UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 01-12846

 

(Exact name of registrant as specified in its charter)

Maryland		74-2604728
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
4545 Airport Way, Denver, Colorado		80239
(Address or principal executive offices)		(Zip Code)

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 þ      No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website; if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter periods that the registrant was required to submit and post such files). Yes þ      No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

þ Large accelerated filer		o Accelerated filer		o Non-accelerated filer (Do not check if a smaller reporting company)		o Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o      No þ

The number of shares outstanding of the Registrant’s common shares as of July 31, 2009 was 442,798,200.

 

 

PROLOGIS

INDEX

		Page
		Number(s)
PART I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets — June 30, 2009 and December 31, 2008		3
Consolidated Statements of Operations — Three and Six Months Ended June 30, 2009 and 2008		4
Consolidated Statement of Equity and Comprehensive Income (Loss) — Six Months Ended June 30, 2009		5
Consolidated Statements of Cash Flows — Six Months Ended June 30, 2009 and 2008		6
Notes to Consolidated Financial Statements		7
Report of Independent Registered Public Accounting Firm		28
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
Item 3. Quantitative and Qualitative Disclosures About Market Risk		50
Item 4. Controls and Procedures		51
PART II. Other Information
Item 1. Legal Proceedings		52
Item 1A. Risk Factors		52
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		52
Item 3. Defaults Upon Senior Securities		52
Item 4. Submission of Matters to a Vote of Security Holders		53
Item 5. Other Information		53
Item 6. Exhibits		53
EX-12.1
EX-12.2
EX-15.1
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART 1.

Item 1.		Financial Statements

PROLOGIS

CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

		June 30,
		2009				December 31,
		(Unaudited)				2008
ASSETS
Real estate		$	15,471,139			$	15,725,272
Less accumulated depreciation			1,545,883				1,583,299
			13,925,256				14,141,973
Investments in and advances to unconsolidated investees			1,997,597				2,269,993
Cash and cash equivalents			74,183				174,636
Accounts and notes receivable			153,922				244,778
Other assets			1,043,889				1,126,993
Discontinued operations — assets held for sale			—				1,310,754
Total assets		$	17,194,847			$	19,269,127
LIABILITIES AND EQUITY
Liabilities:
Debt		$	7,886,025			$	10,711,368
Accounts payable and accrued expenses			544,846				658,868
Other liabilities			654,342				751,238
Discontinued operations — assets held for sale			—				389,884
Total liabilities			9,085,213				12,511,358
Equity:
ProLogis shareholders’ equity:
Series C Preferred Shares at stated liquidation preference of $50 per share; $0.01 par value; 2,000 shares issued and outstanding at June 30, 2009 and December 31, 2008			100,000				100,000
Series F Preferred Shares at stated liquidation preference of $25 per share; $0.01 par value; 5,000 shares issued and outstanding at June 30, 2009 and December 31, 2008			125,000				125,000
Series G Preferred Shares at stated liquidation preference of $25 per share; $0.01 par value; 5,000 shares issued and outstanding at June 30, 2009 and December 31, 2008			125,000				125,000
Common Shares; $0.01 par value; 442,779 shares issued and outstanding at June 30, 2009 and 267,005 shares issued and outstanding at December 31, 2008			4,428				2,670
Additional paid-in capital			8,193,881				7,070,108
Accumulated other comprehensive loss			(84,055	)			(29,374	)
Distributions in excess of net earnings			(375,783	)			(655,513	)
Total ProLogis shareholders’ equity			8,088,471				6,737,891
Noncontrolling interests			21,163				19,878
Total equity			8,109,634				6,757,769
Total liabilities and equity		$	17,194,847			$	19,269,127

The accompanying notes are an integral part of these Consolidated Financial Statements.

