EDGAR 10-K Filing

Company CIK: 920522
Filing Year: 2021
Filename: 920522_10-K_2021_0000920522-21-000015.json

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ITEM 1. BUSINESS
Item 1. Business
OVERVIEW
Essex Property Trust, Inc. ("Essex"), a Maryland corporation, is an S&P 500 company that operates as a self-administered and self-managed real estate investment trust ("REIT"). Essex owns all of its interest in its real estate and other investments directly or indirectly through Essex Portfolio, L.P. (the "Operating Partnership" or "EPLP"). Essex is the sole general partner of the Operating Partnership and as of December 31, 2020, had an approximately 96.6% general partnership interest in the Operating Partnership. In this report, the terms the "Company," "we," "us," and "our" also refer to Essex Property Trust, Inc., the Operating Partnership and those entities/subsidiaries owned or controlled by Essex and/or the Operating Partnership.
Essex has elected to be treated as a REIT for federal income tax purposes, commencing with the year ended December 31, 1994. Essex completed its initial public offering on June 13, 1994. In order to maintain compliance with REIT tax rules, the Company utilizes taxable REIT subsidiaries for various revenue generating or investment activities. All taxable REIT subsidiaries are consolidated by the Company for financial reporting purposes.
The Company is engaged primarily in the ownership, operation, management, acquisition, development and redevelopment of predominantly apartment communities, located along the West Coast of the United States. As of December 31, 2020, the Company owned or had ownership interests in 246 operating apartment communities, aggregating 60,272 apartment homes, excluding the Company's ownership in preferred equity co-investments, loan investments, one operating commercial building, and a development pipeline comprised of three consolidated projects and three unconsolidated joint venture projects aggregating 1,853 apartment homes (collectively, the "Portfolio").
The Company’s website address is http://www.essex.com. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and the Proxy Statement for its Annual Meeting of Stockholders are available, free of charge, on its website as soon as practicable after the Company files the reports with the U.S. Securities and Exchange Commission ("SEC"). The information contained on the Company's website shall not be deemed to be incorporated into this report.
BUSINESS STRATEGIES
The following is a discussion of the Company’s business strategies in regards to real estate investment and management.
Business Strategies
Research Driven Approach to Investments - The Company believes that successful real estate investment decisions and portfolio growth begin with extensive regional economic research and local market knowledge. The Company continually assesses markets where the Company operates, as well as markets where the Company considers future investment opportunities by evaluating markets and focusing on the following strategic criteria:
•Major metropolitan areas that have regional population in excess of one million;
•Constraints on new supply driven by: (i) low availability of developable land sites where competing housing could be economically built; (ii) political growth barriers, such as protected land, urban growth boundaries, and potential lengthy and expensive development permit processes; and (iii) natural limitations to development, such as mountains or waterways;
•Rental demand enhanced by affordability of rents relative to costs of for-sale housing; and
•Housing demand based on job growth, proximity to jobs, high median incomes and the quality of life including related commuting factors.
Recognizing that all real estate markets are cyclical, the Company regularly evaluates the results of its regional economic, and local market research, and adjusts the geographic focus of its portfolio accordingly. The Company seeks to increase its portfolio allocation in markets projected to have the strongest local economies and to decrease allocations in markets projected to have declining economic conditions. Likewise, the Company also seeks to increase its portfolio allocation in markets that have attractive property valuations and to decrease allocations in markets that have inflated valuations and low relative yields.
Property Operations - The Company manages its communities by focusing on activities that may generate above-average rental growth, tenant retention/satisfaction and long-term asset appreciation. The Company intends to achieve this by utilizing the strategies set forth below:
•Property Management - Oversee delivery and quality of the housing provided to our tenants and manage the properties financial performance.
•Capital Preservation - The Company's asset management services are responsible for the planning, budgeting and completion of major capital improvement projects at the Company’s communities.
•Business Planning and Control - Comprehensive business plans are implemented in conjunction with significant investment decisions. These plans include benchmarks for future financial performance based on collaborative discussions between on-site managers, the operations leadership team, and senior management.
•Development and Redevelopment - The Company focuses on acquiring and developing apartment communities in supply constrained markets, and redeveloping its existing communities to improve the financial and physical aspects of the Company’s communities.
CURRENT BUSINESS ACTIVITIES
Acquisitions of Real Estate Interests
Acquisitions are an important component of the Company’s business plan. The table below summarizes acquisition activity for the year ended December 31, 2020 ($ in millions):
Property Name Location Apartment Homes Essex Ownership Percentage Ownership Quarter in 2020 Purchase Price
CPPIB Portfolio(1)
Various 2,020 100 % EPLP Q1 $ 463.4
Total 2020 2,020 $ 463.4
(1)In January 2020, the Company purchased the joint venture partner's 45% membership interest in a land parcel and six communities representing 2,020 apartment homes based on a total valuation of approximately $1.0 billion.
Dispositions of Real Estate
As part of its strategic plan to own quality real estate in supply-constrained markets, the Company continually evaluates all of its communities and sells those which no longer meet its strategic criteria. The Company may use the capital generated from the dispositions to invest in higher-return communities or other real estate investments, or to repay debts. The Company believes that the sale of these communities will not have a material impact on its future results of operations or cash flows nor will their sale materially affect its ongoing operations. In general, the Company seeks to offset the dilutive impact on long-term earnings and funds from operations from these dispositions through the positive impact of reinvestment of proceeds.
In June 2020, the Company completed a portfolio sale which consisted of two apartment communities with 429 apartment homes, One South Market and Museum Park, both located in San Jose, CA, for a total contract price of $232.0 million, resulting in a gain of $16.6 million for the Company.
In July 2020, the Company sold Delano, a 126 apartment home community located in Redmond, WA, for a total contract price of $51.5 million. The Company recognized a $22.7 million gain on sale.
In October 2020, the Company sold 416 on Broadway, a 115 apartment home community located in Glendale, CA, for a total contract price of $60.0 million. The Company recognized a $25.7 million gain on sale.
Development Pipeline
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, 2020, the Company's development pipeline was comprised of three consolidated projects under development and three unconsolidated joint venture projects under development aggregating 1,853 apartment homes, with total incurred costs of $948.0 million, and estimated remaining project costs of approximately $174.0 million, $118.0 million of which represents the Company's estimated remaining costs, for total estimated project costs of $1.1 billion.
The Company defines predevelopment projects as proposed communities in negotiation or in the entitlement process with an expected high likelihood of becoming entitled development projects. As of December 31, 2020, the Company had various consolidated predevelopment projects. The Company may also acquire land for future development purposes or sale.
The following table sets forth information regarding the Company’s development pipeline ($ in millions):
As of
12/31/2020
Essex Estimated Incurred Estimated
Development Pipeline Location Ownership% Apartment Homes Project Cost (1)
Project Cost(1)
Development Projects - Consolidated
Station Park Green - Phase IV San Mateo, CA 100% 107 66 94
Mylo Santa Clara, CA 100% 476 213 226
Wallace on Sunset (2)
Hollywood, CA 100% 200 97 116
Total Development Projects - Consolidated 783 376 436
Development Projects - Joint Venture
Patina at Midtown San Jose, CA 50% 269 135 148
500 Folsom (3)
San Francisco, CA 50% 537 400 415
Scripps Mesa Apartments (3)
San Diego, CA 51% 264 16 102
Total Development Projects - Joint Venture 1,070 551 665
Predevelopment Projects - Consolidated
Other Projects Various 100% - 21 21
Total - Consolidated Predevelopment Projects - 21 21
Grand Total - Development and Predevelopment Pipeline 1,853 $ 948 $ 1,122
(1)Includes costs related to the entire project, including both the Company's and joint venture partners' costs. Includes incurred costs and estimated costs to complete these development projects. For predevelopment projects, only incurred costs are included in estimated costs.
(2)Incurred and estimated project costs for this development is net of cost incurred on the adjacent theatre at the property.
(3)Estimated project cost for this development is net of a projected value for low-income housing tax credit proceeds and the value of the tax exempt bond structure.
Redevelopment Pipeline
The Company defines redevelopment communities as existing properties owned or recently acquired, which have been targeted for additional investment by the Company with the expectation of increased financial returns through property improvement. During redevelopment, apartment homes may not be available for rent and, as a result, the related apartment community may have less than stabilized operations. As of December 31, 2020, the Company had ownership interests in three major redevelopment communities aggregating 1,112 apartment homes with estimated redevelopment costs of $109.1 million, of which approximately $4.5 million remains to be expended.
Long Term Debt
During 2020, the Company made regularly scheduled principal payments and loan payoffs of $316.2 million to its secured mortgage notes payable at an average interest rate of 4.4%.
In February 2020, the Operating Partnership issued $500.0 million of senior unsecured notes due on March 15, 2032, with a coupon rate of 2.650% (the "2032 Notes"), which are payable on March 15 and September 15 of each year, beginning on September 15, 2020. The 2032 Notes were offered to investors at a price of 99.628% of par value. The 2032 Notes are general
unsecured senior obligations of the Operating Partnership, rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership and are unconditionally guaranteed by Essex. The Company used the net proceeds of this offering to repay indebtedness under its unsecured lines of credit, which had been used to fund the buyout of the Canada Pension Plan Investment Board's ("CPPIB" or "CPP") 45.0% joint venture interests, as well as repay $100.3 million of secured debt during the quarter that ended March 31, 2020. In June 2020, the Operating Partnership issued an additional $150.0 million of the 2032 Notes at a price of 105.660% of par value, plus accrued interest from February 2020 up to, but not including, the date of delivery of the additional notes, with an effective yield of 2.093%. These additional notes have substantially identical terms as the 2032 Notes issued in February 2020. The proceeds were used to repay indebtedness under the Company's unsecured credit facilities and for other general corporate and working capital purposes.
In April 2020, the Company obtained a $200.0 million unsecured term loan with a one-year maturity and two 12-month extension options, exercisable at the Company’s option. The unsecured term loan bears a variable interest rate of the London Interbank Offered Rate ("LIBOR") plus 1.20% and the proceeds were used to repay all remaining consolidated debt maturing in 2020.
In August 2020, the Operating Partnership issued $600.0 million of senior unsecured notes, consisting of $300.0 million aggregate principal amount due on January 15, 2031 with a coupon rate of 1.650% (the “2031 Notes”) and $300.0 million aggregate principal amount due on September 1, 2050 with a coupon rate of 2.650% (the “2050 Notes” and together with the 2031 Notes, the “Notes”). The 2031 Notes were offered to investors at a price of 99.035% of par value and the 2050 Notes at 99.691% of par value. Interest is payable on the 2031 Notes semiannually on January 15 and July 15 of each year, beginning on January 15, 2021. Interest is payable on the 2050 Notes semiannually on March 1 and September 1 of each year, beginning on March 1, 2021. The Notes are general unsecured senior obligations of the Operating Partnership, rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership and are unconditionally guaranteed by Essex. The Company used the net proceeds of this offering to repay debt maturities, including certain unsecured private placement notes, secured mortgage notes, and to fund the redemption of $300.0 million aggregate principal amount of
its outstanding 3.625% senior unsecured notes due August 2022, and for other general corporate and working capital purposes.
Bank Debt
As of December 31, 2020, Moody’s Investor Service and Standard and Poor's ("S&P") credit agencies rated Essex Property Trust, Inc. and Essex Portfolio, L.P. Baa1/Stable and BBB+/Stable, respectively.
At December 31, 2020, the Company had two unsecured lines of credit aggregating $1.24 billion. The Company's $1.2 billion credit facility had an interest rate of LIBOR plus 0.825%, with a scheduled maturity date in December 2023 with one 18-month extension, exercisable at the Company's option. The Company's $35.0 million working capital unsecured line of credit had an interest rate of LIBOR plus 0.825%, with a scheduled maturity date in February 2023.
Equity Transactions
During the year ended December 31, 2020, the Company did not issue any shares of common stock through its equity distribution program. As of December 31, 2020, there were no outstanding forward sale agreements, and $826.6 million of shares remain available to be sold under this program.
During the year ended December 31, 2020, the Company repurchased and retired 1,197,190 shares totaling $269.3 million, including commissions. In each of May and December 2020, the board of directors approved the replenishment of the stock repurchase plan such that, as of each of those dates, the Company had $250.0 million of purchase authority remaining under the replenished plan. As a result, as of December 31, 2020, the Company had $223.6 million of purchase authority remaining under its $250.0 million stock repurchase plan.
Co-investments
The Company has entered into, and may continue in the future to enter into, joint ventures or partnerships (including limited liability companies) through which we own an indirect economic interest in less than 100% of the community or land or other investments owned directly by the joint venture or partnership. For each joint venture the Company holds a non-controlling interest in the venture and earns customary management fees and may earn development fees, asset property management fees, and a promote interest.
The Company has also made, and may continue in the future to make, preferred equity investments in various multifamily development projects. The Company earns a preferred rate of return on these investments.
HUMAN CAPITAL MANAGEMENT
Company Overview and Values
The Company is headquartered in San Mateo, CA, and has regional offices in Woodland Hills, CA; Irvine, CA; San Diego, CA and Bellevue, WA. As of December 31, 2020, the Company had 1,799 employees, ninety-eight percent (98%) of which were full-time employees, and of which 1,483 employees worked in operations and 316 were employed in the corporate offices. The Company's mission is to create quality communities in premier locations and it is critical to the Company's mission that it attracts, trains and retains a talented and diverse team by providing a better place to work and significant opportunities for professional growth. The Company's culture supports its mission and is guided by its core values: to act with integrity, to care about what matters, to do right with urgency, to lead at every level and to seek fairness. The Company seeks to reinforce those values within its workforce.
Workplace Diversity
The Company undertakes a wide spectrum of initiatives to support a diverse workforce particularly in regards to ethnic, gender and age diversity as well as fair treatment of all our associates. The Company has one of the most diverse workforces among its peers in the real estate industry. As of December 31, 2020, the Company's workforce was approximately 44% Hispanic or Latino, 29% White, 12% Asian, 7% Black or African American, 1% Native Hawaiian or other Pacific Islander, 1% American Indian or Alaska Native, and 6% two or more races. As of December 31, 2020, the Company's workforce was 42% female and 58% male, of which corporate associates were 54% female and on-site operational associates were 40% female. The Company had 365 females in positions of manager or higher, representing 67% of managerial positions. The tables below detail the gender representation by position in the Company and the age diversity of its workforce.
The Company recently implemented additional training programs as well as employee committees to strengthen and further promote diversity, equal opportunity, and fair treatment for all Company associates. In 2019, the Company formed the Diversity and Inclusion Committee, whose chairperson reports directly to the CEO on the Committee’s activities, and further expanded the initiatives and members in 2020. In 2020 the Company formed Women at Essex, an employee-led affinity group, fostering a sense of community and inclusion for a diverse mix of women and men at the Company through discussions and activities that are intended to engage, educate, enable, and empower the Company's employees. All associates are offered training aimed at preventing workplace harassment, including harassment based on age, gender or ethnicity. In 2020, the Company provided 2,850 hours of training covering the foundations of Diversity, Equity & Inclusion and awareness of unconscious bias in the workplace. Additionally, the Company implemented Diversity, Equity & Inclusion listening sessions where associates were invited to engage with one another through sharing personal and professional experiences involving diversity, equity, and inclusion, fostering a more positive and inclusive environment throughout the Company.
The Company is committed to pay equity and conducts a pay equity analysis on an annual basis. The Company's pay equity analysis for 2020 indicated a zero percent (0%) pay gap between men and women.
The Company was awarded the National Association of Real Estate Investment Trusts’ (“NAREIT"), which is the leading REIT industry association, Diversity and Inclusion Corporate Recognition Award for 2020. This annual recognition is designed to recognize strong commitments and outstanding contributions to the advancement of diversity and inclusion within our Company, our professional network, and in the REIT community
Gender Representation by Position 2020
Male # Female # Male % Female %
Corporate - Top Executives, VPs, Assistant VPs, Directors, & Managers 63 65 49% 51%
Corporate - Below manager position 82 106 44% 56%
Field - Regional Directors/Managers, Community Managers and Assistant Managers 114 299 28% 72%
Field - Leasing Specialists, Leasing Managers, Relationship Reps, Bookkeepers 109 191 36% 64%
Field - Maintenance Supervisors and Techs 562 10 98% 2%
Field - Porter, Landscaper, Painter, Security Guard, Amenities Attendant 110 88 56% 44%
Total Workforce by
Age Group
#
%
<= 25
10%
26-35
30%
36-45
24%
46-55
21%
56-65
13%
> 65
2%
Training and Development
The Company values leadership at every level and demonstrates such value with respect to its associates by providing opportunities for all associates to develop personal and professional skills and by offering programs to encourage employee retention and advancement. In 2020, over 50,000 hours of training and development programs were provided to associates, with our investment in training totaling almost $400,000. These programs include: leadership training, communication training, individual learning plans, Community Manager and Maintenance Manager training, The Berkeley Executive Leadership Program, and mentorship programs. Since its introduction in 2018, over 1,500 on-site associates have participated in our Steps to Success career development program, a learning program that supports associates with their career growth by providing the fundamental knowledge required for success in a particular specialty. Additionally, the Company provides its associates with outside educational benefits by offering an annual $3,000 tuition reimbursement to further support professional growth. To identify, retain and reward top performers, the Company offers a tenure program, which involves a cash gift for every five years of service, as well as excellence awards and a spot bonus recognition program to reward associates for good teamwork, good ideas and good service. The Company encourages internal promotions and hiring for open positions. In 2020, the Company promoted 10% of its employees to higher positions in the Company. Additionally, the Company engages in succession planning for its leadership and managerial positions and its executive team identifies and mentors the Company's top talent in order to ensure strong leadership at the Company for the future.
Employee Well-Being
The Company's compensation and benefits program and safety practices further reinforce its commitment to investing in the well-being of its associates while ensuring that its employees are fairly incentivized to ensure fulfillment of the Company’s mission. The Company offers competitive compensation and a standard suite of benefits, including health insurance, a retirement plan with a $6,000 annual matching benefit, life and disability coverage, and commuter benefits. Additionally, the Company offers a housing discount for associates that live at Company communities, and additionally offers retirement support, associate discount programs, and health benefit credits for participation in wellness programs. The Company engages in an annual compensation study to ensure that its compensation is aligned with market standards and that the Company is appropriately compensating its top performers. In 2019, the Company accomplished its goal of raising the minimum wage for all associates to $15 per hour.
Providing a safe working environment and ensuring employee safety is imperative to the Company. The Company has safety policies in place that coincide with an Injury & Illness Prevention Program, which seeks to prevent workplace accidents and protect the health and safety of the Company's associates. In 2020, the Company provided safety training to Community Managers, Maintenance Supervisors, and Maintenance Technicians on topics including Industrial Safety and Health, Confined Space Awareness, Electrical Safety and Protection, Active Shooter Event, Fire Extinguishing, Safety Data Sheets, Safe Lifting the E-Way, Ladder Safety, and Heat Stress in the Workplace.
As an essential business operating in 2020, the Company's on-site teams supported its residents by providing administrative, operational and maintenance assistance during the COVID-19 pandemic. In order to best protect and support the Company's associates working on-site, the Company spent over $4.1 million on new COVID-19 related protocols and other costs. The Company undertook various COVID-19 safety measures, including implementing work from home where possible, purchasing personal protective equipment and establishing physical distancing and other health safety procedures for its on-site employees, providing paid leave to employees affected by COVID-19, increasing cleaning protocols at its sites and offices, prohibiting all non-essential work-related travel, requiring masks to be worn at all offices and when entering resident homes, and providing regular communication about COVID-19 impacts and protocols to its associates. Keeping the Company's associates healthy and safe continues to be critical, and the Company hopes its actions contributed toward minimizing the impact of the COVID-19 pandemic.
Community and Social Impact
The Company believes volunteering can create positive change in the communities where our associates live and work and that the Company's commitment to giving back helps it attract and retain associates. The Company's Essex Volunteer Program is aimed at supporting and encouraging eligible associates to become actively involved in their communities through the Company's support of charity initiatives and offering paid hours for volunteer time. Additionally, in 2020 the Company established the Essex Cares program for the purpose of supporting the Company’s residents and communities that are experiencing financial hardships caused by the COVID-19 pandemic
Essex raised over $400,000 through employee and director contributions and the Company committed $3,000,000, raising a total fund in 2020 of $3.4 million and began making donations to our residents in need. Additionally, in 2020, Essex established an Employee Emergency Relief Program, which is designed to provide contributions to employees and families experiencing hardships such as a death or disability.
Employee Engagement
In order to engage and promote communication with our associates and solicit meaningful feedback on our efforts to create a positive work environment, the Company has issued engagement surveys to all associates annually, and has begun transitioning to a shorter and more frequent pulse survey format in 2020. The results of the 2020 survey indicate that 93% of surveyed associates consider that their day-to-day work directly impacts the Company’s mission and vision, 91% believe that their opinions and ideas matter at Essex, and 93% feel that the Company supports diversity, equity and inclusion in the workplace.
INSURANCE
The Company purchases general liability and property insurance coverage, including loss of rent, for each of its communities. The Company also purchases limited earthquake, terrorism, environmental and flood insurance. There are certain types of losses which may not be covered or could exceed coverage limits. The insurance programs are subject to deductibles and self-insured retentions in varying amounts. The Company utilizes a wholly owned insurance subsidiary, Pacific Western Insurance LLC ("PWI") to self-insure certain earthquake and property losses. As of December 31, 2020, PWI had cash and marketable securities of approximately $152.8 million, and is consolidated in the Company's financial statements.
All of the Company's communities are located in areas that are subject to earthquake activity. The Company evaluates its financial loss exposure to seismic events by using actuarial loss models developed by the insurance industry and in most cases property vulnerability analysis based on structural evaluations by seismic consultants. The Company manages this exposure, where considered appropriate, desirable, and cost-effective, by upgrading properties to increase their resistance to forces caused by seismic events, by considering available funds and coverages provided by PWI and/or by purchasing seismic insurance. In most cases the Company also purchases limited earthquake insurance for certain properties owned by the Company's co-investments.
In addition, the Company carries other types of insurance coverage related to a variety of risks and exposures.
Based on market conditions, the Company may change or potentially eliminate insurance coverages, or increase levels of self-insurance. Further, the Company may incur losses, which could be material, due to uninsured risks, deductibles and self-insured retentions, and/or losses in excess of coverage limits.
COMPETITION
There are numerous housing alternatives that compete with the Company’s communities in attracting tenants. These include other apartment communities, condominiums and single-family homes. If the demand for the Company’s communities is reduced or if competitors develop and/or acquire competing housing, rental rates and occupancy may drop which may have a material adverse effect on the Company’s financial condition and results of operations.
The Company faces competition from other REITs, businesses and other entities in the acquisition, development and operation of apartment communities. Some competitors are larger and have greater financial resources than the Company. This competition may result in increased costs of apartment communities the Company acquires and/or develops.
WORKING CAPITAL
The Company believes that cash flows generated by its operations, existing cash and cash equivalents, marketable securities balances, availability under existing lines of credit, access to capital markets and the ability to generate cash from the disposition of real estate are sufficient to meet all of its reasonably anticipated cash needs during 2021.
The timing, source and amounts of cash flows provided by financing activities and used in investing activities are sensitive to changes in interest rates, stock price, and other fluctuations in the capital markets environment, which can affect the Company’s plans for acquisitions, dispositions, development and redevelopment activities.
ENVIRONMENTAL CONSIDERATIONS
See the discussion under the caption, "Risks Related to Real Estate Investments and Our Operations - The Company’s Portfolio may have environmental liabilities" in Item 1A, Risk Factors, for information concerning the potential effect of environmental regulations on its operations, which discussion is incorporated by reference into this Item 1.
OTHER MATTERS
Certain Policies of the Company
The Company intends to continue to operate in a manner that will not subject it to regulation under the Investment Company Act of 1940. The Company may in the future (i) issue securities senior to its common stock, (ii) fund acquisition activities with borrowings under its line of credit and (iii) offer shares of common stock and/or units of limited partnership interest in the Operating Partnership or affiliated partnerships as partial consideration for property acquisitions. The Company from time to time acquires partnership interests in partnerships and joint ventures, either directly or indirectly through subsidiaries of the Company, when such entities’ underlying assets are real estate.
The Company invests primarily in apartment communities that are located in predominantly coastal markets within Southern California, Northern California, and the Seattle metropolitan area. The Company currently intends to continue to invest in apartment communities in such regions. However, these practices may be reviewed and modified periodically by management.

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ITEM 1A. RISK FACTORS
ITEM 1A: RISK FACTORS
For purposes of this section, the term "stockholders" means the holders of shares of Essex Property Trust, Inc.’s common stock. Set forth below are the risks that we believe are material to Essex Property Trust, Inc.’s stockholders and Essex Portfolio, L.P.’s unitholders. You should carefully consider the following factors in evaluating our Company, our properties and our business.
Our business, operating results, cash flows and financial condition are subject to various risks and uncertainties, including, without limitation, those set forth below, any one of which could cause our actual operating results to vary materially from recent results or from our anticipated future results.
