Zacks Investment Research



| Arden Realty |(ARI-NYSE) |

|Current Recommendation |Hold |

|Prior Recommendation |Sell |

|Date of Last Change |03/08/2004 |

| | |

|Current Price (03/09/06) |$45.53 |

|Six- Month Target Price | |

OUTLOOK

|Analyst must write |

SUMMARY DATA

|52-Week High |$47.12 |

|52-Week Low |$33.01 |

|One-Year Return (%) |33.02 |

|Beta |0.29 |

|Average Daily Volume (sh) |627,685 |

| | |

|Shares Outstanding (mil) |67 |

|Market Capitalization ($mil) |$3,065 |

|Short Interest Ratio (days) |1.07 |

|Institutional Ownership (%) |94 |

|Insider Ownership (%) |10 |

| | |

|Annual Cash Dividend |$2.02 |

|Dividend Yield (%) |4.44 |

| | |

|5-Yr. Historical Growth Rates | |

| Sales (%) |1.0 |

| Earnings Per Share (%) |-4.1 |

| Dividend (%) |0.6 |

| | |

|P/E using TTM EPS |18.9 |

|P/E using 2006 Estimate |18.0 |

|P/E using 2007 Estimate |17.1 |

| | |

|Zacks Rank |3 |

| | |

|Risk Level |Low |

|Type of Stock |Mid-Blend |

|Industry |Reit-Eqty Trust |

|Zacks Rank in Industry |55 of 130 |

KEY POINTS

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OVERVIEW

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INDUSTRY OUTLOOK

INDUSTRY OUTLOOK - NEUTRAL

Our outlook for the publicly traded real estate industry, comprised primarily of real estate investment

trusts (REITs), is neutral. The sector is at an interesting inflection point in its typical cycle. Operating

fundamentals have been declining over the past few years, but are finally beginning to stabilize. Cash

flow across the sectors has been depressed, but some companies are beginning to forecast growth over

the next year. Despite the weak operating environment, REIT share prices are at or just off all-time

highs, as historically low-interest rates have inflated FFO multiples well above past ranges. With access

to exceptionally cheap capital (most REITs can borrow at 5% or less) and relatively low cost of capital

(given high cash flow multiples being paid by investors), most REIT owners can buy low-growth, low cap

rate properties (defined as net operating income (NOI) yield on invested capital) and still make profitable

spreads. Given the low cap rate environment, most companies are taking the opportunity to prune their

portfolios and achieve extremely attractive pricing on dispositions, using proceeds in most cases to pay

down debt and strengthen balance sheets. With some companies' operating results still negative, a few

companies must sell assets to maintain their dividends, which we view as a fairly large negative when

evaluating the investment merits of individual companies, as financing a net deficit will put these

companies at a competitive disadvantage when external growth via acquisition becomes more attractive

(i.e., they will not have the available capital competing buyers will have). The confluence of low but rising

interest rates, high multiples, and negative to stabilizing operating results should make for a relatively flat

trading market for REIT shares. As interest rates rise, which we believe will continue for the foreseeable

future, we would expect multiples to contract (or, share prices will come down). However, with operating

results stabilizing, most REITs should be able to grow into inflated multiples over the next few years via

FFO expansion, leaving investors with a relatively flat outlook for share prices but overall positive returns

when including dividends, which currently yield about 5% over the sectors.

Some sectors are better positioned than others at this point in the cycle. With continuing strong

consumption in the U.S., retail REITs should continue to see favorable returns. Recent M&A activity

might suggest a near-term top in the mall REIT sector: Simon Property Group (SPG) recently announced

its intentions to acquire Chelsea Property Group (CPG), and General Growth Properties (GGP) closed its

previously announced acquisition of Rouse (RSE). We continue to believe that investors should see

near-term gains in strip-center REITs, with Developer's Diversified (DDR) and Federal Realty Trust

(FRT), in particular, showing continuing strength in operations, and relatively modest valuations.

We believe that in a rising interest rate environment, which implies improving economic growth for the

most part, real estate services companies should provide outstanding returns for investors. While asset

owners should see some contraction in multiples, any pick-up in economic activity generally helps

companies such as Jones Lang LaSalle (JLL), whose leasing and asset management services business

generally see increasing demand as the economy improves.

Mortgage REITs continue to demonstrate discipline in spread investing operations, and debt issuance

among most REITs continues to grow, giving companies in this sector ample opportunity for investment.

We believe most companies in this sector are fairly valued however, therefore shares may trade in a

range at this point.

We view the apartment and office/industrial sectors unfavorably for the most part. Most companies in

both sectors have yet to find an operating bottom, and as such, have not yet seen an uptick in operating

results. Apartment REITs, in particular, may be in a secular operating decline, with access to affordable

mortgage financing increasing for first-time and lower-income home buyers, who have historically been

the primary apartment renting demographic. For investors looking to invest in apartment REITs, we

believe the only place to put money to work is in companies located in markets where monthly rents are

measurably less expensive than a competing monthly mortgage payment (or where the housing

affordability index is relatively high). Office owners continue to see rent roll-downs (or lower market

rates) on expiring leases. In most markets, market rent rates are 10%-15% lower than existing lease

rates, which should continue to pressure office REIT cash flow in 2005. Importantly, both sectors are

struggling with dividend coverage, as most office and apartment REITs are running at negative free cash

flow after a few years of declining cash flow and must sell properties to help pay quarterly dividends.

