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EX-32.4 - EXHIBIT 32.4 - ESSEX PROPERTY TRUST INCess-63016xex324.htm
EX-32.3 - EXHIBIT 32.3 - ESSEX PROPERTY TRUST INCess-63016xex323.htm
EX-32.2 - EXHIBIT 32.2 - ESSEX PROPERTY TRUST INCess-63016xex322.htm
EX-32.1 - EXHIBIT 32.1 - ESSEX PROPERTY TRUST INCess-63016xex321.htm
EX-31.4 - EXHIBIT 31.4 - ESSEX PROPERTY TRUST INCess-63016xex314.htm
EX-31.3 - EXHIBIT 31.3 - ESSEX PROPERTY TRUST INCess-63016xex313.htm
EX-31.2 - EXHIBIT 31.2 - ESSEX PROPERTY TRUST INCess-63016xex312.htm
EX-31.1 - EXHIBIT 31.1 - ESSEX PROPERTY TRUST INCess-63016xex311.htm
EX-12.1 - EXHIBIT 12.1 - ESSEX PROPERTY TRUST INCess-63016xex121.htm
                                

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

For the quarterly period ended June 30, 2016

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.  See the definitions of “large accelerated filer,” ”accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


i


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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Essex Property Trust, Inc.    Yes o   No x
Essex Portfolio, L.P.     Yes o   No x
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 65,494,848 shares of Common Stock ($0.0001 par value) of Essex Property Trust, Inc. were outstanding as of July 28, 2016.
 

ii


EXPLANATORY NOTE

This report combines the reports on Form 10-Q for the three and six month period ended June 30, 2016 of Essex Property Trust, Inc. and Essex Portfolio, L.P. Unless stated otherwise or the context otherwise requires, references to “Essex” mean Essex Property Trust, Inc., a Maryland corporation that operates as a self-administered and self-managed real estate investment trust (“REIT”), and references to “EPLP” mean Essex Portfolio, L.P. (the “Operating Partnership”). References to the “Company,” “we,” “us” or “our” mean collectively Essex, EPLP and those entities/subsidiaries owned or controlled by Essex and/or EPLP.  References to the “Operating Partnership” mean collectively EPLP and those entities/subsidiaries owned or controlled by EPLP.

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

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

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

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

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

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

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

iii


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

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

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

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

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the notes to such unaudited condensed consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations herein. Additionally, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2015.

iv


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

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

1


Part I – Financial Information

Item 1. Condensed Financial Statements

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share amounts)
ASSETS
June 30, 2016
 
December 31, 2015
Real estate:
 
 
 
Rental properties:
 
 
 
Land and land improvements
$
2,573,923

 
$
2,522,842

Buildings and improvements
10,096,484

 
9,808,627

 
12,670,407

 
12,331,469

Less accumulated depreciation
(2,159,840
)
 
(1,949,892
)
 
10,510,567

 
10,381,577

Real estate under development
157,659

 
242,326

Co-investments
1,103,272

 
1,036,047

Real estate held for sale, net

 
26,879

 
11,771,498

 
11,686,829

Cash and cash equivalents-unrestricted
182,515

 
29,683

Cash and cash equivalents-restricted
32,861

 
93,372

Marketable securities
152,263

 
137,485

Notes and other receivables
20,448

 
19,285

Prepaid expenses and other assets
47,106

 
38,437

Total assets
$
12,206,691

 
$
12,005,091

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Unsecured debt, net
$
3,377,728

 
$
3,088,680

Mortgage notes payable, net
2,240,558

 
2,215,077

Lines of credit, net

 
11,707

Accounts payable and accrued liabilities
145,217

 
131,415

Construction payable
38,473

 
40,953

Dividends payable
110,163

 
100,266

Other liabilities
34,945

 
34,518

Total liabilities
5,947,084

 
5,622,616

Commitments and contingencies


 


Redeemable noncontrolling interest
44,531

 
45,452

Equity:
 

 
 

Common stock; $0.0001 par value, 670,000,000 shares authorized; 65,479,054 and 65,379,359 shares issued and outstanding, respectively
6

 
6

   Cumulative redeemable 7.125% Series H preferred stock at liquidation value

 
73,750

Additional paid-in capital
7,017,962

 
7,003,317

Distributions in excess of accumulated earnings
(856,815
)
 
(797,329
)
Accumulated other comprehensive loss, net
(43,007
)
 
(42,011
)
Total stockholders' equity
6,118,146

 
6,237,733

Noncontrolling interest
96,930

 
99,290

Total equity
6,215,076

 
6,337,023

Total liabilities and equity
$
12,206,691

 
$
12,005,091


See accompanying notes to the unaudited condensed consolidated financial statements.