Risks Related to Our Real Estate Investments and Operations
General real estate investment risks may adversely affect property income and values. Real estate investments are subject to a variety of risks. If the communities and other real estate investments do not generate sufficient income to meet operating expenses, including debt service and capital expenditures, cash flow and the ability to make distributions to Essex's stockholders or the Operating Partnership's unitholders will be adversely affected. Income from the communities may be further adversely affected by, among other things, the following factors:
•changes in the general or local economic climate, including layoffs, plant closings, industry slowdowns, relocations of significant local employers and other events negatively impacting local employment rates and wages and the local economy;
•local economic conditions in which the communities are located, such as oversupply of housing or a reduction in demand for rental housing;
•adverse economic or market conditions due to the COVID-19 pandemic leading to a temporary or permanent move by tenants and/or prospective tenants from locations in which our communities are located;
•the attractiveness and desirability of our communities to tenants, including, without limitation, the size and amenity offerings of our units, our technology offerings and our ability to identify and cost effectively implement new, relevant technologies, and to keep up with constantly changing consumer demand for the latest innovations, including any increased requirements due to the significant increase in the number of people who continue to “work from home”;
•inflationary environments in which the costs to operate and maintain communities increase at a rate greater than our ability to increase rents, or deflationary environments where we may be exposed to declining rents more quickly under our short-term leases;
•competition from other available housing alternatives;
•changes in rent control or stabilization laws or other laws regulating housing and other increasing regulations on people and businesses in locations where our communicates are located;
•the Company’s ability to provide for adequate maintenance and insurance;
•declines in the financial condition of our tenants, which may make it more difficult for us to collect rents from some tenants;
•any decline in or tenants' perceptions of the safety, convenience and attractiveness of our communities and the neighborhoods where they are located; and
•changes in interest rates and availability of financing.
As leases at the communities expire, tenants may enter into new leases on terms that are less favorable to the Company. Income and real estate values also may be adversely affected by such factors as applicable laws, including, without limitation, the Americans with Disabilities Act of 1990 (the "Disabilities Act"), Fair Housing Amendment Act of 1988 (the "FHAA"), permanent and temporary rent control laws, rent stabilization laws, other laws regulating housing that may prevent the Company from raising rents to offset increased operating expenses, and tax laws.
Short-term leases expose us to the effects of declining market rents, and the Company may be unable to renew leases or relet units as leases expire. Substantially all of our apartment leases are for a term of one year or less. If the Company is unable to promptly renew the leases or relet the units, or if the rental rates upon renewal or reletting are significantly lower than expected rates, then the Company’s results of operations and financial condition will be adversely affected. With these short term leases, our rental revenues are impacted by declines in market rents more quickly than if our leases were for longer terms.
National and regional economic environments can negatively impact the Company’s liquidity and operating results. The Company's forecast for the national economy assumes growth of the gross domestic product of the national economy and the economies of the west coast states. In the event of a recession or other negative economic effects, including as a result of the COVID-19 pandemic, the Company could incur reductions in rental rates, occupancy levels, property valuations and increases in operating costs such as advertising and turnover expenses. Any such recession or similar event may affect consumer confidence and spending and negatively impact the volume and pricing of real estate transactions, which could negatively affect
the Company’s liquidity and its ability to vary its portfolio promptly in response to changes to the economy. Furthermore, if residents do not experience increases in their income, they may be unable or unwilling to pay rent increases, and delinquencies in rent payments and rent defaults may increase.
Rent control, or other changes in applicable laws, or noncompliance with applicable laws, could adversely affect the Company's operations or expose us to liability. The Company must own, operate, manage, acquire, develop and redevelop its properties in compliance with numerous federal, state and local laws and regulations, some of which may conflict with one another or be subject to limited judicial or regulatory interpretations. These laws and regulations may include zoning laws, building codes, rent control or stabilization laws, laws benefiting disabled persons, federal, state and local tax laws, landlord tenant laws, environmental laws, employment laws, immigration laws and other laws regulating housing or that are generally applicable to the Company's business and operations. Noncompliance with laws could expose the Company to liability. If the Company does not comply with any or all of these requirements, it may have to pay fines to government authorities or damage awards to private litigants, and/or may have to decrease rents in order to comply with such requirements. The Company does not know whether these requirements will change or whether new requirements will be imposed. Changes in, or noncompliance with, these regulatory requirements could require the Company to make significant unanticipated expenditures to address noncompliance, which could have a material adverse effect on the Company's financial condition, results of operations or cash flows.
In addition, rent control or rent stabilization laws and other regulatory restrictions may limit our ability to increase rents and pass through new or increased operating costs to our tenants. There has been a recent increase in municipalities, including those in which we own properties, considering or being urged by advocacy groups to consider rent control or rent stabilization laws and regulations or take other actions which could limit our ability to raise rents based solely on market conditions. These initiatives and any other future enactments of rent control or rent stabilization laws or other laws regulating multifamily housing, as well as any lawsuits against the Company arising from such rent control or other laws, may reduce rental revenues or increase operating costs. Such laws and regulations limit our ability to charge market rents, increase rents, evict tenants or recover increases in our operating expenses and could reduce the value of our communities or make it more difficult for us to dispose of properties in certain circumstances. Expenses associated with our investment in these communities, such as debt service, real estate taxes, insurance and maintenance costs, are generally not reduced when circumstances cause a reduction in rental income from the community. Furthermore, such regulations may negatively impact our ability to attract higher-paying tenants to such communities.
The current COVID-19 pandemic, or the future outbreak of other highly infectious or contagious diseases, and the timing and effectiveness of vaccine distribution, could materially and adversely affect our business, financial condition and results of operations. The outbreak of COVID-19, which is present in nearly all regions around the world, including the United States and the specific regions in which our apartment communities are located, has created considerable instability and disruption in the U.S. and world economies. Considerable uncertainty still surrounds COVID-19, including when the pandemic will conclude, how quickly vaccines can be safely and widely distributed, the effectiveness of such vaccines, and the potential short-term and long-term effects, including but not limited to shifts in consumer housing demand based on geography, affordability, housing type (e.g. multi-family vs. single-family) and unit type (e.g. studio vs. multi-bedroom), mainly resulting from the paradigm shift of work culture, the decentralization of corporate headquarters and the success of “work from home” models. Moreover, local, state and national measures taken to limit the spread of COVID-19, including “social distancing” and other restrictions on travel, congregation and business operations have already resulted in significant negative economic impacts. The prolonged impact of COVID-19 on the U.S. and world economies remains uncertain, but has resulted in increased health issues and mortality rates, increased unemployment, and a world-wide economic downturn, the duration and scope of which cannot currently be predicted. The extent to which the Company’s financial condition or operating results will continue to be affected by the COVID-19 pandemic will largely depend on future demand and developments, which are highly uncertain and cannot be accurately predicted.
The Company’s operating results depend, in large part, on revenues derived from leasing space in our apartment communities to residential tenants and the ability of tenants to generate sufficient income to pay their rents in a timely manner. The market and economic challenges created by the COVID-19 pandemic, and measures implemented to prevent its spread, have, and may continue to, adversely affect our returns and profitability. As a result, our ability to make distributions to Essex’s stockholders and the Operating Partnership’s unitholders may be compromised and we could experience volatility with respect to the market value of our properties and common stock and Operating Partnership units. The spread of COVID-19 has resulted in increases in unemployment and mass layoffs, and some tenants have experienced deteriorating financial conditions and are unwilling or unable to pay all or part of their rent on a timely basis, or at all, and, the continued spread of COVID-19 as well as a sustained economic downturn may result in further increases or sustainment of these situations. In some cases, we may be legally required to or otherwise agree to restructure tenants’ rent obligations, and may not be able to do so on terms as favorable to us as those currently in place. Furthermore, various city, county and state laws restricting rent increases in times of emergency
have come into effect in connection with the COVID-19 pandemic, and numerous state, local, federal and industry-initiated efforts have and may continue to affect our ability to collect rent or enforce remedies for the failure to pay rent, including, among others, limitations or prohibitions on evicting tenants unwilling or unable to pay rent and prohibitions on the ability to collect unpaid rent during certain timeframes. Additionally, eviction moratoriums have passed in various formats at every level of government and while the Company strives to comply, given some of the conflicting standards and unclear requirements, strict compliance might be difficult. Some residents’ views about their obligations to pay rent, even when financially capable of meeting their rent obligation, have shifted away from viewing rent as a primary and necessary financial obligation, and this shift may continue or worsen as a result of the eviction moratoriums and the various laws affecting our abilities to collect rent. In the event of tenant nonpayment, default or bankruptcy, we may incur costs in protecting our investment and re-leasing our property, and have limited ability to renew existing leases or sign new leases at projected rents.
Our properties may also incur significant costs or losses related to legislative mandates, including shelter-in-place orders, business shut-downs, quarantines, infection or other related factors, which may result in a negative impact on our occupancy levels. For example, many companies initially required, and now are continuing to allow or require, employees to “work from home” for an extended period of time, causing some tenants to move away from the urban centers temporarily or permanently. Some businesses have been ordered to temporarily shut down, such as indoor dining, and many have permanently closed due to deteriorating economic conditions, which has contributed to the shuttering of some commercial spaces in downtown areas, and the temporary, or possibly permanent, deterioration of neighborhoods in and around some of our urban communities, which may be further worsened by increases in homelessness and crime as a result of the effects of the pandemic on some individuals and communities. Moreover, we typically conduct aspects of our leasing activity on-site at our apartment communities. Reductions in the ability and willingness of prospective residents to visit our communities due to the COVID-19 pandemic could reduce rental revenue and ancillary operating revenue produced by our properties. Additionally, in connection with an outbreak that directly impacts one or more of our corporate offices or apartment communities, we may experience negative publicity and/or an unwillingness of prospective residents to visit or ultimately choose to live in our communities, which could directly affect our rental revenue. In addition, we have incurred costs associated with protecting our employees and residents, including the purchase of personal protective equipment and disinfecting our properties, and those costs may continue to increase. There may also be an increased risk of material litigation due to the effects of the COVID-19 pandemic, including litigation brought by our residents or employees. To the extent our management or personnel are impacted in significant numbers by the COVID-19 pandemic and are not available or allowed to conduct work, our business and operating results may be negatively impacted. Additionally, our corporate offices remain closed as we have instituted “work from home” measures for our corporate associates, which may impact productivity and our employees’ overall mental health.
Additionally, market fluctuations as a result of the COVID-19 pandemic may affect our ability to obtain necessary funds for our operations from current lenders or new borrowings. We may be unable to obtain financing for the acquisition of investments or re-financing for existing assets on satisfactory terms, or at all. In addition, moratoriums on construction and macro-economic factors have caused some construction delays and may cause construction contractors to be unable to perform and governmental inspections and approvals to be delayed or postponed, which may cause the delivery date of certain development projects or investments in third-party development projects to be materially extended. Market fluctuations and construction delays experienced by the Company’s third-party mezzanine loan borrowers and preferred equity investment sponsors may also negatively impact their ability to repay the Company. Further, while the Company carries general liability, pollution, and property insurance along with other insurance policies that may provide some coverage for any losses or costs incurred in connection with the COVID-19 pandemic, given the novelty of the issue and the scale of losses incurred throughout the world, there is no guarantee that we will be able to recover all or any portion of our losses and costs under these policies. We may be additionally impacted by changes in legislation relating to insurance coverages with respect to the pandemic, including, but not limited to, workers’ compensation. The occurrence of any of the foregoing events or any other related matters could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
The global impact of the COVID-19 pandemic continues to evolve rapidly, and the extent of its effect on our operational and financial performance will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact, the timing of distribution and effectiveness of vaccines and the willingness and ability of the public to get vaccinated in a timely manner, and the direct and indirect economic effects of the pandemic and related containment measures, among others. However, the COVID-19 pandemic presents material uncertainty and risk with respect to our business, financial condition and results of operations. Moreover, to the extent any of these risks and uncertainties adversely impact us in the ways described above or otherwise, they may also have the effect of heightening many of the other risks set forth in this Annual Report on Form 10-K. In addition, if in the future there is a further outbreak of COVID-19 or a variation thereof, an outbreak of another highly infectious or contagious disease or other health concern, the Company and our properties may be subject to similar risks as posed by COVID-19.
Acquisitions of communities involve various risks and uncertainties and may fail to meet expectations. The Company intends to continue to acquire apartment communities. However, there are risks that acquisitions will fail to meet the Company’s expectations. The Company’s estimates of future income, expenses and the costs of improvements or redevelopment that are necessary to allow the Company to market an acquired apartment community as originally intended may prove to be inaccurate. Uncertainty related to the unknown short- and long-term economic and behavioral impacts of the COVID-19 pandemic make forecasting rental rates and occupancies more difficult, and assets the Company acquires may not perform as expected. In addition, following an acquisition, the value and operational performance of an apartment community may be diminished if obsolescence or neighborhood changes occur before we are able to redevelop or sell the community. Also, in connection with such acquisitions, we may assume unknown liabilities, which could ultimately lead to material costs for us that we did not expect to incur. The Company expects to finance future acquisitions, in whole or in part, under various forms of secured or unsecured financing or through the issuance of partnership units by the Operating Partnership or related partnerships or joint ventures or additional equity by the Company. The use of equity financing, rather than debt, for future developments or acquisitions could dilute the interest of the Company’s existing stockholders. If the Company finances new acquisitions under existing lines of credit, there is a risk that, unless the Company obtains substitute financing, the Company may not be able to undertake additional borrowing for further acquisitions or developments or such borrowing may be not available on advantageous terms.
Development and redevelopment activities may be delayed, not completed, and/or not achieve expected results. The Company pursues development and redevelopment projects and these projects generally require various governmental and other approvals, which have no assurance of being received and/or the timing of which may be delayed from the Company’s expectations. 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, and redevelopment projects as existing properties owned or recently acquired that have been targeted for additional investment by the Company with the expectation of increased financial returns through property improvement. As of December 31, 2020, the Company had three consolidated development projects and three unconsolidated joint venture development projects comprised of 1,853 apartment homes for an estimated cost of $1.1 billion, of which $174.0 million remains to be expended, and $118.0 million is the Company's share. In addition, at December 31, 2020, the Company had ownership interests in three major redevelopment projects aggregating 1,112 apartment homes with estimated redevelopment costs of $109.1 million, of which approximately $4.5 million remains to be expended.
The Company’s development and redevelopment activities generally entail certain risks, including, among others:
•funds may be expended and management's time devoted to projects that may not be completed on time or at all;
•construction costs of a project may exceed original estimates possibly making the project economically unfeasible;
•projects may be delayed due to, without limitation, adverse weather conditions, labor or material shortage, municipal office closures and staff shortages, government recommended or mandated work stoppages due to health concerns, or environmental remediation;
•occupancy rates and rents at a completed project may be less than anticipated;
•expenses at completed development or redevelopment projects may be higher than anticipated, including, without limitation, due to costs of litigation over construction contracts by general contractors, environmental remediation or increased costs for labor, materials and leasing;
•we may be unable to obtain, or experience a delay in obtaining, necessary zoning, occupancy, or other required governmental or third party permits and authorizations, which could result in increased costs or delay or abandonment of opportunities;
•we may be unable to obtain financing with favorable terms, or at all, for the proposed development or redevelopment of a community, which may cause us to delay or abandon an opportunity; and
•we may incur liabilities to third parties during the development process, for example, in connection with managing existing improvements on the site prior to tenant terminations and demolition (such as commercial space) or in connection with providing services to third parties (such as the construction of shared infrastructure or other improvements.)
These risks may reduce the funds available for distribution to Essex’s stockholders and the Operating Partnership's unitholders. Further, the development and redevelopment of communities is also subject to the general risks associated with real estate investments. For further information regarding these risks, please see the risk factor above titled "General real estate investment risks may adversely affect property income and values."
Our apartment communities may be subject to unknown or contingent liabilities which could cause us to incur substantial costs. The properties that the Company owns or may acquire are or may be subject to unknown or contingent liabilities for which the Company may have no recourse, or only limited recourse, against the sellers. In general, the representations and
warranties provided under the transaction agreements related to the sales of the properties may not survive the closing of the transactions. While the Company seeks to require the sellers to indemnify us with respect to breaches of representations and warranties that survive, such indemnification may be limited and subject to various materiality thresholds, a significant deductible or an aggregate cap on losses. As a result, there is no guarantee that we will recover any amounts with respect to losses due to breaches by the sellers of their representations and warranties. In addition, the total amount of costs and expenses that may be incurred with respect to liabilities associated with apartment communities may exceed our expectations, and we may experience other unanticipated adverse effects, all of which may adversely affect our business, financial condition and results of operations.
The geographic concentration of the Company’s communities and fluctuations in local markets may adversely impact the Company’s financial condition and operating results. The Company generated significant amounts of rental revenues for the year ended December 31, 2020, from the Company’s communities concentrated in Southern California (primarily Los Angeles, Orange, Santa Barbara, San Diego, and Ventura counties), Northern California (the San Francisco Bay Area), and the Seattle metropolitan area. For the year ended December 31, 2020, 81% of the Company’s rental revenues were generated from communities located in California. This geographic concentration could present risks if local property market performance falls below expectations. In general, factors that may adversely affect local market and economic conditions include, among others, the following:
•the economic climate, which may be adversely impacted by a reduction in job growth or income levels, industry slowdowns, changing demographics and other factors;
•local conditions, such as oversupply of, or reduced demand for, apartment homes;
•rent control or stabilization laws, or other laws regulating rental housing, which could prevent the Company from raising rents to offset increases in operating costs, or the inability or unwillingness of tenants to pay rent increases;
•competition from other available apartments and other housing alternatives and changes in market rental rates;
•economic conditions that could cause an increase in our operating expenses, including increases in property taxes, utilities and routine maintenance; and
•regional specific acts of nature (e.g., earthquakes, fires, floods, etc.).
Because the Company’s communities are primarily located in Southern California, Northern California and the Seattle metropolitan area, the Company is exposed to greater economic concentration risks than if it owned a more geographically diverse portfolio. The Company is susceptible to adverse developments in California and Washington economic and regulatory environments, such as increases in real estate and other taxes, and increased costs of complying with governmental regulations. In addition, the State of California is generally regarded as more litigious and more highly regulated and taxed than many states, which may reduce demand for the Company’s communities. Recently, California has also experienced increased relocation out of the state, including as a result of the regulatory landscape and the COVID-19 pandemic. Any adverse developments in the economy or real estate markets in California or Washington, or any decrease in demand for the Company’s communities resulting from the California or Washington regulatory or business environments, could have an adverse effect on the Company’s business and results of operations.
The Company may experience various increased costs, including increased property taxes, to own and maintain its properties. Real property taxes on our properties may increase as our properties are reassessed by taxing authorities or as property tax rates change. Our real estate taxes in Washington could increase as a result of property value reassessments or increased property tax rates in that state. A current California law commonly referred to as Proposition 13 generally limits annual real estate tax increases on California properties to 2% of assessed value. However, under Proposition 13, property tax reassessment generally occurs as a result of a "change in ownership" of a property, as specially defined for purposes of those rules. Because the property taxing authorities may not determine whether there has been a "change in ownership" or the actual reassessed value of a property for a period of time after a transaction has occurred, we may not know the impact of a potential reassessment for a considerable amount of time following a particular transaction. Therefore, the amount of property taxes we are required to pay could increase substantially from the property taxes we currently pay or have paid in the past, including on a retroactive basis. In addition, from time to time voters and lawmakers have announced initiatives to repeal or amend Proposition 13 to eliminate its application to commercial and industrial property and/or introduce split tax roll legislation. Such initiatives, if successful, could increase the assessed value and/or tax rates applicable to commercial property in California, including our apartment communities. Further, changes in U.S. federal tax law could cause state and local governments to alter their taxation of real property.
The Company may experience increased costs associated with capital improvements and routine property maintenance, such as repairs to the foundation, exterior walls, and rooftops of its properties, as its properties advance through their life-cycles. In some cases, we may spend more than budgeted amounts to make necessary improvements or maintenance. Increases in the
Company’s expenses to own and maintain its properties could adversely impact the Company’s financial condition and results of operations.
Competition in the apartment community market and other housing alternatives may adversely affect operations and the rental demand for the Company’s communities. There are numerous housing alternatives that compete with the Company’s communities in attracting tenants. These include other apartment communities, condominiums and single-family homes that are available for rent or for sale in the markets in which our communities are located. Competitive housing in a particular area and fluctuations in cost of owner-occupied single- and multifamily homes caused by a decrease in housing prices, mortgage interest rates and/or government programs to promote home ownership or create additional rental and/or other types of housing, or an increase in desire for more space due to work from home needs or increased time spent at home due to COVID-19, could adversely affect the Company’s ability to retain its tenants, lease apartment homes and increase or maintain rents. If the demand for the Company’s communities is reduced or if competitors develop and/or acquire competing apartment communities, rental rates may drop, which may have a material adverse effect on the Company’s financial condition and results of operations. The Company also faces competition from other companies, REITs, businesses and other entities in the acquisition, development and operation of apartment communities. This competition may result in an increase in prices and costs of apartment communities that the Company acquires and/or develops.
Investments in mortgages, mezzanine loans, subordinated debt, other real estate, and other marketable securities could adversely affect the Company’s cash flow from operations. The Company may purchase or otherwise invest in securities issued by entities which own real estate and/or invest in mortgages or unsecured debt obligations. Such mortgages may be first, second or third mortgages, and these mortgages and/or other investments may not be insured or otherwise guaranteed. The Company may make or acquire mezzanine loans, which take the form of subordinated loans secured by second mortgages on the underlying property or loans secured by a pledge of the ownership interests of either the entity owning the property or a pledge of the ownership interests of the entity or entities that owns the interest in the entity owning the property. In general, investments in mortgages include the following risks:
•that the value of mortgaged property may be less than the amounts owed, causing realized or unrealized losses;
•the borrower may not pay indebtedness under the mortgage when due, requiring the Company to foreclose, and the amount recovered in connection with the foreclosure may be less than the amount owed;
•that interest rates payable on the mortgages may be lower than the Company’s cost of funds;
•in the case of junior mortgages, that foreclosure of a senior mortgage could eliminate the junior mortgage;
•delays in the collection of principal and interest if a borrower claims bankruptcy; and
•unanticipated early prepayments may limit the Company’s expected return on its investment.
If any of the above were to occur, it could adversely affect the Company’s cash flows from operations.
The Company’s ownership of co-investments, including joint ventures and joint ownership of communities, its ownership of properties with shared facilities with a homeowners' association or other entity, its ownership of properties subject to a ground lease and its preferred equity investments and its other partial interests in entities that own communities, could limit the Company’s ability to control such communities and may restrict our ability to finance, sell or otherwise transfer our interests in these properties and expose us to loss of the properties if such agreements are breached by us or terminated.
The Company has entered into, and may continue in the future to enter into, certain co-investments, including joint ventures or partnerships through which it owns an indirect economic interest in less than 100% of the community or land or other investments owned directly by the joint venture or partnership. As of December 31, 2020, the Company had, through several joint ventures, an interest in 8,652 apartment homes in stabilized operating communities for a total book value of $358.3 million.
Joint venture partners often have shared control over the development and operation of the joint venture assets. Therefore, it is possible that a joint venture partner in an investment might become bankrupt, or have economic or business interests or goals that are inconsistent with the Company’s business interests or goals, or be in a position to take action contrary to the Company’s instructions or requests, or its policies or objectives. Consequently, a joint venture partner's actions might subject property owned by the joint venture to additional risk. Although the Company seeks to maintain sufficient influence over any joint venture to achieve its objectives, the Company may be unable to take action without its joint venture partners’ approval. A joint venture partner might fail to approve decisions that are in the Company’s best interests. Should a joint venture partner become bankrupt, the Company could become liable for such partner’s share of joint venture liabilities. In some instances, the Company and the joint venture partner may each have the right to trigger a buy-sell arrangement, which could cause the Company to sell its interest, or acquire a partner’s interest, at a time when the Company otherwise would not have initiated such a transaction.
From time to time, the Company, through the Operating Partnership, invests in corporations, limited partnerships, limited liability companies or other entities that have been formed for the purpose of acquiring, developing, financing, or managing real property. The Company makes certain co-investments in the form of preferred equity investments in third party entities that own real estate. With preferred equity investments and certain other co-investments, the Operating Partnership’s interest in a particular entity is typically less than a majority of the outstanding voting interests of that entity. Therefore, the Operating Partnership’s ability to control the daily operations of such co-investment may be limited. Furthermore, the Operating Partnership may not have the power to remove a majority of the board of directors (in the case of a corporation) or the general partner or partners (in the case of a limited partnership) of such co-investment in the event that its operations conflict with the Operating Partnership’s objectives. The Operating Partnership may not be able to dispose of its interests in such co-investment. In the event that such co-investment or the partners in such co-investment become insolvent or bankrupt or fail to develop or operate the property in the manner anticipated and expected, the Operating Partnership may not receive the expected return in its expected timeframe or at all and may lose up to its entire investment in, and any advances to, the co-investment. Additionally, the preferred return negotiated on these co-investments may be lower than the Company's cost of funds. The Company may also incur losses if any guarantees or indemnifications were made by the Company.
