Real Estate Investments

(a) Acquisitions of Real Estate

For the year ended December 31, 2018, the Company purchased a partial interest in one community consisting of 166 apartment homes for $35.4 million. The table below summarizes acquisition activity for the year ended December 31, 2018 ($ in millions):



Property Name	Location	Apartment Homes	Essex Ownership Percentage		Quarter in 2018	Purchase Price
Marquis⁽¹⁾	San Jose, CA	166	100	%	Q4	$	35.4
Total 2018		166				$	35.4


⁽¹⁾	In December 2018, the Company purchased the joint venture partner's 49.9% membership interest in the Marquis co-investment. As part of the acquisition, the Company paid $4.7 million in cash and issued Operating Partnership units valued at $7.9 million, based on an estimated property valuation of $71.0 million and an encumbrance of $45.8 million of mortgage debt.

The consolidated fair value of the acquisition listed above was included on the Company's consolidated balance sheet as follows: $20.5 million was included in land and land improvements, $47.8 million was included in buildings and improvements, and $2.7 million was included in prepaid expenses and other assets and liabilities, within the Company's consolidated balance sheets.

For the year ended December 31, 2017, the Company purchased two communities consisting of 1,328 apartment homes for $273.0 million.

(b) Sales of Real Estate Investments

For the year ended December 31, 2018, the Company sold two communities consisting of 669 apartment homes for $352.0 million resulting in gains totaling $61.9 million. The table below summarizes disposition activity of operating communities for the year ended December 31, 2018 ($ in millions):



Property Name	Location	Apartment Homes	Essex Ownership Percentage		Ownership	Quarter in 2018	Sales Price		Gains
Domain	San Diego, CA	379	100	%	EPLP	Q2	$	132.0	$	22.3
8th & Hope	Los Angeles, CA	290	100	%	EPLP	Q4	220.0		39.6
Total 2018		669					$	352.0	$	61.9

During 2017, the Company sold one community consisting of 270 apartment homes for $132.5 million resulting in a gain of $26.2 million, which is included in the line item gain on sale of real estate and land in the Company's consolidated statement of income.

During 2016, the Company sold three communities, consisting of 323 apartment homes, for $80.8 million resulting in gains totaling $14.0 million, net of $4.4 million deferred tax on gain on sale of real estate.

In January 2016, the Company sold its former headquarters office building, located in Palo Alto, CA, for gross proceeds of $18.0 million, resulting in a gain of $9.6 million, which is included in the line item gain on sale of real estate and land in the Company's consolidated statement of income.

As of December 31, 2018 and 2017, the Company had no assets classified as held for sale.

(d) Co-investments

The Company has joint ventures which are accounted for under the equity method. The co-investments’ accounting policies are similar to the Company’s accounting policies. The co-investments own, operate, and develop apartment communities.

In March 2018, the BEXAEW joint venture operating agreement was amended, and the joint venture was extended. Under the amendment, the Company received a cash payment for co-investment promote income of $20.5 million, which is included in equity income from co-investments on the consolidated statements of income and comprehensive income.

In October 2018, Wesco V acquired Meridian at Midtown, a 218 apartment home community located in San Jose, CA, for a total contract price of $104.0 million. In connection with this acquisition, Wesco V assumed $69.9 million of mortgage debt, with an effective interest rate of 4.50% and a maturity date of March 2026. The Company previously had a preferred equity investment in this apartment home community, which was fully redeemed in August 2015.

In November 2018, BEXAEW sold Enclave at Town Square, a 124 apartment home community located in Chino Hills, CA, for $30.5 million, which resulted in a gain of $5.4 million for the Company, recorded in the consolidated statement of income as equity income from co-investments. BEXAEW used $16.1 million of the proceeds to repay the loan on the property.

In November 2018, Wesco III sold The Summit, a 125 apartment home community located in Chino Hills, CA, for $34.8 million, which resulted in a gain of $5.2 million for the Company, recorded in the consolidated statement of income as equity income from co-investments. Wesco III used $15.6 million of the proceeds to repay the loan on the property.

In December 2018, the Company purchased its joint venture partner's 49.9% interest in the Marquis co-investment, for a contract price of $35.4 million. Prior to the purchase, an approximately $45.8 million mortgage encumbered the property. Marquis has 166 apartment homes and is located in San Jose, CA. As a result of this acquisition, the Company realized a gain on remeasurement of co-investment of $1.3 million upon consolidation.

The carrying values of the Company’s co-investments as of December 31, 2018 and 2017 are as follows ($ in thousands, except in parenthetical):



	Weighted Average Essex Ownership		December 31,
	Percentage⁽¹⁾		2018		2017
Ownership interest in:
CPPIB	54	%	$	482,507	$	500,287
Wesco I, Wesco III, Wesco IV, and Wesco V	52	%	194,890		214,408
BEXAEW, BEX II and BEX III ⁽²⁾	50	%	121,780		13,827
Other	51	%	34,093		51,810
Total operating and other co-investments, net			833,270		780,332
Total pre-development and development co-investments	50	%	94,060		73,770
Total preferred interest co-investments (includes related party investments of $51.8 million and $15.7 million as of December 31, 2018 and December 31, 2017, respectively - FN 6 - Related Party Transactions for further discussion)			372,810		265,156
Total co-investments, net			$	1,300,140	$	1,119,258


⁽¹⁾	Weighted average Essex ownership percentages are as of December 31, 2018.


