UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                    

Commission File Number 01-12846

(Exact name of registrant as specified in its charter)

Maryland (State or other jurisdiction of incorporation or organization)		74-2604728 (I.R.S. Employer Identification No.)

4545 Airport Way, Denver, Colorado (Address or principal executive offices)		80239 (Zip Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website; if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter periods that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes o No þ

The number of shares outstanding of the Registrant’s common shares as of May 2, 2011 was approximately 570,550,300.

 

 

PROLOGIS

INDEX

		Page
		Number
PART I. Financial Information
Item 1. Consolidated Balance Sheets — March 31, 2011 and December 31, 2010			1
Consolidated Statements of Operations — Three Months Ended March 31, 2011 and 2010			2
Consolidated Statement of Equity — Three Months Ended March 31, 2011 March 31, 2011			3
Consolidated Statements of Comprehensive Income (Loss) — Three Months Ended March 31, 2011 and 2010 2010			3
Consolidated Statements of Cash Flows — Three Months Ended March 31, 2011 and 2010			4
Notes to Consolidated Financial Statements			5
Report of Independent Registered Public Accounting Firm			18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures About Market Risk			32
Item 4. Controls and Procedures			33
PART II. Other Information
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			34
Item 3. Defaults Upon Senior Securities			34
Item 4. [Removed and Reserved]			34
Item 5. Other Information			34
Item 6. Exhibits			34
EX-10.2
EX-12.1
EX-12.2
EX-15.1
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART 1.

Item 1. Financial Statements

PROLOGIS

CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

		March 31,
		2011				December 31,
		(Unaudited)				2010
ASSETS
Investments in real estate properties		$	13,141,508			$	12,879,641
Less accumulated depreciation			1,656,781				1,595,678
Net investments in properties			11,484,727				11,283,963
Investments in and advances to unconsolidated investees			2,084,696				2,024,661
Notes receivable backed by real estate			358,323				302,144
Assets held for sale			215,714				574,791
Net investments in real estate			14,143,460				14,185,559
Cash and cash equivalents			24,744				37,634
Restricted cash			34,088				27,081
Accounts receivable			95,538				58,979
Other assets			637,865				593,414
Total assets		$	14,935,695			$	14,902,667
LIABILITIES AND EQUITY
Liabilities:
Debt		$	6,415,034			$	6,506,029
Accounts payable and accrued expenses			394,862				388,536
Other liabilities			496,946				467,998
Liabilities related to assets held for sale			2,464				19,749
Total liabilities			7,309,306				7,382,312
Equity:
ProLogis shareholders’ equity:
Series C Preferred Shares at stated liquidation preference of $50 per share; $0.01 par value; 2,000 shares issued and outstanding at March 31, 2011 and December 31, 2010			100,000				100,000
Series F Preferred Shares at stated liquidation preference of $25 per share; $0.01 par value; 5,000 shares issued and outstanding at March 31, 2011 and December 31, 2010			125,000				125,000
Series G Preferred Shares at stated liquidation preference of $25 per share; $0.01 par value; 5,000 shares issued and outstanding at March 31, 2011 and December 31, 2010			125,000				125,000
Common Shares; $0.01 par value; 570,552 shares issued and outstanding at March 31, 2011 and 570,076 shares issued and outstanding at December 31, 2010			5,706				5,701
Additional paid-in capital			9,665,861				9,668,404
Accumulated other comprehensive income (loss)			213,465				(3,160	)
Distributions in excess of net earnings			(2,626,381	)			(2,515,722	)
Total ProLogis shareholders’ equity			7,608,651				7,505,223
Noncontrolling interests			17,738				15,132
Total equity			7,626,389				7,520,355
Total liabilities and equity		$	14,935,695			$	14,902,667

The accompanying notes are an integral part of these Consolidated Financial Statements.

PROLOGIS

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)

		Three Months Ended
		March 31,
		2011				2010
Revenues:
Rental income		$	205,311			$	187,545
Property management and other fees and incentives			29,170				28,662
Development management and other income			4,319				1,076
Total revenues			238,800				217,283
Expenses:
Rental expenses			63,342				56,264
Investment management expenses			10,552				10,319
General and administrative			39,183				42,006
Merger integration expenses and reduction in workforce			5,988				—
Depreciation and amortization			82,693				75,166
Other expenses			4,684				4,267
Total expenses			206,442				188,022
Operating income			32,358				29,261
Other income (expense):
Earnings from unconsolidated investees, net			13,641				7,973
Interest income			4,436				310
Interest expense			(90,562	)			(109,979	)
Other expense, net			(7,015	)			(482	)
Net gains on dispositions of investments in real estate			3,725				11,807
Foreign currency exchange gains, net			1,374				3,688
Loss on early extinguishment of debt, net			—				(47,633	)
Total other income (expense)			(74,401	)			(134,316	)
Loss before income taxes			(42,043	)			(105,055	)
Current income tax expense			5,505				9,753
Deferred income tax expense (benefit)			864				(1,551	)
Total income tax expense			6,369				8,202
Loss from continuing operations			(48,412	)			(113,257	)
Discontinued operations:
Income attributable to disposed properties and assets held for sale			6,288				20,602
Net gains on dispositions of properties and other real estate investments, net of taxes			1,960				8,148
Total discontinued operations			8,248				28,750
Consolidated net loss			(40,164	)			(84,507	)
Net earnings attributable to noncontrolling interests			(83	)			(253	)
Net loss attributable to controlling interests			(40,247	)			(84,760	)
Less preferred share dividends			6,369				6,369
Net loss attributable to common shares		$	(46,616	)		$	(91,129	)
Weighted average common shares outstanding — Basic			570,559				474,991
Weighted average common shares outstanding — Diluted			570,559				474,991
Net earnings (loss) per share attributable to common shares — Basic:
Continuing operations		$	(0.09	)		$	(0.25	)
Discontinued operations			0.01				0.06
Net loss per share attributable to common shares — Basic		$	(0.08	)		$	(0.19	)
Net earnings (loss) per share attributable to common shares — Diluted:
Continuing operations		$	(0.09	)		$	(0.25	)
Discontinued operations			0.01				0.06
Net loss per share attributable to common shares — Diluted		$	(0.08	)		$	(0.19	)
Distributions per common share		$	0.1125			$	0.15

The accompanying notes are an integral part of these Consolidated Financial Statements.

