Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and accompanying Notes thereto included elsewhere herein and with the Company’s 2020 annual report on Form 10-K for the year ended December 31, 2020. Capitalized terms not defined in this section have the meaning ascribed to them elsewhere in this Quarterly Report on Form 10-Q. The Company makes statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this Form 10-Q entitled "Forward-Looking Statements."

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 September 30, 2021, had an approximately 96.6% general partnership 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 September 30, 2021, the Company owned or had ownership interests in 246 operating apartment communities, comprising 60,799 apartment homes, excluding the Company’s ownership interest in preferred equity co-investments, loan investments, three operating commercial buildings, and a development pipeline comprised of two consolidated projects and one unconsolidated joint venture project.

The Company’s apartment communities are 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 September 30, 2021, the Company’s development pipeline was comprised of two consolidated projects under development, one unconsolidated joint venture project under development, and various predevelopment projects aggregating 571 apartment homes, with total incurred costs of $252.0 million, and estimated remaining project costs of approximately $84.0 million, $51.0 million of which represents the Company's share of estimated remaining costs, for total estimated project costs of $336.0 million.

The Company’s consolidated apartment communities are as follows:

As of September 30, 2021As of September 30, 2020
Apartment Homes%Apartment Homes%
Southern California22,19043%22,67543%
Northern California19,12337%19,31937%
Seattle Metro10,21820%10,21720%
Total51,531100%52,211100%

Co-investments, including Wesco I, Wesco III, Wesco IV, Wesco V, Wesco VI, BEXAEW, BEX II, BEX IV, and 500 Folsom communities, developments under construction, and preferred equity interest co-investment communities are not included in the table presented above for both periods. The community previously held in the BEX III co-investment, which was consolidated in the second quarter of 2021, is excluded from the September 30, 2020 table but included in the September 30, 2021 table.

Current Material Development – the COVID-19 Pandemic

The United States and other countries around the world are continuing to experience impacts related to COVID-19 pandemic and related variants which has created considerable instability, disruption, and uncertainty. Governmental authorities in impacted regions are continuing to take dramatic and unpredictable actions in an effort to slow COVID-19’s spread. Federal, state and local jurisdictions have implemented varying forms of requirements on sponsors and patrons of public gatherings and

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requiring businesses to make changes to their operations in a manner that may negatively affect profitability, result in job losses and related financial impacts that may affect future operations to an unknown extent. While the California eviction moratorium sunsetted during the quarter, other state and local eviction moratoriums and, laws that limit rent increases during times of emergency and prohibit the ability to collect unpaid rent during certain timeframes, continue to be in effect in various formats at various 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:

  • instituting a hybrid work model for corporate associates to work at the Company's corporate offices and remotely;

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

  • increasing cleaning practices for common areas and community amenities and opening common areas and community amenities 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 our 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 where required or applicable 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, 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 and related variants, the success of actions taken to contain or treat COVID-19 including but not limited to vaccination rates and the impacts of varying vaccine mandates, 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. The labor shortage due partly to various government mandates and vaccine requirements implemented during the COVID-19 pandemic and supply chain disruptions may negatively impact the Company's results of operations.

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 quarters ended September 30, 2021 and 2020) remained higher than the pre-pandemic period but improved from 2.7% for the three months ended September 30, 2020 to 1.4% for the three months ended September 30, 2021. The Company has executed some payment plans and will continue to work with residents to collect such cash delinquencies. As of September 30, 2021, the increase in delinquencies has not had a material adverse impact on the Company's liquidity position. The Company's average financial occupancy for the Company’s Same-Property portfolio increased from 96.0% for the three months ended September 30, 2020 to 96.4% for the three months ended September 30, 2021.

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 three months ended September 30, 2021 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.

Comparison of the Three Months Ended September 30, 2021 to the Three Months Ended September 30, 2020

The Company’s average financial occupancy for the Company’s Same-Property portfolio was 96.4% and 96.0% for the three months ended September 30, 2021 and 2020, respectively. 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.

