Prologis (PLD) Q3 2026 earnings call transcript

It is now my pleasure to introduce your host, Justin Mang, Global Head of an IR and Strategic Initiative. 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 gap 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 28th, Seagro shareholders overwhelmingly approved the combination of Prologis and Seagro. Following completion, we will have a 363 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 Seagro 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. Taking 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 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 remain 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 marked 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 a 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 one 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 told 63 million square feet in the third quarter, a healthy level and consistent with what we view as normalized annual range of 230 to 240 million square feet. This further underscores the growing improvement we've been highlighting for nearly two 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 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, UK, 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 spread While investors contemplate re 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 out 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 eight 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 95.5%. 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 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 to $525 million. On capital deployment, we are increasing development starts on an owned and managed basis to a range of $6 to $6.75 billion. This increase is driven predominantly by our expectation for a very high fourth quarter of build-a-suit starts, and all of the remaining activity will be in new logistics development.

In total and for the year, we expect build-a-suits to represent between 55 and 65 percent of the year's starts. We are increasing our acquisitions guidance to $2.1 billion to $2.3 billion and expect contributions and dispositions to range from $3.5 to $4.75 billion. Putting it all together, we expect net earnings to range between $405 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.

Hey, 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 our 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 move down from a peak of 7.5 at 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 sevens 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 those are some facts I would consider if I were you as I was making my own determination.

Thank you, Michael.

Yeah, well, first of all, we've had a pretty strong year of starts so far in spec. You know, 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 percent of the year in build-a-suits. And so we have a very large build-a-suit pipeline. It's actually probably about 20 to 25 percent 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-a-suits. So that's what you're seeing come through these numbers.

Thank you, Michael.

Hey, Vikram. It's Tim. So the occupancy, you know, 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 head 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 built 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 it, 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 part of the best momentum globally. And then in Europe, I'd point to the Netherlands as having the best rent dynamics.

Thank you, Vikram.

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 a 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 costs, 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's digesting a lot of change in the capital markets right now. But overall, I like what we said, and we're going to stick to the strategy we've deployed for years.

Yeah, and just to build on to that, Tom, just speaking technically, the activity you see here in the corridor was driven in very large part by one such deal. It 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 as reflected in that discount replacement cost this quarter as well.

Thank you, Tom.

Yeah, 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, you know, it could be any number within there, maybe even higher 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 and 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 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.

Thank you, Caitlin.

Well, Vince, we review the pricing and valuations 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 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 and where values are shaken out today?

Hard to say. There's just so many moving parts there. Thank you, Vince.

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. We were talking with confidence about delivering that one gigawatt right there. We're talking with confidence about delivering these 5.8 gigawatts over the next five years as well. So no one thing to point to. Negotiations just take a long time. These are multi-billion dollar decisions that these hyperscalers are making.

And I'll just underline one thing Dan just said, which is, and I guess implicit in the way you phrased the question, but just that because of starts or despite starts that we've had that are no longer LLI, we're actually refilling that LLI stage steadily as we've had these starts.

Thank you, John.

So, bottom line, Southern California is recovering consistent with what we've been talking about throughout the year. So, you know, net absorption is positive. Market occupancy is up year on year. It's risen to 93.5%. And, in fact, I'd point to Prologis being nearly 97% occupied. Now, rents are stable with progress, variable, just like you're asking, sort of with differences by submarket and product quality. So let's start in Inline Empire. That continues to be really healthy, really strong, good momentum across a range of size categories, vacancies coming in at different speeds with a strength above, say, 600,000 square feet. Los Angeles is variable by sub-market. Yes, after the South Bay, really Class A is enjoying a renaissance in the aerospace space, and that market is moving quickly.

Where we are in this cycle, what really matters is portfolio quality, location quality, and active asset management. Collagis has captured more than our fair share of the market, and this is both true nationally and Southern California with an active portfolio management approach. And so, look, stepping back, we've been consistent that Southern California is a long-term, attractive opportunity for us going back years as we've been discussing Southern California on the call. We've also been clear that we expected a cyclical recovery to emerge, and that absolutely is emerging, and it positions our portfolio to outperform in the next coming years.

The only thing I would pile on there is if you look at just the overall supply picture, I think last quarter was one of the lowest start quarters in I don't know how long, over a decade. And so the overall fundamentals are really shaking out as we've projected.

Thank you, Nick.

Hey, Nick. Yeah, your observations are clear that the turnover cost is indeed more of a mixed issue. We've got new leasing, not just in some higher rent markets, you know, that can concentrate that way, but we're also building occupancy. So in both those activities, you wind up burying a little bit more on a turnover cost front. Embedded in the free rent figure, you see, I would just highlight that it's hard for you to, or any investor, I guess, to detect, but we present that number on a trailing 12-month basis. When you unpack it, sequentially, the free rent level actually declined as a percent of lease value quarter over quarter. I not suggesting we necessarily on that downward trend in earnest yet but it is going to bounce around here We think it will decline closer to 3 over the longer term Thank you, Nick.

