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Rating Action:

Moody's upgrades ESH Hospitality's unsecured bond and secured credit facility ratings and affirms CFR; rating outlook remains positive

Global Credit Research - 10 Aug 2017

Approximately US $2.95 billion in rated securities affected

New York, August 10, 2017 -- Moody's Investors Service (Moody's) today upgraded ESH Hospitality, Inc.'s (ESH) senior unsecured debt rating to B1 from B2 and senior secured credit facility rating to Ba3 from B1. Concurrently, Moody's affirmed ESH Hospitality's Corporate Family Rating (CFR) at B1. The rating outlook remains positive.

The following ratings were upgraded:

- Senior Unsecured Notes due 2025 upgraded to B1 from B2,

- Senior Secured Term Loan upgraded to Ba3 from B1,

- Senior Secured Revolver upgraded to Ba3 from B1.

The following ESH Hospitality, Inc.'s ratings were affirmed:

- Corporate Family Rating is affirmed at B1.

Outlook:

Outlook remains Positive

The upgrade in the senior unsecured and senior secured instrument ratings recognizes ESH Hospitality's steady progress in reducing its reliance on secured debt over the past several quarters and Moody's expectation of further improvement in the next 12-18 months. At the end of Q2 2017, secured debt represented just under half of the REIT's total debt, down from 54% a year ago and 80% at the end of 2015. Moody's estimates that secured debt levels will continue to decline as the REIT continues to delever in the next 12-18 months.

The affirmation of the CFR at B1 and maintenance of the positive rating outlook reflect a combination of a strong and improving balance sheet, disciplined financial policy and enhancements to the portfolio quality. The completion of the 5.5-year renovation program in Q2 2017 that included all 625 properties in the portfolio is a credit positive, as is the exit of private equity sponsors who had previously owned 63% of the company. ESH is making strides in its 5-year strategic growth plan that is based on adding franchised properties to account for roughly 27% of the portfolio by the end of 2021 and further improving portfolio quality through select dispositions, development and renovations. However, there are certain risks with such a transformational change of the portfolio, and the ultimate success of this growth initiative remains to be seen.

In addition, the rating action acknowledges the further progress ESH has made in reducing its Net Debt/EBITDA to 4.4x for the trailing twelve months ending Q2 2017, while continually investing in improving its asset portfolio. The company's management is targeting a 3.5x Net Debt/EBITDA by the end of 2018 (at the parent level), and Moody's estimates that ESH is on track to delever to around 4x or slightly below in the coming year.

RATINGS RATIONALE

The B1 corporate family rating reflects ESH Hospitality's moderate leverage and good market position in the mid-price extended stay lodging segment. The REIT also benefits from the less operating-intensive nature of this lodging segment that results from longer average length of stay and lower levels of service. With 625 properties at June 30, 2017, ESH enjoys a wide geographic footprint encompassing 44 states across the United States. These positive factors are counterbalanced by the lack of an unencumbered asset base, limiting the REIT's financial flexibility. Furthermore, all ESH's properties are managed under a single brand, creating concentration risk. 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.

The positive rating outlook reflects Moody's expectation that the REIT's on-going 5-year strategic transformation initiative and continued improvements in capital structure will result in a stronger credit profile and enhancements to the REIT's key credit metrics in the next 12-18 months. The positive outlook also reflects Moody's view that ESH will continue to grow its earnings and reduce its financial leverage in the next 12-18 months aided by the recently completed renovation program and operating efficiency gains.

Moody's would likely upgrade ESH's ratings should the REIT delever and maintain its Net Debt/EBITDA under 4x and reduce secured debt levels closer to 20% of gross assets, while continuing to demonstrate sound operating performance. An upgrade will also require that liquidity remains strong throughout an industry cycle.

A downgrade is unlikely given the positive outlook on ESH's ratings; however, negative pressure would occur from liquidity challenges or an unexpected drop in demand that causes RevPAR to decline below $40 (below FY2013 levels), or deterioration in leverage such that Net Debt/EBITDA increases over 5x. A shift toward a more aggressive acquisition-oriented growth strategy would also be viewed negatively, as would an increase in debt-financed shareholder initiatives.

The principal methodology used in these ratings was Global Rating Methodology for REITs and Other Commercial Property Firms published in July 2010. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

ESH Hospitality, Inc. ("ESH"), a REIT subsidiary of Extended Stay America, Inc. headquartered in Charlotte, N.C., owns its parent company's 625 hotels in 44 U.S. states comprising approximately 68,780 rooms as of June 30, 2017. 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.

Dilara Sukhov, CFA
Analyst
Commercial Real Estate Finance
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

Nick Levidy
MD - Structured Finance
Commercial Real Estate Finance
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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