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Prologis, Inc. 10-Q 2012

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2012

¨	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: 001-13545 (Prologis, Inc.) 001-14245 (Prologis, L.P.)

LOGO

Prologis, Inc.

Prologis, L.P.

(Exact name of registrant as specified in its charter)


Maryland (Prologis, Inc.) Delaware (Prologis, L.P.)		94-3281941 (Prologis, Inc.) 94-3285362 (Prologis, L.P.)
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

Pier 1, Bay 1, San Francisco, California		94111
(Address or principal executive offices)		(Zip Code)

(415) 394-9000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days.


Prologis, Inc.		Yes x No ¨
Prologis, L.P.		Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website; if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter periods that the registrant was required to submit and post such files).


Prologis, Inc.		Yes x No ¨
Prologis, L.P.		Yes x No ¨

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

Prologis, Inc.:

Prologis, L.P.:

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).


Prologis, Inc.		Yes ¨ No x
Prologis, L.P.		Yes ¨ No x

The number of shares of Prologis, Inc.’s common stock outstanding as of November 1, 2012 was approximately 460,910,000.

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended September 30, 2012 of Prologis, Inc. and Prologis, L.P. Unless stated otherwise or the context otherwise requires, references to “Prologis, Inc.” or the “REIT”, mean Prologis, Inc., and its consolidated subsidiaries; and references to “Prologis, L.P.” or the “Operating Partnership” mean Prologis, L.P., and its consolidated subsidiaries. The terms “the Company”, “Prologis”, “we”, “our” or “us” means the REIT and the Operating Partnership collectively.

Prologis, Inc. is a real estate investment trust and the general partner of the Operating Partnership. As of September 30, 2012, the REIT owned an approximate 99.59% common general partnership interest in the Operating Partnership and 100% of the preferred units in the Operating Partnership. The remaining approximate 0.41% common limited partnership interest is owned by non-affiliated investors and certain current and former directors and officers of the REIT. As the sole general partner of the Operating Partnership, the REIT has full, exclusive and complete responsibility and discretion in the day-to-day management and control of the Operating Partnership.

We operate the REIT and the Operating Partnership as one enterprise. The management of the REIT consists of the same members as the management of the Operating Partnership. These members are officers of the REIT and employees of the Operating Partnership or one of its direct or indirect subsidiaries. As general partner with control of the Operating Partnership, the REIT consolidates the Operating Partnership for financial reporting purposes, and the REIT does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities of the REIT and the Operating Partnership are the same on their respective financial statements.

We believe combining the quarterly reports on Form 10-Q of the REIT and the Operating Partnership into this single report results in the following benefits:

•

enhances investors’ understanding of the REIT and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;

•

eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the Company’s disclosure applies to both the REIT and the Operating Partnership; and

•

creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.

We believe it is important to understand the few differences between the REIT and the Operating Partnership in the context of how we operate as an interrelated consolidated company. The REIT’s only material asset is its ownership of partnership interests in the Operating Partnership. As a result, the REIT does not conduct business itself, other than acting as the sole general partner of the Operating Partnership and issuing public equity from time to time. The REIT itself does not issue any indebtedness, but guarantees the unsecured debt of the Operating Partnership. The Operating Partnership holds substantially all the assets of the business, directly or indirectly, and holds the ownership interests in the Company’s investment in certain entities. The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for net proceeds from equity issuances by the REIT, which are contributed to the Operating Partnership in exchange for partnership units, the Operating Partnership generates the capital required by the business through the Operating Partnership’s operations, its incurrence of indebtedness and the issuance of partnership units to third parties.

Noncontrolling interests, stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of the REIT and those of the Operating Partnership. The noncontrolling interests in the Operating Partnership’s financial statements include the interests in consolidated entities not owned by the Operating Partnership. The noncontrolling interests in the REIT’s financial statements include the same noncontrolling interests at the Operating Partnership level, as well as the common limited partnership interests in the Operating Partnership, which are accounted for as partners’ capital by the Operating Partnership.

In order to highlight the differences between the REIT and the Operating Partnership, there are separate sections in this report, as applicable, that separately discuss the REIT and the Operating Partnership including separate financial statements, controls and procedures sections, and separate Exhibit 31 and 32 certifications. In the sections that combine disclosure of the REIT and the Operating Partnership, this report refers to actions or holdings as being actions or holdings of Prologis.

PROLOGIS

INDEX


			Page Number
PART I.	Financial Information
	Item 1.	Financial Statements
		Prologis, Inc.:
		Consolidated Balance Sheets – September 30, 2012 and December 31, 2011		1
		Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2012 and 2011		2
		Consolidated Statements of Comprehensive Income (Loss) – Three and Nine Months Ended September 30, 2012 and 2011		3
		Consolidated Statement of Equity – Nine Months Ended September 30, 2012		3
		Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2012 and 2011		4
		Prologis, L.P.:
		Consolidated Balance Sheets – September 30, 2012 and December 31, 2011		5
		Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2012 and 2011		6
		Consolidated Statements of Comprehensive Income (Loss) – Three and Nine Months Ended September 30, 2012 and 2011		7
		Consolidated Statement of Capital – Nine Months Ended September 30, 2012		7
		Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2012 and 2011		8
		Prologis, Inc. and Prologis, L.P.:
		Notes to Consolidated Financial Statements		9
		Reports of Independent Registered Public Accounting Firm		28
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		47
	Item 4.	Controls and Procedures		48
PART II.	Other Information
	Item 1.	Legal Proceedings		48
	Item 1A.	Risk Factors		48
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		48
	Item 3.	Defaults Upon Senior Securities		48
	Item 4.	Mine Safety Disclosures		49
	Item 5.	Other Information		49
	Item 6.	Exhibits		49

PART I.

Item 1. Financial Statements

PROLOGIS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)


	September 30,
	2012			December 31,
	(Unaudited)			2011
ASSETS
Investments in real estate properties	$	26,461,066		$	24,787,537
Less accumulated depreciation		2,389,214			2,157,907

Net investments in real estate properties		24,071,852			22,629,630
Investments in and advances to unconsolidated entities		2,242,075			2,857,755
Notes receivable backed by real estate		243,979			322,834
Assets held for sale		376,642			444,850

Net investments in real estate		26,934,548			26,255,069

Cash and cash equivalents		158,188			176,072
Restricted cash		172,515			71,992
Accounts receivable		181,855			147,999
Other assets		1,129,316			1,072,780

Total assets	$	28,576,422		$	27,723,912


LIABILITIES AND EQUITY
Liabilities:
Debt	$	12,578,060		$	11,382,408
Accounts payable and accrued expenses		625,873			639,490
Other liabilities		1,163,651			1,225,548
Liabilities related to assets held for sale		34,317			20,992

Total liabilities		14,401,901			13,268,438


Equity:
Prologis, Inc. stockholders’ equity:
Preferred stock		582,200			582,200
Common stock; $0.01 par value; 460,897 shares and 459,401 shares issued and outstanding at September 30, 2012 and at December 31, 2011, respectively		4,609			4,594
Additional paid-in capital		16,395,797			16,349,328
Accumulated other comprehensive loss		(165,100	)		(182,321	)
Distributions in excess of net earnings		(3,335,757	)		(3,092,162	)

Total Prologis stockholders’ equity		13,481,749			13,661,639
Noncontrolling interests		692,772			793,835

Total equity		14,174,521			14,455,474

Total liabilities and equity	$	28,576,422		$	27,723,912

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

PROLOGIS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Revenues:
Rental income	$	382,293		$	341,118		$	1,124,653		$	707,744
Rental recoveries		97,081			89,165			285,469			185,734
Private capital revenue		31,714			34,578			95,064			97,389
Development management and other income		1,017			4,276			5,859			17,515

Total revenues		512,105			469,137			1,511,045			1,008,382

Expenses:
Rental expenses		130,820			119,949			382,679			254,078
Private capital expenses		15,730			17,080			47,686			39,228
General and administrative expenses		55,886			53,341			167,460			144,364
Merger, acquisition and other integration expenses		20,659			12,683			52,573			121,723
Impairment of real estate properties		9,778			—			12,963			—
Depreciation and amortization		194,622			182,774			560,563			377,193
Other expenses		5,580			3,971			17,142			14,242

Total expenses		433,075			389,798			1,241,066			950,828


Operating income		79,030			79,339			269,979			57,554

Other income (expense):
Earnings from unconsolidated entities, net		2,563			30,975			20,447			56,015
Interest expense		(123,161	)		(135,863	)		(384,489	)		(339,306	)
Impairment of other assets		—			—			(16,135	)		(103,823	)
Interest and other income, net		8,758			4,643			19,771			7,341
Gain on acquisitions and dispositions of investments in real estate, net		12,677			8,396			280,968			114,650
Foreign currency and derivative gains (losses), net		(5,908	)		52,525			(19,930	)		43,643
Gain (loss) on early extinguishment of debt, net		—			(298	)		4,919			(298	)

Total other income (expense)		(105,071	)		(39,622	)		(94,449	)		(221,778	)

Earnings (loss) before income taxes		(26,041	)		39,717			175,530			(164,224	)
Current income tax expense (benefit)		(18,099	)		(4,611	)		10,969			7,205
Deferred income tax expense (benefit)		(1,884	)		1,773			(10,753	)		2,755

Total income tax expense (benefit)		(19,983	)		(2,838	)		216			9,960

Earnings (loss) from continuing operations		(6,058	)		42,555			175,314			(174,184	)

Discontinued operations:
Income attributable to disposed properties and assets held for sale		4,618			11,903			19,889			34,716
Net gain (loss) on dispositions, including related impairment charges and taxes		(31,458	)		11,410			(10,335	)		21,545

Total discontinued operations		(26,840	)		23,313			9,554			56,261

Consolidated net earnings (loss)		(32,898	)		65,868			184,868			(117,923	)
Net earnings attributable to noncontrolling interests		(3,323	)		(23	)		(6,180	)		(308	)

Net earnings (loss) attributable to controlling interests		(36,221	)		65,845			178,688			(118,231	)
Less preferred share dividends		10,305			10,409			30,921			24,420


Net earnings (loss) available for common stockholders	$	(46,526	)	$	55,436		$	147,767		$	(142,651	)

Weighted average common shares outstanding - Basic		460,079			458,256			459,720			340,923

Weighted average common shares outstanding - Diluted		460,079			462,408			464,938			340,923

Net earnings (loss) per share available for common stockholders - Basic:
Continuing operations	$	(0.04	)	$	0.07		$	0.30		$	(0.59	)
Discontinued operations		(0.06	)		0.05			0.02			0.17

Net earnings (loss) per share available for common stockholders - Basic	$	(0.10	)	$	0.12		$	0.32		$	(0.42	)

Net earnings (loss) per share available for common stockholders - Diluted:
Continuing operations	$	(0.04	)	$	0.07		$	0.30		$	(0.59	)
Discontinued operations		(0.06	)		0.05			0.02			0.17

Net earnings (loss) per share available for common stockholders - Diluted	$	(0.10	)	$	0.12		$	0.32		$	(0.42	)


Dividends per common share	$	0.28		$	0.28		$	0.84		$	0.78

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

PROLOGIS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Consolidated net earnings (loss)	$	(32,898	)	$	65,868		$	184,868		$	(117,923	)
Other comprehensive income (loss):
Foreign currency translation gains (losses), net		175,832			(304,313	)		7,148			(90,035	)
Unrealized loss and amortization on derivative contracts, net		(5,067	)		(22,913	)		(365	)		(8,277	)

Comprehensive income (loss)		137,867			(261,358	)		191,651			(216,235	)
Net earnings attributable to noncontrolling interests		(3,323	)		(23	)		(6,180	)		(308	)
Other comprehensive loss (income) attributable to noncontrolling interests		(2,054	)		(684	)		10,438			(1,074	)

Comprehensive income (loss) available for common stockholders	$	132,490		$	(262,065	)	$	195,909		$	(217,617	)

PROLOGIS, INC.

CONSOLIDATED STATEMENT OF EQUITY

Nine Months Ended September 30, 2012

(Unaudited)

(In thousands)


			Common Stock							Accumulated			Distributions
			Number				Additional			Other			in Excess of			Non-
	Preferred		of		Par		Paid-in			Comprehensive			Net			controlling			Total
	Stock		Shares		Value		Capital			Loss			Earnings			interests			Equity
Balance as of January 1, 2012	$	582,200		459,401	$	4,594	$	16,349,328		$	(182,321	)	$	(3,092,162	)	$	793,835		$	14,455,474
Consolidated net earnings		—		—		—		—			—			178,688			6,180			184,868
Adjustment to the Merger purchase price allocation		—		—		—		—			—			—			10,163			10,163
Effect of common stock plans		—		1,496		15		56,291			—			—			—			56,306
Capital contributions, net		—		—		—		—			—			—			41,781			41,781
Purchase of noncontrolling interests		—		—		—		(10,487	)		—			—			(127,177	)		(137,664	)
Foreign currency translation gains (losses), net		—		—		—		—			17,585			—			(10,437	)		7,148
Unrealized loss and amortization on derivative contracts, net		—		—		—		—			(364	)		—			(1	)		(365	)
Distributions and allocations		—		—		—		665			—			(422,283	)		(21,572	)		(443,190	)


Balance as of September 30, 2012	$	582,200		460,897	$	4,609	$	16,395,797		$	(165,100	)	$	(3,335,757	)	$	692,772		$	14,174,521

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

PROLOGIS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Nine Months Ended
	September 30,
	2012			2011
Operating activities:
Consolidated net earnings (loss)	$	184,868		$	(117,923	)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Straight-lined rents		(47,041	)		(43,273	)
Stock-based compensation awards, net		24,054			22,408
Depreciation and amortization		577,898			405,580
Earnings from unconsolidated entities, net		(20,447	)		(56,015	)
Distributions and changes in operating receivables from our unconsolidated entities		30,321			36,542
Amortization of debt and lease intangibles		17,360			35,892
Non-cash Merger, acquisition and other integration expenses		14,508			17,823
Impairment of real estate properties and other assets		29,098			103,823
Net (gain) loss on dispositions, net of related impairment charges, included in discontinued operations		10,335			(23,461	)
Gains recognized on acquisitions and dispositions of investments in real estate, net		(280,968	)		(114,650	)
Loss (gain) on early extinguishment of debt, net		(4,919	)		298
Unrealized foreign currency and derivative losses (gains), net		15,558			(45,036	)
Deferred income tax expense (benefit)		(10,753	)		2,755
Increase in restricted cash, accounts receivable and other assets		(186,450	)		(36,999	)
Increase (decrease) in accounts payable and accrued expenses and other liabilities		19,926			(82,817	)

Net cash provided by operating activities		373,348			104,947

Investing activities:
Real estate development activity		(592,533	)		(645,903	)
Real estate acquisitions		(173,492	)		(136,603	)
Tenant improvements and lease commissions on previously leased space		(91,920	)		(55,726	)
Non-development capital expenditures		(48,438	)		(37,425	)
Investments in and advances to unconsolidated entities, net		(70,207	)		(9,671	)
Return of investment from unconsolidated entities		237,784			114,375
Proceeds from dispositions of real estate properties		1,008,257			812,186
Proceeds from repayment of notes receivable		—			6,450
Investments in notes receivable backed by real estate and advances on other notes receivable		—			(55,000	)
Cash acquired in connection with the Merger		—			234,045
Acquisition of PEPR, net of cash received		—			(1,025,251	)
Acquisition of NAIF II, net of cash received		(317,328	)		—

Net cash used in investing activities		(47,877	)		(798,523	)

Financing activities:
Issuance of common stock, net		29,442			1,156,493
Dividends paid on common stock		(389,159	)		(257,184	)
Dividends paid on preferred stock		(37,269	)		(23,013	)
Noncontrolling interest contributions		41,781			—
Noncontrolling interest distributions		(22,541	)		(11,706	)
Purchase of noncontrolling interest		(137,664	)		—
Debt and equity issuance costs paid		(10,745	)		(72,590	)
Proceeds from credit facilities, net		270,878			377,779
Repurchase of debt		(1,314,387	)		(243,316	)
Proceeds from issuance of debt		1,389,984			885,820
Payments on debt		(166,198	)		(938,264	)

Net cash provided by (used in) financing activities		(345,878	)		874,019


Effect of foreign currency exchange rate changes on cash		2,523			(1,328	)
Net increase (decrease) in cash and cash equivalents		(17,884	)		179,115
Cash and cash equivalents, beginning of period		176,072			37,634

Cash and cash equivalents, end of period	$	158,188		$	216,749

See Note 16 for information on non-cash investing and financing activities and other information.

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

PROLOGIS, L.P.

CONSOLIDATED BALANCE SHEETS

(In thousands)


	September 30,
	2012		December 31,
	(Unaudited)		2011
ASSETS
Investments in real estate properties	$	26,461,066	$	24,787,537
Less accumulated depreciation		2,389,214		2,157,907

Net investments in real estate properties		24,071,852		22,629,630
Investments in and advances to unconsolidated entities		2,242,075		2,857,755
Notes receivable backed by real estate		243,979		322,834
Assets held for sale		376,642		444,850

Net investments in real estate		26,934,548		26,255,069

Cash and cash equivalents		158,188		176,072
Restricted cash		172,515		71,992
Accounts receivable		181,855		147,999
Other assets		1,129,316		1,072,780

Total assets	$	28,576,422	$	27,723,912


LIABILITIES AND CAPITAL
Liabilities:
Debt	$	12,578,060	$	11,382,408
Accounts payable and accrued expenses		625,873		639,490
Other liabilities		1,163,651		1,225,548
Liabilities related to assets held for sale		34,317		20,992

Total liabilities		14,401,901		13,268,438

Capital:
Partners’ capital:
General partner - preferred		582,200		582,200
General partner - common		12,899,549		13,079,439
Limited partners		53,141		58,613

Total partners’ capital		13,534,890		13,720,252
Noncontrolling interests		639,631		735,222

Total capital		14,174,521		14,455,474

Total liabilities and capital	$	28,576,422	$	27,723,912

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

PROLOGIS, L.P.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per unit amounts)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Revenues:
Rental income	$	382,293		$	341,118		$	1,124,653		$	707,744
Rental recoveries		97,081			89,165			285,469			185,734
Private capital revenue		31,714			34,578			95,064			97,389
Development management and other income		1,017			4,276			5,859			17,515

Total revenues		512,105			469,137			1,511,045			1,008,382

Expenses:
Rental expenses		130,820			119,949			382,679			254,078
Private capital expenses		15,730			17,080			47,686			39,228
General and administrative expenses		55,886			53,341			167,460			144,364
Merger, acquisition and other integration expenses		20,659			12,683			52,573			121,723
Impairment of real estate properties		9,778			—			12,963			—
Depreciation and amortization		194,622			182,774			560,563			377,193
Other expenses		5,580			3,971			17,142			14,242

