Equity Based Compensation Plans

Stock Options and Restricted Stock

In May 2018, stockholders approved the Company’s 2018 Stock Award and Incentive Compensation Plan ("2018 Plan"). The 2018 Plan serves as the successor to the Company’s 2013 Stock Incentive Plan (the "2013 Plan"). The Company’s 2018 Plan provides incentives to attract and retain officers, directors and key employees. The 2018 Plan provides for the grant of stock-based awards to employees, directors and consultants of the Company and its affiliates. The aggregate number of shares of the Company’s common stock available for issuance pursuant to awards granted under the 2018 Plan is 2,000,000 shares, plus the number of shares authorized for grants and available for issuance under the 2013 Plan as of the effective date of the 2018 Plan and the number of shares subject to outstanding awards under the 2013 Plan that are forfeited or otherwise not issued under such awards. No further awards will be granted under the 2013 Plan and the shares that remained available for future issuance under the 2013 Plan as of the effective date of the 2018 Plan will be available for issuance under the 2018 Plan. In connection with the adoption of the 2018 Plan, the Board delegated to the Compensation Committee of the Board the authority to administer the 2018 Plan.

Equity-based compensation costs for options and restricted stock under the fair value method totaled $12.1 million, $9.8 million, and $8.5 million for years ended December 31, 2018, 2017 and 2016 respectively. For each of the years ended December 31, 2018, 2017 and 2016 equity-based compensation costs included $3.5 million related to 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 $2.0 million, $1.5 million, and $0.5 million for the years ended December 31, 2018, 2017 and 2016, respectively. The intrinsic value of the options exercised totaled $3.1 million, $16.7 million, and $11.9 million, for the years ended December 31, 2018, 2017, and 2016 respectively. The intrinsic value of the options exercisable totaled $12.5 million and $11.3 million as of December 31, 2018 and 2017, respectively.

Total unrecognized compensation cost related to unvested stock options totaled $6.0 million as of December 31, 2018 and the unrecognized compensation cost is expected to be recognized over a period of 2.1 years.

The average fair value of stock options granted for the years ended December 31, 2018, 2017 and 2016 was $26.13, $22.41 and $21.65, respectively. Certain stock options granted in 2018, 2017, and 2016 included a $100 cap, $125 cap, or no 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:



	2018			2017			2016
Stock price	$	262.09		$	240.56		$	219.60
Risk-free interest rates	2.76		%	2.30		%	2.08		%
Expected lives	6 years			6 years			6 years
Volatility	24.89		%	24.10		%	26.47		%
Dividend yield	2.81		%	2.90		%	2.89		%

A summary of the status of the Company’s stock option plans as of December 31, 2018, 2017, and 2016 and changes during the years ended on those dates is presented below:



	2018				2017				2016
	Shares		Weighted- average exercise price		Shares		Weighted- average exercise price		Shares		Weighted- average exercise price
Outstanding at beginning of year	536,208		$	211.41	557,648		$	181.50	525,094		$	154.98
Granted	119,361		262.09		164,677		240.56		207,429		219.60
Exercised	(39,175	)	159.05		(176,489	)	146.86		(138,054	)	138.79
Forfeited and canceled	(3,440	)	221.80		(9,628	)	160.40		(36,821	)	178.18
Outstanding at end of year	612,954		224.57		536,208		211.41		557,648		181.50
Options exercisable at year end	322,837		206.63		223,796		191.09		290,340		160.90

The following table summarizes information about restricted stock outstanding as of December 31, 2018, 2017 and 2016 and changes during the years ended:



	2018				2017				2016
	Shares		Weighted- average grant price		Shares		Weighted- average grant price		Shares		Weighted- average grant price
Unvested at beginning of year	90,823		$	163.49	58,349		$	149.11	54,676		$	147.10
Granted	51,945		194.70		62,706		177.28		49,183		150.13
Vested	(48,212	)	150.76		(29,675	)	170.17		(38,427	)	147.12
Forfeited and canceled	(3,498	)	158.71		(557	)	119.37		(7,083	)	141.76
Unvested at end of year	91,058		180.99		90,823		163.49		58,349		149.11

The unrecognized compensation cost related to unvested restricted stock totaled $11.4 million as of December 31, 2018 and is expected to be recognized over a period of 2.7 years.

Long Term Incentive Plans – LTIP Units

On December 9, 2014, the Operating Partnership issued 44,750 LTIP 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 LTIP units were granted subject only to performance-based criteria and were 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 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 OP Units 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 LTIP 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 OP Units 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 Compensation Committee of the Board of Directors 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.

Equity-based compensation costs for LTIP and Z Units under the fair value method totaled approximately $0.8 million, $1.5 million and $2.4 million for the years ended December 31, 2018, 2017 and 2016, respectively. Equity-based compensation costs 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 $0.2 million, $0.5 million, and $0.6 million, for the years ended December 31, 2018, 2017, and 2016, respectively. The intrinsic value of the vested and unvested LTIP Units totaled $58.0 million as of December 31, 2018. Total unrecognized compensation cost related to the unvested LTIP Units under the LTIP Units plans totaled $0.9 million as of December 31, 2018. On a weighted average basis, the unamortized cost for the 2015 LTIP Units and the Z Units is expected to be recognized over the next 1.0 years to 6.5 years, depending on certain performance targets.

The following table summarizes information about the LTIP Units outstanding as of December 31, 2018:



	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, 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
Granted	—		—		—
Vested	32,961		(32,961	)	—
Converted	(688	)	—		(688	)
Cancelled	—		(3,854	)	(3,854	)
Balance, December 31, 2017	213,300		23,212		236,512		$	75.03	7.5
Granted	—		—		—
Vested	12,051		(12,051	)	—
Converted	(91,270	)	—		(91,270	)
Cancelled	—		—		—
Balance, December 31, 2018	134,081		11,161		145,242		$	75.03	6.5