Edgar Filing: ESSEX PROPERTY TRUST INC

10-Q

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

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):

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.

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.

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 Balance Sheets as of September 30, 2015 and December 31, 2014	2

	Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2015 and 2014	3

	Condensed Consolidated Statement of Equity for the nine months ended September 30, 2015	4

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014	5

	Condensed Consolidated Financial Statements of Essex Portfolio L.P. (Unaudited)

	Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014	7

	Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2015 and 2014	8

	Condensed Consolidated Statement of Capital for the nine months ended September 30, 2015	9

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014	10

	Notes to Condensed Consolidated Financial Statements	12

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures About Market Risks	34

Item 4.	Controls and Procedures	35

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	36

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 5.	Other Information	36

Item 6.	Exhibits	37

Signatures		38

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.

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.

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.

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



	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.

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.

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.

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.

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



	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.

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

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

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

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.

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.

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

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

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.

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):

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	$