2



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

 
Three Months Ended   June 30,
 
Six Months Ended   June 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Rental and other property
$
319,562

 
$
294,101

 
$
631,740

 
$
574,330

Management and other fees from affiliates
2,028

 
2,061

 
4,052

 
4,705

 
321,590

 
296,162

 
635,792

 
579,035

Expenses:
 

 
 

 
 
 
 
Property operating, excluding real estate taxes
61,538

 
57,400

 
121,609

 
113,019

Real estate taxes
34,541

 
32,677

 
68,960

 
64,229

Depreciation and amortization
109,673

 
113,731

 
219,380

 
220,638

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

 
215,717

 
215,196

 
429,924

 
422,754

Earnings from operations
105,873

 
80,966

 
205,868

 
156,281

Interest expense
(55,568
)
 
(50,802
)
 
(108,034
)
 
(98,348
)
Total return swap income
2,814

 

 
5,937

 

Interest and other income
9,409

 
3,254

 
14,617

 
7,453

Equity income in co-investments
14,296

 
4,472

 
29,364

 
8,783

Gain on sale of real estate and land

 

 
20,258

 
7,112

Deferred tax expense on gain on sale of real estate and land

 

 
(4,279
)
 

Gain on remeasurement of co-investment

 
12,652

 

 
34,014

Net income
76,824

 
50,542

 
163,731

 
115,295

Net income attributable to noncontrolling interest
(4,811
)
 
(3,674
)
 
(9,882
)
 
(7,750
)
Net income attributable to controlling interest
72,013

 
46,868

 
153,849

 
107,545

Dividends to preferred stockholders

 
(1,313
)
 
(1,314
)
 
(2,627
)
Excess of redemption value of preferred stock over the carrying value

 

 
(2,541
)
 

Net income available to common stockholders
$
72,013

 
$
45,555

 
$
149,994

 
$
104,918

Comprehensive income
$
78,005

 
$
51,287

 
$
162,701

 
$
116,639

Comprehensive income attributable to noncontrolling interest
(4,850
)
 
(3,703
)
 
(9,848
)
 
(7,794
)
Comprehensive income attributable to controlling interest
$
73,155

 
$
47,584

 
$
152,853

 
$
108,845

Per share data:
 

 
 

 
 
 
 
Basic:
 

 
 

 
 
 
 
Net income available to common stockholders
$
1.10

 
$
0.70

 
$
2.29

 
$
1.63

Weighted average number of shares outstanding during the period
65,451,110

 
64,810,184

 
65,428,382

 
64,499,545

Diluted:
 

 
 

 
 
 
 
Net income available to common stockholders
$
1.10

 
$
0.70

 
$
2.29

 
$
1.62

Weighted average number of shares outstanding during the period
65,575,378

 
64,972,852

 
65,558,811

 
64,677,521

Dividend per common share
$
1.60

 
$
1.44

 
$
3.20

 
$
2.88


See accompanying notes to the unaudited condensed consolidated financial statements.

3


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Equity for the six months ended June 30, 2016
(Unaudited)
(Dollars and shares in thousands)
 
Series H
Preferred stock
 
Common stock
 
Additional paid-in capital
 
Distributions
in excess of accumulated earnings
 
Accumulated
other
comprehensive loss, net
 
Noncontrolling Interest
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
Total
Balances at December 31, 2015
2,950

 
$
73,750

 
65,379

 
$
6

 
$
7,003,317

 
$
(797,329
)
 
$
(42,011
)
 
$
99,290

 
$
6,337,023

Net income

 

 

 

 

 
153,849

 

 
9,882

 
163,731

Change in fair value of derivatives and amortization of swap settlements

 

 

 

 

 

 
(1,291
)
 
(44
)
 
(1,335
)
Change in fair value of marketable securities, net

 

 

 

 

 

 
295

 
10

 
305

Issuance of common stock under:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Stock option and restricted stock plans, net

 

 
89

 

 
11,760

 

 

 

 
11,760

Sale of common stock, net

 

 

 

 
(279
)
 

 

 

 
(279
)
Equity based compensation costs

 

 

 

 
2,001

 

 

 
1,197

 
3,198

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

Distributions to noncontrolling interest

 

 

 

 

 

 

 
(13,471
)
 
(13,471
)
Redemptions of noncontrolling interest

 

 
11

 

 
(1,743
)
 

 

 
(490
)
 
(2,233
)
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


See accompanying notes to the unaudited condensed consolidated financial statements.

