EXTENDED STAY AMERICA, INC. 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 withU.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those relating to property and equipment (including the estimated useful lives of tangible assets and in the assessment of tangible and intangible assets for impairment), goodwill, revenue recognition, income taxes and investments. Our estimates and judgments are based on information that is then available to us, our experience and various matters that we believe are reasonable and appropriate for consideration under the circumstances. Actual results may differ significantly from these estimates under different assumptions and conditions. The following discussion contains forward-looking statements. Actual results may differ materially from results suggested by our forward-looking statements for various reasons, including those discussed in "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements." Those sections expressly qualify any subsequent oral and written forward-looking statements attributable to us or persons acting on our behalf. The following discussion should be read in conjunction with "About this Combined Annual Report-Certain Defined Terms," "Business-Our Company," "Selected Historical Financial andOther Data-The Company ," "Selected Historical Financial and Other Data-ESH REIT," and each of the consolidated financial statements and related notes ofExtended Stay America, Inc. andESH Hospitality, Inc. , included in Item 8 of this combined annual report on Form 10-K. Unless otherwise defined in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," for definitions related to our indebtedness, see Note 7 to each of the consolidated financial statements ofExtended Stay America, Inc. andESH Hospitality, Inc. , included in Item 8 of this combined annual report on Form 10-K. We present below separate results of operations for each of the Company and ESH REIT. Our assets and operations, other than ownership of our real estate assets (which are owned by ESH REIT), are held directly by the Corporation and operated as an integrated enterprise. The Corporation owns all of the issued and outstanding shares of Class A common stock of ESH REIT, representing 58% of the outstanding common stock of ESH REIT. Due to its controlling interest in ESH REIT, the Corporation consolidates the financial position, results of operations, comprehensive income and cash flows of ESH REIT.
Overview
We are the largest integrated owner/operator of company-branded hotels inNorth America . Our business operates in the extended stay segment of the lodging industry, and we have the following reportable operating segments: •Owned hotels-Earnings are derived from the operation of Company-owned hotel properties and include room and other hotel revenues. •Franchise and management-Earnings are derived from fees under various franchise and management agreements with third parties. These contracts provide us the ability to earn compensation for licensing the Extended Stay America brand name, providing access to shared system-wide platforms and/or management services. As ofDecember 31, 2019 , we owned and operated 557 hotel properties in 40 U.S. states, consisting of approximately 61,900 rooms, and franchised or managed 73 hotel properties for third parties, consisting of approximately 7,500 rooms. All 630 system-wide hotels operate under the Extended Stay America brand, which serves the mid-price extended stay segment and accounts for approximately 42% of the segment by number of rooms inthe United States . See "Business" for additional information on our Company. 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 hotel renovation programs, where justified by anticipated returns on investment; •building newExtended Stay America hotel properties which we expect to own and operate; •selling non-strategic hotels to buyers who may 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 built and owned by third parties for whom we may perform management or other services; 49 -------------------------------------------------------------------------------- •acquiring additional hotel properties; and •repurposing and/or rebuilding certain of our hotel properties.Hotel Acquisitions andNew Hotel Openings The table below summarizes hotel acquisitions and new owned hotel openings during the years endedDecember 31, 2019 and 2018. No hotels were acquired and no new owned hotels were opened during the year endDecember 31, 2017 . All hotels were converted or opened under the Extended Stay America brand. Acquisition / Date Location Number of Hotels Number of Rooms New-Build May 2018 South Carolina 1 115 Acquisition September 2018 (1) South Carolina 1 107 Acquisition November 2019 Florida 1 121 Acquisition December 2019 Florida 1 124 New-Build December 2019 Arizona 1 136 New-Build (1) Hotel acquired was under construction and opened in the fourth quarter of 2018. Hotel Dispositions No hotels were sold during the year endedDecember 31, 2019 . The table below summarizes hotel dispositions for the years endedDecember 31, 2018 and 2017 (in thousands, except number of hotels and number of rooms). Number of Number of Gain (Loss) Year Brand Location Month Sold Hotels Rooms Net Proceeds on Sale Franchised/Managed (1) 2018 Extended Stay America Various November 14 1,386$ 34,855 $ 1,331 (2) Yes 2018 Extended Stay America Various September 16 1,677$ 60,710 $ 6,293 (2) Yes 2018 Extended Stay America Various September 16 1,772$ 58,144 $ (3,014) (2) Yes 2018 Extended Stay America Various February 25 2,420$ 111,156 $ 6,810 (2) Yes 2018 Extended Stay America Texas March 1 101$ 44,090 $ 31,058 No (3) 2017 Extended Stay America Colorado December 1 160$ 15,985 $ 11,870 No (3) 2017 Extended Stay Canada Canada May 3 500$ 43,551 $ (1,894) (4) No 2017 Other Massachusetts May 1 101$ 5,092 $ (2) (2) No
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(1)As ofDecember 31, 2019 . (2)Net of impairment charges of$16.8 million ,$24.3 million ,$6.3 million ,$2.1 million and$1.7 million , respectively, recorded prior to sale. (3)Management agreement terminated in 2019. (4)Due to the fact that the Company's Canadian subsidiaries liquidated substantially all of their assets,$14.5 million of accumulated foreign currency translation loss was recognized at the time of sale. Additionally, an impairment charge of$12.4 million was recognized prior to sale. See Note 4 to each of the consolidated financial statements ofExtended Stay America, Inc. andESH Hospitality, Inc. , included in Item 8 of this combined annual report on Form 10-K. 50 -------------------------------------------------------------------------------- Franchised andManaged Hotels The following table summarizes the number of third-party owned hotels in our franchise and management segment during the years endedDecember 31, 2019 and 2018. Number of franchised Number of rooms Number of franchised Number of franchised Date hotels added (removed) added (removed) hotels(1) rooms(1) January 2018 - - 1 160 February 2018 25 2,420 26 2,580 March 2018 1 101 27 2,681 September 2018 32 3,449 59 6,130 November 2018 14 1,386 73 7,516 April 2019 1 115 74 7,631 July 2019 (1) (160) 73 7,471 August 2019 (1) (101) 72 7,370 November 2019 1 102 73 7,472 December 2019 - - 73 7,472 (1)As of end of period. Hotel Pipeline As ofDecember 31, 2019 , the Company had a pipeline of 75 hotels, which consisted of the following: Company-Owned Pipeline &
Under Option Pre-Development Under Construction Total Pipeline Opened YTD
# Hotels #Rooms # Hotels #Rooms # Hotels #Rooms # Hotels #Rooms # Hotels #Rooms
1 124 6 752 9 1,128 16 2,004 2 260
Third Party Pipeline &
Commitments Applications Executed Total Pipeline Opened YTD
# Hotels #Rooms # Hotels #Rooms # Hotels #Rooms # Hotels #Rooms # Hotels #Rooms
39 4,804 5 588 15 1,665 59 7,057 2 217
Definitions
Under Option Locations with a signed purchase and sale agreement
Pre-Development Land purchased, permitting and/or site work
Under Construction Hotel is under construction
Commitments Signed commitment to build a certain number of hotels by a third party
Applications Third party filed franchise application with deposit
Franchise application approved, various stages of pre-development or
Executed under construction
Key Metrics Evaluated by Management
We evaluate the performance of our business through the use of certain non-GAAP
financial measures and lodging industry operating metrics. Each non-GAAP
financial measure should be considered as a supplemental measure to a U.S. GAAP
financial measure, such as total revenues, net income, net income per share or
cash flow provided by operating activities. Non-GAAP financial measures include
Hotel Operating Profit , Hotel Operating Margin , EBITDA, Adjusted EBITDA, FFO,
Adjusted FFO, Adjusted FFO per diluted Paired Share, Paired Share Income,
Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired
Share. We provide a more detailed discussion of these non-GAAP financial
measures, how management uses such measures to evaluate our financial and
operating performance, a discussion of
51
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certain limitations of such measures and a reconciliation of such measures to
the nearest U.S. GAAP measures under "-Non-GAAP Financial Measures."
Average daily rate ("ADR") is a commonly used measure within the lodging
industry. ADR represents hotel room revenues divided by total number of rooms
sold in a given period. ADR measures average room price attained by a hotel or
group of hotels and ADR trends provide useful information concerning pricing
policies and the nature of the customer base of a hotel or group of hotels
because changes in room rates have an impact on revenues and profitability.
Occupancy is a commonly used measure within the lodging industry. Occupancy
represents the total number of rooms sold in a given period divided by the total
number of rooms available during that period. Occupancy measures the utilization
of a hotel's available capacity. Management uses occupancy to gauge demand at a
specific hotel or group of hotels in a given period. Occupancy levels also help
us determine achievable ADR levels as demand for hotel rooms increases or
decreases.
Revenue per available room ("RevPAR") is a commonly used measure within the
lodging industry. RevPAR represents the product of average daily room rate
charged and the average daily occupancy achieved for a hotel or group of hotels
in a given period. RevPAR does not include ancillary revenues, such as food and
beverage revenues, or parking, pet, WiFi upgrade, telephone or other guest
service revenues. Although RevPAR does not include these ancillary hotel
revenues, it generally is considered a key indicator of core revenues for
hotels. For the year ended December 31, 2019 , room revenues represented 96% of
our total owned hotel revenues. RevPAR changes that are driven predominately by
occupancy typically have different implications on incremental operating
profitability than do changes that are driven predominately by ADR. For example,
increases in occupancy at a hotel would lead to increases in room revenues and
other hotel revenues, as well as incremental operating costs, including
housekeeping services and amenity costs. RevPAR increases due to higher room
rates, however, would generally not result in additional operational
room-related costs, with the exception of those charged or incurred as a
percentage of revenue, such as credit card fees. As a result, changes in RevPAR
driven by increases or decreases in ADR generally have a greater effect on
operating profitability than changes in RevPAR driven by occupancy levels.
Understanding Our Results of Operations - The Company
Revenues and Expenses. The following table presents the components of the
Company's revenues as a percentage of our total revenues for the year ended
December 31, 2019 :
Percentage of
2019
Total Revenues
• Room revenues. Room revenues relate to owned hotels and are driven primarily by ADR 96.2%
and occupancy. Pricing policy and customer mix are significant drivers of ADR.
• Other hotel revenues. Other hotel revenues relate to owned hotels and include 2.0%
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.
• Franchise and management fees. Franchise and management fees include royalty and 0.4%
other fees charged to third parties for use of our brand name and hotel management
services. The substantial majority of these fees are based on a percentage of revenues
of the franchised or managed hotels.
• Other revenues from franchised and managed properties. Other revenues from 1.4%
franchised and managed properties include the direct reimbursement of specific costs,
such as on-site personnel expense, incremental reservation costs and other distribution
costs, incurred by us for which we are reimbursed on a dollar-for-dollar basis.
Additionally, these revenues include fees charged, based on a percentage of revenue of
the franchised hotel, as reimbursement for indirect costs incurred by us associated
with certain shared system-wide platforms (i.e., system services), such as marketing,
technology infrastructure, central reservations, national sales and revenue management
systems.
52-------------------------------------------------------------------------------- The following table presents the components of the Company's operating expenses as a percentage of our total operating expenses for the year endedDecember 31, 2019 : Percentage of 2019 Total Operating Expenses
• Hotel operating expenses. Hotel operating expenses relate to owned hotels and
65.0%
have both fixed and variable components. Operating expenses that are relatively fixed
include personnel expense, real estate tax expense and property insurance premiums.
