The following discussion should be read in conjunction with the condensed
consolidated financial statements of Extended Stay America, Inc. and ESH
Hospitality, Inc., included in Item 1 of this combined quarterly report on Form
10-Q.
Background and Certain Defined Terms
The following defined terms relate to our corporate structure and lodging
industry operating metrics. Unless otherwise indicated or the context requires:
•ADR or average daily rate means hotel room revenues divided by total number of
rooms sold in a given period.
•Company means the Corporation (as defined below), ESH REIT (as defined below)
and their subsidiaries considered as a single enterprise.
•Corporation means Extended Stay America, Inc., a Delaware corporation, and its
subsidiaries (excluding ESH REIT and its subsidiaries), which include the
Operating Lessees (as defined below), ESH Strategies (as defined below) and ESA
Management (as defined below). The Corporation controls ESH REIT through its
ownership of ESH REIT's Class A common stock, which currently represents 58% of
the outstanding common stock of ESH REIT.
•ESA Management means ESA Management LLC, a Delaware limited liability company
and wholly-owned subsidiary of the Corporation, and its subsidiaries, which
manage Extended Stay America-branded hotel properties on behalf of the Operating
Lessees and third parties.
•ESH REIT means ESH Hospitality, Inc., a Delaware corporation that has elected
to be taxed as a real estate investment trust ("REIT"), and its subsidiaries.
ESH REIT, a majority-owned subsidiary of the Corporation, leases all of its
hotel properties to the Operating Lessees.
•ESH Strategies means ESH Hospitality Strategies LLC, a Delaware limited
liability company and wholly-owned subsidiary of the Corporation, and one of its
subsidiaries, ESH Strategies Branding LLC, a Delaware limited liability company,
which owns the intellectual property related to our businesses and licenses it
to the Operating Lessees and ESH Strategies Franchise (as defined below).
•ESH Strategies Franchise means ESH Strategies Franchise LLC, a Delaware limited
liability company and wholly-owned subsidiary of ESH Strategies, that licenses
the Extended Stay America brand name from ESH Strategies and in-turn relicenses
it to third-party franchisees.
•Extended stay market means the market of hotels with a fully equipped
kitchenette in each guest room, which accept reservations and do not require a
lease, as defined by The Highland Group.
•Mid-price extended stay segment means the segment of the extended stay market
that generally operates at a daily rate between $55 and $105.
•Occupancy or occupancy rate means the total number of rooms sold in a given
period divided by the total number of rooms available during that period.
•Operating Lessees means wholly-owned subsidiaries of the Corporation that lease
a group of hotels from subsidiaries of ESH REIT and operate Company-owned
hotels.
•Paired Share means one share of common stock, par value $0.01 per share, of the
Corporation together with one share of Class B common stock, par value $0.01 per
share, of ESH REIT, which are attached and trade as a single unit.
•RevPAR or Revenue per Available Room means the product of average daily room
rate charged and the average daily occupancy achieved for a hotel or group of
hotels in a given period. RevPAR does not include ancillary revenues, such as
food and beverage revenues, or parking, pet, WiFi upgrade or other guest service
revenues.
•System-wide hotels means all hotels that are operated under the Extended Stay
America brand and that are owned, franchised and/or managed by the Company. As
of March 31, 2021, there were 651 system-wide hotels.
•Third-party intermediaries are unaffiliated distribution channels that sell
hotel inventory, including ours, for a fee on the internet. Third-party
intermediaries currently include Expedia.com and Booking.com (and their
respective affiliated brands and distribution channels, such as Priceline,
Hotwire, Kayak and Trivago) and may in the future include search engines such as
Google and alternative lodging suppliers such as Airbnb and HomeAway.

The following discussion may contain forward-looking statements. Actual results
may differ materially from those suggested by any forward-looking statements for
various reasons, including those discussed in "Risk Factors" in the 2020 Form
10-K and in "Item 1A. Risk Factors" contained in this quarterly report, and
"Cautionary Note Regarding Forward-Looking
                                       44
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Statements" contained herein. Those sections expressly qualify any subsequent
oral and written forward-looking statements attributable to us or persons acting
on our behalf.
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. 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
Extended Stay America-branded hotels are designed to provide an affordable and
attractive alternative to traditional lodging or apartment accommodations and
are targeted toward self-sufficient, value-conscious guests who need lodging for
a week or longer. Guests include business travelers, leisure travelers,
professionals on temporary work or training assignments, persons relocating, the
temporarily displaced, those purchasing a home and anyone else in need of
temporary housing.
We are the largest integrated owner/operator of company-branded hotels in North
America. Our business operates in the extended-stay segment of the lodging
industry, and we have the following reportable operating segments:
•Owned Hotels-Earnings are derived from the operation of Company-owned hotel
properties and include room and other hotel revenues, which accounted for 98.8%
of total revenues for the three months ended March 31, 2021.
•Franchise and management-Earnings are derived from fees under various franchise
and, in certain cases, management agreements with third parties, which accounted
for 1.2% of total revenues for the three months ended March 31, 2021. These
contracts provide us the ability to earn compensation for licensing the Extended
Stay America brand name, providing access to shared system-wide platforms and/or
management services.
We are also the only major hotel company focused solely on the extended stay
segment. We target our product and service offering to an underserved customer
base within the lodging industry and the extended stay segment. In addition to
owning and operating hotels, we have increased and seek to continue to increase
our fee-based income stream, which is driven by franchising our brand to third
parties. Our core operations include intense focus on the delivery of a
consistent, quality guest experience; the efficiency of our scalable marketing
and distribution platforms; growing the value of our brand, in-part through
rebranding our hotels to the Extended Stay America Suites brand or the Extended
Stay America Premier Suites step-up brand, each of which we expect will operate
under the Extended Stay America umbrella brand; and maximizing the value of our
owned real estate through investment in our hotels. We intend to continue to (i)
maximize and grow our core operations, (ii) create and curate value within our
real estate portfolio, (iii) increase the number of franchised hotels under the
Extended Stay America umbrella brand and (iv) optimize capital deployment on
behalf of key stakeholders.
As of March 31, 2021, we owned and operated 563 hotel properties in 40 U.S.
states, consisting of approximately 62,700 rooms, and franchised 88 hotel
properties to third parties, consisting of approximately 9,000 rooms. All 651
system-wide hotels operate under the Extended Stay America brand, which serves
the mid-price extended stay segment and accounts for approximately 43% of the
segment by number of rooms in the United States.
RevPAR for owned hotels was $44.60 and $45.23 for the three months ended
March 31, 2021 and 2020, respectively. RevPAR for comparable system-wide hotels,
which includes hotels owned and franchised for the full three months ended
March 31, 2021 and 2020, was $43.56 and $44.30 for the three months ended
March 31, 2021 and 2020, respectively.
During the trailing twelve months ended March 31, 2021, 26.1%, 21.4% and 52.5%
of our owned hotel room revenues were derived from guests with stays from 1-6
nights, from 7-29 nights and for 30 or more nights, respectively. For the
trailing twelve months ended March 31, 2021, 26.9% of our owned hotel room
revenues were derived from property-direct reservations, 31.8% were derived from
our central call center, 21.5% were derived from our own proprietary website,
17.5% were derived from third party intermediaries and 2.3% were derived from
travel agencies using global distribution systems.
Franchisees typically pay an initial application fee, along with monthly royalty
and system service fees for the licensing of our brand and the use of our shared
system-wide platforms, such as marketing, technology infrastructure, central
reservations, national sales and revenue management systems. The standard term
for our franchise agreements is generally 20 years.
                                       45
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Recent Updates
Pending Merger
On March 14, 2021, the Corporation and ESH REIT entered into an Agreement and
Plan of Merger (the "Merger Agreement") with Eagle Parent Holdings L.P.
("Parent"), a joint venture of affiliates of Blackstone Real Estate Partners IX
L.P. and Starwood Distressed Opportunity Fund XII Global, L.P. The Merger
Agreement provides that an acquisition subsidiary of Parent will merge with and
into the Corporation (the "Corporation Merger"), with the Corporation surviving
the Corporation Merger, and an indirect acquisition subsidiary of Parent will
merge with and into ESH REIT (the "ESH Merger" and, together with the
Corporation Merger, the "Mergers"), with ESH REIT surviving the ESH Merger.
Upon completion of the Mergers, holders of our paired shares will be entitled to
receive $19.50, subject to adjustments as described in the definitive joint
proxy statement filed with the SEC on April 26, 2021 (the "joint proxy
statement"), in exchange for each Paired Share, except for certain excluded
shares as described in the joint proxy statement.
The management of the Company recommended the Corporation Merger to the
Corporation's board of directors (the "Corporation Board") and the ESH Merger to
ESH REIT's board of directors (the "ESH Board"), and the Corporation Board and
ESH Board approved the Mergers, based on their assessment that the certainty of
$19.50 per Paired Share in cash today was superior to the risk-adjusted present
value associated with management's execution of its business plan for the
Company. Moreover, the $19.50 per Paired Share price represents a 15.1% premium
to the $16.94 closing price for our Paired Shares on the last trading day prior
to the execution of the merger agreement. The foregoing closing price was near a
52-week high for the Paired Shares. In addition, the $19.50 price reflects a
premium of 23%, 28%, and 44% to the 30 trading day, 3-month and 6-month weighted
average prices, respectively, for the Paired Shares prior to the execution of
the Merger Agreement.
The holders of the Paired Shares will be asked, at a special meeting of
Corporation stockholders, to vote their Corporation common stock on, among other
things, the adoption of the Merger Agreement, and will be asked, at a special
meeting of ESH REIT stockholders, to vote their ESH REIT class B stock on, among
other things, the adoption of the Merger Agreement.
The transaction is expected to close during the second quarter of 2021, subject
to customary closing conditions, including approval by the Company's
shareholders and receipt of certain regulatory approvals. The Company, on the
one hand, and Parent, on the other hand, may mutually agree to terminate and
abandon the Merger Agreement at any time prior to the effective time, even after
we have obtained the requisite vote, and the Company, on the one hand, and
Parent, on the other hand, may terminate the Merger Agreement under certain
circumstances and such termination of the Merger Agreement may result in the
payment of a termination fee by the Company, on the one hand, and Parent, on the
other hand, as described in the joint proxy statement.
Further details of the Mergers are included in Note 1 to each of the condensed
consolidated financial statements of Extended Stay America, Inc. and ESH
Hospitality, Inc., included in Item 1 of this combined quarterly report on Form
10-Q. The foregoing description of the Mergers and the transactions contemplated
thereby does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the full text of the Merger Agreement, which has been
filed with the SEC as an exhibit to a Current Report on Form 8-K on March 16,
2021 and the joint proxy statement filed with the SEC on April 26, 2021.
During the three months ended March 31, 2021, the Company incurred $4.8 million
of operating expenses in contemplation of the proposed transaction.
COVID-19 Pandemic
During the year ended December 31, 2020, primarily as a result of the COVID-19
pandemic, the Company experienced significant declines in RevPAR, net income,
Adjusted EBITDA and cash flow from operations. As a result of the pandemic and
its impact on our business, we have increased our focus on attracting guests
staying for one week or longer. Additionally, we have implemented certain
reductions to expenses in order to reduce costs and maintain liquidity. While
the resulting impact of the pandemic remains uncertain, we believe our business
model has been resilient in absorbing the impact of the COVID-19 pandemic as
compared to the broader lodging industry.
We expect increases in RevPAR, net income, Adjusted EBITDA and cash flow from
operations for the year ending December 31, 2021 compared to the year ended
December 31, 2020, due to the negative impact the COVID-19 pandemic had on our
2020 operating results. The timing and extent of such increases are uncertain.
For the month ended March 31, 2021, we experienced a year-over-year increase in
Company-owned hotel RevPAR for the first month since February 2020.
                                       46
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New Hotels
The table below summarizes owned, newly constructed hotel openings during the
three months ended March 31, 2021 and the year ended December 31, 2020. All
hotels were opened under the Extended Stay America brand.
                                                    Number of   Number of
                Date             Location            Hotels       Rooms
                March 2021       Florida                2          248
                December 2020    Florida                1          124
                November 2020    Florida                1          144
                August 2020      Florida                1          124
                June 2020        Various                2          248
                April 2020       South Carolina         1          120
                March 2020       Florida                1          120


