ESSEX PROPERTY TRUST, INC. (ESS) FY 2022 MD&A

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, 2022, 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, 2022, the Company owned or had ownership interests in 252 operating apartment communities, comprising 62,147 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 unconsolidated joint venture project.

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, 2022, the Company’s development pipeline was comprised of one unconsolidated joint venture project under development aggregating 264 apartment homes and various predevelopment projects, with total incurred costs of $102.0 million. The estimated remaining project costs are approximately $25.0 million, $12.8 million of which represents the Company's estimated remaining costs, for total estimated project costs of $127.0 million.

As of December 31, 2022, the Company also had an ownership interest in three operating commercial buildings (totaling approximately 283,000 square feet).

By region, the Company's operating results for 2022 and 2021 and projection for 2023 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 2023 job growth, and 2023 estimated Same-Property revenue growth are as follows:

Southern California Region:  As of December 31, 2022, this region represented 43% of the Company’s consolidated operating apartment homes. Revenues for "2022 Same-Properties" (as defined below), or "Same-Property revenues," increased 11.3% in 2022 as compared to 2021. In 2023, the Company projects new residential supply of 30,300 apartment homes and single family homes, which represents 0.5% of the total housing stock. The Company projects an increase of 2,000 jobs or 0.3% in the Southern California region.

Northern California Region:  As of December 31, 2022, this region represented 37% of the Company’s consolidated operating apartment homes. Same-Property revenues increased 8.4% in 2022 as compared to 2021. In 2023, the Company projects new residential supply of 12,750 apartment homes and single family homes, which represents 0.5% of the total housing stock. The Company projects an increase of 4,500 jobs or 0.7% in the Northern California region.

Seattle Metro Region: As of December 31, 2022, this region represented 20% of the Company’s consolidated operating apartment homes. Same-Property revenues increased 12.0% in 2022 as compared to 2021. In 2023, the Company projects new residential supply of 14,450 apartment homes and single family homes, which represents 1.1% of the total housing stock. The Company projects an increase of 3,000 jobs or 0.4% in the Seattle Metro region.

In total, the Company projects an increase in 2023 Same-Property revenues of between 3.25% to 4.75%. Same-Property operating expenses are projected to increase in 2023 by 4.50% to 5.50%.

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The Company’s consolidated operating communities are as follows:

Co-investments, developments under construction, and preferred equity interest co-investment communities are not included in the table presented above for both periods.

Market Considerations, including the COVID-19 Pandemic

Though diminishing, the COVID-19 pandemic and its related variants continue to impact the U.S. and world economies. In an effort to mitigate its impact on affected populations, federal, state and local jurisdictions implemented varying forms of requirements which may continue to negatively affect profitability. 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 impair the ability to collect unpaid rent during certain timeframes continue to be in effect in various formats at various regions in which our communities are located, impacting the Company and its properties. The Company continues to work to comply with the stated intent of local, county, state and federal laws.

While COVID-19’s impact begins to dissipate, geopolitical tensions between Russian and Ukraine increased uncertainty during

2022. Inflation has caused an increase in consumer prices, thereby reducing purchasing power and elevating the risks of a

recession. Due to increased inflation, the U.S. Federal Reserve raised the federal funds rate a total of seven times during 2022. In response, market interest rates have increased significantly during this time. At the same time, the labor market remains historically tight and companies continue to look to add employees, pushing unemployment lower.

The long-term impact of these developments will largely depend on new information which may emerge concerning the

COVID-19 pandemic, future laws that may be enacted, geopolitical tensions, inflation, 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, 2022 and 2021) have generally remained higher than the pre-pandemic period due to on-going eviction moratoria related to the COVID-19 pandemic, and above the typical historical range of 0.3% to 0.4% since the second quarter of 2020. Cash delinquencies remained elevated at 1.9% for 2021 but decreased to 1.2% in 2022, attributable to government payments for Emergency Rental Assistance which was mostly depleted by December 31, 2022. The Company continues to work with residents to collect such cash delinquencies. As of December 31, 2022, the delinquencies have not had a material adverse impact to the Company's liquidity position. The Company's average financial occupancy for the Company's Same-Property portfolio decreased slightly from 96.4% for the year ended December 31, 2021 to 96.1% for the year ended December 31, 2022.