On a valuation basis, most sectors are trading at the upper end of historical ranges, with apartment

REITs the highest among all sectors. On average, most REITs are trading at 12x-13x 2005 estimated

FFO, with an average dividend yield in the 5% range. Most REITs continue to trade at premiums to net

asset value (NAV), typically in the 110%-115% range, but some as high as 120% of NAV. Historically,

REITs have traded at slight premiums to NAV more in the 103%-106% range. Overall, we are

forecasting relatively flat FFO growth in 2005 overall, particularly as some of the heavier property sellers

see near-term NOI dilution, and resultant FFO declines, as a result of smaller portfolios without offsetting

acquisitions to maintain run-rates. In a six to 12 month timeframe, we believe investors should see about

5% total returns at this point, almost entirely derived of dividends.

INDUSTRY POSITION

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RECENT NEWS

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VALUATION

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RISKS

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INSIDER TRADING AND OWNERSHIP

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PROJECTED INCOME STATEMENT & BALANCE SHEET

HISTORICAL ZACKS RECOMMENDATIONS

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DISCLOSURES

The analysts contributing to this report do not hold any shares of ARI. Zacks EPS and revenue forecasts are not consensus forecasts. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Buy- Zacks expects that the subject company will outperform the broader U.S. equity market over the next one to two quarters. Hold- Zacks expects that the company will perform in line with the broader U.S. equity market over the next one to two quarters. Sell- Zacks expects the company will under perform the broader U.S. Equity market over the next one to two quarters. The current distribution of Zacks Ratings is as follows on the 1135 companies covered: Buy- 18.9%, Hold- 75.9%, Sell – 4.9%. Data is as of midnight on the business day immediately prior to this publication.

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Month Day, Year

[pic]Equity Research Greg Sukenik

155 North Wacker Drive Chicago, IL 60606

ZACKS ESTIMATES

Revenue

(in millions of $)

| |Q1 |Q2 |Q3 |Q4 |Year |

| |(Mar) |(Jun) |(Sep) |(Dec) |(Dec) |

|2004 |105 A |105 A |104 A |105 A |409 A |

|2005 |102 A |110 A |115 A |114 A |442 A |

|2006 |108 E |112 E |114 E |116 E |449 E |

|2007 | | | | | |

Earnings per Share

(EPS is operating earnings before non recurring items)

| |Q1 |Q2 |Q3 |Q4 |Year |

| |(Mar) |(Jun) |(Sep) |(Dec) |(Dec) |

|2004 |$0.65 A |$0.61 A |$0.64 A |$0.66 A |$2.55 A |

|2005 |$0.58 A |$0.62 A |$0.63 A |$0.58 A |$2.40 A |

|2006 |$0.62 E |$0.63 E |$0.63 E |$0.65 E |$2.54 E |

|2007 | | | | |$2.67 E |

|Zacks Projected EPS Growth Rate - Next 5 Years % |5 |

| | |

| Top 5 Public Companies in the industry |

| | | | |

|Ticker |Company |Market Share |Zacks |

|  |  | |Rec |

|HMT |Host Marriot Cp |6% |Buy |

|SPG |Simon Property |5% |Buy |

|GGP |Genl Grwth Ppty |5% |Hold |

|EOP |Equity Off Prpt |5% |Sell |

|VNO |Vornado Rlty Tr |4% |Hold |

| Arden Realty |  |

|Income Statement and Balance Sheet |  |

|(Dollars in millions, except EPS data) |  |

|  | | | | | | | | |

| |12/01 |12/02 |12/03 |12/04 |12/05 |12/06E |

|Sales | |419 |412 |414 |409 |442 |449 |

|  |Cost of Goods Sold |123 |130 |133 |134 |149 |151 |

|  |SG&A |12 |13 |18 |20 |34 |34 |

|  |Other operating expenses |102 |110 |118 |122 |131 |134 |

|  |Interest and other |77 |84 |93 |97 |105 |107 |

|Zacks Adjusted Income before NRI |98 |69 |46 |37 |69 |171 |

|Net Income |98 |70 |59 |74 |65 |171 |

|Diluted EPS before NRI |1.53 |1.07 |0.72 |0.56 |1.03 |2.54 |

|Reported EPS |1.53 |1.09 |0.92 |1.12 |0.98 |2.54 |

|  | | | | | | |

|Cash & Marketable Securities |56 |25 |24 |28 |28 |28 |

|Current Assets |99 |47 |51 |65 |101 |101 |

|Current Liabilities |94 |108 |109 |117 |111 |111 |

|Long Term Debt |1,251 |1,402 |1,350 |1,326 |1,624 |1,624 |

|Shareholder's Equity |1,337 |1,247 |1,210 |1,196 |1,153 |1,324 |

Industry Comparables

| |Pr Chg |P/E CurrFY |EPS Gr |Price/ |Price/ |Price/ |

| |YTD | |5Yr Est |Book |Sales |CF |

|ARDEN REALTY |1.6 |17.8 |4.8 |2.6 |7.0 |14.8 |

| | | | | | | |

|Industry Mean |7.9 |15.0 |7.6 |3.2 |5.5 |19.1 |

|Industry Median |8.9 |14.4 |6.5 |2.0 |5.2 |14.3 |

|S&P 500 |1.9 |15.6 | |4.3 |2.7 |14.4 |

| | | | | | | |

|SL GREEN REALTY |21.9 |20.6 |7.5 |3.2 |8.9 |23.3 |

|HIGHWOODS PPTYS |15.6 |13.9 |3.1 |1.8 |3.8 |9.8 |

|PENN RE INV TR |9.9 |11.4 | |1.5 |3.5 |11.3 |

|FED RLTY INV |18.7 |21.6 |7.1 |5.9 |9.2 |21.7 |

| | | | | | | |

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