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 March 31, 2016

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)

1100 Park Place, Suite 200

San Mateo, California 94403

(Address of Principal Executive Offices including Zip Code)

(650) 655-7800

(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: 65,430,092 shares of Common Stock ($0.0001 par value) of Essex Property Trust, Inc. were outstanding as of April 28, 2016.

EXPLANATORY NOTE

This report combines the reports on Form 10-Q for the three month period ended March 31, 2016 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, 2015.

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 March 31, 2016 and December 31, 2015	2

	Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2016 and 2015	3

	Condensed Consolidated Statement of Equity for the three months ended March 31, 2016	4

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015	5

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

	Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015	7

	Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2016 and 2015	8

	Condensed Consolidated Statement of Capital for the three months ended March 31, 2016	9

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015	10

	Notes to Condensed Consolidated Financial Statements	12

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risks	32

Item 4.	Controls and Procedures	33

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 5.	Other Information	34

Item 6.	Exhibits	35

Signatures		36

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	March 31, 2016			December 31, 2015
Real estate:
Rental properties:
Land and land improvements	$	2,573,923		$	2,522,842
Buildings and improvements	10,052,754			9,808,627
	12,626,677			12,331,469
Less accumulated depreciation	(2,051,802		)	(1,949,892		)
	10,574,875			10,381,577
Real estate under development	145,711			242,326
Co-investments	1,069,684			1,036,047
Real estate held for sale, net	—			26,879
	11,790,270			11,686,829
Cash and cash equivalents-unrestricted	48,164			29,683
Cash and cash equivalents-restricted	32,319			93,372
Marketable securities	138,597			137,485
Notes and other receivables	18,198			19,285
Prepaid expenses and other assets	39,936			38,437
Total assets	$	12,067,484		$	12,005,091

LIABILITIES AND EQUITY
Unsecured debt, net	$	2,936,463		$	3,088,680
Mortgage notes payable, net	2,252,057			2,215,077
Lines of credit, net	164,282			11,707
Accounts payable and accrued liabilities	170,444			131,415
Construction payable	36,822			40,953
Dividends payable	111,409			100,266
Other liabilities	34,814			34,518
Cumulative redeemable 7.125% Series H preferred stock at liquidation value	73,750			—
Total liabilities	5,780,041			5,622,616
Commitments and contingencies
Redeemable noncontrolling interest	46,203			45,452
Equity:
Common stock; $0.0001 par value, 656,020,000 shares authorized; 65,426,726 and 65,379,359 shares issued and outstanding, respectively	6			6
Cumulative redeemable 7.125% Series H preferred stock at liquidation value	—			73,750
Additional paid-in capital	7,010,181			7,003,317
Distributions in excess of accumulated earnings	(824,046		)	(797,329		)
Accumulated other comprehensive loss, net	(44,149		)	(42,011		)
Total stockholders' equity	6,141,992			6,237,733
Noncontrolling interest	99,248			99,290
Total equity	6,241,240			6,337,023
Total liabilities and equity	$	12,067,484		$	12,005,091

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 March 31,
	2016			2015
Revenues:
Rental and other property	$	312,178		$	280,229
Management and other fees from affiliates	2,024			2,644
	314,202			282,873
Expenses:
Property operating, excluding real estate taxes	60,071			55,618
Real estate taxes	34,419			31,553
Depreciation and amortization	109,707			106,907
General and administrative	9,182			10,545
Merger and integration expenses	—			2,388
Acquisition and investment related costs	828			547
	214,207			207,558
Earnings from operations	99,995			75,315
Interest expense	(52,466		)	(47,546		)
Total return swap income	3,123			—
Interest and other income	5,208			4,199
Equity income in co-investments	15,068			4,311
Gain on sale of real estate and land	20,258			7,112
Deferred tax expense on gain on sale of real estate and land	(4,279		)	—
Gain on remeasurement of co-investment	—			21,362
Net income	86,907			64,753
Net income attributable to noncontrolling interest	(5,071		)	(4,076		)
Net income attributable to controlling interest	81,836			60,677
Dividends to preferred stockholders	(1,314		)	(1,314		)
Excess of redemption value of preferred stock over the carrying value	(2,541		)	—
Net income available to common stockholders	$	77,981		$	59,363
Comprehensive income	$	84,696		$	65,352
Comprehensive income attributable to noncontrolling interest	(4,998		)	(4,091		)
Comprehensive income attributable to controlling interest	$	79,698		$	61,261
Per share data:
Basic:
Net income available to common stockholders	$	1.19		$	0.92
Weighted average number of shares outstanding during the period	65,405,654			64,185,455
Diluted:
Net income available to common stockholders	$	1.19		$	0.92
Weighted average number of shares outstanding during the period	65,557,639			64,394,680
Dividend per common share	$	1.60		$	1.44

See accompanying notes to the unaudited condensed consolidated financial statements.