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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 Same-Property portfolio for financial occupancy for the three months ended September 30, 2021 and 2020 is as follows:

Three Months Ended September 30,
20212020
Southern California97.1%95.9%
Northern California95.9%96.2%
Seattle Metro95.8%95.9%

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

Number of ApartmentThree Months Ended September 30,DollarPercentage
Property Revenues ($ in thousands)Homes20212020ChangeChange
Same-Property Revenues:
Southern California20,800$142,447$130,829$11,6188.9%
Northern California16,072122,426125,193(2,767)(2.2)%
Seattle Metro10,21860,28060,617(337)(0.6)%
Total Same-Property Revenues47,090325,153316,6398,5142.7%
Non-Same Property Revenues35,46751,825(16,358)(31.6)%
Total Property Revenues$360,620$368,464$(7,844)(2.1)%

Same-Property Revenues increased by $8.5 million or 2.7% to $325.2 million in the third quarter of 2021 from $316.6 million in the third quarter of 2020. The increase was primarily attributable to an increase in financial occupancy from 96.0% in the third quarter of 2020 to 96.4% in the third quarter of 2021, a decrease in concessions from $17.9 million in the third quarter of 2020 to $9.5 million in the third quarter of 2021, as well as a decrease in cash delinquencies from 2.7% for the three months ended September 30, 2020 to 1.4% for the three months ended September 30, 2021.

Non-Same Property Revenues decreased by $16.4 million or 31.6% to $35.5 million in the third quarter of 2021 from $51.8 million in the third quarter of 2020. The decrease was primarily due to the sale of 416 on Broadway in the fourth quarter of 2020 and the sales of Hidden Valley, Axis 2300, Park 20, and Devonshire Apartments in 2021.

Management and other fees from affiliates decreased by $0.1 million or 4.3% to $2.2 million in the third quarter of 2021 from $2.3 million in the third quarter of 2020. The decrease was primarily due to a decrease of the management fee rate for one of the joint ventures.

Property operating expenses, excluding real estate taxes increased by $1.5 million or 2.2% to $69.5 million for the third quarter of 2021 compared to $68.0 million for the third quarter of 2020, primarily due to increases of $1.6 million in utilities expense

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and $1.3 million in maintenance and repairs expenses, offset by a decrease of $1.4 million in administrative expenses. Same-Property operating expenses, excluding real estate taxes, increased by $2.7 million or 4.4% to $63.5 million in the third quarter of 2021 compared to $60.8 million in the third quarter of 2020, primarily due to increases of $1.5 million in utilities expense, $1.4 million in maintenance and repairs expenses, and $0.5 million in insurance and other expenses, offset by a decrease of $0.7 million in administrative expenses.

Real estate taxes increased $1.4 million or 3.2% to $45.8 million for the third quarter of 2021 compared to $44.4 million for the third quarter of 2020, primarily due to increases in assessed valuations and tax rates. Same-Property real estate taxes increased by $1.1 million or 2.9% to $39.2 million in the third quarter of 2021 compared to $38.1 million in the third quarter of 2020, primarily due to an increase in assessed valuations and tax rates.

Corporate-level property management expenses increased by $0.5 million or 5.8% to $9.1 million for the third quarter of 2021 compared to $8.6 million for the third quarter of 2020.

Gain on sale of real estate and land of $42.9 million in the third quarter of 2021 was attributable to the sale of Devonshire Apartments.

Depreciation and amortization expense increased by $0.4 million or 0.3% to $130.6 million for the third quarter of 2021 compared to $130.2 million for the third quarter of 2020, primarily due to the recently completed development properties, Mylo, Station Park Green (Phase II and Phase III) and Wallace on Sunset as well as the acquisition of Village at Toluca Lake during the second quarter of 2021. The increases were partially offset by decreases in depreciation expense resulting from property dispositions in 2021, and amortization expense resulting from certain lease intangibles becoming fully amortized during 2020.

