Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto. These consolidated financial statements include all adjustments which are, in the opinion of management, necessary to reflect a fair statement of the results and all such adjustments are of a normal recurring nature.

OVERVIEW

ESS is a self-administered and self-managed REIT that acquires, develops, redevelops and manages apartment communities in selected residential areas located primarily in the West Coast of the United States. ESS owns all of its interests in its real estate investments, directly or indirectly, through the Operating Partnership. ESS is the sole general partner of the Operating Partnership and, as of December 31, 2015, had an approximately 96.7% general partner interest in the Operating Partnership.

The Company’s investment strategy has two components: constant monitoring of existing markets, and evaluation of new markets to identify areas with the characteristics that underlie rental growth. The Company’s strong financial condition supports its investment strategy by enhancing its ability to quickly shift acquisition, development, redevelopment, and disposition activities to markets that will optimize the performance of the portfolio.

As of December 31, 2015, the Company had ownership interests in 246 communities, comprising 59,160 apartment homes.

The Company’s apartment communities are predominately located in the following major regions:

Southern California (Los Angeles, Orange, San Diego, and Ventura counties)

Northern California (the San Francisco Bay Area)

Seattle Metro (Seattle metropolitan area)

As of December 31, 2015, the Company’s development pipeline was comprised of two consolidated projects under development, six unconsolidated joint venture projects under development and various consolidated predevelopment projects aggregating 2,447 apartment homes, with total incurred costs of $0.7 billion, and estimated remaining project costs of approximately $0.8 billion for total estimated project costs of $1.4 billion.

As of December 31, 2015, the Company also had ownership interests in four commercial buildings (with approximately 319,079 square feet).

By region, the Company's operating results for 2015 and 2014 and projections for 2016 new housing supply (defined as new multi-family apartment homes and single family homes, excluding developments with fewer than 100 apartment homes as well as senior and student housing), job growth, and rental income are as follows:

Southern California Region: As of December 31, 2015, this region represented 49% of the Company’s consolidated apartment homes. Revenues for “2015/2014 Same-Properties” (as defined below), or “Same-Property revenues,” increased 6.0% in 2015 as compared to 2014. In 2016, the Company projects new residential supply of 30,300 apartment homes and single family homes, which represents 0.5% of the total housing stock. The Company assumes an increase of 168,050 jobs or 2.2%, and an increase in Same-Property revenues of between 5.25% to 6.25% in 2016.

Northern California Region: As of December 31, 2015, this region represented 30% of the Company’s consolidated apartment homes. Same-Property revenues increased 10.5% in 2015 as compared to 2014. In 2016, the Company projects new residential supply of 18,300 apartment homes and single family homes, which represents 0.8% of the total housing stock. The Company assumes an increase of 95,300 jobs or 2.9%, and an increase in Same-Property revenues of between 8.50% to 9.50% in 2016.

Seattle Metro Region: As of December 31, 2015, this region represented 21% of the Company’s consolidated apartment homes. Same-Property revenues increased 7.7% in 2015 as compared to 2014. In 2016, the Company projects new residential supply of 16,050 apartment homes and single family homes, which represents 1.3% of the total housing stock. The Company assumes an increase of 43,100 jobs or 2.7%, and an increase in Same-Property revenues of between 6.00% to 7.00% in 2016.

The Company projects 2016 Same-Property revenues to increase compared to 2015 results, as renewal and new leases are signed at higher rents in 2016 than 2015. Same-Property operating expenses are expected to increase in 2016 by 3.25% to 4.25%.

The Company’s consolidated communities are as follows:

	As of						As of
	December 31, 2015						December 31, 2014
	Apartment Homes			%			Apartment Homes			%
Southern California	23,707			49	%		22,168			47	%
Northern California	14,694			30	%		14,789			31	%
Seattle Metro	10,239			21	%		10,216			21	%
Arizona	—			—	%		552			1	%
Total	48,640			100	%		47,725			100	%

Co-investments, including Wesco I, LLC ("Wesco I"), Wesco III, LLC ("Wesco III"), Wesco IV, LLC (“Wesco IV”), Canadian Pension Plan Investment Board ("CPPIB" or "CPP"), Palm Valley and BEXAEW, LLC (“BEXAEW”) communities, developments under construction and preferred equity interest co-investment communities are not included in the table presented above for both periods.

RESULTS OF OPERATIONS

Comparison of Year Ended December 31, 2015 to the Year Ended December 31, 2014

The Company’s average financial occupancies for the Company’s stabilized apartment communities or “2015/2014 Same-Properties” (stabilized properties consolidated by the Company for the years ended December 31, 2015 and 2014) was unchanged at 96.2% in both 2015 and 2014. Financial occupancy is defined as the percentage resulting from dividing actual rental revenue by total potential rental revenue (actual rental revenue for occupied apartment homes plus market rent for vacant apartment homes). Actual rental revenue represents contractual rental revenue pursuant to leases without considering delinquency and concessions. Total potential rental revenue represents the value of all apartment homes, with occupied apartment homes valued at contractual rental rates pursuant to leases and vacant apartment homes valued at estimated market rents. We believe that financial occupancy is a meaningful measure of occupancy because it considers the value of each vacant unit at its estimated market rate.

