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EX-31.4 - EXHIBIT 31.4 - ESSEX PROPERTY TRUST, INC.ess-93015xex314.htm
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EX-31.1 - EXHIBIT 31.1 - ESSEX PROPERTY TRUST, INC.ess-93015xex311.htm
EX-12.1 - EXHIBIT 12.1 - ESSEX PROPERTY TRUST, INC.ess-93015xex121.htm
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EX-32.1 - EXHIBIT 32.1 - ESSEX PROPERTY TRUST, INC.ess-93015xex321.htm
                                            

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

OR

o 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 001-13106

ESSEX PROPERTY TRUST, INC.
ESSEX PORTFOLIO, L.P.
(Exact name of Registrant as Specified in its Charter)
Maryland (Essex Property Trust, Inc.)
California (Essex Portfolio, L.P.)
 
77-0369576 (Essex Property Trust, Inc.)
77-0369575 (Essex Portfolio, L.P.)
 
 
 
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification Number)
925 East Meadow Drive
Palo Alto, California    94303
(Address of Principal Executive Offices including Zip Code)

(650) 494-3700
(Registrant's Telephone Number, Including Area Code)
 
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 reports), and (2) has been subject to such filing requirements for the past 90 days.
Essex Property Trust, Inc.    Yes x   No o
Essex Portfolio, L.P.     Yes x   No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Essex Property Trust, Inc.    Yes x   No o
Essex Portfolio, L.P.     Yes x   No o

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


i


Essex Property Trust, Inc.:
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o   (Do not check if a smaller reporting company)
Smaller reporting company o

Essex Portfolio, L.P.:
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x   (Do not check if a smaller reporting company)
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Essex Property Trust, Inc.    Yes o   No x
Essex Portfolio, L.P.     Yes o   No x
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 66,035,140 shares of Common Stock ($0.0001 par value) of Essex Property Trust, Inc. were outstanding as of October 30, 2015.
 

ii


EXPLANATORY NOTE

This report combines the reports on Form 10-Q for the three and nine month periods ended September 30, 2015 of Essex Property Trust, Inc. and Essex Portfolio, L.P. Unless stated otherwise or the context otherwise requires, references to “Essex” mean Essex Property Trust, Inc., a Maryland corporation that operates as a self-administered and self-managed real estate investment trust (“REIT”), and references to “EPLP” mean Essex Portfolio, L.P. (the “Operating Partnership”). References to the “Company,” “we,” “us” or “our” mean collectively Essex, EPLP and those entities/subsidiaries owned or controlled by Essex and/or EPLP.  References to the “Operating Partnership” mean collectively EPLP and those entities/subsidiaries owned or controlled by EPLP.

Essex is the general partner of EPLP and as the sole general partner of EPLP, Essex has exclusive control of EPLP's day-to-day management.

The Company is structured as an umbrella partnership REIT (“UPREIT”) and Essex contributes all net proceeds from its various equity offerings to the Operating Partnership. In return for those contributions, Essex receives a number of OP Units (see definition below) in the Operating Partnership equal to the number of shares of common stock it has issued in the equity offering.  Contributions of properties to the Company can be structured as tax-deferred transactions through the issuance of OP Units in the Operating Partnership, which is one of the reasons why the Company is structured in the manner outlined above. Based on the terms of EPLP's partnership agreement, OP Units can be exchanged with Essex common stock on a one-for-one basis. The Company maintains a one-for-one relationship between the OP Units of the Operating Partnership issued to Essex and shares of common stock.

The Company believes that combining the reports on Form 10-Q of Essex and EPLP into this single report provides the following benefits:

enhances investors' understanding of the Company and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the disclosure applies to both the Company and the Operating Partnership; and
creates time and cost efficiencies through the preparation of one combined report instead of two separate reports

Management operates the Company and the Operating Partnership as one business. The management of Essex consists of the same members as the management of EPLP.

All of the Company's property ownership, development and related business operations are conducted through the Operating Partnership and Essex has no material assets, other than its investment in EPLP. Essex's primary function is acting as the general partner of EPLP.  As general partner with control of the Operating Partnership, the Company consolidates the Operating Partnership for financial reporting purposes. Therefore, the assets and liabilities of the Company and the Operating Partnership are the same on their respective financial statements.  Essex also issues equity from time to time and guarantees certain debt of EPLP, as disclosed in this report. The Operating Partnership holds substantially all of the assets of the Company, including the Company's ownership interests in its joint ventures. The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity.  Except for the net proceeds from equity offerings by the Company, which are contributed to the capital of the Operating Partnership in exchange for additional limited partnership interests in the Operating Partnership (“OP Units”) (on a one-for-one share of common stock per OP Unit basis), the Operating Partnership generates all remaining capital required by the Company's business. These sources include the Operating Partnership's working capital, net cash provided by operating activities, borrowings under its revolving credit facilities, the issuance of secured and unsecured debt and equity securities and proceeds received from disposition of certain properties and joint ventures.

The Company believes it is important to understand the few differences between Essex and EPLP in the context of how Essex and EPLP operate as a consolidated company.  Stockholders' equity, partners' capital and noncontrolling interest are the main areas of difference between the consolidated financial statements of the Company and those of the Operating Partnership. The limited partners of the Operating Partnership are accounted for as partners' capital in the Operating Partnership's consolidated financial statements and as noncontrolling interest in Essex’s consolidated financial statements. The noncontrolling interest in the Operating Partnership's consolidated financial statements include the interest of unaffiliated partners in various consolidated partnerships and joint venture partners. The noncontrolling interest in the Company's  consolidated financial statements include (i) the same noncontrolling interest as presented in the Operating Partnership’s consolidated financial statements and (ii) limited partner OP Unitholders of the Operating Partnership. The differences between stockholders' equity and partners' capital result from differences in the equity issued at the Company and Operating Partnership levels.
 

iii


To help investors understand the significant differences between the Company and the Operating Partnership, this report provides separate consolidated financial statements for the Company and the Operating Partnership; a single set of consolidated notes to such financial statements that includes separate discussions of stockholders' equity or partners' capital, and earnings per share/unit, as applicable; and a combined Management's Discussion and Analysis of Financial Condition and Results of Operations.

This report also includes separate Part I, Item 4. Controls and Procedures sections and separate Exhibits 31 and 32 certifications for each of the Company and the Operating Partnership in order to establish that the requisite certifications have been made and that the Company and the Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934 and 18 U.S.C. §1350.

In order to highlight the differences between the Company and the Operating Partnership, the separate sections in this report for the Company and the Operating Partnership specifically refer to the Company and the Operating Partnership. In the sections that combine disclosure of the Company and the Operating Partnership, this report refers to actions or holdings as being actions or holdings of the Company. Although the Operating Partnership is generally the entity that directly or indirectly enters into contracts and joint ventures and holds assets and debt, reference to the Company is appropriate because the Company is one business and the Company operates that business through the Operating Partnership. The separate discussions of the Company and the Operating Partnership in this report should be read in conjunction with each other to understand the results of the Company on a consolidated basis and how management operates the Company.

The information furnished in the accompanying unaudited condensed consolidated balance sheets, statements of income and comprehensive income, equity, capital, and cash flows of the Company and the Operating Partnership reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the aforementioned condensed consolidated financial statements for the interim periods and are normal and recurring in nature, except as otherwise noted.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the notes to such unaudited condensed consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations herein.  Additionally, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2014.

iv


ESSEX PROPERTY TRUST, INC.
ESSEX PORTFOLIO, L.P.
FORM 10-Q
INDEX

PART I. FINANCIAL INFORMATION
Page No.
 
 
 
Item 1.
Condensed Consolidated Financial Statements of Essex Property Trust, Inc. (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Financial Statements of Essex Portfolio L.P. (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 

1


Part I – Financial Information

Item 1. Condensed Financial Statements

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share amounts)
ASSETS
September 30, 2015
 
December 31, 2014
Real estate:
 
 
 
Rental properties:
 
 
 
Land and land improvements
$
2,566,586

 
$
2,424,930

Buildings and improvements
9,753,982

 
8,819,751

 
12,320,568

 
11,244,681

Less accumulated depreciation
(1,858,134
)
 
(1,564,806
)
 
10,462,434

 
9,679,875

Real estate under development
226,690

 
429,096

Co-investments
1,036,043

 
1,042,423

Real estate held for sale, net
8,742

 
56,300

 
11,733,909

 
11,207,694

Cash and cash equivalents-unrestricted
35,668

 
25,610

Cash and cash equivalents-restricted
36,638

 
70,139

Marketable securities and other investments
133,058

 
117,240

Notes and other receivables
22,668

 
24,923

Acquired in place lease value, net
12,675

 
47,748

Prepaid expenses and other assets
38,101

 
33,378

Total assets
$
12,012,717

 
$
11,526,732

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Unsecured debt, net
$
3,090,896

 
$
2,603,548

Mortgage notes payable, net
2,224,513

 
2,234,317

Lines of credit, net
2,011

 
242,824

Accounts payable and accrued liabilities
177,807

 
135,162

Construction payable
26,411

 
30,892

Dividends payable
99,945

 
88,221

Other liabilities
34,722

 
32,444

Total liabilities
5,656,305

 
5,367,408

Commitments and contingencies


 


Redeemable noncontrolling interest
24,589

 
23,256

Equity:
 

 
 

Common stock; $0.0001 par value, 656,020,000 shares authorized; 65,234,597 and 63,682,646 shares issued and outstanding, respectively
6

 
6

   Cumulative redeemable 7.125% Series H preferred stock at liquidation value
73,750

 
73,750

Additional paid-in capital
6,980,443

 
6,651,165

Distributions in excess of accumulated earnings
(782,801
)
 
(650,797
)
Accumulated other comprehensive loss, net
(50,357
)
 
(51,452
)
Total stockholders' equity
6,221,041

 
6,022,672

Noncontrolling interest
110,782

 
113,396

Total equity
6,331,823

 
6,136,068

Total liabilities and equity
$
12,012,717

 
$
11,526,732



See accompanying notes to the unaudited condensed consolidated financial statements.

2



ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income and Comprehensive Income
(Unaudited)
(In thousands, except share and per share amounts)

 
Three Months Ended September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Rental and other property
$
302,522

 
$
268,512

 
$
876,852

 
$
684,813

Management and other fees from affiliates
2,104

 
2,361

 
6,809

 
6,856

 
304,626

 
270,873

 
883,661

 
691,669

Expenses:
 

 
 

 
 
 
 
Property operating, excluding real estate taxes
60,528

 
56,294

 
173,547

 
146,474

Real estate taxes
33,591

 
31,768

 
97,820

 
77,452

Depreciation and amortization
116,308

 
102,286

 
336,946

 
253,890

General and administrative
11,129

 
11,479

 
31,223

 
28,621

Merger and integration expenses

 
3,857

 
3,798

 
46,413

Acquisition and investment related costs
381

 
51

 
1,357

 
768

 
221,937

 
205,735

 
644,691

 
553,618

Earnings from operations
82,689

 
65,138

 
238,970

 
138,051

Interest expense
(50,053
)
 
(45,830
)
 
(148,401
)
 
(117,021
)
Interest and other income
7,367

 
2,992

 
14,820

 
8,685

Equity income in co-investments
7,179

 
4,910

 
15,962

 
21,065

Gains on sale of real estate and land

 
31,372

 
7,112

 
38,853

Gain on remeasurement of co-investment

 

 
34,014

 

Net income
47,182

 
58,582

 
162,477

 
89,633

Net income attributable to noncontrolling interest
(3,545
)
 
(3,720
)
 
(11,295
)
 
(8,971
)
Net income attributable to controlling interest
43,637

 
54,862

 
151,182

 
80,662

Dividends to preferred stockholders
(1,314
)
 
(1,296
)
 
(3,941
)
 
(3,977
)
Net income available to common stockholders
$
42,323

 
$
53,566

 
$
147,241

 
$
76,685

Comprehensive income
$
46,970

 
$
61,036

 
$
163,609

 
$
99,070

Comprehensive income attributable to noncontrolling interest
(3,538
)
 
(3,789
)
 
(11,332
)
 
(9,345
)
Comprehensive income attributable to controlling interest
$
43,432

 
$
57,247

 
$
152,277

 
$
89,725

Per share data:
 

 
 

 
 
 
 
Basic:
 

 
 

 
 
 
 
Net income available to common stockholders
$
0.65

 
$
0.85

 
$
2.28

 
$
1.41

Weighted average number of shares outstanding during the period
65,138,868

 
62,892,601

 
64,714,994

 
54,250,104

Diluted:
 

 
 

 
 
 
 
Net income available to common stockholders
$
0.65

 
$
0.85

 
$
2.27

 
$
1.41

Weighted average number of shares outstanding during the period
65,297,550

 
63,069,772

 
64,892,770

 
54,443,227

Dividend per common share
$
1.44

 
$
1.30

 
$
4.32

 
$
3.81


See accompanying notes to the unaudited condensed consolidated financial statements.

