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Equity Office Properties Trust (EOP) Real Estate: REITs

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December 10, 2003 Stock rating: In-Line
Coverage view: Cautious Price: US$28.03

Preview

Asset re-positioning how to play it. EOP completes a major asset sale in the very near future. We see no FFO dilution or valuation implications, but EOP can buy time for the dividend. We are keeping the 7% yield in our Income Portfolio, but do not expect growth returns. The stock has lagged, rent it for now.

We write this to get in front of a major asset sale and offer a 2004 outlook Equity Office Properties has made clear its intent to complete a large sale, potentially into a JV structure before year-end. We sensitized our model and see no earnings dilution. Management comments on 2004 in December; market outlook and sensitivity test are inside. You can buy EOP for the 7% dividend yield, but we do not see growth Our conclusion is the dividend yield of 7% remains attractive and is unlikely to be cut even as the company shrinks through asset sales; JV management fees and accretive capital redeployment buy EOP time. EOP is in the Goldman Sachs Income Portfolio. Three observations from our market review: consider with 2004 guidance (1) Top market Boston will be a focus with a flurry of corporate mergers hitting real estate demand, but EOP is relatively well positioned with high occupancy and light lease rollover; (2) San Jose is showing some early positive signs; (3) EOP, like virtually all office REITs has a major 2005 roll issue given how many leases expire; a recovery before then is essential. Still see risk to the dividend, as coverage is tight, but not a liquidity issue EOPs dividend coverage will be stretched above 100%, but the company can effectively buy itself almost a year of dividend coverage with a large asset sale transaction. Stock likely to rise on announcement, but no real change to value We expect EOP shares to react positively initially to any announcement, but to give back those gains as investors realize: there isnt an earnings impact; the multiple shouldnt change meaningfully (we expect a modest downward movement) and NAV is largely unchanged.
Stock data
52-week range Yield S&P 500 $29.10-$23.47 7.2% 1,062
28 27

Carey Callaghan

carey.callaghan@gs.com New York: 1-212-902-4351


Nora Creedon

nora.creedon@gs.com New York: 1-212-902-6751

Price performance
Absolute Rel to S&P 500

1M 0% -1%

3M 0% -4%

12M 7% -10%

Price performance chart


Absolute Price Performance (Left Axis) Relative to Index (Right Axis) 29 0.06 0.04 0.02 0.00 -0.02

Capitalization
Market cap Latest net debt/(cash) Free float Derivatives Shares outstanding $11,805 mn $11,985 mn C 425.1 mn

Forecasts/valuation
FFO P/FFO ROE EV/EBITDA Long-term EPS growth 2%

12/2003E 12/2004E $2.76 10.1 $2.82 9.8

26

-0.04 -0.06 -0.08

25

24

-0.10 -0.12 J F M A M J J A S O N D

Goldman Sachs Global Equity Research

FOR REG AC CERTIFICATION, SEE PAGE 32. FOR OTHER IMPORTANT DISCLOSURES, SEE PAGE 35, GO TO http://www.gs.com/research/hedge.html, OR CONTACT YOUR INVESTMENT REPRESENTATIVE.

Equity Office Properties Trust

Real Estate: REITs

Table of contents
1 Overview: Asset re-positioning how to play it 3 Overview of a potential transaction and implications 7 Source of upcoming funds: whats in the works? 10 How to think about uses 11 A strategic review of EOPs major markets 18 Devils advocate view: could the dividend still be cut? 21 Financials: more leverage to a recovery, but not much growth 25 Valuation: shares seem reasonably priced 32 Company strategy/profile: the giant 35 Disclosures

The prices in this report are based on the market close of December 9, 2003.

Goldman Sachs Global Equity Research - December 10, 2003

Real Estate: REITs

Equity Office Properties Trust

Overview: Asset re-positioning -- how to play it


Exhibit 1: Forecasts and valuation
EBITDA ($ mn) 2,014 2,315 2,094 2,113 Pretax profit ($ mn) 746 838 575 546 FFO ($) 3.20 3.21 2.76 2.82 EPS ($) 1.64 1.61 1.12 1.09 P/FFO (X) 8.7 8.6 10.0 9.8

Year to Revenues December ($ mn) 2001 2,829 2002 3,221 2003E 3,059 2004E 3,073

Source: Company data, Goldman Sachs Research estimates.

Purpose of this report and principal conclusions


This report previews a major asset sale transaction that we believe Equity Office Properties Trust (EOP) hopes to complete before year-end. EOP has traditionally not been a major user of joint venture (JV) structures, and has only one other, relatively small, multi-asset JV in place. The companys $25 billion asset base accordingly holds the possibility of substantial leveraging of returns through such structures. While returns go up, such transactions are usually dilutive to overall income. For EOP however, with $400 million of 7.4% debt having come due in November and an additional $400 million of 6.7% debt coming due in January, the spread implications are relatively modest, assuming asset sales (into the JV) with a yield of about 8%. We believe incremental fees from managing the JV assets will come close to bridging the difference. We therefore expect no material change to FFO from the transaction. EOP management has yet to issue 2004 guidance but will likely do so at the same time as the announcement of any JV in coming days.
But a $1 billion deal would raise valuation questions. EOP is most likely to sell

interests in about a dozen trophystyle properties; without these, the picture of EOPs asset quality, occupancy opportunity and tenant quality is different. While shedding high occupancy properties potentially creates more leverage to an economic recovery exactly when one might want it most, a look at the multiples awarded to companies with similar assets to the new EOP suggests there could be some modest downside.
Even with a relatively attractive deal, the dividend issue persists. We think EOP can effectively buy time with a transaction.

A joint venture yielding $750 million in proceeds to the company would reduce debt-tocapitalization by 200bp and given a roughly FFO-neutral impact, the payout ratios would be about the same. But EOP would net about 10 months of dividend payments
effectively buying it more time to sustain the dividend at the current level while awaiting some clarity in end-market demand. We conclude that EOP will not cut its

dividend despite the likelihood that the payout ratio will top 100% for several years. We rate EOP shares In-Line within our Cautious coverage view on REITs. Clearly, EOP has some of the greatest leverage to an economic recovery with 125 million square feet of national office space, and with only 86% occupancy there could be significant upside if the recovery persists. However 30% of the companys income is earned in northern California markets, which may take longer to recover.

Goldman Sachs Global Equity Research - December 10, 2003

Equity Office Properties Trust

Real Estate: REITs

Behind the scenes: findings from our market analysis


We think EOP management will include a 2004 outlook with any JV announcement; therefore, we took this opportunity to delve into EOPs major markets as we look out to 2004. As just mentioned, EOP owns 125 million square feet of US office space from coast to coast. We can understand the tendency to analyze the company in aggregate. But at turning points in the economy (positive or negative), markets really make a difference. An analysis of trends and rollover exposure in EOPs top 10 markets is included below.

Valuation: EOP shares have underperformed; we think valuation is reasonable


EOP is the largest and most liquid REIT and was the first REIT to enter the S&P 500. We value the shares using three intrinsic value approaches (DCF, DDM and NAV) and a number of comparative approaches including FFO multiple compared to growth, dividend yield and payout ratio. On the intrinsic-value side, our calculation of net asset value (NAV) is $21, based on 2004 net operating income and using a 9.7% capitalization rate on the total portfolio (remember, 60% of the companys assets are suburban). Each 50 bp swing in cap rate assumptions is equal to about $2.50 per share. Both our discounted cash flow (DCF) and dividend discount model (DDM) models suggest a value of $28 per share, exactly in line with current share price. EOP trades at the average office multiple, 10X 2004 FFO. The dividend yield is amongst the highest in our universe at 7.2%, but entails an uncomfortably high payout ratio of 125% this year and 108% estimated for 2004.

Financials: Even with accretive transaction, we do not see a lot of growth for EOP
The three key drivers to rental revenue for any REIT are square footage, occupancy and rental rate per square foot. We forecast only a very slight improvement in occupancy in 2004, when 10% of leases are rolling at flat-to-down 10% rental rates. Beyond 2004 we expect a more meaningful occupancy recovery, in 2005 and beyond. Even with an earnings neutral or accretive JV transaction, we do not see much growth for EOP. Our five-year FFO/share growth rate is 1.7%.

Company strategy/profile: the national provider


EOP owns and manages approximately 125 million square feet of office space, 60% in the suburbs and the balance located in central business districts. Properties located in the ten largest markets generate about 80% of net operating income, including San Francisco and San Jose (23% combined), Boston (14%), San Jose alone (11%), Seattle (7%), and New York (7%). EOPs portfolio was 86.3% occupied at the end of 3Q2003. The federal government, under the auspices of the General Services Administration (GSA), is EOPs largest tenant, accounting for 1.8% of total annualized rental income, followed by PriceWaterhouseCoopers (1.5%), Washington Mutual Bank (1.4%), and Ogilvy and Mather (1.0%). Approximately 10% of EOPs existing leases expire during 2004, followed by 11% in 2005 and 2006.

Goldman Sachs Global Equity Research - December 10, 2003

Real Estate: REITs

Equity Office Properties Trust

Overview of a potential transaction and implications


The largest office REIT and most liquid REIT stock, Equity Office Properties Trust (EOP) is set to announce a major asset re-positioning before year-end. The most likely scenario is the sale of about $1 billion in trophy assets into a joint venture structure. Accretion depends on: (1) how much interest EOP retains; (2) the level of asset management fees EOP might earn through a JV; and (3) what happens to the occupancy in the remaining portfolio. But we see little dilution from any actual deal.

The bigger questions will be: what implication would a deal have for dividend coverage, what kind of portfolio EOP would be left with, and whether value has been created or lost. To begin with sizing the transaction, we think EOP is likely to sell 50% to 75% interests in up to $1 billion worth of property, netting the company at least $500 million and likely up to $750 million of proceeds (see Exhibit 2).
Exhibit 2: At least $500 million in cash likely headed EOPs way this month our assumption is highlighted in blue

SOURCES Sell 50% interest: Sell 65% interest: Sell 75% interest: Value of asset sale

Sell $80 mm of NOI:

sold @ an 8.0% cap rate: sold @ a 7.5% cap rate: sold @ a 7.0% cap rate: sold @ an 8.5% cap rate:

$500 mm $534 $572 $471

$650 mm $694 $743 $612

$750 mm $800 $857 $706

$1,000 mm $1,067 $1,143 $941

Source: Goldman Sachs Research estimates.

The obvious questions become what EOP will do with the cash and whether the deal will be dilutive to FFO; with incremental management fees in a JV and relatively high-cost debt coming due soon, we think the company can avoid FFO dilution. With $400 million of 7.4% debt having come due in November and an additional $400 million of 6.7% debt coming due in January, the spread implications are relatively modest assuming asset sales (into the JV) with about an 8% yield. We believe incremental fees from managing the JV assets will come close to bridging the difference (see Exhibit 3).

Goldman Sachs Global Equity Research - December 10, 2003

Equity Office Properties Trust

Real Estate: REITs

Exhibit 3: We think the company can most likely avoid dilution by paying down debt this assumes a JV deal brings incremental management fees, though timing could impact
Debt Dilution PLUS: Asset Paydown (1) Equals: ($m) Mgmt fees (2) 7.0% -7 10 7.0% -6 10 7.0% -3 12 7.0% 0 14 7.0% -4 12 Net Effect/ share $ 0.01 $ 0.01 $ 0.02 $ 0.03 $ 0.02

Amount $500 m $600 m $700 m $800 m

Capitalization rate 8.5% 8.0% 7.5% 7.0% 7.8%

(1) Equals average of $400 m of debt rolling in November at 7.38% and $400 m rolling in January at 6.7% (2) Asset managemt fees assumed at 2% of the value of assets acquired by a JV

Source: Goldman Sachs Research estimates.

But putting aside for a moment the FFO impact of a large transaction like this, it is clear that dividend coverage, which is really one of the focal issues for EOPs share price right now, remains stretched even with a neutral or accretive deal (see Exhibit 4).
Exhibit 4: But dividend coverage remains an issue: will EOP just manage through?
Dividend/share FAD Payout ratio, without JV deal FAD Payout ratio, with JV deal $ 2003 2.00 $ 125% 122% 2004 2.00 $ 107% 104% 2005 2.00 $ 110% 108% 2006 2.00 $ 110% 110% 2007 2.00 $ 100% 100% 2008 2.00 96% 96%

Source: Goldman Sachs Research estimates.

So what does EOP do with the dividend? The sustained period of stretched payout ratios highlighted in Exhibit 4 suggests EOP would need to borrow in order to pay its distributions (debt-to-total cap would increase from 51% currently to 57% by 2008, interest coverage would remain stuck at 2.5X versus 2.8X in the late 1990s), effectively damaging the balance sheet. While EOP Chairman Sam Zell had been vocal about maintaining the dividend earlier in 2003, we have not heard any such confident reiteration in recent months. In fact, the EOP management team has been notably silent on the subject of dividend sustainability in conversations we have had with them on the subject. Conservatism usually dictates that a REIT cut its dividend if its payout ratio is above 100% for a prolonged period of time and despite Zells flamboyant personality we view his management philosophy in overseeing EOP as essentially a conservative one, given the company and its investor profile. We estimate the 2003-2008 payout of FAD to be 125% (2003), 108%, 110%, 110%, 100% and 96% (2008), while debt to total capitalization currently stands at a relatively high (but manageable) 50%. A joint venture yielding $750 million in proceeds to the company would reduce debt to cap by 100bp and given a roughly FFO-neutral impact, the payout ratios would be about the same. But EOP would net about 10
months of dividend payments effectively buying it more time to sustain the dividend at the current level while awaiting some clarity in end-market demand.

