ProLogis Reports Second Quarter Results

- Total Operating Portfolio Leasing Improves Driven by Development Portfolio -

- Build-to-Suit Development and Land Monetization Ahead of Plan -

- Company Reiterates Full-year Guidance -

News provided by

ProLogis

Jul 22, 2010, 08:00 ET

DENVER, July 22 /PRNewswire-FirstCall/ -- ProLogis (NYSE: PLD), a leading global provider of distribution facilities, today reported second quarter 2010 funds from operations as defined by ProLogis (FFO), excluding significant non-cash items, of $0.15 per diluted share. Of this amount, approximately $0.02 related to gains on contributions and $0.13 per diluted share was from core operations.  FFO, including significant non-cash items of $0.01, was $0.14 per diluted share.

For the six months ended June 30, 2010, FFO, excluding significant non-cash items and first quarter non-recurring charges, was $0.28 per diluted share, relative to the company’s full-year 2010 guidance of $0.70 - $0.78 per diluted share.  Core FFO for the first half was $0.24 relative to the company’s full-year guidance of $0.55 - $0.60 per diluted share.  

The company reported a net loss of $0.05 per diluted share for the second quarter of 2010 and a net loss of $0.24 per diluted share for the six months ended June 30, 2010.

Industrial Fundamentals Remain Mixed

“Economic growth forecasts have been tempered in recent weeks, and for the most part, industrial market conditions are tracking with the expectations of a more moderate pace of recovery,” said Walter C. Rakowich, chief executive officer. “Despite these indications of slower growth, we are seeing steady activity levels with modest occupancy increases in some markets and believe rental rates have bottomed in the majority of them. For the first time since October 2007, we saw positive net absorption in the top 31 North American industrial markets of approximately 11 million square feet.  In addition, customers remain focused on improving supply chain efficiencies, and with limited new supply, those with targeted requirements are increasingly pursuing build-to-suits.”

For the quarter, the company’s total industrial operating portfolio (including completed development) was 89.7 percent leased, up from 89.2 percent in the first quarter of 2010, principally driven by a 480 basis point increase in completed development leasing. Total leasing activity was 28.3 million square feet in the second quarter of 2010, in line with average leasing over the past year of 29.4 million square feet per quarter.  

Customer retention during the quarter remained strong at 78.1 percent in the company’s direct owned portfolio and 81.8 percent within its property funds.  In addition, more than 76 percent of the company’s new development portfolio leases were signed with repeat customers, including Emerson Electric in North America, SONY in Europe and Hitachi Transport System in Asia.

Rental rates on turnovers in the same-store portfolio declined 15.7 percent in the second quarter, with less than three percent of the transactions representing 420 basis points of the decline and the remaining  97 percent of the transactions having a weighted average rental rate decline of 11.5 percent.  Occupancy in the same-store portfolio increased by 1.8 percent, while same-store net operating income declined 3.4 percent.

“We are encouraged by our increased occupancy levels and the activity we see in our markets; however, we expect rent growth comparisons to remain negative over the coming quarters, driven by turnover of leases that were put in place at or near peak rental rates,” Rakowich added.

Steady Demand for New Development

“We continued to see steady demand for new development during the quarter and made significant progress toward our goals of starting $700 to $800 million of development and monetizing $350 to $400 million of land this year,” said Ted R. Antenucci, president and chief investment officer. “During the quarter, we started $196 million of new development, which when combined with two additional build-to-suit agreements signed early in the third quarter, brings the company’s year-to-date total development starts to more than $470 million. With the addition of year-to-date third-party land sales, these activities monetize approximately $184 million of land.”

Further Improvements in Valuations Support Disposition Goal

“Valuations have continued to improve, driven by significant institutional investor demand and a favorable interest rate environment. These factors support some of the most attractive investment spreads in recent years,” Rakowich said. “We are in discussions on transactions that support our goal of $1.3 to $1.5 billion of gross proceeds from contributions and dispositions. We believe this is an excellent time to pursue our objective of selling primarily non-strategic U.S. properties, enabling us to focus on industrial real estate while enhancing the geographic diversification of our direct owned portfolio. We intend to utilize the proceeds principally to de-lever and match our development funding requirements later this year and into 2011.”  

