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, ESH REIT and their subsidiaries considered as a single enterprise.
•Corporation means Extended Stay America, Inc., a Delaware corporation, and its subsidiaries (excluding ESH REIT and its subsidiaries), which include the Operating Lessees (as defined below), ESH Strategies (as defined below) and ESA Management (as defined below). The Corporation controls ESH REIT through its ownership of ESH REIT’s Class A common stock, which currently represents 59% 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 is a majority-owned subsidiary of the Corporation, which leases all of its hotel properties to the Operating Lessees.
•ESH Strategies means ESH Hospitality Strategies LLC, a Delaware limited liability company and wholly-owned subsidiary of the Corporation, and one of its subsidiaries, ESH Strategies Branding LLC, 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, prior to the COVID-19 pandemic, between $55 and $105.
•Occupancy or occupancy rate means the total number of rooms sold in a given period divided by the total number of rooms available during that period.
•Operating Lessees means the wholly-owned subsidiaries of the Corporation that each lease a group of hotels from subsidiaries of ESH REIT and operate the 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, telephone 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 June 30, 2020, there were 636 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 2019 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 59% of the outstanding common stock of ESH REIT. Due to its controlling interest in ESH REIT, the Corporation consolidates the financial position, results of operations, comprehensive income and cash flows of ESH REIT.
Overview
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 98.0% of total revenues for the three and six months ended June 30, 2020.
•Franchise and management—Earnings are derived from fees under various franchise and management agreements with third parties, which accounted for 2.0% of total revenues for the three and six months ended June 30, 2020. These contracts provide us the ability to earn compensation for licensing the Extended Stay America brand name, providing access to shared system-wide platforms and/or management services.
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 more than a week. 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.
As of June 30, 2020, we owned and operated 561 hotel properties in 40 U.S. states, consisting of approximately 62,400 rooms, and franchised or managed 75 hotel properties for third parties, consisting of approximately 7,700 rooms. All 636 system-wide hotels operate under the Extended Stay America brand, which serves the mid-price extended stay segment and accounts for approximately 41% of the segment by number of rooms in the United States ("U.S.").
RevPAR for owned hotels was $38.96 and $42.09 for the three and six months ended June 30, 2020, respectively, and $55.63 and $51.94 for the three and six months ended June 30, 2019, respectively. RevPAR for comparable system-wide hotels, which includes hotels owned, franchised or managed for the full three and six months ended June 30, 2020 and 2019, respectively, was $38.38 and $41.18 for the three and six months ended June 30, 2020, respectively, and $53.84 and $50.29 for the three and six months ended June 30, 2019, respectively.
During the trailing twelve months ended June 30, 2020, 34.1%, 20.9% and 45.0% 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 June 30, 2020, 24.4% of our owned hotel room revenues were derived from property-direct reservations, 29.2% were derived from our central call center, 20.1% were derived from our own proprietary website, 23.6% were derived from third party intermediaries and 2.7% were derived from travel agencies using global distribution systems.
During the trailing twelve months ended June 30, 2020, 52.7% of our franchise and management fees and related revenues were derived from franchising activities and 47.3% were derived from management activities. 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.
We seek to drive our competitive advantage by targeting our product and service offering to an underserved customer base within the lodging industry and the extended stay segment, and by driving economies of scale through our national distribution and concentration of hotels in individual markets. As the only major hotel company focused solely on the extended stay segment, we focus on operational excellence in our core business, which consists of a focus on property operations and the delivery of a consistent, quality guest experience. Operational excellence also includes a focus on our efficient, scalable marketing and sales platform to achieve the most effective use of commercial distribution channels we have identified as the most successful in driving additional targeted guests into our hotels. In addition to owning and operating hotels, we have increased, and intend to continue to increase, our fee-based income stream, which we receive when we franchise our brand to third parties and, in certain instances, manage hotels on behalf of our franchisees. Additionally, we seek to maximize the value
and increase the overall quality of our real estate portfolio by selling non-strategic hotels over time and in certain instances franchise our brand to those buyers.
Our current and future plans include the following:
•continuing to invest capital in our hotels on an ongoing basis and through future cyclical hotel renovations where justified by anticipated returns on investment;
•constructing new Extended Stay America hotel properties we expect to own and operate;
•extracting value from our real estate portfolio through the sale of non-strategic hotels to buyers that may franchise the Extended Stay America brand from us and for whom we may perform management or other services;
•franchising the Extended Stay America brand to newly constructed hotels built and owned by third parties for whom we may perform management or other services;
•converting existing hotels to the Extended Stay America brand, either as franchises or on our own balance sheet;
•repurposing and/or rebuilding certain of our hotel properties; and
•exploring acquisitions of additional hotel properties and/or companies.
Recent Updates
COVID-19 Pandemic
During the three and six months ended June 30, 2020, primarily as a result of the COVID-19 pandemic, the Company experienced material adverse declines in RevPAR due to ADR and occupancy, net (loss) income, Adjusted EBITDA and cash flow from operations. For the three months ended June 30, 2020, the Company’s RevPAR and Adjusted EBITDA declined 30.0% and 51.6%, respectively, compared with the three months ended June 30, 2019. For the six months ended June 30, 2020, the Company's RevPAR and Adjusted EBITDA declined 19.0% and 36.2%, respectively, compared with the six months ended June 30, 2019.
Based on a preliminary assessment of our results of operations for the month ended July 31, 2020, we experienced a decline in RevPAR of 19.3% on a comparable system-wide basis, which includes 626 hotels owned, franchised or managed by the Company for the months ended July 31, 2020 and 2019. Although the July 2020 RevPAR decline was not as severe as declines we experienced each month during the three months ended June 30, 2020, it represents a decline which negatively impacted our results of operations. We expect a decline in total revenues and income from operations in the three months ended September 30, 2020, compared with the three months ended September 20, 2019, in addition to declines in RevPAR and Adjusted EBITDA. Similarly, it is likely that ESH REIT will experience a material decline in percentage rental payments, rental revenues and income from operations in the three months ended September 30, 2020, compared with the three months ended September 30, 2019. Our third quarter results are not complete and performance for the remainder of the third quarter is subject to risks and uncertainties, in particular the ongoing impact of the COVID-19 pandemic, which could cause actual third quarter results to deviate materially adversely from current trends or estimates. In such event, the Company does not expect to, and undertakes no obligation to, announce changes in its expectations or estimates prior to the announcement of actual third quarter results. See "Part I. Item 1A. Risk Factors" in the 2019 Form 10-K, as well as "Item 1A. Risk Factors" below.
As a result of the pandemic and its impact on our business, we have focused on attracting guests staying for one week or longer, which has proven more resilient to-date than the broader lodging industry. Additionally, we have de-emphasized or delayed certain of our strategies in order to reduce costs, conserve financial and employee resources, and maintain short, medium and long-term liquidity. While the evolution and resulting impact of this pandemic is highly uncertain, we believe our business model has been resilient in absorbing the impact of the COVID-19 pandemic compared to the broader lodging industry. Once the COVID-19 pandemic and its effects subside, we expect to refocus on our current and future plans to grow and improve our brand to drive shareholder value. See "Item 1A. Risk Factors."
Hotel Acquisitions and New Hotel Openings
The table below summarizes hotel acquisitions and owned, newly constructed hotel openings during the six months ended June 30, 2020 and the year ended December 31, 2019. All hotels were converted or opened under the Extended Stay America brand.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
|
Location
|
Number of
Hotels
|
Number of
Rooms
|
Acquisition /
New-Build
|
|
November 2019
|
Florida
|
1
|
121
|
Acquisition
|
|
December 2019
|
Florida
|
1
|
124
|
New-Build
|
|
December 2019
|
Arizona
|
1
|
136
|
New-Build
|
|
March 2020
|
Florida
|
1
|
120
|
New-Build
|
|
April 2020
|
South Carolina
|
1
|
120
|
New-Build
|
|
June 2020
|
Georgia
|
1
|
124
|
New-Build
|
|
June 2020
|
Texas
|
1
|
124
|
New-Build
|
Hotel Pipeline
As of June 30, 2020, the Company had a pipeline of 69 hotels, which consisted of the following:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-Owned Pipeline & Recently Opened Hotels as of June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
Under Option
|
|
Pre-Development
|
|
Under Construction
|
|
Total Pipeline
|
|
Opened YTD
|
|
|
# Hotels
|
# Rooms
|
# Hotels
|
# Rooms
|
# Hotels
|
# Rooms
|
# Hotels
|
# Rooms
|
# Hotels
|
# Rooms
|
|
—
|
—
|
4
|
504
|
7
|
888
|
11
|
1,392
|
4
|
488
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-Party Pipeline & Recently Opened Hotels as of June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
Applications
|
|
Executed
|
|
Total Pipeline
|
|
Opened YTD
|
|
|
# Hotels
|
# Rooms
|
# Hotels
|
# Rooms
|
# Hotels
|
# Rooms
|
# Hotels
|
# Rooms
|
# Hotels
|
# Rooms
|
|
27
|
3,348
|
4
|
464
|
27
|
3,184
|
58
|
6,996
|
2
|
205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Definitions
|
|
|
|
Under Option
|
Locations with a signed purchase and sale agreement
|
|
|
Pre-Development
|
Land purchased, permitting and/or site work
|
|
|
Under Construction
|
Hotel is under construction
|
|
|
Commitments
|
Signed commitment to build or convert a certain number of hotels by a third party, generally associated with a prior portfolio sale
|
|
|
Applications
|
Third party filed franchise application with deposit
|
|
|
Executed
|
Franchise and development application approved, geography identified and deposits paid, various stages of pre-development and/or construction
|
|
|
|
|
|
The Company expects to delay commencement of construction of three 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, including our financial position, results of operations and liquidity, is highly uncertain.