The Company also owns properties indirectly under "DownREIT" structures. The Company has entered into, and in the future may enter into, transactions that could require the Company to pay the tax liabilities of partners that contribute assets into DownREITs, joint ventures or the Operating Partnership, in the event that certain taxable events, which are within the Company’s control, occur. Although the Company plans to hold the contributed assets or, if such assets consist of real property, defer recognition of gain on sale of such assets pursuant to the like-kind exchange rules under Section 1031 of the Internal Revenue Code of 1986, as amended (the "Code"), the Company can provide no assurance that the Company will be able to do so and if such tax liabilities were incurred they could have a material impact on its financial position.
Also, from time to time, the Company invests in properties which may be subject to certain shared facilities agreements with homeowners' associations and other entities and/or invests in properties subject to ground leases where a subtenant may have certain similar rights to that of a party under such a shared facilities agreement. For such properties, the Company's ability to control the expenditure of capital improvements and its allocation with such other parties may adversely affect the Company's business, financial condition and results of operations.
We may pursue acquisitions of other REITs and real estate companies, which may not yield anticipated results and could adversely affect our results of operations. We may make acquisitions of and/or investments in other REITs and real estate companies that offer properties and communities to augment our market coverage or enhance our property offerings. We may also enter into strategic alliances or joint ventures to achieve these goals. There can be no assurance that we will be able to identify suitable acquisition, investment, alliance or joint venture opportunities, that we will be able to consummate any such transactions or relationships on terms and conditions acceptable to us, or that such transactions or relationships will be successful. In addition, our original estimates and assumptions used in assessing any acquisition may be inaccurate, and we may not realize the expected financial or strategic benefits of any such acquisition.
These transactions or any other acquisitions involve risks and uncertainties. For example, as a consequence of such transactions, we may assume unknown liabilities, which could ultimately lead to material costs for us. In addition, the integration of acquired businesses or other acquisitions may not be successful and could result in disruption to other parts of our business. To integrate acquired businesses or other acquisitions, we must implement our management information systems, operating systems and internal controls, and assimilate and manage the personnel of the acquired operations. The expected synergies from acquisitions may not be fully realized, which could result in increased costs or other issues and have an adverse effect on our business. There can be no assurance that all pre-acquisition property due diligence will have identified all material issues that might arise with respect to such acquired business and its properties or as to any such other acquisitions. Any future acquisitions we make may also require significant additional debt or equity financing, which, in the case of debt financing, would increase our leverage and potentially affect our credit ratings and, in the case of equity or equity-linked financing, could be dilutive to Essex's stockholders and the Operating Partnership's unitholders. Additionally, the value of these investments could decline for a variety of reasons. These and other factors could affect our ability to achieve anticipated levels of profitability at acquired operations or realize other anticipated benefits of an acquisition, and could adversely affect our business, financial condition and results of operations.
Real estate investments are relatively illiquid and, therefore, the Company's ability to vary its portfolio promptly in response to changes in economic or other conditions may be limited. Real estate investments are illiquid and, in our markets, can at times be difficult to sell at prices we find acceptable. We may be unable to consummate dispositions of properties or interests in properties in a timely manner, on attractive terms, or at all. These potential difficulties in selling real estate in our markets may limit our ability to change or reduce the apartment communities in our portfolio promptly in response to changes in economic or other conditions, which could have a material adverse effect on our financial condition and results of operations. In addition, if
we are found to have held, acquired or developed a community as inventory or primarily for sale to customers in the ordinary course of business, federal tax laws may limit our ability to sell the community without incurring a 100% tax on the gain on the sale of the community and potentially adversely impacting our status as a REIT unless we own the community through one of our taxable REIT subsidiaries ("TRSs").
The Company may not be able to lease its retail/commercial space consistent with its projections or at market rates. The Company has retail/commercial space in its portfolio, which represents approximately 1% of our total revenue. The retail/commercial space at our properties, among other things, serves as an additional amenity for our tenants. The long term nature of our retail/commercial leases, and the characteristics of many of our retail/commercial tenants (small, local businesses), may subject us to certain risks. We may not be able to lease new space for rents that are consistent with our projections or at market rates, and the longer term leases for existing space could result in below market rents over time. Also, when leases for our existing retail/commercial space expire, the space may not be relet on a timely basis, or at all, or the terms of reletting, including the cost of allowances and concessions to tenants, may be less favorable than the current lease terms. Our properties compete with other properties with retail/commercial space. The presence of competitive alternatives may affect our ability to lease space and the level of rents we can obtain. If our retail/commercial tenants experience long term government-mandated closures of their businesses or other substantial restrictions on their operations due to the impact of COVID-19 or otherwise, financial distress or bankruptcy, they may fail to comply with their contractual obligations, seek concessions in order to continue operations or cease their operations, which could adversely impact our results of operations and financial condition.
The Company’s portfolio may have environmental liabilities. Under various federal, state and local environmental and public health laws, regulations and ordinances, we have been required, and may be required in the future, regardless of our knowledge or responsibility, to investigate and remediate the effects of hazardous or toxic substances or petroleum product releases at our properties (including in some cases naturally occurring substances such as methane and radon gas). We may be held liable under these laws or common law to a governmental entity or to third parties for response costs, property damage, personal injury or natural resources damages and for investigation and remediation costs incurred as a result of the impacts resulting from such releases. While the Company is unaware of any such response action required or damage claims associated with its existing properties which individually or in aggregate would have a material adverse effect on our business, assets, financial condition or results of operations, potential future costs and damage claims may be substantial and could exceed any insurance coverage we may have for such events or such coverage may not exist. Further, the presence of such substances, or the failure to properly remediate any such impacts, may adversely affect our ability to borrow against, develop, sell or rent the affected property. In addition, some environmental laws create or allow a government agency to impose a lien on the impacted property in favor of the government for damages and costs it incurs as a result of responding to hazardous or toxic substance or petroleum product releases.
Investments in real property create a potential for environmental liabilities on the part of the owner of such real property. The Company carries certain limited insurance coverage for this type of environmental risk as to its properties; however, such coverage is not fully available for all properties and, as to those properties for which limited coverage is fully available, it may not apply to certain claims arising from known conditions present on those properties. In general, in connection with the ownership (direct or indirect), operation, financing, management and development of its communities, the Company could be considered as the owner or operator of such properties or as having arranged for disposal or treatment of hazardous substances present there and therefore may be potentially liable for removal or clean-up costs, as well as certain other costs and environmental liabilities. The Company may also be subject to governmental fines, costs related to injuries to third parties and/or damage to a third party's property.
Properties which we plan to acquire undergo a pre-acquisition Phase I environmental site assessment, which is intended to afford the Company protection against so-called "owner liability" under the primary federal environmental law, as well as further environmental assessment, which may involve invasive techniques such as soil or ground water sampling where conditions warranting such further assessment are identified and seller’s consent is obtained. Despite these assessments, no assurance can be given that all environmental conditions present on or beneath or emanating from a given property will be discovered or that the full nature and extent of those conditions which are discovered will be adequately ascertained and quantified.
In connection with our ownership, operation and development of communities, from time to time we undertake remedial action in response to the presence of subsurface or other contaminants, including contaminants in soil, groundwater and soil vapor beneath or affecting our buildings. The Company does so pursuant to appropriate environmental regulatory requirements with the objective of obtaining regulatory closure or a no further action determination that will allow for future use, development and sale of any impacted community.
Certain environmental laws impose liability for release of asbestos-containing materials ("ACMs") into the air or exposure to lead-based paint ("LBP"), and third parties may seek recovery from owners or operators of apartment communities for personal injury associated with ACMs or LBP.
Mold growth may occur when excessive moisture accumulates in buildings or on building materials, particularly if the moisture problem remains undiscovered or is not addressed in a timely manner. Although the occurrence of mold at multifamily and other structures, and the need to remediate such mold, is not a new phenomenon, there has been increased awareness in recent years that certain molds may in some instances lead to adverse health effects, including allergic or other reactions. The Company has adopted policies for promptly addressing and resolving reports of mold when it is detected, and to minimize any impact mold might have on tenants of the affected property. The Company believes its mold policies and proactive response to address any known mold existence reduce its risk of loss from these cases; however, no assurance can be provided that the Company has identified and responded to all mold occurrences.
California has enacted legislation, commonly referred to as "Proposition 65," requiring that covered businesses provide "clear and reasonable" warnings before knowingly exposing persons to chemicals known to the State of California to cause cancer or reproductive toxicity, including tobacco smoke. The legislation allows private persons to sue to enforce this warning requirement and recover their legal fees and costs for doing so. Although the Company has sought to comply with Proposition 65 requirements where it appears applicable, we cannot assure you that the Company will not be adversely affected by private enforcement litigation relating to Proposition 65.
Methane gas is a naturally-occurring gas that is commonly found below the surface in several areas, particularly in the Southern California coastal areas. Methane is a non-toxic gas, but is flammable and can be explosive at sufficient concentrations when in confined spaces and exposed to an ignition source. Naturally-occurring methane gas is regulated at the state and federal level as a greenhouse gas but is not otherwise regulated as a hazardous substance; however, some local governments, such as Los Angeles County, require that new buildings constructed in areas designated methane gas zones install detection and/or venting systems. Radon is also a naturally-occurring gas that is found below the surface and can pose a threat to human health requiring abatement action if present in sufficient concentration within occupied areas. The Company cannot assure you that it will not be adversely affected by costs related to its compliance with methane or radon gas related requirements or litigation costs related to methane or radon gas.
We cannot assure you that costs or liabilities incurred as a result of environmental matters will not affect our ability to make distributions to Essex's stockholders or the Operating Partnership's unitholders, or that such costs or liabilities will not have a material adverse effect on our financial condition and results of operations; however, the Company is unaware of any pending or threatened alleged claim resulting from such matters which would have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
The Company may incur general uninsured losses or may experience market conditions that impact the procurement of certain insurance policies. The Company purchases general liability and property, including loss of rent, insurance coverage for each of its communities. The Company may also purchase limited earthquake, terrorism, environmental and flood insurance for some of its communities. However, there are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, pollution, environmental matters or extreme weather conditions such as hurricanes, fires and floods that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with potential terrorist acts could sharply increase the premiums the Company pays for coverage against property and casualty claims. The Company utilizes a wholly owned insurance subsidiary, Pacific Western Insurance LLC ("PWI"), to self-insure certain earthquake and property losses for some of the communities in its portfolio. As of December 31, 2020, PWI, which is consolidated in the Company's financial statements, had cash and marketable securities of approximately $152.8 million. The value of the marketable securities of PWI could decline, and if a decline in value were to occur, PWI's ability to cover all or any portion of the amount of any insured losses could be adversely affected.
All of our communities are located in areas that are subject to earthquake activity. The Company evaluates its financial loss exposure to seismic events by using actuarial loss models developed by the insurance industry and property vulnerability analyses based on structural evaluations by seismic consultants. The Company manages this exposure, where considered appropriate, desirable, and cost-effective, by upgrading properties to increase their resistance to forces caused by seismic events, by considering available funds and coverages provided by PWI and/or, in some cases, by purchasing seismic insurance. Purchasing seismic insurance coverage can be costly and such seismic insurance is in limited supply. As a result, the Company may experience a shortage in desired coverage levels if market conditions are such that insurance is not available, or the cost of the insurance makes it, in management's view, not economically practical. The Company may purchase limited earthquake insurance for certain high-density properties and, in most cases, properties owned by the Company's co-investments.
The Company carries other types of insurance coverage related to a variety of risks and exposures, including cyber risk insurance. There has been a reduction in the number of insurance companies in the market offering certain types of insurance the Company has previously purchased and premiums have materially increased for certain types of insurance coverage. Based on market conditions, the Company may change or potentially eliminate insurance coverages, or increase levels of self-insurance. Further, we cannot assure you that the Company will not incur losses, which could be material, due to uninsured risks, deductibles and self-insured retentions, and/or losses in excess of coverage limits.
We have significant investments in large metropolitan markets, such as the metropolitan markets in Southern California, Northern California, and Seattle. These markets may in the future be the target of actual or threatened terrorist attacks. Future terrorist attacks in these markets could directly or indirectly damage our communities, both physically and financially, or cause losses that exceed our insurance coverage. Our communities could also directly or indirectly be the location or target of actual or threatened terrorist attacks, crimes, shootings, other acts of violence or other incidents beyond our control, the occurrence of which could directly impact the value of our communities through damage, destruction, loss or increased security costs, as well as operational losses due to reduction of traffic and rental demand for our communities, and the availability of insurance for such acts may be limited or may be subject to substantial costs. If such an incident were to occur at one of our communities, we may also be subject to significant liability claims. Such events and losses could significantly affect our ability to operate those communities and materially impair our ability to achieve our expected results. Additionally, we may be obligated to continue to pay any mortgage indebtedness and other obligations relating to affected properties.
Although the Company may carry insurance for potential losses associated with its communities, employees, tenants, and compliance with applicable laws, it may still incur losses due to uninsured risks, deductibles, copayments or losses in excess of applicable insurance coverage and those losses may be material. In the event of a substantial loss, insurance coverage may not be able to cover the full replacement cost of the Company’s lost investment, or the insurance carrier may become insolvent and not be able to cover the full amount of the insured losses. Changes in building codes and ordinances, environmental considerations and other factors might also affect the Company’s ability to replace or renovate an apartment community after it has been damaged or destroyed. In addition, certain causalities and/or losses incurred may expose the Company in the future to higher insurance premiums.
Climate change may adversely affect our business. To the extent that climate change does occur, we may experience extreme weather and changes in precipitation and temperature, all of which may result in physical damage or a decrease in demand for our communities located in these areas or affected by these conditions. Should the impact of climate change be material in nature or occur for lengthy periods of time, our financial condition or results of operations may be adversely affected, and may negatively impact the types and pricing of insurance the Company is able to procure.
Our properties are located along the West Coast of the United States. To the extent climate change causes changes in weather patterns, the regions where our communities are located could experience increases in storm intensity, rising sea levels and/or drought frequency. Over time, such conditions could result in reduced demand for housing in areas where our communities are located and increased costs related to further developing our communities to mitigate the effects of climate change or repairing damage related to the effects of climate change that may or may not be fully covered by insurance.
In addition, changes in federal, state and local legislation and regulation on climate change could result in increased operating costs (for example, increased utility costs) and/or increased capital expenditures to improve the energy efficiency of our existing communities and could also require us to spend more on our new development communities without a corresponding increase in revenue. For example, various federal, regional and state laws and regulations have been implemented or are under consideration to mitigate the effects of climate change caused by greenhouse gas emissions, including the California energy efficiency standards, referred to as Title 24 or The Building Energy Efficiency Standards. Among other things, "green" building codes may seek to reduce emissions through the imposition of standards for design, construction materials, water and energy usage and efficiency and waste management. The imposition of such requirements in the future could increase the costs of maintaining or improving our existing properties or developing properties (for example, requiring retrofits of existing properties to improve their energy efficiency and/or resistance to inclement weather) without creating corresponding increase in revenue, resulting in adverse impacts to our operating results. Further, the impact of climate change may increase the cost of, or make unavailable, property insurance or other hazard insurance on terms we find acceptable or necessary to adequately protect our properties.
Accidental death or severe injuries at our communities due to fires, floods, other natural disasters or hazards could adversely affect our business and results of operations. The accidental death or severe injuries of persons living in our communities due to fires, floods, other natural disasters or hazards could have a material adverse effect on our business and results of operations. Our insurance coverage may not cover all losses associated with such events, and we may experience
difficulty marketing communities where any such events have occurred, which could have a material adverse effect on our business and results of operations.
Adverse changes in laws may adversely affect the Company's liabilities and/or operating costs relating to its properties and its operations. Increases in real estate taxes and income, service and transfer taxes cannot always be passed through to tenants or users in the form of higher rents, and may adversely affect the Company's cash available for distribution and its ability to make distributions to Essex's stockholders or the Operating Partnership's unitholders and pay amounts due on its debts. Similarly, changes in laws increasing the potential liability of the Company and/or its operating costs on a range of issues, including those regarding potential liability for other environmental conditions existing on properties or increasing the restrictions on discharges or other conditions, as well as changes in laws affecting development, construction and safety requirements, may result in significant unanticipated expenditures, including without limitation, those related to structural or seismic retrofit or more costly operational safety systems and programs, which could have a material adverse effect on the Company. For example, (1) the California statute, the "Sustainable Communities and Climate Protection Act of 2008," also known as "SB375," provides that, in order to reduce greenhouse emissions, there should be regional planning to coordinate housing needs with regional transportation and such planning could lead to restrictions on, or increases in, property development that adversely affect the Company and (2) the Environmental Protection Agency has implemented a program for long-term phase out of HCFC-22 coolant (freon) by 2030, which could lead to increased capital and/or operating costs.
Failure to succeed in new markets may limit the Company’s growth. The Company may make acquisitions or commence development activity outside of its existing market areas if appropriate opportunities arise. The Company’s historical experience in its existing markets does not ensure that it will be able to operate successfully in new markets. The Company may be exposed to a variety of risks if it chooses to enter new markets. These risks include, among others:
•an inability to evaluate accurately local apartment market conditions and local economies;
•an inability to identify appropriate acquisition opportunities or to obtain land for development;
•an inability to hire and retain key personnel; and
•lack of familiarity with local governmental and permitting procedures.
Current volatility in market and economic conditions may impact the accuracy of the various estimates used in the preparation of our financial statements and footnotes to the financial statements. Various estimates are used in the preparation of our financial statements, including estimates related to the fair value of tangible and intangible assets and the carrying value of our real estate investments. Often these estimates require the use of local market knowledge and data that is difficult to assess, as well as estimates of future cash flows associated with our real estate investments that can also be difficult to accurately predict. The uncertainty surrounding the short- and long-term impacts of COVID-19 have increased the difficulty in preparing these estimates. Although our management believes it has been prudent and used reasonable judgment in making these estimates, it is possible that actual results may differ materially from these estimates.
Our business and reputation depend on our ability to continue providing high quality housing and consistent operation of our communities, the failure of which could adversely affect our business, financial condition and results of operations. Our business and reputation depend on providing tenants with quality housing with highly reliable services, including with respect to water and electric power, along with the consistent operation of our communities, including a wide variety of amenities such as covered parking, swimming pools, clubhouses with fitness facilities, playground areas, tennis courts and similar features. Public utilities, especially those that provide water and electric power, are fundamental for the consistent operation of our communities. The delayed delivery or any material reduction or prolonged interruption of these services may cause tenants to terminate their leases, or may result in a reduction of rents and/or increase in our costs or other issues. In addition, we may fail to provide quality housing and continuous access to amenities as a result of other factors, including government mandated closures due to health concerns, mechanical failure, power outage, human error, vandalism, physical or electronic security breaches, war, terrorism or similar events. Additionally, residents may choose not to use such facilities or amenities as a matter of social distancing or for other reasons, which may cause our communities to become less appealing to such residents. Such service interruptions, closures or lack of use of facilities, mechanical failures or other events may also expose us to additional liability claims and damage our reputation and brand, and could cause tenants to terminate or not renew their leases, or prospective tenants to seek housing elsewhere. Any such failures could impair our ability to continue providing quality housing and consistent operation of our communities, which could adversely affect our business, financial condition and results of operations.
The Company’s real estate assets may be subject to impairment charges. The Company continually evaluates the recoverability of the carrying value of its real estate assets under U.S. generally accepted accounting principles ("U.S. GAAP"). Factors considered in evaluating impairment of the Company’s existing multifamily real estate assets held for investment
include significant declines in property operating profits, recurring property operating losses and other significant adverse changes in general market conditions that are considered permanent in nature. Generally, a multifamily real estate asset held for investment is not considered impaired if the undiscounted, estimated future cash flows of the asset over its estimated holding period are in excess of the asset’s net book value at the balance sheet date. Assumptions used to estimate annual and residual cash flow and the estimated holding period of such assets require the judgment of management. There can be no assurance that the Company will not take charges in the future related to the impairment of the Company’s assets. Any future impairment charges could have a material adverse effect on the Company’s results of operations.
We face risks associated with land holdings and related activities. We hold land for future development and may in the future acquire additional land holdings. The risks inherent in purchasing, owning and developing land increase as demand for apartments, or rental rates, decrease. Real estate markets are highly uncertain and, as a result, the value of undeveloped land may fluctuate significantly. In addition, carrying costs can be significant and can result in losses or reduced profitability. As a result, we hold certain land, and may, in the future acquire additional land, in our development pipeline at a cost we may not be able to fully recover or at a cost which may preclude our developing a profitable multifamily community. If there are subsequent changes in the fair value of our land holdings which we determine is less that the carrying basis of our land holdings reflected in our financial statements plus estimated costs to sell, we may be required to take future impairment changes which could have a material adverse effect on our results of operations.
We rely on information technology in our operations, and any material failure, inadequacy, interruption or breach of the Company’s privacy or information security systems, or those of our vendors or other third parties, could materially adversely affect the Company’s business and financial condition. The protection of tenant, employee, and company data is critically important to the Company. We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, personally identifiable information, and tenant and lease data. Our business requires us, including some of our vendors, to use and store personally identifiable and other sensitive information of our tenants and employees. The collection and use of personally identifiable information is governed by federal and state laws and regulations. Privacy and information security laws continue to evolve and may be inconsistent from one jurisdiction to another. The Company endeavors to ensure compliance with all such laws and regulations, including by providing required disclosures, promptly responding to consumer requests for data, and seeking vendor compliance with applicable privacy and information security laws. Compliance with all such laws and regulations may increase the Company’s operating costs and adversely impact the Company’s ability to market the Company’s properties and services.
Although we have taken steps to abide by privacy and security laws, and to protect the security of our information systems and maintain confidential tenant, prospective tenant and employee information, the compliance and security measures put in place by the Company, and such vendors, cannot guarantee perfect compliance or provide absolute security, and the Company and our vendors' compliance systems and/or information technology infrastructure may be vulnerable to criminal cyber-attacks or data security incidents, including, ransom of data, such as, without limitation, tenant and/or employee information, due to employee error, malfeasance, or other vulnerabilities. Any such incident could compromise the Company’s or such vendors' networks (or the networks or systems of third parties that facilitate the Company’s or such vendors’ business activities), and the information stored by the Company or such vendors could be accessed, misused, publicly disclosed, corrupted, lost, or stolen, resulting in fraud, including wire fraud related to Company assets, or other harm. Moreover, if there is a compliance failure, or if a data security incident or breach affects the Company’s systems or such vendors' systems, whether through a breach of the Company’s systems or a breach of the systems of third parties, or results in the unauthorized release of personally identifiable information, the Company’s reputation and brand could be materially damaged, which could increase our costs in attracting and retaining tenants, and other serious consequences may result. Such potential other consequences include, without limitation, that the Company and certain executive officers may be exposed to a risk of litigation and possible liability, including, without limitation, government enforcement actions and private litigation; and that the Company may be exposed to a risk of loss including, without limitation, loss related to the fact that agreements with such vendors, or such vendors' financial condition, may not allow the Company to recover all costs related to a cyber breach for which they alone or they and the Company should be jointly responsible for, which could result in a material adverse effect on the Company’s business, results of operations, and financial condition.
Privacy and information security risks have generally increased in recent years because of the proliferation of new technologies, such as ransomware, and the increased sophistication and activities of perpetrators of cyber-attacks. In light of the increased risks, we have dedicated additional Company resources to strengthening the security of the Company’s computer systems, including maintaining cyber risk insurance which may provide some coverage for certain risks arising out of cyber breaches. However, there can be no assurance that our cyber risk insurance will be sufficient in the event of a cyber incident.
In the future, the Company may expend additional resources to continue to enhance the Company’s information security measures to investigate and remediate any information security vulnerabilities and/or to further ensure compliance with privacy and information security laws. Despite these steps, there can be no assurance that the Company will not suffer a significant data security incident in the future, that unauthorized parties will not gain access to sensitive data stored on the Company’s systems, or that any such incident will be discovered in a timely manner. Any failure in or breach of the Company's information security systems, those of third party service providers, or a breach of other third party systems that ultimately impacts the operational or information security systems of the Company as a result of cyber-attacks or information security breaches could result in a wide range of potentially serious harm to our business and results of operations. Additionally, government agencies involved in investigating any potential data security incidents may impose injunctive relief or other civil or criminal penalties on the Company and/or certain executives, which could, among other things, divert the attention of management, impact the Company's ability to collect and use tenant information, materially increase data security costs and/or otherwise require us to alter how we operate our business. Further, the techniques used by criminals to obtain unauthorized access to sensitive data, such as phishing and other forms of human engineering, are increasing in sophistication and are often novel or change frequently; accordingly, the Company may be unable to anticipate these techniques or implement adequate preventative measures.
Reliance on third party software providers to host systems critical to our operations and to provide the Company with data. We rely on certain key software vendors to support business practices critical to our operations, including the collection of rent and ancillary income and communication with our tenants, and to provide us with data, including data we use to set our rents and predict occupancies. The market is currently experiencing a consolidation of these software vendors particularly in the multi-family space, which may negatively impact the Company’s choice of vendor and pricing options. Moreover, if any of these key vendors were to terminate our relationship or access to data, or to fail, we could suffer losses while we sought to replace the services and information provided by the vendors.