4


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands) 
 
Six Months Ended June 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
163,731

 
$
115,295

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

 
 

Depreciation and amortization
219,380

 
220,638

Amortization of discount on marketable securities and other investments
(7,457
)
 
(5,777
)
Amortization of (premium) discount and debt financing costs, net
(7,598
)
 
(11,125
)
Gain on sale of marketable securities
(1,843
)
 

Company's share of gain on the sales of co-investments
(13,046
)
 

Income from early redemption of preferred equity investments

 
(469
)
Earnings from co-investments
(16,318
)
 
(8,314
)
Operating distributions from co-investments
23,985

 
14,804

Gain on the sale of real estate and land
(20,258
)
 
(7,112
)
Equity-based compensation
3,198

 
3,457

Gain on remeasurement of co-investments

 
(34,014
)
Changes in operating assets and liabilities:
 
 
 
   Prepaid expenses, receivables and other assets
(3,942
)
 
(6,646
)
Accounts payable and accrued liabilities
9,772

 
4,924

Other liabilities
749

 
1,387

Net cash provided by operating activities
350,353

 
287,048

Cash flows from investing activities:
 

 
 

Additions to real estate:
 

 
 

Acquisitions of real estate and acquisition related capital expenditures
(117,349
)
 
(314,890
)
Redevelopment
(43,200
)
 
(41,796
)
Development acquisitions of and additions to real estate under development
(37,150
)
 
(122,377
)
Capital expenditures on rental properties
(22,277
)
 
(24,673
)
Acquisition of membership interest in co-investments

 
(115,724
)
Proceeds from insurance for property losses
1,211

 
11,735

Proceeds from dispositions of real estate
48,008

 
74,485

Contributions to co-investments
(96,698
)
 
(97,512
)
Changes in restricted cash and refundable deposits
56,932

 
49,808

Purchases of marketable securities
(16,352
)
 
(7,250
)
Sales and maturities of marketable securities
11,179

 
1,968

Non-operating distributions from co-investments
34,564

 
11,072

Net cash used in investing activities
(181,132
)
 
(575,154
)
Cash flows from financing activities:
 

 
 

Borrowings under debt agreements
768,610

 
923,431

Repayment of debt
(501,167
)
 
(730,712
)
Repayment of cumulative redeemable preferred stock
(73,750
)
 

Additions to deferred charges
(4,962
)
 
(4,456
)
Net proceeds from issuance of common stock
(279
)
 
272,664

Net proceeds from stock options exercised
11,760

 
18,346

Distributions to noncontrolling interest
(12,880
)
 
(11,033
)
Redemption of noncontrolling interest
(2,233
)
 
(2,488
)
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

Net increase in cash and cash equivalents
152,832

 
4,632


5


 
Six Months Ended June 30,
 
2016
 
2015
Cash and cash equivalents at beginning of period
29,683

 
25,610

Cash and cash equivalents at end of period
$
182,515

 
$
30,242

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of $6.2 million and $8.3 million capitalized in 2016 and 2015, respectively
$
93,031

 
$
86,347

Supplemental disclosure of noncash investing and financing activities:
 

 
 

Transfers between real estate under development to rental properties, net
$
108,402

 
$
300,751

Transfer from real estate under development to co-investments
$
4,485

 
$
3,780

Reclassifications (from) to redeemable noncontrolling interest to or from additional paid in capital and noncontrolling interest
$
(921
)
 
$
574

Debt assumed in connection with acquisition
$
48,832

 
$
114,435


See accompanying notes to the unaudited condensed consolidated financial statements.


6


ESSEX PORTFOLIO, L.P.  AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except unit amounts)
 
June 30, 2016
 
December 31, 2015
ASSETS
 
 
 
Real estate:
 
 
 
Rental properties:
 
 
 
Land and land improvements
$
2,573,923

 
$
2,522,842

Buildings and improvements
10,096,484

 
9,808,627

 
12,670,407

 
12,331,469

Less accumulated depreciation
(2,159,840
)
 
(1,949,892
)
 
10,510,567

 
10,381,577

Real estate under development
157,659

 
242,326

Co-investments
1,103,272

 
1,036,047

Real estate held for sale, net

 
26,879

 
11,771,498

 
11,686,829

Cash and cash equivalents-unrestricted
182,515

 
29,683

Cash and cash equivalents-restricted
32,861

 
93,372

Marketable securities
152,263

 
137,485

Notes and other receivables
20,448

 
19,285

Prepaid expenses and other assets
47,106

 
38,437

Total assets
$
12,206,691


$
12,005,091

 
 
 
 
LIABILITIES AND CAPITAL
 

 
 

Unsecured debt, net
$
3,377,728

 
$
3,088,680

Mortgage notes payable, net
2,240,558

 
2,215,077

Lines of credit, net

 
11,707

Accounts payable and accrued liabilities
145,217

 
131,415

Construction payable
38,473

 
40,953

Distributions payable
110,163

 
100,266

Other liabilities
34,945

 
34,518

Total liabilities
5,947,084


5,622,616

Commitments and contingencies


 


Redeemable noncontrolling interest
44,531

 
45,452

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

 
6,161,153


6,279,744

Limited Partners:
 
 
 
   Common equity (2,221,768 and 2,214,545 units issued and outstanding, respectively)
46,298

 
47,235

    Accumulated other comprehensive loss
(40,628
)
 
(39,598
)
Total partners' capital
6,166,823


6,287,381

Noncontrolling interest
48,253

 
49,642

Total capital
6,215,076


6,337,023

Total liabilities and capital
$
12,206,691


$
12,005,091


See accompanying notes to the unaudited condensed consolidated financial statements.