3


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Equity for the nine months ended September 30, 2015
(Unaudited)
(Dollars and shares in thousands)
 
Series H
Preferred stock
 
Common stock
 
Additional paid-in
 
Distributions
in excess of accumulated
 
Accumulated
other
comprehensive
 
Noncontrolling
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
capital
 
earnings
 
loss, net
 
Interest
 
Total
Balances at December 31, 2014
2,950

 
$
73,750

 
63,683

 
$
6

 
$
6,651,165

 
$
(650,797
)
 
$
(51,452
)
 
$
113,396

 
$
6,136,068

Net income

 

 

 

 

 
151,182

 

 
11,295

 
162,477

Change in fair value of derivatives and amortization of swap settlements

 

 

 

 

 

 
1,621

 
54

 
1,675

Change in fair value of marketable securities

 

 

 

 

 

 
(526
)
 
(17
)
 
(543
)
Issuance of common stock under:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Stock option and restricted stock plans

 

 
170

 

 
22,173

 

 

 

 
22,173

Sale of common stock

 

 
1,382

 

 
307,835

 

 

 

 
307,835

Equity based compensation costs

 

 

 

 
2,564

 

 

 
2,947

 
5,511

Reclassification of noncontrolling interest to redeemable noncontrolling interest

 

 

 

 

 

 

 
(144
)
 
(144
)
Changes in the redemption value of redeemable noncontrolling interest

 

 

 

 
(1,095
)
 

 

 

 
(1,095
)
Distributions to noncontrolling interest

 

 

 

 

 

 

 
(16,327
)
 
(16,327
)
Redemptions of noncontrolling interest

 

 

 

 
(2,199
)
 

 

 
(422
)
 
(2,621
)
Common and preferred stock dividends

 

 

 

 

 
(283,186
)
 

 

 
(283,186
)
Balances at September 30, 2015
2,950

 
$
73,750

 
65,235

 
$
6

 
$
6,980,443

 
$
(782,801
)
 
$
(50,357
)
 
$
110,782

 
$
6,331,823


See accompanying notes to the unaudited condensed consolidated financial statements.

4


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands) 
 
Nine Months Ended September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
162,477

 
$
89,633

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
336,946

 
253,890

Amortization of discount on marketable securities
(9,012
)
 
(6,555
)
Amortization of (premium) discount and debt financing costs, net
(15,064
)
 
(4,987
)
Gain on sale of marketable securities and other investments
(598
)
 
(886
)
Company's share of gain on the sales of co-investments
(469
)
 
(3,211
)
Earnings from co-investments
(15,493
)
 
(17,854
)
Operating distributions from co-investments
28,632

 
20,122

Gains on the sales of real estate and land
(7,112
)
 
(38,853
)
Non cash merger and integration expenses

 
7,562

Equity-based compensation
5,511

 
4,996

Gain on remeasurement of co-investments
(34,014
)
 

Changes in operating assets and liabilities:
 
 
 
   Prepaid expense, receivables and other assets
(1,851
)
 
8,923

Accounts payable and accrued liabilities
36,480

 
43,988

Other liabilities
1,475

 
1,393

Net cash provided by operating activities
487,908

 
358,161

Cash flows from investing activities:
 

 
 

Additions to real estate:
 

 
 

Acquisitions of real estate and acquisition related capital expenditures
(327,799
)
 
(438,088
)
Redevelopment
(66,783
)
 
(55,921
)
Development acquisitions of and additions to real estate under development
(138,101
)
 
(108,659
)
Capital expenditures on rental properties
(42,809
)
 
(21,074
)
Acquisition of membership interest in co-investments
(115,724
)
 

Proceeds from insurance for property losses
12,044

 
29,160

Proceeds from dispositions of real estate
74,485

 
61,331

BRE merger consideration paid

 
(555,826
)
Proceeds from dispositions of co-investments
31,556

 
13,900

Contributions to co-investments
(119,120
)
 
(128,268
)
Changes in restricted cash and refundable deposits
38,282

 
(39,482
)
Purchases of marketable securities
(14,300
)
 
(15,516
)
Sales and maturities of marketable securities and other investments
7,566

 
6,275

Collections of notes and other receivables

 
76,585

Non-operating distributions from co-investments
382

 
23,248

Net cash used in investing activities
(660,321
)
 
(1,152,335
)
Cash flows from financing activities:
 

 
 

Borrowings under debt agreements
1,068,032

 
1,737,322

Repayment of debt
(924,844
)
 
(1,327,840
)
Additions to deferred charges
(4,320
)
 
(16,941
)
Net proceeds from issuance of common stock
307,835

 
449,464

Net proceeds from stock options exercises
22,173

 
6,526

Distributions to noncontrolling interest
(15,789
)
 
(13,217
)
Redemption of noncontrolling interest
(2,621
)
 
(4,707
)
Common and preferred stock dividends paid
(272,000
)
 
(177,400
)
Net cash provided by financing activities
178,466

 
653,207


5


 
Nine Months Ended September 30,
 
2015
 
2014
Cash acquired from the BRE merger

 
140,353

Cash acquired in consolidation of co-investment
4,005

 

Net increase (decrease) in cash and cash equivalents
10,058

 
(614
)
Cash and cash equivalents at beginning of period
25,610

 
18,491

Cash and cash equivalents at end of period
$
35,668

 
$
17,877

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of $12.2 million and $17.8 million capitalized in 2015 and 2014, respectively
$
135,736

 
$
93,342

Supplemental disclosure of noncash investing and financing activities:
 

 
 

Issuance of Operating Partnership units for contributed properties
$

 
$
1,419,816

Retirement of Operating Partnership units
$

 
$
(1,419,816
)
Transfer from real estate under development to rental properties
$
308,069

 
$
71,496

Transfer from real estate under development to co-investments
$
5,913

 
$
81,332

Reclassifications of and changes in redeemable noncontrolling interest from additional paid in capital and noncontrolling interest
$
1,333

 
$
18,764

Debt assumed in connection with acquisition of co-investment
$
114,435

 
$


See accompanying notes to the unaudited condensed consolidated financial statements.


6


ESSEX PORTFOLIO, L.P.  AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except unit amounts)
 
September 30, 2015
 
December 31, 2014
ASSETS
 
 
 
Real estate:
 
 
 
Rental properties:
 
 
 
Land and land improvements
$
2,566,586

 
$
2,424,930

Buildings and improvements
9,753,982

 
8,819,751

 
12,320,568

 
11,244,681

Less accumulated depreciation
(1,858,134
)
 
(1,564,806
)
 
10,462,434

 
9,679,875

Real estate under development
226,690

 
429,096

Co-investments
1,036,043

 
1,042,423

Real estate held for sale, net
8,742

 
56,300

 
11,733,909

 
11,207,694

Cash and cash equivalents-unrestricted
35,668

 
25,610

Cash and cash equivalents-restricted
36,638

 
70,139

Marketable securities and other investments
133,058

 
117,240

Notes and other receivables
22,668

 
24,923

Acquired in place lease value , net
12,675

 
47,748

Prepaid expenses and other asset
38,101

 
33,378

Total assets
$
12,012,717


$
11,526,732

 
 
 
 
LIABILITIES AND CAPITAL
 

 
 

Unsecured debt, net
$
3,090,896

 
$
2,603,548

Mortgage notes payable, net
2,224,513

 
2,234,317

Lines of credit, net
2,011

 
242,824

Accounts payable and accrued liabilities
177,807

 
135,162

Construction payable
26,411

 
30,892

Distributions payable
99,945

 
88,221

Other liabilities
34,722

 
32,444

Total liabilities
5,656,305


5,367,408

Commitments and contingencies


 


Redeemable noncontrolling interest
24,589

 
23,256

Capital:
 

 
 

General Partner:
 
 
 
   Common equity (65,234,597 and 63,682,646 units issued and outstanding, respectively)
6,200,189

 
6,002,915

   Series H 7.125% Preferred interest (liquidation value of $73,750)
71,209

 
71,209

 
6,271,398


6,074,124

Limited Partners:
 
 
 
   Common equity (2,176,563 and 2,168,158 units issued and outstanding, respectively)
46,793

 
48,665

    Accumulated other comprehensive loss
(48,224
)
 
(49,356
)
Total partners' capital
6,269,967


6,073,433

Noncontrolling interest
61,856

 
62,635

Total capital
6,331,823


6,136,068

Total liabilities and capital
$
12,012,717


$
11,526,732


See accompanying notes to the unaudited condensed consolidated financial statements.

7


ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Income and Comprehensive Income
(Unaudited)
(In thousands, except unit and per unit amounts)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Rental and other property
$
302,522

 
$
268,512

 
$
876,852

 
$
684,813

Management and other fees from affiliates
2,104

 
2,361

 
6,809

 
6,856

 
304,626

 
270,873

 
883,661

 
691,669

Expenses:
 

 
 

 
 
 
 
Property operating, excluding real estate taxes
60,528

 
56,294

 
173,547

 
146,474

Real estate taxes
33,591

 
31,768

 
97,820

 
77,452

Depreciation and amortization
116,308

 
102,286

 
336,946

 
253,890

General and administrative
11,129

 
11,479

 
31,223

 
28,621

Merger and integration expenses

 
3,857

 
3,798

 
46,413

Acquisition and investment related costs
381

 
51

 
1,357

 
768

 
221,937

 
205,735

 
644,691

 
553,618

Earnings from operations
82,689

 
65,138

 
238,970

 
138,051

Interest expense
(50,053
)
 
(45,830
)
 
(148,401
)
 
(117,021
)
Interest and other income
7,367

 
2,992

 
14,820

 
8,685

Equity income in co-investments
7,179

 
4,910

 
15,962

 
21,065

Gains on sale of real estate and land

 
31,372

 
7,112

 
38,853

Gain on remeasurement of co-investment

 

 
34,014

 

Net income
47,182

 
58,582

 
162,477

 
89,633

Net income attributable to noncontrolling interest
(2,074
)
 
(1,904
)
 
(6,180
)
 
(5,529
)
Net income attributable to controlling interest
45,108

 
56,678

 
156,297

 
84,104

Preferred interest distributions
(1,314
)
 
(1,296
)
 
(3,941
)
 
(3,977
)
Net income available to common unitholders
$
43,794

 
$
55,382

 
$
152,356

 
$
80,127

Comprehensive income
$
46,970

 
$
61,036

 
$
163,609

 
$
99,070

Comprehensive income attributable to noncontrolling interest
(2,074
)
 
(1,904
)
 
(6,180
)
 
(5,529
)
Comprehensive income attributable to controlling interest
$
44,896

 
$
59,132

 
$
157,429

 
$
93,541

Per unit data:
 

 
 

 
 
 
 
Basic:
 

 
 

 
 
 
 
Net income available to common unitholders
$
0.65

 
$
0.85

 
$
2.28

 
$
1.42

Weighted average number of common units outstanding during the period
67,316,498

 
65,057,157

 
66,896,293

 
56,484,589

Diluted:
 
 
 
 
 
 
 
Net income available to common unitholders
$
0.65

 
$
0.85

 
$
2.27

 
$
1.41

Weighted average number of common units outstanding during the period
67,475,180

 
65,234,328

 
67,074,069

 
56,677,712

Distribution per common unit
$
1.44

 
$
1.30

 
$
4.32

 
$
3.81


See accompanying notes to the unaudited condensed consolidated financial statements.

8


ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Condensed Consolidated Statement of Capital for the nine months ended September 30, 2015
(Dollars and units in thousands)
(Unaudited)
 
General Partner
 
Limited Partners
 
Accumulated
 
 
 
 
 
 
 
 
 
Preferred
 
 
 
 
 
other
 
 
 
 
 
Common Equity
 
Equity
 
Common Equity
 
comprehensive
 
Noncontrolling
 
 
 
Units
 
Amount
 
Amount
 
Units
 
Amount
 
loss
 
Interest
 
Total
Balances at December 31, 2014
63,683

 
$
6,002,915

 
$
71,209

 
2,168

 
$
48,665

 
$
(49,356
)
 
$
62,635

 
$
6,136,068

Net income

 
147,241

 
3,941

 

 
5,115

 

 
6,180

 
162,477

Change in fair value of derivatives and amortization of swap settlements

 

 

 

 

 
1,675

 

 
1,675

Change in fair value of marketable securities

 

 

 

 

 
(543
)
 

 
(543
)
Issuance of common units under:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

General partner's stock based compensation
170

 
22,173

 

 

 

 

 

 
22,173

Sale of common stock by general partner
1,375

 
307,835

 

 

 

 

 

 
307,835

Equity based compensation costs

 
2,564

 

 
16

 
2,947

 

 

 
5,511

Changes in redemption value of redeemable noncontrolling interest

 
(1,095
)
 

 

 

 

 

 
(1,095
)
Reclassification of noncontrolling interest to redeemable noncontrolling interest

 

 

 

 

 

 
(144
)
 
(144
)
Distributions to noncontrolling interest

 

 

 

 

 

 
(6,393
)
 
(6,393
)
Redemptions
7

 
(2,199
)
 

 
(7
)
 

 

 
(422
)
 
(2,621
)
Distributions declared

 
(279,245
)
 
(3,941
)
 

 
(9,934
)
 

 

 
(293,120
)
Balances at September 30, 2015
65,235

 
$
6,200,189

 
$
71,209

 
2,177

 
$
46,793

 
$
(48,224
)
 
$
61,856

 
$
6,331,823



See accompanying notes to the unaudited condensed consolidated financial statements.

