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Section 1: 10-Q (10-Q)

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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, 2019

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.)
Commission file number 333-44467-01 (Essex Portfolio, L.P.)

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 every Interactive Data File required to be submitted 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 such files).
Essex Property Trust, Inc.    Yes x   No o
Essex Portfolio, L.P.     Yes x   No o


i


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):

Essex Property Trust, Inc.:
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o  
Smaller reporting company o
 
 
 
Emerging growth company o


Essex Portfolio, L.P.:
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x  
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: 65,716,550 shares of Common Stock ($0.0001 par value) of Essex Property Trust, Inc. were outstanding as of April 23, 2019.
 

ii


EXPLANATORY NOTE

This report combines the reports on Form 10-Q for the three month period ended March 31, 2019 of Essex Property Trust, Inc., a Maryland corporation, and Essex Portfolio, L.P., a Delaware limited partnership of which Essex Property Trust, Inc. is the sole general partner.

Unless stated otherwise or the context otherwise requires, references to the "Company," "we," "us" or "our" mean collectively Essex Property Trust, Inc. and those entities/subsidiaries owned or controlled by Essex Property Trust, Inc., including Essex Portfolio, L.P., and references to the "Operating Partnership," or "EPLP" mean Essex Portfolio, L.P. and those entities/subsidiaries owned or controlled by Essex Portfolio, L.P. Unless stated otherwise or the context otherwise requires, references to "Essex" mean Essex Property Trust, Inc., not including any of its subsidiaries.

Essex operates as a self-administered and self-managed real estate investment trust ("REIT"), and is the sole general partner of the Operating Partnership. As the sole general partner of the Operating Partnership, Essex has exclusive control of the Operating Partnership'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," and the holders of such OP Units, "Unitholders") equal to the number of shares of common stock it has issued in the equity offerings. 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 the Operating Partnership'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 the Operating Partnership into this single report provides the following benefits:

enhances investors' understanding of Essex 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 Essex and the Operating Partnership; and
creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.

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

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 the Operating Partnership. Essex's primary function is acting as the general partner of the Operating Partnership. As general partner with control of the Operating Partnership, Essex consolidates the Operating Partnership for financial reporting purposes. Therefore, the assets and liabilities of Essex 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 the Operating Partnership, 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 co-investments. 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 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 of capital 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 co-investments.

The Company believes it is important to understand the few differences between Essex and the Operating Partnership in the context of how Essex and the Operating Partnership 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 Essex 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 condensed consolidated financial statements include the interest of unaffiliated partners in various consolidated partnerships and co-investment partners. The noncontrolling interest in Essex's condensed consolidated financial statements include (i) the same noncontrolling interest as

iii


presented in the Operating Partnership’s condensed consolidated financial statements and (ii) OP Unit holders. The differences between stockholders' equity and partners' capital result from differences in the equity issued at Essex and Operating Partnership levels.
 
To help investors understand the significant differences between Essex and the Operating Partnership, this report on Form 10-Q provides separate consolidated financial statements for Essex 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 on Form 10-Q also includes separate Part I, Item 4. Controls and Procedures sections and separate Exhibits 31 and 32 certifications for each of Essex and the Operating Partnership in order to establish that the requisite certifications have been made and that Essex 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 Essex and the Operating Partnership, the separate sections in this report on Form 10-Q for Essex and the Operating Partnership specifically refer to Essex and the Operating Partnership. In the sections that combine disclosure of Essex 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 co-investments 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 Essex 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, 2018.

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 3.
 
 
 
Item 4.
 
 
 
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
March 31, 2019
 
December 31, 2018
Real estate:
 
 
 
Rental properties:
 
 
 
Land and land improvements
$
2,727,878

 
$
2,701,356

Buildings and improvements
10,844,322

 
10,664,745

 
13,572,200

 
13,366,101

Less: accumulated depreciation
(3,329,743
)
 
(3,209,548
)
 
10,242,457

 
10,156,553

Real estate under development
497,794

 
454,629

Co-investments
1,307,561

 
1,300,140

 
12,047,812

 
11,911,322

Cash and cash equivalents-unrestricted
107,034

 
134,465

Cash and cash equivalents-restricted
17,092

 
16,930

Marketable securities
211,030

 
209,545

Notes and other receivables (includes related party receivables of $10.5 million and $11.1 million as of March 31, 2019 and December 31, 2018, respectively)
71,154

 
71,895

Operating lease right-of-use assets
76,996

 

Prepaid expenses and other assets
46,883

 
39,439

Total assets
$
12,578,001

 
$
12,383,596

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Unsecured debt, net
$
4,293,973

 
$
3,799,316

Mortgage notes payable, net
1,441,828

 
1,806,626

Lines of credit

 

Accounts payable and accrued liabilities
180,571

 
127,086

Construction payable
60,087

 
59,345

Dividends payable
134,339

 
128,529

Operating lease liabilities
79,010

 

Other liabilities
33,829

 
33,375

Total liabilities
6,223,637

 
5,954,277

Commitments and contingencies


 


Redeemable noncontrolling interest
37,169

 
35,475

Equity:
 

 
 

Common stock; $0.0001 par value, 670,000,000 shares authorized; 65,715,783 and 65,890,322 shares issued and outstanding, respectively
7

 
7

Additional paid-in capital
7,028,154

 
7,093,079

Distributions in excess of accumulated earnings
(822,087
)
 
(812,796
)
Accumulated other comprehensive loss, net
(14,817
)
 
