UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


 
FORM 10-Q
 

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

For the quarterly period ended March 31, 2014

OR

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

For the transition period from ________to _________

Commission file number 001-13106

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

(650) 494-3700
(Registrant's Telephone Number, Including Area Code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days.

Essex Property Trust, Inc.    Yes x   No o
Essex Portfolio, L.P.     Yes x   No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Essex Property Trust, Inc.    Yes x   No o
Essex Portfolio, L.P.     Yes x   No o

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


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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Essex Property Trust, Inc.    Yes o   No x
Essex Portfolio, L.P.     Yes o   No x

 APPLICABLE ONLY TO CORPORATE ISSUERS:
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:  62,513,605 shares of Common Stock ($0.0001 par value) of Essex Property Trust, Inc. were outstanding as of May 8, 2014.
ii

EXPLANATORY NOTE

This report combines the reports on Form 10-Q for the quarterly period ended March 31, 2014 of Essex Property Trust, Inc. and Essex Portfolio, L.P. Unless stated otherwise or the context otherwise requires, references to “Essex” mean Essex Property Trust, Inc., a Maryland corporation that operates as a self-administered and self-managed real estate investment trust (“REIT ”), and references to “EPLP” mean Essex Portfolio, L.P. (the “Operating Partnership” ). References to the “Company,” “we,” “us” or “our” mean collectively Essex, EPLP and those entities/subsidiaries owned or controlled by Essex and/or EPLP.  References to the “Operating Partnership” mean collectively EPLP and those entities/subsidiaries owned or controlled by EPLP.

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

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

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

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

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

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

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

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

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

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

The information furnished in the accompanying unaudited condensed consolidated balance sheets, statements of operations 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, 2013.
iv

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

 
 
Page No.
PART I. FINANCIAL INFORMATION
 
 
Item 1.
Condensed Financial Statements of Essex Property Trust, Inc. (Unaudited)
 
 
 
 
 
2
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
 
 
Condensed Financial Statements of Essex Portfolio L.P. (Unaudited)
 
 
7
 
 
8
 
 
9
 
 
10
 
 
12
 
Item 2.
25
 
 
 
Item 3.
34
 
 
 
Item 4.
35
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
Item 1.
36
 
 
 
Item 1A.
36
 
 
 
Item 2.
36
 
 
 
Item 6.
37
 
 
 
39

1

Part I – Financial Information

Item 1. Condensed Financial Statements

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands, except share amounts)

 
 
March 31,
   
December 31,
 
Assets
 
2014
   
2013
 
Real estate:
 
   
 
Rental properties:
 
   
 
Land and land improvements
 
$
1,354,748
   
$
1,083,552
 
Buildings and improvements
   
5,286,033
     
4,360,205
 
 
               
 
   
6,640,781
     
5,443,757
 
Less accumulated depreciation
   
(1,300,793
)
   
(1,254,886
)
 
               
 
   
5,339,988
     
4,188,871
 
Real estate under development
   
308,266
     
50,430
 
Co-investments
   
716,443
     
677,133
 
 
               
 
   
6,364,697
     
4,916,434
 
Cash and cash equivalents-unrestricted
   
19,918
     
18,491
 
Cash and cash equivalents-restricted
   
28,753
     
35,275
 
Marketable securities
   
100,348
     
90,084
 
Notes and other receivables
   
36,105
     
68,255
 
Prepaid expenses and other assets
   
54,024
     
33,781
 
Deferred charges, net
   
29,197
     
24,519
 
 
               
Total assets
 
$
6,633,042
   
$
5,186,839
 
 
               
Liabilities and  Equity
               
Mortgage notes payable
 
$
1,408,232
   
$
1,404,080
 
Unsecured debt
   
1,410,162
     
1,410,023
 
Lines of credit
   
135,903
     
219,421
 
Accounts payable and accrued liabilities
   
83,470
     
67,183
 
Construction payable
   
7,671
     
8,047
 
Dividends payable
   
1,461
     
50,627
 
Derivative liabilities
   
2,109
     
2,682
 
Other liabilities
   
22,281
     
22,189
 
 
               
Total liabilities
   
3,071,289
     
3,184,252
 
Commitments and contingencies
               
Cumulative convertible Series G preferred stock
   
4,349
     
4,349
 
Equity:
               
Cumulative redeemable Series H preferred stock at liquidation value
   
73,750
     
73,750
 
Common stock, $.0001 par value, 656,020,000 shares authorized 38,392,134 and 37,421,219 shares issued and outstanding
   
4
     
4
 
Additional paid-in capital
   
2,505,003
     
2,345,763
 
Distributions in excess of accumulated earnings
   
(498,368
)
   
(474,426
)
Accumulated other comprehensive loss, net
   
(56,395
)
   
(60,472
)
 
               
Total stockholders' equity
   
2,023,994
     
1,884,619
 
Noncontrolling interest
   
1,533,410
     
113,619
 
 
               
Total equity
   
3,557,404
     
1,998,238
 
 
               
Total liabilities and equity
 
$
6,633,042
   
$
5,186,839
 

See accompanying notes to the unaudited condensed consolidated financial statements.
2

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

 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2014
   
2013
 
Revenues:
 
   
 
Rental and other property
 
$
159,017
   
$
145,057
 
Management and other fees
   
2,628
     
2,948
 
 
   
161,645
     
148,005
 
Expenses:
               
Property operating, excluding real estate taxes
   
36,634
     
32,253
 
Real estate taxes
   
15,339
     
14,073
 
Depreciation
   
50,312
     
46,787
 
General and administrative
   
7,075
     
6,239
 
Merger expenses
   
16,059
     
-
 
Cost of management and other fees
   
1,477
     
1,701
 
Acquisition and dispositions costs
   
975
     
387
 
 
   
127,871
     
101,440
 
 
               
Earnings from operations
   
33,774
     
46,565
 
 
               
Interest expense before amortization
   
(26,055
)
   
(25,211
)
Amortization expense
   
(2,986
)
   
(2,930
)
Interest and other income
   
2,879
     
5,023
 
Equity income in co-investments
   
10,526
     
4,211
 
Gains on sale of real estate and land
   
8,268
     
1,503
 
Income from continuing operations
   
26,406
     
29,161
 
Income from discontinued operations
   
-
     
542
 
Net income
   
26,406
     
29,703
 
Net income attributable to noncontrolling interest
   
(3,126
)
   
(3,132
)
Net income attributable to controlling interest
   
23,280
     
26,571
 
Dividends to preferred stockholders
   
(1,368
)
   
(1,368
)
Net income available to common stockholders
 
$
21,912
   
$
25,203
 
 
               
Comprehensive income
 
$
30,729
   
$
30,739
 
Comprehensive income attributable to noncontrolling interest
   
(3,372
)
   
(3,187
)
Comprehensive income attributable to controlling interest
 
$
27,357
   
$
27,552
 
 
               
Per common share data:
               
Basic:
               
Income from continuing operations
 
$
0.58
   
$
0.67
 
Income from discontinued operations
   
-
     
0.01
 
Net income available to common stockholders
 
$
0.58
   
$
0.68
 
Weighted average number of common shares outstanding during the period
   
37,685,073
     
37,003,925
 
 
               
