UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June~~September 30, 2019



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to



Commission File Number:	001-36190	Commission File Number:	001-36191



Extended Stay America, Inc.	ESH Hospitality, Inc.
(Exact name of registrant as specified in its charter)	(Exact name of registrant as specified in its charter)



Delaware	Delaware
(State or other jurisdiction of incorporation or organization)	(State or other jurisdiction of incorporation or organization)
46-3140312	27-3559821
(I.R.S. Employer Identification No.)	(I.R.S. Employer Identification No.)
11525 N. Community House Road, Suite 100	11525 N. Community House Road, Suite 100
Charlotte	Charlotte
North Carolina	North Carolina
28277	28277
(Address of principal executive offices, zip code)	(Address of principal executive offices, zip code)



(980)	345-1600	(980)	345-1600
(Registrant’s telephone number, including area code)		(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share, of Extended Stay America, Inc.	STAY	Nasdaq Global Select Market
and Class B Common Stock, par value $0.01 per share, of ESH Hospitality, Inc., which are attached and trade together as Paired Shares	STAY	Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



Extended Stay America, Inc.	Yes	☒	No	☐
ESH Hospitality, Inc.	Yes	☒	No	☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).



Extended Stay America, Inc.	Yes	☒	No	☐
ESH Hospitality, Inc.	Yes	☒	No	☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Extended Stay America, Inc.	Large Accelerated Filer	☒	Accelerated filer	☐
	Non-accelerated filer	☐	Smaller reporting company	☐
	Emerging growth company	☐
ESH Hospitality, Inc.	Large Accelerated Filer	☒	Accelerated filer	☐
	Non-accelerated filer	☐	Smaller reporting company	☐
	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Extended Stay America, Inc.	Yes	☐	No	☒
ESH Hospitality, Inc.	Yes	☐	No	☒

~~188,420,319~~182,818,617 shares of common stock, par value $0.01 per share, of Extended Stay America, Inc., which are attached to and traded together with ~~188,420,319~~182,818,617 shares of Class B common stock, par value $0.01 per share, of ESH Hospitality, Inc., and 250,493,583 shares of Class A common stock, par value $0.01 per share, of ESH Hospitality, Inc., were all outstanding as of ~~July~~October 31, 2019.

EXTENDED STAY AMERICA, INC.

ESH HOSPITALITY, INC.

QUARTERLY REPORT ON FORM 10-Q

INDEX



	Page No.
ABOUT THIS COMBINED QUARTERLY REPORT	1
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS	2
PART I — FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements	3
EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	3
Condensed Consolidated Balance Sheets as of ~~June~~September 30, 2019 and December 31, 2018	3
Condensed Consolidated Statements of Operations for the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2019 and 2018	4
Condensed Consolidated Statements of Comprehensive Income for the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2019 and 2018	5
Condensed Consolidated Statements of Changes in Equity for the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2019 and 2018	6
Condensed Consolidated Statements of Cash Flows for the ~~Six~~Nine Months Ended ~~June~~September 30, 2019 and 2018	7
Notes to Condensed Consolidated Financial Statements	8
ESH HOSPITALITY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	2628
Condensed Consolidated Balance Sheets as of ~~June~~September 30, 2019 and December 31, 2018	2628
Condensed Consolidated Statements of Operations for the Three and ~~Six~~Nine Months Ended ~~June 30, 2019 and 2018~~	27
~~Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2019 and 2018~~	28
~~Condensed Consolidated Statements of Changes in Equity for the Three and Six Months Ended June~~September 30, 2019 and 2018	29
Condensed Consolidated Statements of ~~Cash Flows~~Comprehensive Income for the ~~Six~~Three and Nine Months Ended ~~June~~September 30, 2019 and 2018	30
Condensed Consolidated Statements of Changes in Equity for the Three and Nine Months Ended September 30, 2019 and 2018	31
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018	33
Notes to Condensed Consolidated Financial Statements	3234
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	4548
Item 3. Quantitative and Qualitative Disclosures About Market Risk	7075
Item 4. Controls and Procedures	7075
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	7277
Item 1A. Risk Factors	7277
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	7378
Item 3. Defaults Upon Senior Securities	7378
Item 4. Mine Safety Disclosures	7378
Item 5. Other Information	7378
Item 6. Exhibits	7479
Signatures	80

ABOUT THIS COMBINED QUARTERLY REPORT

This combined quarterly report on Form 10-Q is filed by Extended Stay America, Inc., a Delaware corporation (the “Corporation”), and its controlled subsidiary, ESH Hospitality, Inc., a Delaware corporation (“ESH REIT”). Both the Corporation and ESH REIT have securities that have been registered under the Securities Exchange Act of ~~1933,~~1934, as amended (the ~~“Securities~~“Exchange Act”), which are publicly traded and listed on The Nasdaq Global Select Market (“Nasdaq”) as Paired Shares, as defined herein. As further discussed herein, unless otherwise indicated or the context requires, the terms “Company,” “Extended Stay,” “Extended Stay America,” “we,” “our” and “us” refer to the Corporation, ESH REIT and their subsidiaries considered as a single enterprise.

As required by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation, due to the Corporation’s controlling financial interest in ESH REIT, the Corporation consolidates ESH REIT’s financial position, results of operations, comprehensive income and cash flows with those of the Corporation. The Corporation’s stand-alone financial condition and related information is discussed herein where applicable. In addition, with respect to other financial and non-financial disclosure items required by Form 10-Q, any material differences between the Corporation and ESH REIT are discussed herein.

This combined quarterly report on Form 10-Q presents the following sections or portions of sections separately for each of the Company, on a consolidated basis, and ESH REIT, where applicable:

Part I Item 1 – Unaudited Financial Statements

Part I Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Part I Item 3 – Quantitative and Qualitative Disclosures About Market Risk

Part I Item 4 – Controls and Procedures

This combined quarterly report also includes separate Exhibit 31 and 32 certifications for each of Extended Stay America, Inc. and ESH Hospitality, Inc. in order to establish that the Chief Executive Officer and the Chief Financial Officer of each registrant has made the requisite certifications and that Extended Stay America, Inc. and ESH Hospitality, Inc. are compliant with Rule 13a-15 or Rule 15d-15 of the ~~Securities~~ Exchange Act ~~of 1934, as amended (the “Exchange Act”),~~ and 18 U.S.C. §1350.

We believe combining the quarterly reports on Form 10-Q of the Corporation and ESH REIT into this single report results in the following benefits:

Enhances investors’ understanding of the Corporation and ESH REIT by enabling investors, whose ownership of Paired Shares, as defined herein, gives them an ownership interest in our hotel properties through ESH REIT and in the operation, management, development and franchising of hotels and other aspects of our business through the Corporation, to view the business as a whole;

Eliminates duplicative and potentially confusing disclosure and provides a more streamlined presentation, since many disclosures apply to both registrants; and

Creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This combined quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of the federal securities laws. All statements other than statements of historical facts included in this combined quarterly report on Form 10-Q may be forward-looking, including statements regarding, among other things, our ability to meet our debt service obligations, future capital expenditures (including future acquisitions and hotel renovation programs), our distribution policies, our development, growth and franchise opportunities, anticipated benefits or use of proceeds from dispositions, our plans, objectives, goals, beliefs, business strategies, business conditions, results of operations, financial position and business outlook, business trends and future events.

When used in this combined quarterly report on Form 10-Q, the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “will,” “look forward to” and variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not historical facts, and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs, estimates and projections will be achieved and actual results may differ materially from what is expressed in or indicated by the forward-looking statements.

As disclosed in our combined annual report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on February 27, 2019 (the “2018 Form 10-K”) and in other filings with the SEC, there are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this combined quarterly report on Form 10-Q. You should evaluate all forward-looking statements made in this combined quarterly report on Form 10-Q in the context of these risks and uncertainties.

We caution you that the risks, uncertainties and other factors referenced above and throughout this combined quarterly report on Form 10-Q may not contain all of the risks, uncertainties and other factors that may be important to you. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will have the results or effect on us, our business or operations in the way expected. In particular, no assurance can be given that any of our ongoing, planned or expected strategic initiatives or objectives discussed herein or in other filings with the SEC will be initiated or completed on our expected timing or at all. Estimates and forward-looking statements speak only as of the date they were made and we undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances, except as required by law.

PART I — FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF ~~JUNE~~SEPTEMBER 30, 2019 AND DECEMBER 31, 2018

(In thousands, except share and per share data)

(Unaudited)


	June 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
ASSETS
PROPERTY AND EQUIPMENT - Net of accumulated depreciation of $1,300,518 and $1,218,105	$	3,458,238	$	3,453,632
PROPERTY AND EQUIPMENT - Net of accumulated depreciation of $1,333,588 and $1,218,105					$	3,467,627	$	3,453,632
RESTRICTED CASH	16,024		15,878		13,572		15,878
CASH AND CASH EQUIVALENTS	286,616		287,458		489,767		287,458
INTANGIBLE ASSETS - Net of accumulated amortization of $11,896 and $11,065	31,994		28,714
INTANGIBLE ASSETS - Net of accumulated amortization of $12,495 and $11,065					33,035		28,714
GOODWILL	45,192		45,192		45,192		45,192
ACCOUNTS RECEIVABLE - Net of allowance for doubtful accounts of $2,414 and $2,075	23,233		19,769
ACCOUNTS RECEIVABLE - Net of allowance for doubtful accounts of $2,844 and $2,075					21,929		19,769
DEFERRED TAX ASSETS	10,286		7,309		12,346		7,309
OTHER ASSETS	67,982		66,258		71,909		66,258
TOTAL ASSETS	$	3,939,565	$	3,924,210	$	4,155,377	$	3,924,210
LIABILITIES AND EQUITY
LIABILITIES:
Term loan facility payable - Net of unamortized deferred financing costs and debt discount of $13,285 and $14,879	$	1,117,624	$	1,121,713
Senior notes payable - Net of unamortized deferred financing costs and debt discount of $24,137 and $26,206	1,275,863		1,273,794
Term loan facility payable - Net of unamortized deferred financing costs and debt discount of $11,386 and $14,879					$	619,523	$	1,121,713
Senior notes payable - Net of unamortized deferred financing costs and debt discount of $37,156 and $26,206					2,012,844		1,273,794
Mandatorily redeemable preferred stock - $0.01 par value, $1,000 redemption value, 8.0%, 350,000,000 shares authorized, 7,130 shares issued and outstanding	7,130		7,130		7,130		7,130
Finance lease liabilities	3,440		3,360		3,410		3,360
Accounts payable and accrued liabilities	222,485		207,574		245,999		207,574
Total liabilities	2,626,542		2,613,571		2,888,906		2,613,571
COMMITMENTS AND CONTINGENCIES (Note 12)
EQUITY:
Common stock - $0.01 par value, 3,500,000,000 shares authorized, 188,412,376 and 188,219,605 shares issued and outstanding	1,884		1,882
Common stock - $0.01 par value, 3,500,000,000 shares authorized, 184,501,128 and 188,219,605 shares issued and outstanding					1,845		1,882
Additional paid in capital	751,467		749,219		746,146		749,219
Retained earnings	77,551		32,432		66,958		32,432
Accumulated other comprehensive income	789		2,488		444		2,488
Total Extended Stay America, Inc. shareholders’ equity	831,691		786,021		815,393		786,021
Noncontrolling interests	481,332		524,618		451,078		524,618
Total equity	1,313,023		1,310,639		1,266,471		1,310,639
TOTAL LIABILITIES AND EQUITY	$	3,939,565	$	3,924,210	$	4,155,377	$	3,924,210

See accompanying notes to condensed consolidated financial statements.

EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2019 AND 2018

(In thousands, except per share data)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018			2019			2018			2019			2018
REVENUES:
Room revenues	$	311,614		$	326,948		$	578,660		$	617,158		$	320,669		$	340,917		$	899,329		$	958,075
Other hotel revenues	6,070			5,492			11,373			10,767			6,475			5,943			17,848			16,710
Franchise and management fees	1,447			861			2,672			1,276			1,351			864			4,023			2,140
	319,131			333,301			592,705			629,201			328,495			347,724			921,200			976,925
Other revenues from franchised and managed properties	4,526			3,200			8,621			5,067			4,200			3,352			12,821			8,419
Total revenues	323,657			336,501			601,326			634,268			332,695			351,076			934,021			985,344
OPERATING EXPENSES:
Hotel operating expenses	146,907			144,054			284,198			286,684			152,913			156,341			437,111			443,025
General and administrative expenses	22,287			23,507			45,314			48,468			22,292			21,242			67,606			69,710
Depreciation and amortization	49,017			53,499			97,795			107,514			49,748			52,138			147,543			159,652
Impairment of long-lived assets	—			—			—			43,600			2,679			—			2,679			43,600
	218,211			221,060			427,307			486,266			227,632			229,721			654,939			715,987
Other expenses from franchised and managed properties	4,996			3,394			9,643			5,313			4,699			3,449			14,342			8,762
Total operating expenses	223,207			224,454			436,950			491,579			232,331			233,170			669,281			724,749
GAIN ON SALE OF HOTEL PROPERTIES (Note 4)	—			—			—			38,082			—			3,517			—			41,599
OTHER INCOME	1			457			28			462			3			39			31			501
INCOME FROM OPERATIONS	100,451			112,504			164,404			181,233			100,367			121,462			264,771			302,695
OTHER NON-OPERATING (INCOME) EXPENSE	(171		)	102			(349		)	299
OTHER NON-OPERATING EXPENSE (INCOME)													101			(251		)	(248		)	48
INTEREST EXPENSE, NET	29,766			32,425			59,370			64,065			36,535			31,007			95,905			95,072
INCOME BEFORE INCOME TAX EXPENSE	70,856			79,977			105,383			116,869			63,731			90,706			169,114			207,575
INCOME TAX EXPENSE	11,198			14,407			17,321			20,204			10,501			15,014			27,822			35,218
NET INCOME	59,658			65,570			88,062			96,665			53,230			75,692			141,292			172,357
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS	(6,161		)	(514		)	(12,631		)	(16,757		)	(12,159		)	(3,790		)	(24,790		)	(20,547		)
NET INCOME ATTRIBUTABLE TO EXTENDED STAY AMERICA, INC. COMMON SHAREHOLDERS	$	53,497		$	65,056		$	75,431		$	79,908		$	41,071		$	71,902		$	116,502		$	151,810
NET INCOME PER EXTENDED STAY AMERICA, INC. COMMON SHARE:
Basic	$	0.28		$	0.34		$	0.40		$	0.42		$	0.22		$	0.38		$	0.62		$	0.80
Diluted	$	0.28		$	0.34		$	0.40		$	0.42		$	0.22		$	0.38		$	0.62		$	0.80
WEIGHTED-AVERAGE EXTENDED STAY AMERICA, INC. COMMON SHARES OUTSTANDING:
Basic	188,450			189,626			188,399			190,197			186,844			188,822			188,063			189,681
Diluted	188,813			190,183			188,695			190,709			187,015			189,253			188,317			190,111

See accompanying notes to condensed consolidated financial statements.

EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2019 AND 2018

(In thousands)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018			2019			2018			2019			2018
NET INCOME	$	59,658		$	65,570		$	88,062		$	96,665		$	53,230		$	75,692		$	141,292		$	172,357
OTHER COMPREHENSIVE INCOME, NET OF TAX:
FOREIGN CURRENCY TRANSLATION ADJUSTMENT:
FOREIGN CURRENCY TRANSLATION LOSS	—			—			—			(52		)	—			—			—			(52		)

DERIVATIVE ADJUSTMENT:
INTEREST RATE CASH FLOW HEDGE (LOSS) GAIN, NET OF TAX OF $(343), $41, $(591) and $215	(1,984		)	211			(3,422		)	1,909
INTEREST RATE CASH FLOW HEDGE (LOSS) GAIN, NET OF TAX OF $(118), $(25), $(709) and $190													(687		)	(157		)	(4,109		)	1,752

COMPREHENSIVE INCOME	57,674			65,781			84,640			98,522			52,543			75,535			137,183			174,057
COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS	(5,162		)	(622		)	(10,908		)	(17,679		)	(11,817		)	(3,713		)	(22,725		)	(21,392		)
COMPREHENSIVE INCOME ATTRIBUTABLE TO EXTENDED STAY AMERICA, INC. COMMON SHAREHOLDERS	$	52,512		$	65,159		$	73,732		$	80,843		$	40,726		$	71,822		$	114,458		$	152,665

See accompanying notes to condensed consolidated financial statements.

EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE THREE AND ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2019 AND 2018

(In thousands, except per share data)

(Unaudited)


	Common Stock					Additional Paid in Capital				Retained Earnings				Accumulated Other Comprehensive Income				Total Shareholders' Equity				Noncontrolling Interests				Total Equity			Common Stock					Additional Paid in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Total Shareholders' Equity			Noncontrolling Interests			Total Equity
	Shares		Amount										Shares					Total Shareholders' Equity			Amount													Additional Paid in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Total Shareholders' Equity			Noncontrolling Interests			Total Equity
BALANCE - April 1, 2018	190,632		$	1,906		Additional Paid in Capital			$	Retained Earnings	759,042			Accumulated Other Comprehensive Income	$	(6,242	)		$	3,521		Noncontrolling Interests			$	Total Equity			758,227		$	543,445		$	1,301,672
BALANCE - July 1, 2018																													188,994		$	1,890		$	748,706		$	33,253		$	3,624		$	787,473		$	507,128		$	1,294,601
Net income	—		—			—				65,056				—				65,056				514				65,570			—		—			—			71,902			—			71,902			3,790			75,692
Interest rate cash flow hedge gain, net of tax	—		—			—				—				103				103				108				211
Interest rate cash flow hedge loss, net of tax																													—		—			—			—			(80		)	(80		)	(77		)	(157		)
Repurchase of Corporation common stock and ESH REIT Class B common stock (Paired Shares)	(1,638	)	(16		)	—				(20,875		)		—				(20,891		)		(11,932		)		(32,823		)	(559	)	(6		)	—			(7,426		)	—			(7,432		)	(4,242		)	(11,674		)
Corporation common distributions - $0.06 per common share	—		—			(6,719		)		(4,686		)		—				(11,405		)		—				(11,405		)
ESH REIT common distributions - $0.16 per Class B common share	—		—			—				—				—				—				(30,432		)		(30,432		)
Corporation common distributions - $0.04 per common share																													—		—			—			(7,594		)	—			(7,594		)	—			(7,594		)
ESH REIT common distributions - $0.18 per Class B common share																													—		—			—			—			—			—			(34,171		)	(34,171		)
ESH REIT preferred distributions	—		—			—				—				—				—				(4		)		(4		)	—		—			—			—			—			—			(4		)	(4		)
Adjustment to noncontrolling interest for change in ownership of ESH REIT	—		—			(4,709		)		—				—				(4,709		)		4,709				—			—		—			(477		)	—			—			(477		)	477			—
Equity-based compensation	—		—			1,092				—				—				1,092				720				1,812			82		1			1,152			—			—			1,153			653			1,806
BALANCE - June 30, 2018	188,994		$	1,890		$	748,706			$	33,253			$	3,624			$	787,473			$	507,128			$	1,294,601
BALANCE - September 30, 2018																													188,517		$	1,885		$	749,381		$	90,135		$	3,544		$	844,945		$	473,554		$	1,318,499


	Common Stock			Additional Paid in Capital				Retained Earnings				Accumulated Other Comprehensive Income			Total Shareholders' Equity				Noncontrolling Interests				Total Equity			Common Stock					Additional Paid in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Total Shareholders' Equity			Noncontrolling Interests			Total Equity
	Shares	Amount									Shares				Total Shareholders' Equity			Amount													Additional Paid in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Total Shareholders' Equity			Noncontrolling Interests			Total Equity
BALANCE - April 1, 2019	188,403	$	1,884	Additional Paid in Capital			$	Retained Earnings	750,135			Accumulated Other Comprehensive Income	$	41,116		$	1,774		Noncontrolling Interests			$	Total Equity			794,909		$	501,742		$	1,296,651
BALANCE - July 1, 2019																										188,412		$	1,884		$	751,467		$	77,551		$	789		$	831,691		$	481,332		$	1,313,023
Net income	—	—		—				53,497				—			53,497				6,161				59,658			—		—			—			41,071			—			41,071			12,159			53,230
Interest rate cash flow hedge loss, net of tax	—	—		—				—				(985		)	(985		)		(999		)		(1,984		)	—		—			—			—			(345		)	(345		)	(342		)	(687		)
Corporation common distributions - $0.09 per common share	—	—		—				(17,062		)		—			(17,062		)		—				(17,062		)
ESH REIT common distributions - $0.14 per Class B common share	—	—		—				—				—			—				(26,542		)		(26,542		)
Repurchase of Corporation common stock and ESH REIT Class B common stock (Paired Shares)																										(3,993	)	(40		)	—			(36,544		)	—			(36,584		)	(20,887		)	(57,471		)
Corporation common distributions - $0.08 per common share																										—		—			—			(15,120		)	—			(15,120		)	—			(15,120		)
ESH REIT common distributions - $0.15 per Class B common share																										—		—			—			—			—			—			(28,347		)	(28,347		)
ESH REIT preferred distributions	—	—		—				—				—			—				(4		)		(4		)	—		—			—			—			—			—			(4		)	(4		)
Adjustment to noncontrolling interest for change in ownership of ESH REIT	—	—		(75		)		—				—			(75		)		75				—			—		—			(6,563		)	—			—			(6,563		)	6,563			—
Equity-based compensation	9	—		1,407				—				—			1,407				899				2,306			82		1			1,242			—			—			1,243			604			1,847
BALANCE - June 30, 2019	188,412	$	1,884	$	751,467			$	77,551			$	789		$	831,691			$	481,332			$	1,313,023
BALANCE - September 30, 2019																										184,501		$	1,845		$	746,146		$	66,958		$	444		$	815,393		$	451,078		$	1,266,471


	Common Stock					Additional Paid in Capital				Retained Earnings				Accumulated Other Comprehensive Income			Total Extended Stay America, Inc. Shareholders’ Equity				Non- controlling Interests				Total Equity			Common Stock					Additional Paid in Capital				Retained Earnings				Accumulated Other Comprehensive Income				Total Extended Stay America, Inc. Shareholders’ Equity				Noncontrolling Interests				Total Equity
	Shares		Amount										Shares				Total Extended Stay America, Inc. Shareholders’ Equity			Amount													Additional Paid in Capital				Retained Earnings				Accumulated Other Comprehensive Income				Total Extended Stay America, Inc. Shareholders’ Equity				Noncontrolling Interests				Total Equity
BALANCE - January 1, 2018	192,100		$	1,921		Additional Paid in Capital			$	Retained Earnings	768,679			Accumulated Other Comprehensive Income	$	6,917		$	3,066		Non- controlling Interests			$	Total Equity			780,583		$	565,264		$	1,345,847		192,100			$	1,921			$	768,679			$	6,917			$	3,066			$	780,583	$	565,264	$	1,345,847
Net income	—		—			—				79,908				—			79,908				16,757				96,665			—		—			—				151,810				—				151,810				20,547				172,357
Foreign currency translation loss, net of tax	—		—			—				—				(52		)	(52		)		—				(52		)	—		—			—				—				(52		)		(52		)		—				(52		)
Cumulative effect adjustment of ASU 2017-12	—		—			—				377				(377		)	—				—				—			—		—			—				377				(377		)		—				—				—
Interest rate cash flow hedge gain, net of tax	—		—			—				—				987			987				922				1,909			—		—			—				—				907				907				845				1,752
Repurchase of Corporation common stock and ESH REIT Class B common stock (Paired Shares)	(3,428	)	(34		)	—				(43,238		)		—			(43,272		)		(24,730		)		(68,002		)	(3,987	)	(40		)	—				(50,664		)		—				(50,704		)		(28,972		)		(79,676		)
Corporation common distributions - $0.12 per common share	—		—			(12,196		)		(10,711		)		—			(22,907		)		—				(22,907		)
ESH REIT common distributions - $0.31 per Class B common share	—		—			—				—				—			—				(59,200		)		(59,200		)
Corporation common distributions - $0.16 per common share																												—		—			(12,196		)		(18,305		)		—				(30,501		)		—				(30,501		)
ESH REIT common distributions - $0.49 per Class B common share																												—		—			—				—				—				—				(93,371		)		(93,371		)
ESH REIT preferred distributions	—		—			—				—				—			—				(8		)		(8		)	—		—			—				—				—				—				(12		)		(12		)
Adjustment to noncontrolling interest for change in ownership of ESH REIT	—		—			(6,542		)		—				—			(6,542		)		6,542				—			—		—			(7,019		)		—				—				(7,019		)		7,019				—
Equity-based compensation	322		3			(1,235		)		—				—			(1,232		)		1,581				349			404		4			(83		)		—				—				(79		)		2,234				2,155
BALANCE - June 30, 2018	188,994		$	1,890		$	748,706			$	33,253			$	3,624		$	787,473			$	507,128			$	1,294,601
BALANCE - September 30, 2018																												188,517		$	1,885		$	749,381			$	90,135			$	3,544			$	844,945			$	473,554			$	1,318,499


	Common Stock			Additional Paid in Capital			Retained Earnings				Accumulated Other Comprehensive Income			Total Extended Stay America, Inc. Shareholders’ Equity				Non- controlling Interests				Total Equity			Common Stock					Additional Paid in Capital				Retained Earnings				Accumulated Other Comprehensive Income				Total Extended Stay America, Inc. Shareholders’ Equity				Noncontrolling Interests				Total Equity
	Shares	Amount								Shares				Total Extended Stay America, Inc. Shareholders’ Equity			Amount													Additional Paid in Capital				Retained Earnings				Accumulated Other Comprehensive Income				Total Extended Stay America, Inc. Shareholders’ Equity				Noncontrolling Interests				Total Equity
BALANCE - January 1, 2019	188,219	$	1,882	Additional Paid in Capital		$	Retained Earnings	749,219			Accumulated Other Comprehensive Income	$	32,432		$	2,488		Non- controlling Interests			$	Total Equity			786,021		$	524,618		$	1,310,639		188,219			$	1,882			$	749,219			$	32,432			$	2,488			$	786,021	$	524,618	$	1,310,639
Net income	—	—		—			75,431				—			75,431				12,631				88,062			—		—			—				116,502				—				116,502				24,790				141,292
Interest rate cash flow hedge loss, net of tax	—	—		—			—				(1,699		)	(1,699		)		(1,723		)		(3,422		)	—		—			—				—				(2,044		)		(2,044		)		(2,065		)		(4,109		)
Corporation common distributions - $0.16 per common share	—	—		—			(30,312		)		—			(30,312		)		—				(30,312		)
ESH REIT common distributions - $0.29 per Class B common share	—	—		—			—				—			—				(54,940		)		(54,940		)
Repurchase of Corporation common stock and ESH REIT Class B common stock (Paired Shares)																									(3,993	)	(40		)	—				(36,544		)		—				(36,584		)		(20,887		)		(57,471		)
Corporation common distributions - $0.24 per common share																									—		—			—				(45,432		)		—				(45,432		)		—				(45,432		)
ESH REIT common distributions - $0.44 per Class B common share																									—		—			—				—				—				—				(83,287		)		(83,287		)
ESH REIT preferred distributions	—	—		—			—				—			—				(8		)		(8		)	—		—			—				—				—				—				(12		)		(12		)
Adjustment to noncontrolling interest for change in ownership of ESH REIT	—	—		400			—				—			400				(400		)		—			—		—			(6,163		)		—				—				(6,163		)		6,163				—
Equity-based compensation	193	2		1,848			—				—			1,850				1,154				3,004			275		3			3,090				—				—				3,093				1,758				4,851
BALANCE - June 30, 2019	188,412	$	1,884	$	751,467		$	77,551			$	789		$	831,691			$	481,332			$	1,313,023
BALANCE - September 30, 2019																									184,501		$	1,845		$	746,146			$	66,958			$	444			$	815,393			$	451,078			$	1,266,471

See accompanying notes to condensed consolidated financial statements.

EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2019 AND 2018

(In thousands)

(Unaudited)


	Six Months Ended June 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
OPERATING ACTIVITIES:
Net income	$	88,062		$	96,665		$	141,292		$	172,357
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	97,795			107,514			147,543			159,652
Foreign currency transaction (gain) loss	(349		)	299			(248		)	48
Amortization and write-off of deferred financing costs and debt discount	3,993			4,621			11,635			6,618
Amortization and write-off of above-market ground leases	—			(68		)	—			(240		)
Debt prepayment and extinguishment costs	—			1,183
Debt modification and extinguishment costs							82			1,183
Loss on disposal of property and equipment	3,377			668			5,037			2,617
Gain on sale of hotel properties	—			(38,082		)	—			(41,599		)
Impairment of long-lived assets	—			43,600			2,679			43,600
Equity-based compensation	4,255			4,188			6,131			5,999
Deferred income tax benefit	(2,385		)	(6,916		)	(4,327		)	(5,724		)
Changes in assets and liabilities:
Accounts receivable, net	(3,464		)	(2,088		)	(2,160		)	(2,273		)
Other assets	(3,331		)	921			(5,310		)	(837		)
Accounts payable and accrued liabilities	16,144			16,143			36,432			41,649
Net cash provided by operating activities	204,097			228,648			338,786			383,050
INVESTING ACTIVITIES:
Purchases of property and equipment	(84,785		)	(71,003		)	(129,816		)	(106,394		)
Acquisition of hotel property	—			(12,729		)	—			(12,729		)
Development in process payments	(21,841		)	(6,009		)	(42,116		)	(28,414		)
Payment for intangible assets	(6,296		)	—			(6,081		)	—
Proceeds from sale of hotel properties	—			155,244			—			274,100
Proceeds from insurance and related recoveries	613			4,362			914			4,533
Net cash (used in) provided by investing activities	(112,309		)	69,865			(177,099		)	131,096
FINANCING ACTIVITIES:
Principal payments on term loan facilities	(5,683		)	(66,112		)
Principal payments on term loan facility							(505,683		)	(69,163		)
Proceeds from issuance of senior notes							750,000			—
Payment of deferred financing costs							(18,237		)	—
Principal payments on finance leases	(58		)	—			(86		)	—
Debt prepayment and extinguishment costs	—			(1,183		)
Debt modification and extinguishment costs							(82		)	(1,183		)
Tax withholdings related to restricted stock unit settlements	(1,571		)	(3,894		)	(1,598		)	(3,989		)
Repurchase of Corporation common stock and ESH REIT Class B common stock (Paired Shares)	—			(68,002		)	(57,471		)	(79,676		)
Corporation common distributions	(30,287		)	(23,156		)	(45,362		)	(30,737		)
ESH REIT common distributions	(54,938		)	(59,606		)	(83,200		)	(93,652		)
ESH REIT preferred distributions	(8		)	(8		)	(8		)	(12		)
Net cash used in financing activities	(92,545		)	(221,961		)
Net cash provided by (used in) financing activities							38,273			(278,412		)
CHANGES IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH DUE TO CHANGES IN FOREIGN CURRENCY EXCHANGE RATES	61			(88		)	43			(67		)
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH	(696		)	76,464
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH							200,003			235,667
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - Beginning of period	303,336			150,974			303,336			150,974
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - End of period	$	302,640		$	227,438		$	503,339		$	386,641
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest, excluding prepayment and other penalties, net of capitalized interest of $751 and $129	$	57,902		$	58,869
Cash payments for interest, excluding prepayment and other penalties, net of capitalized interest of $1,373 and $243							$	68,953		$	71,130
Cash payments for income taxes, net of refunds of $0 and $96	$	16,583		$	18,130		$	30,853		$	28,303
Operating cash payments for finance leases	$	122		$	—		$	183		$	—
Operating cash payments for operating leases	$	1,380		$	—		$	2,074		$	—
NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital expenditures included in accounts payable and accrued liabilities	$	27,618		$	20,023		$	28,124		$	20,829
Additions to finance lease right-of-use assets and liabilities	$	109		$	—		$	109		$	—
Deferred financing costs included in accounts payable and accrued liabilities							$	2,353		$	—
Debt modification and extinguishment costs included in accounts payable and accrued liabilities							$	1,006		$	—
Corporation common distributions included in accounts payable and accrued liabilities	$	380		$	288		$	428		$	298
ESH REIT common distributions included in accounts payable and accrued liabilities	$	794		$	578		$	879		$	697

See accompanying notes to condensed consolidated financial statements.

EXTENDED STAY AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF ~~JUNE~~SEPTEMBER 30, 2019 AND DECEMBER 31, 2018 AND FOR THE THREE AND ~~SIX~~NINE MONTHS ENDED

~~JUNE~~SEPTEMBER 30, 2019 AND 2018

(Unaudited)


1.	BUSINESS, ORGANIZATION AND BASIS OF CONSOLIDATION

Extended Stay America, Inc. (the “Corporation”) was incorporated in the state of Delaware on July 8, 2013. ESH Hospitality, Inc. (“ESH REIT”) was formed as a limited liability company in the state of Delaware on September 16, 2010 and was converted to a corporation on November 5, 2013. The Corporation owns, and is expected to continue to own, all of the issued and outstanding Class A common stock of ESH REIT, which, as of ~~June~~September 30, 2019, represents ~~57%~~58% of the outstanding common stock of ESH REIT. Due to its controlling interest in ESH REIT, the Corporation consolidates the financial position, results of operations, comprehensive income and cash flows of ESH REIT. The term, “the Company,” as used herein refers to the Corporation and its consolidated subsidiaries, including ESH REIT.

A “Paired Share” consists of ~~one~~1 share of common stock, par value $0.01 per share, of the Corporation, that is attached to and trades as a single unit with ~~one~~1 share of Class B common stock, par value $0.01 per share, of ESH REIT. Each outstanding share of Corporation common stock is attached to and trades with ~~one~~1 share of ESH REIT Class B common stock.

The Company is an integrated owner/operator of Extended Stay America-branded hotels and is also engaged in franchising and managing extended stay hotels for third parties in the U.S. As of ~~June~~September 30, 2019 and December 31, 2018, the Company owned and operated 554 hotel properties in 40 U.S. states, consisting of approximately 61,500 rooms. As of ~~June~~September 30, 2019 and December 31, 2018, the Company franchised and/or managed 7472 and 73 hotel properties for third parties, consisting of approximately ~~7,600~~7,400 and 7,500 rooms, respectively. ~~All 628~~As of September 30, 2019, all 626 system-wide hotels ~~are~~were operated under the Extended Stay America brand.

~~Hotel~~Owned hotel properties are owned by subsidiaries of ESH REIT and are operated by subsidiaries of the Corporation (the “Operating Lessees”) pursuant to leases between subsidiaries of ESH REIT and the Operating Lessees. The hotels are managed by ESA Management LLC (“ESA Management”), a subsidiary of the Corporation, which also manages hotels on behalf of third parties. The Extended Stay America brand is owned by ESH Hospitality Strategies LLC (“ESH Strategies”), also a subsidiary of the Corporation. ESH Strategies licenses the brand and intellectual property to its subsidiaries, ESH Strategies Branding LLC and ESH Strategies Franchise LLC, which license them to the Operating Lessees and third parties, respectively.

