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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 September 30, 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 13(a) of the Exchange Act.
Essex Property Trust, Inc.    o  
Essex Portfolio, L.P.     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: 66,037,029 shares of Common Stock ($0.0001 par value) of Essex Property Trust, Inc. were outstanding as of October 30, 2017.
 

ii


EXPLANATORY NOTE

This report combines the reports on Form 10-Q for the three and nine month periods ended September 30, 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. 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 Operating Partnership limited partnership units ("OP Units") 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, 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 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 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) OP Unit holders. The differences between stockholders' equity and partners' capital result from differences in the equity issued at the Company and Operating Partnership levels.
 
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

iii


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 (the "Exchange Act") 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 Consolidated Financial Statements

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except parenthetical and share amounts)
ASSETS
September 30, 2017
 
December 31, 2016
Real estate:
 
 
 
Rental properties:
 
 
 
Land and land improvements
$
2,719,064

 
$
2,559,743

Buildings and improvements
10,585,742

 
10,116,563

 
13,304,806

 
12,676,306

Less: accumulated depreciation
(2,651,542
)
 
(2,311,546
)
 
10,653,264

 
10,364,760

Real estate under development
313,825

 
190,505

Co-investments
1,124,577

 
1,161,275

Real estate held for sale, net

 
101,957

 
12,091,666

 
11,818,497

Cash and cash equivalents-unrestricted
46,507

 
64,921

Cash and cash equivalents-restricted
16,766

 
105,381

Marketable securities
184,574

 
139,189

Notes and other receivables (includes related party receivables of $65.6 million and $11.3 million as of September 30, 2017 and December 31, 2016, respectively)
121,557

 
40,970

Prepaid expenses and other assets
51,453

 
48,450

Total assets
$
12,512,523

 
$
12,217,408

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Unsecured debt, net
$
3,501,146

 
$
3,246,779

Mortgage notes payable, net
2,111,467

 
2,191,481

Lines of credit
2,609

 
125,000

Accounts payable and accrued liabilities
222,122

 
138,226

Construction payable
59,767

 
35,909

Dividends payable
121,496

 
110,170

Distributions in excess of investments in co-investments
36,245

 

Other liabilities
33,733

 
32,922

Total liabilities
6,088,585

 
5,880,487

Commitments and contingencies


 


Redeemable noncontrolling interest
40,044

 
44,684

Equity:
 

 
 

Common stock; $0.0001 par value, 670,000,000 shares authorized; 66,002,487 and 65,527,993 shares issued and outstanding, respectively
6

 
6

Additional paid-in capital
7,111,866

 
7,029,679

Distributions in excess of accumulated earnings
(821,732
)
 
(805,409
)
Accumulated other comprehensive loss, net
(24,632
)
 
(32,098
)
Total stockholders' equity
6,265,508

 
6,192,178

Noncontrolling interest
118,386

 
100,059

Total equity
6,383,894

 
6,292,237

Total liabilities and equity
$
12,512,523

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Rental and other property
$
341,974

 
$
327,078

 
$
1,011,908

 
$
958,818

Management and other fees from affiliates
2,395

 
2,093

 
6,927

 
6,145

 
344,369

 
329,171

 
1,018,835

 
964,963

Expenses:
 

 
 

 
 
 
 
Property operating, excluding real estate taxes
66,606

 
63,781

 
193,632

 
185,390

Real estate taxes
37,531

 
35,580

 
108,283

 
104,540

Depreciation and amortization
117,451

 
110,467

 
350,893

 
329,847

General and administrative
9,788

 
9,647

 
30,726

 
28,527

Acquisition and investment related costs
324

 
284

 
1,154

 
1,379

 
231,700

 
219,759

 
684,688

 
649,683

Earnings from operations
112,669

 
109,412

 
334,147

 
315,280

Interest expense
(55,938
)
 
(56,693
)
 
(167,333
)
 
