Notes to Condensed Consolidated Financial Statements
September 30, 2016
and
2015
(Unaudited)
(1) Organization and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements present the accounts of Essex Property Trust, Inc. (“Essex” or the “Company”), which include the accounts of the Company and Essex Portfolio, L.P. and subsidiaries (the “Operating Partnership,” which holds the operating assets of the Company), prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q. In the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented have been included and are normal and recurring in nature. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended
December 31, 2015
.
All significant intercompany accounts and transactions have been eliminated in the unaudited condensed consolidated financial statements. Certain reclassifications have been made to conform to the current year’s presentation.
The unaudited condensed consolidated financial statements for the three and
nine
months ended
September 30, 2016
and
2015
include the accounts of the Company and the Operating Partnership. Essex is the sole general partner in the Operating Partnership, with a
96.7%
general partnership interest as of
September 30, 2016
. Total Operating Partnership limited partnership units outstanding were
2,219,268
and
2,214,545
as of
September 30, 2016
and
December 31, 2015
, respectively, and the redemption value of the units, based on the closing price of the Company’s common stock totaled
$494.2 million
and
$530.2 million
, as of
September 30, 2016
and
December 31, 2015
, respectively.
As of
September 30, 2016
, the Company owned or had ownership interests in
244
stabilized apartment communities, aggregating
59,290
apartment homes, excluding the Company’s ownership in preferred interest co-investments, (collectively, the “Communities”, and individually, a “Community”),
three
operating commercial buildings and
six
active developments (collectively, the “Portfolio”). The Communities are located in Southern California (primarily Los Angeles, Orange, San Diego, and Ventura counties), Northern California (the San Francisco Bay Area) and the Seattle metropolitan areas.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, "Revenue from Contracts with Customers." The new standard provides a single comprehensive revenue recognition model for contracts with customers (excluding certain contracts, such as lease contracts) to improve comparability within industries. The new standard requires an entity to recognize revenue to reflect the transfer of goods or services to customers at an amount the entity expects to be paid in exchange for those goods and services and provide enhanced disclosures, all to provide more comprehensive guidance for transactions such as service revenue and contract modifications. In August 2015, the FASB deferred the effective date of the new standard by one year, and it is now effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted but not before the original effective date. The new standard may be applied using either a full retrospective or a modified approach upon adoption. The Company has not yet selected a transition method and is currently evaluating the impact of adopting the new standard on its consolidated results of operations and financial position.
In January 2016, the FASB issued ASU No. 2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities", which requires changes to the classification and measurement of investments in certain equity securities and to the presentation of certain fair value changes for financial liabilities measured at fair value. The new standard will be effective for the Company beginning on January 1, 2018 and early adoption is permitted. The Company does not expect that this will have a material effect on its consolidated results of operations or financial position.
In February 2016, the FASB issued ASU No. 2016-02 "Leases", which requires an entity that is a lessee to classify leases as either finance or operating and to recognize a lease liability and a right-of-use asset for all leases that have a duration of greater than 12 months. Leases of 12 months or less will be accounted for similar to existing guidance for operating leases today. For lessors, accounting for leases under the new standard will be substantially the same as existing guidance for sales-type leases, direct financing leases, and operating leases, but eliminates current real estate specific provisions and changes the treatment of initial direct costs. The new standard will be effective for the Company beginning on January 1, 2019 and early adoption is permitted, including adoption in an interim period. The new standard must be applied using a modified retrospective approach.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2016 and 2015
(Unaudited)
The Company is currently evaluating the impact of this amendment on its consolidated results of operations and financial position.
In March 2016, the FASB issued ASU No. 2016-07 "Simplifying the Transition to the Equity Method of Accounting", which eliminates the requirement to retroactively adjust an investment, results of operations, and retained earnings when the investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence. The new standard will be effective for the Company beginning on January 1, 2017 and early adoption is permitted. The Company does not expect the impact of this to be material on its consolidated results of operations or financial position.
In March 2016, the FASB issued ASU No. 2016-09 "Improvement to Employee Share-Based Payment Accounting", which amends certain aspects of how an entity accounts for share-based payments to employees. This amendment requires entities to recognize the income tax effects of share-based awards in the income statement when the awards vest or are settled, rather than recording such effects in additional paid-in capital. Entities will also be permitted to elect to account for forfeitures of share-based payments as they occur or continue with the current practice which requires estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change. The new standard will be effective January 1, 2017, with early adoption permitted. The change in recognition of income tax effects of share-based awards will be applied prospectively. If the Company elects to account for forfeitures of share-based payments as they occur, such change will be applied using a modified retrospective approach, with a cumulative-effect adjustment to distributions in excess of accumulated earnings. The Company is currently evaluating the impact of this amendment on its consolidated results of operations and financial position.
In June 2016, the FASB issued ASU No. 2016-13 "Measure of Credit Losses on Financial Instruments", which amends the current approach to estimate credit losses on certain financial assets, including trade and other receivables, available-for-sale securities, and other financial instruments. Generally, this amendment requires entities to establish a valuation allowance for the expected lifetime losses of these certain financial assets. Subsequent changes in the valuation allowance are recorded in current earnings and reversal of previous losses are permitted. Currently, U.S. GAAP requires companies to write down credit losses only when losses are probable and loss reversals are not permitted. The new standard will be effective for the Company beginning on January 1, 2020 and early adoption is permitted. The Company is currently evaluating the impact of this amendment on its consolidated results of operations and financial position.
