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 SeptemberJune 30, 20152016

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________to _________

Commission file number 001-13106

ESSEX PROPERTY TRUST, INC.
ESSEX PORTFOLIO, L.P.
(Exact name of Registrant as Specified in its Charter)
Maryland (Essex Property Trust, Inc.)
California (Essex Portfolio, L.P.)
 
77-0369576 (Essex Property Trust, Inc.)
77-0369575 (Essex Portfolio, L.P.)
   
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification Number)
925 East Meadow Drive1100 Park Place, Suite 200
Palo Alto,San Mateo, California    9430394403
(Address of Principal Executive Offices including Zip Code)

(650) 494-3700655-7800
(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):


i

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Essex Property Trust, Inc.    Yes o   No x
Essex Portfolio, L.P.     Yes o   No x
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 66,035,14065,494,848 shares of Common Stock ($0.0001 par value) of Essex Property Trust, Inc. were outstanding as of October 30, 2015.July 28, 2016.
 

ii

EXPLANATORY NOTE

This report combines the reports on Form 10-Q for the three and ninesix month periodsperiod ended SeptemberJune 30, 20152016 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 reportsreports.

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, 2014.2015.

iv

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

PART I. FINANCIAL INFORMATIONPage No.
   
Item 1.Condensed Consolidated Financial Statements of Essex Property Trust, Inc. (Unaudited) 
   
 
Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20152016 and December 31, 20142015
2
   
 
Condensed Consolidated Statements of Income and Comprehensive Income for the three and ninesix months ended SeptemberJune 30, 20152016 and 20142015
3
   
 
Condensed Consolidated Statement of Equity for the ninesix months ended SeptemberJune 30, 20152016
4
   
 
Condensed Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20152016 and 20142015
5
   
 Condensed Consolidated Financial Statements of Essex Portfolio L.P. (Unaudited) 
   
 
Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20152016 and December 31, 20142015
7
   
 
Condensed Consolidated Statements of Income and Comprehensive Income for the three and ninesix months ended SeptemberJune 30, 20152016 and 20142015
8
   
 
Condensed Consolidated Statement of Capital for the ninesix months ended SeptemberJune 30, 20152016
9
   
 
Condensed Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20152016 and 20142015
10
   
 
Notes to Condensed Consolidated Financial Statements
12
   
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
2425
   
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

1

Part I – Financial Information

Item 1. Condensed Financial Statements

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share amounts)
ASSETSSeptember 30, 2015 December 31, 2014June 30, 2016 December 31, 2015
Real estate:      
Rental properties:      
Land and land improvements$2,566,586
 $2,424,930
$2,573,923
 $2,522,842
Buildings and improvements9,753,982
 8,819,751
10,096,484
 9,808,627
12,320,568
 11,244,681
12,670,407
 12,331,469
Less accumulated depreciation(1,858,134) (1,564,806)(2,159,840) (1,949,892)
10,462,434
 9,679,875
10,510,567
 10,381,577
Real estate under development226,690
 429,096
157,659
 242,326
Co-investments1,036,043
 1,042,423
1,103,272
 1,036,047
Real estate held for sale, net8,742
 56,300
—
 26,879
11,733,909
 11,207,694
11,771,498
 11,686,829
Cash and cash equivalents-unrestricted35,668
 25,610
182,515
 29,683
Cash and cash equivalents-restricted36,638
 70,139
32,861
 93,372
Marketable securities and other investments133,058
 117,240
Marketable securities152,263
 137,485
Notes and other receivables22,668
 24,923
20,448
 19,285
Acquired in place lease value, net12,675
 47,748
Prepaid expenses and other assets38,101
 33,378
47,106
 38,437
Total assets$12,012,717
 $11,526,732
$12,206,691
 $12,005,091
      
LIABILITIES AND EQUITY 
  
 
  
Unsecured debt, net$3,090,896
 $2,603,548
$3,377,728
 $3,088,680
Mortgage notes payable, net2,224,513
 2,234,317
2,240,558
 2,215,077
Lines of credit, net2,011
 242,824
—
 11,707
Accounts payable and accrued liabilities177,807
 135,162
145,217
 131,415
Construction payable26,411
 30,892
38,473
 40,953
Dividends payable99,945
 88,221
110,163
 100,266
Other liabilities34,722
 32,444
34,945
 34,518
Total liabilities5,656,305
 5,367,408
5,947,084
 5,622,616
Commitments and contingencies

 



 

Redeemable noncontrolling interest24,589
 23,256
44,531
 45,452
Equity: 
  
 
  
Common stock; $0.0001 par value, 656,020,000 shares authorized; 65,234,597 and 63,682,646 shares issued and outstanding, respectively6
 6
Common stock; $0.0001 par value, 670,000,000 shares authorized; 65,479,054 and 65,379,359 shares issued and outstanding, respectively6
 6
Cumulative redeemable 7.125% Series H preferred stock at liquidation value73,750
 73,750
—
 73,750
Additional paid-in capital6,980,443
 6,651,165
7,017,962
 7,003,317
Distributions in excess of accumulated earnings(782,801) (650,797)(856,815) (797,329)
Accumulated other comprehensive loss, net(50,357) (51,452)(43,007) (42,011)
Total stockholders' equity6,221,041
 6,022,672
6,118,146
 6,237,733
Noncontrolling interest110,782
 113,396
96,930
 99,290
Total equity6,331,823
 6,136,068
6,215,076
 6,337,023
Total liabilities and equity$12,012,717
 $11,526,732
$12,206,691
 $12,005,091

See accompanying notes to the unaudited condensed consolidated financial statements.

2


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

Three Months Ended September 30, Nine Months Ended 
 September 30,		Three Months Ended   June 30, Six Months Ended   June 30,
2015 2014 2015 20142016 2015 2016 2015
Revenues:              
Rental and other property$302,522
 $268,512
 $876,852
 $684,813
$319,562
 $294,101
 $631,740
 $574,330
Management and other fees from affiliates2,104
 2,361
 6,809
 6,856
2,028
 2,061
 4,052
 4,705
304,626
 270,873
 883,661
 691,669
321,590
 296,162
 635,792
 579,035
Expenses: 
  
     
  
    
Property operating, excluding real estate taxes60,528
 56,294
 173,547
 146,474
61,538
 57,400
 121,609
 113,019
Real estate taxes33,591
 31,768
 97,820
 77,452
34,541
 32,677
 68,960
 64,229
Depreciation and amortization116,308
 102,286
 336,946
 253,890
109,673
 113,731
 219,380
 220,638
General and administrative11,129
 11,479
 31,223
 28,621
9,698
 9,549
 18,880
 20,094
Merger and integration expenses—
 3,857
 3,798
 46,413
—
 1,410
 —
 3,798
Acquisition and investment related costs381
 51
 1,357
 768
267
 429
 1,095
 976
221,937
 205,735
 644,691
 553,618
215,717
 215,196
 429,924
 422,754
Earnings from operations82,689
 65,138
 238,970
 138,051
105,873
 80,966
 205,868
 156,281
Interest expense(50,053) (45,830) (148,401) (117,021)(55,568) (50,802) (108,034) (98,348)
Total return swap income2,814
 —
 5,937
 —
Interest and other income7,367
 2,992
 14,820
 8,685
9,409
 3,254
 14,617
 7,453
Equity income in co-investments7,179
 4,910
 15,962
 21,065
14,296
 4,472
 29,364
 8,783
Gains on sale of real estate and land—
 31,372
 7,112
 38,853
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—
 —
 34,014
 —
—
 12,652
 —
 34,014
Net income47,182
 58,582
 162,477
 89,633
76,824
 50,542
 163,731
 115,295
Net income attributable to noncontrolling interest(3,545) (3,720) (11,295) (8,971)(4,811) (3,674) (9,882) (7,750)
Net income attributable to controlling interest43,637
 54,862
 151,182
 80,662
72,013
 46,868
 153,849
 107,545
Dividends to preferred stockholders(1,314) (1,296) (3,941) (3,977)—
 (1,313) (1,314) (2,627)
Excess of redemption value of preferred stock over the carrying value—
 —
 (2,541) —
Net income available to common stockholders$42,323
 $53,566
 $147,241
 $76,685
$72,013
 $45,555
 $149,994
 $104,918
Comprehensive income$46,970
 $61,036
 $163,609
 $99,070
$78,005
 $51,287
 $162,701
 $116,639
Comprehensive income attributable to noncontrolling interest(3,538) (3,789) (11,332) (9,345)(4,850) (3,703) (9,848) (7,794)
Comprehensive income attributable to controlling interest$43,432
 $57,247
 $152,277
 $89,725
$73,155
 $47,584
 $152,853
 $108,845
Per share data: 
  
     
  
    
Basic: 
  
     
  
    
Net income available to common stockholders$0.65
 $0.85
 $2.28
 $1.41
$1.10
 $0.70
 $2.29
 $1.63
Weighted average number of shares outstanding during the period65,138,868
 62,892,601
 64,714,994
 54,250,104
65,451,110
 64,810,184
 65,428,382
 64,499,545
Diluted: 
  
     
  
    
Net income available to common stockholders$0.65
 $0.85
 $2.27
 $1.41
$1.10
 $0.70
 $2.29
 $1.62
Weighted average number of shares outstanding during the period65,297,550
 63,069,772
 64,892,770
 54,443,227
65,575,378
 64,972,852
 65,558,811
 64,677,521
Dividend per common share$1.44
 $1.30
 $4.32
 $3.81
$1.60
 $1.44
 $3.20
 $2.88

See accompanying notes to the unaudited condensed consolidated financial statements.

3

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Equity for the ninesix months ended SeptemberJune 30, 20152016
(Unaudited)
(Dollars and shares in thousands)
Series H
Preferred stock
 Common stock Additional paid-in 
Distributions
in excess of accumulated
 
Accumulated
other
comprehensive
 Noncontrolling  
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 capital earnings loss, net Interest TotalShares Amount Shares Amount Total
Balances at December 31, 20142,950
 $73,750
 63,683
 $6
 $6,651,165
 $(650,797) $(51,452) $113,396
 $6,136,068
Balances at December 31, 20152,950
 $73,750
 65,379
 $6
 $7,003,317
 $(797,329) $(42,011) $99,290
 $6,337,023
Net income—
 —
 —
 —
 —
 151,182
 —
 11,295
 162,477
—
 —
 —
 —
 —
 153,849
 —
 9,882
 163,731
Change in fair value of derivatives and amortization of swap settlements—
 —
 —
 —
 —
 —
 1,621
 54
 1,675
—
 —
 —
 —
 —
 —
 (1,291) (44) (1,335)
Change in fair value of marketable securities—
 —
 —
 —
 —
 —
 (526) (17) (543)
Change in fair value of marketable securities, net—
 —
 —
 —
 —
 —
 295
 10
 305
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
Stock option and restricted stock plans, net—
 —
 89
 —
 11,760
 —
 —
 —
 11,760
Sale of common stock, net—
 —
 —
 —
 (279) —
 —
 —
 (279)
Equity based compensation costs—
 —
 —
 —
 2,564
 —
 —
 2,947
 5,511
—
 —
 —
 —
 2,001
 —
 —
 1,197
 3,198
Reclassification of noncontrolling interest to redeemable noncontrolling interest—
 —
 —
 —
 —
 —
 —
 (144) (144)
Redemption of Series H preferred stock(2,950) (73,750) —
 —
 2,541
 (2,541) —
 —
 (73,750)
Changes in the redemption value of redeemable noncontrolling interest—
 —
 —
 —
 (1,095) —
 —
 —
 (1,095)—
 —
 —
 —
 365
 —
 —
 556
 921
Distributions to noncontrolling interest—
 —
 —
 —
 —
 —
 —
 (16,327) (16,327)—
 —
 —
 —
 —
 —
 —
 (13,471) (13,471)
Redemptions of noncontrolling interest—
 —
 —
 —
 (2,199) —
 —
 (422) (2,621)—
 —
 11
 —
 (1,743) —
 —
 (490) (2,233)
Common and preferred stock dividends—
 —
 —
 —
 —
 (283,186) —
 —
 (283,186)—
 —
 —
 —
 —
 (210,794) —
 —
 (210,794)
Balances at September 30, 20152,950
 $73,750
 65,235
 $6
 $6,980,443
 $(782,801) $(50,357) $110,782
 $6,331,823
Balances at June 30, 2016—
 $—
 65,479
 $6
 $7,017,962
 $(856,815) $(43,007) $96,930
 $6,215,076

See accompanying notes to the unaudited condensed consolidated financial statements.

