• recast our global line of credit.

These objectives are discussed in more detail in Liquidity and Capital Resources below.
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 the remaining near-term objectives that we set in the fourth quarter of 2008, 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 of real estate to third parties; and

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

Our longer-term objectives are to:
• employ a conservative growth model;

• continue to focus on staggering and extending our debt maturities;

• develop pre-leased buildings on our land using development capital or take out commitments from one of our partners or customers, 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 58.30% and 41.44% leased at September 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 nine months ended September 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 $3.0 billion (and since September 30, 2008, we have reduced our debt by $3.1 billion) with proceeds from the issuance of equity and dispositions and contributions of assets as further discussed below.

• In August 2009, we amended and restated our global line of credit ("Global Line"), extending the maturity to August 2012 and reducing the size of our aggregate commitments to $2.25 billion (subject to currency fluctuations), after October 2010. The Global Line will continue to have a capacity of $3.8 billion (subject to currency fluctuations) until October 2010. In connection with the amendment, we repaid the balance outstanding and terminated our existing multi-currency credit facility (the "Credit Facility"), which was scheduled to mature in October 2009.

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

• In August 2009, we issued $350 million of 7.625% senior notes due 2014, at 99.489% of par value for an all-in-rate of 7.75%.

• On October 30, 2009, we issued $600 million of 7.375% senior notes due 2019, at 99.728% of par value for an all-in-rate of 7.414%.

• In the first nine months of 2009, we repurchased an aggregate of $899.4 million original principal amount of our senior notes for $673.1 million. We also repaid $227.0 million of secured mortgage debt with a maturity date of 2012 that had $11.4 million unamortized premium balance remaining. These transactions resulted in the reduction of our debt obligations by $226.3 million and the recognition of a gain in earnings of $173.2 million, which represented the difference between the recorded debt balance, including related debt issue costs, premiums and discounts, and the cash consideration paid.

• On October 1, 2009, pursuant to a consent solicitation, we amended certain covenants and events of default related to certain of our senior notes, as further discussed below.

• During the third quarter, we generated net proceeds of $325.1 million from the issuance of 29.8 million common shares under our at the market equity issuance program after payment of $6.9 million of commissions paid to the sales agent.

• 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").

• 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) in the first quarter of 2009. We entered into a sale 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 nine months of 2009, we generated aggregate proceeds of $1.2 billion from the contribution of 30 development properties to ProLogis European Properties Fund II and the sale of land parcels and 128 properties to third parties.

Results of Operations
Nine months ended September 30, 2009 and 2008 We adopted a new accounting standard that requires separate accounting for the debt and equity components of convertible debt 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. See Note 1 to our Consolidated Financial Statements in Item 1 for further information about this restatement.
Net earnings attributable to common shares for the nine months ended September 30 was as follows:

                                                                        2009               2008
Net earnings attributable to common shares (in thousands)            $ 405,809          $ 422,006
Net earnings per share attributable to common shares - Basic         $    1.07          $    1.61
Net earnings per share attributable to common shares - Diluted       $    1.06          $    1.57

The decrease in net earnings in 2009 from 2008 is due primarily to: (i) lower total gains on contribution/sale of properties of $150.2 million; and
(ii) impairment charges primarily on real estate properties of $130.5 million; offset by: (i) gains recognized from the early extinguishment of debt of $173.2 million; (ii) increased foreign currency exchange gains of $67.9 million primarily unrealized and due to intercompany debt; and (iii) income of $16.3 million from the termination of the Japan properties management agreement. In addition to the items noted above, net earnings per share is also impacted by the issuance of 204.6 million common shares through the Equity Offering and our at the market equity issuance program. 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):

                                                            Nine Months Ended
                                                              September 30,
                                                           2009           2008
    Rental and other income                             $  682,242     $  725,497
    Rental and other expenses                             (227,259 )     (229,716 )

