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Essex Property Trust 10-Q 2015
10-Q
                                            

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

For the quarterly period ended September 30, 2015

OR

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

For the transition period from ________to _________

Commission file number 001-13106

ESSEX PROPERTY TRUST, INC.
ESSEX PORTFOLIO, L.P.
(Exact name of Registrant as Specified in its Charter)
Maryland (Essex Property Trust, Inc.)
California (Essex Portfolio, L.P.)
 
77-0369576 (Essex Property Trust, Inc.)
77-0369575 (Essex Portfolio, L.P.)
 
 
 
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification Number)
925 East Meadow Drive
Palo Alto, California    94303
(Address of Principal Executive Offices including Zip Code)

(650) 494-3700
(Registrant's Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days.
Essex Property Trust, Inc.    Yes x   No o
Essex Portfolio, L.P.     Yes x   No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” ”accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


i


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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Essex Property Trust, Inc.    Yes o   No x
Essex Portfolio, L.P.     Yes o   No x
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 66,035,140 shares of Common Stock ($0.0001 par value) of Essex Property Trust, Inc. were outstanding as of October 30, 2015.
 

ii


EXPLANATORY NOTE

This report combines the reports on Form 10-Q for the three and nine month periods ended September 30, 2015 of Essex Property Trust, Inc. and Essex Portfolio, L.P. Unless stated otherwise or the context otherwise requires, references to “Essex” mean Essex Property Trust, Inc., a Maryland corporation that operates as a self-administered and self-managed real estate investment trust (“REIT”), and references to “EPLP” mean Essex Portfolio, L.P. (the “Operating Partnership”). References to the “Company,” “we,” “us” or “our” mean collectively Essex, EPLP and those entities/subsidiaries owned or controlled by Essex and/or EPLP.  References to the “Operating Partnership” mean collectively EPLP and those entities/subsidiaries owned or controlled by EPLP.

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

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

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

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

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

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

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

iii


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

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

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

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

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the notes to such unaudited condensed consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations herein.  Additionally, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2014.

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
September 30, 2015
 
December 31, 2014
Real estate:
 
 
 
Rental properties:
 
 
 
Land and land improvements
$
2,566,586

 
$
2,424,930

Buildings and improvements
9,753,982

 
8,819,751

 
12,320,568

 
11,244,681

Less accumulated depreciation
(1,858,134
)
 
(1,564,806
)
 
10,462,434

 
9,679,875

Real estate under development
226,690

 
429,096

Co-investments
1,036,043

 
1,042,423

Real estate held for sale, net
8,742

 
56,300

 
11,733,909

 
11,207,694

Cash and cash equivalents-unrestricted
35,668

 
25,610

Cash and cash equivalents-restricted
36,638

 
70,139

Marketable securities and other investments
133,058

 
117,240

Notes and other receivables
22,668

 
24,923

Acquired in place lease value, net
12,675

 
47,748

Prepaid expenses and other assets
38,101

 
33,378

Total assets
$
12,012,717

 
$
11,526,732

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Unsecured debt, net
$
3,090,896

 
$
2,603,548

Mortgage notes payable, net
2,224,513

 
2,234,317

Lines of credit, net
2,011

 
242,824

Accounts payable and accrued liabilities
177,807

 
135,162

Construction payable
26,411

 
30,892

Dividends payable
99,945

 
88,221

Other liabilities
34,722

 
32,444

Total liabilities
5,656,305

 
5,367,408

Commitments and contingencies


 


Redeemable noncontrolling interest
24,589

 
23,256

Equity:
 

 
 

Common stock; $0.0001 par value, 656,020,000 shares authorized; 65,234,597 and 63,682,646 shares issued and outstanding, respectively
6

 
6

   Cumulative redeemable 7.125% Series H preferred stock at liquidation value
73,750

 
73,750

Additional paid-in capital
6,980,443

 
6,651,165

Distributions in excess of accumulated earnings
(782,801
)
 
(650,797
)
Accumulated other comprehensive loss, net
(50,357
)
 
(51,452
)
Total stockholders' equity
6,221,041

 
6,022,672

Noncontrolling interest
110,782

 
113,396

Total equity
6,331,823

 
6,136,068

Total liabilities and equity
$
12,012,717

 
$
11,526,732



See accompanying notes to the unaudited condensed consolidated financial statements.

