filings.toolsItem 16. Form 10-K Summary
306K characters. Original on sec.gov · Markdown
Item 16. Form 10-K Summary
None.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Essex Property Trust, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Essex Property Trust, Inc. and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the years in the three‑year period ended December 31, 2019, and the related notes and financial statement schedule III (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 20, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842) and Accounting Standards Update No. 2018-11, Leases (Topic 842): Targeted Improvements.
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for the derecognition of nonfinancial assets as of January 1, 2018 due to the adoption of the Accounting Standard Codification Topic 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of events or changes in circumstances that indicate rental properties may be impaired
As discussed in Note 2 to the consolidated financial statements, the Company had $10.3 billion in rental properties as of December 31, 2019. The Company evaluates the carrying amount of rental properties for impairment whenever events or changes in circumstances indicate that the carrying amount of a rental property may not be fully recoverable.
F- 1
We identified the evaluation of events or changes in circumstances that indicate rental properties may be impaired as a critical audit matter. Specifically, a high degree of subjective and complex auditor judgment was required to evaluate the intent regarding the expected period the Company will receive cash flows from the rental property. Changes to shorten the expected period the Company will receive cash flows from the rental property could indicate a potential impairment.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s process to evaluate events or changes in circumstances that would indicate rental properties may be impaired including controls over the process for determining the expected period the Company will receive cash flows from the rental property. We evaluated the Company’s assessment by 1) inquiring with the Company about events or changes in circumstances considered by the Company, 2) considering the current economic environment, and 3) reading board of director’s minutes and external communications with investors and analysts. In addition, we visited and inspected certain rental property sites to observe the property conditions and inquired of property management personnel regarding events or changes in circumstances that indicate the rental properties may be impaired.
Evaluation of the value allocated to land and buildings in certain asset acquisitions
As discussed in Notes 2 and 3 to the consolidated financial statements, the Company acquired $373.3 million of real estate properties recorded as asset acquisitions for the year ended December 31, 2019. In asset acquisitions, the Company determines the value allocated to land and buildings using their relative estimated fair values.
We identified the evaluation of the value allocated to land and buildings in certain asset acquisitions as a critical audit matter. There was a high degree of subjective and complex auditor judgment in evaluating the fair value amounts used in the allocation of the purchase price to land and building. Specifically, the relevance and reliability of market information including comparable land sales identified and replacement costs used to determine the building value.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s land and building value estimation process in asset acquisitions including controls over the identification of publicly available and comparable land sales and key inputs used to estimate the replacement cost of the building. For certain asset acquisitions, with the assistance of valuation professionals with specialized skills and knowledge, we 1) compared the Company’s determination of the fair value of land to independently developed ranges of estimates based on publicly available land sales, and 2) compared the key inputs in the Company’s replacement building cost value to ranges of estimates of market data such as industry guides used for developing replacement building values.
| /s/ KPMG LLP |
We have served as the Company’s auditor since 1994.
San Francisco, California
February 20, 2020
F- 2
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Essex Property Trust, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Essex Property Trust, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes and financial statement schedule III (collectively, the consolidated financial statements), and our report dated February 20, 2020 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| /s/ KPMG LLP |
San Francisco, California
February 20, 2020
F- 3
Report of Independent Registered Public Accounting Firm
To the Partners of Essex Portfolio, L.P. and the Board of Directors of Essex Property Trust, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Essex Portfolio, L.P. and subsidiaries (the Operating Partnership) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, capital, and cash flows for each of the years in the three‑year period ended December 31, 2019, and the related notes and financial statement schedule III (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Operating Partnership as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Operating Partnership has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842) and Accounting Standards Update No. 2018-11, Leases (Topic 842): Targeted Improvements.
As discussed in Note 2 to the consolidated financial statements, the Operating Partnership has changed its method of accounting for the derecognition of nonfinancial assets as of January 1, 2018 due to the adoption of the Accounting Standard Codification Topic 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets.
Basis for Opinion
These consolidated financial statements are the responsibility of the Operating Partnership’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Operating Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Operating Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Operating Partnership’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of events or changes in circumstances that indicate rental properties may be impaired
As discussed in Note 2 to the consolidated financial statements, the Operating Partnership had $10.3 billion in rental properties as of December 31, 2019. The Operating Partnership evaluates the carrying amount of rental properties for impairment whenever events or changes in circumstances indicate that the carrying amount of a rental property may not be fully recoverable.
F- 4
We identified the evaluation of events or changes in circumstances that indicate rental properties may be impaired as a critical audit matter. Specifically, a high degree of subjective and complex auditor judgment was required to evaluate the intent regarding the expected period the Operating Partnership will receive cash flows from the rental property. Changes to shorten the expected period the Operating Partnership will receive cash flows from the rental property could indicate a potential impairment.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Operating Partnership’s process to evaluate events or changes in circumstances that would indicate rental properties may be impaired including controls over the process for determining the expected period the Operating Partnership will receive cash flows from the rental property. We evaluated the Operating Partnership’s assessment by 1) inquiring with the Operating Partnership about events or changes in circumstances considered by the Operating Partnership, 2) considering the current economic environment, and 3) reading board of director’s minutes and external communications with investors and analysts. In addition, we visited and inspected certain rental property sites to observe the property conditions and inquired of property management personnel regarding events or changes in circumstances that indicate the rental properties may be impaired.
Evaluation of the value allocated to land and buildings in certain asset acquisitions
As discussed in Notes 2 and 3 to the consolidated financial statements, the Operating Partnership acquired $373.3 million of real estate properties recorded as asset acquisitions for the year ended December 31, 2019. In asset acquisitions, the Operating Partnership determines the value allocated to land and buildings using their relative estimated fair values.
We identified the evaluation of the value allocated to land and buildings in certain asset acquisitions as a critical audit matter. There was a high degree of subjective and complex auditor judgment in evaluating the fair value amounts used in the allocation of the purchase price to land and building. Specifically, the relevance and reliability of market information including comparable land sales identified and replacement costs used to determine the building value.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Operating Partnership’s land and building value estimation process in asset acquisitions including controls over the identification of publicly available and comparable land sales and key inputs used to estimate the replacement cost of the building. For certain asset acquisitions, with the assistance of valuation professionals with specialized skills and knowledge, we 1) compared the Operating Partnership’s determination of the fair value of land to independently developed ranges of estimates based on publicly available land sales, and 2) compared the key inputs in the Operating Partnership’s replacement building cost value to ranges of estimates of market data such as industry guides used for developing replacement building values.
| /s/ KPMG LLP |
We have served as the Operating Partnership's auditor since 2013.
San Francisco, California
February 20, 2020
F- 5
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2019 and 2018
(Dollars in thousands, except share amounts)
| 2019 | 2018 | ||||||
| ASSETS | |||||||
| Real estate: | |||||||
| Rental properties: | |||||||
| Land and land improvements | $ | 2,773,805 | $ | 2,701,356 | |||
| Buildings and improvements | 11,264,337 | 10,664,745 | |||||
| 14,038,142 | 13,366,101 | ||||||
| Less: accumulated depreciation | (3,689,482 | ) | (3,209,548 | ) | |||
| 10,348,660 | 10,156,553 | ||||||
| Real estate under development | 546,075 | 454,629 | |||||
| Co-investments | 1,335,339 | 1,300,140 | |||||
| 12,230,074 | 11,911,322 | ||||||
| Cash and cash equivalents-unrestricted | 70,087 | 134,465 | |||||
| Cash and cash equivalents-restricted | 11,007 | 16,930 | |||||
| Marketable securities | 144,193 | 209,545 | |||||
| Notes and other receivables (includes related party receivables of $90.2 million and $11.1 million as of December 31, 2019 and December 31, 2018, respectively) | 134,365 | 71,895 | |||||
| Operating lease right-of-use assets | 74,744 | — | |||||
| Prepaid expenses and other assets | 40,935 | 39,439 | |||||
| Total assets | $ | 12,705,405 | $ | 12,383,596 | |||
| LIABILITIES AND EQUITY | |||||||
| Unsecured debt, net | $ | 4,763,206 | $ | 3,799,316 | |||
| Mortgage notes payable, net | 990,667 | 1,806,626 | |||||
| Lines of credit | 55,000 | — | |||||
| Accounts payable and accrued liabilities | 158,017 | 127,086 | |||||
| Construction payable | 48,912 | 59,345 | |||||
| Dividends payable | 135,384 | 128,529 | |||||
| Operating lease liabilities | 76,740 | — | |||||
| Other liabilities | 36,565 | 33,375 | |||||
| Total liabilities | 6,264,491 | 5,954,277 | |||||
| Commitments and contingencies | |||||||
| Redeemable noncontrolling interest | 37,410 | 35,475 | |||||
| Equity: | |||||||
| Common stock; $.0001 par value, 670,000,000 shares authorized; 66,091,954 and 65,890,322 shares issued and outstanding, respectively | 7 | 7 | |||||
| Additional paid-in capital | 7,121,927 | 7,093,079 | |||||
| Distributions in excess of accumulated earnings | (887,619 | ) | (812,796 | ) | |||
| Accumulated other comprehensive loss, net | (13,888 | ) | (13,217 | ) | |||
| Total stockholders' equity | 6,220,427 | 6,267,073 | |||||
| Noncontrolling interest | 183,077 | 126,771 | |||||
| Total equity | 6,403,504 | 6,393,844 | |||||
| Total liabilities and equity | $ | 12,705,405 | $ | 12,383,596 |
See accompanying notes to consolidated financial statements.
F- 6
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 2019**,** 2018 and 2017
(Dollars in thousands, except per share and share amounts)
| 2019 | 2018 | 2017 | |||||||||
| Revenues: | |||||||||||
| Rental and other property | $ | 1,450,628 | $ | 1,390,870 | $ | 1,354,325 | |||||
| Management and other fees from affiliates | 9,527 | 9,183 | 9,574 | ||||||||
| 1,460,155 | 1,400,053 | 1,363,899 | |||||||||
| Expenses: | |||||||||||
| Property operating, excluding real estate taxes | 242,525 | 233,764 | 229,076 | ||||||||
| Real estate taxes | 155,170 | 151,570 | 146,310 | ||||||||
| Corporate-level property management expenses | 32,899 | 31,062 | 30,156 | ||||||||
| Depreciation and amortization | 483,750 | 479,884 | 468,881 | ||||||||
| General and administrative | 54,262 | 53,451 | 41,385 | ||||||||
| Expensed acquisition and investment related costs | 168 | 194 | 1,569 | ||||||||
| Impairment loss | 7,105 | — | — | ||||||||
| 975,879 | 949,925 | 917,377 | |||||||||
| Gain (loss) on sale of real estate and land | (3,164 | ) | 61,861 | 26,423 | |||||||
| Earnings from operations | 481,112 | 511,989 | 472,945 | ||||||||
| Interest expense | (217,339 | ) | (220,492 | ) | (222,894 | ) | |||||
| Total return swap income | 8,446 | 8,707 | 10,098 | ||||||||
| Interest and other income | 46,298 | 23,010 | 24,604 | ||||||||
| Equity income from co-investments | 112,136 | 89,132 | 86,445 | ||||||||
| Deferred tax expense on unrealized gain on unconsolidated co-investment | (1,457 | ) | — | — | |||||||
| Gain (loss) on early retirement of debt, net | 3,717 | — | (1,796 | ) | |||||||
| Gain on remeasurement of co-investment | 31,535 | 1,253 | 88,641 | ||||||||
| Net income | 464,448 | 413,599 | 458,043 | ||||||||
| Net income attributable to noncontrolling interest | (25,162 | ) | (23,446 | ) | (24,984 | ) | |||||
| Net income available to common stockholders | $ | 439,286 | $ | 390,153 | $ | 433,059 | |||||
| Per share data: | |||||||||||
| Basic: | |||||||||||
| Net income available to common stockholders | $ | 6.67 | $ | 5.91 | $ | 6.58 | |||||
| Weighted average number of shares outstanding during the year | 65,840,422 | 66,041,058 | 65,829,155 | ||||||||
| Diluted: | |||||||||||
| Net income available to common stockholders | $ | 6.66 | $ | 5.90 | $ | 6.57 | |||||
| Weighted average number of shares outstanding during the year | 65,939,455 | 66,085,089 | 65,898,255 |
See accompanying notes to consolidated financial statements.
F- 7
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years ended December 31, 2019**,** 2018 and 2017
(Dollars in thousands)
| 2019 | 2018 | 2017 | |||||||||
| Net income | $ | 464,448 | $ | 413,599 | $ | 458,043 | |||||
| Other comprehensive income (loss): | |||||||||||
| Change in fair value of derivatives and amortization of swap settlements | (2,948 | ) | 7,824 | 12,744 | |||||||
| Cash flow hedge losses reclassified to earnings | 1,824 | — | — | ||||||||
| Change in fair value of marketable debt securities, net | 281 | (118 | ) | 3,284 | |||||||
| Reversal of unrealized (gains) losses upon the sale of marketable debt securities | (32 | ) | 13 | (1,909 | ) | ||||||
| Total other comprehensive income (loss) | (875 | ) | 7,719 | 14,119 | |||||||
| Comprehensive income | 463,573 | 421,318 | 472,162 | ||||||||
| Comprehensive income attributable to noncontrolling interest | (25,133 | ) | (23,702 | ) | (25,451 | ) | |||||
| Comprehensive income attributable to controlling interest | $ | 438,440 | $ | 397,616 | $ | 446,711 |
See accompanying notes to consolidated financial statements.
F- 8
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Equity
Years ended December 31, 2019**,** 2018 and 2017
(Dollars and shares in thousands)
| Common stock | Additional paid-in | Distributions in excess of accumulated | Accumulated other comprehensive | Noncontrolling | ||||||||||||||||||||||
| Shares | Amount | capital | earnings | loss, net | Interest | Total | ||||||||||||||||||||
| Balances at December 31, 2016 | 65,528 | $ | 6 | $ | 7,029,679 | $ | (805,409 | ) | $ | (32,098 | ) | $ | 100,059 | $ | 6,292,237 | |||||||||||
| Net income | — | — | — | 433,059 | — | 24,984 | 458,043 | |||||||||||||||||||
| Reversal of unrealized gains upon the sale of marketable securities | — | — | — | — | (1,846 | ) | (63 | ) | (1,909 | ) | ||||||||||||||||
| Change in fair value of derivatives and amortization of swap settlements | — | — | — | — | 12,322 | 422 | 12,744 | |||||||||||||||||||
| Change in fair value of marketable securities, net | — | — | — | — | 3,176 | 108 | 3,284 | |||||||||||||||||||
| Issuance of common stock under: | ||||||||||||||||||||||||||
| Stock option and restricted stock plans, net | 179 | — | 26,635 | — | — | — | 26,635 | |||||||||||||||||||
| Sale of common stock, net | 345 | 1 | 89,054 | — | — | — | 89,055 | |||||||||||||||||||
| Equity based compensation costs | — | — | 9,529 | — | — | 1,773 | 11,302 | |||||||||||||||||||
| Changes in the redemption value of redeemable noncontrolling interest | — | — | (136 | ) | — | — | 71 | (65 | ) | |||||||||||||||||
| Changes in noncontrolling interest from acquisition | — | — | — | — | — | 22,506 | 22,506 | |||||||||||||||||||
| Distributions to noncontrolling interest | — | — | — | — | — | (27,051 | ) | (27,051 | ) | |||||||||||||||||
| Redemptions of noncontrolling interest | 2 | — | (25,190 | ) | — | — | (3,390 | ) | (28,580 | ) | ||||||||||||||||
| Common stock dividends ($7.00 per share) | — | — | — | (461,376 | ) | — | — | (461,376 | ) | |||||||||||||||||
| Balances at December 31, 2017 | 66,054 | $ | 7 | $ | 7,129,571 | $ | (833,726 | ) | $ | (18,446 | ) | $ | 119,419 | $ | 6,396,825 | |||||||||||
| Net income | — | — | — | 390,153 | — | 23,446 | 413,599 | |||||||||||||||||||
| Reversal of unrealized losses upon the sale of marketable securities | — | — | — | — | 13 | — | 13 | |||||||||||||||||||
| Change in fair value of derivatives and amortization of swap settlements | — | — | — | — | 7,564 | 260 | 7,824 | |||||||||||||||||||
| Change in fair value of marketable debt securities, net | — | — | — | — | (114 | ) | (4 | ) | (118 | ) | ||||||||||||||||
| Issuance of common stock under: | ||||||||||||||||||||||||||
| Stock option and restricted stock plans, net | 41 | — | 6,213 | — | — | — | 6,213 | |||||||||||||||||||
| Sale of common stock, net | — | — | (919 | ) | — | — | — | (919 | ) | |||||||||||||||||
| Equity based compensation costs | — | — | 11,651 | — | — | 1,200 | 12,851 | |||||||||||||||||||
| Retirement of common stock, net | (210 | ) | — | (51,233 | ) | — | — | — | (51,233 | ) |
F- 9
| Cumulative effect upon adoption of ASU No. 2016-01 | — | — | — | 2,234 | (2,234 | ) | — | — | ||||||||||||||||||
| Cumulative effect upon adoption of ASU No. 2017-05 | — | — | — | 119,651 | — | 4,057 | 123,708 | |||||||||||||||||||
| Changes in the redemption value of redeemable noncontrolling interest | — | — | (1,143 | ) | — | — | (21 | ) | (1,164 | ) | ||||||||||||||||
| Changes in noncontrolling interest from acquisition | — | — | — | — | — | 7,919 | 7,919 | |||||||||||||||||||
| Distributions to noncontrolling interest | — | — | — | — | — | (29,233 | ) | (29,233 | ) | |||||||||||||||||
| Redemptions of noncontrolling interest | 5 | — | (1,061 | ) | — | — | (272 | ) | (1,333 | ) | ||||||||||||||||
| Common stock dividends ($7.44 per share) | — | — | — | (491,108 | ) | — | — | (491,108 | ) | |||||||||||||||||
| Balances at December 31, 2018 | 65,890 | $ | 7 | $ | 7,093,079 | $ | (812,796 | ) | $ | (13,217 | ) | $ | 126,771 | $ | 6,393,844 | |||||||||||
| Net income | — | — | — | 439,286 | — | 25,162 | 464,448 | |||||||||||||||||||
| Reversal of unrealized gains upon the sale of marketable debt securities | — | — | — | — | (31 | ) | (1 | ) | (32 | ) | ||||||||||||||||
| Cash flow hedge losses reclassified to earnings | — | — | — | — | 1,762 | 62 | 1,824 | |||||||||||||||||||
| Change in fair value of derivatives and amortization of swap settlements | — | — | — | — | (2,849 | ) | (99 | ) | (2,948 | ) | ||||||||||||||||
| Change in fair value of marketable debt securities, net | — | — | — | — | 272 | 9 | 281 | |||||||||||||||||||
| Issuance of common stock under: | ||||||||||||||||||||||||||
| Stock option and restricted stock plans, net | 195 | — | 33,779 | — | — | — | 33,779 | |||||||||||||||||||
| Sale of common stock, net | 228 | — | 72,539 | — | — | — | 72,539 | |||||||||||||||||||
| Equity based compensation costs | — | — | 11,029 | — | — | 1,254 | 12,283 | |||||||||||||||||||
| Retirement of common stock, net | (234 | ) | — | (56,989 | ) | — | — | — | (56,989 | ) | ||||||||||||||||
| Cumulative effect upon adoption of ASU No. 2017-12 | — | — | — | — | 175 | 6 | 181 | |||||||||||||||||||
| Changes in the redemption value of redeemable noncontrolling interest | — | — | (3,427 | ) | — | — | 1,419 | (2,008 | ) | |||||||||||||||||
| Changes in noncontrolling interest from acquisition | — | — | — | — | — | 65,472 | 65,472 | |||||||||||||||||||
| Distributions to noncontrolling interest | — | — | — | — | — | (28,493 | ) | (28,493 | ) | |||||||||||||||||
| Redemptions of noncontrolling interest | 13 | — | (28,083 | ) | — | — | (8,485 | ) | (36,568 | ) | ||||||||||||||||
| Common stock dividends ($7.80 per share) | — | — | — | (514,109 | ) | — | — | (514,109 | ) | |||||||||||||||||
| Balances at December 31, 2019 | 66,092 | $ | 7 | $ | 7,121,927 | $ | (887,619 | ) | $ | (13,888 | ) | $ | 183,077 | $ | 6,403,504 |
See accompanying notes to consolidated financial statements.