(13,217
)
Total stockholders' equity
6,191,257

 
6,267,073

Noncontrolling interest
125,938

 
126,771

Total equity
6,317,195

 
6,393,844

Total liabilities and equity
$
12,578,001

 
$
12,383,596


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,
 
2019
 
2018
Revenues:
 
 
 
Rental and other property
$
353,888

 
$
344,947

Management and other fees from affiliates
2,335

 
2,308

 
356,223

 
347,255

Expenses:
 

 
 

Property operating, excluding real estate taxes
58,898

 
57,250

Real estate taxes
39,418

 
37,713

Corporate-level property management expenses
8,153

 
7,770

Depreciation and amortization
120,568

 
119,105

General and administrative
13,459

 
14,813

Expensed acquisition and investment related costs
32

 
57

 
240,528

 
236,708

Earnings from operations
115,695

 
110,547

Interest expense
(53,643
)
 
(54,861
)
Total return swap income
2,045

 
2,270

Interest and other income
12,261

 
5,909

Equity income from co-investments
16,276

 
32,774

Gain on early retirement of debt, net
1,336

 

Gain on remeasurement of co-investment
31,535

 

Net income
125,505

 
96,639

Net income attributable to noncontrolling interest
(6,647
)
 
(5,721
)
Net income available to common stockholders
$
118,858

 
$
90,918

Comprehensive income
$
123,668

 
$
102,815

Comprehensive income attributable to noncontrolling interest
(6,585
)
 
(5,926
)
Comprehensive income attributable to controlling interest
$
117,083

 
$
96,889

Per share data:
 

 
 

Basic:
 

 
 

Net income available to common stockholders
$
1.81

 
$
1.38

Weighted average number of shares outstanding during the period
65,702,788

 
66,044,022

Diluted:
 

 
 

Net income available to common stockholders
$
1.81

 
$
1.38

Weighted average number of shares outstanding during the period
65,783,869

 
66,082,517


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, 2019 and 2018
(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, 2018
 
65,890

 
$
7

 
$
7,093,079

 
$
(812,796
)
 
$
(13,217
)
 
$
126,771

 
$
6,393,844

Net income
 

 

 

 
118,858

 

 
6,647

 
125,505

Reversal of unrealized losses upon the sale of marketable debt securities
 

 

 

 

 
32

 
1

 
33

Change in fair value of derivatives and amortization of swap settlements
 

 

 

 

 
(1,926
)
 
(67
)
 
(1,993
)
Change in fair value of marketable debt securities, net
 

 

 

 

 
119

 
4

 
123

Issuance of common stock under:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Stock option and restricted stock plans, net
 
51

 

 
3,204

 

 

 

 
3,204

  Sale of common stock, net
 

 

 
(20
)
 

 

 

 
(20
)
Equity based compensation costs
 

 

 
2,301

 

 

 
299

 
2,600

Retirement of common stock, net
 
(234
)
 

 
(56,989
)
 

 

 

 
(56,989
)
Cumulative effect upon adoption of ASU No. 2017-12
 

 

 

 

 
175

 
6

 
181

Changes in the redemption value of redeemable noncontrolling interest
 

 

 
(3,027
)
 

 

 
1,260

 
(1,767
)
Distributions to noncontrolling interest
 

 

 

 

 

 
(7,164
)
 
(7,164
)
Redemptions of noncontrolling interest
 
9

 

 
(10,394
)
 

 

 
(1,819
)
 
(12,213
)
Common stock dividends ($1.95 per share)
 

 

 

 
(128,149
)
 

 

 
(128,149
)
Balances at March 31, 2019
 
65,716

 
$
7

 
$
7,028,154

 
$
(822,087
)
 
$
(14,817
)
 
$
125,938

 
$
6,317,195



4


 
 
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, 2017
 
66,054

 
$
7

 
$
7,129,571

 
$
(833,726
)
 
$
(18,446
)
 
$
119,419

 
$
6,396,825

Net income
 

 

 

 
90,918

 

 
5,721

 
96,639

Reversal of unrealized gains upon the sale of marketable debt securities
 

 

 

 

 
(1
)
 

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

 

 

 

 
6,046

 
208

 
6,254

Change in fair value of marketable debt securities, net
 

 

 

 

 
(74
)
 
(3
)
 
(77
)
Issuance of common stock under:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Stock option and restricted stock plans, net
 
7

 

 
1,222

 

 

 

 
1,222

  Sale of common stock, net
 

 

 
(67
)
 

 

 

 
(67
)
Equity based compensation costs
 

 

 
2,253

 

 

 
277

 
2,530

Retirement of common stock, net
 
(17
)
 

 
(3,774
)
 

 

 

 
(3,774
)
Cumulative effect upon adoption of ASU No. 2016-01
 

 

 

 
2,234

 
(2,234
)
 

 

Cumulative effect upon adoption of ASU No. 2017-05
 

 

 

 
119,651

 

 
4,057

 
123,708

Changes in the redemption value of redeemable noncontrolling interest
 

 

 
(1,957
)
 

 

 
4

 
(1,953
)
Distributions to noncontrolling interest
 

 

 

 

 

 
(6,297
)
 
(6,297
)
Common stock dividends ($1.86 per share)
 

 

 

 
(122,850
)
 

 

 
(122,850
)
Balances at March 31, 2018
 
66,044

 
$
7

 
$
7,127,248

 
$
(743,773
)
 
$
(14,709
)
 
$
123,386

 
$
6,492,159



See accompanying notes to the unaudited condensed consolidated financial statements.

