Equity Based Compensation Plans

Stock Options and Restricted Stock

In May 2013, stockholders approved the Company’s 2013 Stock Award and Incentive Compensation Plan (“2013 Plan”). The 2013 Plan became effective on June 1, 2013 and serves as the successor to the Company’s 2004 Stock Incentive Plan (the “2004 Plan”), and no additional equity awards can be granted under the 2004 Plan after the date the 2013 Plan became effective.

The Company’s 2013 Plan provides incentives to attract and retain officers, directors and key employees. The 2013 Plan provides for the grants of options to purchase shares of common stock, grants of restricted stock and other award types. Under the 2013 Plan, the maximum aggregate number of shares that may be issued is 1,000,000, plus any shares that have not been issued under the 2004 Plan, including shares subject to outstanding awards under the 2004 Plan that are not issued or delivered to a participant for any reason. The 2013 Plan is administered by the Compensation Committee of the Board of Directors and is comprised of independent directors. The Compensation Committee is authorized to establish the exercise price; however, the exercise price cannot be less than 100% of the fair market value of the common stock on the grant date. The Company’s options have a life of five to ten years. Option grants for officers and employees fully vest between one year and five years after the grant date.

Stock-based compensation expense for options and restricted stock under the fair value method totaled $6.1 million, $2.3 million, and $2.0 million for years ended December 31, 2014, 2013 and 2012 respectively. Stock-based compensation expense for options and restricted stock for the year ended December 31, 2014 includes $3.6 million related to the BRE merger, of which $1.7 million relates to merger and integration expenses, which is recorded in merger and integration expense in the consolidated statements of income. Stock-based compensation for options and restricted stock related to recipients who are direct and incremental to projects under development were capitalized and totaled $0.4 million, $0.4 million, and $0.3 million for the years ended December 31, 2014, 2013 and 2012, respectively. The intrinsic value of the options exercised totaled $12.7 million, $3.0 million, and $2.9 million, for the years ended December 31, 2014, 2013, and 2012 respectively. The intrinsic value of the options outstanding and fully vested totaled $28.9 million, as of December 31, 2014.

Total unrecognized compensation cost related to unvested stock options totaled $3.6 million as of December 31, 2014 and the unrecognized compensation cost is expected to be recognized over a period of 1 to 5 years.

The average fair value of stock options granted for the years ended December 31, 2014, 2013 and 2012 was $20.56, $15.80 and $12.64, respectively. Certain stock options granted in 2014, 2013, and 2012 included a $75 cap or a $100 cap on the appreciation of the market price over the exercise price. The fair value of stock options was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants:



	2014			2013			2012
Stock price	$	176.65		$	153.54		$	143.95
Risk-free interest rates	2.37		%	2.68		%	1.16		%
Expected lives	8 years			8 years			5 - 8 years
Volatility	18.00		%	18.03		%	20.05		%
Dividend yield	2.90		%	3.15		%	3.26		%

A summary of the status of the Company’s stock option plans as of December 31, 2014, 2013, and 2012 and changes during the years ended on those dates is presented below:



	2014				2013				2012
	Shares		Weighted- average exercise price		Shares		Weighted- average exercise price		Shares		Weighted- average exercise price
Outstanding at beginning of year	695,488		$	133.37	623,434		$	125.96	415,020		$	109.71
Granted	42,518		176.65		150,325		153.54		263,113		143.95
Granted - BRE options converted	133,766		121.03		—		—		—		—
Exercised	(185,387	)	113.72		(52,970	)	102.43		(41,603	)	77.21
Forfeited and canceled	(21,600	)	144.29		(25,301	)	135.25		(13,096	)	128.36
Outstanding at end of year	664,785		138.78		695,488		133.37		623,434		125.96
Options exercisable at year end	395,986		133.99		300,632		119.09		250,620		107.12

The following table summarizes information about stock options outstanding as of December 31, 2014:



	Options outstanding				Options exercisable
	Number outstanding as of	Weighted- average remaining	Weighted- average		Number exercisable as of	Weighted- average
Range of	December 31,	contractual	exercise		December 31,	exercise
exercise prices	2014	life (years)	price		2014	price
$66.05 - $101.01	39,590	2.8	$	79.64	39,590	$	79.64
$103.82 - $161.98	561,626	6.1	139.05		303,670	134.22
$164.76 - $179.48	63,569	8.2	173.22		52,726	173.49
	664,785	6.1	138.78		395,986	133.99

The following table summarizes information about restricted stock outstanding as of December 31, 2014, 2013 and 2012 and changes during the years ended:



	2014				2013				2012
	Shares		Weighted- average grant price		Shares		Weighted- average grant price		Shares		Weighted- average grant price
Unvested at beginning of year	16,176		$	108.06	24,922		$	104.52	35,219		$	98.57
Granted	22,014		194.03		1,556		158.75		1,614		149.68
Granted - BRE restricted stock converted	119,411		173.82		—		—		—		—
Vested	(126,931	)	171.56		(7,211	)	109.86		(8,641	)	106.69
Forfeited and canceled	(4,850	)	135.10		(3,091	)	100.84		(3,270	)	102.00
Unvested at end of year	25,820		168.22		16,176		108.06		24,922		104.52

The unrecognized compensation cost related to unvested restricted stock totaled $3.5 million as of December 31, 2014 and is expected to be recognized over a period of 1 to 7 years.