9


ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
Nine Months Ended September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
162,477

 
$
89,633

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
336,946

 
253,890

Amortization of discount on marketable securities
(9,012
)
 
(6,555
)
Amortization of (premium) discount and debt financing costs, net
(15,064
)
 
(4,987
)
Gain on sale of marketable securities and other investments
(598
)
 
(886
)
Company's share of gain on the sales of co-investments
(469
)
 
(3,211
)
Earnings from co-investments
(15,493
)
 
(17,854
)
Operating distributions from co-investments
28,632

 
20,122

Gain on the sales of real estate and land
(7,112
)
 
(38,853
)
Non cash merger and integration expenses

 
7,562

Equity-based compensation
5,511

 
4,996

Gain on remeasurement of co-investments
(34,014
)
 

Changes in operating assets and liabilities:
 

 
 

Prepaid expense, in-place lease value, receivables and other assets
(1,851
)
 
8,923

Accounts payable and accrued liabilities
36,480

 
43,988

Other liabilities
1,475

 
1,393

Net cash provided by operating activities
487,908

 
358,161

Cash flows from investing activities:
 

 
 

Additions to real estate:
 

 
 

Acquisitions of real estate and acquisition related capital expenditures
(327,799
)
 
(438,088
)
Redevelopment
(66,783
)
 
(55,921
)
Development acquisitions of and additions to real estate under development
(138,101
)
 
(108,659
)
Capital expenditures on rental properties
(42,809
)
 
(21,074
)
Acquisition of membership interest in co-investments
(115,724
)
 

Proceeds from insurance for property losses
12,044

 
29,160

Proceeds from dispositions of real estate
74,485

 
61,331

BRE merger cash consideration paid

 
(555,826
)
Proceeds from dispositions of co-investments
31,556

 
13,900

Contributions to co-investments
(119,120
)
 
(128,268
)
Changes in restricted cash and refundable deposits
38,282

 
(39,482
)
Purchases of marketable securities
(14,300
)
 
(15,516
)
Sales and maturities of marketable securities and other investments
7,566

 
6,275

Collections of notes and other receivables

 
76,585

Non-operating distributions from co-investments
382

 
23,248

Net cash used in investing activities
(660,321
)
 
(1,152,335
)
Cash flows from financing activities:
 

 
 

Borrowings under debt agreements
1,068,032

 
1,737,322

Repayment of debt
(924,844
)
 
(1,327,840
)
Additions to deferred charges
(4,320
)
 
(16,941
)
Net proceeds from issuance of common units
307,835

 
449,464

Net proceeds from stock options exercises
22,173

 
6,526

Distributions to noncontrolling interest
(6,455
)
 
(3,462
)
Redemption of noncontrolling interest
(2,621
)
 
(308
)
Common and preferred units and preferred interest distributions paid
(281,334
)
 
(191,554
)
Net cash provided by financing activities
178,466

 
653,207


10


 
Nine Months Ended September 30,
 
2015
 
2014
Cash acquired from the BRE merger

 
140,353

Cash acquired in consolidation of co-investment
4,005

 

Net increase (decrease) in cash and cash equivalents
10,058

 
(614
)
Cash and cash equivalents at beginning of period
25,610

 
18,491

Cash and cash equivalents at end of period
$
35,668

 
$
17,877

  
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of $12.2 million and $17.8 million capitalized in 2015 and 2014, respectively
$
135,736

 
$
93,342

Supplemental disclosure of noncash investing and financing activities:
 

 
 

Issuance of Operating Partnership units for contributed properties
$

 
$
1,419,816

Retirement of Operating Partnership units
$

 
$
(1,419,816
)
Transfer from real estate under development to rental properties
$
308,069

 
$
71,496

Transfer from real estate under development to co-investments
$
5,913

 
$
81,332

Reclassification of and changes in redeemable noncontrolling interest from common equity and noncontrolling interest
$
1,333

 
$
18,764

  Debt assumed in connection with acquisition of co-investment
$
114,435

 
$


See accompanying notes to the unaudited condensed consolidated financial statements.

11


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2015 and 2014
(Unaudited)

(1) Organization and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements present the accounts of Essex Property Trust, Inc. (“Essex” or the “Company”), which include the accounts of the Company and Essex Portfolio, L.P. and subsidiaries (the “Operating Partnership,” which holds the operating assets of the Company), prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q.  In the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included and are normal and recurring in nature.  These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2014.

All significant intercompany balances and transactions have been eliminated in the condensed consolidated financial statements. Certain reclassifications have been made to conform to the current year’s presentation.

The unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2015 and 2014 include the accounts of the Company and the Operating Partnership.  Essex is the sole general partner in the Operating Partnership, with a 96.8% general partnership interest as of September 30, 2015.  Total Operating Partnership limited partnership units outstanding were 2,176,563 and 2,168,158 as of September 30, 2015 and December 31, 2014, respectively, and the redemption value of the units, based on the closing price of the Company’s common stock totaled $486.3 million and $447.9 million, as of September 30, 2015 and December 31, 2014, respectively.

As of September 30, 2015, the Company owned or had ownership interests in 245 stabilized apartment communities, aggregating 58,768 apartment homes, excluding the Company’s ownership in preferred interest co-investments,  (collectively, the “Communities”, and individually, a “Community”), four commercial buildings and nine active developments (collectively, the “Portfolio”).  The Communities are located in Southern California (primarily Los Angeles, Orange, San Diego, and Ventura counties), Northern California (the San Francisco Bay Area) and the Seattle metropolitan areas.

New Accounting Pronouncements

In February 2015, the FASB issued ASU No. 2015-02 "Consolidation (Topic 810): Amendments to the Consolidation Analysis," which provides new consolidation guidance and makes changes to both the variable interest model and the voting model. Among other changes, the new standard specifically eliminates the presumption in the current voting model that a general partner controls a limited partnership or similar entity unless that presumption can be overcome. Generally, only a single limited partner that is able to exercise substantive kick-out rights will consolidate. The new standard will be effective for the Company beginning on January 1, 2016 and early adoption is permitted, including adoption in an interim period. The new standard must be applied using a modified retrospective approach by recording a cumulative-effect adjustment to equity/capital as of the beginning of the period of adoption or retrospectively to each period presented. The Company has not yet selected a transition method and is currently evaluating the impact of adopting the new standard on its consolidated results of operations and financial position.

In April 2015, the FASB issued ASU No. 2015-03 "Simplifying the Presentation of Debt Issuance Costs," which requires companies to present debt financing costs as a direct deduction from the carrying amount of the associated debt liability rather than as an asset, consistent with the presentation of debt discounts on the consolidated balance sheets.  The new standard will be effective for the Company beginning on January 1, 2016 and early adoption is permitted.  The new standard must be applied retrospectively to all prior periods presented in the consolidated financial statements.  The Company adopted this standard during the second quarter of 2015. This adoption resulted in a reclassification of $27.1 million and $29.4 million in debt issuance costs, net of accumulated amortization from an asset to a reduction to associated debt liabilities as of September 30, 2015 and December 31, 2014, respectively.

Marketable Securities

The Company reports its available for sale securities at fair value, based on quoted market prices (Level 2 for the unsecured bonds and Level 1 for the common stock and investment funds, as defined by the Financial Accounting Standards Board

12


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2015 and 2014
(Unaudited)

(“FASB”) standard for fair value measurements), and any unrealized gain or loss is recorded as other comprehensive income (loss).  Realized gains and losses, interest and dividend income, and amortization of purchase discounts are included in interest and other income on the condensed consolidated statements of income and comprehensive income.

As of September 30, 2015 and December 31, 2014, marketable securities consisted primarily of investment-grade unsecured bonds, common stock, investments in mortgage backed securities and investment funds that invest in US treasury or agency securities.  As of September 30, 2015 and December 31, 2014, the Company classified its investments in mortgage backed securities, which mature through November 2019 and September 2020, as held to maturity, and accordingly, these securities are stated at their amortized cost.  As of September 30, 2015 and December 31, 2014, marketable securities consist of the following ($ in thousands):

 
September 30, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Carrying Value
Available for sale:
 
 
 
 
 
Investment-grade unsecured bonds
$
11,633

 
$
144

 
$
11,777

Investment funds - US treasuries
5,020

 
6

 
5,026

Common stock and stock funds
34,653

 
4,609

 
39,262

Held to maturity:
 

 
 

 
 

Mortgage backed securities
76,993

 

 
76,993

Total - Marketable securities and other investments
$
128,299

 
$
4,759

 
$
133,058

 
 
 
 
 
 
 
December 31, 2014
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Carrying Value
Available for sale:
 

 
 

 
 

Investment-grade unsecured bonds
$
9,435

 
$
145

 
$
9,580

Investment funds - US treasuries
3,769

 
3

 
3,772

Common stock and stock funds
25,755

 
5,137

 
30,892

Held to maturity:
 

 
 

 
 

Mortgage backed securities
67,996

 

 
67,996

Total - marketable securities
$
106,955

 
$
5,285

 
$
112,240

  Other investments
5,000

 

 
5,000

Total - Marketable securities and other investments
$
111,955

 
$
5,285

 
$
117,240


The Company uses the specific identification method to determine the cost basis of a security sold and to reclassify amounts from accumulated other comprehensive income for securities sold.  For the nine months ended September 30, 2015 and 2014, the proceeds from sales of available for sale securities totaled $2.0 million and $6.3 million, respectively, which resulted in no realized gains or losses and gains of $0.9 million, respectively. For the nine months ended September 30, 2015 and 2014, the proceeds from the sale of other investments totaled $5.6 million and none, respectively, which resulted in a realized gain of $0.6 million and none, respectively.

Variable Interest Entities

The Company consolidates 19 DownREIT limited partnerships (comprising twelve communities) since the Company is the primary beneficiary of these variable interest entities (“VIEs”).  Total DownREIT units outstanding were 963,172 and 974,790 as of September 30, 2015 and December 31, 2014 respectively, and the redemption value of the units, based on the closing price

13


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2015 and 2014
(Unaudited)

of the Company’s common stock totaled $215.2 million and $201.4 million, as of September 30, 2015 and December 31, 2014, respectively.  The consolidated total assets and liabilities related to these VIEs, net of intercompany eliminations, were approximately $239.5 million and $208.1 million, respectively, as of September 30, 2015 and $235.1 million and $209.1 million, respectively, as of December 31, 2014.  Interest holders in VIEs consolidated by the Company are allocated income equal to the cash distributions made to those interest holders.  The remaining results of operations are allocated to the Company.  As of September 30, 2015 and December 31, 2014, the Company did not have any other VIEs of which it was deemed to be the primary beneficiary.

Equity Based Compensation

The Company accounts for equity based compensation using the fair value method of accounting.  The estimated fair value of stock options granted by the Company is being amortized over the vesting period of the stock options.  The estimated grant date fair values of the long term incentive plan units (discussed in Note 13, “Equity Based Compensation Plans,” in the Company’s Form 10-K for the year ended December 31, 2014) are being amortized over the expected service periods.

Fair Value of Financial Instruments

Management believes that the carrying amounts of outstanding lines of credit, and notes and other receivables approximate fair value as of September 30, 2015 and December 31, 2014, because interest rates, yields and other terms for these instruments are consistent with yields and other terms currently available for similar instruments.  Management has estimated that the fair value of the Company’s $4.7 billion of fixed rate debt, including unsecured debt, at September 30, 2015 is approximately $4.9 billion and the Company’s variable rate debt, excluding borrowings under the lines of credit, at September 30, 2015 approximates its fair value based on the terms of existing mortgage notes payable, unsecured debt and variable rate demand notes compared to those available in the marketplace.  Management believes that the carrying amounts of cash and cash equivalents, restricted cash, accounts payable and accrued liabilities, construction payables, other liabilities and dividends payable approximate fair value as of September 30, 2015 due to the short-term maturity of these instruments. Marketable securities, except mortgage backed securities that are held to maturity, and derivatives are carried at fair value as of September 30, 2015.

At September 30, 2015, the Company’s investments in mortgage backed securities had a carrying value of $77.0 million and the Company estimated the fair value to be approximately $107.4 million.  At December 31, 2014, the Company’s investments in mortgage backed securities had a carrying value of $68.0 million and the Company estimated the fair value to be approximately $96.0 million.  The Company determines the fair value of the mortgage backed securities based on unobservable inputs (level 3 of the fair value hierarchy) considering the assumptions that market participants would make in valuing these securities.  Assumptions such as estimated default rates and discount rates are used to determine expected discounted cash flows to estimate the fair value.
 