7


ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Income and Comprehensive Income
(Unaudited)
(In thousands, except unit and per unit amounts)
 
Three Months Ended   June 30,
 
Six Months Ended   June 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Rental and other property
$
319,562

 
$
294,101

 
$
631,740

 
$
574,330

Management and other fees from affiliates
2,028

 
2,061

 
4,052

 
4,705

 
321,590

 
296,162

 
635,792

 
579,035

Expenses:
 

 
 

 
 
 
 
Property operating, excluding real estate taxes
61,538

 
57,400

 
121,609

 
113,019

Real estate taxes
34,541

 
32,677

 
68,960

 
64,229

Depreciation and amortization
109,673

 
113,731

 
219,380

 
220,638

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

 
215,717

 
215,196

 
429,924

 
422,754

Earnings from operations
105,873

 
80,966

 
205,868

 
156,281

Interest expense
(55,568
)
 
(50,802
)
 
(108,034
)
 
(98,348
)
Total return swap income
2,814

 

 
5,937

 

Interest and other income
9,409

 
3,254

 
14,617

 
7,453

Equity income in co-investments
14,296

 
4,472

 
29,364

 
8,783

Gain on sale of real estate and land

 

 
20,258

 
7,112

Deferred tax expense on gain on sale of real estate and land

 

 
(4,279
)
 

Gain on remeasurement of co-investment

 
12,652

 

 
34,014

Net income
76,824

 
50,542

 
163,731

 
115,295

Net income attributable to noncontrolling interest
(2,361
)
 
(2,141
)
 
(4,648
)
 
(4,154
)
Net income attributable to controlling interest
74,463

 
48,401

 
159,083

 
111,141

Preferred interest distributions

 
(1,313
)
 
(1,314
)
 
(2,627
)
Excess of redemption value of preferred units over the carrying value

 

 
(2,541
)
 

Net income available to common unitholders
$
74,463

 
$
47,088

 
$
155,228

 
$
108,514

Comprehensive income
$
78,005

 
$
51,287

 
$
162,701

 
$
116,639

Comprehensive income attributable to noncontrolling interest
(2,361
)
 
(2,141
)
 
(4,648
)
 
(4,154
)
Comprehensive income attributable to controlling interest
$
75,644

 
$
49,146

 
$
158,053

 
$
112,485

Per unit data:
 

 
 

 
 
 
 
Basic:
 

 
 

 
 
 
 
Net income available to common unitholders
$
1.10

 
$
0.70

 
$
2.29

 
$
1.63

Weighted average number of common units outstanding during the period
67,675,038

 
66,992,209

 
67,654,279

 
66,682,708

Diluted:
 
 
 
 
 
 
 
Net income available to common unitholders
$
1.10

 
$
0.70

 
$
2.29

 
$
1.62

Weighted average number of common units outstanding during the period
67,799,306

 
67,154,877

 
67,784,708

 
66,860,684

Distribution per common unit
$
1.60

 
$
1.44

 
$
3.20

 
$
2.88


See accompanying notes to the unaudited condensed consolidated financial statements.

8


ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Condensed Consolidated Statement of Capital for the six months ended June 30, 2016
(Dollars and units in thousands)
(Unaudited)
 
General Partner
 
Limited Partners
 
Accumulated other comprehensive loss
 
 
 
 
 
Common Equity
 
Series H Preferred Interest
 
Common Equity
 
 
Noncontrolling Interest
 
 
 
Units
 
Amount
 
 
Units
 
Amount
 
 
 
Total
Balances at December 31, 2015
65,379

 
$
6,208,535

 
$
71,209

 
2,215

 
$
47,235

 
$
(39,598
)
 
$
49,642

 
$
6,337,023

Net income

 
149,994

 
3,855

 

 
5,234

 

 
4,648

 
163,731

Change in fair value of derivatives and amortization of swap settlements

 

 

 

 

 
(1,335
)
 

 
(1,335
)
Change in fair value of marketable securities, net

 

 

 

 

 
305

 

 
305

Issuance of common units under:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

General partner's stock based compensation, net
89

 
11,760

 

 

 

 

 

 
11,760

Sale of common stock by general partner, net

 
(279
)
 

 

 

 

 

 
(279
)
Equity based compensation costs

 
2,001

 

 
18

 
1,197

 

 

 
3,198

Redemption of Series H preferred units

 

 
(73,750
)
 

 

 

 

 
(73,750
)
Changes in redemption value of redeemable noncontrolling interest

 
365

 

 

 

 

 
556

 
921

Distributions to noncontrolling interest

 

 

 

 

 

 
(6,182
)
 
(6,182
)
Redemptions
11

 
(1,743
)
 

 
(11
)
 
(79
)
 

 
(411
)
 
(2,233
)
Distributions declared

 
(209,480
)
 
(1,314
)
 

 
(7,289
)
 

 

 
(218,083
)
Balances at June 30, 2016
65,479

 
$
6,161,153

 
$

 
2,222

 
$
46,298

 
$
(40,628
)
 
$
48,253

 
$
6,215,076



See accompanying notes to the unaudited condensed consolidated financial statements.