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Equity for the three months ended March 31, 2016

(Unaudited)

(Dollars and shares in thousands)



	Series H Preferred stock					Common stock			Additional paid-in capital			Distributions in excess of accumulated earnings			Accumulated other comprehensive loss, net			Noncontrolling Interest
	Shares		Amount			Shares	Amount		Additional paid-in capital			Distributions in excess of accumulated earnings			Accumulated other comprehensive loss, net			Noncontrolling Interest			Total
Balances at December 31, 2015	2,950		$	73,750		65,379	$	6	$	7,003,317		$	(797,329	)	$	(42,011	)	$	99,290		$	6,337,023
Net income	—		—			—	—		—			81,836			—			5,071			86,907
Change in fair value of derivatives and amortization of swap settlements	—		—			—	—		—			—			(2,445		)	(83		)	(2,528		)
Change in fair value of marketable securities	—		—			—	—		—			—			307			10			317
Issuance of common stock under:
Stock option and restricted stock plans, net	—		—			41	—		5,232			—			—			—			5,232
Sale of common stock, net	—		—			—	—		(134		)	—			—			—			(134		)
Equity based compensation costs	—		—			—	—		895			—			—			595			1,490
Reclassification of Series H preferred stock	(2,950	)	(73,750		)	—	—		2,541			(2,541		)	—			—			(73,750		)
Changes in the redemption value of redeemable noncontrolling interest	—		—			—	—		(841		)	—			—			90			(751		)
Distributions to noncontrolling interest	—		—			—	—		—			—			—			(5,465		)	(5,465		)
Redemptions of noncontrolling interest	—		—			7	—		(829		)	—			—			(260		)	(1,089		)
Common and preferred stock dividends	—		—			—	—		—			(106,012		)	—			—			(106,012		)
Balances at March 31, 2016	—		$	—		65,427	$	6	$	7,010,181		$	(824,046	)	$	(44,149	)	$	99,248		$	6,241,240

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)



	Three Months Ended March 31,
	2016			2015
Cash flows from operating activities:
Net income	$	86,907		$	64,753
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	109,707			106,907
Amortization of discount on marketable securities and other investments	(3,756		)	(2,856		)
Amortization of (premium) discount and debt financing costs, net	(3,795		)	(6,530		)
Gain on sale of marketable securities	(740		)	—
Company's share of gain on the sales of co-investments	(7,435		)	—
Income from early redemption of preferred equity investments	—			(469		)
Earnings from co-investments	(7,633		)	(3,842		)
Operating distributions from co-investments	9,753			6,055
Gain on the sale of real estate and land	(20,258		)	(7,112		)
Equity-based compensation	1,490			1,370
Gain on remeasurement of co-investments	—			(21,362		)
Changes in operating assets and liabilities:
Prepaid expenses, receivables and other assets	846			3,548
Accounts payable and accrued liabilities	35,200			21,741
Other liabilities	324			346
Net cash provided by operating activities	200,610			162,549
Cash flows from investing activities:
Additions to real estate:
Acquisitions of real estate and acquisition related capital expenditures	(110,309		)	(199,190		)
Redevelopment	(24,151		)	(19,140		)
Development acquisitions of and additions to real estate under development	(22,656		)	(90,925		)
Capital expenditures on rental properties	(5,688		)	(16,196		)
Acquisition of membership interest in co-investments	—			(41,513		)
Proceeds from insurance for property losses	435			4,589
Proceeds from dispositions of real estate	48,008			74,485
Contributions to co-investments	(50,591		)	(48,650		)
Changes in restricted cash and refundable deposits	59,346			45,145
Purchases of marketable securities	(1,344		)	(7,250		)
Sales and maturities of marketable securities	5,045			717
Non-operating distributions from co-investments	21,146			11,072
Net cash used in investing activities	(80,759		)	(286,856		)
Cash flows from financing activities:
Borrowings under debt agreements	305,895			756,562
Repayment of debt	(309,903		)	(536,830		)
Additions to deferred charges	(1,037		)	(4,456		)
Net proceeds from issuance of common stock	(134		)	174,592
Net proceeds from stock options exercised	5,232			15,613
Distributions to noncontrolling interest	(4,858		)	(3,574		)
Redemption of noncontrolling interest	(1,089		)	(2,154		)
Common and preferred stock dividends paid	(95,476		)	(83,663		)
Net cash (used in) provided by financing activities	(101,370		)	316,090
Cash acquired in consolidation of co-investment	—			1,807
Net increase in cash and cash equivalents	18,481			193,590
Cash and cash equivalents at beginning of period	29,683			25,610



	Three Months Ended March 31,
	2016		2015
Cash and cash equivalents at end of period	$	48,164	$	219,200

Supplemental disclosure of cash flow information:
Cash paid for interest, net of $3.1 million and $4.3 million capitalized in 2016 and 2015, respectively	$	48,109	$	50,343
Supplemental disclosure of noncash investing and financing activities:
Transfers between real estate under development to rental properties, net	$	107,643	$	162,345
Transfer from real estate under development to co-investments	$	2,338	$	1,562
Reclassifications to redeemable noncontrolling interest from additional paid in capital and noncontrolling interest	$	751	$	1,660
Debt assumed in connection with acquisition	$	48,832	$	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)



	March 31, 2016			December 31, 2015
ASSETS
Real estate:
Rental properties:
Land and land improvements	$	2,573,923		$	2,522,842
Buildings and improvements	10,052,754			9,808,627
	12,626,677			12,331,469
Less accumulated depreciation	(2,051,802		)	(1,949,892		)
	10,574,875			10,381,577
Real estate under development	145,711			242,326
Co-investments	1,069,684			1,036,047
Real estate held for sale, net	—			26,879
	11,790,270			11,686,829
Cash and cash equivalents-unrestricted	48,164			29,683
Cash and cash equivalents-restricted	32,319			93,372
Marketable securities	138,597			137,485
Notes and other receivables	18,198			19,285
Prepaid expenses and other assets	39,936			38,437
Total assets	$	12,067,484		$	12,005,091