PROLOGIS

CONSOLIDATED STATEMENT OF EQUITY
Three Months Ended March 31, 2011
(Unaudited)
(In thousands)

						Common Shares												Accumulated				Distributions
						Number								Additional				Other				in Excess of				Non-
		Preferred				of				Par				Paid-in				Comprehensive				Net				controlling				Total
		Shares				Shares				Value				Capital				Income (Loss)				Earnings				Interests				Equity
Balance as of January 1, 2011		$	350,000				570,076			$	5,701			$	9,668,404			$	(3,160	)		$	(2,515,722	)		$	15,132			$	7,520,355
Consolidated net earnings (loss)			—				—				—				—				—				(40,247	)			83				(40,164	)
Issuances of common shares under common share plans, net of issuance costs			—				476				5				(2,543	)			—				—				—				(2,538	)
Foreign currency translation gains, net			—				—				—				—				201,253				—				2,608				203,861
Unrealized gains and amortization on derivative contracts, net			—				—				—				—				15,372				—				—				15,372
Distributions			—				—				—				—				—				(70,412	)			(85	)			(70,497	)
Balance as of March 31, 2011		$	350,000				570,552			$	5,706			$	9,665,861			$	213,465			$	(2,626,381	)		$	17,738			$	7,626,389

PROLOGIS

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)

		Three Months Ended
		March 31,
		2011				2010
Net loss attributable to controlling interests		$	(40,247	)		$	(84,760	)
Other comprehensive income (loss):
Foreign currency translation gains (losses), net			201,253				(118,006	)
Unrealized gains (losses) and amortization on derivative contracts, net			15,372				(12,794	)
Comprehensive income (loss) attributable to common shares		$	176,378			$	(215,560	)

The accompanying notes are an integral part of these Consolidated Financial Statements.

PROLOGIS

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

		Three Months Ended
		March 31,
		2011				2010
Operating activities:
Net loss attributable to controlling interests		$	(40,247	)		$	(84,760	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Noncontrolling interest share in earnings, net			83				253
Straight-lined rents			(12,602	)			(11,304	)
Cost (settlement) of share-based compensation awards			(1,537	)			5,681
Depreciation and amortization			83,121				86,315
Earnings from unconsolidated investees			(13,641	)			(7,973	)
Changes in operating receivables and distributions from unconsolidated investees			23,063				(3,728	)
Amortization of deferred loan costs			4,997				6,482
Amortization of debt discount, net			7,838				15,334
Gains recognized on property dispositions, net			(7,601	)			(19,955	)
Loss on early extinguishment of debt, net			—				47,633
Unrealized foreign currency exchange gains, net			(1,635	)			(3,209	)
Deferred income tax expense (benefit)			864				(1,551	)
Increase in restricted cash, accounts receivable and other assets			(56,198	)			(13,792	)
Increase (decrease) in accounts payable and accrued expenses and other liabilities			16,057				(4,517	)
Net cash provided by operating activities			2,562				10,909
Investing activities:
Real estate investments			(200,746	)			(91,246	)
Tenant improvements and lease commissions on previously leased space			(12,290	)			(9,061	)
Non-development capital expenditures			(4,674	)			(5,351	)
Net advances from (investments in and net advances to) unconsolidated investees			11,329				(127,264	)
Return of investment from unconsolidated investees			38,693				27,251
Proceeds from dispositions of real estate properties			394,494				180,913
Proceeds from repayment of notes receivable			6,450				13,638
Investments in notes receivable backed by real estate and advances on other notes receivable			(55,000	)			—
Net cash provided by (used in) investing activities			178,256				(11,120	)
Financing activities:
Proceeds from sales and issuances of common shares			31				28,309
Distributions paid on common shares			(64,043	)			(71,713	)
Dividends paid on preferred shares			(6,354	)			(6,354	)
Noncontrolling interest distributions, net			(85	)			(143	)
Debt and equity issuance costs paid			(3,039	)			(21,106	)
Net payments on credit facilities			(269,817	)			(561,208	)
Repurchase of senior and convertible senior notes and extinguishment of secured mortgage debt			—				(961,135	)
Proceeds from issuance of senior and convertible senior notes and secured mortgage debt			164,503				1,646,248
Payments on senior notes, secured mortgage debt and assessment bonds			(16,351	)			(30,502	)
Net cash provided by (used in) financing activities			(195,155	)			22,396
Effect of foreign currency exchange rate changes on cash			1,447				(669	)
Net increase (decrease) in cash and cash equivalents			(12,890	)			21,516
Cash and cash equivalents, beginning of period			37,634				34,362
Cash and cash equivalents, end of period		$	24,744			$	55,878

See Note 11 for information on non-cash investing and financing activities and other information.

The accompanying notes are an integral part of these Consolidated Financial Statements.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. General

Business. ProLogis, collectively with our consolidated subsidiaries (“we”, “our”, “us”, the “Company” or “ProLogis”), is a publicly held real estate investment trust (“REIT”) that owns, operates and develops (directly and through our unconsolidated investees) primarily industrial properties in North America, Europe and Asia. Our current business strategy includes two reportable business segments: direct owned and investment management. Our direct owned segment represents the direct long-term ownership of industrial properties. Our investment management segment represents the long-term investment management of property funds and other unconsolidated investees, and the properties they own. See Note 10 for further discussion of our business segments.

On January 30, 2011, we and three of our newly formed, wholly owned subsidiaries, entered into a definitive Agreement and Plan of Merger, with AMB Property Corporation, a Maryland corporation (“AMB”), and AMB Property, L.P., a Delaware limited partnership (“AMB LP”). During the first quarter of 2011, we incurred certain expenses in connection with the expected merger with AMB, that have been included in Merger Integration Expenses and Reduction in Workforce on the Consolidated Statements of Operations. See Note 13 for further discussion on subsequent events related to the merger.

Basis of Presentation. The accompanying consolidated financial statements, presented in the U.S. dollar, are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the financial statements and revenue and expenses during the reporting period. Our actual results could differ from those estimates and assumptions. All material intercompany transactions with consolidated entities have been eliminated.

The accompanying unaudited interim financial information has been prepared according to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with such rules and regulations. Our management believes that the disclosures presented in these financial statements are adequate to make the information presented not misleading. In our opinion, all adjustments and eliminations, consisting only of normal recurring adjustments, necessary to present fairly our financial position as of March 31, 2011, our results of operations for the three months ended March 31, 2011 and 2010, and our cash flows for the three months ended March 31, 2011 and 2010 have been included. We have evaluated all subsequent events for adjustment to or disclosure in these financial statements through the issuance of these financial statements. The results of operations for such interim periods are not necessarily indicative of the results for the full year. The accompanying unaudited interim financial information should be read in conjunction with our December 31, 2010 Consolidated Financial Statements, as filed with the SEC in our Annual Report on Form 10-K.

Certain amounts included in the accompanying Consolidated Financial Statements for 2010 have been reclassified to conform to the 2011 financial statement presentation.

Recent Accounting Pronouncements. In July 2010, the FASB issued a new accounting standard that expands existing disclosures about the credit quality of financing receivables and the related allowance for credit losses. We adopted the expanded disclosure requirements for ending balances applicable to our Notes Receivable Backed by Real Estate as of December 31, 2010. Disclosures regarding activity that occurs during the reporting period were effective beginning January 1, 2011. See Note 4 for disclosure of the rollforward activity for the three months ended March 31, 2011.