Total expenses		433,075			389,798			1,241,066			950,828


Operating income		79,030			79,339			269,979			57,554

Other income (expense):
Earnings from unconsolidated entities, net		2,563			30,975			20,447			56,015
Interest expense		(123,161	)		(135,863	)		(384,489	)		(339,306	)
Impairment of other assets		—			—			(16,135	)		(103,823	)
Interest and other income, net		8,758			4,643			19,771			7,341
Gain on acquisitions and dispositions of investments in real estate, net		12,677			8,396			280,968			114,650
Foreign currency and derivative gains (losses), net		(5,908	)		52,525			(19,930	)		43,643
Gain (loss) on early extinguishment of debt, net		—			(298	)		4,919			(298	)

Total other income (expense)		(105,071	)		(39,622	)		(94,449	)		(221,778	)

Earnings (loss) before income taxes		(26,041	)		39,717			175,530			(164,224	)
Current income tax expense (benefit)		(18,099	)		(4,611	)		10,969			7,205
Deferred income tax expense (benefit)		(1,884	)		1,773			(10,753	)		2,755

Total income tax expense (benefit)		(19,983	)		(2,838	)		216			9,960

Earnings (loss) from continuing operations		(6,058	)		42,555			175,314			(174,184	)

Discontinued operations:
Income attributable to disposed properties and assets held for sale		4,618			11,903			19,889			34,716
Net gain (loss) on dispositions, including related impairment charges and taxes		(31,458	)		11,410			(10,335	)		21,545

Total discontinued operations		(26,840	)		23,313			9,554			56,261

Consolidated net earnings (loss)		(32,898	)		65,868			184,868			(117,923	)
Net earnings attributable to noncontrolling interests		(3,475	)		(553	)		(5,444	)		(838	)

Net earnings (loss) attributable to controlling interests		(36,373	)		65,315			179,424			(118,761	)
Less preferred unit dividends		10,305			10,409			30,921			24,420

Net earnings (loss) available for common unitholders	$	(46,678	)	$	54,906		$	148,503		$	(143,181	)

Weighted average common units outstanding - Basic		461,979			460,315			461,693			341,828

Weighted average common units outstanding - Diluted		461,979			462,408			464,938			341,828

Net earnings (loss) per unit available for common unitholders - Basic:
Continuing operations	$	(0.04	)	$	0.07		$	0.30		$	(0.58	)
Discontinued operations		(0.06	)		0.05			0.02			0.16

Net earnings (loss) per unit available for common unitholders - Basic	$	(0.10	)	$	0.12		$	0.32		$	(0.42	)

Net earnings (loss) per unit available for common unitholders - Diluted:
Continuing operations	$	(0.04	)	$	0.07		$	0.30		$	(0.58	)
Discontinued operations		(0.06	)		0.05			0.02			0.16

Net earnings (loss) per unit available for common unitholders - Diluted	$	(0.10	)	$	0.12		$	0.32		$	(0.42	)


Distributions per common unit	$	0.28		$	0.28		$	0.84		$	0.78

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

PROLOGIS, L.P.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Consolidated net earnings (loss)	$	(32,898	)	$	65,868		$	184,868		$	(117,923	)
Other comprehensive income (loss):
Foreign currency translation gains (losses), net		175,832			(304,313	)		7,148			(90,035	)
Unrealized loss and amortization on derivative contracts, net		(5,067	)		(22,913	)		(365	)		(8,277	)

Comprehensive income (loss)		137,867			(261,358	)		191,651			(216,235	)
Net earnings attributable to noncontrolling interests		(3,475	)		(553	)		(5,444	)		(838	)
Other comprehensive loss (income) attributable to noncontrolling interests		(1,356	)		(684	)		10,510			(1,074	)

Comprehensive income (loss) available for common unitholders	$	133,036		$	(262,595	)	$	196,717		$	(218,147	)

PROLOGIS, L.P.

CONSOLIDATED STATEMENT OF CAPITAL

Nine Months Ended September 30, 2012

(Unaudited)

(In thousands)


	General Partner									Limited Partners						Non-
	Preferred				Common					Common						controlling
	Units		Amount		Units		Amount			Units			Amount			Interests			Total
Balance as of January 1, 2012		21,300	$	582,200		459,401	$	13,079,439			2,059		$	58,613		$	735,222		$	14,455,474
Consolidated net earnings		—		—		—		178,688			—			736			5,444			184,868
Adjustment to the Merger purchase price allocation		—		—		—		—			—			—			10,163			10,163
Effect of REIT’s common stock plans		—		—		1,496		56,306			—			—			—			56,306
Capital contributions, net		—		—		—		—			—			—			41,781			41,781
Purchase of noncontrolling interests		—		—		—		(10,487	)		—						(121,563	)		(132,050	)
Foreign currency translation gains (losses), net		—		—		—		17,585			—			73			(10,510	)		7,148
Unrealized loss and amortization on derivative contracts, net		—		—		—		(364	)		—			(1	)		—			(365	)
Distributions and allocations		—		—		—		(421,618	)		(160	)		(6,280	)		(20,906	)		(448,804	)


Balance as of September 30, 2012		21,300	$	582,200		460,897	$	12,899,549			1,899		$	53,141		$	639,631		$	14,174,521

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

PROLOGIS, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Nine Months Ended
	September 30,
	2012			2011
Operating activities:
Consolidated net earnings (loss)	$	184,868		$	(117,923	)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Straight-lined rents		(47,041	)		(43,273	)
REIT stock-based compensation awards, net		24,054			22,408
Depreciation and amortization		577,898			405,580
Earnings from unconsolidated entities, net		(20,447	)		(56,015	)
Distributions and changes in operating receivables from our unconsolidated entities		30,321			36,542
Amortization of debt and lease intangibles		17,360			35,892
Non-cash Merger, acquisition and other integration expenses		14,508			17,823
Impairment of real estate properties and other assets		29,098			103,823
Net (gain) loss on dispositions, net of related impairment charges, included in discontinued operations		10,335			(23,461	)
Gains recognized on acquisitions and dispositions of investments in real estate, net		(280,968	)		(114,650	)
Loss (gain) on early extinguishment of debt, net		(4,919	)		298
Unrealized foreign currency and derivative losses (gains), net		15,558			(45,036	)
Deferred income tax expense (benefit)		(10,753	)		2,755
Increase in restricted cash, accounts receivable and other assets		(186,450	)		(36,999	)
Increase (decrease) in accounts payable and accrued expenses and other liabilities		19,926			(82,817	)

Net cash provided by operating activities		373,348			104,947

Investing activities:
Real estate development activity		(592,533	)		(645,903	)
Real estate acquisitions		(173,492	)		(136,603	)
Tenant improvements and lease commissions on previously leased space		(91,920	)		(55,726	)
Non-development capital expenditures		(48,438	)		(37,425	)
Investments in and advances to unconsolidated entities, net		(70,207	)		(9,671	)
Return of investment from unconsolidated entities		237,784			114,375
Proceeds from dispositions of real estate properties		1,008,257			812,186
Proceeds from repayment of notes receivable		—			6,450
Investments in notes receivable backed by real estate and advances on other notes receivable		—			(55,000	)
Cash acquired in connection with the Merger		—			234,045
Acquisition of PEPR, net of cash received		—			(1,025,251	)
Acquisition of NAIF II, net of cash received		(317,328	)		—

Net cash used in investing activities		(47,877	)		(798,523	)

Financing activities:
Proceeds from issuance of common partnership units in exchange for contributions from the REIT, net		29,442			1,156,493
Distributions paid on common partnership units		(396,408	)		(257,760	)
Distributions paid on preferred units		(37,269	)		(23,013	)
Noncontrolling interest contributions		41,781			—
Noncontrolling interest distributions		(20,906	)		(11,130	)
Purchase of noncontrolling interest		(132,050	)		—
Debt and equity issuance costs paid		(10,745	)		(72,590	)
Proceeds from credit facilities, net		270,878			377,779
Repurchase of debt		(1,314,387	)		(243,316	)
Proceeds from issuance of debt		1,389,984			885,820
Payments on debt		(166,198	)		(938,264	)

Net cash provided by (used in) financing activities		(345,878	)		874,019


Effect of foreign currency exchange rate changes on cash		2,523			(1,328	)
Net increase (decrease) in cash and cash equivalents		(17,884	)		179,115
Cash and cash equivalents, beginning of period		176,072			37,634

Cash and cash equivalents, end of period	$	158,188		$	216,749

See Note 16 for information on non-cash investing and financing activities and other information.

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

PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	General

Business. On June 3, 2011, AMB Property Corporation (“AMB”) and AMB Property, LP completed the merger contemplated by the Agreement and Plan of Merger with ProLogis, a Maryland real estate investment trust (“ProLogis”) and its subsidiaries (the “Merger”). Following the Merger, AMB changed its name to Prologis, Inc. (the “REIT”). As a result of the Merger, each outstanding common share of beneficial interest of ProLogis was converted into 0.4464 of a newly issued share of common stock of the REIT. As further discussed in Note 2, AMB was the legal acquirer and ProLogis was the accounting acquirer.