4

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands) 
Nine Months Ended September 30,Six Months Ended June 30,
2015 20142016 2015
Cash flows from operating activities:      
Net income$162,477
 $89,633
$163,731
 $115,295
Adjustments to reconcile net income to net cash provided by operating activities: 
  
 
  
Depreciation and amortization336,946
 253,890
219,380
 220,638
Amortization of discount on marketable securities(9,012) (6,555)
Amortization of discount on marketable securities and other investments(7,457) (5,777)
Amortization of (premium) discount and debt financing costs, net(15,064) (4,987)(7,598) (11,125)
Gain on sale of marketable securities and other investments(598) (886)
Gain on sale of marketable securities(1,843) —
Company's share of gain on the sales of co-investments(469) (3,211)(13,046) —
Income from early redemption of preferred equity investments—
 (469)
Earnings from co-investments(15,493) (17,854)(16,318) (8,314)
Operating distributions from co-investments28,632
 20,122
23,985
 14,804
Gains on the sales of real estate and land(7,112) (38,853)
Non cash merger and integration expenses—
 7,562
Gain on the sale of real estate and land(20,258) (7,112)
Equity-based compensation5,511
 4,996
3,198
 3,457
Gain on remeasurement of co-investments(34,014) —
—
 (34,014)
Changes in operating assets and liabilities:      
Prepaid expense, receivables and other assets(1,851) 8,923
Prepaid expenses, receivables and other assets(3,942) (6,646)
Accounts payable and accrued liabilities36,480
 43,988
9,772
 4,924
Other liabilities1,475
 1,393
749
 1,387
Net cash provided by operating activities487,908
 358,161
350,353
 287,048
Cash flows from investing activities: 
  
 
  
Additions to real estate: 
  
 
  
Acquisitions of real estate and acquisition related capital expenditures(327,799) (438,088)(117,349) (314,890)
Redevelopment(66,783) (55,921)(43,200) (41,796)
Development acquisitions of and additions to real estate under development(138,101) (108,659)(37,150) (122,377)
Capital expenditures on rental properties(42,809) (21,074)(22,277) (24,673)
Acquisition of membership interest in co-investments(115,724) —
—
 (115,724)
Proceeds from insurance for property losses12,044
 29,160
1,211
 11,735
Proceeds from dispositions of real estate74,485
 61,331
48,008
 74,485
BRE merger consideration paid—
 (555,826)
Proceeds from dispositions of co-investments31,556
 13,900
Contributions to co-investments(119,120) (128,268)(96,698) (97,512)
Changes in restricted cash and refundable deposits38,282
 (39,482)56,932
 49,808
Purchases of marketable securities(14,300) (15,516)(16,352) (7,250)
Sales and maturities of marketable securities and other investments7,566
 6,275
Collections of notes and other receivables—
 76,585
Sales and maturities of marketable securities11,179
 1,968
Non-operating distributions from co-investments382
 23,248
34,564
 11,072
Net cash used in investing activities(660,321) (1,152,335)(181,132) (575,154)
Cash flows from financing activities: 
  
 
  
Borrowings under debt agreements1,068,032
 1,737,322
768,610
 923,431
Repayment of debt(924,844) (1,327,840)(501,167) (730,712)
Repayment of cumulative redeemable preferred stock(73,750) —
Additions to deferred charges(4,320) (16,941)(4,962) (4,456)
Net proceeds from issuance of common stock307,835
 449,464
(279) 272,664
Net proceeds from stock options exercises22,173
 6,526
Net proceeds from stock options exercised11,760
 18,346
Distributions to noncontrolling interest(15,789) (13,217)(12,880) (11,033)
Redemption of noncontrolling interest(2,621) (4,707)(2,233) (2,488)
Common and preferred stock dividends paid(272,000) (177,400)(201,488) (177,019)
Net cash provided by financing activities178,466
 653,207
Net cash (used in) provided by financing activities(16,389) 288,733
Cash acquired in consolidation of co-investment—
 4,005
Net increase in cash and cash equivalents152,832
 4,632

5

 Nine Months Ended September 30,
 2015 2014
Cash acquired from the BRE merger—
 140,353
Cash acquired in consolidation of co-investment4,005
 —
Net increase (decrease) in cash and cash equivalents10,058
 (614)
Cash and cash equivalents at beginning of period25,610
 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
 $—
 Six Months Ended June 30,
 2016 2015
Cash and cash equivalents at beginning of period29,683
 25,610
Cash and cash equivalents at end of period$182,515
 $30,242
    
Supplemental disclosure of cash flow information:   
Cash paid for interest, net of $6.2 million and $8.3 million capitalized in 2016 and 2015, respectively$93,031
 $86,347
Supplemental disclosure of noncash investing and financing activities: 
  
Transfers between real estate under development to rental properties, net$108,402
 $300,751
Transfer from real estate under development to co-investments$4,485
 $3,780
Reclassifications (from) to redeemable noncontrolling interest to or from additional paid in capital and noncontrolling interest$(921) $574
Debt assumed in connection with acquisition$48,832
 $114,435

See accompanying notes to the unaudited condensed consolidated financial statements.


6

ESSEX PORTFOLIO, L.P.  AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except unit amounts)
September 30, 2015 December 31, 2014June 30, 2016 December 31, 2015
ASSETS      
Real estate:      
Rental properties:      
Land and land improvements$2,566,586
 $2,424,930
$2,573,923
 $2,522,842
Buildings and improvements9,753,982
 8,819,751
10,096,484
 9,808,627
12,320,568
 11,244,681
12,670,407
 12,331,469
Less accumulated depreciation(1,858,134) (1,564,806)(2,159,840) (1,949,892)
10,462,434
 9,679,875
10,510,567
 10,381,577
Real estate under development226,690
 429,096
157,659
 242,326
Co-investments1,036,043
 1,042,423
1,103,272
 1,036,047
Real estate held for sale, net8,742
 56,300
—
 26,879
11,733,909
 11,207,694
11,771,498
 11,686,829
Cash and cash equivalents-unrestricted35,668
 25,610
182,515
 29,683
Cash and cash equivalents-restricted36,638
 70,139
32,861
 93,372
Marketable securities and other investments133,058
 117,240
Marketable securities152,263
 137,485
Notes and other receivables22,668
 24,923
20,448
 19,285
Acquired in place lease value , net12,675
 47,748
Prepaid expenses and other asset38,101
 33,378
Prepaid expenses and other assets47,106
 38,437
Total assets$12,012,717

$11,526,732
$12,206,691

$12,005,091
      
LIABILITIES AND CAPITAL 
  
 
  
Unsecured debt, net$3,090,896
 $2,603,548
$3,377,728
 $3,088,680
Mortgage notes payable, net2,224,513
 2,234,317
2,240,558
 2,215,077
Lines of credit, net2,011
 242,824
—
 11,707
Accounts payable and accrued liabilities177,807
 135,162
145,217
 131,415
Construction payable26,411
 30,892
38,473
 40,953
Distributions payable99,945
 88,221
110,163
 100,266
Other liabilities34,722
 32,444
34,945
 34,518
Total liabilities5,656,305

5,367,408
5,947,084

5,622,616
Commitments and contingencies

 



 

Redeemable noncontrolling interest24,589
 23,256
44,531
 45,452
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
Common equity (65,479,054 and 65,379,359 units issued and outstanding, respectively)6,161,153
 6,208,535
Series H 7.125 % preferred interest (liquidation value of 0 and 73,750, respectively)—
 71,209
6,271,398

6,074,124
6,161,153

6,279,744
Limited Partners:      
Common equity (2,176,563 and 2,168,158 units issued and outstanding, respectively)46,793
 48,665
Common equity (2,221,768 and 2,214,545 units issued and outstanding, respectively)46,298
 47,235
Accumulated other comprehensive loss(48,224) (49,356)(40,628) (39,598)
Total partners' capital6,269,967

6,073,433
6,166,823

6,287,381
Noncontrolling interest61,856
 62,635
48,253
 49,642
Total capital6,331,823

6,136,068
6,215,076

6,337,023
Total liabilities and capital$12,012,717

$11,526,732
$12,206,691

$12,005,091

See accompanying notes to the unaudited condensed consolidated financial statements.

7

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Income and Comprehensive Income
(Unaudited)
(In thousands, except unit and per unit amounts)
Three Months Ended 
 September 30,		 Nine Months Ended 
 September 30,		Three Months Ended   June 30, Six Months Ended   June 30,
2015 2014 2015 20142016 2015 2016 2015
Revenues:              
Rental and other property$302,522
 $268,512
 $876,852
 $684,813
$319,562
 $294,101
 $631,740
 $574,330
Management and other fees from affiliates2,104
 2,361
 6,809
 6,856
2,028
 2,061
 4,052
 4,705
304,626
 270,873
 883,661
 691,669
321,590
 296,162
 635,792
 579,035
Expenses: 
  
     
  
    
Property operating, excluding real estate taxes60,528
 56,294
 173,547
 146,474
61,538
 57,400
 121,609
 113,019
Real estate taxes33,591
 31,768
 97,820
 77,452
34,541
 32,677
 68,960
 64,229
Depreciation and amortization116,308
 102,286
 336,946
 253,890
109,673
 113,731
 219,380
 220,638
General and administrative11,129
 11,479
 31,223
 28,621
9,698
 9,549
 18,880
 20,094
Merger and integration expenses—
 3,857
 3,798
 46,413
—
 1,410
 —
 3,798
Acquisition and investment related costs381
 51
 1,357
 768
267
 429
 1,095
 976
221,937
 205,735
 644,691
 553,618
215,717
 215,196
 429,924
 422,754
Earnings from operations82,689
 65,138
 238,970
 138,051
105,873
 80,966
 205,868
 156,281
Interest expense(50,053) (45,830) (148,401) (117,021)(55,568) (50,802) (108,034) (98,348)
Total return swap income2,814
 —
 5,937
 —
Interest and other income7,367
 2,992
 14,820
 8,685
9,409
 3,254
 14,617
 7,453
Equity income in co-investments7,179
 4,910
 15,962
 21,065
14,296
 4,472
 29,364
 8,783
Gains on sale of real estate and land—
 31,372
 7,112
 38,853
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—
 —
 34,014
 —
—
 12,652
 —
 34,014
Net income47,182
 58,582
 162,477
 89,633
76,824
 50,542
 163,731
 115,295
Net income attributable to noncontrolling interest(2,074) (1,904) (6,180) (5,529)(2,361) (2,141) (4,648) (4,154)
Net income attributable to controlling interest45,108
 56,678
 156,297
 84,104
74,463
 48,401
 159,083
 111,141
Preferred interest distributions(1,314) (1,296) (3,941) (3,977)—
 (1,313) (1,314) (2,627)
Excess of redemption value of preferred units over the carrying value—
 —
 (2,541) —
Net income available to common unitholders$43,794
 $55,382
 $152,356
 $80,127
$74,463
 $47,088
 $155,228
 $108,514
Comprehensive income$46,970
 $61,036
 $163,609
 $99,070
$78,005
 $51,287
 $162,701
 $116,639
Comprehensive income attributable to noncontrolling interest(2,074) (1,904) (6,180) (5,529)(2,361) (2,141) (4,648) (4,154)
Comprehensive income attributable to controlling interest$44,896
 $59,132
 $157,429
 $93,541
$75,644
 $49,146
 $158,053
 $112,485
Per unit data: 
  
     
  
    
Basic: 
  
     
  
    
Net income available to common unitholders$0.65
 $0.85
 $2.28
 $1.42
$1.10
 $0.70
 $2.29
 $1.63
Weighted average number of common units outstanding during the period67,316,498
 65,057,157
 66,896,293
 56,484,589
67,675,038
 66,992,209
 67,654,279
 66,682,708
Diluted:              
Net income available to common unitholders$0.65
 $0.85
 $2.27
 $1.41
$1.10
 $0.70
 $2.29
 $1.62
Weighted average number of common units outstanding during the period67,475,180
 65,234,328
 67,074,069
 56,677,712
67,799,306
 67,154,877
 67,784,708
 66,860,684
Distribution per common unit$1.44
 $1.30
 $4.32
 $3.81
$1.60
 $1.44
 $3.20
 $2.88

See accompanying notes to the unaudited condensed consolidated financial statements.

8

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Condensed Consolidated Statement of Capital for the ninesix months ended SeptemberJune 30, 20152016
(Dollars and units in thousands)
(Unaudited)
General Partner Limited Partners Accumulated    General Partner Limited Partners Accumulated other comprehensive loss    
    Preferred     other    Common Equity Series H Preferred Interest Common Equity Noncontrolling Interest  
Common Equity Equity Common Equity comprehensive Noncontrolling  Units Amount Units Amount Accumulated other comprehensive lossTotal
Units Amount Amount Units Amount loss Interest Total
Balances at December 31, 201463,683
 $6,002,915
 $71,209
 2,168
 $48,665
 $(49,356) $62,635
 $6,136,068
Balances at December 31, 201565,379
 $6,208,535
 $71,209
 2,215
 $47,235
 $(39,598) $49,642
 $6,337,023
Net income—
 147,241
 3,941
 —
 5,115
 —
 6,180
 162,477
—
 149,994
 3,855
 —
 5,234
 —
 4,648
 163,731
Change in fair value of derivatives and amortization of swap settlements—
 —
 —
 —
 —
 1,675
 —
 1,675
—
 —
 —
 —
 —
 (1,335) —
 (1,335)
Change in fair value of marketable securities—
 —
 —
 —
 —
 (543) —
 (543)
Change in fair value of marketable securities, net—
 —
 —
 —
 —
 305
 —
 305
Issuance of common units under: 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
General partner's stock based compensation170
 22,173
 —
 —
 —
 —
 —
 22,173
Sale of common stock by general partner1,375
 307,835
 —
 —
 —
 —
 —
 307,835
General partner's stock based compensation, net89
 11,760
 —
 —
 —
 —
 —
 11,760
Sale of common stock by general partner, net—
 (279) —
 —
 —
 —
 —
 (279)
Equity based compensation costs—
 2,564
 —
 16
 2,947
 —
 —
 5,511
—
 2,001
 —
 18
 1,197
 —
 —
 3,198
Redemption of Series H preferred units—
 —
 (73,750) —
 —
 —
 —
 (73,750)
Changes in redemption value of redeemable noncontrolling interest—
 (1,095) —
 —
 —
 —
 —
 (1,095)—
 365
 —
 —
 —
 —
 556
 921
Reclassification of noncontrolling interest to redeemable noncontrolling interest—
 —
 —
 —
 —
 —
 (144) (144)
Distributions to noncontrolling interest—
 —
 —
 —
 —
 —
 (6,393) (6,393)—
 —
 —
 —
 —
 —
 (6,182) (6,182)
Redemptions7
 (2,199) —
 (7) —
 —
 (422) (2,621)11
 (1,743) —
 (11) (79) —
 (411) (2,233)
Distributions declared—
 (279,245) (3,941) —
 (9,934) —
 —
 (293,120)—
 (209,480) (1,314) —
 (7,289) —
 —
 (218,083)
Balances at September 30, 201565,235
 $6,200,189
 $71,209
 2,177
 $46,793
 $(48,224) $61,856
 $6,331,823
Balances at June 30, 201665,479
 $6,161,153
 $—
 2,222
 $46,298
 $(40,628) $48,253
 $6,215,076


See accompanying notes to the unaudited condensed consolidated financial statements.

