[0] S&P Affms Rtgs on Equity Office Prop and Spieker Prop.

Business Editors

NEW YORK--(BUSINESS WIRE)--Standard & Poor's

Feb. 23, 2001--Standard & Poor's today affirmed its triple-'B'-plus corporate credit and senior unsecured ratings and triple-'B' preferred stock ratings on Equity Office Properties Trust and EOP Operating L.P. The outlook for Equity Office is stable. At the same time, Standard & Poor's affirmed its triple-'B' corporate credit and senior unsecured ratings and triple-'B'-minus preferred stock ratings on Spieker Properties Inc. and Spieker Properties L.P. The outlook for Spieker is positive. These rating actions are in response to the recently proposed merger between these two public real estate investment trusts.

Upon closing of the merger, which is currently expected to take place in June, the rating on Spieker's $2.22 billion of rated senior unsecured debt and $350 million of rated preferred stock will be raised one notch, as EOP will assume these securities. Should the merger not take place, Standard & Poor's would likely affirm Spieker's rating with a stable outlook.

Equity Office, which currently has a market capitalization of over $20 billion, recently announced that it intends to acquire Spieker Properties Inc. in a largely equity-financed transaction totaling $7.2 billion. The affirmation of both companies' ratings acknowledges the good strategic fit between the two companies, the resulting enhancement of Equity Office's position as the nation's dominant office REIT, and no diminution to Equity Office's key financial measures as a result of the transaction. However, these transaction benefits are tempered by concerns regarding Equity Office's increased exposure to a concentrated development pipeline, uncertainty surrounding the long-term growth prospects of this transaction given the acquisition timing near what may be a cyclical peak and, to a lesser extent, integration risk.

The transaction brings together Chicago, Ill.-based Equity Office Properties Trust, the largest U.S. REIT with a total market capitalization of over $20 billion, and Menlo Park, Calif.-based Spieker Properties Inc. Post-merger, Equity Office will have a market capitalization of $28 billion with 124 million square foot (sq. ft.) nationwide. Spieker's well-performing portfolio of office and industrial properties, heavily concentrated in the San Francisco Bay area, will enhance Equity Office's market position in many solidly performing markets. Spieker's portfolio includes 25 million sq. ft. of well-positioned office properties and 13 million sq. ft. of industrial properties. Consistent with Equity Office's focus of building a portfolio of institutional-quality office properties, it is expected that the industrial component will eventually by culled from the portfolio.

This merger announcement does follow closely upon the company's June 2000 $4 billion acquisition of Cornerstone Properties, modestly increasing Standard & Poor's integration concerns. While the combination of Equity Office's regional operating infrastructure and management's experience in integrating large portfolios lends support to the successful completion of the merger with Spieker, there will be challenges integrating this large portfolio. This acquisition is by far the largest to be undertaken by Equity Office, but the company's pre-merger size should provide a solid operating platform to help smooth the process.

Equity Office's development activity will increase with this transaction. Spieker is currently pursuing a $424 million two-year pipeline and also owns an additional 157 acres of developable land. The combined pipeline will carry a total cost of $1.12 billion (Equity Office's share is approximately $1 billion) and encompasses potentially 4.5 million sq. ft.; nearly 4 million sq. ft. of which is located in the San Francisco Bay area. While there is healthy pre-leasing associated with these projects, ongoing uncertainty regarding the near-term demand outlook in these markets and the impact of increasing energy costs are modest concerns with this geographically concentrated pipeline. It is expected that the current pipeline will be successfully completed, and it is anticipated that Equity Office will be able to retain appropriate talent from Spieker's experienced development team.

Despite the size of this acquisition, management is maintaining a moderate financial profile. Equity Office's current book value leverage of 50% is expected to remain unchanged as this transaction is being financed with 50% debt. Equity Office is planning on funding a majority of the required $1.1 billion cash portion of the acquisition with draw-downs from its $1 billion credit facility. Spieker's conservative financial profile and the sizable equity component of the transaction bolsters Equity Office's flexibility in terming out this short-term, variable-rate debt. There should be no material impact to fixed charge coverage, which is expected to remain in the mid-2 times range, including increased capitalized interest from a larger development pipeline. Further, the amount by which the combined portfolio's in-place rents are currently below market should help shield coverage measures from potential erosion due to any possible slippage in market rents as these leases mature during the next few years.

OUTLOOK: STABLE

Standard & Poor's acknowledges this merger's potential for improved operating synergies and imbedded rent growth. Management has flexibility in both the manner it chooses to refinance the increased short-term debt and the development projects currently being pursued. The stable outlook does not contemplate any additional large acquisitions in the near term and does assume the company will pursue refinancing in a manner that will retain financial measures at their strong pre-merger levels, Standard & Poor's said. ---CreditWire

Copyright 2001, Standard & Poor's Ratings Services