5


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands, except parenthetical amounts) 
 
Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
125,505

 
$
96,639

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

 
 

Depreciation and amortization
120,568

 
119,105

Amortization of discount on marketable securities
(5,311
)
 
(4,157
)
Amortization of discount (premium) and debt financing costs, net
529

 
(664
)
Loss (gain) on sale of marketable securities
58

 
(680
)
Unrealized (gain) loss on equity securities recognized through income
(4,510
)
 
876

Earnings from co-investments
(16,276
)
 
(32,774
)
Operating distributions from co-investments
17,804

 
40,437

Accrued interest from notes and other receivables
(1,424
)
 
(1,294
)
Equity-based compensation
2,068

 
2,090

Gain on early retirement of debt, net
(1,336
)
 

Gain on remeasurement of co-investment
(31,535
)
 

Changes in operating assets and liabilities:
 
 
 
   Prepaid expenses, receivables, operating lease right-of-use assets, and other assets
(4,730
)
 
(3,716
)
Accounts payable, accrued liabilities, and operating lease liabilities
53,895

 
52,151

Other liabilities
454

 
345

Net cash provided by operating activities
255,759

 
268,358

Cash flows from investing activities:
 

 
 

Additions to real estate:
 

 
 

Acquisitions of real estate and acquisition related capital expenditures
(44,984
)
 
(2,873
)
Redevelopment
(14,157
)
 
(15,893
)
Development acquisitions of and additions to real estate under development
(39,306
)
 
(38,203
)
Capital expenditures on rental properties
(17,075
)
 
(14,947
)
Collections of notes and other receivables
2,500

 
29,500

Proceeds from insurance for property losses
1,583

 
565

Contributions to co-investments
(126,248
)
 
(56,020
)
Changes in refundable deposits
5

 
410

Purchases of marketable securities
(8,413
)
 
(13,437
)
Sales and maturities of marketable securities
16,847

 
9,579

Non-operating distributions from co-investments
10,000

 
2,330

Net cash used in investing activities
(219,248
)
 
(98,989
)
Cash flows from financing activities:
 

 
 

Proceeds from unsecured debt and mortgage notes
498,234

 
298,773

Payments on unsecured debt and mortgage notes
(360,975
)
 
(83,748
)
Proceeds from lines of credit
567,029

 
256,832

Repayments of lines of credit
(567,029
)
 
(435,832
)
Retirement of common stock
(56,989
)
 
(3,774
)
Additions to deferred charges
(5,445
)
 
(3,283
)
Net proceeds from issuance of common stock
(20
)
 
(67
)
Net proceeds from stock options exercised
6,699

 
1,222

Payments related to tax withholding for share-based compensation
(3,495
)
 
(11
)
Distributions to noncontrolling interest
(6,978
)
 
(5,926
)
Redemption of noncontrolling interest
(12,213
)
 

Redemption of redeemable noncontrolling interest
(73
)
 

Common and preferred stock dividends paid
(122,525
)
 
(115,603
)

6


 
Three Months Ended March 31,
 
2019
 
2018
Net cash used in financing activities
(63,780
)
 
(91,417
)
Net increase (decrease) in unrestricted and restricted cash and cash equivalents
(27,269
)
 
77,952

Unrestricted and restricted cash and cash equivalents at beginning of period
151,395

 
61,126

Unrestricted and restricted cash and cash equivalents at end of period
$
124,126

 
$
139,078

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest (net of $5.9 million and $4.2 million capitalized in 2019 and 2018, respectively)
$
41,914

 
$
40,306

Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Operating cash flows from operating leases
$
1,694

 
$

Supplemental disclosure of noncash investing and financing activities:
 

 
 

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

 
$
1

Transfer from real estate under development to co-investments
$
313

 
$
365

Reclassifications to redeemable noncontrolling interest from additional paid in capital and noncontrolling interest
$
1,767

 
$
1,953

Initial recognition of operating lease right-of-use assets
$
77,645

 
$

Initial recognition of operating lease liabilities
$
79,693

 
$


See accompanying notes to the unaudited condensed consolidated financial statements.


7


ESSEX PORTFOLIO, L.P.  AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except parenthetical and unit amounts)
ASSETS
March 31, 2019
 
December 31, 2018
Real estate:
 
 
 
Rental properties:
 
 
 
Land and land improvements
$
2,727,878

 
$
2,701,356

Buildings and improvements
10,844,322

 
10,664,745

 
13,572,200

 
13,366,101

Less: accumulated depreciation
(3,329,743
)
 
(3,209,548
)
 
10,242,457

 
10,156,553

Real estate under development
497,794

 
454,629

Co-investments
1,307,561

 
1,300,140

 
12,047,812

 
11,911,322

Cash and cash equivalents-unrestricted
107,034

 
134,465

Cash and cash equivalents-restricted
17,092

 
16,930

Marketable securities
211,030

 
209,545

Notes and other receivables (includes related party receivables of $10.5 million and $11.1 million as of March 31, 2019 and December 31, 2018, respectively)
71,154

 
71,895

Operating lease right-of-use assets
76,996

 

Prepaid expenses and other assets
46,883

 
39,439

Total assets
$
12,578,001


$
12,383,596

 
 
 
 
LIABILITIES AND CAPITAL
 

 
 

Unsecured debt, net
$
4,293,973

 
$
3,799,316

Mortgage notes payable, net
1,441,828

 
1,806,626

Lines of credit

 

Accounts payable and accrued liabilities
180,571

 
127,086

Construction payable
60,087

 
59,345

Distributions payable
134,339

 
128,529

Operating lease liabilities
79,010

 

Other liabilities
33,829

 
33,375

Total liabilities
6,223,637


5,954,277

Commitments and contingencies


 


Redeemable noncontrolling interest
37,169

 
35,475

Capital:
 

 
 

General Partner:
 
 
 
Common equity (65,715,783 and 65,890,322 units issued and outstanding, respectively)
6,206,074

 
6,280,290

 
6,206,074


6,280,290

Limited Partners:
 
 
 
Common equity (2,299,379 and 2,305,389 units issued and outstanding, respectively)
58,667

 
59,061

    Accumulated other comprehensive loss
(11,394
)
 
(9,738
)
Total partners' capital
6,253,347


6,329,613

Noncontrolling interest
63,848

 
64,231

Total capital
6,317,195


6,393,844

Total liabilities and capital
$
12,578,001


$
12,383,596


See accompanying notes to the unaudited condensed consolidated financial statements.

