Prologis
Annual Report 2005

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® sustainability 2005 Summary Annual Report The long-term growth plan ProLogis set in motion a year ago is well underway. Our 2005 results were excellent, and we’re confident in our ability to continue to execute our plan for sustained, profitable growth well into the future. But sustaining our performance and building a company that excels long term transcends traditional financial growth. Our commitment includes creating an environment in which our people can recognize their full potential and build mutually beneficial relationships with our customers. And as a leader in our industry, we are committed to implementing innovative solutions for sustainable development while making a difference in our communities and our world. These are the keys to true sustainability. Mission To be the leading global provider of distribution facilities and services to the world’s largest users of distribution space, thereby creating value for our customers and shareholders. Profile ProLogis is one of the world’s largest providers of Operating in: North America United States, Mexico, Canada Europe Belgium, Czech Republic, France, Germany, Hungary, Italy, The Netherlands, Poland, Spain, Sweden, industrial distribution facilities, with operations in United Kingdom Asia Japan, China, South Korea 77 markets across North America, Europe and Asia. We have over 375 million square feet of industrial space in 2,340 buildings, representing over $22 billion of assets owned, managed and under development. These strategically located, state-of-the-art facilities help customers, like DHL, Nippon Express, Unilever, Home Depot and Wal-Mart, meet the needs of their customers wherever they are throughout the world. Table of Contents 1 4 To Our Shareholders Sustainability Our business, our shareholders 10 Sustainability Our people, our customers 16 Sustainability Our planet, our communities 22 Financial Highlights from Our CFO 23 Condensed Consolidated Financial Statements 27 Management’s Responsibility 27 Report of Independent Registered Public Accounting Firm 30 ProLogis Board and Senior Officers 32 Faces of ProLogis IBC Shareholder Information 2005 Highlights • Grew ProLogis’ defined funds from operations • Increased management fees by 31.8% and per share, as adjusted, (FFO) to $2.71, up 11.5% our share of funds from operations from property from $2.43 in 2004, while net earnings per diluted funds by 19.6% share were $1.76, up 63% from $1.08 in 2004 • Established early market leadership position in • Completed merger with Catellus Development China with $200 million of properties Corporation, which added 42 million square feet of commercial space and solidified leading positions • Began development of a record $2.2 billion of new in six key North American logistics markets facilities, up more than 73% over 2004 • Achieved record leasing of 95 million square feet of • Significantly strengthened management team on space in global markets, a 44% increase over 2004 global basis • Increased property fund capacity with the formation • Increased dividend for the 12th consecutive year of Japan Fund II and, in early 2006, the North American to a projected rate of $1.60 per share for 2006, Industrial Fund, with combined capacity of $7 billion up 8% over 2005 ProLogis Defined Funds from Operations, as Adjusted* (per share) 1 7 2 $ . 1 4 2 $ . 3 4 2 $ . Total Revenue* (in millions) 0 3 1 2 $ , 3 8 9 1 $ , 4 9 4 1 $ , Total Assets Owned and Managed* (in billions) . 3 2 2 $ . 9 5 1 $ . 7 1 1 $ Dividend per Share * 0 6 1 $ . 8 4 1 $ . 6 4 1 $ . 03 04 05 03 04 05 03 04 05 04 05 06 *Before $0.24 (2003), $0.32 (2004) and $0.20 (2005) in certain charges, including impairment, relocation, merger integration and preferred redemption charges *As reported in FFO, includes CDFS disposition proceeds *Includes 100% of assets of ProLogis’ unconsolidated investees *Projected for 2006 To Our Shareholders Our commitment to sustainability is deeply rooted in the culture at ProLogis. We believe it is our responsibility to focus on leveraging our leading global platform to bring together the best and most cost-effective, energy-saving and environmental practices from around the world to create value in a sustainable manner. Our focus on customer relationships and profitable growth and our commitment to both our shareholders and our people are stronger than ever. In recent years, as we have grown our development and property fund businesses, we have endeavored to enhance our leading global presence while maximizing shareholder returns. The breadth of our global property platform and strong customer relationships helped us to sustain growth when many global economies struggled, and these same core competitive strengths will propel us forward during more robust economic times. By any measure, 2005 was a year of tremendous accom- plishment. We exceeded others’ expectations, posting 11.5% growth in funds from operations, while making significant progress toward our long-term objectives. Last year at this time, we embarked on a five-year plan to grow assets owned and managed to $30 billion, comprising 500 million square feet of space, and to achieve a pace of $2 billion in new development annually by the end of 2009. While these goals seemed aggressive to some at the time, our talented global team has, in the first year, made significant strides. We ended 2005 with more than $22 billion of assets owned, managed and under development, comprising over 375 million square feet, and began a record $2.2 billion of new development. Catellus Merger Provides Important Benefits Our $5.3 billion merger with Catellus Development Corporation in September was the most significant event of 2005, adding momentum to our initiatives in North America. The transaction was notable in many respects. Most important, we were joined by a team of 75 experienced development and local market professionals, including Ted Antenucci, formerly president of Catellus Commercial Development, who now heads our global P R O L O G I S 2 0 0 5 1 Jeffrey H. Schwartz (r) Chief Executive Officer Walter C. Rakowich (l) President and Chief Operating Officer By focusing on sustainability of our properties, developing our people and nurturing strong customer relation- ships, we can leverage our strengths to capture opportunities in 2006 and beyond. development team. In addition, Nelson Rising, formerly Catellus’ chief executive officer, and Christine Garvey, both Catellus board members, have joined the ProLogis board, providing important continuity and valued insight. The merger added roughly 42 million square feet of high- quality, recently developed commercial space, enhancing our leading positions in six of the largest US logistics markets and providing an additional 2,500 acres of well-located land to support the development of another 40 million square feet of space. The merger with Catellus also brought expertise in the redevelopment of abandoned airports and military bases into attractive, mixed-use projects. Projects of this nature require expertise and financial wherewithal but also a sensitivity to place and community. These redevelopment projects will add to our portfolio of properties while providing fees from infra- structure development and profits from the sale of improved land for non-industrial uses. Six months following the merger, we are excited about the way the two organizations have come together. We are already realizing the benefits of combining the two strongest develop- ment organizations and most extensive land positions in the United States through expanded customer relationships and leasing activity. Strong Global Demand Supports Improved Fundamentals We continued to experience strong customer demand in 2005, sustained by the growth in global trade and the ongoing need Annualized Base Rents from Top 25 Customers (in millions) Global Leasing (in millions of square feet) Development Starts* (in millions) for companies to make distribution efficiency a business imperative. This strong demand led to further increases in our occupancy levels and record leasing activity on all three continents. Across the globe, we leased approximately 95 mil- lion square feet, up almost 44% over leasing activity in 2004. We also achieved significant improvement in our same-store measures with the highest occupancies we’ve seen in over four years, increases in net operating income and higher rent levels in the second half of the year. . 