Research Associate: Tanuka De, M.Comm, MBA

January 12, 2007

Research Associate: Tanuka De, M.Comm, MBA

Editor: Christopher R. Jones, CFA

Sr. Editor: Ian Madsen, CFA 800-767-3771 x417

Canal Street, Suite 1101Chicago, IL 60606

Equity Office Properties Trust (EOP - NYSE) $49.45

Note: All new or revised materialsince the last material ishighlighted.

Reason for Report:Completion of $1.9B Investment Activity in 4Q06 (Prev: 3Q06 Results and Takeover Announced,Nov 29)

Overview

Chicago, Illinois-based Equity Office Properties Trust (EOP) is a real estate investment trust (REIT) that owns, manages, leases, acquires, and develops office properties. The company is among the largest publicly held property owners and managers of office properties in the U.S, and is intimately linked with its Chairman, real estate tycoon Sam Zell. Equity Office owns substantially all of its assets and conducts most of its operations through EOP Operating Limited Partnership. The company owns or has an interest in 596 office properties comprising approximately 110.1 M square feet of rentable office space in 16 states and in theDistrict of Columbia. EOP has ownership presence in 23 Metropolitan Statistical Areas (MSAs) and in 104 submarkets, enabling it to provide a wide range of office solutions for local, regional, and national customers. The current dividend rate is $1.32 per share. Its website is

On October31, 2006, EOP announced 3Q06 FFO of ($0.01). The Street estimate for the quarter was $0.51. Management reduced the guidance from $2.07–$2.22 to $1.59–$1.74to reflect 3Q06 impairment charges. The management issued FY 2007 guidance of $2.25–$2.40.

Key Positive Arguments / Key Negative Arguments

Lease termination fees:Higher lease termination fee is positively impacting the stock.

Asset disposition:Well-timed asset disposition strategy given a very low-cap rate market.

Dividend:Prospects of better dividend coverage.

G&A expense: Increase in G&A expense.

FFO growth:Muted outlook for FFO growth in 2006 and beyond.

Note: EOP’s Fiscal Year ends on December 31.

Recent Events

On January 5, 2006, the company announced the completion of $1.9 billion of investment activity in 4Q06, including dispositions of $1.4 billion and acquisitions of $479.6 million. The quarterly activity brings the company's full-year investment activity total to $3.6 billion, including $2.2 billion in dispositions, and $1.4 billion in acquisitions.

On December 26, 2006, the company announcedthat its subsidiary, EOP Operating Limited Partnership, has commenced cash tender offers in respect of an aggregate of approximately $8.4 billion of its outstanding unsecured debt securities (’Notes’). The Notes comprise the fixed rate notes and debentures (the ‘Fixed Rate Notes’), the Floating Rate Notes due 2010, the Floating Rate Notes due 2014 and the Internotes.

On December 6, 2006, the company’s Board declared a fourth quarter cash dividend in the amount of $0.33 per common share. The dividend was paid on, December 29, 2006, to common shareholders of record ofDecember 15, 2006.

On November 20, 2006, the company announced to be acquired by a private-equity firm Blackstone Group for $36 B (including debts). The deal is expected to be completed in 1Q07. Blackstone offered $48.50 per share – an 8.5 % premium to the stock price.

On November 15, 2006, the company announced that the Board of Trustees declared the 4Q06 dividend for 7.75% Series G Cumulative Redeemable Preferred Share of $0.484375 payable on, December 15, 2006, to shareholders of record on December 1, 2006.

On October 31, the company announced third quarter results with FFO loss of $0.01 compared to a FFO profit of $0.50 in a year-ago quarter.

On October 10, 2006, the company along with Northern Power, a subsidiary of Distributed Energy Systems Corp. and the New York State Energy Research and Development Authority announced the completion of a new $4.1 million, 1.6-megawatt combined heat and power (CHP) system at 717 Fifth Avenue in Midtown Manhattan.

On October 9, 2006, the company filed a resale registration statement on Form S-3 to resell up to $1.5 billion of its exchangeable senior notes and 41.4 million common shares that may be issued upon exchange of the notes.

On October 5, 2006, the company announced two acquisitions in Southern Florida – a 50% interest inWachoviaFinancialCenter for $194 million, and a 50% interest of 1221 Brickell Avenue for approximately $55.8 million.