In January 2010, the FASB issued a new accounting standard that requires disclosures about purchases, sales, issuances and settlements in the reconciliation for Level 3 fair value measurements. The Level 3 disclosure requirements were effective for us on January 1, 2011, but did not have an impact on our financial position or results of operations. In addition, we do not have any significant financial assets or financial liabilities that are measured at fair value using Level 3 valuation techniques and inputs on a recurring basis, the adoption of this standard is not considered material.

2. Real Estate

Investments in real estate properties are presented at cost, and consist of the following (in thousands):

		March 31,				December 31,
		2011				2010
Industrial properties (1):
Improved land		$	2,548,677			$	2,527,972
Buildings and improvements			8,258,506				8,186,827
Properties under development, including cost of land (2)			452,813				365,362
Land (3)			1,599,966				1,533,611
Other real estate investments (4)			281,546				265,869
Total investments in real estate properties			13,141,508				12,879,641
Less accumulated depreciation			1,656,781				1,595,678
Net investments in properties		$	11,484,727			$	11,283,963

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

At March 31, 2011, excluding our assets held for sale, we owned real estate assets in North America (Canada, Mexico and the United States), Europe (Austria, Belgium, the Czech Republic, France, Germany, Hungary, Italy, the Netherlands, Poland, Romania, Slovakia, Spain, Sweden and the United Kingdom) and Asia (Japan).

During the three months ended March 31, 2011, we recognized Net Gains on Dispositions of Real Estate Properties in continuing operations of $3.7 million, which related to the sale of one operating property (0.3 million square feet) to ProLogis European Properties Fund II and adjustments to previous dispositions ($3.1 million gain and cash proceeds of $17.2 million) and the sale of 60 acres of land to third parties ($0.6 million gain and cash proceeds of $9.1 million).

When we contribute to a property fund or joint venture in which we have an ownership interest, we do not recognize a portion of the gain realized. If a loss is realized it is recognized when known. The amount of gain not recognized, based on our ownership interest in the entity acquiring the property, is deferred by recognizing a reduction to our investment in the applicable unconsolidated investee. Due to our continuing involvement through our ownership in the unconsolidated investee, these dispositions are not included in discontinued operations. See Note 5 for further discussion of properties we sold to third parties that are reported in discontinued operations.

During the first quarter of 2011, we recognized a $6.9 million charge for estimated repairs related primarily to one of our buildings in Japan that was damaged from the earthquake and related tsunami in March 2011, which is included in Other Expense, Net on the Consolidated Statement of Operations.

3. Unconsolidated Investees

Summary of Investments

Our investments in and advances to unconsolidated investees, which we account for under the equity method, are summarized by type of investee as follows (in thousands):

		March 31,				December 31,
		2011				2010
Property funds		$	1,950,313			$	1,890,016
Other investees			134,383				134,645
Totals		$	2,084,696			$	2,024,661

Property Funds

We have investments in several property funds that own portfolios of operating industrial properties. Many of these properties were originally developed by us and contributed to these property funds, although certain of the property funds have also acquired properties from third parties. We earn fees for acting as manager of the property funds and the properties they own. We may earn additional fees by providing other services including, but not limited to, leasing, construction, development and financing. We may also earn incentive performance returns based on the investors’ returns over a specified period.

Summarized information regarding our investments in the property funds is as follows (in thousands):

		Three Months Ended
		March 31,
		2011				2010
Earnings (loss) from unconsolidated property funds:
North America		$	2,622			$	(2,813	)
Europe			9,092				8,529
Asia			209				178
Total earnings from unconsolidated property funds, net		$	11,923			$	5,894
Fees paid to ProLogis:
Property management and other fees and incentives:
North America		$	12,541			$	14,376
Europe			13,325				12,895

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

		Three Months Ended
		March 31,
		2011				2010
Asia			193				189
Total property management and other fees and incentives			26,059				27,460
Development management and other income — Europe			1,901				—
Total fees paid to ProLogis		$	27,960			$	27,460

We also earned property management fees from other investees and other entities of $3.1 million and $1.2 million during the three months ended March 31, 2011 and 2010, respectively.

Information about our investments in the property funds is as follows (dollars in thousands):

		Ownership Percentage								Investment in and Advances to
		March 31,				December 31,				March 31,				December 31,
Property Fund		2011				2010				2011				2010
ProLogis California			50.0	%			50.0	%		$	89,577			$	91,088
ProLogis North American Properties Fund I			41.3	%			41.3	%			40,238				40,572
ProLogis North American Properties Fund XI			20.0	%			20.0	%			30,248				30,274
ProLogis North American Industrial Fund			23.1	%			23.1	%			231,498				234,172
ProLogis North American Industrial Fund II			37.0	%			37.0	%			350,463				354,407
ProLogis North American Industrial Fund III			20.0	%			20.0	%			130,915				132,282
ProLogis Mexico Industrial Fund			20.0	%			20.0	%			52,804				53,574
ProLogis European Properties (“PEPR”) (1)			33.1	%			33.1	%			533,718				496,946
ProLogis European Properties Fund II (“PEPF II”)			29.7	%			29.7	%			473,471				439,985
ProLogis Korea Fund			20.0	%			20.0	%			17,381				16,716
Totals										$	1,950,313			$	1,890,016

To the extent an unconsolidated investee acquires properties from a third party or requires cash to retire debt or has other cash needs, we may agree to contribute our proportionate share of the equity component in cash to the unconsolidated investee.

Summarized financial information of the property funds (for the entire entity, not our proportionate share) and our investment in such funds is presented below (dollars in millions):

		North
2011		America				Europe				Asia				Total
For the three months ended March 31, 2011:
Revenues		$	173.3			$	190.4			$	3.0			$	366.7
Net earnings (loss)		$	(14.5	)		$	20.5			$	1.1			$	7.1
As of March 31, 2011:
Total assets		$	8,037.7			$	8,736.4			$	157.6			$	16,931.7
Amounts due to (from) us (1)		$	115.3			$	(26.2	)		$	0.2			$	89.3
Third party debt (2)		$	4,193.2			$	3,719.1			$	50.9			$	7,963.2
Total liabilities		$	4,499.0			$	4,394.6			$	54.7			$	8,948.3
Noncontrolling interest		$	—			$	6.3			$	—			$	6.3
Fund partners’ equity		$	3,538.7			$	4,335.5			$	102.9			$	7,977.1
Our weighted average ownership (3)			28.5	%			31.3	%			20.0	%			29.8	%
Our investment balance (4)		$	925.7			$	1,007.2			$	17.4			$	1,950.3
Deferred gains, net of amortization (5)		$	233.4			$	298.5			$	—			$	531.9

		North
2010		America				Europe				Asia				Total
For the three months ended March 31, 2010:
Revenues		$	201.9			$	186.7			$	2.8			$	391.4
Net earnings (loss) (6)		$	(24.0	)		$	16.5			$	0.9			$	(6.6	)
As of December 31, 2010:
Total assets		$	8,082.2			$	8,176.7			$	127.3			$	16,386.2

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

		North
2010		America				Europe				Asia				Total
Amounts due to (from) us (1)		$	117.3			$	(5.9	)		$	0.2			$	111.6
Third party debt (2)		$	4,196.2			$	3,476.8			$	49.2			$	7,722.2
Total liabilities		$	4,529.8			$	4,131.7			$	52.9			$	8,714.4
Noncontrolling interest		$	—			$	5.9			$	—			$	5.9
Fund partners’ equity		$	3,552.4			$	4,039.1			$	74.4			$	7,665.9
Our weighted average ownership (3)			28.5	%			31.3	%			20.0	%			29.8	%
Our investment balance (4)		$	936.4			$	936.9			$	16.7			$	1,890.0
Deferred gains, net of amortization (5)		$	235.1			$	297.1			$	—			$	532.2

Other unconsolidated investees

During the three months ended March 31, 2011, we had investments in entities that developed and/or owned industrial properties and performed land development activity. During the first quarter of 2010, we also had investments in entities that owned non-core properties, which were disposed of later in 2010 and in the first quarter of 2011. The amounts that we recognized as our proportionate share of the earnings from our investments in these entities are summarized as follows (in thousands):

		Three Months Ended
		March 31,
		2011				2010
North America		$	73			$	1,542
Europe			730				503
Asia			915				34
Total earnings from other unconsolidated investees, net		$	1,718			$	2,079

Our investments in and advances to these entities are as follows (in thousands):

		March 31,				December 31,
		2011				2010
North America		$	17,823			$	17,508
Europe			50,113				49,857
Asia			66,447				67,280
Total investments in and advances to unconsolidated investees		$	134,383			$	134,645

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

4. Notes Receivable Backed by Real Estate

As of March 31, 2011 and December 31, 2010, the balance in notes receivable backed by real estate was $358.3 million and $302.1 million, respectively. The activity on these notes receivable for the three months ended March 31, 2011 is as follows (in thousands):

		$188 million				$55 million
		Preferred Equity				Preferred Equity				ProLogis				Other Notes
		Interest				Interest (1)				NAIF II (2)				Receivable
Balance as of December 31, 2010		$	189,550			$	—			$	81,540			$	31,054
Addition of notes receivable balance			—				55,000				—				—
Payment received on principal note balance			—				—				(2,676	)			—
Accrued interest, net of interest payments received			1,695				316				—				—
Impact of changes in foreign exchange rates			—				—				—				1,844
Balance as of March 31, 2011		$	191,245			$	55,316			$	78,864			$	32,898

5. Assets Held for Sale and Discontinued Operations

Held for Sale

During the first quarter of 2011, we sold a portfolio of non-core assets for net proceeds of $357.3 million that were included in Assets Held for Sale at December 31, 2010 ($296.7 million of the proceeds related to assets that are included in Discontinued Operations). As of March 31, 2011, we have eight land parcels and five operating properties that met the criteria as held for sale. The amounts included in Assets Held for Sale as of March 31, 2011 primarily include real estate balances of certain non-core assets, which were part of a definitive agreement signed in December 2010 that are expected to close in the second quarter of 2011.

Discontinued Operations

During the three months ended March 31, 2011, we disposed of land subject to ground leases and 33 non-development properties aggregating 2.2 million square feet to third parties, most of which was included in Assets Held for Sale at December 31, 2010. During all of 2010, we disposed of land subject to ground leases and 205 properties aggregating 25.4 million square feet to third parties, two of which were development properties.

The operations of the properties held for sale or disposed of to third parties and the aggregate net gains recognized upon their disposition are presented as Discontinued Operations in our Consolidated Statements of Operations for all periods presented. Interest expense is included in discontinued operations only if it is directly attributable to these properties.

Discontinued operations are summarized as follows (in thousands):

		Three Months Ended
		March 31,
		2011				2010
Rental income		$	10,061			$	43,373
Rental expenses			(3,345	)			(11,622	)
Depreciation and amortization			(428	)			(11,149	)
Income attributable to disposed properties			6,288				20,602
Net gains recognized on dispositions of properties and other real estate investments			3,876				8,148
Income tax on dispositions			(1,916	)			—
Total discontinued operations		$	8,248			$	28,750

The following information relates to properties disposed of during the periods presented and recorded as discontinued operations, including adjustments to previous dispositions for actual versus estimated selling costs (dollars in thousands):

		Three Months Ended
		March 31,
		2011				2010
Number of properties			33				8
Net proceeds from dispositions		$	331,153			$	13,688
Net gains from dispositions		$	3,876			$	8,148

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

6. Debt

Our debt consisted of the following (dollars in thousands):

		March 31, 2011								December 31, 2010
		Weighted								Weighted
		Average Interest				Amount				Average Interest				Amount
		Rate				Outstanding				Rate				Outstanding
Credit facilities (“Global Line”)			3.58	%		$	273,520				3.53	%		$	520,141
Senior notes			6.61	%			3,194,083				6.63	%			3,195,724
Convertible senior notes (1)			4.90	%			1,529,843				4.90	%			1,521,568
Secured mortgage debt			5.18	%			1,398,744				5.67	%			1,249,729
Assessment bonds			6.31	%			18,844				6.48	%			18,867
Totals			5.76	%		$	6,415,034				5.79	%		$	6,506,029

As of March 31, 2011, we were in compliance with all of our debt covenants, under our Global Line and Indenture, dated as of March 1, 1995, between Prologis and U.S. Bank National Association, as trustee (as successor in interest to State Street Bank and Trust Company) (as amended, supplemented or otherwise modified to the date hereof, the “Indenture”).

During the three months ended March 31, 2010, in connection with our announced initiatives to stagger and extend our debt maturities and reduce debt, we repurchased certain senior and convertible senior notes outstanding with maturities in 2012 and 2013 (we did not repurchase any debt in 2011). We utilized proceeds from borrowings under the Global Line to repurchase the senior notes. In addition, in 2010 we repaid certain secured mortgage debt in connection with the sale of a property in Japan. The activity is summarized as follows (in thousands):

		Three Months Ended
		March 31, 2010
Convertible Senior Notes (1):
Original principal amount		$	490,039
Cash purchase price		$	465,094
Senior Notes:
Original principal amount		$	422,476
Cash purchase price		$	449,382
Secured Mortgage Debt:
Original principal amount		$	45,140
Cash repayment price		$	46,659
Total:
Original principal amount		$	957,655
Cash purchase / repayment price		$	961,135
Loss on early extinguishment of debt (2)		$	(47,633	)

Global Line

Information related to our Global Line as of March 31, 2011 is as follows (dollars in millions):

Aggregate lender — commitments		$	1,627.5
Less:
Borrowings outstanding			273.5
Outstanding letters of credit			85.3
Current availability		$	1,268.7

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

We may draw funds from a syndicate of banks in U.S. dollars, euros, Japanese yen, and British pound sterling. Based on our public debt ratings and a pricing grid, interest on the borrowings under the Global Line accrues at a variable rate (3.58% per annum at March 31, 2011 based on a weighted average using local currency rates) and is based upon the interbank offered rate in each respective jurisdiction in which the borrowings are outstanding. The facility matures on August 12, 2012.

Secured Mortgage Debt

TMK bonds are a financing vehicle in Japan for special purpose companies known as TMKs. In 2011, we issued a ¥13.0 billion ($161.3 million) TMK bond on March 17, 2011 at 1.34% due March 2018 on one property with an undepreciated cost of $253.8 million at March 31, 2011.

Long-Term Debt Maturities

Principal payments due on our debt, excluding the Global Line, for the remainder of 2011 and for each of the years in the five-year period ending December 31, 2016 and thereafter are as follows (in thousands):

2011 (1)		$	172,333
2012 (2)			800,233
2013 (2) (3)			659,957
2014			659,160
2015			801,616
2016			566,156
Thereafter			2,523,973
Total principal due			6,183,428
Less: discount, net			41,914
Net carrying balance		$	6,141,514

7. Long-Term Compensation

Our long-term incentive plans provide for grants of share options, stock appreciation rights, full value awards and cash incentive awards to employees and other persons, including non-management members of our Board of Trustees. The full value awards outstanding at March 31, 2011 include restricted share units (“RSUs”) and performance share awards (“PSAs”).

Summary of Activity

The activity for the three months ended March 31, 2011, with respect to our share options, is as follows:

		Options Outstanding
						Weighted Average
		Number of Options				Exercise Price				Options Exercisable
Balance at December 31, 2010			3,222,508			$	29.86
Settled			(278,399	)			31.98
Forfeited			(104,435	)			48.34
Balance at March 31, 2011			2,839,674			$	28.97				2,365,352

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

The activity for the three months ended March 31, 2011, with respect to our full value awards, is as follows:

		Number of				Weighted Average				Number of
		Shares				Original Value				Shares Vested
Balance at December 31, 2010			4,185,341
Granted			1,788,385
Distributed			(645,125	)
Settled			(333,900	)
Forfeited			(226,970	)
Balance at March 31, 2011			4,767,731			$	12.61				196,988

In 2011, we granted 1,159,968 RSUs and 628,417 target PSAs. The PSAs were granted to certain employees of the company, vest over three years and may be earned based on the attainment of certain individual and company goals for 2011. The ultimate number of PSAs that may be earned and issued to each employee can be between from 0 — 200% of their target award.

8. Earnings Per Common Share

We determine basic earnings per share based on the weighted average number of common shares outstanding during the period. We compute diluted earnings per share based on the weighted average number of common shares outstanding combined with the incremental weighted average effect from all outstanding potentially dilutive instruments.

The following table sets forth the computation of our basic and diluted earnings per share (in thousands, except per share amounts):

		Three Months Ended
		March 31,
		2011 (1)				2010 (1)
Net loss attributable to common shares		$	(46,616	)		$	(91,129	)
Weighted average common shares outstanding — Basic and Diluted (2)(3)			570,559				474,991
Net loss per share attributable to common shares — Basic		$	(0.08	)		$	(0.19	)
Net loss per share attributable to common shares — Diluted		$	(0.08	)		$	(0.19	)

9. Financial Instruments

Derivative Financial Instruments

In the normal course of business, our operations are exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates. To manage these risks, we may enter into various derivative contracts. We may use foreign currency contracts, including forwards and options, to manage foreign currency exposure. We may use interest rate swaps to manage the effect of interest rate fluctuations. We do not use derivative financial instruments for trading purposes. The majority of our derivative financial instruments are customized derivative transactions and are not exchange-traded. Management reviews our hedging program, derivative positions, and overall risk management strategy on a regular basis. We only enter into transactions that we believe will be effective at offsetting the underlying risk.

Our use of derivatives does involve the risk that counterparties may default on a derivative contract. We establish exposure limits for each counterparty to minimize this risk and provide counterparty diversification. Substantially all of our derivative exposures are with counterparties that have long-term credit ratings of single-A or better. We enter into master agreements with counterparties that generally allow for netting of certain exposures; therefore, the actual loss we would recognize if all counterparties failed to perform as contracted would be significantly lower. To mitigate pre-settlement risk, minimum credit standards become more stringent as the duration of the derivative financial instrument increases. To minimize the concentration of credit risk, we enter into derivative transactions with a portfolio of financial institutions. Based on these factors, we consider the risk of counterparty default to be minimal.

All derivatives are recognized at fair value in our Consolidated Balance Sheets within the line items Other Assets or Accounts Payable and Accrued Expenses, as applicable. We do not net our derivative position by counterparty for purposes of balance sheet presentation and disclosure. The accounting for gains and losses that result from changes in the fair values of derivative instruments depends on whether the derivatives are designated as, and qualify as, hedging instruments. Derivatives can be designated as fair value hedges, cash flow hedges or hedges of net investments in foreign operations.

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

Changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recorded in Accumulated Other Comprehensive Income (Loss) in our Consolidated Balance Sheets. We reclassify changes in the fair value of derivatives into the applicable line item in our Consolidated Statements of Operations in which the hedged items are recorded in the same period that the underlying hedged items affect earnings. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures hedged, fluctuations in the value of the derivative instruments will generally be offset by changes in the fair values or cash flows of the underlying exposures being hedged. The changes in fair values of derivatives that were not designated and/or did not qualify as hedging instruments are immediately recognized in earnings.

For derivatives that will be accounted for as hedging instruments in accordance with the accounting standards, we formally designate and document, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective and the strategy for undertaking the hedge transaction. In addition, we formally assess both at inception and at least quarterly thereafter, whether the derivatives used in hedging transactions are effective at offsetting changes in either the fair values or cash flows of the related underlying exposures. Any ineffective portion of a derivative financial instrument’s change in fair value is immediately recognized in earnings. Derivatives not designated as hedges are not speculative and are used to manage our exposure to foreign currency fluctuations but do not meet the strict hedge accounting requirements.

Our interest rate risk management strategy is to limit the impact of future interest rate changes on earnings and cash flows. To achieve this objective, we primarily borrow on a fixed rate basis for longer-term debt issuances. The maximum length of time that we hedge our exposure to future cash flows is typically less than 10 years. We use cash flow hedges to minimize the variability in cash flows of assets or liabilities or forecasted transactions caused by fluctuations in interest rates. We typically designate our interest rate swap agreements as cash flow hedges as these derivative instruments may be used to manage the interest rate risk on potential future debt issuances or to fix the interest rate on a variable rate debt issuance. The effective portion of the gain or loss on the derivative is reported as a component of Accumulated Other Comprehensive Income (Loss) in our Consolidated Balance Sheets, and reclassified to Interest Expense in the Consolidated Statements of Operations over the corresponding period of the hedged item. Losses on the derivative representing hedge ineffectiveness are recognized in Interest Expense at the time the ineffectiveness occurred.

We have entered into interest rate swap contracts with a combined notional amount of $268.1 million to fix the variable rate on certain TMK bonds. We designated these contracts as cash flow hedges and they qualify for hedge accounting treatment. At March 31, 2011, we had $1.0 million accrued in Accounts Payable and Accrued Expenses in our Consolidated Balance Sheets relating to these unsettled derivative contracts.

There was no ineffectiveness recorded during the three months ended March 31, 2011 and 2010. The amount reclassified to interest expense for the three months ended March 31, 2011 and 2010 is not considered material.

The following table summarizes the activity in our derivative instruments (in millions) for the three months ended March 31:

		2011				2010
		Interest				Interest
		Rate Swaps				Rate Swaps
Notional amounts at January 1		$	268.1			$	157.7
Matured or expired contracts			—				(44.6	)
Notional amounts at March 31		$	268.1			$	113.1

Fair Value of Financial Instruments

We have estimated the fair value of our financial instruments using available market information and valuation methodologies we believe to be appropriate for these purposes. Considerable judgment and a high degree of subjectivity are involved in developing these estimates and, accordingly, they are not necessarily indicative of amounts that we would realize upon disposition.

The fair value hierarchy consists of three broad levels, which are described below:

•

Level 1 — Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

•

Level 2 — Observable inputs, other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

•

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

At March 31, 2011 and December 31, 2010, the carrying amounts of certain of our financial instruments, including cash and cash equivalents, accounts and notes receivable and accounts payable and accrued expenses were representative of their fair values due to the short-term nature of these instruments and the recent acquisition of these items.

At March 31, 2011 and December 31, 2010, the fair value of our senior notes and convertible senior notes, has been estimated based upon quoted market prices for the same (Level 1) or similar (Level 2) issues when current quoted market prices are available, the fair value of our Global Line has been estimated by discounting the future cash flows using rates and borrowing spreads currently available to us (Level 3), and the fair value of our secured mortgage debt and assessment bonds that do not have current quoted market prices available has been estimated by discounting the future cash flows using rates currently available to us for debt with similar terms and maturities (Level 3). The fair value of our derivative

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

financial instruments is determined through widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative (Level 2). The differences in the fair value of our debt from the carrying value in the table below are the result of differences in interest rates and/or borrowing spreads that were available to us at March 31, 2011 and December 31, 2010, as compared with those in effect when the debt was issued or acquired. The senior notes and many of the issues of secured mortgage debt contain pre-payment penalties or yield maintenance provisions that could make the cost of refinancing the debt at lower rates exceed the benefit that would be derived from doing so.

The following table reflects the carrying amounts and estimated fair values of our debt (in thousands):

		March 31, 2011								December 31, 2010
		Carrying Value				Fair Value				Carrying Value				Fair Value
Global Line		$	273,520			$	278,170			$	520,141			$	526,684
Senior notes			3,194,083				3,492,879				3,195,724				3,403,353
Convertible senior notes			1,529,843				1,658,691				1,521,568				1,591,976
Secured mortgage debt			1,398,744				1,525,912				1,249,729				1,320,084
Assessment bonds			18,844				18,098				18,867				17,995
Total debt		$	6,415,034			$	6,973,750			$	6,506,029			$	6,860,092

10. Business Segments

Our business strategy currently includes two operating segments, as follows:

•

Direct Owned — representing the direct long-term ownership of industrial operating properties. Each operating property is considered to be an individual operating segment having similar economic characteristics that are combined within the reportable segment based upon geographic location. Also included in this segment is the development of properties for continued direct ownership, including land held for development and properties currently under development and land we own and lease to customers under ground leases. We own real estate in North America (Canada, Mexico and the United States), Europe (Austria, Belgium, the Czech Republic, France, Germany, Hungary, Italy, the Netherlands, Poland, Romania, Slovakia, Spain, Sweden and the United Kingdom) and Asia (Japan).

•

Investment Management — representing the long-term investment management of property funds and industrial joint ventures and the properties they own. We recognize our proportionate share of the earnings or losses from our investments in unconsolidated property funds and certain joint ventures operating in North America, Europe and Asia that are accounted for under the equity method. In addition, we recognize fees and incentives earned for services performed on behalf of the unconsolidated investees and certain third parties and dividends and interest income earned on investments in preferred stock or debt securities in our unconsolidated investees, if any.

We report the costs associated with our investment management segment for all periods presented in the line item Investment Management Expenses in our Consolidated Statements of Operations. These costs include the direct expenses associated with the asset management of the property funds provided by individuals who are assigned to our investment management segment. In addition, in order to achieve efficiencies and economies of scale, all of our property management functions are provided by a team of professionals who are assigned to our direct owned segment. These individuals perform the property-level management of the properties we own and the properties we manage that are owned by the unconsolidated investees. We allocate the costs of our property management function to the properties we own (reported in Rental Expenses) and the properties owned by the unconsolidated investees (included in Investment Management Expenses), by using the square feet owned at the beginning of the period by the respective portfolios.

Each investment in a property fund or joint venture is considered to be an individual operating segment having similar economic characteristics that are combined within the reportable segment based upon geographic location. Our operations in the investment management segment are in North America (Canada, Mexico and the United States), Europe (Belgium, the Czech Republic, France, Germany, Hungary, Italy, the Netherlands, Poland, Slovakia, Spain, Sweden and the United Kingdom) and Asia (Japan and South Korea).

We present the operations and net gains associated with properties sold to third parties or classified as held for sale as discontinued operations, which results in the restatement of prior year operating results to exclude the items presented as discontinued operations.

Reconciliations are presented below for: (i) each reportable business segment’s revenue from external customers to our Total Revenues; (ii) each reportable business segment’s net operating income from external customers to our Loss before Income Taxes; and (iii) each reportable business segment’s assets to our Total Assets. Our chief operating decision makers rely primarily on net operating income and similar measures to make decisions about allocating resources and assessing segment performance. The applicable components of our Revenues, Loss before Income Taxes and Total Assets are allocated to each reportable business segment’s revenues, net operating income and assets. Items that are not directly assignable to a segment, such as certain corporate income and expenses, are reflected as reconciling items. The following reconciliations are presented in thousands:

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

		Three Months Ended
		March 31,
		2011				2010
Revenues:
Direct owned (1):
North America		$	156,732			$	151,091
Europe			27,570				18,915
Asia			23,427				18,615
Total direct owned segment			207,729				188,621
Investment management (2):
North America			18,062				12,684
Europe			24,912				21,425
Asia			1,485				412
Total investment management segment			44,459				34,521
Total segment revenue			252,188				223,142
Reconciling item (3)			(13,388	)			(5,859	)
Total revenues		$	238,800			$	217,283
Net operating income:
Direct owned (4):
North America		$	107,085			$	107,046
Europe			15,630				7,828
Asia			16,988				13,216
Total direct owned segment			139,703				128,090
Investment management (2)(5):
North America			11,304				6,091
Europe			21,391				17,842
Asia			1,212				269
Total investment management segment			33,907				24,202
Total segment net operating income			173,610				152,292
Reconciling items:
General and administrative expenses			(39,183	)			(42,006	)
Merger integration expenses and reduction in workforce			(5,988	)			—
Depreciation and amortization expense			(82,693	)			(75,166	)
Earnings from other unconsolidated investees, net			253				2,114
Interest income			4,436				310
Interest expense			(90,562	)			(109,979	)
Other expense, net			(7,015	)			(482	)
Net gains on dispositions of investments in real estate			3,725				11,807
Foreign currency exchange gains, net			1,374				3,688
Loss on early extinguishment of debt, net			—				(47,633	)
Total reconciling items			(215,653	)			(257,347	)
Loss before income taxes		$	(42,043	)		$	(105,055	)

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

		March 31,				December 31,
		2011				2010
Assets:
Direct owned:
North America		$	7,371,628			$	7,358,374
Europe			2,842,808				2,619,455
Asia			1,953,817				1,889,879
Total direct owned segment			12,168,253				11,867,708
Investment management:
North America			1,022,278				1,035,548
Europe			1,113,398				1,038,061
Asia			83,828				84,000
Total investment management segment			2,219,504				2,157,609
Total segment assets			14,387,757				14,025,317
Reconciling items:
Investments in and advances to other unconsolidated investees			4,183				6,987
Notes receivable backed by real estate			246,561				189,550
Assets held for sale			215,714				574,791
Cash and cash equivalents			24,744				37,634
Accounts receivable			575				4,081
Other assets			56,161				64,307
Total reconciling items			547,938				877,350
Total assets		$	14,935,695			$	14,902,667

11. Supplemental Cash Flow Information

During the three months ended March 31, 2011 and 2010, we capitalized portions of the total cost of our share-based compensation awards of $1.4 million and $1.3 million, respectively, to the investment basis of our real estate or other assets.

In February 2010, we received $4.6 million of ownership interests in ProLogis North American Industrial Fund as a portion of our proceeds from the contribution of a property to this property fund.

The amount of interest paid in cash, net of amounts capitalized, for the three months ended March 31, 2011 and 2010 was $68.2 million and $43.1 million, respectively.

During the three months ended March 31, 2011 and 2010, cash paid for income taxes, net of refunds, was $5.9 million and $19.9 million, respectively.

12. Commitments and Contingencies

From time to time, we and our unconsolidated investees are party to a variety of legal proceedings arising in the ordinary course of business. We believe that, with respect to any such matters that we are currently a party to, the ultimate disposition of any such matters will not result in a material adverse effect on our business, financial position or results of operations.

Following the announcement of the merger agreement, several lawsuits were filed. Three actions were filed in the District Court for the City and County of Denver, Colorado. These cases have been consolidated, and on or about April 1, 2011, plaintiffs filed a consolidated class action

PROLOGIS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

complaint against ProLogis, the members of our Board of Trustees (the “Board”), AMB, New Pumpkin Inc. (“New Pumpkin”), Upper Pumpkin LLC (“Upper Pumpkin”), Pumpkin LLC (“Pumpkin”) and AMB LP. The complaint alleges that the Board breached their fiduciary duties in connection with entering into the merger agreement and that we, AMB, New Pumpkin, Upper Pumpkin, Pumpkin and AMB LP aided and abetted the breaches of those fiduciary duties. The complaint further alleges that the registration statement that was filed along with the joint proxy statement/prospectus contained material omissions and misstatements. The plaintiffs seek, among other relief, an order to (i) enjoin the defendants from consummating the merger unless and until we adopt and implement a procedure or process reasonably designed to enter into a merger agreement providing the best possible value for our shareholders; (ii) direct the defendants to exercise their fiduciary duties to obtain a transaction that is in the best interests of our shareholders and to refrain from entering into any transaction until the process for the sale or merger of ProLogis is completed and the highest possible value obtained; (iii) rescind the merger agreement, to the extent already implemented; and (iv) award plaintiffs’ costs and disbursements of the action. Defendants have moved to stay the Colorado action in favor of the Maryland action described below. Plaintiffs have moved for expedited discovery, and the defendants have opposed that motion.

Two actions were filed in the Circuit Court of Maryland for Baltimore City. The actions have been consolidated, and the plaintiffs filed a consolidated class action and derivative complaint on or about March 28, 2011. The Maryland consolidated complaint names the same defendants as the Colorado consolidated complaint. The complaint alleges that the members of the Board breached their fiduciary duties in connection with the merger and that AMB and AMB LP aided and abetted the breaches of those fiduciary duties. The complaint further alleges that the registration statement that was filed along with the joint proxy statement/prospectus is misleading and incomplete. The plaintiffs in this action seek, among other relief, an order to: (i) enjoin, preliminarily and permanently, the merger; (ii) rescind the merger in the event it is consummated or award rescissory damages; (iii) direct the defendants to account to plaintiffs and all other members of the class for all damages, profits and any special benefits defendants obtained as a result of their breaches of fiduciary duties; and (iv) award plaintiffs the costs of the action. Defendants have moved to dismiss the Maryland action for failure to state a claim and to stay all discovery pending a ruling on their motion to dismiss. Plaintiffs have moved for expedited discovery in advance of a preliminary injunction hearing.

On April 15, 2011, the parties to the Maryland action executed a memorandum of understanding that embodies their agreement in principle on the structure of a proposed settlement. The proposed settlement, which is subject to confirmatory discovery and court approval following notice to the class of all or our shareholders during the period from January 30, 2011 through the date of the consummation of the merger (which we refer to as the “Class”), would dismiss all causes of action asserted in the Maryland consolidated complaint and release all claims that members of the Class may have arising out of or relating in any manner to the merger, including all claims being asserted in the Colorado action. Pursuant to the terms of the proposed settlement, defendants agreed to make certain disclosures to shareholders in their joint proxy statement/prospectus. The parties reported to the Maryland court on April 18, 2011 that they had reached agreement on a proposed settlement and executed a memorandum of understanding. On April 27, 2011, the parties to the consolidated action in Colorado reached an agreement in principle on the structure of a proposed settlement. Under the proposed settlement, which is subject to confirmatory discovery and approval of the Maryland court following notice to the Class, defendants agreed to make additional disclosures in their joint proxy statement/prospectus.

The defendants believe that the claims asserted against them in these lawsuits are without merit and, absent court approval of the proposed settlement, intend to defend themselves vigorously against the claims.

13. Subsequent Events

Merger with AMB

On April 28, 2011, the SEC declared effective AMB’s registration statement on Form S-4 relating to our proposed merger with AMB (the “Merger”) effective. We have set June 1, 2011 as the date of the special meeting for our common shareholders to vote on the Merger. Subject to receipt of shareholder approval, approval by the stockholders of AMB and satisfaction or waiver of the other closing conditions, the anticipated effective date of the Merger is June 3, 2011.