9


ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
Six Months Ended June 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
163,731

 
$
115,295

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

 
 

Depreciation and amortization
219,380

 
220,638

Amortization of discount on marketable securities and other investments
(7,457
)
 
(5,777
)
Amortization of (premium) discount and debt financing costs, net
(7,598
)
 
(11,125
)
Gain on sale of marketable securities
(1,843
)
 

Company's share of gain on the sales of co-investments
(13,046
)
 


Income from early redemption of preferred equity investments

 
(469
)
Earnings from co-investments
(16,318
)
 
(8,314
)
Operating distributions from co-investments
23,985

 
14,804

Gain on the sales of real estate and land
(20,258
)
 
(7,112
)
Equity-based compensation
3,198

 
3,457

Gain on remeasurement of co-investments

 
(34,014
)
Changes in operating assets and liabilities:
 

 
 

Prepaid expense, receivables and other assets
(3,942
)
 
(6,646
)
Accounts payable and accrued liabilities
9,772

 
4,924

Other liabilities
749

 
1,387

Net cash provided by operating activities
350,353

 
287,048

Cash flows from investing activities:
 

 
 

Additions to real estate:
 

 
 

Acquisitions of real estate and acquisition related capital expenditures
(117,349
)
 
(314,890
)
Redevelopment
(43,200
)
 
(41,796
)
Development acquisitions of and additions to real estate under development
(37,150
)
 
(122,377
)
Capital expenditures on rental properties
(22,277
)
 
(24,673
)
Acquisition of membership interest in co-investments

 
(115,724
)
Proceeds from insurance for property losses
1,211

 
11,735

Proceeds from dispositions of real estate
48,008

 
74,485

Contributions to co-investments
(96,698
)
 
(97,512
)
Changes in restricted cash and refundable deposits
56,932

 
49,808

Purchases of marketable securities
(16,352
)
 
(7,250
)
Sales and maturities of marketable securities
11,179

 
1,968

Non-operating distributions from co-investments
34,564

 
11,072

Net cash used in investing activities
(181,132
)
 
(575,154
)
Cash flows from financing activities:
 

 
 

Borrowings under debt agreements
768,610

 
923,431

Repayment of debt
(501,167
)
 
(730,712
)
Repayment of cumulative redeemable preferred stock
(73,750
)
 

Additions to deferred charges
(4,962
)
 
(4,456
)
Net proceeds from issuance of common units
(279
)
 
272,664

Net proceeds from stock options exercised
11,760

 
18,346

Distributions to noncontrolling interest
(3,379
)
 
(4,884
)
Redemption of noncontrolling interest
(2,233
)
 
(2,488
)
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

Cash acquired in consolidation of co-investment

 
4,005

Net increase in cash and cash equivalents
152,832

 
4,632


10


 
Six Months Ended June 30,
 
2016
 
2015
Cash and cash equivalents at beginning of period
29,683

 
25,610

Cash and cash equivalents at end of period
$
182,515

 
$
30,242

  
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of $6.2 million and $8.3 million capitalized in 2016 and 2015, respectively
$
93,031

 
$
86,347

Supplemental disclosure of noncash investing and financing activities:
 

 
 

Transfers between real estate under development to rental properties, net
$
108,402

 
$
300,751

Transfer from real estate under development to co-investments
$
4,485

 
$
3,780

Reclassifications (from) to redeemable noncontrolling interest to or from general partner capital and noncontrolling interest
$
(921
)
 
$
574

  Debt assumed in connection with acquisition
$
48,832

 
$
114,435


See accompanying notes to the unaudited condensed consolidated financial statements.

11


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

(1) Organization and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements present the accounts of Essex Property Trust, Inc. (“Essex” or the “Company”), which include the accounts of the Company and Essex Portfolio, L.P. and subsidiaries (the “Operating Partnership,” which holds the operating assets of the Company), prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q.  In the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented have been included and are normal and recurring in nature. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2015.

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

The unaudited condensed consolidated financial statements for the three and six months ended June 30, 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. Total Operating Partnership limited partnership units outstanding were 2,221,768 and 2,214,545 as of June 30, 2016 and December 31, 2015, respectively, and the redemption value of the units, based on the closing price of the Company’s common stock totaled $506.8 million and $530.2 million, as of June 30, 2016 and December 31, 2015, respectively.

