Summary of PROLOGIS - Yahoo! Finance

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with our Consolidated Financial Statements and the related notes included in Item 1 of this report and our 2007 Annual Report on Form 10-K, as amended, "Form 10-K".
Certain statements contained in this discussion or elsewhere in this report may be deemed "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Words and phrases such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", "designed to achieve", 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, changes in sales or contribution volume or profitability 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 exchanges rates; (iii) increased or unanticipated competition for our properties; (iv) risks associated with acquisitions and development; (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 "Item 1A. Risk Factors" of this report and our Form 10-K. Unless the context otherwise requires, the terms "we", "us" and "our" refer to ProLogis and our consolidated subsidiaries.
Management's Overview
We are a self-administered and self-managed REIT that owns, operates and develops real estate properties, primarily industrial distribution properties, in North America, Europe and Asia (directly and through our unconsolidated investees). Our business is primarily driven by growth in world trade and the related requirements for modern, well-located inventory space in key global distribution locations. Our focus on our customers' expanding needs has enabled us to become the world's largest owner, manager and developer of industrial distribution properties.
Our business is organized into three reportable business segments:
(i) property operations; (ii) investment management; and (iii) development or CDFS business. Our property operations segment represents the direct long-term ownership of distribution and retail properties. Our investment management segment represents the long-term investment management of property funds and the properties they own. Our CDFS business segment primarily encompasses our development or acquisition of real estate properties that are subsequently contributed to a property fund in which we have an ownership interest and act as manager, or sold to third parties. We generate and seek to increase revenues, earnings, funds from operations ("FFO"), as defined at the end of Item 2, and cash flows through our segments primarily as follows:
• Property Operations Segment - We earn rent from our customers, including reimbursements of certain operating costs, under long-term operating leases in the distribution and retail properties that we own directly. We expect to grow our revenue through the selective acquisition of properties and increases in rental rates and, to a limited extent, increases in leased space primarily of properties in our development pipeline. Our strategy is to achieve increases in rental rates and leased space primarily through continued focus on our customers' global needs for distribution space on the three continents in which we operate.

• Investment Management Segment - We recognize our proportionate share of the earnings or losses from our investments in unconsolidated property funds. Along with the income recognized under the equity method, we recognize fees and incentives earned for services performed on behalf of the property funds and interest earned on advances to the property funds. We earn fees for services provided to the property funds, such as property

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management, asset management, acquisition, financing, leasing and development fees. We may earn incentives based on the return provided to our fund partners. We expect growth in income recognized to come from newly created property funds and growth in existing property funds. The growth in the existing property funds is expected to come primarily from additional properties the funds will acquire, generally from us, and increased rental revenues in the property funds due, in part, to the leasing and property management efforts we provide as manager of the properties.

• CDFS Business Segment - We recognize income primarily from the contributions of developed, rehabilitated and repositioned properties and acquired portfolios of properties to the property funds, and from dispositions to third parties. The income is generated due to the increased fair value of the properties at the time of contribution, based on third party appraisals, and the income recognized is only to the extent of the third party ownership interest in the property fund acquiring the property. In addition, we:
(i) earn fees from our customers or other third parties for development activities that we perform on their behalf; (ii) recognize interest income on notes receivable related to asset dispositions or development activity;
(iii) recognize gains from the disposition of land parcels, including land subject to ground leases; and (iv) recognize our proportionate share of the earnings or losses generated by development joint ventures in which we have an investment. We do not expect growth in income in this segment in the short-term. See "Operational Outlook" below.

