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

Greetings, and welcome to the Prologis Third Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Justin Meng, Global Head of IR and Strategic Initiatives. Thank you. You may begin.

Thank you, operator, and good morning, everyone. Welcome to our third 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 third 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 third quarter earnings press release and supplemental. Both are available on our website at www.prologis.com. And with that, I will hand the call over to Dan.

Thank you, Justin, and good morning, everyone. The third quarter was another strong example of our business model at work. Operations were excellent. We signed 60 million square feet of leases and fully replenished our pipeline, giving us clear visibility into what our customers need. We also remained active deploying and recycling capital and are on track for $15 billion of activity this year. We reached another important milestone during the quarter. On September 28, SEGRO shareholders overwhelmingly approved the combination of Prologis and SEGRO. Following completion, we will have a 363 million (sic) [ 368 million ] square foot operating portfolio in Europe with greater scale to serve customers and a broader set of development opportunities across logistics and data centers. We appreciate the constructive engagement with the SEGRO leadership team and look forward to closing the transaction. Before Tim walks you through the quarter, I want to spend a few minutes on the current environment, especially with the recent move in interest rates and how Prologis is positioned. Operating fundamentals are healthy, and we remain constructive on the outlook. Most of our customers are operating efficiently, so incremental growth in their businesses should translate into additional space requirements. At the same time, several long-term trends continue to drive demand for logistics real estate. E-commerce, advanced manufacturing and the build-out of the data center supply chain are all critical to the modern economy. Taken together, we expect demand to remain resilient even in a higher rate environment. On the supply side, the bar for new development is going up. Construction costs are escalating, financing is more expensive and return requirements are trending higher. That makes projects harder to pencil at today's rents. All else equal, we expect fewer starts and a more favorable supply environment. That creates an attractive setup for rents. In a balanced market, logistics rents should grow above inflation over time. Today, the rents needed to justify new construction have expanded to 27% above current market levels. That leaves meaningful room for rents to grow before new supply makes economic sense. That said, the capital markets backdrop has become more challenging. We think the recent move in rates will slow transaction activity and could put some pressure on values. Our bar for allocating capital was already high. And in response, we've raised it even further. But the fundamentals of logistics real estate remains strong, and our balance sheet gives us the flexibility to invest through changing market conditions. We also have an enormous opportunity in data centers, where our land, power and development capabilities give us multiple ways to create value. Add to that, what we can do across energy and strategic capital, and we are well positioned to create value for our customers and shareholders. With that, I'll turn the call over to Tim.