PROLOGIS

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Revenues:
Rental income		$	229,819			$	238,207			$	450,434			$	483,347
Property management and other fees and incentives			31,774				32,580				65,408				62,070
CDFS disposition proceeds:
Developed and repositioned properties			—				1,136,655				180,237				2,400,068
Acquired property portfolios			—				79,843				—				163,175
Development management and other income			1,823				3,361				4,584				10,494
Total revenues			263,416				1,490,646				700,663				3,119,154
Expenses:
Rental expenses			70,716				72,758				139,375				151,280
Investment management expenses			10,819				12,177				21,395				24,962
Cost of CDFS dispositions:
Developed and repositioned properties			—				936,999				—				1,922,432
Acquired property portfolios			—				79,843				—				163,175
General and administrative			41,450				49,004				89,693				93,712
Reduction in workforce			6,868				—				11,330				—
Impairment of real estate properties			84,218				—				84,218				—
Depreciation and amortization			77,973				76,686				153,759				146,813
Other expenses			4,584				4,693				11,003				7,163
Total expenses			296,628				1,232,160				510,773				2,509,537
Operating income (loss)			(33,212	)			258,486				189,890				609,617
Other income (expense):
Earnings from unconsolidated property funds, net			17,398				36,553				19,496				17,986
Earnings from other unconsolidated investees, net			1,342				5,251				3,543				7,221
Interest expense			(83,049	)			(94,835	)			(175,981	)			(190,462	)
Interest and other income, net			859				8,395				4,175				13,128
Net gains on dispositions of real estate properties			7,904				4,664				8,792				4,664
Foreign currency exchange gains (losses), net			(9,025	)			12,949				21,512				(22,904	)
Gain on early extinguishment of debt			143,280				—				161,208				—
Total other income (expense)			78,709				(27,023	)			42,745				(170,367	)
Earnings before income taxes			45,497				231,463				232,635				439,250
Current income tax expense			12,577				12,374				34,766				36,779
Deferred income tax expense (benefit)			(8,771	)			6,197				(15,599	)			8,697
Total income taxes			3,806				18,571				19,167				45,476
Earnings from continuing operations			41,691				212,892				213,468				393,774
Discontinued operations:
Income (loss) attributable to disposed properties, net			6,824				(2,939	)			17,332				3,262
Net gain related to disposed assets — China operations			—				—				3,315				—
Net gains on dispositions:
Non-development properties			185,521				1,856				185,521				5,669
Development properties and land subject to ground leases			11,692				1,994				11,503				2,124
Total discontinued operations			204,037				911				217,671				11,055
Consolidated net earnings			245,728				213,803				431,139				404,829
Net earnings attributable to noncontrolling interests			(494	)			(1,087	)			(804	)			(2,238	)
Net earnings attributable to controlling interests			245,234				212,716				430,335				402,591
Less preferred share dividends			6,369				6,384				12,738				12,738
Net earnings attributable to common shares		$	238,865			$	206,332			$	417,597			$	389,853
Weighted average common shares outstanding — Basic			406,539				262,715				342,183				260,827
Weighted average common shares outstanding — Diluted			409,504				272,317				345,106				270,370
Net earnings per share attributable to common shares — Basic:
Continuing operations		$	0.09			$	0.79			$	0.58			$	1.45
Discontinued operations			0.50				—				0.64				0.04
Net earnings per share attributable to common shares — Basic		$	0.59			$	0.79			$	1.22			$	1.49
Net earnings per share attributable to common shares — Diluted:
Continuing operations		$	0.08			$	0.76			$	0.58			$	1.41
Discontinued operations			0.50				—				0.63				0.04
Net earnings per share attributable to common shares — Diluted		$	0.58			$	0.76			$	1.21			$	1.45
Distributions per common share		$	0.15			$	0.5175			$	0.40			$	1.035

The accompanying notes are an integral part of these Consolidated Financial Statements.

PROLOGIS

CONSOLIDATED STATEMENT OF EQUITY
AND COMPREHENSIVE INCOME (LOSS)
For the Six Months Ended June 30, 2009
(Unaudited)
(In thousands)

						Common Stock												Accumulated				Distributions
						Number								Additional				Other				in Excess of
		Preferred				of								Paid-in				Comprehensive				Net				Noncontrolling
		Stock				Shares				Amount				Capital				Income (Loss)				Earnings				Interests				Total
Balance as of January 1, 2009		$	350,000				267,005			$	2,670			$	7,070,108			$	(29,374	)		$	(655,513	)		$	19,878			$	6,757,769
Consolidated net earnings			—				—				—				—				—				430,335				804				431,139
Foreign currency translation gains (losses), net			—				—				—				—				(67,198	)			—				1,206				(65,992	)
Unrealized gains/amortization on derivative contracts, net			—				—				—				—				12,517				—				—				12,517
Issuances of common shares in Equity Offering			—				174,800				1,748				1,105,272				—				—				—				1,107,020
Issuances of common shares under common share plans			—				974				10				2,522				—				—				—				2,532
Change in receivable from timing differences on equity transactions			—				—				—				(14	)			—				—				—				(14	)
Cost of share-based compensation awards			—				—				—				15,993				—				—				—				15,993
Distributions			—				—				—				—				—				(150,605	)			(725	)			(151,330	)
Balance as of June 30, 2009		$	350,000				442,779			$	4,428			$	8,193,881			$	(84,055	)		$	(375,783	)		$	21,163			$	8,109,634

The accompanying notes are an integral part of these Consolidated Financial Statements.

PROLOGIS

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

		Six Months Ended
		June 30,
		2009				2008
Operating activities:
Net earnings		$	430,335			$	402,591
Adjustments to reconcile net earnings to net cash provided by operating activities:
Noncontrolling interest share in earnings			948				(3,479	)
Straight-lined rents			(19,372	)			(15,900	)
Cost of share-based compensation awards			12,901				17,599
Depreciation and amortization			161,893				162,599
Equity in earnings from unconsolidated investees			(23,841	)			(14,380	)
Changes in operating receivables and distributions from unconsolidated investees			32,286				48,443
Amortization of deferred loan costs			6,249				5,722
Amortization of debt discount, net			35,343				26,982
Impairment of real estate properties			84,218				—
Gains on dispositions of assets included in discontinued operations			(200,339	)			(7,793	)
Gains recognized on disposition of investments in Japan property funds			(180,237	)			—
Gains recognized on property dispositions, net			(8,792	)			(4,664	)
Gain on early extinguishment of debt			(161,208	)			—
Unrealized foreign currency exchange (gains) losses, net			(43,837	)			20,801
Deferred income tax (benefit) expense			(15,611	)			8,736
Decrease (increase) in accounts and notes receivable and other assets			70,492				(29,817	)
Decrease in accounts payable and accrued expenses and other liabilities			(40,470	)			(81,145	)
Net cash provided by operating activities			140,958				536,295
Investing activities:
Real estate investments			(853,039	)			(3,019,054	)
Tenant improvements and lease commissions on previously leased space			(24,533	)			(27,777	)
Non-development capital expenditures			(8,210	)			(13,335	)
Investments in and net advances to unconsolidated investees			(103,833	)			(87,765	)
Proceeds from disposition of investments in Japan property funds			500,000				—
Return of investment from unconsolidated investees			32,119				58,109
Proceeds from dispositions of real estate assets — China operations			845,468				—
Proceeds from dispositions of real estate assets			959,914				2,496,653
Proceeds from repayment of notes receivable			8,222				1,290
Net cash provided by (used in) investing activities			1,356,108				(591,879	)
Financing activities:
Proceeds from sales and issuances of common shares			1,155,536				215,105
Distributions paid on common shares			(133,292	)			(277,583	)
Dividends paid on preferred shares			(12,708	)			(12,738	)
Noncontrolling interest (distributions) contributions, net			(685	)			27,502
Debt and equity issuance costs paid			(47,567	)			(10,990	)
Net (payments on) proceeds from credit facilities			(2,250,295	)			52,607
Repurchase of senior notes			(640,167	)			—
Proceeds from issuance of senior notes, secured and unsecured debt			390,952				1,144,112
Payments on senior notes, secured and unsecured debt and assessment bonds			(56,245	)			(959,185	)
Net cash (used in) provided by financing activities			(1,594,471	)			178,830
Effect of foreign currency exchange rate changes on cash			(3,048	)			690
Net (decrease) increase in cash and cash equivalents			(100,453	)			123,936
Cash and cash equivalents, beginning of period			174,636				399,910
Cash and cash equivalents, end of period		$	74,183			$	523,846

