Reit Valuation: The Case of Equity Office Properties

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This case will require the student to value the equity of Equity Office Properties, Incorporated (NYSE: EOP) and make a buy or sell recommendation as an independent analyst. The data given should be examined to determine whether or not the company's stock is valued above or below the market price in order for investors to make a buy or sell decision. The student must assess the real estate industry environment using Porter's five-force model of competitive strategy and the DuPont identity. Valuation techniques employed include the capital asset pricing model, the two-stage dividend-discount model, the P/E valuation approach, and the Gordon model.


The student is placed in the role of an equity analyst and asked to prepare a buy or sell recommendation for Equity Office Property (NYSE: EOP) stock. EOP is the nation's largest office building owner and manager, as well as the largest real estate investment trust (REIT) in the United States. The student must assess the competitive environment of EOP using the DuPont identity and Porter's five force model of competitive strategy as well as estimate the value of EOP stock. All information in the case is publicly available.



The valuation of the common stock for Equity Office Properties, a large cap stock, is the focus of this case. The student must remember, however, that they are to interpret the case from the perspective of an external analyst or investor. Implementation of processes that address industry concerns through Porter's Five Force Model and the usage of the Dupont identity will identify the company's strength and weaknesses among its competition. The difficulty level of the case is appropriate for seniors or first year graduate students. The case should take a maximum of two hours of class time and two and one-half hours of student preparation outside of class.

Stock evaluation issues relating/but not limited to the following are to be discussed:

* the expected return

* risk-free rates

* security's beta

* discount rate

* growth rates

Teaching Plan

Class discussion should be initiated with the students identifying Porter's five competitive forces and the strength of these pressures. Instructors may want to focus on the following topics for class discussion.

1. List and describe the sources and strengths of the five competitive forces.

2. Analyze the ROE, Profit Margin, and ROA using the Dupont identity.

3. Calculate the expected return for EOP stock.

4. Estimate the value for EOP stock using the constant growth model.

5. Determine the value estimate using a Price/Earnings valuation approach.

6. Find the value estimate for EOP using the two-stage Dividend Discount Model.

7. Present an overall external investment recommendation to buy or sell the stock based on your analysis. Explain.

Discussion Questions

1. List and describe the sources and strengths of the five competitive forces.

* Threat of entry by new competitors

* Threat of substitute goods

* Bargaining power of buyers

* Bargaining power of suppliers

* Rivalry among existing competitors

Threat of entry by new competitors

No matter the industry, the threat of new companies entering into the market will always prevail. However, the real estate industry seems to be a quite different monster when it comes to new companies coming into a geographical area and breaking new ground. Once a location gets saturated, there may not be any more land available for development.

EOP is in a relatively good position as far as the competition is concerned. The total capitalization of EOP is approximately $25 billion and they manage 124.1 million square feet of office space in 721 buildings in metropolitan areas all across the United States. …


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