0 4 3 3 $ . 9 4 9 4 5 1 2 $ , . 0 9 6 2 $ . 5 6 0 2 $ . 0 6 6 . 9 6 5 5 4 2 1 $ , 4 7 6 $ 03 04 05 03 04 05 03 04 05 *Total expected invest- ment, including 100% of development JVs. 2 P R O L O G I S 2 0 0 5 There are some US markets in which speculative construction Our Ability to Sustain More than Simply Growth has picked up. However, we estimate that new deliveries of In the pages of this report, we will elaborate on our approach space in the top 30 US markets amounted to about 2% of to sustainability, not only as it relates to growth but also the the existing competitive base in 2005, still well below annual sustainability of development, our customer relationships, our increases of about 3.5% during the late ’90s. Overall, leasing organization and our communities. We believe we have the activity continues to outpace new construction deliveries. platform of people in place and the expertise required to be We closely watch how quickly new construction is absorbed a global leader in this important area. Equally important is in addition to key business indicators, such as GDP growth, our leadership in sound governance practices. We are proud sales-to-inventory ratios and manufacturing indices, so we are to have been recognized by Institutional Investor as one of positioned to react quickly if conditions change. the most shareholder-friendly companies in our industry. In Europe, our stabilized portfolio remains well leased at 94% Our success builds on the strong foundation established over the while economic conditions are steadily improving. In Japan, past years, and we would be remiss not to mention the contribu- demand remains strong with our new facilities being fully leased tions made by Dane Brooksher, who, while retired at the end within a few months of completion. In China, strong GDP of 2004 as chief executive officer, has continued to offer us growth coupled with increased domestic consumption con- valuable counsel as chairman of our board. We are grateful as tinue to provide us with significant opportunities. well for the wisdom and experience of all our board members. Overall, we’re encouraged by conditions across our global As we develop and grow our business and our organization markets. Key business drivers are trending positively and in a strong, sustainable manner, we remain ever focused on occupancy levels in our portfolio of properties that have been providing higher levels of customer service throughout the complete for more than one year are above market average world, and we thank our customers for the opportunity to help in virtually every market in which we operate. Additionally, them grow their business platforms. Finally, we want to thank we continue to capture a growing share of new development all of our ProLogis associates, who are pictured on the inside activity, driven by our strong customer relationships and the back cover. These teammates were the true force driving our breadth of our global presence. excellent results in 2005 and will be instrumental in sustain- ing our growth in profitability and operations while enhancing New Funds Support Future Growth our unique culture as we move forward. As we continue to expand our market share and take advantage of opportunities, it is critical to have the capital in place to support our growth. During the year, we raised a second Japan fund with the capacity to support an additional $3 billion of development. In addition, in February, we announced the for- Jeffrey H. Schwartz mation of a $4 billion open-end, infinite-life North American Chief Executive Officer fund, our largest raising of private capital to date. This fund allowed us to redeem our partners’ interest in expiring funds while supporting our development and acquisition activity in North America for the next two to three years. Going forward, we believe this perpetual, liquid structure will provide impor- Walter C. Rakowich tant benefits for us and our investors. President and Chief Operating Officer P R O L O G I S 2 0 0 5 3 4 P R O L O G I S 2 0 0 5 sustain Our business, our shareholders Since our IPO in 1994, we have consistently grown earnings, assets and dividends and seen appreciation in share price, demonstrating the sustainability of our financial performance. Our unparalleled global development pipeline and expanding property fund business support our confidence in the long-term success of our business plan. Sustaining profitable long-term The ProLogis Business Model In this manner, we recycle our initial investment in CDFS prop- In our early years, we grew primarily by acquiring properties in erties into new development and acquisitions. By continuing to the United States. Today, while we continue to make acquisitions, manage these properties under long-term agreements, we recog- our growth is fueled by our expansive development and fund nize management fees as well as our proportionate share of each management businesses, not only in the United States but in fund’s earnings. We also maintain key customer relationships. Europe and Asia as well. This expansion helped us become the largest, US-based, global developer and manager of industrial Our numbers underscore the strength of this approach. In 1994, properties. We ended 2005 with a record Corporate Distribution we had 16 million square feet of facilities in 15 US markets, Facilities Services (CDFS) pipeline of approximately $3.3 bil- with a total value of less than $500 million. Today, we are in lion – up nearly 70% from the year before – driven by strong 77 markets, with more than 375 million square feet owned, fundamentals, new markets and greater opportunities. managed or under development, representing approximately Our global development drives our expansion, while our $22 billion. business plan allows us to grow by accessing and managing We believe our development pipeline will enable us to achieve a variety of capital sources. We raise third-party capital for growth within our funds of roughly $2 to $2.5 billion per ProLogis property funds. We contribute our completed, stabi- year. A core objective for us is to increase total assets under lized properties to these funds, generating development gains, management to approximately $30 billion by 2009. We remain and we co-invest a portion of these gains in our funds, result- optimistic about reaching that goal, given solid industry funda- ing in average ownership in the funds of 10% to 25%. mentals and the past success of our strategic plan. 6 P R O L O G I S 2 0 0 5 growth Top: Growing globalization and rampant brand extension of consumer products require manufacturers to get their prod- ucts to market quickly and efficiently. Our state-of-the-art facilities located in the world’s largest logistics markets are key to accomplishing that goal. Middle: The ability to recycle cap- ital is the core of ProLogis’ fund strategy. Masato Miki, ProLogis Japan Co-President, evaluates opportunities to invest capital for maximum returns and manages our fund business in Japan. Bottom: Creating thriving metropol- itan areas from infill redevelopment locations is a core competency of Catellus Development Corp. Pacific Commons, in California, is a perfect example of how respon- sible development can effectively meet the needs of both business and the community. P R O L O G I S 2 0 0 5 7 8 P R O L O G I S 2 0 0 5 Global Growth The remarkable growth in international trade seen over the past several years shows little sign of abating, as the manufacture of consumer goods shifts increasingly to regions of the world with low labor costs. That trend is fundamentally changing how companies get their products to the world’s largest consumer markets. As they rethink their supply chains, modern, efficiently designed industrial warehouses play a crucial role. At year end, market conditions were healthy or improving on all three continents in which we do business. Our North American stabilized portfolio occupancy increased by 2.75 per- centage points in 2005, nearly double the industry average. Importantly, this improvement was achieved at a time when an additional 100 million square feet of new space was added to the top 30 US markets. ProLogis continues to benefit from dynamics that are fundamentally changing the manufacturing, retailing and distribution industries on a global basis. In Europe, demand for high-quality space continues to strengthen, driven by the growth in outsourcing of logistics services and the increase in cross-border trade brought about by the expansion of the European Union. ProLogis serves as the leading pan-European industrial warehouse provider, with the ability to serve customers in multiple markets across 11 countries. In Asia, we experienced a record development year due to several market drivers. Among them is the move by an increasing number of Japanese companies to streamline distribution and to lease, rather than own, real estate assets. In China, increased port traffic, driven by the explosion of global trade and growing domestic consumption, requires enhanced supply chains that deliver goods more efficiently throughout the country. Of course, we are not immune from future downturns in global markets. But given the track record of our operating model, the scale and reach of our platform and the long-term trends in our industry, we continue to see a future bright with promise and opportunity. P R O L O G I S 2 0 0 5 9 In 2005, ProLogis began develop- ment of a record $2.2 billion of facilities worldwide, driven by improving global economies and strong customer demand. These facilities add to our CDFS pipeline, thereby supporting the sustain- ability of future growth. ability Our people, our customers ProLogis was founded on a simple idea – we could create exceptional value by forging long-term ties with our customers and focusing on quality facilities and services. Traditional real estate firms concentrated on generating a high volume of single transactions. We embrace a different approach. The ability to provide superior Sustainable Relationships Our customers trust us to serve them effectively. That’s why Sustainable relationships have been the key to success at they often return to us when seeking to build new facilities, ProLogis over the past decade, and they remain so today. whether it’s in Asia, North America or Europe. A good example We operate with a clear, precisely defined view of our global is adidas®, one of the world’s premier makers of athletic customer base, which includes manufacturers, retailers, apparel and sporting goods. The company is a customer in distributors, transportation companies, third-party logistics North America, with 500,000 square feet leased from us in providers and other enterprises around the world with large- metropolitan Cincinnati. In late 2005, adidas needed a new scale needs for industrial space. The Focus 500 distribution center in China. They asked us again to serve as their facilities provider, leading us to develop 650,000 square feet for them at ProLogis Park Suzhou, outside Shanghai. In We serve more than 4,600 customers, but we concentrate fact, more than 40 global companies do business with us on our strategic sales and marketing efforts on a segment we’ve multiple continents, including industry leaders like Hitachi, defined as the “Focus 500.” Members of this target group Unilever, Bridgestone, L’Oreal, Coca-Cola and Nippon Express. have been identified based on their size and the nature of Over the past year, 50% of our newly developed space has their distribution needs. At the end of 2005, we did business been leased to repeat customers. with 314 of the Focus 500, and they leased approximately 50% of our total space. 1 2 P R O L O G I S 2 0 0 5 service Top: Listening to customers is key in building long-term relationships. JimPerry(l),CEOofOfficeScapes, knew what his company needed in their Denver showroom. Working with Ted Antenucci, President Global Development, OfficeScapes was the first customer at the Stapleton Airport redevelopment project in Denver, Colorado. Middle: The global success of ProLogis lies in hiring nationals to ensure consistency with local customs and expectations. From left to right, managing directors Robin von Weiler, Northern and Central Europe; Ming Mei, China; Alan Curtis, United Kingdom; and Ranald Hahn, Southern Europe, oversee their regions and provide a single point of contact for large- scale international users of distribution space. Bottom: Opportunity lies in rela- tionships. Home Depot, a customer of ours since the early ‘90s, has become the second largest retailer in the United States. As they have grown, so has their relationship with us. In 2005, we signed four leases with them for over two mil- lion square feet, including a 678,000 square-foot expansion in Atlanta. P R O L O G I S 2 0 0 5 1 3 A Leading Industrial Platform to Serve Customers Today, we operate what we believe is the world’s most extensive platform of industrial real estate, including approximately 9,900 acres of land owned and controlled to support future development. We maintain a leading position in some of the most strategically important distribution markets around the world – markets such as Los Angeles, Tokyo and the Midlands region of the United Kingdom. Another key advantage is our position in the world’s top container ports, since seaports process more than 90% of global trade. Today, we have properties in 18 of the largest 75 ports worldwide. These 18 ports account for 30% of the global volume in shipping containers. Our port presence has grown to almost 85 million square feet, and we have land available to support more than 38 million square feet of future port-related development. Serving our customers well does more than generate repeat business. It hones our understanding of the market and enables us to build an industry-leading portfolio of properties. Our properties are in the right markets, of the right size, and built with the right design. We believe they will deliver a sustainable competitive advantage for us over the long term, creating value for customers and investors as well. People Make the Difference A key reason for our success is the ability of our people. Whether it is a market officer in China, a fund manager in Japan, a development professional in the United Kingdom, a US property manager or the finance, accounting, tax and legal professionals that underpin our operations, our people take pride in our success and in delivering the best solutions to our cus- tomers. We don’t outsource property management, customer service or other key functions to third-party providers. Local nationals across the world build and operate our business. Our teams are made up of skilled real estate professionals with in-depth knowledge of local market dynamics, who communi- cate fluently with customers in their language. It is our people who differentiate us from our competitors and ensure that we will continue to grow and thrive around the globe. 1 4 P R O L O G I S 2 0 0 5 A leading provider of third-party logisticsservicesinJapan,Hitachi Transport System is helping customers modernize their distri- bution networks. Mike Yamada (l), ProLogis Japan Co-President, and Shinya Hasegawa, Vice President and Executive Officer, Solution Business Management, worked together on three new leases in 2005. InJanuary2006,Hitachi signed its third build-to-suit agreement, bringing the total to be leased from ProLogis to over 1.8 million square feet. P R O L O G I S 2 0 0 5 1 5 sustainability Our planet, our communities Sustainability has been defined in many ways. We see it as a state where the needs of people and commerce can be met while supporting our communities, protecting our environment and in some cases, restoring the ability of the land to provide for future generations. Sustaining our business and the Sustaining the Environment ProLogis Park Sideway will include features designed to limit Managing environmental impact is our responsibility as one environmental impacts, including heat-absorbent solar walls, of the world’s largest industrial real estate developers. At irrigation systems that recycle rainwater, convenient links to ProLogis, the nature of our business requires us to work effec- mass transit and bike paths for park employees. The public tively with government agencies, community groups and other agency overseeing the project called our plan “a benchmark organizations to address concerns about how our facilities for the rest of Europe’s commercial property industry.” might affect adjacent neighborhoods and natural habitats. We will strive to become the leader in developing standards We are fortunate to have world-class expertise in this area. for economically feasible sustainable development. But no In France, Japan and the United Kingdom, we recently began development can accurately be deemed sustainable unless it investigating sustainable development techniques and have creates economic value for investors. At ProLogis Park Sideway, incorporated elements such as solar roofing panels and effec- environmental technologies will be independently measured to tive use of landscaping, which help mitigate the impact of determine which ones deliver the greatest impact relative to the carbon emissions on the environment. cost. By gathering scientific data to support economic decisions, we help create lasting sustainability and value for shareholders. Our brownfield redevelopment initiatives in Europe are well known and were recognized recently in the United Kingdom, Viewed as a US leader in redevelopment, Catellus is continuing where we were selected to undertake a large-scale redevelop- its work on projects like the former Robert Mueller Municipal ment project on the strength of our environmental credentials. Airport in Austin, Texas, and the Los Angeles Air Force Base. 1 8 P R O L O G I S 2 0 0 5 planet Top: Solar panels help to reduce dependence on less environmen- tally friendly energy sources. We have begun to incorporate and evaluate these and other eco-friendly advances to strike a balance between social responsi- bility and economic accountability. Middle: Whether it’s a closed military base, former railyard or abandoned airport, some of the best opportunities for expansion in key markets are through rede- velopment. Commonly located near major cities, such projects provide us the opportunity to help redefine the role of these sites in their communities. Bottom: Giving back to the com- munities in which our associates work and live is a core ProLogis value. In 2005, we donated four facilities to support the gathering and distribution of relief supplies to those affected by hurricanes Katrina and Rita. P R O L O G I S 2 0 0 5 1 9 2 0 P R O L O G I S 2 0 0 5 Sustainable Development at Home Earlier in 2006, we formally opened our new world headquarters in Denver, Colorado. After years of working from converted ware- house space, we have brought together all of our Denver-based employees to improve productivity, create a more integrated organization and further our strong corporate culture. We incorporated a wide array of environmental technologies and design features into our building, including an illumination system that harvests sunlight to reduce power consumption and recharging stations for electric vehicles. We are pleased to incorporate cutting-edge technologies into our new headquarters and believe these features will generate long-term benefits – for our company and the environment. As a leader in our industry, we are fully aware of our social obligations and are committed to making a contribution to the betterment of the communities in which we operate. Commitment to Our Communities Our geographic diversity means we are well positioned to support our customers’ distribution space needs throughout the world’s largest logistics markets. It also means we have a dedicated group of more than 1,000 ProLogis associates living and working in those same 77 global markets, who know best what those communities need. Employees at our global head- quarters are active in local literacy initiatives and work in programs designed for at-risk children. In Amsterdam, we are a patron of Emma Children’s Hospital, supporting research and helping to make children with cancer a little more com- fortable. In Chicago, our team helps the homeless through their efforts with the Greater Chicago Food Depository. We also support Shanghai Sunrise, a university scholarship program for underprivileged children in China, and Building Blocks, a parent/toddler program, in the United Kingdom. We encourage our associates to be actively engaged in their local communi- ties in whatever manner delivers the most impact. In this way, we contribute to the sustainability of our organization and the communities in which we live. P R O L O G I S 2 0 0 5 2 1 In Denver, ProLogis associates, like Mari Akers, First Vice President Human Resources, participate in programs such as Junior Achievement. Interaction with successful members of the business community helps stu- dents like Yenny Blanco visualize the opportunities that a solid education can provide. Financial Highlights from Our CFO In our CDFS business, we continued to commit capital to In 2005, we met or exceeded developments throughout the world, starting $2.2 billion of new our expectations in every segment. developments, up from $1.2 billion in 2004. After completing We increased FFO per share, asset contributions to property funds and third-party sales of adjusted for merger and one-time $1.3 billion, at healthy 22.4% margins, we ended the year with charges, by 11.5% to $2.71 per $3.3 billion in our CDFS pipeline. This strong pipeline will be share. The growth in our cash an important part of our growth over the next few years. Dessa M. Bokides flows and future prospects gave our board confidence to raise our dividend by 8%, from an annual rate of $1.48 per share, to $1.60 per share in 2006. During 2005, we strengthened our platform through the $5.3 bil- lion merger with Catellus. The merger increased our wholly owned properties by over 30%, our land positions by 45% and strength- ened our balance sheet through the addition of 56 million shares. All three segments of our business enjoyed excellent results. Funds from operations per share were $2.71, up 11.5% over $2.43 in the prior year – our strongest annual increase since US economic conditions began to slow in 2000. We were especially pleased with our property performance. Finally, our strong leasing and development activity drove the Stabilized occupancies increased to 94.5% from 92.3% at the growth in our fund management business. We are pleased with end of 2004. Higher occupancies, combined with significantly the recurring cash flow that is generated by this business and less negative rent growth on expiring leases (negative 1.5% in our ability to recycle capital to fund future developments. We 2005 compared to negative 5.8% in 2004), led to an increase successfully raised a fund with $3 billion of capacity in Japan in same store net operating income of 1.5%. For the year, 73% and set the foundation for our open-end, infinite-life North of customers remained in place when their leases expired. American Industrial Fund that closed in early 2006 with $4 bil- This is our strongest retention rate since 1997. lion of capacity. We also increased our financial flexibility through Property Operations* (in millions) . 7 9 6 4 $ . 2 9 0 4 $ . 6 4 0 4 $ FFO from CDFS Dispositions* (in millions) Fund Management Income* (in millions) . 3 3 3 2 $ . 7 9 0 2 $ . 5 6 2 1 $ . 3 1 3 1 $ . 6 7 1 1 $ the formation of a $2.6 billion, multi-currency global line of credit and a $900 million debt offering. During 2005, we saw improvement in most of our operating measures and enjoyed access to both public and private debt . 2 3 6 1 $ and equity to further our growth. Furthermore, we improved our coverage ratios and retained a conservative balance sheet while delivering a total return to our shareholders of 11.7%. Dessa M. Bokides Chief Financial Officer 03 04 05 03 04 05 03 04 05 *As reported in FFO *As reported in FFO *As reported in FFO 2 2 P R O L O G I S 2 0 0 5 Condensed Consolidated Statements of Earnings Years Ended December 31, (In thousands, except per share data) 2005 2004 2003 Revenues Rental income CDFS dispositions proceeds Property management and other fees and incentives Development management and other income Total revenues Expenses Rental expenses Cost of CDFS dispositions General and administrative Depreciation and amortization Merger integration expenses Relocation expenses Other expenses Total expenses Operating income Earnings from unconsolidated property funds Earnings (losses) from CDFS joint ventures and other unconsolidated investees Interest expense Interest income on long-term notes receivable Other interest and other income Earnings before minority interest Minority interest Earnings before certain net gains Gains recognized on dispositions of certain non-CDFS business assets and investments in property funds, net Foreign currency exchange gains (expenses/losses), net Earnings before income taxes Income taxes Current income tax expense Deferred income tax expense Total income taxes Earnings from continuing operations Discontinued operations Income attributable to disposed assets Losses related to temperature-controlled distribution assets Gains recognized on dispositions, net Non-CDFS business assets CDFS business assets Total discontinued operations Net Earnings Less preferred share dividends Less excess of redemption values over carrying values of preferred shares redeemed Net Earnings Attributable to Common Shares Weighted average common shares outstanding – Basic Weighted average common shares outstanding – Diluted Net earnings per share attributable to common shares – Basic Continuing operations Discontinued operations Net earnings per share attributable to common shares – Basic Net earnings per share attributable to common shares – Diluted Continuing operations Discontinued operations Net earnings per share attributable to common shares – Diluted Distributions per common share See ProLogis’ Annual Report on Form 10-K for Audited Consolidated Financial Statements and Notes. $÷«635,186 1,140,457 66,934 25,464 1,868,041 176,119 917,782 107,164 199,377 12,152 4,451 8,633 1,425,678 442,363 46,078 6,421 (178,369) 6,781 10,724 333,998 5,243 328,755 – 15,979 344,734 14,847 12,045 26,892 317,842 6,411 (25,150) 86,444 10,616 78,321 396,163 25,416 – $÷«370,747 203,337 213,713 $÷÷÷÷«1.44 0.38 $÷÷÷÷«1.82 $÷÷÷÷«1.39 0.37 $÷÷÷÷«1.76 $÷÷÷÷«1.48 $÷«527,065 1,288,665 50,778 2,698 1,869,206 136,642 1,111,698 84,861 166,409 – 6,794 5,519 1,511,923 357,283 42,899 (801) (152,551) – 5,721 252,551 4,875 247,676 9,400 14,686 271,762 24,870 18,692 43,562 228,200 6,998 (36,671) 1,549 32,719 4,595 232,795 25,746 4,236 $«÷202,813 182,226 191,801 $÷÷÷«÷1.09 0.02 $÷÷÷«÷1.11 $÷÷÷«÷1.06 0.02 $÷÷÷«÷1.08 $÷÷÷«÷1.46 $÷«525,778 900,978 44,184 2,349 1,473,289 130,911 774,452 65,907 158,792 – – 7,608 1,137,670 335,619 27,265 (12,231) (154,427) – 1,883 198,109 4,959 193,150 76,354 (10,587) 258,917 4,759 10,615 15,374 243,543 7,132 – – – 7,132 250,675 30,485 7,823 $÷«212,367 179,245 187,222 $÷÷÷«÷1.14 0.04 $÷÷÷÷«1.18 $÷÷÷«÷1.12 0.04 $÷÷÷÷«1.16 $÷÷÷÷«1.44 P R O L O G I S 2 0 0 5 2 3 Condensed Consolidated Balance Sheets December 31, (In thousands) Assets Real estate Less accumulated depreciation Investments in and advances to unconsolidated investees Cash and cash equivalents Accounts and notes receivable Other assets Discontinued operations – assets held for sale Total assets Liabilities and Shareholders’ Equity Liabilities Debt Accounts payable and accrued expenses Other liabilities Discontinued operations – assets held for sale Total liabilities Minority interest Shareholders’ Equity Series C preferred shares Series F preferred shares Series G preferred shares Common shares Additional paid-in capital Accumulated other comprehensive income Distributions in excess of net earnings Total shareholders’ equity Total liabilities and shareholders’ equity See ProLogis’ Annual Report on Form 10-K for Audited Consolidated Financial Statements and Notes. 2005 2004 $11,875,130 1,118,547 10,756,583 1,049,743 191,716 327,214 788,840 – $13,114,096 $÷6,677,880 332,339 557,210 – 7,567,429 58,644 100,000 125,000 125,000 2,438 5,606,017 149,586 (620,018) 5,488,023 $13,114,096 $6,333,731 989,221 5,344,510 908,513 236,529 92,015 401,564 114,668 $7,097,799 $3,413,961 255,841 196,240 62,991 3,929,033 66,273 100,000 125,000 125,000 1,858 3,249,576 194,445 (693,386)) 3,102,493 $7,097,799 2 4 P R O L O G I S 2 0 0 5 Condensed Consolidated Statements of Cash Flows Years Ended December 31, (In thousands) 2005 2004 2003 Operating Activities Net earnings Minority interest share in earnings Adjustments to reconcile net earnings to net cash provided by operating activities Straight-lined rents Cost of share-based compensation awards Depreciation and amortization Cumulative translation losses and impairment charge on assets held for sale Equity in earnings from unconsolidated investees Distributions from and changes in operating receivables of unconsolidated investees Amortization of deferred loan costs and net premium on debt Gains recognized on dispositions of non-CDFS business assets and investments in property funds, net Adjustments to foreign currency exchange amounts recognized Provision for deferred income taxes Increase in accounts and notes receivable and other assets Increase (decrease) in accounts payable and accrued expenses and other liabilities Net cash provided by operating activities Investing Activities Real estate investments Tenant improvements and lease commissions on previously leased space Recurring capital expenditures Cash used in Catellus Merger in 2005 and Keystone Transaction in 2004, net of cash acquired Cash received associated with Keystone Transaction Proceeds from dispositions of real estate assets Proceeds from dispositions of investments in unconsolidated investees Proceeds from repayments of notes receivable Net cash amounts (invested in/advanced to) received from unconsolidated investees Adjustment to cash balance resulting from reporting change Net cash used in investing activities Financing Activities Net proceeds from sales and issuances of common shares under various common share plans, net of repurchases Net proceeds from sales of preferred shares Redemptions of preferred shares Distributions paid on common shares Minority interest redemptions and distributions Dividends paid on preferred shares Debt and equity issuance costs paid Repayment of debt assumed in Catellus Merger Net proceeds from lines of credit and short-term borrowings Proceeds from issuance of senior notes and secured debt Payments on senior notes, secured debt and assessment bonds Purchases of derivative contracts, net of settlement proceeds Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year $÷÷396,163 5,243 $÷÷232,795 4,875 $÷÷250,675 4,959 (11,323) 23,928 204,378 26,864 (52,499) 89,633 1,521 (86,444) (11,316) 12,045 (84,933) (15,070) 498,190 (2,479,818) (53,919) (26,989) (1,292,644) – 1,516,614 – 59,991 (10,193) – (2,286,958) 45,641 – – (297,379) (13,953) (25,416) (8,112) (106,356) 1,348,023 890,011 (119,067) 30,563 1,743,955 (44,813) 236,529 $÷÷191,716 (9,654) 19,544 174,606 50,582 (42,098) 76,518 5,741 (10,949) (10,477) 18,692 (68,424) 117,102 558,853 (1,654,988) (46,693) (24,561) (510,560) 177,106 1,405,420 13,209 – (52,233) 3,284 (690,016) 146,782 – (125,000) (266,135) (7,685) (25,746) (4,507) – 210,784 420,573 (312,465) (412) 36,189 (94,974) 331,503 $÷÷236,529 (7,236) 15,453 164,969 – (15,034) 38,607 5,892 (76,354) 13,083 10,615 (62,646) 23,576 366,559 (1,167,925) (41,036) (22,789) – – 835,172 246,242 – 35,242 – (115,094) 32,614 241,767 (175,000) (258,187) (9,341) (31,214) (10,426)) – 75,149 331,000 (224,756) (2,377) (30,771) 220,694 110,809 $÷÷331,503 See ProLogis’ Annual Report on Form 10-K for Audited Consolidated Financial Statements and Notes (including information on supplemental non-cash investing and financing activities). P R O L O G I S 2 0 0 5 2 5 Condensed Consolidated Statements of Shareholders’ Equity and Comprehensive Income Years Ended December 31, (In thousands) Common shares (par value) at beginning of year Issuance of common shares in connection with the Catellus Merger Issuances of common shares, net of repurchases Conversions of limited partnership units Common shares (par value) at end of year Preferred shares at stated liquidation preference at beginning of year Redemptions of preferred shares Issuances of preferred shares Preferred shares at stated liquidation preference at end of year Additional paid-in capital at beginning of year Issuance of common shares in connection with the Catellus Merger Issuances of common shares, net of repurchases Conversions of limited partnership units Excess of redemption values over carrying values of preferred shares redeemed Cost of issuing preferred shares Cost of issuing common shares Change in receivables from timing differences on equity transactions Sales of share-based compensation awards to unconsolidated investees Cost of share-based compensation awards Additional paid-in capital at end of year Accumulated other comprehensive income at beginning of year Foreign currency translation adjustments Unrealized gains (losses) on derivative contracts, net Accumulated other comprehensive income at end of year Distributions in excess of net earnings at beginning of year Net earnings Preferred share dividends Excess of redemption values over carrying values of preferred shares redeemed Common share distributions Distributions in excess of net earnings at end of year Total shareholders’ equity at end of year Comprehensive income attributable to common shares Net earnings Preferred share dividends Excess of redemption values over carrying values of preferred shares redeemed Foreign currency translation adjustments Gains (losses) on derivative contracts, net Comprehensive income attributable to common shares See ProLogis’ Annual Report on Form 10-K for Audited Consolidated Financial Statements and Notes. 2005 $÷÷÷«1,858 559 21 – $÷÷÷«2,438 $÷«350,000 – – $÷«350,000 $3,249,576 2,285,029 43,126 150 – – (1,395) 2,494 – 27,037 $5,606,017 $÷«194,445 (70,076) 25,217 $÷«149,586 $÷(693,386) 396,163 (25,416) – (297,379) $÷(620,018) $5,488,023 $÷«396,163 (25,416) – (70,076) 25,217 $÷«325,888 2004 $÷÷÷«1,802 – 56 – $÷÷÷«1,858 $«««475,000 (125,000) – $«««350,000 $3,073,959 – 148,248 869 4,236 (473)) (157)) (1,365)) – 24,259 $3,249,576 $÷«138,235 63,276 (7,066) $÷«194,445 $÷(630,064) 232,795 (25,746) (4,236) (266,135) $÷(693,386) $3,102,493 $÷«232,795 (25,746) (4,236) 63,276 (7,066) $÷«259,023 2003 $÷÷÷«1,781 – 20 1 $÷÷÷«1,802 $«««400,000 (175,000) 250,000 $÷«475,000 $3,021,686 – 34,401 355 7,823 (8,233) (74) (1,736) 319 19,418 $3,073,959 $«««««35,119 101,157 1,959 $÷«138,235 $÷(584,244) 250,675 (30,485) (7,823) (258,187) $÷(630,064) $3,058,932 $÷«250,675 (30,485) (7,823) 101,157 1,959 $÷«315,483 2 6 P R O L O G I S 2 0 0 5 Report of Independent Registered Public Accounting Firm The Board of Trustees and Shareholders ProLogis: We have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of ProLogis and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of earnings, share- holders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2005 (not presented herein); and in our report dated March 14, 2006, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated financial statements is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived. Los Angeles, California March 14, 2006 Management’s Responsibility for Financial Statements Management is responsible for the preparation, integrity and objectivity of the condensed consolidated financial statements and other financial information presented in this report. The accompanying condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, applying certain estimates and judgments as required. ProLogis’ internal controls are designed to provide reasonable assur- ance as to the integrity and reliability of the financial statements and to adequately safeguard, verify and maintain accountability of assets. Such controls are based on established written policies and procedures, are implemented by trained, skilled personnel with an appropriate segregation of duties and are monitored through a comprehensive internal audit program. These policies and procedures prescribe that ProLogis and all its employees are to maintain the highest ethical standards in its business practices throughout the world. KPMG LLP, independent registered public accountants, has been retained to audit ProLogis’ 2005 financial statements. Their accom- panying report is based on an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), which include the consideration of ProLogis’ internal controls to establish a basis for reliance thereon in determining the nature, timing and extent of audit tests to be applied. The Board of Trustees exercises its responsibility for these financial statements through its Audit Committee, which consists entirely of independent, non-management Board members. One of the responsibilities of the Audit Committee is to meet periodically with the independent auditors and with ProLogis’ internal auditors, both privately and with management present, to review accounting, auditing, internal controls and financial reporting matters. Jeffrey H. Schwartz Chief Executive Officer Dessa M. Bokides Chief Financial Officer P R O L O G I S 2 0 0 5 2 7 Condensed Consolidated Statements of Funds From Operations Unaudited Years Ended December 31, (In thousands, except per share data) Revenues Rental income CDFS dispositions proceeds Property management and other fees and incentives Development management and other income Total revenues Expenses Rental expenses Cost of CDFS dispositions General and administrative Depreciation of non-real estate assets Merger integration expenses Relocation expenses Other expenses Total expenses Other Income (Expense) FFO from unconsolidated property funds FFO from CDFS joint ventures and other unconsolidated investees Interest expense Interest income on long-term notes receivable Other interest and other income Gains recognized on dispositions of investments in property funds, net Foreign currency exchange gains (expenses/losses), net Current income tax expense Losses related to temperature-controlled distribution assets Total other income (expense) FFO Less preferred share dividends Less excess of redemption values over carrying values of preferred shares redeemed Less minority interest FFO Attributable to Common Shares Weighted average Common Shares outstanding – Basic Weighted average Common Shares outstanding – Diluted Basic per share FFO attributable to common shares Diluted per share FFO attributable to common shares 2005 2004 2003 $÷«649,530 1,240,950 66,934 25,464 1,982,878 179,815 1,007,659 107,164 7,153 12,152 4,451 8,633 1,327,027 655,851 96,261 8,449 (178,639) 6,781 10,724 – 1,914 (14,847) (25,363) (94,720) 561,131 25,416 – 5,243 $÷«530,472 203,337 213,713 $÷÷÷÷«2.61 $÷÷÷÷«2.51 $«÷546,948 1,529,647 50,778 2,698 2,130,071 142,393 1,319,961 84,861 8,065 – 6,794 5,519 1,567,593 562,478 80,504 1,416 (153,334) – 5,721 3,164 (1,904) (24,870) (37,915) (127,218) 435,260 25,746 4,236 4,875 $«÷400,403 182,226 191,801 $«««««««÷2.20 $«««««««÷2.11 $÷«546,064 900,978 44,184 2,349 1,493,575 136,840 774,452 65,907 7,884 – – 7,608 992,691 500,884 73,387 (16,907) (155,475) – 1,883 47,822 (2,823) (4,759) – (56,872) 444,012 30,485 7,823 4,959 $÷«400,745 179,245 187,222 $«««««««÷2.24 $«««««««÷2.17 Funds From Operations Funds from operations (“FFO”) is a non-GAAP measure that is commonly used in the real estate industry. The most directly comparable GAAP measure to FFO is net earnings. Although the National Association of Real Estate Investment Trusts (“NAREIT”) has published a definition of FFO, modifications to the NAREIT calculation of FFO are common among REITs, as companies seek to provide financial measures that meaning- fully reflect their business. FFO, as we define it, is presented as a supplemental financial measure. We do not use FFO as, nor should it be considered to be, an alternative to net earnings computed under GAAP as an indicator of our operating performance or as an alternative