    Total net operating income - direct owned segment   $  454,983     $  495,781

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

                                       September 30, 2009                                     December 31, 2008                                     September 30, 2008
                          Number of            Square                           Number of            Square                           Number of            Square
                          Properties            Feet            Leased%         Properties            Feet            Leased%         Properties            Feet            Leased %
Core industrial
properties                   1,032            141,862            90.4 %            1,157            154,947            92.2 %            1,169            156,093              92.3 %
Retail and mixed
use properties                  35              1,491            87.5 %               34              1,404            94.5 %               32              1,241              90.9 %

Subtotal
non-development
properties                   1,067            143,353            90.4 %            1,191            156,351            92.2 %            1,201            157,334              92.3 %
Completed
development
properties (1)                 169             52,281            56.6 %              140             40,763            43.5 %              153             43,435              46.2 %

Total operating
portfolio                    1,236            195,634            81.3 %            1,331            197,114            82.1 %            1,354            200,769              82.3 %
Assets in China -
sold in 2009                     -                  -               -                  -                  -               -                 62             10,667              77.8 %

Total                        1,236            195,634            81.3 %            1,331            197,114            82.1 %            1,416            211,436              82.1 %

(1) Included at September 30, 2009 are 50 properties aggregating 15.3 million square feet for which development was completed in 2009. During the nine months ended September 30, 2009, we contributed or sold 32 properties (11 properties that were completed in 2009) from this portfolio that were 96.5% 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.
Rental expenses decreased by $11.2 million in 2009 over 2008 primarily due to the properties that were contributed to the property funds in 2009 and 2008 and lower property management expenses, offset with increases in expenses due to the completed development properties. Also included in this segment are other expenses, which increased in 2009 over 2008 by $8.8 million primarily due to the write-off of costs associated with potential development projects when the development is not likely of happening and land holding costs. 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 $151.8 million and $165.1 million for the nine months ended September 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 direct 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):

                                                                Nine Months Ended
                                                                  September 30,
                                                                2009          2008
 Unconsolidated property funds:
 North America (1)                                            $  31,994     $ 24,942
 Europe (2)                                                      52,780       42,384
 Asia (3)                                                        25,980       27,356
 Other unconsolidated investees (4)                                (539 )      4,477

 Total net operating income - investment management segment   $ 110,215     $ 99,159

(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 September 30, 2009. These property funds on a combined basis owned 850 and 833 properties at September 30, 2009 and 2008, respectively. The increase in properties is due primarily to contributions we made to certain of the property funds in the fourth quarter of 2008.

Included in net operating income for 2009 and 2008 are net losses of $7.7 million and $15.4 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. In addition, in 2009, we recognized $2.2 million of losses due to impairment charges recognized by two property funds on properties they expect to sell and gains of $7.2 million from the early extinguishment of debt by the North American Industrial Fund.

(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 415 and 362 properties at September 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 14 properties by PEPR to a third party during the second and third quarters of 2009. Our share of the net loss from these property sales was $3.8 million.

Our ownership interest in PEPR was 24.8% and 24.9% at September 30, 2009 and 2008, respectively. Our ownership interest in PEPF II was 32.7% and 24.5% at September 30, 2009 and 2008, respectively. Our ownership interest in PEPF II at September 30, 2008 included a 17% direct ownership and a 7.5% indirect ownership (through PEPR's 30% ownership interest in PEPF II). In December 2008, we acquired from PEPR a 20% ownership interest in PEPF II, and in February 2009 PEPR sold its remaining 10% interest to third parties. As such, we have only a direct ownership interest in PEPF II at September 30, 2009.

(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). We continued to manage the Japan properties until July 2009. In connection with the termination of the management agreement, we earned a termination fee of $16.3 million. At September 30, 2009 and 2008, the property funds, in which we maintain an ownership interest, on a combined basis owned 12 and 86 properties.

(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 nine months ended September 30, 2009 was $180.2 million, compared with $548.0 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 128 properties to the property funds.
Operational Outlook
During the first nine 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. . . .