Understanding Our Results of Operations—The Company
The following table presents the components of the Company’s revenues as a percentage of our total revenues for the six months ended June 30, 2020:
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|
|
|
|
|
|
|
|
Percentage of 2020 Year to Date Total Revenues
|
|
• Room revenues. Room revenues relate to owned hotels and are driven primarily by ADR and occupancy. Pricing policy and customer mix are significant drivers of ADR. Room revenues and similar measures or metrics 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, franchised and/or managed hotels.
|
95.4%
|
|
• Other hotel revenues. Other hotel revenues relate to owned hotels and include ancillary revenues such as laundry revenues, vending commissions, additional housekeeping fees, purchased WiFi upgrades, parking revenues and pet charges. Occupancy and customer mix, as well as the number and percentage of guests that have longer-term stays, have been historical drivers of our other hotel revenues.
|
2.6%
|
|
• Franchise and management fees. Franchise and management fees include royalty and other fees charged to third party hotel owners for use of our brand name and hotel management services. The substantial majority of these fees are based on a percentage of revenues of the franchised or managed hotels.
|
0.5%
|
|
• Other revenues from franchised and managed properties. Other revenues from franchised and managed properties include the direct reimbursement of specific costs, such as on-site personnel, incremental reservation costs and other distribution costs, incurred by us for which we are reimbursed on a dollar-for-dollar basis by third party hotel owners. Additionally, these revenues include fees charged, based on a percentage of revenue of the franchised hotel, as reimbursement for indirect costs incurred by us associated with certain shared system-wide platforms (i.e., system services), such as marketing, technology infrastructure, central reservations, national sales and revenue management systems.
|
1.5%
|
The following table presents the components of the Company’s operating expenses as a percentage of our total operating expenses for the six months ended June 30, 2020:
|
|
|
|
|
|
|
|
|
Percentage of 2020 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 and amenity costs. Other variable expenses include marketing costs, reservation costs, property insurance claims and repairs and maintenance expense.
|
63.9%
|
|
• General and administrative expenses. General and administrative expenses include expenses associated with corporate overhead. Costs consist primarily of compensation expense of our corporate staff, including equity-based compensation and severance costs, and professional fees, including audit, tax and consulting fees, legal fees and legal settlement costs.
|
10.8%
|
|
• Depreciation and amortization. Depreciation and amortization relates primarily to the acquisition and usage of hotels and other property and equipment, including capital expenditures incurred with respect to renovations and other capital expenditures.
|
23.3%
|
|
|
|
|
• Impairment of long-lived assets. Impairment of long-lived assets is a charge recognized when events and circumstances indicate that the carrying value of a real estate asset, including an individual hotel asset or a group of hotel assets, may not be recoverable. The estimation and evaluation of future cash flows, which is a key factor in determining the amount and/or timing of impairment charges, in particular the holding period for real estate asset composition and/or concentration within real estate portfolios, relies on judgments and assumptions regarding holding period, current and future operating and economic performance and current and future market conditions. It is possible that such judgments and/or estimates will change; if this occurs, we may recognize additional impairment charges reflecting either changes in estimate, circumstance or the estimated market value of our assets.
|
0.2%
|
|
• Other expenses from franchised and managed properties. Other expenses from franchised and managed properties include specific costs, such as on-site hotel personnel expense, incremental reservation costs and other distribution costs, incurred by us in the delivery of services for which we are reimbursed on a dollar-for-dollar basis. Additionally, these expenses include costs associated with shared system-wide platforms (i.e., system services), such as marketing, technology infrastructure, central reservations, national sales and revenue management systems for which we are reimbursed over time through system service (i.e., program) fees.
|
1.8%
|
|
|
|
Understanding Our Results of Operations—ESH REIT
Revenues. ESH REIT's sole source of revenues is lease rental revenues. ESH REIT’s rental revenues are generated from leasing its hotel properties to subsidiaries of the Corporation. Rental revenues consist of fixed minimum rental payments recognized on a straight-line basis over the lease terms plus variable rental payments based on specified percentages of total hotel revenues over designated thresholds.
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 six months ended June 30, 2020:
|
|
|
|
|
|
|
|
|
Percentage of 2020 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 certain capital assets.
|
30.6%
|
|
• 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.
|
5.1%
|
|
• Depreciation and amortization. Depreciation and amortization relate primarily to the acquisition and usage of hotels and other property and equipment, including capital expenditures incurred with respect to renovations and other capital expenditures.
|
63.9%
|
|
• Impairment of long-lived assets. Impairment of long-lived assets is a charge recognized when events and circumstances indicate that the carrying value of a real estate asset, including an individual hotel asset or a group of hotel assets, may not be recoverable. The estimation and evaluation of future cash flows, which is a key factor in determining the amount and/or timing of impairment charges, in particular the holding period for real estate asset composition and/or concentration within real estate portfolios, relies on judgments and assumptions regarding holding period, current and future operating and economic performance and current and future market conditions. It is possible that such judgments and/or estimates will change; if this occurs, we may recognize additional impairment charges reflecting either changes in estimate, circumstance or the estimated market value of our assets.
|
0.4%
|
|
|
|
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 41% 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 June 30, 2020, the Company owned and operated 561 hotels, consisting of approximately 62,400 rooms, and franchised or managed 75 hotels for third parties, consisting of approximately 7,700 rooms. As of June 30, 2019, the Company owned and operated 554 hotels, consisting of approximately 61,500 rooms, and franchised or managed 74 hotels for third parties, consisting of approximately 7,600 rooms.
Comparison of Three Months Ended June 30, 2020 and June 30, 2019
The following table presents the Company's consolidated results of operations for the three months ended June 30, 2020 and 2019, including the amount and percentage change in these results between the periods (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change ($)
|
|
Change (%)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Room revenues
|
$
|
219,851
|
|
|
$
|
311,614
|
|
|
$
|
(91,763)
|
|
|
(29.4)%
|
|
Other hotel revenues
|
6,320
|
|
|
6,070
|
|
|
250
|
|
|
4.1%
|
|
Franchise and management fees
|
1,218
|
|
|
1,447
|
|
|
(229)
|
|
|
(15.8)%
|
|
|
227,389
|
|
|
319,131
|
|
|
(91,742)
|
|
|
(28.7)%
|
|
Other revenues from franchised and managed properties
|
3,445
|
|
|
4,526
|
|
|
(1,081)
|
|
|
(23.9)%
|
|
Total revenues
|
230,834
|
|
|
323,657
|
|
|
(92,823)
|
|
|
(28.7)%
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Hotel operating expenses
|
133,435
|
|
|
146,907
|
|
|
(13,472)
|
|
|
(9.2)%
|
|
General and administrative expenses
|
23,103
|
|
|
22,287
|
|
|
816
|
|
|
3.7%
|
|
Depreciation and amortization
|
51,042
|
|
|
49,017
|
|
|
2,025
|
|
|
4.1%
|
|
Impairment of long-lived assets
|
675
|
|
|
—
|
|
|
675
|
|
|
n/a
|
|
|
208,255
|
|
|
218,211
|
|
|
(9,956)
|
|
|
(4.6)%
|
|
Other expenses from franchised and managed properties
|
4,083
|
|
|
4,996
|
|
|
(913)
|
|
|
(18.3)%
|
|
Total operating expenses
|
212,338
|
|
|
223,207
|
|
|
(10,869)
|
|
|
(4.9)%
|
|
|
|
|
|
|
|
|
|
|
Other income
|
1
|
|
|
1
|
|
|
—
|
|
|
0.0%
|
|
Income from operations
|
18,497
|
|
|
100,451
|
|
|
(81,954)
|
|
|
(81.6)%
|
|
Other non-operating income
|
(302)
|
|
|
(171)
|
|
|
(131)
|
|
|
76.6%
|
|
Interest expense, net
|
33,621
|
|
|
29,766
|
|
|
3,855
|
|
|
13.0%
|
|
Income before income tax (benefit) expense
|
(14,822)
|
|
|
70,856
|
|
|
(85,678)
|
|
|
(120.9)%
|
|
Income tax (benefit) expense
|
(6,052)
|
|
|
11,198
|
|
|
(17,250)
|
|
|
(154.0)%
|
|
Net (loss) income
|
(8,770)
|
|
|
59,658
|
|
|
(68,428)
|
|
|
(114.7)%
|
|
Net income attributable to noncontrolling interests(1)
|
(3,593)
|
|
|
(6,161)
|
|
|
2,568
|
|
|
(41.7)%
|
|
Net (loss) income attributable to Extended Stay America, Inc. common shareholders
|
$
|
(12,363)
|
|
|
$
|
53,497
|
|
|
$
|
(65,860)
|
|
|
(123.1)%
|
|
|
|
|
|
|
|
|
|
|
|
|
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________________________
(1)Noncontrolling interests in Extended Stay America, Inc. include 41% and 43% of ESH REIT’s common equity as of June 30, 2020 and 2019, respectively, and 125 shares of ESH REIT preferred stock.
The following table presents key operating metrics, including occupancy, ADR, RevPAR and hotel inventory for the Company's owned hotels for the three months ended June 30, 2020 and 2019, respectively:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
Number of hotels (as of June 30)
|
561
|
|
554
|
|
7
|
|
Number of rooms (as of June 30)
|
62,421
|
|
61,552
|
|
869
|
|
Occupancy
|
68.7%
|
|
79.9%
|
|
(1,120) bps
|
|
ADR
|
$56.68
|
|
$69.65
|
|
(18.6)%
|
|
RevPAR
|
$38.96
|
|
$55.63
|
|
(30.0)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Room revenues. Room revenues decreased by $91.8 million, or 29.4%, to $219.9 million for the three months ended June 30, 2020, compared to $311.6 million for the three months ended June 30, 2019, due to a 30.0% decrease in RevPAR as a result of a 18.6% decrease in ADR and a 1,120 basis point decrease in occupancy due to material business disruption as a result of the COVID-19 pandemic. We anticipate that continued disruption resulting from the COVID-19 pandemic, as well as changes in customer behavior, will result in a material adverse decrease in room revenues for the year ending December 31, 2020, compared with the year ended December 31, 2019. The length and severity of such impact is highly uncertain.
Other hotel revenues. Other hotel revenues increased by $0.2 million, or 4.1%, to $6.3 million for the three months ended June 30, 2020, compared to $6.1 million for the three months ended June 30, 2019, due to reimbursements received from certain third-party intermediaries.
Franchise and management fees. Franchise and management fees decreased by $0.2 million, or 15.8%, to $1.2 million for the three months ended June 30, 2020, compared to $1.4 million for the three months ended June 30, 2019, due to a decline in revenues at franchised and managed hotels due to the COVID-19 pandemic. We expect franchise and management fees to increase over time if additional franchised hotels open in the future.