As of June 30, 2016, the Company owned or had ownership interests in 243 stabilized apartment communities, aggregating 59,241 apartment homes, excluding the Company’s ownership in preferred interest co-investments, (collectively, the “Communities”, and individually, a “Community”), three commercial buildings and seven active developments (collectively, the “Portfolio”). The Communities are located in Southern California (primarily Los Angeles, Orange, San Diego, and Ventura counties), Northern California (the San Francisco Bay Area) and the Seattle metropolitan areas.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, "Revenue from Contracts with Customers." The new standard provides a single comprehensive revenue recognition model for contracts with customers (excluding certain contracts, such as lease contracts) to improve comparability within industries. The new standard requires an entity to recognize revenue to reflect the transfer of goods or services to customers at an amount the entity expects to be paid in exchange for those goods and services and provide enhanced disclosures, all to provide more comprehensive guidance for transactions such as service revenue and contract modifications. In August 2015, the FASB deferred the effective date of the new standard by one year, and it is now effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted but not before the original effective date. The new standard may be applied using either a full retrospective or a modified approach upon adoption. The Company has not yet selected a transition method and is currently evaluating the impact of adopting the new standard on its consolidated results of operations and financial position.

In January 2016, the FASB issued ASU No. 2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities", which requires changes to the classification and measurement of investments in certain equity securities and to the presentation of certain fair value changes for financial liabilities measured at fair value. The new standard will be effective for the Company beginning on January 1, 2018 and early adoption is permitted. The Company is currently evaluating the impact of this amendment on its consolidated results of operations and financial position.

In February 2016, the FASB issued ASU No. 2016-02 "Leases", which requires an entity that is a lessee to classify leases as either finance or operating and to recognize a lease liability and a right-of-use asset for all leases that have a duration of greater than 12 months. Leases of 12 months or less will be accounted for similar to existing guidance for operating leases today. For lessors, accounting for leases under the new standard will be substantially the same as existing guidance for sales-type leases, direct financing leases, and operating leases, but eliminates current real estate specific provisions and changes the treatment of initial direct costs. The new standard will be effective for the Company beginning on January 1, 2019 and early adoption is permitted, including adoption in an interim period. The new standard must be applied using a modified retrospective approach.

12


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

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

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

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

Marketable Securities

The Company reports its available for sale securities at fair value, based on quoted market prices (Level 1 for the common stock and investment funds and Level 2 for the unsecured bonds, as defined by the FASB standard for fair value measurements), and any unrealized gain or loss is recorded as other comprehensive income (loss). Realized gains and losses, interest income, and amortization of purchase discounts are included in interest and other income on the condensed consolidated statements of income and comprehensive income.

As of June 30, 2016 and December 31, 2015, marketable securities consisted primarily of investment-grade unsecured bonds, common stock, investments in mortgage backed securities, investment funds that invest in U.S. treasury or agency securities. As of June 30, 2016 and December 31, 2015, the Company classified its investments in mortgage backed securities, which mature through November 2019 and September 2020, as held to maturity, and accordingly, these securities are stated at their amortized cost. As of June 30, 2016 and December 31, 2015, marketable securities consist of the following (in thousands):


13


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

 
June 30, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Carrying Value
Available for sale:
 
 
 
 
 
Investment-grade unsecured bonds
$
19,604

 
$
347

 
$
19,951

Investment funds - U.S. treasuries
7,600

 
10

 
7,610

Common stock and stock funds
29,970

 
7,098

 
37,068

Held to maturity:
 

 
 

 
 

Mortgage backed securities
87,634

 

 
87,634

Total - Marketable securities
$
144,808

 
$
7,455

 
$
152,263

 
 
 
 
 
 
 
December 31, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gain (Loss)
 
Carrying Value
Available for sale:
 

 
 

 
 

Investment-grade unsecured bonds
$
11,618

 
$
68

 
$
11,686

Investment funds - U.S. treasuries
3,675

 
(9
)
 
3,666

Common stock and stock funds
34,655

 
7,091

 
41,746

Held to maturity:
 

 
 

 
 

Mortgage backed securities
80,387

 

 
80,387

Total - Marketable securities
$
130,335

 
$
7,150

 
$
137,485


The Company uses the specific identification method to determine the cost basis of a security sold and to reclassify amounts from accumulated other comprehensive income for securities sold. For the three months ended June 30, 2016 and 2015, the proceeds from sales of available for sale securities totaled $6.2 million and $1.3 million, respectively, which resulted in $1.1 million realized gains and no realized gains or losses, respectively. For the six months ended June 30, 2016 and 2015, the proceeds from sales of available for sale securities totaled $11.2 million and $2.0 million, respectively, which resulted in $1.8 million realized gains and no realized gains or losses, respectively.