2



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

 
Three Months Ended September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Rental and other property
$
302,522

 
$
268,512

 
$
876,852

 
$
684,813

Management and other fees from affiliates
2,104

 
2,361

 
6,809

 
6,856

 
304,626

 
270,873

 
883,661

 
691,669

Expenses:
 

 
 

 
 
 
 
Property operating, excluding real estate taxes
60,528

 
56,294

 
173,547

 
146,474

Real estate taxes
33,591

 
31,768

 
97,820

 
77,452

Depreciation and amortization
116,308

 
102,286

 
336,946

 
253,890

General and administrative
11,129

 
11,479

 
31,223

 
28,621

Merger and integration expenses

 
3,857

 
3,798

 
46,413

Acquisition and investment related costs
381

 
51

 
1,357

 
768

 
221,937

 
205,735

 
644,691

 
553,618

Earnings from operations
82,689

 
65,138

 
238,970

 
138,051

Interest expense
(50,053
)
 
(45,830
)
 
(148,401
)
 
(117,021
)
Interest and other income
7,367

 
2,992

 
14,820

 
8,685

Equity income in co-investments
7,179

 
4,910

 
15,962

 
21,065

Gains on sale of real estate and land

 
31,372

 
7,112

 
38,853

Gain on remeasurement of co-investment

 

 
34,014

 

Net income
47,182

 
58,582

 
162,477

 
89,633

Net income attributable to noncontrolling interest
(3,545
)
 
(3,720
)
 
(11,295
)
 
(8,971
)
Net income attributable to controlling interest
43,637

 
54,862

 
151,182

 
80,662

Dividends to preferred stockholders
(1,314
)
 
(1,296
)
 
(3,941
)
 
(3,977
)
Net income available to common stockholders
$
42,323

 
$
53,566

 
$
147,241

 
$
76,685

Comprehensive income
$
46,970

 
$
61,036

 
$
163,609

 
$
99,070

Comprehensive income attributable to noncontrolling interest
(3,538
)
 
(3,789
)
 
(11,332
)
 
(9,345
)
Comprehensive income attributable to controlling interest
$
43,432

 
$
57,247

 
$
152,277

 
$
89,725

Per share data:
 

 
 

 
 
 
 
Basic:
 

 
 

 
 
 
 
Net income available to common stockholders
$
0.65

 
$
0.85

 
$
2.28

 
$
1.41

Weighted average number of shares outstanding during the period
65,138,868

 
62,892,601

 
64,714,994

 
54,250,104

Diluted:
 

 
 

 
 
 
 
Net income available to common stockholders
$
0.65

 
$
0.85

 
$
2.27

 
$
1.41

Weighted average number of shares outstanding during the period
65,297,550

 
63,069,772

 
64,892,770

 
54,443,227

Dividend per common share
$
1.44

 
$
1.30

 
$
4.32

 
$
3.81


See accompanying notes to the unaudited condensed consolidated financial statements.

3


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Equity for the nine months ended September 30, 2015
(Unaudited)
(Dollars and shares in thousands)
 
Series H
Preferred stock
 
Common stock
 
Additional paid-in
 
Distributions
in excess of accumulated
 
Accumulated
other
comprehensive
 
Noncontrolling
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
capital
 
earnings
 
loss, net
 
Interest
 
Total
Balances at December 31, 2014
2,950

 
$
73,750

 
63,683

 
$
6

 
$
6,651,165

 
$
(650,797
)
 
$
(51,452
)
 
$
113,396

 
$
6,136,068

Net income

 

 

 

 

 
151,182

 

 
11,295

 
162,477

Change in fair value of derivatives and amortization of swap settlements

 

 

 

 

 

 
1,621

 
54

 
1,675

Change in fair value of marketable securities

 

 

 

 

 

 
(526
)
 
(17
)
 
(543
)
Issuance of common stock under:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Stock option and restricted stock plans

 

 
170

 

 
22,173

 

 

 

 
22,173

Sale of common stock

 

 
1,382

 

 
307,835

 

 

 

 
307,835

Equity based compensation costs

 

 

 

 
2,564

 

 

 
2,947

 
5,511

Reclassification of noncontrolling interest to redeemable noncontrolling interest

 

 

 

 

 

 

 
(144
)
 
