Item 6. Selected Financial Data

The following tables set forth summary financial and operating information for Essex and the Operating Partnership from January 1, 2014 through December 31, 2018.

Essex Property Trust, Inc. and Subsidiaries



	Years Ended December 31,
	2018		2017		2016		2015		2014
	($ in thousands, except per share amounts)
OPERATING DATA:
Rental and other property	$	1,390,870	$	1,354,325	$	1,285,723	$	1,185,498	$	961,591
Management and other fees from affiliates	9,183		9,574		8,278		8,909		9,347
Net income	413,599		458,043		438,410		248,239		134,438
Net income available to common stockholders	$	390,153	$	433,059	$	411,124	$	226,865	$	116,859
Per share data:
Basic:
Net income available to common stockholders	$	5.91	$	6.58	$	6.28	$	3.50	$	2.07
Weighted average common stock outstanding	66,041		65,829		65,472		64,872		56,547
Diluted:
Net income available to common stockholders	$	5.90	$	6.57	$	6.27	$	3.49	$	2.06
Weighted average common stock outstanding	66,085		65,898		65,588		65,062		56,697
Cash dividend per common share	$	7.44	$	7.00	$	6.40	$	5.76	$	5.11



	As of December 31,
	2018		2017		2016		2015		2014
	($ in thousands)
BALANCE SHEET DATA:
Investment in rental properties (before accumulated depreciation)	$	13,366,101	$	13,362,073	$	12,687,722	$	12,338,129	$	11,249,071
Net investment in rental properties	10,156,553		10,592,776		10,376,176		10,388,237		9,684,265
Real estate under development	454,629		355,735		190,505		242,326		429,096
Co-investments	1,300,140		1,155,984		1,161,275		1,036,047		1,042,423
Total assets	12,383,596		12,495,706		12,217,408		12,008,384		11,530,299
Total indebtedness, net	5,605,942		5,689,126		5,563,260		5,318,757		5,084,256
Redeemable noncontrolling interest	35,475		39,206		44,684		45,452		23,256
Cumulative redeemable preferred stock	—		—		—		73,750		73,750
Stockholders' equity	6,267,073		6,277,406		6,192,178		6,237,733		6,022,672



	As of and for the years ended December 31,
	2018			2017			2016			2015			2014
	($ in thousands, except per share amounts)
OTHER DATA:
Funds from operations ("FFO")(1) attributable to common stockholders and unitholders:
Net income available to common stockholders	$	390,153		$	433,059		$	411,124		$	226,865		$	116,859
Adjustments:
Depreciation and amortization	479,884			468,881			441,682			453,423			360,592
Gains not included in FFO attributable to common stockholders and unitholders	(73,683		)	(159,901		)	(167,607		)	(81,347		)	(50,064		)
Deferred tax expense on sale of real estate and land - taxable REIT subsidiary activity	—			—			4,410			—			—
Depreciation and amortization add back from unconsolidated co-investments	62,954			55,531			50,956			49,826			33,975
Noncontrolling interest related to Operating Partnership units	13,452			14,825			14,089			7,824			4,911
Insurance reimbursements	—			—			—			(1,751		)	—
Depreciation attributable to third party ownership and other	(940		)	(286		)	(9		)	(781		)	(1,331		)
Funds from operations attributable to common stockholders and unitholders	$	871,820		$	812,109		$	754,645		$	654,059		$	464,942
Non-core items:
Merger and integration expenses	—			—			—			3,798			53,530
Expensed acquisition and investment related costs	194			1,569			1,841			2,414			1,878
Gain on sale of marketable securities, note prepayment, and other investments	(737		)	(1,909		)	(5,719		)	(598		)	(886		)
Unrealized losses on marketable securities	5,159			—			—			—			—
Gain on sale of land	—			—			—			—			(2,533		)
Interest rate hedge ineffectiveness (2)	148			(78		)	(250		)	—			—
Loss on early retirement of debt	—			1,796			606			6,114			268
Gain on early retirement of debt from unconsolidated co-investment	(3,662		)	—			—			—			—
Co-investment promote income	(20,541		)	—			—			(192		)	(10,640		)
Income from early redemption of preferred equity investments	(1,652		)	(356		)	—			(1,954		)	(5,250		)
Excess of redemption value of preferred stock over carrying value	—			—			2,541			—			—
General and administrative and other, net	8,745			(1,083		)	—			(651		)	1,758
Insurance reimbursements and legal settlements, net	(561		)	(25		)	(4,470		)	(2,319		)	94
Core funds from operations ("Core FFO")(1) attributable to common stockholders and unitholders	$	858,913		$	812,023		$	749,194		$	660,671		$	503,161
Weighted average number of shares outstanding, diluted (FFO)(3)	68,322			68,194			67,890			67,310			58,921
Funds from operations attributable to common stockholders and unitholders per share - diluted	$	12.76		$	11.91		$	11.12		$	9.72		$	7.89
Core funds from operations attributable to common stockholders and unitholders per share - diluted	$	12.57		$	11.91		$	11.04		$	9.82		$	8.54


