Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 3, 2017)
  • 10-Q (Jul 31, 2017)
  • 10-Q (May 1, 2017)
  • 10-Q (Oct 31, 2016)
  • 10-Q (Aug 1, 2016)
  • 10-Q (May 3, 2016)

 
8-K

 
Other

Essex Property Trust 10-Q 2017
Document
                                

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

For the quarterly period ended March 31, 2017

OR

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

For the transition period from ________to _________

Commission file number 001-13106

ESSEX PROPERTY TRUST, INC.
ESSEX PORTFOLIO, L.P.
(Exact name of Registrant as Specified in its Charter)
Maryland (Essex Property Trust, Inc.)
California (Essex Portfolio, L.P.)
 
77-0369576 (Essex Property Trust, Inc.)
77-0369575 (Essex Portfolio, L.P.)
 
 
 
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification Number)
1100 Park Place, Suite 200
San Mateo, California    94403
(Address of Principal Executive Offices including Zip Code)

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

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

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

i



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


Essex Portfolio, L.P.:
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x   (Do not check if a smaller reporting company)
Smaller reporting company o
 
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
Essex Property Trust, Inc.    Yes o   No o
Essex Portfolio, L.P.     Yes o   No o

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

ii


EXPLANATORY NOTE

This report combines the reports on Form 10-Q for three month period ended March 31, 2017 of Essex Property Trust, Inc. and Essex Portfolio, L.P. Unless stated otherwise or the context otherwise requires, references to “Essex” mean Essex Property Trust, Inc., a Maryland corporation that operates as a self-administered and self-managed real estate investment trust (“REIT”), and references to “EPLP” mean Essex Portfolio, L.P. (the “Operating Partnership”). References to the “Company,” “we,” “us” or “our” mean collectively Essex, EPLP and those entities/subsidiaries owned or controlled by Essex and/or EPLP.  References to the “Operating Partnership” mean collectively EPLP and those entities/subsidiaries owned or controlled by EPLP.

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

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

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

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

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

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

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

iii


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

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

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

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

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the notes to such unaudited condensed consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations herein. Additionally, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2016.

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 in parenthetical and share amounts)
ASSETS
March 31, 2017
 
December 31, 2016
Real estate:
 
 
 
Rental properties:
 
 
 
Land and land improvements
$
2,719,064

 
$
2,559,743

Buildings and improvements
10,492,413

 
10,116,563

 
13,211,477

 
12,676,306

Less: accumulated depreciation
(2,418,793
)
 
(2,311,546
)
 
10,792,684

 
10,364,760

Real estate under development
239,685

 
190,505

Co-investments
1,071,258

 
1,161,275

Real estate held for sale, net

 
101,957

 
12,103,627

 
11,818,497

Cash and cash equivalents-unrestricted
84,344

 
64,921

Cash and cash equivalents-restricted
15,908

 
105,381

Marketable securities
138,977

 
139,189

Notes and other receivables (includes related party receivables of $10.3 million and $11.3 million as of March 31, 2017 and December 31, 2016, respectively)
50,855

 
40,970

Prepaid expenses and other assets
53,716

 
48,450

Total assets
$
12,447,427

 
$
12,217,408

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Unsecured debt, net
$
3,195,129

 
$
3,246,779

Mortgage notes payable, net
2,231,145

 
2,191,481

Lines of credit
176,233

 
125,000

Accounts payable and accrued liabilities
184,778

 
138,226

Construction payable
35,590

 
35,909

Dividends payable
120,573

 
110,170

Distributions in excess of investments in co-investments
35,534

 

Other liabilities
34,027

 
32,922

Total liabilities
6,013,009

 
5,880,487

Commitments and contingencies


 


Redeemable noncontrolling interest
45,415

 
44,684

Equity:
 

 
 

Common stock; $0.0001 par value, 670,000,000 shares authorized; 65,569,521 and 65,527,993 shares issued and outstanding, respectively
6

 
6

Additional paid-in capital
7,035,178

 
7,029,679

Distributions in excess of accumulated earnings
(741,204
)
 
(805,409
)
Accumulated other comprehensive loss, net
(29,959
)
 
(32,098
)
Total stockholders' equity
6,264,021

 
6,192,178

Noncontrolling interest
124,982

 
100,059

Total equity
6,389,003

 
6,292,237

Total liabilities and equity
$
12,447,427

 
$
12,217,408


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 March 31,
 
2017
 
2016
Revenues:
 
 
 