F- 10
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2019**,** 2018 and 2017
(Dollars in thousands)
| 2019 | 2018 | 2017 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 464,448 | $ | 413,599 | $ | 458,043 | |||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 483,750 | 479,884 | 468,881 | ||||||||
| Amortization of discount on marketable securities | (28,491 | ) | (17,637 | ) | (15,119 | ) | |||||
| Amortization of (premium) discount and debt financing costs, net | 5,689 | (2,587 | ) | (5,948 | ) | ||||||
| Gain on sale of marketable securities | (1,271 | ) | (737 | ) | (1,909 | ) | |||||
| Unrealized (gain) loss on equity securities recognized through income | (5,710 | ) | 5,159 | — | |||||||
| Company's share of gain on the sales of co-investments | (51,097 | ) | (10,569 | ) | (44,837 | ) | |||||
| Earnings from co-investments | (61,039 | ) | (78,563 | ) | (41,608 | ) | |||||
| Operating distributions from co-investments | 99,277 | 99,593 | 76,764 | ||||||||
| Accrued interest from notes and other receivables | (6,012 | ) | (5,436 | ) | (4,030 | ) | |||||
| Impairment loss | 7,105 | — | — | ||||||||
| (Gain) loss on the sale of real estate and land | 3,164 | (61,861 | ) | (26,423 | ) | ||||||
| Equity-based compensation | 7,010 | 7,135 | 9,286 | ||||||||
| (Gain) loss on early retirement of debt, net | (3,717 | ) | — | 1,796 | |||||||
| Gain on remeasurement of co-investment | (31,535 | ) | (1,253 | ) | (88,641 | ) | |||||
| Changes in operating assets and liabilities: | |||||||||||
| Prepaid expenses, receivables, operating lease right-of-use assets, and other assets | 5,751 | (1,203 | ) | (3,004 | ) | ||||||
| Accounts payable, accrued liabilities, and operating lease liabilities | 29,551 | (145 | ) | (13,474 | ) | ||||||
| Other liabilities | 2,206 | 1,175 | (170 | ) | |||||||
| Net cash provided by operating activities | 919,079 | 826,554 | 769,607 | ||||||||
| Cash flows from investing activities: | |||||||||||
| Additions to real estate: | |||||||||||
| Acquisitions of real estate and acquisition related capital expenditures | (133,825 | ) | (15,311 | ) | (206,194 | ) | |||||
| Redevelopment | (70,295 | ) | (73,000 | ) | (69,928 | ) | |||||
| Development acquisitions of and additions to real estate under development | (158,234 | ) | (182,772 | ) | (137,733 | ) | |||||
| Capital expenditures on rental properties | (101,689 | ) | (81,684 | ) | (72,812 | ) | |||||
| Investments in notes receivable | (231,400 | ) | — | (106,461 | ) | ||||||
| Collections of notes and other receivables | 168,720 | 29,500 | 55,000 | ||||||||
| Proceeds from insurance for property losses | 3,734 | 1,408 | 648 | ||||||||
| Proceeds from dispositions of real estate | 23,214 | 347,587 | 132,039 | ||||||||
| Contributions to co-investments | (402,284 | ) | (162,437 | ) | (293,363 | ) | |||||
| Changes in refundable deposits | 5 | (414 | ) | 837 | |||||||
| Purchases of marketable securities | (46,458 | ) | (37,952 | ) | (67,893 | ) | |||||
| Sales and maturities of marketable securities | 147,531 | 31,521 | 35,481 | ||||||||
| Non-operating distributions from co-investments | 273,290 | 83,661 | 162,439 | ||||||||
| Net cash used in investing activities | (527,691 | ) | (59,893 | ) | (567,940 | ) | |||||
| Cash flows from financing activities: |
F- 11
| Proceeds from unsecured debt and mortgage notes | 1,045,290 | 298,773 | 597,981 | ||||||||
| Payments on unsecured debt and mortgage notes | (1,026,616 | ) | (230,398 | ) | (561,160 | ) | |||||
| Proceeds from lines of credit | 1,939,213 | 742,961 | 982,246 | ||||||||
| Repayments of lines of credit | (1,884,213 | ) | (921,961 | ) | (928,246 | ) | |||||
| Retirement of common stock | (56,989 | ) | (51,233 | ) | — | ||||||
| Additions to deferred charges | (10,898 | ) | (4,250 | ) | (4,108 | ) | |||||
| Payments related to debt prepayment penalties | (1,406 | ) | — | (1,630 | ) | ||||||
| Net proceeds from issuance of common stock | 72,539 | (919 | ) | 89,055 | |||||||
| Net proceeds from stock options exercised | 37,467 | 6,213 | 26,635 | ||||||||
| Payments related to tax withholding for share-based compensation | (3,688 | ) | (869 | ) | (316 | ) | |||||
| Distributions to noncontrolling interest | (27,993 | ) | (29,050 | ) | (26,552 | ) | |||||
| Redemption of noncontrolling interest | (36,568 | ) | (1,333 | ) | (28,580 | ) | |||||
| Redemption of redeemable noncontrolling interest | (73 | ) | (144 | ) | (5,543 | ) | |||||
| Common and preferred stock dividends paid | (507,754 | ) | (484,182 | ) | (450,625 | ) | |||||
| Net cash used in financing activities | (461,689 | ) | (676,392 | ) | (310,843 | ) | |||||
| Net increase (decrease) in unrestricted and restricted cash and cash equivalents | (70,301 | ) | 90,269 | (109,176 | ) | ||||||
| Unrestricted and restricted cash and cash equivalents at beginning of period | 151,395 | 61,126 | 170,302 | ||||||||
| Unrestricted and restricted cash and cash equivalents at end of period | $ | 81,094 | $ | 151,395 | $ | 61,126 | |||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid for interest, net of capitalized interest | $ | 194,418 | $ | 203,803 | $ | 212,163 | |||||
| Interest capitalized | $ | 24,169 | $ | 18,708 | $ | 13,860 | |||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases | $ | 6,811 | $ | — | $ | — | |||||
| Supplemental disclosure of noncash investing and financing activities: | |||||||||||
| Issuance of Operating Partnership units for contributed properties | $ | — | $ | 7,919 | $ | — | |||||
| Issuance of DownREIT units in connection with acquisition of real estate | $ | 65,472 | $ | — | $ | 22,506 | |||||
| Transfers between real estate under development to rental properties, net | $ | 19,812 | $ | 100,415 | $ | 2,413 | |||||
| Transfer from real estate under development to co-investments | $ | 671 | $ | 853 | $ | 5,075 | |||||
| Reclassifications to redeemable noncontrolling interest from additional paid in capital and noncontrolling interest | $ | 2,008 | $ | 1,165 | $ | 65 | |||||
| Redemption of redeemable noncontrolling interest via reduction of note receivable | $ | — | $ | 4,751 | $ | — | |||||
| Initial recognition of operating lease right-of-use assets | $ | 77,645 | $ | — | $ | — | |||||
| Initial recognition of operating lease liabilities | $ | 79,693 | $ | — | $ | — | |||||
| Debt assumed in connection with acquisition | $ | 143,006 | $ | 45,804 | $ | 51,882 | |||||
| Repayment of mortgage note from new financing proceeds | $ | — | $ | 52,000 | $ | — |
See accompanying notes to consolidated financial statements
F- 12
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2019 and 2018
(Dollars in thousands, except per unit amounts)
| 2019 | 2018 | ||||||
| ASSETS | |||||||
| Real estate: | |||||||
| Rental properties: | |||||||
| Land and land improvements | $ | 2,773,805 | $ | 2,701,356 | |||
| Buildings and improvements | 11,264,337 | 10,664,745 | |||||
| 14,038,142 | 13,366,101 | ||||||
| Less: accumulated depreciation | (3,689,482 | ) | (3,209,548 | ) | |||
| 10,348,660 | 10,156,553 | ||||||
| Real estate under development | 546,075 | 454,629 | |||||
| Co-investments | 1,335,339 | 1,300,140 | |||||
| 12,230,074 | 11,911,322 | ||||||
| Cash and cash equivalents-unrestricted | 70,087 | 134,465 | |||||
| Cash and cash equivalents-restricted | 11,007 | 16,930 | |||||
| Marketable securities | 144,193 | 209,545 | |||||
| Notes and other receivables (related party receivables of $90.2 million and $11.1 million as of December 31, 2019 and December 31, 2018, respectively) | 134,365 | 71,895 | |||||
| Operating lease right-of-use assets | 74,744 | — | |||||
| Prepaid expenses and other assets | 40,935 | 39,439 | |||||
| Total assets | $ | 12,705,405 | $ | 12,383,596 | |||
| LIABILITIES AND CAPITAL | |||||||
| Unsecured debt, net | $ | 4,763,206 | $ | 3,799,316 | |||
| Mortgage notes payable, net | 990,667 | 1,806,626 | |||||
| Lines of credit | 55,000 | — | |||||
| Accounts payable and accrued liabilities | 158,017 | 127,086 | |||||
| Construction payable | 48,912 | 59,345 | |||||
| Distributions payable | 135,384 | 128,529 | |||||
| Operating lease liabilities | 76,740 | — | |||||
| Other liabilities | 36,565 | 33,375 | |||||
| Total liabilities | 6,264,491 | 5,954,277 | |||||
| Commitments and contingencies | |||||||
| Redeemable noncontrolling interest | 37,410 | 35,475 | |||||
| Capital: | |||||||
| General Partner: | |||||||
| Common equity (66,091,954 and 65,890,322 units issued and outstanding, respectively) | 6,234,315 | 6,280,290 | |||||
| 6,234,315 | 6,280,290 | ||||||
| Limited Partners: | |||||||
| Common equity (2,301,653 and 2,305,389 units issued and outstanding, respectively) | 57,359 | 59,061 | |||||
| Accumulated other comprehensive loss | (10,432 | ) | (9,738 | ) | |||
| Total partners' capital | 6,281,242 | 6,329,613 | |||||
| Noncontrolling interest | 122,262 | 64,231 | |||||
| Total capital | 6,403,504 | 6,393,844 | |||||
| Total liabilities and capital | $ | 12,705,405 | $ | 12,383,596 |
See accompanying notes to consolidated financial statements
F- 13
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 2019**,** 2018**, and** 2017
(Dollars in thousands, except per unit and unit amounts)
| 2019 | 2018 | 2017 | |||||||||
| Revenues: | |||||||||||
| Rental and other property | $ | 1,450,628 | $ | 1,390,870 | $ | 1,354,325 | |||||
| Management and other fees from affiliates | 9,527 | 9,183 | 9,574 | ||||||||
| 1,460,155 | 1,400,053 | 1,363,899 | |||||||||
| Expenses: | |||||||||||
| Property operating, excluding real estate taxes | 242,525 | 233,764 | 229,076 | ||||||||
| Real estate taxes | 155,170 | 151,570 | 146,310 | ||||||||
| Corporate-level property management expenses | 32,899 | 31,062 | 30,156 | ||||||||
| Depreciation and amortization | 483,750 | 479,884 | 468,881 | ||||||||
| General and administrative | 54,262 | 53,451 | 41,385 | ||||||||
| Expensed acquisition and investment related costs | 168 | 194 | 1,569 | ||||||||
| Impairment loss | 7,105 | — | — | ||||||||
| 975,879 | 949,925 | 917,377 | |||||||||
| Gain (loss) on sale of real estate and land | (3,164 | ) | 61,861 | 26,423 | |||||||
| Earnings from operations | 481,112 | 511,989 | 472,945 | ||||||||
| Interest expense | (217,339 | ) | (220,492 | ) | (222,894 | ) | |||||
| Total return swap income | 8,446 | 8,707 | 10,098 | ||||||||
| Interest and other income | 46,298 | 23,010 | 24,604 | ||||||||
| Equity income from co-investments | 112,136 | 89,132 | 86,445 | ||||||||
| Deferred tax expense on unrealized gain on unconsolidated co-investment | (1,457 | ) | — | — | |||||||
| Gain (loss) on early retirement of debt, net | 3,717 | — | (1,796 | ) | |||||||
| Gain on remeasurement of co-investment | 31,535 | 1,253 | 88,641 | ||||||||
| Net income | 464,448 | 413,599 | 458,043 | ||||||||
| Net income attributable to noncontrolling interest | (9,819 | ) | (9,994 | ) | (10,159 | ) | |||||
| Net income available to common unitholders | $ | 454,629 | $ | 403,605 | $ | 447,884 | |||||
| Per unit data: | |||||||||||
| Basic: | |||||||||||
| Net income available to common unitholders | $ | 6.67 | $ | 5.91 | $ | 6.58 | |||||
| Weighted average number of common units outstanding during the year | 68,140,900 | 68,315,999 | 68,081,730 | ||||||||
| Diluted: | |||||||||||
| Net income available to common unitholders | $ | 6.66 | $ | 5.90 | $ | 6.57 | |||||
| Weighted average number of common units outstanding during the year | 68,239,933 | 68,360,030 | 68,150,830 |
See accompanying notes to consolidated financial statements
F- 14
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2019**,** 2018**, and** 2017
(Dollars in thousands)
| 2019 | 2018 | 2017 | |||||||||
| Net income | $ | 464,448 | $ | 413,599 | $ | 458,043 | |||||
| Other comprehensive income (loss): | |||||||||||
| Change in fair value of derivatives and amortization of swap settlements | (2,948 | ) | 7,824 | 12,744 | |||||||
| Cash flow hedge losses reclassified to earnings | 1,824 | — | — | ||||||||
| Change in fair value of marketable debt securities, net | 281 | (118 | ) | 3,284 | |||||||
| Reversal of unrealized (gains) losses upon the sale of marketable debt securities | (32 | ) | 13 | (1,909 | ) | ||||||
| Total other comprehensive income (loss) | (875 | ) | 7,719 | 14,119 | |||||||
| Comprehensive income | 463,573 | 421,318 | 472,162 | ||||||||
| Comprehensive income attributable to noncontrolling interest | (9,819 | ) | (9,994 | ) | (10,159 | ) | |||||
| Comprehensive income attributable to controlling interest | $ | 453,754 | $ | 411,324 | $ | 462,003 |
See accompanying notes to consolidated financial statements.
F- 15
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Consolidated Statements of Capital
Years ended December 31, 2019**,** 2018**, and** 2017
(Dollars and units in thousands)
| General Partner | Limited Partners | Accumulated | |||||||||||||||||||||||
| other | |||||||||||||||||||||||||
| Common Equity | Common Equity | comprehensive | Noncontrolling | ||||||||||||||||||||||
| Units | Amount | Units | Amount | loss, net | Interest | Total | |||||||||||||||||||
| Balances at December 31, 2016 | 65,528 | $ | 6,224,276 | 2,237 | $ | 49,436 | $ | (29,348 | ) | $ | 47,873 | $ | 6,292,237 | ||||||||||||
| Net income | — | 433,059 | — | 14,825 | — | 10,159 | 458,043 | ||||||||||||||||||
| Reversal of unrealized gains upon the sale of marketable securities | — | — | — | — | (1,909 | ) | — | (1,909 | ) | ||||||||||||||||
| Change in fair value of derivatives and amortization of swap settlements | — | — | — | — | 12,744 | — | 12,744 | ||||||||||||||||||
| Change in fair value of marketable securities, net | — | — | — | — | 3,284 | — | 3,284 | ||||||||||||||||||
| Issuance of common units under: | — | ||||||||||||||||||||||||
| General partner's stock based compensation, net | 179 | 26,635 | — | — | — | — | 26,635 | ||||||||||||||||||
| Sale of common stock by general partner, net | 345 | 89,055 | — | — | — | — | 89,055 | ||||||||||||||||||
| Equity based compensation costs | — | 9,529 | 33 | 1,773 | — | — | 11,302 | ||||||||||||||||||
| Changes in the redemption value of redeemable noncontrolling interest | — | (136 | ) | — | 136 | — | (65 | ) | (65 | ) | |||||||||||||||
| Changes in noncontrolling interest from acquisition | — | — | — | — | — | 22,506 | 22,506 | ||||||||||||||||||
| Distributions to noncontrolling interest | — | — | — | — | — | (11,078 | ) | (11,078 | ) | ||||||||||||||||
| Redemptions | 2 | (25,190 | ) | (2 | ) | (405 | ) | — | (2,985 | ) | (28,580 | ) | |||||||||||||
| Distributions declared ($7.00 per unit) | — | (461,376 | ) | — | (15,973 | ) | — | — | (477,349 | ) | |||||||||||||||
| Balances at December 31, 2017 | 66,054 | $ | 6,295,852 | 2,268 | $ | 49,792 | $ | (15,229 | ) | $ | 66,410 | $ | 6,396,825 | ||||||||||||
| Net income | — | 390,153 | — | 13,452 | — | 9,994 | 413,599 | ||||||||||||||||||
| Reversal of unrealized gains upon the sale of marketable debt securities | — | — | — | — | 13 | — | 13 | ||||||||||||||||||
| Change in fair value of derivatives and amortization of swap settlements | — | — | — | — | 7,824 | — | 7,824 | ||||||||||||||||||
| Change in fair value of marketable debt securities, net | — | — | — | — | (118 | ) | — | (118 | ) | ||||||||||||||||
| Issuance of common units under: | |||||||||||||||||||||||||
| General partner's stock based compensation, net | 41 | 6,213 | — | — | — | — | 6,213 | ||||||||||||||||||
| Sale of common stock by general partner, net | — | (919 | ) | — | — | — | — | (919 | ) | ||||||||||||||||
| Equity based compensation costs | — | 11,651 | 11 | 1,200 | — | — | 12,851 | ||||||||||||||||||
| Retirement of common units, net | (210 | ) | (51,233 | ) | — | — | — | — | (51,233 | ) |
F- 16
| Cumulative effect upon adoption of ASU No. 2016-01 | — | 2,234 | — | (6 | ) | (2,228 | ) | — | — | ||||||||||||||||
| Cumulative effect upon adoption of ASU No. 2017-05 | — | 119,651 | — | 4,057 | — | — | 123,708 | ||||||||||||||||||
| Changes in redemption value of redeemable noncontrolling interest | — | (1,143 | ) | — | (89 | ) | — | 68 | (1,164 | ) | |||||||||||||||
| Changes in noncontrolling interest from acquisition | — | — | 31 | 7,919 | — | — | 7,919 | ||||||||||||||||||
| Distributions to noncontrolling interest | — | — | — | — | — | (12,174 | ) | (12,174 | ) | ||||||||||||||||
| Redemptions | 5 | (1,061 | ) | (5 | ) | (205 | ) | — | (67 | ) | (1,333 | ) | |||||||||||||
| Distributions declared ($7.44 per unit) | — | (491,108 | ) | — | (17,059 | ) | — | — | (508,167 | ) | |||||||||||||||
| Balances at December 31, 2018 | 65,890 | $ | 6,280,290 | 2,305 | $ | 59,061 | $ | (9,738 | ) | $ | 64,231 | $ | 6,393,844 | ||||||||||||
| Net income | — | 439,286 | — | 15,343 | — | 9,819 | 464,448 | ||||||||||||||||||
| Reversal of unrealized gains upon the sale of marketable debt securities | — | — | — | — | (32 | ) | — | (32 | ) | ||||||||||||||||
| Cash flow hedge losses reclassified to earnings | — | — | — | — | 1,824 | — | 1,824 | ||||||||||||||||||
| Change in fair value of derivatives and amortization of swap settlements | — | — | — | — | (2,948 | ) | — | (2,948 | ) | ||||||||||||||||
| Change in fair value of marketable debt securities, net | — | — | — | — | 281 | — | 281 | ||||||||||||||||||
| Issuance of common units under: | |||||||||||||||||||||||||
| General partner's stock based compensation, net | 195 | 33,779 | — | — | — | — | 33,779 | ||||||||||||||||||
| Sale of common stock by general partner, net | 228 | 72,539 | — | — | — | — | 72,539 | ||||||||||||||||||
| Equity based compensation costs | — | 11,029 | 10 | 1,254 | — | — | 12,283 | ||||||||||||||||||
| Retirement of common units, net | (234 | ) | (56,989 | ) | — | — | — | — | (56,989 | ) | |||||||||||||||
| Cumulative effect upon adoption of ASU No. 2017-12 | — | — | — | — | 181 | — | 181 | ||||||||||||||||||
| Changes in the redemption value of redeemable noncontrolling interest | — | (3,427 | ) | — | 109 | — | 1,310 | (2,008 | ) | ||||||||||||||||
| Changes in noncontrolling interest from acquisition | — | — | — | — | — | 65,472 | 65,472 | ||||||||||||||||||
| Distributions to noncontrolling interest | — | — | — | — | — | (10,521 | ) | (10,521 | ) | ||||||||||||||||
| Redemptions | 13 | (28,083 | ) | (13 | ) | (436 | ) | — | (8,049 | ) | (36,568 | ) | |||||||||||||
| Distributions declared ($7.80 per unit) | — | (514,109 | ) | — | (17,972 | ) | — | — | (532,081 | ) | |||||||||||||||
| Balances at December 31, 2019 | 66,092 | $ | 6,234,315 | 2,302 | $ | 57,359 | $ | (10,432 | ) | $ | 122,262 | $ | 6,403,504 |
See accompanying notes to consolidated financial statements
F- 17
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2019**,** 2018**, and** 2017
(Dollars in thousands)
| 2019 | 2018 | 2017 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 464,448 | $ | 413,599 | $ | 458,043 | |||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 483,750 | 479,884 | 468,881 | ||||||||
| Amortization of discount on marketable securities | (28,491 | ) | (17,637 | ) | (15,119 | ) | |||||
| Amortization of (premium) discount and debt financing costs, net | 5,689 | (2,587 | ) | (5,948 | ) | ||||||
| Gain on sale of marketable securities | (1,271 | ) | (737 | ) | (1,909 | ) | |||||
| Unrealized (gain) loss on equity securities recognized through income | (5,710 | ) | 5,159 | — | |||||||
| Company's share of gain on the sales of co-investments | (51,097 | ) | (10,569 | ) | (44,837 | ) | |||||
| Earnings from co-investments | (61,039 | ) | (78,563 | ) | (41,608 | ) | |||||
| Operating distributions from co-investments | 99,277 | 99,593 | 76,764 | ||||||||
| Accrued interest from notes and other receivables | (6,012 | ) | (5,436 | ) | (4,030 | ) | |||||
| Impairment loss | 7,105 | — | — | ||||||||
| (Gain) loss on the sale of real estate and land | 3,164 | (61,861 | ) | (26,423 | ) | ||||||
| Equity-based compensation | 7,010 | 7,135 | 9,286 | ||||||||
| (Gain) loss on early retirement of debt, net | (3,717 | ) | — | 1,796 | |||||||
| Gain on remeasurement of co-investment | (31,535 | ) | (1,253 | ) | (88,641 | ) | |||||
| Changes in operating assets and liabilities: | |||||||||||
| Prepaid expenses, receivables, operating lease right-of-use assets, and other assets | 5,751 | (1,203 | ) | (3,004 | ) | ||||||
| Accounts payable, accrued liabilities, and operating lease liabilities | 29,551 | (145 | ) | (13,474 | ) | ||||||
| Other liabilities | 2,206 | 1,175 | (170 | ) | |||||||
| Net cash provided by operating activities | 919,079 | 826,554 | 769,607 | ||||||||
| Cash flows from investing activities: | |||||||||||
| Additions to real estate: | |||||||||||
| Acquisitions of real estate and acquisition related capital expenditures | (133,825 | ) | (15,311 | ) | (206,194 | ) | |||||
| Redevelopment | (70,295 | ) | (73,000 | ) | (69,928 | ) | |||||
| Development acquisitions of and additions to real estate under development | (158,234 | ) | (182,772 | ) | (137,733 | ) | |||||
| Capital expenditures on rental properties | (101,689 | ) | (81,684 | ) | (72,812 | ) | |||||
| Investments in notes receivable | (231,400 | ) | — | (106,461 | ) | ||||||
| Collections of notes and other receivables | 168,720 | 29,500 | 55,000 | ||||||||
| Proceeds from insurance for property losses | 3,734 | 1,408 | 648 | ||||||||
| Proceeds from dispositions of real estate | 23,214 | 347,587 | 132,039 | ||||||||
| Contributions to co-investments | (402,284 | ) | (162,437 | ) | (293,363 | ) | |||||
| Changes in refundable deposits | 5 | (414 | ) | 837 | |||||||
| Purchases of marketable securities | (46,458 | ) | (37,952 | ) | (67,893 | ) | |||||
| Sales and maturities of marketable securities | 147,531 | 31,521 | 35,481 | ||||||||
| Non-operating distributions from co-investments | 273,290 | 83,661 | 162,439 | ||||||||
| Net cash used in investing activities | (527,691 | ) | (59,893 | ) | (567,940 | ) | |||||
| Cash flows from financing activities: |
F- 18
| Proceeds from unsecured debt and mortgage notes | 1,045,290 | 298,773 | 597,981 | ||||||||
| Payments on unsecured debt and mortgage notes | (1,026,616 | ) | (230,398 | ) | (561,160 | ) | |||||
| Proceeds from lines of credit | 1,939,213 | 742,961 | 982,246 | ||||||||
| Repayments of lines of credit | (1,884,213 | ) | (921,961 | ) | (928,246 | ) | |||||
| Retirement of common units | (56,989 | ) | (51,233 | ) | — | ||||||
| Additions to deferred charges | (10,898 | ) | (4,250 | ) | (4,108 | ) | |||||
| Payments related to debt prepayment penalties | (1,406 | ) | — | (1,630 | ) | ||||||
| Net proceeds from issuance of common units | 72,539 | (919 | ) | 89,055 | |||||||
| Net proceeds from stock options exercised | 37,467 | 6,213 | 26,635 | ||||||||
| Payments related to tax withholding for share-based compensation | (3,688 | ) | (869 | ) | (316 | ) | |||||
| Distributions to noncontrolling interest | (7,288 | ) | (8,518 | ) | (7,752 | ) | |||||
| Redemption of noncontrolling interests | (36,568 | ) | (1,333 | ) | (28,580 | ) | |||||
| Redemption of redeemable noncontrolling interests | (73 | ) | (144 | ) | (5,543 | ) | |||||
| Common and preferred units and preferred interest distributions paid | (528,459 | ) | (504,714 | ) | (469,425 | ) | |||||
| Net cash used in financing activities | (461,689 | ) | (676,392 | ) | (310,843 | ) | |||||
| Net increase (decrease) in unrestricted and restricted cash and cash equivalents | (70,301 | ) | 90,269 | (109,176 | ) | ||||||
| Unrestricted and restricted cash and cash equivalents at beginning of period | 151,395 | 61,126 | 170,302 | ||||||||
| Unrestricted and restricted cash and cash equivalents at end of period | $ | 81,094 | $ | 151,395 | $ | 61,126 | |||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Cash paid for interest, net of capitalized interest | $ | 194,418 | $ | 203,803 | $ | 212,163 | |||||
| Interest capitalized | $ | 24,169 | $ | 18,708 | $ | 13,860 | |||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases | $ | 6,811 | $ | — | $ | — | |||||
| Supplemental disclosure of noncash investing and financing activities: | |||||||||||
| Issuance of Operating Partnership units for contributed properties | $ | — | $ | 7,919 | $ | — | |||||
| Issuance of DownREIT units in connection with acquisition of real estate | $ | 65,472 | $ | — | $ | 22,506 | |||||
| Transfers between real estate under development to rental properties, net | $ | 19,812 | $ | 100,415 | $ | 2,413 | |||||
| Transfer from real estate under development to co-investments | $ | 671 | $ | 853 | $ | 5,075 | |||||
| Reclassifications to redeemable noncontrolling interest from general and limited partner capital and noncontrolling interest | $ | 2,008 | $ | 1,165 | $ | 65 | |||||
| Redemption of redeemable noncontrolling interest via reduction of note receivable | $ | — | $ | 4,751 | $ | — | |||||
| Initial recognition of operating lease right-of-use assets | $ | 77,645 | $ | — | $ | — | |||||
| Initial recognition of operating lease liabilities | $ | 79,693 | $ | — | $ | — | |||||
| Debt assumed in connection with acquisition | $ | 143,006 | $ | 45,804 | $ | 51,882 | |||||
| Repayment of mortgage note from new financing proceeds | $ | — | $ | 52,000 | $ | — |
See accompanying notes to consolidated financial statements
F- 19
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019**,** 2018**, and** 2017
(1) Organization
The accompanying consolidated financial statements present the accounts of Essex Property Trust, Inc. ("Essex" or the "Company"), which include the accounts of the Company and Essex Portfolio, L.P. and its subsidiaries (the "Operating Partnership," which holds the operating assets of the Company). Unless otherwise indicated, the notes to consolidated financial statements apply to both the Company and the Operating Partnership.
Essex is the sole general partner of the Operating Partnership with a 96.6% general partner interest and the limited partners owned a 3.4% interest as of December 31, 2019. The limited partners may convert their Operating Partnership units into an equivalent number of shares of Essex common stock. Total Operating Partnership limited partnership units outstanding were 2,301,653 and 2,305,389 as of December 31, 2019 and 2018, respectively, and the redemption value of the units, based on the closing price of the Company’s common stock, totaled approximately $692.5 million and $565.3 million, as of December 31, 2019 and 2018, respectively. The Company has reserved shares of common stock for such conversions.
As of December 31, 2019, the Company owned or had ownership interests in 250 operating apartment communities, aggregating 60,570 apartment homes, excluding the Company's ownership interests in preferred interest co-investments, loan investments, one operating commercial building, and a development pipeline comprised of five consolidated projects and two unconsolidated joint venture projects. The Communities are located in Southern California (primarily Los Angeles, Orange, San Diego, and Ventura counties), Northern California (the San Francisco Bay Area) and the Seattle metropolitan areas.
(2) Summary of Critical and Significant Accounting Policies
(a) Principles of Consolidation and Basis of Presentation
The accounts of the Company, its controlled subsidiaries and the variable interest entities ("VIEs") in which it is the primary beneficiary are consolidated in the accompanying financial statements and prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). 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. All significant inter-company accounts and transactions have been eliminated. Certain reclassifications have been made to conform to the current year’s presentation.
Noncontrolling interest includes the 3.4% limited partner interests in the Operating Partnership not held by the Company at both December 31, 2019 and 2018. These percentages include the Operating Partnership’s vested long-term incentive plan units (see Note 14).
(b) Accounting Pronouncements Adopted in the Current Year
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02 "Leases (Topic 842)" which requires an entity that is a lessee to classify leases as either finance or operating and to recognize a lease liability and a right-of-use asset for all leases that have a duration of greater than 12 months. Leases of 12 months or less are to be accounted for similar to prior leasing guidance (Topic 840) for operating leases. For lessors, accounting for leases under the new standard is substantially the same as prior leasing guidance for sales-type leases, direct financing leases, and operating leases, but eliminates current real estate specific provisions and changes the treatment of initial direct costs. In July 2018, the FASB issued ASU No. 2018-11 "Leases (Topic 842): Targeted Improvements," which includes a practical expedient that allows lessors to not separate nonlease components from the associated lease component. This provides the Company with the option of not bifurcating certain common area maintenance recoveries as a non-lease component, if certain requirements are met. The Company adopted ASU No. 2016-02 and ASU No. 2018-11 as of January 1, 2019 using the modified retrospective approach and elected a package of practical expedients. There was no adjustment to the opening balance of retained earnings as a result of the adoption. See Note 10, Lease Agreements - Company as Lessor, and Note 11, Lease Agreements - Company as Lessee, for further details.
In August 2017, the FASB issued ASU No. 2017-12 "Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities," which, among other things, requires entities to present the earnings effect of hedging instruments in the same income statement line item in which the earnings effect of the hedged item is reported. The new standard also adds new
F- 20
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
disclosure requirements. The Company adopted ASU No. 2017-12 as of January 1, 2019 using the modified retrospective method by applying a cumulative effect adjustment to accumulated other comprehensive loss, net of $0.2 million, representing accumulated net hedge ineffectiveness. Furthermore, as a result of the adoption of this standard, the Company will recognize qualifying hedge ineffectiveness through accumulated other comprehensive income as opposed to current earnings.
(c) Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13 "Measurement of Credit Losses on Financial Instruments," which amends the current approach to estimate credit losses on certain financial assets, including trade and other receivables, available-for-sale securities, and other financial instruments. Generally, this amendment requires entities to establish a valuation allowance for the expected lifetime losses of these certain financial assets. Subsequent changes in the valuation allowance are recorded in current earnings and reversal of previous losses are permitted. Currently, U.S. GAAP requires entities to write down credit losses only when losses are probable and loss reversals are not permitted. The FASB additionally issued various updates to clarify and amend the guidance provided in ASU 2016-13. In May 2019, the FASB issued ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments," which, with respect to credit losses, among other things, clarifies and addresses issues related to accrued interest, transfers between classifications of loans or debt securities, recoveries, and variable interest rates. Additionally, in May 2019, the FASB issued ASU 2019-05, "Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief," which allows entities to irrevocably elect the fair value option on certain financial instruments. The new standards will be effective for the Company beginning January 1, 2020 and early adoption is permitted. The Company expects to apply the new standard on January 1, 2020 and does not expect the adoption to have a material impact on the Company's consolidated results of operations or financial position.