Long Term Incentive Plans – LTIP Units

On December 9, 2014, the Operating Partnership issued 44,750 units under the 2015 Long-Term Incentive Plan Award agreements to executives of the Company. The 2015 Long-Term Incentive Plan Units (the “2015 LTIP Units”) are subject to forfeiture based on performance-based and service based conditions. An additional 24,000 units were granted subject only to performance-based criteria and are fully vested on the date granted. The 2015 LTIP Units, that are subject to vesting, will vest at 20% per year on each of the first five anniversaries of the initial grant date. The 2015 LTIP Units performance conditions measurement ends December 9, 2015. The 2015 LTIP Units, once earned and vested, are convertible one-for-one into common units of the Operating Partnership which, in turn, are convertible into common stock of the Company subject to a ten year liquidity restriction. 2015 LTIP Units not earned based on the performance-based criteria shall be automatically forfeited by the recipient.

In December 2013, the Operating Partnership issued 50,500 units under the 2014 Long-Term Incentive Plan Award agreements to executives of the Company. The 2014 Long-Term Incentive Plan Units (the “2014 LTIP Units”) were subject to forfeiture based on performance-based conditions and are currently subject to service based vesting. The 2014 LTIP Units vest 25% per year on each of the first four anniversaries of the initial grant date. In December 2014, the Company achieved the performance criteria and all of the 2014 LTIP Units awarded were earned by the recipients, subject to satisfaction of service based vesting conditions. The 2014 LTIP Units are convertible one-for-one into common units of the Operating Partnership which, in turn, are convertible into common stock of the Company subject to a ten year liquidity restriction.

The estimated fair value of the 2015 LTIP Units and 2014 LTIP Units are determined on the grant date using Monte Carlo simulations under a risk-neutral premise and considers Essex’s current stock price, the unpaid dividends on unvested units and the discount factor for 10 years of illiquidity.

Prior to 2013, the Company issued Series Z Incentive Units and Series Z-1 Incentive Units (collectively referred to as “Z Units”) of limited partnership interest in the Operating Partnership. Vesting in the Z Units is based on performance criteria established in the plan. The criteria can be revised by the Board's Compensation Committee if the Committee deems that the plan's criterion is unachievable for any given year. The sale of Z Units is contractually prohibited. Z Units are convertible into Operating Partnership units which are exchangeable for shares of the Company’s common stock that have marketability restrictions. The estimated fair value of a Z Unit is determined on the grant date and considers the Company's current stock price, the dividends that are not paid on unvested units and a marketability discount for the 8 to 15 years of illiquidity. Compensation expense is calculated by multiplying estimated vesting increases for the period by the estimated fair value as of the grant date.

During 2011 and 2010, the Operating Partnership issued 154,500 Series Z-1 Incentive Units (the “Z-1 Units”) of limited partner interest to executives of the Company. The Z-1 Units are convertible one-for-one into common units of the Operating Partnership (which, in turn, are convertible into common stock of the Company) upon the earlier to occur of 100 percent vesting of the units or the year 2026. The conversion ratchet (accounted for as vesting) of the Z-1 Units into common units, is to increase consistent with the Company’s annual FFO growth, but is not to be less than zero or greater than 14 percent. Z-1 Unit holders are entitled to receive distributions, on vested units, that are approximately the same as dividends distributed to common stockholders.

LTIP Units are administered by the Compensation Committee which has the authority to select participants and determine the awards to be made up to a maximum of 600,000 LTIP Units.

Stock-based compensation expense for LTIP Units under the fair value method totaled approximately $6.0 million, $2.2 million and $2.1 million for the years ended December 31, 2014, 2013 and 2012, respectively. Stock-based compensation expense for the year ended December 31, 2014 includes $1.7 million related to merger and integration expenses and is recorded in merger and integration expense in the consolidated statements of income. In the fourth quarter of 2014, stock-based compensation expense included $2.4 million related to an immediate vesting of certain of the 2015 LTIP Units. Stock-based compensation related to LTIP Units attributable to recipients who are direct and incremental to these projects was capitalized to real estate under development and totaled approximately $0.4 million, $0.5 million, and $0.5 million, for the years ended December 31, 2014, 2013, and 2012, respectively. The intrinsic value of the vested and unvested LTIP Units totaled $68.8 million as of December 31, 2014. Total unrecognized compensation cost related to the unvested LTIP Units under the LTIP Units plans totaled $11.7 million as of December 31, 2014. On a weighted average basis, the unamortized cost for the 2014 and 2015 LTIP Units and the Z Units is expected to be recognized over the next 4.2 years and 10.5 years, respectively, subject to the achievement of the stated performance criteria.

The following table summarizes information about the LTIP Units outstanding as of December 31, 2014 ($ in thousands):



	Long Term Incentive Plan - LTIP Units
	Total Vested Units		Total Unvested Units		Total Outstanding Units		Weighted- average Grant-date Fair Value		Weighted- average Remaining Contractual Life (years)
Balance, December 31, 2011	179,082		170,019		349,101		$	58.17	12.3
Granted	—		—		—
Vested	28,163		(28,163	)	—
Converted	(16,541	)	—		(16,541	)
Cancelled	—		(1,813	)	(1,813	)
Balance, December 31, 2012	190,704		140,043		330,747		58.44		11.3
Granted	—		50,500		50,500
Vested	35,919		(35,919	)	—
Converted	(108,433	)	—		(108,433	)
Cancelled	—		(5,243	)	(5,243	)
Balance, December 31, 2013	118,190		149,381		267,571		63.53		9.3
Granted	24,000		44,750		68,750
Vested	41,729		(41,729	)	—
Converted	(2,000	)	—		(2,000	)
Cancelled	—		(1,335	)	(1,335	)
Balance, December 31, 2014	181,919		151,067		332,986		$	71.14	10.5