Goldman Sachs Global Equity Research - December 10, 2003

Real Estate: REITs

Equity Office Properties Trust

Importantly, if the high payout ratio in 2005 and beyond stems from upfront investments to fill the buildings (in the form of tenant improvement allowances and leasing commissions) we believe EOP will be far more likely to maintain the dividend at its current $2.00 level given that it will have visibility on higher cash flows from higher occupancy. The key will be to watch employment trends, especially in office-intensive service industries, as well as EOPs occupancy trends. Were EOP to characterize any JV proceeds as a dividend bridge to a better economy, as we believe the company may, we would again become concerned about dividend security by next fall in the absence of a marked pick-up in occupancy.
Therefore, we are keeping EOP shares in the Goldman Sachs REIT Income Portfolio with a 7.2% dividend yield.

And what about valuation implications?


Finally, how will the stock react to a deal of this size? At first blush, the answer is that an exchange of assets for cash, after which (assuming management fees to be reaped from the JV and a paydown of high cost debt) there is no real impact on FFO, there should be little to no impact on valuation. Fundamentally we think investors will be pleased with EOP taking more advantage of the JV structure, which can offer better returns at lower risk and bring incremental asset management and other fees. However, we think the suggestion that EOP is marketing some of its trophy assets in a deal like this could mute the upside somewhat. While $750 million on a total asset base of $25 billion should not be overestimated, EOP
would have more leverage to an economic recovery post any such transaction. Core

occupancy would be lower, given the presumably well-leased nature of the JV assets, and therefore leverage would increase. However, we think there could be modest downside risk to the multiple investors are willing to pay for EOP, which should also limit upside. Consider EOPs current multiple, 10X 2004E FFO, which is the sector average. We think this multiple reflects EOPs particular mix of assets, which one might think of as one-third Boston Property-style assets (protected markets, class-A properties in the CBD), one-third Trizec-style assets (national, mix of CBD and suburban) and one-third CarrAmerica-style assets (Californiaconcentrated). Boston Properties trades at 12X FFO, EOP at 10X, CarrAmerica at 10X and Trizec at 8X. If EOP sells its trophy assets that are worthy of a 12X multiple of
income, could there be a multiple adjustment to reflect a more Trizec/CarrAmerica type of portfolio?

EOP will maintain a 25% to 50% stake in these properties, and is likely to have additional income from the asset management fees, but we think there is some possibility that investor enthusiasm for a deal could be muted as a result of the change in portfolio quality. Occupancy would likely dip somewhat in the core portfolio. We would also add, however, that the leverage to a better economy is even greater in the remaining portfolio. In total, we do not see a real change in the value of EOPs portfolio and think any initial rally will give way and the stock will remain valued at about $27-28 per share (see Exhibit 5), all else being equal.

Goldman Sachs Global Equity Research - December 10, 2003

Equity Office Properties Trust

Real Estate: REITs

Exhibit 5: Following share price appreciation to reflect approval of a deal we think investors will make some modest multiple adjustment and bring shares back to the current $28 level
% Sq Ft Boston San Francisco San Jose Seattle New York Chicago Washington DC Los Angeles Atlanta Orange County Other Total/Avg CBD % NOI 9.8% 4.7% 0.4% 4.3% 7.3% 4.3% 2.8% 1.5% 1.8% 0.0% 7.5% 44.4% Type BXP BXP CRE BXP BXP BXP BXP BXP TRZ TRZ Multiple 12 12 10 12 12 12 12 12 8 8 10.8 1 1 0 1 1 1 0 0 0 0 1 SUBURBAN % Sq Ft % NOI 3.0% 4.5% 6.6% 3.8% 0.0% 3.6% 3.0% 4.3% 4.6% 4.9% 20.0% 58.3% 3.7% 7.2% 10.6% 3.1% 0.0% 2.5% 3.3% 3.9% 2.7% 4.1% 14.4% 55.5% Type TRZ CRE CRE CRE TRZ CRE TRZ TRZ TRZ TRZ Multiple 8 10 10 10 8 10 8 8 8 8 8.9 0 1 1 0 0 0 0 0 0 0 1 TOTAL EOP MULTIPLE 1 1 1 1 1 1 1 0 0 0 2 Actual '04 Multiple today

7.3% 4.3% 0.2% 4.1% 4.0% 5.3% 1.8% 1.5% 1.6% 0.0% 11.4% 41.5%

CBD Multiple: Assumptions: Current estimated CBD NOI, '04: % of total Average multiple: Current estimated sub NOI, '04: % of total Average multiple: Total NOI Current multiple Stock price

4.9

Suburban Multiple:

4.9

9.8

832.5 44% 10.8 1042.5 56% 8.9 1875 9.8 $ 27.64

Current multiple reflects current mix of assets

NEW CBD/SUBURBAN MIX AND VALUATION IMPLICATIONS: Sell $80 m of NOI ($1 billion deal, 8% cap rate) $ mm % of total Multiple CBD NOI 752.5 42% 10.8 4.5 Suburban NOI 1042.5 58% 8.9 5.1 Total 9.7 1795.0 Stock Price $ 27.11 upside/downside -2%

Source: Goldman Sachs Research estimates.

Goldman Sachs Global Equity Research - December 10, 2003

Real Estate: REITs

Equity Office Properties Trust

Source of upcoming funds: what's in the works?


A look back at the timeline
Richard Kincaid assumed CEO duties at Equity Office Properties Trust in April 2003. By July the company had begun outlining a new strategy. Three goals were identified:

Achieve growth with value oriented acquisitions (i.e., properties with management opportunities and/or low occupancy levels acquired below replacement cost); Capitalize on EOPs operating leverage as the largest office landlord (i.e., concentrate in fewer markets); and Do more sizable joint venture transactions to take advantage of a financial structure than can boost returns while lowering risk.

The company re-hired Jeff Johnson as Chief Investment Officer and put the wheels in motion for a major asset re-positioning. In October, management commented that a large disposition of joint venture transaction was likely to close by year-end. Since that time there has been much market comment on the potential size of a transaction, with many sources pointing to up to $1 billion of asset sales, with proceeds to EOP depending on what interest the company might retain.

What's on the market now?


While a major re-positioning is indeed in the works, this is by no means the companys initial foray into the asset sale market. In fact, in the year to date EOP has sold over $800 million of assets, as the company exited some non-core markets and took advantage of opportunistic pricing. Exhibit 6 shows the companys geographic exposure at December 2002 compared with October 2003. EOP has substantially slimmed its presence in Minneapolis, San Antonio, Fort Worth and other slower-growing markets where the company did not have the scale to justify its presence. Delving into this exposure chart, we can probably identify five to ten markets in which EOP could continue to prune assets; are Orlando, Florida and Columbus, Ohio, at less than 0.5% of total square footage, worth holding, for instance? Moreover we sense the company would like to pare down its exposure to northern California (20+% of income, a relic of the Spieker acquisition in 2001), but at severely depressed income levels in that region would not find pricing attractive enough. In fact, we think EOP is likely to sell trophy-quality assets in some of the companys strongest markets. Broker rumors put assets such as 225 Franklin Street in Boston (headquarters of State Street Global) and 161 North Clark Street in the Loop in Chicago on the market. We believe about a dozen properties are for sale and the rumored value of these properties is $1 billionassuming an 8% cap rate, this puts the income of those properties at about $80 million annually. Actual proceeds to EOP would of course depend on what interest the company would sell in these properties; if the company sells a 75% interest the proceeds would be $750 million, at a 65% interest the proceeds would be $650 million and so forth.

Goldman Sachs Global Equity Research - December 10, 2003

Equity Office Properties Trust

Real Estate: REITs

Exhibit 6: EOPs market presence at December 2002 EOP has exited at least three markets and substantially pared down exposure in others
4Q2002 Market Boston Chicago San Francisco Seattle San Jose Atlanta LA Orange County Washington DC New York Dallas Denver Portland Oakland Minneapolis Houston San Diego Sacramento Philadelphia New Orleans Stamford Austin Cleveland Indianapolis Orlando Phoenix San Antonio Charlotte Columbus Riverside, CA Fort Worth Salt Lake City % of Total 10.4% 8.9% 8.5% 8.0% 6.8% 6.2% 5.7% 5.0% 4.8% 4.0% 3.4% 3.3% 3.0% 2.4% 2.3% 2.2% 2.1% 2.1% 2.0% 1.9% 1.4% 1.1% 1.0% 0.8% 0.5% 0.5% 0.5% 0.5% 0.3% 0.2% 0.2% 0.1% 100%

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 TOTAL

Square ft 13,018.0 11,190.2 10,642.7 10,071.1 8,577.4 7,783.2 7,130.1 6,227.8 6,041.2 4,986.4 4,237.0 4,206.7 3,774.1 3,050.6 2,933.0 2,734.4 2,607.9 2,595.6 2,528.1 2,357.7 1,814.1 1,426.9 1,270.2 1,057.9 640.7 605.3 604.3 583.4 379.8 274.3 239.1 136.2 125,725

Grey highlighting represents market exit, blue highlighting represents decreased presence.

Source: Company filings.

Exhibit 7: 2003 asset sales top $800 million already


Announced 11/24/03 11/24/03 10/15/03 10/2/03 9/12/03 5/2/03 3/31/03 3/3/03 2/21/03 2/12/03 1/3/03 12/20/02 12/19/02 12/18/02 12/11/02
Source: Company filings.

Market San Jose San Diego Charlotte Fort Worth San Francisco Minneapolis Oakland Los Angeles Los Angeles Salt Lake City Seattle Durham, NC Riverside, CA St Louis Seattle

Square ft. 194.0 362.8 583.4 239.1 496.1 929.7 60.3 92.4 94.4 136.2 114.5 181.7 308.4 339.2 408.4

Price ($mm) 106.8 67.0 Market exit Market exit 174.0 4.4 35.5 16.1 11.6 Market exit 13.5 20.0 Market exit 39.3 51.2 Market exit 56.2

Goldman Sachs Global Equity Research - December 10, 2003

Real Estate: REITs

Equity Office Properties Trust

An historical example that might help us understand EOP's mindset


EOP has clearly been slower than some of its peers to use the joint venture and fund structure. Consider industrial REIT ProLogis on one end with extensive use of private capital, but a glance at Exhibit 8 shows EOPs percentage of assets in JVs at a lower level than even other office peers, and note the decline in this number since 2000 versus growth in use of JVs by most other office REITs.
Exhibit 8: EOPs JV exposure has declined versus a positive trend for most other office REITs; JV assets as a % of total assets

1998 EOP BXP CRE TRZ CLI


Source: Company filings.

1999 6.2% 0.7% 1.9% n/a 2.5%

2000 6.2% 1.4% 8.8% n/a 2.8%

2001 5.1% 1.4% 4.3% 4.7% 3.9%

2002 4.3% 1.2% 4.4% 4.0% 4.7%

2003 3.9% 1.0% 4.6% 4.6% 4.7%

2.7% 0.9% n/a n/a 1.9%

However the company has used the structure in the past, in fact in a similar way. Moreover, some EOP executives have hinted that the planned deal for December might be modeled after a transaction with Lend Lease back in 1999. In 1999, EOP sold interests in seven assets for $535 million to an Australian-listed property trust managed by Lend Lease (now managed by The Principal Group of Des Moines, Iowa). The assets were also spread across the country, in Chicago, Indianapolis, Atlanta, Orlando, Dallas and Los Angeles. The properties had a mix of occupancy levels. Generally, 50-75% interests in the various buildings were sold. EOP used the proceeds immediately to pay down debt on its credit line, and subsequently for share repurchases and acquisitions.

Goldman Sachs Global Equity Research - December 10, 2003

Equity Office Properties Trust

Real Estate: REITs

How to think about uses


EOP has three obvious uses for the significant amount of cash that could be generated in this kind of transaction: to pay down debt, to acquire new properties, or to buy back equity (see Exhibit 9). Management has made clear that retiring the 7% debt due in November 2003 and January 2004 is on top of the list. This would avoid major earnings dilution, assuming the company sells at 7-8% cap rates.
Exhibit 9: Share buyback might be the most accretive option, but we think debt retirement is more likely

Proceeds from the sale of asset interests to a joint venture: $500 million to $750 million, most likely, assuming 7-8% cap rates

Debt paydown option: $400m at 7.38% due in November $400m at 6.7% due in January = only MODEST DILUTION Acquisition option: Mgmt has indicated an expectation that interest rates, and cap rates, will go up in 2004; assuming the company wants to leverage scale in markets it is already in, cap rates will probably run in the 7% range; but timing factors would result in about 5c of dilution; what might be interesting is if EOP considered buying assets in a different property type, such as industrial- this could create POTENTIAL ACCRETION

Equity buyback option: Year to date EOP has repurchased about $700m of preferred and common equity; the company has called another $115 million of preferred series in December; not many preferred redemption opportunities remain; the return on buying back common stock at these levels is 10%- ACCRETIVE

More DILUTIVE

More ACCRETIVE

Source: Goldman Sachs Research estimates.

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Goldman Sachs Global Equity Research - December 10, 2003

Real Estate: REITs

Equity Office Properties Trust

A strategic review of EOP's major markets


We expect management also to comment on 2004 along with any asset sale announcement. Therefore, we have delved into EOPs top markets and thought about office fundamentals over the next 12-18 months. EOP owns 125 million square feet of office space from coast to coast. We can understand the tendency to analyze the company in aggregate. At turning points, we think markets matter.