In August 2018, the FASB issued ASU No. 2018-13 "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement," which eliminates certain disclosure requirements affecting all levels of measurements, and modifies and adds new disclosure requirements for Level 3 measurements. The new standard will be effective for the Company beginning January 1, 2020 and early adoption is permitted. The Company expects to apply the new standard on January 1, 2020 and does not expect the adoption to have a material impact on the Company's consolidated results of operations or financial position.
(d) Real Estate Rental Properties
Significant expenditures, which improve or extend the life of an asset and have a useful life of greater than one year, are capitalized. Operating real estate assets are stated at cost and consist of land and land improvements, buildings and improvements, furniture, fixtures and equipment, and other costs incurred during their development, redevelopment and acquisition. Expenditures for maintenance and repairs are charged to expense as incurred.
The depreciable life of various categories of fixed assets is as follows:
| Computer software and equipment | 3 - 5 years |
| Interior apartment home improvements | 5 years |
| Furniture, fixtures and equipment | 5 - 10 years |
| Land improvements and certain exterior components of real property | 10 years |
| Real estate structures | 30 years |
The Company capitalizes all costs incurred with the predevelopment, development or redevelopment of real estate assets or are associated with the construction or expansion of real property. Such capitalized costs include land, land improvements, allocated costs of the Company’s project management staff, construction costs, as well as interest and related loan fees, property taxes and insurance. Capitalization begins for predevelopment, development, and redevelopment projects when activity commences. Capitalization ends when the apartment home is completed and the property is available for a new tenant or if the development activities cease.
The Company allocates the purchase price of real estate on a relative fair value basis to land and building including personal property, and identifiable intangible assets, such as the value of above, below and in-place leases. In making estimates of
F- 21
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
relative fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including independent land appraisals which consider comparable market transactions, its own analysis of recently acquired or developed comparable properties in our portfolio for land comparables and building replacement costs, and other publicly available market data. 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 amortized over the average remaining term of all acquired leases.
The values of the above and below market leases are amortized and recorded as either a decrease (in the case of above market leases) or an increase (in the case of below market leases) to rental revenue over the remaining term of the associated leases acquired. The value of acquired in-place leases are amortized to expense over the average remaining term of the leases acquired. The net carrying value of acquired in-place leases is $1.2 million and $0.1 million as of December 31, 2019 and 2018, respectively, and are included in prepaid expenses and other assets on the Company's consolidated balance sheets.
The Company periodically assesses the carrying value of its real estate investments for indicators of impairment. The judgments regarding the existence of impairment indicators are based on monitoring investment market conditions and performance compared to budget for operating properties including the net operating income for the most recent 12 month period, monitoring estimated costs for properties under development, the Company's ability to hold and its intent with regard to each asset, and each property's remaining useful life. 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 expected future cash flows (undiscounted and without interest charges) is less than the carrying amount (including intangible assets) of a property held for investment, then the Company will recognize an impairment loss equal to the excess of the carrying amount over the fair value of the property. Fair value of a property is determined using conventional real estate valuation methods, such as discounted cash flow, the property’s unleveraged yield in comparison to the unleveraged yields and/or sales prices of similar communities that have been recently sold, and other third party information, if available. Communities held for sale are carried at the lower of cost and fair value less estimated costs to sell. As of both December 31, 2019 and 2018, no properties were classified as held for sale. The Company recorded an impairment charge of $7.1 million for the year ended December 31, 2019 on a parcel of land that was part of a consolidated co-investment with Canada Pension Plan Investment Board ("CPPIB" or "CPP"). The impairment charge resulted from the Company's offer to acquire CPPIB's 45% interest in the co-investment. The impairment analysis over the parcel’s fair value was determined using internally developed models based on market assumptions. No impairment charges were recorded for the years ended December 31, 2018 or 2017.
In the normal course of business, the Company will receive purchase offers for its communities, either solicited or unsolicited. For those offers that are accepted, the prospective buyer will usually require a due diligence period before consummation of the transaction. It is not unusual for matters to arise that result in the withdrawal or rejection of the offer during this process. The Company classifies real estate as "held for sale" when all criteria under the accounting standard for the disposals of long-lived assets have been met.
(e) Co-investments
The Company owns investments in joint ventures in which it has significant influence, but its ownership interest does not meet the criteria for consolidation in accordance with U.S. GAAP. Therefore, the Company accounts for co-investments using the equity method of accounting. Under the equity method of accounting, the investment is carried at the cost of assets contributed, plus the Company’s equity in earnings less distributions received and the Company’s share of losses. The significant accounting policies of the Company’s co-investment entities are consistent with those of the Company in all material respects.
Upon the acquisition of a controlling interest of a co-investment, the co-investment entity is consolidated and a gain or loss is recognized upon the remeasurement of co-investments in the consolidated statement of income equal to the amount by which the fair value of the co-investment interest in the Company previously owned exceeds its carrying value. A majority of the co-investments, excluding most preferred equity investments, compensate the Company for its asset management services and some of these investments may provide promote income if certain financial return benchmarks are achieved. Asset management fees are recognized when earned, and promote fees are recognized when the earnings events have occurred and the amount is determinable and collectible. Any promote fees are reflected in equity income from co-investments.
The Company recorded an other-than-temporary impairment charge of $11.5 million for the year ended December 31, 2019 on an unconsolidated co-investment with CPPIB which holds Agora, a 49 unit apartment home community located in Walnut Creek, CA. The other-than-temporary impairment charge resulted from the Company's offer to acquire CPPIB's 45% interest in
F- 22
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
the co-investment. The impairment analysis over the co-investments fair value was determined using internally developed models based on market assumptions. The impairment is reflected in equity income from co-investments on the consolidated statements of income. No other-than-temporary impairment charges were recorded for the years ended December 31, 2018 or 2017.
(f) Revenues and Gains on Sale of Real Estate
Revenues from tenants renting or leasing apartment homes are recorded when due from tenants and are recognized monthly as they are earned, which approximates a straight-line basis. Apartment homes are rented under short-term leases (generally, lease terms of 9 to 12 months). Revenues from tenants leasing commercial space are recorded on a straight-line basis over the life of the respective lease. See Note 4, Revenues, and Note 10, Lease Agreements - Company as Lessor, for additional information regarding such revenues.
The Company also generates other property-related revenue associated with the leasing of apartment homes, including storage income, pet rent, and other miscellaneous revenue. Similar to rental income, such revenues are recorded when due from tenants and recognized monthly as they are earned.
Apart from rental and other property-related revenue, revenues from contracts with customers are recognized as control of the promised services is passed to the customer. For customer contracts related to management and other fees from affiliates (which includes asset management and property management), the transaction price and amount of revenue to be recognized is determined each quarter based on the management fee calculated and earned for that month or quarter. The contract will contain a description of the service and the fee percentage for management services. Payments from such services are one month or one quarter in arrears of the service performed.
Subsequent to the adoption of Accounting Standards Codification ("ASC") 610-20 "Gains and Losses from the Derecognition of Nonfinancial Assets" on January 1, 2018, the Company recognizes any gains on sales of real estate when it transfers control of a property and when it is probable that the Company will collect substantially all of the related consideration.
(g) Cash, Cash Equivalents and Restricted Cash
Highly liquid investments with original maturities of three months or less when purchased are classified as cash equivalents. Restricted cash balances relate primarily to reserve requirements for capital replacement at certain communities in connection with the Company’s mortgage debt.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows ($ in thousands):
| 2019 | 2018 | 2017 | |||||||||
| Cash and cash equivalents - unrestricted | $ | 70,087 | $ | 134,465 | $ | 44,620 | |||||
| Cash and cash equivalents - restricted | 11,007 | 16,930 | 16,506 | ||||||||
| Total unrestricted and restricted cash and cash equivalents shown in the consolidated statements of cash flows | $ | 81,094 | $ | 151,395 | $ | 61,126 |
(h) Marketable Securities
The Company reports its equity securities and available for sale debt securities at fair value, based on quoted market prices (Level 1 for the common stock and investment funds, Level 2 for the unsecured bonds and Level 3 for investments in mortgage backed securities, as defined by the FASB standard for fair value measurements as discussed later in Note 2). As of December 31, 2019 and 2018, $3.6 million and $6.7 million, respectively, of equity securities presented within common stock and stock funds in the tables below represent investments measured at fair value, using net asset value as a practical expedient, and are not categorized in the fair value hierarchy.
F- 23
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
Any unrealized gain or loss in debt securities classified as available for sale is recorded as other comprehensive income. There were no other than temporary impairment charges for the years ended December 31, 2019, 2018, and 2017. Unrealized gains and losses in equity securities, realized gains and losses in debt securities, interest income, and amortization of purchase discounts are included in interest and other income on the consolidated statements of income and comprehensive income.
As of December 31, 2019 and 2018, equity securities and available for sale debt securities consisted primarily of investment-grade unsecured bonds, U.S. treasury securities, and common stock and stock funds. As of December 31, 2019 and 2018, the Company classified its investments in mortgage backed securities, one of which matured in November 2019 while the other matures in September 2020, as held to maturity debt securities, and accordingly, these securities are stated at their amortized cost. The discount on the mortgage backed securities is being amortized to interest income based on an estimated yield and the maturity date of the securities.
As of December 31, 2019 and 2018 marketable securities consist of the following ($ in thousands):
| December 31, 2019 | |||||||||||
| Amortized Cost | Gross Unrealized Gain | Carrying Value | |||||||||
| Equity securities: | |||||||||||
| Investment funds - debt securities | $ | 29,588 | $ | 544 | $ | 30,132 | |||||
| Common stock and stock funds | 34,941 | 2,927 | 37,868 | ||||||||
| Debt securities: | |||||||||||
| Available for sale | |||||||||||
| U.S. treasury securities | 2,421 | 13 | 2,434 | ||||||||
| Investment-grade unsecured bonds | 1,048 | 60 | 1,108 | ||||||||
| Held to maturity: | |||||||||||
| Mortgage backed securities | 72,651 | — | 72,651 | ||||||||
| Total - Marketable securities | $ | 140,649 | $ | 3,544 | $ | 144,193 |
| December 31, 2018 | |||||||||||
| Amortized Cost | Gross Unrealized Loss | Carrying Value | |||||||||
| Equity securities: | |||||||||||
| Investment funds - debt securities | $ | 31,934 | $ | (568 | ) | $ | 31,366 | ||||
| Common stock and stock funds | 39,731 | (1,671 | ) | 38,060 | |||||||
| Debt securities: | |||||||||||
| Available for sale | |||||||||||
| U.S. treasury securities | 8,983 | (31 | ) | 8,952 | |||||||
| Investment-grade unsecured bonds | 4,125 | (145 | ) | 3,980 | |||||||
| Held to maturity: | |||||||||||
| Mortgage backed securities | 127,187 | — | 127,187 | ||||||||
| Total - Marketable securities | $ | 211,960 | $ | (2,415 | ) | $ | 209,545 |
The Company uses the specific identification method to determine the cost basis of a debt security sold and to reclassify amounts from accumulated other comprehensive loss for such securities.
F- 24
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
In November 2019, the Company received cash proceeds of $83.1 million from the maturity of an investment in a mortgage backed security. The Company recognized approximately $7.0 million of accelerated interest income related to this maturity.
For the years ended December 31, 2019, 2018 and 2017, the proceeds from sales and maturities of marketable securities totaled $147.5 million, $31.5 million and $35.5 million, respectively. For the years ended December 31, 2019, 2018 and 2017 these sales resulted in gains of $1.3 million, $0.7 million, and $1.9 million, respectively.
For the years ended December 31, 2019 and 2018, the portion of equity security unrealized losses or gains that were recognized in income totaled $5.7 million in gains, and $5.2 million in losses, respectively, and were included in interest and other income on the Company's consolidated statements of income and comprehensive income.
(i) Notes Receivable
Notes receivable relate to real estate financing arrangements including mezzanine and bridge loans. Interest is recognized over the life of the note as interest income.
Each note is analyzed to determine if it is impaired. A note is impaired if it is probable that the Company will not collect all contractually due principal and interest. The Company does not accrue interest when a note is considered impaired and an allowance is recorded for any principal and previously accrued interest that are not believed to be collectible. All cash receipts on impaired notes are applied to reduce the principal amount of such notes until the principal has been recovered and, thereafter, are recognized as interest income. As of December 31, 2019 and 2018, no notes were impaired.
(j) Capitalization Policy
The Company capitalizes all direct and certain indirect costs, including interest, real estate taxes and insurance, 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 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. Those costs as well as capitalized development and redevelopment fees totaled $17.9 million, $18.6 million and $18.8 million for the years ended December 31, 2019, 2018 and 2017, respectively, most of which relates to development projects. The Company capitalizes leasing costs associated with the lease-up of development communities and amortizes the costs over the life of the leases. The amounts capitalized are immaterial for all periods presented.
(k) Fair Value of Financial Instruments
The Company values its financial instruments based on the fair value hierarchy of valuation techniques described in the FASB’s accounting standard for fair value measurements. Level 1 inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability. The Company uses Level 1 inputs for the fair values of its cash equivalents and its marketable securities except for unsecured bonds and mortgage backed securities. The Company uses Level 2 inputs for its investments in unsecured bonds, notes receivable, notes payable, and derivative assets/liabilities. These inputs include interest rates for similar financial instruments. The Company’s valuation methodology for derivatives is described in Note 9. The Company uses Level 3 inputs to estimate the fair value of its mortgage backed securities. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
Management believes that the carrying amounts of the outstanding balances under its lines of credit, and notes and other receivables approximate fair value as of December 31, 2019 and 2018, because interest rates, yields and other terms for these instruments are consistent with interest rates, yields and other terms currently available for similar instruments. Management has estimated that the fair value of fixed rate debt with a carrying value of $5.2 billion and $5.0 billion at December 31, 2019 and 2018, respectively, to be $5.4 billion and $5.0 billion at December 31, 2019 and 2018, respectively. Management has
F- 25
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
estimated the fair value of the Company’s $660.4 million and $619.6 million of variable rate debt at December 31, 2019 and 2018, respectively, to be $655.8 million and $615.2 million at December 31, 2019 and 2018, respectively, based on the terms of existing mortgage notes payable, unsecured debt, and variable rate demand notes compared to those available in the marketplace. Management believes that the carrying amounts of cash and cash equivalents, restricted cash, accounts payable and accrued liabilities, construction payables, other liabilities and dividends payable approximate fair value as of December 31, 2019 and 2018 due to the short-term maturity of these instruments. Marketable securities, except mortgage backed securities, are carried at fair value as of December 31, 2019 and 2018.
At December 31, 2019 and 2018, the Company’s investments in mortgage backed securities had a carrying value of $72.7 million and $127.2 million, respectively. In November 2019, the Company received cash proceeds of $83.1 million from the maturity of an investment in a mortgage backed security. The Company estimated the fair value of its investment in mortgage backed securities at December 31, 2019 and 2018 to be approximately $72.7 million and $129.5 million, respectively. 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.
(l) Interest Rate Protection, Swap, and Forward Contracts
The Company uses interest rate swaps, interest rate caps, and total return swap contracts to manage interest rate risks. The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, the Company primarily uses interest rate swaps and interest rate caps as part of its cash flow hedging strategy.
The Company records all derivatives on its consolidated balance sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
For derivatives designated for accounting purposes as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated for accounting purposes as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the initial and ongoing effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction.
For derivatives not designated for accounting purposes as cash flow hedges, changes in fair value are recognized in earnings. All of the Company’s interest rate swaps are considered cash flow hedges.
(m) Income Taxes
Generally in any year in which Essex qualifies as a real estate investment trust ("REIT") under the Internal Revenue Code (the "IRC"), it is not subject to federal income tax on that portion of its income that it distributes to stockholders. No provision for federal income taxes, other than the taxable REIT subsidiaries discussed below, has been made in the accompanying consolidated financial statements for each of the years in the three-year period ended December 31, 2019 as Essex has elected to be and believes it qualifies under the IRC as a REIT and has made distributions during the periods in amounts to preclude Essex from paying federal income tax.
In order to maintain compliance with REIT tax rules, the Company utilizes taxable REIT subsidiaries for various revenue generating or investment activities. The taxable REIT subsidiaries are consolidated by the Company. In general, the activities and tax related provisions, assets and liabilities are not material. On December 22, 2017, the Tax Cuts and Jobs Act ("Tax Act") was signed into law, which reduced the federal income tax rate from 35% to 21% effective January 1, 2018. As a result of the Tax Act, the Company remeasured its net deferred tax liabilities at December 31, 2017, accordingly a net tax benefit of $1.5 million was recorded.
F- 26
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
As a partnership, the Operating Partnership is not subject to federal or state income taxes, except that in order to maintain Essex's compliance with REIT tax rules that are applicable to Essex, the Operating Partnership utilizes taxable REIT subsidiaries for various revenue generating or investment activities. The taxable REIT subsidiaries are consolidated by the Operating Partnership.
The status of cash dividends distributed for the years ended December 31, 2019, 2018, and 2017 related to common stock are classified for tax purposes as follows:
| 2019 | 2018 | 2017 | ||||||
| Common Stock | ||||||||
| Ordinary income | 83.81 | % | 79.72 | % | 84.04 | % | ||
| Capital gain | 13.78 | % | 15.35 | % | 13.20 | % | ||
| Unrecaptured section 1250 capital gain | 2.41 | % | 4.93 | % | 2.76 | % | ||
| 100.00 | % | 100.00 | % | 100.00 | % |
(n) Equity-based Compensation
The cost of share- and unit-based compensation awards is measured at the grant date based on the estimated fair value of the awards. The estimated fair value of stock options and restricted stock granted by the Company are being amortized over the vesting period. The estimated grant date fair values of the long-term incentive plan units (discussed in Note 14) are being amortized over the expected service periods.
(o) Changes in Accumulated Other Comprehensive Loss, by Component
Changes in Accumulated Other Comprehensive Loss, Net, by Component
Essex Property Trust, Inc. ($ in thousands)
| Change in fair value and amortization of swap settlements | Unrealized gain (loss) on available for sale securities | Total | |||||||||
| Balance at December 31, 2018 | $ | (13,077 | ) | $ | (140 | ) | $ | (13,217 | ) | ||
| Cumulative effect upon adoption of ASU No. 2017-12 | 175 | — | 175 | ||||||||
| Other comprehensive income before reclassification | 7,836 | 272 | 8,108 | ||||||||
| Amounts reclassified from accumulated other comprehensive loss | (8,923 | ) | (31 | ) | (8,954 | ) | |||||
| Other comprehensive income (loss) | (912 | ) | 241 | (671 | ) | ||||||
| Balance at December 31, 2019 | $ | (13,989 | ) | $ | 101 | $ | (13,888 | ) |
F- 27
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
Changes in Accumulated Other Comprehensive Loss, by Component
Essex Portfolio, L.P. ($ in thousands)
| Change in fair value and amortization of swap settlements | Unrealized gain (loss) on available for sale securities | Total | |||||||||
| Balance at December 31, 2018 | $ | (9,593 | ) | $ | (145 | ) | $ | (9,738 | ) | ||
| Cumulative effect upon adoption of ASU No. 2017-12 | 181 | — | 181 | ||||||||
| Other comprehensive income before reclassification | 8,111 | 281 | 8,392 | ||||||||
| Amounts reclassified from accumulated other comprehensive loss | (9,235 | ) | (32 | ) | (9,267 | ) | |||||
| Other comprehensive income (loss) | (943 | ) | 249 | (694 | ) | ||||||
| Balance at December 31, 2019 | $ | (10,536 | ) | $ | 104 | $ | (10,432 | ) |
Amounts reclassified from accumulated other comprehensive loss in connection with derivatives are recorded in interest expense on the consolidated statements of income. Realized gains and losses on available for sale debt securities are included in interest and other income on the consolidated statements of income.
(p) Redeemable Noncontrolling Interest
The carrying value of redeemable noncontrolling interest in the accompanying balance sheets was $37.4 million and $35.5 million as of December 31, 2019 and 2018, respectively. The limited partners may redeem their noncontrolling interests for cash in certain circumstances.
The changes in the redemption value of redeemable noncontrolling interests for the years ended December 31, 2019, 2018, and 2017 is as follows:
| 2019 | 2018 | 2017 | |||||||||
| Balance at January 1, | $ | 35,475 | $ | 39,206 | $ | 44,684 | |||||
| Reclassifications due to change in redemption value and other | 2,008 | 1,164 | 65 | ||||||||
| Redemptions | (73 | ) | (4,895 | ) | (5,543 | ) | |||||
| Balance at December 31, | $ | 37,410 | $ | 35,475 | $ | 39,206 |
(q) Accounting Estimates
The preparation of consolidated financial statements, in accordance with U.S. GAAP, requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing 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, and its notes receivable. 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.
(r) Variable Interest Entities
In accordance with accounting standards for consolidation of VIEs, the Company consolidates the Operating Partnership, 17 DownREIT entities (comprising nine communities), and six co-investments as of December 31, 2019. As of December 31, 2018, the Company consolidated the Operating Partnership, 16 DownREIT entities (comprising eight communities), and eight co-investments. The Company consolidates these entities because it is deemed the primary beneficiary. The Company has no assets or liabilities other than its investment in the Operating Partnership. The consolidated total assets and liabilities related to the above consolidated co-investments and DownREIT entities, net of intercompany eliminations, were approximately $1.0
F- 28
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
billion and $364.3 million, respectively, as of December 31, 2019, and $849.8 million and $261.7 million, respectively, as of December 31, 2018. Noncontrolling interests in these entities were $122.5 million and $64.5 million as of December 31, 2019 and 2018, respectively. The Company's financial risk in each VIE is limited to its equity investment in the VIE.
The DownREIT VIEs collectively own nine apartment communities in which the Company is the general partner or manager of the DownREIT entity, the Operating Partnership is a special limited partner or member, and the other limited partners or members were granted rights of redemption for their interests. Such limited partners or members can request to be redeemed and the Company, subject to certain restrictions, can elect to redeem their rights for cash or by issuing shares of its common stock on a one share per unit basis. Conversion values will be based on the market value of the Company's common stock at the time of redemption multiplied by the number of units stipulated under various arrangements, as noted above. The other limited partners or members receive distributions based on the Company's current dividend rate times the number of units held. Total DownREIT units outstanding were 1,033,907 and 912,269 as of December 31, 2019 and 2018, respectively, and the redemption value of the units, based on the closing price of the Company’s common stock totaled approximately $311.1 million and $223.7 million, as of December 31, 2019 and 2018, respectively. The carrying value of redeemable noncontrolling interest in the accompanying balance sheets was $37.4 million and $35.5 million as of December 31, 2019 and 2018, respectively. Of these amounts, $13.0 million and $14.5 million as of December 31, 2019 and 2018, respectively, represent units of limited partners' or members' interests in DownREIT VIEs as to which it is outside of the Company’s control to redeem the DownREIT units with Company common stock and may potentially be redeemed for cash, and are presented at either their redemption value or historical cost, depending on the limited partner's or members' right to redeem their units as of the balance sheet date. The carrying value of DownREIT units as to which it is within the control of the Company to redeem the units with its common stock was $97.7 million and $32.4 million as of December 31, 2019 and 2018, respectively, and is classified within noncontrolling interests in the accompanying consolidated balance sheets.
Interest holders in VIEs consolidated by the Company are allocated a priority of net income equal to the cash payments made to those interest holders or distributions from cash flow. The remaining results of operations are generally allocated to the Company.
As of December 31, 2019 and 2018, the Company did not have any other VIEs of which it was deemed to be the primary beneficiary and did not have any VIEs of which it was not deemed to be the primary beneficiary.
(s) Discontinued Operations
The Company determined that the disposals during the years ended December 31, 2019, 2018 and 2017 were not considered discontinued operations in accordance with ASU 2014-08. The gains related to these disposals are recorded in gain on sale of real estate and land in the consolidated statements of income.
(3) Real Estate Investments
(a) Acquisitions of Real Estate
For the year ended December 31, 2019, the Company purchased four communities consisting of 849 apartment homes for approximately $373.3 million. The table below summarizes acquisition activity for the year ended December 31, 2019 ($ in millions):
| Property Name | Location | Apartment Homes | Essex Ownership Percentage | Quarter in 2019 | Purchase Price | ||||
| One South Market(1) | San Jose, CA | 312 | 100 | % | Q1 | $ | 80.6 | ||
| Brio(2) | Walnut Creek, CA | 300 | N/A | Q2 | 164.9 | ||||
| Township | Redwood City, CA | 132 | 100 | % | Q3 | 88.7 | |||
| Pure Redmond | Redmond, WA | 105 | 100 | % | Q4 | 39.1 | |||
| Total 2019 | 849 | $ | 373.3 |
F- 29
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
| (1) | In March 2019, the Company purchased the joint venture partner's 45% membership interest in the One South Market co-investment based on an estimated property valuation of $179.0 million. In conjunction with the acquisition, $86.0 million of mortgage debt that encumbered the property was repaid. |
| (2) | In June 2019, the Company acquired Brio for a total contract price of $164.9 million in a DownREIT transaction. As part of the acquisition, the Company assumed $98.7 million of mortgage debt in the community. Based on a VIE analysis performed by the Company, the property was consolidated. |
The consolidated fair value of the acquisitions listed above were included on the Company's consolidated balance sheet as follows: $72.4 million was included in land and land improvements, $402.4 million was included in buildings and improvements, $3.3 million was included in prepaid expenses and other assets, and $149.0 million was included in mortgage notes payable, within the Company's consolidated balance sheets.
In December 2019, the Company purchased the joint venture partner's 25% ownership interest in Hidden Valley, a consolidated community consisting of 324 apartment homes, for a contract price of $24.2 million based on an estimated property valuation of $97.0 million and an encumbrance of $29.7 million of mortgage debt. The purchase was recorded as a redemption of noncontrolling interest in the consolidated statements of equity.
For the year ended December 31, 2018, the Company purchased a partial interest in one community consisting of 166 apartment homes for $35.4 million.
(b) Sales of Real Estate Investments
For the year ended December 31, 2019, the Company sold a land parcel adjacent to the Mylo development project located in Santa Clara, CA, for $10.8 million and recorded an immaterial gain as well as land located in San Mateo, CA, that had been held for future development for $12.5 million and recorded a loss of $3.2 million.
For the year ended December 31, 2018, the Company sold two communities consisting of 669 apartment homes for $352.0 million resulting in gains totaling $61.9 million.
During 2017, the Company sold one community consisting of 270 apartment homes for $132.5 million resulting in a gain of $26.2 million.
(c) Real Estate Assets Held for Sale, net
As of December 31, 2019 and 2018, the Company had no assets classified as held for sale.
(d) Co-investments
The Company has joint ventures which are accounted for under the equity method. The co-investments’ accounting policies are similar to the Company’s accounting policies. The co-investments own, operate, and develop apartment communities.