Diluted:
               
Income from continuing operations
 
$
0.58
   
$
0.67
 
Income from discontinued operations
   
-
     
0.01
 
Net income available to common stockholders
 
$
0.58
   
$
0.68
 
Weighted average number of common shares outstanding during the period
   
37,931,454
     
37,092,062
 
 
               
Dividend per common share
 
$
1.21
   
$
1.21
 
 
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, 2014
(Unaudited)
(Dollars and shares in thousands)
 
 
 
 
   
   
   
   
   
Distributions
   
Accumulated
   
   
 
 
 
Series H
   
   
   
Additional
   
in excess of
   
other
   
   
 
 
 
Preferred stock
   
Common stock
   
paid-in
   
accumulated
   
comprehensive
   
Noncontrolling
   
 
 
 
Shares
   
Amount
   
Shares
   
Amount
   
capital
   
earnings
   
loss, net
   
Interest
   
Total
 
Balances at December 31, 2013
   
2,950
   
$
73,750
     
37,421
   
$
4
   
$
2,345,763
   
$
(474,426
)
 
$
(60,472
)
 
$
113,619
   
$
1,998,238
 
Net income
   
-
     
-
     
-
     
-
     
-
     
23,280
     
-
     
3,126
     
26,406
 
Reversal of unrealized gains upon the sale of marketable securities
   
-
     
-
     
-
     
-
     
-
     
-
     
(402
)
   
(25
)
   
(427
)
Change in fair value of derivatives and amortization of swap settlements
   
-
     
-
     
-
     
-
     
-
     
-
     
2,565
     
155
     
2,720
 
Change in fair value of marketable securities
   
-
     
-
     
-
     
-
     
-
     
-
     
1,914
     
116
     
2,030
 
Issuance of common stock under:
                                                                       
Stock option and restricted stock plans
   
-
     
-
     
13
     
-
     
1,769
     
-
     
-
     
-
     
1,769
 
Equity distribution agreements
   
-
     
-
     
958
     
-
     
157,596
     
-
     
-
     
-
     
157,596
 
Equity based compensation costs
   
-
     
-
     
-
     
-
     
(125
)
   
-
     
-
     
673
     
548
 
Contributions from noncontrolling interest
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
1,419,816
     
1,419,816
 
Distributions to noncontrolling interest
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(3,969
)
   
(3,969
)
Redemptions of noncontrolling interest
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(101
)
   
(101
)
Common and preferred stock dividends
   
-
     
-
     
-
     
-
     
-
     
(47,222
)
   
-
     
-
     
(47,222
)
Balances at March 31, 2014
   
2,950
   
$
73,750
     
38,392
   
$
4
   
$
2,505,003
   
$
(498,368
)
 
$
(56,395
)
 
$
1,533,410
   
$
3,557,404
 
 
See accompanying notes to the unaudited condensed consolidated financial statements.

4

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)

 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2014
   
2013
 
Cash flows from operating activities:
 
   
 
Net income
 
$
26,406
   
$
29,703
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Gain on sale of marketable securities
   
(427
)
   
(1,767
)
Company's share of gain on the sales of co-investment
   
(3,213
)
   
-
 
Gain on the sales of real estate and land
   
(8,268
)
   
(1,503
)
Noncash merger expense
   
3,750
     
-
 
Co-investments, net
   
(6,695
)
   
(391
)
Amortization expense
   
2,986
     
2,930
 
Amortization of discount on notes receivables
   
-
     
(844
)
Amortization of discount on marketable securities
   
(1,938
)
   
(1,377
)
Depreciation
   
50,312
     
47,144
 
Equity-based compensation
   
1,233
     
1,132
 
Changes in operating assets and liabilities:
               
Prepaid expenses and other assets
   
2,787
     
1,764
 
Accounts payable and accrued liabilities
   
15,918
     
8,443
 
Other liabilities
   
92
     
458
 
Net cash provided by operating activities
   
82,943
     
85,692
 
Cash flows from investing activities:
               
Additions to real estate:
               
Acquisitions of real estate
   
(33,825
)
   
(175,950
)
Improvements to recent acquisitions
   
(1,960
)
   
(2,601
)
Redevelopment
   
(6,408
)
   
(6,573
)
Revenue generating capital expenditures
   
(3,873
)
   
(304
)
Lessor required capital expenditures
   
(4,321
)
   
(768
)
Non-revenue generating capital expenditures
   
(4,416
)
   
(4,019
)
Acquisitions of and additions to real estate under development
   
(11,919
)
   
(3,332
)
Dispositions of real estate
   
14,123
     
9,051
 
Changes in restricted cash and deposits
   
2,512
     
19,980
 
Purchases of marketable securities
   
(10,340
)
   
(6,541
)
Sales and maturities of marketable securities
   
4,016
     
20,335
 
Collections of notes and other receivables
   
35,500
     
52,473
 
Contributions to co-investments
   
(39,679
)
   
(45,518
)
Distributions from co-investments
   
8,951
     
38,030
 
Net cash used in investing activities
   
(51,639
)
   
(105,737
)
Cash flows from financing activities:
               
Borrowings under debt agreements
   
233,780
     
235,282
 
Repayment of debt
   
(312,585
)
   
(279,854
)
Payment of loan fees
   
(9,294
)
   
(716
)
Equity related issuance cost
   
(92
)
   
(225
)
Net proceeds from stock options exercised
   
1,176
     
1,367
 
Net proceeds from issuance of common stock
   
157,596
     
122,905
 
Distributions to noncontrolling interest
   
(3,969
)
   
(3,995
)
Redemption of noncontrolling interest
   
(101
)
   
(1,329
)
Common and preferred stock dividends paid
   
(96,388
)
   
(41,152
)
Net cash (used in) provided by financing activities
   
(29,877
)
   
32,283
 
Net increase in cash and cash equivalents
   
1,427
     
12,238
 
Cash and cash equivalents at beginning of year
   
18,491
     
18,606
 
Cash and cash equivalents at end of period
 
$
19,918
   
$
30,844
 
 
(Continued)

5

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)

 
 
2014
   
2013
 
Supplemental disclosure of cash flow information:
 
   
 
Cash paid for interest, net of $3.1 million, and $3.7 million capitalized in 2014 and 2013, respectively
 
$
26,447
   
$
23,863
 
Supplemental disclosure of noncash investing and financing activities:
               
Issuance of Operating Partnership units for contributed properties
 
$
1,419,816
   
$
-
 
Transfer from real estate under development to rental properties
 
$
3,070
   
$
67
 
Transfer from real estate under development to co-investments
 
$
3,125
   
$
-
 
Change in fair value of derivative liabilities
 
$
631
   
$
570
 
Change in fair value of marketable securities
 
$
1,575
   
$
1,629
 

See accompanying notes to the unaudited condensed consolidated financial statements
6

ESSEX PORTFOLIO, L.P.  AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands, except unit amounts)

`
 
March 31,
   
December 31,
 
 
 
2014
   
2013
 
ASSETS
 
   
 
Real estate:
 
   
 
Rental properties:
 
   
 
Land and land improvements
 
$
1,354,748
   
$
1,083,552
 
Buildings and improvements
   
5,286,033
     
4,360,205
 
 
               
