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 June 30, 2016March 31, 2017

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)
1100 Park Place, Suite 200
San Mateo, California    94403
(Address of Principal Executive Offices including Zip Code)

(650) 655-7800
(Registrant's Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days.
Essex Property Trust, Inc.    Yes x   No o
Essex Portfolio, L.P.     Yes x   No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Essex Property Trust, Inc.    Yes x   No o
Essex Portfolio, L.P.     Yes x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” ”accelerated filer” and“accelerated filer,” “smaller reporting company” and "emerging growth 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
Emerging growth 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
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not check if a smaller reporting company)to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
Essex Property Trust, Inc.    Yes o   No o
Essex Portfolio, L.P.     Yes o   No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Essex Property Trust, Inc.    Yes o   No x
Essex Portfolio, L.P.     Yes o   No x
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 65,494,84865,598,892 shares of Common Stock ($0.0001 par value) of Essex Property Trust, Inc. were outstanding as of July 28, 2016.April 27, 2017.
 

ii


EXPLANATORY NOTE

This report combines the reports on Form 10-Q for the three and six month period ended June 30, 2016March 31, 2017 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 withinto Essex common stock on a one-for-one basis. The Company maintains a one-for-one relationship between the OP Units of the Operating Partnership issued to Essex and shares of common stock.

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

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

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

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

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

iii


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

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

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

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

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the notes to such unaudited condensed consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations herein. Additionally, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2015.2016.

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 Financial Statements of Essex Portfolio L.P. (Unaudited) 
   
 
   
 
   
 
   
 
   
 
   
Item 2.
   
Item 3.
   
Item 4.
   
PART II. OTHER INFORMATION 
   
Item 1.
   
Item 1A.
   
Item 2.
   
Item 5.
   
Item 6.
   

Part I – Financial Information

Item 1. Condensed Financial Statements

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except in parenthetical and share amounts)
ASSETSJune 30, 2016 December 31, 2015March 31, 2017 December 31, 2016
Real estate:      
Rental properties:      
Land and land improvements$2,573,923
 $2,522,842
$2,719,064
 $2,559,743
Buildings and improvements10,096,484
 9,808,627
10,492,413
 10,116,563
12,670,407
 12,331,469
13,211,477
 12,676,306
Less accumulated depreciation(2,159,840) (1,949,892)
Less: accumulated depreciation(2,418,793) (2,311,546)
10,510,567
 10,381,577
10,792,684
 10,364,760
Real estate under development157,659
 242,326
239,685
 190,505
Co-investments1,103,272
 1,036,047
1,071,258
 1,161,275
Real estate held for sale, net
 26,879

 101,957
11,771,498
 11,686,829
12,103,627
 11,818,497
Cash and cash equivalents-unrestricted182,515
 29,683
84,344
 64,921
Cash and cash equivalents-restricted32,861
 93,372
15,908
 105,381
Marketable securities152,263
 137,485
138,977
 139,189
Notes and other receivables20,448
 19,285
Notes and other receivables (includes related party receivables of $10.3 million and $11.3 million as of March 31, 2017 and December 31, 2016, respectively)50,855
 40,970
Prepaid expenses and other assets47,106
 38,437
53,716
 48,450
Total assets$12,206,691
 $12,005,091
$12,447,427
 $12,217,408
      
LIABILITIES AND EQUITY 
  
 
  
Unsecured debt, net$3,377,728
 $3,088,680
$3,195,129
 $3,246,779
Mortgage notes payable, net2,240,558
 2,215,077
2,231,145
 2,191,481
Lines of credit, net
 11,707
Lines of credit176,233
 125,000
Accounts payable and accrued liabilities145,217
 131,415
184,778
 138,226
Construction payable38,473
 40,953
35,590
 35,909
Dividends payable110,163
 100,266
120,573
 110,170
Distributions in excess of investments in co-investments35,534
 
Other liabilities34,945
 34,518
34,027
 32,922
Total liabilities5,947,084
 5,622,616
6,013,009
 5,880,487
Commitments and contingencies

 



 

Redeemable noncontrolling interest44,531
 45,452
45,415
 44,684
Equity: 
  
 
  
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 value
 73,750
Common stock; $0.0001 par value, 670,000,000 shares authorized; 65,569,521 and 65,527,993 shares issued and outstanding, respectively6
 6
Additional paid-in capital7,017,962
 7,003,317
7,035,178
 7,029,679
Distributions in excess of accumulated earnings(856,815) (797,329)(741,204) (805,409)
Accumulated other comprehensive loss, net(43,007) (42,011)(29,959) (32,098)
Total stockholders' equity6,118,146
 6,237,733
6,264,021
 6,192,178
Noncontrolling interest96,930
 99,290
124,982
 100,059
Total equity6,215,076
 6,337,023
6,389,003
 6,292,237
Total liabilities and equity$12,206,691
 $12,005,091
$12,447,427
 $12,217,408

See accompanying notes to the unaudited condensed consolidated financial statements.

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

Three Months Ended   June 30, Six Months Ended   June 30,Three Months Ended March 31,
2016 2015 2016 20152017 2016
Revenues:          
Rental and other property$319,562
 $294,101
 $631,740
 $574,330
$333,168
 $312,178
Management and other fees from affiliates2,028
 2,061
 4,052
 4,705
2,236
 2,024
321,590
 296,162
 635,792
 579,035
335,404
 314,202
Expenses: 
  
     
  
Property operating, excluding real estate taxes61,538
 57,400
 121,609
 113,019
63,645
 60,071
Real estate taxes34,541
 32,677
 68,960
 64,229
35,868
 34,419
Depreciation and amortization109,673
 113,731
 219,380
 220,638
115,503
 109,707
General and administrative9,698
 9,549
 18,880
 20,094
10,601
 9,182
Merger and integration expenses
 1,410
 
 3,798
Acquisition and investment related costs267
 429
 1,095
 976
556
 828
215,717
 215,196
 429,924
 422,754
226,173
 214,207
Earnings from operations105,873
 80,966
 205,868
 156,281
109,231
 99,995
Interest expense(55,568) (50,802) (108,034) (98,348)(54,583) (52,466)
Total return swap income2,814
 
 5,937
 
2,584
 3,123
Interest and other income9,409
 3,254
 14,617
 7,453
6,764
 5,208
Equity income in co-investments14,296
 4,472
 29,364
 8,783
Equity income from co-investments10,899
 15,068
Gain on sale of real estate and land
 
 20,258
 7,112
26,174
 20,258
Deferred tax expense on gain on sale of real estate and land
 
 (4,279) 

 (4,279)
Gain on remeasurement of co-investment
 12,652
 
 34,014
86,482
 
Net income76,824
 50,542
 163,731
 115,295
187,551
 86,907
Net income attributable to noncontrolling interest(4,811) (3,674) (9,882) (7,750)(8,587) (5,071)
Net income attributable to controlling interest72,013
 46,868
 153,849
 107,545
178,964
 81,836
Dividends to preferred stockholders
 (1,313) (1,314) (2,627)
 (1,314)
Excess of redemption value of preferred stock over the carrying value
 
 (2,541) 

 (2,541)
Net income available to common stockholders$72,013
 $45,555
 $149,994
 $104,918
$178,964
 $77,981
Comprehensive income$78,005
 $51,287
 $162,701
 $116,639
$189,764
 $84,696
Comprehensive income attributable to noncontrolling interest(4,850) (3,703) (9,848) (7,794)(8,661) (4,998)
Comprehensive income attributable to controlling interest$73,155
 $47,584
 $152,853
 $108,845
$181,103
 $79,698
Per share data: 
  
     
  
Basic: 
  
     
  
Net income available to common stockholders$1.10
 $0.70
 $2.29
 $1.63
$2.73
 $1.19
Weighted average number of shares outstanding during the period65,451,110
 64,810,184
 65,428,382
 64,499,545
65,549,484
 65,405,654
Diluted: 
  
     
  
Net income available to common stockholders$1.10
 $0.70
 $2.29
 $1.62
$2.72
 $1.19
Weighted average number of shares outstanding during the period65,575,378
 64,972,852
 65,558,811
 64,677,521
65,859,490
 65,557,639
Dividend per common share$1.60
 $1.44
 $3.20
 $2.88
$1.75
 $1.60

See accompanying notes to the unaudited condensed consolidated financial statements.

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Equity for the sixthree months ended June 30, 2016March 31, 2017
(Unaudited)
(Dollars and shares in thousands)
Series H
Preferred stock
 Common stock Additional paid-in capital 
Distributions
in excess of accumulated earnings
 
Accumulated
other
comprehensive loss, net
 Noncontrolling Interest   Common stock Additional paid-in capital 
Distributions
in excess of accumulated earnings
 
Accumulated
other
comprehensive loss, net
 Noncontrolling Interest  
Shares Amount Shares Amount Total Shares Amount Total
Balances at December 31, 20152,950
 $73,750
 65,379
 $6
 $7,003,317
 $(797,329) $(42,011) $99,290
 $6,337,023
Balances at December 31, 2016 65,528
 $6
 $7,029,679
 $(805,409) $(32,098) $100,059
 $6,292,237
Net income
 
 
 
 
 153,849
 
 9,882
 163,731
 
 
 
 178,964
 
 8,587
 187,551
Reversal of unrealized gains upon the sale of marketable securities 
 
 
 
 (1,552) (53) (1,605)
Change in fair value of derivatives and amortization of swap settlements
 
 
 
 
 
 (1,291) (44) (1,335) 
 
 
 
 3,518
 121
 3,639
Change in fair value of marketable securities, net
 
 
 
 
 
 295
 10
 305
 
 
 
 
 173
 6
 179
Issuance of common stock under: 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
Stock option and restricted stock plans, net
 
 89
 
 11,760
 
 
 
 11,760
 41
 
 5,794
 
 
 
 5,794
Sale of common stock, net
 
 
 
 (279) 
 
 
 (279) 
 
 (65) 
 
 
 (65)
Equity based compensation costs
 
 
 
 2,001
 
 
 1,197
 3,198
 
 
 1,110
 
 
 143
 1,253
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
 
 
 
 365
 
 
 556
 921
 
 
 (505) 
 
 (226) (731)
Contributions from noncontrolling interest 
 
 
 
 
 22,506
 22,506
Distributions to noncontrolling interest
 
 
 
 
 
 
 (13,471) (13,471) 
 
 
 
 
 (5,926) (5,926)
Redemptions of noncontrolling interest
 
 11
 
 (1,743) 
 
 (490) (2,233) 1
 
 (835) 
 
 (235) (1,070)
Common and preferred stock dividends
 
 
 
 
 (210,794) 
 
 (210,794)
Balances at June 30, 2016
 $
 65,479
 $6
 $7,017,962
 $(856,815) $(43,007) $96,930
 $6,215,076
Common stock dividends 
 
 
 (114,759) 
 
 (114,759)
Balances at March 31, 2017 65,570
 $6
 $7,035,178
 $(741,204) $(29,959) $124,982
 $6,389,003

See accompanying notes to the unaudited condensed consolidated financial statements.

