S&P Affirms Ratings on ProLogis Trust; Outlook Stable

Business Wire, May 7, 2002

Business Editors

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

May 7, 2002--Standard & Poor's today affirmed its triple-'B'-plus corporate credit rating on ProLogis Trust. In addition, triple-'B'-plus ratings on the company's unsecured notes and triple-'B' ratings on the company's preferred stock were affirmed.

Concurrently, preliminary triple-'B'/triple-'B'-plus ratings on the company's mixed-shelf registrations were affirmed. The outlook is stable.

The rating affirmation follows recent company announcements, which serve to clarify the status of a large block of ProLogis common equity.

In December 2001, General Electric Capital Corp. (GE Capital; triple-'A'/Stable/'A-1'-plus) announced its intention to acquire Security Capital Group (Security Capital; triple-'B'/Watch Positive), Security Capital currently owns 28.6% of ProLogis' common stock, or roughly 49.9 million shares, valued at $1.1 billion. On May 4, 2002, the terms of the transaction between GE Capital and Security Capital were finalized, with GE Capital electing to include common shares of ProLogis in the consideration to be received by Security Capital stockholders in the pending acquisition of Security Capital. GE Capital will retain approximately 9.8% of the outstanding ProLogis common shares following the merger, which is expected to close in May. Since GE Capital's continuing ownership position will be less than 10% of ProLogis' outstanding shares, GE Capital will retain no ProLogis board seats or any other 'super' rights that Security Capital Group previously had. Standard & Poor's views the resolution of the stock overhang issue as a long-term credit positive. ProLogis is not expected to pursue any large share repurchases as a result of the merger. However, Standard & Poor's believes that any near-term share repurchases that might take place (per the $85 million remaining on the company's existing board-authorized $100 million repurchase program) would be pursued in a prudent manner.

Denver-based ProLogis, a public REIT, is a global provider of distribution facilities and services, with over 1,700 owned and managed properties throughout U.S. (75% of investments, including construction in progress), Europe (24%), Mexico (<2%) and Japan (<1%), and undepreciated assets on-balance sheet of $6.6 billion. The company's current ratings reflect ProLogis' solid market position in North America and Europe, exemplified by the company's portfolio diversification and stability of income from its core holdings. ProLogis' stabilized portfolio occupancy is sound at 92% leased and 91% occupied, despite current market softness in many U.S. submarkets, and rental rates continue to rise at rollover, although below historical growth levels. Same-store net operating income (NOI), weak due primarily to occupancy declines, was a modest 1.4% for full year 2001, -0.5% for the fourth quarter of 2001, and 0.7% for the first quarter of 2002. Financial flexibility remains solid; however, credit weaknesses include a growing amount of potentially less-predictable ancillary income, growth in (and use of secured financing at) unconsolidated businesses, current softness in certain North American markets, and modest new market and development risk.

ProLogis' merchant building gains have become an increasingly large proportion of the company's funds from operation (FFO), about 20% in the year 2001, which is a credit concern. Standard & Poor's views the revenue from merchant building activity to be more volatile and less leverageable than revenue derived from property rents. While merchant building activity is volatile, ProLogis' merchant building revenue volume for the near term is fairly well supported with take-out buyers in the form of ProLogis-sponsored investment funds. The company has formed seven funds since 1999, including the ProLogis European Properties Fund, its largest fund (at $1.5 billion assets). ProLogis maintains a 16% to 50% interest in each of these funds and, during the first quarter of 2002, received fees of $6.3 million for managing fund assets, which totaled $3.2 billion at quarter-end. These funds are moderately leveraged, at just over 50% loan-to-value on average, however, the majority of fund debt is secured.

The ProLogis European Properties Fund's third-party institutional investors have committed $400 million in additional equity capital contributions through 2002, and ProLogis has agreed to make $52 million in additional capital contributions. When leveraged at 50%, these capital contributions support $900 million of additional property acquisitions within the fund, with the majority of acquisitions anticipated to be derived from ProLogis' European merchant building activity. Although a portion (about 24%) of the company's merchant building gains are deferred due to ProLogis' ownership in each of the funds, the remainder (76%) is accounted for as revenue and included in ProLogis' FFO calculation.

Should the company's merchant building sales realize a material decline in volume and/or profit margins (which have averaged about 15%), the impact to ProLogis' coverage measures could be pronounced. When Standard & Poor's adjusts for the nonrecurring nature of this service income by backing out all gains associated with development profits, debt service coverage dips to about 2.8 times (x) from 3.1x, while fully loaded fixed-charge coverage (which includes all preferred stock dividends, capitalized interest related to core development projects, and regularly scheduled principal amortization) declines to 2.3x from 2.6x at year-end 2001. This adjusted fixed-charge coverage measure has improved during 2001, from a year-ago level of 2.1x that is considered weak for the current rating.