(144
)
Changes in the redemption value of redeemable noncontrolling interest

 

 

 

 
(1,095
)
 

 

 

 
(1,095
)
Distributions to noncontrolling interest

 

 

 

 

 

 

 
(16,327
)
 
(16,327
)
Redemptions of noncontrolling interest

 

 

 

 
(2,199
)
 

 

 
(422
)
 
(2,621
)
Common and preferred stock dividends

 

 

 

 

 
(283,186
)
 

 

 
(283,186
)
Balances at September 30, 2015
2,950

 
$
73,750

 
65,235

 
$
6

 
$
6,980,443

 
$
(782,801
)
 
$
(50,357
)
 
$
110,782

 
$
6,331,823


See accompanying notes to the unaudited condensed consolidated financial statements.

4


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands) 
 
Nine Months Ended September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
162,477

 
$
89,633

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

 
 

Depreciation and amortization
336,946

 
253,890

Amortization of discount on marketable securities
(9,012
)
 
(6,555
)
Amortization of (premium) discount and debt financing costs, net
(15,064
)
 
(4,987
)
Gain on sale of marketable securities and other investments
(598
)
 
(886
)
Company's share of gain on the sales of co-investments
(469
)
 
(3,211
)
Earnings from co-investments
(15,493
)
 
(17,854
)
Operating distributions from co-investments
28,632

 
20,122

Gains on the sales of real estate and land
(7,112
)
 
(38,853
)
Non cash merger and integration expenses

 
7,562

Equity-based compensation
5,511

 
4,996

Gain on remeasurement of co-investments
(34,014
)
 

Changes in operating assets and liabilities:
 
 
 
   Prepaid expense, receivables and other assets
(1,851
)
 
8,923

Accounts payable and accrued liabilities
36,480

 
43,988

Other liabilities
1,475

 
1,393

Net cash provided by operating activities
487,908

 
358,161

Cash flows from investing activities:
 

 
 

Additions to real estate:
 

 
 

Acquisitions of real estate and acquisition related capital expenditures
(327,799
)
 
(438,088
)
Redevelopment
(66,783
)
 
(55,921
)
Development acquisitions of and additions to real estate under development
(138,101
)
 
(108,659
)
Capital expenditures on rental properties
(42,809
)
 
(21,074
)
Acquisition of membership interest in co-investments
(115,724
)
 

Proceeds from insurance for property losses
12,044

 
29,160

Proceeds from dispositions of real estate
74,485

 
61,331

BRE merger consideration paid

 
(555,826
)
Proceeds from dispositions of co-investments
31,556

 
13,900

Contributions to co-investments
(119,120
)
 
(128,268
)
Changes in restricted cash and refundable deposits
38,282

 
(39,482
)
Purchases of marketable securities
(14,300
)
 
(15,516
)
Sales and maturities of marketable securities and other investments
7,566

 
6,275

Collections of notes and other receivables

 
76,585

Non-operating distributions from co-investments
382

 
23,248

Net cash used in investing activities
(660,321
)
 
(1,152,335
)
Cash flows from financing activities:
 

 
 

Borrowings under debt agreements
1,068,032

 
1,737,322

Repayment of debt
(924,844
)
 
(1,327,840
)
Additions to deferred charges
(4,320
)
 
(16,941
)
Net proceeds from issuance of common stock
307,835

 
449,464

Net proceeds from stock options exercises
22,173

 
6,526

Distributions to noncontrolling interest
(15,789
)
 
(13,217
)
Redemption of noncontrolling interest
(2,621
)
 
(4,707
)
Common and preferred stock dividends paid
(272,000
)
 
(177,400
)
Net cash provided by financing activities
178,466

 
653,207


5


 
Nine Months Ended September 30,
 
2015
 
2014
Cash acquired from the BRE merger

 
140,353

Cash acquired in consolidation of co-investment
4,005

 

Net increase (decrease) in cash and cash equivalents
10,058

 
(614
)
Cash and cash equivalents at beginning of period
25,610

 
18,491

Cash and cash equivalents at end of period
$
35,668

 
$
17,877

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of $12.2 million and $17.8 million capitalized in 2015 and 2014, respectively
$
135,736

 
$
93,342

Supplemental disclosure of noncash investing and financing activities:
 

 
 

Issuance of Operating Partnership units for contributed properties
$

 
$
1,419,816

Retirement of Operating Partnership units
$

 
$
(1,419,816
)
Transfer from real estate under development to rental properties
$
308,069

 
$
71,496

Transfer from real estate under development to co-investments
$
5,913

 
$
81,332

Reclassifications of and changes in redeemable noncontrolling interest from additional paid in capital and noncontrolling interest
$
1,333

 
$
18,764

Debt assumed in connection with acquisition of co-investment
$
114,435

 
$


See accompanying notes to the unaudited condensed consolidated financial statements.