LIABILITIES AND CAPITAL
Unsecured debt, net	$	2,936,463		$	3,088,680
Mortgage notes payable, net	2,252,057			2,215,077
Lines of credit, net	164,282			11,707
Accounts payable and accrued liabilities	170,444			131,415
Construction payable	36,822			40,953
Distributions payable	111,409			100,266
Other liabilities	34,814			34,518
Cumulative redeemable 7.125% Series H preferred units at liquidation value	73,750			—
Total liabilities	5,780,041			5,622,616
Commitments and contingencies
Redeemable noncontrolling interest	46,203			45,452
Capital:
General Partner:
Common equity (65,426,726 and 65,379,359 units issued and outstanding, respectively)	6,186,141			6,208,535
Cumulative redeemable 7.125% Series H preferred stock (liquidation value of 73,750)	—			71,209
	6,186,141			6,279,744
Limited Partners:
Common equity (2,224,968 and 2,214,545 units issued and outstanding, respectively)	46,889			47,235
Accumulated other comprehensive loss	(41,809		)	(39,598		)
Total partners' capital	6,191,221			6,287,381
Noncontrolling interest	50,019			49,642
Total capital	6,241,240			6,337,023
Total liabilities and capital	$	12,067,484		$	12,005,091

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 March 31,
	2016			2015
Revenues:
Rental and other property	$	312,178		$	280,229
Management and other fees from affiliates	2,024			2,644
	314,202			282,873
Expenses:
Property operating, excluding real estate taxes	60,071			55,618
Real estate taxes	34,419			31,553
Depreciation and amortization	109,707			106,907
General and administrative	9,182			10,545
Merger and integration expenses	—			2,388
Acquisition and investment related costs	828			547
	214,207			207,558
Earnings from operations	99,995			75,315
Interest expense	(52,466		)	(47,546		)
Total return swap income	3,123			—
Interest and other income	5,208			4,199
Equity income in co-investments	15,068			4,311
Gain on sale of real estate and land	20,258			7,112
Deferred tax expense on gain on sale of real estate and land	(4,279		)	—
Gain on remeasurement of co-investment	—			21,362
Net income	86,907			64,753
Net income attributable to noncontrolling interest	(2,287		)	(2,013		)
Net income attributable to controlling interest	84,620			62,740
Preferred interest distributions	(1,314		)	(1,314		)
Excess of redemption value of preferred units over the carrying value	(2,541		)	—
Net income available to common unitholders	$	80,765		$	61,426
Comprehensive income	$	84,696		$	65,352
Comprehensive income attributable to noncontrolling interest	(2,287		)	(2,013		)
Comprehensive income attributable to controlling interest	$	82,409		$	63,339
Per unit data:
Basic:
Net income available to common unitholders	$	1.19		$	0.93
Weighted average number of common units outstanding during the period	67,633,519			66,369,769
Diluted:
Net income available to common unitholders	$	1.19		$	0.92
Weighted average number of common units outstanding during the period	67,785,504			66,578,994
Distribution per common unit	$	1.60		$	1.44

See accompanying notes to the unaudited condensed consolidated financial statements.

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES

Condensed Consolidated Statement of Capital for the three months ended March 31, 2016

(Dollars and units in thousands)

(Unaudited)



	General Partner							Limited Partners					Accumulated other comprehensive loss
	Common Equity							Common Equity								Noncontrolling Interest
	Units	Amount						Units		Amount						Noncontrolling Interest			Total
Balances at December 31, 2015	65,379	$	6,208,535		$	71,209		2,215		$	47,235		$	(39,598	)	$	49,642		$	6,337,023
Net income	—	77,981			3,855			—		2,784			—			2,287			86,907
Change in fair value of derivatives and amortization of swap settlements	—	—			—			—		—			(2,528		)	—			(2,528		)
Change in fair value of marketable securities	—	—			—			—		—			317			—			317
Issuance of common units under:
General partner's stock based compensation, net	41	5,232			—			—		—			—			—			5,232
Sale of common stock by general partner, net	—	(134		)	—			—		—			—			—			(134		)
Equity based compensation costs	—	895			—			18		595			—			—			1,490
Reclassification of Series H preferred units	—	—			(73,750		)	—		—			—			—			(73,750		)
Changes in redemption value of redeemable noncontrolling interest	—	(841		)	—			—		—			—			90			(751		)
Distributions to noncontrolling interest	—	—			—			—		—			—			(1,818		)	(1,818		)
Redemptions	7	(829		)	—			(8	)	(78		)	—			(182		)	(1,089		)
Distributions declared	—	(104,698		)	(1,314		)	—		(3,647		)	—			—			(109,659		)
Balances at March 31, 2016	65,427	$	6,186,141		$	—		2,225		$	46,889		$	(41,809	)	$	50,019		$	6,241,240

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)