Occupancy is a key driver of expenses that have a high degree of variability, such as
housekeeping services and amenity costs. Other variable expenses include marketing
costs, reservation costs, property insurance claims and repairs and maintenance
expense.
• General and administrative expenses. General and administrative expenses include 10.6%
expenses associated with corporate overhead. Costs consist primarily of compensation
expense of our corporate staff, including equity-based compensation and severance
costs, and professional fees, including audit, tax and consulting fees, legal fees
and legal settlement costs.
• Depreciation and amortization. Depreciation and amortization relates primarily 22.0%
to the acquisition and usage of hotels and other property and equipment, including
capital expenditures incurred with respect to renovations and other capital
expenditures.
• Impairment of long-lived assets. Impairment of long-lived assets is a charge 0.3%
recognized when events and circumstances indicate that the carrying value of an
individual hotel asset or a group of hotel assets may not be recoverable. The
estimation and evaluation of future cash flows, which is a key factor in determining
the amount and/or timing of impairment charges, in particular the holding period for
real estate assets and asset composition and/or concentration within real estate
portfolios, relies on judgments and assumptions regarding holding period, current and
future operating and economic performance and current and future market conditions.
It is possible that such judgments and/or estimates will change; if this occurs, we
may recognize additional impairment charges reflecting either changes in estimate,
circumstance or the estimated market value of our assets.
• Other expenses from franchised and managed properties. Other expenses from 2.1%
franchised and managed properties include specific costs, such as on-site hotel
personnel expense, incremental reservation costs and other distribution costs,
incurred by us in the delivery of services for which we are reimbursed on a
dollar-for-dollar basis. Additionally, these expenses include costs associated with
shared system-wide platforms (i.e., system services), such as marketing, technology
infrastructure, central reservations, national sales and revenue management systems
for which we are reimbursed over time through system service (i.e., program) fees.
Understanding Our Results of Operations - ESH REIT
Revenues. ESH REIT's sole source of revenues is lease rental revenues. ESH
REIT's rental revenues are generated from leasing its hotel properties to
subsidiaries of the Corporation. Rental revenues consist of fixed minimum rental
payments recognized on a straight-line basis over the lease terms plus variable
rental payments based on specified percentages of total hotel revenues over
designated thresholds. The initial lease term of ESH REIT's leases expired in
October 2018 . In connection with the five-year renewal of the leases, amended
and restated leases were executed effective November 1, 2018 . At such time,
minimum and percentage rents were adjusted to reflect then-current market terms.
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, 2019 :
Percentage of
2019
Total Operating
Expenses• Hotel operating expenses. ESH REIT's hotel operating expenses include expenses
29.2%
directly related to hotel ownership, such as real estate tax expense, property insurance premiums and loss on disposal of assets. • General and administrative expenses. General and administrative expenses include
5.1%
overhead expenses incurred directly by ESH REIT and certain administrative service
costs reimbursed to the Corporation.
• Depreciation and amortization. Depreciation and amortization relate primarily to 65.7%
the acquisition and usage of hotels and other property and equipment, including capital expenditures incurred with respect to renovations and other capital expenditures.
53
--------------------------------------------------------------------------------Results of Operations
Results of Operations discusses the Company's and ESH REIT's consolidated financial statements, each of which have been prepared in accordance withU.S. GAAP. The consolidated financial statements of the Company include the financial position, results of operations, comprehensive income, changes in equity and cash flows of the Corporation and its subsidiaries, including ESH REIT. Third-party equity interests in ESH REIT, which consist primarily of the Class B common stock of ESH REIT and represent 42% 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 EndedDecember 31, 2019 andDecember 31, 2018 As ofDecember 31, 2019 , the Company owned and operated 557 hotels, consisting of approximately 61,900 rooms, and franchised or managed 73 hotel properties for third parties, consisting of approximately 7,500 rooms. As ofDecember 31, 2018 , the Company owned and operated 554 hotels, consisting of approximately 61,500 rooms, and franchised or managed 73 hotel properties for third parties, consisting of approximately 7,500 rooms. See Note 4 to the consolidated financial statements ofExtended Stay America, Inc. , included in Item 8 of this combined annual report on Form 10-K. The following table presents our consolidated results of operations for the years endedDecember 31, 2019 and 2018, including the amount and percentage change in these results between the periods (in thousands): Year Ended December 31, 2019 2018 Change ($) Change (%) Revenues: Room revenues$ 1,171,726 $ 1,237,311 $ (65,585) (5.3) % Other hotel revenues 24,365 21,871 2,494 11.4 % Franchise and management fees 5,412 3,310 2,102 63.5 % 1,201,503 1,262,492 (60,989) (4.8) % Other revenues from franchised and managed properties 16,716 12,567 4,149 33.0 % Total revenues 1,218,219 1,275,059 (56,840) (4.5) % Operating expenses: Hotel operating expenses 582,321 583,029 (708) (0.1) % General and administrative expenses 95,155 91,094 4,061 4.5 % Depreciation and amortization 197,400 209,329 (11,929) (5.7) % Impairment of long-lived assets 2,679 43,600 (40,921) (93.9) % 877,555 927,052 (49,497) (5.3) % Other expenses from franchised and managed properties 18,870 13,217 5,653 42.8 % Total operating expenses 896,425 940,269 (43,844) (4.7) % Gain on sale of hotel properties, net - 42,478 (42,478) (100.0) % Other income 32 669 (637) (95.2) % Income from operations 321,826 377,937 (56,111) (14.8) % Other non-operating income (391) (765) 374 (48.9) % Interest expense, net 127,764 124,870 2,894 2.3 % Income before income tax expense 194,453 253,832 (59,379) (23.4) % Income tax expense 29,315 42,076 (12,761) (30.3) % Net income 165,138 211,756 (46,618) (22.0) % Net income attributable to noncontrolling interests (1) (95,470) (98,892) 3,422 (3.5) % Net income attributable to Extended Stay America Inc. common shareholders$ 69,668 $ 112,864 $ (43,196) (38.3) %
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(1)Noncontrolling interests in
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The following table presents key operating metrics, including occupancy, ADR,
RevPAR and hotel inventory for our owned hotels for the years ended December 31,
2019 and 2018:
Year Ended December 31,
2019 2018 Change
Number of hotels (as of December 31) 557 554 3
Number of rooms (as of December 31) 61,933 61,552 381
Occupancy 76.7% 75.9% 80 bps
ADR $67.97 $69.67 (2.4)%
RevPAR $52.16 $52.86 (1.3)%
Renovation Displacement Data (in thousands, except percentages): Total available room nights
22,606 22,466 140
Room nights displaced from renovation 79 - 79
% of available room nights displaced 0.3% -% 30bps
Room revenues. Room revenues decreased by $65.6 million , or 5.3%, to $1,171.7
million for the year ended December 31, 2019 compared to $1,237.3 million for
the year ended December 31, 2018 primarily due to several hotel portfolio
dispositions, totaling 72 hotels, that occurred during 2018. Additionally, on a
Comparable Hotel basis, room revenues decreased by $16.1 million , or 1.4%, due
to a 1.3% decrease in RevPAR for hotels we owned and operated for the entirety
of both periods. The 1.3% RevPAR decline for Comparable Hotels was the result of
a 2.5% decrease in ADR, partially offset by a 90 bps increase in occupancy.
Other hotel revenues. Other hotel revenues increased by $2.5 million , or 11.4%,
to $24.4 million for the year ended December 31, 2019 , compared to $21.9 million
for the year ended December 31, 2018 . On a Comparable Hotel basis, other hotel
revenues increased by $3.6 million , or 17.2%, due to system and process
improvements that improved billing efficiency, including the collection of
cancellation and other fees.
Franchise and management fees. For the year ended December 31, 2019 , we earned
franchise and management fees of $5.4 million , and for the year ended
December 31, 2018 , we earned franchise and management fees of $3.3 million . The
$2.1 million increase in fees was due to the net addition of 73 hotels to our
franchise and management segment throughout 2018, resulting in a partial year of
fee revenue from these hotels in 2018 compared to a full year of fee revenue
from these hotels in 2019. We expect franchise and management fees to increase
over time as additional franchised hotels open in the future.
Other revenues from franchised and managed properties. For the year ended
December 31, 2019 and 2018, we recognized $16.7 million and $12.6 million ,
respectively, in other revenues from franchised and managed properties. Other
revenues from franchised and managed properties include both direct and indirect
reimbursable costs.
Hotel operating expenses. Hotel operating expenses decreased by $0.7 million , or
0.1%, to $582.3 million for the year ended December 31, 2019 compared to $583.0
million for the year ended December 31, 2018 due to several hotel portfolio
dispositions, totaling 72 hotels, that occurred during 2018. On a Comparable
Hotel basis, hotel operating expenses increased by $30.1 million , or 5.5%. The
increase in Comparable Hotel operating expenses was primarily due to increases
in hotel-level personnel expense of $12.0 million , allowance for certain
uncollectible guest balances of $4.7 million , marketing costs of $3.2 million ,
cable, internet, and telephone costs of $2.9 million , loss on disposal of assets
of $2.7 million , insurance expense of $2.5 million and real estate tax expense
of $1.6 million . We anticipate comparable operating expenses to increase in 2020
due to further increases in personnel costs and increasing costs of property
insurance.
General and administrative expenses. General and administrative expenses
increased by $4.1 million , or 4.5%, to $95.2 million for the year ended
December 31, 2019 , compared to $91.1 million for the year ended December 31,
2018 . This increase was due to severance and other corporate transition costs
and legal settlements totaling $10.1 million , partially offset by a decrease in
compensation expense of $3.4 million and professional fees of $2.4 million .
Depreciation and amortization. Depreciation and amortization decreased by $11.9
million , or 5.7%, to $197.4 million for the year ended December 31, 2019
compared to $209.3 million for the year ended December 31, 2018 , primarily due
to hotel dispositions which occurred during 2018.
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Impairment of long-lived assets. During the year ended December 31, 2019 , we
recognized an impairment charge of $2.7 million related to one hotel in New
York . The impairment charge was incurred as a result of a decline in the hotel's
estimated future operating cash flows. During the year ended December 31, 2018 ,
we recognized impairment charges for 21 hotels, generally located in the
Midwestern U.S. , which totaled $43.6 million . The majority of the 2018
impairment charges were incurred in connection with evaluating the potential
sale of certain non-core assets.
Other expenses from franchised and managed properties. For the years ended
December 31, 2019 and 2018, we incurred other expenses from franchised and
managed properties of $18.9 million and $13.2 million , respectively. We
generally expect the cost to provide certain shared system-wide platforms to
franchisees to be recovered through system service fees. System services fees
are included in other revenues from franchised and managed properties.
Gain on sale of hotel properties, net. No hotels were sold during the year ended
December 31, 2019 . During the year ended December 31, 2018 , we recognized a
$42.5 million gain related to the sale of 72 hotels. We incurred impairment
charges totaling $37.4 million related to 17 of the 72 sold hotels during the
year ended December 31, 2018 .
Other income. Less than $0.1 million of other income was recognized during the
year ended December 31, 2019 . Other income for the year ended December 31, 2018
was $0.7 million , which primarily related to a business interruption insurance
reimbursement and the receipt of funds related to temporary easements at several
of our hotel properties.
Other-non operating income. During the year ended December 31, 2019 , we
recognized a foreign currency transaction gain of $0.4 million related to a
residual Canadian dollar-denominated deposit resulting from the 2017 sale of our
Canadian hotels. During the year ended December 31, 2018 , we recognized other
non-operating income of $1.2 million , partially offset by a foreign currency
transaction loss of $0.4 million .
