PROLOGIS, INC. 2026 Q3 Earnings Call

Greetings and welcome to the Prologis third quarter 2026 earnings conference call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. 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 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.

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. 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, SEGRO shareholders overwhelmingly approved the combination of Prologis and SEGRO. 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 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 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 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 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 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 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, U.K., Spain, and Italy remain among the stronger markets for both rents and deployment opportunities. 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.