 
   
6,640,781
     
5,443,757
 
Less accumulated depreciation
   
(1,300,793
)
   
(1,254,886
)
 
               
 
   
5,339,988
     
4,188,871
 
Real estate under development
   
308,266
     
50,430
 
Co-investments
   
716,443
     
677,133
 
 
               
 
   
6,364,697
     
4,916,434
 
Cash and cash equivalents-unrestricted
   
19,918
     
18,491
 
Cash and cash equivalents-restricted
   
28,753
     
35,275
 
Marketable securities
   
100,348
     
90,084
 
Notes and other receivables
   
36,105
     
68,255
 
Prepaid expenses and other assets
   
54,024
     
33,781
 
Deferred charges, net
   
29,197
     
24,519
 
 
               
Total assets
 
$
6,633,042
   
$
5,186,839
 
 
               
LIABILITIES AND CAPITAL
               
Mortgage notes payable
 
$
1,408,232
   
$
1,404,080
 
Unsecured debt
   
1,410,162
     
1,410,023
 
Lines of credit
   
135,903
     
219,421
 
Accounts payable and accrued liabilities
   
83,470
     
67,183
 
Construction payable
   
7,671
     
8,047
 
Distributions payable
   
1,461
     
50,627
 
Derivative liabilities
   
2,109
     
2,682
 
Other liabilities
   
22,281
     
22,189
 
 
               
Total liabilities
   
3,071,289
     
3,184,252
 
Commitments and contingencies
               
Cumulative convertible Series G preferred interest (liquidation value of $4,456)
   
4,349
     
4,349
 
Capital:
               
General Partner:
               
Common equity (38,392,134 and 37,421,219  units issued and outstanding at March 31, 2014 and December 31, 2013, respectively)
   
2,009,181
     
1,873,882
 
Series H Preferred interest (liquidation value of $73,750)
   
71,209
     
71,209
 
 
   
2,080,390
     
1,945,091
 
Limited Partners:
               
Common equity (10,736,550 and 2,149,802 units issued and outstanding at March 31, 2014 and December 31, 2013, respectively)
   
1,465,127
     
45,957
 
Accumulated other comprehensive loss
   
(54,617
)
   
(58,940
)
Total partners' capital
   
3,490,900
     
1,932,108
 
Noncontrolling interest
   
66,504
     
66,130
 
Total capital
   
3,557,404
     
1,998,238
 
 
               
Total liabilities and capital
 
$
6,633,042
   
$
5,186,839
 

See accompanying notes to the unaudited condensed consolidated financial statements
7

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
(Dollars in thousands, except unit and per unit amounts)

 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2014
   
2013
 
Revenues:
 
   
 
Rental and other property
 
$
159,017
   
$
145,057
 
Management and other fees
   
2,628
     
2,948
 
 
   
161,645
     
148,005
 
Expenses:
               
Property operating, excluding real estate taxes
   
36,634
     
32,253
 
Real estate taxes
   
15,339
     
14,073
 
Depreciation
   
50,312
     
46,787
 
General and administrative
   
7,075
     
6,239
 
Merger expenses
   
16,059
     
-
 
Cost of management and other fees
   
1,477
     
1,701
 
Acquisition and dispositions costs
   
975
     
387
 
 
   
127,871
     
101,440
 
 
               
Earnings from operations
   
33,774
     
46,565
 
 
               
Interest expense before amortization
   
(26,055
)
   
(25,211
)
Amortization expense
   
(2,986
)
   
(2,930
)
Interest and other income
   
2,879
     
5,023
 
Equity income in co-investments
   
10,526
     
4,211
 
Gains on sale of real estate and land
   
8,268
     
1,503
 
Income from continuing operations
   
26,406
     
29,161
 
Income from discontinued operations
   
-
     
542
 
Net income
   
26,406
     
29,703
 
Net income attributable to noncontrolling interest
   
(1,709
)
   
(1,631
)
Net income attributable to controlling interest
   
24,697
     
28,072
 
Preferred interest distributions
   
(1,368
)
   
(1,368
)
Net income available to common unitholders
 
$
23,329
   
$
26,704
 
 
               
Comprehensive income
 
$
30,729
   
$
30,739
 
Comprehensive income attributable to noncontrolling interest
   
(1,709
)
   
(1,631
)
Comprehensive income attributable to controlling interest
 
$
29,020
   
$
29,108
 
 
               
Per common unit data:
               
Basic:
               
Income from continuing operations
 
$
0.58
   
$
0.67
 
Income from discontinued operations
   
-
     
0.01
 
Net income available to common unitholders
 
$
0.58
   
$
0.68
 
Weighted average number of common units outstanding during the period
   
39,957,252
     
39,083,371
 
 
               
Diluted:
               
Income from continuing operations
 
$
0.58
   
$
0.67
 
Income from discontinued operations
   
-
     
0.01
 
Net income available to common unitholders
 
$
0.58
   
$
0.68
 
Weighted average number of common units outstanding during the period
   
40,203,633
     
39,171,508
 
 
               
Distribution per common unit
 
$
1.21
   
$
1.21
 

See accompanying notes to the unaudited condensed consolidated financial statements
8

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Condensed Consolidated Statement of Capital for the three months ended March 31, 2014
(Unaudited)
(Dollars and units in thousands)
 
 
 
General Partner
   
Limited Partners
   
Accumulated
   
   
 
 
 
   
   
Preferred
   
   
   
other
   
   
 
 
 
Common Equity
   
Equity
   
Common Equity
   
comprehensive
   
Noncontrolling
   
 
 
 
Units
   
Amount
   
Amount
   
Units
   
Amount
   
(loss) income
   
Interest
   
Total
 
Balances at December 31, 2013
   
37,421
   
$
1,873,882
     
71,209
     
2,150
   
$
45,957
   
$
(58,940
)
 
$
66,130
   
$
1,998,238
 
Comprehensive income:
                                                               
Net income
   
-
     
21,912
     
1,368
     
-
     
1,417
     
-
     
1,709
     
26,406
 
Reversal of unrealized gains upon the sale of marketable securities
   
-
     
-
     
-
     
-
     
-
     
(427
)
   
-
     
(427
)
Change in fair value of derivatives and amortization of swap settlements
   
-
     
-
     
-
     
-
     
-
     
2,720
     
-
     
2,720
 
Change in fair value of marketable securities
   
-
     
-
     
-
     
-
     
-
     
2,030
     
-
     
2,030
 
Issuance of common units under:
                                                               
Stock and unit based compensation
   
13
     
1,769
     
-
     
-
     
-
     
-
     
-
     
1,769
 
Sale of common stock by general partner
   
958
     
157,596
     
-
     
-
     
-
     
-
     
-
     
157,596
 
Equity based compensation costs
           
(125
)
   
-
     
26
     
673
     
-
     
-
     
548
 
Contributions from noncontrolling interest
   
-
     
-
     
-
     
8,561
     
1,419,816
     
-
     
-
     
1,419,816
 
Distributions to noncontrolling interest
   
-
     
-
     
-
     
-
     
-
     
-
     
(1,335
)
   