Capitalization of Costs

The Company’s capitalized internal costs related to development and redevelopment projects were comprised primarily of employee compensation and totaled $2.9 million during both the three months ended September 30, 2015 and 2014, respectively, and $8.3 million and $7.6 million during the nine months ended September 30, 2015 and 2014, respectively. The Company capitalizes leasing commissions associated with the lease-up of a development community and amortizes the costs over the life of the leases.  The amounts capitalized for leasing commissions are immaterial for all periods presented.

Co-investments

The Company owns investments in joint ventures (“co-investments”) in which it has significant influence, but its ownership interest does not meet the criteria for consolidation in accordance with U.S. GAAP.  Therefore, the Company accounts for co-investments using the equity method of accounting.  The equity method employs the accrual basis for recognizing the investor’s share of investee income or losses. In addition, distributions received from the investee are treated as a reduction in the investment account, not as income.  The significant accounting policies of the Company’s co-investment entities are consistent with those of the Company in all material respects.

Upon the acquisition of a controlling interest of a co-investment, the co-investment entity is consolidated and a gain or loss is recognized upon the remeasurement of co-investments in the condensed consolidated statement of income equal to the amount

14


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2015 and 2014
(Unaudited)

by which the fair value of the co-investment interest the Company previously owned exceeds its carrying value.  A majority of the co-investments, excluding the preferred equity investments, compensate the Company for its asset management services and may provide promote income if certain financial return benchmarks are achieved.  Asset management fees are recognized when earned, and promote fees are recognized when the earnings events have occurred and the amount is determinable and collectible. Any promote fees are reflected in equity income in co-investments.

Changes in Accumulated Other Comprehensive Loss, Net by Component

Essex Property Trust, Inc.
(in thousands)
 
Change in fair
value and amortization
of swap settlements
 
Unrealized
gains on
available for sale
securities
 
Total
Balance at December 31, 2014
$
(56,003
)
 
$
4,551

 
$
(51,452
)
Other comprehensive income before reclassification
(4,403
)
 
(526
)
 
(4,929
)
Amounts reclassified from accumulated other comprehensive loss
6,024

 

 
6,024

Other comprehensive income
1,621

 
(526
)
 
1,095

Balance at September 30, 2015
$
(54,382
)
 
$
4,025

 
$
(50,357
)

Changes in Accumulated Other Comprehensive Loss, by Component

Essex Portfolio, L.P.
(in thousands):
 
Change in fair
value and amortization
of swap settlements
 
Unrealized
gains on
available for sale
securities
 
Total
Balance at December 31, 2014
$
(53,980
)
 
$
4,624

 
$
(49,356
)
Other comprehensive income before reclassification
(4,552
)
 
(543
)
 
(5,095
)
Amounts reclassified from accumulated other comprehensive loss
6,227

 

 
6,227

Other comprehensive income
1,675

 
(543
)
 
1,132

Balance at September 30, 2015
$
(52,305
)
 
$
4,081

 
$
(48,224
)

Amounts reclassified from accumulated other comprehensive loss in connection with derivatives are recorded in interest expense on the condensed consolidated statement of income and comprehensive income.  Realized gains and losses on available for sale securities are included in interest and other income on the condensed consolidated statement of income and comprehensive income.

Accounting Estimates

The preparation of condensed consolidated financial statements, in accordance with GAAP, requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to acquiring, developing and assessing the carrying values of its real estate portfolio, its investments in and advances to joint ventures and affiliates, its notes receivables and its qualification as a Real Estate Investment Trust (“REIT”). The Company bases its estimates on historical experience, current market conditions, and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may vary from those estimates and those estimates could be different under different assumptions or conditions.




15


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2015 and 2014
(Unaudited)

BRE Merger

The merger with BRE Properties, Inc. ("BRE") was a two step process. First, 14 of the BRE properties were acquired on March 31, 2014 in exchange for $1.4 billion of limited partnership interests in the Operating Partnership ("OP Units").  The fair value of these properties was substantially all attributable to rental properties which included land, buildings and improvements, and real estate under development and approximately $19 million was attributable to acquired in-place lease value.  Second, the BRE merger was closed on April 1, 2014 in exchange for the total consideration of approximately $4.3 billion. A summary of the fair value of the assets and liabilities acquired on April 1, 2014 was as follows (includes the 14 properties acquired on March 31, 2014 as the OP Units issued were retired on April 1, 2014) (in millions):

Cash assumed
$
140

Rental properties and real estate under development
5,605

Real estate held for sale, net
108

Co-investments
224

Acquired in-place lease value
77

Other assets
16

Mortgage notes payable and unsecured debt
(1,747
)
Other liabilities
(87
)
Redeemable noncontrolling interest
(5
)
 
$
4,331

 
 

Cash consideration for BRE merger
$
556

Equity consideration for BRE merger
3,775

Total consideration for BRE merger
$
4,331


During the quarter ended March 31, 2015, the Company recorded adjustments to decrease the preliminary fair value of real property by $13.1 million, to increase the preliminary fair value of co-investments by $6.0 million and to decrease its preliminary estimate for liabilities assumed by $7.1 million. The changes in estimates were the result of subsequent additional information pertaining to the opening balance sheet identified by management. The Company believes that the information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed. Due to these adjustments and the resulting adjustments to depreciation expense, certain amounts do not agree to previously reported balances.
(2)  Significant Transactions During the Third Quarter of 2015 and Subsequent Events

Significant Transactions

Preferred Equity Investments

In August 2015, the Company made a $5.0 million preferred equity investment in a related party limited liability company that owns Alta Vista Apartments, a 92 apartment community located in Los Angeles, CA. This investment will earn a 9.5% preferred return and is scheduled to mature in August 2022. (See Note 5 - "Related Party Transactions" for further discussion.)

In August 2015, the Company redeemed a preferred equity investment in a joint venture that holds property in San Jose, CA with a carrying value of $20.4 million. The Company recognized a gain of $1.5 million as a result of this redemption which is included in equity income from co-investments in the Condensed Consolidated Statement of Income and Comprehensive Income.

Common Stock

During the third quarter, the Company issued 155,728 shares of common stock, through our equity distribution program, at an average price of $228.61 for net proceeds of $35.4 million.

16


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2015 and 2014
(Unaudited)


Subsequent Events

During the fourth quarter through October 30, 2015, the Company sold 107,098 shares of common stock for $24.3 million, net of fees and commissions, at an average price of $228.61.

(3) Co-investments

The Company has co-investments, which are accounted for under the equity method.  The co-investments own, operate and develop apartment communities.  The following table details the carrying value of Company's co-investments (in thousands):
 
September 30, 2015
 
December 31, 2014
Membership interest/Partnership interest in:
 
 
 
CPPIB
$
335,493

 
$
336,977

Wesco I, III and IV
218,316

 
256,790

BEXAEW
89,236

 
97,686

Palm Valley
69,428

 
70,186

Other
6,143

 
19,519

Total operating co-investments
718,616

 
781,158

Total development co-investments
212,892

 
152,574

Total preferred interest co-investments (includes related party investments of $35.4 million and $40.8 million as of September 30, 2015 and December 31, 2014, respectively)
104,535

 
108,691

Total co-investments
$
1,036,043

 
$
1,042,423

 
The combined summarized financial information of co-investments are as follows (in thousands).
 
September 30, 2015
 
December 31, 2014
Combined balance sheets: (1)
 
 
 
Rental properties and real estate under development
$
3,281,309

 
$
3,426,574

Other assets
117,430

 
107,902

Total assets
$
3,398,739

 
$
3,534,476

Debt
$
1,423,734

 
$
1,568,398

Other liabilities
109,504

 
91,579

Equity (1)
1,865,501

 
1,874,499

Total liabilities and equity
$
3,398,739

 
$
3,534,476

Company's share of equity
$
1,036,043

 
$
1,042,423



17


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2015 and 2014
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Combined statements of income: (1)
 
 
 
 
 
 
 
Property revenues
$
65,869

 
$
51,725

 
$
191,458

 
$
128,469

Property operating expenses
(23,094
)
 
(18,759
)
 
(69,232
)
 
(48,875
)
Net operating income
42,775

 
32,966

 
122,226

 
79,594

Gain on sale of real estate

 

 
14

 
11,369

Interest expense
(11,314
)
 
(9,838
)
 
(33,727
)
 
(25,283
)
General and administrative
(1,335
)
 
(1,840
)
 
(4,414
)
 
(5,039
)
Equity income from co-investments (2)

 
4,808

 

 
14,351

Depreciation and amortization
(26,574
)
 
(21,357
)
 
(76,220
)
 
(49,935
)
Net income
$
3,552

 
$
4,739

 
$
7,879

 
$
25,057

Company's share of net income (3)
$
7,179

 
$
4,910

 
$
15,962

 
$
21,065

 
(1) Includes preferred equity investments held by the Company.
(2) Represents income from Wesco II's preferred equity investment in Park Merced.
(3) Includes the Company's share of equity income from co-investments and preferred equity investments, gain on sales of co-investments, co-investment promote income and income from early redemption of preferred equity investments. Includes related party income of $0.8 million and $1.1 million for the three months ended September 30, 2015 and 2014, respectively and $2.9 million for both the nine months ended September 30, 2015 and 2014.

(4) Notes and Other Receivables
 
Notes receivable secured by real estate and other receivables consist of the following as of September 30, 2015 and December 31, 2014 (in thousands):
 
September 30, 2015
 
December 31, 2014
Notes receivable, secured, bearing interest at 6.0%, due December 2016
$
3,219

 
$
3,212

Notes and other receivables from affiliates
4,336

 
8,105

Other receivables
15,113

 
13,606

 
$
22,668

 
$
24,923


(5) Related Party Transactions

The Company charges certain fees to its co-investments for asset management, property management, development and redevelopment services. These fees from affiliates totaled $3.3 million and $4.1 million during the three months ended September 30, 2015 and 2014, respectively and $12.5 million and $11.7 million during the nine months ended September 30, 2015 and 2014, respectively. All of these fees are net of intercompany amounts eliminated by the Company. The Company netted development and redevelopment fees of $1.2 million and $1.7 million against general and administrative expenses for the three months ended September 30, 2015 and 2014, respectively and $5.8 million and $4.9 million for the nine months ended September 30, 2015 and 2014, respectively.

The Company’s Chairman and founder, Mr. George Marcus, is the Chairman of the Marcus & Millichap Company (“MMC”), which is a parent company of a diversified group of real estate investment and development firms. Mr. Marcus is also the Co-Chairman of Marcus & Millichap, Inc. (“MMI”), and Mr. Marcus owns a controlling interest in MMI, a national brokerage firm listed on the NYSE. 

During the first quarter, a multifamily property, located in Anaheim, CA that was owned by an entity affiliated with MMC, in which the Company held a $13.7 million preferred equity investment, was sold. That investment of $13.7 million plus an

18


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2015 and 2014
(Unaudited)

additional $1.3 million in cash was invested as outlined in the next two paragraphs. Prior to the property sale, the $13.7 million preferred equity investment earned a 9.0% preferred return and was scheduled to mature in September 2020.

In June 2015, the Company made a $10.0 million preferred equity investment in an entity affiliated with MMC that owns Greentree Apartments, a 220 apartment community located in San Jose, CA. This investment will earn a 9.5% preferred return and is scheduled to mature in June 2022. Independent members of the Company’s Board of Directors that serve on the Nominating and Corporate Governance and Audit Committees approved the investment in this entity.

In June 2015, the Company made a $5.0 million preferred equity investment in an entity affiliated with MMC that owns Sterling Cove Apartments, a 218 apartment community located in Concord, CA. This investment will earn a 9.5% preferred return and is scheduled to mature in June 2022. Independent members of the Company’s Board of Directors that serve on the Nominating and Corporate Governance and Audit Committees approved the investment in this entity.

In August 2015, the Company made a $5.0 million preferred equity investment in an entity affiliated with MMC that owns Alta Vista Apartments, a 92 apartment community located in Los Angeles, CA. This investment will earn a 9.5% preferred return and is scheduled to mature in August 2022. Independent members of the Company’s Board of Directors that serve on the Nominating and Corporate Governance and Audit Committees approved the investment in this entity.

In July 2014, the Company acquired Paragon Apartments, a 301 apartment community located in Fremont, CA for $111.0 million from an entity that was partially owned by an affiliate of MMC.  Independent members of the Company’s Board of Directors that serve on the Nominating and Corporate Governance and Audit Committees approved the acquisition of Paragon Apartments.

The Company has provided short-term bridge loans to affiliates.  As of September 30, 2015 and December 31, 2014, $4.3 million and $8.1 million of short-term loans remained outstanding due from joint venture affiliates and is classified within notes and other receivables in the accompanying condensed consolidated balance sheets.

(6) Debt
 
The Company does not have indebtedness as debt is incurred by the Operating Partnership.  The Company guarantees the Operating Partnership’s unsecured debt including the revolving credit facilities for the full term of such debt.