See Note 11 for information on non-cash investing and financing activities and other information.

The accompanying notes are an integral part of these Consolidated Financial Statements.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. General:

Business. ProLogis, collectively with our consolidated subsidiaries (“we”, “our”, “us”, “the Company” or “ProLogis”), is a publicly held real estate investment trust (“REIT”) that owns, operates and develops (directly and through our unconsolidated investees) primarily industrial properties in North America, Europe and Asia. Through 2008, our business consisted of three reportable business segments: (i) direct owned; (ii) investment management; and (iii) CDFS business. Our direct owned segment represents the direct long-term ownership of industrial properties. Our investment management segment represents the long-term investment management of property funds and certain joint ventures and the properties they own. Our CDFS business segment primarily encompassed our development or acquisition of real estate properties that were generally contributed to a property fund in which we had an ownership interest and managed, or sold to third parties. Changes in global economic conditions resulted in changes to our business strategy and, therefore, as of December 31, 2008, our business strategy no longer includes the CDFS business segment. See Note 10 for further discussion of our business segments.

Basis of Presentation. The accompanying consolidated financial statements, presented in the U.S. dollar, are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the financial statements and revenue and expenses during the reporting period. Our actual results could differ from those estimates and assumptions. All material intercompany transactions with consolidated entities have been eliminated.

The accompanying unaudited interim financial information has been prepared according to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with such rules and regulations. Our management believes that the disclosures presented in these financial statements are adequate to make the information presented not misleading. In our opinion, all adjustments and eliminations, consisting only of normal recurring adjustments, necessary to present fairly our financial position as of June 30, 2009, our results of operations for the three and six months ended June 30, 2009 and 2008, and our cash flows for the six months ended June 30, 2009 and 2008 have been included. We have evaluated all subsequent events for adjustment to or disclosure in these financial statements through the issuance of these financial statements on August 4, 2009. The results of operations for such interim periods are not necessarily indicative of the results for the full year. The accompanying unaudited interim financial information should be read in conjunction with our December 31, 2008 Consolidated Financial Statements, as filed with the SEC in our Annual Report on Form 10-K.

Certain amounts included in the accompanying consolidated financial statements for 2008 have been restated due to the required retroactive application of a new accounting standard that we adopted as of January 1, 2009, as further discussed below. In addition, in 2009 we began reporting the direct costs associated with our investment management segment as Investment Management Expenses in our Consolidated Statements of Operations. These costs include the property-level management expenses associated with the properties owned by the unconsolidated investees (previously included in Rental Expenses) and the investment management expenses associated with the asset management of the property funds (previously included in General and Administrative Expenses). Therefore, we have reclassified these expenses in 2008, as well as certain other 2008 amounts, to conform to the 2009 financial statement presentation.

Adoption of New Accounting Pronouncements. On July 1, 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”, also known as FASB Accounting Standards Codification (“ASC”) 105-10, “Generally Accepted Accounting Principles” (“ASC 105-10”) (the “Codification”). ASC 105-10 establishes the exclusive authoritative reference for U.S. GAAP for use in financial statements, except for SEC rules and interpretive releases, which are also authoritative GAAP for SEC registrants. The Codification will supersede all existing non-SEC accounting and reporting standards. We have included the references to the Codification, as appropriate, in these consolidated financial statements.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