Summary of the nine months ended September 30, 2008 Net operating income from our property operations segment decreased to $494.8 million for the nine months ended September 30, 2008 from $557.8 million for the same period in 2007. The decrease was largely due to us owning a smaller operating portfolio, on average, during the first nine months of 2008 over the same period in 2007, an increase in property management expenses and an increase in insurance and other rental expenses not recoverable from our customers, offset partially by an increase in same store net operating income (as defined below) for the properties we own. Our direct owned portfolio decreased, on average, in part due to the contributions of 66 non-CDFS properties at the end of June 2007 to a property fund. In addition, approximately $17 million of the decrease was due to the MPR Transaction in 2007, which resulted in us owning 100% of a portfolio of properties for two months in 2007, prior to the creation of a new property fund, as discussed below. Rental expenses include the property management costs we incur to manage our properties and the properties owned by the property funds for which we receive management fee income, which increased $8.9 million in 2008 compared with 2007, primarily due to the growth in the portfolios we manage on behalf of the property funds. The increase in insurance expense of $6.0 million was due to a tornado that struck certain properties in Memphis, Tennessee in February 2008 that were owned by us and owned by the property funds and insured by us through our insurance company.
The size and leased percentage of our direct-owned operating portfolio fluctuates due to the timing of contributions and dispositions of properties and the acquisition and development of properties and impacts net operating income in the property operations segment. We had a direct-owned operating portfolio of 1,416 properties at September 30, 2008 as compared with 1,409 properties at December 31, 2007. Our stabilized lease percentage (as defined below) in our direct-owned operating portfolio, including properties pending contribution to a property fund, was 89.5% at September 30, 2008, 92.9% at December 31, 2007 and 93.5% at September 30, 2007.
Our net operating income from the investment management segment was $133.9 million for the nine months ended September 30, 2008, compared to $154.1 million for the same period in 2007. In the nine months ended September 30, 2007, we recognized $38.2 million of income representing our proportionate share of the gain recognized by ProLogis European Properties ("PEPR") upon the sale of certain properties. Excluding these gains, net operating income from this segment increased $18.0 million, or 15.5%, due primarily to an increase in the number of properties managed by us on behalf of the property funds, including several new property funds that were formed in the third quarter of 2007.
We increased our total operating portfolio of distribution and retail properties owned or managed, including direct-owned properties and properties owned by the property funds and industrial CDFS joint ventures, to 501.5 million square feet at September 30, 2008 from 459.5 million square feet at December 31, 2007. This increase is primarily in the portfolio of properties owned by the property funds due to contributions of properties from us and

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acquisitions from third parties. Our stabilized leased percentage for this portfolio (as defined below) was 93.4% at September 30, 2008, compared with 95.6% at December 31, 2007. Our same store net operating income increased by 2.3% in the first nine months of 2008 over the same period in 2007. See below for a reconciliation of our consolidated rental income, rental expenses and net operating income to the same store results.
Net operating income of the CDFS business segment decreased for the nine months ended September 30, 2008 to $550.5 million from $698.9 million for the same period in 2007. This decrease was due primarily to decreased levels of contributions and lower profit margins. In 2007, we repositioned a property fund and recognized gains of $68.6 million in this segment (see below and Note 3 to our consolidated financial statements in Item 1 for additional detail).
Key Transactions in 2008
• In the first nine months of 2008, we generated aggregate proceeds of $3.4 billion and recognized aggregate gains of $565.5 million from contributions and dispositions of properties, net of amounts deferred and including minor adjustments to previous dispositions, as follows:

o We generated $3.0 billion of proceeds and $549.3 million of gains from the contributions of CDFS developed and repositioned properties and sales of land. This is net of the deferral of $165.5 million of gains related to our ongoing ownership in the property funds or other unconsolidated investee that acquired the properties and also includes $21.5 million of previously deferred gains. This also includes one property sold to a third party that was developed under a pre-sale agreement.

o We contributed, to certain property funds, acquired CDFS property portfolios at cost generating $353.9 million of proceeds. We acquired these portfolios of properties in 2008, 2007 and 2006 with the intent to contribute them to a new or existing property fund at our cost. In addition, we contributed one non-CDFS property to a property fund generating $7.1 million of proceeds and $5.8 million of gains.

o We disposed of nine CDFS and non-CDFS properties and one parcel of land subject to a ground lease to third parties, all of which are included in discontinued operations, generating proceeds of $81.4 million and $10.4 million of gains.

• During the nine months ended September 30, 2008, we acquired an aggregate 5.0 million square feet of operating properties with a combined purchase price of $271.5 million. These properties were primarily acquired for future contribution to a property fund, although we may hold certain properties for long-term investment.

• We started development on projects with a total expected cost at completion of $2.5 billion and completed development projects with a total expected cost of $2.9 billion. We also acquired 2,203 acres of land (or land use rights) for future development for an aggregate purchase price of $941.1 million.

• We announced the formation of ProLogis China Acquisition Fund and made a contribution of 9 properties in July 2008 that we had acquired earlier in the year with the intent to contribute to a new property fund. The ProLogis China Acqusition Fund will primarily acquire properties from third parties. See Note 3 to our Consolidated Financial Statements in Item 1 for more detail.

• We raised $1.15 billion of proceeds through the issuance of $600 million of 6.625% senior notes and $550 million of 2.625% convertible senior notes.

• We generated $196.4 million from the issuance of 3.4 million common shares under our Controlled Equity Offering Program.

