Item 1. Business

OVERVIEW

Essex Property Trust, Inc. (“Essex"), a Maryland corporation, is an S&P 500 company that operates as a self-administered and self-managed real estate investment trust (“REIT”). The Company owns all of its interest in its real estate and other investments directly or indirectly through Essex Portfolio, L.P. (the “Operating Partnership” or “EPLP”). The Company is the sole general partner of the Operating Partnership and as of December 31, 2017 owns a 96.7% general partnership interest. In this report, the terms the “Company,” "we," "us," and "our" also refer to Essex Property Trust, Inc., the Operating Partnership and those entities/subsidiaries owned or controlled by Essex and/or the Operating Partnership.

The Company has elected to be treated as a REIT for federal income tax purposes, commencing with the year ended December 31, 1994. The Company completed its initial public offering on June 13, 1994. In order to maintain compliance with REIT tax rules, the Company utilizes taxable REIT subsidiaries for various revenue generating or investment activities. All taxable REIT subsidiaries are consolidated by the Company.

The Company is engaged primarily in the ownership, operation, management, acquisition, development and redevelopment of predominantly apartment communities, located along the West Coast. As of December 31, 2017, the Company owned or held an interest in 247 operating apartment communities, aggregating 60,239 apartment homes, excluding the Company's ownership in preferred equity investments, as well as one operating commercial building (totaling approximately 106,564 square feet), and seven active development projects with 1,982 apartment homes in various stages of development (collectively, the “Portfolio”).

The Company’s website address is http://www.essex.com. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and the Proxy Statement for its Annual Meeting of Stockholders are available, free of charge, on its website as soon as practicable after the Company files the reports with the U.S. Securities and Exchange Commission (“SEC”).

BUSINESS STRATEGIES

The following is a discussion of the Company’s business strategies in regards to real estate investment and management.

Business Strategies

Research Driven Approach to Investments – The Company believes that successful real estate investment decisions and portfolio growth begin with extensive regional economic research and local market knowledge. The Company continually assesses markets where the Company operates, as well as markets where the Company considers future investment opportunities by evaluating markets and focusing on the following strategic criteria:

•	Major metropolitan areas that have regional population in excess of one million;

•	Constraints on new supply driven by: (i) low availability of developable land sites where competing housing could be economically built; (ii) political growth barriers, such as protected land, urban growth boundaries, and potential lengthy and expensive development permit processes; and (iii) natural limitations to development, such as mountains or waterways;

•	Rental demand enhanced by affordability of rents relative to costs of for-sale housing; and

•	Housing demand based on job growth, proximity to jobs, high median incomes and the quality of life including related commuting factors.

Recognizing that all real estate markets are cyclical, the Company regularly evaluates the results of its regional economic, and local market research, and adjusts the geographic focus of its portfolio accordingly. The Company seeks to increase its portfolio

allocation in markets projected to have the strongest local economies and to decrease allocations in markets projected to have declining economic conditions. Likewise, the Company also seeks to increase its portfolio allocation in markets that have attractive property valuations and to decrease allocations in markets that have inflated valuations and low relative yields.

Property Operations – The Company manages its communities by focusing on activities that may generate above-average rental growth, tenant retention/satisfaction and long-term asset appreciation. The Company intends to achieve this by utilizing the strategies set forth below:

•	Property Management – Oversee delivery of and quality of the housing provided to our tenants and manage the properties financial performance.

•	Capital Preservation – The Company's asset management services are responsible for the planning, budgeting and completion of major capital improvement projects at the Company’s communities.

•	Business Planning and Control – Comprehensive business plans are implemented in conjunction with significant investment decisions. These plans include benchmarks for future financial performance based on collaborative discussions between on-site managers and senior management.

•	Development and Redevelopment – The Company focuses on acquiring and developing apartment communities in supply constrained markets, and redeveloping its existing communities to improve the financial and physical aspects of the Company’s communities.

CURRENT BUSINESS ACTIVITIES

Acquisitions of Real Estate

Acquisitions are an important component of the Company’s business plan, and during 2017, the Company acquired ownership interests in five communities comprised of 1,897 apartment homes for $566.8 million.

The following is a summary of 2017 acquisitions ($ in millions):

Property Name		Location		Apartment Homes			Essex Ownership Percentage			Ownership		Quarter in 2017		Purchase Price
Palm Valley(1)		San Jose, CA		1,098			100	%		EPLP		Q1		$	183.0
Sage at Cupertino(2)		San Jose, CA		230			41	%		EPLP		Q1		90.0
8th & Republican		Seattle, WA		211			50	%		Wesco V		Q3		101.3			(3)
360 Residences		San Jose, CA		213			50	%		Wesco V		Q3		133.5			(3)
Village at Toluca Lake		Burbank, CA		145			50	%		BEX III		Q4		59.0			(3)
Total 2017				1,897										$	566.8

(1)	In January 2017, the Company purchased its joint venture partner's 50.0% membership interest in the Palm Valley co-investment for a purchase price of $183.0 million.

