ProLogis Reports Strong Third Quarter Results

DENVER, Nov. 1 /PRNewswire-FirstCall/ -- ProLogis , a leading global provider of distribution facilities and services, today reported adjusted funds from operations as defined by ProLogis (FFO) of $0.78 per diluted share for the third quarter of 2005, a 9.9% increase over $0.71 per share in the third quarter of 2004. For 2005, FFO excludes a $0.04 per share charge related to merger integration expenses, while FFO for 2004 excludes a $0.01 per share relocation expense. For the third quarter of 2005, net earnings per diluted share increased 50.0%, from $0.42 for the third quarter in 2004 to $0.63, primarily due to gains on the sale of assets that are recognized under GAAP but that are not included in ProLogis' definition of FFO.

For the nine months ended September 30, 2005, FFO was $2.15 per diluted share, up 15.0% from $1.87 in the first nine months of 2004. For 2005, FFO per share excludes $0.19 in relocation and merger integration expenses and cumulative translation losses and impairment charges related to the sale of its temperature-controlled business. For 2004, FFO per share excludes $0.03 per share in charges related to redemption of preferred shares and relocation expenses. For the nine months ended September 30, 2005, net earnings per diluted share increased 23.1%, from $1.08 in the comparable period in 2004 to $1.33, primarily due to the sale of assets as noted above.

"Across our global markets, we continue to see improvement in market conditions, with positive net absorption, strong leasing activity and further increases in occupancies," said Jeffrey H. Schwartz, chief executive officer. "ProLogis' solid financial performance was driven by strong development income, improved property operations and increased income and fees from our property funds.

"In addition, the completion of our merger with Catellus Development Corporation during the quarter added more than $4.7 billion of high-quality real estate assets, while providing excellent land positions and significantly expanding our share of key North American logistics markets."

For the year to date, ProLogis reported a 20.4% increase in FFO from its corporate distribution facilities services (CDFS) business over the same period in the prior year. "Due to the continued strength of our development business, we have raised and tightened our full-year guidance from $2.60 - $2.68 to $2.67 - $2.70 in adjusted FFO per share. Additionally, we have raised earnings per share guidance from $1.60 - $1.80 to $2.65 - $2.85 per share, driven by approximately $1.00 per share from expected sales of non-CDFS assets in the fourth quarter," Mr. Schwartz said. Additionally, the company established a range for 2006 of $2.90 to $3.02 in FFO per share and $1.50 to $1.70 in earnings per share. The company added that its FFO per share guidance does not include merger integration and corporate relocation expenses.

Operating Property Performance Continues to Improve

For the third quarter, the company reported a 1.08% increase in same-store net operating income (a 1.77% increase when straight-lined rents are excluded) and a 1.73% increase in same-store average occupancies when compared with the third quarter of 2004. The company also reported positive rent growth in its same-store pool for the first time in three years with an overall leased percentage in its stabilized portfolio of 93.7%.

"Strong customer demand is driving improvement in occupancies in North America, even as development has accelerated across a number of key markets," Mr. Schwartz said. "Overall occupancies during the quarter rose 30 basis points on average across the top 30 North American logistics markets that we track closely. As a result, rents have firmed throughout the markets and are rising in some. In Europe, distribution optimization continues to support strong leasing in our inventory developments enabling us to maintain high occupancies in our stabilized portfolio, even though some countries' economies remain stagnant. In Asia, both development and leasing activity continue to be brisk due to the relative lack of modern distribution infrastructure in that region."

Strong Leasing in CDFS Pipeline

Walter C. Rakowich, president and chief operating officer, said, "Our pace of development starts moderated in the third quarter, as we indicated it would last quarter. However, at approximately $1.8 billion of development starts year-to-date, including those in CDFS joint ventures, we are confident that we will achieve, or slightly exceed, the upper end of our projected range of $1.9 to $2.0 billion for the year. Improving global market conditions and strong customer relationships continue to support strong leasing in our record CDFS pipeline of completions, repositioned acquisitions and properties under development, which now exceeds $3.1 billion. Completed developments over the past four quarters of $1.4 billion totaling 23.5 million square feet were more than 69% leased at quarter's end, ahead of expectations.

"Additionally, we signed nearly 3.8 million square feet of new CDFS leases in the third quarter -- over 66% with repeat customers. Among the new CDFS leases signed in the quarter were agreements with YUM Brands in Shanghai, Matsushita in Tokyo, Goodyear Dunlop Tires in Madrid and International Paper in central Florida," Mr. Rakowich added.

Strong Demand for Japan Developments and Continued Progress in China

"Our completed CDFS developments in Asia were over 79% leased at quarter-end. In Japan, demand remains very strong, resulting in the vast majority of our major, multi-customer inventory facilities being fully leased upon completion. To address this steady demand, we secured land to develop ProLogis Parc Koshigaya, a 360,000 square-foot inventory facility located just north of Central Tokyo, about half of which is already leased to Sanyo Electric Logistics. We also signed an agreement to develop a facility for Hitachi in Sendai -- our first transaction in this important market located northeast of Tokyo in the Tohuku region.

"In China, we began construction of two facilities for a total of 430,000 square feet in Guangzhou at ProLogis Park Yunpu that are pre-leased to ST-Anda Logistics Co. and broke ground on our first development at the just-opened Yangshan Deep Water Port, in the Shanghai region. Leasing activity is strong, with over 327,000 square feet of leasing in newly completed facilities near Shanghai at ProLogis Park Suzhou and ProLogis Park Taopu during the quarter," Mr. Schwartz concluded.

Third Quarter 2005 Selected Financial and Operating Information - Closed merger agreement with Catellus Development Corporation on September 15, 2005, adding $4.7 billion in gross real estate assets. - Achieved FFO from CDFS transactions of $71.3 million for the quarter, compared with $75.6 million in the third quarter of 2004. FFO amounts do not include unrecognized deferred gains of $16.4 million for the current period and $10.1 million for the same period in 2004. Year-to-date post-deferral, post-tax CDFS margins were 24.3%. - Recycled $405.3 million of capital through CDFS dispositions and contributions during the quarter and $1.04 billion year to date. - Started new developments, including those within CDFS joint ventures, with a total expected investment of $309 million during the quarter and $1.8 billion year to date. - Increased ProLogis' share of FFO from property funds to $23.4 million for the quarter, up 6.4% from $22.0 million in the prior year. - Grew third quarter fee income from property funds to $17.3 million, up 34.1% from $12.9 million in the prior year. - Increased total assets owned and under management to $21.9 billion, up from $15.9 billion at December 31, 2004.

