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

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

OVERVIEW

Essex is a self-administered and self-managed REIT that acquires, develops, redevelops, and manages apartment communities in selected residential areas located on the West Coast of the United States. Essex owns all of its interests in its real estate investments, directly or indirectly, through the Operating Partnership. Essex is the sole general partner of the Operating Partnership and, as of December 31, 2020, had an approximately 96.6% general partner interest in the Operating Partnership.

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

As of December 31, 2020, the Company owned or had ownership interests in 246 operating apartment communities, comprising 60,272 apartment homes, excluding the Company's ownership in preferred equity co-investments, loan investments, one operating commercial building and a development pipeline comprised of three consolidated projects and three unconsolidated joint venture projects.

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

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

Northern California (the San Francisco Bay Area)

Seattle Metro (Seattle metropolitan area)

As of December 31, 2020, the Company’s development pipeline was comprised of three consolidated projects under development, three unconsolidated joint venture projects under development, and various predevelopment projects aggregating 1,853 apartment homes, with total incurred costs of $948.0 million, and estimated remaining project costs of approximately $174.0 million, $118.0 million of which represents the Company's estimated remaining costs, for total estimated project costs of $1.1 billion.

As of December 31, 2020, the Company also had an ownership interest in one operating commercial building (totaling approximately 107,000 square feet).

By region, the Company's operating results for 2020 and 2019 and projection for 2021 new housing supply (defined as new multifamily apartment homes and single family homes, excluding developments with fewer than 50 apartment homes as well as student, senior and 100% affordable housing), projection for 2021 job growth, and 2021 estimated Same-Property revenue decline are as follows:

Southern California Region: As of December 31, 2020, this region represented 43% of the Company’s consolidated operating apartment homes. Revenues for "2020 Same-Properties" (as defined below), or "Same-Property revenues," decreased 4.4% in 2020 as compared to 2019. In 2021, the Company projects new residential supply of 26,500 apartment homes and single family homes, which represents 0.4% of the total housing stock. The Company projects an increase of 231,000 jobs or 3.1% in the Southern California region.

Northern California Region: As of December 31, 2020, this region represented 37% of the Company’s consolidated operating apartment homes. Same-Property revenues decreased 4.9% in 2020 as compared to 2019. In 2021, the Company projects new residential supply of 16,800 apartment homes and single family homes, which represents 0.7% of the total housing stock. The Company projects an increase of 110,500 jobs or 3.4% in the Northern California region.

Seattle Metro Region**:** As of December 31, 2020, this region represented 20% of the Company’s consolidated operating apartment homes. Same-Property revenues decreased 0.6% in 2020 as compared to 2019. In 2021, the Company projects new residential supply of 13,800 apartment homes and single family homes, which represents 1.1% of the total housing stock. The Company projects an increase of 55,000 jobs or 3.3% in the Seattle Metro region.

Table of Contents

In total, the Company projects a decrease in 2021 Same-Property revenues of between 1.5% to 3.5%. Same-Property operating expenses are projected to increase in 2021 by 2.0% to 3.0%.

The Company’s consolidated operating communities are as follows:

			As of												As of
			December 31, 2020												December 31, 2019
			Apartment Homes						%						Apartment Homes						%
Southern California			22,560						43		%				22,674						45		%
Northern California			19,319						37		%				17,556						35		%
Seattle Metro			10,217						20		%				10,343						20		%
Total			52,096						100		%				50,573						100		%

Co-investments, including Wesco I, Wesco III, Wesco IV, Wesco V, BEXAEW, BEX II, BEX III, and BEX IV communities, developments under construction, and preferred equity interest co-investment communities are not included in the table presented above for both periods.

Current Material Development – the COVID-19 Pandemic

The United States and other countries around the world are continuing to experience an unprecedented health pandemic related to COVID-19, which has created considerable instability, disruption, and uncertainty. Governmental authorities in impacted regions are taking dramatic and unpredictable actions in an effort to slow COVID-19’s spread. Federal, state and local jurisdictions have issued and revised varying forms of "Shelter-in-Place" orders, halted or restricted public gatherings and restricted business to only those that are considered "essential" or requiring businesses to make changes to their operations in a manner that negatively affects profitability, resulting in extraordinary job losses and related financial impacts that will affect future operations to an unknown extent. Moreover, eviction moratoriums and, laws that limit rent increases during times of emergency and prohibit the ability to collect unpaid rent during certain timeframes, have been enacted in various formats at various levels of government, including regions in which Essex's communities are located, impacting Essex properties. The Company is working to comply with the stated intent of local, county, state and federal laws. In that regard, the Company has implemented a wide range of practices to protect and support its employees and residents. Such measures include:

• closing the Company's corporate offices and instituting “work from home” measures for corporate associates;

• closing leasing offices to non-Essex personnel, reducing on-site staff so that hygiene and “social distancing” standards can be effectively managed and applied, and requiring face coverings to be worn;

• transitioning most public interactions with leasing staff to on-line and telephonic communications;

• increasing cleaning practices for common areas and community amenities and temporarily closing common areas and community amenities or opening with limited hours, limited capacity or by reservation only, depending in part on jurisdictional requirements; and

• delaying the response to maintenance orders in certain circumstances in order to promote the protection of the Company's employees and residents.

Due to the COVID-19 pandemic, some of the Company's residents, their health, their employment, and, thus, their ability to pay rent, have been and may continue to be impacted. To support residents, the Company has implemented the following steps, including, but not limited to:

• assembling a Resident Response Team to effectively and efficiently respond to resident needs and concerns with respect to the pandemic;

• structuring payment plans for residents who are unable to pay their rent as a result of the outbreak and waiving late fees for those residents; and

• establishing the Essex Cares fund for the purpose of supporting the Company’s residents and communities that are experiencing financial hardships caused by the COVID-19 pandemic.

The impact of the COVID-19 pandemic on the U.S. and world economies generally, and on the Company's results in particular, has been, and may continue to be significant. The long-term impact will largely depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, when a vaccine can be safely and widely distributed and whether employees and employers will continue to promote remote work if and when the pandemic concludes. This includes new information which may emerge concerning the severity of COVID-19, the success of actions taken to contain or treat

Table of Contents

COVID-19, future laws that may be enacted, the impact on job growth and the broader economy, and reactions by consumers, companies, governmental entities and capital markets.

Primarily as a result of the impact of the COVID-19 pandemic, the Company's cash delinquencies as a percentage of scheduled rental income for the Company’s stabilized apartment communities or "Same-Property" (stabilized properties consolidated by the Company for the years ended December 31, 2020 and 2019) increased from 0.3% for 2019 to 2.5% for 2020. The Company has executed some payment plans and will continue to work with residents to execute payment plans related to such cash delinquencies. As part of this process, the Company assessed the collectability reserve attributable to those deferred payments and the anticipated execution of payment plans in the future, which partially mitigated the delinquencies resulting in actual delinquencies as a percentage of scheduled rent for the Company's Same-Property portfolio of 2.1% for the year ended December 31, 2020. As of December 31, 2020, the increase in delinquencies has not had a material adverse impact to the Company's liquidity position.

The COVID-19 pandemic has not negatively impacted the Company's ability to access traditional funding sources on the same or reasonably similar terms as were available in recent periods prior to the pandemic, as demonstrated by the Company's financing activity during the year ended December 31, 2020 discussed in the “Liquidity and Capital Resources" section below. The Company is not at material risk of not meeting the covenants in its credit agreements and is able to timely service its debt and other obligations.

RESULTS OF OPERATIONS

Comparison of Year Ended December 31, 2020 to the Year Ended December 31, 2019

The Company’s average financial occupancy for the Company’s stabilized apartment communities or "2020 Same-Property" (stabilized properties consolidated by the Company for the years ended December 31, 2020 and 2019) decreased 60 basis points to 96.0% in 2020 from 96.6% in 2019. Financial occupancy is defined as the percentage resulting from dividing actual rental income by total scheduled rental income. Actual rental income represents contractual rental income pursuant to leases without considering delinquency and concessions. Total scheduled rental income represents the value of all apartment homes, with occupied apartment homes valued at contractual rental rates pursuant to leases and vacant apartment homes valued at estimated market rents. The Company believes that financial occupancy is a meaningful measure of occupancy because it considers the value of each vacant apartment home at its estimated market rate.

Market rates are determined using the recently signed effective rates on new leases at the property and are used as the starting point in the determination of the market rates of vacant apartment homes. The Company may increase or decrease these rates based on a variety of factors, including overall supply and demand for housing, concentration of new apartment deliveries within the same submarket which can cause periodic disruption due to greater rental concessions to increase leasing velocity, and rental affordability. Financial occupancy may not completely reflect short-term trends in physical occupancy and financial occupancy rates, and the Company's calculation of financial occupancy may not be comparable to financial occupancy disclosed by other REITs.

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

The regional breakdown of the Company’s 2020 Same-Property portfolio for financial occupancy for the years ended December 31, 2020 and 2019 is as follows:

			Years ended December 31,
			2020						2019
Southern California			96.0		%				96.6		%
Northern California			96.1		%				96.7		%
Seattle Metro			96.0		%				96.6		%

Table of Contents

The following table provides a breakdown of revenue amounts, including the revenues attributable to 2020 Same-Properties.