Three observations to take away from our market analysis below


1. Boston, EOPs largest market at 14% of income, is clearly in flux with corporate

mergers likely to pressure real estate demandbut EOP has positioned itself relatively well here with a healthy occupancy pickup this quarter and a relatively easier rent roll on re-leases in 2004.
2. Sister cities San Francisco and San Jose have begun behaving differently and this

surprises us. Fundamentals in San Francisco appear to be weakening (consistent with layoff news we have heard), while San Jose has begun to show signs of relative strength. While these are early days in this trend we think it bears watching: these markets are almost 25% of income for EOP (mostly acquired through the Spieker merger in 1999).
3. EOP could be in for some real trouble if markets do not pick up by 2005, because

that is the year rent rolls really get tough. Note this is also true for several other office REITs. This is because leases expiring in 2005 were likely signed between 1995 and 2000 and those rents are now above-market. Specifically, Boston and San Jose are large markets with rent roll-down risk in 2005 for EOP. We think this 05 Roll Risk across office companies has not yet been fully understood by the market and is a key driver behind our cautious stance on these companies.

Digging into the markets


Equity Office Properties is the truly national REIT and we sympathize with the tendency to associate the company with the economy in general, ignoring market nuances considered more relevant for market-concentrated companies (think Post Properties, BRE, Reckson, SL Green). But as the economy begins to shift towards meaningful growth, we think 2004 will be a market story. We model all 10 of EOPs markets in detail and thus can glean some insights into lease rollover risk, rental rate trends, etc. Weve split these markets into buckets of whats most important to EOPs numbers.

Tier 1 Markets: at 45% of income, these are the ones to watch San Francisco and San Jose: the needle than can move the dial
While Boston is EOPs single largest market at 14% of income, we think of the Bay Area and San Jose markets together and these two combined represent 23% of incomewhat happens here will move the numbers for EOP. The large presence here is a function of the 1999 acquisition of Spieker Properties. We thought the 3Q2003 trends in these
markets were interesting: for the first time in a while, the direction of business activity diverged. Occupancy in San Francisco fell 500bp from 2Q2003 while

occupancy increased 200bp in San Jose. Could the 50% move in the NASDAQ since

Goldman Sachs Global Equity Research - December 10, 2003

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Equity Office Properties Trust

Real Estate: REITs

March and positive newsflow from technology companies suggest a recovery is underway in tech-heavy San Jose? While it is clearly too early to call, we think the relationship between the two markets should be monitored. We are modeling a 10% rolldown on lease expirations in San Francisco in 2004, but San Jose is fortunate with a relatively easier roll over the next two years. Leases are expiring $30-$32 per sq foot versus $37 this year, so we think the company could get flat re-leases. See Exhibits 1014.
Exhibit 10: San Jose office rents bottoming out projections provided by REIS Exhibit 11: San Francisco office rent projections mirror San Jose

$58

55%

$47

45%
Net Effective Rent

30%

Net Effective Rent

$37

20%

$38

5%

$27

-5%

-20%

$17 1990 1992 1994 1996 1998 2000 2002 2004 2006 Rent % Change

-30%

$18 1990 1992 1994 1996 1998 2000 2002 2004 2006 Rent % Change

-45%

Source: REIS.

Source: REIS.

Exhibit 12: San Jose vacancy has likely peaked projections provided by REIS.
5 25%

Exhibit 13: Similar story for San Fran, though the change is less dramatic
25%

20% 2 15%

20%

square feet (millions)

square feet (millions)

Vacancy Rate (%)

15%

10% -1 5%

-3

10%

5%

-4 1990 1992 1994 1996 1998 2000 2002 2004 2006

0%

-8 1990 1992 Completions 1994 1996 1998 2000 2002 2004 2006

0%

Completions

Absorptions

Vacancy Rate

Absorptions

Vacancy Rate

Source: REIS.

Source: REIS.

12

Goldman Sachs Global Equity Research - December 10, 2003

Vacancy Rate

Real Estate: REITs

Equity Office Properties Trust

Exhibit 14: San Francisco and San Jose lease rollover schedule and Goldman Sachs assumptions 2001-2008
2001A
SAN FRANCISCO Rentable Sq ft (000) (period end) Expiring Sq ft (000) Annualized rent ($ mm) Base Portfolio Rent/SF Rent Step % Rollover Rent/SF Rate on new and renewal leases % Change in new lease rates Rollover Renewal % Renewal space leased in period Vacant Space Leased in period Total Period Leasing (000 SF) Period End Occupancy Average Occupancy Unallocated Market Revenue Total Market Revenue ($mm) (EOP) Average Total Market Revenue ($mm) 86.8% 92.6% $ $ 10,618 774 43.5 43.29 $ 19% 56.18 $

2002A
10,643 961 34.2 44.57 $ 3% 35.58 $ $

2003E
10,932 1,206 42.6 42.47 $ 0% 35.30 $ 37.00 $

2004E
10,643 783 29.3 43.24 $ 0% 37.41 $ 33.67 $ -9% 85% 666 862 1,528 80.0% 76.1% 0.0 368.2 362.9

2005E
10,643 1,422 58.8 42.23 $ 0% 41.36 $ 34.34 $ 2% 85% 1,209 320 1,528 81.0% 80.5% 0.0 364.1 366.1

2006E
10,643 920 41.7 41.24 $ 0% 45.35 $ 34.39 $ 5% 85% 782 244 1,027 82.0% 81.5% 0.0 359.9 362.0

2007E
10,643 1,100 42.8 40.84 $ 0% 38.94 $ 34.44 $ 5% 85% 935 271 1,206 83.0% 82.5% 0.0 360.8 360.3

2008E
10,643 1,085 46.7 39.97 0% 43.03 34.49 5% 85% 923 269 1,192 84.0% 83.5% 0.0 357.3 359.0

3,402 76.6% 81.7%

85% 1,025 (213) 813 73.0% 75.5% 0.0 338.9 360.9

398.8 398.8

357.7 363.5

SAN JOSE Rentable Sq ft (000) (period end) Expiring Sq ft (000) Annualized rent ($ mm) Base Portfolio Rent/SF Rent Step % Rollover Rent/SF Rate on new and renewal leases % Change in new lease rates Rollover Renewal % Renewal space leased in period Vacant Space Leased in period Total Period Leasing (000 SF) Period End Occupancy Average Occupancy Unallocated Market Revenue Total Market Revenue ($mm) (EOP) Average Total Market Revenue ($mm) 91.5% 45.8% $ 39.56 $ $

8,577 1,098 34.5 41.18 31.46 $ $ $

8,577 885 33.3 36.81 $ 2% 37.58 $ 37.00 $

8,577 834 27.1 37.54 $ 0% 32.54 $ 33.30 $ -10% 85% 709 254 962 86.5% 85.6% 0.0 278.6 273.9

8,577 1,686 51.8 38.37 $ 0% 30.71 $ 33.97 $ 2% 85% 1,433 296 1,729 87.0% 86.8% 0.0 286.3 282.4

8,577 941 34.8 38.39 $ 0% 37.00 $ 35.66 $ 5% 85% 800 227 1,027 88.0% 87.5% 0.0 289.8 288.0

8,577 656 26.8 38.30 $ 0% 40.85 $ 37.45 $ 5% 85% 558 184 742 89.0% 88.5% 0.0 292.4 291.1

8,577 370 12.6 38.78 0% 34.11 39.32 5% 85% 314 141 456 90.0% 89.5% 0.0 299.4 295.9

2,268 86.6% 89.1%

85% 752 (4) 748 85.0% 84.4% 0.0 268.4 283.8

313.9 313.9

149.9 306.0

Source: Company filings, Goldman Sachs Research estimates.

Seattle: Aerospace jobs have flown but market now stabilized


Seattle, at 7% of income is EOPs fourth-largest market and with the shift from an aerospace city to a technology one, in some ways Seattle should be considered in conjunction with San Francisco and San Jose. Occupancy is stable in this market and the company appears to be signing leases as they have expired. The lease rollover in 2004 is a mirror image of 2003 and we are assuming nothing changes. Seattle is an interesting
market in the sense that the employment base truly has radically changed in the last ten years. In a report issued in November 2003, the State of Washington noted that

technology companies now employ more workers than Boeing and the aerospace

Goldman Sachs Global Equity Research - December 10, 2003

13

Equity Office Properties Trust

Real Estate: REITs

industry, following a rapid decline in aerospace jobs in the last three years. This reinforces the notion that we can really think about the trends driving this market as similar to what is driving the tech-prevalent Bay Area and San Jose. See Exhibits 15-17.
Exhibit 15: Seattle still under rent pressure Exhibit 16: because vacancy has probably not quite peaked

25%

16% 11%
square feet (millions)

6 20%

Net Effective Rent

6% 1%
$20

15%

2 10%

-4% -9%

5%

$14 1990 1992 1994 1996 1998 2000 2002 2004 2006 Rent % Change

-14%

-2 1990 1992 1994 1996 1998 2000 2002 2004 2006

0%

Completions

Absorptions

Vacancy Rate

Source: REIS.

Source: REIS.

Exhibit 17: Seattle lease rollover schedule and Goldman Sachs assumptions 2001-2008
2001A
SEATTLE Rentable Sq ft (000) (period end) Expiring Sq ft (000) Annualized rent ($ mm) Base Portfolio Rent/SF Rent Step % Rollover Rent/SF Rate on new and renewal leases % Change in new lease rates Rollover Renewal % Renewal space leased in period Vacant Space Leased in period Total Period Leasing (000 SF) Period End Occupancy Average Occupancy Unallocated Market Revenue Total Market Revenue ($mm) (EOP) Average Total Market Revenue ($mm) 92.8% 94.7% $ $ 10,380 689 17.0 28.06 $ 2% 24.63 $

2002A
10,071 1,399 33.3 28.40 $ 1% 23.81 $ $

2003E
9,954 2,091 58.1 27.29 $ 0% 27.80 $ 27.00 $

2004E
9,954 1,006 27.4 27.34 $ 0% 27.28 $ 27.00 $ 0% 85% 855 250 1,105 89.0% 88.4% 0.0 242.2 238.1

2005E
9,954 1,130 33.4 27.39 $ 0% 29.58 $ 27.54 $ 2% 85% 960 369 1,329 91.0% 90.0% 0.0 248.1 245.1

2006E
9,954 923 27.3 27.49 $ 0% 29.59 $ 28.92 $ 5% 85% 785 238 1,023 92.0% 91.5% 0.0 251.7 249.9

2007E
9,954 616 17.1 27.84 $ 0% 27.80 $ 30.36 $ 5% 85% 524 192 716 93.0% 92.5% 0.0 257.7 254.7

2008E
9,954 974 25.8 28.59 0% 26.55 31.88 5% 85% 828 246 1,073 94.0% 93.5% 0.0 267.5 262.6

1,505 91.4% 92.1%

85% 1,777 (25) 1,752 88.0% 88.4% 0.0 239.1 240.7

270.3 270.3

263.8 261.4

Source: Goldman Sachs Research estimates.

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Goldman Sachs Global Equity Research - December 10, 2003

Vacancy Rate (%)

$26

Real Estate: REITs

Equity Office Properties Trust

Boston: Will corporate mergers cut real estate demand?


Boston represents 14% of NOI and is the largest single market for EOP. There was an impressive 150 bp occupancy gain in 3Q2003, but we calculate an ugly rent spread on new leases in Boston versus positive mark to markets in the first half. The lease rollover is modestly easier in 2004, but note we are still modeling a 10% rent rolldown and a 50bp drop in occupancy. Why be so cautious on 2004? Because with a number of recent
corporate M&A transactions we think there will be some available space coming to market. Take the Manulife acquisition of John Hancock: Manulife has 400 thousand sq

feet in Boston and John Hancock has 1.5 million sq feet. Or the Banc of America purchase of Fleet Fleet has 1.4 million sq feet. While Banc of America does not have a real presence in Boston there will clearly be a need to squeeze efficiencies wherever possible. In addition, the rent roll becomes considerably more difficult in 2005. If 2004 is anything like 2003, during which tenants look to lock in current low rates on leases ahead of a pickup in the economy, we could see the impact of those deals soon. See Exhibits 18-20.
Exhibit 18: Boston market rents set for modest increase, but note the roll gets tough for EOP in 2005 Exhibit 19: Falling vacancy should support rent growth

25%

$39
square feet (millions)

20%

Net Effective Rent

10%
$32

15% 0

10% -5 5%

$25

-5%

$18 1990 1992 1994 1996 1998 2000 2002 2004 2006

-20%

-10 1990 1992 1994 1996 1998 2000 2002 2004 2006 Completions Absorptions

0%

Vacancy Rate

Rent

% Change

Source: REIS.

Source: REIS.

Goldman Sachs Global Equity Research - December 10, 2003

Vacancy Rate (%)

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Real Estate: REITs

Exhibit 20: Boston lease rollover schedule and Goldman Sachs assumptions 2001-2008
2001A
BOSTON Rentable Sq ft (000) (period end) Expiring Sq ft (000) Period rent ($ mm) Base Portfolio Rent/SF Rent Step % Rollover Rent/SF Rate on new and renewal leases % Change in new lease rates Rollover Renewal % Renewal space leased in period Vacant Space Leased in period Total Period Leasing (000 SF) Period End Occupancy Average Occupancy Unallocated Market Revenue Total Market Revenue ($mm) (EOP) Average Total Market Revenue ($mm) 97.2% 98.2% $ 13,019 1,314 46.7 36.85 $

2002A
13,018 1,199 46.0 38.67 $ $ $

2003E
12,931 1,213 44.5 38.49 $ 0% 36.68 $ 35.00 $

2004E
12,931 965 33.4 37.99 $ 0% 34.60 $ 31.50 $ -10% 85% 820 80 901 91.5% 91.2% 0.0 449.5 448.1

2005E
12,931 1,171 43.5 37.57 $ 0% 37.13 $ 32.13 $ 2% 85% 995 240 1,235 92.0% 91.8% 0.0 447.0 448.2

2006E
12,931 846 28.6 37.72 $ 0% 33.84 $ 33.74 $ 5% 85% 719 256 976 93.0% 92.5% 0.0 453.7 450.3

2007E
12,931 1,390 55.0 37.42 $ 0% 39.61 $ 35.42 $ 5% 85% 1,181 338 1,519 94.0% 93.5% 0.0 454.8 454.3

2008E
12,931 1,374 51.2 37.61 0% 37.26 37.19 5% 85% 1,168 335 1,503 95.0% 94.5% 0.0 462.0 458.4

2,227 91.4% 94.3%

85% 1,031 259 1,290 92.0% 91.4% 0.0 457.9 454.9

466.6 466.6

460.1 460.0

Source: Company filings and Goldman Sachs Research estimates.

