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, which 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 0 and 5 years after the grant date.

Stock-based compensation expense for options and restricted stock under the fair value method totaled $8.2 million, $6.1 million, and $6.1 million for years ended December 31, 2016, 2015 and 2014 respectively. Stock-based compensation expense for options and restricted stock for the year ended December 31, 2016 and 2015, includes $0.1 million and $0.2 million related to the BRE merger, of which zero and $0.1 million relates to merger and integration expenses, and which is recorded in merger and integration expense in the consolidated statements of income, respectively. For the years ended December 31, 2016 and 2015, stock-based compensation expense included $3.5 million and $2.7 million related to an immediate vesting of options and restricted stock for bonuses awarded based on asset dispositions, which is recorded as a cost of real estate and land sold, respectively. Stock-based compensation for options and restricted stock related to recipients who are direct and incremental to projects under development were capitalized and totaled $0.5 million, $0.3 million, and $0.4 million for the years ended December 31, 2016, 2015 and 2014, respectively. The intrinsic value of the options exercised totaled $11.9 million, $19.4 million, and $12.7 million, for the years ended December 31, 2016, 2015, and 2014 respectively. The intrinsic value of the options exercisable totaled $20.8 million and $29.8 million as of December 31, 2016 and 2015, respectively.

Total unrecognized compensation cost related to unvested stock options totaled $5.0 million as of December 31, 2016 and the unrecognized compensation cost is expected to be recognized over a period of 2.8 years.

The average fair value of stock options granted for the years ended December 31, 2016, 2015 and 2014 was $21.65, $22.78 and $20.56, respectively. Certain stock options granted in 2016, 2015, and 2014 included a $75 cap, a $100 cap or a $125 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:



	2016			2015			2014
Stock price	$	219.60		$	227.75		$	176.65
Risk-free interest rates	2.08		%	1.83		%	2.37		%
Expected lives	6 years			6 years			8 years
Volatility	26.47		%	20.06		%	18.00		%
Dividend yield	2.89		%	2.73		%	2.90		%

A summary of the status of the Company’s stock option plans as of December 31, 2016, 2015, and 2014 and changes during the years ended on those dates is presented below:



	2016				2015				2014
	Shares		Weighted- average exercise price		Shares		Weighted- average exercise price		Shares		Weighted- average exercise price
Outstanding at beginning of year	525,094		$	154.98	664,785		$	138.78	695,488		$	133.37
Granted	207,429		219.60		78,600		227.75		42,518		176.65
Granted - BRE options converted	—		—		—		—		133,766		121.03
Exercised	(138,054	)	138.79		(203,556	)	131.53		(185,387	)	113.72
Forfeited and canceled	(36,821	)	178.18		(14,735	)	136.11		(21,600	)	144.29
Outstanding at end of year	557,648		181.50		525,094		154.98		664,785		138.78
Options exercisable at year end	290,340		160.90		342,048		152.42		395,986		133.99

The following table summarizes information about restricted stock outstanding as of December 31, 2016, 2015 and 2014 and changes during the years ended:



	2016				2015				2014
	Shares		Weighted- average grant price		Shares		Weighted- average grant price		Shares		Weighted- average grant price
Unvested at beginning of year	54,676		$	147.10	25,820		$	168.22	16,176		$	108.06
Granted	49,183		150.13		56,177		155.21		22,014		194.03
Granted - BRE restricted stock converted	—		—		—		—		119,411		173.82
Vested	(38,427	)	147.12		(22,939	)	148.20		(126,931	)	171.56
Forfeited and canceled	(7,083	)	141.76		(4,382	)	122.06		(4,850	)	135.10
Unvested at end of year	58,349		149.11		54,676		147.10		25,820		168.22

The unrecognized compensation cost related to unvested restricted stock totaled $5.9 million as of December 31, 2016 and is expected to be recognized over a period of 2.2 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 were fully vested on the date granted. The 2015 LTIP Units, that were 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 ended on December 9, 2015 and 95.75% of the units awarded were earned by the recipients. 2015 LTIP Units not earned based on the performance-based criteria were automatically forfeited by the recipients. 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.

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 were determined on the grant date using Monte Carlo simulations under a risk-neutral premise and considered Essex’s stock price on the date of grant, 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 Z Units were determined on the grant date and considered the Company's stock price on the date of grant, 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 now equal to dividends distributed to common stockholders.

Stock-based compensation expense for LTIP and Z Units under the fair value method totaled approximately $2.7 million, $3.5 million and $6.0 million for the years ended December 31, 2016, 2015 and 2014, 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. No such amounts were recorded in merger and integration expense in 2015. For the year ended December 31, 2014, stock-based compensation expense included $2.4 million related to an immediate vesting of certain of the 2015 LTIP Units. No such amounts were recorded in 2015. 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 $0.6 million, $0.5 million, and $0.4 million, for the years ended December 31, 2016, 2015, and 2014, respectively. The intrinsic value of the vested and unvested LTIP Units totaled $56.0 million as of December 31, 2016. Total unrecognized compensation cost related to the unvested LTIP Units under the LTIP Units plans totaled $3.6 million as of December 31, 2016. 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 2.2 years to 8.5 years, depending on certain performance targets.

The following table summarizes information about the LTIP Units outstanding as of December 31, 2016 ($ 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, 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
Granted	—		—		—
Vested	36,650		(36,650	)	—
Converted	(74,384	)	—		(74,384	)
Cancelled	—		(8,260	)	(8,260	)
Balance, December 31, 2015	144,185		106,157		250,342		75.41		9.5
Granted	—		—		—
Vested	36,842		(36,842	)	—
Converted	—		—		—
Cancelled	—		(9,288	)	(9,288	)
Balance, December 31, 2016	181,027		60,027		241,054		$	75.11	8.5