
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
(In thousands, except per share data)
Common Stock
Shares
Amount
Additional
Paid in
Capital
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
Total
Extended Stay
America, Inc.
Shareholders’
Equity
Non-
controlling
Interests
Total
Equity
BALANCE - January 1, 2015
204,517
$
2,048
$
779,447
$
13,833
$
(5,810)
$
789,518
$
599,799
$ 1,389,317
Net income
Foreign currency translation loss, net
of tax
Corporation common distributions -
$0.12 per common share
ESH REIT common distributions -
$0.79 per Class B common share
ESH REIT preferred distributions
Equity-based compensation
—
—
—
—
—
77
—
—
—
—
—
1
BALANCE - December 31, 2015
204,594
2,049
Net income
Foreign currency translation gain, net
of tax
Interest rate cash flow hedge gain, net
of tax
Repurchase of Corporation common
stock and ESH REIT Class B
common stock (Paired Shares)
Corporation common distributions -
$0.31 per common share
ESH REIT common distributions -
$0.43 per Class B common share
ESH REIT preferred distributions
Adjustment to noncontrolling interest
for change in ownership of ESH
Equity-based compensation
—
—
—
—
—
—
(9,415)
(94)
—
—
—
—
228
—
—
—
—
2
BALANCE - December 31, 2016
195,407
1,957
Net income
Foreign currency translation, net of
tax
Interest rate cash flow hedge gain, net
of tax
Repurchase of Corporation common
stock and ESH REIT Class B
common stock (Paired Shares)
Corporation common distributions -
$0.29 per common share
ESH REIT common distributions -
$0.53 per Class B common share
ESH REIT preferred distributions
Adjustment to noncontrolling interest
for change in ownership of ESH
REIT
Equity-based compensation
—
—
—
—
—
—
(3,624)
(39)
—
—
—
—
317
—
—
—
—
3
—
—
—
—
—
4,747
784,194
—
—
—
—
—
—
—
(13,508)
4,125
774,811
—
—
—
—
—
—
—
(5,699)
(433)
113,040
—
113,040
169,982
283,022
—
(2,944)
(2,944)
(3,377)
(6,321)
(24,689)
—
—
—
102,184
69,932
—
—
(86,126)
(62,311)
—
—
—
—
23,679
78,847
—
—
(39,508)
(56,101)
—
—
—
—
—
—
—
—
(8,754)
—
1,438
1,701
—
—
—
—
—
—
(5,615)
—
7,467
1,214
—
—
—
—
—
—
(24,689)
—
(24,689)
—
—
4,748
879,673
69,932
1,438
1,701
(162,351)
(162,351)
(16)
4,647
608,684
93,420
275
2,181
(16)
9,395
1,488,357
163,352
1,713
3,882
(86,220)
(53,675)
(139,895)
(62,311)
—
(62,311)
—
—
(87,605)
(87,605)
(16)
(16)
(13,508)
4,127
794,832
78,847
7,467
1,214
13,508
5,635
582,407
93,341
3,876
896
—
9,762
1,377,239
172,188
11,343
2,110
(39,547)
(22,776)
(62,323)
(56,101)
—
(56,101)
—
—
(102,563)
(102,563)
(16)
(16)
(5,699)
(430)
5,699
4,400
—
3,970
BALANCE - December 31, 2017
192,100
$
1,921
$
768,679
$
6,917
$
3,066
780,583
$
565,264
$ 1,345,847
See accompanying notes to consolidated financial statements.
79
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
(In thousands)
OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Amortization of intangible assets
Foreign currency transaction (gain) loss
Loss on interest rate swap
Amortization and write-off of deferred financing costs and debt discount
Amortization of above-market ground leases
Loss on disposal of property and equipment
Gain on sale of hotel properties, net
Impairment of long-lived assets
Equity-based compensation
Deferred income tax expense (benefit)
Changes in assets and liabilities:
Accounts receivable, net
Other assets
Accounts payable and accrued liabilities
Net cash provided by operating activities
INVESTING ACTIVITIES:
Purchases of property and equipment
Proceeds from sale of hotel properties
(Increase) decrease in restricted cash and insurance collateral
Proceeds from insurance and related recoveries
Net cash (used in) provided by investing activities
FINANCING ACTIVITIES:
Principal payments on mortgage loan
Proceeds from term loan facilities, net of debt discount
Principal payments on term loan facilities
Proceeds from senior notes, net of debt discount
Proceeds from revolving credit facilities
Payments on revolving credit facilities
Payments of deferred financing costs
Tax withholdings related to restricted stock unit settlements
Repurchase of Corporation common stock and ESH REIT class B common stock (Paired
Shares)
Repurchase of Corporation mandatorily redeemable preferred stock
Corporation common distributions
ESH REIT common distributions
ESH REIT preferred distributions
Net cash used in financing activities
CHANGES IN CASH AND CASH EQUIVALENTS DUE TO CHANGES IN FOREIGN
CURRENCY EXCHANGE RATES
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS—Beginning of period
CASH AND CASH EQUIVALENTS—End of period
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest, excluding prepayment and other penalties
Cash payments for income taxes, net of refunds of $571, $2,026 and $97
NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital expenditures included in accounts payable and accrued liabilities
Deferred financing costs included in accounts payable and accrued liabilities
Principal payments on term loan facilities included in accounts payable and accrued
liabilities
Proceeds from sale of hotel properties included in other assets
Corporation common distributions included in accounts payable and accrued liabilities
ESH REIT common distributions included in accounts payable and accrued liabilities
See accompanying notes to consolidated financial statements.
80
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Year Ended
December 31,
2015
$
172,188
$
163,352
$
283,022
227,876
1,340
(713)
667
8,097
(136)
8,606
(9,973)
25,169
7,552
963
(895)
(3,606)
7,034
444,169
(166,378)
63,936
(16,017)
3,302
(115,157)
—
—
(16,193)
—
105,000
(150,000)
—
(3,548)
(62,323)
(14,069)
(56,126)
(102,845)
(16)
(300,120)
293
29,185
84,158
113,343
123,953
55,694
$
$
$
12,596
$
— $
— $
12,589
532
983
$
$
$
219,969
1,340
(1,576)
—
31,116
(136)
10,740
—
9,828
12,000
(25,975)
(2,655)
1,829
(1,427)
418,405
(225,323)
—
62,901
2,958
(159,464)
(1,931,157)
1,293,500
(366,463)
788,000
70,000
(25,000)
(34,475)
(2,229)
(139,895)
—
(74,153)
(126,058)
(16)
(547,946)
(76)
(289,081)
373,239
84,158
117,518
78,903
21,912
79
3,250
$
$
$
$
$
$
— $
$
559
$
1,269
202,531
1,366
2,732
—
12,608
(136)
9,299
(130,894)
9,011
10,500
8,709
8,306
(2,755)
14,590
428,889
(204,717)
277,108
(11,363)
5,261
66,289
(586,892)
—
(8,537)
500,000
90,000
(90,000)
(11,476)
(1,105)
—
—
(12,278)
(122,876)
(16)
(243,180)
(83)
251,915
121,324
373,239
120,220
69,825
23,951
—
—
—
12,411
39,734
$
$
$
$
$
$
$
$
$
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2017 AND 2016 AND FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
1. BUSINESS, ORGANIZATION AND BASIS OF CONSOLIDATION
Organization
Extended Stay America, Inc. (the “Corporation”) was incorporated in the state of Delaware on July 8, 2013. ESH
Hospitality, Inc. (“ESH REIT”) was formed as a limited liability company in the state of Delaware on September 16, 2010 and
was converted to a corporation on November 5, 2013. On November 18, 2013, the Corporation and ESH REIT completed an
initial public offering of 32.5 million Paired Shares. A "Paired Share" consists of one share of common stock, par value $0.01
per share, of the Corporation, that is attached to and trades as a single unit with one share of Class B common stock, par value
$0.01 per share, of ESH REIT. The Corporation owns, and is expected to continue to own, all of the issued and outstanding
Class A common stock of ESH REIT, which, as of December 31, 2017, represents approximately 57% of the outstanding
common stock of ESH REIT. Due to its controlling interest in ESH REIT, the Corporation consolidates the financial position,
results of operations, comprehensive income and cash flows of ESH REIT. The term, “the Company,” as used herein refers to
the Corporation and its consolidated subsidiaries, including ESH REIT.
As of December 31, 2017, the Corporation had approximately 192.1 million shares of common stock outstanding,
approximately 99.3% of which were owned by the public and approximately 0.7% of which were owned by senior
management and certain directors. As of December 31, 2017, ESH REIT’s common equity consisted of the following: (i)
approximately 250.5 million shares of Class A common stock outstanding (approximately 57% of its common equity), all of
which were owned by the Corporation, and (ii) approximately 192.1 million shares of Class B common stock outstanding
(approximately 43% of its common equity), approximately 99.3% of which were owned by the public and approximately 0.7%
of which were owned by senior management and directors of the Corporation and ESH REIT.
As of December 31, 2016, the Corporation had approximately 195.4 million shares of common stock outstanding,
approximately 55.9% of which were owned by the public and approximately 44.1% of which were owned by Centerbridge
Partners, L.P., Paulson & Co. Inc. and The Blackstone Group L.P. and their funds or affiliates (individually, each a “Sponsor,”
or collectively, the “Sponsors”) and senior management and certain directors. As of December 31, 2016, ESH REIT’s common
equity consisted of the following: (i) approximately 250.5 million shares of Class A common stock outstanding (approximately
56% of its common equity), all of which were owned by the Corporation, and (ii) approximately 195.4 million shares of Class
B common stock outstanding (approximately 44% of its common equity), approximately 55.9% of which were owned by the
public and approximately 44.1% of which were owned by the Sponsors and senior management and directors of the
Corporation and ESH REIT.
Secondary Offerings—In June 2015, the Corporation and ESH REIT filed an automatic shelf registration statement with
the U.S. Securities and Exchange Commission (“SEC”) pursuant to which, from time to time, (i) the Corporation and ESH
REIT may offer and sell an unlimited number of Paired Shares and (ii) the Sponsors could offer and sell, on a cumulative basis,
up to approximately 143.0 million Paired Shares. In November 2015, certain selling stockholders (the “Selling Stockholders”)
sold 15.0 million Paired Shares registered pursuant to the automatic shelf registration statement as part of the secondary
offering. The Corporation and ESH REIT incurred professional fees in connection with filing the 2015 automatic shelf
registration and secondary offering totaling approximately $0.9 million during the year ended December 31, 2015.
During 2016, certain Selling Stockholders sold approximately 42.1 million Paired Shares, pursuant to the automatic shelf
registration statement as part of three secondary offerings, of which the Corporation and ESH REIT repurchased and retired
approximately 3.85 million Paired Shares for approximately $35.1 million and $21.6 million, respectively (see Note 16). The
Corporation and ESH REIT incurred professional fees in connection with these secondary offerings totaling approximately $1.1
million during the year ended December 31, 2016.
During 2017, certain Selling Stockholders sold 80.0 million Paired Shares, pursuant to the automatic shelf registration
statement as part of three secondary offerings. In conjunction with these secondary offerings, the Corporation and ESH REIT
repurchased and retired approximately 2.0 million Paired Shares for approximately $21.4 million and $12.2 million,
respectively (see Note 16). The Corporation and ESH REIT incurred professional fees in connection with the secondary
offerings totaling approximately $1.0 million during the year ended December 31, 2017.
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With respect to each of the above discussed secondary offerings, the Selling Stockholders consisted solely of entities
affiliated with the Sponsors and did not include officers or directors of the Corporation or ESH REIT. Neither the Corporation
nor ESH REIT sold Paired Shares in any secondary offerings and neither received proceeds from any secondary offerings.
Paired Share Repurchase Program—In December 2015, the Boards of Directors of the Corporation and ESH REIT
authorized a combined Paired Share repurchase program for up to $100 million of Paired Shares. In February 2016, the Boards
of Directors of the Corporation and ESH REIT authorized an increase of the combined Paired Share repurchase program from
up to $100 million to up to $200 million of Paired Shares. In December 2016, the Boards of Directors of the Corporation and
ESH REIT authorized an increase of the combined Paired Share repurchase program from up to $200 million to up to $300
million of Paired Shares and extended the maturity of the Paired Share repurchase program through December 31, 2017, each
effective January 1, 2017. In January 2018, the Boards of Directors of the Corporation and ESH REIT authorized an extension
of the maturity date of the Paired Share repurchase program through December 31, 2018, each effective January 1, 2018.
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, 2017, the Corporation and
ESH REIT repurchased and retired approximately 13.0 million Paired Shares for approximately $125.8 million and $76.4
million, respectively, of which approximately 5.8 million Paired Shares were repurchased and retired from entities affiliated
with the Sponsors.
Business
As of December 31, 2017, the Company owned and operated 624 hotel properties in 44 U.S. states, consisting of
approximately 68,600 rooms. As of December 31, 2016, the Company owned and operated 626 hotel properties in 44 U.S.
states, consisting of approximately 68,900 rooms, and three hotels in Canada, consisting of 500 rooms. The hotel properties are
owned by wholly-owned subsidiaries of ESH REIT and are operated by wholly-owned subsidiaries of the Corporation (the
"Operating Lessees") pursuant to leases between ESH REIT and the Operating Lessees. The hotels are managed by ESA
Management LLC ("ESA Management"), a wholly-owned subsidiary of the Corporation. The hotels are operated under the core
brand, Extended Stay America. The Extended Stay America brand is owned by ESH Hospitality Strategies LLC ("ESH
Strategies"), also a wholly-owned subsidiary of the Corporation.
In November 2017, the Company executed a purchase and sale agreement to divest twenty-five Extended Stay America-
branded hotels for approximately $114.0 million, including approximately $1.9 million in initial franchise application fees,
subject to adjustment. The transaction closed in February 2018 (see Note 17). The Company will manage these hotels under a
twenty-year management agreement, with the option for the third-party owner to convert to independently-managed franchises
after two years.
In October 2016, the Company executed a purchase and sale agreement to divest one Extended Stay America-branded
hotel for approximately $44.8 million, subject to adjustment. Upon and subject to the completion of customary due diligence
and the satisfaction or waiver of certain closing conditions, this transaction is currently expected to close in 2018 or 2019. The
Company expects to manage the hotel on an interim basis after closing, after which the hotel is planned to be closed and
converted by the owner to a different use.
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 the ESH REIT Class B common stock; therefore, ESH REIT Class B common stock represents a third party equity
interest. As such, the rights associated with the ESH REIT Class B common stock, along with other third party equity interests
in ESH REIT, which include 125 shares of preferred stock, are presented as noncontrolling interests in the accompanying
consolidated financial statements (see Note 12). Changes in ownership interests in a consolidated subsidiary that do not result
in a loss of control are accounted for as equity transactions. All intercompany accounts and transactions have been eliminated.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Management used significant estimates to determine the estimated useful lives of tangible
82
assets as well as in the assessment of tangible and intangible assets for impairment, estimated liabilities for insurance reserves
and income taxes and the grant-date fair value of certain equity-based awards. 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 and net sale proceeds from hotel sales
held by qualified intermediaries pursuant to pending tax-free exchanges under Section 1031 of the Internal Revenue Code
("1031 exchanges").
Accounts Receivable and Allowance for Doubtful Accounts—Accounts receivable primarily consists of receivables
due from corporate customers and third-party internet intermediaries. A provision for doubtful accounts is made when
collection of receivables 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 doubtful accounts. There were not a material amount of write-offs recognized during the years ended
December 31, 2017, 2016 or 2015.
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
Hotel building improvements
Hotel site improvements
Hotel furniture, fixtures and equipment
Corporate furniture, fixtures, equipment
7–49 years
4–39 years
3–20 years
2–10 years
3–15 years
Management assesses the performance of long-lived assets for potential impairment quarterly, as well as when events or
changes in circumstances indicate the carrying amount of an asset or group of assets may not be recoverable. Recoverability of
property and equipment is measured by a comparison of the carrying amount of a hotel property to the estimated future
undiscounted cash flows expected to be generated by each hotel property. Impairment is recognized when estimated future
undiscounted cash flows, including proceeds from disposition, are less than the carrying value of each hotel property. To the
extent that a hotel is impaired, the excess carrying amount over its estimated fair value is recognized as an impairment charge
and reduces income from operations. Fair value is determined based upon the discounted cash flows of the hotel property,
quoted market prices or independent appraisals, as considered necessary. The Company recognized impairment charges related
to property and equipment of approximately $25.2 million, $9.8 million and $9.0 million for the years ended December 31,
2017, 2016 and 2015, respectively (see Note 5). The estimation of future undiscounted cash flows is inherently uncertain and
relies upon assumptions regarding current and future economic and market conditions. If such conditions change, then an
impairment charge to reduce the carrying value of a hotel property could occur in a future period in which conditions change.
Intangible Assets and Liabilities—Intangible assets and liabilities include trademarks, above-market contracts,
corporate customer relationships and customer databases. Above-market contracts, corporate customer relationships and
customer databases are amortized using the straight-line method over their estimated remaining useful lives, which in the case
of contracts is typically the remaining non-cancelable term. Finite-lived intangible assets are reviewed for impairment quarterly
and whenever events or changes in circumstances indicate that the carrying amount of the intangible asset may not be
recoverable. Trademarks are not amortized. Indefinite-lived intangible assets are reviewed for impairment quarterly. 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 not more likely than not that the fair value of its
indefinite-lived intangible assets is less than its carrying amount. No impairment charges related to intangible assets were
recognized during the years ended December 31, 2017, 2016 or 2015.
83
Goodwill—Goodwill represents the excess purchase price over the fair value of net assets acquired. The Company tests
goodwill 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 one operating segment, which is its
reporting unit; therefore, management analyzes goodwill associated with all hotels when analyzing for potential impairment.
The Company first assesses qualitative factors to determine if it is not more likely than not that the fair value of its reporting
unit is less than its carrying amount. No impairment charges related to goodwill were recognized during the years ended
December 31, 2017, 2016 or 2015.
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 in the carrying value is
recognized as an impairment charge.
Discontinued Operations—The Company defines discontinued operations as a component that represents a strategic
shift that has (or will have) a major effect on an entity’s operations and financial results, which would require separate
presentation on the consolidated balance sheets and statements of operations.
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 included as
a component of net interest expense. During the years ended December 31, 2017, 2016 and 2015, $0, approximately $20.0
million and $2.1 million, respectively, of unamortized deferred financing costs, related to the prepayment of debt are included
in net interest expense in the accompanying consolidated statements of operations. Amortization of deferred financing costs
unrelated to the prepayment of debt, which is also included in net interest expense in the accompanying consolidated statements
of operations, was approximately $5.9 million, $8.5 million and $10.1 million for the years ended December 31, 2017, 2016
and 2015, respectively.
Revenue Recognition—Room and other hotel revenues are recognized when services are provided. Amounts paid in
advance by customers are recorded as deferred revenues and included in accounts payable and accrued liabilities in the
accompanying consolidated balance sheets. Other hotel revenues primarily consist of revenues derived from guest laundry, pet
fees, internet fees, additional housekeeping, telephone and other fees or services. Occupancy, hotel and other sales taxes
collected from customers and remitted to the taxing authorities are excluded from revenues.
Advertising Costs—Advertising costs are expensed as incurred. For the years ended December 31, 2017, 2016 and
2015, total advertising costs were approximately $23.0 million, $21.6 million and $24.1 million, respectively, and are classified
as hotel operating expenses in the accompanying consolidated statements of operations.
Operating Leases—Rent expense, including ground rent, is recognized on a straight-line basis over the terms of the
related leases.
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 (exit price). In instances where inputs used to measure
84
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, certain
other assets (deposits), accounts payable and accrued liabilities, term loans, senior notes, mandatorily redeemable preferred
stock and revolving credit facilities. The carrying values of cash and cash equivalents, restricted cash, accounts receivable,
certain other assets, 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, senior notes and
mandatorily redeemable preferred stock 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 current term loans, senior notes and mandatorily redeemable
preferred stock or from quoted market prices, when available (see Notes 7 and 9).
Derivative Instruments—The Company from time to time uses derivative instruments to manage its exposure to interest
rate, foreign currency exchange rate and commodity price risks. The Company’s primary objective in holding derivatives is to
reduce the volatility of cash flows and earnings associated with changes in interest rates, foreign currency exchange rates and
commodity prices. The Company’s derivatives expose it to credit risk to the extent that counterparties may be unable to meet
the terms of the agreement. The Company seeks to mitigate such risks by limiting its counterparties to major financial
institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is
monitored. Management does not expect material losses as a result of defaults by counterparties.
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. As of December 31, 2017 and 2016, approximately
$42.1 million and $41.1 million, respectively, of liabilities for such insurance programs are included in accounts payable and
accrued liabilities in the accompanying 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.
The Company evaluates subsidiaries and affiliates, as well as other entities, to determine if they are variable interest
entities ("VIEs"). If a subsidiary, affiliate or other entity is a 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 of its wholly-owned subsidiaries, ESA
Management, ESH Strategies and the Operating Lessees, and distribution income related to its ownership of approximately
57% of ESH REIT. As a result, approximately 57% 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
85
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, as amended (the "Code"). A REIT is a legal entity that holds real estate assets and is
generally not subject to federal and state income taxes. In order to maintain qualification as a REIT, ESH REIT is required to
distribute at least 90% of its taxable income, excluding 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 (including any applicable alternative
minimum tax) and generally would be precluded from qualifying as a REIT for the subsequent four taxable years following the
year during which it lost its REIT qualification. Even in qualifying as a REIT, ESH REIT may be subject to state and local
taxes in certain jurisdictions, and is subject to federal income and excise taxes on undistributed income.
In 2017 and 2016, 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.
In December 2017, the U.S. Congress passed H.R. 1, known as “The Tax Cuts and Jobs Act” (“TCJA”) which was signed
into law on December 22, 2017. See Note 10 for additional information, including the expected impact on the Company.
Foreign Currency—The Company sold its three Extended Stay Canada-branded hotels in 2017. Prior to completion of
the sale, the financial statements of the Company’s Canadian subsidiaries and its investments therein were maintained in their
functional currency, the Canadian dollar, and their revenues and expenses were translated into U.S. dollars using the average
exchange rate for the period. The assets and liabilities of these subsidiaries were translated into U.S. dollars using the exchange
rate in effect at the balance sheet date. Due to the fact that the Company's Canadian subsidiaries liquidated substantially all of
their assets, their functional currency changed to the U.S. dollar and approximately $14.5 million of accumulated foreign
currency translation loss was charged to the consolidated statement of operations during the year ended December 31, 2017. As
of December 31, 2016, foreign currency translation losses, net of tax, of approximately $7.3 million were reflected in
accumulated other comprehensive loss as a component of equity in the accompanying consolidated balance sheets. Foreign
currency transaction (gains) losses of approximately $(0.7) million, $(1.6) million and $2.7 million are included in other non-
operating (income) expense in the accompanying consolidated statements of operations for the years ended December 31,
2017, 2016 and 2015, respectively.
Comprehensive Income—Comprehensive income includes net income and other comprehensive income, 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”), as
amended and restated in 2015, approved by their shareholders. Under the LTIPs, the Corporation and ESH REIT may issue to
eligible employees or directors restricted stock awards ("RSAs"), restricted stock units ("RSUs") or other equity-based awards,
in respect of Paired Shares, with service, performance or market vesting conditions. The 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
86
recognized over the period during which an employee or director is required to provide services in exchange for the award; the
requisite service period (usually the vesting period). No compensation expense is recognized for awards for which employees
or directors do not render the requisite services. All 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’s hotel operations represent a single operating segment based on the way the Company
manages its business. The Company’s hotels provide similar services, use similar processes to sell those services and sell those
services to similar classes of customers. The amounts of long-lived assets and net revenues outside the U.S. are not significant
for any period presented.
Recently Issued Accounting Standards
Goodwill—In January 2017, the FASB issued an accounting standards update in which the guidance on testing for
goodwill was updated to eliminate Step 2 in the determination on whether goodwill should be considered impaired. Annual
and/or interim assessments are still required to be completed. This update will be effective or interim and annual reporting
periods beginning after December 15, 2019, with early adoption permitted. The Company does not expect the adoption of this
update to have a material effect on its consolidated financial statements.
