What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-25 compared with 2021-02-19 · 102 added, 140 removed, 274 unchanged (47% of the section changed)

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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.

As of December 31, 2021, the Company owned or had ownership interests in 252 operating apartment communities, comprising 61,911 apartment homes, excluding the Company's ownership in preferred equity co-investments, loan investments, three operating commercial buildings, and a development pipeline comprised of one consolidated project and one unconsolidated joint venture project.

The Company’s apartment communities are predominately located in the following major regions:

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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:

As of December 31, 2021, the Company’s development pipeline was comprised of one consolidated project under development, one unconsolidated joint venture project under development, and various predevelopment projects aggregating 371 apartment homes, with total incurred costs of $156.0 million, and estimated remaining project costs of approximately $61.0 million, $32.6 million of which represents the Company's estimated remaining costs, for total estimated project costs of $217.0 million.

As of December 31, 2021, the Company also had an ownership interest in three operating commercial buildings (totaling approximately 281,000 square feet).

By region, the Company's operating results for 2021 and 2020 and projection for 2022 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 2022 job growth, and 2022 estimated Same-Property revenue growth are as follows:

Southern California Region :

As of December 31, 2021, 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.

Revenues for "2021 Same-Properties" (as defined below), or "Same-Property revenues," increased 3.2% in 2021 as compared to 2020.

In 2022, the Company projects new residential supply of 31,750 apartment homes and single family homes, which represents 0.5% of the total housing stock.

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The Company projects an increase of 63,000 jobs or 3.6% in the Seattle Metro region.

In total, the Company projects a decrease in 2021 Same-Property revenues of between 1.5% to 3.5%.

In total, the Company projects an increase in 2022 Same-Property revenues of between 7.0% to 8.5%.

Same-Property operating expenses are projected to increase in 2022 by 3.5% to 4.5%.

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Total 51,654 100 % 52,096 100 %

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.

Co-investments, including Wesco I, Wesco III, Wesco IV, Wesco V, Wesco VI, BEXAEW, BEX II, BEX IV, and 500 Folsom communities, developments under construction, and preferred equity interest co-investment communities are not included in the table presented above for both periods.

A community previously held in the BEX III co-investment was consolidated in the second quarter of 2021 and is excluded from the December 31, 2020 table but included in the December 31, 2021 table.

The COVID-19 Pandemic

The United States and other countries around the world are continuing to experience impacts related to the COVID-19 pandemic and its related variants which has created considerable instability, disruption, and uncertainty.

Governmental authorities in impacted regions are taking extraordinary steps in an effort to slow down the spread of the viruses and mitigate its impact on affected populations.

Federal, state and local jurisdictions have implemented varying forms of requirements related to sponsors and patrons of public gatherings and required businesses to make changes to their operations in a manner that negatively affects profitability, resulting in job losses and related financial impacts that may affect future operations to an unknown extent.

While the California eviction moratorium sunsetted during the third quarter of 2021, other state and local eviction moratoriums and laws that limit rent increases during times of emergency and prohibit the ability to collect unpaid rent during certain timeframes continue to be in effect in various formats at various regions in which Essex's communities are located, impacting Essex and its 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;

• delaying the response to maintenance orders in certain circumstances in order to promote the protection of the Company's employees and residents.

Such measures include instituting a hybrid work model for corporate associates to work at the Company's corporate offices and remotely, and transitioning many public interactions with leasing staff to on-line and telephonic communications;

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.

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• 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;

• structuring payment plans for residents who are unable to pay their rent as a result of the outbreak and waiving late fees where required or applicable for those residents;

• 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.

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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 long-term impact will largely depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, 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 and related variants, 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.

The labor shortage due partly to various government mandates and vaccine requirements implemented during the COVID-19 pandemic and supply chain disruptions may negatively impact the Company's results of operations.

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, 2021 and 2020) remained higher than the pre-pandemic period but improved from 2.5% for 2020 to 1.9% for 2021.

The Company has executed some payment plans and will continue to work with residents

to collect such cash delinquencies.

As a result of continued analysis of the collectability of delinquencies, reported delinquencies as a percentage of scheduled rent for the Company's Same-Property portfolio was 2.0% for the year ended December 31, 2021.

As of December 31, 2021, the delinquencies have 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, 2021 discussed in the “Liquidity and Capital Resources" section below.

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Comparison of Year Ended December 31, 2021 to the Year Ended December 31, 2020

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.