Risks Related to Our Indebtedness and Financings
Capital and credit market conditions may affect the Company’s access to sources of capital and/or the cost of capital, which could negatively affect the Company’s business, results of operations, cash flows and financial condition. In periods when the capital and credit markets experience significant volatility, the amounts, sources and cost of capital available to the Company may be adversely affected. Our current balance sheet, the debt capacity available on the unsecured line of credit with a diversified bank group, access to the public and private placement debt markets and secured debt financing providers such as Fannie Mae and Freddie Mac provide some insulation from volatile capital markets. We primarily use external financing, including sales of debt and equity securities, to fund acquisitions, developments, and redevelopments and to refinance indebtedness as it matures. If sufficient sources of external financing are not available to us on cost effective terms, we could be forced to limit our acquisition, development and redevelopment activity and/or take other actions to fund our business activities and repayment of debt, such as selling assets, reducing our cash dividend or distributing less than 100% of our REIT taxable income. In general, to the extent that the Company’s access to capital and credit is at a higher cost than the Company has experienced in recent years (reflected in higher interest rates for debt financing or a lower stock price for equity financing without a corresponding change to investment cap rates) the Company’s ability to make acquisitions, develop or redevelop communities, obtain new financing, and refinance existing borrowing at competitive rates could be adversely affected, which would impact the Company's financial standing and related credit rating. In addition, if our ability to obtain financing is adversely affected, we may be unable to satisfy scheduled maturities on existing financing through other sources of our liquidity, which, in the case of secured financings, could result in lender foreclosure on the apartment communities securing such debt.
Debt financing has inherent risks. At December 31, 2020, the Company had approximately $6.3 billion of indebtedness (including $775.1 million of variable rate indebtedness, of which $175.0 million is subject to an interest rate swap effectively fixing the interest rate on $175.0 million in debt). The Company is subject to the risks normally associated with debt financing, including, among others, the following:
•cash flow may not be sufficient to meet required payments of principal and interest;
•inability to refinance maturing indebtedness on encumbered apartment communities;
•inability to comply with debt covenants could trigger cash management provisions limiting our ability to control cash flows, cause defaults, or an acceleration of maturity dates; and
•paying debt before the scheduled maturity date could result in prepayment penalties.
The Company may not be able to renew, repay or refinance its indebtedness when due or may be required to refinance its indebtedness at higher interest rates or on terms that may not be as favorable as the terms of existing indebtedness. If the
Company is unable to refinance its indebtedness on acceptable terms, or at all, the Company might be forced to dispose of one or more of its properties on disadvantageous terms, which might result in losses. Such losses could have an adverse effect on the Company and its ability to make distributions to Essex's stockholders or the Operating Partnership's unitholders and pay amounts due on its debt.
Debt financing of communities may result in insufficient cash flow to service debt and fund distributions. Where appropriate, the Company intends to continue to use leverage to increase the rate of return on the Company’s investments and to provide for additional investments that the Company could not otherwise make. There is a risk that the cash flow from the communities will be insufficient to meet both debt payment obligations and the REIT distribution requirements of the Code. Our ability to make payments on and to refinance our indebtedness and to fund our operations, working capital and capital expenditures, depends on our ability to generate cash in the future. There is a risk that we may not be able to refinance existing indebtedness or that a refinancing will not be done on as favorable terms, which in either case could have an adverse effect on our financial condition, results of operations and cash flows.
As of December 31, 2020, the Company had 12 consolidated communities encumbered by debt. With respect to such communities, all of them are secured by deeds of trust relating solely to those communities. The holders of this indebtedness will have rights with respect to these communities and, if debt payment obligations are not met, lenders may seek foreclosure of communities, or may appoint a receiver and exercise rights under an assignment of rents and leases, or pursue other remedies which would reduce the Company’s income and net asset value, and its ability to service other debt. Foreclosures could also create taxable income without accompanying cash proceeds, thereby hindering our ability to meet REIT distribution requirements.
Compliance requirements of tax-exempt financing and below market rent requirements may limit income from certain communities. At December 31, 2020, the Company had approximately $225.1 million of variable rate tax-exempt financing. This tax-exempt financing provides for certain deed restrictions and restrictive covenants. The Company expects to engage in tax-exempt financings in the future. If the compliance requirements of the tax-exempt financing restrict our ability to increase our rental rates to low or moderate income tenants, or eligible/qualified tenants, then our income from these properties may be limited. While we generally believe that the interest rate benefit attendant to properties with tax-exempt bonds more than outweigh any loss of income due to restrictive covenants or deed restrictions, this may not always be the case. Some of these requirements are complex and our failure to comply with them may subject us to material fines or liabilities. Certain state and local authorities may impose additional rental restrictions. These restrictions may limit income from the tax-exempt financed communities if the Company is required to decrease its rental rates to attract tenants who satisfy the median income test. If the Company does not reserve the required number of apartment homes for tenants satisfying these income requirements, the tax-exempt status of the bonds may be terminated, the obligations under the bond documents may be accelerated and the Company may be subject to additional contractual liability. Notwithstanding the limitations due to tax-exempt financing requirements, the income from certain communities may be limited due to below market rent requirements imposed by local authorities in connection with the original development of the community.
The indentures governing our notes and other financing arrangements contain restrictive covenants that limit our operating flexibility. The indentures that govern our publicly registered notes contain financial and operating covenants that, among other things, restrict our ability to take specific actions, even if we believe them to be in our best interests, including restrictions on our ability to:
•consummate a merger, consolidation or sale of all or substantially all of our assets; and
•incur additional secured and unsecured indebtedness.
The instruments governing our other unsecured indebtedness require us to meet specified financial covenants, including covenants relating to net worth, fixed charge coverage, debt service coverage, the amounts of total indebtedness and secured indebtedness, leverage and certain investment limitations. These covenants may restrict our ability to expand or fully pursue our business strategies. Our ability to comply with these provisions and those contained in the indentures governing the notes, may be affected by changes in our operating and financial performance, changes in general business and economic conditions, adverse regulatory developments or other events adversely impacting us. The breach of any of these covenants, including those contained in our indentures, could result in a default under our indebtedness, which could cause those and other obligations to become due and payable. If any of our indebtedness is accelerated, we may not be able to repay it.
Uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR after 2021 may materially adversely affect us. The interest rate on certain of the Company’s secured and unsecured debt obligations, including the Company’s two unsecured lines of credit, is based on the LIBOR. In July 2017, the United Kingdom regulator that regulates
LIBOR announced its intention to phase out LIBOR rates by the end of 2021. On November 30, 2020, the United Kingdom regulator announced its intentions, subject to confirmation following an early December consultation, to cease the publication of the one week and two month U.S. dollar LIBOR immediately following the December 31, 2021 publications, and the remaining U.S. dollar LIBOR tenors immediately following the June 30, 2023 publications. At this time, no consensus exists as to what rate or rates may become accepted alternatives to LIBOR, and it is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted in the United Kingdom, the United States or elsewhere. Any changes in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in LIBOR. If a published U.S. dollar LIBOR rate is unavailable after 2021, the interest rates on certain of the Company’s debt obligations could change. Uncertainty as to the nature of such potential changes, phase out, alternative reference rates or other reforms may materially adversely affect the trading market for LIBOR-based securities. Any of these proposals or consequences could have a material adverse effect on our financing costs, and as a result, our financial condition and results of operations.
Interest rate hedging arrangements may result in losses. The Company from time to time uses interest rate swaps and interest rate caps contracts to manage certain interest rate risks. Although these agreements may partially protect against rising interest rates, they also may reduce the benefits to the Company if interest rates decline. If a hedging arrangement is not indexed to the same rate as the indebtedness that is hedged, the Company may be exposed to losses to the extent that the rate governing the indebtedness and the rate governing the hedging arrangement change independently of each other. Finally, nonperformance by the other party to the hedging arrangement may subject the Company to increased credit risks. In order to minimize counterparty credit risk, the Company enters into hedging arrangements only with investment grade financial institutions.
A downgrade in the Company's investment grade credit rating could materially and adversely affect its business and financial condition. The Company plans to manage its operations to maintain its investment grade credit rating with a capital structure consistent with its current profile, but there can be no assurance that it will be able to maintain its current credit ratings. Any downgrades in terms of ratings or outlook by any of the rating agencies could have a material adverse impact on the Company’s cost and availability of capital, which could in turn have a material adverse impact on its financial condition, results of operations and liquidity.
Changes in the Company’s financing policy may lead to higher levels of indebtedness. The Company’s organizational documents do not limit the amount or percentage of indebtedness that may be incurred. The Company has adopted a policy of maintaining a limit on debt financing consistent with the existing covenants required to maintain the Company’s unsecured line of credit bank facility, unsecured debt and senior unsecured bonds. Although pursuant to this policy the Company manages its debt to be in compliance with the debt covenants, the Company may increase the amount of outstanding debt at any time without a concurrent improvement in the Company’s ability to service the additional debt. Accordingly, the Company could become more leveraged, resulting in an increased risk of default on its debt covenants or on its debt obligations and in an increase in debt service requirements. Any covenant breach or significant increase in the Company’s leverage could materially adversely affect the Company’s financial condition and ability to access debt and equity capital markets in the future.
If the Company or any of its subsidiaries defaults on an obligation to repay outstanding indebtedness when due, the default could trigger a cross-default or cross-acceleration under other indebtedness. If the Company or any of its subsidiaries defaults on its obligations to repay outstanding indebtedness, the default could cause a cross-default or cross-acceleration under other indebtedness. A default under the agreements governing the Company’s or its subsidiaries’ indebtedness, including a default under mortgage indebtedness, lines of credit, bank term loan, or the indenture for the Company’s outstanding senior notes, that is not waived by the required lenders or holders of outstanding notes, could trigger cross-default or cross-acceleration provisions under one or more agreements governing the Company’s indebtedness, which could cause an immediate default or allow the lenders to declare all funds borrowed thereunder to be due and payable.
The Company could be negatively impacted by the condition of Fannie Mae or Freddie Mac and by changes in government support for multifamily housing. Historically, the Company has utilized borrowing from Fannie Mae and Freddie Mac. There are no assurances that these entities will lend to the Company in the future. The Company primarily utilizes unsecured debt and repays secured debt at or near its respective maturity and places less reliance on agency mortgage debt financing. Potential options have been proposed for the future of agency mortgage finance in the United States that could involve the phase out of Fannie Mae and Freddie Mac. While we believe Fannie Mae and Freddie Mac will continue to provide liquidity to our sector, should they discontinue doing so, have their mandates changed or reduced or be disbanded or reorganized by the government or if there is reduced government support for multifamily housing more generally, it may adversely affect interest rates, capital availability, development of multifamily communities and the value of multifamily residential real estate and, as a result, may adversely affect the Company and its growth and operations.
Risks Related to Personnel
The Company depends on its key personnel, whose continued service is not guaranteed. The Company’s success depends on its ability to attract, train and retain executive officers, senior officers and company managers. There is substantial competition for qualified personnel in the real estate industry and the departure of any of the Company’s key personnel could have an adverse effect on the Company. While the Company engages in regular succession planning for key positions, the Company’s plans may be impacted and therefore adjusted due to the departure of any key personnel.
The Company’s Chairman is involved in other real estate activities and investments, which may lead to conflicts of interest. The Company’s Chairman, George M. Marcus, is not an employee of the Company, and is involved in other real estate activities and investments, which may lead to conflicts of interest. Mr. Marcus owns interests in various other real estate-related businesses and investments. He is the Chairman of the Marcus & Millichap Company ("MMC"), which is a parent company of a diversified group of real estate service, investment and development firms. Mr. Marcus is also the Co-Chairman of Marcus & Millichap, Inc. ("MMI"), and Mr. Marcus owns a controlling interest in MMI. MMI is a national brokerage firm listed on the NYSE that underwent its initial public offering in 2013.
Mr. Marcus has agreed not to divulge any confidential or proprietary information that may be received by him in his capacity as Chairman of the Company to any of his affiliated companies and that he will absent himself from any and all discussions by Essex's Board of Directors regarding any proposed acquisition and/or development of an apartment community where it appears that there may be a conflict of interest with any of his affiliated companies. Notwithstanding this agreement, Mr. Marcus and his affiliated entities may potentially compete with the Company in acquiring and/or developing apartment communities, which competition may be detrimental to the Company. In addition, due to such potential competition for real estate investments, Mr. Marcus and his affiliated entities may have a conflict of interest with the Company, which may be detrimental to the interests of Essex's stockholders and the Operating Partnership's unitholders.
The influence of executive officers, directors, and significant stockholders may be detrimental to holders of common stock. As of December 31, 2020, Mr. Marcus wholly or partially owned approximately 1.9 million shares of common stock (including shares issuable upon exchange of limited partnership interests in the Operating Partnership and certain other partnerships, indirectly held shares of common stock and assuming exercise of all vested options). Mr. Marcus currently does not have majority control over the Company. However, he currently has, and likely will continue to have, significant influence with respect to the election of directors and approval or disapproval of significant corporate actions. Consequently, his influence could result in decisions that do not reflect the interests of all the Company’s stockholders.
Under the partnership agreement of the Operating Partnership, the consent of the holders of limited partnership interests is generally required for certain amendments of the agreement and for certain extraordinary actions. Through their ownership of limited partnership interests and their positions with the Company, the Company’s directors and executive officers, including Mr. Marcus, have substantial influence on the Company. Consequently, their influence could result in decisions that do not reflect the interests of all stockholders.
Our related party guidelines may not adequately address all of the issues that may arise with respect to related party transactions. The Company has adopted "Related Party Transaction Approval Process Guidelines" that provide generally that any transaction in which a director or executive officer has an interest must have the prior approval of the Audit Committee of Essex's Board of Directors. The review and approval procedures in these guidelines are intended to determine whether a particular related party transaction is fair, reasonable and serves the interests of the Company's stockholders. Pursuant to these guidelines, related party transactions have been approved from time to time. There is no assurance that this policy will be adequate for determining whether a particular related party transaction is suitable and fair for the Company. Also, the policy's procedures may not identify and address all the potential issues and conflicts of interests with a related party transaction.
Employee theft or fraud could result in loss. Certain of our employees have access to, or signature authority with respect to, bank accounts or other Company assets, which exposes us to the risk of fraud or theft. In addition, certain employees have access to key information technology ("IT") infrastructure and to tenant and other information that is commercially valuable. Should any employee compromise our IT systems, or misappropriate tenant or other information, we could incur losses, including significant financial or reputational harm, from which full recovery cannot be assured. We also may not have insurance that covers any losses in full or that covers losses from particular criminal acts. Potential liabilities for theft or fraud are not quantifiable and an estimate of possible loss cannot be made.
Risks Related to Taxes and Status as a REIT
Failure to generate sufficient revenue or other liquidity needs and impacts of economic conditions could limit cash flow available for dividend distributions, as well as the form and timing of such distributions, to Essex's stockholders or the Operating Partnership's unitholders. A decrease in rental revenue, or liquidity needs such as the repayment of indebtedness or
funding of our acquisition and development activities, could have an adverse effect on our ability to pay distributions to Essex's stockholders or the Operating Partnership's unitholders. Significant expenditures associated with each community such as debt service payments, if any, real estate taxes, insurance and maintenance costs are generally not reduced when circumstances cause a reduction in income from a community. The form, timing and/or amount of dividend distributions will be declared at the discretion of the Board of Directors and will depend on actual cash from operations, our financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and other factors as the Board of Directors may consider relevant. The Board of Directors may modify our dividend policy from time to time.
Essex may choose to pay dividends in its own stock, in which case stockholders may be required to pay tax in excess of the cash they receive. We may distribute taxable dividends that are payable in part in Essex's stock. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as income to the extent of our current and accumulated earnings and profits for federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of the cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, the trading price of Essex's stock would experience downward pressure if a significant number of our stockholders sell shares of Essex's stock in order to pay taxes owed on dividends.
The Maryland Business Combination Act may delay, defer or prevent a transaction or change in control of the Company that might involve a premium price for the Company's stock or otherwise be in the best interest of our stockholders. Under the Maryland General Corporation Law, certain "business combinations" between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as any person (and certain affiliates of such person) who beneficially owns ten percent or more of the voting power of the then-outstanding voting stock of the corporation. The law also requires a two supermajority stockholder votes for such transactions. This means that the transaction must be approved by at least:
•80% of the votes entitled to be cast by holders of outstanding voting shares; and
•two-thirds of the votes entitled to be cast by holders of outstanding voting shares other than shares held by the interested stockholder with whom the business combination is to be effected.
The statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors prior to the time that the interested stockholder becomes an interested stockholder. These voting provisions do not apply if the stockholders receive a minimum price, as defined under the Maryland General Corporation Law. As permitted by the statute, the Board of Directors of Essex irrevocably has elected to exempt any business combination among the Company, George M. Marcus, who is the chairman of the Company, and MMC or any entity owned or controlled by Mr. Marcus and MMC. Consequently, the five-year prohibition and supermajority vote requirements described above will not apply to any business combination between the Company, Mr. Marcus, or MMC. As a result, the Company may in the future enter into business combinations with Mr. Marcus and MMC, without compliance with the supermajority vote requirements and other provisions of the Maryland Business Combination Act.
Certain provisions contained in the Operating Partnership agreement, Charter and Bylaws, and certain provisions of the Maryland General Corporation Law could delay, defer or prevent a change in control. While the Company is the sole general partner of the Operating Partnership, and generally has full and exclusive responsibility and discretion in the management and control of the Operating Partnership, certain provisions of the Operating Partnership agreement place limitations on the Company’s power to act with respect to the Operating Partnership. Such limitations could delay, defer or prevent a transaction or a change in control that might involve a premium price for the Company’s stock or otherwise be in the best interests of its stockholders or that could otherwise adversely affect their interests. The partnership agreement provides that if the limited partners own at least 5% of the outstanding units of partnership interest in the Operating Partnership, the Company may not, without first obtaining the consent of a majority in interest of the limited partners in the Operating Partnership, transfer all or any portion of the Company’s general partner interest in the Operating Partnership to another entity. Such limitations on the Company’s power to act may result in the Company’s being precluded from taking action that the Board of Directors otherwise believes is in the best interests of the Company or its stockholders.
The Company’s Charter authorizes the issuance of additional shares of common stock or preferred stock and the setting of the preferences, rights and other terms of such stock without the approval of the holders of the common stock. The Company may establish one or more classes or series of stock that could delay, defer or prevent a transaction or a change in control. Such a
transaction might involve a premium price for the Company’s stock or otherwise be in the best interests of the holders of common stock. Also, such a class or series of stock could have dividend, voting or other rights that could adversely affect the interests of holders of common stock.
The Company’s Charter contains provisions limiting the transferability and ownership of shares of capital stock, which may delay, defer or prevent a transaction or a change in control. For example, subject to receiving an exemption from the Board of Directors, potential acquirers may not purchase more than 6% in value of the stock (other than qualified pension trusts which can acquire 9.9%). This may discourage tender offers that may be attractive to the holders of common stock and limit the opportunity for stockholders to receive a premium for their shares of common stock.
The Maryland General Corporation Law restricts the voting rights of holders of shares deemed to be "control shares." Under the Maryland General Corporation Law, "control shares" are those which, when aggregated with any other shares held by the acquirer, entitle the acquirer to exercise voting power within specified ranges. Although the Bylaws exempt the Company from the control share provisions of the Maryland General Corporation Law, the Board of Directors may amend or eliminate the provisions of the Bylaws at any time in the future. Moreover, any such amendment or elimination of such provision of the Bylaws may result in the application of the control share provisions of the Maryland General Corporation Law not only to control shares which may be acquired in the future, but also to control shares previously acquired. If the provisions of the Bylaws are amended or eliminated, the control share provisions of the Maryland General Corporation Law could delay, defer or prevent a transaction or change in control that might involve a premium price for the stock or otherwise be in the best interests of the Company’s stockholders.
The Company’s Charter and Bylaws as well as Maryland General Corporation Law also contain other provisions that may impede various actions by stockholders without approval of Essex’s Board of Directors, and that in turn may delay, defer or prevent a transaction, including a change in control that might involve a premium price for the stock or otherwise be in the best interests of the Company's stockholders. Those provisions include, among others:
•directors may be removed by stockholders, without cause, only upon the affirmative vote of at least two-thirds of the votes entitled to be cast generally in the election of the directors, and with cause, only upon the affirmative vote of a majority of the votes entitled to be cast generally in the election of the directors;
•Essex’s Board of Directors can fix the number of directors and fill vacant directorships upon the vote of a majority of the directors and Essex's Board of Directors can classify the board such that the entire board is not up for re-election annually;
•stockholders must give advance notice to nominate directors or propose business for consideration at a stockholders’ meeting; and
•for stockholders to call a special meeting, the meeting must be requested by not less than a majority of all the votes entitled to be cast at the meeting.
Loss of the Company's REIT status would have significant adverse consequences to the Company and the value of the Company's common stock. The Company has elected to be taxed as a REIT under the Code. The Company’s qualification as a REIT requires it to satisfy various annual and quarterly requirements, including income, asset and distribution tests, established under highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations.
For example, in order to qualify as a REIT, at least 95% of our gross income in each year must be derived from qualifying sources, and we must pay distributions to stockholders aggregating annually at least 90% of our REIT taxable income (excluding net capital gains). Although the Company intends that its current organization and method of operation enable it to qualify as a REIT, it cannot assure you that it so qualifies or that it will be able to remain so qualified in the future. If the Company fails to qualify as a REIT in any taxable year, the Company would be subject to U.S. federal corporate income tax on the Company’s taxable income (and the Company could be subject to the federal alternative minimum tax for taxable years prior to 2018), and the Company would not be allowed to deduct dividends paid to its stockholders in computing its taxable income. The Company would also be disqualified from treatment as a REIT for the four taxable years following the year in which the Company failed to qualify, unless we are entitled to relief under statutory provisions. The additional tax liability would reduce its net earnings available for investment or distribution to Essex stockholders and Operating Partnership unitholders, and the Company would no longer be required to make distributions to its stockholders for the purpose of maintaining REIT status. As a result of all these factors, the Company’s failure to qualify as a REIT also could impair its ability to expand its business and raise capital, and could adversely affect the value and market price of the Company’s common stock.
Complying with REIT requirements may affect our profitability and may force us to liquidate or forgo otherwise attractive investments. To qualify as a REIT, we must continually satisfy tests concerning, among other things, the nature and diversification of our assets, the sources of our income and the amounts we distribute to our stockholders. We may be required to liquidate or forgo otherwise attractive investments in order to satisfy the asset and income tests or to qualify under certain
statutory relief provisions. We also may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. As a result, having to comply with the distribution requirement could cause us to: (1) sell assets in adverse market conditions; (2) borrow on unfavorable terms; or (3) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt. Accordingly, satisfying the REIT requirements could materially and adversely affect us. Moreover, if we are compelled to liquidate our investments to meet any of these asset, income or distribution tests, or to repay obligations to our lenders, we may be unable to comply with one or more of the requirements applicable to REITs or may be subject to a 100% tax on any resulting of debt. Accordingly, satisfying the REIT requirements could materially and adversely affect us. Moreover, if we are compelled to liquidate our investments to meet any of these asset, income or distribution tests, or to repay obligations to our lenders, we may be unable to comply with one or more of the requirements applicable to REITs or may be subject to a 100% tax on any resulting gain if such sales constitute prohibited transactions.
Legislative or other actions affecting REITs could have a negative effect on the Company or its stockholders. The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the Internal Revenue Service and the U.S. Department of the Treasury. Changes to the tax laws, with or without retroactive legislation, could adversely affect the Company or its stockholders. New legislation, Treasury Regulations, administrative interpretations or court decisions could significantly and negatively affect the Company’s ability to qualify as a REIT, the federal income tax consequences of such qualification, or the federal income tax consequences of an investment in the Company. Also, the law relating to the tax treatment of other entities, or an investment in other entities, could change, making an investment in such other entities more attractive relative to an investment in a REIT.
The Company’s ownership of TRSs is subject to certain restrictions, and it will be required to pay a 100% penalty tax on certain income or deductions if transactions with the Company’s TRSs are not conducted on arm’s length terms. The Company has established several TRSs. The TRSs must pay U.S. federal income tax on their taxable income as a regular C corporation. While the Company will attempt to ensure that its dealings with its TRSs do not adversely affect its REIT qualification, it cannot provide assurances that it will successfully achieve that result. Furthermore, the Company may be subject to a 100% penalty tax, to the extent dealings between the Company and its TRSs are not deemed to be arm’s length in nature. The Company intends that its dealings with its TRSs will be on an arm’s length basis. No assurances can be given, however, that the Internal Revenue Service will not assert a contrary position.