Other revenues from franchised and managed properties. Other revenues from franchised and managed properties decreased by $1.1 million, or 23.9%, to $3.4 million for the three months ended June 30, 2020, compared to $4.5 million for the three months ended June 30, 2019, due to a decrease in direct reimbursable costs resulting from the termination of two management agreements in the third quarter of 2019.
Hotel operating expenses. Hotel operating expenses decreased by $13.5 million, or 9.2%, to $133.4 million for the three months ended June 30, 2020, compared to $146.9 million for the three months ended June 30, 2019. The decrease in hotel operating expenses was primarily due to declines in certain variable costs, including reservation costs of $5.5 million related to a decrease in commissionable bookings through third-party intermediaries, hotel-level payroll expense of $3.3 million, credit card fees of $3.0 million, marketing costs of $2.3 million and $2.3 million in costs related to the temporary suspension of our grab-and-go breakfast. These decreases were partially offset by increases in allowance for uncollectible guest balances of $1.3 million, personal protective equipment and other safety related costs of $1.1 million and property insurance of $0.8 million. We currently anticipate that certain variable costs such as those noted above will decrease for the year ending December 31, 2020, partially due to increases in the average length of guest stays and a continued shift to less expensive reservation channels. We expect other variable costs, such as costs incurred for personal protective equipment and other related safety measures taken in response to the COVID-19 pandemic, as well as certain fixed operating expenses, such as property insurance, to increase. The potential impact of changes in hotel operating expenses related to the COVID-19 pandemic is highly uncertain.
General and administrative expenses. General and administrative expenses increased by $0.8 million, or 3.7%, to $23.1 million for the three months ended June 30, 2020, compared to $22.3 million for the three months ended June 30, 2019, due to separation and corporate transition costs. The Company expects to defer certain general and administrative costs for the remainder of 2020 in response to the COVID-19 pandemic. As the length and severity of the COVID-19 pandemic is highly uncertain, while we expect a decline in certain general and administrative expenses, we are unable to determine the full impact for the year ending December 31, 2020.
Depreciation and amortization. Depreciation and amortization increased by $2.0 million, or 4.1%, to $51.0 million for the three months ended June 30, 2020, compared to $49.0 million for the three months ended June 30, 2019, due to a hotel acquisition and new hotel openings that occurred during the fourth quarter of 2019 and the first half of 2020.
Impairment of long-lived assets. During the three months ended June 30, 2020, we recognized an impairment charge of $0.7 million related to an undeveloped land parcel. No impairment charges were recognized during the three months ended June 30, 2019.
Other expenses from franchised and managed properties. Other expenses from franchised and managed properties decreased by $0.9 million, or 18.3%, to $4.1 million for the three months ended June 30, 2020, compared to $5.0 million for the three months ended June 30, 2019, due to a decrease in direct costs resulting from the termination of two management agreements in the third quarter of 2019. 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.
Other non-operating income. During the three months ended June 30, 2020 and 2019, we recognized a foreign currency transaction gain of $0.3 million and $0.2 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 increased by $3.9 million, or 13.0%, to $33.6 million for the three months ended June 30, 2020, compared to $29.8 million for the three months ended June 30, 2019, due to an increase in the Company's total debt outstanding to $3.0 billion, net of unamortized deferred financing costs and debt discounts, as of June 30, 2020, compared to $2.4 billion, net of unamortized deferred financing costs and debt discounts, as of June 30, 2019. In March 2020, the Company borrowed $399.8 million under revolving credit facilities and in September 2019, ESH REIT issued $750.0 million of its 2027 Notes and repaid $500.0 million of the ESH REIT Term Facility. The Company’s weighted-average interest rate decreased to 4.5% as of June 30, 2020 compared to 4.8% as of June 30, 2019, due to a decline in LIBOR. Interest expense, net is expected to increase for the year ending December 31, 2020, due to the increase in total debt outstanding.
Income tax (benefit) expense. We recorded a benefit for federal, state, and foreign income taxes of $6.1 million, an effective tax rate of 40.8%, for the three months ended June 30, 2020, compared to a provision of $11.2 million, an effective tax rate of 15.8%, for the three months ended June 30, 2019. The Company’s effective rate differs from the federal statutory rate of 21% primarily due to ESH REIT’s status as a REIT under the provisions of the Internal Revenue Code and the passage of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which provides the Company the ability to carry back and utilize projected federal tax losses to higher tax rate years.
Comparison of Six Months Ended June 30, 2020 and June 30, 2019
The following table presents the Company's consolidated results of operations for the six months ended June 30, 2020 and 2019, including the amount and percentage change in these results between the periods (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change ($)
|
|
Change (%)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Room revenues
|
$
|
474,315
|
|
|
$
|
578,660
|
|
|
$
|
(104,345)
|
|
|
(18.0)%
|
|
Other hotel revenues
|
13,088
|
|
|
11,373
|
|
|
1,715
|
|
|
15.1%
|
|
Franchise and management fees
|
2,497
|
|
|
2,672
|
|
|
(175)
|
|
|
(6.5)%
|
|
|
489,900
|
|
|
592,705
|
|
|
(102,805)
|
|
|
(17.3)%
|
|
Other revenues from franchised and managed properties
|
7,235
|
|
|
8,621
|
|
|
(1,386)
|
|
|
(16.1)%
|
|
Total revenues
|
497,135
|
|
|
601,326
|
|
|
(104,191)
|
|
|
(17.3)%
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Hotel operating expenses
|
278,730
|
|
|
284,198
|
|
|
(5,468)
|
|
|
(1.9)%
|
|
General and administrative expenses
|
47,041
|
|
|
45,314
|
|
|
1,727
|
|
|
3.8%
|
|
Depreciation and amortization
|
101,562
|
|
|
97,795
|
|
|
3,767
|
|
|
3.9%
|
|
Impairment of long-lived assets
|
675
|
|
|
—
|
|
|
675
|
|
|
n/a
|
|
|
428,008
|
|
|
427,307
|
|
|
701
|
|
|
0.2%
|
|
Other expenses from franchised and managed properties
|
8,290
|
|
|
9,643
|
|
|
(1,353)
|
|
|
(14.0)%
|
|
Total operating expenses
|
436,298
|
|
|
436,950
|
|
|
(652)
|
|
|
(0.1)%
|
|
|
|
|
|
|
|
|
|
|
Other income
|
3
|
|
|
28
|
|
|
(25)
|
|
|
(89.3)%
|
|
Income from operations
|
60,840
|
|
|
164,404
|
|
|
(103,564)
|
|
|
(63.0)%
|
|
Other non-operating expense (income)
|
401
|
|
|
(349)
|
|
|
750
|
|
|
(214.9)%
|
|
Interest expense, net
|
66,306
|
|
|
59,370
|
|
|
6,936
|
|
|
11.7%
|
|
Income before income tax (benefit) expense
|
(5,867)
|
|
|
105,383
|
|
|
(111,250)
|
|
|
(105.6)%
|
|
Income tax (benefit) expense
|
(4,942)
|
|
|
17,321
|
|
|
(22,263)
|
|
|
(128.5)%
|
|
Net (loss) income
|
(925)
|
|
|
88,062
|
|
|
(88,987)
|
|
|
(101.1)%
|
|
Net income attributable to noncontrolling interests(1)
|
(6,884)
|
|
|
(12,631)
|
|
|
5,747
|
|
|
(45.5)%
|
|
Net (loss) income attributable to Extended Stay America, Inc. common shareholders
|
$
|
(7,809)
|
|
|
$
|
75,431
|
|
|
$
|
(83,240)
|
|
|
(110.4)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________________________
(1)Noncontrolling interests in Extended Stay America, Inc. include 41% and 43% of ESH REIT’s common equity as of June 30, 2020 and 2019, respectively, and 125 shares of ESH REIT preferred stock.
The following table presents key operating metrics, including occupancy, ADR, RevPAR and hotel inventory for the Company's owned hotels for the six months ended June 30, 2020 and 2019, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
|
Number of hotels (as of June 30)
|
561
|
|
554
|
|
7
|
|
Number of rooms (as of June 30)
|
62,421
|
|
61,552
|
|
869
|
|
Occupancy
|
70.1%
|
|
75.7%
|
|
(560) bps
|
|
ADR
|
$60.07
|
|
$68.64
|
|
(12.5)%
|
|
RevPAR
|
$42.09
|
|
$51.94
|
|
(19.0)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Room revenues. Room revenues decreased by $104.3 million, or 18.0%, to $474.3 million for the six months ended June 30, 2020, compared to $578.7 million for the six months ended June 30, 2019, due to a 19.0% decrease in RevPAR as a result of a 12.5% decrease in ADR and a 560 basis point decline in occupancy due to material business disruption as a result of the COVID-19 pandemic. We anticipate that continued disruption resulting from the COVID-19 pandemic, as well as changes
in customer behavior, will result in a material adverse decrease in room revenues for the year ending December 31, 2020, compared with the year ended December 31, 2019. The length and severity of such impact is highly uncertain.
Other hotel revenues. Other hotel revenues increased by $1.7 million, or 15.1%, to $13.1 million for the six months ended June 30, 2020, compared to $11.4 million for the six months ended June 30, 2019, due to system and process improvements that improved billing efficiency as well as reimbursements received from certain third-party intermediaries.
Franchise and management fees. Franchise and management fees decreased by $0.2 million, or 6.5%, to $2.5 million for the six months ended June 30, 2020, compared to $2.7 million for the six months ended June 30, 2019, due to a decline in revenues at franchised and managed hotels due to the COVID-19 pandemic. We expect franchise and management fees to increase over time if additional franchised hotels open in the future.
Other revenues from franchised and managed properties. Other revenues from franchised and managed properties decreased by $1.4 million, or 16.1%, to $7.2 million for the six months ended June 30, 2020, compared to $8.6 million for the six months ended June 30, 2019, due to a decrease in direct reimbursable costs resulting from the termination of two management agreements in the third quarter of 2019.
