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DENVER-Property fundamentals continued to decline for ProLogis in the second quarter as the distribution REIT shed assets and debt in order to shore up its balance sheet and stay afloat during the downturn, according to second quarter results released Thursday. The distribution REIT’s FFO fell by 67% and net earnings fell 24%, with gains from the sale of assets and the early debt pay down offset by lost asset value, losses from Europe and workforce reduction.

ProLogis owns and manages approximately 475 million square feet. The company’s non-development portfolio was 92.5% leased at the end of the second quarter, representing a decline of approximately 50 basis points. In the first quarter, occupancy declined by 170 basis points. Rent growth was negative to the tune of 12.6% on turnover of 19 million square feet or 5% of the same-store pool. Same-store NOI decreased 0.4%, primarily reflecting occupancy declines that were offset by reductions in rental expenses due to decreases in property taxes and bad debt expense relative to the same 2008 period.

“Property fundamentals continue to mirror global economic weakness, characterized by reductions in market rental rates and an increase in leasing concessions,” ProLogis CEO Walter Rakowich said. “However, we are seeing some improvement, as the rate of decline in occupancies appears to be leveling off. We also continue to see strong customer retention and sharply reduced levels of new supply, with new development starts in the industry in 2009 expected to be at the lowest level in over 25 years.”

In November 2008, ProLogis outlined a series of actions to reduce direct debt by roughly $2 billion by the end of 2009 and to reduce risk in the company’s development portfolio and land bank. Through a combination of asset sales and fund contributions, a common equity offering, repurchases of debt at a discount and reductions in business expenditures, the company has reduced its direct debt by $2.9 billion. In the second quarter the company repurchased $816.2 million of notional debt at a discount, resulting in $143.3 million in gains from early extinguishment of debt. The company also extended the maturity of its $3.64-billion global senior credit facility from October 2009 to October 2010.

“Our accomplishments have put the company on much firmer financial footing,” Rakowich said. “However, the industry is facing declining rents, and we expect the challenging leasing environment will persist. Over the near term, we will continue to enhance liquidity and reduce risk as we focus on further lease-up of our development portfolio, land monetization and addressing both on-balance sheet and fund debt maturities as appropriate.”

The company’s static development portfolio (in place at December 31, 2008) was 54.1% leased at the end of the second quarter, up from 46.4% at March 31, 2009. The company says it remains confident with its goal of achieving leasing of 60- to 70% in its static development portfolio by the end of 2009.

FFO, including significant non-cash items, was $0.34 per diluted share, compared with $1.02 per diluted share in the second quarter of 2008. Excluding significant non-cash items it was $0.19 per diluted share compared with $1.02 per diluted share in the same period in 2008.

Significant non-cash items for the second quarter of 2009 included $0.35 of gains from the early extinguishment of debt that were partially offset by $0.20 related to impairment of real estate properties. Also factored in were $0.06 of non-recurring charges associated with ProLogis’ share of a loss on the sale of assets by ProLogis European Properties, realized losses on foreign currency transactions and costs associated with the company’s workforce reduction.

Net earnings for the second quarter in 2009 were $0.58 per diluted share, compared with $0.76 per diluted share in 2008. Included in net earnings were $0.46 of additional gains, primarily associated with the sale of non-development properties, which are not included in FFO, compared with $0.02 of similar gains in 2008.

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