Prologis (NYSE:PLD) reported third-quarter core funds from operations of $1.60 per share, or $1.61 excluding net promote expense, as the logistics real estate company cited rising occupancy, strong leasing activity and continued demand from e-commerce, advanced manufacturing and data center-related customers.
Chief Executive Officer Dan Letter said the company signed 60 million square feet of leases during the quarter and replenished its pipeline. Prologis also remained active in capital deployment and recycling and is on track for $15 billion of activity for the year, he said.
“Operating fundamentals are healthy, and we remain constructive on the outlook,” Letter said. He added that higher construction costs, financing costs and return requirements are making new development more difficult to justify at current rents, potentially creating a more favorable supply environment.
Occupancy, Rent Growth and Embedded NOI
Prologis ended the quarter with 95.6% occupancy, up 10 basis points from the second quarter. Average occupancy was 95.1%, also an increase of 10 basis points.
Rent change on rollover was 38% on a net-effective basis, contributing $85 million of incremental net operating income. On a cash basis, rent change was 23%. The company’s lease mark-to-market stood at 16%, representing about $780 million of embedded NOI at spot rents, according to Chief Financial Officer Tim Arndt.
Same-store NOI increased 5.7% on a net-effective basis and 5.9% on a cash basis. Arndt said the embedded mark-to-market figure does not include additional potential upside from inflation and elevated replacement-cost rents over coming years.
Management said rents required to justify new construction are now 27% above current market levels. Managing Director Chris Caton said the setup supports above-inflation rent growth over time, while noting it was too early to provide a 2027 market forecast.
U.S. net absorption totaled 63 million square feet in the third quarter, which the company said was consistent with a normalized annual range of 230 million to 240 million square feet. Market vacancy declined 10 basis points to 7.1%, while market rents increased 50 basis points for a third consecutive quarter of positive growth.
Caton identified Dallas, Houston, Atlanta, Phoenix, Indianapolis and Northern California among markets projected to record 5% to 6% rent growth this year. Internationally, he said Brazil showed the strongest global momentum, while the Netherlands had the best rent dynamics in Europe.
Development, Acquisitions and Capital Markets
Prologis started $1 billion of development during the quarter, bringing year-to-date starts to nearly $5 billion. The company said it owns or controls sites supporting the next $40 billion of logistics development.
The company acquired $950 million of real estate in the quarter at an estimated 20% discount to replacement cost and disposed of $310 million of properties. The year-to-date spread between acquisition and disposition internal rates of return was 150 basis points, Arndt said.
Letter said Prologis evaluates deployment based on total return and believes its balance sheet and access to both private-vehicle and corporate capital provide flexibility that some competitors lack. Arndt noted that a significant portion of quarterly acquisition activity came from one transaction with a high lease mark-to-market.
Management acknowledged that a recent increase in Treasury yields has widened the bid-ask spread in transaction markets. Arndt said the company expects transaction volumes to moderate as buyers and sellers recalibrate, while its reduced contribution and disposition guidance also reflects caution over potential pricing turbulence and the timing of certain transactions moving into the new year.
Prologis raised $2.4 billion of common equity during the quarter and completed about $1.3 billion of debt financing at an average rate just below 4%. Approximately 95% of its debt is fixed rate, with an average remaining life of roughly eight years. Liquidity totaled nearly $9 billion at quarter-end.
Data Centers and SEGRO Transaction
Management highlighted data centers as a major growth opportunity. Prologis’ data center pipeline totals 5.8 gigawatts, including 1.7 gigawatts of secured power and 4.1 gigawatts in advanced stages. Letters of intent cover about 1 gigawatt, much of which the company expects to start in 2027.
Letter said the company had already started more than $2 billion of data center projects this year and characterized the business as lumpy because of the size and complexity of hyperscaler decisions. He said the reported pipeline has not been affected by data center moratoriums and that 85% of the 5.8-gigawatt pipeline could start by 2030.
Data center supply-chain customers represented about 10% of Prologis’ global new leasing and 17% of U.S. new leasing during the quarter. The company estimates those customers could require more than 150 million square feet through the end of the decade for data center construction and ongoing service needs.
Prologis also said SEGRO shareholders approved the planned combination on Sept. 28. The transaction is proceeding through regulatory clearances and is still expected to close in the first half of 2027. Following completion, Prologis expects to have a 363 million-square-foot operating portfolio in Europe. Arndt said the company does not expect its initial 2027 guidance to include specific SEGRO impacts because the closing date remains uncertain.
Updated Outlook
For the full year, Prologis narrowed its average occupancy outlook to 95.25% to 95.5%. It raised its same-store NOI growth forecast to 5.5% to 6% on a net-effective basis and 7% to 7.5% on a cash basis.
- Development starts are now expected to total $6 billion to $6.75 billion on an owned and managed basis.
- Acquisition guidance increased to $2.1 billion to $2.3 billion.
- Contributions and dispositions are projected at $3.5 billion to $4.75 billion.
- Strategic capital revenue, excluding promotes, is forecast at $650 million to $660 million.
- Net earnings are expected to range from $4.05 to $4.15 per share.
- Core FFO is expected to range from $6.25 to $6.29 per share, both with and without promotes.
Letter said the increased development-start outlook is largely tied to an expected high volume of fourth-quarter build-to-suit activity. Build-to-suit projects are expected to account for 55% to 65% of annual starts.
About Prologis (NYSE:PLD)
Prologis, Inc (NYSE: PLD) is a global logistics real estate company that owns, develops, acquires and manages distribution facilities, warehouses and other properties used throughout the supply chain. Its portfolio serves manufacturers, retailers, transportation providers and third-party logistics companies.
The company provides logistics real estate and related services in key markets across North America, Europe, Asia and Latin America. Its properties are generally located near major population centers, transportation hubs, ports and trade corridors, supporting e-commerce, industrial and distribution operations.
Prologis traces its roots to 1983 and was created in its current form through the 1999 merger of ProLogis and Security Capital Industrial Trust.