Tier 2 Market: Healthy markets, if only EOP had more of them New York: great market but flipside is theres nowhere to go but down
New York is about equal to Seattle in importance to EOP at 7% of income. Occupancy in the New York City market is an eye-catching 98-99% every quarter but the result of this is that there is not much growth upside. EOP has had below-market rents expiring in New York City in 2003, so rent growth has materialized this will be a little tougher in 2004 when leases expire at $56 per square foot. We are assuming a 10% negative rent roll in this market.

Chicago: Is strategy change brewing in the Windy City?


Also 7% of income, Chicago is a relatively healthy market for EOP as the company has well-located assets and a leasing team that has impressed us. We would also point out Chicago is a pilot city for the EOPlus program. The bad news in Chicago has been the 110bp drop in occupancy this quarter, but importantly the rent pressure visible in 1Q2003 and 2Q2003 results seems to be subsiding here. Could the company be giving up occupancy because lease economics just dont make sense? This could be a strategy worth noting because Chicago tends to be a market to which management is highly attuned, because EOPs headquarters are there. The roll in 2004 is similar to 2003 but as in Boston and San Jose, watch out on 2005, when leases generating $39 per sq foot expire compared to $29/sq ft expirations this year.

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Equity Office Properties Trust

Washington, DC: Election year should keep this market strong in 2004
Washington DC at 6% of income should see growth next year as real estate demand could benefit from players in the presidential election process. The market lost 200 bp of occupancy in 3Q2003 (Washington, DC is one of only a few markets with new office supply pressure) but our sense is that the company is signing leases with reasonably good rent growth on expirations. Again this is a market with a 2005 rent roll issue, as expiring leases step up from $33/ft to $38/ft in that year.

Southern California: Apartments, industrial and retail steal all the sunshine
Los Angeles at 5% of income and Orange County at 4% give EOP exposure to southern California, which has been a hot market for apartment, industrial and retail REITs but relatively quiet for office. Los Angeles lost 250bp of occupancy in the quarter and rents came under pressure because of a much tougher roll than earlier in the year ($25/ft leases expired in the first half and $29/ft leases expired in 3Q2003). If EOP continues to sign leases comparable to rates in 3Q2003, this would imply a 9% rolldown in 2004, which is what we are modeling. Orange County picked up 120 bp of occupancy but also at a big negative spread, which we expect to persist.

Atlanta: Early signs of job growth but rent roll is really tough here
Atlanta (5% of income) rounds out Tier-2 markets. Occupancy and rents are stable now and early signs of job growth in this market give us hopebut EOP will need it with the roll faced in 2004. If the company continues to sign leases at $20/foot there will be a stunning 20% rolldown in 2004, which we are modeling.

Tier 3 Markets: Everything else and curiously, where the company is buying
The rest of EOPs markets represent 22% of income and include most of the suburban assets which have been hit much harder in this downturn (recall that central business district occupancy stands at 90% currently versus 84% for suburban assets). Interestingly, the company added to this bucket in 3Q2003 with the purchase of a 485k sq foot building in Denver (the US Bank Tower downtown, acquired for $165 per sq foot).

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Devil's advocate view: could the dividend still be cut?


Although an asset sale transaction can be done on an earnings-neutral basis, dividend coverage remains an issue (see Exhibit 21). We think, however, that with a recovery on the horizon, a newly disciplined approach to leasing commissions and tenant improvements, and ample liquidity EOP will maintain the $2.00/share distribution.
Exhibit 21: Even with an earnings-neutral transaction, dividend issue persists
2003 Current Model (no JV sale) Dividend/share FAD Payout ratio $ 2.00 $ 125% 2.00 $ 107% 2.00 $ 110% 2.00 $ 110% 2.00 $ 100% 2.00 96% 2004 2005 2006 2007 2008

elevated level of TI/leasing commissions

estimated increase in interest rates nicks cash flow

EOP isn't in the clear for 4-5 years, assuming TI/LC are about $20-25/foot leased

Sensitivity with JV sale (sell $1bn into JV, retain 25% stake & redeem debt) Dividend/share FAD Payout ratio $ 2.00 $ 122% 2.00 $ 104% 2.00 $ 108% 2.00 $ 110% 2.00 $ 100% 2.00 96%

still have the dividend coverage issue

Source: Goldman Sachs Research estimates.

While EOP Chairman Sam Zell had been vocal about maintaining the dividend earlier in the year, we have not heard any such confident reiterations in recent months. In fact the EOP management team has been notably silent on the subject of dividend sustainability in conversations we have had with them on the subject. Conservatism usually dictates that a REIT cut its dividend if its payout ratio is above 100% for a prolonged period, and despite Zells flamboyant personality we view his management philosophy in overseeing EOP as essentially a conservative one, given the company and its investor profile. The sustained period of stretched payout ratios suggests EOP would need to borrow in order to pay its distributions (debt to total cap would increase from 50% currently to 57% by 2008, interest coverage would remain stuck at 2.5X versus 2.8X in the late 1990s), effectively damaging the balance sheet. A joint venture yielding $750 million in proceeds to the company would reduce debt to cap by 200bp and given a roughly FFO neutral

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Goldman Sachs Global Equity Research - December 10, 2003

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Equity Office Properties Trust

impact the payout ratios would be about the same. But EOP would net about 10
months of dividend payments effectively buying it more time to sustain the dividend at the current level while awaiting some clarity in end-market demand.

Importantly, if the high payout ratio in 2005 and beyond stems from upfront investments to fill the buildings (in the form of tenant improvement allowances and leasing commissions), we believe EOP will be far more likely to maintain the dividend at its current $2.00 level given that it will have visibility on higher cash flows from higher occupancy. The key will be to watch employment trends, especially in officeintensive service industries, as well as EOPs occupancy trends. Were EOP to characterize the JV proceeds as a dividend bridge to a better economy, as we believe it may, we would again become concerned about dividend security by next fall in the absence of a marked pick-up in occupancy.

Stress testing to plumb the downside


EOPs actions have been notably more pessimistic than its words. For instance, while publicly professing optimism on end markets EOP became markedly more aggressive than its competitors in rates, use of tenant improvement allowances and generous leasing commissions very early in the current downturn. In retrospect, some of this early aggressiveness now appears to have been prescient given that conditions since deteriorated further. We believe EOP management is brutally realistic about the difficult office market and that it is managing the company accordingly. EOP faces a difficult rent roll in 2005 (as do many office REITs) as five-year leases set at market peaks roll off into a much lower rent environment. We have included these lower resets in our financial model, but they represent a further hurdle before the office REITs fundamentals truly bottom out. It is conceivable that EOP could view this last hurdle as being sufficiently high that it may choose to cut its dividend now rather than prolong the uncertainty for two more years. We estimate that a dividend cut to $1.75 would reduce the payout ratio to a more comfortable 90-95% for all of our forecast years. At such a level, EOP shares would still yield 6.2% relative to the average REIT at 5.9% and the average office REIT at 6.1%. We do not, however, believe that a dividend cut is fully baked into the stock, and foresee $3-4 downside for the shares were the company to announce such a cut (most likely a $4-5 drop initially followed by a slight recovery in subsequent days). A sensitivity to different dividend levels is provided in Exhibit 22.

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Equity Office Properties Trust

Real Estate: REITs

Exhibit 22: Dividend sensitivity: even with a 10-15% cut, yield would be attractive each scenario assumes our current forecast for capex/tenant improvements/commissions

Payout Ratios (FAD) 2004 Dividend: Yield: Dividend: Yield: Dividend: Yield: Dividend: Yield: $ 2.00 7.2% 1.90 6.8% 1.75 6.3% 1.50 5.4% 108% 2005 110% 2006 111% 2007 100% 2008 96%

102%

105%

104%

94%

90%

94%

96%

95%

86%

81%

81%

82%

91%

72%

68%

Source: Goldman Sachs Research estimates.

20

Goldman Sachs Global Equity Research - December 10, 2003

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Equity Office Properties Trust

Financials: more leverage to a recovery, but not much growth


With occupancy at 86% at September 30 (one of the lowest of major office REITs), and almost 125 million square feet of space, EOP clearly has some of the most leverage to a turn in office fundamentals. And with an economic recovery underway with new office supply at historically low levels, EOP should be well positioned. However we still see less than 2% annual FFO growth over the next five years.

The three key drivers to rental revenue for any REIT are square footage, occupancy and rental rate per square foot. We forecast only a very slight improvement in occupancy in 2004, when 10% of leases are rolling at flat to down 10% rental rates. Beyond 2004 we expect a more meaningful occupancy recovery in 2005 and beyond. Even with an earnings neutral or accretive JV transaction, we see little growth for EOP. Our fvive-year FFO/share growth rate is 1.7%. One interesting moving piece that could potentially arise from an asset sale of this size would be the occupancy level of the remaining portfolio. Most of EOPs downtown office buildings tend to be very well leased; thus removing these properties from the consolidated total could lower the average occupancy modestly, and offer more leverage to an economic recovery (see Exhibit 23).
Exhibit 23: EOP has experienced a steep drop in occupancy and should see more gains that peers in 2004 represents weighted average occupancy for each
2001A EOP BXP TRZ CRE 93.6% 97.1% 90.7% 95.4% 2002A 90.2% 95.0% 90.0% 92.3% 2003E 87.1% 93.2% 86.2% 91.4% 03 Drop -3.1% -1.8% -3.8% -0.9% 2004E 87.3% 92.6% 86.3% 90.4% 04 Pickup 0.2% -0.6% 0.1% -1.0% 2005E 89.0% 92.9% 87.4% 91.2% 2006E 89.9% 93.5% 88.5% 92.1% 2007E 90.7% 94.0% 89.6% 93.2% 2008E 91.4% 94.5% 90.8% 94.0%

EOP probably has best upside potential for occupancy in 2004

Source: Company filings, Goldman Sachs Research estimates.

From a cost standpoint, EOP has launched a program called EOPlus, which management believes can save the company $75-100 million per year, half in expenses and half in capital costs. With G&A costs at less than 2% of revenue, EOP has proven scale advantages, though this number may not be directly comparable to prior years or peers since some costs were recently reclassified as operating. Please see Exhibits 24-26 for our full financial model.

Goldman Sachs Global Equity Research - December 10, 2003

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Real Estate: REITs

Exhibit 24: EOP income statement analysis $ millions, except per-share data
2003 Quarterly Statements

1998A (1) 1999A (1)


Operating Revenue (incl. tenant recoveries) Operating Expense Net Operating Income (NOI) Non-Rental Income (incl. parking & fees) Joint Venture Income General & Administrative Expenses EBITDA (2) Depreciation & Amortization EBIT Interest Expense Interest Income & Other Pretax Income Taxes Rate % Preferred Dividends (including OP) Operating Partnership Minority Interest Minority Interest Net Income from cont. operations Disc. oper. (incl. prop. sales gains/(losses)) Extraordinary Items / non-recurring Net Income for common shareholders Common Shares Outstanding (basic) Common Shares Outstanding (diluted) EPS cont. ops. (basic) EPS cont. ops. (diluted) EPS (basic) EPS (diluted) 1,538.4 (600.4) 938.1 129.6 11.3 (63.6) 1,015.3 (299.6) 715.7 (345.0) 11.7 382.4 0.0 0.0% (32.2) (36.2) (2.1) 311.9 12.4 (7.5) 316.8 253.2 255.0 $1.23 $1.22 $1.25 $1.24 1,774.6 (669.8) 1,104.8 153.4 13.8 (80.9) 1,191.1 (354.3) 836.8 (418.7) 14.2 432.4 0.0 0.0% (43.6) (48.2) (2.0) 338.6 59.7 (16.2) 382.1 256.0 258.9 $1.32 $1.31 $1.49 $1.48

2000A
2,027.5 (752.0) 1,275.5 168.5 56.3 (88.7) 1,411.5 (421.2) 990.3 (535.4) 36.1 491.0 (2.7) 0.6% (43.3) (59.4) (6.8) 378.8 48.8 (2.6) 424.9 277.2 280.1 $1.37 $1.35 $1.53 $1.52

2001A
2,828.7 (986.4) 1,842.3 212.1 69.2 (109.7) 2,013.9 (566.6) 1,447.3 (741.9) 40.2 745.6 (8.8) 1.2% (57.0) (76.2) (8.7) 594.8 103.7 (134.7) 563.8 360.0 363.1 $1.65 $1.64 $1.57 $1.55

2002A
3,220.5 (1,138.4) 2,082.1 263.2 106.9 (137.5) 2,314.7 (684.2) 1,630.5 (815.0) 22.3 837.8 (9.4) 1.1% (62.6) (89.2) (7.2) 669.4 38.2 0.0 707.6 414.7 416.7 $1.61 $1.61 $1.71 $1.70

1Q03A
765.6 (284.9) 480.7 60.4 20.8 (13.5) 548.4 (174.3) 374.1 (207.0) 3.3 170.4 (1.0) 0.6% (15.5) (17.3) (2.5) 134.1 7.6 0.0 141.7 408.3 409.2 $0.33 $0.33 $0.35 $0.35

2Q03A
759.6 (288.4) 471.2 47.6 20.9 (17.7) 522.1 (176.1) 346.0 (208.7) 3.7 141.0 (1.6) 1.1% (15.4) (18.5) (1.9) 103.7 46.2 0.0 149.9 400.5 402.3 $0.26 $0.26 $0.37 $0.37