Revenues

Total Revenue( in M) / 2005A / 1Q06A / 2Q06A / 3Q06A / 4Q06E / 2006E / 2007E / 2008E
Average / $3,108 / $854 / $840 / $860 / $853↑ / $3,407↑ / $3,387↑ / $3,490↑
Digest High / $3,108 / $855 / $840 / $861 / $868 / $3,423 / $3,495 / $3,587
Digest Low / $3,108 / $854 / $840 / $860 / $803 / $3,357 / $3,210 / $3,354
YoY Growth Rate / -2.8% / 3.4% / 11.0% / 16.5% / 8.5% / 9.6% / -0.6% / 3.0%
Sequential Growth / 8.6% / -1.6% / 2.4% / -0.8%

Revenue in 3Q06 stood at $860M, 16.5% higher than $739M posted in 3Q05. The upside came from an increase in property revenue (up 17.1% y-o-y to $859M). On a quarterly sequential basis, revenue in 3Q06 was 2.4% higher than $840M posted in 2Q06.

During 3Q06, same-store revenue increased 4.3% compared to a year ago quarter because of occupancy gains, higher tenant reimbursement and market rent growth. During 3Q06, the company had same-store occupancy of 91.9%, up from 89.7% posted in a year-ago quarter and 90.7% posted in 2Q06. Effective office portfolio occupancy was 91.1%, an increase of 180 bps from 89.3% posted in a year-ago quarter and increase of 40 bps sequentially. Lease termination fees were $2.9 M, flat quarter over quarter. During 3Q06, tenant improvements and leasing costs per square feet increased sequentially to $4.44 from $4.22.

Analysts expect revenuesof $3,407M, $3,387M, and $3,490M for 2006, 2007, and 2008, indicating y-o-y growth rates of 9.6%, (0.6%), and 3.0%, respectively.

Please refer to the Zacks Research Digest spreadsheet for specific revenue estimates.

Margins

Margins / 2005A / 1Q06A / 2Q06A / 3Q06A / 4Q06E / 2006E / 2007E / 2008E
EBITDA / 58.7% / 57.3% / 57.8% / 53.6% / 55.1% / 56.0% / 54.4% / 58.6%
Net / 0.3% / 5.3% / 10.5% / -16.2% / 5.3% / 0.8% / 5.1% / 4.8%

During 3Q06, G&A increased 33.0% to $57.2 M from $43.0 M posted in 3Q05 and increased 105.1% from $27.9 M posted in 2Q06. DD&A expense increased 24.3% to $226.7 M from $182.4 M posted in 3Q05 but decreased 1.1% from $229.2 M posted in 2Q06. Interest expense for 3Q06 was $233.0 M, an increase of 19.0% from $195.8 M posted in a year-ago quarter and increased 3.8% sequentially from $224.4 M.

Same-store net operating income during 3Q06 decreased 0.2% compared to a year-ago quarter. Same-store net operating income excludes income from early lease termination fees and effects of Hurricane Katrina. The company expects same-store NOI to grow in the range of 1%–2%.

EBITDA for 3Q06 was $464.2 M, 8.4% higher than $428.3 M posted in 3Q05 but 4.4% lower than $485.6 m posted in 2Q06. The EBITDA margin was 54.0% in 3Q06, lower than 58.0% posted in a year-ago quarter and 57.4% posted in 2Q06. Analysts are forecasting EBITDA margins of 56.0%, 54.4%, and 58.6% for 2006, 2007, and 2008, respectively.

During 3Q06 the company had a net loss of $139.4 M compared to a net profit of $93.7 posted in 3Q05 and a net profit of $87.9 M posted in 2Q06. The net loss was due to non cash impairment charge of $188.9 M and severance charge of $22 M taken in advance. The net margin for 3Q06 came in at (16.2%), lower than 12.7% posted in a year-ago quarter and 10.5% posted in last quarter. The analysts expect the net marginsof0.8%, 5.1%, and 4.8% for 2006, 2007, and 2008, respectively.

Please refer to the Zacks Research Digest spreadsheet for more details on margin estimates.