Hotel Dispositions
In March 2021, the Company disposed of two hotels located in Texas. Net proceeds
totaled $21.9 million and the Company recorded a gain on sale of $12.0 million.
In November 2020, the Company disposed of a hotel located in California. Net
proceeds totaled $63.6 million and the Company recorded a gain on sale of $52.5
million.
Hotel Pipeline
As of March 31, 2021, the Company had a pipeline of 51 hotels, which consisted
of the following:
                                            Company-Owned Pipeline &

Recently Opened Hotels as of March 31, 2021


        Under Option                 Pre-Development                  Under Construction                  Total Pipeline                 Opened YTD
   # Hotels       # Rooms        # Hotels       # Rooms            # Hotels            # Rooms        # Hotels       # Rooms       # Hotels       # Rooms
      -              -              4             504                  2                 248             6             752             2            248

                                             Third-Party Pipeline &

Recently Opened Hotels as of March 31, 2021


         Commitments                  Applications                         Executed                       Total Pipeline                 Opened YTD
   # Hotels       # Rooms        # Hotels       # Rooms            # Hotels            # Rooms        # Hotels       # Rooms       # Hotels       # Rooms
      21           2,604            -              -                  24                2,893            45           5,497            3            291



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
                            Signed commitment to build or convert a certain number of hotels by a third
Commitments                 party, generally associated with a prior portfolio sale
Applications                Third party filed franchise application with deposit
Executed                    Franchise and development application approved, geography identified and
                            deposits paid, various stages of

pre-development and/or construction




The Company expects to delay commencement of construction of four
pre-development locations as a result of current market uncertainty. We also
expect delays in certain third-party pipeline activity. The length of such
delays and severity of the impact on our business, financial position, results
of operations and liquidity, is highly uncertain.



                                       47
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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 three months ended March 31, 2021:


                                                                                    Percentage of 2021 Year to
                                                                                       Date Total Revenues

• Room revenues. Room revenues relate to owned hotels and are driven primarily by

           96.3%
ADR and occupancy. Pricing policy and customer mix are significant drivers of ADR.
Room revenues are presented and/or discussed with respect to owned hotels only as
opposed to on a system-wide basis. System-wide hotels include all owned and
franchised hotels.
•   Other hotel revenues. Other hotel revenues relate to owned hotels and include              2.6%
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               0.5%
and other fees charged to third party hotel owners for use of our brand name and
hotel management services. The substantial majority of these fees are based on a
percentage of hotel revenues.
•   Other revenues from franchised and managed properties. Other revenues from                 0.6%
franchised and managed properties include the direct reimbursement of specific
costs, such as on-site personnel, incremental reservation costs and other
distribution costs incurred by us for which we are reimbursed on a
dollar-for-dollar basis by third party hotel owners. Additionally, these revenues
include fees charged, based on a percentage of revenue of the franchised hotel, as
reimbursement for indirect costs incurred by us associated with certain shared
system-wide platforms (i.e., system services), such as marketing, technology
infrastructure, central reservations, national sales and revenue management
systems.

The following table presents the components of the Company's operating expenses as a percentage of our total operating expenses for the three months ended March 31, 2021:


                                                                                    Percentage of 2021 Year
                                                                                    to Date Total Operating
                                                                                           Expenses

• Hotel operating expenses. Hotel operating expenses relate to owned hotels and

            64.4%
have both fixed and variable components. Operating expenses that are relatively
fixed include personnel expense, real estate tax expense and property insurance
premiums. Occupancy is a key driver of expenses that have a high degree of
variability, such as housekeeping services. Other variable expenses include
marketing costs, reservation costs, property insurance claims and repairs and
maintenance expense.
•   General and administrative expenses. General and administrative expenses                 10.6%
include expenses associated with corporate overhead. Costs consist primarily of
compensation expense of our corporate staff, including equity-based compensation
and severance costs, and professional fees, including audit, tax and consulting
fees, legal fees and legal settlement costs.
•   Depreciation and amortization. Depreciation and amortization relates primarily           21.8%
to the acquisition and usage of hotels and related property and equipment,
including capital expenditures incurred with respect to renovations and other
capital expenditures.
•   Merger transaction expenses. Merger transaction expenses include direct,                 2.1%

incremental expenses incurred associated with our pending merger. • Other expenses from franchised and managed properties. Other expenses from

               1.1%
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 through system service (i.e., program) fees.



                                       48
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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 annual hotel revenues over
designated thresholds. Although variable rental payments are received throughout
the year, variable rental revenues are recognized in income when such amounts
are fixed and determinable (i.e., only when percentage rental revenue thresholds
have been achieved).
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 three
months ended March 31, 2021:
                                                                                    Percentage of 2021 Year
                                                                                    to Date Total Operating
                                                                                           Expenses

• Hotel operating expenses. ESH REIT's hotel operating expenses include expenses

            28.1%
directly related to hotel ownership, such as real estate tax expense, property
insurance premiums and loss on disposal of capital assets.
•  General and administrative expenses. General and administrative expenses include          5.2%
overhead expenses incurred directly by ESH REIT and certain administrative service
costs reimbursed to the Corporation.
•   Depreciation and amortization. Depreciation and amortization relate primarily            63.6%
to the acquisition and usage of hotels and related property and equipment,
including capital expenditures incurred with respect to renovations and other
capital expenditures.
•   Merger transaction expenses. Merger transaction expenses include direct,                 3.1%

incremental expenses incurred associated with our pending merger.