In connection with and contingent upon consummation of the Merger, on May 3, 2011, AMB LP commenced offers to exchange all of our outstanding senior notes and convertible senior notes issued under the Indenture for corresponding series of notes to be issued by AMB LP and guaranteed by AMB. Following the Merger, we intend to revoke the classification of all indebtedness arising under the Indenture as designated senior debt under the Amended and Restated Security Agency Agreement dated as of October 6, 2005 among various creditors of ProLogis and Bank of America, N.A., as collateral agent (the “Security Agency Agreement”) and to cause the termination of the Security Agency Agreement. Although we intend to make such revocation promptly after satisfaction of the requirements for revocation set forth in Section 8(e) of the Security Agency Agreement, and to cause such termination concurrently therewith or shortly thereafter, we do not have any obligation to do so and may delay, or elect not to take, either of such actions.

Ownership in PEPR

In April 2011, we increased our ownership percentage in PEPR to approximately 39% and launched a mandatory tender offer to acquire any or all of the outstanding ordinary units and convertible preferred units we do not currently own in PEPR. In May 2011, we agreed to purchase additional ordinary and convertible preferred units in PEPR from two of PEPR’s institutional investors at a price of €6.20 per unit. After the purchases, our ownership percentage in PEPR will increase to approximately 60%. Concurrently, we increased the offer price for any and all ordinary units and convertible preferred units of PEPR that we do not currently own to €6.20 per unit in cash from our previous offer price of €6.10 per unit and extended the offer acceptance period to May 18, 2011. The consideration for the shares we purchased in April 2011 will be increased to match the new €6.20 per unit offer price. We have funded the April purchases on our Global Line and we expect to fund the purchase of these additional units and any units tendered (approximately €811 million or $1.2 billion at May 2, 2011) by drawing on our Global Line and with funds borrowed through a new €500 million ($741.9 million at May 2, 2011) bridge loan obtained in April 2011. Depending on the results of the tender offer, the accounting for our investment in PEPR may change.

Report of Independent Registered Public Accounting Firm

The Board of Trustees and Shareholders
ProLogis:

We have reviewed the accompanying consolidated balance sheet of ProLogis and subsidiaries (the “Company”) as of March 31, 2011, the related consolidated statements of operations for the three-month periods ended March 31, 2011 and 2010, the related consolidated statement of equity for the three-month period ended March 31, 2011, the related consolidated statements of comprehensive income (loss) for the three-month periods ended March 31, 2011 and 2010, and the related consolidated statements of cash flows for the three-month periods ended March 31, 2011 and 2010. These consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of ProLogis and subsidiaries as of December 31, 2010, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for the year then ended (not presented herein); and in our report dated February 25, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2010, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Denver, Colorado
May 9, 2011

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 2010 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 on such sales and contributions, 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 our most recent annual report on Form 10-K. All references to “we”, “us” and “our” refer to ProLogis and our consolidated subsidiaries. Unless otherwise noted herein, all statements, particularly those in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are not reflective of the impact of the proposed merger with AMB Property Corporation discussed herein.

Management’s Overview

We are a self-administered and self-managed real estate investment trust (“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.

Our current business strategy includes two operating segments: direct owned and investment management. Our direct owned segment represents the direct long-term ownership of industrial properties. Our investment management segment represents the long-term investment management of property funds, other unconsolidated investees and the properties they own.

We generate 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 properties in key distribution markets. Also included in this segment are industrial properties that are currently under development, land available for development and/or disposition and land subject to ground leases.

We earn rent from our customers, including reimbursements of certain operating costs, generally under long-term operating leases. The revenue from this segment has increased in 2011 from 2010 due to the lease up and increased occupancy levels of our operating portfolio, primarily from our completed development properties, partially offset by a decrease in rental rates. We anticipate additional increases in occupied square feet to come from leases that have been signed, but where the space will not be occupied until future quarters. Our direct owned operating portfolio was 87.7% and 87.6% leased at March 31, 2011 and December 31, 2010, respectively, and 85.7% and 85.9% occupied at March 31, 2011 and December 31, 2010, 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, leasing, acquisition, financing and development services. We may also earn incentives from our property funds depending on the return provided to the fund partners over a specified period.

On January 30, 2011, we and three of our newly formed, wholly owned subsidiaries, entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”), with AMB Property Corporation, a Maryland corporation (“AMB”), and AMB Property, L.P., a Delaware limited partnership (“AMB LP”). The merger and related integration is progressing as expected and we anticipate closing will be in the second quarter of 2011, subject to shareholder approval and other closing conditions. The meeting of shareholders to consider and vote on the merger is scheduled for June 1, 2011. See further discussion in Note 13 to the Consolidated Financial Statements in Item I.

Summary of 2011

Our objectives for 2011 and beyond are to: (i) increase occupancy in our industrial portfolio (representing 167.6 million square feet at March 31, 2011 that was 85.7% occupied); (ii) develop new industrial properties on our land, predominantly in our major logistics corridors; (iii) sell our non-core properties; and (iv) along with development, monetize our investment in land through dispositions to third parties as raw land or subsequent to the development of a building.

We have made progress on these objectives, as well as completed other activities, as follows:

•

We generated aggregate proceeds of $409.0 million from the disposition of 33 properties to third parties, including the sale of the majority of a portfolio of non-core assets for which we signed a definitive agreement in the fourth quarter of 2010, and the sale of one development property to ProLogis European Properties Fund II (“PEPF II”). We used these proceeds to help fund our

development activities, which will allow us to develop a portion of our investment in land held for development into income producing properties through new build-to-suit and potential speculative opportunities.

•

We began development on four properties in Europe that aggregated 1.2 million square feet and utilized $29.1 million of land we owned and held for development. Three of these properties were 100% pre-leased. In addition, we sold land parcels to third parties for net proceeds of $9.1 million.

•

On March 17, 2011, we issued ¥13.0 billion in TMK bonds ($161.3 million) at 1.34% due March 2018 on one property with an undepreciated cost of $253.8 million at March 31, 2011.

•

We increased the leased percentage of our operating portfolio slightly from 87.6% at December 31, 2010 to 87.7% at March 31, 2011.

•

In April 2011, we increased our ownership percentage in PEPR and launched a mandatory tender offer. See further discussion on the tender offer in Liquidity and Capital Resources.

Results of Operations

Three Months Ended March 31, 2011 and 2010

Summary

The following table illustrates the net operating income for each of our segments, along with the reconciling items to Loss from Continuing Operations on our Consolidated Statements of Operations in Item 1 for the three months ended March 31 (dollars in thousands):

		2011				2010
Net operating income — direct owned segment		$	139,703			$	128,090
Net operating income — investment management segment			33,907				24,202
Other:
General and administrative expenses			(39,183	)			(42,006	)
Merger integration expenses and reduction in workforce			(5,988	)			—
Depreciation and amortization expense			(82,693	)			(75,166	)
Earnings from unconsolidated investees, net			253				2,114
Interest income			4,436				310
Interest expense			(90,562	)			(109,979	)
Other expense, net			(7,015	)			(482	)
Net gains on dispositions of investments in real estate			3,725				11,807
Foreign currency exchange gains, net			1,374				3,688
Loss on early extinguishment of debt, net			—				(47,633	)
Income tax expense			(6,369	)			(8,202	)
Loss from continuing operations		$	(48,412	)		$	(113,257	)