Rental and other property
$
333,168

 
$
312,178

Management and other fees from affiliates
2,236

 
2,024

 
335,404

 
314,202

Expenses:
 

 
 

Property operating, excluding real estate taxes
63,645

 
60,071

Real estate taxes
35,868

 
34,419

Depreciation and amortization
115,503

 
109,707

General and administrative
10,601

 
9,182

Acquisition and investment related costs
556

 
828

 
226,173

 
214,207

Earnings from operations
109,231

 
99,995

Interest expense
(54,583
)
 
(52,466
)
Total return swap income
2,584

 
3,123

Interest and other income
6,764

 
5,208

Equity income from co-investments
10,899

 
15,068

Gain on sale of real estate and land
26,174

 
20,258

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

 
(4,279
)
Gain on remeasurement of co-investment
86,482

 

Net income
187,551

 
86,907

Net income attributable to noncontrolling interest
(8,587
)
 
(5,071
)
Net income attributable to controlling interest
178,964

 
81,836

Dividends to preferred stockholders

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

 
(2,541
)
Net income available to common stockholders
$
178,964

 
$
77,981

Comprehensive income
$
189,764

 
$
84,696

Comprehensive income attributable to noncontrolling interest
(8,661
)
 
(4,998
)
Comprehensive income attributable to controlling interest
$
181,103

 
$
79,698

Per share data:
 

 
 

Basic:
 

 
 

Net income available to common stockholders
$
2.73

 
$
1.19

Weighted average number of shares outstanding during the period
65,549,484

 
65,405,654

Diluted:
 

 
 

Net income available to common stockholders
$
2.72

 
$
1.19

Weighted average number of shares outstanding during the period
65,859,490

 
65,557,639

Dividend per common share
$
1.75

 
$
1.60


See accompanying notes to the unaudited condensed consolidated financial statements.

3


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Equity for the three months ended March 31, 2017
(Unaudited)
(Dollars and shares in thousands)
 
 
Common stock
 
Additional paid-in capital
 
Distributions
in excess of accumulated earnings
 
Accumulated
other
comprehensive loss, net
 
Noncontrolling Interest
 
 
 
 
Shares
 
Amount
 
 
 
 
 
Total
Balances at December 31, 2016
 
65,528

 
$
6

 
$
7,029,679

 
$
(805,409
)
 
$
(32,098
)
 
$
100,059

 
$
6,292,237

Net income
 

 

 

 
178,964

 

 
8,587

 
187,551

Reversal of unrealized gains upon the sale of marketable securities
 

 

 

 

 
(1,552
)
 
(53
)
 
(1,605
)
Change in fair value of derivatives and amortization of swap settlements
 

 

 

 

 
3,518

 
121

 
3,639

Change in fair value of marketable securities, net
 

 

 

 

 
173

 
6

 
179

Issuance of common stock under:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Stock option and restricted stock plans, net
 
41

 

 
5,794

 

 

 

 
5,794

Sale of common stock, net
 

 

 
(65
)
 

 

 

 
(65
)
Equity based compensation costs
 

 

 
1,110

 

 

 
143

 
1,253

Changes in the redemption value of redeemable noncontrolling interest
 

 

 
(505
)
 

 

 
(226
)
 
(731
)
Contributions from noncontrolling interest
 

 

 

 

 

 
22,506

 
22,506

Distributions to noncontrolling interest
 

 

 

 

 

 
(5,926
)
 
(5,926
)
Redemptions of noncontrolling interest
 
1

 

 
(835
)
 

 

 
(235
)
 
(1,070
)
Common stock dividends
 

 

 

 
(114,759
)
 

 

 
(114,759
)
Balances at March 31, 2017
 
65,570

 
$
6

 
$
7,035,178

 
$
(741,204
)
 
$
(29,959
)
 
$
124,982

 
$
6,389,003


See accompanying notes to the unaudited condensed consolidated financial statements.

