Equity-Based Compensation

3 Months Ended

Mar. 31, 2016

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 awards (“RSAs”), 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 8,000,000, of which no more than 4,000,000 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 March 31, 2016, approximately 4,016,000 Paired Shares were available for future issuance under the LTIPs.

Equity-based compensation expense is recognized by amortizing the grant-date fair value of the equity-based awards, less estimated forfeitures, 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 common stock of the Corporation and a portion is allocated to a share of ESH REIT Class B common stock. Equity-based compensation expense was approximately $2.7 million and $2.1 million for the three months ended March 31, 2016 and 2015, respectively, and is included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.

As of March 31, 2016, 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 March 31, 2016, is presented in the following table. Total unrecognized compensation expense will be adjusted for actual forfeitures.



	Unrecognized Compensation Expense Related to Outstanding RSAs/RSUs (in thousands)		Remaining Weighted-Average Amortization Period (in years)
RSAs/RSUs with service vesting conditions	$	14,431	2.3
RSUs with performance vesting conditions	2,060		0.8
RSUs with market vesting conditions	8,076		2.6
Total unrecognized compensation expense	$	24,567

RSA/RSU activity during the three months ended March 31, 2016, was as follows:



					Performance-Based Awards
	Service-Based Awards				Performance Vesting				Market Vesting
	Number of RSAs/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 RSAs/RSUs - January 1, 2016	992		$	18.24	19		$	19.07	556	$	6.81
RSAs/RSUs granted in 2016	492		$	14.07	166		$	14.07	441	$	12.03
RSAs/RSUs settled in 2016	(473	)	$	17.49	(19	)	$	19.07	—	$	—
RSAs/RSUs forfeited in 2016	(1	)	$	19.07	—		$	—	—	$	—
Outstanding RSAs/RSUs - March 31, 2016	1,010		$	16.56	166		$	14.07	997	$	9.16
Vested RSAs/RSUs - March 31, 2016	—		$	—	—		$	—	—	$	—
Nonvested RSAs/RSUs - March 31, 2016	1,010		$	16.56	166		$	14.07	997	$	9.16

_________________________________


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

Service-Based Awards

The Corporation granted approximately 492,000 service-based awards during the three months ended March 31, 2016, with a grant-date fair value per award of $14.07. 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 two to four years, subject to the grantee’s continued employment or service.

Performance-Based Awards

The Corporation granted approximately 166,000 awards with performance vesting conditions during the three months ended March 31, 2016, with a grant-date fair value per award of $14.07. 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 remainder of the fiscal year to reflect the probability of achievement of performance targets defined in the award agreements. These awards vest over the remainder of the fiscal year, 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. As of March 31, 2016, all awards with performance vesting conditions are expected to be satisfied at or near their target level.

During the three months ended March 31, 2016, the Corporation granted approximately 441,000 awards with market vesting conditions with a grant-date fair value per award of $12.03. 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 lodging companies identified in the award agreements. The grant-date fair value of awards with market vesting conditions is based on an independent third-party valuation. During the three months ended March 31, 2016, the grant-date fair value of awards granted during the quarter with market vesting conditions was calculated using a Monte Carlo simulation model with the following key assumptions:



Expected holding period	2.85 years
Risk-free rate of return	0.88	%
Expected dividend yield	5.91	%

ESH REIT

Equity-Based Compensation

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 awards ("RSAs"), 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 8,000,000, of which no more than 4,000,000 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 March 31, 2016, approximately 4,016,000 Paired Shares were available for future issuance under the LTIPs.

Equity-based compensation expense is recognized by amortizing the grant-date fair value of the equity-based awards, less estimated forfeitures, on a straight-line basis over the requisite service period of each award. The fair value of equity-based awards is based on the closing price of a Paired Share on the date of grant. 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. Expense related to the portion of the grant-date fair value with respect to a share of Corporation common stock is recorded as a payable due to the Corporation. Expense related to the portion of the grant-date fair value with respect to a share of Class B common stock of ESH REIT is recorded as an increase to additional paid in capital.

During the three months ended March 31, 2016, ESH REIT incurred approximately $0.1 million of equity-based compensation expense related to its equity-based awards. ESH REIT incurred approximately $0.3 million of equity-based compensation expense (which included approximately $0.2 million paid to the Corporation) for the three months ended March 31, 2015. Equity-based compensation expense is included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.

As of March 31, 2016, there was approximately $0.1 million of unrecognized compensation expense related to outstanding equity-based awards, which is expected to be recognized subsequent to March 31, 2016 over a weighted-average period of approximately 2.2 years. Total unrecognized compensation expense will be adjusted for actual forfeitures.

ESH REIT will have to pay more or less for a share of the Corporation common stock than it would have otherwise paid at the time of grant as the result of regular market changes in the value of a Paired Share between the time of grant and the time of settlement. An increase in the value allocated to a share of Corporation common stock due to market changes in the value of a Paired Share between the time of grant and the time of settlement is recorded as a distribution to the Corporation. A decrease in the value allocated to a share of Corporation common stock due to market changes in the value of a Paired Share between the time of grant and the time of settlement is recorded as additional paid in capital from the Corporation.

The Corporation accounts for awards issued under its LTIP in a manner similar to that of ESH REIT. As such, for all LTIP awards granted by the Corporation, ESH REIT will receive compensation for the fair value of the Class B shares on the date of settlement of such Class B shares by ESH REIT. As of March 31, 2016, the Corporation had granted a total of approximately 2,612,000 RSUs, of which approximately 525,000 were forfeited or settled, under which ESH REIT is counterparty and is expected to issue, and be compensated in cash for, approximately 2,087,000 shares of Class B common stock of ESH REIT in future periods, assuming performance-based awards vest at 100% and no additional forfeitures.

RSA/RSU activity during the three months ended March 31, 2016, was as follows:



	Number of RSAs/RSUs (in thousands)		Weighted- Average Grant-Date Fair Value
Outstanding RSAs/RSUs - January 1, 2016	244		$	9.71
RSAs/RSUs granted in 2016	—		$	—
RSAs/RSUs settled in 2016	(158	)	$	8.92
RSAs/RSUs forfeited in 2016	—		$	—
Outstanding RSAs/RSUs - March 31, 2016	86		$	11.06
Vested RSAs/RSUs - March 31, 2016	—		$	—
Nonvested RSAs/RSUs - March 31, 2016	86		$	11.06