As of ~~June~~September 30, 2019 and December 31, 2018, the Corporation had ~~188.4~~184.5 million shares and 188.2 million shares of common stock outstanding, respectively. As of ~~June~~September 30, 2019 and December 31, 2018, ESH REIT’s common equity consisted of the following: (i) 250.5 million shares of Class A common stock outstanding ~~(57%~~(58% and 57%, respectively, of its common equity), all of which were owned by the Corporation, and (ii) ~~188.4~~184.5 million shares and 188.2 million shares of Class B common stock outstanding, respectively ~~(43%~~(42% and 43%, respectively, of its common equity).

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, including a $150 million increase to the authorized amount and a program extension in August 2019, as of ~~June~~September 30, 2019, the combined Paired Share repurchase program authorized the Corporation and ESH REIT to purchase up to ~~$400~~$550 million in Paired Shares through December 31, ~~2019.~~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~~September 30, 2019, the Corporation and ESH REIT had repurchased and retired ~~17.3~~21.3 million Paired Shares for ~~$180.1~~$216.7 million and ~~$107.5~~$128.4 million, including transaction fees, respectively, and ~~$112.5~~$205.3 million remained available under the combined Paired Share repurchase program.

Basis of Consolidation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) and include the financial position, results of operations, comprehensive income, changes in equity and cash flows of the Corporation and its consolidated subsidiaries, including ESH REIT. Third-party equity interests in consolidated subsidiaries are presented as noncontrolling interests. Despite the fact that

each share of Corporation common stock is paired on a ~~one-for-one~~1-for-one basis with each share of ESH REIT Class B common stock, the Corporation does not own ESH REIT Class B common stock; therefore, ESH REIT Class B common stock represents a third-party equity interest. As such, the rights associated with ESH REIT Class B common stock, along with other third-party

equity interests in ESH REIT, are presented as noncontrolling interests in the accompanying condensed consolidated financial statements. Changes in ownership interests in a consolidated subsidiary that do not result in a loss of control are accounted for as equity transactions. All intercompany accounts and transactions have been eliminated.

With respect to the condensed consolidated balance sheets, statements of operations and statements of cash flows and the segments disclosure (see Note 10), certain prior period amounts have been reclassified for comparability to current period presentation. In the condensed consolidated statements of operations, other revenues from franchised and managed properties for the three and ~~six~~nine months ended ~~June~~September 30, ~~2019,~~2018, include $0.6 million and ~~$0.8~~$1.4 million, respectively, that was included in franchise and management fees as originally presented. Other expenses from franchised and managed properties for the three and ~~six~~nine months ended ~~June~~September 30, 2018, include ~~$0.8~~$0.7 million and ~~$1.0~~$1.7 million, respectively, that was included in general and administrative expenses as originally presented.


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim Presentation—Certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP have been condensed or omitted in the accompanying condensed consolidated financial statements. The Company believes the disclosures made are adequate to prevent the information presented from being misleading. However, the condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2018, included in the combined annual report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on February 27, 2019.

The accompanying condensed consolidated financial statements reflect all adjustments (consisting only of normal and recurring items) necessary to present fairly the Company’s financial position as of ~~June~~September 30, 2019, the results of the Company’s operations, comprehensive income and changes in equity for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 and cash flows for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018. Interim results are not necessarily indicative of full year performance because of the impact of seasonal and short-term variations, as well as the impact of acquisitions, dispositions, hotel renovations and ~~hotel renovations.~~financing or other capital transactions.

Use of Estimates—The preparation of the accompanying condensed consolidated financial statements in conformity with U.S. GAAP 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 amounts of revenues and expenses during the reporting period. Management used significant estimates to determine the estimated useful lives of tangible assets as well as in the assessment of tangible and intangible assets for impairment, estimated liabilities for insurance reserves and income taxes and the grant-date fair value of certain equity-based awards. Actual results could differ from those estimates.

Property and Equipment—Property and equipment additions are recorded at cost. Major improvements that extend the life or utility of property or equipment are capitalized and depreciated over a period equal to the shorter of the estimated useful life of the improvement or the remaining estimated useful life of the asset. Ordinary repairs and maintenance are charged to expense as incurred. Depreciation and amortization are recorded on a straight-line basis over estimated useful lives which range from two to 49 years.

Management assesses the performance of long-lived assets for potential impairment quarterly, as well as when events or changes in circumstances indicate the carrying amount of an asset, or group of assets, may not be recoverable. Recoverability of property and equipment is measured by a comparison of the carrying amount of a hotel property (or group of hotel properties) to the estimated future undiscounted cash flows expected to be generated by the hotel property (or group of hotel properties). Impairment is recognized when estimated future undiscounted cash flows, including expected proceeds from disposition, are less than the carrying value of the hotel property (or group of hotel properties). To the extent that a hotel property (or group of hotel properties) is impaired, the excess carrying amount over its estimated fair value is recognized as an impairment charge and reduces income from operations. Fair value is determined based upon the discounted cash flows of the hotel property (or group of hotel properties), bids, quoted market prices or independent appraisals, as considered necessary. The estimation of future undiscounted cash flows is inherently uncertain and relies upon assumptions regarding current and future economic and market conditions. If such conditions change, an impairment ~~charge could~~charges may occur in a future ~~period~~periods (see Note 5).

Revenue Generated from Owned and Operated Hotels—Revenue generated from owned and operated hotels consists of room and other hotel revenues recognized when services are provided. When a reservation is made, the Company deems that the parties have approved a contract in accordance with customary business practices and are committed to perform their

respective obligations. At such time, each party’s rights regarding the services to be transferred are identified, payment terms are specified, the contract has commercial substance and, in most instances, it is probable the Company will collect substantially all consideration to which it will be entitled in exchange for services.

Each room night consumed by a guest with a cancellable reservation represents a contract whereby the Company has a performance obligation to provide the room night at an agreed upon price. For cancellable reservations, the Company recognizes revenue as each performance obligation (i.e., each room night) is met. Such contract is renewed if the guest continues their stay. For room nights consumed by a guest with a non-cancellable reservation, the entire reservation period represents the contract term whereby the Company has a performance obligation to provide the room night or nights at an agreed upon price. For non-cancellable reservations, the Company recognizes revenue over the term of the performance period (i.e., the reservation period) as room nights are consumed. For these reservations, the room rate is typically fixed over the reservation period. The Company uses an output method based on performance completed to date (i.e., room nights consumed) to determine the amount of revenue it recognizes on a daily basis if the length of a non-cancellable reservation exceeds one night since consumption of room nights indicates when services are transferred to the guest. In certain instances, variable consideration may exist with respect to the transaction price, such as discounts, coupons and price concessions made upon guest checkout.

In evaluating its performance obligation, the Company bundles the obligation to provide the guest the room itself with other obligations (such as free WiFi, grab and go breakfast, access to on-site laundry facilities and parking), as the other obligations are not distinct and separable because the guest cannot benefit from the additional amenities without the consumed room night. The Company’s obligation to provide the additional items or services is not separately identifiable from the fundamental contractual obligation (i.e., providing the room and its contents). The Company has no performance obligations once a guest’s stay is complete.

Certain revenues are generated through third-party intermediaries or distribution channels (i.e., online travel agents). Regardless of the basis on which the Company is compensated (i.e., gross or net), the Company is responsible for fulfilling the promise to provide the hotel room and related services to the guest and retains inventory risk. Since the Company controls the inventory and services provided and because third-party intermediaries are typically not contractually required to guarantee room night consumption, the Company is the principal in these transactions. As such, the Company is required to record revenue at an amount equal to the price charged to the guest (i.e., on a gross basis). Third-party intermediaries that pay the Company directly (i.e., on a net basis) typically charge the guest additional fees, blend the room offering with other offerings at amounts which are not allocable and may adjust the price without the Company’s approval. As such, the Company is unable to calculate the room rate charged to the guest. Since any estimate the Company would make has significant uncertainty that ultimately would not be resolved, despite its role as principal, in these instances the Company records revenue equal to the amount paid by the third-party intermediaries (i.e., the net amount).

Revenue Generated from Franchise and Management Fees—Revenue generated from franchise and management contracts consists of the following:

Franchise fees, which consist of an initial fee and an ongoing royalty fee based on a percentage of a hotel’s monthly revenue in exchange for the access to and use of the Company’s brand name and other intellectual property. Initial fees are deferred and recognized over the expected contract or customer life. Royalty fees are recognized over time as franchisees derive value from the license to use the intellectual property.

Management fees, which consist of an ongoing base fee calculated as a percentage of a hotel’s monthly revenue in exchange for on-site hotel management services. Management fees are recognized over time as third-party hotel owners derive value from on-site personnel and related services.

Other revenues from franchised and managed properties, which include the reimbursement of costs incurred on behalf of third-party owners on a direct and an indirect basis, as follows:

◦

Direct costs incurred with respect to management and franchise agreements include on-site hotel personnel and incremental reservation and distribution costs, respectively, for which the Company is reimbursed on a dollar-for-dollar basis. Since the Company employs the hotel personnel and has discretion over reservation and distribution costs, it is the principal with respect to these services and revenue is recognized on a gross basis.

◦

Indirect costs incurred with respect to franchise agreements include costs associated with certain shared system-wide platforms (i.e., system services), such as marketing, technology infrastructure, central reservations, national sales and revenue management systems. The Company is reimbursed for indirect costs through a system service, or program, fee based on a percentage of a hotel’s monthly revenue. System service fees are recognized over time as franchisees derive value from the license to use these processes and systems. The Company has discretion over

how it spends system service fees and is the principal with respect to these services. Revenue is recognized on a gross basis; expense is recognized as incurred. Over time, the Company manages system services to break-even, but the timing of revenue will typically not align with the expense to operate the programs.

The promise to provide access to the Company’s intellectual property is combined with the promise to provide system services to form a single performance obligation since the promises generally accompany one another. Hotel management services form a single performance obligation. As noted above, each identified performance obligation is considered to be a series of services transferred over time. Revenue is recognized on an output method based on performance completed to date. The Company recognizes revenue in the amount to which it has a right to bill third parties under their respective franchise and/or management agreements, as it has a right to consideration in an amount that corresponds directly with the third parties’ hotel revenues. Franchise, management and system service fees are characterized as variable consideration and vary from period to period. In the event that fees include variables that extend beyond the current period, the Company uses the most likely amount method to determine the amount of revenue to record based on a reasonable revenue forecast for the applicable hotel. In most instances, the Company does not have constraining estimates, as hotel revenues are typically available and obtained monthly.

Segments—The Company has ~~two~~2 reportable operating segments based on the manner in which we evaluate our business: (i) owned hotels and (ii) franchise and management. The Company assesses the performance of these segments on an individual basis (see Note 10).

Recently Issued Accounting Standards

Fair Value Measurement—In August 2018, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update which modifies the disclosure requirements for fair value measurements in Topic 820, Fair Value Measurement. This update will be effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, and may be early adopted. The Company does not expect the adoption of this update to have a material effect on its condensed consolidated financial statements.

Intangibles-Goodwill and Other—Internal-Use Software—In August 2018, the FASB issued an accounting standards update which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. This update will be effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, and may be early adopted. The Company expects to apply this update prospectively and does not expect adoption to have a material effect on its condensed consolidated financial statements.

Compensation—Stock Compensation—In June 2018, the FASB issued an accounting standards update which expands the scope of Topic 718, Stock Compensation, to include share-based payments granted to non-employees in exchange for goods or services. The new guidance simplifies the accounting for share-based payments granted to non-employees for goods or services by aligning it with the accounting for share-based payments granted to employees, with certain exceptions. Under the new guidance, non-employee share-based payment awards included within the scope of Topic 718 will be measured at the grant-date fair value of the equity instruments. In addition, classification of non-employee share-based payment awards will be subject to the requirements of Topic 718 unless modified after the good has been delivered and/or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. This approach will eliminate the requirement to reassess classification of such awards upon vesting. The Company adopted this update on January 1, 2019, using a retrospective method. The adoption of this update did not have a material effect on the Company’s condensed consolidated financial statements.

Comprehensive Income—In February 2018, the FASB issued an accounting standards update that allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (“TCJA”). The Company adopted this update on January 1, 2019, using a retrospective method. The adoption of this update did not have a material effect on the Company’s condensed consolidated financial statements.

Goodwill—In January 2017, the FASB issued an accounting standards update in which the guidance on testing for goodwill was updated to eliminate Step 2 in the determination on whether goodwill should be considered impaired. Annual and/or interim assessments are still required. This update will be effective for fiscal years and interim periods within fiscal years beginning after December 15, 2019, and may be adopted early. The Company expects to apply this ~~amendment~~update prospectively and does not expect adoption to have a material effect on its condensed consolidated financial statements.

Financial Instruments—Credit Losses—In June 2016, the FASB issued an accounting standards update which requires the measurement of an impairment allowance for certain financial assets based on a company’s current estimate of all contractual cash flows it does not expect to collect. This update will be effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, and may be adopted early. The Company expects to apply this update using a modified retrospective method and does not expect adoption to have a material effect on its condensed consolidated financial statements.

identification and classification of leases that commenced before the effective date, (ii) initial direct costs for leases that commenced before the effective date, (iii) the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset, (iv) land easements and (v) the evaluation of lease and non-lease components of a contract.

Implementation had no cumulative effect on retained earnings. Adoption resulted in the recognition of operating lease right-of-use assets of $7.1 million as of January 1, 2019, which included adjustments for accrued lease payments, above market lease liabilities and lease incentives, and liabilities of $14.5 million. Finance lease right-of-use assets and liabilities recognized as of January 1, 2019, included preexisting assets and liabilities of $3.8 million and $3.4 million, respectively, related to capital leases accounted for under prior guidance.

Judgement was exercised in the application of ASC 842 with respect to the determination of whether a contract contains a lease. While the ability to control and direct the use of an identified asset indicates that the contract, or portion of a contract, is a lease, a counterparty’s substantive substitution rights typically provide evidence that a lessee does not control the asset. Judgement was also exercised with respect to the determination of the discount rate used to determine the present value of lease payments. In instances in which interest rates implicit in leases are not readily determinable, the Company uses its incremental borrowing rate. The substantial majority of widely available market maturities and asset-specific risk spreads may not match the underlying contract and, as such, borrowing rates and risk spreads are estimated based on the contract’s term, the counterparty’s security and other characteristics of the identified asset.


3.	NET INCOME PER SHARE

Basic net income per share is computed by dividing net income available to common shareholders by the weighted-average number of shares of the Corporation’s unrestricted common stock outstanding. Diluted net income per share is computed by dividing net income available to common shareholders, as adjusted for potentially dilutive securities, by the weighted-average number of shares of unrestricted common stock outstanding plus other potentially dilutive securities. Dilutive securities include certain equity-based awards (see Note 13) and are included in the calculation provided that the inclusion of such securities is not anti-dilutive.

The calculations of basic and diluted net income per share, including a reconciliation of the numerators and denominators, are as follows (in thousands, except per share data):


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018			2019			2018			2019			2018
Numerator:
Net income available to Extended Stay America, Inc. common shareholders - basic	$	53,497		$	65,056		$	75,431		$	79,908		$	41,071		$	71,902		$	116,502		$	151,810
Income attributable to noncontrolling interests assuming conversion	(7		)	(1		)	(12		)	(26		)	(6		)	(5		)	(19		)	(26		)
Net income available to Extended Stay America, Inc. common shareholders - diluted	$	53,490		$	65,055		$	75,419		$	79,882		$	41,065		$	71,897		$	116,483		$	151,784
Denominator:
Weighted-average number of Extended Stay America, Inc. common shares outstanding - basic	188,450			189,626			188,399			190,197			186,844			188,822			188,063			189,681
Dilutive securities	363			557			296			512			171			431			254			430
Weighted-average number of Extended Stay America, Inc. common shares outstanding - diluted	188,813			190,183			188,695			190,709			187,015			189,253			188,317			190,111
Net income per Extended Stay America, Inc. common share - basic	$	0.28		$	0.34		$	0.40		$	0.42		$	0.22		$	0.38		$	0.62		$	0.80
Net income per Extended Stay America, Inc. common share - diluted	$	0.28		$	0.34		$	0.40		$	0.42		$	0.22		$	0.38		$	0.62		$	0.80


4.	HOTEL DISPOSITIONS

NoNaN hotels were sold during the three or ~~six~~nine months ended ~~June~~September 30, 2019. The table below summarizes hotel dispositions during the year ended December 31, 2018 (in thousands, except number of hotels and number of rooms). None of the 2018

dispositions were reported as discontinued operations.


Year	Brand	Location	Month Sold	Number of Hotels	Number of Rooms	Net Proceeds		Gain (Loss) on Sale				Franchised/Managed ⁽¹⁾		Brand	Location	Month Sold	Number of Hotels	Number of Rooms	Net Proceeds		Gain (Loss) on Sale				Franchised/Managed ⁽¹⁾
2018	Extended Stay America	Various	November	14	1,369	$	34,855	$	1,331		⁽²⁾	Yes		Extended Stay America	Various	November	14	1,369	$	34,855	$	1,331		⁽²⁾	Yes
2018	Extended Stay America	Various	September	16	1,680	60,710		6,293			⁽²⁾	Yes		Extended Stay America	Various	September	16	1,680	60,710		6,293			⁽²⁾	Yes
2018	Extended Stay America	Various	September	16	1,776	58,144		(3,014		)	⁽²⁾	Yes		Extended Stay America	Various	September	16	1,776	58,144		(3,014		)	⁽²⁾	Yes
2018	Extended Stay America	Various	February	25	2,430	111,156		6,810			⁽²⁾	Yes		Extended Stay America	Various	February	25	2,430	111,156		6,810			⁽²⁾	Yes
2018	Extended Stay America	Texas	March	1	101	44,090		31,058				Yes	⁽³⁾	Extended Stay America	Texas	March	1	101	44,090		31,058				No	⁽³⁾


(1)	As of ~~June~~September 30, 2019.


(2)	Net of impairment charges of $16.8 million, $24.3 million, $6.3 million and $2.1 million, respectively, recognized prior to sale.


(3)	~~Remaining term of franchise or management~~Management agreement ~~is less than one year.~~terminated in August 2019.

During the three and ~~six~~nine months ended ~~June~~September 30, 2018, disposed hotel properties contributed total room and other hotel revenues, total operating expenses and ~~loss~~gain (loss) before income tax expense as follows (in thousands):


	Three Months Ended June 30, 2018		Six Months Ended June 30, 2018			Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
Total room and other hotel revenues	$	16,107	$	34,807		$	16,363	$	51,170
Total operating expenses ⁽¹⁾	12,481		66,095			12,295		78,390
Gain (loss) before income tax expense ⁽¹⁾	3,626		(31,288		)	4,068		(27,220		)


(1)	Includes impairment charges of $0 and $37.4 million for the three and ~~six~~nine months ended ~~June~~September 30, ~~2018.~~2018, respectively.


5.	PROPERTY AND EQUIPMENT

Net investment in property and equipment as of ~~June~~September 30, 2019 and December 31, 2018, consists of the following (in thousands):


	June 30, 2019			December 31, 2018			September 30, 2019			December 31, 2018
Hotel properties:
Land and site improvements ⁽¹⁾	$	1,217,149		$	1,215,710		$	1,218,581		$	1,215,710
Building and improvements	2,747,230			2,729,661			2,754,786			2,729,661
Furniture, fixtures and equipment	717,774			674,545			726,980			674,545
Total hotel properties	4,682,153			4,619,916			4,700,347			4,619,916
Development in process ⁽²⁾	51,199			27,174			74,125			27,174
Corporate furniture, fixtures, equipment and other	23,729			22,972			25,068			22,972
Undeveloped land parcel	1,675			1,675			1,675			1,675
Total cost	4,758,756			4,671,737			4,801,215			4,671,737
Less accumulated depreciation:
Hotel properties	(1,281,821		)	(1,201,260		)	(1,314,367		)	(1,201,260		)
Corporate furniture, fixtures, equipment and other	(18,697		)	(16,845		)	(19,221		)	(16,845		)
Total accumulated depreciation	(1,300,518		)	(1,218,105		)	(1,333,588		)	(1,218,105		)
Property and equipment - net	$	3,458,238		$	3,453,632		$	3,467,627		$	3,453,632


(1)	Includes finance lease asset of $3.2 million as of ~~June~~September 30, 2019 and December 31, 2018.


(2)	Includes finance lease asset of $0.8 million and $0.6 million as of ~~June~~September 30, 2019 and December 31, 2018, respectively.

As of ~~June~~September 30, 2019 and December 31, 2018, development in process consisted of 1315 and 11 land parcels, respectively, which are in various phases of construction and/or development.

NoThe Company recognized an impairment charge of $2.7 million for 1 hotel located in New York during the three and nine months ended September 30, 2019. The impairment charge was incurred as a result of a decline in the hotel’s estimated future operating cash flows. NaN impairment charges were recognized during the three ~~and six~~ months ended ~~June 30, 2019 and the three months ended June~~September 30, 2018. During the ~~six~~nine months ended ~~June~~September 30, 2018, the Company recognized $43.6 million of impairment

charges for 21 hotels generally located in the Midwestern U.S., the majority of which were incurred in connection with evaluating the potential sale of certain non-core assets.

The Company used Level 3 unobservable inputs and, in certain instances Level 2 observable inputs, to determine the impairment on its property and equipment. Quantitative information with respect to observable inputs consists of non-binding bids or, in certain instances, binding agreements to sell a hotel or portfolio of hotels to one or more third parties. Quantitative information with respect to unobservable inputs consists of internally developed cash flow models that include the following assumptions, among others: projections of revenues, expenses and hotel-related cash flows based on assumed long-term growth rates, demand trends, expected future capital expenditures and estimated discount rates that range from 6% to 10% and terminal capitalization rates that range from 7% to 11%. These assumptions are based on the Company’s historical data and experience, the Company’s budgets, industry projections and overall micro and macro-economic projections.

The estimation and evaluation of future cash flows, in particular the holding period for real estate assets and asset composition and/or concentration within real estate portfolios, relies on judgments and assumptions regarding holding period, current and future operating and economic performance, and current and future market conditions. It is possible that such judgments and/or estimates will change; if this occurs, the Company may recognize additional impairment charges or losses on sale in future periods reflecting either changes in estimate, circumstance or the estimated market value of its assets.


6.	INTANGIBLE ASSETS AND GOODWILL

The Company’s intangible assets and goodwill as of ~~June~~September 30, 2019 and December 31, 2018, consist of the following (dollars in thousands):

June 30, 2019

Gross
Carrying
Amount

Accumulated
Amortization

Net Book
Value
Definite-lived intangible assets—customer relationships $ 26,800
$ (11,699 ) $ 15,101
Definite-lived intangible assets—software license 4,607
(197 ) 4,410
Definite-lived intangible assets—software license in process 2,321
—
2,321
Indefinite-lived intangible assets—trademarks 10,162
—
10,162
Total intangible assets 43,890
(11,896 ) 31,994
Goodwill 45,192
—
45,192
Total intangible assets and goodwill $ 89,082
$ (11,896 ) $ 77,186



	September 30, 2019
	Gross Carrying Amount		Accumulated Amortization			Net Book Value
Definite-lived intangible assets—customer relationships	$	26,800	$	(12,035	)	$	14,765
Definite-lived intangible assets—software licenses	8,508		(460		)	8,048
Definite-lived intangible assets—software licenses in process	58		—			58
Indefinite-lived intangible assets—trademarks	10,164		—			10,164
Total intangible assets	45,530		(12,495		)	33,035
Goodwill	45,192		—			45,192
Total intangible assets and goodwill	$	90,722	$	(12,495	)	$	78,227


	December 31, 2018							December 31, 2018
	Gross Carrying Amount		Accumulated Amortization			Net Book Value		Gross Carrying Amount		Accumulated Amortization			Net Book Value
Definite-lived intangible assets—customer relationships	$	26,800	$	(11,029	)	$	15,771	$	26,800	$	(11,029	)	$	15,771
Definite-lived intangible assets—software license	1,926		(36		)	1,890
Definite-lived intangible assets—software license in process	870		—			870
Definite-lived intangible assets—software licenses								1,926		(36		)	1,890
Definite-lived intangible assets—software licenses in process								870		—			870
Indefinite-lived intangible assets—trademarks	10,183		—			10,183		10,183		—			10,183
Total intangible assets	39,779		(11,065		)	28,714		39,779		(11,065		)	28,714
Goodwill	45,192		—			45,192		45,192		—			45,192
Total intangible assets and goodwill	$	84,971	$	(11,065	)	$	73,906	$	84,971	$	(11,065	)	$	73,906

The remaining weighted-average amortization period for amortizing intangible assets is approximately 1110 years as of ~~June~~September 30, 2019. Estimated future amortization expense for amortizing intangible assets is as follows (in thousands):


Years Ending December 31,
Remainder of 2019	$	936	$	583
2020	1,869		2,336
2021	1,869		2,336
2022	1,869		2,336
2023	1,869		2,336
2024	1,869		2,336
Thereafter	9,230		10,550
Total	$	19,511	$	22,813


7.	DEBT

Summary - The Company’s outstanding debt, net of unamortized debt ~~discount~~discounts and unamortized deferred financing costs, as of ~~June~~September 30, 2019 and December 31, 2018, consists of the following (dollars in thousands):


	Stated Amount⁽¹⁾			Carrying Amount						Unamortized Deferred Financing Costs										Stated Amount			Carrying Amount						Unamortized Deferred Financing Costs
Loan			June 30, 2019			December 31, 2018			June 30, 2019			December 31, 2018			Stated Interest Rate		Maturity Date			Stated Amount		September 30, 2019			December 31, 2018			September 30, 2019			December 31, 2018			Stated Interest Rate		Maturity Date
Term loan facility	Stated Amount⁽¹⁾
ESH REIT Term Facility	$	1,300,000		$	1,127,040	⁽²⁾	$	1,132,259	⁽²⁾	$	9,416		$	10,546		LIBOR⁽³⁾ + 2.00%		8/30/2023	⁽¹⁾	$	630,909		$	628,880	⁽¹⁾	$	1,132,259	⁽¹⁾	$	9,357		$	10,546		LIBOR⁽²⁾ + 2.00%		9/18/2026	⁽³⁾
Senior notes
2027 Notes																				750,000			750,000			—			14,054			—			4.63%		10/1/2027
2025 Notes	1,300,000			1,292,329		⁽⁴⁾	1,291,671		⁽⁴⁾	16,466			17,877			5.25%		5/1/2025		1,300,000			1,292,658		⁽⁴⁾	1,291,671		⁽⁴⁾	15,760			17,877			5.25%		5/1/2025
Revolving credit facilities
ESH REIT Revolving Credit Facility	350,000			—			—			1,193		⁽⁵⁾	1,469		⁽⁵⁾	LIBOR⁽³⁾ + 2.75%		8/30/2021		350,000			—			—			2,709		⁽⁵⁾	1,469		⁽⁵⁾	LIBOR⁽²⁾ + 2.00%		9/18/2024
Corporation Revolving Credit Facility	50,000			—			—			237		⁽⁵⁾	292		⁽⁵⁾	LIBOR⁽³⁾ + 3.00%		8/30/2021		50,000			—			—			551		⁽⁵⁾	292		⁽⁵⁾	LIBOR⁽²⁾ + 2.25%		9/18/2024
Unsecured Intercompany Facility
Unsecured Intercompany Facility⁽⁶⁾
Unsecured Intercompany Facility⁽⁶⁾	75,000			—			—			—			—			5.00%		8/30/2023		75,000			—			—			—			—			5.00%		9/18/2026
Total				$	2,419,369		$	2,423,930		$	27,312		$	30,184									$	2,671,538		$	2,423,930		$	42,431		$	30,184


(1)	~~Amortization~~The ESH REIT Term Facility (defined below) is ~~interest only, except for~~presented net of an unamortized debt discount of $2.0 million and $4.3 million as of September 30, 2019 and December 31, 2018, respectively.


(2)	As of September 30, 2019 and December 31, 2018, one-month LIBOR was 2.02% and 2.50%, respectively. As of September 30, 2019 and December 31, 2018, $250.0 million and $300.0 million, respectively, of the ESH REIT Term Facility ~~(as defined below), which amortizes~~was subject to an interest rate swap at a fixed rate of 1.175%.

(3)

Amortizes in equal quarterly installments of ~~$2.8~~$1.6 million. In addition to scheduled amortization, subject to certain exceptions, annual mandatory prepayments of up to 50% of Excess Cash Flow, as defined, may be ~~required under the ESH REIT Term Facility.~~required. Annual mandatory prepayments for the year are due during the first quarter of the following year. No mandatory prepayments were required in the first quarter of 2019 based on ESH REIT’s Excess Cash Flow for the year ended December 31, 2018.


~~(2)~~	~~ESH REIT Term Facility is presented net of an unamortized debt discount of $3.9 million and $4.3 million as of June 30, 2019 and December 31, 2018, respectively.~~


~~(3)~~	~~As of June 30, 2019 and December 31, 2018, one-month LIBOR was 2.40% and 2.50%, respectively. As of June 30, 2019~~, ~~$250.0 million of the ESH REIT Term Facility is subject to an interest rate swap at a fixed rate of 1.175%.~~


(4)	The 2025 Notes ~~(as defined~~(defined below) are presented net of an unamortized ~~debt~~ discount of ~~$7.7~~$7.3 million and $8.3 million as of ~~June~~September 30, 2019 and December 31, 2018, respectively.


(5)	Unamortized deferred financing costs related to revolving credit facilities are included in other assets in the accompanying condensed consolidated balance sheets.


(6)	Any outstanding debt balances and interest expense, as applicable, owed from ESH REIT to the Corporation eliminate in consolidation.

ESH REIT Credit Facilities

~~In August 2016,~~ ESH ~~REIT entered into a~~REIT’s credit agreement, as may be amended and supplemented from time to time, ~~providing~~provides for senior secured credit facilities (collectively, the “ESH REIT Credit Facilities”) ~~consisting~~, which, as of September 30, 2019, consisted of a ~~$1,300.0~~$630.9 million senior secured term loan facility (the “ESH REIT Term Facility”) and a $350.0 million senior secured revolving credit facility (the “ESH REIT Revolving Credit Facility”). ~~Under~~Subject to the satisfaction of certain criteria, borrowings under the ESH REIT Credit Facilities, ~~ESH REIT~~ may ~~increase its borrowings~~be increased by an amount of up to $600.0 million, plus additional amounts, so long as, after giving effect to the incurrence of such incremental facility and the application of proceeds thereof, ESH REIT’s pro-forma senior loan-to-value ratio is less than or equal to 45%.

In September 2019, ESH REIT entered into an amendment to the ESH REIT Credit Facilities whereby, among other things, proceeds from the issuance of the 2027 Notes (defined below) were used to repay $500.0 million of the outstanding borrowings under the ESH REIT Term Facility and the stated amount of the ESH REIT Term Facility was reduced from $1,130.0 million to $630.9 million. Additionally, the amendment reduced the interest rate applicable to the ESH REIT Revolving Credit Facility and extended the maturity of both the ESH REIT Term Facility and the ESH REIT Revolving Credit Facility. In connection with these transactions, ESH REIT incurred $6.7 million of debt extinguishment and modification costs, which consist of the write-off of unamortized deferred financing costs and discounts of $5.6 million and other costs of $1.1 million. Debt extinguishment and modification costs are included as a component of net interest expense in ~~each case subject to certain conditions.~~the accompanying condensed consolidated statements of operations.

period other than a Level 1 Period; or (ii) a base rate, as defined, plus 0.75% during a Level 1 Period or 1.00% for any period other than a Level 1 Period. The ESH REIT Term Facility amortizes in equal quarterly installments of $1.6 million. In addition to scheduled amortization, subject to certain exceptions, annual mandatory prepayments of up to 50% of Excess Cash Flow, as defined, may be required. The ESH REIT Term Facility matures on September 18, 2026.

ESH REIT has the option to voluntarily prepay outstanding loans under the ESH REIT Term Facility ~~without~~at any time upon prior written notice. In addition to customary breakage costs, amounts refinanced, substituted or replaced by indebtedness in connection with certain repricing transactions which have a lower all-in yield than the all-in yield under the ESH REIT Term Facility on or prior to March 18, 2020 (other than as a result of a transformative transaction) are subject to a prepayment penalty equal to 1.00% of the aggregate principal amount refinanced, substituted or replaced. Prepayments made after March 18, 2020 are not subject to a prepayment penalty.

ESH REIT Revolving Credit Facility—~~The~~Borrowings under the ESH REIT Revolving Credit Facility ~~provides for the issuance of up to $50.0 million of letters of credit. Borrowings under the facility~~ bear interest at a rate equal to (i) LIBOR plus a spread that ranges from ~~2.25%~~1.50% to ~~2.75%~~2.00% based on ESH REIT’s Consolidated Total Net Leverage Ratio, as defined, or (ii) a base rate ~~as defined,~~(determined by reference to the highest of (A) the prime lending rate, (B) the overnight federal funds rate plus 0.50%, or (C) the one-month adjusted LIBOR rate plus 1.00%) plus a spread that ranges from ~~1.25%~~0.50% to ~~1.75%~~1.00% based on ESH REIT’s Consolidated Total Net Leverage Ratio, as defined. ~~In addition to paying interest on outstanding principal,~~ ESH REIT incurs a fee of ~~0.35%~~0.30% or 0.175% on the unutilized revolver balance. ESH REIT is also required to pay customary letter of credit fees and agency fees. The ESH REIT Revolving Credit Facility provides for the issuance of up to $50.0 million of letters of credit. As of ~~June~~September 30, 2019, ESH REIT had no0 letters of credit outstanding under the facility and available borrowing capacity of $350.0 million. The ESH REIT Revolving Credit Facility matures on September 18, 2024.

ESH REIT 2027 Notes

In September 2019, ESH REIT issued $750.0 million of its 4.625% senior notes due in 2027 (the “2027 Notes”) under an indenture with Deutsche Bank Trust Company Americas, as trustee, at a price equal to 100% of par value in a private placement pursuant to Rule 144A of the Securities Act of 1933, as amended. Proceeds received from the issuance of the 2027 Notes, net of financing costs, totaled $738.0 million, $500.0 million of which were used to repay a portion of outstanding borrowings under the ESH REIT Term Loan. The remaining proceeds, $238.0 million, are expected to be used for general corporate purposes. The 2027 Notes bear interest at a fixed rate of 4.625% per annum, payable semi-annually in arrears on April 1 and October 1 of each year, commencing April 1, 2020, and mature on October 1, 2027.

The 2027 Notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis by each of ESH REIT’s subsidiaries that guarantee ESH REIT’s obligations under the ESH REIT Credit Facilities. The 2027 Notes are not guaranteed by the Corporation or any of its subsidiaries that lease ESH REIT’s properties or its subsidiaries that engage in franchising or management activities or own intellectual property. The 2027 Notes rank equally in right of payment with ESH REIT’s existing and future senior unsecured indebtedness, and senior in right of payment to all future subordinated indebtedness, if any. The 2027 Notes are effectively junior to any of ESH REIT’s secured indebtedness to the extent of the value of the assets securing such indebtedness.