FFO per Share

FFO per Share / 2005A / 1Q06A / 2Q06A / 3Q06A / 4Q06E / 2006E / 2007E / 2008E
Digest Average / $1.35 / $0.55 / $0.55 / ($0.01) / $0.54 ↓ / $1.76↑ / $2.33↓ / $2.54↓
Digest High / $1.35 / $0.55 / $0.55 / ($0.01) / $0.60 / $2.18 / $2.40 / $2.63
Digest Low / $1.35 / $0.55 / $0.55 / ($0.01) / $0.50 / $1.60 / $2.27 / $2.42
YoY Growth Rate / -34.8% / -16.7% / -102.0% / 32.6% / 30.6% / 32.4% / 9.0%
Zacks Consensus / $0.55 / $1.64 / $2.32

FFO in 3Q06 stood at ($0.01), 102.0% lower than $0.50 posted in 3Q05. FFO for 3Q06 includes asset impairment charge and severance charge of $0.54 per share. Sequentially FFO for 3Q06 was 101.8% lower than $0.55. The Street estimate for the quarter was $0.51. Management reduced the guidance from $2.07–$2.22 to $1.59–$1.74 to reflect 3Q06 impairment charges. The management issued FY 2007 guidance of $2.25-$2.40.

One analyst (RBC Cap.) reduced the estimate for 2006 from $2.15 to $1.65 and for 2007, from $2.47 to $2.36 to reflect near-term dilution due to increased value add acquisition assumptions, slower recovery in leasing trends and lower-than-expected lease termination fees. One other analyst (B. of America) reduced the estimate for 2006 from $2.19 to $2.18 but raised the estimate for 2007 from $2.32 to $2.39 to reflect better-than-expected pricing of sales and stronger-than-expected core NOI growth from market rent growth. Another analyst (Merrill) reduced the estimate for 2006 from $2.37 to $2.33.

Recently one analyst (Lehman) initiated estimates for 2008 at $2.50.

Analysts expect FFO of $1.76, $2.33, and $2.54 for 2006, 2007, and 2008, indicating y-o-y growth of 30.6%, 32.4%, and 9.0%, respectively.

Please refer to the Zacks Research Digest spreadsheet for more extensive FFO figures.

Target Price/Valuation

Of the 15 analysts included in this report, 2 have given a positive rating, 12provided neutral ratings, and 1came up with negative ratings. Target prices range from $42.00 (12.9% downside from current price) to $53.00(10.0% upside from current price). The average price target is $46.83 (↑ from previous target price; 2.8% downside from current price). Analysts applied a multiple to FFO estimates for 2007 and NAV analysis to have target price. Following 3Q results, four analysts (B. of America, Lehman, Merrill, and RBC Cap.) raised the price target. One analyst (Raymond James) downgraded the rating.Recently two analysts (Citigroup; UnionBankSwitz.) haveraised the target price. One analyst (UnionBankSwitz.) has upgraded the valuation.

The rating distribution is as follows:

Rating Distribution
Positive / 13.3%
Neutral / 80.0%
Negative / 6.7%
Avg. Target Price / $46.83↑
Target price range / $42.00-$53.00
Number Targets/ Analysts / 9/15

Risks to the price targets include increase in interest rates, investor preference for alternative investments, cyclical nature of real estate, outsourcing of jobs, and lower demand for office space.

Please refer to the Zacks Research Digest Spreadsheet for further details on valuation.

Potentially Severe Problems

There are none other than those discussed in other sections of the report.

Capital Structure/Solvency/Cash Flow/Governance/Other

During 3Q06, the company acquired 1.6 M square feet of property for $768.9 M including the acquisition of 1540 Broadway in New York for $525.1 M. Year to date the company acquired 2.9 M square feet of assets for $1.1 B including the acquisitions in Miami, Florida.

During 3Q06, the company sold 2.5 M square feet of property for $435.0 M. Year to date the company completed sale of 5.7 M square feet of property for $966.4 M making a gain of $177.1 M.

During 3Q06, the company leased 3.7 M square feet compared to 5.3 M square feet during 3Q05.

The company’s development pipeline has six projects of 2.2 M square feet with a total investment of $1.3 B including redevelopment of Verizon building having 1.0 M square feet of area and an estimated cost of $914 M. The company leased 23% of the property during 3Q06. The company expects to invest approximately $200–$300 M every year on new developments maintaining an active pipeline of approximately $700 M-1 B at any given time.