(1,335
)
Redemptions of noncontrolling interest
   
-
     
-
     
-
     
-
     
(101
)
   
-
     
-
     
(101
)
Distributions declared
   
-
     
(45,853
)
   
(1,368
)
   
-
     
(2,635
)
   
-
     
-
     
(49,856
)
Balances at March 31, 2014
   
38,392
   
$
2,009,181
   
$
71,209
     
10,737
   
$
1,465,127
   
$
(54,617
)
 
$
66,504
   
$
3,557,404
 
 
See accompanying notes to the unaudited condensed consolidated financial statements
9

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)

 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2014
   
2013
 
Cash flows from operating activities:
 
   
 
Net income
 
$
26,406
   
$
29,703
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Gain on sale of marketable securities
   
(427
)
   
(1,767
)
Company's share of gain on the sales of co-investment
   
(3,213
)
   
-
 
Gain on the sales of real estate and land
   
(8,268
)
   
(1,503
)
Noncash merger expense
   
3,750
     
-
 
Co-investments, net
   
(6,695
)
   
(391
)
Amortization expense
   
2,986
     
2,930
 
Amortization of discount on notes receivables
   
-
     
(844
)
Amortization of discount on marketable securities
   
(1,938
)
   
(1,377
)
Depreciation
   
50,312
     
47,144
 
Equity-based compensation
   
1,233
     
1,132
 
Changes in operating assets and liabilities:
               
Prepaid expenses and other assets
   
2,787
     
1,764
 
Accounts payable and accrued liabilities
   
15,918
     
8,443
 
Other liabilities
   
92
     
458
 
Net cash provided by operating activities
   
82,943
     
85,692
 
Cash flows from investing activities:
               
Additions to real estate:
               
Acquisitions of real estate
   
(33,825
)
   
(175,950
)
Improvements to recent acquisitions
   
(1,960
)
   
(2,601
)
Redevelopment
   
(6,408
)
   
(6,573
)
Revenue generating capital expenditures
   
(3,873
)
   
(304
)
Lessor required capital expenditures
   
(4,321
)
   
(768
)
Non-revenue generating capital expenditures
   
(4,416
)
   
(4,019
)
Acquisitions of and additions to real estate under development
   
(11,919
)
   
(3,332
)
Dispositions of real estate
   
14,123
     
9,051
 
Changes in restricted cash and deposits
   
2,512
     
19,980
 
Purchases of marketable securities
   
(10,340
)
   
(6,541
)
Sales and maturities of marketable securities
   
4,016
     
20,335
 
Collections of notes and other receivables
   
35,500
     
52,473
 
Contributions to co-investments
   
(39,679
)
   
(45,518
)
Distributions from co-investments
   
8,951
     
38,030
 
Net cash used in investing activities
   
(51,639
)
   
(105,737
)
Cash flows from financing activities:
               
Borrowings under debt agreements
   
233,780
     
235,282
 
Repayment of debt
   
(312,585
)
   
(279,854
)
Payment of loan fees
   
(9,294
)
   
(716
)
Equity related issuance cost
   
(92
)
   
(225
)
Net proceeds from stock options exercised
   
1,176
     
1,367
 
Net proceeds from issuance of common units
   
157,596
     
122,905
 
Distributions to noncontrolling interest
   
(1,335
)
   
(1,323
)
Redemption of noncontrolling interest
   
(101
)
   
(1,329
)
Common units and preferred units and preferred interests distributions paid
   
(99,022
)
   
(43,824
)
Net cash (used in) provided by financing activities
   
(29,877
)
   
32,283
 
Net increase in cash and cash equivalents
   
1,427
     
12,238
 
Cash and cash equivalents at beginning of year
   
18,491
     
18,606
 
Cash and cash equivalents at end of period
 
$
19,918
   
$
30,844
 
 
(Continued)
10

ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)

 
 
2014
   
2013
 
Supplemental disclosure of cash flow information:
 
   
 
Cash paid for interest, net of $3.1 million, and $3.7 million capitalized in 2014 and 2013, respectively
 
$
26,447
   
$
23,863
 
Supplemental disclosure of noncash investing and financing activities:
               
Issuance of Operating Partnership units for contributed properties
 
$
1,419,816
   
$
-
 
Transfer from real estate under development to rental properties
 
$
3,070
   
$
67
 
Transfer from real estate under development to co-investments
 
$
3,125
   
$
-
 
Change in fair value of derivative liabilities
 
$
631
   
$
570
 
Change in fair value of marketable securities
 
$
1,575
   
$
1,629
 

See accompanying notes to the unaudited condensed consolidated financial statements
11

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO L.P. SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2014 and 2013
(Unaudited)

(1)  Organization and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements present the accounts of Essex Property Trust, Inc. (“Essex” or the “Company”), which include the accounts of the Company and Essex Portfolio, L.P. and subsidiaries (the “Operating Partnership,” which holds the operating assets of the Company), prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q.  In the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included and are normal and recurring in nature.  These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's  annual report on Form 10-K for the year ended December 31, 2013.

All significant intercompany balances and transactions have been eliminated in the condensed consolidated financial statements.  Certain reclassifications have been made to conform to the current year’s presentation. Such reclassification had no effect on previously reported financial statements.

On April 1, 2014, Essex completed the merger with BRE Properties, Inc. (“BRE”).  In connection with the closing of the merger, (1) BRE merged into a wholly owned subsidiary of Essex, and (2) each outstanding share of BRE common stock was converted into (i) 0.2971 shares (the “Stock Consideration”) of Essex common stock, and (ii) $7.18 in cash, (the “Cash Consideration”), plus cash in lieu of fractional shares for total consideration of approximately $4.3 billion.  The Cash Consideration was adjusted as a result of the authorization and declaration of a special distribution to the stockholders of BRE of $5.15 per share of BRE common stock payable to BRE stockholders of record as of the close of business on March 31, 2014 (the “Special Dividend”).  The Special Dividend is payable as a result of the closing of the sale of certain interests in assets of BRE to certain parties designated by Essex, which closed on March 31, 2014.  Pursuant to the terms of the merger agreement, the amounts payable as a Special Dividend reduced the Cash Consideration of $12.33 payable by Essex in the merger to $7.18 per share of BRE common stock.

Essex issued approximately 23.1 million shares of Essex common stock as Stock Consideration in the merger.  For purchase accounting, the value of the common stock issued by Essex upon the consummation of the merger was determined based on the closing price of BRE’s common stock on the closing date of the merger. As a result of Essex being admitted to the S&P 500 on the same date as the closing of the merger, Essex’s common stock price experienced significantly higher than usual trading volume and the closing price of $174 per share was significantly higher than its volume-weighted average trading price for the days before and after April 1, 2014.  BRE’s common stock did not experience the same proportionate increase in common stock price leading up to April 1, 2014.  As a result, given that a substantial component of the purchase price is an exchange of equity instruments, Essex used the closing price of BRE’s common stock on April 1, 2014 of $61 per share, less the Cash Consideration, as the fair value of the Stock Consideration.  The net assets and results of operations of BRE will be included in our condensed consolidated financial statements beginning April 1, 2014, our second quarter of 2014.