Interest expense decreased by $5.4 million or 9.7% to $50.0 million for the third quarter of 2021 compared to $55.4 million for the third quarter of 2020, primarily due to a decrease in average outstanding debt primarily as a result of debt that was paid off or matured, regular principal amortization during and after the third quarter of 2020, and lower average interest rates, which resulted in a decrease in interest expense of $11.5 million for the third quarter of 2020. These decreases to interest expense were partially offset by the issuance of $300 million of senior unsecured notes due June 15, 2031 in May 2021, $450.0 million of senior unsecured notes due March 1, 2028 in February 2021, $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 $4.1 million interest expense for the third quarter of 2021. Additionally, there was a $2.0 million decrease in capitalized interest in the third quarter of 2021, due to a decrease in development activity as compared to the same period in 2020.

Total return swap income of $2.7 million in the third quarter of 2021 consists of monthly settlements related to the Company's total return swap contracts with an aggregate notional amount of $224.5 million.

Interest and other income increased by $5.5 million or 84.6% to $12.0 million for the third quarter of 2021 compared to $6.5 million for the third quarter of 2020, primarily due to increases of $3.8 million in unrealized gains on marketable securities and $1.6 million in marketable securities and other income.

Equity income from co-investments increased by $10.4 million or 69.3% to $25.4 million for the third quarter of 2021 compared to $15.0 million for the third quarter of 2020, primarily due to increases of $11.1 million in equity income from non-core co-investments and $3.3 million in income from preferred equity investments, offset by decreases of $2.2 million in gain on sale of co-investment communities and $1.7 million in equity income from co-investments.

Deferred tax expense on unrealized gain on unconsolidated co-investment of $3.0 million for the third quarter of 2021 resulted from a net unrealized gain of $10.7 million from unconsolidated co-investments.

Comparison of the Nine Months Ended September 30, 2021 to the Nine Months Ended September 30, 2020

The Company's average financial occupancy for its stabilized apartment communities or "Same-Property" (stabilized properties consolidated by the Company for the nine months ended September 30, 2021 and 2020) was 96.6% and 95.9% for the nine months ended September 30, 2021 and 2020, respectively.

The regional breakdown of the Company's Same-Property portfolio for financial occupancy for the nine months ended September 30, 2021 and 2020 is as follows:

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Nine Months Ended September 30,
20212020
Southern California97.0%95.7%
Northern California96.2%96.0%
Seattle Metro96.4%96.0%
Number of ApartmentNine Months Ended September 30,DollarPercentage
Property Revenues ($ in thousands)Homes20212020ChangeChange
Same-Property Revenues:
Southern California20,800$413,384$407,362$6,0221.5%
Northern California16,072366,344395,273(28,929)(7.3)%
Seattle Metro10,218178,180184,310(6,130)(3.3)%
Total Same-Property Revenues47,090957,908986,945(29,037)(2.9)%
Non-Same Property Revenues104,345139,418(35,073)(25.2)%
Total Property Revenues$1,062,253$1,126,363$(64,110)(5.7)%

Same-Property Revenues decreased by $29.0 million or 2.9% to $957.9 million in the nine months ended September 30, 2021 from $986.9 million in the nine months ended September 30, 2020. The decrease was primarily attributable to an additional $10.6 million of cash concessions compared to the prior year period and a decrease of 2.7% in average rental rates from $2,361 per apartment home in the nine months ended September 30, 2020 to $2,298 per apartment home in the nine months ended September 30, 2021.

Non-Same Property Revenues decreased by $35.1 million or 25.2% to $104.3 million in the nine months ended September 30, 2021 from $139.4 million in the nine months ended September 30, 2020. The decrease was primarily due to property dispositions in 2020 and the sale of Hidden Valley, Axis 2300, Park 20, and Devonshire Apartments in 2021.

