(1) Organization and Basis of Presentation

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 subsidiaries (the “Operating Partnership,” which holds the operating assets of the Company), prepared in accordance with U.S. generally accepted accounting principles (“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, 2013.

All significant intercompany balances and transactions have been eliminated in the condensed consolidated financial statements. Certain reclassifications have been made to conform to the current year’s presentation. Such reclassification had no effect on previously reported financial statements.

On April 1, 2014, Essex completed the merger with BRE Properties, Inc. (“BRE”). In connection with the closing of the merger, (1) BRE merged into a wholly owned subsidiary of Essex, and (2) each outstanding share of BRE common stock was converted into (i) 0.2971 shares (the “Stock Consideration”) of Essex common stock, and (ii) $7.18 in cash, (the “Cash Consideration”), plus cash in lieu of fractional shares for total consideration of approximately $4.3 billion. The Cash Consideration was adjusted as a result of the authorization and declaration of a special distribution to the stockholders of BRE of $5.15 per share of BRE common stock payable to BRE stockholders of record as of the close of business on March 31, 2014 (the “Special Dividend”). The Special Dividend is payable as a result of the closing of the sale of certain interests in assets of BRE to certain parties designated by Essex, which closed on March 31, 2014. Pursuant to the terms of the merger agreement, the amounts payable as a Special Dividend reduced the Cash Consideration of $12.33 payable by Essex in the merger to $7.18 per share of BRE common stock.

Essex issued approximately 23.1 million shares of Essex common stock as Stock Consideration in the merger. For purchase accounting, the value of the common stock issued by Essex upon the consummation of the merger was determined based on the closing price of BRE’s common stock on the closing date of the merger. As a result of Essex being admitted to the S&P 500 on the same date as the closing of the merger, Essex’s common stock price experienced significantly higher than usual trading volume and the closing price of $174 per share was significantly higher than its volume-weighted average trading price for the days before and after April 1, 2014. BRE’s common stock did not experience the same proportionate increase in common stock price leading up to April 1, 2014. As a result, given that a substantial component of the purchase price is an exchange of equity instruments, Essex used the closing price of BRE’s common stock on April 1, 2014 of $61 per share, less the Cash Consideration, as the fair value of the stock consideration. The net assets and results of operations of BRE will be included in our condensed consolidated financial statements beginning April 1, 2014, our second quarter of 2014.

On March 31, 2014, BRE contributed 14 properties valued at approximately $1.4 billion to Essex for approximately 8.6 million Operating Partnership units (“OP units”). The OP units were subsequently retired by the Company on April 1, 2014. The purpose of this transaction was tax efficiency.

The unaudited condensed consolidated financial statements for the three months ended March 31, 2014 and 2013 include the accounts of the Company and the Operating Partnership. Essex is the sole general partner in the Operating Partnership, and excluding the 8.6 million OP units issued on March 31, 2014 and retired on April 1, 2014, held a 94.5% general partnership interest as of March 31, 2014. Total Operating Partnership units outstanding, excluding the March 31, 2014 transaction, were 2,176,222 and 2,149,802 as of March 31, 2014 and December 31, 2013, respectively, and the redemption value of the units, based on the closing price of the Company’s common stock totaled $370.1 million and $308.5 million, as of March 31, 2014 and December 31, 2013, respectively.

As of March 31, 2014, and prior to the merger with BRE, the Company owned or had ownership interests in 176 apartment communities, aggregating 37,569 units, excluding the Company’s ownership in preferred interest co-investments, (collectively, the “Communities”, and individually, a “Community”), four commercial buildings and thirteen 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, 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, 2014 and December 31, 2013, 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, 2014 and December 31, 2013, 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. As of March 31, 2014 and December 31, 2013 marketable securities consist of the following ($ in thousands):

	March 31, 2014
	Cost/		Gross
	Amortized		Unrealized
	Cost		Gain (Loss)		Carrying Value
Available for sale:
Investment-grade unsecured bonds	$	11,772	$	96	$	11,868
Investment funds - US treasuries		5,017		5		5,022
Common stock		22,103		710		22,813
Held to maturity:
Mortgage backed securities		60,645		-		60,645
Total	$	99,537	$	811	$	100,348

	December 31, 2013
	Cost/		Gross
	Amortized		Unrealized
	Cost		Gain (Loss)			Carrying Value
Available for sale:
Investment-grade unsecured bonds	$	15,446	$	509		$	15,955
Investment funds - US treasuries		3,675		3			3,678
Common stock		13,104		(1,304	)		11,800
Held to maturity:
Mortgage backed securities		58,651		-			58,651
Total	$	90,876	$	(792	)	$	90,084

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, 2014, and 2013, the proceeds from sales of available for sale securities totaled $4.0 million and $20.3 million, respectively, which resulted in gains of $0.4 million and $1.8 million, respectively.

