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 2008 Annual Report on 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 and changes in sales or contribution volume or profitability of developed properties, economic and market 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. Many of the factors that may affect outcomes and results are beyond our ability to control. For further discussion of these factors see Part II, "Item 1A. Risk Factors" in this report and in our most recent annual report on Form 10-K. All references to "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 properties, in North America, Europe and Asia (directly and through our unconsolidated investees). Our business is primarily driven by requirements for modern, well-located inventory space in key global distribution locations. Our focus on our customers' needs has enabled us to become a leading global provider of industrial distribution properties.
The global financial markets have been undergoing pervasive and fundamental disruptions, which began to impact us late in the third quarter of 2008. As the global credit crisis worsened in the fourth quarter of 2008, it was prudent for us to modify our business strategy. As such, we discontinued most of our new development and acquisition activities in order to focus on our core business of owning and managing industrial properties. Narrowing our focus has allowed us to take the necessary steps toward reducing our debt and maximizing liquidity and cash flow. We believe our current business strategy, coupled with the following objectives for both the near and long-term, will position us to take advantage of business opportunities upon the stabilization of the global financial markets.
In the following discussion, we will address our progress on meeting our near-term objectives, which are to:
• simplify our business model and focus on our core business;

• 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;

• recast our global line of credit; and

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

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, other unconsolidated investees 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, 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 of properties we completed in 2008 and 2009 or that we may make in the remainder of 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 50.85% and 41.44% leased at June 30, 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 that are accounted for under the equity method. In addition, we recognize fees and incentives earned for services performed on behalf of these and other entities. We provide services to these entities, which may include 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 and other properties managed through the formation of future property funds or joint ventures.

• 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. 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 six months ended June 30, 2008, we recognized income primarily from the contributions of developed 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.

Our intent is to hold and use the properties in our direct owned segment, however, we may contribute certain properties to a property fund or sell them to third parties, depending on market conditions and liquidity needs. Beginning in 2009, we report these as net gains on dispositions rather than CDFS proceeds and cost of CDFS dispositions.
Key Transactions in 2009
• Since December 31, 2008, we have reduced our debt by $2.8 billion (and since September 30, 2008 we have reduced our debt by $2.9 billion) with proceeds from the issuance of equity and dispositions and contributions of assets as further discussed below.

• In the first quarter of 2009, we generated $1.345 billion of cash from the sale of our China operations ($845 million) and our investments in the Japan property funds ($500 million). 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 six months of 2009, we generated aggregate proceeds of $955.5 million from the contribution of 20 development properties to ProLogis European Properties Fund II and the sale of land parcels and 125 properties (3 of which were development properties) to third parties. 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.

• In the first half of 2009, we repurchased $864.4 million original principal amount of our senior notes for $640.2 million. This resulted in the reduction of our debt obligations by $224.3 million and the recognition of a gain in earnings of $161.2 million, which represented the difference between the recorded debt (net of discount) and the cash consideration paid.

• 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 ("Equity Offering").

• During the second quarter of 2009, we recorded an impairment charge of $84.2 million related primarily to completed development properties we expect to contribute or sell.

• In June 2009, we issued $391.7 million of secured debt in four separate transactions.

• We adopted Financial Accounting Standards Board ("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 Accounting Standards Codification ("ASC") 470-20 "Debt with Conversion and Other Options" ("ASC 470-20") 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.

Results of Operations
Six months ended June 30, 2009 and 2008
Net earnings attributable to common shares for the six months ended June 30 was as follows:

                                                                        2009               2008
Net earnings attributable to common shares (in thousands)            $ 417,597          $ 389,853
Net earnings per share attributable to common shares - Basic         $    1.22          $    1.49
Net earnings per share attributable to common shares - Diluted       $    1.21          $    1.45

The increase in net earnings in 2009 from 2008 is due primarily to: (i) gains recognized from the early extinguishment of debt of $161.2 million; and
(ii) increased foreign currency exchange gains of $44.4 million; offset by:
(i) lower total gains on contribution/sale of properties of $100.7 million;
(ii) Reduction in Workforce ("RIF") charges of $11.3 million; and
(iii) impairment charges on real estate properties of $84.2 million. In the discussion that follows, we present the results of operations as net operating income by reportable business segment. See Note 10 to our Consolidated Financial Statements in Item 1 for further description of our segments and a reconciliation of net operating income to earnings before income taxes. Direct Owned Segment
The net operating income of the direct owned segment consists of rental income and rental expenses from industrial and retail properties that we own. The size and leased percentage of our direct owned operating portfolio fluctuates due to the timing of development, contributions and dispositions 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. 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):

                                                            Six Months Ended
                                                                June 30,
                                                           2009           2008
    Rental and other income                             $  455,018     $  493,841
    Rental and other expenses                             (150,147 )     (158,213 )

    Total net operating income - direct owned segment   $  304,871     $  335,628

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

                                          June 30, 2009                                       December 31, 2008                                        June 30, 2008
                          Number of            Square                           Number of            Square                           Number of            Square
                          Properties            Feet            Leased%         Properties            Feet            Leased%         Properties            Feet            Leased %
Core industrial
properties                   1,036            142,593            89.7 %            1,157            154,947            92.2 %            1,135            149,906              93.3 %
Retail and mixed
use properties                  35              1,491            87.3 %               34              1,404            94.5 %               32              1,241              96.5 %

Subtotal
non-development
properties                   1,071            144,084            89.7 %            1,191            156,351            92.2 %            1,167            151,147              93.4 %
Completed
development
properties (1)                 175             52,744            49.4 %              140             40,763            43.5 %              164             43,862              52.5 %

Total operating
portfolio                    1,246            196,828            78.9 %            1,331            197,114            82.1 %            1,331            195,009              84.2 %
Assets in China -
sold in 2009                     -                  -               -                  -                  -               -                 70             11,912              60.8 %

Total                        1,246            196,828            78.9 %            1,331            197,114            82.1 %            1,401            206,921              82.8 %

(1) Included at June 30, 2009 are 54 properties aggregating 15.5 million square feet for which development was completed in 2009. During the six months ended June 30, 2009, we contributed or sold 22 properties from this portfolio that were 95.02% leased at the time of contribution or sale.

