Fitch Affirms ProLogis On Catellus Acquisition Announcement

Business Wire, June 6, 2005

NEW YORK -- ProLogis' expected acquisition of Catellus Development Corp. (Catellus) appears to be a modest positive for ProLogis' ratings, according to Fitch Ratings, who affirms the real estate investment trust (REIT) as follows:

-- Senior unsecured debt 'BBB ';

-- Preferred stock 'BBB';

-- Rating Outlook Stable.

Catellus has a track record as an experienced developer of industrial warehouse space and also has a high quality direct-owned portfolio a with strong occupancy rate and a very young average property age. These attributes, combined with significant presence in many key domestic industrial markets, will add materially to the quality of ProLogis' direct-owned portfolio. The acquisition will also add proportionately to ProLogis' portfolio of direct-owned stabilized assets, which Fitch views as much stronger from a leveragability and cash flow standpoint than land and development assets.

Several factors partially offset some of the positives, including that ProLogis' leverage may rise modestly to the extent that bridge financing is required to complete the transaction. As Catellus was a nearly 100% secured borrower, ProLogis' already light unencumbered asset coverage may also be diluted modestly. Fitch believes that combination of ProLogis and Catellus will give the combined company a market share of roughly 13% of domestic distribution/bulk real estate development. While the combined expertise and experience of the two companies should be expected to lead to continued success in ProLogis' effectiveness at developing and selling high quality assets, it may also increase development risk on the company's balance sheet.

ProLogis' rating strengths center on the size and quality of its diverse multinational pool of industrial warehouse properties. In general, the portfolio has exhibited solid occupancy rates and a strong quality of tenants and tenant diversity. In particular, Fitch believes that ProLogis' international presence adds diversity and robustness to the core earnings stream and gives the company an edge in its ability to attract and retain high quality tenants as well as gather and interpret market intelligence. In addition, ProLogis has demonstrated substantial acumen at managing development projects in a variety of the world's most desirable warehouse and industrial real estate locations. Other strengths center on the company's deep management team.

ProLogis' interest and fixed charge coverage metrics continue to be adequate for its rating level. However, in recent years ProLogis has shown increasing reliance on gains on sale and equity in the income of unconsolidated subsidiaries. For example, recurring fixed charge coverage (as defined below) which includes rental revenue, management fees and equity in subsidiary income as revenue sources, was 1.54 times (x) for the first quarter and 1.52x for 2004 which is low for the rating category. With capitalized interest excluded from these coverages, the metrics improve to 1.98x and 1.84x, respectively. This underscores the interest cost associated with the development business, as nearly 100% of capitalized interest is attributable to projects developed for sale to third parties or funds.

Including all gains on sale and capitalized interest expense, ProLogis' fixed charge coverage increases to 2.54x for the first quarter and 2.40x for fiscal 2004 which is superior to its industrial peergroup. (Fixed Charge Coverage defined as EBITDA, as indicated, less tenant improvements, recurring capital expenditures, and straight line rents divided by the sum of interest expense, preferred dividends and capitalized interest). Together, Fitch views the fixed charge coverages as adequate for the rating category.

ProLogis' core leverage, defined as debt divided by undepreciated book capital, is also solid for the rating category even at 47.3% at the end of the first quarter and 44.5% at the end of 2004. These metrics are near or below most peers. From a risk adjusted standpoint, Fitch believes that ProLogis' leverage has been increasing which reflects the company's growing component of undeveloped land, development properties, and equity in unconsolidated joint ventures. Nevertheless, risk-adjusted leverage continues to be acceptable.

Rating concerns center on the growing component of investments in joint ventures, which tend to have less transparency with respect to commitments and contingencies, increased legal complexity, and less reliable cash flow streams to the parent company than traditional direct-owned stabilized operating properties. Other concerns center on the company's significant use of variable rate financing, which accounted for 35% of total indebtedness at March 31, 2005. This level is uncharacteristically high and is driven by heavy use of the company's revolving credit facility to finance development, and is expected over time to return closer to the 20% range. ProLogis also has significant releasing risk, with approximately 19% of total base rents in the direct owned portfolio maturing in 2005, although this is reduced to 12% if the property funds are included. The Catellus acquisition also helps mitigate this concern as total base rents of approximately 12% expire in 2005.