e10vk
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-K
 
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2010
OR
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 1-12846
 
 
 
(PROLOGIS LOGO)
(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, CO 80239
(Address of principal executive offices and zip code)
 
(303) 567-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
 
     
    Name of each exchange
Title of Each Class
  on which registered
Common Shares of Beneficial Interest, par value $0.01 per share
  New York Stock Exchange
Series F Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $0.01 per share
  New York Stock Exchange
Series G Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $0.01 per share
  New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act: NONE
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
 
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 requirements 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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
         
(Check one)
  þ  Large accelerated filer   o  Accelerated filer
    o  Non-accelerated filer (do not check if a smaller reporting company)   o  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
 
Based on the closing price of the registrant’s shares on June 30, 2010, the aggregate market value of the voting common equity held by non-affiliates of the registrant was $4,817,236,572.
 
At February 18, 2011, there were outstanding approximately 570,437,118 common shares of beneficial interest of the registrant.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of Part III of this report are incorporated by reference to the registrant’s definitive proxy statement for the 2011 annual meeting of its shareholders or will be provided in an amendment filed on Form 10-K/A.
 


 

 
TABLE OF CONTENTS
 
             
Item   Description   Page
 
PART I
1.   Business     3  
    Business Strategy     4  
    Our Operating Segments     5  
    Our Management     8  
    Environmental Matters     9  
    Insurance Coverage     10  
1A.   Risk Factors     10  
1B.   Unresolved Staff Comments     16  
2.   Properties     16  
    Geographic Distribution     16  
    Properties     17  
    Unconsolidated Investees     19  
3.   Legal Proceedings     20  
4.   Submission of Matters to a Vote of Security Holders     21  
PART II
5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     21  
    Market Information and Holders     21  
    Distributions and Dividends     21  
    Securities Authorized for Issuance Under Equity Compensation Plans     22  
    Other Shareholder Matters     22  
6.   Selected Financial Data     23  
7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations     24  
    Management’s Overview     24  
    Results of Operations     26  
    Portfolio Information     32  
    Environmental Matters     35  
    Liquidity and Capital Resources     35  
    Off-Balance Sheet Arrangements     38  
    Contractual Obligations     38  
    Critical Accounting Policies     39  
    New Accounting Pronouncements     41  
    Funds from Operations     41  
7A.   Quantitative and Qualitative Disclosure About Market Risk     45  
8.   Financial Statements and Supplementary Data     46  
9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     46  
9A.   Controls and Procedures     46  
9B.   Other Information     47  
PART III
10.   Directors, Executive Officers and Corporate Governance     47  
11.   Executive Compensation     47  
12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     47  
13.   Certain Relationships and Related Transactions, and Director Independence     47  
14.   Principal Accounting Fees and Services     47  
PART IV
15.   Exhibits, Financial Statement Schedules     47  
 EX-12.1
 EX-12.2
 EX-21.1
 EX-23.1
 EX-10.25
 EX-10.28
 EX-10.29
 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


2


Table of Contents

 
Certain statements contained in this discussion or elsewhere in this report may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Words and phrases such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “designed to achieve”, variations of such words and similar expressions are intended to identify such forward-looking statements, which generally are not historical in nature. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future — including statements relating to rent and occupancy growth, development activity and changes in sales or contribution volume or profitability of developed properties, economic and market conditions in the geographic areas where we operate, the availability of capital in existing or new property funds and the consummation of the Merger — 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 “Item 1A Risk Factors” in this 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 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are not reflective of the impact of the proposed transaction with AMB Property Corporation discussed herein.
 
PART I
 
ITEM 1.  Business
 
ProLogis is a leading global provider of industrial distribution facilities. We are a Maryland real estate investment trust (“REIT”) and have elected to be taxed as such under the Internal Revenue Code of 1986, as amended (the “Code”). Our world headquarters is located in Denver, Colorado. Our European headquarters is located in the Grand Duchy of Luxembourg with our European customer service headquarters located in Amsterdam, the Netherlands. Our primary office in Asia is located in Tokyo, Japan.
 
Our Internet website address is www.prologis.com. All reports required to be filed with the Securities and Exchange Commission (the “SEC”) are available or may be accessed free of charge through the Investor Relations section of our Internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. Our common shares trade under the ticker symbol “PLD” on the New York Stock Exchange (“NYSE”).
 
We were formed in 1991, primarily as a long-term owner of industrial distribution space operating in the United States. Over time, our business strategy evolved to include the development of properties for contribution to property funds in which we maintain an ownership interest and the management of those property funds and the properties they own. Originally, we sought to differentiate ourselves from our competition by focusing on our corporate customers’ distribution space requirements on a national, regional and local basis and providing customers with consistent levels of service throughout the United States. However, as our customers’ needs expanded to markets outside the United States, so did our portfolio and our management team. Today, we are an international real estate company with operations in North America, Europe and Asia. Our business strategy is to integrate international scope and expertise with a strong local presence in our markets, thereby becoming an attractive choice for our targeted customer base, the largest global users of distribution space, while achieving long-term sustainable growth in cash flow.
 
Industrial distribution facilities are a crucial link in the modern supply chain, and they serve three primary purposes for supply-chain participants: (i) support accurate and seamless flow of goods to their appointed destinations; (ii) function as processing centers for goods; and (iii) enable companies to store enough inventory to meet surges in demand and to cushion themselves from the impact of a break in the supply chain.
 
At December 31, 2010, our total portfolio of properties owned, managed, and under development includes direct-owned properties and properties owned by property funds and joint ventures that we manage. These properties are located in North America, Europe and Asia and are broken down as follows:
 
                         
    Number of
             
    Properties     Square Feet     Investment  
              (in thousands )     (in thousands )
Total owned, managed and under development:
                       
Industrial properties:
                       
Operating properties
    985       168,547     $ 10,714,799  
Properties under development
    14       4,858       365,362  
Land
    n/a       n/a       1,533,611  
Other real estate investments
    n/a       n/a       265,869  
                         
             
             
Total properties owned
    999       173,405       12,879,641  
Investment management-industrial properties (1)
    1,179       255,367       18,064,230  
                         
Total properties owned and under management
    2,178       428,772     $ 30,943,871  
 
(1) Amounts represent the entity’s investment in the operating property, not our proportionate share.
 
Proposed Merger with AMB Property Corporation
 
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 Agreement provides that, upon the terms and subject to the conditions set forth in


3


Table of Contents

the Merger Agreement, (i) ProLogis will be reorganized into an umbrella partnership REIT, or “UPREIT”, structure through the merger of ProLogis with an indirect wholly owned subsidiary (the “ProLogis Merger”); (ii) thereafter, the new holding company formed by the ProLogis Merger will be merged with and into AMB (the “Topco Merger” and, together with the ProLogis Merger, the “Merger”), with AMB continuing as the surviving corporation with its corporate name changed to “ProLogis Inc.”; and (iii) thereafter, the surviving corporation will contribute all of the indirect equity interests of ProLogis to AMB LP in exchange for the issuance by AMB LP of partnership interests in AMB LP to the surviving corporation. AMB LP’s name will be changed to “ProLogis L.P.”. The all-stock merger is intended to be a tax-free transaction. Upon completion of the Merger, the common stock of the surviving corporation will trade on the NYSE under the ticker symbol PLD. Pursuant to the Merger Agreement and the Merger upon the terms and subject to the conditions set forth in the Merger Agreement, (i) each ProLogis common share will be converted into 0.4464 (the “Exchange Ratio”) of a newly issued share of common stock of AMB and (ii) each outstanding Series C Cumulative Redeemable Preferred Share of Beneficial Interest of ProLogis, Series F Cumulative Redeemable Preferred Share of Beneficial Interest of ProLogis and Series G Cumulative Redeemable Preferred Share of Beneficial Interest of ProLogis will be exchanged for one newly issued share of a corresponding series of preferred stock of AMB. Cash will be issued in lieu of any fractional shares. Each share of AMB common stock and AMB preferred stock will remain outstanding following the effective time of the Merger as shares of the surviving corporation. From an accounting perspective, ProLogis will be the acquirer.
 
The Merger is subject to customary closing conditions, including receipt of approval of our shareholders and AMB stockholders and certain regulatory approvals outside the United States. We currently expect the transactions contemplated by the Merger Agreement to close during the second quarter of 2011.
 
Business Strategy
 
After the global financial market and economic disruptions that began at the end of 2008, our strategy included specific goals aimed at generating liquidity in order to reduce our debt, reducing general and administrative costs, and postponing most development to allow us to focus on leasing our existing properties. During 2010, we focused on our longer-term strategy of conservative growth through the ownership, management and development of industrial properties, with a concentrated focus on customer service. This allowed us to concentrate on our objectives, which were to:
 
 
•  retain more of our development properties in order to improve the geographic diversification of our direct owned properties, as most of our planned developments were in international markets;
 
 
•  monetize a portion of our investment in land through disposition or development; and
 
 
•  continue to focus on staggering and extending our debt maturities.
 
During 2010 we made progress on these objectives, as well as completed other activities (discussed in more detail in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”), such as:
 
 
•  increased the leased percentage of our completed development properties from 62.2% at December 31, 2009 to 78.7% at December 31, 2010, and increased the leased percentage of our total portfolio from 82.7% at December 31, 2009 to 87.6% at December 31, 2010;
 
 
•  monetized an aggregate of approximately $320.8 million in land through development, contributions and sales to third parties;
 
 
•  reduced our net debt by approximately $1.5 billion through three debt tender offers of certain senior notes and the buyback of other outstanding senior and convertible notes;
 
 
•  staggered our debt maturities with $176.3 million maturing in 2011 and, excluding our global credit facility, less than $800 million in any year thereafter; and
 
 
•  generated proceeds of $1.7 billion on the dispositions of investments in real estate and $1.1 billion through a public offering of common shares, which was principally used to reduce debt and fund development activities.
 
In 2011, we plan to continue to focus on our longer-term strategy of conservative growth through the ownership, management and development of industrial properties with a concentrated focus on customer service. Building off our objectives for 2010, our goals for 2011 and beyond include:
 
 
•  increase occupancy in our operating portfolio (representing 168.5 million square feet at December 31, 2010 that was 87.6% leased);
 
 
•  develop new industrial properties on our land, primarily in our major logistics corridors; and
 
 
•  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 plan to accomplish these objectives through the disposition of certain assets. During the fourth quarter of 2010, we made a strategic decision to more aggressively pursue land sales and, as a result, we have almost $1.0 billion in land targeted for disposition at December 31, 2010. We also plan to dispose of our retail, mixed use and other non-core assets in early 2011. We will use these proceeds to help fund our development activities, allowing us to develop our investment of over $0.5 billion in land held for development at December 31, 2010 into income producing properties through new build-to-suit and potential speculative opportunities. In addition, we will analyze any opportunities for acquisitions of quality industrial portfolios within our current business model.


4


Table of Contents

 
Our Operating Segments
 
The following discussion of our business segments should be read in conjunction with “Item 1A Risk Factors”, our property information presented in “Item 2 Properties”, “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our segment footnote - Note 20 to our Consolidated Financial Statements in Item 8.
 
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 properties. Our investment management segment represents the long-term investment management of property funds, other unconsolidated investees and the properties they own.
 
Operating Segments - Direct Owned
 
Our direct owned segment represents the long-term ownership of industrial properties. Our investment strategy focuses primarily on the ownership and leasing of industrial operating properties in key distribution markets. Within our direct owned operating portfolio are properties that we developed that we sometimes refer to as completed development properties. Also included in this segment are industrial properties that are currently under development, land and land subject to ground leases.
 
Investments
 
At December 31, 2010, the following properties are in the direct owned segment located in North America, Europe and Asia (square feet and investment in thousands):
 
                                 
    Number of
    Square
    Leased
    Investment (before
 
    Properties     Feet     Percentage     depreciation)  
Industrial properties:
                               
Operating properties
    985       168,547       87.6  %   $ 10,714,799  
Properties under development
    14       4,858       67.6       365,362  
                                 
Total industrial properties
    999       173,405       87.0  %     11,080,161  
                                 
Land
    n/a       n/a       n/a       1,533,611  
Other real estate investments
    n/a       n/a       n/a       265,869  
                                 
Total
                          $ 12,879,641  
                                 
 
Results of Operations
 
We earn rent from our customers, including reimbursement of certain operating costs, under long-term operating leases (with an average lease term of six years at December 31, 2010). The revenue in this segment increased in 2010 due to the lease up and increased occupancy levels of our completed development properties, as well as the acquisition of properties and the completion of new development properties, partially offset by decreases due to contributions of properties to the unconsolidated property funds in 2010 and 2009 and decreases in effective rental rates. We expect our total revenues from this segment to continue to increase in 2011 from 2010 predominantly through increases in occupied square feet in our development properties, offset partially by lower rents on turnover of space. We anticipate the increases in occupied square feet to come from leases that were signed in 2010, but where the space was not occupied until 2011, and future leasing activity.
 
Market Presence
 
At December 31, 2010, our 985 industrial operating properties in this segment aggregating 168.5 million square feet were located in three countries in North America (Canada, Mexico and the United States), in 12 countries in Europe (Czech Republic, France, Germany, Hungary, Italy, the Netherlands, Poland, Romania, Slovakia, Spain, Sweden and the United Kingdom) and in one country in Asia (Japan). Our largest investments for this segment in North America (based on our investment in the properties) are Atlanta, Chicago, Dallas, Los Angeles basin/Inland Empire, New Jersey/Eastern Pennsylvania and the San Francisco Bay Area/Central Valley. Our largest investments in Europe are in Poland and the United Kingdom and our largest investment in Asia is in Tokyo. Our 14 properties under development at December 31, 2010 aggregated 4.9 million square feet and were located in North America, Europe and Asia. At December 31, 2010, we owned 8,990 acres of land with an investment of $1.5 billion located in North America (5,214 acres, $0.6 billion investment), Europe (3,724 acres, $0.7 billion investment) and Asia (52 acres, $0.2 billion investment). Within our portfolio of land, we have identified almost $1.0 billion of land that we have targeted for disposition. See further detail in “Item 2 Properties”.
 
Competition
 
The existence of competitively priced distribution space available in any market could have a material impact on our ability to rent space and on the rents that we can charge. To the extent we wish to acquire land for future development of properties in our direct owned segment or dispose of land, we may compete with local, regional, and national developers. We also face competition from other investment managers in attracting capital for our property funds to be utilized to acquire properties from us or third parties.
 
We believe we have competitive advantages due to (i) our ability to quickly respond to customer’s needs for high-quality distribution space in key global distribution markets; (ii) our established relationships with key customers served by our local personnel; (iii) our ability to leverage our organizational structure to provide a single point of contact for our global customers; (iv) our property management and leasing expertise; (v) our relationships and proven track record with current and prospective investors in the property funds; (vi) our


5


Table of Contents

global experience in the development and management of industrial properties; (vii) the strategic locations of our land that we expect to develop; and (viii) our personnel who are experienced in the land entitlement process.
 
Property Management
 
Our business strategy includes a customer service focus that enables us to provide responsive, professional and effective property management services at the local level. To enhance our management services, we have developed and implemented proprietary operating and training systems to achieve consistent levels of performance and professionalism and to enable our property management team to give the proper level of attention to our customers. We manage substantially all of our operating properties.
 
Customers
 
We have developed a customer base that is diverse in terms of industry concentration and represents a broad spectrum of international, national, regional and local distribution space users. At December 31, 2010, in our direct owned segment, we had 2,002 customers occupying 144.7 million square feet of industrial properties. Our largest customer and 25 largest customers accounted for 2.7% and 21.0%, respectively, of our annualized collected base rents at December 31, 2010.
 
Employees
 
We employ 1,100 persons in our entire business. Our employees work in three countries in North America (692 persons), in 13 countries in Europe (313 persons) and in three countries in Asia (95 persons). Of the total, we have assigned 605 employees to our direct owned segment and 45 employees to our investment management segment. We have 450 employees who work in corporate positions who are not assigned to a segment who may assist with segment activities. We believe our relationships with our employees are good. Our employees are not organized under collective bargaining agreements, although some of our employees in Europe are represented by statutory Works Councils and benefit from applicable labor agreements.
 
Future Plans
 
Our current business plan allows for the selective development of industrial properties (generally on our land) to: (i) address the specific expansion needs of customers; (ii) enhance our market presence in a specific country, market or submarket; (iii) take advantage of opportunities where we believe we have the ability to achieve favorable returns; (iv) monetize our existing land positions through development of industrial properties to primarily hold for long-term investment (generally in our major logistics corridors) or for disposition; and (v) improve the geographic diversification of our portfolio. In addition, we expect to dispose of land parcels, specifically those that we have identified as land targeted for disposition.
 
In 2011, we intend to fund our investment activities in the direct owned segment primarily with proceeds generated through the sale of our non-core retail and other assets (expected to close in the first quarter) and the sale of land parcels. Additionally, depending on market conditions and the capital available from our fund partners, we may contribute properties to the property funds or joint ventures we manage.
 
Operating Segments — Investment Management
 
The investment management segment represents the investment management of unconsolidated property funds and certain joint ventures and the properties they own. We utilize our investment management expertise to manage the property funds and joint ventures and we utilize our leasing and property management expertise to manage the properties owned by these entities.
 
Our property fund strategy:
 
 
•  allows us, as the manager of the property funds, to maintain and expand our market presence and customer relationships;
 
 
•  allows us to maintain a long-term ownership position in the properties;
 
 
•  allows us to earn fees for providing services to the property funds and joint ventures; and
 
 
•  provides us an opportunity to earn incentive performance participation income based on the investors’ returns over a specified period.
 
Investments
 
As of December 31, 2010, we had investments in and advances to 10 property funds totaling $1.9 billion with ownership interests ranging from 20% to 50%. These investments are in North America — seven aggregating $936.4 million; Europe — two aggregating $936.9 million; and Asia — one of $16.7 million. These property funds owned, on a combined basis, 1,174 distribution properties aggregating 252.1 million square feet with a total entity investment (not our proportionate share) in operating properties of $17.5 billion. Also included in this segment are certain industrial joint ventures in which we had investments of $127.7 million at December 31, 2010 and that owned five operating properties with 3.2 million square feet, located in North America (one property aggregating 0.3 million square feet), Europe (one property with 1.0 million square feet) and Asia (three properties aggregating 1.9 million square feet) with a total entity investment of $524.0 million that we manage.
 
Results of Operations
 
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


6


Table of Contents

behalf of these investees and certain third parties. 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.
 
We report the costs associated with our investment management segment as a separate 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 45 individuals (as of December 31, 2010 and as discussed below) 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. We allocate the costs of our property management function to the properties we own (reported in Rental Expenses) and the properties we manage (included in Investment Management Expenses), by using the square feet owned at the beginning of the quarter by the respective portfolios. For 2010, we allocated approximately 59% of our total property management costs to the investment management segment.
 
Market Presence
 
At December 31, 2010, the property funds on a combined basis owned 1,174 properties aggregating 252.1 million square feet located in three countries in North America (Canada, Mexico and the United States), 12 countries in Europe (Belgium, the Czech Republic, France, Germany, Hungary, Italy, the Netherlands, Poland, Slovakia, Spain, Sweden, and the United Kingdom) and one country in Asia (South Korea). The industrial joint ventures included in this segment own properties in the United States (one industrial property with 0.3 million square feet), United Kingdom (one industrial property with 1.0 million square feet), and Japan (three industrial properties with 1.9 million square feet). See further detail in “Item 2. Properties — Unconsolidated Investees”.
 
Competition
 
As the manager of the property funds, we compete with other fund managers for institutional capital. As the manager of the properties owned by the property funds, we compete with other industrial properties located in proximity to the properties owned by the property funds. The amount of rentable distribution space available and its current occupancy in any market could have a material effect on the ability to rent space and on the rents that can be charged by the fund properties. We believe we have competitive advantages as discussed above in “Operating Segments — Direct Owned”.
 
Property Management
 
We manage the properties owned by unconsolidated investees utilizing our leasing and property management experience from the employees who are in our direct owned segment. Our business strategy includes a customer service focus that enables us to provide responsive, professional and effective property management services at the local level. To enhance our management services, we have developed and implemented proprietary operating and training systems to achieve consistent levels of performance and professionalism and to enable our property management team to give the proper level of attention to our customers.
 
Customers
 
As in our direct owned segment, we have developed a customer base in the property funds and joint ventures that is diverse in terms of industry concentration and represents a broad spectrum of international, national, regional and local distribution space users. At December 31, 2010, our unconsolidated investees, on a combined basis, had 2,493 customers occupying 233.9 million square feet of distribution space. The largest customer, and 25 largest customers of our unconsolidated investees, on a combined basis, accounted for 3.9% and 27.8%, respectively, of the total combined annualized collected base rents at December 31, 2010. In addition, in this segment we consider our fund partners to also be our customers. As of December 31, 2010 in our private property funds, we partnered with 41 investors, several of which invest in multiple funds.
 
Employees
 
The property funds generally have no employees of their own. We have assigned 45 employees directly to the asset management of the property funds in our investment management segment. As discussed above, we have employees in our direct owned segment that are responsible for the property management functions we provide for the properties owned by the property funds, as well as the properties we own. We have 450 employees who work in corporate positions and are not assigned to a segment who also assist with these activities as well.
 
Future Plans
 
We may increase our investments in certain of the property funds, depending on market and other conditions and the capital needs of our property funds. To a limited extent, the additional investments may be through the existing property funds’ acquisition of properties from us, or from third parties. We may also increase our investments through cash investments made in existing property funds or through the creation of new property funds. We expect the fee income we earn from the property funds and our proportionate share of net earnings of the property funds will increase as the size and value of the portfolios owned by the property funds grows and occupancy increases in the property funds. We continually explore our options related to both new and existing property funds.


7


Table of Contents

 
Our Management
 
Our executive team is led by our Chief Executive Officer, Walter C. Rakowich, who also serves as a member of our Board of Trustees (the “Board”) and an Executive Committee of eleven people, as follows:
 
Executive Committee
 
Walter C. Rakowich* — 53 — Chief Executive Officer of ProLogis since November 2008. Mr. Rakowich was ProLogis’ President and Chief Operating Officer from January 2005 to November 2008 and served as Managing Director and ProLogis’ Chief Financial Officer from December 1998 to September 2005. Mr. Rakowich has been with ProLogis in various capacities since July 1994. Prior to joining ProLogis, Mr. Rakowich was a consultant to ProLogis in the area of due diligence and acquisitions, and he was a partner and principal with Trammell Crow Company, a diversified commercial real estate company in North America. Mr. Rakowich served on the Board from August 2004 to May 2008 and was reappointed to the Board in November 2008.
 