(1)	FFO is a financial measure that is commonly used in the REIT industry. The Company presents FFO and FFO excluding non-core items ("referred to as "Core FFO") as supplemental operating performance measures. FFO and Core FFO are not used by the Company as, nor should they be considered to be, alternatives to net income computed under U.S. GAAP as an indicator of the Company’s operating performance or as alternatives to cash from operating activities computed under U.S. GAAP as an indicator of the Company's ability to fund its cash needs.

(1)

FFO is a financial measure that is commonly used in the REIT industry. The Company presents FFO and FFO excluding non-core items ("referred to as "Core FFO") as supplemental operating performance measures. FFO and Core FFO are not used by the Company as, nor should they be considered to be, alternatives to net income computed under U.S. GAAP as an indicator of the Company’s operating performance or as alternatives to cash from operating activities computed under U.S. GAAP as an indicator of the Company's ability to fund its cash needs.

FFO and Core FFO are not meant to represent a comprehensive system of financial reporting and do not present, nor do they intend to present, a complete picture of the Company's financial condition and operating performance. The Company believes that net income computed under U.S. GAAP is the primary measure of performance and that FFO and Core FFO are only meaningful when they are used in conjunction with net income. The Company considers FFO and Core FFO to be useful financial performance measurements of an equity REIT because, together with net income and cash flows, FFO and Core FFO provide investors with additional bases to evaluate operating performance and ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures and to pay dividends. By excluding gains or losses related to sales of depreciated operating properties and excluding real estate depreciation (which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates), FFO can help investors compare the operating performance of a real estate company between periods or as compared to different companies. By further adjusting for items that are not considered part of the Company’s core business operations, Core FFO allows investors to compare the core operating performance of the Company to its performance in prior reporting periods and to the operating performance of other real estate companies without the effect of items that by their nature are not comparable from period to period and tend to obscure the Company’s actual operating results. The Company believes that its consolidated financial statements, prepared in accordance with U.S. GAAP, provide the most meaningful picture of its financial condition and its operating performance.

In calculating FFO, the Company follows the definition for this measure published by the National Association of Real Estate Investment Trusts (“NAREIT"), which is the leading REIT industry association. The Company believes that, under the NAREIT FFO definition, the two most significant adjustments made to net income are (i) the exclusion of historical cost depreciation and (ii) the exclusion of gains and losses from the sale of previously depreciated properties. The Company agrees that these two NAREIT adjustments are useful to investors for the following reasons:


(a)	historical cost accounting for real estate assets in accordance with U.S. GAAP assumes, through depreciation charges, that the value of real estate assets diminishes predictably over time. NAREIT stated in its White Paper on Funds from Operations “since real estate asset values have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves." Consequently, NAREIT’s definition of FFO reflects the fact that real estate, as an asset class, generally appreciates over time and depreciation charges required by U.S. GAAP do not reflect the underlying economic realities.

(a)

historical cost accounting for real estate assets in accordance with U.S. GAAP assumes, through depreciation charges, that the value of real estate assets diminishes predictably over time. NAREIT stated in its White Paper on Funds from Operations “since real estate asset values have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves." Consequently, NAREIT’s definition of FFO reflects the fact that real estate, as an asset class, generally appreciates over time and depreciation charges required by U.S. GAAP do not reflect the underlying economic realities.


