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 its subsidiaries (the "Operating Partnership," which holds the operating assets of the Company), prepared in accordance with U.S. generally accepted accounting principles ("U.S. 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, 2018.

The unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2019 and 2018 include the accounts of the Company and the Operating Partnership. Essex is the sole general partner of the Operating Partnership, with a 96.6% general partnership interest as of both September 30, 2019 and December 31, 2018. Total Operating Partnership limited partnership units ("OP Units," and the holders of such OP Units, "Unitholders") outstanding were 2,298,237 and 2,305,389 as of September 30, 2019 and December 31, 2018, respectively, and the redemption value of the units, based on the closing price of the Company’s common stock totaled approximately $750.7 million and $565.3 million as of September 30, 2019 and December 31, 2018, respectively.

As of September 30, 2019, the Company owned or had ownership interests in 249 operating apartment communities, aggregating 60,620 apartment homes, excluding the Company’s ownership interest in preferred interest co-investments, loan investments, one operating commercial building, and seven active developments. The operating apartment 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.

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02 (Topic 842) "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 are to be accounted for similar to prior leasing guidance (Topic 840) for operating leases. For lessors, accounting for leases under the new standard is substantially the same as prior leasing 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. In July 2018, the FASB issued ASU No. 2018-11 "Leases (Topic 842): Targeted Improvements," which includes a practical expedient that allows lessors to not separate nonlease components from the associated lease component. This provides the Company with the option of not bifurcating certain common area maintenance recoveries as a non-lease component, if certain requirements are met. The Company adopted ASU No. 2016-02 and ASU No. 2018-11 as of January 1, 2019 using the modified retrospective approach and elected a package of practical expedients. There was no adjustment to the opening balance of retained earnings as a result of the adoption. See Note 11, Lease Agreements - Company as Lessor, and Note 12, Lease Agreements - Company as Lessee, for further details.

In August 2017, the FASB issued ASU No. 2017-12 "Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities," which, among other things, requires entities to present the earnings effect of hedging instruments in the same income statement line item in which the earnings effect of the hedged item is reported. The new standard also adds new disclosure requirements. The Company adopted ASU No. 2017-12 as of January 1, 2019 using the modified retrospective method by applying a cumulative effect adjustment to accumulated other comprehensive loss, net of $0.2 million, representing accumulated net hedge ineffectiveness. Furthermore, as a result of the adoption of this standard, the Company will recognize qualifying hedge ineffectiveness through accumulated other comprehensive income as opposed to current earnings.

In June 2016, the FASB issued ASU No. 2016-13 "Measurement 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 entities to write down credit losses only when losses are probable and loss reversals are not permitted. The FASB additionally issued various updates to clarify and amend the guidance provided in ASU 2016-13. In May 2019, the FASB issued ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments," which, with respect to credit losses, among other things, clarifies and addresses issues related to accrued interest, transfers between classifications of loans or debt securities, recoveries, and variable interest rates. Additionally, in May 2019, the FASB issued ASU 2019-05, "Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief," which allows entities to irrevocably elect the fair value option on certain financial instruments. The new standards will be effective for the Company beginning January 1, 2020 and early adoption is permitted. The Company is currently in the process of evaluating the impact of these amendments, with a focus on investments in mortgage backed securities and mezzanine loans, and does not expect the adoption to have a material impact on the Company's consolidated results of operations or financial position.

In August 2018, the FASB issued ASU No. 2018-13 "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement," which eliminates certain disclosure requirements affecting all levels of measurements, and modifies and adds new disclosure requirements for Level 3 measurements. The new standard will be effective for the Company beginning January 1, 2020 and early adoption is permitted. The Company expects to apply the new standard on January 1, 2020 and does not expect the adoption to have a material impact on the Company's consolidated results of operations or financial position.