Hotel operating expenses. Hotel operating expenses decreased by $5.5 million, or 1.9%, to $278.7 million for the six months ended June 30, 2020, compared to $284.2 million for the six months ended June 30, 2019. The decrease in hotel operating expenses was primarily due to declines in certain variable costs, including reservation costs of $7.1 million, credit card fees of $3.8 million, marketing costs of $2.5 million and $2.2 million in costs related to the temporary suspension of our grab-and-go breakfast. These decreases were partially offset by increases in allowance for uncollectible guest balances of $2.6 million, property insurance of $1.6 million, loss on disposal of assets of $1.6 million, hotel-level payroll expense of $1.5 million, real estate tax expense of $1.4 million and personal protective equipment and other safety related costs of $1.2 million. We currently anticipate that certain variable costs such as those noted above, as well as hotel-level payroll expense, will decrease for the year ending December 31, 2020, partially due to increases in the average length of guest stays and a continued shift to less expensive reservation channels. We expect other variable costs, such as costs incurred for personal protective equipment and other related safety measures taken in response to the COVID-19 pandemic, as well as certain fixed operating expenses, such as property insurance, to increase. The potential impact of changes in hotel operating expenses related to the COVID-19 pandemic is highly uncertain.
General and administrative expenses. General and administrative expenses increased by $1.7 million, or 3.8%, to $47.0 million for the six months ended June 30, 2020, compared to $45.3 million for the six months ended June 30, 2019, due to separation and corporate transition costs. The Company expects to defer certain general and administrative costs for the remainder of 2020 in response to the COVID-19 pandemic. As the length and severity of the COVID-19 pandemic is highly uncertain, while we expect a decline in certain general and administrative expenses, we are unable to determine the full impact for the year ending December 31, 2020.
Depreciation and amortization. Depreciation and amortization increased by $3.8 million, or 3.9%, to $101.6 million for the six months ended June 30, 2020, compared to $97.8 million for the six months ended June 30, 2019, due to a hotel acquisition and new hotel openings that occurred during the fourth quarter of 2019 and the first half of 2020.
Impairment of long-lived assets. During the six months ended June 30, 2020, we recognized an impairment charge of $0.7 million related to an undeveloped land parcel. No impairment charges were recognized during the six months ended June 30, 2019.
Other expenses from franchised and managed properties. Other expenses from franchised and managed properties decreased by $1.4 million, or 14.0%, to $8.3 million for the six months ended June 30, 2020, compared to $9.6 million for the six months ended June 30, 2019, due to a decrease in direct costs resulting from the termination of two management agreements in the third quarter of 2019. 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.
Other non-operating expense (income). During the six months ended June 30, 2020 and 2019, we recognized a foreign currency transaction loss of $0.4 million and gain of $0.3 million, respectively, related to a residual Canadian dollar-denominated deposit as a result of the prior sale of Canadian hotels.
Interest expense, net. Net interest expense increased by $6.9 million, or 11.7%, to $66.3 million for the six months ended June 30, 2020, compared to $59.4 million for the six months ended June 30, 2019, due to an increase in the Company's total debt outstanding to $3.0 billion, net of unamortized deferred financing costs and debt discounts, as of June 30, 2020, compared
to $2.4 billion, net of unamortized deferred financing costs and debt discounts, as of June 30, 2019. In March 2020, the Company borrowed $399.8 million under revolving credit facilities and in September 2019, ESH REIT issued $750.0 million of its 2027 Notes and repaid $500.0 million of the ESH REIT Term Facility. The Company’s weighted-average interest rate decreased to 4.5% as of June 30, 2020, compared to 4.8% as of June 30, 2019, due to a decline in LIBOR. Interest expense, net is expected to increase for the year ending December 31, 2020, due to the increase in total debt outstanding.
Income tax (benefit) expense. We recorded a benefit for federal, state, and foreign income taxes of $4.9 million, an effective tax rate of 84.2%, for the six months ended June 30, 2020, compared to a provision of $17.3 million, an effective tax rate of 16.4%, for the six months ended June 30, 2019. The Company’s effective rate differs from the federal statutory rate of 21% primarily due to ESH REIT’s status as a REIT under the provisions of the Internal Revenue Code and the passage of the CARES Act, which provides the Company the ability to carry back and utilize projected federal tax losses to higher tax rate years.
Results of Operations—ESH REIT
As of June 30, 2020, ESH REIT owned and leased 561 hotels, consisting of approximately 62,400 rooms. As of June 30, 2019, ESH REIT owned and leased 554 hotels, consisting of approximately 61,500 rooms.
Comparison of Three Months Ended June 30, 2020 and June 30, 2019
The following table presents ESH REIT’s results of operations for the three months ended June 30, 2020 and 2019, including the amount and percentage change in these results between the periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change ($)
|
|
Change (%)
|
|
Revenues- Rental revenues from Extended Stay America, Inc.
|
$
|
119,486
|
|
|
$
|
118,102
|
|
|
$
|
1,384
|
|
|
1.2%
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Hotel operating expenses
|
23,289
|
|
|
21,937
|
|
|
1,352
|
|
|
6.2%
|
|
General and administrative expenses
|
3,769
|
|
|
3,544
|
|
|
225
|
|
|
6.3%
|
|
Depreciation and amortization
|
50,127
|
|
|
48,132
|
|
|
1,995
|
|
|
4.1%
|
|
Impairment of long-lived assets
|
675
|
|
|
—
|
|
|
675
|
|
|
n/a
|
|
Total operating expenses
|
77,860
|
|
|
73,613
|
|
|
4,247
|
|
|
5.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
41,626
|
|
|
44,489
|
|
|
(2,863)
|
|
|
(6.4)%
|
|
Other non-operating income
|
(245)
|
|
|
(134)
|
|
|
(111)
|
|
|
(82.8)%
|
|
Interest expense, net
|
33,197
|
|
|
30,267
|
|
|
2,930
|
|
|
9.7%
|
|
Income before income tax expense
|
8,674
|
|
|
14,356
|
|
|
(5,682)
|
|
|
(39.6)%
|
|
Income tax expense
|
9
|
|
|
7
|
|
|
2
|
|
|
28.6%
|
|
Net income
|
$
|
8,665
|
|
|
$
|
14,349
|
|
|
$
|
(5,684)
|
|
|
(39.6)%
|
Rental revenues from Extended Stay America, Inc. Rental revenues increased by $1.4 million, or 1.2%, to $119.5 million for the three months ended June 30, 2020, compared to $118.1 million for the three months ended June 30, 2019. The increase in rental revenues was due to rent income related to a hotel acquisition and newly completed hotels during the fourth quarter of 2019 and the first half of 2020. No variable rental revenues were recognized during the three months ended June 30, 2020, as minimum percentage rental revenue thresholds were not achieved during the period. Variable rental revenues of $0.1 million were recognized during the three months ended June 30, 2019. Variable rental revenues are expected to materially decrease for the year ended December 31, 2020 as a result of a decline in Operating Lessee hotel revenues expected due to business disruption and changes in customer behavior resulting from the COVID-19 pandemic.
Hotel operating expenses. Hotel operating expenses increased by $1.4 million, or 6.2%, to $23.3 million for the three months ended June 30, 2020, compared to $21.9 million for the three months ended June 30, 2019. This increase was primarily due to increases in real estate tax expense of $0.7 million and property insurance of $0.5 million.
General and administrative expenses. General and administrative expenses increased by $0.2 million, or 6.3%, to $3.8 million for the three months ended June 30, 2020, compared to $3.5 million for the three months ended June 30, 2019, due to an increase in professional fees.
Depreciation and amortization. Depreciation and amortization increased by $2.0 million, or 4.1%, to $50.1 million for the three months ended June 30, 2020, compared to $48.1 million for the three months ended June 30, 2019, due to a hotel acquisition and newly completed hotels during the fourth quarter of 2019 and first half of 2020.
Impairment of long-lived assets. During the three months ended June 30, 2020, ESH REIT recognized an impairment charge of $0.7 million related to an undeveloped land parcel. No impairment charges were recognized during the three months ended June 30, 2019.
Other non-operating income. During the three months ended June 30, 2020 and 2019, ESH REIT recognized a foreign currency transaction gain of $0.2 million and $0.1 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 increased by $2.9 million, or 9.7%, to $33.2 million for the three months ended June 30, 2020, compared to $30.3 million for the three months ended June 30, 2019, due to an increase in ESH REIT's total debt outstanding to $3.0 billion, net of unamortized deferred financing costs and debt discounts, as of June 30, 2020 compared to $2.4 billion, net of unamortized deferred financing costs and debt discounts, as of June 30, 2019. In March 2020, ESH REIT borrowed $350.0 million under its revolving credit facility and in September 2019, ESH REIT issued $750.0 million of its 2027 Notes and repaid $500.0 million of the ESH REIT Term Facility. ESH REIT’s weighted-average interest rate decreased to 4.5% as of June 30, 2020, compared to 4.7% as of June 30, 2019, due to a decline in LIBOR. Interest expense, net is expected to increase due to the increase in total debt outstanding.
Income tax expense. ESH REIT’s effective income tax rate remained consistent at less than 0.1% for each of the three months ended June 30, 2020 and 2019. ESH REIT’s effective rate differs from the federal statutory rate of 21% primarily due to ESH REIT’s status as a REIT under the provisions of the Code.
Comparison of Six Months Ended June 30, 2020 and June 30, 2019
The following table presents ESH REIT’s results of operations for the six months ended June 30, 2020 and 2019, including the amount and percentage change in these results between the periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Change ($)
|
|
Change (%)
|
|
Revenues- Rental revenues from Extended Stay America, Inc.
|
$
|
238,676
|
|
|
$
|
236,107
|
|
|
$
|
2,569
|
|
|
1.1%
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Hotel operating expenses
|
47,816
|
|
|
43,245
|
|
|
4,571
|
|
|
10.6%
|
|
General and administrative expenses
|
7,936
|
|
|
7,525
|
|
|
411
|
|
|
5.5%
|
|
Depreciation and amortization
|
99,715
|
|
|
95,999
|
|
|
3,716
|
|
|
3.9%
|
|
Impairment of long-lived assets
|
675
|
|
|
—
|
|
|
675
|
|
|
n/a
|
|
Total operating expenses
|
156,142
|
|
|
146,769
|
|
|
9,373
|
|
|
6.4%
|
|
|
|
|
|
|
|
|
|
|
Other income
|
—
|
|
|
15
|
|
|
(15)
|
|
|
(100.0)%
|
|
Income from operations
|
82,534
|
|
|
89,353
|
|
|
(6,819)
|
|
|
(7.6)%
|
|
Other non-operating expense (income)
|
315
|
|
|
(273)
|
|
|
588
|
|
|
215.4%
|
|
Interest expense, net
|
65,625
|
|
|
60,201
|
|
|
5,424
|
|
|
9.0%
|
|
Income before income tax expense
|
16,594
|
|
|
29,425
|
|
|
(12,831)
|
|
|
(43.6)%
|
|
Income tax expense
|
11
|
|
|
10
|
|
|
1
|
|
|
10.0%
|
|
Net income
|
$
|
16,583
|
|
|
$
|
29,415
|
|
|
$
|
(12,832)
|
|
|
(43.6)%
|
Rental revenues from Extended Stay America, Inc. Rental revenues increased by $2.6 million, or 1.1%, to $238.7 million for the six months ended June 30, 2020, compared to $236.1 million for the six months ended June 30, 2019. The increase in rental revenues was due to rent income related to a hotel acquisition and newly completed hotels during the fourth quarter of 2019 and the first half of 2020. No variable rental revenues were recognized during the six months ended June 30, 2020, as minimum percentage rental revenue thresholds were not achieved during the period. Variable rental revenues of $0.1 million were recognized during the six months ended June 30, 2019. Variable rental revenues are expected to materially decrease for
the year ending December 31, 2020 as a result of a decline in Operating Lessee hotel revenues expected due to business disruption and changes in customer behavior resulting from the COVID-19 pandemic.