Management and other fees from affiliates decreased by $0.6 million or 8.2% to $6.7 million in the nine months ended September 30, 2021 from $7.3 million in the nine months ended September 30, 2020. The decrease was primarily due to a decrease in asset management fees resulting from the consolidation of six communities as part of the Company's purchase of Canada Pension Plan Investment Board's ("CPPIB") 45.0% co-investment interests in the first quarter of 2020, and a decrease in revenues used to calculate management fees.

Property operating expenses, excluding real estate taxes increased by $0.6 million or 0.3% to $197.9 million for the nine months ended September 30, 2021 compared to $197.3 million for the nine months ended September 30, 2020, primarily due to an increase of $3.9 million in utilities expense offset by decreases of $2.0 million in administrative expenses and $1.3 million in maintenance and repairs expenses partially driven by sales in 2020 and the sales of Hidden Valley, Axis 2300, Park 20, and Devonshire Apartments in 2021. Same-Property operating expenses, excluding real estate taxes, increased by $3.5 million or 2.0% to $180.6 million in the nine months ended September 30, 2021 compared to $177.1 million in the nine months ended September 30, 2020, primarily due to increases of $3.9 million in utilities expenses and $1.8 million in insurance and other expenses, offset by decreases of $1.8 million in administrative expenses and $0.4 million in maintenance and repairs expenses.

Real estate taxes increased by $3.0 million or 2.3% to $135.4 million for the nine months ended September 30, 2021 compared to $132.4 million for the nine months ended September 30, 2020, primarily due to increases in assessed valuations and tax rates. Same-Property real estate taxes increased by $3.1 million or 2.8% to $116.2 million in the nine months ended September 30, 2021 compared to $113.1 million in the nine months ended September 30, 2020, primarily due to an increase in assessed valuations and tax rates.

Corporate-level property management expenses increased by $1.1 million or 4.2% to $27.1 million for the nine months ended September 30, 2021 compared to $26.0 million for the nine months ended September 30, 2020.

Depreciation and amortization expense decreased by $7.5 million or 1.9% to $387.9 million for the nine months ended September 30, 2021 compared to $395.4 million for the nine months ended September 30, 2020, primarily due to a decrease in amortization expense resulting from certain lease intangibles becoming fully amortized during 2020 and the sale of Hidden Valley, Axis 2300, and Park 20 in the first quarter of 2021.

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Gain on sale of real estate and land of $143.0 million in the nine months ended September 30, 2021 was attributable to the sale of Hidden Valley, Axis 2300, and Park 20 in the first quarter of 2021 and Devonshire Apartments in the third quarter of 2021.

Interest expense decreased by $12.4 million or 7.5% to $152.6 million for the nine months ended September 30, 2021 compared to $165.0 million for the nine months ended September 30, 2020, primarily due to a decrease in average outstanding debt primarily as a result of debt that was paid off or matured, regular principal amortization during and after the third quarter of 2020, and lower average interest rates, which resulted in a decrease in interest expense of $36.6 million from the third quarter of 2020. These decreases to interest expense were partially offset by the issuance of $300 million of senior unsecured notes due June 15, 2031 in May 2021, $450.0 million of senior unsecured notes due March 1, 2028 in February 2021, $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 $16.9 million interest expense for the nine months ended September 30, 2021. Additionally, there was a $7.3 million decrease in capitalized interest in the nine months ended September 30, 2021, due to a decrease in development activity as compared to the same period in 2020.

Total return swap income of $8.1 million in the nine months ended September 30, 2021 consists of monthly settlements related to the Company's total return swap contracts with an aggregate notional amount of $224.5 million.