Results of Operations
Results of Operations discusses the Company's and ESH REIT's condensed
consolidated financial statements, each of which have been prepared in
accordance with U.S. GAAP. The condensed 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 condensed 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.
                                       49
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Results of Operations-The Company
As of March 31, 2021, the Company owned and operated 563 hotels, consisting of
approximately 62,700 rooms, and franchised 88 hotels for third parties,
consisting of approximately 9,000 rooms. As of March 31, 2020, the Company owned
and operated 558 hotels, consisting of approximately 62,100 rooms, and
franchised 74 hotels for third parties, consisting of approximately 7,600 rooms.
See Notes 4 and 5 to the condensed consolidated financial statements of Extended
Stay America, Inc., included in Item 1 of this quarterly report on Form 10-Q,
Comparison of Three Months Ended March 31, 2021 and March 31, 2020
The following table presents the Company's consolidated results of operations
for the three months ended March 31, 2021 and 2020, including the amount and
percentage change in these results between the periods (in thousands):
                                                   Three Months Ended
                                                       March 31,
                                               2021                 2020               Change ($)            Change (%)
Revenues:
Room revenues                              $  249,868           $  254,464           $    (4,596)              (1.8)%
Other hotel revenues                            6,680                6,768                   (88)              (1.3)%
Franchise and management fees                   1,218                1,279                   (61)              (4.8)%
                                              257,766              262,511                (4,745)              (1.8)%
Other revenues from franchised and managed
properties                                      1,805                3,790                (1,985)             (52.4)%
Total revenues                                259,571              266,301                (6,730)              (2.5)%
Operating Expenses:
Hotel operating expenses                      146,338              145,295                 1,043                0.7%
General and administrative expenses            24,124               23,938                   186                0.8%
Depreciation and amortization                  49,408               50,520                (1,112)              (2.2)%
Merger transaction expenses                     4,782                    -                 4,782                n/a

                                              224,652              219,753                 4,899                2.2%
Other expenses from franchised and managed
properties                                      2,444                4,207                (1,763)             (41.9)%
Total operating expenses                      227,096              223,960                 3,136                1.4%
Gain on sale of hotel properties               12,018                    -                12,018                n/a
Other income                                        1                    2                    (1)             (50.0)%
Income from operations                         44,494               42,343                 2,151                5.1%
Other non-operating (income) expense              (84)                 703                  (787)             (111.9)%
Interest expense, net                          31,462               32,685                (1,223)              (3.7)%
Income before income tax expense               13,116                8,955                 4,161               46.5%
Income tax expense                                750                1,110                  (360)             (32.4)%
Net income                                     12,366                7,845                 4,521               57.6%
Net income attributable to noncontrolling
interests(1)                                  (10,445)              (3,291)               (7,154)              217.4%
Net income attributable to Extended Stay
America, Inc. common shareholders          $    1,921           $    4,554           $    (2,633)             (57.8)%

________________________


(1)Noncontrolling interests in Extended Stay America, Inc. include 42% and 41%
of ESH REIT's common equity as of March 31, 2021 and 2020, respectively, and 125
shares of ESH REIT preferred stock.
                                       50
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The following table presents key operating metrics, including occupancy, ADR,
RevPAR and hotel inventory for the Company's owned hotels for the three months
ended March 31, 2021 and 2020, respectively:
                                        Three Months Ended
                                            March 31,
                                      2021              2020       Change
Number of hotels (as of March 31)     563               558           5
Number of rooms (as of March 31)     62,674            62,053        621
Occupancy                            74.5%             71.4%       310 bps
ADR                                  $59.86            $63.35      (5.5)%
RevPAR                               $44.60            $45.23      (1.4)%


Room revenues. Room revenues decreased by $4.6 million, or 1.8%, to $249.9
million for the three months ended March 31, 2021, compared to $254.5 million
for the three months ended March 31, 2020, due to a 1.4% decrease in RevPAR due
to significant business disruption resulting from the COVID-19 pandemic that
began in March 2020. The decrease in RevPAR was driven by a 5.5% decrease in
ADR, partially offset by a 310 basis point increase in occupancy.
Other hotel revenues. Other hotel revenues decreased by $0.1 million, or 1.3%,
to $6.7 million for the three months ended March 31, 2021, compared to $6.8
million for the three months ended March 31, 2020.
Franchise and management fees. Franchise and management fees decreased by $0.1
million, or 4.8%, to $1.2 million for the three months ended March 31, 2021,
compared to $1.3 million for the three months ended March 31, 2020. We expect
franchise fees to increase over time as additional franchised hotels open in the
future. As of March 31, 2021, the Company does not manage any third-party
hotels.
Other revenues from franchised and managed properties. Other revenues from
franchised and managed properties decreased by $2.0 million, or 52.4%, to $1.8
million for the three months ended March 31, 2021, compared to $3.8 million for
the three months ended March 31, 2020, due to a decrease in direct reimbursable
costs related to the management of 25 hotels whose management agreement expired
on December 31, 2020. As of March 31, 2021, the Company does not manage any
third-party hotels.
Hotel operating expenses. Hotel operating expenses increased by $1.0 million, or
0.7%, to $146.3 million for the three months ended March 31, 2021, compared to
$145.3 million for the three months ended March 31, 2020. The increase in hotel
operating expenses was primarily due to increases in general liability premiums
and claims of $2.3 million, hotel-level payroll expense of $2.2 million,
allowance for uncollectible guest balances of $1.3 million and utilities expense
of $1.2 million. These increases were partially offset by decreases of $2.1
million in costs related to the temporary suspension of our grab-and-go
breakfast, loss on disposal of assets of $2.1 million and reservation costs of
$2.1 million.
General and administrative expenses. General and administrative expenses
increased by $0.2 million, or 0.8%, to $24.1 million for the three months ended
March 31, 2021, compared to $23.9 million for the three months ended March 31,
2020.
Depreciation and amortization. Depreciation and amortization decreased by $1.1
million, or 2.2%, to $49.4 million for the three months ended March 31, 2021,
compared to $50.5 million for the three months ended March 31, 2020, primarily
due to declines in capital expenditures related to existing and
newly-constructed hotels.
Merger transaction expenses. During the three months ended March 31, 2021, the
Company incurred $4.8 million in direct, incremental expenses associated with
our pending merger.
Other expenses from franchised and managed properties. Other expenses from
franchised and managed properties decreased by $1.8 million, or 41.9%, to $2.4
million for the three months ended March 31, 2021, compared to $4.2 million for
the three months ended March 31, 2020, due to a decrease in direct reimbursable
costs related to the management of 25 hotels whose management agreement expired
on December 31, 2020. We generally expect the cost to provide certain shared
system-wide platforms to franchisees to be recovered through system service
fees, which are included in other revenues from franchised and managed
properties.
Gain on sale of hotel properties. During the three months ended March 31, 2021,
the Company recognized a $12.0 million gain related to the sale of two hotels.
No hotels were sold during three months ended March 31, 2020.
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Other income. Other income remained consistent at less than $0.1 million for
each of the three months ended March 31, 2021 and 2020.
Other non-operating (income) expense. During the three months ended March 31,
2021 and 2020, we recognized a foreign currency transaction gain of $0.1 million
and loss of $0.7 million, respectively, related to a residual Canadian
dollar-denominated deposit as a result of the prior sale of Canadian hotels.
Interest expense, net. Net interest expense decreased by $1.2 million, or 3.7%,
to $31.5 million for the three months ended March 31, 2020, compared to $32.7
million for the three months ended March 31, 2020. In March 2020, the Company
borrowed $399.8 million under revolving credit facilities, of which $350.0
million was repaid in August 2020 and $40.0 million was repaid during the three
months ended March 31, 2021. The Company's total debt outstanding, net of
unamortized deferred financing costs and debt discounts, decreased to $2.6
billion as of March 31, 2021, compared to $3.0 billion as of March 31, 2020. The
Company's weighted-average interest rate decreased to 4.4% as of March 31, 2021,
compared to 4.7% as of March 31, 2020, due to a decline in LIBOR.
Income tax expense. The Company recorded a provision for federal, state, and
foreign income taxes of $0.8 million, an effective tax rate of 5.7%, for the
three months ended March 31, 2021, compared to a provision of $1.1 million, an
effective tax rate of 12.4%, for the three months ended March 31, 2020. The
Company's effective rate differs from the federal statutory rate of 21%
primarily due to ESH REIT's status as a REIT under the provisions of the
Internal Revenue Code (the "Code").