Failure of one or more of the Company’s subsidiaries to qualify as a REIT could adversely affect the Company’s ability to qualify as a REIT. The Company owns interests in multiple subsidiary REITs that have elected to be taxed as REITs under the Code. These subsidiary REITs are subject to the various REIT qualification requirements and other limitations that are applicable to the Company. If any of the Company’s subsidiary REITs were to fail to qualify as a REIT, then (i) the subsidiary REIT would become subject to federal income tax and (ii) the Company’s ownership of shares in such subsidiary REIT would cease to be a qualifying asset for purposes of the asset tests applicable to REITs. If any of the Company’s subsidiary REITs were to fail to qualify as REITs, it is possible that the Company could also fail to qualify as a REIT.
The tax imposed on REITs engaging in "prohibited transactions" may limit the Company’s ability to engage in transactions which would be treated as sales for federal income tax purposes. From time to time, the Company may transfer or otherwise dispose of some of its properties. Under the Code, unless certain exceptions apply, any gain resulting from transfers of properties that the Company holds as inventory or primarily for sale to customers in the ordinary course of business could be treated as income from a prohibited transaction subject to a 100% penalty tax. Since the Company acquires properties for investment purposes, it does not believe that its occasional transfers or disposals of property should be treated as prohibited transactions. However, whether property is held for investment purposes depends on all the facts and circumstances surrounding the particular transaction. The Internal Revenue Service may contend that certain transfers or disposals of properties by the Company are prohibited transactions. If the Internal Revenue Service were to argue successfully that a transfer or disposition of property constituted a prohibited transaction, then the Company would be required to pay a 100% penalty tax on any gain allocable to it from the prohibited transaction, and the Company’s ability to retain proceeds from real property sales may be jeopardized.
Dividends payable by REITs may be taxed at higher rates than dividends of non-REIT corporations, which could reduce the net cash received by stockholders and may be detrimental to the Company’s ability to raise additional funds through any future sale of its stock. Dividends paid by REITs to U.S. stockholders that are individuals, trusts or estates are generally not eligible for the reduced tax rate applicable to qualified dividends received from non-REIT corporations. U.S. stockholders that are individuals, trusts and estates generally may deduct 20% of ordinary dividends from a REIT for taxable years beginning after December 31, 2017 and before January 1, 2026. Although this deduction reduces the effective tax rate applicable to certain dividends paid by REITs, such tax rate is still higher than the tax rate applicable to regular corporate qualified dividends. This
may cause investors to view REIT investments as less attractive than investments in non-REIT corporations, which in turn may adversely affect the value of stock in REITs, including the Company's stock.
We may face risks in connection with Section 1031 exchanges. From time to time we dispose of real properties in transactions intended to qualify as "like-kind exchanges" under Section 1031 of the Code. If a transaction intended to qualify as a Section 1031 exchange is later determined to be taxable, we may face adverse consequences, and if the laws applicable to such transactions are amended or repealed, we may not be able to dispose of real properties on a tax deferred basis.
If the Operating Partnership failed to qualify as a partnership for federal income tax purposes, the Company could cease to qualify as a REIT and suffer other adverse consequences. The Company believes that the Operating Partnership will continue to be treated as a partnership for U.S. federal income tax purposes. As a partnership, the Operating Partnership is not subject to U.S. federal income tax on its income. Instead, each of its partners is required to pay tax on the partner’s allocable share of the income of the Operating Partnership. No assurances can be given, however, that the Internal Revenue Service will not challenge the Operating Partnership’s status as a partnership for U.S. federal income tax purposes, or that a court would not sustain such a challenge. If the Internal Revenue Service were successful in treating the Operating Partnership as a corporation for U.S. federal income tax purposes, the Company could fail to meet the income tests and/or the asset tests applicable to REITs and, accordingly, cease to qualify as a REIT. Also, the failure of the Operating Partnership to qualify as a partnership would cause it to become subject to federal and state corporate income tax, which would reduce significantly the amount of cash available for debt service and distribution to its partners, including us.
Partnership tax audit rules could have a material adverse effect on us. Under current federal partnership tax audit rules, subject to certain exceptions, any audit adjustment to items of income, gain, loss, deduction, or credit of a partnership (and a partner’s allocable share thereof) is determined, and taxes, interest, and penalties attributable thereto are assessed and collected, at the partnership level. Unless the partnership makes an election or takes certain steps to require the partners to pay their tax on their allocable shares of the adjustment, it is possible that partnerships in which we directly or indirectly invest would be required to pay additional taxes, interest, and penalties as a result of an audit adjustment. We, as a direct or indirect partner of these partnerships, could be required to bear the economic burden of those taxes, interest, and penalties even though Essex, as a REIT, may not otherwise have been required to pay additional corporate-level taxes had we owned the assets of the partnership directly. The partnership tax audit rules apply to Essex Portfolio, L.P. and its subsidiaries that are classified as partnerships for U.S. federal income tax purposes. There can be no assurance that these rules will not have a material adverse effect on us.
General Risks
We may from time to time be subject to litigation, which could have a material adverse effect on our business, financial condition and results of operations. We may be a party to various claims and routine litigation arising in the ordinary course of business. Some of these claims may result in defense costs, settlements, fines or judgments against us, some of which are not, or cannot be, covered by insurance. Payment of any such costs, settlements, fines or judgments that are not insured could have an adverse impact on our financial position and results of operations. In addition, certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could adversely impact our results of operations and cash flow, expose us to increased risks that would be uninsured, or adversely impact our ability to attract officers and directors.
Rising interest rates may affect the Company’s costs of capital and financing activities and results of operation and otherwise adversely affect the market price of our common stock. Interest rates could increase, which could result in higher interest expense on the Company’s variable rate indebtedness or increase interest rates when refinancing maturing fixed rate debt. Prolonged interest rate increases could negatively impact the Company’s ability to make acquisitions and develop apartment communities with positive economic returns on investment and the Company’s ability to refinance existing borrowings. In addition, an increase in market interest rates may lead purchasers of our common stock to demand a greater annual dividend yield, which could adversely affect the market price of our common stock.
The soundness of financial institutions could adversely affect us. We maintain cash and cash equivalent balances, including significant cash amounts at our wholly owned insurance subsidiary, PWI, as well as 401(k) plan assets in a limited number of financial institutions. Our cash balances are generally in excess of federally insured limits. The failure or collapse of one or more of these financial institutions may materially adversely affect our ability to recover our cash balances or the 401(k) assets. Certain financial institutions are lenders under our credit facilities, and, from time to time, we execute transactions with counterparties in the financial services industry. In the event that the volatility of the financial markets adversely affects these financial institutions or counterparties, we or other parties to the transactions with us may be unable to complete transactions as intended, which could adversely affect our business and results of operations. Additionally, certain of our tax-exempt bond
financing documents require us to obtain a guarantee from a financial institution of payment of the principal and interest on the bonds. The guarantee may take the form of a letter of credit, surety bond, guarantee agreement or other additional collateral. If the financial institution defaults in its guarantee obligations, or if we are unable to renew the applicable guarantee or otherwise post satisfactory collateral, a default will occur under the applicable tax-exempt bonds and the community could be foreclosed upon if we do not redeem the bonds.
The price per share of the Company’s stock may fluctuate significantly. The market price per share of the Company’s common stock may fluctuate significantly in response to many factors, including without limitation:
•regional, national and global economic conditions;
•actual or anticipated variations in the Company’s quarterly operating results or dividends;
•changes in the Company’s funds from operations or earnings estimates;
•issuances of common stock, preferred stock or convertible debt securities, or the perception that such issuances might occur;
•publication of research reports about the Company or the real estate industry;
•the general reputation of REITs and the attractiveness of their equity securities in comparison to other equity securities (including securities issued by other real estate based companies);
•general stock and bond market conditions, including changes in interest rates on fixed income securities, that may lead prospective purchasers of the Company’s stock to demand a higher annual yield from dividends;
•shifts in our investor base to a higher concentration of passive investors such as exchange traded fund and index funds, which may adversely affect our ability to communicate effectively with our investors;
•the resale of substantial amounts of the Company's stock, or the anticipation of such resale, by large holders of our securities;
•availability of capital markets and cost of capital;
•a change in analyst ratings or the Company’s credit ratings;
•terrorist activity adversely affecting the markets in which the Company’s securities trade, possibly increasing market volatility and causing erosion of business and consumer confidence and spending;
•hazards such as natural disasters like earthquakes, wildfires, landslides or flooding; terrorism; an active shooter at a property or corporate office; an incident involving multiple key members of the executive team; or an epidemic or pandemic;
•changes in public policy and tax law; and
•the issuance of ratings and scores related to corporate social responsibility ("CSR") and environmental, social and governance ("ESG") reports and disclosures.
Many of the factors listed above are beyond the Company’s control. These factors may cause the market price of shares of the Company’s common stock to decline, regardless of the Company’s financial condition, results of operations, or business prospects.
The Company’s future issuances of common stock, preferred stock or convertible debt securities could be dilutive to current stockholders and adversely affect the market price of the Company’s common stock. In order to finance the Company’s acquisition and development activities, the Company could issue and sell common stock, preferred stock and convertible debt securities. The Company may in the future sell further shares of common stock, including pursuant to its equity distribution program with Citigroup Global Markets Inc., Barclays Capital Inc., BNP Paribas Securities Corp., BTIG, LLC, Capital One Securities, Inc., Jefferies LLC, J.P. Morgan Securities LLC, Mizuho Securities USA LLC, MUFG Securities Americas Inc., and Scotia Capital (USA) Inc.
In 2018, the Company filed a new shelf registration statement with the SEC, allowing the Company to sell an undetermined number of equity and debt securities as defined in the prospectus. Future sales of common stock, preferred stock or convertible debt securities may dilute stockholder ownership in the Company and could adversely affect the market price of the common stock.
Stockholders have limited control over changes in our policies and operations. Essex’s Board of Directors determines our major policies, including our policies regarding investments, financing, growth, debt capitalization, REIT qualification and distributions. Essex’s Board of Directors may amend or revise these and other policies without a vote of the stockholders. In addition, pursuant to Maryland law, all matters other than the election or removal of a director must be declared advisable by Essex’s Board of Directors prior to a stockholder vote.
Our score or rating by proxy advisory firms or other corporate governance consultants advising institutional investors could have an adverse effect on the perception of our corporate governance, and thereby negatively impact the market price of our common stock. Various proxy advisory firms and other corporate governance consultants advising institutional investors
provide scores or ratings of our governance measures, nominees for election as directors, executive compensation practices, ESG or sustainability matters, and other matters that may be submitted to stockholders for consideration at our annual meetings. From time to time certain matters that we propose for approval may not receive a favorable score or rating, or may result in a negative score or rating or recommendation against the nominee or matter proposed. These unfavorable scores or ratings may lead to rejected proposals or a loss of stockholder confidence in our corporate governance measures, which could adversely affect the market price of our common stock.
We periodically review our corporate governance measures, including our ESG business practices, and consider implementing changes that we believe are responsive to concerns that have been raised, but there may be times where we decide not to implement changes or other measures recommended by proxy advisors or other corporate governance consultants that we believe are contrary to the best interests of our stockholders, notwithstanding the adverse effect this decision may have on our scores or ratings or the perception of our corporate governance, thereby negatively impacting the market price of our common stock.
Corporate responsibility, specifically related to ESG factors, may impose additional costs and expose us to new risks. The Company and many of its investors and potential investors are focused on corporate responsibility, specifically related to ESG factors. Some investors may use ESG factors to guide their investment strategies. Many investment funds focus on positive ESG business practices and sustainability scores when making investments and may consider a company’s sustainability efforts and/or score when making an investment decision. In addition, investors, particularly institutional investors, may use ESG or sustainability scores to benchmark companies against their peers. Although the Company makes ESG disclosures and undertakes sustainability and diversity initiatives, there can be no assurance that the Company will score highly on ESG matters in the future. In addition, the criteria by which companies are rated may change, which could cause the Company to perform differently or worse than it has in the past. The Company may face reputational damage in the event its corporate responsibility procedures or standards do not meet the standards set by various constituencies. The occurrence of any of the foregoing could have an adverse effect on the price of the Company’s stock and the Company’s business, financial condition and results of operations, including increased development costs, capital expenditures and operating expenses.
We could face adverse consequences as a result of actions of activist investors. Campaigns by stockholders to effect changes at publicly traded companies are sometimes led by investors seeking to increase short-term stockholder value through actions such as financial restructuring, increased debt, special dividends, stock repurchases or sales of assets or the entire company. Responding to stockholder activism or engaging in a process or proxy contest may be costly and time-consuming, disrupt our operations and divert the attention of our management team and our employees from executing our business plan, which could adversely affect our business and results of operations.
Expanding social media vehicles present new risks. The use of social media could cause us to suffer brand damage or information leakage. Negative posts or comments about us on any social networking website could damage our reputation. In addition, employees or others might disclose non-public sensitive information relating to our business through external media channels. The continuing evolution of social media will present us with new challenges and risks.
Any material weaknesses identified in the Company's internal control over financial reporting could have an adverse effect on the Company’s stock price. Section 404 of the Sarbanes-Oxley Act of 2002 requires the Company to evaluate and report on its internal control over financial reporting. If the Company identifies one or more material weaknesses in its internal control over financial reporting, the Company could lose investor confidence in the accuracy and completeness of its financial reports, which in turn could have an adverse effect on the Company’s stock price.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties
The Company’s portfolio as of December 31, 2020 (including communities owned by unconsolidated joint ventures, but excluding communities underlying preferred equity investments) was comprised of 246 stabilized operating apartment communities (comprising 60,272 apartment homes), of which 26,581 apartment homes are located in Southern California, 21,584 apartment homes are located in Northern California, and 12,107 apartment homes are located in the Seattle metropolitan area. The Company’s apartment communities accounted for 99.4% of the Company’s revenues for the year ended December 31, 2020.
Occupancy Rates
Financial occupancy is defined as the percentage resulting from dividing actual rental income by total potential rental income. Total potential rental income represents the value of all apartment homes, with occupied apartment homes valued at contractual rental rates pursuant to leases and vacant apartment homes valued at estimated market rents. When calculating actual rents for occupied apartment homes and market rents for vacant apartment homes, delinquencies and concessions are not taken into account. The Company believes that financial occupancy is a meaningful measure of occupancy because it considers the value of each vacant unit at its estimated market rate. Financial occupancy may not completely reflect short-term trends in physical occupancy and financial occupancy rates, and the Company's calculation of financial occupancy may not be comparable to financial occupancy as disclosed by other REITs. Market rates are determined using the recently signed effective rates on new leases at the property and are used as the starting point in the determination of the market rates of vacant apartment homes. The Company may increase or decrease these rates based on a variety of factors, including overall supply and demand for housing, concentration of new apartment deliveries within the same submarket which can cause periodic disruption due to greater rental concessions to increase leasing velocity, and rental affordability.
For communities that are development properties in lease-up without stabilized occupancy figures, the Company believes the physical occupancy rate is the appropriate performance metric. While a community is in the lease-up phase, the Company’s primary motivation is to stabilize the property, which may entail the use of rent concessions and other incentives, and thus financial occupancy which is based on contractual income is not considered the best metric to quantify occupancy.
Communities
The Company’s communities are primarily urban and suburban high density wood frame communities comprising of three to seven stories above grade construction with structured parking situated on 1-10 acres of land with densities averaging between 30-80+ units per acre. As of December 31, 2020, the Company’s communities include 103 garden-style, 134 mid-rise, and 9 high-rise communities. Garden-style communities are generally defined as on-grade properties with two and/or three-story buildings with no structured parking while mid-rise communities are generally defined as properties with three to seven story buildings and some structured parking. High-rise communities are typically defined as properties with buildings that are greater than seven stories, are steel or concrete framed, and frequently have structured parking. The communities have an average of approximately 245 apartment homes, with a mix of studio, one-, two- and some three-bedroom apartment homes. A wide variety of amenities are available at the Company’s communities, including covered parking, fireplaces, swimming pools, clubhouses with fitness facilities, playground areas and dog parks.
The Company hires, trains and supervises on-site service and maintenance personnel. The Company believes that the following primary factors enhance the Company’s ability to retain tenants:
•located near employment centers;
•attractive communities that are well maintained; and
•proactive customer service.
Commercial Buildings
The Company owns an office building with approximately 107,000 square feet located in Irvine, CA, of which the Company occupied approximately 14,000 square feet as of December 31, 2020. Furthermore, as of December 31, 2020, the office building's physical occupancy rate was 100% consisting of 7 tenants, including the Company.
Operating Portfolio
The table below describes the Company’s operating portfolio as of December 31, 2020. (See Note 8, "Mortgage Notes Payable" to the Company’s consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K for more
information about the Company’s secured mortgage debt and Schedule III thereto for a list of secured mortgage loans related to the Company’s portfolio.)
Apartment Year Year
Communities (1)
Location Type Homes Built Acquired Occupancy(2)
Southern California
Alpine Village Alpine, CA Garden 301 1971 2002 98%
Anavia Anaheim, CA Mid-rise 250 2009 2010 97%
Barkley, The (3)(4)
Anaheim, CA Garden 161 1984 2000 98%
Park Viridian Anaheim, CA Mid-rise 320 2008 2014 97%
Bonita Cedars Bonita, CA Garden 120 1983 2002 97%
Village at Toluca Lake (5)
Burbank, CA Mid-rise 145 1974 2017 95%
Camarillo Oaks Camarillo, CA Garden 564 1985 1996 97%
Camino Ruiz Square Camarillo, CA Garden 159 1990 2006 98%
Pinnacle at Otay Ranch I & II Chula Vista, CA Mid-rise 364 2001 2014 98%
Mesa Village Clairemont, CA Garden 133 1963 2002 96%
Villa Siena Costa Mesa, CA Garden 272 1974 2014 96%
Emerald Pointe Diamond Bar, CA Garden 160 1989 2014 98%
Regency at Encino Encino, CA Mid-rise 75 1989 2009 94%
The Havens (6)
Fountain Valley, CA Garden 440 1969 2014 96%
Valley Park Fountain Valley, CA Garden 160 1969 2001 98%
Capri at Sunny Hills (4)
Fullerton, CA Garden 102 1961 2001 97%
Haver Hill (7)
Fullerton, CA Garden 264 1973 2012 97%
Pinnacle at Fullerton Fullerton, CA Mid-rise 192 2004 2014 96%
Wilshire Promenade Fullerton, CA Mid-rise 149 1992 1997 95%
Montejo Apartments Garden Grove, CA Garden 124 1974 2001 98%
The Henley I Glendale, CA Mid-rise 83 1974 1999 95%
The Henley II Glendale, CA Mid-rise 132 1970 1999 95%
CBC and The Sweeps Goleta, CA Garden 239 1962 2006 92%
Devonshire Hemet, CA Garden 276 1988 2002 98%
Huntington Breakers Huntington Beach, CA Mid-rise 342 1984 1997 97%
The Huntington Huntington Beach, CA Garden 276 1975 2012 96%
Axis 2300 Irvine, CA Mid-rise 115 2010 2010 96%
Hillsborough Park (8)
La Habra, CA Garden 235 1999 1999 98%
Village Green La Habra, CA Garden 272 1971 2014 97%
The Palms at Laguna Niguel Laguna Niguel, CA Garden 460 1988 2014 97%
Trabuco Villas Lake Forest, CA Mid-rise 132 1985 1997 98%
Marbrisa Long Beach, CA Mid-rise 202 1987 2002 96%
Pathways at Bixby Village Long Beach, CA Garden 296 1975 1991 96%
5600 Wilshire Los Angeles, CA Mid-rise 284 2008 2014 95%
Alessio Los Angeles, CA Mid-rise 624 2001 2014 94%
Ashton Sherman Village Los Angeles, CA Mid-rise 264 2014 2016 96%
Avant Los Angeles, CA Mid-rise 440 2014 2015 97%
The Avery Los Angeles, CA Mid-rise 121 2014 2014 97%
Bellerive Los Angeles, CA Mid-rise 63 2011 2011 96%
Belmont Station Los Angeles, CA Mid-rise 275 2009 2009 95%
Bunker Hill Los Angeles, CA High-rise 456 1968 1998 94%
Catalina Gardens Los Angeles, CA Mid-rise 128 1987 2014 95%
Cochran Apartments Los Angeles, CA Mid-rise 58 1989 1998 91%
Emerson Valley Village Los Angeles, CA Mid-rise 144 2012 2016 96%
Apartment Year Year
Communities (1)
Location Type Homes Built Acquired Occupancy(2)
Gas Company Lofts (7)
Los Angeles, CA High-rise 251 2004 2013 95%
The Blake LA Los Angeles, CA Mid-rise 196 1979 1997 96%
Marbella Los Angeles, CA Mid-rise 60 1991 2005 91%
Pacific Electric Lofts (9)
Los Angeles, CA High-rise 314 2006 2012 93%
Park Catalina Los Angeles, CA Mid-rise 90 2002 2012 96%
Park Place Los Angeles, CA Mid-rise 60 1988 1997 91%
Regency Palm Court (7)
Los Angeles, CA Mid-rise 116 1987 2014 94%
Santee Court Los Angeles, CA High-rise 165 2004 2010 95%
Santee Village Los Angeles, CA High-rise 73 2011 2011 95%
Tiffany Court Los Angeles, CA Mid-rise 101 1987 2014 95%
Wilshire La Brea Los Angeles, CA Mid-rise 478 2014 2014 94%
Windsor Court (7)
Los Angeles, CA Mid-rise 95 1987 2014 93%
Windsor Court Los Angeles, CA Mid-rise 58 1988 1997 91%
Aqua Marina Del Rey Marina Del Rey, CA Mid-rise 500 2001 2014 94%
Marina City Club (10)
Marina Del Rey, CA Mid-rise 101 1971 2004 95%
Mirabella Marina Del Rey, CA Mid-rise 188 2000 2000 94%
Mira Monte Mira Mesa, CA Garden 354 1982 2002 97%
Hillcrest Park Newbury Park, CA Garden 608 1973 1998 97%
Fairway Apartments at Big Canyon (11)
Newport Beach, CA Mid-rise 74 1972 1999 91%
Muse North Hollywood, CA Mid-rise 152 2011 2011 95%
Country Villas Oceanside, CA Garden 180 1976 2002 98%