4


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands) 
 
Three Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
187,551

 
$
86,907

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

 
 

Depreciation and amortization
115,503

 
109,707

Amortization of discount on marketable securities and other investments
(3,573
)
 
(3,756
)
Amortization of (premium) discount and debt financing costs, net
(3,309
)
 
(3,795
)
Gain on sale of marketable securities and other investments
(1,605
)
 
(740
)
Company's share of gain on the sales of co-investments

 
(7,435
)
Earnings from co-investments
(10,899
)
 
(7,633
)
Operating distributions from co-investments
12,358

 
9,753

Gain on the sale of real estate and land
(26,174
)
 
(20,258
)
Equity-based compensation
1,253

 
1,490

Gain on remeasurement of co-investment
(86,482
)
 

Changes in operating assets and liabilities:
 
 
 
   Prepaid expenses, receivables and other assets
(4,536
)
 
846

Accounts payable and accrued liabilities
42,449

 
35,200

Other liabilities
737

 
324

Net cash provided by operating activities
223,273

 
200,610

Cash flows from investing activities:
 

 
 

Additions to real estate:
 

 
 

Acquisitions of real estate and acquisition related capital expenditures
(187,917
)
 
(110,309
)
Redevelopment
(12,240
)
 
(24,151
)
Development acquisitions of and additions to real estate under development
(30,457
)
 
(22,656
)
Capital expenditures on rental properties
(10,885
)
 
(5,688
)
Investments in notes receivable
(8,750
)
 

Proceeds from insurance for property losses
435

 
435

Proceeds from dispositions of real estate
131,230

 
48,008

Contributions to co-investments
(120,816
)
 
(50,591
)
Changes in restricted cash and refundable deposits
89,985

 
59,346

Purchases of marketable securities
(20,939
)
 
(1,344
)
Sales and maturities of marketable securities and other investments
24,903

 
5,045

Non-operating distributions from co-investments
55,025

 
21,146

Net cash used in investing activities
(90,426
)
 
(80,759
)
Cash flows from financing activities:
 

 
 

Borrowings under debt agreements
654,562

 
305,895

Repayment of debt
(661,349
)
 
(309,903
)
Additions to deferred charges
(1,014
)
 
(1,037
)
Net proceeds from issuance of common stock
(65
)
 
(134
)
Net proceeds from stock options exercised
5,794

 
5,232

Distributions to noncontrolling interest
(5,425
)
 
(4,858
)
Redemption of noncontrolling interest
(1,070
)
 
(1,089
)
Common stock dividends paid
(104,857
)
 
(95,476
)
Net cash used in financing activities
(113,424
)
 
(101,370
)
Net increase in cash and cash equivalents
19,423

 
18,481

Cash and cash equivalents at beginning of period
64,921

 
29,683

Cash and cash equivalents at end of period
$
84,344

 
$
48,164

 
 
 
 

5


 
Three Months Ended March 31,
 
2017
 
2016
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of $3.3 million and $3.1 million capitalized in 2017 and 2016, respectively
$
48,397

 
$
48,109

Supplemental disclosure of noncash investing and financing activities:
 

 
 

Issuance of DownREIT units in connection with acquisition of real estate
$
22,506

 
$

Transfers between real estate under development to rental properties, net
$
747

 
$
107,643

Transfer from real estate under development to co-investments
$
2,080

 
$
2,338

Reclassifications to redeemable noncontrolling interest to or from additional paid in capital and noncontrolling interest
$
731

 
$
751

Debt assumed in connection with acquisition
$
51,882

 
$
48,832


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 in parenthetical and unit amounts)
 
March 31, 2017
 
December 31, 2016
ASSETS
 
 
 
Real estate:
 
 
 
Rental properties:
 
 
 
Land and land improvements
$
2,719,064

 
$
2,559,743

Buildings and improvements
10,492,413

 
10,116,563

 
13,211,477

 
12,676,306

Less: accumulated depreciation
(2,418,793
)
 
(2,311,546
)
 
10,792,684

 
10,364,760

Real estate under development
239,685

 
190,505

Co-investments
1,071,258

 
1,161,275

Real estate held for sale, net

 
101,957

 
12,103,627

 
11,818,497

Cash and cash equivalents-unrestricted
84,344

 
64,921

Cash and cash equivalents-restricted
15,908

 
105,381

Marketable securities
138,977

 
139,189

Notes and other receivables (includes related party receivables of $10.3 million and $11.3 million as of March 31, 2017 and December 31, 2016, respectively)
50,855

 
40,970

Prepaid expenses and other assets
53,716

 
48,450

Total assets
$
12,447,427


$
12,217,408

 
 
 
 
LIABILITIES AND CAPITAL
 

 
 