Debt consists of the following ($ in thousands):
 
September 30, 2015
 
December 31, 2014
 
Weighted Average
Maturity
In Years
Unsecured bonds private placement - fixed rate
$
463,776

 
$
463,443

 
3.5
Term loan - variable rate
224,383

 
224,130

 
1.2
Unsecured bonds - fixed rate
2,402,737

 
1,915,975

 
7.0
Unsecured debt, net (1)
3,090,896

 
2,603,548

 
 
Lines of credit, net (2)
2,011

 
242,824

 

Mortgage notes payable, net (3)
$
2,224,513

 
$
2,234,317

 
6.3
Total debt
$
5,317,420

 
$
5,080,689

 
 
Weighted average interest rate on fixed rate unsecured and unsecured private placement bonds
3.6
%
 
3.6
%
 
 
Weighted average interest rate on variable rate term loan
2.4
%
 
2.4
%
 
 
Weighted average interest rate on lines of credit
1.7
%
 
1.8
%
 
 
Weighted average interest rate on mortgage notes payable
4.5
%
 
4.6
%
 
 

(1) Includes unamortized premium of $17.3 million and $27.5 million and reduced by unamortized debt issuance costs of $16.4 million and $13.9 million, as of September 30, 2015 and December 31, 2014, respectively.

19


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2015 and 2014
(Unaudited)

(2) Lines of credit, net excludes unamortized debt issuance costs of $3.6 million as of September 30, 2015 as the net effect resulted in a debit balance and was reclassified to prepaid expenses and other assets on the condensed consolidated balance sheets. The December 31, 2014 amount includes $3.6 million of unamortized debt issuance costs because the net balance resulted in a credit balance and is presented on a net basis.
(3) Includes unamortized premium of $69.3 million and $83.8 million and reduced by unamortized debt issuance costs of $10.7 million and $11.9 million, as of September 30, 2015 and December 31, 2014, respectively.

The aggregate scheduled principal payments of the Company’s outstanding debt as of September 30, 2015 are as follows (excluding lines of credit) ($ in thousands):
Remaining in 2015
$
7,296

2016
379,707

2017
564,178

2018
320,621

2019
641,393

Thereafter
3,342,742

 
$
5,255,937


(7) Segment Information

The Company defines its reportable operating segments as the three geographical regions in which its communities are located: Southern California, Northern California and Seattle Metro.  Excluded from segment revenues and net operating income are management and other fees from affiliates, and interest and other income. Non-segment revenues and net operating income included in the following schedule also consist of revenue generated from commercial properties.  Other non-segment assets include real estate under development, co-investments, cash and cash equivalents, marketable securities, notes and other receivables, prepaid expenses and other assets and deferred charges.

The revenues and net operating income for each of the reportable operating segments are summarized as follows for the three and nine months ended September 30, 2015 and 2014 ($ in thousands):

20


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2015 and 2014
(Unaudited)

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Southern California
$
135,900

 
$
122,089

 
$
394,375

 
$
311,873

Northern California
110,483

 
94,807

 
319,834

 
239,018

Seattle Metro
51,181

 
47,132

 
149,662

 
120,281

Other real estate assets
4,958

 
4,484

 
12,981

 
13,641

Total property revenues
$
302,522

 
$
268,512

 
$
876,852

 
$
684,813

Net operating income:
 
 
 
 
 
 
 
Southern California
90,377

 
78,860

 
263,715

 
204,177

Northern California
79,223

 
66,313

 
228,190

 
167,034

Seattle Metro
34,484

 
31,751

 
101,288

 
80,198

Other real estate assets
4,319

 
3,526

 
12,292

 
9,478

Total net operating income
208,403

 
180,450

 
605,485

 
460,887

Management and other fees from affiliates
2,104

 
2,361

 
6,809

 
6,856

Depreciation and amortization
(116,308
)
 
(102,286
)
 
(336,946
)
 
(253,890
)
General and administrative
(11,129
)
 
(11,479
)
 
(31,223
)
 
(28,621
)
Merger and integration expenses

 
(3,857
)
 
(3,798
)
 
(46,413
)
Acquisition and investment related costs
(381
)
 
(51
)
 
(1,357
)
 
(768
)
Interest expense
(50,053
)
 
(45,830
)
 
(148,401
)
 
(117,021
)
Interest and other income
7,367

 
2,992

 
14,820

 
8,685

Equity income from co-investments
7,179

 
4,910

 
15,962

 
21,065

Gains on sale of real estate and land

 
31,372

 
7,112

 
38,853

Gain on remeasurement of co-investment

 

 
34,014

 

Net income
$
47,182

 
$
58,582

 
$
162,477

 
$
89,633


Total assets for each of the reportable operating segments are summarized as follows as of September 30, 2015 and December 31, 2014 ($ in thousands):
 
September 30, 2015
 
December 31, 2014
Assets:
 
 
 
Southern California
$
4,813,844

 
$
4,241,277

Northern California
3,888,700

 
3,641,720

Seattle Metro
1,616,932

 
1,647,058

Other real estate assets
142,958

 
149,820

Net reportable operating segment - real estate assets
10,462,434

 
9,679,875

Real estate under development
226,690

 
429,096

Co-investments
1,036,043

 
1,042,423

Real estate held for sale, net
8,742

 
56,300

Cash and cash equivalents, including restricted cash
72,306

 
95,749

Marketable securities and other investments
133,058

 
117,240

Notes and other receivables
22,668

 
24,923

Other non-segment assets
50,776

 
81,126

Total assets
$
12,012,717

 
$
11,526,732

 

21


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2015 and 2014
(Unaudited)

(8) Net Income Per Common Share
 
(Amounts in thousands, except per share and unit data)

Essex Property Trust, Inc.
 
Three Months Ended 
 September 30, 2015
 
Three Months Ended 
 September 30, 2014
 
Income
 
Weighted-
average
Common
Shares
 
Per
Common
Share
Amount
 
Income
 
Weighted-
average
Common
Shares
 
Per
Common
Share
Amount
Basic:
 
 
 
 
 
 
 
 
 
 
 
Net income available to common stockholders
$
42,323

 
65,138,868

 
$
0.65

 
$
53,566

 
62,892,601

 
$
0.85

Effect of Dilutive Securities

 
158,682

 
 

 

 
177,171

 
 

Diluted:
 

 
 

 
 

 
 

 
 

 
 

Net income available to common stockholders
$
42,323

 
65,297,550

 
$
0.65

 
$
53,566

 
63,069,772

 
$
0.85

 
Nine Months Ended 
 September 30, 2015
 
Nine Months Ended 
 September 30, 2014
 
Income
 
Weighted-
average
Common
Shares
 
Per
Common
Share
Amount
 
Income
 
Weighted-
average
Common
Shares
 
Per
Common
Share
Amount
Basic:
 
 
 
 
 
 
 
 
 
 
 
Net income available to common stockholders
$
147,241

 
64,714,994

 
$
2.28

 
$
76,685

 
54,250,104

 
$
1.41

Effect of Dilutive Securities

 
177,776

 
 

 

 
193,123

 
 

Diluted:
 

 
 

 
 

 
 

 
 

 
 

Net income available to common stockholders
$
147,241

 
64,892,770

 
$
2.27

 
$
76,685

 
54,443,227

 
$
1.41


Weighted average convertible limited partnership units of 2,177,630 and 2,164,556, which include vested Series Z-1 incentive units, for the three months ended September 30, 2015 and 2014, respectively, and 2,181,299 and 2,234,485 for the nine months ended September 30, 2015, and 2014, respectively, were not included in the determination of diluted EPS because they were anti-dilutive. The related income allocated to these convertible limited partnership units, which includes vested Series Z-1 units, aggregated $1.5 million and $1.8 million for the three months ended September 30, 2015 and 2014, respectively, and $5.1 million and $3.4 million for the nine months ended September 30, 2015 and 2014, respectively. Additionally, excludes 902,668 DownREIT units as they are anti-dilutive.
 
Stock options of 24,500 and 24,500 were excluded from the calculation of diluted earnings per share for the three and nine months ended September 30, 2015, respectively, because the effects on earnings per share were anti-dilutive. Stock options of 8,343 and 42,518 for the three and nine months ended September 30, 2014, respectively, were not included in the diluted earnings per share calculation because the effects on earnings per share were anti-dilutive.



22


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2015 and 2014
(Unaudited)

Essex Portfolio, L.P.

 
Three Months Ended 
 September 30, 2015
 
Three Months Ended 
 September 30, 2014
 
Income
 
Weighted-
average
Common Units
 
Per
Common
Unit
Amount
 
Income
 
Weighted-
average
Common Units
 
Per
Common
Unit
Amount
Basic:
 
 
 
 
 
 
 
 
 
 
 
Net income available to common unitholders
$
43,794

 
67,316,498

 
$
0.65

 
$
55,382

 
65,057,157

 
$
0.85

Effect of Dilutive Securities

 
158,682

 
 

 

 
177,171

 
 

Diluted:
 

 
 

 
 

 
 

 
 

 
 

Net income available to common unitholders
$
43,794

 
67,475,180

 
$
0.65

 
$
55,382

 
65,234,328

 
$
0.85


 
Nine Months Ended 
 September 30, 2015
 
Nine Months Ended 
 September 30, 2014
 
Income
 
Weighted-
average
Common Units
 
Per
Common
Unit
Amount
 
Income
 
Weighted-
average
Common Units
 
Per
Common
Unit
Amount
Basic:
 
 
 
 
 
 
 
 
 
 
 
Net income available to common unitholders
$
152,356

 
66,896,293

 
$
2.28

 
$
80,127

 
56,484,589

 
$
1.42

Effect of Dilutive Securities

 
177,776

 
 

 

 
193,123

 
 

Diluted:
 

 
 

 
 

 
 

 
 

 
 

Net income available to common unitholders
$
152,356

 
67,074,069

 
$
2.27

 
$
80,127

 
56,677,712

 
$
1.41

 
Stock options of 24,500 and 24,500 were excluded from the calculation of diluted earnings per share for the three and nine months ended September 30, 2015, respectively, because the effects on earnings per share were anti-dilutive. Stock options of 8,343 and 42,518 for the three and nine months ended September 30, 2014, respectively, were not included in the diluted earnings per share calculation because the effects on earnings per share were anti-dilutive. Additionally, excludes 902,668 DownREIT units as they are anti-dilutive.
 
(9) Derivative Instruments and Hedging Activities

As of September 30, 2015, the Company has entered into interest rate swap contracts with an aggregate notional amount of $225 million that effectively fixed the interest rate on the $225 million unsecured term loan at 2.4%.  These derivatives qualify for hedge accounting.

As of September 30, 2015, the Company has interest rate cap contracts totaling a notional amount of $148.1 million that effectively limit the Company’s exposure to interest rate risk by providing a ceiling on the underlying variable interest rate for substantially all of the Company’s tax exempt variable rate debt.

The Company has total return swaps, with a notional amount of $114.4 million and a carrying value and fair value of $5 thousand at September 30, 2015.

As of September 30, 2015 and December 31, 2014, the aggregate carrying value of the interest rate swap contracts was a liability of $1.9 million and $1.8 million, respectively, which is classified in other liabilities on the condensed consolidated balance sheets. The aggregate carrying value of the interest rate cap contracts was zero on the balance sheets as of September 30, 2015 and December 31, 2014.

23


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2015 and 2014
(Unaudited)


(10) Commitments and Contingencies

To the extent that an environmental matter arises or is identified in the future that has other than a remote risk of having a material impact on the condensed consolidated financial statements, the Company will disclose the estimated range of possible outcomes, and, if an outcome is probable, accrue an appropriate liability for remediation and other potential liability. The Company will consider whether such occurrence results in an impairment of value on the affected property and, if so, impairment will be recognized. The Company is subject to various lawsuits in the normal course of its business operations.

Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and accompanying Notes thereto included elsewhere herein and with the Company’s 2014 Annual Report on Form 10-K for the year ended December 31, 2014.
 
The Company is a self-administered and self-managed REIT that acquires, develops, redevelops and manages apartment communities in selected residential areas located primarily in the West Coast of the United States. Essex owns all of its interests in its real estate investments, directly or indirectly, through the Operating Partnership. Essex is the sole general partner of the Operating Partnership and, as of September 30, 2015, had an approximately 96.8% general partner interest in the Operating Partnership.

The Company’s investment strategy has two components: constant monitoring of existing markets, and evaluation of new markets to identify areas with the characteristics that underlie rental growth. The Company’s strong financial condition supports its investment strategy by enhancing its ability to quickly shift acquisition, development, redevelopment, and disposition activities to markets that will optimize the performance of the portfolio.

As of September 30, 2015, the Company had ownership interests in 245 stabilized apartment communities, comprising 58,768 apartment homes, excluding the Company’s ownership in preferred equity interest co-investments, and the Company also had ownership interests in four commercial buildings with approximately 320,235 square feet and nine active developments.  The Company’s apartment communities are located in the following major West Coast regions:

Southern California (Los Angeles, Orange, Riverside, San Diego, Santa Barbara, and Ventura counties)
Northern California (the San Francisco Bay Area)
Seattle Metro (Seattle metropolitan area)

As of September 30, 2015, the Company’s development pipeline was comprised of two consolidated projects under development and seven unconsolidated joint venture projects under development, all aggregating 2,759 apartment homes, with total incurred costs of $0.8 billion, and estimated remaining project costs of $0.8 billion for total estimated project costs of $1.6 billion.