Mission Hills Oceanside, CA Garden 282 1984 2005 98%
Renaissance at Uptown Orange Orange, CA Mid-rise 460 2007 2014 96%
Mariner's Place Oxnard, CA Garden 105 1987 2000 97%
Monterey Villas Oxnard, CA Garden 122 1974 1997 98%
Tierra Vista Oxnard, CA Mid-rise 404 2001 2001 97%
Arbors at Parc Rose (9)
Oxnard, CA Mid-rise 373 2001 2011 98%
The Hallie Pasadena, CA Mid-rise 292 1972 1997 95%
The Stuart Pasadena, CA Mid-rise 188 2007 2014 96%
Villa Angelina Placentia, CA Garden 256 1970 2001 97%
Fountain Park Playa Vista, CA Mid-rise 705 2002 2004 94%
Highridge (4)
Rancho Palos Verdes, CA Mid-rise 255 1972 1997 96%
Cortesia Rancho Santa Margarita, CA Garden 308 1999 2014 97%
Pinnacle at Talega San Clemente, CA Mid-rise 362 2002 2014 97%
Allure at Scripps Ranch San Diego, CA Mid-rise 194 2002 2014 97%
Bernardo Crest San Diego, CA Garden 216 1988 2014 96%
Cambridge Park San Diego, CA Mid-rise 320 1998 2014 97%
Carmel Creek San Diego, CA Garden 348 2000 2014 96%
Carmel Landing San Diego, CA Garden 356 1989 2014 96%
Carmel Summit San Diego, CA Mid-rise 246 1989 2014 97%
CentrePointe San Diego, CA Garden 224 1974 1997 97%
Esplanade (6)
San Diego, CA Garden 616 1986 2014 95%
Form 15 San Diego, CA Mid-rise 242 2014 2016 93%
Montanosa San Diego, CA Garden 472 1990 2014 96%
Summit Park San Diego, CA Garden 300 1972 2002 98%
Essex Skyline (12)
Santa Ana, CA High-rise 350 2008 2010 94%
Fairhaven Apartments (4)
Santa Ana, CA Garden 164 1970 2001 97%
Apartment Year Year
Communities (1)
Location Type Homes Built Acquired Occupancy(2)
Parkside Court (6)
Santa Ana, CA Mid-rise 210 1986 2014 97%
Pinnacle at MacArthur Place Santa Ana, CA Mid-rise 253 2002 2014 97%
Hope Ranch Santa Barbara, CA Garden 108 1965 2007 96%
Bridgeport Coast (13)
Santa Clarita, CA Mid-rise 188 2006 2014 97%
Hidden Valley Simi Valley, CA Garden 324 2004 2004 97%
Meadowood (8)
Simi Valley, CA Garden 320 1986 1996 97%
Shadow Point Spring Valley, CA Garden 172 1983 2002 97%
The Fairways at Westridge (13)
Valencia, CA Mid-rise 234 2004 2014 97%
The Vistas of West Hills (13)
Valencia, CA Mid-rise 220 2009 2014 97%
Allegro Valley Village, CA Mid-rise 97 2010 2010 95%
Lofts at Pinehurst, The Ventura, CA Garden 118 1971 1997 97%
Pinehurst (14)
Ventura, CA Garden 28 1973 2004 99%
Woodside Village Ventura, CA Garden 145 1987 2004 98%
Walnut Heights Walnut, CA Garden 163 1964 2003 97%
The Dylan West Hollywood, CA Mid-rise 184 2014 2014 94%
The Huxley West Hollywood, CA Mid-rise 187 2014 2014 93%
Reveal Woodland Hills, CA Mid-rise 438 2010 2011 97%
Avondale at Warner Center Woodland Hills, CA Mid-rise 446 1970 1999 97%
26,581 96%
Northern California
Belmont Terrace Belmont, CA Mid-rise 71 1974 2006 96%
Fourth & U Berkeley, CA Mid-rise 171 2010 2010 95%
The Commons Campbell, CA Garden 264 1973 2010 96%
Pointe at Cupertino Cupertino, CA Garden 116 1963 1998 98%
Connolly Station Dublin, CA Mid-rise 309 2014 2014 97%
Avenue 64 Emeryville, CA Mid-rise 224 2007 2014 94%
The Courtyards at 65th Street (15)
Emeryville, CA Mid-rise 331 2004 2019 94%
Emme Emeryville, CA Mid-rise 190 2015 2015 94%
Foster's Landing Foster City, CA Garden 490 1987 2014 96%
Stevenson Place Fremont, CA Garden 200 1975 2000 95%
Mission Peaks Fremont, CA Mid-rise 453 1995 2014 96%
Mission Peaks II Fremont, CA Garden 336 1989 2014 96%
Paragon Apartments Fremont, CA Mid-rise 301 2013 2014 96%
Boulevard Fremont, CA Garden 172 1978 1996 97%
Briarwood (9)
Fremont, CA Garden 160 1978 2011 97%
The Woods (9)
Fremont, CA Garden 160 1978 2011 96%
City Centre (13)
Hayward, CA Mid-rise 192 2000 2014 97%
City View Hayward, CA Garden 572 1975 1998 96%
Lafayette Highlands Lafayette, CA Garden 150 1973 2014 96%
777 Hamilton (16)
Menlo Park, CA Mid-rise 195 2017 2019 97%
Apex Milpitas, CA Mid-rise 366 2014 2014 96%
Regency at Mountain View (7)
Mountain View, CA Mid-rise 142 1970 2013 95%
Bridgeport (8)
Newark, CA Garden 184 1987 1987 97%
The Landing at Jack London Square Oakland, CA Mid-rise 282 2001 2014 95%
The Grand Oakland, CA High-rise 243 2009 2009 96%
The Galloway Pleasanton, CA Mid-rise 506 2016 2016 97%
Radius Redwood City, CA Mid-rise 264 2015 2015 96%
Apartment Year Year
Communities (1)
Location Type Homes Built Acquired Occupancy(2)
Township Redwood City, CA Mid-rise 132 2014 2019 96%
San Marcos Richmond, CA Mid-rise 432 2003 2003 97%
Bennett Lofts San Francisco, CA Mid-rise 165 2004 2012 93%
Fox Plaza San Francisco, CA High-rise 445 1968 2013 90%
MB 360 San Francisco, CA Mid-rise 360 2014 2014 96%
Park West San Francisco, CA Mid-rise 126 1958 2012 96%
101 San Fernando San Jose, CA Mid-rise 323 2001 2010 95%
360 Residences (15)
San Jose, CA Mid-rise 213 2010 2017 95%
Bella Villagio San Jose, CA Mid-rise 231 2004 2010 97%
Century Towers (17)
San Jose, CA High-rise 376 2017 2017 95%
Enso San Jose, CA Mid-rise 183 2014 2015 97%
Epic San Jose, CA Mid-rise 769 2013 2013 97%
Esplanade San Jose, CA Mid-rise 278 2002 2004 97%
Fountains at River Oaks San Jose, CA Mid-rise 226 1990 2014 96%
Marquis San Jose, CA Mid-rise 166 2015 2016 97%
Meridian at Midtown (15)
San Jose, CA Mid-rise 218 2015 2018 95%
Mio San Jose, CA Mid-rise 103 2015 2016 97%
Palm Valley San Jose, CA Mid-rise 1,099 2008 2014 97%
Sage at Cupertino (4)
San Jose, CA Garden 230 1971 2017 96%
The Carlyle (8)
San Jose, CA Garden 132 2000 2000 96%
The Waterford San Jose, CA Mid-rise 238 2000 2000 97%
Willow Lake San Jose, CA Mid-rise 508 1989 2012 96%
Lakeshore Landing San Mateo, CA Mid-rise 308 1988 2014 96%
Hillsdale Garden San Mateo, CA Garden 697 1948 2006 96%
Park 20 San Mateo, CA Mid-rise 197 2015 2015 97%
Station Park Green - Phases I, II, and III San Mateo, CA Mid-rise 492 2018 2018 95%
Deer Valley San Rafael, CA Garden 171 1996 2014 95%
Bel Air San Ramon, CA Garden 462 1988 1995 97%
Canyon Oaks San Ramon, CA Mid-rise 250 2005 2007 97%
Crow Canyon San Ramon, CA Mid-rise 400 1992 2014 98%
Foothill Gardens San Ramon, CA Garden 132 1985 1997 98%
Mill Creek at Windermere San Ramon, CA Mid-rise 400 2005 2007 97%
Twin Creeks San Ramon, CA Garden 44 1985 1997 98%
1000 Kiely Santa Clara, CA Garden 121 1971 2011 97%
Le Parc Santa Clara, CA Garden 140 1975 1994 97%
Marina Cove (18)
Santa Clara, CA Garden 292 1974 1994 96%
Riley Square (9)
Santa Clara, CA Garden 156 1972 2012 96%
Villa Granada Santa Clara, CA Mid-rise 270 2010 2014 96%
Chestnut Street Apartments Santa Cruz, CA Garden 96 2002 2008 95%
Bristol Commons Sunnyvale, CA Garden 188 1989 1995 96%
Brookside Oaks (4)
Sunnyvale, CA Garden 170 1973 2000 96%
Lawrence Station Sunnyvale, CA Mid-rise 336 2012 2014 97%
Magnolia Lane (19)
Sunnyvale, CA Garden 32 2001 2007 96%
Magnolia Square (4)
Sunnyvale, CA Garden 156 1963 2007 96%
Montclaire Sunnyvale, CA Mid-rise 390 1973 1988 96%
Reed Square Sunnyvale, CA Garden 100 1970 2011 97%
Solstice Sunnyvale, CA Mid-rise 280 2014 2014 96%
Apartment Year Year
Communities (1)
Location Type Homes Built Acquired Occupancy(2)
Summerhill Park Sunnyvale, CA Garden 100 1988 1988 97%
Via Sunnyvale, CA Mid-rise 284 2011 2011 96%
Windsor Ridge Sunnyvale, CA Mid-rise 216 1989 1989 95%
Vista Belvedere Tiburon, CA Mid-rise 76 1963 2004 98%
Verandas (13)
Union City, CA Mid-rise 282 1989 2014 98%
Agora Walnut Creek, CA Mid-rise 49 2016 2016 97%
Brio (4)
Walnut Creek, CA Mid-rise 300 2015 2019 96%
21,584 96%
Seattle, Washington Metropolitan Area
Belcarra Bellevue, WA Mid-rise 296 2009 2014 95%
BellCentre Bellevue, WA Mid-rise 248 2001 2014 96%
Cedar Terrace Bellevue, WA Garden 180 1984 2005 95%
Courtyard off Main Bellevue, WA Mid-rise 110 2000 2010 97%
Ellington Bellevue, WA Mid-rise 220 1994 2014 95%
Emerald Ridge Bellevue, WA Garden 180 1987 1994 97%
Foothill Commons Bellevue, WA Mid-rise 394 1978 1990 96%
Palisades, The Bellevue, WA Garden 192 1977 1990 96%
Park Highland Bellevue, WA Mid-rise 250 1993 2014 96%
Piedmont Bellevue, WA Garden 396 1969 2014 96%
Sammamish View Bellevue, WA Garden 153 1986 1994 97%
Woodland Commons Bellevue, WA Garden 302 1978 1990 96%
Bothell Ridge (6)
Bothell, WA Garden 214 1988 2014 97%
Canyon Pointe Bothell, WA Garden 250 1990 2003 97%
Inglenook Court Bothell, WA Garden 224 1985 1994 95%
Pinnacle Sonata Bothell, WA Mid-rise 268 2000 2014 96%
Salmon Run at Perry Creek Bothell, WA Garden 132 2000 2000 97%
Stonehedge Village Bothell, WA Garden 196 1986 1997 97%
Highlands at Wynhaven Issaquah, WA Mid-rise 333 2000 2008 97%
Park Hill at Issaquah Issaquah, WA Garden 245 1999 1999 97%
Wandering Creek Kent, WA Garden 156 1986 1995 98%
Ascent Kirkland, WA Garden 90 1988 2012 97%
Bridle Trails Kirkland, WA Garden 108 1986 1997 97%
Corbella at Juanita Bay Kirkland, WA Garden 169 1978 2010 96%
Evergreen Heights Kirkland, WA Garden 200 1990 1997 96%
Slater 116 Kirkland, WA Mid-rise 108 2013 2013 97%
Montebello Kirkland, WA Garden 248 1996 2012 97%
Aviara (20)
Mercer Island, WA Mid-rise 166 2013 2014 96%
Laurels at Mill Creek Mill Creek, WA Garden 164 1981 1996 97%
Parkwood at Mill Creek Mill Creek, WA Garden 240 1989 2014 97%
The Elliot at Mukilteo (4)
Mukilteo, WA Garden 301 1981 1997 96%
Castle Creek Newcastle, WA Garden 216 1998 1998 97%
Elevation Redmond, WA Garden 158 1986 2010 96%
Pure Redmond Redmond, WA Mid-rise 105 2016 2019 94%
Redmond Hill (9)
Redmond, WA Garden 442 1985 2011 96%
Shadowbrook Redmond, WA Garden 418 1986 2014 95%
The Trails of Redmond Redmond, WA Garden 423 1985 2014 96%
Vesta (9)
Redmond, WA Garden 440 1998 2011 96%
Apartment Year Year
Communities (1)
Location Type Homes Built Acquired Occupancy(2)
Brighton Ridge Renton, WA Garden 264 1986 1996 96%
Fairwood Pond Renton, WA Garden 194 1997 2004 98%
Forest View Renton, WA Garden 192 1998 2003 97%
Pinnacle on Lake Washington Renton, WA Mid-rise 180 2001 2014 97%
8th & Republican (15)
Seattle, WA Mid-rise 211 2016 2017 95%
Annaliese Seattle, WA Mid-rise 56 2009 2013 96%
The Audrey at Belltown Seattle, WA Mid-rise 137 1992 2014 95%
The Bernard Seattle, WA Mid-rise 63 2008 2011 95%
Cairns, The Seattle, WA Mid-rise 99 2006 2007 93%
Collins on Pine Seattle, WA Mid-rise 76 2013 2014 95%
Domaine Seattle, WA Mid-rise 92 2009 2012 96%
Expo (17)
Seattle, WA Mid-rise 275 2012 2012 93%
Fountain Court Seattle, WA Mid-rise 320 2000 2000 93%
Patent 523 Seattle, WA Mid-rise 295 2010 2010 95%
Taylor 28 Seattle, WA Mid-rise 197 2008 2014 95%
Velo and Ray (15)
Seattle, WA Mid-rise 308 2014 2019 94%
Vox Apartments Seattle, WA Mid-rise 58 2013 2013 96%
Wharfside Pointe Seattle, WA Mid-rise 155 1990 1994 96%
12,107 96%
Total/Weighted Average 60,272 96%
Footnotes to the Company’s Portfolio Listing as of December 31, 2020
(1)Unless otherwise specified, the Company consolidates each community in accordance with U.S. GAAP.
(2)For communities, occupancy rates are based on financial occupancy for the year ended December 31, 2020. For an explanation of how financial occupancy is calculated, see "Occupancy Rates" in this Item 2.
(3)The community is subject to a ground lease, which, unless extended, will expire in 2082.
(4)Each of these communities is part of a DownREIT structure in which the Company is the general partner or manager and the other limited partners or members are granted rights of redemption for their interests.
(5)This community is owned by BEX III, LLC ("BEX III"). The Company has a 50% interest in BEX III, which is accounted for using the equity method of accounting.
(6)This community is owned by BEXAEW. The Company has a 50% interest in BEXAEW, which is accounted for using the equity method of accounting.
(7)This community is owned by Wesco III, LLC ("Wesco III"). The Company has a 50% interest in Wesco III, which is accounted for using the equity method of accounting.
(8)This community is owned by BEX II, LLC ("BEX II"). The Company has a 50% interest in BEX II, which is accounted for using the equity method of accounting.
(9)This community is owned by Wesco I, LLC ("Wesco I"). The Company has a 58% interest in Wesco I, which is accounted for using the equity method of accounting.
(10)This community is subject to a ground lease, which, unless extended, will expire in 2067.
(11)This community is subject to a ground lease, which, unless extended, will expire in 2027.
(12)The Company has a 97% interest and a former Executive Vice President of the Company has a 3% interest in this community.
(13)This community is owned by Wesco IV, LLC ("Wesco IV") The Company has a 50% interest in Wesco IV, which is accounted for using the equity method of accounting.
(14)This community is subject to a ground lease, which, unless extended, will expire in 2028.
(15)This community is owned by Wesco V, LLC ("Wesco V"). The Company has a 50% interest in Wesco V, which is accounted for using the equity method of accounting.
(16)This community is owned by BEX IV, LLC ("BEX IV"). The Company has a 50.1% interest in BEX IV, which is accounted for using the equity method of accounting.
(17)The Company has 50% ownership in this community, which is accounted for using the equity method of accounting.
(18)A portion of this community on which 84 apartment homes are presently located is subject to a ground lease, which, unless extended, will expire in 2028.
(19)The community is subject to a ground lease, which, unless extended, will expire in 2070.
(20)This community is subject to a ground lease, which, unless extended, will expire in 2070.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
The information regarding lawsuits, other proceedings and claims, set forth in Note 17, "Commitments and Contingencies", to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K is incorporated by reference into this Item 3. In addition to such matters referred to in Note 17, the Company is subject to various other legal and/or regulatory proceedings arising in the course of its business operations. We believe that, with respect to such matters that we are currently a party to, the ultimate disposition of any such matter will not result in a material adverse effect on the Company’s financial condition, results of operations or cash flows.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not Applicable.
Part II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The shares of the Company’s common stock are traded on the New York Stock Exchange under the symbol ESS.
There is no established public trading market for the Operating Partnership's limited partnership units ("OP Units").
Holders
The approximate number of holders of record of the shares of Essex's common stock was 1,191 as of February 17, 2021. This number does not include stockholders whose shares are held in investment accounts by other entities. Essex believes the actual number of stockholders is greater than the number of holders of record.
As of February 17, 2021, there were 67 holders of record of OP Units, including Essex.
Return of Capital
Under provisions of the Code, the portion of the cash dividend, if any, that exceeds earnings and profits is considered a return of capital. The return of capital is generated due to a variety of factors, including the deduction of non-cash expenses, primarily depreciation, in the determination of earnings and profits.
The status of the cash dividends distributed for the years ended December 31, 2020, 2019, and 2018 related to common stock are as follows:
2020 2019 2018
Common Stock
Ordinary income 85.23 % 83.81 % 79.72 %
Capital gain 10.68 % 13.78 % 15.35 %
Unrecaptured section 1250 capital gain 4.09 % 2.41 % 4.93 %
100.00 % 100.00 % 100.00 %
Dividends and Distributions
Future dividends/distributions by Essex and the Operating Partnership will be at the discretion of the Board of Directors of Essex and will depend on the actual cash flows from operations of the Company, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code, applicable legal restrictions and such other factors as the Board of Directors deems relevant. There are currently no contractual restrictions on Essex's and the Operating Partnership's present or future ability to pay dividends and distributions, and we do not anticipate that our ability to pay dividends/distributions will be impaired; however, there can be no assurances in that regard.
The Board of Directors declared a dividend/distribution for the fourth quarter of 2020 of $2.0775 per share. The dividend/distribution was paid on January 15, 2021 to stockholders/unitholders of record as of January 4, 2021.
Dividend Reinvestment and Share Purchase Plan
Essex has adopted a dividend reinvestment and share purchase plan designed to provide holders of common stock with a convenient and economical means to reinvest all or a portion of their cash dividends in shares of common stock and to acquire additional shares of common stock through voluntary purchases. Computershare, LLC, which serves as Essex's transfer agent, administers the dividend reinvestment and share purchase plan. For a copy of the plan, contact Computershare, LLC at (312) 360-5354.
Securities Authorized for Issuance under Equity Compensation Plans
The information required by this section is incorporated herein by reference from our Proxy Statement, relating to our 2021 Annual Meeting of Shareholders, under the headings "Equity Compensation Plan Information," to be filed with the SEC within 120 days of December 31, 2020.
Issuance of Registered Equity Securities
During the year ended December 31, 2020, the Company did not issue any shares of common stock through its equity distribution program. As of December 31, 2020, there were no outstanding forward sale agreements, and $826.6 million of shares remains available to be sold under this program.
Issuer Purchases of Equity Securities
In December 2015, Essex's Board of Directors authorized a stock repurchase plan to allow Essex to acquire shares in an aggregate of up to $250.0 million. In February 2019, the Board of Directors approved the replenishment of the stock repurchase plan such that, as of such date, the Company had $250.0 million of purchase authority remaining under the stock repurchase plan. During the year ended December 31, 2020, the Company repurchased and retired 1,197,190 shares of its common stock totaling $269.3 million, including commissions, at an average price of $224.96 per share. In each of May and December 2020, the Board of Directors approved the replenishment of the stock repurchase plan such that, as of each such date, Essex had $250.0 million of purchase authority remaining under the replenished plan. As of December 31, 2020, the Company had $223.6 million of purchase authority remaining under the stock repurchase plan.
Performance Graph
The line graph below compares the cumulative total stockholder return on Essex's common stock for the last five years with the cumulative total return on the S&P 500 and the NAREIT All Equity REIT index over the same period. This comparison assumes that the value of the investment in the common stock and each index was $100 on December 31, 2015 and that all dividends were reinvested.
Period Ending
Index 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020
Essex Property Trust, Inc. 100.00 99.87 106.66 111.75 140.70 115.26
NAREIT All Equity REIT Index 100.00 108.63 118.05 113.28 145.75 138.28
S&P 500 Index 100.00 111.96 136.40 130.42 171.49 203.04
(1)Common stock performance data is provided by S&P Global Market Intelligence.
The graph and other information furnished under the above caption "Performance Graph" in this Part II Item 5 of this Form 10-K shall not deemed to be "soliciting material" or to be "filed" with the SEC or subject to Regulation 14A or 14C, or to the liabilities of the Exchange Act.
Unregistered Sales of Equity Securities
During the years ended December 31, 2020 and 2019, the Operating Partnership issued OP Units in private placements in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act, in the amounts and for the consideration set forth below:
During the years ended December 31, 2020 and 2019, Essex issued an aggregate of 70,802 and 178,675 shares of its common stock upon the exercise of stock options, respectively. Essex contributed the proceeds from the option exercises of $14.9 million and $37.5 million to the Operating Partnership in exchange for an aggregate of 70,802 and 178,675 OP Units, as required by the Operating Partnership’s partnership agreement, during the years ended December 31, 2020 and 2019, respectively.
During the years ended December 31, 2020 and 2019, Essex issued an aggregate of 24,666 and 16,114 shares of its common stock in connection with restricted stock awards for no cash consideration, respectively. For each share of common stock issued by Essex in connection with such awards, the Operating Partnership issued OP Units to Essex as required by the Operating
Partnership's partnership agreement, for an aggregate of 24,666 and 16,114 OP Units during the years ended December 31, 2020 and 2019, respectively.
During the years ended December 31, 2020 and 2019, Essex issued an aggregate of 8,783 and 12,633 shares of its common stock in connection with the exchange of OP Units and DownREIT units by limited partners or members into shares of common stock, respectively. For each share of common stock issued by Essex in connection with such exchange, the Operating Partnership issued OP Units to Essex as required by the Operating Partnership's partnership agreement, for an aggregate of 8,783 and 12,633 OP Units during the year ended December 31, 2020 and 2019, respectively.
Essex may sell shares through its equity distribution program, then contribute the net proceeds from these share issuances to the Operating Partnership in exchange for OP Units as required by the Operating Partnership's partnership agreement. During the year ended December 31, 2020, the Company did not issue any shares of common stock through its equity distribution program. As of December 31, 2020, there were no outstanding forward purchase agreements. During the year ended December 31, 2019, 228,271 shares of the Company's common stock were issued or sold by Essex pursuant to its equity distribution programs.
Stock Repurchases
The following table summarizes the Company's purchase of its common stock during the three months ended December 31, 2020:
Total Number of
Shares Purchased Average Price
Paid Per Share Total Number of Shares
Purchased as Part of a
Publicly Announced
Program(1)
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program (in millions)(1)
October 1, 2020 - October 31, 2020 56,600 $ 191.05 56,600 $ 192.5
November 1, 2020 - November 30, 2020 33,182 196.59 33,182 186.0
December 1, 2020 - December 31, 2020 121,899 237.80 121,899 223.6
Total 211,681 $ 218.84 211,681 $ 223.6
(1) In December 2020, the Board of Directors approved the replenishment of the stock repurchase plan such that, as of such date, the Company had $250.0 million of purchase authority remaining under the replenished plan.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data
Not applicable.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto. These consolidated financial statements include all adjustments which are, in the opinion of management, necessary to reflect a fair statement of the results and all such adjustments are of a normal recurring nature.
OVERVIEW
Essex is a self-administered and self-managed REIT that acquires, develops, redevelops, and manages apartment communities in selected residential areas located on the West Coast of the United States. Essex owns all of its interests in its real estate investments, directly or indirectly, through the Operating Partnership. Essex is the sole general partner of the Operating Partnership and, as of December 31, 2020, had an approximately 96.6% general partner interest in the Operating Partnership.
The Company’s investment strategy has two components: constant monitoring of existing markets, and evaluation of new markets to identify areas with the characteristics that underlie rental growth. The Company’s strong financial condition supports its investment strategy by enhancing its ability to quickly shift acquisition, development, redevelopment, and disposition activities to markets that will optimize the performance of the Company's portfolio.
As of December 31, 2020, the Company owned or had ownership interests in 246 operating apartment communities, comprising 60,272 apartment homes, excluding the Company's ownership in preferred equity co-investments, loan investments, one operating commercial building and a development pipeline comprised of three consolidated projects and three unconsolidated joint venture projects.
The Company’s apartment communities are predominately located in the following major regions:
Southern California (primarily Los Angeles, Orange, San Diego, and Ventura counties)
Northern California (the San Francisco Bay Area)
Seattle Metro (Seattle metropolitan area)
As of December 31, 2020, the Company’s development pipeline was comprised of three consolidated projects under development, three unconsolidated joint venture projects under development, and various predevelopment projects aggregating 1,853 apartment homes, with total incurred costs of $948.0 million, and estimated remaining project costs of approximately $174.0 million, $118.0 million of which represents the Company's estimated remaining costs, for total estimated project costs of $1.1 billion.
As of December 31, 2020, the Company also had an ownership interest in one operating commercial building (totaling approximately 107,000 square feet).
By region, the Company's operating results for 2020 and 2019 and projection for 2021 new housing supply (defined as new multifamily apartment homes and single family homes, excluding developments with fewer than 50 apartment homes as well as student, senior and 100% affordable housing), projection for 2021 job growth, and 2021 estimated Same-Property revenue decline are as follows:
Southern California Region: As of December 31, 2020, this region represented 43% of the Company’s consolidated operating apartment homes. Revenues for "2020 Same-Properties" (as defined below), or "Same-Property revenues," decreased 4.4% in 2020 as compared to 2019. In 2021, the Company projects new residential supply of 26,500 apartment homes and single family homes, which represents 0.4% of the total housing stock. The Company projects an increase of 231,000 jobs or 3.1% in the Southern California region.
Northern California Region: As of December 31, 2020, this region represented 37% of the Company’s consolidated operating apartment homes. Same-Property revenues decreased 4.9% in 2020 as compared to 2019. In 2021, the Company projects new residential supply of 16,800 apartment homes and single family homes, which represents 0.7% of the total housing stock. The Company projects an increase of 110,500 jobs or 3.4% in the Northern California region.
Seattle Metro Region: As of December 31, 2020, this region represented 20% of the Company’s consolidated operating apartment homes. Same-Property revenues decreased 0.6% in 2020 as compared to 2019. In 2021, the Company projects new residential supply of 13,800 apartment homes and single family homes, which represents 1.1% of the total housing stock. The Company projects an increase of 55,000 jobs or 3.3% in the Seattle Metro region.
In total, the Company projects a decrease in 2021 Same-Property revenues of between 1.5% to 3.5%. Same-Property operating expenses are projected to increase in 2021 by 2.0% to 3.0%.
