Prologis, Inc. (PLD) Earnings Call Transcript & Summary

Greetings, and welcome to the Prologis Q2 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference also is being recorded. It is now my pleasure to introduce Justin Meng, Senior Vice President, Head of Investor Relations. Thank you. You may begin. .

Thank you, operator, and good morning, everyone. Welcome to our second quarter 2026 earnings conference call. Joining us today are Dan Letter, CEO; Tim Arndt, CFO; and Chris Caton, Managing Director. I'd like to note that this call will contain forward-looking statements within the meaning of the federal securities laws, including statements regarding our outlook, expectations and future performance. These statements are based on current assumptions and are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings and second quarter earnings press release for a discussion of these risks. We undertake no obligation to update any forward-looking statements. Additionally, during this call, we will discuss certain financial measures such as FFO and EBITDA that are non-GAAP. And in accordance with Reg G, we have provided a reconciliation to the most directly comparable GAAP measures in our second quarter earnings press release and supplemental. Both are available on our website at www.prologis.com. I'd also note that in connection with the company's possible offer for Sabre under the U.K. Takeover Code, for regulatory reasons, we will not take or respond to any questions directly or indirectly related to Zebra or the possible offer. And with that, I will hand the call over to Dan.

Thank you, Justin, and good morning, everyone. Thank you for joining us today. As we look across the business, it's clear we're entering the next phase of growth where logistics, data centers and energy increasingly reinforce one another. We delivered another exceptional quarter, driven by strengthening demand, disciplined execution and the expanding capabilities of our platform. As a result, we're raising our outlook for the year. We signed a record 67 million square feet of leases during the quarter and after several quarters of sustained demand, we believe the market is entering its next phase. We're putting that demand to work through disciplined investment. Our 14,000 acre land bank represents 240 million square feet of embedded development opportunity. That gives us the flexibility to meet customer demand while creating value through development. During the quarter, we started $1.6 billion of new projects. Our logistics platform is creating opportunities well beyond warehouse development, the same land, customer relationships and operating capabilities that have made us the leader in logistics are enabling our data center and energy businesses, creating 2 additional long-term growth opportunities for Prologis. Our power pipeline has expanded to approximately 5.8 gigawatts representing about $17 billion of powered shell investment potential or up to $87 billion on a turnkey basis. While this opportunity has been years in the making, we believe we're still in the early innings. Importantly, the projects in our current power pipeline represent less than 1% of our global portfolio, underscoring the runway ahead. We're also seeing customers increasingly look to Prologis for more than real estate. They're looking for integrated solutions across logistics, energy and warehouse operations. Our scale and long-standing customer relationships give us a unique view into how their businesses are evolving. That insight helps us anticipate demand, shape our development pipeline and stay ahead of the market. Finally, we continue to execute on our strategic capital strategy. During the quarter, we closed our $1.2 billion European joint venture with La case, further expanding that long-standing relationship and reflecting strong demand for high-quality logistics assets. Prologis remains the partner of choice for investors seeking scale, execution and access to the highest quality logistics portfolio in the world. Taken together, these results reinforce the strength of our platform and the opportunities in front of us. We're confident in where the business is headed and remain focused on creating long-term value for our shareholders. With that, I'll turn the call over to Tim.