Interest expense, net. During the year ended December 31, 2019 , we incurred debt
extinguishment and modification costs of $6.7 million , consisting of the
write-off of unamortized deferred financing costs and debt discount of $5.6
million and other costs of $1.1 million , which related to the $500.0 million
repayment of outstanding borrowings under the ESH REIT Term Facility and the
modification of the ESH REIT Credit Facilities. During the year ended
December 31, 2018 , we incurred debt modification costs of $1.6 million related
to repricing the ESH REIT Term Facility. Excluding debt extinguishment and
modification costs, net interest expense decreased $2.2 million , or 1.8%, to
$121.0 million for the year ended December 31, 2019 , compared to $123.2 million
for the year ended December 31, 2018 , primarily due to a $3.2 million increase
in interest income earned on money market investments. The Company's
weighted-average interest rate was 4.7% and 4.8% as of December 31, 2019 and
2018, respectively. The Company's total debt outstanding increased to $2.6
billion , net of unamortized deferred financing costs and debt discounts, as of
December 31, 2019 compared to $2.4 billion , net of unamortized deferred
financing costs and debt discounts, as of December 31, 2018 as a result of ESH
REIT's issuance of $750.0 million of its 2027 Notes, partially offset by $500.0
million in repayments on the ESH REIT Term Facility.
Income tax expense. Our effective income tax rate decreased to 15.1% for the
year ended December 31, 2019 , compared to 16.6% for the year ended December 31,
2018 . The Company's effective tax rate differs from the current federal
statutory rate of 21% due to ESH REIT's status as a REIT under the provisions of
the Code. The decrease in the effective income tax rate for the year ended
December 31, 2019 was due to a decrease in the percentage of ESH REIT
distribution income as a percentage of total Corporation income. This decrease
was partially offset by a 1.5% increase in rate due to a change in the
Corporation's investment in ESH REIT temporary differences and future
anticipated receipts of ESH REIT nontaxable distributions.
Comparison of Years Ended December 31, 2018 and December 31, 2017
As of December 31, 2018 , the Company owned and operated 554 hotels, consisting
of approximately 61,500 rooms, and franchised or managed 73 hotel properties for
third parties, consisting of approximately 7,500 rooms. As of December 31, 2017 ,
the Company owned and operated 624 hotels, consisting of approximately 68,600
rooms. See Note 4 to the consolidated financial statements of Extended Stay
America, Inc. , included in Item 8 of this combined annual report on Form 10-K.
56
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The following table presents our consolidated results of operations for the
years ended
Year Ended December 31,
2018 2017 Change ($) Change (%)
Revenues:
Room revenues $ 1,237,311 $ 1,260,868 $ (23,557) (1.9) %
Other hotel revenues 21,871 21,857 14 0.1 %
Franchise and management fees 3,310 - 3,310 n/a
1,262,492 1,282,725 (20,233) (1.6) %
Other revenues from franchised and
managed properties 12,567 - 12,567 n/a
Total revenues 1,275,059 1,282,725 (7,666) (0.6) %
Operating expenses:
Hotel operating expenses 583,029 585,545 (2,516) (0.4) %
General and administrative expenses 91,094 94,652 (3,558) (3.8) %
Depreciation and amortization 209,329 229,216 (19,887) (8.7) %
Impairment of long-lived assets 43,600 25,169 18,431 73.2 %
927,052 934,582 (7,530) (0.8) %
Other expenses from franchised and
managed properties 13,217 - 13,217 n/a
Total operating expenses 940,269 934,582 5,687 0.6 %
Gain on sale of hotel properties, net 42,478 9,973 32,505 325.9 %
Other income 669 2,959 (2,290) (77.4) %
Income from operations 377,937 361,075 16,862 4.7 %
Other non-operating income (765) (399) (366) 91.7 %
Interest expense, net 124,870 129,772 (4,902) (3.8) %
Income before income tax expense 253,832 231,702 22,130 9.6 %
Income tax expense 42,076 59,514 (17,438) (29.3) %
Net income 211,756 172,188 39,568 23.0 %
Net income attributable to noncontrolling
interests(1) (98,892) (93,341) (5,551) 5.9 %
Net income attributable to Extended Stay
America Inc. common shareholders $ 112,864 $ 78,847 $ 34,017 43.1 %
________________________
(1)Noncontrolling interests in Extended Stay America, Inc. include approximately
43% of ESH REIT's common equity as of December 31, 2018 and 2017, and 125 shares
of ESH REIT preferred stock.
The following table presents key operating metrics, including occupancy, ADR,
RevPAR and hotel inventory for our owned hotels for the years ended December 31,
2018 and 2017:
Year Ended December 31,
2018 2017 Change
Number of hotels (as of December 31) 554 624 (70)
Number of rooms (as of December 31) 61,552 68,686 (7,134) Occupancy 75.9% 74.5% 140 bps ADR$69.67 $67.19 3.7% RevPAR$52.86 $50.09 5.5% Room revenues. Room revenues decreased by$23.6 million , or 1.9%, to$1,237.3 million for the year endedDecember 31, 2018 , compared to$1,260.9 million for the year endedDecember 31, 2017 due to several hotel portfolio dispositions, totaling 72 hotels, that occurred during 2018. On a Comparable Hotel basis, room revenues increased by$23.1 million , or 2.0%, due to a 2.0% increase in RevPAR, primarily due to improved asset quality as a result of our previous cyclical hotel renovation program completed during mid-2017. 57 -------------------------------------------------------------------------------- Other hotel revenues. Other hotel revenues for the year endedDecember 31, 2018 remained consistent with the year endedDecember 31, 2017 and totaled$21.9 million for each year. Franchise and management fees. For the year endedDecember 31, 2018 , franchise and management fees of$3.3 million were earned as a result of the franchise and/or management of 73 third-party owned hotels, which were all pre-existingExtended Stay America -branded hotels sold by the Company to third parties. Other revenues from franchised and managed properties. For the year endedDecember 31, 2018 , the Company recognized$12.6 million in other revenues from franchised and managed properties as a result of the franchise and/or management of 73 third-party owned hotels. Other revenues from franchised and managed properties include both direct and indirect reimbursable costs. Hotel operating expenses. Hotel operating expenses decreased by$2.5 million , or 0.4%, to$583.0 million for the year endedDecember 31, 2018 , compared to$585.5 million for the year endedDecember 31, 2017 . On a Comparable Hotel basis, hotel operating expenses increased by$24.6 million , or 4.7%, due to increases in hotel-level personnel expense of$9.6 million , reservation costs of$8.4 million , which related to an increase in commissionable bookings through third-party intermediaries, maintenance expense of$3.9 million , marketing costs of$3.1 million and real estate tax expense of$1.8 million . These increases were partially offset by a$4.3 million decrease in loss on disposal of assets. General and administrative expenses. General and administrative expenses decreased by$3.6 million , or 3.8%, to$91.1 million for the year endedDecember 31, 2018 , compared to$94.7 million for the year endedDecember 31, 2017 . This decrease was driven by a decrease in corporate personnel expense of$3.8 million , partially related to a decrease in short-term incentive compensation. Depreciation and amortization. Depreciation and amortization decreased by$19.9 million , or 8.7%, to$209.3 million for the year endedDecember 31, 2018 , compared to$229.2 million for the year endedDecember 31, 2017 , due to hotel dispositions during 2018 and a decrease in capital expenditures as a result of the completion of our previous cyclical hotel renovation program during mid-2017. Impairment of long-lived assets. During the year endedDecember 31, 2018 , we recognized impairment charges for 21 hotels, generally located in the MidwesternU.S. , which totaled$43.6 million . The majority of the 2018 impairment charges were incurred in connection with evaluating the potential sale of certain non-core assets. During the year endedDecember 31, 2017 , we recognized impairment charges of$25.2 million ,$12.4 million of which related to the sale of our three Canadian hotels inMay 2017 . Other expenses from franchised and managed properties. During the year endedDecember 31, 2018 , we incurred other expenses from franchised and managed properties of$13.2 million as a result of the franchise and/or management of 73 third-party owned hotels. We generally expect the cost to provide certain shared system-wide platforms to franchisees to be recovered through system services fees. System services fees are included in other revenues from franchised and managed properties. Gain on sale of hotel properties, net. During the year endedDecember 31, 2018 , we recognized a$42.5 million gain related to the sale of 72 hotels. We recorded impairment charges totaling$37.4 million related to 17 of the 72 sold hotels during the year endedDecember 31, 2018 . During the year endedDecember 31, 2017 , we recognized an$11.9 million gain related to the sale of two hotels, partially offset by a$1.9 million loss related to the sale of our Canadian hotels. Other income. During the year endedDecember 31, 2018 , we recognized other income of$0.7 million , which primarily consisted of business interruption insurance reimbursement and funds related to temporary easements. During the year endedDecember 31, 2017 , we recognized other income of$3.0 million , which consisted of the settlement of a lawsuit, the receipt of funds related to temporary easements and certain fees related to our previously owned Canadian hotels. Other-non operating income. During the year endedDecember 31, 2018 , we recognized other non-operating income of$1.2 million , partially offset by a foreign currency transaction loss of$0.4 million associated with a Canadian dollar-denominated deposit and an income tax liability related to the sale of our Canadian hotels in 2017. During the year endedDecember 31, 2017 , we recognized a foreign currency transaction gain of$0.7 million , partially offset by a loss related to our interest rate swap of$0.3 million . Interest expense, net. Net interest expense decreased$4.9 million , or 3.8%, to$124.9 million for the year endedDecember 31, 2018 , compared to$129.8 million for the year endedDecember 31, 2017 . This decrease was primarily a result of 58 -------------------------------------------------------------------------------- a$2.3 million increase in interest income earned on money market investments. The Company's weighted average interest rate increased to 4.8% as ofDecember 31, 2018 compared to 4.5% as ofDecember 31, 2017 . The Company's total debt outstanding decreased to$2.4 billion , net of unamortized deferred financing costs and debt discounts, as ofDecember 31, 2018 , compared to$2.5 billion , net of unamortized deferred financing costs and debt discounts, as ofDecember 31, 2017 . Income tax expense. Our effective income tax rate decreased to 16.6% for the year endedDecember 31, 2018 compared to 25.7% for the year endedDecember 31, 2017 . The Company's effective tax rate is lower than the federal statutory rate of 21% due to ESH REIT's status as a REIT under the provisions of the Code. During the year endedDecember 31, 2017 , the Company was subject to a federal income tax rate of 35%. The decrease in our effective tax rate for the year endedDecember 31, 2018 , is partially a result of the decrease in the federal statutory rate to 21% as a result of the TCJA, which was effectiveJanuary 1, 2018 . During the year endedDecember 31, 2017 , we recognized$4.1 million in deferred income tax expense due to the impact of the TCJA. Results of Operations-ESH REIT Comparison of Years EndedDecember 31, 2019 andDecember 31, 2018 As ofDecember 31, 2019 , ESH REIT owned and leased 557 hotels, consisting of approximately 61,900 rooms. As ofDecember 31, 2018 , ESH REIT owned and leased 554 hotels, consisting of approximately 61,500 rooms. See Note 4 to the consolidated financial statements ofESH Hospitality, Inc. , included in Item 8 of this combined annual report on Form 10-K. The following table presents ESH REIT's results of operations for the years endedDecember 31, 2019 and 2018, including the amount and percentage change in these results between the periods (in thousands): Year Ended December 31, 2019 2018 Change ($) Change (%) Revenues - Rental revenues from Extended Stay America, Inc.