6


ESSEX PORTFOLIO, L.P.  AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except unit amounts)
 
September 30, 2015
 
December 31, 2014
ASSETS
 
 
 
Real estate:
 
 
 
Rental properties:
 
 
 
Land and land improvements
$
2,566,586

 
$
2,424,930

Buildings and improvements
9,753,982

 
8,819,751

 
12,320,568

 
11,244,681

Less accumulated depreciation
(1,858,134
)
 
(1,564,806
)
 
10,462,434

 
9,679,875

Real estate under development
226,690

 
429,096

Co-investments
1,036,043

 
1,042,423

Real estate held for sale, net
8,742

 
56,300

 
11,733,909

 
11,207,694

Cash and cash equivalents-unrestricted
35,668

 
25,610

Cash and cash equivalents-restricted
36,638

 
70,139

Marketable securities and other investments
133,058

 
117,240

Notes and other receivables
22,668

 
24,923

Acquired in place lease value , net
12,675

 
47,748

Prepaid expenses and other asset
38,101

 
33,378

Total assets
$
12,012,717


$
11,526,732

 
 
 
 
LIABILITIES AND CAPITAL
 

 
 

Unsecured debt, net
$
3,090,896

 
$
2,603,548

Mortgage notes payable, net
2,224,513

 
2,234,317

Lines of credit, net
2,011

 
242,824

Accounts payable and accrued liabilities
177,807

 
135,162

Construction payable
26,411

 
30,892

Distributions payable
99,945

 
88,221

Other liabilities
34,722

 
32,444

Total liabilities
5,656,305


5,367,408

Commitments and contingencies


 


Redeemable noncontrolling interest
24,589

 
23,256

Capital:
 

 
 

General Partner:
 
 
 
   Common equity (65,234,597 and 63,682,646 units issued and outstanding, respectively)
6,200,189

 
6,002,915

   Series H 7.125% Preferred interest (liquidation value of $73,750)
71,209

 
71,209

 
6,271,398


6,074,124

Limited Partners:
 
 
 
   Common equity (2,176,563 and 2,168,158 units issued and outstanding, respectively)
46,793

 
48,665

    Accumulated other comprehensive loss
(48,224
)
 
(49,356
)
Total partners' capital
6,269,967


6,073,433

Noncontrolling interest
61,856

 
62,635

Total capital
6,331,823


6,136,068

Total liabilities and capital
$
12,012,717


$
11,526,732


See accompanying notes to the unaudited condensed consolidated financial statements.

7


ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Income and Comprehensive Income
(Unaudited)
(In thousands, except unit and per unit amounts)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Rental and other property
$
302,522

 
$
268,512

 
$
876,852

 
$
684,813

Management and other fees from affiliates
2,104

 
2,361

 
6,809

 
6,856

 
304,626

 
270,873

 
883,661

 
691,669

Expenses:
 

 
 

 
 
 
 
Property operating, excluding real estate taxes
60,528

 
56,294

 
173,547

 
146,474

Real estate taxes
33,591

 
31,768

 
97,820

 
77,452

Depreciation and amortization
116,308

 
102,286

 
336,946

 
253,890

General and administrative
11,129

 
11,479

 
31,223

 
28,621

Merger and integration expenses

 
3,857

 
3,798

 
46,413

Acquisition and investment related costs
381

 
51

 
1,357

 
768

 
221,937

 
205,735

 
644,691

 
553,618

Earnings from operations
82,689

 
65,138

 
238,970

 
138,051

Interest expense
(50,053
)
 
(45,830
)
 
(148,401
)
 
(117,021
)
Interest and other income
7,367

 
2,992

 
14,820

 
8,685

Equity income in co-investments
7,179

 
4,910

 
15,962

 
21,065

Gains on sale of real estate and land

 
31,372

 
7,112

 
38,853

Gain on remeasurement of co-investment

 

