Security Capital

Management Letter 1999

LETTER TO SHAREHOLDERS OF SECURITY CAPITAL GROUP
1999 was a critical turning point for Security Capital Group. The wide disparity between the private and public market valuations of Security Capital created a powerful dynamic that required management to formulate a very focused strategy to narrow this gap. On February 1, 1999, Security Capital's Board of Directors approved a new strategic plan designed to intelligently unlock shareholder value. This plan concentrates primarily on actions related to the Capital Division, where over 98% of Security Capital's assets are held; the Financial Services Division continues in its efforts to broaden the scope of its businesses.

Integral to the development of the new strategy was the realization that, since February 1998, the availability and cost of equity capital in the public real estate markets required Security Capital to adjust its historical approach to capital allocation. In sum, Security Capital will focus its investment only in "leadership" companies that generate internal earnings growth through property development activities and produce substantial third-party service income. These companies must also be able to create measurable brand value and hold one of the top two market positions in their respective niches.

To achieve these objectives, Security Capital is in the process of intelligently repositioning or selling its investment in companies that do not meet these criteria, working jointly with the management teams of these companies to maximize value for shareholders. Capital generated as a result of these efforts is being reallocated to the SCZ stock repurchase program and prudent repayment of debt, as well as to increasing our ownership positions in those few companies that meet Security Capital's stated objectives. In addition, we are supporting actions taken by our affiliates to optimize investments to repurchase their own undervalued stock or profitably expand their core business.

To ensure that shareholder value is maximized, the refocusing process cannot take place overnight. This process is expected to result in a simplified structure and eliminate the gap between the public market price of our stock and private market valuation of our underlying assets. Although we are in the very early stages, substantial progress has been made by Security Capital and its affiliates. Specifically, actions have been focused in these key areas:

-	Sizing overhead to align with new business strategy.
-	Selling/repositioning of investments not meeting ownership criteria. Reallocating capital generated by Security Capital and affiliates to repurchase stock, prudently repay debt, profitably expand the core business and increase Security Capital's ownership in "leadership" companies.
-	Simplifying structure to eliminate the public/private market discount and clarify public market perception.

IMPLEMENTATION OF A NEW STRATEGY
Sizing overhead to align with new business strategy.
In February, Security Capital implemented an overhead reduction program to align and size the organization with the new business strategy. By the end of 1999, annualized operating expenses were less than $85 million, a reduction of $32 million from levels anticipated for the year.

A major operational and strategic restructuring of Homestead Village Incorporated was initiated in May. Homestead exited the development business and sold land inventory, aligning its overhead to match the requirements of the new business plan. Overhead was reduced from an annualized rate of $49 million in the first quarter of 1999 to $25 million in the first quarter of 2000. Bank debt was reduced from $399 million at the end of the first quarter of 1999 to $125 million at year-end 1999. Cash flow grew from $35 million in 1999 to a current annualized rate of $54 million. Weekly revenue per available room increased 15.6% to $245 in 1999, compared to $212 in 1998.

Selling/repositioning of investments not meeting ownership criteria. Reallocating capital generated by Security Capital and affiliates to repurchase stock, prudently repay debt, profitably expand the core business and increase Security Capital's ownership in "leadership" companies.

Actions taken by Security Capital
Security Capital's Board of Directors determined that an investment in Strategic Hotel Capital was no longer consistent with the company's long-term strategy since there was no opportunity for Strategic Hotel Capital to generate significant service or development profits. In September, Security Capital closed the sale of its 23.6% interest in Strategic Hotel Capital for $329 million in cash. Proceeds were utilized to reduce short-term debt and initiate the firm's stock repurchase program.

Security Capital initiated a $100 million share repurchase program in September, which was expanded to $200 million in December. As of March 1, 2000, the company had repurchased $164 million, the equivalent of approximately 12.6 million SCZ shares, or 10.3% of shares outstanding when the program was initiated. We remain confident our stock represents value unparalleled in the public real estate market and that, through share repurchase, we are investing in an opportunity with substantial potential for growth.

Actions taken by Affiliates
Archstone Communities announced a $100 million share repurchase program in February, and commenced an additional $50 million buyback program in September. As of March 1, 2000, approximately 6.1 million shares or 4.3% of Archstone's shares outstanding were repurchased through both programs, which were funded primarily through the disposition of low-growth or non-strategic assets. As a result, Security Capital's ownership position in Archstone increased from 38.1% to 39.2%.

An initial $100 million share repurchase program announced by Security Capital U.S. Realty in May was increased to $200 million in June. As of March 1, 2000, SC-U.S. Realty had repurchased 10.7 million shares for an aggregate cost of $195 million, representing approximately 12.3% of SC-U.S.Realty's shares outstanding when the program was initiated. As a result, Security Capital's ownership position in SC-U.S. Realty increased from 35.0% to 40.1%.

In September, ProLogis successfully tapped the private equity market by forming a $1.3 billion European Properties Fund, which when fully funded will contain approximately $3 billion of new facilities located throughout Europe. By placing its stabilized European assets in this fund, ProLogis is able to reallocate capital in the expansion of new markets and services to continue to grow the business.

Regency Realty announced a $65 million share repurchase program in October. The program was completed in February when Regency had repurchased approximately 3.3 million shares representing 5.5% of the shares outstanding at the beginning of the program. The share repurchase was funded primarily by the proceeds from Regency's for-sale development program and the sale of low-growth, non-strategic operating properties. In November, Storage USA announced two joint ventures with GE Capital for the acquisition and development of self-storage facilities. The joint ventures efficiently raised capital that allows Storage USA to expand its national presence as well as fund the repurchase of up to 5% of its shares outstanding. In January, CarrAmerica's Board authorized the repurchase of up to $100 million of its outstanding common shares. The share repurchase program will be funded from the $380 million proceeds received from the merger transaction of its executive office suites affiliate.

Simplifying structure to eliminate the public/private market discount and clarify public market perception.
It is important to note that implementation of our new business strategy will continue to unfold for the foreseeable future. While excellent progress has been made this past year, it is only the beginning, and much remains to be done.

Security Capital and our affiliates will continue to take advantage of the unprecedented public/private market opportunity to simplify our structure as well as to buy back undervalued stock, raise capital to expand growth opportunities and unlock significant shareholder value. Through purposeful execution of this plan, we will simplify Security Capital's structure and create a valuable currency in SCZ stock by making it the best way to invest in our family of outstanding high-growth real estate operating companies.

It is management's goal that Security Capital will come to be known as a focused operating company with strong earnings performance, an investment appealing to the growth investor.

1999 OPERATIONS
Security Capital's financial performance for the year improvedsignificantly as the company began to benefit from the implementation of the new business strategy as well as several key initiatives to deliver improved operating profitability. Earnings before depreciation, amortization and deferred taxes (EBDADT) before special items for the year was $238.2 million, or $1.98 per share, compared to $222.3 million, or $1.78 per share, in 1998. On a per share basis, diluted EBDADT before special items increased by 11.2% for the year. After special items, the company's EBDADT for the year was $122.5 million compared to $213.4 million for 1998.

The Capital Division produced $222.7 million of EBDADT before special items for the year, an increase of $28.0 million over 1998. This performance is attributable to the strong internal growth achieved by the Capital Division's affiliates, in which 98.8% of the firm's capital is invested. Solid real estate fundamentals�with supply and demand in a healthy ratio�combined with excellent results from newly completed development properties and significant reductions in operating expenses contributed to their performance. Development will continue to be a driver of growth in the future as 21.6% of the total capital invested by our affiliates is in pre-stabilized assets or properties under development.

The Financial Services Division produced EBDADT $15.5 million for the year. The Capital Markets Group broadened the scope of its transactions with clients in the United States and Europe. The Global Capital Management Group was awarded $324.9 million of new separate account business in 1999 and executed two new institutional accounts in March of 2000. Capital funding from the new accounts is expected to increase assets under management by the Global Capital Management Group by more than $200 million by year end. In addition, as of January 31, 2000, one of its mutual funds, Security Capital U.S. Real Estate Shares (SUSIX), achieved a ranking by an independent information provider in the top 5% of all real estate mutual funds for its three-year average annual return.

Security Capital remains focused on maintaining a strong balance sheet. At year end, total outstanding indebtedness was $1.1 billion of which $1.0 billion was fixed-rate debt with an average maturity of 13.2 years and an average interest rate of 7.2%. The company's only floating-rate indebtedness was its revolving line of credit, which had an outstanding balance of $90.9 million at year end. Security Capital's coverage ratio continues to improve, and debt ratings are investment-grade.

THE FUTURE
Management's perspective of the future has both an immediate and intermediate-term horizon. During the next four quarters, the focus is clearly to sell or reposition investments in companies not meeting Security Capital's ownership criteria. The capital generated will be reallocated to repurchase SCZ stock, increase ownership in our "leadership" companies and, in the process, reduce debt to maintain an investment-grade rating. All operating companies will be urged to sell stabilized, non-strategic assets and/or create funds and joint ventures to repurchase stock or expand their core business activities. This process will result in a simplified structure designed to clarify public market perception and eliminate the deep discount that exists between the private market value of our assets and the current stock price.

Over the intermediate term, Security Capital will continue to transition to a more focused company with larger positions in fewer companies that can be classified as the new "leadership" companies we have described throughout this letter. These remaining companies will have significant growth opportunities in both the United States and Europe.

The Annual Meeting of Shareholders will take place in Chicago on Thursday, May 25, 2000, at 9:30 a.m. Central Time at the Fairmont Hotel, 200 North Columbus Drive. This year, we will begin a new annual meeting format consisting of a brief business presentation with the balance of time allowed for questions and answers.

On behalf of the Board of Directors, the management team and colleagues of Security Capital, we would like to thank you for your past support, and assure you that we are fully committed to expeditiously executing the strategy and unlocking value for our shareholders.

William D. Sanders C. - Chairman
March 14, 2000

Ronald Blankenship - Vice Chairman

| | | |