$ 649,898 $ 667,428 $ (17,530) (2.6) % Operating expenses: Hotel operating expenses 86,019 85,089 930 1.1 % General and administrative expenses 15,189 15,245 (56) (0.4) % Depreciation and amortization 193,798 207,313 (13,515) (6.5) % Total operating expenses 295,006 307,647 (12,641) (4.1) % Loss on sale of hotel properties, net - (5,624) 5,624 (100.0) % Other income 15 645 (630) (97.7) % Income from operations 354,907 354,802 105 - % Other non-operating income (310) (869) 559 (64.3) % Interest expense, net 128,955 124,745 4,210 3.4 % Income before income tax expense 226,262 230,926 (4,664) (2.0) % Income tax expense 375 797 (422) (52.9) % Net income$ 225,887 $ 230,129 $ (4,242) (1.8) % Rental revenues fromExtended Stay America, Inc. Rental revenues decreased by$17.5 million , or 2.6%, to$649.9 million for the year endedDecember 31, 2019 , compared to$667.4 million for the year endedDecember 31, 2018 . The decrease in rental revenues resulted from the sale of 72 hotels in 2018 and a decrease in rental revenues of leasedComparable Hotels , which was partially offset by an increase in fixed rental revenues resulting from the straight-line impact of changes associated with theNovember 2018 lease amendment and renewal. Percentage rental revenues decreased to$177.4 million from$217.2 million during the years endedDecember 31, 2019 and 2018, respectively. Hotel operating expenses. Hotel operating expenses increased by$0.9 million , or 1.1%, to$86.0 million for the year endedDecember 31, 2019 , compared to$85.1 million for the year endedDecember 31, 2018 . This increase was due to an increase in loss on disposal of assets of$2.7 million , partially offset by a decrease in expenses related to hotels sold during 2018. General and administrative expenses. General and administrative expenses remained consistent and totaled$15.2 million for each of the years endedDecember 31, 2019 and 2018. 59 -------------------------------------------------------------------------------- Depreciation and amortization. Depreciation and amortization decreased by$13.5 million , or 6.5%, to$193.8 million for the year endedDecember 31, 2019 , compared to$207.3 million for the year endedDecember 31, 2018 , primarily due to the sale of 72 hotels which occurred during 2018. Loss on sale of hotel properties, net. No hotels were sold during the year endedDecember 31, 2019 . During the year endedDecember 31, 2018 , ESH REIT recognized a$5.6 million loss related to the sale of 72 hotels. Other income. No material other income was recognized during the year endedDecember 31, 2019 . Other income for the year endedDecember 31, 2018 was$0.6 million , primarily related to a business interruption insurance reimbursement. Other-non operating income. During the year endedDecember 31, 2019 , ESH REIT recognized a foreign currency transaction gain of$0.3 million related to a residual Canadian dollar-denominated deposit resulting from the 2017 sale of our Canadian hotels. During the year endedDecember 31, 2018 , ESH REIT recognized other non-operating income of$1.2 million , partially offset by a foreign currency transaction loss of$0.3 million . Interest expense, net. During the year endedDecember 31, 2019 , ESH REIT incurred debt extinguishment and modification costs of$6.7 million , consisting of the write-off of unamortized deferred financing costs and debt discount of$5.6 million and other costs of$1.1 million , which related to the$500.0 million repayment of outstanding borrowings under the ESH REIT Term Facility and the modification of the ESH REIT Credit Facilities. During the year endedDecember 31, 2018 , ESH REIT incurred debt modification costs of$1.6 million related to repricing the ESH REIT Term Facility. Excluding debt extinguishment and modification costs, net interest expense decreased$0.9 million , or 0.7%, to$122.2 million for the year endedDecember 31, 2019 , compared to$123.1 million for the year endedDecember 31, 2018 , due to a$1.8 million increase in interest income earned on money market investments. ESH REIT's weighted-average interest rate was 4.7% as ofDecember 31, 2019 and 2018. ESH REIT's total debt outstanding increased to$2.6 billion , net of unamortized deferred financing costs and debt discounts, as ofDecember 31, 2019 , compared to$2.4 billion , net of unamortized deferred financing costs and debt discounts, as ofDecember 31, 2018 as a result of ESH REIT's issuance of$750.0 million of its 2027 Notes, partially offset by$500.0 million in repayments on the ESH REIT Term Facility. Income tax expense. ESH REIT's effective income tax rate decreased to 0.2% for the year endedDecember 31, 2019 compared to 0.3% for the year endedDecember 31, 2018 . ESH REIT's effective tax rate differs from the federal statutory rate of 21% primarily due to ESH REIT's status as a REIT under the provisions of the Code. The decrease in the effective income tax rate for the year endedDecember 31, 2019 was primarily due to the fact that ESH REIT filed its final Canadian income tax return during the year endedDecember 31, 2018 , which resulted in$0.7 million in incremental income tax expense. 60 -------------------------------------------------------------------------------- Comparison of Years EndedDecember 31, 2018 andDecember 31, 2017 As ofDecember 31, 2018 , ESH REIT owned and leased 554 hotels, consisting of approximately 61,500 rooms. As ofDecember 31, 2017 , ESH REIT owned and leased 624 hotels, consisting of approximately 68,600 rooms. See Note 4 to the consolidated financial statements ofESH Hospitality, Inc. , included in Item 8 of this combined annual report on Form 10-K. The following table presents ESH REIT's results of operations for the years endedDecember 31, 2018 and 2017, including the amount and percentage change in these results between the periods (in thousands): Year Ended December 31, 2018 2017 Change ($) Change (%) Revenues - Rental revenues from Extended Stay America, Inc.$ 667,428 $ 683,500 $ (16,072) (2.4) % Operating expenses: Hotel operating expenses 85,089 90,495 (5,406) (6.0) % General and administrative expenses 15,245 14,801 444 3.0 % Depreciation and amortization 207,313 225,484 (18,171) (8.1) % Impairment of long lived assets - 15,046 (15,046) (100.0) % Total operating expenses 307,647 345,826 (38,179) (11.0) % (Loss) gain on sale of hotel properties, net (5,624) 8,562 (14,186) (165.7) % Other income 645 673 (28) (4.2) % Income from operations 354,802 346,909 7,893 2.3 % Other non-operating income (869) (227) (642) 282.8 % Interest expense, net 124,745 130,923 (6,178) (4.7) % Income before income tax expense 230,926 216,213 14,713 6.8 % Income tax expense 797 1,229 (432) (35.2) % Net income$ 230,129 $ 214,984 $ 15,145 7.0 % Rental revenues fromExtended Stay America, Inc. Rental revenues decreased by$16.1 million , or 2.4%, to$667.4 million for the year endedDecember 31, 2018 compared to$683.5 million for the year endedDecember 31, 2017 . The decrease in rental revenues was primarily due a decrease in fixed minimum rents related to the sale of 72 hotels during the year endedDecember 31, 2018 . Additionally, percentage rental revenues decreased by$5.1 million to$217.2 million during the year endedDecember 31, 2018 from$222.3 million during the year endedDecember 31, 2017 , also due to the sale of hotel properties. Hotel operating expenses. Hotel operating expenses decreased by$5.4 million , or 6.0%, to$85.1 million for the year endedDecember 31, 2018 compared to$90.5 million for the year endedDecember 31, 2017 . This decrease was primarily a result of the sale of 72 hotel properties during the year endedDecember 31, 2018 , as well as a decrease in loss on disposal of assets of$5.2 million due to the completion of ESH REIT's previous cyclical hotel renovation program during mid-2017. General and administrative expenses. General and administrative expenses increased by$0.4 million , or 3.0%, to$15.2 million for the year endedDecember 31, 2018 , compared to$14.8 million for the year endedDecember 31, 2017 . The increase was due to a$1.3 million increase in reimbursable costs paid toESA Management for administrative services performed on ESH REIT's behalf, partially offset by a decrease in professional fees of$1.2 million . Depreciation and amortization. Depreciation and amortization decreased by$18.2 million , or 8.1%, to$207.3 million for the year endedDecember 31, 2018 , compared to$225.5 million for the year endedDecember 31, 2017 , due to hotel dispositions during 2018 and a decrease in capital expenditures. Impairment of long-lived assets. During the year endedDecember 31, 2017 , ESH REIT recognized impairment charges of$15.0 million related to its three Canadian hotels that were sold inMay 2017 . No impairment charges were recognized during the year endedDecember 31, 2018 . The estimation and evaluation of future cash flows, which is a key factor in determining the amount and/or timing of impairment charges, in particular the holding period for real estate assets and asset composition and/or concentration within real estate portfolios, relies on judgments and assumptions regarding holding period, current and future operating and economic performance and current and future market conditions. It is possible that such judgments and/or estimates will change; if this occurs, ESH REIT may recognize additional impairment charges reflecting either changes in estimate, circumstance or the estimated market value of our assets. 61 -------------------------------------------------------------------------------- (Loss) gain on sale of hotel properties, net. During the year endedDecember 31, 2018 , ESH REIT recognized a loss of$5.6 million related to the sale of 72 hotels. During the year endedDecember 31, 2017 , ESH REIT recognized a gain of$11.8 million related to the sale of one hotel, partially offset by a loss of$3.3 million related to the sale of four hotels, including its three Canadian hotels.