Hotel operating expenses. Hotel operating expenses increased by $4.6 million, or 10.6%, to $47.8 million for the six months ended June 30, 2020, compared to $43.2 million for the six months ended June 30, 2019. This increase was primarily due to increases in loss on disposal of assets of $1.6 million, property insurance and related costs of $1.6 million and real estate tax expense of $1.4 million.
General and administrative expenses. General and administrative expenses increased by $0.4 million, or 5.5%, to $7.9 million for the six months ended June 30, 2020, compared to $7.5 million for the six months ended June 30, 2019, due to an increase in reimbursable costs paid to the Corporation.
Depreciation and amortization. Depreciation and amortization increased by $3.7 million, or 3.9%, to $99.7 million for the six months ended June 30, 2020, compared to $96.0 million for the six months ended June 30, 2019, due to a hotel acquisition and newly completed hotels during the fourth quarter of 2019 and first half of 2020.
Impairment of long-lived assets. During the six months ended June 30, 2020, ESH REIT recognized an impairment charge of $0.7 million related to an undeveloped land parcel. No impairment charges were recognized during the six months ended June 30, 2019.
Other non-operating expense (income). During the six months ended June 30, 2020 and 2019, ESH REIT recognized a foreign currency transaction loss of $0.3 million and gain of $0.3 million, respectively, related to a residual Canadian dollar-denominated deposit as a result of the prior sale of Canadian hotels.
Interest expense, net. Net interest expense increased by $5.4 million, or 9.0%, to $65.6 million for the six months ended June 30, 2020, compared to $60.2 million for the six months ended June 30, 2019, due to an increase in ESH REIT's total debt outstanding to $3.0 billion, net of unamortized deferred financing costs and debt discounts, as of June 30, 2020 compared to $2.4 billion, net of unamortized deferred financing costs and debt discounts, as of June 30, 2019. In March 2020, ESH REIT borrowed $350.0 million under its revolving credit facility and in September 2019, ESH REIT issued $750.0 million of its 2027 Notes and repaid $500.0 million of the ESH REIT Term Facility. ESH REIT’s weighted-average interest rate decreased to 4.5% as of June 30, 2020, compared to 4.7% as of June 30, 2019, due to a decline in LIBOR. Interest expense, net is expected to increase for the year ending December 31, 2020, due to the increase in total debt outstanding.
Income tax expense. ESH REIT’s effective income tax rate remained consistent at less than 0.1% for each of the six months ended June 30, 2020 and 2019. ESH REIT’s effective rate differs from the federal statutory rate of 21% primarily due to ESH REIT’s status as a REIT under the provisions of the Code.
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 (loss) income excluding: (1) income tax (benefit) expense; (2) net interest expense; (3) other non-operating (income) expense; (4) other income; (5) gain on sale of hotel properties; (6) impairment of long-lived assets; (7) depreciation and amortization; (8) general and administrative expenses; (9) loss on disposal of assets; (10) franchise and management fees; and (11) other expenses from franchised and managed properties, net of other revenues. 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 (loss) 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 and six months ended June 30, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Net (loss) income
|
$
|
(8,770)
|
|
|
$
|
59,658
|
|
|
$
|
(925)
|
|
|
$
|
88,062
|
|
|
Income tax (benefit) expense
|
(6,052)
|
|
|
11,198
|
|
|
(4,942)
|
|
|
17,321
|
|
|
Interest expense, net
|
33,621
|
|
|
29,766
|
|
|
66,306
|
|
|
59,370
|
|
|
Other non-operating (income) expense
|
(302)
|
|
|
(171)
|
|
|
401
|
|
|
(349)
|
|
|
Other income
|
(1)
|
|
|
(1)
|
|
|
(3)
|
|
|
(28)
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of long-lived assets
|
675
|
|
|
—
|
|
|
675
|
|
|
—
|
|
|
Depreciation and amortization
|
51,042
|
|
|
49,017
|
|
|
101,562
|
|
|
97,795
|
|
|
General and administrative expenses
|
23,103
|
|
|
22,287
|
|
|
47,041
|
|
|
45,314
|
|
|
Loss on disposal of assets (1)
|
1,636
|
|
|
2,001
|
|
|
4,979
|
|
|
3,377
|
|
|
Franchise and management fees
|
(1,218)
|
|
|
(1,447)
|
|
|
(2,497)
|
|
|
(2,672)
|
|
|
System services loss, net
|
638
|
|
|
470
|
|
|
1,055
|
|
|
1,022
|
|
|
Hotel Operating Profit
|
$
|
94,372
|
|
|
$
|
172,778
|
|
|
$
|
213,652
|
|
|
$
|
309,212
|
|
|
|
|
|
|
|
|
|
|
|
Room revenues
|
$
|
219,851
|
|
|
$
|
311,614
|
|
|
$
|
474,315
|
|
|
$
|
578,660
|
|
|
Other hotel revenues
|
6,320
|
|
|
6,070
|
|
|
13,088
|
|
|
11,373
|
|
|
Total room and other hotel revenues
|
$
|
226,171
|
|
|
$
|
317,684
|
|
|
$
|
487,403
|
|
|
$
|
590,033
|
|
|
|
|
|
|
|
|
|
|
|
Hotel Operating Margin
|
41.7
|
%
|
|
54.4
|
%
|
|
43.8
|
%
|
|
52.4
|
%
|
________________________
(1) Included in hotel operating expenses in the condensed consolidated statements of operations.
EBITDA and Adjusted EBITDA
EBITDA is defined as net (loss) income excluding: (1) net interest expense; (2) income tax (benefit) expense; and (3) depreciation and amortization. EBITDA is a commonly used measure of performance in many industries. The Company believes that EBITDA provides useful information to investors regarding our operating performance as it helps us and investors evaluate the ongoing performance of our hotels and our franchise and management operations after removing the impact of our capital structure, primarily net interest expense, our corporate structure, primarily income tax expense, and our asset base, primarily depreciation and amortization. We believe that the use of EBITDA facilitates comparisons between us and other lodging companies, hotel owners and capital-intensive companies. Additionally, EBITDA is a measure that is used by management in our annual budgeting and compensation planning processes.
The Company uses Adjusted EBITDA when evaluating our performance because we believe the adjustment for certain additional items, described below, provides useful supplemental information to investors regarding ongoing operating performance and that the presentation of Adjusted EBITDA, when combined with the U.S. GAAP presentation of net (loss) income, net (loss) income per share and cash flow provided by operating activities, is beneficial to the overall understanding of ongoing operating performance. We adjust EBITDA for the following items where applicable for each period presented, and refer to this measure as Adjusted EBITDA:
•Equity-based compensation—We exclude charges related to equity-based compensation expense with respect to awards issued under long-term incentive compensation plans to employees and certain directors.
•Impairment of long-lived assets—We exclude the effect of impairment losses recorded on property and equipment and intangible assets, as we believe they are not reflective of ongoing or future operating performance.
•Gain on sale of hotel properties, net—We exclude the net gain on sale of hotel properties, as we believe it is not reflective of ongoing or future operating performance.
•System services (profit) loss, net—We exclude direct and indirect reimbursable expenses from franchised and managed properties, net of other revenues, because although the timing of system service fee revenues will typically not align with expenses incurred to operate these programs, the Company manages system services to break even over time. This policy was implemented on January 1, 2020, due to the growth of our franchise business; no adjustments have been made to prior periods.
•Other expenses—We exclude the effect of other expenses or income that we do not consider reflective of ongoing or future operating performance, including the following: loss on disposal of assets, non-operating expense (income), including foreign currency transaction costs, and certain costs associated with acquisitions, dispositions and/or capital transactions.
EBITDA and Adjusted EBITDA as presented may not be comparable to similar measures calculated by other companies. This information should not be considered as an alternative to net (loss) 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 (loss) income to EBITDA and Adjusted EBITDA for the Company for the three and six months ended June 30, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Net (loss) income
|
$
|
(8,770)
|
|
|
$
|
59,658
|
|
|
$
|
(925)
|
|
|
$
|
88,062
|
|
|
Interest expense, net
|
33,621
|
|
|
29,766
|
|
|
66,306
|
|
|
59,370
|
|
|
Income tax (benefit) expense
|
(6,052)
|
|
|
11,198
|
|
|
(4,942)
|
|
|
17,321
|
|
|
Depreciation and amortization
|
51,042
|
|
|
49,017
|
|
|
101,562
|
|
|
97,795
|
|
|
EBITDA
|
69,841
|
|
|
149,639
|
|
|
162,001
|
|
|
262,548
|
|
|
Equity-based compensation
|
1,864
|
|
|
2,147
|
|
|
2,990
|
|
|
4,255
|
|
|
Impairment of long-lived assets
|
675
|
|
|
—
|
|
|
675
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
System services loss, net (1)
|
638
|
|
|
—
|
|
|
1,055
|
|
|
—
|
|
|
Other expense (2)
|
1,335
|
|
|
1,857
|
|
|
5,381
|
|
|
3,151
|
|
|
Adjusted EBITDA
|
$
|
74,353
|
|
|
$
|
153,643
|
|
|
$
|
172,102
|
|
|
$
|
269,954
|
|
________________________
(1)In light of the growth of our franchise business and in order to enhance comparability, effective January 1, 2020, the Company adopted the practice of other lodging companies with franchise businesses of excluding system services (profit) loss, net from Adjusted EBITDA; no adjustments have been made to prior period results. System services loss, net, for the three and six months ended June 30, 2019, was $0.5 million and $1.0 million, respectively.
