Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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
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.
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.
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.
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Date
|
Location
|
Number of
Hotels
|
Number of
Rooms
|
|
March 2021
|
Florida
|
2
|
248
|
|
December 2020
|
Florida
|
1
|
124
|
|
November 2020
|
Florida
|
1
|
144
|
|
August 2020
|
Florida
|
1
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124
|
|
June 2020
|
Various
|
2
|
248
|
|
April 2020
|
South Carolina
|
1
|
120
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|
March 2020
|
Florida
|
1
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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:
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Company-Owned Pipeline & Recently Opened Hotels as of March 31, 2021
|
|
Under Option
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Pre-Development
|
Under Construction
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Total Pipeline
|
Opened YTD
|
|
# Hotels
|
# Rooms
|
# Hotels
|
# Rooms
|
# Hotels
|
# Rooms
|
# Hotels
|
# Rooms
|
# Hotels
|
# Rooms
|
|
—
|
—
|
4
|
504
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2
|
248
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6
|
752
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2
|
248
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|
|
|
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|
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|
|
|
|
|
|
Third-Party Pipeline & Recently Opened Hotels as of March 31, 2021
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|
Commitments
|
Applications
|
Executed
|
Total Pipeline
|
Opened YTD
|
|
# Hotels
|
# Rooms
|
# Hotels
|
# Rooms
|
# Hotels
|
# Rooms
|
# Hotels
|
# Rooms
|
# Hotels
|
# Rooms
|
|
21
|
2,604
|
—
|
—
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24
|
2,893
|
45
|
5,497
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3
|
291
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Definitions
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Under Option
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Locations with a signed purchase and sale agreement
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|
Pre-Development
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Land purchased, permitting and/or site work
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Under Construction
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Hotel is under construction
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|
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Commitments
|
Signed commitment to build or convert a certain number of hotels by a third party, generally associated with a prior portfolio sale
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|
|
Applications
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Third party filed franchise application with deposit
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|
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Executed
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Franchise and development application approved, geography identified and deposits paid, various stages of pre-development and/or construction
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|
|
|
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|
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.
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:
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Percentage of 2021 Year to Date Total Revenues
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|
• Room revenues. Room revenues relate to owned hotels and are driven primarily by ADR and occupancy. Pricing policy and customer mix are significant drivers of ADR. Room revenues are presented and/or discussed with respect to owned hotels only as opposed to on a system-wide basis. System-wide hotels include all owned and franchised hotels.
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96.3%
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|
• Other hotel revenues. Other hotel revenues relate to owned hotels and include ancillary revenues such as laundry revenues, vending commissions, additional housekeeping fees, purchased WiFi upgrades, parking revenues and pet charges. Occupancy and customer mix, as well as the number and percentage of guests that have longer-term stays, have been historical drivers of our other hotel revenues.
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2.6%
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|
• Franchise and management fees. Franchise and management fees include royalty and other fees charged to third party hotel owners for use of our brand name and hotel management services. The substantial majority of these fees are based on a percentage of hotel revenues.
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0.5%
|
|
• Other revenues from franchised and managed properties. Other revenues from franchised and managed properties include the direct reimbursement of specific costs, such as on-site personnel, incremental reservation costs and other distribution costs incurred by us for which we are reimbursed on a dollar-for-dollar basis by third party hotel owners. Additionally, these revenues include fees charged, based on a percentage of revenue of the franchised hotel, as reimbursement for indirect costs incurred by us associated with certain shared system-wide platforms (i.e., system services), such as marketing, technology infrastructure, central reservations, national sales and revenue management systems.
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0.6%
|
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:
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|
|
|
|
|
|
|
|
Percentage of 2021 Year to Date Total Operating Expenses
|
|
• Hotel operating expenses. Hotel operating expenses relate to owned hotels and have both fixed and variable components. Operating expenses that are relatively fixed include personnel expense, real estate tax expense and property insurance premiums. Occupancy is a key driver of expenses that have a high degree of variability, such as housekeeping services. Other variable expenses include marketing costs, reservation costs, property insurance claims and repairs and maintenance expense.
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64.4%
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• General and administrative expenses. General and administrative expenses include expenses associated with corporate overhead. Costs consist primarily of compensation expense of our corporate staff, including equity-based compensation and severance costs, and professional fees, including audit, tax and consulting fees, legal fees and legal settlement costs.
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10.6%
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• Depreciation and amortization. Depreciation and amortization relates primarily to the acquisition and usage of hotels and related property and equipment, including capital expenditures incurred with respect to renovations and other capital expenditures.
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21.8%
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|
• Merger transaction expenses. Merger transaction expenses include direct, incremental expenses incurred associated with our pending merger.