Other income. During the years ended
Other-non operating income. During the year endedDecember 31, 2018 , ESH REIT recognized other non-operating income of$1.2 million , partially offset by a foreign currency transaction loss of$0.3 million . During the year endedDecember 31, 2017 , ESH REIT recognized a foreign currency transaction gain of$0.5 million , partially offset by non-cash charges related to its interest rate swap of$0.3 million . Interest expense, net. Net interest expense decreased$6.2 million , or 4.7%, to$124.7 million for the year endedDecember 31, 2018 compared to$130.9 million for the year endedDecember 31, 2017 . This decrease was primarily the result of a$1.8 million increase in interest earned on money market investments. ESH REIT's weighted average interest rate increased to 4.7% as ofDecember 31, 2018 compared to 4.5% as ofDecember 31, 2017 . ESH REIT's total debt outstanding decreased to$2.4 billion , net of unamortized deferred financing costs and debt discounts, as ofDecember 31, 2018 , compared to$2.5 billion , net of unamortized deferred financing costs and debt discounts, as ofDecember 31, 2017 . Income tax expense. ESH REIT's effective income tax rate decreased to 0.3% for the year endedDecember 31, 2018 compared to 0.6% for the year endedDecember 31, 2017 . ESH REIT's effective tax rate differs from the federal statutory rate of 21% primarily due to ESH REIT's status as a REIT under the provisions of the Code. The decrease in the effective tax rate is primarily due to the fact that ESH REIT is no longer subject to Canadian tax, as it sold all of its Canadian assets in 2017. Non-GAAP Financial MeasuresHotel Operating Profit andHotel Operating Margin Hotel Operating Profit andHotel Operating Margin measure hotel-level operating results prior to certain items, including debt service, income tax expense, impairment charges, depreciation and amortization and general and administrative expenses. The Company believes thatHotel Operating Profit andHotel Operating Margin are useful measures to investors regarding our operating performance as they help us evaluate aggregate owned hotel-level profitability, specifically owned hotel operating efficiency and effectiveness. Further, these measures allow us to analyze period over period operating margin flow-through, defined as the change inHotel Operating Profit divided by the change in total room and other hotel revenues. We defineHotel Operating Profit as net income excluding: (1) income tax expense; (2) net interest expense; (3) other non-operating expense (income); (4) other income; (5) gain on sale of hotel properties; (6) impairment of long-lived assets; (7) depreciation and amortization; (8) general and administrative expenses; (9) loss on disposal of assets; (10) franchise and management fees and (11) other expenses from franchised and managed properties, net of other revenues. We defineHotel Operating Margin asHotel Operating Profit divided by the sum of room and other hotel revenues. We believe thatHotel Operating Profit andHotel Operating Margin are not meaningful or useful measures for ESH REIT on a stand-alone basis due to the fact that a Paired Share represents an investment in the Company, as a single, consolidated enterprise, which is reflected in the consolidated Company results of operations; therefore, we believe these performance measures are meaningful for the consolidated Company only.Hotel Operating Profit andHotel Operating Margin as presented may not be comparable to similar measures calculated by other companies. This information should not be considered as an alternative to net income of the Company, the Corporation or ESH REIT, or any other measure of the Company, the Corporation or ESH REIT calculated in accordance withU.S. GAAP. Interest expense and other items have been and will continue to be incurred and are not reflected inHotel Operating Profit orHotel Operating Margin . Management separately considers the impact of these excluded items to the extent they are material to operating decisions and assessments of operating performance. The Company's consolidated statements of operations include excluded items, each of which should be considered when evaluating our performance in addition to our non-GAAP financial measures.Hotel Operating Profit andHotel Operating Margin should not solely be considered as measures of our profitability. 62 --------------------------------------------------------------------------------
The following table provides a reconciliation of
Year Ended December 31,
2019 2018 2017
Net income $ 165,138 $ 211,756 $ 172,188
Income tax expense 29,315 42,076 59,514
Interest expense, net 127,764 124,870 129,772
Other non-operating income (391) (765) (399)
Other income (32) (669) (2,959)
Gain on sale of hotel properties, net - (42,478) (9,973)
Impairment of long-lived assets 2,679 43,600 25,169
Depreciation and amortization 197,400 209,329 229,216
General and administrative expenses 95,155 91,094 94,652
Loss on disposal of assets(1) 6,072 3,413 8,607
Franchise and management fees (5,412) (3,310) -
Other expenses from franchised and managed
properties, net of other revenues 2,154 650 -
Hotel Operating Profit $ 619,842 $ 679,566 $ 705,787
Room revenues $ 1,171,726 $ 1,237,311 $ 1,260,868
Other hotel revenues 24,365 21,871 21,857
Total room and other hotel revenues $ 1,196,091 $
1,259,182
Hotel Operating Margin 51.8 % 54.0 % 55.0 % ________________________
(1)Included in hotel operating expenses in the consolidated statements of operations.
EBITDA and Adjusted EBITDA
EBITDA is defined as net income excluding: (1) net interest expense; (2) income tax expense; and (3) depreciation and amortization. EBITDA is a commonly used measure of performance in many industries. The Company believes that EBITDA provides useful information to investors regarding our operating performance as it helps us and investors evaluate the ongoing performance of our hotels and our franchise and management operations after removing the impact of our capital structure, primarily net interest expense, our corporate structure, primarily income tax expense, and our asset base, primarily depreciation and amortization. We believe that the use of EBITDA facilitates comparisons between us and other lodging companies, hotel owners and capital-intensive companies. Additionally, EBITDA is a measure that is used by management in our annual budgeting and compensation planning processes. The Company uses Adjusted EBITDA when evaluating our performance because we believe the adjustment for certain additional items, described below, provides useful supplemental information to investors regarding ongoing operating performance and that the presentation of Adjusted EBITDA, when combined with theU.S. GAAP presentation of net income, net income per share and cash flow provided by operating activities, is beneficial to the overall understanding of ongoing operating performance. We adjust EBITDA for the following items where applicable for each period presented and refer to this measure as Adjusted EBITDA: •Equity-based compensation-We exclude charges related to equity-based compensation expense with respect to awards issued under long-term incentive compensation plans to employees and certain directors. •Impairment of long-lived assets-We exclude the effect of impairment losses recorded on property and equipment and intangible assets, as we believe they are not reflective of ongoing or future operating performance. •Gain on sale of hotel properties, net-We exclude the net gain on sale of hotel properties, as we believe it is not reflective of ongoing or future operating performance. 63 -------------------------------------------------------------------------------- •Other expense (income)-We exclude the effect of other expenses or income that we do not consider reflective of ongoing or future operating performance, including the following: loss (gain) on disposal of assets, non-operating expense (income), including mark-to-market impact of interest rate hedges and foreign currency transaction costs, and certain costs associated with acquisitions, dispositions and/or capital transactions. EBITDA and Adjusted EBITDA as presented may not be comparable to similar measures calculated by other companies. This information should not be considered as an alternative to net income of the Company, the Corporation or ESH REIT, or any other measure of the Company, the Corporation or ESH REIT calculated in accordance withU.S. GAAP. Cash expenditures for capital expenditures, interest expense and other items have been and will continue to be incurred and are not reflected in EBITDA or Adjusted EBITDA. Management separately considers the impact of these excluded items to the extent they are material to operating decisions and assessments of operating performance. The Company's consolidated statements of operations and cash flows include capital expenditures, net interest expense and other excluded items, all of which should be considered when evaluating our performance in addition to our non-GAAP financial measures. EBITDA and Adjusted EBITDA should not solely be considered as measures of our profitability or indicative of funds available to fund our cash needs, including our ability to pay shareholder distributions. We believe that EBITDA and Adjusted EBITDA are not meaningful or useful measures for ESH REIT on a stand-alone basis due to the fact that a Paired Share represents an investment in the Company, as a single, consolidated enterprise, which is reflected in the consolidated Company results of operations; therefore, we believe these performance measures are meaningful for the consolidated Company only. The following table provides a reconciliation of net income to EBITDA and Adjusted EBITDA for the Company for the years endedDecember 31, 2019 , 2018 and 2017 (in thousands): Year Ended December 31, 2019 2018 2017 Net income$ 165,138 $ 211,756 $ 172,188 Interest expense, net 127,764 124,870 129,772 Income tax expense 29,315 42,076 59,514 Depreciation and amortization 197,400 209,329 229,216 EBITDA 519,617 588,031 590,690 Equity-based compensation 6,913 7,724 7,552 Impairment of long-lived assets 2,679 43,600
25,169
Gain on sale of hotel properties, net - (42,478) (9,973) Other expense(1) 5,829 2,860 9,467 Adjusted EBITDA$ 535,038 $ 599,737 $ 622,905 ________________________ (1)Includes loss on disposal of assets, non-operating (income) expense, including mark-to-market impact of interest rate hedges and foreign currency transaction costs, and certain costs associated with acquisitions, dispositions and/or capital transactions. Loss on disposal of assets totaled$6.1 million ,$3.4 million and$8.6 million , respectively. FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share are metrics used by management to assess our operating performance and profitability and to facilitate comparisons between us and other hotel and/or real estate companies that include a REIT as part of their legal entity structure. Funds from Operations ("FFO") is defined by theNational Association of Real Estate Investment Trusts ("NAREIT") as net income (computed in accordance withU.S. GAAP), excluding gains from sales of real estate, impairment charges, the cumulative effect of changes in accounting principle, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures following the same approach. FFO is a commonly used measure among other hotel and/or real estate companies that include a REIT as a part of their legal entity structure. Since real estate depreciation and amortization, impairment of long-lived assets and gains from sales of hotel properties 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. 64 -------------------------------------------------------------------------------- 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 toExtended 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 byU.S. GAAP. We believe that including earnings attributable to ESH REIT's Class B common shares in our calculations of FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share provides investors with useful supplemental measures of the Company's operating performance since our Paired Shares, directly through the pairing of the common stock of the Corporation and Class B common stock of ESH REIT, and indirectly through the Corporation's ownership of the Class A common stock of ESH REIT, entitle holders to participate in 100% of the common equity and earnings of both the Corporation and ESH REIT. Based on the limitation on transfer provided for in each of the Corporation's and ESH REIT's charters, shares of common stock of the Corporation and shares of Class B common stock of ESH REIT are 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 theU.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 and debt discounts, prepayment penalties and other costs associated with the modification and/or extinguishment of debt as we believe they are not reflective of our ongoing or future operating performance. •Other income-We exclude the effect of expenses or income that we do not consider reflective of ongoing or future operating performance, including the following: mark-to-market impact of interest rate hedges and certain other non-operating income. Adjusted FFO per diluted Paired Share is defined as Adjusted FFO divided by the weighted average number of Paired Shares outstanding on a diluted basis. Until such time as the number of outstanding common shares of the Corporation and Class B common shares of ESH REIT differ, we believe Adjusted FFO per diluted Paired Share is useful to investors, as it represents a measure of the economic risks and rewards related to an investment in our Paired Shares. FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share as presented may not be comparable to similar measures calculated by other REITs or real estate companies that include a REIT as part of their legal entity structure. In particular, due to the fact that we present these measures for the Company on a consolidated basis (i.e., including the impact of franchise fees, management fees and income taxes), FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share, may be of limited use to investors comparing our results only to REITs. This information should not be considered as an alternative to net income of the Company, the Corporation or ESH REIT, net income per share of common stock of the Corporation, net income per share of Class A or Class B common stock of ESH REIT or any other measure of the Company, the Corporation or ESH REIT calculated in accordance withU.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 withU.S. GAAP may occur and are not reflected in FFO, Adjusted FFO or Adjusted FFO per diluted Paired Share. Management separately considers the impact of these excluded items to the extent they are material to operating decisions and assessments of operating performance. The Company's consolidated statements of operations include these items, all of which should be considered when evaluating our performance, in addition to our non-GAAP financial measures. We believe that FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share are not meaningful or useful measures for ESH REIT on a stand-alone basis due to the fact that a Paired Share represents an investment in the Company, as a single, consolidated enterprise, which is reflected in the consolidated Company results of operations; therefore, we believe these performance measures are meaningful for the consolidated Company only. 65 --------------------------------------------------------------------------------
The following table provides a reconciliation of net income attributable to
Year Ended December 31,
2019 2018 2017
Net income per
$ 0.37
Net income attributable to
$ 69,668
95,454 98,876 93,325
Real estate depreciation and amortization 191,560 204,095 224,559
Impairment of long-lived assets 2,679 43,600 25,169
Gain on sale of hotel properties, net - (42,478) (9,973)
Tax effect of adjustments to net income attributable to
(27,582) (34,517) (56,883)
FFO 331,779 382,440 355,044
Debt modification and extinguishment costs 6,733 1,621 2,351
Other (income) expense(1) - (1,208) 314
Tax effect of adjustments to FFO (956) (70) (639)
Adjusted FFO $ 337,556 $ 382,783 $ 357,070
Adjusted FFO per Paired Share - diluted $ 1.81 $ 2.02 $ 1.84
Weighted Average Paired Shares outstanding - diluted 186,822 189,821 193,670
________________________
(1)Includes mark-to-market impact of interest rate hedges and certain other non-operating income. Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share We present Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share as supplemental measures of the Company's performance. We believe that these are useful measures for investors since our Paired Shares, directly through the pairing of the common stock of the Corporation and Class B common stock of ESH REIT, and indirectly through the Corporation's ownership of the Class A common stock of ESH REIT, entitle holders to participate in 100% of the common equity and earnings of both the Corporation and ESH REIT. As required byU.S. GAAP, net income attributable toExtended 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 toExtended 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, impairment of long-lived assets, gain on sale of hotel properties and other expenses (income) such as loss on disposal of assets, non-operating (income) expense, including mark-to-market impact of interest rate hedges and foreign currency transaction costs, and certain costs associated with acquisitions, dispositions and/or capital transactions. With the exception of equity-based compensation, an ongoing charge, and debt modification and extinguishment costs, these adjustments (other than the effect of income taxes) are the same as those used in the reconciliation of net income calculated in accordance withU.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 66 -------------------------------------------------------------------------------- diluted Paired Share provide meaningful indicators of the Company's operating performance in addition to separate and/or individual analyses of net income attributable to common shareholders of the Corporation and net income attributable to Class B common shareholders of ESH REIT, each of which is impacted by specificU.S. GAAP requirements, including the recognition of contingent lease rental revenues and the recognition of fixed minimum lease rental revenues on a straight-line basis, and may not reflect how cash flows and/or earnings are generated on an individual entity or 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 or ESH REIT, net income per share of common stock of the Corporation, net income per share of Class A or Class B common stock of ESH REIT or any other measure of the Company, the Corporation or ESH REIT calculated in accordance withU.S. GAAP. We believe that Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share are not meaningful or useful measures for ESH REIT on a stand-alone basis due to the fact that a Paired Share represents an investment in the Company, as a single, consolidated enterprise, which is reflected in the consolidated Company results of operations; therefore, we believe these performance measures are meaningful for the consolidated Company only. The following table provides a reconciliation of net income attributable toExtended 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 endedDecember 31, 2019 , 2018 and 2017 (in thousands, except per Paired Share data): Year Ended December 31, 2019 2018 2017 Net income perExtended Stay America, Inc. common share - diluted$ 0.37 $
0.59
Net income attributable to Extended Stay America, Inc. common shareholders$ 69,668 $ 112,864 $ 78,847 Noncontrolling interests attributable to Class B common shares of ESH REIT 95,454 98,876 93,325 Paired Share Income 165,122 211,740 172,172 Debt modification and extinguishment costs 6,733 1,621 2,351 Impairment of long-lived assets 2,679 43,600 25,169 Gain on sale of hotel properties, net - (42,478) (9,973) Other expense(1) 5,829 2,860 9,467 Tax effect of adjustments to Paired Share Income (2,163) (937) (6,241) Adjusted Paired Share Income$ 178,200 $
216,406
Adjusted Paired Share Income per Paired Share - diluted$ 0.95 $
1.14
Weighted average Paired Shares outstanding - diluted 186,822 189,821 193,670 ________________________ (1)Includes loss on disposal of assets, non-operating (income) expense, including mark-to-market impact of interest rate hedges and foreign currency transaction costs, and certain costs associated with acquisitions, dispositions and/or capital transactions. Loss on disposal of assets totaled$6.1 million ,$3.4 million and$8.6 million , respectively.
