• complete the development and leasing of properties currently in our development portfolio;

• manage our core portfolio of industrial distribution properties to maintain and improve our net operating income stream from these assets;

• provide exceptional customer service to our current and future customers;

• generate liquidity through contributions of properties to our property funds and through sales to third parties;

• reduce our debt at December 31, 2009 by at least $2.0 billion from our debt levels at September 30, 2008, through debt retirements utilizing proceeds from property contributions and dispositions, buying back outstanding debt and issuing additional equity (see further discussion below of the actions we have taken in the first quarter and subsequent to March 31, 2009);

• recast our global line of credit; and

• reduce our general and administrative expenses through various cost savings initiatives, including reductions in workforce.

In the following discussion, we will address our progress on meeting these objectives.
Our longer-term objectives are to:
• employ a conservative growth model;

• develop industrial properties utilizing a portion of our existing land parcels, which we will hold for long-term direct investment, or otherwise monetize our land holdings through dispositions; and

• grow the property funds by utilizing the property fund structure for the development of properties and the opportunistic acquisition of properties from third parties.

Our current business strategy includes two operating segments: (i) direct owned and (ii) investment management. Our direct owned segment represents the direct long-term ownership of industrial and retail properties. Our investment management segment represents the long-term investment management of property funds and the properties they own.
We generate and seek to increase revenues; earnings; FFO, as defined at the end of Item 2; and cash flows through our segments primarily as follows:
• Direct Owned Segment - Our investment strategy in this segment focuses primarily on the ownership and leasing of industrial and retail properties in key distribution markets. We may refer to these properties as core properties or our core portfolio. Also included in this segment are operating properties we developed with the intent to contribute the properties to an unconsolidated property fund that we previously referred to as our CDFS Properties and, beginning December 31, 2008, we now refer to as our completed development properties. In addition, we have industrial properties that are currently under development (also included in our development portfolio), land available for development and land subject to ground leases that are part of this segment as well.

We earn rent from our customers, including reimbursements of certain operating costs, under long-term operating leases for the properties we own. The revenue in this segment has decreased due to the contribution of properties to property funds, offset partially with increases in occupancy levels within our development portfolio. However, leasing activity has slowed and rental revenues generated by the lease-up of newly developed properties have not been adequate to completely offset the loss of rental revenues from property contributions. We expect our total revenues from this segment will continue to decrease in 2009 due to the contributions and dispositions of properties we made in 2008 and may make in 2009. We intend to grow our revenue in the remaining properties primarily through increases in occupied square feet in our development portfolio. Our development portfolio, including completed development properties and those currently under development, was 44.59% and 41.44% leased at March 31, 2009 and December 31, 2008, respectively.

• Investment Management Segment - We recognize our proportionate share of the earnings or losses from our investments in unconsolidated property funds and certain joint ventures. In addition to the income recognized under the equity method, we recognize fees and incentives earned for services performed on behalf of these entities and interest earned on advances to these entities, if any. We provide services to these entities, such as property management, asset management, acquisition, financing and development. We may also earn incentives from our property funds depending on the return provided to the fund partners over a specified period. We expect future growth in income recognized to result from growth in existing property funds, primarily from properties the funds acquired from us in 2008 and may acquire, from us or third parties, in 2009 and beyond, as well as the formation of future funds.

• CDFS Business Segment - Our CDFS business segment primarily encompassed our development or acquisition of real estate properties that were subsequently contributed to a property fund in which we have an

ownership interest and act as manager, or sold to third parties. As of December 31, 2008, all of the assets and liabilities in this segment were transferred into our two remaining segments and this segment is no longer a primary focus of our business strategy. In 2009, we recognized income from the previously deferred gains from the Japan property funds that were deferred upon original contributions and triggered with the sale of our investments. During the three months ended March 31, 2008, we recognized income primarily from the contributions of developed, rehabilitated and repositioned properties and acquired portfolios of properties to the property funds as well as from dispositions of land and properties to third parties. The income was generated due to the increased fair value of the properties at the time of contribution, based on third party appraisals, and income was recognized only to the extent of the third party ownership interest in the property fund acquiring the property.