On March 31, 2014, BRE contributed 14 properties valued at approximately $1.4 billion to Essex for approximately 8.6 million Operating Partnership units (“OP units”).  The OP units were subsequently retired by the Company on April 1, 2014.  The purpose of this transaction was tax efficiency.

The unaudited condensed consolidated financial statements for the three months ended March 31, 2014 and 2013 include the accounts of the Company and the Operating Partnership.  Essex is the sole general partner in the Operating Partnership, and excluding the 8.6 million OP units issued on March 31, 2014 and retired on April 1, 2014,  held a 94.5% general partnership interest as of March 31, 2014.  Total Operating Partnership units outstanding, excluding the March 31, 2014 transaction, were 2,176,222  and 2,149,802 as of March 31, 2014 and December 31, 2013, respectively, and the redemption value of the units, based on the closing price of the Company’s common stock totaled $370.1 million and $308.5 million, as of March 31, 2014 and December 31, 2013, respectively.
12

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO L.P. SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2014 and 2013
(Unaudited)

As of March 31, 2014, and prior to the merger with BRE, the Company owned or had ownership interests in 176 apartment communities, aggregating 37,569 units, excluding the Company’s ownership in preferred interest co-investments,  (collectively, the “Communities”, and individually, a “Community”), four commercial buildings and thirteen active development projects (collectively, the “Portfolio”).  The Communities are located in Southern California (Los Angeles, Orange, Riverside, San Diego, Santa Barbara, and Ventura counties), Northern California (the San Francisco Bay Area) and the Seattle metropolitan area.

Marketable Securities

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

As of March 31, 2014 and December 31, 2013, marketable securities consisted primarily of investment-grade unsecured bonds, common stock, investments in mortgage backed securities and investment funds that invest in U.S. treasury or agency securities.  As of March 31, 2014 and December 31, 2013, 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.  As of March 31, 2014 and December 31, 2013 marketable securities consist of the following ($ in thousands):

 
 
March 31, 2014
 
 
 
Cost/
   
Gross
   
 
 
 
Amortized
   
Unrealized
   
 
 
 
Cost
   
Gain (Loss)
   
Carrying Value
 
Available for sale:
 
   
   
 
Investment-grade unsecured bonds
 
$
11,772
   
$
96
   
$
11,868
 
Investment funds - US treasuries
   
5,017
     
5
     
5,022
 
Common stock
   
22,103
     
710
     
22,813
 
Held to maturity:
                       
Mortgage backed securities
   
60,645
     
-
     
60,645
 
Total
 
$
99,537
   
$
811
   
$
100,348
 

 
 
December 31, 2013
 
 
 
Cost/
   
Gross
   
 
 
 
Amortized
   
Unrealized
   
 
 
 
Cost
   
Gain (Loss)
   
Carrying Value
 
Available for sale:
 
   
   
 
Investment-grade unsecured bonds
 
$
15,446
   
$
509
   
$
15,955
 
Investment funds - US treasuries
   
3,675
     
3
     
3,678
 
Common stock
   
13,104
     
(1,304
)
   
11,800
 
Held to maturity:
                       
Mortgage backed securities
   
58,651
     
-
     
58,651
 
Total
 
$
90,876
   
$
(792
)
 
$
90,084
 

The Company uses the specific identification method to determine the cost basis of a security sold and to reclassify amounts from accumulated other comprehensive income for securities sold.  For the three months ended March 31, 2014, and 2013,  the proceeds from sales of available for sale securities totaled $4.0 million and $20.3 million, respectively, which resulted in gains of $0.4 million and $1.8 million, respectively.
13

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO L.P. SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2014 and 2013
(Unaudited)

Variable Interest Entities

The Company consolidates 19 DownREIT limited partnerships (comprising twelve communities) since the Company is the primary beneficiary of these variable interest entities (“VIEs”).  Total DownREIT units outstanding were 1,007,879 for both as of March 31, 2014 and December 31, 2013, and the redemption value of the units, based on the closing price of the Company’s common stock totaled $171.4 million and $144.6 million, as of March 31, 2014 and December 31, 2013, respectively.  The consolidated total assets and liabilities related to these VIEs, net of intercompany eliminations, were approximately $233.4 million and $218.9 million, respectively, as of March 31, 2014 and $194.9 million and $178.3 million, respectively, as of December 31, 2013.  Interest holders in VIEs consolidated by the Company are allocated income equal to the cash payments made to those interest holders.  The remaining results of operations are allocated to the Company.  As of March 31, 2014 and December 31, 2013, the Company did not have any other VIEs of which it was deemed to be the primary beneficiary.

Equity Based Compensation

The Company accounts for equity based compensation using the fair value method of accounting.  The estimated fair value of stock options granted by the Company is being amortized over the vesting period of the stock options.  The estimated grant date fair values of the long term incentive plan units (discussed in Note 13, “Equity Based Compensation Plans,” in the Company’s Form 10-K for the year ended December 31, 2013) are being amortized over the expected service periods.

Stock-based compensation expense for options and restricted stock totaled $0.6 million for the three months ended March 31, 2014 and 2013.  The intrinsic value of the stock options exercised during the three months ended March 31, 2014 and 2013 totaled $0.6 million and $0.9 million, respectively. As of March 31, 2014, the intrinsic value of the stock options outstanding and fully vested totaled $21.1 million.  As of March 31, 2014, total unrecognized compensation cost related to unvested share-based compensation granted under the stock option and restricted stock plans totaled $6.1 million.  The cost is expected to be recognized over a weighted-average period of 1 to 5 years for the stock option plans and is expected to be recognized straight-line over a period of 1 to 7 years for the restricted stock awards.

The Company has adopted an incentive program involving the issuance of Series Z-1 Incentive Units of limited partnership interest in the Operating Partnership.  The Operating Partnership also issued 50,500 units under the 2014 Long-Term Incentive Plan Award agreements in December 2013.  Pursuant to the 2014 Long-Term Incentive Plan Awards, each recipient was initially granted a number of 2014 Long-Term Incentive Plan Units (the “2014 LTIP Units”), 90% of which are subject to performance-based vesting, and 10% of which are subject to service-based vesting based on continued employment.  One-third of the performance-based vesting of the 2014 LTIP Units initially granted will be eligible to be earned by recipients based on Essex’s absolute total stockholder return and two-thirds will be eligible to be earned based on Essex’s relative total stockholder return, in each case, during a one-year performance period beginning on the initial grant date of the awards.

Stock-based compensation expense for Z-1 Units and 2014 LTIP Units totaled $0.6 million and $0.5 million for the three months ended March 31, 2014 and 2013, respectively. As of March 31, 2014, the intrinsic value of the Z-1 Units and 2014 LTIP Units subject to future vesting totaled $22.4 million.  As of March 31, 2014, total unrecognized compensation cost related to Z-1 Units and 2014 LTIP Units subject to future vesting totaled $7.6 million.  The unamortized cost is expected to be recognized over 6 years subject to the achievement of the stated performance criteria.