Inflation
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 results of operations. Inflation also typically results in overall wage increases, which we experienced during the years endedDecember 31, 2019 , 2018 and 2017 and contributed to moderate decreases inHotel Operating Margin . Liquidity and Capital Resources Overview On a consolidated basis, we have historically generated significant cash flow from operations and have financed our ongoing business, including execution of our strategic objectives, primarily with existing cash, cash flow generated from operations, borrowings under our revolving credit facilities, as needed, and, in certain instances, proceeds from asset dispositions. We generated cash flow from operations of$400.0 million for the year endedDecember 31, 2019 . 67 -------------------------------------------------------------------------------- Our current liquidity requirements consist primarily of funds necessary to pay for (i) hotel operating expenses, (ii) capital expenditures, including those capital expenditures incurred to perform hotel renovations, construct new hotels and acquire additional hotel properties and/or other lodging companies, (iii) investments in franchise, management and other fee programs, (iv) general and administrative expenses, (v) debt service obligations, including interest expense, (vi) income taxes, (vii) Paired Share repurchases, (viii) Corporation distributions and required ESH REIT distributions and (ix) certain other growth and 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 existing hotels, (iii) construct newExtended Stay America -branded hotels, (iv) acquire additional hotel properties and/or other lodging companies, (v) execute our other growth and strategic initiatives, (vi) pay distributions and (vii) refinance (including prior to or in connection with debt maturity payments) the 2025 Notes, the ESH REIT Term Facility and the 2027 Notes maturing inMay 2025 ,September 2026 andOctober 2027 , respectively. See Note 7 to each of the consolidated financial statements ofExtended Stay America, Inc. andESH Hospitality, Inc. , included in Item 8 of this combined annual report on Form 10-K, for additional detail related to our debt obligations. With respect to our long-term liquidity requirements, specifically our ability to refinance our existing outstanding debt obligations, we cannot assure you that the Corporation and/or ESH REIT will be able to refinance any debt on attractive terms at or before maturity, on commercially reasonable terms or at all, or the timing of any such refinancing. We expect to meet our long-term liquidity requirements through various sources of capital, including future debt financings or equity issuances by the Corporation and/or ESH REIT, existing working capital, cash flow generated from operations and, in certain instances, proceeds from asset dispositions. However, there are a number of factors that may have a material adverse effect on our ability to access these capital sources, including the current and future state of overall capital and credit markets, 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$346.8 million atDecember 31, 2019 . 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 structure and at any time may refinance or repay existing indebtedness, incur new indebtedness or purchase debt or equity securities. Debt Obligations. InSeptember 2019 , ESH REIT entered into an amendment to the ESH REIT Credit Facilities whereby, among other things, proceeds from the issuance of the 2027 Notes (defined below) were used to repay$500.0 million of the outstanding borrowings under the ESH REIT Term Facility and the stated amount of the ESH REIT Term Facility was reduced from$1,130.9 million to$630.9 million . Additionally, the amendment reduced the interest rate applicable to the ESH REIT Revolving Credit Facility and extended the maturity of both the ESH REIT Revolving Credit Facility and the ESH REIT Term Facility throughSeptember 2024 and 2026, respectively. InSeptember 2019 , ESH REIT issued$750.0 million of its 4.625% senior notes due in 2027 (the "2027 Notes") under an indenture withDeutsche Bank Trust Company Americas , as trustee, at a price equal to 100% of par value in a private placement pursuant to Rule 144A of the Securities Act of 1933, as amended. Proceeds received from the issuance of the 2027 Notes, net of financing costs, totaled$738.0 million ,$500.0 million of which were used to repay a portion of outstanding borrowings under the ESH REIT Term Loan. The remaining proceeds,$238.0 million , are expected to be used for general corporate purposes. The 2027 Notes bear interest at a fixed rate of 4.625% per annum, payable semi-annually in arrears onApril 1 andOctober 1 of each year, commencingApril 1, 2020 , and mature onOctober 1, 2027 . The 2027 Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis by each of ESH REIT's subsidiaries that guarantee ESH REIT's obligations under the ESH REIT Credit Facilities. The 2027 Notes are not guaranteed by the Corporation or any of its subsidiaries that lease ESH REIT's properties or its subsidiaries that engage in franchising or management activities or own intellectual property. The 2027 Notes rank equally in right of payment with ESH REIT's existing and future senior unsecured indebtedness, and senior in right of payment to all future subordinated indebtedness, if any. The 2027 Notes are effectively junior to any of ESH REIT's secured indebtedness to the extent of the value of the assets securing such indebtedness. 68 -------------------------------------------------------------------------------- ESH REIT may redeem the 2027 Notes at any time on or afterOctober 1, 2022 , in whole or in part, at a redemption price equal to 102.313% of the principal amount, declining annually to 100% of the principal amount fromOctober 1, 2024 and thereafter, plus accrued and unpaid interest. Prior toOctober 1, 2022 , ESH REIT may redeem the 2027 Notes, in whole or in part, at a redemption price equal to 100% of the principal amount, plus a "make-whole" premium, as defined, plus accrued and unpaid interest. Prior toOctober 1, 2022 , subject to certain conditions, ESH REIT may redeem up to 35% of the aggregate principal amount of the 2027 Notes at a redemption price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest, with the net cash proceeds from certain equity offerings, provided 65% of the original amount of the principal remains outstanding after the occurrence of each such redemption. Upon a Change of Control, as defined, holders of the 2027 Notes have the right to require ESH REIT to redeem the 2027 Notes at 101% of the principal amount, plus accrued and unpaid interest. InSeptember 2019 , the Corporation entered into an amendment to the Corporation Revolving Credit Facility which, among other things, extended the facility's maturity throughSeptember 2026 and reduced the interest rate spread on utilized and unutilized revolver balances. InAugust 2016 , ESH REIT, as borrower, and the Corporation, as lender, entered into an unsecured intercompany credit facility, as may be amended and supplemented from time to time (the "Unsecured Intercompany Facility"). InSeptember 2019 , the Unsecured Intercompany Facility was amended to, among other things, extend the facility's maturity throughSeptember 2026 . Under the Unsecured Intercompany Facility, ESH REIT may borrow up to$300.0 million , plus additional amounts, in each case subject to certain conditions. As ofDecember 31, 2019 , the outstanding balance under the Unsecured Intercompany Facility was$0 . Paired Share Repurchase Program. InDecember 2015 , the Boards of Directors of the Corporation and ESH REIT authorized a combined Paired Share repurchase program. As a result of several increases in authorized amounts and program extensions, as ofDecember 31, 2019 , the combined Paired Share repurchase program authorized the Corporation and ESH REIT to purchase up to$550 million in Paired Shares throughDecember 31, 2020 . 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 ofDecember 31, 2019 , the Corporation and ESH REIT repurchased and retired their respective portion of 26.4 million Paired Shares for$263.3 million and$155.0 million , including transaction fees, respectively, and$132.2 million remained available under the combined Paired Share repurchase program. Distributions. OnFebruary 26, 2020 , the Board of Directors of ESH REIT declared a cash distribution of$0.14 per share for the fourth quarter of 2019 on its Class A and Class B common stock. Also onFebruary 26, 2020 , the Board of Directors of the Corporation declared a cash distribution of$0.09 per share for the fourth quarter of 2019 on its common stock. These distributions, which total$0.23 per Paired Share, will be payable onMarch 26, 2020 to shareholders of record as ofMarch 12, 2020 . The following table outlines distributions declared or paid during the years endedDecember 31, 2019 , 2018 and 2017: Declaration Date Record Date Date Paid ESH REIT Distribution Corporation Distribution Total Distribution 2019 11/6/2019 11/20/2019 12/4/2019$0.11 $0.12 $0.23 8/6/2019 9/4/2019 8/21/2019$0.15 $0.08 $0.23 5/1/2019 5/16/2019 5/30/2019$0.14 $0.09 $0.23 2/27/2019 3/14/2019 3/28/2019$0.15 $0.07 $0.22 2018 10/31/2018 11/15/2018 11/29/2018$0.14 $0.08 $0.22 7/25/2018 8/9/2018 8/23/2018$0.18 $0.04 $0.22 4/26/2018 5/11/2018 5/25/2018$0.16 $0.06 $0.22 2/27/2018 3/13/2018 3/27/2018$0.15 $0.06 $0.21 2017 11/7/2017 11/21/2017 12/5/2017$0.10 $0.11 $0.21 8/1/2017 8/15/2017 8/29/2017$0.14 $0.07 $0.21 4/27/2017 5/11/2017 5/25/2017$0.14 $0.07 $0.21 2/28/2017 3/14/2017 3/28/2017$0.15 $0.04 $0.19 69
-------------------------------------------------------------------------------- In the future, we intend to maintain or increase our current distribution of$0.23 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, including future capital expenditures and asset dispositions, 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 include, as they have in prior periods, distributions in respect of the common stock of the Corporation using funds distributed to the Corporation in respect of the Class A common stock of ESH REIT, after allowance for tax, if any, on those funds. For the year endedDecember 31, 2019 , the Corporation's common distributions were classified as 100% qualified dividends and ESH REIT's distributions per Class A and Class B common shares were classified as 100% ordinary income. See "Item 5-Market for Registrants' Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Distribution Policies" elsewhere in this combined annual report on Form 10-K for a description of our distribution policies. The Corporation 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 ofDecember 31, 2019 , represents 58% of the outstanding common stock of ESH REIT. Other sources of liquidity include income from the operations of the Operating Lessees,ESA Management , ESH Strategies and ESH Strategies Franchise. The Corporation's current liquidity requirements consist primarily of funds necessary to pay for or fund (i) hotel operating expenses, (ii) general and administrative expenses, (iii) any debt service obligations, including interest expense on its outstanding mandatorily redeemable voting preferred stock, (iv) income taxes, (v) investments in its franchise, management and other fee programs, (vi) Paired Share repurchases, (vii) Corporation distributions and (viii) repayment of its 8% mandatorily redeemable voting preferred stock outstanding, which totals$7.1 million , dueNovember 2020 . The Corporation expects to fund its current liquidity requirements from a combination of cash on hand, cash flow generated from operations (including distribution income it receives in respect of its ownership of 100% of the Class A common stock of ESH REIT) and borrowings under its revolving credit facility, as needed. The Corporation's long-term liquidity requirements include the repayment of any outstanding amounts under its revolving credit facility. See Note 7 to the consolidated financial statements ofExtended Stay America, Inc. , included in Item 8 of this combined annual report on Form 10-K, for additional detail on the Corporation's debt obligations. 