ESH REIT may redeem the 2027 Notes at any time on or after October 1, 2022, in whole or in part, at a redemption price equal to 102.313% of the principal amount, declining annually to 100% of the principal amount from October 1, 2024 and thereafter, plus accrued and unpaid interest. Prior to October 1, 2022, ESH REIT may redeem the 2027 Notes, in whole or in part, at a redemption price equal to 100% of the principal amount, plus a “make-whole” premium, as defined, plus accrued and unpaid interest. Prior to October 1, 2022, subject to certain conditions, ESH REIT may redeem up to 35% of the aggregate principal amount of the 2027 Notes at a redemption price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest, with the net cash proceeds from certain equity offerings, provided 65% of the original amount of the principal remains outstanding after the occurrence of each such redemption. Upon a Change of Control, as defined, holders of the 2027 Notes have the right to require ESH REIT to redeem the 2027 Notes at 101% of the principal amount, plus accrued and unpaid interest.

ESH REIT 2025 Notes

In May 2015 and March 2016, ESH REIT issued $500.0 million and $800.0 million, respectively, of its 5.25% senior notes due in ~~May~~ 2025 (the “2025 Notes”) under an indenture ~~(the “Indenture”)~~ with Deutsche Bank Trust Company Americas, as trustee, in private placements pursuant to Rule 144A of the Securities Act of 1933, as amended. The 2025 Notes bear interest at a fixed rate of 5.25% per annum, payable semi-annually in arrears on May 1 and November 1 of each year, and mature on May 1, 2025.

ESH REIT may redeem the 2025 Notes at any time on or after May 1, 2020, in whole or in part, at a redemption price equal to 102.625% of the principal amount, declining annually to 100% of the principal amount from May 1, 2023 and thereafter, plus accrued and unpaid interest. Prior to May 1, 2020, ESH REIT may redeem the 2025 Notes, in whole or in part, at a redemption price equal to 100% of the principal amount, plus a “make-whole” premium, as defined, plus accrued and unpaid interest. Upon a Change of Control, as defined, holders of the 2025 Notes have the right to require ESH REIT to redeem the 2025 Notes at 101% of the principal amount, plus accrued and unpaid interest.

Corporation Revolving Credit Facility

~~In August 2016, the Corporation entered into a~~The Corporation’s revolving credit facility, ~~agreement,~~ as may be amended and supplemented from time to time (the “Corporation Revolving Credit Facility”), ~~providing~~provides for the issuance of up to $50.0 million of letters of credit as well as borrowing on same day notice, referred to as swingline loans, in an amount of up to $20.0 million. In September 2019, the Corporation entered into an amendment to the Corporation Revolving Credit Facility which, among other things, extended the facility’s maturity and reduced the interest rate spread on utilized and unutilized revolver balances. Borrowings under the ~~facility~~Corporation Revolving Credit Facility bear interest at a rate equal to (i) LIBOR plus ~~3.00%~~2.25% or (ii) a base rate ~~as defined,~~(determined by reference to the highest of (A) the prime lending rate, (B) the overnight federal funds rate plus ~~2.00%. In addition to paying interest on outstanding principal,~~0.50% or (C) the ~~Corporation incurs a fee of 0.35% or 0.175% on the unutilized revolver balance. The Corporation is also required to pay customary letter of credit fees and agency fees.~~one-month adjusted LIBOR plus 1.00%) plus 1.25%. As of ~~June~~September 30, 2019, the Corporation had ~~one~~1 letter of credit outstanding under the facility of $0.2 million and available borrowing capacity of $49.8 million. The Corporation Revolving Credit Facility matures on September 18, 2024.

Unsecured Intercompany Facility

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 “Unsecured Intercompany Facility”). ~~As of June 30,~~In September 2019, ~~and December 31, 2018,~~ the ~~amount outstanding under~~Unsecured Intercompany Facility was amended to, among other things, extend the ~~facility was $0.~~facility’s maturity. Under the Unsecured Intercompany Facility, ESH REIT may borrow up to $300.0 million, plus additional amounts, in each case subject to certain conditions. Loans under the ~~facility~~Unsecured Intercompany Facility bear interest at an annual rate of ~~5.00%~~5.0%. ESH REIT has the option to prepay outstanding balances under the facility without penalty. As of September 30, 2019 and December 31, 2018, the amount outstanding under the facility was $0. There is no scheduled amortization, and the Unsecured Intercompany Facility matures on September 18, 2026.

Covenants

The ESH REIT Credit Facilities, the 2027 Notes, the 2025 Notes, the Corporation Revolving Credit Facility and the Unsecured Intercompany Facility contain a number of restrictive covenants that, among other things and subject to certain exceptions, limit the Corporation’s or ESH REIT’s ability and the ability of their respective subsidiaries to engage in certain transactions. In addition, the ESH REIT Revolving Credit Facility and the Corporation Revolving Credit Facility contain financial covenants that, subject to certain conditions, require compliance with certain senior loan-to-value and consolidated leverage ratios. The agreements governing the Corporation’s and ESH REIT’s indebtedness also contain certain customary events of default, including, but not limited to, cross-defaults to certain other indebtedness and, in the case of the ESH REIT Credit Facilities and the Unsecured Intercompany Facility, certain material operating leases and management agreements. As of ~~June~~September 30, 2019, the Corporation and ESH REIT were in compliance with all covenants under their respective debt agreements.

Interest Expense, net—The components of net interest expense during the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, are as follows (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018			2019			2018			2019			2018
Contractual interest ⁽¹⁾	$	28,765		$	29,076		$	57,482		$	58,038		$	28,727		$	29,120		$	86,209		$	87,158
Amortization of deferred financing costs and debt discount	1,996			1,997			3,993			4,012			2,014			1,996			6,007			6,008
Debt extinguishment and other costs ⁽²⁾	405			1,477			806			2,197			7,117			231			7,923			2,428
Interest income	(1,400		)	(125		)	(2,911		)	(182		)	(1,323		)	(340		)	(4,234		)	(522		)
Total	$	29,766		$	32,425		$	59,370		$	64,065		$	36,535		$	31,007		$	95,905		$	95,072

______________________


(1)	Includes dividends on shares of mandatorily redeemable Corporation preferred ~~stock and is net~~stock. Net of capitalized interest of ~~$0.4~~$0.6 million, $0.1 million, ~~$0.8~~$1.4 million and ~~$0.1~~$0.2 million, respectively.


(2)	Includes interest expense on finance leases (see Note 12) and unused credit facility fees.

Mandatorily Redeemable Preferred Stock—The Corporation has authorized 350.0 million shares of preferred stock, $0.01 par value, of which 7,130 shares of mandatorily redeemable voting preferred stock were issued and outstanding as of September 30, 2019 and December 31, 2018. Dividends on these mandatorily redeemable voting preferred shares are payable quarterly in arrears at a rate of 8.0% per year. With respect to dividend, distribution and liquidation rights, the 8.0% voting preferred stock ranks senior to the Corporation’s common stock. Holders of the 8.0% voting preferred stock have the right to require the Corporation to redeem in cash the 8.0% voting preferred stock at $1,000 per share plus any accumulated unpaid dividends. On November 15, 2020, the Corporation shall mandatorily redeem all of the 8.0% voting preferred stock at $1,000 per share plus any accumulated unpaid dividends.

Fair Value of Debt and Mandatorily Redeemable Preferred Stock—As of ~~June~~September 30, 2019 and December 31, 2018, the estimated fair value of the Company’s debt was ~~$2.5~~$2.7 billion and $2.3 billion, respectively, and the estimated fair value of the Corporation’s 8.0% mandatorily redeemable preferred stock was $7.1 million and $7.0 million, respectively. Estimated fair values are determined by comparing current borrowing rates and risk spreads offered in the market (Level 2 fair value measures) or quoted market prices (Level 1 fair value measures), when available, to the stated interest rates and spreads on the Company’s debt and the Corporation’s 8.0% mandatorily redeemable preferred stock.


8.	DERIVATIVE INSTRUMENTS

In September 2016, ESH REIT entered into a floating-to-fixed interest rate swap, as amended and supplemented from time to time, at a fixed rate of 1.175% and a floating rate of one-month LIBOR to manage its exposure to interest rate risk on a portion of the ESH REIT Term Facility. The notional amount of the interest rate swap as of ~~June~~September 30, 2019 was $250.0 million. The notional amount decreases by an additional $50.0 million every six months until the swap’s maturity in September 2021.

For the three and ~~six~~nine months ended ~~June~~September 30, 2019, the Company received proceeds of $0.7 million and $2.5 million, respectively, and for the three and nine months ended September 30, 2018, the Company received proceeds of $0.8 million and ~~$1.8 million, respectively, and for the three and six months ended June 30, 2018, the Company received proceeds of $0.7 million and $1.1~~$1.9 million, respectively, that offset interest expense. As of ~~June~~September 30, 2019, ~~$1.5~~$0.9 million is expected to be recognized through earnings over the following twelve months.

The table below presents the amounts and classification of the interest rate swap on the Company’s condensed consolidated financial statements (in thousands):

Other assets Accumulated other comprehensive income, net of tax
Interest
expense, net
As of June 30, 2019 $ 1,776
$ 1,512
⁽¹⁾

As of December 31, 2018 $ 5,789
$ 4,934
⁽²⁾

For the three months ended June 30, 2019 $ (821 )
For the three months ended June 30, 2018 $ (664 )
For the six months ended June 30, 2019 $ (1,797 )
For the six months ended June 30, 2018 $ (1,085 )



	Other assets		Accumulated other comprehensive income, net of tax			Interest expense, net
As of September 30, 2019	$	971	$	825	⁽¹⁾
As of December 31, 2018	$	5,789	$	4,934	⁽²⁾
For the three months ended September 30, 2019						$	(704	)
For the three months ended September 30, 2018						$	(803	)
For the nine months ended September 30, 2019						$	(2,501	)
For the nine months ended September 30, 2018						$	(1,888	)


(1)	Changes during the ~~six~~nine months ended ~~June~~September 30, 2019, on a pre-tax basis, consisted of changes in fair value of ~~$(4.0)~~$(4.8) million.


(2)	Changes during the year ended December 31, 2018, on a pre-tax basis, consisted of changes in fair value of $(0.6) million and the cumulative effect adjustment of $(0.7) million recorded as a result of adopting ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, on January 1, 2018.


9.	REVENUE FROM CONTRACTS WITH CUSTOMERS

Disaggregation of Revenue

The following table disaggregates room revenues generated from owned hotels by booking source for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 (in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,					Three Months Ended September 30,					Nine Months Ended September 30,
	2019		2018			2019		2018			2019		2018			2019		2018
Property direct	$	80,043	$	93,480		$	153,587	$	186,866		$	83,335	$	94,356		$	236,922	$	281,222
Central call center	78,091		79,202			143,628		147,665			83,266		85,088			226,894		232,754
Proprietary website	58,638		57,742			107,893		107,601			58,791		61,930			166,684		169,531
Third-party intermediaries	83,744		81,866		⁽¹⁾	152,841		148,986		⁽¹⁾	84,226		84,594		⁽¹⁾	237,065		233,579		⁽¹⁾
Travel agency global distribution systems	11,098		14,658		⁽¹⁾	20,711		26,040		⁽¹⁾	11,051		14,949		⁽¹⁾	31,764		40,989		⁽¹⁾
Total room revenues⁽²⁾	$	311,614	$	326,948		$	578,660	$	617,158		$	320,669	$	340,917		$	899,329	$	958,075

(1)

As a result of the correction of a classification error, for the three and ~~six~~nine months ended ~~June~~September 30, 2018, ~~$19.6~~$19.3 million and ~~$36.0~~$55.2 million of room revenues generated from opaque booking channels, which were previously reported as revenues generated from travel agency global distribution systems, have been reclassified and reported as revenues generated from third-party intermediaries. The Company concluded that the effect of the error is immaterial to previously issued financial statements but has made the correction for consistent presentation.

systems, have been reclassified and reported as revenues generated from third-party intermediaries. The Company concluded that the effect of the error is immaterial to previously issued financial statements but has made the correction for consistent presentation.


(2)	In addition to room revenues, the Company’s owned hotels earned ~~$6.1~~$6.5 million and ~~$11.4~~$17.8 million of other hotel revenues during the three and ~~six~~nine months ended ~~June~~September 30, 2019, respectively, and $~~5.5~~5.9 million and ~~$10.8~~$16.7 million of other hotel revenues during the three and ~~six~~nine months ended ~~June~~September 30, 2018, respectively.

The following table disaggregates room revenues generated from owned hotels by length of guest stay for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018		2019		2018		2019		2018
1-6 nights	$	121,052	$	126,394	$	222,476	$	231,424	$	118,700	$	125,285	$	341,176	$	356,709
7-29 nights	63,867		67,902		118,967		128,666		67,927		74,331		186,894		202,997
30+ nights	126,695		132,652		237,217		257,068		134,042		141,301		371,259		398,369
Total room revenues ⁽¹⁾	$	311,614	$	326,948	$	578,660	$	617,158	$	320,669	$	340,917	$	899,329	$	958,075


(1)	In addition to room revenues, the Company’s owned hotels earned ~~$6.1~~$6.5 million and ~~$11.4~~$17.8 million of other hotel revenues during the three and ~~six~~nine months ended ~~June~~September 30, 2019, respectively, and $~~5.5~~5.9 million and $~~10.8~~16.7 million of other hotel revenues during the three and ~~six~~nine months ended ~~June~~September 30, 2018, respectively.

The following table disaggregates revenues from franchised and managed hotels for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018		2019		2018		2019		2018
Management fees	$	367	$	343	$	660	$	541	$	312	$	335	$	972	$	875
Franchise fees	1,080		518		2,012		735		1,039		529		3,051		1,265
Indirect reimbursements (system services fees)	1,400		563		2,584		771		1,365		582		3,948		1,353
Direct reimbursements	3,126		2,637		6,037		4,296		2,835		2,770		8,873		7,066
Total revenues from franchised and managed hotels	$	5,973	$	4,061	$	11,293	$	6,343	$	5,551	$	4,216	$	16,844	$	10,559

Outstanding Contract Liabilities

Contract liabilities relate to advance deposits and deferred revenue with respect to owned hotels and, with respect to franchised hotels, advance consideration received, such as initial franchise fees paid when a franchise agreement is executed and certain system implementation fees paid at the time of installation. Contract liabilities are included in accounts payable and accrued liabilities on the accompanying condensed consolidated balance sheets. The following table presents outstanding contract liabilities as of ~~June~~September 30, 2019 and January 1, 2019, and the amount of outstanding January 1, 2019 contract liabilities recognized as revenue during the three and ~~six~~nine months ended ~~June~~September 30, 2019 (in thousands):

Outstanding Contract Liabilities
Outstanding Contract Liabilities as of
January 1, 2019
Recognized as Revenue
As of June 30, 2019 $ 19,606

As of January 1, 2019 13,829

For the three months ended June 30, 2019 $ 218
For the six months ended June 30, 2019 8,615



	Outstanding Contract Liabilities		Outstanding Contract Liabilities as of January 1, 2019 Recognized as Revenue
As of September 30, 2019	$	19,327
As of January 1, 2019	13,829
For the three months ended September 30, 2019			$	346
For the nine months ended September 30, 2019			8,961

Performance Obligations

As of ~~June~~September 30, 2019, ~~$14.7~~$14.0 million of the outstanding contract liabilities related to owned hotels and ~~$4.9~~$5.3 million related to franchised hotels. The Company does not estimate revenues expected to be recognized related to unsatisfied performance obligations for royalty fees, system service fees or management fees, as they are considered either sales-based fees or allocated to wholly unsatisfied performance obligations in a series.

Performance obligations related to owned hotels are expected to be satisfied within less than one year. Performance obligations related to franchised hotels are expected to be satisfied over the term of the respective franchise agreements, which are typically 20 years.


10.	SEGMENTS

The Company’s operating segments are components of the business which are managed discretely and for which discrete financial information is reviewed regularly by its chief operating decision maker to assess performance and make decisions regarding the allocation of resources. The Company’s operating and reportable segments are defined as follows:


•	Owned hotels—Earnings are derived from the operation of owned hotel properties and include room and other hotel revenues.


•	Franchise and management—Earnings are derived from fees under various franchise and management agreements with third parties. These contracts provide the Company the ability to earn compensation for licensing the Extended Stay America brand name, providing access to shared system-wide platforms and/or management services.

The performance of the Company’s operating segments is evaluated primarily on income from operations. Selected financial data is provided below (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,								Nine Months Ended September 30,
	2019			2018			2019			2018				2019				2018				2019				2018
Revenues:
Owned hotels	$	317,684		$	332,440		$	590,033		$	627,925			$	327,144			$	346,861			$	917,177			$	974,786
Franchise and management ⁽¹⁾	2,400			1,860			4,442			3,161				2,332				1,901				6,774				5,062
Total segment revenues	320,084			334,300			594,475			631,086				329,476				348,762				923,951				979,848
Corporate and other ⁽²⁾	19,704			20,800			39,218			42,130				18,506				19,471				57,724				61,601
Other revenues from franchised and managed properties ⁽³⁾	4,526			3,200			8,621			5,067				4,200				3,352				12,821				8,419
Intersegment eliminations ⁽⁴⁾	(20,657		)	(21,799		)	(40,988		)	(44,015		)		(19,487		)		(20,509		)		(60,475		)		(64,524		)
Total	$	323,657		$	336,501		$	601,326		$	634,268			$	332,695			$	351,076			$	934,021			$	985,344

Income (loss) from operations:
Owned hotels	$	104,653		$	116,684		$	174,348		$	191,146		⁽⁵⁾	$	105,777		⁽⁵⁾	$	124,848		⁽⁶⁾	$	280,125		⁽⁵⁾	$	315,994		⁽⁷⁾
Franchise and management ⁽¹⁾	2,400			1,860			4,442			3,161				2,332				1,901				6,774				5,062
Total segment income from operations	107,053			118,544			178,790			194,307				108,109				126,749				286,899				321,056
Corporate and other ⁽²⁾	(6,132		)	(5,846		)	(13,364		)	(12,828		)		(7,243		)		(5,190		)		(20,607		)		(18,018		)
Other expenses from franchised and managed properties, net ⁽³⁾	(470		)	(194		)	(1,022		)	(246		)		(499		)		(97		)		(1,521		)		(343		)
Total	$	100,451		$	112,504		$	164,404		$	181,233			$	100,367			$	121,462			$	264,771			$	302,695

(1)

Includes intellectual property fees charged to the owned hotels segment of $1.0 million and ~~$1.8~~$2.8 million for the three and ~~six~~nine months ended ~~June~~September 30, 2019, respectively, and $1.0 million and ~~$1.9~~$2.9 million for the three and ~~six~~nine months ended ~~June~~September 30, 2018, respectively, that are eliminated in the condensed consolidated statements of operations.

(2)

Includes revenues generated and operating expenses incurred in connection with the overall support of owned, franchised and managed hotels and related operations. ~~These amounts include~~Corporate and other revenues are comprised of management fees earned by and cost reimbursements charged to the owned hotels segment ~~of $19.7 million and $39.2 million for the three and six months ended June 30, 2019, respectively, and $20.8 million and $42.1 million for the three and six months ended June 30, 2018, respectively,~~ that are eliminated in the condensed consolidated statements of operations.


(3)	Includes direct reimbursement of specific costs incurred under franchise and management agreements that the Company is reimbursed for on a dollar-for-dollar basis as well as indirect reimbursement of certain costs incurred associated with the Company’s shared platform (i.e., system services) (see Note 2).


(4)	Includes management fees, intellectual property fees and other cost reimbursements charged to the owned hotels segment that are eliminated in the condensed consolidated statements of operations.


(5)	Includes impairment charge of $2.7 million.


(6)	Includes gain on sale of hotel properties of $3.5 million.


(7)	Includes impairment charges of $43.6 million and gain on sale of hotel properties of ~~$38.1~~$41.6 million.

Total assets for each of the Company’s operating segments are provided below (in thousands):


	June 30, 2019			December 31, 2018			September 30, 2019			December 31, 2018
Assets:
Owned hotels	$	3,671,208		$	3,643,603		$	3,728,423		$	3,643,603
Franchise and management	12,870			14,634			12,793			14,634
Total segment assets	3,684,078			3,658,237			3,741,216			3,658,237
Corporate and other	295,675			308,181			454,239			308,181
Intersegment eliminations	(40,188		)	(42,208		)	(40,078		)	(42,208		)
Total	$	3,939,565		$	3,924,210		$	4,155,377		$	3,924,210

Total capital expenditures for each of the Company's operating segments are provided below (in thousands):


	Six Months Ended June 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Capital Expenditures:
Owned hotels	$	112,294	$	89,053	$	177,214	$	146,445
Franchise and management	—		250		—		250
Total segment capital expenditures	112,294		89,303		177,214		146,695
Corporate and other	628		438		799		842
Total	$	112,922	$	89,741	$	178,013	$	147,537


11.	INCOME TAXES

The Corporation’s taxable income includes the taxable income of its wholly-owned subsidiaries and distribution income related to its ~~57%~~58% ownership of ESH REIT.

ESH REIT has elected to be taxed and expects to continue to qualify as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). A REIT is a legal entity that holds real estate assets and is generally not subject to federal and state income taxes. In order to maintain qualification as a REIT, ESH REIT is required to distribute at least 90% of its taxable income, excluding net capital gain, to its shareholders each year. In addition, ESH REIT must meet a number of complex organizational and operational requirements. If ESH REIT were to fail to qualify as a REIT in any taxable year, it would be subject to federal income taxes at regular corporate rates and generally would be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which it lost its REIT qualification. 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. Even in qualifying as a REIT, ESH REIT may be subject to state and local taxes in certain jurisdictions, and is subject to federal income and excise taxes on undistributed income.

The Company recorded a provision for federal, state and foreign income taxes of ~~$11.2~~$10.5 million for the three months ended ~~June~~September 30, 2019, an effective tax rate of ~~15.8%~~16.5%, as compared with a provision of ~~$14.4~~$15.0 million for the three months ended ~~June~~September 30, 2018, an effective rate of ~~18.0%~~16.6%. The Company recorded a provision for federal, state and foreign income taxes of ~~$17.3~~$27.8 million for the ~~six~~nine months ended ~~June~~September 30, 2019, an effective tax rate of ~~16.4%~~16.5%, as compared with a provision of ~~$20.2~~$35.2 million for the ~~six~~nine months ended ~~June~~September 30, 2018, an effective rate of ~~17.3%~~17.0%. 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 Code.

The Company’s income tax returns for the years ~~2015~~2016 to present are subject to examination by the Internal Revenue Service (“IRS”) and other tax returns for the years 2014 to present are subject to examination by other taxing authorities. ~~In June 2019, Extended Stay America, Inc. resolved its examination with the IRS for the tax year ended December 31, 2016, which resulted in no changes.~~ As of ~~June~~September 30, 2019, a subsidiary of ESH REIT was under examination by the Canada Revenue Agency for tax years 2014 through 2017. As the examination is still in process, the timing of the resolution and any payments that may be required cannot be determined at this time. The Company believes that, to the extent a liability may exist, it is appropriately reserved as of ~~June~~September 30, 2019.


12.	COMMITMENTS AND CONTINGENCIES

Lease Commitments—The Company is a tenant under long-term ground leases at ~~five~~5 of its hotel properties, including ~~one~~1 hotel site for which development is in process. ~~Three~~NaN of these leases are operating leases and ~~two~~2 are finance leases. The ground lease agreements terminate at various dates between 2023 and 2096 and several of the agreements include multiple renewal options for generally five or ten year periods. The Company is also a tenant under an operating lease for its corporate office, which terminates in August 2021 and includes renewal options for ~~two~~2 five-year terms. As the Company is reasonably certain that it will exercise the options to extend its ground leases, fixed payments associated with the extensions are included in the measurement of related right-of-use assets and lease liabilities. Payments associated with the option to extend the corporate office lease are not included in the measurement of the right-of-use asset and lease liability, as the associated payments cannot be reasonably estimated.

Operating lease costs related to ground leases are included in hotel operating expenses, while operating lease costs related to the Company’s office lease are included in general and administrative expenses, in the condensed consolidated statements of

operations. Finance lease interest costs are included in interest expense, net in the condensed consolidated statements of operations (see Note 7) or, when pertaining to assets under development, are capitalized and included in property and equipment, net on the condensed consolidated balance sheets (see Note 5). As the Company’s finance lease right-of-use assets pertain to land and land under development, and as the Company elected the practical expedient to retain prior lease classification upon adoption of ASC 842, Leases, no0 amortization costs related to finance leases were incurred during the three and ~~six~~nine months ended ~~June~~September 30, 2019. The Company has no variable lease costs or short-term leases.

For the three and ~~six~~nine months ended ~~June~~September 30, 2019, the components of the Company’s total lease costs are as follows (in thousands):


	Three Months Ended		Six Months Ended
	June 30, 2019				Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating lease costs	$	770	$	1,538	$	794	$	2,332
Finance lease costs - interest	61		122		61		183
Total lease costs	831		1,660		855		2,515

The Company’s right-of-use assets and lease liabilities are as follows (in thousands):


	June 30, 2019		December 31, 2018⁽⁴⁾		September 30, 2019		December 31, 2018⁽⁴⁾
Right-of-use assets:
Operating⁽¹⁾	$	5,988	$	—	$	5,429	$	—
Finance⁽²⁾	3,979		3,843		3,979		3,843

Lease liabilities:
Operating⁽³⁾	13,574		—		13,091		—
Finance	3,440		3,360		3,410		3,360


(1)	Included in other assets on the accompanying condensed consolidated balance sheets.


(2)	Included in property and equipment, net on the accompanying condensed consolidated balance sheets.


(3)	Included in accounts payable and accrued liabilities on the accompanying condensed consolidated balance sheets.


(4)	Finance lease right-of-use assets and liabilities as of December 31, 2018, were previously classified as capital lease assets and liabilities under ASC 840, Leases.

Maturities of lease liabilities as of ~~June~~September 30, 2019, are as follows (in thousands):


Years Ending December 31,	Operating Leases			Finance Leases			Operating Leases			Finance Leases
Remainder of 2019	$	1,399		$	181		705			90
2020	2,899			386			2,899			386
2021	2,220			395			2,220			395
2022	806			397			806			397
2023	545			400			545			400
2024	503			402			503			402
Thereafter	77,594			3,100			77,594			3,100
Total	$	85,966		$	5,261		$	85,272		$	5,170

Total discounted lease liability	$	13,574		$	3,440		$	13,091		$	3,410
Difference between undiscounted cash flows and discounted cash flows	$	72,392		$	1,821		$	72,181		$	1,760

Weighted-average remaining lease term	40 years			13 years			41 years			12 years
Weighted-average discount rate	6.3		%	7.0		%	6.3		%	7.0		%

Future minimum lease payments as of December 31, 2018, disclosed in accordance with ASC 840, Leases, were as follows (in thousands):



Years Ending December 31,	Operating Leases		Finance Leases
2019	$	2,779	$	351
2020	2,899		375
2021	2,220		384
2022	806		386
2023	545		387
Thereafter	78,097		3,340
Total	$	87,346	$	5,223

The Company’s leases do not contain residual value guarantees and do not contain restrictions with respect to incurring additional financial obligations or dividends. As of ~~June~~September 30, 2019, the Company does not have any material leases that have not yet commenced.

Letter of Credit—As of ~~June~~September 30, 2019, the Company had ~~one~~1 outstanding letter of credit, issued by the Corporation, for $0.2 million, which is collateralized by the Corporation Revolving Credit Facility.

Legal Contingencies—As of ~~June~~September 30, 2019, ~~six~~6 purported class action lawsuits in California have been filed against the Company. The complaints allege, among other things, failure to provide meal and rest periods, wage and hour violations and violations of the Fair Credit Reporting Act. The complaints seek, among other relief, collective and class certification of the lawsuits, unspecified damages, costs and expenses, including attorneys’ fees, and such other relief as the Court might find just and proper. The Company believes it has meritorious defenses and is prepared to vigorously defend the lawsuits.

With respect to the meal and rest period and the wage and hour violations alleged in the lawsuits described above, although the Company believes it is reasonably possible that it may incur losses associated with such matters, it is not possible to estimate the amount of loss or range of loss, if any, that might result from adverse judgments, settlements or other resolution based on the early stage of these lawsuits, the uncertainty as to the certification of a class or classes and the size of any certified class, if applicable, and the lack of resolution of significant factual and legal issues. However, depending on the amount and timing, an unfavorable resolution of some or all of these lawsuits could have a material adverse effect on the Company’s condensed consolidated financial statements, results of operations or liquidity in a future period.

With respect to the Fair Credit Reporting Act violations alleged in the lawsuits described above, the parties ~~have~~ reached a tentative settlement agreement in May 2019, which is subject to certain conditions, including court approval. During the ~~three~~nine months ended ~~June~~September 30, 2019, the Company recorded a payable and a corresponding insurance receivable for the amount of the tentative settlement. The expected resolution of the alleged Fair Credit Reporting Act violations in the lawsuits did not have, and is not expected to have, a material adverse impact on the Company’s condensed consolidated financial statements, results of operations or liquidity.

The Company is not a party to any additional litigation or claims, other than routine matters arising in the ordinary course of business that are incidental to the operation of the business of the Company. The Company believes that the results of all additional litigation and claims, individually or in the aggregate, will not have a material adverse effect on its ~~business or~~ condensed consolidated financial ~~statements.~~statements, results of operations or liquidity.


13.	EQUITY-BASED COMPENSATION

The Corporation and ESH REIT each maintain a long-term incentive plan (“LTIP”), as amended and restated in 2015, approved by their shareholders. Under the LTIPs, the Corporation and ESH REIT may issue to eligible employees or directors restricted stock units (“RSUs”) or other equity-based awards, in respect of Paired Shares, with service, performance or market vesting conditions. The aggregate number of Paired Shares that may be the subject of awards under the LTIPs shall not exceed 8.0 million, of which no more than 4.0 million may be granted as incentive stock options. Each of the Corporation’s and ESH REIT’s LTIP has a share reserve of an equivalent number of shares of Corporation common stock and ESH REIT Class B common stock. As of ~~June~~September 30, 2019, 4.5 million Paired Shares were available for future issuance under the LTIPs.

Equity-based compensation expense is recognized by amortizing the grant-date fair value on a straight-line basis over the requisite service period of each award. A portion of the grant-date fair value of all equity-based awards is allocated to a share of

Corporation common stock and a portion is allocated to a share of ESH REIT Class B common stock. Equity-based compensation expense, which is included in general and administrative expenses in the accompanying condensed consolidated statements of operations, was ~~$2.1~~$1.9 million and $1.8 million for the three months ended ~~June~~September 30, 2019 and 2018, respectively, and ~~$4.3~~$6.1 million and ~~$4.2~~$6.0 million for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively.

As of ~~June~~September 30, 2019, unrecognized compensation expense related to outstanding equity-based awards and the related weighted-average period over which it is expected to be recognized subsequent to ~~June~~September 30, 2019, is presented in the following table. Total unrecognized compensation expense will be adjusted for ~~actual forfeitures.~~forfeitures and the achievement of certain performance conditions.


	Unrecognized Compensation Expense Related to Outstanding Awards (in thousands)		Remaining Weighted-Average Amortization Period (in years)	Unrecognized Compensation Expense Related to Outstanding Awards (in thousands)		Remaining Weighted-Average Amortization Period (in years)
RSUs with service vesting conditions	$	9,207	1.5	$	7,674	1.3
RSUs with performance vesting conditions	218		0.5	52		0.3
RSUs with market vesting conditions	5,051		2.1	4,122		1.9
Total unrecognized compensation expense	$	14,476		$	11,848

RSU activity during the ~~six~~nine months ended ~~June~~September 30, 2019, was as follows:


					Performance-Based Awards												Performance-Based Awards
	Service-Based Awards				Performance Vesting				Market Vesting				Service-Based Awards				Performance Vesting				Market Vesting
	Number of RSUs (in thousands)		Weighted- Average Grant- Date Fair Value		Number of RSUs (in thousands)		Weighted- Average Grant- Date Fair Value		Number of RSUs (in thousands)		Weighted- Average Grant- Date Fair Value⁽¹⁾		Number of RSUs (in thousands)		Weighted- Average Grant- Date Fair Value		Number of RSUs (in thousands)		Weighted- Average Grant- Date Fair Value		Number of RSUs (in thousands)		Weighted- Average Grant- Date Fair Value⁽¹⁾
Outstanding at January 1, 2019	523		$	18.42	32		$	19.52	297		$	16.79	523		$	18.42	32		$	19.52	297		$	16.79
Granted	382		$	17.22	24		$	17.20	247		$	15.35	394		$	17.16	24		$	17.20	247		$	15.35
Settled	(177	)	$	17.81	(32	)	$	19.52	(50	)	$	12.03	(249	)	$	18.03	(33	)	$	19.46	(53	)	$	12.36
Forfeited	(10	)	$	17.97	—		$	—	(6	)	$	16.55	(31	)	$	17.85	(1	)	$	17.20	(30	)	$	16.37
Outstanding at June 30, 2019	718		$	17.94	24		$	17.20	488		$	16.55
Outstanding at September 30, 2019													637		$	17.82	22		$	17.20	461		$	16.55

Vested at June 30, 2019	75		$	18.79	1		$	17.20	3		$	18.58
Nonvested at June 30, 2019	643		$	17.84	23		$	17.20	485		$	16.54
Vested at September 30, 2019													11		$	17.03	—		$	—	—		$	—
Nonvested at September 30, 2019													626		$	17.83	22		$	17.20	461		$	16.55

_________________________________


(1)	An independent third-party valuation was performed contemporaneously with the issuance of grants.

The grant-date fair value of awards with service vesting conditions is based on the closing price of a Paired Share on the date of grant. Service-based awards vest over a period of one to three years, subject to the grantee’s continued employment or service. The grant-date fair value of awards with performance vesting conditions is based on the closing price of a Paired Share on the date of grant. Equity-based compensation expense with respect to these awards is adjusted over the vesting period to reflect the probability of achievement of performance targets defined in the award agreements. These awards vest over a one-year period, subject to the grantee’s continued employment, with the ability to earn Paired Shares in a range of 0% to 200% of the awarded number of RSUs based on the achievement of defined performance targets. The grant-date fair value of awards with market vesting conditions is based on an independent third-party valuation. These awards vest at the end of a three-year period, subject to the grantee’s continued employment, with the ability to earn Paired Shares in a range of 0% to 150% of the awarded number of RSUs based on the total shareholder return of a Paired Share relative to the total shareholder return of other publicly traded companies identified in the award agreements. During the ~~six~~nine months ended ~~June~~September 30, 2019, the grant-date fair value of awards with market vesting conditions was calculated using a Monte Carlo simulation model with the following key assumptions:



Expected holding period	2.90 years
Risk-free rate of return	2.46	%
Expected dividend yield	5.12	%


14.	SUBSEQUENT EVENTS

On ~~August~~November 6, 2019, the Board of Directors of the Corporation declared a cash distribution of ~~$0.08~~$0.12 per share for the ~~second~~third quarter of 2019 on its common stock. The distribution is payable on ~~September~~December 4, 2019 to shareholders of record as of ~~August 21,~~November 20, 2019. Also on ~~August~~November 6, 2019, the Board of Directors of ESH REIT declared a cash distribution of ~~$0.15~~$0.11 per share for the ~~second~~third quarter of 2019 on its Class A and Class B common stock. This distribution is also payable on ~~September~~December 4, 2019 to shareholders of record as of ~~August 21,~~November 20, 2019.