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2.1%
|
|
• Other expenses from franchised and managed properties. Other expenses from franchised and managed properties include specific costs, such as on-site hotel personnel expense, incremental reservation costs and other distribution costs, incurred by us in the delivery of services for which we are reimbursed on a dollar-for-dollar basis. Additionally, these expenses include costs associated with shared system-wide platforms (i.e., system services), such as marketing, technology infrastructure, central reservations, national sales and revenue management systems for which we are reimbursed through system service (i.e., program) fees.
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1.1%
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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:
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|
|
|
|
|
|
|
Percentage of 2021 Year to Date Total Operating Expenses
|
|
• Hotel operating expenses. ESH REIT’s hotel operating expenses include expenses directly related to hotel ownership, such as real estate tax expense, property insurance premiums and loss on disposal of capital assets.
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28.1%
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• General and administrative expenses. General and administrative expenses include overhead expenses incurred directly by ESH REIT and certain administrative service costs reimbursed to the Corporation.
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5.2%
|
|
• Depreciation and amortization. Depreciation and amortization relate primarily to the acquisition and usage of hotels and related property and equipment, including capital expenditures incurred with respect to renovations and other capital expenditures.
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63.6%
|
|
• Merger transaction expenses. Merger transaction expenses include direct, incremental expenses incurred associated with our pending merger.
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3.1%
|
|
|
|
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.
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):
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|
|
|
|
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.
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:
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Three Months Ended
March 31,
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2021
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2020
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Change
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|
Number of hotels (as of March 31)
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563
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|
558
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|
5
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|
Number of rooms (as of March 31)
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62,674
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|
62,053
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|
621
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|
Occupancy
|
74.5%
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71.4%
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|
310 bps
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ADR
|
$59.86
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$63.35
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(5.5)%
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RevPAR
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$44.60
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$45.23
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(1.4)%
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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.
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 $1.1 million, an effective tax rate of 12.4%, for the three months ended March 31, 2020. The Company’s effective rate differs from the federal statutory rate of 21% primarily due to ESH REIT’s status as a REIT under the provisions of the Internal Revenue Code (the “Code”).
Results of Operations—ESH REIT
As of March 31, 2021, ESH REIT owned and leased 563 hotels, consisting of approximately 62,700 rooms. As of March 31, 2020, ESH REIT owned and leased 558 hotels, consisting of approximately 62,100 rooms. See Notes 4 and 5 to the condensed consolidated financial statements of ESH Hospitality, Inc., included in Item 1 of this quarterly report on Form 10-Q,
Comparison of Three Months Ended March 31, 2021 and March 31, 2020
The following table presents ESH REIT’s results of operations for the three months ended March 31, 2021 and 2020, including the amount and percentage change in these results between the periods (in thousands):
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Three Months Ended
March 31,
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2021
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2020
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Change ($)
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Change (%)
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|
Revenues- Rental revenues from Extended Stay America, Inc.
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$
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120,392
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$
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119,190
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$
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1,202
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1.0%
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Operating expenses:
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Hotel operating expenses
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21,405
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|
24,527
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(3,122)
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(12.7)%
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General and administrative expenses
|
3,960
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|
|
4,167
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|
|
(207)
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|
|
(5.0)%
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Depreciation and amortization
|
48,381
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|
|
49,588
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|
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(1,207)
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(2.4)%
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Merger transaction expenses
|
2,373
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—
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2,373
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n/a
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Total operating expenses
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76,119
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78,282
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(2,163)
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(2.8)%
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Gain on sale of hotel properties
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11,930
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—
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11,930
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n/a
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Income from operations
|
56,203
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|
40,908
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15,295
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37.4%
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Other non-operating (income) expense
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(84)
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560
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(644)
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(115.0)%
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Interest expense, net
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31,135
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32,428
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(1,293)
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(4.0)%
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Income before income tax expense
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25,152
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|
7,920
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|
17,232
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217.6%
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Income tax expense
|
2
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|
2
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—
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0.0%
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Net income
|
$
|
25,150
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$
|
7,918
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$
|
17,232
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217.6%
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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.
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
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):
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|
|
Three Months Ended
March 31,
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|
|
|
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|
|
2021
|
|
2020
|
|
Net income
|
|
|
|
|
$
|
12,366
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|
|
$
|
7,845
|
|
|
Income tax expense
|
|
|
|
|
750
|
|
|
1,110
|
|
|
Interest expense, net
|
|
|
|
|
31,462
|
|
|
32,685
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|
|
Other non-operating (income) expense
|
|
|
|
|
(84)
|
|
|
703
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|
|
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.
•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):
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|
|
|
|
|
|
|
|
|
|
|
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
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,
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
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,
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.
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:
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
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.
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
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.
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.