Gary E. Anderson — 45 — Head of Global Operations and Investment Management since March 2009, where he is responsible for global leasing and property management and managing ProLogis’ property funds as well as raising additional private capital for our investment management business. Mr. Anderson also serves on the board of directors of ProLogis European Properties (“PEPR”), one of our unconsolidated investees that is publicly traded on the Euronext stock exchange in Amsterdam and the Luxembourg Stock Exchange. Mr. Anderson was President of Europe and the Middle East, as well as Chairman of ProLogis’ European Operating Committee from November 2006 to March 2009. Mr. Anderson was the Managing Director responsible for investments and development in ProLogis’ Southwest and Mexico Regions from May 2003 to November 2006 and has been with ProLogis in various capacities since August 1994. Prior to joining ProLogis, Mr. Anderson was in the management development program of Security Capital Group, a real estate holding company.
 
Ted R. Antenucci* — 46 — President and Chief Investment Officer since May 2007. Mr. Antenucci also serves on the board of directors of PEPR, one of our unconsolidated investees that is publicly traded on the Euronext stock exchange in Amsterdam and the Luxembourg Stock Exchange. Mr. Antenucci was ProLogis’ President of Global Development from September 2005 to May 2007. From September 2001 to September 2005, Mr. Antenucci was President of Catellus Development Corporation (“Catellus”), an industrial and retail real estate company that was merged with ProLogis in September 2005. Mr. Antenucci was with affiliates of Catellus in various capacities from 1995 to September 2001. Following the closing of the sale of our non-core assets in the first quarter of 2011, it is expected that Mr. Antenucci will join that sold business after a transition period concluding in mid-2011.
 
Michael S. Curless — 47 — Managing Director of Global Capital Deployment since September 2010 where he is responsible for overseeing the deployment of capital for our new developments across the company, as well as focusing on land monetization and capital recycling. Mr. Curless was President and one of four principals at Lauth, a privately held national construction and development firm, from 2000 to 2010. Prior to joining Lauth in 2000, Mr. Curless was First Vice President at ProLogis, overseeing the Indianapolis and St. Louis market operations and management of key national accounts.
 
Philip N. Dunne — 42 — President — Europe since July 2009, where he is responsible for all aspects of ProLogis’ business performance in Continental Europe and the United Kingdom, including investments and development. He is also Chairman of ProLogis’ European Operating Committee. Prior to this, Mr. Dunne was Chief Operating Officer, Europe and the Middle East. Prior to joining ProLogis on December 1, 2008, Mr. Dunne was the Chief Operating Officer — EMEA at Jones Lang LaSalle, a global financial and professional services firm specializing in real estate services and investment management.
 
Larry H. Harmsen — 50 — President — United States and Canada since February 2009, where he is responsible for all aspects of business performance for ProLogis’ U.S. and Canadian operations. He has been responsible for capital deployment in North America since July 2005. Previous to this and since 2003, Mr. Harmsen had been responsible for capital deployment in North America’s Pacific Region. Prior to this and since 1995, Mr. Harmsen oversaw ProLogis’ Southern California market. Prior to joining ProLogis, Mr. Harmsen was a vice president and general partner of Lincoln Property Company for 10 years.
 
Edward S. Nekritz* — 45 — General Counsel of ProLogis since December 1998, Secretary of ProLogis since March 1999 and Head of Global Strategic Risk Management since March 2009. Mr. Nekritz oversees the provision of all legal services and strategic risk management for ProLogis. Mr. Nekritz is also responsible for ProLogis Investment Services Group, which handles all aspects of contract negotiations, real estate and corporate due diligence and closings on acquisitions, dispositions and financings. Mr. Nekritz has been with ProLogis in various capacities since September 1995. Prior to joining ProLogis, Mr. Nekritz was an attorney with Mayer, Brown & Platt (now Mayer Brown LLP).
 
John R. “Jack” Rizzo — 61 — Chief Sustainability Officer and Head of Global Construction for ProLogis since 2009, where he is responsible for implementing our global sustainability initiatives and for maintaining our leadership position in business excellence, environmental stewardship and corporate social responsibility. Mr. Rizzo is also responsible for all new industrial development projects worldwide. Mr. Rizzo has been with ProLogis since 1999. Prior to joining ProLogis, Mr. Rizzo was Senior Vice President and Chief Operating Officer of Perini Management Services, Inc., an affiliate of Perini Corporation, a global construction management and general contracting firm, and was responsible for international construction operations.
 
Charles E. Sullivan — 53 — Chief Administrative Officer since August 2010 where he oversees the Global Corporate Services Group and has overall responsibility for information technology, marketing and human resources. Most recently, Mr. Sullivan served as Head of Global Operations where he had overall responsibility for global operations, including property management and leasing. Mr. Sullivan was Managing Director of ProLogis with overall responsibility for operations in North America from October 2006 to February 2009 and has been with ProLogis in various capacities since October 1994. Prior to joining ProLogis, Mr. Sullivan was an industrial broker with Cushman & Wakefield of Florida, a real estate brokerage and services company.


8


Table of Contents

William E. Sullivan* — 56 — Chief Financial Officer since April 2007. Prior to joining ProLogis, Mr. Sullivan was the founder and president of Greenwood Advisors, Inc., a financial consulting and advisory firm focused on providing strategic planning and implementation services to small and mid-cap companies since 2005. From 2001 to 2005, Mr. Sullivan was Chairman and Chief Executive Officer of SiteStuff, an online procurement company serving the real estate industry and he continued as their chairman through June 2007.
 
Mike Yamada — 57 — President — Japan since February 2009 where he is responsible for all aspects of business performance for ProLogis’ Japanese operations. Mr. Yamada was Japan Co-President from March 2006 to February 2009, where he was responsible for development and leasing activities in Japan and a Managing Director with ProLogis from December 2004 to March 2006 with similar responsibilities in Japan. He has been with ProLogis in various capacities since April 2002. Prior to joining ProLogis, Mr. Yamada was a senior officer of Fujita Corporation, a construction company in Japan.
 
* These individuals are our Executive Officers under Item 401 of Regulation S-K.
 
In addition to the leadership and oversight provided by our executive committee, in the United States, a regional director leads each of our four regions (Midwest, East, West and Southwest), and is responsible for both operations and capital deployment. In Europe, each of the four regions (Northern Europe, Central and Eastern Europe, Southern Europe and the United Kingdom) are led by one individual responsible for operations and capital deployment. Japan and Mexico each have one individual who is responsible for operations and capital deployment.
 
We maintain a Code of Ethics and Business Conduct applicable to our Board and all of our officers and employees, including the principal executive officer, the principal financial officer and the principal accounting officer, or persons performing similar functions. A copy of our Code of Ethics and Business Conduct is available on our website, www.prologis.com. In addition to being accessible through our website, copies of our Code of Ethics and Business Conduct can be obtained, free of charge, upon written request to Investor Relations, 4545 Airport Way, Denver, Colorado 80239. Any amendments to or waivers of our Code of Ethics and Business Conduct that apply to the principal executive officer, the principal financial officer, or the principal accounting officer, or persons performing similar functions, and that relate to any matter enumerated in Item 406(b) of Regulation S-K, will be disclosed on our website.
 
Capital Management, Customer Service and Capital Deployment
 
We have a team of professionals dedicated to managing and leasing all the properties in our portfolio, which includes both direct-owned properties and those owned by the property funds that we manage. Our marketing team comprises a network of regional directors, market officers and property managers who are directly responsible for understanding and meeting the needs of existing and prospective customers in their respective markets.
 
Our marketing team works closely with our Global Solutions Group to identify and accommodate customers with multiple market requirements. The Global Solutions Group’s primary focus is to position us as the preferred provider of distribution space to large users of industrial distribution space. The professionals in our Global Solutions Group also seek to build long-term relationships with our existing customers by addressing their international distribution and logistics needs. The Global Solutions Group provides our customers with outsourcing options for network optimization tools, strategic site selection assistance, business location services, material handling equipment and design consulting services. The integration of our local market expertise with our global platform enables us to better serve customers throughout all of our markets.
 
Our network of regional directors and market officers also leads our capital deployment efforts. They are responsible for deploying our capital resources in an efficient and productive manner that will best serve our long-term objective of increasing shareholder value. They evaluate acquisition, disposition and development opportunities in light of market conditions in their respective markets and regions, and they work closely with the Global Development Group to, among other things, create master-planned distribution parks utilizing the extensive experience of the Global Development Group. The Global Development Group incorporates the latest technology with respect to building design and systems and has developed standards and procedures to which we strictly adhere in the development of all properties to ensure that properties we develop are of a consistent quality.
 
We strive to build in accordance with the accepted green building rating system in all of our regions of operation. Beginning in 2008, all of our new developments in the United States comply with the U.S. Green Building Council’s standards for Leadership in Energy and Environmental Design (LEED®). In the United Kingdom, since 2008, we have been committed to developing any new properties to achieve at least a “Very Good” rating in accordance with the Building Research Establishment’s Environmental Assessment Method (BREEAM). In Japan, many of our facilities comply with the Comprehensive Assessment System for Building Environmental Efficiency (CASBEE). Where rating systems do not exist, we implement best practices learned from developing sustainable buildings across our global portfolio. In total, counting all three rating systems, ProLogis has 62 buildings with 28.0 million square feet (2.6 million square meters) of development registered or certified as green buildings.
 
Environmental Matters
 
We are exposed to various environmental risks that may result in unanticipated losses that could affect our operating results and financial condition. Either the previous owners or we subjected a majority of the properties we have acquired, including land, to environmental reviews. While some of these assessments have led to further investigation and sampling, none of the environmental assessments has revealed an environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations. See Note 19 to our Consolidated Financial Statements in Item 8 and “Item 1A Risk Factors”.


9


Table of Contents

 
Insurance Coverage
 
We carry insurance coverage on our properties. We determine the type of coverage and the policy specifications and limits based on what we deem to be the risks associated with our ownership of properties and our business operations in specific markets. Such coverages include property damage and rental loss insurance resulting from such perils as fire, additional perils as covered under an extended coverage policy, named windstorm, flood, earthquake and terrorism; commercial general liability insurance; and environmental insurance. Insurance is maintained through a combination of commercial insurance, self insurance and through a wholly-owned captive insurance entity. We believe that our insurance coverage contains policy specifications and insured limits that are customary for similar properties, business activities and markets and we believe our properties are adequately insured. However, an uninsured loss could result in loss of capital investment and anticipated profits.
 
ITEM 1A.  Risk Factors
 
Our operations and structure involve various risks that could adversely affect our financial condition, results of operations, distributable cash flow and the value of our common shares. These risks include, among others:
 
Risks Related to the AMB Merger
 
The proposed Merger may present certain risks to our business and operations.
 
On January 30, 2011, we and three of our newly formed, wholly owned subsidiaries, entered into the Merger Agreement with AMB and AMB LP providing for a “merger of equals.” Pursuant to the terms of the Merger Agreement, which was approved by our board of trustees and the board of directors of AMB, each of our outstanding common shares will be converted into 0.4464 of a newly issued share of AMB common stock, and the combined company will be an UPREIT. The Merger is subject to customary closing conditions, including receipt of approval of AMB and ProLogis shareholders and certain regulatory approval outside of the United States. The parties currently expect the transaction to close during the second quarter of 2011.
 
The Merger may present certain risks to our business and operations prior to the closing of the Merger, including, among other things, risks that:
 
  •  the completion of the Merger is subject to the receipt of consents and approvals from government entities, which may require conditions that could have an adverse effect on us or could cause us to abandon the Merger;
 
  •  failure to complete the Merger could negatively impact our common share price and our future business and financial results resulting from an obligation to pay a termination fee and reimbursement of up to a specified amount of expenses under certain circumstances, having to pay certain costs relating to the proposed Merger, and focusing of management on the Merger instead of on pursuing other opportunities that could be beneficial to us;
 
  •  the pendency of the Merger could cause some customers or vendors to delay or defer decisions which could negatively impact our business and operations;
 
  •  current and prospective employees may experience uncertainty about their future roles with the combined company following the Merger, which may materially adversely affect our ability to attract and retain key personnel during the pendency of the Merger;
 
  •  due to operating covenants in the Merger Agreement, we may be unable, during the pendency of the Merger, to pursue strategic transactions, undertake significant capital projects, undertake certain significant financing transactions and otherwise pursue actions that are not in the ordinary course of business which could negatively impact our business and operations; and
 
  •  as described below under “Item 3. Legal Proceedings”, we are subject to various lawsuits in connection with the Merger and may be subject to additional lawsuits during the pendency of the Merger, which, if not settled, could prevent or delay completion of the Merger and result in substantial cost to us.
 
In addition, certain risks may continue to exist after the closing of the Merger, including, among other things, risks that:
 
  •  the combined company expects to incur substantial expenses in connection with completing the Merger and integrating the business, operations, networks, systems, technologies, policies and procedures of ProLogis and AMB;
 
  •  the combined company may be unable to integrate successfully the businesses of ProLogis and AMB and realize the anticipated synergies and related benefits of the Merger or do so within the anticipated timeframe;
 
  •  the combined company may be unable to retain key employees;
 
  •  the Merger will result in changes to the board of directors and management of the combined company that may affect the strategy of the combined company as compared to our existing strategy;
 
  •  the future results of the combined company will suffer if the combined company does not effectively manage its expanded operations following the Merger; and
 
  •  the trading price of shares of the common stock of the combined company may be affected by factors different from those affecting the price of our common shares.


10


Table of Contents

 
These risks, as they relate to us as part of the combined company and additional risks associated with the Merger, will be described in more detail in the preliminary joint proxy statement/prospectus contained in AMB’s Registration Statement on Form S-4, which will be filed with the SEC.
 
General
 
Market disruptions may adversely affect our operating results and financial condition.
 
Volatility in the global financial markets may lead to adverse impacts on the general availability of credit to businesses and could lead to a further weakening of the U.S. and global economies. To the extent there is turmoil in the financial markets, it has the potential to materially affect the value of our properties and our investments in our unconsolidated investees, the availability or the terms of financing that we and our unconsolidated investees have or may anticipate utilizing, our ability and that of our unconsolidated investees to make principal and interest payments on, or refinance, any outstanding debt when due and/or may impact the ability of our customers to enter into new leasing transactions or satisfy rental payments under existing leases.
 
The market volatility over the last several years has made the valuation of our properties and those of our unconsolidated investees more difficult. There may be significant uncertainty in the valuation, or in the stability of the value, of our properties and those of our unconsolidated investees, that could result in a decrease in the value of our properties and those of our unconsolidated investees.
 
As a result, we may not be able to recover the current carrying amount of our properties, land, our investments in and advances to our unconsolidated investees and/or goodwill, which may require us to recognize an impairment charge in earnings in addition to the charges we recognized in 2010, 2009 and 2008.
 
General Real Estate Risks
 
General economic conditions and other events or occurrences that affect areas in which our properties are geographically concentrated, may impact financial results.
 
We are exposed to general economic conditions, local, regional, national and international economic conditions and other events and occurrences that affect the markets in which we own properties. Our operating performance is further impacted by the economic conditions of the specific markets in which we have concentrations of properties. Approximately 26.2% of our direct owned operating properties (based on our investment before depreciation) are located in California. Properties in California may be more susceptible to certain types of natural disasters, such as earthquakes, brush fires, flooding and mudslides, than properties located in other markets and a major natural disaster in California could have a material adverse effect on our operating results. We also have significant holdings (defined as more than 3.0% of our total investment before depreciation in direct owned operating properties), in certain major logistics corridors located in Chicago, Dallas, New Jersey/ Eastern Pennsylvania, London/ Midlands, Tokyo and Osaka. Our operating performance could be adversely affected if conditions become less favorable in any of the markets in which we have a concentration of properties. Conditions such as an oversupply of distribution space or a reduction in demand for distribution space, among other factors, may impact operating conditions. Any material oversupply of distribution space or material reduction in demand for distribution space could adversely affect our results of operations, distributable cash flow and the value of our securities. In addition, the property funds and joint ventures in which we have an ownership interest have concentrations of properties in the same major logistics corridors mentioned above, as well as in markets in France, Germany, Mexico, Poland and Reno and are subject to the economic conditions in those markets.
 
Real property investments are subject to risks that could adversely affect our business.
 
Real property investments are subject to varying degrees of risk. While we seek to minimize these risks through geographic diversification of our portfolio, market research and our property management capabilities, these risks cannot be eliminated. Some of the factors that may affect real estate values include:
 
•      local conditions, such as an oversupply of distribution space or a reduction in demand for distribution space in an area;
 
•      the attractiveness of our properties to potential customers;
 
•      competition from other available properties;
 
•      our ability to provide adequate maintenance of, and insurance on, our properties;
 
•      our ability to control rents and variable operating costs;
 
•      governmental regulations, including zoning, usage and tax laws and changes in these laws; and
 
•      potential liability under, and changes in, environmental, zoning and other laws.
 
Our investments are concentrated in the industrial distribution sector and our business would be adversely affected by an economic downturn in that sector or an unanticipated change in the supply chain dynamics.
 
Our investments in real estate assets are primarily concentrated in the industrial distribution sector. This concentration may expose us to the risk of economic downturns in this sector to a greater extent than if our business activities were more diversified.


11


Table of Contents

Our real estate development strategies may not be successful.
 
We have developed a significant number of industrial properties since our inception. We may develop properties on our land and such development may or may not be pre-committed.
 
As of December 31, 2010, we had 14 industrial properties under development that were 67.6% leased and we had approximately $296.5 million of costs remaining to be spent to complete development and lease the space in these properties.
 
Additionally as of December 31, 2010, we had 8,990 acres of land with a current investment, after impairment, of $1.5 billion for potential future development of industrial properties or for sale to third parties. At December 31, 2010, we have targeted approximately $1.0 billion for disposition as raw land or after development of an operating property. As a result of this change of intent, during 2010, we recorded impairment charges of $687.6 million on this land based on the amount by which the carrying value exceeded the fair value. Within our land positions, we have concentrations in many of the same markets as our operating properties. Approximately 18.2% of our land (based on the current investment balance) is in the United Kingdom. We will look to monetize land in the future through sale to third parties, development of industrial properties to hold for long-term investment or sale to a third party depending on market conditions, our liquidity needs and other factors.
 
We will be subject to risks associated with such development, leasing and disposition activities, all of which may adversely affect our results of operations and available cash flow, including, but not limited to:
 
•      the risk that we may not be able to lease the available space in our recently completed developments at rents that are sufficient to be profitable;
 
•      the risk that we will seek to sell certain land parcels and we will not be able to find a third party to acquire such land or that the sales price will not allow us to recover our investment, resulting in additional impairment charges;
 
•      the risk that development opportunities explored by us may be abandoned and the related investment will be impaired;
 
•      the risk that we may not be able to obtain, or may experience delays in obtaining, all necessary zoning, building, occupancy and other governmental permits and authorizations;
 
•      the risk that due to the increased cost of land, our activities may not be as profitable;
 
•      the risk that construction costs of a property may exceed the original estimates, or that construction may not be concluded on schedule, making the project less profitable than originally estimated or not profitable at all; including the possibility of contract default, the effects of local weather conditions, the possibility of local or national strikes by construction-related labor and the possibility of shortages in materials, building supplies or energy and fuel for equipment; and
 
•      the risk that occupancy levels and the rents that can be earned for a completed project will not be sufficient to make the project profitable.
 
If we decide to dispose of properties to third parties to generate liquidity, we may not be successful.
 
Our ability to sell properties on advantageous terms is affected by competition from other owners of properties that are trying to dispose of their properties; market conditions, including the capitalization rates applicable to our properties; and other factors beyond our control. The third parties who might acquire our properties may need to have access to debt and equity capital, in the private and public markets, in order to acquire properties from us. Should the third parties have limited or no access to capital on favorable terms, then dispositions could be delayed resulting in adverse effects on our liquidity, results of operations, distributable cash flow, debt covenant ratios, and the value of our securities.
 
We may acquire properties, which involves risks that could adversely affect our operating results and the value of our securities.
 
We may acquire industrial properties in our direct owned segment. The acquisition of properties involves risks, including the risk that the acquired property will not perform as anticipated and that any actual costs for rehabilitation, repositioning, renovation and improvements identified in the pre-acquisition due diligence process will exceed estimates. There is, and it is expected there will continue to be, significant competition for properties that meet our investment criteria as well as risks associated with obtaining financing for acquisition activities.
 
Our operating results and distributable cash flow will depend on the continued generation of lease revenues from customers.
 
Our operating results and distributable cash flow would be adversely affected if a significant number of our customers were unable to meet their lease obligations. We are also subject to the risk that, upon the expiration of leases for space located in our properties, leases may not be renewed by existing customers, the space may not be re-leased to new customers or the terms of renewal or re-leasing (including the cost of required renovations or concessions to customers) may be less favorable to us than current lease terms. In the event of default by a significant number of customers, we may experience delays and incur substantial costs in enforcing our rights as landlord. A customer may experience a downturn in its business, which may cause the loss of the customer or may weaken its financial condition, resulting in the customer’s failure to make rental payments when due or requiring a restructuring that might reduce cash flow from the lease. In addition, a customer may seek the protection of bankruptcy, insolvency or similar laws, which could result in the rejection and termination of such customer’s lease and thereby cause a reduction in our available cash flow.


12


Table of Contents

Our ability to renew leases or re-lease space on favorable terms as leases expire significantly affects our business.
 
Our results of operations, distributable cash flow and the value of our securities would be adversely affected if we were unable to lease, on economically favorable terms, a significant amount of space in our operating properties. We have 23.1 million square feet of industrial space (out of a total of 144.7 million occupied square feet representing 13.7% of total annual base rents) with leases that expire in 2011, including 4.0 million square feet of leases that are on a month-to-month basis. In addition, our unconsolidated investees have a combined 29.1 million square feet of industrial space (out of a total 233.9 million occupied square feet representing 11.4% of total annual base rent) with leases that expire in 2011, including 3.1 million square feet of leases that are on a month-to-month basis. The number of industrial properties in a market or submarket could adversely affect both our ability to re-lease the space and the rental rates that can be obtained in new leases.
 
Real estate investments are not as liquid as other types of assets, which may reduce economic returns to investors.
 
Real estate investments are not as liquid as other types of investments and this lack of liquidity may limit our ability to react promptly to changes in economic or other conditions. In addition, significant expenditures associated with real estate investments, such as mortgage payments, real estate taxes and maintenance costs, are generally not reduced when circumstances cause a reduction in income from the investments. Like other companies qualifying as REITs under the Code, we are only able to hold property for sale in the ordinary course of business through taxable REIT subsidiaries in order to avoid punitive taxation on the gain from the sale of such property. While we may dispose of certain properties that have been held for investment in order to generate liquidity, if we do not satisfy certain safe harbors or if we believe there is too much risk of incurring the punitive tax on the gain from the sale, we may not pursue such sales.
 