~~On August 6,~~Subsequent to September 30, 2019, ~~the Boards of Directors of~~ the Corporation and ESH REIT ~~authorized an extension to~~repurchased and retired their respective portion of 1.7 million Paired Shares for $15.6 million and $8.9 million, including transaction fees, respectively. As of October 31, 2019, $180.8 million is remaining under the ~~maturity date of the combined~~ Paired Share repurchase ~~program through December 31, 2020, and authorized a $150 million increase to the amount of the~~ program. As a result, the combined Paired Share repurchase program authorizes the Corporation and ESH REIT to purchase up to $550 million in Paired Shares, and as of August 6, 2019, $262.5 million remained available under the program.

ESH HOSPITALITY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF ~~JUNE~~SEPTEMBER 30, 2019 AND DECEMBER 31, 2018

(In thousands, except share and per share data)

(Unaudited)


	June 30, 2019		December 31, 2018		September 30, 2019			December 31, 2018
ASSETS
PROPERTY AND EQUIPMENT - Net of accumulated depreciation of $1,297,206 and $1,215,899	$	3,468,418	$	3,467,645
PROPERTY AND EQUIPMENT - Net of accumulated depreciation of $1,332,796 and $1,215,899					$	3,479,649		$	3,467,645
CASH AND CASH EQUIVALENTS	124,115		178,538		368,338			178,538
RENTS RECEIVABLE FROM EXTENDED STAY AMERICA, INC. (Note 10)	22,685		4,098		15,780			4,098
DEFERRED RENTS RECEIVABLE FROM EXTENDED STAY AMERICA, INC. (Note 10)	18,925		8,637		24,069			8,637
INTANGIBLE ASSETS - Net of accumulated amortization of $197 and $36	6,731		2,760
INTANGIBLE ASSETS - Net of accumulated amortization of $460 and $36					8,106			2,760
GOODWILL	44,012		44,012		44,012			44,012
OTHER ASSETS	23,243		22,692		25,767			22,692
TOTAL ASSETS	$	3,708,129	$	3,728,382	$	3,965,721		$	3,728,382
LIABILITIES AND EQUITY
LIABILITIES:
Term loan facility payable - Net of unamortized deferred financing costs and debt discount of $13,285 and $14,879	$	1,117,624	$	1,121,713
Senior notes payable - Net of unamortized deferred financing costs and debt discount of $24,137 and $26,206	1,275,863		1,273,794
Term loan facility payable - Net of unamortized deferred financing costs and debt discount of $11,386 and $14,879					$	619,523		$	1,121,713
Senior notes payable - Net of unamortized deferred financing costs and debt discount of $37,156 and $26,206					2,012,844			1,273,794
Finance lease liabilities	3,440		3,360		3,410			3,360
Unearned rental revenues from Extended Stay America, Inc. (Note 10)	123,739		37,506		165,273			37,506
Due to Extended Stay America, Inc., net (Note 10)	1,909		12,177		11,973			12,177
Accounts payable and accrued liabilities	71,534		64,658		97,711			64,658
Deferred tax liabilities	19		20		16			20
Total liabilities	2,594,128		2,513,228		2,910,750			2,513,228
COMMITMENTS AND CONTINGENCIES (Note 11)
EQUITY:
Common stock - Class A: $0.01 par value, 4,300,000,000 shares authorized, 250,493,583 shares issued and outstanding; Class B: $0.01 par value, 7,800,000,000 shares authorized, 188,412,376 and 188,219,605 shares issued and outstanding	4,389		4,387
Common stock - Class A: $0.01 par value, 4,300,000,000 shares authorized, 250,493,583 shares issued and outstanding; Class B: $0.01 par value, 7,800,000,000 shares authorized, 184,501,128 and 188,219,605 shares issued and outstanding					4,350			4,387
Additional paid in capital	1,091,845		1,090,809		1,050,136			1,090,809
Preferred stock - no par value, $1,000 liquidation value, 125 shares authorized, issued and outstanding	73		73		73			73
Retained earnings	15,919		114,096
(Accumulated deficit) retained earnings					(557		)	114,096
Accumulated other comprehensive income	1,775		5,789		969			5,789
Total equity	1,114,001		1,215,154		1,054,971			1,215,154
TOTAL LIABILITIES AND EQUITY	$	3,708,129	$	3,728,382	$	3,965,721		$	3,728,382

See accompanying notes to condensed consolidated financial statements.

ESH HOSPITALITY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2019 AND 2018

(In thousands, except per share data)

(Unaudited)


	Three Months Ended June 30,					Six Months Ended June 30,					Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018		2019		2018			2019			2018
REVENUES - Rental revenues from Extended Stay America, Inc. (Note 10)	$	118,102		$	111,532	$	236,107		$	224,863	$	139,455	$	142,977		$	375,562		$	367,840
OPERATING EXPENSES:
Hotel operating expenses	21,937			19,975		43,245			42,056		21,577		22,621			64,822			64,677
General and administrative expenses (Note 10)	3,544			4,217		7,525			8,312		3,477		3,393			11,002			11,705
Depreciation and amortization	48,132			53,538		95,999			106,818		48,885		51,748			144,884			158,566
Total operating expenses	73,613			77,730		146,769			157,186		73,939		77,762			220,708			234,948
GAIN ON SALE OF HOTEL PROPERTIES (Note 4)	—			—		—			35,410
(LOSS) GAIN ON SALE OF HOTEL PROPERTIES (Note 4)											—		(25,657		)	—			9,753
OTHER INCOME	—			451		15			479		—		20			15			499
INCOME FROM OPERATIONS	44,489			34,253		89,353			103,566		65,516		39,578			154,869			143,144
OTHER NON-OPERATING (INCOME) EXPENSE	(134		)	64		(273		)	266
OTHER NON-OPERATING EXPENSE (INCOME)											79		(216		)	(194		)	50
INTEREST EXPENSE, NET	30,267			32,284		60,201			63,779		36,882		30,931			97,083			94,710
INCOME BEFORE INCOME TAX EXPENSE	14,356			1,905		29,425			39,521		28,555		8,863			57,980			48,384
INCOME TAX EXPENSE	7			715		10			750		88		42			98			792
NET INCOME	$	14,349		$	1,190	$	29,415		$	38,771	$	28,467	$	8,821		$	57,882		$	47,592
NET INCOME PER ESH HOSPITALITY, INC. COMMON SHARE:
Class A - basic	$	0.03		$	—	$	0.07		$	0.09	$	0.07	$	0.02		$	0.13		$	0.11
Class A - diluted	$	0.03		$	—	$	0.07		$	0.09	$	0.07	$	0.02		$	0.13		$	0.11
Class B - basic	$	0.03		$	—	$	0.07		$	0.09	$	0.07	$	0.02		$	0.13		$	0.11
Class B - diluted	$	0.03		$	—	$	0.07		$	0.09	$	0.07	$	0.02		$	0.13		$	0.11
WEIGHTED-AVERAGE ESH HOSPITALITY, INC. COMMON SHARES OUTSTANDING:
Class A - basic	250,494			250,494		250,494			250,494		250,494		250,494			250,494			250,494
Class A - diluted	250,494			250,494		250,494			250,494		250,494		250,494			250,494			250,494
Class B - basic	188,450			189,626		188,399			190,197		186,844		188,822			188,063			189,681
Class B - diluted	188,813			190,183		188,695			190,709		187,015		189,253			188,317			190,111

See accompanying notes to condensed consolidated financial statements.

ESH HOSPITALITY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2019 AND 2018

(In thousands)

(Unaudited)


	Three Months Ended June 30,					Six Months Ended June 30,					Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018		2019			2018		2019			2018			2019			2018
NET INCOME	$	14,349		$	1,190	$	29,415		$	38,771	$	28,467		$	8,821		$	57,882		$	47,592
OTHER COMPREHENSIVE INCOME, NET OF TAX:
INTEREST RATE CASH FLOW HEDGE (LOSS) GAIN, NET OF TAX OF $1, $0, $2, $(12)	(2,327		)	253		(4,014		)	2,137
INTEREST RATE CASH FLOW HEDGE (LOSS) GAIN, NET OF TAX OF $0, $0, $2, $(12)											(806		)	(184		)	(4,820		)	1,953

COMPREHENSIVE INCOME	$	12,022		$	1,443	$	25,401		$	40,908	$	27,661		$	8,637		$	53,062		$	49,545

See accompanying notes to condensed consolidated financial statements.

ESH HOSPITALITY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE THREE AND ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2019 AND 2018

(In thousands, except preferred stock shares and per share data)

(Unaudited)


	Common Stock						Preferred Stock			Additional Paid in Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total Equity			Common Stock									Preferred Stock			Additional Paid in Capital		Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income			Total Equity
	Class A Shares	Class B Shares		Amount			Shares	Amount				Class A Shares				Accumulated Other Comprehensive (Loss) Income		Class B Shares					Amount				Shares			Amount				Additional Paid in Capital		Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income			Total Equity
BALANCE - April 1, 2018	250,494	190,632		$	4,411		125	$	73	Additional Paid in Capital		$	Retained Earnings	1,089,542		$	151,080		Total Equity	$	8,258			$	1,253,364
BALANCE - July 1, 2018																						250,494			188,994			$	4,395		125	$	73	$	1,089,926	$	69,835		$	8,511		$	1,172,740
Net income	—	—		—			—	—		—			1,190			—			1,190			—			—			—			—	—		—		8,821			—			8,821
Interest rate cash flow hedge gain, net of tax	—	—		—			—	—		—			—			253			253
Interest rate cash flow hedge loss, net of tax																						—			—			—			—	—		—		—			(184		)	(184		)
Repurchase of Class B common stock	—	(1,638	)	(16		)	—	—		—			(11,920		)	—			(11,936		)	—			(559	)		(6		)	—	—		—		(4,236		)	—			(4,242		)
Common distributions - $0.16 per Class A and Class B common share	—	—		—			—	—		—			(70,511		)	—			(70,511		)
Common distributions - $0.18 per Class A and Class B common share																						—			—			—			—	—		—		(79,260		)	—			(79,260		)
Preferred distributions	—	—		—			—	—		—			(4		)	—			(4		)	—			—			—			—	—		—		(4		)	—			(4		)
Equity-based compensation	—	—		—			—	—		384			—			—			384			—			82			1			—	—		37		—			—			38
BALANCE - June 30, 2018	250,494	188,994		$	4,395		125	$	73	$	1,089,926		$	69,835		$	8,511		$	1,172,740
BALANCE - September 30, 2018																						250,494			188,517			$	4,390		125	$	73	$	1,089,963	$	(4,844	)	$	8,327		$	1,097,909


	Common Stock				Preferred Stock			Additional Paid in Capital			Retained Earnings			Accumulated Other Comprehensive Income				Total Equity			Common Stock									Preferred Stock			Additional Paid in Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income			Total Equity
	Class A Shares	Class B Shares	Amount		Shares	Amount				Class A Shares				Accumulated Other Comprehensive Income			Class B Shares					Amount				Shares			Amount				Additional Paid in Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income			Total Equity
BALANCE - April 1, 2019	250,494	188,403	$	4,389	125	$	73	Additional Paid in Capital		$	Retained Earnings	1,091,456		$	63,185			Total Equity	$	4,102			$	1,163,205
BALANCE - July 1, 2019																					250,494			188,412			$	4,389		125	$	73	$	1,091,845		$	15,919		$	1,775		$	1,114,001
Net income	—	—	—		—	—		—			14,349			—				14,349			—			—			—			—	—		—			28,467			—			28,467
Interest rate cash flow hedge loss, net of tax	—	—	—		—	—		—			—			(2,327		)		(2,327		)	—			—			—			—	—		—			—			(806		)	(806		)
Common distributions - $0.14 per Class A and Class B common share	—	—	—		—	—		—			(61,611		)	—				(61,611		)
Repurchase of Class B common stock																					—			(3,993	)		(40		)	—	—		—			(20,847		)	—			(20,887		)
Common distributions - $0.15 per Class A and Class B common share																					—			—			—			—	—		(41,832		)	(24,092		)	—			(65,924		)
Preferred distributions	—	—	—		—	—		—			(4		)	—				(4		)	—			—			—			—	—		—			(4		)	—			(4		)
Equity-based compensation	—	9	—		—	—		389			—			—				389			—			82			1			—	—		123			—			—			124
BALANCE - June 30, 2019	250,494	188,412	$	4,389	125	$	73	$	1,091,845		$	15,919		$	1,775			$	1,114,001
BALANCE - September 30, 2019																					250,494			184,501			$	4,350		125	$	73	$	1,050,136		$	(557	)	$	969		$	1,054,971


	Common Stock						Preferred Stock			Additional Paid in Capital			Retained Earnings			Accumulated Other Comprehensive Income				Total Equity			Common Stock									Preferred Stock						Additional Paid in Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income			Total Equity
	Class A Shares	Class B Shares		Amount			Shares	Amount				Class A Shares				Accumulated Other Comprehensive Income			Class B Shares					Amount				Shares			Amount							Additional Paid in Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income			Total Equity
BALANCE - January 1, 2018	250,494	192,100		$	4,426		125	$	73	Additional Paid in Capital		$	Retained Earnings	1,088,793		$	191,964			Total Equity	$	7,038			$	1,292,294		250,494			192,100		$	4,426			125		$	73		$	1,088,793		$	191,964		$	7,038	$	1,292,294
Net income	—	—		—			—	—		—			38,771			—				38,771			—			—			—			—			—			—			47,592			—			47,592
Cumulative effect adjustment of ASU 2017-12	—	—		—			—	—		—			664			(664		)		—			—			—			—			—			—			—			664			(664		)	—
Interest rate cash flow hedge gain, net of tax	—	—		—			—	—		—			—			2,137				2,137			—			—			—			—			—			—			—			1,953			1,953
Repurchase of Class B common stock	—	(3,428	)	(34		)	—	—		—			(24,703		)	—				(24,737		)	—			(3,987	)		(40		)	—			—			—			(28,939		)	—			(28,979		)
Common distributions - $0.31 per Class A and Class B common share	—	—		—			—	—		—			(136,853		)	—				(136,853		)
Common distributions - $0.49 per Class A and Class B common share																							—			—			—			—			—			—			(216,113		)	—			(216,113		)
Preferred distributions	—	—		—			—	—		—			(8		)	—				(8		)	—			—			—			—			—			—			(12		)	—			(12		)
Equity-based compensation	—	322		3			—	—		1,133			—			—				1,136			—			404			4			—			—			1,170			—			—			1,174
BALANCE - June 30, 2018	250,494	188,994		$	4,395		125	$	73	$	1,089,926		$	69,835		$	8,511			$	1,172,740
BALANCE - September 30, 2018																							250,494			188,517			$	4,390		125			$	73		$	1,089,963		$	(4,844	)	$	8,327		$	1,097,909


	Common Stock				Preferred Stock			Additional Paid in Capital			Retained Earnings			Accumulated Other Comprehensive Income				Total Equity			Common Stock									Preferred Stock						Additional Paid in Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income			Total Equity
	Class A Shares	Class B Shares	Amount		Shares	Amount				Class A Shares				Accumulated Other Comprehensive Income			Class B Shares					Amount				Shares			Amount							Additional Paid in Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income			Total Equity
BALANCE - January 1, 2019	250,494	188,219	$	4,387	125	$	73	Additional Paid in Capital		$	Retained Earnings	1,090,809		$	114,096			Total Equity	$	5,789			$	1,215,154		250,494			188,219		$	4,387			125		$	73		$	1,090,809		$	114,096		$	5,789	$	1,215,154
Net income	—	—	—		—	—		—			29,415			—				29,415			—			—			—			—			—			—			57,882			—			57,882
Interest rate cash flow hedge loss, net of tax	—	—	—		—	—		—			—			(4,014		)		(4,014		)	—			—			—			—			—			—			—			(4,820		)	(4,820		)
Common distributions - $0.29 per Class A and Class B common share	—	—	—		—	—		—			(127,584		)	—				(127,584		)
Repurchase of Class B common stock																					—			(3,993	)		(40		)	—			—			—			(20,847		)	—			(20,887		)
Common distributions - $0.44 per Class A and Class B common share																					—			—			—			—			—			(41,832		)	(151,676		)	—			(193,508		)
Preferred distributions	—	—	—		—	—		—			(8		)	—				(8		)	—			—			—			—			—			—			(12		)	—			(12		)
Equity-based compensation	—	193	2		—	—		1,036			—			—				1,038			—			275			3			—			—			1,159			—			—			1,162
BALANCE - June 30, 2019	250,494	188,412	$	4,389	125	$	73	$	1,091,845		$	15,919		$	1,775			$	1,114,001
BALANCE - September 30, 2019																					250,494			184,501			$	4,350		125			$	73		$	1,050,136		$	(557	)	$	969		$	1,054,971

See accompanying notes to condensed consolidated financial statements.

ESH HOSPITALITY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, 2019 AND 2018

(In thousands)

(Unaudited)


	Six Months Ended June 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
OPERATING ACTIVITIES:
Net income	$	29,415		$	38,771		$	57,882		$	47,592
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	95,999			106,818			144,884			158,566
Foreign currency transaction (gain) loss	(273		)	266			(194		)	50
Amortization and write-off of deferred financing costs and debt discount	3,939			4,567			11,540			6,536
Amortization and write-off of above-market ground leases	—			(68		)	—			(240		)
Debt prepayment and extinguishment costs	—			1,183
Debt modification and extinguishment costs							82			1,183
Loss on disposal of property and equipment	3,377			668			5,037			2,618
Gain on sale of hotel properties	—			(35,410		)	—			(9,753		)
Equity-based compensation	277			304			411			461
Deferred income tax expense	—			4			(5		)	(14		)
Changes in assets and liabilities:
Deferred rents receivable from Extended Stay America, Inc.	(10,288		)	14,325			(15,432		)	21,366
Due to Extended Stay America, Inc., net	(7,764		)	(3,555		)
Due from (to) Extended Stay America, Inc., net							2,222			(3,491		)
Other assets	(5,111		)	(3,653		)	(6,257		)	(6,496		)
Unearned rental revenues/rents receivable from Extended Stay America, Inc., net	67,646			68,958			116,085			125,576
Accounts payable and accrued liabilities	8,140			6,351			31,708			29,441
Net cash provided by operating activities	185,357			199,529			347,963			373,395
INVESTING ACTIVITIES:
Purchases of property and equipment	(80,173		)	(67,113		)	(124,192		)	(101,165		)
Acquisition of hotel property	—			(12,733		)	—			(12,733		)
Development in process payments	(21,841		)	(6,009		)	(42,116		)	(28,414		)
Payments for intangible assets	(6,296		)	—			(6,081		)	—
Proceeds from sale of hotel properties	—			155,244			—			274,100
Proceeds from insurance and related recoveries	613			4,362			914			4,533
Net cash (used in) provided by investing activities	(107,697		)	73,751			(171,475		)	136,321
FINANCING ACTIVITIES:
Principal payments on term loan facilities	(5,683		)	(66,112		)
Principal payments on term loan facility							(505,683		)	(69,163		)
Proceeds from issuance of senior notes							750,000			—
Payment of deferred financing costs							(17,983		)	—
Principal payments on finance leases	(58		)	—			(86		)	—
Debt prepayment and extinguishment costs	—			(1,183		)
Debt modification and extinguishment costs							(82		)	(1,183		)
Repurchase of Class B common stock	—			(24,737		)	(20,887		)	(28,979		)
Issuance of Class B common stock related to issuance of Paired Shares	1,248			2,316
Issuance of Class B common stock							1,462			2,700
Common distributions	(127,582		)	(137,249		)	(193,421		)	(216,397		)
Preferred distributions	(8		)	(8		)	(8		)	(12		)
Net cash used in financing activities	(132,083		)	(226,973		)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	(54,423		)	46,307
Net cash provided by (used in) financing activities							13,312			(313,034		)
NET INCREASE IN CASH AND CASH EQUIVALENTS							189,800			196,682
CASH AND CASH EQUIVALENTS - Beginning of period	178,538			54,915			178,538			54,915
CASH AND CASH EQUIVALENTS - End of period	$	124,115		$	101,222		$	368,338		$	251,597
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest, excluding prepayment and other penalties, net of capitalized interest of $751 and $129	$	57,527		$	58,493
Cash payments for interest, excluding prepayment and other penalties, net of capitalized interest of $1,373 and $243							$	68,389		$	70,566
Cash payments for income taxes, net of refunds of $0 and $6	$	606		$	608		$	742		$	645
Operating cash payments for finance leases	$	122		$	—		$	183		$	—
Operating cash payments for operating leases	$	354		$	—		$	532		$	—
NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital expenditures included in due to/from Extended Stay America, Inc. and accounts payable and accrued liabilities	$	26,920		$	19,374		$	27,072		$	20,288
Additions to finance lease right-of-use assets and liabilities	$	109		$	—		$	109		$	—
Deferred financing costs included in accounts payable and accrued liabilities							$	2,254		$	—
Debt modification and extinguishment costs included in accounts payable and accrued liabilities							$	1,006		$	—
Common stock distributions included in accounts payable and accrued liabilities	$	794		$	578		$	879		$	697
Net payable related to unsettled RSUs not yet settled or issued included in due to/from Extended Stay America, Inc.	$	(131	)	$	(69	)	$	(32	)	$	(144	)

See accompanying notes to condensed consolidated financial statements.

ESH HOSPITALITY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF ~~JUNE~~SEPTEMBER 30, 2019 AND DECEMBER 31, 2018 AND FOR THE THREE AND ~~SIX~~NINE MONTHS ENDED

~~JUNE~~SEPTEMBER 30, 2019 AND 2018

(Unaudited)


1.	BUSINESS, ORGANIZATION AND BASIS OF CONSOLIDATION

ESH Hospitality, Inc. (“ESH REIT”) was formed as a limited liability company in the state of Delaware on September 16, 2010 and was converted to a corporation on November 5, 2013. Extended Stay America, Inc. (the “Corporation”), the parent of ESH REIT, was incorporated in the state of Delaware on July 8, 2013. The Corporation owns, and is expected to continue to own, all of the issued and outstanding Class A common stock of ESH REIT, which, as of ~~June~~September 30, 2019, represents ~~57%~~58% of the outstanding common stock of ESH REIT.

A “Paired Share” consists of ~~one~~1 share of common stock, par value $0.01 per share, of the Corporation, that is attached to and trades as a single unit with ~~one~~1 share of Class B common stock, par value $0.01 per share, of ESH REIT. Each outstanding share of ESH REIT Class B common stock is attached to and trades with one share of Corporation common stock.

As of ~~June~~September 30, 2019 and December 31, 2018, ESH REIT and its subsidiaries owned and leased 554 hotel properties in 40 U.S. states, consisting of approximately 61,500 rooms. All hotels are leased to wholly-owned subsidiaries of the Corporation (the “Operating Lessees”).

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, including a $150 million increase to the authorized amount and a program extension in August 2019, as of ~~June~~September 30, 2019, the combined Paired Share repurchase program authorized the Corporation and ESH REIT to purchase up to ~~$400~~$550 million in Paired Shares through December 31, ~~2019.~~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~~September 30, 2019, ESH REIT had repurchased and retired ~~17.3~~21.3 million ESH REIT Class B common shares for ~~$107.5~~$128.4 million, including transaction fees, and ~~$112.5~~$205.3 million remained available under the combined Paired Share repurchase program.

Basis of Consolidation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”), and include the financial position, results of operations, comprehensive income, changes in equity and cash flows of ESH REIT and its consolidated subsidiaries. Changes in ownership interests in a consolidated subsidiary that do not result in a loss of control are accounted for as equity transactions. All intercompany accounts and transactions have been eliminated. With respect to the condensed consolidated balance sheets, certain prior period amounts have been reclassified for comparability to current period presentation.


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim Presentation—Certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP have been condensed or omitted in the accompanying condensed consolidated financial statements. ESH REIT believes the disclosures made are adequate to prevent the information presented from being misleading. However, the condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2018, included in the combined annual report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on February 27, 2019.

The accompanying condensed consolidated financial statements reflect all adjustments (consisting only of normal and recurring items) necessary to present fairly ESH REIT’s financial position as of ~~June~~September 30, 2019, the results of ESH REIT’s operations, comprehensive income and changes in equity for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 and cash flows for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018. Interim results are not necessarily indicative of full year performance because of acquisitions, dispositions, financing or other capital transactions and the impact of accounting for variable rental payments under lease arrangements.

well as in the assessment of tangible and intangible assets for impairment and the grant-date fair value of certain equity-based awards. Actual results could differ from those estimates.

Management assesses the performance of long-lived assets for potential impairment quarterly, as well as when events or changes in circumstances indicate the carrying amount of an asset, or group of assets, may not be recoverable. Recoverability of property and equipment is measured by a comparison of the carrying amount of a hotel property or group of hotel properties (when they are grouped under ESH REIT’s leases), to the estimated future undiscounted cash flows expected to be generated by each hotel property or group of hotel properties. Impairment is recognized when estimated future undiscounted cash flows, including expected proceeds from disposition, are less than the carrying ~~value.~~value of the hotel property or group of hotel properties. To the extent that a hotel property or group of hotel properties is impaired, ~~their~~the excess carrying amount over ~~their~~ estimated fair value is recognized as an impairment charge and reduces income from operations. Fair value is determined based upon the discounted cash flows of a hotel property or group of hotel properties, bids, quoted market prices or independent appraisals, as considered necessary. The estimation of future undiscounted cash flows is inherently uncertain and relies upon assumptions regarding current and future economic and market conditions. If such conditions change, an impairment ~~charge could~~charges may occur in a future ~~period~~periods (see Note 5).

Revenue Recognition—ESH REIT’s sole source of revenues is rental revenue derived from operating leases with subsidiaries of the Corporation (i.e., all revenues are generated from agreements with related parties (see Note 10). Rental revenues are recorded on a straight-line basis as they are earned during the lease terms. Rents receivable from Extended Stay America, Inc. on the accompanying condensed consolidated balance sheets represent monthly rental amounts contractually due. Deferred rents receivable from Extended Stay America, Inc. on the accompanying condensed consolidated balance sheets represent the cumulative difference between straight-line rental revenues recognized and rental revenues contractually due. Lease rental payments received prior to rendering services are included in unearned rental revenues from Extended Stay America, Inc. on the accompanying condensed consolidated balance sheets. Variable rental revenues, specifically percentage rental revenues related to hotel revenues of the Operating Lessees, are recognized when such amounts are fixed and determinable (i.e., only when percentage rental revenue thresholds have been achieved).

Recently Issued Accounting Standards

Fair Value Measurement—In August 2018, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update which modifies the disclosure requirements for fair value measurements in Topic 820, Fair Value Measurement. This update will be effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, and may be early adopted. ESH REIT does not expect the adoption of this update to have a material effect on its condensed consolidated financial statements.

Intangibles-Goodwill and Other—Internal-Use Software—In August 2018, the FASB issued an accounting standards update which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. This update will be effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, and may be early adopted. ESH REIT expects to apply this update prospectively and does not expect adoption to have a material effect on its condensed consolidated financial statements.

subject to the requirements of Topic 718 unless modified after the good has been delivered and/or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. This approach will eliminate the requirement to reassess classification of such awards upon vesting. ESH REIT adopted this update

on January 1, 2019, using a retrospective method. The adoption of this update did not have a material effect on ESH REIT’s condensed consolidated financial statements.

Goodwill—In January 2017, the FASB issued an accounting standards update in which the guidance on testing for goodwill was updated to eliminate Step 2 in the determination on whether goodwill should be considered impaired. Annual and/or interim assessments are still required. This update will be effective for fiscal years and interim periods within fiscal years beginning after December 15, 2019, and may be adopted early. ESH REIT expects to apply this ~~amendment~~update prospectively and does not expect adoption to have a material effect on its condensed consolidated financial statements.

Leases—ASC 842, Leases, introduced a lessee model that requires a right-of-use asset and lease obligation to be presented on the balance sheet for all leases, whether operating or financing. ESH REIT adopted ASC 842 on January 1, 2019, using the modified retrospective approach with the Comparatives Under 840 Option, whereby ESH REIT applied the standard at the beginning of the period of adoption and has presented financial information for periods prior to January 1, 2019 in accordance with prior guidance. Upon adoption, ESH REIT elected practical expedients related to (i) the identification and classification of leases that commenced before the effective date, (ii) initial direct costs for leases that commenced before the effective date, (iii) the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset, (iv) land easements and (v) the evaluation of lease and non-lease components of a contract.

Implementation had no cumulative effect on retained earnings. Adoption resulted in the recognition of operating lease right-of-use assets of $2.8 million as of January 1, 2019, which included adjustments for accrued lease payments, above market lease liabilities and lease incentives, and liabilities of $9.3 million. Finance lease right-of-use assets and liabilities recognized as of January 1, 2019, included preexisting assets and liabilities of $3.8 million and $3.4 million, respectively, related to capital leases accounted for under prior guidance.

Judgement was exercised in the application of ASC 842 with respect to the determination of whether a contract contains a lease. While the ability to control and direct the use of an identified asset indicates that the contract, or portion of a contract, is a lease, a counterparty’s substantive substitution rights typically provide evidence that a lessee does not control the asset. Judgement was also exercised with respect to the determination of the discount rate used to determine the present value of lease payments. In instances in which interest rates implicit in leases are not readily determinable, ESH REIT uses its incremental borrowing rate. The substantial majority of widely available market maturities and asset-specific risk spreads may not match the underlying contract and, as such, borrowing rates and risk spreads are estimated based on the contract’s term, the counterparty’s security and other characteristics of the identified asset.

Under ASC 842, lessor accounting for leases did not substantially change from previous guidance; however, the standard introduced certain modifications to conform lessor accounting with the lessee model, further defined certain lease and non-lease components and changed the definition of initial direct costs of leases. The adoption of ASC 842 did not have a material effect on ESH REIT’s revenue recognition or related disclosures.


3.	NET INCOME PER SHARE

Basic net income per share is computed by dividing net income available to Class A and Class B common shareholders by the weighted-average number of shares of unrestricted Class A and Class B common stock outstanding, respectively. Diluted net income per share is computed by dividing net income available to Class A and Class B common shareholders, as adjusted for potentially dilutive securities, by the weighted-average number of shares of unrestricted Class A and Class B common stock outstanding, respectively, plus other potentially dilutive securities. Dilutive securities include certain equity-based awards and are included in the calculation provided that the inclusion of such securities is not anti-dilutive.

The calculations of basic and diluted net income per share, including a reconciliation of the numerators and denominators, are as follows (in thousands, except per share data):


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018			2019			2018			2019			2018
Numerator:
Net income	$	14,349		$	1,190		$	29,415		$	38,771		$	28,467		$	8,821		$	57,882		$	47,592
Less preferred dividends	(4		)	(4		)	(8		)	(8		)	(4		)	(4		)	(12		)	(12		)
Net income available to ESH Hospitality, Inc. common shareholders	$	14,345		$	1,186		$	29,407		$	38,763		$	28,463		$	8,817		$	57,870		$	47,580
Class A:
Net income available to ESH Hospitality, Inc. Class A common shareholders - basic	$	8,186		$	675		$	16,783		$	22,033		$	16,303		$	5,027		$	33,054		$	27,077
Amounts attributable to ESH Hospitality, Inc. Class B shareholders assuming conversion	(7		)	(1		)	(12		)	(26		)	(6		)	(5		)	(19		)	(26		)
Net income available to ESH Hospitality, Inc. Class A common shareholders - diluted	$	8,179		$	674		$	16,771		$	22,007		$	16,297		$	5,022		$	33,035		$	27,051
Class B:
Net income available to ESH Hospitality, Inc. Class B common shareholders - basic	$	6,159		$	511		$	12,624		$	16,730		$	12,160		$	3,790		$	24,816		$	20,503
Amounts attributable to ESH Hospitality, Inc. Class B shareholders assuming conversion	7			1			12			26			6			5			19			26
Net income available to ESH Hospitality, Inc. Class B common shareholders - diluted	$	6,166		$	512		$	12,636		$	16,756		$	12,166		$	3,795		$	24,835		$	20,529
Denominator:
Class A:
Weighted-average number of ESH Hospitality, Inc. Class A common shares outstanding - basic and diluted	250,494			250,494			250,494			250,494			250,494			250,494			250,494			250,494
Class B:
Weighted-average number of ESH Hospitality, Inc. Class B common shares outstanding - basic	188,450			189,626			188,399			190,197			186,844			188,822			188,063			189,681
Dilutive securities	363			557			296			512			171			431			254			430
Weighted-average number of ESH Hospitality, Inc. Class B common shares outstanding - diluted	188,813			190,183			188,695			190,709			187,015			189,253			188,317			190,111
Net income per ESH Hospitality, Inc. common share - Class A - basic	$	0.03		$	—		$	0.07		$	0.09		$	0.07		$	0.02		$	0.13		$	0.11
Net income per ESH Hospitality, Inc. common share - Class A - diluted	$	0.03		$	—		$	0.07		$	0.09		$	0.07		$	0.02		$	0.13		$	0.11
Net income per ESH Hospitality, Inc. common share - Class B - basic	$	0.03		$	—		$	0.07		$	0.09		$	0.07		$	0.02		$	0.13		$	0.11
Net income per ESH Hospitality, Inc. common share - Class B - diluted	$	0.03		$	—		$	0.07		$	0.09		$	0.07		$	0.02		$	0.13		$	0.11


4.	HOTEL DISPOSITIONS



Year	Brand	Location	Month Sold	Number of Hotels	Number of Rooms	Net Proceeds		(Loss) Gain On Sale
2018	Extended Stay America	Various	November	14	1,369	$	34,855	$	(14,930	)
2018	Extended Stay America	Various	September	16	1,680	60,710		(17,025		)
2018	Extended Stay America	Various	September	16	1,776	58,144		(8,934		)
2018	Extended Stay America	Various	February	25	2,430	111,156		4,269
2018	Extended Stay America	Texas	March	1	101	44,090		30,992

During the three and ~~six~~nine months ended ~~June~~September 30, 2018, disposed hotel properties contributed rental revenues, total operating expenses and income before income tax expense as follows (in thousands):


	Three Months Ended June 30, 2018		Six Months Ended June 30, 2018		Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
Rental revenues from Extended Stay America, Inc.	$	5,928	$	14,033	$	6,316	$	20,349
Total operating expenses	5,084		11,318		4,319		15,637
Income before income tax expense	844		2,715		1,997		4,712


5.	PROPERTY AND EQUIPMENT

Net investment in property and equipment as of ~~June~~September 30, 2019 and December 31, 2018, consists of the following (in thousands):


	June 30, 2019			December 31, 2018			September 30, 2019			December 31, 2018
Hotel properties:
Land and site improvements ⁽¹⁾	$	1,219,515		$	1,218,077		$	1,220,948		$	1,218,077
Building and improvements	2,774,244			2,756,674			2,786,268			2,756,674
Furniture, fixtures and equipment	718,991			679,944			729,429			679,944
Total hotel properties	4,712,750			4,654,695			4,736,645			4,654,695
Development in process ⁽²⁾	51,199			27,174			74,125			27,174
Undeveloped land parcel	1,675			1,675			1,675			1,675
Total cost	4,765,624			4,683,544			4,812,445			4,683,544
Less accumulated depreciation	(1,297,206		)	(1,215,899		)	(1,332,796		)	(1,215,899		)
Property and equipment - net	$	3,468,418		$	3,467,645		$	3,479,649		$	3,467,645


(1)	Includes finance lease asset of $3.2 million as of ~~June~~September 30, 2019 and December 31, 2018.