(164,727
)
Total return swap income
2,538

 
3,143

 
7,653

 
9,080

Interest and other income
5,790

 
4,943

 
17,916

 
19,560

Equity income from co-investments
19,727

 
9,568

 
40,934

 
38,932

Loss on early retirement of debt

 
(211
)
 

 
(211
)
Gain on sale of real estate and land
249

 

 
26,423

 
20,258

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

 

 

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

 

 
88,641

 

Net income
85,035

 
70,162

 
348,381

 
233,893

Net income attributable to noncontrolling interest
(5,312
)
 
(4,601
)
 
(18,935
)
 
(14,483
)
Net income attributable to controlling interest
79,723

 
65,561

 
329,446

 
219,410

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
$
79,723

 
$
65,561

 
$
329,446

 
$
215,555

Comprehensive income
$
88,870

 
$
73,173

 
$
356,102

 
$
235,874

Comprehensive income attributable to noncontrolling interest
(5,438
)
 
(4,700
)
 
(19,190
)
 
(14,548
)
Comprehensive income attributable to controlling interest
$
83,432

 
$
68,473

 
$
336,912

 
$
221,326

Per share data:
 

 
 

 
 
 
 
Basic:
 

 
 

 
 
 
 
Net income available to common stockholders
$
1.21

 
$
1.00

 
$
5.01

 
$
3.29

Weighted average number of shares outstanding during the period
65,994,896

 
65,507,669

 
65,759,450

 
65,455,004

Diluted:
 

 
 

 
 
 
 
Net income available to common stockholders
$
1.21

 
$
1.00

 
$
5.00

 
$
3.29

Weighted average number of shares outstanding during the period
66,078,283

 
65,617,551

 
65,836,965

 
65,578,661

Dividend per common share
$
1.75

 
$
1.60

 
$
5.25

 
$
4.80


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, 2017
(Unaudited)
(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
 

 

 

 
329,446

 

 
18,935

 
348,381

Reversal of unrealized gains upon the sale of marketable securities
 

 

 

 

 
(1,596
)
 
(54
)
 
(1,650
)
Change in fair value of derivatives and amortization of swap settlements
 

 

 

 

 
7,160

 
245

 
7,405

Change in fair value of marketable securities, net
 

 

 

 

 
1,902

 
64

 
1,966

Issuance of common stock under:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Stock option and restricted stock plans, net
 
160

 

 
24,079

 

 

 

 
24,079

Sale of common stock, net
 
312

 

 
80,377

 

 

 

 
80,377

Equity based compensation costs
 

 

 
3,814

 

 

 
1,080

 
4,894

Changes in the redemption value of redeemable noncontrolling interest
 

 

 
(916
)
 

 

 
13

 
(903
)
Contributions from noncontrolling interest
 

 

 

 

 

 
22,506

 
22,506

Distributions to noncontrolling interest
 

 

 

 

 

 
(21,072
)
 
(21,072
)
Redemptions of noncontrolling interest
 
2

 

 
(25,167
)
 

 

 
(3,390
)
 
(28,557
)
Common stock dividends
 

 

 

 
(345,769
)
 

 

 
(345,769
)
Balances at September 30, 2017
 
66,002

 
$
6

 
$
7,111,866

 
$
(821,732
)
 
$
(24,632
)
 
$
118,386

 
$
6,383,894


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,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
348,381

 
$
233,893

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

 
 

Depreciation and amortization
350,893

 
329,847

Amortization of discount on marketable securities and other investments
(11,128
)
 
(10,771
)
Amortization of (premium) discount and debt financing costs, net
(5,132
)
 
(11,432
)
Gain on sale of marketable securities and other investments
(1,650
)
 
(2,876
)
Company's share of gain on the sales of co-investments
(10,058
)
 
(13,046
)
Earnings from co-investments
(30,876
)
 
(25,886
)
Operating distributions from co-investments
47,702

 
45,342

Gain on the sale of real estate and land
(26,423
)
 
(20,258
)
Equity-based compensation
4,894

 
4,436

Loss on early retirement of debt, net

 
211

Gain on remeasurement of co-investment
(88,641
)
 

