ProLogis Reports Growth in Third Quarter FFO and Earnings per Share

DENVER, Oct. 26 /PRNewswire-FirstCall/ -- ProLogis , the world's largest owner, manager and developer of distribution facilities, today reported adjusted funds from operations as defined by ProLogis (FFO) of $0.79 per diluted share for the third quarter of 2006, which was after a $0.03 per share charge for ProLogis' portion of expenses related to the initial public offering (IPO) of ProLogis European Properties (PEPR). This compares with $0.78 in the third quarter of 2005, which was before $0.04 of merger integration charges. Net earnings per diluted share were $0.65 for the third quarter of 2006, compared with $0.63 for the same period in 2005.

For the nine months ended September 30, 2006, adjusted FFO was $2.59 per diluted share, up 20.5% from $2.15 in the first nine months of 2005. After $0.01 of merger integration expenses, FFO per diluted share was $2.58 for the nine months ended September 30, 2006, compared with $1.96 in 2005, which included $0.19 related to merger integration and relocation expenses and cumulative translation losses and impairment charges related to the sale of ProLogis' temperature-controlled business. Year to date, net earnings per diluted share were $2.04, compared with $1.33 in the comparable period of 2005. The increase was primarily due to improvement in each of the company's business segments, as well as gains on the sale of assets that are recognized under GAAP but are not included in ProLogis' definition of FFO.

Strong market conditions were reflected in ProLogis' results in each of its operating segments: property operations, development and fund management. Rent growth on lease turnovers was 2.1% for the quarter, the highest level in more than four years, while the same-store pool, year-to-date net operating income increased 3.0% and occupancy was up 316 basis points. "Development margins remained strong, due to outstanding execution by our teams. Year-to- date income from our property funds also increased in line with the expansion of our assets under management," said Jeffrey H. Schwartz, chief executive officer.

Guidance set for 2007 FFO per share at $3.80 to $4.00

The company also set a range for 2007 FFO guidance of $3.80 to $4.00 per share and will provide business drivers to support that guidance in early 2007. "Our expectation for another year of solid growth in FFO per share is driven by continued strong market fundamentals, supported by customer demand in key logistics markets that are closely tied to the expansion of global trade," Schwartz said.

European IPO Crystallizes Value

During the quarter, ProLogis completed the IPO of ProLogis European Properties (Euronext: PEPR). Schwartz noted that the IPO demonstrated the advantages of ProLogis' property fund strategy and the quality of the company's European industrial platform. "With the IPO, we created a liquid public market to satisfy the future redemption needs of PEPR's investors, while maintaining the largest ownership interest in PEPR's premiere platform of European industrial properties," Schwartz said. "We will continue to manage PEPR, thereby preserving important customer relationships and management fees. In addition, the IPO enables us to crystallize the value created by PEPR through the recognition of an incentive return."

The incentive return, totaling approximately $109 million ($0.42 per share), net of certain expenses, will be recognized in the fourth quarter. As a result, ProLogis increased full-year 2006 guidance for FFO per share to $3.55 - $3.65, which is after approximately $0.03 per share related to ProLogis' share of the IPO charges recognized in the third quarter. In addition, earnings per share guidance was increased to $3.20 - $3.40. The incentive return was based on the internal rate of return that PEPR unitholders earned during their pre-IPO holding periods and includes both PEPR ordinary units and a cash adjustment based on the average closing price of the ordinary units during the first 30 days after PEPR began trading. ProLogis' previous guidance was $3.15 - $3.25 in FFO per share, prior to $0.01 per share in year-to-date merger integration and corporate relocation charges, and $2.20 - $2.45 in earnings per share.

Global Market Fundamentals Remain Solid

Leasing in the company's stabilized properties continued to be strong at 94.7% for the quarter. "Globally, market supply and demand remain well balanced, as evidenced by third quarter net absorption of more than 46 million square feet in the top 30 logistics markets in North America," said Walter C. Rakowich, president and chief operating officer.

Year-to-date gross proceeds from Corporate Distribution Facilities Services (CDFS) dispositions of $1.3 billion led to a 30.5% increase in CDFS disposition gains over the prior year. Leasing in the 29.8 million square feet of developments completed in the last 12 months, including those in CDFS joint ventures, was 76% at September 30, 2006, supporting year-to-date starts of $1.7 billion. ProLogis' pipeline of CDFS completed developments, repositioned acquisitions and properties under development reached a record $4.6 billion, supporting future growth in CDFS income and property funds.

"Our unique ability to address global customers' distribution space needs throughout North America, Europe and Asia drove the quarter's strong development and leasing activity. Year to date, approximately half of our 18.6 million square feet of new CDFS leases were with repeat customers, including: Danzas in Shanghai; Wal-Mart in Dallas; DHL in the Netherlands; and UPS in Louisville," Rakowich added.

Selected Financial and Operating Information * Achieved adjusted FFO per share growth of 20.5% year to date over the first nine months of 2005. * Improved average year-to-date same-store net operating income by 3.0% (a 3.5% increase when straight-lined rents and lease amortization are excluded) while same-store occupancies increased by 3.2% for the year to date. * Realized year-to-date FFO from CDFS transactions of $260.3 million, including recognition of previously deferred proceeds from the first quarter contribution of properties from North American Property Funds II, III and IV to ProLogis North American Industrial Fund, up from $199.5 million in the same period of 2005. FFO amounts do not include unrecognized deferred gains of $52.0 million related to CDFS development contributions for the year to date and $42.1 million for the same period in 2005. Post-deferral, post-tax CDFS margins were 22.6% for the dispositions completed year to date. * Recycled $447.1 million of capital through CDFS contributions and dispositions during the quarter and $1.3 billion year to date. * Started new developments with total expected investment of $343.2 million during the quarter and $1.7 billion year to date. Year-to-date starts include $97.0 million of retail development. * Increased ProLogis' share of FFO from property funds to $98.5 million year to date, including earnings from the North American property fund transaction noted above, up 41.5% from $69.6 million in the prior year. * Grew fee income from property funds in the first nine months to $79.3 million, including the incentive fee from the North American fund transaction noted above, up 57.7% from $50.3 million in 2005. * Achieved combined development management fees, FFO from CDFS joint ventures and other unconsolidated investees and interest income on long-term notes receivable of $91.3 million year to date. * Increased total assets owned and under management to $25.3 billion, up from $22.1 billion at December 31, 2005.

Copies of ProLogis' third quarter 2006 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 1:00 pm Eastern Time on Thursday, October 26, 2006. A replay of the webcast will be available on the company's website until November 9, 2006. Additionally, a podcast of the company's conference call will be available at REITCafe by accessing the following link: http://www.reitcafe.com/REITcalls/REITcalls_06q3_PLD.mp3

About ProLogis

ProLogis is the world's largest owner, manager and developer of distribution facilities, with operations in 81 markets across North America, Europe and Asia. The company has $25.3 billion of assets owned, managed and under development, comprising 406.9 million square feet (37.8 million square meters) in 2,406 properties as of September 30, 2006. ProLogis' customers include manufacturers, retailers, transportation companies, third-party logistics providers and other enterprises with large-scale distribution needs. Headquartered in Denver, Colorado, ProLogis employs more than 1,200 people worldwide.

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 1A -- Risk Factors" in ProLogis' Annual Report on Form 10-K for the year ended December 31, 2005.

ProLogis Third Quarter 2006 Unaudited Financial Results Selected Financial Information (in thousands, except per share amounts and percentages) Three Months Ended September 30, 2006 (1) 2005 (2) % Change Net earnings attributable to common shares: Net earnings attributable to common shares $166,305 $129,402 28.5% Net earnings per diluted share attributable to common shares $0.65 $0.63 3.2% FFO and FFO, as adjusted and see definition of FFO: FFO attributable to common shares $202,054 $150,837 34.0% Add back: Merger integration expenses (3) -- 8,288 Relocation expenses (4) -- 246 Cumulative translation losses and impairment charges related to temperature-controlled distribution assets (5) -- -- FFO attributable to common shares, as adjusted $202,054 $159,371 26.8% FFO per diluted share attributable to common shares $0.79 $0.74 6.8% Add back: Merger integration expenses (3) -- 0.04 Relocation expenses (4) -- -- Cumulative translation losses and impairment charges related to temperature-controlled distribution assets (5) -- -- FFO per diluted share attributable to common shares, as adjusted $0.79 $0.78 1.3% EBITDA $329,837 $226,467 45.6% Distributions: Actual distributions per common share (6) $0.40 $0.37 8.1% Nine Months Ended September 30, 2006 (1) 2005 (2) % Change Net earnings attributable to common shares: Net earnings attributable to common shares $517,861 $261,645 97.9% Net earnings per diluted share attributable to common shares $2.04 $1.33 53.4% FFO and FFO, as adjusted and see definition of FFO: FFO attributable to common shares $656,263 $387,604 69.3% Add back: Merger integration expenses (3) 2,630 8,288 Relocation expenses (4) 93 4,049 Cumulative translation losses and impairment charges related to temperature-controlled distribution assets (5) -- 26,864 FFO attributable to common shares, as adjusted $658,986 $426,805 54.4% FFO per diluted share attributable to common shares $2.58 $1.96 31.6% Add back: Merger integration expenses (3) 0.01 0.04 Relocation expenses (4) -- 0.02 Cumulative translation losses and impairment charges related to temperature-controlled distribution assets (5) -- 0.13 FFO per diluted share attributable to common shares, as adjusted $2.59 $2.15 20.5% EBITDA $1,036,369 $634,261 63.4% Distributions: Actual distributions per common share (6) $1.20 $1.11 8.1% Footnotes follow Consolidated Balance Sheets. ProLogis Third Quarter 2006 Unaudited Financial Results Consolidated Statements of Earnings (in thousands) Three Months Ended Nine Months Ended September 30, September 30, 2006 (1) 2005 (2) 2006 (1) 2005 (2) Revenues: Rental income (8)(9)(10) $237,521 $144,965 $683,429 $401,490 CDFS disposition proceeds (11)(12)(13)(14) 311,840 355,524 1,050,704 956,110 Property management and other fees and incentives (14) 20,421 17,321 79,318 50,326 Development management and other income (11) 11,099 9,254 26,525 12,580 Total revenues 580,881 527,064 1,839,976 1,420,506 Expenses: Rental expenses (8)(10) 59,753 36,866 175,399 108,578 Cost of CDFS dispositions (11)(12)(13) 234,216 290,658 821,054 762,955 General and administrative 37,787 24,688 110,362 72,731 Depreciation and amortization (10) 70,964 45,215 211,782 126,919 Merger integration expenses (3) -- 8,288 2,630 8,288 Relocation expenses (4) -- 246 93 4,049 Other expenses 2,977 3,030 8,924 6,312 Total expenses 405,697 408,991 1,330,244 1,089,832 Operating income 175,184 118,073 509,732 330,674 Other income (expense): Earnings from unconsolidated property funds (14) 11,215 12,217 78,629 34,992 Earnings from CDFS joint ventures and other unconsolidated investees (7)(15) 9,590 301 47,011 668 Interest expense (10)(16) (77,417) (42,549) (216,933) (113,803) Interest income on long-term notes receivable (11) 3,914 841 13,236 841 Interest and other income, net 5,313 3,210 10,596 6,657 Total other income (expense) (47,385) (25,980) (67,461) (70,645) Earnings before minority interest 127,799 92,093 442,271 260,029 Minority interest (565) (1,327) (2,541) (3,929) Earnings before certain net gains 127,234 90,766 439,730 256,100 Gains recognized on dispositions of certain non- CDFS business assets, net -- -- 13,709 -- Foreign currency exchange gains, net (17) 9,202 4,742 16,449 8,323 Earnings before income taxes 136,436 95,508 469,888 264,423 Income taxes (15)(18): Current income tax expense 34,824 2,435 75,913 7,185 Deferred income tax (benefit) expense (22,362) 5,369 (16,780) 8,190 Total income taxes 12,462 7,804 59,133 15,375 Earnings from continuing operations 123,974 87,704 410,755 249,048 Discontinued operations (10): Income attributable to disposed properties and assets held for sale 4,111 5,017 15,953 11,586 Losses related to temperature controlled distribution assets (5) -- -- -- (25,150) Gains recognized on dispositions, net: Non-CDFS business assets 29,386 36,633 80,037 38,840 CDFS business assets 15,188 6,402 30,178 6,383 Total discontinued operations 48,685 48,052 126,168 31,659 Net earnings 172,659 135,756 536,923 280,707 Less preferred share dividends 6,354 6,354 19,062 19,062 Net earnings attributable to common shares $166,305 $129,402 $517,861 $261,645 Weighted average common shares outstanding - Basic 245,460 196,323 244,918 189,768 Weighted average common shares outstanding - Diluted 256,233 206,760 255,559 200,022 Net earnings per share attributable to common shares - Basic: Continuing operations $0.48 $0.42 $1.59 $1.21 Discontinued operations 0.20 0.24 0.52 0.17 Net earnings per share attributable to common shares - Basic $0.68 $0.66 $2.11 $1.38 Net earnings per share attributable to common shares - Diluted: Continuing operations $0.46 $0.40 $1.55 $1.17 Discontinued operations 0.19 0.23 0.49 0.16 Net earnings per share attributable to common shares - Diluted $0.65 $0.63 $2.04 $1.33 Calculation of Net Earnings per Share Attributable to Common Shares - Diluted (in thousands, except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, 2006 (1) 2005 (2) 2006 (1) 2005 (2) Net earnings attributable to common shares - Basic $166,305 $129,402 $517,861 $261,645 Minority interest (a) 565 1,327 2,541 3,929 Adjusted net earnings attributable to common shares - Diluted $166,870 $130,729 $520,402 $265,574 Weighted average common shares outstanding - Basic 245,460 196,323 244,918 189,768 Incremental weighted average effect of conversion of limited partnership units 5,142 5,539 5,218 5,540 Incremental weighted average effect of potentially dilutive instruments (a) 5,631 4,898 5,423 4,714 Weighted average common shares outstanding - Diluted 256,233 206,760 255,559 200,022 Net earnings per share attributable to common shares - Diluted $0.65 $0.63 $2.04 $1.33 (a) Total weighted average potentially dilutive instruments outstanding were 10,966 and 10,499 for the three months ended September 30, 2006 and 2005, respectively, and 10,987 and 10,898 for the nine months ended September 30, 2006 and 2005, respectively. Footnotes follow Consolidated Balance Sheets. ProLogis Third Quarter 2006 Unaudited Financial Results Consolidated Statements of Funds From Operations (FFO) (in thousands, except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, 2006 (1) 2005 (2) 2006 (1) 2005 (2) Revenues: Rental income (8) $243,907 $154,297 $723,356 $427,299 CDFS disposition proceeds (10)(11)(12)(13)(14) 429,002 388,945 1,273,783 999,300 Property management and other fees and incentives (14) 20,421 17,321 79,318 50,326 Development management and other income (11) 11,099 9,254 26,525 12,580 Total revenues 704,429 569,817 2,102,982 1,489,505 Expenses: Rental expenses (8) 61,271 39,139 193,257 115,682 Cost of CDFS dispositions (10)(11)(12)(13) 336,190 317,677 1,013,489 799,762 General and administrative 37,787 24,688 110,362 72,731 Depreciation of corporate assets 2,201 1,743 7,016 5,106 Merger integration expenses (3) -- 8,288 2,630 8,288 Relocation expenses (4) -- 246 93 4,049 Other expenses 2,977 3,030 8,924 6,312 Total expenses 440,426 394,811 1,335,771 1,011,930 264,003 175,006 767,211 477,575 Other income (expense): FFO from unconsolidated property funds (14) 19,420 23,417 98,467 69,551 FFO from CDFS joint ventures and other unconsolidated investees (7) 10,937 911 51,551 2,017 Interest expense (77,417) (42,587) (217,807) (114,072) Interest income on long-term notes receivable (11) 3,914 841 13,236 841 Interest and other income 5,313 3,210 10,596 6,657 Foreign currency exchange (expenses/losses) gains, net (17) (840) 155 7,334 574 Current income tax expense (18) (16,357) (2,435) (52,722) (7,185) Losses related to temperature controlled distribution assets (5) -- -- -- (25,363) Total other income (expense) (55,030) (16,488) (89,345) (66,980) FFO 208,973 158,518 677,866 410,595 Less preferred share dividends 6,354 6,354 19,062 19,062 Less minority interest 565 1,327 2,541 3,929 FFO attributable to common shares $202,054 $150,837 $656,263 $387,604 Weighted average common shares outstanding - Basic 245,460 196,323 244,918 189,768 Weighted average common shares outstanding - Diluted 256,233 206,760 255,559 200,022 FFO per share attributable to common shares: Basic $0.82 $0.77 $2.68 $2.04 Diluted $0.79 $0.74 $2.58 $1.96 Calculation of FFO per Share Attributable to Common Shares - Diluted (in thousands, except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, 2006 (1) 2005 (2) 2006 (1) 2005 (2) FFO attributable to common shares - Basic $202,054 $150,837 $656,263 $387,604 Minority interest 565 1,327 2,541 3,929 FFO attributable to common shares - Diluted $202,619 $152,164 $658,804 $391,533 Merger integration expenses (3) -- 8,288 2,630 8,288 Relocation expenses (4) -- 246 93 4,049 Cumulative translation losses and impairment charges related to temperature-controlled distribution assets (5) -- -- -- 26,864 FFO attributable to common shares, as adjusted - Diluted $202,619 $160,698 $661,527 $430,734 Weighted average common shares outstanding - Basic 245,460 196,323 244,918 189,768 Incremental weighted average effect of conversion of limited partnership units 5,142 5,539 5,218 5,540 Incremental weighted average effect of potentially dilutive instruments 5,631 4,898 5,423 4,714 Weighted average common shares outstanding - Diluted 256,233 206,760 255,559 200,022 FFO per share attributable to common shares - Diluted $0.79 $0.74 $2.58 $1.96 FFO per share attributable to common shares, as adjusted - Diluted $0.79 $0.78 $2.59 $2.15 See Consolidated Statements of Earnings and the Reconciliations of Net Earnings to FFO. Footnotes follow Consolidated Balance Sheets. Definition of FFO FFO 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 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 meaningfully reflect their business. FFO, as we define it, is presented as a supplemental financial measure. FFO is not used by us 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 that GAAP net earnings remains the primary measure of performance and that FFO is only meaningful when it is used in conjunction with GAAP net earnings. Further, we believe that 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 GAAP net earnings to exclude historical 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 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. We include the gains and losses from dispositions of properties acquired or developed in our CDFS business segment and our proportionate share of the gains and losses from dispositions recognized by the property funds in our definition of FFO. 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 that financial analysts, potential investors and shareholders who review our operating results are best served by a defined FFO measure that includes other adjustments to GAAP net earnings in addition to those included in the NAREIT defined measure of FFO. Our defined FFO measure excludes the following items from GAAP net earnings 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) current income tax expense related to acquired tax liabilities that were recorded as deferred tax liabilities in an acquisition, to the extent the expense is offset with a deferred income tax benefit in GAAP earnings that is excluded from our defined FFO measure; (iii) certain foreign currency exchange gains and losses resulting from certain debt transactions between us and our foreign consolidated subsidiaries and our foreign unconsolidated investees; (iv) foreign currency exchange gains and losses from the remeasurement (based on current foreign currency exchange rates) of certain third party debt of our foreign consolidated subsidiaries and our foreign unconsolidated investees; and (v) mark-to-market adjustments associated with derivative financial instruments utilized to manage our foreign currency risks. FFO of our unconsolidated investees is calculated on the same basis. The items that we exclude 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 our results of operations, in inconsistent and unpredictable directions. Most importantly, the economics underlying the items that we exclude 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, we believe that 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 our 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 our FFO measure are helpful to management in making real estate investment decisions and evaluating our current operating performance. We believe that 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. While we believe that 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 GAAP net earnings and are, therefore, limited as an analytical tool. Some of the limitations are: -- The current income tax expenses that are excluded from our defined FFO measure represent taxes that are payable. -- 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 amortization 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. FFO, 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 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 currently 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 defined 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 our FFO measure only in conjunction with GAAP net earnings. To further compensate, we always reconcile our defined FFO measure to GAAP net earnings in our financial reports. Additionally, we provide investors with our 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. ProLogis Third Quarter 2006 Unaudited Financial Results Reconciliations of Net Earnings to FFO (in thousands) Three Months Ended Nine Months Ended September 30, September 30, 2006 (1) 2005 (2) 2006 (1) 2005 (2) Reconciliation of net earnings to FFO: Net earnings attributable to common shares $166,305 $129,402 $517,861 $261,645 Add (deduct) NAREIT defined adjustments: Real estate related depreciation and amortization 68,763 43,472 204,766 121,813 Additional CDFS proceeds recognized (14) -- -- 466 -- Gains recognized on dispositions of certain non- CDFS business assets, net -- -- (13,709) -- Reconciling items attributable to discontinued operations (10): Gains recognized on dispositions of non-CDFS business assets, net (29,386) (36,633) (80,037) (38,840) Real estate related depreciation and amortization 757 2,004 5,242 6,850 Totals discontinued operations (28,629) (34,629) (74,795) (31,990) Our share of reconciling items from unconsolidated investees (19): Real estate related depreciation and amortization 18,010 13,596 47,834 39,947 Gains on dispositions of non- CDFS business assets, net (6,642) (469) (6,753) (805) Other amortization items (14)(20) (2,067) (1,604) (14,199) (4,061) Totals unconsolidated investees 9,301 11,523 26,882 35,081 Totals NAREIT defined adjustments 49,435 20,366 143,610 124,904 Subtotals-NAREIT defined FFO 215,740 149,768 661,471 386,549 Add (deduct) our defined adjustments: Foreign currency exchange gains, net (17) (10,042) (4,587) (9,115) (7,749) Current income tax expense (18) 18,467 -- 23,191 -- Deferred income tax (benefit) expense (18) (22,362) 5,369 (16,780) 8,190 Reconciling items attributable to discontinued operations: Assets disposed of - deferred income tax benefit (5) -- -- -- (213) Our share of reconciling items from unconsolidated investees (19): Foreign currency exchange expenses/losses (gains), net (17) 1,143 287 130 (263) Deferred income tax (benefit) expense (892) -- (2,634) 1,090 Totals unconsolidated investees 251 287 (2,504) 827 Totals our defined adjustments (13,686) 1,069 (5,208) 1,055 FFO attributable to common shares $202,054 $150,837 $656,263 $387,604 See Consolidated Statements of Earnings, Consolidated Statements of FFO and the definition of FFO. Footnotes follow Consolidated Balance Sheets. ProLogis Third Quarter 2006 Unaudited Financial Results Reconciliations of Net Earnings to EBITDA (in thousands) Three Months Ended Nine Months Ended September 30, September 30, 2006 (1) 2005 (2) 2006 (1) 2005 (2) Reconciliation of net earnings to EBITDA: Net earnings attributable to common shares $166,305 $129,402 $517,861 $261,645 Add (deduct): NAREIT defined adjustments to compute FFO 49,435 20,366 143,610 124,904 Our defined adjustments to compute FFO (13,686) 1,069 (5,208) 1,055 Add: Interest expense 77,417 42,549 216,933 113,803 Depreciation of corporate assets, including amounts reported in relocation expense 2,201 1,831 7,016 5,948 Current income tax expense included in FFO (18) 16,357 2,435 52,722 7,185 Adjustments to CDFS gains on dispositions for interest capitalized 5,521 4,105 25,427 19,102 Preferred share dividends 6,354 6,354 19,062 19,062 Reconciling items attributable to discontinued operations -- 38 874 27,305 Impairment charges 614 -- 4,174 180 Share of reconciling items from unconsolidated investees (19) 19,319 18,318 53,898 54,072 EBITDA $329,837 $226,467 $1,036,369 $634,261 See Consolidated Statements of Earnings and the Reconciliations of Net Earnings to FFO. Footnotes follow Consolidated Balance Sheets. Definition of EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization): We believe that EBITDA is a useful supplemental measure, although it 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 we present in our Consolidated Statements of Cash Flows and include in our 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 should not be considered as an alternative to net earnings as an indicator of our operating performance, or as an alternative to cash flows from operating, investing, or financing activities as a measure of liquidity. The EBITDA measure presented may not be comparable to similarly titled measures of other REITs. EBITDA generally represents net earnings computed in accordance with GAAP adjusted to exclude: (i) interest expense; (ii) income tax expenses and benefits; and (iii) depreciation and amortization expenses. In our 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 our definition of FFO (presented on pages 3a and 3b); (iii) impairment charges; and (iv) gains and losses from the dispositions of non-CDFS business assets. In addition, we adjust 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 our unconsolidated investees is calculated on the same basis. ProLogis Third Quarter 2006 Unaudited Financial Results Consolidated Balance Sheets (in thousands) September 30, December 31, 2006 2005 (2) Assets: Investments in real estate assets: Industrial operating properties $10,013,595 $8,730,906 Retail operating properties 264,502 288,253 Land subject to ground leases and other 453,519 792,668 Properties under development (including cost of land) 911,847 884,345 Land held for development 1,090,941 1,045,042 Other investments 273,291 133,916 13,007,695 11,875,130 Less accumulated depreciation 1,248,214 1,118,547 Net investments in real estate assets 11,759,481 10,756,583 Investments in and advances to unconsolidated investees: Property funds (14)(21)(22) 949,634 755,320 CDFS joint ventures and other unconsolidated investees (7) 320,736 294,423 Total investments in and advances to unconsolidated investees 1,270,370 1,049,743 Cash and cash equivalents 519,234 203,800 Accounts and notes receivable 357,778 327,214 Other assets 955,519 788,840 Discontinued operations-assets held for sale (10) 134,717 -- Total assets $14,997,099 $13,126,180 Liabilities and Shareholders' Equity: Liabilities: Lines of credit and short-term borrowings $2,760,770 $2,240,054 Senior notes 3,582,298 2,759,675 Secured debt and assessment bonds 1,543,374 1,678,151 Accounts payable and accrued expenses 481,069 344,423 Other liabilities 678,679 557,210 Discontinued operations-assets held for sale (10) 5,144 -- Total liabilities 9,051,334 7,579,513 Minority interest 52,679 58,644 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 2,471 2,438 Additional paid-in capital 5,751,334 5,606,017 Accumulated other comprehensive income 185,267 149,586 Distributions in excess of net earnings (395,986) (620,018) Total shareholders' equity 5,893,086 5,488,023 Total liabilities and shareholders' equity $14,997,099 $13,126,180 Footnotes follow Consolidated Balance Sheets. ProLogis Third Quarter 2006 Unaudited Financial Results Notes to Consolidated Financial Statements (1) On September 15, 2005, we completed a merger with Catellus Development Corporation ("Catellus Merger"). This transaction was accounted for using the purchase method of accounting and, accordingly, the purchase price of $5.3 billion has been allocated to the net assets acquired based on their estimated fair values at the date of acquisition. (2) Certain 2005 amounts included in this Supplemental Information package have been reclassified to conform to the 2006 presentation. (3) Represents costs incurred related to the Catellus Merger. These costs included merger integration and employee transition costs as well as severance costs for certain of our employees whose responsibilities became redundant after the Catellus Merger. (4) We completed the relocation of our information technology and corporate accounting functions from El Paso, Texas to Denver, Colorado in the first quarter of 2005. We moved our corporate headquarters, which is located in Denver, to a recently constructed building in February 2006. Relocation costs included (i) employee termination costs; (ii) costs associated with the hiring and training of new personnel and other costs including travel, moving and temporary facility costs; and (iii) accelerated depreciation associated with non-real estate assets whose useful life was shortened due to the relocations. (5) In July 2005, we sold our temperature-controlled distribution operations in France and accordingly, the results of operations for 2005 are included in discontinued operations. Due to the sale and liquidation of the business, we recognized impairment charges and cumulative translation losses of $26.9 million in the nine months ended September 30, 2005. (6) The annual distribution rate for 2006 is $1.60 per common share. The amount of the common share distribution is declared quarterly and may be adjusted at the discretion of the Board of Trustees. (7) Our corporate distribution facilities services business ("CDFS business") segment activities are discussed in note 11. In addition to the activities performed directly, we also invest in joint ventures that perform CDFS business activities and own operating properties in China, Europe and North America. We have ownership interests ranging from 30% to 50% in the CDFS joint ventures. We refer to these investees as our CDFS industrial joint ventures. In addition, we have interests in several entities that engage in land, retail and commercial development activities that we refer to as non-industrial CDFS joint ventures. In addition, we have varying ownership interests in other unconsolidated investees that primarily own and operate industrial, commercial and hotel properties. (8) Represents rental income earned and rental expenses incurred while we own a property directly. Under the terms of the respective lease agreements, some or all of our rental expenses are recovered from our customers. Amounts recovered are included as a component of rental income. Rental expenses also include direct expenses associated with our management of the property funds' operations. For properties that have been contributed to property funds, we recognize our share of the total operations of the property funds under the equity method and present these amounts below operating income in our Consolidated Statements of Earnings and FFO. (9) Rental income includes the following (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2006 (1) 2005 (2) 2006 (1) 2005 (2) Rental income $180,738 $114,806 $524,062 $318,503 Rental expense recoveries 47,188 28,288 133,684 77,691 Straight-lined rents 9,595 1,871 25,683 5,296 $237,521 $144,965 $683,429 $401,490 (10) Properties disposed of to third parties are considered to be discontinued operations unless such properties were developed under a pre-sale agreement. During the nine months ended September 30, 2006, we disposed of 65 properties to third parties, eight of which were CDFS business assets. The operations of the properties disposed of to third parties during 2006 and the aggregate net gains recognized upon their dispositions are presented as discontinued operations in our Consolidated Statements of Earnings for all periods presented. In addition, the operations of the 72 properties disposed of during 2005 (eight of which were CDFS business assets) are presented as discontinued operations. As of September 30, 2006, we had 23 office, retail and industrial properties that were classified as held for sale, and accordingly, the operations of these properties are included in discontinued operations and the respective assets and liabilities are presented