	Three Months Ended March 31,
	2016			2015
Cash flows from operating activities:
Net income	$	86,907		$	64,753
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	109,707			106,907
Amortization of discount on marketable securities and other investments	(3,756		)	(2,856		)
Amortization of (premium) discount and debt financing costs, net	(3,795		)	(6,530		)
Gain on sale of marketable securities	(740		)	—
Company's share of gain on the sales of co-investments	(7,435		)	—
Income from early redemption of preferred equity investments	—			(469		)
Earnings from co-investments	(7,633		)	(3,842		)
Operating distributions from co-investments	9,753			6,055
Gain on the sales of real estate and land	(20,258		)	(7,112		)
Equity-based compensation	1,490			1,370
Gain on remeasurement of co-investments	—			(21,362		)
Changes in operating assets and liabilities:
Prepaid expense, receivables and other assets	846			3,548
Accounts payable and accrued liabilities	35,200			21,741
Other liabilities	324			346
Net cash provided by operating activities	200,610			162,549
Cash flows from investing activities:
Additions to real estate:
Acquisitions of real estate and acquisition related capital expenditures	(110,309		)	(199,190		)
Redevelopment	(24,151		)	(19,140		)
Development acquisitions of and additions to real estate under development	(22,656		)	(90,925		)
Capital expenditures on rental properties	(5,688		)	(16,196		)
Acquisition of membership interest in co-investments	—			(41,513		)
Proceeds from insurance for property losses	435			4,589
Proceeds from dispositions of real estate	48,008			74,485
Contributions to co-investments	(50,591		)	(48,650		)
Changes in restricted cash and refundable deposits	59,346			45,145
Purchases of marketable securities	(1,344		)	(7,250		)
Sales and maturities of marketable securities	5,045			717
Non-operating distributions from co-investments	21,146			11,072
Net cash used in investing activities	(80,759		)	(286,856		)
Cash flows from financing activities:
Borrowings under debt agreements	305,895			756,562
Repayment of debt	(309,903		)	(536,830		)
Additions to deferred charges	(1,037		)	(4,456		)
Net proceeds from issuance of common units	(134		)	174,592
Net proceeds from stock options exercised	5,232			15,613
Distributions to noncontrolling interest	(1,528		)	(221		)
Redemption of noncontrolling interest	(1,089		)	(2,154		)
Common and preferred units and preferred interest distributions paid	(98,806		)	(87,016		)
Net cash (used in) provided by financing activities	(101,370		)	316,090
Cash acquired in consolidation of co-investment	—			1,807
Net increase in cash and cash equivalents	18,481			193,590
Cash and cash equivalents at beginning of period	29,683			25,610



	Three Months Ended March 31,
	2016		2015
Cash and cash equivalents at end of period	$	48,164	$	219,200

Supplemental disclosure of cash flow information:
Cash paid for interest, net of $3.1 million and $4.3 million capitalized in 2016 and 2015, respectively	$	48,109	$	50,343
Supplemental disclosure of noncash investing and financing activities:
Transfers between real estate under development to rental properties, net	$	107,643	$	162,345
Transfer from real estate under development to co-investments	$	2,338	$	1,562
Reclassifications to redeemable noncontrolling interest from general partner capital and noncontrolling interest	$	751	$	1,660
Debt assumed in connection with acquisition	$	48,832	$	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

March 31, 2016 and 2015

(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, 2015.

All significant intercompany accounts and transactions have been eliminated in the unaudited 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 months ended March 31, 2016 and 2015 include the accounts of the Company and the Operating Partnership. Essex is the sole general partner in the Operating Partnership, with a 96.7% general partnership interest as of March 31, 2016. Total Operating Partnership limited partnership units outstanding were 2,224,968 and 2,214,545 as of March 31, 2016 and December 31, 2015, respectively, and the redemption value of the units, based on the closing price of the Company’s common stock totaled $520.3 million and $530.2 million, as of March 31, 2016 and December 31, 2015, respectively.

As of March 31, 2016, the Company owned or had ownership interests in 244 stabilized apartment communities, aggregating 59,441 apartment homes, excluding the Company’s ownership in preferred interest co-investments, (collectively, the “Communities”, and individually, a “Community”), two commercial buildings and seven 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 January 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities", which requires changes to the classification and measurement of investments in certain equity securities and to the presentation of certain fair value changes for financial liabilities measured at fair value. The new standard will be effective for the Company beginning on January 1, 2018 and early adoption is permitted. The Company is currently evaluating the impact of this amendment on its consolidated results of operations and financial position.

In February 2016, the FASB issued ASU No. 2016-02 "Leases", which requires an entity that is a lessee to recognize the assets and liabilities arising from leases on the balance sheet. The guidance also requires disclosure regarding the amount, timing, and uncertainty of cash flows arising from leases. The new standard will be effective for the Company beginning on January 1, 2019 and early adoption is permitted, including adoption in an interim period. The new standard must be applied using a modified retrospective approach. The Company is currently evaluating the impact of this amendment on its consolidated results of operations and financial position.