We have contributed and may continue to contribute completed development properties and/or core properties to the property funds, or sell to third parties. Although, beginning in 2009, we report these as net gains on dispositions rather than CDFS proceeds and cost of CDFS dispositions. Key Transactions in 2009
• In the first quarter of 2009, we sold our China operations and our investments in the Japan property funds for $1.3 billion of cash. We entered into a sales agreement in December 2008, at which time we recorded an impairment charge of $198.2 million on our China operations and classified the assets and liabilities as held for sale.

• In connection with the sale of our investments in the Japan property funds, we recognized a net gain of $180.2 million and $20.5 million of current income tax expense. The gain is reflected as CDFS proceeds as it represents the recognition of previously deferred gains on the contribution of properties to the property funds based on our ownership interest in the property funds at the time of original contributions.

• In the first three months of 2009, we generated aggregate proceeds of $135.7 million from the contribution of nine properties to ProLogis European Properties Fund II and the sale of land parcels to third parties.

• In March 2009, we repurchased $48.2 million original principal amount of our convertible senior notes for $24.8 million and recognized a gain of $17.9 million.

• In April 2009, we repurchased $225.0 million original principal amount of our convertible senior notes for $128.4 million. We also repurchased €42.65 million ($58.3 million at March 31, 2009) original principal amount of our 4.375% senior notes due April 2011 for €32.0 million ($43.7 million at March 31, 2009).

• On April 14, 2009, we completed a public offering of 174.8 million common shares at a price of $6.60 per share and received net proceeds of $1.1 billion. The proceeds were used to repay borrowings under our credit facilities, which include borrowings that were made on our credit facilities in April 2009 to repurchase the convertible and senior notes discussed above.

• We adopted FASB Staff Position APB 14-1 "Accounting for Convertible Debt Instruments that May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"), on January 1, 2009, on a retroactive basis to reflect the new accounting associated with the convertible notes we issued in 2007 and 2008. As a result, we restated 2008 amounts to reflect the adjustment to debt and equity, as well as the additional interest expense. The 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 applicable periods.

Results of Operations
Three months ended March 31, 2009 and 2008
Net earnings attributable to common shares for the three months ended March 31
was as follows:

                                                                2009             2008
Net earnings attributable to common shares (in
thousands)                                                    $ 178,732        $ 183,521
Net earnings per share attributable to common shares -
Basic                                                         $    0.67        $    0.71
Net earnings per share attributable to common shares -
Diluted                                                       $    0.66        $    0.69

The decrease in net earnings in 2009 from 2008 is due primarily to lower gains on dispositions of properties offset by higher foreign currency exchange gains. 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. Direct Owned Segment
The net operating income of the direct owned segment consists of rental income and rental expenses from industrial and retail properties during the time we directly own them. The size and leased percentage of our direct owned operating portfolio fluctuates due to the timing of contributions and dispositions of properties and the development of properties and impacts the net operating income we recognize in this segment. Also, included in this segment is land we own and lease to customers under ground leases, development management and other income and land holding and acquisition costs. See Note 11 to our Consolidated Financial Statements in Item 1 for a reconciliation of net operating income to earnings before income taxes.
The net operating income from the direct owned segment, excluding amounts presented as discontinued operations in our Consolidated Financial Statements, was as follows (in thousands):

                                                      Three months ended
                                                           March 31,
                                                      2009          2008
Rental and other income                             $ 241,223     $ 269,692
Rental and other expenses                              79,604        85,370

Total net operating income - direct owned segment   $ 161,619     $ 184,322

Our direct owned operating portfolio was as follows (square feet in thousands):

                                        March 31, 2009                                   December 31, 2008                                    March 31, 2008
                           Number of         Square                          Number of         Square                          Number of         Square
                          Properties          Feet           Leased%        Properties          Feet           Leased%        Properties          Feet           Leased %
Core industrial
properties                      1,157         154,829            90.4 %           1,157         154,947            92.2 %           1,159         153,812             93.1 %
Retail and mixed use
properties                         35           1,497            86.6 %              34           1,404            94.5 %              32           1,241             96.5 %