(2)

In March 2017, the Company converted its existing $15.3 million preferred equity investment in Sage at Cupertino into a 40.5% equity ownership interest in the property. The Company issued DownREIT limited partnership units to the seller for the remaining equity based on an estimated property valuation of $90.0 million and an encumbrance of $52.0 million of mortgage debt. Based on a consolidation analysis performed by the Company, the property is consolidated.

(3)	8th & Republican, 360 Residences, and Village at Toluca Lake purchase prices represent the total contract price at 100%.

Dispositions of Real Estate

As part of its strategic plan to own quality real estate in supply-constrained markets, the Company continually evaluates all of its communities and sells those which no longer meet its strategic criteria. The Company may use the capital generated from the dispositions to invest in higher-return communities or other real estate investments, or to repay debts. The Company believes that the sale of these communities will not have a material impact on its future results of operations or cash flows nor will their sale materially affect its ongoing operations. Generally, the Company seeks to have any impact of earnings dilution resulting from these dispositions offset by the positive impact of its acquisitions, development and redevelopment activities.

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

In August 2017, a Company co-investment, Wesco I, LLC ("Wesco I") sold Madrid, a 230 apartment home community located in Mission Viejo, CA, for $83.0 million, which resulted in a gain of $10.1 million for the Company.

In December 2017, a Company co-investment, BEXAEW, LLC ("BEXAEW") sold two apartment home communities, consisting of 587 total apartment homes, located in Seattle, WA, for $160.3 million, which resulted in an aggregate gain of $34.8 million for the Company.

Development 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, 2017, the Company had five consolidated development projects and two joint venture development projects comprised of 1,982 apartment homes, with total incurred costs of $557.0 million, and estimated remaining project costs of approximately $752.0 million, $572.0 million of which represents the Company's estimated remaining costs,for total estimated project costs of $1.3 billion.

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. As of December 31, 2017, the Company had various consolidated predevelopment projects. The Company may also acquire land for future development purposes or sale.

The following table sets forth information regarding the Company’s development pipeline ($ in millions):

										As of
										12/31/2017
				Essex						Incurred				Estimated
Development Pipeline		Location		Ownership%			Apartment Homes			Project Cost (1)				Project Cost(1)
Development Projects - Consolidated
Station Park Green - Phase I		San Mateo, CA		100	%		121			$	95			$	98
Station Park Green - Phase II		San Mateo, CA		100	%		199			57				141
Station Park Green - Phase III		San Mateo, CA		100	%		172			43				124
Gateway Village		Santa Clara, CA		100	%		476			81				226
Hollywood		Hollywood, CA		100	%		200			27				105
Total - Consolidated Development Projects							1,168			303				694
Development Projects - Joint Venture
Ohlone		San Jose, CA		50	%		269			30				136
500 Folsom (2)		San Francisco, CA		50	%		545			160				415
Total - Joint Venture Development Projects							814			190				551
Predevelopment Projects - Consolidated
Other Projects		Various		100	%		—			64				64
Total - Predevelopment Projects							—			64				64
Grand Total - Development and Predevelopment Pipeline							1,982			$	557			$	1,309

(1)	Includes costs related to the entire project, including both the Company's and joint venture partners' costs. Includes incurred costs and estimated costs to complete these development projects. For predevelopment projects, only incurred costs are included in estimated costs.

(2)	Estimated project cost for this development is net of a projected value for low-income housing tax credit proceeds and the value of the tax exempt bond structure.

Redevelopment Pipeline

The Company defines the redevelopment pipeline 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, 2017, the Company had ownership interests in five major redevelopment communities aggregating 1,727 apartment homes with estimated redevelopment costs of $138.8 million, of which approximately $43.6 million remains to be expended.

Long Term Debt

During 2017, the Company made regularly scheduled principal payments and loan payoffs of $219.5 million of its secured mortgage notes payable at an average interest rate of 5.2%.

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

In April 2017, the Company issued $350.0 million of 3.625% senior unsecured notes that mature on May 1, 2027. The interest is payable semi-annually in arrears on May 1st and November 1st of each year, commencing November 1, 2017, until the maturity date on May 1, 2027. The Company used the net proceeds of this offering to repay indebtedness under its unsecured lines of credit and for other general corporate and working capital purposes.

Bank Debt

As of December 31, 2017, Fitch Ratings, Moody’s Investor Service, and Standard and Poor's (“S&P”) credit agencies rated Essex Property Trust, Inc. and Essex Portfolio, L.P. BBB+/Stable, Baa1/Stable, and BBB+/Stable, respectively.

At December 31, 2017, the Company had two lines of unsecured credit aggregating $1.03 billion. The Company's $1.0 billion credit facility had an interest rate of LIBOR plus 0.90%. In January 2018, the Company's $1.0 billion credit facility was amended and the line's capacity was increased to $1.2 billion and the scheduled maturity date was extended to December 2021, with one 18-month extension, exercisable at the Company's option. The underlying interest rate on the amended line is based on a tiered rate structure tied to the Company's corporate ratings and is at LIBOR plus 0.875%. The Company's $25.0 million working capital unsecured line of credit had an interest rate of LIBOR plus 0.90%. In January 2018, this line of credit facility was amended and the line's capacity was increased to $35.0 million and the scheduled maturity date was extended to January 2020. The underlying interest rate on the amended line is based on a tiered rate structure tied to the Company's corporate ratings and is at LIBOR plus 0.875%.