Results of Operations-ESH REIT
As of March 31, 2021, ESH REIT owned and leased 563 hotels, consisting of
approximately 62,700 rooms. As of March 31, 2020, ESH REIT owned and leased 558
hotels, consisting of approximately 62,100 rooms. See Notes 4 and 5 to the
condensed consolidated financial statements of ESH Hospitality, Inc., included
in Item 1 of this quarterly report on Form 10-Q,
Comparison of Three Months Ended March 31, 2021 and March 31, 2020
The following table presents ESH REIT's results of operations for the three
months ended March 31, 2021 and 2020, including the amount and percentage change
in these results between the periods (in thousands):
                                                      Three Months Ended
                                                           March 31,
                                                    2021               2020             Change ($)            Change (%)
Revenues- Rental revenues from Extended Stay
America, Inc.                                   $ 120,392          $ 119,190          $     1,202                1.0%
Operating expenses:
Hotel operating expenses                           21,405             24,527               (3,122)              (12.7)%
General and administrative expenses                 3,960              4,167                 (207)              (5.0)%
Depreciation and amortization                      48,381             49,588               (1,207)              (2.4)%

Merger transaction expenses                         2,373                  -                2,373                 n/a
Total operating expenses                           76,119             78,282               (2,163)              (2.8)%
Gain on sale of hotel properties                   11,930                  -               11,930                 n/a

Income from operations                             56,203             40,908               15,295                37.4%
Other non-operating (income) expense                  (84)               560                 (644)             (115.0)%
Interest expense, net                              31,135             32,428               (1,293)              (4.0)%
Income before income tax expense                   25,152              7,920               17,232               217.6%
Income tax expense                                      2                  2                    -                0.0%
Net income                                      $  25,150          $   7,918          $    17,232               217.6%


Rental revenues from Extended Stay America, Inc. Rental revenues increased by
$1.2 million, or 1.0%, to $120.4 million for the three months ended March 31,
2021, compared to $119.2 million for the three months ended March 31, 2020. The
increase in rental revenues was due to new hotel openings that occurred during
2020 and the first quarter of 2021, partially offset by asset sales. No variable
rental revenues were recognized during the three months ended March 31, 2021 or
2020, as minimum percentage rental revenue thresholds were not achieved during
either of those periods.
                                       52
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Hotel operating expenses. Hotel operating expenses decreased by $3.1 million, or
12.7%, to $21.4 million for the three months ended March 31, 2021, compared to
$24.5 million for the three months ended March 31, 2020. This decrease was due
to decreases in loss on disposal of assets of $2.1 million and property
insurance related costs of $0.9 million.
General and administrative expenses. General and administrative expenses
decreased by $0.2 million, or 5.0%, to $4.0 million for the three months ended
March 31, 2021, compared to $4.2 million for the three months ended March 31,
2020, due to a decrease in reimbursable costs paid to the Corporation.
Depreciation and amortization. Depreciation and amortization decreased by $1.2
million, or 2.4%, to $48.4 million for the three months ended March 31, 2021,
compared to $49.6 million for the three months ended March 31, 2020, primarily
due to declines in capital expenditures related to existing and
newly-constructed hotels.
Merger transaction expenses. During the three months ended March 31, 2021, ESH
REIT incurred $2.4 million in direct, incremental expenses associated with our
pending merger.
Other non-operating (income) expense. During the three months ended March 31,
2021 and 2020, ESH REIT recognized a foreign currency transaction gain of $0.1
million and loss of $0.6 million, respectively, related to a residual Canadian
dollar-denominated deposit as a result of the prior sale of Canadian hotels.
Interest expense, net. Net interest expense decreased by $1.3 million, or 4.0%,
to $31.1 million for the three months ended March 31, 2021, compared to $32.4
million for the three months ended March 31, 2020. In March 2020, ESH REIT
borrowed $350.0 million under its revolving credit facility, which was fully
repaid in August 2020. ESH REIT's total debt outstanding, net of unamortized
deferred financing costs and debt discounts, decreased to $2.6 billion as of
March 31, 2021, compared to $3.0 billion as of March 31, 2020. ESH REIT's
weighted-average interest rate decreased to 4.4% as of March 31, 2021, compared
to 4.6% as of March 31, 2020, due to a decline in LIBOR.
Income tax expense. ESH REIT's effective income tax rate remained consistent at
less than 0.1% for each of the three months ended March 31, 2021 and 2020. ESH
REIT's effective rate differs from the federal statutory rate of 21% primarily
due to its status as a REIT under the provisions of the Code.
Non-GAAP Financial Measures
Hotel Operating Profit and Hotel Operating Margin
Hotel Operating Profit and Hotel Operating Margin measure hotel-level operating
results prior to certain items, including debt service, income tax expense,
impairment charges, depreciation and amortization and general and administrative
expenses. The Company believes that Hotel Operating Profit and Hotel Operating
Margin are useful measures to investors regarding our operating performance as
they help us evaluate aggregate owned hotel-level profitability, specifically
owned hotel operating efficiency and effectiveness. Further, these measures
allow us to analyze period over period operating margin flow-through, defined as
the change in Hotel Operating Profit divided by the change in total room and
other hotel revenues.

We define Hotel Operating Profit as net income excluding: (1) income tax
expense; (2) net interest expense; (3) other non-operating (income) expense; (4)
other income; (5) gain on sale of hotel properties; (6) impairment of long-lived
assets; (7) depreciation and amortization; (8) merger transaction expenses (9)
general and administrative expenses; (10) loss on disposal of assets; (11)
franchise and management fees; and (12) system services (profit) loss, net. We
define Hotel Operating Margin as Hotel Operating Profit divided by the sum of
room and other hotel revenues. We believe that Hotel Operating Profit and Hotel
Operating Margin are not meaningful or useful measures for ESH REIT on a
stand-alone basis due to the fact that a Paired Share represents an investment
in the Company, as a single, consolidated enterprise, which is reflected in the
consolidated Company results of operations; therefore, we believe these
performance measures are meaningful for the consolidated Company only.
Hotel Operating Profit and Hotel Operating Margin as presented may not be
comparable to similar measures calculated by other companies. This information
should not be considered as an alternative to net income of the Company, the
Corporation or ESH REIT, or any other measure of the Company, the Corporation or
ESH REIT calculated in accordance with U.S. GAAP. Interest expense and other
items have been and will continue to be incurred and are not reflected in Hotel
Operating Profit or Hotel Operating Margin. Management separately considers the
impact of these excluded items to the extent they are material to operating
decisions and assessments of operating performance. The Company's condensed
consolidated statements of operations include excluded items, each of which
should be considered when evaluating our performance in addition to our
                                       53
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non-GAAP financial measures. Hotel Operating Profit and Hotel Operating Margin
should not solely be considered as measures of our profitability.
The following table provides a reconciliation of Hotel Operating Profit and
Hotel Operating Margin for the Company for the three months ended March 31, 2021
and 2020 (in thousands):
                                                         Three Months Ended
                                                             March 31,
                                                                       2021            2020
        Net income                                                 $  12,366       $   7,845
        Income tax expense                                               750           1,110
        Interest expense, net                                         31,462          32,685
        Other non-operating (income) expense                             (84)            703
        Other income                                                      (1)             (2)
        Gain on sale of hotel properties                             (12,018)              -

        Depreciation and amortization

49,408 50,520


        Merger transaction expenses                                    4,782               -
        General and administrative expenses

24,124 23,938


        Loss on disposal of assets (1)                                 1,232           3,343
        Franchise and management fees

(1,218) (1,279)


        System services loss, net                                        639             417
        Hotel Operating Profit                                     $

111,442 $ 119,280



        Room revenues                                              $

249,868 $ 254,464


        Other hotel revenues                                           6,680           6,768
        Total room and other hotel revenues                        $

256,548 $ 261,232



        Hotel Operating Margin                                          43.4  %         45.7  %

________________________


(1) Included in hotel operating expenses in the condensed 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 the
U.S. GAAP presentation of net income, net income per share and cash flow
provided by operating activities, is beneficial to the overall understanding of
ongoing operating performance. We adjust EBITDA for the following items where
applicable for each period presented, and refer to this measure as Adjusted
EBITDA:

•Equity-based compensation-We exclude charges related to equity-based
compensation expense with respect to awards issued under long-term incentive
compensation plans to employees and certain directors.
•Impairment of long-lived assets-We exclude the effect of impairment losses
recorded on property and equipment and intangible assets, as we believe they are
not reflective of ongoing or future operating performance.
                                       54
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•Gain on sale of hotel properties-We exclude the gain on sale of hotel
properties, as we believe it is not reflective of ongoing or future operating
performance.
•Merger transaction expenses-We exclude transaction expenses related to our
pending merger, as we believe they are not reflective of ongoing or future
operating performance.
•System services (profit) loss, net-We exclude direct and indirect reimbursable
expenses from franchised and managed properties, net of other revenues, because
although the timing of system service fee revenues will typically not align with
expenses incurred to operate these programs, the Company manages system services
to break even over time.
•Other expenses-We exclude the effect of other expenses or income that we do not
consider reflective of ongoing or future operating performance, including the
following: loss on disposal of assets, non-operating (income) expense, including
foreign currency transaction costs, and certain costs associated with
acquisitions, dispositions and/or capital transactions.
EBITDA and Adjusted EBITDA as presented may not be comparable to similar
measures calculated by other companies. This information should not be
considered as an alternative to net income of the Company, the Corporation or
ESH REIT, or any other measure of the Company, the Corporation or ESH REIT
calculated in accordance with U.S. GAAP. Cash expenditures for capital
expenditures, interest expense and other items have been and will continue to be
incurred and are not reflected in EBITDA or Adjusted EBITDA. Management
separately considers the impact of these excluded items to the extent they are
material to operating decisions and assessments of operating performance. The
Company's condensed 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 three months ended March 31, 2021 and
2020 (in thousands):
                                                        Three Months Ended
                                                            March 31,
                                                                       2021          2020
           Net income                                               $ 12,366      $  7,845
           Interest expense, net                                      31,462        32,685
           Income tax expense                                            750         1,110
           Depreciation and amortization                              49,408        50,520
           EBITDA                                                     93,986        92,160
           Equity-based compensation                                   2,348         1,126