Prologis, Inc. commenced operations as a fully integrated real estate company in 1997, elected to be taxed as a real estate investment trust under the Internal Revenue Code of 1986, as amended, and believes the current organization and method of operation will enable the REIT to maintain its status as a real estate investment trust. The REIT is the general partner of Prologis, L.P. (the “Operating Partnership”). Through our controlling interest in the Operating Partnership, we are engaged in the ownership, acquisition, development and operation of industrial properties in global, regional and other distribution markets throughout the Americas, Europe and Asia. Our current business strategy includes two reportable business segments: Real Estate Operations and Private Capital. Our Real Estate Operations segment represents the long-term ownership of industrial properties. Our Private Capital segment represents the long-term management of co-investment ventures and other unconsolidated entities. See Note 15 for further discussion of our business segments. Unless otherwise indicated, the notes to the Consolidated Financial Statements apply to both the REIT and the Operating Partnership. The terms “the Company”, “Prologis”, “we”, “our” or “us” means the REIT and Operating Partnership collectively.

As of September 30, 2012, the REIT owned an approximate 99.59% common general partnership interest in the Operating Partnership, and 100% of the preferred units. The remaining approximate 0.41% common limited partnership interest is owned by non-affiliated investors and certain current and former directors and officers of the REIT. As the sole general partner of the Operating Partnership, the REIT has full, exclusive and complete responsibility and discretion in the day-to-day management and control of the Operating Partnership. We operate the REIT and the Operating Partnership as one enterprise. The management of the REIT consists of the same members as the management of the Operating Partnership. These members are officers of the REIT and employees of the Operating Partnership or one of its direct or indirect subsidiaries. As general partner with control of the Operating Partnership, the REIT consolidates the Operating Partnership for financial reporting purposes, and the REIT does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities of the REIT and the Operating Partnership are the same on their respective financial statements.

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

The accompanying unaudited interim financial information has been prepared according to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with such rules and regulations. Our management believes that the disclosures presented in these financial statements are adequate to make the information presented not misleading. In our opinion, all adjustments and eliminations, consisting only of normal recurring adjustments, necessary to present fairly the financial position and results of operations for both the REIT and the Operating Partnership for the reported periods have been included. The results of operations for such interim periods are not necessarily indicative of the results for the full year. The accompanying unaudited interim financial information should be read in conjunction with the December 31, 2011 Consolidated Financial Statements of Prologis, as previously filed with the SEC on Form 10-K and other public information.

Certain amounts included in the accompanying Consolidated Financial Statements for 2011 have been reclassified to conform to the 2012 financial statement presentation.

Recent Accounting Pronouncements. In December 2011, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update that requires disclosures about offsetting and related arrangements to enable financial statements users to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including rights of setoff associated with certain financial instruments and derivative instruments. The disclosure requirements are effective for us on January 1, 2013, and we do not expect the guidance to have a material impact on our Consolidated Financial Statements.

In December 2011, the FASB issued an accounting standard update to clarify the scope of current U.S. GAAP. The update clarifies that the real estate sales guidance applies to the derecognition of a subsidiary that is in-substance real estate as a result of default on the subsidiary’s nonrecourse debt. That is, even if the reporting entity ceases to have a controlling financial interest under the consolidation guidance, the reporting entity would continue to include the real estate, debt, and the results of the subsidiary’s operations in its consolidated financial statements until legal title to the real estate is transferred to legally satisfy the debt. This accounting standard update is effective for us on January 1, 2013, and we do not expect the guidance to impact our Consolidated Financial Statements.

In September 2011, the FASB issued an accounting standard update to amend and simplify the rules related to testing goodwill for impairment. The update allows an entity to make an initial qualitative evaluation, based on the entity’s events and circumstances, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The results of this qualitative assessment determine whether it is necessary to perform the currently required two-step impairment test. The new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We adopted this standard as of January 1, 2012 and it has not had a material impact on our Consolidated Financial Statements.

PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

In June 2011, the FASB issued an accounting standard update that eliminates the option to present components of other comprehensive income as part of the changes in stockholders’ equity, and requires the presentation of components of net income and other comprehensive income either in a single continuous statement or in two separate but consecutive statements. This accounting standard update is effective, on a retrospective basis, for interim and annual periods beginning after December 15, 2011. We adopted this standard as of January 1, 2012. As this standard is for presentation purposes only, it had no impact on our Consolidated Financial Statements.

In May 2011, the FASB issued an accounting standard update to amend the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements in order to achieve further convergence with International Financial Reporting Standards. We adopted this standard as of January 1, 2012. See Note 14 for additional disclosures.

2.	Business Combinations

Merger of AMB and ProLogis

As discussed in Note 1, we completed the Merger on June 3, 2011. After consideration of all applicable factors pursuant to the business combination accounting rules, the Merger resulted in a reverse acquisition in which AMB was the “legal acquirer” because AMB issued its common stock to ProLogis shareholders and ProLogis was the “accounting acquirer” due to various factors, including the fact that ProLogis shareholders held the largest portion of the voting rights in the merged entity and ProLogis appointees represented the majority of the Board of Directors. In our Consolidated Financial Statements, the period ended September 30, 2011 includes the historical results of ProLogis for the entire period, and the results of the merged company are included subsequent to the Merger.

The purchase price allocation reflects aggregate consideration of approximately $5.9 billion. The allocation of the purchase price required a significant amount of judgment and was based on our valuation, estimates and assumptions of the acquisition date fair value of the tangible and intangible assets and liabilities acquired.

Acquisition of ProLogis European Properties

During the second quarter of 2011, we increased our ownership of ProLogis European Properties (“PEPR”) through open market purchases and a mandatory tender offer. In May 2011, we settled our mandatory tender offer that resulted in the acquisition of an additional 96.5 million ordinary units and 2.7 million convertible preferred units of PEPR. During all of the second quarter of 2011, we made aggregate cash purchases totaling €715.8 million ($1.0 billion). We funded the purchases through borrowings under our global line of credit and a new €500 million bridge facility, which was subsequently repaid with proceeds from an equity offering in June 2011.

Upon completion of the tender offer, we met the requirements to consolidate PEPR. In accordance with the accounting rules for business combinations, we marked our equity investment in PEPR from carrying value to fair value of approximately €486 million, which resulted in the recognition of a gain of €59.6 million ($85.9 million). We refer to this transaction as the “PEPR Acquisition”. The fair value was based on the trading price for our previously owned units and our acquisition price for the PEPR units purchased during the tender offer period.

We have allocated the aggregate purchase price, representing the share of PEPR we owned at the time of consolidation of €1.1 billion ($1.6 billion). The allocation of the purchase price required a significant amount of judgment and was based on our valuation, estimates and assumptions of the acquisition date fair value of the tangible and intangible assets and liabilities acquired.

For additional information related to PEPR, see Note 10.

Pro forma Information

The following unaudited pro forma financial information presents our results as though the Merger and the PEPR Acquisition, as well as the equity offering in June 2011 that was used, in part, to repay the loans used to fund the PEPR Acquisition, had been consummated as of January 1, 2010. The pro forma information does not necessarily reflect the actual results of operations had the transactions been consummated at the beginning of the period indicated nor is it necessarily indicative of future operating results. The pro forma information does not give effect to any cost synergies or other operating efficiencies that have resulted or could result from the Merger and also does not include any merger and integration expenses. The results for the nine months ended September 30, 2011 include approximately four months of actual results for both the Merger and PEPR Acquisition, and pro forma adjustments for five months. Actual results in 2011 include rental income and rental expenses of the properties acquired through the Merger and PEPR Acquisition of $325.3 million and $86.7 million, respectively, of which $23.3 million of rental income and $4.0 million of rental expenses are included in discontinued operations.


	Nine Months Ended
	September 30,
(amounts in thousands, except per share amounts)	2011
Total revenues	$	1,497,447
Net loss available for common stockholders	$	(44,301	)
Net loss per share available for common stockholders - basic	$	(0.10	)
Net loss per share available for common stockholders - diluted	$	(0.10	)

These results include certain adjustments, primarily decreased revenues resulting from the amortization of the net asset from the acquired leases with favorable or unfavorable rents relative to estimated market rents, increased depreciation and amortization expense resulting from the adjustment of real estate assets to estimated fair value and recognition of intangible assets related to in-place leases and acquired management contracts and lower interest expense due to the accretion of the fair value adjustment of debt.

PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

Acquisitions of Unconsolidated Co-Investment Ventures

On February 3, 2012, we acquired our partner’s 63% interest in and now own 100% of our previously unconsolidated co-investment venture Prologis North American Industrial Fund II (“NAIF II”) and we repaid the loan from NAIF II to our partner for a total of $336.1 million. The assets and liabilities of this venture, as well as the activity since the acquisition date, have been included in our Consolidated Financial Statements. In accordance with the accounting rules for business combinations, we marked our equity investment in NAIF II from its carrying value to the estimated fair value. The fair value was determined and allocated based on our valuation, estimates, and assumptions of the acquisition date fair value of the tangible and intangible assets and liabilities. The preliminary allocation of net assets acquired is approximately $1.6 billion in real estate assets, $27.3 million of net other assets, and $875.4 million in debt. We have not recorded a gain or loss with this transaction, as the carrying value of our investment was equal to the estimated fair value. While the current allocation of the purchase price is substantially complete, the valuation of the real estate properties is being finalized. We do not expect future revisions, if any, to have a significant impact on our financial position or results of operations.