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  Results of Operations
  Nine months ended September 30, 2008 and 2007
   Information for the nine months ended September 30, regarding net earnings
attributable to common shares was as follows:

                                                                        2008               2007
Net earnings attributable to common shares (in thousands)            $ 454,869          $ 935,639
Net earnings per share attributable to common shares - Basic         $    1.74          $    3.65
Net earnings per share attributable to common shares - Diluted       $    1.69          $    3.51

The decrease in net earnings in 2008 from 2007 is due primarily to lower gains on dispositions of properties, lower rental income, lower earnings from unconsolidated investees and higher rental expenses. In 2007, we recognized gains on dispositions of both CDFS and non-CDFS properties of $879.0 million as compared with $565.5 million of gains in 2008. Net earnings in 2007 included;
(i) the repositioning of a property fund resulting in total gains from CDFS contributions and foreign exchange contracts of $95.2 million; (ii) the disposition of 77 properties from our property operations segment to two of the unconsolidated property funds, which generated gains of $145.4 million; and
(iii) the recognition of our share of net gains of $38.2 million from the property funds due to the disposition of properties in 2007. These transactions have also resulted in less rental income in 2008 compared with 2007. In the discussion that follows, we present the results of operations by reportable business segment. See Note 11 to our Consolidated Financial Statements in Item 1 for further description of our segments.
Portfolio Information
Our total operating portfolio of properties includes distribution and retail properties owned by us and distribution properties owned by the property funds and CDFS joint ventures that we manage. Our operating portfolio also includes properties that were developed or acquired in our CDFS business segment and are pending contribution to a property fund or disposition to a third party. The operating portfolio does not include properties under development or any other properties owned by the CDFS joint ventures, other than distribution properties, and was as follows (square feet in thousands):

                                  September 30, 2008           December 31, 2007            September 30, 2007
                               Number of       Square       Number of       Square       Number of       Square
Reportable Business Segment    Properties       Feet        Properties       Feet        Properties       Feet
Property operations (1)            1,416       211,436          1,409       208,530          1,396       202,159
Investment management              1,281       282,956          1,131       244,150          1,097       236,958
CDFS business (2)                     41         7,126             39         6,801             33         5,070

Totals                             2,738       501,518          2,579       459,481          2,526       444,187

(1) Our operating portfolio includes properties that were developed or acquired in our CDFS business segment and are pending contribution to a property fund or disposition to a third party as follows (square feet in thousands):

                                    Number of Properties     Square Feet
              September 30, 2008                 270              61,518
              December 31, 2007                  249              56,861
              September 30, 2007                 230              50,727

(2) Only includes distribution properties owned by the CDFS joint ventures. We include our wholly owned CDFS properties in the property operations segment (see above).

The stabilized operating properties owned by us, the property funds and CDFS joint ventures were 93.4% leased at September 30, 2008, 95.6% leased at December 31, 2007 and 95.5% leased at September 30, 2007. The stabilized properties are those properties where the capital improvements, repositioning efforts, new management and new marketing programs for acquisitions or the marketing programs in the case of newly developed properties, have been completed and in effect for a sufficient period of time to achieve stabilization. A property generally enters the stabilized pool at the earlier of 12 months from acquisition or completion or when it becomes

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substantially occupied, which we define as 93.0%. We generally classify properties in the property funds to be stabilized.
Same Store Analysis
We evaluate the operating performance of the operating properties we own and manage using a "same store" analysis because the population of properties in this analysis is consistent from period to period, thereby eliminating the effects of changes in the composition of the portfolio on performance measures. We include properties owned by us, and properties owned by the property funds and industrial CDFS joint ventures that are managed by us (referred to as "unconsolidated investees"), in our same store analysis. We have defined the same store portfolio, for the nine months ended September 30, 2008, as those operating properties that were in operation at January 1, 2007 and have been in operation throughout the full periods in both 2008 and 2007. We have removed all properties that were disposed of to a third party from the population for both periods. We believe the factors that impact rental income, rental expenses and net operating income in the same store portfolio are generally the same as for the total portfolio. In order to derive an appropriate measure of period-to-period operating performance, we remove the effects of foreign currency exchange rate movements by using the current exchange rate to translate from local currency into U.S. dollars, for both periods, to derive the same store results. The same store portfolio, for the nine months ended September 30, 2008, aggregated 377.4 million square feet.
The following is a reconciliation of our consolidated rental income, rental expenses and net operating income, as included in our Consolidated Financial Statements in Item 1, to the respective amounts in our same store portfolio analysis.