The decrease in rental and other income in 2009 from 2008 is due primarily to the contributions of properties in 2009 and 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. Due to our continuing involvement with the property funds, the operations of the

contributed properties are not included in discontinued operations. 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 $103.4 million and $113.6 million for the six months ended June 30, 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 entities and the properties they own. The net earnings or losses of the unconsolidated investees may include the following income and expense items, 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 and derivative 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. These costs include the property management expenses associated with the property-level management of 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). In order to allocate the property management expenses between the properties owned by us and the properties owned by the unconsolidated investees, we use the square feet owned at the beginning of the period by the respective portfolios. The net operating income from the investment management segment was as follows (in thousands):

                                                                 Six Months Ended
                                                                     June 30,
                                                                 2009         2008
  Unconsolidated property funds:
  North America (1)                                            $ 21,045     $ 11,582
  Europe (2)                                                     32,526       24,896
  Asia (3)                                                        9,937       18,616
  Other unconsolidated investees (4)                              1,197          984

  Total net operating income - investment management segment   $ 64,705     $ 56,078

(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 June 30, 2009. These property funds on a combined basis owned 852 and 825 properties at June 30, 2009 and 2008, respectively. The increase in properties is due primarily to contributions we made to certain of the property funds in the last half of 2008. Included in net operating income for 2009 and 2008, are net losses of $4.8 million and $14.6 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 meet the requirements for hedge accounting.

(2) Represents the income earned by us from our investments in two property funds in Europe, ProLogis European Properties ("PEPR") and ProLogis European Properties
Fund II ("PEPF II"). On a combined basis, these funds owned 409 and 339 properties at June 30, 2009 and 2008, respectively. The increase in properties is due primarily to contributions we made to PEPF II in 2008 and 2009, offset somewhat by the sale of 10 properties by PEPR during the second quarter of 2009. Our share of the net loss from these property sales was $4.8 million.

Our ownership
interest in
PEPR was 24.8%
and 24.9% at
both June 30,
2009 and 2008,
respectively.
Our ownership
interest in
PEPF II was
33.3% and
24.5% at
June 30, 2009
and 2008,
respectively.
Our ownership
interest in
PEPF II at

(3) Represents the income earned by us from our 20% ownership interest in one property fund in South Korea and two property funds in Japan through February 2009, at which time we sold our investments in Japan (see Note 2 to our Consolidated Financial Statements in Item 1). At June 30, 2009 and 2008, the property funds, in which we maintain an ownership interest, on a combined basis owned 12 and 77 properties. Included in
2008 for Japan
are net gains
of $4.0
million that
represent our
proportionate
share of
unrealized
gains 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 certain of our other unconsolidated investees that principally develop and operate industrial and retail properties and were previously included in the CDFS business segment.

CDFS Business Segment
Net operating income of the CDFS business segment for the six months ended June 30, 2009 was $180.2 million, compared with $477.6 million for the same period in 2008. As discussed earlier, our business strategy no longer includes the CDFS business segment. The amount in 2009 is the gain from the sale of our investments in the Japan property funds in February 2009, while the amount in 2008 consisted of gains recognized principally from the contributions of 90 properties to the property funds.
Operational Outlook
During the first six months of 2009, industrial property fundamentals have continued to mirror global economic weakness. We are experiencing a very challenging leasing environment throughout the majority of our markets with increased leasing costs and lower rental rates due to the competitive markets. Partially offsetting these trends is continued strong customer retention and a decline in occupancy rates in the second quarter that was less than the decline in the first quarter. The industry as a whole has had sharply reduced levels of new supply. We expect demand in the U.S. to improve as Gross Domestic Product ("GDP") growth returns. We believe significant obsolescence and ownership shifts, in the industry as a whole, in Europe and Asia will continue to drive demand in those regions.
In our total operating portfolio, including properties managed by us and owned by our unconsolidated investees that are accounted for under the equity method, we leased 48.3 million square feet and 121.5 million square feet of space during the first half of 2009 and the year ended December 31, 2008, respectively, including 62.1 million square feet of leases signed in the first half of 2008. This total operating portfolio was 87.4% leased at June 30, 2009, as compared to 88.5% leased at December 31, 2008.
In our direct owned portfolio, we leased 26.8 million square feet, including 8.2 million square feet of new leases in our development portfolio (both completed properties and those under development) in the six months ended June 30, 2009. Repeat business with our global customers is important to our long-term growth. During the first half of 2009, 54% 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 half of 2009, existing customers renewed their leases 71% of the time, as compared with 76% for the same period in 2008. We expect that leasing will continue to slow, leasing costs may increase and market rents will continue to decrease until economic conditions improve. As of June 30, 2009, our total direct owned operating portfolio was 78.9% leased, as compared with 82.1% at December 31, 2008. Excluding the development portfolio, our direct owned operating portfolio was 89.7% leased at June 30, 2009, as compared to 92.2% leased at December 31, 2008. As we previously disclosed, we have significantly reduced new development starts. During the six months ended June 30, 2009, we started development of . . .