separately in our Consolidated Balance Sheet. Interest expense represents interest directly attributable to these properties. The operations that are presented as discontinued operations (excluding the net gains or losses recognized upon disposition) are as follows (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2006 (1) 2005 (2) 2006 (1) 2005 (2) Rental income $6,386 $9,332 $39,927 $25,809 Rental expenses (1,518) (2,273) (17,858) (7,104) Depreciation and amortization (757) (2,004) (5,242) (6,850) Interest expense -- (38) (874) (269) $4,111 $5,017 $15,953 $11,586 For purposes of our Consolidated Statements of FFO, we do not segregate discontinued operations. In addition, in the calculation of FFO we include the CDFS disposition proceeds and the cost of CDFS dispositions for all CDFS properties disposed of during the period, including those classified as discontinued operations. (11) The CDFS business segment primarily represents the development of properties, the acquisition of properties with the intent to rehabilitate and/or reposition the property and other land and commercial development activities. It is generally our intent to contribute the properties to a property fund in which we have an ownership interest and act as manager or sell the properties to a third party. Additionally, we (i) earn fees for development activities provided on behalf of customers or third parties, (ii) recognize interest income on notes receivable related to previous asset dispositions, (iii) recognize gains or losses on the disposition of land parcels when our development plans no longer include these parcels and (iv) recognize our proportionate share of the earnings or losses of CDFS joint ventures. We include the income generated in the CDFS business segment in our computation of FFO and EBITDA. (12) When we contribute properties to an entity in which we have an ownership interest, we do not recognize a portion of the proceeds in our computation of the gain resulting from the contribution. The amount of the proceeds that we defer is determined based on our continuing ownership interest in the contributed property that arises due to our ownership interest in the entity acquiring the property. We defer this portion of the proceeds by recognizing a reduction to our investment in the applicable unconsolidated investee. We adjust our proportionate share of the earnings or losses that we recognize under the equity method in later periods to reflect the entity's depreciation expense as if the depreciation expense was computed on our lower basis in the contributed real estate assets rather than on the entity's basis in the contributed real estate assets. If a loss is recognized when a property is contributed, the entire loss is recognized. See note 13 for the amount of cumulative gross proceeds that have not been recognized as of September 30, 2006. Gross proceeds deferred related to contributions during the three months ended September 30, 2006 and 2005 were $18.1 million and $16.4 million, respectively, and during the nine months ended September 30, 2006 and 2005 were $52.0 million and $42.1 million, respectively. When a property that we originally contributed to an unconsolidated investee is disposed of to a third party, we recognize a gain during the period that the disposition occurs related to the proceeds we had previously deferred, in addition to our proportionate share of the gain or loss recognized by the entity. Further, during periods when our ownership interest in a property fund decreases, we recognize gains to the extent that proceeds were previously deferred to coincide with our new ownership interest in the property fund. (13) As of September 30, 2006, the cumulative gross proceeds that have not been recognized in computing the gains from our contributions of properties to unconsolidated investees (before subsequent amortization) are presented below (in thousands). See note 12. Gross Proceeds Not Recognized CDFS Non-CDFS Transactions Transactions Totals ProLogis European Properties $123,609 $9,338 $132,947 ProLogis California LLC 5,394 26,129 31,523 ProLogis North American Properties Fund I 8,271 862 9,133 ProLogis North American Properties Fund V 24,737 2,904 27,641 ProLogis North American Properties Funds VI-X 2,766 -- 2,766 ProLogis North American Industrial Fund 22,519 -- 22,519 ProLogis Japan Properties Fund I 44,878 -- 44,878 ProLogis Japan Properties Fund II 20,322 -- 20,322 CDFS joint ventures 4,996 -- 4,996 Totals $257,492 $39,233 $296,725 (14) On January 4, 2006, we purchased the 80% ownership interests in each of ProLogis North American Properties Funds II, III and IV (collectively "the Funds") from our fund partner, an affiliate of Arcapita Bank B.S.C.(c) ("Arcapita"). On March 1, 2006, we contributed substantially all of the assets and associated liabilities to the ProLogis North American Industrial Fund ("North American Industrial Fund"), which was finalized in February 2006. See note 22. In connection with these transactions, we recognized the following amounts in the respective line items, during the first quarter of 2006 (in thousands): Statements Statements of Earnings of FFO CDFS disposition proceeds (a) $12,492 $12,958 Property management and other fees and incentives (b) $21,958 $21,958 Earnings from unconsolidated property funds (c) $37,113 $27,916 (a) Represents the recognition of the proceeds that we had previously deferred as part of CDFS income upon the initial contributions of the properties to the Funds. See note 12. (b) Represents an incentive return we earned due to certain return levels achieved by Arcapita upon the liquidation of the Funds. (c) Represents our proportionate share of the gain on liquidation recognized by the Funds on a depreciated basis (earnings) and on an undepreciated basis (FFO). All of the above amounts are net of an aggregate deferred amount of $17.9 million, due to our 20% ownership interest in the North American Industrial Fund that purchased the assets. (15) Included in our earnings from CDFS joint ventures in North America for the three and nine months ended September 30, 2006 is $8.0 million and $35.0 million, respectively, representing our proportionate share of the net earnings of a CDFS joint venture, "LAAFB JV". The LAAFB JV was formed by Catellus to redevelop a U.S. Air Force base in Los Angeles, California in exchange for land