(2)Includes loss on disposal of assets, non-operating (income) expense, including foreign currency transaction costs, and certain costs associated with dispositions. Loss on disposal of assets totaled $1.6 million, $2.0 million, $5.0 million and $3.4 million, respectively.
FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share
FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share are metrics used by management to assess our operating performance and profitability and to facilitate comparisons between us and other hotel and/or real estate companies that include a REIT as part of their legal entity structure. Funds from Operations (“FFO”) is defined by the National Association of Real Estate Investment Trusts (“NAREIT”) as net income (computed in accordance with U.S. GAAP), excluding gains from sales of real estate, impairment charges, the cumulative effect of changes in accounting principle, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures following the same approach. FFO is a commonly used measure among other hotel and/or real estate companies that include a REIT as a part of their legal entity structure. Since real estate depreciation and amortization, impairment of long-lived assets and gains from sales of hotel properties 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 (Loss) Income, Adjusted Paired Share (Loss) Income and Adjusted Paired Share (Loss) Income per diluted Paired Share, as described below, our reconciliation of FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share begins with net (loss) 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 (loss) income and net (loss) 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.
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 (loss) income of the Company, the Corporation, or ESH REIT, net (loss) income per share of common stock of the Corporation, net income per share of Class A or Class B common stock of ESH REIT or any other measure of the Company, the Corporation or ESH REIT calculated in accordance with U.S. GAAP. Real estate related depreciation and amortization expense will continue to be incurred and is not reflected in FFO, Adjusted FFO or Adjusted FFO per diluted Paired Share. Additionally, impairment charges, gains or losses on sales of hotel properties and other charges or income incurred in accordance with U.S. GAAP may occur and are not reflected in FFO, Adjusted FFO or Adjusted FFO per diluted Paired Share. Management separately considers the impact of these excluded items to the extent they are material to operating decisions and assessments of operating
performance. The Company’s consolidated statements of operations include these items, all of which should be considered when evaluating our performance, in addition to our non-GAAP financial measures.
We believe that FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share are not meaningful or useful measures for ESH REIT on a stand-alone basis due to the fact that a Paired Share represents an investment in the Company, as a single, consolidated enterprise, which is reflected in the consolidated Company results of operations; therefore, we believe these performance measures are meaningful for the consolidated Company only.
The following table provides a reconciliation of net (loss) 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 and six months ended June 30, 2020 and 2019 (in thousands, except per Paired Share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Net (loss) income per Extended Stay America, Inc. common share - diluted
|
$
|
(0.07)
|
|
|
$
|
0.28
|
|
|
$
|
(0.04)
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Extended Stay America, Inc. common shareholders
|
$
|
(12,363)
|
|
|
$
|
53,497
|
|
|
$
|
(7,809)
|
|
|
$
|
75,431
|
|
|
Noncontrolling interests attributable to Class B common shares of ESH REIT
|
3,589
|
|
|
6,157
|
|
|
6,876
|
|
|
12,623
|
|
|
Real estate depreciation and amortization
|
49,429
|
|
|
47,655
|
|
|
98,310
|
|
|
95,088
|
|
|
Impairment of long-lived assets
|
675
|
|
|
—
|
|
|
675
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect of adjustments to net (loss) income attributable to Extended Stay America, Inc. common shareholders
|
(10,822)
|
|
|
(7,482)
|
|
|
(12,430)
|
|
|
(14,882)
|
|
|
FFO
|
30,508
|
|
|
99,827
|
|
|
85,622
|
|
|
168,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted FFO
|
$
|
30,508
|
|
|
$
|
99,827
|
|
|
$
|
85,622
|
|
|
$
|
168,260
|
|
|
Adjusted FFO per Paired Share - diluted
|
$
|
0.17
|
|
|
$
|
0.53
|
|
|
$
|
0.48
|
|
|
$
|
0.89
|
|
|
Weighted Average Paired Shares outstanding - diluted
|
177,844
|
|
|
188,813
|
|
|
178,008
|
|
|
188,695
|
|
Paired Share (Loss) Income, Adjusted Paired Share (Loss) Income and Adjusted Paired Share (Loss) Income per diluted Paired Share
We present Paired Share (Loss) Income, Adjusted Paired Share (Loss) Income and Adjusted Paired Share (Loss) 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 (loss) 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 (Loss) Income, Adjusted Paired Share (Loss) Income and Adjusted Paired Share (Loss) Income per diluted Paired Share represent useful measures to holders of our Paired Shares.
Paired Share (Loss) Income is defined as the sum of net (loss) income attributable to Extended Stay America, Inc. common shareholders and noncontrolling interests attributable to Class B common shares of ESH REIT. Adjusted Paired Share (Loss) Income is defined as Paired Share (Loss) Income adjusted for items that, net of income taxes, we believe are not reflective of ongoing or future operating performance. We adjust Paired Share (Loss) 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, system services (profit) loss, net and other expenses such as loss on disposal of assets, non-operating expense (income), including foreign currency transaction costs and certain costs associated with acquisitions, dispositions and/or capital transactions. With the exception of equity-based compensation, an ongoing charge, and debt modification and extinguishment costs, these adjustments (other than the effect of income taxes) are
the same as those used in the reconciliation of net (loss) income calculated in accordance with U.S. GAAP to EBITDA and Adjusted EBITDA.
Adjusted Paired Share (Loss) Income per diluted Paired Share is defined as Adjusted Paired Share (Loss) 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 (Loss) 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 (Loss) Income, Adjusted Paired Share (Loss) Income and Adjusted Paired Share (Loss) Income per diluted Paired Share provide meaningful indicators of the Company’s operating performance in addition to separate and/or individual analyses of net (loss) income attributable to common shareholders of the Corporation and net (loss) 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 (Loss) Income, Adjusted Paired Share (Loss) Income and Adjusted Paired Share (Loss) Income per diluted Paired Share should not be considered as an alternative to net (loss) income of the Company, the Corporation or ESH REIT, net (loss) 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 (Loss) Income, Adjusted Paired Share (Loss) Income and Adjusted Paired Share (Loss) Income per diluted Paired Share are not meaningful or useful measures for ESH REIT on a stand-alone basis due to the fact that a Paired Share represents an investment in the Company, as a single, consolidated enterprise, which is reflected in the consolidated Company results of operations; therefore, we believe these performance measures are meaningful for the consolidated Company only.
The following table provides a reconciliation of net (loss) income attributable to Extended Stay America, Inc. common shareholders to Paired Share (Loss) Income, Adjusted Paired Share (Loss) Income and Adjusted Paired Share (Loss) Income per diluted Paired Share for the three and six months ended June 30, 2020 and 2019 (in thousands, except per Paired Share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
Net (loss) income per Extended Stay America, Inc. common share - diluted
|
$
|
(0.07)
|
|
|
$
|
0.28
|
|
|
$
|
(0.04)
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Extended Stay America, Inc. common shareholders
|
$
|
(12,363)
|
|
|
$
|
53,497
|
|
|
$
|
(7,809)
|
|
|
$
|
75,431
|
|
|
|
Noncontrolling interests attributable to Class B common shares of ESH REIT
|
3,589
|
|
|
6,157
|
|
|
6,876
|
|
|
12,623
|
|
|
|
Paired Share (Loss) Income
|
(8,774)
|
|
|
59,654
|
|
|
(933)
|
|
|
88,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of long-lived assets
|
675
|
|
|
—
|
|
|
675
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System services loss, net(1)
|
638
|
|
|
—
|
|
|
1,055
|
|
|
—
|
|
|
|
Other expense(2)
|
1,335
|
|
|
1,857
|
|
|
5,381
|
|
|
3,151
|
|
|
|
Tax effect of adjustments to Paired Share (Loss) Income
|
(573)
|
|
|
(291)
|
|
|
(720)
|
|
|
(493)
|
|
|
|
Adjusted Paired Share (Loss) Income
|
$
|
(6,699)
|
|
|
$
|
61,220
|
|
|
$
|
5,458
|
|
|
$
|
90,712
|
|
|
|
Adjusted Paired Share (Loss) Income per Paired Share – diluted
|
$
|
(0.04)
|
|
|
$
|
0.32
|
|
|
$
|
0.03
|
|
|
$
|
0.48
|
|
|
|
Weighted average Paired Shares outstanding – diluted
|
177,551
|
|
|
188,813
|
|
|
178,008
|
|
|
188,695
|
|
|
_________________________
(1)In light of the growth of our franchise business and in order to enhance comparability, effective January 1, 2020, the Company adopted the practice of other lodging companies with franchise businesses of excluding system services (profit) loss, net from Adjusted Paired Share Income; no adjustments have been made to prior period results. System services loss, net, for the three and six months ended June 30, 2019, was $0.5 million and $1.0 million, respectively.
(2)Includes loss on disposal of assets, non-operating (income) expense, including foreign currency transaction costs, and certain costs associated with dispositions. Loss on disposal of assets totaled $1.6 million, $2.0 million, $5.0 million and $3.4 million, respectively.
Liquidity and Capital Resources
Company Overview
On a consolidated basis, 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 $110.3 million and $204.1 million for the six months ended June 30, 2020 and 2019, respectively. Similar to our decreases in RevPAR and Adjusted EBITDA, the decrease in our cash flow from operations was due to the effects of the COVID-19 pandemic. We expect cash flow from operations to materially decrease for the year ended December 31, 2020 due to macroeconomic conditions related to the COVID-19 pandemic. Actual results are subject to a high degree of uncertainty due to the volatility of macroeconomic trends and the evolving nature of the pandemic.
