Item 6. Selected Financial Data

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Item 6. Selected Financial Data

The following tables set forth summary financial and operating information for Essex and the Operating Partnership from January 1, 2015 through December 31, 2019.

Essex Property Trust, Inc. and Subsidiaries



	Years Ended December 31,
	2019		2018		2017		2016		2015
	($ in thousands, except per share amounts)
OPERATING DATA:
Rental and other property	$	1,450,628	$	1,390,870	$	1,354,325	$	1,285,723	$	1,185,498
Management and other fees from affiliates	9,527		9,183		9,574		8,278		8,909
Net income	464,448		413,599		458,043		438,410		248,239
Net income available to common stockholders	$	439,286	$	390,153	$	433,059	$	411,124	$	226,865
Per share data:
Basic:
Net income available to common stockholders	$	6.67	$	5.91	$	6.58	$	6.28	$	3.50
Weighted average common stock outstanding	65,840		66,041		65,829		65,472		64,872
Diluted:
Net income available to common stockholders	$	6.66	$	5.90	$	6.57	$	6.27	$	3.49
Weighted average common stock outstanding	65,939		66,085		65,898		65,588		65,062
Cash dividend per common share	$	7.80	$	7.44	$	7.00	$	6.40	$	5.76



	As of December 31,
	2019		2018		2017		2016		2015
	($ in thousands)
BALANCE SHEET DATA:
Investment in rental properties (before accumulated depreciation)	$	14,038,142	$	13,366,101	$	13,362,073	$	12,687,722	$	12,338,129
Net investment in rental properties	10,348,660		10,156,553		10,592,776		10,376,176		10,388,237
Real estate under development	546,075		454,629		355,735		190,505		242,326
Co-investments	1,335,339		1,300,140		1,155,984		1,161,275		1,036,047
Total assets	12,705,405		12,383,596		12,495,706		12,217,408		12,008,384
Total indebtedness, net	5,808,873		5,605,942		5,689,126		5,563,260		5,318,757
Redeemable noncontrolling interest	37,410		35,475		39,206		44,684		45,452
Cumulative redeemable preferred stock	—		—		—		—		73,750
Stockholders' equity	6,220,427		6,267,073		6,277,406		6,192,178		6,237,733



	As of and for the years ended December 31,
	2019			2018			2017			2016			2015
	($ in thousands, except per share amounts)
OTHER DATA:
Funds from operations ("FFO")(1) attributable to common stockholders and unitholders:
Net income available to common stockholders	$	439,286		$	390,153		$	433,059		$	411,124		$	226,865
Adjustments:
Depreciation and amortization	483,750			479,884			468,881			441,682			453,423
Gains not included in FFO attributable to common stockholders and unitholders	(79,468		)	(73,683		)	(159,901		)	(167,607		)	(81,347		)
Impairment loss	7,105			—			—			—			—

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Impairment loss from unconsolidated co-investments	11,484			—			—			—			—
Deferred tax expense on sale of real estate and land - taxable REIT subsidiary activity	—			—			—			4,410			—
Depreciation and amortization from unconsolidated co-investments	60,655			62,954			55,531			50,956			49,826
Noncontrolling interest related to Operating Partnership units	15,343			13,452			14,825			14,089			7,824
Insurance reimbursements	—			—			—			—			(1,751		)
Depreciation attributable to third party ownership and other	(1,805		)	(940		)	(286		)	(9		)	(781		)
Funds from operations attributable to common stockholders and unitholders	$	936,350		$	871,820		$	812,109		$	754,645		$	654,059
Non-core items:
Merger and integration expenses	—			—			—			—			3,798
Expensed acquisition and investment related costs	168			194			1,569			1,841			2,414
Deferred tax expense on unrealized gain on unconsolidated co-investment (2)	1,457			—			—			—			—
Gain on sale of marketable securities	(1,271		)	(737		)	(1,909		)	(5,719		)	(598		)
Unrealized (gains) losses on marketable securities	(5,710		)	5,159			—			—			—
Equity income from non-core co-investment (3)	(4,143		)	—			—			—			—
Interest rate hedge ineffectiveness (4)	181			148			(78		)	(250		)	—
(Gain) loss on early retirement of debt, net	(3,717		)	—			1,796			606			6,114
Gain on early retirement of debt from unconsolidated co-investment	—			(3,662		)	—			—			—
Co-investment promote income	(809		)	(20,541		)	—			—			(192		)
Income from early redemption of preferred equity investments	(3,562		)	(1,652		)	(356		)	—			(1,954		)
Accelerated interest income from maturity of investment in mortgage backed security	(7,032		)	—			—			—			—
Excess of redemption value of preferred stock over carrying value	—			—			—			2,541			—
General and administrative and other, net	1,181			8,745			(1,083		)	—			(651		)
Insurance reimbursements and legal settlements, net	(858		)	(561		)	(25		)	(4,470		)	(2,319		)
Core funds from operations ("Core FFO")(1) attributable to common stockholders and unitholders	$	912,235		$	858,913		$	812,023		$	749,194		$	660,671
Weighted average number of shares outstanding, diluted (FFO)(5)	68,199			68,322			68,194			67,890			67,310
Funds from operations attributable to common stockholders and unitholders per share - diluted	$	13.73		$	12.76		$	11.91		$	11.12		$	9.72
Core funds from operations attributable to common stockholders and unitholders per share - diluted	$	13.38		$	12.57		$	11.91		$	11.04		$	9.82