In August 2016, the FASB issued ASU No. 2016-15 "Classification of Certain Cash Receipts and Cash Payments", which requires entities to adhere to a uniform classification and presentation of certain cash receipts and cash payments in the statement of cash flows. The amendments in this update provide guidance on eight specific cash flow issues. The new standard will be effective for the Company beginning on January 1, 2018 and early adoption is permitted, The Company does not expect the impact of the other items identified in the ASU to be material on its consolidated results of operations and financial position.
Marketable Securities
The Company reports its available for sale securities at fair value, based on quoted market prices (Level 1 for the common stock and investment funds and Level 2 for the unsecured bonds, as defined by the FASB standard for fair value measurements), and any unrealized gain or loss is recorded as other comprehensive income (loss). Realized gains and losses, interest income, and amortization of purchase discounts are included in interest and other income on the condensed consolidated statements of income and comprehensive income.
As of
September 30, 2016
and
December 31, 2015
, marketable securities consisted primarily of investment-grade unsecured bonds, common stock, investments in mortgage backed securities, investment funds that invest in U.S. treasury or agency securities. As of
September 30, 2016
and
December 31, 2015
, the Company classified its investments in mortgage backed securities, which mature through November 2019 and September 2020, as held to maturity, and accordingly, these securities are stated at their amortized cost. As of
September 30, 2016
and
December 31, 2015
, marketable securities consist of the following (in thousands):
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2016 and 2015
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gain
|
|
Carrying Value
|
Available for sale:
|
|
|
|
|
|
Investment-grade unsecured bonds
|
$
|
19,604
|
|
|
$
|
416
|
|
|
$
|
20,020
|
|
Investment funds - U.S. treasuries
|
7,598
|
|
|
2
|
|
|
7,600
|
|
Common stock and stock funds
|
29,901
|
|
|
5,232
|
|
|
35,133
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
Mortgage backed securities
|
90,950
|
|
|
—
|
|
|
90,950
|
|
Total - Marketable securities
|
$
|
148,053
|
|
|
$
|
5,650
|
|
|
$
|
153,703
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gain (Loss)
|
|
Carrying Value
|
Available for sale:
|
|
|
|
|
|
|
|
|
Investment-grade unsecured bonds
|
$
|
11,618
|
|
|
$
|
68
|
|
|
$
|
11,686
|
|
Investment funds - U.S. treasuries
|
3,675
|
|
|
(9
|
)
|
|
3,666
|
|
Common stock and stock funds
|
34,655
|
|
|
7,091
|
|
|
41,746
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
Mortgage backed securities
|
80,387
|
|
|
—
|
|
|
80,387
|
|
Total - Marketable securities
|
$
|
130,335
|
|
|
$
|
7,150
|
|
|
$
|
137,485
|
|
The Company uses the specific identification method to determine the cost basis of a security sold and to reclassify amounts from accumulated other comprehensive income for securities sold.
For the three months ended
September 30, 2016
and
2015
, the proceeds from sales of available for sale securities totaled
$3.5 million
and
none
, respectively, which resulted in
$1.0 million
realized gains and
no
realized gains or losses, respectively. For the
nine
months ended
September 30, 2016
and
2015
, the proceeds from sales of available for sale securities totaled
$14.7 million
and
$2.0 million
, respectively, which resulted in
$2.9 million
realized gains and
no
realized gains or losses, respectively.
For the three and nine months ended
September 30, 2015
, the proceeds from sales of other investments totaled
$5.6 million
, which resulted in
$0.6 million
realized gains. The Company did not own any other investments during the nine months ended
September 30, 2016
.
Variable Interest Entities
In February 2015, the FASB issued ASU No. 2015-02 "Consolidation: Amendments to the Consolidation Analysis," which provides new consolidation guidance and makes changes to both the variable interest model and the voting model. Among other changes, the new standard specifically eliminates the presumption in the current voting model that a general partner controls a limited partnership or similar entity unless that presumption can be overcome. The Company adopted ASU No. 2015-02 on January 1, 2016. Based on the Company’s evaluation of the new standard, it determined that no change was required to its accounting for variable interest entities (“VIEs”). However, under the guidance of ASU No. 2015-02,
9
previously consolidated co-investments now meet the definition of a VIE and requires additional disclosure about these VIEs which the Company continues to consolidate as they were determined to be the primary beneficiary.
The Company continues to be the primary beneficiary and consolidates the Operating Partnership and
19
DownREIT limited partnerships (comprising
eleven
communities). Commencing on January 1, 2016,
9
other consolidated co-investments were determined to be VIEs and the Company continues to consolidate those co-investments as the Company was determined to be
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2016 and 2015
(Unaudited)
the primary beneficiary. The consolidated total assets and liabilities related to the
9
consolidated co-investments and
19
DownREIT limited partnerships, net of intercompany eliminations, were approximately
$954.6 million
and
$267.3 million
, respectively, as of
September 30, 2016
and
$893.1 million
and
$231.8 million
, respectively, as of
December 31, 2015
. Noncontrolling interests in these entities was
$52.3 million
and
$54.6 million
as of
September 30, 2016
and
December 31, 2015
, respectively. The Company's financial risk in each VIE is limited to its equity investment in the VIE. As of
September 30, 2016
and
December 31, 2015
, 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.