3Q03A
753.6 (291.0) 462.6 52.5 21.2 (13.5) 522.9 (178.9) 343.9 (208.1) 3.7 139.6 0.3 (0.2%) (10.5) (13.6) (1.8) 113.9 (3.8) 0.0 110.2 397.4 399.5 $0.29 $0.29 $0.28 $0.31 13.6

4Q03E
780.4 (330.1) 450.3 51.3 20.2 (13.8) 508.0 (180.4) 327.6 (207.7) 3.6 123.6 (1.2) 0.9% (10.5) (12.1) (1.8) 98.0 0.0 0.0 98.0 398.9 401.6 $0.25 $0.24 $0.25 $0.24

2003E
3,059.3 (1,194.4) 1,864.9 211.9 83.1 (58.5) 2,101.4 (709.6) 1,391.7 (831.5) 14.3 574.6 (3.4) 0.6% (51.9) (61.6) (8.0) 449.7 50.1 0.0 499.7 401.3 403.1 $1.12 $1.12 $1.25 $1.24

2004E
3,072.7 (1,197.6) 1,875.1 216.1 73.4 (59.7) 2,104.9 1.9% (737.8) 1,367.2 (835.9) 14.6 545.9 (3.3) 0.6% (42.0) (54.2) (8.0) 438.4 0.0 0.0 438.4 398.9 400.9 $1.10 $1.09 $1.10 $1.09

Addback Derivation of Funds From Operations (FFO) 1998A (1) 1999A (1) Net Income to common shareholders 316.8 382.1 Property Sales (Gains)/ Losses D & A (including JV D&A) Minority Interest/OP adjustment Non-recurring and/or Convert Addback Funds from Operations (FFO) Straight-line rent adjustment Capitalized Interest CAPEX, TIs, and Lease Commissions Other (incl. FAS 141/142 adjustment) Funds Available for Distribution (FAD) Common Shares & Units Outstanding (diluted) FFO/share (diluted) FAD/share Dividends/share Dividend growth (YOY) Payout Ratio (Dividend/FFO) Payout Ratio (Dividend/FAD) Payout Ratio (Dividend/Net Income) Profit and Return Metrics Margin Analysis: Property Operating (NOI) Margin EBITDA Margin (3) Pretax Income Margin Net-Continuing Operations Margin Net Margin Return on Equity Analysis: Pretax Margin Retention Rate to Common (4) Asset Turnover Leverage ROE (common) Current Yield on Cost (NOI/gross PP&E) Return on Invested Capital FFO Return on Equity (FFO/(Eq+MI+Acc. D&A) (12.4) 313.5 36.2 0.0 654.1 (59.7) 368.5 48.2 0.0 739.1 (65.4) (18.0) (352.6) 0.0 303.1 291.2 $2.54 $1.04 $1.58 14.5% 62.2% 151.8% 107.0%

2000A
424.9 (34.5) 459.4 59.4 0.0 909.1 (69.8) (14.8) (373.2) 0.0 451.4 319.0 $2.85 $1.42 $1.74 10.1% 61.1% 123.0% 114.7%

2001A
563.8 (81.7) 613.9 76.2 4.7 1,177.0 (69.1) (25.9) (437.7) 0.0 644.3 412.0 $2.86 $1.56 $1.90 9.2% 66.5% 121.5% 122.4%

2002A
707.6 (0.4) 708.1 89.2 0.0 1,504.5 (72.9) (21.4) (433.6) 0.0 976.6 469.1 $3.21 $2.08 $2.00 5.3% 62.4% 96.1% 117.8%

1Q03A
141.7 0.0 175.9 17.3 0.0 334.9 (13.0) (3.6) (94.6) 0.0 223.7 459.3 $0.73 $0.49 $0.50 0.0% 68.6% 102.7% 144.4%

2Q03A
149.9 (44.1) 185.9 18.5 0.0 310.2 (19.0) (1.2) (124.0) 0.0 166.0 452.0 $0.69 $0.37 $0.50 0.0% 72.9% 136.2% 134.2%

3Q03A
110.2 0.0 188.3 13.6 3.9 316.0 (19.9) (2.2) (134.8) 0.0 159.1 457.2 $0.69 $0.35 $0.50 0.0% 72.3% 143.7% 161.3%

4Q03E
98.0 0.0 190.4 12.1 3.9 304.4 (20.2) (2.2) (101.5) 0.0 180.5 457.2 $0.67 $0.39 $0.50 0.0% 75.1% 126.6% 204.9%

2003E
499.7 (44.1) 740.4 61.6 7.9 1,265.5 (72.0) (9.2) (455.0) 0.0 729.3 456.4 $2.77 $1.60 $2.00 0.0% 72.1% 125.2% 161.3%

2004E
438.4 0.0 779.8 54.2 15.7 1,288.1 (70.0) (8.9) (359.3) 0.0 849.9 456.5 $2.82 $1.86 $1.75 0.0% 62.0% 94.0% 160.0%

(15.1) (253.4) 0.0 385.6 284.0 $2.30 $1.36 $1.38 NA 59.9% 101.6% 111.1%

1998A (1) 1999A (1)


61.0% 65.3% 24.9% 20.3% 20.6% 62.3% 66.3% 24.4% 19.1% 21.5%

2000A
62.9% 66.8% 24.2% 18.7% 21.0%

2001A
65.1% 68.7% 26.4% 21.0% 19.9%

2002A
64.7% 68.6% 26.0% 20.8% 22.0%

1Q03A
62.8% 68.9% 22.3% 17.5% 18.5%

2Q03A
62.0% 66.0% 18.6% 13.7% 19.7%

3Q03A
61.4% 66.6% 18.5% 15.1% 14.6%

4Q03E
57.7% 62.5% 15.8% 12.6% 12.6%

2003E
61.0% 66.0% 18.8% 14.7% 16.3%

2004E
61.0% 66.1% 17.8% 14.3% 14.3%

24.9% 81.6% n/a n/a n/a n/a n/a n/a

24.4% 78.3% 0.1x 2.2 5.4% 8.4% 5.5% 9.5%

24.2% 77.1% 0.1x 2.4 5.5% 8.4% 5.7% 10.2%

26.4% 79.8% 0.1x 2.5 6.6% 8.8% 6.1% 10.0%

26.0% 79.9% 0.1x 2.5 6.5% 8.5% 5.9% 10.8%

22.3% 78.7% 0.1x 2.3 5.0% 7.8% 5.5% 9.6%

18.6% 73.5% 0.1x 2.3 3.7% 7.7% 5.1% 9.1%

18.5% 81.6% 0.1x 2.3 4.2% 7.5% 5.3% 9.2%

15.8% 79.3% 0.1x 2.3 3.6% 7.2% 5.0% 8.8%

18.8% 78.3% 0.1x 2.4 4.3% 7.5% 5.2% 9.1%

17.8% 80.3% 0.1x 2.3 4.1% 7.5% 5.3% 9.2%

Source: Goldman Sachs Research estimates.

22

Goldman Sachs Global Equity Research - December 10, 2003

Real Estate: REITs

Equity Office Properties Trust

Exhibit 25: Summary of operating drivers $ in millions


Drivers
Existing Office Property Summary Total Sq footage (000s) at 12/31 Weighted avg occupancy Average rental rate/SF Total Revenue (inc Unconsolidated) Total expiring sq footage % of total portolio Total Leasing Activity (period end) Operating Expenses Operating Expense/Sq ft % Change Net Operating Income (excl. Dev. & Acq.) Less Unconsolidated Revenue Less Unconsolidated Expenses Consolidated Office Revenue Straight line rent adjustment Other Revenue GAAP consolidated revenue Consolidated Expenses Consolidated NOI Capex/TI costs/Leasing Commissions per square foot leased in period Acquisition & Disposition Summary Cost of Acquisitions/(Disposition Proceeds) Net Period Revenues Period Expenses Period NOI (local calculation) Period NOI (from Acq/Disp schedule) Property Operating Margin Development Summary Cost of Developments Period Revenues Period Expenses Period NOI (local calculation) Period NOI (from Dev schedule) Property Operating Margin Joint Venture Income Total Unconsolidated JV income 1,538.4 1,774.6 383.5 (143.6) 2,027.5 509.2 (212.2) 2,828.7

1998A
94.5%

1999A
45,189 94.5% 0.0

2000A
82,215 94.5% 0.0

2001A
119,562 93.6% 2,478.3 9,517 8% 14,711

2002A
125,725 90.2% $ 23.33 3,236.9 15,381 12% 20,620

2003E

2004E

124,887 124,598 87.1% 87.3% $ 22.28 $ 22.53 3,177.9 3,283.5 16,271 13% 13,787 11,945 10% 14,373

(1,335.3) (1,378.0) (1,384.1) 10.89 $ 11.00 $ 11.10 1.0% 0.9% 1,901.6 561.5 (196.9) 2,675.5 72.9 305.4 3,053.7 3,220.5 (1,138.4) 1,915.3 433.6 21.03 1,800.0 470.0 (180.0) 2,785.8 72.0 210.0 3,067.8 (1,198.0) 1,587.9 455.0 33.00 1,899.4 485.6 (180.8) 2,797.9 70.0 218.0 3,085.9 (1,203.3) 1,594.6 359.3 25.00

(600.4) 938.1 253.4

(669.8) 1,104.8 352.6

(752.0) 1,275.5 373.2 $

(986.4) 1,842.3 437.7 29.75

0.0 0.0 0.0 0.0 0.0 70.0%

(194.2) (9.9) 4.1 (5.8) (5.8) 70.0%

0.0 (26.4) 10.9 (15.5) (15.5) 70.0%

315.8 16.1 (6.3) 9.8 9.8 65.0%

50.7 1.4 (0.5) 0.8 0.8 65.0%

50.2 13.2 (5.2) 8.0 8.0 65.0%

83.1

73.4

Source: Goldman Sachs Research.

Goldman Sachs Global Equity Research - December 10, 2003

23

Equity Office Properties Trust

Real Estate: REITs

Exhibit 26: EOP statement of cash flows and balance sheets $ millions, except per-share data
1998A (1) 1999A (1)
Cash from Operations Net Income Preferred Dividends & Minority Interest Extr Items, Disc Ops & Gains on prop sales Depreciation & Amt. Deferred Taxes & Other Change in Working Capital Total Cash from Operations Uses Maintenance Capex Other Capex Development Expenditures Acquisitions Divestitures Net Dist/(Inv) in JVs Incr. In Deferred Leasing Costs & Other Total Uses of Cash Preferred Dividends (including OP) Common Dividends Free Cash Flow Equity Issuance/(Repurchase) Preferred Issuance/(Redemption) Debt Issuance/(Repayment) Other Financing (ex-LOC) Financing Activities Cash Available/(Line of Credit Draw) Line of Credit Use/(Repayment) Change in Cash & Mktable Sec. Balance Sheet Cash and cash equivalents Accounts Receivable Prepaid Expenses Other current assets Total Current Assets Deferred charges, gross Accumulated amortization Joint venture - rental properties Joint venture - construction in process Deferred rent & other assets Operating Assets: Land Buildings & Improvements Accumulated depreciation Total Operating Real Estate Construction in process Land Held for Development Total Property Assets Total Assets Accrued interest and dividend payable Accounts payable Prepaid rents and other Other liabilities Short Term Debt Total Current Liabilities: Total Long Term debt Other Long Term Liability Total Liabilities Minority Interest (including OP interest) Preferred stock Common stock Total Shareholders' Equity Total Liabilities, MI, and Sh. Equity ROIC Analysis Return on Capital (Graham & Dodd) Interest coverage Ratio (1) Fixed charge coverage Ratio (2) Effective leverage (3) Net Debt / EBITDA
(calcs include JV adjustment beginning in 2000)

2000A
424.9 109.6 (27.1) 435.5 (54.5) 18.9 907.3

2001A
563.8 142.0 (82.2) 587.4 91.5 (60.9) 1,241.6

2002A
707.6 159.0 (17.9) 687.9 (63.9) (81.7) 1,390.9

2003E
499.7 121.5 (50.1) 713.3 (83.1) (102.4) 1,099.0

2004E
438.2 104.2 0.0 741.4 (73.4) (106.6) 1,103.8

316.8 70.5 (4.9) 311.7 (10.4) 75.4 759.2

382.1 93.8 (43.5) 362.0 (6.2) (67.5) 720.7

(207.1) (46.3) 0.0 (1,930.2) 10.2 4.1 (62.4) (2,231.7) (29.6) (389.0) (1,891.1) 59.4 400.5 1,333.4 (64.0) 1,729.3 (161.8) (161.8)

(297.5) (55.1) 0.0 (122.4) 452.7 13.4 (58.2) (67.1) (43.8) (454.5) 155.2 (48.7) 0.0 (83.7) (87.6) (220.0) (64.7) (64.7)

(293.7) (79.4) 0.0 (1,229.4) 352.4 (54.1) (7.5) (1,311.8) (43.5) (578.9) (1,026.9) (41.5) (0.9) 1,173.1 (53.0) 1,077.8 50.9 50.9

(360.1) (77.6) 0.0 (1,181.7) 361.4 (117.9) 27.8 (1,348.2) (58.6) (837.7) (1,002.8) 70.6 (106.3) 1,021.9 24.5 1,010.7 7.9 7.9

(328.9) (104.7) 0.0 (53.1) 377.2 1.6 193.1 85.2 (62.8) (935.1) 478.3 (263.6) 5.8 (251.1) 27.9 (480.9) (2.7) (2.7)

(344.6) (138.0) 0.0 (87.4) 399.0 108.0 0.0 (63.1) (53.8) (680.3) 301.7 (348.6) (250.0) 259.5 (8.0) (347.1) (45.4) 45.4 47.3