Subtotal
non-development
properties                      1,192         156,326            90.4 %           1,191         156,351            92.2 %           1,191         155,053             93.1 %
Completed development
properties (1)                    160          46,260            45.1 %             140          40,763            43.5 %             156          45,160             55.2 %

Total operating
portfolio                       1,352         202,586            80.1 %           1,331         197,114            82.1 %           1,347         200,213             84.5 %
Assets in China -
sold in 2009                        -               -               -                 -               -               -                62          10,477             51.8 %

Total                           1,352         202,586            80.1 %           1,331         197,114            82.1 %           1,409         210,690             82.9 %

(1) Included at March 31, 2009 are 28 properties aggregating 7.3 million square feet for which development was completed in 2009. The leased percentage fluctuates based on the composition of properties.

The decrease in rental and other income in 2009 from 2008 is due primarily to the contributions of properties in 2008 (generally completed development properties) to the unconsolidated property funds and a decrease in the leased percentage of our core industrial properties, partially offset by new leasing activity in our completed development properties. However, leasing activity has slowed and rental revenues generated by the lease-up of newly developed properties have not been adequate to completely offset the loss of rental revenues from property contributions. Under the terms of our lease agreements, we are able to recover the majority of our rental expenses

from customers. Rental expense recoveries, included in both rental income and expenses, were $53.9 million and $58.8 million for the three months ended March 31, 2009 and 2008, respectively.
Investment Management Segment
The net operating income of the investment management segment consists of:
(i) earnings or losses recognized under the equity method from our investments in property funds and certain joint ventures (that develop or own industrial or retail properties); (ii) fees and incentives earned for services performed; and
(iii) interest earned on advances; offset by (iv) our direct costs of managing these property funds and the properties they own. The net earnings or losses of the unconsolidated investees may include the following income and expense items of our unconsolidated investees, in addition to rental income and rental expenses: (i) interest income and interest expense; (ii) depreciation and amortization expenses; (iii) general and administrative expenses; (iv) income tax expense; (v) foreign currency exchange gains and losses; (vi) gains or losses on dispositions of properties or investments; and (vii) impairment charges. The fluctuations in income we recognize in any given period are generally the result of: (i) variances in the income and expense items of the unconsolidated investees; (ii) the size of the portfolio and occupancy levels in each period; (iii) changes in our ownership interest; and (iv) fluctuations in foreign currency exchange rates at which we translate our share of net earnings to U.S. dollars, if applicable. Beginning in 2009, we are reporting the direct costs associated with our investment management segment for all periods presented as a separate line item "Investment Management Expenses" in our Consolidated Statements of Operations and Comprehensive Income (Loss). These costs include the property management expenses associated with the property-level management of the properties owned by the property funds (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). In order to allocate the property management expenses between the properties owned by us and the properties owned by the property funds, we use the square feet owned at the beginning of the period by the respective portfolios. The net operating income (loss) from the investment management segment was as follows (in thousands):

                                                                  Three months ended
                                                                      March 31,
                                                                 2009             2008
Unconsolidated property funds:
North America (1)                                             $    1,365        $ (9,243 )
Europe (2)                                                        16,601          10,762
Asia (3)                                                           7,190          (1,825 )
Unconsolidated joint ventures (4)                                    751            (793 )

Total net operating income (loss) - investment
management segment                                            $   25,907        $ (1,099 )

(1) Represents the income earned by us from our investments in 12 property funds in North America. Our ownership interests ranged from 20.0% to 50.0% at March 31, 2009. These property funds on a combined basis owned 854 and 778 properties at March 31, 2009 and 2008, respectively. The increase in properties is due primarily to contributions we have made to certain of the property funds. Included in
2009 and 2008,
are net losses
of
$9.7 million
and
$21.3 million,
respectively,
which
represent our
proportionate
share of
realized and
unrealized
losses that
were
recognized by
certain of the
property funds
related to
interest rate
derivative
contracts that
no longer met
the
requirements
for hedge
accounting.