Market rates are determined using the recently signed effective rates on new leases at the property and are used as the starting point in the determination of the market rates of vacant apartment homes. The Company may increase or decrease these rates based on the supply and demand in the apartment community’s market. The Company will check the reasonableness of these rents based on its position within the market and compare the rents against the asking rents by comparable properties in the market. Financial occupancy may not completely reflect short-term trends in physical occupancy and financial occupancy rates and the Company's calculation of financial occupancy may not be comparable to financial occupancy as disclosed by other REITs.

The Company does not take into account delinquency and concessions to calculate actual rent for occupied apartment homes and market rents for vacant apartment homes. The calculation of financial occupancy compares contractual rates for occupied apartment homes to estimated market rents for unoccupied apartment homes, and thus the calculation compares the gross value of all apartment homes excluding delinquency and concessions. For apartment communities that are development properties in lease-up without stabilized occupancy figures, the Company believes the physical occupancy rate is the appropriate performance metric. While an apartment community is in the lease-up phase, the Company’s primary motivation is to stabilize the property which may entail the use of rent concessions and other incentives, and thus financial occupancy, which is based on contractual revenue is not considered the best metric to quantify occupancy.

The regional breakdown of the Company’s 2015/2014 Same-Property portfolio for financial occupancy for the years ended December 31, 2015 and 2014 is as follows:

	Years ended December 31,
	2015			2014
Southern California	96.2	%		96.3	%
Northern California	96.3	%		96.2	%
Seattle Metro	96.2	%		96.0	%

The following table provides a breakdown of revenue amounts, including the revenues attributable to 2015/2014 Same-Properties.

		Number of			Years Ended December 31,								Dollar				Percentage
Property Revenues ($ in thousands)		Properties			2015				2014				Change				Change
2015/2014 Same-Properties: (1)
Southern California		58			$	283,435			$	267,413			$	16,022			6.0	%
Northern California		37			250,478				226,679				$	23,799			10.5	%
Seattle Metro		34			124,143				115,219				8,924				7.7	%
Total 2015/2014 Same-Property revenues		129			658,056				609,311				48,745				8.0	%
2015/2014 Non-Same Property Revenues					527,442				352,280				175,162				49.7	%
Total property revenues					$	1,185,498			$	961,591			$	223,907			23.3	%

(1)	Same-property excludes BRE properties acquired April 1, 2014 and properties held for sale.

2015/2014 Same-Property Revenues increased by $48.7 million or 8.0% to $658.1 million for 2015 compared to $609.3 million in 2014. The increase was primarily attributable to an increase of 8.1% in average rental rates from $1,741 per apartment home for 2014 to $1,882 per apartment home for 2015.

2015/2014 Non-Same Property Revenues increased by $175.2 million or 49.7% to $527.4 million in 2015 compared to $352.3 million in 2014. The increase was primarily due to the BRE merger and the acquisition or consolidation of ten communities, net of dispositions and properties held for sale, since January 1, 2014.

Property operating expenses, excluding real estate taxes increased $30.3 million or 14.8% in 2015 compared to 2014, primarily due to the BRE merger and the acquisition or consolidation of ten communities, net of dispositions and properties held for sale, since January 1, 2014. 2015/2014 Same-Property operating expenses excluding real estate taxes, increased by $2.3 million or 1.7% in 2015 compared to 2014, due mainly to a $1.7 million increase in repairs and maintenance.

Real estate taxes increased $20.7 million or 19.2% in 2015 compared to 2014, due primarily due to the BRE merger and the acquisition or consolidation of ten communities, net of dispositions and held for sale, since January 1, 2014. 2015/2014 Same-Property real estate taxes increased by $1.7 million or 3.2% for 2015 compared to 2014.

Depreciation and amortization expense increased by $92.8 million or 25.7% in 2015 compared to 2014, primarily due to the BRE merger and the acquisition or consolidation of ten communities, net of dispositions and properties held for sale, since January 1, 2014.

Merger and integration expenses include, but are not limited to, advisor fees, legal fees, and accounting fees related to the merger with BRE and related integration activity. The Company completed the merger with BRE on April 1, 2014. Merger and integration expenses were $3.8 million for 2015 and $53.5 million for 2014.

Interest expense increased $40.3 million or 24.5% in 2015, due to an increase in average outstanding debt primarily due to assumed debt in connection with the BRE merger in addition to a $6.8 million decrease in capitalized interest in 2015 compared to 2014, which was due to a decrease in development costs as compared to the same period in 2014.

Total return swap income of $5.7 million in 2015 consists of monthly settlements related to the Company's total return swap contracts that were entered into during the year, in connection with $257.3 million of tax-exempt mortgage notes payable. The Company had no total return swap income in 2014.

Interest and other income increased $7.3 million or 62.1% in 2015, due to an increase in the investment of mortgage backed securities, an increase of $3.1 million in insurance proceeds and $0.6 million in income from the sale of an investment.

Equity income from co-investments decreased by $18.0 million to $21.9 million in 2015 compared to $39.9 million in 2014, primarily due to events in 2014 which did not recur in 2015, including the Company’s share of the gain on the sale of two co-investment communities of $6.6 million, promote income of $10.6 million, and income from the early redemption of preferred equity investments of $5.3 million in 2014, partially offset by $2.0 million in income from the early redemption of two preferred equity investments during 2015 and an increase of $7.4 million in equity income from co-investment operations. Additionally, income from preferred equity investments decreased by approximately $5.1 million from 2014 to 2015.

Gains on sale of real estate and land increased by $1.3 million or 2.8% in 2015 compared to 2014, due primarily to $7.1 million in gains on the sales of Pinnacle South Mountain and two commercial buildings as well as a $40.2 million gain on the sale of Sharon Green during 2015 as compared to approximately $16.8 million in gains on the sales of Vista Capri North, Coldwater Canyon, Pinnacle Town Center, and a land parcel adjacent to the Company's Park Viridian property, as well as a $29.2 million gain on the sale of Mt. Sutro during 2014.

Gains on remeasurement of co-investment increased by $34.0 million in 2015 compared to 2014, due to the remeasurement of the Company's investments, as a result of the Company's acquisition of a controlling interest in The Huxley and The Dylan properties, resulting in a gain of $21.3 million, and Reveal, resulting in a gain of $12.7 million.

Comparison of Year Ended December 31, 2014 to the Year Ended December 31, 2013

The Company’s average financial occupancies for the Company’s stabilized apartment communities for “2014/2013 Same-Properties” (stabilized properties consolidated by the Company for the years ended December 31, 2014 and 2013) increased 10 basis points to 96.2% in 2014 from 96.1% in 2013. The regional breakdown of the Company’s stabilized 2014/2013 Same-Property portfolio for financial occupancy for the years ended December 31, 2014 and 2013 is as follows:

	Years ended December 31,
	2014			2013
Southern California	96.3	%		96.1	%
Northern California	96.3	%		96.1	%
Seattle Metro	96.0	%		96.1	%

The following table provides a breakdown of revenue amounts, including the revenues attributable to 2014/2013 Same-Properties.

		Number of			Years Ended December 31,								Dollar				Percentage
Property Revenues ($ in thousands)		Properties			2014				2013				Change				Change
2014/2013 Same-Properties:
Southern California		58			$	267,413			$	253,503			$	13,910			5.5	%
Northern California		35			218,577				199,395				19,182				9.6	%
Seattle Metro		29			115,219				107,225				7,994				7.5	%
Total 2014/2013 Same-Property revenues		122			601,209				560,123				41,086				7.3	%
2014/2013 Non-Same Property Revenues (1)					80,059				43,204				36,855				85.3	%
2014 BRE Legacy Property Revenues (2)					280,323				—				280,323
Total property revenues					$	961,591			$	603,327			$	358,264			59.4	%

(1)	Includes eleven communities acquired after January 1, 2013, three sold communities and one redevelopment community.

(2)	Includes 55 stabilized properties acquired in connection with the BRE merger on April 1, 2014, and two development communities in lease-up.

2014/2013 Same-Property Revenues increased by $41.1 million or 7.3% to $601.2 million for 2014 compared to $560.1 million in 2013. The increase was primarily attributable to an increase in scheduled rents of $39.1 million as reflected in an increase of 7.1% in average rental rates from $1,619 per unit for 2013 to $1,734 per unit for 2014. Scheduled rents increased in all regions by 5.2%, 9.5%, and 7.4% in Southern California, Northern California, and Seattle Metro, respectively. Income from utility billings and other income increased by $2.2 million and $1.1 million, respectively in 2014 compared to 2013. Financial occupancy increased 10 basis points in 2014 to 96.2% compared to 96.1% in 2013.

2014/2013 Non-Same Property Revenues increased by $36.9 million or 85.3% to $80.1 million in 2014 compared to $43.2 million to 2013. The increase was primarily due to revenue generated from eleven communities acquired or consolidated since January 1, 2013.

Management and other fees from affiliates increased $2.0 million or 28.7% to $9.3 million in 2013 compared to $7.3 million in 2012. The increase is primarily due to the asset and property management fees earned from the Wesco III, Wesco IV, and BEXAEW co-investments formed during 2014. The increase in management fees was offset by a reduction of $1.2 million in asset and property management fees from the sale of two Essex Apartment Value Fund II, L.P. ("Fund II") communities in 2014.

Property operating expenses, excluding real estate taxes increased $64.6 million or 46.1% in 2014 compared to 2013, primarily due to properties acquired in connection with the BRE merger and six other communities in 2014. 2014/2013 Same-Property operating expenses excluding real estate taxes, increased by $3.8 million or 3.0% in 2014 compared to 2013, due mainly to a $1.6 million increase in repairs and maintenance and a $1.3 million increase in utilities expense.

Real estate taxes increased $50.6 million or 88.3% in 2014 compared to 2013, due primarily to properties acquired in connection with the BRE merger and six other communities in 2014. 2014/2013 Same-Property real estate taxes increased by $2.3 million or 4.5% for 2014 compared to 2013 due to a $1.6 million or 15.6% increase in property taxes for Seattle Metro due to higher assessed values for 2014.

Depreciation and amortization expense increased by $168.2 million or 87.4% in 2014 compared to 2013, due to the acquisition of BRE and six other communities. The increase is also due to the capitalization of approximately $313.1 million in additions to rental properties through 2013, including $152.8 million spent on acquisition of and additions to real estate under development, $81.4 million spent on redevelopment, and $78.9 million spent on capital expenditures on rental properties. Approximately $122.0 million in additions to rental properties were capitalized for 2012, including $17.8 million spent on acquisitions of and additions to real estate under development, $47.3 million spent on redevelopment, and $56.9 million spent on capital expenditures on rental properties.

General and administrative expense increased $14.2 million or 53.2% in 2014 compared to 2013 primarily due to additional corporate employees from the BRE merger and $2.8 million in expenses related to the cyber-intrusion.

Merger and integration expenses include, but are not limited to, advisor fees, legal fees, and accounting fees related to the BRE merger. The Company completed the merger with BRE on April 1, 2014. Merger and integration expenses were $53.5 million for 2014 and $4.3 million for 2013.

Interest expense increased $48.0 million or 41.2% in 2014, primarily due to additional debt assumed as part of the BRE merger, offset by an increase in capitalized interest from development and redevelopment projects.

Equity income from co-investments decreased by $16.0 million to $39.9 million in 2014 compared to $55.9 million in 2013. The decrease was primarily due to the Company’s share of the gain on the sale of two Fund II communities of $6.6 million, promote income of $10.6 million, and income from early redemption of preferred equity investments of $5.3 million in 2014, compared to the Company's share of gain on the sale of five Fund II communities of $38.8 million, net of internal dispositions costs in 2013.

Liquidity and Capital Resources

The following table sets forth the Company’s cash flows for 2015, 2014 and 2013 ($ in thousands):

		For the year ended December 31,
		2015				2014				2013
Cash flow provided by (used in):
Operating activities		$	617,410			$	493,312			$	304,982
Investing activities		$	(725,556	)		$	(1,147,156	)		$	(453,696	)
Financing activities		$	108,214			$	520,610			$	148,599

ESS’s business is operated primarily through the Operating Partnership. ESS issues public equity from time to time, but does not otherwise generate any capital itself or conduct any business itself, other than incurring certain expenses in operating as a public company which are fully reimbursed by the Operating Partnership. ESS itself does not hold any indebtedness, and its only material asset is its ownership of partnership interests of the Operating Partnership. ESS’s principal funding requirement is the payment of dividends on its common stock and preferred stock. ESS’s sole source of funding for its dividend payments is distributions it receives from the Operating Partnership.

As of December 31, 2015, ESS owned a 96.7% general partner interest and the limited partners owned the remaining 3.3% interest in the Operating Partnership.

The liquidity of ESS is dependent on the Operating Partnership’s ability to make sufficient distributions to ESS. The primary cash requirement of ESS is its payment of dividends to its stockholders. ESS also guarantees some of the Operating Partnership’s debt, as discussed further in Notes 7 and 8 of the notes to consolidated financial statements included elsewhere herein. If the Operating Partnership fails to fulfill certain of its debt requirements, which trigger the ESS’s guarantee obligations, then ESS will be required to fulfill its cash payment commitments under such guarantees. However, ESS’s only significant asset is its investment in the Operating Partnership.

For ESS to maintain its qualification as a REIT, it must pay dividends to its stockholders aggregating annually at least 90% of its REIT taxable income, excluding net capital gains. While historically ESS has satisfied this distribution requirement by making cash distributions to its stockholders, it may choose to satisfy this requirement by making distributions of cash or other property, including, in limited circumstances, ESS’s own stock. As a result of this distribution requirement, the Operating Partnership cannot rely on retained earnings to fund its ongoing operations to the same extent that other companies whose parent companies are not REITs can. ESS may need to continue to raise capital in the equity markets to fund the Operating Partnership’s working capital needs, acquisitions and developments.

At December 31, 2015, the Company had $29.7 million of unrestricted cash and cash equivalents and $137.5 million in marketable securities, of which $57.1 million were held available for sale. The Company believes that cash flows generated by its operations, existing cash and cash equivalents, marketable securities balances, availability under existing lines of credit, access to capital markets and the ability to generate cash from the disposition of real estate are sufficient to meet all of the Company’s reasonably anticipated cash needs during 2016. The timing, source and amounts of cash flows provided by financing activities and used in investing activities are sensitive to changes in interest rates and other fluctuations in the capital markets environment, which can affect the Company’s plans for acquisitions, dispositions, development and redevelopment activities.

As of December 31, 2015, the Company had $465.0 million of private placement unsecured bonds outstanding at an average interest rate of 4.5% with maturity dates ranging from March 2016 through August 2021. In January 2016, $150.0 million of these bonds bearing an interest rate of 4.36% were repaid.

As of December 31, 2015, the Company had $2.4 billion of fixed rate public bonds, net of unamortized premiums, discounts and debt issuance costs, with interest rates varying from 3.25% to 5.50% and maturity dates ranging from 2017 to 2025.

As of December 31, 2015, the Company had a $225.0 million unsecured term loan outstanding that has a variable interest rate of LIBOR plus 1.05%. The Company has entered into interest rate swap contracts for a term of five years with a notional amount totaling $225.0 million, which effectively converted the interest rate on $225.0 million of the term loan to a fixed rate of 2.4%. The $200 million tranche of this unsecured term loan has a maturity date of November 2016 and the $25 million tranche has a maturity date of August 2017.

As of December 31, 2015, the Company’s mortgage notes payable totaled $2.2 billion, net of unamortized premiums and debt issuance costs, which consisted of $1.9 billion in fixed rate debt with interest rates varying from 4.3% to 6.4% and maturity dates ranging from 2016 to 2021 and $281.7 million of tax-exempt variable rate demand notes with a weighted average interest rate of 1.2%. The tax-exempt variable rate demand notes have maturity dates ranging from 2025 to 2040, and $20.7 million is subject to interest rate caps and $257.3 million is subject to total return swaps.

The Company has two lines of credit aggregating $1.03 billion as of December 31, 2015 including a $1.0 billion unsecured line of credit. As of December 31, 2015, there was a $15.0 million balance on this unsecured line of credit with an underlying interest rate of LIBOR plus 0.95%. In January 2016, the facility maturity date was extended to December 31, 2019 with one 18-month extension, exercisable by the Company, with an underlying interest rate of LIBOR plus 0.90%. The Company also has a $25.0 million working capital unsecured line of credit agreement. As of December 31, 2015, there were no amounts outstanding on this unsecured line with an underlying interest rate of LIBOR plus 0.95%. In January 2016 the maturity date was extended to January 2018 and the interest rate was lowered to LIBOR plus 0.90%.

The Company’s unsecured line of credit and unsecured debt agreements contain debt covenants related to limitations on indebtedness and liabilities and maintenance of minimum levels of consolidated earnings before depreciation, interest and amortization. The Company was in compliance with the debt covenants as of December 31, 2015 and 2014.

The Company pays quarterly dividends from cash available for distribution. Until it is distributed, cash available for distribution is invested by the Company primarily in investment grade securities held available for sale or is used by the Company to reduce balances outstanding under its line of credit.

The Company has benefited from borrowing from Fannie Mae and Freddie Mac, and there are no assurances that these entities will lend to the Company in the future. To the extent that the Company’s access to capital and credit is at a higher cost than the Company has experienced in recent years (reflected in higher interest rates for debt financing or a lower stock price for equity financing) the Company’s ability to make acquisitions, develop communities, obtain new financing, and refinance existing borrowing at competitive rates could be adversely impacted. For the past three years the Company has primarily issued unsecured debt and repaid secured debt when it has matured to place less reliance on mortgage debt financing, and to unencumber more of the Company's communities.

Derivative Activity

The Company uses interest rate swaps, interest rate cap, and total return swap contracts to manage certain interest rate risks. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair values of interest rate swaps and total return swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparties nonperformance risk in the fair value measurements.

The Company has entered into interest rate swap contracts with an aggregate notional amount of $225.0 million that effectively fixed the interest rate on the $225.0 million unsecured term loan at 2.4%. These derivatives qualify for hedge accounting.