The Company’s average financial occupancy for the Company’s stabilized apartment communities or "2021 Same-Property" (stabilized properties consolidated by the Company for the years ended December 31, 2021 and 2020) increased 40 basis points to 96.4% in 2021 from 96.0% in 2020.

Financial occupancy is defined as the percentage resulting from dividing actual rental income by total scheduled rental income.

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Total Property Revenues $ 1,431,418 $ 1,486,150 $ (54,732) (3.7) %

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.

2021 Same-Property Revenues decreased by $16.2 million or 1.2% to $1.3 billion for 2021.

The decrease was primarily attributable to an additional $5.3 million of cash concessions and $1.2 million in delinquencies compared to the prior year and due to a decrease of 1.5% in average rental rates from $2,349 for 2020 to $2,313 for 2021.

2021 Non-Same Property Revenues decreased by $38.6 million or 21.2% to $143.2 million in 2021 compared to $181.7 million in 2020.

The decrease was primarily due to property dispositions in 2020 and the sale of Hidden Valley, Axis 2300, Park 20, and Devonshire Apartments in 2021 partially offset by the acquisition of The Village at Toluca Lake.

Management and other fees from affiliates decreased by $0.5 million or 5.2% to $9.1 million in 2021 from $9.6 million in 2020.

The decrease was primarily due to a decrease in revenues used to calculate management fees as well as a decrease of the management fee rate for one of the joint ventures.

Property operating expenses, excluding real estate taxes increased by $1.5 million or 0.6% to $264.9 million in 2021 compared to $263.4 million in 2020, primarily due to an increase of $3.8 million in utilities expenses offset by a $2.4 million decrease in administrative expenses.

2021 Same-Property operating expenses, excluding real estate taxes, increased by $5.3 million or 2.2% to $241.8 million in 2021 compared to $236.5 million in 2020, primarily due to increases of $4.1 million in utilities expenses, $2.2 million in insurance and other expenses, and $1.2 million in maintenance and repairs expenses, offset by a decrease of $2.2 million in administrative expenses.

Real estate taxes increased by $3.4 million or 1.9% to $180.4 million in 2021 compared to $177.0 million in 2020, primarily due to increases in assessed valuations and tax rates.

2021 Same-Property real estate taxes increased by $3.6 million or 2.4% to $155.0 million in 2021 compared to $151.4 million in 2020 primarily due to increases in assessed valuations and tax rates.

Corporate-level property management expenses increased by $1.6 million or 4.6% to $36.2 million in 2021 compared to $34.6 million in 2020 due to costs pertaining to the centralization of certain property level functions.

Depreciation and amortization expense decreased by $5.4 million or 1.0% to $520.1 million in 2021 compared to $525.5 million in 2020, primarily due to a decrease in amortization expense resulting from certain lease intangibles becoming fully amortized during 2020 and the sale of Hidden Valley, Axis 2300, Park 20, and Devonshire Apartments during 2021.

Gain on sale of real estate and land of $143.0 million in 2021 was attributable to the sale of Hidden Valley, Axis 2300, Park 20, and Devonshire Apartments during 2021.

The Company's $65.0 million gain on sale of real estate and land in 2020 was primarily attributable to the portfolio sale of One South Market and Museum Park, and the sales of Delano and 416 on Broadway during 2020.

Interest expense decreased by $17.5 million or 7.9% to $203.1 million in 2021 compared to $220.6 million in 2020 , primarily due to various debt that was paid off, matured, or regular principal payments during and after 2020, and lower average interest rates, which resulted in a decrease in interest expense of $49.8 million for 2021.

These decreases in interest expense were partially offset by the issuance of new senior unsecured notes which resulted in an increase of $23.8 million interest expense for 2021 as compared to 2020.

Additionally, there was a $8.5 million decrease in capitalized interest in 2021, due to a decrease in development activity as compared to the same period in 2020.

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 $10.8 million in 2021 consists of monthly settlements related to the Company's four total return swap contracts with an aggregate notional amount of $224.4 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.

Interest and other income increased by $57.7 million or 140.7% to $98.7 million in 2021 compared to $41.0 million in 2020, primarily due to increases of $34.3 million in insurance reimbursements, legal settlements and other driven by a one-time legal settlement claim, $20.6 million in unrealized gains on marketable securities, $7.9 million in marketable securities and other income, $4.9 million in income from early redemption of notes receivable, and $1.3 million in gain on sale of marketable securities.

These increases were offset by a $11.8 million decrease in interest income resulting from the maturity of a mortgage backed security investment in 2020.