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2016 and 2015

(Unaudited)

Marketable Securities

The Company reports its available for sale securities at fair value, based on quoted market prices (Level 1 for the common stock and investment funds and Level 2 for the unsecured bonds, as defined by the FASB standard for fair value measurements), and any unrealized gain or loss is recorded as other comprehensive income (loss). Realized gains and losses, interest 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 March 31, 2016 and December 31, 2015, marketable securities consisted primarily of investment-grade unsecured bonds, common stock, investments in mortgage backed securities, investment funds that invest in U.S. treasury or agency securities. As of March 31, 2016 and December 31, 2015, 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 March 31, 2016 and December 31, 2015, marketable securities consist of the following ($ in thousands):



	March 31, 2016
	Amortized Cost		Gross Unrealized Gain			Carrying Value
Available for sale:
Investment-grade unsecured bonds	$	9,603	$	154		$	9,757
Investment funds - U.S. treasuries	5,019		2			5,021
Common stock and stock funds	32,576		7,311			39,887
Held to maturity:
Mortgage backed securities	83,932		—			83,932
Total - Marketable securities	$	131,130	$	7,467		$	138,597

	December 31, 2015
	Amortized Cost		Gross Unrealized Gain (Loss)			Carrying Value
Available for sale:
Investment-grade unsecured bonds	$	11,618	$	68		$	11,686
Investment funds - U.S. treasuries	3,675		(9		)	3,666
Common stock and stock funds	34,655		7,091			41,746
Held to maturity:
Mortgage backed securities	80,387		—			80,387
Total - Marketable securities	$	130,335	$	7,150		$	137,485

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 three months ended March 31, 2016 and 2015, the proceeds from sales of available for sale securities totaled $5.0 million and $0.7 million, respectively, which resulted in $0.7 million realized gains and no realized gains or losses, respectively.

Variable Interest Entities

In February 2015, the FASB issued ASU No. 2015-02 "Consolidation: 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. The Company adopted ASU No. 2015-02 on

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2016 and 2015

(Unaudited)

January 1, 2016. Based on the Company’s evaluation of the new standard, it determined that no change was required to its accounting for variable interest entities (“VIEs”). However, under the guidance of ASU No. 2015-02, 9 previously consolidated co-investments now meet the definition of a VIE and requires additional disclosure about these VIEs which the Company continues to consolidate as they were determined to be the primary beneficiary.

The Company continues to be the primary beneficiary and consolidates the Operating Partnership and 19 DownREIT limited partnerships (comprising eleven communities). Commencing on January 1, 2016, 9 other consolidated co-investments were determined to be VIEs and the Company continued to consolidate as they were determined to be the primary beneficiary. The consolidated total assets and liabilities related to the 9 consolidated co-investments and 19 DownREIT limited partnerships, net of intercompany eliminations, were approximately $904.4 million and $231.4 million, respectively, as of March 31, 2016 and $893.1 million and $231.8 million, respectively, as of December 31, 2015. Noncontrolling interests in these entities was $55.0 million and $54.6 million as of March 31, 2016 and December 31, 2015, respectively. The Company's financial risk in each VIE is limited to its equity investment in the VIE. As of March 31, 2016 and December 31, 2015, the Company did not have any other VIEs of which it was deemed to be the primary beneficiary and did not have any VIEs of which it was not deemed to be the primary beneficiary.

Equity-based Compensation

The cost of share and unit based compensation awards is measured at the grant date based on the estimated fair value of the awards. The estimated fair value of stock options and restricted stock granted by the Company are being amortized over the vesting period. 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, 2015) are being amortized over the expected service periods.

Fair Value of Financial Instruments

Management believes that the carrying amounts of the outstanding balances under its lines of credit, and notes and other receivables approximate fair value as of March 31, 2016 and December 31, 2015, 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 $4.6 billion of fixed rate debt, including unsecured debt, at March 31, 2016 is approximately $4.8 billion and the Company’s variable rate debt at March 31, 2016 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 March 31, 2016 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 March 31, 2016.

At March 31, 2016, the Company’s investments in mortgage backed securities had a carrying value of $83.9 million and the Company estimated the fair value to be approximately $113.3 million. At December 31, 2015, the Company’s investments in mortgage backed securities had a carrying value of $80.4 million and the Company estimated the fair value to be approximately $110.2 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 $3.2 million and $2.0 million during the three months ended March 31, 2016 and 2015, respectively. The Company capitalizes leasing commissions associated with the lease-up of development communities and amortizes the costs over the life of the leases. The amounts capitalized for leasing commissions are immaterial for all periods presented.

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2016 and 2015

(Unaudited)

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 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 some of these investments 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 from 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, 2015	$	(48,366	)	$	6,355	$	(42,011	)
Other comprehensive income (loss) before reclassification	(4,444		)	307		(4,137		)
Amounts reclassified from accumulated other comprehensive loss	1,999			—		1,999
Other comprehensive loss	(2,445		)	307		(2,138		)
Balance at March 31, 2016	$	(50,811	)	$	6,662	$	(44,149	)

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, 2015	$	(46,087	)	$	6,489	$	(39,598	)
Other comprehensive income (loss) before reclassification	(4,595		)	317		(4,278		)
Amounts reclassified from accumulated other comprehensive loss	2,067			—		2,067
Other comprehensive loss	(2,528		)	317		(2,211		)
Balance at March 31, 2016	$	(48,615	)	$	6,806	$	(41,809	)

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.

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2016 and 2015

(Unaudited)

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

March 31, 2016 and 2015

(Unaudited)

(2) Significant Transactions During the First Quarter of 2016 and Subsequent Events

Significant Transactions

Acquisitions

In January 2016, the Company acquired Mio, a 103 unit apartment community, located in San Jose, CA for $51.3 million.