to cash from operating activities computed under GAAP as an indicator of our ability to fund our cash needs. FFO is not meant to represent a comprehensive system of financial reporting and does not present, nor do we intend it to present, a complete picture of our financial condition and operating performance. We believe net earnings computed under GAAP remains the primary measure of performance and that FFO is only meaningful when it is used in conjunction with net earnings computed under GAAP. Further, we believe our consolidated financial statements, prepared in accordance with GAAP, provide the most meaningful picture of our financial condition and our operating performance. NAREIT’s FFO measure adjusts net earnings computed under GAAP to exclude his- torical cost depreciation and gains and losses from the sales of previously depreciated properties. We agree 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 FFO “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 FFO 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 FFO, of gains and losses from the sales of previously depreci- ated 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 activity and assists in comparing those operating results between periods. At the same time that NAREIT created and defined its FFO 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.” We believe financial analysts, potential investors and shareholders who review our operating results are best served by a defined FFO measure that includes other adjustments to net earnings computed under GAAP in addition to those included in the NAREIT defined measure of FFO. 2 8 P R O L O G I S 2 0 0 5 Reconciliation of Net Earnings to Funds From Operations Unaudited Years Ended December 31, (In thousands) Reconciliation of Net Earnings to FFO Net earnings attributable to common shares Add (deduct) NAREIT defined adjustments Real estate related depreciation and amortization Adjustment to gains recognized on dispositions of certain non-CDFS business assets and investments in property funds, net Reconciling items attributable to discontinued operations Gains recognized on dispositions of non-CDFS business assets, net Real estate related depreciation and amortization Totals discontinued operations Our share of reconciling items from unconsolidated investees Real estate related depreciation and amortization FFO adjustment to gain recognized on disposition of CDFS business segment assets Losses (gains) on dispositions of non-CDFS business business assets, net Other amortization items Totals unconsolidated investees Totals NAREIT defined adjustments Subtotals – NAREIT defined FFO Add (deduct) our defined adjustments Foreign currency exchange losses (gains), net Deferred income tax expense Reconciling items attributable to discontinued operations Assets disposed of – deferred income tax benefit Our share of reconciling items from unconsolidated investees Foreign currency exchange losses, net Deferred income tax expense (benefit) Totals unconsolidated investees Totals our defined adjustments FFO attributable to common shares as defined by us Funds From Operations (continued) Our defined FFO measure excludes the following items from net earnings computed under GAAP that are not excluded in the NAREIT defined FFO measure: (i) deferred income tax benefits and deferred income tax expenses recognized by our subsidiaries; (ii) certain foreign currency exchange gains and losses resulting from certain debt transactions between us and our foreign consolidated subsidiaries and our 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 our foreign con- solidated subsidiaries and our foreign unconsolidated investees; and (iv) mark-to-market adjustments associated with derivative financial instruments utilized to manage foreign currency risks. FFO of our unconsolidated investees is calculated on the same basis. The items that we exclude from net earnings computed under GAAP, while not infre- quent or unusual, are subject to significant fluctuations from period to period that cause both positive and negative effects on our results of operations, in inconsistent and unpredictable directions. Most importantly, the economics underlying the items that we exclude from net earnings computed under GAAP 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 long-term tax planning and tax structuring decisions. Accordingly, we believe investors are best served if the information that is made available to them allows them to align their analysis and evaluation of our operating results along the same lines that our 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 net earnings computed under GAAP that are included in arriving at our defined FFO measure are helpful to management in making real estate investment decisions and evaluating our current operating performance. We believe these adjustments are also helpful to industry analysts, potential investors and shareholders in their understanding and evaluation of our performance on the key measures of net asset value and current operating returns generated on real estate investments. 2005 2004 2003 $370,747 $202,813 $212,367 192,224 158,344 – (86,444) 3,967 (82,477) 57,766 – (1,114) (5,134) 51,518 161,265 532,012 (14,065) 12,045 (213) 298 395 693 (1,540) $530,472 (6,236) (1,718) 6,351 4,633 42,635 – 601 (3,498) 39,738 196,479 399,292 (16,590) 18,692 (1,075) 443 (359) 84 1,111 $400,403 150,908 (28,532) – 6,177 6,177 46,413 (1,823) (12,322) (2,040) 30,228 158,781 371,148 7,764 10,615 – 11,721 (503) 11,218 29,597 $400,745 While we believe our defined FFO measure is an important supplemental measure, neither NAREIT’s nor our measure of FFO should be used alone because they exclude significant economic components of net earnings computed under GAAP 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 FFO. FFO is limited, as it does not reflect the cash requirements that may be necessary for future replacements of the real estate assets. Further, the amorti- zation of capital expenditures and leasing costs necessary to maintain the operating performance of distribution properties are not reflected in FFO. – Gains or losses from property dispositions represent changes in the value of the disposed properties. By excluding these gains and losses, FFO 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 our defined FFO measure result from the creation of a deferred income tax asset or liability that may have to be settled at some future point. Our defined FFO measure does not cur- rently reflect any income or expense that may result from such settlement. – The foreign currency exchange gains and losses that are excluded from our defined FFO measure are generally recognized based on movements in foreign currency exchange rates through a specific point in time. The ultimate settlement of our foreign currency- denominated net assets is indefinite as to timing and amount. Our FFO 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. We compensate for these limitations by using the FFO measure only in conjunction with net earnings computed under GAAP. To further compensate, we always reconcile our FFO measure to net earnings computed under GAAP in our financial reports. Additionally, we provide investors with complete financial statements prepared under GAAP, our definition of FFO, which includes a discussion of the limitations of using our non-GAAP measure, and a reconciliation of our GAAP measure (net earnings) to our non-GAAP measure (FFO, as we define it), so that investors can appropriately incorporate this measure and its limitations into their analyses. P R O L O G I S 2 0 0 5 2 9 K. Dane Brooksher Christine N. Garvey Stephen L. Feinberg George L. Fotiades Donald P. Jacobs Irving F. Lyons, III Walter C. Rakowich Nelson C. Rising Jeffrey H. Schwartz D. Michael Steuert Kenneth N. Stensby J. André Teixeira William D. Zollars Andrea M. Zulberti 3 0 P R O L O G I S 2 0 0 5 ProLogis Board K. Dane Brooksher Chairman ProLogis Stephen L. Feinberg 1 Chairman and Chief Executive Officer Dorsar Investment Co., Inc. George L. Fotiades 2, 3 President and Chief Operating Officer Cardinal Health, Inc. Christine