Unsecured debt, net
$
3,195,129

 
$
3,246,779

Mortgage notes payable, net
2,231,145

 
2,191,481

Lines of credit
176,233

 
125,000

Accounts payable and accrued liabilities
184,778

 
138,226

Construction payable
35,590

 
35,909

Distributions payable
120,573

 
110,170

Distributions in excess of investments in co-investments
35,534

 

Other liabilities
34,027

 
32,922

Total liabilities
6,013,009


5,880,487

Commitments and contingencies


 


Redeemable noncontrolling interest
45,415

 
44,684

Capital:
 

 
 

General Partner:
 
 
 
Common equity (65,569,521 and 65,527,993 units issued and outstanding, respectively)
6,293,980

 
6,224,276

 
6,293,980


6,224,276

Limited Partners:
 
 
 
Common equity (2,251,920 and 2,237,290 units issued and outstanding, respectively)
51,496

 
49,436

    Accumulated other comprehensive loss
(27,135
)
 
(29,348
)
Total partners' capital
6,318,341


6,244,364

Noncontrolling interest
70,662

 
47,873

Total capital
6,389,003


6,292,237

Total liabilities and capital
$
12,447,427


$
12,217,408


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 March 31,
 
2017
 
2016
Revenues:
 
 
 
Rental and other property
$
333,168

 
$
312,178

Management and other fees from affiliates
2,236

 
2,024

 
335,404

 
314,202

Expenses:
 

 
 

Property operating, excluding real estate taxes
63,645

 
60,071

Real estate taxes
35,868

 
34,419

Depreciation and amortization
115,503

 
109,707

General and administrative
10,601

 
9,182

Acquisition and investment related costs
556

 
828

 
226,173

 
214,207

Earnings from operations
109,231

 
99,995

Interest expense
(54,583
)
 
(52,466
)
Total return swap income
2,584

 
3,123

Interest and other income
6,764

 
5,208

Equity income from co-investments
10,899

 
15,068

Gain on sale of real estate and land
26,174

 
20,258

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

 
(4,279
)
Gain on remeasurement of co-investment
86,482

 

Net income
187,551

 
86,907

Net income attributable to noncontrolling interest
(2,441
)
 
(2,287
)
Net income attributable to controlling interest
185,110

 
84,620

Preferred interest distributions

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

 
(2,541
)
Net income available to common unitholders
$
185,110

 
$
80,765

Comprehensive income
$
189,764

 
$
84,696

Comprehensive income attributable to noncontrolling interest
(2,441
)
 
(2,287
)
Comprehensive income attributable to controlling interest
$
187,323

 
$
82,409

Per unit data:
 

 
 

Basic:
 

 
 

Net income available to common unitholders
$
2.73

 
$
1.19

Weighted average number of common units outstanding during the period
67,801,718

 
67,633,519

Diluted:
 
 
 
Net income available to common unitholders
$
2.72

 
$
1.19

Weighted average number of common units outstanding during the period
68,111,724

 
67,785,504

Distribution per common unit
$
1.75

 
$
1.60


See accompanying notes to the unaudited condensed consolidated financial statements.

8


ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Condensed Consolidated Statement of Capital for the three months ended March 31, 2017
(Dollars and units in thousands)
(Unaudited)
 
General Partner
 
Limited Partners
 
Accumulated other comprehensive loss
 
 
 
 
 
Common Equity
 
Common Equity
 
 
Noncontrolling Interest
 
 
 
Units
 
Amount
 
Units
 
Amount
 
 
 
Total
Balances at December 31, 2016
65,528

 
$
6,224,276

 
2,237

 
$
49,436

 
$
(29,348
)
 
$
47,873

 
$
6,292,237

Net income

 
178,964

 

 
6,146

 

 
2,441

 
187,551

Reversal of unrealized gains upon the sale of marketable securities

 

 

 

 
(1,605
)
 

 
(1,605
)
Change in fair value of derivatives and amortization of swap settlements

 

 

 

 
3,639

 

 
3,639

Change in fair value of marketable securities, net

 

 

 

 
179

 

 
179

Issuance of common units under:
 

 
 

 
 

 
 

 
 

 
 

 
 

General partner's stock based compensation, net
41

 
5,794

 

 

 

 

 
5,794

Sale of common stock by general partner, net

 
(65
)
 

 

 

 

 
(65
)
Equity based compensation costs

 
1,110

 
16

 
143

 

 

 
1,253

Changes in redemption value of redeemable noncontrolling interest

 
(505
)
 