Copies of ProLogis' third quarter 2005 supplemental information will be available from the company's website at http://ir.prologis.com/ or by request at 800-820-0181. The supplemental information also is available on the SEC's website at http://www.sec.gov/. The related conference call will be available via a live webcast on the company's website at http://ir.prologis.com/ at 9:00 am Eastern Time on Tuesday, November 1, 2005. A replay of the webcast will be available on the company's website until November 15, 2005.

ProLogis is a leading provider of distribution facilities and services with 371.9 million square feet (34.6 million square meters) in 2,336 properties owned, managed and under development in 75 markets in North America, Europe and Asia as of September 30, 2005. ProLogis continues to expand the industry's first and largest global network of distribution facilities with the objective of building shareholder value. The company expects to achieve this through the ProLogis Operating System(R) and its commitment to be 'The Global Distribution Solution' for its customers, providing exceptional facilities and services to meet their expansion and reconfiguration needs.

In addition to historical information, this press release contains forward-looking statements under the federal securities laws. Because these statements are based on current expectations, estimates and projections about the industry and markets in which ProLogis operates, management's beliefs and assumptions made by management, they involve uncertainties that could significantly impact ProLogis' financial results. Forward-looking statements are not guarantees of future performance, involve certain risks, uncertainties and assumptions that are difficult to predict. Actual operating results may be affected by changes in general economic conditions; increased or unanticipated competitive market conditions; changes in financial markets, interest rates and foreign currency exchange rates that could adversely affect ProLogis' cost of capital, its ability to meet its financing needs and obligations and its results of operations; the availability of private capital; geopolitical concerns and uncertainties and therefore, may differ materially from what is expressed or forecasted in this press release. For a discussion of factors that could affect ProLogis' financial condition and results of operations, refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Factors" in ProLogis' Annual Report on Form 10-K/A #1 for the year ended December 31, 2004.