No Changes to Guidance

“Our guidance for 2010 remains unchanged, with a continued expectation of improving net operating income from our core development portfolio in addition to greater development management fees and gains to be recognized in the second half of the year.  We intend to continue to pursue sales of land and non-strategic operating properties, which may create additional impairments in the second half of the year and into 2011.  Consistent with our definitions of core FFO and FFO, excluding significant non-cash items, our guidance does not include the impact from any potential impairments,” said William E. Sullivan, chief financial officer.

Additional Information

Copies of ProLogis’ second quarter 2010 supplemental information are available from the company’s website at http://ir.prologis.com in the “Annual & Supplemental Reports” section. The company will host a webcast/conference call on Thursday, July 22, 2010, at 10:00 a.m. Eastern Time.  The live webcast as well as the subsequent replay, including in a podcast format, will be available from the company’s website at http://ir.prologis.com.  

About ProLogis

ProLogis is a leading global provider of distribution facilities, with more than 475 million square feet of industrial space owned and managed (44 million square meters) in markets across North America, Europe and Asia. The company leases its industrial facilities to more than 4,400 customers, including manufacturers, retailers, transportation companies, third-party logistics providers and other enterprises with large-scale distribution needs. For additional information about the company, go to www.prologis.com.

Follow ProLogis on Twitter: http://twitter.com/ProLogis

The statements above that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  These forward-looking statements are based on current expectations, estimates and projections about the industry and markets in which ProLogis operates, management’s beliefs and assumptions made by management, they involve uncertainties that could significantly impact ProLogis’ financial results.  Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements, which generally are not historical in nature.  All statements that address operating performance, events or developments that we expect or anticipate will occur in the future – including statements relating to rent and occupancy growth, development activity and changes in sales or contribution volume of developed properties, general conditions in the geographic areas where we operate and the availability of capital in existing or new property funds – are forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict.  Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be attained and therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Some of the factors that may affect outcomes and results include, but are not limited to: (i) national, international, regional and local economic climates, (ii) changes in financial markets, interest rates and foreign currency exchange rates, (iii) increased or unanticipated competition for our properties, (iv) risks associated with acquisitions, (v) maintenance of real estate investment trust (“REIT”) status, (vi) availability of financing and capital, (vii) changes in demand for developed properties, and (viii) those additional factors discussed in reports filed with the Securities and Exchange Commission by ProLogis under the heading “Risk Factors.”  ProLogis undertakes no duty to update any forward-looking statements appearing in this press release.

Overview

(in thousands, except per share amounts)





Summary of Results




Three Months Ended

Six Months Ended




June 30,

June 30,


2010 

2009

2010 

2009

Revenues

$

260,731

$

258,479

$

520,697

$

691,203

Net earnings (loss) (a)

$

(23,150)

$

238,865

$

(114,279)

$

417,597

Net earnings (loss) per share - Diluted  (a)

$

(0.05)

$

0.58

$

(0.24)

$

1.21

FFO, including significant non-cash items  (a)

$

67,844

$

137,194

$

74,961

$

379,459

Add (deduct) significant non-cash items :













Impairment of real estate properties


367

84,218

367

84,218



Net gain related to disposed assets - China operations


-

-

-

(3,315)



Losses (gains) on early extinguishment of debt

(975)

(143,280)

14,258

(161,208)



Write-off deferred extension fees associated with the Global Line

854

-

854

-



Our share of certain losses recognized by the property funds

3,000

-

3,575

11,283



Total adjustments for significant non-cash items

3,246

(59,062)

19,054

(69,022)

FFO, excluding significant non-cash items (a)

$

71,090

$

78,132

$

94,015

$

310,437

FFO per share - Diluted, including significant non-cash items  (a)

$

0.14

$

0.34

$

0.16

$

1.10

Add (deduct) - summarized significant non-cash adjustments - per share

0.01

(0.15)

0.04

(0.20)

FFO per share - Diluted, excluding significant non-cash items (a)

$

0.15

$

0.19

$

0.20

$

0.90















(a) These amounts are attributable to common shares.