We adopted the FASB Staff Position No. FAS 157-2 “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”) also known as ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”) that establishes a framework for measuring fair value of non-financial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis but only in certain circumstances, such as a business combination, as of January 1, 2009. The adoption of ASC 820 did not have a material impact on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141R “Business Combinations” also known as FASB ASC 805 “Business Combinations” (“ASC 805”) and SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51” also known as FASB ASC 810-10 “Consolidation” (“ASC 810-10”). ASC 805 and ASC 810-10 require most identifiable assets, liabilities, noncontrolling interests and goodwill acquired in a business combination to be recorded at “full fair value” and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. ASC 805 applies to business combinations occurring after the effective date, including any that existed at the effective date. ASC 805 broadens the scope of what qualifies as a business combination to include the acquisition of an operating property by us and our unconsolidated investees. Transaction costs related to the acquisition of a business that were previously capitalized are expensed under ASC 805. The transaction costs related to the acquisition of land and equity method investments continue to be capitalized. ASC 805 requires subsequent adjustments of tax uncertainties that occur after the purchase price allocation period to be recognized in earnings. Previously, these adjustments were recognized in the purchase price as an adjustment to goodwill. The initial adoption of ASC 805, as of January 1, 2009, did not have a material impact on our financial position or results of operations. The adoption of ASC 810-10, as of January 1, 2009 changed the classification and reporting of our noncontrolling interests (previously referred to as minority interests). The provisions of both ASC 805 and ASC 810-10 may have a more significant impact on our consolidated financial statements in the future depending on our acquisition activity and any potential changes to our tax uncertainties.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” also known as FASB ASC 815-10-65 “Derivatives and Hedging” (“ASC 815-10-65”). ASC 815-10-65 requires enhanced disclosures related to derivative instruments and hedging activities. ASC 815-10-65 requires disclosures relating to: (i) how and why an entity uses derivative instruments; (ii) how derivative instruments and related hedge items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” also known as FASB ASC 815 Derivatives and Hedging”; and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. We adopted the provisions of ASC 815-10-65 to be applied prospectively on January 1, 2009. As the standard only requires enhanced disclosures, the adoption of ASC 815-10-65 did not have a significant impact on our consolidated financial statements.

In May 2008, the FASB issued FASB Staff Position APB 14-1 “Accounting for Convertible Debt Instruments that May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)” also known as FASB ASC 470-20 “Debt with Conversion and Other Options” (“ASC 470-20”), that requires separate accounting for the debt and equity components of convertible debt. The value assigned to the debt component is the estimated fair value at the date of issuance of a similar bond without the conversion feature, which results in the debt being recorded at a discount. The resulting debt discount is amortized over the estimated remaining life of the debt (the first cash redemption date in 2012 and 2013 for our outstanding convertible notes) as additional non-cash interest expense. We adopted ASC 470-20 on January 1, 2009 on a retroactive basis to the convertible notes we issued in 2007 and 2008. As a result, we restated 2008 amounts to reflect the adjustments to debt and equity, as well as the additional interest expense. This restatement also impacted the interest we would have capitalized related to our development activities for both properties we currently own, as well as properties that were contributed or sold during the periods the convertible notes were outstanding.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following tables illustrate the impact of ASC 470-20 on our Consolidated Balance Sheet and Consolidated Statement of Operations for these periods (in thousands):

		As of December 31, 2008
						ASC 470-20
		As Reported				adjustments				As Restated
Consolidated Balance Sheet:
Real estate		$	15,706,172			$	19,100			$	15,725,272
Other assets		$	1,129,182			$	(2,189	)		$	1,126,993
Debt		$	11,007,636			$	(296,268	)		$	10,711,368
Additional paid — in capital		$	6,688,615			$	381,493			$	7,070,108
Distributions in excess of net earnings		$	(587,199	)		$	(68,314	)		$	(655,513	)

		For the Three Months Ended June 30, 2008
						ASC 470-20
		As Reported				adjustments				As Restated
										(before 2009 discontinued
										operations adjustment)
Consolidated Statement of Operations:
Total cost of CDFS dispositions		$	1,016,453			$	389			$	1,016,842
Interest expense		$	84,136			$	10,671			$	94,807
Net earnings attributable to controlling interests		$	223,776			$	(11,060	)		$	212,716
Net earnings per share attributable to common shares — Basic		$	0.83			$	(0.04	)		$	0.79
Net earnings per share attributable to common shares — Diluted		$	0.80			$	(0.04	)		$	0.76

		For the Six Months Ended June 30, 2008
						ASC 470-20
		As Reported				adjustments				As Restated
										(before 2009 discontinued
										operations adjustment)
Consolidated Statement of Operations:
Total cost of CDFS dispositions		$	2,085,092			$	515			$	2,085,607
Interest expense		$	169,260			$	21,029			$	190,289
Net earnings attributable to controlling interests		$	424,135			$	(21,544	)		$	402,591
Net earnings per share attributable to common shares — Basic		$	1.58			$	(0.09	)		$	1.49
Net earnings per share attributable to common shares — Diluted		$	1.53			$	(0.08	)		$	1.45

See Note 6 for additional information on our convertible notes.

In April 2009, the FASB issued Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”, also known as FASB ASC 825-10 “Financial Instruments” (“ASC 825-10”). ASC 825-10 amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments” to require disclosures about fair value of financial instruments in interim reporting periods. These disclosures were previously only required in annual financial statements. The adoption of ASC 825-10 for the quarter-ended June 30, 2009 did not have a material impact on our consolidated financial statements as this only requires additional disclosures.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events”, also known as FASB ASC 855-10 “Subsequent Events” (“ASC 855-10”), which is effective for interim and annual periods ending after June 15, 2009. ASC 855-10 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855-10 did not have a material impact on our consolidated financial statements.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”), which will be effective for us on January 1, 2010. SFAS 167 is a revision to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, and changes how a reporting entity evaluates whether an entity is considered the primary beneficiary of a variable interest entity (“VIE”) and is therefore required to consolidate such VIE. SFAS 167 will also require assessments at each reporting period of which party within the VIE is considered the primary beneficiary and will require a number of new disclosures related to VIE’s. We are currently evaluating the impact that SFAS 167 will have on our financial position and results of operations upon adoption.

2. Sale of China Operations and Property Fund Interest in Japan

On February 9, 2009, we sold our operations in China and our property fund interests in Japan to affiliates of GIC Real Estate, the real estate investment company of the Government of Singapore Investment Corporation (“GIC RE”), for total cash consideration of $1.3 billion ($845.5 million related to China and $500.0 million related to the Japan investments). We used these proceeds primarily to pay down borrowings on our credit facilities.

All of the assets and liabilities associated with our China operations were classified as Discontinued Operations — Assets and Liabilities Held for Sale in our accompanying Consolidated Balance Sheet as of December 31, 2008, at which time we recognized an impairment of $198.2 million based on the carrying values of these assets and liabilities, as compared with the estimated sales proceeds less costs to sell. In connection with the sale in the first quarter of 2009, we recognized a $3.3 million gain. The results of our China operations are presented as discontinued operations in our accompanying Consolidated Statements of Operations for all periods.

In connection with the sale of our investments in the Japan property funds, we recognized a net gain of $180.2 million. The gain is reflected as CDFS Proceeds in our Consolidated Statements of Operations, as it represents the recognition of previously deferred gains on the contribution of properties to these property funds based on our ownership interest in the property funds at the time of original contribution. We also recognized $20.5 million in current income tax expense related to a portion of the transaction.

In addition, as part of this transaction, we entered into an agreement to sell one property in Japan to GIC RE. Therefore, this property was classified as held for sale as of December 31, 2008, along with borrowings of $108.6 million under our credit facilities, and its operations have been included in discontinued operations for all periods presented in our accompanying Consolidated Statements of Operations. In April 2009, we sold the Japan property for proceeds of $128.1 million, resulting in a gain of $13.1 million. See Note 5 for detail of all amounts included in discontinued operations.

3. Real Estate:

Real estate assets are presented at cost, and consist of the following (in thousands):

		June 30,				December 31,
		2009				2008
Industrial properties (1):
Improved land		$	2,575,272			$	2,413,840
Buildings and improvements			8,844,911				8,542,116
Retail and mixed use properties (2):
Improved land			83,401				81,117
Buildings and improvements			303,539				277,875
Properties under development, including cost of land (3)			281,007				1,181,344
Land held for development (4)			2,710,867				2,482,582
Land subject to ground leases and other			416,028				425,001
Other investments (5)			256,114				321,397
Total real estate assets			15,471,139				15,725,272
Less accumulated depreciation			1,545,883				1,583,299
Net real estate assets		$	13,925,256			$	14,141,973

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

At June 30, 2009, we owned real estate assets in North America (Canada, Mexico and the United States), Europe (Austria, Belgium, the Czech Republic, France, Germany, Hungary, Italy, the Netherlands, Poland, Romania, Slovakia, Spain, Sweden, and the United Kingdom) and Asia (Japan and South Korea).

During the six months ended June 30, 2009, we recognized net gains of $8.8 million related to the sale of land parcels ($1.7 million gain), the contribution of properties ($1.3 million loss) and the recognition of previously deferred gains from ProLogis European Properties (“PEPR”) and ProLogis Korea Fund on properties they sold to third parties ($8.4 million in gains). This activity includes the contribution of 20 development properties aggregating 4.1 million square feet to ProLogis European Properties Fund II (“PEPF II”) for total cash proceeds of $280.6 million. If we realize a gain on contribution of a property, we recognize the portion attributable to the third party ownership in the property fund until the property is sold to a third party. If we realize a loss on contribution, we recognize the full amount of the impairment as soon as it is known. Due to our continuing involvement through our ownership in the property fund, these dispositions are not included in discontinued operations. As discussed earlier, in 2008, contribution activity was reported as CDFS Proceeds and Cost of CDFS Dispositions within our CDFS business segment. See Note 5 for further discussion of properties we sold to third parties that are reported in discontinued operations.

During the second quarter of 2009, we recorded impairment charges of $84.2 million related primarily to completed development properties in Europe and Mexico that we expect to contribute to the unconsolidated property funds. The charges represent the difference between the estimated proceeds from disposition and our cost basis at the time of contribution and are due to our current intent to contribute these properties. We estimated the proceeds from contribution of these properties based on the future net rental income of the property and the expected market capitalization rates or on third party appraisals. In the case of properties to be contributed to PEPF II, we further adjusted the capitalization rates based on our contribution agreement with PEPF II, which was modified during the fourth quarter of 2008. To determine the contribution value for 2009 contributions, after the capitalization rate is determined based on a third party appraisal, a margin of 0.25 to 0.75 percentage points is added depending on the quarter contributed. This modification was made due to the belief that appraisals were lagging true market conditions. The agreement provides for an adjustment in our favor if the appraised values at the end of 2010 are higher than those used to determine contribution values. These properties do not meet the criteria to be classified as Held for Sale at June 30, 2009.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The estimate of proceeds from disposition is based on assumptions that are consistent with our estimates of future expectations and the strategic plan we use to manage our underlying business and represents primarily Level 3 input, as discussed in Note 9. However assumptions and estimates about future rental income, market capitalization rates and the timing of the contribution are complex and subjective. Changes in economic and operating conditions and our ultimate investment intent that may occur in the future could impact these assumptions and result in additional impairment charges of these or other real estate properties.