On February 22, 2012, we dissolved the unconsolidated co-investment venture Prologis California (“Prologis California”) and divided the portfolio equally with our partner. The net value of the assets and liabilities distributed represents the fair value of our ownership interest in the co-investment venture on that date. In accordance with the accounting rules for business combinations, we marked our equity investment in Prologis California from its carrying value to the estimated fair value which resulted in a gain of $273.0 million. The gain is recorded in Gains on Acquisitions and Dispositions of Investments in Real Estate, Net in the Consolidated Statements of Operations. The fair value was determined and allocated based on our valuation, estimates, and assumptions of the acquisition date fair value of the tangible and intangible assets and liabilities. The preliminary allocation of net assets acquired is approximately $496.3 million in real estate assets, $17.7 million of net other assets, and $150.0 million in debt. While the current allocation of the purchase price is substantially complete, the valuation of the real estate properties is being finalized. We do not expect future revisions, if any, to have a significant impact on our financial position or results of operations.

We refer to these two transactions collectively as “Q1 Venture Acquisitions”. Our results for 2012 include rental income and rental expenses of the properties acquired in the Q1 Venture Acquisitions of $124.0 million and $30.3 million, respectively, of which $1.7 million of rental income and $0.2 million of rental expenses are included in discontinued operations.

3.	Real Estate

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


	September 30,		December 31,
	2012		2011
Industrial operating properties (1):
Improved land	$	5,501,866	$	4,813,145
Buildings and improvements		17,802,380		16,739,403
Development portfolio, including cost of land (2)		774,821		860,531
Land (3)		1,924,626		1,984,233
Other real estate investments (4)		457,373		390,225

Total investments in real estate properties		26,461,066		24,787,537
Less accumulated depreciation		2,389,214		2,157,907

Net investments in properties	$	24,071,852	$	22,629,630

(1)

At September 30, 2012 and December 31, 2011, we had 1,898 and 1,797 industrial properties consisting of 320.3 million square feet and 291.1 million square feet, respectively. Included at September 30, 2012 were 177 properties totaling $2.0 billion that were acquired in connection with the Q1 Venture Acquisitions.

(2)

At September 30, 2012, the development portfolio consisted of 35 properties aggregating 13.0 million square feet. At December 31, 2011, we had 30 properties aggregating 9.5 million square feet in the development portfolio. Our total expected investment upon completion of the properties currently in the development portfolio at September 30, 2012 was $1.3 billion, including land, development and leasing costs.

(3)	Land consisted of 10,208 acres and 10,723 acres at September 30, 2012 and December 31, 2011, respectively, and included land parcels that we may develop or sell depending on market conditions and other factors.

In March 2012, we recorded an impairment charge of $16.1 million related to the land received in 2011 in exchange for a note receivable. This impairment was recorded in Impairment of Other Assets in our Consolidated Financial Statements. During the nine months ended September 30, 2012, we recorded impairment charges of $9.8 million related to certain land parcels for which our intent is to sell and therefore, we wrote down to estimated fair value. The impairment was recorded in Impairment of Real Estate Properties in our Consolidated Financial Statements.

(4)

Included in other investments are: (i) certain non-industrial real estate; (ii) our corporate office buildings; (iii) land ground leased to third parties; (iv) certain infrastructure costs related to projects we are developing on behalf of others; (v) costs related to future development projects, including purchase options on land; (vi) restricted funds that are held in escrow pending the completion of tax-deferred exchange transactions involving operating properties; and (vii) earnest money deposits associated with potential acquisitions.

PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

At September 30, 2012, excluding our assets held for sale, we owned real estate assets on a consolidated basis in the Americas (Canada, Mexico and the United States), Europe (Austria, Belgium, the Czech Republic, France, Germany, Hungary, Italy, the Netherlands, Poland, Romania, Slovakia, Spain, Sweden and the United Kingdom) and Asia (China, Japan and Singapore).

During the nine months ended September 30, 2012, we acquired ten operating buildings aggregating 1.3 million square feet for $60.4 million and 350 acres of land for a total of $112.2 million.

During 2012, we contributed one property aggregating 0.1 million square feet to Europe Logistics Venture I and one property aggregating 0.1 million square feet to Prologis European Properties Fund II.

See Note 6 for further discussion of properties classified as held for sale and properties we sold to third parties that are reported in discontinued operations.

4.	Unconsolidated Entities

Summary of Investments

We have investments in entities through a variety of ventures. We co-invest in entities that own multiple properties with private capital investors and provide asset and property management services to these entities. We refer to these entities as co-investment ventures. Our ownership interest in these entities generally ranges from 15-50%. These entities may be consolidated or unconsolidated, depending on the structure, our partner’s rights and participation and our level of control of the entity. This Note details our unconsolidated co-investment ventures. See Note 10 for more detail regarding our consolidated investments.

We also have investments in other joint ventures, generally with one partner and that we do not manage. We refer to our investments in the entities accounted for on the equity method, both unconsolidated co-investment ventures and other joint ventures, as unconsolidated entities.

Our investments in and advances to our unconsolidated entities are summarized below (in thousands):


	September 30,		December 31,
	2012		2011
Unconsolidated co-investment ventures	$	1,965,734	$	2,471,179
Other joint ventures		276,341		386,576

Totals	$	2,242,075	$	2,857,755

Unconsolidated Co-Investment Ventures

As of September 30, 2012, we had investments in and managed 12 unconsolidated co-investment ventures that own portfolios of operating industrial properties and may also develop properties. Private capital revenue includes revenues we earn for the management services we provide to unconsolidated entities and certain third parties. These fees are recognized as earned and may include property and asset management fees or transactional fees for leasing, acquisition, construction, financing, legal and tax services. We may also earn promote payments based on the third party investor returns over time. In addition, we may earn fees for services provided to develop a building within the co-investment venture and those fees are reflected as Development Management and Other Income in the Consolidated Statements of Operations.

Summarized information regarding our investments in the co-investment ventures is as follows (in thousands):


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2012			2011		2012			2011
Earnings (loss) from unconsolidated co-investment ventures:
Americas (1)	$	(3,912	)	$	18,931	$	(8,378	)	$	23,557
Europe		5,858			8,706		21,027			23,478
Asia		432			218		2,640			1,387

Total earnings from unconsolidated co-investment ventures, net	$	2,378		$	27,855	$	15,289		$	48,422


Private capital revenue and other income:
Americas	$	16,937		$	19,291	$	50,541		$	45,405
Europe		9,546			8,612		28,008			35,743
Asia		5,131			4,808		14,973			7,344

Total private capital revenue		31,614			32,711		93,522			88,492
Development management and other income		106			—		184			5,943

Total	$	31,720		$	32,711	$	93,706		$	94,435

(1)

During the three and nine months ended September 30, 2012, we recorded losses of $1.3 million and $2.1 million representing our share of the disposal of the remaining properties in one of our ventures. Also included in the nine months ended September 30, 2012, is a $5.0 million loss representing our share of a loss from the early extinguishment of debt in Prologis North American Industrial Fund III (“Prologis NAIII”). During the three and nine months ended September 30, 2011, we recorded a gain of $13.9 million for our share of the gain on disposal of 13 properties in one of our ventures.

PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

We completed the Merger and PEPR Acquisition in the second quarter of 2011. During the first quarter of 2012, we also acquired one of our unconsolidated co-investment ventures and dissolved another, both located in the Americas. Therefore 2011 may not be comparable to 2012. See Note 2 for more information on these transactions.

Private capital revenue included fees and incentives we earn for services provided to our unconsolidated co-investment ventures (shown above), as well as fees earned from other unconsolidated entities and third parties of $0.1 million and $1.6 million during the three and nine months ended September 30, 2012, respectively and $1.9 million and $8.9 million during the three and nine months ended September 30, 2011, respectively.

Information about our investments in the co-investment ventures is as follows (dollars in thousands):


	Weighted Average Ownership Percentage						Investment in and Advances to
	September 30,			December 31,			September 30,		December 31,
Unconsolidated co-investment ventures by region	2012			2011			2012		2011
Americas		23.9	%		28.2	%	$	1,119,855	$	1,596,295
Europe		30.0	%		29.9	%		648,397		662,010
Asia		19.3	%		19.4	%		197,482		212,874

Totals		25.5	%		27.9	%	$	1,965,734	$	2,471,179

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


2012	Americas			Europe			Asia			Total
For the three months ended September 30, 2012 (1):
Revenues	$	184.8		$	115.5		$	36.0		$	336.3
Net earnings (loss)	$	(16.7	)	$	13.8		$	4.2		$	1.3
For the nine months ended September 30, 2012 (1):
Revenues	$	581.0		$	361.4		$	105.8		$	1,048.2
Net earnings (loss) (2)	$	(54.8	)	$	61.8		$	8.9		$	15.9
As of September 30, 2012:
Total assets	$	9,285.7		$	6,254.8		$	2,097.7		$	17,638.2
Amounts due to us (3)	$	23.4		$	4.5		$	8.0		$	35.9
Third party debt (4)	$	3,891.4		$	2,286.6		$	1,060.8		$	7,238.8
Total liabilities	$	4,212.6		$	2,815.2		$	1,161.7		$	8,189.5
Noncontrolling interest	$	1.6		$	6.8		$	—		$	8.4
Venture partners’ equity	$	5,071.5		$	3,432.8		$	936.0		$	9,440.3
Our weighted average ownership (5)		23.9	%		30.0	%		19.3	%		25.5	%
Our investment balance (6)	$	1,119.8		$	648.4		$	197.5		$	1,965.7
Deferred gains, net of amortization (7)	$	154.2		$	180.8		$	—		$	335.0