Fair Value of Financial Instruments

Management believes that the carrying amounts of outstanding lines of credit, notes and other receivables approximate fair value as of March 31, 2014 and December 31, 2013, 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 $2.29 billion of fixed rate debt, including unsecured bonds, at March 31, 2014 is approximately $2.42 billion and the fair value of the Company’s $527.6 million of variable rate debt, excluding borrowings under the lines of credit, at March 31, 2014 is $500.0 million based on the terms of existing mortgage notes payable, unsecured bonds 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, 2014 due to the short-term maturity of these instruments.  Marketable securities, except mortgage backed securities, and derivatives are carried at fair value as of March 31, 2014.
14

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO L.P. SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2014 and 2013
(Unaudited)

At March 31, 2014, the Company’s investments in mortgage backed securities had a carrying value of $60.6 million and the Company estimated the fair value to be approximately $89.4 million.  At December 31, 2013, the Company’s investments in mortgage backed securities had a carrying value of $58.7 million and the Company estimated the fair value to be approximately $86.2 million.  The Company determines the fair value of the mortgage backed securities based on unobservable inputs (level 3 of the fair value hierarchy) considering the assumptions that market participants would make in valuing these securities.  Assumptions such as estimated default rates and discount rates are used to determine expected, discounted cash flows to estimate the fair value.

Capitalization of Costs

The Company’s capitalized internal costs related to development and redevelopment projects totaled $1.7 million and $1.6 million during the three months ended March 31, 2014 and 2013, respectively, most of which relates to development projects.  These totals include capitalized salaries of $0.9 million and $0.6 million for the three months ended March 31, 2014 and 2013, respectively. The Company capitalizes leasing commissions associated with the lease-up of a development community and amortizes the costs over the life of the leases.  The amounts capitalized are immaterial for all periods presented.

Co-investments

The Company owns investments in joint ventures (“co-investments”) in which it has significant influence, but its ownership interest does not meet the criteria for consolidation in accordance with the accounting standards.  Therefore, the Company accounts for these investments using the equity method of accounting.  Under the equity method of accounting, the investment is carried at the cost of assets contributed, plus the Company’s equity in earnings less distributions received and the Company’s share of losses.  The significant accounting policies of the Company’s co-investment entities are consistent with those of the Company in all material respects.  For preferred equity investments, the Company recognizes its preferred interest in equity income in co-investments.

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 operations equal to the amount by which the fair value of the co-investment interest the Company previously owned exceeds its carrying value.  A majority of the co-investments, excluding the preferred equity investments, compensate the Company for its asset management services and may provide promote distributions 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 (loss) from co-investments.

Changes in Accumulated Other Comprehensive Loss, Net by Component

Essex Property Trust, Inc.

 
 
   
Unrealized
   
 
 
 
Change in fair
   
gains/(losses) on
   
 
 
 
value and amortization
   
available for sale
   
 
 
 
of derivatives
   
securities
   
Total
 
Balance at December 31, 2013
 
$
(59,724
)
 
$
(748
)
 
$
(60,472
)
Other comprehensive income (loss) before reclassification
   
472
     
1,914
     
2,386
 
Amounts reclassified from accumulated other comprehensive loss
   
2,093
     
(402
)
   
1,691
 
Net other comprehensive income (loss)
   
2,565
     
1,512
     
4,077
 
Balance at March 31, 2014
 
$
(57,159
)
 
$
764
   
$
(56,395
)

15

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO L.P. SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2014 and 2013
(Unaudited)

Essex Portfolio, L.P.

 
 
   
Unrealized
   
 
 
 
Change in fair
   
gains/(losses) on
   
 
 
 
value and amortization
   
available for sale
   
 
 
 
of derivatives
   
securities
   
Total
 
Balance at December 31, 2013
 
$
(58,148
)
 
$
(792
)
 
$
(58,940
)
Other comprehensive income (loss) before reclassification
   
627
     
2,030
     
2,657
 
Amounts reclassified from accumulated other comprehensive loss
   
2,093
     
(427
)
   
1,666
 
Net other comprehensive income (loss)
   
2,720
     
1,603
     
4,323
 
Balance at March 31, 2014
 
$
(55,428
)
 
$
811
   
$
(54,617
)

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

Accounting Estimates

The preparation of condensed consolidated financial statements, in accordance with U.S. generally accepted accounting principles, 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.

Discontinued Operations

In April 2014, the Financial Accounting Standards Board (“FASB”) issued ASU, No. 2014-018, Presentation of Financial Statements, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-018 changes the requirements for reporting discontinued operation under Subtopic 205-20, Presentation of Financial Statements—Discontinued Operations.  The amendment updates the definition of discontinued operation and defines discontinued operations to be those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.  This ASU is effective for disposals of components of an entity that occur within annual periods beginning on or after December 15, 2014 with early adoption permitted , but only for disposal that have not been reported in financial statements previously issued.

The Company adopted ASU 2014-018 in its first quarter of 2014.  In January 2014, Essex sold Vista Capri North, a 106 unit community located in San Diego, CA for $14.4 million.  The total gain on sale was $7.9 million.  The Company determined that the disposal was not a discontinued operation in accordance with ASU 2014-018.  The gain is recorded in gains on sale of real estate and land in the condensed consolidated statements of operations and comprehensive income.

BRE Merger

As previously discussed in Note 1, the merger with BRE closed on April 1, 2014 and 14 of the BRE properties were acquired on March 31, 2013.  The preliminary fair value of the assets acquired on March 31, 2014 in exchange for $1.4 billion of OP units was substantially all attributable to rental properties which included land, buildings and improvements, and real estate under development and approximately $19 million attributable to acquired in-place lease value  which is classified within prepaid expenses and other assets in the accompanying condensed consolidated balance sheets.  With regards to the BRE merger that closed on April 1, 2014, a summary of the preliminary fair value of the assets and liabilities acquired on April 1, 2014 in exchange for the total consideration of approximately $4.3 billion were as follows (includes the 14 properties acquired on March 31, 2014 as the OP units issued were retired on April 1, 2014) (in millions):
16

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO L.P. SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2014 and 2013
(Unaudited)
 
Rental properties, excluding co-investments
 
$
5,808
 
Co-investments
   
206
 
In-place lease value
   
97
 
Other assets
   
96
 
Secured and unsecured debt
   
(1,736
)
Other liabilities
   
(129
)
 
 
$
4,342
 

The initial purchase accounting is based on management’s preliminary assessment, which may differ when final information becomes available. Subsequent adjustments made to the initial purchase accounting, if any, are made within the measurement period, which typically does not exceed one year.

The unaudited pro forma financial information set forth below is based on Essex’s historical condensed consolidated statement of operations and comprehensive income for the quarters ended March 31, 2014 and March 31, 2013, adjusted to give effect to the merger with BRE including the 14 BRE properties contributed on March 31, 2014, as if they occurred on January 1, 2013. The pro forma adjustments primarily relate to merger expenses, depreciation expense on acquired buildings and improvements, amortization of acquired intangibles, and estimated interest expense related to assumed debt.

Essex Property Trust, Inc.

 
 
Pro forma (unaudited)
 
 
 
three months ended March 31
 
 
 
(in thousands, except per share data)
 
 
 
2014
   
2013
 
Total revenue
 
$
247,801
   
$
228,721
 
Net income available to common shareholders (1) (2)
 
$
130,506
   
$
(16,956
)
Earnings per share, diluted (1)
 
$
2.08
   
$
(0.28
)

Essex Portfolio, L.P.