Statement of Cash Flows—In August and November 2016, the FASB issued accounting standards updates which provide
additional clarity on the classification of specific events on the statement of cash flows. These events include debt prepayment
and extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a
business combination, proceeds from settlement of insurance claims, distributions received from equity method investees, and
beneficial interests in securitization transactions. These updates also require amounts generally described as restricted cash to
be included with cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on
the statement of cash flows. These updates are effective for annual reporting periods beginning after December 15, 2017,
including interim periods within those annual reporting periods, with early application permitted and should be applied using a
retrospective transition method to each period presented. The adoption of these updates will require cash outflows related to
debt prepayment and extinguishment costs to be classified as financing activities. For the years ended December 31, 2017,
2016 and 2015, debt modification and extinguishment costs included within net cash provided by operating activities totaled
approximately $2.4 million, $4.0 million and $0.9 million, respectively. Additionally, the effect of the adoption of these updates
on the Company's consolidated statements of cash flows will be to include restricted cash in the beginning and end of period
balances of cash, restricted cash and cash equivalents. The change in restricted cash is currently included in investing activities
in the consolidated statements of cash flows.
Compensation—Stock Compensation—In March 2016, the FASB issued an accounting standards update which identifies
areas for simplification involving several aspects of accounting for share-based payment transactions, including income tax
consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense
with actual forfeitures recognized as they occur, and certain classifications on the statement of cash flows. The Company
adopted this update on January 1, 2017 using a prospective transition method. The adoption of this update did not have a
material effect on the Company's consolidated financial statements.
In May 2017, the FASB issued an accounting standards update that provides guidance about which changes to the terms
or conditions of a share-based payment award requires an entity to apply modification accounting. This update will be effective
for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted and should be
applied prospectively to awards modified on or after the adoption date. The Company adopted this update on January 1, 2018
using a prospective transition method. The adoption of this update did not have a material effect on the Company's consolidated
financial statements.
Derivatives and Hedging—In August 2017, the FASB issued an accounting standards update which changes the
designation and measurement guidance for qualifying hedging relationships and the presentation of hedging results. This
update expands and refines hedge accounting and aligns recognition and presentation of its effects within the financial
statements. This update is effective for interim and annual reporting periods beginning after December 15, 2018, with early
adoption permitted, and will require a cumulative-effect adjustment to the balance of retained earnings as of the beginning of
the fiscal year that an entity adopts this update. The Company adopted this update on January 1, 2018 and recorded a
cumulative-effect adjustment to reclassify a previously recorded loss of approximately $0.7 million from retained earnings to
accumulated other comprehensive income. In addition to the cumulative-effect adjustment, expected impacts of adoption
include, on a prospective basis, the elimination of hedge ineffectiveness related to designated interest rate swaps, the
presentation of all interest rate hedge related items that impact earnings in the interest expense line item in the consolidated
statements of operations and an election to perform qualitative assessments of hedge effectiveness.
87
In March 2016, the FASB issued accounting standards updates to clarify the requirements for assessing whether
contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to
their debt hosts and to clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging
instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting
criteria continue to be met. The Company adopted these updates on January 1, 2017. The adoption of these updates did not
have a material effect on the Company's consolidated financial statements.
Leases—In February 2016, the FASB issued an accounting standards update which introduces a lessee model that
requires a right-of-use asset and lease obligation to be presented on the balance sheet for all leases, whether operating or
financing. The update eliminates the requirement in current U.S. GAAP for an entity to use bright-line tests in determining
lease classification. The update also requires lessors to increase the transparency of their exposure to changes in value of their
residual assets and how they manage that exposure. This update will be effective for interim and annual reporting periods
beginning after December 15, 2018, with early adoption permitted, and must be applied using a modified retrospective
approach, which will require adjustment to all periods presented.
As of December 31, 2017, using its incremental borrowing rate with respect to the future minimum lease payments under
its operating leases (ground leases and corporate office lease), the Company has preliminarily determined that the lease liability
would have been between approximately $14.5 million and $18.5 million and the right of use asset would have been between
approximately $6.5 million and $10.5 million, which includes adjustments for accrued lease payments, above market lease
liabilities and lease incentives.
The recording of a lease obligation may increase total indebtedness for purposes of financial covenants within certain of
the Company’s existing debt agreements; however, the Company currently does not expect this increase to cause instances of
non-compliance with any of these covenants. The Company does not expect the adoption of this update to have a material
effect on its consolidated statements of operations or cash flows. The Company expects to elect the optional practical
expedients which relate to the identification and classification of leases that commenced before the effective date, initial direct
costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend
or terminate a lease or to purchase the underlying asset. The election to apply these practical expedients will, in effect, mean the
Company will continue to account for leases that commenced before the effective date in accordance with previous U.S. GAAP
unless the lease is modified, except that the Company will recognize a right-of-use asset and a lease liability for all operating
leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and
disclosed under previous U.S. GAAP.
Contractual Revenue—The Company adopted ASC 606, Revenue from Contracts with Customers, on January 1, 2018, on
a modified retrospective basis. The core principle of ASC 606 is that recognized revenue reflects consideration to which a
company is entitled in exchange for specifically identified services. To achieve this principle, ASC 606 requires companies to
use the following five-step model as part of their revenue recognition process: (1) identify the contract; (2) identify
performance obligations; (3) determine the transaction price; (4) allocate the transaction price to performance obligations; and
(5) recognize revenue when performance obligations are satisfied.
Adoption of ASC 606 had no impact on the Company’s historical consolidated financial statements. Additionally, the
Company recognized no cumulative effect adjustment upon adoption. The impact of the standard is also expected to be
immaterial to the Company’s current sources of revenue on an ongoing basis. Adoption of the standard will result in enhanced
revenue-related disclosures in the first quarter of 2018 that will provide information with respect to the Company’s analysis of
certain contracts, significant judgments, future reservations and the disaggregation of revenue based on booking source and
length of guest stay.
With respect to revenue generated from owned and operated hotels, the Company applied, and expects to continue to
apply, the guidance in ASC 606 to a portfolio of contracts or performance obligations with similar characteristics, as the
Company reasonably expects that the effects on the financial statements of applying the guidance to the portfolio does not
differ materially from applying the guidance to individual contracts or performance obligations within that portfolio.
The Company implemented changes to its processes and procedures related to revenue recognition and the control
activities within them. These included the development of new policies based on the five-step model outlined above, additional
training, ongoing contract review requirements and procedures with respect to the validation of information expected to be
included in updated financial statement disclosures.
88
3. NET INCOME PER SHARE
Basic net income per share is computed by dividing net income available to common shareholders by the weighted-
average number of shares of the Corporation’s unrestricted common stock outstanding. Diluted net income per share is
computed by dividing net income available to common shareholders, as adjusted for potentially dilutive securities, by the
weighted-average number of shares of the Corporation’s unrestricted common stock outstanding plus potentially dilutive
securities. Dilutive securities include certain equity-based awards issued under long-term incentive plans (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):
Numerator:
Net income available to Extended Stay America, Inc.
common shareholders - basic
Income attributable to noncontrolling interests assuming
conversion
Net income available to Extended Stay America, Inc.
common shareholders - diluted
Denominator:
Weighted-average number of Extended Stay America, Inc.
common shares outstanding - basic
Dilutive securities
Weighted-average number of Extended Stay America, Inc.
common shares outstanding - diluted
Net income per Extended Stay America, Inc.
common share - basic
Net income per Extended Stay America, Inc.
common share - diluted
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Year Ended
December 31,
2015
$
$
$
$
78,847
$
69,932
$
113,040
(392)
(43)
(152)
78,455
$
69,889
$
112,888
193,101
569
193,670
200,572
164
200,736
0.41
0.41
$
$
0.35
0.35
$
$
204,211
356
204,567
0.55
0.55
89
4. HOTEL DISPOSITIONS
2017 Disposition of Extended Stay Canada-Branded Hotels—In 2017, the Company sold its three Extended Stay
Canada-branded hotels for gross proceeds of 76.0 million Canadian dollars, or approximately $55.3 million. The carrying
value of the hotels, including net working capital and allocable goodwill, net of an impairment charge recorded prior to the
sale, was approximately 56.7 million Canadian dollars, or approximately $41.2 million, prior to the evaluation of existing
accumulated foreign currency translation loss. Due to the fact that the Company’s Canadian subsidiaries liquidated
substantially all of their assets, approximately $14.5 million of accumulated foreign current translation loss was recognized at
the time of sale. This charge more than fully offset the Canadian subsidiaries’ gain on sale, which resulted in a loss on sale of
approximately $1.9 million, net of closing costs and adjustments, which is reported in gain on sale of hotel properties, net
during the year ended December 31, 2017 in the accompanying consolidated statement of operations.
2017 Additional Dispositions—In 2017, the Company sold two additional hotels for gross proceeds of $21.4 million. The
carrying value of these hotels, including net working capital and allocable goodwill, net of an impairment charge recorded prior
to the sale, was approximately $9.2 million, resulting in a gain on sale of approximately $11.9 million, net of closing costs and
adjustments, which is reported in gain on sale of hotel properties, net during the year ended December 31, 2017 in the
accompanying consolidated statements of operations.
2015 Dispositions of Crossland Economy Studios-Branded and Extended Stay America-Branded Hotels—In 2015, the
Company sold 53 hotel properties, 47 of which operated under the Crossland Economy Studios brand and six of which
operated under the Extended Stay America brand, and certain intellectual property of Crossland Economy Studios (the
“Portfolio Sale”), for gross proceeds of $285.0 million. The carrying value of the hotel portfolio, including net working capital
and allocable goodwill, was approximately $145.4 million, resulting in a gain on sale, net of closing costs and adjustments, of
approximately $130.9 million, which is reported in gain on sale of hotel properties, net during the year ended December 31,
2015 in the accompanying consolidated statements of operations.
None of the above dispositions were reported as discontinued operations. The table below summarizes hotel dispositions
for the years ended December 31, 2017, 2016 and 2015 (in thousands, except number of hotels and number of rooms):
Year (1)
2017
2017
2017
2015
Brand
Location
Extended Stay Canada
Canada
Other
Massachusetts
May
May
Extended Stay America
Colorado
December
Month
Sold
Number of
Hotels
Number of
Rooms
Net
Proceeds
Gain (Loss)
Recognized
3
1
1
500
103
160
$43,551
$5,092
$15,985
$(1,894)
$(2)
$11,870
(4)
(2)
(3)
Crossland Economy
Studios and Extended
Stay America
Multiple
December
53
6,617
$276,336
$130,894
____________________
(1) No hotels were sold during the year ended December 31, 2016.
(2) Due to the fact that the Company’s Canadian subsidiaries liquidated substantially all of their assets, approximately $14.5 million of
accumulated foreign currency translation loss was recognized at the time of sale. An impairment charge of approximately $12.4 million was
recorded prior to sale.
(3) Net of impairment charge of approximately $1.7 million.
(4) Net sale proceeds held by qualified intermediary pursuant to pending 1031 exchanges.
During the years ended December 31, 2017, 2016 and 2015, the disposed hotel properties contributed total room revenue
and other hotel revenues, total operating expenses and (loss) income before income tax expense as follows (in thousands):
Total room and other hotel revenues
Total operating expenses
(Loss) income before income tax expense
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Year Ended
December 31,
2015
$
5,295
$
14,925
$
83,546
16,950
(11,342) (1)
14,117
1,142 (2)
57,509
17,979 (3)
_____________________
(1)
(2)
(3)
Includes impairment charge of approximately $12.4 million.
Includes impairment charge of approximately $1.7 million.
Includes interest expense related to ESH REIT's previous mortgage loan repaid in conjunction with the Portfolio Sale.
90
5. PROPERTY AND EQUIPMENT
Net investment in property and equipment as of December 31, 2017 and 2016, consists of the following (in thousands):
Hotel properties:
Land and site improvements
Construction in process
Building and improvements
Furniture, fixtures and equipment
Total hotel properties
Corporate furniture, fixtures, equipment, software and other
Undeveloped land parcel
Total cost
Less accumulated depreciation:
Hotel properties
Corporate furniture, fixtures, equipment, software and other
Total accumulated depreciation
Property and equipment—net
December 31,
2017
December 31,
2016
$
1,286,784
$
1,303,752
2,453
2,934,048
649,487
4,872,772
21,486
1,675
—
2,940,615
612,855
4,857,222
20,076
1,675
4,895,933
4,878,973
(1,128,465)
(14,334)
(1,142,799)
(962,400)
(11,269)
(973,669)
$
3,753,134
$
3,905,304
During the years ended December 31, 2017, 2016 and 2015, the Company, using Level 3 unobservable inputs and, in
certain instances Level 2 observable inputs, assessed property and equipment for potential impairment. The Company
recognized impairment charges of approximately $25.2 million, including approximately $12.4 million related to the sold
Extended Stay Canada-branded hotels, $9.8 million and $9.0 million, respectively, in the accompanying consolidated
statements of operations. 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 micro and macro general economic
condition projections.
91
6.
INTANGIBLE ASSETS AND GOODWILL
The Company’s intangible assets and goodwill as of December 31, 2017 and 2016, consist of the following (dollars in
thousands):
December 31, 2017
Estimated
Useful
Life
Gross
Carrying
Amount
Accumulated
Amortization
Net Book
Value
Definite-lived intangible assets - customer relationships
20 years
$
26,800
$
(9,690) $
Indefinite-lived intangible assets - trademarks
Total intangible assets
Goodwill
Total intangible assets and goodwill
9,933
36,733
48,866
—
(9,690)
—
$
85,599
$
(9,690) $
17,110
9,933
27,043
48,866
75,909
December 31, 2016
Estimated
Useful
Life
Gross
Carrying
Amount
Accumulated
Amortization
Net Book
Value
Definite-lived intangible assets - customer relationships
20 years
$
26,800
$
(8,350) $
Indefinite-lived tangible assets - trademarks
Total intangible assets
Goodwill
Total intangible assets and goodwill
9,933
36,733
53,531
—
(8,350)
—
$
90,264
$
(8,350) $
18,450
9,933
28,383
53,531
81,914
The remaining weighted-average amortization period for definite-lived intangible assets is approximately 13 years as of
December 31, 2017. Estimated future amortization expense for definite-lived intangible assets is as follows (in thousands):
Years Ending December 31,
2018
2019
2020
2021
2022
Thereafter
Total
$
$
1,340
1,340
1,340
1,340
1,340
10,410
17,110
92
7. DEBT
During the years ended December 31, 2017 and 2016, the following debt transactions occurred (in thousands):
Debt, net of deferred financing costs and debt discount(s)- beginning of year
Additions:
Proceeds from term loan facilities, net of debt discount
Proceeds from senior notes payable, net of debt discount
Proceeds from revolving credit facilities
Amortization and write-off of deferred financing costs and debt discount (1)
Deductions:
Payments on mortgage loan
Payments on term loan facilities
Payments on revolving credit facilities
Payments of deferred financing costs (1)
December 31,
2017
December 31,
2016
$
2,585,274
$
2,762,388
—
—
105,000
7,437
1,293,500
788,000
70,000
29,091
—
(1,931,157)
(12,943)
(150,000)
—
(369,713) (2)
(25,000)
(31,835)
Debt, net of deferred financing costs and debt discounts(s) - end of year
$
2,534,768
$
2,585,274
______________________
(1) Excludes amortization and payments of deferred financing costs related to revolving credit facilities.
(2)
Includes principal payment of $3.25 million made in January 2017, included in accounts payable and accrued liabilities as of December 31, 2016.
The Company’s outstanding debt, net of unamortized debt discounts and unamortized deferred financing costs, as of
December 31, 2017 and 2016, consists of the following (in thousands):
Carrying Amount
Unamortized Deferred
Financing Costs
Interest Rate
Stated
Amount
(1)
December
31, 2017
December
31, 2016
December
31, 2017
December
31, 2016
1,300,000 (2)
1,278,545 (3)
1,290,560
13,433
15,804
Stated
Interest
Rate
LIBOR(4)
+ 2.25%(5)
December
31, 2017
December
31, 2016
Maturity
Date
3.69%
(5)
3.75%
8/30/2023 (7)
Loan
Term loan facilities
ESH REIT 2016 Term
Facility
Senior notes
ESH REIT 2025 Notes
1,300,000
1,290,356
(6)
1,289,041
20,700
23,523
5.25%
5.25%
5.25%
5/1/2025
Revolving credit
facilities(9)
ESH REIT 2016
Revolving Credit Facility
Corporation Revolving
2016 Credit Facility
Unsecured Intercompany
Facility
Unsecured Intercompany
Facility
Total
______________________
(1)
350,000
50,000
75,000 (9)
—
—
—
—
—
45,000
2,020 (8)
2,570 (8)
401 (8)
511 (8)
LIBOR +
2.75%
LIBOR +
3.00%
N/A
N/A
3.33%
8/30/2021
N/A
8/30/2021
$ 2,568,901
$ 2,624,601
$
36,554
$
42,408
—
—
5.00%
5.00%
5.00%
8/30/2023
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Amortization is interest only, except for the 2016 Term Facility (as defined below) which amortizes in equal quarterly installments of $3.22 million.
See (7) below.
ESH REIT is able to increase its borrowings under the 2016 ESH REIT Credit Facilities (as defined below) by an amount of up to $600.0 million,
plus additional amounts, in each case subject to certain conditions.
The 2016 Term Facility is presented net of an unamortized debt discount of approximately $5.3 million and $6.2 million as of December 31, 2017
and 2016, respectively.
As of December 31, 2016, the stated interest rate of the 2016 Term Facility was LIBOR + 3.00% and included a LIBOR floor of 0.75%.
$400.0 million of the 2016 Term Facility is subject to an interest rate swap at a fixed rate of 1.175% (see Note 8).
The ESH REIT 2025 Notes (as defined below) are presented net of an unamortized debt discount of approximately $9.6 million and $11.0 million as
of December 31, 2017 and 2016, respectively.
In addition to scheduled amortization noted in (1) above, subject to certain exceptions, annual mandatory prepayments of up to 50% of Excess Cash
Flow, as defined, may be required under the 2016 Term Facility commencing with the year ending December 31, 2017. Annual mandatory
prepayments for the year ended December 31, 2017 and each year thereafter, are due during the first quarter of the following year. No mandatory
prepayments are required in the first quarter of 2018 based on ESH REIT's Excess Cash Flow for the year ended December 31, 2017.
Unamortized deferred financing costs related to the revolving credit facilities are included in other assets in the accompanying consolidated balance
sheets.
As of December 31, 2017, no amounts were outstanding under the Unsecured Intercompany Facility. ESH REIT is able to increase its borrowings
under the Unsecured Intercompany Facility to an amount of up to $300.0 million, plus additional amounts, in each case subject to certain conditions.
The outstanding debt balance and interest expense, as applicable, owed by ESH REIT to the Corporation related to the Unsecured Intercompany
Facility eliminate in consolidation.
93
ESH REIT Credit Facilities
On August 30, 2016, ESH REIT entered into a new credit agreement, as may be amended and supplemented from time to
time, providing for senior secured credit facilities (collectively the "2016 ESH REIT Credit Facilities") consisting of a $1,300.0
million senior secured term loan facility (the "2016 Term Facility") and a $350.0 million senior secured revolving credit facility
(the "2016 ESH REIT Revolving Credit Facility"). Subject to the satisfaction of certain criteria, borrowings under the 2016
ESH REIT Credit Facilities may be increased by an amount of up to $600.0 million, plus additional amounts, so long as, after
giving effect to the incurrence of such incremental facility and the application of proceeds thereof, its pro-forma senior loan-to-
value ratio is less than or equal to 45%.
Obligations under the 2016 ESH REIT Credit Facilities are guaranteed by certain existing and future material domestic
subsidiaries of ESH REIT, other than those owning real property, subject to customary exceptions. Obligations under the 2016
ESH REIT Credit Facilities are secured, subject to certain exceptions, including an exception for real property, by a first-
priority security interest in substantially all of the assets of ESH REIT and the guarantors.
The 2016 ESH REIT Credit Facilities contain a number of restrictive covenants that, among other things and subject to
certain exceptions, limit ESH REIT’s ability and the ability of its subsidiaries to incur additional debt, modify existing debt,
create certain liens, pay dividends and distributions, make certain investments and other restricted payments, enter into affiliate
transactions, amend or modify certain material operating leases and management agreements, sell assets or merge, consolidate
or transfer all or substantially all of their assets. The 2016 ESH REIT Credit Facilities contain certain customary representations
and warranties, affirmative covenants and events of default, including, but not limited to, cross-defaults to certain other
indebtedness and certain material operating leases and management agreements. If an event of default occurs, the
administrative agent is entitled to take various actions, including the acceleration of amounts due under the 2016 ESH REIT
Credit Facilities and additional actions that a secured creditor is permitted to take following a default. As of December 31,
2017, ESH REIT was in compliance with all covenants under the 2016 ESH REIT Credit Facilities.
2016 Term Facility—In November 2017, ESH REIT entered into a second amendment to the ESH REIT 2016 Term
Facility, as amended (such amendment, the “Second Repricing Amendment”). The ESH REIT 2016 Term Facility, as amended,
bears interest at a rate equal to (i) LIBOR plus 2.00% 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 2.25% for any period other than a Level 1 Period; or (ii) a base rate
(determined by reference to the highest of (A) the prime lending rate, (B) the overnight federal funds rate plus 0.50% or (C) the
one-month adjusted LIBOR rate plus 1.00%) plus 1.00% during a Level 1 Period or base rate plus 1.25% for any period other
than a Level 1 Period. The ESH REIT 2016 Term Facility amortizes in equal quarterly installments in annual amounts of 1.0%
of the principal amount outstanding as of the Second Repricing Amendment, or approximately $12.9 million, with the
remaining balance payable at maturity. In addition to scheduled amortization, subject to certain exceptions, mandatory
prepayments of up to 50% of annual Excess Cash Flow, as defined, may be required based on ESH REIT's Consolidated
Leverage Ratio, each as defined. Annual mandatory prepayments are due during the first quarter of the following year. No
mandatory prepayments are required in the first quarter of 2018 based on ESH REIT's Excess Cash Flow for the year ended
December 31, 2017. The ESH REIT 2016 Term Facility matures on August 30, 2023.
ESH REIT has the option to voluntarily prepay outstanding loans under the 2016 Term Facility at any time upon three
business days’ prior written notice for LIBOR loans or on one business day’s prior written notice for base rate loans. In addition
to customary "breakage" costs with respect to LIBOR loans, amounts refinanced, substituted or replaced by indebtedness which
has a lower all-in yield than the all-in yield under the 2016 Term Facility on or prior to May 21, 2018 (other than as a result of a
transformative transaction) are subject to a prepayment penalty equal to 1.00% of the aggregate principal amount refinanced,
substituted or replaced. Prepayments made after May 21, 2018 are not subject to a prepayment penalty.
2016 ESH REIT Revolving Credit Facility—The 2016 ESH REIT Revolving Credit Facility provides for the issuance of
up to $50.0 million of letters of credit. Borrowings under the facility bear interest at a rate equal to (i) LIBOR plus a spread that
ranges from 2.25% to 2.75% based on ESH REIT’s Total Net Leverage Ratio, as defined, or (ii) base rate (determined by
reference to the highest of (A) the prime lending rate, (B) the overnight federal funds rate plus 0.50%, or (C) the one-month
adjusted LIBOR rate plus 1.00%) plus a spread that ranges from 1.25% to 1.75% based on ESH REIT’s Total Net Leverage
Ratio, as defined. There is no scheduled amortization under the 2016 ESH REIT Revolving Credit Facility and the facility
matures on August 30, 2021.
In addition to paying interest on outstanding principal, ESH REIT incurs a fee of 0.35% or 0.175% on the unutilized
revolver balance, based on the amount outstanding under the facility. ESH REIT is also required to pay customary letter of
94
credit fees and agency fees. As of December 31, 2017, ESH REIT had no letters of credit outstanding under the facility, an
outstanding balance of $0.0 million and available borrowing capacity of $350.0 million.
The 2016 ESH REIT Revolving Credit Facility is subject to a springing financial covenant whereby the senior loan-to-
value ratio may not exceed 45% when the aggregate principal amount of borrowings and letters of credit under the 2016 ESH
REIT Revolving Credit Facility, excluding up to $30.0 million of letters of credit, is equal to or greater than 25% of the
aggregate available principal amount of the 2016 ESH REIT Revolving Credit Facility on the applicable fiscal quarter end date.