Current liquidity requirements consist primarily of funds necessary to pay for (i) hotel operating expenses, (ii) capital expenditures, including capital expenditures incurred to complete the construction of new hotels and select ongoing hotel renovations, (iii) investments in franchise, management and other fee-based programs, (iv) general and administrative expenses, (v) debt service obligations, including interest expense, (vi) income taxes, (vii) Corporation and required ESH REIT distributions and (viii) certain other growth and strategic initiatives (see “—Overview”). We expect to fund our current liquidity requirements from a combination of cash on hand, cash flow generated from operations 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 has given rise to uncertainty with respect to our current liquidity and cash flow generation. As discussed above, in response to the current environment, we have chosen to delay the execution of certain of our business strategies and reduce operating costs and certain capital expenditures in order to preserve liquidity. In March 2020, the Company drew the $399.8 million available borrowing capacity under its revolving credit facilities as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic. See “Item 1A. Risk Factors - The continuing crisis resulting from the spread of COVID-19 could negatively impact our current liquidity position, limit or restrict our ability to access new sources of capital and our ability to maintain compliance with the financial covenants and other terms of the agreements governing our existing indebtedness."
Long-term liquidity requirements consist of funds necessary to (i) make future hotel renovations (ii) construct new Extended Stay America-branded hotels, (iii) acquire additional hotel properties and/or other companies, (iv) repurpose or rebuild certain existing hotels (v) execute our other growth and strategic initiatives, (vi) pay Corporation and required ESH REIT distributions, (vii) repay and/or refinance outstanding amounts under our existing debt obligations, including our revolving credit facilities 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 related to our debt obligations.
With respect to our long-term liquidity requirements, specifically our ability to refinance our existing outstanding debt obligations, we cannot assure you that the Corporation and/or ESH REIT will be able to refinance any debt on attractive terms at or before maturity, on commercially reasonable terms or at all, or the timing of any such refinancing. We expect to meet our long-term liquidity requirements through various sources of capital, including future debt financings or equity issuances by the Corporation and/or ESH REIT, existing working capital, cash flow generated from operations and, in certain instances, proceeds from asset dispositions. However, there are a number of factors that may have a material adverse effect on our ability to access these capital sources, including the current and future state of overall capital and credit markets generally and as a result of the COVID-19 pandemic, our degree of leverage, which substantially increased during the six months ended June 30, 2020 with the drawdown of approximately $400 million of borrowing capacity under our revolving credit facilities, the value of our unencumbered assets, borrowing restrictions imposed by existing or prospective lenders, general market conditions for the lodging industry, our operating performance and liquidity and market perceptions about us. The success of our business strategies will depend, in part, on our ability to access these various capital sources. There can be no assurance that we will be able to raise any such financing on terms acceptable to us or at all.
Business Environment. The COVID-19 pandemic has had, and is expected to continue to have, a material adverse effect on the Company's cash flows from operations. Although the Company generated positive cash flow from operations, net of interest and capital expenditures, during the month ended July 31, 2020, the length and severity of the economic impact related to the COVID-19 pandemic and any future recovery remains uncertain. See "Part I. Item 1A. Risk Factors" in the 2019 Form 10-K, as well as "Item 1A. Risk Factors" below. Although we believe there are opportunities to serve additional extended stay guests in the current environment, including new demand from doctors and other medical staff that have traveled throughout the
U.S. to combat the COVID-19 pandemic, it is difficult to predict when the pre-pandemic demand and pricing for our hotels will resume, if at all.
Cash Balances. The Company had unrestricted cash and cash equivalents of $667.6 million and $346.8 million at June 30, 2020 and December 31, 2019, respectively. Based upon the current level of operations, management believes that our cash flow from operations, together with our cash balances, including the $399.8 million of borrowings by the Company in March 2020 under its revolving credit facilities, 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 further 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. The Company’s continued compliance with financial covenants under its debt obligations could be impacted by current or future economic conditions associated with the COVID-19 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.
In May 2020, the Company entered into an amendment to the Corporation Revolving Credit Facility and 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 has been 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.
On August 6, 2020, ESH REIT repaid the $350.0 million outstanding balance under the ESH REIT Revolving Credit Facility. As of August 10, 2020, the outstanding balance under the facility was $0.
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 and “Item 1A. Risk Factors - The continuing crisis resulting from the spread of COVID-19 could negatively impact our current liquidity position, limit or restrict our ability to access new sources of capital and our ability to maintain compliance with the financial covenants and other terms of the agreements governing our existing indebtedness."
Paired Share Repurchase Program. In December 2015, the Boards of Directors of the Corporation and ESH REIT authorized a combined Paired Share repurchase program. As a result of several increases in authorized amounts and program extensions, the combined Paired Share repurchase program currently authorizes the Corporation and ESH REIT to purchase up to $550 million in Paired Shares through December 31, 2020. Repurchases may be made at management’s discretion from time to time in the open market, in privately negotiated transactions or by other means (including through Rule 10b5-1 trading plans). As of June 30, 2020, 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. While the Company may continue to repurchase Paired Shares at management's discretion, due to the COVID-19 pandemic, we believe it is in the Company's best interest to preserve current liquidity for business and operational needs and, thus, we do not expect to make any repurchases of Paired Shares in the foreseeable future.
Distributions. On August 10, 2020, the Board of Directors of ESH REIT declared a cash distribution of $0.01 per Class A and Class B common share for the second quarter of 2020 payable on September 8, 2020 to shareholders of record as of August 25, 2020.
The following table outlines distributions declared or paid to date in 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Record Date
|
|
Date Paid/Payable
|
|
ESH REIT Distribution
|
|
Corporation Distribution
|
|
Total Distribution
|
|
2/26/2020
|
|
3/12/2020
|
|
3/26/2020
|
|
$0.14
|
|
$0.09
|
|
$0.23
|
|
5/6/2020
|
|
5/21/2020
|
|
6/4/2020
|
|
$0.01
|
|
$—
|
|
$0.01
|
|
8/10/2020
|
|
8/25/2020
|
|
9/8/2020
|
|
$0.01
|
|
$—
|
|
$0.01
|
For the remainder of 2020, due to the impact of the COVID-19 pandemic on current and long-term liquidity, we intend to decrease our prior distribution rate of $0.23 per Paired Share per quarter, subject to continuing compliance with the
requirements to qualify and maintain the REIT status of ESH REIT and our ongoing interest in delivering returns to our shareholders. We continue to monitor each of the preceding factors and expect further potential changes in our distribution amounts in each of the third and fourth quarters of 2020.
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 June 30, 2020, represents 59% of the outstanding common stock of ESH REIT. Distribution income from ESH REIT declined significantly during the second quarter of 2020 as a result of the business impact of the COVID-19 pandemic and we expect such decline to continue for several quarters. Distributions are subject to a high degree of uncertainty due to the volatility of macroeconomic trends and 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. In March 2020, in response to the COVID-19 pandemic and the resulting macroeconomic volatility and economic impact, the Corporation fully drew the available capacity under the Corporation Revolving Credit Facility and borrowed $49.8 million to preserve flexibility and its current and long-term liquidity.
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, management 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 Company has taken steps to reduce both general and administrative and hotel operating expenses in order to preserve current liquidity.
The Corporation’s long-term liquidity requirements include the repayment of outstanding amounts under the Corporation Revolving Credit Facility, which was fully drawn in March 2020, 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 on the Corporation’s debt obligations.
The Corporation may continue to pay distributions on its common stock to meet a portion of our Paired Share distributions. The Corporation’s ability to pay distributions on its common stock is dependent upon a number of factors, including but not limited to, its results of operations, net (loss) income, liquidity, cash flows, financial condition or prospects, economic conditions, all of which have been negatively impacted as a result of the COVID-19 pandemic, as well the ability to effectively execute certain tax planning strategies, compliance with applicable law, the receipt of distributions from ESH REIT in respect of the Class A common stock, level of indebtedness, capital requirements, contractual restrictions, restrictions in any existing and future debt agreements of the Corporation and ESH REIT and other factors. The payment of future distributions will continue to be at the discretion of the Corporation’s Board of Directors. Due to the impact of the COVID-19 pandemic, for the remainder of 2020, the Corporation expects that such distributions will be materially reduced in order to preserve current and long-term liquidity and, in light of the unknown duration and severity of the COVID-19 pandemic, the Corporation will continue to approach its future capital allocation, including returning capital to its investors through dividends, share repurchases and debt retirement, with the goal of balancing the need to preserve cash and maintain liquidity.
In July 2020, the Corporation, as borrower, and ESH REIT, as lender, entered into an unsecured credit facility (the "Corporation Intercompany Facility"). Under the Corporation Intercompany Facility, the Corporation may borrow up to $150.0 million. 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 in July 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 August 10, 2020, the outstanding balance under the facility was $0.
ESH REIT may in the future 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, management believes that the Corporation’s cash position and cash flow generated from operations will be adequate to meet all the Corporation’s funding requirements and business objectives for the foreseeable future.
ESH REIT
ESH REIT’s primary source of liquidity is rental revenues derived from leases. The leases expire in October 2023, and at such time, we expect minimum and percentage rents to be adjusted to reflect then-current market terms. Percentage rents are expected to materially decrease for the year ending December 31, 2020, as a result of a decline in Operating Lessee hotel revenues expected due to macroeconomic conditions related to the COVID-19 pandemic and may continue to decline in future years. Current and future results are subject to a high degree of uncertainty due to the volatility of macroeconomic trends and the evolving nature of the pandemic. In March 2020, as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic, ESH REIT fully drew the available capacity of $350.0 million under the ESH REIT Revolving Credit Facility. On August 6, 2020, ESH REIT repaid the $350.0 million outstanding balance under the ESH REIT Revolving Credit Facility. As of August 10, 2020, the outstanding balance under the facility was $0.
ESH REIT’s current liquidity requirements include funds necessary to pay (i) fixed costs associated with ownership of hotel properties, (ii) debt service obligations, including interest expense, and with respect to the ESH REIT Term Facility, scheduled principal payments on outstanding borrowings, (iii) real estate tax expense, (iv) property insurance expense, (v) general and administrative expense, including administrative service costs reimbursed to the Corporation, (vi) capital expenditures, including those capital expenditures incurred to perform hotel renovations, construct new hotels and acquire additional hotel properties and/or other lodging companies, (vii) 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, (ii) repurpose and/or rebuild certain of ESH REIT’s existing hotel properties, (iii) construct new Extended Stay America-branded owned hotels, (iv) acquire additional hotel properties and/or other lodging companies, (v) pay required REIT distributions, (vi) fund draws made by the Corporation on the Corporation Intercompany Facility, (vii) repay outstanding amounts under its revolving credit facility and (viii) 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. To the extent distributions in respect of the Class B common stock of ESH REIT are not sufficient to meet our expected Paired Share distributions, Paired Share distributions may be completed through distributions in respect of the common stock of the Corporation, as they have been in certain prior periods, using funds distributed to the Corporation in respect of the Class A common stock of ESH REIT, after allowance for tax, if any, on those funds.