2011	Americas			Europe			Asia			Total
For the three months ended September 30, 2011 (1):
Revenues	$	256.5		$	123.2		$	38.2		$	417.9
Net earnings (loss) (8)	$	27.3		$	26.3		$	(3.5	)	$	50.1
For the nine months ended September 30, 2011 (1):
Revenues	$	624.9		$	482.9		$	56.3		$	1,164.1
Net earnings (loss) (8)	$	(2.6	)	$	64.1		$	1.1		$	62.6
As of December 31, 2011:
Total assets	$	12,236.0		$	6,211.8		$	2,245.1		$	20,692.9
Amounts due to us (3)	$	59.5		$	8.1		$	9.3		$	76.9
Third party debt (4)	$	5,952.8		$	2,275.8		$	1,061.4		$	9,290.0
Total liabilities	$	6,386.4		$	2,758.9		$	1,174.0		$	10,319.3
Noncontrolling interest	$	1.7		$	6.2		$	—		$	7.9
Venture partners’ equity	$	5,847.9		$	3,446.7		$	1,071.1		$	10,365.7
Our weighted average ownership (5)		28.2	%		29.9	%		19.4	%		27.9	%
Our investment balance (6)	$	1,596.3		$	662.0		$	212.9		$	2,471.2
Deferred gains, net of amortization (7)	$	227.6		$	191.0		$	0.1		$	418.7

PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

(1)

During the first quarter of 2012, we began consolidating two of our co-investment ventures in the Americas whose results are included through the transaction date. During the nine months ended September 30, 2011, amounts include approximately five months of activity, respectively, for PEPR while accounted for on the equity method and approximately four months of activity from the investments acquired through the Merger. See Note 2 for more details of these transactions.

(2)

In 2012, one of our ventures in the Americas recorded a $10.7 million loss on the disposition of the remaining properties in this venture to third parties. During the second quarter of 2012, Prologis NAIII settled debt before maturity by transferring the secured properties to the lender in lieu of payment and triggered the write-off of the related derivative balance in other comprehensive income of $25.1 million (Prologis share was $5.0 million).

(3)

At December 31, 2011, we had notes receivable aggregating $41.2 million from Prologis NAIII ($21.4 million) and Prologis SGP Mexico ($19.8 million). In February 2012, Prologis NAIII restructured the loan payable to us and our partner into equity according to our ownership percentages. As of September 30, 2012, we have one note receivable from Prologis SGP Mexico of $19.7 million. The remaining amounts represent current balances from services provided by us to the co-investment ventures.

(4)

As discussed in Note 2, debt was reduced by $1.4 billion related to the consolidation of two unconsolidated co-investment ventures during the first quarter of 2012. As of September 30, 2012 and December 31, 2011, we guaranteed $28.4 million and $28.0 million, respectively, of the third party debt of certain unconsolidated ventures. As of December 31, 2011, we had pledged properties included in our Real Estate Operations segment with an undepreciated cost of approximately $277.0 million, to serve as additional collateral for the secured mortgage loan of NAIF II payable to an affiliate of our venture partner. In connection with the acquisition of our partner’s interest in February 2012, we repaid this loan, and these assets are no longer pledged.

(5)	Represents our weighted average ownership interest in all co-investment ventures based on each entity’s contribution to total assets, before depreciation, net of other liabilities.

(6)

The difference between our ownership interest of the venture’s equity and our investment balance results principally from three types of transactions: (i) deferring a portion of the gains we recognize from a contribution of one of our properties to the venture (see next footnote); (ii) recording additional costs associated with our investment in the venture; and (iii) advances to the venture.

(7)	This amount is recorded as a reduction to our investment and represents the gains that were deferred when we contributed a property to a venture due to our continuing ownership in the property.

(8)	Included in 2011 is a gain of $33.6 million (Prologis share $13.9 million) from the disposition of 13 properties by one of our ventures in the Americas.

Equity Commitments Related to Certain Unconsolidated Co-Investment Ventures

Certain unconsolidated co-investment ventures have equity commitments from us and our venture partners. We may fulfill our equity commitment through contributions of properties or cash. Our venture partners fulfill their equity commitment with cash. We are committed to offer to contribute certain properties that we develop and stabilize in select markets in Europe and Mexico to certain ventures. These ventures are committed to acquire such properties, subject to certain exceptions, including that the properties meet certain specified leasing and other criteria, and that the ventures have available capital. We are not obligated to contribute properties at a loss. Depending on market conditions, the investment objectives of the ventures, our liquidity needs and other factors, we may make contributions of properties to these ventures through the remaining commitment period.

The following table is a summary of remaining equity commitments as of September 30, 2012 (in millions):


	Equity commitments		Expiration date for remaining commitments
Prologis Targeted U.S. Logistics Fund (1)
Prologis	$	—	Open-Ended (1)
Venture Partners	$	82.5

Prologis SGP Mexico (2)
Prologis	$	24.6	(2)
Venture Partner	$	98.1

Europe Logistics Venture 1 (3)
Prologis	$	72.5	February 2014
Venture Partner	$	410.7

Prologis China Logistics Venture 1
Prologis	$	71.0	March 2015
Venture Partner	$	402.1

Total
Prologis	$	168.1

Venture Partners	$	993.4

(1)

We secured $265.5 million in commitments from third parties in 2012 in order to fund future acquisitions from us and third parties that meet the venture’s investment strategy, or to pay down existing debt. During the nine month ended September 30, 2012, the venture called capital of $183.0 million from these investors primarily to pay down existing debt.

PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

(2)	These equity commitments will be called only if needed to pay outstanding debt of the venture. The relevant debt was due in the third quarter of 2012, which was automatically extended until the third quarter of 2013. There is also an option to extend until the third quarter of 2014.

(3)

Equity commitments are denominated in euro and reported above in U.S. dollar. During the third quarter of 2012, this venture called capital of €25.0 million ($32.2 million) of which €3.8 million ($4.8 million) represented our share, for the acquisition of one building from a third party. During the first quarter of 2012, this venture acquired two buildings from a third party with proceeds from commitments previously called and one building that was contributed by us with capital called during the quarter of €13.0 million ($17.2 million) of which €2.0 million ($2.6 million) represented our share.

Other Joint Ventures

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


	September 30, 2012		December 31, 2011
Americas (1)	$	194,014	$	305,352
Europe		52,013		50,474
Asia		30,314		30,750

Total investments in and advances to other joint ventures	$	276,341	$	386,576

(1)	During the second quarter of 2012, we received $95.0 million, which represented a return of capital from one of our joint ventures that held a note receivable that was repaid in full during the quarter.

5.	Notes Receivable Backed by Real Estate

The activity on the notes receivable backed by real estate for the nine months ended September 30, 2012 is as follows (in thousands):


	$188 million Preferred Equity Interest		$55 million Preferred Equity Interest		NAIF II Secured Mortgage Receivable (1)			Total
Balance as of December 31, 2011	$	188,000	$	55,970	$	78,864		$	322,834
Elimination upon acquisition of NAIF II		—		—		(78,864	)		(78,864	)
Accrued interest/(interest payments received), net		9		—		—			9

Balance as of September 30, 2012	$	188,009	$	55,970	$	—		$	243,979

(1)	The balance as of December 31, 2011 represented a loan to NAIF II secured by 12 buildings. In February 2012, we purchased the remaining interest in NAIF II. As a result, we began consolidating this entity and eliminated this note receivable. See Note 2 for more detail on this transaction.

6.	Assets Held for Sale and Discontinued Operations

Held for Sale

As of September 30, 2012, we had land and 23 operating properties that met the criteria to be classified as held for sale. The amounts included in held for sale as of September 30, 2012 represent real estate investment balances and the related assets and liabilities for each property.

Discontinued Operations

During the nine months ended September 30, 2012, we disposed of land subject to ground leases and 113 operating properties aggregating 14.4 million square feet to third parties. During all of 2011, we disposed of land subject to ground leases and 94 operating properties aggregating 10.7 million square feet to third parties.

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

PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

Discontinued operations are summarized as follows (in thousands):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Rental income and recoveries	$	11,267		$	36,671		$	50,830		$	86,479
Rental expenses		(2,975	)		(9,187	)		(13,445	)		(22,873	)
Depreciation and amortization expense		(3,674	)		(15,256	)		(17,335	)		(28,387	)
Other expenses		—			(325	)		(161	)		(503	)

Income attributable to disposed properties and assets held for sale		4,618			11,903			19,889			34,716
Net gain (loss) on dispositions, net of taxes		(4,049	)		11,410			17,074			24,204
Impairment charges		(27,409	)		—			(27,409	)		(2,659	)

Total discontinued operations	$	(26,840	)	$	23,313		$	9,554		$	56,261

Debt

All debt is held directly or indirectly by the Operating Partnership. The REIT itself does not have any indebtedness, but guarantees the unsecured debt of the Operating Partnership. We generally do not guarantee the debt issued by non-wholly owned subsidiaries.