(2)	Includes finance lease asset of $0.8 million and $0.6 million as of ~~June~~September 30, 2019 and December 31, 2018, respectively.

As of ~~June~~September 30, 2019 and December 31, 2018, development in process consisted of 1315 and 11 land parcels, respectively, which are in various phases of construction and/or development.

ESH REIT uses Level 3 unobservable inputs and, in certain instances Level 2 observable inputs, to determine the impairment on its property and equipment. Quantitative information with respect to observable inputs consists of non-binding bids or, in certain instances, binding agreements to sell a hotel or portfolio of hotels to one or more third parties. Quantitative information with respect to unobservable inputs consists of internally developed cash flow models that include the following assumptions, among others: projections of revenues, expenses and hotel-related cash flows based on assumed long-term growth rates, demand trends, expected future capital expenditures and estimated discount rates. These assumptions are based on ESH REIT’s historical data and experience, budgets, industry projections and overall micro and macro-economic projections.

The estimation and evaluation of future cash flows, in particular the holding period for real estate assets and asset composition and/or concentration within real estate portfolios, relies on judgments and assumptions regarding holding period, current and future operating and economic performance, and current and future market conditions. It is possible that such judgments and/or estimates will change; if this occurs, ESH REIT may recognize impairment charges or losses on sale of hotel properties in future periods reflecting either changes in estimate, circumstance or the estimated market value of assets.


6.	INTANGIBLE ASSETS AND GOODWILL

ESH REIT’s intangible assets and goodwill as of ~~June~~September 30, 2019 and December 31, 2018, consist of the following (dollars in thousands):

June 30, 2019

Gross
Carrying
Amount

Accumulated
Amortization

Net Book
Value
Definite-lived intangible assets—software license $ 4,607
$ (197 ) $ 4,410
Definite-lived intangible assets—software license in process 2,321
—
2,321
Total intangible assets 6,928
(197 ) 6,731
Goodwill 44,012
—
44,012
Total intangible assets and goodwill $ 50,940
$ (197 ) $ 50,743



	September 30, 2019
	Gross Carrying Amount		Accumulated Amortization			Net Book Value
Definite-lived intangible assets—software licenses	$	8,508	$	(460	)	$	8,048
Definite-lived intangible assets—software licenses in process	58		—			58
Total intangible assets	8,566		(460		)	8,106
Goodwill	44,012		—			44,012
Total intangible assets and goodwill	$	52,578	$	(460	)	$	52,118


	December 31, 2018							December 31, 2018
	Gross Carrying Amount		Accumulated Amortization			Net Book Value		Gross Carrying Amount		Accumulated Amortization			Net Book Value
Definite-lived intangible assets—software license	$	1,926	$	(36	)	$	1,890
Definite-lived intangible assets—software license in process	870		—			870
Definite-lived intangible assets—software licenses								$	1,926	$	(36	)	$	1,890
Definite-lived intangible assets—software licenses in process								870		—			870
Total intangible assets	2,796		(36		)	2,760		2,796		(36		)	2,760
Goodwill	44,012		—			44,012		44,012		—			44,012
Total intangible assets and goodwill	$	46,808	$	(36	)	$	46,772	$	46,808	$	(36	)	$	46,772

The remaining weighted-average amortization period for amortizing intangible assets is approximately 8 years as of ~~June~~September 30, 2019. Estimated future amortization expense for amortizing intangible assets is as follows (in thousands):


Years Ending December 31,
Remainder of 2019	$	265	$	249
2020	529		996
2021	529		996
2022	529		996
2023	529		996
2024	529		996
Thereafter	1,500		2,819
Total	$	4,410	$	8,048


7.	DEBT

Summary—ESH REIT’s outstanding debt, net of unamortized debt ~~discount~~discounts and unamortized deferred financing costs, as of ~~June~~September 30, 2019 and December 31, 2018, consists of the following (dollars in thousands):


	Stated Amount⁽¹⁾		Carrying Amount						Unamortized Deferred Financing Costs									Stated Amount		Carrying Amount						Unamortized Deferred Financing Costs
Loan	Stated Amount⁽¹⁾		June 30, 2019			December 31, 2018			June 30, 2019			December 31, 2018			Stated Interest Rate	Maturity Date		Stated Amount		September 30, 2019			December 31, 2018			September 30, 2019			December 31, 2018			Stated Interest Rate	Maturity Date
Term loan facility
ESH REIT Term Facility	$	1,300,000	$	1,127,040	⁽²⁾	$	1,132,259	⁽²⁾	$	9,416		$	10,546		LIBOR⁽³⁾ + 2.00%	8/30/2023	⁽¹⁾	$	630,909	$	628,880	⁽¹⁾	$	1,132,259	⁽¹⁾	$	9,357		$	10,546		LIBOR⁽²⁾ + 2.00%	9/18/2026	⁽³⁾
Senior notes
2027 Notes																		750,000		750,000			—			14,054			—			4.63%	10/1/2027
2025 Notes	1,300,000		1,292,329		⁽⁴⁾	1,291,671		⁽⁴⁾	16,466			17,877			5.25%	5/1/2025		1,300,000		1,292,658		⁽⁴⁾	1,291,671		⁽⁴⁾	15,760			17,877			5.25%	5/1/2025
Revolving credit facility
ESH REIT Revolving Credit Facility	350,000		—			—			1,193		⁽⁵⁾	1,469		⁽⁵⁾	LIBOR⁽³⁾ + 2.75%	8/30/2021		350,000		—			—			2,709		⁽⁵⁾	1,469		⁽⁵⁾	LIBOR⁽²⁾ + 2.00%	9/18/2024
Unsecured Intercompany Facility
Unsecured Intercompany Facility	75,000		—			—			—			—			5.00%	8/30/2023		75,000		—			—			—			—			5.00%	9/18/2026
Total			$	2,419,369		$	2,423,930		$	27,075		$	29,892							$	2,671,538		$	2,423,930		$	41,880		$	29,892

_________________________________


(1)	~~Amortization~~The ESH REIT Term Facility (defined below) is ~~interest only, except for~~presented net of an unamortized debt discount of $2.0 million and $4.3 million as of September 30, 2019 and December 31, 2018, respectively.


(2)	As of September 30, 2019 and December 31, 2018, one-month LIBOR was 2.02% and 2.50%, respectively. As of September 30, 2019 and December 31, 2018, $250.0 million and $300.0 million, respectively, of the ESH REIT Term Facility ~~(as defined below), which amortizes~~was subject to an interest rate swap at a fixed rate of 1.175%.

(3)


~~(2)~~	~~ESH REIT Term Facility is presented net of an unamortized debt discount of $3.9 million and $4.3 million as of June 30, 2019 and December 31, 2018, respectively.~~


~~(3)~~	~~As of June 30, 2019 and December 31, 2018, one-month LIBOR was 2.40% and 2.50%, respectively. As of June 30, 2019~~, ~~$250.0 million of the ESH REIT Term Facility is subject to an interest rate swap at a fixed rate of 1.175%.~~


(4)	The 2025 Notes ~~(as defined~~(defined below) are presented net of an unamortized ~~debt~~ discount of ~~$7.7~~$7.3 million and $8.3 million as of ~~June~~September 30, 2019 and December 31, 2018, respectively.


(5)	Unamortized deferred financing costs related to the revolving credit facility are included in other assets in the accompanying condensed consolidated balance sheets.

ESH REIT Credit Facilities

~~In August 2016,~~ ESH ~~REIT entered into a~~REIT’s credit agreement, as may be amended and supplemented from time to time, ~~providing~~provides for senior secured credit facilities (collectively, the “ESH REIT Credit Facilities”) ~~consisting~~which, as of September 30, 2019, consisted of a ~~$1,300.0~~$630.9 million senior secured term loan facility (the “ESH REIT Term Facility”) and a $350.0 million senior secured revolving credit facility (the “ESH REIT Revolving Credit Facility”). ~~Under~~Subject to the satisfaction of certain criteria, borrowings under the ESH REIT Credit Facilities ~~ESH REIT~~ may ~~increase its borrowings~~be increased by an amount of up to $600.0 million, plus additional amounts, so long as, after giving effect to the incurrence of such incremental facility and the application of proceeds thereof, ESH REIT’s pro-forma senior loan-to-value ratio is less than or equal to 45%.

ESH REIT Term Facility—The ESH REIT Term Facility bears interest at a rate equal to (i) LIBOR plus 1.75% for any period during which ESH REIT maintains a public corporate family rating better than or equal to BB- (with a stable or better outlook) from S&P and Ba3 (with a stable or better outlook) from Moody’s (a “Level 1 Period”) or LIBOR plus 2.00% for any period other than a Level 1 Period; or (ii) a base rate, as defined, plus 0.75% during a Level 1 Period or 1.00% for any period other than a Level 1 Period. The ESH REIT Term Facility amortizes in equal quarterly installments of $1.6 million. In addition

to scheduled amortization, subject to certain exceptions, annual mandatory prepayments of up to 50% of Excess Cash Flow, as defined, may be required. The ESH REIT Term Facility matures on September 18, 2026.

ESH REIT 2027 Notes

ESH REIT 2025 Notes

as trustee, in private placements pursuant to Rule 144A of the Securities Act of 1933, as amended. The 2025 Notes bear interest at a fixed rate of 5.25% per annum, payable semi-annually in arrears on May 1 and November 1 of each year, and mature on May 1, 2025.

Unsecured Intercompany Facility

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 “Unsecured Intercompany Facility”). ~~As of June 30,~~In September 2019, ~~and December 31, 2018,~~ the ~~amount outstanding under~~Unsecured Intercompany Facility was amended to, among other things, extend the ~~facility was $0.~~facility’s maturity. Under the Unsecured Intercompany Facility, ESH REIT may borrow up to $300.0 million, plus additional amounts, in each case subject to certain conditions. Loans under the ~~facility~~Unsecured Intercompany Facility bear interest at an annual rate of ~~5.00%~~5.0%. ESH REIT has the option to prepay outstanding balances under the facility without penalty. As of September 30, 2019, and December 31, 2018, the amount outstanding under the facility was $0. There is no scheduled amortization, and the Unsecured Intercompany Facility matures on September 18, 2026.

Covenants

The ESH REIT Credit Facilities, the 2027 Notes, the 2025 Notes and the Unsecured Intercompany Facility contain a number of restrictive covenants that, among other things and subject to certain exceptions, limit ESH REIT’s ability and the ability of its subsidiaries to engage in certain transactions. In addition, the ESH REIT Revolving Credit Facility contains a financial covenant that, subject to certain conditions, requires compliance with a certain senior loan-to-value ratio. The agreements governing ESH REIT’s indebtedness also contain certain customary events of default, including, but not limited to, cross-defaults to certain other indebtedness and, in the case of the ESH REIT Credit Facilities and the Unsecured Intercompany Facility, certain material operating leases and management agreements. As of ~~June~~September 30, 2019, ESH REIT was in compliance with all covenants under its debt agreements.

Interest Expense, net—The components of net interest expense during the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, are as follows (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018			2019			2018			2019			2018
Contractual interest⁽¹⁾	$	28,622		$	28,932		$	57,197		$	57,752		$	28,584		$	28,978		$	85,781		$	86,730
Amortization of deferred financing costs and debt discount	1,969			1,969			3,939			3,957			1,987			1,969			5,925			5,926
Debt extinguishment and other costs⁽²⁾	359			1,416			714			2,107			7,058			199			7,773			2,306
Interest Income	(683		)	(33		)	(1,649		)	(37		)	(747		)	(215		)	(2,396		)	(252		)
Total	$	30,267		$	32,284		$	60,201		$	63,779		$	36,882		$	30,931		$	97,083		$	94,710

______________________


(1)	Net of capitalized interest of ~~$0.4~~$0.6 million, $0.1 million, ~~$0.8~~$1.4 million and ~~$0.1~~$0.2 million, respectively.


(2)	Includes interest expense on finance leases (see Note 11)11) and unused credit facility fees.

Fair Value of Debt—As of ~~June~~September 30, 2019 and December 31, 2018, the estimated fair value of ESH REIT’s debt was ~~$2.5~~$2.7 billion and $2.3 billion, respectively. Estimated fair values are determined by comparing current borrowing rates and risk spreads offered in the market (Level 2 fair value measures) or quoted market prices (Level 1 fair value measures), when available, to the stated interest rates and spreads on ESH REIT’s debt.


8.	DERIVATIVE INSTRUMENTS

For the three and ~~six~~nine months ended ~~June~~September 30, 2019, ESH REIT received proceeds of $0.7 million and $2.5 million, respectively, and for the three and nine months ended September 30, 2018, ESH REIT received proceeds of $0.8 million and ~~$1.8 million, respectively, and for the three and six months ended June 30, 2018, ESH REIT received proceeds of $0.7 million and $1.1~~$1.9 million, respectively, that offset interest expense. As of ~~June~~September 30, 2019, ~~$1.5~~$0.9 million is expected to be recognized through earnings over the following twelve months.

The table below presents the amounts and classification of the interest rate swap on ESH REIT’s condensed consolidated financial statements (in thousands):

Other assets Accumulated other comprehensive income, net of tax
Interest
expense, net
As of June 30, 2019 $ 1,776
$ 1,774
⁽¹⁾

As of December 31, 2018 $ 5,789
$ 5,789
⁽²⁾

For the three months ended June 30, 2019 $ (821 )
For the three months ended June 30, 2018 $ (664 )
For the six months ended June 30, 2019 $ (1,797 )
For the six months ended June 30, 2018 $ (1,085 )



	Other assets		Accumulated other comprehensive income, net of tax			Interest expense, net
As of September 30, 2019	$	971	$	969	⁽¹⁾
As of December 31, 2018	$	5,789	$	5,789	⁽²⁾
For the three months ended September 30, 2019						$	(704	)
For the three months ended September 30, 2018						$	(803	)
For the nine months ended September 30, 2019						$	(2,501	)
For the nine months ended September 30, 2018						$	(1,888	)


(1)	Changes during the ~~six~~nine months ended ~~June~~September 30, 2019, on a pre-tax basis, consisted of changes in fair value of ~~$(4.0)~~$(4.8) million.


(2)	Changes during the year ended December 31, 2018, on a pre-tax basis, consisted of changes in fair value of $(0.6) million and the cumulative effect adjustment of $(0.7) million recorded as a result of adopting ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, on January 1, 2018.


9.	INCOME TAXES

ESH REIT has elected to be taxed and expects to continue to qualify as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended ~~(“the Code”~~(the “Code”). A REIT is a legal entity that holds real estate assets and is generally not subject to federal and state income taxes. In order to maintain qualification as a REIT, ESH REIT is required to distribute at least 90% of its taxable income, excluding net capital gain, to its shareholders each year. In addition, ESH REIT must meet a number of complex organizational and operational requirements. If ESH REIT were to fail to qualify as a REIT in any taxable year, it would be subject to federal income taxes at regular corporate rates and generally would be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which it lost its REIT qualification. 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. Even in qualifying as a REIT, ESH REIT may be subject to state and local taxes in certain jurisdictions, and is subject to federal income and excise taxes on undistributed income.

ESH REIT recorded a provision for state income taxes of ~~less than~~ $0.1 million for each of the three and ~~six~~nine months ended ~~June~~September 30, 2019, an effective ~~rate~~rates of ~~less than 0.1%~~0.3% and 0.2%, respectively, as compared to a provision of ~~$0.7~~less than $0.1 million and $0.8 million for the three and ~~six~~nine months ended ~~June~~September 30, 2018, respectively, effective rates of ~~37.5%~~0.5% and ~~1.9%~~1.6%. ESH REIT’s effective rate differs from the federal statutory income tax rate of 21% primarily due to ESH REIT’s status as a REIT under the provisions of the Code.

ESH REIT’s income tax returns for the years ~~2015~~2016 to present are subject to examination by the Internal Revenue Service and other tax returns for the years 2014 to present are subject to examination by other taxing authorities. As of ~~June~~September 30, 2019, a subsidiary of ESH REIT was under examination by the Canada Revenue Agency for tax years 2014 through 2017. As the examination is still in process, the timing of the resolution and any payments that may be required cannot be determined at this time. ESH REIT believes that, to the extent a liability may exist, it is appropriately reserved as of ~~June~~September 30, 2019.


10.	RELATED PARTY TRANSACTIONS

Revenues and Overhead Expenses

Leases and Rental Revenues—All revenues are generated as a result of, and earned from, related parties. During the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, ESH REIT’s revenues were derived from ~~three~~3 operating leases. The counterparty to each lease agreement is a subsidiary of the Corporation. ~~Fixed rental revenues are recognized on a straight-line basis.~~

ESH REIT’s fixed and variable rental revenues for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 are as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018		2019		2018		2019		2018
Fixed rental revenues	$	118,005	$	111,070	$	236,010	$	224,401	$	118,005	$	111,598	$	354,016	$	335,999
Variable rental revenues⁽¹⁾	97		462		97		462		21,450		31,379		21,546		31,841

_________________________________


(1)	Regardless of whether cash rental payments are received, ESH REIT only recognizes revenue when a lessee’s revenue exceeds specific thresholds stated in the lease.

Each lease agreement, which had an initial term that expired in October 2018, was renewed effective November 1, 2018, for a five-year term that expires in October 2023. ~~Upon renewal, minimum and percentage rents were adjusted to reflect then-current market terms.~~ Each lease agreement contains an automatic five-year renewal, unless lessee provides notice that it will not renew no later than thirty months prior to expiration. Upon renewal, if applicable, minimum and percentage rents shall be adjusted to reflect then-current market terms. Future fixed rental payments to be received under current remaining noncancelable lease terms are as follows (in thousands):


Years Ending December 31,
Remainder of 2019	$	225,722	$	112,861
2020	462,860		462,860
2021	474,409		474,409
2022	486,247		486,247
2023	415,112		415,112
Total	$	2,064,350	$	1,951,489

Overhead Expenses—A ~~wholly-owned~~ subsidiary of the Corporation incurs costs under a services agreement with the Corporation and ESH REIT for certain overhead services performed on the entities’ behalf. The services relate to executive management, accounting, financial analysis, training and technology. For the three months ended ~~June~~September 30, 2019 and 2018, ESH REIT incurred costs of ~~$2.3~~$2.5 million and ~~$2.4~~$2.2 million, respectively, and for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, ESH REIT incurred costs of ~~$4.8~~$7.3 million and ~~$5.2~~$7.4 million, respectively, related to this agreement, which are included in general and administrative expenses in the accompanying condensed consolidated statements of operations. The expenses ESH REIT incurred under this services agreement include expenses related to certain employees that participate in the Corporation’s long-term incentive plan. Such charges were ~~$0.3 million and~~ $0.2 million for each of the three months ended ~~June~~September 30, 2019 and 2018 ~~respectively,~~ and ~~$0.6~~$0.8 million and ~~$0.5~~$0.7 million for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively.

Debt and Equity Transactions

Unsecured Intercompany Facility—As of ~~June~~September 30, 2019 and December 31, 2018, there were no0 outstanding balances owed by ESH REIT to the Corporation under the Unsecured Intercompany Facility, and ESH REIT incurred no0 interest expense during the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 related to the Unsecured Intercompany Facility. ESH REIT is able to borrow under the Unsecured Intercompany Facility up to $300.0 million, plus additional amounts, in each case subject to certain ~~conditions.~~conditions (see Note 7).

Distributions—During the three months ended ~~June~~September 30, 2019 and 2018, ESH REIT paid distributions of ~~$35.1~~$37.6 million and ~~$40.1~~$45.1 million, respectively, and during the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, ESH REIT paid distributions of ~~$72.6~~$110.2 million and ~~$77.7~~$122.7 million, respectively, to the Corporation in respect of the Class A common stock of ESH REIT.

Issuance of Common Stock—In September 2019 and 2018, ESH REIT issued and was compensated $0.2 million and $0.3 million, respectively, for 0.1 million shares of Class B common stock, each of which was attached to a share of Corporation common stock to form a Paired Share, used to settle vested restricted stock units (“RSUs”). In March 2019 and 2018, ESH REIT was compensated $1.2 million and $2.3 million, respectively, for the issuance of 0.2 million and 0.3 million shares of Class B common stock, respectively, each of which was attached to a share of Corporation common stock to form a Paired Share, used to settle vested ~~restricted stock units (“RSUs”).~~RSUs.

As of ~~June~~September 30, 2019, the Corporation has granted a total of ~~1.2~~1.1 million RSUs, whereby, as a counterparty to these outstanding RSUs, ESH REIT is expected to issue and be compensated in cash for ~~1.2~~1.1 million shares of Class B common stock of ESH REIT in future periods, assuming performance-based and market-based awards vest at 100% and no forfeitures.

Related Party Balances

Related party transaction balances as of ~~June~~September 30, 2019 and December 31, 2018, include the following (in thousands):


	June 30, 2019			December 31, 2018			September 30, 2019			December 31, 2018
Leases:
Rents receivable⁽¹⁾	$	22,685		$	4,098		$	15,780		$	4,098
Deferred rents receivable⁽²⁾	$	18,925		$	8,637		$	24,069		$	8,637
Unearned rental revenues⁽¹⁾	$	(123,739	)	$	(37,506	)	$	(165,273	)	$	(37,506	)

Working capital and other:
Ordinary working capital⁽³⁾	$	(1,778	)	$	(12,581	)	$	(11,941	)	$	(12,581	)
Equity awards (payable) receivable⁽⁴⁾	(131		)	404			(32		)	404
Total working capital and other, net⁽⁵⁾	$	(1,909	)	$	(12,177	)	$	(11,973	)	$	(12,177	)

______________________


(1)	Rents receivable relate to percentage rents. As of ~~June~~September 30, 2019, unearned rental revenues related to ~~July~~October 2019 fixed minimum rent of $37.5 million and percentage rent of ~~$86.2~~$127.8 million. As of December 31, 2018, unearned rental revenues related to January 2019 fixed minimum rent.


(2)	Revenues recognized in excess of cash rents received.


(3)	Disbursements and/or receipts made by the Corporation or ESH REIT on the other entity’s behalf and amounts payable/receivable for certain transactions between the Corporate and ESH REIT. Includes overhead costs incurred by the Corporation on ESH REIT’s behalf.


(4)	Amounts related to restricted stock units not yet settled or issued.


(5)	Outstanding balances are typically repaid within 30 days.


11.	COMMITMENTS AND CONTINGENCIES

Lease Commitments—ESH REIT is a tenant under long-term ground leases at ~~five~~5 of its hotel properties, including ~~one~~1 hotel site for which development is in process. ~~Three~~NaN of these leases are operating leases and ~~two~~2 are finance leases. The ground lease agreements terminate at various dates between 2023 and 2096 and several of the agreements include multiple renewal options for generally five or ten year periods. As ESH REIT is reasonably certain that it will exercise the options to extend its ground leases, fixed payments associated with the extensions are included in the measurement of related right-of-use assets and lease liabilities.

Operating lease costs related to ground leases are included in hotel operating expenses in the condensed consolidated statements of operations. Finance lease interest costs are included in interest expense, net in the condensed consolidated statements of operations (see Note 7) or, when pertaining to assets under development, are capitalized and included in property and equipment, net on the condensed consolidated balance sheets (see Note 5). As ESH REIT’s finance lease right-of-use assets pertain to land and land under development, and as ESH REIT elected the practical expedient to retain prior lease classification upon adoption of ASC 842, Leases, no0 amortization costs related to finance leases were incurred during the three and ~~six~~nine months ended ~~June~~September 30, 2019. ESH REIT has no variable lease costs or short-term leases.

For the three and ~~six~~nine months ended ~~June~~September 30, 2019, components of ESH REIT’s total lease costs are as follows (in thousands):


	Three Months Ended		Six Months Ended
	June 30, 2019		June 30, 2019		Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating lease costs	$	327	$	652	$	351	$	1,004
Finance lease costs - interest	61		122		61		183
Total lease costs	388		774		412		1,187

ESH REIT’s right-of-use assets and lease liabilities are as follows (in thousands):


	June 30, 2019		December 31, 2018⁽⁴⁾		September 30, 2019		December 31, 2018⁽⁴⁾
Right-of-use assets:
Operating⁽¹⁾	$	2,435	$	—	$	2,260	$	—
Finance⁽²⁾	3,979		3,843		3,979		3,843

Lease liabilities:
Operating⁽³⁾	9,261		—		9,235		—
Finance	3,440		3,360		3,410		3,360


(1)	Included in other assets on the accompanying condensed consolidated balance sheets.


(2)	Included in property and equipment, net on the accompanying condensed consolidated balance sheets.


(3)	Included in accounts payable and accrued liabilities on the accompanying condensed consolidated balance sheets.


(4)	Finance lease right-of-use assets and liabilities as of December 31, 2018 were previously recorded as capital lease assets and obligations under ASC 840, Leases.

Maturities of lease liabilities as of ~~June~~September 30, 2019, are as follows (in thousands):


Years Ending December 31,	Operating Leases			Finance Leases			Operating Leases			Finance Leases
Remainder of 2019	$	358		$	181		$	181		$	90
2020	779			386			779			386
2021	784			395			784			395
2022	806			397			806			397
2023	545			400			545			400
2024	503			402			503			402
Thereafter	77,594			3,100			77,594			3,100
Total	$	81,369		$	5,261		$	81,192		$	5,170

Total discounted lease liability	$	9,261		$	3,440		$	9,235		$	3,410
Difference between undiscounted cash flows and discounted cash flows	$	72,108		$	1,821		$	71,957		$	1,760

Weighted-average remaining lease term	58 years			13 years			58 years			12 years
Weighted-average discount rate	6.6		%	7.0		%	6.6		%	7.0		%

Future minimum lease payments as of December 31, 2018, disclosed in accordance with ASC 840, Leases, were as follows (in thousands):



Years Ending December 31,	Operating Leases		Finance Leases
2019	$	712	$	351
2020	779		375
2021	784		384
2022	806		386
2023	545		387
Thereafter	78,097		3,340
Total	$	81,723	$	5,223

ESH REIT’s leases do not contain residual value guarantees and do not contain restrictions with respect to incurring additional financial obligations or paying dividends. As of ~~June~~September 30, 2019, ESH REIT does not have any material leases that have not yet commenced.

Legal Contingencies—ESH REIT is not a party to any litigation or claims, other than routine matters arising in the ordinary course of business that are incidental to the operation of the business of ESH REIT. ESH REIT believes that the results of all claims and litigation, individually or in the aggregate, will not have a material adverse effect on its ~~business or~~ condensed consolidated financial ~~statements.~~statements, results of operations or liquidity.


12.	SUBSEQUENT EVENTS

On ~~August~~November 6, 2019, the Board of Directors of ESH REIT declared a cash distribution of ~~$0.15~~$0.11 per share for the ~~second~~third quarter of 2019 on its Class A and Class B common stock. The distribution is payable on ~~September~~December 4, 2019 to shareholders of record as of ~~August 21,~~November 20, 2019.

~~On August 6,~~Subsequent to September 30, 2019, ~~the Boards of Directors of the Corporation and~~ ESH REIT ~~authorized an extension to~~repurchased and retired 1.7 million ESH REIT Class B common shares for $8.9 million, including transaction fees. As of October 31, 2019, $180.8 million is remaining under the ~~maturity date of the combined~~ Paired Share repurchase program through December 31, 2020, and authorized a $150 million increase to the amount of the program. As a result, the combined Paired Share repurchase program authorizes the Corporation and ESH REIT to purchase up to $550 million in Paired Shares, and as of August 6, 2019, $262.5 million remained available under the program.

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 in 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.

•

Comparable Hotels means, when used in connection with describing our results of operations, the 553 and 552 Extended Stay America-branded hotels owned and operated by the Company during the full three and ~~six~~nine months ended ~~June~~September 30, 2019 and ~~2018.~~2018, respectively. The operating results of 553 Comparable Hotels for the three months ended September 30, 2019 and 2018 exclude the results of 72 hotels sold in 2018 and ~~two~~one hotel that opened in November 2018. The operating results of 552 Comparable Hotels for the nine months ended September 30, 2019 and 2018 exclude the results of 72 hotels sold in 2018, one hotel acquired in May 2018 and one hotel that opened in November 2018.

•

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 ~~57%~~58% of the outstanding common stock of ESH REIT.


•	ESA Management means ESA Management LLC, a Delaware limited liability company and wholly-owned subsidiary of the Corporation, and its subsidiaries, which manage Extended Stay America-branded hotel properties on behalf of the Operating Lessees and third parties.


•	ESH REIT means ESH Hospitality, Inc., a Delaware corporation that has elected to be taxed as a real estate investment trust (“REIT”), and its subsidiaries. ESH REIT 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 between $55 and $105.


•	Occupancy or occupancy rate means the total number of rooms sold in a given period divided by the total number of rooms available during that period.


•	Operating Lessees means the wholly-owned subsidiaries of the Corporation that each lease a group of hotels from ESH REIT and, as stipulated under each lease agreement, operate the 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~~September 30, 2019, there were ~~628~~626 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 2018 Form 10-K, 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 hotel properties (which are owned by ESH REIT), are held directly by the Corporation and operated as an integrated enterprise. The Corporation owns all of the issued and outstanding shares of Class A common stock of ESH REIT, representing ~~57%~~58% of the outstanding common stock of ESH REIT. Due to its controlling interest in ESH REIT, the Corporation consolidates the financial position, results of operations, comprehensive income and cash flows of ESH REIT.

Overview

We are the largest integrated owner/operator of company-branded hotels 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 owned hotel properties and include room and other hotel revenues.


•	Franchise and management—Earnings are derived from revenues (i.e., fees) under various franchise and management agreements with third parties. These contracts provide us the ability to earn compensation for licensing the Extended Stay America brand name, providing access to shared system-wide platforms and/or management services.

As of ~~June~~September 30, 2019, we owned and operated 554 hotel properties in 40 U.S. states, consisting of approximately 61,500 rooms, and franchised or managed 7472 hotel properties for third parties, consisting of approximately ~~7,600~~7,400 rooms. All ~~628~~626 system-wide hotels operate under the Extended Stay America brand, which serves the mid-price extended stay segment and accounts for approximately 42% of the segment by number of rooms in the United States.

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.

For the trailing twelve months ended ~~June~~September 30, 2019, ~~37.4%~~37.5%, ~~21.0%~~20.8% and ~~41.6%~~41.7% 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~~September 30, 2019, ~~27.3%~~26.8% of our owned hotel room revenues were derived from property-direct reservations, ~~25.0%~~25.2% were derived from our central call center, 18.5% were derived from our own proprietary website, ~~25.3%~~25.9% were derived from third-party intermediaries and ~~3.9%~~3.6% were derived from travel agency global distribution systems.

For the trailing twelve months ended ~~June~~September 30, 2019, ~~47.7%~~51.4% of our franchise and management fees and related revenues were derived from franchising activities and ~~52.3%~~48.6% were derived from management activities. Franchisees typically pay an initial application fee, along with monthly royalty and system services 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 offering to an underserved market segment and by driving economies of scale through our national distribution and concentration of multiple hotels in individual markets. We focus on continually improving our product and service, improving marketing efforts and driving ADR. In addition to owning and operating hotels, we have increased, and plan to continue to increase, our distribution through the ongoing development of our fee-based income stream pursuant to which we franchise our brand to third parties and, in ~~some~~certain instances, manage hotels on behalf of our franchisees. We also seek to increase our efficiency and the overall quality of our real estate portfolio by selling non-strategic hotels over time, in some cases franchising our brand to, or managing sold hotels for, the buyers. Our current and future plans include some or all of the following:

continuing to invest capital in our hotels, both on an ongoing basis and through future cyclical hotel renovation programs, where justified by anticipated returns on investment;

repurposing and/or rebuilding certain of our hotel properties;

building new Extended Stay America hotel properties which we expect to own and operate;

selling non-strategic hotels to buyers that we expect will franchise the Extended Stay America brand from us and for whom we may perform management or other services;

converting existing hotels to the Extended Stay America brand, either as franchises or on our own balance sheet;

franchising the Extended Stay America brand to newly-constructed hotel properties built and owned by third parties for whom we may perform management or other services; and

acquiring additional hotel properties.

Hotel Acquisitions

No hotels were acquired during the ~~six~~nine months ended ~~June~~September 30, 2019. In September 2018, we acquired a 107-room hotel under construction. The hotel opened under the Extended Stay America brand in the fourth quarter of 2018. In May 2018, we acquired a 115-room hotel and converted it to an Extended Stay America-branded hotel. Prior to its acquisition by the Company, the hotel opened in late 2017.

Hotel Dispositions

No hotels were sold during the ~~six~~nine months ended ~~June~~September 30, 2019. The table below summarizes hotel dispositions for the year ended December 31, 2018 (in thousands, except number of hotels and number of rooms).


Year	Brand	Location	Month Sold	Number of Hotels	Number of Rooms	Net Proceeds		Gain (Loss) on Sale				Franchised/Managed ⁽¹⁾		Brand	Location	Month Sold	Number of Hotels	Number of Rooms	Net Proceeds		Gain (Loss) on Sale				Franchised/Managed ⁽¹⁾
2018	Extended Stay America	Various	November	14	1,369	$	34,855	$	1,331		⁽²⁾	Yes		Extended Stay America	Various	November	14	1,369	$	34,855	$	1,331		⁽²⁾	Yes
2018	Extended Stay America	Various	September	16	1,680	$	60,710	$	6,293		⁽²⁾	Yes		Extended Stay America	Various	September	16	1,680	$	60,710	$	6,293		⁽²⁾	Yes
2018	Extended Stay America	Various	September	16	1,776	$	58,144	$	(3,014	)	⁽²⁾	Yes		Extended Stay America	Various	September	16	1,776	$	58,144	$	(3,014	)	⁽²⁾	Yes
2018	Extended Stay America	Various	February	25	2,430	$	111,156	$	6,810		⁽²⁾	Yes		Extended Stay America	Various	February	25	2,430	$	111,156	$	6,810		⁽²⁾	Yes
2018	Extended Stay America	Texas	March	1	101	$	44,090	$	31,058			Yes	⁽³⁾	Extended Stay America	Texas	March	1	101	$	44,090	$	31,058			No	⁽³⁾

____________________


(1)	As of ~~June~~September 30, 2019.