The Company has entered into four total return swap contracts, with an aggregate notional amount of $257.3 million, that effectively converts $257.3 million of mortgage notes payable to a floating interest rate based on SIFMA plus a spread. Additionally, the total return swaps provide fair market value protection on the mortgage notes payable to our counterparties during the initial period of the total return swap until the Company's option to call the mortgage notes at par can be exercised. The Company can currently call one of the total return swaps with $114.4 million of the outstanding debt at par, while the call option on the other three total return swaps relating to $142.9 million of the outstanding debt can be exercised starting on January 1, 2017. These derivatives do not qualify for hedge accounting.

As of December 31, 2015 the Company also had nine interest rate caps totaling a notional amount of $20.7 million that effectively limit the Company’s exposure to interest rate risk by providing a ceiling on the underlying variable interest rate for $20.7 million of the Company’s tax exempt variable rate debt.

As of December 31, 2015 and 2014, the aggregate carrying value of the interest rate swap contracts was a liability of $1.0 million and $1.8 million, respectively. The aggregate carrying value of the interest rate caps was zero on the balance sheets as of both December 31, 2015 and 2014. The aggregate carrying value of the total return swaps was $4 thousand and zero as of December 31, 2015 and 2014, respectively.

Hedge ineffectiveness related to cash flow hedges, which is reported in current year income as interest expense, was not significant for the years ended December 31, 2015, 2014 and 2013.

Issuance of Common Stock

In 2014, the Company filed a new shelf registration statement with the SEC, allowing the Company to sell an undetermined number or amount of certain equity (only ESS) and debt securities as defined in the prospectus.

ESS has entered into equity distribution agreements with Cantor Fitzgerald & Co., Barclays Capital Inc., BMO Capital Markets Corp., BNP Paribas Securities Corp., Citigroup Global Markets Inc, Jefferies LLC, J.P. Morgan Securities LLC, Liquidnet, Inc., Mitsubishi UFJ Securities (USA), Inc, and UBS Securities LLC. Pursuant to its equity distribution program, in 2015, ESS issued 1,481,737 shares of common stock for $332.3 million, net of fees and commissions, and in 2014, ESS issued 2,964,315 shares of common stock for proceeds of $534.0 million, net of fees and commissions. During the first quarter of 2016 through February 22, 2016, ESS has not issued any shares of common stock pursuant to this program. Under this program, ESS may from time to time sell shares of common stock into the existing trading market at current market prices, and the Company anticipates using the net proceeds, which are contributed to the Operating Partnership, to pay down debt, fund redevelopment and development pipelines, fund acquisitions, and for general corporate purposes. As of February 22, 2016, ESS may sell an additional 1,719,109 shares under the current equity distribution program.

Capital Expenditures

Non-revenue generating capital expenditures are improvements and upgrades that extend the useful life of the property. For the year ended December 31, 2015, non-revenue generating capital expenditures totaled approximately $1,173 per apartment home. The Company projects to incur approximately $1,200 per apartment home in non-revenue generating capital expenditures for the year ending December 31, 2016. These expenditures do not include the improvements required in connection with the origination of mortgage loans, expenditures for deferred maintenance on acquisition properties, and expenditures for property renovations and improvements which are expected to generate additional revenue. The Company expects that cash from operations and/or its lines of credit will fund such expenditures. However, there can be no assurance that the actual expenditures incurred during 2016 and/or the funding thereof will not be significantly different than the Company’s current expectations.

Development and Predevelopment Pipeline

The Company defines development projects as new communities that are being constructed or are newly constructed and are in a phase of lease-up and have not yet reached stabilized operations. As of December 31, 2015, the Company had two consolidated development projects comprised of 771 apartment homes with an estimated cost of $489.0 million of which $287.0 million remains to be expended, and six unconsolidated joint venture active development projects comprised of 1,676 apartment homes with an estimated cost of $0.9 billion, of which approximately $500.0 million remains to be expended. The Company's share of these estimated remaining project costs is approximately $255.0 million.

The Company defines predevelopment projects as proposed communities in negotiation or in the entitlement process with an expected high likelihood of becoming entitled development projects. The Company may also acquire land for future development purposes or sale.

The Company expects to fund the development and predevelopment pipeline by using a combination of some or all of the following sources: its working capital, amounts available on its lines of credit, construction loans, net proceeds from public and private equity and debt issuances, and proceeds from the disposition of properties, if any.

Redevelopment Pipeline

The Company defines redevelopment communities as existing properties owned or recently acquired, which have been targeted for additional investment by the Company with the expectation of increased financial returns through property improvement. During redevelopment, apartment homes may not be available for rent and, as a result, may have less than stabilized operations. As of December 31, 2015, the Company had ownership interests in five major redevelopment communities aggregating 1,313

apartment homes with estimated redevelopment costs of $159.8 million, of which approximately $82.5 million remains to be expended.