In light of the unknown duration and severity of the COVID-19 pandemic, ESH REIT will continue to approach its future capital allocation, including returning capital to its shareholders (including the Corporation) through dividends, share repurchases and debt retirement, with the goal of balancing the need to preserve cash, maintain liquidity as well as compliance with REIT distribution rules.
We expect that ESH REIT will need to refinance all or a portion of its outstanding debt, including the 2025 Notes, the ESH REIT Credit Facilities and the 2027 Notes, on or before maturity. See Note 7 to the condensed consolidated financial statements of ESH Hospitality, Inc., included in Item 1 of this quarterly report on Form 10-Q, for additional detail on ESH
REIT’s debt obligations. We cannot assure you that ESH REIT will be able to refinance any of its debt on attractive terms at or before maturity, on commercially reasonable terms or at all.
In August 2016, ESH REIT, as borrower, and the Corporation, as lender, entered into an unsecured intercompany credit facility, as may be amended and supplemented from time to time (the “ESH REIT Intercompany Facility”). 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 June 30, 2020, the outstanding balance under the ESH REIT Intercompany Facility was $0.
From time to time, the Corporation may return additional cash to ESH REIT in order for ESH REIT to pay for or fund (i) its current and long-term liquidity requirements, (ii) capital expenditures, (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. See Note 7 to the condensed consolidated financial statements of ESH Hospitality, Inc., included in Item 1 of this quarterly report on Form 10-Q, for additional detail on ESH REIT’s debt obligations. In light of the effect of the COVID-19 pandemic, 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, management believes 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 Six Months Ended June 30, 2020 and June 30, 2019
We had total cash, cash equivalents and restricted cash of $682.4 million and $302.6 million at June 30, 2020 and 2019, respectively. The following table summarizes the changes in our cash, cash equivalents and restricted cash as a result of operating, investing and financing activities for the six months ended June 30, 2020 and 2019 (in thousands):
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Six Months Ended June 30,
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2020
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2019
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Change ($)
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Cash provided by (used in):
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Operating activities
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$
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110,318
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$
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204,097
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$
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(93,779)
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Investing activities
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(104,322)
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(112,309)
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7,987
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Financing activities
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314,858
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(92,545)
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407,403
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Effects of changes in exchange rate on cash and cash equivalents
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(78)
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61
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(139)
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Net increase (decrease) in cash and cash equivalents
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$
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320,776
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$
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(696)
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$
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321,472
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Cash Flows provided by Operating Activities
Cash flows provided by operating activities totaled $110.3 million for the six months ended June 30, 2020 compared to $204.1 million for the six months ended June 30, 2019, a decrease of $93.8 million. The decrease in cash flows provided by operating activities was due to a decline in hotel operating performance, specifically a 19.0% decrease in RevPAR driven by the negative impact of the COVID-19 pandemic, as well as the management of short-term working capital.
Cash Flows used in Investing Activities
Cash flows used in investing activities totaled $104.3 million for the six months ended June 30, 2020 compared to $112.3 million for the six months ended June 30, 2019, a decrease of $8.0 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 $7.6 million.
Cash Flows provided by (used in) Financing Activities
Cash flows provided by financing activities totaled $314.9 million for the six months ended June 30, 2020 compared to cash flows used in financing activities of $92.5 million for the six months ended June 30, 2019. Cash flows provided by financing activities increased due to the Company borrowing $399.8 million under the ESH REIT and ESA revolving credit facilities in March 2020, and a decrease in Paired Share distributions of $42.1 million, partially offset by an increase of $31.1 million in Paired Share repurchases and $6.4 million in the repurchase of the Corporation’s 8.0% mandatorily redeemable preferred stock.
Sources and Uses of Cash – ESH REIT
The following cash flow table and comparisons are provided for ESH REIT:
Comparison of Six Months Ended June 30, 2020 and June 30, 2019
ESH REIT had total cash and cash equivalents of $606.7 million and $124.1 million at June 30, 2020 and 2019, respectively. The following table summarizes the changes in ESH REIT’s cash and cash equivalents as a result of operating, investing and financing activities for the six months ended June 30, 2020 and 2019 (in thousands):
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Six Months Ended June 30,
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2020
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2019
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Change ($)
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Cash provided by (used in):
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Operating activities
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$
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141,159
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$
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185,357
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$
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(44,198)
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Investing activities
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(102,150)
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(107,697)
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5,547
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Financing activities
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271,537
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(132,083)
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403,620
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Net increase (decrease) in cash and cash equivalents
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$
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310,546
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$
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(54,423)
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$
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364,969
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Cash Flows provided by Operating Activities
Cash flows provided by operating activities totaled $141.2 million for the six months ended June 30, 2020 compared to $185.4 million for the six months ended June 30, 2019, a decrease of $44.2 million. This decrease was due to a decline in percentage rent payments received due to the decline in Operating Lessee hotel revenues as a result of the COVID-19 pandemic, as well as the management of short-term working capital.
Cash Flows used in Investing Activities
Cash flows used in investing activities totaled $102.2 million for the six months ended June 30, 2020 compared to $107.7 million for the six months ended June 30, 2019, a decrease of $5.5 million. The decrease in cash flows used in investing activities was due to a $5.2 million net decrease in investment in property and equipment, including development in process and intangible assets.
Cash Flows provided by (used in) Financing Activities
Cash flows provided by financing activities totaled $271.5 million for the six months ended June 30, 2020 compared to cash flows used in financing activities of $132.1 million for the six months ended June 30, 2019. Cash flows provided by financing activities increased due to ESH REIT borrowing $350.0 million under the its revolving credit facility in March 2020 and a decrease in ESH REIT Class A and Class B common distributions of $63.0 million, partially offset by an increase 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 flows from operations. During the six months ended June 30, 2020 and 2019, the Company incurred capital expenditures, including development and construction in process, of $105.3 million and $112.9 million, respectively. These capital expenditures related to development and construction in process, ordinary hotel capital improvements, investments in information technology and cyclical hotel renovations. Each hotel is generally on a seven-year renovation cycle. We completed our prior cyclical hotel renovation program in mid-2017. In the fourth quarter of 2018, the Company commenced its current cyclical hotel renovation program. With respect to our current cyclical hotel renovation program, as of June 30, 2020, we have substantially completed renovations at 22 hotels for $47.4
million. We are in the process of performing renovations at 12 additional hotels, with total costs incurred for this and future planned hotel renovations (consisting primarily of advance materials purchases) of $14.2 million.
Funding requirements for future capital expenditures, including current and future cyclical hotel renovations, building new hotels we expect to own and operate, acquiring and converting existing hotels to the Extended Stay America brand and repurposing and/or rebuilding certain of our hotel properties, will be significant and are expected to be provided primarily from cash flows generated from operations or, to the extent necessary, the Corporation or ESH REIT revolving credit facilities, including intercompany facilities and, in certain instances, proceeds from asset sales.
In response to the COVID-19 pandemic, the Company, specifically ESH REIT, has delayed certain non-guest facing capital investments and construction of three new hotels. In 2020, we expect to incur capital expenditures between $160 million and $190 million. As part of these capital expenditures, we expect to spend approximately $65 to $75 million for construction of new hotels, $20 to $25 million for hotel renovations and $10 to $15 million for incremental information technology investments.
Our Indebtedness
As of June 30, 2020, the Company’s total indebtedness was $3.0 billion, net of unamortized deferred financing costs and debt discounts, including $0.7 million of Corporation mandatorily redeemable preferred stock. ESH REIT’s total indebtedness at June 30, 2020 was $3.0 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.
Off-Balance Sheet Arrangements
Neither the Corporation nor ESH REIT have off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. See Note 12 to the condensed consolidated financial statements of Extended Stay America, Inc. and Note 11 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 information with respect to commitments and contingencies, including lease 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 2019 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 June 30, 2020, the Corporation's variable rate debt consisted of $49.8 million drawn on its revolving credit facility. If market rates of interest were to fluctuate by 1.0%, interest expense would increase or decrease by $0.5 million annually, assuming that the amount of outstanding Corporation variable rate debt remains at $49.8 million.
ESH REIT
As of June 30, 2020, $1.0 billion of ESH REIT’s outstanding gross debt of $3.0 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 June 30, 2020 was $150.0 million, which is reduced by $50.0 million every six months until the swap matures in September 2021. The remaining $826.2 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 $8.3 million annually, assuming that the amount of outstanding ESH REIT unhedged variable interest rate debt remains at $826.2 million.
Item 4. Controls and Procedures
Controls and Procedures (Extended Stay America, Inc.)
Disclosure Controls and Procedures
As of June 30, 2020, Extended Stay America, Inc. reviewed, under the direction of the Chief Executive Officer and Chief Financial Officer, the disclosure controls and procedures of Extended Stay America, Inc., as defined in Exchange Act Rule 13a-15(e). Based upon and as of the date of that review, the Chief Executive Officer and Chief Financial Officer of Extended Stay America, Inc. concluded that the disclosure controls and procedures of Extended Stay America, Inc. were effective to ensure that information required to be disclosed in the reports that Extended Stay America, Inc. files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the management of Extended Stay America, Inc., including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There were no changes in Extended Stay America, Inc.’s internal control over financial reporting that occurred during the most recent fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, Extended Stay America, Inc.’s internal control over financial reporting.
Controls and Procedures (ESH Hospitality, Inc.)
Disclosure Controls and Procedures
As of June 30, 2020, ESH Hospitality, Inc. reviewed, under the direction of the Chief Executive Officer and Chief Financial Officer, the disclosure controls and procedures of ESH Hospitality, Inc., as defined in Exchange Act Rule 13a-15(e). Based upon and as of the date of that review, the Chief Executive Officer and Chief Financial Officer of ESH Hospitality, Inc. concluded that the disclosure controls and procedures of ESH Hospitality, Inc. were effective to ensure that information required to be disclosed in the reports that ESH Hospitality, Inc. files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the management of ESH Hospitality, Inc., including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There were no changes in ESH Hospitality, Inc.’s internal control over financial reporting that occurred during the most recent fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, ESH Hospitality, Inc.’s internal control over financial reporting.