ESH REIT Senior Notes Due 2025
In May 2015, ESH REIT issued $500.0 million of its 5.25% senior notes due in 2025 (together with the $800.0 million of
additional notes discussed below, the “2025 Notes”) under an indenture (the “Indenture”) with Deutsche Bank Trust Company
Americas, as trustee, at 100% of par value in a private placement pursuant to Rule 144A of the Securities Act ("Rule 144A"). In
March 2016, ESH REIT issued an additional $800.0 million of the 2025 Notes under the Indenture at 98.5% of par value in a
private placement pursuant to Rule 144A. The 2025 Notes mature on May 1, 2025 and bear interest at a fixed rate of 5.25% per
annum, payable semi-annually in arrears on May 1 and November 1 of each year.
The 2025 Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis by each of ESH
REIT’s subsidiaries that guarantee ESH REIT’s obligations under the 2016 ESH REIT Credit Facilities. The 2025 Notes rank
equally in right of payment with ESH REIT’s existing and future senior unsecured indebtedness, and senior in right of payment
to all future subordinated indebtedness, if any. The 2025 Notes are effectively junior to any of ESH REIT’s secured
indebtedness to the extent of the value of the assets securing such indebtedness.
ESH REIT may redeem the 2025 Notes at any time on or after May 1, 2020, in whole or in part, at a redemption price
equal to 102.625% of the principal amount, declining annually to 100% of the principal amount from May 1, 2023 and
thereafter, plus accrued and unpaid interest. Prior to May 1, 2020, ESH REIT may redeem the 2025 Notes, in whole or in part,
at a redemption price equal to 100% of the principal amount, plus a "make-whole" premium, as defined in the Indenture, plus
accrued and unpaid interest. Prior to May 1, 2018, subject to certain conditions, ESH REIT may redeem up to 35% of the
aggregate principal amount of the 2025 Notes at a redemption price equal to 105.250% of the aggregate principal amount
thereof, plus accrued and unpaid interest, with the net cash proceeds from certain equity offerings, provided 65% of the original
amount of the principal remains outstanding after the occurrence of each such redemption. Upon a Change of Control, as
defined, holders of the 2025 Notes have the right to require ESH REIT to redeem the 2025 Notes at 101% of the principal
amount, plus accrued and unpaid interest.
The Indenture contains a number of customary covenants that, among other things and subject to certain exceptions, limit
ESH REIT’s ability and the ability of its subsidiaries to incur additional debt, create certain liens, pay dividends or
distributions, make certain investments and other restricted payments, enter into affiliate transactions, sell assets or merge,
consolidate or transfer all or substantially all of their assets. The Indenture also contains certain customary events of default,
including, but not limited to, cross-defaults to certain other indebtedness. If an event of default occurs, the holders of the Notes
and the Trustee are entitled to take various actions, including declaring the 2025 Notes immediately due and payable. As of
December 31, 2017, ESH REIT was in compliance with all covenants set forth in the Indenture.
Corporation Revolving Credit Facility
On August 30, 2016, the Corporation entered into a revolving credit facility (the "2016 Corporation Revolving Credit
Facility") of $50.0 million. The facility provides for the issuance of up to $50.0 million of letters of credit as well as borrowing
on same day notice, referred to as swingline loans, in an amount up to $20.0 million. Borrowings under the facility bear interest
at a rate equal to (i) LIBOR plus 3.00% or (ii) base rate (determined by reference to the highest of (A) the prime lending rate,
(B) the overnight federal funds rate plus 0.50% or (C) the one-month adjusted LIBOR plus 1.00%) plus 2.00%. There is no
scheduled amortization under the 2016 Corporation Revolving Credit Facility and the facility matures on August 30, 2021.
In addition to paying interest on outstanding principal, the Corporation incurs a fee of 0.35% or 0.175% on the unutilized
revolver balance, based on the amount outstanding under the facility. The Corporation is also required to pay customary letter
of credit fees and agency fees. As of December 31, 2017, the Corporation had one letter of credit outstanding under this facility
of $0.2 million, an outstanding balance drawn of $0 and borrowing capacity available of $49.8 million.
Obligations under the 2016 Corporation Revolving Credit Facility are guaranteed by certain existing and future material
domestic subsidiaries of the Corporation, excluding ESH REIT and its subsidiaries and subject to customary exceptions. The
95
facility is secured, subject to certain exceptions, by a first-priority security interest in substantially all of the assets of the
Corporation and the guarantors.
If obligations are outstanding under the facility during any fiscal quarter, the 2016 Corporation Revolving Credit Facility
requires that the Consolidated Leverage Ratio, as defined, calculated as of the end of such fiscal quarter, be less than or equal to
8.75 to 1.00. The facility is also subject to a springing financial covenant whereby the senior loan-to-value ratio may not exceed
45% when the aggregate principal amount of borrowings and letters of credit under the 2016 Corporation Revolving Credit
Facility, excluding up to $30.0 million of letters of credit, is equal to or greater than 25% of the aggregate available principal
amount of the 2016 Corporation Revolving Credit Facility on the applicable fiscal quarter end date.
The 2016 Corporation Revolving Credit Facility contains a number of restrictive covenants that, among other things and
subject to certain exceptions, limit the Corporation’s ability and the ability of its subsidiaries to incur additional debt, modify
existing debt, create certain liens, pay dividends or distributions, make certain restricted payments, enter into affiliate
transactions, amend or modify certain material operating leases and management agreements, merge, consolidate or transfer all
or substantially all of its assets. The 2016 Corporation Revolving Credit Facility also contains certain customary affirmative
covenants and events of default, including, but not limited to, cross-defaults to certain other indebtedness and certain material
operating leases. If an event of default occurs, the administrative agent is entitled to take various actions, including the
acceleration of amounts due under the facility and additional actions that a secured creditor is permitted to take following a
default. As of December 31, 2017, the Corporation was in compliance with all covenants under the 2016 Corporation
Revolving Credit Facility.
Unsecured Intercompany Facility
On August 30, 2016, ESH REIT, as borrower, and the Corporation, as lender, entered into an unsecured intercompany
credit facility (the "Unsecured Intercompany Facility"), under which ESH REIT borrowed $75.0 million from the Corporation
upon the facility's closing. As of December 31, 2017 and 2016, the amount outstanding under the facility totaled $0 and $50.0
million, respectively. Subject to certain conditions, the principal amount of the Unsecured Intercompany Facility may be
increased up to an amount that shall not exceed the greater of (i) $300.0 million and (ii) an unlimited amount so long as the
incremental loan-to-value ratio, determined on a pro-forma basis as of the last day of the most recently ended test period, as if
any incremental loans available under such incremental commitments had been outstanding on the last day of such period, and,
in each case, without netting the cash proceeds of any such incremental loans, does not exceed 5.0%. Loans under the facility
bear interest at 5.00% per annum. There is no scheduled amortization under the facility and the facility matures on August 30,
2023. ESH REIT has the option to voluntarily prepay outstanding loans at any time upon one business day’s prior written
notice.
The Unsecured Intercompany Facility contains a number of restrictive covenants that, among other things and subject to
certain exceptions, limit ESH REIT’s ability and the ability of its subsidiaries to incur additional debt, modify existing debt,
create certain liens, pay dividends or distributions, make certain investments and other restricted payments, enter into affiliate
transactions, amend or modify certain material operating leases and management agreements, sell assets or merge, consolidate
or transfer all or substantially all of their assets. The facility contains certain customary representations and warranties,
affirmative covenants and events of default, including, but not limited to, cross-defaults to certain other indebtedness and
certain material operating leases and management agreements. If an event of default occurs, the Corporation is entitled to take
various actions, including the acceleration of amounts due under the facility and all other actions that a creditor is permitted to
take following a default. As of December 31, 2017, ESH REIT was in compliance with all covenants under the Unsecured
Intercompany Facility.
Interest Expense—The components of net interest expense for the years ended December 31, 2017, 2016 and 2015 are
as follows (in thousands):
Contractual interest(1)
Amortization of deferred financing costs and debt discount
Debt extinguishment and other costs
Interest income
Total
______________________
Year Ended
December 31, 2017
Year Ended
December 31, 2016
Year Ended
December 31, 2015
$
$
118,510
$
127,633
$
8,097
3,335
(170)
9,882
27,435
(413)
129,772
$
164,537
$
123,411
10,490
4,198
(317)
137,782
(1)
Contractual interest includes dividends on the shares of mandatorily redeemable preferred stock (see Note 9).
96
Future Maturities of Debt—The future maturities of debt as of December 31, 2017, are as follows (in thousands):
Years Ending December 31,
2018
2019
2020
2021
2022
Thereafter
Total
$
$
12,870
12,870
12,870
12,870
12,870
2,519,457 (1)
2,583,807
______________________
(1) Under the 2016 Term Facility, annual mandatory prepayments of up to 50% of Excess Cash Flow, as defined, may be required commencing with the
year ending December 31, 2017. Annual mandatory prepayments for the year ending December 31, 2017 and each year thereafter, are due during the
first quarter of the following year.
Fair Value of Debt—As of December 31, 2017 and 2016, the estimated fair value of the Company's debt was
approximately $2.6 billion and $2.7 billion, respectively. Estimated fair values are determined by comparing current borrowing
rates and risk spreads offered in the market to the stated interest rates and spreads on the Company's debt (Level 2 fair value
measures) or quoted market prices (Level 1 fair value measures), when available.
8. DERIVATIVE INSTRUMENTS
In September 2016, ESH REIT entered into a floating-to-fixed interest rate swap at a fixed rate of 1.175% and a floating
rate of one-month LIBOR, subject to a LIBOR floor of 0.75%, to manage its exposure to interest rate risk on a portion of the
2016 Term Facility. In February 2017, ESH REIT executed an amendment to its swap agreement, the impact of which was to
remove the LIBOR floor on floating rate cash flows. The notional amount of the interest rate swap as of December 31, 2017
was $400.0 million. On March 30, 2018, the notional amount decreases to $350.0 million, and the notional amount continues to
decrease by an additional $50.0 million every six months until the swap's maturity in September 2021.
From inception through the February 2017 amendment to ESH REIT's swap agreement, the swap was designated as an
effective cash flow hedge and changes in fair value were recognized through accumulated other comprehensive income.
Concurrent with the February 2017 swap amendment and through April 2017, the swap's designation as a cash flow hedge was
reversed and changes in fair value were recognized in earnings and are included in the line item other non-operating income
(expense) on the accompanying consolidated statements of operations. In April 2017, ESH REIT redesignated the swap as an
effective cash flow hedge. Subsequent to April 2017, the effective portion of changes in fair value are recognized through
accumulated other comprehensive income and the ineffective portion of changes in fair value are recognized in other non-
operating income (expense) on the accompanying consolidated statements of operations. Prior changes recognized through
accumulated other comprehensive income are amortized over the remaining life of the swap through earnings and are included
in the line item other non-operating income (expense) on the accompanying consolidated statements of operations. As of
December 31, 2017, approximately $1.3 million is expected to be recognized through earnings over the following twelve
months.
On January 1, 2018, the Company adopted ASU 2017-12 which changes the designation and measurement guidance for
qualifying hedging relationships and the presentation of hedging results, and as a result recorded a cumulative-effect
adjustment to reclassify a previously recorded loss of approximately $0.7 million from retained earnings to accumulated other
comprehensive income. Consistent with the adoption of the ASU, the Company will have the ability to, and plans to, elect to
perform qualitative assessments of hedge effectiveness. Additionally, on a prospective basis, all changes in the fair value of the
swap expect to be recognized through accumulated other comprehensive income and all interest rate hedge related items that
impact earnings will be presented in the interest expense line item in the consolidated statements of operations.
The table below presents the amounts and classification on the Company's financial statements related to the ESH REIT
interest rate swap (in thousands):
97
As of December 31, 2017
As of December 31, 2016
For the year ended December 31, 2017
For the year ended December 31, 2016
Other Assets
Accumulated other
comprehensive
income, net of tax
Other non-
operating
expense (income)
Interest
Expense, Net
$
$
6,387 $
4,990 $
5,992 (1)
3,898
$
$
314 (2) $
$
—
(707)
(183)
_______________________________
(1)
(2)
Changes during the year ended December 31, 2017 on a pre-tax basis, consisted of changes in fair value of $1.4 million (effective
portion) and amortization of accumulated other comprehensive income prior to de-designation of $0.7 million.
Consists of amortization of accumulated other comprehensive income prior to de-designation of $0.7 million and removal of the
LIBOR floor of approximately $(0.3) million.
9. MANDATORILY REDEEMABLE PREFERRED STOCK
The Corporation has authorized 350.0 million shares of preferred stock, par value $0.01 per share, of which 7,133 and
21,202 shares of mandatorily redeemable voting preferred stock were issued and outstanding as of December 31, 2017 and
2016, respectively. Dividends on these preferred shares are payable quarterly in arrears at a rate of 8.0% per year. With respect
to dividend, distribution and liquidation rights, the 8.0% voting preferred stock ranks senior to the Corporation’s common
stock. Holders of the 8.0% voting preferred stock are generally entitled to one vote for each share and will vote together with
the Corporation common stock as a single class on all matters that the Corporation’s common shareholders are entitled to vote
upon. On or after November 15, 2018, a holder of the 8.0% voting preferred stock has the right to require the Corporation to
redeem in cash the 8.0% voting preferred stock at $1,000 per share plus any accumulated unpaid dividends. On November 15,
2020, the Corporation shall mandatorily redeem all of the 8.0% voting preferred stock at $1,000 per share plus any
accumulated unpaid dividends.
Due to the fact that the 8.0% voting preferred stock is mandatorily redeemable by the Corporation, it is classified as a
liability on the accompanying consolidated balance sheets. Dividends on these preferred shares are classified as net interest
expense on the accompanying consolidated statements of operations.
Fair Value of Mandatorily Redeemable Preferred Stock—As of December 31, 2017 and 2016, the estimated fair value
of the 8.0% mandatorily redeemable voting preferred stock was approximately $7.1 million and $21.3 million, respectively.
The estimated fair value of the 8.0% mandatorily redeemable voting preferred stock is determined by comparing current
borrowing rates and risk spreads offered in the market to the stated interest rates and spreads (Level 2 fair value measures).
10. INCOME TAXES
Income before income tax expense for the years ended December 31, 2017, 2016 and 2015 consists of the following (in
thousands):
U.S.
Canada
Total
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Year Ended
December 31,
2015
$
$
244,995
(13,293)
231,702
$
$
196,557
1,146
197,703
$
$
362,844
(3,286)
359,558
98
The components of income tax expense for the years ended December 31, 2017, 2016 and 2015 are as follows (in
thousands):
Federal (including foreign):
Current
Deferred
State:
Current
Deferred
Total
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Year Ended
December 31,
2015
$
$
49,307
$
1,675
51,495
$
(23,377)
9,244
(712)
8,831
(2,598)
59,514
$
34,351
$
56,282
8,183
11,545
526
76,536
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, 2017, 2016 and 2015 are as follows (in thousands):
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Year Ended
December 31,
2015
$
81,096
35.0% $
69,196
35.0% $
125,845
35.0%
Tax at statutory rate
State income tax
Foreign income tax rate differential
Nondeductible (nontaxable):
ESH REIT income
Change in expected distribution policy
Equity-based compensation
Other permanent differences
Estimate of future nontaxable distributions from
ESH REIT
Change in ESH REIT temporary differences
Change in deferred tax rate(1)
Valuation allowance
Tax credits
Other - net
5,578
(4,741)
2.4
(2.0)
(25,689)
(11.1)
—
(263)
3,283
(2,054)
(2,102)
4,051
(427)
(497)
1,279
—
(0.1)
1.4
(0.9)
(0.9)
1.7
(0.2)
(0.2)
0.6
2,891
891
(34,132)
(1,633)
807
743
(8,461)
3,917
—
981
(648)
(201)
1.5
0.5
(17.3)
(0.8)
0.4
0.3
(4.3)
2.0
—
0.5
(0.3)
(0.1)
7,987
4
2.2
—
(59,386)
(16.5)
—
954
1,247
—
(399)
—
923
—
(639)
—
0.3
0.3
—
(0.1)
—
0.3
—
(0.2)
21.3%
Income tax expense - net
$
59,514
25.7% $
34,351
17.4% $
76,536
________________________
(1) Reflects the impact of the TCJA on Corporation deferred tax assets, specifically the remeasurement of deferred tax assets at December 31, 2017, using
newly enacted tax rates, which resulted in deferred income tax expense.
99
The significant components of deferred tax assets and deferred tax liabilities as of December 31, 2017 and 2016, consist
of the following (in thousands):
December 31,
2017
December 31,
2016
Deferred tax assets:
Net operating loss carryforwards
Accruals and allowances
Equity-based compensation
Depreciable property
Other
Total deferred tax assets
Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Undistributed ESH REIT income
Intangible assets
Prepaid expenses
Other
$
2,900
$
15,072
1,603
4,028
426
24,029
(2,900)
21,129
(9,676)
(2,545)
(763)
(20)
Total net deferred tax assets (liabilities):
$
8,125
$
4,646
32,268
4,411
1,570
273
43,168
(4,646)
38,522
(17,954)
(3,650)
(3,810)
(18)
13,090
The Corporation's taxable income includes the taxable income of its wholly-owned subsidiaries and distribution income
related to its ownership of approximately 57% of ESH REIT.
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 (including any applicable alternative minimum tax) and generally would be precluded
from qualifying as a REIT for the subsequent four taxable years following the year during which it lost its REIT qualification.
Even in qualifying as a REIT, ESH REIT may be subject to state and local taxes in certain jurisdictions, and is subject to federal
income and excise taxes on undistributed income.
ESH REIT intends to distribute its taxable income to the extent necessary to optimize its tax efficiency including, but not
limited to, maintaining its REIT status, while retaining sufficient capital for its ongoing needs. Accordingly, ESH REIT expects
to distribute approximately 100% of its taxable income for the foreseeable future. However, as of December 31, 2015, the
expectation was to distribute approximately 95% of ESH REIT’s taxable income. As a result of this change, during the year
ended December 31, 2016, the Company recognized a benefit of approximately $1.7 million with respect to the reversal of net
deferred tax liabilities recorded as of December 31, 2015, which represented the previously estimated 5% of taxable income to
be retained by ESH REIT under its prior distribution policy.
On December 20, 2017, the U.S. Congress passed TCJA, which was signed into law on December 22, 2017. The TCJA
includes numerous changes to existing tax law, including a permanent reduction in the federal corporate income tax rate from
35% to 21%. The rate reduction is effective for the Company as of January 1, 2018.
The Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) 118 to assist public companies in
addressing uncertainty and diversity of views in applying ASC 740, Income Taxes, in the reporting period in which the TCJA
was enacted. SAB 118 provides the option of reporting a reasonable estimate for certain income tax effects of the TCJA in
situations in which a company does not have complete information available, prepared or analyzed in reasonable detail to
complete the accounting. The estimate is reported as a provisional amount in a company’s financial statements during a
measurement period that should not extend beyond one-year from the enactment date.
As of December 31, 2017, the Company has not completed its accounting for all tax effects related to the enactment of
the TCJA. The Company estimated the remeasurement of its net deferred tax asset based on the 21% federal corporate income
tax rate and recorded provisional deferred income tax expense of approximately $4.1 million during the year ended December
100
31, 2017. However, the Company is still analyzing the TCJA and refining its calculations, including the TCJA’s effect on state
income taxes, the transition rules applicable to the deductibility of certain types of expenses and certain other matters, all of
which are subject to complex rules and continued interpretation. The Company expects to complete its analysis prior to filing
its 2017 federal tax return, which will occur during the measurement period. At that time, which is expected to occur in the
fourth quarter of 2018, the Company will conclude on further adjustments, if any, to be recorded in addition to the
approximately $4.1 million provisional expense recorded during the year ended December 31, 2017.
In 2017 and 2016, ESH REIT recognized a dividends paid deduction for 100% of its taxable income, incurring no federal
income tax and minimal state and local income taxes. For the years ended December 31, 2017 and 2016, the Company
recognized an income tax benefit of approximately $2.1 million and $9.4 million, respectively, attributable to a December 2015
statutory law change in the way earnings and profits are computed at ESH REIT.
In 2015, ESH REIT distributed approximately 95% of its taxable income and utilized its federal net operating loss
carryforward of approximately $18.6 million. As a result, in 2015, ESH REIT incurred minimal current federal income tax in
the form of alternative minimum tax.
ESH REIT had taxable income prior to distributions of approximately $231.6 million, $210.2 million and $369.0 million
for the years ended December 31, 2017, 2016 and 2015, respectively. In 2017, ESH REIT made approximately $235.1 million
in cash distributions to its shareholders, all of which were considered ordinary taxable income. ESH REIT's 2017 cash
distributions included approximately $6.2 million previously deducted in 2016 to fully offset 2016 taxable income. In 2016,
ESH REIT made approximately $280.9 million in cash distributions to its shareholders, all of which were considered ordinary
taxable income. The 2016 cash distribution amount included a special distribution of approximately $86.5 million paid in
January 2016. Approximately $77.1 million of the special distribution was deductible in 2015; the remaining $9.4 million was
deductible in 2016. The special distribution was subject to current taxation to the Corporation as a distribution in 2016 at the
time of receipt. In 2015, ESH REIT made approximately $273.1 million in cash distributions to its shareholders, of which
approximately $113.0 million were considered capital gain and approximately $160.1 million were considered ordinary taxable
income.
As of December 31, 2017 and 2016, the Company recorded a valuation allowance related to the net operating loss
carryforwards of its Canadian Operating Lessee and state net operating losses of 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.
As of December 31, 2017, the book basis of ESH REIT’s property and equipment was approximately $60.4 million
greater than the tax basis.
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
2014 to present are subject to examination by the Internal Revenue Service and other tax returns for the years 2013 to present
are subject to examination by other taxing authorities.
101
11. QUARTERLY RESULTS (Unaudited)
Quarterly financial data for the years ended December 31, 2017 and 2016 is as follows (in thousands, except per share
data):
Three Months Ended
March 31,
Three Months Ended
June 30,
Three Months Ended
September 30,
2017
2016
2017 (1)
2016
2017
2016
Three Months Ended
December 31,
2017 (2)
2016
$ 290,991
$ 287,558
$
338,363
$
332,789
$ 350,866
$ 354,521
$
302,505
$
295,725
52,931
16,063
63,756
14,753
98,442
49,725
104,712
117,918
121,340
61,386
66,250
57,065
91,784
40,150
70,856
30,148
7,038
2,293
2,050
(657)
(12,374)
(10,509)
(90,055)
(84,547)
23,101
17,046
51,775
60,729
53,876
46,556
(49,905)
(54,399)
$
$
0.12
0.12
$
$
0.08
0.08
$
$
0.27
0.27
$
$
0.30
0.30
$
$
0.28
0.28
$
$
0.23
0.23
$
$
(0.26)
$
(0.28)
(0.26) (4) $
(0.28)
Total revenues
Income from operations
Net income
Net (income) loss attributable to
noncontrolling interests
Net income (loss) attributable to
common shareholders
Net income (loss) per common
share—basic(3)
Net income (loss) per common
share—diluted(3)
_________________________
Includes loss on sale of four hotel properties of approximately $(1.9) million, as discussed in Note 4.
Includes gain on sale of one hotel property of approximately $11.9 million, as discussed in Note 4.
(1)
(2)
(3) The sum of the four quarters may differ from the annual amount due to rounding.
(4) Excludes approximately 0.5 million anti-dilutive securities.
12. EQUITY
The Corporation
The Corporation has authorized 3,500.0 million shares of common stock, par value $0.01 per share, of which
approximately 192.1 million and 195.4 million shares were issued and outstanding as of December 31, 2017 and 2016,
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 7,133 and 21,202
shares of mandatorily redeemable voting preferred stock were issued and outstanding as of December 31, 2017 and 2016,
respectively. Dividends on these mandatorily redeemable voting preferred shares are payable quarterly in arrears at a rate of
8.0% per year. With respect to dividend, distribution and liquidation rights, the 8.0% mandatorily redeemable voting preferred
stock ranks senior to the Corporation’s common stock. The outstanding 8.0% mandatorily redeemable voting preferred shares
are classified as a liability on the accompanying consolidated balance sheets and are further described in Note 9.
The Corporation paid cash distributions totaling approximately $56.1 million, $74.2 million and $12.3 million during the
years ended December 31, 2017, 2016 and 2015, respectively, to its common shareholders, all of which were considered
taxable dividends.