(b)	REITs were created as a legal form of organization in order to encourage public ownership of real estate as an asset class through investment in firms that were in the business of long-term ownership and management of real estate. The exclusion, in NAREIT’s definition of FFO, of gains and losses from the sales of previously depreciated operating real estate assets allows investors and analysts to readily identify the operating results of the long-term assets that form the core of a REIT’s activity and assists in comparing those operating results between periods.

(b)

REITs were created as a legal form of organization in order to encourage public ownership of real estate as an asset class through investment in firms that were in the business of long-term ownership and management of real estate. The exclusion, in NAREIT’s definition of FFO, of gains and losses from the sales of previously depreciated operating real estate assets allows investors and analysts to readily identify the operating results of the long-term assets that form the core of a REIT’s activity and assists in comparing those operating results between periods.

Management believes that it has consistently applied the NAREIT definition of FFO to all periods presented. However, there is judgment involved and other REITs' calculation of FFO may vary from the NAREIT definition for this measure, and thus their disclosure of FFO may not be comparable to the Company’s calculation.

The table to which this footnote relates is a reconciliation of net income available to common stockholders to FFO and Core FFO for the years ended December 31, 2018, 2017, 2016, 2015, and 2014.


(2)	Interest rate swaps generally are adjusted to fair value through other comprehensive income (loss). However, because certain of the Company's interest rate swaps do not have a 0% LIBOR floor, while related hedged debt in these cases is subject to a 0% LIBOR floor, the portion of the change in fair value of these interest rate swaps attributable to this mismatch, if any, is recorded as a non-cash interest rate hedge ineffectiveness through interest expense.

(2)

Interest rate swaps generally are adjusted to fair value through other comprehensive income (loss). However, because certain of the Company's interest rate swaps do not have a 0% LIBOR floor, while related hedged debt in these cases is subject to a 0% LIBOR floor, the portion of the change in fair value of these interest rate swaps attributable to this mismatch, if any, is recorded as a non-cash interest rate hedge ineffectiveness through interest expense.


(3)	Assumes conversion of all dilutive outstanding operating partnership interests in the Operating Partnership into shares of the Company's common stock and excludes all DownREIT limited partnership units for which the Operating Partnership has the ability and intention to redeem the units for cash and does not consider them to be common stock equivalents.

Essex Portfolio, L.P. and Subsidiaries



	Years Ended December 31,
	2018		2017		2016		2015		2014
	($ in thousands, except per unit amounts)
OPERATING DATA:
Rental and other property	$	1,390,870	$	1,354,325	$	1,285,723	$	1,185,498	$	961,591
Management and other fees from affiliates	9,183		9,574		8,278		8,909		9,347
Net income	413,599		458,043		438,410		248,239		134,438
Net income available to common unitholders	$	403,605	$	447,884	$	425,213	$	234,689	$	121,726
Per unit data:
Basic:
Net income available to common unitholders	$	5.91	$	6.58	$	6.28	$	3.50	$	2.07
Weighted average common units outstanding	68,316		68,082		67,696		67,054		58,772
Diluted:
Net income available to common unitholders	$	5.90	$	6.57	$	6.27	$	3.49	$	2.07
Weighted average common units outstanding	68,360		68,151		67,812		67,244		58,921
Cash distributions per common unit	$	7.44	$	7.00	$	6.40	$	5.76	$	5.11



	As of December 31,
	2018		2017		2016		2015		2014
	($ in thousands)
BALANCE SHEET DATA:
Investment in rental properties (before accumulated depreciation)	$	13,366,101	$	13,362,073	$	12,687,722	$	12,338,129	$	11,249,071
Net investment in rental properties	10,156,553		10,592,776		10,376,176		10,388,237		9,684,265
Real estate under development	454,629		355,735		190,505		242,326		429,096
Co-investments	1,300,140		1,155,984		1,161,275		1,036,047		1,042,423
Total assets	12,383,596		12,495,706		12,217,408		12,008,384		11,530,299
Total indebtedness, net	5,605,942		5,689,126		5,563,260		5,318,757		5,084,256
Redeemable noncontrolling interest	35,475		39,206		44,684		45,452		23,256
Cumulative redeemable preferred interest	—		—		—		71,209		71,209
Partners' capital	6,329,613		6,330,415		6,244,364		6,287,381		6,073,433

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