Our insurance coverage does not include all potential losses.
 
We and our unconsolidated investees currently carry insurance coverage including property damage and rental loss insurance resulting from certain perils such as fire and additional perils as covered under an extended coverage policy, named windstorm, flood, earthquake and terrorism; commercial general liability insurance; and environmental insurance, as appropriate for the markets where each of our properties and business operations are located. The insurance coverage contains policy specifications and insured limits customarily carried for similar properties, business activities and markets. We believe our properties and the properties of our unconsolidated investees, including the property funds, are adequately insured. However, there are certain losses, including losses from floods, earthquakes, acts of war, acts of terrorism or riots, that are not generally insured against or that are not generally fully insured against because it is not deemed economically feasible or prudent to do so. If an uninsured loss or a loss in excess of insured limits occurs with respect to one or more of our properties, we could experience a significant loss of capital invested and potential revenues in these properties and could potentially remain obligated under any recourse debt associated with the property.
 
We are exposed to various environmental risks that may result in unanticipated losses that could affect our operating results and financial condition.
 
Under various federal, state and local laws, ordinances and regulations, a current or previous owner, developer or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances. The costs of removal or remediation of such substances could be substantial. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release or presence of such hazardous substances.
 
A majority of the properties we acquire are subjected to environmental reviews either by us or by the predecessor owners. In addition, we may incur environmental remediation costs associated with certain land parcels we acquire in connection with the development of the land. We establish a liability at the time of acquisition to cover such costs. We adjust the liabilities, as appropriate, when additional information becomes available. We purchase various environmental insurance policies to mitigate our exposure to environmental liabilities. We are not aware of any environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations.
 
We cannot give any assurance that other such conditions do not exist or may not arise in the future. The presence of such substances on our real estate properties could adversely affect our ability to lease, develop or sell such properties or to borrow using such properties as collateral and may have an adverse effect on our distributable cash flow.
 
We are exposed to the potential impacts of future climate change and climate change related risks.
 
We consider that we are exposed to potential physical risks from possible future changes in climate. Our distribution facilities may be exposed to rare catastrophic weather events, such as severe storms and/or floods. If the frequency of extreme weather events increases due to climate change, our exposure to these events could increase.
 
We do not currently consider our company to be exposed to regulatory risks related to climate change, as our operations do not emit a significant amount of greenhouse gases. However, we may be adversely impacted as a real estate developer in the future by stricter energy efficiency standards for buildings.
 
Risks Related to Financing and Capital
 
Our operating results and financial condition could be adversely affected if we are unable to make required payments on our debt or are unable to refinance our debt.
 
We are subject to risks normally associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest. There can be no assurance that we will be able to refinance any maturing indebtedness, that such refinancing would be on terms as favorable as the terms of the maturing indebtedness, or we will be able to otherwise obtain funds by


13


Table of Contents

selling assets or raising equity to make required payments on maturing indebtedness. If we are unable to refinance our indebtedness at maturity or meet our payment obligations, the amount of our distributable cash flow and our financial condition would be adversely affected and, if the maturing debt is secured, the lender may foreclose on the property securing such indebtedness. Our credit facilities and certain other debt bears interest at variable rates. Increases in interest rates would increase our interest expense under these agreements. In addition, our unconsolidated investees may be unable to refinance their indebtedness or meet their payment obligations, which may impact our distributable cash flow and our financial condition and/or we may be required to recognize impairment charges of our investments.
 
Covenants in our credit agreements could limit our flexibility and breaches of these covenants could adversely affect our financial condition.
 
The terms of our various credit agreements, including our credit facilities, the indenture under which our senior notes are issued and other note agreements, require us to comply with a number of customary financial covenants, such as maintaining debt service coverage, leverage ratios, fixed charge ratios and other operating covenants including maintaining insurance coverage. These covenants may limit our flexibility in our operations, and breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness. If we default under our covenant provisions and are unable to cure the default, refinance our indebtedness or meet our payment obligations, the amount of our distributable cash flow and our financial condition could be adversely affected.
 
Federal Income Tax Risks
 
Failure to qualify as a REIT could adversely affect our cash flows.
 
We have elected to be taxed as a REIT under the Code commencing with our taxable year ended December 31, 1993. In addition, we have a consolidated subsidiary that has elected to be taxed as a REIT and certain unconsolidated investees that are REITs and are subject to all the risks pertaining to the REIT structure, discussed herein. To maintain REIT status, we must meet a number of highly technical requirements on a continuing basis. Those requirements seek to ensure, among other things, that the gross income and investments of a REIT are largely real estate related, that a REIT distributes substantially all of its ordinary taxable income to shareholders on a current basis and that the REIT’s equity ownership is not overly concentrated. Due to the complex nature of these rules, the available guidance concerning interpretation of the rules, the importance of ongoing factual determinations and the possibility of adverse changes in the law, administrative interpretations of the law and changes in our business, no assurance can be given that we, or our REIT subsidiaries, will qualify as a REIT for any particular period.
 
If we fail to qualify as a REIT, we will be taxed as a regular corporation, and distributions to shareholders will not be deductible in computing our taxable income. The resulting corporate income tax liabilities could materially reduce our cash flow and funds available for dividends and/or reinvestment. Moreover, we might not be able to elect to be treated as a REIT for the four taxable years after the year during which we ceased to qualify as a REIT. In addition, if we later requalified as a REIT, we might be required to pay a full corporate-level tax on any unrealized gains in our assets as of the date of requalification, or upon subsequent disposition, and to make distributions to our shareholders equal to any earnings accumulated during the period of non-REIT status.
 
REIT distribution requirements could adversely affect our financial condition.
 
To maintain qualification as a REIT under the Code, generally a REIT must annually distribute to its shareholders at least 90% of its REIT taxable income, computed without regard to the dividends paid deduction and net capital gains. This requirement limits our ability to accumulate capital and, therefore, we may not have sufficient cash or other liquid assets to meet the distribution requirements. Difficulties in meeting the distribution requirements might arise due to competing demands for our funds or to timing differences between tax reporting and cash receipts and disbursements, because income may have to be reported before cash is received or because expenses may have to be paid before a deduction is allowed. In addition, the Internal Revenue Service (the “IRS”) may make a determination in connection with the settlement of an audit by the IRS that increases taxable income or disallows or limits deductions taken thereby increasing the distribution we are required to make. In those situations, we might be required to borrow funds or sell properties on adverse terms in order to meet the distribution requirements and interest and penalties could apply, which could adversely affect our financial condition. If we fail to make a required distribution, we would cease to qualify as a REIT.
 
Prohibited transaction income could result from certain property transfers.
 
We contribute properties to property funds and sell properties to third parties from the REIT and from taxable REIT subsidiaries (“TRS”). Under the Code, a disposition of a property from other than a TRS could be deemed a prohibited transaction. In such case, a 100% penalty tax on the resulting gain could be assessed. The determination that a transaction constitutes a prohibited transaction is based on the facts and circumstances surrounding each transaction. The IRS could contend that certain contributions or sales of properties by us are prohibited transactions. While we do not believe the IRS would prevail in such a dispute, if the IRS successfully argued the matter, the 100% penalty tax could be assessed against the gains from these transactions, which may be significant.
 
Additionally, any gain from a prohibited transaction may adversely affect our ability to satisfy the gross income tests for qualification as a REIT.
 
Liabilities recorded for tax audits may not be sufficient.
 
We are subject to a pending audit by the IRS for the 2003 through 2005 income tax returns of Catellus, including certain of its subsidiaries and partnerships. We have recorded an accrual for the liabilities that may arise from these audits. See Note 15 to our Consolidated Financial Statements in Item 8. In addition, we incur tax in certain federal, foreign, and state and local jurisdictions and, we may be subject to audit by the taxing authorities. These audits may result in actual liabilities or settlement costs, including interest and potential penalties, if any, in excess of the liability we have recorded.


14


Table of Contents

Uncertainties relating to Catellus’ estimate of its “earnings and profits” attributable to C-corporation taxable years may have an adverse effect on our distributable cash flow.
 
In order to qualify as a REIT, a REIT cannot have at the end of any REIT taxable year any undistributed earnings and profits that are attributable to a C-corporation taxable year. A REIT that has non-REIT accumulated earnings and profits has until the close of its first full tax year as a REIT to distribute such earnings and profits. Because Catellus’ first full taxable year as a REIT was 2004, Catellus was required to distribute its accumulated earnings and profits prior to the end of 2004. Failure to meet this requirement would result in Catellus’ disqualification as a REIT. Catellus distributed its accumulated non-REIT earnings and profits in December 2003, well in advance of the 2004 year-end deadline, and believed that this distribution was sufficient to distribute all of its non-REIT earnings and profits. However, the determination of non-REIT earnings and profits is complicated and depends upon facts with respect to which Catellus may have had less than complete information or the application of the law governing earnings and profits, which is subject to differing interpretations, or both. Consequently, there are substantial uncertainties relating to the estimate of Catellus’ non-REIT earnings and profits, and we cannot be assured that the earnings and profits distribution requirement has been met. These uncertainties include the possibility that the IRS could upon audit, as discussed above, increase the taxable income of Catellus, which would increase the non-REIT earnings and profits of Catellus. There can be no assurances that we have satisfied the requirement that Catellus distribute all of its non-REIT earnings and profits by the close of its first taxable year as a REIT, and therefore, this may have an adverse effect on our distributable cash flow.
 
There are potential deferred and contingent tax liabilities that could affect our operating results or financial condition.
 
Palmtree Acquisition Corporation, our subsidiary that was the surviving corporation in the merger with Catellus in 2005, is subject to a federal corporate level tax at the highest regular corporate rate (currently 35%) and potential state taxes on certain gains recognized within ten years of Catellus’ conversion to a REIT from a disposition of any assets that Catellus held at the effective time of its election to be a REIT, but only to the extent of the built-in-gain based on the fair market value of those assets on the effective date of the REIT election (which was January 1, 2004). Gain from the sale of an asset occurring more than 10 years after the REIT conversion or occurring in taxable years beginning in 2009, 2010 and 2011 that meets special rules will not be subject to this corporate-level tax. We do not currently expect to dispose of any asset of the surviving corporation in the merger if such disposition would result in the imposition of a material tax liability unless we can affect a tax-deferred exchange of the property.
 
Other Risks
 
The company is subject to certain risks in connection with its Investment Management business.
 
As of December 31, 2010, we manage properties that aggregate approximately 252.1 million square feet that are owned by our property funds in which we also invest. Our relationships with the investors in our property funds are generally contractual in nature and may be terminated or dissolved under the terms of the agreements, and in such event, we may not continue to manage the assets of the property fund, which would eliminate the fees that we earn. In that event, it may have an adverse effect on our earnings and financial position.
 
Contingent or unknown liabilities could adversely affect our financial condition.
 
We have acquired and may in the future acquire entities or properties subject to liabilities and without any recourse, or with only limited recourse, with respect to contingent or unknown liabilities. As a result, if a liability were asserted against us based upon ownership of any of these entities or properties, then we might have to pay substantial sums to settle the liability, which could adversely affect our cash flow. Contingent or unknown liabilities with respect to entities or properties acquired might include:
 
•      liabilities for environmental conditions;
 
•      losses in excess of our insured coverage;
 
•      accrued but unpaid liabilities incurred in the ordinary course of business;
 
•      tax, legal and regulatory liabilities;
 
•      claims of customers, vendors or other persons that had not been asserted or were unknown prior to the acquisition transaction.
 
We are dependent on key personnel.
 
Our executive and other senior officers have a significant role in our success. Our ability to retain our management group or to attract suitable replacements should any members of the management group leave is dependent on the competitive nature of the employment market. The loss of services from key members of the management group or a limitation in their availability could adversely affect our financial condition and cash flow. Further, such a loss could be negatively perceived in the capital markets.
 
Share prices may be affected by market interest rates.
 
Our current quarterly distribution is $0.1125 per common share. The annual distribution rate on common shares as a percentage of our market price may influence the trading price of such common shares. An increase in market interest rates may lead investors to demand a higher annual distribution rate than we have set, which could adversely affect the value of our common shares.


15


Table of Contents

As a global company, we are subject to social, political and economic risks of doing business in foreign countries.
 
We conduct a significant portion of our business and employ a substantial number of people outside of the United States. During 2010, we generated approximately 28% of our revenue from operations outside the United States. Circumstances and developments related to international operations that could negatively affect our business, financial condition or results of operations include, but are not limited to, the following factors:
 
•      difficulties and costs of staffing and managing international operations in certain regions;
 
•      currency restrictions, which may prevent the transfer of capital and profits to the United States;
 
•      unexpected changes in regulatory requirements;
 
•      potentially adverse tax consequences;
 
•      the responsibility of complying with multiple and potentially conflicting laws, e.g., with respect to corrupt practices, employment and licensing;
 
•      the impact of regional or country-specific business cycles and economic instability;
 
•      political instability, civil unrest, drug trafficking, political activism or the continuation or escalation of terrorist or gang activities (particularly with respect to our operations in Mexico); and
 
•      foreign ownership restrictions with respect to operations in countries.
 
Although we have committed substantial resources to expand our global development platform, if we are unable to successfully manage the risks associated with our global business or to adequately manage operational fluctuations, our business, financial condition and results of operations could be harmed.
 
In addition, our international operations and, specifically, the ability of our non-U.S. subsidiaries to dividend or otherwise transfer cash among our subsidiaries, including transfers of cash to pay interest and principal on our debt, may be affected by currency exchange control regulations, transfer pricing regulations and potentially adverse tax consequences, among other things.
 
The depreciation in the value of the foreign currency in countries where we have a significant investment may adversely affect our results of operations and financial position.
 
We have pursued, and intend to continue to pursue, growth opportunities in international markets where the U.S. dollar is not the national currency. At December 31, 2010, approximately 42% of our total assets are invested in a currency other than the U.S. dollar, primarily the euro, Japanese yen and British pound sterling. As a result, we are subject to foreign currency risk due to potential fluctuations in exchange rates between foreign currencies and the U.S. dollar. A significant change in the value of the foreign currency of one or more countries where we have a significant investment may have a material adverse effect on our results of operations and financial position. Although we attempt to mitigate adverse effects by borrowing under debt agreements denominated in foreign currencies and, on occasion and when deemed appropriate, using derivative contracts, there can be no assurance that those attempts to mitigate foreign currency risk will be successful.
 
We are subject to governmental regulations and actions that affect operating results and financial condition.
 
Many laws, including tax laws, and governmental regulations apply to us, our unconsolidated investees and our properties. Changes in these laws and governmental regulations, or their interpretation by agencies or the courts, could occur, which might affect our ability to conduct business.
 
ITEM 1B.  Unresolved Staff Comments
 
None.
 
ITEM 2.  Properties
 
We have directly invested in real estate assets that are primarily generic industrial properties. In Japan, our industrial properties are generally multi-level centers, which is common in Japan due to the high cost and limited availability of land. Our properties are typically used for storage, packaging, assembly, distribution, and light manufacturing of consumer and industrial products. Based on the square footage of our operating properties in the direct owned segment at December 31, 2010, our properties are 100% industrial properties; including 93.1% used for bulk distribution, 6.1% used for light manufacturing and assembly, and 0.8% used for other purposes, primarily service centers.
 
Geographic Distribution
 
For this presentation, we define major logistics corridors as worldwide population centers with a population of at least five million and income per capita substantially above the respective national average. We define our markets based on the concentration of properties in a specific area. A major logistics corridor may consist of one or more markets. A market, as defined by us, can be a metropolitan area, a city, a subsection of a metropolitan area, a subsection of a city or a region of a state or country. As of December 31, 2010, 75% of our operating properties (based on investment balance) are in major logistics corridors.


16


Table of Contents

Properties
 
The information in the following tables is as of December 31, 2010 for our direct owned operating properties, properties under development and land we own, including 76 buildings owned by entities we consolidate but of which we own less than 100%. All of these assets are included in our direct owned segment. This includes our development portfolio of operating properties we developed or are currently developing. No individual property or group of properties operating as a single business unit amounted to 10% or more of our consolidated total assets at December 31, 2010. No individual property or group of properties operating as a single business unit generated income equal to 10% or more of our consolidated gross revenues for the year ended December 31, 2010. These tables do not include properties that are owned by property funds or other unconsolidated investees, which are discussed under “— Unconsolidated Investees”.
 
                                         
                Rentable
    Investment
       
    No. of
    Percentage
    Square
    Before
    Encumbrances
 
    Bldgs.     Leased (1)     Footage     Depreciation     (2)  
   
Operating properties owned in the direct owned segment at
                                       
December 31, 2010 (dollars and rentable square footage
                                       
in thousands):
                                       
North America:
                                       
Major Logistics Corridors:
                                       
United States:
                                       
Atlanta
    49       82.07  %     7,835     $ 293,055     $ 48,678  
Chicago
    79       91.64  %     17,493       984,899       161,107  
Dallas
    78       86.13  %     12,649       527,344       64,450  
Houston
    57       97.77  %     4,706       166,937       8,719  
Los Angeles Basin / Inland Empire - California
    102       96.59  %     22,169       1,920,530       262,848  
Miami / South Florida
    21       84.48  %     2,081       161,317       11,747  
New Jersey / Eastern Pennsylvania
    41       94.81  %     8,905       530,003       82,723  
San Francisco Bay Area / Central Valley - California
    123       90.03  %     13,015       895,581       65,124  
Washington DC / Baltimore
    25       76.95  %     3,389       184,578       14,054  
Mexico:
                                       
Mexico City
    9       85.91  %     2,300       131,525       -  
Canada:
                                       
Toronto
    2       100.00  %     526       48,702       -  
Other Markets:
                                       
United States:
                                       
Austin, Texas
    4       88.52  %     270       11,035       -  
Charlotte, North Carolina
    23       95.02  %     2,873       100,126       34,926  
Cincinnati, Ohio
    17       77.91  %     2,585       84,479       22,263  
Columbus, Ohio
    24       98.28  %     5,236       214,792       34,643  
Denver, Colorado
    20       100.00  %     3,563       204,702       26,781  
El Paso, Texas
    8       97.85  %     931       32,675       -  
Indianapolis, Indiana
    11       89.40  %     1,274       41,797       5,024  
Las Vegas, Nevada
    7       86.30  %     664       39,548       -  
Louisville, Kentucky
    10       98.41  %     3,205       111,225       3,739  
Memphis, Tennessee
    18       94.82  %     4,094       120,909       -  
Nashville, Tennessee
    22       91.78  %     2,032       55,191       -  
Orlando, Florida
    8       69.89  %     1,425       82,965       -  
Phoenix, Arizona
    18       79.82  %     1,794       95,206       -  
Portland, Oregon
    11       90.47  %     1,374       97,427       29,524  
Reno, Nevada
    11       89.19  %     2,184       93,768       10,458  
San Antonio, Texas
    29       94.02  %     2,912       111,462       3,368  
Seattle, Washington
    2       100.00  %     245       29,207       7,755  
St. Louis, Missouri
    6       80.29  %     685       23,743       -  
Tampa, Florida
    29       87.62  %     2,035       85,858       9,980  
Other
    3       84.98  %     719       31,735       -  
Mexico:
                                       
Guadalajara
    2       42.38  %     269       12,093       -  
Juarez
    8       76.56  %     947       44,550       -  
Monterrey
    4       91.54  %     745       37,550       -  
Reynosa
    4       82.70  %     607       28,511       -  
Tijuana
    3       41.91  %     692       35,869       -  
     
     
Subtotal North America
    888       90.64  %     138,428       7,670,894       907,911  
     
     
Europe:
                                       
Major Logistics Corridors:
                                       
Amsterdam / Rotterdam / Antwerp - Benelux
    1       100.00  %     273       13,883       -  
Cologne / Frankfurt - Western Germany
    2       98.25  %     343       27,177       -  
Hamburg / Bremen - Northern Germany
    1       100.00  %     213       9,090       -  
London / Midlands - UK
    13       77.33  %     3,163       321,750       -  
Lyon / Marseille - Southern France
    3       77.17  %     1,520       92,017       -  
Madrid / Barcelona - Spain
    2       89.61  %     1,107       71,994       -  
Munich / Stuttgart - Southern Germany
    5       99.56  %     1,143       78,983       -  
Paris / Le Havre - Central France
    6       56.78  %     944       88,154       -  
Warsaw / Poznan - Central Poland
    12       69.29  %     2,172       120,601       -  
Wroclaw / Silesia - Southern Poland
    8       53.37  %     2,550       146,355       -  
Other Markets:
                                       
Czech Republic
    8       64.69  %     2,121       179,902       -  
France
    3       46.31  %     624       39,856       -  
Germany
    5       70.86  %     453       30,076       -  
Hungary
    5       67.80  %     1,205       65,942       -  
Italy
    4       64.44  %     1,330       81,363       -  
Poland
    1       15.18  %     448       25,958       -  
Romania
    4       91.52  %     1,155       51,975       -  
Slovakia
    2       85.50  %     593       46,921       -  
Spain
    2       %     644       33,376       -  
Sweden
    1       100.00  %     881       65,383       -  
     
     
Subtotal Europe
    88       70.54  %     22,882       1,590,756       -  
     
     


17


Table of Contents

                                         
                Rentable
    Investment
       
    No. of
    Percentage
    Square
    Before
    Encumbrances
 
    Bldgs.     Leased (1)     Footage     Depreciation     (2)  
   
Asia:
                                       
Major Logistics Corridors:
                                       
Tokyo
    4       89.45  %     3,487       790,319       171,393  
Osaka
    2       93.30  %     2,209       377,326       160,497  
Other Markets:
                                       
Japan
    3       51.91  %     1,541       285,504       -  
     
     
Subtotal Asia
    9       82.63  %     7,237       1,453,149       331,890  
     
     
Total operating properties owned in the direct owned
                                       
segment at December 31, 2010
    985       87.57  %     168,547     $ 10,714,799     $ 1,239,801  
 
 
 
                                                         
    Investment in Land     Properties Under Development  
                            Rentable
          Total
 
                No. of
    Percentage
    Square
    Current
    Expected
 
    Acres     Investment     Bldgs.     Leased(1)     Footage     Investment     Cost (3)  
   
Land and properties under development at December 31, 2010
(dollars and rentable square footage in thousands):
                                                       
North America:
                                                       
Major Logistics Corridors:
                                                       
United States:
                                                       
Atlanta
    350     $ 12,909       -               -     $ -     $ -  
Chicago
    682       61,169       1       100.00  %     336       4,946       11,282  
Dallas
    485       23,111       -               -       -       -  
Houston
    71       6,845       -               -       -       -  
Los Angeles Basin / Inland Empire - California
    360       60,888       1       %     271       23,932       30,118  
Miami / South Florida
    74       35,463       -               -       -       -  
New Jersey / Eastern Pennsylvania
    565       133,588       2       78.98  %     379       6,867       31,944  
San Francisco Bay Area / Central Valley - California
    180       17,013       -               -       -       -  
Washington DC / Baltimore
    138       20,351       -               -       -       -  
Mexico:
                                                       