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.ESH REIT may in the future return additional cash to theCorporation for the Corporation to fund its current and long-term liquidity requirements or for other corporate purposes. ESH REIT may transfer cash to the Corporation through the redemption of shares of Class A common stock, which would decrease the Corporation's ownership of ESH REIT. Such redemption would likely be inefficient from a tax perspective because the redemption would be taxed as an ordinary dividend. Additionally, although no intercompany credit facility currently exists between ESH REIT, as lender, and the Corporation, as borrower, the entities may choose to execute such a facility in the future, which would provide an additional cash movement alternative. 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. The existing amended and restated leases will expire inOctober 2023 , and at such time, minimum and percentage rents may be adjusted to reflect then-current market terms. ESH REIT's current liquidity requirements include funds necessary to pay (i) fixed costs associated with ownership of hotel properties, (ii) debt service obligations, including interest expense, and with respect to the ESH REIT Term Facility, 70 -------------------------------------------------------------------------------- scheduled principal payments on outstanding borrowings, (iii) real estate tax expense, (iv) property insurance expense, (v) general and administrative expense, including administrative service costs reimbursed to the Corporation, (vi) capital expenditures, including those capital expenditures incurred to perform hotel renovations, construct new hotels and acquire additional hotel properties and/or other lodging companies, (vii) Paired Share repurchases and (viii) the payment of distributions. ESH REIT's long-term liquidity requirements consist of funds necessary to (i) complete future hotel renovations, (ii) repurpose and/or rebuild certain of ESH REIT's existing hotel properties, (iii) construct newExtended 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) the 2025 Notes, the ESH REIT Term Facility and the 2027 Notes maturing inMay 2025 ,September 2026 andOctober 2027 , respectively. See Note 7 to the consolidated financial statements ofESH Hospitality, Inc. , included in Item 8 of this combined annual report on Form 10-K for additional detail on ESH REIT's debt obligations. In order to qualify and maintain its status as a REIT, ESH REIT must distribute annually to its shareholders an amount at least equal to: •90% of its REIT taxable income, computed without regard to the deduction for dividends paid and excluding any net capital gain; plus •90% of the excess of its net income, if any, from foreclosure property over the tax imposed on such income by the Code; less •the sum of certain items of non-cash income that exceeds a percentage of ESH REIT's income. ESH REIT intends to distribute its taxable income to the extent necessary to optimize its tax efficiency including, but not limited to, maintaining its REIT status, while retaining sufficient capital for its ongoing needs. ESH REIT is subject to income tax on its taxable income that is not distributed and to an excise tax to the extent that certain percentages of its taxable income are not distributed by specified dates. To the extent distributions in respect of the Class B common stock of ESH REIT are not sufficient to meet our expected Paired Share distributions, Paired Share distributions 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. We expect that ESH REIT will need to refinance all or a portion of its outstanding debt, including the 2025 Notes, the ESH REIT Credit Facilities and the 2027 Notes, on or before maturity. See Note 7 to the consolidated financial statements ofESH Hospitality, Inc. , included in Item 8 of this combined annual report on Form 10-K. 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. From time to time, the Corporation may return additional cash to ESH REIT in order for ESH REIT to pay for or fund (i) its current and long-term liquidity requirements, (ii) capital expenditures (see "-Liquidity and Capital Resources - ESH REIT"), (iii) outstanding debt obligations or (iv) for other corporate purposes. The Corporation may transfer cash to ESH REIT through the purchase of additional shares of Class A common stock, which would increase its ownership of ESH REIT and reduce the Company's overall tax efficiency. Additionally, the Corporation may loan funds to ESH REIT under the Unsecured Intercompany Facility or an additional intercompany facility, subject to the conditions contained in the ESH REIT Credit Facilities, the 2027 Notes, the 2025 Notes and the Unsecured Intercompany Facility. See Note 7 to the consolidated financial statements ofExtended Stay America, Inc. andESH Hospitality, Inc. , both of which are included in Item 8 of this combined annual report on Form 10-K. 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, and, in certain circumstances, proceeds from asset sales, will be adequate to meet all of ESH REIT's funding requirements and business objectives for the foreseeable future. 71 -------------------------------------------------------------------------------- Sources and Uses of Cash - The Company The following cash flow tables and comparisons are provided for the Company: Comparison of Years EndedDecember 31, 2019 andDecember 31, 2018 We had total cash, cash equivalents and restricted cash of$361.7 million and$303.3 million atDecember 31, 2019 and 2018, respectively. The following table summarizes the changes in our cash, cash equivalents and restricted cash as a result of operating, investing and financing activities for the years endedDecember 31, 2019 and 2018 (in thousands): Year Ended December
31,
2019 2018 Change ($)
Cash provided by (used in):
Operating activities $ 399,950 $ 449,850 $ (49,900)
Investing activities (259,809) 106,276 (366,085)
Financing activities (81,879) (403,607) 321,728
Effects of changes in exchange rate on cash,
cash equivalents and restricted cash 72 (157) 229
Net increase in cash, cash equivalents and
restricted cash $ 58,334 $
152,362
Cash Flows provided by Operating Activities Cash flows provided by operating activities totaled$400.0 million for the year endedDecember 31, 2019 compared to$449.9 million for the year endedDecember 31, 2018 , a decrease of$49.9 million . Cash flows provided by operating activities decreased primarily as a result of hotel dispositions which occurred in the first and third quarters of 2018. In addition, cash flows provided by operating activities decreased due to a decline inComparable Hotel operating performance, including a 1.3% decrease in RevPAR for hotels owned and operated for the entirety of both periods, as well as an increase in hotel operating expenses. These decreases in cash flows provided by operating activities were partially offset by a reduction in net cash interest payments of$10.0 million . Cash Flows (used in) provided by Investing Activities Cash flows used in investing activities totaled$259.8 million for the year endedDecember 31, 2019 compared to cash flows provided by investing activities of$106.3 million for the year endedDecember 31, 2018 . Cash flows used in investing activities increased as a result of$309.1 million in proceeds received from hotel dispositions during the year endedDecember 31, 2018 , whereas no hotel properties were sold during the year endedDecember 31, 2019 . In addition, cash flows used in investing activities increased due to a net increase in investment in property and equipment, including hotel acquisitions, development in process and intangible assets, of$52.0 million for the year endedDecember 31, 2019 . Cash Flows used in Financing Activities Cash flows used in financing activities totaled$81.9 million for the year endedDecember 31, 2019 compared to$403.6 million for the year endedDecember 31, 2018 , a decrease of$321.7 million . Cash flows used in financing activities decreased primarily due to a$369.3 million increase in net proceeds from debt issuances, partially offset by a$45.3 million increase in Paired Share repurchases. 72 -------------------------------------------------------------------------------- Comparison of Years EndedDecember 31, 2018 andDecember 31, 2017 We had total cash, cash equivalents and restricted cash of$303.3 million and$151.0 million atDecember 31, 2018 and 2017, respectively. The following table summarizes the changes in our cash, cash equivalents and restricted cash as a result of operating, investing and financing activities for the years endedDecember 31, 2018 and 2017 (in thousands): Year Ended December 31, 2018 2017 Change ($) Cash provided by (used in): Operating activities$ 449,850 $ 446,520 $ 3,330 Investing activities 106,276 (99,140) 205,416 Financing activities (403,607) (302,471) (101,136) Effects of changes in exchange rate on cash, cash equivalents and restricted cash (157) 293 (450) Net increase in cash, cash equivalents and restricted cash$ 152,362 $
45,202
Cash Flows provided by Operating Activities Cash flows provided by operating activities totaled$449.9 million for the year endedDecember 31, 2018 compared to$446.5 million for the year endedDecember 31, 2017 , an increase of$3.3 million . Cash flows provided by operating activities increased for the year endedDecember 31, 2018 due to a decrease in income tax payments of$17.1 million and interest payments of$5.4 million , as well as an increase in cash flows provided by franchise and management fees. These increases were partially offset by a decrease in hotel operating cash flow as a result of asset dispositions which occurred in the first and third quarters of 2018. Cash Flows provided by (used in) Investing Activities Cash flows provided by investing activities totaled$106.3 million for the year endedDecember 31, 2018 compared to cash flows used in investing activities of$99.1 million for the year endedDecember 31, 2017 . Cash flows provided by investing activities increased primarily due to a$245.1 million increase in proceeds received from the sale of hotel properties during the year endedDecember 31, 2018 . This increase was partially offset by an increase in the Company's investment in property and equipment, including hotel acquisitions, development in process and intangible assets, of$42.9 million . Cash Flows used in Financing Activities Cash flows used in financing activities totaled$403.6 million for the year endedDecember 31, 2018 compared to$302.5 million for the year endedDecember 31, 2017 , an increase of$101.1 million . Cash flows used in financing activities increased due to an increase in net debt repayments of$86.0 million , an increase in Paired Share repurchases of$23.1 million and an increase in Paired Share distributions of$6.8 million . These increases were partially offset by a$14.1 million decrease in cash used for the repurchase of Corporation mandatorily redeemable preferred stock. Sources and Uses of Cash - ESH REIT The following cash flow tables and comparisons are provided for ESH REIT: Comparison of Years EndedDecember 31, 2019 andDecember 31, 2018 ESH REIT had cash, cash equivalents and restricted cash of$296.1 million and$178.5 million atDecember 31, 2019 and 2018, respectively. The following table summarizes the changes in ESH REIT's cash, cash equivalents and restricted cash as a result of operating, investing and financing activities for the years endedDecember 31, 2019 and 2018 (in thousands): Year Ended December
31,
2019 2018 Change ($)
Cash provided by (used in):
Operating activities $ 436,752 $ 466,458 $ (29,706)
Investing activities (253,398) 111,718 (365,116)
Financing activities (65,758) (454,553) 388,795
Net increase in cash, cash equivalents and
restricted cash $ 117,596 $ 123,623 $ (6,027)