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


	September 30, 2012					December 31, 2011
	Weighted Average Interest Rate (1)			Amount Outstanding		Weighted Average Interest Rate (1)			Amount Outstanding
Credit Facilities		1.40	%	$	1,209,467		2.17	%	$	936,796
Senior notes (2)		5.60	%		5,230,412		6.30	%		4,772,607
Exchangeable senior notes (3)		4.56	%		881,682		4.82	%		1,315,448
Secured mortgage debt (2)		4.00	%		4,010,205		4.71	%		1,699,363
Secured mortgage debt of consolidated entities (2)		4.40	%		516,212		4.54	%		1,495,047
Other debt of consolidated entities (2)		4.79	%		67,936		5.30	%		775,763
Other debt		1.75	%		662,146		2.44	%		387,384

Totals		4.32	%	$	12,578,060		5.12	%	$	11,382,408

(1)	The interest rates presented represent the effective interest rates (including amortization of the non-cash premiums or discount).

(2)

As discussed in Note 10, during the third quarter of 2012 in connection with the liquidation of PEPR, we acquired the remaining interest in PEPR’s assets and liabilities. As such, $1,390.9 million was reclassified from debt of consolidated entities to $538.7 million of senior notes and $852.2 million of secured mortgage debt.

(3)	The weighted average coupon interest rate was 2.8% as of September 30, 2012 and 2.6% as of December 31, 2011.

Credit Facilities

We have a global senior credit facility (“Global Facility”), where funds may be drawn in U.S. dollar, euro, Japanese yen, British pound sterling and Canadian dollar on a revolving basis. The loans cannot exceed $1.71 billion (subject to currency fluctuations). We may increase the Global Facility to $2.71 billion, subject to currency fluctuations and obtaining additional lender commitments. The Global Facility is scheduled to mature on June 3, 2015, but the Operating Partnership may, at its option and subject to the satisfaction of certain conditions and payment of an extension fee, extend the maturity date to June 3, 2016. Pricing under the Global Facility, including the spread over LIBOR, facility fees and letter of credit fees, varies based upon the public debt ratings of the Operating Partnership. The Global Facility contains customary representations, covenants and defaults (including a cross-acceleration to other recourse indebtedness of more than $50 million).

We also have a ¥36.5 billion (approximately $470 million at September 30, 2012) yen revolver (the “Revolver”). The Revolver matures on March 1, 2014, but we may, at our option and subject to the satisfaction of customary conditions and payment of an extension fee, extend the maturity date to February 27, 2015. We may increase availability under the Revolver to an amount not exceeding ¥56.5 billion (approximately $728 million at September 30, 2012) subject to obtaining additional lender commitments. Pricing under the Revolver is consistent with the Global Facility pricing. The Revolver contains certain customary representations, covenants and defaults that are substantially the same as the corresponding provisions of the Global Facility.

We refer to the Global Facility and the Revolver, collectively, as our “Credit Facilities”.

Commitments and availability under our Credit Facilities as of September 30, 2012 were as follows (dollars in millions):


Aggregate lender - commitments	$	2,178.6
Less:
Borrowings outstanding		1,209.3
Outstanding letters of credit		66.9

Current availability	$	902.4

PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

Exchangeable Senior Notes

In connection with the Merger and exchange offer, our convertible senior notes became exchangeable senior notes issued by the Operating Partnership that are exchangeable into common stock of the REIT. As a result, the accounting for the exchangeable senior notes now requires us to separate the fair value of the derivative instrument (exchange feature) from the debt instrument and account for it separately as a derivative contract. We have determined that the exchangeable notes issued in 2010 are the only exchangeable notes where the fair value of the derivative is not zero at September 30, 2012, therefore this modification in accounting for the exchangeable notes only affected these notes. At each reporting period, we adjust the derivative instrument to fair value with the resulting adjustment being recorded in earnings as Foreign Currency and Derivative Gains (Losses), Net. The fair value of the derivative associated with our exchangeable notes was a liability of $36.6 million and $17.5 million at September 30, 2012 and December 31, 2011, respectively. We have recognized an unrealized loss of $6.7 million and $19.1 million for the three and nine months ended September 30, 2012, respectively. We recognized an unrealized gain of $61.0 million and $51.3 million for the three and nine months ended September 30, 2011, respectively.

We redeemed $448.9 million of the exchangeable notes issued in 2007 in April 2012, which was when the holders had the right to require us to repurchase their notes for cash.

Secured Mortgage Debt

TMK bonds are a financing vehicle in Japan for special purpose companies known as TMKs. In 2012, we issued ¥35.6 billion ($458.0 million as of September 30, 2012) of new TMK bonds with maturity dates ranging from March 2017 to May 2019 with interest rates ranging from 0.8% to 1.4%, and secured by eight properties with an undepreciated cost at September 30, 2012 of $819.4 million.

In addition, we amended our existing TMK bonds, increasing amounts outstanding by ¥12.4 billion ($160.3 million as of September 30, 2012). As a result, the range of maturities on these bonds changed from 2012 to 2014 to a range of December 2014 to April 2018, and the interest rates were reduced from a range of 1.8% to 3.95% to a range of 1.0% to 1.8%.

In the first quarter of 2012 in connection with the acquisition of NAIF II (see Note 2 for more details), we have assumed additional secured mortgage debt of $875.4 million, with maturity dates through December 2018. Subsequent to the acquisition, we have paid down a portion of outstanding debt and reduced the balance to $718.4 million, secured by 92 properties with an undepreciated cost of $1.1 billion at September 30, 2012.

In the first quarter of 2012 in connection with the acquisition of our share of Prologis California (see Note 2 for more details), we assumed additional secured mortgage debt of $150.0 million payable in 2014 and secured by 24 properties with an undepreciated cost of $320.7 million at September 30, 2012.

Secured Mortgage Debt of Consolidated Entities

On June 20, 2012, one of our consolidated co-investment ventures incurred $23.0 million of secured mortgage debt, including $13.0 million at 4.50% due December 2016 and $10.0 million at 4.78% due December 2018. This debt is secured by four real estate properties with an aggregate undepreciated cost of $40.3 million at September 30, 2012.

Other Debt

On February 2, 2012, we entered into a senior term loan agreement where we may obtain loans in an aggregate amount not to exceed €487.5 million ($633.2 million at September 30, 2012). The loans can be obtained in U.S. dollar, euro, Japanese yen, and British pound sterling. We may increase the borrowings to approximately €987.5 million ($1.3 billion at September 30, 2012), subject to obtaining additional lender commitments. The loan agreement is scheduled to mature on February 2, 2014, but we may extend the maturity date three times at our option, in each case up to one year, subject to satisfaction of certain conditions and payment of an extension fee. We fully drew the senior term loan and used the proceeds to pay off two term loans assumed in connection with the Merger and the remainder to pay down borrowings on our Credit Facilities.

PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

Long-Term Debt Maturities

Principal payments due on our debt, for the remainder of 2012 and for each of the years in the ten-year period ending December 31, 2021 and thereafter are as follows (in millions):


	Prologis
	Unsecured									Secured				Consolidated		Total
	Senior		Exchangeable			Credit		Other		Mortgage				Entities’		Consolidated
Maturity	Debt		Notes			Facilities		Debt		Debt		Total		Debt		Debt
2012 (1) (2)	$	—	$	—		$	—	$	—	$	9	$	9	$	34	$	43
2013 (1) (2)		376		483			—		1		518		1,378		255		1,633
2014		903		—			465		645		1,137		3,150		62		3,212
2015		287		460			744		1		214		1,706		27		1,733
2016		640		—			—		1		316		957		123		1,080
2017		700		9			—		1		579		1,289		3		1,292
2018		900		—			—		1		330		1,231		73		1,304
2019		647		—			—		1		528		1,176		1		1,177
2020		690		—			—		1		10		701		1		702
2021		—		—			—		—		171		171		1		172
Thereafter		—		—			—		10		143		153		1		154

Subtotal		5,143		952			1,209		662		3,955		11,921		581		12,502
Unamortized (discounts) premiums, net		87		(70	)		—		—		56		73		3		76

Total	$	5,230	$	882		$	1,209	$	662	$	4,011	$	11,994	$	584	$	12,578

(1)

We expect to repay the amounts maturing in 2012 and 2013 related to our wholly owned debt with cash generated from operations, proceeds from the disposition of wholly owned real estate properties and with borrowings on our Credit Facilities. The maturities in 2012 and 2013 in our consolidated but not wholly owned subsidiaries principally include $206.7 million of secured mortgage debt, which we expect to extend, or pay, through the issuance of new debt, with proceeds from asset sales, available cash, or equity contributions to the funds by us and our venture partners.

(2)	The maturities in 2013 include the aggregate principal amounts of the exchangeable senior notes issued in 2007 and 2008, as this is when the holders first have the right to require us to repurchase their notes for cash.

Debt Covenants

Our debt agreements contain various covenants, including maintenance of specified financial ratios. As of September 30, 2012 we were in compliance with all covenants.

8.	Other Liabilities:

Other liabilities consisted of the following, net of amortization, if applicable, as of September 30, 2012 and December 31, 2011 (in thousands):


	September 30, 2012		December 31, 2011
Income tax liabilities	$	574,173	$	634,790
Tenant security deposits		184,151		158,544
Unearned rents		112,317		115,093
Lease intangible assets		61,595		68,256
Deferred income		48,897		52,045
Environmental		32,352		40,206
Value added tax and other tax liabilities		18,780		42,895
Other		131,386		113,719

Totals	$	1,163,651	$	1,225,548

9.	Stockholders’ Equity of the REIT and Partners’ Capital of the Operating Partnership

Operating Partnership

For each share of common stock or preferred stock the REIT issues, the Operating Partnership issues a corresponding common or preferred partnership unit, as applicable, to the REIT in exchange for the contribution of the proceeds from the stock issuance. In addition, other third parties and certain current and former directors and officers of the REIT own common limited partnership units that make up approximately 0.41% of the common partnership units.