Equity-based Compensation
The cost of share and unit based compensation awards is measured at the grant date based on the estimated fair value of the awards. The estimated fair value of stock options and restricted stock granted by the Company are being amortized over the vesting period. The estimated grant date fair values of the long term incentive plan units (discussed in Note 13, “Equity Based Compensation Plans,” in the Company’s Form 10-K for the year ended
December 31, 2015
) are being amortized over the expected service periods.
Fair Value of Financial Instruments
Management believes that the carrying amounts of the outstanding balances under its lines of credit, and notes and other receivables approximate fair value as of
September 30, 2016
and
December 31, 2015
, because interest rates, yields, and other terms for these instruments are consistent with yields and other terms currently available for similar instruments. Management has estimated that the fair value of the Company’s
$5.0 billion
of fixed rate debt, including unsecured debt, at
September 30, 2016
is approximately
$5.3 billion
and the Company’s variable rate debt at
September 30, 2016
and December 31, 2015 approximates its fair value based on the terms of existing mortgage notes payable, unsecured debt, and variable rate demand notes compared to those available in the marketplace. Management believes that the carrying amounts of cash and cash equivalents, restricted cash, accounts payable and accrued liabilities, construction payables, other liabilities, and dividends payable approximate fair value as of
September 30, 2016
and December 31, 2015 due to the short-term maturity of these instruments. Marketable securities, except mortgage backed securities that are held to maturity, and derivatives are carried at fair value as of
September 30, 2016
and December 31, 2015.
At
September 30, 2016
, the Company’s investments in mortgage backed securities had a carrying value of
$91.0 million
and the Company estimated the fair value to be approximately
$105.9 million
. At
December 31, 2015
, the Company’s investments in mortgage backed securities had a carrying value of
$80.4 million
and the Company estimated the fair value to be approximately
$110.2 million
. The Company determines the fair value of the mortgage backed securities based on unobservable inputs (level 3 of the fair value hierarchy) considering the assumptions that market participants would make in valuing these securities. Assumptions such as estimated default rates and discount rates are used to determine expected discounted cash flows to estimate the fair value.
Capitalization of Costs
The Company’s capitalized internal costs related to development and redevelopment projects were comprised primarily of employee compensation and totaled
$3.8 million
and
$2.9 million
during the three months ended
September 30, 2016
and
2015
, respectively, and
$10.6 million
and
$8.3 million
during the
nine
months ended
September 30, 2016
and
2015
, respectively. The Company capitalizes leasing commissions associated with the lease-up of development communities and amortizes the costs over the life of the leases. The amounts capitalized for leasing commissions are immaterial for all periods presented.
Co-investments
The Company owns investments in joint ventures (“co-investments”) in which it has significant influence, but its ownership interest does not meet the criteria for consolidation in accordance with U.S. GAAP. Therefore, the Company accounts for co-investments using the equity method of accounting. The equity method employs the accrual basis for recognizing the investor’s share of investee income or losses. In addition, distributions received from the investee are treated as a reduction in the investment account, not as income. The significant accounting policies of the Company’s co-investment entities are consistent with those of the Company in all material respects.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2016 and 2015
(Unaudited)
Upon the acquisition of a controlling interest of a co-investment, the co-investment entity is consolidated and a gain or loss is recognized upon the remeasurement of co-investments in the condensed consolidated statement of income equal to the amount by which the fair value of the co-investment interest the Company previously owned exceeds its carrying value. A majority of the co-investments, excluding the preferred equity investments, compensate the Company for its asset management services and some of these investments may provide promote income if certain financial return benchmarks are achieved. Asset management fees are recognized when earned, and promote fees are recognized when the earnings events have occurred and the amount is determinable and collectible. Any promote fees are reflected in equity income from co-investments.
Changes in Accumulated Other Comprehensive Loss, Net by Component
Essex Property Trust, Inc.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair
value and amortization
of swap settlements
|
|
Unrealized
gains on
available for sale
securities
|
|
Total
|
Balance at December 31, 2015
|
$
|
(48,366
|
)
|
|
$
|
6,355
|
|
|
$
|
(42,011
|
)
|
Other comprehensive (loss) income before reclassification
|
(4,618
|
)
|
|
1,330
|
|
|
(3,288
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
7,985
|
|
|
(2,781
|
)
|
|
5,204
|
|
Other comprehensive income (loss)
|
3,367
|
|
|
(1,451
|
)
|
|
1,916
|
|
Balance at September 30, 2016
|
$
|
(44,999
|
)
|
|
$
|
4,904
|
|
|
$
|
(40,095
|
)
|
Changes in Accumulated Other Comprehensive Loss, by Component
Essex Portfolio, L.P.