8


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,
 
2019
 
2018
Revenues:
 
 
 
Rental and other property
$
353,888

 
$
344,947

Management and other fees from affiliates
2,335

 
2,308

 
356,223

 
347,255

Expenses:
 

 
 

Property operating, excluding real estate taxes
58,898

 
57,250

Real estate taxes
39,418

 
37,713

Corporate-level property management expenses
8,153

 
7,770

Depreciation and amortization
120,568

 
119,105

General and administrative
13,459

 
14,813

Expensed acquisition and investment related costs
32

 
57

 
240,528

 
236,708

Earnings from operations
115,695

 
110,547

Interest expense
(53,643
)
 
(54,861
)
Total return swap income
2,045

 
2,270

Interest and other income
12,261

 
5,909

Equity income from co-investments
16,276

 
32,774

Gain on early retirement of debt, net
1,336

 

Gain on remeasurement of co-investment
31,535

 

Net income
125,505

 
96,639

Net income attributable to noncontrolling interest
(2,476
)
 
(2,589
)
Net income available to common unitholders
$
123,029

 
$
94,050

Comprehensive income
$
123,668

 
$
102,815

Comprehensive income attributable to noncontrolling interest
(2,476
)
 
(2,589
)
Comprehensive income attributable to controlling interest
$
121,192

 
$
100,226

Per unit data:
 

 
 

Basic:
 

 
 

Net income available to common unitholders
$
1.81

 
$
1.38

Weighted average number of common units outstanding during the period
68,007,852

 
68,317,435

Diluted:
 
 
 
Net income available to common unitholders
$
1.81

 
$
1.38

Weighted average number of common units outstanding during the period
68,088,933

 
68,355,930


See accompanying notes to the unaudited condensed consolidated financial statements.

9


ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Condensed Consolidated Statement of Capital for the three months ended March 31, 2019 and 2018
(Unaudited)
(In thousands)
 
General Partner
 
Limited Partners
 
Accumulated other comprehensive loss
 
 
 
 
 
Common Equity
 
Common Equity
 
 
Noncontrolling Interest
 
 
 
Units
 
Amount
 
Units
 
Amount
 
 
 
Total
Balances at December 31, 2018
65,890

 
$
6,280,290

 
2,305

 
$
59,061

 
$
(9,738
)
 
$
64,231

 
$
6,393,844

Net income

 
118,858

 

 
4,171

 

 
2,476

 
125,505

Reversal of unrealized losses upon the sale of marketable debt securities

 

 

 

 
33

 

 
33

Change in fair value of derivatives and amortization of swap settlements

 

 

 

 
(1,993
)
 

 
(1,993
)
Change in fair value of marketable debt securities, net

 

 

 

 
123

 

 
123

Issuance of common units under:
 

 
 

 
 

 
 

 
 

 
 

 
 

General partner's stock based compensation, net
51

 
3,204

 

 

 

 

 
3,204

Sale of common stock by general partner, net

 
(20
)
 

 

 

 

 
(20
)
Equity based compensation costs

 
2,301

 
3

 
299

 

 

 
2,600

Retirement of common units, net
(234
)
 
(56,989
)
 

 

 

 

 
(56,989
)
Cumulative effect upon adoption of ASU No. 2017-12

 

 

 

 
181

 

 
181

Changes in redemption value of redeemable noncontrolling interest

 
(3,027
)
 

 
(2
)
 

 
1,262

 
(1,767
)
Distributions to noncontrolling interest

 

 

 

 

 
(2,667
)
 
(2,667
)
Redemptions
9

 
(10,394
)
 
(9
)
 
(365
)
 

 
(1,454
)
 
(12,213
)
Distributions declared ($1.95 per unit)

 
(128,149
)
 

 
(4,497
)
 

 

 
(132,646
)
Balances at March 31, 2019
65,716

 
$
6,206,074

 
2,299

 
$
58,667

 
$
(11,394
)
 
$
63,848

 
$
6,317,195



10


 
General Partner
 
Limited Partners
 
Accumulated other comprehensive loss
 
 
 
 
 
Common Equity
 
Common Equity
 
 
Noncontrolling Interest
 
 
 
Units
 
Amount
 
Units
 
Amount
 
 
 
Total
Balances at December 31, 2017
66,054

 
$
6,295,852

 
2,268

 
$
49,792

 
$
(15,229
)
 
$
66,410

 
$
6,396,825

Net income

 
90,918

 

 
3,132

 

 
2,589

 
96,639

Reversal of unrealized gains upon the sale of marketable debt securities

 

 

 

 
(1
)
 

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

 

 

 

 
6,254

 

 
6,254

Change in fair value of marketable debt securities, net

 

 

 

 
(77
)
 

 
(77
)
Issuance of common units under:
 

 
 

 
 

 
 

 
 

 
 

 
 