9

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Nine Months Ended September 30,Six Months Ended June 30,
2015 20142016 2015
Cash flows from operating activities:      
Net income$162,477
 $89,633
$163,731
 $115,295
Adjustments to reconcile net income to net cash provided by operating activities: 
  
 
  
Depreciation and amortization336,946
 253,890
219,380
 220,638
Amortization of discount on marketable securities(9,012) (6,555)
Amortization of discount on marketable securities and other investments(7,457) (5,777)
Amortization of (premium) discount and debt financing costs, net(15,064) (4,987)(7,598) (11,125)
Gain on sale of marketable securities and other investments(598) (886)
Gain on sale of marketable securities(1,843) —
Company's share of gain on the sales of co-investments(469) (3,211)(13,046) 

Income from early redemption of preferred equity investments—
 (469)
Earnings from co-investments(15,493) (17,854)(16,318) (8,314)
Operating distributions from co-investments28,632
 20,122
23,985
 14,804
Gain on the sales of real estate and land(7,112) (38,853)(20,258) (7,112)
Non cash merger and integration expenses—
 7,562
Equity-based compensation5,511
 4,996
3,198
 3,457
Gain on remeasurement of co-investments(34,014) —
—
 (34,014)
Changes in operating assets and liabilities: 
  
 
  
Prepaid expense, in-place lease value, receivables and other assets(1,851) 8,923
Prepaid expense, receivables and other assets(3,942) (6,646)
Accounts payable and accrued liabilities36,480
 43,988
9,772
 4,924
Other liabilities1,475
 1,393
749
 1,387
Net cash provided by operating activities487,908
 358,161
350,353
 287,048
Cash flows from investing activities: 
  
 
  
Additions to real estate: 
  
 
  
Acquisitions of real estate and acquisition related capital expenditures(327,799) (438,088)(117,349) (314,890)
Redevelopment(66,783) (55,921)(43,200) (41,796)
Development acquisitions of and additions to real estate under development(138,101) (108,659)(37,150) (122,377)
Capital expenditures on rental properties(42,809) (21,074)(22,277) (24,673)
Acquisition of membership interest in co-investments
(115,724) —
—
 (115,724)
Proceeds from insurance for property losses12,044
 29,160
1,211
 11,735
Proceeds from dispositions of real estate74,485
 61,331
48,008
 74,485
BRE merger cash consideration paid—
 (555,826)
Proceeds from dispositions of co-investments31,556
 13,900
Contributions to co-investments(119,120) (128,268)(96,698) (97,512)
Changes in restricted cash and refundable deposits38,282
 (39,482)56,932
 49,808
Purchases of marketable securities(14,300) (15,516)(16,352) (7,250)
Sales and maturities of marketable securities and other investments7,566
 6,275
Collections of notes and other receivables—
 76,585
Sales and maturities of marketable securities11,179
 1,968
Non-operating distributions from co-investments382
 23,248
34,564
 11,072
Net cash used in investing activities(660,321) (1,152,335)(181,132) (575,154)
Cash flows from financing activities: 
  
 
  
Borrowings under debt agreements1,068,032
 1,737,322
768,610
 923,431
Repayment of debt(924,844) (1,327,840)(501,167) (730,712)
Repayment of cumulative redeemable preferred stock(73,750) —
Additions to deferred charges(4,320) (16,941)(4,962) (4,456)
Net proceeds from issuance of common units307,835
 449,464
(279) 272,664
Net proceeds from stock options exercises22,173
 6,526
Net proceeds from stock options exercised11,760
 18,346
Distributions to noncontrolling interest(6,455) (3,462)(3,379) (4,884)
Redemption of noncontrolling interest(2,621) (308)(2,233) (2,488)
Common and preferred units and preferred interest distributions paid(281,334) (191,554)(210,989) (183,168)
Net cash provided by financing activities178,466
 653,207
Net cash (used in) provided by financing activities(16,389) 288,733
Cash acquired in consolidation of co-investment—
 4,005
Net increase in cash and cash equivalents152,832
 4,632

10

 Nine Months Ended September 30,
 2015 2014
Cash acquired from the BRE merger—
 140,353
Cash acquired in consolidation of co-investment4,005
 —
Net increase (decrease) in cash and cash equivalents10,058
 (614)
Cash and cash equivalents at beginning of period25,610
 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
 $—
 Six Months Ended June 30,
 2016 2015
Cash and cash equivalents at beginning of period29,683
 25,610
Cash and cash equivalents at end of period$182,515
 $30,242
     
Supplemental disclosure of cash flow information:   
Cash paid for interest, net of $6.2 million and $8.3 million capitalized in 2016 and 2015, respectively$93,031
 $86,347
Supplemental disclosure of noncash investing and financing activities: 
  
Transfers between real estate under development to rental properties, net$108,402
 $300,751
Transfer from real estate under development to co-investments$4,485
 $3,780
Reclassifications (from) to redeemable noncontrolling interest to or from general partner capital and noncontrolling interest$(921) $574
  Debt assumed in connection with acquisition$48,832
 $114,435

See accompanying notes to the unaudited condensed consolidated financial statements.

11

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
SeptemberJune 30, 20152016 and 20142015
(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, 2014.2015.

All significant intercompany balancesaccounts 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 and ninesix months ended SeptemberJune 30, 20152016 and 20142015 include the accounts of the Company and the Operating Partnership. Essex is the sole general partner in the Operating Partnership, with a 96.8%96.7% general partnership interest as of SeptemberJune 30, 2015.2016. Total Operating Partnership limited partnership units outstanding were 2,176,5632,221,768 and 2,168,1582,214,545 as of SeptemberJune 30, 20152016 and December 31, 2014,2015, respectively, and the redemption value of the units, based on the closing price of the Company’s common stock totaled $486.3$506.8 million and $447.9$530.2 million, as of SeptemberJune 30, 20152016 and December 31, 2014,2015, respectively.

As of SeptemberJune 30, 2015,2016, the Company owned or had ownership interests in 245243 stabilized apartment communities, aggregating 58,76859,241 apartment homes, excluding the Company’s ownership in preferred interest co-investments, (collectively, the “Communities”, and individually, a “Community”), fourthree commercial buildings and nineseven 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 May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, "Revenue from Contracts with Customers." The new standard provides a single comprehensive revenue recognition model for contracts with customers (excluding certain contracts, such as lease contracts) to improve comparability within industries. The new standard requires an entity to recognize revenue to reflect the transfer of goods or services to customers at an amount the entity expects to be paid in exchange for those goods and services and provide enhanced disclosures, all to provide more comprehensive guidance for transactions such as service revenue and contract modifications. In August 2015, the FASB deferred the effective date of the new standard by one year, and it is now effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted but not before the original effective date. The new standard may be applied using either a full retrospective or a modified approach upon adoption. 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 January 2016, the 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 classify leases as either finance or operating and to recognize a lease liability and a right-of-use asset for all leases that have a duration of greater than 12 months. Leases of 12 months or less will be accounted for similar to existing guidance for operating leases today. For lessors, accounting for leases under the new standard will be substantially the same as existing guidance for sales-type leases, direct financing leases, and operating leases, but eliminates current real estate specific provisions and changes the treatment of initial direct costs. 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.

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2016 and 2015
(Unaudited)

The Company is currently evaluating the impact of this amendment on its consolidated results of operations and financial position.

In March 2016, the FASB issued ASU No. 2016-07 "Simplifying the Transition to the Equity Method of Accounting", which eliminates the requirement to retroactively adjust an investment, results of operations, and retained earnings when the investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence. The new standard will be effective for the Company beginning on January 1, 2017 and early adoption is permitted. The Company does not expect the impact of this amendment to be material on its consolidated results of operations or financial position.

In March 2016, the FASB issued ASU No. 2016-09 "Improvement to Employee Share-Based Payment Accounting", which amends certain aspects of how an entity accounts for share-based payments to employees. This amendment requires entities to recognize the income tax effects of share-based awards in the income statement when the awards vest or are settled, rather than recording such effects in additional paid-in capital. Entities will also be permitted to elect to account for forfeitures of share-based payments as they occur or continue with the current practice which requires estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change. The new standard will be effective January 1, 2017, with early adoption permitted. The change in recognition of income tax effects of share-based awards will be applied prospectively. If the Company elects to account for forfeitures of share-based payments as they occur, such change will be applied using a modified retrospective approach, with a cumulative-effect adjustment to distributions in excess of accumulated earnings. The Company is currently evaluating the impact of this amendment on its consolidated results of operations and financial position.

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 June 30, 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 June 30, 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 June 30, 2016 and December 31, 2015, marketable securities consist of the following (in thousands):


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2016 and 2015
(Unaudited)

 June 30, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gain
 Carrying Value
Available for sale:     
Investment-grade unsecured bonds$19,604
 $347
 $19,951
Investment funds - U.S. treasuries7,600
 10
 7,610
Common stock and stock funds29,970
 7,098
 37,068
Held to maturity: 
  
  
Mortgage backed securities87,634
 —
 87,634
Total - Marketable securities$144,808
 $7,455
 $152,263
      
 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. treasuries3,675
 (9) 3,666
Common stock and stock funds34,655
 7,091
 41,746
Held to maturity: 
  
  
Mortgage backed securities80,387
 —
 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 June 30, 2016 and 2015, the proceeds from sales of available for sale securities totaled $6.2 million and $1.3 million, respectively, which resulted in $1.1 million realized gains and no realized gains or losses, respectively. For the six months ended June 30, 2016 and 2015, the proceeds from sales of available for sale securities totaled $11.2 million and $2.0 million, respectively, which resulted in $1.8 million realized gains and no realized gains or losses, respectively.

Variable Interest Entities

In February 2015, the FASB issued ASU No. 2015-02 "Consolidation (Topic 810):"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. Generally, only a single limited partner that is able to exercise substantive kick-out rights will consolidate. The Company adopted ASU No. 2015-02 on January 1, 2016. Based on the Company’s evaluation of the new standard, will be effectiveit 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 beginningcontinues 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 early adoption is permitted, including adoption in an interim period.the Company continues to consolidate those co-investments as the Company was determined to be the primary beneficiary. The new standard must be applied using a modified retrospective approach by recording a cumulative-effect adjustmentconsolidated total assets and liabilities related to equity/capitalthe 9 consolidated co-investments and 19 DownREIT limited partnerships, net of intercompany eliminations, were approximately $901.3 million and $229.5 million, respectively, 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,June 30, 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$893.1 million and $29.4$231.8 million, in debt issuance costs, net of accumulated amortization from an asset to a reduction to associated debt liabilitiesrespectively, as of SeptemberDecember 31, 2015. Noncontrolling interests in these entities was $53.3 million and $54.6 million as of June 30, 20152016 and December 31, 2014,2015, respectively.

Marketable Securities

The Company reportsCompany's financial risk in each VIE is limited to its available for sale securities at fair value, based on quoted market prices (Level 2 forequity investment in the unsecured bondsVIE. As of June 30, 2016 and Level 1 for the common stock and investment funds, as defined by the Financial Accounting Standards BoardDecember 31,

12

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
SeptemberJune 30, 20152016 and 20142015
(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 treasuries5,020
 6
 5,026
Common stock and stock funds34,653
 4,609
 39,262
Held to maturity: 
  
  
Mortgage backed securities76,993
 —
 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 treasuries3,769
 3
 3,772
Common stock and stock funds25,755
 5,137
 30,892
Held to maturity: 
  
  
Mortgage backed securities67,996
 —
 67,996
Total - marketable securities$106,955
 $5,285
 $112,240
  Other investments5,000
 —
 5,000
Total - Marketable securities and other investments$111,955
 $5,285
 $117,240

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

Variable Interest Entities

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

13

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

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

Equity BasedEquity-based Compensation

The Company accounts for equitycost of share and unit based compensation usingawards is measured at the grant date based on the estimated fair value method of accounting.the awards.  The estimated fair value of stock options and restricted stock granted by the Company isare being amortized over the vesting period of the stock options.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, 2014)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 SeptemberJune 30, 20152016 and December 31, 2014,2015, 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 $4.7$5.1 billion of fixed rate debt, including unsecured debt, at SeptemberJune 30, 20152016 is approximately $4.9$5.3 billion and the Company’s variable rate debt excluding borrowings under the lines of credit, at SeptemberJune 30, 20152016 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 SeptemberJune 30, 20152016 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 SeptemberJune 30, 2015.2016.