The Company’s consolidated apartment communities are as follows:
 
As of September 30, 2015
 
As of September 30, 2014
 
Apartment Homes
 
%
 
Apartment Homes
 
%
Southern California
23,514

 
48
%
 
22,168

 
46
%
Northern California
14,807

 
31
%
 
14,601

 
31
%
Seattle Metro
10,239

 
21
%
 
10,216

 
21
%
Arizona
-

 
-

 
902

 
2
%
Total
48,560

 
100
%
 
47,887

 
100
%

Co-investments, including Wesco I, LLC ("Wesco I"), Wesco III, LLC ("Wesco III"), Wesco IV, LLC (“Wesco IV”), Canadian Pension Plan Investment Board ("CPPIB" or "CPP"), Palm Valley and BEXAEW, LLC (“BEXAEW”) communities, and preferred equity interest co-investment communities are not included in the table presented above for both periods.

24



On April 1, 2014, the Company completed the merger with BRE Properties, Inc. ("BRE"). For further details regarding the merger see the discussion set forth under the caption "BRE Merger" in Note 1 of the Notes to Consolidated Financial Statements set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference. The net assets and results of operations of BRE are included in our consolidated financial statements as of April 1, 2014.

In March 2015, the Company issued $500.0 million of 3.50% senior unsecured notes that mature on April 1, 2025.  The interest is payable semi-annually in arrears on April 1 and October 1 of each year, commencing October 1, 2015 until the maturity date in April 2025.  The Company used the net proceeds of this offering to repay indebtedness under the Company’s $1.0 billion unsecured line of credit facility, its $25.0 million unsecured working capital line and for other general corporate purposes.

In March 2015, the Company purchased a controlling interest in The Huxley and The Dylan, two properties with a total of 371 apartment homes, located in West Hollywood, California, with cash and the assumption of the mortgage loans with a principal balance of $114.4 million and with a remaining term to maturity of thirty-two years. As a result of the acquisition, the Company now consolidates these two properties and the related debt.

In April 2015, the Company purchased an additional 49.5% interest in Reveal, a 438 apartment community located in Woodland Hills, CA, from Wesco I, a related party in which the Company holds a 50.0% noncontrolling interest, for a contract price of $73.0 million. As a result of the acquisition, the property is now consolidated and the Company recorded a gain of $12.7 million to remeasure the portion of its investment in Wesco I related to Reveal at fair value. The gain is included in “Gain on remeasurement of co-investment” on the Company’s Condensed Consolidated Statements of Income and Comprehensive Income for nine months ended September 30, 2015.

In June 2015, the Company purchased Avant, a 247 apartment community, located in downtown Los Angeles, California, for $99.0 million.

In June 2015, the Company made a $10.0 million preferred equity investment in a related party limited liability company that owns Greentree Apartments, a 220 apartment community located in San Jose, CA. This investment will earn a 9.5% preferred return and is scheduled to mature in June 2022.

In June 2015, the Company made a $5.0 million preferred equity investment in a related party limited liability company that owns Sterling Cove Apartments, a 218 apartment community located in Concord, CA. This investment will earn a 9.5% preferred return and is scheduled to mature in June 2022.

In August 2015, the Company made a $5.0 million preferred equity investment in a related party limited liability company that owns Alta Vista Apartments, a 92 apartment community located in Los Angeles, CA. This investment will earn a 9.5% preferred return and is scheduled to mature in August 2022.

Redemption of Preferred Equity Investment

In August 2015, the Company's preferred equity investment in a joint venture that holds property in San Jose, CA was redeemed. The Company recognized a gain of $1.5 as a result of this redemption.

Comparison of the Three Months Ended September 30, 2015 to the Three Months Ended September 30, 2014

The Company’s average financial occupancies for the Company’s stabilized apartment communities or “Quarterly Same-Property” (stabilized properties consolidated by the Company for the quarters ended September 30, 2015 and 2014) was 96.0% and 95.9% for the three months ended September 30, 2015 and 2014, respectively.  Financial occupancy is defined as the percentage resulting from dividing actual rental revenue by total potential rental revenue. Actual rental revenue represents contractual rental revenue pursuant to leases without considering delinquency and concessions. Total potential rental revenue represents the value of all apartment homes, with occupied apartment homes valued at contractual rental rates pursuant to leases and vacant apartment homes valued at estimated market rents.  We believe that financial occupancy is a meaningful measure of occupancy because it considers the value of each vacant apartment home at its estimated market rate.

Market rates are determined using the recently signed effective rates on new leases at the property and are used as the starting point in the determination of the market rates of vacant apartment homes. The Company may increase or decrease these rates based on the supply and demand in the apartment community’s market. The Company will check the reasonableness of these rents based on its position within the market and compare the rents against the asking rents by comparable properties in the

25


market. Financial occupancy may not completely reflect short-term trends in physical occupancy and financial occupancy rates, as disclosed by other REITs, may not be comparable to the Company’s calculation of financial occupancy.

The Company does not take into account delinquency and concessions to calculate actual rent for occupied apartment homes and market rents for vacant apartment homes. The calculation of financial occupancy compares contractual rates for occupied apartment homes to estimated market rents for unoccupied apartment homes, and thus the calculation compares the gross value of all apartment homes excluding delinquency and concessions. For apartment communities that are development properties in lease-up without stabilized occupancy figures, the Company believes the physical occupancy rate is the appropriate performance metric. While an apartment community is in the lease-up phase, the Company’s primary motivation is to stabilize the property which may entail the use of rent concessions and other incentives, and thus financial occupancy, which is based on contractual revenue is not considered the best metric to quantify occupancy.

The regional breakdown of the Company’s Quarterly Same-Property portfolio for financial occupancy for the three months ended September 30, 2015 and 2014 is as follows:
 
Three Months Ended 
 September 30,
 
2015
 
2014
Southern California
95.8
%
 
95.9
%
Northern California
96.3
%
 
96.1
%
Seattle Metro
96.1
%
 
95.6
%

The following table provides a breakdown of revenue amounts, including revenues attributable to the Quarterly Same-Properties:
 
 
Number of
 
Three Months Ended 
 September 30,
 
Dollar
 
Percentage
 
 
Properties
 
2015
 
2014
 
Change
 
Change
Property Revenues ($ in thousands)
 
 
 
 
 
 
 
 
Quarterly Same-Property(1):
 
 
 
 
 
 
 
 
 
 
Southern California
 
84

 
$
117,186

 
$
110,915

 
$
6,271

 
5.7
%
Northern California
 
51

 
94,326

 
85,594

 
8,732

 
10.2

Seattle Metro
 
45

 
46,700

 
43,522

 
3,178

 
7.3

Total Quarterly Same-Property revenues
 
180

 
258,212

 
240,031

 
18,181

 
7.6

Quarterly Non-Same Property Revenues
 
 

 
44,310

 
28,481

 
15,829

 
55.6

Total property revenues
 
 

 
$
302,522

 
$
268,512

 
$
34,010

 
12.7
%

(1) 
Quarterly Same-Property includes BRE properties acquired on April 1, 2014.

Quarterly Same-Property Revenues increased by $18.2 million or 7.6% to $258.2 million in the third quarter of 2015 from $240.0 million in the third quarter of 2014. The increase was primarily attributable to an increase of 7.6% in average rental rates from $1,824 per apartment home in the third quarter of 2014 to $1,963 per apartment home in the third quarter of 2015. On a sequential basis the Company experienced Quarterly Same-Property revenue growth from the second quarter of 2015 to the third quarter of 2015 of $6.0 million or 2.4%, resulting from sequential revenue growth in all three regions mainly driven by an increase in average rental rates of 2.8%.

Quarterly Non-Same Property Revenues increased by $15.8 million or 55.6% to $44.3 million in the third quarter of 2015 from $28.5 million in the third quarter of 2014. The increase was primarily due to revenue generated by nine communities acquired or consolidated since July 1, 2014.

Management and other fees from affiliates decreased by $0.3 million in the third quarter of 2015 as compared to the third quarter of 2014.  The decrease is primarily due to the loss of asset and management fees in 2015, as compared to 2014, due to the consolidation of The Huxley, The Dylan, and Reveal in 2015 and the sale of certain Fund II communities.

Property operating expenses, excluding real estate taxes increased $4.2 million to $60.5 million in the third quarter of 2015 from $56.3 million in the third quarter of 2014, primarily due to the acquisition or consolidation of nine communities since July 1, 2014. Quarterly Same-Property operating expenses, excluding real estate taxes, increased by $2.2 million or 4.4% for the

26


third quarter of 2015 compared to the third quarter of 2014, primarily due to a $1.7 increase in maintenance and repairs and a $0.8 million increase in management fees, partially offset by a decrease of $0.3 million in administrative expenses.

Real estate taxes increased by $1.8 million for the third quarter of 2015 compared to the third quarter of 2014 due primarily to the acquisition or consolidation of nine communities since July 1, 2014. Quarterly Same-Property real estate taxes decreased by $0.5 million or 1.6% for the third quarter of 2015 compared to the third quarter of 2014 primarily due to property tax refunds received in 2015 related to 2014.

Depreciation and amortization expense increased by $14.0 million for the third quarter of 2015 compared to the third quarter of 2014, due to the acquisition or consolidation of nine communities since July 1, 2014. 

Merger and integration expenses include, but are not limited to, advisor fees, legal, and accounting fees related to the merger with BRE and related integration activity. There were no merger and integration expenses for the third quarter of 2015 and $3.9 million for the third quarter of 2014. 

Interest expense increased $4.2 million for the third quarter of 2015 compared to the third quarter of 2014, primarily due to a $2.2 million decrease in capitalized interest for the third quarter of 2015 compared to the third quarter of 2014, which decrease was in turn due to the decrease in development costs as compared to the same period in 2014.
 
Interest and other income increased by $4.4 million for the third quarter of 2015 compared to the third quarter of 2014 primarily due to an increase of $3.1 million in insurance proceeds and $0.6 million in income from the sale of a marketable security.

Equity income in co-investments increased $2.3 million for the third quarter of 2015 compared to the third quarter of 2014 primarily due to income of $1.5 million from the early redemption of a preferred equity investment and a promote income allocation of $0.2 million during the third quarter of 2015.

Gains on sale of real estate and land decreased by $31.4 million for the third quarter of 2015 compared to the third quarter of 2014 due to a $2.2 million gain on the sale of Coldwater Canyon and a $29.2 million gain on the sale of Mt. Sutro during the third quarter of 2014.

Comparison of the Nine Months Ended September 30, 2015 to the Nine Months Ended September 30, 2014

Our average financial occupancies for the Company’s stabilized apartment communities or “2015/2014 Same-Property” (stabilized properties consolidated by the Company for the nine months ended September 30, 2015 and 2014) was 96.3% and 96.2%, for the nine months ended September 30, 2015 and 2014, respectively. 

The regional breakdown of the Company’s 2015/2014 Same-Property portfolio for financial occupancy for the nine months ended September 30, 2015 and 2014 is as follows:
 
Nine Months Ended 
 September 30,
 
2015
 
2014
Southern California
96.2
%
 
96.2
%
Northern California
96.3
%
 
96.2
%
Seattle Metro
96.3
%
 
96.0
%

27



The following table provides a breakdown of revenue amounts, including revenues attributable to the 2015/2014 Same-Properties:
 
 
Number of
 
Nine Months Ended 
 September 30,
 
Dollar
 
Percentage
 
 
Properties
 
2015
 
2014
 
Change
 
Change
Property Revenues ($ in thousands)
 
 
 
 
 
 
 
 
2015/2014 Same-Property(1):
 
 
 
 
 
 
 
 
 
 
Southern California
 
58

 
$
210,901

 
$
198,839

 
$
12,062

 
6.1
%
Northern California
 
38

 
187,319

 
169,346

 
17,973

 
10.6

Seattle Metro
 
34

 
92,204

 
85,606

 
6,598

 
7.7

Total 2015/2014 Same-Property revenues
 
130

 
490,424

 
453,791

 
36,633

 
8.1

2015/2014 Non-Same Property Revenues
 
 

 
386,428

 
231,022

 
155,406

 
67.3

Total property revenues
 
 

 
$
876,852

 
$
684,813

 
$
192,039

 
28.0
%

(1) 
2015/2014 Same-Property excludes BRE properties acquired on April 1, 2014.

2015/2014 Same-Property Revenues increased by $36.6 million or 8.1% to $490.4 million for the nine months ended September 30, 2015 from $453.8 million for the nine months ended September 30, 2014.  The increase was primarily attributable to an increase of 8.1% in average rental rates from $1,722 per apartment home for the nine months ended September 30, 2014 to $1,862 per apartment home for the nine months ended September 30, 2015

2015/2014 Non-Same Property Revenues increased by $155.4 million or 67.3% to $386.4 million for the nine months ended September 30, 2015 from $231.0 million for the nine months ended September 30, 2014. The increase was primarily due to revenue generated from the BRE merger and twelve other communities acquired or consolidated since January 1, 2014.