 

 

 
(226
)
 
(731
)
Contributions from noncontrolling interest

 

 

 

 

 
22,506

 
22,506

Distributions to noncontrolling interest

 

 

 

 

 
(1,932
)
 
(1,932
)
Redemptions
1

 
(835
)
 
(1
)
 
(235
)
 

 

 
(1,070
)
Distributions declared

 
(114,759
)
 

 
(3,994
)
 

 

 
(118,753
)
Balances at March 31, 2017
65,570

 
$
6,293,980

 
2,252

 
$
51,496

 
$
(27,135
)
 
$
70,662

 
$
6,389,003


See accompanying notes to the unaudited condensed consolidated financial statements.

9


ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
Three Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
187,551

 
$
86,907

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

 
 

Depreciation and amortization
115,503

 
109,707

Amortization of discount on marketable securities and other investments
(3,573
)
 
(3,756
)
Amortization of (premium) discount and debt financing costs, net
(3,309
)
 
(3,795
)
Gain on sale of marketable securities and other investments
(1,605
)
 
(740
)
Company's share of gain on the sales of co-investments

 
(7,435
)
Earnings from co-investments
(10,899
)
 
(7,633
)
Operating distributions from co-investments
12,358

 
9,753

Gain on the sales of real estate and land
(26,174
)
 
(20,258
)
Equity-based compensation
1,253

 
1,490

Gain on remeasurement of co-investment
(86,482
)
 

Changes in operating assets and liabilities:
 

 
 

Prepaid expense, receivables and other assets
(4,536
)
 
846

Accounts payable and accrued liabilities
42,449

 
35,200

Other liabilities
737

 
324

Net cash provided by operating activities
223,273

 
200,610

Cash flows from investing activities:
 

 
 

Additions to real estate:
 

 
 

Acquisitions of real estate and acquisition related capital expenditures
(187,917
)
 
(110,309
)
Redevelopment
(12,240
)
 
(24,151
)
Development acquisitions of and additions to real estate under development
(30,457
)
 
(22,656
)
Capital expenditures on rental properties
(10,885
)
 
(5,688
)
Investments in notes receivable
(8,750
)
 

Proceeds from insurance for property losses
435

 
435

Proceeds from dispositions of real estate
131,230

 
48,008

Contributions to co-investments
(120,816
)
 
(50,591
)
Changes in restricted cash and refundable deposits
89,985

 
59,346

Purchases of marketable securities
(20,939
)
 
(1,344
)
Sales and maturities of marketable securities and other investments
24,903

 
5,045

Non-operating distributions from co-investments
55,025

 
21,146

Net cash used in investing activities
(90,426
)
 
(80,759
)
Cash flows from financing activities:
 

 
 

Borrowings under debt agreements
654,562

 
305,895

Repayment of debt
(661,349
)
 
(309,903
)
Additions to deferred charges
(1,014
)
 
(1,037
)
Net proceeds from issuance of common units
(65
)
 
(134
)
Net proceeds from stock options exercised
5,794

 
5,232

Distributions to noncontrolling interest
(5,425
)
 
(1,528
)
Redemption of noncontrolling interest
(1,070
)
 
(1,089
)
Common unit distributions paid
(104,857
)
 
(98,806
)
Net cash used in financing activities
(113,424
)
 
(101,370
)
Cash acquired in consolidation of co-investment

 

Net increase in cash and cash equivalents
19,423

 
18,481

Cash and cash equivalents at beginning of period
64,921

 
29,683

Cash and cash equivalents at end of period
$
84,344

 
$
48,164


10


 
Three Months Ended March 31,
 
2017
 
2016
  
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of $3.3 million and $3.1 million capitalized in 2017 and 2016, respectively
$
48,397

 
$
48,109

Supplemental disclosure of noncash investing and financing activities:
 

 
 

Issuance of DownREIT units in connection with acquisition of real estate
$
22,506

 
$

Transfers between real estate under development to rental properties, net
$
747

 
$
107,643

Transfer from real estate under development to co-investments
$
2,080

 
$
2,338

Reclassifications to redeemable noncontrolling interest to or from general partner capital and noncontrolling interest
$
731

 
$
751

  Debt assumed in connection with acquisition
$
51,882

 
$
48,832


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
March 31, 2017 and 2016
(Unaudited)

(1) Organization and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements present the accounts of Essex Property Trust, Inc. (“Essex” or the “Company”), which include the accounts of the Company and Essex Portfolio, L.P. and subsidiaries (the “Operating Partnership,” which holds the operating assets of the Company), prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q. In the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented have been included and are normal and recurring in nature. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2016.