⁽²⁾	As of December 31, 2017, the Company's investment in BEX II was classified as a liability of $36.7 million.

The combined summarized financial information of co-investments is as follows ($ in thousands):



	December 31,
	2018		2017
Combined balance sheets:⁽¹⁾
Rental properties and real estate under development	$	4,367,987	$	3,722,778
Other assets	104,119		110,333
Total assets	$	4,472,106	$	3,833,111
Debt	$	2,190,764	$	1,705,051
Other liabilities	106,316		45,515
Equity	2,175,026		2,082,545
Total liabilities and equity	$	4,472,106	$	3,833,111
Company's share of equity	$	1,300,140	$	1,155,984



	Years ended December 31,
	2018			2017			2016
Combined statements of income: ⁽¹⁾
Property revenues	$	332,164		$	312,841		$	289,011
Property operating expenses	(107,584		)	(110,583		)	(99,637		)
Net operating income	224,580			202,258			189,374
Gain on sale of real estate	24,218			90,663			28,291
Interest expense	(63,913		)	(62,844		)	(46,894		)
General and administrative	(6,379		)	(9,091		)	(7,448		)
Depreciation and amortization	(126,485		)	(118,048		)	(103,986		)
Net income	$	52,021		$	102,938		$	59,337
Company's share of net income ⁽²⁾	$	89,132		$	86,445		$	48,698


⁽¹⁾	Includes preferred equity investments held by the Company.


⁽²⁾	Includes the Company's share of equity income from joint ventures 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 $2.0 million, $1.9 million, and $3.4 million for the years ended December 31, 2018, 2017, and 2016, respectively.

Operating Co-investments

As of December 31, 2018 and 2017, the Company, through several joint ventures, owned 10,613 and 10,810 apartment homes, respectively, in operating communities. The Company’s book value of these co-investments was $833.3 million and $780.3 million at December 31, 2018 and 2017, respectively.

Pre-Development and Development Co-investments

As of both December 31, 2018 and 2017, the Company, through several joint ventures, owned 814 apartment homes in pre-development and development communities. The Company’s book value of these co-investments was $94.1 million and $73.8 million at December 31, 2018 and 2017, respectively.

In 2017, the Company entered into a joint venture to develop Ohlone, a multifamily community comprised of 269 apartment homes located in San Jose, CA. The Company has a 50% ownership interest in the development which has a projected total cost of $136.0 million. Construction began in the third quarter of 2017 and the community is expected to open in the fourth quarter of 2019. The Company has also committed to a $28.9 million preferred equity investment in the project, which accrues an annualized preferred return of 10.0% and matures in 2020.

In 2015, the Company entered into a joint venture to develop 500 Folsom, a multifamily community comprised of 545 apartment homes located in San Francisco, CA. The Company has a 50% ownership interest in the development which has a projected total cost of $415.0 million. Construction began in the fourth quarter of 2015 and the property is projected to open in the third quarter of 2019.

Preferred Equity Investments

As of December 31, 2018 and 2017, the Company held preferred equity investment interests in several joint ventures which own real estate. The Company’s book value of these preferred equity investments was $372.8 million and $265.2 million at December 31, 2018 and 2017, respectively, and is included in the co-investments line in the accompanying consolidated balance sheets.

During 2018, the Company made commitments to fund $45.1 million preferred equity investment in two preferred equity investments, in which the sponsors include a related party. See Note 6, Related Party Transactions, for additional details. The investments have initial returns ranging from 10.25%-12.0%, with maturities ranging from May 2023 to April 2024. As of December 31, 2018, the Company had funded $39.6 million of the $45.1 million commitment. The remaining committed amount will be funded if and when requested by the sponsors.

During 2017, the Company made commitments to fund $153.8 million in eight preferred equity investments. These investments have initial accrued preferred returns ranging from 9.5%-11.3%, with maturities ranging from March 2020 to August 2024. As of December 31, 2018, the Company had funded $151.8 million of the $153.8 million commitment.

In January 2018, the Company received cash of $2.4 million for the full redemption of a preferred equity investment in a co-investment that holds property in Seattle, WA.

In June 2018, the Company received cash of $26.5 million for the full redemption of a preferred equity investment in an entity that holds property in Seattle, WA. The Company recognized a gain of $1.6 million as a result of this early redemption, which is included in equity income from co-investments in the consolidated statements of income and comprehensive income.

In October 2018, the Company received cash of $5.0 million for the full redemption of a related party preferred equity investment in a co-investment that holds property in Los Angeles, CA.

(e) Real Estate under Development

The Company defines development projects as new communities that are being constructed, or are newly constructed and are in a phase of lease-up and have not yet reached stabilized operations. As of December 31, 2018, the Company's development pipeline was comprised of four consolidated projects under development, two unconsolidated joint venture projects under development and various predevelopment projects, aggregating 1,861 apartment homes, with total incurred costs of $0.8 billion.