(2)	Net of impairment charges of $16.8 million, $24.3 million, $6.3 million and $2.1 million, respectively, recorded prior to sale.


(3)	~~Remaining term of franchise or management~~Management agreement ~~is less than one year.~~terminated in August 2019.

See Note 4 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.

Franchised and Managed Hotels

The following table summarizes the number of third-party owned hotels in our franchise and management segment during the year ended December 31, 2018 and the nine months ended September 30, 2019.



Date	Number of franchised hotels added (removed)		Number of rooms		Number of franchised hotels⁽¹⁾	Number of franchised rooms⁽¹⁾
January 2018	—		—		1	160
February 2018	25		2,430		26	2,588
March 2018	1		101		27	2,689
September 2018	32		3,456		59	6,147
November 2018	14		1,369		73	7,533
April 2019	1		115		74	7,648
July 2019	(1	)	(160	)	73	7,488
August 2019	(1	)	(101	)	72	7,387
September 2019	—		—		72	7,387


(1)	As of month end.

Hotel Pipeline

As of ~~June~~September 30, 2019, the Company had a pipeline of 7177 hotels, which consisted of the following:

Company-Owned Pipeline & Recently Opened Hotels as of June 30, 2019
Under Option Pre-Development Under Construction Total Pipeline Opened YTD
# Hotels # Rooms # Hotels # Rooms # Hotels # Rooms # Hotels # Rooms # Hotels # Rooms
6 744 6 772 7 872 19 2,388 — —

Third-Party Pipeline & Recently Opened Hotels as of June 30, 2019
Commitments Applications Executed Total Pipeline Opened YTD
# Hotels # Rooms # Hotels # Rooms # Hotels # Rooms # Hotels # Rooms # Hotels # Rooms
40 4,928 6 687 6 673 52 6,288 1 115



Company-Owned Pipeline & Recently Opened Hotels as of September 30, 2019
Under Option		Pre-Development		Under Construction		Total Pipeline		Opened YTD
# Hotels	# Rooms	# Hotels	# Rooms	# Hotels	# Rooms	# Hotels	# Rooms	# Hotels	# Rooms
4	496	6	752	9	1,140	19	2,388	—	—

Third-Party Pipeline & Recently Opened Hotels as of September 30, 2019
Commitments		Applications		Executed		Total Pipeline		Opened YTD
# Hotels	# Rooms	# Hotels	# Rooms	# Hotels	# Rooms	# Hotels	# Rooms	# Hotels	# Rooms
40	4,928	7	868	11	1,261	58	7,057	1	115



Definitions
Under Option	Locations with a signed purchase and sale agreement
Pre-Development	Land purchased, permitted and/or site work
Under Construction	Hotel is under construction
Commitments	Signed commitment to build a certain number of hotels by a third party
Applications	Third party filed franchise application with deposit
Executed	Franchise application approved, various stages of pre-development and/or under construction

Understanding Our Results of Operations—The Company

Revenues and Expenses. The Company’s revenues are derived from hotel ownership/operations and the franchise and management of hotels owned by third parties. Hotel operating expenses account for the largest portion of the Company’s operating expenses and reflect ongoing expenses associated with the ownership and operation of our hotels.

The following table presents the components of the Company’s revenues as a percentage of our total revenues for the ~~six~~nine months ended ~~June~~September 30, 2019:



	Percentage of 2019 Year to Date Total Revenues
• Room revenues. Room revenues are driven primarily by ADR and occupancy. Pricing policy and customer mix are significant drivers of ADR.	~~96.2%~~96.3%
• Other hotel revenues. Other hotel revenues include ancillary revenues such as laundry revenues, vending commissions, additional housekeeping fees, purchased WiFi upgrades, parking revenues and pet charges. Occupancy and customer mix, as well as the number and percentage of guests that have longer-term stays, have been historical drivers of our other hotel revenues.	1.9%
• Franchise and management fees. Franchise and management fees include royalty and other fees charged to third parties for use of our brand name and hotel management services. The substantial majority of these fees are based on a percentage of revenues of the franchised or managed hotels.	0.4%
• 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 expense and incremental reservation and other distribution costs, incurred by us for which we are reimbursed on a dollar-for-dollar basis. Additionally, these revenues include fees charged, typically based on a percentage of revenue from 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%~~1.4%

The following table presents the components of the Company’s operating expenses as a percentage of our total operating expenses for the ~~six~~nine months ended ~~June~~September 30, 2019:



	Percentage of 2019 Year to Date Total Operating Expenses
• Hotel operating expenses. Hotel operating expenses 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.	~~65.0%~~65.3%
• 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 professional fees, including audit, tax, legal and consulting fees.	~~10.4%~~10.1%
• Depreciation and amortization. Depreciation and amortization is a charge that relates primarily to the acquisition and related usage of hotels and other property and equipment, including capital expenditures incurred with respect to hotel renovations and other capital expenditures.	~~22.4%~~22.0%
• Impairment of long-lived assets. Impairment of long-lived assets is a charge recognized when events and circumstances indicate that the carrying value of an individual hotel asset, or a group of hotel assets, may not be recoverable.	—%0.4%
• Other expenses from franchised and managed properties. Other expenses from franchised and managed properties include specific costs, such as on-site hotel personnel expense and incremental reservation 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.	2.2%

Understanding Our Results of Operations—ESH REIT

Revenues. ESH REIT’s rental revenues are generated from leasing its hotel properties to subsidiaries of the Corporation. Rental revenues consist of fixed minimum rental payments recognized on a straight-line basis over the lease terms plus variable rental payments based on specified percentages of total hotel revenues over designated thresholds.

The initial lease term of the operating leases expired in October 2018. In connection with the five-year renewal of the lease agreements, amended and restated leases were executed effective November 1, 2018. At such time, minimum and percentage rents were adjusted to reflect then-current market terms.

Expenses. The following table presents the components of ESH REIT’s operating expenses as a percentage of ESH REIT’s total operating expenses for the ~~six~~nine months ended ~~June~~September 30, 2019:



	Percentage of 2019 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 assets.	~~29.5%~~29.4%
• General and administrative expenses. General and administrative expenses include overhead expenses incurred directly by ESH REIT and administrative service costs reimbursed to the Corporation.	~~5.1%~~5.0%
• Depreciation and amortization. Depreciation and amortization are charges that relate primarily to the acquisition and related usage of hotels and other property and equipment, including capital expenditures incurred with respect to hotel renovations and other capital expenditures.	~~65.4%~~65.6%

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 ~~43%~~42% of ESH REIT’s total common equity, are not owned by the Corporation and therefore are presented as noncontrolling interests. The condensed consolidated financial statements of ESH REIT include the financial position, results of operations, comprehensive income, changes in equity and cash flows of ESH REIT and its subsidiaries.

Results of Operations—The Company

~~Comparison of Three Months Ended June 30, 2019 and June 30, 2018~~

As of ~~June~~September 30, 2019, we owned and operated 554 hotels, consisting of approximately 61,500 rooms, and franchised and/or managed 7472 hotels for third parties, consisting of approximately ~~7,600~~7,400 rooms. As of ~~June~~September 30, 2018, we owned and operated ~~599~~567 hotels, consisting of approximately ~~66,200~~62,700 rooms, and franchised and/or managed 2759 hotels for third parties, consisting of approximately ~~2,700~~6,200 rooms.

Comparison of Three Months Ended September 30, 2019 and September 30, 2018

The following table presents our consolidated results of operations for the three months ended ~~June~~September 30, 2019 and 2018, including the amount and percentage change in these results between the periods (in thousands):


	Three Months Ended June 30,											Three Months Ended September 30,
	2019			2018			Change ($)			Change (%)		2019			2018			Change ($)			Change (%)
Revenues:
Room revenues	$	311,614		$	326,948		$	(15,334	)	(4.7	)%	$	320,669		$	340,917		$	(20,248	)	(5.9	)%
Other hotel revenues	6,070			5,492			578			10.5	%	6,475			5,943			532			9.0	%
Franchise and management fees	1,447			861			586			68.1	%	1,351			864			487			56.4	%
	319,131			333,301			(14,170		)	(4.3	)%	328,495			347,724			(19,229		)	(5.5	)%
Other revenues from franchised and managed properties	4,526			3,200			1,326			41.4	%	4,200			3,352			848			25.3	%
Total revenues	323,657			336,501			(12,844		)	(3.8	)%	332,695			351,076			(18,381		)	(5.2	)%
Operating expenses:
Hotel operating expenses	146,907			144,054			2,853			2.0	%	152,913			156,341			(3,428		)	(2.2	)%
General and administrative expenses	22,287			23,507			(1,220		)	(5.2	)%	22,292			21,242			1,050			4.9	%
Depreciation and amortization	49,017			53,499			(4,482		)	(8.4	)%	49,748			52,138			(2,390		)	(4.6	)%
Impairment of long-lived assets												2,679			—			2,679			n/a
	218,211			221,060			(2,849		)	(1.3	)%	227,632			229,721			(2,089		)	(0.9	)%
Other expenses from franchised and managed properties	4,996			3,394			1,602			47.2	%	4,699			3,449			1,250			36.2	%
Total operating expenses	223,207			224,454			(1,247		)	(0.6	)%	232,331			233,170			(839		)	(0.4	)%
Gain on sale of hotel properties												—			3,517			(3,517		)	(100.0	)%
Other income	1			457			(456		)	(99.8	)%	3			39			(36		)	(92.3	)%
Income from operations	100,451			112,504			(12,053		)	(10.7	)%	100,367			121,462			(21,095		)	(17.4	)%
Other non-operating (income) expense	(171		)	102			(273		)	267.6	%
Other non-operating expense (income)												101			(251		)	352			140.2	%
Interest expense, net	29,766			32,425			(2,659		)	(8.2	)%	36,535			31,007			5,528			17.8	%
Income before income tax expense	70,856			79,977			(9,121		)	(11.4	)%	63,731			90,706			(26,975		)	(29.7	)%
Income tax expense	11,198			14,407			(3,209		)	(22.3	)%	10,501			15,014			(4,513		)	(30.1	)%
Net income	59,658			65,570			(5,912		)	(9.0	)%	53,230			75,692			(22,462		)	(29.7	)%
Net income attributable to noncontrolling interests	(6,161		)	(514		)	(5,647		)	1,098.6	%	(12,159		)	(3,790		)	(8,369		)	220.8	%
Net income attributable to Extended Stay America, Inc. common shareholders	$	53,497		$	65,056		$	(11,559	)	(17.8	)%	$	41,071		$	71,902		$	(30,831	)	(42.9	)%

The following table presents key operating metrics, including occupancy, ADR, RevPAR and hotel inventory for our owned hotels for the three months ended ~~June~~September 30, 2019 and 2018, respectively:


	Three Months Ended June 30,			Three Months Ended September 30,
	2019	2018	Change	2019	2018	Change
Number of hotels (as of June 30)	554	599	(45)
Number of rooms (as of June 30)	61,486	66,204	(4,718)
Number of hotels (as of September 30)				554	567	(13)
Number of rooms (as of September 30)				61,486	62,748	(1,262)
Occupancy	79.9%	77.6%	230 bps	80.8%	80.2%	60 bps
ADR	$69.65	$69.91	(0.4)%	$70.10	$69.85	0.4%
RevPAR	$55.63	$54.27	2.5%	$56.66	$56.02	1.1%

Renovation Displacement Data (in thousands, except percentages):
Total available room nights	5,595	6,025	(430)	5,657	5,773	(116)
Room nights displaced from renovation	15	—	15	10	—	10
% of available room nights displaced	0.3%	—%	30 bps	0.2%	—%	20 bps

Room revenues. Room revenues decreased by ~~$15.3~~$20.2 million, or ~~4.7%~~5.9%, to ~~$311.6~~$320.7 million for the three months ended ~~June~~September 30, 2019, compared to ~~$326.9~~$340.9 million for the three months ended ~~June~~September 30, 2018, primarily due to ~~hotel dispositions during~~the sale of 32 hotels that occurred in September 2018. OnAdditionally, on a Comparable Hotel basis, room revenues decreased by ~~$0.4~~$4.7 million, or ~~0.1%~~1.5%, due to a ~~relatively flat~~1.4% decline in RevPAR for hotels we owned and operated during the entirety of both periods, which was the result of a ~~2.3%~~1.6% decrease in ADR, partially offset by a ~~1.7%~~0.1% increase in occupancy.

Other hotel revenues. Other hotel revenues increased by ~~$0.6~~$0.5 million, or ~~10.5%~~9.0%, to ~~$6.1~~$6.5 million for the three months ended ~~June~~September 30, 2019, compared to ~~$5.5~~$5.9 million for the three months ended ~~June~~September 30, 2018. On a Comparable Hotel basis, other hotel revenues increased by ~~$0.9~~$0.8 million, or ~~17.5%~~14.0%, due to system and process improvements that improved our billing efficiency and collection of cancellation and other fees.

Franchise and management fees. For the three months ended ~~June~~September 30, 2019, we earned franchise and management fees of $1.4 million, ~~as a result of the franchise and/or management of 74 third-party owned hotels. For~~and for the three months ended ~~June~~September 30, 2018, we earned franchise and management fees of $0.9 million. The $0.5 million ~~as a~~increase in fees was the result of the addition of 13 hotels on a net basis, or approximately 1,200 rooms, to our franchise ~~and/or~~and management ~~of 27 third-party owned hotels.~~ ~~During the three months ended~~ ~~June 30, 2019, a third-party franchisee converted a 115-room hotel in Texas to the Extended Stay America brand, and we~~segment. We expect additional newly built and ~~brand-conversion~~brand-converted franchised hotels to open in the future.

Other revenues from franchised and managed properties. For the three months ended ~~June~~September 30, 2019 and 2018, we recognized ~~$4.5~~$4.2 million and ~~$3.2~~$3.4 million, respectively, in other revenues from franchised and managed properties. Other revenues from franchised and managed ~~hotels~~properties include both direct and indirect reimbursable costs.

Hotel operating expenses. Hotel operating expenses ~~increased~~decreased by ~~$2.9~~$3.4 million, or ~~2.0%~~2.2%, to ~~$146.9~~$152.9 million for the three months ended ~~June~~September 30, 2019, compared to ~~$144.1~~$156.3 million for the three months ended ~~June~~September 30, 2018. On a Comparable Hotel basis, hotel operating expenses increased by ~~$9.0~~$5.9 million, or ~~6.7%~~4.0%. The increase in hotel operating expenses was primarily due to increases in personnel expense of ~~$4.0~~$3.3 million, ~~loss on disposal~~allowance for uncollectible guest balances of ~~assets of $2.8~~$1.9 million ~~marketing~~and cable and internet costs of ~~$1.6 million and technology-related costs of $1.1~~$0.6 million.

General and administrative expenses. General and administrative expenses ~~decreased~~increased by ~~$1.2~~$1.1 million, or ~~5.2%~~4.9%, to $22.3 million for the three months ended ~~June~~September 30, 2019, compared to ~~$23.5~~$21.2 million for the three months ended ~~June~~September 30, 2018. The ~~decrease~~increase in general and administrative expenses was primarily due to ~~decreases in professional and consulting fees of $0.6 million and asset-related acquisition~~employee separation costs of ~~$0.3~~$1.2 million.

Depreciation and amortization. Depreciation and amortization decreased by ~~$4.5~~$2.4 million, or ~~8.4%~~4.6%, to ~~$49.0~~$49.7 million for the three months ended ~~June~~September 30, 2019, compared to ~~$53.5~~$52.1 million for the three months ended ~~June~~September 30, 2018, primarily due to hotel dispositions that occurred in September 2018.

Impairment of long-lived assets. During the three months ended September 30, 2019, we recognized an impairment charge of $2.7 million related to a hotel located in New York. The impairment charge was the result of a decline in the hotel’s estimated future operating cash flows. No impairment charges were recognized during the three months ended September 30, 2018. The estimation and evaluation of future cash flows, which is a key factor in determining the amount and/or timing of impairment charges, in particular the holding period for real estate assets and asset composition and/or concentration within

real estate portfolios, relies on judgments and assumptions regarding holding period, current and future operating and economic performance and current and future market conditions. It is possible that such judgments and/or estimates will change; if this occurs, we may recognize additional impairment charges or losses in future periods reflecting either changes in estimate, circumstance or the estimated market value of our assets.

Other expenses from franchised and managed properties. For the three months ended ~~June~~September 30, 2019, we incurred other expenses from franchised and managed properties of ~~$5.0~~$4.7 million, ~~as a result of the franchise and/or management of 74 third-party owned hotels. For~~and for the three months ended ~~June~~September 30, 2018, we incurred other expenses from franchised and managed

properties of $3.4 ~~million as a result of the franchise and/or management of 27 third-party owned hotels.~~million. We generally expect the cost to provide certain shared system-wide platforms to franchisees to be recovered through system services fees. System services fees are included in other revenues from franchised and managed properties.

Gain on sale of hotel properties. No hotels were sold during the three months ended September 30, 2019. During the three months ended September 30, 2018, we recognized a $3.5 million gain related to the sale of 32 hotels.

Other income. No material other income was recognized during the three months ended ~~June~~September 30, ~~2019. Other income for the three months ended June 30, 2018 was $0.5 million, which primarily related to a business interruption insurance reimbursement.~~2019 and 2018.

Other non-operating expense (income) ~~expense.~~. During the three months ended ~~June~~September 30, 2019 and 2018, we recognized a foreign currency transaction ~~gain of $0.2 million and~~ loss of $0.1 million and gain of $0.3 million, respectively, related to a residual Canadian dollar-denominated deposit resulting from the 2017 sale of our Canadian hotels.

Interest expense, net. ~~Net~~During the three months ended September 30, 2019, we incurred debt extinguishment and modification costs of $6.7 million, consisting of the write-off of unamortized deferred financing costs and debt discount of $5.6 million and other costs of $1.1 million, which related to the $500.0 million repayment of outstanding borrowings under the ESH REIT Term Facility and the modification of the ESH REIT Credit Facilities. Excluding debt extinguishment and modification costs, net interest expense decreased ~~by $2.7~~$1.2 million, or ~~8.2%~~3.9%, to $29.8 million for the three months ended ~~June~~September 30, 2019, compared to ~~$32.4~~$31.0 million for the three months ended ~~June~~September 30, ~~2018. This decrease was~~2018, primarily due to ~~a $1.3 million~~an increase in interest income earned on money market ~~investments as well as a $1.2 million decrease in debt extinguishment costs.~~investments. The Company’s weighted-average interest rate ~~increased to 4.8%~~was 4.7% as of ~~June~~September 30, 2019 ~~compared to 4.6% as of June 30,~~and 2018. The Company’s total debt outstanding ~~decreased~~increased to ~~$2.4~~$2.6 billion, net of unamortized deferred financing costs and debt discounts, as of ~~June~~September 30, 2019, compared to $2.5 billion, net of unamortized deferred financing costs and debt discounts, as of ~~June~~September 30, ~~2018.~~2018 as a result of the issuance of $750.0 million of 2027 Notes.

Income tax expense. Our effective income tax rate decreased to ~~15.8%~~16.5% for the three months ended ~~June~~September 30, 2019, compared to ~~18.0%~~16.6% for the three months ended ~~June~~September 30, 2018. The Company’s effective rate differs from the current federal statutory rate of 21% primarily due to ESH REIT’s status as a REIT under the provisions of the Internal Revenue Code of 1986, as amended (the “Code”). The decrease in the effective income tax rate for the three months ended ~~June~~September 30, 2019 was ~~primarily~~ due to ~~the fact that the Company filed its final Canadian tax return during the three months ended June 30, 2018, resulting~~a slight decrease in ~~a $0.7 million~~dividend income ~~tax expense related~~and other factors with respect to the ~~sale of three Canadian hotels that did not reoccur~~Corporation’s ownership in ~~2019.~~ESH REIT.

Net income attributable to noncontrolling interests. Third-party equity interests in Extended Stay America, Inc. consist of the outstanding shares of the Class B common stock of ESH REIT, which represented 42% and 43% of ESH REIT’s total common equity as of ~~June~~September 30, 2019 and ~~2018.~~2018, respectively.

Comparison of ~~Six~~Nine Months Ended ~~June~~September 30, 2019 and ~~June~~September 30, 2018

As of June 30, 2019, we owned and operated 554 hotels, consisting of approximately 61,500 rooms, and franchised and/or managed 74 hotels for third parties, consisting of approximately 7,600 rooms. As of June 30, 2018, we owned and operated 599 hotels, consisting of approximately 66,200 rooms, and franchised and/or managed 27 hotels for third parties, consisting of approximately 2,700 rooms.

The following table presents our consolidated results of operations for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, including the amount and percentage change in these results between the periods (in thousands):


	Six Months Ended June 30,											Nine Months Ended September 30,
	2019			2018			Change ($)			Change (%)		2019			2018			Change ($)			Change (%)
Revenues:
Room revenues	$	578,660		$	617,158		$	(38,498	)	(6.2	)%	$	899,329		$	958,075		$	(58,746	)	(6.1	)%
Other hotel revenues	11,373			10,767			606			5.6	%	17,848			16,710			1,138			6.8	%
Franchise and management fees	2,672			1,276			1,396			109.4	%	4,023			2,140			1,883			88.0	%
	592,705			629,201			(36,496		)	(5.8	)%	921,200			976,925			(55,725		)	(5.7	)%
Other revenues from franchised and managed properties	8,621			5,067			3,554			70.1	%	12,821			8,419			4,402			52.3	%
Total revenues	601,326			634,268			(32,942		)	(5.2	)%	934,021			985,344			(51,323		)	(5.2	)%
Operating expenses:
Hotel operating expenses	284,198			286,684			(2,486		)	(0.9	)%	437,111			443,025			(5,914		)	(1.3	)%
General and administrative expenses	45,314			48,468			(3,154		)	(6.5	)%	67,606			69,710			(2,104		)	(3.0	)%
Depreciation and amortization	97,795			107,514			(9,719		)	(9.0	)%	147,543			159,652			(12,109		)	(7.6	)%
Impairment of long-lived assets	—			43,600			(43,600		)	(100.0	)%	2,679			43,600			(40,921		)	(93.9	)%
	427,307			486,266			(58,959		)	(12.1	)%	654,939			715,987			(61,048		)	(8.5	)%
Other expenses from franchised and managed properties	9,643			5,313			4,330			81.5	%	14,342			8,762			5,580			63.7	%
Total operating expenses	436,950			491,579			(54,629		)	(11.1	)%	669,281			724,749			(55,468		)	(7.7	)%
Gain on sale of hotel properties	—			38,082			(38,082		)	(100.0	)%	—			41,599			(41,599		)	(100.0	)%
Other income	28			462			(434		)	(93.9	)%	31			501			(470		)	(93.8	)%
Income from operations	164,404			181,233			(16,829		)	(9.3	)%	264,771			302,695			(37,924		)	(12.5	)%
Other non-operating (income) expense	(349		)	299			(648		)	216.7	%	(248		)	48			(296		)	616.7	%
Interest expense, net	59,370			64,065			(4,695		)	(7.3	)%	95,905			95,072			833			0.9	%
Income before income tax expense	105,383			116,869			(11,486		)	(9.8	)%	169,114			207,575			(38,461		)	(18.5	)%
Income tax expense	17,321			20,204			(2,883		)	(14.3	)%	27,822			35,218			(7,396		)	(21.0	)%
Net income	88,062			96,665			(8,603		)	(8.9	)%	141,292			172,357			(31,065		)	(18.0	)%
Net income attributable to noncontrolling interests	(12,631		)	(16,757		)	4,126			(24.6	)%	(24,790		)	(20,547		)	(4,243		)	20.7	%
Net income attributable to Extended Stay America, Inc. common shareholders	$	75,431		$	79,908		$	(4,477	)	(5.6	)%	$	116,502		$	151,810		$	(35,308	)	(23.3	)%

The following table presents key operating metrics, including occupancy, ADR, RevPAR and hotel inventory for our owned hotels for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, respectively:


	Six Months Ended June 30,			Nine Months Ended September 30,
	2019	2018	Change	2019	2018	Change
Number of hotels (as of June 30)	554	599	(45)
Number of rooms (as of June 30)	61,486	66,204	(4,718)
Number of hotels (as of September 30)				554	567	(13)
Number of rooms (as of September 30)				61,486	62,748	(1,262)
Occupancy	75.7%	74.1%	160 bps	77.4%	76.0%	140 bps
ADR	$68.64	$69.00	(0.5)%	$69.15	$69.24	(0.1)%
RevPAR	$51.94	$51.12	1.6%	$53.53	$52.65	1.7%

Renovation Displacement Data (in thousands, except percentages):
Total available room nights	11,129	11,983	(854)	16,786	17,130	(344)
Room nights displaced from renovation	35	—	35	45	—	45
% of available room nights displaced	0.3%	—%	30 bps	0.3%	—%	30 bps

Room revenues. Room revenues decreased by ~~$38.5~~$58.7 million, or ~~6.2%~~6.1%, to ~~$578.7~~$899.3 million for the ~~six~~nine months ended ~~June~~September 30, 2019, compared to ~~$617.2~~$958.1 million for the ~~six~~nine months ended ~~June~~September 30, 2018, primarily due to hotel dispositions ~~during~~which occurred in the first and third quarters of 2018. On a Comparable Hotel basis, room revenues decreased by ~~$6.2~~$10.9 million, or ~~1.1%~~1.2%, due to a ~~1.1%~~1.2% decrease in RevPAR for hotels we owned and operated for the entirety of both periods. The ~~1.1%~~1.2% RevPAR decline for the Comparable Hotels was the result of a ~~2.4%~~2.1% decrease in ADR, partially offset by a ~~0.1%~~0.7% increase in occupancy.

Other hotel revenues. Other hotel revenues increased by ~~$0.6~~$1.1 million, or ~~5.6%~~6.8%, to ~~$11.4~~$17.8 million for the ~~six~~nine months ended ~~June~~September 30, 2019, compared to ~~$10.8~~$16.7 million for the ~~six~~nine months ended ~~June~~September 30, 2018. On a Comparable Hotel basis, other hotel revenues increased by ~~$1.4~~$2.2 million, or ~~14.1%~~14.0%, due to system and process improvements that improved billing efficiency and collection of cancellation and other fees.

Franchise and management fees. For the ~~six~~nine months ended ~~June~~September 30, 2019, we earned franchise and management fees of ~~$2.7~~$4.0 million, ~~as a result of~~and for the ~~franchise and/or management of 74 third-party owned hotels. For the six~~nine months ended ~~June~~September 30, 2018, we earned franchise and management fees of ~~$1.3~~$2.1 million. The $1.9 million ~~as a~~increase in fees was the result of the addition of 13 hotels on a net basis, or approximately 1,200 rooms, to our franchise ~~and/or~~and management ~~of 27 third-party owned hotels.~~ ~~During the~~ ~~six~~segment. ~~months ended~~ ~~June 30, 2019, a third-party franchisee converted a 115-room hotel in Texas to the Extended Stay America brand, and we~~We expect additional newly built and ~~brand-conversion~~brand-converted franchised hotels to open in the future.

Other revenues from franchised and managed properties. For the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, we recognized ~~$8.6~~$12.8 million and ~~$5.1~~$8.4 million, respectively, in other revenues from franchised and managed properties. Other revenues from franchised and managed ~~hotels~~properties include both direct and indirect reimbursable costs.

Hotel operating expenses. Hotel operating expenses decreased by ~~$2.5~~$5.9 million, or ~~0.9%~~1.3%, to ~~$284.2~~$437.1 million for the ~~six~~nine months ended ~~June~~September 30, 2019, compared to ~~$286.7~~$443.0 million for the ~~six~~nine months ended ~~June~~September 30, 2018. On a Comparable Hotel basis, hotel operating expenses increased by ~~$15.2~~$23.7 million, or ~~5.7%~~5.8%. The increase in hotel operating expenses was primarily due to increases in personnel expense of ~~$6.3~~$9.5 million, allowance for uncollectible guest balances of $2.9 million, marketing costs of $2.8 million, cable, internet and telephone costs of $2.7 million, loss on disposal of assets of ~~$2.7~~$2.4 million, ~~technology-related costs of $2.2 million, workers’ compensation and general liability insurance claims of $1.4 million and~~ real estate tax expense of ~~$0.9~~$1.3 million ~~partially offset by a decrease in maintenance~~and insurance expense of ~~$0.6~~$1.0 million.

General and administrative expenses. General and administrative expenses decreased by ~~$3.2~~$2.1 million, or ~~6.5%~~3.0%, to ~~$45.3~~$67.6 million for the ~~six~~nine months ended ~~June~~September 30, 2019, compared to ~~$48.5~~$69.7 million for the ~~six~~nine months ended ~~June~~September 30, 2018. This decrease was primarily due to decreases in professional fees and compensation ~~expense of $1.1 million, professional and consulting fees of $0.6 million and asset-related acquisition costs of $0.3 million.~~expense.

Depreciation and amortization. Depreciation and amortization decreased by ~~$9.7~~$12.1 million, or ~~9.0%~~7.6%, to ~~$97.8~~$147.5 million for the ~~six~~nine months ended ~~June~~September 30, 2019, compared to ~~$107.5~~$159.7 million for the ~~six~~nine months ended ~~June~~September 30, 2018, primarily due to hotel dispositions ~~during~~which occurred in the first and third quarters of 2018.

Impairment of long-lived assets. ~~No impairment charges were recognized during~~During the ~~six~~nine months ended ~~June~~September 30, ~~2019.~~2019, we recognized an impairment charge of $2.7 million related to a hotel located in New York. The impairment charge was incurred as a result of a decline in the hotel’s estimated future operating cash flows. During the ~~six~~nine months ended ~~June~~September 30, 2018, we recognized impairment charges

for 21 hotels, generally located in the

Midwestern U.S., which totaled $43.6 million. The majority of the charges incurred were in connection with evaluating the potential sale of certain non-core assets. The estimation and evaluation of future cash flows, which is a key factor in determining the amount and/or timing of impairment charges, in particular the holding period for real estate assets and asset composition and/or concentration within real estate portfolios, relies on judgments and assumptions regarding holding period, current and future operating and economic performance and current and future market conditions. It is possible that such judgments and/or estimates will change; if this occurs, we may recognize additional impairment charges reflecting either changes in estimate, circumstance or the estimated market value of our assets.

Other expenses from franchised and managed properties. For the ~~six~~nine months ended ~~June~~September 30, 2019, we incurred other expenses from franchised and managed properties of ~~$9.6~~$14.3 million ~~as a result of~~and for the ~~franchise and/or management of 74 third-party owned hotels. For the six~~nine months ended ~~June~~September 30, 2018, we incurred other expenses from franchised and managed properties of ~~$5.3 million as a result of the franchise and/or management of 27 third-party owned hotels.~~$8.8 million. We generally expect the cost to provide certain shared system-wide platforms to franchisees to be recovered through system services fees. System services fees are included in other revenues from franchised and managed properties.

Gain on sale of hotel properties. No hotels were sold during the ~~six~~nine months ended ~~June~~September 30, 2019. During the ~~six~~nine months ended ~~June~~September 30, 2018, we recognized a ~~$38.1~~$41.6 million gain related to the sale of 2658 hotels.

Other income. No material other income was recognized during the ~~six~~nine months ended ~~June~~September 30, 2019. Other income for the ~~six~~nine months ended ~~June~~September 30, 2018 was $0.5 million, which primarily related to a business interruption insurance reimbursement.

Other non-operating (income) expense. During the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018, we recognized a foreign currency transaction gain of ~~$0.3~~$0.2 million and loss of ~~$0.3~~less than $0.1 million, respectively, related to a residual Canadian dollar-denominated deposit resulting from the 2017 sale of our Canadian hotels.

Interest expense, net. ~~Net~~During the nine months ended September 30, 2019, we incurred debt extinguishment and modification costs of $6.7 million, consisting of the write-off of unamortized deferred financing costs and debt discount of $5.6 million and other costs of $1.1 million, which related to the $500.0 million repayment of outstanding borrowings under the ESH REIT Term Facility and the modification of the ESH REIT Credit Facilities. During the nine months ended September 30, 2018, we incurred debt modification costs of $1.6 million related to repricing the ESH REIT Term Facility. Excluding debt extinguishment and modification costs, net interest expense decreased ~~by $4.7~~$4.3 million, or ~~7.3%~~4.6%, to ~~$59.4~~$89.2 million for the ~~six~~nine months ended ~~June~~September 30, 2019, compared to ~~$64.1~~$93.5 million for the ~~six~~nine months ended ~~June~~September 30, ~~2018. This decrease was primarily~~2018, due to ~~a $2.7 million~~an increase in interest income earned on money market ~~investments as well as a $1.6 million decrease in debt extinguishment costs.~~investments. The Company’s weighted-average interest rate ~~increased to~~was 4.7% as of ~~June~~September 30, 2019 ~~compared to 4.6% as of June 30,~~and 2018. The Company’s total debt outstanding ~~decreased~~increased to ~~$2.4~~$2.6 billion, net of unamortized deferred financing costs and debt discounts, as of ~~June~~September 30, 2019 compared to $2.5 billion, net of unamortized deferred financing costs and debt discounts, as of ~~June~~September 30, ~~2018.~~2018 as a result of the issuance of $750.0 million of 2027 Notes.

Income tax expense. Our effective income tax rate decreased to ~~16.4%~~16.5% for the ~~six~~nine months ended ~~June~~September 30, 2019, compared to ~~17.3%~~17.0% for the ~~six~~nine months ended ~~June~~September 30, 2018. The Company’s effective rate differs from the current federal statutory rate of 21% primarily due to ESH REIT’s status as a REIT under the provisions of the Code. The decrease in the effective income tax rate for the ~~six~~nine months ended ~~June~~September 30, 2019 was due to a ~~modest~~slight decrease in dividend income and other factors with respect to the Corporation’s ownership in ESH REIT.

Net income attributable to noncontrolling interests. Third-party equity interests in the Company consist of the outstanding shares of the Class B common stock of ESH REIT, which represented 42% and 43% of ESH REIT’s total common equity as of ~~June~~September 30, 2019 and ~~2018.~~2018, respectively.

Results of Operations—ESH REIT

ESH REIT’s sole source of revenues is lease rental revenues. The initial lease term of ~~the operating leases~~ESH REIT’s lease agreements expired in October 2018. In connection with the five-year renewal of the lease agreements, amended and restated leases were executed effective November 1, 2018. At such time, minimum and percentage rents were adjusted to reflect then-current market terms. Hotel operating expenses reflect only those hotel operating expenses incurred directly related to hotel ownership. Administrative service costs reimbursed to the Corporation are included as a component of general and administrative expenses.

~~Comparison of Three Months Ended June 30, 2019 and June 30, 2018~~

As of ~~June~~September 30, 2019, ESH REIT owned and leased 554 hotels, consisting of approximately 61,500 rooms. As of ~~June~~September 30, 2018, ESH REIT owned and leased ~~599~~567 hotels, consisting of approximately ~~66,200~~62,700 rooms.