ProLogis Third Quarter 2005 Unaudited Financial Results Selected Financial Information (in thousands, except per share amounts and percentages) Three Months Ended Nine Months Ended September 30, September 30, 2005(1) 2004(2) %Change 2005(1) 2004(2) %Change Net Earnings Attributable to Common Shares: Net Earnings attributable to Common Shares $129,402 $79,758 62.2% $261,645 $202,550 29.2% Net Earnings per diluted Common Share $0.63 $0.42 50.0% $1.33 $1.08 23.1% Funds From Operations and Funds From Operations, as adjusted: Funds From Operations attributable to Common Shares $150,837 $133,166 13.3% $387,604 $347,087 11.7% Add back: Excess of redemption values over carrying values of preferred shares redeemed(3) -- -- -- 4,236 Merger integration expenses(4) 8,288 -- 8,288 -- Relocation expenses(5) 246 2,154 4,049 2,845 Cumulative translation losses and impairment charge related to temperature- controlled distribution assets(8) -- -- 26,864 -- Funds From Operations attributable to Common Shares, as adjusted $159,371 $135,320 17.8% $426,805 $354,168 20.5% Funds From Operations attributable to Common Shares per diluted share $0.74 $0.70 5.7% $1.96 $1.84 6.5% Add back: Excess of redemption values over carrying values of preferred shares redeemed(3) -- -- -- 0.02 Merger integration expenses(4) 0.04 -- 0.04 -- Relocation expenses(5) -- 0.01 0.02 0.01 Cumulative translation losses and impairment charge related to temperature- controlled distribution assets(8) -- -- 0.13 -- Funds From Operations per diluted Common Share, as adjusted $0.78 $0.71 9.9% $2.15 $1.87 15.0% EBITDA: EBITDA $226,467 $213,776 5.9% $634,081 $582,770 8.8% Distributions: Actual distributions per Common Share(6) $0.370 $0.365 1.4% $1.110 $1.095 1.4% Footnotes follow ProLogis' Consolidated Balance Sheets. ProLogis Third Quarter 2005 Unaudited Financial Results Consolidated Statements of Earnings (in thousands) Three Months Ended Nine Months Ended September 30, September 30, 2005(1) 2004(2) 2005(1) 2004(2) Revenues: Rental income(9)(10)(11) $152,078 $131,124 $418,173 $398,358 Property management and other property fund fees 17,321 12,931 50,326 36,050 Development management fees and other CDFS income(7) 9,254 373 12,580 2,422 Total revenues 178,653 144,428 481,079 436,830 Expenses: Rental expenses(9)(11) 38,679 33,266 113,239 102,786 General and administrative 23,816 20,678 71,589 60,381 Depreciation and amortization (11) 46,504 41,428 130,793 123,686 Merger integration expenses(4) 8,288 -- 8,288 -- Relocation expenses(5) 246 2,154 4,049 2,845 Other expenses 3,030 1,201 6,312 3,673 Total expenses 120,563 98,727 334,270 293,371 Gains on dispositions of certain CDFS business assets, net (7)(11)(12)(13): Net proceeds from dispositions 355,524 281,692 956,110 911,732 Costs of assets disposed of 290,658 227,738 762,955 777,132 Total gains, net 64,866 53,954 193,155 134,600 Operating Income 122,956 99,655 339,964 278,059 Income from unconsolidated property funds 12,217 11,576 34,992 30,529 Income (loss) from CDFS joint ventures and other unconsolidated investees(14) 301 (621) 668 (1,004) Interest expense(11)(15) (42,549) (38,126) (113,802) (114,935) Interest and other income 3,179 829 6,356 2,037 Earnings before minority interest 96,104 73,313 268,178 194,686 Minority interest (1,327) (1,344) (3,929) (3,811) Earnings before certain net gains (losses) 94,777 71,969 264,249 190,875 Gains recognized on dispositions of certain non-CDFS business assets, net -- -- -- 6,072 Gain on partial disposition of investment in property fund (16) -- -- -- 3,328 Foreign currency exchange gains (losses), net(17) 4,742 (1,343) 8,323 9,882 Earnings before income taxes 99,519 70,626 272,572 210,157 Income taxes: Current income tax expense 2,435 12,180 7,185 18,177 Deferred income tax expense 5,369 2,390 8,190 11,975 Total income taxes 7,804 14,570 15,375 30,152 Earnings from Continuing Operations 91,715 56,056 257,197 180,005 Discontinued Operations: Operating income attributable to assets disposed of and held for sale(11) 1,006 2,438 3,437 5,086 Income (losses) related to temperature controlled distribution assets(8) -- 3,993 (25,150) 10,841 Gains (losses) recognized on dispositions, net(11): Non-CDFS business assets 36,633 1,956 38,840 (887) CDFS business assets 6,402 21,669 6,383 31,133 Total discontinued operations 44,041 30,056 23,510 46,173 Net Earnings 135,756 86,112 280,707 226,178 Less preferred share dividends 6,354 6,354 19,062 19,392 Less excess of redemption values over carrying values of preferred shares redeemed(3) -- -- -- 4,236 Net Earnings Attributable to Common Shares $129,402 $79,758 $261,645 $202,550 Weighted average Common Shares outstanding - basic 196,323 182,213 189,768 181,451 Weighted average Common Shares outstanding - diluted 206,760 192,043 200,022 190,751 Net Earnings per Common Share-Basic: Continuing operations $0.43 $0.27 $1.25 $0.86 Discontinued operations 0.23 0.17 0.13 0.26 Net Earnings Attributable to Common Shares-Basic $0.66 $0.44 $1.38 $1.12 Net Earnings per Common Share-Diluted: Continuing operations $0.42 $0.26 $1.21 $0.84 Discontinued operations 0.21 0.16 0.12 0.24 Net Earnings Attributable to Common Shares-Diluted $0.63 $0.42 $1.33 $1.08 Calculation of Net Earnings per Common Share on a Diluted Basis (in thousands, except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, 2005(1) 2004(2) 2005(1) 2004(2) Basic Net Earnings Attributable to Common Shares $129,402 $79,758 $261,645 $202,550 Minority interest 1,327 1,344 3,929 3,811 Diluted Net Earnings Attributable to Common Shares $130,729 $81,102 $265,574 $206,361 Weighted average Common Shares outstanding - Basic 196,323 182,213 189,768 181,451 Weighted average limited partnership units, as if converted 5,539 5,219 5,540 4,863 Incremental weighted average effect of potentially dilutive instruments(a) 4,898 4,611 4,714 4,437 Weighted average Common Shares outstanding - Diluted 206,760 192,043 200,022 190,751 Diluted Net Earnings per Common Share $0.63 $0.42 $1.33 $1.08 (a) On a weighted average basis, the total potentially dilutive instruments outstanding were 10,499 and 10,946 for the three months ended September 30, 2005 and 2004, respectively, and 10,898 and 11,287 for the nine months ended September 30, 2005 and 2004, respectively. Footnotes follow ProLogis' Consolidated Balance Sheets. ProLogis Third Quarter 2005 Unaudited Financial Results Consolidated Statements of Funds From Operations (in thousands, except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, 2005(1) 2004(2) 2005(1) 2004(2) Revenues: Rental income(9) $154,297 $136,201 $427,299 $411,937 Property management and other property fund fees 17,321 12,931 50,326 36,050 Development management fees and other CDFS income(7) 9,254 373 12,580 2,422 Total revenues 180,872 149,505 490,205 450,409 Expenses: Rental expenses(9) 39,139 34,439 115,682 106,466 General and administrative 23,816 20,678 71,589 60,381 Depreciation of non-real estate assets 1,743 1,978 5,106 5,962 Merger integration expenses (4) 8,288 -- 8,288 -- Relocation expenses(5) 246 2,154 4,049 2,845 Other expenses 3,030 1,201 6,312 3,673 Total expenses 76,262 60,450 211,026 179,327 Gains on dispositions of CDFS business assets, net (7)(11)(12)(13): Net proceeds from dispositions 388,945 400,675 999,300 1,144,287 Costs of assets disposed of 317,677 325,052 799,762 978,554 Total gains, net 71,268 75,623 199,538 165,733 175,878 164,678 478,717 436,815 Income from unconsolidated property funds 23,417 21,951 69,551 56,850 Income from CDFS joint ventures and other unconsolidated investees(14) 911 467 2,017 867 Interest expense(15) (42,587) (38,287) (114,072) (115,601) Interest and other income 3,179 829 6,356 2,037 Gain on partial disposition of investment in property fund (16) -- -- -- 3,164 Foreign currency exchange gains (losses), net(17) 155 (459) 574 (1,787) Current income tax expense (2,435) (12,180) (7,185) (18,177) FFO related to temperature controlled distribution assets (8) -- 3,865 (25,363) 10,358 (17,360) (23,814) (68,122) (62,289) Funds From Operations 158,518 140,864 410,595 374,526 Less preferred share dividends 6,354 6,354 19,062 19,392 Less excess of redemption values over carrying values of preferred shares redeemed(3) -- -- -- 4,236 Less minority interest 1,327 1,344 3,929 3,811 Funds From Operations Attributable to Common Shares $150,837 $133,166 $387,604 $347,087 Weighted average Common Shares outstanding - basic 196,323 182,213 189,768 181,451 Weighted average Common Shares outstanding - diluted 206,760 192,043 200,022 190,751 Funds From Operations per Common Share: Basic $0.77 $0.73 $2.04 $1.91 Diluted $0.74 $0.70 $1.96 $1.84 Calculation of Funds From Operations per Common Share on a Diluted Basis (in thousands, except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, 2005(1) 2004(2) 2005(1) 2004(2) Basic Funds From Operations Attributable to Common Shares $150,837 $133,166 $387,604 $347,087 Minority interest 1,327 1,344 3,929 3,811 Diluted Funds From Operations Attributable to Common Shares $152,164 $134,510 $391,533 $350,898 Weighted average Common Shares outstanding - Basic 196,323 182,213 189,768 181,451 Weighted average limited partnership units, as if converted 5,539 5,219 5,540 4,863 Incremental weighted average effect of potentially dilutive instruments(a) 4,898 4,611 4,714 4,437 Weighted average Common Shares outstanding - Diluted 206,760 192,043 200,022 190,751 Diluted Funds From Operations per Common Share $0.74 $0.70 $1.96 $1.84 (a) On a weighted average basis, the total potentially dilutive instruments outstanding were 10,499 and 10,946 for the three months ended September 30, 2005 and 2004, respectively, and 10,898 and 11,287 for the nine months ended September 30, 2005 and 2004, respectively. See ProLogis' Consolidated Statements of Earnings and the Reconciliations of Net Earnings to Funds From Operations. Footnotes follow ProLogis' Consolidated Balance Sheets. ProLogis Third Quarter 2005 Unaudited Financial Results ProLogis' Definition of Funds From Operations ProLogis' Definition of Funds From Operations Funds From Operations is a non-Generally Accepted Accounting Principles (GAAP) measure that is commonly used in the real estate industry. The most directly comparable GAAP measure to Funds From Operations is Net Earnings. Although the National Association of Real Estate Investment Trusts (NAREIT) has published a definition of Funds From Operations, modifications to the NAREIT calculation of Funds From Operations are common among REITs, as companies seek to provide financial measures that meaningfully reflect their business. Funds From Operations, as defined by ProLogis, is presented as a supplemental financial measure. Funds From Operations is not used by ProLogis as, nor should it be considered to be, an alternative to Net Earnings computed under GAAP as an indicator of ProLogis' operating performance or as an alternative to cash from operating activities computed under GAAP as an indicator of ProLogis' ability to fund its cash needs. Funds From Operations is not meant to represent a comprehensive system of financial reporting and does not present, nor does ProLogis intend it to present, a complete picture of its financial condition and operating performance. ProLogis believes that GAAP Net Earnings remains the primary measure of performance and that Funds From Operations is only meaningful when it is used in conjunction with GAAP Net Earnings. Further, ProLogis believes that its consolidated financial statements, prepared in accordance with GAAP, provide the most meaningful picture of its financial condition and its operating performance. NAREIT's Funds From Operations measure adjusts GAAP Net Earnings to exclude historical cost depreciation and gains and losses from the sales of previously depreciated properties. ProLogis agrees that these two NAREIT adjustments are useful to investors for the following reasons: (a) historical cost accounting for real estate assets in accordance with GAAP assumes, through depreciation charges, that the value of real estate assets diminishes predictably over time. NAREIT stated in its White Paper on Funds From Operations "since real estate asset values have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves." Consequently, NAREIT's definition of Funds From Operations reflects the fact that real estate, as an asset class, generally appreciates over time and depreciation charges required by GAAP do not reflect the underlying economic realities. (b) REITs were created as a legal form of organization in order to encourage public ownership of real estate as an asset class through investment in firms that were in the business of long-term ownership and management of real estate. The exclusion, in NAREIT's definition of Funds From Operations, of gains and losses from the sales of previously depreciated operating real estate assets allows investors and analysts to readily identify the operating results of the long-term assets that form the core of a REIT's activities and assists in comparing those operating results between periods. At the same time that NAREIT created and defined its Funds From Operations concept for the REIT industry, it also recognized that "management of each of its member companies has the responsibility and authority to publish financial information that it regards as useful to the financial community." ProLogis believes that financial analysts, potential investors and shareholders who review its operating results are best served by a defined Funds From Operations measure that includes other adjustments to GAAP Net Earnings in addition to those included in the NAREIT defined measure of Funds From Operations. The ProLogis Defined Funds From Operations measure excludes the following items from GAAP Net Earnings that are not excluded in the NAREIT Defined Funds From Operations measure: (i) deferred income tax benefits and deferred income tax expenses recognized by ProLogis' taxable subsidiaries; (ii) certain foreign currency exchange gains and losses resulting from certain debt transactions between ProLogis and its foreign consolidated subsidiaries and its foreign unconsolidated investees; (iii) foreign currency exchange gains and losses from the remeasurement (based on current foreign currency exchange rates) of certain third party debt of ProLogis' foreign consolidated subsidiaries and its foreign unconsolidated investees; and (iv) mark-to-market adjustments associated with derivative financial instruments utilized to manage ProLogis' foreign currency risks. Funds From Operations of ProLogis' unconsolidated investees is calculated on the same basis as ProLogis. The items that ProLogis excludes from GAAP Net Earnings, while not infrequent or unusual, are subject to significant fluctuations from period to period that cause both positive and negative effects on ProLogis' results of operations, in inconsistent and unpredictable directions. Most importantly, the economics underlying the items that ProLogis excludes from GAAP Net Earnings are not the primary drivers in management's decision-making process and capital investment decisions. Period to period fluctuations in these items can be driven by accounting for short-term factors that are not relevant to long-term investment decisions, long-term capital structures or to long-term tax planning and tax structuring decisions. Accordingly, ProLogis believes that investors are best served if the information that is made available to them allows them to align their analysis and evaluation of ProLogis' operating results along the same lines that ProLogis' management uses in planning and executing its business strategy. Real estate is a capital-intensive business. Investors' analyses of the performance of real estate companies tend to be centered on understanding the asset value created by real estate investment decisions and understanding current operating returns that are being generated by those same investment decisions. The adjustments to GAAP Net Earnings that are included in arriving at the ProLogis Defined Funds From Operations measure are helpful to management in making real estate investment decisions and evaluating its current operating performance. ProLogis believes that these adjustments are also helpful to industry analysts, potential investors and shareholders in their understanding and evaluation of ProLogis' performance on the key measures of net asset value and current operating returns generated on real estate investments. While ProLogis believes that its defined Funds From Operations measure is an important supplemental measure, neither NAREIT's nor ProLogis' measure of Funds From Operations should be used alone because they exclude significant economic components of GAAP Net Earnings and are, therefore, limited as an analytical tool. Some of these limitations are: --Depreciation and amortization of real estate assets are economic costs that are excluded from Funds From Operations. Funds From Operations is limited as it does not reflect the cash requirements that may be necessary for future replacements of the real estate assets. Further, the amortization of capital expenditures and leasing costs necessary to maintain the operating performance of distribution properties are not reflected in Funds From Operations. --Gains or losses from property dispositions represent changes in the value of the disposed properties. Funds From Operations, by excluding these gains and losses, does not capture realized changes in the value of disposed properties arising from changes in market conditions. --The deferred income tax benefits and expenses that are excluded from ProLogis' Defined Funds From Operations measure result from the creation of a deferred income tax asset or liability that may have to be settled at some future point. ProLogis' Defined Funds From Operations measure does not currently reflect any income or expense that may result from such settlement. --The foreign currency exchange gains and losses that are excluded from ProLogis' Defined Funds From Operations measure are generally recognized based on movements in foreign currency exchange rates through a specific point in time. The ultimate settlement of ProLogis' foreign currency- denominated net assets is indefinite as to timing and amount. ProLogis' Funds From Operations measure is limited in that it does not reflect the current period changes in these net assets that result from periodic foreign currency exchange rate movements. ProLogis compensates for these limitations by using its Funds From Operations measure only in conjunction with GAAP Net Earnings. To further compensate, ProLogis always reconciles its Funds From Operations measure to GAAP Net Earnings in its financial reports. Additionally, ProLogis provides investors with its complete financial statements prepared under GAAP, its definition of Funds From Operations, which includes a discussion of the limitations of using ProLogis' non-GAAP measure, and a reconciliation of ProLogis' GAAP measure (Net Earnings) to its non-GAAP measure (Funds From Operations as defined by ProLogis) so that investors can appropriately incorporate this ProLogis measure and its limitations into their analyses. ProLogis Third Quarter 2005 Unaudited Financial Results Consolidated Statements of EBITDA (in thousands) Three Months Ended Nine Months Ended September 30, September 30, 2005(1) 2004(2) 2005(1) 2004(2) Revenues: Rental income(9) $154,297 $136,201 $427,299 $411,937 Property management and other property fund fees 17,321 12,931 50,326 36,050 Development management fees and other CDFS income(7) 9,254 373 12,580 2,422 180,872 149,505 490,205 450,409 Expenses: Rental expenses(9) 39,139 34,439 115,682 106,466 General and administrative 23,816 20,678 71,589 60,381 Merger integration expenses(4) 8,288 -- 8,288 -- Relocation expenses(5) 158 1,491 3,207 1,917 Other expenses 3,030 1,201 6,312 3,673 74,431 57,809 205,078 172,437 Gains on dispositions of CDFS business assets, net (7)(11)(12)(13) 75,374 82,869 218,640 196,139 181,815 174,565 503,767 474,111 Income from unconsolidated property funds 41,507 34,950 122,925 95,179 Income from CDFS joint ventures and other unconsolidated investees(14) 1,138 676 2,715 1,586 Interest and other income 3,179 829 6,356 2,037 Gain on partial disposition of investment in property fund(16) -- -- -- 3,164 Foreign currency exchange gains (losses), net(17) 155 (459) 574 (1,787) EBITDA attributable to temperature controlled distribution assets(8) -- 4,559 1,673 12,291 EBITDA before minority interest 227,794 215,120 638,010 586,581 Less minority interest 1,327 1,344 3,929 3,811 EBITDA $226,467 $213,776 $634,081 $582,770 See ProLogis' Consolidated Statements of Earnings and the Reconciliations of Net Earnings to EBITDA. Footnotes follow ProLogis' Consolidated Balance Sheets. ProLogis' definition of EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization): EBITDA, as computed by ProLogis, does not represent Net Earnings or cash from operating activities that are computed in accordance with GAAP and is not indicative of cash available to fund cash needs, which ProLogis presents in its Consolidated Statements of Cash Flows and includes in its Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q that are filed with the Securities and Exchange Commission. Accordingly, the EBITDA measure presented by ProLogis should not be considered as an alternative to Net Earnings as an indicator of ProLogis' operating performance, or as an alternative to cash flows from operating, investing, or financing activities as a measure of liquidity. The EBITDA measure presented by ProLogis will not be comparable to similarly titled measures of other REITs. EBITDA generally represents Net Earnings (computed in accordance with GAAP) excluding: (i) interest expense; (ii) income tax expenses and benefits; and (iii) depreciation and amortization expenses. In ProLogis' computation of EBITDA the following items are also excluded: (i) preferred dividends and charges related to the redemption of preferred shares; (ii) the foreign currency exchange gains and losses that are also excluded in ProLogis' definition of Funds From Operations; (iii) impairment charges; and (iv) gains and losses from the dispositions of non-CDFS business assets. In addition, ProLogis adjusts the gains and losses from the contributions and sales of developed properties recognized as CDFS income to reflect these gains and losses as if no interest cost had been capitalized during the development of the properties (i.e. the gains are larger since capitalized interest is not included in the basis of the assets contributed and sold). EBITDA of ProLogis' unconsolidated investees is calculated on the same basis as ProLogis. ProLogis Third Quarter 2005 Unaudited Financial Results Reconciliations of Net Earnings to Funds From Operations (in thousands) Three Months Ended Nine Months Ended September 30, September 30, 2005(1) 2004(2) 2005(1) 2004(2) Reconciliation of Net Earnings to Funds From Operations: Net Earnings Attributable to Common Shares $129,402 $79,758 $261,645 $202,550 Add (Deduct) NAREIT Defined Adjustments: Real estate related depreciation and amortization 44,761 39,450 125,687 117,724 Funds From Operations adjustment to gain on partial disposition of investment in property fund (16) -- -- -- (164) Reconciling items attributable to discontinued operations: Gains recognized on dispositions of non-CDFS business assets, net(11) (36,633) (1,956) (38,840) (5,426) Real estate related depreciation and amortization(11) 715 1,305 2,976 4,147 Totals discontinued operations (35,918) (651) (35,864) (1,279) ProLogis' share of reconciling items from unconsolidated investees(18): ProLogis Property Funds: Real estate related depreciation and amortization 13,229 11,002 38,841 29,106 Losses (gains) on dispositions of non-CDFS business assets, net (469) 1 (805) (719) Other amortization items (19) (1,604) (902) (4,061) (2,435) Totals ProLogis Property Funds 11,156 10,101 33,975 25,952 Other investees(14): Real estate related depreciation and amortization 367 155 1,106 290 Losses on dispositions of non-CDFS business assets, net -- 720 -- 1,368 Totals other investees 367 875 1,106 1,658 Totals NAREIT Defined Adjustments 20,366 49,775 124,904 143,891 Subtotals--NAREIT Defined Funds From Operations 149,768 129,533 386,549 346,441 Add (Deduct) ProLogis Defined Adjustments: Foreign currency exchange (gains) losses, net(17) (4,587) 884 (7,749) (11,669) Deferred income tax expense 5,369 2,390 8,190 11,975 Reconciling items attributable to discontinued operations: Assets disposed of - deferred income tax benefit(8) -- (128) (213) (242) ProLogis' share of reconciling items from unconsolidated investees(18): ProLogis Property Funds Foreign currency exchange (gains) losses, net(17) 44 502 (506) 754 Deferred income tax expense (benefit) -- (228) 1,090 (385) Totals ProLogis Property Funds 44 274 584 369 Other investees(14): Deferred income tax expense -- 213 -- 213 Foreign currency exchange losses, net 243 -- 243 -- Totals other investees 243 213 243 213 Totals ProLogis Defined Adjustments 1,069 3,633 1,055 646 ProLogis Defined Funds From Operations Attributable to Common Shares $150,837 $133,166 $387,604 $347,087 See ProLogis' Consolidated Statements of Earnings. Footnotes follow ProLogis' Consolidated Balance Sheets. ProLogis Third Quarter 2005 Unaudited Financial Results Reconciliations of Net Earnings to EBITDA (in thousands) Three Months Ended Nine Months Ended September 30, September 30, 2005(1) 2004(2) 2005(1) 2004(2) Reconciliation of Net Earnings to EBITDA: Net Earnings Attributable to Common Shares: $129,402 $79,758 $261,645 $202,550 Add (Deduct): NAREIT Defined Adjustments to compute Funds From Operations 20,366 49,775 124,904 143,891 ProLogis Defined Adjustments to compute Funds From Operations 1,069 3,633 1,055 646 Other adjustments to compute ProLogis' EBITDA measure: Interest expense 42,549 38,126 113,802 114,935 Depreciation of non-real estate assets 1,743 1,978 5,106 5,962 Depreciation of non-real estate assets included in relocation expenses(5) 88 663 842 928 Current income tax expense 2,435 12,180 7,185 18,177 Adjustments to CDFS gains for interest capitalized to disposed assets 4,105 7,246 19,102 30,406 Preferred share dividends 6,354 6,354 19,062 19,392 Excess of redemption values over carrying values of preferred shares redeemed (3) -- -- -- 4,236 Reconciling items attributable to discontinued operations: Interest expense(11) 38 161 270 666 Current income tax expense (8) -- 694 172 1,933 Cumulative translation losses and impairment charge(8) -- -- 26,864 -- ProLogis' share of reconciling items from unconsolidated investees (18): ProLogis Property Funds: Interest expense 16,618 12,278 49,501 36,207 Current income tax and other expense 1,496 893 3,933 2,645 Other amortization items (19) (23) (172) (59) (523) Totals ProLogis Property Funds 18,091 12,999 53,375 38,329 Other investees(14): Interest expense 61 -- 160 -- Depreciation of non-real estate assets 71 72 209 237 Current income tax expense 95 137 328 482 Totals other investees 227 209 697 719 ProLogis' EBITDA measure $226,467 $213,776 $634,081 $582,770 See ProLogis' Consolidated Statements of Earnings. Footnotes follow ProLogis' Consolidated Balance Sheets. ProLogis Third Quarter 2005 Unaudited Financial Results Consolidated Balance Sheets (in thousands) September 30, December 31, 2005(1) 2004(2) Assets: Investments in real estate assets: Industrial operating properties $8,455,139 $5,047,414 Commercial and retail operating properties 716,894 -- Ground leases and other 547,727 -- Properties under development (including cost of land) 869,702 575,703 Land held for development 942,186 596,001 Other investments(20) 145,422 114,613 11,677,070 6,333,731 Less accumulated depreciation 1,068,766 989,221 Net investments in real estate assets 10,608,304 5,344,510 Investments in and advances to unconsolidated investees: ProLogis Property Funds(21) 777,476 839,675 CDFS joint ventures and other unconsolidated investees(14) 273,079 68,838 Total investments in and advances to unconsolidated investees 1,050,555 908,513 Cash and cash equivalents 173,581 236,529 Accounts and notes receivable 335,137 92,015 Other assets 793,716 401,564 Discontinued operations-assets held for sale(8)(11) 17,474 114,668 Total assets $12,978,767 $7,097,799 Liabilities and Shareholders' Equity: Liabilities: Lines of credit and short-term borrowings $2,991,078 $960,002 Senior unsecured notes 1,869,533 1,962,316 Secured debt and assessment bonds 1,675,407 491,643 Construction costs payable 95,395 63,509 Accounts payable and accrued expenses 271,867 192,332 Other liabilities 552,413 196,240 Discontinued operations-assets held for sale(8)(11) 358 62,991 Total liabilities 7,456,051 3,929,033 Minority interest 58,496 66,273 Shareholders' equity: Series C Preferred Shares at stated liquidation preference of $50.00 per share 100,000 100,000 Series F Preferred Shares at stated liquidation preference of $25.00 per share 125,000 125,000 Series G Preferred Shares at stated liquidation preference of $25.00 per share 125,000 125,000 Common Shares at $.01 par value per share 2,435 1,858 Additional paid-in capital 5,594,497 3,249,576 Accumulated other comprehensive income(22) 156,274 194,445 Distributions in excess of net earnings (638,986) (693,386) Total shareholders' equity 5,464,220 3,102,493 Total liabilities and shareholders' equity $12,978,767 $7,097,799 Footnotes follow ProLogis' Consolidated Balance Sheets. ProLogis Third Quarter 2005 Unaudited Financial Results Notes to Consolidated Financial Statements (1) On September 15, 2005, ProLogis completed its merger with Catellus Development Corporation ("Catellus Merger"). This transaction was accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to net assets acquired based on their estimated fair values at the date of acquisition. The purchase price was allocated as follows (in thousands): Consideration: Cash $1,285,132 Stock 2,285,580 Transaction costs 41,374 Assumption of liabilities 1,749,834 Preliminary purchase price 5,361,920 Allocation to assets (5,201,466) Goodwill $160,454 The preliminary estimate of assets and liabilities acquired represents management's best estimate based on currently available information; however, such estimate may be revised. ProLogis financed the cash portion of this transaction primarily through borrowings on a short-term bridge facility. (2) Certain 2004 amounts have been reclassified to conform to the 2005 presentation. (3) On December 11, 2003, ProLogis called for the redemption of all of the remaining 5,000,000 Series D Preferred Shares outstanding at a price of $25.00 per share, plus $0.066 in accrued and unpaid dividends. The redemption of these shares was completed on January 12, 2004 at a total redemption value of $125.3 million. During the first quarter of 2004, ProLogis recognized a charge of $4.2 million associated with the excess of the redemption value over the carrying value of ProLogis' remaining Series D Preferred Shares. (4) Represents costs incurred by ProLogis related to the Catellus Merger. ProLogis expects to incur integration costs through the first half of 2006. These costs include merger integration and employee transition costs as well as severance costs for certain ProLogis employees whose responsibilities became redundant after the Catellus Merger. (5) Represents the costs incurred (including accrued employee termination costs) associated with ProLogis' relocation of its information technology and corporate accounting functions from El Paso, Texas to Denver, Colorado and the move of its Denver corporate headquarters to a new building in Denver. Such relocations are expected to occur and costs are expected to be incurred through the first quarter of 2006. Costs include (i) employee termination costs; (ii) costs associated with the hiring and training of new personnel and other costs including travel and temporary facility costs; (iii) and accelerated depreciation associated with non-real estate assets whose useful life has been shortened due to the relocations. (6) The annual distribution rate for 2005 is $1.48 per Common Share. The amount of the Common Share distribution may be adjusted at the discretion of the Board of Trustees. (7) The corporate distribution facilities services and other real estate development business ("CDFS business") segment primarily represents the development of industrial distribution properties, the acquisition and rehabilitation or acquisition and repositioning of industrial distribution properties and other land and commercial development activities. It is generally ProLogis' intent to either contribute the properties to a ProLogis Property Fund in which ProLogis has an ownership interest and acts as manager or sell the properties to a third party. This segment's income also includes fees earned for development activities performed on behalf of customers or third parties and gains or losses from the dispositions of land parcels that no longer fit into ProLogis' development plans. ProLogis includes the income generated in the CDFS business segment in its computation of Funds From Operations and EBITDA. Further, ProLogis has ownership interests in various unconsolidated joint ventures that engage in CDFS activities in Europe, the United States and China. See note 14. During the third quarter of 2005, CDFS income included $4.3 million of income from an investment that was recovered and had previously been reserved against CDFS income. (8) ProLogis owned a temperature-controlled distribution business in France, which was sold in July 2005. The assets and liabilities are shown as held for sale as of December 31, 2004, and the operations are included in discontinued operations for all periods presented in the Consolidated Financial Statements. Due to the sale and liquidation of the business, ProLogis recognized an impairment charge and cumulative translation losses aggregating $26,864,000 during the first half of 2005. In connection with the sale, ProLogis received total proceeds of approximately euro 30.8 million (the currency equivalent of approximately $36.6 million as of the sale date) including a note receivable of euro 23.9 million (the currency equivalent of approximately $29.0 million as of September 30, 2005). The note bears interest at Euribor plus 1.1% and is due in July 2006. (9) Represents rental income earned and rental expenses incurred while ProLogis owns a property directly. Under the terms of the respective lease agreements, some or all of ProLogis' rental expenses are recovered from its customers. Amounts recovered are included as a component of rental income. Rental expenses also include ProLogis' direct expenses associated with its management of the ProLogis Property Funds' operations. For properties that have been contributed to ProLogis Property Funds, ProLogis recognizes its share of the total operations of the Property Funds under the equity method and presents these amounts below Operating Income in its Consolidated Statements of Earnings, Funds From Operations and EBITDA. (10) Amounts include straight-line rents of $1,841,000 and $2,566,000 for the three months ended September 30, 2005 and 2004, respectively, and $5,230,000 and $7,423,000 for the nine months ended September 30, 2005 and 2004, respectively, and rental expense recoveries from customers of $29,559,000 and $23,977,000 for the three months ended September 30, 2005 and 2004, respectively, and $80,688,000 and $74,703,000 for the nine months ended September 30, 2005 and 2004, respectively. (11) Properties disposed of to third parties are considered to be discontinued operations unless such properties were developed under a pre-sale agreement. During the three months ended September 30, 2005, ProLogis began dispositions of its entire portfolio in three non-strategic markets-Kansas City, Oklahoma City and Tulsa, and completed the dispositions in September and October 2005. Of the 55 properties disposed of during 2005 (15 of the assets were disposed of in October 2005 and are included in assets held for sale at September 30, 2005), five properties were CDFS business assets. The operations of the properties disposed of in 2005 for the three and nine months ended September 30, 2005 and 2004 and the aggregate net gains or losses recognized upon their dispositions are presented as discontinued operations in ProLogis' Consolidated Statements of Earnings. In addition, the operations of the 20 properties sold during 2004 (ten of which were CDFS business assets) are presented as discontinued operations in ProLogis' Consolidated Statements of Earnings for the three and nine months ended September 30, 2004. Interest expense represents interest directly attributable to these properties due to secured debt. These amounts are not presented as discontinued operations in either of ProLogis' Consolidated Statements of Funds From Operations or EBITDA. The operating amounts that are presented as discontinued operations (other than the net gains or losses recognized upon disposition) are as follows (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 Rental income $2,219 $5,077 $9,126 $13,579 Rental expenses (460) (1,173) (2,443) (3,680) Depreciation and amortization (715) (1,305) (2,976) (4,147) Interest expense (38) (161) (270) (666) $1,006 $2,438 $3,437 $5,086 (12) When ProLogis contributes properties to a ProLogis Property Fund in which it has an ownership interest, ProLogis does not recognize a portion of the proceeds in its computation of the gain resulting from the contribution. The amount of the proceeds that cannot be recognized is determined based on ProLogis' continuing ownership interest in the contributed property that arises due to ProLogis' ownership interest