Thank you, Dan. We delivered an excellent quarter with core FFO of $1.63 per share, including net promote income and $1.60 per share without, each ahead of our expectations. We generated $83 million of promote revenue in the quarter, driven by outperformance from 3 vehicles, underscoring the performance-driven nature within our strategic capital business. We ended the quarter with 95.5% occupancy, a 20 basis point improvement over the first quarter. Rent change on rollover exceeded 36% on a net effective basis, realizing $16 million of incremental NOI and rent change on a cash basis was 22%. Notably, our portfolio lease mark-to-market remained unchanged from the prior quarter at 17% on a net effective basis, fully replenishing our embedded NOI opportunity of nearly $800 million available without any further market rent growth. . In the end, we delivered same-store NOI growth for the quarter of 6.4% on a net effective basis and 8.5% on cash. Overall, these results continue to demonstrate the strength of a global platform in a portfolio highly curated to outperform. Turning to capital deployment. As Dan mentioned, we started over $1.6 billion in new development during the quarter including approximately $800 million in logistics properties. As market conditions continue to strengthen, our starts and logistics have spanned our global footprint, representing markets such as San Francisco, Vancouver, the U.K., Milan, Berlin and Chennai, all were demand and rents for modern, well-located warehouse facilities support new development. We acquired $1.8 billion of real estate during the quarter at an estimated discount to replacement cost of approximately 20%, executing on our strategy to go deeper within our existing markets. This allows us to leverage our teams, infrastructure, data and customer relationships to drive scale and operational outperformance. Our disposition activity totaled $800 million during the quarter. Stepping back, the underwritten IRRs on our acquisitions have exceeded the IRRs on our dispositions by 140 basis points year-to-date, achieving both ongoing portfolio optimization while enhancing long-term returns. And finally, contributions totaled $500 million for the quarter, demonstrating continued execution of our business model, which crystallizes value creation, recycles capital and grows AUM and revenues within our strategic capital business. As an update on data centers, we had an exceptional quarter with advancement of our priorities in every facet of this growing business. We started a 260-megawatt build-to-suit campus with total expected investment of approximately $800 million. Our year-to-date data center starts now totaled $2.1 billion, exceeding our full year guidance. We now commenced nearly $4 billion of data center development, all build-to-suit for the highest quality digital infrastructure customers with more than 50% of this capital invested in turnkey projects. During the quarter, we also completed a 100-megawatt power land sale, generating an 82% margin and illustrating our disciplined approach to maximizing risk-adjusted returns by monetizing projects at the stage where we see the greatest profit margin. And lastly, we expanded our power pipeline to approximately 5.8 gigawatts, which has now more than doubled over the past 2 years. Approximately 85% of this pipeline is positioned to support development starts through 2030. The breadth of this activity demonstrates that our data center business is driven by an integrated platform that consistently originates, develops and realizes value. We see over 10 gigawatts of development opportunity over the next 10 years. Turning to our market conditions. As we've been discussing for over a year, the market has been working through the stages of inflection, and we see overall conditions now geared for growth. U.S. net absorption totaled 66 million square feet in the second quarter, a strong result and the highest level since 2022. This contributed to vacancy declining to 7.2%, while market rents increased approximately 70 basis points. Customer demand is broadening with notable and growing strength across e-commerce, advanced manufacturing and increasingly customers supporting the build-out of digital infrastructure. Our research estimates that each $1 trillion of data center CapEx will generate 30 million to 40 million square feet of incremental logistics demand creating a durable multiyear source of growth. Alongside these secular additions, demand from our largest segment, basic daily needs and the logistics that support them remains healthy. Taken together, these trends reinforce our view that the market has transitioned into its next phase of growth with additional upside potential when cyclical sectors such as housing, autos and furnishings recover towards their historical levels. Europe has been ahead of the U.S. with its market recovery now nearly 12 months in the making. Demand remains robust and vacancy has been stable and relatively tight at 5.2%. This has been translating to rent growth, which increased approximately 60 basis points during the quarter and 160 basis points from the trough last year. Finally, we are seeing the strength across all size categories. Large-format space remains in tight supply, creating upward pressure on rents and adding depth to our build-to-suit pipeline. We have very limited availability in spaces larger than 500,000 square feet and no availability whatsoever in spaces larger than 1 million square feet. At the same time, occupancy is improving across smaller units in nearly all of our markets. Moving to the capital markets. Sentiment towards logistics real estate continues to lead other property types, supported by improving operating fundamentals. Transaction volumes are increasing year-over-year with broader buyer participation across our target markets, though capital remains selective with a clear preference for high-quality, well-located assets. Appraised values across our strategic capital platform increased approximately 1% quarter-over-quarter. Market cap rates remain around 5% with in-place cap rates in the mid-4s and unlevered IRR stable in the mid-7s. And turning to the balance sheet. During the quarter, we completed approximately $3.4 billion of financing activity, accessing capital across the U.S., Europe and Asia in multiple currencies. Our debt-to-EBITDA ratio ended the quarter at 4.7x, building tremendous borrowing capacity, especially when considering the scale of our balance sheet. And now turning to guidance, which I'll review at our share. We are raising our outlook to reflect the strength of our operating performance and continued visibility into earnings growth. We are increasing our forecast for average occupancy to a range of 95.25% to 95.75%. This increase, together with our second quarter outperformance drives our expectation for net effective same-store growth of 5.25% to 5.75% and cash same-store growth of 6.75% to 7.25%. Strategic capital revenue, excluding promotes, remains unchanged at $660 million to $680 million, while net promote income is now expected to be flat on the year. G&A is expected to remain in the range of $510 million to $525 million. We are increasing development starts and this on an own and managed basis to a range of $5.5 billion to $6.5 billion, reflecting strong demand and expanding opportunities. This incorporates the $2.1 billion of data center starts in the first half. We are also increasing acquisitions to $1.5 billion to $2 billion and expect contributions and dispositions to range from $4.25 billion to $5.25 billion, consistent with our strategy of recycling capital and optimizing portfolio returns. Putting it all together, we are raising our net earnings guidance to $4.40 to $4.55 per share. Core FFO is now expected to range between $6.22 and $6.30 per share, including and excluding promotes, representing a 100 basis point increase at the midpoint of our prior guidance. In closing, we believe the business is exceptionally well positioned. We are executing across every part of our platform from operations and development to strategic capital data centers and energy at a time that market conditions continue to improve. Occupier and investor demand is broadening. Rent growth is reaccelerating and our customers continue to turn to us for increasingly integrated solutions. Combined with the strength of our balance sheet and the scale of our platform, we believe these trends position Prologis to continue creating value today while extending our long-term growth opportunity. And with that, I will turn the call back over to Dan.