In August 2019, the Company formed a new joint venture entity, BEX IV, LLC ("BEX IV"), with an institutional partner. The Company has a 50.1% ownership interest in the joint venture and an initial equity commitment of $52.2 million. The joint venture is unconsolidated for financial reporting purposes. Also, in August 2019, BEX IV acquired 777 Hamilton, a 195 unit apartment home community located in Menlo Park, CA, for a total contract price of $148.0 million. The property was encumbered by a $44.4 million related party bridge loan from the Company, with an interest rate of 3.25% and a maturity date of November 2019. See Note 6, Related Party Transactions, for additional details. The scheduled maturity was extended to February 2020 but the related party bridge loan was paid off in December 2019 when BEX IV assumed $44.4 million of mortgage debt, with an interest rate of 3.23% and a maturity date of January 2030.
In August 2019, Wesco V, LLC ("Wesco V"), one of the Company's joint ventures, acquired The Courtyards at 65th Street, a 331 unit apartment home community located in Emeryville, CA, for a total contract price of $178.0 million. The property was encumbered by an $89.0 million related party bridge loan from the Company, with an interest rate of the London Interbank Offered Rate ("LIBOR") plus 1.30% and a maturity date of December 2019. See Note 6, Related Party Transactions, for
F- 30
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
additional details. The related party bridge loan was paid off in November 2019 when Wesco V assumed $89.0 million of mortgage debt, with an interest rate of LIBOR plus 1.30% and a maturity date of January 2027.
In October 2019, a CPP joint venture, in which Essex had a 55.0% ownership interest, sold Mosso, a 463 unit apartment home community located in San Francisco, CA, for $311.0 million, resulting in a gain of $50.2 million for the Company.
In November 2019, Wesco V acquired Velo and Ray Apartments, a 308 unit apartment home community located in Seattle, WA, for a total contract price of $133.0 million. The property was encumbered by an $85.5 million related party bridge loan from the Company, with an interest rate of LIBOR plus 1.30% and a maturity date of February 2020. See Note 6, Related Party Transactions, for additional details.
The carrying values of the Company’s co-investments as of December 31, 2019 and 2018 are as follows ($ in thousands, except in parenthetical):
| Weighted Average Essex Ownership | December 31, | |||||||||
| Percentage (1) | 2019 | 2018 | ||||||||
| Ownership interest in: | ||||||||||
| CPPIB | 55 | % | $ | 345,466 | $ | 482,507 | ||||
| Wesco I, Wesco III, Wesco IV, and Wesco V | 51 | % | 216,756 | 194,890 | ||||||
| BEXAEW, BEX II, BEX III, and BEX IV | 50 | % | 160,888 | 121,780 | ||||||
| Other | 48 | % | 20,351 | 34,093 | ||||||
| Total operating and other co-investments, net | 743,461 | 833,270 | ||||||||
| Total predevelopment and development co-investments | 50 | % | 146,944 | 94,060 | ||||||
| Total preferred interest co-investments (includes related party investments of $73.2 million and $51.8 million as of December 31, 2019 and December 31, 2018, respectively - Note 6 - Related Party Transactions for further discussion) | 444,934 | 372,810 | ||||||||
| Total co-investments, net | $ | 1,335,339 | $ | 1,300,140 |
| (1) | Weighted average Company ownership percentages are as of December 31, 2019. |
The combined summarized financial information of co-investments is as follows ($ in thousands):
| December 31, | |||||||
| 2019 | 2018 | ||||||
| Combined balance sheets: (1) | |||||||
| Rental properties and real estate under development | $ | 4,733,762 | $ | 4,367,987 | |||
| Other assets | 139,562 | 104,119 | |||||
| Total assets | $ | 4,873,324 | $ | 4,472,106 | |||
| Debt | $ | 2,442,213 | $ | 2,190,764 | |||
| Other liabilities | 117,160 | 106,316 | |||||
| Equity | 2,313,951 | 2,175,026 | |||||
| Total liabilities and equity | $ | 4,873,324 | $ | 4,472,106 | |||
| Company's share of equity | $ | 1,335,339 | $ | 1,300,140 |
F- 31
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
| Years ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Combined statements of income: (1) | |||||||||||
| Property revenues | $ | 336,922 | $ | 332,164 | $ | 312,841 | |||||
| Property operating expenses | (115,658 | ) | (107,584 | ) | (110,583 | ) | |||||
| Net operating income | 221,264 | 224,580 | 202,258 | ||||||||
| Gain on sale of real estate | 112,918 | 24,218 | 90,663 | ||||||||
| Interest expense | (65,665 | ) | (63,913 | ) | (62,844 | ) | |||||
| General and administrative | (9,575 | ) | (6,379 | ) | (9,091 | ) | |||||
| Depreciation and amortization | (121,006 | ) | (126,485 | ) | (118,048 | ) | |||||
| Net income | $ | 137,936 | $ | 52,021 | $ | 102,938 | |||||
| Company's share of net income (2) | $ | 112,136 | $ | 89,132 | $ | 86,445 |
| (1) | Includes preferred equity investments held by the Company. |
| (2) | Includes the Company's share of equity income from joint ventures and preferred equity investments, gain on sales of co-investments, co-investment promote income and income from early redemption of preferred equity investments. Includes related party income of $7.5 million, $2.0 million, and $1.9 million for the years ended December 31, 2019, 2018, and 2017, respectively. |
Operating Co-investments
As of December 31, 2019 and 2018, the Company, through several joint ventures, owned 10,672 and 10,613 apartment homes, respectively, in operating communities. The Company’s book value of these co-investments was $743.5 million and $833.3 million at December 31, 2019 and 2018, respectively.
Predevelopment and Development Co-investments
As of December 31, 2019 and 2018, the Company, through several joint ventures, owned 806 and 814 apartment homes in predevelopment and development communities, respectively. The Company’s book value of these co-investments was $146.9 million and $94.1 million at December 31, 2019 and 2018, respectively.
In 2017, the Company entered into a joint venture to develop Patina at Midtown (formerly known as Ohlone), a multifamily community comprised of 269 apartment homes located in San Jose, CA. The Company has a 50% ownership interest in the development which has a projected total cost of $136.0 million. Construction began in the third quarter of 2017 and the community is expected to open in the first quarter of 2020. The Company has also committed to a $28.9 million preferred equity investment in the project, which accrues an annualized preferred return of 10.0% and matures in 2020.
In 2015, the Company entered into a joint venture to develop 500 Folsom, a multifamily community comprised of 537 apartment homes located in San Francisco, CA. The Company has a 50% ownership interest in the development which has a projected total cost of $415.0 million. The property began initial occupancy in the third quarter of 2019 and is expected to be fully stabilized by the fourth quarter of 2020.
Preferred Equity Investments
As of December 31, 2019 and 2018, the Company held preferred equity investment interests in several joint ventures which own real estate. The Company’s book value of these preferred equity investments was $444.9 million and $372.8 million at December 31, 2019 and 2018, respectively, and is included in the co-investments line in the accompanying consolidated balance sheets.
During 2019, the Company made commitments to fund $141.7 million of preferred equity investment in five preferred equity investments, some of which include related party sponsors. See Note 6, Related Party Transactions, for additional details. The investments have initial preferred returns ranging from 10.15%-11.3%, with maturities ranging from July 2022 to October
F- 32
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
- As of December 31, 2019, the Company had funded $125.4 million of the $141.7 million of commitments. The remaining committed amount is expected to be funded in 2020.
During 2018, the Company made commitments to fund $45.1 million of preferred equity investment in two preferred equity investments, some of which include related party sponsors. See Note 6, Related Party Transactions, for additional details. The investments have initial preferred returns ranging from 10.25%-12.0%, with maturities ranging from May 2023 to April 2024. As of December 31, 2019, the Company had funded $41.1 million of the $45.1 million of commitments. The remaining committed amount will be funded when requested by the sponsors.
In February 2019, the Company received cash of $10.9 million, including an early redemption fee of $0.1 million, for the full redemption of a related party preferred equity investment in a joint venture that holds property in San Jose, CA. See Note 6, Related Party Transactions, for additional details.
In April 2019, the Company received cash of $16.3 million, including an early redemption fee of $0.7 million, for the full redemption of a preferred equity investment in a joint venture that holds property in Santa Ana, CA.
In September 2019, the Company received cash of $14.8 million, including an early redemption fee of $0.3 million, for the full redemption of a preferred equity investment in a property located in Redmond, WA.
In September 2019, the Company received cash of $16.3 million, including an early redemption fee of $1.4 million, for the full redemption of a preferred equity investment in a property located in Seattle, WA.
In October 2019, the Company received cash of $15.8 million, including an early redemption fee of $0.2 million, for the full redemption of a preferred equity investment in a property located in San Jose, CA.
In November 2019, the Company received cash of $16.0 million, including an early redemption fee of $0.9 million, for the full redemption of a preferred equity investment in a property located in Bellevue, WA.
(e) Real Estate under Development
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, 2019, the Company's development pipeline was comprised of five consolidated projects under development, two unconsolidated joint venture projects under development and various predevelopment projects, aggregating 1,960 apartment homes, with total incurred costs of $1.0 billion.
(4) Revenues
On January 1, 2018, the Company adopted ASU No. 2014-09, "Revenue from Contracts with Customers" using a modified retrospective transition method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods after January 1, 2018 are presented under the new standard, while prior period amounts are not adjusted and continue to be reported in accordance with the old revenue recognition standard.
Based on a full analysis of applicable contracts, the Company determined that the new standard did not have an impact to reported revenues from prior or current periods.
Disaggregated Revenue
The following table presents the Company’s revenues disaggregated by revenue source ($ in thousands):
F- 33
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
| 2019 | 2018 | 2017 | |||||||||
| Rental income (1) | $ | 1,425,585 | $ | 1,366,590 | $ | 1,326,464 | |||||
| Other property (1) | 25,043 | 24,280 | 27,861 | ||||||||
| Management and other fees from affiliates | 9,527 | 9,183 | 9,574 | ||||||||
| Total revenues | $ | 1,460,155 | $ | 1,400,053 | $ | 1,363,899 |
| (1) | On January 1, 2019, the Company adopted ASU No. 2016-02 and ASU No. 2018-11. As a result of this adoption, certain amounts previously classified as other property revenue have been reclassified to rental income. Prior period amounts have been adjusted to conform to the current period's presentation. |
The following table presents the Company’s rental and other property-leasing revenues disaggregated by geographic operating segment ($ in thousands):
| 2019 | 2018 | 2017 | |||||||||
| Southern California | $ | 610,240 | $ | 592,281 | $ | 574,552 | |||||
| Northern California | 569,556 | 522,561 | 505,313 | ||||||||
| Seattle Metro | 245,476 | 236,525 | 229,871 | ||||||||
| Other real estate assets (1) | 25,356 | 39,503 | 44,589 | ||||||||
| Total rental and other property revenues | $ | 1,450,628 | $ | 1,390,870 | $ | 1,354,325 |
| (1) | Other real estate assets consists of revenue generated from retail space, commercial properties, held for sale properties, and disposition properties. Executive management does not evaluate such operating performance geographically. |
The following table presents the Company’s rental and other property revenues disaggregated by current property category status ($ in thousands):
| 2019 | 2018 | 2017 | |||||||||
| Same-property (1) | $ | 1,367,311 | $ | 1,321,862 | $ | 1,284,030 | |||||
| Acquisitions (2) | 22,924 | 259 | — | ||||||||
| Development (3) | 7,562 | 2,713 | — | ||||||||
| Redevelopment | 20,988 | 20,345 | 19,641 | ||||||||
| Non-residential/other, net (4) | 31,843 | 45,691 | 50,654 | ||||||||
| Total rental and other property revenues | $ | 1,450,628 | $ | 1,390,870 | $ | 1,354,325 |
| (1) | Properties that have comparable stabilized results as of January 1, 2018 and are consolidated by the Company for the years ended December 31, 2019, 2018, and 2017. A community is generally considered to have reach stabilized operations once it achieves an initial occupancy of 95%. |
| (2) | Acquisitions includes properties acquired which did not have comparable stabilized results as of January 1, 2018. |
| (3) | Development includes properties developed which did not have stabilized results as of January 1, 2018. |
| (4) | Non-residential/other, net consists of revenue generated from retail space, commercial properties, held for sale properties, disposition properties and student housing. |
Deferred Revenues and Remaining Performance Obligations
When cash payments are received or due in advance of the Company’s performance of contracts with customers, deferred revenue is recorded. The total deferred revenue balance related to such contracts was $3.9 million and $6.2 million as of December 31, 2019 and December 31, 2018, respectively, and was included in accounts payable and accrued liabilities within the accompanying consolidated balance sheets. The amount of revenue recognized for the year ended December 31, 2019 that was included in the December 31, 2018 deferred revenue balance was $2.3 million, which was included in interest and other income within the consolidated statements of income and comprehensive income.
F- 34
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in the new revenue recognition accounting standard. As of December 31, 2019, the Company had $3.9 million of remaining performance obligations. The Company expects to recognize approximately 19% of these remaining performance obligations in 2020, an additional 38% through 2022, and the remaining balance thereafter.
Practical Expedients
The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less or when variable consideration is allocated entirely to a wholly unsatisfied performance obligation.
(5) Notes and Other Receivables
Notes and other receivables consist of the following as of December 31, 2019 and 2018 ($ in thousands):
| 2019 | 2018 | ||||||
| Note receivable, secured, bearing interest at 9.00%, due May 2021 | 16,828 | 15,226 | |||||
| Note receivable, secured, bearing interest at 10.75%, due September 2020 (1) | — | 32,650 | |||||
| Note receivable, secured, bearing interest at 9.90%, due November 2021 | 12,838 | — | |||||
| Related party note receivable, secured, bearing interest at 9.50%, due October 2019 (2)(3) | — | 6,618 | |||||
| Related party note receivable, secured, bearing variable rate interest, due February 2020 (3) | 85,713 | — | |||||
| Notes and other receivables from affiliates (4) | 4,442 | 4,457 | |||||
| Other receivables | 14,544 | 12,944 | |||||
| Total notes and receivables | $ | 134,365 | $ | 71,895 |
| (1) | In December 2019, the Company received cash of $36.1 million for the payoff of this note receivable. |
| (2) | In October 2019, the Company received cash of $6.7 million for the payoff of this note receivable. |
| (3) | See Note 6, Related Party Transactions, for additional details. |
| (4) | These amounts consist of short-term loans outstanding and due from various joint ventures as of December 31, 2019 and 2018, respectively. See Note 6, Related Party Transactions, for additional details. |
(6) Related Party Transactions
The Company has adopted written related party transaction guidelines that are intended to cover transactions in which the Company (including entities it controls) is a party and in which any "related person" has a direct or indirect interest. A "related person" means any person who is or was (since the beginning of the last fiscal year) a Company director, director nominee, or executive officer, any beneficial owner of more than 5% of the Company’s outstanding common stock, and any immediate family member of any of the foregoing persons. A related person may be considered to have an indirect interest in a transaction if he or she (i) is an owner, director, officer or employee of or otherwise associated with another company that is engaging in a transaction with the Company, or (ii) otherwise, through one or more entities or arrangements, has an indirect financial interest in or personal benefit from the transaction.
The related person transaction review and approval process is intended to determine, among any other relevant issues, the dollar amount involved in the transaction; the nature and value of any related person’s direct or indirect interest (if any) in the transaction; and whether or not (i) a related person’s interest is material, (ii) the transaction is fair, reasonable, and serves the best interest of the Company and its shareholders, and (iii) whether the transaction or relationship should be entered into, continued or ended.
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. For the years ended December 31, 2019, 2018 and 2017 there were no brokerage commissions paid by the Company to MMI or its affiliates.
F- 35
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
The Company charges certain fees relating to its co-investments for asset management, property management, development and redevelopment services. These fees from affiliates total $13.8 million, $13.9 million, and $12.6 million for the years ended December 31, 2019, 2018 and 2017, respectively. All of these fees are net of intercompany amounts eliminated by the Company. The Company netted development and redevelopment fees of $4.3 million, $4.8 million, and $3.0 million against general and administrative expenses for the years ended December 31, 2019, 2018 and 2017, respectively.
As described in Note 5, Notes and Other Receivables, the Company has provided short-term loans to affiliates. As of December 31, 2019 and 2018, $4.4 million and $4.5 million, respectively, of short-term loans remained outstanding due from joint venture affiliates and are classified within notes and other receivables in the accompanying consolidated balance sheets. In November 2016, the Company provided a $6.6 million mezzanine loan to a limited liability company in which MMC holds a significant ownership interest through subsidiaries. The mezzanine loan was classified within notes and other receivables in the accompanying consolidated balance sheets and was paid off in October 2019.
In November 2019, the Company provided an $85.5 million related party bridge loan to Wesco V as part of the acquisition of Velo and Ray. The note receivable accrued interest at LIBOR plus 1.30% and was scheduled to mature in February 2020, but was paid off in January 2020. See Note 18, Subsequent Events, for further details. The bridge loan is classified within notes and other receivables in the accompanying consolidated balance sheets.
In August 2019, the Company provided an $89.0 million related party bridge loan to Wesco V as part of the acquisition of The Courtyards at 65th Street. The note receivable accrued interest at LIBOR plus 1.30% and was paid off in November 2019.
In August 2019, the Company provided a $44.4 million related party bridge loan to BEX IV as part of the acquisition of 777 Hamilton. The note receivable accrued interest at 3.25%. In November 2019, the term of the bridge loan was extended to February 2020, but was paid off in December 2019.
In June 2019, the Company acquired Brio, a 300 unit apartment home community located in Walnut Creek, CA. The Company issued DownREIT units to an affiliate of MMC, based on a contract price of $164.9 million. The property was encumbered by $98.7 million of mortgage debt which was assumed by the Company at the time of acquisition. As a result of this transaction, the Company consolidated the property, based on a VIE analysis performed by the Company.
In February 2019, the Company funded a $24.5 million preferred equity investment in an entity whose sponsor is an affiliate of MMC, which owns a multifamily development community located in Mountain View, CA. The investment has an initial preferred return of 11.0% and is scheduled to mature in February 2024.
In October 2018, the Company funded a $18.6 million preferred equity investment in an entity whose sponsor is an affiliate of MMC. The entity wholly owns a 268 apartment home community development located in Burlingame, CA. This investment accrues interest based on an initial 12.00% preferred return. The investment is scheduled to mature in April 2024.
In May 2018, the Company made a commitment to fund a $26.5 million preferred equity investment in an entity whose sponsors include an affiliate of MMC. The entity wholly owns a 400 apartment home community located in Ventura, CA. This investment accrues interest based on a 10.25% preferred return. The investment is scheduled to mature in May 2023. As of December 31, 2019, the Company had funded $22.5 million of the commitment. The remaining committed amount will be funded when requested by the sponsors.
In November 2017, the Company provided a $29.5 million related party bridge loan to a property acquired by BEX III. The note receivable accrued interest at 3.5% and was paid off in January 2018.
In March 2017, the Company converted its existing $15.3 million preferred equity investment in Sage at Cupertino, a 230 apartment home community located in San Jose, CA, into a 40.5% common equity ownership interest in the property. The Company issued DownREIT units to the other members, including an MMC affiliate, based on an estimated property valuation of $90.0 million. At the time of the conversion, the property was encumbered by $52.0 million of mortgage debt. As a result of this transaction, the Company consolidates the property, based on a consolidation analysis performed by the Company.
In 2015, the Company made preferred equity investments totaling $20.0 million in three entities affiliated with MMC that own apartment communities in California. The Company earned a 9.5% preferred return on each such investment. One $5.0 million
F- 36
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
investment, which was scheduled to mature in 2022, was fully redeemed in 2017. Another $5.0 million investment, which was scheduled to mature in 2022, was fully redeemed in 2018. The remaining investment was fully redeemed in February 2019.
(7) Unsecured Debt
Essex does not have any indebtedness as all debt is incurred by the Operating Partnership. Essex guarantees the Operating Partnership’s unsecured debt including the revolving credit facilities up to the maximum amounts and for the full term of the facilities.
Unsecured debt consists of the following as of December 31, 2019 and 2018 ($ in thousands):
| 2019 | 2018 | Weighted Average Maturity In Years | |||||||
| Unsecured bonds private placement - fixed rate | $ | 199,820 | $ | 274,624 | 1.5 | ||||
| Term loan - variable rate | 349,189 | 348,813 | 2.1 | ||||||
| Bonds public offering - fixed rate | 4,214,197 | 3,175,879 | 7.4 | ||||||
| Unsecured debt, net (1) | 4,763,206 | 3,799,316 | |||||||
| Lines of credit (2) | 55,000 | — | |||||||
| Total unsecured debt | $ | 4,818,206 | $ | 3,799,316 | |||||
| Weighted average interest rate on fixed rate unsecured bonds private placement and bonds public offering | 3.8 | % | 3.9 | % | |||||
| Weighted average interest rate on variable rate term loan | 2.7 | % | 3.0 | % | |||||
| Weighted average interest rate on lines of credit | 2.5 | % | 3.2 | % |
| (1) | Includes unamortized discount, net of premiums, of $12.2 million and $7.1 million and unamortized debt issuance costs of $24.5 million and $18.5 million as of December 31, 2019 and 2018, respectively. |
| (2) | Lines of credit, related to the Company's two lines of unsecured credit aggregating $1.24 billion, excludes unamortized debt issuance costs of $3.8 million and $3.9 million as of December 31, 2019 and 2018, respectively. These debt issuance costs are included in prepaid expenses and other assets on the consolidated balance sheets. |
As of December 31, 2019 and 2018, the Company had $200.0 million and $275.0 million of private placement unsecured bonds outstanding at an average effective interest rate of 4.4% and 4.5%, respectively.
The following is a summary of the Company’s unsecured private placement bonds as of December 31, 2019 and 2018 ($ in thousands):
| Maturity | 2019 | 2018 | Coupon Rate | |||||||||
| Senior unsecured private placement notes | December 2019 | — | 75,000 | 4.92 | % | |||||||
| Senior unsecured private placement notes | April 2021 | 100,000 | 100,000 | 4.27 | % | |||||||
| Senior unsecured private placement notes | June 2021 | 50,000 | 50,000 | 4.30 | % | |||||||
| Senior unsecured private placement notes | August 2021 | 50,000 | 50,000 | 4.37 | % | |||||||
| $ | 200,000 | $ | 275,000 |
As of both December 31, 2019 and 2018, the Company had unsecured term loans outstanding of $350.0 million at an average interest rate of 2.7% and 3.0%, respectively. These loans are included in the line "Term loan - variable rate" in the table above, and as of December 31, 2019 and 2018, the carrying value, net of debt issuance costs, was $349.2 million and $348.8 million, respectively, and the term loan matures in February 2022. The Company had entered into five interest rate swap contracts, for a term of five years with a notional amount totaling $175.0 million, which will effectively convert the interest rate on $175.0 million of the term loan to a fixed rate of 2.3%. These interest rate swaps are accounted for as cash flow hedges.
F- 37
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
In August 2019, the Company issued $400.0 million of senior unsecured notes due on January 15, 2030, with a coupon rate of 3.000% per annum (the "2030 Notes"), which are payable on January 15 and July 15 of each year, beginning on January 15, 2020. The 2030 Notes were offered to investors at a price of 98.632% of the principal amount thereof. The 2030 Notes are general unsecured senior obligations of the Operating Partnership, rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership and are unconditionally guaranteed by Essex Property Trust, Inc. In October 2019, the Company issued an additional $150.0 million of the 2030 notes at a price of 101.685% of the principal amount thereof. These additional notes have substantially identical terms as the 2030 Notes issued in August 2019. The Company used the net proceeds of these offerings to prepay, with no prepayment penalties, certain secured indebtedness under outstanding mortgage notes, to repay indebtedness under its unsecured lines of credit and for other general corporate and working capital purposes. These bonds are included in the line "Bonds public offering-fixed rate" in the table above, and as of December 31, 2019, the carrying value of the 2030 Notes, net of discount and debt issuance costs was $542.3 million.
In February 2019, the Company issued $350.0 million of senior unsecured notes due on March 1, 2029, with a coupon rate of 4.000% per annum (the "2029 Notes"), which are payable on March 1 and September 1 of each year, beginning on September 1, 2019. The 2029 Notes were offered to investors at a price of 99.188% of the principal amount thereof. The 2029 Notes are general unsecured senior obligations of the Operating Partnership, rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership and are unconditionally guaranteed by Essex Property Trust, Inc. In March 2019, the Company issued an additional $150.0 million of the 2029 Notes at a price of 100.717% of the principal amount thereof. These additional notes have substantially identical terms as the 2029 Notes issued in February 2019. The Company used the net proceeds of these offerings to repay indebtedness under its unsecured lines of credit and for other general corporate and working capital purposes. These bonds are included in the line "Bonds public offering-fixed rate" in the table above, and as of December 31, 2019, the carrying value of the 2029 Notes, net of discount and debt issuance costs was $494.1 million.
In March 2018, the Company issued $300.0 million of senior unsecured notes due on March 15, 2048 with a coupon rate of 4.500% per annum and are payable on March 15 and September 15 of each year, beginning on September 15, 2018 (the "2048 Notes"). The 2048 Notes were offered to investors at a price of 99.591% of par value. The 2048 Notes are general unsecured senior obligations of the Operating Partnership, rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership and are fully and unconditionally guaranteed by Essex Property Trust, Inc. These bonds are included in the line "Bonds public offering-fixed rate" in the table above, and as of December 31, 2019 and 2018, the carrying value of the 2048 Notes, net of discount and debt issuance costs was $295.6 million and $295.4 million, respectively.
In April 2017, the Company issued $350.0 million of senior unsecured notes due on May 1, 2027 with a coupon rate of 3.625% per annum and are payable on May 1 and November 1 of each year, beginning on November 1, 2017 (the "2027 Notes"). The 2027 Notes were offered to investors at a price of 99.423% of par value. The 2027 Notes are general unsecured senior obligations of the Operating Partnership, rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership and are fully and unconditionally guaranteed by Essex Property Trust, Inc. These bonds are included in the line "Bonds public offering-fixed rate" in the table above, and as of December 31, 2019 and 2018, the carrying value of the 2027 Notes, net of discount and debt issuance costs was $346.3 million and $345.8 million, respectively.
In April 2016, the Company issued $450.0 million of senior unsecured notes due on April 15, 2026 with a coupon rate of 3.375% per annum and are payable on April 15th and October 15th of each year, beginning October 15, 2016 (the "2026 Notes"). The 2026 Notes were offered to investors at a price of 99.386% of par value. The 2026 Notes are general unsecured senior obligations of the Operating Partnership, rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership and are fully and unconditionally guaranteed by Essex Property Trust, Inc. These bonds are included in the line "Bonds public offering-fixed rate" in the table above, and as of December 31, 2019 and 2018, the carrying value of the 2026 Notes, net of discount and debt issuance costs was $445.7 million and $445.0 million, respectively.