Interest and other income increased by $36.1 million or 284.3% to $48.8 million in income for the nine months ended September 30, 2021 compared to $12.7 million for the nine months ended September 30, 2020, primarily due to increases of $21.6 million in unrealized gains on marketable securities, $6.9 million in marketable securities and other income, $4.7 million in income from early redemption of notes receivable, and $2.4 million in gain on sale of marketable securities.

Equity income from co-investments increased by $7.2 million or 13.5% to $60.7 million for the nine months ended September 30, 2021 compared to $53.5 million for the nine months ended September 30, 2020, primarily due to increases of $14.9 million in equity income from non-core co-investments and $8.8 million in income from preferred equity investments including income from early redemptions. The increases were partially offset by decreases of $7.8 million in equity income from co-investments, $6.5 million in co-investment promote income, and $2.2 million in gain on sale of co-investment communities.

Deferred tax expense on unrealized gain on unconsolidated co-investment of $5.4 million for the nine months ended September 30, 2021 resulted from a net unrealized gain on $18.8 million from unconsolidated co-investments.

Loss on early retirement of debt, net of $19.0 million for the nine months ended September 30, 2021 was primarily due to the early termination of the Company's five interest rate swap contracts in conjunction with the partial repayment of the Company's unsecured term debt and the early repayment of $300.0 million of senior unsecured notes.

Gain on remeasurement of co-investment of $2.3 million resulted from the Company's purchase of BEX III's 50.0% interest in The Village at Toluca Lake community in the second quarter of 2021. The gain on remeasurement of $234.7 million for the nine months ended September 30, 2020 resulted from the Company's purchase of CPPIB's 45.0% co-investment interests during the first quarter of 2020.

Liquidity and Capital Resources

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 and disruption in the U.S. and world economies. Governmental authorities in affected regions have taken extraordinary steps in an effort to slow down the spread of the virus and mitigate its impact on affected populations.

As of September 30, 2021, the Company had $49.9 million of unrestricted cash and cash equivalents and $183.1 million in marketable securities, all of which were equity securities or available for sale debt 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 the next twelve months. 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

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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 September 30, 2021, Moody’s Investor Service, and Standard and Poor's credit agencies rated the Company and the Operating Partnership, Baa1/Stable, and BBB+/Stable, respectively.

As of September 30, 2021, the Company had two unsecured lines of credit aggregating $1.24 billion. As of September 30, 2021, there was $35.0 million outstanding on the Company's $1.2 billion unsecured line of credit. The underlying interest rate is based on a tiered rate structure tied to the Company's credit ratings and sustainability-linked metrics and was LIBOR plus 0.775% as of September 30, 2021. This facility is scheduled to mature in September 2025, with three 6-month extensions, exercisable at the Company's option. As of September 30, 2021, there was $7.7 million outstanding on the Company's $35.0 million working capital unsecured line of credit. The underlying interest rate on the $35.0 million line is based on a tiered rate structure tied to the Company's credit ratings and sustainability-linked metrics and was LIBOR plus 0.775% as of September 30, 2021. This facility is scheduled to mature in February 2023.

In June 2021, the Operating Partnership issued $300.0 million of senior unsecured notes due on June 15, 2031 with a coupon rate of 2.550% per annum (the "2031 Notes"), which are payable on June 15 and December 15 of each year, beginning on December 15, 2021. The 2031 Notes were offered to investors at a price of 99.367% of par value. The 2031 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. The Company used the net proceeds of this offering to repay upcoming debt maturities, including to fund the redemption of $300.0 million aggregate principal amount (plus the make-whole amount and accrued and unpaid interest) of its outstanding 3.375% senior unsecured notes due January 2023, and for other general corporate and working capital purposes.

In March 2021, the Operating Partnership issued $450.0 million of senior unsecured notes due on March 1, 2028 with a coupon rate of 1.700% per annum (the "2028 Notes"), which are payable on March 1 and September 1 of each year, beginning on September 1, 2021. The 2028 Notes were offered to investors at a price of 99.423% of par value. The 2028 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. The Company used the net proceeds of this offering to repay upcoming debt maturities, including all or a portion of certain unsecured term loans, and for general corporate and working capital purposes.

