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DENVER-ProLogis, the locally based international distribution REIT said Thursday that its second quarter funds from operations fell 8.6% due to lower development and disposition income, and that growth in its investment management business helped shore up the results. A merchant builder and manager for its own fund business and select third parties, the public company says weakness in the US and Great Britain has had it focusing its growth outside those two markets.

“While there is a greater degree of market uncertainty in the United States and the United Kingdom, over 87 percent of our development starts year to date are in markets outside these countries,” ProLogis CIO Ted R. Antenucci said in a statement.

FFO was $1.06 per share in Q2 2008, down from $1.16 in Q2 2007, but came in slightly above analysts’ consensus estimate. Profit for the quarter was $0.80 per share, compared with $1.50 in Q2 2007. The difference is due to $0.56 in gains from the disposition of properties that are not included in FFO, in Q2 2007 compared to $0.02 of similar gains in Q2 2008.

Through the first half of the year, FFO was $2.44 per share, up from $2.41 through the first half of 2007. Profit was $1.53 per share, compared with $2.39 tough the first half of 2007, due to the aforementioned gains from dispositions not included in FFO.

As for property-level performance, the company posted gains in same-store NOI and rental rates in Q2 2008, although not as much as the same year-earlier period. Same-store NOI grew by 1.62% in Q2 2008, down from 6.16% in Q2 2007, while rental rates grew by 3.06% in Q2 2008, down from 8.25% in Q2 2007.

The gains were offset by an overall drop in occupancy. Occupancy in its stabilized portfolio worldwide, which totals 456.2 million sf, was 94.23% at the end of June, down 133 basis points from 95.56% at the start of the year. Occupancy in its stabilized US portfolio, which totals 320.8 million sf, fell to 94.35% in Q2 2007 from 95.86% at the start of the year. Occupancy in its 95.5 million-sf stabilized European portfolio rose slightly, to 93.15% from 93.0%.

Occupancy in its 39.9 million-sf portfolio of stabilized properties in Asia took the biggest hit, dropping to 95.82% in Q2 2008 from 99.08% at the start of the year. When un-stabilized properties are included, its total mid-year portfolio grows to 487.2 million sf and its occupancy falls to 90.2%, down from 91.48% at the start of the year.

“Throughout Asia and Central Europe, growing domestic consumption, exports and the lack of modern distribution space continue to support strong demand,” ProLogis chairman/chief executive Jeffrey Schwartz said in a statement. “Operating property fundamentals held up well, despite a difficult financial environment, and further signs of moderating demand for industrial space in the United States and the United Kingdom.

Overall net absorption for all distribution space in the top 30 North American logistics markets declined to roughly 10.8 million sf, and occupancy in these 30 markets decreased to 91.5% from 92.1% at March 31, 2008, according to ProLogis.

“Development margins are moving toward more normalized levels, reflecting our sustainable expectations for the business,” Schwartz said. “New supply and the potential for overbuilding have been significantly reduced by the return to historic margin levels and continued capacity constraints in the debt markets. Ultimately, we believe these factors will result in healthier market conditions, and those companies with access to capital will be well positioned to capture opportunities.”

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