At SeptemberJune 30, 2016, the Company’s investments in mortgage backed securities had a carrying value of $87.6 million and the Company estimated the fair value to be approximately $115.4 million. At December 31, 2015, the Company’s investments in mortgage backed securities had a carrying value of $77.0$80.4 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$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 $2.9$3.6 million and $3.4 million during both the three months ended SeptemberJune 30, 20152016 and 2014,2015, respectively, and $8.3$6.8 million and $7.6$5.4 million during the ninesix months ended SeptemberJune 30, 20152016 and 2014,2015, respectively. The Company capitalizes leasing commissions associated with the lease-up of a development communitycommunities and amortizes the costs over the life of the leases. The amounts capitalized for leasing commissions are immaterial for all periods presented.

Co-investments

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

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

14

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

by which the fair value of the co-investment interest the Company previously owned exceeds its carrying value.  A majority of the co-investments, excluding the preferred equity investments, compensate the Company for its asset management services and some of these investments may provide promote income if certain financial return benchmarks are achieved. Asset management

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2016 and 2015
(Unaudited)

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 infrom 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
 $(51,452)
Other comprehensive income before reclassification(4,403) (526) (4,929)
Amounts reclassified from accumulated other comprehensive loss6,024
 —
 6,024
Other comprehensive income1,621
 (526) 1,095
Balance at September 30, 2015$(54,382) $4,025
 $(50,357)
 
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
 $(42,011)
Other comprehensive (loss) income before reclassification(5,286) 2,077
 (3,209)
Amounts reclassified from accumulated other comprehensive loss3,995
 (1,782) 2,213
Other comprehensive (loss) income(1,291) 295
 (996)
Balance at June 30, 2016$(49,657) $6,650
 $(43,007)

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
 $(49,356)
Other comprehensive income before reclassification(4,552) (543) (5,095)
Amounts reclassified from accumulated other comprehensive loss6,227
 —
 6,227
Other comprehensive income1,675
 (543) 1,132
Balance at September 30, 2015$(52,305) $4,081
 $(48,224)
 
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
 $(39,598)
Other comprehensive (loss) income before reclassification(5,466) 2,148
 (3,318)
Amounts reclassified from accumulated other comprehensive loss4,131
 (1,843) 2,288
Other comprehensive (loss) income(1,335) 305
 (1,030)
Balance at June 30, 2016$(47,422) $6,794
 $(40,628)

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

Accounting Estimates

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




15

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
SeptemberJune 30, 20152016 and 20142015
(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 development5,605
Real estate held for sale, net108
Co-investments224
Acquired in-place lease value77
Other assets16
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 merger3,775
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 ThirdSecond Quarter of 20152016 and Subsequent Events

Significant Transactions

Dispositions

In April 2016, a Company co-investment, BEXAEW, LLC, sold Canyon Creek, a 200 unit apartment community, located in Northridge, CA for $53.5 million. The Company's share of the gain on sale was $5.6 million, which the Company recorded in the statement of income and comprehensive income as equity income in co-investments. 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.

Preferred Equity Investments

In August 2015,May 2016, the Company made a $5.0$23.7 million preferred equity investment in a related party limited liability company that owns Alta Vista Apartments,624 Yale, a 92206 apartment home community development project located in Los Angeles, CA.Seattle, WA. This investment will earn a 9.5% preferred return and is scheduled to mature in August 2022. (See Note 5 - "Related Party Transactions"November 2020 and will accrue interest based on a 10.0% compounded preferred return for further discussion.)the first 30 months, after which the rate may drop to 8.0% if certain loan-to-value thresholds are met.

Series H Cumulative Redeemable Preferred Stock Redemption

In August 2015,April 2016, the Company redeemed a preferred equity investmentall 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 for $73.8 million in a joint venture that holds propertycash. As the notice of redemption was given in San Jose, CA with aMarch 2016, the $2.5 million excess of redemption value over carrying value of $20.4 million. The Company recognized a gain of $1.5 millionwas recorded as a result of this redemption which is included in equitycharge to net income from co-investments inattributable to common stockholders for the Condensed Consolidated Statement of Income and Comprehensive Income.quarter ended March 31, 2016.

Common StockIssuance of Unsecured Debt

During the third quarter,In April 2016, the Company issued 155,728 shares$450 million of common stock, through our equity distribution program, at an average price3.375% senior unsecured notes that mature in April 2026. The interest is paid semi-annually in arrears on April 15 and October 15 of $228.61 foreach year, commencing on October 15, 2016 until the maturity date of April 15, 2026. The Company used the net proceeds of $35.4 million.this offering to repay indebtedness under its unsecured lines of credit and for other general corporate and working capital purposes.

(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 June 30, 2016 and December 31, 2015 are as follows (in thousands, except in parenthetical):
16
 Ownership Percentage June 30, 2016 December 31, 2015
Membership interest/Partnership interest in:     
CPPIB55% $379,311
 $376,862
Wesco I, III and IV50% 209,573
 218,902
BEXAEW50% 65,636
 88,850
Palm Valley50% 68,229
 68,525
Other50%-55%
 31,517
 32,927
Total operating co-investments  754,266
 786,066
Total development co-investments50%-55%
 175,269
 143,669
Total preferred interest co-investments (includes related party investments of $35.8 million as of both June 30, 2016 and December 31, 2015, respectively)  173,737
 106,312
Total co-investments  $1,103,272
 $1,036,047

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
SeptemberJune 30, 20152016 and 20142015
(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 IV218,316
 256,790
BEXAEW89,236
 97,686
Palm Valley69,428
 70,186
Other6,143
 19,519
Total operating co-investments718,616
 781,158
Total development co-investments212,892
 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 areis as follows (in thousands).
September 30, 2015 December 31, 2014June 30, 2016 December 31, 2015
Combined balance sheets: (1)
      
Rental properties and real estate under development$3,281,309
 $3,426,574
$3,327,936
 $3,360,360
Other assets117,430
 107,902
114,524
 96,785
Total assets$3,398,739
 $3,534,476
$3,442,460
 $3,457,145
Debt$1,423,734
 $1,568,398
$1,473,705
 $1,499,601
Other liabilities109,504
 91,579
96,151
 92,241
Equity (1)
1,865,501
 1,874,499
1,872,604
 1,865,303
Total liabilities and equity$3,398,739
 $3,534,476
$3,442,460
 $3,457,145
Company's share of equity$1,036,043
 $1,042,423
$1,103,272
 $1,036,047


17

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

Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
2015 2014 2015 20142016 2015 2016 2015
Combined statements of income: (1)
              
Property revenues$65,869
 $51,725
 $191,458
 $128,469
$69,180
 $62,092
 $144,310
 $125,589
Property operating expenses(23,094) (18,759) (69,232) (48,875)(24,580) (23,184) (50,401) (46,138)
Net operating income42,775
 32,966
 122,226
 79,594
44,600
 38,908
 93,909
 79,451
Gain on sale of real estate—
 —
 14
 11,369
10,796
 —
 28,291
 14
Interest expense(11,314) (9,838) (33,727) (25,283)(11,142) (11,097) (24,282) (22,413)
General and administrative(1,335) (1,840) (4,414) (5,039)(1,540) (1,473) (2,780) (3,079)
Equity income from co-investments (2)
—
 4,808
 —
 14,351
Depreciation and amortization(26,574) (21,357) (76,220) (49,935)(25,391) (24,265) (54,107) (49,646)
Net income$3,552
 $4,739
 $7,879
 $25,057
$17,323
 $2,073
 $41,031
 $4,327
Company's share of net income (3)
$7,179
 $4,910
 $15,962
 $21,065
Company's share of net income (2)
$14,296
 $4,472
 $29,364
 $8,783
 
(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$0.9 million and $1.1$0.7 million for the three months ended SeptemberJune 30, 20152016 and 2014,2015, respectively and $2.9$1.7 million and $1.6 million for both the ninesix months ended SeptemberJune 30, 2016 and 2015, and 2014.respectively.

(4) Notes and Other Receivables
 
Notes receivable, secured by real estate, and other receivables consist of the following as of SeptemberJune 30, 20152016 and December 31, 20142015 (in thousands):
September 30, 2015 December 31, 2014June 30, 2016 December 31, 2015
Notes receivable, secured, bearing interest at 6.0%, due December 2016$3,219
 $3,212
$3,219
 $3,219
Notes and other receivables from affiliates(1)4,336
 8,105
4,893
 3,092
Other receivables15,113
 13,606
12,336
 12,974
$22,668
 $24,923
$20,448
 $19,285
(1) The Company had $4.9 million and $3.1 million of short-term loans outstanding and due from various joint ventures as of June 30, 2016 and December 31, 2015, respectively. See Note 5, Related Party Transactions, for additional details.




ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2016 and 2015
(Unaudited)

(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$3.2 million and $4.1$3.6 million during the three months ended SeptemberJune 30, 20152016 and 2014,2015, respectively, and $12.5$6.5 million and $11.7$9.3 million during the ninesix months ended SeptemberJune 30, 20152016 and 2014,2015, respectively. All of these fees are net of intercompany amounts eliminated by the Company. The Company netted development and redevelopment fees of $1.2$1.1 million and $1.7$1.5 million against general and administrative expenses for the three months ended SeptemberJune 30, 20152016 and 2014,2015, respectively, and $5.8$2.4 million and $4.9$4.6 million for the ninesix months ended SeptemberJune 30, 20152016 and 2014,2015, 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. 

During the first quarter,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

18

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

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

In June 2015, the Company made a $10.0 million preferred equity investment in an entity affiliated with MMC that owns Greentree Apartments, a 220 apartment community located in San Jose, CA. This investment will earnearns 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 earnearns 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 earnearns 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,January 2013, the Company acquired Paragon Apartments,invested $8.6 million as a 301 apartment community locatedpreferred equity interest investment in Fremont, CA for $111.0 million from an entity affiliated with MMC that owns an apartment development in Redwood City, CA. In March 2015, the Company's preferred interest investment was partially owned by an affiliateprepaid and the Company recognized a gain of MMC.  Independent members$0.5 million as a result of the Company’s Board of Directors that serve on the Nominating and Corporate Governance and Audit Committees approved the acquisition of Paragon Apartments.prepayment.

The Company has provided short-term bridge loans to affiliates.  As of SeptemberJune 30, 20152016 and December 31, 2014, $4.32015, $4.9 million and $8.1$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):
 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 rate224,383
 224,130
 1.2
Unsecured bonds - fixed rate2,402,737
 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 bonds3.6% 3.6%  
Weighted average interest rate on variable rate term loan2.4% 2.4%  
Weighted average interest rate on lines of credit1.7% 1.8%  
Weighted average interest rate on mortgage notes payable4.5% 4.6%  

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

19

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
SeptemberJune 30, 20152016 and 20142015
(Unaudited)

 June 30, 2016 December 31, 2015 
Weighted Average
Maturity
In Years
Unsecured bonds private placement - fixed rate$314,067
 $463,891
 4.1
Term loan - variable rate224,635
 224,467
 0.4
Bonds public offering - fixed rate2,839,026
 2,400,322
 6.8
Unsecured debt, net (1)
3,377,728
 3,088,680
  
Lines of credit, net (2)
—
 11,707
 
Mortgage notes payable, net (3)
2,240,558
 2,215,077
 5.3
Total debt, net$5,618,286
 $5,315,464
  
Weighted average interest rate on fixed rate unsecured and unsecured private placement bonds3.6% 3.6%  
Weighted average interest rate on variable rate term loan2.4% 2.4%  
Weighted average interest rate on lines of credit1.9% 1.9%  
Weighted average interest rate on mortgage notes payable4.4% 4.4%  

(1) Includes unamortized premium and discounts of $5.7 million and $14.3 million and reduced by unamortized debt issuance costs of $18.0 million and $15.6 million, as of June 30, 2016 and December 31, 2015, respectively.
(2) Lines of credit, net, related to the Company's two lines of unsecured credit aggregating $1.0 billion, excludes unamortized debt issuance costs of $3.6$3.8 million as of SeptemberJune 30, 20152016 as the net effect resulted in a debitnegative debt balance and as such the amount was reclassified to prepaid expenses and other assets on the condensed consolidated balance sheets. The December 31, 20142015 amount includes $3.6$3.3 million of unamortized debt issuance costs because the net balance resulted in a creditpositive debt balance and is presented on a net basis.
(3) Includes unamortized premium of $69.3$59.9 million and $83.8$64.8 million and reduced by unamortized debt issuance costs of $10.7$7.6 million and $11.9$8.0 million, as of SeptemberJune 30, 20152016 and December 31, 2014,2015, respectively.

The aggregate scheduled principal payments of the Company’s outstanding debt as of SeptemberJune 30, 20152016 are as follows (excluding lines of credit) ($ in(in thousands):
Remaining in 2015$7,296
2016379,707
Remaining in 2016$215,402
2017564,178
564,851
2018320,621
321,328
2019641,393
661,954
2020693,868
Thereafter3,342,742
3,120,852
$5,255,937
$5,578,255

(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.properties and properties that have been sold. Other non-segment assets include real estate under

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2016 and 2015
(Unaudited)

development, co-investments, cash and cash equivalents, marketable securities, notes and other receivables, prepaid expenses, and other assets and deferred charges.assets.