In December 2015, the Boards of Directors of the Corporation and ESH REIT authorized a combined Paired Share
repurchase program for up to $100 million of Paired Shares. In February 2016, the Boards of Directors of the Corporation and
ESH REIT authorized an increase of the combined Paired Share repurchase program from up to $100 million to up to $200
million of Paired Shares. In December 2016, the Boards of Directors of the Corporation and ESH REIT authorized an increase
of the combined Paired Share repurchase program from up to $200 million to up to $300 million of Paired Shares and extended
the maturity of the Paired Share repurchase program through December 31, 2017, each effective January 1, 2017. In January
2018, the Boards of Directors of the Corporation and ESH REIT authorized an extension of the maturity date of the Paired
Share repurchase program through December 31, 2018, each effective on January 1, 2018. 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, 2017, the Corporation and ESH REIT repurchased and retired
approximately 13.0 million Paired Shares for approximately $125.8 million and $76.4 million, respectively, of which
approximately 5.8 million Paired Shares were repurchased and retired from the Selling Stockholders.
102
Noncontrolling Interests
As of December 31, 2017 and 2016, third party equity interests in the Corporation consist of the outstanding shares of the
Class B common stock of ESH REIT, which represent approximately 43% and 44% of ESH REIT’s total common equity,
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
approximately 250.5 million shares were issued and outstanding as of December 31, 2017 and 2016. All issued and outstanding
shares of ESH REIT Class A common stock were held by the Corporation as of December 31, 2017 and 2016. ESH REIT has
authorized 7,800.0 million shares of Class B common stock, par value $0.01 per share, of which approximately 192.1 million
and 195.4 million shares were issued and outstanding as of December 31, 2017 and 2016, 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, 2017 and 2016. Additionally, ESH REIT has authorized 125 shares of preferred stock,
no par value, all of which were issued and outstanding as of December 31, 2017 and 2016. 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 approximately $235.6 million (of which approximately $132.8 million was
paid to the Corporation), $281.4 million (of which approximately $155.3 million was paid to the Corporation), and $273.1
million (of which approximately $150.3 million was paid to the Corporation) during the years ended December 31, 2017, 2016
and 2015, respectively.
In December 2015, the Board of Directors of ESH REIT declared a special cash distribution of $0.19 per share, payable
to ESH REIT’s Class A and Class B common shareholders, totaling approximately $86.5 million. Approximately $47.6 million
was payable to the Corporation and was eliminated in consolidation; the remainder, approximately $38.9 million, was payable
to ESH REIT Class B common shareholders. ESH REIT paid this special distribution in January 2016.
As noted above, in December 2015, the Board of Directors of ESH REIT, together with the Board of Directors of the
Corporation, authorized a combined Paired Share repurchase program for up to $100 million of the Paired Shares. In February
2016, the Boards of Directors of the Corporation and ESH REIT authorized an increase of the combined Paired Share
repurchase program from up to $100 million to up to $200 million of Paired Shares. In January, 2017, the Boards of Directors
of the Corporation and ESH REIT authorized an increase of the combined Paired Share repurchase program from up to $200
million to up to $300 million of Paired Shares and extended the maturity of the Paired Share repurchase program through
December 31, 2017. In January 2018, the Boards of Directors of the Corporation and ESH REIT authorized an extension of the
maturity date of the Paired Share repurchase program through December 31, 2018, each effective on January 1, 2018.
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, 2017, ESH REIT
repurchased and retired approximately 13.0 million ESH REIT Class B common shares for approximately $76.4 million, of
which approximately 5.8 million ESH REIT Class B common shares were repurchased and retired from the Selling
Stockholders.
13. COMMITMENTS AND CONTINGENCIES
Lease Commitments—The Company is a tenant under long-term ground leases at four of its hotel properties. The initial
terms of the ground lease agreements terminate at various dates between 2021 and 2096, and three leases include multiple
renewal options for generally five or ten year periods. The Company is a tenant under an office lease for its corporate office.
The initial term of the office lease terminates in August 2021 and includes renewal options for two additional terms of five
years each.
103
Rent expense on ground and office leases is recognized on a straight-line basis and was approximately $3.2 million for
the year ended December 31, 2017 and approximately $3.3 million for each of the years ended December 31, 2016 and 2015.
Ground lease expense is included in hotel operating expenses and office lease expense is included in general and administrative
expenses in the accompanying consolidated statements of operations.
Future minimum lease payments under operating leases as of December 31, 2017, are as follows (in thousands):
Years Ending
December 31,
2018
2019
2020
2021
2022
Thereafter
Total
$
$
2,788
2,843
2,964
2,288
876
79,808
91,567
Other Commitments—The Company has a commitment to make quarterly payments in lieu of taxes to the owner of the
land on which one of its properties is located. The initial term of the agreement terminates in 2031. The cost related to this
commitment was approximately $0.3 million for each of the years ended December 31, 2017, 2016 and 2015, and is included
in hotel operating expenses in the accompanying consolidated statements of operations.
Letter of Credit—As of December 31, 2017, the Company had one outstanding letter of credit, issued by the
Corporation, for $0.2 million, which is collateralized by the 2016 Corporation Revolving Credit Facility.
Paired Share Repurchase Commitment—As of December 31, 2017, the Corporation and ESH REIT agreed to
repurchase 73,600 Paired Shares for approximately $0.9 million and $0.5 million, respectively, for which settlement had not yet
occurred.
Legal Contingencies—On February 14, 2018, the Company learned that a default judgment had been entered against it
and certain of its affiliates on March 16, 2017 in the State Court of Gwinnett County, Georgia in an action entitled Sweeting v.
Extended Stay America, Inc. et al., Case No. 16-C-06630-S4. The Company has filed motions to open the default and set aside
the judgment. The Company believes that it is probable that the judgment will be set aside. The Company does not have
sufficient information on which to estimate the liability, if any, and therefore has not recorded a liability for this matter.
The Company is not a party to 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 claims
and litigation, individually or in the aggregate, will not have a material adverse effect on its business or consolidated financial
statements.
14. EQUITY-BASED COMPENSATION
The Corporation and ESH REIT each maintain an LTIP, as amended and restated in 2015, approved by their shareholders.
Under the LTIPs, the Corporation and ESH REIT may issue to eligible employees or directors RSAs, RSUs or other equity-
based awards, in respect of Paired Shares, with service, performance or market vesting conditions. The aggregate number of
Paired Shares that may be the subject of awards under the LTIPs shall not exceed 8.0 million, of which no more than 4.0
million may be granted as incentive stock options. Each of the Corporation’s and ESH REIT’s LTIP has a share reserve of an
equivalent number of shares of Corporation common stock and ESH REIT Class B common stock. As of December 31, 2017,
approximately 5.4 million Paired Shares were available for future issuance under the LTIPs.
Equity-based compensation expense is recognized by amortizing the grant-date fair value of equity-based awards on a
straight-line basis over the requisite service period of each award. A portion of the grant-date fair value of all equity-based
awards is allocated to a share of Corporation common stock and a portion is allocated to a share of ESH REIT Class B common
stock. Equity-based compensation expense was approximately $7.6 million, $12.0 million and $10.5 million for the years
ended December 31, 2017, 2016 and 2015, respectively, and is included in general and administrative expenses in the
accompanying consolidated statements of operations.
104
As of December 31, 2017, unrecognized compensation expense related to outstanding equity-based awards and the
related weighted-average period over which it is expected to be recognized subsequent to December 31, 2017, is presented in
the following table. Total unrecognized compensation expense will be adjusted for actual forfeitures.
Unrecognized
Compensation
Expense
Related to
Outstanding
Awards
(in thousands)
Remaining
Weighted-
Average
Amortization
Period
(in years)
RSAs/RSUs with service vesting conditions
RSUs with performance vesting conditions
RSUs with market vesting conditions
Total unrecognized compensation expense
$
$
4,767
—
1,494
6,261
1.5
—
1.8
RSA/RSU activity during the years ended December 31, 2017, 2016 and 2015, was as follows:
Service-Based Awards
Performance Vesting
Market Vesting
Number of
RSAs/RSUs
(in thousands)
Weighted-
Average Grant-
Date Fair
Value(1)
Number of
RSUs
(in thousands)
Weighted-
Average Grant-
Date Fair
Value
Number of
RSUs
(in thousands)
Weighted-
Average Grant-
Date Fair
Value(1)
Performance-Based Awards
1,071
462
$
$
(499) $
(42) $
992
536
$
$
(582) $
(54) $
892
272
$
$
(417) $
(145) $
602
45
847
46
556
$
$
$
$
$
16.43
18.93
15.19
15.99
18.24
14.08
16.66
15.56
16.93
17.51
17.75
15.13
17.06
23.74
16.57
23.66
18.46
— $
19
$
— $
— $
19
166
$
$
(19) $
(47) $
119
192
$
$
(119) $
(39) $
153
119
$
$
— $
145
$
— $
—
19.07
—
—
19.07
14.07
19.07
14.07
14.07
17.45
14.07
17.45
17.45
14.07
—
17.45
—
— $
557
$
— $
(1) $
556
441
$
$
— $
(25) $
972
104
$
$
— $
(865) $
211
$
— $
972
41
170
$
$
$
—
6.84
—
20.76
6.81
12.03
—
13.19
9.01
18.58
—
8.35
16.46
—
9.01
20.76
20.48
Outstanding at January 1, 2015
Granted
Settled
Forfeited
Outstanding at December 31, 2015
Granted
Settled
Forfeited
Outstanding at December 31, 2016
Granted
Settled
Forfeited
Outstanding at December 31, 2017
Vested at December 31, 2016
Nonvested at December 31, 2016
Vested at December 31, 2017
Nonvested at December 31, 2017
_____________________
(1) An independent valuation was performed contemporaneously with the issuance of grants.
Service-Based Awards
The Corporation granted approximately 246,000 service-based awards during the year ended December 31, 2017, with a
weighted-average grant-date fair value per award of $17.50. ESH REIT granted approximately 26,000 service-based awards
during the year ended December 31, 2017, with a grant-date fair value per award of $17.56. The grant-date fair value of awards
with service vesting conditions is based on the closing price of a Paired Share on the date of grant. Service-based awards vest
over a period of two to four years, subject to the grantee’s continued employment or service.
105
Performance-Based Awards
The Corporation granted approximately 192,000 awards with performance vesting conditions during the year ended
December 31, 2017, with a grant-date fair value per award of $17.45. The grant-date fair value of awards with performance
vesting conditions is based on the closing price of a Paired Share on the date of grant. Equity-based compensation expense with
respect to these awards is adjusted over the 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 Corporation granted approximately 104,000 awards with market vesting conditions during the year ended
December 31, 2017, with a grant-date fair value per award of $18.58. The grant-date fair value of awards with market vesting
conditions is based on an independent third-party valuation. These awards vest at the end of a three-year period, subject to the
grantee’s continued employment, with the ability to earn Paired Shares in a range of 0% to 150% 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, 2017, 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
Risk–free rate of return
Expected dividend yield
2.86 years
1.46%
4.72%
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. Through December 31, 2015, the plan had an employer-matching contribution of 50% of
the first 6% of an employee’s contribution, which vested over an employee’s initial five-year service period. For the period
from January 1, 2016 through September 9, 2016, the plan had an employer-matching contribution of 100% of the first 3% of
an employee's contribution and 50% of the next 2% of an employee's contribution, which vested immediately. Beginning
January 1, 2017, the plan has an employer-matching contribution of 50% of the first 6% of an employee’s contribution, which
vests over an employee’s initial three-year service period. The plan also provides for contribution of up to 100% of eligible
employee pretax salary, subject to the Code’s annual deferral limit of $18,000 during 2017, 2016 and 2015. Employer
contributions, net of forfeitures, totaled approximately $1.7 million, $2.7 million and $1.7 million for the years ended
December 31, 2017, 2016 and 2015, respectively.
In June 2016, ESA Management established a non-qualified deferred compensation plan to allow certain eligible
employees an option to defer a portion of their compensation on a tax-deferred basis. Beginning January 2017, the plan had an
employer-matching contribution of 50% of the first 6% of an employee's contribution, which vests over a three-year service
period. The plan is fully funded in a Rabbi Trust, which is subject to creditor claims in the event of insolvency, but the assets
held in the Rabbi Trust are not available for general corporate purposes. As of December 31, 2017 and 2016, approximately
$0.9 million and $0.1 million, respectively, are included in other assets and accounts payable and accrued liabilities related to
this plan.
16. RELATED PARTY TRANSACTIONS
Investment funds and affiliates of Paulson & Co. Inc., a Sponsor, held 7,036 shares of the Corporation's outstanding
mandatorily redeemable preferred stock as of December 31, 2017. Investment funds and affiliates of the Sponsors held 21,105
shares of the Corporation’s outstanding mandatorily redeemable voting preferred stock as of December 31, 2016. During 2017,
the Corporation repurchased 14,069 preferred shares from funds or affiliates of Centerbridge Partners, L.P. and The Blackstone
Group L.P., each a Sponsor, at par value, or approximately $14.1 million.
As of December 31, 2017 and 2016, the outstanding balance owed by ESH REIT to the Corporation under the Unsecured
Intercompany Facility was $0 and $50.0 million, respectively. ESH REIT is able to increase its borrowings under the Unsecured
Intercompany Facility to an amount of up to $300.0 million, plus additional amounts, in each case, subject to certain conditions.
The outstanding debt balance and interest expense owed by ESH REIT to the Corporation related to this facility eliminate in
consolidation (see Note 7).
106
During the year ended December 31, 2017, the Corporation and ESH REIT repurchased and retired approximately 2.0
million Paired Shares from the Sponsors for approximately $21.4 million and $12.2 million, respectively. These Paired Shares
were purchased in connection with the secondary offerings consummated during the year ended December 31, 2017, and pursuant
to, and counted toward, the combined Paired Share repurchase program (see Notes 1 and 12).
In the fourth quarter of 2016, the Corporation and ESH REIT repurchased and retired approximately 3.85 million Paired
Shares from the Sponsors for approximately $35.1 million and $21.6 million, respectively. These Paired Shares were purchased
in connection with secondary offerings consummated in the fourth quarter of 2016 and pursuant to, and counted toward, the
combined Paired Share repurchase program.
In March 2016, in connection with ESH REIT's $800.0 million issuance of its 2025 Notes discussed in Note 7, an affiliate
of one of the Sponsors acted as an initial purchaser and purchased and resold $24.0 million of the 2025 Notes. As such, the
affiliate of one of the Sponsors earned approximately $0.4 million in fees related to the transaction during the year ended
December 31, 2016.
17. SUBSEQUENT EVENTS
In January 2018, the Boards of Directors of Extended Stay America, Inc. and ESH REIT extended the maturity of their
combined Paired Share repurchase program through December 31, 2018, each effective January 1, 2018.
Subsequent to December 31, 2017, the Corporation and ESH REIT repurchased and retired their respective portion of
approximately 1.0 million Paired Shares for approximately $12.4 million and $7.1 million, respectively. In February 2018, the
Boards of Directors of the Corporation and ESH REIT authorized an increase to the amount of the combined Paired Share
repurchase program from up to $300 million to up to $400 million of Paired Shares, which expires on December 31, 2018.
On February 21, 2018, the Company completed the sale of 25 hotels for approximately $114.0 million, including
approximately $1.9 million in initial franchise application fees. The Company received approximately $113.0 million in sale
proceeds and expects to recognize a gain on sale not to exceed $10 million. The Company will manage these hotels under a
twenty-year management agreement, with the option for the third-party owner to convert the hotels to independently managed
franchises after two years.
On February 27, 2018, the Board of Directors of the Corporation declared a cash distribution of $0.06 per share for the
fourth quarter of 2017 on its common stock. This distribution is payable on March 27, 2018 to shareholders of record as of
March 13, 2018. Also on February 27, 2018, the Board of Directors of ESH REIT declared a cash distribution of $0.15 per
share for the fourth quarter of 2017 on its Class A and Class B common stock. This distribution is also payable on March 27,
2018 to shareholders of record as of March 13, 2018.
107
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, 2017 and 2016, 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, 2017, 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, 2017 and 2016, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2017, 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, 2017, 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 27, 2018, 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.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
February 27, 2018
We have served as the Company's auditor since 2013.
108
ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2017 AND 2016
(In thousands, except share and per share data)
ASSETS
PROPERTY AND EQUIPMENT - Net of accumulated depreciation of $1,143,164 and $959,449
$
3,775,640
$
3,914,569
December 31,
2017
December 31,
2016
RESTRICTED CASH
CASH AND CASH EQUIVALENTS
RENTS RECEIVABLE FROM EXTENDED STAY AMERICA, INC. (Note 11)
DEFERRED RENTS RECEIVABLE FROM EXTENDED STAY AMERICA, INC. (Note 11)
GOODWILL
OTHER ASSETS
TOTAL ASSETS
LIABILITIES AND EQUITY
LIABILITIES:
Term loan facilities payable - Net of unamortized deferred financing costs and debt discount
of $18,695 and $21,994
Senior notes payable - Net of unamortized deferred financing costs and debt discount
of $30,344 and $34,482
Revolving credit facility
Loan payable to Extended Stay America, Inc. (Notes 6 and 11)
Unearned rental revenues from Extended Stay America, Inc. (Note 11)
Due to Extended Stay America, Inc., net (Note 11)
Accounts payable and accrued liabilities
Deferred tax liabilities
Total liabilities
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, 192,099,933
and 195,406,944 shares issued and outstanding
Additional paid in capital
Preferred stock—no par value, $1,000 liquidation value, 125 shares authorized, issued and
outstanding
Retained earnings
Accumulated other comprehensive income (loss)
Total equity
TOTAL LIABILITIES AND EQUITY
See accompanying notes to consolidated financial statements.
$
$
15,985
38,930
3,704
24,388
47,584
29,212
344
53,506
2,609
40,259
52,245
13,973
3,935,443
$
4,077,505
1,265,112
$
1,274,756
1,269,656
1,265,518
—
—
40,523
7,055
60,755
48
45,000
50,000
39,898
11,608
69,520
3,286
2,643,149
2,759,586
4,426
4,462
1,088,793
1,144,664
73
191,964
7,038
1,292,294
$
3,935,443
$
73
176,532
(7,812)
1,317,919
4,077,505
109
ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
(In thousands, except per share data)
REVENUES - Rental revenues from Extended Stay America, Inc. (Note 11)
$
683,500
$
694,275
$
719,635
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Year Ended
December 31,
2015
OPERATING EXPENSES:
Hotel operating expenses
General and administrative expenses (Note 11)
Depreciation
Impairment of long-lived assets
Total operating expenses
GAIN ON SALE OF HOTEL PROPERTIES, NET (Note 4)
OTHER INCOME
INCOME FROM OPERATIONS
OTHER NON-OPERATING (INCOME) EXPENSE
INTEREST EXPENSE, NET
INCOME BEFORE INCOME TAX EXPENSE
INCOME TAX EXPENSE
NET INCOME
NET INCOME PER ESH HOSPITALITY, INC. COMMON SHARE:
Class A - basic
Class A - diluted
Class B - basic
Class B - diluted
WEIGHTED-AVERAGE ESH HOSPITALITY, INC. COMMON SHARES
OUTSTANDING:
Class A - basic
Class A - diluted
Class B - basic
Class B - diluted
See accompanying notes to consolidated financial statements.
90,495
14,801
225,484
15,046
345,826
8,562
673
346,909
(227)
130,923
216,213
1,229
214,984
0.49
0.48
0.48
0.48
250,494
250,494
193,101
193,101
$
$
$
$
$
89,166
14,264
216,394
—
319,824
—
5
374,456
(1,245)
163,443
212,258
51
212,207
0.47
0.47
0.47
0.47
250,494
250,494
200,572
200,736
$
$
$
$
$
97,062
15,973
199,044
—
312,079
116,616
37
524,209
2,726
134,780
386,703
8,519
378,184
0.83
0.83
0.83
0.83
250,451
250,451
204,211
204,567
$
$
$
$
$
110
ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
(In thousands)
NET INCOME
OTHER COMPREHENSIVE INCOME, NET OF TAX:
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS:
FOREIGN CURRENCY TRANSLATION GAIN (LOSS), NET
OF TAX OF $0, $91 AND $173
RECLASSIFICATION ADJUSTMENT - SALE OF CANADIAN
HOTEL PROPERTIES, NET OF TAX OF $(264), $0 AND $0
TOTAL FOREIGN CURRENCY TRANSLATION
ADJUSTMENTS
DERIVATIVE ADJUSTMENTS:
INTEREST RATE CASH FLOW HEDGE GAIN, NET OF TAX
OF $0, $16, AND $0
RECLASSIFICATION ADJUSTMENT - AMOUNTS
RECLASSIFIED TO NET INCOME, NET OF TAX OF $0
TOTAL DERIVATIVE ADJUSTMENTS
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Year Ended
December 31,
2015
$
214,984
$
212,207
$
378,184
531
12,256
12,787
1,400
663
2,063
583
—
583
4,975
—
4,975
(7,516)
—
(7,516)
—
—
—
COMPREHENSIVE INCOME
$
229,834
$
217,765
$
370,668
See accompanying notes to consolidated financial statements.
111
ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
(In thousands, except per share data)
Common Stock
Preferred Stock
Class A
Shares
Class B
Shares
Amount
Shares
Amount
Additional
Paid in
Capital
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
Income (Loss)
Total
Equity
BALANCE -
January 1, 2015
Net income
Foreign currency
translation loss,
net of tax
Issuance of
common stock
Common
distributions -
$0.79 per Class A
and Class B
common share
Preferred
distributions
Equity-based
compensation
BALANCE -
December 31, 2015
Net income
Foreign currency
translation gain,
net of tax
Interest rate cash
flow hedge gain,
net of tax
Repurchase of
Class B common
stock
Common
distributions -
$0.43 per Class A
and Class B
common share
Preferred
distributions
Equity-based
compensation
BALANCE—
December 31, 2016
Net income
Foreign currency
translation, net of
tax
Interest rate cash
flow hedge gain,
net of tax
Repurchase of
Class B common
stock
Common
distributions -
$0.53 per Class A
and Class B
common share
Preferred
distributions
Equity-based
compensation
BALANCE -
December 31, 2017
250,303
204,517
$
4,551
125
$
—
—
191
—
—
—
—
—
97
—
—
(20)
—
—
3
—
—
—
250,494
204,594
4,554
—
—
—
—
—
—
—
—
—
(9,415)
(94)
—
—
228
—
—
2
250,494
195,407
4,462
—
—
—
—
—
—
—
—
—
(3,624)
(39)
—
—
317
—
—
3
—
—
—
—
—
—
125
—
—
—
—
—
125
—
—
—
—
—
250,494
192,100
$
4,426
125
$
See accompanying notes to consolidated financial statements.
112
73
—
—
—
—
—
—
73
—
—
—
—
—
73
—
—
—
—
—
73
$ 1,182,611
$
150,652
$
(5,854) $1,332,033
—
—
3,516
378,184
—
378,184
—
—
(7,516)
(7,516)
—
3,519
(17,698)
(342,514)
—
474
1,168,903
—
—
(16)
—
186,306
212,207
—
—
—
(360,212)
(16)
474
(13,370)
1,346,466
—
212,207
—
583
583
4,975
4,975
(53,581)
(53,675)
(26,933)
(168,384)
(16)
—
176,532
214,984
—
2,694
1,144,664
—
—
—
—
—
(195,317)
(16)
2,696
(7,812)
1,317,919
—
214,984
—
12,787
12,787
2,063
2,063
(22,737)
(22,776)
(58,523)
(176,799)
—
2,652
(16)
—
—
—
—
(235,322)
(16)
2,655
$ 1,088,793
$
191,964
$
7,038
$1,292,294
ESH HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
(In thousands)
OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Foreign currency transaction (gain) loss
Loss on interest rate swap
Amortization and write-off of deferred financing costs and debt discount
Amortization of above-market ground leases
Loss on disposal of property and equipment
Gain on sale of hotel properties, net
Impairment of long-lived assets
Equity-based compensation
Deferred income tax (benefit) expense
Changes in assets and liabilities:
Deferred rents receivable from Extended Stay America, Inc.
Due (to) from Extended Stay America, Inc., net
Other assets
Unearned rental revenues/rents receivable from Extended Stay America, Inc., net
Accounts payable and accrued liabilities
Net cash provided by operating activities
INVESTING ACTIVITIES:
Purchases of property and equipment
Proceeds from sale of hotel properties
(Increase) decrease in restricted cash
Proceeds from insurance and related recoveries
FINANCING ACTIVITIES:
Net cash (used in) provided by investing activities
Principal payments on mortgage loan
Proceeds from term loan facilities, net of debt discount
Principal payments on term loan facilities
Proceeds from senior notes, net of debt discount
Proceeds from revolving credit facility
Payments on revolving credit facility
Proceeds from loan payable to Extended Stay America, Inc.