In March 2016, the Company acquired Form 15, a 242 apartment unit community, located in San Diego, CA for $97.4 million. In connection with this acquisition, the Company assumed $44.8 million in mortgage loans.

Both properties were acquired via like kind exchange with disposition proceeds.

The $148.7 million aggregate purchase price for the acquisitions listed above were included on the Company's consolidated balance sheet as follows: $35.6 million was included in land and land improvements, $112.2 million was included in buildings and improvements, and $0.9 million was recorded as acquired in-place lease value and was included in prepaid expenses and other assets in the Company's consolidated balance sheets.

Dispositions

In January 2016, the Company sold its former headquarters office building, located in Palo Alto, CA for $18.0 million, resulting in a gain of $9.6 million.

In January 2016, a Company co-investment, BEXAEW, LLC sold The Heights, a 332 unit apartment community, located in Chino Hills, CA for $93.8 million, which resulted in a gain of $7.4 million for the Company, recorded in the statement of income as equity income in co-investments. BEXAEW, LLC used $50.3 million of proceeds to repay the loan on the property. The Company has a 50% ownership interest in the BEXAEW, LLC joint venture.

In February 2016, the Company sold Harvest Park, a 104 unit apartment community, located in Santa Rosa, CA, which was owned by the Company's wholly owned taxable REIT subsidiary, for $30.5 million, resulting in a gain of $6.4 million, net of $4.3 million deferred tax on gain on sale of real estate.

Preferred Equity Investments

In March 2016, the Company made a commitment to fund a $47.1 million preferred equity investment in a limited liability company that owns 201 Lexington, a development located in Glendale, CA. As of March 31, 2016, $31.8 million of this commitment had been funded. This investment earns a 12.0% preferred return and is scheduled to mature in March 2020.

Private Placement Bond Redemption

In January 2016, the Company paid off $150.0 million in private placement unsecured bonds that had an interest rate of 4.36% and a stated maturity date of March 2016. This represented the total outstanding balance of these unsecured bonds.

Subsequent Events

In April 2016, the Company issued $450 million of 3.375% senior unsecured notes that mature in April 2026. The interest is paid semi-annually in arrears on April 15 and October 15 of each year, commencing on October 15, 2016 until the maturity date of April 15, 2026. The Company used the net proceeds of this offering to repay indebtedness under its unsecured lines of credit and for other general corporate and working capital purposes.

In April 2016, the Company redeemed all of the issued and outstanding 2,950,000 shares of the Company's 7.125% Series H Cumulative Redeemable Preferred Stock for $25.00 per share. Since the notice of redemption was given in March 2016, the preferred stock was presented at redemption value as a liability as of March 31, 2016, and the excess of redemption value over carrying value was recorded as a charge to net income attributable to common stockholders for the quarter ended March 31, 2016.

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2016 and 2015

(Unaudited)

In April 2016, a Company co-investment, BEXAEW, LLC, sold Canyon Creek, a 200 apartment home community, located in Northridge, CA for $53.5 million. BEXAEW, LLC used $26.3 million of proceeds to repay the loan on the property. The Company has a 50% ownership interest in the BEXAEW, LLC joint venture.

(3) Co-investments

The Company has joint ventures and preferred equity investments in co-investments which are accounted for under the equity method. The co-investments own, operate, and develop apartment communities. The carrying values of the Company's co-investments as of March 31, 2016 and December 31, 2015 are as follows (in thousands):



	Ownership Percentage		March 31, 2016		December 31, 2015
Membership interest/Partnership interest in:
CPPIB	55	%	$	380,399	$	376,862
Wesco I, III and IV	50	%	216,485		218,902
BEXAEW	50	%	74,069		88,850
Palm Valley	50	%	68,340		68,525
Other	50%-55%		32,000		32,927
Total operating co-investments			771,293		786,066
Total development co-investments	50%-55%		158,408		143,669
Total preferred interest co-investments (includes related party investments of $35.9 million and $35.8 million as of March 31, 2016 and December 31, 2015, respectively)			139,983		106,312
Total co-investments			$	1,069,684	$	1,036,047

The combined summarized financial information of co-investments is as follows (in thousands).



	March 31, 2016		December 31, 2015
Combined balance sheets: ⁽¹⁾
Rental properties and real estate under development	$	3,323,201	$	3,360,360
Other assets	111,040		96,785
Total assets	$	3,434,241	$	3,457,145
Debt	$	1,475,295	$	1,499,601
Other liabilities	97,765		92,241
Equity ⁽¹⁾	1,861,181		1,865,303
Total liabilities and equity	$	3,434,241	$	3,457,145
Company's share of equity	$	1,069,684	$	1,036,047

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2016 and 2015

(Unaudited)



	Three Months Ended March 31,
	2016			2015
Combined statements of income: ⁽¹⁾
Property revenues	$	75,130		$	63,498
Property operating expenses	(25,821		)	(22,954		)
Net operating income	49,309			40,544
Gain on sale of real estate	17,495			14
Interest expense	(13,140		)	(11,316		)
General and administrative	(1,240		)	(1,606		)
Depreciation and amortization	(28,716		)	(25,381		)
Net income	$	23,708		$	2,255
Company's share of net income ⁽²⁾	$	15,068		$	4,311

⁽¹⁾ Includes preferred equity investments held by the Company.

⁽²⁾ 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 $0.9 million for the three months ended March 31, 2016 and 2015, respectively.