The revenues and net operating income for each of the reportable operating segments are summarized as follows for the three and ninesix months ended SeptemberJune 30, 2016 and 2015 and 2014 ($ in(in thousands):

20
 Three Months Ended   June 30, Six Months Ended   June 30,
 2016 2015 2016 2015
Revenues:       
Southern California$144,772
 $131,026
 $286,264
 $254,481
Northern California115,361
 103,041
 228,094
 201,692
Seattle Metro53,575
 49,826
 105,649
 98,480
Other real estate assets5,854
 10,208
 11,733
 19,677
Total property revenues$319,562
 $294,101
 $631,740
 $574,330
Net operating income:       
Southern California$98,934
 $87,810
 $195,387
 $173,340
Northern California83,510
 73,682
 164,221
 143,579
Seattle Metro35,975
 33,674
 71,664
 66,803
Other real estate assets5,064
 8,858
 9,899
 13,360
Total net operating income223,483
 204,024
 441,171
 397,082
Depreciation and amortization(109,673) (113,731) (219,380) (220,638)
Interest expense(55,568) (50,802) (108,034) (98,348)
Total return swap income2,814
 —
 5,937
 —
Management and other fees from affiliates2,028
 2,061
 4,052
 4,705
General and administrative(9,698) (9,549) (18,880) (20,094)
Merger and integration expenses—
 (1,410) —
 (3,798)
Acquisition and investment related costs(267) (429) (1,095) (976)
Interest and other income9,409
 3,254
 14,617
 7,453
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-investments14,296
 4,472
 29,364
 8,783
Gain on remeasurement of co-investment—
 12,652
 —
 34,014
Net income$76,824
 $50,542
 $163,731
 $115,295


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
SeptemberJune 30, 20152016 and 20142015
(Unaudited)

 Three Months Ended 
 September 30,		 Nine Months Ended 
 September 30,
 2015 2014 2015 2014
Revenues:       
Southern California$135,900
 $122,089
 $394,375
 $311,873
Northern California110,483
 94,807
 319,834
 239,018
Seattle Metro51,181
 47,132
 149,662
 120,281
Other real estate assets4,958
 4,484
 12,981
 13,641
Total property revenues$302,522
 $268,512
 $876,852
 $684,813
Net operating income:       
Southern California90,377
 78,860
 263,715
 204,177
Northern California79,223
 66,313
 228,190
 167,034
Seattle Metro34,484
 31,751
 101,288
 80,198
Other real estate assets4,319
 3,526
 12,292
 9,478
Total net operating income208,403
 180,450
 605,485
 460,887
Management and other fees from affiliates2,104
 2,361
 6,809
 6,856
Depreciation and amortization(116,308) (102,286) (336,946) (253,890)
General and administrative(11,129) (11,479) (31,223) (28,621)
Merger and integration expenses—
 (3,857) (3,798) (46,413)
Acquisition and investment related costs(381) (51) (1,357) (768)
Interest expense(50,053) (45,830) (148,401) (117,021)
Interest and other income7,367
 2,992
 14,820
 8,685
Equity income from co-investments7,179
 4,910
 15,962
 21,065
Gains on sale of real estate and land—
 31,372
 7,112
 38,853
Gain on remeasurement of co-investment—
 —
 34,014
 —
Net income$47,182
 $58,582
 $162,477
 $89,633

Total assets for each of the reportable operating segments are summarized as follows as of SeptemberJune 30, 20152016 and December 31, 2014 ($ in2015 (in thousands):
September 30, 2015 December 31, 2014June 30, 2016 December 31, 2015
Assets:      
Southern California$4,813,844
 $4,241,277
$4,847,701
 $4,912,264
Northern California3,888,700
 3,641,720
3,866,145
 3,749,072
Seattle Metro1,616,932
 1,647,058
1,686,923
 1,613,175
Other real estate assets142,958
 149,820
109,798
 107,066
Net reportable operating segment - real estate assets10,462,434
 9,679,875
10,510,567
 10,381,577
Real estate under development226,690
 429,096
157,659
 242,326
Co-investments1,036,043
 1,042,423
1,103,272
 1,036,047
Real estate held for sale, net8,742
 56,300
—
 26,879
Cash and cash equivalents, including restricted cash72,306
 95,749
215,376
 123,055
Marketable securities and other investments133,058
 117,240
Marketable securities152,263
 137,485
Notes and other receivables22,668
 24,923
20,448
 19,285
Other non-segment assets50,776
 81,126
47,106
 38,437
Total assets$12,012,717
 $11,526,732
$12,206,691
 $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.
21
 Three Months Ended June 30, 2016 Three Months Ended June 30, 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$72,013
 65,451,110
 $1.10
 $45,555
 64,810,184
 $0.70
Effect of Dilutive Securities—
 124,268
  
 —
 162,668
  
Diluted: 
  
  
  
  
  
Net income available to common stockholders$72,013
 65,575,378
 $1.10
 $45,555
 64,972,852
 $0.70


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
SeptemberJune 30, 20152016 and 20142015
(Unaudited)

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

Essex Property Trust, Inc.
 Three Months Ended 
 September 30, 2015		 Three Months Ended 
 September 30, 2014
 Income 
Weighted-
average
Common
Shares
 
Per
Common
Share
Amount
 Income 
Weighted-
average
Common
Shares
 
Per
Common
Share
Amount
Basic:           
Net income available to common stockholders$42,323
 65,138,868
 $0.65
 $53,566
 62,892,601
 $0.85
Effect of Dilutive Securities—
 158,682
  
 —
 177,171
  
Diluted: 
  
  
  
  
  
Net income available to common stockholders$42,323
 65,297,550
 $0.65
 $53,566
 63,069,772
 $0.85
Nine Months Ended 
 September 30, 2015		 Nine Months Ended 
 September 30, 2014		Six Months Ended June 30, 2016 Six Months Ended June 30, 2015
Income 
Weighted-
average
Common
Shares
 
Per
Common
Share
Amount
 Income 
Weighted-
average
Common
Shares
 
Per
Common
Share
Amount
Income Weighted-
average
Common
Shares		 Per
Common
Share
Amount		 Income Weighted-
average
Common
Shares		 Per
Common
Share
Amount
Basic:                      
Net income available to common stockholders$147,241
 64,714,994
 $2.28
 $76,685
 54,250,104
 $1.41
$149,994
 65,428,382
 $2.29
 $104,918
 64,499,545
 $1.63
Effect of Dilutive Securities—
 177,776
  
 —
 193,123
  
—
 130,429
  
 —
 177,976
  
Diluted: 
  
  
  
  
  
 
  
  
  
  
  
Net income available to common stockholders$147,241
 64,892,770
 $2.27
 $76,685
 54,443,227
 $1.41
$149,994
 65,558,811
 $2.29
 $104,918
 64,677,521
 $1.62

Weighted average convertible limited partnership units of 2,177,6302,223,928 and 2,164,556,2,182,025, which include vested Series Z Incentive Units, Series Z-1 incentive units,Incentive Units, 2014 Long-Term Incentive Plan Units, and 2015 Long-Term Incentive Plan Units, for the three months ended SeptemberJune 30, 20152016 and 2014,2015, respectively, and 2,181,2992,225,897 and 2,234,4852,183,163 for the ninesix months ended SeptemberJune 30, 2015,2016, and 2014,2015, respectively, were not included inexcluded from the determinationcalculation of diluted EPS because they were anti-dilutive. The related income allocated to these convertible limited partnership units which includes vested Series Z-1 units, aggregated $1.5$2.4 million and $1.8$1.6 million for the three months ended SeptemberJune 30, 20152016 and 2014,2015, respectively, and $5.1$5.2 million and $3.4$3.6 million for the ninesix months ended SeptemberJune 30, 20152016 and 2014,2015, respectively. Additionally, excludes 902,668953,006 DownREIT units as they are anti-dilutive.
 
Stock options of 24,50087,954 and 24,500 for the three months ended June 30, 2016 and 2015, respectively, and 87,954 and 36,956 for the six months ended June 30, 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 threeperiods ended and, nine months ended September 30, 2015, respectively, because the effects on earnings per share were anti-dilutive. Stock options of 8,343 and 42,518 for the three and nine months ended September 30, 2014, respectively, were not included in the diluted earnings per share calculation because the effects on earnings per sharetherefore, were anti-dilutive.

Essex Portfolio, L.P.
 Three Months Ended June 30, 2016 Three Months Ended June 30, 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$74,463
 67,675,038
 $1.10
 $47,088
 66,992,209
 $0.70
Effect of Dilutive Securities—
 124,268
  
 —
 162,668
  
Diluted: 
  
  
  
  
  
Net income available to common unitholders$74,463
 67,799,306
 $1.10
 $47,088
 67,154,877
 $0.70


22

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
SeptemberJune 30, 20152016 and 20142015
(Unaudited)

Essex Portfolio, L.P.

 Three Months Ended 
 September 30, 2015		 Three Months Ended 
 September 30, 2014
 Income 
Weighted-
average
Common Units
 
Per
Common
Unit
Amount
 Income 
Weighted-
average
Common Units
 
Per
Common
Unit
Amount
Basic:           
Net income available to common unitholders$43,794
 67,316,498
 $0.65
 $55,382
 65,057,157
 $0.85
Effect of Dilutive Securities—
 158,682
  
 —
 177,171
  
Diluted: 
  
  
  
  
  
Net income available to common unitholders$43,794
 67,475,180
 $0.65
 $55,382
 65,234,328
 $0.85

Nine Months Ended 
 September 30, 2015		 Nine Months Ended 
 September 30, 2014		Six Months Ended June 30, 2016 Six Months Ended June 30, 2015
Income 
Weighted-
average
Common Units
 
Per
Common
Unit
Amount
 Income 
Weighted-
average
Common Units
 
Per
Common
Unit
Amount
Income Weighted-
average
Common Units		 Per
Common
Unit
Amount		 Income Weighted-
average
Common Units		 Per
Common
Unit
Amount
Basic:                      
Net income available to common unitholders$152,356
 66,896,293
 $2.28
 $80,127
 56,484,589
 $1.42
$155,228
 67,654,279
 $2.29
 $108,514
 66,682,708
 $1.63
Effect of Dilutive Securities—
 177,776
  
 —
 193,123
  
—
 130,429
  
 —
 177,976
  
Diluted: 
  
  
  
  
  
 
  
  
  
  
  
Net income available to common unitholders$152,356
 67,074,069
 $2.27
 $80,127
 56,677,712
 $1.41
$155,228
 67,784,708
 $2.29
 $108,514
 66,860,684
 $1.62
 
Stock options of 24,50087,954 and 24,500 for the three months ended June 30, 2016 and 2015, respectively, and 87,954 and 36,956 for the six months ended June 30, 2016 and 2015, respectively, were excluded from the calculation of diluted earnings per shareunit because the assumed proceeds per unit of these options plus the average unearned compensation were greater than the average market price of the common unit for the threeperiods ended and, nine months ended September 30, 2015, respectively, because the effects on earnings per share were anti-dilutive. Stock options of 8,343 and 42,518 for the three and nine months ended September 30, 2014, respectively, were not included in the diluted earnings per share calculation because the effects on earnings per sharetherefore, were anti-dilutive. Additionally, excludes 902,668953,006 DownREIT units as they are anti-dilutive.
 
(9) Derivative Instruments and Hedging Activities

As of SeptemberJune 30, 2015,2016, 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 SeptemberJune 30, 2015,2016, the Company has interest rate cap contractscaps, which are not accounted for as hedges, totaling a notional amount of $148.1$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 substantially all$20.7 million of the Company’s tax exempt variable rate debt.

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

As of Septemberboth June 30, 20152016 and December 31, 2014,2015, the aggregate carrying value of the interest rate swap contracts was a liability of $1.9$0.7 million and $1.8$1.0 million, respectively, whichand is classifiedincluded in other liabilities on the condensed consolidated balance sheets. The aggregate carrying value of the interest rate cap contractscaps was zero on the condensed consolidated balance sheets as of Septemberboth June 30, 20152016 and December 31, 2014.2015.

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 and six months ended June 30, 2016 and 2015, respectively.
23
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 the remaining $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 $16 thousand and $4 thousand at June 30, 2016 and December 31, 2015, respectively. These total return swaps are scheduled to mature between September 2021 and November 2022. Realized gains of $2.8 million and $5.9 million are reported in the condensed consolidated income statements as total return swap income for the three and six months ended June 30, 2016, respectively. There was no total return swap income for the both the three and six months ended June 30, 2015.



ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
SeptemberJune 30, 20152016 and 20142015
(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 remediation and other potential liability.that matter. The Company will consider whether any such occurrencematter 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 20142015 Annual Report on Form 10-K for the year ended December 31, 2014.2015.
 
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 SeptemberJune 30, 2015,2016, had an approximately 96.8%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 SeptemberJune 30, 2015,2016, the Company had ownership interests in 245243 stabilized apartment communities, comprising 58,76859,241 apartment homes, excluding the Company’s ownership in preferred equity interest co-investments, and the Company also had ownership interests in fourthree operating commercial buildings with approximately 320,235154,465 square feet and nineseven active developments. The Company’s apartment communities are predominately located in the following major West Coast regions:

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

As of SeptemberJune 30, 2015,2016, the Company’s development pipeline was comprised of two consolidated projects under development, and sevenfive unconsolidated joint venture projects under development, and various consolidated predevelopment projects all aggregating 2,7592,272 apartment homes, with total incurred costs of $0.8$0.6 billion, and estimated remaining project costs of $0.8 billion for total estimated project costs of $1.6$1.4 billion.

