Equity Office Offers
2005 Rent Forecast

Equity Office Properties Trust (EOP) President and Chief Executive Richard Kincaid said rent declines will likely get worse before they get better, with rent declines on lease expirations hitting bottom in 2005.

During a conference call Tuesday, Kincaid said he expects rents to fall 15% to 20% on expiring leases in 2005, which is a bigger decline than the 12.6% rent rolldown the company experienced in the third quarter.

"Next year will be the peak year as far as we expect for this cycle in terms of rent rolldown," he said.

Kincaid said tenant improvement and leasing commission costs remained high in 2004. These costs averaged $22.66 a foot in the third quarter, which is down slightly from $22.85 a year ago. He expects these costs to fall even more - to between $18 and $20 a foot - in 2005.

Still, Kincaid said he's "seeing some very significant signs of improvement" in the office markets and the economy in general. Industry-wide, he said, vacancies have declined for four consecutive quarters in the company's top 20 markets, and some of the company's largest tenants have indicated they're hiring again. Also, GDP growth is forecast at 2.5% to 4%, he noted. All of this is "encouraging," he said.

Kincaid said the vacancy rates seem to have peaked in 17 of his company's top 20 markets. (Chicago and Boston are the key markets that have yet to peak.)

Although there are signs of a recovery, Kincaid said it has not yet translated into more leasing activity and higher rents. He said the average vacancy rate is 15.7%, and "our experience would suggest you'd have to be at 14% or under" before the office market sees a significant rebound.

"It is improving at a macro level. It just takes time," he said.

Kincaid's comments came during a conference call discussing the company's third quarter results.

The Chicago real estate investment trust, which is the largest owner of office properties in the country, reported revenue of $790.7 million in the third quarter, up from $778.1 million a year ago. It posted a loss of $120.3 million, or 32 cents a share, compared with net income of $110.2 million, or 28 cents a share, a year earlier.

The loss in the latest quarter was largely due to a one-time, non-cash impairment charge of $229.2 million, or 51 cents a share, related to the writedown of research and development properties the company is selling in California. An impairment charge occurs when the valuation at which properties are held in a portfolio exceeds the amount the company expects to fetch when it sells them. In this case, the value of the properties had declined significantly since Equity Office purchased them from Spieker Properties in July 2001.

The company's funds from operations totaled 11 cents a share in the latest quarter, which is down from 70 cents a year ago, and short of analysts' mean estimate of 13 cents a share, according to Thomson First Call.

The shortfall was related to falling rents and lower-than-expected operating income in the quarter.

Equity Office continues to sell non-core properties. It sold 29 industrial properties for $210.3 million in the third quarter, and has sold three more for $15.1 million since the end of the quarter.

"It is clearly still a seller's market, and we plan to take advantage of it as much as possible" said Kincaid. However, when it comes to acquisitions, "we're going to continue to be disciplined," he said.

Kincaid said he doesn't see this scenario changing anytime soon. "Interest rates would need to increase significantly" to cool off the massive amount of capital that is currently chasing deals and bidding up property prices, he said.

Equity Office has been acquiring properties that are only 70% to 75% leased so that the company can lease them up and enjoy the upside.

Kincaid affirmed the company's guidance for 2004 and 2005. However, he said these projections don't include the impact from acquisitions and sales.

Equity Office's shares fell 56 cents, or 1.9%, to close at $28.39. Volume of 3.7 million shares compared with average daily volume of 1.3 million.

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