By Jennifer D. Duell

Richard Kincaid was promoted to president and CEO of Equity Office Properties Trust (NYSE: EOP) in 2003, under the leadership of chairman and founder Sam Zell, one of the leading real estate and business entrepreneurs in the world. Moreover, Kincaid stepped into the head position right in the middle of one of the worst office markets in modern history.

Since taking on the role, Kincaid has made some major changes at Equity Office, which now owns and manages a portfolio comprised of 620 properties totaling 110 million square feet of office space in 17 major markets. Portfolio sat down with Kincaid to discuss the challenges of leading the nation's largest office REIT and what's next for the company.

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AGE: 44 EDUCATION: Master's degree in business administration from the University of Texas and a Bachelor's degree in business administration from Wichita State University. FAMILY: Wife, two sons and a daughter MOST RECENTLY READ BOOK: "The Kite Runner" by Khaled Hosseini and "Tell No One" by Harlan Corbin FAVORITE RECREATIONAL ACTIVITIES: Skiing, hiking, tennis FAVORITE SPORTS TEAMS: Chicago Bulls, Chicago Bears, University of Kansas Jayhawks COMMUNITY ACTIVITIES: He supports Little Star, which aids children with life-threatening illnesses, and who are abused or in need. He also supports the Chicago Children's Advocacy Center, which serves abused children. Along with his wife, he supports Doctors without Borders and the Wichita State University Foundation. OTHER PROFESSIONAL ACTIVITIES: On the board of directors of timber REIT Rayonier, Inc. (NYSE: RYN). He is also a member of the executive committee and board of governors of NAREIT and serves on the board of directors of the Real Estate Roundtable.

Portfolio: The past few years have been somewhat challenging from the standpoint of office market performance. How has Equity Office changed its strategy and what kind of performance expectations do you have for this year?

Kincaid: The office market certainly has been challenging, and we've changed the way we operate to put us in a position to perform well in the challenging environment. We changed our sales channel with brokers and introduced space options for different customer segments, such as pre-built suites and shorter-term leases. We've really started to focus on segmenting the marketplace.

We have reorganized from building-centric to portfolio-centric and have looked hard at where we wanted to concentrate our portfolio. Over the past few years, we've exited a number of our markets to focus on super core markets, places where we want to have operating infrastructure throughout real estate cycles. Right now, we're primarily in coastal markets as well as Chicago, Denver and Austin. It's a two-pronged strategy: we want to be in supply-challenged markets and be in markets that have the higher-end white collar job growth. Today, 86 percent of our NOI is from our 10 largest markets.

Portfolio: What are Equity Office's great attributes?

Kincaid: We have tried to ensure that we conduct ourselves at the highest level of integrity and we have been very open in terms of accounting, information and governance. I want to make sure that there is no question about how we conduct ourselves in business and as individuals.

I've tried to make Equity Office a great example for how a public company should be run.

Portfolio: What are the biggest challenges that Equity Office is facing from a competitive standpoint?

Kincaid: As a public REIT with a national scope, there's no other REIT similar to us now that Trizec Properties, Inc. and CarrAmerica have been acquired. We're truly the only national office REIT, and we're much larger than other office REITs. We're always compared to other companies that aren't like us, and we continually strive to broadcast the message that we offer a fairly steady high total return relative to risk and to the S&P 500. We offer a sort of core-plus type of strategy, while our competi-tors are more high risk—they are concentrated in fewer markets or more focused on development. We can't be expected to outperform someone who is located completely in New York City where the vacancy rate is 5 percent, and the vacancy rate in the majority of our markets is 12 percent. We have to look more broadly at how the other large cap REITs are doing and make sure that we're outperforming in the markets that we're in.

Portfolio: In 2005, Equity Office was a net seller. How would you describe your acquisition and disposition activity this year?

Kincaid: We'll end up assuredly being a net seller again this year. There's such demand that it makes it difficult for us to do acquisitions that don't exceed our cost of capital. Since 2003, our company has been paring down the portfolio and has sold more than $5 billion in assets. I still think there's an opportunity to sell more. Since 2003, we've also been buying back stock, and have purchased $3.5 billion.

From an acquisition standpoint, we are going after larger assets with vacancy rollover. For example, we closed in mid-July on a property in midtown Manhattan for approximately $525.1 million. It's a 906,287-square foot building that we bought for $579 per square foot, which is a great price. Right now, it's 97.5 percent leased, but a major tenant is vacating space that is currently $15 below market. We were able to go in and negotiate a lease termination, and we'll be able to bring that space up to market rental rates.

Portfolio: This year, Equity Office entered Southern Florida. What are your plans to expand in that market and do you have any plans to enter any new markets?

Kincaid: Southern Florida is an interesting market. We had a presence there a long time ago, but we sold it. We started watching the region again about a year and a half ago, but we had concerns about the inventory. However, it's very attractive because it's become supply constrained since many office development sites were taken out by residential developers and there is a lot of white collar job growth. We're going to add to our portfolio down there when we can. For any market that we're in, we want to be one of the major players.

Portfolio: Tell us about one of Equity Office's latest broker and customer program changes.

Kincaid: We have rolled out a program that we call "the space between," which is a broader pricing initiative where we apply quantitative tools to showcase the trade between the options of leasing space at a cheaper rate versus leaving it empty. This program couples science with the art of leasing space to ensure that we're maximizing your best space and appropriately pricing our more challenged space. We've found it very effective.

Portfolio: You said that expenses rose in 2005 from energy, construction costs and insurance. How is Equity Office handling expenses going forward?

Kincaid: It's an interesting issue for everybody in our sector. During our first quarter 2006, the same store expenses were up 11 percent. We have some flexibility in our leases so we can pass on higher energy costs, but it still impacts on our vacant space.

We've seen construction costs grow for our tenant improvements, but we've been fortunate on the insurance side because we have not been exposed due to our captive insurance company.

We monitor energy usage with sophisticated monitoring systems and strive to reduce what we use. By using algorithms, the software, which is linked to a building's mechanical systems, can adjust itself based on the weather forecast and even assists you by self-auditing the utility bills.

Portfolio: What are Equity Office's strategic objectives for 2006 and the longer term?

Kincaid: Our main focus is to continue executing on the strategy that we put in place to deal with the challenging office market. We also want to focus on marketing so we get more leasing without giving up economics. We are continuing to work hard on keeping costs in line and we are taking advantage of an environment that is favorable for selling assets.