4. Unconsolidated Investees:

Summary of Investments

Our investments in and advances to unconsolidated investees, which are accounted for under the equity method, are summarized by type of investee as follows (in thousands):

		June 30,				December 31,
		2009				2008
Property funds		$	1,670,608			$	1,957,977
Other investees			326,989				312,016
Totals		$	1,997,597			$	2,269,993

Property Funds

We have investments in several property funds that own portfolios of operating industrial properties. Many of these properties were originally developed by ProLogis and contributed to these property funds, although certain of the property funds have also acquired properties from third parties. When we contribute a property to a property fund, we may receive ownership interests as part of the proceeds generated by the contribution. We earn fees for acting as manager of the property funds and the properties they own. We may earn additional fees by providing other services including, but not limited to, acquisition, development, construction management, leasing and financing activities. We may also earn incentive performance returns based on the investors’ returns over a specified period.

Summarized information regarding our proportionate share of net earnings or loss and fees and incentives related to our investments in property funds is as follows (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Earnings (loss) from unconsolidated property funds:
North America		$	9,495			$	10,859			$	953			$	(6,236	)
Europe			7,201				5,940				15,075				9,730
Asia			702				19,754				3,468				14,492
Total earnings from unconsolidated property funds		$	17,398			$	36,553			$	19,496			$	17,986
Property management and other fees and incentives:
North America		$	15,325			$	15,523			$	30,795			$	29,311
Europe			12,282				12,878				24,732				24,776
Asia			332				4,179				2,175				7,983
Total property management and other fees and incentives		$	27,939			$	32,580			$	57,702			$	62,070

We also earned property management fees from joint ventures and other entities of $3.8 million and $7.7 million during the three and six months ended June 30, 2009, respectively. This includes fees earned from the Japan property funds after February 2009, which is the date we sold our investments in the funds.

Information about our investments in the property funds is as follows (dollars in thousands):

		Ownership Percentage								Investment in and Advances to
		June 30,				December 31,				June 30,				December 31,
Property Fund		2009				2008				2009				2008
ProLogis California			50.0	%			50.0	%		$	110,086			$	102,685
ProLogis North American Properties Fund I			41.3	%			41.3	%			23,625				25,018
ProLogis North American Properties Fund VI			20.0	%			20.0	%			34,760				35,659
ProLogis North American Properties Fund VII			20.0	%			20.0	%			32,556				32,679
ProLogis North American Properties Fund VIII			20.0	%			20.0	%			12,868				13,281
ProLogis North American Properties Fund IX			20.0	%			20.0	%			13,036				13,375
ProLogis North American Properties Fund X			20.0	%			20.0	%			15,231				15,567
ProLogis North American Properties Fund XI			20.0	%			20.0	%			30,123				28,322
ProLogis North American Industrial Fund			23.0	%			23.1	%			192,398				191,088
ProLogis North American Industrial Fund II (1)			36.9	%			36.9	%			263,796				265,575
ProLogis North American Industrial Fund III			20.0	%			20.0	%			144,968				122,148
ProLogis Mexico Industrial Fund			24.2	%			24.2	%			91,191				96,320
ProLogis European Properties (“PEPR”)			24.8	%			24.9	%			312,711				321,984
ProLogis European Properties Fund II (“PEPF II”) (2)			33.3	%			36.9	%			372,056				312,600
ProLogis Korea Fund			20.0	%			20.0	%			21,203				21,867
ProLogis Japan Property Funds (3)			—				20.0	%			—				359,809
Totals										$	1,670,608			$	1,957,977

Several property funds have equity commitments from us and our fund partners. We may fulfill our equity commitment through property fund contributions or cash. Our fund partners fulfill the commitment with cash. To the extent a property fund acquires properties from a third party or requires cash to pay-off debt or has other cash needs, we may be required or agree to contribute our proportionate share of the equity component in cash to the property fund. During the six months ended June 30, 2009, we made a cash contribution of $64.6 million (in respect of our 20% ownership interest that we acquired from PEPR in December 2008) in connection with the contribution of 20 properties to PEPF II and $5.2 million for the repayment of debt by ProLogis North American Industrial Fund. In addition, during the second quarter, we made a cash capital contribution of $2.9 million to ProLogis North American Properties Fund XI for the repayment of debt.

Summarized financial information of the property funds (for the entire entity, not our proportionate share) and our investment in such funds is presented below (dollars in millions):

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

		2009
		North
		America				Europe				Asia				Total
For the three months ended June 30, 2009:
Revenues		$	217.7			$	177.9			$	2.7			$	398.3
Net earnings (1)(2)		$	13.4			$	17.9			$	3.5			$	34.8
For the six months ended June 30, 2009:
Revenues		$	436.5			$	344.5			$	35.6			$	816.6
Net earnings (loss) (1)(2)		$	(18.7	)		$	36.7			$	14.5			$	32.5
As of June 30, 2009:
Total assets		$	9,888.5			$	8,530.7			$	145.1			$	18,564.3
Amounts due to us (3)		$	49.4			$	24.9			$	0.2			$	74.5
Third party debt (4)		$	5,618.5			$	4,141.5			$	43.7			$	9,803.7
Total liabilities		$	5,917.8			$	4,996.6			$	48.1			$	10,962.5
Noncontrolling interest		$	1.4			$	13.9			$	—			$	15.3
Fund partners’ equity		$	3,969.3			$	3,520.2			$	97.1			$	7,586.6
Our weighted average ownership (5)			27.5	%			28.9	%			20.0	%			28.1	%
Our investment balance (1)(6)		$	964.6			$	684.8			$	21.2			$	1,670.6
Deferred gains, net of amortization (7)		$	244.0			$	295.2			$	—			$	539.2

		2008
		North
		America				Europe				Asia				Total
For the three months ended June 30, 2008:
Revenues		$	206.2			$	166.1			$	70.1			$	442.4
Net earnings (1)		$	17.8			$	21.1			$	92.6			$	131.5
For the six months ended June 30, 2008:
Revenues		$	406.2			$	308.6			$	135.2			$	850.0
Net earnings (loss) (1)		$	(41.5	)		$	27.2			$	59.9			$	45.6
As of December 31, 2008:
Total assets		$	9,979.2			$	8,982.9			$	5,821.6			$	24,783.7
Amounts due to us		$	30.2			$	22.4			$	147.4			$	200.0
Third party debt (4)		$	5,726.0			$	4,829.9			$	2,906.5			$	13,462.4
Total liabilities		$	5,985.4			$	5,581.1			$	3,855.1			$	15,421.6
Noncontrolling interest		$	10.7			$	19.8			$	—			$	30.5
Fund partners’ equity		$	3,983.1			$	3,382.0			$	1,966.5			$	9,331.6
Our weighted average ownership (5)			27.5	%			30.2	%			20.0	%			26.9	%
Our investment balance (1)(6)		$	941.7			$	634.6			$	381.7			$	1,958.0
Deferred gains, net of amortization (7)		$	246.7			$	299.0			$	163.3			$	709.0

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
North America property funds		$	13,343			$	17,976			$	(13,045	)		$	(40,175	)
Japan property funds			—				71,747				—				20,063
Total gain (loss) related to derivative activity		$	13,343			$	89,723			$	(13,045	)		$	(20,112	)
Our proportionate share of earnings (loss) from unconsolidated property funds derivative activity		$	4,920			$	20,977			$	(4,810	)		$	(10,642	)

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Other unconsolidated investees

At June 30, 2009, we had investments in entities that develop and own industrial and retail properties, perform land and mixed-use development activity, own a hotel and own office properties. The amounts we have recognized as our proportionate share of the earnings (loss) from our investments in these investees are summarized as follows (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
North America		$	604			$	5,624			$	2,588			$	7,888
Europe			738				(373	)			955				(667	)
Total earnings from other unconsolidated investees		$	1,342			$	5,251			$	3,543			$	7,221

     Our investments in and advances to these entities are as follows (in thousands):

		June 30,				December 31,
		2009				2008
North America		$	148,648			$	150,963
Europe (1)			178,341				161,053
Total		$	326,989			$	312,016

5. Assets Held for Sale and Discontinued Operations:

The operations of the properties held for sale or disposed of to third parties and the aggregate net gains recognized upon their disposition are presented as discontinued operations in our Consolidated Statements of Operations for all periods presented, unless the property was developed under a pre-sale agreement. Interest expense is included in discontinued operations only if it is directly attributable to these operations or properties.

As discussed in Note 2, all of the assets and liabilities associated with our China operations were classified as held for sale in our accompanying Consolidated Balance Sheet as of December 31, 2008, as well as one property in Japan that we sold to GIC RE in April 2009.

During the first six months of 2009, other than our China operations, we disposed of 125 properties to third parties aggregating 13.1 million square feet, 3 of which were development properties. This includes a portfolio of 90 properties that were sold to a single venture and we will continue to act as property manager for the venture. During all of 2008, we disposed of 15 properties to third parties, 6 of which were development properties, as well as land subject to ground leases.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The income (loss) attributable to discontinued operations is summarized as follows (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Revenues:
Rental revenue		$	13,101			$	24,294			$	36,021			$	48,630
Other income			—				13				93				37
Total revenues			13,101				24,307				36,114				48,667
Expenses:
Rental expenses			3,269				7,760				9,979				14,762
General and administrative			—				3,818				1,305				8,624
Depreciation and amortization			3,008				8,335				8,134				15,786
Other expenses			—				940				6				940
Total expenses			6,277				20,853				19,424				40,112
Operating income			6,824				3,454				16,690				8,555
Total other income, (expense) net			—				(12,065	)			786				(11,010	)
Noncontrolling interest share in (earnings) loss			—				5,672				(144	)			5,717
Income (loss) attributable to assets held for sale and disposed properties			6,824				(2,939	)			17,332				3,262
Net gain related to disposed assets— China operations			—				—				3,315				—
Net gains recognized on property dispositions			197,213				3,850				197,024				7,793
Total discontinued operations		$	204,037			$	911			$	217,671			$	11,055

The following information relates to properties disposed of during the periods presented and recorded as discontinued operations, excluding the China operations and including minor adjustments to previous dispositions (dollars in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Number of properties			125				2				125				5
Net proceeds from dispositions		$	666,806			$	29,390			$	666,806			$	66,500
Net gains from dispositions		$	197,213			$	3,850			$	197,024			$	7,793

6. Debt:

Our debt consisted of the following (dollars in thousands):

		June 30, 2009								December 31, 2008
		Weighted								Weighted
		Average				Amount				Average				Amount
		Interest Rate				Outstanding				Interest Rate				Outstanding
Global Line			0.88	%		$	247,397				2.38	%		$	2,617,764
Credit Facility			1.28	%			606,864				2.81	%			600,519
Senior and other notes			5.54	%			3,601,639				5.60	%			3,995,410
Convertible senior notes (1)			5.55	%			2,164,500				5.56	%			2,590,133
Secured debt			6.83	%			1,238,488				6.79	%			877,916
Assessment bonds			6.52	%			27,137				6.55	%			29,626
Totals			5.28	%		$	7,886,025				4.75	%		$	10,711,368

As of June 30, 2009, we were in compliance with all of our debt covenants.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

During 2009, in connection with our announced initiatives to reduce debt, we repurchased several series of notes outstanding at a discount, as follows (in thousands):

		For the Three Months Ended				For the Six Months Ended
		June 30, 2009				June 30, 2009
Convertible Notes
Original principal amount		$	473,057			$	521,257
Cash purchase price		$	313,256			$	338,077
Senior Notes (1)
Original principal amount		$	343,192			$	343,192
Cash purchase price		$	302,090			$	302,090
Total
Original principal amount		$	816,249			$	864,449
Cash purchase price		$	615,346			$	640,167
Gain on Early Extinguishment of Debt (2)		$	143,280			$	161,208

Unsecured Credit Facilities

At June 30, 2009, our credit facilities provided aggregate borrowing capacity of $4.3 billion. This includes our global line of credit, where a syndicate of banks allows us to draw funds in U.S. dollar, euro, Japanese yen, British pound sterling, South Korean won and Canadian dollar (“Global Line”). This also includes a multi-currency credit facility that allows us to borrow in U.S. dollar, euro, Japanese yen, and British pound sterling (“Credit Facility”) and a 13.4 million British pound sterling facility (“Sterling Facility”). The total commitments under our credit facilities fluctuate in U.S. dollars based on the underlying currencies. Based on our public debt ratings, interest on the borrowings under the Global Line and Credit Facility primarily accrues at a variable rate based upon the interbank offered rate in each respective jurisdiction in which the borrowings are outstanding (1.16% per annum at June 30, 2009 based on a weighted average using local currency rates).

The Global Line was scheduled to mature in October 2009. In July 2009, we exercised our option to extend the maturity to October 2010. We are currently in discussions with the lead banks to amend the Global Line with an overall commitment of $2.1 to $2.3 billion and extend the maturity to 2012.

The Credit Facility matures in October 2009 and we have a similar option to extend the maturity to October 2010, subject to certain customary conditions and the payment of an extension fee. The Credit Facility provides us the ability to re-borrow, within a specified period of time, any amounts repaid on the facility. We expect we will repay the Credit Facility with borrowings under the Global Line once it has been amended and extended or we may extend the Credit Facility.

During the first quarter of 2009, we reduced the commitment of the Sterling Facility, which matures December 31, 2009, to the balance of the outstanding letters of credit.

As of June 30, 2009, under these facilities, we had outstanding borrowings of $854.3 million and letters of credit of $127.7 million, resulting in remaining borrowing capacity of approximately $3.3 billion, which we expect to be reduced as discussed above.

Convertible Notes

We issued three series of convertible senior notes in 2007 and 2008 and refer to them in the aggregate as “Convertible Notes”. The Convertible Notes are senior obligations of ProLogis and are convertible, under certain

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

circumstances, for cash, our common shares or a combination of cash and our common shares, at our option, at a conversion rate per $1,000 of principal amount of the notes of 13.1614 shares for the March 2007 issuance, 12.2926 shares for the November 2007 issuance and 13.1203 shares for the May 2008 issuance. The initial conversion price ($76.58 for the March 2007 issuance, $82.00 for the November 2007 issuance and $76.22 for the May 2008 issuance) represented a premium of approximately 20% over the closing price of our common shares at the date of first sale and is subject to adjustment under certain circumstances. The Convertible Notes, issued in 2007 and 2008, are redeemable at our option beginning in 2012 and 2013, respectively, for the principal amount plus accrued and unpaid interest and at any time prior to maturity to the extent necessary to preserve our status as a REIT. Holders of the Convertible Notes have the right to require us to repurchase their Convertible Notes for cash on specific dates approximately every five years beginning in 2012 and 2013 and at any time prior to their maturity upon certain limited circumstances. Therefore, we have reflected these amounts in 2012 and 2013 in the schedule of debt maturities below based on the first redemption date and we will amortize the discount through these dates.

While we have the legal right to settle the conversion in either cash or shares, we intend to settle the principal balance of the Convertible Notes in cash and, therefore, we have not included the effect of the conversion of these notes in our computation of diluted earnings per share. Based on the current conversion rates, 30.8 million shares would be required to settle the principal amount in shares. Such potentially dilutive shares, and the corresponding adjustment to interest expense, are not included in our computation of diluted earnings per share. The amount in excess of the principal balance of the notes (the “Conversion Spread”) will be settled in cash or, at our option, ProLogis common shares. If the Conversion Spread becomes dilutive to our earnings per share, (i.e., if our share price exceeds $75.98 for the March 2007 issuance, $81.35 for the November 2007 issuance and $76.22 for the May 2008 issuance) we will include the shares in our computation of diluted earnings per share.

After the adoption of ASC 470-20, as discussed in Note 1, below is the detail related to the Convertible Notes (in thousands):

		June 30, 2009				December 31, 2008
Principal amount		$	2,399,243			$	2,920,500
Discount			(234,743	)			(330,367	)
Net carrying balance		$	2,164,500			$	2,590,133
Additional paid-in capital — conversion option		$	381,493			$	381,493

Interest expense related to the Convertible Notes includes the following components (in thousands):

		For the Three Months Ended June 30,								For the Six Months Ended June 30,
		2009				2008				2009				2008
Coupon rate		$	14,156			$	14,351			$	30,049			$	26,634
Amortization of discount			17,978				18,006				38,161				33,837
Amortization of deferred loan costs			833				843				1,815				1,493
Interest expense		$	32,967			$	33,200			$	70,025			$	61,964
Effective interest rate			5.54	%			5.83	%			5.55	%			5.46	%