Changes in operating assets and liabilities:
 
 
 
   Prepaid expenses, receivables and other assets
(7,862
)
 
656

Accounts payable and accrued liabilities
50,788

 
49,961

Other liabilities
399

 
420

Net cash provided by operating activities
621,287

 
580,497

Cash flows from investing activities:
 

 
 

Additions to real estate:
 

 
 

Acquisitions of real estate and acquisition related capital expenditures
(200,028
)
 
(124,054
)
Redevelopment
(50,642
)
 
(62,983
)
Development acquisitions of and additions to real estate under development
(92,936
)
 
(58,575
)
Capital expenditures on rental properties
(46,455
)
 
(40,503
)
Investments in notes receivable
(76,961
)
 
(4,375
)
Proceeds from insurance for property losses
648

 
3,288

Proceeds from dispositions of real estate
132,039

 
48,008

Contributions to co-investments
(231,552
)
 
(121,972
)
Changes in restricted cash and refundable deposits
91,209

 
65,858

Purchases of marketable securities
(65,668
)
 
(18,779
)
Sales and maturities of marketable securities and other investments
33,377

 
14,708

Non-operating distributions from co-investments
112,572

 
34,564

Net cash used in investing activities
(394,397
)
 
(264,815
)
Cash flows from financing activities:
 

 
 

Proceeds from unsecured debt and mortgage notes
597,981

 
499,724

Payments on unsecured debt and mortgage notes
(460,040
)
 
(244,583
)
Proceeds from lines of credit
564,833

 
321,373

Repayments of lines of credit
(687,224
)
 
(336,373
)
Repayment of cumulative redeemable preferred stock

 
(73,750
)
Additions to deferred charges
(4,108
)
 
(5,300
)
Net proceeds from issuance of common stock
80,377

 
(382
)
Net proceeds from stock options exercised
24,079

 
17,878

Payments related to tax withholding for share-based compensation
(118
)
 
(222
)
Distributions to noncontrolling interest
(20,405
)
 
(19,844
)
Redemption of noncontrolling interest
(4,849
)
 
(2,435
)
Redemption of redeemable noncontrolling interest
(720
)
 


5


 
Nine Months Ended September 30,
 
2017
 
2016
Common and preferred stock dividends paid
(335,110
)
 
(306,284
)
Net cash used in financing activities
(245,304
)
 
(150,198
)
Net (decrease) increase in cash and cash equivalents
(18,414
)
 
165,484

Cash and cash equivalents at beginning of period
64,921

 
29,683

Cash and cash equivalents at end of period
$
46,507

 
$
195,167

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of $10.0 million and $9.4 million capitalized in 2017 and 2016, respectively
$
148,742

 
$
140,183

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
$
2,195

 
$
106,255

Transfer from real estate under development to co-investments
$
4,122

 
$
8,332

Reclassifications to (from) redeemable noncontrolling interest to or from additional paid in capital and noncontrolling interest
$
903

 
$
(1,343
)
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 parenthetical and unit amounts)
 
September 30, 2017
 
December 31, 2016
ASSETS
 
 
 
Real estate:
 
 
 
Rental properties:
 
 
 
Land and land improvements
$
2,719,064

 
$
2,559,743

Buildings and improvements
10,585,742

 
10,116,563

 
13,304,806

 
12,676,306

Less: accumulated depreciation
(2,651,542
)
 
(2,311,546
)
 
10,653,264

 
10,364,760

Real estate under development
313,825

 
190,505

Co-investments
1,124,577

 
1,161,275

Real estate held for sale, net

 
101,957

 
12,091,666

 
11,818,497

Cash and cash equivalents-unrestricted
46,507

 
64,921

Cash and cash equivalents-restricted
16,766

 
105,381

Marketable securities
184,574

 
139,189

Notes and other receivables (includes related party receivables of $65.6 million and $11.3 million as of September 30, 2017 and December 31, 2016, respectively)
121,557

 
40,970

Prepaid expenses and other assets
51,453

 
48,450

Total assets
$
12,512,523


$
12,217,408

 
 
