UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission File Number 01-12846

PROLOGIS

(303) 375-9292
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year,
if changed since last report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days.

Yes [X] No [   ]

     Indicate by check mark whether the registrant is accelerated filer (as defined in Rule 12b-2 of the Securities Act of 1934).

Yes [X] No [   ]

     The number of shares outstanding of the Registrant’s common shares as of November 5, 2004 was 183,900,455.

PROLOGIS

INDEX

2

PROLOGIS

CONSOLIDATED CONDENSED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated condensed financial statements.

3

PROLOGIS

CONSOLIDATED CONDENSED STATEMENTS OF
EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS)

(Continued)

The accompanying notes are an integral part of these consolidated condensed financial statements.

4

PROLOGIS

CONSOLIDATED CONDENSED STATEMENTS OF
EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS) (CONTINUED)
(Unaudited)
(In thousands, except per share data)

The accompanying notes are an integral part of these consolidated condensed financial statements.

5

PROLOGIS

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

     See Note 12 for information on non-cash investing and financing activities and other information.

The accompanying notes are an integral part of these consolidated condensed financial statements.

6

PROLOGIS

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2004 and 2003
(Unaudited)

1. General:

     Business

     ProLogis (collectively with its consolidated subsidiaries and partnerships “ProLogis”) is a publicly held real estate investment trust (“REIT”) that owns, operates and develops (directly or through unconsolidated investees) industrial distribution properties in North America (the United States and Mexico), Europe (11 countries) and Asia (Japan and China). At September 30, 2004, ProLogis’ real estate investments in China were all through unconsolidated investees. ProLogis has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”).

     ProLogis’ business consists of two reportable business segments: property operations and the corporate distribution facilities services business (“CDFS business”). The property operations segment represents the long-term ownership, management and leasing of industrial distribution properties. The CDFS business segment primarily encompasses Prologis’ development of industrial distribution properties that are either contributed to an unconsolidated property fund in which ProLogis has an ownership interest and acts as manager, or sold to third parties. Additionally, ProLogis will acquire industrial distribution properties that are generally rehabilitated and/or repositioned in the CDFS business segment prior to being contributed to a property fund. See Note 11.

     Principles of Financial Presentation

     ProLogis’ Consolidated Condensed Financial Statements are prepared in accordance with U. S. generally accepted accounting principles (“GAAP”). The accounts of ProLogis, its wholly owned subsidiaries and its majority owned and controlled subsidiaries and partnerships are consolidated in the accompanying financial statements and are presented in ProLogis’ functional currency, the U.S. dollar. ProLogis consolidates all entities in which it owns a majority voting interest and those variable interest entities, as defined, in which it is the primary beneficiary. All material intercompany transactions, including transactions with unconsolidated investees, have been eliminated.

     The Consolidated Condensed Financial Statements of ProLogis as of September 30, 2004 and for the three and nine months ended September 30, 2004 and 2003 are unaudited and, pursuant to the rules of the U.S. Securities and Exchange Commission (the “SEC”), certain information and footnote disclosures normally included in financial statements have been omitted. Management of ProLogis believes that the disclosures presented in these financial statements are adequate. However, these interim Consolidated Condensed Financial Statements should be read in conjunction with ProLogis’ December 31, 2003 audited Consolidated Financial Statements contained in ProLogis’ 2003 Annual Report on Form 10-K.

     Interpretation No. 46, “Consolidation of Variable Interest Entities”, was issued in January 2003 and revised in December 2003. ProLogis adopted the revised Interpretation No. 46 (“FIN 46R”) as of January 1, 2004. FIN 46R clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, and requires that variable interest entities in which ProLogis is the primary beneficiary be presented on a consolidated basis in its financial statements. As a result of adopting FIN 46R on January 1, 2004, ProLogis began consolidating its investments in TCL Holding S.A. (“TCL Holding”), formerly Frigoscandia Holding S.A., and CSI/Frigo LLC, a company that holds the voting ownership interest in TCL Holding. Through December 31, 2003, ProLogis presented its investments in TCL Holding and CSI/Frigo LLC under the equity method. ProLogis’ combined effective ownership in these entities was 99.75% at both September 30, 2004 and December 31, 2003. The adoption of FIN 46R did not change the presentation of any of ProLogis’ other unconsolidated investments, as these investees are not variable interest entities. Therefore, ProLogis will continue to present its investments in these entities under the equity method. See Note 4.

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     The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

     Certain amounts included in ProLogis’ Consolidated Condensed Financial Statements for the prior period have been reclassified to conform to the 2004 financial statement presentation.

2. Keystone Transaction:

     On May 3, 2004, ProLogis and affiliates of four investment funds managed by Eaton Vance Management (the “Fund Affiliates”) established five property funds (the “Acquiring Property Funds” and also referred to by ProLogis as ProLogis North American Properties Funds VI, VII, VIII, IX and X—see Note 4). ProLogis has a 20% ownership interest in each of the Acquiring Property Funds with the remainder owned by the Fund Affiliates. Also on May 3, 2004, ProLogis and the Acquiring Property Funds entered into an agreement to acquire the outstanding equity of Keystone Property Trust (“Keystone”), a publicly traded REIT, and the operating units of Keystone Operating Partnership, L.P., a subsidiary of Keystone (the “Keystone Transaction”). Keystone owned and leased industrial distribution properties located in New Jersey, Pennsylvania, Indiana, Florida, South Carolina and Ohio. The acquisition of Keystone by ProLogis and the Acquiring Property Funds was approved by Keystone’s shareholders on July 30, 2004 and was closed on August 4, 2004.

     Consideration for the common shares of Keystone was paid in cash at $23.80 per share. Also, the Acquiring Property Funds retired approximately $567 million of Keystone’s outstanding debt at closing. On September 3, 2004, Keystone was liquidated and, in conjunction with such liquidation, all of the then outstanding preferred shares of Keystone were cancelled and holders received a cash liquidation distribution in the aggregate amount of approximately $125 million, including accrued dividends.

     The total consideration for the Keystone Transaction was approximately $1.70 billion, including cash, assumed liabilities, preferred share liquidation payments and estimated transaction costs. ProLogis’ share of the total consideration was approximately $579 million, including ProLogis’ investment in the Acquiring Property Funds of approximately $279 million and ProLogis’ direct acquisition of certain assets and assumption of certain liabilities of approximately $300 million. ProLogis’ direct acquisition included the acquisition of nine operating properties aggregating 2.3 million square feet and land parcels aggregating 14 acres valued on a combined basis at approximately $143 million, ownership interests in two unconsolidated property funds (20% interest in each) valued at approximately $102 million (including the proportionate assumption of approximately $26 million of secured debt of the property funds), a 50% ownership interest in an unconsolidated entity and an interest in another entity that each engage in CDFS business activities valued on a combined basis at approximately $19 million (including the proportionate assumption of approximately $6 million of secured debt), a preferred equity interest in an unconsolidated investee valued at approximately $20 million and certain other assets, net of certain other liabilities valued at approximately $16 million. The allocation of the purchase price to the net assets acquired in the Keystone Transaction is based on a preliminary assessment and is subject to change as additional information becomes available.

     ProLogis’ share of the total consideration was funded in cash (approximately $504 million), through the issuance of approximately 879,000 limited partnership units that are redeemable for cash or, at ProLogis’ election, into one share of ProLogis’ common shares of beneficial interest, par value $0.01 per share (“Common Shares”) valued at approximately $30 million, the direct assumption of secured debt valued at approximately $13 million and the indirect assumption of secured debt of unconsolidated investees valued at approximately $32 million.

     The two unconsolidated property funds in which ProLogis acquired a 20% ownership interest own, on a combined basis, 7.7 million square feet of operating properties. The entity in which ProLogis holds a 50% ownership interest owns a 0.8 million square foot property that was recently developed by Keystone.

     ProLogis and the Fund Affiliates funded approximately $892 million of cash at closing (ProLogis’ share was approximately $178 million) on a short-term basis, pending completion of long-term, secured financing arrangements by the Acquiring Property Fund. Such arrangements aggregating $473 million were completed by the Acquiring Property Funds in October 2004, the proceeds of which have been returned to the Fund

8

Affiliates and ProLogis. ProLogis’ share of the returned funds was approximately $95 million. The remaining financing arrangements aggregating $419 million are expected to be completed before the end of 2004. The average term of the financing arrangements is expected to be eight years. The average annual interest rate associated with the financing arrangements is expected to be 5.48%, based on the rates included in the completed transactions and existing interest rate-lock agreements for the remaining financing arrangements.

     In May 2004, the Acquiring Property Funds entered into interest rate swap agreements to hedge a portion of the future interest payments associated with the long-term, secured financing arrangements. These interest rate swap agreements qualified for hedge accounting treatment. Certain of the interest rate swap agreements were subject to an indemnification agreement between the Acquiring Property Funds and ProLogis that obligated ProLogis to make any settlement payments that became due and, alternatively, entitled ProLogis to receive any settlement proceeds that were paid. The indemnification agreement relates to interest swap agreements with an aggregate notional amount of $185.2 million, originally estimated to be the amount of the financing arrangements to be incurred by the Acquiring Property Funds attributable to ProLogis’ 20% ownership interest. Upon settlement of the swap agreements in June and July 2004, ProLogis paid $1.2 million under the indemnification agreement. The portion of this payment attributable to each of the Acquiring Property Funds has been included in ProLogis’ investment basis and will be amortized to ProLogis’ share of the earnings or losses of the respective property fund over the term of the associated debt.