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

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

As of March 31, 2017, the Company owned or had ownership interests in 246 stabilized apartment communities, aggregating 59,860 apartment homes, excluding the Company’s ownership in preferred interest co-investments, (collectively, the “Communities”, and individually, a “Community”), one operating commercial building and five active developments (collectively, the “Portfolio”). The Communities are located in Southern California (Los Angeles, Orange, San Diego, and Ventura counties), Northern California (the San Francisco Bay Area) and the Seattle metropolitan areas.

Recent 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. The new standard may be applied using either a full retrospective or a modified approach upon adoption. The Company does not expect that this amendment will have a material effect on its consolidated results of operations or 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 does not expect that this amendment will have a material effect on its consolidated results of operations or 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
March 31, 2017 and 2016
(Unaudited)

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

In June 2016, the FASB issued ASU No. 2016-13 "Measurement of Credit Losses on Financial Instruments", which amends the current approach to estimate credit losses on certain financial assets, including trade and other receivables, available-for-sale securities, and other financial instruments. Generally, this amendment requires entities to establish a valuation allowance for the expected lifetime losses of these certain financial assets. Subsequent changes in the valuation allowance are recorded in current earnings and reversal of previous losses are permitted. Currently, U.S. GAAP requires entities to write down credit losses only when losses are probable and loss reversals are not permitted. The new standard will be effective for the Company beginning on January 1, 2020 and early adoption is permitted. The Company is currently evaluating the impact of this amendment on its consolidated results of operations and financial position.

In August 2016, the FASB issued ASU No. 2016-15 "Classification of Certain Cash Receipts and Cash Payments", which requires entities to adhere to a uniform classification and presentation of certain cash receipts and cash payments in the statement of cash flows. The amendments in this update provide guidance on eight specific cash flow issues. The new standard will be effective for the Company beginning on January 1, 2018 and early adoption is permitted. The Company does not expect the impact of the other items identified in this amendment to be material on its consolidated results of operations or financial position.

In November 2016, the FASB issued ASU No. 2016-18 "Statement of Cash Flows", which requires entities to include restricted cash and restricted cash equivalents in the reconciliation of beginning-of-period to the end-of-period of cash and cash equivalents in the statement of cash flows. This new standard seeks to eliminate the current diversity in practice in how changes in restricted cash and restricted cash equivalents is presented in the statement of cash flows. This new standard will be effective for the Company beginning January 1, 2018 and early adoption is permitted. The Company does not expect the impact of the other items identified in this amendment to be material on its consolidated results of operations or financial position.

In January 2017, the FASB issued ASU No. 2017-01 "Business Combinations: Clarifying the Definition of a Business", which provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Currently, U.S. GAAP does not specify the minimum inputs and processes required for an integrated set of assets and activities to meet the definition of a business, causing a broad interpretation of the definition of a business. This new standard will be effective for the Company beginning January 1, 2018 and early adoption is permitted. The Company is currently evaluating the impact of this amendment on its consolidated results of operations and financial position.

In February 2017, the FASB issued ASU No. 2017-05 "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets", which adds guidance for partial sales of nonfinanical assets, including partial sales of real estate. Historically, U.S. GAAP contained several different accounting models to evaluate whether the transfer of certain assets qualified for sale treatment. This new standard reduces the number of potential accounting models that might apply and clarifies which model does apply in various circumstances. Partial sales of nonfinancial assets are common in the real estate industry and include transactions in which the seller retains an equity interest in the entity that owns the assets or has an equity interest in the buyer. This new standard will be effective for the Company beginning January 1, 2018 and early adoption is permitted. The Company is currently evaluating the impact of this amendment on its consolidated results of operations and financial position.

Marketable Securities

The Company reports its available for sale securities at fair value, based on quoted market prices (Level 1 for the common stock and investment funds, Level 2 for the unsecured bonds and Level 3 for investments in mortgage backed securities, as defined by the FASB standard for fair value measurements), and any unrealized gain or loss is recorded as other comprehensive income. Realized gains and losses, interest income, and amortization of purchase discounts are included in interest and other income on the condensed consolidated statements of income and comprehensive income.