						Number of Apartment						Years Ended December 31,												Dollar						Percentage
Property Revenues ($ in thousands)						Homes						2020						2019						Change						Change
2020 Same-Properties:
Southern California						20,800						$	540,771					$	565,594					$	(24,823)					(4.4)		%
Northern California						15,638						504,300						530,114						(25,814)						(4.9)		%
Seattle Metro						10,112						241,615						242,982						(1,367)						(0.6)		%
Total 2020 Same-Property Revenues						46,550						1,286,686						1,338,690						(52,004)						(3.9)		%
2020 Non-Same Property Revenues												199,464						111,938						87,526						78.2		%
Total Property Revenues												$	1,486,150					$	1,450,628					$	35,522					2.4		%

2020 Same-Property Revenues decreased by $52.0 million or 3.9% to $1.3 billion for 2020 compared to $1.3 billion in 2019. The decrease was primarily attributable to an additional $31.8 million of cash concessions and $23.5 million in delinquencies compared to the prior year and a decrease of 0.6% in financial occupancy from 96.6% in 2019 to 96.0% in 2020.

2020 Non-Same Property Revenues increased by $87.5 million or 78.2% to $199.5 million in 2020 compared to $111.9 million in 2019. The increase was primarily due to revenues generated from the six communities that were consolidated as part of the Company's purchase of CPPIB's 45.0% co-investment interests in the first quarter of 2020, offset by the sale of One South Market, Delano, and 416 on Broadway during 2020.

Management and other fees from affiliates increased by $0.1 million or 1.1% to $9.6 million in 2020 from $9.5 million in 2019.

Property operating expenses, excluding real estate taxes increased by $22.0 million or 9.1% to $263.4 million in 2020 compared to $241.4 million in 2019, primarily due to an increase of $10.2 million in maintenance and repairs expenses, an increase of $7.2 million in utilities expenses, and an increase of $4.7 million in administrative expenses. 2020 Same-Property operating expenses, excluding real estate taxes, increased by $7.8 million or 3.5% to $233.1 million in 2020 compared to $225.3 million in 2019, primarily due to increases of $5.5 million in maintenance and repairs expenses driven by COVID-19 related expenses and $3.2 million in utilities expenses, offset by a decrease of $1.4 million in administrative expenses.

Real estate taxes increased by $21.8 million or 14.0% to $177.0 million in 2020 compared to $155.2 million in 2019, primarily due to the additions of six communities that were consolidated in the first quarter of 2020 as part of the Company's purchase of CPPIB's 45.0% co-investment interests. 2020 Same-Property real estate taxes increased by $6.7 million or 4.7% to $148.6 million in 2020 compared to $141.9 million in 2019 primarily due to an increase in property valuations and tax rates in Seattle Metro region.

Corporate-level property management expenses increased by $0.5 million or 1.5% to $34.6 million in 2020 compared to $34.1 million in 2019, primarily due to an increase in corporate-level property management and staffing costs supporting the communities.

Depreciation and amortization expense increased by $41.7 million or 8.6% to $525.5 million in 2020 compared to $483.8 million in 2019, primarily due to the additions of six communities that were consolidated in the first quarter of 2020 as part of the Company's purchase of CPPIB's 45.0% co-investment interests offset by the sale of One South Market, Delano, and 416 on Broadway during 2020.

Impairment loss of $1.8 million in 2020 was related to one of the Company's consolidated properties as a result of a change in the Company's intent to hold the property for its remaining useful life.

Gain on sale of real estate and land of $65.0 million in 2020 was primarily attributable to the portfolio sale of One South Market and Museum Park in the second quarter of 2020, the sale of Delano in the third quarter of 2020, and the sale of 416 on Broadway in the fourth quarter of 2020. The Company's $3.2 million loss on sale of real estate and land in 2019 was attributable to the sale of land in San Mateo, CA that had been held for future development.

Table of Contents

Interest expense increased by $3.3 million or 1.5% to $220.6 million in 2020 compared to $217.3 million in 2019*,* primarily due to an increase in average outstanding debt primarily as a result of the issuance of $500.0 million of senior unsecured notes due March 1, 2029 in February and March 2019, $550.0 million of senior unsecured notes due January 15, 2030 in August and October 2019, $650 million of senior unsecured notes due March 15, 2032 in February and June 2020, and $600 million of senior unsecured notes due January 15, 2031 and September 1, 2050 in August 2020, which resulted in an increase of $37.6 million interest expense for 2020 as compared to 2019. Additionally, there was a $9.6 million decrease in capitalized interest in 2020, due to a decrease in development activity as compared to the same period in 2019. These increases to interest expense were partially offset by debt that was paid off, matured, or regular principal amortization during and after 2019, and lower average interest rates, which resulted in a decrease in interest expense of $43.9 million for 2020.

Total return swap income of $10.7 million in 2020 consists of monthly settlements related to the Company's four total return swap contracts with an aggregate notional amount of $254.8 million.