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 1,007,879 for both as of March 31, 2014 and December 31, 2013, and the redemption value of the units, based on the closing price of the Company’s common stock totaled $171.4 million and $144.6 million, as of March 31, 2014 and December 31, 2013, respectively. The consolidated total assets and liabilities related to these VIEs, net of intercompany eliminations, were approximately $233.4 million and $218.9 million, respectively, as of March 31, 2014 and $194.9 million and $178.3 million, respectively, as of December 31, 2013. 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, 2014 and December 31, 2013, 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, 2013) are being amortized over the expected service periods.

Stock-based compensation expense for options and restricted stock totaled $0.6 million for the three months ended March 31, 2014 and 2013. The intrinsic value of the stock options exercised during the three months ended March 31, 2014 and 2013 totaled $0.6 million and $0.9 million, respectively. As of March 31, 2014, the intrinsic value of the stock options outstanding and fully vested totaled $21.1 million. As of March 31, 2014, total unrecognized compensation cost related to unvested share-based compensation granted under the stock option and restricted stock plans totaled $6.1 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. The Operating Partnership also issued 50,500 units under the 2014 Long-Term Incentive Plan Award agreements in December 2013. Pursuant to the 2014 Long-Term Incentive Plan Awards, each recipient was initially granted a number of 2014 Long-Term Incentive Plan Units (the “2014 LTIP Units”), 90% of which are subject to performance-based vesting, and 10% of which are subject to service-based vesting based on continued employment. One-third of the performance-based vesting of the 2014 LTIP Units initially granted will be eligible to be earned by recipients based on Essex’s absolute total stockholder return and two-thirds will be eligible to be earned based on Essex’s relative total stockholder return, in each case, during a one-year performance period beginning on the initial grant date of the awards.

Stock-based compensation expense for Z-1 Units and 2014 LTIP Units totaled $0.6 million and $0.5 million for the three months ended March 31, 2014 and 2013, respectively. As of March 31, 2014, the intrinsic value of the Z-1 Units and 2014 LTIP Units subject to future vesting totaled $22.4 million. As of March 31, 2014, total unrecognized compensation cost related to Z-1 Units and 2014 LTIP Units subject to future vesting totaled $7.6 million. The unamortized cost is expected to be recognized over 6 years subject to the achievement of the stated performance criteria.

Fair Value of Financial Instruments

Management believes that the carrying amounts of outstanding lines of credit, notes and other receivables approximate fair value as of March 31, 2014 and December 31, 2013, 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 $2.29 billion of fixed rate debt, including unsecured bonds, at March 31, 2014 is approximately $2.42 billion and the fair value of the Company’s $527.6 million of variable rate debt, excluding borrowings under the lines of credit, at March 31, 2014 is $500.0 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, 2014 due to the short-term maturity of these instruments. Marketable securities, except mortgage backed securities, and derivatives are carried at fair value as of March 31, 2014.

At March 31, 2014, the Company’s investments in mortgage backed securities had a carrying value of $60.6 million and the Company estimated the fair value to be approximately $89.4 million. At December 31, 2013, the Company’s investments in mortgage backed securities had a carrying value of $58.7 million and the Company estimated the fair value to be approximately $86.2 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 expected, discounted cash flows to estimate the fair value.

Capitalization of Costs

The Company’s capitalized internal costs related to development and redevelopment projects totaled $1.7 million and $1.6 million during the three months ended March 31, 2014 and 2013, respectively, most of which relates to development projects. These totals include capitalized salaries of $0.9 million and $0.6 million for the three months ended March 31, 2014 and 2013, respectively. The Company capitalizes leasing commissions associated with the lease-up of a development community and amortizes the costs over the life of the leases. The amounts capitalized are immaterial for all periods presented.

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-investment entities are consistent with those of the Company in all material respects. For preferred equity investments, the Company recognizes its preferred interest in equity income in co-investments.

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. Any promote fees are reflected in equity income (loss) from co-investments.

Changes in Accumulated Other Comprehensive Loss, Net by Component

Essex Property Trust, Inc.

				Unrealized
	Change in fair			gains/(losses) on
	value and amortization			available for sale
	of derivatives			securities			Total
Balance at December 31, 2013	$	(59,724	)	$	(748	)	$	(60,472	)
Other comprehensive income (loss) before reclassification		472			1,914			2,386
Amounts reclassified from accumulated other comprehensive loss		2,093			(402	)		1,691
Net other comprehensive income (loss)		2,565			1,512			4,077
Balance at March 31, 2014	$	(57,159	)	$	764		$	(56,395	)

Essex Portfolio, L.P.