Equity income from co-investments increased by $45.2 million or 68.0% to $111.7 million in 2021 compared to $66.5 million in 2020, primarily due to increases of $50.3 million in equity income from non-core co-investments and $11.6 million in income from preferred equity investments including income from early redemptions.

These increases were offset by decreases of $8.8 million in equity income from co-investments and $6.5 million in co-investment promote income.

Deferred tax expense on unrealized gain on unconsolidated co-investment of $15.7 million in 2021 resulted from a net unrealized gain of $53.7 million from an unconsolidated co-investments.

Loss on early retirement of debt, net of $19.0 million in 2021 was primarily due to the early termination of the Company's

five interest rate swap contracts in conjunction with the partial repayment of the Company's unsecured term debt and the early repayment of $300.0 million of senior unsecured notes.

Gain on remeasurement of co-investment of $2.3 million in 2021 resulted from the Company's purchase of BEX III's 50.0% interest in The Village at Toluca Lake community in the second quarter of 2021.

Gain on remeasurement of $234.7 million in 2020 resulted from the Company's purchase of Canada Pension Plan Investment Board's ("CPPIB") 45.0% co-investment interests during the first quarter of 2020.

Comparison of Year Ended December 31, 2020 to the Year Ended December 31, 2019

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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 2021, 2020 and 2019 ($ in thousands):

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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.

In the event that conditions become further exacerbated due to the COVID-19 pandemic and related economic disruptions or otherwise, 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, 2021, the Company had $5.4 billion of fixed rate public bonds outstanding at an average interest rate of 3.3% 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%.

As of December 31, 2021, the Company’s mortgage notes payable totaled $639.0 million, net of unamortized premiums and debt issuance costs, which consisted of $415.4 million in fixed rate debt at an average interest rate of 3.5% and maturity dates ranging from 2022 to 2028 and $223.6 million of tax-exempt variable rate demand notes with a weighted average interest rate of 1.1%.

The tax-exempt variable rate demand notes have maturity dates ranging from 2027 to 2046.

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As of December 31, 2021, 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.

As of December 31, 2021, there was $340.0 million 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 0.775% as of December 31, 2021.

There was no amount outstanding on the Company's $35.0 million working capital unsecured line of credit as of December 31, 2020.

There was $1.3 million outstanding on the Company's $35.0 million working capital unsecured line of credit as of December 31, 2021.

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 0.775%.

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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 Company has four total return swap contracts, with an aggregate notional amount of $224.4 million, that effectively converts $224.4 million of mortgage notes payable 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.

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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.

As of December 31, 2021 and 2020, the aggregate carrying value of the interest rate swap contracts was a liability of zero and $2.4 million, respectively.

As of December 31, 2021 and 2020, the swap contracts were presented in the consolidated balance sheets as a liability of zero and $2.4 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, 2021 and 2020.

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.

Hedge ineffectiveness related to cash flow hedges, which is reported in current year income as interest expense, net was zero, zero, and a loss of $0.2 million, for the years ended December 31, 2021, 2020, and 2019, 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.

In September 2021, the Company entered into the 2021 ATM Program, a new 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.

In connection with the 2021 ATM Program, the Company may also enter into related forward sale agreements, and may sell shares of its common stock pursuant to these 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 receipt of the proceeds from the sale of shares until a later date should the Company elect to settle such forward sale agreement, in whole or in part, in shares of common stock.

The 2021 ATM Program replaces the prior equity distribution agreement entered into in September 2018 (the "2018 ATM Program"), which was terminated upon the establishment of the 2021 ATM Program.

For the year ended December 31, 2021, the Company did not sell any shares of its common stock through the 2021 ATM Program or through the 2018 ATM Program.

As of December 31, 2021, there were no outstanding forward purchase agreements, and $900.0 million of shares remain available to be sold under the 2021 ATM Program.

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 tota led approximately $1,371 per apartment home.

For the year ended December 31, 2021, non-revenue generating capital expenditures totaled approximately $1,914 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.

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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.

As of December 31, 2021, the Company's development pipeline was comprised of one consolidated project under development, one unconsolidated joint venture project under development and various consolidated predevelopment projects, aggregating 371 apartment homes, with total incurred costs of $156.0 million, and estimated remaining project costs of approximately $61.0 million, $32.6 million of which represents the Company's estimated remaining costs, for total estimated project costs of $217.0 million.

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.