Thank you, Dan. We delivered another excellent quarter with core FFO of $1.60 per share and $1.61 per share, excluding net promote expense. We ended the quarter with 95.6% occupancy, up 10 basis points from the second quarter, with average occupancy of 95.1%, also a 10 basis point increase. Rent change on rollover was 38% on a net effective basis, adding $85 million of incremental NOI. And on a cash basis, rent change was 23%. Our lease mark-to-market ended the quarter at 16%, representing approximately $780 million of embedded NOI at spot rents. This does not capture the additional upside we expect as inflation and today's elevated replacement cost rents flow through over the coming years. In aggregate, we delivered same-store NOI growth of 5.7% on a net effective basis and 5.9% on cash. Turning to capital deployment. We started $1 billion of development in the third quarter, bringing year-to-date starts to nearly $5 billion. Alongside this volume, we've been very successful replenishing strategic land positions and upholding a long runway for value creation. We own or control sites to develop the next $40 billion of logistics development with a highly capital-efficient land strategy. We acquired $950 million of real estate during the quarter at an estimated discount to replacement cost of 20%. Our disposition activity totaled $310 million, and we continue to focus on the positive IRR spread we generate between acquisitions and dispositions, which now stands at 150 basis points year-to-date. In terms of data centers, the increasing difficulty of powering and entitling sites is certainly adding scarcity value to our portfolio, particularly alongside exceptionally strong customer demand. Our pipeline currently totals 5.8 gigawatts, including 1.7 of secured power and 4.1 in advanced stages. We are engaged with customers across the pipeline with letters of intent covering approximately 1 gigawatt, much of which we expect to start in 2027. Turning to market conditions. The recovery in logistics demand continues to gain momentum. U.S. net absorption totaled 63 million square feet in the third quarter, a healthy level and consistent with what we view as normalized annual range of 230 million to 240 million square feet. This further underscores the growing improvement we've been highlighting for nearly 2 years. Market vacancy declined 10 basis points to 7.1% and market rents increased another 50 basis points, marking the third consecutive quarter of positive rent growth. Across the U.S., demand is broadening across geographies and size categories with markets such as Houston, Dallas and Atlanta continuing to lead. At the same time, conditions are improving in markets that have been slower to recover. Southern California is steadily improving. Northern New Jersey is picking up momentum, and the San Francisco Bay Area stands out for its high occupancy and strong rent growth, all creating potential for future outperformance. Consistent with prior quarters, the recovery is being led by notable strength across e-commerce, advanced manufacturing and the rapidly growing segment of customers supporting the data center supply chain. This customer segment represented approximately 10% of our new leasing globally and 17% in the U.S. this quarter. We're seeing that demand translate into meaningful activity across several U.S. markets that are geographically aligned with the data center build-out underway. Markets like Texas, Northern California, Northern Virginia, Arizona and select Midwest markets. Our current estimate is that these customers will require upwards of 150 million square feet of demand through the end of the decade for both the build-out and ongoing service of this new segment, a topic we explore in greater depth through research we plan to publish in the coming weeks. Beyond the U.S., our global platform is designed to deepen customer relationships and expand value creation opportunity, but it is also key to delivering resilient diversified operating performance. In this regard, Europe continues to show solid operating fundamentals. Market vacancy has remained low at 5.3% and market rents increased 70 basis points during the quarter, now amounting to 275 basis points year-over-year. The Netherlands, U.K., Spain and Italy remain among the stronger markets for both rents and deployment opportunities. And across Latin America, Brazil continues to lead, while Mexico is normalizing. As we saw in the U.S., even as market rents soften, Mexico's heightened lease mark-to-market is delivering strong rent change and same-store growth. Finally, in Japan, it is noteworthy that the higher rate and inflation environment is translating to growing market rents aided by declining market vacancy. Moving to capital markets. U.S. transaction volume is up 20% year-to-date. And for most of the year, risk appetite and pricing improved alongside operating fundamentals. Clearly, the market is now digesting the recent increase in Treasury yields, and we are observing a wider bid-ask spread. While investors contemplate re-underwriting exit cap rates, the corresponding reassessment for higher rents provides the potential to offset some pressure on values. We expect transaction volumes to moderate in the near term as buyers and sellers recalibrate. And while some short-term noise is likely, we believe the scarcity of high-quality assets with inflation plus growth characteristics will continue to attract global capital. Turning to a brief update on SEGRO. As Dan mentioned, we are very pleased with the progress made during the quarter, having reached agreement with the Board for a recommended deal and subsequently obtaining approval from the SEGRO shareholders. The transaction is now progressing through the required regulatory clearances, and we continue to expect it to close in the first half of 2027. We also raised $2.4 billion of common equity during the quarter, completing an important part of the transaction's consideration. Further rounding out the balance sheet, we closed on approximately $1.3 billion in debt financing at an average rate of just under 4% during the quarter. More broadly, while the abrupt shift in the interest rate environment presents challenges, we are fortunate to hold approximately 95% of our debt on a fixed rate basis with approximately 8 years of average life remaining. Our debt metrics remain in excellent shape, and our liquidity at the end of the quarter was nearly $9 billion. Turning to guidance, which I'll review in our share. First, in our operations, we are narrowing our forecast for average occupancy to a range of 95.25% to 95.50%. Our strong year-to-date performance in same-store growth is driving an increase to its range to 5.5% to 6% on a net effective basis and 7% to 7.5% on a cash basis. Strategic capital revenue, excluding promotes, is being revised to a range of $650 million to $660 million, reflecting a tempered view on asset management fees as well as the timing of some transaction-based fees. And G&A is now expected to range between $515 million to $525 million. On capital deployment, we are increasing development starts on an owned and managed basis to a range of $6 billion to $6.75 billion. This increase is driven predominantly by our expectation for a very high fourth quarter of build-to-suit starts and all of the remaining activity will be in new logistics development. In total and for the year, we expect build-to-suits to represent between 55% and 65% of the year's starts. We're increasing our acquisitions guidance to $2.1 billion to $2.3 billion and expect contributions and dispositions to range from $3.5 billion to $4.75 billion. Putting it all together, we expect net earnings to range between $4.05 and $4.15 per share, and core FFO is expected to range between $6.25 and $6.29 per share, both with and without promotes. In closing, our third quarter results confirm that our underlying business and market conditions remain strong. Demand is broad. Our portfolio is performing very well, and our land and power positions create significant opportunities for value creation. Underneath our global platform, strong balance sheet and proven team position us to respond to changing conditions and invest with discipline in the opportunities ahead. With that, I will turn the call over to the operator for your questions. Operator?