Thanks, Tim. As Justin said, we're not going to take questions on Sabre for regulatory reasons. What I would say is this, we've been very consistent over time in how we think about M&A. The bar is high, it has to be the right asset and it has to be the right strategic fit, and we'll always be disciplined on price. On Sgro specifically, we put forward a very compelling proposal. It offers a meaningful premium to where the stock has traded and values the business above its stated NTA. As importantly, it gives Sgro shareholders the opportunity to participate in the upside of a stronger combined company and the value of the Prologis enterprise and everything it offers should not be overlooked. Beyond that, there's not much more we can say today. We'll stay disciplined and if and when there's something to share, we'll share it. Operator, we're ready for questions.

[Operator Instructions] Our first question comes from Tom Catherwood with BTIG.

Maybe, Tim, the blue sky scenario for logistics real estate that you'd always talked about really seems to be playing out. And this quarter specifically, record leasing again and customer retention started coming down, which is usually a sign of pushing rents. So our question is, how much market rent growth is needed for your embedded mark-to-market to start expanding again? I know it's stabilized this quarter. And is your portfolio ahead of the curve in any way such that you're able to capture higher rents before your competitors in a given market? .

Tom, well, first off, I appreciate you acknowledging the realization of the call that we've been, I think, in a silver way, just predicting over the last really 6 quarters now. It's been a really steady level of improvement in execution, and we're as pleased as anybody to see the market also coming along. In terms of seeing an expansion of the lease mark-to-market from here, one, I'll just underline again, this was an interesting quarter to see it fully level out. Now that's not necessarily something to expect. We know that, that number will come down. We've talked about that many over time -- many times in the past, it should normalize at some point in the future in a run rate in the low-double-digit kind of range. But the specific answer to your question is if we see market rents achieve a growth level that exceeds rent change in any given year by role, right? That's just going to be the math of when we would then turn to see it expand again. And we would hold out the possibility that, that could occur, especially when we look at not just the standing lease mark-to-market that we have, but when we evaluate replacement cost rents as well, which you know are very favorable.

And then I'll just pile on as you also asked around the Prologis portfolio. I think what you should look at is just the continued outperformance in occupancy and you're seeing us just take more and more market share every quarter.

Your next question comes from Michael Griffin with Evercore ISI.

Maybe just going back to sort of leasing demand of the portfolio broadly. Can you give us a sense in your conversations with customers? Is this more kind of pent-up demand, maybe customers have been dragging their feet over the past couple of quarters, realized that inventory is getting tighter, they needed to execute on some of these leases? Or are you seeing maybe newer customers you weren't expecting start to enter the market given what seems like maybe more certainty around kind of their business needs or demand for logistics real estate.

Thanks, Michael. Let me get started and then I'm going to hand it over to Chris. I think the headline here, again, is really 2 numbers. We signed 67 million square feet of leases in the second quarter here. That's our fourth record in the past 7 quarters. We also saw 66 million square feet of net absorption across the United States. We've also seen our pipeline. We've talked a lot about our pipeline over the last couple of years to have that level of leasing and the replenishment of the pipeline rolling where it is. It just shows where this trend is. You put that together, the tone of the customer conversations continues to improve. We started talking about them making decisions a few quarters ago. Companies are very focused on growth. They're investing in their supply chains. They're making these longer-term decisions. You've heard us talk about our big box availability. We have only a few -- just a small handful of buildings over 500,000 square feet and our 1.3 billion square foot portfolio that are available. And we're actually seeing that now migrate into the midsize and smaller spaces as well. So all very positive. And Chris, would you want to give some more color there?

Yes. In terms of the rationale for growth, let's look at some of the industries that are driving the growth. We have 3 or 4 points here. Number 1 is e-commerce. And -- this is not just 1 company or 1 geography. It's international in nature. It's a range of size category. So e-commerce is for sure driving growth. Second is broadly advanced manufacturing, whether it's data center construction support, whether it's defense, whether it's the semiconductor space, that's a growth driver. And then Dan touched on supply chain reconfiguration. Companies are just getting more comfortable investing in their supply chains, competing and winning for revenues. And then there are categories that reflect growth opportunities in the future that are under -- sort of under punching their weight, broadly, housing comes to mind. So whether it's construction materials or the furniture or appliance space, -- this is roughly 1/4 of our customers that are just not on their front foot quite yet but represent a growth opportunity.

Your next question comes from Jon Peterson with Jefferies.

I just want to make sure I understand the development start guidance correctly. So you increased it by about $1 billion that matches the data center development starts this year. So I guess if we just think about the difference between what you started year-to-date, and getting to guidance. Does that mostly imply warehouses? And anything you do on data centers is upside to that? Or I guess, how are you baking in data center starts into the guidance? And then also, maybe just can you talk to us about like a maximum number of starts you think you can do in a year, given your strong balance sheet?

Jon, I want to be sure I understand your question. Yes, we took up the overall starts guidance meaningfully. Last quarter, if you unpack to the components of our guidance, it had predicted $2 billion of data center starts, which we have now achieved. So yes, the uplift, I think you're trying to infer is that coming from logistics, that would be correct.

And when you see the improving market fundamentals across so many of our markets, we're talking over 2 dozen markets that we could see spec this year where the rents have caught up -- and so that's really great momentum. And also the build-to pipeline continues to increase. It's up about 10%, 12% quarter-over-quarter. So a lot of momentum on the logistics side.

Next question comes from Vikram Malhotra with Mizuho. .

I just want to clarify, I guess, 2 things. One, can you just specifically give us what was the market rent growth in the U.S. in the quarter and your expectation and then do you mind just updating us on your latest net absorption view given the uptick you mentioned in 2Q, like what are you anticipating for the year?

So let's start with the market fundamentals and then jump into the rent growth dynamic. I want to be clear, we're upgrading our view on market fundamentals. And really, this is a natural progression of the view that we've held over the course of the last, like Tim described 6 quarters. We're moving through this inflection phase that we've been talking about and a broader recovery is taking hold. Market rents and occupancies have stabilized and begun to grow again. The specific numbers you're looking for net absorption, we see that amounting to 220 million square feet in the U.S. this year. And it's all the things Dan described as it relates to the dialogue we're having with customers, our pipeline and the breadth across markets and sizes. For completions, we anticipate 195 million square feet this year, and that should allow market occupancies to rise a total of, let's say, 30 basis points this year. So putting it together, the markets are entering a new phase of growth, and it sets us up to see more consistent and sustained rent growth going forward as the occupational recovery emerges. In terms of rent growth, in the quarter, the United States was 70 basis points. It was -- and we're thinking -- we're not thinking we're anticipating that growth has the position to become more consistent going forward as this operational recovery becomes more broad-based, we could see inflation plus style growth emerge over time. given where market rents are relative to replacement costs.

Your next question comes from Michael Goldsmith with UBS.

Can you provide an update on the Southern California market? It looks like lease percentage picked up 110 basis points sequentially above the overall average of 30 basis points in the U.S. So can you just talk about the pace of recovery of that market relative to the rest of the portfolio.

Michael, it's Chris. Yes, good call out. Southern California also bottomed and is moving towards early recovery. We've talked about these 3 phases of an inflection phase. So let's hit those real quick demand that's become more consistent and broad-based across customers, across submarkets, across sizes. Net absorption in the quarter in Southern California amounted to 9 million square feet, led by the Inland Empire. But we also saw a vacancy inflection across the marketplace. Vacancies were down 30 basis points quarter-on-quarter and are now below 7% in that geography. Market rents are stable with some notable increases in a few pockets occurring this year. So bottom line, Southern California is early in the recovery, but the cycle advanced this quarter just as you're asking, Now looking forward, barriers to supply, both at the municipal and at the state level should help accelerate the recovery as conditions firm.

And let me just pile on there. Tim mentioned earlier about us delivering this forecast over the last several quarters as to what was going to happen in the market. We look at the overall broader market, we talked about this inflection period. We now see these numbers. We see that inflection in the rearview mirror. And we've also been talking over the last several quarters about Southern California following that by 2 or 3 quarters. We'll hear you have it. It's playing out as we had suggested. And then I would just pile on when it comes to our outperformance, I think you need to take into consideration the quality of our portfolio, the location of our portfolio and why you see that recovery show up in our numbers.

Your next question comes from Caitlin Burrows with Goldman Sachs.

Maybe a follow-up from earlier on the development side. So it sounds like you're expecting $2 billion of industrial starts in the second half. Can you talk about the appetite for build-to-suit versus spec at this point? It sounds like it's both. And to the extent there's more spec included, what's your take on the rest of the market? Is it just Prologis picking up spec developments? Or is it the industry as a whole?

What I would say is, again, just to reiterate, we're seeing market improvement across many markets. And so you'll see more spec from us. The build-to-suit pipeline is growing. Build-to-suits are binary, right? These are -- they take several quarters often to come to fruition. And so -- and then we always have to look back and see where that percentage shakes out. And it's usually somewhere between 40% and 50% of the overall volume. I feel very good about that build-to-suit volume and just where our customers are. And just the fact that there are so few large-format buildings available. And then when you have 14,000 acres of land and 240 million square feet of opportunities, it really plays out well for us.

Your next question comes from Vince Tibone with Green Street. .

I wanted to follow up on the comment that you think of the current 5.8 gigawatt data center power pipeline could be started through 2030, which I think is the first time you shared that time line. I just want to get a sense of how we should think about kind of the mix of powered shell versus turnkey data centers going forward just to help kind of narrow down a reasonable range of the potential capital investment here? Because obviously, it's a huge swing factors you outlined depending if it's all one versus the other.

Yes. It is a wide range for sure. The numbers that I quoted in the script from $17 billion to $87 billion worth of opportunity. The number will shake out somewhere in between those 2 numbers. That's all I can tell you. We'd like to say we want to do turnkey for all of these because it's a better situation for us and our whatever vehicle or whatever -- however we capitalize this business. But the reality is this is a customer-led business. And we're going to deliver what our customers. We've delivered turnkey and we've delivered powered shell. You saw us actually sell Howard land this last quarter as well because the risk-adjusted return at that point was so attractive to us to not have to spend any more capital yet to get an 82% margin on that so significant. So really hard to peg where it is, but you see where our mix has been so far. And much like build-to-suits, it's hard to see where those shake out, but it's going to be somewhere in the middle there.

Your next question comes from John Kim with BMO Capital Markets.

It's Eric on for John. I was just hoping you could provide some more detail on the 160 basis point decline in development yield starts quarter-over-quarter. Is that primarily a function of deal mix? Or are you seeing changes in pricing due to increased competition?

That is entirely mix. I think you just need to look at the overall development book over time to really track what that is. But it's really just a mix and it can be lumpy quarter-by-quarter.

I might pile on there and just highlight as well the margin is what best contextualizes that mix then together with our expectations on stabilized cap rates and that looks very strong in the quarter, clearly.