The Company’s consolidated apartment communities are as follows:
As of September 30, 2015 As of September 30, 2014As of June 30, 2016 As of June 30, 2015
Apartment Homes % Apartment Homes %Apartment Homes % Apartment Homes %
Southern California23,514
 48% 22,168
 46%23,949
 49% 23,514
 48%
Northern California14,807
 31% 14,601
 31%14,865
 30% 14,807
 31%
Seattle Metro10,239
 21% 10,216
 21%10,239
 21% 10,239
 21%
Arizona-
 -
 902
 2%
Total48,560
 100% 47,887
 100%49,053
 100% 48,560
 100%

Co-investments, including Wesco I, LLC ("Wesco I"), Wesco III, LLC ("Wesco III"), Wesco IV, LLC (“Wesco IV”), Canadian Pension Plan Investment Board ("CPPIB" or "CPP"), Palm Valley, and BEXAEW, LLC (“BEXAEW”) communities,

developments under construction, and preferred equity interest co-investment communities are not included in the table presented above for both periods.

24


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

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

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

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

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

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

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

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

Redemption of Preferred Equity Investment

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

Comparison of the Three Months Ended SeptemberJune 30, 20152016 to the Three Months Ended SeptemberJune 30, 20142015

The Company’s average financial occupancies for the Company’s stabilized apartment communities or “Quarterly Same-Property” (stabilized properties consolidated by the Company for the quarters ended SeptemberJune 30, 20152016 and 2014)2015) was 96.0% and 95.9% for both the three months ended SeptemberJune 30, 20152016 and 2014, respectively.2015. Financial occupancy is defined as the percentage resulting from dividing actual rental revenue by total potential rental revenue. Actual rental revenue represents contractual rental revenue pursuant to leases without considering delinquency and concessions. Total potential rental revenue represents the value of all apartment homes, with occupied apartment homes valued at contractual rental rates pursuant to leases and vacant apartment homes valued at estimated market rents. We believe that financial occupancy is a meaningful measure of occupancy because it considers the value of each vacant apartment home at its estimated market rate.

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

25

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

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

The regional breakdown of the Company’s Quarterly Same-Property portfolio for financial occupancy for the three months ended SeptemberJune 30, 20152016 and 20142015 is as follows:
Three Months Ended 
 September 30,		Three Months Ended June 30,
2015 20142016 2015
Southern California95.8% 95.9%96.0% 95.8%
Northern California96.3% 96.1%96.2% 96.3%
Seattle Metro96.1% 95.6%95.9% 96.1%

The following table provides a breakdown of revenue amounts, including revenues attributable to the Quarterly Same-Properties:
 Number of Three Months Ended 
 September 30,		 Dollar Percentage
 Properties 2015 2014 Change Change Number of Three Months Ended   June 30, Dollar Percentage
Property Revenues ($ in thousands)
         Properties 2016 2015 Change Change
Quarterly Same-Property(1):
          
        
Quarterly Same-Property Revenues:          
Southern California 84
 $117,186
 $110,915
 $6,271
 5.7% 92
 $128,800
 $121,362
 $7,438
 6.1%
Northern California 51
 94,326
 85,594
 8,732
 10.2
 54
 102,481
 95,263
 7,218
 7.6
Seattle Metro 45
 46,700
 43,522
 3,178
 7.3
 50
 53,575
 49,825
 3,750
 7.5
Total Quarterly Same-Property revenues 180
 258,212
 240,031
 18,181
 7.6
 196
 284,856
 266,450
 18,406
 6.9
Quarterly Non-Same Property Revenues  
 44,310
 28,481
 15,829
 55.6
  
 34,706
 27,651
 7,055
 25.5
Total property revenues  
 $302,522
 $268,512
 $34,010
 12.7%  
 $319,562
 $294,101
 $25,461
 8.7%

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

Quarterly Same-Property Revenues increased by $18.2$18.4 million or 7.6%6.9% to $258.2$284.9 million in the thirdsecond quarter of 20152016 from $240.0$266.5 million in the thirdsecond quarter of 2014.2015. The increase was primarily attributable to an increase of 7.6%7.0% in average rental

rates from $1,824$1,918 per apartment home in the third quarter of 2014 to $1,963 per apartment home in the third quarter of 2015. On a sequential basis the Company experienced Quarterly Same-Property revenue growth from the second quarter of 2015 to $2,052 per apartment home in the thirdsecond quarter of 2015 of $6.0 million or 2.4%, resulting from sequential revenue growth in all three regions mainly driven by an increase in average rental rates of 2.8%.2016. 

Quarterly Non-Same Property Revenues increased by $15.8$7.1 million or 55.6%25.5% to $44.3$34.7 million in the thirdsecond quarter of 20152016 from $28.5$27.7 million in the thirdsecond quarter of 2014.2015. The increase was primarily due to revenue generated by ninethe acquisition or consolidation of eight communities, net of dispositions, since April 1, 2015.

Management and other fees from affiliates remained relatively flat at $2.0 million in the second quarter of 2016 as compared to $2.1 million in the second quarter of 2015, reflecting no significant changes in management and other fee activity from joint ventures.

Property operating expenses, excluding real estate taxes increased $4.1 million to $61.5 million in the second quarter of 2016 from $57.4 million in the second quarter of 2015, primarily due to the acquisition or consolidation of eight communities, net of dispositions, since April 1, 2015. Quarterly Same-Property operating expenses, excluding real estate taxes, increased by $2.9 million or 5.5% for the second quarter of 2016 compared to the second quarter of 2015, primarily due to a $1.2 million increase in property management fees and increases of $0.6 million in both maintenance and repairs, and administrative expenses, respectively.

Real estate taxes increased by $1.9 million for the second quarter of 2016 compared to the second quarter of 2015 due primarily to the acquisition or consolidation of eight communities, net of dispositions, since April 1, 2015 and increases in tax rates and property valuations. Quarterly Same-Property real estate taxes increased by $0.4 million or 1.3% for the second quarter of 2016 compared to the second quarter of 2015 primarily due to increases in tax rates and property valuations.

Depreciation and amortization expense decreased by $4.1 million for the second quarter of 2016 compared to the second quarter of 2015, due to the amortization of a larger amount of acquired in-place leases during the second quarter of 2015 compared to the second quarter of 2016.

Merger and integration expenses include, but are not limited to, advisor fees, legal, and accounting fees related to the merger with BRE Properties, Inc. ("BRE") and related integration activity. There were no merger and integration expenses for the second quarter of 2016 and $1.4 million for the second quarter of 2015. 

Interest expense increased $4.8 million for the second quarter of 2016 compared to the second quarter of 2015, primarily due to the $450.0 million senior unsecured notes due on April 15, 2026 issued in April 2016 which resulted in $3.4 million interest expense for the second quarter of 2016 and none for the second quarter of 2015, offset by the reduction in interest expense due to the payoff of $150.0 million in private placement unsecured bonds. In addition, capitalized interest decreased $0.8 million in the second quarter of 2016 compared to the second quarter of 2015, which was due to a decrease in development costs as compared to the same period in 2015.

Total return swap income of $2.8 million in the second quarter of 2016 consists of monthly settlements related to the Company's total return swap contracts that were entered into during 2015 in connection with $257.3 million of fixed rate tax-exempt mortgage notes payable. There was no total return swap income for the second quarter of 2015.
Interest and other income increased by $6.2 million for the second quarter of 2016 compared to the second quarter of 2015 primarily due to $4.0 million in insurance reimbursements and legal settlements and $1.1 million in income from the sale of marketable securities.

Equity income in co-investments increased $9.8 million for the second quarter of 2016 compared to the second quarter of 2015 primarily due to $5.6 million in income on the gain on sale of a co-investment community during the second quarter of 2016.

Gain on remeasurement of co-investment of $12.7 million for the second quarter of 2015 was due to a remeasurement of the Company's investments, caused by the Company's purchase of the joint venture partner's 49.5% membership interest in the Reveal co-investment. There were no gains on remeasurement of co-investments for the second quarter of 2016.

Comparison of the Six Months Ended June 30, 2016 to the Six Months Ended June 30, 2015

Our average financial occupancies for the Company’s stabilized apartment communities or “2016/2015 Same-Property” (stabilized properties consolidated by the Company for the six months ended June 30, 2016 and 2015) was 96.0% and 96.1%, for the six months ended June 30, 2016 and 2015, respectively. 

The regional breakdown of the Company’s 2016/2015 Same-Property portfolio for financial occupancy for the six months ended June 30, 2016 and 2015 is as follows:
 Six Months Ended June 30,
 2016 2015
Southern California96.0% 95.9%
Northern California96.2% 96.2%
Seattle Metro95.8% 96.1%

The following table provides a breakdown of revenue amounts, including revenues attributable to the 2016/2015 Same-Properties:
  Number of Six Months Ended   June 30, Dollar Percentage
Property Revenues ($ in thousands) Properties 2016 2015 Change Change
         
2016/2015 Same-Property Revenues:          
Southern California 92
 $255,901
 $241,186
 $14,715
 6.1%
Northern California 54
 203,052
 187,482
 15,570
 8.3%
Seattle Metro 50
 105,648
 98,480
 7,168
 7.3%
Total 2016/2015 Same-Property revenues 196
 564,601
 527,148
 37,453
 7.1%
2016/2015 Non-Same Property Revenues  
 67,139
 47,182
 19,957
 42.3%
Total property revenues  
 $631,740
 $574,330
 $57,410
 10.0%

2016/2015 Same-Property Revenues increased by $37.5 million or 7.1% to $564.6 million in the six months ended June 30, 2016 from $527.1 million in the six months ended June 30, 2015. The increase was primarily attributable to an increase of 7.2% in average rental rates from $1,898 per apartment home for the six months ended June 30, 2015 to $2,034 per apartment home for the six months ended June 30, 2016. 

2016/2015 Non-Same Property Revenues increased by $20.0 million or 42.3% to $67.1 million in the six months ended June 30, 2016 from $47.2 million in the six months ended June 30, 2015. The increase was primarily due to revenue generated by the acquisition or consolidation of ten communities, net of dispositions, since JulyJanuary 1, 2014.2015.

Management and other fees from affiliates decreased by $0.3$0.7 million in the third quarter of 2015six months ended June 30, 2016 as compared to the third quarter of 2014.six months ended June 30, 2015. The decrease is primarily due to the loss of asset and management fees in 2015,the six months ended June 30, 2016, as compared to 2014, due to the consolidationsix months ended June 30, 2015, associated with the Company's purchase of the joint venture partner's remaining membership interest in The Huxley, The Dylan, and Reveal incommunities during the six months ended June 30, 2015 and the sale of certain Fund II communities.

Property operating expenses, excluding real estate taxes increased $4.2$8.6 million to $60.5$121.6 million in the third quarter of 2015six months ended June 30, 2016 from $56.3$113.0 million in the third quarter of 2014,six months ended June 30, 2015 primarily due to the acquisition or consolidation of nineten communities, net of dispositions, since JulyJanuary 1, 2014. Quarterly2015. 2016/2015 Same-Property operating expenses, excluding real estate taxes, increased by $2.2$5.6 million or 4.4%5.3% for the

26

third quarter of 2015 six months ended June 30, 2016 compared to the third quarter of 2014,six months ended June 30, 2015, primarily due to a $1.7$2.4 million increase in property management fees and a $1.5 million increase in maintenance and repairs and a $0.8 million increase in management fees, partially offset by a decrease of $0.3 million in administrative expenses.repairs.

Real estate taxes increased by $1.8$4.7 million for the third quarter of 2015six months ended June 30, 2016 compared to the third quarter of 2014six months ended June 30, 2015 due primarily to the acquisition or consolidation of nineten communities, net of dispositions, since JulyJanuary 1, 2014. Quarterly2015 and increases in tax rates and property valuations. 2016/2015 Same-Property real estate taxes decreasedincreased by $0.5$1.0 million or 1.6%1.7% for the third quarter of 2015six months ended June 30, 2016 compared to the third quarter of 2014six months ended June 30, 2015 primarily due to increases in tax rates and property tax refunds received in 2015 related to 2014.valuations.

Depreciation and amortization expense increaseddecreased by $14.0$1.3 million for the third quartersix months ended June 30, 2016 compared to the six months ended June 30, 2015 due to the amortization of a larger amount of acquired in-place leases during the six months ended June 30, 2015 compared to the third quarter of 2014, due to the acquisition or consolidation of nine communities since July 1, 2014.six months ended June 30, 2016. 

Merger and integration expenses include, but are not limited to, advisor fees, legal, and accounting fees related to the merger with BRE and related integration activity. There were no merger and integration expenses for the third quarter of 2015six months ended June 30, 2016 and $3.9$3.8 million for the third quarter of 2014.six months ended June 30, 2015. 

Interest expense increased $4.2$9.7 million for the third quarter of 2015six months ended June 30, 2016 compared to the third quarter of 2014,six months ended June 30, 2015, primarily due to a $2.2the $500.0 million decreasesenior unsecured notes due on April 1, 2025 issued in March 2015 and the $450.0 million senior unsecured notes due on April 15, 2026 issued in April 2016 which resulted in $12.2 million and $5.1 million interest expense for the six months ended June 30, 2016 and 2015, respectively. These additions were offset by the reduction in interest expense due to the payoff of $150.0 million in private placement unsecured bonds. In addition, capitalized interest decreased $2.1 million for the third quarter of 2015six months ended June 30, 2016 compared to the third quarter of 2014,six months ended June 30, 2015, which decrease was in turn due to thea decrease in development costs as compared to the same period in 2014.2015.

Total return swap income of $5.9 million in the six months ended June 30, 2016 consists of monthly settlements related to the Company's total return swap contracts that were entered into during 2015 in connection with $257.3 million of fixed rate tax-exempt mortgage notes payable. There was no total return swap income for the six months ended June 30, 2015.
 