The Company reports its equity securities and available for sale debt securities at fair value, based on quoted market prices (Level 1 for the common stock and investment funds, Level 2 for the unsecured bonds and Level 3 for investments in mortgage backed securities, as defined by the FASB standard for fair value measurements). As of September 30, 2019 and December 31, 2018, $4.9 million and $6.7 million, respectively, of equity securities presented within common stock and stock funds in the tables below, represent investments measured at fair value, using net asset value as a practical expedient, and are not categorized in the fair value hierarchy.

Any unrealized gain or loss in debt securities classified as available for sale is recorded as other comprehensive income. Unrealized gains and losses in equity securities, realized gains and losses in debt securities, 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, 2019 and December 31, 2018, equity securities and debt securities consisted primarily of investment-grade unsecured bonds, U.S. treasury securities, common stock and stock funds, and investments in mortgage backed securities. As of September 30, 2019 and December 31, 2018, the Company classified its investments in mortgage backed securities, which mature in November 2019 and September 2020, as held to maturity, and accordingly, these securities are stated at their amortized cost. The discount on the mortgage backed securities is being amortized to interest income based on an estimated yield and the maturity date of the securities.



	September 30, 2019
	Amortized Cost/Cost		Gross Unrealized Gain (Loss)			Carrying Value
Equity securities:
Investment funds - debt securities	$	27,883	$	576		$	28,459
Common stock and stock funds	37,123		1,465			38,588

Debt securities:
Available for sale
U.S. treasury securities	4,915		(15		)	4,900
Investment-grade unsecured debt	1,048		10			1,058
Held to maturity
Mortgage backed securities	143,889		—			143,889
Total - Marketable securities	$	214,858	$	2,036		$	216,894



	December 31, 2018
	Amortized Cost/Cost		Gross Unrealized Gain (Loss)			Carrying Value
Equity securities:
Investment funds - debt securities	$	31,934	$	(568	)	$	31,366
Common stock and stock funds	39,731		(1,671		)	38,060

Debt securities:
Available for sale
U.S. treasury securities	8,983		(31		)	8,952
Investment-grade unsecured bonds	4,125		(145		)	3,980
Held to maturity
Mortgage backed securities	127,187		—			127,187
Total - Marketable securities	$	211,960	$	(2,415	)	$	209,545

For the three months ended September 30, 2019 and 2018, the proceeds from sales and maturities of marketable securities totaled $7.0 million and $3.5 million, respectively, which resulted in $0.2 million and $0.1 million in realized gains, respectively, for such periods. For the nine months ended September 30, 2019 and 2018, the proceeds from sales and maturities of marketable securities totaled $57.2 million and $22.5 million, respectively, which resulted in $0.7 million in realized gains for both periods.

For the three and nine months ended September 30, 2019, the portion of equity security unrealized losses or gains that were recognized in income totaled $0.2 million in losses and $4.3 million in gains, respectively, and were included in interest and other income on the Company's condensed consolidated statements of income and comprehensive income. For the three and nine months ended September 30, 2018, the portion of equity security unrealized gains that was recognized in income totaled

In accordance with accounting standards for consolidation of variable interest entities ("VIEs"), the Company consolidates the Operating Partnership, 17 DownREIT limited partnerships (comprising nine communities), and seven co-investments as of September 30, 2019. As of December 31, 2018, the Company consolidated the Operating Partnership, 16 DownREIT limited partnerships (comprising eight communities), and eight co-investments. The Company consolidates these entities because it is deemed the primary beneficiary. Essex has no assets or liabilities other than its investment in the Operating Partnership. The consolidated total assets and liabilities related to the above consolidated co-investments and DownREIT limited partnerships, net of intercompany eliminations, were approximately $1.0 billion and $372.0 million, respectively, as of September 30, 2019 and $849.8 million and $261.7 million, respectively, as of December 31, 2018. Noncontrolling interests in these entities were $129.9 million and $64.5 million as of September 30, 2019 and December 31, 2018, respectively. The Company's financial risk in each VIE is limited to its equity investment in the VIE. As of September 30, 2019 and December 31, 2018, the Company did not have any VIEs of which it was not deemed to be the primary beneficiary.