Equity Transactions

During 2017, the Company issued 345,444 shares of common stock through its equity distribution program at an average price of $260.38 for aggregate proceeds of $89.1 million, net of fees and commissions. During the first quarter of 2018 through February 15, 2018, Essex has not issued any shares under its equity distribution program.

Co-investments

The Company has entered into, and may continue in the future to enter into, joint ventures or partnerships (including limited liability companies) through which we own an indirect economic interest in less than 100% of the community or land or other investments owned directly by the joint venture or partnership. For each joint venture the Company holds a non-controlling interest in the venture and earns customary management fees and may earn development fees, asset property management fees, and a promote interest.

The Company has also made, and may continue in the future to make, preferred equity investments in various multi-family development projects. The Company earns a preferred rate of return on these investments.

OFFICES AND EMPLOYEES

The Company is headquartered in San Mateo, CA, and has regional offices in Woodland Hills, CA; San Jose, CA; Irvine, CA; San Diego, CA and Bellevue, WA. As of December 31, 2017, the Company had 1,835 employees.

INSURANCE

The Company purchases general liability and property insurance coverage, including loss of rent, for each of its communities. The Company also purchases limited earthquake, terrorism, environmental and flood insurance. There are certain types of losses which may not be covered or could exceed coverage limits. The insurance programs are subject to deductibles and self-insured retentions in varying amounts. The Company utilizes a wholly owned insurance subsidiary, Pacific Western Insurance LLC ("PWI") to self-insure certain earthquake and property losses. As of December 31, 2017, PWI had cash and marketable securities of approximately $81.8 million, and is consolidated in the Company's financial statements.

All of the Company's communities are located in areas that are subject to earthquake activity. The Company evaluates its financial loss exposure to seismic events by using actuarial loss models developed by the insurance industry and in most cases property vulnerability analysis based on structural evaluations by seismic consultants. The Company manages this exposure, where considered appropriate, desirable, and cost-effective, by upgrading properties to increase their resistance to forces caused by seismic events, by considering available funds and coverages provided by PWI and/or by purchasing seismic insurance. In most cases the Company also purchases limited earthquake insurance for certain properties owned by the Company's co-investments.

In addition, the Company carries other types of insurance coverage related to a variety of risks and exposures.

Based on market conditions, the Company may change or potentially eliminate insurance coverages, or increase levels of self-insurance. Further, the Company may incur losses, which could be material, due to uninsured risks, deductibles and self-insured retentions, and/or losses in excess of coverage limits.

COMPETITION

There are numerous housing alternatives that compete with the Company’s communities in attracting tenants. These include other apartment communities, condominiums and single-family homes. If the demand for the Company’s communities is reduced or if competitors develop and/or acquire competing housing, rental rates and occupancy may drop which may have a material adverse effect on the Company’s financial condition and results of operations.

The Company faces competition from other REITs, businesses and other entities in the acquisition, development and operation of apartment communities. Some competitors are larger and have greater financial resources than the Company. This competition may result in increased costs of apartment communities the Company acquires and or develops.

WORKING CAPITAL

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 its reasonably anticipated cash needs during 2018.

The timing, source and amounts of cash flows provided by financing activities and used in investing activities are sensitive to changes in interest rates, stock price, and other fluctuations in the capital markets environment, which can affect the Company’s plans for acquisitions, dispositions, development and redevelopment activities.

ENVIRONMENTAL CONSIDERATIONS

See the discussion under the caption, “Risks Related to Real Estate Investments and Our Operations - The Company’s Portfolio may have environmental liabilities” in Item 1A, Risk Factors, for information concerning the potential effect of environmental regulations on its operations, which discussion under the caption “The Company’s Portfolio may have environmental liabilities” is incorporated by reference into this Item 1.

OTHER MATTERS

Certain Policies of the Company

The Company intends to continue to operate in a manner that will not subject it to regulation under the Investment Company Act of 1940. The Company may in the future (i) issue securities senior to its common stock, (ii) fund acquisition activities with borrowings under its line of credit and (iii) offer shares of common stock and/or units of limited partnership interest in the Operating Partnership or affiliated partnerships as partial consideration for property acquisitions. The Company from time to

time acquires partnership interests in partnerships and joint ventures, either directly or indirectly through subsidiaries of the Company, when such entities’ underlying assets are real estate.

The Company invests primarily in apartment communities that are located in predominantly coastal markets within Southern California, the San Francisco Bay Area, and the Seattle metropolitan area. The Company currently intends to continue to invest in apartment communities in such regions. However, these practices may be reviewed and modified periodically by management.