 
 
Pro forma (unaudited)
 
 
 
three months ended March 31
 
 
 
(in thousands, except per unit data)
 
 
 
2014
   
2013
 
Total revenue
 
$
247,801
   
$
228,721
 
Net income available to common unitholders (1) (2)
 
$
131,923
   
$
(15,455
)
Earnings per unit, diluted (1)
 
$
2.08
   
$
(0.25
)

(1) 2014 supplemental pro forma net income available to common stockholders were adjusted to exclude $16,059 of merger related costs incurred by Essex  during the three-months ended March 31, 2014. 2013 supplemental pro forma net income available to common stockholders were adjusted to include these charges plus an additional approximately $29,000 of merger expenses estimated to be incurred by Essex .  2014 and 2013 supplemental proforma earnings per share, diluted, were adjusted accordingly.
 
(2) 2014 supplemental pro forma net income available to common stockholders includes approximately $105 million from discontinued operations related to the sale of three BRE properties that are non-recurring transactions.
17

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO L.P. SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2014 and 2013
(Unaudited)

(2)  Significant Transactions During the First Quarter of 2014 and Subsequent Events

Acquisitions

In March 2014, the Company purchased Avery, a 121-unit apartment community located in Valley Village, California, for a total purchase price of $35.0 million. In May 2014, the Company acquired Piedmont Apartments for $76.8 million. The 396 unit community was built in 1969 and subsequently renovated in 1997 and 2005. The Company assumed a $44.8 million mortgage loan secured by the property at a fixed rate of 5.6% for a remaining term of 3 years. The property is located in the East Bellevue submarket of Seattle.

Dispositions

In March 2014, Essex Apartment Value Fund II, L.P. (“Fund II”) sold one of the two remaining communities owned by Fund II for $23.8 million which resulted in a gain of $11.4 million.  The Company has a 28.2% ownership stake in Fund II and received a promote income allocation of $3.8 million which is included within equity income from co-investments in the accompanying condensed consolidated statement of income for the three months ended March 31, 2014.  The remaining Fund II property is expected to be sold in 2014.

Common Stock

During the first quarter of 2014, the Company issued 958,055 shares of common stock, through our equity distribution program, at an average share price of $166.24 for proceeds of $157.6 million, net of fees and commissions.  During the second quarter of 2014 through May 8, 2014, Essex has issued 197,600 shares of common stock at an average price of $171.62 for proceeds of $33.7 million, net of fees and commissions.

Unsecured Bond Offering

In April 2014, the Company issued $400 million aggregate principal amount of its 3.875% Senior Notes due 2024 (the 2024 Notes).  The net proceeds from the issuance of the 2024 Notes were approximately $394 million, after deducting the underwriters’ discounts and estimated offering expenses.
18

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO L.P. SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2014 and 2013
(Unaudited)

(3) Co-investments

The Company has co-investments, which are accounted for under the equity method.  The co-investments own, operate and develop apartment communities.  The following table details the Company's co-investments (dollars in thousands):

 
 
March 31,
   
December 31,
 
 
 
2014
   
2013
 
 
 
   
 
 
 
   
 
Membership interest in Wesco I
 
$
136,495
   
$
142,025
 
Membership interest in Wesco III
   
38,928
     
39,073
 
Partnership interest in Fund II
   
7,235
     
4,166
 
Membership interest in a limited liability company that owns Expo
   
11,877
     
12,041
 
Total operating co-investments
   
194,535
     
197,305
 
 
               
Membership interests in limited liability companies with CPPIB that own and are developing Epic, Connolly Station, Mosso I & II, Park 20, and The Village
   
336,417
     
301,538
 
Membership interests in limited liability companies that own and are developing The Huxley and The Dylan
   
19,151
     
18,545
 
Membership interest in a limited liability company that owns and is developing One South Market
   
22,632
     
17,115
 
Total development co-investments
   
378,200
     
337,198
 
 
               
Membership interest in Wesco II that owns a preferred equity interest in Parkmerced with a preferred return of 10.1%
   
95,115
     
94,711
 
Preferred interest in related party limited liability company that owns Sage at Cupertino with a preferred return of  9.5%
   
15,955
     
15,775
 
Preferred interest in a related party limited liability company that owns Madison Park at Anaheim with a preferred return of 9%
   
13,824
     
13,824
 
Preferred interest in related party limited liability company that owns an apartment development in Redwood City with a preferred return of 12%
   
9,681
     
9,455
 
Preferred interest in a limited liability company that owns an apartment development in San Jose with a preferred return of 12%
   
9,133
     
8,865
 
Total preferred interest investments
   
143,708
     
142,630
 
 
               
Total co-investments
 
$
716,443
   
$
677,133
 

19

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO L.P. SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2014 and 2013
(Unaudited)

The combined summarized balance sheet and statements of operations for co-investments are as follows (dollars in thousands).

 
 
March 31,
   
December 31,
 
 
 
2014
   
2013
 
Balance sheets:
 
   
 
Rental properties and real estate under development
 
$
1,993,763
   
$
1,953,328
 
Other assets
   
131,716
     
61,578
 
 
               
Total assets
 
$
2,125,479
   
$
2,014,906
 
 
               
Debt
 
$
756,117
   
$
667,641
 
Other liabilities
   
82,519
     
125,479
 
Equity
   
1,286,843
     
1,221,786
 
 
               
Total liabilities and equity
 
$
2,125,479
   
$
2,014,906
 
 
               
Company's share of equity
 
$
716,443
   
$
677,133
 
 
               
`
 
Three Months Ended
 
 
 
March 31,
 
 
   
2014
     
2013
 
Statements of operations:
               
Property revenues
 
$
27,960
   
$
27,859
 
Property operating expenses
   
(11,560
)
   
(9,828
)
Net property operating income
   
16,400
     
18,031
 
 
               
Gain on sale of real estate
   
11,369
     
-
 
Interest expense
   
(6,023
)
   
(6,778
)
General and administrative
   
(1,388
)
   
(1,514
)
Equity income from co-investments
   
4,759
     
4,622
 
Depreciation and amortization
   
(10,693
)
   
(11,019
)
 
               
Net income
 
$
14,424
   
$
3,342
 
 
               
Company's share of net income
 
$
10,526
   
$
4,211
 

(4) Notes and Other Receivables
 
Notes receivable secured by real estate and other receivables consist of the following as of March 31, 2014 and December 31, 2013 (dollars in thousands):

 
 
March 31,
   
December 31,
 
 
 
2014
   
2013
 
 
 
   
 
Notes receivable, secured, bearing interest at 4.0%, due December 2014 (1)
 
$
3,212
   
$
3,212
 
Notes and other receivables from affiliates (2)
   
25,854
     
60,968
 
Other receivables
   
7,039
     
4,075
 
 
 
$
36,105
   
$
68,255
 

(1) The borrower funds an impound account for capital replacement.
(2) The Company provided two bridge loans, for Gas Company Lofts and Regency at Mt. View, totaling $56.8 million to Wesco III at a rate of LIBOR + 2.50%.  Wesco III repaid these two loans on Gas Company Lofts and Regency at Mt. View in January 2014 and April 2014, respectively.
20

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO L.P. SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2014 and 2013
(Unaudited)

(5) Related Party Transactions

Fees earned from affiliates include management, development and redevelopment fees from co-investments of $2.6 million and $2.8 million during the three months ended March 31, 2014 and 2013, respectively. All of these fees are net of intercompany amounts eliminated by the Company.