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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

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Total estimated remaining costs total approximately $58.0 million, of which the Company estimates that its remaining investment in these development joint ventures will be approximately $29.6 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):

In addition, the Company had an interest in 10,257 apartment homes in operating communities with joint ventures and other investments for a total book value of $565.3 million.

Real Estate and Other Commitments

The following table summarizes the Company's unfunded real estate and other future commitments at December 31, 2021 ($ in thousands):

Number of Properties Investment Remaining Commitment

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Preferred equity investments 4 $ 128,000 $ 27,867

Real estate under development (1)

3 550,863 14,000

Mezzanine loans 2 140,000 52,734

Non-core co-investments — 37,000 16,020

Consolidated:

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$ 396,162 $ 99,621

$ 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.

(1) Excludes approximately $29.6 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.

At December 31, 2021, the Company had operating lease commitments of $167.4 million for ground, building and garage leases with maturity dates ranging from 2025 to 2083.

$7.0 million of this commitment is due within the next twelve months.

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.

In accordance with accounting standards for consolidation of variable interest entities ("VIEs"), the Company consolidates the Operating Partnership, 18 DownREIT entities (comprising nine communities) and six co-investments as of December 31, 2021.

As of December 31, 2020, the Company consolidated the Operating Partnership, 17 DownREIT entities (comprising nine communities), and five 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.

The consolidated total assets and liabilities related to the above consolidated co-investments and DownREIT entities, net of intercompany eliminations, were approximately $909.3 million and $320.1 million, respectively, as of December 31, 2021, and $898.5 million and $326.8 million, respectively, as of December 31, 2020.

Noncontrolling interests in these entities were $122.4 million and $120.8 million as of December 31, 2021 and 2020, respectively.

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As of December 31, 2021, 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

Critical Accounting 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);

The Company defines critical accounting estimates as those estimates that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the Company.

The Company’s critical accounting 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 during the

year ended December 31, 2020);

and (ii) evaluation of events and changes in circumstances indicating whether the Company’s rental properties may be impaired.

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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 allocation of the total consideration exchanged for a real estate acquisition between the identifiable assets and liabilities and the depreciation we recognize over the estimated useful life of the asset could be impacted by different assumptions and estimates used in the calculation.

The reasonable likelihood that the estimate could have a material impact on the financial condition of the Company is based on the total consideration exchanged for real estate during any given year.

The allocation of the value between land and building was a critical accounting estimate during the year ended December 31, 2020 as result of the potential material impact of the Company's acquisition of a land parcel and six communities for a total purchase price of $463.4 million.

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.

The judgments regarding the existence of impairment indicators are based on monitoring investment market conditions and performance 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.

Although each of these may result in an impairment indicator, the shortening of an expected holding period due to the potential sale of a property is the most likely impairment indicator.

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.

Changes in operating and market conditions may result in a change of our intent to hold the property through the end of its useful life and may impact the assumptions utilized to determine the future cash flows of the real estate investment.

The Company bases its accounting estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.

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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.

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.

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Gain on sale of marketable securities (3,400) (2,131) (1,271)

Unrealized (gains) losses on marketable securities (12,515) (5,710) 5,159

Unrealized gains on marketable securities (33,104) (12,515) (5,710)

Provision for credit losses 141 687 —

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Loss (gain) on early retirement of debt, net 19,010 22,883 (3,717)

Gain on early retirement of debt from unconsolidated co-investment (38) — (3,662)

Loss (gain) on early retirement of debt from unconsolidated co-investment 25 (38) —

Co-investment promote income — (6,455) (809)

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Core funds from operations attributable to common stockholders and unitholders per share - diluted $ 12.49 $ 12.82 $ 13.38

(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.

(1) Represents deferred tax expense related to net unrealized gains on technology co-investments.

(2) Represents the Company's share of co-investment income from technology co-investments.

(3) Assumes conversion of all outstanding OP Units into shares of the Company's common stock and excludes DownREIT units.

Net Operating Income

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General and administrative 51,838 65,388 54,262

Merger and integration expenses — — —

Expensed acquisition and investment related costs 203 1,591 168

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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.

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, as amended (the Securities Act") 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.

Such forward-looking statements include, among other things, statements regarding the Company's expectations related to the continued impact of the COVID-19 pandemic and related variants 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, 2022 Same-Property revenue and operating expenses generally and in specific regions, 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;

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 continued impact of the COVID-19 pandemic and related variants, 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, which 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;

uncertainty regarding ongoing hostility between Russia and the Ukraine and the related impact on macroeconomic conditions as a result of such conflict;

the Company may fail to achieve its business objectives;

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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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis