Fitch Downgr Archstone Communities Trust; Merger Announcement.

Business Editors

NEW YORK--(BUSINESS WIRE)--Oct. 31, 2001

Fitch has downgraded its ratings for $1.4 billion of the senior unsecured debt issued by Archstone Communities Trust (NYSE: ASN) from `A-` to `BBB+' and for $250 million of preferred stock from `BBB+' to `BBB' following today's announcement that the company had concluded its merger with Charles E. Smith Residential Realty, Inc. (NYSE: SRW) and renamed itself Archstone-Smith (NYSE: ASN). Charles E. Smith's $250 million of preferred stock has been reissued by Archstone- Smith, and is upgraded from `BBB-' to `BBB'. Following the downgrade, Archstone's ratings are removed from Rating Watch Negative. The Rating Outlook for Archstone-Smith is Stable.

The Fitch ratings reflect credit concerns from Archstone's incrementally lower coverage levels, which had been trending downward prior to the merger, the fact that the Smith portfolio is largely encumbered with mortgages that carry lock-out periods and prepayment penalties making them difficult to unencumber in the near-term, a large geographic concentration in Washington D.C. and the San Francisco Bay Area, as well as the risks associated with an ambitious development and capital recycling program into a new property type. Credit positives are also reflected in the ratings, particularly the relative scale of Archstone's institutional quality portfolio of multifamily assets, which are located in very protected markets, a capable and seasoned management team, and a conservative balance sheet. Fitch has determined that these factors culminate into a risk profile that provides appropriate debt protection for the `BBB+' senior unsecured rating category.

On a pro forma basis, the combined company will have a total market capitalization of approximately $9.1 billion and rank as the second largest multifamily REIT in a steadily consolidating sector. Fitch believes that the merger is strategically well founded, as it will provide Archstone with a greater presence in the Washington, D.C., Southeast Florida, Chicago and Boston markets, as well as a development capability that will allow it to grow organically into the high-rise markets of the San Francisco Bay Area, Los Angeles, San Diego, and other urban regions characterized by high barriers to new development and a history of above-average rent growth. However, Fitch notes that the transaction, which effectively reduces Archstone's San Francisco Bay Area concentration from 12% to 10% of total investments, results in a material geographic concentration in Washington D.C. of 29%.

Although Archstone's leverage will remain in the low 40% range and its EBITDA to interest coverage ratio will remain in the low-3 times (x) range, it does not remedy an incremental decline in coverage (from 3.8x in 1998) that Archstone incurred from a $505 million share repurchase from Security Capital Group in 2000, which prompted Fitch to place Archstone's `A-` senior debt rating on Negative Outlook. Additional credit concerns include an increased level of mortgage debt from Smith's predominantly secured portfolio, which reduces encumbered net operating income (NOI) as a percent of total NOI from 72% to 57%. However, the transaction will not change the amount of unencumbered assets contributed by the Archstone portfolio, which Fitch estimates provides satisfactory 1.9x coverage of unsecured debt as of June 30, 2001 (using conservative historical cost values) for the `BBB+' rating category. Fitch anticipates that Archstone's revenues will continue to be of high quality with less than 6% of total revenue contribution from unconsolidated ventures or subsidiaries.

Based on Archstone's presence in West Coast markets and Smith's experience with high-rise properties, the combined company expects that it will be able to expand its high-rise portfolio into other metropolitan regions over time, including Los Angeles, San Francisco, Seattle, and Manhattan. While this would potentially benefit portfolio quality, Archstone will be dependent upon the high-rise development expertise of the Smith organization, which will be organizationally centered in a new high-rise division. The cost of such an expansion program could be considerable, as entry into urban CBDs are likely to include both acquisitions and development as a way to gain critical mass, which pose additional risk from the economic concentration and longer lease-up cycle from the high-rise asset type. Fitch recognizes that funding requirements will be off set by the recycling of approximately $1 billion of primarily non-core garden community assets, for which Archstone has an excellent track record of accomplishing as it has sold more than $1 billion of assets year to date in 2001 alone, but it also recognizes that there may be new challenges posed to Archstone as it strives to accretively redeploy the proceeds into high-rise projects with tighter yields due to more difficult entitlements, and higher land prices and construction costs. Nevertheless, Archstone has ample near-term liquidity to meet the combined Archstone - Smith development and acquisition pipeline and modest debt maturities from full capacity under an expanded $800 million of unsecured credit facilities, an estimated $350 million of cash, as well as proven access to capital markets.

The Archstone-Smith merger was structured as a stock-for-stock transaction, and also included Archstone's conversion to an UPREIT format to accommodate partnership interests in the Smith portfolio. Since all of Archstone's property interests, bank debt, and senior unsecured notes will be held at the operating partnership level, the UPREIT conversion is credit neutral.

The Rating Outlook is Stable reflecting Fitch's belief that Archstone-Smith will be able to generate stable earnings while properly integrating and utilizing Smith's development organization to successfully execute its stated goal of capital recycling non-core assets from Archstone's garden communities into high-rise properties in higher barrier to entry urban markets within its current capital structure. The Outlook further anticipates that Archstone-Smith will not materially alter its ratio of unencumbered cash flow by continuing its strategy of utilizing unsecured credit lines to fund developments.