Interest and other income decreased $5.3 million or 11.4% to $41.0 million in 2020 compared to $46.3 million in 2019, primarily due to a decrease of $16.8 million in marketable securities and other income, offset by an increase in unrealized gains on marketable securities of $6.8 million and an increase in interest income of $4.7 million from the maturity of a mortgage backed security investment recognized in 2020 which resulted in the reversal of the estimated credit loss on the investment.

Equity income from co-investments decreased by $45.6 million or 40.7% to $66.5 million in 2020 compared to $112.1 million in 2019, primarily due to a decrease of $48.9 million in gains from the sale of co-investment communities, and a decrease of $16.5 million in equity income from co-investments of which, $9.1 million was as a result of the Company's purchase of CPPIB's 45.0% co-investment interests. These decreases were offset by a decrease of $11.5 million in impairment loss from unconsolidated co-investment, an increase of $5.6 million in promote income, and an increase of $2.0 million in income from preferred equity investments including income from early redemptions.

Deferred tax expense on unrealized gain on unconsolidated co-investment of $1.5 million in 2020 resulted from a net unrealized gain of $5.3 million from an unconsolidated co-investment.

Loss on early retirement of debt, net of $22.9 million in 2020 was primarily due to early repayment of a $297.7 million secured mortgage note payable in the first and second quarters of 2020, and the early repayment of $600.0 million of senior unsecured notes during the third and fourth quarters of 2020.

Gain on remeasurement of co-investment of $234.7 million in 2020 resulted from the Company's purchase of CPPIB's 45.0% co-investment interests. Gain on remeasurement of $31.5 million in 2019 resulted from the purchase of the Company's joint venture partner's 45.0% membership interest in the One South Market co-investment in March 2019.

Comparison of Year Ended December 31, 2019 to the Year Ended December 31, 2018

For the comparison of the years ended December 31, 2019 and December 31, 2018, refer to Part II, Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations" on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 20, 2020 under the subheading "Comparison of Year Ended December 31, 2019 to the Year Ended December 31, 2018."

Liquidity and Capital Resources

The United States and other countries around the world are experiencing an unprecedented health pandemic related to COVID-19, which has created considerable instability and disruption in the U.S. and world economies. Governmental authorities in affected regions are taking extraordinary steps in an effort to slow down the spread of the virus and mitigate its impact on affected populations.

The following table sets forth the Company’s cash flows for 2020, 2019 and 2018 ($ in thousands):

						For the year ended December 31,
						2020						2019						2018
Cash flow provided by (used in):
Operating activities						$	803,108					$	919,079					$	826,554
Investing activities						$	(416,900)					$	(527,691)					$	(59,893)
Financing activities						$	(383,261)					$	(461,689)					$	(676,392)

Table of Contents

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

As of December 31, 2020, Essex owned a 96.6% general partner interest and the limited partners owned the remaining 3.4% interest in the Operating Partnership.

The liquidity of Essex is dependent on the Operating Partnership’s ability to make sufficient distributions to Essex. The primary cash requirement of Essex is its payment of dividends to its stockholders. Essex also guarantees some of the Operating Partnership’s debt, as discussed further in Notes 7 and 8 to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K. If the Operating Partnership fails to fulfill certain of its debt requirements, which trigger Essex’s guarantee obligations, then Essex will be required to fulfill its cash payment commitments under such guarantees. However, Essex’s only significant asset is its investment in the Operating Partnership.

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

At December 31, 2020, the Company had $73.6 million of unrestricted cash and cash equivalents and $147.8 million in marketable securities. The Company believes that cash flows generated by its operations, existing cash and cash equivalents, marketable securities balances and availability under existing lines of credit are sufficient to meet all of its anticipated cash needs during 2021. Additionally, the capital markets continue to be available and the Company is able to generate cash from the disposition of real estate assets to finance additional cash flow needs, including continued development and select acquisitions. In the event that conditions become further exacerbated due to the COVID-19 pandemic and related economic disruptions, the Company may further utilize other resources such as its cash reserves, lines of credit, or decreased investment in redevelopment activities to supplement operating cash flows. The Company is carefully monitoring and managing its cash position in light of ongoing conditions and levels of operations. The timing, source and amounts of cash flows provided by financing activities and used in investing activities are sensitive to changes in interest rates and other fluctuations in the capital markets environment, which can affect the Company’s plans for acquisitions, dispositions, development and redevelopment activities.

As of December 31, 2020, the Company had $200.0 million of private placement unsecured bonds outstanding at an average interest rate of 4.4% with maturity dates ranging from April 2021 through August 2021.

As of December 31, 2020, the Company had $4.9 billion of fixed rate public bonds outstanding at an average interest rate of 3.4% with maturity dates ranging from 2023 to 2050.

As of December 31, 2020, the Company had $550.0 million outstanding on its unsecured term loan. $350.0 million of the unsecured term loan bears a variable interest rate of LIBOR plus 0.95% and matures in February 2022. $200.0 million of the unsecured term loan bears a variable interest rate of LIBOR plus 1.20% and matures in April 2021 with two 12-month extension options, exercisable at the Company's option. The Company has five interest rate swap contracts, with an aggregate notional balance of $175.0 million, which effectively converts the interest rate on $175.0 million of the unsecured term loan to a fixed rate of 2.3%.

As of December 31, 2020, the Company’s mortgage notes payable totaled $0.6 billion, net of unamortized premiums and debt issuance costs, which consisted of $0.4 billion in fixed rate debt at an average interest rate of 3.5% and maturity dates ranging from 2022 to 2028 and $224.2 million of tax-exempt variable rate demand notes with a weighted average interest rate of 1.2%. The tax-exempt variable rate demand notes have maturity dates ranging from 2027 to 2046. $254.8 million is subject to total return swaps.

As of December 31, 2020, 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, 2020, there was no

Table of Contents

amount outstanding on the $1.2 billion unsecured line of credit. 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, 2020. There was no amount outstanding on the Company's $35.0 million working capital unsecured line of credit as of December 31, 2020. 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%.

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, 2020 and 2019.

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

Derivative Activity

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.

The Company has entered into interest rate swap contracts with an aggregate notional amount of $175.0 million that effectively fixed the interest rate on the $175.0 million of the $550.0 million unsecured term loan at 2.3%. These derivatives qualify for hedge accounting.

The Company has four total return swap contracts, with an aggregate notional amount of $254.8 million, that effectively converts $225.1 million of mortgage notes payable and $29.7 million of mortgage notes payable related to real estate held for sale that is included in liabilities associated with real assets held for sale on the consolidated balance sheet to a floating interest rate based on the Securities Industry and Financial Markets Association Municipal Swap Index ("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 all four of the total return swaps, with $254.8 million of the outstanding debt at par. These derivatives do not qualify for hedge accounting.

As of December 31, 2020 and 2019, the aggregate carrying value of the interest rate swap contracts was a liability of $2.4 million and an asset of $0.8 million, respectively. As of December 31, 2020 and 2019, the swap contracts were presented in the consolidated balance sheets as an asset of zero and $1.0 million, respectively, and were included in prepaid expenses and other assets on the consolidated balance sheets, and a liability of $2.4 million and $0.2 million, respectively, and were included in other liabilities on the consolidated balance sheets. The aggregate carrying and fair value of the total return swaps was zero at both December 31, 2020 and 2019.

Hedge ineffectiveness related to cash flow hedges, which is reported in current year income as interest expense, net was a zero, a loss of $0.2 million, and a loss of $0.1 million, for the years ended December 31, 2020, 2019, and 2018, respectively.

Issuance of Common Stock

In September 2018, the Company filed a new shelf registration statement with the SEC, allowing the Company to sell an undetermined number or amount of certain equity and debt securities of the Company, as defined in the prospectus contained in the shelf registration statement.

Also in September 2018, the Company entered into an 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"). 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

Table of Contents

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, 2020, the Company did not issue any shares of its common stock through the 2018 ATM Program. 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 previous equity distribution agreement. As of December 31, 2020, $826.6 million of shares remains available to be sold under the 2018 ATM Program.

Capital Expenditures

Non-revenue generating capital expenditures are improvements and upgrades that extend the useful life of the property. For the year ended December 31, 2020, non-revenue generating capital expenditures totaled approximately $1,371 per apartment home. These expenditures do not include expenditures for deferred maintenance on acquisition properties, expenditures for property renovations and improvements which are expected to generate additional revenue or cost savings, and do not include expenditures incurred due to changes in government regulations that the Company would not have incurred otherwise, costs related to the COVID-19 pandemic, retail, furniture and fixtures, or expenditures for which the Company expects to be reimbursed. The Company expects that cash from operations and/or its lines of credit will fund such expenditures.

Development and Predevelopment Pipeline

The Company defines development projects as new communities that are being constructed, or are newly constructed and are in a phase of lease-up and have not yet reached stabilized operations. As of December 31, 2020, the Company's development pipeline was comprised of three consolidated projects under development, three unconsolidated joint venture projects under development and various consolidated predevelopment projects, aggregating 1,853 apartment homes, with total incurred costs of $948.0 million, and estimated remaining project costs of approximately $174.0 million, $118.0 million of which represents the Company's estimated remaining costs, for total estimated project costs of $1.1 billion.

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

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

Redevelopment Pipeline

The Company defines redevelopment communities as existing properties owned or recently acquired, which have been targeted for additional investment by the Company with the expectation of increased financial returns through property improvement. During redevelopment, apartment homes may not be available for rent and, as a result, the related apartment community may have less than stabilized operations. As of December 31, 2020, the Company had ownership interests in three major redevelopment communities aggregating 1,112 apartment homes with estimated redevelopment costs of $109.1 million, of which approximately $4.5 million remains to be expended.

Alternative Capital Sources

The Company utilizes co-investments as an alternative source of capital for acquisitions of both operating and development communities. As of December 31, 2020, the Company had an interest in 1,070 apartment homes in communities actively under development with joint ventures for total estimated costs of $665.0 million. Total estimated remaining costs total approximately $114.0 million, of which the Company estimates that its remaining investment in these development joint ventures will be approximately $57.9 million. In addition, the Company had an interest in 8,652 apartment homes in operating communities with joint ventures for a total book value of $0.4 billion.

Contractual Obligations and Commercial Commitments

Table of Contents

The following table summarizes our obligations at December 31, 2020 ($ in thousands):

						For the Fiscal Years Ending
						2021						2022 and 2023						2024 and 2025						Thereafter						Total
Mortgage notes payable						$	3,501					$	46,133					$	136,163					$	455,629					$	641,426
Unsecured debt						200,000						1,150,000						900,000						3,400,000						5,650,000
Lines of credit						—						—						—						—						—
Interest on indebtedness (1)						192,004						344,212						273,729						826,309						1,636,254
Ground leases						3,506						7,012						7,012						121,485						139,015
Operating leases						3,457						6,937						5,988						18,932						35,314
						$	402,468					$	1,554,294					$	1,322,892					$	4,822,355					$	8,102,009

(1)Interest on indebtedness for variable debt was calculated using interest rates as of December 31, 2020.

We have a commitment, which is not reflected in the table above, to make additional capital contributions to two limited partnerships in which we hold an equity interest. The capital contributions may be called by the general partner at any time until September 2022 and April 2025, after giving appropriate notice. As of December 31, 2020, we had committed to make additional capital contributions totaling up to $6.3 million and $14.9 million if and when called by the general partner of the two limited partnerships until September 2022 and April 2025, respectively.

Real Estate Commitments

The following table summarizes the Company's real estate commitment at December 31, 2020 ($ in thousands):

						Number of Properties						Investment						Remaining Commitment
Joint ventures:
Preferred equity investments						5						$	179,387					$	139,225
Real estate under development (1)						3						550,863						14,000
Consolidated:
Real estate under development (2)						3						396,571						60,000
												$	1,126,821					$	213,225

(1)Estimated project cost for development of the Company's 500 Folsom project is net of a projected value for low-income housing tax credit proceeds and the value of the tax exempt bond structure. Excludes approximately $44.0 million of the Company's share of estimated project costs for Scripps Mesa Apartments which have been fully funded.

(2)Estimated project cost for development of the Company's Wallace on Sunset project is net of cost incurred on the adjacent theatre at the property.

Variable Interest Entities

In accordance with accounting standards for consolidation of variable interest entities ("VIEs"), the Company consolidates the Operating Partnership, 17 DownREIT entities (comprising nine communities) and five co-investments as of December 31, 2020. As of December 31, 2019, the Company consolidated the Operating Partnership, 17 DownREIT entities (comprising nine communities), and six co-investments. The Company consolidates these entities because it is deemed the primary beneficiary. Essex 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 $898.5 million and $326.8 million, respectively, as of December 31, 2020, and $1.0 billion and $364.3 million, respectively, as of December 31, 2019. Noncontrolling interests in these entities were $120.8 million and $122.5 million as of December 31, 2020 and 2019, respectively. The Company's financial risk in each VIE is limited to its equity investment in the VIE. As of December 31, 2020, 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.

Table of Contents

Critical Accounting Policies and 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. The Company defines critical accounting policies as those accounting policies that require the Company's management to exercise their most difficult, subjective and complex judgments. The Company’s critical accounting policies and estimates relate principally to the following key areas: (i) accounting for the acquisition of investments in real estate (specifically, the allocation between land and buildings); and (ii) evaluation of events and changes in circumstances indicating whether the Company’s rental properties may be impaired. The Company bases its estimates on historical experience, current market conditions, and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from those estimates made by management.

The Company accounts for its acquisitions of investments in real estate by assessing each acquisition to determine if it meets the definition of a business or if it qualifies as an asset acquisition. We expect that acquisitions of individual operating communities will generally be viewed as asset acquisitions, and result in the capitalization of acquisition costs, and the allocation of purchase price to the assets acquired and liabilities assumed based on the relative fair value of the respective assets and liabilities.

In making estimates of 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 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 property’s expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the property, then the Company will recognize an impairment loss equal to the excess of the carrying amount over the fair value of the property.

When the Company determines that a property is held for sale, it discontinues the periodic depreciation of that property. The criteria for determining when a property is held for sale requires judgment and has potential financial statement impact as depreciation would cease and an impairment loss could occur upon determination of held for sale status. Assets held for sale are reported at the lower of the carrying amount or estimated fair value less costs to sell.

The Company bases its accounting estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may vary from those estimates and those estimates could be different under different assumptions or conditions.

Funds from Operations

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

FFO and Core FFO are not meant to represent a comprehensive system of financial reporting and do not present, nor do they intend to present, a complete picture of the Company's financial condition and operating performance. The Company believes that net income computed under U.S. GAAP is the primary measure of performance and that FFO and Core FFO are only meaningful when they are used in conjunction with net income. The Company considers FFO and Core FFO to be useful financial performance measurements of an equity REIT because, together with net income and cash flows, FFO and Core FFO provide investors with additional bases to evaluate operating performance and ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures and to pay dividends. By excluding gains or losses related to sales of

Table of Contents

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 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.

(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 below is a reconciliation of net income available to common stockholders to FFO and Core FFO for the years ended December 31, 2020, 2019, and 2018.

Table of Contents

						As of and for the years ended December 31,
						2020						2019						2018
						($ in thousands, except per share amounts)
OTHER DATA:
Funds from operations attributable to common stockholders and unitholders:
Net income available to common stockholders						$	568,870					$	439,286					$	390,153
Adjustments:
Depreciation and amortization						525,497						483,750						479,884
Gains not included in FFO attributable to common stockholders and unitholders						(301,886)						(79,468)						(73,683)
Impairment loss						1,825						7,105						—
Impairment loss from unconsolidated co-investments						—						11,484						—
Depreciation and amortization from unconsolidated co-investments						51,594						60,655						62,954
Noncontrolling interest related to Operating Partnership units						19,912						15,343						13,452
Depreciation attributable to third party ownership and other						(539)						(1,805)						(940)
Funds from operations attributable to common stockholders and unitholders						$	865,273					$	936,350					$	871,820
Non-core items:
Expensed acquisition and investment related costs						1,591						168						194
Deferred tax expense on unrealized gain on unconsolidated co-investment (1)						1,531						1,457						—
Gain on sale of marketable securities						(2,131)						(1,271)						(737)
Unrealized (gains) losses on marketable securities						(12,515)						(5,710)						5,159
Provision for credit losses						687						—						—
Equity income from non-core co-investment (2)						(5,289)						(4,143)						—
Interest rate hedge ineffectiveness (3)						—						181						148
Loss (gain) on early retirement of debt, net						22,883						(3,717)						—
Gain on early retirement of debt from unconsolidated co-investment						(38)						—						(3,662)
Co-investment promote income						(6,455)						(809)						(20,541)
Income from early redemption of preferred equity investments						(210)						(3,562)						(1,652)
Accelerated interest income from maturity of investment in mortgage backed security						(11,753)						(7,032)						—
General and administrative and other, net						14,958						1,181						8,745
Insurance reimbursements, legal settlements, and other, net						(81)						(858)						(561)
Core funds from operations attributable to common stockholders and unitholders						$	868,451					$	912,235					$	858,913
Weighted average number of shares outstanding, diluted (FFO)(4)						67,726						68,199						68,322
Funds from operations attributable to common stockholders and unitholders per share - diluted						$	12.78					$	13.73					$	12.76
Core funds from operations attributable to common stockholders and unitholders per share - diluted						$	12.82					$	13.38					$	12.57

(1)Represents deferred tax (income) expense recorded during the year related to net unrealized gains on the Real Estate Technology Ventures, L.P. co-investment.

(2)Represents the Company's share of co-investment income from Real Estate Technology Ventures, L.P.

(3)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. As a result of the adoption of this standard, the Company

Table of Contents

recognizes qualifying hedge ineffectiveness through accumulated other comprehensive income as opposed to current earnings.

(4)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.

Net Operating Income

Net operating income ("NOI") and Same-Property NOI are considered by management to be important supplemental performance measures to earnings from operations included in the Company’s consolidated statements of income. The presentation of Same-Property NOI assists with the presentation of the Company’s operations prior to the allocation of depreciation and any corporate-level or financing-related costs. NOI reflects the operating performance of a community and allows for an easy comparison of the operating performance of individual communities or groups of communities. In addition, because prospective buyers of real estate have different financing and overhead structures, with varying marginal impacts to overhead by acquiring real estate, NOI is considered by many in the real estate industry to be a useful measure for determining the value of a real estate asset or group of assets. The Company defines Same-Property NOI as Same-Property revenues less Same-Property operating expenses, including property taxes. Please see the reconciliation of earnings from operations to NOI and Same-Property NOI, which in the table below is the NOI for stabilized properties consolidated by the Company for the periods presented ($ in thousands):

			2020						2019						2018
Earnings from operations			$	491,441					$	481,112					$	511,989
Adjustments:
Corporate-level property management expenses			34,573						34,067						32,055
Depreciation and amortization			525,497						483,750						479,884
Management and other fees from affiliates			(9,598)						(9,527)						(9,183)
General and administrative			65,388						54,262						53,451
Expensed acquisition and investment related costs			1,591						168						194
Impairment loss			1,825						7,105						—
(Gain) Loss on sale of real estate and land			(64,967)						3,164						(61,861)
NOI			1,045,750						1,054,101						1,006,529
Less: Non Same-Property NOI			(140,782)						(82,644)						(75,688)
Same-Property NOI			$	904,968					$	971,457					$	930,841

Forward-Looking Statements

Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this Annual Report on Form 10-K which are not historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act, including statements regarding the Company's expectations, estimates, assumptions, hopes, intentions, beliefs and strategies regarding the future. Words such as "expects," "assumes," "anticipates," "may," "will," "intends," "plans," "projects," "believes," "seeks," "future," "estimates," and variations of such words and similar expressions are intended to identify such forward-looking statements. Such forward-looking statements include, among other things, statements regarding the Company's expectations related to the continued impact of the COVID-19 pandemic on the Company's business, financial condition and results of operations and the impact of any additional measures taken to mitigate the impact of the pandemic, the Company's intent, beliefs or expectations with respect to the timing of completion of current development and redevelopment projects and the stabilization of such projects, the timing of lease-up and occupancy of its apartment communities, the anticipated operating performance of its apartment communities, the total projected costs of development and redevelopment projects, co-investment activities, qualification as a REIT under the Internal Revenue Code of 1986, as amended, 2021 Same-Property revenue generally and in specific regions, 2021 Same-Property operating expenses, the real estate markets in the geographies in which the Company's properties are located and in the United States in general, the adequacy of future cash flows to meet anticipated cash needs, its financing activities and the use of proceeds from such activities, the availability of debt and equity financing, general economic conditions including the potential impacts from such economic conditions, including as a result of the COVID-19 pandemic and governmental measures intended to prevent its spread, trends affecting the Company's financial condition or results of operations, changes to U.S. tax laws and regulations in general or specifically related to REITs or real estate, changes to laws

Table of Contents

and regulations in jurisdictions in which communities the Company owns are located, and other information that is not historical information.

While the Company's management believes the assumptions underlying its forward-looking statements are reasonable, such forward-looking statements involve known and unknown risks, uncertainties and other factors, many of which are beyond the Company’s control, which could cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The Company cannot assure the future results or outcome of the matters described in these statements; rather, these statements merely reflect the Company’s current expectations of the approximate outcomes of the matters discussed. Factors that might cause the Company’s actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements include, but are not limited to, the following: the continued impact of the COVID-19 pandemic, which remains inherently uncertain as to duration and severity, and any additional governmental measures taken to limit its spread, and other potential future outbreaks of infectious diseases or other health concerns could continue to adversely affect the Company's business and its tenants, and cause a significant downturn in general economic conditions, the real estate industry, and the markets in which the Company's communities are located; the Company may fail to achieve its business objectives; the actual completion of development and redevelopment projects may be subject to delays; the stabilization dates of such projects may be delayed; the Company may abandon or defer development or redevelopment projects for a number of reasons, including changes in local market conditions which make development less desirable, increases in costs of development, increases in the cost of capital or lack of capital availability, resulting in losses; the total projected costs of current development and redevelopment projects may exceed expectations; such development and redevelopment projects may not be completed; development and redevelopment projects and acquisitions may fail to meet expectations; estimates of future income from an acquired property may prove to be inaccurate; occupancy rates and rental demand may be adversely affected by competition and local economic and market conditions; there may be increased interest rates and operating costs; the Company may be unsuccessful in the management of its relationships with its co-investment partners; future cash flows may be inadequate to meet operating requirements and/or may be insufficient to provide for dividend payments in accordance with REIT requirements; changes in laws or regulations; the terms of any refinancing may not be as favorable as the terms of existing indebtedness; unexpected difficulties in leasing of development projects; volatility in financial and securities markets; the Company’s failure to successfully operate acquired properties; unforeseen consequences from cyber-intrusion; the Company’s inability to maintain our investment grade credit rating with the rating agencies; government approvals, actions and initiatives, including the need for compliance with environmental requirements; and those further risks, special considerations, and other factors discussed in Item 1A, Risk Factors, of this Form 10-K, and those risk factors and special considerations set forth in the Company’s other filings with the SEC which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Additionally, the risks, uncertainties and other factors set forth above or otherwise referred to in this Annual Report on Form 10-K and the other reports that the Company has filed with the SEC may be further amplified by the global impact of the COVID-19 pandemic. All forward-looking statements are made as of the date hereof, the Company assumes no obligation to update or supplement this information for any reason, and therefore, they may not represent the Company's estimates and assumptions after the date of this report.