In March 2015, the Company issued $500.0 million of senior unsecured notes due on April 1, 2025 with a coupon rate of 3.5% per annum and are payable on April 1st and October 1st of each year, beginning October 1, 2015 (the "2025 Notes"). The 2025 Notes were offered to investors at a price of 99.747% of par value. The 2025 Notes are general unsecured senior obligations of the Operating Partnership, rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership and are fully and unconditionally guaranteed by Essex Property Trust, Inc. These bonds are included in the line "Bonds public offering-fixed rate" in the table above, and as of December 31, 2019 and 2018, the carrying value of the 2025 Notes, net of discount and debt issuance costs was $497.1 million and $496.5 million, respectively.
F- 38
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
In April 2014, the Company assumed $900.0 million aggregate principal amount of BRE Property Inc.’s 5.500% senior notes due 2017; 5.200% senior notes due 2021; and 3.375% senior notes due 2023 (together the "BRE Notes"). These notes are included in the line "Bonds public offering-fixed rate" in the table above, and as of December 31, 2019 and 2018, the carrying value of the BRE Notes, plus unamortized premium was $599.4 million and $601.3 million, respectively. In March 2017, the Company paid off $300.0 million of 5.500% senior notes, at maturity.
In April 2014, the Company issued $400.0 million of senior unsecured notes due on May 1, 2024 with a coupon rate of 3.875% per annum and are payable on May 1st and November 1st of each year, beginning November 1, 2014 (the "2024 Notes"). The 2024 Notes were offered to investors at a price of 99.234% of par value. The 2024 Notes are general unsecured senior obligations of the Operating Partnership, rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership and are fully and unconditionally guaranteed by Essex Property Trust, Inc. These bonds are included in the line "Bonds public offering-fixed rate" in the table above, and as of December 31, 2019 and 2018, the carrying value of the 2024 Notes, net of discount and debt issuance costs was $397.1 million and $396.5 million, respectively.
In April 2013, the Company issued $300.0 million of senior unsecured notes due on May 1, 2023 with a coupon rate of 3.25% per annum and are payable on May 1st and November 1st of each year, beginning November 1, 2013 (the "2023 Notes"). The 2023 Notes were offered to investors at a price of 99.152% of par value. The 2023 Notes are general unsecured senior obligations of the Operating Partnership, rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership and are fully and unconditionally guaranteed by Essex Property Trust, Inc. These bonds are included in the line "Bonds public offering-fixed rate" in the table above, and as of December 31, 2019 and 2018, the carrying value of the 2023 Notes, net of discount and debt issuance costs was $298.2 million and $297.6 million, respectively.
During the third quarter of 2012, the Company issued $300.0 million of senior unsecured notes due August 2022 with a coupon rate of 3.625% per annum and are payable on February 15th and August 15th of each year, beginning February 15, 2013 (the "2022 Notes"). The 2022 Notes were offered to investors at a price of 98.99% of par value. The 2022 Notes are general unsecured senior obligations of the Operating Partnership, rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership and are fully and unconditionally guaranteed by Essex Property Trust, Inc. These bonds are included in the line "Bonds public offering-fixed rate" in the table above, and as of December 31, 2019 and 2018, the carrying value of the 2022 Notes, net of unamortized discount and debt issuance costs was $298.4 million and $297.8 million, respectively.
The following is a summary of the Company’s senior unsecured notes as of December 31, 2019 and 2018 ($ in thousands):
| Maturity | 2019 | 2018 | Coupon Rate | |||||||||
| Senior notes | March 2021 | $ | 300,000 | $ | 300,000 | 5.200 | % | |||||
| Senior notes | August 2022 | 300,000 | 300,000 | 3.625 | % | |||||||
| Senior notes | January 2023 | 300,000 | 300,000 | 3.375 | % | |||||||
| Senior notes | May 2023 | 300,000 | 300,000 | 3.250 | % | |||||||
| Senior notes | May 2024 | 400,000 | 400,000 | 3.875 | % | |||||||
| Senior notes | April 2025 | 500,000 | 500,000 | 3.500 | % | |||||||
| Senior notes | April 2026 | 450,000 | 450,000 | 3.375 | % | |||||||
| Senior notes | May 2027 | 350,000 | 350,000 | 3.625 | % | |||||||
| Senior notes | March 2029 | 500,000 | — | 4.000 | % | |||||||
| Senior notes | January 2030 | 550,000 | — | 3.000 | % | |||||||
| Senior notes | March 2048 | 300,000 | 300,000 | 4.500 | % | |||||||
| $ | 4,250,000 | $ | 3,200,000 |
The aggregate scheduled principal payments of unsecured debt payable, excluding lines of credit, at December 31, 2019 are as follows ($ in thousands):
F- 39
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
| 2020 | $ | — | |
| 2021 | 500,000 | ||
| 2022 | 650,000 | ||
| 2023 | 600,000 | ||
| 2024 | 400,000 | ||
| Thereafter | 2,650,000 | ||
| $ | 4,800,000 |
As of December 31, 2019, the Company had two unsecured lines of credit aggregating $1.24 billion, including a $1.2 billion unsecured line of credit and a $35.0 million working capital unsecured line of credit. As of December 31, 2019, there was $55.0 million outstanding on the $1.2 billion unsecured line of credit. As of December 31, 2018, there was no amount outstanding on this line. The interest rate is based on a tiered rate structure tied to the Company's credit ratings and was LIBOR plus 0.825% as of December 31, 2019. In January 2020, the Company amended the $1.2 billion credit facility such that the scheduled maturity date was extended to December 2023 with one 18-month extension, exercisable at the Company's option. The interest rate on the amended line is based on a tiered rate structure tied to the Company's credit ratings and is currently at LIBOR plus 0.825%. As of both December 31, 2019 and 2018, there was no amount outstanding on the Company's $35.0 million working capital unsecured line of credit. The interest rate on the line is based on a tiered rate structure tied to the Company's credit ratings and was LIBOR plus 0.825% as of December 31, 2019.
The Company’s unsecured lines 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, 2019 and 2018.
In February 2020, the Operating Partnership issued $500.0 million of senior unsecured notes due on March 15, 2032 with a coupon rate of 2.650% per annum (the "2032 Notes"). See Note 18, Subsequent Events, for further details.
(8) Mortgage Notes Payable
Essex does not have any indebtedness as all debt is incurred by the Operating Partnership. Mortgage notes payable consist of the following as of December 31, 2019 and 2018 ($ in thousands):
| 2019 | 2018 | ||||||
| Fixed rate mortgage notes payable | $ | 736,490 | $ | 1,538,488 | |||
| Variable rate mortgage notes payable (1) | 254,177 | 268,138 | |||||
| Total mortgage notes payable (2) | $ | 990,667 | $ | 1,806,626 | |||
| Number of properties securing mortgage notes | 24 | 50 | |||||
| Remaining terms | 1-27 years | 1-28 years | |||||
| Weighted average interest rate | 4.1 | % | 4.3 | % |
The aggregate scheduled principal payments of mortgage notes payable at December 31, 2019 are as follows ($ in thousands):
| 2020 | $ | 288,057 | |
| 2021 | 31,653 | ||
| 2022 | 43,188 | ||
| 2023 | 2,945 | ||
| 2024 | 3,109 | ||
| Thereafter | 618,383 | ||
| $ | 987,335 |
| (1) | Variable rate mortgage notes payable, including $255.4 million in bonds that have been converted to variable rate through total return swap contracts, consists of multifamily housing mortgage revenue bonds secured by deeds of trust on rental |
F- 40
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
properties and guaranteed by collateral pledge agreements, payable monthly at a variable rate as defined in the Loan Agreement (approximately 2.3% at December 2019 and 2.5% at December 2018) including credit enhancement and underwriting fees. Among the terms imposed on the properties, which are security for the bonds, is a requirement that 20% of the apartment homes are subject to tenant income criteria. Once the bonds have been repaid, the properties may no longer be obligated to comply with such tenant income criteria. Principal balances are due in full at various maturity dates from December 2027 through December 2046. The Company had no interest rate cap agreements as of December 31, 2019. As of December 31, 2018, $9.9 million of these bonds was subject to various interest rate cap agreements that limit the maximum interest rate to such bonds. The interest rate cap agreements matured in December 2019.
| (2) | Includes total unamortized premium, net of discounts, of $5.9 million and $14.9 million and reduced by unamortized debt issuance costs of $2.6 million and $4.2 million as of December 31, 2019 and 2018, respectively. |
For the Company’s mortgage notes payable as of December 31, 2019, monthly interest expense and principal amortization, excluding balloon payments, totaled approximately $5.5 million and $1.4 million, respectively. Second deeds of trust accounted for none of the mortgage notes payable balance as of both December 31, 2019 and 2018. Repayment of debt before the scheduled maturity date could result in prepayment penalties. The prepayment penalty on the majority of the Company’s mortgage notes payable are computed by the greater of (a) 1% of the amount of the principal being prepaid or (b) the present value of the principal being prepaid multiplied by the difference between the interest rate of the mortgage note and the stated yield rate on a U.S. treasury security which generally has an equivalent remaining term as the mortgage note.
(9) Derivative Instruments and Hedging Activities
The Company uses interest rate swaps, interest rate caps, 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 counterparty’s nonperformance risk in the fair value measurements.
In November 2016, the Company replaced its $225.0 million term loan with a $350.0 million five-year term loan with a delayed draw feature. The term loan carries a variable interest rate of LIBOR plus 95 basis points. In 2016, the Company entered into four forward starting interest rate swaps (settlement payments commenced in March 2017) and in 2017, the Company entered into one forward starting interest rate swap (settlement payments commenced in March 2017) all related to the $350.0 million term loan. These five swaps, with a total notional amount of $175.0 million bear an average fixed interest rate of 2.3% and are scheduled to mature in February 2022. These derivatives qualify for hedge accounting.
As of December 31, 2019, the Company had no interest rate caps. As of December 31, 2018, the Company had interest rate caps, which were not accounted for as hedges, totaling a notional amount of $9.9 million that effectively limited the Company’s exposure to interest rate risk by providing a ceiling on the variable interest rate for $9.9 million of the Company’s tax exempt variable rate debt. These interest rate caps matured in December 2019.
As of December 31, 2019 and 2018, the aggregate carrying value of the interest rate swap contracts was an asset of $1.0 million and $5.8 million, respectively, and is included in prepaid expenses and other assets on the consolidated balance sheets, and a liability of $0.2 million and zero, respectively, and is included in other liabilities on the consolidated balance sheets. The aggregate carrying value of the interest rate caps was zero on the balance sheets as of December 31, 2018.
Hedge ineffectiveness related to cash flow hedges, which is included in interest expense, was a loss of $0.2 million, a loss of $0.1 million, and a gain of $0.1 million for the years ended December 31, 2019, 2018, and 2017 respectively.
The Company has four total return swap contracts, with an aggregate notional amount of $255.4 million, that effectively convert $255.4 million of mortgage notes payable to a floating interest rate based on SIFMA plus a spread. 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
F- 41
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
all four of the total return swaps with $255.4 million of the outstanding debt at par. These derivatives do not qualify for hedge accounting and had a carrying and fair value of zero at both December 31, 2019 and 2018, respectively. These total return swaps are scheduled to mature between September 2021 and November 2022. The realized gains of $8.4 million, $8.7 million, and $10.1 million as of December 31, 2019, 2018, and 2017, respectively, were reported in current year income as total return swap income.
(10) Lease Agreements - Company as Lessor
As of December 31, 2019, the Company is a lessor of apartment homes at all of its consolidated operating and lease-up communities, one commercial building, and commercial portions of mixed use communities. The apartment homes are rented under short-term leases (generally, lease terms of 9 to 12 months) while commercial lease terms typically range from 5 to 20 years. All such leases are classified as operating leases.
Although the majority of the Company’s apartment home and commercial leasing income is derived from fixed lease payments, some lease agreements also allow for variable payments. The primary driver of variable leasing income comes from utility reimbursements from apartment home leases and common area maintenance reimbursements from commercial leases. A small number of commercial leases contain provisions for lease payments based on a percentage of gross retail sales over set hurdles.
At the end of the term of apartment home leases, unless the lessee decides to renew the lease with the Company at the market rate or gives notice not to renew, the lease will be automatically renewed on a month-to-month term. Apartment home leases include an option to terminate the lease, however the lessee must pay the Company for expected or actual downtime to find a new tenant to lease the space or a lease-break fee specified in the lease agreement. Most commercial leases include options to renew, with the renewal periods extending the term of the lease for no greater than the same period of time as the original lease term. The initial option to renew for commercial leases will typically be based on a fixed price while any subsequent renewal options will generally be based on the current market rate at the time of the renewal. Certain commercial leases contain lease termination options that would require the lessee to pay termination fees based on the expected amount of time it would take the Company to re-lease the space.
The Company’s apartment home and commercial lease agreements do not contain residual value guarantees. As the Company is the lessor of real estate assets which tend to either hold their value or appreciate, residual value risk is not deemed to be substantial. Furthermore, the Company carries comprehensive liability, fire, extended coverage, and rental loss insurance for each of its communities as well as limited insurance coverage for certain types of extraordinary losses, such as, for example, losses from terrorism or earthquakes.
A maturity analysis of undiscounted future minimum non-cancelable base rent to be received under the above operating leases as of December 31, 2019 is summarized as follows ($ in thousands):
| Future Minimum Rent | |||
| 2020 | $ | 746,150 | |
| 2021 | 17,986 | ||
| 2022 | 14,482 | ||
| 2023 | 13,302 | ||
| 2024 | 11,542 | ||
| Thereafter | 26,967 | ||
| $ | 830,429 |
As of December 31, 2018, in accordance with previously applicable lease accounting guidance, ASC 840 "Leases", the future minimum non-cancelable base rent to be received under one commercial building and commercial portions of mixed use communities, for which the Company was the lessor, was as follows ($ in thousands):
F- 42
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
| Future Minimum Rent | |||
| 2019 | $ | 16,386 | |
| 2020 | 15,842 | ||
| 2021 | 14,412 | ||
| 2022 | 13,324 | ||
| 2023 | 12,181 | ||
| Thereafter | 33,034 | ||
| $ | 105,179 |
Practical Expedients
The Company has elected to account for operating lease (e.g., fixed payments including rent) and non-lease components (e.g., utility reimbursements and common-area maintenance costs) as a single combined lease component under ASC 842 "Leases" as the lease components are the predominant elements of the combined components.
As part of the transition to ASC Topic 842, the Company has elected to use the modified retrospective transition method with the new standard being applied as of the January 1, 2019 adoption date. Additionally, the Company has elected, as of the adoption date, not to reassess whether expired or existing contracts contain leases under the new definition of a lease, not to reassess the lease classification for expired or existing leases, not to reassess whether previously capitalized initial direct costs would qualify for capitalization under ASC Topic 842, and not to reassess whether existing or expired land easements meet the definition of a lease.
(11) Lease Agreements - Company as Lessee
As of December 31, 2019, the Company is a lessee of corporate office space, ground leases and a parking lease associated with various consolidated properties, and equipment. Lease terms for the Company's office leases, in general, range between 5 to 10 years while ground leases and the parking lease have terms typically ranging from 20 to 85 years. The corporate office leases occasionally contain renewal options of approximately five years while certain ground leases contain renewal options that can extend the lease term from approximately 10 to 39 years.
A majority of the Company’s ground leases and the parking lease are subject to changes in the Consumer Price Index ("CPI"). Furthermore, certain of the Company’s ground leases include rental payments based on a percentage of gross or net income. While lease liabilities are not remeasured as a result of changes in the CPI or percentage of gross or net income, such changes are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred.
The Company’s lease agreements do not contain any residual value guarantees or restrictive covenants.
Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
As of December 31, 2019 and 2018, the Company had no material finance leases.
F- 43
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
Supplemental consolidated balance sheet information related to leases as of December 31, 2019 is as follows ($ in thousands):
| Classification | December 31, 2019 | ||||
| Assets | |||||
| Operating lease right-of-use assets | Operating lease right-of-use assets | $ | 74,744 | ||
| Total leased assets | $ | 74,744 | |||
| Liabilities | |||||
| Operating lease liabilities | Operating lease liabilities | 76,740 | |||
| Total lease liabilities | $ | 76,740 |
The components of lease expense for the year ended December 31, 2019 were as follows ($ in thousands):
| December 31, 2019 | |||
| Operating lease cost | $ | 6,745 | |
| Variable lease cost | 783 | ||
| Short-term lease cost | 610 | ||
| Sublease income | (436 | ) | |
| Total lease cost | $ | 7,702 |
A maturity analysis of lease liabilities as of December 31, 2019 are as follows ($ in thousands):
| Operating Leases | |||
| 2020 | $ | 6,855 | |
| 2021 | 6,877 | ||
| 2022 | 6,888 | ||
| 2023 | 6,860 | ||
| 2024 | 6,585 | ||
| Thereafter | 146,673 | ||
| Total lease payments | $ | 180,738 | |
| Less: Imputed interest | (103,998 | ) | |
| Present Value of lease liabilities | $ | 76,740 |
Lease term and discount rate information for leases at December 31, 2019 are as follows:
| Weighted-average of remaining lease terms (years) | ||
| Operating Leases | 39 | |
| Weighted-average of discount rates | ||
| Operating Leases | 4.99 | % |
F- 44
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
As of December 31, 2018, in accordance with previously applicable lease accounting guidance, ASC 840, the total minimum lease commitments under operating leases was as follows ($ in thousands):
| Future Minimum Rent | |||
| 2019 | $ | 6,811 | |
| 2020 | 6,855 | ||
| 2021 | 6,877 | ||
| 2022 | 6,888 | ||
| 2023 | 6,860 | ||
| Thereafter | 153,258 | ||
| $ | 187,549 |
Practical Expedients
As part of the transition to ASC Topic 842, the Company elected to use the modified retrospective transition method with the new standard being applied as of the January 1, 2019 adoption date. Additionally, the Company has elected, as of the adoption date, not to reassess whether expired or existing contracts contain leases under the new definition of a lease, not to reassess the lease classification for expired or existing leases, not to reassess whether previously capitalized initial direct costs would qualify for capitalization under ASC Topic 842, and not to reassess whether existing or expired land easements meet the definition of a lease.
Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes the lease expense for such leases on a straight-line basis over the lease term.
The Company has elected to account for lease components (e.g., fixed payments including rent) and non-lease components (e.g., common-area maintenance costs) as a single combined lease component as the lease components are the predominant elements of the combined components.
(12) Equity Transactions
Common Stock Offerings
In September 2018, the Company entered into a new equity distribution agreement pursuant to which the Company may offer and sell shares of its common stock having an aggregate gross sales price of up to $900.0 million (the "2018 ATM Program"). Upon entering into the 2018 ATM Program, the Company simultaneously terminated its existing equity distribution agreements, which were entered into in March 2016 in connection with its prior at-the-market equity offering program (the "2016 ATM Program").
In connection with the 2018 ATM Program, the Company may also enter into related forward sale agreements whereby, at the Company’s discretion, it may sell shares of its common stock under the 2018 ATM Program under forward sale agreements. The use of a forward sale agreement would allow the Company to lock in a share price on the sale of shares of its common stock at the time the agreement is executed, but defer receiving the proceeds from the sale of shares until a later date. The Company anticipates using the net proceeds, which are contributed to the Operating Partnership, to acquire, develop, or redevelop properties, which primarily will be apartment communities, to make other investments and for working capital or general corporate purposes, which may include the repayment of indebtedness.
For the year ended December 31, 2019, the Company issued 228,271 shares of common stock through the 2018 ATM Program at an average price of $321.56 per share for proceeds of $73.4 million. For the year ended December 31, 2018, the Company did not sell any shares of its common stock through the 2018 ATM Program or through the 2016 ATM Program. For the year ended December 31, 2017, the Company issued 345,444 shares of common stock, through the 2016 ATM program, at an average price of $260.38 per share for proceeds of $89.9 million. As of December 31, 2019, there were no outstanding forward sale agreements, and $826.6 million of shares remained available to be sold under this program.
F- 45
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
Operating Partnership Units and Long-Term Incentive Plan ("LTIP") Units
As of December 31, 2019 and 2018, the Operating Partnership had outstanding 2,158,396 and 2,171,309 operating partnership units and 143,257 and 134,080 vested LTIP units, respectively. The Operating Partnership’s general partner, Essex, owned 96.6% of the partnership interests in the Operating Partnership as of both December 31, 2019 and 2018, and Essex is responsible for the management of the Operating Partnership’s business. As the general partner of the Operating Partnership, Essex effectively controls the ability to issue common stock of Essex upon a limited partner’s notice of redemption. Essex has generally acquired Operating Partnership limited partnership units ("OP Units") upon a limited partner’s notice of redemption in exchange for shares of its common stock. The redemption provisions of OP Units owned by limited partners that permit Essex to settle in either cash or common stock at the option of Essex were further evaluated in accordance with applicable accounting guidance to determine whether temporary or permanent equity classification on the balance sheet is appropriate. The Operating Partnership evaluated this guidance, including the requirement to settle in unregistered shares, and determined that, with few exceptions, these OP Units meet the requirements to qualify for presentation as permanent equity.
LTIP units represent an interest in the Operating Partnership for services rendered or to be rendered by the LTIP unitholder in its capacity as a partner, or in anticipation of becoming a partner, in the Operating Partnership. Upon the occurrence of specified events, LTIP units may over time achieve full parity with common units of the Operating Partnership for all purposes. Upon achieving full parity, LTIP units will be exchanged for an equal number of the OP Units.
The collective redemption value of OP Units and LTIP units owned by the limited partners, not including Essex, was approximately $692.5 million and $565.3 million based on the closing price of Essex's common stock as of December 31, 2019 and 2018, respectively.
(13) Net Income Per Common Share and Net Income Per Common Unit
Essex Property Trust, Inc.
Basic and diluted income per share is calculated as follows for the years ended December 31 ($ in thousands, except share and per share amounts):
| 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
| Income | Weighted- average Common Shares | Per Common Share Amount | Income | Weighted- average Common Shares | Per Common Share Amount | Income | Weighted- average Common Shares | Per Common Share Amount | ||||||||||||||||||||||||
| Basic: | ||||||||||||||||||||||||||||||||
| Net income available to common stockholders | $ | 439,286 | 65,840,422 | $ | 6.67 | $ | 390,153 | 66,041,058 | $ | 5.91 | $ | 433,059 | 65,829,155 | $ | 6.58 | |||||||||||||||||
| Effect of Dilutive Securities | ||||||||||||||||||||||||||||||||
| Stock options | — | 99,033 | — | 44,031 | — | 69,100 | ||||||||||||||||||||||||||
| Diluted: | ||||||||||||||||||||||||||||||||
| Net income available to common stockholders | $ | 439,286 | 65,939,455 | $ | 6.66 | $ | 390,153 | 66,085,089 | $ | 5.90 | $ | 433,059 | 65,898,255 | $ | 6.57 |
The table above excludes from the calculations of diluted earnings per share weighted average convertible OP Units of 2,300,478, 2,274,941, and 2,252,575, which include vested Series Z-1 Incentive Units, 2014 Long-Term Incentive Plan Units, and 2015 Long-Term Incentive Plan Units, for the years ended December 31, 2019, 2018 and 2017, respectively, because they were anti-dilutive. The related income allocated to these convertible OP Units aggregated $15.3 million, $13.5 million, and $14.8 million for the years ended December 31, 2019, 2018 and 2017, respectively. Additionally, the table excludes all DownREIT units for which the Operating Partnership has the ability and intention to redeem the units for cash and does not consider them to be common stock equivalents.
Stock options of 115,066, 160,039, and 154,793, for the years ended December 31, 2019, 2018, and 2017, respectively, were excluded from the calculation of diluted earnings per share because the assumed proceeds per share of such options plus the
F- 46
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
average unearned compensation were greater than the average market price of the common stock for the years ended and, therefore, were anti-dilutive.
Essex Portfolio, L.P.
Basic and diluted income per unit is calculated as follows for the years ended December 31 ($ in thousands, except unit and per unit amounts):
| 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
| Income | Weighted- average Common Units | Per Common Unit Amount | Income | Weighted- average Common Units | Per Common Unit Amount | Income | Weighted- average Common Units | Per Common Unit Amount | ||||||||||||||||||||||||
| Basic: | ||||||||||||||||||||||||||||||||
| Net income available to common unitholders | $ | 454,629 | 68,140,900 | $ | 6.67 | $ | 403,605 | 68,315,999 | $ | 5.91 | $ | 447,884 | 68,081,730 | $ | 6.58 | |||||||||||||||||
| Effect of Dilutive Securities | ||||||||||||||||||||||||||||||||
| Stock options | — | 99,033 | — | 44,031 | — | 69,100 | ||||||||||||||||||||||||||
| Diluted: | ||||||||||||||||||||||||||||||||
| Net income available to common unitholders | $ | 454,629 | 68,239,933 | $ | 6.66 | $ | 403,605 | 68,360,030 | $ | 5.90 | $ | 447,884 | 68,150,830 | $ | 6.57 |
Stock options of 115,066, 160,039, and 154,793, for the years ended December 31, 2019, 2018, and 2017, respectively, were excluded from the calculation of diluted earnings per unit because the assumed proceeds per unit of these options plus the average unearned compensation were greater than the average market price of the common unit for the years ended and, therefore, were anti-dilutive. Additionally, the table excludes all DownREIT 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.
(14) Equity Based Compensation Plans
Stock Options and Restricted Stock
In May 2018, stockholders approved the Company’s 2018 Stock Award and Incentive Compensation Plan ("2018 Plan"). The 2018 Plan serves as the successor to the Company’s 2013 Stock Incentive Plan (the "2013 Plan"). The Company’s 2018 Plan provides incentives to attract and retain officers, directors and key employees. The 2018 Plan provides for the grant of stock-based awards to employees, directors and consultants of the Company and its affiliates. The aggregate number of shares of the Company’s common stock available for issuance pursuant to awards granted under the 2018 Plan is 2,000,000 shares, plus the number of shares authorized for grants and available for issuance under the 2013 Plan as of the effective date of the 2018 Plan and the number of shares subject to outstanding awards under the 2013 Plan that are forfeited or otherwise not issued under such awards. No further awards will be granted under the 2013 Plan and the shares that remained available for future issuance under the 2013 Plan as of the effective date of the 2018 Plan will be available for issuance under the 2018 Plan. In connection with the adoption of the 2018 Plan, the Board delegated to the Compensation Committee of the Board the authority to administer the 2018 Plan.
Equity-based compensation costs for options and restricted stock under the fair value method totaled $11.4 million, $12.1 million, and $9.8 million for years ended December 31, 2019, 2018 and 2017, respectively. For each of the years ended December 31, 2019, 2018 and 2017 equity-based compensation costs included $3.5 million related to restricted stock for bonuses awarded based on asset dispositions, which is recorded as a cost of real estate and land sold, respectively. Stock-based compensation for options and restricted stock related to recipients who are direct and incremental to projects under development were capitalized and totaled $1.6 million, $2.0 million, and $1.5 million for the years ended December 31, 2019, 2018 and 2017, respectively. The intrinsic value of the options exercised totaled $18.7 million, $3.1 million, and $16.7 million, for the years ended December 31, 2019, 2018, and 2017 respectively. The intrinsic value of the options exercisable totaled $23.5 million and $12.5 million as of December 31, 2019 and 2018, respectively.