Interest and other income increased by $4.4$7.2 million for the third quarter of 2015six months ended June 30, 2016 compared to the third quarter of 2014six months ended June 30, 2015 primarily due to an increase of $3.1$3.0 million in income from insurance proceedsreimbursements and $0.6legal settlements and $1.8 million in income from the sale of a marketable security.securities.

Equity income in co-investments increased $2.3$20.6 million for the third quarter of 2015six months ended June 30, 2016 compared to the third quarter of 2014six months ended June 30, 2015 primarily due to $13.0 million in income on the gain on the sale of $1.5 million from the early redemption of a preferred equity investment and a promote income allocation of $0.2 milliontwo co-investment communities during the third quarter of 2015.six months ended June 30, 2016.

GainsGain on sale of real estate and land decreasedincreased by $31.4$13.1 million for the third quarter of 2015six months ended June 30, 2016 compared to the third quarter of 2014six months ended June 30, 2015, due to a $2.2$10.7 million gain on the sale of Coldwater CanyonHarvest Park before tax expense and a $29.2$9.6 million gain on the sale of Mt. Sutrothe Company's former headquarters office building during the third quarter of 2014.

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

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

The regional breakdown of the Company’s 2015/2014 Same-Property portfolio for financial occupancy for the nine months ended September 30, 2015 and 2014 is as follows:
 Nine Months Ended 
 September 30,
 2015 2014
Southern California96.2% 96.2%
Northern California96.3% 96.2%
Seattle Metro96.3% 96.0%

27


The following table provides a breakdown of revenue amounts, including revenues attributable to the 2015/2014 Same-Properties:
  Number of Nine Months Ended 
 September 30,		 Dollar Percentage
  Properties 2015 2014 Change Change
Property Revenues ($ in thousands)
        
2015/2014 Same-Property(1):
          
Southern California 58
 $210,901
 $198,839
 $12,062
 6.1%
Northern California 38
 187,319
 169,346
 17,973
 10.6
Seattle Metro 34
 92,204
 85,606
 6,598
 7.7
Total 2015/2014 Same-Property revenues 130
 490,424
 453,791
 36,633
 8.1
2015/2014 Non-Same Property Revenues  
 386,428
 231,022
 155,406
 67.3
Total property revenues  
 $876,852
 $684,813
 $192,039
 28.0%

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

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

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

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

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

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

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

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

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

28

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

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

Gains on sale of real estate and land decreased by $31.7 million for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 primarily due to2016 versus $7.1 million in gains on the sales of Pinnacle South Mountain and two commercial buildings during the ninesix months ended SeptemberJune 30, 2015 as compared2015.

Deferred tax expense on gain on sale of real estate and land of $4.3 million for the six months ended June 30, 2016 was recorded due to a $7.5 million gainthe sale of Harvest Park, which was owned by our wholly owned taxable REIT subsidiary. There was no current tax expense on the sale of Vista Capri North, a $2.2 million gain onreal estate and land for the sale of Coldwater Canyon and a $29.2 million gain on the sale of Mt. Sutro during the ninesix months ended SeptemberJune 30, 2014.2016, because Harvest Park was sold in a like-kind exchange transaction.

Gain on remeasurement of co-investment increased byof $34.0 million for the ninesix months ended SeptemberJune 30, 2015 compared to the nine months ended September 30, 2014was due to thea remeasurement of the Company's investments, as a consequencecaused by the Company's purchase of the Company's acquisition of a controllingjoint venture partner's remaining membership interest in The Huxley, and The Dylan, properties, resulting in a gain of $21.3 million, and Reveal resulting in a gainco-investments. There were no gains on remeasurement of $12.7 million.co-investments for the six months ended June 30, 2016.

Liquidity and Capital Resources

As of SeptemberJune 30, 2015,2016, the Company had $35.7$182.5 million of unrestricted cash and cash equivalents and $133.1$152.3 million in marketable securities, of which $56.1$64.6 million were available for sale. We believe that cash flows generated by our operations, existing cash, cash equivalents, and marketable securities balances, availability under existing lines of credit, access to capital markets and the ability to generate cash from the disposition of real estate are sufficient to meet all of our reasonably anticipated cash needs during the next twelve months. The timing, source and amounts of cash flows provided by financing activities and used in investing activities are sensitive to changes in interest rates and other fluctuations in the capital markets environment, which can affect our plans for acquisitions, dispositions, development and redevelopment activities.

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

The Company has two lines of unsecured credit aggregating $1.03 billion. The Company has a $1.0 billion unsecured line of credit, and as of SeptemberJune 30, 2015,2016, there were no amounts outstanding on it.the line. The underlying interest rate is based on a tiered rate structure tied to the Company's credit ratings on the credit facility and the rate was LIBOR plus 0.95%0.90% as of SeptemberJune 30, 2015.2016. This facility matures in December 20182019 with one 18-month extension, exercisable at the Company’s option. The Company has a working capital unsecured line of credit agreement for $25.0 million.  This facility matures in January 2016.2018.  As of SeptemberJune 30, 2015,2016, there was $2.0 millionwere no

amounts outstanding on the $25.0 million unsecured line. The underlying interest rate on the $25.0 million line is based on a tiered rate structure tied to Fitchthe Company's credit ratings and S&P ratings on the credit facility ofwas LIBOR plus 0.95%.0.90% as of June 30, 2016.

In March 2015,April 2016, the Company issued $500$450 million of 3.50%3.375% senior unsecured notes that mature in April 1, 2025.2026. The interest is payablepaid semi-annually in arrears on April 115 and October 115 of each year, commencing on October 1, 201515, 2016 until the maturity date inof April 2025.15, 2026. The Company used the net proceeds of this offering to repay indebtedness under the Company’s $1.0 billionits unsecured linelines of credit facility, its $25.0 million unsecured working capital line 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 for $73.8 million in cash.

The Company has entered into equity distribution agreements with Cantor Fitzgerald & Co, Barclays Capital Inc., BMO Capital Markets Corp., BNB Paribas Securities Corp., Capital One Securities, Citigroup Global CapitalMarkets Inc., Jefferies LLC, ("Jefferies"), J.P. Morgan Securities LLC, ("JP Morgan"), Liquidnet, Inc., Mitsubishi UFJ Securities (USA), Inc., and UBS Securities LLC ("UBS"). PursuantLLC. The Company has not issued any shares pursuant to its equity distribution program during the ninesix months ended SeptemberJune 30, 20152016 and through October 30, 2015, the Company has issued 1,481,737 shares of common stock at an average price of $226.46 per share, for proceeds of $332.3 million, net of fees and commissions. Under this program, the Company may from time to time sell shares of common stock into the existing trading market at current market prices, and the Company anticipates using the net proceeds, which are contributed to the Operating Partnership, to pay down debt, acquire apartment communities and fund the development pipeline. As of October 30, 2015, the Company may sell an additional 1,719,109 shares under the current equity distribution program.July 28, 2016.


29

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

Development and Predevelopment Pipeline

The Company defines development activitiesprojects as new propertiescommunities that are being constructed, or are newly constructed and in the case of development communities, are in a phase of lease-up and have not yet reached stabilized operations. As of SeptemberJune 30, 2015,2016, the Company’s development pipeline was comprised of two consolidated projects under development and sevenfive unconsolidated joint venture projects under development, all aggregating 2,7592,272 apartment homes, with total incurred costs of $0.8$0.6 billion, and estimated remaining project costs of approximately $0.8 billion, $574 million of which represents the Company's estimated remaining costs, for total estimated project costs of $1.6$1.4 billion.

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

Redevelopment Pipeline

The Company defines redevelopment communities as existing properties owned or recently acquired, which have been targeted for additional investment by the Company with the expectation of increased financial returns through property improvement. During redevelopment, apartment homes may not be available for rent and, as a result, may have less than stabilized operations. As of SeptemberJune 30, 2015,2016, the Company had ownership interests in five major redevelopment communities aggregating 1,313 apartment homes with estimated redevelopment costs of $159.8 million, of which approximately $100.0$64.2 million remains to be expended. The Company has the ability to cease funding of the redevelopment pipeline as needed.

Derivative Activity

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

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

Alternative Capital Sources

The Company utilizes co-investments as an alternative source of capital for acquisitions of both operating and development communities. As of SeptemberJune 30, 2015,2016, the Company had an interest in 1,9881,476 apartment homes of communities actively under development with joint ventures for total estimated costs of $1.1 billion.$823 million. Total estimated remaining costs total approximately $542

$389 million, of which the Company estimates that our remaining investment in these development joint ventures will be approximately $278$197 million. In addition, the Company had an interest in 10,20810,188 apartment homes of operating communities with joint ventures for a total book value of $718.6$754.3 million as of SeptemberJune 30, 2015.2016.
 
Critical Accounting Policies and Estimates
 
The preparation of condensed consolidated financial statements, in accordance with GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. The Company defines critical accounting policies as those accounting policies that require the Company’s management to exercise their most difficult, subjective and complex judgments. The Company’s critical accounting

30

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

The Company’s critical accounting policies and estimates have not changed materially from the information reported in Note 2, “Summary of Critical and Significant Accounting Policies,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.2015.
  
Forward Looking Statements
 
Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this quarterly report on Form 10-Q which are not historical facts may be considered forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, including statements regarding the Company's expectations, hopes, intentions, beliefs and strategies regarding the future. Forward looking statements include statements regarding the Company’s expectations as to the total projected costs of predevelopment, development and redevelopment projects, beliefs as to our ability to meet our cash needs during the next twelve months and to fund the Company’s development and redevelopment pipeline, the expected impact of lawsuits on the Company, and statements regarding the Company's financing activities.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors including, but not limited to, that the Company will fail to achieve its business objectives, that the total projected costs of current predevelopment, development and redevelopment projects exceed expectations, that such development and redevelopment projects will not be completed, that development and redevelopment projects and acquisitions will fail to meet expectations, that estimates of future income from an acquired property may prove to be inaccurate, that future cash flows will be inadequate to meet operating requirements, that there may be a downturn in the markets in which the Company's properties are located, that the terms of any refinancing may not be as favorable as the terms of existing indebtedness, and that lawsuits will be more costly than anticipated, as well as those risks, special considerations, and other factors referred to in Item 1A, “Risk Factors,” of the Company's Annual Report on Form 10-K for the year ended December 31, 2014,2015, and those risk factors and special considerations set forth in the Company's other filings with the Securities and Exchange Commission (the “SEC”) which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. All forward-looking statements are made as of the date hereof, and the Company assumes no obligation to update this information.

Funds from Operations Attributable to Common Stockholders and Unitholders
 
Funds from Operations Attributable to Common Stockholders and Unitholders ("FFO") is a financial measure that is commonly used in the REIT industry.  The Company presents funds from operations as a supplemental operating performance measure. FFO is not used by the Company as, nor should it be considered to be, an alternative to net earnings computed under GAAP as an indicator of the Company’s operating performance or as an alternative to cash from operating activities computed under GAAP as an indicator of the Company’s ability to fund its cash needs.
 
FFO is not meant to represent a comprehensive system of financial reporting and does not present, nor does it intend to present, a complete picture of the Company's financial condition and operating performance. The Company believes that net earnings computed under GAAP is the primary measure of performance and that FFO is only meaningful when it is used in conjunction with net earnings. The Company considers FFO and FFO excluding non-recurring items and acquisition costs (referred to as “Core FFO”) to be useful financial performance measurements of an equity REIT because, together with net income and cash flows, FFO provides investors with an additional basis to evaluate operating performance and ability of a REIT to incur and

service debt and to fund acquisitions and other capital expenditures and ability to pay dividends. Further, the Company believes that its consolidated financial statements, prepared in accordance with GAAP, provide the most meaningful picture of its financial condition and its operating performance.
 
