(1) Organization and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements present the accounts of Essex Property Trust, Inc. (the "Company"), which include the accounts of the Company and Essex Portfolio, L.P. (the "Operating Partnership," which holds the operating assets of the Company), prepared in accordance with U.S. generally accepted accounting principles 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, 2012.

All significant intercompany balances and transactions have been eliminated in the condensed consolidated financial statements.

The unaudited condensed consolidated financial statements for the three months ended March 31, 2013 and 2012 include the accounts of the Company and the Operating Partnership. The Company is the sole general partner in the Operating Partnership, with a 94.5% general partnership interest as of March 31, 2013. Total Operating Partnership units outstanding were 2,154,510 and 2,122,381 as of March 31, 2013 and December 31, 2012, respectively, and the redemption value of the units, based on the closing price of the Company's common stock totaled $324.4 million and $311.2 million, as of March 31, 2013 and December 31, 2012, respectively.

As of March 31, 2013, the Company owned or had ownership interests in 166 apartment communities, aggregating 34,343 units, excluding the Company's ownership in preferred interest co-investments, (collectively, the "Communities", and individually, a "Community"), five commercial buildings and eight active development projects (collectively, the "Portfolio"). The Communities are located in Southern California (Los Angeles, Orange, Riverside, San Diego, Santa Barbara, and Ventura counties), Northern California (the San Francisco Bay Area) and the Seattle metropolitan area.

Marketable Securities

The Company reports its available for sale securities at fair value, based on quoted market prices (Level 2 for the unsecured bonds and Level 1 for the common stock and investment funds, as defined by the Financial Accounting Standards Board ("FASB") standard for fair value measurements as discussed later in Note 1), and any unrealized gain or loss is recorded as other comprehensive income (loss). Realized gains and losses, interest and dividend income, and amortization of purchase discounts are included in interest and other income on the condensed consolidated statement of operations and comprehensive income.

As of March 31, 2013 and December 31, 2012, marketable securities consisted primarily of investment-grade unsecured bonds, common stock, investments in mortgage backed securities and investment funds that invest in U.S. treasury or agency securities. As of March 31, 2013 and December 31, 2012, 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 estimated fair values of the mortgage backed securities (Level 2 securities) are approximately equal to the carrying values.

As of March 31, 2012 and December 31, 2012 marketable securities consist of the following ($ in thousands):

	March 31, 2013
	Cost/		Gross
	Amortized		Unrealized
	Cost		Gain		Carrying Value
Available for sale:
Investment-grade unsecured bonds	$	5,119	$	96	$	5,215
Investment funds - US treasuries		15,365		721		16,086
Common stock		5,642		85		5,727
Held to maturity:
Mortgage backed securities		53,404		-		53,404
Total	$	79,530	$	902	$	80,432

	December 31, 2012
	Cost/		Gross
	Amortized		Unrealized
	Cost		Gain		Carrying Value
Available for sale:
Investment-grade unsecured bonds	$	5,143	$	98	$	5,241
Investment funds - US treasuries		14,120		729		14,849
Common stock		18,917		1,704		20,621
Held to maturity:
Mortgage backed securities		52,002		-		52,002
Total	$	90,182	$	2,531	$	92,713

The Company uses the specific identification method to determine the cost basis of a security sold and to reclassify amounts from accumulated other comprehensive income for securities sold. For the three months ended March 31, 2013, the proceeds from sales of available for sale securities totaled $20.3 million which resulted in a realized gain of $1.8 million. For the three months ended March 31, 2012, there were no sales of available for sale securities.

Variable Interest Entities

The Company consolidates 19 DownREIT limited partnerships (comprising twelve communities) since the Company is the primary beneficiary of these variable interest entities ("VIEs"). Total DownREIT units outstanding were 1,033,474 and 1,039,431 as of March 31, 2013 and December 31, 2012, respectively, and the redemption value of the units, based on the closing price of the Company's common stock totaled $155.6 million and $152.4 million, as of March 31, 2013 and December 31, 2012, respectively. The consolidated total assets and liabilities related to these VIEs, net of intercompany eliminations, were approximately $202.4 million and $181.1 million, respectively, as of March 31, 2013 and $201.1 million and $178.6 million, respectively, as of December 31, 2012. Interest holders in VIEs consolidated by the Company are allocated income equal to the cash payments made to those interest holders. The remaining results of operations are allocated to the Company. As of March 31, 2013 and December 31, 2012, the Company did not have any other VIEs of which it was deemed to be the primary beneficiary.