Alternative Capital Sources

The Company utilizes co-investments as an alternative source of capital for acquisitions of both operating and development communities. As of December 31, 2015, the Company had an interest in 1,676 apartment homes of communities actively under development with joint ventures for a total estimated cost of $0.9 billion. Total estimated remaining costs total approximately $500.0 million, of which the Company estimates that its remaining investment in these development joint ventures will be approximately $255.0 million. In addition, the Company had an interest in 10,520 apartment homes of operating communities with joint ventures for a total book value of $738.9 million.

Contractual Obligations and Commercial Commitments

The following table summarizes the maturity or due dates of the Company’s contractual obligations and other commitments at December 31, 2015, and the effect such obligations could have on the Company’s liquidity and cash flow in future periods ($ in thousands):

		2016				2017 and 2018				2019 and 2020				Thereafter				Total
Mortgage notes payable		$	29,714			$	519,802			$	1,279,300			$	329,451			$	2,158,267
Unsecured debt		350,000				365,000				75,000				2,300,000				3,090,000
Lines of credit		—				—				15,000				—				15,000
Interest on indebtedness (1)		221,917				373,819				266,313				223,734				1,085,783
Ground leases		2,742				5,484				5,484				131,851				145,561
Operating leases		1,695				3,557				3,792				12,350				21,394
Development commitments (including co-investments) (2)		195,218				329,207				17,235				—				541,660
		$	801,286			$	1,596,869			$	1,662,124			$	2,997,386			$	7,057,665

(1)	Interest on indebtedness for variable debt was calculated using interest rates as of December 31, 2015.

(2)	Estimated project cost for development the Company's 500 Folsom project is net of a projected value for low-income housing tax credit proceeds and savings from tax exempt bonds.

Variable Interest Entities

In accordance with accounting standards for consolidation of variable interest entities (VIEs), the Company consolidates the Operating Partnership and 19 DownREIT limited partnerships (comprising eleven communities). The Company consolidates these entities because it is deemed the primary beneficiary. The REIT has no assets or liabilities other than its investment in the Operating Partnership. The consolidated total assets and liabilities related to these DownREIT VIEs, net of intercompany eliminations, were approximately $241.0 million and $206.7 million, respectively, as of December 31, 2015, and $235.1 million and $209.1 million respectively, as of December 31, 2014. Interest holders in VIEs consolidated by the Company are allocated net income equal to the cash payments made to those interest holders for services rendered or distributions from cash flow. The remaining results of operations are generally allocated to the Company. As of December 31, 2015, the Company did not have any VIE’s of which it was not deemed to be the primary beneficiary.

Critical Accounting Policies and Estimates

The preparation of 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. The Company defines critical accounting policies as those accounting policies that require the Company's management to exercise their most difficult, subjective and complex judgments. The Company’s critical accounting policies relate principally to the following key areas: (i) accounting for business combinations; (ii) consolidation under applicable accounting standards of various entities; (iii) assessing the carrying values of the Company's real estate and investments in and advances to joint ventures and affiliates; and (iv) internal cost capitalization. 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 differ from those estimates made by management.

The Company accounts for its business combinations, including the merger and other acquisitions of investments in real estate, in accordance with ASC 805-10, Business Combinations, which requires the acquired tangible and intangible assets and liabilities to be recorded at fair value, with excess purchase price, if any, recorded to goodwill. The Company must make significant assumptions in determining the fair value of the tangible and intangible assets and liabilities acquired and consideration transferred. The use of different assumptions in estimating the fair value could affect the measurement and timing of recognition of acquired assets and liabilities and related expenses.

The consideration transferred in a business combination is generally measured at fair value. For debt assumed by the Company, the fair value is determined using estimated market interest rates for debt with comparable terms in place at the time of the acquisition. For equity issued by the Company, the fair value is generally based on the fair value of the Company’s equity interests at the date of issuance.

The fair value of the tangible assets, which principally includes land and building, is determined first by valuing the property as a whole as if it were vacant, using stabilized net operating income and market specific capitalization rates. The fair value of the land and building is then recorded based on its estimated fair value.

In calculating the fair value of identified intangible assets of an acquired property, the in-place leases are valued based on in-place rent rates and estimated time and cost to lease a unit.

The initial purchase accounting is based on the Company’s preliminary assessment, which may differ when additional information becomes available. Subsequent adjustments made to the initial purchase accounting, if any, are made within the measurement period, which will be finalized within one year of the acquisition date.

The Company assesses each entity in which it has an investment or contractual relationship to determine if it may be deemed to be a VIE. If such an entity is a VIE, then the Company performs an analysis to determine who is the primary beneficiary. If the Company is the primary beneficiary, then the entity is consolidated. The analysis required to identify VIEs and primary beneficiaries is complex and judgmental, and the analysis must be applied to various types of entities and legal structures.