Footnotes follow Financial Statements

Consolidated Balance Sheets

(in thousands, except per share data)






June 30,

December 31,






2010

2009











Assets:






Investments in real estate assets:







Industrial properties:








Core

$

7,486,076

$

7,436,539



Core - completed development

4,002,407

4,108,962



Properties under development

199,434

191,127


Land held for development



2,282,223

2,569,343


Retail and mixed use properties

303,428

302,838


Land subject to ground leases and other

430,349

373,422


Other investments



249,643

233,665







14,953,560

15,215,896


Less accumulated depreciation

1,801,602

1,671,100















Net investments in real estate assets

13,151,958

13,544,796

Investments in and advances to unconsolidated investees:







Property funds



1,776,646

1,876,650


Other unconsolidated investees

280,166

275,073




Total investments in and advances to unconsolidated investees

2,056,812

2,151,723

Cash and cash equivalents

25,102

34,362

Accounts and notes receivable

153,193

136,754

Other assets



1,011,414

1,017,780




Total assets

$

16,398,479

$

16,885,415











Liabilities and Equity:






Liabilities:







Debt (1)

$

8,176,178

$

7,977,778


Accounts payable and accrued expenses

397,685

455,919


Other liabilities

465,250

444,432




Total liabilities

9,039,113

8,878,129












Equity:







ProLogis shareholders' equity:








Series C preferred shares at stated liquidation preference of $50 per share

100,000

100,000



Series F preferred shares at stated liquidation preference of $25 per share

125,000

125,000



Series G preferred shares at stated liquidation preference of $25 per share

125,000

125,000



Common shares at $.01 par value per share

4,767

4,742



Additional paid-in capital



8,566,388

8,524,867



Accumulated other comprehensive income (loss) (2)

(386,546)

42,298



Distributions in excess of net earnings

(1,192,677)

(934,583)




Total ProLogis shareholders' equity

7,341,932

7,987,324


Noncontrolling interests



17,434

19,962




Total equity

7,359,366

8,007,286




Total liabilities and equity

$

16,398,479

$

16,885,415

Footnotes follow Financial Statements

Consolidated Statements of Operations

(in thousands, except per share amounts)





Three Months Ended

Six Months Ended





June 30,

June 30,





2010 

2009

2010 

2009

Revenues:










Rental income (3)

$

229,790

$

224,882

$

460,018

$

440,974


Property management and other fees and incentives


28,307

31,774

56,969

65,408


CDFS disposition proceeds (4)

-

-

-

180,237


Development management and other income

2,634

1,823

3,710

4,584



Total revenues

260,731

258,479

520,697

691,203















Expenses:










Rental expenses


65,274

68,884

132,851

135,600


Investment management expenses


9,931

10,819

20,250

21,395


General and administrative (5)

38,921

41,450

80,927

89,693


Reduction in workforce (5)

-

6,868

-

11,330


Impairment of real estate properties


367

84,218

367

84,218


Depreciation and amortization

87,476

76,941

173,675

151,391


Other expenses

4,649

4,584

8,916

11,003



Total expenses

206,618

293,764

416,986

504,630















Operating income

54,113

(35,285)

103,711

186,573

Other income (expense):










Earnings (loss) from unconsolidated property funds, net


(44)

17,398

5,850

19,496


Earnings from other unconsolidated investees, net

3,348

1,342

5,427

3,543


Interest expense (6)

(118,920)

(83,049)

(228,899)

(175,981)


Other income (expense), net

(1,370)

859

(1,542)

4,175


Net gains on dispositions of real estate properties (7)

10,959

7,904

22,766

8,792


Foreign currency exchange gains (losses), net (8)

(7,206)

(9,025)

(3,518)

21,512


Gain (loss) on early extinguishment of debt, net (1)

975

143,280

(46,658)

161,208



Total other income (expense)

(112,258)

78,709

(246,574)

42,745















Earnings (loss) before income taxes

(58,145)

43,424

(142,863)

229,318


Current income tax expense (4)

598

12,577

10,351

34,766


Deferred income tax benefit


(40,847)

(8,771)

(42,398)

(15,599)



Total income taxes

(40,249)

3,806

(32,047)

19,167

Earnings (loss) from continuing operations

(17,896)

39,618

(110,816)

210,151

Discontinued operations (9):