parcels and certain rights to receive tax increment financing ("TIF") proceeds over a period of time. As our investment in LAAFB JV is held in a taxable subsidiary that was acquired in the Catellus Merger, we recognized the associated current income tax expense and a deferred tax benefit of $15.1 million and $12.4 million for the three months ended September 30, 2006, and $27.0 million and $12.4 million for the nine months ended September 30, 2006, respectively. As of September 30, 2006, the operations of the partnership were substantially complete. (16) The following table presents the components of interest expense as presented in the Consolidated Statements of Earnings (in thousands). The increase in interest expense and capitalized interest is primarily the result of increased debt levels due to the Catellus Merger and our increased development activities. Three Months Ended Nine Months Ended September 30, September 30, 2006 (1) 2005 (2) 2006 (1) 2005 (2) Gross interest expense $101,859 $55,688 $292,006 $151,986 Net premium recognized (3,061) (672) (9,525) (864) Amortization of deferred loan costs 1,714 1,487 4,253 4,216 Interest expense before capitalization 100,512 56,503 286,734 155,338 Less: capitalized amounts (23,095) (13,954) (69,801) (41,535) Net interest expense $77,417 $42,549 $216,933 $113,803 (17) Foreign currency exchange gains and losses that are recognized as a component of net earnings generally result from: (i) remeasurement and/or settlement of certain debt transactions between us and our 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 our investment); (ii) remeasurement and/or settlement of certain third party debt of our 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. We generally exclude these types of foreign currency exchange gains and losses from our defined FFO measure and also from our 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 entity's functional currency and from the settlement of derivative financial instruments utilized to manage foreign currency risks are included in our defined FFO measure and in our computation of EBITDA. (18) Current income tax is generally a function of the level of income recognized by our taxable subsidiaries operating primarily in the CDFS business segment, state income taxes, taxes incurred in foreign jurisdictions and interest associated with our income tax liabilities. Deferred income tax is generally a function of the period's temporary differences (items that are treated differently for tax purposes than for financial reporting purposes), the utilization of tax net operating losses generated in prior years that had been previously recognized as deferred tax assets and deferred tax liabilities related to indemnification agreements related to certain contributions to property funds. In connection with the Catellus Merger and in accordance with purchase accounting, we recorded all of the acquired assets and liabilities at the estimated fair values at the date of acquisition. For our taxable subsidiaries, we recognized the deferred tax liabilities that represent the tax effect of the difference between the tax basis carried over and the fair values of these assets at the date of acquisition. As taxable income is generated in these subsidiaries, we recognize a deferred tax benefit in earnings as a result of the reversal of the deferred tax liability previously recorded at the acquisition date and we record current income tax expense representing the entire current income tax liability. In our calculation of FFO, we only include the current income tax expense to the extent the associated income is recognized for financial reporting purposes. (19) We report our investments in the property funds, CDFS joint ventures and other unconsolidated investees under the equity method. For purposes of calculating FFO and EBITDA, the net earnings of each of our unconsolidated investees is adjusted to be consistent with our calculation of these measures. (20) Consists primarily of adjustments to the amounts we recognize 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 our ownership interest in the unconsolidated investee acquiring the property. See note 12. In addition, this amount represents the adjustment to the amounts we recognize under the equity method on dispositions made by the unconsolidated investees to reflect the gain on sale on an undepreciated basis for FFO. (21) In September 2006, ProLogis European Properties ("PEPR") completed an initial public offering ("IPO") of ordinary units to trade on the Euronext Amsterdam N.V.'s Eurolist under the ticker symbol PEPR. Selling unitholders offered 49.8 million ordinary units, including an over-allotment option, for aggregate proceeds of Euro 715 million, which were paid to the selling unit holders. PEPR did not receive any proceeds from the offering. As the manager of the property fund, we received an initial incentive allocation of Euro 53.5 million paid in additional ordinary units from the pre-IPO PEPR unitholders based on the internal rate of return that such unit holders earned during their pre-IPO holding period. The incentive return was adjusted through a cash settlement based on the average closing price of the ordinary units during the 30-day, post-IPO period ("Post IPO Trading Price"). As the amount was not fixed and determinable as of September 30, 2006, we will recognize the incentive return of approximately $109 million in the fourth quarter of 2006. In addition, we no longer have an obligation to the pre-IPO unit holders under a tax indemnification agreement. The reversal of this obligation will be recognized in earnings in the fourth quarter for approximately $36 million, with no impact on FFO. Subsequent to the IPO, our ownership in PEPR is 24%. (22) In February, 2006, we formed a new property fund, the North American Industrial Fund, with several institutional investors, which currently owns industrial distribution properties in the United States and may own properties in Canada. The North American Industrial Fund, in which we have a 20% ownership interest, is an open-end fund. See note 14 for further discussion about the initial contribution of assets to the North American Industrial Fund in the first quarter of 2006. In addition, in January 2006, we made the first contribution of assets to ProLogis Japan Properties Fund II, which was formed in late 2005.