Variable Interest Entities

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

The Company continues to be the primary beneficiary and consolidates the Operating Partnership and 19 DownREIT limited partnerships (comprising eleven communities). Commencing on January 1, 2016, 9 other consolidated co-investments were determined to be VIEs and the Company continues to consolidate those co-investments as the Company was determined to be the primary beneficiary. The consolidated total assets and liabilities related to the 9 consolidated co-investments and 19 DownREIT limited partnerships, net of intercompany eliminations, were approximately $901.3 million and $229.5 million, respectively, as of June 30, 2016 and $893.1 million and $231.8 million, respectively, as of December 31, 2015. Noncontrolling interests in these entities was $53.3 million and $54.6 million as of June 30, 2016 and December 31, 2015, respectively. The Company's financial risk in each VIE is limited to its equity investment in the VIE. As of June 30, 2016 and December 31,

14


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.

Equity-based Compensation

The cost of share and unit based compensation awards is measured at the grant date based on the estimated fair value of the awards.  The estimated fair value of stock options and restricted stock granted by the Company are being amortized over the vesting period.  The estimated grant date fair values of the long term incentive plan units (discussed in Note 13, “Equity Based Compensation Plans,” in the Company’s Form 10-K for the year ended December 31, 2015) are being amortized over the expected service periods.

Fair Value of Financial Instruments

Management believes that the carrying amounts of the outstanding balances under its lines of credit, and notes and other receivables approximate fair value as of June 30, 2016 and December 31, 2015, because interest rates, yields, and other terms for these instruments are consistent with yields and other terms currently available for similar instruments.  Management has estimated that the fair value of the Company’s $5.1 billion of fixed rate debt, including unsecured debt, at June 30, 2016 is approximately $5.3 billion and the Company’s variable rate debt at June 30, 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, 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, 2016.

At June 30, 2016, the Company’s investments in mortgage backed securities had a carrying value of $87.6 million and the Company estimated the fair value to be approximately $115.4 million. At December 31, 2015, the Company’s investments in mortgage backed securities had a carrying value of $80.4 million and the Company estimated the fair value to be approximately $110.2 million. The Company determines the fair value of the mortgage backed securities based on unobservable inputs (level 3 of the fair value hierarchy) considering the assumptions that market participants would make in valuing these securities.  Assumptions such as estimated default rates and discount rates are used to determine expected discounted cash flows to estimate the fair value.
 
Capitalization of Costs

The Company’s capitalized internal costs related to development and redevelopment projects were comprised primarily of employee compensation and totaled $3.6 million and $3.4 million during the three months ended June 30, 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. The equity method employs the accrual basis for recognizing the investor’s share of investee income or losses. In addition, distributions received from the investee are treated as a reduction in the investment account, not as income. The significant accounting policies of the Company’s co-investment entities are consistent with those of the Company in all material respects.

Upon the acquisition of a controlling interest of a co-investment, the co-investment entity is consolidated and a gain or loss is recognized upon the remeasurement of co-investments in the condensed consolidated statement of income equal to the amount by which the fair value of the co-investment interest the Company previously owned exceeds its carrying value.  A majority of the co-investments, excluding the preferred equity investments, compensate the Company for its asset management services and some of these investments may provide promote income if certain financial return benchmarks are achieved. Asset management

15


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.

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 loss
3,995

 
(1,782
)
 
2,213

Other comprehensive (loss) income
(1,291
)
 
295

 
(996
)
Balance at June 30, 2016
$
(49,657
)
 
$
6,650

 
$
(43,007
)

Changes in Accumulated Other Comprehensive Loss, by Component

Essex Portfolio, L.P.
(in thousands):
 
Change in fair
value and amortization
of swap settlements
 
Unrealized
gains on
available for sale
securities
 
Total
Balance at December 31, 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 loss
4,131

 
(1,843
)
 
2,288

Other comprehensive (loss) income
(1,335
)
 
305

 
(1,030
)
Balance at June 30, 2016
$
(47,422
)
 
$
6,794

 
$
(40,628
)

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

Accounting Estimates

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



16


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

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

Significant Transactions

Dispositions

In April 2016, a Company co-investment, BEXAEW, LLC, sold Canyon Creek, a 200 unit apartment community, located in Northridge, CA for $53.5 million. The Company's share of the gain on sale was $5.6 million, which the Company recorded in the statement of income and comprehensive income as equity income in co-investments. BEXAEW, LLC used $26.3 million of proceeds to repay the loan on the property. The Company has a 50% ownership interest in the BEXAEW, LLC joint venture.

Preferred Equity Investments

In 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 for the first 30 months, after which the rate may drop to 8.0% if certain loan-to-value thresholds are met.