Principal payments on loan payable to Extended Stay America, Inc.
Payments of deferred financing costs
Net proceeds to Extended Stay America, Inc.
Repurchase of common stock
Issuance of Class B common stock
Common distributions
Preferred distributions
Net cash used in financing activities
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS—Beginning of period
CASH AND CASH EQUIVALENTS—End of period
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest, excluding prepayment and other penalties
Cash payments for income taxes, net of refunds of $5, $416 and $37
NONCASH INVESTING AND FINANCING ACTIVITIES:
$
$
$
Capital expenditures included in due to/from Extended Stay America, Inc. and accounts
payable and accrued liabilities
Principal payments on term loan facilities included in accounts payable and accrued liabilities $
$
Deferred financing costs included in accounts payable and accrued liabilities
$
Proceeds from sale of hotel properties included in other assets
$
Common distributions included in accounts payable and accrued liabilities
Common distributions included in due to Extended Stay America, Inc.
$
Net (payable) receivable related to RSUs not yet settled or issued included in due to/from
Extended Stay America, Inc.
$
$
See accompanying notes to consolidated financial statements.
113
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Year Ended
December 31,
2015
$
214,984
$
212,207
$
378,184
225,484
(541)
667
7,987
(136)
8,606
(8,562)
15,046
412
(3,733)
15,162
(1,261)
(2,855)
(470)
452
471,242
(163,797)
57,989
(15,641)
3,302
(118,147)
—
—
(16,193)
—
105,000
(150,000)
—
(50,000)
—
—
(22,773)
1,915
(235,604)
(16)
(367,671)
(14,576)
53,506
38,930
125,006
2,483
12,314
$
$
$
$
216,394
(1,245)
—
30,358
(136)
10,739
—
—
126
571
1,288
4,400
3,268
3,267
7,113
488,350
(222,257)
—
60,601
2,958
(158,698)
(1,931,157)
1,293,500
(366,463)
788,000
70,000
(25,000)
75,000
(25,000)
(34,165)
(10,306)
(53,675)
1,244
(281,364)
(16)
(499,402)
(169,750)
223,256
53,506
116,919
1,712
20,996
$
$
$
$
— $
— $
$
12,589
983
$
— $
3,250
$
$
76
— $
$
— $
1,269
199,044
2,726
—
11,526
(136)
9,206
(116,616)
—
474
6,076
(13,028)
21,787
(5,334)
7,897
10,179
511,985
(199,135)
265,854
(10,946)
5,261
61,034
(586,892)
—
(8,537)
500,000
90,000
(90,000)
—
—
(11,476)
(5,928)
—
2,414
(273,144)
(16)
(383,579)
189,440
33,816
223,256
118,226
1,044
23,571
—
—
—
39,734
47,594
1,386
$
958
$
(363)
ESH HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2017 AND 2016 AND FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 AND 2015
1. BUSINESS, ORGANIZATION AND BASIS OF CONSOLIDATION
Organization
ESH Hospitality, Inc. (“ESH REIT”) was formed as a limited liability company in the state of Delaware on
September 16, 2010 and was converted to a corporation on November 5, 2013. Extended Stay America, Inc. (the
“Corporation”), the parent of ESH REIT, was incorporated in the state of Delaware on July 8, 2013. On November 18, 2013,
the Corporation and ESH REIT completed an initial public offering of 32.5 million Paired Shares. A "Paired Share" consists of
one share of common stock, par value $0.01 per share, of the Corporation, that is attached to and trades as a single unit with
one share of Class B common stock, par value $0.01 per share, of ESH REIT. The Corporation owns, and is expected to
continue to own, all of the issued and outstanding Class A common stock of ESH REIT, which, as of December 31, 2017,
currently represents approximately 57% of the outstanding common stock of ESH REIT.
As of December 31, 2017, ESH REIT’s common equity consisted of the following: (i) approximately 250.5 million
shares of Class A common stock outstanding (approximately 57% of its common equity), all of which were owned by the
Corporation, and (ii) approximately 192.1 million shares of Class B common stock outstanding (approximately 43% of its
common equity), approximately 99.3% of which were owned by the public and approximately 0.7% of which were owned by
senior management and directors of the Corporation and ESH REIT.
As of December 31, 2016, ESH REIT’s common equity consisted of the following: (i) approximately 250.5 million
shares of Class A common stock outstanding (approximately 56% of its common equity), all of which were owned by the
Corporation, and (ii) approximately 195.4 million shares of Class B common stock outstanding (approximately 44% of its
common equity), approximately 55.9% of which were owned by the public and approximately 44.1% of which were owned by
Centerbridge Partners, L.P., Paulson & Co. Inc. and The Blackstone Group L.P. and their funds or affiliates (individually, each
a Sponsor, or collectively, the Sponsors) and senior management and directors of the Corporation and ESH REIT.
Secondary Offerings—In June 2015, the Corporation and ESH REIT filed an automatic shelf registration statement with
the U.S. Securities and Exchange Commission (“SEC”) pursuant to which, from time to time, (i) the Corporation and ESH
REIT may offer and sell an unlimited number of Paired Shares and (ii) the Sponsors could offer and sell, on a cumulative basis,
up to 143.0 million Paired Shares. In November 2015, certain selling stockholders (the "Selling Stockholders") sold 15.0
million Paired Shares registered pursuant to the automatic shelf registration statement. ESH REIT incurred professional fees in
connection with filing the automatic shelf registration and the secondary offering of approximately $0.3 million during the year
ended December 31, 2015.
During 2016, certain Selling Stockholders sold approximately 42.1 million Paired Shares pursuant to the automatic shelf
registration statement as part of three secondary offerings, of which ESH REIT repurchased and retired approximately 3.85
million ESH REIT Class B common shares from the Selling Stockholders for approximately $21.6 million (see Note 11). ESH
REIT incurred professional fees in connection with these secondary offerings of approximately $0.5 million during the year
ended December 31, 2016.
During 2017, certain Selling Stockholders sold 80.0 million Paired Shares pursuant to the automatic shelf registration
statement as part of three secondary offerings. In conjunction with these secondary offerings, ESH REIT repurchased and
retired approximately 2.0 million ESH REIT Class B common shares from the Sponsors for approximately $12.2 million (see
Note 11). ESH REIT incurred professional fees in connection with the secondary offerings of approximately $0.5 million
during the year ended December 31, 2017.
With respect to each of the above discussed secondary offering transactions, the Selling Stockholders consisted solely of
entities affiliated with the Sponsors and did not include officers or directors of the Corporation or ESH REIT. Neither the
Corporation nor ESH REIT sold Paired Shares in any secondary offerings and neither received proceeds from any secondary
offerings.
114
Paired Share Repurchase Program—In December 2015, the Board of Directors of the Corporation and ESH REIT
authorized a combined Paired Share repurchase program for up to $100 million of Paired Shares. In February 2016, the Boards
of Directors of the Corporation and ESH REIT authorized an increase of the combined Paired Share repurchase program from
up to $100 million to up to $200 million of Paired Shares. In December 2016, the Boards of Directors of the Corporation and
ESH REIT authorized an increase of the combined Paired Share repurchase program from up to $200 million to up to $300
million of Paired Shares and extended the maturity of the program through December 31, 2017, each effective January 1, 2017.
In January 2018, the Boards of Directors of the Corporation and ESH REIT authorized an extension of the maturity date of the
Paired Share repurchase program through December 31, 2018, each effective January 1, 2018. 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, 2017, ESH REIT repurchased and retired approximately 13.0 million
ESH REIT Class B common shares for approximately $76.4 million of which approximately 5.8 million ESH REIT Class B
common shares were repurchased and retired from entities affiliated with the Sponsors.
Business
As of December 31, 2017, ESH REIT and its subsidiaries owned and leased 624 hotel properties in 44 U.S. states,
consisting of approximately 68,600 rooms. As of December 31, 2016, ESH REIT and its subsidiaries owned and leased 626
hotel properties in 44 U.S. states, consisting of approximately 68,900 rooms, and three hotels in Canada, consisting of 500
rooms. The hotels are leased to wholly-owned subsidiaries of the Corporation (the "Operating Lessees").
In November 2017, ESH REIT executed a purchase and sale agreement to divest twenty-five Extended Stay America-
branded hotels for approximately $112.1 million. The transaction closed in February 2018 (see Note 14).
In October 2016, ESH REIT executed a purchase and sale agreement to divest one Extended Stay America-branded hotel
for approximately $44.8 million, subject to adjustment. Upon and subject to the completion of customary due diligence and the
satisfaction or waiver of certain closing conditions, this transaction is currently expected to close in 2018 or 2019.
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 statements of cash flows, certain prior period
amounts have been presented 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 reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Management used significant estimates to determine the estimated useful lives of tangible
assets as well as in the assessment of tangible and intangible assets for impairment, estimated liabilities for insurance reserves
and the grant-date fair value of certain equity-based awards. Actual results could differ from those estimates.
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.
Restricted Cash—Restricted cash consists of net sale proceeds from hotel sales held by qualified intermediaries pursuant
to pending tax-free exchanges under Section 1031 of the Internal Revenue Code ("1031 exchanges").
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.
115
Depreciation and amortization are recorded on a straight-line basis over the following estimated useful lives:
Hotel buildings
Hotel building improvements
Hotel site improvements
Hotel furniture, fixtures and equipment
7–49 years
4–39 years
3–20 years
2–10 years
Management assesses the performance of long-lived assets for potential impairment quarterly, as well as when events or
changes in circumstances indicate the carrying amount of an asset, or group of assets, may not be recoverable. Recoverability
of property and equipment is measured by a comparison of the carrying amount of a group of hotel properties (groups of hotel
properties align with hotels as they are grouped under ESH REIT’s leases) to the estimated future undiscounted cash flows
expected to be generated by each group of hotel properties. Impairment is recognized when estimated future undiscounted cash
flows, including proceeds from disposition, are less than the carrying value of each group of hotel properties. To the extent that
a group of hotel properties is impaired, their excess carrying amount over their estimated fair value is recognized as an
impairment charge and reduces income from operations. Fair value is determined based upon the discounted cash flows of a
group of hotel properties, quoted market prices or independent appraisals, as considered necessary. ESH REIT recognized an
impairment charge of approximately $15.0 million for the year ended December 31, 2017. No impairment charges were
recorded for the years ended December 31, 2016 and 2015 (see Note 5). The estimation of future undiscounted cash flows is
inherently uncertain and relies upon assumptions regarding current and future economic and market conditions. If such
conditions change, then an impairment charge to reduce the carrying value of a group of hotel properties could occur in a future
period in which conditions change.
Goodwill—Goodwill represents the excess purchase price over the fair value of net assets acquired. ESH REIT tests
goodwill 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 not more likely than not that the fair value of its reporting unit is less than
its carrying amount. No impairment charges related to goodwill were recognized during the years ended December 31, 2017,
2016 or 2015.
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 in the carrying value is recognized as an impairment
charge.
Discontinued Operations—ESH REIT defines discontinued operations as a component that represents a strategic shift
that has (or will have) a major effect on ESH REIT’s operations and financial results, which would require separate
presentation on the consolidated balance sheets and statements of operations.
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 included as
a component of net interest expense. During the years ended December 31, 2017, 2016 and 2015, $0, approximately $20.0
million and $2.1 million, respectively, of unamortized deferred financing costs related to the prepayment of debt are included in
net interest expense in the accompanying consolidated statements of operations. Amortization of deferred financing costs
unrelated to the prepayment of debt, which is also included in net interest expense in the accompanying consolidated statements
of operations, was approximately $5.7 million, $7.7 million and $9.0 million for the years ended December 31, 2017, 2016 and
2015, respectively.
Revenue Recognition—ESH REIT’s sole source of revenues is rental revenue derived from leases with subsidiaries of
the Corporation (the Operating Lessees). ESH REIT records rental revenues 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
116
monthly rental amounts contractually due. Deferred rents receivable from Extended Stay America, Inc. on the accompanying
consolidated balance sheets represent the cumulative difference between straight-line rental revenues recognized and rental
revenues contractually due. This amount, approximately $24.4 million as of December 31, 2017, will gradually decrease
through the remainder of the lease terms until it is zero at the end of the lease terms in October 2018. Lease rental payments
received prior to rendering services are included in unearned rental revenues from Extended Stay America, Inc. on the
accompanying consolidated balance sheets. Contingent 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).
Operating Leases—Rent expense, including ground rent, is recognized on a straight-line basis over the terms of the
related leases.
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 (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, restricted cash, certain other assets (deposits),
accounts payable and accrued liabilities, intercompany and term loans, senior notes and its revolving credit facility. The
carrying values of cash and cash equivalents, restricted cash, certain other assets (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 intercompany and 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
current intercompany and term loans and senior notes or from quoted market prices, when available (see Note 6).
Derivative Instruments—ESH REIT from time to time uses derivative instruments to manage its exposure to interest
rate risks and foreign currency exchange 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 and foreign currency exchange 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 7). 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. Third party equity interests in consolidated subsidiaries are presented as noncontrolling interests.
ESH REIT evaluates subsidiaries and affiliates, as well as other entities, to determine if they are variable interest entities
("VIEs"). If a subsidiary, affiliate or other entity is a VIE, it is subject to the consolidation framework specifically for VIEs.
117
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 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, as amended (the "Code"). A REIT is a legal entity that holds real estate assets and is
generally not subject to federal and state income taxes. In order to maintain qualification as a REIT, ESH REIT is required to
distribute at least 90% of its taxable income, excluding 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 (including any applicable alternative
minimum tax) and generally would be precluded from qualifying as a REIT for the subsequent four taxable years following the
year during which it lost its REIT qualification. Even in qualifying as a REIT, ESH REIT may be subject to state and local
taxes in certain jurisdictions, and is subject to federal income and excise taxes on undistributed income.
In 2017 and 2016, 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 on its taxable income not distributed.
Foreign Currency—ESH REIT sold its three Extended Stay Canada-branded hotels in 2017. Prior to the completion of
the sale, the financial statements of ESH REIT's Canadian subsidiaries and its investments therein were maintained in their
functional currency, the Canadian dollar, and their revenues and expenses were translated into U.S. dollars using the average
exchange rate for the period. The assets and liabilities of these subsidiaries were translated into U.S. dollars using the exchange
rate in effect at the balance sheet date. Due to the fact that ESH REIT's Canadian subsidiaries liquidated substantially all of
their assets, their functional currency changed to the U.S. dollar and approximately $12.5 million of accumulated foreign
currency translation loss was charged to the consolidated statement of operations during the year ended December 31, 2017. As
of December 31, 2016, foreign currency translation losses, net of tax, of approximately $12.8 million were reflected in
accumulated other comprehensive loss as a component of equity in the accompanying consolidated balance sheets. Foreign
currency transaction (gains) losses of approximately $(0.5) million, $(1.2) million and $2.7 million are included in other non-
operating (income) expense in the accompanying consolidated statements of operations for the years ended December 31,
2017, 2016 and 2015, respectively.
Comprehensive Income—Comprehensive income includes net income and other comprehensive income, 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.
118
Equity-Based Compensation—ESH REIT maintains a Long-Term Incentive Plan (“LTIP”), as amended and restated in
2015, approved by its shareholders. Under the LTIP, ESH REIT may issue to eligible employees or directors restricted stock
awards ("RSAs"), restricted stock units ("RSUs") or other equity-based awards, in respect of Paired Shares, with service,
performance or market vesting conditions. 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 period during which an employee or director is required to provide services in exchange for the award; the requisite service
period (usually the vesting period). No compensation expense is recognized for awards for which employees or directors do not
render the requisite services. All awards are classified as equity awards.
Segments—ESH REIT’s hotel ownership business represents a single operating segment based on the way ESH REIT
manages its business and operations. ESH REIT leases its hotel properties to similar classes of customers. The amounts of
long-lived assets and revenues outside the U.S. are not significant for any period presented.
Recently Issued Accounting Standards
Goodwill—In January 2017, the Financial Accounting Standards Board ("FASB") issued an accounting standards update
in which the guidance on testing for goodwill was updated to eliminate Step 2 in the determination on whether goodwill
should be considered impaired. Annual and/or interim assessments are still required to be completed. This update will be
effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. ESH
REIT does not expect the adoption of this update to have a material effect on its consolidated financial statements.
Statement of Cash Flows—In August and November 2016, the FASB issued accounting standards updates which
provide additional clarity on the classification of specific events on the statement of cash flows. These events include debt
prepayment and extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made
after a business combination, proceeds from settlement of insurance claims, distributions received from equity method
investees, and beneficial interests in securitization transactions. These updates also require amounts generally described as
restricted cash to be included with cash and cash equivalents when reconciling beginning-of-period and end-of-period total
amounts shown on the statement of cash flows. These updates are effective for annual reporting periods beginning after
December 15, 2017, including interim periods within those annual reporting periods, with early application permitted and
should be applied using a retrospective transition method to each period presented. The adoption of these updates will require
cash outflows related to debt prepayment and extinguishment costs to be classified as financing activities. For the years ended
December 31, 2017, 2016 and 2015, debt prepayment and extinguishment costs included within net cash provided by
operating activities totaled approximately $2.4 million, $4.0 million and $0.9 million, respectively. Additionally, the effect of
the adoption of these updates on ESH REIT's consolidated statements of cash flows will be to include restricted cash in the
beginning and end of period balances of cash, restricted cash and cash equivalents. The change in restricted cash is currently
included in investing activities in the consolidated statements of cash flows.
Compensation—Stock Compensation—In March 2016, the FASB issued an accounting standards update which
identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including
income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock
compensation expense with actual forfeitures recognized as they occur, and certain classifications on the statement of cash
flows. ESH REIT adopted this update on January 1, 2017 using a prospective transition method. The adoption of this update
did not have a material effect on ESH REIT's consolidated financial statements.
In May 2017, the FASB issued an accounting standards update that provides guidance about which changes to the terms
or conditions of a share-based payment award requires an entity to apply modification accounting. This update will be
effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted and
should be applied prospectively to awards modified on or after the adoption date. ESH REIT adopted this update on January 1,
2018 using a prospective transition method. The adoption of this update did not have a material effect on ESH REIT's
consolidated financial statements.
Derivatives and Hedging—In August 2017, the FASB issued an accounting standards update which changes the
designation and measurement guidance for qualifying hedging relationships and the presentation of hedging results. This
update expands and refines hedge accounting and aligns recognition and presentation of its effects within the financial
statements. This update is effective for interim and annual reporting periods beginning after December 15, 2018, with early
adoption permitted, and will require a cumulative-effect adjustment to the balance of retained earnings as of the beginning of
119
the fiscal year that an entity adopts this update. ESH REIT adopted this update on January 1, 2018 and recorded a cumulative-
effect adjustment to reclassify a previously recorded loss of approximately $0.7 million from retained earnings to accumulated
other comprehensive income. In addition to the cumulative-effect adjustment, expected impacts of adoption include, on a
prospective basis, the elimination of hedge ineffectiveness related to designated interest rate swaps, the presentation of all
interest rate hedge related items that impact earnings in the interest expense line item in the consolidated statements of
operations and an election to perform qualitative assessments of hedge effectiveness.
In March 2016, the FASB issued accounting standards updates to clarify the requirements for assessing whether
contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to
their debt hosts and to clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging
instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge
accounting criteria continue to be met. ESH REIT adopted these updates on January 1, 2017. The adoption of these updates did
not have a material effect on ESH REIT's consolidated financial statements.
Leases—In February 2016, the FASB issued an accounting standards update which introduces a lessee model that
requires a right-of-use asset and lease obligation to be presented on the balance sheet for all leases, whether operating or
financing. The update eliminates the requirement in current U.S. GAAP for an entity to use bright-line tests in determining
lease classification. The update also requires lessors to increase the transparency of their exposure to changes in value of their
residual assets and how they manage that exposure. This update will be effective for interim and annual reporting periods
beginning after December 15, 2018, with early adoption permitted, and must be applied using a modified retrospective
approach, which will require adjustment to all comparative periods presented.
As of December 31, 2017, using its incremental borrowing rate with respect to the future minimum lease payments under
its operating leases (ground leases), ESH REIT has estimated that the lease liability would have been between approximately
$7.5 million and $11.5 million and the right of use asset would have been between approximately $1.0 million and $5.0
million, which includes adjustments for accrued lease payments, above market lease liabilities and lease incentives.
The recording of a lease obligation may increase total indebtedness for purposes of financial covenants within certain of
ESH REIT’s existing debt agreements; however, ESH REIT does not expect this increase to cause instances of non-compliance
with any of these covenants. ESH REIT currently does not expect the adoption of this update to have a material effect on its
consolidated statements of operations or cash flows. ESH REIT expects to elect the optional practical expedients which relate
to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that
commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease
or to purchase the underlying asset. The election to apply these practical expedients will, in effect, mean ESH REIT will
continue to account for leases that commenced before the effective date in accordance with previous U.S. GAAP unless the
lease is modified, except that ESH REIT will recognize a right-of-use asset and a lease liability for all operating leases at each
reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under
previous U.S. GAAP.
120
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 ESH REIT’s unrestricted Class A and Class B common stock outstanding,
respectively. Diluted net income per share is computed by dividing net income available to Class A and Class B common
shareholders, as adjusted for potentially dilutive securities, by the weighted-average number of shares of ESH REIT’s
unrestricted Class A and Class B common stock outstanding, respectively, plus potentially dilutive securities. Dilutive securities
include certain equity-based awards issued under long-term incentive plans (see Note 13) and are included in the calculation,
provided that the inclusion of such securities is not anti-dilutive.
The calculations of basic and diluted net income per share, including a reconciliation of the numerators and
denominators, are as follows (in thousands, except per share data):
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Year Ended
December 31,
2015
Numerator:
Net income
Less preferred dividends
Net income available to ESH Hospitality, Inc. common shareholders
Class A:
Net income available to ESH Hospitality, Inc. Class A common
shareholders - basic
Less amounts available to ESH Hospitality, Inc. Class B
shareholders assuming conversion
Net income available to ESH Hospitality, Inc. Class A common
shareholders - diluted
Class B:
Net income available to ESH Hospitality, Inc. Class B common
shareholders - basic
Amounts available to ESH Hospitality, Inc. Class B shareholders
assuming conversion
Net income available to ESH Hospitality, Inc. Class B common
shareholders - diluted
Denominator:
Class A:
Weighted-average number of ESH Hospitality, Inc. Class A
common shares outstanding - basic and diluted
Class B:
Weighted-average number of ESH Hospitality, Inc. Class B
common shares outstanding - basic
Dilutive securities
Weighted-average number of ESH Hospitality, Inc. Class B
common shares outstanding - diluted
Net income per ESH Hospitality, Inc. common share -
Class A - basic
Net income per ESH Hospitality, Inc. common share -
Class A - diluted
Net income per ESH Hospitality, Inc. common share -
Class B - basic
Net income per ESH Hospitality, Inc. common share -
Class B - diluted
Anti-dilutive securities excluded from net income per common share -
Class B - diluted
$
$
$
$
$
$
$
$
$
$
214,984
(16)
214,968
$
$
212,207
(16)
212,191
$
$
378,184
(16)
378,168
121,627
$
118,787
$
208,202
(392)
(43)
(152)
121,235
$
118,744
$
208,050
93,341
$
93,404
$
169,966
—
43
152
93,341
$
93,447
$
170,118
250,494
250,494
250,451
193,101
—
193,101
200,572
164
200,736
$
$
$
$
0.49
0.48
0.48
0.48
569
$
$
$
$
0.47
0.47
0.47
0.47
—
204,211
356
204,567
0.83
0.83
0.83
0.83
—
121
4. HOTEL DISPOSITIONS
2017 Disposition of Extended Stay Canada-Branded Hotels—In 2017, ESH REIT sold its three Extended Stay Canada-
branded hotels for gross proceeds of 67.4 million Canadian dollars, or approximately $49.0 million. ESH REIT's carrying value
of the hotels, including net working capital and allocable goodwill, net of an impairment charge recorded prior to the sale, was
approximately 51.2 million Canadian dollars, or approximately $37.3 million, prior to the evaluation of existing accumulated
foreign currency translation loss. Due to the fact that ESH REIT’s Canadian subsidiary liquidated substantially all of its assets,
approximately $12.5 million of accumulated foreign current translation loss was recognized at the time of sale. This charge
offset the Canadian subsidiary’s gain on sale, which resulted in a loss on sale of approximately $1.5 million, net of closing costs
and adjustments, which is reported in gain on sale of hotel properties, net during the year ended December 31, 2017 in the
accompanying consolidated statements of operations.