Mexico City
    122       39,237       -               -       -       -  
Canada:
                                                       
Toronto
    169       75,501       -               -       -       -  
Other Markets:
                                                       
United States:
                                                       
Charlotte, North Carolina
    20       1,300       -               -       -       -  
Cincinnati, Ohio
    75       4,862       -               -       -       -  
Columbus, Ohio
    199       6,703       -               -       -       -  
Denver, Colorado
    77       6,908       -               -       -       -  
El Paso, Texas
    16       953       -               -       -       -  
Indianapolis, Indiana
    91       3,523       -               -       -       -  
Jacksonville, Florida
    103       10,929       -               -       -       -  
Las Vegas, Nevada
    66       7,556       -               -       -       -  
Louisville, Kentucky
    13       425       -               -       -       -  
Memphis, Tennessee
    159       6,448       -               -       -       -  
Norfolk, Virginia
    84       7,634       -               -       -       -  
Orlando, Florida
    16       2,804       -               -       -       -  
Phoenix, Arizona
    148       7,053       -               -       -       -  
Portland, Oregon
    23       2,467       -               -       -       -  
Reno, Nevada
    178       9,860       -               -       -       -  
Tampa, Florida
    41       1,274       -               -       -       -  
Other
    126       4,760       -               -       -       -  
Mexico:
                                                       
Guadalajara
    48       8,100       -               -       -       -  
Juarez
    148       15,631       -               -       -       -  
Monterrey
    157       36,388       -               -       -       -  
Reynosa
    230       16,216       -               -       -       -  
     
     
Subtotal North America
    5,214       647,869       4       64.47  %     986       35,745       73,344  
     
     
Europe:
                                                       
Major Logistics Corridors:
                                                       
Amsterdam / Rotterdam / Antwerp - Benelux
    68       29,292       -               -       -       -  
Cologne / Frankfurt - Western Germany
    98       27,817       -               -       -       -  
Hamburg / Bremen - Northern Germany
    14       3,683       -               -       -       -  
London / Midlands - UK
    1,128       263,844       1       100.00  %     155       10,423       20,814  
Lyon / Marseille - Southern France
    16       3,439       1       100.00  %     242       11,923       15,158  
Madrid / Barcelona - Spain
    55       8,408       -               -       -       -  
Munich / Stuttgart - Southern Germany
    95       25,046       -               -       -       -  
Paris / Le Havre - Central France
    86       25,983       1       100.00  %     342       17,042       24,275  
Warsaw / Poznan - Central Poland
    446       52,345       -               -       -       -  
Wroclaw / Silesia - Southern Poland
    378       57,919       -               -       -       -  
Other Markets:
                                                       
Austria
    28       12,571       1       100.00  %     115       9,522       10,421  
Czech Republic
    330       48,891       -               -       -       -  
France
    171       24,199       -               -       -       -  
Germany
    46       13,540       -               -       -       -  
Hungary
    338       46,495       -               -       -       -  
Italy
    53       10,545       -               -       -       -  
Poland
    82       7,168       -               -       -       -  
Romania
    90       12,509       -               -       -       -  
Slovakia
    118       21,474       -               -       -       -  
Spain
    45       9,565       -               -       -       -  
Sweden
    3       1,139       2       100.00  %     765       29,779       48,575  
United Kingdom
    36       16,141       -               -       -       -  
     
     
Subtotal Europe
    3,724       722,013       6       100.00  %     1,619       78,689       119,243  
     
     

18


Table of Contents

                                                         
    Investment in Land     Properties Under Development  
                            Rentable
          Total
 
                No. of
    Percentage
    Square
    Current
    Expected
 
    Acres     Investment     Bldgs.     Leased(1)     Footage     Investment     Cost (3)  
   
Asia:
                                                       
Major Logistics Corridors:
                                                       
Tokyo
    21       80,190       1       21.12  %     1,551       193,847       264,618  
Osaka
    8       46,407       1       100.00  %     214       21,219       44,393  
Other Markets:
                                                       
Japan
    23       37,132       2       100.00  %     488       35,862       78,486  
     
     
Subtotal Asia
    52       163,729       4       45.71  %     2,253       250,928       387,497  
     
     
Total land and properties under development in the direct
owned segment at December 31, 2010
    8,990     $ 1,533,611       14       67.61  %     4,858     $ 365,362     $ 580,084  
 
 
 
The following is a summary of our direct owned investment in real estate properties at December 31, 2010:
 
         
    Investment Before
 
    Depreciation
 
    (in thousands)  
   
 
Industrial properties
  $   10,714,799  
Properties under development
    365,362  
Land
    1,533,611  
Other real estate investments (4)
    265,869  
         
Total
  $        12,879,641  
 
 
 
(1) Represents the percentage leased at December 31, 2010. Operating properties at December 31, 2010 include completed development properties that may be in the initial lease-up phase, which reduces the overall leased percentage.
 
(2) Certain properties are pledged as security under our secured mortgage debt and assessment bonds at December 31, 2010. For purposes of this table, the total principal balance of a debt issuance that is secured by a pool of properties is allocated among the properties in the pool based on each property’s investment balance. In addition to the amounts reflected here, we also have a $7.4 million encumbrance related to a property under development in Japan and $0.7 million of encumbrances related to other real estate properties not included in the direct owned segment. See Schedule III - Real Estate and Accumulated Depreciation to our Consolidated Financial Statements in Item 8 for additional identification of the properties pledged.
 
(3) Represents the total expected cost to complete a property under development and may include the cost of land, fees, permits, payments to contractors, architectural and engineering fees, interest, project management costs and other appropriate costs to be capitalized during construction and also leasing costs, rather than the total actual costs incurred to date.
 
(4) Included in other investments are: (i) ground leases; (ii) parking lots; (iii) costs related to our corporate office buildings, which we occupy, and one office building available for lease; (iv) certain infrastructure costs related to projects we are developing on behalf of others; (v) costs incurred related to future development projects, including purchase options on land; and (vi) earnest money deposits associated with potential acquisitions.
 
Unconsolidated Investees
 
At December 31, 2010, our investments in and advances to unconsolidated investees totaled $2.0 billion. The property funds totaled $1.9 billion and the industrial joint ventures totaled $127.6 million at December 31, 2010 and are all included in our investment management segment. The remaining unconsolidated investees totaled $7.0 million at December 31, 2010 and are not included in either of our reportable segments.
 
Investment Management Segment
 
At December 31, 2010, our ownership interests range from 20% to 50% in 10 property funds and several other entities that are presented under the equity method. We act as manager of each of these entities. We also have an ownership interest in a joint venture that we manage and do not account for under the equity method. These entities primarily own or are developing industrial properties.
 
The information provided in the table below (dollars and square footage in thousands) is only for our unconsolidated entities included in this segment with operating industrial properties that we account for under the equity method. The amounts presented below represent the total entity, not just our proportionate share. See “Item 1 Business” and Note 5 to our Consolidated Financial Statements in Item 8 for more information on our unconsolidated investees.
 

19


Table of Contents

                                         
                Rentable
             
    No. of
    No. of
    Square
    Percentage
    Entity’s
 
    Bldgs.     Markets     Footage     Leased     Investment (1)  
   
North America:
                                       
Property funds:
                                       
ProLogis California
    80       2       14,178       96.52  %   $ 705,396  
ProLogis North American Properties Fund I
    35       16       9,033       94.25  %     377,468  
ProLogis North American Properties Fund XI
    12       2       3,616       85.25  %     184,512  
ProLogis North American Industrial Fund
    258       31       49,909       94.59  %     2,988,944  
ProLogis North American Industrial Fund II
    148       31       36,018       93.07  %     2,169,772  
ProLogis North American Industrial Fund III
    120       7       24,693       86.00  %     1,760,459  
ProLogis Mexico Industrial Fund
    72       6       9,144       90.46  %     582,112  
     
     
Property funds
    725       39       146,591       92.45  %     8,768,663  
Industrial joint ventures
    1       1       284       100.00  %     34,874  
     
     
Total North America
    726       39  (2)     146,875       92.46  %     8,803,537  
     
     
Europe:
                                       
Property funds:
                                       
ProLogis European Properties
    232       28       52,980       94.97  %     4,208,646  
ProLogis European Properties Fund II
    205       32       50,824       94.15  %     4,433,989  
     
     
Property funds
    437       35       103,804       94.57  %     8,642,635  
Industrial joint ventures
    1       1       1,015       100.00  %     66,200  
     
     
Total Europe
    438       35  (2)     104,819       94.62  %     8,708,835  
     
     
Asia:
                                       
ProLogis Korea Fund
    12       2       1,734       100.00  %     128,919  
Industrial joint ventures
    3       2       1,939       100.00  %     422,939  
     
     
Total Asia
    15       (2)     3,673       100.00  %     551,858  
     
     
Total unconsolidated investees (3)
    1,179       78       255,367       93.46  %   $ 18,064,230  
 
 
 
(1) Investment represents 100% of the carrying value of the properties, before depreciation, of each entity at December 31, 2010.
 
(2) Represents the total number of markets in each continent on a combined basis.
 
(3) This table does not include a joint venture that we manage and do not account for under the equity method that owns 90 properties that are 85.24% leased with a total entity investment of $463.7 million.
 
ITEM 3.  Legal Proceedings
 
From time to time, we and our unconsolidated investees are parties 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 matter will not result in a material adverse effect on our business, financial position or results of operations.
 
In connection with the announcement of the Merger Agreement, five complaints have been filed and remain pending through February 21, 2011. Three of the actions have been filed in the District Court for the City and County of Denver, Colorado. On February 2, 2011, a class action complaint was filed by James Kinsey, on behalf of himself and purportedly those similarly situated, against ProLogis, each of our trustees, our chief executive officer and chief financial officer, AMB, New Pumpkin Inc. (“New Pumpkin”), Upper Pumpkin LLC (“Upper Pumpkin”), Pumpkin LLC (“Pumpkin”) and AMB LP alleging that our trustees, chief executive officer and chief financial officer 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 plaintiff seeks among other relief 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 shareholders, (ii) direct the defendants to exercise their fiduciary duties to commence a sale process, (iii) rescind the already implemented Merger Agreement, (iv) impose a constructive trust in favor of the class upon any benefits improperly received by defendants, and (v) award plaintiff’s costs and disbursements of the action. On February 16, 2011, a class action complaint was filed by Gene Moorhead, on behalf of himself and purportedly those similarly situated, against the same defendants other than our chief financial officer alleging that our trustees 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 “Moorhead Matter”). The plaintiff in this action seeks among other relief to (i) enjoin the defendants, from consummating the Merger unless and until we adopt and implement a procedure or process to obtain the highest possible value for shareholders; (ii) direct our trustees and chief executive officer to exercise their fiduciary duties to obtain a transaction that is in the best interests of our shareholders and refrain from entering into any transaction until the process for the sale or merger is completed and the highest possible value is obtained; (iii) rescind, to the extent already implemented, the Merger Agreement, and (iv) award plaintiff’s costs and disbursements of the action. On February 18, 2011, a class action complaint was filed by Palisades Pointe Partners LTD, on behalf of itself and purportedly those similarly situated shareholders of ProLogis, against the same defendants in the Moorhead Matter alleging that our trustees breached their fiduciary duties in connection with the Merger and that we, AMB, New Pumpkin, Upper Pumpkin, Pumpkin and AMB LP aided and abetted the breaches of those fiduciary duties. The plaintiff in this action seeks among other relief to (i) preliminarily and permanently enjoin the defendants from consummating the Merger, from placing their own interests ahead of the interests of the shareholders, and from implementing certain measures provided for in the Merger Agreement, (ii) declare that defendants’ conduct in approving the Merger constituted a breach of fiduciary duty, and (iii) award plaintiff’s appropriate compensatory damages, costs and expenses.

20


Table of Contents

Two of the actions have been filed in the Circuit Court of Maryland for Baltimore County. On February 16, 2011, a class action and derivative complaint was filed by Vernon C. Burrows, on behalf of himself, derivatively on behalf of ProLogis and purportedly those similarly situated, against the same defendants other than our chief financial officer alleging that our trustees breached their fiduciary duties and wasted corporate assets 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 plaintiff in this action seeks among other relief 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 plaintiff for all damages, profits and any special benefits obtained as a result of their breaches of fiduciary duties; and (iv) award plaintiff the costs of the action. On February 17, 2011, a class action complaint was filed by Marshall Ferguson Jr., on behalf of himself, derivatively on behalf of ProLogis and purportedly those similarly situated, against the same defendants other than our chief financial officer alleging that our trustees breached their fiduciary duties, wasted corporate assets in connection with entering into the Merger Agreement and failed to maximize shareholder value and that we, AMB, New Pumpkin, Upper Pumpkin, Pumpkin and AMB LP aided and abetted the breaches of those fiduciary duties. The plaintiff in this action seeks among other relief 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 plaintiff for all damages, profits and any special benefits obtained as a result of their breaches of fiduciary duties, and (iv) award plaintiff the costs of this action.
 
We believe that the claims are without merit and intend to vigorously defend ourselves in these actions.
 
ITEM 4.  Submission of Matters to a Vote of Security Holders
 
[Removed and Reserved]
 
PART II
 
ITEM 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information and Holders
 
Our common shares are listed on the NYSE under the symbol “PLD”. The following table sets forth the high and low sale prices, as reported in the NYSE Composite Tape, and distributions per common share, for the periods indicated.
 
                         
                Per Common Share
 
    High Sale Price     Low Sale Price     Cash Distribution  
   
 
2009
                       
First Quarter
  $ 16.68     $ 4.87     $ 0.25  
Second Quarter
    9.77       6.10       0.15  
Third Quarter
    13.30       6.54       0.15  
Fourth Quarter
    15.04       10.76       0.15  
2010
                       
First Quarter
  $ 14.71     $ 11.32     $ 0.15  
Second Quarter
    14.67       9.61       0.15  
Third Quarter
    12.22       9.15       0.15  
Fourth Quarter
    14.97       11.66       0.1125  
2011
                       
First Quarter (through February 18)
  $        16.51     $        14.02     $        0.1125  (1)
 
 
 
(1) Declared on January 30, 2011 and payable on February 28, 2011 to holders of record on February 14, 2011.
 
On February 18, 2011, we had approximately 570,437,000 common shares outstanding, which were held of record by approximately 7,400 shareholders.
 
Distributions and Dividends
 
In order to comply with the REIT requirements of the Code, we are generally required to make common share distributions and preferred share dividends (other than capital gain distributions) to our shareholders in amounts that together at least equal (i) the sum of (a) 90% of our “REIT taxable income” computed without regard to the dividends paid deduction and net capital gains and (b) 90% of the net income (after tax), if any, from foreclosure property, minus (ii) certain excess non-cash income. Our common share distribution policy is to distribute a percentage of our cash flow that ensures that we will meet the distribution requirements of the Code and that allows us to maximize the cash retained to meet other cash needs, such as capital improvements and other investment activities.
 
The payment of common share distributions is dependent upon our financial condition, operating results and REIT distribution requirements and may be adjusted at the discretion of the Board during the year.
 
In addition, pursuant to the Merger Agreement, we and AMB have agreed to coordinate the record date and payment date of regular quarterly dividends for our respective shareholders such that, if one set of shareholders receives their dividend for a particular quarter prior to the closing of the Merger, the other set of shareholders will also receive their dividend for such quarter at the same time.
 
In addition to common shares, we have issued cumulative redeemable preferred shares of beneficial interest. At December 31, 2010, we had three series of preferred shares outstanding (“Series C Preferred Shares”, “Series F Preferred Shares” and “Series G Preferred Shares”). Holders of each series of preferred shares outstanding have limited voting rights, subject to certain conditions, and are entitled to receive cumulative preferential dividends based upon each series’ respective liquidation preference. Such dividends are payable quarterly


21


Table of Contents

in arrears on the last day of March, June, September and December. Dividends on preferred shares are payable when, and if, they have been declared by the Board, out of funds legally available for payment of dividends. After the respective redemption dates, each series of preferred shares can be redeemed at our option.
 
The cash redemption price (other than the portion consisting of accrued and unpaid dividends) with respect to Series C Preferred Shares is payable solely out of the cumulative sales proceeds of other capital shares of ours, which may include shares of other series of preferred shares. With respect to the payment of dividends, each series of preferred shares ranks on parity with our other series of preferred shares. Annual per share dividends paid on each series of preferred shares were as follows for the periods indicated:
 
                 
      Years Ended December 31,  
    2010     2009  
   
Series C Preferred Shares
  $        4.27     $        4.27  
Series F Preferred Shares
  $ 1.69     $ 1.69  
Series G Preferred Shares
  $ 1.69     $ 1.69  
 
 
 
Pursuant to the terms of our preferred shares, we are restricted from declaring or paying any distribution with respect to our common shares unless and until all cumulative dividends with respect to the preferred shares have been paid and sufficient funds have been set aside for dividends that have been declared for the then-current dividend period with respect to the preferred shares.
 
For more information regarding our distributions and dividends, see Note 11 to our Consolidated Financial Statements in Item 8.
 
Securities Authorized for Issuance Under Equity Compensation Plans
 
For information regarding securities authorized for issuance under our equity compensation plans see Notes 11 and 12 to our Consolidated Financial Statements in Item 8.
 
Other Shareholder Matters
 
Other Issuances of Common Shares
 
In 2010, we issued 50,250 common shares, upon exchange of limited partnership units in our majority-owned and consolidated real estate partnerships. These common shares were issued in transactions exempt from registration under Section 4(2) of the Securities Act of 1933.
 
Common Share Plans
 
We have approximately $84.1 million remaining on our Board authorization to repurchase common shares that began in 2001. We have not repurchased our common shares since 2003.
 
See our 2011 Proxy Statement or our subsequent amendment of this Form 10-K for further information relative to our equity compensation plans.


22


Table of Contents

ITEM 6. Selected Financial Data
 
The following table sets forth selected financial data relating to our historical financial condition and results of operations for 2010 and the four preceding years. Certain amounts for the years prior to 2010 presented in the table below have been reclassified to conform to the 2010 financial statement presentation and to reflect discontinued operations. The amounts in the table below are in millions, except for per share amounts.
 
                                         
    Years Ended December 31,  
    2010     2009     2008     2007     2006  
Operating Data:
                                       
Total revenues (1)
  $     909     $     1,055     $     5,396     $     5,944     $     2,209  
Total expenses (1)
  $ 1,503     $ 1,089     $ 4,897     $ 4,922     $ 1,556  
Operating income (loss) (1)(2)
  $ (594 )   $ (35 )   $ 500     $ 1,022     $ 654  
Interest expense
  $ 461     $ 373     $ 385     $ 389     $ 294  
Earnings (loss) from continuing operations (2)
  $ (1,582 )   $ (346 )   $ (359 )   $ 853     $ 609  
Discontinued operations
  $ 311     $ 370     $ (91 )   $ 205     $ 269  
Consolidated net earnings (loss) (2)
  $ (1,270 )   $ 24     $ (450 )   $ 1,058     $ 878  
Net earnings (loss) attributable to common shares (2)
  $ (1,296 )   $ (3 )   $ (479 )   $ 1,028     $ 849  
Net earnings (loss) per share attributable to common shares — Basic:
                                       
Continuing operations
  $ (3.27 )   $ (0.93 )   $ (1.48 )   $ 3.20     $ 2.36  
Discontinued operations
    0.63       0.92       (0.34 )     0.80       1.09  
                                         
Net earnings (loss) per share attributable to common shares - Basic (2)
  $ (2.64 )   $ (0.01 )   $ (1.82 )   $ 4.00     $ 3.45  
Net earnings (loss) per share attributable to common shares - Diluted:
                                       
Continuing operations
  $ (3.27 )   $ (0.93 )   $ (1.48 )   $ 3.09     $ 2.27  
Discontinued operations
    0.63       0.92       (0.34 )     0.77       1.05  
                                         
Net earnings (loss) per share attributable to common shares - Diluted (2)
  $ (2.64 )   $ (0.01 )   $ (1.82 )   $ 3.86     $ 3.32  
                                         
Weighted average common shares outstanding:
                                       
Basic
    492       403       263       257       246  
Diluted
    492       403       263       267       257  
Common Share Distributions:
                                       
Common share cash distributions paid
  $ 281     $ 272     $ 543     $ 473     $ 393  
Common share distributions paid per share
  $ 0.56     $ 0.70     $ 2.07     $ 1.84     $ 1.60  
FFO (3):
                                       
Reconciliation of net earnings (loss) to FFO:
                                       
Net earnings (loss) attributable to common shares (2)
  $ (1,296 )   $ (3 )   $ (479 )   $ 1,028     $ 849  
Total NAREIT defined adjustments
    241       213       449       150       149  
Total our defined adjustments
    (46 )     (71 )     164       28       (53 )
                                         
FFO attributable to common shares as defined by ProLogis, including significant non-cash items
    (1,101 )     139       134       1,206       945  
Add (deduct) significant non-cash items:
                                       
Impairment of real estate properties (2)
    824       331       275       -       -  
Impairment of goodwill and other assets (2)
    413       164       321       -       -  
Impairment (net gain) related to China operations
    -       (3 )     198       -       -  
Loss (gain) on early extinguishment of debt
    31       (172 )     (91 )     -       -  
Write-off deferred financing fees associated with credit facility restructuring
    8       -       -       -       -  
Our share of certain losses recognized by the property funds, net
    11       9       108       -       -  
                                         
FFO attributable to common shares as defined by ProLogis, excluding significant non-cash items
  $ 186     $ 468     $ 945     $ 1,206     $ 945  
                                         
Cash Flow Data:
                                       
Net cash provided by operating activities (1)
  $ 241     $ 89     $ 888     $ 1,230     $ 664  
Net cash provided by (used in) investing activities
  $ 733     $ 1,235     $ (1,347 )   $ (4,076 )   $ (2,047 )
Net cash provided by (used in) financing activities
  $ (970 )   $ (1,463 )   $ 358     $ 2,742     $ 1,645  
                                         
 
                                         
    As of December 31,  
    2010     2009     2008 (1)     2007 (1)     2006  
Financial Position:
                                       
Real estate properties owned, excluding land held for development, before depreciation
  $   11,346     $   12,606     $   13,234     $   14,414     $   12,482  
Land held for development or targeted for disposition (2)
  $ 1,534     $ 2,574     $ 2,483     $ 2,153     $ 1,397  
Net investments in properties
  $ 11,284     $ 13,508     $ 14,134     $ 15,199     $ 12,615  
Investments in and advances to unconsolidated investees
  $ 2,025     $ 2,107     $ 2,195     $ 2,252     $ 1,300  
Total assets
  $ 14,903     $ 16,797     $ 19,210     $ 19,652     $ 15,827  
Total debt
  $ 6,506     $ 7,978     $ 10,711     $ 10,217     $ 8,387  
Total liabilities
  $ 7,382     $ 8,790     $ 12,452     $ 11,848     $ 9,376  
Noncontrolling interests
  $ 15     $ 20     $ 20     $ 79     $ 52  
ProLogis shareholders’ equity
  $ 7,505     $ 7,987     $ 6,738     $ 7,725     $ 6,399  
Number of common shares outstanding
    570       474       267       258       251  
                                         


23


Table of Contents

(1) During 2010 and 2009, we contributed certain properties with any resulting gain or loss reflected as net gains in our Consolidated Statements of Operations and as cash provided by investing activities in our Consolidated Statements of Cash Flows. In 2008 and previous years, we reflected these contributions as gross revenues and expenses and as cash provided by operating activities. See our Consolidated Financial Statements in Item 8 for more information.
 