F- 47
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
Total unrecognized compensation cost related to unvested stock options totaled $5.3 million as of December 31, 2019 and the unrecognized compensation cost is expected to be recognized over a period of 2.2 years.
The average fair value of stock options granted for the years ended December 31, 2019, 2018 and 2017 was $24.02, $26.13 and $22.41, respectively. Certain stock options granted in 2019, 2018, and 2017 included a $100 cap, $125 cap, or no cap on the appreciation of the market price over the exercise price. The fair value of stock options was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants:
| 2019 | 2018 | 2017 | |||||||||
| Stock price | $ | 304.85 | $ | 262.09 | $ | 240.56 | |||||
| Risk-free interest rates | 2.01 | % | 2.76 | % | 2.30 | % | |||||
| Expected lives | 6 years | 6 years | 6 years | ||||||||
| Volatility | 19.56 | % | 24.89 | % | 24.10 | % | |||||
| Dividend yield | 2.72 | % | 2.81 | % | 2.90 | % |
A summary of the status of the Company’s stock option plans as of December 31, 2019, 2018, and 2017 and changes during the years ended on those dates is presented below:
| 2019 | 2018 | 2017 | ||||||||||||||||||
| Shares | Weighted- average exercise price | Shares | Weighted- average exercise price | Shares | Weighted- average exercise price | |||||||||||||||
| Outstanding at beginning of year | 612,954 | $ | 224.57 | 536,208 | $ | 211.41 | 557,648 | $ | 181.50 | |||||||||||
| Granted | 148,147 | 304.85 | 119,361 | 262.09 | 164,677 | 240.56 | ||||||||||||||
| Exercised | (182,817 | ) | 205.25 | (39,175 | ) | 159.05 | (176,489 | ) | 146.86 | |||||||||||
| Forfeited and canceled | (5,313 | ) | 257.87 | (3,440 | ) | 221.80 | (9,628 | ) | 160.40 | |||||||||||
| Outstanding at end of year | 572,971 | 251.10 | 612,954 | 224.57 | 536,208 | 211.41 | ||||||||||||||
| Options exercisable at year end | 305,379 | 223.90 | 322,837 | 206.63 | 223,796 | 191.09 |
The following table summarizes information about restricted stock outstanding as of December 31, 2019, 2018 and 2017 and changes during the years ended:
| 2019 | 2018 | 2017 | ||||||||||||||||||
| Shares | Weighted- average grant price | Shares | Weighted- average grant price | Shares | Weighted- average grant price | |||||||||||||||
| Unvested at beginning of year | 91,058 | $ | 180.99 | 90,823 | $ | 163.49 | 58,349 | $ | 149.11 | |||||||||||
| Granted | 41,643 | 235.93 | 51,945 | 194.70 | 62,706 | 177.28 | ||||||||||||||
| Vested | (13,222 | ) | 143.56 | (48,212 | ) | 150.76 | (29,675 | ) | 170.17 | |||||||||||
| Forfeited and canceled | (4,602 | ) | 158.06 | (3,498 | ) | 158.71 | (557 | ) | 119.37 | |||||||||||
| Unvested at end of year | 114,877 | 197.62 | 91,058 | 180.99 | 90,823 | 163.49 |
The unrecognized compensation cost related to unvested restricted stock totaled $12.7 million as of December 31, 2019 and is expected to be recognized over a period of 2.1 years.
F- 48
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
Long-Term Incentive Plans – LTIP Units
On December 9, 2014, the Operating Partnership issued 44,750 LTIP units under the 2015 Long-Term Incentive Plan Award agreements to executives of the Company. The 2015 Long-Term Incentive Plan Units (the "2015 LTIP Units") are subject to forfeiture based on performance-based and service based conditions. An additional 24,000 LTIP units were granted subject only to performance-based criteria and were fully vested on the date granted. The 2015 LTIP Units, that are subject to vesting, will vest at 20% per year on each of the first five anniversaries of the initial grant date. The 2015 LTIP Units performance conditions measurement ended on December 9, 2015 and 95.75% of the units awarded were earned by the recipients. 2015 LTIP Units not earned based on the performance-based criteria were automatically forfeited by the recipients. The 2015 LTIP Units, once earned and vested, are convertible one-for-one into OP Units which, in turn, are convertible into common stock of the Company subject to a ten-year liquidity restriction.
In December 2013, the Operating Partnership issued 50,500 LTIP units under the 2014 Long-Term Incentive Plan Award agreements to executives of the Company. The 2014 Long-Term Incentive Plan Units (the "2014 LTIP Units") were subject to forfeiture based on performance-based conditions and are currently subject to service based vesting. The 2014 LTIP Units vest 25% per year on each of the first four anniversaries of the initial grant date. In December 2014, the Company achieved the performance criteria and all of the 2014 LTIP Units awarded were earned by the recipients, subject to satisfaction of service based vesting conditions. The 2014 LTIP Units are convertible one-for-one into OP Units which, in turn, are convertible into common stock of the Company subject to a ten year liquidity restriction.
The estimated fair value of the 2015 LTIP Units and 2014 LTIP Units were determined on the grant date using Monte Carlo simulations under a risk-neutral premise and considered Essex’s stock price on the date of grant, the unpaid dividends on unvested units and the discount factor for 10 years of illiquidity.
Prior to 2013, the Company issued Series Z Incentive Units and Series Z-1 Incentive Units (collectively referred to as "Z Units") of limited partnership interest in the Operating Partnership. Vesting in the Z Units is based on performance criteria established in the plan. The criteria can be revised by the Compensation Committee of the Board of Directors if the Committee deems that the plan's criterion is unachievable for any given year. The sale of Z Units is contractually prohibited. Z Units are convertible into Operating Partnership units which are exchangeable for shares of the Company’s common stock that have marketability restrictions. The estimated fair value of Z Units were determined on the grant date and considered the Company's stock price on the date of grant, the dividends that are not paid on unvested units and a marketability discount for the 8 to 15 years of illiquidity. Compensation expense is calculated by multiplying estimated vesting increases for the period by the estimated fair value as of the grant date.
During 2011 and 2010, the Operating Partnership issued 154,500 Series Z-1 Incentive Units (the "Z-1 Units") of limited partner interest to executives of the Company. The Z-1 Units are convertible one-for-one into common units of the Operating Partnership (which, in turn, are convertible into common stock of the Company) upon the earlier to occur of 100 percent vesting of the units or the year 2026. The conversion ratchet (accounted for as vesting) of the Z-1 Units into common units, is to increase consistent with the Company’s annual FFO growth, but is not to be less than zero or greater than 14 percent. Z-1 Unitholders are entitled to receive distributions, on vested units, that are now equal to dividends distributed to common stockholders.
Equity-based compensation costs for LTIP and Z Units under the fair value method totaled approximately $0.9 million, $0.8 million and $1.5 million for the years ended December 31, 2019, 2018 and 2017, respectively. Equity-based compensation costs related to LTIP Units attributable to recipients who are direct and incremental to these projects was capitalized to real estate under development and totaled approximately $0.2 million, $0.2 million, and $0.5 million, for the years ended December 31, 2019, 2018, and 2017, respectively. The intrinsic value of the vested and unvested LTIP Units totaled $43.7 million as of December 31, 2019. Total unrecognized compensation cost related to the unvested LTIP Units under the LTIP Units plans was zero as of December 31, 2019.
F- 49
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
The following table summarizes information about the LTIP Units outstanding as of December 31, 2019:
| Long-Term Incentive Plan - LTIP Units | ||||||||||||||
| Total Vested Units | Total Unvested Units | Total Outstanding Units | Weighted- average Grant-date Fair Value | Weighted- average Remaining Contractual Life (years) | ||||||||||
| Balance, December 31, 2016 | 181,027 | 60,027 | 241,054 | $ | 75.11 | 8.5 | ||||||||
| Granted | — | — | — | |||||||||||
| Vested | 32,961 | (32,961 | ) | — | ||||||||||
| Converted | (688 | ) | — | (688 | ) | |||||||||
| Cancelled | — | (3,854 | ) | (3,854 | ) | |||||||||
| Balance, December 31, 2017 | 213,300 | 23,212 | 236,512 | $ | 75.03 | 7.5 | ||||||||
| Granted | — | — | — | |||||||||||
| Vested | 12,051 | (12,051 | ) | — | ||||||||||
| Converted | (91,270 | ) | — | (91,270 | ) | |||||||||
| Cancelled | — | — | — | |||||||||||
| Balance, December 31, 2018 | 134,081 | 11,161 | 145,242 | $ | 75.03 | 6.5 | ||||||||
| Granted | — | — | — | |||||||||||
| Vested | 9,176 | (9,176 | ) | — | ||||||||||
| Converted | — | — | — | |||||||||||
| Cancelled | — | (95 | ) | (95 | ) | |||||||||
| Balance, December 31, 2019 | 143,257 | 1,890 | 145,147 | $ | 75.03 | 5.2 |
(15) Segment Information
The Company's segment disclosures present the measure used by the chief operating decision makers for purposes of assessing each segment's performance. The Company's chief operating decision makers are comprised of several members of its executive management team who use net operating income ("NOI") to assess the performance of the business for the Company's reportable operating segments. NOI represents total property revenues less direct property operating expenses.
The executive management team generally evaluates the Company's operating performance geographically. The Company defines its reportable operating segments as the three geographical regions in which its communities are located: Southern California, Northern California and Seattle Metro.
Excluded from segment revenues and NOI are management and other fees from affiliates and interest and other income. Non-segment revenues and NOI included in the following schedule also consist of revenues generated from commercial properties and properties that have been sold. Other non-segment assets include items such as real estate under development, co-investments, real estate held for sale, net, cash and cash equivalents, marketable securities, notes and other receivables, and prepaid expenses and other assets.
F- 50
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
The revenues and NOI for each of the reportable operating segments are summarized as follows for the years ended December 31, 2019, 2018, and 2017 ($ in thousands):
| Years Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Revenues: | |||||||||||
| Southern California | $ | 610,240 | $ | 592,281 | $ | 574,552 | |||||
| Northern California | 569,556 | 522,561 | 505,313 | ||||||||
| Seattle Metro | 245,476 | 236,525 | 229,871 | ||||||||
| Other real estate assets | 25,356 | 39,503 | 44,589 | ||||||||
| Total property revenues | $ | 1,450,628 | $ | 1,390,870 | $ | 1,354,325 | |||||
| Net operating income: | |||||||||||
| Southern California | $ | 434,267 | $ | 421,274 | $ | 407,771 | |||||
| Northern California | 420,320 | 385,483 | 371,597 | ||||||||
| Seattle Metro | 173,875 | 165,244 | 162,111 | ||||||||
| Other real estate assets | 24,471 | 33,535 | 37,460 | ||||||||
| Total net operating income | 1,052,933 | 1,005,536 | 978,939 | ||||||||
| Management and other fees from affiliates | 9,527 | 9,183 | 9,574 | ||||||||
| Corporate-level property management expenses | (32,899 | ) | (31,062 | ) | (30,156 | ) | |||||
| Depreciation and amortization | (483,750 | ) | (479,884 | ) | (468,881 | ) | |||||
| General and administrative | (54,262 | ) | (53,451 | ) | (41,385 | ) | |||||
| Expensed acquisition and investment related costs | (168 | ) | (194 | ) | (1,569 | ) | |||||
| Impairment loss | (7,105 | ) | — | — | |||||||
| Gain (loss) on sale of real estate and land | (3,164 | ) | 61,861 | 26,423 | |||||||
| Interest expense | (217,339 | ) | (220,492 | ) | (222,894 | ) | |||||
| Total return swap income | 8,446 | 8,707 | 10,098 | ||||||||
| Interest and other income | 46,298 | 23,010 | 24,604 | ||||||||
| Equity income from co-investments | 112,136 | 89,132 | 86,445 | ||||||||
| Deferred tax expense on unrealized gain on unconsolidated co-investment | (1,457 | ) | — | — | |||||||
| Gain (loss) on early retirement of debt, net | 3,717 | — | (1,796 | ) | |||||||
| Gain on remeasurement of co-investment | 31,535 | 1,253 | 88,641 | ||||||||
| Net income | $ | 464,448 | $ | 413,599 | $ | 458,043 |
F- 51
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
Total assets for each of the reportable operating segments are summarized as follows as of December 31, 2019 and 2018 ($ in thousands):
| As of December 31, | |||||||
| 2019 | 2018 | ||||||
| Assets: | |||||||
| Southern California | $ | 4,233,110 | $ | 4,368,882 | |||
| Northern California | 4,622,268 | 4,289,232 | |||||
| Seattle Metro | 1,481,061 | 1,485,040 | |||||
| Other real estate assets | 12,221 | 13,399 | |||||
| Net reportable operating segments - real estate assets | 10,348,660 | 10,156,553 | |||||
| Real estate under development | 546,075 | 454,629 | |||||
| Co-investments | 1,335,339 | 1,300,140 | |||||
| Cash and cash equivalents, including restricted cash | 81,094 | 151,395 | |||||
| Marketable securities | 144,193 | 209,545 | |||||
| Notes and other receivables | 134,365 | 71,895 | |||||
| Operating lease right-of-use assets | 74,744 | — | |||||
| Prepaid expenses and other assets | 40,935 | 39,439 | |||||
| Total assets | $ | 12,705,405 | $ | 12,383,596 |
(16) 401(k) Plan
The Company has a 401(k) benefit plan (the "Plan") for all eligible employees. Employee contributions are limited by the maximum allowed under Section 401(k) of the Internal Revenue Code. The Company matches 50% of the employee contributions up to a specified maximum. Company contributions to the Plan were approximately $2.4 million, $2.1 million, and $1.8 million for the years ended December 31, 2019, 2018, and 2017, respectively.
(17) Commitments and Contingencies
The Company's total minimum lease payment commitments, under ground leases, parking leases, and operating leases are disclosed in Note 11, Lease Agreements - Company as Lessee.
To the extent that an environmental matter arises or is identified in the future that has other than a remote risk of having a material impact on the financial statements, the Company will disclose the estimated range of possible outcomes associated with it and, if an outcome is probable, accrue an appropriate liability for that matter. The Company will consider whether any such matter results in an impairment of value on the affected property and, if so, the impairment will be recognized.
The Company has no way of determining the magnitude of any potential liability to which it may be subject arising out of unknown environmental conditions with respect to the communities currently or formerly owned by the Company. No assurance can be given that: existing environmental assessments conducted with respect to any of these communities have revealed all environmental conditions or potential liabilities associated with such conditions; any prior owner or operator of a property did not create any material environmental condition not known to the Company; or a material unknown environmental condition does not otherwise exist as to any one or more of the communities. The Company has limited insurance coverage for some of the types of environmental conditions and associated liabilities described above.
The Company has entered into transactions that may require the Company to pay the tax liabilities of the partners or members in the Operating Partnership or in the DownREIT entities. These transactions are within the Company’s control. Although the Company plans to hold the contributed assets or defer recognition of gain on their sale pursuant to like-kind exchange rules under Section 1031 of the Internal Revenue Code, the Company can provide no assurance that it will be able to do so and if such tax liabilities were incurred they may have a material impact on the Company’s financial position.
F- 52
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
There continue to be lawsuits against owners and managers of certain of the Company's apartment communities alleging personal injury and property damage caused by the presence of mold in the residential units and common areas of those communities. Some of these lawsuits have resulted in substantial monetary judgments or settlements. The Company has been sued for mold related matters and has settled some, but not all, of such suits. Insurance carriers have reacted to the increase in mold related liability awards by excluding mold related claims from standard general liability policies and pricing mold endorsements at prohibitively high rates. The Company has, however, purchased pollution liability insurance which includes coverage for some mold claims. The Company has also adopted policies intended to promptly address and resolve reports of mold and to minimize any impact mold might have on tenants of its properties. The Company believes its mold policies and proactive response to address reported mold exposures reduces its risk of loss from mold claims. While no assurances can be given that the Company has identified and responded to all mold occurrences, the Company promptly addresses and responds to all known mold reports. Liabilities resulting from such mold related matters are not expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flows. As of December 31, 2019, potential liabilities for mold and other environmental liabilities are not quantifiable and an estimate of possible loss cannot be made.
The Company carries comprehensive liability, fire, extended coverage and rental loss insurance for each of the communities. There are, however, certain types of extraordinary losses, such as, for example, losses from terrorism or earthquakes, for which the Company has limited insurance coverage. Substantially all of the communities are located in areas that are subject to earthquake activity. The Company has established a wholly-owned insurance subsidiary, Pacific Western Insurance LLC ("PWI"). Through PWI, the Company is self-insured for earthquake related losses. Additionally, since January 2008, PWI has provided property and casualty insurance coverage for the first $5.0 million of the Company’s property level insurance claims per incident. As of December 31, 2019, PWI has cash and marketable securities of approximately $78.4 million. These assets are consolidated in the Company’s financial statements. Beginning in 2013, the Company has obtained limited third party seismic insurance on selected assets in the Company's co-investments.
The Company is subject to various other legal and/or regulatory proceedings arising in the course of its business operations. The Company believes that, with respect to such matters that it is currently a party to, the ultimate disposition of any such matter will not result in a material adverse effect on the Company’s financial condition, results of operations or cash flows.
(18) Subsequent Events
In January 2020, the Company purchased CPPIB's 45.0% interest in a land parcel and six communities, totaling 2,020 apartment homes, valued at approximately $1.0 billion on a gross basis.
In January 2020, the Company received $85.8 million for the payoff of a related party bridge loan to Wesco V.
In February 2020, the Company issued $500.0 million of the 2032 Notes, with a coupon rate of 2.650%, which are payable on March 15 and September 15 of each year, beginning on September 15, 2020. The 2032 Notes were offered to investors at a price of 99.628% of par value. The 2032 Notes are general unsecured senior obligations of the Operating Partnership, rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership and are unconditionally guaranteed by Essex Property Trust, Inc. The Company used the net proceeds of this offering to repay indebtedness under its unsecured lines of credit and for other general corporate purposes.
F- 53
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(19) Quarterly Results of Operations (Unaudited)
Essex Property Trust, Inc.
The following is a summary of quarterly results of operations for 2019 and 2018 ($ in thousands, except per share and dividend amounts):
| Quarter ended December 31 | Quarter ended September 30 | Quarter ended June 30 | Quarter ended March 31 | ||||||||||||
| 2019: | |||||||||||||||
| Total property revenues | $ | 372,861 | $ | 364,504 | $ | 359,375 | $ | 353,888 | |||||||
| Net income | $ | 135,182 | $ | 105,700 | $ | 98,061 | $ | 125,505 | |||||||
| Net income available to common stockholders | $ | 128,818 | $ | 99,335 | $ | 92,275 | $ | 118,858 | |||||||
| Per share data: | |||||||||||||||
| Net income: | |||||||||||||||
| Basic (1) | $ | 1.95 | $ | 1.51 | $ | 1.40 | $ | 1.81 | |||||||
| Diluted (1) | $ | 1.95 | $ | 1.51 | $ | 1.40 | $ | 1.81 | |||||||
| Dividends declared | $ | 1.95 | $ | 1.95 | $ | 1.95 | $ | 1.95 | |||||||
| 2018: | |||||||||||||||
| Total property revenues | $ | 350,787 | $ | 348,610 | $ | 346,526 | $ | 344,947 | |||||||
| Net income | $ | 124,440 | $ | 86,110 | $ | 106,410 | $ | 96,639 | |||||||
| Net income available to common stockholders | $ | 117,820 | $ | 80,975 | $ | 100,440 | $ | 90,918 | |||||||
| Per share data: | |||||||||||||||
| Net income: | |||||||||||||||
| Basic (1) | $ | 1.78 | $ | 1.23 | $ | 1.52 | $ | 1.38 | |||||||
| Diluted (1) | $ | 1.78 | $ | 1.22 | $ | 1.52 | $ | 1.38 | |||||||
| Dividends declared | $ | 1.86 | $ | 1.86 | $ | 1.86 | $ | 1.86 |
| (1) | Quarterly earnings per common share amounts may not total to the annual amounts due to rounding and the changes in the number of weighted common shares outstanding and included in the calculation of basic and diluted shares. |
F- 54
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
Essex Portfolio, L.P.