(4) Notes and Other Receivables

Notes receivable, secured by real estate, and other receivables consist of the following as of March 31, 2016 and December 31, 2015 (in thousands):



	March 31, 2016		December 31, 2015
Notes receivable, secured, bearing interest at 6.0%, due December 2016	$	3,219	$	3,219
Notes and other receivables from affiliates ⁽¹⁾	3,522		3,092
Other receivables	11,457		12,974
	$	18,198	$	19,285

⁽¹⁾ The Company had $3.5 million and $3.1 million of short-term loans outstanding and due from various joint ventures as of March 31, 2016 and December 31, 2015, respectively. See Note 5, Related Party Transactions, for additional details.

(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 $5.7 million during the three months ended March 31, 2016 and 2015, respectively. All of these fees are net of intercompany amounts eliminated by the Company. The Company netted development and redevelopment fees of $1.3 million and $3.1 million against general and administrative expenses for the three months ended March 31, 2016 and 2015, 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 service, 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.

In March 2015, 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 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.

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2016 and 2015

(Unaudited)

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.

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.

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.

In January 2013, the Company invested $8.6 million as a preferred equity interest investment in an entity affiliated with MMC that owns an apartment development in Redwood City, CA. In March 2015, the Company's preferred interest investment was prepaid and the Company recognized a gain of $0.5 million as a result of the prepayment.

As described in Note 4, the Company has provided short-term bridge loans to affiliates. As of March 31, 2016 and December 31, 2015, $3.5 million and $3.1 million, respectively, 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):



	March 31, 2016			December 31, 2015			Weighted Average Maturity In Years
Unsecured bonds private placement - fixed rate	$	314,003		$	463,891		4.4
Term loan - variable rate	224,551			224,467			0.7
Bonds public offering - fixed rate	2,397,909			2,400,322			6.5
Unsecured debt, net ⁽¹⁾	2,936,463			3,088,680
Lines of credit, net ⁽²⁾	164,282			11,707
Mortgage notes payable, net ⁽³⁾	2,252,057			2,215,077			5.6
Total debt, net	$	5,352,802		$	5,315,464
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	1.8		%	1.9		%
Weighted average interest rate on mortgage notes payable	4.4		%	4.4		%

(1) Includes unamortized premium and discounts of $11.3 million and $14.3 million and reduced by unamortized debt issuance costs of $14.8 million and $15.6 million, as of March 31, 2016 and December 31, 2015, respectively.

(2) Lines of credit, net, includes unamortized debt issuance costs of $4.1 million and $3.3 million as of March 31, 2016 and December 31, 2015.

(3) Includes unamortized premium of $64.5 million and $64.8 million and reduced by unamortized debt issuance costs of $8.1 million and $8.0 million, as of March 31, 2016 and December 31, 2015, respectively.

The aggregate scheduled principal payments of the Company’s outstanding debt as of March 31, 2016 are as follows (excluding lines of credit) (in thousands):

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2016 and 2015

(Unaudited)



Remaining in 2016	$	222,803
2017	564,851
2018	321,328
2019	661,954
2020	693,868
Thereafter	2,670,852
	$	5,135,656

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2016 and 2015

(Unaudited)

(7) Segment Information

The Company's segment disclosures present the measure used by the chief operating decision makers for purposes of assessing each segment's performance. Essex's chief operating decision makers are comprised of several members of its executive management team who use NOI to assess the performance of the business for the Company's reportable operating segments. NOI represents total property revenue less direct property operating expenses.

The executive management team evaluates the Company's operating performance geographically. 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.

The revenues and net operating income for each of the reportable operating segments are summarized as follows for the three months ended March 31, 2016 and 2015 (in thousands):



	Three Months Ended March 31,
	2016			2015
Revenues:
Southern California	$	141,492		$	123,455
Northern California	112,733			102,427
Seattle Metro	52,074			48,654
Other real estate assets	5,879			5,693
Total property revenues	$	312,178		$	280,229
Net operating income:
Southern California	$	96,453		$	83,088
Northern California	80,711			72,516
Seattle Metro	35,689			33,129
Other real estate assets	4,835			4,325
Total net operating income	217,688			193,058
Depreciation and amortization	(109,707		)	(106,907		)
Interest expense	(52,466		)	(47,546		)
Total return swap income	3,123			—
Management and other fees from affiliates	2,024			2,644
General and administrative	(9,182		)	(10,545		)
Merger and integration expenses	—			(2,388		)
Acquisition and investment related costs	(828		)	(547		)
Interest and other income	5,208			4,199
Gain on sale of real estate and land	20,258			7,112
Deferred tax expense on gain on sale of real estate and land	(4,279		)	—
Equity income in co-investments	15,068			4,311
Gain on remeasurement of co-investment	—			21,362
Net income	$	86,907		$	64,753

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2016 and 2015

(Unaudited)

Total assets for each of the reportable operating segments are summarized as follows as of March 31, 2016 and December 31, 2015 (in thousands):



	March 31, 2016		December 31, 2015
Assets:
Southern California	$	4,875,525	$	4,912,264
Northern California	3,892,121		3,749,072
Seattle Metro	1,698,550		1,613,175
Other real estate assets	108,679		107,066
Net reportable operating segment - real estate assets	10,574,875		10,381,577
Real estate under development	145,711		242,326
Co-investments	1,069,684		1,036,047
Real estate held for sale, net	—		26,879
Cash and cash equivalents, including restricted cash	80,483		123,055
Marketable securities	138,597		137,485
Notes and other receivables	18,198		19,285
Other non-segment assets	39,936		38,437
Total assets	$	12,067,484	$	12,005,091

(8) Net Income Per Common Share and Net Income Per Common Unit

(Amounts in thousands, except share and unit data)

Essex Property Trust, Inc.