In September 2021, 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 “2021 ATM Program”). In connection with the 2021 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 2021 ATM Program under forward sales 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 2021 ATM Program replaces the Company’s prior equity distribution agreement entered into in September 2018 (the “2018 ATM Program”), which was terminated upon the establishment of the 2021 ATM Program. During the nine months ended September 30, 2021, the Company did not sell any shares of its common stock through the 2021 ATM Program or through the 2018 ATM Program. As of September 30, 2021, there are no outstanding forward purchase agreements, and $900.0 million of shares remains available to be sold under the 2021 ATM Program.

In December 2015, the Company’s Board of Directors authorized a stock repurchase plan to allow the Company to acquire shares in an aggregate of up to $250.0 million. In February 2019, the Board of Directors approved the replenishment of the stock repurchase plan such that, as of such date, the Company had $250.0 million of purchase authority remaining under the stock repurchase plan. In each of May and December 2020, the Board of Directors approved the replenishment of the stock repurchase plan such that, as of such date, the Company had $250.0 million of purchase authority remaining under the replenished plan. During the nine months ended September 30, 2021, the Company repurchased and retired 40,000 shares of its common stock totaling $9.2 million, including commissions, at an average price of $229.30 per share. As of September 30, 2021, the Company had $214.5 million of purchase authority remaining under the stock repurchase plan.

Essex 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 line of credit.

Development and Predevelopment Pipeline

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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 September 30, 2021, the Company’s development pipeline was comprised of two consolidated projects under development, one unconsolidated joint venture project under development and various consolidated predevelopment projects, aggregating 571 apartment homes, with total incurred costs of $252.0 million, and estimated remaining project costs of approximately $84.0 million, $51.0 million of which represents the Company's share of estimated remaining costs, for total estimated project costs of $336.0 million.

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.

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.

Alternative Capital Sources

The Company utilizes co-investments as an alternative source of capital for acquisitions of both operating and development communities. As of September 30, 2021, the Company had an interest in 264 apartment homes in communities actively under development with joint ventures for total estimated costs of $0.1 billion. Total estimated remaining costs are approximately $68.0 million, of which the Company estimates its remaining investment in these development joint ventures will be approximately $34.7 million. In addition, the Company had an interest in 9,468 apartment homes of operating communities with joint ventures for a total book value of $470.8 million as of September 30, 2021.

Off-Balance Sheet Arrangements

The Company has various unconsolidated interests in certain joint ventures. The Company does not believe that these unconsolidated investments have a materially different impact on its liquidity, cash flows, capital resources, credit or market risk than its consolidated operations. See Note 4, Co-investments, in the Notes to Condensed Consolidated Financial Statements, for carrying values and combined summarized financial information of these unconsolidated investments.

Critical Accounting Policies and Estimates

The preparation of condensed 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’s critical accounting policies and estimates have not changed materially from the information reported in Note 2, Summary of Critical and Significant Accounting Policies, in the Company’s annual report on Form 10-K for the year ended December 31, 2020.

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Forward-Looking Statements

Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this quarterly report on Form 10-Q which are not historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), 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 and related variants 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, 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 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 and related variants, 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 referred to in this quarterly report on Form 10-Q, in the Company's annual report on Form 10-K for the year ended December 31, 2020, and those risk factors and special considerations set forth in the Company's other filings with the Securities and Exchange Commission (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 the reports that the Company has filed with the SEC may be further amplified by the global impact of the COVID-19 pandemic and related variants. All forward-looking statements are made as of the date hereof, the Company assumes no obligation to

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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.