           Gain on sale of hotel properties                          (12,018)            -
           Merger transaction expenses                                 4,782             -
           System services loss, net                                     639           417
           Other expense (1)                                           1,149         4,046
           Adjusted EBITDA                                          $ 90,886      $ 97,749

________________________


(1)Includes loss on disposal of assets and non-operating (income) expense,
including foreign currency transaction costs. Loss on disposal of assets totaled
$1.2 million and $3.3 million, respectively.
FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share
FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share are metrics used by
management to assess our operating performance and profitability and to
facilitate comparisons between us and other hotel and/or real estate companies
that include a REIT as part of their legal entity structure. Funds From
Operations ("FFO") is defined by the National Association of Real Estate
Investment Trusts ("NAREIT") as net income (computed in accordance with U.S.
GAAP), excluding gains from sales of
                                       55
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real estate, impairment charges, the cumulative effect of changes in accounting
principle, plus real estate related depreciation and amortization and after
adjustments for unconsolidated partnerships and joint ventures following the
same approach. FFO is a commonly used measure among other hotel and/or real
estate companies that include a REIT as a part of their legal entity structure.
Since real estate depreciation and amortization, impairment of long-lived assets
and gains from sales of hotel properties, net are dependent upon the historical
cost of the real estate asset bases and generally not reflective of ongoing
operating performance or earnings capability, the Company believes FFO is useful
to investors as it provides a meaningful comparison of our performance between
periods and between us and other companies and/or REITs.
Consistent with our presentation of Paired Share Income, Adjusted Paired Share
Income and Adjusted Paired Share Income per diluted Paired Share, as described
below, our reconciliation of FFO, Adjusted FFO and Adjusted FFO per diluted
Paired Share begins with net income attributable to Extended Stay America, Inc.
common shareholders, which excludes net income attributable to noncontrolling
interests, and adds back earnings attributable to ESH REIT's Class B common
shares, presented as noncontrolling interest of the Company as required by U.S.
GAAP. We believe that including earnings attributable to ESH REIT's Class B
common shares in our calculations of FFO, Adjusted FFO and Adjusted FFO per
diluted Paired Share provides investors with useful supplemental measures of the
Company's operating performance since our Paired Shares, directly through the
pairing of the common stock of the Corporation and Class B common stock of ESH
REIT, and indirectly through the Corporation's ownership of the Class A common
stock of ESH REIT, entitle holders to participate in 100% of the common equity
and earnings of both the Corporation and ESH REIT. Based on the limitation on
transfer provided for in each of the Corporation's and ESH REIT's charters,
shares of common stock of the Corporation and shares of Class B common stock of
ESH REIT are transferable and tradable only in combination as units, each unit
consisting of one share of the Corporation's common stock and one share of ESH
REIT Class B common stock.
The Company uses Adjusted FFO and Adjusted FFO per diluted Paired Share when
evaluating our performance because we believe the adjustment for certain
additional items, described below, provides useful supplemental information to
investors regarding our ongoing operating performance and that the presentation
of Adjusted FFO and Adjusted FFO per diluted Paired Share, when combined with
the U.S. GAAP presentation of net income and net income per common share, is
beneficial to the overall understanding of our ongoing performance.
The Company adjusts FFO for the following items, net of tax, as applicable, that
are not addressed in NAREIT's definition of FFO, and refers to this measure as
Adjusted FFO:
•Debt modification and extinguishment costs-We exclude charges related to the
write-off of unamortized deferred financing costs, prepayment penalties and
other costs associated with the modification and/or extinguishment of debt as we
believe they are not reflective of our ongoing or future operating performance.
•Merger transaction expenses-We exclude transaction expenses related to our
pending merger, as we believe they are not reflective of ongoing or future
operating performance.
Adjusted FFO per diluted Paired Share is defined as Adjusted FFO divided by the
weighted average number of Paired Shares outstanding on a diluted basis. Until
such time as the number of outstanding common shares of the Corporation and
Class B common shares of ESH REIT differ, we believe Adjusted FFO per diluted
Paired Share is useful to investors, as it represents a measure of the economic
risks and rewards related to an investment in our Paired Shares.
FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share as presented may not
be comparable to similar measures calculated by other REITs or real estate
companies that include a REIT as part of their legal entity structure. In
particular, due to the fact that we present these measures for the Company on a
consolidated basis (i.e., including the impact of franchise fees, management
fees and income taxes), FFO, Adjusted FFO and Adjusted FFO per diluted Paired
Share, may be of limited use to investors comparing our results only to REITs.
This information should not be considered as an alternative to net income of the
Company, the Corporation, or ESH REIT, net income per share of common stock of
the Corporation, net income per share of Class A or Class B common stock of ESH
REIT or any other measure of the Company, the Corporation or ESH REIT calculated
in accordance with U.S. GAAP. Real estate related depreciation and amortization
expense will continue to be incurred and is not reflected in FFO, Adjusted FFO
or Adjusted FFO per diluted Paired Share. Additionally, impairment charges,
gains or losses on sales of hotel properties and other charges or income
incurred in accordance with U.S. GAAP may occur and are not reflected in FFO,
Adjusted FFO or Adjusted FFO per diluted Paired Share. Management separately
considers the impact of these excluded items to the extent they are material to
operating decisions and assessments of operating performance. The Company's
condensed 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,
                                       56
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consolidated enterprise, which is reflected in the consolidated Company results
of operations; therefore, we believe these performance measures are meaningful
for the consolidated Company only.
The following table provides a reconciliation of net income attributable to
Extended Stay America, Inc. common shareholders to FFO, Adjusted FFO and
Adjusted FFO per diluted Paired Share for the Company for the three months ended
March 31, 2021 and 2020 (in thousands, except per Paired Share data):
                                                                 Three Months Ended
                                                                      March 31,
                                                                           2021                    2020
Net income per Extended Stay America, Inc.
common share - diluted                                               $

0.01 $ 0.03

Net income attributable to Extended Stay America, Inc. common shareholders

                                                  $

1,921 $ 4,554 Noncontrolling interests attributable to Class B common shares of ESH REIT

                                                           10,441                   3,287
Real estate depreciation and amortization                                    47,755                  48,881

Gain on sale of hotel properties                                            (12,018)                      -

Tax effect of adjustments to net income attributable to Extended Stay America, Inc. common shareholders

                              (3,038)                 (1,608)
FFO                                                                          45,061                  55,114

Merger transaction expenses                                                   4,782                       -
Tax effect of adjustments to FFO                                               (406)                      -
Adjusted FFO                                                         $       49,437          $       55,114
Adjusted FFO per Paired Share - diluted                              $         0.28          $         0.31
Weighted average Paired Shares outstanding - diluted                        178,549                 178,171



Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share
Income per diluted Paired Share
We present Paired Share Income, Adjusted Paired Share Income and Adjusted Paired
Share Income per diluted Paired Share as supplemental measures of the Company's
performance. We believe that these are useful measures for investors since our
Paired Shares, directly through the pairing of the common stock of the
Corporation and Class B common stock of ESH REIT, and indirectly through the
Corporation's ownership of the Class A common stock of ESH REIT, entitle holders
to participate in 100% of the common equity and earnings of both the Corporation
and ESH REIT. As required by U.S. GAAP, net income attributable to Extended Stay
America, Inc. common shareholders excludes earnings attributable to ESH REIT's
Class B common shares, a noncontrolling interest. Based on the limitation on
transfer provided for in each of the Corporation's and ESH REIT's charters,
shares of common stock of the Corporation and shares of Class B common stock of
ESH REIT are transferable and tradable only in combination as units, each unit
consisting of one share of the Corporation's common stock and one share of ESH
REIT Class B common stock. As a result, we believe that Paired Share Income,
Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired
Share represent useful measures to holders of our Paired Shares.
Paired Share Income is defined as the sum of net income attributable to Extended
Stay America, Inc. common shareholders and noncontrolling interests attributable
to Class B common shares of ESH REIT. Adjusted Paired Share Income is defined as
Paired Share Income adjusted for items that, net of income taxes, we believe are
not reflective of ongoing or future operating performance. We adjust Paired
Share Income for the following items, net of tax, as applicable, and refer to
this measure as Adjusted Paired Share Income: debt modification and
extinguishment costs, impairment of long-lived assets, gain on sale of hotel
properties, merger transaction expenses, system services (profit) loss, net and
other expenses such as loss on disposal of assets, non-operating (income)
expense, including foreign currency transaction costs and certain costs
associated with acquisitions, dispositions and/or capital transactions. With the
exception of equity-based compensation, an ongoing charge, and debt modification
and extinguishment costs, these adjustments (other than the effect of income
taxes) are the same as those used in the reconciliation of net income calculated
in accordance with U.S. GAAP to EBITDA and Adjusted EBITDA.
Adjusted Paired Share Income per diluted Paired Share is defined as Adjusted
Paired Share Income divided by the number of Paired Shares outstanding on a
diluted basis. Until such time as the number of outstanding common shares of the
Corporation and Class B common shares of ESH REIT differ, we believe Adjusted
Paired Share Income per diluted Paired Share is useful to investors, as it
represents one measure of the economic risks and rewards related to an
investment in our
                                       57
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Paired Shares. We believe that Paired Share Income, Adjusted Paired Share Income
and Adjusted Paired Share Income per diluted Paired Share provide meaningful
indicators of the Company's operating performance in addition to separate and/or
individual analyses of net income attributable to common shareholders of the
Corporation and net income attributable to Class B common shareholders of ESH
REIT, each of which is impacted by specific U.S. GAAP requirements, including
the recognition of contingent lease rental revenues and the recognition of fixed
minimum lease rental revenues on a straight-line basis, and may not reflect how
cash flows and/or earnings are generated on an individual entity or total
enterprise basis. Paired Share Income, Adjusted Paired Share Income and Adjusted
Paired Share Income per diluted Paired Share should not be considered as an
alternative to net income of the Company, the Corporation or ESH REIT, net
income per share of common stock of the Corporation, net income per share of
Class A or Class B common stock of ESH REIT or any other measure of the Company,
the Corporation or ESH REIT calculated in accordance with U.S. GAAP.
We believe that Paired Share Income, Adjusted Paired Share Income and Adjusted
Paired Share Income per diluted Paired Share are not meaningful or useful
measures for ESH REIT on a stand-alone basis due to the fact that a Paired Share
represents an investment in the Company, as a single, consolidated enterprise,
which is reflected in the condensed consolidated Company results of operations;
therefore, we believe these performance measures are meaningful for the
consolidated Company only.
The following table provides a reconciliation of net income attributable to
Extended Stay America, Inc. common shareholders to Paired Share Income, Adjusted
Paired Share Income and Adjusted Paired Share Income per diluted Paired Share
for the three months ended March 31, 2021 and 2020 (in thousands, except per
Paired Share data):
                                                                     Three Months Ended
                                                                         March 31,
                                                                2021                    2020
Net income per Extended Stay America, Inc. common
share - diluted                                          $          0.01

$ 0.03

Net income attributable to Extended Stay America, Inc. common shareholders

                                      $         1,921          $        4,554
Noncontrolling interests attributable to Class B common
shares of ESH REIT                                                10,441                   3,287
Paired Share Income                                               12,362                   7,841

Gain on sale of hotel properties                                 (12,018)                      -
Merger transaction expenses                                        4,782                       -
System services loss, net                                            639                     417
Other expense (1)                                                  1,149                   4,046
Tax effect of adjustments to Paired Share Income                     464                    (147)
Adjusted Paired Share Income                             $         7,378          $       12,157
Adjusted Paired Share Income per Paired Share - diluted  $          0.04          $         0.07
Weighted average Paired Shares outstanding - diluted             178,549                 178,171

_________________________

(1)Includes loss on disposal of assets and non-operating (income) expense, including foreign currency transaction costs. Loss on disposal of assets totaled $1.2 million and $3.3 million, respectively.



Liquidity and Capital Resources
Company Overview
We have historically generated significant cash flow from operations and have
financed our ongoing business as well as the execution of our strategic
objectives with existing cash, cash flow generated from operations, borrowings
under our revolving credit facilities, as needed, and, in certain instances,
proceeds from asset dispositions. We generated cash flow from operations of
$91.3 million and $92.3 million for the three months ended March 31, 2021 and
2020, respectively.
Current liquidity requirements consist primarily of funds necessary to pay for
(i) hotel operating expenses, (ii) capital expenditures, including capital
expenditures incurred to complete the construction of two new hotels in process
and certain hotel renovations, (iii) investments in franchise and other
fee-based programs, (iv) general and administrative expenses, including expenses
related to our pending merger, (v) debt service obligations, including interest
expense, (vi) income taxes, (vii) Corporation and required ESH REIT
distributions and (viii) continued focus on our core operations and business
strategy,
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including rebranding our hotels to the Extended Stay America Suites brand or the
Extended Stay America Premier Suites brand, each of which we expect to operate
under the Extended Stay America umbrella brand. We expect to fund our current
liquidity requirements from a combination of cash on hand, cash flow generated
from operations and, in certain instances, proceeds from asset dispositions. We
may also fund a portion of our current liquidity requirements with the
borrowings under our revolving credit facilities.
The COVID-19 pandemic had a material adverse effect on the Company's cash flows
from operations during the year ended December 31, 2020. Despite this impact,
the Company continues to generate positive cash flow from operations, net of
interest and capital expenditures. It remains difficult to predict when
pre-pandemic demand and pricing for our hotels will resume. We may choose to
delay the execution of certain of our business strategies and reduce operating
costs and certain capital expenditures in order to preserve liquidity. As of
March 31, 2021, the Company's total available borrowing capacity under its
revolving credit facilities was $390.0 million.
Long-term liquidity requirements consist of funds necessary to (i) make future
hotel renovations (ii) acquire additional hotel properties and/or other
companies, (iii) execute our business strategy and strategic initiatives,
including rebranding our hotels to the Extended Stay America Suites brand or the
Extended Stay America Premier Suites brand, each of which we expect to operate
under the Extended Stay America umbrella brand, (iv) pay Corporation and
required ESH REIT distributions, (v) repay and/or refinance outstanding amounts
under our existing debt obligations, including the Corporation Revolving Credit
Facility due in September 2024, the 2025 Notes due in May 2025, the ESH REIT
Term Facility due in September 2026 and the 2027 Notes due in October 2027. See
Note 7 to each of the condensed consolidated financial statements of Extended
Stay America, Inc. and ESH Hospitality, Inc., included in Item 1 of this
combined quarterly report on Form 10-Q, for additional detail.
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. There are a number of factors that
may have a material adverse effect on our ability to refinance our existing debt
obligations, including the current and future state of overall capital and
credit markets generally and as a result of the COVID-19 pandemic, our degree of
leverage, the value of our unencumbered assets, borrowing restrictions imposed
by existing or prospective lenders, general market conditions for the lodging
industry, our operating performance and liquidity and market perceptions about
us. The success of our business strategies will depend, in part, on our ability
to access various capital sources. There can be no assurance that we will be
able to raise any such financing on terms acceptable to us or at all.
Cash Balances. The Company had unrestricted cash and cash equivalents of $357.9
million and $396.8 million at March 31, 2021 and December 31, 2020,
respectively. Based upon the current level of operations, management believes
that our cash flow from operations, together with our cash balances, including
the $9.8 million of borrowings under the Corporation's Revolving Credit
Facility, is expected to be adequate to meet the Company's anticipated funding
requirements and business objectives for the foreseeable future. However, the
length and severity of the COVID-19 pandemic and its economic impact continues
to be highly uncertain and the potential future worsening of macroeconomic
conditions could require the Company to reassess its liquidity position and take
additional measures of liquidity preservation to ensure it can satisfy financial
obligations as they come due.
Debt Obligations. During the three months ended March 31, 2021, the Company
repaid $40.0 million under the Corporation Revolving Credit Facility. As of
March 31, 2021, the outstanding balance under the Corporation Revolving Credit
Facility was $9.8 million and the Corporation and ESH REIT had $40.0 million and
$350.0 million of available borrowing capacity, respectively, under each of
their respective credit facilities.
In May 2020, the Company entered into an amendment to the Corporation Revolving
Credit Facility whereby it obtained a suspension of the quarterly tested
leverage covenant from the beginning of the second quarter of 2020 through the
end of the first quarter of 2021 (the "Four Quarter Suspension Period"). For the
second quarter of 2021 through the fourth quarter of 2021, the leverage covenant
calculation was modified to use annualized EBITDA as opposed to trailing
twelve-month EBITDA. Throughout the Four Quarter Suspension Period, the Company
has agreed to maintain minimum liquidity of $150.0 million and to limit share
repurchases and dividend payments made by the Corporation. Additionally, the
amendment provides for the Corporation to borrow up to $150.0 million from ESH
REIT through an intercompany loan facility.
The Company's compliance with financial covenants under its debt obligations
could be impacted by current or future economic conditions associated with the
pandemic. We may not be able to maintain compliance with our debt covenants or
pay debt obligations as they become due and could risk default under the
agreements governing the Company's indebtedness, upon which the amount
outstanding could be accelerated and may raise substantial doubt about our
ability to continue as a going concern.
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See Note 7 to each of the condensed consolidated financial statements of
Extended Stay America, Inc. and ESH Hospitality, Inc., included in Item 1 of
this combined quarterly report on Form 10-Q, for additional detail related to
our debt obligations and related covenants.
Paired Share Repurchase Program. In December 2015, the Boards of Directors of
the Corporation and ESH REIT authorized a combined Paired Share repurchase
program. As a result of several increases in authorized amounts and program
extensions, the combined Paired Share repurchase program currently authorizes
the Corporation and ESH REIT to purchase up to $550.0 million in Paired Shares
through December 31, 2021. Repurchases may be made at management's discretion
from time to time in the open market, in privately negotiated transactions or by
other means (including through Rule 10b5-1 trading plans). As of March 31, 2021,
the Corporation and ESH REIT had repurchased and retired 28.6 million Paired
Shares for $283.0 million and $166.4 million, including transaction fees,
respectively, and $101.1 million remained available under the combined Paired
Share repurchase program.
Distributions. The following table outlines distributions declared or paid to
date in 2021:
   Declaration Date               Record Date              Date Paid/Payable            ESH REIT Distribution          Corporation Distribution           Total Distribution