Preferred Stock of the REIT

We had the following preferred stock issued and outstanding (in thousands, except per share and par value data):


	September 30, 2012		December 31, 2011

Series L Preferred stock at stated liquidation preference of $25 per share; $0.01 par value; 2,000 shares	$	49,100	$	49,100
Series M Preferred stock at stated liquidation preference of $25 per share; $0.01 par value; 2,300 shares		57,500		57,500
Series O Preferred stock at stated liquidation preference of $25 per share; $0.01 par value; 3,000 shares		75,300		75,300
Series P Preferred stock at stated liquidation preference of $25 per share; $0.01 par value; 2,000 shares		50,300		50,300
Series Q Preferred stock at stated liquidation preference of $50 per share; $0.01 par value; 2,000 shares		100,000		100,000
Series R Preferred stock at stated liquidation preference of $25 per share; $0.01 par value; 5,000 shares		125,000		125,000
Series S Preferred stock at stated liquidation preference of $25 per share; $0.01 par value; 5,000 shares		125,000		125,000


Total preferred stock	$	582,200	$	582,200

PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

The holders of the preferred stock have preference rights with respect to distributions and liquidation over the common stock and certain rights in the case of arrearage. Holders of the preferred stock are not entitled to vote on any matters, except under certain limited circumstances. The series L, M, O, P, R and S preferred stock are redeemable solely at our option, in whole or in part. The series Q preferred stock will be redeemable at our option on and after November 13, 2026.

10.

Noncontrolling Interests

Operating Partnership

We report noncontrolling interests related to several entities we consolidate but do not own 100% of the common equity. These entities include three real estate partnerships that have issued limited partnership units to third parties. Depending on the specific partnership agreements, these limited partnership units are exchangeable into shares of our common stock (or cash), generally at a rate of one share of common stock to one unit. We evaluated the noncontrolling interests with redemption provisions that permit the issuer to settle in either cash or common stock at the option of the issuer to determine whether temporary or permanent equity classification on the balance sheet is appropriate, including the requirement to settle in unregistered shares, and determined that these units meet the requirements to qualify for presentation as permanent equity.

We also consolidate several entities in which we do not own 100% but the units are not exchangeable into our common stock. If we contribute a property to a consolidated co-investment venture, the property is still reflected in our Consolidated Financial Statements, but due to our ownership of less than 100%, there is an increase in noncontrolling interest related to the contributed properties, which represents the cash we receive from our partners.

REIT

The noncontrolling interest of the REIT includes the noncontrolling interests presented in the Operating Partnership, as well as the common limited partnership units in the Operating Partnership that are not owned by the REIT. As of September 30, 2012, the REIT owned approximately 99.59% of the common partnership units of the Operating Partnership.

The following is a summary of the noncontrolling interest and the consolidated entity’s total investment in real estate and debt at September 30, 2012 and December 31, 2011 (dollars in thousands):


	Our Ownership Percentage						Noncontrolling Interests				Consolidated Entity Total Investment In Real Estate				Consolidated Entity Debt
	2012			2011			2012		2011		2012		2011		2012		2011
Partnerships with exchangeable units (1)		various			various		$	43,303	$	11,173	$	828,112	$	827,263	$	26,417	$	26,417
Prologis Institutional Alliance Fund II (2)		28.2	%		24.1	%		291,271		324,721		600,439		624,318		196,291		220,625
PEPR (3)		100.0	%		93.7	%		—		106,759		—		4,047,329		—		1,699,587
Mexico Fondo Logistico (AFORES) (4)		20.0	%		20.0	%		144,916		118,580		371,820		312,914		215,356		177,000
Prologis AMS (5)		38.6	%		38.5	%		62,515		83,897		175,209		211,627		74,656		77,041
Other consolidated entities		various			various			97,626		90,092		569,296		620,052		71,428		70,140

Operating Partnership noncontrolling interests								639,631		735,222		2,544,876		6,643,503		584,148		2,270,810
Limited partners in the Operating Partnership (6)								53,141		58,613		—		—		—		—

REIT noncontrolling interests							$	692,772	$	793,835	$	2,544,876	$	6,643,503	$	584,148	$	2,270,810

(1)

At September 30, 2012 and December 31, 2011, there were 1,285,312 and 1,302,238 limited partnership units, respectively, that were exchangeable into an equal number of shares of the REIT’s common stock. In the first quarter of 2012, 16,926 limited partnership units were exchanged for cash. The majority of the outstanding limited partnership units are entitled to quarterly cash distributions equal to the quarterly dividends paid on our common stock. In 2012, we recorded an additional purchase accounting adjustment of $32.9 million associated with the Merger.

(2)	In the second quarter of 2012, we purchased an additional interest in the fund from one of our partners for $14.1 million increasing our ownership to 28.2%.

(3)

In June 2012, the unitholders of PEPR passed a resolution to wind-up the entity, pursuant to which we opted for in-kind distribution of assets with responsibility for all liabilities of PEPR. In September 2012, PEPR completed its delisting from two European stock exchanges, completed a distribution to the remaining common and preferred unitholders and have acquired the remaining assets and liabilities.

PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

(4)

In the second quarter of 2012, we contributed four properties aggregating 0.8 million square feet to this entity for $40.6 million. As this entity is consolidated, we did not record a gain on this transaction and the noncontrolling interests increased $15.7 million, which is primarily due to our partners’ investment in cash.

(5)	In 2012, we recorded additional purchase accounting adjustments of $22.7 million associated with the Merger.

(6)

At September 30, 2012 and December 31, 2011, 1,898,699 and 2,058,730 units were associated with the common limited partners in the Operating Partnership and exchangeable into an equal number of shares of the REIT’s common stock. During the nine months ended September 30, 2012, 160,031 units were exchanged for cash in the amount of $5.6 million. The majority of the outstanding limited partnership units are entitled to quarterly cash distributions equal to the quarterly distributions paid on our common stock.

11.

Long-Term Compensation

Under our incentive plans, we had stock options and full value awards (restricted stock, restricted share units (“RSUs”) and performance based shares (“PSAs”)) outstanding during 2012.

Summary of Activity

The activity for the nine months ended September 30, 2012, with respect to our stock options, was as follows:


	Options Outstanding
	Number of Options			Weighted Average Exercise Price		Options Exercisable
Balance at December 31, 2011		9,879,960		$	34.93
Exercised		(1,258,490	)		22.36
Forfeited		(302,186	)		56.70

Balance at September 30, 2012		8,319,284		$	36.04		7,733,065

The activity for the nine months ended September 30, 2012, with respect to our unvested restricted stock, was as follows:


	Number of Shares			Weighted Average Grant Date Fair Value
Balance at December 31, 2011		1,192,982
Granted		5,000
Vested		(507,465	)
Forfeited		(2,865	)

Balance at September 30, 2012		687,652		$	34.03

The activity for the nine months ended September 30, 2012, with respect to our RSU and PSA awards, was as follows:

Number of
Shares

Weighted Average
Grant-Date Fair Value

Number of
Shares Vested

Balance at December 31, 2011

1,684,713

Granted

1,609,527

Distributed

(762,777

)

Forfeited/Expired

(49,975

)

Balance at September 30, 2012

2,481,488

32.27

48,735

During the nine months ended September 30, 2012, we granted 1,570,498 RSUs, which, generally, will vest over three years. In addition, 39,029 PSAs were earned based on 2011 performance.

12.

Merger, Acquisition and Other Integration Expenses

In connection with the Merger, we have incurred significant transaction, integration, and transitional costs. These costs include investment banker advisory fees; legal, tax, accounting and valuation fees; termination and severance costs (both cash and stock based compensation awards) for terminated and transitional employees; non-capitalized system conversion costs; and other integration costs. These costs are expensed as incurred, which in some cases will be through the end of 2012. Certain of these costs were obligations of AMB and expensed prior to the closing of the Merger by AMB. At the time of the Merger, we terminated our existing credit facilities and wrote-off the remaining unamortized deferred loan

PROLOGIS, INC. AND PROLOGIS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

costs associated with such facilities, which is included as a merger expense. In addition, we have included costs associated with the acquisition of a controlling interest in PEPR in 2011, the liquidation of PEPR in 2012, as well as some costs associated with restructuring the finance organization in Europe. The following is a breakdown of the Merger and Acquisition costs incurred (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Termination, severance and transitional employee costs	$	14,757	$	11,107	$	34,294	$	45,444
Professional fees		3,718		909		12,672		42,398
Office closure, travel and other costs		2,184		667		5,607		23,012
Write-off of deferred loan costs		—		—		—		10,869

Total	$	20,659	$	12,683	$	52,573	$	121,723

13.

Earnings (Loss) Per Common Share/Unit

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

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
REIT	2012(1)			2011			2012		2011(1)
Net earnings (loss) available for common stockholders	$	(46,526	)	$	55,436		$	147,767	$	(142,651	)
Noncontrolling interest attributable to exchangeable limited partnership units		—			(485	)		935		—

Adjusted net earnings (loss) available for common stockholders	$	(46,526	)	$	54,951		$	148,702	$	(142,651	)


Weighted average common shares outstanding - Basic (2)		460,079			458,256			459,720		340,923
Incremental weighted average effect on exchange of limited partnership units		—			3,362			3,260

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