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair
value and amortization
of swap settlements
|
|
Unrealized
gains on
available for sale
securities
|
|
Total
|
Balance at December 31, 2015
|
$
|
(46,087
|
)
|
|
$
|
6,489
|
|
|
$
|
(39,598
|
)
|
Other comprehensive (loss) income before reclassification
|
(4,775
|
)
|
|
1,376
|
|
|
(3,399
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
8,256
|
|
|
(2,876
|
)
|
|
5,380
|
|
Other comprehensive income (loss)
|
3,481
|
|
|
(1,500
|
)
|
|
1,981
|
|
Balance at September 30, 2016
|
$
|
(42,606
|
)
|
|
$
|
4,989
|
|
|
$
|
(37,617
|
)
|
Amounts reclassified from accumulated other comprehensive loss in connection with derivatives are recorded in interest expense on the condensed consolidated statement of income and comprehensive income. Realized gains and losses on available for sale securities are included in interest and other income on the condensed consolidated statement of income and comprehensive income.
Accounting Estimates
The preparation of condensed consolidated financial statements, in accordance with GAAP, requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to acquiring, developing, and assessing the carrying values of its real estate portfolio, its investments in and advances to joint ventures and affiliates, its notes receivables, and its qualification as a Real Estate Investment Trust (“REIT”). The Company bases its estimates on historical experience, current market conditions, and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may vary from those estimates and those estimates could be different under different assumptions or conditions.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2016 and 2015
(Unaudited)
(2) Significant Transactions During the
Third
Quarter of
2016
and Subsequent Events
Significant Transactions
Preferred Equity Investments
In August 2016, the Company made a commitment to fund a
$11.6 million
preferred equity investment in a limited liability company that owns The Line, a
228
apartment home community development project located in Santa Ana, CA. This investment is scheduled to mature in March 2020 and will accrue interest based on a
12.0%
compounded preferred return. As of September 30, 2016, the Company has funded
$1.9 million
of the
$11.6 million
commitment.
Notes Receivable
In September 2016, the Company made a commitment to loan
$26.3 million
to a limited liability company that owns Oceanaire, a
216
apartment home community development project located in Long Beach, CA. The loan investment is scheduled to mature in September 2020 and will accrue interest based on a
10.75%
compounded return. As of September 30, 2016, the Company has funded
$4.4 million
of the
$26.3 million
commitment.
(3) Co-investments
The Company has joint ventures and preferred equity investments in co-investments which are accounted for under the equity method. The co-investments own, operate, and develop apartment communities. The carrying values of the Company's co-investments as of
September 30, 2016
and
December 31, 2015
are as follows (in thousands, except in parenthetical):
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership Percentage
|
|
September 30, 2016
|
|
December 31, 2015
|
Membership interest/Partnership interest in:
|
|
|
|
|
|
CPPIB
|
55
|
%
|
|
$
|
426,259
|
|
|
$
|
422,317
|
|
Wesco I, III and IV
|
50
|
%
|
|
202,531
|
|
|
218,902
|
|
BEXAEW
|
50
|
%
|
|
66,346
|
|
|
88,850
|
|
Palm Valley
|
50
|
%
|
|
68,403
|
|
|
68,525
|
|
Other
|
50%-55%
|
|
|
31,319
|
|
|
32,927
|
|
Total operating co-investments
|
|
|
794,858
|
|
|
831,521
|
|
Total development co-investments
|
50%-55%
|
|
|
141,666
|
|
|
98,214
|
|
Total preferred interest co-investments (includes related party investments of $35.9 million and $35.8 million of September 30, 2016 and December 31, 2015, respectively)
|
|
|
186,389
|
|
|
106,312
|
|
Total co-investments
|
|
|
$
|
1,122,913
|
|
|
$
|
1,036,047
|
|
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2016 and 2015
(Unaudited)
The combined summarized financial information of co-investments is as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Combined balance sheets:
(1)
|
|
|
|
Rental properties and real estate under development
|
$
|
3,432,866
|
|
|
$
|
3,360,360
|
|
Other assets
|
118,131
|
|
|
96,785
|
|
Total assets
|
$
|
3,550,997
|
|
|
$
|
3,457,145
|
|
Debt
|
$
|
1,506,107
|
|
|
$
|
1,499,601
|
|
Other liabilities
|
90,039
|
|
|
92,241
|
|
Equity
(1)
|
1,954,851
|
|
|
1,865,303
|
|
Total liabilities and equity
|
$
|
3,550,997
|
|
|
$
|
3,457,145
|
|
Company's share of equity
|
$
|
1,122,913
|
|
|
$
|
1,036,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Combined statements of income:
(1)
|
|
|
|
|
|
|
|
Property revenues
|
$
|
72,124
|
|
|
$
|
65,869
|
|
|
$
|
216,434
|
|
|
$
|
191,458
|
|
Property operating expenses
|
(24,976
|
)
|
|
(23,094
|
)
|
|
(75,377
|
)
|
|
(69,232
|
)
|
Net operating income
|
47,148
|
|
|
42,775
|
|
|
141,057
|
|
|
122,226
|
|
Gain on sale of real estate
|
—
|
|
|
—
|
|
|
28,291
|
|
|
14
|
|
Interest expense
|
(10,978
|
)
|
|
(11,314
|
)
|
|
(35,260
|
)
|
|
(33,727
|
)
|
General and administrative
|
(1,496
|
)
|
|
(1,335
|
)
|
|
(4,276
|
)
|
|
(4,414
|
)
|
Depreciation and amortization
|
(25,569
|
)
|
|
(26,574
|
)
|
|
(79,676
|
)
|
|
(76,220
|
)
|
Net income
|
$
|
9,105
|
|
|
$
|
3,552
|
|
|
$
|
50,136
|
|
|
$
|
7,879
|
|
Company's share of net income
(2)
|
$
|
9,568
|
|
|
$
|
7,179
|
|
|
$
|
38,932
|
|
|
$
|
15,962
|
|
(1) Includes preferred equity investments held by the Company.