The best lens we have to answer that question is really just through the lens of our customers. Obviously, we're with them daily and sharing anecdotes and pulling our data, proprietary data, regularly. And what I'd say is just overall conversations continue to be very constructive. You heard the numbers from last quarter. You see the overall trend across the U. S. with net absorption numbers in the 230, 240 million square foot range. We're certainly seeing an outsized percentage of demand in the data center build-out. Some of the more interest rate-sensitive segments are a little bit slower.

I think that says something about just our business, the quality of our real estate, and the fact that we can attract this new demand driver around the data center build-out. But what I'd say is our customers, they invest in their supply chain when their businesses are growing. And the conversations, again, like I said, are very constructive. We're hearing about additional capacity they need, and that's from both just the modernization of the supply chain, that's their e-commerce growth, just a fair amount of those tailwinds. And I'd say the pipeline itself continues to replenish even after these big 60 million plus square foot quarters. So overall, we're thinking we're going to get more than our fair share of the leasing.

Thank you, Mike.

Hey, Blaine, it's Tim. Yeah, well, you answered it yourself there. We can't really speak in very much detail to the transaction overall. Beyond saying we're super excited about where things have landed over the course of the quarter, we'll now go through the regulatory steps from here. But all of that regulated process does keep us from speaking with any specificity to things like cost and revenue synergies and accretion. So I have no update for you there. But I can say this, to the thrust of your question on capitalization and interest rates, it's not news that the vast majority of the capitalization of this transaction is known and certain. It's broadly the share exchange. Thereafter, we've done an equity raise that we've tucked away for this eventual closing, and then there will be an amount of assumed debt that has interest rates that won't change.

So you can think about it that way as you wait for further guidance. I do not anticipate that inaugural guidance will include specifics on SAGRO because we don't expect it will have closed by then. That's not our expectation, and because thereafter its closing date is uncertain, it would just be too wide of a range and too confusing. But more on that to come in January and upon the eventual close.

Thank you, Blaine.

I'll start and hand it to Chris for the second and third part of your question there. But overall, the pipeline that we quote has not been impacted by moratoriums. We have a very high bar that we set before we pull any power into this and publish it. And so we feel very strongly about our ability to deliver this, as I mentioned earlier in the call. A number of these various issues you see or various moratoriums, maybe they're not necessarily moratoriums. Maybe there's just a pause while more analysis is taking place. And so it may slow a project down by a few months or a quarter or two. But we just point blank have not been impacted by any of the specific moratoriums.

And like I said earlier, 85% of that 5.8 gigawatts will be able to start by 2030. And Chris, why don't you hit?

Yeah, Dave, the 17%, so just everyone's on the same page, that's the share of new leasing in the quarter for logistics real estate that were data center supplier related. That is strengthening, to answer your question directly. These are the hyperscalers, manufacturers, distributors. These are large, well-capitalized companies signing long-term logistics real estate leases, and they're establishing a whole ecosystem of regional distribution. And they're facilitating just-in-time equipment delivery, wide assembly, and modular construction to speed these facilities to delivery.

And, you know, I'll pick up the last part just on any implications to funding. I guess I would start just by saying, you know, empirically, you know that we do not require any JV or other funding for this business. We've been happily executing on it on our own, have plenty of balance sheet capacity to continue doing so. So we're happy with what we shared last quarter where we've set up some structures that we can choose to utilize, especially as some projects may come along that could be very significant in size where it may be appropriate and also more accretive, frankly, on our equity dollars.

But heretofore, you know, we've been pretty happy to do this on our own. Thank you, Dave.

Hey, Todd, it's Tim. I'll just start on return requirements, how we're handling cost of capital. We don't know where the cost of capital is precisely. We saw the 10-year drop 20 basis points today, so it's certainly bouncing around quite a bit. But in these periods of volatility, we do put some reserve in the way we look for underwriting expectations through our investment committee process. These are periods of transition where we, you know, exercise that caution and await some kind of new equilibrium and stable environment. And everything can reset there. And the beauty about our business is we're spread investors, and we know we can create value in both our operations and our development businesses really in any yield environment.

But indeed, as things have been so volatile the last, what, six weeks in particular, we are a little more cautious in that outlook. And then when you think about the data center underwriting, data center capital markets, you know, these markets are still forming, and certainly rates matter in a big way for sure. But these values, they're not driven by one variable. And given where that overall market is, we build buffers in to these risk-adjusted returns, whether it be the ultimate terminal value, the execution risk, construction risk, supply chain risk. So we have buffers there. We're going to continue to preserve those margins, those margins that we've been quoting going all the way back to 2023.

And these deals evolve over time, and we'll adjust the returns as needed, but we feel good about the numbers that we've been quoting.

Thank you.

Well, thank you for joining us today, and thanks again to our Prologis colleagues around the world for another excellent quarter. We look forward to speaking with you all again next quarter. Thank you.