 
34,014

 

Net income
47,182

 
58,582

 
162,477

 
89,633

Net income attributable to noncontrolling interest
(2,074
)
 
(1,904
)
 
(6,180
)
 
(5,529
)
Net income attributable to controlling interest
45,108

 
56,678

 
156,297

 
84,104

Preferred interest distributions
(1,314
)
 
(1,296
)
 
(3,941
)
 
(3,977
)
Net income available to common unitholders
$
43,794

 
$
55,382

 
$
152,356

 
$
80,127

Comprehensive income
$
46,970

 
$
61,036

 
$
163,609

 
$
99,070

Comprehensive income attributable to noncontrolling interest
(2,074
)
 
(1,904
)
 
(6,180
)
 
(5,529
)
Comprehensive income attributable to controlling interest
$
44,896

 
$
59,132

 
$
157,429

 
$
93,541

Per unit data:
 

 
 

 
 
 
 
Basic:
 

 
 

 
 
 
 
Net income available to common unitholders
$
0.65

 
$
0.85

 
$
2.28

 
$
1.42

Weighted average number of common units outstanding during the period
67,316,498

 
65,057,157

 
66,896,293

 
56,484,589

Diluted:
 
 
 
 
 
 
 
Net income available to common unitholders
$
0.65

 
$
0.85

 
$
2.27

 
$
1.41

Weighted average number of common units outstanding during the period
67,475,180

 
65,234,328

 
67,074,069

 
56,677,712

Distribution per common unit
$
1.44

 
$
1.30

 
$
4.32

 
$
3.81


See accompanying notes to the unaudited condensed consolidated financial statements.

8


ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Condensed Consolidated Statement of Capital for the nine months ended September 30, 2015
(Dollars and units in thousands)
(Unaudited)
 
General Partner
 
Limited Partners
 
Accumulated
 
 
 
 
 
 
 
 
 
Preferred
 
 
 
 
 
other
 
 
 
 
 
Common Equity
 
Equity
 
Common Equity
 
comprehensive
 
Noncontrolling
 
 
 
Units
 
Amount
 
Amount
 
Units
 
Amount
 
loss
 
Interest
 
Total
Balances at December 31, 2014
63,683

 
$
6,002,915

 
$
71,209

 
2,168

 
$
48,665

 
$
(49,356
)
 
$
62,635

 
$
6,136,068

Net income

 
147,241

 
3,941

 

 
5,115

 

 
6,180

 
162,477

Change in fair value of derivatives and amortization of swap settlements

 

 

 

 

 
1,675

 

 
1,675

Change in fair value of marketable securities

 

 

 

 

 
(543
)
 

 
(543
)
Issuance of common units under:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

General partner's stock based compensation
170

 
22,173

 

 

 

 

 

 
22,173

Sale of common stock by general partner
1,375

 
307,835

 

 

 

 

 

 
307,835

Equity based compensation costs

 
2,564

 

 
16

 
2,947

 

 

 
5,511

Changes in redemption value of redeemable noncontrolling interest

 
(1,095
)
 

 

 

 

 

 
(1,095
)
Reclassification of noncontrolling interest to redeemable noncontrolling interest

 

 

 

 

 

 
(144
)
 
(144
)
Distributions to noncontrolling interest

 

 

 

 

 

 
(6,393
)
 
(6,393
)
Redemptions
7

 
(2,199
)
 

 
(7
)
 

 

 
(422
)
 
(2,621
)
Distributions declared

 
(279,245
)
 
(3,941
)
 

 
(9,934
)
 

 

 
(293,120
)
Balances at September 30, 2015
65,235

 
$
6,200,189

 
$
71,209

 
2,177

 
$
46,793

 
$
(48,224
)
 
$
61,856

 
$
6,331,823



See accompanying notes to the unaudited condensed consolidated financial statements.