(2) During 2010, we recognized impairment charges of $824.3 million on certain of our real estate properties, which includes $87.7 million in Discontinued Operations, and $412.7 million related to goodwill and other assets. During 2009, we recognized impairment charges of $331.6 million on certain of our real estate properties and $163.6 million related to goodwill and other assets. During 2008, we recognized impairment charges of $274.7 million on certain of our real estate properties and $320.6 million related to goodwill and other assets. In addition, during 2008, we recognized impairment charges of $198.2 million in Discontinued Operations related to the net assets of our China operations that were reclassified as held for sale and our share of impairment charges recorded by an unconsolidated investee of $108.2 million. See Note 14 to our Consolidated Financial Statements in Item 8 for more information.
 
(3) Funds from operations (“FFO”) is a non-U.S. generally accepted accounting principle (“GAAP”) measure that is commonly used in the real estate industry. The most directly comparable GAAP measure to FFO is net earnings. Although the National Association of Real Estate Investment Trusts (“NAREIT”) has published a definition of FFO, modifications to the NAREIT calculation of FFO are common among REITs, as companies seek to provide financial measures that meaningfully reflect their business. FFO, as we define it, is presented as a supplemental financial measure. FFO is not used by us as, nor should it be considered to be, an alternative to net earnings computed under GAAP as an indicator of our operating performance or as an alternative to cash from operating activities computed under GAAP as an indicator of our ability to fund our cash needs.
 
FFO is not meant to represent a comprehensive system of financial reporting and does not present, nor do we intend it to present, a complete picture of our financial condition and operating performance. We believe net earnings computed under GAAP remains the primary measure of performance and that FFO is only meaningful when it is used in conjunction with net earnings computed under GAAP. Further, we believe that our consolidated financial statements, prepared in accordance with GAAP, provide the most meaningful picture of our financial condition and our operating performance.
 
At the same time that NAREIT created and defined its FFO concept for the REIT industry, it also recognized that “management of each of its member companies has the responsibility and authority to publish financial information that it regards as useful to the financial community.” We believe that financial analysts, potential investors and shareholders who review our operating results are best served by a defined FFO measure that includes other adjustments to net earnings computed under GAAP in addition to those included in the NAREIT defined measure of FFO. Our FFO measures are discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Funds From Operations”.
 
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
You should read the following discussion in conjunction with our Consolidated Financial Statements included in Item 8 of this report and the matters described under “Item 1A. Risk Factors”.
 
Management’s Overview
 
We are a self-administered and self-managed REIT that owns, operates and develops real estate properties, primarily industrial properties, in North America, Europe and Asia (directly and through our unconsolidated investees). Our business is primarily driven by requirements for modern, well-located inventory space in key global distribution locations. Our focus on our customers’ needs has enabled us to become a leading global provider of industrial distribution properties.
 
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 7; 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 operating properties in key distribution markets. Within our direct owned operating portfolio are properties that we developed that we may refer to as completed development properties. Also included in this segment are industrial properties that are currently under development, land and certain land that is 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 due to the lease up and increased occupancy levels of our completed development properties, partially offset by a decrease in effective rental rates. Our completed development properties were 78.7% and 62.2% leased at December 31, 2010 and December 31, 2009, respectively, and 73.7% and 55.2% occupied at December 31, 2010 and December 31, 2009, respectively. We expect our total revenues from this segment to continue to increase in 2011 from 2010 predominantly through increases in occupied square feet in our development properties, offset partially by lower rents on turnover of space. We anticipate the increases in occupied square feet to come from leases that were signed in 2010, but have not commenced occupancy, and future leasing activity. Our intent is to generally hold the properties in our direct owned segment for long-term investment, including properties we may develop utilizing our existing land. However, we may contribute certain properties to a property fund or to third parties, depending on market conditions and liquidity needs. As of December 31, 2010, we have identified approximately $1.0 billion of land that we are targeting for disposition to third parties as raw land or subsequent to the development of a building, depending on customer needs and market and other conditions.
 
•  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 certain third parties. We provide services to these entities,


24


Table of Contents

  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.
 
We no longer have a CDFS business segment. 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 2008, 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 had an ownership interest and managed, or sold to third parties.
 
Summary of 2010
 
Our objectives for 2010 were to: (i) retain more of our development properties in order to improve the geographic diversification of our direct owned properties as most of our planned developments were in international markets; (ii) monetize a portion of our investment in land through disposition or development; and (iii) continue to focus on staggering and extending our debt maturities.
 
We have made progress on these objectives, as well as completed other activities, as follows:
 
Debt activity (all are discussed in further detail below under “-Liquidity and Capital Resources”):
 
•  We reduced our debt at December 31, 2010 to $6.5 billion, from $8.0 billion at December 31, 2009. Excluding our Global Line, we have $176.3 million in debt maturing in 2011 and less than $800 million in any year thereafter.
 
•  We completed three debt tender offers for specified series of our outstanding senior notes. In connection with these tenders, we repurchased an aggregate of $1.69 billion original principal amount of our senior notes with maturities ranging from 2012 — 2020 for $1.84 billion.
 
•  During 2010, in addition to the tenders discussed above, we repurchased an aggregate of $1.18 billion original principal amount of our senior and convertible senior notes with maturities ranging from 2012 — 2016 for $1.13 billion.
 
•  We amended our global line of credit (“Global Line”) twice during the year to amend certain covenants and to reduce the size of the aggregate commitments to approximately $1.6 billion (subject to currency fluctuations).
 
•  In March 2010, we issued five-year convertible senior notes and seven- and ten-year senior notes for a total of $1.56 billion.
 
Equity offering:
•  On November 1, 2010, we completed a public offering of 92 million common shares at a price of $12.30 per share and received net proceeds of $1.1 billion (the “2010 Equity Offering”), which were used for the debt buy-backs discussed above.
 
Asset dispositions and contributions:
•  During the fourth quarter of 2010, we sold a portfolio of 182 industrial properties and several equity method investments to a third party for gross proceeds of approximately $1.02 billion, resulting in a net gain of $203.1 million net of taxes ($66.1 million loss in continuing operations and $269.2 million gain in Discontinued Operations).
 
•  In addition to the large portfolio sale discussed above, we generated aggregate proceeds of $598.0 million from the contribution of one development property to ProLogis North American Industrial Properties Fund (“NAIF”), six development properties to ProLogis European Properties Fund II (“PEPF II”), the sale of 90% of two development properties in Japan, additional proceeds from contributions we made to PEPF II in 2009 based on valuations received as of December 31, 2010 and our contribution agreement with the property fund, and the sale of 23 properties to third parties.
 
•  In December 2010, we entered into a definitive agreement to sell a portfolio of U.S. retail, mixed-use and other non-core assets for approximately $505 million. The transaction is expected to be substantially completed in the first quarter of 2011, subject to customary closing conditions. Based on the carrying values of these net assets, as compared with the estimated sales proceeds less costs to sell, we recognized an impairment charge of $168.8 million ($91.4 million in continuing operations, of which $47.1 million relates to land and is recorded in Impairment of Real Estate Properties and $44.3 million relates to the joint ventures and other assets and is recorded in Impairment of Goodwill and Other Assets; and $77.4 million is recorded in Discontinued Operations and is associated with the operating properties). See Note 3 to our Consolidated Financial Statements in Item 8.
 
Land:
•  In the fourth quarter of 2010, we made a strategic decision to more aggressively pursue land sales. As a result of this decision, we undertook a complete evaluation of all land positions and divided them between two categories: land held for development of over $0.5 billion and land targeted for disposition of almost $1.0 billion. As a result of our change in intent, we adjusted the carrying value of the land targeted for disposition to fair value, if the carrying value exceeded fair value, based on valuations and other relevant market data, and recorded an impairment charge of $687.6 million.
 
•  We began development of 19 properties that aggregated 6.3 million square feet and utilized $183.0 million of land that we owned and held for development. The developments included 11 properties in Europe that were 100% pre-leased; four properties in Japan, three of which were pre-leased; and four properties in the U.S., two of which were pre-leased and another that was substantially pre-leased. Subsequent to the start of one of these developments in Europe, we sold the underlying land (41 acres) to PEPF II for $34.6 million and are constructing a building on behalf of the property fund for a development fee. Of the remaining developments, four are completed and in our direct owned operating portfolio at December 31, 2010. We received additional proceeds of $103.2 million from the sale of land to third parties. All of these activities allowed us to monetize an aggregate of approximately $320.8 million of land in 2010.


25


Table of Contents

Other:
•  We increased the leased percentage of our completed development properties from 62.2% at December 31, 2009 to 78.7% at December 31, 2010. The leased percentage of our total portfolio increased from 82.7% at December 31, 2009 to 87.6% at December 31, 2010.
 
•  We acquired 10 properties aggregating 2.4 million square feet with a combined purchase price of $128.6 million.
 
•  Early in 2010, we purchased 15.8 million additional common units of ProLogis European Properties (“PEPR”) for €80.4 million ($109.2 million), which increased our ownership percentage in the common equity of PEPR to 33.1%.
 
•  As a result of our strategic decisions in the fourth quarter 2010 to more aggressively pursue land sales and dispose of certain properties, in connection with our annual review of goodwill, we recognized an impairment charge of $368.5 million related to the goodwill allocated to our direct owned segments in the North America reporting unit and Europe reporting unit. See Note 14 to our Consolidated Financial Statements in Item 8.
 
Objectives for 2011
 
In 2011, we plan to continue to focus on our longer-term strategy of conservative growth through the ownership, management and development of industrial properties with a concentrated focus on customer service. Building off our objectives for 2010, our goals for 2011 and beyond include:
 
•  increase occupancy in our portfolio (representing 168.5 million square feet at December 31, 2010 that was 87.6% leased);
 
•  develop new industrial properties on our land, predominantly in our major logistics corridors; and
 
•  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 plan to accomplish these objectives through the disposition of certain assets. During the fourth quarter of 2010, we made a strategic decision to more aggressively pursue land sales and, as a result, we have almost $1.0 billion in land targeted for disposition at December 31, 2010. We also plan to dispose of our retail, mixed use and other non-core assets in early 2011. We will use these proceeds to help fund our development activities, allowing 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. In addition, we will analyze any opportunities for acquisitions of quality industrial portfolios within our current business model.
 
The Merger
 
On January 30, 2011, we entered into the Merger Agreement with AMB (see Note 23 to our Consolidated Financial Statements in Item 8). Subject to the satisfaction of customary closing conditions, including the receipt of approval of our shareholders and AMB stockholders, we currently expect the transactions contemplated by the Merger Agreement to close during the second quarter of 2011.
 
Results of Operations
 
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:
 
                         
    Years Ended December 31,  
    2010     2009     2008  
Net operating income – direct owned segment
  $        540,421     $        484,377     $        512,483  
Net operating income – investment management segment
    103,261       122,694       15,680  
Net operating income – CDFS business segment
    -       180,237       654,746  
General and administrative expense
    (165,981 )     (180,486 )     (177,350 )
Reduction in workforce
    -       (11,745 )     (23,131 )
Impairment of real estate properties
    (736,612 )     (331,592 )     (274,705 )
Depreciation and amortization expense
    (319,602 )     (274,522 )     (272,791 )
Earnings from other unconsolidated investees, net
    8,213       4,712       8,796  
Interest income
    5,022       2,702       9,473  
Interest expense
    (461,166 )     (373,305 )     (385,065 )
Impairment of goodwill and other assets
    (412,745 )     (163,644 )     (320,636 )
Other income (expense), net
    10,825       (42,510 )     7,049  
Net gains on dispositions of investments in real estate
    28,488       35,262       11,668  
Foreign currency exchange gains (losses), net
    (11,081 )     35,626       (148,281 )
Gain (loss) on early extinguishment of debt, net
    (201,486 )     172,258       90,719  
Income tax benefit (expense)
    30,499       (5,975 )     (68,011 )
                         
Loss from continuing operations
  $ (1,581,944 )   $ (345,911 )   $ (359,356 )
                         


26


Table of Contents

See Note 20 to our Consolidated Financial Statements in Item 8 for additional information regarding our segments and a reconciliation of net operating income to Loss Before Income Taxes.
 
Direct Owned Segment
 
The net operating income of the direct owned segment consists of rental income and rental expenses from industrial properties that we own. The size and occupied percentage of our direct owned operating portfolio fluctuates due to the timing of development and contributions and affects 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, offset by 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 for the years ended December 31 was as follows (in thousands):
 
                         
    2010     2009     2008  
Rental and other income
  $        780,700     $        731,635     $        769,661  
Rental and other expenses
    240,279       247,258       257,178  
                         
Total net operating income – direct owned segment
  $ 540,421     $ 484,377     $ 512,483  
                         
 
The increase in rental income and net operating income in 2010 from 2009 is due principally to the increased occupancy in our completed development properties (from 55.2% at December 31, 2009 to 73.7% at December 31, 2010) as well as the acquisition of properties and the completion of new development properties, offset partially by decreases due to contributions of properties in 2010 and 2009 to the unconsolidated property funds and decreases in effective rental rates. The effective rental rates in our same store portfolio (as defined below) decreased 10.5% in the fourth quarter 2010 as compared with fourth quarter 2009. The decrease was due to: (i) leases turning that were put in place when market rents were at or near peak; and (ii) decreased market rents. 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 $166.7 million and $156.8 million for the years ended December 31, 2010 and 2009, respectively.
 
Our direct owned operating portfolio as of December 31 was as follows (square feet in thousands):
 
                                                     
    2010     2009  
    Number of
    Square
    Leased
    Number of
    Square
    Leased
 
    Properties     Feet     %     Properties     Feet     %  
Industrial operating properties
       985          168,547          87.6 %        1,188          191,623          82.7 %
Retail properties
    -       -       -         27       1,014       91.5 %
                                                     
Total operating portfolio
    985       168,547       87.6 %     1,215       192,637       82.8 %
                                                     
 
In 2010, we disposed of 205 industrial properties aggregating 25.4 million square feet to third parties. The results of these properties and those held for sale at December 31, 2010 (including our retail properties) are not included in the segment operating income for any periods presented above. See Note 3 to our Consolidated Financial Statements in Item 8 for more information. In 2010, we also acquired 10 properties aggregating 2.4 million square feet.
 
During 2010, we completed the development of nine buildings aggregating 3.6 million square feet, four of which we continue to own at December 31, 2010.
 
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; (ii) fees and incentives earned for services performed for our unconsolidated investees and certain third parties; and (iii) dividends and interest earned on investments in preferred stock or debt securities of our unconsolidated investees; 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 expense; (iii) general and administrative expense; (iv) income tax expense; (v) foreign currency exchange gains and losses; (vi) gains or losses on dispositions of properties or investments; and (vii) impairment charges. The fluctuations in income we recognize in any given period are generally the result of: (i) variances in the income and expense items of the unconsolidated investees; (ii) the size of the portfolio and occupancy levels; (iii) changes in our ownership interest; and (iv) fluctuations in foreign currency exchange rates at which we translate our share of net earnings and fees to U.S. dollars, if applicable.
 
The direct costs associated with our investment management segment for all periods presented are included in the line item Investment Management Expenses in our Consolidated Statements of Operations. We reported expenses of $40.7 million, $43.4 million, and $50.8 million for the years ended December 31, 2010, 2009 and 2008, respectively. 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 and certain third parties. We allocate the costs of our property management function to the properties we own (reported in Rental Expenses) and the properties included in this segment


27


Table of Contents

(included in Investment Management Expenses), by using the square feet owned at the beginning of each quarter by the respective portfolios. The decreases are due primarily to the sale of our Japan investments that we managed through July 2009.
 
The net operating income from the investment management segment for the years ended December 31 was as follows (in thousands):
 
                         
    2010     2009     2008  
Unconsolidated property funds:
                       
North America (1)
  $        19,431     $        29,996     $        40,982  
Europe (2)
    76,637       67,651       (60,488 )
Asia (3)
    (4,200 )     6,188       30,640  
Other (4)
    11,393       18,859       4,546  
                         
Total net operating income - investment management segment
  $ 103,261     $ 122,694     $ 15,680  
                         
 
(1) As of December 31, 2010, our ownership interests in the North America funds ranged from 20.0% to 50.0%. These property funds on a combined basis owned 725, 847 and 854 properties that were 92.1%, 91.5% and 94.1% occupied at December 31, 2010, 2009 and 2008, respectively. Excluding ProLogis North American Properties Funds VI-X, on a combined basis, the occupied percentage of the portfolio was 92.5% and 95.1% at 2009 and 2008, respectively.
 
  Our proportionate share of earnings from the North American property funds decreased in 2010, as compared with 2009, due primarily to lower revenue as a result of previous property sales, lower occupancy and lower effective rents on new leases. In addition, our share of other unusual items that occurred in each year in these funds are as follows:
 
  •  2010 includes impairment losses of $6.0 million on two operating buildings in two of the funds and $13.0 million in losses on interest rate derivative contracts that no longer met requirements for hedge accounting.
  •  2009 includes $15.8 million in deferred tax expense recognized by the Mexico Industrial Fund, offset by $7.2 million gains recognized by NAIF from the extinguishment of debt.
  •  2008 includes $28.2 million in losses on interest rate derivative contracts that no longer met hedge accounting.
 
(2) Represents the income earned by us from our investments in two property funds in Europe, PEPR and PEPF II. On a combined basis, these funds owned 437, 428 and 399 properties that were 94.6%, 96.3% and 97.6% leased at December 31, 2010, 2009 and 2008, respectively. The increase in properties is due to contributions we made to PEPF II in 2010 and 2009, along with the acquisition of three properties by PEPF II in 2010.
 
  Our common ownership interest in PEPR and PEPF II was 33.1% and 29.7%, respectively, at December 31, 2010. During the first quarter of 2010, we purchased 15.8 million common units of PEPR for €80.4 million ($109.2 million). In addition, we earn a 10.5% annual return on €41.6 million of preferred units in PEPR that we acquired in December 2009.
 
  In 2008, we recognized a loss of $108.2 million representing our share of the loss recognized by PEPR upon the sale and impairment of its ownership interests in PEPF II.
 
(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 fund investments in Japan. These property funds, on a combined basis, owned 12, 12 and 83 properties that were 100%, 97.8% and 99.6% leased at December 31, 2010, 2009 and 2008, respectively. In 2010, we recognized our share of an impairment of $5.0 million due to our expectation that the property fund will dispose of its real estate properties.
 
(4) Includes property management fees and our share of earnings from industrial joint ventures and other entities, offset by investment management expenses. Included in 2009 are fees earned from the Japan property funds after February through July 2009, including a termination fee of $16.3 million. The remaining increase from 2009 to 2010 is due to increased activity in our joint ventures.
 
See Note 5 to our Consolidated Financial Statements in Item 8 for additional information on our unconsolidated investees.
 
CDFS Business Segment
 
Net operating income of the CDFS business segment for 2009 and 2008 was $180.2 million and $654.7 million, respectively. As previously discussed, our business strategy no longer includes the CDFS business segment. The amount in 2009 is the recognition of gains previously deferred from the contribution of properties and recognized due to the sale of our investments in the Japan property funds in February 2009, while the amount in 2008 consisted of gains recognized primarily from the contributions of 180 properties to the property funds.
 
Operational Outlook
 
With global economic fundamentals having begun to show signs of recovery in late 2009, the industrial real estate business has followed suit, albeit with a slight lag, and also begun to stabilize. Globally, demand for industrial distribution space is still soft, but we are seeing signs of increased customer interest, with increased leasing activity in 2010 and positive net absorption for three consecutive quarters to close out 2010. Looking ahead, we expect demand in the U.S. to improve as the economic recovery gains traction. Within Europe and Asia, we believe significant obsolescence and customers’ preference to lease, rather than own, facilities will continue to drive demand for industrial space. Market rents currently remain below their cyclical peaks and also below the level of feasibility rents needed to justify new inventory construction. However, we believe market rents are trending upward and new development will take place.


28


Table of Contents

In our total operating industrial portfolio, including properties managed by us and owned by our unconsolidated investees that are accounted for under the equity method, we leased 119.4 million square feet, 108.1 million square feet and 121.5 million square feet of space during 2010, 2009, and 2008, respectively. On lease turnovers in the same store portfolio (as defined below), rental rates decreased 10.5% for the fourth quarter of 2010 as compared with 12.4% for the fourth quarter of 2009. The total operating portfolio was 91.0% leased at December 31, 2010, up from 89.2% at December 31, 2009, primarily due to increased leasing in our direct owned properties, offset by a modest decrease in the investment management portfolio.
 
In our direct owned portfolio, we leased 57.3 million square feet, including 18.3 million square feet in our development portfolio (both completed properties and those under development) in 2010 compared to 57.9 million square feet in 2009. Repeat leasing business with our global customers is important to our long-term growth. During 2010, of the space leased in our newly developed properties, 66.3% was with repeat customers. Our existing customers renewed their leases 77.8% of the time in 2010 as compared with 75.1% in 2009. As of December 31, 2010, our total direct owned industrial operating portfolio was 87.6% leased, as compared with 82.7% at December 31, 2009.
 
New speculative development has fallen to record-low levels worldwide during the past couple of years. However, we continue to experience an increase in customer requests for build-to-suit proposals, since much of the overall existing industry vacancy is in older, obsolete buildings and, therefore, does not meet these customers’ distribution space requirements. During 2010, in response to this emerging demand, we started development of 19 properties worldwide totaling 6.3 million square feet, 16 of which were 100% leased prior to the commencement of development. Additionally, in an effort to monetize our land holdings, we plan to continue to take advantage of opportunities to develop new operating properties for long-term investment, predominantly in our major logistics corridors or for sale to third parties. We will continue to evaluate future opportunities for such developments that may be pre-leased, as well as the development of buildings on a speculative basis in certain areas, depending on market conditions and other factors. Some of this land we have designated to be developed and held. If we decide to sell this land, we may recognize impairments at that time or gains on the sale, depending on the value as compared to our carrying value.
 