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

(1)

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

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

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


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

(a)

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


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

(b)

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

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

The table to which this footnote relates is a reconciliation of net income available to common stockholders to FFO and Core FFO for the years ended December 31, 2019, 2018, 2017, 2016, and 2015.


(2)	A deferred tax expense was recorded during the year ended December 31, 2019 related to the $4.4 million net unrealized gain on Real Estate Technology Ventures, L.P. co-investment discussed below.


(3)	Represents the Company's share of co-investment income from Real Estate Technology Ventures, L.P. Income for the year ended December 31, 2019 includes a net unrealized gain of $4.4 million.


(4)	Interest rate swaps are generally adjusted to fair value through other comprehensive income (loss). However, because certain of the Company's interest rate swaps do not have a 0% LIBOR floor, while related hedged debt in these cases is subject to a 0% LIBOR floor, the portion of the change in fair value of these interest rate swaps attributable to this mismatch, if any, is recorded as a non-cash interest rate hedge ineffectiveness through interest expense. On January 1, 2019, the Company adopted ASU No. 2017-12 "Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities," which resulted in a cumulative effect adjustment of approximately $181,000 from interest expense to accumulated other comprehensive income.

(4)

Interest rate swaps are generally adjusted to fair value through other comprehensive income (loss). However, because certain of the Company's interest rate swaps do not have a 0% LIBOR floor, while related hedged debt in these cases is subject to a 0% LIBOR floor, the portion of the change in fair value of these interest rate swaps attributable to this mismatch, if any, is recorded as a non-cash interest rate hedge ineffectiveness through interest expense. On January 1, 2019, the Company adopted ASU No. 2017-12 "Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities," which resulted in a cumulative effect adjustment of approximately $181,000 from interest expense to accumulated other comprehensive income.

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(5)	Assumes conversion of all outstanding OP Units into shares of the Company's common stock and 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.

Essex Portfolio, L.P. and Subsidiaries



	Years Ended December 31,
	2019		2018		2017		2016		2015
	($ in thousands, except per unit amounts)
OPERATING DATA:
Rental and other property	$	1,450,628	$	1,390,870	$	1,354,325	$	1,285,723	$	1,185,498
Management and other fees from affiliates	9,527		9,183		9,574		8,278		8,909
Net income	464,448		413,599		458,043		438,410		248,239
Net income available to common unitholders	$	454,629	$	403,605	$	447,884	$	425,213	$	234,689
Per unit data:
Basic:
Net income available to common unitholders	$	6.67	$	5.91	$	6.58	$	6.28	$	3.50
Weighted average common units outstanding	68,141		68,316		68,082		67,696		67,054
Diluted:
Net income available to common unitholders	$	6.66	$	5.90	$	6.57	$	6.27	$	3.49
Weighted average common units outstanding	68,240		68,360		68,151		67,812		67,244
Cash distributions per common unit	$	7.80	$	7.44	$	7.00	$	6.40	$	5.76



	As of December 31,
	2019		2018		2017		2016		2015
	($ in thousands)
BALANCE SHEET DATA:
Investment in rental properties (before accumulated depreciation)	$	14,038,142	$	13,366,101	$	13,362,073	$	12,687,722	$	12,338,129
Net investment in rental properties	10,348,660		10,156,553		10,592,776		10,376,176		10,388,237
Real estate under development	546,075		454,629		355,735		190,505		242,326
Co-investments	1,335,339		1,300,140		1,155,984		1,161,275		1,036,047
Total assets	12,705,405		12,383,596		12,495,706		12,217,408		12,008,384
Total indebtedness, net	5,808,873		5,605,942		5,689,126		5,563,260		5,318,757
Redeemable noncontrolling interest	37,410		35,475		39,206		44,684		45,452
Cumulative redeemable preferred interest	—		—		—		—		71,209
Partners' capital	6,281,242		6,329,613		6,330,415		6,244,364		6,287,381

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