As of March 31, 2017 and December 31, 2016, marketable securities consisted primarily of investment-grade unsecured bonds, common stock, investments in mortgage backed securities, and investment funds that invest in U.S. treasury or agency securities. As of March 31, 2017 and December 31, 2016, the Company classified its investments in mortgage backed

13


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

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

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

 
March 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gain (Loss)
 
Carrying Value
Available for sale:
 
 
 
 
 
Investment-grade unsecured bonds
$
13,540

 
$
99

 
$
13,639

Investment funds - U.S. treasuries
10,273

 
(24
)
 
10,249

Common stock and stock funds
17,147

 
(27
)
 
17,120

Held to maturity:
 

 
 

 
 

Mortgage backed securities
97,969

 

 
97,969

Total - Marketable securities
$
138,929

 
$
48

 
$
138,977

 
 
 
 
 
 
 
December 31, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gain (Loss)
 
Carrying Value
Available for sale:
 

 
 

 
 

Investment-grade unsecured bonds
$
19,604

 
$
(73
)
 
$
19,531

Investment funds - U.S. treasuries
10,022

 
(22
)
 
10,000

Common stock and stock funds
13,696

 
1,569

 
15,265

Held to maturity:
 

 
 

 
 

Mortgage backed securities
94,393

 

 
94,393

Total - Marketable securities
$
137,715

 
$
1,474

 
$
139,189


The Company uses the specific identification method to determine the cost basis of a security sold and to reclassify amounts from accumulated other comprehensive income for securities sold. 

For the three months ended March 31, 2017 and 2016, the proceeds from sales of available for sale securities totaled $24.9 million and $5.0 million, respectively, which resulted in $1.6 million realized gains and $0.7 million realized gains, respectively.

Variable Interest Entities

In accordance with accounting standards for consolidation of variable interest entities ("VIEs"), the Company consolidates the Operating Partnership, 20 DownREIT limited partnerships (comprising twelve communities), and 9 co-investments. The Company consolidates these entities because it is deemed the primary beneficiary. The Company has no assets or liabilities other than its investment in the Operating Partnership. The consolidated total assets and liabilities related to the 9 consolidated co-investments and 20 DownREIT limited partnerships, net of intercompany eliminations, were approximately $1.1 billion and $351.1 million, respectively, as of March 31, 2017 and $989.3 million and $288.1 million, respectively, as of December 31, 2016. Noncontrolling interests in these entities was $75.7 million and $52.9 million as of March 31, 2017 and December 31, 2016, respectively. The Company's financial risk in each VIE is limited to its equity investment in the VIE. As of March 31, 2017 and December 31, 2016, 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.


14


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

Equity-based Compensation

The cost of share and unit based compensation awards is measured at the grant date based on the estimated fair value of the awards. The estimated fair value of stock options and restricted stock granted by the Company are being amortized over the vesting period. The estimated grant date fair values of the long term incentive plan units (discussed in Note 12, “Equity Based Compensation Plans,” in the Company’s Form 10-K for the year ended December 31, 2016) are being amortized over the expected service periods.

Fair Value of Financial Instruments

Management believes that the carrying amounts of the outstanding balances under its lines of credit, and notes and other receivables approximate fair value as of March 31, 2017 and December 31, 2016, because interest rates, yields, and other terms for these instruments are consistent with yields and other terms currently available for similar instruments. Management has estimated that the fair value of the Company’s $4.8 billion of fixed rate debt, including unsecured debt, at March 31, 2017 is approximately $4.9 billion and the Company’s variable rate debt at March 31, 2017 and December 31, 2016 approximates its fair value based on the terms of existing mortgage notes payable, unsecured debt, and variable rate demand notes compared to those available in the marketplace. Management believes that the carrying amounts of cash and cash equivalents, restricted cash, accounts payable and accrued liabilities, construction payables, other liabilities, and dividends payable approximate fair value as of March 31, 2017 and December 31, 2016 due to the short-term maturity of these instruments. Marketable securities, except mortgage backed securities, and derivatives are carried at fair value as of March 31, 2017 and December 31, 2016.

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

The Company’s capitalized internal costs related to development and redevelopment projects were comprised primarily of employee compensation and totaled $5.2 million and $4.5 million during the three months ended March 31, 2017 and 2016, 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. Under the equity method of accounting, the investment is carried at the cost of assets contributed, plus the Company's equity in earnings less distributions received and the Company's share of losses. The significant accounting policies of the Company’s co-investment entities are consistent with those of the Company in all material respects.