	Three Months Ended March 31, 2016					Three Months Ended March 31, 2015
	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	$	77,981	65,405,654	$	1.19	$	59,363	64,185,455	$	0.92
Effect of Dilutive Securities	—		151,985			—		209,225
Diluted:
Net income available to common stockholders	$	77,981	65,557,639	$	1.19	$	59,363	64,394,680	$	0.92

Weighted average convertible limited partnership units of 2,227,865 and 2,184,314, which include vested Series Z Incentive Units, Series Z-1 Incentive Units, 2014 Long-Term Incentive Plan Units, and 2015 Long-Term Incentive Plan Units, for the three months ended March 31, 2016 and 2015, 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 $2.8 million and $2.1 million for the three months ended March 31, 2016 and 2015, respectively. Additionally, excludes 958,972 DownREIT units as they are anti-dilutive.

Stock options of 77,200 and zero for the three months ended March 31, 2016 and 2015, respectively, were excluded from the calculation of diluted earnings per share because the assumed proceeds per share of these options plus the average unearned compensation were greater than the average market price of the common stock for the years ended and, therefore, were anti-dilutive.

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2016 and 2015

(Unaudited)

Essex Portfolio, L.P.



	Three Months Ended March 31, 2016					Three Months Ended March 31, 2015
	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	$	80,765	67,633,519	$	1.19	$	61,426	66,369,769	$	0.93
Effect of Dilutive Securities	—		151,985			—		209,225
Diluted:
Net income available to common unitholders	$	80,765	67,785,504	$	1.19	$	61,426	66,578,994	$	0.92

(9) Derivative Instruments and Hedging Activities

As of March 31, 2016, 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 March 31, 2016, the Company has interest rate caps, which are not accounted for as hedges, totaling a notional amount of $20.7 million that effectively limit the Company’s exposure to interest rate risk by providing a ceiling on the underlying variable interest rate for $20.7 million of the Company’s tax exempt variable rate debt.

As of both March 31, 2016 and December 31, 2015, the aggregate carrying value of the interest rate swap contracts was a liability of $1.0 million, and is included in other liabilities on the condensed consolidated balance sheets. The aggregate carrying value of the interest rate cap was zero on the condensed consolidated balance sheets as of March 31, 2016 and December 31, 2015.

Hedge ineffectiveness related to cash flow hedges, which is included in interest expense on the condensed consolidated income statements, net was not significant for the three months ended March 31, 2016 and 2015, respectively.

Additionally, the Company has entered into total return swaps that effectively convert $257.3 million of mortgage notes payable to a floating interest rate based on SIFMA plus a spread. The total return swaps provide fair market value protection on the mortgage notes payable to our counterparties during the initial period of the total return swap until the Company's option to call the mortgage notes at par can be exercised. The Company can currently call the total return swaps with $114.4 million of the outstanding debt at par, while the call option on the total return swaps relating to $142.9 million of outstanding debt can be exercised starting on January 1, 2017. These derivatives do not qualify for hedge accounting and had a carrying and fair value of $13 thousand and $4 thousand at March 31, 2016 and December 31, 2015, respectively. These total return swaps are scheduled to mature between September 2021 and November 2022. Realized gains of $3.1 million and zero are reported in the condensed consolidated income statements as total return swap income for the three months ended March 31, 2016 and 2015, respectively.

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2016 and 2015

(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 associated with it, and, if an outcome is probable, accrue an appropriate liability for that matter. The Company will consider whether any such matter 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. We believe that, with respect to such matters we are currently a party to, the ultimate disposition of any such matter will not result in a material adverse effect on the Company's financial condition, results of operations, or cash flows.

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

The following discussion and analysis 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 2015 Annual Report on Form 10-K for the year ended December 31, 2015.

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 March 31, 2016, had an approximately 96.7% 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 March 31, 2016, the Company had ownership interests in 244 stabilized apartment communities, comprising 59,441 apartment homes, excluding the Company’s ownership in preferred equity interest co-investments, and the Company also had ownership interests in two operating commercial buildings with approximately 140,564 square feet and seven active developments. The Company’s apartment communities are predominately located in the following major regions:

Southern California (Los Angeles, Orange, San Diego, and Ventura counties)

Northern California (the San Francisco Bay Area)

Seattle Metro (Seattle metropolitan area)

As of March 31, 2016, the Company’s development pipeline was comprised of two consolidated projects under development, five unconsolidated joint venture projects under development, and various consolidated predevelopment projects all aggregating 2,551 apartment homes, with total incurred costs of $0.5 billion, and estimated remaining project costs of $0.9 billion for total estimated project costs of $1.4 billion.

The Company’s consolidated apartment communities are as follows:



	As of March 31, 2016			As of March 31, 2015
	Apartment Homes	%		Apartment Homes	%
Southern California	23,949	49	%	22,829	48	%
Northern California	14,865	30	%