(2) Represents the income earned by us from our investments in two property funds in Europe, PEPR and PEPF II. On a combined basis, these funds owned 408 and 315 properties at March 31, 2009 and 2008, respectively. The increase in properties is due primarily to contributions we have made to PEPF II.

Our ownership
interest in
PEPR was 24.9%
at both
March 31, 2009
and 2008. Our
ownership
interest in
PEPF II was
33.9% and
24.5% at
March 31, 2009
and 2008,
respectively.
Our ownership
interest at
March 31, 2008
included a 17%
direct
ownership and
a 7.5%
indirect
ownership
(through
PEPR's 30%
ownership
interest in
PEPF II). In

(3) Represents the income earned by us from our 20% ownership interest in two property funds in Japan and one property fund in South Korea. At March 31, 2009 and 2008, the property funds, in which we maintain an ownership interest, on a combined basis owned 13 and 74 properties. The decrease in properties is due to the sale of our investments in the Japan property funds in February 2009 (see Note 2 to our Consolidated Financial Statements in Item 1). Included in
2008 for
Japan are net
losses of
$10.3 million
that
represent our
proportionate
share of
unrealized
losses from
derivative
contracts.

(4) We have restated the net operating income of this segment for 2008 to include our proportionate share of the net earnings of our joint ventures that develop and operate principally industrial and retail properties. These amounts were previously included in the CDFS business segment.

CDFS Business Segment
Net operating income of the CDFS business segment for the three months ended March 31, 2009 was $180.2 million, compared with $278.0 million for the same period in 2008. As discussed earlier, our business strategy no longer focuses on the CDFS business segment. The amount in 2009 is the gain from the sale of our investments in the Japan property funds, while the amount in 2008 consisted of gains recognized from the contributions of 41 properties to the property funds. Operational Outlook
During the first three months of 2009, industrial property fundamentals have reflected the global economic weakness and slowdown in global trade. Throughout the majority of our markets, we are experiencing reduced leasing activity and increased leasing costs. Partially offsetting these trends, we have had higher-than-average customer retention and the industry as a whole has had sharply reduced levels of new supply.
In our total operating portfolio, including properties owned by our unconsolidated investees and managed by us, we leased 22.9 million square feet and 121.5 million square feet of space during the quarter ended March 31, 2009 and the year ended December 31, 2008, respectively, including 28.8 million square feet of leases signed in the quarter ended March 31, 2008.

In our direct owned portfolio, we leased 13.7 million square feet, including 3.2 million square feet of new leases in our development portfolio (both completed properties and those under development) in the three months ended March 31, 2009. Repeat business with our global customers is important to our long-term growth. During the first quarter of 2009, 57% of the space leased in our newly developed properties was with repeat customers. Although leasing activity has slowed, for the leases that expired in the first quarter of 2009, existing customers renewed their leases 74% of the time. We expect that leasing will continue to slow, leasing costs may increase and market rents will likely decrease until economic conditions improve. As of March 31, 2009, our total direct owned operating portfolio was 80.1% leased, as compared with 82.1% at December 31, 2008.
As we previously disclosed, we have significantly reduced new development starts. During the three months ended March 31, 2009, we started development of two properties with 394,000 square feet that were 100% leased, completed the development of 29 buildings aggregating 7.6 million square feet that were 39.9% leased at March 31, 2009 and we contributed nine properties aggregating 2.0 million square feet that were 95% leased to ProLogis European Properties Fund II. As of March 31, 2009, we had 160 completed development properties that were 45.1% leased with a current investment of approximately $3.3 billion and a total expected investment (including estimated remaining leasing costs) of $3.6 billion. We also had 37 properties under development that were 42.8% leased with a current investment of $861 million and a total expected investment of $1.2 billion when completed and leased. Our near-term focus is to complete the development and leasing of these properties. Once these properties are leased, we may continue to own them directly, thereby creating additional income in our direct owned segment or we may contribute them to a property fund or sell to a third party, generating cash to reduce our debt.

Other Components of Income
Investment Management Expenses . . .