 
 
LIABILITIES AND CAPITAL
 

 
 

Unsecured debt, net
$
3,501,146

 
$
3,246,779

Mortgage notes payable, net
2,111,467

 
2,191,481

Lines of credit
2,609

 
125,000

Accounts payable and accrued liabilities
222,122

 
138,226

Construction payable
59,767

 
35,909

Distributions payable
121,496

 
110,170

Distributions in excess of investments in co-investments
36,245

 

Other liabilities
33,733

 
32,922

Total liabilities
6,088,585


5,880,487

Commitments and contingencies


 


Redeemable noncontrolling interest
40,044

 
44,684

Capital:
 

 
 

General Partner:
 
 
 
Common equity (66,002,487 and 65,527,993 units issued and outstanding, respectively)
6,290,140

 
6,224,276

 
6,290,140


6,224,276

Limited Partners:
 
 
 
Common equity (2,251,112 and 2,237,290 units issued and outstanding, respectively)
49,498

 
49,436

    Accumulated other comprehensive loss
(21,627
)
 
(29,348
)
Total partners' capital
6,318,011


6,244,364

Noncontrolling interest
65,883

 
47,873

Total capital
6,383,894


6,292,237

Total liabilities and capital
$
12,512,523


$
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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Rental and other property
$
341,974

 
$
327,078

 
$
1,011,908

 
$
958,818

Management and other fees from affiliates
2,395

 
2,093

 
6,927

 
6,145

 
344,369

 
329,171

 
1,018,835

 
964,963

Expenses:
 

 
 

 
 
 
 
Property operating, excluding real estate taxes
66,606

 
63,781

 
193,632

 
185,390

Real estate taxes
37,531

 
35,580

 
108,283

 
104,540

Depreciation and amortization
117,451

 
110,467

 
350,893

 
329,847

General and administrative
9,788

 
9,647

 
30,726

 
28,527

Acquisition and investment related costs
324

 
284

 
1,154

 
1,379

 
231,700

 
219,759

 
684,688

 
649,683

Earnings from operations
112,669

 
109,412

 
334,147

 
315,280

Interest expense
(55,938
)
 
(56,693
)
 
(167,333
)
 
(164,727
)
Total return swap income
2,538

 
3,143

 
7,653

 
9,080

Interest and other income
5,790

 
4,943

 
17,916

 
19,560

Equity income from co-investments
19,727

 
9,568

 
40,934

 
38,932

Loss on early retirement of debt, net

 
(211
)
 

 
(211
)
Gain on sale of real estate and land
249

 

 
26,423

 
20,258

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

 

 

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

 

 
88,641

 

Net income
85,035

 
70,162

 
348,381

 
233,893

Net income attributable to noncontrolling interest
(2,591
)
 
(2,378
)
 
(7,646
)
 
(7,026
)
Net income attributable to controlling interest
82,444

 
67,784

 
340,735

 
226,867

Preferred interest distributions

 

 

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

 

 

 
(2,541
)
Net income available to common unitholders
$
82,444

 
$
67,784

 
$
340,735

 
$
223,012

Comprehensive income
$
88,870

 
$
73,173

 
$
356,102

 
$
235,874

Comprehensive income attributable to noncontrolling interest
(2,591
)
 
(2,378
)
 
(7,646
)
 
(7,026
)
Comprehensive income attributable to controlling interest
$
86,279

 
$
70,795

 
$
348,456

 
$
228,848

Per unit data:
 

 
 

 
 
 
 
Basic:
 

 
 

 
 
 
 
Net income available to common unitholders
$
1.21

 
$
1.00

 
$
5.01

 
$
3.30

Weighted average number of common units outstanding during the period
68,246,008

 
67,728,621

 
68,011,123

 
67,679,240

Diluted:
 
 
 
 
 
 
 
Net income available to common unitholders
$
1.21

 
$
1.00

 
$
5.00

 
$
3.29

Weighted average number of common units outstanding during the period
68,329,395

 
67,838,503

 
68,088,638

 
67,802,897

Distribution per common unit
$
1.75

 
$
1.60

 
$
5.25

 
$
4.80


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, 2017
(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