Funds from Operations Attributable to Common Stockholders and Unitholders

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

FFO and Core FFO are not meant to represent a comprehensive system of financial reporting and do not present, nor do they intend to present, a complete picture of the Company's financial condition and operating performance. The Company believes that net income computed under U.S. GAAP is the primary measure of performance and that FFO and Core FFO are only meaningful when they are used in conjunction with net income.

The Company considers FFO and Core FFO to be useful financial performance measurements of an equity REIT because, together with net income and cash flows, FFO and Core FFO provide investors with additional bases to evaluate operating performance and ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures and to pay dividends. By excluding gains or losses related to sales of depreciated operating properties and excluding real estate depreciation (which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates), FFO can help investors compare the operating performance of a real estate company between periods or as compared to different companies. By further adjusting for items that are not considered part of the Company’s core business operations, Core FFO allows investors to compare the core operating performance of the Company to its performance in prior reporting periods and to the operating performance of other real estate companies without the effect of items that by their nature are not comparable from period to period and tend to obscure the Company’s actual operating results. The Company believes that its condensed 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.

(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 following table is a reconciliation of net income available to common stockholders to FFO and Core FFO for the three and nine months ended September 30, 2021 and 2020 (in thousands, except share and per share amounts):

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Essex Property Trust, Inc.

Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Net income available to common stockholders$118,390$73,661$351,680$473,125
Adjustments:
Depreciation and amortization130,564130,202387,887395,370
Gains not included in FFO attributable to common stockholders and unitholders(42,897)(24,879)(145,253)(276,170)
Depreciation and amortization from unconsolidated co-investments15,04412,88344,59238,191
Noncontrolling interest related to Operating Partnership units4,1682,59312,40316,543
Depreciation attributable to third party ownership and other(145)(134)(412)(407)
Funds from operations attributable to common stockholders and unitholders$225,124$194,326$650,897$646,652
Funds from operations attributable to common stockholders and unitholders per share - diluted$3.34$2.88$9.67$9.53
Non-core items:
Expensed acquisition and investment related costs1082164104
Deferred tax expense on unrealized gain on unconsolidated co-investment (1)3,041—5,3911,636
Gain on sale of marketable securities—(91)(2,499)(124)
Unrealized gains on marketable securities(7,091)(3,288)(23,772)(2,215)
Provision for credit losses(3)3(110)100
Equity income from non-core co-investments (2)(10,868)213(19,266)(4,373)
Loss on early retirement of debt, net—19,11418,98223,820
Loss (gain) on early retirement of debt from unconsolidated co-investment15—18(38)
Co-investment promote income———(6,455)
Income from early redemption of preferred equity investments and notes receivable——(8,260)(210)
General and administrative and other, net2522,5107655,642
Insurance reimbursements, legal settlements, and other, net(4)132(190)69
Core Funds from Operations attributable to common stockholders and unitholders$210,574$212,921$622,120$664,608
Core Funds from Operations attributable to common stockholders and unitholders per share-diluted$3.12$3.15$9.24$9.80
Weighted average number shares outstanding, diluted (3)67,391,33367,495,28667,324,08767,837,336

(1) Represents deferred tax expense related to net unrealized gains on technology co-investments.

(2) Represents the Company's share of co-investment income from technology co-investments.

(3) Assumes conversion of all outstanding Operating Partnership limited partnership units ("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.

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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 condensed consolidated statements of income and comprehensive 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):

Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Earnings from operations$137,971$128,937$428,733$379,510
Adjustments:
Corporate-level property management expenses9,0688,61927,12026,024
Depreciation and amortization130,564130,202387,887395,370
Management and other fees from affiliates(2,237)(2,347)(6,707)(7,312)
General and administrative12,71213,31034,74642,244
Expensed acquisition and investment related costs1082164104
Gain on sale of real estate and land(42,897)(22,654)(142,993)(39,251)
NOI245,289256,069728,950796,689
Less: Non-Same Property NOI(22,807)(38,308)(67,844)(99,957)
Same-Property NOI$222,482$217,761$661,106$696,732

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