As of December 31, 2010, we had 14 properties under development that were 67.6% leased and we expect to incur an additional $296.5 million of development and leasing costs related to these properties. Our near-term focus is to complete the development and leasing of these properties. Once these properties are leased, we will generally own them directly, thereby creating additional income in our direct owned segment. In certain limited circumstances, we may sell them to a property fund or joint venture, including two properties that are pre-committed for sale.
 
Other Components of Income
 
General and Administrative (“G&A”) Expenses and Reduction in Workforce (“RIF”)
 
Net G&A expenses for the years ended December 31 consisted of the following (in thousands):
 
                         
    2010     2009     2008  
Gross G&A expense
  $        266,932     $        294,598     $        400,648  
Reclassed to discontinued operations, net of capitalized amounts
    -       (1,305 )     (21,721 )
Reported as rental expense
    (19,709 )     (19,446 )     (25,306 )
Reported as investment management expenses
    (40,659 )     (43,416 )     (50,761 )
Capitalized amounts
    (40,583 )     (49,945 )     (125,510 )
                         
Net G&A
  $ 165,981     $ 180,486     $ 177,350  
                         
 
Overall G&A expense decreased due to lower gross G&A expense, as a result of our RIF program in 2009 and 2008 and various cost savings measures, offset by lower capitalized G&A. Our capitalized G&A has decreased due to lower gross G&A expense incurred and less development activity.
 
Impairment of Real Estate Properties
 
During 2010, 2009 and 2008, we recognized impairment charges of real estate properties of $736.6 million, $331.6 million and $274.7 million, respectively. We recognized impairment charges principally on land, and operating properties due to our change of intent to no longer hold these assets for long-term investment. In 2010, the charges primarily include land as a result of our change in strategy and the in-depth review performed in the fourth quarter. Changes in economic and operating conditions and our ultimate investment intent with regard to our investments in real estate that occur in the future may result in additional impairment charges or gains at the time of sale. See Note 14 to our Consolidated Financial Statements in Item 8 for more detail on the process we took to value these assets and the related impairments taken.
 
Depreciation and Amortization Expense
 
Depreciation and amortization expenses were $319.6 million, $274.5 million and $272.8 million for the years ended December 31, 2010, 2009 and 2008, respectively. The increase each year beginning in 2008 is due to the completion, retention and leasing of our developed properties..


29


Table of Contents

Interest Expense
 
Interest expense for the years ended December 31, included the following components (in thousands):
 
                         
    2010     2009     2008  
Gross interest expense
  $        435,289     $        382,899     $        477,933  
Amortization of discount, net
    47,136       67,542       63,676  
Amortization of deferred loan costs
    32,402       17,069       12,238  
                         
Interest expense before capitalization
    514,827       467,510       553,847  
Capitalized amounts
    (53,661 )     (94,205 )     (168,782 )
                         
Net interest expense
  $ 461,166     $ 373,305     $ 385,065  
                         
 
The increase in interest expense in 2010 over 2009 is due to increased borrowing rates and lower capitalization due to less development activity in 2010. Our weighted average interest rate was 6.48%, 5.34% and 5.13% for the years ended December 31, 2010, 2009 and 2008, respectively. In addition, in 2010 we wrote-off $7.7 million in deferred loan costs based on the proportionate amount that we reduced our borrowing capacity on our Global Line. The lower amortization of discount is due to the buyback of convertible debt that includes a non-cash discount. The decrease in interest expense in 2009 over 2008 was due to significantly lower debt levels, offset by higher average borrowing rates and lower capitalization due to less development activity in 2009. Our future interest expense, both gross and the portion capitalized, will vary depending on, among other things, available borrowing rates and the level of our development activities.
 
Impairment of Goodwill and Other Assets
 
We performed our annual impairment review of the goodwill allocated to each of our segments during the fourth quarter of 2010. As a result of this process, we concluded that the carrying value of the goodwill allocated to the direct owned segment for both North America and Europe exceeded the implied fair value and recorded an impairment charge of $368.5 million.
 
The fair value of these operating segments decreased due principally to the strategic decision we made in the fourth quarter of 2010 to significantly downsize our development platform. As a result, we have targeted for sale to third parties a substantial portion of our land that we had previously expected to develop, some of which was acquired in the acquisitions that originally created the goodwill. In addition, we plan to sell to third parties our non-core and certain other assets that we acquired in connection with these same acquisitions.
 
Based on our review of goodwill in 2008, which was triggered by a significant decrease in our common share price and the decline in fair value of certain of our real estate properties, specifically investments in land in the United Kingdom, we recognized an impairment charge of $175.4 million related to goodwill allocated to the direct owned segment in the Europe reporting unit.
 
In 2010, 2009 and 2008, we recorded impairment charges of $44.3 million, $163.6 million and $145.2 million, respectively, on certain of our investments in and advances to unconsolidated investees, notes receivable and other assets, as we did not believe these amounts to be recoverable based on the present value of the estimated future cash flows associated with these assets, including estimated sales proceeds.
 
See Notes 2 and 14 to our Consolidated Financial Statements in Item 8 for further information on our process with regard to analyzing the recoverability of goodwill and other assets. Also see Note 5 to our Consolidated Financial Statements in Item 8 for further information on our unconsolidated investees.
 
Other Income (Expense), Net
 
We recognized other income not allocated to a segment of $10.8 million and expense of $42.5 million in 2010 and 2009, respectively, and expense of $7.0 million in 2008. The primary components in 2009 were adjustments of $20.3 million to accruals we had related to rent indemnifications we had made to certain property funds due to changes in leasing and other assumptions and settlement costs of $13.0 million related to an obligation we assumed in the 2005 acquisition of Catellus.
 
Net Gains on Dispositions of Real Estate Properties
 
During the year ended December 31, 2010, we recognized Net Gains on Dispositions of Investments in Real Estate in continuing operations of $28.5 million, which related to the contribution of land and operating properties to unconsolidated investees ($58.3 million gain), additional proceeds from contributions we made to PEPF II in 2009 based on valuations received as of December 31, 2010 and our contribution agreement with the fund ($27.4 million gain) and the sale of land parcels to third parties ($7.4 million gain), offset by a loss of $64.6 million related to the sale of certain unconsolidated joint ventures.
 
The 2010 contribution activity resulted in cash proceeds of $469.7 million related to 41 acres of land, on which we are currently developing a 0.8 million square foot building on behalf of the property fund and earning development fees, and six development properties aggregating 1.8 million square feet contributed to PEPF II, the sale of 90% of two development properties in Japan with 1.3 million square feet and the contribution of one development property aggregating 0.3 million square feet to NAIF. We continue to own 10% of the Japan properties, which are accounted for under the equity method of accounting, and we continue to manage the properties.
 
During 2009, we recognized net gains of $35.3 million related to the contribution of properties ($13.0 million), the recognition of


30


Table of Contents

previously deferred gains from PEPR and ProLogis Korea Fund on properties they sold to third parties ($9.9 million), the sale of land parcels ($6.4 million), and a gain on settlement of an obligation to our fund partner in connection with the restructure of the North American Industrial Fund II (“NAIF II”) ($6.0 million). The contribution activity resulted in total cash proceeds of $643.7 million and included 43 properties aggregating 9.2 million square feet to PEPF II.
 
In 2008, we recognized gains of $11.7 million on the contribution of two properties from our direct owned segment (non-CDFS properties) to certain of the unconsolidated property funds. As discussed earlier, in 2008, contribution activity of CDFS/development properties and land was reported as CDFS Disposition Proceeds and Cost of CDFS Dispositions within our CDFS business segment.
 
If we realize a gain on contribution of a property, we recognize the portion attributable to the third party ownership in the property fund. If we realize a loss on contribution, we recognize the full amount of the impairment as soon as it is known. Due to our continuing involvement through our ownership in the property fund, these dispositions are not included in discontinued operations.
 
Foreign Currency Exchange Gains (Losses), net
 
We and certain of our foreign consolidated subsidiaries may have intercompany or third party debt that is not denominated in the entity’s functional currency. When the debt is remeasured against the functional currency of the entity, a gain or loss may result. To mitigate our foreign currency exchange exposure, we borrow in the functional currency of the borrowing entity when appropriate. Certain of our intercompany debt is remeasured with the resulting adjustment recognized as a cumulative translation adjustment in Foreign Currency Translation Losses, Net in our Consolidated Statements of Comprehensive Income (Loss). This treatment is applicable to intercompany debt that is deemed to be long-term in nature.
 
If the intercompany debt is deemed short-term in nature, when the debt is remeasured, we recognize a gain or loss in earnings. We recognized net foreign currency exchange losses of $11.5 million in 2010, gains of $58.2 million in 2009 and losses of $141.3 million in 2008, related to the remeasurement of debt. Predominantly the gains or losses recognized in earnings relate to the remeasurement of intercompany loans between the U.S. parent and certain consolidated subsidiaries in Japan and Europe and result from fluctuations in the exchange rates of U.S. dollars to the yen, euro and pound sterling. In addition, we recognized net foreign currency exchange gains of $0.4 million and losses of $22.6 million and $7.0 million from the settlement of transactions with third parties during December 31, 2010, 2009 and 2008, respectively.
 
We may utilize derivative financial instruments to manage certain foreign currency exchange risks. During 2009, we entered into and settled forward contracts to buy yen to manage the foreign currency fluctuations related to the sale of our investments in the Japan property funds and recognized losses of $5.7 million. During 2008, we recognized net losses of $3.1 million associated with forward contracts on certain intercompany loans. See Note 18 to our Consolidated Financial Statements in Item 8 for more information on our derivative financial instruments.
 
Gains (Loss) on Early Extinguishment of Debt, net
 
During the years ended December 31, 2010, 2009 and 2008, in connection with our initiatives to reduce debt and stagger debt maturities, we purchased portions of several series of senior notes and senior convertible notes outstanding, including tender offers completed in 2010, and extinguished some secured mortgage debt prior to maturity, which resulted in the recognition of losses of $201.5 million in 2010 and gains of $172.3 million and $90.7 million in 2009 and 2008, respectively. The gains or losses represent the difference between the recorded debt (net of premiums and discounts and including related debt issuance costs) and the consideration we paid to retire the debt, including fees. See Note 9 to our Consolidated Financial Statements in Item 8 for more information regarding our debt repurchases.
 
Income Tax Benefit (Expense)
 
During the years ended December 31, 2010, 2009 and 2008, our current income tax expense was $21.7 million, $29.3 million and $63.4 million, respectively. We recognize current income tax expense for income taxes incurred by our taxable REIT subsidiaries and in certain foreign jurisdictions, as well as certain state taxes. We also include in current income tax expense the interest associated with our liability for uncertain tax positions. Our current income tax expense fluctuates from period to period based primarily on the timing of our taxable income and changes in tax and interest rates. In the first quarter of 2009, in connection with the sale of our investments in the Japan property funds, we recognized current income tax expense of $20.5 million.
 
Certain 1999 through 2005 federal and state income tax returns of Catellus have been under audit by the Internal Revenue Service (“IRS”) and various state taxing authorities. In November 2008, we agreed to enter into a closing agreement with the IRS for the settlement of the 1999 through 2002 audits. As a result, in 2008, we increased our unrecognized tax liability by $85.4 million, including interest and penalties. As this liability was an income tax uncertainty related to an acquired company, we increased goodwill by $66.6 million related to the liability that existed at the acquisition date. The remaining amount is included in current income tax expense in 2008. We made cash payments of $226.6 million in 2009 in connection with this closing agreement and settlement of certain state tax audits, and as a result, the interest decreased in 2009 and 2010.
 
In 2010 and 2009, we recognized a net deferred tax benefit of $52.2 million and $23.3 million, respectively, and in 2008 we recognized a deferred tax expense of $4.6 million. Deferred income tax expense is generally a function of the period’s temporary differences and the utilization of net operating losses generated in prior years that had been previously recognized as deferred income tax assets in certain of our taxable subsidiaries operating in the U.S. or in foreign jurisdictions. The deferred tax benefit recorded during 2010 is primarily due to


31


Table of Contents

impairment charges recorded to the book basis of real estate properties and equity investees, net operating losses (“NOL”) carryforwards recorded for certain jurisdictions, and the reversal of deferred tax liabilities related to built-in-gains. In addition, during the second quarter of 2010, we recognized a deferred income tax benefit of approximately $27.5 million resulting from the conversion of two of our European management companies to taxable entities. This conversion was approved by the applicable tax authorities in June 2010 and created an asset for tax purposes that will be utilized against future taxable income as it is amortized. The deferred tax benefit was partially offset by an increase to the valuation allowance in certain jurisdictions because we could not sustain a conclusion that it was more likely than not that we could realize the deferred tax assets and NOL carryforwards.
 
Our income taxes are discussed in more detail in Note 15 to our Consolidated Financial Statements in Item 8.
 
Discontinued Operations
 
Discontinued operations represent a component of an entity that has either been disposed of or is classified as held for sale if both the operations and cash flows of the component have been or will be eliminated from ongoing operations of the entity as a result of the disposal transaction and the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. The results of operations of the component of the entity that has been classified as discontinued operations are reported separately in our Consolidated Financial Statements in Item 8.
 
As discussed above, all of the non-core assets and related liabilities associated with a pending sale are held for sale as of December 31, 2010 and, therefore, the impairment charge of $77.4 million relating to the operating properties is included in discontinued operations. In addition, we have six operating properties that met the criteria as Held for Sale. The operations associated with these properties have been included in discontinued operations for all periods presented, along with any related impairment charges.
 
In February 2009, we sold our operations in China. Accordingly, we included the results in discontinued operations for all periods presented in our Consolidated Statements of Operations. Based on the carrying values of the assets and liabilities to be sold as compared with the estimated sales proceeds, less costs to sell, we recognized an impairment charge of $198.2 million in 2008, which is included in discontinued operations.
 
During 2010, 2009 and 2008, in addition to our China operations, we disposed of land subject to ground leases and 205, 140 and 15 properties, respectively, to third parties that met the requirements to be classified as discontinued operations. Therefore, the results of operations for these disposed properties are included in discontinued operations for all periods presented, along with the gains recognized during the period.
 
See Notes 3 and 8 to our Consolidated Financial Statements in Item 8.
 
Other Comprehensive Income (Loss) – Foreign Currency Translation (Losses), Net
 
For our consolidated subsidiaries whose functional currency is not the U.S. dollar, we translate their financial statements into U.S. dollars at the time we consolidate those subsidiaries’ financial statements. Generally, assets and liabilities are translated at the exchange rate in effect as of the balance sheet date. The resulting translation adjustments, due to the fluctuations in exchange rates from the beginning of the period to the end of the period, are included in Other Comprehensive Income (Loss).
 
During 2010, we recognized losses in Other Comprehensive Income (Loss) of $42.3 million related to foreign currency translations of our international business units into U.S. dollars upon consolidation, mainly as a result of the yen strengthening against the U.S. dollar, partially offset by the strengthening of the U.S. dollar to the euro and pound sterling, from the beginning of the year to December 31, 2010.
 
During 2009, we recognized net gains in Other Comprehensive Income (Loss) of $59.9 million. This includes $209.2 million in gains, mainly as a result of the strengthening of the British pound sterling to the U.S. dollar offset partially by the strengthening of the U.S. dollar to the euro and yen. These gains were offset by a decrease in other comprehensive income of $149.3 million, as a result of the sale of our China operations and our investments in the Japan property funds in February 2009, and represents the gains previously included as currency translation adjustments.
 
During 2008, we recognized $279.6 million of net losses due to the strengthening of the U.S. dollar to the euro and British pound sterling, offset partially by the strengthening of the yen to the U.S. dollar.
 
Portfolio Information
 
Our total operating portfolio of properties includes industrial properties owned by us and industrial properties owned by the property funds and joint ventures we manage and account for on the equity method. In 2009 and 2008, this also includes our retail properties, which are


32


Table of Contents

included in assets held for sale at December 31, 2010. The operating portfolio does not include properties under development, properties held for sale or any other properties owned by unconsolidated investees, and was as follows as of December 31 (square feet in thousands):
 
                                                 
    2010     2009     2008  
    Number of
          Number of
          Number of
       
Reportable Business Segment
  Properties     Square Feet     Properties     Square Feet     Properties     Square Feet  
Direct Owned
       985          168,547          1,215          192,637          1,331          197,114  
Investment Management
    1,179       255,367       1,289       274,617       1,339       297,665  
                                                 
Totals
    2,164       423,914       2,504       467,254       2,670       494,779  
                                                 
 
Same Store Analysis
 
We evaluate the performance of the operating properties we own and manage using a “same store” analysis because the population of properties in this analysis is consistent from period to period, thereby eliminating the effects of changes in the composition of the portfolio on performance measures. We include properties owned by us, and properties owned by the unconsolidated investees (accounted for on the equity method) that are managed by us (referred to as “unconsolidated investees”), in our same store analysis. We have defined the same store portfolio, for the three months ended December 31, 2010, as those properties that were in operation at October 1, 2009, and have been in operation throughout the three-month periods in both 2010 and 2009, including completed development properties. We have removed all properties that were disposed of to a third party or were classified as held for sale from the population for both periods. We believe the factors that impact rental income, rental expenses and net operating income in the same store portfolio are generally the same as for the total portfolio. In order to derive an appropriate measure of period-to-period operating performance, we remove the effects of foreign currency exchange rate movements by using the current exchange rate to translate from local currency into U.S. dollars, for both periods. The same store portfolio, for the three months ended December 31, 2010, included 2,138 properties that aggregated 413.7 million square feet.
 
The following is a reconciliation of our consolidated rental income, rental expenses and net operating income (calculated as rental income less rental expenses) for the full year, as included in our Consolidated Statements of Operations in Item 8, to the respective amounts in our same store portfolio analysis.
 
                                           
      Three Months Ended        
      March 31,     June 30,     September 30,     December 31,     Full Year  
2010
                                         
                                           
Rental income
    $      188,073     $      188,608     $      195,032     $      199,595     $      771,308  
Rental expenses
      56,796       54,662       57,390       55,076       223,924  
                                           
Net operating income
    $ 131,277     $ 133,946     $ 137,642     $ 144,519     $ 547,384  
                                           
2009
                                         
                                           
Rental income
    $ 174,088     $ 182,904     $ 179,427     $ 186,229     $ 722,648  
Rental expenses
      55,294       55,971       57,291       55,136       223,692  
                                           
Net operating income
    $ 118,794     $ 126,933     $ 122,136     $ 131,093     $ 498,956  
                                           


33


Table of Contents

                         
    For the Three Months Ended December 31,  
                Percentage
 
    2010     2009     Change  
Rental Income (1)(2)
                       
Consolidated:
                       
Rental income per our Consolidated Statements of Operations
  $   199,595     $ 186,229                    
Adjustments to derive same store results:
                       
Rental income of properties not in the same store portfolio — properties
                       
developed and acquired during the period and land subject to ground leases
    (10,813 )     (9,276 )        
Effect of changes in foreign currency exchange rates and other
    (418 )     (1,797 )        
Unconsolidated investees:
                       
Rental income of properties managed by us and owned by our unconsolidated
                       
investees
    352,365       368,029          
                         
Same store portfolio — rental income (2)(3)
    540,729       543,185       (0.45)%  
                         
Less completed development properties (4)
    (65,565 )     (44,482 )        
                         
Adjusted same store portfolio – rental income (2)(3)(4)
  $ 475,164     $ 498,703       (4.72)%  
                         
Rental Expenses (1)(5)
                       
Consolidated:
                       
Rental expenses per our Consolidated Statements of Operations
  $ 55,076     $ 55,136          
Adjustments to derive same store results:
                       
Rental expenses of properties not in the same store portfolio - properties
                       
developed and acquired during the period and land subject to ground leases
    (3,467 )     (4,377 )        
Effect of changes in foreign currency exchange rates and other
    1,377       1,321          
Unconsolidated investees:
                       
Rental expenses of properties managed by us and owned by our unconsolidated
                       
investees
    83,318       84,869          
                         
Same store portfolio — rental expenses (3)(5)
    136,304       136,949       (0.47)%  
                         
Less completed development properties (4)
    (20,034 )     (17,208 )        
                         
Adjusted same store portfolio – rental expenses (3)(4)(5)
  $ 116,270     $ 119,741       (2.90)%  
                         
Net Operating Income (1)
                       
Consolidated:
                       
Net operating income per our Consolidated Statements of Operations
  $ 144,519     $ 131,093          
Adjustments to derive same store results:
                       
Net operating income of properties not in the same store portfolio — properties
                       
developed and acquired during the period and land subject to ground leases
    (7,346 )     (4,899 )        
Effect of changes in foreign currency exchange rates and other
    (1,795 )     (3,118 )        
Unconsolidated investees:
                       
Net operating income of properties managed by us and owned by our
                       
unconsolidated investees
    269,047       283,160          
                         
Same store portfolio — net operating income (3)
    404,425       406,236       (0.45)%  
                         
Less completed development properties (4)
    (45,531 )     (27,274 )        
                         
Adjusted same store portfolio – net operating income (3)(4)
  $ 358,894     $ 378,962       (5.30)%  
                         
 
(1) As discussed above, our same store portfolio includes industrial properties from our consolidated portfolio and industrial properties owned by the unconsolidated investees (accounted for on the equity method) that are managed by us. During the periods presented, certain properties owned by us were contributed to a property fund and are included in the same store portfolio on an aggregate basis. Neither our consolidated results nor that of the unconsolidated investees, when viewed individually, would be comparable on a same store basis due to the changes in composition of the respective portfolios from period to period (for example, the results of a contributed property would be included in our consolidated results through the contribution date and in the results of the unconsolidated investee subsequent to the contribution date).
 
(2) We exclude the net termination and renegotiation fees from our same store rental income to allow us to evaluate the growth or decline in each property’s rental income without regard to items that are not indicative of the property’s recurring operating performance. Net termination and renegotiation fees represent the gross fee negotiated to allow a customer to terminate or renegotiate their


34


Table of Contents

lease, offset by the write-off of the asset recognized due to the adjustment to straight-line rents over the lease term. The adjustments to remove these items are included as “effect of changes in foreign currency exchange rates and other” in the tables above.
 
(3) These amounts include rental income, rental expenses and net operating income of our consolidated industrial properties and those industrial properties owned by our unconsolidated investees (accounted for on the equity method) and managed by us.
 