2017 Additional Dispositions—In 2017, ESH REIT sold two additional hotels for gross proceeds of $21.4 million. The
carrying value of these hotels, including net working capital and allocable goodwill, was approximately $11.0 million, resulting
in a gain on sale of approximately $10.1 million, net of closing costs and adjustments, which is reported in gain on sale of hotel
properties, net during the year ended December 31, 2017 in the accompanying consolidated statements of operations.
2015 Dispositions of Crossland Economy Studios-Branded and Extended Stay America-Branded Hotels—In 2015, the
Company sold 53 hotel properties, 47 of which operated under the Crossland Economy Studios brand and six of which
operated under the Extended Stay America brand for gross proceeds of $273.0 million. The carrying value of the hotel
portfolio, including net working capital and allocable goodwill, was approximately $148.4 million, resulting in a gain on sale,
net of closing costs and adjustments, of approximately $116.6 million, which is reported in gain on sale of hotel properties
during the year ended December 31, 2015 in the accompanying consolidated statements of operations.
None of the above dispositions were reported as discontinued operations. The table below summarizes hotel dispositions
for the years ended December 31, 2017, 2016 and 2015 (in thousands, except number of hotels and number of rooms):
Year (1)
2017
2017
2017
2015
Brand
Location
Extended Stay Canada
Canada
Other
Massachusetts
May
May
Extended Stay America
Colorado
December
Month
Sold
Number of
Hotels
Number of
Rooms
Net
Proceeds
Gain (Loss)
Recognized
3
1
1
500
103
160
$43,551
$5,092
$15,985
(3)
$(1,507)
$(1,767)
$11,836
(2)
Crossland Economy
Studios and Extended
Stay America
Multiple
December
53
6,617
$265,002
$116,616
_________________________________
(1) No hotels were sold during the year ended December 31, 2016.
(2) Due to the fact that ESH REIT’s Canadian subsidiary liquidated substantially all of its assets, approximately $12.5 million of accumulated
foreign currency translation loss was recognized at the time of sale. An impairment charge of approximately $15.0 million was recorded prior
to sale.
(3) Net sale proceeds held by qualified intermediary pursuant to pending 1031 exchanges.
During the years ended December 31, 2017, 2016 and 2015, these disposed hotel properties contributed rental revenues,
total operating expenses and (loss) income before income tax expense as follows (in thousands):
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Year Ended
December 31,
2015
Rental revenues from Extended Stay America, Inc.
$
2,657
$
7,780
$
Total operating expenses
(Loss) income before income tax expense
15,916
(12,946) (1)
2,884
5,229
50,236
15,376
26,802 (2)
_________________________________
(1)
(2)
Includes impairment charge of approximately $15.0 million.
Includes interest expense related to ESH REIT's previous mortgage loan repaid in conjunction with the sale.
122
5.
PROPERTY AND EQUIPMENT
Net investment in property and equipment as of December 31, 2017 and 2016, consists of the following (in thousands):
Hotel properties:
Land and site improvements
Construction in process
Building and improvements
Furniture, fixtures and equipment
Total hotel properties
Undeveloped land parcel
Total cost
Less accumulated depreciation
Property and equipment - net
December 31,
2017
December 31,
2016
$
1,289,152
$
1,304,503
2,453
2,970,404
655,120
4,917,129
1,675
4,918,804
(1,143,164)
—
2,960,158
607,682
4,872,343
1,675
4,874,018
(959,449)
$
3,775,640
$
3,914,569
During the years ended December 31, 2017, 2016 and 2015, ESH REIT, using Level 3 unobservable inputs and, in
certain instances Level 2 observable inputs, assessed property and equipment for potential impairment. ESH REIT recognized
impairment charges of approximately $15.0 million for the year ended December 31, 2017 related to the Extended Stay
Canada-branded hotels that were sold. No impairment charges were recognized during the years ended December 31, 2016 or
2015. Quantitative information with respect to unobservable inputs consists of internally developed cash flow models that
include the following assumptions, among others: projections of revenues, expenses and hotel related cash flows based on
assumed long-term growth rates, demand trends, expected future capital expenditures and estimated discount rates. These
assumptions are based on ESH REIT’s historical data and experience, budgets, industry projections and micro and macro
general economic condition projections.
123
6. DEBT
During the years ended December 31, 2017 and 2016, the following debt transactions occurred (in thousands):
Debt, net of deferred financing costs and debt discount(s) - beginning of year
Additions:
Proceeds from term loan facilities, net of debt discount
Proceeds from senior notes payable, net of debt discount
Proceeds from loan payable to Extended Stay America, Inc.
Proceeds from revolving credit facility
Amortization and write-off of deferred financing costs and debt discount (1)
Deductions:
Payments on mortgage loan
Payments on term loan facilities
Payments on loan payable to Extended Stay America, Inc.
Payments on revolving credit facility
Payments of deferred financing costs (1)
December 31,
2017
December 31,
2016
$
2,635,274
$
2,762,388
—
—
—
105,000
7,437
1,293,500
788,000
75,000
70,000
29,091
—
(1,931,157)
(12,943)
(50,000)
(150,000)
—
(369,713) (2)
(25,000)
(25,000)
(31,835)
Debt, net of deferred financing costs and debt discount(s) - end of year
$
2,534,768
$
2,635,274
______________________
(1) Excludes amortization and payments of deferred financing costs related to the revolving credit facility.
(2)
Includes principal payment of $3.25 million made in January 2017, included in accounts payable and accrued liabilities as of December 31, 2016.
ESH REIT’s outstanding debt, net of unamortized debt discounts, and unamortized deferred financing costs as of
December 31, 2017 and 2016, consists of the following (in thousands):
Stated
Amount(1
)
Loan
Term loan facilities
Carrying Amount
Unamortized Deferred
Financing Costs
Interest Rate
December
31, 2017
December
31, 2016
December
31, 2017
December
31, 2016
Stated Interest
Rate
December
31, 2017
December
31, 2016
Maturity
Date
2016 Term Facility
1,300,000 (2)
1,278,545 (3)
1,290,560
13,433
15,804
LIBOR(4)
+ 2.25%(5)
3.69%
(5)
3.75%
8/30/2023
(7)
Senior notes
2025 Notes
Revolving credit
facilities (9)
2016 Revolving Credit
Facility
Unsecured
Intercompany Facility
Unsecured
Intercompany Facility
Total
1,300,000
1,290,356 (6)
1,289,041
20,700
23,523
5.25%
5.25%
5.25%
5/1/2025
350,000
75,000 (9)
—
—
45,000
2,020 (8)
2,570 (8)
LIBOR + 2.75%
N/A
3.33%
8/30/2021
50,000
—
—
5.00%
5.00%
5.00%
8/30/2023
$
2,568,901
$
2,674,601
$
36,153
$
41,897
______________________
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Amortization is interest only, except for the 2016 Term Facility (as defined below) which amortizes in equal quarterly installments of $3.22 million.
See (7) below.
ESH REIT is able to increase its borrowings under the 2016 ESH REIT Credit Facilities (as defined below) by an amount of up to $600.0 million,
plus additional amounts, in each case subject to certain conditions.
The 2016 Term Facility is presented net of an unamortized debt discount of approximately $5.3 million and $6.2 million as of December 31, 2017
and 2016, respectively.
As of December 31, 2016, the stated interest rate of the 2016 Term Facility was LIBOR + 3.00% and included a LIBOR floor of 0.75%.
$400.0 million of the 2016 Term Facility is subject to an interest rate swap at a fixed rate of 1.175% (see Note 7).
The 2025 Notes (as defined below) are presented net of an unamortized debt discount of approximately $9.6 million and $11.0 million as of
December 31, 2017 and 2016, respectively.
In addition to scheduled amortization noted in (1) above, subject to certain exceptions, annual mandatory prepayments of up to 50% of Excess Cash
Flow, as defined, may be required under the 2016 Term Facility commencing with the year ending December 31, 2017. Annual mandatory
prepayments for the year ending December 31, 2017 and each year thereafter are due during the first quarter of the following year. No mandatory
prepayments are required in the first quarter of 2018 based on ESH REIT's Excess Cash Flow for the year ended December 31, 2017.
Unamortized deferred financing costs related to the revolving credit facility are included in other assets in the accompanying consolidated balance
sheets.
As of December 31, 2017, no amounts were outstanding under the Unsecured Intercompany Facility. ESH REIT is able to increase its borrowings
under the Unsecured Intercompany Facility to an amount of up to $300.0 million, plus additional amounts, in each case subject to certain conditions
(see Note 11).
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ESH REIT Credit Facilities
On August 30, 2016, ESH REIT entered into a credit agreement, as may be amended and supplemented from time to
time, providing for senior secured credit facilities (collectively the "2016 ESH REIT Credit Facilities") consisting of a $1,300.0
million senior secured term loan facility (the "2016 Term Facility") and a $350.0 million senior secured revolving credit facility
(the "2016 ESH REIT Revolving Credit Facility"). Subject to the satisfaction of certain criteria, borrowings under the 2016
ESH REIT Credit Facilities may be increased by an amount of up to $600.0 million, plus additional amounts, so long as, after
giving effect to the incurrence of such incremental facility and the application of proceeds thereof, its pro-forma senior loan-to-
value ratio is less than or equal to 45%.
Obligations under the 2016 ESH REIT Credit Facilities are guaranteed by certain existing and future material domestic
subsidiaries of ESH REIT, other than those owning real property, subject to customary exceptions. Obligations under the 2016
ESH REIT Credit Facilities are secured, subject to certain exceptions, including an exception for real property, by a first-
priority security interest in substantially all of the assets of ESH REIT and the guarantors.
The 2016 ESH REIT Credit Facilities contain a number of restrictive covenants that, among other things and subject to
certain exceptions, limit ESH REIT’s ability and the ability of its subsidiaries to incur additional debt, modify existing debt,
create certain liens, pay dividends and distributions, make certain investments and other restricted payments, enter into affiliate
transactions, amend or modify certain material operating leases and management agreements, sell assets or merge, consolidate
or transfer all or substantially all of their assets. The 2016 ESH REIT Credit Facilities contain certain customary representations
and warranties, affirmative covenants and events of default, including, but not limited to, cross-defaults to certain other
indebtedness and certain material operating leases and management agreements. If an event of default occurs, the
administrative agent is entitled to take various actions, including the acceleration of amounts due under the 2016 ESH REIT
Credit Facilities and additional actions that a secured creditor is permitted to take following a default. As of December 31,
2017, ESH REIT was in compliance with all covenants under the 2016 ESH REIT Credit Facilities.
2016 Term Facility—In November 2017, ESH REIT entered into a second amendment to the ESH REIT 2016 Term
Facility, as amended (such amendment, the “Second Repricing Amendment”). The ESH REIT 2016 Term Facility, as amended,
bears interest at a rate equal to (i) LIBOR plus 2.00% 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 2.25% for any period other than a Level 1 Period; or (ii) a base rate
(determined by reference to the highest of (A) the prime lending rate, (B) the overnight federal funds rate plus 0.50% or (C) the
one-month adjusted LIBOR rate plus 1.00%) plus 1.00% during a Level 1 Period or 1.25% for any period other than a Level 1
Period. The ESH REIT 2016 Term Facility amortizes in equal quarterly installments in annual amounts of 1.0% of the principal
amount outstanding as of the Second Repricing Amendment, or approximately $12.9 million, with the remaining balance
payable at maturity. In addition to scheduled amortization, subject to certain exceptions, mandatory prepayments of up to
50.0% of annual Excess Cash Flow, as defined, may be required based on ESH REIT's Consolidated Leverage Ratio, each as
defined. Annual mandatory prepayments are due during the first quarter of the following year. No mandatory prepayments are
required in the first quarter of 2018 based on ESH REIT's Excess Cash Flow for the year ended December 31, 2017. The ESH
REIT 2016 Term Facility matures on August 30, 2023.
ESH REIT has the option to voluntarily prepay outstanding loans under the 2016 Term Facility at any time upon three
business days’ prior written notice for LIBOR loans or on one business day’s prior written notice for base rate loans. In addition
to customary "breakage" costs with respect to LIBOR loans, amounts refinanced, substituted or replaced by indebtedness which
has a lower all-in yield than the all-in yield under the 2016 Term Facility on or prior to May 21, 2018 (other than as a result of a
transformative transaction) are subject to a prepayment penalty equal to 1.00% of the aggregate principal amount refinanced,
substituted or replaced. Prepayments made after May 21, 2018 are not subject to a prepayment penalty.
2016 ESH REIT Revolving Credit Facility—The 2016 ESH REIT Revolving Credit Facility provides for the issuance of
up to $50.0 million of letters of credit. Borrowings under the facility bear interest at a rate equal to (i) LIBOR plus a spread that
ranges from 2.25% to 2.75% based on ESH REIT’s Total Net Leverage Ratio, as defined, or (ii) base rate (determined by
reference to the highest of (A) the prime lending rate, (B) the overnight federal funds rate plus 0.50%, or (C) the one-month
adjusted LIBOR rate plus 1.00%) plus a spread that ranges from 1.25% to 1.75% based on ESH REIT’s Total Net Leverage
Ratio, as defined. There is no scheduled amortization under the 2016 ESH REIT Revolving Credit Facility and the facility
matures on August 30, 2021.
In addition to paying interest on outstanding principal, ESH REIT incurs a fee of 0.35% or 0.175% on the unutilized
revolver balance, based on the amount outstanding under the facility. ESH REIT is also required to pay customary letter of
125
credit fees and agency fees. As of December 31, 2017, ESH REIT had no letters of credit outstanding under the facility, an
outstanding balance of $0.0 million and available borrowing capacity of $350.0 million.
The 2016 ESH REIT Revolving Credit Facility is subject to a springing financial covenant whereby the senior loan-to-
value ratio may not exceed 45% when the aggregate principal amount of borrowings and letters of credit under the 2016 ESH
REIT Revolving Credit Facility, excluding up to $30.0 million of letters of credit, is equal to or greater than 25% of the
aggregate available principal amount of the 2016 ESH REIT Revolving Credit Facility on the applicable fiscal quarter end date.
ESH REIT Senior Notes Due 2025
In May 2015, ESH REIT issued $500.0 million of its 5.25% senior notes due in 2025 (together with the $800.0 million of
additional notes discussed below, the “2025 Notes”) under an indenture (the “Indenture”) with Deutsche Bank Trust Company
Americas, as trustee, at 100% of par value in a private placement pursuant to Rule 144A of the Securities Act ("Rule 144A"). In
March 2016, ESH REIT issued an additional $800.0 million of the 2025 Notes under the Indenture at 98.5% of par value in a
private placement pursuant to Rule 144A. The 2025 Notes mature on May 1, 2025 and bear interest at a fixed rate of 5.25% per
annum, payable semi-annually in arrears on May 1 and November 1 of each year.
The 2025 Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis by each of ESH
REIT’s subsidiaries that guarantee ESH REIT’s obligations under the 2016 ESH REIT Credit Facilities. The 2025 Notes rank
equally in right of payment with ESH REIT’s existing and future senior unsecured indebtedness, and senior in right of payment
to all future subordinated indebtedness, if any. The 2025 Notes are effectively junior to any of ESH REIT’s secured
indebtedness to the extent of the value of the assets securing such indebtedness.
ESH REIT may redeem the 2025 Notes at any time on or after May 1, 2020, in whole or in part, at a redemption price
equal to 102.625% of the principal amount, declining annually to 100% of the principal amount from May 1, 2023 and
thereafter, plus accrued and unpaid interest. Prior to May 1, 2020, ESH REIT may redeem the 2025 Notes, in whole or in part,
at a redemption price equal to 100% of the principal amount, plus a "make-whole" premium, as defined in the Indenture, plus
accrued and unpaid interest. Prior to May 1, 2018, subject to certain conditions, ESH REIT may redeem up to 35% of the
aggregate principal amount of the 2025 Notes at a redemption price equal to 105.250% of the aggregate principal amount
thereof, plus accrued and unpaid interest, with the net cash proceeds from certain equity offerings, provided 65% of the original
amount of the principal remains outstanding after the occurrence of each such redemption. Upon a Change of Control, as
defined, holders of the 2025 Notes have the right to require ESH REIT to redeem the 2025 Notes at 101% of the principal
amount, plus accrued and unpaid interest.
The Indenture contains a number of customary covenants that, among other things and subject to certain exceptions, limit
ESH REIT’s ability and the ability of its subsidiaries to incur additional debt, create certain liens, pay dividends or
distributions, make certain investments and other restricted payments, enter into affiliate transactions, sell assets or merge,
consolidate or transfer all or substantially all of their assets. The Indenture also contains certain customary events of default,
including, but not limited to, cross-defaults to certain other indebtedness. If an event of default occurs, the holders of the Notes
and the Trustee are entitled to take various actions, including declaring the 2025 Notes immediately due and payable. As of
December 31, 2017, ESH REIT was in compliance with all covenants set forth in the Indenture.
Unsecured Intercompany Facility
On August 30, 2016, ESH REIT, as borrower, and the Corporation, as lender, entered into an unsecured intercompany
credit facility (the "Unsecured Intercompany Facility"), under which ESH REIT borrowed $75.0 million from the Corporation
upon the facility's closing. As of December 31, 2017 and 2016, the amount outstanding under the facility totaled $0 and $50.0
million, respectively. Subject to certain conditions, the principal amount of the Unsecured Intercompany Facility may be
increased up to an amount that shall not exceed the greater of (i) $300.0 million and (ii) an unlimited amount so long as the
incremental loan-to-value ratio, determined on a pro-forma basis as of the last day of the most recently ended test period, as if
any incremental loans available under such incremental commitments had been outstanding on the last day of such period, and,
in each case, without netting the cash proceeds of any such incremental loans, does not exceed 5.0%. Loans under the facility
bear interest at 5.00% per annum. There is no scheduled amortization under the facility and the facility matures on August 30,
2023. ESH REIT has the option to voluntarily prepay outstanding loans at any time upon one business day’s prior written
notice.
The Unsecured Intercompany Facility contains a number of restrictive covenants that, among other things and subject to
certain exceptions, limit ESH REIT’s ability and the ability of its subsidiaries to incur additional debt, modify existing debt,
126
create certain liens, pay dividends or distributions, make certain investments and other restricted payments, enter into affiliate
transactions, amend or modify certain material operating leases and management agreements, sell assets or merge, consolidate
or transfer all or substantially all of their assets. The facility contains certain customary representations and warranties,
affirmative covenants and events of default, including, but not limited to, cross-defaults to certain other indebtedness and
certain material operating leases and management agreements. If an event of default occurs, the Corporation is entitled to take
various actions, including the acceleration of amounts due under the facility and all other actions that a creditor is permitted to
take following a default. As of December 31, 2017, ESH REIT was in compliance with all covenants under the Unsecured
Intercompany Facility.
Interest Expense— The components of net interest expense for the years ended December 31, 2017, 2016 and 2015, are
as follows (in thousands):
Contractual interest
Amortization of deferred financing costs and debt discount
Debt extinguishment and other costs
Interest income
Total
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Year Ended
December 31,
2015
119,819
$
127,215
$
121,715
7,988
3,136
(20)
9,124
27,196
(92)
9,408
3,890
(233)
130,923
$
163,443
$
134,780
$
$
Future Maturities of Debt—The future maturities of debt as of December 31, 2017, are as follows (in thousands):
Years Ending December 31,
2018
2019
2020
2021
2022
Thereafter
Total
$
$
12,870
12,870
12,870
12,870
12,870
2,519,457 (1)
2,583,807
______________________
(1) Under the 2016 Term Facility, mandatory annual prepayments of up to 50% of Excess Cash Flow, as defined, may be required
commencing with the year ending December 31, 2017. Annual mandatory prepayments for the year ending December 31, 2017 and
each year thereafter, are due during the first quarter of the following year.
Fair Value of Debt—As of December 31, 2017 and 2016, the estimated fair value of ESH REIT’s debt was
approximately $2.6 billion and $2.7 billion, respectively. Estimated fair values are determined by comparing current borrowing
rates and risk spreads offered in the market to the stated interest rates and spreads on ESH REIT’s debt (Level 2 fair value
measures) or quoted market prices (Level 1 fair value measures), when available.
7. DERIVATIVE INSTRUMENTS
In September 2016, ESH REIT entered into a floating-to-fixed interest rate swap at a fixed rate of 1.175% and a floating
rate of one-month LIBOR, subject to a LIBOR floor of 0.75%, to manage its exposure to interest rate risk on a portion of the
2016 Term Facility. In February 2017, ESH REIT executed an amendment to its swap agreement, the impact of which was to
remove the LIBOR floor on floating rate cash flows. The notional amount of the interest rate swap as of December 31, 2017
was $400.0 million. On March 30, 2018, the notional amount decreases to $350.0 million, and the notional amount continues to
decrease by an additional $50.0 million every six months until the swap's maturity in September 2021.
From inception through the February 2017 amendment to ESH REIT's swap agreement, the swap was designated as an
effective cash flow hedge and changes in fair value were recognized through accumulated other comprehensive income.
Concurrent with the February 2017 swap amendment and through April 2017, the swap's designation as a cash flow hedge was
reversed and changes in fair value were recognized in earnings and are included in the line item other non-operating income
(expense) on the accompanying consolidated statements of operations. In April 2017, ESH REIT re-designated the swap as an
effective cash flow hedge. Subsequent to April 2017, the effective portion of changes in fair value are recognized through
accumulated other comprehensive income and the ineffective portion of changes in fair value are recognized in other non-
127
operating income (expense) on the accompanying consolidated statements of operations. Prior changes recognized through
accumulated other comprehensive income are amortized over the remaining life of the swap through earnings and are included
in the line item other non-operating income (expense) on the accompanying consolidated statements of operations. As of
December 31, 2017, approximately $1.3 million is expected to be recognized through earnings over the following twelve
months.
On January 1, 2018, ESH REIT adopted ASU 2017-12 which changes the designation and measurement guidance for
qualifying hedging relationships and the presentation of hedging results, and as a result recorded a cumulative-effect
adjustment to reclassify a previously recorded loss of approximately $0.7 million from retained earnings to accumulated other
comprehensive income. Consistent with the adoption of the ASU, ESH REIT will have the ability to, and plans to, elect to
perform qualitative assessments of hedge effectiveness. Additionally, on a prospective basis, all changes in the fair value of the
swap expect to be recognized through accumulated other comprehensive income and all interest rate hedge related items that
impact earnings will be presented in the interest expense line item in the consolidated statements of operations.
The table below presents the amounts and classification on ESH REIT's financial statements related to the interest rate
swap (in thousands):
As of December 31, 2017
As of December 31, 2016
For the year ended December 31, 2017
For the year ended December 31, 2016
Other Assets
Accumulated other
comprehensive
income, net of tax
Other non-
operating
expense (income)
Interest
Expense
$
$
6,387 $
4,990 $
7,038 (1)
4,975
314 (2)
—
(707)
(183)
_______________________________
(1)
(2)
Changes during the year ended December 31, 2017 on a pre-tax basis consisted of changes in fair value of $1.4 million (effective
portion) and amortization of accumulated other comprehensive income prior to de-designation of $0.7 million.
Consists of amortization of accumulated other comprehensive income prior to de-designation of $0.7 million and removal of the
LIBOR floor of approximately $(0.3) million.
8.
INCOME TAXES
Income before income tax expense for the years ended December 31, 2017, 2016 and 2015 consists of the following (in
thousands):
U.S.