[Operator Instructions] Our first question comes from the line of Michael Goldsmith with UBS.

You've now had several straight quarters of positive rent growth. Vacancy is down to 7.1% and you're describing normalized absorption of roughly 230 million to 240 million square feet annually. At the same time, replacement cost rents are now 27% above market rents, making new supply more difficult. I think you said 1.7% of stock in the first quarter on construction. So if absorption stays around this normalized level, how quickly can vacancy tighten from here? And then when do you think that would translate into more meaningful acceleration in pricing power?

Michael, it's Chris. That's a really nice way to ask for 2027 forecast of market conditions. Let me give you a few pieces, and I'll just underline some points you're making, and then I'll let you make your own inferences. And you're right, you're right. The facts on the ground are constructive as we look into 2027, but it's just early to share a forecast. And I want to underline, it's not just in the third quarter, it's all year that net absorption has been running at 240 million square feet on an annualized basis. And as we take a sense of where demand is running today based on the proprietary data we have, so I'm looking at our pipeline and looking at our customer conversations and the progression through the pipeline, that's all very promising. And indeed, vacancies moved down from a peak of 7.5% at (sic) [ to ] 7.1%. It's on pace to go to 7% by the end of the year. So there's really nice momentum there. And the replacement cost rents do set up for above inflation growth over time. I think the detail to add that you don't have is we're already seeing it in some markets. So places like Dallas, Houston, Atlanta, Phoenix, Indianapolis, Northern California, these are all markets that are on pace to have market rent growth of 5% to 6% this year. And that's even with vacancies in the mid- to high 7s in some of these geographies all this year. So what's really made the difference for those cities is just healthy demand rather than needing vacancy to go to 3%, 4%, or 5%. And so that's -- those are some facts I would consider if I were you as I -- to make my own determination.

Our next question comes from the line of Michael Griffin with Evercore ISI.

Dan, I think you mentioned in your prepared remarks that the bar for new development is higher, but you modestly increased the development starts guidance. Just wondering how you can marry those 2 aspects? Do you think Prologis is in a better position to execute on developments given maybe a more favorable basis in your land, more efficiencies on the cost side? Just curious, any additional thoughts there as it relates to maybe the view and cost related to developments versus what seems like incremental positivity on your own starts guidance?

Yes. Well, first of all, we've had a pretty strong year of starts so far on -- in spec. This was a pretty big spec quarter actually with 80% of our starts in spec. But that being said, you heard in Tim's script, we expect to end the year at 55% to 65% of the year in build-to-suits. And so we have a very large build-to-suit pipeline. It's actually probably about 20% to 25% larger than it was at this time last year. And you know these are big lumpy deals. And so we expect to have a pretty big quarter in the fourth quarter here in build-to-suits. So that's what you're seeing come through these numbers.

Our next question comes from the line of Vikram Malhotra with Mizuho.

I guess just maybe 2 parts to it. One, can you just describe what led to the top end of occupancy guide tick down and how confident you are in kind of building occupancy over the next few months into '27? And just related to that, like as the occupancy builds, where are you seeing like sustained evidence of market rent growth that might be, say, mid-single digits?

Vikram, it's Tim. So the occupancy, I guess it is a drop technically on the midpoint. It's just really -- I see it as a tightening of the range. We had a range on both it and same-store growth. And now as we see the fourth quarter coming into focus, we can just see where it's going to land on a full year basis. And so the occupancy range on an average basis reflects that. The important output here is clearly same-store growth, which is the uptick. So the focus should be there. That's the dollars and cents of the business. We feel very good about what's implicit in that, meaning further occupancy build through the fourth quarter. We ended very strong here at the end of the third quarter. And as Dan mentioned, the pipeline is very full in terms of leasing, in particular, as we parse through an agreement stage, just how advanced a lot of deals look, we feel great about that. I'll pass to Chris on the market rent question.