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands) 
Six Months Ended June 30,Three Months Ended March 31,
2016 20152017 2016
Cash flows from operating activities:      
Net income$163,731
 $115,295
$187,551
 $86,907
Adjustments to reconcile net income to net cash provided by operating activities: 
  
 
  
Depreciation and amortization219,380
 220,638
115,503
 109,707
Amortization of discount on marketable securities and other investments(7,457) (5,777)(3,573) (3,756)
Amortization of (premium) discount and debt financing costs, net(7,598) (11,125)(3,309) (3,795)
Gain on sale of marketable securities(1,843) 
Gain on sale of marketable securities and other investments(1,605) (740)
Company's share of gain on the sales of co-investments(13,046) 

 (7,435)
Income from early redemption of preferred equity investments
 (469)
Earnings from co-investments(16,318) (8,314)(10,899) (7,633)
Operating distributions from co-investments23,985
 14,804
12,358
 9,753
Gain on the sale of real estate and land(20,258) (7,112)(26,174) (20,258)
Equity-based compensation3,198
 3,457
1,253
 1,490
Gain on remeasurement of co-investments
 (34,014)
Gain on remeasurement of co-investment(86,482) 
Changes in operating assets and liabilities:      
Prepaid expenses, receivables and other assets(3,942) (6,646)(4,536) 846
Accounts payable and accrued liabilities9,772
 4,924
42,449
 35,200
Other liabilities749
 1,387
737
 324
Net cash provided by operating activities350,353
 287,048
223,273
 200,610
Cash flows from investing activities: 
  
 
  
Additions to real estate: 
  
 
  
Acquisitions of real estate and acquisition related capital expenditures(117,349) (314,890)(187,917) (110,309)
Redevelopment(43,200) (41,796)(12,240) (24,151)
Development acquisitions of and additions to real estate under development(37,150) (122,377)(30,457) (22,656)
Capital expenditures on rental properties(22,277) (24,673)(10,885) (5,688)
Acquisition of membership interest in co-investments
 (115,724)
Investments in notes receivable(8,750) 
Proceeds from insurance for property losses1,211
 11,735
435
 435
Proceeds from dispositions of real estate48,008
 74,485
131,230
 48,008
Contributions to co-investments(96,698) (97,512)(120,816) (50,591)
Changes in restricted cash and refundable deposits56,932
 49,808
89,985
 59,346
Purchases of marketable securities(16,352) (7,250)(20,939) (1,344)
Sales and maturities of marketable securities11,179
 1,968
Sales and maturities of marketable securities and other investments24,903
 5,045
Non-operating distributions from co-investments34,564
 11,072
55,025
 21,146
Net cash used in investing activities(181,132) (575,154)(90,426) (80,759)
Cash flows from financing activities: 
  
 
  
Borrowings under debt agreements768,610
 923,431
654,562
 305,895
Repayment of debt(501,167) (730,712)(661,349) (309,903)
Repayment of cumulative redeemable preferred stock(73,750) 
Additions to deferred charges(4,962) (4,456)(1,014) (1,037)
Net proceeds from issuance of common stock(279) 272,664
(65) (134)
Net proceeds from stock options exercised11,760
 18,346
5,794
 5,232
Distributions to noncontrolling interest(12,880) (11,033)(5,425) (4,858)
Redemption of noncontrolling interest(2,233) (2,488)(1,070) (1,089)
Common and preferred stock dividends paid(201,488) (177,019)
Net cash (used in) provided by financing activities(16,389) 288,733
Cash acquired in consolidation of co-investment
 4,005
Common stock dividends paid(104,857) (95,476)
Net cash used in financing activities(113,424) (101,370)
Net increase in cash and cash equivalents152,832
 4,632
19,423
 18,481
Cash and cash equivalents at beginning of period64,921
 29,683
Cash and cash equivalents at end of period$84,344
 $48,164
   

Six Months Ended June 30,Three Months Ended March 31,
2016 20152017 2016
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
Cash paid for interest, net of $3.3 million and $3.1 million capitalized in 2017 and 2016, respectively$48,397
 $48,109
Supplemental disclosure of noncash investing and financing activities: 
  
 
  
Issuance of DownREIT units in connection with acquisition of real estate$22,506
 $
Transfers between real estate under development to rental properties, net$108,402
 $300,751
$747
 $107,643
Transfer from real estate under development to co-investments$4,485
 $3,780
$2,080
 $2,338
Reclassifications (from) to redeemable noncontrolling interest to or from additional paid in capital and noncontrolling interest$(921) $574
Reclassifications to redeemable noncontrolling interest to or from additional paid in capital and noncontrolling interest$731
 $751
Debt assumed in connection with acquisition$48,832
 $114,435
$51,882
 $48,832

See accompanying notes to the unaudited condensed consolidated financial statements.


ESSEX PORTFOLIO, L.P.  AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except in parenthetical and unit amounts)
June 30, 2016 December 31, 2015March 31, 2017 December 31, 2016
ASSETS      
Real estate:      
Rental properties:      
Land and land improvements$2,573,923
 $2,522,842
$2,719,064
 $2,559,743
Buildings and improvements10,096,484
 9,808,627
10,492,413
 10,116,563
12,670,407
 12,331,469
13,211,477
 12,676,306
Less accumulated depreciation(2,159,840) (1,949,892)
Less: accumulated depreciation(2,418,793) (2,311,546)
10,510,567
 10,381,577
10,792,684
 10,364,760
Real estate under development157,659
 242,326
239,685
 190,505
Co-investments1,103,272
 1,036,047
1,071,258
 1,161,275
Real estate held for sale, net
 26,879

 101,957
11,771,498
 11,686,829
12,103,627
 11,818,497
Cash and cash equivalents-unrestricted182,515
 29,683
84,344
 64,921
Cash and cash equivalents-restricted32,861
 93,372
15,908
 105,381
Marketable securities152,263
 137,485
138,977
 139,189
Notes and other receivables20,448
 19,285
Notes and other receivables (includes related party receivables of $10.3 million and $11.3 million as of March 31, 2017 and December 31, 2016, respectively)50,855
 40,970
Prepaid expenses and other assets47,106
 38,437
53,716
 48,450
Total assets$12,206,691

$12,005,091
$12,447,427

$12,217,408
      
LIABILITIES AND CAPITAL 
  
 
  
Unsecured debt, net$3,377,728
 $3,088,680
$3,195,129
 $3,246,779
Mortgage notes payable, net2,240,558
 2,215,077
2,231,145
 2,191,481
Lines of credit, net
 11,707
Lines of credit176,233
 125,000
Accounts payable and accrued liabilities145,217
 131,415
184,778
 138,226
Construction payable38,473
 40,953
35,590
 35,909
Distributions payable110,163
 100,266
120,573
 110,170
Distributions in excess of investments in co-investments35,534
 
Other liabilities34,945
 34,518
34,027
 32,922
Total liabilities5,947,084

5,622,616
6,013,009

5,880,487
Commitments and contingencies

 



 

Redeemable noncontrolling interest44,531
 45,452
45,415
 44,684
Capital: 
  
 
  
General Partner:      
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
Common equity (65,569,521 and 65,527,993 units issued and outstanding, respectively)6,293,980
 6,224,276
6,161,153

6,279,744
6,293,980

6,224,276
Limited Partners:      
Common equity (2,221,768 and 2,214,545 units issued and outstanding, respectively)46,298
 47,235
Common equity (2,251,920 and 2,237,290 units issued and outstanding, respectively)51,496
 49,436
Accumulated other comprehensive loss(40,628) (39,598)(27,135) (29,348)
Total partners' capital6,166,823

6,287,381
6,318,341

6,244,364
Noncontrolling interest48,253
 49,642
70,662
 47,873
Total capital6,215,076

6,337,023
6,389,003

6,292,237
Total liabilities and capital$12,206,691

$12,005,091
$12,447,427

$12,217,408

See accompanying notes to the unaudited condensed consolidated financial statements.

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Income and Comprehensive Income
(Unaudited)
(In thousands, except unit and per unit amounts)
Three Months Ended   June 30, Six Months Ended   June 30,Three Months Ended March 31,
2016 2015 2016 20152017 2016
Revenues:          
Rental and other property$319,562
 $294,101
 $631,740
 $574,330
$333,168
 $312,178
Management and other fees from affiliates2,028
 2,061
 4,052
 4,705
2,236
 2,024
321,590
 296,162
 635,792
 579,035
335,404
 314,202
Expenses: 
  
     
  
Property operating, excluding real estate taxes61,538
 57,400
 121,609
 113,019
63,645
 60,071
Real estate taxes34,541
 32,677
 68,960
 64,229
35,868
 34,419
Depreciation and amortization109,673
 113,731
 219,380
 220,638
115,503
 109,707
General and administrative9,698
 9,549
 18,880
 20,094
10,601
 9,182
Merger and integration expenses
 1,410
 
 3,798
Acquisition and investment related costs267
 429
 1,095
 976
556
 828
215,717
 215,196
 429,924
 422,754
226,173
 214,207
Earnings from operations105,873
 80,966
 205,868
 156,281
109,231
 99,995
Interest expense(55,568) (50,802) (108,034) (98,348)(54,583) (52,466)
Total return swap income2,814
 
 5,937
 
2,584
 3,123
Interest and other income9,409
 3,254
 14,617
 7,453
6,764
 5,208
Equity income in co-investments14,296
 4,472
 29,364
 8,783
Equity income from co-investments10,899
 15,068
Gain on sale of real estate and land
 
 20,258
 7,112
26,174
 20,258
Deferred tax expense on gain on sale of real estate and land
 
 (4,279) 

 (4,279)
Gain on remeasurement of co-investment
 12,652
 
 34,014
86,482
 
Net income76,824
 50,542
 163,731
 115,295
187,551
 86,907
Net income attributable to noncontrolling interest(2,361) (2,141) (4,648) (4,154)(2,441) (2,287)
Net income attributable to controlling interest74,463
 48,401
 159,083
 111,141
185,110
 84,620
Preferred interest distributions
 (1,313) (1,314) (2,627)
 (1,314)
Excess of redemption value of preferred units over the carrying value
 
 (2,541) 

 (2,541)
Net income available to common unitholders$74,463
 $47,088
 $155,228
 $108,514
$185,110
 $80,765
Comprehensive income$78,005
 $51,287
 $162,701
 $116,639
$189,764
 $84,696
Comprehensive income attributable to noncontrolling interest(2,361) (2,141) (4,648) (4,154)(2,441) (2,287)
Comprehensive income attributable to controlling interest$75,644
 $49,146
 $158,053
 $112,485
$187,323
 $82,409
Per unit data: 
  
     
  
Basic: 
  
     
  
Net income available to common unitholders$1.10
 $0.70
 $2.29
 $1.63
$2.73
 $1.19
Weighted average number of common units outstanding during the period67,675,038
 66,992,209
 67,654,279
 66,682,708
67,801,718
 67,633,519
Diluted:          
Net income available to common unitholders$1.10
 $0.70
 $2.29
 $1.62
$2.72
 $1.19
Weighted average number of common units outstanding during the period67,799,306
 67,154,877
 67,784,708
 66,860,684
68,111,724
 67,785,504
Distribution per common unit$1.60
 $1.44
 $3.20
 $2.88
$1.75
 $1.60

See accompanying notes to the unaudited condensed consolidated financial statements.

