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COMMITMENTS AND CONTINGENCIES - REIT

6 Months Ended

Jun. 30, 2019

Lease Commitments—The Company is a tenant under long-term ground leases at five of its hotel properties, including one hotel site for which development is in process. Three of these leases are operating leases and two 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 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, no amortization costs related to finance leases were incurred during the three and six months ended June 30, 2019. The Company has no variable lease costs or short-term leases.

For the three and six months ended June 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		June 30, 2019
Operating lease costs	$	770	$	1,538
Finance lease costs - interest	61		122
Total lease costs	831		1,660

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



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

Lease liabilities:
Operating⁽³⁾	13,574		—
Finance	3,440		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 30, 2019, are as follows (in thousands):



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

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

Weighted-average remaining lease term	40 years			13 years
Weighted-average discount rate	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 30, 2019, the Company does not have any leases that have not yet commenced.

Letter of Credit—As of June 30, 2019, the Company had one 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 30, 2019, six 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 which is subject to certain conditions, including court approval. During the three months ended June 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.

ESH REIT

Entity Information [Line Items]

COMMITMENTS AND CONTINGENCIES

Lease Commitments—ESH REIT is a tenant under long-term ground leases at five of its hotel properties, including one hotel site for which development is in process. Three of these leases are operating leases and two 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, no amortization costs related to finance leases were incurred during the three and six months ended June 30, 2019. ESH REIT has no variable lease costs or short-term leases.

For the three and six months ended June 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
Operating lease costs	$	327	$	652
Finance lease costs - interest	61		122
Total lease costs	388		774

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



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

Lease liabilities:
Operating⁽³⁾	9,261		—
Finance	3,440		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 30, 2019, are as follows (in thousands):



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

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

Weighted-average remaining lease term	58 years			13 years
Weighted-average discount rate	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 30, 2019, ESH REIT does not have any 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.