Property operating expenses, excluding real estate taxes increased $27.0 million to $173.5 million for the nine months ended September 30, 2015 from $146.5 million for the nine months ended September 30, 2014, primarily due to the BRE merger and the acquisition of or consolidation of twelve communities since January 1, 2014.  2015/2014 Same-Property operating expenses, excluding real estate taxes, increased by $0.8 million or 0.8% for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, primarily due to a $0.5 million increase in administrative expenses.

Real estate taxes increased by $20.4 million for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, due primarily to the BRE merger and the acquisition or consolidation of twelve communities since January 1, 2014.  2015/2014 Same-Property real estate taxes increased by $0.8 million or 2.0% for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.

Depreciation and amortization expense increased by $83.1 million for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, due to the BRE merger and the acquisition or consolidation of twelve communities since January 1, 2014. 
 
General and administrative expense increased $2.6 million or 9.1% for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 primarily due to additional corporate employees from the BRE merger.

Merger and integration expenses include, but are not limited to, advisor fees, legal, and accounting fees related to the merger with BRE and related integration activity.  Merger and integration expenses were $3.8 million for the nine months ended September 30, 2015 and $46.4 million for the nine months ended September 30, 2014

Interest expense increased $31.4 million for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, due to an increase in average outstanding debt primarily due to assumed debt in connection with the BRE merger in addition to a $5.6 million decrease in capitalized interest for the nine months ended September 30, 2015 compared to the same period in 2014, which in turn was due to the decrease in development costs as compared to the same period in 2014.

Interest and other income increased by $6.1 million for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 primarily due to an increase in interest income attributable to an increase in the estimated

28


yield on mortgage backed securities in addition to an increase of $3.1 million in insurance proceeds and $0.6 million in income from the sale of a marketable security.

Equity income in co-investments decreased $5.1 million for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 primarily due to events in 2014 which did not recur in 2015, including the Company's share of the gain on the sale of a Fund II community for $3.2 million, a promote income allocation of $4.9 million during the nine months ended September 30, 2014, partially offset by $2.0 million in income from the early redemption of two preferred equity investments during the nine months ended September 30, 2015.

Gains on sale of real estate and land decreased by $31.7 million for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 primarily due to $7.1 million in gains on the sales of Pinnacle South Mountain and two commercial buildings during the nine months ended September 30, 2015 as compared to a $7.5 million gain on the sale of Vista Capri North, a $2.2 million gain on the sale of Coldwater Canyon and a $29.2 million gain on the sale of Mt. Sutro during the nine months ended September 30, 2014.

Gain on remeasurement of co-investment increased by $34.0 million for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 due to the remeasurement of the Company's investments, as a consequence of the Company's acquisition of a controlling interest, in The Huxley and The Dylan properties, resulting in a gain of $21.3 million, and Reveal, resulting in a gain of $12.7 million.

Liquidity and Capital Resources

As of September 30, 2015, the Company had $35.7 million of unrestricted cash and cash equivalents and $133.1 million in marketable securities, of which $56.1 million were available for sale.  We believe that cash flows generated by our operations, existing cash, cash equivalents, and marketable securities balances, availability under existing lines of credit, access to capital markets and the ability to generate cash from the disposition of real estate are sufficient to meet all of our reasonably anticipated cash needs during the next twelve months.  The timing, source and amounts of cash flows provided by financing activities and used in investing activities are sensitive to changes in interest rates and other fluctuations in the capital markets environment, which can affect our plans for acquisitions, dispositions, development and redevelopment activities.

Fitch Ratings ("Fitch"), Moody’s Investor Service, and Standard and Poor's (“S&P”) credit agencies rate Essex Property Trust, Inc. and Essex Portfolio, L.P. BBB+/Stable, Baa2/Positive, and BBB/Positive, respectively.

The Company has two lines of unsecured credit aggregating $1.03 billion.  The Company has a $1.0 billion unsecured line of credit, and as of September 30, 2015, there were no amounts outstanding on it. The underlying interest rate is based on a tiered rate structure tied to the Company's credit ratings on the credit facility and the rate was LIBOR plus 0.95% as of September 30, 2015.  This facility matures in December 2018 with one 18-month extension, exercisable at the Company’s option. The Company has a working capital unsecured line of credit agreement for $25.0 million.  This facility matures in January 2016.  As of September 30, 2015, there was $2.0 million outstanding on the $25.0 million unsecured line. The underlying interest rate on the $25.0 million line is based on a tiered rate structure tied to Fitch and S&P ratings on the credit facility of LIBOR plus 0.95%.

In March 2015, the Company issued $500 million of 3.50% senior unsecured notes that mature in April 1, 2025.  The interest is payable semi-annually in arrears on April 1 and October 1 of each year, commencing October 1, 2015 until the maturity date in April 2025.  The Company used the net proceeds of this offering to repay indebtedness under the Company’s $1.0 billion unsecured line of credit facility, its $25.0 million unsecured working capital line and for other general corporate purposes.

The Company has entered into equity distribution agreements with Cantor Fitzgerald & Co, Barclays Capital Inc., BMO Capital Markets Corp., BNB Paribas Securities Corp., Citigroup Global Capital Inc., Jefferies, LLC ("Jefferies"), J.P. Morgan Securities LLC ("JP Morgan"), Liquidnet, Inc., Mitsubishi UFJ Securities (USA), Inc., and UBS Securities LLC ("UBS"). Pursuant to its equity distribution program, during the nine months ended September 30, 2015 and through October 30, 2015, the Company has issued 1,481,737 shares of common stock at an average price of $226.46 per share, for proceeds of $332.3 million, net of fees and commissions. Under this program, the Company may from time to time sell shares of common stock into the existing trading market at current market prices, and the Company anticipates using the net proceeds, which are contributed to the Operating Partnership, to pay down debt, acquire apartment communities and fund the development pipeline. As of October 30, 2015, the Company may sell an additional 1,719,109 shares under the current equity distribution program.


29


Essex pays quarterly dividends from cash available for distribution.  Until it is distributed, cash available for distribution is invested by the Company primarily in investment grade securities held available for sale or is used by the Company to reduce balances outstanding under its line of credit. 

Development and Predevelopment Pipeline

The Company defines development activities as new properties that are being constructed, or are newly constructed and, in the case of development communities, are in a phase of lease-up and have not yet reached stabilized operations. As of September 30, 2015, the Company’s development pipeline was comprised of two consolidated projects under development and seven unconsolidated joint venture projects under development, all aggregating 2,759 apartment homes, with total incurred costs of $0.8 billion, and estimated remaining project costs of approximately $0.8 billion for total estimated project costs of $1.6 billion.

The Company expects to fund the development and predevelopment pipeline by using a combination of some or all of the following sources: its working capital, amounts available on its lines of credit, net proceeds from public and private equity and debt issuances, and proceeds from the disposition of assets, if any.

Redevelopment Pipeline

The Company defines redevelopment communities as existing properties owned or recently acquired, which have been targeted for additional investment by the Company with the expectation of increased financial returns through property improvement. During redevelopment, apartment homes may not be available for rent and, as a result, may have less than stabilized operations. As of September 30, 2015, the Company had ownership interests in five major redevelopment communities aggregating 1,313 apartment homes with estimated redevelopment costs of $159.8 million, of which approximately $100.0 million remains to be expended. The Company has the ability to cease funding of the redevelopment pipeline as needed.

Derivative Activity

The Company uses interest rate swaps, interest rate cap, and total return swap contracts to manage certain interest rate risks. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair values of interest rate swaps and total return swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.

As of September 30, 2015 and December 31, 2014 the aggregate carrying value of the interest rate swap contracts was a liability of $1.9 million and $1.8 million, respectively. The aggregate carrying value of the interest rate cap contracts was zero on the consolidated balance sheets as of September 30, 2015 and December 31, 2014. The aggregate carrying value of the total return swaps was an asset of $5 thousand on the condensed consolidated balance sheet as of September 30, 2015. The Company did not hold any total return swaps as of December 31, 2014.

Alternative Capital Sources

The Company utilizes co-investments as an alternative source of capital for acquisitions of both operating and development communities. As of September 30, 2015, the Company had an interest in 1,988 apartment homes of communities actively under development with joint ventures for total estimated costs of $1.1 billion. Total estimated remaining costs total approximately $542 million, of which the Company estimates that our remaining investment in these development joint ventures will be approximately $278 million. In addition, the Company had an interest in 10,208 apartment homes of operating communities with joint ventures for a total book value of $718.6 million as of September 30, 2015.
 
Critical Accounting Policies and Estimates
 
The preparation of condensed consolidated financial statements, in accordance with GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. The Company defines critical accounting policies as those accounting policies that require the Company’s management to exercise their most difficult, subjective and complex judgments. The Company’s critical accounting

30


policies and estimates relate principally to the following key areas: (i) accounting for business combinations (ii) consolidation under applicable accounting standards for entities that are not wholly owned; (iii) assessing the carrying values of our real estate properties and investments in and advances to joint ventures and affiliates; and (iv) internal cost capitalization. The Company bases its estimates on historical experience, current market conditions, and on various other assumptions that are believed to be reasonable under the circumstances.  Actual results may differ from those estimates made by management.

The Company’s critical accounting policies and estimates have not changed materially from information reported in Note 2, “Summary of Critical and Significant Accounting Policies,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
  
Forward Looking Statements
 
Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this quarterly report on Form 10-Q which are not historical facts may be considered forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, including statements regarding the Company's expectations, hopes, intentions, beliefs and strategies regarding the future. Forward looking statements include statements regarding the Company’s expectations as to the total projected costs of predevelopment, development and redevelopment projects, beliefs as to our ability to meet our cash needs during the next twelve months and the Company’s development and redevelopment pipeline, and statements regarding the Company's financing activities.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors including, but not limited to, that the Company will fail to achieve its business objectives, that the total projected costs of current predevelopment, development and redevelopment projects exceed expectations, that such development and redevelopment projects will not be completed, that development and redevelopment projects and acquisitions will fail to meet expectations, that estimates of future income from an acquired property may prove to be inaccurate, that future cash flows will be inadequate to meet operating requirements, that there may be a downturn in the markets in which the Company's properties are located, that the terms of any refinancing may not be as favorable as the terms of existing indebtedness, and that lawsuits will be more costly than anticipated, as well as those risks, special considerations, and other factors referred to in Item 1A, “Risk Factors,” of the Company's Annual Report on Form 10-K for the year ended December 31, 2014, and those risk factors and special considerations set forth in the Company's other filings with the Securities and Exchange Commission (the “SEC”) which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  All forward-looking statements are made as of the date hereof, and the Company assumes no obligation to update this information.

Funds from Operations Attributable to Common Stockholders and Unitholders
 
Funds from Operations Attributable to Common Stockholders and Unitholders ("FFO") is a financial measure that is commonly used in the REIT industry.  The Company presents funds from operations as a supplemental operating performance measure. FFO is not used by the Company as, nor should it be considered to be, an alternative to net earnings computed under GAAP as an indicator of the Company’s operating performance or as an alternative to cash from operating activities computed under GAAP as an indicator of the Company’s ability to fund its cash needs.
 
FFO is not meant to represent a comprehensive system of financial reporting and does not present, nor does it intend to present, a complete picture of the Company's financial condition and operating performance. The Company believes that net earnings computed under GAAP is the primary measure of performance and that FFO is only meaningful when it is used in conjunction with net earnings. The Company considers FFO and FFO excluding non-recurring items and acquisition costs (referred to as “Core FFO”) to be useful financial performance measurements of an equity REIT because, together with net income and cash flows, FFO provides investors with an additional basis to evaluate operating performance and ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures and ability to pay dividends. Further, the Company believes that its consolidated financial statements, prepared in accordance with GAAP, provide the most meaningful picture of its financial condition and its operating performance.
 
In calculating FFO, the Company follows the definition for this measure published by the National Association of REITs (“NAREIT”), which is a REIT trade association. The Company believes that, under the NAREIT FFO definition, the two most significant adjustments made to net income are (i) the exclusion of historical cost depreciation and (ii) the exclusion of gains and losses (including impairment charges on depreciable real estate) from the sale of previously depreciated properties. The Company agrees that these two NAREIT adjustments are useful to investors for the following reason:
 

31


(a)
historical cost accounting for real estate assets in accordance with GAAP assumes, through depreciation charges, that the value of real estate assets diminishes predictably over time. NAREIT stated in its White Paper on Funds from Operations “since real estate asset values have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves.” Consequently, NAREIT’s definition of FFO reflects the fact that real estate, as an asset class, generally appreciates over time and depreciation charges required by GAAP do not reflect the underlying economic realities.

(b)
REITs were created as a legal form of organization in order to encourage public ownership of real estate as an asset class through investment in firms that were in the business of long-term ownership and management of real estate.  The exclusion, in NAREIT’s definition of FFO, of gains and losses (including impairment charges on depreciable real estate) from the sales of previously depreciated operating real estate assets allows investors and analysts to readily identify the operating results of the long-term assets that form the core of a REIT’s activity and assists in comparing those operating results between periods.