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Condensed Consolidated Statement of Capital for the sixthree months ended June 30, 2016March 31, 2017
(Dollars and units in thousands)
(Unaudited)
General Partner Limited Partners Accumulated other comprehensive loss    General Partner Limited Partners Accumulated other comprehensive loss    
Common Equity Series H Preferred Interest Common Equity Noncontrolling Interest  Common Equity Common Equity Noncontrolling Interest  
Units Amount Units Amount Accumulated other comprehensive lossTotalUnits Amount Units Amount Total
Balances at December 31, 201565,379
 $6,208,535
 $71,209
 2,215
 $47,235
 $(39,598)$49,642
6,337,023
Balances at December 31, 201665,528
 $6,224,276
 2,237
 $49,436
 $(29,348) $47,873
 $6,292,237
Net income
 149,994
 3,855
 
 5,234
 
 4,648
 163,731

 178,964
 
 6,146
 
 2,441
 187,551
Reversal of unrealized gains upon the sale of marketable securities
 
 
 
 (1,605) 
 (1,605)
Change in fair value of derivatives and amortization of swap settlements
 
 
 
 
 (1,335) 
 (1,335)
 
 
 
 3,639
 
 3,639
Change in fair value of marketable securities, net
 
 
 
 
 305
 
 305

 
 
 
 179
 
 179
Issuance of common units under: 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
General partner's stock based compensation, net89
 11,760
 
 
 
 
 
 11,760
41
 5,794
 
 
 
 
 5,794
Sale of common stock by general partner, net
 (279) 
 
 
 
 
 (279)
 (65) 
 
 
 
 (65)
Equity based compensation costs
 2,001
 
 18
 1,197
 
 
 3,198

 1,110
 16
 143
 
 
 1,253
Redemption of Series H preferred units
 
 (73,750) 
 
 
 
 (73,750)
Changes in redemption value of redeemable noncontrolling interest
 365
 
 
 
 
 556
 921

 (505) 
 
 
 (226) (731)
Contributions from noncontrolling interest
 
 
 
 
 22,506
 22,506
Distributions to noncontrolling interest
 
 
 
 
 
 (6,182) (6,182)
 
 
 
 
 (1,932) (1,932)
Redemptions11
 (1,743) 
 (11) (79) 
 (411) (2,233)1
 (835) (1) (235) 
 
 (1,070)
Distributions declared
 (209,480) (1,314) 
 (7,289) 
 
 (218,083)
 (114,759) 
 (3,994) 
 
 (118,753)
Balances at June 30, 201665,479
 $6,161,153
 $
 2,222
 $46,298
 $(40,628) $48,253
 $6,215,076
Balances at March 31, 201765,570
 $6,293,980
 2,252
 $51,496
 $(27,135) $70,662
 $6,389,003

See accompanying notes to the unaudited condensed consolidated financial statements.

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Six Months Ended June 30,Three Months Ended March 31,
2016 20152017 2016
Cash flows from operating activities:      
Net income$163,731
 $115,295
$187,551
 $86,907
Adjustments to reconcile net income to net cash provided by operating activities: 
  
 
  
Depreciation and amortization219,380
 220,638
115,503
 109,707
Amortization of discount on marketable securities and other investments(7,457) (5,777)(3,573) (3,756)
Amortization of (premium) discount and debt financing costs, net(7,598) (11,125)(3,309) (3,795)
Gain on sale of marketable securities(1,843) 
Gain on sale of marketable securities and other investments(1,605) (740)
Company's share of gain on the sales of co-investments(13,046) 


 (7,435)
Income from early redemption of preferred equity investments
 (469)
Earnings from co-investments(16,318) (8,314)(10,899) (7,633)
Operating distributions from co-investments23,985
 14,804
12,358
 9,753
Gain on the sales of real estate and land(20,258) (7,112)(26,174) (20,258)
Equity-based compensation3,198
 3,457
1,253
 1,490
Gain on remeasurement of co-investments
 (34,014)
Gain on remeasurement of co-investment(86,482) 
Changes in operating assets and liabilities: 
  
 
  
Prepaid expense, receivables and other assets(3,942) (6,646)(4,536) 846
Accounts payable and accrued liabilities9,772
 4,924
42,449
 35,200
Other liabilities749
 1,387
737
 324
Net cash provided by operating activities350,353
 287,048
223,273
 200,610
Cash flows from investing activities: 
  
 
  
Additions to real estate: 
  
 
  
Acquisitions of real estate and acquisition related capital expenditures(117,349) (314,890)(187,917) (110,309)
Redevelopment(43,200) (41,796)(12,240) (24,151)
Development acquisitions of and additions to real estate under development(37,150) (122,377)(30,457) (22,656)
Capital expenditures on rental properties(22,277) (24,673)(10,885) (5,688)
Acquisition of membership interest in co-investments

 (115,724)
Investments in notes receivable(8,750) 
Proceeds from insurance for property losses1,211
 11,735
435
 435
Proceeds from dispositions of real estate48,008
 74,485
131,230
 48,008
Contributions to co-investments(96,698) (97,512)(120,816) (50,591)
Changes in restricted cash and refundable deposits56,932
 49,808
89,985
 59,346
Purchases of marketable securities(16,352) (7,250)(20,939) (1,344)
Sales and maturities of marketable securities11,179
 1,968
Sales and maturities of marketable securities and other investments24,903
 5,045
Non-operating distributions from co-investments34,564
 11,072
55,025
 21,146
Net cash used in investing activities(181,132) (575,154)(90,426) (80,759)
Cash flows from financing activities: 
  
 
  
Borrowings under debt agreements768,610
 923,431
654,562
 305,895
Repayment of debt(501,167) (730,712)(661,349) (309,903)
Repayment of cumulative redeemable preferred stock(73,750) 
Additions to deferred charges(4,962) (4,456)(1,014) (1,037)
Net proceeds from issuance of common units(279) 272,664
(65) (134)
Net proceeds from stock options exercised11,760
 18,346
5,794
 5,232
Distributions to noncontrolling interest(3,379) (4,884)(5,425) (1,528)
Redemption of noncontrolling interest(2,233) (2,488)(1,070) (1,089)
Common and preferred units and preferred interest distributions paid(210,989) (183,168)
Net cash (used in) provided by financing activities(16,389) 288,733
Common unit distributions paid(104,857) (98,806)
Net cash used in financing activities(113,424) (101,370)
Cash acquired in consolidation of co-investment
 4,005

 
Net increase in cash and cash equivalents152,832
 4,632
19,423
 18,481
Cash and cash equivalents at beginning of period64,921
 29,683
Cash and cash equivalents at end of period$84,344
 $48,164

Six Months Ended June 30,Three Months Ended March 31,
2016 20152017 2016
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
Cash paid for interest, net of $3.3 million and $3.1 million capitalized in 2017 and 2016, respectively$48,397
 $48,109
Supplemental disclosure of noncash investing and financing activities: 
  
 
  
Issuance of DownREIT units in connection with acquisition of real estate$22,506
 $
Transfers between real estate under development to rental properties, net$108,402
 $300,751
$747
 $107,643
Transfer from real estate under development to co-investments$4,485
 $3,780
$2,080
 $2,338
Reclassifications (from) to redeemable noncontrolling interest to or from general partner capital and noncontrolling interest$(921) $574
Reclassifications to redeemable noncontrolling interest to or from general partner capital and noncontrolling interest$731
 $751
Debt assumed in connection with acquisition$48,832
 $114,435
$51,882
 $48,832

See accompanying notes to the unaudited condensed consolidated financial statements.

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30,March 31, 2017 and 2016 and 2015
(Unaudited)

(1) Organization and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements present the accounts of Essex Property Trust, Inc. (“Essex” or the “Company”), which include the accounts of the Company and Essex Portfolio, L.P. and subsidiaries (the “Operating Partnership,” which holds the operating assets of the Company), prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q. In the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented have been included and are normal and recurring in nature. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2015.2016.

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

The unaudited condensed consolidated financial statements for the three and six months ended June 30,March 31, 2017 and 2016 and 2015 include the accounts of the Company and the Operating Partnership. Essex is the sole general partner in the Operating Partnership, with a 96.7% general partnership interest as of June 30, 2016.March 31, 2017. Total Operating Partnership limited partnership units outstanding were 2,221,7682,251,920 and 2,214,5452,237,290 as of June 30, 2016March 31, 2017 and December 31, 2015,2016, respectively, and the redemption value of the units, based on the closing price of the Company’s common stock totaled $506.8$521.4 million and $530.2$520.2 million, as of June 30, 2016March 31, 2017 and December 31, 2015,2016, respectively.

As of June 30, 2016,March 31, 2017, the Company owned or had ownership interests in 243246 stabilized apartment communities, aggregating 59,24159,860 apartment homes, excluding the Company’s ownership in preferred interest co-investments, (collectively, the “Communities”, and individually, a “Community”), threeone operating commercial buildingsbuilding and sevenfive active developments (collectively, the “Portfolio”). The Communities are located in Southern California (primarily Los(Los Angeles, Orange, San Diego, and Ventura counties), Northern California (the San Francisco Bay Area) and the Seattle metropolitan areas.

NewRecent 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.permitted. The new standard may be applied using either a full retrospective or a modified approach upon adoption. The Company hasdoes not yet selectedexpect that this amendment will have a transition method and is currently evaluating the impact of adopting the new standardmaterial effect on its consolidated results of operations andor 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 ofdoes not expect that this amendment will have a material effect on its consolidated results of operations andor 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,March 31, 2017 and 2016 and 2015
(Unaudited)

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

In MarchJune 2016, the FASB issued ASU No. 2016-07 "Simplifying the Transition to the Equity Method2016-13 "Measurement of Accounting"Credit Losses on Financial Instruments", which eliminatesamends the requirementcurrent approach to retroactively adjust an investment, resultsestimate credit losses on certain financial assets, including trade and other receivables, available-for-sale securities, and other financial instruments. Generally, this amendment requires entities to establish a valuation allowance for the expected lifetime losses of operations, and retained earnings when the investment qualifies for use of the equity method as a result of an increasethese certain financial assets. Subsequent changes in the levelvaluation allowance are recorded in current earnings and reversal of ownership interest or degree of influence.previous losses are permitted. Currently, U.S. GAAP requires entities to write down credit losses only when losses are probable and loss reversals are not permitted. The new standard will be effective for the Company beginning on January 1, 20172020 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 August 2016, the FASB issued ASU No. 2016-15 "Classification of Certain Cash Receipts and Cash Payments", which requires entities to adhere to a uniform classification and presentation of certain cash receipts and cash payments in the statement of cash flows. The amendments in this update provide guidance on eight specific cash flow issues. The new standard will be effective for the Company beginning on January 1, 2018 and early adoption is permitted. The Company does not expect the impact of the other items identified in this amendment to be material on its consolidated results of operations or financial position.

In MarchNovember 2016, the FASB issued ASU No. 2016-09 "Improvement to Employee Share-Based Payment Accounting"2016-18 "Statement of Cash Flows", 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 awardsinclude restricted cash and restricted cash equivalents in the incomereconciliation of beginning-of-period to the end-of-period of cash and cash equivalents in the statement when the awards vest or are settled, rather than recording such effects in additional paid-in capital. Entities will also be permittedof cash flows. This new standard seeks to elect to account for forfeitures of share-based payments as they occur or continue witheliminate the current diversity in practice which requires estimatingin how changes in restricted cash and restricted cash equivalents is presented in the numberstatement of awards expected to be forfeited and adjusting the estimate when it is likely to change. Thecash flows. This new standard will be effective for the Company beginning January 1, 2017, with2018 and early adoption is permitted. The changeCompany does not expect the impact of the other items identified in recognitionthis amendment to be material on its consolidated results of income tax effectsoperations or financial position.

In January 2017, the FASB issued ASU No. 2017-01 "Business Combinations: Clarifying the Definition of share-based awardsa Business", which provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Currently, U.S. GAAP does not specify the minimum inputs and processes required for an integrated set of assets and activities to meet the definition of a business, causing a broad interpretation of the definition of a business. This new standard will be applied prospectively. Ifeffective for the Company electsbeginning 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 2017, the FASB issued ASU No. 2017-05 "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets", which adds guidance for partial sales of nonfinanical assets, including partial sales of real estate. Historically, U.S. GAAP contained several different accounting models to accountevaluate whether the transfer of certain assets qualified for forfeituressale treatment. This new standard reduces the number of share-based payments as they occur, such changepotential accounting models that might apply and clarifies which model does apply in various circumstances. Partial sales of nonfinancial assets are common in the real estate industry and include transactions in which the seller retains an equity interest in the entity that owns the assets or has an equity interest in the buyer. This new standard will be applied using a modified retrospective approach, with a cumulative-effect adjustment to distributions in excess of accumulated earnings.effective for the Company beginning 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.

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 and Level 3 for investments in mortgage backed securities, as defined by the FASB standard for fair value measurements), and any unrealized gain or loss is recorded as other comprehensive income (loss).income. 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, 2016March 31, 2017 and December 31, 2015,2016, marketable securities consisted primarily of investment-grade unsecured bonds, common stock, investments in mortgage backed securities, and investment funds that invest in U.S. treasury or agency securities. As of June 30, 2016March 31, 2017 and December 31, 2015,2016, 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,March 31, 2017 and 2016 and 2015
(Unaudited)

securities, which mature in November 2019 and September 2020, as held to maturity, and accordingly, these securities are stated at their amortized cost. The discount on the mortgage backed securities is being amortized to interest income based on an estimated yield and the maturity date of the securities.