The Company assesses the carrying value of its real estate investments by monitoring investment market conditions and performance compared to budget for operating properties and joint ventures, and by monitoring estimated costs for properties under development. Local market knowledge and data is used to assess carrying values of properties and the market value of acquisition opportunities. Whenever events or changes in circumstances indicate that the carrying amount of a property held for investment may not be fully recoverable, the carrying amount is evaluated. If the sum of the property’s expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the property, then the Company will recognize an impairment loss equal to the excess of the carrying amount over the fair value of the property. Adverse changes in market conditions or poor operating results of real estate investments could result in impairment charges. When the Company determines that a property is held for sale, it discontinues the periodic depreciation of that property. The criteria for determining when a property is held for sale requires judgment and has potential financial statement impact as depreciation would cease and an impairment loss could occur upon determination of held for sale status. Assets held for sale are reported at the lower of the carrying amount or estimated fair value less costs to sell.

Further, the Company evaluates whether its co-investments are other than temporarily impaired and, if so, records an impairment loss equal to the excess of the co-investments' carrying value over its estimated fair value.

The Company capitalizes all direct and certain indirect costs, including interest and real estate taxes, incurred during development and redevelopment activities. Interest is capitalized on real estate assets that require a period of time to get them ready for their intended use. The amount of interest capitalized is based upon the average amount of accumulated development expenditures during the reporting period. Included in capitalized costs are management’s accounting estimates of the direct and incremental personnel costs and indirect project costs associated with the Company's development and redevelopment activities. Indirect project costs consist primarily of personnel costs associated with construction administration and development, including accounting, legal fees, and various corporate and community onsite costs that clearly relate to projects under development.

The Company bases its accounting estimates on historical experience 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.

Net Operating Income (“NOI”)

Same-Property net operating income (“NOI”) is considered by management to be an important supplemental performance measure to earnings from operations included in the Company’s consolidated statements of income. The presentation of Same-Property NOI assists with the presentation of the Company’s operations prior to the allocation of depreciation and any corporate-level or financing-related costs. NOI reflects the operating performance of a community and allows for an easy comparison of the operating performance of individual communities or groups of communities. Prospective buyers of real estate have different financing and overhead structures, with varying marginal impacts to overhead by acquiring real estate, and NOI is considered by many in the real estate industry to be a useful measure for determining the value of a real estate asset or group of assets. The Company defines Same-Property NOI as Same-Property revenue less Same-Property operating expenses.

The reconciliation of earnings from operations to Same-Property NOI for the periods presented:

	2015				2014				2013
Earnings from operations	$	331,174			$	201,514			$	188,705
Adjustments:
General and administrative	40,090				40,878				26,684
Management and other fees from affiliates	(8,909		)		(9,347		)		(7,263		)
Depreciation and amortization	453,423				360,592				192,420
Merger and integration expenses	3,798				53,530				4,284
Acquisition and investment related costs	2,414				1,878				1,161
Net operating income	821,990				649,045				405,991
Less: Non Same-Property NOI	(357,457		)		(229,244		)		(22,599		)
Same-Property NOI	$	464,533			$	419,801			$	383,392

Forward Looking Statements

Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this Annual Report on Form 10-K which are not historical facts may be considered forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, including statements regarding the Company's expectations, hopes, intentions, beliefs and strategies regarding the future. Forward looking statements include statements regarding the Company's expectations as to the timing of completion of current development and redevelopment projects and the stabilization dates of such projects, expectation as to the total projected costs of development and redevelopment projects, beliefs as to the adequacy of future cash flows to meet anticipated cash needs, expectations as to the amount of non-revenue generating capital expenditures, future acquisitions, the Company's development and redevelopment pipeline and the sources of funding for it, the anticipated performance of existing properties, anticipated property and growth trends in various geographic regions, statements regarding the Company’s expected 2016 Same-Property revenue generally and in various areas, and 2016 Same-Property operating expenses, statements regarding the Company's financing activities, and the use of proceeds from such activities.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors including, but not limited to, that the Company will fail to achieve its business objectives, that the actual completion of development and redevelopment projects will be subject to delays, that the stabilization dates of such projects will be delayed, that the total projected costs of current development and redevelopment projects will exceed expectations, that such development and redevelopment projects will not be completed, that development and redevelopment projects and acquisitions will fail to meet expectations, that estimates of future income from an acquired property may prove to be inaccurate, that future cash flows will be inadequate to meet operating requirements and/or will be insufficient to provide for dividend payments in accordance with REIT requirements, that the actual non-revenue generating capital expenditures will exceed the Company's current expectations, that there may be a downturn in the markets in which the Company's communities are located, that the terms of any refinancing may not be as favorable as the terms of existing indebtedness, as well as those risks, special considerations, and other factors discussed in Item 1A, Risk Factors, of this Form 10-K, and those risk factors and special considerations set forth in the Company’s other filings with the SEC which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. All forward-looking statements are made as of today, and the Company assumes no obligation to update this information.