     On June 30, 2004, ProLogis contributed 21 operating properties aggregating 3.0 million square feet to the Acquiring Property Funds. Total proceeds from these contributions were $127.4 million. These properties are being used to secure a portion of the financing arrangements of the Acquiring Property Funds. See Note 4.

3. Real Estate:

   Real Estate Assets

     Real estate assets directly owned by ProLogis consist of income producing industrial distribution properties, industrial distribution properties under development and land held for future development of industrial distribution properties. ProLogis’ real estate assets, presented at cost, include the following as of the dates indicated (in thousands of U.S. dollars):

9

     The real estate assets that ProLogis’ owns through a direct investment rather than through investments in unconsolidated entities are located in North America (the United States and Mexico), 11 countries in Europe and Japan. No individual market in any country, as defined by ProLogis and presented in Item 2 of ProLogis 2003 Annual Report on Form 10-K, represents more than 10% of ProLogis’ total real estate assets, before depreciation. See Note 4 for information on the locations of the real estate assets owned by ProLogis’ unconsolidated investees.

   Operating Lease Agreements

     ProLogis leases its operating properties to customers under agreements that are generally classified as operating leases. At September 30, 2004, minimum lease payments on leases with lease periods greater than one year for space in ProLogis’ directly owned properties for the remainder of 2004 and the other years in the five-year period ending December 31, 2008 and thereafter are as follows (in thousands of U.S. dollars):

     For ProLogis’ directly owned properties, the largest customer and the 25 largest customers accounted for 1.38% and 15.97%, respectively, of ProLogis’ annualized collected base rents at September 30, 2004.

4. Unconsolidated Investees:

   Summary of Investments and Income

     Since 1997, ProLogis has invested in various entities in which its ownership interest is less than 100% and in which it does not have control as defined under GAAP. Accordingly, these investments are presented under the equity method in ProLogis’ Consolidated Condensed Financial Statements. Certain of these investments were originally structured such that ProLogis’ ownership interest would allow ProLogis to continue to comply with the requirements of the Code to qualify as a REIT. However, with respect to ProLogis’ investments in property funds, having an ownership interest of 50% or less is part of ProLogis’ business strategy.

     ProLogis’ investments in entities that are accounted for under the equity method are summarized by type of investee as follows as of the dates indicated (in thousands of U.S. dollars):

10

     ProLogis recognizes income or losses from its investments in unconsolidated investees consisting of its proportionate shares of the earnings or losses of these investees recognized under the equity method and interest income on advances made to these investees, if any. Further, ProLogis earns fees for providing services to the property funds. The amounts recognized by ProLogis from its investments in unconsolidated investees are summarized as follows for the periods indicated (in thousands of U.S. dollars):

(1)

As of January 1, 2004, ProLogis began presenting its investments in TCL Holding and CSI/Frigo LLC on a consolidated basis as a result of adopting FIN 46R. See Note 1.

   Property Funds

      Contributions of developed properties to a property fund allow ProLogis to realize, for financial reporting purposes, a portion of the profits from its development activities while at the same time allowing ProLogis to maintain a long-term ownership interest in its developed properties. This business strategy also provides liquidity to fund ProLogis’ future development activities and generates fee income to ProLogis. ProLogis has investments in 15 property funds (13 of which were formed by ProLogis). ProLogis’ ownership interests in these property funds ranged from 11.5% to 50% at September 30, 2004. The property funds formed by ProLogis own operating properties that have generally been contributed to them by ProLogis, although certain of the property funds have also acquired properties from third parties. Interests in two property funds were acquired by ProLogis’ as part of the Keystone Transaction (see Note 2). In most cases, ProLogis receives ownership interests in the property funds as part of the proceeds generated by the contributions of properties to the property funds. ProLogis recognizes its proportionate share of the earnings or losses of each property fund under the equity method. ProLogis earns fees for acting as the manager of each of the property funds and may earn additional fees by providing other services to certain of the property funds including, but not limited to, acquisition, development and leasing activities performed on their behalf.

     ProLogis’ investments in the 15 property funds, presented under the equity method, were as follows as of the dates indicated (in thousands of U.S. dollars):

     ProLogis’ investments in the 15 property funds at September 30, 2004 consisted of the following components (in millions of U.S. dollars):

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     ProLogis’ proportionate shares of the earnings or losses of the property funds recognized under the equity method, interest income on advances to the property funds, if any, and fees earned for services provided to the property funds were as follows for the periods indicated (in thousands of U.S. dollars):

•

Began operations on August 26, 1999;

•

Members are ProLogis (50%) and New York State Common Retirement Fund (50%);

•

Owned 79 properties aggregating 13.0 million square feet at September 30, 2004;

12

•

Acquired two properties aggregating 0.3 million square feet from third parties and disposed of two properties aggregating 0.3 million square feet during the nine months ended September 30, 2004;

•

All but three of the properties owned were contributed by ProLogis or were developed by ProLogis on behalf of the property fund;

•

Properties are located in the Los Angeles/Orange County market;

•

ProLogis California has the right of first offer with respect to properties that ProLogis develops, excluding properties developed under build to suit lease agreements, in certain counties included in ProLogis’ Los Angeles/Orange County market; and

•

Property management, asset management, leasing and other fees recognized by ProLogis were $0.8 million for both the three months ended September 30, 2004 and 2003, respectively, and $2.6 million and $2.5 million for the nine months ended September 30, 2004 and 2003, respectively.

(2)

ProLogis North American Properties Fund I LLC (“ProLogis North American Properties Fund I”):

•

Began operations on June 30, 2000;

•

Members are ProLogis (41.3%) and State Teachers’ Retirement Board of Ohio (58.7%) ;

•

Owned 36 properties aggregating 9.4 million square feet at September 30, 2004;

•

All properties were contributed by ProLogis;

•

Properties are located in 16 markets in the United States;

•

ProLogis’ ownership interest was 20% prior to January 15, 2001; and

•

Property management, asset management, leasing and other fees recognized by ProLogis were $0.6 million for both the three months ended September 30, 2004 and 2003, and $1.8 million and $1.6 million for the nine months ended September 30, 2004 and 2003, respectively.

(3)

ProLogis First U.S. Properties LP (“ProLogis North American Properties Fund II”):

•

Began operations on June 30, 2000;

•

Partners are ProLogis (20%) and an affiliate of First Islamic Investment Bank E.C. (“First Islamic Bank”) (80%);

•

Owned 27 properties aggregating 4.5 million square feet at September 30, 2004;

•

All properties were contributed by ProLogis;

•

Properties are located in 13 markets in the United States; and

•

Property management, asset management, leasing and other fees recognized by ProLogis were $0.5 million for both the three months ended September 30, 2004 and 2003 and $1.7 million and $1.4 million for the nine months ended September 30, 2004 and 2003, respectively.

(4)

ProLogis Second U.S. Properties LP (“ProLogis North American Properties Fund III”):

13

•

Began operations on June 15, 2001;

•

Partners are ProLogis (20%) and an affiliate of First Islamic Bank (80%);

•

Owned 34 properties aggregating 4.4 million square feet at September 30, 2004;

•

All properties were acquired from ProLogis;

•

Properties are located in 15 markets in the United States; and

•

Property management, asset management, leasing and other fees recognized by ProLogis were $0.6 million and $0.5 million for the three months ended September 30, 2004 and 2003, respectively, and $1.7 million and $1.6 million for the nine months ended September 30, 2004 and 2003, respectively.

(5)

ProLogis Third U.S. Properties LP (“ProLogis North American Properties Fund IV”):

•

Began operations on September 21, 2001;

•

Partners are ProLogis (20%) and an affiliate of First Islamic Bank; (80%)

•

Owned 17 properties aggregating 3.5 million square feet at September 30, 2004;

•

All properties were acquired from ProLogis;

•

Properties are located in 10 markets in the United States; and

•

Property management, asset management, leasing and other fees recognized by ProLogis were $0.3 million and $0.4 million for the three months ended September 30, 2004 and 2003, respectively, and $0.9 million for both the nine months ended September 30, 2004 and 2003.

(6)

ProLogis North American Properties Fund V:

•

Began operations on March 28, 2002;

•

Ownership interests (direct and indirect) of the ProLogis-Macquarie Fund at September 30, 2004 are held directly or indirectly by ProLogis, Macquarie ProLogis Trust (“MPR”), a listed property trust in Australia, and a company that was formed to act as manager of the ProLogis-Macquarie Fund. ProLogis and a United States subsidiary of Macquarie Bank Limited (“Macquarie Bank”) each have a 50% ownership interest in the manager of the ProLogis-Macquarie Fund;

•

MPR’s effective ownership interest in the ProLogis-Macquarie Fund was 85.8% at September 30, 2004 through its 96.4% weighted ownership interest in two entities that collectively owned 89.0% of the ProLogis-Macquarie Fund. MPR’s effective ownership interest in the ProLogis-Macquarie Fund was 83.1% at September 30, 2003;

•

ProLogis’ effective ownership interest in the ProLogis-Macquarie Fund was 11.5% at September 30, 2004 based on its 11.0% direct ownership interest in the ProLogis-Macquarie Fund and its 0.6% ownership interest in two entities that collectively own 89.0% of the ProLogis-Macquarie Fund. ProLogis’ effective ownership interest in the ProLogis-Macquarie Fund was 14.0% at September 30, 2003;

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•

Macquarie Bank’s effective ownership interest in the ProLogis-Macquarie Fund was 2.7% at September 30, 2004 based on its 3.0% ownership interest in two entities that collectively own 89.0% of the ProLogis-Macquarie Fund. Macquarie Bank’s effective ownership interest was 2.9% at September 30, 2003;

•

ProLogis refers to the combined entities in which it has ownership interests (ProLogis-Macquarie Fund and the management company) as one property fund named ProLogis North American Properties Fund V. ProLogis’ combined ownership interest in this property fund has ranged from 11.4% to 16.9% since the property fund’s inception;

•

ProLogis reduced its ownership interest in the ProLogis-Macquarie Fund in June 2004 by exchanging a portion of its investment into units of MPR as allowed under certain formation agreements. Upon receipt of the units of MPR, ProLogis sold them in the public market. The sale generated net proceeds of $13.2 million. ProLogis recognized a net gain on the disposition of the investment of $3.3 million;

•

Owned 114 properties aggregating 26.7 million square feet at September 30, 2004 (including 18 properties aggregating 3.3 million square feet that have been contributed by ProLogis during 2004);

•

Acquired seven properties aggregating 2.7 million square feet from third parties during 2004;

•

All but seven of the properties owned were acquired from ProLogis;

•

Properties are located in 24 markets in the United States and four markets in Mexico;

•

At September 30, 2004, ProLogis had guaranteed $29.4 million of borrowings of ProLogis North American Properties Fund V. ProLogis provided these guarantees on short-term borrowings associated with the contribution of properties. The borrowings that are guaranteed mature in December 2004 and ProLogis expects that they will be repaid with the proceeds from a secured debt financing that will not be guaranteed by ProLogis;

•

ProLogis committed to offer to contribute all of the properties that it developed and stabilized during 2003 in North America (excluding properties that are covered under the agreement with ProLogis California) to ProLogis North American Properties Fund V. This commitment originally expired on December 31, 2003. However, on June 29, 2004, both parties agreed to extend the commitment through December 31, 2004 with respect to properties that ProLogis develops, stabilizes and desires to dispose of in North America during 2004 (excluding properties that are covered under an agreement with ProLogis California). ProLogis North American Properties Fund V is not obligated to acquire any of the properties that ProLogis expects it will offer to contribute in 2004. Accordingly, ProLogis cannot predict the extent to which ProLogis North American Properties Fund V will continue to acquire properties from ProLogis during the remainder of 2004; and

•

Property management, asset management, leasing and other fees recognized by ProLogis were $2.0 million and $1.8 million for the three months ended September 30, 2004 and 2003, respectively, and $5.6 million and $6.8 million for the nine months ended September 30, 2004 and 2003, respectively.

In addition to property management and asset management fees recognized in 2004, ProLogis recognized fees associated with the acquisition of properties directly by the property fund of $0.2 million and $1.1 million for the three and nine months, respectively, and with debt placement of $0.3 million for both the three and nine months.

In addition to property management and asset management fees recognized in 2003, ProLogis recognized fees associated with the acquisition of properties directly by the property fund of $0.2 million and $1.0 million for the three and nine months, respectively, and with debt placement of $0.2 million and $1.0 million for the three and nine months, respectively. Also, in the second quarter of 2003, ProLogis recognized $1.6 million of income that was earned based on certain performance criteria.

(7)

ProLogis North American Properties Fund VI:

•

Formed on May 3, 2004 and began operations on June 30, 2004;

•

Originally formed to acquire properties as part of the Keystone Transaction (see Note 2);

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•

Ownership interests held by ProLogis (20%) and an affiliate of an investment fund managed by Eaton Vance Management (80%);

•

Owned 22 properties aggregating 8.6 million square feet at September 30, 2004 (including 17 properties aggregating 7.5 million square feet acquired in the Keystone Transaction – see Note 2);

•

Five properties aggregating 1.1 million square feet were contributed by ProLogis on June 30, 2004;

•

Properties are located in seven markets in the United States; and

•

Property and asset management fees recognized by ProLogis were $0.3 million for both the three and nine months ended September 30, 2004.

(8)

ProLogis North American Properties Fund VII:

•

Formed on May 3, 2004 and began operations on June 30, 2004;

•

Originally formed to acquire properties as part of the Keystone Transaction (see Note 2);

•

Ownership interests held by ProLogis (20%) and an affiliate of an investment fund managed by Eaton Vance Management (80%);

•

Owned 29 properties aggregating 6.1 million square feet at September 30, 2004 (including 25 properties aggregating 5.5 million square feet acquired in the Keystone Transaction – see Note 2);

•

Four properties aggregating 0.6 million square feet were contributed by ProLogis on June 30, 2004;

•

Properties are located in eight markets in the United States; and

•

Property and asset management fees recognized by ProLogis were $0.3 million for both the three and nine months ended September 30, 2004.

(9)

ProLogis North American Properties Fund VIII:

•

Formed on May 3, 2004 and began operations on June 30, 2004;

•

Originally formed to acquire properties as part of the Keystone Transaction (see Note 2);

•

Ownership interests held by ProLogis (20%) and an affiliate of an investment fund managed by Eaton Vance Management (80%);

•

Owned 24 properties aggregating 3.1 million square feet at September 30, 2004 (including 20 properties aggregating 2.7 million square feet acquired in the Keystone Transaction – see Note 2);

•

Four properties aggregating 0.4 million square feet were contributed by ProLogis on June 30, 2004;

16

•

Properties are located in 10 markets in the United States; and

•

Property and asset management fees recognized by ProLogis were $0.1 million for both the three and nine months ended September 30, 2004.

(10)

ProLogis North American Properties Fund IX:

•

Formed on May 3, 2004 and began operations on June 30, 2004;

•

Originally formed to acquire properties as part of the Keystone Transaction (see Note 2);

•

Ownership interests held by ProLogis (20%) and an affiliate of an investment fund managed by Eaton Vance Management (80%);

•

Owned 21 properties aggregating 3.5 million square feet at September 30, 2004 (including 18 properties aggregating 3.2 million square feet acquired in the Keystone Transaction – see Note 2);

•

Three properties aggregating 0.3 million square feet were contributed by ProLogis on June 30, 2004;

•

Properties are located in seven markets in the United States; and

•

Property and asset management fees recognized by ProLogis were $0.2 million for both the three and nine months ended September 30, 2004.

(11)

ProLogis North American Properties Fund X:

•

Formed on May 3, 2004 and began operations on June 30, 2004;

•

Originally formed to acquire properties as part of the Keystone Transaction (see Note 2);

•

Ownership interests held by ProLogis (20%) and an affiliate of an investment fund managed by Eaton Vance Management (80%);

•

Owned 29 properties aggregating 4.2 million square feet at September 30, 2004 (including 24 properties aggregating 3.6 million square feet acquired in the Keystone Transaction – see Note 2);

•

Five properties aggregating 0.6 million square feet were contributed by ProLogis on June 30, 2004;

•

Properties are located in nine markets in the United States; and

•

Property and asset management fees recognized by ProLogis were $0.2 million for both the three and nine months ended September 30, 2004.

(12)

ProLogis North American Properties Fund XI:

17

•

Ownership interest in existing property fund acquired by ProLogis on August 4, 2004 as part of the Keystone Transaction (see Note 2);

•

Partners are ProLogis (20%) and AFL-CIO Building Investment Trust (80%);

•

Owned 14 properties aggregating 4.3 million square feet at September 30, 2004;

•

Properties are located in three markets in the United States; and

•

Property management fees recognized by ProLogis were $0.1 million for both the three and nine months ended September 30, 2004.

(13)

ProLogis North American Properties Fund XII:

•

Ownership interest in existing property fund acquired by ProLogis on August 4, 2004 as part of the Keystone Transaction (see Note 2);

•

Partners are ProLogis (20%) and CalEast Industrial Investors, LLC (80%);

•

Owned 12 properties aggregating 3.4 million square feet at September 30, 2004;

•

Properties are located in the New Jersey market; and

•

Property management fees recognized by ProLogis were $0.1 million for both the three and nine months ended September 30, 2004.

(14)

ProLogis European Properties Fund:

•

Began operations on September 23, 1999;

•

ProLogis and 21 third parties, primarily institutional investors, own units in the property fund. ProLogis European Properties Fund has equity commitments from 11 investors through subscription agreements aggregating 636.6 million euro (the currency equivalent of approximately $777.4 million at September 30, 2004) of which 428.3 million euro (the currency equivalent of approximately $522.9 million at September 30, 2004) was unfunded at September 30, 2004. The subscription agreements expire on August 29, 2006;

•

At September 30, 2004, ProLogis was committed to make additional equity contributions to ProLogis European Properties Fund of 135.4 million euro (the currency equivalent of approximately $165.3 million as of September 30, 2004) through September 15, 2009;

•

Owned 220 properties aggregating 45.2 million square feet at September 30, 2004 (including 22 properties aggregating 4.5 million square feet that were contributed by ProLogis during 2004);

•

Acquired a 0.2 million square foot property from a third party during 2004;

•

Properties have been contributed by ProLogis (174 properties, 34.0 million square feet) and acquired from third parties (46 properties, 11.2 million square feet);

•

Properties are located in 26 markets in 11 countries in Europe;

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•

ProLogis is committed to offer to contribute all of the properties that it develops and stabilizes in specified markets in Europe through September 2019 to ProLogis European Properties Fund, subject to the property meeting certain criteria, including leasing criteria;

•

ProLogis’ ownership interest was 21.6% and 29.9% at September 30, 2004 and 2003, respectively; and

•

Property management, asset management and other fees recognized by ProLogis were $6.2 million and $6.0 million for the three months ended September 30, 2004 and 2003, respectively, and $18.5 million and $17.0 million for the nine months ended September 30, 2004 and 2003, respectively.

(15)

PLD/RECO Japan TMK Property Trust (“ProLogis Japan Properties Fund”):

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Began operations on September 24, 2002;

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Partners are ProLogis (20%) and a real estate investment subsidiary of the Government of Singapore Investment Corporation (“GIC”) (80%);

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The total capital commitment by the real estate investment subsidiary of GIC to the property fund is $300.0 million, of which $135.6 million was unfunded at September 30, 2004;

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Owned 13 properties aggregating 3.9 million square feet at September 30, 2004 (including three properties aggregating 1.2 million square feet that were contributed by ProLogis during 2004);

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Acquired five properties aggregating 1.1 million square feet from third parties during 2004;

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Seven of the 13 properties owned by the property fund were contributed by ProLogis;

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Properties are located in three markets in Japan;

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ProLogis is committed to offer to contribute all of the properties that it develops and stabilizes in Japan through June 2006 to ProLogis Japan Properties Fund, subject to the property meeting certain criteria, including leasing criteria; and

•

Property management and asset management fees recognized by ProLogis were $0.7 million and $0.3 million for the three months ended September 30, 2004 and 2003, respectively, and $1.9 million and $0.5 million for the nine months ended September 30, 2004 and 2003, respectively.

(16)

Under GAAP, a portion of the proceeds resulting from ProLogis’ contribution of a property to a property fund is deferred due to ProLogis’ continuing ownership in the property fund that acquires the property. The amount of the proceeds that ProLogis is unable to recognize in computing the gain on the contribution is recorded as a reduction to ProLogis’ balance sheet investment in the property fund that acquires the property. The proceeds that have not been recognized are eventually recognized when ProLogis adjusts its proportionate share of the earnings or loss of the property fund, recognized under the equity method, to reflect lower depreciation expense within the property fund. The lower depreciation expense is the result of ProLogis’ reduced investment in the property fund and, accordingly, its lower basis in the contributed property. The proceeds not recognized are eventually recognized in results of operations by ProLogis if the property fund disposes of a property to a third party that was originally contributed to the property fund by ProLogis. ProLogis also recognizes gains associated with the previously deferred proceeds in amounts proportionate to reductions in its ownership interest in the property fund after the contribution is made. If a loss results when a property is contributed to a property fund, the entire loss is recognized.

(17)

Includes costs associated with ProLogis’ investment in the property fund, ProLogis’ proportionate share of the accumulated other comprehensive income or loss recognized by ProLogis European Properties Fund (cumulative translation adjustments and hedge accounting adjustments) and ProLogis Japan Properties Fund

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(cumulative translation adjustments) and settlement amounts either paid or reserved associated with the interest rate swap agreements and a related indemnification agreement between ProLogis and ProLogis North American Properties Funds VI through X (see Note 2).

     ProLogis, from time to time, enters into Special Limited Contribution Agreements (“SLCA”) in connection with certain of its contributions of properties to certain of its property funds. Under the SLCAs, ProLogis is obligated to make an additional capital contribution to the respective property fund under certain circumstances, the occurrence of which ProLogis believes to be remote. Specifically, ProLogis would be required to make an additional capital contribution to the property fund if the property fund’s third-party lender, whose loans to the property fund are generally secured by the property fund’s assets and are non-recourse, does not receive a specified minimum level of debt repayment. However, the proceeds received by the third-party lender from the exhaustion of all of the assets of the property fund combined with the debt repayments received directly from the property fund will reduce ProLogis’ obligations under the SLCA on a dollar-for-dollar basis. ProLogis’ potential obligations under the respective SLCAs, as a percentage of the assets in the property funds, range from 2% to 28%. Accordingly, the value of the assets of the respective property funds would have to decline by between 98% and 72% before ProLogis would be required to make an additional capital contribution. ProLogis believes that the likelihood of declines in the values of the assets that support the third-party loans of the magnitude necessary to require an additional capital contribution is remote, especially in light of the geographically diversified portfolios of properties owned by the property funds. Accordingly, these potential obligations have not been recognized as a liability by ProLogis at September 30, 2004 and ProLogis has assessed a nominal value to the obligation undertaken through the SLCAs. The potential obligations under the SLCAs aggregate $402.8 million at September 30, 2004 and the combined book value of the assets in the property funds, before depreciation, that are subject to the provisions of the SLCAs was approximately $5.8 billion at September 30, 2004.

     In August 2003, ProLogis entered into an indemnification agreement with ProLogis European Properties Fund whereby ProLogis would indemnify ProLogis European Properties Fund for certain future capital gains tax liabilities that could be incurred by ProLogis European Properties Fund associated with contributions of properties to ProLogis European Properties Fund after March 31, 2003. ProLogis’ contributions to ProLogis European Properties Fund are structured as contributions of the shares of companies that own the real estate assets. Accordingly, the capital gains tax liability associated with the step up in the value, if any, of the underlying real estate assets is deferred and transferred to ProLogis European Properties Fund at contribution. ProLogis has indemnified ProLogis European Properties Fund to the extent that ProLogis European Properties Fund: (i) incurs capital gains tax as a result of a direct sale of the real estate asset, as opposed to a transaction in which the shares of the company owning the real estate asset are transferred or sold or (ii) is required to grant a discount to the buyer of shares under a share transfer transaction as a result of ProLogis European Properties Fund transferring the embedded capital gain tax liability to the buyer of the shares in the transaction. Further, if an initial public offering of units in ProLogis European Properties Fund is undertaken, ProLogis has indemnified the unit holders of ProLogis European Properties Fund in the event the unit holders are required to accept a discount to the value of their units because the capital gain tax liability is being transferred to the holders of units in the new public entity. The agreement limits the amount that is subject to ProLogis’ indemnification with respect to each property to 100% of the actual capital gains tax liability that is deferred and transferred by ProLogis to ProLogis European Properties Fund at the time of the initial contribution. Pursuant to the indemnification agreement, ProLogis has recognized a deferred income tax liability of $9.1 million associated with the contributions of 36 properties to ProLogis European Properties Fund during the period from April 1, 2003 to September 30, 2004.

     In June 2004, ProLogis entered into an indemnification agreement with ProLogis North American Properties Fund V whereby ProLogis would indemnify ProLogis North American Properties Fund V for certain future capital gains tax liabilities that could be incurred by ProLogis North American Properties Fund V associated with the contribution of assets located in Mexico. ProLogis’ contributions of properties located in Mexico to ProLogis North American Properties Fund V are structured as contributions of the shares of companies that own the real estate assets. Accordingly, the capital gains tax liability in Mexico associated with the step up in the value, if any, of the underlying real estate assets is deferred and transferred to ProLogis North American Properties Fund V at contribution. ProLogis has indemnified ProLogis North American Properties Fund V to the extent that ProLogis North American Properties Fund V incurs capital gains tax in Mexico as a result of a sale of the real estate asset or an interest in the real estate asset. The agreement limits the amount that is subject to ProLogis’ indemnification with respect to each property located in Mexico to the lesser of (1) the actual capital gains tax paid in Mexico upon the sale of the real

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estate assets or (2) 100% of the capital gains tax liability in Mexico that is deferred and transferred by ProLogis to ProLogis North American Properties Fund V at the time of the initial contribution. Pursuant to the indemnification agreement, ProLogis has recognized a deferred income tax liability of $4.0 million associated with the contributions of 20 properties located in Mexico to ProLogis North American Properties Fund V during the period from March 28, 2002 to September 30, 2004.

     Summarized financial information of the property funds as of and for the nine months ended September 30, 2004 is presented below (in millions of U.S. dollars). The information presented is for the entire entity, not ProLogis’ proportionate share of the entity.