       2/25/2021                   3/12/2021                   3/26/2021                        $0.09                             $-                             $0.09
      12/22/2020                   1/6/2021                    1/20/2021                        $0.35                             $-                             $0.35


We do not expect to pay our regular quarterly distribution during the pendency
of transactions contemplated by the Merger Agreement. Under the terms of the
Merger Agreement, Parent may request that the Corporation pay a special
distribution (the "Special Dividend") immediately prior to the closing of up to
$1.75 per share of Corporation common stock, in which case the cash
consideration paid in the merger in respect of a share of Corporation common
stock shall be reduced by the amount of such Special Dividend. See
"Overview-Pending Merger".
The Corporation
The Corporation's primary source of liquidity is distribution income it receives
in respect of its ownership of 100% of the Class A common stock of ESH REIT,
which as of March 31, 2021, represents 58% of the outstanding common stock of
ESH REIT. Distributions are subject to uncertainty due to the volatility of
macroeconomic trends, including the evolving nature of the COVID-19 pandemic.
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) debt service obligations, (iv) income taxes, (v)
investments in its franchise and other fee programs and (vi) Corporation
distributions. The Corporation expects to fund its current liquidity
requirements from a combination of cash on hand, including funds borrowed under
the Corporation Revolving Credit Facility or borrowings from ESH REIT, as
lender, under the Corporation Intercompany Facility (defined below), as well as
cash flow generated from operations, including distribution income it receives
in respect of its ownership of 100% of the Class A common stock of ESH REIT.
The Corporation's long-term liquidity requirements include the repayment of
outstanding amounts under the Corporation Revolving Credit Facility, and the
repayment of outstanding amounts, if any, under the Corporation Intercompany
Facility. See Note 7 to the condensed consolidated financial statements of
Extended Stay America, Inc., included in Item 1 of this combined quarterly
report on Form 10-Q, for additional detail.
The Corporation's ability to pay distributions is dependent upon a number of
factors, including but not limited to, its results of operations, net income,
liquidity, cash flows, financial condition or prospects, economic conditions,
ability to effectively execute certain tax planning strategies, compliance with
applicable law, the receipt of distributions from ESH REIT in respect of the
Class A common stock, level of indebtedness, capital requirements, contractual
restrictions, restrictions in any existing and future debt agreements and other
factors. The payment of future distributions is at the discretion of the
Corporation's Board of Directors.
During the three months ended March 31, 2021, the Corporation repaid
$40.0 million under the Corporation Revolving Credit Facility. As of March 31,
2021, the outstanding balance under the Corporation Revolving Credit Facility
was $9.8 million and the Corporation had $40.0 million of available borrowing
capacity under the facility.
In July 2020, the Corporation, as borrower, and ESH REIT, as lender, entered
into an unsecured credit facility (the "Corporation Intercompany Facility").
Under the Corporation Intercompany Facility, the Corporation may borrow up to
$150.0 million from ESH REIT. Loans under the facility bear interest at an
annual rate of 4.5%. In addition to paying interest on
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outstanding principal, the Corporation is required to pay a commitment fee to
ESH REIT of 0.25% on the unutilized facility balance. There is no scheduled
amortization under the facility and the facility matures on July 2, 2025.
Obligations under the Corporation Intercompany Facility and guarantees thereof
are unsecured and fully subordinated to the obligations of the Corporation under
the Corporation Revolving Credit Facility. The Corporation has the option to
prepay outstanding balances under the facility without penalty. As of March 31,
2021, the outstanding balance under the facility was $0.
ESH REIT may return additional cash to the Corporation for the Corporation to
fund its current and long-term liquidity requirements or for other corporate
purposes. ESH REIT may transfer cash to the Corporation through the redemption
of shares of Class A common stock, which would decrease the Corporation's
ownership of ESH REIT. Such redemption would likely be inefficient from a tax
perspective because the redemption would be taxed as an ordinary dividend.
Additionally, ESH REIT may loan funds to the Corporation under the Corporation
Intercompany Facility, subject to the conditions contained in the Corporation
Revolving Credit Facility and other existing debt agreements.
Based upon the current level of operations, we believe that the Corporation's
cash position and cash flow generated from operations will be adequate to meet
all the Corporation's funding requirements and business objectives for the
foreseeable future.
ESH REIT
ESH REIT's primary source of liquidity is rental revenues derived from leases.
The leases expire in October 2023, and at such time, we expect minimum and
percentage rents to be adjusted to reflect then-current market terms.
ESH REIT's current liquidity requirements include funds necessary to pay (i)
costs associated with ownership of hotel properties, (ii) debt service
obligations, including interest expense, and with respect to the ESH REIT Term
Facility, scheduled principal payments on outstanding borrowings, (iii) real
estate tax expense, (iv) property insurance expense, (v) general and
administrative expense, including administrative service costs reimbursed to the
Corporation, (vi) capital expenditures, including those capital expenditures
incurred to complete certain hotel renovations, the completion of construction
of two new hotels in-process and rebranding hotels to the Extended Stay America
Suites brand or the Extended Stay America Premier Suites brand, vii) draws made
by the Corporation on the Corporation Intercompany Facility and (viii) the
payment of required REIT distributions.
ESH REIT's long-term liquidity requirements consist of funds necessary to (i)
complete future hotel renovations, including at those hotels which may rebrand
to the Extended Stay America Premier Suites brand (ii) acquire additional hotel
properties and/or other lodging companies, (iii) pay required REIT
distributions, (iv) fund draws made by the Corporation on the Corporation
Intercompany Facility, (v) repay any outstanding amounts under the ESH REIT
Revolving Credit Facility 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 in May 2025, September 2026 and October
2027, respectively. See Note 7 to the condensed consolidated financial
statements of ESH Hospitality, Inc., included in Item 1 of this combined
quarterly report on Form 10-Q, 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.
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 condensed consolidated
financial statements of ESH Hospitality, Inc., included in Item 1 of this
combined quarterly report on Form 10-Q, for additional detail. We cannot assure
you that ESH REIT will be able to refinance any of its debt on attractive terms
at or before maturity, on commercially reasonable terms or at all.
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As of March 31, 2021, the outstanding balance under the ESH REIT Revolving
Credit Facility was $0 and available borrowing capacity was $350.0 million.
In August 2016, ESH REIT, as borrower, and the Corporation, as lender, entered
into an unsecured intercompany credit facility (the "ESH REIT Intercompany
Facility"). Under the ESH REIT Intercompany Facility, ESH REIT may borrow up to
$300.0 million, plus additional amounts, in each case subject to certain
conditions. There is no scheduled amortization under the facility and the
facility matures in September 2026. As of March 31, 2021, the outstanding
balance under the ESH REIT Intercompany Facility was $0.
The Corporation may return additional cash to ESH REIT in order for ESH REIT to
pay for or fund (i) its current and long-term liquidity requirements, (ii)
capital expenditures, (iii) outstanding debt obligations or (iv) for other
corporate purposes. The Corporation may transfer cash to ESH REIT through the
purchase of additional shares of Class A common stock, which would increase its
ownership of ESH REIT and reduce the Company's overall tax efficiency.
Additionally, the Corporation may loan funds to ESH REIT under the ESH REIT
Intercompany Facility, subject to the conditions contained in existing debt
agreements. The Corporation does not expect to return additional cash to ESH
REIT in the foreseeable future to the extent it is not required under existing
agreements or applicable law.
Based upon the current level of operations, we believe that ESH REIT's cash
position, cash flow generated from operations and, in certain circumstances,
proceeds from asset sales, will be adequate to meet all of ESH REIT's funding
requirements and business objectives for the foreseeable future.
Sources and Uses of Cash - The Company
The following cash flow table and comparisons are provided for the Company:
Comparison of Three Months Ended March 31, 2021 and March 31, 2020
We had total cash, cash equivalents and restricted cash of $371.0 million and
$725.0 million at March 31, 2021 and 2020, 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 three months
ended March 31, 2021 and 2020 (in thousands):
                                                            Three Months