The COVID-19 pandemic and the resulting macroeconomic conditions have 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, 2022 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, 2022 to the Year Ended December 31, 2021

The Company’s average financial occupancy for the Company’s stabilized apartment communities or "2022 Same-Property" (stabilized properties consolidated by the Company for the years ended December 31, 2022 and 2021) decreased 30

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basis points to 96.1% in 2022 from 96.4% in 2021. 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 2022 Same-Property portfolio for financial occupancy for the years ended December 31, 2022 and 2021 is as follows:

The following table provides a breakdown of revenue amounts, including the revenues attributable to 2022 Same-Properties.

2022 Same-Property Revenues increased by $138.3 million or 10.3% to $1.5 billion for 2022 compared to $1.3 billion in 2021. The increase was primarily attributable to an increase of 7.2% in average rental rates from $2,320 for 2021 to $2,486 for 2022 and 2.3% of the increase was attributable to a decrease in cash concessions in 2022 compared to 2021.

2022 Non-Same Property Revenues increased by $26.0 million or 30.6% to $110.7 million in 2022 compared to $84.7 million in 2021. The increase was primarily due to the acquisitions of The Village at Toluca Lake and Canvas in 2021, the acquisitions of Regency Palm Court and Windsor Court in 2022, and an increase in average rental rates.

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Management and other fees from affiliates increased by $2.0 million or 22.0% to $11.1 million in 2022 from $9.1 million in 2021. The increase was primarily due to the addition of Martha Lake Apartments, Monterra in Mill Creek, The Rexford, and Silver communities to the Company's joint venture portfolio in 2021 and Vela in 2022, partially offset by the Company's purchases of BEX III, LLC's 50.0% interest in The Village at Toluca Lake in 2021, and its joint venture partner's 49.8% interest in Essex JV LLC co-investment that owned Regency Palm Court and Windsor Court, in 2022.

Property operating expenses, excluding real estate taxes increased by $18.5 million or 7.0% to $283.4 million in 2022 compared to $264.9 million in 2021, primarily due to increases of $9.2 million in utilities expenses, $7.4 million in maintenance and repairs expenses, and $1.9 million in administrative expenses. 2022 Same-Property operating expenses, excluding real estate taxes, increased by $15.5 million or 6.1% to $268.6 million in 2022 compared to $253.1 million in 2021, primarily due to increases of $8.0 million in utilities expenses, $6.2 million in maintenance and repairs expenses, $0.8 million in insurance and other expenses, and $0.5 million in administrative expenses.

Real estate taxes increased by $3.5 million or 1.9% to $183.9 million in 2022 compared to $180.4 million in 2021, primarily due to real estate taxes from the completion of development properties Wallace on Sunset in 2021 and Station Park Green (Phase IV) in 2022, as well as the acquisitions of The Village at Toluca Lake, Canvas, and 7 S Linden Commercial properties during 2021. 2022 Same-Property real estate taxes increased by $0.3 million or 0.2% to $164.0 million in 2022 compared to $163.7 million in 2021 primarily due to increased valuations and tax rates.

Corporate-level property management expenses increased by $4.5 million or 12.4% to $40.7 million in 2022 compared to $36.2 million in 2021 due to costs pertaining to the centralization of certain property level functions.

Depreciation and amortization expense increased by $19.2 million or 3.7% to $539.3 million in 2022 compared to $520.1 million in 2021, primarily due to an increase in depreciation expense from the completion of development properties Mylo and Wallace on Sunset in 2021, Station Park Green (Phase IV) in 2022, as well as the acquisitions of The Village at Toluca Lake and Canvas in 2021, and Regency Palm Court and Windsor Court in 2022.