Canada
Total
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Year Ended
December 31,
2015
$
$
231,093
(14,880)
216,213
$
$
207,896
4,362
212,258
$
$
386,656
47
386,703
The components of income tax expense for the years ended December 31, 2017, 2016 and 2015 are as follows (in
thousands):
Federal (including foreign):
Current
Deferred
State:
Current
Deferred
Total
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Year Ended
December 31,
2015
$
$
4,792
$
(3,377)
170
(356)
1,229
$
1,195
$
549
(1,715)
22
51
$
1,336
6,059
1,107
17
8,519
128
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, 2017, 2016 and 2015 are as follows (in thousands):
Tax at statutory rate
State income tax
Foreign income tax rate differential
Nondeductible (nontaxable):
ESH REIT income
Change in expected distribution policy
Other permanent differences
Other - net
Income tax expense (benefit) - net
$
Year Ended
December 31, 2017
Year Ended
December 31, 2016
Year Ended
December 31, 2015
$
75,675
35.0% $
74,290
35.0% $
135,346
35.0%
(272)
(5,149)
(0.1)
(2.4)
(71,304)
(33.0)
—
1,925
354
1,229
—
0.9
0.2
0.6% $
(1,834)
1,872
(73,581)
(2,243)
(602)
2,149
51
(0.9)
0.9
1,160
4
0.3
—
(34.6)
(128,354)
(33.2)
(1.0)
(0.3)
1.0
—
(68)
431
—
—
0.1
0.1% $
8,519
2.2%
The significant components of deferred tax assets and deferred tax liabilities as of December 31, 2017 and 2016, consist
of the following (in thousands):
Deferred tax assets:
Net operating loss carryforwards
Other
Total deferred tax assets:
Valuation allowance
Net deferred tax assets:
Deferred tax liabilities:
Depreciable property
Other
Total net deferred tax liabilities:
December 31,
2017
December 31,
2016
$
775
$
2
777
(775)
2
(24)
(26)
$
(48) $
696
347
1,043
(696)
347
(3,387)
(152)
(3,192)
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 (including any applicable alternative minimum tax) and generally would be precluded
from qualifying as a REIT for the subsequent four taxable years following the year during which it lost its REIT qualification.
Even in qualifying as a REIT, ESH REIT may be subject to state and local taxes in certain jurisdictions, and is subject to federal
income and excise taxes on undistributed income.
ESH REIT intends to distribute its taxable income to the extent necessary to optimize its tax efficiency including, but not
limited to, maintaining its REIT status, while retaining sufficient capital for its ongoing needs. Accordingly, ESH REIT expects
to distribute approximately 100% of its taxable income for the foreseeable future. However, as of December 31, 2015, the
expectation was to distribute approximately 95% of ESH REIT’s taxable income. As a result of this change, during the year
ended December 31, 2016, the ESH REIT recognized a benefit of approximately $2.3 million with respect to the reversal of net
deferred tax liabilities recorded as of December 31, 2015, which represented the previously estimated 5% of taxable income to
be retained by ESH REIT under its prior distribution policy.
In 2017 and 2016, ESH REIT recognized a dividends paid deduction for 100% of its taxable income, incurring no federal
income tax and minimal state and local income taxes. As discussed in Note 4, during 2017 ESH REIT disposed of substantially
all of its Canadian assets. The disposition resulted in a gain for tax purposes and, as a result, ESH REIT incurred approximately
$4.5 million of current period income tax. In 2015, ESH REIT distributed approximately 95% of its taxable income and utilized
its federal net operating loss carryforward of approximately $18.6 million. As a result, in 2015, ESH REIT incurred minimal
current federal income tax in the form of alternative minimum tax.
129
ESH REIT had taxable income prior to distributions of approximately $231.6 million, $210.2 million and $369.0 million
for the years ended December 31, 2017, 2016 and 2015, respectively. In 2017, ESH REIT made approximately $235.1 million
in cash distributions to its shareholders, all of which were considered ordinary taxable income. ESH REIT's 2017 cash
distributions included approximately $6.2 million previously deducted in 2016 to fully offset its 2016 taxable income. In 2016,
ESH REIT made approximately $280.9 million in cash distributions to its shareholders, all of which were considered ordinary
taxable income. The 2016 cash distribution amount included a special distribution of approximately $86.5 million paid in
January 2016. Approximately $77.1 million of the special distribution was deductible in 2015; the remaining $9.4 million was
deductible in 2016. In 2015, ESH REIT made approximately $273.1 million in distributions to its shareholders, of which
approximately $113.0 million were considered capital gain and approximately $160.1 million were considered ordinary taxable
income.
As of December 31, 2017, the book basis of ESH REIT’s property and equipment was approximately $60.4 million
greater than the tax 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 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 years 2014 to
present are subject to examination by the Internal Revenue Service and other tax returns for the years 2013 to present are
subject to examination by other taxing authorities.
130
9. QUARTERLY RESULTS (Unaudited)
Quarterly financial data for the years ended December 31, 2017 and 2016 is as follows (in thousands, except per share
data):
Three Months
Ended
March 31,
Three Months
Ended
June 30,
Three Months
Ended
September 30,
Three Months
Ended
December 31,
2017
2016
2017 (1)
2016
2017
2016
2017 (2)
2016
Rental revenues from
Extended Stay America,
Inc.
Income from operations
Net (loss) income
Net (loss) income per
common share - Class A -
basic(3)
Net (loss) income per
common share - Class A -
diluted(3)
Net (loss) income per
common share - Class B -
basic(3)
Net (loss) income per
common share - Class B -
diluted(3)
$
116,294
$
116,242
$
115,589
$
116,492
$
143,407
$
153,139
$
308,210
$
308,402
16,054
36,797
28,946
36,336
60,589
72,760
241,320
228,563
(16,116)
(5,130)
(4,724)
1,471
28,486
23,652
207,338
192,214
$
$
$
$
(0.04)
(0.04)
(0.04)
$
$
$
(0.01)
(0.01)
(0.01)
$
$
$
(0.01) $
0.00
$
0.06
$
0.05
$
0.47
$
0.43
(0.01) $
0.00
$
0.06
$
0.05
$
0.47
$
0.43
(0.01) $
0.00
$
0.06
$
0.05
$
0.47
$
0.43
(0.04) (4) $
(0.01)
(4) $
(0.01) $
0.00
$
0.06
$
0.05
$
0.47
$
0.43
_______________________
Includes loss on sale of four hotel properties of approximately $(3.3) million as discussed in Note 4.
Includes gain on sale of one hotel property of approximately $11.9 million as discussed in Note 4.
(1)
(2)
(3) The sum of the four quarters may differ from the annual amount due to rounding.
(4) Excludes approximately 0.3 million and 0.1 million anti-dilutive securities, respectively.
10. EQUITY
ESH REIT has authorized 4,300.0 million shares of Class A common stock, par value $0.01 per share, of which
approximately 250.5 million shares were issued and outstanding as of December 31, 2017 and 2016. All issued and outstanding
shares of ESH REIT Class A common stock were held by the Corporation as of December 31, 2017 and 2016. ESH REIT has
authorized 7,800.0 million shares of Class B common stock, par value $0.01 per share, of which approximately 192.1 million
and 195.4 million shares were issued and outstanding as of December 31, 2017 and 2016, 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, 2017 and 2016. Additionally, ESH REIT has authorized 125 shares of preferred stock,
no par value, all of which were issued and outstanding as of December 31, 2017 and 2016. 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 approximately $235.6 million (of which approximately $132.8 million was
paid to the Corporation), $281.4 million (of which approximately $155.3 million was paid to the Corporation) and $273.1
million (of which approximately $150.3 million was paid to the Corporation) during the years ended December 31, 2017, 2016
and 2015, respectively.
As discussed in Note 1, in December 2015, the Board of Directors of ESH REIT, together with the Board of Directors of
the Corporation, authorized a combined Paired Share repurchase program for up to $100 million of Paired Shares. In February
2016, the Boards of Directors of the Corporation and ESH REIT authorized an increase of the combined Paired Share
repurchase program from up to $100 million to up to $200 million of Paired Shares. In December 2016, the Boards of Directors
of the Corporation and ESH REIT authorized an increase of the combined Paired Share repurchase program from up to $200
131
million to up to $300 million of Paired Shares and extended the maturity of the Paired Share repurchase program through
December 31, 2017, each effective January 1, 2017. In January 2018, the Boards of Directors of the Corporation and ESH
REIT authorized an extension of the maturity date of the Paired Share repurchase program through December 31, 2018, each
effective January 1, 2018. 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, 2017,
ESH REIT repurchased and retired approximately 13.0 million ESH REIT Class B common shares for approximately $76.4
million, of which approximately 5.8 million ESH REIT Class B common shares were repurchased and retired from the entities
associated with the Sponsors.
ESH REIT records distributions in excess of retained earnings as a reduction to additional paid in capital. As of
December 31, 2017, ESH REIT had cumulative earnings in excess of declared distributions of approximately $10.8 million.
11. RELATED PARTY TRANSACTIONS
Revenues and Overhead Expenses
Leases and Rental Revenues—For the period from May 1, 2017 through December 31, 2017, ESH REIT's revenues
were derived from three leases. Prior to the sale of its Extended Stay Canada-branded hotels in May 2017, ESH REIT’s
revenues were derived from four leases. The counterparty to each lease agreement is a subsidiary of the Corporation. Fixed
rental revenues are recognized on a straight-line basis. For the years ended December 31, 2017, 2016 and 2015, ESH REIT
recognized fixed rental revenues of approximately $461.2 million, $465.2 million and $490.8 million, respectively. ESH REIT
recognized approximately $222.3 million, $229.1 million and $228.8 million of percentage rental revenues for the years ended
December 31, 2017, 2016 and 2015, respectively.
Each lease agreement, which had an original term that expires in October 2018, is subject to an automatic five-year
renewal term that expires in October 2023. Upon renewal, minimum and/or percentage rents may be adjusted and are expected
to continue to reflect arms-length terms. Future fixed rental payments to be received under current remaining noncancelable
lease terms are as follows (in thousands):
Years Ending
December 31,
2018
2019
2020
2021
2022
Thereafter
Total
$
$
487,773
502,406
517,478
533,003
548,993
471,219
3,060,872
Overhead Expenses—ESA Management LLC, a wholly-owned subsidiary of the Corporation, incurs costs under a
services agreement with the Corporation and ESH REIT for certain overhead services performed on the entities' behalf. The
services relate to executive management, accounting, financial analysis, training and technology. For the years ended
December 31, 2017, 2016 and 2015, ESH REIT incurred approximately $8.5 million, $8.8 million and $9.5 million,
respectively, related to this agreement, which is included in general and administrative expenses in the accompanying
consolidated statements of operations. The expenses ESH REIT incurred under this services agreement include expenses
related to applicable employees that participate in the Corporation’s long-term incentive plan (as described in Note 13). Such
charges were approximately $1.1 million, $1.9 million and $1.1 million for the years ended December 31, 2017, 2016 and
2015, respectively.
Debt and Equity Transactions
Share Repurchases—During the year ended December 31, 2017, ESH REIT repurchased and retired approximately 2.0
million Class B common shares from the Selling Stockholders for approximately $12.2 million. These shares were purchased in
connection with the secondary offerings consummated during the year ended December 31, 2017 and pursuant to, and counted
toward, the combined Paired Share repurchase program (see Notes 1 and 10).
132
During the year ended December 31, 2016, ESH REIT repurchased and retired approximately 3.85 million Class B
common shares from the Selling Stockholders for approximately $21.6 million. These shares were purchased in connection
with the secondary offerings consummated during the year ended December 31, 2016 and pursuant to, and counted toward, the
combined Paired Share repurchase program (see Notes 1 and 10).
Senior Notes Due 2025—In March 2016, in connection with ESH REIT's $800.0 million issuance of its 2025 Notes
discussed in Note 6, an affiliate of one of the Sponsors acted as an initial purchaser and purchased and resold $24.0 million of
the 2025 Notes. As such, the affiliate of one of the Sponsors earned approximately $0.4 million in fees related to the transaction
during the year ended December 31, 2016.
Unsecured Intercompany Facility—As of December 31, 2017 and 2016, the outstanding balance owed by ESH REIT to
the Corporation under the Unsecured Intercompany Facility was $0 and $50.0 million, respectively. ESH REIT is able to
increase its borrowings under the Unsecured Intercompany Facility to an amount of up to $300.0 million, plus additional
amounts, in each case, subject to certain conditions (see Note 6). During the years ended December 31, 2017 and 2016, ESH
REIT incurred approximately $2.4 million and $1.3 million, respectively, in interest expense related to the Unsecured
Intercompany Facility.
Distributions—The Corporation owns all of the Class A common stock of ESH REIT, which represents approximately
57% of the outstanding shares of common stock of ESH REIT. During the years ended December 31, 2017, 2016 and 2015,
ESH REIT paid distributions of approximately $132.8 million, $155.3 million (of which $47.6 million had been declared as of
December 31, 2015) and $150.3 million, respectively, to the Corporation in respect of the Class A common stock of ESH REIT.
Issuance of Common Stock—During the year ended December 31, 2017, ESH REIT issued and was compensated
approximately $1.9 million for approximately 309,000 shares of Class B common stock, each of which was attached to a share
of Corporation common stock to form a Paired Share, used to settle vested restricted stock units. During the year ended
December 31, 2016, ESH REIT issued and was compensated approximately $1.3 million for approximately 224,000 shares of
Class B common stock, each of which was attached to a share of Corporation common stock to form a Paired Share, used to
settle vested restricted stock units. During the year ended December 31, 2015, ESH REIT issued and was compensated
approximately $0.7 million for approximately 97,000 shares of Class B common stock, each of which was attached to a share
of Corporation common stock to form a Paired Share, used to settle vested restricted stock units.
As of December 31, 2017, approximately 232,000 RSUs issued by the Corporation have vested but have not been settled,
for which ESH REIT has recognized a receivable of approximately $1.4 million, which is included as a component of due to
Extended Stay America, Inc., net on the accompanying consolidated balance sheet. In March 2018, 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, 2016, approximately 164,000 RSUs issued by the Corporation had vested but had not been settled,
for which ESH REIT had recognized a receivable of approximately $1.0 million, which is included as a component of due to
Extended Stay America, Inc. on the accompanying consolidated balance sheet. In March 2017, 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.
133
Related party transaction balances as of December 31, 2017 and 2016, include the following (in thousands):
Leases:
Rents receivable(1)
Deferred rents receivable(2)
Unearned rental revenues(1)
Debt:
Loan payable (Unsecured Intercompany Facility)(3)
Working capital and other:
Ordinary working capital(4)
Equity awards receivable (payable)(5)
Total working capital and other, net(6)
December 31,
2017
December 31,
2016
$
$
$
$
$
$
3,704
24,388
$
$
(40,523) $
2,609
40,259
(39,898)
— $
(50,000)
(8,441) $
(12,566)
1,386
958
(7,055) $
(11,608)
______________________
(1)
Fixed minimum rents are due one-month in advance. Percentage rents are due one-month in arrears. Rents receivable relate to December 2017 and
2016 percentage rent, respectively. Unearned rental revenues relate to January 2018 and 2017 fixed minimum rent, respectively.
Represents rental revenues recognized in excess of cash rents received. Amount will decrease over lease terms to zero.
The Unsecured Intercompany Facility bears interest at 5.0% per annum. ESH REIT is able to increase its borrowings under the Unsecured
Intercompany Facility to an amount up to $300 million, plus additional amounts, in each case subject to certain conditions (see Note 6).
Represents disbursements and/or receipts made by the Corporation or ESH REIT on the other entity's behalf. Includes overhead costs incurred by
the Corporation on ESH REIT's behalf.
Represents amounts related to RSUs not yet settled or issued.
Outstanding balances are typically repaid within 60 days.
(2)
(3)
(4)
(5)
(6)
12. COMMITMENTS AND CONTINGENCIES
Lease Commitments—ESH REIT is a tenant under long-term ground leases at four of its hotel properties. The initial
terms of the ground lease agreements terminate at various dates between 2021 and 2096 and three leases include multiple
renewal options for generally five or 10 year periods. Rent expense on ground leases is recognized on a straight-line basis and
was approximately $1.5 million for each of the years ended December 31, 2017, 2016 and 2015. Ground lease expense is
included in hotel operating expense in the accompanying consolidated statements of operations.
Future minimum lease payments under operating leases as of December 31, 2017, are as follows (in thousands):
Years Ending
December 31,
2018
2019
2020
2021
2022
Thereafter
Total
$
$
771
775
845
852
876
79,808
83,927
Other Commitments—ESH REIT has a commitment to make quarterly payments in lieu of taxes to the owner of the
land on which one of its properties is located. The initial term of the agreement terminates in 2031. The cost related to this
commitment was approximately $0.3 million for each of the years ended December 31, 2017, 2016 and 2015, and is included
in hotel operating expenses in the accompanying consolidated statements of operations.
Paired Share Repurchase Commitment—As of December 31, 2017, ESH REIT agreed to repurchase 73,600 Class B
common shares for approximately $0.5 million, for which settlement had not yet occurred.
Legal Contingencies—On February 14, 2018, a subsidiary of ESH REIT learned that a default judgment had been
entered against it and certain of its affiliates on March 16, 2017 in the State Court of Gwinnett County, Georgia in an action
entitled Sweeting v. Extended Stay America, Inc. et al., Case No. 16-C-06630-S4. A subsidiary of ESH REIT has filed motions
134
to open the default and set aside the judgment. ESH REIT believes that it is probable that the judgment will be set aside. ESH
REIT does not have sufficient information on which to estimate the liability, if any, and therefore has not recorded a liability for
this matter.
ESH REIT is not a party to 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 ESH REIT. ESH REIT believes that the results of all claims and
litigation, individually or in the aggregate, will not have a material adverse effect on its business or consolidated financial
statements.
13. EQUITY-BASED COMPENSATION
The Corporation and ESH REIT each maintain an LTIP, as amended and restated, approved by their shareholders. Under
the LTIPs, the Corporation and ESH REIT may issue to eligible employees or directors RSAs, RSUs or other equity-based
awards, in respect of Paired Shares, with service, performance or market vesting conditions. The aggregate number of Paired
Shares that may be the subject of awards under the LTIPs shall not exceed 8.0 million, of which no more than 4.0 million may
be granted as incentive stock options. Each of the Corporation’s and ESH REIT’s LTIP has a share reserve of an equivalent
number of shares of Corporation common stock and ESH REIT Class B common stock. As of December 31, 2017,
approximately 5.4 million Paired Shares were available for future issuance under the LTIPs.
Equity-based compensation expense is recognized by amortizing the grant-date fair value of equity-based awards, less
estimated forfeitures, on a straight-line basis over the requisite service period of each award. The grant-date fair value of
awards is based on the closing price of a Paired Share on the date of grant. A portion of the grant-date fair value of all equity-
based awards is allocated to a share of Corporation common stock and a portion is allocated to a share of ESH REIT Class B
common stock. Expense related to the portion of the grant-date fair value with respect to a share of Corporation common stock
is recorded as a payable due to the Corporation. Expense related to the portion of the grant-date fair value with respect to a
share of ESH REIT Class B common stock is recorded as an increase to additional paid in capital. Equity-based compensation
expense totaled approximately $0.4 million, $0.1 million and $1.1 million for the years ended December 31, 2017, 2016 and
2015, respectively, and is included in general and administrative expenses in the accompanying consolidated statements of
operations.
As of December 31, 2017, there was approximately $0.3 million of unrecognized compensation expense related to
outstanding equity-based awards, which is expected to be recognized subsequent to December 31, 2017 over a weighted-
average period of approximately 0.7 years. Total unrecognized compensation expense will be adjusted for actual forfeitures.
ESH REIT will have to pay more or less for a share of the Corporation common stock than it would have otherwise paid
at the time of grant as the result of regular market changes in the value of a Paired Share between the time of grant and the time
of settlement. An increase in the value allocated to a share of 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.
The Corporation accounts for awards issued under its LTIP in a manner similar to ESH REIT. For all LTIP awards
granted by the Corporation, ESH REIT will receive compensation for the fair value of the Class B shares on the date of
settlement of such Class B shares by ESH REIT. As of December 31, 2017, the Corporation has granted a total of
approximately 3.2 million service-based, performance-based and market-based RSUs, of which approximately 2.3 million
RSUs were either forfeited or settled. As a counterparty to these outstanding RSUs, ESH REIT is expected to issue and be
compensated in cash for approximately 0.9 million shares of Class B common stock of ESH REIT in future periods, assuming
performance-based awards vest at 100% and no forfeitures.
135
RSA/RSU activity (all of which relates to awards with service vesting conditions) during the years ended December 31,
2017, 2016 and 2015, was as follows:
Outstanding RSAs/RSUs - January 1, 2015
Granted
Settled
Forfeited
Outstanding RSAs/RSUs - December 31, 2015
Granted
Settled
Forfeited
Outstanding RSAs/RSUs - December 31, 2016
Granted
Settled
Forfeited
Outstanding RSAs/RSUs - December 31, 2017
Vested RSAs/RSUs - December 31, 2016
Nonvested RSAs/RSUs - December 31, 2016
Vested RSAs/RSUs - December 31, 2017
Nonvested RSAs/RSUs - December 31, 2017
Number of
RSAs/RSUs
(in thousands)
Weighted-
Average Grant-
Date Fair
Value
600
8
$
$
(344) $
(20) $
244
15
$
$
(231) $
— $
28
26
$
$
(15) $
— $
39
$
— $
28
$
— $
39
$
10.38
19.74
11.11
9.34
9.71
14.08
9.40
—
14.57
17.56
13.66
—
16.91
—
14.57
—
16.91
14. SUBSEQUENT EVENTS
In January 2018, the Boards of Directors of Extended Stay America, Inc. and ESH REIT extended the maturity of their
combined Paired Share repurchase program through December 31, 2018, each effective January 1, 2018.
Subsequent to December 31, 2017, ESH REIT repurchased and retired its respective portion of approximately 1.0 million
ESH REIT Class B common shares for approximately $7.1 million. In February 2018, the Board of Directors of ESH REIT
authorized an increase to the amount of the combined Paired Share repurchase program from up to $300 million to up to $400
million of Paired Shares, which expires on December 31, 2018.
On February 21, 2018, ESH REIT completed the sale of 25 hotels for approximately $112.1 million. ESH REIT received
approximately $111.2 million in sale proceeds and expects to recognize a gain on sale not to exceed $10 million.
On February 27, 2018, the Board of Directors of ESH REIT declared a cash distribution of $0.15 per share for the fourth
quarter of 2017 on its Class A and Class B common stock. The distribution is payable on March 27, 2018 to shareholders of
record as of March 13, 2018.
136
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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, 2017, 2016 and 2015 were as follows:
Balance, beginning of the period
Additions during period:
Capital Expenditures
Acquisitions
Deductions during period:
Dispositions and other
Impairment
Balance, end of period
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Year Ended
December 31,
2015
$
4,878,973
$
4,703,270
$
4,709,962
166,378
—
124,249
25,169
225,323
—
39,792
9,828
212,767
—
210,448
9,011
$
4,895,933
$
4,878,973
$
4,703,270
The Company’s changes in accumulated depreciation for the years ended December 31, 2017, 2016 and 2015 were as follows:
Balance, beginning of the period
Additions during period:
Depreciation
Deductions during period:
Dispositions and other
Balance, end of period
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Year Ended
December 31,
2015
973,669
$
781,929
$
622,514
227,876
219,969
202,531
58,746
28,229
1,142,799
$
973,669
$
43,116
781,929
$
$
ESH REIT’s changes in investment in real estate for the years ended December 31, 2017, 2016 and 2015 were as follows:
Balance, beginning of the period
Additions during period:
Capital Expenditures
Acquisitions
Deductions during period:
Dispositions and other
Impairment
Balance, end of period
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Year Ended
December 31,
2015
$
4,874,018
$
4,685,940
$
4,686,608
163,797
—
103,965
15,046
219,681
—
31,603
—
207,642
—
208,310
—
$
4,918,804
$
4,874,018
$
4,685,940
152
ESH REIT’s changes in accumulated depreciation for the years ended December 31, 2017, 2016 and 2015 were as follows:
Balance, beginning of the period
Additions during period:
Depreciation
Deductions during period:
Dispositions and other
Balance, end of period
(concluded)
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Year Ended
December 31,
2015
959,449
$
765,034
$
606,960
225,484
216,394
199,044
41,769
21,979
1,143,164
$
959,449
$
40,970
765,034
$
$
153
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Controls and Procedures (Extended Stay America, Inc.)
Disclosure Controls and Procedures
As of December 31, 2017, 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, 2017. 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, 2017, 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, 2017. The report appears
in this Item 9A of this combined annual report on Form 10-K.
154
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, 2017, 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, 2017, 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, 2017, of the Company and our
report dated February 27, 2018, 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 27, 2018
155
Controls and Procedures (ESH Hospitality, Inc.)
Disclosure Controls and Procedures
As of December 31, 2017, 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, 2017. 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, 2017, 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, 2017. The report appears in this Item 9A of
this combined annual report on Form 10-K.
156
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, 2017, 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, 2017, 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, 2017, of the Company and our
report dated February 27, 2018, 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 27, 2018
157
Item 9B.
Other Information
None.
158
Item 10.
Directors, Executive Officers and Corporate Governance
PART III
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 our Proxy Statements prepared for the solicitation of
proxies in connection with our annual Meetings of Shareholders to be held May 16, 2018 (“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—Section 16(a)
Beneficial Ownership 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—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 “Questions and Answers About the Proxy Materials and the Annual Meeting” and “Corporate Governance and Board
Matters” in our Proxy Statements, which information is incorporated by reference herein.
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—Report of the Compensation Committee” 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.
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—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, 2017 with respect to the Paired Shares that may be issued
under our existing equity compensation plans:
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)
957,110 (1)
—
957,110 (1)
—
—
—
5,421,041 (2)
—
5,421,041 (2)
Plan Category
Equity compensation plans approved by
security holders
Equity compensation plans not approved by
security holders
Total
________________________
(1) Includes 918,664 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
159
performance conditions, and 38,446 Paired Shares underlying time-vesting restricted stock unit awards made under the
amended and restated ESH Hospitality, Inc. Long-Term Incentive Plan.
(2) This number 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.
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” in our Proxy
Statements, which information is incorporated by reference herein.
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.
160
PART IV
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, 2017” 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
3.2
3.3
3.4
4.1
4.2
4.3
4.3.1
4.4
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).
Amended and Restated Bylaws of Extended Stay America, Inc. (filed as Exhibit 3.2 to the Registrants’
Current Report on Form 8-K (File No. 001-36190) filed November 18, 2013, and incorporated herein by
reference).
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).
Bylaws of ESH Hospitality, Inc. (filed as Exhibit 3.4 to the Registrants’ Current Report on Form 8-K
(File No. 001-36190) filed November 18, 2013, and incorporated herein by reference).
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).
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).
Registration Rights Agreement, by and among Extended Stay America, Inc., ESH Hospitality, Inc. and
the other parties listed therein, dated November 18, 2013 (filed as Exhibit 4.2 to the Registrants’ Current
Report on Form 8-K (File No. 001-36190) filed November 18, 2013, and incorporated herein by
reference).
Joinder to Registration Rights Agreement, by and among Extended Stay America, Inc., ESH Hospitality,
Inc., and other parties thereto, dated September 29, 2015 (filed as Exhibit 4.1 to the Registrants’
Quarterly Report on Form 10-Q (File No. 001-36190) filed October 27, 2015, and incorporated by
reference herein).
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).
161
Exhibit
Number
Description
4.5
4.6.1
4.6.2
4.7
10.1
10.2
10.3
10.4
10.5
10.5.1
10.5.2
10.5.3
10.5.4
10.6
10.7
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).
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 18, 2016, and incorporated herein by reference).
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’
Quarterly Report on Form 10-Q (File No. 001-36190) filed February 28, 2017, and incorporated herein
by reference).
Form of 5.25% Senior Notes due 2025 (included as part of Exhibit 4.6 above).
Amended and Restated Management Agreement, between ESA P Portfolio Operating Lessee LLC,
Lessee, and ESA Management, LLC, Manager, dated as of August 30, 2016 (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).
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).
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).
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).
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).
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).
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).
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).
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).
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).
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).
162
Exhibit
Number
10.8
10.8.1
10.8.2
10.9
10.14†
10.14.1†
10.15†
10.15.1†
10.16†
10.17†
10.17.1†
10.17.2†
10.17.3†
10.17.4†
10.18†
10.19†
Description
Trademark License Agreement, dated as of October 8, 2010, by and between ESH Strategies Branding
LLC and ESA Canada Operating Lessee Inc. (filed as Exhibit 10.7 to the Registrants’ Registration
Statement on Form S-1 (File No. 333-190052), and incorporated herein by reference).
First Amendment to Trademark License Agreement, dated as of November 30, 2012, by and between
ESH Strategies Branding LLC and ESA Canada Operating Lessee Inc. (filed as Exhibit 10.7.1 to the
Registrants’ Registration Statement on Form S-1 (File No. 333-190052), and incorporated herein by
reference).
Termination of Trademark License Agreement, dated July 11, 2017, by and between ESH Strategies
Branding LLC and ESA Canada Operating ULC (f/k/a ESA Canada Operating Lessee Inc.) (filed as
Exhibit 10.2 to the Registrants’ Quarterly Report on Form 10-Q (File No. 001-36190) filed November
11, 2017, and incorporated herein by reference).
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 11, 2017, and incorporated herein by reference).
Employment Agreement by and between HVM L.L.C. and James L. Donald entered into as of February
21, 2012 (filed as Exhibit 10.15 to the Registrants’ Amendment No. 3 to Registration Statement on Form
S-1 (File No. 333-190052), and incorporated herein by reference).
Acknowledgment of Assumption executed by James L. Donald on October 15, 2013 (filed as Exhibit
10.15.1 to the Registrants’ Amendment No. 6 to Registration Statement on Form S-1 (File No.
333-190052), and incorporated herein by reference).
Employment Agreement by and between HVM L.L.C. and Thomas Seddon entered into as of March 26,
2012 (filed as Exhibit 10.17 to the Registrants’ Amendment No. 3 to Registration Statement on Form S-1
(File No. 333-190052), and incorporated herein by reference).
Acknowledgment of Assumption executed by Thomas Seddon on October 16, 2013 (filed as Exhibit
10.17.1 to the Registrants’ Amendment No. 6 to Registration Statement on Form S-1 (File No.
333-190052), and incorporated herein by reference).
Amended and Restated Employment Agreement by and between ESA Management, LLC and Jonathan
Halkyard entered into as of December 16, 2014 (filed as Exhibit 10.3 to the Registrants’ Current Report
on Form 8-K (File No. 001-36190) filed December 17, 2014, and incorporated herein by reference).
Employment Agreement by and between HVM L.L.C. and M. Thomas Buoy entered into as of August
24, 2011 (filed as Exhibit 10.19 to the Registrants’ Amendment No.3 to Registration Statement on Form
S-1 (File No. 333-190052), and incorporated herein by reference).
First Amendment to Employment Agreement by and between HVM L.L.C. and M. Thomas Buoy (filed
as Exhibit 10.19.1 to the Registrants’ Amendment No. 6 to Registration Statement on Form S-1 (File No.
333-190052), and incorporated herein by reference).
Second Amendment to Employment Agreement by and between HVM L.L.C. and M. Thomas Buoy
entered into as of October 17, 2013 (filed as Exhibit 10.19.2 to the Registrants’ Amendment No. 6 to
Registration Statement on Form S-1 (File No. 333-190052), and incorporated herein by reference).
Waiver and Acknowledgment executed by M. Thomas Buoy on October 17, 2013 (filed as Exhibit
10.19.3 to the Registrants’ Amendment No. 6 to Registration Statement on Form S-1 (File No.
333-190052), and incorporated herein by reference).
Acknowledgment of Assumption executed by M. Thomas Buoy on October 17, 2013 (filed as Exhibit
10.19.4 to the Registrants’ Amendment No. 6 to Registration Statement on Form S-1 (File No.
333-190052), and incorporated herein by reference).
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).
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).
163
Exhibit
Number
10.20
10.20.1
10.20.2
10.21
10.21.1
10.22
10.22.1
10.22.2
10.23
10.24
10.25
10.28†
Description
Amended and Restated Lease Agreement, dated as of August 30, 2016, 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 10.6 to the Registrants’
Quarterly Report on Form 10-Q (File No. 001-36190) filed October 25, 2016, and incorporated herein
by reference).
First Amendment to Amended and Restated Lease Agreement, dated as of January 6, 2017, 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 10.20.1 to the Registrants’ Annual Report on Form 10-K (File No. 001-36190) filed February
28, 2017, and incorporated herein by reference).
Partial Termination Side Letter, dated as of May 16, 2017, of that certain (i) Amended and Restated
Lease Agreement, dated August 30, 2016, between ESA P Portfolio L.L.C., ESA P Portfolio MD Trust,
and ESH/TN Properties LLC, individually and collectively as Landlord, and ESA P Portfolio Operating
Lessee LLC, as Tenant, as amended by that certain First Amendment to Amended and Restated Lease
Agreement, dated January 6, 2017, and (ii) Amended and Restated Management Agreement, between
Tenant and ESA Management, LLC, as Manager, dated as of August 30, 2016 (filed as Exhibit 10.2 to
the Registrants’ Quarterly Report on Form 10-Q (File No. 001-36190) filed August 1, 2017, and
incorporated herein by reference).
Amended and Restated Lease Agreement, dated as of August 30, 2016, by and between ESA Canada
Administrator L.L.C., as Landlord, ESA Canada Properties Trust, as Beneficial Owner, and ESA Canada
Operating Lessee ULC, as Tenant (filed as Exhibit 10.7 to the Registrants’ Quarterly Report on Form 10-
Q (File No. 001-36190) filed October 25, 2016, and incorporated herein by reference).
First Amendment to Amended and Restated Lease Agreement, dated as of January 6, 2017, by and
between ESA Administrator LLC, as Landlord, ESA Canada Properties Trust, as Beneficial Owner, and
ESA Canada Operating Lessee ULC, as Tenant (filed as Exhibit 10.21.1 to the Registrants’ Annual
Report on Form 10-K (File No. 001-36190) filed February 28, 2017, and incorporated herein by
reference).
Lease Agreement, dated as of October 8, 2010, by and between ESA UD Properties L.L.C., as Landlord,
and ESA 2007 Operating Lessee Inc., as Tenant (filed as Exhibit 10.25 to the Registrants’ Amendment
No. 7 to Registration Statement on Form S-1 (File No. 333-190052), and incorporated herein by
reference).
First Amendment to Lease Agreement, by and between ESA UD Properties L.L.C., as Landlord, and
ESA 2007 Operating Lessee Inc., as Tenant, dated November 11, 2013 (filed as Exhibit 10.10 to the
Registrants’ Current Report on Form 8-K (File No. 001-36190) filed November 18, 2013, and
incorporated herein by reference).
Second Amendment to Lease Agreement, dated as of February 22, 2016, by and between ESA UD
Properties L.L.C., as Landlord, and ESA 2007 Operating Lessee Inc., as Tenant (filed as Exhibit 10.22.2
to the Registrants’ Annual Report on Form 10-K (File No. 001-36190) filed February 23, 2016, and
incorporated herein by reference).
Lease Agreement, dated as of December 31, 2013, by and between ESA LVP Portfolio LLC, as
Landlord, and ESA LVP Operating Lessee LLC, as Tenant (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).
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).
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).
Extended Stay America Incentive Plan for Executives (as implemented for 2014) (filed as Exhibit 10.29
to the Registrants’ Annual Report on Form 10-K (File No. 001-36190) filed February 26, 2015, and
incorporated herein by reference).
164
Exhibit
Number
10.29†
10.30†
10.31†
10.32†
10.33†
10.34†
10.35†
10.36†
10.37†
10.38†
10.39†
10.40†
10.41†
10.42†
Description
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).
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).
Letter Agreement, dated as of December 11, 2014, between Extended Stay America, Inc. and ESH
Hospitality, Inc. and John R. Dent (filed as Exhibit 10.1 to the Registrants’ Current Report on Form 8-K
(File No. 001-36190) filed December 17, 2014, and incorporated herein by reference).
Letter Agreement, dated as of December 9, 2014, between Extended Stay America, Inc. and Tom
Bardenett (filed as Exhibit 10.2 to the Registrants’ Current Report on Form 8-K (File No. 001-36190)
filed December 17, 2014, and incorporated herein by reference).
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 21, 2015, and incorporated herein by reference).
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).
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).
Form of Amended and Restated ESH Hospitality, Inc. Long-Term Incentive Plan Restricted Stock Unit
Agreement (Time-Vesting) for Directors (filed as Exhibit 10.8 to the Registrants’ Quarterly Report on
Form 10-Q (File No. 001-36190) filed on July 30, 2015, and incorporated herein by reference).
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).
Letter Agreement by and between Extended Stay America, Inc. and Gerardo Lopez dated July 17, 2015
(filed as Exhibit 10.1 to the Registrants’ Current Report on Form 8-K (File No. 001-36190) filed July 21,
2015, and incorporated herein by reference).
Restricted Stock Unit Agreement by and between Extended Stay America, Inc. and Gerardo I. Lopez
dated September 3, 2015 (filed as Exhibit 10.1 to the Registrants’ Current Report on Form 8-K (File No.
001-36190) filed September 4, 2015, and incorporated herein by reference).
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).
Letter Agreement by and between Extended Stay America, Inc. and Gerardo Lopez dated December 18,
2017 (filed as Exhibit 10.1 to the Registrants’ Current Report on Form 8-K (File No. 001-36190) filed
December 18, 2017, and incorporated herein by reference).
Letter Agreement by and between Extended Stay America, Inc. and Jonathan S. Halkyard dated
December 18, 2017 (filed as Exhibit 10.2 to the Registrants’ Current Report on Form 8-K (File No.
001-36190) filed December 18, 2017, and incorporated herein by reference).
165
Exhibit
Number
10.43
10.44
10.44.1
10.44.2
10.45
10.46
10.47
10.48
10.49
21.1*
23.1*
23.2*
31.1*
31.2*
31.3*
Description
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 August 31, 2016, and incorporated by reference herein).
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 August 31, 2016,
and incorporated by reference herein).
First Amendment to Credit Agreement, dated as of March 1, 2017, 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).
Second Amendment to Credit Agreement, dated as of November 21, 2017, 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).
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 August 31, 2016, and
incorporated by reference herein).
Share Repurchase Agreement, dated March 1, 2017, by and among Extended Stay America, Inc., ESH
Hospitality, Inc. and each of the entities identified on Schedule 1 thereto (filed as Exhibit 10.1 to the
Registrants’ Current Report on Form 8-K (File No. 01-36190) filed March 7, 2017, and incorporated by
reference herein).
Share Repurchase Agreement, dated April 26, 2017, by and among Extended Stay America, Inc., ESH
Hospitality, Inc. and each of the entities identified on Schedule 1 thereto (filed as Exhibit 10.1 to the
Registrants’ Current Report on Form 8-K (File No. 01-36190) filed April 28, 2017, and incorporated by
reference herein).
Share Repurchase Agreement, dated May 29, 2017, by and among Extended Stay America, Inc., ESH
Hospitality, Inc. and each of the entities identified on Schedule 1 thereto (filed as Exhibit 10.1 to the
Registrants’ Current Report on Form 8-K (File No. 01-36190) filed May 31, 2017, and incorporated by
reference herein).
Preferred Stock Repurchase Agreement, dated June 15, 2017, by and among Extended Stay America,
Inc. and each of the entities identified on Schedule 1 thereto (filed as Exhibit 10.1 to the Registrants’
Current Report on Form 8-K (File No. 01-36190) filed June 15, 2017, and incorporated by reference
herein).
List of Subsidiaries of Extended Stay America, Inc.
Consent of Deloitte & Touche LLP.
Consent of Deloitte & Touche LLP.
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.
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.
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.
166
Exhibit
Number
31.4*
32.1*
32.2*
101.INS*
101.SCH*
101.CAL*
101.DEF*
101.LAB*
101.PRE*
Description
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.
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.
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.
XBRL Instance Document.
XBRL Taxonomy Extension Schema Document.
XBRL Taxonomy Extension Calculation Linkbase Document.
XBRL Taxonomy Extension Definition Linkbase Document.
XBRL Taxonomy Extension Label Linkbase Document.
XBRL Taxonomy Extension Presentation Linkbase Document.
*
†
Filed herewith.
Management contract or compensatory plan or arrangement.
167
Item 16.
Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EXTENDED STAY AMERICA, INC.
By:
/s/ JONATHAN S. HALKYARD
Jonathan S. Halkyard
Chief Executive Officer
Date: February 27, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons
in the capacities and on the dates indicated.
Signature
Title
Date
/s/ JONATHAN S. HALKYARD
Chief Executive Officer and Director (Principal Executive Officer)
February 27, 2018
Jonathan S. Halkyard
/s/ DAVID CLARKSON
Chief Financial Officer (Principal Financial and Accounting Officer)
February 27, 2018
David Clarkson
/s/ DOUGLAS G. GEOGA
Director
Douglas G. Geoga
/s/ KAPILA K. ANAND
Kapila K. Anand
/s/ JODIE W. MCLEAN
Jodie W. McLean
Director
Director
/s/ THOMAS F. O’TOOLE
Director
Thomas F. O’Toole
/s/ RICHARD F. WALLMAN
Director
Richard F. Wallman
/s/ ELLEN KESZLER
Ellen Keszler
Director
February 27, 2018
February 27, 2018
February 27, 2018
February 27, 2018
February 27, 2018
February 27, 2018
168
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
ESH HOSPITALITY, INC.
By:
/s/ JONATHAN S. HALKYARD
Jonathan S. Halkyard
Chief Executive Officer
Date: February 27, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons
in the capacities and on the dates indicated.
Signature
Title
Date
/s/ JONATHAN S. HALKYARD
Chief Executive Officer and Director (Principal Executive Officer)
February 27, 2018
Jonathan S. Halkyard
/s/ DAVID CLARKSON
Chief Financial Officer (Principal Financial and Accounting Officer)
February 27, 2018
David Clarkson
/S/ DOUGLAS G. GEOGA
Director
Douglas G. Geoga
/s/ KAPILA K. ANAND
Kapila K. Anand
/s/ NEIL BROWN
Neil Brown
/s/ STEVEN KENT
Steven Kent
/s/ LISA PALMER
Lisa Palmer
Director
Director
Director
Director
February 27, 2018
February 27, 2018
February 27, 2018
February 27, 2018
February 27, 2018
169
Exhibit 31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Jonathan S. Halkyard, certify that:
1.
I have reviewed this annual report on Form 10-K for the fiscal year ended December 31, 2017 of Extended Stay America,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
February 27, 2018
/s/ Jonathan S. Halkyard
Jonathan S. Halkyard
President and Chief Executive Officer
Exhibit 31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, David Clarkson, certify that:
1.
I have reviewed this annual report on Form 10-K for the fiscal year ended December 31, 2017 of Extended Stay America,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
February 27, 2018
/s/ David Clarkson
David Clarkson
Chief Financial Officer
Exhibit 31.3
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Jonathan S. Halkyard, certify that:
1.
I have reviewed this annual report on Form 10-K for the fiscal year ended December 31, 2017 of ESH Hospitality, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
February 27, 2018
/s/ Jonathan S. Halkyard
Jonathan S. Halkyard
President and Chief Executive Officer
Exhibit 31.4
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, David Clarkson, certify that:
1.
I have reviewed this annual report on Form 10-K for the fiscal year ended December 31, 2017 of ESH Hospitality, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
February 27, 2018
/s/ David Clarkson
David Clarkson
Chief Financial Officer
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Pursuant to 18 U.S.C. § 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Jonathan S. Halkyard,
President and Chief Executive Officer, and David Clarkson, Chief Financial Officer of Extended Stay America, Inc., each
certifies with respect to the annual report of Extended Stay America, Inc. on Form 10-K for the year ended December 31, 2017
(the “Report”) that, to the best of his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of Extended Stay America, Inc.
February 27, 2018
February 27, 2018
/s/ Jonathan S. Halkyard
Jonathan S. Halkyard
President and Chief Executive Officer
/s/ David Clarkson
David Clarkson
Chief Financial Officer
Exhibit 32.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Pursuant to 18 U.S.C. § 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Jonathan S. Halkyard,
President and Chief Executive Officer, and David Clarkson, Chief Financial Officer of ESH Hospitality, Inc., each certifies
with respect to the annual report of ESH Hospitality, Inc. on Form 10-K for the year ended December 31, 2017 (the “Report”)
that, to the best of his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of ESH Hospitality, Inc.
February 27, 2018
February 27, 2018
/s/ Jonathan S. Halkyard
Jonathan S. Halkyard
President and Chief Executive Officer
/s/ David Clarkson
David Clarkson
Chief Financial Officer
D I R E CTO R S , O F F I C E R S , C O R PO R AT E I N FO R M AT I O N
B OA R D O F D I R ECTO R S
B OA R D O F D I R ECTO R S
C O R P O R AT E O F F I C E
E X T E N D E D STAY A M E R I CA , I N C .
E S H H O S P I TA L I T Y, I N C .
DOUGLAS G. GEOGA 1,2
Chairman, Extended Stay America, Inc.
President and Chief Executive Officer of Salt
Creek Hospitality, LLC
Former President of Global Hyatt Corporation
DOUGLAS G. GEOGA 2,3
Chairman, ESH Hospitality, Inc.
President and Chief Executive Officer of Salt
Creek Hospitality, LLC
Former President of Global Hyatt Corporation
JONATHAN S. HALKYARD
President and Chief Executive Officer
JONATHAN S. HALKYARD
President and Chief Executive Officer
KAPILA K. ANAND 2,3
Former Partner at KPMG LLP
KAPILA K. ANAND 1
Former Partner at KPMG LLP
ELLEN KESZLER 1
President and Chief Executive Officer, Clear Sky
Associates
NEIL BROWN 2,3
Founder and Chief Executive Officer, ArchCo
Residential LLC
THOMAS F. O’TOOLE 1,3
Senior Advisor, McKinsey & Co. and Senior Fellow
and Clinical Professor of Marketing, Northwestern
University
JODIE W. MCLEAN 2,3
Chief Executive Officer of EDENS
RICHARD F. WALLMAN 1,2,3
Former Chief Financial Officer of
Honeywell International Inc.
BRUCE N. HAASE
Former Chief Executive Officer Woodspring
Hotels LLC
STEVEN KENT 1,2
Former Managing Director of Leisure & Hospitality,
Goldman Sachs & Co., Inc.
LISA PALMER 1,3
President and Chief Financial Officer of
Regency Centers Corporation
1. Member of Audit Committee, ESA
2. Member of Compensation Committee, ESA
3. Member of Nominating and Corporate Governance
1. Member of Audit Committee, ESH
2. Member of Compensation Committee, ESH
3. Member of Nominating and Corporate Governance
Committee, ESA
Committee, ESH
L E A D E R S H I P T E A M
L E A D E R S H I P T E A M
JONATHAN S. HALKYARD
President and Chief Executive Officer
DAVID CLARKSON
Acting Chief Financial Officer
KEVIN A. HENRY
Chief Human Resources Officer
JONATHAN S. HALKYARD
President and Chief Executive Officer
DAVID CLARKSON
Acting Chief Financial Officer
JOHN R. DENT
General Counsel and Corporate Secretary
JOHN R. DENT
General Counsel and Corporate Secretary
JAMES G. ALDERMAN JR.
Chief Asset Merchant
11525 N. Community House Rd., Suite 100
Charlotte, NC 28277
(980) 345-1600
www.esa.com
STO C K H O L D E R I N FO R M AT I O N
Transfer Agent and Registrar
If you are a stockholder of record and require
assistance with your account, such as a
change of address or change in registration,
please contact:
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
(800) 937-5449
info@amstock.com
Common Stock Listing
Paired Shares of Extended Stay America, Inc.’s
common stock and ESH Hospitality, Inc.’s Class B
common stock are listed on the New York
Stock Exchange under the symbol “STAY.”
Independent Registered Public Accounting Firm
Deloitte & Touche LLP
Charlotte, NC
Investor Relations
Rob Ballew
(980) 345-1546
InvestorRelations@esa.com
Media
Terry Atkins
(980) 345-1648
tatkins@esa.com
HOWARD J. WEISSMAN
Corporate Controller and Chief Accounting Officer
M. THOMAS BUOY
Executive Vice President, Revenue
JAMES G. ALDERMAN JR.
Chief Asset Merchant
AMES B. FLYNN
Executive Vice President, Shared Services
SIMON MENDY
Executive Vice President, Operations
HOWARD J. WEISSMAN
Corporate Controller and Chief Accounting Officer
Growing Bigger, Better and Stronger
After a decade-long break, our development plan returns us to unit
growth – both with franchisees as well as with our own capital. We
have renovated hotels in Providence, RI and Nashville, TN utilizing
the prototype design, and we have purchased 3 sites to begin
development of new hotels in 2018.
New Milestones in Corporate Charity
With a passion to support a charitable cause so close to the hearts
of its employees, in 2013 Extended Stay America partnered with
the American Cancer Society to create the Hotel Keys of Hope®
program, which provides free and deeply discounted hotel stays for
cancer patients in need of potentially lifesaving treatment away from
home. To date, Extended Stay America has donated over 120,000
hotel room nights throughout the US, helping over 15,000 patients
and their families save over $7 million in lodging costs.
www.esa.com