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


15


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

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

Changes in Accumulated Other Comprehensive Loss, Net by Component

Essex Property Trust, Inc.
($ in thousands)
 
Change in fair
value and amortization
of swap settlements
 
Unrealized
gains on
available for sale
securities
 
Total
Balance at December 31, 2016
$
(32,963
)
 
$
865

 
$
(32,098
)
Other comprehensive income before reclassification
5,496

 
173

 
5,669

Amounts reclassified from accumulated other comprehensive loss
(1,978
)
 
(1,552
)
 
(3,530
)
Other comprehensive income (loss)
3,518

 
(1,379
)
 
2,139

Balance at March 31, 2017
$
(29,445
)
 
$
(514
)
 
$
(29,959
)

Changes in Accumulated Other Comprehensive Loss, by Component

Essex Portfolio, L.P.
($ in thousands):
 
Change in fair
value and amortization
of swap settlements
 
Unrealized
gains on
available for sale
securities
 
Total
Balance at December 31, 2016
$
(30,161
)
 
$
813

 
$
(29,348
)
Other comprehensive income before reclassification
5,685

 
179

 
5,864

Amounts reclassified from accumulated other comprehensive loss
(2,046
)
 
(1,605
)
 
(3,651
)
Other comprehensive income (loss)
3,639

 
(1,426
)
 
2,213

Balance at March 31, 2017
$
(26,522
)
 
$
(613
)
 
$
(27,135
)

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

Redeemable Noncontrolling Interest

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

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


16


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

 
2017
Balance at January 1,
$
44,684

Reclassification due to change in redemption value and other
731

Redemptions

Additions

Balance at March 31,
$
45,415


Accounting Estimates

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

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

Significant Transactions

Acquisitions

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

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

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

Dispositions

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

Preferred Equity Investments

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

17


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

the developments and if certain loan-to-value thresholds are met. The investment is scheduled to mature in March 2020. As of March 31, 2017, the Company has funded $2.0 million of the $21.5 million commitment.

Senior Unsecured Debt

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

Subsequent Event

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

(3) Co-investments

The Company has joint ventures and preferred equity investments in co-investments which are accounted for under the equity method. The co-investments own, operate, and develop apartment communities. The carrying values of the Company's co-investments as of March 31, 2017 and December 31, 2016 are as follows (in thousands, except in parenthetical):
 
Ownership Percentage
 
March 31, 2017
 
December 31, 2016
Membership interest/Partnership interest in:
 
 
 
 
 
CPPIB
50%-55%

 
$
463,899

 
$
422,068

Wesco I, III and IV
50
%
 
181,187

 
180,687

Palm Valley
50
%
 

 
68,396

BEXAEW
50
%
 
47,321

 
47,963

BEX II (1)
50
%
 
(35,534
)
 
19,078

Other
50%-55%

 
42,384

 
43,713

Total operating co-investments, net
 
 
699,257

 
781,905

Total development co-investments, net
50%-55%

 
123,408

 
157,317

Total preferred interest co-investments (includes related party investments of $20.5 million and $35.9 million as of March 31, 2017 and December 31, 2016, respectively)
 
 
213,059

 
222,053

Total co-investments, net
 
 
$
1,035,724

 
$
1,161,275

 
(1) This co-investment was classified as a liability as of March 31, 2017.

The combined summarized financial information of co-investments is as follows (in thousands).
 
March 31, 2017
 
December 31, 2016
Combined balance sheets: (1)
 
 
 
Rental properties and real estate under development
$
3,433,014

 
$
3,807,245

Other assets
102,385

 
121,505

Total assets
$
3,535,399

 
$
3,928,750

Debt
$
1,461,893

 
$
1,617,639

Other liabilities
75,570

 
74,607

Equity (1)
1,997,936

 
2,236,504

Total liabilities and equity
$
3,535,399

 
$
3,928,750

Company's share of equity
$
1,035,724

 
$
1,161,275


18


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




 
Three Months Ended March 31,
 
2017
 
2016
Combined statements of income: (1)
 
 
 
Property revenues
$
75,905

 
$
75,130

Property operating expenses
(25,408
)
 
(25,821
)
Net operating income
50,497

 
49,309

Gain on sale of real estate

 
17,495

Interest expense
(11,921
)
 
(13,140
)
General and administrative
(1,778
)