Income attributable to disposed properties

327

8,897

592

20,649


Net gain related to disposed assets  - China operations (4)

-

-

-

3,315


Net gains on dispositions:











Non-development properties

979

185,521

9,062

185,521



Development properties and land subject to ground leases


-

11,692

65

11,503




Total discontinued operations

1,306

206,110

9,719

220,988

Consolidated net earnings (loss)

(16,590)

245,728

(101,097)

431,139

Net earnings attributable to noncontrolling interests


(191)

(494)

(444)

(804)

Net earnings (loss) attributable to controlling interests


(16,781)

245,234

(101,541)

430,335

Less preferred share dividends

6,369

6,369

12,738

12,738

Net earnings (loss) attributable to common shares

$

(23,150)

$

238,865

$

(114,279)

$

417,597















Weighted average common shares outstanding - Basic

476,791

406,539

475,898

342,183

Weighted average common shares outstanding - Diluted

476,791

409,504

475,898

345,106

Net earnings (loss) per share attributable to common shares - Basic:












Continuing operations

$

(0.05)

$

0.08

$

(0.26)

$

0.57


Discontinued operations

-

0.51

0.02

0.65



Net earnings (loss) per share attributable to common shares - Basic

$

(0.05)

$

0.59

$

(0.24)

$

1.22















Net earnings (loss) per share attributable to common shares - Diluted:












Continuing operations

$

(0.05)

$

0.08

$

(0.26)

$

0.57


Discontinued operations

-

0.50

0.02

0.64



Net earnings (loss) per share attributable to common shares - Diluted

$

(0.05)

$

0.58

$

(0.24)

$

1.21














Footnotes follow Financial Statements








Consolidated Statements of Funds From Operations (FFO)

(in thousands, except per share amounts)

















Three Months Ended

Six Months Ended




June 30,

June 30,




2010 

2009

2010 

2009

Revenues:










Rental income

$

230,249

$

242,920

$

461,167

$

486,455


Property management and other fees and incentives


28,307

31,774

56,969

65,501


CDFS disposition proceeds (4)

-

-

-

180,237


Development management and other income

2,634

1,823

3,710

4,584



Total revenues

261,190

276,517

521,846

736,777














Expenses:










Rental expense


65,395

73,985

133,281

149,354


Investment management expenses


9,931

10,819

20,250

21,395


General and administrative (5)

38,921

41,450

80,927

90,998


Reduction in workforce (5)

-

6,868

-

11,330


Impairment of real estate properties

367

84,218

367

84,218


Depreciation of corporate assets

3,106

3,969

6,501

8,087


Other expenses

4,649

4,584

8,916

11,009



Total expenses

122,369

225,893

250,242

376,391














Operating FFO

138,821

50,624

271,604

360,386

Other income (expense):










FFO from unconsolidated property funds


39,665

34,874

73,701

71,617


FFO from other unconsolidated investees

4,843

2,966

8,475

7,979


Interest expense


(118,920)

(83,049)

(228,899)

(175,811)


Other income (expense), net

(1,370)

859

(1,542)

4,247


Net gains on dispositions of real estate properties (7)(10)

10,756

15,986

20,251

17,557


Foreign currency exchange gains (losses), net

232

(8,906)

711

(22,386)


Gain (loss) on early extinguishment of debt, net (1)

975

143,280

(46,658)

161,208


Current income tax expense (4)(10)

(598)

(12,577)

(9,500)

(34,967)


Net gain related to disposed assets - China operations (4)

-

-

-

3,315



Total other income (expense)

(64,417)

93,433

(183,461)

32,759














FFO

74,404

144,057

88,143

393,145

Less preferred share dividends

6,369

6,369

12,738

12,738

Less net earnings attributable to noncontrolling interests


191

494

444

948














FFO attributable to common shares, including significant non-cash items

$

67,844

$

137,194

$

74,961

$

379,459

Adjustments for significant non-cash items


3,246

(59,062)

19,054

(69,022)














FFO attributable to common shares, excluding significant non-cash items

$

71,090

$

78,132

$

94,015

$

310,437














Weighted average common shares outstanding - Basic


476,791

406,539

475,898

342,183

FFO per share attributable to common shares, including significant non-cash items:










Basic

$

0.14

$

0.34

$

0.16

$

1.11


Diluted

$

0.14

$

0.34

$

0.16

$

1.10














FFO per share attributable to common shares, excluding significant non-cash items:










Basic

$

0.15

$

0.19

$

0.20

$

0.91


Diluted

$

0.15

$

0.19

$

0.20

$

0.90













Footnotes follow Financial Statements








Reconciliations of Net Earnings (Loss) to FFO and EBITDA

(in thousands)

Reconciliation of net earnings (loss) to FFO, including significant non-cash items







Three Months Ended

Six Months Ended







June 30,

June 30,







2010 

2009 

2010 

2009 

Net earnings (loss) (a)

$

(23,150)

$

238,865

$

(114,279)

$

417,597

Add (deduct) NAREIT defined adjustments:










Real estate related depreciation and amortization

84,370

72,972

167,174

143,304


Adjustments to gains on dispositions for depreciation

(203)

(452)

(1,832)

(1,203)


Adjustments to (gains on) dispositions of non-development properties

-

(3,158)

103

(1,535)


Reconciling items attributable to discontinued operations: (9)











Gains on dispositions of non-development properties

(979)

(185,521)

(9,062)

(185,521)



Real estate related depreciation and amortization

11

4,040

127

10,502




Total discontinued operations

(968)

(181,481)

(8,935)

(175,019)


Our share of reconciling items from unconsolidated investees:











Real estate related depreciation and amortization

39,191

37,664

76,832

75,981



Adjustment to gains/losses on dispositions for depreciation

-

(6,578)

-

(6,578)



Other amortizations items

(3,515)

(2,571)

(6,989)

(6,161)




Total unconsolidated investees

35,676

28,515

69,843

63,242





Total NAREIT defined adjustments

118,875

(83,604)

226,353

28,789






Subtotal-NAREIT defined FFO

95,725

155,261

112,074

446,386

Add (deduct) our defined adjustments:










Foreign currency exchange losses (gains), net (8)

7,438

119

4,229

(43,829)


Deferred income tax benefit

(40,847)

(8,771)

(42,398)

(15,611)


Our share of reconciling items from unconsolidated investees:











Foreign currency exchange losses (gains), net (8)

2,731

(1,885)

1,944

(234)



Unrealized losses (gains) on derivative contracts, net

2,485

(4,105)

(1,575)

(5,959)



Deferred income tax expense (benefit)

312

(3,425)

687

(1,294)




Total unconsolidated investees

5,528

(9,415)

1,056

(7,487)





Total our defined adjustments

(27,881)

(18,067)

(37,113)

(66,927)

FFO, including significant non-cash items (a)

$

67,844

$

137,194

$

74,961

$

379,459
















Reconciliation of FFO, including significant non-cash items to FFO, excluding significant non-cash items







Three Months Ended

Six Months Ended







June 30,

June 30,







2010 

2009 

2010 

2009 

FFO, including significant non-cash items (a)

$

67,844

$

137,194

$

74,961

$

379,459

Add (deduct) significant non-cash items:










Impairment of real estate properties

367

84,218

367

84,218


Net gain related to disposed assets - China operations (4)

-

-

-

(3,315)


Losses (gains) on early extinguishment of debt (1)

(975)

(143,280)

14,258

(161,208)


Write-off deferred extension fees associated with Global Line

854

-

854

-


Our share of certain losses recognized by the property funds


3,000

-

3,575

11,283



Total adjustments for significant non-cash items

3,246

(59,062)

19,054

(69,022)

FFO, excluding significant non-cash items (a)

$

71,090

$

78,132

$

94,015

$

310,437
















Reconciliation of FFO, excluding significant non-cash items, to EBITDA







Three Months Ended

Six Months Ended







June 30,

June 30,







2010 

2009 

2010 

2009 

FFO, excluding significant non-cash items (a)

$

71,090

$

78,132

$

94,015

$

310,437

Interest expense

118,066

83,049

228,045

175,811

Depreciation of corporate assets

3,106

3,969

6,501

8,087

Current income tax expense included in FFO

598

12,577

10,351

34,967

Adjustments to gains on dispositions for interest capitalized

677

4,181

1,270

6,939

Preferred share dividends

6,369

6,369

12,738

12,738

Our share of reconciling items from unconsolidated investees

44,075

34,576

95,542

86,464

Earnings before interest, taxes, depreciation, and amortization (EBITDA)

$

244,981

$

222,853

$

448,462

$

635,443
















(a) Attributable to common shares.

See Consolidated Statements of Operations and Consolidated Statements of FFO
Footnotes follow Financial Statements

Calculation of Per Share Amounts

(in thousands, except per share amounts)













Net Earnings (Loss) Per Share




Three Months Ended

Six Months Ended




June 30,

June 30,




2010 (a)

2009 

2010 (a)

2009 

Net earnings (loss) - Basic (b)

$

(23,150)

$

238,865 

$

(114,279)

$

417,597 

Noncontrolling interest attributable to convertible limited partnership units (c)

- 

494 

- 

804 

Adjusted net earnings (loss)  - Diluted (b)

$

(23,150)

$

239,359 

$

(114,279)

$

418,401 










Weighted average common shares outstanding - Basic

476,791 

406,539 

475,898 

342,183 

Incremental weighted average effect of conversion of limited partnership units (c)

- 

1,235 

- 

1,235 

Incremental weighted average effect of stock awards (d)

- 

1,730 

- 

1,688 

Weighted average common shares outstanding - Diluted (e)

476,791 

409,504 

475,898 

345,106 













Net earnings (loss) per share - Diluted (b)

$

(0.05)

$

0.58 

$

(0.24)

$

1.21 













FFO Per Share, including significant non-cash items




Three Months Ended

Six Months Ended




June 30,

June 30,




2010 

2009 

2010 

2009 

FFO - Basic, including significant non-cash items (b)

$

67,844 

$

137,194 

$

74,961 

$

379,459 

Noncontrolling interest attributable to convertible limited partnership units (c)

- 

- 

- 

804 

FFO - Diluted, including significant non-cash items (b)

$

67,844 

$

137,194 

$

74,961 

$

380,263 










Weighted average common shares outstanding - Basic

476,791 

406,539 

475,898 

342,183 

Incremental weighted average effect of conversion of limited partnership units (c)

- 

- 

- 

1,235 

Incremental weighted average effect of stock awards (d)

2,876 

1,730 

3,045 

1,688 

Weighted average common shares outstanding - Diluted (e)

479,667 

408,269 

478,943 

345,106 










FFO per share - Diluted, including significant non-cash items (b)

$

0.14 

$

0.34 

$

0.16 

$

1.10 













FFO Per Share, excluding significant non-cash items




Three Months Ended

Six Months Ended




June 30,

June 30,




2010 

2009 

2010 

2009 

FFO - Basic, including significant non-cash items (b)

$

67,844 

$

137,194 

$

74,961 

$

379,459 

Adjustments for significant non-cash items


3,246 

(59,062)

19,054 

(69,022)

Noncontrolling interest attributable to convertible limited partnership units (c)

- 

- 

- 

804 

FFO - Diluted, excluding significant non-cash items (b)

$

71,090 

$

78,132 

$

94,015 

$

311,241 













Weighted average common shares outstanding - Basic

476,791 

406,539 

475,898 

342,183 

Incremental weighted average effect of conversion of limited partnership units (c)

- 

- 

- 

1,235 

Incremental weighted average effect of stock awards (d)

2,876 

1,730 

3,045 

1,688 

Weighted average common shares outstanding - Diluted (e)

479,667 

408,269 

478,943 

345,106 













FFO per share - Diluted, excluding significant non-cash items (b)

$

0.15 

$

0.19 

$

0.20 

$

0.90 



(a)  In periods with a net loss, the inclusion of any incremental shares is anti-dilutive, and therefore, both basic and diluted shares are the same.

(b)  Attributable to common shares.

(c)  If the impact of the conversion of limited partnership units is anti-dilutive, the income and shares of the limited partnerships are not included
in the diluted per share calculation.

(d)  Total weighted average potentially dilutive awards outstanding were 11,382 and 12,147 for the three months ended June 30, 2010 and 2009,
respectively, and 11,213 and 12,101 for the six months ended June 30, 2010 and 2009, respectively. Of the potentially dilutive instruments,
5,645 and 8,252 were anti-dilutive for the three months ended June 30, 2010 and 2009, respectively, and 5,143 and 8,699 were anti-dilutive
for the six months ended June 30, 2010 and 2009, respectively. During a loss period, the effect of stock awards is not included as the impact
is anti-dilutive.

(e)  The shares underlying the convertible debt have not been included because the impact would be anti-dilutive.

Notes to Financial Statements

Please refer to our annual and quarterly financial statements filed with the Securities and Exchange Commission on Forms 10-K and 10-Q for
further information about us and our business.
Our direct owned segment represents the direct, long-term ownership of industrial properties. Our investment strategy in this segment focuses
primarily on the ownership and leasing of industrial properties in key distribution markets. We consider these properties to be our Core Portfolio.
Also included in this segment are operating properties we developed that we refer to as Completed Development Properties. Our intent is to hold
and use the Core and Development properties, however, depending on market and other conditions, we may contribute either Core or Development
properties to the property funds, to the extent there is fund capacity, or sell them to third parties.  When we contribute or sell Development properties,
we recognize FFO to the extent the proceeds received exceed our original investment (i.e. prior to depreciation) and present the results as Net Gains
on Dispositions. In addition, we have industrial properties that are currently under development and land available for development that are part of this
segment as well. The investment management segment represents the investment management of unconsolidated property funds and joint ventures
and the properties they own.

(1)  During the three and six months ended June 30, 2010 and 2009, in connection with our announced initiatives to stagger and extend our debt
maturities and reduce debt, we repurchased portions of several series of senior and convertible senior notes outstanding with maturities in 2012
and 2013. In addition, in the first quarter of 2010 we repaid certain secured mortgage debt in connection with the sale of a property in Japan.
The repurchase activity is summarized as follows (in thousands):



Three Months Ended

Six Months Ended



June 30,

June 30,



2010 

2009 

2010 

2009 

Convertible Senior Notes (a):












Original principal amount                                       

$

249,603 

$

473,057 

$

739,642 

$

521,257 


Cash purchase price                                          

$

229,328 

$

313,256 

$

694,422 

$

338,077 

Senior Notes:












Original principal amount                                       

$

- 

$

343,192 

$

422,476 

$

343,192 


Cash purchase price                                          

$

- 

$

302,090 

$

449,382 

$

302,090 

Secured Mortgage Debt:












Original principal amount                                       

$

- 

$

- 

$

45,140 

$

- 


Cash repayment price                                         

$

- 

$

- 

$

46,659 

$

- 

Total:












Original principal amount                                    

$

249,603 

$

816,249 

$

1,207,258 

$

864,449 


Cash purchase / repayment price                            

$

229,328 

$

615,346 

$

1,190,463 

$

640,167 


Gain (loss) on early extinguishment of debt, net (b)

$

975 

$

143,280 

$

(46,658)

$

161,208 














(a)  Although the cash purchase price is less than the principal amount outstanding, the repurchase of these notes resulted in a non-cash
loss in the first quarter of 2010 due to the non-cash discount. Therefore, we adjusted for this non-cash loss of $15.2 million to arrive at
FFO, excluding significant non-cash items.

(b)  Represents the difference between the recorded debt (including unamortized related debt issuance costs, premiums and discounts)
and the consideration we paid to retire the debt.

(2)  The net losses recognized in Accumulated Other Comprehensive Income (Loss) for the six months ended June 30, 2010 in our Consolidated
Balance Sheet are principally the result of the strengthening of the U.S. dollar against the euro and pound sterling, offset slightly by the weakening
of the U.S. dollar against the yen. The strengthening of the U.S. dollar against these currencies results in less reported net assets upon translation
of our international operations into U.S. dollars.

(3)  In our Consolidated Statements of Operations, rental income includes the following (in thousands):


Three Months Ended

Six Months Ended


June 30,

June 30,



2010 

2009 

2010 

2009 

Rental income

$

167,970

$

162,900

$

336,189

$

322,222

Rental expense recoveries

51,613

52,218

102,335

100,298

Straight-lined rents

10,207

9,764

21,494

18,454


$

229,790

$

224,882

$

460,018

$

440,974













(4)  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, for total cash consideration of $1.3 billion ($845 million related
to China and $500 million related to the Japan investments).  