Comparison of Three Months Ended September 30, 2019 and September 30, 2018

The following table presents ESH REIT’s results of operations for the three months ended ~~June~~September 30, 2019 and 2018, including the amount and percentage change in these results between the periods (in thousands):



	Three Months Ended September 30,
	2019		2018			Change ($)			Change (%)
Revenues- Rental revenues from Extended Stay America, Inc.	$	139,455	$	142,977		$	(3,522	)	(2.5)%
Operating expenses:
Hotel operating expenses	21,577		22,621			(1,044		)	(4.6)%
General and administrative expenses	3,477		3,393			84			2.5%
Depreciation and amortization	48,885		51,748			(2,863		)	(5.5)%
Total operating expenses	73,939		77,762			(3,823		)	(4.9)%
Loss on sale of hotel properties	—		(25,657		)	25,657			(100.0)%
Other income	—		20			(20		)	(100.0)%
Income from operations	65,516		39,578			25,938			65.5%
Other non-operating expense (income)	79		(216		)	295			136.6%
Interest expense, net	36,882		30,931			5,951			19.2%
Income before income tax expense	28,555		8,863			19,692			222.2%
Income tax expense	88		42			46			109.5%
Net income	$	28,467	$	8,821		$	19,646		222.7%

Rental revenues from Extended Stay America, Inc. Rental revenues decreased by $3.5 million, or 2.5%, to $139.5 million for the three months ended September 30, 2019, compared to $143.0 million for the three months ended September 30, 2018. The decrease in rental revenues was due to the sale of 32 hotels in September 2018 and a decrease in revenues of the leased Comparable Hotels, partially offset by the renewal of the lease agreements between ESH REIT and the Operating Lessees in November 2018, which reset the straight-line impact of future fixed minimum rent increases. Percentage rental revenues were $21.5 million and $31.4 million during the three months ended September 30, 2019 and 2018, respectively.

Hotel operating expenses. Hotel operating expenses decreased by $1.0 million, or 4.6%, to $21.6 million for the three months ended September 30, 2019, compared to $22.6 million for the three months ended September 30, 2018. This decrease was primarily due to the 32 hotel dispositions which occurred during September 2018.

General and administrative expenses. General and administrative expenses increased by $0.1 million, or 2.5%, to $3.5 million for the three months ended September 30, 2019, compared to $3.4 million for the three months ended September 30, 2018.

Depreciation and amortization. Depreciation and amortization decreased by $2.9 million, or 5.5%, to $48.9 million for the three months ended September 30, 2019, compared to $51.7 million for the three months ended September 30, 2018, primarily due to the 32 hotel dispositions which occurred during September 2018.

Loss on sale of hotel properties. No hotels were sold during the three months ended September 30, 2019. During the three months ended September 30, 2018, ESH REIT recognized a loss on sale of hotel properties of $25.7 million related to the sale of 32 hotel properties.

Other income. No material other income was recognized during the three months ended September 30, 2019 and 2018.

Other non-operating expense (income). During the three months ended September 30, 2019 and 2018, ESH REIT recognized a foreign currency transaction loss of $0.1 million and gain of $0.2 million, respectively, related to a residual Canadian dollar-denominated deposit resulting from the 2017 sale of its Canadian hotels.

Interest expense, net. During the three months ended September 30, 2019, ESH REIT incurred debt extinguishment and modification costs of $6.7 million, consisting of the write-off of unamortized deferred financing costs and debt discount of $5.6 million and other costs of $1.1 million, which related to the $500.0 million repayment of outstanding borrowings under the ESH REIT Term Facility and the modification of the ESH REIT Credit Facilities. Excluding debt extinguishment and modification costs, net interest expense decreased $0.7 million, or 2.3%, to $30.2 million, for the three months ended September 30, 2019, compared to $30.9 million for the three months ended September 30, 2018, due to an increase in interest income earned on money market investments. ESH REIT’s weighted-average interest rate was 4.7% and 4.6% as of September 30, 2019 and 2018, respectively. ESH REIT’s total debt outstanding increased to $2.6 billion, net of unamortized deferred financing costs and debt discounts, as of September 30, 2019 compared to $2.5 billion, net of unamortized deferred financing costs and debt discounts, as of September 30, 2018 as a result of the issuance of $750.0 million of 2027 Notes.

Income tax expense. ESH REIT’s effective income tax rate decreased to 0.3% for the three months ended September 30, 2019 compared to 0.5% for the three months ended September 30, 2018. 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 Nine Months Ended September 30, 2019 and September 30, 2018

The following table presents ESH REIT’s results of operations for the nine months ended September 30, 2019 and 2018, including the amount and percentage change in these results between the periods (in thousands):


	Three Months Ended June 30,									Nine Months Ended September 30,
	2019			2018		Change ($)			Change (%)	2019			2018		Change ($)			Change (%)
Revenues- Rental revenues from Extended Stay America, Inc.	$	118,102		$	111,532	$	6,570		5.9%	$	375,562		$	367,840	$	7,722		2.1%
Operating expenses:
Hotel operating expenses	21,937			19,975		1,962			9.8%	64,822			64,677		145			0.2%
General and administrative expenses	3,544			4,217		(673		)	(16.0)%	11,002			11,705		(703		)	(6.0)%
Depreciation and amortization	48,132			53,538		(5,406		)	(10.1)%	144,884			158,566		(13,682		)	(8.6)%
Total operating expenses	73,613			77,730		(4,117		)	(5.3)%	220,708			234,948		(14,240		)	(6.1)%
Gain on sale of hotel properties										—			9,753		(9,753		)	(100.0)%
Other income	—			451		(451		)	(100.0)%	15			499		(484		)	(97.0)%
Income from operations	44,489			34,253		10,236			29.9%	154,869			143,144		11,725			8.2%
Other non-operating (income) expense	(134		)	64		(198		)	309.4%	(194		)	50		(244		)	488.0%
Interest expense, net	30,267			32,284		(2,017		)	(6.2)%	97,083			94,710		2,373			2.5%
Income before income tax expense	14,356			1,905		12,451			653.6%	57,980			48,384		9,596			19.8%
Income tax expense	7			715		(708		)	(99.0)%	98			792		(694		)	(87.6)%
Net income	$	14,349		$	1,190	$	13,159		1,105.8%	$	57,882		$	47,592	$	10,290		21.6%

Rental revenues from Extended Stay America, Inc. Rental revenues increased by ~~$6.6~~$7.7 million, or ~~5.9%~~2.1%, to ~~$118.1~~$375.6 million for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~$111.5~~$367.8 million for the ~~three~~nine months ended ~~June~~September 30, 2018. The increase in rental revenues was due to the renewal of the ~~leases~~lease agreements between ESH REIT and the Operating Lessees in November 2018, which ~~increased the proportion of minimum rents to total rental payments, and~~reset the straight-line impact of ~~the future~~ fixed minimum rent increases, ~~under the renewed leases. This increase was~~ partially offset by a decrease in percentage rental revenues asresulting from the sale of 58 hotels in 2018 and a ~~result~~decrease in revenues of the ~~hotel dispositions during 2018.~~leased Comparable

Hotels. Percentage rental revenues were ~~$0.1~~$21.5 million and ~~$0.5~~$31.8 million during the ~~three~~nine months ended ~~June~~September 30, 2019 and 2018, respectively.

Hotel operating expenses. Hotel operating expenses increased by ~~$2.0~~$0.1 million, or ~~9.8%~~0.2%, to ~~$21.9~~$64.8 million for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~$20.0~~$64.7 million for the ~~three~~nine months ended ~~June~~September 30, 2018. This increase was ~~primarily~~ due to an increase in ~~the~~ loss on disposal of assets of ~~$2.8~~$2.4 million, ~~partially~~mostly offset by a decrease in ~~real estate tax expense of $0.8 million.~~expenses related to sold hotels.

General and administrative expenses. General and administrative expenses decreased by $0.7 million, or ~~16.0%~~6.0%, to ~~$3.5~~$11.0 million for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~$4.2~~$11.7 million for the ~~three~~nine months ended ~~June~~September 30, 2018. This decrease was primarily due to decreases in professional ~~and consulting~~ fees ~~of $0.3 million, asset-related acquisition costs of $0.2 million~~ and costs paid to the Corporation ~~of $0.1 million~~ for administrative services performed on ESH REIT’s behalf.

Depreciation and amortization. Depreciation and amortization decreased by ~~$5.4~~$13.7 million, or ~~10.1%~~8.6%, to ~~$48.1~~$144.9 million for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~$53.5~~$158.6 million for the ~~three~~nine months ended ~~June~~September 30, 2018, primarily due to the sale of 58 hotels which occurred during the first and third quarters of 2018.

Gain on sale of hotel ~~dispositions~~properties. No hotels were sold during ~~2018.~~the nine months ended September 30, 2019. During the nine months ended September 30, 2018, ESH REIT recognized a gain of $9.8 million related to the sale of 58 hotels.

Other income. No material other income was recognized during the ~~three~~nine months ended ~~June~~September 30, 2019. Other income for the ~~three~~nine months ended ~~June~~September 30, 2018 was $0.5 million, which primarily related to a business interruption insurance reimbursement.

Other non-operating (income) expense. During the ~~three~~nine months ended ~~June~~September 30, 2019 and 2018, ESH REIT recognized a foreign currency transaction gain of $0.2 million and loss of $0.1 million, respectively, related to a residual Canadian dollar-denominated deposit resulting from the 2017 sale of our Canadian hotels.

Interest expense, net. ~~Net~~During the nine months ended September 30, 2019, ESH REIT incurred debt extinguishment and modification costs of $6.7 million, consisting of the write-off of unamortized deferred financing costs and debt discount of $5.6 million and other costs of $1.1 million, which related to the $500.0 million repayment of outstanding borrowings under the ESH REIT Term Facility and the modification of the ESH REIT Credit Facilities. During the nine months ended September 30, 2018, ESH REIT incurred debt modification costs of $1.6 million related to repricing the ESH REIT Term Facility. Excluding debt extinguishment and modification costs, net interest expense decreased ~~by $2.0~~$2.7 million, or ~~6.2%~~2.9%, to ~~$30.3~~$90.4 million for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~$32.3~~$93.1 million for the ~~three~~nine months ended ~~June~~September 30, ~~2018. This decrease was primarily~~2018, due to ~~a $1.2 million decrease in debt extinguishment costs and a $0.7 million~~an increase in interest income earned on money market investments. ESH REIT’s weighted-average interest rate ~~increased to~~was 4.7% ~~as of June 30, 2019 compared to~~and 4.6% as of ~~June~~September 30, ~~2018.~~2019 and 2018, respectively. ESH REIT’s total debt outstanding ~~decreased~~increased to ~~$2.4~~$2.6 billion, net of unamortized deferred financing costs and debt discounts, as of ~~June~~September 30, 2019, compared to $2.5 billion, net of unamortized deferred financing costs and debt discounts, as of ~~June~~September 30, ~~2018.~~2018 as a result of the issuance of $750.0 million of 2027 Notes.

Income tax expense. ESH REIT’s effective income tax rate decreased to ~~less than 0.1%~~0.2% for the ~~three~~nine months ended ~~June~~September 30, 2019, compared to ~~37.5%~~1.6% for the ~~three~~nine months ended ~~June~~September 30, 2018. 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. The decrease in the effective income tax rate for the ~~three~~nine months ended ~~June~~September 30, 2019 was primarily due to the fact that ESH REIT filed its final Canadian income tax return during the ~~three~~nine months ended ~~June~~September 30, 2018, ~~resulting~~which resulted in a $0.7 million in incremental income tax ~~expense related to the sale of three Canadian hotels that did not reoccur in 2019.~~

~~Comparison of Six Months Ended June 30, 2019 and June 30, 2018~~

As of June 30, 2019, ESH REIT owned and leased 554 hotels, consisting of approximately 61,500 rooms. As of June 30, 2018, ESH REIT owned and leased 599 hotels, consisting of approximately 66,200 rooms.

The following table presents ESH REIT’s results of operations for the six months ended June 30, 2019 and 2018, including the amount and percentage change in these results between the periods (in thousands):

Six Months Ended
June 30,
2019 2018 Change ($) Change (%)
Revenues- Rental revenues from Extended Stay America, Inc.
$ 236,107
$ 224,863
$ 11,244
5.0%
Operating expenses:
Hotel operating expenses 43,245
42,056
1,189
2.8%
General and administrative expenses 7,525
8,312
(787 ) (9.5)%
Depreciation and amortization 95,999
106,818
(10,819 ) (10.1)%
Total operating expenses 146,769
157,186
(10,417 ) (6.6)%
Gain on sale of hotel properties —
35,410
(35,410 ) (100.0)%
Other income 15
479
(464 ) (96.9)%
Income from operations 89,353
103,566
(14,213 ) (13.7)%
Other non-operating (income) expense (273 ) 266
(539 ) 202.6%
Interest expense, net 60,201
63,779
(3,578 ) (5.6)%
Income before income tax expense 29,425
39,521
(10,096 ) (25.5)%
Income tax expense 10
750
(740 ) (98.7)%
Net income $ 29,415
$ 38,771
$ (9,356 ) (24.1)%

~~Rental revenues from Extended Stay America, Inc.~~ Rental revenues increased by $11.2 million, or 5.0%, to $236.1 million for the six months ended June 30, 2019, compared to $224.9 million for the six months ended June 30, 2018. The increase in rental revenues was due to the renewal of the leases between ESH REIT and the Operating Lessees in November 2018, which increased the proportion of minimum rents to total rental payments, and the straight-line impact of the future fixed minimum rent increases under the renewed leases. This increase was partially offset by a decrease in revenues as a result of hotel dispositions during 2018. Percentage rental revenues were $0.1 million and $0.5 million during the six months ended June 30, 2019 and 2018, respectively.

~~Hotel operating expenses~~. Hotel operating expenses increased by $1.2 million, or 2.8%, to $43.2 million for the six months ended June 30, 2019, compared to $42.1 million for the six months ended June 30, 2018. This increase was primarily due to an increase in the loss on disposal of assets of $2.7 million, partially offset by a decrease in real estate tax and use tax expenses of $1.5 million.

~~General and administrative expenses.~~ General and administrative expenses decreased by $0.8 million, or 9.5%, to $7.5 million for the six months ended June 30, 2019, compared to $8.3 million for the six months ended June 30, 2018. This decrease was primarily due to decreases in asset-related acquisition costs of $0.3 million and costs paid to the Corporation of $0.3 million for administrative services performed on ESH REIT’s behalf.

~~Depreciation and amortization.~~ Depreciation and amortization decreased by $10.8 million, or 10.1%, to $96.0 million for the six months ended June 30, 2019, compared to $106.8 million for the six months ended June 30, 2018, primarily due to hotel dispositions during 2018.

~~Gain on sale of hotel properties.~~ ~~No hotels were sold during the six months ended June 30, 2019. During the six months ended June 30, 2018, ESH REIT recognized a gain of $35.4 million related to the sale of 26 hotels.~~

~~Other income.~~ No material other income was recognized during the six months ended June 30, 2019. Other income for the six months ended June 30, 2018 was $0.5 million, which primarily related to a business interruption insurance reimbursement.

~~Other non-operating (income)~~ expense. During the six months ended June 30, 2019 and 2018, ESH REIT recognized a foreign currency transaction gain of $0.3 million and loss of $0.3 million, respectively, related to a residual Canadian dollar-denominated deposit resulting from the 2017 sale of our Canadian hotels.

~~Interest expense, net.~~ Net interest expense decreased by $3.6 million, or 5.6%, to $60.2 million for the six months ended June 30, 2019, compared to $63.8 million for the six months ended June 30, 2018. This decrease was primarily due to a $1.6 million increase in interest income earned on money market investments as well as a $1.6 million decrease in debt extinguishment costs. ESH REIT’s weighted-average interest rate increased to 4.7% as of June 30, 2019 compared to 4.6% as of June 30, 2018. ESH REIT’s total debt outstanding decreased to $2.4 billion, net of unamortized deferred financing costs and debt discounts, as of June 30, 2019 compared to $2.5 billion, net of unamortized deferred financing costs and debt discounts, as of June 30, 2018.

~~Income tax expense.~~ ESH REIT’s effective income tax rate decreased to less than 0.1% for the six months ended June 30, 2019, compared to 1.9% for the six months ended June 30, 2018. 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. The decrease in the effective income tax rate for the six months ended June 30, 2019 was primarily due to the fact that ESH REIT filed its final Canadian tax return during the six months ended June 30, 2018, resulting in a $0.7 million income tax expense related to the sale of three Canadian hotels that did not reoccur in 2019.

Non-GAAP Financial Measures

Hotel Operating Profit and Hotel Operating Margin

Hotel Operating Profit and Hotel Operating Margin measure hotel-level operating results prior to certain items, including debt service, income tax expense, impairment charges, depreciation and amortization and general and administrative expenses. The Company believes that Hotel Operating Profit and Hotel Operating Margin are useful measures to investors regarding our operating performance as they help us evaluate aggregate owned hotel-level profitability, specifically owned hotel operating efficiency and effectiveness. Further, these measures allow us to analyze period over period operating margin flow-through, defined as the change in Hotel Operating Profit divided by the change in total room and other hotel revenues.

We define Hotel Operating Profit as net income excluding: (1) income tax expense; (2) net interest expense; (3) other non-operating expense (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.

The following table provides a reconciliation of Hotel Operating Profit and Hotel Operating Margin for the Company for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018			2019			2018			2019			2018
Net income	$	59,658		$	65,570		$	88,062		$	96,665		$	53,230		$	75,692		$	141,292		$	172,357
Income tax expense	11,198			14,407			17,321			20,204			10,501			15,014			27,822			35,218
Interest expense, net	29,766			32,425			59,370			64,065			36,535			31,007			95,905			95,072
Other non-operating (income) expense	(171		)	102			(349		)	299
Other non-operating expense (income)													101			(251		)	(248		)	48
Other income	(1		)	(457		)	(28		)	(462		)	(3		)	(39		)	(31		)	(501		)
Gain on sale of hotel properties	—			—			—			(38,082		)	—			(3,517		)	—			(41,599		)
Impairment of long-lived assets	—			—			—			43,600			2,679			—			2,679			43,600
Depreciation and amortization	49,017			53,499			97,795			107,514			49,748			52,138			147,543			159,652
General and administrative expenses	22,287			23,507			45,314			48,468			22,292			21,242			67,606			69,710
Loss (gain) on disposal of assets ⁽¹⁾	2,001			(824		)	3,377			668
Loss on disposal of assets⁽¹⁾													1,660			1,949			5,037			2,617
Franchise and management fees	(1,447		)	(861		)	(2,672		)	(1,276		)	(1,351		)	(864		)	(4,023		)	(2,140		)
Other expenses from franchised and managed properties, net of other revenues	470			194			1,022			246			499			97			1,521			343
Hotel Operating Profit	$	172,778		$	187,562		$	309,212		$	341,909		$	175,891		$	192,468		$	485,103		$	534,377

Room revenues	$	311,614		$	326,948		$	578,660		$	617,158		$	320,669		$	340,917		$	899,329		$	958,075
Other hotel revenues	6,070			5,492			11,373			10,767			6,475			5,943			17,848			16,710
Total room and other hotel revenues	$	317,684		$	332,440		$	590,033		$	627,925		$	327,144		$	346,860		$	917,177		$	974,785

Hotel Operating Margin	54.4		%	56.4		%	52.4		%	54.5		%	53.8		%	55.5		%	52.9		%	54.8		%

________________________

(1) Included in hotel operating expenses in the condensed consolidated statements of operations.

EBITDA and Adjusted EBITDA

EBITDA is defined as net income excluding: (1) net interest expense; (2) income tax expense; and (3) depreciation and amortization. EBITDA is a commonly used measure of performance in many industries. The Company believes that EBITDA provides useful information to investors regarding our operating performance as it helps us and investors evaluate the ongoing performance of our hotels and our franchise and management operations after removing the impact of our capital structure, primarily net interest expense, our corporate structure, primarily income tax expense, and our asset base, primarily depreciation and amortization. We believe that the use of EBITDA facilitates comparisons between us and other lodging companies, hotel owners and capital-intensive companies. Additionally, EBITDA is a measure that is used by management in our annual budgeting and compensation planning processes.

The Company uses Adjusted EBITDA when evaluating our performance because we believe the adjustment for certain additional items, described below, provides useful supplemental information to investors regarding ongoing operating performance and that the presentation of Adjusted EBITDA, when combined with the U.S. GAAP presentation of net income, net income per share and cash flow provided by operating activities, is beneficial to the overall understanding of ongoing operating performance. We adjust EBITDA for the following items, where applicable for each period presented, and refer to this measure as Adjusted EBITDA:


•	Equity-based compensation—We exclude charges related to equity-based compensation expense with respect to awards issued under long-term incentive compensation plans to employees and certain directors.


•	Impairment of long-lived assets—We exclude the effect of impairment losses recorded on property and equipment and intangible assets, as we believe they are not reflective of ongoing or future operating performance.


•	Gain on sale of hotel properties—We exclude the net gain on sale of hotel properties, as we believe it is not reflective of ongoing or future operating performance.


•	Other expense (income)—We exclude the effect of other expense or income that we do not consider reflective of ongoing or future operating performance, including the following: loss (gain) on disposal of assets, non-operating expense (income) ~~expense,~~, including foreign currency transaction costs, and certain costs associated with acquisitions, dispositions and/or capital transactions.

EBITDA and Adjusted EBITDA as presented may not be comparable to similar measures calculated by other companies. This information should not be considered as an alternative to net income of the Company, the Corporation or ESH REIT, or any other measure of the Company, the Corporation or ESH REIT calculated in accordance with U.S. GAAP. Cash expenditures for capital expenditures, interest expense and other items have been and will continue to be incurred and are not reflected in EBITDA or Adjusted EBITDA. Management separately considers the impact of these excluded items to the extent they are material to operating decisions and assessments of operating performance. The Company’s condensed consolidated statements of operations and cash flows include capital expenditures, net interest expense and other excluded items, all of which should be considered when evaluating our performance in addition to our non-GAAP financial measures. EBITDA and Adjusted EBITDA should not solely be considered as measures of our profitability or indicative of funds available to fund our cash needs, including our ability to pay shareholder distributions.

We believe that EBITDA and Adjusted EBITDA are not meaningful or useful measures for ESH REIT on a stand-alone basis due to the fact that a Paired Share represents an investment in the Company, as a single, consolidated enterprise, which is reflected in the consolidated Company results of operations; therefore, we believe these performance measures are meaningful for the consolidated Company only.

The following table provides a reconciliation of net income to EBITDA and Adjusted EBITDA for the Company for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 (in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,					Three Months Ended September 30,					Nine Months Ended September 30,
	2019		2018			2019		2018			2019		2018			2019		2018
Net income	$	59,658	$	65,570		$	88,062	$	96,665		$	53,230	$	75,692		$	141,292	$	172,357
Interest expense, net	29,766		32,425			59,370		64,065			36,535		31,007			95,905		95,072
Income tax expense	11,198		14,407			17,321		20,204			10,501		15,014			27,822		35,218
Depreciation and amortization	49,017		53,499			97,795		107,514			49,748		52,138			147,543		159,652
EBITDA	149,639		165,901			262,548		288,448			150,014		173,851			412,562		462,299
Equity-based compensation	2,147		1,785			4,255		4,188			1,876		1,811			6,131		5,999
Impairment of long-lived assets	—		—			—		43,600			2,679		—			2,679		43,600
Gain on sale of hotel properties	—		—			—		(38,082		)	—		(3,517		)	—		(41,599		)
Other expense (income)⁽¹⁾	1,857		(349		)	3,151		1,347
Other expense⁽¹⁾											1,756		1,532			4,907		2,879
Adjusted EBITDA	$	153,643	$	167,337		$	269,954	$	299,501		$	156,325	$	173,677		$	426,279	$	473,178

________________________


(1)	Includes loss ~~(gain)~~ on disposal of assets, non-operating expense (income) ~~expense,~~, including foreign currency transaction costs, and certain costs associated with acquisitions and dispositions. Loss ~~(gain)~~ on disposal of assets totaled ~~$2.0~~$1.7 million, ~~$(0.8)~~$1.9 million, ~~$3.4~~$5.0 million and ~~$0.7~~$2.6 million, respectively.

FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share

FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share are metrics used by management to assess our operating performance and profitability and to facilitate comparisons between us and other hotel and/or real estate companies that include a REIT as part of their legal entity structure. Funds from Operations (“FFO”) is defined by 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 Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share, as described below, our reconciliation of FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share begins with net income attributable to Extended Stay America, Inc. common shareholders, which excludes net income attributable to noncontrolling interests, and adds back earnings attributable to ESH REIT’s Class B common shares, presented as noncontrolling interest of the Company as required by U.S. GAAP. We believe that including earnings attributable to ESH REIT’s Class B common shares in our calculations of FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share provides investors with useful supplemental measures of the Company’s operating performance since our Paired Shares, directly through the pairing of the common stock of the Corporation and Class B common stock of ESH REIT, and indirectly through the Corporation’s ownership of the Class A common stock of ESH REIT, entitle holders to participate in 100% of the common equity and earnings of both the Corporation and ESH REIT. Based on the limitation on transfer provided for in each of the Corporation’s and ESH REIT’s charters, shares of common stock of the Corporation and shares of Class B common stock of ESH REIT are transferable and tradable only in combination as units, each unit consisting of one share of the Corporation’s common stock and one share of ESH REIT Class B common stock.

The Company uses Adjusted FFO and Adjusted FFO per diluted Paired Share when evaluating our performance because we believe the adjustment for certain additional items, described below, provides useful supplemental information to investors regarding our ongoing operating performance and that the presentation of Adjusted FFO and Adjusted FFO per diluted Paired Share, when combined with the U.S. GAAP presentation of net income and net income per common share, is beneficial to the overall understanding of our ongoing performance.

The Company adjusts FFO for the following items, net of tax, that are not addressed in NAREIT’s definition of FFO, and refers to this measure as Adjusted FFO:


•	Debt modification and extinguishment costs—We exclude charges related to the write-off of unamortized deferred financing costs and debt discounts, prepayment penalties and other costs associated with the modification and/or extinguishment of debt as we believe they are not reflective of our ongoing or future operating performance.

Adjusted FFO per diluted Paired Share is defined as Adjusted FFO divided by the weighted average number of Paired Shares outstanding on a diluted basis. Until such time as the number of outstanding common shares of the Corporation and Class B common shares of ESH REIT differ, we believe Adjusted FFO per diluted Paired Share is useful to investors, as it represents a measure of the economic risks and rewards related to an investment in our Paired Shares.

FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share as presented may not be comparable to similar measures calculated by other REITs or real estate companies that include a REIT as part of their legal entity structure. In particular, due to the fact that we present these measures for the Company on a consolidated basis (i.e., including the impact of franchise fees, management fees and income taxes), FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share, may be of limited use to investors comparing our results only to REITs. This information should not be considered as an alternative to net income of the Company, the Corporation, or ESH REIT, net income per share of common stock of the Corporation, net income per share of Class A or Class B common stock of ESH REIT or any other measure of the Company, the Corporation or ESH REIT calculated in accordance with U.S. GAAP. Real estate related depreciation and amortization expense will continue to be incurred and is not reflected in FFO, Adjusted FFO or Adjusted FFO per diluted Paired Share. Additionally, impairment charges, gains or losses on sales of hotel properties and other charges or income incurred in accordance with U.S. GAAP may occur and are not reflected in FFO, Adjusted FFO or Adjusted FFO per diluted Paired Share. Management separately considers the impact of these excluded items to the extent they are material to operating decisions and assessments of operating

performance. The Company’s consolidated statements of operations include these items, all of which should be considered when evaluating our performance, in addition to our non-GAAP financial measures.

We believe that FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share are not meaningful or useful measures for ESH REIT on a stand-alone basis due to the fact that a Paired Share represents an investment in the Company, as a single, consolidated enterprise, which is reflected in the consolidated Company results of operations; therefore, we believe these performance measures are meaningful for the consolidated Company only.

The following table provides a reconciliation of net income attributable to Extended Stay America, Inc. common shareholders to FFO, Adjusted FFO and Adjusted FFO per diluted Paired Share for the Company for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 (in thousands, except per Paired Share data):

Three Months Ended June 30, Six Months Ended
June 30,
2019 2018 2019 2018
Net income per Extended Stay America, Inc. common share - diluted $ 0.28
$ 0.34
$ 0.40
$ 0.42

Net income attributable to Extended Stay America, Inc. common shareholders $ 53,497
$ 65,056
$ 75,431
$ 79,908
Noncontrolling interests attributable to Class B common shares of ESH REIT 6,157
510
12,623
16,749
Real estate depreciation and amortization 47,655
52,233
95,088
104,981
Impairment of long-lived assets —
—
—
43,600
Gain on sale of hotel properties —
—
—
(38,082 )
Tax effect of adjustments to net income attributable to Extended Stay America, Inc. common shareholders (7,482 ) (8,880 ) (14,882 ) (18,605 )
FFO 99,827
108,919
168,260
188,551
Debt modification and extinguishment costs —
1,184
—
1,621
Tax effect of adjustments to FFO —
(201 ) —
(274 )
Adjusted FFO $ 99,827
$ 109,902
$ 168,260
$ 189,898
Adjusted FFO per Paired Share - diluted $ 0.53
$ 0.58
$ 0.89
$ 1.00
Weighted Average Paired Shares outstanding - diluted 188,813
190,183
188,695
190,709



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net income per Extended Stay America, Inc. common share - diluted	$	0.22		$	0.38		$	0.62		$	0.80

Net income attributable to Extended Stay America, Inc. common shareholders	$	41,071		$	71,902		$	116,502		$	151,810
Noncontrolling interests attributable to Class B common shares of ESH REIT	12,155			3,786			24,778			20,535
Real estate depreciation and amortization	48,247			50,807			143,335			155,788
Impairment of long-lived assets	2,679			—			2,679			43,600
Gain on sale of hotel properties	—			(3,517		)	—			(41,599		)
Tax effect of adjustments to net income attributable to Extended Stay America, Inc. common shareholders	(8,250		)	(7,897		)	(23,132		)	(26,502		)
FFO	95,902			115,081			264,162			303,632
Debt modification and extinguishment costs	6,716			—			6,716			1,621
Tax effect of adjustments to FFO	(1,088		)	—			(1,088		)	(274		)
Adjusted FFO	$	101,530		$	115,081		$	269,790		$	304,979
Adjusted FFO per Paired Share - diluted	$	0.54		$	0.61		$	1.43		$	1.60
Weighted Average Paired Shares outstanding - diluted	187,015			189,253			188,317			190,111

Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share

We present Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share as supplemental measures of the Company’s performance. We believe that these are useful measures for investors since our Paired Shares, directly through the pairing of the common stock of the Corporation and Class B common stock of ESH REIT, and indirectly through the Corporation’s ownership of the Class A common stock of ESH REIT, entitle holders to participate in 100% of the common equity and earnings of both the Corporation and ESH REIT. As required by U.S. GAAP, net income attributable to Extended Stay America, Inc. common shareholders excludes earnings attributable to ESH REIT’s Class B common shares, a noncontrolling interest. Based on the limitation on transfer provided for in each of the Corporation’s and ESH REIT’s charters, shares of common stock of the Corporation and shares of Class B common stock of ESH REIT are transferable and tradable only in combination as units, each unit consisting of one share of the Corporation’s common stock and one share of ESH REIT Class B common stock. As a result, we believe that Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share represent useful measures to holders of our Paired Shares.

Paired Share Income is defined as the sum of net income attributable to Extended Stay America, Inc. common shareholders and noncontrolling interests attributable to Class B common shares of ESH REIT. Adjusted Paired Share Income is defined as Paired Share Income adjusted for items that, net of income taxes, we believe are not reflective of ongoing or future operating performance. We adjust Paired Share Income for the following items, net of income taxes, where applicable for each period presented, and refer to this measure as Adjusted Paired Share Income: debt modification and extinguishment costs, impairment of long-lived assets, gain on sale of hotel properties and other expenses (income) such as loss on disposal of assets, non-operating (income) expense, including foreign currency transaction costs and certain costs associated with acquisitions, dispositions and/or capital transactions. With the exception of equity-based compensation, an ongoing charge, and debt modification and extinguishment costs, these adjustments (other than the effect of income taxes) are the same as those used in the reconciliation of net income calculated in accordance with U.S. GAAP to EBITDA and Adjusted EBITDA.

Adjusted Paired Share Income per diluted Paired Share is defined as Adjusted Paired Share Income divided by the number of Paired Shares outstanding on a diluted basis. Until such time as the number of outstanding common shares of the Corporation and Class B common shares of ESH REIT differ, we believe Adjusted Paired Share Income per diluted Paired Share is useful to investors, as it represents one measure of the economic risks and rewards related to an investment in our Paired Shares. We believe that Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share provide meaningful indicators of the Company’s operating performance in addition to separate and/or individual analyses of net income attributable to common shareholders of the Corporation and net income attributable to Class B common shareholders of ESH REIT, each of which is impacted by specific U.S. GAAP requirements, including the recognition of contingent lease rental revenues and the recognition of fixed minimum lease rental revenues on a straight-line basis, and may not reflect how cash flows are generated on an individual entity or total enterprise basis. Paired Share Income,

Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share should not be considered as an alternative to net income of the Company, net income of the Corporation, net income of ESH REIT, net income per share of common stock of the Corporation, net income per share of Class A or Class B common stock of ESH REIT or any other measure of the Company, the Corporation or ESH REIT calculated in accordance with U.S. GAAP.

We believe that Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share are not meaningful or useful measures for ESH REIT on a stand-alone basis due to the fact that a Paired Share represents an investment in the Company, as a single, consolidated enterprise, which is reflected in the consolidated Company results of operations; therefore, we believe these performance measures are meaningful for the consolidated Company only.