73-------------------------------------------------------------------------------- Cash Flows provided by Operating Activities Cash flows provided by operating activities totaled$436.8 million for the year endedDecember 31, 2019 compared to$466.5 million for the year endedDecember 31, 2018 , a decrease of$29.7 million . The decrease in cash flows from operating activities was a result of hotel dispositions which occurred during the first and third quarters of 2018, a decrease in percentage rental revenues due to a decrease in hotel revenues at leasedComparable Hotels and theNovember 2018 lease amendments and renewals. Cash Flows (used in) provided by Investing Activities Cash flows used in investing activities totaled$253.4 million for the year endedDecember 31, 2019 compared to cash flows provided by investing activities of$111.7 million for the year endedDecember 31, 2018 . Cash flows used in investing activities increased due to$309.1 million in proceeds received from hotel dispositions during the year endedDecember 31, 2018 , whereas no hotel properties were sold during the year endedDecember 31, 2019 . In addition, cash flows used in investing activities increased due to a net increase in investment in property and equipment, including hotel acquisitions, development in process and intangible assets, of$51.1 million for the year endedDecember 31, 2019 . Cash Flows used in Financing Activities Cash flows used in financing activities totaled$65.8 million for the year endedDecember 31, 2019 compared to$454.6 million for the year endedDecember 31, 2018 , a decrease of$388.8 million . Cash flows used in financing activities decreased due to a$369.7 million increase in net proceeds from debt issuances and a$36.8 million decrease in Class A and Class B common stock distributions, partially offset by a$16.5 million increase in ESH REIT Class B common stock repurchases. Comparison of Years EndedDecember 31, 2018 andDecember 31, 2017 ESH REIT had cash, cash equivalents and restricted cash of$178.5 million and$54.9 million atDecember 31, 2018 and 2017, respectively. The following table summarizes the changes in ESH REIT's cash, cash equivalents and restricted cash as a result of operating, investing and financing activities for the years endedDecember 31, 2018 and 2017 (in thousands): Year Ended December
31,
2018 2017 Change ($)
Cash provided by (used in):
Operating activities $ 466,458 $ 473,593 $ (7,135)
Investing activities 111,718 (102,506) 214,224
Financing activities (454,553) (370,022) (84,531)
Net increase in cash, cash equivalents and
restricted cash $ 123,623 $
1,065
Cash Flows provided by Operating Activities Cash flows provided by operating activities totaled$466.5 million for the year endedDecember 31, 2018 compared to$473.6 million for the year endedDecember 31, 2017 , a decrease of$7.1 million . Cash flows provided by operating activities decreased due to a decrease in rental revenues of$16.1 million as a result of ESH REIT's hotel dispositions in 2018, partially offset by a decrease in cash interest payments of$7.3 million and cash income tax payments of$1.8 million . Cash Flows provided by (used in) Investing Activities Cash flows provided by investing activities totaled$111.7 million for the year endedDecember 31, 2018 compared to cash flows used in investing activities of$102.5 million for the year endedDecember 31, 2017 . Cash flows provided by investing activities increased due to an increase in proceeds received from the sale of hotel properties of$251.1 million during the year endedDecember 31, 2018 . This increase was partially offset by an increase in ESH REIT's investment in property and equipment of$40.0 million , including hotel acquisitions, development in process and intangible assets. Cash Flows used in Financing Activities Cash flows used in financing activities totaled$454.6 million for the year endedDecember 31, 2018 compared to$370.0 million for the year endedDecember 31, 2017 , an increase of$84.5 million . Cash flows used in financing activities 74 -------------------------------------------------------------------------------- increased primarily due to a$42.2 million increase in Class A and Class B common stock distributions, a$36.0 million increase in net debt repayments and an$8.3 million increase in ESH REIT Class B common stock repurchases. Capital Expenditures We maintain each of our hotels in good repair and condition and in conformity with applicable laws and regulations. The cost of all improvements and significant alterations are generally made with cash flows from operations. During the years endedDecember 31, 2019 , 2018 and 2017, the Company incurred capital expenditures, including development in process, of$261.3 million ,$209.3 million and$166.4 million , respectively. These capital expenditures related to land and hotel acquisitions, development and construction in process, ordinary hotel capital improvements, investments in information technology and cyclical hotel renovations. Each hotel is generally on a seven-year renovation cycle. We completed our prior cyclical hotel renovation program in mid-2017. In the fourth quarter of 2018, the Company commenced its current cyclical hotel renovation program. With respect to our current cyclical hotel renovation program, as ofDecember 31, 2019 , we have substantially completed renovations at 16 hotels for$26.9 million . We are in the process of performing renovations at seven additional hotels, with total costs incurred for these and future hotel renovations (consisting primarily of advance materials purchases) of$25.0 million . Funding requirements for future capital expenditures, including our current and any future cyclical 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, will be significant and are expected to be provided primarily from cash flows generated from operations or, to the extent necessary, the Corporation or ESH REIT revolving credit facilities, including the Unsecured Intercompany Facility and, in certain instances, proceeds from asset sales. In 2020, we expect to incur capital expenditures between$210 million and$240 million . As part of these capital expenditures, we expect to spend approximately$80 to$90 million for construction of new hotels, land acquisitions and other future growth initiatives,$25 to$30 million for hotel renovations and$15 to$20 million for incremental information technology investments. Our Indebtedness As ofDecember 31, 2019 , the Company's total indebtedness was$2.6 billion , net of unamortized deferred financing costs and debt discounts, including$7.1 million of Corporation mandatorily redeemable preferred stock. ESH REIT's total indebtedness atDecember 31, 2019 was$2.6 billion , net of unamortized deferred financing costs and debt discounts. For additional detail related to our debt obligations, see Note 7 to each of the consolidated financial statements ofExtended Stay America, Inc. andESH Hospitality, Inc. , included in Item 8 of this combined annual report on Form 10-K. Contractual Obligations The following table summarizes our contractual obligations as ofDecember 31, 2019 (in thousands): Payments Due by Period Total 2020 2021 2022 2023 2024 Thereafter ESH REIT Term Facility (1)$ 629,331 $ 6,309 $ 6,309 $ 6,309 $ 6,309 $ 6,309 $ 597,786 2025 Notes (2) 1,300,000 - - - - - 1,300,000 2027 Notes (3) 750,000 - - - - - 750,000 Corporation mandatorily redeemable preferred stock (4) 7,130 7,130 - - - - - Operating lease obligations (5) 84,567 2,899 2,220 806 545 503
77,594
Finance lease obligations (6) 5,080 386 395 397 400 402
3,100
Interest payments on outstanding debt obligations (7)(8)(9) 819,412 128,989 127,764 127,930 127,673 127,484
179,572
Purchase obligations (10) 87,694 19,939 18,078 18,086 18,170 12,804
617
Total contractual obligations
$ 154,766 $ 153,528 $ 153,097 $ 147,502 $ 2,908,669 _________________ (1)The ESH REIT Term Facility is included on the Company's consolidated balance sheet net of unamortized deferred financing costs and debt discount of$11.0 million . Contractual obligations exclude mandatory prepayments related to ESH REIT's Excess Cash Flow for future years as they are not currently known. Annual mandatory prepayments, if any, commence during the year endedDecember 31, 2020 and are due each year thereafter in the first quarter of the following year. (2)The 2025 Notes are included on the Company's consolidated balance sheet net of unamortized deferred financing costs and debt discount of$14.9 million . ESH REIT may redeem the 2025 Notes at any time at specified redemption prices. 75 -------------------------------------------------------------------------------- (3)The 2027 Notes are included on the Company's consolidated balance sheet net of unamortized deferred financing costs of$13.6 million . ESH REIT may redeem the 2027 Notes at any time at specified redemption prices. (4)Redeemable at the holders' option through maturity onNovember 15, 2020 , at which time the preferred stock is mandatorily redeemable by the Corporation. (5)Includes long-term ground leases at three of the Company's hotel properties and lease for the Company's corporate headquarters. (6)Includes finance lease obligations at one of the Company's hotel properties and one property in development. (7)Floating rate interest calculated using current LIBOR plus 2.0% for the portion of the ESH REIT Term Facility not subject to an interest rate swap. (8)Interest calculated using base rate of 2.0% plus 1.175% for portion of the ESH REIT Term Facility subject to interest rate swap. (9)Includes dividends payable on the Corporation's mandatorily redeemable preferred stock. (10)Purchase obligations consist of commitments to vendors for information technology services and subscriptions at our hotel properties. 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 14 to the consolidated financial statements ofExtended Stay America, Inc. and Note 13 to the consolidated financial statements ofESH Hospitality, Inc. , included in Item 8 of 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 ofExtended Stay America, Inc. andESH Hospitality, Inc. , included in Item 8 of this combined annual report on Form 10-K, require material subjective or complex judgment and have a significant impact on the Company's and ESH REIT's financial condition and results of operations, as applicable. The following represent certain critical accounting policies that require us to exercise our business judgment or make significant estimates: •Property and equipment-Policies related to property and equipment include significant judgment related to the assessment and measurement of impairment and estimates with respect to assets' useful lives, which materially impact impairment of long-lived assets and depreciation expense, respectively. Judgments related to the assessment and measurement of impairment of long-lived assets include asset holding period, future operating performance (i.e., projections of future cash flow) and current and/or future market conditions. •Investments-Policies related to accounting for investments, specifically the consolidation of subsidiaries and other entities, including variable interest entities, have the potential to materially impact the presentation of the Company's and ESH REIT's consolidated financial statements. •Rental revenue recognition-For ESH REIT, policies related to rental revenues generated from leases involve judgment that materially impacts total revenues due to the contingent nature of a significant portion of lease rental revenues. •Income taxes-Policies related to income taxes involve judgment and complexity, including analysis of the Corporation's ownership in ESH REIT, the valuation of deferred tax assets and liabilities and the execution and performance of all matters related to REIT compliance. Recent Accounting Pronouncements For discussion of recently issued accounting standards, see Note 2 to each of the consolidated financial statements ofExtended Stay America, Inc. andESH Hospitality, Inc. , included in Item 8 of this combined annual report on Form 10-K. Item 7A. Quantitative and Qualitative Disclosures About Market RiskThe Corporation and ESH REIT may seek to reduce earnings and cash flow volatility associated with changes in interest rates and commodity prices by entering into financial arrangements to provide a hedge against a portion of the risks associated with such volatility, when applicable. We have exposure to such risks to the extent they are not hedged. We may enter into derivative financial arrangements to the extent they meet the foregoing objectives. We do not use derivatives for trading or speculative purposes. The Corporation As ofDecember 31, 2019 , 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's revolving credit facility. The 76 -------------------------------------------------------------------------------- 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. ESH REIT As ofDecember 31, 2019 ,$618.3 million of ESH REIT's outstanding debt of$2.6 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 ofDecember 31, 2019 was$200.0 million , which is reduced by$50.0 million every six months until the swap matures inSeptember 2021 . The remaining$418.3 million of outstanding variable interest rate debt not subject to the interest rate swap remains subject to interest rate risk. If market rates of interest were to fluctuate by 1.0%, interest expense would increase or decrease by$4.2 million annually, assuming that the amount outstanding under ESH REIT's unhedged variable interest rate debt remains at$418.3 million . 77
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