(359.3) 0.0 0.0 0.0 0.0 10.0 0.0 (349.3) (42.0) (909.1) (196.6) 0.0 0.0 60.0 0.0 60.0 (136.6) 136.6 0.0

1998A (1) 1999A (1)


67.1 36.2 83.0 159.6 345.8 134.2 (16.0) 378.5 0.0 87.1 2.3 54.5 239.8 19.8 316.4 190.3 (37.3) 865.9 0.0 138.7

2000A
53.3 101.8 353.3 39.8 548.2 294.7 (61.7) 1,164.6 0.0 207.1

2001A
61.1 120.4 252.4 196.3 630.2 380.0 (114.8) 1,321.1 0.0 269.8

2002A
58.5 77.6 273.7 29.2 439.0 466.7 (164.5) 1,087.8 0.0 331.9

2003E
105.8 85.5 291.2 49.7 532.2 583.7 (215.0) 979.8 0.0 403.2

2004E
105.8 71.6 286.6 45.1 509.0 631.8 (218.6) 969.8 0.0 473.2

1,343.3 12,006.3 (352.3) 12,997.4 268.4 65.8 13,331.6 14,261.3 5.1 348.0 0.0 1.1 1,216.0 1,570.2 4,809.4 93.0 6,472.6 737.7 615.0 6,436.0 7,051.0 14,261.3

1,278.3 11,569.1 (630.4) 12,217.0 229.2 125.9 12,572.2 14,046.1 5.4 318.0 0.0 0.0 453.0 776.4 5,398.9 161.2 6,336.5 883.5 615.0 6,211.1 6,826.1 14,046.1 5.5% 2.7x 2.5x 49.0% 4.9x

1,931.5 15,529.0 (978.1) 16,482.5 70.4 88.4 16,641.3 18,794.3 3.7 497.8 0.0 0.0 51.0 552.5 8,752.0 200.2 9,504.7 1,218.4 613.9 7,457.3 8,071.2 18,794.3 5.7% 2.5x 2.3x 52.3% 6.5x

2,820.1 21,579.6 (1,494.3) 22,905.4 165.0 251.7 23,322.1 25,808.4 6.1 570.7 0.0 0.0 244.3 821.1 11,744.3 330.3 12,895.7 1,604.4 863.4 10,444.9 11,308.4 25,808.4 6.1% 2.6x 2.4x 50.8% 6.0x

2,878.1 21,747.8 (2,077.6) 22,548.3 284.7 252.9 23,085.9 25,246.8 5.7 560.1 0.0 0.0 205.7 771.5 11,565.5 392.0 12,729.0 1,432.4 876.1 10,209.4 11,085.5 25,246.8 5.9% 2.7x 2.6x 49.7% 5.2x

2,884.1 22,085.6 (2,726.5) 22,243.2 61.3 253.9 22,558.5 24,842.4 227.5 578.9 0.0 0.0 513.7 1,320.0 11,483.0 457.1 13,260.1 170.3 626.1 10,786.0 11,412.0 24,842.4 5.2% 2.5x 2.3x 49.6% 5.9x

2,884.1 22,444.9 (3,467.9) 21,861.1 61.3 253.9 22,176.3 24,541.6 227.5 584.1 0.0 0.0 650.3 1,461.8 11,543.0 363.1 13,367.9 121.7 626.1 10,425.9 11,052.0 24,541.6 5.3% 2.5x 2.4x 49.7% 5.9x

2.8x 2.6x 48.5% 5.9x

Interest Rate Analysis Interest Expense Capitalized Interest Weighted Average Interest Rate Balance Sheet Statistics Days Receivable (period end) Days Payables (period end) Net Debt (period end) Debt to Cap (period end)

(345.0) (15.1)

(418.7) (18.0) 7.4% 11.2 173.3 5,849.6 46%

(535.4) (14.8) 7.5% 18.3 241.6 8,749.7 52%

(741.9) (25.9) 7.4% 15.5 211.2 11,927.5 51%

(815.0) (21.4) 7.0% 8.8 179.6 11,712.8 51%

(831.5) (9.2) 7.1% 10.2 176.9 11,890.9 51%

(836.1) (8.9) 7.0% 8.5 178.0 12,087.5 52%

8.6 211.6 5,958.3 46%

Source: Goldman Sachs Research estimates.

24

Goldman Sachs Global Equity Research - December 10, 2003

Real Estate: REITs

Equity Office Properties Trust

Valuation: shares seem reasonably priced


EOP shares trade at the office multiple average, in line with our DCF and DDM models, but at a significant premium to our calculation of net asset value. We like EOP for the 7% yield, assuming the dividend is maintained.

Share price performance


Exhibit 27: Aggressive acquisition history drove stock price performance recent improvement reflects hope for an office recovery, but EOP is still lagging peers

35 33 31 29 27 25 23 21 19

Beacon merger

Spieker acquisition

Cut 2002 FFO guidance; added to S&P 500

Cornerstone merger

share price ($)

Callahan resigns as CEO

IPO, $21

Announced interest in Lend Lease JV Launched share repurchase program

17 15 1997

EOP names Kincaid for CEO, increases share repurchase program

1998

1999

2000

2001

2002

2003

2004

Source: Factset, company press releases.

Goldman Sachs Global Equity Research - December 10, 2003

25

Equity Office Properties Trust

Real Estate: REITs

Exhibit 28: EOPs shares have underperformed those of its peers in the last three, six and 12 months
Performance & Trading
GS Rating/ View Current Share Price 12/09/2003 Absolute and Relative Price Change (k) 6 months 12 months Abs. Rel. Abs. Rel. Avg. daily vol (6 m) (000)

3 months Abs. Rel.

YTD Abs. Rel.

Company

Ticker

52 Week L-H

Office Properties
Alexandria Real Estate Arden Realty, Inc. Brandywine Realty Trust Brookfield Properties Corp. Boston Properties Mack-Cali Corporation CarrAmerica Realty Equity Office Properties Great Lakes REIT Glenborough Realty Trust Highwoods Properties HRPT Properties Trust Kilroy Properties Maguire Properties Mission West Properties Corporate Office Properties Prime Group Realty Parkway Properties Prentiss Properties Reckson Associates SL Green Realty Trizec Properties, Inc. Weighted Average/Total Average ARE ARI BDN BPO BXP CLI CRE EOP GL GLB HIW HRP KRC MPG MSW OFC PGE PKY PP RA SLG TRZ NC NC NC IL/C IL/C IL/C U/C IL/C NC NC NC NC NC NC NC NC NC NC NC U/C U/C IL/C $56.65 29.45 27.35 28.02 46.95 40.20 30.15 28.03 15.72 19.51 25.01 9.98 31.55 23.35 12.70 21.38 6.04 42.85 32.10 23.90 38.18 14.86 20.1% 5.8 8.2 17.8 6.4 7.6 5.1 0.1 0.2 1.5 5.6 9.1 10.3 NM 5.8 11.1 -11.9 -5.0 4.4 2.2 4.0 16.8 6.3% 6.0 13.4 % (0.9) 1.5 11.1 (0.3) 0.9 (1.6) (6.6) (6.5) (5.2) (1.1) 2.4 3.6 NM (0.9) 4.4 (18.6) (11.8) (2.3) (4.6) (2.7) 10.1 (0.4)% (0.7) 27.0 % 11.0 12.7 26.4 8.6 14.2 5.4 2.9 (0.3) 0.4 15.6 4.0 16.6 NM 12.0 29.7 0.5 4.4 10.4 13.5 9.4 26.9 11.3 % 12.0 13.8 % (2.2) (0.5) 13.2 (4.6) 1.0 (7.8) (10.2) (13.5) (12.8) 2.4 (9.2) 3.4 NM (1.2) 16.5 (12.7) (8.8) (2.8) 0.3 (3.8) 13.7 (1.9)% (1.2) 39.2 % 31.9 26.0 60.6 27.0 33.0 19.3 7.5 (5.0) 11.3 16.5 20.6 36.7 NM 26.9 55.0 16.9 18.6 16.0 13.4 21.9 50.1 25.3 % 25.9 12.8 % 5.5 (0.4) 34.3 0.6 6.7 (7.0) (18.9) (31.4) (15.0) (9.9) (5.8) 10.4 NM 0.6 28.6 (9.4) (7.7) (10.4) (13.0) (4.4) 23.7 (1.1)% (0.5) 34.0 % 32.5 24.5 52.8 27.5 33.1 20.2 11.8 (4.9) 9.7 13.4 20.3 38.4 NM 29.5 52.1 31.9 21.7 13.5 12.8 21.0 54.2 25.8 % 26.2 7.7 % 6.2 (1.8) 26.4 1.2 6.8 (6.2) (14.5) (31.3) (16.7) (12.9) (6.1) 12.0 NM 3.2 25.8 5.6 (4.6) (12.8) (13.5) (5.3) 27.9 (0.6)% (0.1) $40 21 19 17 35 27 23 23 13 15 20 8 21 19 9 13 5 33 25 18 29 8 $57 30 27 28 47 41 32 29 17 21 26 10 32 24 14 21 7 46 33 24 39 15 90 222 161 114 296 219 217 1,158 54 103 281 482 110 315 43 99 68 36 177 369 159 285

Source: Factset, Goldman Sachs Research.

Exhibit 29: Historically, EOP has outperformed its office peers office REIT index is our calculation of a market cap weighted index of office REITs
120

110

100

90

80
EOP's recent share price performance has lagged, even versus a market cap weighted office index in which EOP is very influential

70

60

50
1997 1998 1999 2000 2001 2002 2003

Office REIT Index

EOP Indexed share price performance

Source: Goldman Sachs Research.

26

Goldman Sachs Global Equity Research - December 10, 2003

Real Estate: REITs

Equity Office Properties Trust

Exhibit 30: Historical multiple analysis shows EOP trading in line with historical average
20.0x 18.0x 16.0x 14.0x 12.0x 10.0x 8.0x 6.0x 4.0x 2.0x 0.0x Average NTM P/E: 10.2x Average LTM P/E: 10.3x

1998

1999

2000

2001

2002

NTM P/ E

LTM P/ E

Ave LTM

Ave NTM

Source: Factset.

Exhibit 31: Office REIT comparison: FFO and FAD multiples


Funds From Operations (FFO) / Funds Available for Distribution (FAD)
GS Rating/ View Current Share Price 12/09/2003 Consensus FFO/Share (b) 03E 04E Price/ FFO 03E 04E 04E Mult. vs. Sector (bps) FFO CAGR (p) 03-08E

Company

Ticker

02A

FFO/Share (b) 04E 03E

FFO Growth 02-03E 03-04E

2003
FAD/Share (c) 03E 04E

02A

Price/FAD 03E 04E

Office Properties
Alexandria Real Estate Arden Realty, Inc. Brandywine Realty Trust Brookfield Properties Corp. Boston Properties Mack-Cali Corporation CarrAmerica Realty Equity Office Properties Great Lakes REIT Glenborough Realty Trust Highwoods Properties HRPT Properties Trust Kilroy Properties Maguire Properties Mission West Properties Corporate Office Properties Prime Group Realty Parkway Properties Prentiss Properties Reckson Associates SL Green Realty Trizec Properties, Inc. Weighted Average/Total Average ARE ARI BDN BPO BXP CLI CRE EOP GL GLB HIW HRP KRC MPG MSW OFC PGE PKY PP RA SLG TRZ NC NC NC IL/C IL/C IL/C U/C IL/C NC NC NC NC NC NC NC NC NC NC NC U/C U/C IL/C $56.65 29.45 27.35 28.02 46.95 40.20 30.15 28.03 15.72 19.51 25.01 9.98 31.55 23.35 12.70 21.38 6.04 42.85 32.10 23.90 38.18 14.86 $3.93 2.75 2.69 1.87 4.09 3.93 3.31 3.21 2.14 2.45 3.44 1.29 3.09 NA 1.13 1.39 1.06 4.64 3.36 2.36 3.32 2.05 $4.23 2.65 2.69 2.16 4.04 3.79 3.29 2.76 1.76 2.25 2.60 1.26 3.39 1.46 1.11 1.56 1.73 4.43 3.08 2.09 3.44 1.85 $4.55 2.58 2.66 2.38 4.00 3.73 3.10 2.82 1.42 2.10 2.61 1.30 2.74 2.15 1.04 1.69 0.96 4.42 3.10 2.15 3.55 1.72 13.4x 11.1 10.2 13.0 11.6 10.6 9.2 10.2 8.9 8.7 9.6 7.9 9.3 16.0 11.4 13.7 3.5 9.7 10.4 11.4 11.1 8.0 10.8x 10.4 12.4x 11.4 10.3 11.8 11.7 10.8 9.7 9.9 11.1 9.3 9.6 7.7 11.5 10.9 12.3 12.7 6.3 9.7 10.3 11.1 10.8 8.6 10.6x 10.5 180 80 (30) 120 110 20 (90) (70) NA (250) (100) (290) 90 30 170 210 (430) (90) (150) 50 20 (200) 7.7 % (3.7) (0.2) 15.5 (1.2) (3.6) (0.6) (14.0) (17.8) (8.2) (24.3) (2.3) 9.8 NM (1.8) 11.9 63.2 (4.6) (8.2) (11.4) 3.6 (9.8) (4.2)% 0.0 7.6 % (2.7) (1.1) 10.2 (1.0) (1.6) (5.8) 2.2 (17.8) (6.8) 0.3 3.2 (19.2) 47.1 (6.8) 8.6 (44.5) (0.2) 0.7 2.9 3.2 (7.0) 1.6 % (1.3)

2.15 4.04 3.79 3.27 2.80

2.41 4.05 3.70 3.12 2.75

5.1 % 2.3 1.1 2.8 1.7

$1.30 2.85 2.95 2.79 2.08

$1.78 3.22 2.72 2.18 1.60

$2.19 3.20 3.09 2.06 1.86

15.7x 14.6 14.8 13.8 17.5

12.8x 14.7 13.0 14.6 15.1

2.06 3.47 1.85

2.29 3.60 1.73

1.9 1.6 1.7 2.3 % 2.3

1.47 2.38 0.93

1.09 2.32 1.15

1.30 2.70 0.97

22.0 16.4 12.9 16.2x 16.0

18.4 14.2 15.3 14.6x 14.8

Source: Factset,, Goldman Sachs Research estimates.