At 3Q06 end, the company had 390.4 M diluted shares and OP units outstanding. Including $512.0 M of preferred stock, the company’s equity market capitalization was $17.1 B. Including company’s portion of unconsolidated debt and excluding third party portion of consolidated debt, total debt outstanding was $15.3 B. Interest coverage ratio was 2.1x and fixed charge coverage was 2.0x at quarter end. On October 16, 2006, the company paid third quarter dividend of $0.33 per share to the shareholders of record on September29, 2006, implying an annual dividend of $1.32.

During 3Q06, the company replaced $1.25 B credit facility with a four year $2.5 B facility. The borrowings from the new facility were used to repay $1.6 B of bridge loan with an outstanding balance of $1.9 M having $600 M of capacity.

Long-Term Growth

Long-term growth rates for EOP range from 2.0% to 16% with an average of 4.1%.

One analyst (Citigroup) believes that Equity Office owns a highly diversified office portfolio, which should, in the long run, provide a stable earnings stream. While Equity Office’s portfolio does have a meaningful concentration in high-barrier-to-entry markets, in the near-term, the analyst believes the company’s exposure to the weak Atlanta, Chicago, Northern California, andBoston office markets will prove to be a challenge. In addition, dilution from nearly $3 billion of asset sales in 2005 and planned increased capital spending aimed at improving occupancy will likely further pressure earnings and dividend coverage. Negative sentiment surrounding the recent 34% dividend cut could also weigh on the shares.

Another analyst (AG Edwards) believes that the company’s portfolio is close to bottoming, and barring a relapse in economic growth, the steady progress over the past several quarters will continue.

Upcoming Events

February 8, 2007:Expected 4Q06 and FY 2006 Earnings Release

Individual Analyst Opinions

POSITIVE RATINGS

Merrill – Buy ($45) – (10/31/06): The analyst raised the price target from $44to $45 and maintained Buy rating. INVESTMENT SUMMARY: the analyst believes the company’s portfolio is not valued properly by the public markets because of variances between public and private pricing.

MorganStanley – Overweight ($44) – (11/19/06):The analyst maintained the Overweight rating and price target of $44.

NEUTRAL RATINGS

Barclays Capital– Market weight – (10/31/06): The analyst initiated coverage with a Market weight rating.

Zacks Investment Research– Hold ($48.50) – (12/15/06):The analyst gave a six month target price of $48.50 and maintained a Hold rating.

AG Edwards – Hold – (11/20/06):The analyst maintained the Hold rating. INVESTMENT SUMMARY: The analyst believes the company’s selling properties into strong markets is a right business strategy and the shares reflect current office recovery and benefits the company will have from planned asset sales.

B. of America – Neutral ($42) – (12/08/06):The analyst maintained the Neutral rating and price target of $42. INVESTMENT SUMMARY: The analyst expects with the saleof asset in Atlanta, Denver, andChicago andbenefiting from an improved portfolio and office leasing in its core markets, the company will have one of the stronger portfolios in the office REIT.

Bear Stearns – Peer perform– (12/29/06):The analyst maintained the Peer perform rating.

Citigroup – Hold ($48.50) – (12/14/06): The analyst maintained the Hold rating and raised the price target from $44 to $48.50. INVESTMENT SUMMARY: The analyst believes the company will have a steady earnings growth given the company’s diversified portfolio.

Deutsche Bank – Buy ($48.50) – (11/21/06): The analyst maintained the Buy rating price target of $48.50.

J.P. Morgan – Neutral – (11/20/06): The analyst maintained the Neutral rating.

Lehman – Equal weight ($48) – (12/14/06):The analyst maintained the price target of $48 and an Equal weight rating.

RBC Cap. – Sector perform ($44) – (11/16/06): The analyst maintained Sector perform rating and raised the price target from $38 to $44.

Stifel Nicolaus – Hold – (01/05/07):The analyst maintained the Hold rating.

UnionBankSwitz. – Neutral 1 ($53) –(11/22/06):The analyst upgraded the valuation from Reduce 1 to Neutral 1 and raised the price target from $39 to $53.

NEGATIVE RATINGS

Raymond James – Under perform – (11/20/06): The analyst downgraded the rating from Market perform to Under perform.

SUSPENDED COVERAGE

Goldman–(11/20/06): Suspended coverage due to the analyst acting in an advisory capacity in the merger.

Copy Editor: Salma Islam

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