As of March 31, 2017 and December 31, 2016, marketable securities consist of the following ($ in thousands):

June 30, 2016March 31, 2017
Amortized
Cost
 
Gross
Unrealized
Gain
 Carrying Value
Amortized
Cost
 
Gross
Unrealized
Gain (Loss)
 Carrying Value
Available for sale:          
Investment-grade unsecured bonds$19,604
 $347
 $19,951
$13,540
 $99
 $13,639
Investment funds - U.S. treasuries7,600
 10
 7,610
10,273
 (24) 10,249
Common stock and stock funds29,970
 7,098
 37,068
17,147
 (27) 17,120
Held to maturity: 
  
  
 
  
  
Mortgage backed securities87,634
 
 87,634
97,969
 
 97,969
Total - Marketable securities$144,808
 $7,455
 $152,263
$138,929
 $48
 $138,977
          
December 31, 2015December 31, 2016
Amortized
Cost
 
Gross
Unrealized
Gain (Loss)
 Carrying Value
Amortized
Cost
 
Gross
Unrealized
Gain (Loss)
 Carrying Value
Available for sale: 
  
  
 
  
  
Investment-grade unsecured bonds$11,618
 $68
 $11,686
$19,604
 $(73) $19,531
Investment funds - U.S. treasuries3,675
 (9) 3,666
10,022
 (22) 10,000
Common stock and stock funds34,655
 7,091
 41,746
13,696
 1,569
 15,265
Held to maturity: 
  
  
 
  
  
Mortgage backed securities80,387
 
 80,387
94,393
 
 94,393
Total - Marketable securities$130,335
 $7,150
 $137,485
$137,715
 $1,474
 $139,189

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,March 31, 2017 and 2016, and 2015, the proceeds from sales of available for sale securities totaled $6.2$24.9 million and $1.3$5.0 million, respectively, which resulted in $1.1$1.6 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$0.7 million realized gains, and no realized gains or losses, respectively.

Variable Interest Entities

In February 2015, the FASB issued ASU No. 2015-02 "Consolidation: Amendments to the Consolidation Analysis," which provides newaccordance with accounting standards for consolidation guidance and makes changes to both the variable interest model and the voting model. Among other changes, the new standard specifically eliminates the presumption in the current voting model that a general partner controls a limited partnership or similar entity unless that presumption can be overcome. The Company adopted ASU No. 2015-02 on January 1, 2016. Based on the Company’s evaluation of the new standard, it determined that no change was required to its accounting for variable interest entities (“VIEs”("VIEs"). However, under, the guidance of ASU No. 2015-02, 9 previously consolidated co-investments now meet the definition of a VIE and requires additional disclosure about these VIEs which the Company continues to consolidate as they were determined to be the primary beneficiary.

The Company continues to be the primary beneficiary and consolidates the Operating Partnership, and 1920 DownREIT limited partnerships (comprising eleventwelve communities). Commencing on January 1, 2016,, and 9 other consolidated co-investments were determined to be VIEs and theco-investments. The Company continues to consolidate those co-investments as the Company was determined to beconsolidates these entities because it is deemed the primary beneficiary. The Company has no assets or liabilities other than its investment in the Operating Partnership. The consolidated total assets and liabilities related to the 9 consolidated co-investments and 1920 DownREIT limited partnerships, net of intercompany eliminations, were approximately $901.3 million$1.1 billion and $229.5$351.1 million, respectively, as of June 30, 2016March 31, 2017 and $893.1$989.3 million and $231.8$288.1 million, respectively, as of December 31, 2015.2016. Noncontrolling interests in these entities was $53.3$75.7 million and $54.6$52.9 million as of June 30, 2016March 31, 2017 and December 31, 2015,2016, respectively. The Company's financial risk in each VIE is limited to its equity investment in the VIE. As of June 30, 2016March 31, 2017 and December 31,

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

2015, the Company did not have any other VIEs of which it was deemed to be the primary beneficiary and did not have any VIEs of which it was not deemed to be the primary beneficiary.


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 and 2016
(Unaudited)

Equity-based Compensation

The cost of share and unit based compensation awards is measured at the grant date based on the estimated fair value of the awards. The estimated fair value of stock options and restricted stock granted by the Company are being amortized over the vesting period. The estimated grant date fair values of the long term incentive plan units (discussed in Note 13,12, “Equity Based Compensation Plans,” in the Company’s Form 10-K for the year ended December 31, 2015)2016) 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 June 30, 2016March 31, 2017 and December 31, 2015,2016, 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 $5.1$4.8 billion of fixed rate debt, including unsecured debt, at June 30, 2016March 31, 2017 is approximately $5.3$4.9 billion and the Company’s variable rate debt at June 30,March 31, 2017 and December 31, 2016 approximates its fair value based on the terms of existing mortgage notes payable, unsecured debt, and variable rate demand notes compared to those available in the marketplace. Management believes that the carrying amounts of cash and cash equivalents, restricted cash, accounts payable and accrued liabilities, construction payables, other liabilities, and dividends payable approximate fair value as of June 30,March 31, 2017 and December 31, 2016 due to the short-term maturity of these instruments. Marketable securities, except mortgage backed securities, that are held to maturity, and derivatives are carried at fair value as of June 30,March 31, 2017 and December 31, 2016.

At June 30,March 31, 2017, the Company’s investments in mortgage backed securities had a carrying value of $98.0 million and the Company estimated the fair value to be approximately $111.6 million. At December 31, 2016, the Company’s investments in mortgage backed securities had a carrying value of $87.6$94.4 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 $80.4 million and the Company estimated the fair value to be approximately $110.2$108.8 million. The Company determines the fair value of the mortgage backed securities based on unobservable inputs (level 3 of the fair value hierarchy) considering the assumptions that market participants would make in valuing these securities.  Assumptions such as estimated default rates and discount rates are used to determine expected, discounted cash flows to estimate the fair value.
 
Capitalization of Costs

The Company’s capitalized internal costs related to development and redevelopment projects were comprised primarily of employee compensation and totaled $3.6$5.2 million and $3.4$4.5 million during the three months ended June 30,March 31, 2017 and 2016, and 2015, respectively, and $6.8 million and $5.4 million during the six months ended June 30, 2016 and 2015, respectively. The Company capitalizes leasing commissions associated with the lease-up of development communities and amortizes the costs over the life of the leases. The amounts capitalized for leasing commissions are immaterial for all periods presented.

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. TheUnder the equity method employsof accounting, the accrual basis for recognizinginvestment is carried at the investor’scost of assets contributed, plus the Company's equity in earnings less distributions received and the Company'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 and comprehensive income equal to the amount by which the fair value of the co-investment interest the Company previously owned exceeds its carrying value. A majority of the co-investments, excluding the preferred equity investments, compensate the Company for its asset management services and some of these investments may provide promote income if certain financial return benchmarks are achieved. Asset management

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 from co-investments.


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 and 2016
(Unaudited)

The Company reports investments in co-investments where accumulated distributions have exceeded the Company’s investment as distributions in excess of investments in co-investments in the accompanying condensed consolidated balance sheets. The net investment of one of the Company’s co-investments is less than zero as a result of financing distributions in excess of the Company's investment in that co-investment.

Changes in Accumulated Other Comprehensive Loss, Net by Component

Essex Property Trust, Inc.
($ in thousands)
 
Change in fair
value and amortization
of swap settlements
 
Unrealized
gains on
available for sale
securities
 Total
Balance at December 31, 2015$(48,366) $6,355
 $(42,011)
Other comprehensive (loss) income before reclassification(5,286) 2,077
 (3,209)
Amounts reclassified from accumulated other comprehensive loss3,995
 (1,782) 2,213
Other comprehensive (loss) income(1,291) 295
 (996)
Balance at June 30, 2016$(49,657) $6,650
 $(43,007)
 
Change in fair
value and amortization
of swap settlements
 
Unrealized
gains on
available for sale
securities
 Total
Balance at December 31, 2016$(32,963) $865
 $(32,098)
Other comprehensive income before reclassification5,496
 173
 5,669
Amounts reclassified from accumulated other comprehensive loss(1,978) (1,552) (3,530)
Other comprehensive income (loss)3,518
 (1,379) 2,139
Balance at March 31, 2017$(29,445) $(514) $(29,959)

Changes in Accumulated Other Comprehensive Loss, by Component

Essex Portfolio, L.P.
($ in thousands):
 
Change in fair
value and amortization
of swap settlements
 
Unrealized
gains on
available for sale
securities
 Total
Balance at December 31, 2015$(46,087) $6,489
 $(39,598)
Other comprehensive (loss) income before reclassification(5,466) 2,148
 (3,318)
Amounts reclassified from accumulated other comprehensive loss4,131
 (1,843) 2,288
Other comprehensive (loss) income(1,335) 305
 (1,030)
Balance at June 30, 2016$(47,422) $6,794
 $(40,628)
 
Change in fair
value and amortization
of swap settlements
 
Unrealized
gains on
available for sale
securities
 Total
Balance at December 31, 2016$(30,161) $813
 $(29,348)
Other comprehensive income before reclassification5,685
 179
 5,864
Amounts reclassified from accumulated other comprehensive loss(2,046) (1,605) (3,651)
Other comprehensive income (loss)3,639
 (1,426) 2,213
Balance at March 31, 2017$(26,522) $(613) $(27,135)

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.

Redeemable Noncontrolling Interest

The carrying value of redeemable noncontrolling interest in the accompanying condensed consolidated balance sheets was $45.4 million and $44.7 million as of March 31, 2017 and December 31, 2016, respectively. The manner of redemption of these noncontrolling interests is outside of the Company’s control as the limited partners may elect to receive Company common stock or cash.

The changes to the redemption value of redeemable noncontrolling interests for the three months ended March 31, 2017 is as follows ($ in thousands):


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 and 2016
(Unaudited)

 2017
Balance at January 1,$44,684
Reclassification due to change in redemption value and other731
Redemptions
Additions
Balance at March 31,$45,415

Accounting Estimates

The preparation of condensed consolidated financial statements, in accordance with U.S. 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.

(2)  Significant Transactions During the First Quarter of 2017 and Subsequent Event

Significant Transactions

Acquisitions

In January 2017, the Company purchased its joint venture partner's 50.0% interest in Palm Valley, for a contract price of $183.0 million. Prior to the purchase, an approximately $220.0 million mortgage encumbered the property. Concurrent with the closing of the acquisition, the entire mortgage balance was repaid and the property is now unencumbered. Palm Valley has 1,098 apartment homes, within four communities, and is located in San Jose, CA. As a result of this acquisition, the Company realized a gain on remeasurement of co-investment of $86.5 million upon consolidation.

In March 2017, the Company converted its existing $15.3 million preferred equity investment in Sage at Cupertino, a 230 apartment home community located in San Jose, CA, into a 40.5% common equity ownership interest in the property. The Company issued DownREIT units to the other members, including an affiliate of the Marcus & Millichap Company, based on an estimated property valuation of $90.0 million. See Note 5, Related Party Transactions, for additional details. The property is encumbered by $52.0 million of mortgage debt. As a result of this transaction, the Company consolidates the property, based on a VIE analysis performed by the Company.

The consolidated fair value of acquired communities listed in the preceding paragraphs above were included on the Company's condensed consolidated balance sheet as follows: $169.5 million was included in land and land improvements, $365.7 million was included in buildings and improvements, and $3.2 million was included in prepaid expenses and other assets, within the Company's condensed consolidated balance sheets.

Dispositions

In January 2017, the Company sold Jefferson at Hollywood, a 270 apartment home community, located in Los Angeles, CA, for $132.5 million, resulting in a gain of $26.2 million.

Preferred Equity Investments

In March 2017, the Company made a commitment to fund a $21.5 million preferred equity investment in a limited liability company that wholly owns two apartment home buildings that are under development, one of which is a 142 unit development located in Fullerton, CA and the other a 170 unit development located in Irvine, CA. This investment will accrue interest based on an 11% compounded preferred return for the first 30 months, after which the rate may decrease to 9.5% upon completion of

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30,March 31, 2017 and 2016 and 2015
(Unaudited)

(2)  Significant Transactions During the Second Quarter of 2016developments 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.if certain loan-to-value thresholds are met. 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 May 2016, the Company made a $23.7 million preferred equity investment in a limited liability company that owns 624 Yale, a 206 apartment home community development project located in Seattle, WA. This investment is scheduled to mature in November 2020 and will accrue interest based on a 10.0% compounded preferred return forMarch 2020. As of March 31, 2017, the first 30 months, after whichCompany has funded $2.0 million of the rate may drop to 8.0% if certain loan-to-value thresholds are met.$21.5 million commitment.

Series H Cumulative Redeemable Preferred Stock Redemption

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. As the notice of redemption was given in March 2016, the $2.5 million excess of redemption value over carrying value was recorded as a charge to net income attributable to common stockholders for the quarter ended March 31, 2016.

Issuance ofSenior Unsecured Debt

In March 2017, the Company paid off $300 million of 5.500% senior unsecured notes, at maturity.

Subsequent Event

In April 2016,2017, the Company issued $450$350 million of 3.375%10-year 3.625% senior unsecured notes that mature in April 2026.notes. The interest is paid semi-annually in arrears on April 15May 1 and October 15November 1 of each year commencing on October 15, 2016November 1, 2017 until the maturity date of April 15, 2026.May 1, 2027. The Company used the net proceeds of this offering to repay indebtedness under its unsecured lines of credit and for other general corporate and working capital purposes.

(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, 2016March 31, 2017 and December 31, 20152016 are as follows (in thousands, except in parenthetical):
Ownership Percentage June 30, 2016 December 31, 2015Ownership Percentage March 31, 2017 December 31, 2016
Membership interest/Partnership interest in:          
CPPIB55% $379,311
 $376,862
50%-55%
 $463,899
 $422,068
Wesco I, III and IV50% 209,573
 218,902
50% 181,187
 180,687
Palm Valley50% 
 68,396
BEXAEW50% 65,636
 88,850
50% 47,321
 47,963
Palm Valley50% 68,229
 68,525
BEX II (1)
50% (35,534) 19,078
Other50%-55%
 31,517
 32,927
50%-55%
 42,384
 43,713
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
Total operating co-investments, net  699,257
 781,905
Total development co-investments, net50%-55%
 123,408
 157,317
Total preferred interest co-investments (includes related party investments of $20.5 million and $35.9 million as of March 31, 2017 and December 31, 2016, respectively)  213,059
 222,053
Total co-investments, net  $1,035,724
 $1,161,275
 
(1) This co-investment was classified as a liability as of March 31, 2017.

The combined summarized financial information of co-investments is as follows (in thousands).
 March 31, 2017 December 31, 2016
Combined balance sheets: (1)
   
Rental properties and real estate under development$3,433,014
 $3,807,245
Other assets102,385
 121,505
Total assets$3,535,399
 $3,928,750
Debt$1,461,893
 $1,617,639
Other liabilities75,570
 74,607
Equity (1)
1,997,936
 2,236,504
Total liabilities and equity$3,535,399
 $3,928,750
Company's share of equity$1,035,724
 $1,161,275

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30,March 31, 2017 and 2016 and 2015
(Unaudited)

The combined summarized financial information of co-investments is as follows (in thousands).
 June 30, 2016 December 31, 2015
Combined balance sheets: (1)
   
Rental properties and real estate under development$3,327,936
 $3,360,360
Other assets114,524
 96,785
Total assets$3,442,460
 $3,457,145
Debt$1,473,705
 $1,499,601
Other liabilities96,151
 92,241
Equity (1)
1,872,604
 1,865,303
Total liabilities and equity$3,442,460
 $3,457,145
Company's share of equity$1,103,272
 $1,036,047


Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
2016 2015 2016 20152017 2016
Combined statements of income: (1)
          
Property revenues$69,180
 $62,092
 $144,310
 $125,589
$75,905
 $75,130
Property operating expenses(24,580) (23,184) (50,401) (46,138)(25,408) (25,821)
Net operating income44,600
 38,908
 93,909
 79,451
50,497
 49,309
Gain on sale of real estate10,796
 
 28,291
 14

 17,495
Interest expense(11,142) (11,097) (24,282) (22,413)(11,921) (13,140)
General and administrative(1,540) (1,473) (2,780) (3,079)(1,778) (1,240)
Depreciation and amortization(25,391) (24,265) (54,107) (49,646)(27,904) (28,716)
Net income$17,323
 $2,073
 $41,031
 $4,327
$8,894
 $23,708
Company's share of net income (2)
$14,296
 $4,472
 $29,364
 $8,783
$10,899
 $15,068
 
(1) Includes preferred equity investments held by the Company.
(2) Includes the Company's share of equity income from co-investments and preferred equity investments, gain on sales of co-investments, co-investment promote income and income from early redemption of preferred equity investments. Includes related party income of $0.9$0.5 million and $0.7$0.8 million for the three months ended June 30,March 31, 2017 and 2016, and 2015, respectively and $1.7 million and $1.6 million for the six months ended June 30, 2016 and 2015, respectively.

(4) Notes and Other Receivables
 
Notes receivable, secured by real estate, and other receivables consist of the following as of June 30, 2016March 31, 2017 and December 31, 2015 (in2016 ($ in thousands):
 June 30, 2016 December 31, 2015
Notes receivable, secured, bearing interest at 6.0%, due December 2016$3,219
 $3,219
Notes and other receivables from affiliates (1)
4,893
 3,092
Other receivables12,336
 12,974
 $20,448
 $19,285
 March 31, 2017 December 31, 2016
Notes receivable, secured, bearing interest at 10.75%, due September 2020$27,032
 $17,685
Related party note receivable, secured, bearing interest at 9.5%, due October 2019(1)
6,594
 6,593
Notes and other receivables from affiliates (2)
3,739
 4,695
Other receivables13,490
 11,997
Total notes and other receivables$50,855
 $40,970

(1) See Note 5, Related Party Transactions, for additional details.
(2) The Company had $4.9$3.7 million and $3.1$4.7 million of short-term loans outstanding and due from various joint ventures as of June 30, 2016March 31, 2017 and December 31, 2015,2016, 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 relating to its co-investments for asset management, property management, development, and redevelopment services. These fees from affiliates totaled $3.2$3.0 million and $3.6$3.3 million during the three months ended June 30,March 31, 2017 and 2016, and 2015, respectively, and $6.5 million and $9.3 million during the six months ended June 30, 2016 and 2015, respectively. All of these fees are net of intercompany amounts eliminated by the Company. The Company netted development and redevelopment fees of $1.1$0.8 million and $1.5$1.3 million against general and administrative expenses for the three months ended June 30,March 31, 2017 and 2016, and 2015, respectively, and $2.4 million and $4.6 million for the six months ended June 30, 2016 and 2015, respectively.

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

In

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 2015, a multifamily property, located in Anaheim, CA that was owned by an entity affiliated with MMC, in which the Company held a $13.7 million preferred equity investment, was sold. That investment of $13.7 million plus an additional $1.3 million in cash was invested as outlined in the next two paragraphs. Prior to the property sale, the $13.7 million preferred equity investment earned a 9.0% preferred return31, 2017 and was scheduled to mature in September 2020.2016
(Unaudited)

In June 2015,March 2017, the Company made a $10.0converted its existing $15.3 million preferred equity investment in an entity affiliated with MMC that owns Greentree Apartments,Sage at Cupertino, a 220230 apartment home community located in San Jose, CA. This investmentCA, into a 40.5% common equity ownership interest in the property. The Company issued DownREIT units to the other members, including an MMC affiliate, based on an estimated property valuation of $90.0 million. The property is encumbered by $52.0 million of mortgage debt. As a result of this transaction, the Company consolidates the property, based on a VIE analysis performed by the Company.

In 2015, the Company made preferred equity investments totaling $20.0 million in three entities affiliated with MMC that own apartment communities in California. The Company earns a 9.5% preferred return and ison each such investment, all of which are scheduled to mature in June 2022.

In June 2015,As described in Note 4, 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 earns a 9.5% preferred return and is scheduled to mature in June 2022.

In August 2015, the Company made a $5.0 million preferred equity investment in an entity affiliated with MMC that owns Alta Vista Apartments, a 92 apartment community located in Los Angeles, CA. This investment earns a 9.5% preferred return and is scheduled to mature in August 2022.

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

The Company has provided short-term bridge loans to affiliates. As of June 30, 2016March 31, 2017 and December 31, 2015, $4.92016, $3.7 million and $3.1$4.7 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. In November 2016, the Company provided a $6.6 million mezzanine loan to a limited liability company in which MMC holds a significant ownership interest through subsidiaries. The mezzanine loan is also classified within notes and other receivables in the accompanying condensed consolidated balance sheets and had an outstanding balance of $6.6 million and $6.6 million as of March 31, 2017 and December 31, 2016, respectively.

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

Debt consists of the following ($ in thousands):
 March 31, 2017 December 31, 2016 
Weighted Average
Maturity
In Years
Unsecured bonds private placement - fixed rate$314,253
 $314,190
 3.4
Term loan - variable rate348,279
 98,189
 4.9
Bonds public offering - fixed rate2,532,597
 2,834,400
 6.8
Unsecured debt, net (1)
3,195,129
 3,246,779
  
Lines of credit (2)
176,233
 125,000
 
Mortgage notes payable, net (3)
2,231,145
 2,191,481
 5.7
Total debt, net$5,602,507
 $5,563,260
  
Weighted average interest rate on fixed rate unsecured and unsecured private placement bonds3.8% 3.6%  
Weighted average interest rate on variable rate term loan2.2% 2.3%  
Weighted average interest rate on lines of credit1.9% 1.8%  
Weighted average interest rate on mortgage notes payable4.3% 4.3%  

(1) Includes unamortized discount of $2.6 million and $0.1 million and unamortized debt issuance costs of $17.3 million and $18.1 million, as of March 31, 2017 and December 31, 2016, respectively.
(2) Lines of credit, related to the Company's two lines of unsecured credit aggregating $1.03 billion, excludes unamortized debt issuance costs of $4.0 million and $3.3 million as of March 31, 2017 and December 31, 2016, respectively. These debt issuance costs are included in prepaid expenses and other assets on the condensed consolidated balance sheets. As of March 31, 2017, the Company had two lines of unsecured credit aggregating $1.03 billion. The Company’s $1.0 billion credit facility had an interest rate of LIBOR plus 0.90%, which is based on a tiered rate structure tied to the Company’s credit ratings. In January 2017, the Company’s $1.0 billion credit facility’s maturity date was extended to December 2020 with one 18-month extension, exercisable at the Company’s option. The Company’s $25.0 million working capital unsecured line of credit had an interest rate of LIBOR plus 0.90%, which is based on a tiered rate structure tied to the Company’s credit ratings. The $25.0 million credit facility matures in January 2018.

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30,March 31, 2017 and 2016 and 2015
(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)(3) Includes unamortized premium and discounts of $5.7$46.0 million and $14.3$50.8 million and reduced by unamortized debt issuance costs of $18.0$6.9 million and $15.6$7.4 million, as of June 30, 2016March 31, 2017 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 $3.8 million as of June 30, 2016, as the net effect resulted in a negative debt balance and as such the amount was reclassified to prepaid expenses and other assets on the condensed consolidated balance sheets. The December 31, 2015 amount includes $3.3 million of unamortized debt issuance costs because the net balance resulted in a positive debt balance and is presented on a net basis.
(3) Includes unamortized premium of $59.9 million and $64.8 million and reduced by unamortized debt issuance costs of $7.6 million and $8.0 million, as of June 30, 2016 and December 31, 2015, respectively.

The aggregate scheduled principal payments of the Company’s outstanding debt as of June 30, 2016March 31, 2017 are as follows (excluding lines of credit) (in($ in thousands):
Remaining in 2016$215,402
2017564,851
Remaining in 2017$114,776
2018321,328
301,858
2019661,954
653,114
2020693,868
695,070
2021552,831
Thereafter3,120,852
3,089,422
$5,578,255
Total$5,407,071

(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 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, real estate held for sale, net, cash and cash equivalents, marketable securities, notes and other receivables, and prepaid expenses and other assets.

The revenues and net operating income for each of the reportable operating segments are summarized as follows for the three and six months ended June 30,March 31, 2017 and 2016 and 2015 (in($ in thousands):
 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
June 30,March 31, 2017 and 2016 and 2015
(Unaudited)

 Three Months Ended March 31,
 2017 2016
Revenues:   
Southern California$147,099
 $135,894
Northern California123,308
 110,408
Seattle Metro56,192
 52,073
Other real estate assets6,569
 13,803
Total property revenues$333,168
 $312,178
Net operating income:   
Southern California$101,405
 $92,654
Northern California87,663
 79,013
Seattle Metro38,933
 35,689
Other real estate assets5,654
 10,332
Total net operating income233,655
 217,688
Management and other fees from affiliates2,236
 2,024
Depreciation and amortization(115,503) (109,707)
General and administrative(10,601) (9,182)
Acquisition and investment related costs(556) (828)
Interest expense(54,583) (52,466)
Total return swap income2,584
 3,123
Interest and other income6,764
 5,208
Equity income from co-investments10,899
 15,068
Gain on sale of real estate and land26,174
 20,258
Deferred tax expense on gain on sale of real estate and land
 (4,279)
Gain on remeasurement of co-investment86,482
 
Net income$187,551
 $86,907

Total assets for each of the reportable operating segments are summarized as follows as of June 30, 2016March 31, 2017 and December 31, 2015 (in2016 ($ in thousands):
June 30, 2016 December 31, 2015March 31, 2017 December 31, 2016
Assets:      
Southern California$4,847,701
 $4,912,264
$4,885,678
 $4,924,792
Northern California3,866,145
 3,749,072
4,293,943
 3,791,549
Seattle Metro1,686,923
 1,613,175
1,555,853
 1,570,340
Other real estate assets109,798
 107,066
57,210
 78,079
Net reportable operating segment - real estate assets10,510,567
 10,381,577
10,792,684
 10,364,760
Real estate under development157,659
 242,326
239,685
 190,505
Co-investments1,103,272
 1,036,047
1,071,258
 1,161,275
Real estate held for sale, net
 26,879

 101,957
Cash and cash equivalents, including restricted cash215,376
 123,055
100,252
 170,302
Marketable securities152,263
 137,485
138,977
 139,189
Notes and other receivables20,448
 19,285
50,855
 40,970
Other non-segment assets47,106
 38,437
Prepaid expenses and other assets53,716
 48,450
Total assets$12,206,691
 $12,005,091
$12,447,427
 $12,217,408
 
(8) Net Income Per Common Share and Net Income Per Common Unit
(Amounts in thousands, except share and unit data)

Essex Property Trust, Inc.
 Three Months Ended 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
June 30,March 31, 2017 and 2016 and 2015
(Unaudited)

(8) Net Income Per Common Share and Net Income Per Common Unit
 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
Basic:           
Net income available to common stockholders$149,994
 65,428,382
 $2.29
 $104,918
 64,499,545
 $1.63
Effect of Dilutive Securities
 130,429
  
 
 177,976
  
Diluted: 
  
  
  
  
  
Net income available to common stockholders$149,994
 65,558,811
 $2.29
 $104,918
 64,677,521
 $1.62
($ in thousands, except share and unit data)

WeightedEssex Property Trust, Inc.
 Three Months Ended March 31, 2017 Three Months Ended March 31, 2016
 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$178,964
 65,549,484
 $2.73
 $77,981
 65,405,654
 $1.19
Effect of Dilutive Securities:           
Stock options
 96,778
   
 151,985
  
DownREIT units373
 213,228
   
 
  
Diluted: 
  
  
  
  
  
Net income available to common stockholders$179,337
 65,859,490
 $2.72
 $77,981
 65,557,639
 $1.19


The table above exclude from the calculations of diluted EPS weighted average convertible limited partnership units of 2,223,9282,252,234 and 2,182,025,2,227,865, which include vested Series Z Incentive Units, Series Z-1 Incentive Units, 2014 Long-Term Incentive Plan Units, and 2015 Long-Term Incentive Plan Units for the three months ended June 30,March 31, 2017 and 2016, and 2015, respectively, and 2,225,897 and 2,183,163 for the six months ended June 30, 2016, and 2015, respectively, were excluded from the calculation of diluted EPS because they were anti-dilutive. The related income allocated to these convertible limited partnership units aggregated $2.4$6.1 million and $1.6$2.8 million for the three months ended June 30,March 31, 2017 and 2016, and 2015, respectively, and $5.2 million and $3.6 million for the six months ended June 30, 2016 and 2015, respectively. Additionally, the table excludes 953,006all DownREIT units as they are anti-dilutive.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.
 
Stock options of 87,954225,895 and 24,50077,200 for the three months ended June 30,March 31, 2017 and 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 periods ended and, therefore, 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


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30,March 31, 2017 and 2016 and 2015
(Unaudited)

Essex Portfolio, L.P.
Six Months Ended June 30, 2016 Six Months Ended June 30, 2015Three Months Ended March 31, 2017 Three Months Ended March 31, 2016
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$155,228
 67,654,279
 $2.29
 $108,514
 66,682,708
 $1.63
$185,110
 67,801,718
 $2.73
 $80,765
 67,633,519
 $1.19
Effect of Dilutive Securities
 130,429
  
 
 177,976
  
Effect of Dilutive Securities:           
Stock options
 96,778
   
 151,985
  
DownREIT units373
 213,228
   
 
  
Diluted: 
  
  
  
  
  
 
  
  
  
  
  
Net income available to common unitholders$155,228
 67,784,708
 $2.29
 $108,514
 66,860,684
 $1.62
$185,483
 68,111,724
 $2.72
 $80,765
 67,785,504
 $1.19
 
Stock options of 87,954225,895 and 24,50077,200 for the three months ended June 30,March 31, 2017 and 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 unit 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 periods ended and, therefore, were anti-dilutive. Additionally, the table excludes 953,006all DownREIT units as they are anti-dilutive.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.
 
(9) Derivative Instruments and Hedging Activities

As of June 30, 2016,March 31, 2017, the Company has entered into interest rate swap contracts with an aggregate notional amount of $225$200 million that effectively fixed the interest rate on the $225$200 million unsecured term loan at 2.4%2.3%. These derivatives qualify for hedge accounting.

As of June 30, 2016,March 31, 2017, the Company has interest rate caps, which are not accounted for as hedges, totaling a notional amount of $20.7 million that effectively limit the Company’s exposure to interest rate risk by providing a ceiling on the underlying variable interest rate for $20.7 million of the Company’s tax exempt variable rate debt.

As of both June 30, 2016March 31, 2017 and December 31, 2015,2016, the aggregate carrying value of the interest rate swap contracts was a liabilityan asset of $0.7$4.7 million and $1.0$4.4 million, respectively, and is included in prepaid expenses and other liabilitiesassets on the condensed consolidated balance sheets. The aggregate carrying value of the interest rate caps was zero on the condensed consolidated balance sheets as of both June 30, 2016March 31, 2017 and December 31, 2015.2016.

Hedge ineffectiveness related to cash flow hedges, which is included in interest expense on the condensed consolidated income statements, net was not significant for both the three and six months ended June 30, 2016March 31, 2017 and 2015, respectively.2016.

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 theall total return swaps with $114.4$257.3 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.par. These derivatives do not qualify for hedge accounting and had a carrying and fair value of $16 thousand and $4 thousandzero at June 30, 2016both March 31, 2017 and December 31, 2015, respectively.2016. These total return swaps are scheduled to mature between September 2021 and November 2022. Realized gains of $2.8$2.6 million and $5.9$3.1 million are reported in the condensed consolidated statements of income statementsand comprehensive income as total return swap income for the three and six months ended June 30,March 31, 2017 and 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
June 30,March 31, 2017 and 2016 and 2015
(Unaudited)

(10) Commitments and Contingencies

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 is subject to various federal, state, and local environmental laws. To the extent that an environmental matter arises or is identified in the future that has other than a remote risk of having a material impact on the condensed consolidated financial statements, the Company will disclose the estimated range of possible outcomes associated with it, and, if an outcome is probable, accrue an appropriate liability for that matter. The Company will consider whether any such matter results in an impairment of value on the affected property and, if so, impairment will be recognized. The Company is subject to various lawsuits in the normal course of its business operations. We believe that, with respect to such matters we are currently a party to, the ultimate disposition of any such matter will not result in a material adverse effect on the Company's financial condition, results of operations, or cash flows.

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

The following discussion and analysis should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and accompanying Notes thereto included elsewhere herein and with the Company’s 20152016 Annual Report on Form 10-K for the year ended December 31, 2015.2016.
 
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 June 30, 2016,March 31, 2017, had an approximately 96.7% general partner interest in the Operating Partnership.

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

As of June 30, 2016,March 31, 2017, the Company had ownership interests in 243246 stabilized apartment communities, comprising 59,24159,860 apartment homes, excluding the Company’s ownership in preferred equity interest co-investments, and the Company also had ownership interests in threeone operating commercial buildings with approximately 154,465106,564 square feet and sevenfive active developments. The Company’s apartment communities are predominately located in the following major regions:

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

As of June 30, 2016,March 31, 2017, the Company’s development pipeline was comprised of two consolidated projects under development, fivethree unconsolidated joint venture projects under development, and various consolidated predevelopment projects all aggregating 2,2721,968 apartment homes, with total incurred costs of $0.6 billion, and estimated remaining project costs of $0.8$0.7 billion, $0.5 billion of which represents the Company's estimated remaining costs, for total estimated project costs of $1.4$1.3 billion.

The Company’s consolidated apartment communities are as follows:
As of June 30, 2016 As of June 30, 2015As of March 31, 2017 As of March 31, 2016
Apartment Homes % Apartment Homes %Apartment Homes % Apartment Homes %
Southern California23,949
 49% 23,514
 48%23,343
 47% 23,949
 49%
Northern California14,865
 30% 14,807
 31%15,848
 32% 14,865
 30%
Seattle Metro10,239
 21% 10,239
 21%10,238
 21% 10,239
 21%
Total49,053
 100% 48,560
 100%49,429
 100% 49,053
 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, BEX II, LLC ("BEX

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

Comparison of the Three Months Ended June 30, 2016March 31, 2017 to the Three Months Ended June 30, 2015March 31, 2016

The Company’s average financial occupancies for the Company’s stabilized apartment communities or “Quarterly Same-Property”“Same-Property” (stabilized properties consolidated by the Company for the quarters ended June 30, 2016March 31, 2017 and 2015)2016) was 96.5% and 96.0% for both the three months ended June 30,March 31, 2017 and 2016, and 2015.respectively. Financial occupancy is defined as the percentage resulting from dividing actual rental revenue by total potential rental revenue. Actual rental revenue represents contractual rental revenue pursuant to leases without considering delinquency and concessions. Total potential rental revenue represents the value of all apartment homes, with occupied apartment homes valued at contractual rental rates pursuant to leases and vacant apartment homes valued at estimated market rents. We believe that financial occupancy is a meaningful measure of occupancy because it considers the value of each vacant apartment home at its estimated market rate.

Market rates are determined using the recently signed effective rates on new leases at the property and are used as the starting point in the determination of the market rates of vacant apartment homes. The Company may increase or decrease these rates based on the supply and demand in the apartment community’s market. Financial occupancy may not completely reflect short-term trends in physical occupancy and financial occupancy rates and the Company's calculation of financial occupancy may not be comparable to financial 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 June 30,March 31, 2017 and 2016 and 2015 is as follows:
Three Months Ended June 30,Three Months Ended March 31,
2016 20152017 2016
Southern California96.0% 95.8%96.4% 96.0%
Northern California96.2% 96.3%96.6% 96.0%
Seattle Metro95.9% 96.1%96.6% 95.8%

The following table provides a breakdown of revenue amounts, including revenues attributable to the Quarterly Same-Properties:
 Number of Three Months Ended   June 30, Dollar Percentage Number of Apartment Three Months Ended March 31, Dollar Percentage
Property Revenues ($ in thousands) Properties 2016 2015 Change Change Homes 2017 2016 Change Change
        
Quarterly Same-Property Revenues:          
Same-Property Revenues:          
Southern California 92
 $128,800
 $121,362
 $7,438
 6.1% 21,998
 $137,971
 $131,611
 $6,360
 4.8%
Northern California 54
 102,481
 95,263
 7,218
 7.6
 13,892
 107,962
 104,166
 3,796
 3.6%
Seattle Metro 50
 53,575
 49,825
 3,750
 7.5
 10,238
 56,192
 52,073
 4,119
 7.9%
Total Quarterly Same-Property revenues 196
 284,856
 266,450
 18,406
 6.9
Quarterly Non-Same Property Revenues  
 34,706
 27,651
 7,055
 25.5
Total Same-Property revenues 46,128
 302,125
 287,850
 14,275
 5.0%
Non-Same Property Revenues  
 31,043
 24,328
 6,715
 27.6%
Total property revenues  
 $319,562
 $294,101
 $25,461
 8.7%  
 $333,168
 $312,178
 $20,990
 6.7%

Quarterly Same-Property Revenues increased by $18.4$14.3 million or 6.9%5.0% to $284.9$302.1 million in the secondfirst quarter of 20162017 from $266.5$287.9 million in the secondfirst quarter of 2015.2016. The increase was primarily attributable to an increase of 7.0%4.1% in average rental

rates from $1,918$2,050 per apartment home in the secondfirst quarter of 20152016 to $2,052$2,134 per apartment home in the secondfirst quarter of 2016. 2017. 


Quarterly Non-Same Property Revenues increased by $7.1$6.7 million or 25.5%27.6% to $34.7$31.0 million in the secondfirst quarter of 20162017 from $27.7$24.3 million in the secondfirst quarter of 2015.2016. The increase was primarily due to revenue generated by the acquisition or consolidation of eight communities, net of dispositions, since April 1, 2015.Palm Valley in January 2017.

Management and other fees from affiliates remained relatively flat atincreased by $0.2 million to $2.2 million in the first quarter of 2017 from $2.0 million in the secondfirst quarter of 2016, as comparedprimarily due to $2.1 million inproperty management fee revenue from joint venture development communities that went into lease-up after the secondfirst quarter of 2015, reflecting no significant changes in management2016 and other fee activity from joint ventures.during the first quarter of 2017.

Property operating expenses, excluding real estate taxes increased $4.1$3.6 million to $61.5 million infor the secondfirst quarter of 2016 from $57.4 million in2017 compared to the secondfirst quarter of 2015,2016 primarily due to the acquisition or consolidation of eight communities, net of dispositions, since April 1, 2015. QuarterlyPalm Valley. Same-Property operating expenses, excluding real estate taxes, increased by $2.9$2.8 million or 5.5%5.1% for the secondfirst quarter of 20162017 compared to the secondfirst quarter of 2015,2016, primarily due to a $1.2$1.0 million increase in property management feesutilities and increasesan increase of $0.6$0.8 million in both maintenance and repairs, and administrative expenses, respectively.repairs.

Real estate taxes increased by $1.9$1.4 million for the secondfirst quarter of 20162017 compared to the secondfirst quarter of 20152016 due primarily to the acquisition or consolidation of eight communities, net of dispositions, since April 1, 2015 and increasesPalm Valley in tax rates and property valuations. QuarterlyJanuary 2017. Same-Property real estate taxes increased by $0.4remained relatively flat at $31.6 million or 1.3% for the secondfirst quarter of 20162017 compared to $31.4 million for the secondfirst quarter of 2015 primarily due to increases in tax rates and property valuations.2016.

Depreciation and amortization expense decreasedincreased by $4.1$5.8 million for the secondfirst quarter of 2017 compared to the first quarter of 2016, compared to the second quarter of 2015,primarily due to the amortizationconsolidation 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. Palm Valley in January 2017.

Interest expense increased $4.8$2.1 million for the secondfirst quarter of 20162017 compared to the secondfirst quarter of 2015,2016, primarily due to the $450.0 million senior unsecured notes due on April 15, 2026 issued in April 2016 which resulted in $3.4$3.9 million interest expense for the secondfirst quarter of 20162017 and none for the secondfirst quarter of 2015,2016. The increase was partially offset by various debt that was paid off or matured during and after the reductionfirst quarter of 2016, which resulted in a decrease in interest expense due toof $1.5 million for the payoff of $150.0 million in private placement unsecured bonds. In addition, capitalized interest decreased $0.8 million in the secondfirst 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 2015.2017.

Total return swap income of $2.8$2.6 million in the secondfirst quarter of 20162017 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 incomeThe decrease of $0.5 million for the secondfirst quarter of 2015.2017 compared to the first quarter of 2016 was due to less favorable interest rates.

Interest and other income increased by $6.2$1.6 million for the secondfirst quarter of 2017 compared to the first quarter of 2016 compared to the second quarter of 2015 primarily due to $4.0 million in insurance reimbursements and legal settlements and $1.1an increase of $0.9 million in income from the sale of marketable securities.securities as well as an increase of $0.4 million in interest income as a result of a larger notes receivable balance.

Equity income infrom co-investments increased $9.8decreased $4.2 million for the secondfirst quarter of 20162017 compared to the secondfirst 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 January 1, 2015.

Management and other fees from affiliates decreased by $0.7 million in the six months ended June 30, 2016 as compared to the six months ended June 30, 2015. The decrease is primarily due to the losssale of asset and management fees in the six months ended June 30, 2016, as compared to the six 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 communitiesa property by BEXAEW, LLC during the six months ended June 30, 2015 and the salefirst quarter of certain communities.

Property operating expenses, excluding real estate taxes increased $8.6 million to $121.6 million in the six months ended June 30, 2016 from $113.0 million in the six months ended June 30, 2015 primarily due to the acquisition or consolidation of ten communities, net of dispositions, since January 1, 2015. 2016/2015 Same-Property operating expenses, excluding real estate taxes, increased by $5.6 million or 5.3% for the six months ended June 30, 2016 compared to the six months ended June 30, 2015, primarily due to a $2.4 million increase in property management fees and a $1.5 million increase in maintenance and repairs.

Real estate taxes increased by $4.7 million for the six months ended June 30, 2016 compared to the six months ended June 30, 2015 due primarily to the acquisition or consolidation of ten communities, net of dispositions, since January 1, 2015 and increases in tax rates and property valuations. 2016/2015 Same-Property real estate taxes increased by $1.0 million or 1.7% for the six months ended June 30, 2016 compared to the six months ended June 30, 2015 primarily due to increases in tax rates and property valuations.

Depreciation and amortization expense decreased by $1.3 million for the six 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 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 six months ended June 30, 2016 and $3.8 million for the six months ended June 30, 2015. 

Interest expense increased $9.7 million for the six months ended June 30, 2016 compared to the six months ended June 30, 2015, primarily due to the $500.0 million senior 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 payoffa gain of $150.0 million in private placement unsecured bonds. In addition, capitalized interest decreased $2.1 million for six months ended June 30, 2016 compared to the six months ended June 30, 2015, which was due to a decrease in development costs as compared to the same period in 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 $7.2$7.4 million for the six months ended June 30, 2016 compared to the six months ended June 30, 2015 primarily due to an increaseCompany for that period. This decrease was offset by increases in preferred equity income of approximately $3.0 million in income from insurance reimbursements and legal settlements and $1.8 million in income from the sale of marketable securities.

Equity income in co-investments increased $20.6 million for the six months ended June 30, 2016 compared to the six months ended June 30, 2015 primarily due to $13.0 million in income on the gain on the sale of two co-investment communities during the six months ended June 30, 2016.million.

Gain on sale of real estate and land increased by $13.1$5.9 million for the six months ended June 30, 2016first quarter of 2017 compared to the six months ended June 30, 2015,first quarter of 2016 was due primarily to a $26.2 million gain on the sale of Jefferson at Hollywood during the first quarter of 2017 as compared to a $10.7 million gain on the sale of Harvest Park before tax expense and a $9.6 million gain on the sale of the Company's former headquarters office building during the six months ended June 30, 2016 versus $7.1 million in gains on the salesfirst quarter of Pinnacle South Mountain and two commercial buildings during the six months ended June 30, 2015.2016.

Deferred tax expense on gain on sale of real estate and landof $4.3 million for the six months ended June 30,first quarter of 2016 was recorded due to the sale of Harvest Park, which was owned by our wholly owned taxable REIT subsidiary. There was no current tax expense on the sale of real estate and land for the six months ended June 30,first quarter of 2016 becauseas the Harvest Park was soldproceeds were used in a like-kind exchange transaction.

Gain on remeasurement of co-investmentof $34.0$86.5 million for the six months ended June 30, 2015 was due to a remeasurementfirst quarter of 2017 resulted from the purchase of the Company's investments, caused by the Company's purchase of the joint venture partner's remaining membership50% interest in The Huxley, The Dylan,Palm Valley. See Note 2, Significant Transactions and Reveal co-investments.Subsequent Events, for additional details. There were no gains on remeasurementsuch transactions during the first quarter of co-investments for the six months ended June 30, 2016.

Liquidity and Capital Resources

As of June 30, 2016,March 31, 2017, the Company had $182.5$84.3 million of unrestricted cash and cash equivalents and $152.3$139.0 million in marketable securities, of which $64.6$41.0 million were available for sale. We believe that cash flows generated by our operations, existing cash and 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.

As of March 31, 2017, Fitch Ratings ("Fitch"), Moody’s Investor Service ("Moody's"), and Standard and Poor's (“S&P”) credit agencies rate Essex Property Trust, Inc. and Essex Portfolio, L.P. BBB+/Stable, Baa2/Positive,Baa1/Stable, and BBB/Positive,BBB+/Stable, 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 June 30, 2016,March 31, 2017, there were no amounts outstandingwas a $175.0 million balance on the line.this unsecured line of credit. The underlying interest rate is based on a tiered rate structure tied to the Company's credit ratings and was LIBOR plus 0.90% as of June 30, 2016. This facility matures inMarch 31, 2017. In January 2017, the maturity date was extended to December 20192020 with one 18-month extension, exercisable at the Company’sCompany's option. The Company also has a $25 million working capital unsecured line of credit agreement for $25.0 million.agreement. This facility matures in January 2018. As of June 30, 2016,March 31, 2017, there were no

amountswas $1.2 million outstanding on the $25.0 million unsecured line. The underlying interest rate on the $25.0 million line is based on a tiered rate structure tied to the Company's credit ratings and was LIBOR plus 0.90% as of June 30, 2016.March 31, 2017.

In March 2017, the Company paid off $300 million of 5.500% senior unsecured notes, at maturity.

In April 2016,2017, the Company issued $450$350 million of 3.375%10-year 3.625% senior unsecured notes that mature in April 2026.notes. The interest is paid semi-annually in arrears on April 15May 1 and October 15November 1 of each year commencing on October 15, 2016November 1, 2017 until the maturity date of April 15, 2026.May 1, 2027. The Company used the net proceeds of this offering to repay indebtedness under its unsecured lines of credit and for other general corporate and working capital purposes.

In April 2016, the Company redeemed all of the issued and outstanding 2,950,000 shares of the Company's 7.125% Series H Cumulative Redeemable Preferred Stock for $25.00 per share 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., BNBBNP Paribas Securities Corp., Capital One Securities, Inc., Citigroup Global Markets Inc., Jefferies LLC, J.P. Morgan Securities LLC, Mitsubishi UFJ Securities (USA), Inc., and UBS Securities LLC. The Company has not issued any shares pursuant to its equity distribution program during the sixthree months ended June 30, 2016March 31, 2017 and through July 28, 2016.April 27, 2017.

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 projects as new communities that are being constructed, or are newly constructed and are in a phase of lease-up and have not yet reached stabilized operations. As of June 30, 2016,March 31, 2017, the Company’s development pipeline was comprised of two consolidated projects under development and fivethree unconsolidated joint venture projects under development, all aggregating 2,2721,968 apartment homes, with total incurred costs of $0.6 billion, and estimated remaining project costs of approximately $0.8$0.7 billion, $574 million$0.5 billion of which represents the Company's estimated remaining costs, for total estimated project costs of $1.4$1.3 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, construction loans, 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 June 30, 2016,March 31, 2017, the Company had ownership interests in fiveseven major redevelopment communities aggregating 1,3132,269 apartment homes with estimated redevelopment costs of $159.8$177.1 million, of which approximately $64.2$66.8 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.

Alternative Capital Sources

The Company utilizes co-investments as an alternative source of capital for acquisitions of both operating and development communities. As of June 30, 2016,March 31, 2017, the Company had an interest in 1,4761,172 apartment homes of communities actively under development with joint ventures for total estimated costs of $823 million.$0.7 billion. Total estimated remaining costs total approximately

$389 million, $0.3 billion, of which the Company estimates that our remaining investment in these development joint ventures will be approximately $197 million.$0.2 billion. In addition, the Company had an interest in 10,18810,431 apartment homes of operating communities with joint ventures for a total book value of $754.3 million$0.7 billion as of June 30, 2016.March 31, 2017.
 
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 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, 2015.2016.
  
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 timing of completion of current development and redevelopment projects and the stabilization of such projects, expectation as the total projected costs of predevelopment, development and redevelopment projects, beliefs as to our abilitythe adequacy of future cash flows to meet ouranticipated 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, and the use of proceeds from such 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 actual completion of development and redevelopment projects will be subject to delays, that the stabilization dates of such projects will be delayed, that the total projected costs of current predevelopment, development and redevelopment projects will 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 and/or will be insufficient to provide for dividend payments in accordance with REIT requirements, that there may be a downturn in the markets in which the Company's propertiescommunities 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, 2015,2016, 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 providesand Core FFO provide investors with an additional basisbases 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:
 
(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 six months ended June 30,March 31, 2017 and 2016 and 2015 (in thousands except for share and per share data):


Essex Property Trust, Inc.
Three Months Ended   June 30, Six Months Ended   June 30,Three Months Ended March 31,
2016 2015 2016 20152017 2016
Net income available to common stockholders$72,013
 $45,555
 $149,994
 $104,918
$178,964
 $77,981
Adjustments: 
  
  
  
 
  
Depreciation and amortization109,673
 113,731
 219,380
 220,638
115,503
 109,707
Gains not included in Funds from Operations attributable to common stockholders and unitholders(5,611) (12,652) (33,304) (41,126)(112,656) (27,693)
Deferred tax expense on sale of real estate and land - taxable REIT subsidiary activity
 
 4,279
 

 4,279
Depreciation add back from unconsolidated co-investments12,457
 12,105
 24,480
 24,022
12,854
 12,023
Noncontrolling interest related to Operating Partnership units2,450
 1,581
 5,234
 3,644
6,146
 2,784
Depreciation attributable to third party ownership and other(4) (251) 2
 (500)(25) 6
Funds from Operations attributable to common stockholders and unitholders$190,978
 $160,069
 $370,065
 $311,596
$200,786
 $179,087
Funds from Operations attributable to common stockholders and unitholders per share - diluted$2.81
 $2.38
 $5.45
 $4.66
$2.95
 $2.64
Non-core items: 
  
  
  
 
  
Merger and integration expenses
 1,410
 
 3,798
Acquisition and investment related costs267
 429
 1,095
 976
556
 828
Gain on sale of marketable securities(1,103) 
 (1,843) 
Income from early redemption of preferred equity investments
 
 
 (469)
Gain on sale of marketable securities and other investments(1,605) (740)
Interest rate hedge ineffectiveness (1)
(6) 
Excess of redemption value of preferred stock over carrying value
 
 2,541
 

 2,541
Insurance reimbursements, legal settlements , and other, net(4,010) (582) (4,010) (1,957)
Insurance reimbursements(25) 
Core Funds from Operations attributable to common stockholders and unitholders$186,132
 $161,326

$367,848

$313,944
$199,706
 $181,716
Core Funds from Operations attributable to common stockholders and unitholders per share-diluted$2.74
 $2.40
 $5.42
 $4.69
$2.94
 $2.68
Weighted average number shares outstanding diluted (1)
67,877,202
 67,215,382
 67,864,255
 66,922,047
Weighted average number shares outstanding diluted (2)
67,974,466
 67,866,703

(1) Interest rate swaps generally are adjusted to fair value through other comprehensive income (loss). However, because certain of our interest rate swaps do not have a 0% LIBOR floor, while related hedged debt in these cases is subject to a 0% LIBOR floor, the portion of the change in fair value of these interest rate swaps attributable to this mismatch is recorded as a non-cash interest rate hedge ineffectiveness through interest expense.

(2) Assumes conversion of all dilutive outstanding operating partnership interests in the Operating Partnership and excludes 739,779all 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”Net Operating Income ("NOI")is and same-property NOI are considered by management to be an important supplemental performance measuremeasures 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($ in thousands):


Three Months Ended   June 30, Six Months Ended   June 30,Three Months Ended March 31,
2016 2015 2016 20152017 2016
Earnings from operations$105,873
 $80,966
 $205,868
 $156,281
$109,231
 $99,995
Adjustments: 
  
  
  
 
  
Depreciation and amortization109,673
 113,731
 219,380
 220,638
115,503
 109,707
Management and other fees from affiliates(2,028) (2,061) (4,052) (4,705)(2,236) (2,024)
General and administrative9,698
 9,549
 18,880
 20,094
10,601
 9,182
Merger and integration expenses
 1,410
 
 3,798
Acquisition and investment related costs267
 429
 1,095
 976
556
 828
NOI223,483
 204,024
 441,171
 397,082
233,655
 217,688
Less: Non-same property NOI(24,138) (19,780) (46,337) (33,129)(21,985) (17,235)
Same-property NOI$199,345
 $184,244
 $394,834
 $363,953
$211,670
 $200,453

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 June 30, 2016,March 31, 2017, the Company has entered into sevensix interest rate swap contracts to mitigate the risk of changes in the interest-related cash outflows on its $225.0$200.0 million variable rateof the Company's five-year unsecured term debt. As of June 30, 2016,March 31, 2017, the Company also had $291.7$281.6 million of variable rate indebtedness, of which $20.7 million is subject to interest rate cap protection. All of the Company's interest rate swaps are designated as cash flow hedges as of June 30, 2016.March 31, 2017. 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 June 30, 2016.March 31, 2017. 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 June 30, 2016.March 31, 2017.

  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 $(687) $(287) $(1,082)$200,000
 2017-2022 $4,734
 $8,731
 $740
Interest rate caps20,674
 2018-2019 
 3
 
20,674
 2018-2019 
 
 
Total cash flow hedges$245,674
 2016-2019 $(687) $(284) $(1,082)$220,674
 2017-2022 $4,734
 $8,731
 $740

Additionally, the Company has entered into total return swap contracts, with an aggregate notional amount of $257.3 million that effectively convertsconvert $257.3 million of fixed mortgage notes payable to a floating interest rate based on SIFMA plus a spread and hashave a carrying value of $16 thousandzero at June 30, 2016.March 31, 2017. The Company is exposed to insignificant interest rate risk on these swaps as the related mortgages are callable, at par, by the Company, co-terminus with the termination of any related swap. These derivatives do not qualify for hedge 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 used to maintain liquidity and unsecured term debt.fund capital expenditures and expansion of the Company's real estate investment portfolio and operations. 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 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.
 
For the Years Ended2016 2017 2018 2019 2020 Thereafter Total Fair value2017 2018 2019 2020 2021 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$15,364
 539,356
 320,786
 651,362
 693,221
 2,841,457
 $5,061,546
 $5,319,991
$114,401
 301,317
 652,522
 694,424
 552,123
 2,460,732
 $4,775,519
 $4,862,517
Average interest rate4.6% 3.3% 5.5% 4.3% 5.0% 3.7% 4.0%  
5.0% 5.5% 4.3% 4.8% 4.3% 3.6% 4.1%  
Variable rate debt(1)$200,038
(1) 
25,495
(1) 
542
 10,592
 647
 279,395
(2) (3) 
$516,709
 $512,667
$375

1,774

592
 175,646
 708
 628,690
(2) (3) 
$807,785
 $802,338
Average interest rate2.4% 2.4% 1.3% 1.7% 1.3% 1.1% 1.7%  
1.9% 1.9% 1.9% 1.9% 1.9% 2.0% 2.0%  
 
(1) $225.0$200.0 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 June 30, 2016;March 31, 2017; it does not consider those exposures or positions that could arise after that date. As a result, the 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 June 30, 2016,March 31, 2017, 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 June 30, 2016,March 31, 2017, 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 June 30, 2016,March 31, 2017, 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 June 30, 2016,March 31, 2017, 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 June 30, 2016,March 31, 2017, 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.

There were no changes in the Operating Partnership’s internal control over financial reporting, that occurred during the quarter ended June 30, 2016,March 31, 2017, 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.

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, 2015,2016, 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 June 30, 2016,March 31, 2017, 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 June 30, 2016,March 31, 2017, Essex Property Trust, Inc. issued an aggregate of 52,32841,528 of its common stock upon the exercise of stock options, vesting of restricted stock awards, and the exchange of Operating Partnership limited partnership units by limited partners into shares of common stock. Essex Property Trust, Inc. contributed the proceeds from the option exercises during the three months ended June 30, 2016March 31, 2017 to our Operating Partnership in exchange for an aggregate of 52,32840,571 common operating partnership units ("common units"), as required by the Operating Partnership’s partnership agreement. Furthermore, for each share of common stock issued by Essex Property Trust, Inc. in connection with vesting of restricted stock awards and the exchange of Operating Partnership limited partnership units by limited partners, our Operating Partnership issued common units to Essex Property Trust, Inc., as required by the partnership agreement, for an aggregate of 957 units during the three months ended March 31, 2017.

Item 5: Other Information

None.


Item 6: Exhibits
 
A. Exhibits 
3.13.2Articles SupplementarySixth Amended and Restated Bylaws 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.,dated February 21, 2017, attached as Exhibit 3.2 to the Company's Current Report on Form 8-K, filed on May 23, 2016February 27, 2017, 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 referencereference.
  
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

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: AugustMay 1, 20162017
  
 By:  /S/ ANGELA L. KLEIMAN
  
 Angela L. Kleiman
 
Executive Vice President and Chief Financial Officer
(Authorized Officer, Principal Financial Officer)

 Date: AugustMay 1, 20162017
  
 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: AugustMay 1, 20162017
  
 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: AugustMay 1, 20162017
  
 By:  /S/ JOHN FARIAS
  
 John Farias
 Group Vice President and Chief Accounting Officer


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