 
329,446

 

 
11,289

 

 
7,646

 
348,381

Reversal of unrealized gains upon the sale of marketable securities

 

 

 

 
(1,650
)
 

 
(1,650
)
Change in fair value of derivatives and amortization of swap settlements

 

 

 

 
7,405

 

 
7,405

Change in fair value of marketable securities, net

 

 

 

 
1,966

 

 
1,966

Issuance of common units under:
 

 
 

 
 

 
 

 
 

 
 

 
 

General partner's stock based compensation, net
160

 
24,079

 

 

 

 

 
24,079

Sale of common stock by general partner, net
312

 
80,377

 

 

 

 

 
80,377

Equity based compensation costs

 
3,814

 
16

 
1,080

 

 

 
4,894

Changes in redemption value of redeemable noncontrolling interest

 
(916
)
 

 
78

 

 
(65
)
 
(903
)
Contributions from noncontrolling interest

 

 

 

 

 
22,506

 
22,506

Distributions to noncontrolling interest

 

 

 

 

 
(9,092
)
 
(9,092
)
Redemptions
2

 
(25,167
)
 
(2
)
 
(405
)
 

 
(2,985
)
 
(28,557
)
Distributions declared

 
(345,769
)
 

 
(11,980
)
 

 

 
(357,749
)
Balances at September 30, 2017
66,002

 
$
6,290,140

 
2,251

 
$
49,498

 
$
(21,627
)
 
$
65,883

 
$
6,383,894


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,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
348,381

 
$
233,893

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

 
 

Depreciation and amortization
350,893

 
329,847

Amortization of discount on marketable securities and other investments
(11,128
)
 
(10,771
)
Amortization of (premium) discount and debt financing costs, net
(5,132
)
 
(11,432
)
Gain on sale of marketable securities and other investments
(1,650
)
 
(2,876
)
Company's share of gain on the sales of co-investment
(10,058
)
 
(13,046
)
Earnings from co-investments
(30,876
)
 
(25,886
)
Operating distributions from co-investments
47,702

 
45,342

Gain on the sale of real estate and land
(26,423
)
 
(20,258
)
Equity-based compensation
4,894

 
4,436

Loss on early retirement of debt

 
211

Gain on remeasurement of co-investment
(88,641
)
 

Changes in operating assets and liabilities:
 

 
 

Prepaid expense, receivables and other assets
(7,862
)
 
656

Accounts payable and accrued liabilities
50,788

 
49,961

Other liabilities
399

 
420

Net cash provided by operating activities
621,287

 
580,497

Cash flows from investing activities:
 

 
 

Additions to real estate:
 

 
 

Acquisitions of real estate and acquisition related capital expenditures
(200,028
)
 
(124,054
)
Redevelopment
(50,642
)
 
(62,983
)
Development acquisitions of and additions to real estate under development
(92,936
)
 
(58,575
)
Capital expenditures on rental properties
(46,455
)
 
(40,503
)
Investments in notes receivable
(76,961
)
 
(4,375
)
Proceeds from insurance for property losses
648

 
3,288

Proceeds from dispositions of real estate
132,039

 
48,008

Contributions to co-investments
(231,552
)
 
(121,972
)
Changes in restricted cash and refundable deposits
91,209

 
65,858

Purchases of marketable securities
(65,668
)
 
(18,779
)
Sales and maturities of marketable securities and other investments
33,377

 
14,708

Non-operating distributions from co-investments
112,572

 
34,564

Net cash used in investing activities
(394,397
)
 
(264,815
)
Cash flows from financing activities:
 

 
 

Proceeds from unsecured debt and mortgage notes
597,981

 
499,724

Payments on unsecured debt and mortgage notes
(460,040
)
 
(244,583
)
Proceeds from lines of credit
564,833

 
321,373

Repayments of lines of credit
(687,224
)
 
(336,373
)
Repayment of cumulative redeemable preferred stock

 
(73,750
)
Additions to deferred charges
(4,108
)
 
(5,300
)
Net proceeds from issuance of common units
80,377

 
(382
)
Net proceeds from stock options exercised
24,079

 
17,878

Payments related to tax withholding for share-based compensation
(118
)
 
(222
)
Distributions to noncontrolling interest
(5,568
)
 
(5,171
)
Redemption of noncontrolling interest
(4,849
)
 
(2,435
)
Redemption of redeemable noncontrolling interest
(720
)
 


10


 
Nine Months Ended September 30,
 
2017
 
2016
Common and preferred units and preferred interest distributions paid
(349,947
)
 
(320,957
)
Net cash used in financing activities
(245,304
)
 
(150,198
)
Net (decrease) increase in cash and cash equivalents
(18,414
)
 
165,484

Cash and cash equivalents at beginning of period
64,921

 
29,683

Cash and cash equivalents at end of period
$
46,507

 
$
195,167

  
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of $10.0 million and $9.4 million capitalized in 2017 and 2016, respectively
$
148,742

 
$
140,183

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
$
2,195

 
$
106,255

Transfer from real estate under development to co-investments
$
4,122

 
$
8,332

Reclassifications to (from) redeemable noncontrolling interest to or from general partner capital and noncontrolling interest
$
903

 
$
(1,343
)
  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
September 30, 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 its 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 and nine months ended September 30, 2017 and 2016 include the accounts of the Company and the Operating Partnership. Essex is the sole general partner of the Operating Partnership, with a 96.7% general partnership interest as of both September 30, 2017 and December 31, 2016. Total Operating Partnership limited partnership units ("OP Units") outstanding were 2,251,112 and 2,237,290 as of September 30, 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 $571.8 million and $520.2 million as of September 30, 2017 and December 31, 2016, respectively.

As of September 30, 2017, the Company owned or had ownership interests in 247 stabilized apartment communities, aggregating 60,305 apartment homes, excluding the Company’s ownership in preferred interest co-investments (collectively, the “Communities”, and individually, a “Community”), one operating commercial building and seven 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 Accounting Standards Update ("ASU") No. 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 to early adopt and expects to adopt using the modified approach. The Company is currently evaluating the impact the adoption of this new standard will have on its recording of revenue related to its revenue streams and related disclosures. The Company does not expect that the adoption of this new standard 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

12


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

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. 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 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 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 expects that substantially all of its acquisitions of communities will qualify as asset acquisitions and transaction costs related to these acquisitions will be capitalized upon adoption.

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 will adopt this new standard concurrently with the adoption of ASU 2014-09 "Revenue from Contracts with Customers" and is currently evaluating the impact of this amendment on its consolidated results of operations and financial position.

In August 2017, the FASB issued ASU No. 2017-12 "Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities", which, among other things, requires entities to present the earnings effect of hedging instruments in the same income statement line item in which the earnings effect of the hedged item is reported. The new standard also adds new disclosure requirements. This new standard will be effective for the Company beginning January 1, 2019 and early adoption is permitted. The Company is currently evaluating the impact of this amendment on its consolidated results of operations and financial position.



13


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

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 September 30, 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 September 30, 2017 and December 31, 2016, the Company classified its investments in mortgage backed 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 September 30, 2017 and December 31, 2016, marketable securities consist of the following ($ in thousands):

 
September 30, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gain (Loss)
 
Carrying Value
Available for sale:
 
 
 
 
 
Investment-grade unsecured bonds
$
4,450

 
$
(14
)
 
$
4,436

Investment funds - debt securities
28,067

 
146

 
28,213

Investment funds - U.S. treasuries
10,910

 
(29
)
 
10,881

Common stock and stock funds
33,816

 
1,687

 
35,503

Held to maturity:
 

 
 

 
 

Mortgage backed securities
105,541

 

 
105,541

Total - Marketable securities
$
182,784

 
$
1,790

 
$
184,574

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

 
 

 
 

Investment funds - debt securities
$
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