in the Property Fund acquiring the property. ProLogis defers this portion of the proceeds by recognizing a reduction to its investment in the applicable Property Fund. ProLogis adjusts its proportionate share of the earnings or losses that it recognizes under the equity method from the Property Fund in later periods to reflect the Property Fund's depreciation expense as if the depreciation expense was computed on ProLogis' lower basis in the contributed real estate assets rather than on the Property Fund's basis in the contributed real estate assets. If a loss is recognized when a property is contributed to a ProLogis Property Fund, the entire loss is recognized. See note 13 for the amount of cumulative gross proceeds that have not been recognized as of September 30, 2005. Gross proceeds deferred related to contributions during the three months ended September 30, 2005 and 2004 were $16,403,000 and $10,072,000, respectively, and during the nine months ended September 30, 2005 and 2004 were $42,057,000 and $30,987,000, respectively. When a property that ProLogis originally contributed to a ProLogis Property Fund is disposed of to a third party, ProLogis recognizes the amount of the gain that it had previously deferred as a part of its CDFS income during the period that the disposition occurs, in addition to ProLogis' proportionate share of the gain or loss recognized by the Property Fund. Further, during periods when ProLogis' ownership interest in a ProLogis Property Fund decreases, ProLogis will recognize gains to the extent that previously deferred proceeds are recognized to coincide with ProLogis' new ownership interest in the ProLogis Property Fund. (13) As of September 30, 2005, the cumulative gross proceeds that have not been recognized in computing the gains from the contributions of properties by ProLogis to ProLogis Property Funds (before subsequent amortization) are presented below (in thousands). See note 12. Gross Proceeds Not Recognized CDFS Non-CDFS Transactions Transactions Totals ProLogis European Properties Fund $94,393 $9,344 $103,737 ProLogis California LLC 5,350 26,129 31,479 ProLogis North American Properties Fund I 8,278 862 9,140 ProLogis North American Properties Fund II 7,336 -- 7,336 ProLogis North American Properties Fund III 5,651 337 5,988 ProLogis North American Properties Fund IV 3,805 810 4,615 ProLogis North American Properties Fund V 23,791 871 24,662 ProLogis North American Properties Funds VI-X 2,751 -- 2,751 ProLogis Japan Properties Fund I 44,878 -- 44,878 Totals $196,233 $38,353 $234,586 (14) ProLogis invests in joint ventures that perform CDFS business activities (see note 7), in Europe, China and North America. ProLogis has a weighted ownership interest of 50% in the CDFS joint ventures. In connection with the Catellus Merger, ProLogis acquired interests in several entities that engage in land and commercial development activities. In addition, ProLogis has varying ownership interests in other unconsolidated investees which primarily operate industrial, commercial and hotel properties. (15) Includes amortization of deferred loan costs of $1,306,000 and $1,370,000 for the three months ended September 30, 2005 and 2004, respectively, and $3,673,000 and $4,183,000 for the nine months ended September 30, 2005 and 2004, respectively. Excludes interest that has been capitalized based on ProLogis' development activities of $13,954,000 and $9,985,000 for the three months ended September 30, 2005 and 2004, respectively, and $41,535,000 and $26,671,000 for the nine months ended September 30, 2005 and 2004, respectively. The increase in capitalized interest is due to the significant increase in ProLogis' development activities. (16) In June 2004, ProLogis disposed of a portion of its ownership interest in ProLogis North American Properties Fund V. As provided in certain formation agreements, ProLogis exchanged a certain portion of its investment into shares of Macquarie ProLogis Trust, the listed property trust in Australia that has an 86.0% ownership interest in ProLogis North American Properties Fund V. Upon receipt of the shares, they were immediately sold by ProLogis in the public market. ProLogis recognized a net gain of $3,328,000 in its Consolidated Statement of Earnings and a net gain of $3,164,000 on this disposition in both its Consolidated Statements of Funds From Operations and EBITDA. (17) Foreign currency exchange gains and losses that are recognized as a component of Net Earnings computed under GAAP generally result from: (i) remeasurement and/or settlement of certain debt transactions between ProLogis and its foreign consolidated subsidiaries and foreign unconsolidated investees (depending on the type of loan, the currency in which the loan is denominated and the form of ProLogis' investment); (ii) remeasurement and/or settlement of certain third party debt of ProLogis' foreign consolidated subsidiaries (depending on the currency in which the loan is denominated); and (iii) mark-to-market adjustments related to derivative financial instruments utilized to manage foreign currency risks. ProLogis generally excludes these types of foreign currency exchange gains and losses from the ProLogis Defined Funds From Operations measure and also from its computation of EBITDA. Foreign currency exchange gains and losses that result from transactions (including certain intercompany debt and equity investments) that are settled in a currency other than the reporting company's functional currency and from the settlement of derivative financial instruments utilized to manage foreign currency risks are included in the ProLogis Defined Funds From Operations measure and in ProLogis' computation of EBITDA. (18) ProLogis reports its investments in the ProLogis Property Funds, CDFS joint ventures and other unconsolidated investees under the equity method. For purposes of calculating Funds From Operations and EBITDA, the Net Earnings of each of its unconsolidated investees is adjusted to be consistent with the calculation of these measures by ProLogis. (19) Consists primarily of adjustments to the amounts ProLogis recognizes under the equity method that are necessary to recognize the amount of gains not recognized at the contribution date due to the deferral of certain proceeds based on ProLogis' ownership interest in the ProLogis Property Fund acquiring the property. See note 12. (20) Other investments primarily include: (i) funds that are held in escrow pending the completion of tax-deferred exchange transactions; (ii) earnest money deposits associated with potential acquisitions; (iii) costs incurred during the pre-acquisition due diligence process; (iv) costs incurred during the pre-construction phase related to future development projects; and (v) costs related to ProLogis' corporate office buildings. (21) On September 30, 2005, ProLogis acquired the remaining 80% interest in ProLogis North American Properties Fund XII for approximately $235.0 million. The acquisition resulted in the addition of 12 buildings aggregating 3,363,810 square feet with an investment basis of $283.2 million, including ProLogis' original 20% investment, to ProLogis' direct owned portfolio. (22) Accumulated other comprehensive income includes cumulative foreign currency translation adjustments and unrealized gains and losses associated with derivative financial instruments that receive hedge accounting treatment. ProLogis also recognizes its proportionate share of the accumulated other comprehensive income balances of its unconsolidated investees.