The Company’s consolidated operating communities are as follows:
As of As of
December 31, 2020 December 31, 2019
Apartment Homes % Apartment Homes %
Southern California 22,560 43 % 22,674 45 %
Northern California 19,319 37 % 17,556 35 %
Seattle Metro 10,217 20 % 10,343 20 %
Total 52,096 100 % 50,573 100 %
Co-investments, including Wesco I, Wesco III, Wesco IV, Wesco V, BEXAEW, BEX II, BEX III, and BEX IV communities, developments under construction, and preferred equity interest co-investment communities are not included in the table presented above for both periods.
Current Material Development - the COVID-19 Pandemic
The United States and other countries around the world are continuing to experience an unprecedented health pandemic related to COVID-19, which has created considerable instability, disruption, and uncertainty. Governmental authorities in impacted regions are taking dramatic and unpredictable actions in an effort to slow COVID-19’s spread. Federal, state and local jurisdictions have issued and revised varying forms of "Shelter-in-Place" orders, halted or restricted public gatherings and restricted business to only those that are considered "essential" or requiring businesses to make changes to their operations in a manner that negatively affects profitability, resulting in extraordinary job losses and related financial impacts that will affect future operations to an unknown extent. Moreover, eviction moratoriums and, laws that limit rent increases during times of emergency and prohibit the ability to collect unpaid rent during certain timeframes, have been enacted in various formats at various levels of government, including regions in which Essex's communities are located, impacting Essex properties. The Company is working to comply with the stated intent of local, county, state and federal laws. In that regard, the Company has implemented a wide range of practices to protect and support its employees and residents. Such measures include:
•closing the Company's corporate offices and instituting “work from home” measures for corporate associates;
•closing leasing offices to non-Essex personnel, reducing on-site staff so that hygiene and “social distancing” standards can be effectively managed and applied, and requiring face coverings to be worn;
•transitioning most public interactions with leasing staff to on-line and telephonic communications;
•increasing cleaning practices for common areas and community amenities and temporarily closing common areas and community amenities or opening with limited hours, limited capacity or by reservation only, depending in part on jurisdictional requirements; and
•delaying the response to maintenance orders in certain circumstances in order to promote the protection of the Company's employees and residents.
Due to the COVID-19 pandemic, some of the Company's residents, their health, their employment, and, thus, their ability to pay rent, have been and may continue to be impacted. To support residents, the Company has implemented the following steps, including, but not limited to:
•assembling a Resident Response Team to effectively and efficiently respond to resident needs and concerns with respect to the pandemic;
•structuring payment plans for residents who are unable to pay their rent as a result of the outbreak and waiving late fees for those residents; and
•establishing the Essex Cares fund for the purpose of supporting the Company’s residents and communities that are experiencing financial hardships caused by the COVID-19 pandemic.
The impact of the COVID-19 pandemic on the U.S. and world economies generally, and on the Company's results in particular, has been, and may continue to be significant. The long-term impact will largely depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, when a vaccine can be safely and widely distributed and whether employees and employers will continue to promote remote work if and when the pandemic concludes. This includes new information which may emerge concerning the severity of COVID-19, the success of actions taken to contain or treat
COVID-19, future laws that may be enacted, the impact on job growth and the broader economy, and reactions by consumers, companies, governmental entities and capital markets.
Primarily as a result of the impact of the COVID-19 pandemic, the Company's cash delinquencies as a percentage of scheduled rental income for the Company’s stabilized apartment communities or "Same-Property" (stabilized properties consolidated by the Company for the years ended December 31, 2020 and 2019) increased from 0.3% for 2019 to 2.5% for 2020. The Company has executed some payment plans and will continue to work with residents to execute payment plans related to such cash delinquencies. As part of this process, the Company assessed the collectability reserve attributable to those deferred payments and the anticipated execution of payment plans in the future, which partially mitigated the delinquencies resulting in actual delinquencies as a percentage of scheduled rent for the Company's Same-Property portfolio of 2.1% for the year ended December 31, 2020. As of December 31, 2020, the increase in delinquencies has not had a material adverse impact to the Company's liquidity position.
The COVID-19 pandemic has not negatively impacted the Company's ability to access traditional funding sources on the same or reasonably similar terms as were available in recent periods prior to the pandemic, as demonstrated by the Company's financing activity during the year ended December 31, 2020 discussed in the “Liquidity and Capital Resources" section below. The Company is not at material risk of not meeting the covenants in its credit agreements and is able to timely service its debt and other obligations.
RESULTS OF OPERATIONS
Comparison of Year Ended December 31, 2020 to the Year Ended December 31, 2019
The Company’s average financial occupancy for the Company’s stabilized apartment communities or "2020 Same-Property" (stabilized properties consolidated by the Company for the years ended December 31, 2020 and 2019) decreased 60 basis points to 96.0% in 2020 from 96.6% in 2019. Financial occupancy is defined as the percentage resulting from dividing actual rental income by total scheduled rental income. Actual rental income represents contractual rental income pursuant to leases without considering delinquency and concessions. Total scheduled rental income represents the value of all apartment homes, with occupied apartment homes valued at contractual rental rates pursuant to leases and vacant apartment homes valued at estimated market rents. The Company believes that financial occupancy is a meaningful measure of occupancy because it considers the value of each vacant apartment home at its estimated market rate.
Market rates are determined using the recently signed effective rates on new leases at the property and are used as the starting point in the determination of the market rates of vacant apartment homes. The Company may increase or decrease these rates based on a variety of factors, including overall supply and demand for housing, concentration of new apartment deliveries within the same submarket which can cause periodic disruption due to greater rental concessions to increase leasing velocity, and rental affordability. Financial occupancy may not completely reflect short-term trends in physical occupancy and financial occupancy rates, and the Company's calculation of financial occupancy may not be comparable to financial occupancy disclosed by other REITs.
The Company does not take into account delinquency and concessions to calculate actual rent for occupied apartment homes and market rents for vacant apartment homes. The calculation of financial occupancy compares contractual rates for occupied apartment homes to estimated market rents for unoccupied apartment homes, and thus the calculation compares the gross value of all apartment homes excluding delinquency and concessions. For apartment communities that are development properties in lease-up without stabilized occupancy figures, the Company believes the physical occupancy rate is the appropriate performance metric. While an apartment community is in the lease-up phase, the Company’s primary motivation is to stabilize the property, which may entail the use of rent concessions and other incentives, and thus financial occupancy, which is based on contractual income is not considered the best metric to quantify occupancy.
The regional breakdown of the Company’s 2020 Same-Property portfolio for financial occupancy for the years ended December 31, 2020 and 2019 is as follows:
Years ended
December 31,
2020 2019
Southern California 96.0 % 96.6 %
Northern California 96.1 % 96.7 %
Seattle Metro 96.0 % 96.6 %
The following table provides a breakdown of revenue amounts, including the revenues attributable to 2020 Same-Properties.
Number of Apartment Years Ended
December 31, Dollar Percentage
Property Revenues ($ in thousands)
Homes 2020 2019 Change Change
2020 Same-Properties:
Southern California 20,800 $ 540,771 $ 565,594 $ (24,823) (4.4) %
Northern California 15,638 504,300 530,114 (25,814) (4.9) %
Seattle Metro 10,112 241,615 242,982 (1,367) (0.6) %
Total 2020 Same-Property Revenues 46,550 1,286,686 1,338,690 (52,004) (3.9) %
2020 Non-Same Property Revenues 199,464 111,938 87,526 78.2 %
Total Property Revenues $ 1,486,150 $ 1,450,628 $ 35,522 2.4 %
2020 Same-Property Revenues decreased by $52.0 million or 3.9% to $1.3 billion for 2020 compared to $1.3 billion in 2019. The decrease was primarily attributable to an additional $31.8 million of cash concessions and $23.5 million in delinquencies compared to the prior year and a decrease of 0.6% in financial occupancy from 96.6% in 2019 to 96.0% in 2020.
2020 Non-Same Property Revenues increased by $87.5 million or 78.2% to $199.5 million in 2020 compared to $111.9 million in 2019. The increase was primarily due to revenues generated from the six communities that were consolidated as part of the Company's purchase of CPPIB's 45.0% co-investment interests in the first quarter of 2020, offset by the sale of One South Market, Delano, and 416 on Broadway during 2020.
Management and other fees from affiliates increased by $0.1 million or 1.1% to $9.6 million in 2020 from $9.5 million in 2019.
Property operating expenses, excluding real estate taxes increased by $22.0 million or 9.1% to $263.4 million in 2020 compared to $241.4 million in 2019, primarily due to an increase of $10.2 million in maintenance and repairs expenses, an increase of $7.2 million in utilities expenses, and an increase of $4.7 million in administrative expenses. 2020 Same-Property operating expenses, excluding real estate taxes, increased by $7.8 million or 3.5% to $233.1 million in 2020 compared to $225.3 million in 2019, primarily due to increases of $5.5 million in maintenance and repairs expenses driven by COVID-19 related expenses and $3.2 million in utilities expenses, offset by a decrease of $1.4 million in administrative expenses.
Real estate taxes increased by $21.8 million or 14.0% to $177.0 million in 2020 compared to $155.2 million in 2019, primarily due to the additions of six communities that were consolidated in the first quarter of 2020 as part of the Company's purchase of CPPIB's 45.0% co-investment interests. 2020 Same-Property real estate taxes increased by $6.7 million or 4.7% to $148.6 million in 2020 compared to $141.9 million in 2019 primarily due to an increase in property valuations and tax rates in Seattle Metro region.
Corporate-level property management expenses increased by $0.5 million or 1.5% to $34.6 million in 2020 compared to $34.1 million in 2019, primarily due to an increase in corporate-level property management and staffing costs supporting the communities.
Depreciation and amortization expense increased by $41.7 million or 8.6% to $525.5 million in 2020 compared to $483.8 million in 2019, primarily due to the additions of six communities that were consolidated in the first quarter of 2020 as part of the Company's purchase of CPPIB's 45.0% co-investment interests offset by the sale of One South Market, Delano, and 416 on Broadway during 2020.
Impairment loss of $1.8 million in 2020 was related to one of the Company's consolidated properties as a result of a change in the Company's intent to hold the property for its remaining useful life.
Gain on sale of real estate and land of $65.0 million in 2020 was primarily attributable to the portfolio sale of One South Market and Museum Park in the second quarter of 2020, the sale of Delano in the third quarter of 2020, and the sale of 416 on Broadway in the fourth quarter of 2020. The Company's $3.2 million loss on sale of real estate and land in 2019 was attributable to the sale of land in San Mateo, CA that had been held for future development.
Interest expense increased by $3.3 million or 1.5% to $220.6 million in 2020 compared to $217.3 million in 2019, primarily due to an increase in average outstanding debt primarily as a result of the issuance of $500.0 million of senior unsecured notes due March 1, 2029 in February and March 2019, $550.0 million of senior unsecured notes due January 15, 2030 in August and October 2019, $650 million of senior unsecured notes due March 15, 2032 in February and June 2020, and $600 million of senior unsecured notes due January 15, 2031 and September 1, 2050 in August 2020, which resulted in an increase of $37.6 million interest expense for 2020 as compared to 2019. Additionally, there was a $9.6 million decrease in capitalized interest in 2020, due to a decrease in development activity as compared to the same period in 2019. These increases to interest expense were partially offset by debt that was paid off, matured, or regular principal amortization during and after 2019, and lower average interest rates, which resulted in a decrease in interest expense of $43.9 million for 2020.
Total return swap income of $10.7 million in 2020 consists of monthly settlements related to the Company's four total return swap contracts with an aggregate notional amount of $254.8 million.
Interest and other income decreased $5.3 million or 11.4% to $41.0 million in 2020 compared to $46.3 million in 2019, primarily due to a decrease of $16.8 million in marketable securities and other income, offset by an increase in unrealized gains on marketable securities of $6.8 million and an increase in interest income of $4.7 million from the maturity of a mortgage backed security investment recognized in 2020 which resulted in the reversal of the estimated credit loss on the investment.
Equity income from co-investments decreased by $45.6 million or 40.7% to $66.5 million in 2020 compared to $112.1 million in 2019, primarily due to a decrease of $48.9 million in gains from the sale of co-investment communities, and a decrease of $16.5 million in equity income from co-investments of which, $9.1 million was as a result of the Company's purchase of CPPIB's 45.0% co-investment interests. These decreases were offset by a decrease of $11.5 million in impairment loss from unconsolidated co-investment, an increase of $5.6 million in promote income, and an increase of $2.0 million in income from preferred equity investments including income from early redemptions.
Deferred tax expense on unrealized gain on unconsolidated co-investment of $1.5 million in 2020 resulted from a net unrealized gain of $5.3 million from an unconsolidated co-investment.
Loss on early retirement of debt, net of $22.9 million in 2020 was primarily due to early repayment of a $297.7 million secured mortgage note payable in the first and second quarters of 2020, and the early repayment of $600.0 million of senior unsecured notes during the third and fourth quarters of 2020.
Gain on remeasurement of co-investment of $234.7 million in 2020 resulted from the Company's purchase of CPPIB's 45.0% co-investment interests. Gain on remeasurement of $31.5 million in 2019 resulted from the purchase of the Company's joint venture partner's 45.0% membership interest in the One South Market co-investment in March 2019.
Comparison of Year Ended December 31, 2019 to the Year Ended December 31, 2018
For the comparison of the years ended December 31, 2019 and December 31, 2018, refer to Part II, Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations" on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 20, 2020 under the subheading "Comparison of Year Ended December 31, 2019 to the Year Ended December 31, 2018."
Liquidity and Capital Resources
The United States and other countries around the world are experiencing an unprecedented health pandemic related to COVID-19, which has created considerable instability and disruption in the U.S. and world economies. Governmental authorities in affected regions are taking extraordinary steps in an effort to slow down the spread of the virus and mitigate its impact on affected populations.
The following table sets forth the Company’s cash flows for 2020, 2019 and 2018 ($ in thousands):
For the year ended December 31,
2020 2019 2018
Cash flow provided by (used in):
Operating activities $ 803,108 $ 919,079 $ 826,554
Investing activities $ (416,900) $ (527,691) $ (59,893)
Financing activities $ (383,261) $ (461,689) $ (676,392)
Essex’s business is operated primarily through the Operating Partnership. Essex issues public equity from time to time, but does not otherwise generate any capital itself or conduct any business itself, other than incurring certain expenses from operating as a public company which are fully reimbursed by the Operating Partnership. Essex itself does not hold any indebtedness, and its only material asset is its ownership of partnership interests of the Operating Partnership. Essex’s principal funding requirement is the payment of dividends on its common stock and preferred stock. Essex’s sole source of funding for its dividend payments is distributions it receives from the Operating Partnership.
As of December 31, 2020, Essex owned a 96.6% general partner interest and the limited partners owned the remaining 3.4% interest in the Operating Partnership.
The liquidity of Essex is dependent on the Operating Partnership’s ability to make sufficient distributions to Essex. The primary cash requirement of Essex is its payment of dividends to its stockholders. Essex also guarantees some of the Operating Partnership’s debt, as discussed further in Notes 7 and 8 to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K. If the Operating Partnership fails to fulfill certain of its debt requirements, which trigger Essex’s guarantee obligations, then Essex will be required to fulfill its cash payment commitments under such guarantees. However, Essex’s only significant asset is its investment in the Operating Partnership.
For Essex to maintain its qualification as a REIT, it must pay dividends to its stockholders aggregating annually at least 90% of its REIT taxable income, excluding net capital gains. While historically Essex has satisfied this distribution requirement by making cash distributions to its stockholders, it may choose to satisfy this requirement by making distributions of other property, including, in limited circumstances, Essex’s own stock. As a result of this distribution requirement, the Operating Partnership cannot rely on retained earnings to fund its ongoing operations to the same extent that other companies whose parent companies are not REITs can. Essex may need to continue to raise capital in the equity markets to fund the Operating Partnership’s working capital needs, acquisitions and developments.
At December 31, 2020, the Company had $73.6 million of unrestricted cash and cash equivalents and $147.8 million in marketable securities. The Company believes that cash flows generated by its operations, existing cash and cash equivalents, marketable securities balances and availability under existing lines of credit are sufficient to meet all of its anticipated cash needs during 2021. Additionally, the capital markets continue to be available and the Company is able to generate cash from the disposition of real estate assets to finance additional cash flow needs, including continued development and select acquisitions. In the event that conditions become further exacerbated due to the COVID-19 pandemic and related economic disruptions, the Company may further utilize other resources such as its cash reserves, lines of credit, or decreased investment in redevelopment activities to supplement operating cash flows. The Company is carefully monitoring and managing its cash position in light of ongoing conditions and levels of operations. The timing, source and amounts of cash flows provided by financing activities and used in investing activities are sensitive to changes in interest rates and other fluctuations in the capital markets environment, which can affect the Company’s plans for acquisitions, dispositions, development and redevelopment activities.
As of December 31, 2020, the Company had $200.0 million of private placement unsecured bonds outstanding at an average interest rate of 4.4% with maturity dates ranging from April 2021 through August 2021.
As of December 31, 2020, the Company had $4.9 billion of fixed rate public bonds outstanding at an average interest rate of 3.4% with maturity dates ranging from 2023 to 2050.
As of December 31, 2020, the Company had $550.0 million outstanding on its unsecured term loan. $350.0 million of the unsecured term loan bears a variable interest rate of LIBOR plus 0.95% and matures in February 2022. $200.0 million of the unsecured term loan bears a variable interest rate of LIBOR plus 1.20% and matures in April 2021 with two 12-month extension options, exercisable at the Company's option. The Company has five interest rate swap contracts, with an aggregate notional balance of $175.0 million, which effectively converts the interest rate on $175.0 million of the unsecured term loan to a fixed rate of 2.3%.
As of December 31, 2020, the Company’s mortgage notes payable totaled $0.6 billion, net of unamortized premiums and debt issuance costs, which consisted of $0.4 billion in fixed rate debt at an average interest rate of 3.5% and maturity dates ranging from 2022 to 2028 and $224.2 million of tax-exempt variable rate demand notes with a weighted average interest rate of 1.2%. The tax-exempt variable rate demand notes have maturity dates ranging from 2027 to 2046. $254.8 million is subject to total return swaps.
As of December 31, 2020, the Company had two unsecured lines of credit aggregating $1.24 billion, including a $1.2 billion unsecured line of credit and a $35.0 million working capital unsecured line of credit. As of December 31, 2020, there was no
amount outstanding on the $1.2 billion unsecured line of credit. The interest rate is based on a tiered rate structure tied to the Company's credit ratings and was LIBOR plus 0.825% as of December 31, 2020. There was no amount outstanding on the Company's $35.0 million working capital unsecured line of credit as of December 31, 2020. The interest rate on the amended line is based on a tiered rate structure tied to the Company's credit ratings and is currently at LIBOR plus 0.825%.
The Company’s unsecured lines of credit and unsecured debt agreements contain debt covenants related to limitations on indebtedness and liabilities and maintenance of minimum levels of consolidated earnings before depreciation, interest and amortization. The Company was in compliance with the debt covenants as of December 31, 2020 and 2019.
The Company pays quarterly dividends from cash available for distribution. Until it is distributed, cash available for distribution is invested by the Company primarily in investment grade securities held available for sale or is used by the Company to reduce balances outstanding under its lines of credit.
Derivative Activity
The Company uses interest rate swaps, interest rate caps, and total return swap contracts to manage certain interest rate risks. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair values of interest rate swaps and total return swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements.
The Company has entered into interest rate swap contracts with an aggregate notional amount of $175.0 million that effectively fixed the interest rate on the $175.0 million of the $550.0 million unsecured term loan at 2.3%. These derivatives qualify for hedge accounting.
The Company has four total return swap contracts, with an aggregate notional amount of $254.8 million, that effectively converts $225.1 million of mortgage notes payable and $29.7 million of mortgage notes payable related to real estate held for sale that is included in liabilities associated with real assets held for sale on the consolidated balance sheet to a floating interest rate based on the Securities Industry and Financial Markets Association Municipal Swap Index ("SIFMA") plus a spread. The total return swaps provide fair market value protection on the mortgage notes payable to our counterparties during the initial period of the total return swap until the Company's option to call the mortgage notes at par can be exercised. The Company can currently call all four of the total return swaps, with $254.8 million of the outstanding debt at par. These derivatives do not qualify for hedge accounting.
As of December 31, 2020 and 2019, the aggregate carrying value of the interest rate swap contracts was a liability of $2.4 million and an asset of $0.8 million, respectively. As of December 31, 2020 and 2019, the swap contracts were presented in the consolidated balance sheets as an asset of zero and $1.0 million, respectively, and were included in prepaid expenses and other assets on the consolidated balance sheets, and a liability of $2.4 million and $0.2 million, respectively, and were included in other liabilities on the consolidated balance sheets. The aggregate carrying and fair value of the total return swaps was zero at both December 31, 2020 and 2019.
Hedge ineffectiveness related to cash flow hedges, which is reported in current year income as interest expense, net was a zero, a loss of $0.2 million, and a loss of $0.1 million, for the years ended December 31, 2020, 2019, and 2018, respectively.
Issuance of Common Stock
In September 2018, the Company filed a new shelf registration statement with the SEC, allowing the Company to sell an undetermined number or amount of certain equity and debt securities of the Company, as defined in the prospectus contained in the shelf registration statement.
Also in September 2018, the Company entered into an equity distribution agreement pursuant to which the Company may offer and sell shares of its common stock having an aggregate gross sales price of up to $900.0 million (the "2018 ATM Program"). In connection with the 2018 ATM Program, the Company may also enter into related forward sale agreements whereby, at the Company’s discretion, it may sell shares of its common stock under the 2018 ATM Program under forward sale agreements. The use of a forward sale agreement would allow the Company to lock in a share price on the sale of shares of its common
stock at the time the agreement is executed, but defer receiving the proceeds from the sale of shares until a later date. The Company anticipates using the net proceeds, which are contributed to the Operating Partnership, to acquire, develop, or redevelop properties, which primarily will be apartment communities, to make other investments and for working capital or general corporate purposes, which may include the repayment of indebtedness.
For the year ended December 31, 2020, the Company did not issue any shares of its common stock through the 2018 ATM Program. For the year ended December 31, 2019, the Company issued 228,271 shares of common stock through the 2018 ATM Program at an average price of $321.56 per share for proceeds of $73.4 million. For the year ended December 31, 2018, the Company did not sell any shares of its common stock through the 2018 ATM Program or through the previous equity distribution agreement. As of December 31, 2020, $826.6 million of shares remains available to be sold under the 2018 ATM Program.
Capital Expenditures
Non-revenue generating capital expenditures are improvements and upgrades that extend the useful life of the property. For the year ended December 31, 2020, non-revenue generating capital expenditures totaled approximately $1,371 per apartment home. These expenditures do not include expenditures for deferred maintenance on acquisition properties, expenditures for property renovations and improvements which are expected to generate additional revenue or cost savings, and do not include expenditures incurred due to changes in government regulations that the Company would not have incurred otherwise, costs related to the COVID-19 pandemic, retail, furniture and fixtures, or expenditures for which the Company expects to be reimbursed. The Company expects that cash from operations and/or its lines of credit will fund such expenditures.
Development and Predevelopment Pipeline
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, 2020, the Company's development pipeline was comprised of three consolidated projects under development, three unconsolidated joint venture projects under development and various consolidated predevelopment projects, aggregating 1,853 apartment homes, with total incurred costs of $948.0 million, and estimated remaining project costs of approximately $174.0 million, $118.0 million of which represents the Company's estimated remaining costs, for total estimated project costs of $1.1 billion.
The Company defines predevelopment projects as proposed communities in negotiation or in the entitlement process with an expected high likelihood of becoming entitled development projects. The Company may also acquire land for future development purposes or sale.
The Company expects to fund the development and predevelopment communities by using a combination of some or all of the following sources: its working capital, amounts available on its lines of credit, construction loans, net proceeds from public and private equity and debt issuances, and proceeds from the disposition of assets, if any.
Redevelopment Pipeline
The Company defines redevelopment communities as existing properties owned or recently acquired, which have been targeted for additional investment by the Company with the expectation of increased financial returns through property improvement. During redevelopment, apartment homes may not be available for rent and, as a result, the related apartment community may have less than stabilized operations. As of December 31, 2020, the Company had ownership interests in three major redevelopment communities aggregating 1,112 apartment homes with estimated redevelopment costs of $109.1 million, of which approximately $4.5 million remains to be expended.
Alternative Capital Sources
The Company utilizes co-investments as an alternative source of capital for acquisitions of both operating and development communities. As of December 31, 2020, the Company had an interest in 1,070 apartment homes in communities actively under development with joint ventures for total estimated costs of $665.0 million. Total estimated remaining costs total approximately $114.0 million, of which the Company estimates that its remaining investment in these development joint ventures will be approximately $57.9 million. In addition, the Company had an interest in 8,652 apartment homes in operating communities with joint ventures for a total book value of $0.4 billion.