9


ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
Nine Months Ended September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
162,477

 
$
89,633

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

 
 

Depreciation and amortization
336,946

 
253,890

Amortization of discount on marketable securities
(9,012
)
 
(6,555
)
Amortization of (premium) discount and debt financing costs, net
(15,064
)
 
(4,987
)
Gain on sale of marketable securities and other investments
(598
)
 
(886
)
Company's share of gain on the sales of co-investments
(469
)
 
(3,211
)
Earnings from co-investments
(15,493
)
 
(17,854
)
Operating distributions from co-investments
28,632

 
20,122

Gain on the sales of real estate and land
(7,112
)
 
(38,853
)
Non cash merger and integration expenses

 
7,562

Equity-based compensation
5,511

 
4,996

Gain on remeasurement of co-investments
(34,014
)
 

Changes in operating assets and liabilities:
 

 
 

Prepaid expense, in-place lease value, receivables and other assets
(1,851
)
 
8,923

Accounts payable and accrued liabilities
36,480

 
43,988

Other liabilities
1,475

 
1,393

Net cash provided by operating activities
487,908

 
358,161

Cash flows from investing activities:
 

 
 

Additions to real estate:
 

 
 

Acquisitions of real estate and acquisition related capital expenditures
(327,799
)
 
(438,088
)
Redevelopment
(66,783
)
 
(55,921
)
Development acquisitions of and additions to real estate under development
(138,101
)
 
(108,659
)
Capital expenditures on rental properties
(42,809
)
 
(21,074
)
Acquisition of membership interest in co-investments
(115,724
)
 

Proceeds from insurance for property losses
12,044

 
29,160

Proceeds from dispositions of real estate
74,485

 
61,331

BRE merger cash consideration paid

 
(555,826
)
Proceeds from dispositions of co-investments
31,556

 
13,900

Contributions to co-investments
(119,120
)
 
(128,268
)
Changes in restricted cash and refundable deposits
38,282

 
(39,482
)
Purchases of marketable securities
(14,300
)
 
(15,516
)
Sales and maturities of marketable securities and other investments
7,566

 
6,275

Collections of notes and other receivables

 
76,585

Non-operating distributions from co-investments
382

 
23,248

Net cash used in investing activities
(660,321
)
 
(1,152,335
)
Cash flows from financing activities:
 

 
 

Borrowings under debt agreements
1,068,032

 
1,737,322

Repayment of debt
(924,844
)
 
(1,327,840
)
Additions to deferred charges
(4,320
)
 
(16,941
)
Net proceeds from issuance of common units
307,835

 
449,464

Net proceeds from stock options exercises
22,173

 
6,526

Distributions to noncontrolling interest
(6,455
)
 
(3,462
)
Redemption of noncontrolling interest
(2,621
)
 
(308
)
Common and preferred units and preferred interest distributions paid
(281,334
)
 
(191,554
)
Net cash provided by financing activities
178,466

 
653,207


10


 
Nine Months Ended September 30,
 
2015
 
2014
Cash acquired from the BRE merger

 
140,353

Cash acquired in consolidation of co-investment
4,005

 

Net increase (decrease) in cash and cash equivalents
10,058

 
(614
)
Cash and cash equivalents at beginning of period
25,610

 
18,491

Cash and cash equivalents at end of period
$
35,668

 
$
17,877

  
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of $12.2 million and $17.8 million capitalized in 2015 and 2014, respectively
$
135,736

 
$
93,342

Supplemental disclosure of noncash investing and financing activities:
 

 
 

Issuance of Operating Partnership units for contributed properties
$

 
$
1,419,816

Retirement of Operating Partnership units
$

 
$
(1,419,816
)
Transfer from real estate under development to rental properties
$
308,069

 
$
71,496

Transfer from real estate under development to co-investments
$
5,913

 
$
81,332

Reclassification of and changes in redeemable noncontrolling interest from common equity and noncontrolling interest
$
1,333

 
$
18,764

  Debt assumed in connection with acquisition of co-investment
$
114,435

 
$


See accompanying notes to the unaudited condensed consolidated financial statements.

11


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

(1) Organization and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements present the accounts of Essex Property Trust, Inc. (“Essex” or the “Company”), which include the accounts of the Company and Essex Portfolio, L.P. and subsidiaries (the “Operating Partnership,” which holds the operating assets of the Company), prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q.  In the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included and are normal and recurring in nature.  These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2014.

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

The unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2015 and 2014 include the accounts of the Company and the Operating Partnership.  Essex is the sole general partner in the Operating Partnership, with a 96.8% general partnership interest as of September 30, 2015.  Total Operating Partnership limited partnership units outstanding were 2,176,563 and 2,168,158 as of September 30, 2015 and December 31, 2014, respectively, and the redemption value of the units, based on the closing price of the Company’s common stock totaled $486.3 million and $447.9 million, as of September 30, 2015 and December 31, 2014, respectively.