(4) The same store portfolio results include the benefit of leasing our completed development properties that meet our definition of the same store portfolio. We have also presented the results for the adjusted same store portfolio by excluding the 159 completed development properties that we owned as of October 1, 2009 and that are still included in the same store portfolio (either owned by us or our unconsolidated investees that we manage).
 
(5) Rental expenses in the same store portfolio include the direct operating expenses of the property such as property taxes, insurance, utilities, etc. In addition, we include an allocation of the property management expenses for our direct-owned properties based on the property management fee that is provided for in the individual management agreements under which our wholly owned management companies provides property management services to each property (generally, the fee is based on a percentage of revenues). On consolidation, the management fee income earned by the management company and the management fee expense recognized by the properties are eliminated and the actual costs of providing property management services are recognized as part of our consolidated rental expenses. These expenses fluctuate based on the level of properties included in the same store portfolio and any adjustment is included as “effect of changes in foreign currency exchange rates and other” in the above table.
 
Environmental Matters
 
A majority of the properties acquired by us were subjected to environmental reviews either by us or the previous owners. While some of these assessments have led to further investigation and sampling, none of the environmental assessments have revealed an environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations.
 
We record a liability for the estimated costs of environmental remediation to be incurred in connection with certain operating properties we acquire, as well as certain land parcels we acquire in connection with the planned development of the land. The liability is established to cover the environmental remediation costs, including cleanup costs, consulting fees for studies and investigations, monitoring costs and legal costs relating to cleanup, litigation defense, and the pursuit of responsible third parties. We purchase various environmental insurance policies to mitigate our exposure to environmental liabilities. We are not aware of any environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations.
 
Liquidity and Capital Resources
 
Overview
 
We consider our ability to generate cash from operating activities, dispositions of properties and from available financing sources to be adequate to meet our anticipated future development, acquisition, operating, debt service and shareholder distribution requirements.
 
During 2010, we decreased our overall debt to $6.5 billion at December 31, 2010, as compared to $8.0 billion at December 31, 2009, and we continued to focus on staggering and extending our debt maturities. We currently have maturities of $176.3 million due in 2011 and have reduced maturities in other years, excluding our Global Line, to less than $800 million in any one year. The following is a summary of several of these related activities:
 
•  On November 1, we closed on the 2010 Equity Offering, generating net proceeds of $1.1 billion. A portion of the proceeds were used to repay borrowings under our Global Line, which borrowings were used to repurchase outstanding indebtedness.
 
•  During the fourth quarter of 2010, we sold a portfolio of industrial properties and several equity method investments to a third party for approximately $1.02 billion. We used the proceeds to repurchase debt.
 
•  In 2010, we repurchased $1.7 billion original principal amount of our unsecured senior notes. In the first quarter, we completed a tender offer for our 5.5% senior notes due April 1, 2012 and March 1, 2013 and repurchased $422.5 million original principal amount for $449.4 million. In the third quarter, we purchased $33.5 million original principal amount of our 5.625% and 5.75% senior notes due November 15, 2015 and April 1, 2016, respectively, for $33.1 million. In the fourth quarter, we completed tender offers for several series of senior notes with maturities ranging from 2015 to 2020 and repurchased $1.3 billion original principal amount for $1.4 billion.
 
•  During 2010, we repurchased $1.1 billion original principal amount of the convertible senior notes we had issued in 2007 and 2008, with the first cash put dates in 2012 and 2013, for $1.1 billion.
 
•  In March, we issued $1.56 billion of senior debt. The proceeds were used to repay borrowings on our Global Line, including amounts used to repurchase debt as discussed above. The debt we issued consisted of:
 
  –     $800 million with a stated rate of 6.875% and a maturity of March 2020;
 
  –     $300 million with a stated rate of 6.25% and a maturity of March 2017; and
 
  –     $460 million of convertible notes with a stated rate of 3.25% and a maturity of March 2015.
 
•  We issued ¥26.4 billion ($300.6 million) in secured mortgage debt related to certain of our Japan properties and repaid ¥11.8 billion ($134.7 million) upon the sale of certain Japan properties.


35


Table of Contents

•  In the first quarter, we generated proceeds of $27.4 million from the issuance of 2.2 million common shares under our at-the-market equity issuance program, which is net of $0.6 million of costs paid to our sales agent.
 
•  We amended our Global Line, to reduce the aggregate lender commitments to approximately $1.6 billion (subject to currency fluctuations) at December 31, 2010 and to amend certain financial covenants.
 
•  In December 2010, we entered into a definitive agreement to sell a portfolio of U.S. retail, mixed-use and other non-core assets for approximately $505 million that is expected to close in the first quarter of 2011, subject to customary closing conditions.
 
See Note 9 to our Consolidated Financial Statements in Item 8 for more information on our debt and our Global Line.
 
Near-Term Principal Cash Sources and Uses
 
In addition to common share distributions and preferred share dividend requirements, we expect our primary cash needs will consist of the following:
 
•  completion of the development and leasing of the properties currently under development(a);
 
•  development of new properties for long-term investment, predominantly in our major logistics corridors;
 
•  repayment of debt, including payments on our Global Line and repurchases of senior notes and/or convertible senior notes;
 
•  scheduled debt principal payments in 2011 of $176.3 million;
 
•  capital expenditures and leasing costs on properties;
 
•  investments in current or future unconsolidated investees, primarily for the repayment of debt or acquisition of properties from third parties; and
 
•  depending on market conditions, direct acquisition of operating properties and/or portfolios of operating properties in major logistics corridors for direct, long-term investment.
 
  (a)   As of December 31, 2010, we had 14 properties under development that were 67.6% leased with a current investment of $366.5 million and a total expected investment of $580.1 million when completed and leased, with $213.6 million remaining to be spent.
 
We expect to fund our cash needs principally from the following sources, all subject to market conditions:
 
•  available cash balances ($37.6 million at December 31, 2010);
 
•  property operations;
 
•  fees and incentives earned for services performed on behalf of the property funds and distributions received from the property funds;
 
•  proceeds from the disposition of properties, land parcels or other investments to third parties, including the expected sale of non-core assets discussed above;
 
•  proceeds from the contributions of properties to property funds or other unconsolidated investees;
 
•  borrowing capacity under our Global Line ($993.2 million available as of December 31, 2010), other facilities or borrowing arrangements;
 
•  proceeds from the issuance of equity securities including sales under our at-the-market equity issuance program (under which we have 48.1 million common shares remaining); and
 
•  proceeds from the issuance of debt securities, including secured mortgage debt.
 
We may repurchase our outstanding debt securities through cash purchases, in open market purchases, privately negotiated transactions, tender offers or otherwise. Such repurchases will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. We have approximately $84.1 million remaining on authorization to repurchase common shares that was approved by our Board in 2001. We have not repurchased our common shares since 2003.
 
Equity Commitments related to future contributions to Property Funds
 
Certain property funds had equity commitments from us and our fund partners. In connection with the expiration of the remaining commitments in August 2010, ProLogis Mexico Industrial Fund (the “Mexico Fund”) and PEPF II called capital of $75 million and €282 million ($361 million), respectively. Our contributions ($1.1 million to the Mexico Fund and $87.0 million to PEPF II) were less than our proportionate share, resulting in a reduced ownership interest in the property funds. The property funds have used or will use the cash to pay down debt; and in the case of PEPF II, to acquire properties from us (we contributed five development properties with 1.2 million square feet for $78.8 million during the third quarter of 2010), to fund development costs and to fund future capital needs


36


Table of Contents

(including the acquisition of two properties from a third party during the fourth quarter). In connection with these capital calls, we received $19.5 million from the Mexico Fund for the repayment of amounts due to us. In December 2010, we received $27.4 million from PEPF II as additional proceeds from contributions of properties we made to the fund in 2009 based on valuations received in December 2010 and our agreement with the fund.
 
During 2010, we used cash for investments in or loans to the unconsolidated investees of approximately $335.4 million, net of repayments on advances. These investments included: (i) purchase of PEPR’s common units of $109.2 million in the first quarter; (ii) a $46.2 million contribution to ProLogis North American Industrial Fund II to settle interest rate swap contracts in the fourth quarter; (iii) contributions of $110.3 million to PEPF II; (iv) additional investment in a joint venture of $33.3 million to repay debt (our interest in this joint venture was sold in the fourth quarter and we recovered this investment); (v) contribution of $23.6 million for ProLogis North America Properties Fund I to repay debt in the fourth quarter; and (vi) contributions of $27.8 million to and repayments of $14.3 million from, other property funds and joint ventures.
 
For more information on our investments in the property funds, see Note 5 to our Consolidated Financial Statements in Item 8.
 
Cash Provided by Operating Activities
 
Net cash provided by operating activities was $240.8 million, $89.1 million and $888.3 million for the years ended December 31, 2010, 2009 and 2008, respectively. In 2010 and 2009, cash provided by operating activities was less than the cash distributions paid on common shares and dividends paid on preferred shares by $65.3 million and $208.1 million, respectively. In 2008, gains on the disposition of CDFS assets were included in cash provided by operating activities. As a result of our change in business strategy in 2008, all gains on the disposition of real estate properties for 2010 and 2009 have been included in cash provided by investing activities.
 
Cash Investing and Cash Financing Activities
 
For the years ended December 31, 2010 and 2009, investing activities provided net cash of $733.3 million and $1.2 billion, respectively. For 2008, investing activities used net cash of $1.3 billion. The following are the significant activities for all periods presented:
 
•  We generated cash from contributions and dispositions of properties and land parcels of $1.6 billion, $1.5 billion and $4.5 billion during 2010, 2009 and 2008, respectively.
 
•  We invested $543.9 million, $1.3 billion and $5.6 billion in real estate during 2010, 2009 and 2008, respectively; including costs for current and future development projects and recurring capital expenditures and tenant improvements on existing operating properties. In 2010, we acquired 10 properties with an aggregate purchase price of $128.6 million.
 
•  We invested cash of $335.4 million, $401.4 million and $329.6 million during 2010, 2009 and 2008, respectively, in unconsolidated investees including investments in connection with property contributions we made, net of repayment of advances by the investees, as discussed above.
 
•  We received distributions from unconsolidated investees as a return of investment and proceeds from the sale of our investments of $220.2 million, $81.2 million and $149.5 million during 2010, 2009 and 2008, respectively. Included in 2010 is $112.0 million from the sale of several of our equity method investments to a third party.
 
•  In 2009, we received $1.3 billion in proceeds from the sale of our China operations and our property fund interests in Japan. The proceeds were used to pay down borrowings on our Global Line.
 
•  We generated net cash proceeds from payments on notes receivable of $18.4 million, $12.4 million and $29.0 million in 2010, 2009 and 2008, respectively.
 
•  We had advances on notes receivable of $269.0 million, $4.8 million and $47.3 million in 2010, 2009 and 2008, respectively. 2010 includes the preferred equity interest in a subsidiary of the buyer of a portfolio of assets of approximately $188 million and a $81.0 million loan to ProLogis NAIF II that we purchased from the lender.
 
For the years ended December 31, 2010 and 2009, financing activities used net cash of $969.8 million and $1.5 billion, respectively. For the year ended 2008 financing activities provided net cash of $358.1 million. The following are the significant activities for all periods presented:
 
•  In 2010, we repurchased and extinguished $3.0 billion original principal amount of our senior notes and convertible senior notes and secured mortgage debt, for a total of $3.1 billion. In 2009, we repurchased and extinguished $1.5 billion original principal amount of our senior notes, convertible senior notes, and secured mortgage debt for $1.2 billion. In 2008, we repurchased and extinguished $309.7 million original principal amount of our senior notes for $216.8 million.
 
•  In 2010, we issued $1.1 billion of senior notes due 2017 and 2020 and $460.0 million of convertible senior notes due 2015. The proceeds were used to repay borrowings under our Global Line. We also incurred $300.6 million in secured mortgage debt. In 2009, we issued $950.0 million of senior notes and closed on $499.9 million of secured mortgage debt. In 2008, we issued $550.0 million convertible senior notes and $600.0 million of senior notes.
 
•  We had net payments on our credit facilities of $246.3 million and $2.4 billion in 2010 and 2009, respectively and net borrowings of $743.9 million in 2008, most of which was on our Global Line.


37


Table of Contents

•  We made net payments of $257.5 million, $351.8 million and $985.2 million on regularly scheduled debt principal and maturity payments during 2010, 2009 and 2008, respectively.
 
•  In November of 2010, we received net proceeds of $1.1 billion from the issuance of 92.0 million common shares. In April 2009, we received net proceeds of $1.1 billion from the issuance of 174.8 million common shares. We also generated proceeds from the sale and issuance of common shares under our various common share plans primarily from our at-the-market equity issuance program of $30.8 million, $337.4 million, and $222.2 million during 2010, 2009, and 2008, respectively.
 
•  We paid distributions of $280.7 million, $271.8 million and $542.8 million to our common shareholders during 2010, 2009 and 2008, respectively. We paid dividends on our preferred shares of $25.4 million during each of 2010, 2009 and 2008.
 
Off-Balance Sheet Arrangements
 
Unconsolidated Investees
 
We had investments in and advances to the property funds at December 31, 2010 of $2.0 billion. The property funds had total third party debt of $7.7 billion (for the entire entity, not our proportionate share) at December 31, 2010 that matures as follows (in millions):
 
                                                                 
    2011     2012     2013     2014     2015     Thereafter     Discount     Total (1)  
                                                                 
ProLogis California LLC
  $ -     $ -     $ -     $ 137.5     $ -     $ 172.5     $ -     $ 310.0  
                                                                 
ProLogis North American Properties Fund I
    2.8       177.2       -       -       -       -       -       180.0  
                                                                 
ProLogis North American Properties Fund XI
    0.6       0.7       0.4       -       -       -       -       1.7  
                                                                 
ProLogis North American Industrial Fund
    -       52.0       80.0       -       108.7       1,003.5       -       1,244.2  
                                                                 
ProLogis North American Industrial Fund II (2)
    10.0       164.0       74.0       526.4       -       462.2       (6.7 )     1,229.9  
                                                                 
ProLogis North American Industrial Fund III (3)
    120.5       85.7       385.6       146.4       -       280.0       (1.9 )     1,016.3  
                                                                 
ProLogis Mexico Industrial Fund
    -       -       -       -       -       214.1       -       214.1  
                                                                 
ProLogis European Properties (4)
    -       334.5       526.5       1,205.2       -       -       -       2,066.2  
                                                                 
ProLogis European Properties Fund II (5)
    -       146.1       276.3       464.7       247.1       276.5       -       1,410.7  
                                                                 
ProLogis Korea Fund
    16.3       32.8       -       -       -       -       -       49.1  
                                                                 
                                                                 
Total property funds
  $   150.2     $   993.0     $   1,342.8     $   2,480.2     $   355.8     $   2,408.8     $   (8.6 )   $   7,722.2  
                                                                 
 
 
(1) As of December 31, 2010, we had not guaranteed any of the third party debt of the property funds. See notes (2) and (3) below. In our role as the manager of the property funds, we work with the property funds to refinance their maturing debt. As noted in note (3) below, remaining 2011 maturities have been substantially addressed. There can be no assurance that the property funds will be able to refinance any maturing indebtedness on terms as favorable as the maturing debt, or at all, including the planned financings discussed below. If the property funds are unable to refinance the maturing indebtedness with newly issued debt, they may be able to obtain funds by voluntary capital contributions from us and our fund partners or by selling assets. Certain of the property funds also have credit facilities, which may be used to obtain funds. Generally, the property funds issue long-term debt and utilize the proceeds to repay borrowings under the credit facilities.
 
(2) In the third quarter of 2010, we purchased an $81.0 million loan to NAIF II from the lender. The loan bears interest at 8%, matures in May 2015 and is secured by 13 buildings in the property fund. This loan is not presented in the table as it is not third party debt. We have pledged properties we own directly, with an undepreciated cost of $267.2 million, to serve as additional collateral on a loan payable to an affiliate of our fund partner that is due in 2014.
 
(3) We have a note receivable from this property fund. The outstanding balance at December 31, 2010 was $21.4 million and is not included in the maturities above as it is not third party debt. ProLogis North American Industrial Fund III is in discussions with the lender of its debt that matures in July 2011.
 
(4) PEPR has a €50 million ($65.8 million) credit facility, with the ability to increase the facility to €150 million. This facility is denominated in euro and pound sterling.
 
(5) PEPF II has a €75 million ($98.7 million) credit facility with the ability to increase the facility to €150 million. The facility is denominated in euro and pound sterling.
 
Contractual Obligations
 
Long-Term Contractual Obligations


38


Table of Contents

 
We had long-term contractual obligations at December 31, 2010 as follows (in millions):
 
                                         
    Payments Due By Period  
          Less than 1
                More than
 
    Total     year     1 to 3 years     3 to 5 years     5 years  
Debt obligations, other than credit facilities
  $      6,036     $      176     $      1,455     $      1,454     $      2,951  
Interest on debt obligations, other than credit facilities
    2,023       329       604       499       591  
Unfunded commitments on development projects (1)
    214       214       -       -       -  
Amounts due on credit facilities
    520       -       520       -       -  
Interest on lines of credit
    30       18       12       -       -  
                                         
Totals
  $ 8,823     $ 737     $ 2,591     $ 1,953     $ 3,542  
                                         
 
 
(1) We had properties under development at December 31, 2010 with a total expected investment of $580.1 million. The unfunded commitments presented include not only those costs that we are obligated to fund under construction contracts, but all costs necessary to place the property into service, including the estimated costs of tenant improvements, marketing and leasing costs which we will incur as the property is leased.
 
 
Other Commitments
 
 
As discussed above, we entered into a definitive agreement to sell a portfolio of our non-core assets for $505 million that we expect to close in the first quarter of 2011. In addition, on a continuing basis, we are engaged in various stages of negotiations for the acquisition and/or disposition of individual properties or portfolios of properties.
 
 
Distribution and Dividend Requirements
 
 
Our common share distribution policy is to distribute a percentage of our cash flow to ensure we will meet the distribution requirements of the Internal Revenue Code of 1986, as amended, relative to maintaining our REIT status, while still allowing us to maximize the cash retained to meet other cash needs such as capital improvements and other investment activities.
 
 
Cash distributions per common share paid in 2010, 2009 and 2008 were $0.5625, $0.70 and $2.07, respectively. Our 2010 dividend was $0.15 for the first, second and third quarters. In recognition of our anticipated taxable income for 2010 and considering the impact of issuing additional shares in the 2010 Equity Offering, our board of trustees (“Board”) declared a reduced fourth quarter distribution of $0.1125 per share, and we expect that our Board will maintain this level of distributions per quarter throughout 2011. A cash distribution of $0.1125 per common share for the first quarter of 2011 was declared on January 30, 2011. This distribution will be paid on February 28, 2011 to holders of common shares on February 14, 2011. Our future common share distributions may vary and will be determined by our Board upon the circumstances prevailing at the time, including our financial condition, operating results and REIT distribution requirements, and may be adjusted at the discretion of the Board during the year.
 
 
At December 31, 2010, we had three series of preferred shares outstanding. The annual dividend rates on preferred shares are $4.27 per Series C preferred share, $1.6875 per Series F preferred share and $1.6875 per Series G preferred share. The dividends are payable quarterly in arrears on the last day of each quarter.
 
 
Pursuant to the terms of our preferred shares, we are restricted from declaring or paying any distribution with respect to our common shares unless and until all cumulative dividends with respect to the preferred shares have been paid and sufficient funds have been set aside for dividends that have been declared for the then current dividend period with respect to the preferred shares.
 
 
Critical Accounting Policies
 
A critical accounting policy is one that is both important to the portrayal of an entity’s financial condition and results of operations and requires judgment on the part of management. Generally, the judgment requires management to make estimates and assumptions about the effect of matters that are inherently uncertain. Estimates are prepared using management’s best judgment, after considering past and current economic conditions and expectations for the future. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions. Changes in estimates could affect our financial position and specific items in our results of operations that are used by shareholders, potential investors, industry analysts and lenders in their evaluation of our performance. Of the accounting policies discussed in Note 2 to our Consolidated Financial Statements in Item 8, those presented below have been identified by us as critical accounting policies.


39


Table of Contents

Impairment of Long-Lived Assets and Goodwill
 
We assess the carrying values of our respective long-lived assets, including goodwill, whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable.
 
Recoverability of real estate assets is measured by comparison of the carrying amount of the asset to the estimated future undiscounted cash flows. In order to review our real estate assets for recoverability, we consider current market conditions, as well as our intent with respect to holding or disposing of the asset. Our intent with regard to the underlying assets might change as market conditions change, as well as other factors, especially in the current global economic environment. Fair value is determined through various valuation techniques; including discounted cash flow models, quoted market values and third party appraisals, where considered necessary. If our analysis indicates that the carrying value of the real estate asset is not recoverable on an undiscounted cash flow basis, we recognize an impairment charge for the amount by which the carrying value exceeds the current estimated fair value of the real estate property.
 
We use a two step approach to our goodwill impairment evaluation. The first step of the goodwill impairment test is used to identify whether there is any potential impairment. If the fair value of a reporting unit exceeds its corresponding book value, including goodwill, the goodwill of the reporting unit is not considered to be impaired and the second step of the impairment test is unnecessary. If the carrying amount of the reporting unit exceeds its fair value, the second step of the impairment test is performed. The second step requires that we compare the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill to measure the amount of impairment loss, if any.
 
Generally, we use net asset value analyses to estimate the fair value of the reporting unit where the goodwill is allocated. We estimate the current fair value of the assets and liabilities in the reporting unit through various valuation techniques; including discounted cash flow models, applying a capitalization rate to estimated net operating income of a property, quoted market values and third-party appraisals, as considered necessary. The fair value of the reporting unit may also include an enterprise value premium that we estimate a third party would be willing to pay for the particular reporting unit. The use of projected future cash flows is based on assumptions that are consistent with our estimates of future expectations and the strategic plan we use to manage our underlying business. However, assumptions and estimates about future cash flows, discount rates and capitalization rates are complex and subjective. Changes in economic and operating conditions or our intent with regard to our investment that occurs subsequent to our impairment analyses could impact these assumptions and result in future impairment of our real estate properties and/or goodwill.
 
Other than Temporary Impairment of Investments in Unconsolidated Investees
 
When circumstances indicate there may have been a reduction in the value of an equity investment, we evaluate the equity investment and any advances made to the investee for impairment by estimating our ability to recover our investment from future expected cash flows. If we determine there is a loss in value that is other than temporary, we recognize an impairment charge to reflect the investment at fair value. The use of projected future cash flows and other estimates of fair value, the determination of when a loss is other than temporary, and the calculation of the amount of the loss, is complex and subjective. Use of other estimates and assumptions may result in different conclusions. Changes in economic and operating conditions, as well as changes in our intent with regard to our investment, that occur subsequent to our review could impact these assumptions and result in future impairment charges of our equity investments.
 