Ended March 31,


                                                               2021                  2020            Change ($)
Cash provided by (used in):
Operating activities                                    $        91,346          $  92,285          $     (939)
Investing activities                                             (8,513)           (53,623)             45,110
Financing activities                                           (121,745)           324,827            (446,572)

Effects of changes in exchange rate on cash and cash equivalents

                                                           -               (150)                150

Net (decrease) increase in cash and cash equivalents $ (38,912)

$ 363,339 $ (402,251)




Cash Flows provided by Operating Activities
Cash flows provided by operating activities totaled $91.3 million for the three
months ended March 31, 2021, compared to $92.3 million for the three months
ended March 31, 2020, a decrease of $0.9 million. The decrease in cash flows
provided by operating activities was a result of a slight decline in hotel
operating income, primarily due to a 5.5% decrease in ADR driven by the negative
impact of the COVID-19 pandemic, partially offset by a 310 bps increase in
occupancy.
Cash Flows used in Investing Activities
Cash flows used in investing activities totaled $8.5 million for the three
months ended March 31, 2021, compared to $53.6 million for the three months
ended March 31, 2020, a decrease of $45.1 million. The decrease in cash flows
used in investing activities was due to a net decrease in investment in property
and equipment, including development in process and intangible assets, of $24.1
million. In addition, cash flows used in investing activities decreased as a
result of $21.9 million in proceeds received from the disposition of two hotels
during the three months ended March 31, 2021, whereas no hotel properties were
sold during the three months ended March 31, 2020.
Cash Flows (used in) provided by Financing Activities
Cash flows used in financing activities totaled $121.7 million for the three
months ended March 31, 2021 compared to cash flows provided by financing
activities of $324.8 million for the three months ended March 31, 2020. Cash
flows used in
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financing activities changed due to a $439.7 million decrease in net proceeds
received from financing transactions and an increase in Paired Share
distributions of $37.1 million, partially offset by a $31.1 million decrease in
Paired Share repurchases.
Sources and Uses of Cash - ESH REIT
The following cash flow table and comparisons are provided for ESH REIT:
Comparison of Three Months Ended March 31, 2021 and March 31, 2020
ESH REIT had total cash and cash equivalents of $288.0 million and $628.9
million at March 31, 2021 and 2020, respectively. The following table summarizes
the changes in ESH REIT's cash and cash equivalents as a result of operating,
investing and financing activities for the three months ended March 31, 2021 and
2020 (in thousands):

                                                            Three Months Ended March 31,
                                                               2021                  2020            Change ($)
Cash provided by (used in):
Operating activities                                    $       108,155          $ 108,295          $     (140)
Investing activities                                             (6,682)           (52,957)             46,275
Financing activities                                           (189,199)           277,415            (466,614)

Net (decrease) increase in cash and cash equivalents $ (87,726)

$ 332,753 $ (420,479)




Cash Flows provided by Operating Activities
Cash flows provided by operating activities totaled $108.2 million for the three
months ended March 31, 2021 compared to $108.3 million for the three months
ended March 31, 2020, a decrease of $0.1 million.
Cash Flows used in Investing Activities
Cash flows used in investing activities totaled $6.7 million for the three
months ended March 31, 2021 compared to $53.0 million for the three months ended
March 31, 2020, a decrease of $46.3 million. The decrease in cash flows used in
investing activities was due to a $25.3 million net decrease in investment in
property and equipment, including development in process and intangible assets.
In addition, cash flows used in investing activities decreased as a result of
$21.9 million in proceeds received from the disposition of two hotels during the
three months ended March 31, 2021, whereas no hotel properties were sold during
the three months ended March 31, 2020.
Cash Flows (used in) provided by Financing Activities
Cash flows used in financing activities totaled $189.2 million for the three
months ended March 31, 2021 compared to cash flows provided by financing
activities of $277.4 million for the three months ended March 31, 2020. Cash
flows used in financing activities changed due a $350.0 million decrease in net
proceeds received from financing transactions and an increase in ESH REIT Class
A and Class B common distributions of $128.3 million, partially offset by a
decrease of $11.4 million in ESH REIT Class B common stock repurchases.
Capital Expenditures
We maintain each of our hotels in good repair and condition and in conformity
with applicable laws and regulations. The cost of all improvements and
significant alterations are generally made with cash flow from operations.
During the three months ended March 31, 2021 and 2020, the Company incurred
capital expenditures, including development in process, of $30.4 million and
$54.6 million, respectively. These capital expenditures related to development
and construction in process, ordinary hotel capital improvements, investments in
information technology and hotel renovations.
With respect to our current hotel renovation program, as of March 31, 2021, we
have substantially completed renovations at 31 hotels for $71.7 million. We are
currently in the process of performing renovations at three additional hotels,
with total costs incurred to date of $7.9 million. After completion of the
current renovation program, we generally expect each hotel to be on a seven to
eight-year renovation cycle. We expect future hotel renovations to focus on
strict underwriting standards intended to maximize returns on investment through
the renovation of our highest potential assets, which may include renovations to
conform certain existing, core-branded Extended Stay America Suites hotels to
our new step-up brand, Extended Stay America Premier Suites.
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Funding requirements for future capital expenditures, including hotel
rebranding, hotel renovations, completing construction of new hotels we expect
to own and operate, acquiring and converting existing hotels, will be
significant and are expected to be provided primarily from cash flows generated
from operations or, to the extent necessary, the Corporation or ESH REIT
revolving credit facilities, including intercompany facilities and, in certain
instances, proceeds from asset sales.
Our Indebtedness
As of March 31, 2021, the Company's total indebtedness was $2.6 billion, net of
unamortized deferred financing costs and debt discounts. ESH REIT's total
indebtedness at March 31, 2021 was $2.6 billion, net of unamortized deferred
financing costs and debt discounts. See Note 7 to the condensed consolidated
financial statements of Extended Stay America, Inc. and ESH Hospitality, Inc.,
included in Item 1 of this quarterly report on Form 10-Q, for additional detail
related to our debt obligations.
Critical Accounting Policies
Our discussion and analysis of our historical financial condition and results of
operations is based on the Company's and ESH REIT's historical condensed
consolidated financial statements, which have been prepared in accordance with
U.S. GAAP. The preparation of these financial statements requires management to
make estimates and assumptions that affect the amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date of the
financial statements and the amounts of revenues and expenses during the
reporting periods. Actual results may differ significantly from these estimates
and assumptions. We believe the following accounting policies, which are
described in detail in Note 2 to each of the audited consolidated financial
statements of Extended Stay America, Inc. and ESH Hospitality, Inc., included in
Item 8 of the 2020 Form 10-K, require material subjective or complex judgments
and have the most significant impact on the Company's and ESH REIT's financial
condition and results of operations: property and equipment, investments, rental
revenue recognition and income taxes. We evaluate estimates, assumptions and
judgments on an ongoing basis, 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.
Recent Accounting Pronouncements
For a discussion of recently issued accounting standards, see Note 2 to each of
the condensed consolidated financial statements of Extended Stay America, Inc.
and ESH Hospitality, Inc., included in Item 1 of this combined quarterly report
on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Corporation and ESH REIT may seek to reduce earnings and cash flow
volatility associated with changes in interest rates and commodity prices by
entering into financial arrangements to provide a hedge against a portion of the
risks associated with such volatility, when applicable. We have exposure to such
risks to the extent they are not hedged. We may enter into derivative financial
arrangements to the extent they meet the foregoing objectives. We do not use
derivatives for trading or speculative purposes.
The Corporation
The Corporation currently has limited exposure to market risk from changes in
interest rates. As of March 31, 2021, the Corporation's variable rate debt
consisted of $9.8 million drawn on its revolving credit facility. If market
rates of interest were to fluctuate by 1.0%, interest expense would increase or
decrease by $0.1 million annually, assuming that the amount of outstanding
Corporation variable rate debt remains at $9.8 million.
ESH REIT
As of March 31, 2021, $621.4 million of ESH REIT's outstanding gross debt of
$2.7 billion had a variable interest rate. ESH REIT is a counterparty to an
interest rate swap at a fixed rate of 1.175%. The notional amount of the
interest rate swap as of March 31, 2021 was $50.0 million, and the swap matures
in September 2021. The remaining $571.4 million of outstanding variable interest
rate debt not subject to the interest rate swap remains subject to interest rate
risk. If market rates of interest were to fluctuate by 1.0%, interest expense
would increase or decrease by $5.7 million annually, assuming that the amount of
outstanding ESH REIT unhedged variable interest rate debt remains at $571.4
million.
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