Gain on sale of real estate and land of $94.4 million in 2022 was attributable to the sale of Anavia in the fourth quarter of 2022. The Company's $143.0 million gain on sale of real estate and land in 2021 was attributable to the sale of Hidden Valley, Axis 2300, Park 20, and Devonshire Apartments during 2021.

Interest expense increased by $1.7 million or 0.8% to $204.8 million in 2022 compared to $203.1 million in 2021, primarily due to the issuance of new senior unsecured notes in 2021 which resulted in an increase in interest expense of $4.8 million and increased borrowing on the Company's unsecured lines of credit, and higher average interest rates, which resulted in an increase in interest expense of $3.0 million. Additionally, there was a $3.9 million decrease in capitalized interest in 2022, due to a decrease in development activity as compared to the same period in 2021. These increases in interest expense were partially offset by various debts that were paid off, matured, or regular principal payments during and after 2021 which resulted in a decrease in interest expense of $10.0 million for 2022.

Total return swap income of $7.9 million in 2022 consists of monthly settlements related to the Company's four total return swap contracts with an aggregate notional amount of $223.6 million.

Interest and other (loss) income decreased by $117.7 million or 119.3% to a loss of $19.0 million in 2022 compared to an income of $98.7 million in 2021, primarily due to unrealized losses resulting from a decrease in the fair value of marketable securities.

Equity income from co-investments decreased by $85.7 million or 76.7% to $26.0 million in 2022 compared to $111.7 million in 2021, primarily due to decreases of $93.6 million in equity income from non-core co-investments, $5.3 million in income from preferred equity investments including income from early redemptions, and a $2.1 million impairment loss from an unconsolidated co-investment. These decreases were offset by $17.1 million in co-investment promote income during 2022 and an increase of $1.0 million in loss on early retirement of debt from unconsolidated co-investments.

Deferred tax benefit on unconsolidated co-investments of $10.2 million in 2022 is primarily due to net unrealized losses from non-core unconsolidated co-investments.

Gain on remeasurement of co-investment of $17.4 million in 2022 resulted from the Company's purchase of its joint venture partner's 49.8% membership interest in Essex JV, LLC co-investment that owned Regency Palm Court and Windsor Court. Gain on remeasurement 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.

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

For the comparison of the years ended December 31, 2021 and December 31, 2020, 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, 2021, filed with the SEC on February 25, 2022 under the subheading "Comparison of Year Ended December 31, 2021 to the Year Ended December 31, 2020."

Liquidity and Capital Resources

The following table sets forth the Company’s cash flows for 2022, 2021 and 2020 ($ in thousands):

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. Essex’s sole source of funding for its dividend payments is distributions it receives from the Operating Partnership.

As of December 31, 2022, 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, 2022, the Company had $33.3 million of unrestricted cash and cash equivalents and $112.7 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 2023. 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 economic disruptions occur, 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, 2022, 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.

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As of December 31, 2022, the Company’s mortgage notes payable totaled $593.9 million, net of unamortized premiums and debt issuance costs, which consisted of $371.8 million in fixed rate debt at an average interest rate of 3.6% and maturity dates ranging from 2025 to 2028 and $222.1 million of tax-exempt variable rate demand notes with a weighted average interest rate of 3.5%. The tax-exempt variable rate demand notes have maturity dates ranging from 2027 to 2046. $223.6 million is subject to total return swaps.

As of December 31, 2022, 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, 2022, there was $40.0 million outstanding on the $1.2 billion unsecured line of credit. The underlying interest rate is based on a tiered rate structure tied to the Company's credit ratings, adjusted for the Company's sustainability metric grid, and was at Adjusted SOFR plus 0.75% as of December 31, 2022. This facility is scheduled to mature in January 2027, with two six-month extensions, exercisable at the Company's option. As of December 31, 2022, there was $12.1 million outstanding on the Company's $35.0 million working capital unsecured line of credit. The underlying interest rate is based on a tiered rate structure tied to the Company's credit ratings, adjusted for the Company's sustainability metric grid, and was at Adjusted SOFR plus 0.75% as of December 31, 2022. This facility is scheduled to mature in July 2024.