The following is a summary of quarterly results of operations for 2019 and 2018 ($ in thousands, except per unit and distribution amounts):
| Quarter ended December 31 | Quarter ended September 30 | Quarter ended June 30 | Quarter ended March 31 | ||||||||||||
| 2019: | |||||||||||||||
| Total property revenues | $ | 372,861 | $ | 364,504 | $ | 359,375 | $ | 353,888 | |||||||
| Net income | $ | 135,182 | $ | 105,700 | $ | 98,061 | $ | 125,505 | |||||||
| Net income available to common unitholders | $ | 133,298 | $ | 102,799 | $ | 95,503 | $ | 123,029 | |||||||
| Per unit data: | |||||||||||||||
| Net income: | |||||||||||||||
| Basic (1) | $ | 1.95 | $ | 1.51 | $ | 1.40 | $ | 1.81 | |||||||
| Diluted (1) | $ | 1.95 | $ | 1.51 | $ | 1.40 | $ | 1.81 | |||||||
| Distributions declared | $ | 1.95 | $ | 1.95 | $ | 1.95 | $ | 1.95 | |||||||
| 2018: | |||||||||||||||
| Total property revenues | $ | 350,787 | $ | 348,610 | $ | 346,526 | $ | 344,947 | |||||||
| Net income | $ | 124,440 | $ | 86,110 | $ | 106,410 | $ | 96,639 | |||||||
| Net income available to common unitholders | $ | 121,891 | $ | 83,764 | $ | 103,900 | $ | 94,050 | |||||||
| Per unit data: | |||||||||||||||
| Net income: | |||||||||||||||
| Basic (1) | $ | 1.78 | $ | 1.23 | $ | 1.52 | $ | 1.38 | |||||||
| Diluted (1) | $ | 1.78 | $ | 1.23 | $ | 1.52 | $ | 1.38 | |||||||
| Distributions declared | $ | 1.86 | $ | 1.86 | $ | 1.86 | $ | 1.86 |
| (1) | Quarterly earnings per common unit amounts may not total to the annual amounts due to rounding and the changes in the number of weighted common units outstanding and included in the calculation of basic and diluted units. |
F- 55
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2019
(Dollars in thousands)
| Costs | ||||||||||||||||||||||||||||||
| Initial cost | capitalized | Gross amount carried at close of period | ||||||||||||||||||||||||||||
| Apartment | Buildings and | subsequent to | Land and | Buildings and | Accumulated | Date of | Date | Lives | ||||||||||||||||||||||
| Property | Homes | Location | Encumbrance | Land | improvements | acquisition | improvements | improvements | Total (1) | depreciation | construction | acquired | (years) | |||||||||||||||||
| Encumbered communities | ||||||||||||||||||||||||||||||
| Belmont Station | 275 | Los Angeles, CA | 29,703 | 8,100 | 66,666 | 6,642 | 8,267 | 73,141 | 81,408 | (31,302 | ) | 2009 | Mar-09 | 3-30 | ||||||||||||||||
| Brio | 300 | Walnut Creek, CA | 101,540 | 16,885 | 151,741 | 704 | 16,885 | 152,445 | 169,330 | (2,972 | ) | 2015 | Jun-19 | 3-30 | ||||||||||||||||
| Brookside Oaks | 170 | Sunnyvale, CA | 17,318 | 7,301 | 16,310 | 27,158 | 10,328 | 40,441 | 50,769 | (24,680 | ) | 1973 | Jun-00 | 3-30 | ||||||||||||||||
| City View | 572 | Hayward, CA | 60,841 | 9,883 | 37,670 | 31,487 | 10,350 | 68,690 | 79,040 | (50,256 | ) | 1975 | Mar-98 | 3-30 | ||||||||||||||||
| Domaine | 92 | Seattle, WA | 12,845 | 9,059 | 27,177 | 1,296 | 9,059 | 28,473 | 37,532 | (7,309 | ) | 2009 | Sep-12 | 3-30 | ||||||||||||||||
| Fairhaven Apartments | 164 | Santa Ana, CA | 17,602 | 2,626 | 10,485 | 9,757 | 2,957 | 19,911 | 22,868 | (12,157 | ) | 1970 | Nov-01 | 3-30 | ||||||||||||||||
| Form 15 | 242 | San Diego, CA | 43,616 | 24,510 | 72,221 | 8,167 | 25,540 | 79,358 | 104,898 | (10,490 | ) | 2014 | Mar-16 | 3-30 | ||||||||||||||||
| Fountain Park | 705 | Playa Vista, CA | 82,639 | 25,073 | 94,980 | 34,339 | 25,203 | 129,189 | 154,392 | (74,993 | ) | 2002 | Feb-04 | 3-30 | ||||||||||||||||
| Hidden Valley | 324 | Simi Valley, CA | 29,392 | 14,174 | 34,065 | 7,501 | 9,674 | 46,066 | 55,740 | (22,843 | ) | 2004 | Dec-04 | 3-30 | ||||||||||||||||
| Highridge | 255 | Rancho Palos Verdes, CA | 69,309 | 5,419 | 18,347 | 32,286 | 6,073 | 49,979 | 56,052 | (39,463 | ) | 1972 | May-97 | 3-30 | ||||||||||||||||
| 1000 Kiely | 121 | Santa Clara, CA | 33,260 | 9,359 | 21,845 | 8,294 | 9,359 | 30,139 | 39,498 | (12,313 | ) | 1971 | Mar-11 | 3-30 | ||||||||||||||||
| Magnolia Square/Magnolia Lane (2) | 188 | Sunnyvale, CA | 52,270 | 8,190 | 24,736 | 18,388 | 8,191 | 43,123 | 51,314 | (23,557 | ) | 1963 | Sep-07 | 3-30 | ||||||||||||||||
| Marquis | 166 | San Jose, CA | 43,772 | 20,495 | 47,823 | 46 | 20,495 | 47,869 | 68,364 | (1,664 | ) | 2015 | Dec-18 | 3-30 | ||||||||||||||||
| Montanosa | 472 | San Diego, CA | 59,723 | 26,697 | 106,787 | 6,299 | 26,697 | 113,086 | 139,783 | (24,590 | ) | 1990 | Apr-14 | 5-30 | ||||||||||||||||
| Montebello | 248 | Kirkland, WA | 23,682 | 13,857 | 41,575 | 5,542 | 13,858 | 47,116 | 60,974 | (13,781 | ) | 1996 | Jul-12 | 3-30 | ||||||||||||||||
| Montejo Apartments | 124 | Garden Grove, CA | 12,536 | 1,925 | 7,685 | 4,365 | 2,194 | 11,781 | 13,975 | (7,013 | ) | 1974 | Nov-01 | 3-30 | ||||||||||||||||
| Sage at Cupertino | 230 | San Jose, CA | 51,724 | 35,719 | 53,449 | 6,442 | 35,719 | 59,891 | 95,610 | (6,349 | ) | 1971 | Mar-17 | 3-30 | ||||||||||||||||
| The Barkley (3) | 161 | Anaheim, CA | 14,857 | — | 8,520 | 7,440 | 2,353 | 13,607 | 15,960 | (9,240 | ) | 1984 | Apr-00 | 3-30 | ||||||||||||||||
| The Dylan | 184 | West Hollywood, CA | 58,854 | 19,984 | 82,286 | 1,202 | 19,990 | 83,482 | 103,472 | (15,578 | ) | 2015 | Mar-15 | 3-30 | ||||||||||||||||
| The Huxley | 187 | West Hollywood, CA | 53,589 | 19,362 | 75,641 | 1,385 | 19,371 | 77,017 | 96,388 | (14,609 | ) | 2014 | Mar-15 | 3-30 | ||||||||||||||||
| The Waterford | 238 | San Jose, CA | 28,713 | 11,808 | 24,500 | 17,347 | 15,165 | 38,490 | 53,655 | (23,732 | ) | 2000 | Jun-00 | 3-30 | ||||||||||||||||
| Township | 132 | Redwood City, CA | 46,087 | 19,812 | 70,619 | 251 | 19,812 | 70,870 | 90,682 | (713 | ) | 2014 | Sep-19 | 3-30 | ||||||||||||||||
| Valley Park | 160 | Fountain Valley, CA | 20,327 | 3,361 | 13,420 | 6,186 | 3,761 | 19,206 | 22,967 | (11,634 | ) | 1969 | Nov-01 | 3-30 | ||||||||||||||||
| Villa Angelina | 256 | Placentia, CA | 26,468 | 4,498 | 17,962 | 7,744 | 4,962 | 25,242 | 30,204 | (15,684 | ) | 1970 | Nov-01 | 3-30 | ||||||||||||||||
| 5,966 | $ | 990,667 | $ | 318,097 | $ | 1,126,510 | $ | 250,268 | $ | 326,263 | $ | 1,368,612 | $ | 1,694,875 | $ | (456,922 | ) | |||||||||||||
| Unencumbered Communities | ||||||||||||||||||||||||||||||
| Alessio | 624 | Los Angeles, CA | — | 32,136 | 128,543 | 12,865 | 32,136 | 141,408 | 173,544 | (31,530 | ) | 2001 | Apr-14 | 5-30 | ||||||||||||||||
| Allegro | 97 | Valley Village, CA | — | 5,869 | 23,977 | 2,530 | 5,869 | 26,507 | 32,376 | (10,365 | ) | 2010 | Oct-10 | 3-30 | ||||||||||||||||
| Allure at Scripps Ranch | 194 | San Diego, CA | — | 11,923 | 47,690 | 1,653 | 11,923 | 49,343 | 61,266 | (10,557 | ) | 2002 | Apr-14 | 5-30 |
F- 56
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2019
(Dollars in thousands)
| Costs | ||||||||||||||||||||||||||||||
| Initial cost | capitalized | Gross amount carried at close of period | ||||||||||||||||||||||||||||
| Apartment | Buildings and | subsequent to | Land and | Buildings and | Accumulated | Date of | Date | Lives | ||||||||||||||||||||||
| Property | Homes | Location | Encumbrance | Land | improvements | acquisition | improvements | improvements | Total (1) | depreciation | construction | acquired | (years) | |||||||||||||||||
| Alpine Village | 301 | Alpine, CA | — | 4,967 | 19,728 | 9,094 | 4,982 | 28,807 | 33,789 | (16,958 | ) | 1971 | Dec-02 | 3-30 | ||||||||||||||||
| Anavia | 250 | Anaheim, CA | — | 15,925 | 63,712 | 8,796 | 15,925 | 72,508 | 88,433 | (22,599 | ) | 2009 | Dec-10 | 3-30 | ||||||||||||||||
| Annaliese | 56 | Seattle, WA | — | 4,727 | 14,229 | 701 | 4,726 | 14,931 | 19,657 | (3,613 | ) | 2009 | Jan-13 | 3-30 | ||||||||||||||||
| Apex | 366 | Milpitas, CA | — | 44,240 | 103,251 | 3,857 | 44,240 | 107,108 | 151,348 | (19,343 | ) | 2014 | Aug-14 | 3-30 | ||||||||||||||||
| Aqua Marina Del Rey | 500 | Marina Del Rey, CA | — | 58,442 | 175,326 | 14,430 | 58,442 | 189,756 | 248,198 | (44,329 | ) | 2001 | Apr-14 | 5-30 | ||||||||||||||||
| Ascent | 90 | Kirkland, WA | — | 3,924 | 11,862 | 2,172 | 3,924 | 14,034 | 17,958 | (4,169 | ) | 1988 | Oct-12 | 3-30 | ||||||||||||||||
| Ashton Sherman Village | 264 | Los Angeles, CA | — | 23,550 | 93,811 | 976 | 23,550 | 94,787 | 118,337 | (10,157 | ) | 2014 | Dec-16 | 3-30 | ||||||||||||||||
| Avant | 440 | Los Angeles, CA | — | 32,379 | 137,940 | 3,203 | 32,379 | 141,143 | 173,522 | (21,614 | ) | 2014 | Jun-15 | 3-30 | ||||||||||||||||
| Avenue 64 | 224 | Emeryville, CA | — | 27,235 | 64,403 | 14,656 | 27,235 | 79,059 | 106,294 | (15,897 | ) | 2007 | Apr-14 | 5-30 | ||||||||||||||||
| Aviara (4) | 166 | Mercer Island, WA | — | — | 49,813 | 1,412 | — | 51,225 | 51,225 | (11,908 | ) | 2013 | Apr-14 | 5-30 | ||||||||||||||||
| Avondale at Warner Center | 446 | Woodland Hills, CA | — | 10,536 | 24,522 | 24,703 | 10,601 | 49,160 | 59,761 | (34,453 | ) | 1970 | Jan-99 | 3-30 | ||||||||||||||||
| Axis 2300 | 115 | Irvine, CA | — | 5,405 | 33,585 | 1,963 | 5,405 | 35,548 | 40,953 | (13,576 | ) | 2010 | Aug-10 | 3-30 | ||||||||||||||||
| Bel Air | 462 | San Ramon, CA | — | 12,105 | 18,252 | 40,856 | 12,682 | 58,531 | 71,213 | (40,414 | ) | 1988 | Jan-95 | 3-30 | ||||||||||||||||
| Belcarra | 296 | Bellevue, WA | — | 21,725 | 92,091 | 2,283 | 21,725 | 94,374 | 116,099 | (19,774 | ) | 2009 | Apr-14 | 5-30 | ||||||||||||||||
| Bella Villagio | 231 | San Jose, CA | — | 17,247 | 40,343 | 4,001 | 17,247 | 44,344 | 61,591 | (14,888 | ) | 2004 | Sep-10 | 3-30 | ||||||||||||||||
| BellCentre | 248 | Bellevue, WA | — | 16,197 | 67,207 | 5,041 | 16,197 | 72,248 | 88,445 | (15,892 | ) | 2001 | Apr-14 | 5-30 | ||||||||||||||||
| Bellerive | 63 | Los Angeles, CA | — | 5,401 | 21,803 | 1,312 | 5,401 | 23,115 | 28,516 | (7,768 | ) | 2011 | Aug-11 | 3-30 | ||||||||||||||||
| Belmont Terrace | 71 | Belmont, CA | — | 4,446 | 10,290 | 7,294 | 4,473 | 17,557 | 22,030 | (9,414 | ) | 1974 | Oct-06 | 3-30 | ||||||||||||||||
| Bennett Lofts | 165 | San Francisco, CA | — | 21,771 | 50,800 | 30,544 | 28,371 | 74,744 | 103,115 | (19,437 | ) | 2004 | Dec-12 | 3-30 | ||||||||||||||||
| Bernardo Crest | 216 | San Diego, CA | — | 10,802 | 43,209 | 4,737 | 10,802 | 47,946 | 58,748 | (10,574 | ) | 1988 | Apr-14 | 5-30 | ||||||||||||||||
| Bonita Cedars | 120 | Bonita, CA | — | 2,496 | 9,913 | 5,583 | 2,503 | 15,489 | 17,992 | (8,551 | ) | 1983 | Dec-02 | 3-30 | ||||||||||||||||
| Boulevard | 172 | Fremont, CA | — | 3,520 | 8,182 | 14,248 | 3,580 | 22,370 | 25,950 | (17,944 | ) | 1978 | Jan-96 | 3-30 | ||||||||||||||||
| Bridle Trails | 108 | Kirkland, WA | — | 1,500 | 5,930 | 6,614 | 1,531 | 12,513 | 14,044 | (8,949 | ) | 1986 | Oct-97 | 3-30 | ||||||||||||||||
| Brighton Ridge | 264 | Renton, WA | — | 2,623 | 10,800 | 6,174 | 2,656 | 16,941 | 19,597 | (12,601 | ) | 1986 | Dec-96 | 3-30 | ||||||||||||||||
| Bristol Commons | 188 | Sunnyvale, CA | — | 5,278 | 11,853 | 10,206 | 5,293 | 22,044 | 27,337 | (15,631 | ) | 1989 | Jan-95 | 3-30 | ||||||||||||||||
| 416 on Broadway | 115 | Glendale, CA | — | 8,557 | 34,235 | 3,407 | 8,557 | 37,642 | 46,199 | (12,466 | ) | 2009 | Dec-10 | 3-30 | ||||||||||||||||
| Bunker Hill | 456 | Los Angeles, CA | — | 11,498 | 27,871 | 91,959 | 11,639 | 119,689 | 131,328 | (67,010 | ) | 1968 | Mar-98 | 3-30 | ||||||||||||||||
| Camarillo Oaks | 564 | Camarillo, CA | — | 10,953 | 25,254 | 8,562 | 11,075 | 33,694 | 44,769 | (25,023 | ) | 1985 | Jul-96 | 3-30 | ||||||||||||||||
| Cambridge Park | 320 | San Diego, CA | — | 18,185 | 72,739 | 3,642 | 18,185 | 76,381 | 94,566 | (16,732 | ) | 1998 | Apr-14 | 5-30 | ||||||||||||||||
| Camino Ruiz Square | 159 | Camarillo, CA | — | 6,871 | 26,119 | 2,349 | 6,931 | 28,408 | 35,339 | (12,693 | ) | 1990 | Dec-06 | 3-30 | ||||||||||||||||
| Canyon Oaks | 250 | San Ramon, CA | — | 19,088 | 44,473 | 4,988 | 19,088 | 49,461 | 68,549 | (21,478 | ) | 2005 | May-07 | 3-30 | ||||||||||||||||
| Canyon Pointe | 250 | Bothell, WA | — | 4,692 | 18,288 | 9,096 | 4,693 | 27,383 | 32,076 | (15,931 | ) | 1990 | Oct-03 | 3-30 |
F- 57
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2019
(Dollars in thousands)
| Costs | ||||||||||||||||||||||||||||||
| Initial cost | capitalized | Gross amount carried at close of period | ||||||||||||||||||||||||||||
| Apartment | Buildings and | subsequent to | Land and | Buildings and | Accumulated | Date of | Date | Lives | ||||||||||||||||||||||
| Property | Homes | Location | Encumbrance | Land | improvements | acquisition | improvements | improvements | Total (1) | depreciation | construction | acquired | (years) | |||||||||||||||||
| Capri at Sunny Hills | 102 | Fullerton, CA | — | 3,337 | 13,320 | 9,503 | 4,048 | 22,112 | 26,160 | (14,445 | ) | 1961 | Sep-01 | 3-30 | ||||||||||||||||
| Carmel Creek | 348 | San Diego, CA | — | 26,842 | 107,368 | 6,878 | 26,842 | 114,246 | 141,088 | (25,679 | ) | 2000 | Apr-14 | 5-30 | ||||||||||||||||
| Carmel Landing | 356 | San Diego, CA | — | 16,725 | 66,901 | 9,043 | 16,725 | 75,944 | 92,669 | (16,943 | ) | 1989 | Apr-14 | 5-30 | ||||||||||||||||
| Carmel Summit | 246 | San Diego, CA | — | 14,968 | 59,871 | 4,154 | 14,968 | 64,025 | 78,993 | (13,876 | ) | 1989 | Apr-14 | 5-30 | ||||||||||||||||
| Castle Creek | 216 | Newcastle, WA | — | 4,149 | 16,028 | 5,185 | 4,833 | 20,529 | 25,362 | (14,880 | ) | 1998 | Dec-98 | 3-30 | ||||||||||||||||
| Catalina Gardens | 128 | Los Angeles, CA | — | 6,714 | 26,856 | 1,970 | 6,714 | 28,826 | 35,540 | (6,159 | ) | 1987 | Apr-14 | 5-30 | ||||||||||||||||
| CBC Apartments & The Sweeps | 239 | Goleta, CA | — | 11,841 | 45,320 | 6,718 | 11,906 | 51,973 | 63,879 | (26,615 | ) | 1962 | Jan-06 | 3-30 | ||||||||||||||||
| Cedar Terrace | 180 | Bellevue, WA | — | 5,543 | 16,442 | 8,092 | 5,652 | 24,425 | 30,077 | (12,765 | ) | 1984 | Jan-05 | 3-30 | ||||||||||||||||
| CentrePointe | 224 | San Diego, CA | — | 3,405 | 7,743 | 21,698 | 3,442 | 29,404 | 32,846 | (20,349 | ) | 1974 | Jun-97 | 3-30 | ||||||||||||||||
| Chestnut Street Apartments | 96 | Santa Cruz, CA | — | 6,582 | 15,689 | 2,057 | 6,582 | 17,746 | 24,328 | (7,206 | ) | 2002 | Jul-08 | 3-30 | ||||||||||||||||
| Collins on Pine | 76 | Seattle, WA | — | 7,276 | 22,226 | 562 | 7,276 | 22,788 | 30,064 | (4,337 | ) | 2013 | May-14 | 3-30 | ||||||||||||||||
| Corbella at Juanita Bay | 169 | Kirkland, WA | — | 5,801 | 17,415 | 3,815 | 5,801 | 21,230 | 27,031 | (7,273 | ) | 1978 | Nov-10 | 3-30 | ||||||||||||||||
| Cortesia | 308 | Rancho Santa Margarita, CA | — | 13,912 | 55,649 | 3,034 | 13,912 | 58,683 | 72,595 | (12,706 | ) | 1999 | Apr-14 | 5-30 | ||||||||||||||||
| Country Villas | 180 | Oceanside, CA | — | 4,174 | 16,583 | 5,358 | 4,187 | 21,928 | 26,115 | (12,942 | ) | 1976 | Dec-02 | 3-30 | ||||||||||||||||
| Courtyard off Main | 110 | Bellevue, WA | — | 7,465 | 21,405 | 4,911 | 7,465 | 26,316 | 33,781 | (8,924 | ) | 2000 | Oct-10 | 3-30 | ||||||||||||||||
| Crow Canyon | 400 | San Ramon, CA | — | 37,579 | 87,685 | 11,695 | 37,579 | 99,380 | 136,959 | (22,121 | ) | 1992 | Apr-14 | 5-30 | ||||||||||||||||
| Deer Valley | 171 | San Rafael, CA | — | 21,478 | 50,116 | 3,175 | 21,478 | 53,291 | 74,769 | (11,659 | ) | 1996 | Apr-14 | 5-30 | ||||||||||||||||
| Delano | 126 | Redmond, WA | — | 7,470 | 22,511 | 1,655 | 7,470 | 24,166 | 31,636 | (6,762 | ) | 2005 | Dec-11 | 3-30 | ||||||||||||||||
| Devonshire | 276 | Hemet, CA | — | 3,470 | 13,786 | 5,988 | 3,482 | 19,762 | 23,244 | (11,177 | ) | 1988 | Dec-02 | 3-30 | ||||||||||||||||
| Elevation | 158 | Redmond, WA | — | 4,758 | 14,285 | 7,182 | 4,757 | 21,468 | 26,225 | (9,807 | ) | 1986 | Jun-10 | 3-30 | ||||||||||||||||
| Ellington | 220 | Bellevue, WA | — | 15,066 | 45,249 | 3,914 | 15,066 | 49,163 | 64,229 | (9,897 | ) | 1994 | Jul-14 | 3-30 | ||||||||||||||||
| Emerald Pointe | 160 | Diamond Bar, CA | — | 8,458 | 33,832 | 2,098 | 8,458 | 35,930 | 44,388 | (7,907 | ) | 1989 | Apr-14 | 5-30 | ||||||||||||||||
| Emerald Ridge | 180 | Bellevue, WA | — | 3,449 | 7,801 | 6,444 | 3,449 | 14,245 | 17,694 | (10,963 | ) | 1987 | Nov-94 | 3-30 | ||||||||||||||||
| Emerson Valley Village | 144 | Los Angeles, CA | — | 13,378 | 53,240 | 979 | 13,378 | 54,219 | 67,597 | (5,806 | ) | 2012 | Dec-16 | 3-30 | ||||||||||||||||
| Enso | 183 | San Jose, CA | — | 21,397 | 71,135 | 1,630 | 21,397 | 72,765 | 94,162 | (10,555 | ) | 2014 | Dec-15 | 3-30 | ||||||||||||||||
| Esplanade | 278 | San Jose, CA | — | 18,170 | 40,086 | 15,809 | 18,429 | 55,636 | 74,065 | (29,746 | ) | 2002 | Apr-04 | 3-30 | ||||||||||||||||
| Essex Skyline | 349 | Santa Ana, CA | — | 21,537 | 146,099 | 10,028 | 21,537 | 156,127 | 177,664 | (41,718 | ) | 2008 | Apr-10 | 3-30 | ||||||||||||||||
| Evergreen Heights | 200 | Kirkland, WA | — | 3,566 | 13,395 | 6,886 | 3,649 | 20,198 | 23,847 | (14,843 | ) | 1990 | Jun-97 | 3-30 | ||||||||||||||||
| Fairway Apartments at Big Canyon (5) | 74 | Newport Beach, CA | — | — | 7,850 | 8,180 | — | 16,030 | 16,030 | (11,744 | ) | 1972 | Jun-99 | 3-28 | ||||||||||||||||
| Fairwood Pond | 194 | Renton, WA | — | 5,296 | 15,564 | 4,408 | 5,297 | 19,971 | 25,268 | (10,643 | ) | 1997 | Oct-04 | 3-30 | ||||||||||||||||
| Foothill Commons | 394 | Bellevue, WA | — | 2,435 | 9,821 | 41,492 | 2,440 | 51,308 | 53,748 | (45,513 | ) | 1978 | Mar-90 | 3-30 |
F- 58
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2019
(Dollars in thousands)
| Costs | ||||||||||||||||||||||||||||||
| Initial cost | capitalized | Gross amount carried at close of period | ||||||||||||||||||||||||||||
| Apartment | Buildings and | subsequent to | Land and | Buildings and | Accumulated | Date of | Date | Lives | ||||||||||||||||||||||
| Property | Homes | Location | Encumbrance | Land | improvements | acquisition | improvements | improvements | Total (1) | depreciation | construction | acquired | (years) | |||||||||||||||||
| Foothill Gardens/Twin Creeks | 176 | San Ramon, CA | — | 5,875 | 13,992 | 11,404 | 5,964 | 25,307 | 31,271 | (18,366 | ) | 1985 | Feb-97 | 3-30 | ||||||||||||||||
| Forest View | 192 | Renton, WA | — | 3,731 | 14,530 | 3,095 | 3,731 | 17,625 | 21,356 | (9,840 | ) | 1998 | Oct-03 | 3-30 | ||||||||||||||||
| Foster's Landing | 490 | Foster City, CA | — | 61,714 | 144,000 | 10,178 | 61,714 | 154,178 | 215,892 | (35,111 | ) | 1987 | Apr-14 | 5-30 | ||||||||||||||||
| Fountain Court | 320 | Seattle, WA | — | 6,702 | 27,306 | 13,162 | 6,985 | 40,185 | 47,170 | (28,006 | ) | 2000 | Mar-00 | 3-30 | ||||||||||||||||
| Fountains at River Oaks | 226 | San Jose, CA | — | 26,046 | 60,773 | 5,104 | 26,046 | 65,877 | 91,923 | (14,742 | ) | 1990 | Apr-14 | 3-30 | ||||||||||||||||
| Fourth & U | 171 | Berkeley, CA | — | 8,879 | 52,351 | 3,967 | 8,879 | 56,318 | 65,197 | (19,549 | ) | 2010 | Apr-10 | 3-30 | ||||||||||||||||
| Fox Plaza | 445 | San Francisco, CA | — | 39,731 | 92,706 | 35,532 | 39,731 | 128,238 | 167,969 | (34,285 | ) | 1968 | Feb-13 | 3-30 | ||||||||||||||||
| The Henley I/The Henley II | 215 | Glendale, CA | — | 6,695 | 16,753 | 27,953 | 6,733 | 44,668 | 51,401 | (26,394 | ) | 1970 | Jun-99 | 3-30 | ||||||||||||||||
| Highlands at Wynhaven | 333 | Issaquah, WA | — | 16,271 | 48,932 | 14,851 | 16,271 | 63,783 | 80,054 | (27,806 | ) | 2000 | Aug-08 | 3-30 | ||||||||||||||||
| Hillcrest Park | 608 | Newbury Park, CA | — | 15,318 | 40,601 | 21,179 | 15,755 | 61,343 | 77,098 | (42,560 | ) | 1973 | Mar-98 | 3-30 | ||||||||||||||||
| Hillsdale Garden | 697 | San Mateo, CA | — | 22,000 | 94,681 | 28,988 | 22,000 | 123,669 | 145,669 | (58,877 | ) | 1948 | Sep-06 | 3-30 | ||||||||||||||||
| Hope Ranch | 108 | Santa Barbara, CA | — | 4,078 | 16,877 | 2,989 | 4,208 | 19,736 | 23,944 | (8,757 | ) | 1965 | Mar-07 | 3-30 | ||||||||||||||||
| Huntington Breakers | 342 | Huntington Beach, CA | — | 9,306 | 22,720 | 21,487 | 9,315 | 44,198 | 53,513 | (32,546 | ) | 1984 | Oct-97 | 3-30 | ||||||||||||||||
| Inglenook Court | 224 | Bothell, WA | — | 3,467 | 7,881 | 8,307 | 3,474 | 16,181 | 19,655 | (13,291 | ) | 1985 | Oct-94 | 3-30 | ||||||||||||||||
| Lafayette Highlands | 150 | Lafayette, CA | — | 17,774 | 41,473 | 3,526 | 17,774 | 44,999 | 62,773 | (9,732 | ) | 1973 | Apr-14 | 5-30 | ||||||||||||||||
| Lakeshore Landing | 308 | San Mateo, CA | — | 38,155 | 89,028 | 8,183 | 38,155 | 97,211 | 135,366 | (22,592 | ) | 1988 | Apr-14 | 5-30 | ||||||||||||||||
| Laurels at Mill Creek | 164 | Mill Creek, WA | — | 1,559 | 6,430 | 8,202 | 1,595 | 14,596 | 16,191 | (10,517 | ) | 1981 | Dec-96 | 3-30 | ||||||||||||||||
| Lawrence Station | 336 | Sunnyvale, CA | — | 45,532 | 106,735 | 2,006 | 45,532 | 108,741 | 154,273 | (27,218 | ) | 2012 | Apr-14 | 5-30 | ||||||||||||||||
| Le Parc | 140 | Santa Clara, CA | — | 3,090 | 7,421 | 13,782 | 3,092 | 21,201 | 24,293 | (16,474 | ) | 1975 | Feb-94 | 3-30 | ||||||||||||||||
| Marbrisa | 202 | Long Beach, CA | — | 4,700 | 18,605 | 9,755 | 4,760 | 28,300 | 33,060 | (17,214 | ) | 1987 | Sep-02 | 3-30 | ||||||||||||||||
| Marina City Club (6) | 101 | Marina Del Rey, CA | — | — | 28,167 | 31,783 | — | 59,950 | 59,950 | (28,367 | ) | 1971 | Jan-04 | 3-30 | ||||||||||||||||
| Marina Cove (7) | 292 | Santa Clara, CA | — | 5,320 | 16,431 | 15,948 | 5,324 | 32,375 | 37,699 | (26,197 | ) | 1974 | Jun-94 | 3-30 | ||||||||||||||||
| Mariner's Place | 105 | Oxnard, CA | — | 1,555 | 6,103 | 2,589 | 1,562 | 8,685 | 10,247 | (6,020 | ) | 1987 | May-00 | 3-30 | ||||||||||||||||
| MB 360 | 360 | San Francisco, CA | — | 42,001 | 212,648 | 11,373 | 42,001 | 224,021 | 266,022 | (41,021 | ) | 2014 | Apr-14 | 3-30 | ||||||||||||||||