In calculating FFO, the Company follows the definition for this measure published by the National Association of REITs (“NAREIT”), which is a REIT trade association. The Company believes that, under the NAREIT FFO definition, the two most significant adjustments made to net income are (i) the exclusion of historical cost depreciation and (ii) the exclusion of gains and losses (including impairment charges on depreciable real estate) from the sale of previously depreciated properties. The Company agrees that these two NAREIT adjustments are useful to investors for the following reason:
 

31

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

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

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

The following table sets forth the Company’s calculation of FFO and Core FFO for the three and ninesix months ended SeptemberJune 30, 20152016 and 20142015 (in thousands except for share and per share data):


32

Essex Property Trust, Inc.
Three Months Ended 
 September 30,		 Nine Months Ended 
 September 30,		Three Months Ended   June 30, Six Months Ended   June 30,
2015 2014 2015 20142016 2015 2016 2015
Net income available to common stockholders$42,323
 $53,566
 $147,241
 $76,685
$72,013
 $45,555
 $149,994
 $104,918
Adjustments: 
  
  
  
 
  
  
  
Depreciation and amortization116,308
 102,286
 336,946
 253,890
109,673
 113,731
 219,380
 220,638
Gains not included in Funds from Operations attributable to common stockholders and unitholders—
 (31,372) (41,126) (41,664)(5,611) (12,652) (33,304) (41,126)
Deferred tax expense on sale of real estate and land - taxable REIT subsidiary activity—
 —
 4,279
 —
Depreciation add back from unconsolidated co-investments12,800
 9,986
 36,822
 23,060
12,457
 12,105
 24,480
 24,022
Noncontrolling interest related to Operating Partnership units1,471
 1,816
 5,115
 3,442
2,450
 1,581
 5,234
 3,644
Insurance reimbursements(1,751) —
 (1,751) —
Depreciation attributable to third party ownership and other(253) (335) (753) (996)(4) (251) 2
 (500)
Funds from Operations attributable to common stockholders and unitholders$170,898
 $135,947
 $482,494
 $314,417
$190,978
 $160,069
 $370,065
 $311,596
Funds from Operations attributable to common stockholders and unitholders per share - diluted$2.53
 $2.08
 $7.19
 $5.55
$2.81
 $2.38
 $5.45
 $4.66
Non-core items: 
  
  
  
 
  
  
  
Merger and integration expenses—
 3,857
 3,798
 46,413
—
 1,410
 —
 3,798
Acquisition and investment related costs381
 51
 1,357
 768
267
 429
 1,095
 976
Gain on sales of marketable securities, note prepayment and other investments(598) —
 (598) (886)
Gain on sale of land—
 —
 —
 (400)
Co-investment promote income(192) —
 (192) (4,904)
Gain on sale of marketable securities(1,103) —
 (1,843) —
Income from early redemption of preferred equity investments(1,485) —
 (1,954) —
—
 —
 —
 (469)
Insurance reimbursements(569) —
 (2,319) —
Other non-core adjustments—
 1,249
 (207) 710
Excess of redemption value of preferred stock over carrying value—
 —
 2,541
 —
Insurance reimbursements, legal settlements , and other, net(4,010) (582) (4,010) (1,957)
Core Funds from Operations attributable to common stockholders and unitholders$168,435
 $141,104

$482,379

$356,118
$186,132
 $161,326

$367,848

$313,944
Core Funds from Operations attributable to common stockholders and unitholders per share-diluted$2.49
 $2.16
 $7.19
 $6.28
$2.74
 $2.40
 $5.42
 $4.69
Weighted average number 
  
  
  
shares outstanding diluted (1)
67,535,685
 65,234,328
 67,135,143
 56,677,712
Weighted average number shares outstanding diluted (1)
67,877,202
 67,215,382
 67,864,255
 66,922,047

(1)Assumes conversion of all outstanding operating partnership interests in the Operating Partnership and excludes 902,668 DownREIT units for which the Operating Partnership has the ability and intention to redeem the DownREIT limited partnership units for cash and does not consider them to be common stock equivalents.
(1) Assumes conversion of all outstanding operating partnership interests in the Operating Partnership and excludes 739,779 DownREIT units for which the Operating Partnership has the ability and intention to redeem the DownREIT limited partnership units for cash and does not consider them to be common stock equivalents.

Net Operating Income (“NOI”)

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


33

Three Months Ended 
 September 30,		 Nine Months Ended 
 September 30,		Three Months Ended   June 30, Six Months Ended   June 30,
2015 2014 2015 20142016 2015 2016 2015
Earnings from operations$82,689
 $65,138
 $238,970
 $138,051
$105,873
 $80,966
 $205,868
 $156,281
Adjustments: 
  
  
  
 
  
  
  
Depreciation and amortization116,308
 102,286
 336,946
 253,890
109,673
 113,731
 219,380
 220,638
Management and other fees from affiliates(2,104) (2,361) (6,809) (6,856)(2,028) (2,061) (4,052) (4,705)
General and administrative11,129
 11,479
 31,223
 28,621
9,698
 9,549
 18,880
 20,094
Merger and integration expenses—
 3,857
 3,798
 46,413
—
 1,410
 —
 3,798
Acquisition and investment related costs381
 51
 1,357
 768
267
 429
 1,095
 976
NOI208,403
 180,450
 605,485
 460,887
223,483
 204,024
 441,171
 397,082
Less: Non same-property NOI(30,032) (18,478) (258,856) (149,241)
Less: Non-same property NOI(24,138) (19,780) (46,337) (33,129)
Same-property NOI (1)
$178,371
 $161,972
 $346,629
 $311,646
$199,345
 $184,244
 $394,834
 $363,953

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

Item 3: Quantitative and Qualitative Disclosures About Market Risks

Interest Rate Hedging Activities

The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, the Company uses interest rate swaps as part of its cash flow hedging strategy. As of SeptemberJune 30, 2015,2016, the Company has entered into seven interest rate swap contracts to mitigate the risk of changes in the interest-related cash outflows on its $225.0 million variable rate five-year unsecured term debt. As of SeptemberJune 30, 2015,2016, the Company also had $292.1$291.7 million of variable rate indebtedness, of which $148.1$20.7 million is subject to interest rate cap protection. The Company holds derivative instrumentsAll of the Company's interest rate swaps are designated as cash flow hedges as of SeptemberJune 30, 2015.2016. The following table summarizes the notional amount, carrying value, and estimated fair value of the Company’s cash flow hedge derivative instruments used to hedge interest rates as of SeptemberJune 30, 2015.2016. The notional amount represents the aggregate amount of a particular security that is currently hedged at one time, but does not represent exposure to credit, interest rates, or market risks.  The table also includes a sensitivity analysis to demonstrate the impact on the Company’s derivative instruments from an increase or decrease in 10-year Treasury bill interest rates by 50 basis points, as of SeptemberJune 30, 2015.2016.

  Carrying and Estimated Carrying Value  Carrying and Estimated Carrying Value
Notional Maturity Estimated 50 -50Notional Maturity Estimated 50 -50
(in thousands)Amount Date Range Fair Value Basis Points Basis PointsAmount Date Range Fair Value Basis Points Basis Points
Cash flow hedges:     
  
     
  
Interest rate swaps$225,000
 2016-2017 $(1,942) $(685) $(2,989)$225,000
 2016-2017 $(687) $(287) $(1,082)
Interest rate caps148,125
 2016-2020 —
 45
 —
20,674
 2018-2019 —
 3
 —
Total cash flow hedges$373,125
 2016-2020 $(1,942) $(640) $(2,989)$245,674
 2016-2019 $(687) $(284) $(1,082)

Additionally, the Company has aentered into total return swap which doescontracts, with an aggregate notional amount of $257.3 million that effectively converts $257.3 million of fixed mortgage notes payable to a floating interest rate based on SIFMA plus a spread and has a carrying value of $16 thousand at June 30, 2016. These derivatives do not qualify for hedge accounting, with a notional amount of $114.4 million and a carrying value and fair value of $5 thousand at September 30, 2015.accounting.

Interest Rate Sensitive Liabilities

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

34

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


The Company’s interest rate risk is monitored using a variety of techniques. The table below presents the principal amounts and weighted average interest rates by year of expected maturity to evaluate the expected cash flows (excludes lines of credit).flows.
 
For the Years Ended2015 2016 2017 2018 2019 Thereafter Total Fair value2016 2017 2018 2019 2020 Thereafter Total Fair value
(in thousands, except for interest rates)(in thousands, except for interest rates)              (in thousands, except for interest rates)          
Fixed rate debt$7,296
 179,669
 538,683
 320,080
 630,801
 3,062,325
 $4,738,854
 $4,908,133
$15,364
 539,356
 320,786
 651,362
 693,221
 2,841,457
 $5,061,546
 $5,319,991
Average interest rate4.6% 4.5% 3.3% 5.5% 4.3% 4.1% 4.1%  
4.6% 3.3% 5.5% 4.3% 5.0% 3.7% 4.0%  
Variable rate debt$—
 200,038
(1) 
25,495
(1) 
541
 10,592
 280,417
(2) (3) 
$517,083
 $513,037
$200,038
(1) 
25,495
(1) 
542
 10,592
 647
 279,395
(2) (3) 
$516,709
 $512,667
Average interest rate—
 2.1% 2.0% 2.0% 1.8% 1.5% 1.8%  
2.4% 2.4% 1.3% 1.7% 1.3% 1.1% 1.7%  
 
(1)$225.0 million subject to interest rate swap agreements.
(2)$148.1 million subject to interest rate caps.
(3)$114.4 million subject to total return swaps.
(1) $225.0 million is subject to interest rate swap agreements.
(2) $20.7 million is subject to interest rate caps.
(3) $257.3 million is subject to total return swaps.

The table incorporates only those exposures that exist as of SeptemberJune 30, 2015;2016; it does not consider those exposures or positions that could arise after that date. As a result, ourthe Company's ultimate realized gain or loss, with respect to interest rate fluctuations and hedging strategies would depend on the exposures that arise prior to settlement.

Item 4: Controls and Procedures

Essex Property Trust, Inc.

As of SeptemberJune 30, 2015,2016, Essex carried out an evaluation, under the supervision and with the participation of management, including Essex’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon that evaluation, Essex’s Chief Executive Officer and Chief Financial Officer concluded that as of SeptemberJune 30, 2015,2016, our disclosure controls and procedures were effective to ensure that the information required to be disclosed by Essex in the reports that Essex files or submit under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such disclosure controls and procedures were also effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to Essex’s management, including Essex’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

There were no changes in Essex’s internal control over financial reporting, that occurred during the quarter ended SeptemberJune 30, 2015,2016, that have materially affected, or are reasonably likely to materially affect, the Essex’s internal control over financial reporting.

Essex Portfolio, L.P.

As of SeptemberJune 30, 2015,2016, the Operating Partnership carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of SeptemberJune 30, 2015,2016, our disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Operating Partnership in the reports that the Operating Partnership files or submit under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such disclosure controls and procedures were also effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to the Operating Partnership’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.


35
Index

There were no changes in the Operating Partnership’s internal control over financial reporting, that occurred during the quarter ended SeptemberJune 30, 2015,2016, that have materially affected, or are reasonably likely to materially affect, the Operating Partnership’s internal control over financial reporting.
 

Part II -- Other Information

Item 1: Legal Proceedings

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

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

Item 1A: Risk Factors

There were no material changes to the Risk Factors disclosed in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2014,2015, as filed with the SEC and available at www.sec.gov.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

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

During the three months ended SeptemberJune 30, 2015,2016, the Operating Partnership issued partnership units in private placements in reliance on the exemption from registration provided by Section 4(2) of the Securities Act, in the amounts and for the consideration set forth below:

During the three months ended SeptemberJune 30, 2015,2016, Essex Property Trust, Inc. issued an aggregate of 191,91652,328 of its common stock upon the exercise of stock options, the vesting of restricted stock awards, and the issuancesexchange of Operating Partnership limited partnership units by limited partners into shares of common stock into the public market pursuant to its equity distribution program.stock. Essex Property Trust, Inc. contributed the proceeds from the option exercises and issuances of common stock pursuant to its equity distribution program of $39.0 million forduring the three months ended SeptemberJune 30, 20152016 to our Operating Partnership in exchange for an aggregate of 191,91652,328 common operating partnership units ("common units"), as required by the Operating Partnership’s partnership agreement.

Item 5: Other Information

None.


36

Item 6: Exhibits
 
A. Exhibits
3.1Articles Supplementary of Essex Property Trust, Inc., attached as Exhibit 3.1 to the Company's Current Report on Form 8-K, filed on May 23, 2016, and incorporated herein by reference
3.2Articles of Amendment and Restatement of Essex Property Trust, Inc., attached as Exhibit 3.2 to the Company's Current Report on Form 8-K, filed on May 23, 2016 and incorporated herein by reference
3.3Fifth Amended and Restated Bylaws of Essex Property Trust, Inc. (as of May 17, 2016), attached as Exhibit 3.3 to the Company's Current Report on Form 8-K, filed on May 23, 2015 and incorporated herein by reference
4.1Indenture, dated April 11, 2016, among Essex Portfolio, L.P., Essex Property Trust, Inc., and U.S. Bank National Association, as trustee, including the form of the 3.375% Senior Notes due 2026 and the guarantee thereof, attached as Exhibit 4.1 to the Company's Current Report on Form 8-K, filed on April 11, 2016, and incorporated herein by reference
10.1Amended and Restated Non-Employee Director Equity Award Program, attached as Exhibit 10.1 to the Company's Current Report on Form 8-K, filed on May 23, 2016, and incorporated herein by reference
 
12.1Ratio of Earnings to Fixed Charges.
  
31.1Certification of Michael J. Schall, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  
31.2Certification of Angela L. Kleiman, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  
31.3Certification of Michael J. Schall,  Principal Executive Officer of General Partner, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  
31.4Certification of Angela L. Kleiman, Principal Financial Officer of General Partner, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  
32.1Certification of Michael J. Schall, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
32.2Certification of Angela L. Kleiman, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
32.3Certification of Michael J. Schall, Principal Executive Officer of General Partner, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
32.4Certification of Angela L. Kleiman, Principal Financial Officer of General Partner, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document

37

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
                    
 ESSEX PROPERTY TRUST, INC.
 (Registrant)
  
 Date: November 4, 2015August 1, 2016
  
 By:  /S/ ANGELA L. KLEIMAN
  
 Angela L. Kleiman
 
Executive Vice President and Chief Financial Officer
(Authorized Officer, Principal Financial Officer)

 Date: November 4, 2015August 1, 2016
  
 By:  /S/ JOHN FARIAS
  
 John Farias
 Group Vice President and Chief Accounting Officer

 
ESSEX PORTFOLIO, L.P.
By Essex Property Trust, Inc., its general partner
 (Registrant)
  
 Date: November 4, 2015August 1, 2016
  
 By:  /S/ ANGELA L. KLEIMAN
  
 Angela L. Kleiman
 
Executive Vice President and Chief Financial Officer
(Authorized Officer, Principal Financial Officer)

 
ESSEX PORTFOLIO, L.P.
By Essex Property Trust, Inc., its general partner
 (Registrant)
  
 Date: November 4, 2015August 1, 2016
  
 By:  /S/ JOHN FARIAS
  
 John Farias
 Group Vice President and Chief Accounting Officer


38