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Rating Action:

Moody's revises ESH Hospitality's outlook to negative, Ba3 senior unsecured rating affirmed

25 Mar 2020

New York, March 25, 2020 -- Moody's Investors Service, ("Moody's") revised the outlook of ESH Hospitality, Inc. to negative from stable. At the same time, Moody's affirmed the REIT's ratings, including its Ba3 senior unsecured debt and corporate family and its Ba2 senior secured bank credit facility. In the same rating action, Moody's downgraded ESH's speculative grade liquidity rating to SGL-3 from SGL-2.

The negative outlook reflects Moody's expectation that travel restrictions being put in place across the US related to the spread of the COVID-19 coronavirus will put significant pressure on ESH's earnings in 2020. Additional travel restrictions likely to be put in place over the coming weeks will put further pressure on the REIT's earnings, however its net debt/EBITDA will remain within the downgrade trigger of 4.5x on a sustained basis and the REIT has adequate liquidity to get it through this period of unprecedented declines in occupancy.

Affirmations:

Issuer: ESH Hospitality, Inc.

--Senior unsecured debt, Affirmed at Ba3

--Corporate family rating, Affirmed at Ba3

--Senior secured bank credit facility, Affirmed at Ba2

Downgrade:

Issuer: ESH Hospitality, Inc.

--Speculative grade liquidity rating, Downgraded to SGL-3 from SGL-2

Outlook Action:

Issuer: ESH Hospitality, Inc.

Outlook changed to Negative from Stable

RATINGS RATIONALE

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The commercial lodging real estate sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment. More specifically, the weaknesses in ESH's credit profile, including its exposure to increased travel restrictions for US citizens have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and ESH remains vulnerable to the outbreak continuing to spread. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action in part reflects the impact on ESH, the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

The Ba3 corporate family rating reflects ESH Hospitality's moderate leverage with Net Debt/EBITDA at around 4x and strong market position in the mid-price extended stay lodging segment. The REIT benefits from the less operating-intensive nature of this lodging segment due to longer average length of stay, lower levels of service, and resultant higher profitability. With 557 properties, ESH enjoys a wide geographic footprint encompassing 40 states across the United States. Counterbalancing these positive credit factors, all of ESH's properties are managed under a single brand, creating a concentration risk. The REIT's liquidity is sound but constrained by lumpy debt maturities, with 100% of funded debt coming due between 2025-2027. The rating is also tempered by the volatility inherent in the lodging economic cycle as well as intense competition from a number of lodging chains owned by well capitalized leading hotel operators with vast marketing expertise and resources.

For the first quarter of 2020, ESH now expects that RevPAR growth and adjusted EBITDA will likely be modestly below the low end of its first quarter 2020 guidance range. Its quarter to March 12, 2020's comparable system-wide RevPAR rate was approximately +1.3%, reflecting the benefits of ESH's wide geographical foot print, suburban locations, its limited in-bound international travel and the ability to attract extended staying guests that are not related to the broader hotel industry. Nonetheless, ESH has withdrawn its full-year 2020 guidance, as the REIT is not able to accurately assess the potential impact on its full-year operating results, given the rapidly evolving environment. ESH is also taking measures to reduce operating expenses prudently. With significant brand concentration to Extended Stay America, ESH's earnings and overall credit quality will be strained if ESH is forced to temporarily close portions of its hotels for an extended period of time.

The negative outlook reflects the earnings pressure ESH will face in 2020 as travel restrictions being put in place across the US related to the spread of the COVID-19 coronavirus cause significant declines in occupancy and revenue per available room (RevPAR). Moody's expects that additional restrictions will be put in place as the number of confirmed COVID-19 cases increases in the US over the coming weeks. ESH'S net debt/EBITDA was 4.4x at the end of 2019 and its fixed charge coverage was good at 4.3x. The downgrade of ESH's speculative grade liquidity to SGL-3 from SGL-2 reflects Moody's expectation that ESH might need to rely on external sources to meet its obligations in the coming 12-months, as evidenced by its fully drawn $400 million revolver to date, which is not due until September 2024. ESH has no maturities until 2025 when its $1.3 billion senior unsecured bond comes due.

Ratings could be downgraded should the EBITDA decline meaningfully in the next six month which will imply that net debt/EBITDA is sustained above 4.5x. The ratings would also be downgrade if there are liquidity challenges, operational set-backs or a drop in demand that causes RevPAR to decline below $45 (below FY2015 levels). A shift towards a more aggressive debt-financed acquisition growth strategy would also be viewed negatively, as would an increase in debt-financed shareholder initiatives.

Although not likely, ratings could be upgraded if ESH lowers its brand concentration and improves its debt maturity ladder while maintaining secured debt under 17% of gross assets. The ratings upgrade would also requires that ESH continue to demonstrate sound operating performance and that liquidity remains strong throughout an industry and economic cycle.

The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms published in September 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

ESH Hospitality, Inc., a REIT subsidiary of Extended Stay America, Inc. headquartered in Charlotte, N.C., owns its parent company's 557 hotels in the U.S. comprising approximately 61,900 rooms. The company's brand, Extended Stay America®, serves the mid-priced extended stay segment

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Thuy Nguyen
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Philip Kibel
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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