In connection with the sale of our investments in the Japan property funds, we recognized a gain of $180.2 million. The gain is reflected as
CDFS Proceeds in our Consolidated Statements of Operations and FFO, as it represents previously deferred gains on the contribution of
development properties to the 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 the Japan portion of the transaction.  We continued to manage the
Japan properties until July 2009.

(5)  In the fourth quarter of 2008, in response to the difficult economic climate, we initiated general and administrative expense ("G&A") reductions.
These initiatives included a Reduction in Workforce ("RIF") program and reductions to other expenses through various cost savings measures.
Lower gross G&A and less development activity has resulted in lower capitalized G&A. Our G&A included in our Statements of Operations
consisted of the following (in thousands):


Three Months Ended

Six Months Ended


June 30,

June 30,



2010 

2009 

2010 

2009 

Gross G&A expense

$

63,577 

$

69,320 

$

130,733 

$

147,160 

Reported as rental expense

(4,831)

(4,852)

(9,833)

(9,787)

Reported as investment management expenses

(9,931)

(10,819)

(20,250)

(21,395)

Capitalized amounts

(9,894)

(12,199)

(19,723)

(26,285)

Net G&A

$

38,921 

$

41,450 

$

80,927 

$

89,693 













(6)  The following table presents the components of interest expense as reflected in our Consolidated Statements of Operations (in thousands):




Three Months Ended

Six Months Ended



June 30,

June 30,




2010 

2009 

2010 

2009 















Gross interest expense

$

113,225

$

88,377

$

218,234

$

190,237

Amortization of discount, net

12,198

16,630

27,532

35,343

Amortization of deferred loan costs

7,435

2,873

13,917

6,249


Interest expense before capitalization

132,858

107,880

259,683

231,829

Capitalized amounts

(13,938)

(24,831)

(30,784)

(55,848)

Net interest expense

$

118,920

$

83,049

$

228,899

$

175,981

Gross interest expense increased in 2010 from 2009 due to increased borrowing rates. The decrease in capitalized amounts in 2010 from 2009
is due to less development activity.

(7)  Included in Net Gains on Dispositions of Real Estate Properties for the six months ended June 30, 2010 is a gain of $1.1 million from the sale of land
during the first quarter of 2010 that was previously impaired.

(8)  Included in Foreign Currency Exchange Gains (Losses), Net, for the six months ended June 30, 2010 and 2009, are net foreign currency
exchange gains or losses from the remeasurement of inter-company loans between the U.S. and our consolidated subsidiaries in Japan and
Europe due to the fluctuations in the exchange rates of U.S. dollars to the yen, the euro and pound sterling between January 1st and June
30th of the applicable years. We do not include the gains and losses related to inter-company loans in our calculation of FFO.

(9)  The operations of the properties held for sale and properties that are disposed of to third parties during a period, including 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.

During the six months ended June 30, 2010, we disposed of 9 properties to third parties aggregating 0.7 million square feet, none of which
were development properties. During all of 2009, other than our China operations, we disposed of land subject to ground leases and 140
properties aggregating 14.8 million square feet to third parties, 3 of which were development properties.


The income attributable to these properties and our China operations was as follows (in thousands):


Three Months Ended

Six Months Ended


June 30,

June 30,


2010 

2009 

2010 

2009 

Rental income

$

459 

$

18,038 

$

1,149 

$

45,481 

Rental expenses

(121)

(5,101)

(430)

(13,754)

Depreciation and amortization

(11)

(4,040)

(127)

(10,502)

Other expenses, net

- 

- 

- 

(576)

Income attributable to disposed properties

$

327 

$

8,897 

$

592 

$

20,649 

For purposes of our Consolidated Statements of FFO, we do not segregate discontinued operations.  In addition, we include the gains from
disposition of land parcels and Completed Development Properties in the calculation of FFO, including those classified as discontinued
operations.

(10)  The net gains on dispositions of real properties presented in our Consolidated Statements of FFO are net of related taxes
of $0.9 million from the sale of a building during the first quarter of 2010.

SOURCE ProLogis

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