Goldman Sachs Global Equity Research - December 10, 2003

27

Equity Office Properties Trust

Real Estate: REITs

Exhibit 32: Office REIT comparison: dividends and payout ratios

Dividends
GS Rating/ View Current Share Price 12/09/2003 Div/ Share (Ann.) Dividend CAGR 03-08E

Payout Ratios
04E FFO Payout Ratio (d) 04E FAD Payout Ratio (e)

Company

Ticker

Dividend Yield

Office Properties
Alexandria Real Estate Arden Realty, Inc. Brandywine Realty Trust Brookfield Properties Corp. Boston Properties Mack-Cali Corporation CarrAmerica Realty Equity Office Properties Great Lakes REIT Glenborough Realty Trust Highwoods Properties HRPT Properties Trust Kilroy Properties Maguire Properties Mission West Properties Corporate Office Properties Prime Group Realty Parkway Properties Prentiss Properties Reckson Associates SL Green Realty Trizec Properties, Inc. Weighted Average/Total Average ARE ARI BDN BPO BXP CLI CRE EOP GL GLB HIW HRP KRC MPG MSW OFC PGE PKY PP RA SLG TRZ NC NC NC IL/C IL/C IL/C U/C IL/C NC NC NC NC NC NC NC NC NC NC NC U/C U/C IL/C $56.65 29.45 27.35 28.02 46.95 40.20 30.15 28.03 15.72 19.51 25.01 9.98 31.55 23.35 12.70 21.38 6.04 42.85 32.10 23.90 38.18 14.86 $2.24 2.02 1.76 0.60 2.52 2.52 2.00 2.00 1.62 1.40 1.70 0.80 1.98 1.67 0.96 0.94 0.00 2.60 2.24 1.70 2.00 0.80 4.0 % 6.9 6.4 2.1 5.4 6.3 6.6 7.1 10.3 7.2 6.8 8.0 6.3 7.2 7.6 4.4 0.0 6.1 7.0 7.1 5.2 5.4 6.1 % 6.1 49 % 78 66 25 % 63 68 65 71 114 67 65 62 72 78 93 56 0 59 72 79 56 47 63 % 64

7.8 1.8 1.4 0.0 0.0

27 % 79 82 97 107

0.0 3.0 0.0 1.6 % 1.7

131 74.2 82 87 % 85

Source: Factset, Goldman Sachs Research.

Exhibit 33: Office REIT comparison: returns and value


Returns
GS Rating/ View Current Share Price 12/09/2003 FCF Yield 04E (j) Premium (Disc.) to NAV

Margins-2003E
Pretax Income Margin Net Cont. Ops Margin

Company

Ticker

ROE 04E

ROIC 04E

CYC 04E

NAV

Est. Cap Rate

NOI Margin

EBITDA Margin

Net Margin

Office Properties
Alexandria Real Estate Arden Realty, Inc. Brandywine Realty Trust Brookfield Properties Corp. Boston Properties Mack-Cali Corporation CarrAmerica Realty Equity Office Properties Great Lakes REIT Glenborough Realty Trust Highwoods Properties HRPT Properties Trust Kilroy Properties Maguire Properties Mission West Properties Corporate Office Properties Prime Group Realty Parkway Properties Prentiss Properties Reckson Associates SL Green Realty Trizec Properties, Inc. Weighted Average/Total Average ARE ARI BDN BPO BXP CLI CRE EOP GL GLB HIW HRP KRC MPG MSW OFC PGE PKY PP RA SLG TRZ NC NC NC IL/C IL/C IL/C U/C IL/C NC NC NC NC NC NC NC NC NC NC NC U/C U/C IL/C $56.65 29.45 27.35 28.02 46.95 40.20 30.15 28.03 15.72 19.51 25.01 9.98 31.55 23.35 12.70 21.38 6.04 42.85 32.10 23.90 38.18 14.86

5.7 % 1.4 1.4 0.2 (0.5)

11.0 % 9.2 7.6 4.6 4.1

6.0 % 6.3 6.3 5.0 5.3

10.8 % 9.5 9.6 8.9 7.5

$21 38 32 28 21

31 23 25 6 35

9.0% 9.3 9.8 9.8 9.7

61.2 % 62.8 68.0 62.8 61.0

59.8 % 65.1 65.8 63.4 66.0

30.8 % 24.3 26.6 15.2 18.8

19.2 % 18.6 21.0 8.9 14.7

19.2 % 28.6 24.7 11.2 16.3

(1.7) 2.0 1.1 1.1 % 1.2

3.6 9.0 4.0 6.5 % 6.6

4.1 6.6 4.5 5.6 % 5.5

10.4 10.8 6.6 8.8 % 9.3

22 32 12

9 21 24 27 22

9.8 9.8 9.8 9.5% 9.6

60.1 49.5 46.1 60.4 % 58.9

52.9 51.2 54.6 62.7 % 59.8

15.6 26.1 10.6 21.5 % 21.0

6.3 22.0 9.8 15.8 % 15.1

4.9 30.4 12.3 19.1 % 18.4

Source: Factset, Goldman Sachs Research estimates.

28

Goldman Sachs Global Equity Research - December 10, 2003

Real Estate: REITs

Equity Office Properties Trust

Intrinsic value approaches


Exhibit 34: Discounted free cash flow model using unlevered free cash flow; builds on static model not adjusted for any JV sale; $ millions, except per-share data
2003E Operating Revenue (includes Acq & Dev) Operating Expenses NOI Margin Property NOI plus: Non-Rental and JV Income less: G&A = Portfolio EBITDA Tax Rate (unlevered) less: Unlevered Taxes EBIDA Less: Straight line rents Change in Working Capital Preferred Stock Capex & Acquisition/Development Spend Unlevered Free Cash Flow Present Value of UFCF Sum of PV of UFCF PV of Residual Value Value of Unconsolidated Investments Total Value Less: Net Debt Net Value - US$ Less Minority stake Net Value to majority # shares Net Value per Share 3,059 (1,194) 61.0% 1,865 295 (59) 2,101 0% 2,101 2004E 3,073 (1,198) 61.0% 1,875 290 (60) 2,105 0% 2,105 (70) (107) (42) (359) 1,527 1,466 6,673 18,069 24,743 (11,891) 12,852 0% 12,852 448 $ 28.67 27% 73% 0% 2005E 3,082 (1,209) 60.8% 1,874 296 (61) 2,108 0% 2,108 (70) (74) (42) (369) 1,553 1,374 2006E 3,117 (1,221) 60.8% 1,897 304 (62) 2,138 0% 2,138 (70) (21) (42) (386) 1,619 1,320 2007E 3,160 (1,233) 61.0% 1,927 313 (63) 2,177 0% 2,177 (70) (21) (42) (326) 1,718 1,291 2008E 3,240 (1,245) 61.6% 1,994 326 (65) 2,256 0% 2,256 (70) (24) (42) (354) 1,766 1,223

Implied Price Matrix FCF Terminal Growth Rate WACC $ 28.67 8.0% 8.5% 9.0% 9.5% E51 0.8% 27 23 21 18 1.3% 30 26 23 20 1.8% 33 29 25 22 Matrix Avg 2.3% 37 32 28 24 $26

2003E WACC Analysis Total Debt Total Preferred Total Equity WACC Valuation Assumptions: WACC (or r)= Perp. UFCF growth rate (or g)= 1/(r-g)=
Source: Goldman Sachs Research.

cost 7.1% 6.9% 10.0% 8.5%

$ 11,997 626 12,339 24,962

% of cap Current Price 48.1% 2.5% 49.4% 27.53

8.5% 1.8% 14.8 x UFCF

g = our estimate

Goldman Sachs Global Equity Research - December 10, 2003

29

Equity Office Properties Trust

Real Estate: REITs

Exhibit 35: Dividend discount model assuming $2.00 dividend level


2003 Dividend per share (Estimated) Dividend growth Perpetual dividend growth assumption ("g") Present Value of dividends Sum of present value of dividends Present Value of residual value Value of unconsolidated Investments Total Value Less Minority Stake Net Value to Majority $ 2.00 $ 2004 2.00 $ 0.0% 2005 2.00 $ 0.0% 2006 2.00 $ 0.0% 2007 2.00 $ 0.0% 2008 2.00 0.0% 0.2% 1.38

$ $ $ 8.21 20.46 0 28.67 0 28.67

1.92

1.77

1.63

1.50

Implied Price Matrix Dividend Terminal Growth Rate $ WACC 28.67 8.0% 8.5% 9.0% 9.5% C26 -0.4% -10.3% 3.9% 0.8% 31 29 27 25 1.3% 31 29 27 25 1.8% 31 29 27 25 Matrix Avg 0.2% 3.8% 4.8% 2.3% 31 29 27 25 $28

Valuation Assumptions g = Retention Rate X Return on Equity Retention Rate (=1-FAD Payout Ratio) ROE WACC= ("k")= r(e) * equity % + (1-t) * r(d) * debt %

-1.1% -25.2% 4.3% 8.5%

-0.3% -7.5% 4.1%

-0.4% -10.5% 4.0%

0.0% -0.2% 4.2%

Source: Goldman Sachs Research.

30

Goldman Sachs Global Equity Research - December 10, 2003

Real Estate: REITs

Equity Office Properties Trust

Exhibit 36: Net asset value analysis $ millions, except per-share data
2003 Annual Net Operating Income Inc Acq & Dev Straight Line Rent Adjustment Adjusted Net Operating Income Capitalization Rate Share of NOI, Subsidiaries Cap. Rate Non-rental Income Cap. Rate Real Estate Asset Value Construction in Process/Land Held for Development Cash Net of Balance Sheet (receivables, payables) Other Assets Asset Value 1,865 (72) 1,793 9.20% 145 7.50% 212 12.50% 23,122 315 106 (380) 772 23,935 1,865 (72) 1,793 9.70% 145 8.00% 212 12.50% 21,997 315 106 (380) 772 22,810 (12,816) (751) 9,243 456 $ 20.25 8.2% 1,865 (72) 1,793 10.20% 145 8.50% 212 12.50% 20,984 315 106 (380) 772 21,797 (12,816) (751) 8,230 456 $ 18.03 2004 Annual 1,875 (70) 1,805 9.20% 152 7.50% 216 12.50% 23,381 315 106 (408) 886 24,281 (13,012) (626) 10,642 457 $ 23.31 1,875 (70) 1,805 9.70% 152 8.00% 216 12.50% 22,243 315 106 (408) 886 23,142 (13,012) (626) 9,504 457 $ 20.82 8.3% 1,875 (70) 1,805 10.20% 152 8.50% 216 12.50% 21,219 315 106 (408) 886 22,118 (13,012) (626) 8,480 457 $ 18.57 2005 Annual 1,874 (70) 1,804 9.20% 152 7.50% 223 12.50% 23,412 315 106 (406) 984 24,411 (13,200) (626) 10,586 457 $ 23.19 1,874 (70) 1,804 9.70% 152 8.00% 223 12.50% 22,275 315 106 (406) 984 23,274 (13,200) (626) 9,448 457 $ 20.70 8.3% 1,874 (70) 1,804 10.20% 152 8.50% 223 12.50% 21,252 315 106 (406) 984 22,251 (13,200) (626) 8,425 457 $ 18.45

Less: Debt Outstanding (incl. share of unconsolidated (12,816) Less: Preferred Outstanding Net Asset Value Shares Outstanding NAV Per Share Implied Cap Rate (751) 10,369 456 $ 22.72

Source: Goldman Sachs Research.

Goldman Sachs Global Equity Research - December 10, 2003

31

Equity Office Properties Trust

Real Estate: REITs

Company strategy/profile: the giant


EOP is the largest and most liquid REIT, with a $11.2 billion equity market cap. The office landlord owns about 125 million square feet of space nationally. Interestingly, 60% of this space is in suburban markets and 40% in central business districts.

EOP owns and manages approximately 125 million square feet of office space, 60% in the suburbs and the balance located in central business districts (see Exhibit 36). Properties located in the ten largest markets generate about 80% of net operating income, including San Francisco and San Jose (23% combined ), Boston (14%), Seattle (7%), and New York (7%). EOPs portfolio was 86.3% occupied at the end of 3Q2003. The federal government, under the auspices of the General Services Administration (GSA), is EOPs largest tenant, accounting for 1.8% of total annualized rental income, followed by PriceWaterhouseCoopers (1.5%), Washington Mutual Bank (1.4%), and Ogilvy and Mather (1.0%). 10% of EOPs existing leases expire during 2004, followed by 11% in 2004 and 2005.
Exhibit 37: Map of operations

Source: www.eop.com; Equity Office Properties.

Reg AC certification
I, Carey Callaghan, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

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Real Estate: REITs

Equity Office Properties Trust

Disclosures

Goldman Sachs Global Equity Research - December 10, 2003

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Equity Office Properties Trust

Real Estate: REITs

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Goldman Sachs Global Equity Research - December 10, 2003

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Equity Office Properties Trust

Distribution of ratings/investment banking relationships Goldman Sachs Research global coverage universe

70% 60%
53%

Percentage of companies covered by the Goldman Sachs Group, Inc, within the specified category

50% 40%
67%

Percentage of companies within each category for which The Goldman Sachs Group, Inc. has provided investment banking services within the previous 12 months

30% 20% 10% 0%

26% 21% 77% 58%

As of 10/1/03 Goldman Sachs Global Investment Research had investment ratings on 1,654 equity securities.