Equity Based Compensation

The Company accounts for equity based compensation using the fair value method of accounting. The estimated fair value of stock options granted by the Company is being amortized over the vesting period of the stock options. 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 Form 10-K for the year ended December 31, 2012) are being amortized over the expected service periods.

Stock-based compensation expense for options and restricted stock totaled $0.6 million and $0.4 million for the three months ended March 31, 2013 and 2012, respectively. The intrinsic value of the stock options exercised during the three months ended March 31, 2013 and 2012 totaled $0.9 million and $1.1 million, respectively. As of March 31, 2013, the intrinsic value of the stock options outstanding totaled $14.6 million. As of March 31, 2013, total unrecognized compensation cost related to unvested share-based compensation granted under the stock option and restricted stock plans totaled $5.8 million. The cost is expected to be recognized over a weighted-average period of 1 to 5 years for the stock option plans and is expected to be recognized straight-line over a period of 1 to 7 years for the restricted stock awards.

The Company has adopted an incentive program involving the issuance of Series Z-1 Incentive Units of limited partnership interest in the Operating Partnership. Stock-based compensation expense for Z-1 Units totaled $0.5 million and $0.6 million for the three months ended March 31, 2013 and 2012. Stock-based compensation for Z-1 units capitalized totaled $0.1 million for the three months ended March 31, 2013, and 2012, respectively. As of March 31, 2013, the intrinsic value of the Z-1 Units subject to future vesting totaled $16.1 million. As of March 31, 2013, total unrecognized compensation cost related to Z-1 Units subject to future vesting totaled $6.8 million. The unamortized cost is expected to be recognized up to 14 years subject to the achievement of the stated performance criteria.

Fair Value of Financial Instruments

Management believes that the carrying amounts of its amounts outstanding under lines of credit, notes receivable and notes and other receivables approximate fair value as of March 31, 2013 and December 31, 2012, because interest rates, yields and other terms for these instruments are consistent with yields and other terms currently available for similar instruments. Management has estimated that the fair value of the Company's $2.12 billion of fixed rate debt, including unsecured bonds, at March 31, 2013 is approximately $2.21 billion and the fair value of the Company's $551.6 million of variable rate debt, excluding borrowings under the lines of credit, at March 31, 2013 is $632.7 million based on the terms of existing mortgage notes payable, unsecured bonds 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 March 31, 2013 due to the short-term maturity of these instruments. The fair values of the Company's investments in mortgage backed securities are approximately equal to the amortized cost carrying value of these securities. Marketable securities and derivatives are carried at fair value as of March 31, 2013.

Capitalization

The Company's capitalized internal costs related to development and redevelopment projects totaled $1.6 million and $1.5 million during the three months ended March 31, 2013 and 2012, respectively, most of which relates to development projects. These totals include capitalized salaries of $0.6 million and $0.7 million for the three months ended March 31, 2013 and 2012, respectively.

Co-investments

The Company owns investments in joint ventures ("co-investments") in which it has significant influence, but its ownership interest does not meet the criteria for consolidation in accordance with the accounting standards. Therefore, the Company accounts for these 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-investments entities are consistent with those of the Company in all material respects. For preferred equity investments the Company recognizes its preferred interest as equity in earnings.

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 operations 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 may provide promote distributions 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.

Changes in Accumulated Other Comprehensive Loss, Net by Component

					Unrealized
	Change in				gains/(losses) on
	fair value and amortization of				available for sale
	derivatives				securities				Total
Balance at December 31, 2012		$	(71,658	)		$	2,397			$	(69,261	)
Other comprehensive income (loss) before reclassification			506				130				636
Amounts reclassified from accumulated other
comprehensive loss			2,018				(1,543	)			345
Net other comprehensive income (loss)			2,524				(1,629	)			981
Balance at March 31, 2013		$	(69,134	)		$	854			$	(68,280	)

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

Accounting Estimates

The preparation of condensed consolidated financial statements, in accordance with U.S. generally accepted accounting principles, 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.