The Company’s Chairman and founder, Mr. George Marcus, is the Chairman of the Marcus & Millichap Company (“MMC”), which is a parent company of a diversified group of real estate service, investment, and development firms. Mr. Marcus is also the Co-Chairman of Marcus & Millichap, Inc. (“MMI”), and Mr. Marcus owns a controlling interest in MMI. MMI is a national brokerage firm listed on the NYSE that underwent its initial public offering in 2013.  During the third quarter of 2013, the Company restructured the terms of a preferred equity investment on a property located in Anaheim, California, reducing the rate from 13% to 9%, while extending the maximum term by one year.  The Company recorded $0.4 million of income related to the restructured investment.  The entity that owns the property is an affiliate of MMC.  Independent members of the Company’s Board of Directors that serve on the Nominating and Corporate Governance and Audit Committees approved the restructuring of the investment in this entity.

In January 2013, the Company invested $8.6 million as a preferred equity interest investment in an entity affiliated with MMC that owns an apartment development in Redwood City, California.  Independent members of the Company’s Board of Directors that serve on the Nominating and Corporate Governance and Audit Committees approved the investment in this entity.

As described in Note 4, the Company has provided short-term bridge loans to affiliates.  As of December 31, 2013, two loans remained outstanding totaling $56.8 million;  Wesco III repaid these two loans on Gas Company Lofts and Regency at Mt. View in January 2014 and April 2014, respectively.

(6) Unsecured Debt and Lines of Credit
 
Essex does not have any indebtedness as all debt is incurred by the Operating Partnership.  Essex guarantees the Operating Partnership’s unsecured debt including the revolving credit facilities for the full term of such facilities.

Unsecured debt and lines of credit consist of the following as of March 31, 2014 and December 31, 2013 ($ in thousands):

 
 
   
   
Weighted Average
 
 
 
March 31,
   
December 31,
   
Maturity
 
 
 
2014
   
2013
   
In Years
 
 
 
   
   
 
Bonds private placement - fixed rate
 
$
465,000
   
$
465,000
     
5.0
 
Term loan - variable rate
   
350,000
     
350,000
     
2.9
 
Bonds public offering - fixed rate
   
595,162
     
595,023
     
8.7
 
Unsecured debt
   
1,410,162
     
1,410,023
         
Lines of credit
   
135,903
     
219,421
     
5.0
 
Total unsecured debt and lines of credit
 
$
1,546,065
   
$
1,629,444
         
 
                       
Weighted average interest rate on fixed rate unsecured bonds
   
4.0
%
   
4.0
%
       
Weighted average interest rate on variable rate term loan
   
2.4
%
   
2.5
%
       
Weighted average interest rate on line of credit
   
1.6
%
   
2.2
%
       

21

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO L.P. SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2014 and 2013
(Unaudited)

(7) Segment Information

The Company defines its reportable operating segments as the three geographical regions in which its apartment communities are located: Southern California, Northern California and Seattle Metro.  Excluded from segment revenues are properties classified in discontinued operations, management and other fees from affiliates, and interest and other income.  Non-segment revenues and net operating income included in the following schedule also consist of revenue generated from commercial properties.  Other non-segment assets include real estate under development, co-investments, cash and cash equivalents, marketable securities, notes and other receivables, prepaid expenses and other assets and deferred charges.
The revenues, net operating income, and assets for each of the reportable operating segments are summarized as follows for the three months ended March 31, 2014 and 2013 (dollars in thousands):

 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2014
   
2013
 
Revenues:
 
   
 
Southern California
 
$
69,687
   
$
64,740
 
Northern California
   
56,944
     
50,770
 
Seattle Metro
   
28,641
     
25,751
 
Other real estate assets
   
3,745
     
3,796
 
Total property revenues
 
$
159,017
   
$
145,057
 
 
               
Net operating income:
               
Southern California
 
$
47,066
   
$
43,708
 
Northern California
   
40,353
     
35,283
 
Seattle Metro
   
19,045
     
16,995
 
Other real estate assets
   
580
     
2,745
 
Total net operating income
   
107,044
     
98,731
 
 
               
 
               
 
               
Management and other fees
   
2,628
     
2,948
 
Depreciation
   
(50,312
)
   
(46,787
)
General and administrative
   
(7,075
)
   
(6,239
)
Merger expenses
   
(16,059
)
   
-
 
Cost of management and other fees
   
(1,477
)
   
(1,701
)
Acquisition and dispositon costs
   
(975
)
   
(387
)
Interest expense before amortization
   
(26,055
)
   
(25,211
)
Amortization expense
   
(2,986
)
   
(2,930
)
Interest and other income
   
2,879
     
5,023
 
Equity income from co-investments
   
10,526
     
4,211
 
Gains on sale of real estate and land
   
8,268
     
1,503
 
Income from continuing operations
 
$
26,406
   
$
29,161
 

22

ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO L.P. SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2014 and 2013
(Unaudited)

Total assets for each of the reportable operating segments are summarized as follows as of March 31, 2014 and December 31, 2013 (in thousands):
 
 
 
March 31,
   
December 31,
 
 
 
2014
   
2013
 
Assets:
 
   
 
Southern California
 
$
2,551,297
   
$
1,746,434
 
Northern California
   
1,967,133
     
1,614,159
 
Seattle Metro
   
734,972
     
741,533
 
Other real estate assets
   
86,586
     
86,745
 
Net reportable operating segment - real estate assets
   
5,339,988
     
4,188,871
 
Real estate under development
   
308,266
     
50,430
 
Co-investments
   
716,443
     
677,133
 
Cash and cash equivalents, including restricted cash
   
48,671
     
53,766
 
Marketable securities
   
100,348
     
90,084
 
Notes and other receivables
   
36,105
     
68,255
 
Other non-segment assets
   
83,221
     
58,300
 
Total assets
 
$
6,633,042
   
$
5,186,839
 

(8)  Net Income Per Common Share
 
(Amounts in thousands, except per share and unit data)

Essex Property Trust, Inc.

 
 
Three Months Ended
   
Three Months Ended
 
 
 
March 31, 2014
   
March 31, 2013
 
 
 
   
Weighted-
   
Per
   
   
Weighted-
   
Per
 
 
 
   
average
   
Common
   
   
average
   
Common
 
 
 
   
Common
   
Share
   
   
Common
   
Share
 
 
 
Income
   
Shares
   
Amount
   
Income
   
Shares
   
Amount
 
Basic:
 
   
   
   
   
   
 
Income from continuing operations available to common stockholders
 
$
21,912
     
37,685
   
$
0.58
   
$
24,690
     
37,004
   
$
0.67
 
Income from discontinued operations available to common stockholders
   
-
     
37,685
     
-
     
513
     
37,004
     
0.01
 
 
 
$
21,912
           
$
0.58
   
$
25,203
           
$
0.68