As of September 30, 2015, the Company owned or had ownership interests in 245 stabilized apartment communities, aggregating 58,768 apartment homes, excluding the Company’s ownership in preferred interest co-investments,  (collectively, the “Communities”, and individually, a “Community”), four commercial buildings and nine active developments (collectively, the “Portfolio”).  The Communities are located in Southern California (primarily Los Angeles, Orange, San Diego, and Ventura counties), Northern California (the San Francisco Bay Area) and the Seattle metropolitan areas.

New Accounting Pronouncements

In February 2015, the FASB issued ASU No. 2015-02 "Consolidation (Topic 810): Amendments to the Consolidation Analysis," which provides new consolidation guidance and makes changes to both the variable interest model and the voting model. Among other changes, the new standard specifically eliminates the presumption in the current voting model that a general partner controls a limited partnership or similar entity unless that presumption can be overcome. Generally, only a single limited partner that is able to exercise substantive kick-out rights will consolidate. The new standard will be effective for the Company beginning on January 1, 2016 and early adoption is permitted, including adoption in an interim period. The new standard must be applied using a modified retrospective approach by recording a cumulative-effect adjustment to equity/capital as of the beginning of the period of adoption or retrospectively to each period presented. The Company has not yet selected a transition method and is currently evaluating the impact of adopting the new standard on its consolidated results of operations and financial position.

In April 2015, the FASB issued ASU No. 2015-03 "Simplifying the Presentation of Debt Issuance Costs," which requires companies to present debt financing costs as a direct deduction from the carrying amount of the associated debt liability rather than as an asset, consistent with the presentation of debt discounts on the consolidated balance sheets.  The new standard will be effective for the Company beginning on January 1, 2016 and early adoption is permitted.  The new standard must be applied retrospectively to all prior periods presented in the consolidated financial statements.  The Company adopted this standard during the second quarter of 2015. This adoption resulted in a reclassification of $27.1 million and $29.4 million in debt issuance costs, net of accumulated amortization from an asset to a reduction to associated debt liabilities as of September 30, 2015 and December 31, 2014, respectively.

Marketable Securities

The Company reports its available for sale securities at fair value, based on quoted market prices (Level 2 for the unsecured bonds and Level 1 for the common stock and investment funds, as defined by the Financial Accounting Standards Board

12


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

(“FASB”) standard for fair value measurements), and any unrealized gain or loss is recorded as other comprehensive income (loss).  Realized gains and losses, interest and dividend income, and amortization of purchase discounts are included in interest and other income on the condensed consolidated statements of income and comprehensive income.

As of September 30, 2015 and December 31, 2014, marketable securities consisted primarily of investment-grade unsecured bonds, common stock, investments in mortgage backed securities and investment funds that invest in US treasury or agency securities.  As of September 30, 2015 and December 31, 2014, the Company classified its investments in mortgage backed securities, which mature through November 2019 and September 2020, as held to maturity, and accordingly, these securities are stated at their amortized cost.  As of September 30, 2015 and December 31, 2014, marketable securities consist of the following ($ in thousands):

 
September 30, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Carrying Value
Available for sale:
 
 
 
 
 
Investment-grade unsecured bonds
$
11,633

 
$
144

 
$
11,777

Investment funds - US treasuries
5,020

 
6

 
5,026

Common stock and stock funds
34,653

 
4,609

 
39,262

Held to maturity:
 

 
 

 
 

Mortgage backed securities
76,993

 

 
76,993

Total - Marketable securities and other investments
$
128,299

 
$
4,759

 
$
133,058

 
 
 
 
 
 
 
December 31, 2014
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Carrying Value
Available for sale:
 

 
 

 
 

Investment-grade unsecured bonds
$
9,435

 
$
145

 
$
9,580

Investment funds - US treasuries
3,769

 
3

 
3,772

Common stock and stock funds
25,755

 
5,137

 
30,892

Held to maturity:
 

 
 

 
 

Mortgage backed securities
67,996

 

 
67,996

Total - marketable securities
$
106,955

 
$
5,285

 
$
112,240

  Other investments
5,000

 

 
5,000

Total - Marketable securities and other investments
$