Sure. So market rent, I hit many of the American markets that are enjoying that sort of mid-single digits rent growth. So that's Dallas, Houston, Atlanta, Phoenix, Indy, NorCal, and there are other Midwest markets as well. But it's also true internationally. Brazil certainly is seeing probably the best momentum globally. And then in Europe, I'd point to the Netherlands as having the best rent dynamics.

Our next question comes from the line of Tom Catherwood with U.S. Bancorp -- BTIG.

Maybe I wanted to go back to Michael's initial question about rent growth. The assets you've acquired this year have been at lower going-in cap rates than you've done historically. Given the rent growth expectations that you talked about on this call and previous calls, are you now willing to buy assets where the mark-to-market upside is further out, say, 2 to 3 years? And if so, how does that impact both the pool of acquisition opportunities that are available to you and your return expectations?

Sure. Thanks, Tom. I think the way you should think about this is our approach in any sort of deployment, capital allocation is around total return. And with the balance sheet our size and access to capital through both private vehicles and the PLD mothership, we have all sorts of opportunity to deploy where others just simply can't. And so with a large mark-to-market with the widening gap between market rents and replacement costs, we do have confidence that if we get the right discount to replacement cost, the right quality, take it through all the same filters using the same discipline that we've always used, we'll certainly find more opportunities there. What that means for the overall pool of opportunities out there, who knows? The market is digesting a lot of change in the capital markets right now. But overall, I like where we sit, and we're going to stick to the strategy we've deployed for years.

Yes. And just to build on to that, Tom, just speaking technically, the activity you see here in the quarter was driven in very large part by one such deal had a very high lease mark-to-market, and we reflect the actual cap rate, not a market cap rate in the supplemental. So you're seeing that. And as Dan just said, our ability to wait longer maybe than the average investor for those rents to come through gives us the buying advantage that we have is reflected in that discount to replacement cost this quarter as well.

Our next question comes from the line of Caitlin Burrows with Goldman Sachs.

Just a follow-up on the transaction market. So just looking at acquisition guidance having increased, but then contributions and dispositions were down. I guess, could you go through the driving factors of the revisions and why they're being revised in different directions? I know you mentioned earlier that the market may take a pause and there's some bid-ask difference spread. But yes, the impact that's having.

Yes, Caitlin, I mean, on the first part, acquisitions, a lot of it is a function of what we've now just simply done to date, and we have a narrow range for the balance of the year. We'll see if we execute on -- it could be any number within there, maybe even higher or lower than the range. It's all subject to what the market ultimately brings. I think the disposition and contribution guidance just reflects a little bit of caution in our willingness to be careful if there is some turbulence in pricing from here as the interest rate environment has been so volatile. We also know of a couple of deals that simply are pushing in terms of timing out into the new year. And next year, when we give new guidance, we'll see how that trues up.

Our next question comes from the line of Vince Tibone with Green Street.

So the weighted average stabilized cap rate on the active development projects increased about 20 basis points to 5.7% quarter-over-quarter. Just want to understand, is that 20 basis point change your initial view for changing market cap rates as a result of higher rates? Or is there something else impacting that figure on a quarter-over-quarter basis?

Well, Vince, we review the pricing and valuations on these -- on that development pool, as you can imagine, on a regular basis. And there's a same-store aspect to it, and then there's obviously ins and outs in that overall pool. But that is a reflection on what we see the terminal value of that real estate will be upon stabilization. And that being said, keep in mind, as we underwrite, we've long used, I would even say, maybe a conservative approach where we build in the appropriate cost of capital. We already build in expansion in these cap rates over time and take into account risk associated with delivering this. So is that the exact number on where values are shaking out today? Hard to say. There's just so many moving parts there.

Our next question comes from the line of John Kim with BMO Capital Markets.

On the data center front, you mentioned Letter of Intent of roughly 1 gigawatt. I think that's been fairly stable over the last few months. But can you just comment on what the constraints are to getting those leases signed? Is it securing the permitting and the power? Or is it something more on the leasing economics front?

I think every deal is a little bit different, right? The pace of power and entitlements, these are projects we've been working on for years. These negotiations with these hyperscalers, they're long in duration. And you've seen us already start over $2 billion worth of data centers this year. We've always said that this is going to be a very lumpy business. So there's not one single constraint that we're talking with confidence about delivering that 1 gigawatt right there. We're talking with confidence about delivering these 5.8 gigawatts over the next 5 years as well. So no one thing to point to. Negotiations just take a long time. These are multibillion-dollar decisions that these hyperscalers are making.