The following table provides a reconciliation of net income attributable to Extended Stay America, Inc. common shareholders to Paired Share Income, Adjusted Paired Share Income and Adjusted Paired Share Income per diluted Paired Share for the three and ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 (in thousands, except per Paired Share data):


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018			2019			2018			2019			2018
Net income per Extended Stay America, Inc. common share - diluted	$	0.28		$	0.34		$	0.40		$	0.42		$	0.22		$	0.38		$	0.62		$	0.80

Net income attributable to Extended Stay America, Inc. common shareholders	$	53,497		$	65,056		$	75,431		$	79,908		$	41,071		$	71,902		$	116,502		$	151,810
Noncontrolling interests attributable to Class B common shares of ESH REIT	6,157			510			12,623			16,749			12,155			3,786			24,778			20,535
Paired Share Income	59,654			65,566			88,054			96,657			53,226			75,688			141,280			172,345
Debt modification and extinguishment costs	—			1,184			—			1,621			6,716			—			6,716			1,621
Impairment of long-lived assets	—			—			—			43,600			2,679			—			2,679			43,600
Gain on sale of hotel properties	—			—			—			(38,082		)	—			(3,517		)	—			(41,599		)
Other expense (income)⁽¹⁾	1,857			(349		)	3,151			1,347
Other expense⁽¹⁾													1,756			1,532			4,907			2,879
Tax effect of adjustments to Paired Share Income	(291		)	(142		)	(493		)	(1,419		)	(1,806		)	331			(2,299		)	(1,088		)
Adjusted Paired Share Income	$	61,220		$	66,259		$	90,712		$	103,724		$	62,571		$	74,034		$	153,283		$	177,758
Adjusted Paired Share Income per Paired Share – diluted	$	0.32		$	0.35		$	0.48		$	0.54		$	0.33		$	0.39		$	0.81		$	0.94
Weighted average Paired Shares outstanding – diluted	188,813			190,183			188,695			190,709			187,015			189,253			188,317			190,111

_________________________


(1)	Includes loss ~~(gain)~~ on disposal of assets, non-operating expense (income) ~~expense,~~, including foreign currency transaction costs, and certain costs associated with acquisitions and dispositions. Loss ~~(gain)~~ on disposal of assets totaled ~~$2.0~~$1.7 million, ~~$(0.8)~~$1.9 million, ~~$3.4~~$5.0 million and ~~$0.7~~$2.6 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, including execution of our strategic objectives, primarily with existing cash, cash flow generated from operations, borrowings under our revolving credit facilities, as needed, and, in certain instances, proceeds from asset dispositions. We generated cash flow from operations of ~~$204.1~~$338.8 million for the ~~six~~nine months ended ~~June~~September 30, 2019.

Our current liquidity requirements consist primarily of funds necessary to pay for (i) hotel operating expenses, (ii) capital expenditures, including those capital expenditures incurred to perform hotel renovations, repurpose and/or rebuild certain hotels, construct new hotels and acquire additional hotel properties and/or other lodging companies, (iii) investments in

franchise, management and other fee programs, (iv) general and administrative expenses, (v) debt service obligations, including interest expense, (vi) income taxes, (vii) Paired Share repurchases, (viii) Corporation distributions and required ESH REIT distributions and (ix) certain other growth and strategic initiatives (See “—Overview”). We expect to fund our current liquidity requirements from a combination of cash on hand, cash flow generated from operations, borrowings under our revolving credit facilities, as needed, and, in certain instances, proceeds from asset dispositions.

Long-term liquidity requirements consist of funds necessary to (i) complete future hotel renovations, (ii) repurpose and/or rebuild certain existing hotels, (iii) construct new Extended Stay America-branded hotels, (iv) acquire additional hotel properties and/or other lodging companies, (v) execute our other growth and strategic initiatives, (vi) pay distributions and (vii) refinance (including prior to or in connection with debt maturity payments) the 2025 Notes, the ESH REIT Term Facility and the ~~2025~~2027 Notes maturing in ~~August 2023~~May 2025, September 2026 and ~~May 2025,~~October 2027, respectively. See Note 7 to each of the ~~audited~~condensed consolidated financial statements of Extended

Stay America, Inc. and ~~Note 6 to the audited consolidated financial statements of~~ ESH Hospitality, Inc., included in Item ~~8 of the 2018 Form10-K,~~1 in 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, our degree of leverage, the value of our unencumbered assets and borrowing restrictions imposed by existing or prospective lenders, general market conditions for the lodging industry, our operating performance and liquidity and market perceptions about us. The success of our business strategies will depend, in part, on our ability to access these various capital sources. There can be no assurance that we will be able to raise any such financing on terms acceptable to us or at all.

The Company had unrestricted cash and cash equivalents of ~~$286.6~~$489.8 million at ~~June~~September 30, 2019. Based upon the current level of operations, management believes that our cash flow from operations, together with our cash balances and available borrowings under our revolving credit facilities, will be adequate to meet our anticipated funding requirements and business objectives for the foreseeable future. We regularly review our capital structure and at any time may refinance or repay existing indebtedness, incur new indebtedness or purchase debt or equity securities.

Debt Obligations. In September 2019, ESH REIT entered into an amendment to the ESH REIT Credit Facilities whereby, among other things, proceeds from the issuance of the 2027 Notes (defined below) were used to repay $500.0 million of the outstanding borrowings under the ESH REIT Term Facility and the stated amount of the ESH REIT Term Facility was reduced from $1,130.0 million to $630.9 million. Additionally, the amendment reduced the interest rate applicable to the ESH REIT Revolving Credit Facility and extended the maturity of both the ESH REIT Revolving Credit Facility and the ESH REIT Term Facility through September 2024 and 2026, respectively.

unpaid interest. Prior to October 1, 2022, subject to certain conditions, ESH REIT may redeem up to 35% of the aggregate principal amount of the 2027 Notes at a redemption price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest, with the net cash proceeds from certain equity offerings, provided 65% of the original amount of the principal remains outstanding after the occurrence of each such redemption. Upon a Change of Control, as defined, holders of the 2027 Notes have the right to require ESH REIT to redeem the 2027 Notes at 101% of the principal amount, plus accrued and unpaid interest.

In September 2019, the Corporation entered into an amendment to the Corporation Revolving Credit Facility which, among other things, extended the facility’s maturity through September 2026 and reduced the interest rate spread on utilized and unutilized revolver balances.

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 “Unsecured Intercompany Facility”). In September 2019, the Unsecured Intercompany Facility was amended to, among other things, extend the facility’s maturity through September 2026. Under the Unsecured Intercompany Facility, ESH REIT may borrow up to $300.0 million, plus additional amounts, in each case subject to certain conditions. As of September 30, 2019, the outstanding balance under the Unsecured Intercompany Facility was $0.

See Note 7 to each of the condensed consolidated financial statements of Extended Stay America, Inc. and ESH Hospitality, Inc., both of which are included in Item 1 in this combined quarterly report on Form 10-Q, for additional detail on our debt obligations.

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, including a $150 million increase to the authorized amount and a program extension in August 2019, as of ~~June~~September 30, 2019, the combined Paired Share repurchase program authorized the Corporation and ESH REIT to purchase up to ~~$400~~$550 million in Paired Shares through December 31, ~~2019.~~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~~September 30, 2019, the Corporation and ESH REIT repurchased and retired their respective portion of ~~17.3~~21.3 million Paired Shares for a total of ~~$287.6 million.~~$345.1 million, including transaction fees. As of ~~July~~October 31, 2019, ~~$112.5~~$180.8 million remained under the combined Paired Share repurchase program.

On August 6, 2019, the Boards of Directors of the Corporation and ESH REIT authorized an extension to the maturity date of the combined Paired Share repurchase program through December 31, 2020, and authorized a $150 million increase to the amount of the program. As a result, the combined Paired Share repurchase program authorizes the Corporation and ESH REIT to purchase up to $550 million in Paired Shares, and as of August 6, 2019, $262.5 million remained available under the program.

Distributions. On ~~August~~November 6, 2019, the Board of Directors of ESH REIT declared a cash distribution of ~~$0.15~~$0.11 per Class A and Class B common share for the ~~first~~third quarter of 2019. Additionally, the Board of Directors of the Corporation declared a cash distribution of ~~$0.08~~$0.12 per common share for the ~~first~~third quarter of 2019. These distributions, which total $0.23 per Paired Share, will be payable on ~~September~~December 4, 2019 to shareholders of record as of ~~August 21,~~November 20, 2019.

The following table outlines distributions declared or paid to date in 2019:


Declaration Date	Record Date	Date Paid/Payable	ESH REIT Distribution	Corporation Distribution	Total Distribution	Record Date	Date Paid/Payable	ESH REIT Distribution	Corporation Distribution	Total Distribution
2/27/2019	3/14/2019	3/28/2019	$0.15	$0.07	$0.22	3/14/2019	3/28/2019	$0.15	$0.07	$0.22
5/15/2019	5/16/2019	5/30/2019	$0.14	$0.09	$0.23
5/1/2019						5/16/2019	5/30/2019	$0.14	$0.09	$0.23
8/6/2019	8/21/2019	9/4/2019	$0.15	$0.08	$0.23	9/4/2019	8/21/2019	$0.15	$0.08	$0.23
11/6/2019						11/20/2019	12/4/2019	$0.11	$0.12	$0.23
								$0.55	$0.36	$0.91

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~~September 30, 2019, represents ~~57%~~58% of the outstanding common stock of ESH REIT. Other sources of liquidity include income from the operations of the Operating Lessees, ESA Management, ESH Strategies and ESH Strategies Franchise.

In August 2016, the Corporation and ESH REIT entered into an unsecured intercompany credit facility (the “Unsecured Intercompany Facility”). As of June 30, 2019, the outstanding balance under the Unsecured Intercompany Facility was $0. Subject to certain conditions, the Corporation may loan to ESH REIT up to the greater of $300.0 million and an amount based

on ESH REIT’s Loan-to-Value Ratio under the Unsecured Intercompany Facility. See Note 7 to the audited consolidated financial statements of Extended Stay America, Inc., included in Item 8 of the 2018 Form 10-K, for additional detail on the Unsecured Intercompany Facility.

The Corporation’s current liquidity requirements consist primarily of funds necessary to pay for or fund (i) hotel

operating expenses, (ii) general and administrative expenses, (iii) any debt service obligations, including interest expense on its outstanding mandatorily redeemable voting preferred stock, (iv) income taxes, (v) investments in its franchise, management and other fee programs, (vi) Paired Share repurchases, and (vii) Corporation distributions. The Corporation expects to fund its current liquidity requirements from a combination of cash on hand, cash flow generated from operations (including distribution income it receives in respect of its ownership of 100% of the Class A common stock of ESH REIT) and borrowings under its revolving credit facility, as needed.

The Corporation’s long-term liquidity requirements include the repayment of any outstanding amounts under its revolving credit facility and the repayment of its 8% mandatorily redeemable voting preferred stock outstanding, the total par value of which is $7.1 million, in November 2020. Holders of the mandatorily redeemable voting preferred stock have the right to require the Corporation to redeem in cash the mandatorily redeemable voting preferred stock at $1,000 per share plus any accumulated unpaid dividends. See Note 7 to the ~~audited~~condensed consolidated financial statements of Extended Stay America, Inc., included in Item 81 of ~~the 2018~~this combined quarterly report on Form ~~10-K,~~10-Q, for additional detail on the Corporation’s debt obligations.

The Corporation is expected to continue to pay distributions on its common stock to meet a portion of our expected distribution rate on our Paired Shares. The Corporation’s ability to pay distributions is dependent upon its results of operations, net income, liquidity, cash flows, financial condition or prospects, economic conditions, the ability to effectively execute certain tax planning strategies, compliance with applicable law, the receipt of distributions from ESH REIT in respect of the Class A common stock, level of indebtedness, capital requirements, contractual restrictions, restrictions in any existing and future debt agreements of the Corporation and ESH REIT and other factors. The payment of distributions in the future will be at the discretion of the Corporation’s Board of Directors.

From time to time, the Corporation may return additional cash to ESH REIT in order for ESH REIT to pay for or fund (i) its current and long-term liquidity requirements, (ii) capital expenditures (see “—Liquidity and Capital Resources - ESH REIT”), (iii) outstanding debt obligations or (iv) for other corporate purposes. The Corporation may transfer cash to ESH REIT through the purchase of additional shares of Class A common stock, which would increase its ownership of ESH REIT and reduce the Company’s overall tax efficiency. Additionally, the Corporation may loan funds to ESH REIT under the Unsecured Intercompany Facility or an additional intercompany facility, subject to the conditions contained in the ESH REIT Credit Facilities, the 2027 Notes, the 2025 Notes and the Unsecured Intercompany Facility. See Note 7 to each of the ~~audited~~condensed consolidated financial statements of Extended Stay America, Inc. and ESH Hospitality, Inc., both of which are included in Item ~~8 of the 2018~~1 in this combined quarterly report on Form ~~10-K.~~10-Q.

Based upon the current level of operations, management believes that the Corporation’s cash position, cash flow generated from operations and available borrowings under its revolving credit facility, as needed, will be adequate to meet all of the Corporation’s funding requirements and business objectives for the foreseeable future.

ESH REIT

ESH REIT’s primary source of liquidity is rental revenues derived from leases. The initial lease term of the operating leases expired in October 2018. In connection with the five-year renewal of the lease agreements, amended and restated leases were executed effective November 1, 2018. At such time, minimum and percentage rents were adjusted to reflect then-current market terms. 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 ~~(ii)~~and, with respect to the ESH REIT Term Facility, scheduled principal payments on ~~its~~ outstanding ~~indebtedness, including the repayment of outstanding amounts, if any, under the ESH REIT Credit Facilities and the Unsecured Intercompany Facility,~~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, repurpose and/or rebuild certain hotels, construct new hotels and acquire additional hotel properties and/or other lodging companies, (vii) Paired Share repurchases and (viii) the payment of distributions.

ESH REIT’s long-term liquidity requirements consist of funds necessary to (i) complete future hotel renovations, (ii) repurpose and/or rebuild certain of ESH REIT’s existing hotel properties, (iii) construct new Extended Stay America-branded owned hotels, (iv) acquire additional hotel properties and/or other lodging companies, (v) pay distributions and (vi) refinance (including prior to or in connection with debt maturity payments) the 2025 Notes, the ESH REIT Term Facility and the ~~2025~~2027 Notes maturing in ~~August 2023~~May 2025, September 2026 and ~~May 2025,~~October 2027, respectively. See Note 7 to the ~~audited~~condensed consolidated financial statements of ESH Hospitality, Inc., included in Item ~~8 of the 2018~~1 in this combined quarterly report on Form ~~10-K, for additional detail on ESH REIT’s debt obligations.~~

10-Q.

In order to qualify and maintain its status as a REIT, ESH REIT must distribute annually to its shareholders an amount at least equal to:

90% of its REIT taxable income, computed without regard to the deduction for dividends paid and excluding any net capital gain; plus

90% of the excess of its net income, if any, from foreclosure property over the tax imposed on such income by the Code; less

the sum of certain items of non-cash income that exceeds a percentage of ESH REIT’s income.

ESH REIT intends to distribute its taxable income to the extent necessary to optimize its tax efficiency, including, but not limited to, maintaining its REIT status, while retaining sufficient capital for its ongoing needs. ESH REIT is subject to income tax on its taxable income that is not distributed and to an excise tax to the extent that certain percentages of its taxable income are not distributed by specified dates. To the extent distributions in respect of the Class B common stock of ESH REIT are not sufficient to meet our expected Paired Share distributions, Paired Share distributions are expected to be completed through distributions in respect of the common stock of the Corporation, as they have been in prior periods, using funds distributed to the Corporation in respect of the Class A common stock of ESH REIT, after allowance for tax, if any, on those funds.

Due to REIT distribution requirements, ESH REIT has historically not accumulated significant amounts of cash. As a result and as discussed above, we expect that ESH REIT will need to refinance all or a portion of its outstanding debt, including the 2025 Notes, the ESH REIT Credit Facilities and the ~~2025~~2027 Notes, on or before maturity. See Note 7 to the ~~audited~~condensed consolidated financial statements of ESH Hospitality, Inc., included in Item ~~8 of the 2018~~1 in this combined quarterly report on Form ~~10-K, for additional detail on ESH REIT’s debt obligations.~~10-Q. We cannot assure you that ESH REIT will be able to refinance any of its debt on attractive terms at or before maturity, on commercially reasonable terms or at all.

Based upon the current level of operations, management believes that ESH REIT’s cash position, cash flow generated from operations, available borrowings under its revolving credit facility and the Unsecured Intercompany Facility, as needed, and, in certain circumstances, proceeds from asset sales, will be adequate to meet all of ESH REIT’s funding requirements and business objectives for the foreseeable future.

Sources and Uses of Cash – The Company

The following cash flow table and comparisons are provided for the Company:

Comparison of ~~Six~~Nine Months Ended ~~June~~September 30, 2019 and ~~June~~September 30, 2018

We had total cash, cash equivalents and restricted cash of ~~$302.6~~$503.3 million and ~~$227.4~~$386.6 million at ~~June~~September 30, 2019 and 2018, respectively. The following table summarizes the changes in our cash, cash equivalents and restricted cash as a result of operating, investing and financing activities for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 (in thousands):


	Six Months Ended June 30,									Nine Months Ended September 30,
	2019			2018			Change ($)			2019			2018			Change ($)
Cash provided by (used in):
Operating activities	$	204,097		$	228,648		$	(24,551	)	$	338,786		$	383,050		$	(44,264	)
Investing activities	(112,309		)	69,865			(182,174		)	(177,099		)	131,096			(308,195		)
Financing activities	(92,545		)	(221,961		)	129,416			38,273			(278,412		)	316,685
Effects of changes in exchange rate on cash and cash equivalents	61			(88		)	149			43			(67		)	110
Net (decrease) increase in cash, cash equivalents and restricted cash	$	(696	)	$	76,464		$	(77,160	)
Net increase in cash, cash equivalents and restricted cash										$	200,003		$	235,667		$	(35,664	)

Cash Flows provided by Operating Activities

Cash flows provided by operating activities totaled ~~$204.1~~$338.8 million for the ~~six~~nine months ended ~~June~~September 30, 2019 compared to ~~$228.6~~$383.1 million for the ~~six~~nine months ended ~~June~~September 30, 2018, a decrease of ~~$24.6~~$44.3 million. Cash flows provided by operating activities decreased for the ~~six~~nine months ended ~~June~~September 30, 2019, primarily as a result of hotel dispositions ~~during~~which occurred in the first and third quarters of 2018. In addition, hotel operating cash flow decreased due to the management of short-term working capital and a decline in hotel operating performance, ~~specifically~~including a ~~1.1%~~1.2% decrease in RevPAR for hotels owned and operated for the entirety of both ~~periods.~~periods and an increase in hotel operating expenses.

Cash Flows (used in) provided by Investing Activities

Cash flows used in investing activities totaled ~~$112.3~~$177.1 million for the ~~six~~nine months ended ~~June~~September 30, 2019 compared to cash flows provided by investing activities of ~~$69.9~~$131.1 million for the ~~six~~nine months ended ~~June~~September 30, 2018. Cash flows used in investing activities increased due to ~~$155.2~~$274.1 million ofin net proceeds received from hotel dispositions during the ~~six~~nine months ended ~~June~~September 30, 2018, whereas no hotel properties were sold during the ~~six~~nine months ended ~~June~~September 30, 2019. In addition, cash flows used in investing activities increased due to increased investment in property and equipment, including development in process and intangible assets, of ~~$35.9~~$43.2 million for the ~~six~~nine months ended ~~June~~September 30, 2019, partially offset by a $12.7 million decrease in cash used for hotel acquisitions.

Cash Flows provided by (used in) Financing Activities

Cash flows provided by financing activities totaled $38.3 million for the nine months ended September 30, 2019 compared to ~~the six months ended June 30, 2018.~~

~~Cash Flows used in Financing Activities~~

~~Cash~~cash flows used in financing activities ~~totaled $92.5~~of $278.4 million for the ~~six~~nine months ended ~~June~~September 30, ~~2019 compared to $222.0 million for the six months ended June 30, 2018, a decrease of $129.4 million.~~2018. Cash flows ~~used in~~provided by financing activities ~~decreased~~increased primarily due to a ~~$60.4~~$295.2 million ~~decrease~~increase in proceeds from debt issuances, net of debt repayments and deferred financing costs, as well as a ~~$68.0~~$22.2 million decrease in Paired Share repurchases.

Sources and Uses of Cash – ESH REIT

The following cash flow table and comparisons are provided for ESH REIT:

Comparison of ~~Six~~Nine Months Ended ~~June~~September 30, 2019 and ~~June~~September 30, 2018

ESH REIT had total cash and cash equivalents ~~and restricted cash~~ of ~~$124.1~~$368.3 million and ~~$101.2~~$251.6 million at ~~June~~September 30, 2019 and 2018, respectively. The following table summarizes the changes in ESH REIT’s cash and cash equivalents ~~and restricted cash~~ as a result of operating, investing and financing activities for the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018 (in thousands):


	Six Months Ended June 30,									Nine Months Ended September 30,
	2019			2018			Change ($)			2019			2018			Change ($)
Cash provided by (used in):
Operating activities	$	185,357		$	199,529		$	(14,172	)	$	347,963		$	373,395		$	(25,432	)
Investing activities	(107,697		)	73,751			(181,448		)	(171,475		)	136,321			(307,796		)
Financing activities	(132,083		)	(226,973		)	94,890			13,312			(313,034		)	326,346
Net (decrease) increase in cash, cash equivalents and restricted cash	$	(54,423	)	$	46,307		$	(100,730	)
Net increase in cash and cash equivalents										$	189,800		$	196,682		$	(6,882	)

Cash Flows provided by Operating Activities

Cash flows provided by operating activities totaled ~~$185.4~~$348.0 million for the ~~six~~nine months ended ~~June~~September 30, 2019 compared to ~~$199.5~~$373.4 million for the ~~six~~nine months ended ~~June~~September 30, 2018, a decrease of ~~$14.2~~$25.4 million. This decrease in cash flows from operating activities was a result of hotel dispositions which occurred during the first and third quarters of 2018, as well as a decrease in percentage rental revenues as a result of a decrease in revenues of the ~~management of short-term working capital.~~leased Comparable Hotels.

Cash Flows (used in) provided by Investing Activities

Cash flows used in investing activities totaled ~~$107.7~~$171.5 million for the ~~six~~nine months ended ~~June~~September 30, 2019 compared to cash flows provided by investing activities of ~~$73.8~~$136.3 million for the ~~six~~nine months ended ~~June~~September 30, 2018. Cash flows used in investing activities increased due to ~~$155.2~~$274.1 million ofin net proceeds received from hotel dispositions during the ~~six~~nine months ended ~~June~~September 30, 2018, whereas no hotel properties were sold during the ~~six~~nine months ended ~~June~~September 30, 2019. In addition, cash flows used in investing activities increased due to increased investment in property and equipment, including development in process and intangible assets, of ~~$35.2~~$42.8 million for the ~~six~~nine months ended ~~June~~September 30, 2019, partially offset by a $12.7 million decrease in cash used for hotel acquisitions.

Cash Flows provided by (used in) Financing Activities

Cash flows provided by financing activities totaled $13.3 million for the nine months ended September 30, 2019 compared to ~~the six months ended June 30, 2018.~~

~~Cash Flows used in Financing Activities~~

~~Cash~~cash flows used in financing activities ~~totaled $132.1~~of $313.0 million for the ~~six~~nine months ended ~~June~~September 30, ~~2019 compared to $227.0 million for the six months ended June 30, 2018, a decrease of $94.9 million.~~2018. Cash flows ~~used in~~provided by financing activities ~~decreased~~increased due to a ~~$60.4~~$295.4 million ~~decrease~~increase in proceeds from debt issuances, net of debt

repayments ~~a $24.7~~and deferred financing costs, an $8.1 million decrease in Paired Share repurchases and a ~~$9.7~~$23.0 million decrease in Class A and Class B common share distributions.

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~~nine months ended ~~June~~September 30, 2019 and 2018, the Company incurred capital expenditures, including development and construction in process, of ~~$112.9~~$178.0 million and ~~$77.0~~$147.5 million, respectively. Capital expenditures during the ~~six~~nine months ended ~~June~~September 30, 2019 and 2018

related to land acquisitions, development and construction in process, cyclical hotel renovations, ordinary hotel capital improvements and investments in information technology. Funding requirements for future capital expenditures, including our current and any future cyclical hotel renovations, repurposing and/or rebuilding certain of our hotel properties, building new hotels we expect to own and operate and acquiring and converting existing hotels to the Extended Stay America brand, either as a franchise or on our balance sheet, will be significant and are expected to be provided primarily from cash flows generated from operations or, to the extent necessary, the Corporation or ESH REIT revolving credit facilities, including the Unsecured Intercompany Facility and, in certain instances, proceeds from asset sales.

Hotel Renovation Program

In the fourth quarter of 2018, the Company commenced its current cyclical hotel renovation program. We completed our prior cyclical hotel renovation program in the second quarter of 2017. Each hotel is generally on a seven-year renovation cycle. Over the next seven years, we expect to renovate approximately 450 owned hotels. This renovation cycle is expected to provide each hotel a renovation package ranging from $5,000 to $20,000 per room. We expect to renovate an average of 60 to 70 hotels per year over a multi-year period under the current renovation program, whereby the level of investment in each hotel will be determined by potential return based on multiple market and hotel specific variables.

As of ~~June~~September 30, 2019, we have substantially completed renovations at ~~seven~~12 hotels for ~~$10.1~~$23.4 million. Also as of ~~June~~September 30, 2019, we are in the process of performing renovations at ~~six~~eight additional hotels, with total costs incurred for these and future hotel renovations (consisting primarily of advance materials purchases) of ~~$24.4~~$23.1 million.

Our Indebtedness

As of ~~June~~September 30, 2019, the Company’s total indebtedness was ~~$2.4~~$2.6 billion, net of unamortized deferred financing costs and debt discounts, including $7.1 million of Corporation mandatorily redeemable preferred stock. ESH REIT’s total indebtedness at ~~June~~September 30, 2019 was ~~$2.4~~$2.6 billion, net of unamortized deferred financing costs and debt discounts. See Note 7 to each of the ~~audited~~condensed consolidated financial statements of Extended Stay America, Inc. and ~~Note 7 to the audited consolidated financial statements of~~ ESH Hospitality, Inc., included in Item ~~8 of the 2018~~1 in this combined quarterly report on Form ~~10-K,~~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 2018 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, income taxes and equity-based compensation. 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

As of ~~June~~September 30, 2019, the Corporation had minimal exposure to market risk from changes in interest rates because it had no variable rate debt as there were no outstanding amounts drawn on the Corporation’s revolving credit facility. The Corporation’s exposure to market risk from changes in interest rates may increase in future periods should the Corporation incur variable rate debt, including draws on the Corporation’s revolving credit facility.

ESH REIT

As of ~~June~~September 30, 2019, ~~$1.1 billion~~$630.9 million of ESH REIT’s outstanding debt of ~~$2.4~~$2.6 billion, net of unamortized deferred financing costs and debt discounts, had a variable interest rate. ESH REIT is a counterparty to an interest rate swap at a fixed rate of 1.175%. The notional amount of the interest rate swap as of ~~June~~September 30, 2019 was $250.0 million, which is reduced by $50.0 million every six months until the swap matures in September 2021. The remaining ~~$880.9~~$380.9 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 ~~$8.8~~$3.8 million annually, assuming that the amount outstanding under ESH REIT’s unhedged variable interest rate debt remains at ~~$880.9~~$380.9 million.

ESH REIT is exposed to losses in the event of non-performance by the counterparty to the interest rate swap discussed above; however, we do not anticipate any non-performance by the counterparty. The counterparty was evaluated for creditworthiness and risk assessment prior to initiating hedging activity and is evaluated periodically throughout each year.

Item 4. Controls and Procedures

Controls and Procedures (Extended Stay America, Inc.)

Disclosure Controls and Procedures

As of ~~June~~September 30, 2019, 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~~September 30, 2019, 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.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

We are from time to time subject to various litigation and claims incidental to our business. We recognize a liability when we believe a loss is probable and can be reasonably estimated. However, the ultimate result of litigation and claims cannot be predicted with certainty.

As of ~~June~~September 30, 2019, the following six purported class action lawsuits have been filed against the Company:



Date of Filing	Plaintiff(s)	Defendant(s)	Court
March 27, 2018	Tracy Reid, on behalf of himself, all others similarly situated	ESA Management, LLC	US District Court, Northern District of California
June 8, 2018	Franisha Beasley and Stephanie Randall, individually and on behalf of others similarly situated	ESA Management, LLC	US District Court, Northern District of California
July 13, 2018	Adrienne Liggins, individually and on behalf of others similarly situated and aggrieved	ESA Management, LLC, Extended Stay America - Anaheim Convention Center	US District Court, Northern District of California
July 13, 2018	Bridget Liggins, individually and on behalf of others similarly situated and aggrieved	ESA Management, LLC	State of California, Orange County Superior Court
August 21, 2018	Sandra Arizmendi, an individual, on behalf of the State of California, as private attorney general, and on behalf of all others similarly situated	ESA Management, LLC	US District Court, Northern District of California
January 18, 2019	Lisa M. Sanchez, individually and on behalf of all others similarly situated	Extended Stay America, Inc. and ESA Management, LLC	State of California, Orange County Superior Court

The complaints allege, among other things, failure to provide meal and rest periods, wage and hour violations and violations of the Fair Credit Reporting Act. The complaints seek, among other relief, collective and class certification of the lawsuits, unspecified damages, costs and expenses, including attorneys’ fees, and such other relief as the court might find just and proper. We believe that we have meritorious defenses and are prepared to vigorously defend the lawsuits.

We are also subject to various other litigation and claims incidental to our business. We believe we have adequate reserves against such matters. In the opinion of management, such matters, individually or in the aggregate, will not have a material adverse effect on the Company’s condensed consolidated financial statements, results of operations or liquidity or on ESH REIT’s condensed consolidated financial statements, results of operations or liquidity.

Item 1A. Risk Factors

There have been no material changes to our principal risks that we believe are material to our business, results of operations and financial condition, from the risk factors previously disclosed in the 2018 Form 10-K, which is accessible on the SEC’s website at www.sec.gov.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuers and Affiliated Purchasers

Paired Share Repurchase Program

~~No Paired Shares were repurchased during the six months ended June 30, 2019. In December 2015, the Boards of Directors~~The following table sets forth all purchases made by or on behalf of the Corporation and ESH REIT ~~authorized a combined~~or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Exchange Act, of Paired ~~Share repurchase program. As a result~~Shares during the third quarter of ~~several increases in authorized amounts and program extensions, as of June~~2019:



Period	Total number of Paired Shares purchased⁽¹⁾	Average price paid per Paired Share⁽²⁾		Total number of Paired Shares purchased as part of publicly announced program^{(1) (3)}	Maximum dollar value that may yet be purchased under the program⁽³⁾⁽⁴⁾
July 1 - July 31, 2019	—	$	—	—	$	112,680,640
August 1 - August 31, 2019	1,482,644	$	14.13	1,482,644	$	241,724,679
September 1 - September 30, 2019	2,509,999	$	14.51	2,509,999	$	205,309,942
Total	3,992,643	$	14.37	3,992,643	$	205,309,942

________________________


(1)	Represents an equal number of Corporation common shares and ESH REIT Class B common shares, which are paired together on a one-for-one basis to form Paired Shares.


(2)	In the aggregate, the Corporation and ESH REIT paid $36.6 million and $20.9 million, including transaction fees, respectively, for their respective portion of the Paired Shares that were repurchased and retired during the three months ended September 30, 2019.

(3)

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, including a $150 million increase to the authorized amount and a program extension in August 2019, 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).


(4)	As of month end.

Subsequent to September 30, 2019, ~~the combined Paired Share repurchase program authorized~~ the Corporation and ESH REIT ~~to purchase up to $400~~repurchased and retired their respective portion of 1.7 million in Paired Shares through December 31, 2019. 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).for $15.6 million and $8.9 million, including transaction fees, respectively. As of ~~July~~October 31, 2019, ~~$112.5~~$180.8 million ~~remained~~is remaining under the ~~combined~~ Paired Share repurchase program.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits




Exhibit Number	Description
4.1	Indenture, dated September 18, 2019, by and among ESH Hospitality, Inc., certain subsidiaries of ESH Hospitality, Inc. and Deutsche Bank Trust Company Americas (filed as Exhibit 4.1 to the Registrants’ Current Report on Form 8-K (File No. 001-36190) filed September 20, 2019, and incorporated herein by reference).
4.2	Form of 4.625% Senior Notes due 2027 (included as part of Exhibit 4.1 above).
10.1	Separation Agreement between Extended Stay America, Inc. and M. Thomas Buoy, dated as of August 9, 2019 (filed as Exhibit 10.1 to the Registrants’ Current Report on Form 8-K (File No. 001-36190) filed August 9, 2019, and incorporated herein by reference).
10.2	Fourth Amendment to Credit Agreement, dated September 18, 2019, among ESH Hospitality Inc., certain wholly-owned subsidiaries of ESH Hospitality, Inc., the lenders party thereto and Deutsche Bank AG New York Branch, as administrative agent and collateral agent (filed as Exhibit 10.1 to the Registrants’ Current Report on Form 8-K (File No. 001-36190) filed September 20, 2019, and incorporated herein by reference).
10.3	First Amendment to Credit Agreement, dated September 18, 2019, among Extended Stay America, Inc., certain wholly-owned subsidiaries of Extended Stay America, Inc., the lenders party thereto and Deutsche Bank AG New York Branch, as administrative agent (filed as Exhibit 10.2 to the Registrants’ Current Report on Form 8-K (File No. 001-36190) filed September 20, 2019, and incorporated herein by reference).
10.4	First Amendment to Credit Agreement, dated September 18, 2019, among ESH Hospitality, Inc., certain wholly-owned subsidiaries of ESH Hospitality, Inc. and Extended Stay America, Inc., as the lender (filed as Exhibit 10.3 to the Registrants’ Current Report on Form 8-K (File No. 001-36190) filed September 20, 2019, and incorporated herein by reference).
31.1	Certification of the Chief Executive Officer of Extended Stay America, Inc. pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, ~~and Item 601(b)(31) of Regulation S-K,~~ as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer of Extended Stay America, Inc. pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, ~~and Item 601(b)(31) of Regulation S-K,~~ as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.3	Certification of the Chief Executive Officer of ESH Hospitality, Inc. pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, ~~and Item 601(b)(31) of Regulation S-K,~~ as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.4	Certification of the Chief Financial Officer of ESH Hospitality, Inc. pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended, ~~and Item 601(b)(31) of Regulation S-K,~~ as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer and the Chief Financial Officer of Extended Stay America, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Executive Officer and the Chief Financial Officer of ESH Hospitality, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
~~101.1.SCH~~101.SCH	Inline XBRL Taxonomy Extension Schema Document
~~101.1.CAL~~101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
~~101.1.DEF~~101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
~~101.1.LAB~~101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
~~101.1.PRE~~101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104	Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.



	EXTENDED STAY AMERICA, INC.

Date: ~~August~~November 6, 2019	By:	/s/ Jonathan S. Halkyard
		Jonathan S. Halkyard
		President and Chief Executive Officer

Date: ~~August~~November 6, 2019	By:	/s/ Brian T. Nicholson
		Brian T. Nicholson
		Chief Financial Officer

	ESH HOSPITALITY, INC.

Date: ~~August~~November 6, 2019	By:	/s/ Jonathan S. Halkyard
		Jonathan S. Halkyard
		President and Chief Executive Officer

Date: ~~August~~November 6, 2019	By:	/s/ Brian T. Nicholson
		Brian T. Nicholson
		Chief Financial Officer

7580



	Outstanding Contract Liabilities		Outstanding Contract Liabilities as of January 1, 2019 Recognized as Revenue
As of June 30, 2019	$	19,606
As of January 1, 2019	13,829
For the three months ended June 30, 2019			$	218
For the six months ended June 30, 2019			8,615