Management believes that it has consistently applied the NAREIT definition of FFO to all periods presented.  However, there is judgment involved and other REITs’ calculation of FFO may vary from the NAREIT definition for this measure, and thus their disclosure of FFO may not be comparable to the Company’s calculation.

The following table sets forth the Company’s calculation of FFO and Core FFO for the three and nine months ended September 30, 2015 and 2014 (in thousands except for share and per share data):


32


Essex Property Trust, Inc.
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Net income available to common stockholders
$
42,323

 
$
53,566

 
$
147,241

 
$
76,685

Adjustments:
 

 
 

 
 

 
 

Depreciation and amortization
116,308

 
102,286

 
336,946

 
253,890

Gains not included in Funds from Operations attributable to common stockholders and unitholders

 
(31,372
)
 
(41,126
)
 
(41,664
)
Depreciation add back from unconsolidated co-investments
12,800

 
9,986

 
36,822

 
23,060

Noncontrolling interest related to Operating Partnership units
1,471

 
1,816

 
5,115

 
3,442

Insurance reimbursements
(1,751
)
 

 
(1,751
)
 

Depreciation attributable to third party ownership and other
(253
)
 
(335
)
 
(753
)
 
(996
)
Funds from Operations attributable to common stockholders and unitholders
$
170,898

 
$
135,947

 
$
482,494

 
$
314,417

Funds from Operations attributable to common stockholders and unitholders per share - diluted
$
2.53

 
$
2.08

 
$
7.19

 
$
5.55

Non-core items:
 

 
 

 
 

 
 

Merger and integration expenses

 
3,857

 
3,798

 
46,413

Acquisition and investment related costs
381

 
51

 
1,357

 
768

Gain on sales of marketable securities, note prepayment and other investments
(598
)
 

 
(598
)
 
(886
)
Gain on sale of land

 

 

 
(400
)
Co-investment promote income
(192
)
 

 
(192
)
 
(4,904
)
Income from early redemption of preferred equity investments
(1,485
)
 

 
(1,954
)
 

Insurance reimbursements
(569
)
 

 
(2,319
)
 

Other non-core adjustments

 
1,249

 
(207
)
 
710

Core Funds from Operations attributable to common stockholders and unitholders
$
168,435

 
$
141,104


$
482,379


$
356,118

Core Funds from Operations attributable to common stockholders and unitholders per share-diluted
$
2.49

 
$
2.16

 
$
7.19

 
$
6.28

Weighted average number
 

 
 

 
 

 
 

shares outstanding diluted (1)
67,535,685

 
65,234,328

 
67,135,143

 
56,677,712


(1)
Assumes conversion of all outstanding operating partnership interests in the Operating Partnership and excludes 902,668 DownREIT units for which the Operating Partnership has the ability and intention to redeem the DownREIT limited partnership units for cash and does not consider them to be common stock equivalents.

Net Operating Income (“NOI”)

Same-property net operating income (“NOI”) is considered by management to be an important supplemental performance measure to earnings from operations included in the Company’s consolidated statements of income. The presentation of same-property NOI assists with the presentation of the Company’s operations prior to the allocation of depreciation and any corporate-level or financing-related costs. NOI reflects the operating performance of a community and allows for an easy comparison of the operating performance of individual communities or groups of communities.  In addition, because prospective buyers of real estate have different financing and overhead structures, with varying marginal impacts to overhead by acquiring real estate, NOI is considered by many in the real estate industry to be a useful measure for determining the value of a real estate asset or group of assets.  The Company defines same-property NOI as same-property revenue less same-property operating expenses, including property taxes.  Please see the reconciliation of earnings from operations to same-property NOI, which in the table below is the NOI for stabilized properties consolidated by the Company for the periods presented (in thousands):


33


 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Earnings from operations
$
82,689

 
$
65,138

 
$
238,970

 
$
138,051

Adjustments:
 

 
 

 
 

 
 

Depreciation and amortization
116,308

 
102,286

 
336,946

 
253,890

Management and other fees from affiliates
(2,104
)
 
(2,361
)
 
(6,809
)
 
(6,856
)
General and administrative
11,129

 
11,479

 
31,223

 
28,621

Merger and integration expenses

 
3,857

 
3,798

 
46,413

Acquisition and investment related costs
381

 
51

 
1,357

 
768

NOI
208,403

 
180,450

 
605,485

 
460,887

Less: Non same-property NOI
(30,032
)
 
(18,478
)
 
(258,856
)
 
(149,241
)
Same-property NOI (1)
$
178,371

 
$
161,972

 
$
346,629

 
$
311,646


(1) 
Same-Property NOI for the three months ended September 30, 2015 and 2014 includes BRE properties acquired on April 1, 2014, while the BRE properties are excluded from Same-Property NOI for the nine months ended September 30, 2015 and 2014.

Item 3: Quantitative and Qualitative Disclosures About Market Risks

Interest Rate Hedging Activities

The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, the Company uses interest rate swaps as part of its cash flow hedging strategy. As of September 30, 2015, the Company has entered into seven interest rate swap contracts to mitigate the risk of changes in the interest-related cash outflows on its $225.0 million variable rate five-year unsecured term debt.  As of September 30, 2015, the Company also had $292.1 million of variable rate indebtedness, of which $148.1 million is subject to interest rate cap protection.  The Company holds derivative instruments designated as cash flow hedges as of September 30, 2015.  The following table summarizes the notional amount, carrying value, and estimated fair value of the Company’s cash flow hedge derivative instruments used to hedge interest rates as of September 30, 2015.  The notional amount represents the aggregate amount of a particular security that is currently hedged at one time, but does not represent exposure to credit, interest rates or market risks.  The table also includes a sensitivity analysis to demonstrate the impact on the Company’s derivative instruments from an increase or decrease in 10-year Treasury bill interest rates by 50 basis points, as of September 30, 2015.

 
 
 
 
 
Carrying and
 
Estimated Carrying Value
 
Notional
 
Maturity
 
Estimated
 
50
 
-50
(in thousands)
Amount
 
Date Range
 
Fair Value
 
Basis Points
 
Basis Points
Cash flow hedges:
 
 
 
 
 
 
 

 
 

Interest rate swaps
$
225,000

 
2016-2017
 
$
(1,942
)
 
$
(685
)
 
$
(2,989
)
Interest rate caps
148,125

 
2016-2020
 

 
45

 

Total cash flow hedges
$
373,125

 
2016-2020
 
$
(1,942
)
 
$
(640
)
 
$
(2,989
)

Additionally, the Company has a total return swap, which does not qualify for hedge accounting, with a notional amount of $114.4 million and a carrying value and fair value of $5 thousand at September 30, 2015.

Interest Rate Sensitive Liabilities

The Company is exposed to interest rate changes primarily as a result of its lines of credit and long-term tax exempt variable rate debt and unsecured term debt.  The Company’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives the Company borrows primarily at fixed rates and may enter into derivative financial instruments such as interest rate swaps, caps and treasury locks

34


in order to mitigate its interest rate risk on a related financial instrument. The Company does not enter into derivative or interest rate transactions for speculative purposes.

The Company’s interest rate risk is monitored using a variety of techniques. The table below presents the principal amounts and weighted average interest rates by year of expected maturity to evaluate the expected cash flows (excludes lines of credit).
 
For the Years Ended
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
Total
 
Fair value
(in thousands, except for interest rates)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate debt
$
7,296

 
179,669

 
538,683

 
320,080

 
630,801

 
3,062,325

 
$
4,738,854

 
$
4,908,133

Average interest rate
4.6
%
 
4.5
%
 
3.3
%
 
5.5
%
 
4.3
%
 
4.1
%
 
4.1
%
 
 

Variable rate debt
$

 
200,038

(1) 
25,495

(1) 
541

 
10,592

 
280,417

(2) (3) 
$
517,083

 
$
513,037

Average interest rate

 
2.1
%
 
2.0
%
 
2.0
%
 
1.8
%
 
1.5
%
 
1.8
%
 
 

 
(1)
$225.0 million subject to interest rate swap agreements.
(2)
$148.1 million subject to interest rate caps.
(3)
$114.4 million subject to total return swaps.

The table incorporates only those exposures that exist as of September 30, 2015; it does not consider those exposures or positions that could arise after that date. As a result, our ultimate realized gain or loss, with respect to interest rate fluctuations and hedging strategies would depend on the exposures that arise prior to settlement.

Item 4: Controls and Procedures

Essex Property Trust, Inc.

As of September 30, 2015, Essex carried out an evaluation, under the supervision and with the participation of management, including Essex’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)).  Based upon that evaluation, Essex’s Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2015, our disclosure controls and procedures were effective to ensure that the information required to be disclosed by Essex in the reports that Essex files or submit under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such disclosure controls and procedures were also effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to Essex’s management, including Essex’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

There were no changes in Essex’s internal control over financial reporting, that occurred during the quarter ended September 30, 2015, that have materially affected, or are reasonably likely to materially affect, the Essex’s internal control over financial reporting.

Essex Portfolio, L.P.

As of September 30, 2015, the Operating Partnership carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)).  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2015, our disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Operating Partnership in the reports that the Operating Partnership files or submit under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such disclosure controls and procedures were also effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to the Operating Partnership’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.


35


There were no changes in the Operating Partnership’s internal control over financial reporting, that occurred during the quarter ended September 30, 2015, that have materially affected, or are reasonably likely to materially affect, the Operating Partnership’s internal control over financial reporting.
 
Part II -- Other Information

Item 1: Legal Proceedings

The Company is subject to various lawsuits in the normal course of its business operations.  Such lawsuits could, but are not expected to, have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

The Company purchases general liability and all risk property, including loss of rent, insurance coverage for each of its communities. The Company also purchases limited earthquake, terrorism, environmental and flood insurance. There are certain types of losses which may not be covered or could exceed coverage limits. The insurance are subject to deductibles and self-insured retentions in varying amounts. The Company utilizes a wholly owned insurance subsidiary, Pacific Western Insurance LLC (“PWI”) to self-insure certain earthquake and all risk losses. As of September 30, 2015, PWI has cash and marketable securities of approximately $57.4 million, and is consolidated in the Company's financial statements.

Item 1A: Risk Factors

There were no material changes to the Risk Factors disclosed in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC and available at www.sec.gov.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities; Essex Portfolio, L.P.

During the three months ended September 30, 2015, the Operating Partnership issued partnership units in private placements in reliance on the exemption from registration provided by Section 4(2) of the Securities Act, in the amounts and for the consideration set forth below:

During the three months ended September 30, 2015, Essex Property Trust, Inc. issued an aggregate of 191,916 of its common stock upon the exercise of stock options, the vesting of restricted stock awards and the issuances of common stock into the public market pursuant to its equity distribution program.  Essex Property Trust, Inc. contributed the proceeds from the option exercises and issuances of common stock pursuant to its equity distribution program of $39.0 million for the three months ended September 30, 2015 to our Operating Partnership in exchange for an aggregate of 191,916 common operating partnership units ("common units"), as required by the Operating Partnership’s partnership agreement.

Item 5: Other Information

None.


36


Item 6: Exhibits
 
A. Exhibits
 
12.1
Ratio of Earnings to Fixed Charges.
 
 
31.1
Certification of Michael J. Schall, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
Certification of Angela L. Kleiman, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.3
Certification of Michael J. Schall,  Principal Executive Officer of General Partner, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.4
Certification of Angela L. Kleiman, Principal Financial Officer of General Partner, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1
Certification of Michael J. Schall, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32.2
Certification of Angela L. Kleiman, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32.3
Certification of Michael J. Schall, Principal Executive Officer of General Partner, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32.4
Certification of Angela L. Kleiman, Principal Financial Officer of General Partner, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

37


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
                    
 
ESSEX PROPERTY TRUST, INC.
 
(Registrant)
 
 
 
Date: November 4, 2015
 
 
 
By:  /S/ ANGELA L. KLEIMAN
 
 
 
Angela L. Kleiman
 
Executive Vice President and Chief Financial Officer
(Authorized Officer, Principal Financial Officer)

 
Date: November 4, 2015
 
 
 
By:  /S/ JOHN FARIAS
 
 
 
John Farias
 
Group Vice President and Chief Accounting Officer

 
ESSEX PORTFOLIO, L.P.
By Essex Property Trust, Inc., its general partner
 
(Registrant)
 
 
 
Date: November 4, 2015
 
 
 
By:  /S/ ANGELA L. KLEIMAN
 
 
 
Angela L. Kleiman
 
Executive Vice President and Chief Financial Officer
(Authorized Officer, Principal Financial Officer)

 
ESSEX PORTFOLIO, L.P.
By Essex Property Trust, Inc., its general partner
 
(Registrant)
 
 
 
Date: November 4, 2015
 
 
 
By:  /S/ JOHN FARIAS
 
 
 
John Farias
 
Group Vice President and Chief Accounting Officer


38