Contractual Obligations and Commercial Commitments
The following table summarizes our obligations at December 31, 2020 ($ in thousands):
For the Fiscal Years Ending
2021 2022 and
2023 2024 and
2025 Thereafter Total
Mortgage notes payable $ 3,501 $ 46,133 $ 136,163 $ 455,629 $ 641,426
Unsecured debt 200,000 1,150,000 900,000 3,400,000 5,650,000
Lines of credit - - - - -
Interest on indebtedness (1)
192,004 344,212 273,729 826,309 1,636,254
Ground leases 3,506 7,012 7,012 121,485 139,015
Operating leases 3,457 6,937 5,988 18,932 35,314
$ 402,468 $ 1,554,294 $ 1,322,892 $ 4,822,355 $ 8,102,009
(1)Interest on indebtedness for variable debt was calculated using interest rates as of December 31, 2020.
We have a commitment, which is not reflected in the table above, to make additional capital contributions to two limited partnerships in which we hold an equity interest. The capital contributions may be called by the general partner at any time until September 2022 and April 2025, after giving appropriate notice. As of December 31, 2020, we had committed to make additional capital contributions totaling up to $6.3 million and $14.9 million if and when called by the general partner of the two limited partnerships until September 2022 and April 2025, respectively.
Real Estate Commitments
The following table summarizes the Company's real estate commitment at December 31, 2020 ($ in thousands):
Number of Properties Investment Remaining Commitment
Joint ventures:
Preferred equity investments 5 $ 179,387 $ 139,225
Real estate under development (1)
3 550,863 14,000
Consolidated:
Real estate under development (2)
3 396,571 60,000
$ 1,126,821 $ 213,225
(1)Estimated project cost for development of the Company's 500 Folsom project is net of a projected value for low-income housing tax credit proceeds and the value of the tax exempt bond structure. Excludes approximately $44.0 million of the Company's share of estimated project costs for Scripps Mesa Apartments which have been fully funded.
(2)Estimated project cost for development of the Company's Wallace on Sunset project is net of cost incurred on the adjacent theatre at the property.
Variable Interest Entities
In accordance with accounting standards for consolidation of variable interest entities ("VIEs"), the Company consolidates the Operating Partnership, 17 DownREIT entities (comprising nine communities) and five co-investments as of December 31, 2020. As of December 31, 2019, the Company consolidated the Operating Partnership, 17 DownREIT entities (comprising nine communities), and six 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 entities, net of intercompany eliminations, were approximately $898.5 million and $326.8 million, respectively, as of December 31, 2020, and $1.0 billion and $364.3 million, respectively, as of December 31, 2019. Noncontrolling interests in these entities were $120.8 million and $122.5 million as of December 31, 2020 and 2019, respectively. The Company's financial risk in each VIE is limited to its equity investment in the VIE. As of December 31, 2020, the Company did not have any other VIEs of which it was deemed to be the primary beneficiary and did not have any VIEs of which it was not deemed to be the primary beneficiary.
Critical Accounting Policies and Estimates
The preparation of 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. The Company defines critical accounting policies as those accounting policies that require the Company's management to exercise their most difficult, subjective and complex judgments. The Company’s critical accounting policies and estimates relate principally to the following key areas: (i) accounting for the acquisition of investments in real estate (specifically, the allocation between land and buildings); and (ii) evaluation of events and changes in circumstances indicating whether the Company’s rental properties may be impaired. 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 differ from those estimates made by management.
The Company accounts for its acquisitions of investments in real estate by assessing each acquisition to determine if it meets the definition of a business or if it qualifies as an asset acquisition. We expect that acquisitions of individual operating communities will generally be viewed as asset acquisitions, and result in the capitalization of acquisition costs, and the allocation of purchase price to the assets acquired and liabilities assumed based on the relative fair value of the respective assets and liabilities.
In making estimates of fair values for purposes of allocating purchase price, the Company utilizes a number of sources, including independent land appraisals which consider comparable market transactions, its own analysis of recently acquired or developed comparable properties in our portfolio for land comparables and building replacement costs, and other publicly available market data. In calculating the fair value of identified intangible assets of an acquired property, the in-place leases are valued based on in-place rent rates and amortized over the average remaining term of all acquired leases.
The Company periodically assesses the carrying value of its real estate investments for indicators of impairment. The judgments regarding the existence of impairment indicators are based on monitoring investment market conditions and performance compared to budget for operating properties including the net operating income for the most recent 12 month period, monitoring estimated costs for properties under development, the Company's ability to hold and its intent with regard to each asset, and each property's remaining useful life. Whenever events or changes in circumstances indicate that the carrying amount of a property held for investment may not be fully recoverable, the carrying amount is evaluated. If the sum of the property’s expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the property, then the Company will recognize an impairment loss equal to the excess of the carrying amount over the fair value of the property.
When the Company determines that a property is held for sale, it discontinues the periodic depreciation of that property. The criteria for determining when a property is held for sale requires judgment and has potential financial statement impact as depreciation would cease and an impairment loss could occur upon determination of held for sale status. Assets held for sale are reported at the lower of the carrying amount or estimated fair value less costs to sell.
The Company bases its accounting estimates on historical experience 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.
Funds from Operations
Funds from Operations ("FFO") is a financial measure that is commonly used in the REIT industry. The Company presents FFO and FFO excluding non-core items (referred to as "Core FFO") as supplemental operating performance measures. FFO and Core FFO are not used by the Company as, nor should they be considered to be, alternatives to net income computed under U.S. GAAP as an indicator of the Company’s operating performance or as alternatives to cash from operating activities computed under U.S. GAAP as an indicator of the Company's ability to fund its cash needs.
FFO and Core FFO are not meant to represent a comprehensive system of financial reporting and do not present, nor do they intend to present, a complete picture of the Company's financial condition and operating performance. The Company believes that net income computed under U.S. GAAP is the primary measure of performance and that FFO and Core FFO are only meaningful when they are used in conjunction with net income. The Company considers FFO and Core FFO to be useful financial performance measurements of an equity REIT because, together with net income and cash flows, FFO and Core FFO provide investors with additional bases to evaluate operating performance and ability of a REIT to incur and service debt and to fund acquisitions and other capital expenditures and to pay dividends. By excluding gains or losses related to sales of
depreciated operating properties and excluding real estate depreciation (which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates), FFO can help investors compare the operating performance of a real estate company between periods or as compared to different companies. By further adjusting for items that are not considered part of the Company’s core business operations, Core FFO allows investors to compare the core operating performance of the Company to its performance in prior reporting periods and to the operating performance of other real estate companies without the effect of items that by their nature are not comparable from period to period and tend to obscure the Company’s actual operating results. The Company believes that its consolidated financial statements, prepared in accordance with U.S. GAAP, provide the most meaningful picture of its financial condition and its operating performance.
In calculating FFO, the Company follows the definition for this measure published by NAREIT, which is the leading REIT industry association. The Company believes that, under the NAREIT FFO definition, the two most significant adjustments made to net income are (i) the exclusion of historical cost depreciation and (ii) the exclusion of gains and losses from the sale of previously depreciated properties. The Company agrees that these two NAREIT adjustments are useful to investors for the following reasons:
(a)historical cost accounting for real estate assets in accordance with U.S. GAAP assumes, through depreciation charges, that the value of real estate assets diminishes predictably over time. NAREIT stated in its White Paper on Funds from Operations “since real estate asset values have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves." Consequently, NAREIT’s definition of FFO reflects the fact that real estate, as an asset class, generally appreciates over time and depreciation charges required by U.S. GAAP do not reflect the underlying economic realities.
(b)REITs were created as a legal form of organization in order to encourage public ownership of real estate as an asset class through investment in firms that were in the business of long-term ownership and management of real estate. The exclusion, in NAREIT’s definition of FFO, of gains and losses from the sales of previously depreciated operating real estate assets allows investors and analysts to readily identify the operating results of the long-term assets that form the core of a REIT’s activity and assists in comparing those operating results between periods.
Management believes that it has consistently applied the NAREIT definition of FFO to all periods presented. However, there is judgment involved and other REITs' calculation of FFO may vary from the NAREIT definition for this measure, and thus their disclosure of FFO may not be comparable to the Company’s calculation.
The table below is a reconciliation of net income available to common stockholders to FFO and Core FFO for the years ended December 31, 2020, 2019, and 2018.
As of and for the years ended December 31,
2020 2019 2018
($ in thousands, except per share amounts)
OTHER DATA:
Funds from operations attributable to common stockholders and unitholders:
Net income available to common stockholders $ 568,870 $ 439,286 $ 390,153
Adjustments:
Depreciation and amortization 525,497 483,750 479,884
Gains not included in FFO attributable to common stockholders and unitholders (301,886) (79,468) (73,683)
Impairment loss 1,825 7,105 -
Impairment loss from unconsolidated co-investments - 11,484 -
Depreciation and amortization from unconsolidated co-investments 51,594 60,655 62,954
Noncontrolling interest related to Operating Partnership units 19,912 15,343 13,452
Depreciation attributable to third party ownership and other (539) (1,805) (940)
Funds from operations attributable to common stockholders and unitholders $ 865,273 $ 936,350 $ 871,820
Non-core items:
Expensed acquisition and investment related costs 1,591 168 194
Deferred tax expense on unrealized gain on unconsolidated co-investment (1)
1,531 1,457 -
Gain on sale of marketable securities (2,131) (1,271) (737)
Unrealized (gains) losses on marketable securities (12,515) (5,710) 5,159
Provision for credit losses 687 - -
Equity income from non-core co-investment (2)
(5,289) (4,143) -
Interest rate hedge ineffectiveness (3)
- 181 148
Loss (gain) on early retirement of debt, net 22,883 (3,717) -
Gain on early retirement of debt from unconsolidated co-investment (38) - (3,662)
Co-investment promote income (6,455) (809) (20,541)
Income from early redemption of preferred equity investments (210) (3,562) (1,652)
Accelerated interest income from maturity of investment in mortgage backed security (11,753) (7,032) -
General and administrative and other, net 14,958 1,181 8,745
Insurance reimbursements, legal settlements, and other, net (81) (858) (561)
Core funds from operations attributable to common stockholders and unitholders $ 868,451 $ 912,235 $ 858,913
Weighted average number of shares outstanding, diluted (FFO)(4)
67,726 68,199 68,322
Funds from operations attributable to common stockholders and unitholders per share - diluted $ 12.78 $ 13.73 $ 12.76
Core funds from operations attributable to common stockholders and unitholders per share - diluted $ 12.82 $ 13.38 $ 12.57
(1)Represents deferred tax (income) expense recorded during the year related to net unrealized gains on the Real Estate Technology Ventures, L.P. co-investment.
(2)Represents the Company's share of co-investment income from Real Estate Technology Ventures, L.P.
(3)On January 1, 2019, the Company adopted ASU No. 2017-12 "Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities," which resulted in a cumulative effect adjustment of approximately $181,000 from interest expense to accumulated other comprehensive income. As a result of the adoption of this standard, the Company
recognizes qualifying hedge ineffectiveness through accumulated other comprehensive income as opposed to current earnings.
(4)Assumes conversion of all outstanding OP Units into shares of the Company's common stock and excludes all DownREIT units for which the Operating Partnership has the ability and intention to redeem the units for cash and does not consider them to be common stock equivalents.
Net Operating Income
Net operating income ("NOI") and Same-Property NOI are considered by management to be important supplemental performance measures to earnings from operations included in the Company’s consolidated statements of income. The presentation of Same-Property NOI assists with the presentation of the Company’s operations prior to the allocation of depreciation and any corporate-level or financing-related costs. NOI reflects the operating performance of a community and allows for an easy comparison of the operating performance of individual communities or groups of communities. In addition, because prospective buyers of real estate have different financing and overhead structures, with varying marginal impacts to overhead by acquiring real estate, NOI is considered by many in the real estate industry to be a useful measure for determining the value of a real estate asset or group of assets. The Company defines Same-Property NOI as Same-Property revenues less Same-Property operating expenses, including property taxes. Please see the reconciliation of earnings from operations to NOI and Same-Property NOI, which in the table below is the NOI for stabilized properties consolidated by the Company for the periods presented ($ in thousands):
2020 2019 2018
Earnings from operations $ 491,441 $ 481,112 $ 511,989
Adjustments:
Corporate-level property management expenses 34,573 34,067 32,055
Depreciation and amortization 525,497 483,750 479,884
Management and other fees from affiliates (9,598) (9,527) (9,183)
General and administrative 65,388 54,262 53,451
Expensed acquisition and investment related costs 1,591 168 194
Impairment loss 1,825 7,105 -
(Gain) Loss on sale of real estate and land (64,967) 3,164 (61,861)
NOI 1,045,750 1,054,101 1,006,529
Less: Non Same-Property NOI (140,782) (82,644) (75,688)
Same-Property NOI $ 904,968 $ 971,457 $ 930,841
Forward-Looking Statements
Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this Annual Report on Form 10-K which are not historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act, including statements regarding the Company's expectations, estimates, assumptions, hopes, intentions, beliefs and strategies regarding the future. Words such as "expects," "assumes," "anticipates," "may," "will," "intends," "plans," "projects," "believes," "seeks," "future," "estimates," and variations of such words and similar expressions are intended to identify such forward-looking statements. Such forward-looking statements include, among other things, statements regarding the Company's expectations related to the continued impact of the COVID-19 pandemic on the Company's business, financial condition and results of operations and the impact of any additional measures taken to mitigate the impact of the pandemic, the Company's intent, beliefs or expectations with respect to the timing of completion of current development and redevelopment projects and the stabilization of such projects, the timing of lease-up and occupancy of its apartment communities, the anticipated operating performance of its apartment communities, the total projected costs of development and redevelopment projects, co-investment activities, qualification as a REIT under the Internal Revenue Code of 1986, as amended, 2021 Same-Property revenue generally and in specific regions, 2021 Same-Property operating expenses, the real estate markets in the geographies in which the Company's properties are located and in the United States in general, the adequacy of future cash flows to meet anticipated cash needs, its financing activities and the use of proceeds from such activities, the availability of debt and equity financing, general economic conditions including the potential impacts from such economic conditions, including as a result of the COVID-19 pandemic and governmental measures intended to prevent its spread, trends affecting the Company's financial condition or results of operations, changes to U.S. tax laws and regulations in general or specifically related to REITs or real estate, changes to laws
and regulations in jurisdictions in which communities the Company owns are located, and other information that is not historical information.
While the Company's management believes the assumptions underlying its forward-looking statements are reasonable, such forward-looking statements involve known and unknown risks, uncertainties and other factors, many of which are beyond the Company’s control, which could cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The Company cannot assure the future results or outcome of the matters described in these statements; rather, these statements merely reflect the Company’s current expectations of the approximate outcomes of the matters discussed. Factors that might cause the Company’s actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements include, but are not limited to, the following: the continued impact of the COVID-19 pandemic, which remains inherently uncertain as to duration and severity, and any additional governmental measures taken to limit its spread, and other potential future outbreaks of infectious diseases or other health concerns could continue to adversely affect the Company's business and its tenants, and cause a significant downturn in general economic conditions, the real estate industry, and the markets in which the Company's communities are located; the Company may fail to achieve its business objectives; the actual completion of development and redevelopment projects may be subject to delays; the stabilization dates of such projects may be delayed; the Company may abandon or defer development or redevelopment projects for a number of reasons, including changes in local market conditions which make development less desirable, increases in costs of development, increases in the cost of capital or lack of capital availability, resulting in losses; the total projected costs of current development and redevelopment projects may exceed expectations; such development and redevelopment projects may not be completed; development and redevelopment projects and acquisitions may fail to meet expectations; estimates of future income from an acquired property may prove to be inaccurate; occupancy rates and rental demand may be adversely affected by competition and local economic and market conditions; there may be increased interest rates and operating costs; the Company may be unsuccessful in the management of its relationships with its co-investment partners; future cash flows may be inadequate to meet operating requirements and/or may be insufficient to provide for dividend payments in accordance with REIT requirements; changes in laws or regulations; the terms of any refinancing may not be as favorable as the terms of existing indebtedness; unexpected difficulties in leasing of development projects; volatility in financial and securities markets; the Company’s failure to successfully operate acquired properties; unforeseen consequences from cyber-intrusion; the Company’s inability to maintain our investment grade credit rating with the rating agencies; government approvals, actions and initiatives, including the need for compliance with environmental requirements; and those further risks, special considerations, and other factors discussed in Item 1A, Risk Factors, of this Form 10-K, and those risk factors and special considerations set forth in the Company’s other filings with the SEC which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Additionally, the risks, uncertainties and other factors set forth above or otherwise referred to in this Annual Report on Form 10-K and the other reports that the Company has filed with the SEC may be further amplified by the global impact of the COVID-19 pandemic. All forward-looking statements are made as of the date hereof, the Company assumes no obligation to update or supplement this information for any reason, and therefore, they may not represent the Company's estimates and assumptions after the date of this report.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
Interest Rate Hedging Activities
The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, the Company uses interest rate swaps as part of its cash flow hedging strategy. As of December 31, 2020, the Company had entered into five interest rate swap contracts to mitigate the risk of changes in the interest-related cash outflows on $175.0 million of the unsecured term debt. As of December 31, 2020, the Company also had $225.1 million of secured variable rate indebtedness. All of the Company’s interest rate swaps are designated as cash flow hedges as of December 31, 2020. The following table summarizes the notional amount, carrying value, and estimated fair value of the Company’s cash flow hedge derivative instruments used to hedge interest rates as of December 31, 2020. The notional amount represents the aggregate amount of a particular security that is currently hedged at one time, but does not represent exposure to credit, interest rates or market risks. The table also includes a sensitivity analysis to demonstrate the impact on the Company’s derivative instruments from an increase or decrease in 10-year Treasury bill interest rates by 50 basis points, as of December 31, 2020.
Carrying and Estimated Carrying Value
Maturity Estimated + 50 - 50
($ in thousands)
Notional Amount Date Range Fair Value Basis Points Basis Points
Cash flow hedges:
Interest rate swaps $ 175,000 2022 $ (2,373) $ (1,412) $ (3,350)
Total cash flow hedges $ 175,000 2022 $ (2,373) $ (1,412) $ (3,350)
Additionally, the Company has entered into total return swap contracts, with an aggregate notional amount of $254.8 million that effectively convert $225.1 million of fixed mortgage notes payable and $29.7 million of mortgage notes payable related to real estate held for sale that is included in liabilities associated with real estate held for sale on the consolidated balance sheet to a floating interest rate based on the SIFMA plus a spread and have a carrying value of zero at December 31, 2020. The Company is exposed to insignificant interest rate risk on these swaps as the related mortgages are callable, at par, by the Company, co-terminus with the termination of any related swap. These derivatives do not qualify for hedge accounting.
Interest Rate Sensitive Liabilities
The Company is exposed to interest rate changes primarily as a result of its lines of credit and long-term debt used to maintain liquidity and fund capital expenditures and expansion of the Company’s real estate investment portfolio and operations. The Company’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Company borrows primarily at fixed rates and may enter into derivative financial instruments such as interest rate swaps, caps and treasury locks in order to mitigate its interest rate risk on a related financial instrument. The Company does not enter into derivative or interest rate transactions for speculative purposes.
The Company’s interest rate risk is monitored using a variety of techniques. The table below presents the principal amounts and weighted average interest rates by year of expected maturity to evaluate the expected cash flows. Management has estimated the fair value of the Company’s $5.5 billion of fixed rate debt at December 31, 2020, to be $6.0 billion. Management has estimated the fair value of the Company’s $775.1 million of variable rate debt at December 31, 2020, to be $770.1 million based on the terms of existing mortgage notes payable and variable rate demand notes compared to those available in the marketplace. The following table represents scheduled principal payments ($ in thousands):
For the Years Ended December 31,
($ in thousands, except for interest rates) 2021 2022 2023 2024 2025 Thereafter Total Fair value
Fixed rate debt
$202,788 $42,408 $602,093 $402,177 $632,035 $3,634,849 $5,516,350 $6,030,203
Average interest rate 4.3% 3.7% 3.7% 4.0% 3.5% 3.3%
Variable rate debt (1)
$713 $350,780 $200,852 $932 $1,019 $220,780 $775,076 $770,075
Average interest rate 1.3% 1.8% 1.5% 1.3% 1.3% 1.1%
(1)$175.0 million is subject to interest rate protection agreements ($175.0 million is subject to interest rate swaps). $225.1 million of variable rate debt in the table above excludes $29.7 million of variable rate debt related to real estate held for sale that is included in liabilities associated with real estate held for sale on the consolidated balance sheet and both amounts are subject to total return swaps.
The table incorporates only those exposures that exist as of December 31, 2020; it does not consider those exposures or positions that could arise after that date. As a result, the Company’s ultimate realized gain or loss, with respect to interest rate fluctuations and hedging strategies would depend on the exposures that arise prior to settlement.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of this Form 10-K. See Item 15.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Essex Property Trust, Inc.
As of December 31, 2020, Essex carried out an evaluation, under the supervision and with the participation of management, including Essex's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Essex's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, Essex’s Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2020, Essex’s disclosure controls and procedures were effective to ensure that the information required to be disclosed by Essex in the reports that Essex files or submits under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such disclosure controls and procedures were also effective to ensure that information required to be disclosed in the reports that Essex files or submits under the Exchange Act is accumulated and communicated to Essex’s management, including Essex’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
There were no changes in Essex’s internal control over financial reporting, that occurred during the quarter ended December 31, 2020, that have materially affected, or are reasonably likely to materially affect, Essex’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Essex’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Essex’s management assessed the effectiveness of Essex’s internal control over financial reporting as of December 31, 2020. In making this assessment, Essex’s management used the criteria set forth in the report entitled "Internal Control-Integrated Framework (2013)" published by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Essex’s management has concluded that, as of December 31, 2020, its internal control over financial reporting was effective based on these criteria. Essex’s independent registered public accounting firm, KPMG LLP, has issued an attestation report over Essex’s internal control over financial reporting, which is included herein.
Essex Portfolio, L.P.
As of December 31, 2020, the Operating Partnership carried out an evaluation, under the supervision and with the participation of management, including Essex's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Operating Partnership's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2020, the Operating Partnership’s disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Operating Partnership in the reports that the Operating Partnership files or submits under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such disclosure controls and procedures were also effective to ensure that information required to be disclosed in the reports that the Operating Partnership files or submits under the Exchange Act is accumulated and communicated to the Operating Partnership’s management, including Essex's Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
There were no changes in the Operating Partnership’s internal control over financial reporting, that occurred during the quarter ended December 31, 2020, that have materially affected, or are reasonably likely to materially affect, the Operating Partnership’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
The Operating Partnership’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). The Operating Partnership’s management assessed the effectiveness of the Operating Partnership’s internal control over financial reporting as of December 31, 2020. In making this assessment, the Operating Partnership’s management used the criteria set forth in the report entitled "Internal Control-Integrated Framework (2013)" published by COSO. The Operating Partnership’s management has concluded that, as of December 31, 2020, its internal control over financial reporting was effective based on these criteria.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item is incorporated herein by reference from our Proxy Statement, relating to our 2021 Annual Meeting of Stockholders, under the heading "Board and Corporate Governance Matters," to be filed with the SEC within 120 days of December 31, 2020.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference from our Proxy Statement, relating to our 2021 Annual Meeting of Stockholders, under the headings "Executive Compensation" and "Director Compensation," to be filed with the SEC within 120 days of December 31, 2020.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated herein by reference from our Proxy Statement, relating to our 2021 Annual Meeting of Stockholders, under the heading "Security Ownership of Certain Beneficial Owners and Management," to be filed with the SEC within 120 days of December 31, 2020.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by this Item is incorporated herein by reference from our Proxy Statement, relating to our 2021 Annual Meeting of Stockholders, under the heading "Certain Relationships and Related Persons Transactions," to be filed with the SEC within 120 days of December 31, 2020.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services
The information required by this Item is incorporated herein by reference from our Proxy Statement, relating to our 2021 Annual Meeting of Stockholders, under the headings "Report of the Audit Committee" and "Fees Paid to KPMG LLP," to be filed with the SEC within 120 days of December 31, 2020.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
(A) Financial Statements
(1) Consolidated Financial Statements of Essex Property Trust, Inc. Page
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets: As of December 31, 2020 and 2019
Consolidated Statements of Income: Years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Comprehensive Income: Years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Equity: Years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Cash Flows: Years ended December 31, 2020, 2019, and 2018
Notes to Consolidated Financial Statements
(2) Consolidated Financial Statements of Essex Portfolio, L.P.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets: As of December 31, 2020 and 2019
Consolidated Statements of Income: Years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Comprehensive Income: Years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Capital: Years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Cash Flows: Years ended December 31, 2020, 2019, and 2018
Notes to Consolidated Financial Statements
(3) Financial Statement Schedule - Schedule III - Real Estate and Accumulated Depreciation as of December 31, 2020
(4) See the Exhibit Index immediately preceding the signature page and certifications for a list of exhibits filed or incorporated by reference as part of this report.
(B) Exhibits
The Company hereby files, as exhibits to this Form 10-K, those exhibits listed on the Exhibit Index referenced in Item 15(A)(4) above.