Revenue Recognition – Gains on Disposition of Real Estate
 
We recognize gains from the contributions and sales of real estate assets, generally at the time the title is transferred, consideration is received and we no longer have substantial continuing involvement with the real estate sold. In many of our transactions, an entity in which we have an ownership interest will acquire a real estate asset from us. We make judgments based on the specific terms of each transaction as to the amount of the total profit from the transaction that we recognize given our continuing ownership interest and our level of future involvement with the investee that acquires the assets. We also make judgments regarding recognition in earnings of certain fees and incentives based on when they are earned, fixed and determinable.
 
Business Combinations
 
We acquire individual properties, as well as portfolios of properties, or businesses. When we acquire a business or individual operating properties, with the intention to hold the investment for the long-term, we allocate the purchase price to the various components of the acquisition based upon the fair value of each component. The components typically include land, building, debt and other assumed liabilities, intangible assets related to above and below market leases, value of costs to obtain tenants and goodwill, deferred tax liabilities and other assets and liabilities in the case of an acquisition of a business. In an acquisition of multiple properties, we must also allocate the purchase price among the properties. The allocation of the purchase price is based on our assessment of estimated fair value and often times is based upon the expected future cash flows of the property and various characteristics of the markets where the property is located. The initial allocation of the purchase price is based on management’s preliminary assessment, which may differ when final information becomes available. Subsequent adjustments made to the initial purchase price allocation are made within the allocation period, which typically does not exceed one year.
 
Consolidation
 
We consolidate all entities that are wholly owned and those in which we own less than 100% but control, as well as any variable interest entities in which we are the primary beneficiary. We evaluate our ability to control an entity and whether the entity is a variable interest


40


Table of Contents

entity and we are the primary beneficiary through consideration of the substantive terms of the arrangement to identify which enterprise has the power to direct the activities of a variable interest entity that most significantly impacts the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity. Investments in entities in which we do not control but over which we have the ability to exercise significant influence over operating and financial policies are presented under the equity method. Investments in entities that we do not control and over which we do not exercise significant influence are carried at the lower of cost or fair value, as appropriate. Our ability to correctly assess our influence and/or control over an entity affects the presentation of these investments in our consolidated financial statements.
 
Capitalization of Costs and Depreciation
 
We capitalize costs incurred in developing, renovating, rehabilitating, and improving real estate assets as part of the investment basis. Costs incurred in making repairs and maintaining real estate assets are expensed as incurred. During the land development and construction periods, we capitalize interest costs, insurance, real estate taxes and certain general and administrative costs of the personnel performing development, renovations, and rehabilitation if such costs are incremental and identifiable to a specific activity to get the asset ready for its intended use. Capitalized costs are included in the investment basis of real estate assets. We also capitalize costs incurred to successfully originate a lease that result directly from, and are essential to, the acquisition of that lease. Leasing costs that meet the requirements for capitalization are presented as a component of other assets.
 
We estimate the depreciable portion of our real estate assets and related useful lives in order to record depreciation expense. Our ability to estimate the depreciable portions of our real estate assets and useful lives is critical to the determination of the appropriate amount of depreciation expense recorded and the carrying value of the underlying assets. Any change to the assets to be depreciated and the estimated depreciable lives of these assets would have an impact on the depreciation expense recognized.
 
Income Taxes
 
As part of the process of preparing our consolidated financial statements, significant management judgment is required to estimate our income tax liability, the liability associated with open tax years that are under review and our compliance with REIT requirements. Our estimates are based on interpretation of tax laws. We estimate our actual current income tax due and assess temporary differences resulting from differing treatment of items for book and tax purposes resulting in the recognition of deferred income tax assets and liabilities. These estimates may have an impact on the income tax expense recognized. Adjustments may be required by a change in assessment of our deferred income tax assets and liabilities, changes in assessments of the recognition of income tax benefits for certain non-routine transactions, changes due to audit adjustments by federal and state tax authorities, our inability to qualify as a REIT, the potential for built-in-gain recognition, changes in the assessment of properties to be contributed to TRSs and changes in tax laws. Adjustments required in any given period are included within income tax expense. We recognize the tax benefit from an uncertain tax position only if it is “more-likely-than-not” that the tax position will be sustained on examination by taxing authorities.
 
New Accounting Pronouncements
 
See Note 2 to our Consolidated Financial Statements in Item 8.
 
Funds from Operations (“FFO”)
 
FFO is a non-GAAP measure that is commonly used in the real estate industry. The most directly comparable GAAP measure to FFO is net earnings. Although National Association of Real Estate Investment Trusts (“NAREIT”) has published a definition of FFO, modifications to the NAREIT calculation of FFO are common among REITs, as companies seek to provide financial measures that meaningfully reflect their business.
 
FFO is not meant to represent a comprehensive system of financial reporting and does not present, nor do we intend it to present, a complete picture of our financial condition and operating performance. We believe net earnings computed under GAAP remains the primary measure of performance and that FFO is only meaningful when it is used in conjunction with net earnings computed under GAAP. Further, we believe our consolidated financial statements, prepared in accordance with GAAP, provide the most meaningful picture of our financial condition and our operating performance.
 
NAREIT’s FFO measure adjusts net earnings computed under GAAP to exclude historical cost depreciation and gains and losses from the sales of previously depreciated properties. We agree that these two NAREIT adjustments are useful to investors for the following reasons:
 
(i)  historical cost accounting for real estate assets in accordance with GAAP assumes, through depreciation charges, that the value of real estate assets diminishes predictably over time. NAREIT stated in its White Paper on FFO “since real estate asset values have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves.” Consequently, NAREIT’s definition of FFO reflects the fact that real estate, as an asset class, generally appreciates over time and depreciation charges required by GAAP do not reflect the underlying economic realities.
 
(ii)  REITs were created as a legal form of organization in order to encourage public ownership of real estate as an asset class through investment in firms that were in the business of long-term ownership and management of real estate. The exclusion, in NAREIT’s definition of FFO, of gains and losses from the sales of previously depreciated operating real estate assets allows investors and


41


Table of Contents

analysts to readily identify the operating results of the long-term assets that form the core of a REIT’s activity and assists in comparing those operating results between periods. We include the gains and losses from dispositions of land, development properties and properties acquired in our CDFS business segment, as well as our proportionate share of the gains and losses from dispositions recognized by the property funds, in our definition of FFO.
 
Our FFO Measures
 
At the same time that NAREIT created and defined its FFO measure for the REIT industry, it also recognized that “management of each of its member companies has the responsibility and authority to publish financial information that it regards as useful to the financial community.” We believe shareholders, potential investors and financial analysts who review our operating results are best served by a defined FFO measure that includes other adjustments to net earnings computed under GAAP in addition to those included in the NAREIT defined measure of FFO. Our FFO measures are used by management in analyzing our business and the performance of our properties and we believe that it is important that shareholders, potential investors and financial analysts understand the measures management uses.
 
We use our FFO measures as supplemental financial measures of operating performance. We do not use our FFO measures as, nor should they be considered to be, alternatives to net earnings computed under GAAP, as indicators of our operating performance, as alternatives to cash from operating activities computed under GAAP or as indicators of our ability to fund our cash needs.
 
FFO, including significant non-cash items
 
To arrive at FFO, including significant non-cash items, we adjust the NAREIT defined FFO measure to exclude:
 
(i)  deferred income tax benefits and deferred income tax expenses recognized by our subsidiaries;
 
(ii)  current income tax expense related to acquired tax liabilities that were recorded as deferred tax liabilities in an acquisition, to the extent the expense is offset with a deferred income tax benefit in GAAP earnings that is excluded from our defined FFO measure;
 
(iii)  certain foreign currency exchange gains and losses resulting from certain debt transactions between us and our foreign consolidated subsidiaries and our foreign unconsolidated investees;
 
(iv)  foreign currency exchange gains and losses from the remeasurement (based on current foreign currency exchange rates) of certain third party debt of our foreign consolidated subsidiaries and our foreign unconsolidated investees; and
 
(v)  mark-to-market adjustments associated with derivative financial instruments utilized to manage foreign currency and interest rate risks.
 
We calculate FFO, including significant non-cash items for our unconsolidated investees on the same basis as we calculate our FFO, including significant non-cash items.
 
We use this FFO measure, including by segment and region, to: (i) evaluate our performance and the performance of our properties in comparison to expected results and results of previous periods, relative to resource allocation decisions; (ii) evaluate the performance of our management; (iii) budget and forecast future results to assist in the allocation of resources; (iv) assess our performance as compared to similar real estate companies and the industry in general; and (v) evaluate how a specific potential investment will impact our future results. Because we make decisions with regard to our performance with a long-term outlook, we believe it is appropriate to remove the effects of short-term items that we do not expect to affect the underlying long-term performance of the properties. The long-term performance of our properties is principally driven by rental income. While not infrequent or unusual, these additional items we exclude in calculating FFO, including significant non-cash items, are subject to significant fluctuations from period to period that cause both positive and negative short-term effects on our results of operations, in inconsistent and unpredictable directions that are not relevant to our long-term outlook.
 
We believe investors are best served if the information that is made available to them allows them to align their analysis and evaluation of our operating results along the same lines that our management uses in planning and executing our business strategy.
 
FFO, excluding significant non-cash items
 
When we began to experience the effects of the global economic crises in the fourth quarter of 2008, we decided that FFO, including significant non-cash items, did not provide all of the information we needed to evaluate our business in this environment. As a result, we developed FFO, excluding significant non-cash items to provide additional information that allows us to better evaluate our operating performance in this unprecedented economic time.
 
To arrive at FFO, excluding significant non-cash items, we adjust FFO, including significant non-cash items, to exclude the following items that we recognized directly or our share recognized by our unconsolidated investees:
 
Non-recurring items
 
(i) impairment charges related to the sale of our China operations;


42


Table of Contents

 
(ii) impairment charges of goodwill; and
 
(iii) our share of the losses recognized by PEPR on the sale of its investment in PEPF II.
 
Recurring items
 
(i) impairment charges of completed development properties that we contributed or expect to contribute to a property fund;
 
(ii) impairment charges of land or other real estate properties that we sold or expect to sell;
 
(iii) impairment charges of other non-real estate assets, including equity investments;
 
(iv) our share of impairment charges of real estate that is sold or expected to be sold by an unconsolidated investee; and
 
(v) gains or losses from the early extinguishment of debt.
 
We believe that these items, both recurring and non-recurring, are driven by factors relating to the fundamental disruption in the global financial and real estate markets, rather than factors specific to the company or the performance of our properties or investments.
 
The impairment charges of real estate properties that we have recognized were primarily based on valuations of real estate, which had declined due to market conditions, that we no longer expected to hold for long-term investment. In order to generate liquidity, we decided to sell our China operations in the fourth quarter of 2008 at a loss and, therefore, we recognized an impairment charge. Also, to generate liquidity, we have contributed or intend to contribute certain completed properties to property funds and sold or intend to sell certain land parcels or properties to third parties. To the extent these properties are expected to be sold at a loss, we record an impairment charge when the loss is known. The impairment charges related to goodwill and other assets that we have recognized were similarly caused by the decline in the real estate markets.
 
Certain of our unconsolidated investees have recognized and may continue to recognize similar impairment charges of real estate that they expect to sell, which impacts our equity in earnings of such investees.
 
In connection with our announced initiatives to reduce debt and extend debt maturities, we have purchased portions of our debt securities. As a result, we recognized net gains or losses on the early extinguishment of certain debt. Certain of our unconsolidated investees have recognized or may recognize similar gains or losses, which impacts our equity in earnings of such investees.
 
During this turbulent time, we have recognized certain of these recurring charges and gains over several quarters since the fourth quarter of 2008. We believe that as the economy stabilizes, our liquidity needs change, and since the remaining capital available to the existing unconsolidated property funds to acquire our completed development properties expired, the potential for impairment charges on real estate properties will diminish to an immaterial amount. As we continue to monetize our land bank through development or dispositions, we may dispose of this land at a gain or loss. We may also dispose of other non-strategic assets at a gain or loss. However, we do not expect that we will adjust our FFO measure for these gains or losses after 2010.
 
We analyze our operating performance primarily by the rental income of our real estate, net of operating, administrative and financing expenses, which is not directly impacted by short-term fluctuations in the market value of our real estate or debt securities. As a result, although these significant non-cash items have had a material impact on our operations and are reflected in our financial statements, the removal of the effects of these items allows us to better understand the core operating performance of our properties over the long-term.
 
As described above, we began using FFO, excluding significant non-cash items, including by segment and region, to: (i) evaluate our performance and the performance of our properties in comparison to expected results and results of previous periods, relative to resource allocation decisions; (ii) evaluate the performance of our management; (iii) budget and forecast future results to assist in the allocation of resources; (iv) assess our performance as compared to similar real estate companies and the industry in general; and (v) evaluate how a specific potential investment will impact our future results. Because we make decisions with regard to our performance with a long-term outlook, we believe it is appropriate to remove the effects of short-term items that we do not expect to affect the underlying long-term performance of the properties we own. As noted above, we believe the long-term performance of our properties is principally driven by rental income. We believe investors are best served if the information that is made available to them allows them to align their analysis and evaluation of our operating results along the same lines that our management uses in planning and executing our business strategy.
 
As the impact of these recurring items dissipates, we expect that the usefulness of FFO, excluding significant non-cash items will similarly dissipate and we will go back to using only FFO, including significant non-cash items.
 
Limitations on Use of our FFO Measures
 
While we believe our defined FFO measures are important supplemental measures, neither NAREIT’s nor our measures of FFO should be


43


Table of Contents

used alone because they exclude significant economic components of net earnings computed under GAAP and are, therefore, limited as an analytical tool. Accordingly they are two of many measures we use when analyzing our business. Some of these limitations are:
 
•  The current income tax expenses that are excluded from our defined FFO measures represent the taxes that are payable.
 
•  Depreciation and amortization of real estate assets are economic costs that are excluded from FFO. FFO is limited, as it does not reflect the cash requirements that may be necessary for future replacements of the real estate assets. Further, the amortization of capital expenditures and leasing costs necessary to maintain the operating performance of industrial properties are not reflected in FFO.
 
•  Gains or losses from property dispositions represent changes in the value of the disposed properties. By excluding these gains and losses, FFO does not capture realized changes in the value of disposed properties arising from changes in market conditions.
 
•  The deferred income tax benefits and expenses that are excluded from our defined FFO measures result from the creation of a deferred income tax asset or liability that may have to be settled at some future point. Our defined FFO measures do not currently reflect any income or expense that may result from such settlement.
 
•  The foreign currency exchange gains and losses that are excluded from our defined FFO measures are generally recognized based on movements in foreign currency exchange rates through a specific point in time. The ultimate settlement of our foreign currency-denominated net assets is indefinite as to timing and amount. Our FFO measures are limited in that they do not reflect the current period changes in these net assets that result from periodic foreign currency exchange rate movements.
 
•  The non-cash impairment charges that we exclude from our FFO, excluding significant non-cash items, have been or may be realized as a loss in the future upon the ultimate disposition of the related real estate properties or other assets through the form of lower cash proceeds.
 
•  The gains on extinguishment of debt that we exclude from our FFO, excluding significant non-cash items, provides a benefit to us as we are settling our debt at less than our future obligation.
 
We compensate for these limitations by using our FFO measures only in conjunction with net earnings computed under GAAP when making our decisions. To assist investors in compensating for these limitations, we reconcile our defined FFO measures to our net earnings computed under GAAP. This information should be read with our complete financial statements prepared under GAAP and the rest of the disclosures we file with the SEC to fully understand our FFO measures and the limitations on its use.
 
FFO, including significant non-cash items, attributable to common shares as defined by us was a negative $1.1 billion, $138.9 million and $133.8 million for 2010, 2009, and 2008, respectively. FFO, excluding significant non-cash items, attributable to common shares as defined by us was $185.8 million, $467.8 million and $944.9 million for the years ended December 31, 2010, 2009, and 2008,


44


Table of Contents

respectively. The reconciliations of FFO attributable to common shares as defined by us to net earnings attributable to common shares computed under GAAP are as follows for the periods indicated (in thousands):
 
                           
      2010     2009     2008  
FFO:
                         
Reconciliation of net earnings to FFO
                         
Net earnings (loss) attributable to common shares
    $ (1,295,920 )   $ (2,650 )   $ (479,226 )
                           
Add (deduct) NAREIT defined adjustments:
                         
Real estate related depreciation and amortization
      305,716       258,625       256,459  
Adjustments to gains on dispositions for depreciation
      (4,208 )     (5,387 )     (2,866 )
Adjustments to (gains on) dispositions of non-development properties
      936       (4,937 )     (11,620 )
Net gain on disposition of assets to a third party
      (205,613 )     -       -  
Reconciling items attributable to discontinued operations:
                         
Gains on dispositions of non-development properties
      (34,821 )     (220,815 )     (9,718 )
Real estate related depreciation and amortization
      37,092       52,604       78,185  
Our share of reconciling items from unconsolidated investees:
                         
Real estate related depreciation and amortization
      155,730       154,315       155,067  
Adjustment to gains/losses on dispositions for depreciation
      -       (9,569 )     (492 )
Other amortization items
      (14,009 )     (11,775 )     (15,840 )
                           
Subtotal-NAREIT defined FFO
      (1,055,097 )     210,411       (30,051 )
                           
Add (deduct) our defined adjustments:
                         
Foreign currency exchange losses (gains), net
      11,487       (58,128 )     144,364  
Current income tax expense
      -       3,658       9,656  
Deferred income tax expense (benefit)
      (52,223 )     (23,299 )     4,073  
Our share of reconciling items from unconsolidated investees:
                         
Foreign currency exchange losses (gains), net
      (339 )     (1,737 )     2,331  
Unrealized losses (gains) on derivative contracts, net
      (8,967 )     (7,561 )     23,005  
Deferred income tax expense (benefit)
      3,955       15,541       (19,538 )
                           
FFO, including significant non-cash items, attributable to common shares,
as defined by us
      (1,101,184 )     138,885       133,840  
Impairment of real estate properties
      824,314       331,592       274,705  
Impairment of goodwill and other assets
      412,745       163,644       320,636  
Losses (gains) on early extinguishment of debt
      30,723       (172,258 )     (90,719 )
Write-off deferred extension fees associated with Global Line
      7,680       -       -  
Our share of certain losses recognized by the property funds
      11,533       9,240       -  
Impairment related to assets held for sale (gain on sale) – China operations
      -       (3,315 )     198,236  
Our share of the loss/impairment recorded by PEPR
      -       -       108,195  
                           
FFO, excluding significant non-cash items, attributable to common shares,
as defined by us
    $ 185,811     $ 467,788     $ 944,893  
                           
                           
 
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk
 
We are exposed to the impact of interest rate changes and foreign-exchange related variability and earnings volatility on our foreign investments. We have used certain derivative financial instruments, primarily foreign currency put option and forward contracts, to reduce our foreign currency market risk, as we deem appropriate. We have also used interest rate swap agreements to reduce our interest rate market risk. We do not use financial instruments for trading or speculative purposes and all financial instruments are entered into in accordance with established policies and procedures.
 
We monitor our market risk exposures using a sensitivity analysis. Our sensitivity analysis estimates the exposure to market risk sensitive instruments assuming a hypothetical 10% adverse change in year end interest rates. The results of the sensitivity analysis are summarized below. The sensitivity analysis is of limited predictive value. As a result, our ultimate realized gains or losses with respect to interest rate and foreign currency exchange rate fluctuations will depend on the exposures that arise during a future period, hedging strategies at the time and the prevailing interest and foreign currency exchange rates.
 
Interest Rate Risk
 
Our interest rate risk management objective 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. At December 31, 2010, we have ¥24.2 billion ($297.5 million as of December 31, 2010) in TMK bond agreements with variable interest rates. We have entered into interest rate swap


45


Table of Contents

agreements to fix the interest rate on ¥23.0 billion ($268.1 million as of December 31, 2010) of the notes for the term of the agreements. We have no other derivative contracts outstanding at December 31, 2010.
 
Our primary interest rate risk is created by the variable rate Global Line. During the year ended December 31, 2010, we had weighted average daily outstanding borrowings of $501.1 million on our variable rate Global Line. Based on the results of the sensitivity analysis, which assumed a 10% adverse change in interest rates, the estimated market risk exposure for the variable rate lines of credit was approximately $1.3 million of cash flow for the year ended 2010.
 
The unconsolidated property funds that we manage, and in which we have an equity ownership, may enter into interest rate swap contracts. See Note 5 to our Consolidated Financial Statements in Item 8 for further information on these derivatives.
 
Foreign Currency Risk
 
Foreign currency risk is the possibility that our financial results could be better or worse than planned because of changes in foreign currency exchange rates.
 
Our primary exposure to foreign currency exchange rates relates to the translation of the net income of our foreign subsidiaries into U.S. dollars, principally euro, British pound sterling and yen. To mitigate our foreign currency exchange exposure, we borrow in the functional currency of the borrowing entity, when appropriate. We also may use foreign currency put option contracts to manage foreign currency exchange rate risk associated with the projected net operating income of our foreign consolidated subsidiaries and unconsolidated investees. At December 31, 2010, we had no put option contracts outstanding and, therefore, we may experience fluctuations in our earnings as a result of changes in foreign currency exchange rates.
 
We also have some exposure to movements in exchange rates related to certain intercompany loans we issue from time to time and we may use foreign currency forward contracts to manage these risks. At December 31, 2010, we had no forward contracts outstanding and, therefore, we may experience fluctuations in our earnings from the remeasurement of these intercompany loans due to changes in foreign currency exchange rates.
 
ITEM 8. Financial Statements and Supplementary Data
 
Our Consolidated Balance Sheets as of December 31, 2010 and 2009, our Consolidated Statements of Operations, Comprehensive Income (Loss), Equity and Cash Flows for each of the years in the three-year period ended December 31, 2010, Notes to Consolidated Financial Statements and Schedule III – Real Estate and Accumulated Depreciation, together with the reports of KPMG LLP, Independent Registered Public Accounting Firm, are included under Item 15 of this report and are incorporated herein by reference. Selected unaudited quarterly financial data is presented in Note 22 of our Consolidated Financial Statements.
 
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.
 
ITEM 9A. Controls and Procedures
 
An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of December 31, 2010. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Subsequent to December 31, 2010, there were no significant changes in our internal controls or in other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
Management’s Report on Internal Control over Financial Reporting
 
We are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.
 
Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of our internal control over financial reporting was conducted as of December 31, 2010 based on the criteria described in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management determined that, as of December 31, 2010, our internal control over financial reporting was effective.
 
The effectiveness of our internal control over financial reporting as of December 31, 2010 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.