Fitch Affirms Prologis At 'BBB+' Following Announced Keystone Acquisition

Business Wire, May 5, 2004

Business Editors/Real Estate Writers

NEW YORK--(BUSINESS WIRE)--May 5, 2004

Fitch Ratings affirms the 'BBB ' rating on the $1.7 billion of outstanding senior unsecured notes of Prologis and the 'BBB' rating on Prologis' $350 million of outstanding preferred stock. This affirmation is in response to the announcement that Prologis, together with affiliates of the investment management firm, Eaton Vance, will acquire the outstanding common equity of Keystone Properties Trust for total consideration of $1.67 billion. The Rating Outlook is Stable.

In order to acquire Keystone, Prologis will establish five investment funds with affiliates of Eaton Vance (the Funds). The Funds will acquire Keystone assets valued at $1.37 billion. The Funds will be capitalized with $550 million in partner's equity capital and $825 million of debt. Prologis will contribute 20% of the equity, or $110 million. Eaton Vance affiliates will contribute the remaining $440 million in common equity. In addition, the Funds have received secured financing commitments totaling $825 million. In addition to its investments in the Funds, Prologis will purchase the remaining $290 million of Keystone assets for its core portfolio.

Prologis expects to fund its portion of the Keystone acquisition with an equity issuance of approximately $100 million (to existing Keystone operating partnership unit holders), asset sales of $150 million, additional unsecured borrowings or preferred stock issuance of $100 million and the assumption of its pro rata share of mortgage debt of $215 million. Of the $215 million of mortgage debt approximately $165 million will be the obligation of the funds and the remaining $50 million represents Prologis' share of mortgage debt in three Keystone joint ventures.

Fitch views the addition of the Keystone Property Trust portfolio to Prologis' owned and managed assets as a positive. With headquarters in Pennsylvania, Keystone's assets include 141 industrial properties, aggregating approximately 33 million square feet in the Eastern half of the United States. The Keystone properties are well leased (92.4%) and located in markets which generally compliment Prologis' existing holdings. The addition of the Keystone assets will enhance Prologis' position in key markets like Miami, Florida, New Jersey and eastern Pennsylvania, though increase the company's exposure to more challenging markets in South Carolina. While the fund structure minimizes Prologis' vulnerability to individual markets, assets, and tenants and further enhances its already broadly diversified portfolio, it does increase the potential for conflicts of interest among Prologis' varied constituencies. Fitch is familiar with a number of the assets being acquired by Prologis directly (the CalEast joint venture assets) and several of the Keystone assets in New Jersey. Fitch would describe those assets as well leased, good quality assets, with strong tenancy, in solid industrial markets though pockets of leasing risk/opportunity exist within the portfolio.

Transaction risks include: modestly increasing leverage, the potential for conflicts of interest, and adverse asset selection with respect to the core portfolio. Finally, while the core portfolio alone continues to support the unsecured borrowings of the company at a 'BBB ' rating level, and earnings and asset contributions from the funds may be considered additive, Fitch remains cautious in its view of the increasing management and financial resources needed to further the expansion the company's funds management businesses.

Pro forma for the transaction, Prologis' leverage which will increase modestly to 45% from 43%, is still within the acceptable range for the 'BBB ' rating. Fitch intends to continue to focus on the type and quality of the unencumbered assets held in the core portfolio to ensure adequate support for unsecured borrowings. Finally, Fitch acknowledges the depth of Prologis' team and sees management as sufficiently skilled to manage the complex, far reaching ventures the company has undertaken with sophisticated partners.

Prologis is a $6.5 billion real estate investment trust (REIT) with headquarters in Denver, Colorado. At March 31, 2004, Prologis owned 1,790 properties comprised of 247 million square feet in 70 markets in North America, Europe, and Asia.