Series H Cumulative Redeemable Preferred Stock Redemption

In 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 of Unsecured Debt

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

(3) Co-investments

The Company has joint ventures and preferred equity investments in co-investments which are accounted for under the equity method. The co-investments own, operate, and develop apartment communities. The carrying values of the Company's co-investments as of June 30, 2016 and December 31, 2015 are as follows (in thousands, except in parenthetical):
 
Ownership Percentage
 
June 30, 2016
 
December 31, 2015
Membership interest/Partnership interest in:
 
 
 
 
 
CPPIB
55
%
 
$
379,311

 
$
376,862

Wesco I, III and IV
50
%
 
209,573

 
218,902

BEXAEW
50
%
 
65,636

 
88,850

Palm Valley
50
%
 
68,229

 
68,525

Other
50%-55%

 
31,517

 
32,927

Total operating co-investments
 
 
754,266

 
786,066

Total development co-investments
50%-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

 

17


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

The 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 assets
114,524

 
96,785

Total assets
$
3,442,460

 
$
3,457,145

Debt
$
1,473,705

 
$
1,499,601

Other liabilities
96,151

 
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,
 
2016
 
2015
 
2016
 
2015
Combined statements of income: (1)
 
 
 
 
 
 
 
Property revenues
$
69,180

 
$
62,092

 
$
144,310

 
$
125,589

Property operating expenses
(24,580
)
 
(23,184
)
 
(50,401
)
 
(46,138
)
Net operating income
44,600

 
38,908

 
93,909

 
79,451

Gain on sale of real estate
10,796

 

 
28,291

 
14

Interest expense
(11,142
)
 
(11,097
)
 
(24,282
)
 
(22,413
)
General and administrative
(1,540
)
 
(1,473
)
 
(2,780
)
 
(3,079
)
Depreciation and amortization
(25,391
)
 
(24,265
)
 
(54,107
)
 
(49,646
)
Net income
$
17,323

 
$
2,073

 
$
41,031

 
$
4,327

Company's share of net income (2)
$
14,296

 
$
4,472

 
$
29,364

 
$
8,783

 
(1) Includes preferred equity investments held by the Company.
(2) 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 million and $0.7 million for the three months ended June 30, 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, 2016 and December 31, 2015 (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 receivables
12,336

 
12,974

 
$
20,448

 
$
19,285

 
(1) The Company had $4.9 million and $3.1 million of short-term loans outstanding and due from various joint ventures as of June 30, 2016 and December 31, 2015, respectively. See Note 5, Related Party Transactions, for additional details.




18


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

(5) Related Party Transactions

The Company charges certain fees to its co-investments for asset management, property management, development, and redevelopment services. These fees from affiliates totaled $3.2 million and $3.6 million during the three months ended June 30, 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 million and $1.5 million against general and administrative expenses for the three months ended June 30, 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 March 2015, a multifamily property, located in Anaheim, CA that was owned by an entity affiliated with MMC, in which the Company held a $13.7 million preferred equity investment, was sold. That investment of $13.7 million plus an additional $1.3 million in cash was invested as outlined in the next two paragraphs. Prior to the property sale, the $13.7 million preferred equity investment earned a 9.0% preferred return and was scheduled to mature in September 2020.

In June 2015, the Company made a $10.0 million preferred equity investment in an entity affiliated with MMC that owns Greentree Apartments, a 220 apartment community located in San Jose, CA. This investment earns a 9.5% preferred return and is scheduled to mature in June 2022.

In June 2015, the Company made a $5.0 million preferred equity investment in an entity affiliated with MMC that owns Sterling Cove Apartments, a 218 apartment community located in Concord, CA. This investment 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, 2016 and December 31, 2015, $4.9 million and $3.1 million, respectively, of short-term loans remained outstanding due from joint venture affiliates and is classified within notes and other receivables in the accompanying condensed consolidated balance sheets.

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

Debt consists of the following ($ in thousands):

19


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

 
June 30, 2016
 
December 31, 2015
 
Weighted Average
Maturity
In Years
Unsecured bonds private placement - fixed rate
$
314,067

 
$
463,891

 
4.1
Term loan - variable rate
224,635

 
224,467

 
0.4
Bonds public offering - fixed rate
2,839,026

 
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 bonds
3.6
%
 
3.6
%
 
 
Weighted average interest rate on variable rate term loan
2.4
%
 
2.4
%
 
 
Weighted average interest rate on lines of credit
1.9
%
 
1.9
%
 
 
Weighted average interest rate on mortgage notes payable
4.4
%
 
4.4
%
 
 

(1) Includes unamortized premium and discounts of $5.7 million and $14.3 million and reduced by unamortized debt issuance costs of $18.0 million and $15.6 million, as of June 30, 2016 and December 31, 2015, respectively.
(2) Lines of credit, net, related to the Company's two lines of unsecured credit aggregating $1.0 billion, excludes unamortized debt issuance costs of $3.8 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.