				Unrealized
	Change in fair			gains/(losses) on
	value and amortization			available for sale
	of derivatives			securities			Total
Balance at December 31, 2013	$	(58,148	)	$	(792	)	$	(58,940	)
Other comprehensive income (loss) before reclassification		627			2,030			2,657
Amounts reclassified from accumulated other comprehensive loss		2,093			(427	)		1,666
Net other comprehensive income (loss)		2,720			1,603			4,323
Balance at March 31, 2014	$	(55,428	)	$	811		$	(54,617	)

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.

Discontinued Operations

In April 2014, the Financial Accounting Standards Board (“FASB”) issued ASU, No. 2014-018, Presentation of Financial Statements, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-018 changes the requirements for reporting discontinued operation under Subtopic 205-20, Presentation of Financial Statements—Discontinued Operations. The amendment updates the definition of discontinued operation and defines discontinued operations to be those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. This ASU is effective for disposals of components of an entity that occur within annual periods beginning on or after December 15, 2014 with early adoption permitted , but only for disposal that have not been reported in financial statements previously issued.

The Company adopted ASU 2014-018 in its first quarter of 2014. In January 2014, Essex sold Vista Capri North, a 106 unit community located in San Diego, CA for $14.4 million. The total gain on sale was $7.9 million. The Company determined that the disposal was not a discontinued operation in accordance with ASU 2014-018. The gain is recorded in gains on sale of real estate and land in the condensed consolidated statements of operations and comprehensive income.

BRE Merger

As previously discussed in Note 1, the merger with BRE closed on April 1, 2014 and 14 of the BRE properties were acquired on March 31, 2013. The preliminary fair value of the assets acquired on March 31, 2014 in exchange for $1.4 billion of OP units was substantially all attributable to rental properties which included land, buildings and improvements, and real estate under development and approximately $19 million attributable to acquired in-place lease value which is classified within prepaid expenses and other assets in the accompanying condensed consolidated balance sheets. With regards to the BRE merger that closed on April 1, 2014, a summary of the preliminary fair value of the assets and liabilities acquired on April 1, 2014 in exchange for the total consideration of approximately $4.3 billion were as follows (includes the 14 properties acquired on March 31, 2014 as the OP units issued were retired on April 1, 2014) (in millions):

Rental properties, excluding co-investments	$	5,808
Co-investments		206
In-place lease value		97
Other assets		96
Secured and unsecured debt		(1,736	)
Other liabilities		(129	)
	$	4,342

The initial purchase accounting is based on management’s preliminary assessment, which may differ when final information becomes available. Subsequent adjustments made to the initial purchase accounting, if any, are made within the measurement period, which typically does not exceed one year.

The unaudited pro forma financial information set forth below is based on Essex’s historical condensed consolidated statement of operations and comprehensive income for the quarters ended March 31, 2014 and March 31, 2013, adjusted to give effect to the merger with BRE including the 14 BRE properties contributed on March 31, 2014, as if they occurred on January 1, 2013. The pro forma adjustments primarily relate to merger expenses, depreciation expense on acquired buildings and improvements, amortization of acquired intangibles, and estimated interest expense related to assumed debt.

Essex Property Trust, Inc.

	Pro forma (unaudited)
	three months ended March 31
	(in thousands, except per share data)
	2014		2013
Total revenue	$	247,801	$	228,721
Net income available to common shareholders (1) (2)	$	130,506	$	(16,956	)
Earnings per share, diluted (1)	$	2.08	$	(0.28	)

Essex Portfolio, L.P.

	Pro forma (unaudited)
	three months ended March 31
	(in thousands, except per unit data)
	2014		2013
Total revenue	$	247,801	$	228,721
Net income available to common unitholders (1) (2)	$	131,923	$	(15,455	)
Earnings per unit, diluted (1)	$	2.08	$	(0.25	)

(1)

2014 supplemental pro forma net income available to common stockholders were adjusted to exclude $16,059 of merger related costs incurred by Essex during the three-months ended March 31, 2014. 2013 supplemental pro forma net income available to common stockholders were adjusted to include these charges plus an additional approximately $29,000 of merger expenses estimated to be incurred by Essex . 2014 and 2013 supplemental proforma earnings per share, diluted, were adjusted accordingly.

(2)

2014 supplemental pro forma net income available to common stockholders includes approximately $105 million from discontinued operations related to the sale of three BRE properties that are non-recurring transactions.