OP/Buy

IL/Hold

U/Sell

Goldman Sachs uses three ratings - Outperform, In-Line, and Underperform - reflecting expected stock price performance relative to each analyst's coverage group, on an unweighted basis with regard to market capitalization and with a 12-month time horizon. Each analyst also assigns a coverage view - Attractive, Neutral, or Cautious - representing the analyst's investment outlook on the coverage group. NASD/NYSE rules require a member to disclose the percentage of its rated securities to which the member would assign a buy, hold, or sell rating if such a system were used. Although relative ratings do not correlate to buy, hold, and sell ratings across all rated securities, for purposes of the NASD/NYSE rules, Goldman Sachs has determined the indicated percentages by assigning buy ratings to securities rated Outperform, hold ratings to securities rated In-Line, and sell ratings to securities rated Underperform, without regard to the coverage views of analysts.

Source: Goldman Sachs

As of October 1, 2003

Equity Office Properties Trust (EOP)


Goldman Sachs rating and stock price target history
34 32 30 28 26 24

Currency: U.S. Dollar


1,500

1,250

1,000

Stock Price

22

Jul 3 RL RL

Oct 31 MP

Nov 4 IL A S

750

N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J 2000 2001 2002 2003 Source: Goldman Sachs Research for ratings and price targets; Reuters for daily closing prices, as of 10/01/03.

May 21, 2001 to NR from RL

Rating Price target Price target removal S&P 500; pricing by FactSet

Covered by David J. Kostin Not covered by current analyst New rating system as of 11/4/02

The price targets shown should be considered in the context of all prior published Goldman Sachs research, which may or may not have included price targets, as well as developments relating to the company, its industry and financial markets.

Goldman Sachs Global Equity Research - December 10, 2003

Index Price

35

Equity Office Properties Trust

Real Estate: REITs

Company-specific disclosures
The Goldman Sachs Group Inc. beneficially owned 1% or more of a class of equity securities of the following companies as of the end of the month immediately preceding the publication date of this report. If the publication date is less than ten calendar days after month end, The Goldman Sachs Group, Inc. beneficially owned 1% or more of a class of equity securities of the companies as of the end of the second most recent month: Reckson Associates. The Goldman Sachs Group, Inc. and/or its affiliates have received during the past 12 months compensation for investment banking services from the following companies, their parents, or their wholly owned or majority-owned subsidiaries: CarrAmerica Realty Corporation, Boston Properties, Inc., Equity Office Properties Trust, SL Green Realty Corp, and Brookfield Properties Corp. The Goldman Sachs Group, Inc. and/or its affiliates expect to receive or intend to seek compensation for investment banking services in the next 3 months from these companies, their parents, or wholly owned or majority-owned subsidiaries: CarrAmerica Realty Corporation, Trizec Properties Inc., Boston Properties, Inc., Reckson Associates, Equity Office Properties Trust, Mack Cali Realty Corporation, SL Green Realty Corp, and Brookfield Properties Corp. The Goldman Sachs Group, Inc. and/or its affiliates have managed or co-managed a public offering of the following companies' securities in the past 12 months: Boston Properties, Inc. The Goldman Sachs Group, Inc. is a specialist in the securities (including derivative securities) of the following: Boston Properties, Inc. and Reckson Associates.

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Ratings and other definitions/identifiers


Current rating system (effective November 4, 2002) Definitions of ratings
OP = Outperform. We expect this stock to outperform the median total return for the analyst's coverage universe over the next 12 months. IL = In-Line. We expect this stock to perform in line with the median total return for the analyst's coverage universe over the next 12 months. U = Underperform. We expect this stock to underperform the median total return for the analyst's coverage universe over the next 12 months.

Other definitions
Coverage view. The coverage view represents each analyst or analyst team's investment outlook on his/her/their coverage group(s). The coverage view will consist of one of the following designations: Attractive (A). The investment outlook over the following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation. CIL = Current Investment List. We expect stocks on this list to provide an absolute total return of approximately 15%20% over the next 12 months. We only assign this designation to stocks rated Outperform. We require a 12-month price target for stocks with this designation. Each stock on the CIL will automatically come off the list after 90 days unless renewed by the covering analyst and the relevant Regional Investment Review Committee.

Other ratings/identifiers
NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Goldman Sachs policies in circumstances when Goldman Sachs is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. CS = Coverage Suspended. Goldman Sachs has suspended coverage of this company. NC = Not Covered. Goldman Sachs does not cover this company. RS = Rating Suspended. Goldman Sachs Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA = Not Available or Not Applicable. The information is not available for display or is not applicable. NM = Not Meaningful. The information is not meaningful and is therefore excluded.

Global Investment Policy and Regional Investment Review Committees


The Global Investment Policy Committee oversees ratings policy, monitors the distribution of ratings and the composition of the CIL, provides guidance to the Regional Investment Review Committees, and oversees the implementation of methodology for portfolio allocation by sectors. A Regional Investment Review Committee in each of the Americas, Europe, Japan, and Asia-Pacific regions approves all rating changes and approves stocks for inclusion on the Current Investment List in its region.

Previous rating system definitions


RL = Recommended List. Expected to provide price gains of at least 10 percentage points greater than the market over the next 6-18 months. LL = Latin America Recommended List. Expected to provide price gains at least 10 percentage points greater than the Latin America MSCI Index over the next 6-18 months. TB = Trading Buy. Expected to provide price gains of at least 20 percentage points sometime in the next 6-9 months. MO = Market Outperformer. Expected to provide price gains of at least 5-10 percentage points greater than the market over the next 6-18 months. MP = Market Performer. Expected to provide price gains similar to the market over the next 6-18 months. MU = Market Underperformer. Expected to provide price gains of at least 5 percentage points less than the market over the next 6-18 months.

Goldman Sachs Global Equity Research - December 10, 2003

Real Estate: REITs

Equity Office Properties Trust

Disclaimer
Copyright 2003 The Goldman Sachs Group, Inc. All rights reserved. The Goldman Sachs Group, Inc. is a full-service, integrated investment banking, investment management, and brokerage firm. We are a leading underwriter of securities and a leading participant in virtually all trading markets. We have investment banking and other business relationships with a substantial percentage of the companies covered by our Investment Research Department. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Our research professionals are paid in part based on the profitability of The Goldman Sachs Group, Inc., which includes earnings from the firms investment banking and other business. The Goldman Sachs Group, Inc. generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or futures of any companies that the analysts cover. Additionally, The Goldman Sachs Group, Inc. policy prohibits its analysts, persons reporting to analysts, or members of their households from serving as an officer, director, or advisory board member of any companies that the analysts cover. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of clients of The Goldman Sachs Group, Inc. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. The Goldman Sachs Group, Inc. does not provide tax advice to its clients, and all investors are strongly advised to consult with their tax advisers regarding any potential investment. Certain transactions including those involving futures, options, and other derivatives as well as non-investment-grade securities give rise to substantial risk and are not suitable for all investors. This report is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed are our current opinions as of the date appearing on this material only. We endeavor to update on a reasonable basis the information discussed in this material, but regulatory, compliance, or other reasons may prevent us from doing so. We and our affiliates, officers, directors, and employees, excluding equity analysts, will from time to time have long or short positions in, act as principal in, and buy or sell the securities or derivatives (including options and warrants) thereof of companies mentioned herein. For purposes of calculating whether The Goldman Sachs Group, Inc. beneficially owns or controls, including having the right to vote for directors, 1% of more of a class of the common equity security of the subject issuer of a research report, The Goldman Sachs Group, Inc. includes all derivatives that, by their terms, give a right to acquire the common equity security within 60 days through the conversion or exercise of a warrant, option, or other right but does not aggregate accounts managed by Goldman Sachs Asset Management. No part of this material may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without The Goldman Sachs Group, Inc.s prior written consent. 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Goldman Sachs International and its non-US affiliates may, to the extent permitted under applicable law, have acted on or used this research, to the extent that it relates to non-US issuers, prior to or immediately following its publication. Foreign-currency-denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or income derived from, the investment. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies, effectively assume currency risk. In addition, options involve risk and are not suitable for all investors. Please ensure that you have read and understood the current options disclosure document before entering into any options transactions. Further information on any of the securities mentioned in this material may be obtained on request, and for this purpose, persons in Italy should contact Goldman Sachs S.I.M. 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Unless governing law permits otherwise, you must contact a Goldman Sachs entity in your home jurisdiction if you want to use our services in effecting a transaction in the securities mentioned in this material. Other disclosure information is available at http://www.gs.com/research/hedge.html or from Research Compliance, One New York Plaza, New York, NY 10004.

Goldman Sachs Global Equity Research - December 10, 2003

Equity Office Properties Trust

Real Estate: REITs

Goldman Sachs US Investment Research


Co-Directors of US Research Kimberly E. Ritrievi (212) 902-7693 David Tenney (212) 902-6791
Accounting
Michael B. Clement Michael A. Moran, CFA (212) 855-0469 (212) 357-3512 (212) 902-0394

Environmental services
Aldo Mazzaferro, CFA (212) 902-9916

PC hardware
Laura Conigliaro (212) 902-5926

Economics
Jan Hatzius

Equity derivatives
Maria Grant, CFA (212) 855-0070

Pharmaceuticals, major
James Kelly (212) 357-7536

Portfolio strategy
Abby Joseph Cohen, CFA David J. Kostin (212) 902-4095 (212) 902-6781 (212) 902-6753

Food
Romitha Mally (212) 902-2533

Pharmaceuticals, specialty
Amy Stevens, M.D. (212) 902-5306

Aerospace & defense electronics


Glenn Engel, CFA

Gaming and lodging, cruises


Steven Kent, CFA (212) 902-6752

Publishing & information services


Peter P. Appert, CFA (415) 249-7480

Airlines
Glenn Engel, CFA (212) 902-6753

Healthcare facilities
Andrew Bhak (212) 902-0535

Radio & TV broadcasting


Richard Rosenstein (212) 902-6718

Apparel, footwear & textiles


Margaret Mager (212) 902-3099

Healthcare technology & distribution


Christopher McFadden, CFA (212) 357-0136

REITs
Carey Callaghan (212) 902-4351

Autos & auto parts


Gary Lapidus (212) 902-2359

Imaging technology
Jack L. Kelly, CFA (212) 902-6764

Restaurants
Coralie Tournier Witter, CFA (212) 855-0276

Banks, large-cap
Lori B. Appelbaum (212) 902-6846

Insurance/life
Joan H. Zief (212) 902-6778

Retail, hardlines
Matthew J. Fassler (212) 902-6740

Banks, mid-cap
Lori B. Appelbaum (212) 902-6846

Insurance/nonlife
Thomas V. Cholnoky (212) 902-3408

Retailing, department stores


George Strachan Adrianne Shapira (212) 902-6708 (212) 357-4174 (212) 902-6835

Beverages
Marc Cohen (212) 902-0004

Integrated oil
Arjun N. Murti (212) 357-0931

Retailing, food & drug


John Heinbockel

Biotechnology
May-Kin Ho, Ph.D. Meg Malloy, CFA (212) 902-6723 (212) 902-7839 (212) 357-4333

Internet
Anthony Noto (212) 357-1849

Semiconductor capital equipment


James Covello (212) 902-1918

Chemicals, commodity
Robert Koort, CFA

Machinery
Joanna Shatney (212) 902-1079

Semiconductor devices
Andrew Root (212) 902-2550

Chemicals, specialty
Robert Koort, CFA (212) 357-4333

Managed care
Matthew Borsch, CFA (212) 902-6784

Small companies
Chris Hussey David Small (212) 902-7564 (212) 902-1890 (212) 902-6772 (212) 902-6719 (212) 902-5926

Commodities
Steven Strongin (212) 357-4706

Medical supplies & devices


Lawrence Keusch (617) 204-2051

Specialty finance
Michael S. Hodes Robert G. Hottensen

Computer services and IT consulting


Gregory Gould (212) 902-7771

Metals & mining


Alberto Arias Aldo Mazzaferro, CFA Jim Copland (212) 902-9884 (212) 902-9916 (212) 357-3519 (212) 902-6719

Storage networking
Laura Conigliaro

Cosmetic, household, & personal care products


Amy Low Chasen (212) 902-6748

Motrgage finance
Robert G. Hottensen

Technology strategy
Laura Conigliaro Rick G. Sherlund Brantley Thompson (212) 902-5926 (212) 902-6790 (212) 902-9823

Electric utilities
Jonathan Raleigh (212) 357-6334

Multi-industry
Jack L. Kelly, CFA Deane M. Dray, CFA (212) 902-6764 (212) 902-2451 (212) 902-6018 (212) 902-0324 (212) 357-0931

Telecom equipment - wireline/wireless

Electronics manufacturing services


Stephen Savas (212) 902-2082

Natural gas
David Fleischer, CFA David Maccarrone, CFA

Telecom services - wireline/wireless


Frank J. Governali, CFA (207) 772-3300

Enterprise application & infrastructure software


Rick G. Sherlund Sarah Friar (212) 902-6790 (415) 249-7436 (212) 902-5926

Oil & gas exploration & production


Arjun N. Murti

Tobacco
Judy E. Hong (212) 902-0490

Enterprise hardware
Laura Conigliaro

Oil services & equipment


Terry Darling (212) 357-0379

Washington research
Joan Woodward Alec Phillips (202) 637-3757 (202) 637-3746

Entertainment
Anthony Noto (212) 357-1849

Paper & Forest Products


Richard Skidmore, CFA (212)357-5509

E-mail: firstname.lastname@gs.com

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