(2) Includes the Company's share of equity income from co-investments and preferred equity investments, gain on sales of co-investments, co-investment promote income and income from early redemption of preferred equity investments. Includes related party income of
$0.8 million
and
$0.8 million
for the three months ended
September 30, 2016
and
2015
, respectively and
$2.5 million
and
$2.9 million
for the
nine months ended
September 30, 2016
and
2015
, respectively.
(4) Notes and Other Receivables
Notes receivable, secured by real estate, and other receivables consist of the following as of
September 30, 2016
and
December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Notes receivable, secured, bearing interest at 10.75%, due September 2020
|
$
|
4,378
|
|
|
$
|
—
|
|
Notes receivable, secured, bearing interest at 6.0%, due December 2016
|
3,199
|
|
|
3,219
|
|
Notes and other receivables from affiliates
(1)
|
3,602
|
|
|
3,092
|
|
Other receivables
|
11,762
|
|
|
12,974
|
|
Total notes and other receivables
|
$
|
22,941
|
|
|
$
|
19,285
|
|
(1) The Company had
$3.6 million
and
$3.1 million
of short-term loans outstanding and due from various joint ventures as of
September 30, 2016
and
December 31, 2015
, respectively. See Note 5, Related Party Transactions, for additional details.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2016 and 2015
(Unaudited)
(5) Related Party Transactions
The Company charges certain fees to its co-investments for asset management, property management, development, and redevelopment services. These fees from affiliates totaled
$3.1 million
and
$3.3 million
during the three months ended
September 30, 2016
and
2015
, respectively, and
$9.6 million
and
$12.5 million
during the
nine months ended
September 30, 2016
and
2015
, respectively. All of these fees are net of intercompany amounts eliminated by the Company. The Company netted development and redevelopment fees of
$1.0 million
and
$1.2 million
against general and administrative expenses for the three months ended
September 30, 2016
and
2015
, respectively, and
$3.4 million
and
$5.8 million
for the
nine months ended
September 30, 2016
and
2015
, respectively.
The Company’s Chairman and founder, Mr. George Marcus, is the Chairman of the Marcus & Millichap Company (“MMC”), which is a parent company of a diversified group of real estate service, investment, and development firms. Mr. Marcus is also the Co-Chairman of Marcus & Millichap, Inc. (“MMI”), and Mr. Marcus owns a controlling interest in MMI, a national brokerage firm listed on the NYSE.
In March 2015, a multifamily property, located in Anaheim, CA that was owned by an entity affiliated with MMC, in which the Company held a
$13.7 million
preferred equity investment, was sold. That investment of
$13.7 million
plus an additional
$1.3 million
in cash was invested as outlined in the following two paragraphs. Prior to the property sale, the
$13.7 million
preferred equity investment earned a
9.0%
preferred return and was scheduled to mature in September 2020.
In June 2015, the Company made a
$10.0 million
preferred equity investment in an entity affiliated with MMC that owns Greentree Apartments, a
220
apartment community located in San Jose, CA. This investment earns a
9.5%
preferred return and is scheduled to mature in
June 2022
.
In June 2015, the Company made a
$5.0 million
preferred equity investment in an entity affiliated with MMC that owns Sterling Cove Apartments, a
218
apartment community located in Concord, CA. This investment earns a
9.5%
preferred return and is scheduled to mature in
June 2022
.
In August 2015, the Company made a
$5.0 million
preferred equity investment in an entity affiliated with MMC that owns Alta Vista Apartments, a
92
apartment community located in Los Angeles, CA. This investment earns a
9.5%
preferred return and is scheduled to mature in
August 2022
.
In January 2013, the Company invested
$8.6 million
as a preferred equity interest investment in an entity affiliated with MMC that owns an apartment development in Redwood City, CA. In March 2015, the Company's preferred interest investment was prepaid and the Company recognized a gain of
$0.5 million
as a result of the prepayment.
The Company has provided short-term bridge loans to affiliates. As of
September 30, 2016
and
December 31, 2015
,
$3.6 million
and
$3.1 million
, respectively, of short-term loans remained outstanding due from joint venture affiliates and is classified within notes and other receivables in the accompanying condensed consolidated balance sheets.
(6) Debt
The Company does not have indebtedness as debt is incurred by the Operating Partnership. The Company guarantees the Operating Partnership’s unsecured debt including the revolving credit facilities for the full term of such debt.
Debt consists of the following ($ in thousands):
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2016 and 2015
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Weighted Average
Maturity
In Years
|
Unsecured bonds private placement - fixed rate
|
$
|
314,128
|
|
|
$
|
463,891
|
|
|
3.9
|
Term loan - variable rate
|
224,719
|
|
|
224,467
|
|
|
0.2
|
Bonds public offering - fixed rate
|
2,836,763
|
|
|
2,400,322
|
|
|
6.6
|
Unsecured debt, net
(1)
|
3,375,610
|
|
|
3,088,680
|
|
|
|
Lines of credit, net
(2)
|
—
|
|
|
11,707
|
|
|
|
Mortgage notes payable, net
(3)
|
2,209,077
|
|
|
2,215,077
|
|
|
5.3
|
Total debt, net
|
$
|
5,584,687
|
|
|
$
|
5,315,464
|
|
|
|
Weighted average interest rate on fixed rate unsecured and unsecured private placement bonds
|
3.6
|
%
|
|
3.6
|
%
|
|
|
Weighted average interest rate on variable rate term loan
|
2.4
|
%
|
|
2.4
|
%
|
|
|
Weighted average interest rate on lines of credit
|
2.2
|
%
|
|
1.9
|
%
|
|
|
Weighted average interest rate on mortgage notes payable
|
4.3
|
%
|
|
4.4
|
%
|
|
|
(1) Includes unamortized premium and discounts of
$2.8 million
and
$14.3 million
and reduced by unamortized debt issuance costs of
$17.2 million
and
$15.6 million
, as of
September 30, 2016
and
December 31, 2015
, respectively.
(2) Lines of credit, net, related to the Company's
two
lines of unsecured credit aggregating
$1.0 billion
, excludes unamortized debt issuance costs of
$3.6 million
as of
September 30, 2016
as the net effect resulted in a negative debt balance and as such the amount was reclassified to prepaid expenses and other assets on the condensed consolidated balance sheets. The
December 31, 2015
amount includes
$3.3 million
of unamortized debt issuance costs because the net balance resulted in a positive debt balance and is presented on a net basis.
(3) Includes unamortized premium of
$55.3 million
and
$64.8 million
and reduced by unamortized debt issuance costs of
$7.4 million
and
$8.0 million
, as of
September 30, 2016
and
December 31, 2015
, respectively.
The aggregate scheduled principal payments of the Company’s outstanding debt as of
September 30, 2016
are as follows (excluding lines of credit) (in thousands):
|
|
|
|
|
Remaining in 2016
|
$
|
207,668
|
|
2017
|
493,007
|
|
2018
|
321,328
|
|
2019
|
661,954
|
|
2020
|
693,868
|
|
Thereafter
|
3,173,339
|
|
Total
|
$
|
5,551,164
|
|
(7) Segment Information
The Company's segment disclosures present the measure used by the chief operating decision makers for purposes of assessing each segment's performance. Essex's chief operating decision makers are comprised of several members of its executive management team who use NOI to assess the performance of the business for the Company's reportable operating segments. NOI represents total property revenue less direct property operating expenses.
The executive management team evaluates the Company's operating performance geographically. The Company defines its reportable operating segments as the
three
geographical regions in which its communities are located: Southern California, Northern California, and Seattle Metro.
Excluded from segment revenues and net operating income are management and other fees from affiliates and interest and other income. Non-segment revenues and net operating income included in the following schedule also consist of revenue generated from commercial properties and properties that have been sold. Other non-segment assets include real estate under
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2016 and 2015
(Unaudited)
development, co-investments, cash and cash equivalents, marketable securities, notes and other receivables, prepaid expenses, and other assets.
The revenues and net operating income for each of the reportable operating segments are summarized as follows for the
three and nine
months ended
September 30, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenues:
|
|
|
|
|
|
|
|
Southern California
|
$
|
147,953
|
|
|
$
|
135,900
|
|
|
$
|
434,217
|
|
|
$
|
390,381
|
|
Northern California
|
117,699
|
|
|
106,428
|
|
|
345,793
|
|
|
308,118
|
|
Seattle Metro
|
55,544
|
|
|
51,181
|
|
|
161,192
|
|
|
149,661
|
|
Other real estate assets
|
5,882
|
|
|
9,013
|
|
|
17,616
|
|
|
28,692
|
|
Total property revenues
|
$
|
327,078
|
|
|
$
|
302,522
|
|
|
$
|
958,818
|
|
|
$
|
876,852
|
|
Net operating income:
|
|
|
|
|
|
|
|
Southern California
|
$
|
100,447
|
|
|
$
|
90,377
|
|
|
$
|
295,834
|
|
|
$
|
261,320
|
|
Northern California
|
84,790
|
|
|
76,327
|
|
|
249,011
|
|
|
219,906
|
|
Seattle Metro
|
37,688
|
|
|
34,484
|
|
|
109,352
|
|
|
101,288
|
|
Other real estate assets
|
4,792
|
|
|
7,215
|
|
|
14,691
|
|
|
22,971
|
|
Total net operating income
|
227,717
|
|
|
208,403
|
|
|
668,888
|
|
|
605,485
|
|
Management and other fees from affiliates
|
2,093
|
|
|
2,104
|
|
|
6,145
|
|
|
6,809
|
|
Depreciation and amortization
|
(110,467
|
)
|
|
(116,308
|
)
|
|
(329,847
|
)
|
|
(336,946
|
)
|
General and administrative
|
(9,647
|
)
|
|
(11,129
|
)
|
|
(28,527
|
)
|
|
(31,223
|
)
|
Merger and integration expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,798
|
)
|
Acquisition and investment related costs
|
(284
|
)
|
|
(381
|
)
|
|
(1,379
|
)
|
|
(1,357
|
)
|
Interest expense
|
(56,693
|
)
|
|
(50,053
|
)
|
|
(164,727
|
)
|
|
(148,401
|
)
|
Total return swap income
|
3,143
|
|
|
—
|
|
|
9,080
|
|
|
—
|
|
Interest and other income
|
4,943
|
|
|
7,367
|
|
|
19,560
|
|
|
14,820
|
|
Equity income in co-investments
|
9,568
|
|
|
7,179
|
|
|
38,932
|
|
|
15,962
|
|
Loss on early retirement of debt
|
(211
|
)
|
|
—
|
|
|
(211
|
)
|
|
—
|
|
Gain on sale of real estate and land
|
—
|
|
|
—
|
|
|
20,258
|
|
|
7,112
|
|
Deferred tax expense on gain on sale of real estate and land
|
—
|
|
|
—
|
|
|
(4,279
|
)
|
|
—
|
|
Gain on remeasurement of co-investment
|
—
|
|
|
—
|
|
|
—
|
|
|
34,014
|
|
Net income
|
$
|
70,162
|
|
|
$
|
47,182
|
|
|
$
|
233,893
|
|
|
$
|
162,477
|
|
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2016 and 2015
(Unaudited)
Total assets for each of the reportable operating segments are summarized as follows as of
September 30, 2016
and
December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Assets:
|
|
|
|
Southern California
|
$
|
4,830,293
|
|
|
$
|
4,912,264
|
|
Northern California
|
3,844,421
|
|
|
3,749,072
|
|
Seattle Metro
|
1,679,303
|
|
|
1,613,175
|
|
Other real estate assets
|
89,895
|
|
|
107,066
|
|
Net reportable operating segment - real estate assets
|
10,443,912
|
|
|
10,381,577
|
|
Real estate under development
|
170,972
|
|
|
242,326
|
|
Co-investments
|
1,122,913
|
|
|
1,036,047
|
|
Real estate held for sale, net
|
—
|
|
|
26,879
|
|
Cash and cash equivalents, including restricted cash
|
211,055
|
|
|
123,055
|
|
Marketable securities
|
153,703
|
|
|
137,485
|
|
Notes and other receivables
|
22,941
|
|
|
19,285
|
|
Prepaid expenses and other assets
|
51,700
|
|
|
38,437
|
|
Total assets
|
$
|
12,177,196
|
|
|
$
|
12,005,091
|
|
(8) Net Income Per Common Share and Net Income Per Common Unit
(Amounts in thousands, except share and unit data)
Essex Property Trust, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
Three Months Ended September 30, 2015
|
|
Income
|
|
Weighted-
average
Common
Shares
|
|
Per
Common
Share
Amount
|
|
Income
|
|
Weighted-
average
Common
Shares
|
|
Per
Common
Share
Amount
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
$
|
65,561
|
|
|
65,507,669
|
|
|
$
|
1.00
|
|
|
$
|
42,323
|
|
|
65,138,868
|
|
|
$
|
0.65
|
|
Effect of Dilutive Securities
|
—
|
|
|
109,882
|
|
|
|
|
|
—
|
|
|
158,682
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
$
|
65,561
|
|
|
65,617,551
|
|
|
$
|
1.00
|
|
|
$
|
42,323
|
|
|
65,297,550
|
|
|
$
|
0.65
|
|
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2016 and 2015
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
Nine Months Ended September 30, 2015
|
|
Income
|
|
Weighted-
average
Common
Shares
|
|
Per
Common
Share
Amount
|
|
Income
|
|
Weighted-
average
Common
Shares
|
|
Per
Common
Share
Amount
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
$
|
215,555
|
|
|
65,455,004
|
|
|
$
|
3.29
|
|
|
$
|
147,241
|
|
|
64,714,994
|
|
|
$
|
2.28
|
|
Effect of Dilutive Securities
|
—
|
|
|
123,657
|
|
|
|
|
|
—
|
|
|
177,776
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
$
|
215,555
|
|
|
65,578,661
|
|
|
$
|
3.29
|
|
|
$
|
147,241
|
|
|
64,892,770
|
|
|
$
|
2.27
|
|
The tables above exclude from the calculations of diluted EPS weighted average convertible limited partnership units of
2,220,952
and
2,177,630
, which include vested Series Z Incentive Units, Series Z-1 Incentive Units, 2014 Long-Term Incentive Plan Units, and 2015 Long-Term Incentive Plan Units, for the three months ended
September 30, 2016
and
2015
, respectively, and
2,224,236
and
2,181,299
for the
nine months ended September 30, 2016
, and
2015
, respectively, because they were anti-dilutive. The related income allocated to these convertible limited partnership units aggregated
$2.2 million
and
$1.5 million
for the three months ended
September 30, 2016
and
2015
, respectively, and
$7.5 million
and
$5.1 million
for the
nine months ended September 30, 2016
and
2015
, respectively. Additionally, excludes all DownREIT units as they are anti-dilutive.