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, 2022 and 2021.

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 four total return swap contracts, with an aggregate notional amount of $223.6 million, that effectively converts $223.6 million of fixed 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. The Company can currently call all four of the total return swaps, with $223.6 million of the outstanding debt at par. These derivatives do not qualify for hedge accounting.

As of December 31, 2022 and 2021, the aggregate carrying value of the interest rate swap contracts were an asset of $5.6 million and zero, respectively. As of December 31, 2022 and 2021, the swap contracts were presented in the consolidated balance sheets as an asset of $5.6 million and zero, respectively, and were included in prepaid expenses and other assets on the consolidated balance sheets. The aggregate carrying and fair value of the total return swaps was zero at both December 31, 2022 and 2021.

Hedge ineffectiveness related to cash flow hedges, which is reported in current year income as interest expense, net was zero for the years ended December 31, 2022, 2021, and 2020.

Issuance of Common Stock

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

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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 replaced 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, 2022, the Company did not sell any shares of its common stock through the 2021 ATM Program. As of December 31, 2022, there were no outstanding forward purchase agreements, and $900.0 million of shares of common stock remain available to be sold under the 2021 ATM Program. For the years ended December 31, 2021 and 2020, the Company did not issue any shares of its common stock through the 2021 ATM Program or through 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, 2022, non-revenue generating capital expenditures totaled approximately $2,670 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, 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, 2022, the Company's development pipeline was comprised of one unconsolidated joint venture project under development aggregating 264 apartment homes and various predevelopment projects, with total incurred costs of $102.0 million. Estimated remaining project costs are approximately $25.0 million, $12.8 million of which represents the Company's estimated remaining costs, for total estimated project costs of $127.0 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. 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.

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, 2022, the Company had an interest in 264 apartment homes in communities actively under development with joint ventures for total estimated costs of $102.0 million. Total estimated remaining costs total approximately $25.0 million, of which the Company estimates that its remaining investment in these development joint ventures will be approximately $12.8 million. In addition, the Company had an interest in 10,425 apartment homes in operating communities with joint ventures and other investments for a total book value of $491.8 million.

Real Estate and Other Commitments

The following table summarizes the Company's unfunded real estate and other future commitments at December 31, 2022 ($ in thousands):

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(1) Excludes approximately $12.8 million of the Company's share of estimated project costs for LIVIA (fka Scripps Mesa Apartments) which have been fully funded.

At December 31, 2022, the Company had operating lease commitments of $162.1 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 consolidated the Operating Partnership, 18 DownREIT entities (comprising nine communities) and six co-investments as of December 31, 2022 and 2021. 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 $939.4 million and $324.3 million, respectively, as of December 31, 2022, and $909.3 million and $320.1 million, respectively, as of December 31, 2021. Noncontrolling interests in these entities were $121.5 million and $122.4 million as of December 31, 2022 and 2021, respectively. The Company's financial risk in each VIE is limited to its equity investment in the VIE. As of December 31, 2022, the Company did not have any other VIEs of which it was deemed to be the primary beneficiary.

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 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. 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 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

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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 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. 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. Actual results may vary from those estimates and those estimates could be different under different assumptions or conditions.

Funds from Operations Attributable to Common Stockholders and Unitholders

Funds from Operations Attributable to Common Stockholders and Unitholders ("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

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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, 2022, 2021, and 2020.

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(1)The Company consolidates certain co-investments. The noncontrolling interest's share of net operating income in these investments for the twelve months ended December 31, 2022 was $3.3 million.

(2)Represents deferred tax (benefit) expense related to net unrealized gains or losses on technology co-investments.

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

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

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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):

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, 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 evolution of the work-from-home trend in light of the COVID-19 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, inflation, the labor market, supply chain impacts and ongoing hostilities between Russia and Ukraine, 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

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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: potential future outbreaks of infectious diseases or other health concerns, which could 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; uncertainties regarding ongoing hostilities between Russia and Ukraine and the related impacts on macroeconomic conditions, including, among other things, interest rates and inflation; 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. 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.