General partner's stock based compensation, net
7

 
1,222

 

 

 

 

 
1,222

Sale of common stock by general partner, net

 
(67
)
 

 

 

 

 
(67
)
Equity based compensation costs

 
2,253

 
5

 
277

 

 

 
2,530

Retirement of common units, net
(17
)
 
(3,774
)
 

 

 

 

 
(3,774
)
Cumulative effect upon adoption of ASU No. 2016-01

 
2,234

 

 
(6
)
 
(2,228
)
 

 

Cumulative effect upon adoption of ASU No. 2017-05

 
119,651

 

 
4,057

 

 

 
123,708

Changes in redemption value of redeemable noncontrolling interest

 
(1,957
)
 

 
4

 

 

 
(1,953
)
Distributions to noncontrolling interest

 

 

 

 

 
(2,044
)
 
(2,044
)
Distributions declared ($1.86 per unit)

 
(122,850
)
 

 
(4,253
)
 

 

 
(127,103
)
Balances at March 31, 2018
66,044

 
$
6,383,482

 
2,273

 
$
53,003

 
$
(11,281
)
 
$
66,955

 
$
6,492,159



See accompanying notes to the unaudited condensed consolidated financial statements.

11


ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands, except parenthetical amounts)
 
Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
125,505

 
$
96,639

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

 
 

Depreciation and amortization
120,568

 
119,105

Amortization of discount on marketable securities
(5,311
)
 
(4,157
)
Amortization of discount (premium) and debt financing costs, net
529

 
(664
)
Loss (gain) on sale of marketable securities
58

 
(680
)
Unrealized (gain) loss on equity securities recognized through income
(4,510
)
 
876

Earnings from co-investments
(16,276
)
 
(32,774
)
Operating distributions from co-investments
17,804

 
40,437

Accrued interest from notes and other receivables
(1,424
)
 
(1,294
)
Equity-based compensation
2,068

 
2,090

(Gain) Loss on early retirement of debt
(1,336
)
 

Gain on remeasurement of co-investment
(31,535
)
 

Changes in operating assets and liabilities:
 

 
 

Prepaid expenses, receivables, operating lease right-of-use assets, and other assets
(4,730
)
 
(3,716
)
Accounts payable, accrued liabilities, and operating lease liabilities
53,895

 
52,151

Other liabilities
454

 
345

Net cash provided by operating activities
255,759

 
268,358

Cash flows from investing activities:
 

 
 

Additions to real estate:
 

 
 

Acquisitions of real estate and acquisition related capital expenditures
(44,984
)
 
(2,873
)
Redevelopment
(14,157
)
 
(15,893
)
Development acquisitions of and additions to real estate under development
(39,306
)
 
(38,203
)
Capital expenditures on rental properties
(17,075
)
 
(14,947
)
Collections of notes receivable
2,500

 
29,500

Proceeds from insurance for property losses
1,583

 
565

Contributions to co-investments
(126,248
)
 
(56,020
)
Changes in refundable deposits
5

 
410

Purchases of marketable securities
(8,413
)
 
(13,437
)
Sales and maturities of marketable securities
16,847

 
9,579

Non-operating distributions from co-investments
10,000

 
2,330

Net cash used in investing activities
(219,248
)
 
(98,989
)
Cash flows from financing activities:
 

 
 

Proceeds from unsecured debt and mortgage notes
498,234

 
298,773

Payments on unsecured debt and mortgage notes
(360,975
)
 
(83,748
)
Proceeds from lines of credit
567,029

 
256,832

Repayments of lines of credit
(567,029
)
 
(435,832
)
Retirement of common units
(56,989
)
 
(3,774
)
Additions to deferred charges
(5,445
)
 
(3,283
)
Net proceeds from issuance of common units
(20
)
 
(67
)
Net proceeds from stock options exercised
6,699

 
1,222

Payments related to tax withholding for share-based compensation
(3,495
)
 
(11
)
Distributions to noncontrolling interest
(1,959
)
 
(2,267
)
Redemption of noncontrolling interests
(12,213
)
 

Redemption of redeemable noncontrolling interests
(73
)
 

Common and preferred units and preferred interest distributions paid
(127,544
)
 
(119,262
)

12


 
Three Months Ended March 31,
 
2019
 
2018
Net cash used in financing activities
(63,780
)
 
(91,417
)
Net increase (decrease) in unrestricted and restricted cash and cash equivalents
(27,269
)
 
77,952

Unrestricted and restricted cash and cash equivalents at beginning of period
151,395

 
61,126

Unrestricted and restricted cash and cash equivalents at end of period
$
124,126

 
$
139,078

  
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest (net of $5.9 million and $4.2 million capitalized in 2019 and 2018, respectively)
$
41,914

 
$
40,306

Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Operating cash flows from operating leases
$
1,694

 
$

Supplemental disclosure of noncash investing and financing activities:
 

 
 

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

 
$
1

Transfer from real estate under development to co-investments
$
313

 
$
365

Reclassifications to redeemable noncontrolling interest from general and limited partner capital and noncontrolling interest
$
1,767

 
$
1,953

Initial recognition of operating lease right-of-use assets
$
77,645

 
$

Initial recognition of operating lease liabilities
$
79,693

 
$


See accompanying notes to the unaudited condensed consolidated financial statements.

13


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2019 and 2018
(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, 2018.

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, 2019 and 2018 include the accounts of the Company and the Operating Partnership. Essex is the sole general partner of the Operating Partnership, with a 96.6% general partnership interest as of both March 31, 2019 and December 31, 2018. Total Operating Partnership limited partnership units ("OP Units," and the holders of such OP Units, "Unitholders") outstanding were 2,299,379 and 2,305,389 as of March 31, 2019 and December 31, 2018, respectively, and the redemption value of the units, based on the closing price of the Company’s common stock totaled approximately $665.1 million and $565.3 million as of March 31, 2019 and December 31, 2018, respectively.

As of March 31, 2019, the Company owned or had ownership interests in 245 operating apartment communities, aggregating 59,662 apartment homes, excluding the Company’s ownership interest in preferred interest co-investments, loan investments, one operating commercial building, and six active developments. The operating apartment 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.

Accounting Pronouncements Adopted in the Current Year

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02 (Topic 842) "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 are to be accounted for similar to prior leasing guidance (Topic 840) for operating leases. For lessors, accounting for leases under the new standard is substantially the same as prior leasing 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. In July 2018, the FASB issued ASU No. 2018-11 "Leases (Topic 842): Targeted Improvements," which includes a practical expedient that allows lessors to not separate nonlease components from the associated lease component. This provides the Company with the option of not bifurcating certain common area maintenance recoveries as a non-lease component, if certain requirements are met. The Company adopted ASU No. 2016-02 and ASU No. 2018-11 as of January 1, 2019 using the modified retrospective approach and elected a package of practical expedients. There was no adjustment to the opening balance of retained earnings as a result of the adoption. See Note 11, Lease Agreements - Company as Lessor, and Note 12, Lease Agreements - Company as Lessee, for further details.

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. The Company adopted ASU No. 2017-12 as of January 1, 2019, using the modified retrospective method by applying a cumulative effect adjustment to accumulated other comprehensive loss, net of $0.2 million, representing accumulated net hedge ineffectiveness. Furthermore, as a result of the adoption of this standard, the Company will recognize qualifying hedge ineffectiveness through accumulated other comprehensive income as opposed to current earnings.



14


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2019 and 2018
(Unaudited)

Recent Accounting Pronouncements

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 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 2018, the FASB issued ASU No. 2018-13 "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement," which eliminates certain disclosure requirements affecting all levels of measurements, and modifies and adds new disclosure requirements for Level 3 measurements. The new standard will be effective for the Company beginning January 1, 2020 and early adoption is permitted. The Company expects to apply the new standard on January 1, 2020 and does not expect the adoption to have a material impact on the Company's consolidated results of operations of financial position.

Marketable Securities

The Company reports its equity securities and available for sale debt 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). As of March 31, 2019 and December 31, 2018, $6.8 million and $6.7 million, respectively, of equity securities presented within common stock and stock funds in the tables below, represent investments measured at fair value, using net asset value as a practical expedient, and are not categorized in the fair value hierarchy.

Any unrealized gain or loss in debt securities classified as available for sale is recorded as other comprehensive income. Unrealized gains and losses in equity securities, realized gains and losses in debt securities, 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, 2019 and December 31, 2018, equity securities and debt securities consisted primarily of investment-grade unsecured bonds, U.S. treasury securities, common stock and stock funds, and investments in mortgage backed securities. As of March 31, 2019 and December 31, 2018, 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.


















15


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2019 and 2018
(Unaudited)

As of March 31, 2019 and December 31, 2018, marketable securities consist of the following ($ in thousands):
 
March 31, 2019
 
Amortized
Cost/Cost
 
Gross
Unrealized
Gain (Loss)
 
Carrying Value
Equity securities:
 
 
 
 
 
Investment funds - debt securities
$
21,083

 
$
45

 
$
21,128

Common stock and stock funds
41,997

 
2,226

 
44,223

 
 
 
 
 
 
Debt securities:
 
 
 
 
 
Available for sale
 
 
 
 
 
U.S. treasury securities
9,022

 
(25
)
 
8,997

Investment-grade unsecured bonds
4,152

 
5

 
4,157

Held to maturity
 
 
 

 
 

Mortgage backed securities
132,525

 

 
132,525

Total - Marketable securities
$
208,779

 
$
2,251

 
$
211,030


 
December 31, 2018
 
Amortized
Cost/Cost
 
Gross
Unrealized
Gain (Loss)
 
Carrying Value
Equity securities:
 
 
 
 
 
Investment funds - debt securities
$
31,934

 
$
(568
)
 
$
31,366

Common stock and stock funds
39,731

 
(1,671
)
 
38,060

 
 
 
 
 


Debt securities:
 
 
 
 
 
Available for sale
 
 
 
 
 
U.S. treasury securities
8,983

 
(31
)
 
8,952

Investment-grade unsecured bonds
4,125

 
(145
)
 
3,980

Held to maturity
 

 
 

 
 

Mortgage backed securities
127,187

 

 
127,187

Total - Marketable securities
$
211,960

 
$
(2,415
)
 
$
209,545


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

For the three months ended March 31, 2019 and 2018, the proceeds from sales and maturities of marketable securities totaled $16.8 million and $9.6 million, respectively, which resulted in $0.1 million in realized losses and $0.7 million in realized gains, respectively.

For the three months ended March 31, 2019, the portion of equity security unrealized gains that was recognized in income totaled $4.5 million and was included in interest and other income on the Company's condensed consolidated statements of income and comprehensive income.





16


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2019 and 2018
(Unaudited)

Variable Interest Entities

In accordance with accounting standards for consolidation of variable interest entities ("VIEs"), the Company consolidates the Operating Partnership, 16 limited partnerships (comprising eight communities), and eight co-investments as of March 31, 2019. The Company consolidates these entities because it is deemed the primary beneficiary. Essex has no assets or liabilities other than its investment in the Operating Partnership. The consolidated total assets and liabilities related to the eight consolidated co-investments and 16 DownREIT limited partnerships, net of intercompany eliminations, were approximately $876.2 million and $268.5 million, respectively, as of March 31, 2019 and $849.8 million and $261.7 million, respectively, as of December 31, 2018. Noncontrolling interests in these entities were $64.1 million and $64.5 million as of March 31, 2019 and December 31, 2018, respectively. The Company's financial risk in each VIE is limited to its equity investment in the VIE. As of March 31, 2019 and December 31, 2018, the Company did not have any VIEs of which it was not deemed to be the primary beneficiary.

Equity-based Compensation

The cost of share- and unit-based compensation awards is measured at the grant date based on the estimated fair value of the awards. The estimated fair value of stock options and restricted stock granted by the Company are being amortized over the vesting period. The estimated grant date fair values of the long term incentive plan units (discussed in Note 13, "Equity Based Compensation Plans," in the Company’s annual report on Form 10-K for the year ended December 31, 2018) 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, 2019 and December 31, 2018, 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 fixed rate debt with a carrying value of $5.1 billion and $5.0 billion at March 31, 2019 and December 31, 2018, respectively, was approximately $5.2 billion and $5.0 billion, respectively. Management has estimated that the fair value of the Company’s $619.5 million and $619.6 million of variable rate debt, at March 31, 2019 and December 31, 2018, respectively, was approximately $615.0 million and $615.2 million 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, 2019 and December 31, 2018 due to the short-term maturity of these instruments. Marketable securities, except mortgage backed securities, are carried at fair value as of March 31, 2019 and December 31, 2018.

At March 31, 2019, the Company’s investments in mortgage backed securities had a carrying value of $132.5 million and the Company estimated the fair value to be approximately $135.6 million. At December 31, 2018, the Company’s investments in mortgage backed securities had a carrying value of $127.2 million and the Company estimated the fair value to be approximately $129.5 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 the expected, discounted cash flows to estimate 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 $4.8 million and $5.0 million during the three months ended March 31, 2019 and 2018, 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 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

17


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2019 and 2018
(Unaudited)

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 consolidated statement of income equal to the amount by which the fair value of the co-investment interest in 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.

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. 

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/(losses) on
available for sale securities
 
Total
Balance at December 31, 2018
$
(13,077
)
 
$
(140
)
 
$
(13,217
)
Cumulative effect upon adoption of ASU No. 2017-12
175

 

 
175

Other comprehensive income (loss) before reclassification
(27
)
 
119

 
92

Amounts reclassified from accumulated other comprehensive loss
(1,899
)
 
32

 
(1,867
)
Other comprehensive income
(1,751
)
 
151

 
(1,600
)
Balance at March 31, 2019
$
(14,828
)
 
$
11

 
$
(14,817
)

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/(losses) on
available for sale securities
 
Total
Balance at December 31, 2018
$
(9,593
)
 
$
(145
)
 
$
(9,738
)
Cumulative effect upon adoption of ASU No. 2017-12
181

 

 
181

Other comprehensive income (loss) before reclassification
(28
)
 
123

 
95

Amounts reclassified from accumulated other comprehensive loss
(1,965
)
 
33

 
(1,932
)
Other comprehensive income
(1,812
)
 
156

 
(1,656
)
Balance at March 31, 2019
$
(11,405
)
 
$
11

 
$
(11,394
)

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


18


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2019 and 2018
(Unaudited)

Redeemable Noncontrolling Interest

The carrying value of redeemable noncontrolling interest in the accompanying condensed consolidated balance sheets was $37.2 million and $35.5 million as of March 31, 2019 and December 31, 2018, respectively. The limited partners may redeem their noncontrolling interests for cash in certain circumstances.

The changes to the redemption value of redeemable noncontrolling interests for the three months ended March 31, 2019 is as follows ($ in thousands):
Balance at December 31, 2018
$
35,475

Reclassification due to change in redemption value and other
1,767

Redemptions
(73
)
Balance at March 31, 2019
$
37,169


Cash, Cash Equivalents and Restricted Cash

Highly liquid investments with original maturities of three months or less when purchased are classified as cash equivalents. Restricted cash balances relate primarily to reserve requirements for capital replacement at certain communities in connection with the Company’s mortgage debt.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows ($ in thousands):
 
March 31, 2019
 
December 31, 2018
 
March 31, 2018
 
December 31, 2017
Cash and cash equivalents - unrestricted
$
107,034

 
$
134,465

 
$
121,954

 
$
44,620

Cash and cash equivalents - restricted
17,092

 
16,930

 
17,124

 
16,506

Total unrestricted and restricted cash and cash equivalents shown in the condensed consolidated statement of cash flows
$
124,126

 
$
151,395

 
$
139,078

 
$
61,126


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 Three Months Ended March 31, 2019 and Subsequent Events

Significant Transactions

Acquisitions

In March 2019, the Company acquired its joint venture partner’s 45.0% membership interest in One South Market, a multifamily community located in San Jose, CA, for total consideration of $80.6 million. Concurrent with the closing of the acquisition, $86.0 million in mortgage debt was repaid. As a result of this acquisition, the Company realized a gain on remeasurement of co-investment of $31.5 million upon consolidation. Furthermore, the Company recognized $0.8 million in

19


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2019 and 2018
(Unaudited)

promote income as a result of the transaction, which is included in equity income from co-investments on the condensed consolidated statements of income and comprehensive income.

Co-Investments

Preferred Equity Investments

In March 2019, the Company made a commitment to fund a $36.0 million preferred equity commitment in a multifamily development community located in Irvine, CA. The investment has an initial preferred return of 10.15% and is scheduled to mature in July 2022. As of March 31, 2019, the Company had not funded any of this commitment.

In February 2019, the Company funded a $24.5 million related party preferred equity investment in a multifamily development community located in Mountain View, CA. The investment has an initial preferred return of 11.0% and is scheduled to mature in February 2024. See Note 6, Related Party Transactions, for additional details.

In February 2019, the Company received cash of $10.9 million, including an early redemption fee of $0.1 million, for the full redemption of a related party preferred equity investment in a joint venture that holds property in San Jose, CA. See Note 6, Related Party Transactions, for additional details.

Common Stock

In January 2019, the Company repurchased and retired 234,061 shares totaling $57.0 million, including commissions. In February 2019, the board of directors approved the replenishment of the stock repurchase plan such that, as of such date, the Company had $250.0 million of purchase authority remaining under the replenished plan. As a result of the replenishment, as of March 31, 2019, the Company had $250.0 million of purchase authority remaining under the stock repurchase plan.

Senior Unsecured Debt

In February 2019, the Operating Partnership issued $350.0 million of senior unsecured notes due on March 1, 2029, with a coupon rate of 4.000% (the "2029 Notes"), which are payable on March 1 and September 1 of each year, beginning on September 1, 2019. The 2029 Notes were offered to investors at a price of 99.188% of the principal amount thereof. The 2029 Notes are general unsecured senior obligations of the Operating Partnership, rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership and are unconditionally guaranteed by the Company. In March 2019, the Operating Partnership issued an additional $150.0 million of the 2029 Notes at a price of 100.717% of the principal amount thereof. These additional notes have substantially identical terms as the 2029 Notes issued in February 2019. The Company used the net proceeds of these offerings to repay indebtedness under its unsecured lines of credit and for other general corporate and working capital purposes.

Mortgage Notes Payable

In January 2019, the Company repaid $290.0 million in secured mortgage notes payable with a coupon rate of 5.57% and a stated maturity date of May 2019. The Company realized a gain on early extinguishment of debt of $1.4 million.

Subsequent Event

In April 2019, the Company received cash of $16.3 million for the full redemption of a preferred equity investment in a joint venture that holds property in Santa Ana, CA.







20


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2019 and 2018
(Unaudited)

(3)  Revenues

Disaggregated Revenue

The following table presents the Company’s revenues disaggregated by revenue source ($ in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Rental income (1)
$
347,805

 
$
339,015

Other property (1)
6,083

 
5,932

Management and other fees from affiliates
2,335

 
2,308

Total revenues
$
356,223

 
$
347,255


(1) On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases.” As a result of this adoption certain amounts previously classified as other property revenue have been reclassified to rental income. Prior period amounts have been adjusted to conform to the current period’s presentation.

The following table presents the Company’s rental and other property-related revenues disaggregated by geographic operating segment ($ in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Southern California
$
151,024

 
$
146,558

Northern California
136,325

 
128,622

Seattle Metro
60,240

 
58,713

Other real estate assets (1)
6,299

 
11,054

Total rental and other property revenues
$
353,888

 
$
344,947


(1) Other real estate assets consists of revenues generated from retail space, commercial properties, held for sale properties, and disposition properties. Executive management does not evaluate such operating performance geographically.

The following table presents the Company’s rental and other property-related revenues disaggregated by current property category status ($ in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Same-property (1)
$
337,352

 
$
327,267

Acquisitions (2)
2,271

 

Development (3)
1,133

 
19

Redevelopment
5,212

 
5,024

Non-residential/other, net (4)
7,920

 
12,637

Total rental and other property revenues
$
353,888

 
$
344,947


(1) Stabilized properties consolidated by the Company for the three months ended March 31, 2019 and 2018. A community is generally considered to have reached stabilized operations once it achieves an initial occupancy of 95%.
(2) Acquisitions includes properties acquired which did not have comparable stabilized results as of January 1, 2018.
(3) Development includes properties developed which did not have stabilized results as of January 1, 2018.
(4) Non-residential/other, net consists of revenues generated from retail space, commercial properties, held for sale properties, disposition properties and student housing.


21


ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2019 and 2018
(Unaudited)


Deferred Revenues and Remaining Performance Obligations

When cash payments are received or due in advance of the Company’s performance of contracts with customers, deferred revenue is recorded. The total deferred revenue balance related to such contracts was $5.5 million and $6.2 million as of March 31, 2019 and December 31, 2018, respectively, and was included in accounts payable and accrued liabilities within the accompanying consolidated balance sheets. The amount of revenue recognized for the three months ended March 31, 2019 that was included in the December 31, 2018 deferred revenue balance was $0.7 million, which was included in interest and other income within the condensed consolidated statements of income and comprehensive income.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in the revenue recognition accounting standard. As of March 31, 2019, the Company had $5.5 million of remaining performance obligations. The Company expects to recognize approximately 29% of these remaining performance obligations in 2019, an additional 27% through 2021, and the remaining balance thereafter.

(4) 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. In addition to the Company's joint ventures with BEXAEW, BEX II, and BEX III, the Company has joint venture investments with the Canadian Pension Plan Investment Board ("CPPIB"), Wesco I, LLC ("Wesco I"), Wesco III, LLC ("Wesco III"), Wesco IV, LLC ("Wesco IV"), and Wesco V, LLC ("Wesco V"). The carrying values of the Company's co-investments as of March 31, 2019 and December 31, 2018<