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 annual report on Form 10-K for the year ended December 31, 2018) are being amortized over the expected service periods.

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, 2019 and December 31, 2018, because interest rates, yields, and other terms for these instruments are consistent with interest rates, yields, and other terms currently available for similar instruments. Management has estimated that the fair value of the Company’s fixed rate debt with a carrying value of $5.2 billion and $5.0 billion at September 30, 2019 and December 31, 2018, respectively, was approximately $5.5 billion and $5.0 billion, respectively. Management has estimated that the fair value of the Company’s $839.2 million and $619.6 million of variable rate debt at September 30, 2019 and December 31, 2018, respectively, was approximately $833.6 million and $615.2 million 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, 2019 and December 31, 2018 due to the short-term maturity of these instruments. Marketable securities, except mortgage backed securities, are carried at fair value as of September 30, 2019 and December 31, 2018.

At September 30, 2019, the Company’s investments in mortgage backed securities had a carrying value of $143.9 million and the Company estimated the fair value to be approximately $144.7 million. At December 31, 2018, the Company’s investments in mortgage backed securities had a carrying value of $127.2 million and the Company estimated the fair value to be approximately $129.5 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 the expected, discounted cash flows to estimate fair value.

The Company’s capitalized internal costs related to development and redevelopment projects were comprised primarily of employee compensation and totaled $4.3 million and $4.7 million during the three months ended September 30, 2019 and 2018, respectively, and $13.1 million and $14.2 million for the nine months ended September 30, 2019 and 2018, 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.

The Company owns investments in joint ventures 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. Under the equity method of accounting, the investment is carried at the cost of assets contributed, plus the Company's equity in earnings less distributions received and the Company's share of losses. The significant accounting policies of the Company’s co-investment entities are consistent with those of the Company in all material respects.

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 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.

($ in thousands):



	Change in fair value and amortization of swap settlements			Unrealized gains/(losses) on available for sale securities			Total
Balance at December 31, 2018	$	(13,077	)	$	(140	)	$	(13,217	)
Cumulative effect upon adoption of ASU No. 2017-12	175			—			175
Other comprehensive (loss) income before reclassification	(490		)	197			(293		)
Amounts reclassified from accumulated other comprehensive loss	(5,662		)	(31		)	(5,693		)
Other comprehensive income	(5,977		)	166			(5,811		)
Balance at September 30, 2019	$	(19,054	)	$	26		$	(19,028	)



	Change in fair value and amortization of swap settlements			Unrealized gains/(losses) on available for sale securities			Total
Balance at December 31, 2018	$	(9,593	)	$	(145	)	$	(9,738	)
Cumulative effect upon adoption of ASU No. 2017-12	181			—			181
Other comprehensive income (loss) before reclassification	(506		)	203			(303		)
Amounts reclassified from accumulated other comprehensive loss	(5,860		)	(32		)	(5,892		)
Other comprehensive income	(6,185		)	171			(6,014		)
Balance at September 30, 2019	$	(15,778	)	$	26		$	(15,752	)

Amounts reclassified from accumulated other comprehensive loss in connection with derivatives are recorded in interest expense on the condensed consolidated statements of income and comprehensive income. Realized gains and losses on available for sale debt securities are included in interest and other income on the condensed consolidated statements of income and comprehensive income.



	September 30, 2019		December 31, 2018		September 30, 2018		December 31, 2017
Cash and cash equivalents - unrestricted	$	74,031	$	134,465	$	157,279	$	44,620
Cash and cash equivalents - restricted	17,695		16,930		17,347		16,506
Total unrestricted and restricted cash and cash equivalents shown in the condensed consolidated statement of cash flows	$	91,726	$	151,395	$	174,626	$	61,126

The preparation of condensed consolidated financial statements, in accordance with U.S. 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.