Stock options of
40,900
and
24,500
for the three months ended
September 30, 2016
and
2015
, respectively, and
76,054
and
24,500
for the
nine months ended September 30, 2016
and
2015
, respectively, were excluded from the calculation of diluted earnings per share because the assumed proceeds per share of these options plus the average unearned compensation were greater than the average market price of the common stock for the periods ended and, therefore, were anti-dilutive.
Essex Portfolio, L.P.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
Three Months Ended September 30, 2015
|
|
Income
|
|
Weighted-
average
Common Units
|
|
Per
Common
Unit
Amount
|
|
Income
|
|
Weighted-
average
Common Units
|
|
Per
Common
Unit
Amount
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common unitholders
|
$
|
67,784
|
|
|
67,728,621
|
|
|
$
|
1.00
|
|
|
$
|
43,794
|
|
|
67,316,498
|
|
|
$
|
0.65
|
|
Effect of Dilutive Securities
|
—
|
|
|
109,882
|
|
|
|
|
|
—
|
|
|
158,682
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common unitholders
|
$
|
67,784
|
|
|
67,838,503
|
|
|
$
|
1.00
|
|
|
$
|
43,794
|
|
|
67,475,180
|
|
|
$
|
0.65
|
|
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2016 and 2015
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
Nine Months Ended September 30, 2015
|
|
Income
|
|
Weighted-
average
Common Units
|
|
Per
Common
Unit
Amount
|
|
Income
|
|
Weighted-
average
Common Units
|
|
Per
Common
Unit
Amount
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common unitholders
|
$
|
223,012
|
|
|
67,679,240
|
|
|
$
|
3.30
|
|
|
$
|
152,356
|
|
|
66,896,293
|
|
|
$
|
2.28
|
|
Effect of Dilutive Securities
|
—
|
|
|
123,657
|
|
|
|
|
|
—
|
|
|
177,776
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common unitholders
|
$
|
223,012
|
|
|
67,802,897
|
|
|
$
|
3.29
|
|
|
$
|
152,356
|
|
|
67,074,069
|
|
|
$
|
2.27
|
|
Stock options of
40,900
and
24,500
for the three months ended
September 30, 2016
and
2015
, respectively, and
76,054
and
24,500
for the
nine months ended September 30, 2016
and
2015
, respectively, were excluded from the calculation of diluted earnings per unit because the assumed proceeds per unit of these options plus the average unearned compensation were greater than the average market price of the common unit for the periods ended and, therefore, were anti-dilutive. Additionally, excludes all DownREIT units as they are anti-dilutive.
(9) Derivative Instruments and Hedging Activities
As of
September 30, 2016
, the Company has entered into interest rate swap contracts with an aggregate notional amount of
$225 million
that effectively fixed the interest rate on the
$225 million
unsecured term loan at
2.4%
. These derivatives qualify for hedge accounting.
As of
September 30, 2016
, the Company has interest rate caps, which are not accounted for as hedges, totaling a notional amount of
$20.7 million
that effectively limit the Company’s exposure to interest rate risk by providing a ceiling on the underlying variable interest rate for
$20.7 million
of the Company’s tax exempt variable rate debt.
As of
September 30, 2016
and
December 31, 2015
, the aggregate carrying value of the interest rate swap contracts was a liability of
$0.2 million
and
$1.0 million
, respectively, and is included in other liabilities on the condensed consolidated balance sheets. The aggregate carrying value of the interest rate caps was
zero
on the condensed consolidated balance sheets as of both
September 30, 2016
and
December 31, 2015
.
Hedge ineffectiveness related to cash flow hedges, which is included in interest expense on the condensed consolidated income statements, net was not significant for both the three and nine months ended
September 30, 2016
and
2015
.
Additionally, the Company has entered into total return swaps that effectively convert
$257.3 million
of mortgage notes payable to a floating interest rate based on SIFMA plus a spread. The total return swaps provide fair market value protection on the mortgage notes payable to our counterparties during the initial period of the total return swap until the Company's option to call the mortgage notes at par can be exercised. The Company can currently call the total return swaps with
$114.4 million
of the outstanding debt at par, while the call option on the total return swaps relating to the remaining
$142.9 million
of outstanding debt can be exercised starting on January 1, 2017. These derivatives do not qualify for hedge accounting and had a carrying and fair value of
$16 thousand
and
$4 thousand
at
September 30, 2016
and
December 31, 2015
, respectively. These total return swaps are scheduled to mature between
September 2021
and
November 2022
. Realized gains of
$3.1 million
and
$9.1 million
are reported in the condensed consolidated income statements as total return swap income for the three and nine months ended
September 30, 2016
, respectively. There was no total return swap income for both the three and nine months ended
September 30, 2015
.
ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES
ESSEX PORTFOLIO, L.P. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2016 and 2015
(Unaudited)
(10) Commitments and Contingencies
To the extent that an environmental matter arises or is identified in the future that has other than a remote risk of having a material impact on the condensed consolidated financial statements, the Company will disclose the estimated range of possible outcomes associated with it, and, if an outcome is probable, accrue an appropriate liability for that matter. The Company will consider whether any such matter results in an impairment of value on the affected property and, if so, impairment will be recognized. The Company is subject to various lawsuits in the normal course of its business operations. Such lawsuits could, but are not expected to, have a material adverse effect on the Company's financial condition, results of operations or cash flows.