| Mesa Village | 133 | Clairemont, CA | — | 1,888 | 7,498 | 2,591 | 1,894 | 10,083 | 11,977 | (5,624 | ) | 1963 | Dec-02 | 3-30 | ||||||||||||||||
| Mill Creek at Windermere | 400 | San Ramon, CA | — | 29,551 | 69,032 | 6,201 | 29,551 | 75,233 | 104,784 | (31,986 | ) | 2005 | Sep-07 | 3-30 | ||||||||||||||||
| Mio | 103 | San Jose, CA | — | 11,012 | 39,982 | 557 | 11,012 | 40,539 | 51,551 | (5,695 | ) | 2015 | Jan-16 | 3-30 | ||||||||||||||||
| Mirabella | 188 | Marina Del Rey, CA | — | 6,180 | 26,673 | 16,790 | 6,270 | 43,373 | 49,643 | (26,253 | ) | 2000 | May-00 | 3-30 | ||||||||||||||||
| Mira Monte | 354 | Mira Mesa, CA | — | 7,165 | 28,459 | 11,933 | 7,186 | 40,371 | 47,557 | (25,280 | ) | 1982 | Dec-02 | 3-30 | ||||||||||||||||
| Miracle Mile/Marbella | 236 | Los Angeles, CA | — | 7,791 | 23,075 | 15,151 | 7,886 | 38,131 | 46,017 | (27,856 | ) | 1988 | Aug-97 | 3-30 | ||||||||||||||||
| Mission Hills | 282 | Oceanside, CA | — | 10,099 | 38,778 | 11,134 | 10,167 | 49,844 | 60,011 | (24,458 | ) | 1984 | Jul-05 | 3-30 | ||||||||||||||||
| Mission Peaks | 453 | Fremont, CA | — | 46,499 | 108,498 | 7,387 | 46,499 | 115,885 | 162,384 | (25,036 | ) | 1995 | Apr-14 | 5-30 |
F- 59
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2019
(Dollars in thousands)
| Costs | ||||||||||||||||||||||||||||||
| Initial cost | capitalized | Gross amount carried at close of period | ||||||||||||||||||||||||||||
| Apartment | Buildings and | subsequent to | Land and | Buildings and | Accumulated | Date of | Date | Lives | ||||||||||||||||||||||
| Property | Homes | Location | Encumbrance | Land | improvements | acquisition | improvements | improvements | Total (1) | depreciation | construction | acquired | (years) | |||||||||||||||||
| Mission Peaks II | 336 | Fremont, CA | — | 31,429 | 73,334 | 7,308 | 31,429 | 80,642 | 112,071 | (17,908 | ) | 1989 | Apr-14 | 5-30 | ||||||||||||||||
| Montclaire | 390 | Sunnyvale, CA | — | 4,842 | 19,776 | 28,185 | 4,997 | 47,806 | 52,803 | (41,752 | ) | 1973 | Dec-88 | 3-30 | ||||||||||||||||
| Monterey Villas | 122 | Oxnard, CA | — | 2,349 | 5,579 | 6,873 | 2,424 | 12,377 | 14,801 | (8,553 | ) | 1974 | Jul-97 | 3-30 | ||||||||||||||||
| Muse | 152 | North Hollywood, CA | — | 7,822 | 33,436 | 3,466 | 7,823 | 36,901 | 44,724 | (13,932 | ) | 2011 | Feb-11 | 3-30 | ||||||||||||||||
| Museum Park | 117 | San Jose, CA | — | 13,864 | 32,348 | 2,012 | 13,864 | 34,360 | 48,224 | (7,530 | ) | 2002 | Apr-14 | 5-30 | ||||||||||||||||
| One South Market | 312 | San Jose, CA | — | 28,290 | 148,649 | 162 | 28,290 | 148,811 | 177,101 | (3,931 | ) | 2015 | Mar-19 | 3-30 | ||||||||||||||||
| Palm Valley | 1,099 | San Jose, CA | — | 133,802 | 312,205 | 15,296 | 133,802 | 327,501 | 461,303 | (35,244 | ) | 2008 | Jan-17 | 3-30 | ||||||||||||||||
| Paragon Apartments | 301 | Fremont, CA | — | 32,230 | 77,320 | 2,173 | 32,230 | 79,493 | 111,723 | (14,796 | ) | 2013 | Jul-14 | 3-30 | ||||||||||||||||
| Park Catalina | 90 | Los Angeles, CA | — | 4,710 | 18,839 | 3,372 | 4,710 | 22,211 | 26,921 | (7,029 | ) | 2002 | Jun-12 | 3-30 | ||||||||||||||||
| Park Highland | 250 | Bellevue, WA | — | 9,391 | 38,224 | 12,981 | 9,391 | 51,205 | 60,596 | (13,942 | ) | 1993 | Apr-14 | 5-30 | ||||||||||||||||
| Park Hill at Issaquah | 245 | Issaquah, WA | — | 7,284 | 21,937 | 10,119 | 7,284 | 32,056 | 39,340 | (16,614 | ) | 1999 | Feb-99 | 3-30 | ||||||||||||||||
| Park Viridian | 320 | Anaheim, CA | — | 15,894 | 63,574 | 3,789 | 15,894 | 67,363 | 83,257 | (14,776 | ) | 2008 | Apr-14 | 5-30 | ||||||||||||||||
| Park West | 126 | San Francisco, CA | — | 9,424 | 21,988 | 12,500 | 9,424 | 34,488 | 43,912 | (11,971 | ) | 1958 | Sep-12 | 3-30 | ||||||||||||||||
| Parkwood at Mill Creek | 240 | Mill Creek, WA | — | 10,680 | 42,722 | 3,376 | 10,680 | 46,098 | 56,778 | (10,263 | ) | 1989 | Apr-14 | 5-30 | ||||||||||||||||
| Patent 523 | 295 | Seattle, WA | — | 14,558 | 69,417 | 5,923 | 14,558 | 75,340 | 89,898 | (26,798 | ) | 2010 | Mar-10 | 3-30 | ||||||||||||||||
| Pathways at Bixby Village | 296 | Long Beach, CA | — | 4,083 | 16,757 | 21,850 | 6,239 | 36,451 | 42,690 | (31,839 | ) | 1975 | Feb-91 | 3-30 | ||||||||||||||||
| Piedmont | 396 | Bellevue, WA | — | 19,848 | 59,606 | 12,913 | 19,848 | 72,519 | 92,367 | (16,747 | ) | 1969 | May-14 | 3-30 | ||||||||||||||||
| Pinehurst (8) | 28 | Ventura, CA | — | — | 1,711 | 731 | — | 2,442 | 2,442 | (1,517 | ) | 1973 | Dec-04 | 3-24 | ||||||||||||||||
| Pinnacle at Fullerton | 192 | Fullerton, CA | — | 11,019 | 45,932 | 3,983 | 11,019 | 49,915 | 60,934 | (11,134 | ) | 2004 | Apr-14 | 5-30 | ||||||||||||||||
| Pinnacle on Lake Washington | 180 | Renton, WA | — | 7,760 | 31,041 | 3,513 | 7,760 | 34,554 | 42,314 | (7,545 | ) | 2001 | Apr-14 | 5-30 | ||||||||||||||||
| Pinnacle at MacArthur Place | 253 | Santa Ana, CA | — | 15,810 | 66,401 | 5,238 | 15,810 | 71,639 | 87,449 | (15,689 | ) | 2002 | Apr-14 | 5-30 | ||||||||||||||||
| Pinnacle at Otay Ranch I & II | 364 | Chula Vista, CA | — | 17,023 | 68,093 | 4,227 | 17,023 | 72,320 | 89,343 | (15,862 | ) | 2001 | Apr-14 | 5-30 | ||||||||||||||||
| Pinnacle at Talega | 362 | San Clemente, CA | — | 19,292 | 77,168 | 3,097 | 19,292 | 80,265 | 99,557 | (17,314 | ) | 2002 | Apr-14 | 5-30 | ||||||||||||||||
| Pinnacle Sonata | 268 | Bothell, WA | — | 14,647 | 58,586 | 4,597 | 14,647 | 63,183 | 77,830 | (13,613 | ) | 2000 | Apr-14 | 5-30 | ||||||||||||||||
| Pointe at Cupertino | 116 | Cupertino, CA | — | 4,505 | 17,605 | 12,637 | 4,505 | 30,242 | 34,747 | (19,206 | ) | 1963 | Aug-98 | 3-30 | ||||||||||||||||
| Pure Redmond | 105 | Redmond, WA | — | 7,461 | 31,363 | — | 7,461 | 31,363 | 38,824 | (46 | ) | 2016 | Dec-19 | 3-30 | ||||||||||||||||
| Radius | 264 | Redwood City, CA | — | 11,702 | 152,336 | 904 | 11,702 | 153,240 | 164,942 | (33,929 | ) | 2015 | Apr-14 | 3-30 | ||||||||||||||||
| Reed Square | 100 | Sunnyvale, CA | — | 6,873 | 16,037 | 8,451 | 6,873 | 24,488 | 31,361 | (10,156 | ) | 1970 | Jan-12 | 3-30 | ||||||||||||||||
| Regency at Encino | 75 | Encino, CA | — | 3,184 | 12,737 | 3,911 | 3,184 | 16,648 | 19,832 | (6,945 | ) | 1989 | Dec-09 | 3-30 | ||||||||||||||||
| Renaissance at Uptown Orange | 460 | Orange, CA | — | 27,870 | 111,482 | 6,212 | 27,870 | 117,694 | 145,564 | (25,469 | ) | 2007 | Apr-14 | 5-30 | ||||||||||||||||
| Reveal | 438 | Woodland Hills, CA | — | 25,073 | 121,314 | 2,446 | 25,073 | 123,760 | 148,833 | (22,720 | ) | 2010 | Apr-15 | 3-30 | ||||||||||||||||
| Salmon Run at Perry Creek | 132 | Bothell, WA | — | 3,717 | 11,483 | 2,941 | 3,801 | 14,340 | 18,141 | (8,857 | ) | 2000 | Oct-00 | 3-30 |
F- 60
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2019
(Dollars in thousands)
| Costs | ||||||||||||||||||||||||||||||
| Initial cost | capitalized | Gross amount carried at close of period | ||||||||||||||||||||||||||||
| Apartment | Buildings and | subsequent to | Land and | Buildings and | Accumulated | Date of | Date | Lives | ||||||||||||||||||||||
| Property | Homes | Location | Encumbrance | Land | improvements | acquisition | improvements | improvements | Total (1) | depreciation | construction | acquired | (years) | |||||||||||||||||
| Sammamish View | 153 | Bellevue, WA | — | 3,324 | 7,501 | 7,285 | 3,331 | 14,779 | 18,110 | (12,571 | ) | 1986 | Nov-94 | 3-30 | ||||||||||||||||
| 101 San Fernando | 323 | San Jose, CA | — | 4,173 | 58,961 | 13,374 | 4,173 | 72,335 | 76,508 | (26,862 | ) | 2001 | Jul-10 | 3-30 | ||||||||||||||||
| San Marcos | 432 | Richmond, CA | — | 15,563 | 36,204 | 33,430 | 22,866 | 62,331 | 85,197 | (33,909 | ) | 2003 | Nov-03 | 3-30 | ||||||||||||||||
| Santee Court/Santee Village | 238 | Los Angeles, CA | — | 9,581 | 40,317 | 11,607 | 9,582 | 51,923 | 61,505 | (17,070 | ) | 2004 | Oct-10 | 3-30 | ||||||||||||||||
| Shadow Point | 172 | Spring Valley, CA | — | 2,812 | 11,170 | 4,305 | 2,820 | 15,467 | 18,287 | (8,864 | ) | 1983 | Dec-02 | 3-30 | ||||||||||||||||
| Shadowbrook | 418 | Redmond, WA | — | 19,292 | 77,168 | 5,704 | 19,292 | 82,872 | 102,164 | (18,117 | ) | 1986 | Apr-14 | 5-30 | ||||||||||||||||
| Slater 116 | 108 | Kirkland, WA | — | 7,379 | 22,138 | 1,194 | 7,379 | 23,332 | 30,711 | (5,181 | ) | 2013 | Sep-13 | 3-30 | ||||||||||||||||
| Solstice | 280 | Sunnyvale, CA | — | 34,444 | 147,262 | 6,544 | 34,444 | 153,806 | 188,250 | (36,993 | ) | 2014 | Apr-14 | 5-30 | ||||||||||||||||
| Station Park Green - Phase I | 121 | San Mateo, CA | — | 14,923 | 96,229 | 5,610 | 14,924 | 101,838 | 116,762 | (8,241 | ) | 2018 | Mar-18 | 3-30 | ||||||||||||||||
| Stevenson Place | 200 | Fremont, CA | — | 996 | 5,582 | 13,651 | 1,001 | 19,228 | 20,229 | (14,432 | ) | 1975 | Apr-00 | 3-30 | ||||||||||||||||
| Stonehedge Village | 196 | Bothell, WA | — | 3,167 | 12,603 | 8,669 | 3,201 | 21,238 | 24,439 | (14,829 | ) | 1986 | Oct-97 | 3-30 | ||||||||||||||||
| Summerhill Park | 100 | Sunnyvale, CA | — | 2,654 | 4,918 | 11,180 | 2,656 | 16,096 | 18,752 | (11,728 | ) | 1988 | Sep-88 | 3-30 | ||||||||||||||||
| Summit Park | 300 | San Diego, CA | — | 5,959 | 23,670 | 8,485 | 5,977 | 32,137 | 38,114 | (18,375 | ) | 1972 | Dec-02 | 3-30 | ||||||||||||||||
| Taylor 28 | 197 | Seattle, WA | — | 13,915 | 57,700 | 3,391 | 13,915 | 61,091 | 75,006 | (13,005 | ) | 2008 | Apr-14 | 5-30 | ||||||||||||||||
| The Audrey at Belltown | 137 | Seattle, WA | — | 9,228 | 36,911 | 1,290 | 9,228 | 38,201 | 47,429 | (8,013 | ) | 1992 | Apr-14 | 5-30 | ||||||||||||||||
| The Avery | 121 | Los Angeles, CA | — | 6,964 | 29,922 | 726 | 6,964 | 30,648 | 37,612 | (5,957 | ) | 2014 | Mar-14 | 3-30 | ||||||||||||||||
| The Bernard | 63 | Seattle, WA | — | 3,699 | 11,345 | 800 | 3,689 | 12,155 | 15,844 | (3,574 | ) | 2008 | Sep-11 | 3-30 | ||||||||||||||||
| The Blake LA | 196 | Los Angeles, CA | — | 4,023 | 9,527 | 22,158 | 4,031 | 31,677 | 35,708 | (18,135 | ) | 1979 | Jun-97 | 3-30 | ||||||||||||||||
| The Cairns | 99 | Seattle, WA | — | 6,937 | 20,679 | 2,389 | 6,939 | 23,066 | 30,005 | (9,915 | ) | 2006 | Jun-07 | 3-30 | ||||||||||||||||
| The Commons | 264 | Campbell, CA | — | 12,555 | 29,307 | 9,206 | 12,556 | 38,512 | 51,068 | (14,792 | ) | 1973 | Jul-10 | 3-30 | ||||||||||||||||
| The Elliot at Mukilteo | 301 | Mukilteo, WA | — | 2,498 | 10,595 | 17,699 | 2,824 | 27,968 | 30,792 | (21,381 | ) | 1981 | Jan-97 | 3-30 | ||||||||||||||||
| The Grand | 243 | Oakland, CA | — | 4,531 | 89,208 | 7,334 | 4,531 | 96,542 | 101,073 | (37,589 | ) | 2009 | Jan-09 | 3-30 | ||||||||||||||||
| The Hallie | 292 | Pasadena, CA | — | 2,202 | 4,794 | 54,674 | 8,385 | 53,285 | 61,670 | (35,599 | ) | 1972 | Apr-97 | 3-30 | ||||||||||||||||
| The Huntington | 276 | Huntington Beach, CA | — | 10,374 | 41,495 | 5,741 | 10,374 | 47,236 | 57,610 | (13,725 | ) | 1975 | Jun-12 | 3-30 | ||||||||||||||||
| The Landing at Jack London Square | 282 | Oakland, CA | — | 33,554 | 78,292 | 6,329 | 33,554 | 84,621 | 118,175 | (19,726 | ) | 2001 | Apr-14 | 5-30 | ||||||||||||||||
| The Lofts at Pinehurst | 118 | Ventura, CA | — | 1,570 | 3,912 | 5,499 | 1,618 | 9,363 | 10,981 | (6,164 | ) | 1971 | Jun-97 | 3-30 | ||||||||||||||||
| The Palisades | 192 | Bellevue, WA | — | 1,560 | 6,242 | 13,743 | 1,565 | 19,980 | 21,545 | (17,648 | ) | 1977 | May-90 | 3-30 | ||||||||||||||||
| The Palms at Laguna Niguel | 460 | Laguna Niguel, CA | — | 23,584 | 94,334 | 9,442 | 23,584 | 103,776 | 127,360 | (23,149 | ) | 1988 | Apr-14 | 5-30 | ||||||||||||||||
| The Stuart | 188 | Pasadena, CA | — | 13,574 | 54,298 | 2,693 | 13,574 | 56,991 | 70,565 | (12,753 | ) | 2007 | Apr-14 | 5-30 | ||||||||||||||||
| The Trails of Redmond | 423 | Redmond, WA | — | 21,930 | 87,720 | 5,406 | 21,930 | 93,126 | 115,056 | (20,366 | ) | 1985 | Apr-14 | 5-30 | ||||||||||||||||
| Tierra Vista | 404 | Oxnard, CA | — | 13,652 | 53,336 | 6,023 | 13,661 | 59,350 | 73,011 | (32,123 | ) | 2001 | Jan-01 | 3-30 |
F- 61
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2019
(Dollars in thousands)
| Costs | ||||||||||||||||||||||||||||||
| Initial cost | capitalized | Gross amount carried at close of period | ||||||||||||||||||||||||||||
| Apartment | Buildings and | subsequent to | Land and | Buildings and | Accumulated | Date of | Date | Lives | ||||||||||||||||||||||
| Property | Homes | Location | Encumbrance | Land | improvements | acquisition | improvements | improvements | Total (1) | depreciation | construction | acquired | (years) | |||||||||||||||||
| Tiffany Court | 101 | Los Angeles, CA | — | 6,949 | 27,796 | 1,857 | 6,949 | 29,653 | 36,602 | (6,429 | ) | 1987 | Apr-14 | 5-30 | ||||||||||||||||
| Trabuco Villas | 132 | Lake Forest, CA | — | 3,638 | 8,640 | 4,061 | 3,890 | 12,449 | 16,339 | (8,740 | ) | 1985 | Oct-97 | 3-30 | ||||||||||||||||
| Via | 284 | Sunnyvale, CA | — | 22,000 | 82,270 | 3,189 | 22,016 | 85,443 | 107,459 | (27,803 | ) | 2011 | Jul-11 | 3-30 | ||||||||||||||||
| Villa Granada | 270 | Santa Clara, CA | — | 38,299 | 89,365 | 2,200 | 38,299 | 91,565 | 129,864 | (19,559 | ) | 2010 | Apr-14 | 5-30 | ||||||||||||||||
| Villa Siena | 272 | Costa Mesa, CA | — | 13,842 | 55,367 | 8,399 | 13,842 | 63,766 | 77,608 | (14,671 | ) | 1974 | Apr-14 | 5-30 | ||||||||||||||||
| Village Green | 272 | La Habra, CA | — | 6,488 | 36,768 | 4,061 | 6,488 | 40,829 | 47,317 | (9,428 | ) | 1971 | Apr-14 | 5-30 | ||||||||||||||||
| Vista Belvedere | 76 | Tiburon, CA | — | 5,573 | 11,901 | 8,844 | 5,573 | 20,745 | 26,318 | (12,068 | ) | 1963 | Aug-04 | 3-30 | ||||||||||||||||
| Vox Apartments | 58 | Seattle, WA | — | 5,545 | 16,635 | 408 | 5,545 | 17,043 | 22,588 | (3,543 | ) | 2013 | Oct-13 | 3-30 | ||||||||||||||||
| Walnut Heights | 163 | Walnut, CA | — | 4,858 | 19,168 | 5,645 | 4,887 | 24,784 | 29,671 | (13,726 | ) | 1964 | Oct-03 | 3-30 | ||||||||||||||||
| Wandering Creek | 156 | Kent, WA | — | 1,285 | 4,980 | 5,152 | 1,296 | 10,121 | 11,417 | (7,945 | ) | 1986 | Nov-95 | 3-30 | ||||||||||||||||
| Wharfside Pointe | 155 | Seattle, WA | — | 2,245 | 7,020 | 12,465 | 2,258 | 19,472 | 21,730 | (14,892 | ) | 1990 | Jun-94 | 3-30 | ||||||||||||||||
| Willow Lake | 508 | San Jose, CA | — | 43,194 | 101,030 | 15,998 | 43,194 | 117,028 | 160,222 | (32,271 | ) | 1989 | Oct-12 | 3-30 | ||||||||||||||||
| 5600 Wilshire | 284 | Los Angeles, CA | — | 30,535 | 91,604 | 4,495 | 30,535 | 96,099 | 126,634 | (20,175 | ) | 2008 | Apr-14 | 5-30 | ||||||||||||||||
| Wilshire La Brea | 478 | Los Angeles, CA | — | 56,932 | 211,998 | 11,252 | 56,932 | 223,250 | 280,182 | (52,822 | ) | 2014 | Apr-14 | 5-30 | ||||||||||||||||
| Wilshire Promenade | 149 | Fullerton, CA | — | 3,118 | 7,385 | 10,727 | 3,797 | 17,433 | 21,230 | (11,640 | ) | 1992 | Jan-97 | 3-30 | ||||||||||||||||
| Windsor Ridge | 216 | Sunnyvale, CA | — | 4,017 | 10,315 | 16,759 | 4,021 | 27,070 | 31,091 | (22,682 | ) | 1989 | Mar-89 | 3-30 | ||||||||||||||||
| Woodland Commons | 302 | Bellevue, WA | — | 2,040 | 8,727 | 24,610 | 2,044 | 33,333 | 35,377 | (22,838 | ) | 1978 | Mar-90 | 3-30 | ||||||||||||||||
| Woodside Village | 145 | Ventura, CA | — | 5,331 | 21,036 | 5,387 | 5,341 | 26,413 | 31,754 | (13,691 | ) | 1987 | Dec-04 | 3-30 | ||||||||||||||||
| 43,932 | $ | — | $ | 2,415,080 | $ | 8,256,799 | $ | 1,643,811 | $ | 2,443,633 | $ | 9,872,057 | $ | 12,315,690 | $ | (3,217,204 | ) |
| Costs | |||||||||||||||||||||||||||||
| Initial cost | capitalized | Gross amount carried at close of period | |||||||||||||||||||||||||||
| Buildings and | subsequent | Land and | Buildings and | Accumulated | |||||||||||||||||||||||||
| Property | Encumbrance | Land | improvements | to acquisition | improvements | improvements | Total(1) | depreciation | |||||||||||||||||||||
| Other real estate assets | — | 3,079 | 12,315 | 12,183 | 3,909 | 23,668 | 27,577 | (15,356 | ) | ||||||||||||||||||||
| $ | — | $ | 3,079 | $ | 12,315 | $ | 12,183 | $ | 3,909 | $ | 23,668 | $ | 27,577 | $ | (15,356 | ) | |||||||||||||
| Total | $ | 990,667 | $ | 2,736,256 | $ | 9,395,624 | $ | 1,906,262 | $ | 2,773,805 | $ | 11,264,337 | $ | 14,038,142 | $ | (3,689,482 | ) |
(1) The aggregate cost for federal income tax purposes is approximately $11.0 billion (unaudited).
(2) A portion of land is leased pursuant to a ground lease expiring 2070.
(3) The land is leased pursuant to a ground lease expiring 2082.
(4) The land is leased pursuant to a ground lease expiring 2070.
F- 62
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2019
(Dollars in thousands)
(5) The land is leased pursuant to a ground lease expiring 2027.
(6) The land is leased pursuant to a ground lease expiring 2067.
(7) A portion of land is leased pursuant to a ground lease expiring in 2028.
(8) The land is leased pursuant to a ground lease expiring in 2028.
A summary of activity for rental properties and accumulated depreciation is as follows:
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||
| Rental properties: | Accumulated depreciation: | ||||||||||||||||||||||
| Balance at beginning of year | $ | 13,366,101 | $ | 13,362,073 | $ | 12,687,722 | Balance at beginning of year | $ | 3,209,548 | $ | 2,769,297 | $ | 2,311,546 | ||||||||||
| Acquisition, development, and improvement of real estate | 672,041 | 325,986 | 700,892 | Depreciation expense | 479,934 | 478,721 | 464,043 | ||||||||||||||||
| Disposition of real estate and other | — | (321,958 | ) | (28,367 | ) | Depreciation expense - Disposals and other | — | (38,470 | ) | (6,292 | ) | ||||||||||||
| Reclassification from other assets and into building and improvements, net | — | — | 1,826 | Balance at the end of year | $ | 3,689,482 | $ | 3,209,548 | $ | 2,769,297 | |||||||||||||
| Balance at the end of year | $ | 14,038,142 | $ | 13,366,101 | $ | 13,362,073 |
F- 63
EXHIBIT INDEX
| 32.2 | Certification of Angela L. Kleiman, Principal Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.3 | Certification of Michael J. Schall, Principal Executive Officer of General Partner, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.4 | Certification of Angela L. Kleiman, Principal Financial Officer of General Partner, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101 | The following financial statements from the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets of Essex Property Trust, Inc., (ii) Consolidated Statements of Income of Essex Property Trust, Inc., (iii) Consolidated Statements of Comprehensive Income of Essex Property Trust, Inc., (iv) Consolidated Statements of Equity of Essex Property Trust, Inc., (v) Consolidated Statements of Cash Flows of Essex Property Trust, Inc., (vi) Notes to Consolidated Financial Statements of Essex Property Trust, Inc., (vii) Consolidated Balance Sheets of Essex Portfolio, L.P., (viii) Consolidated Statements of Income of Essex Portfolio, L.P., (ix) Consolidated Statements of Comprehensive Income of Essex Portfolio, L.P., (x) Consolidated Statements of Capital of Essex Portfolio, L.P., (xi) Consolidated Statements of Cash Flows of Essex Portfolio, L.P. and (xii) Notes to Consolidated Financial Statements of Essex Portfolio, L.P., tagged as blocks of text and including detailed tags. |
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
- Management contract or compensatory plan or arrangement.
† The schedules and certain exhibits to this agreement, as set forth in the agreement, have not been filed herewith. The Company agrees to furnish supplementally a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, each Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Mateo, State of California, on February 20, 2020.
| ESSEX PROPERTY TRUST, INC. | |
| By: /s/ ANGELA L. KLEIMAN | |
| Angela L. Kleiman | |
| Executive Vice President, Chief Financial Officer (Authorized Officer, Principal Financial Officer) | |
| By: /s/ JOHN FARIAS | |
| John Farias | |
| Senior Vice President, Chief Accounting Officer | |
| ESSEX PORTFOLIO, L.P. By: Essex Property Trust, Inc., its general partner | |
| By: /s/ ANGELA L. KLEIMAN | |
| Angela L. Kleiman | |
| Executive Vice President, Chief Financial Officer (Authorized Officer, Principal Financial Officer) | |
| By: /s/ JOHN FARIAS | |
| John Farias | |
| Senior Vice President, Chief Accounting Officer |
S-1
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael J. Schall and Angela L. Kleiman, and each of them, his or her attorney-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorney-in-fact, or his or substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of each Registrant and in the capacities and on the dates indicated.
| Signature | Title | Date |
| /s/ GEORGE M. MARCUS George M. Marcus | Director and Chairman of the Board | February 20, 2020 |
| /s/ KEITH R. GUERICKE Keith R. Guericke | Director, and Vice Chairman of the Board | February 20, 2020 |
| /s/ IRVING F. LYONS, III Irving F. Lyons, III | Lead Director | February 20, 2020 |
| /s/ AMAL M. JOHNSON Amal M. Johnson | Director | February 20, 2020 |
| /s/ MARY KASARIS Mary Kasaris | Director | February 20, 2020 |
| /s/ THOMAS E. ROBINSON Thomas E. Robinson | Director | February 20, 2020 |
| /s/ MICHAEL J. SCHALL Michael J. Schall | Chief Executive Officer and President, and Director (Principal Executive Officer) | February 20, 2020 |
| /s/ BYRON A. SCORDELIS Byron A. Scordelis | Director | February 20, 2020 |
| /s/ JANICE L. SEARS Janice L. Sears | Director | February 20, 2020 |
S-2
Previous: Item 15. Exhibits and Financial Statement Schedules