N. Garvey 2 Former Global Head of Corporate Real Estate Services Deutsche Bank AG London Donald P. Jacobs 1, 3 Dean Emeritus J.L. Kellogg School of Management Northwestern University Irving F. Lyons, III Vice Chairman ProLogis Walter C. Rakowich President and Chief Operating Officer ProLogis Nelson C. Rising Former Chairman and Chief Executive Officer Catellus Development Corp. Jeffrey H. Schwartz Chief Executive Officer ProLogis Kenneth N. Stensby 2 Former Senior Vice President Mortgage Origination Heitman Real Estate Investment Management D. Michael Steuert 2 Senior Vice President and Chief Financial Officer Fluor Corporation J. André Teixeira 3 Chairman & Partner BBL Partners LLC Partner eemPOK William D. Zollars 1 Chairman, President and Chief Executive Officer YRC Worldwide Inc. Andrea M. Zulberti 2 Former Managing Director Barclays Global Investors ProLogis Executive Committee Jeffrey H. Schwartz Chief Executive Officer Walter C. Rakowich President and Chief Operating Officer Ted R. Antenucci President Global Development Dessa M. Bokides Chief Financial Officer Ming Z. Mei MD China Steven K. Meyer Europe President and Chief Operating Officer Masato Miki Japan Co-President Edward S. Nekritz General Counsel and Secretary Robert J. Watson North America President and Chief Operating Officer Mike Yamada Japan Co-President ProLogis Senior Officers Gary E. Anderson MD Central/Mexico Region – North America Bert Angel SVP Global Solutions Group – Europe Gregory J. Arnold SVP Global Solutions Group – North America Patrick J. Boot SVP China Eric D. Brown SVP Central/Mexico Region – North America Stephen L. Bryan SVP Development – North America James P. Cavanagh SVP So. California – North America Paul C. Congleton MD Fund Management and Real Estate Research – North America Alan J. Curtis MD United Kingdom Michael de Jong-Douglas SVP Central Europe Jeffrey S. Finnin SVP and Chief Accounting Officer Andrew Griffiths SVP United Kingdom Kenneth R. Hall SVP Global Development – Europe Ranald A. Hahn MD Southern Europe Larry H. Harmsen MD Capital Deployment – North America M. Gordon Keiser, Jr. SVP and Treasurer Douglas A. Kiersey, Jr. SVP Midwest Region – North America Robert A. Kritt SVP Acquisitions and Dispositions – North America W. Scott Lamson SVP Pacific Region – North America Luke A. Lands MD and Europe Chief Financial Officer Paul D. Loosmann SVP Northeast Region – North America Daniel R. Marcus SVP No. California – North America Melissa A. Marsden SVP Investor Relations and Corporate Communications Brian N. Marsh SVP Midwest Region – North America Thomas T. Marshall EVP Catellus Development Corp. Charles A. McPhee SVP Pacific Region – North America Debra A. McRight SVP Client Services – North America Michael Nachamkin SVP Northeast Region – North America Kiyoshi Nagasawa SVP Development – Japan David D. Riefe SVP Chicago – North America John R. Rizzo MD Global Development – North America/Asia Francois de la Rochefoucauld SVP Southern Europe Joerg Schroeder SVP Northern Europe Richard H. Strader SVP Southeast Region – North America Charles E. Sullivan SVP Southeast Region – North America Neville D.E. Teagarden SVP and Chief Information Officer Kazuhiro Tsutsumi SVP Finance and Fund Management – Japan Gregory J. Weaver SVP Catellus Development Corp. Robin P.R. von Weiler MD Northern and Central Europe 1 Compensation Committee 2 Audit Committee 3 Governance Committee MD – Managing Director EVP – Executive Vice President SVP – Senior Vice President P R O L O G I S 2 0 0 5 3 1 We believe that our key asset, the one that gives us our real competitive advantage in the marketplace, is the talented group of associates who represent ProLogis around the world. These dedicated individuals take pride in creating value not only by building, acquiring and managing quality, state-of-the-art facilities but by establishing and sustaining long-term relationships with our customers. Whether it is a market officer in Germany, a fund manager in Japan or an information technology professional in Denver, these individuals are the foundation of our success and will be the drivers of our continued growth. With this photo tribute, we give our thanks and acknowledge the many faces of ProLogis. 3 2 P R O L O G I S 2 0 0 5 Shareholder Information World Headquarters ProLogis 4545 Airport Way Denver, CO 80239 USA 303.567.5000 800.566.2706 Annual Meeting The Annual Meeting of Shareholders of ProLogis will be held at the company’s world headquarters, identified above, at 10:30 am Mountain Time on Friday, May 26, 2006. Shareholders As of March 16, 2006, ProLogis had in excess of 62,000 record and beneficial common shareholders. Independent Registered Public Accountants KPMG LLP Los Angeles, California Transfer Agent Computershare P.O. Box 43010 Providence, RI 02940-3010 800.956.3378 781.575.3120 outside the United States Shareholder account information may also be accessed from its website at www.computershare.com/equiserve. Information Requests ProLogis’ audited consolidated financial statements are available upon request. The 2005 Annual Report Form on 10-K to the Securities and Exchange Commission and additional company materials can be obtained by calling the Investor Relations information line at 800.820.0181 or by visiting the company’s website at http://ir.prologis.com and clicking on the appropriate sections of the site. Analyst Contact: Melissa Marsden SVP, Investor Relations and Corporate Communications 303.567.5622 mmarsden@prologis.com ProLogis Dividend Reinvestment and Share Purchase Plan The ProLogis Dividend Reinvestment and Share Purchase Plan offers the opportunity to purchase common shares at a 0% to 2% discount from market price, as determined by the company. Copies of the plan prospectus and enrollment forms are available from our transfer agent, Computershare, at www.computershare.com/equiserve or by calling 800.956.3378. Quarterly Stock Price Ranges and Distributions New York Stock Exchange: PLD 2005 Stock Price 2004 Stock Price Quarter High Low Dividend High Low Dividend First Second Third Fourth $43.50 $36.67 $42.34 $36.50 $46.41 $40.12 $47.61 $39.81 $0.37 $0.37 $0.37 $0.37 $36.00 $30.80 $0.365 $36.39 $27.62 $0.365 $36.95 $32.74 $0.365 $43.33 $35.30 $0.365 Notice of Capital Gain Dividends This notice is provided to inform the shareholders of ProLogis of the capital gain portion of dividends received during 2005 pursuant to Internal Revenue Code §857(b)(3)(C). This notice is being provided in addition to a 2005 Form 1099-DIV that has been mailed to all shareholders. The following table displays the taxability of company distributions for the year ended December 31, 2005, and designates the portion of the dividends that are capital gain dividends. The tax treatment to shareholders of these distributions could vary depending on the shareholder’s particular situation (i.e., foreign, tax-exempt, etc.). Shareholders should consult their own tax advisors regarding the treatment of these distributions. Long-Term Long-Term Unrecaptured §1250 Taxable Ordinary Capital Gain Dividends Dividends Capital Gain Dividends Qualified Return of Capital Class of Stock Common 66.73% 1.54% 8.76% 4.57% 18.41% Series C Preferred 81.79% 1.88% 10.73% 5.60% Series F Preferred 81.79% 1.88% 10.73% 5.60% Series G Preferred 81.79% 1.88% 10.73% 5.60% 0% 0% 0% This report was printed with soy-based inks on recycled paper that contains 30% post consumer waste. The paper was made using renewable wind power, is Green Seal certified and acid free. Design: Coates and Coates. Printing: Graphic Press. ® Japan Shiodome City Center 8th Floor 1-5-2 Higashi-Shimbashi Minato-ku Tokyo, Japan 105-7108 +81 3 6215 8480 China 2707-2708, Azia Center 1233 Lu Jia Zui Ring Road, Pudong Shanghai, 200120 PR China +86 21 6105 3999 World Headquarters 4545 Airport Way Denver, CO 80239 www.prologis.com 303.567.5000 European Headquarters 18 Boulevard Royal L-2449, Luxembourg +352 26 20 57 40 European Customer Service Headquarters World Trade Center, Tower F 6 Floor, Schiphol Blvd 115 Schiphol, Noord Holland 1118 BG, Schiphol Airport The Netherlands +31 20 655 66 66

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