Prologis (PLD)

Business Overview

Prologis is a landlord charging less than its own space is worth, and that gap is most of the investment case. At the end of Q2 2026 the company put the difference between the rents in its leases and the rents those units would fetch today at about 17%, worth roughly $800 million of NOI that has not yet reached the income statement. It converts on rollover: leases signed in Q2 2026 were struck 36.9% above the expiring net effective rent, and 22.3% above on a cash basis. Prologis leases run about four years on average, which is short for commercial property, and short is an advantage when the roll goes up rather than down.

The portfolio is roughly 1.3 billion square feet owned and managed across 20 countries, though the US supplies around 84% of net operating income, with Europe and Asia most of the rest. The best assets are infill: land near ports, population centres and motorway junctions, where zoning, entitlement and land cost make a competing shed hard to build. That barrier is local rather than national. Warehouse vacancy across the US ran at 6.5% in Q2 2026 after the 2021-24 building wave, and Prologis sits at 4.5% vacant. The premium is what the locations earn, not a nationwide shortage of sheds.

Development is the second engine and the one that separates Prologis from its peers. It builds at yields on cost of about 7%, against stabilised assets that change hands nearer a 5.5% cap rate, and books the difference as value on completion. On the $1.3 billion it started in Q2 2026 the estimated margin was 32.3%, or $434 million of value created. It started $3.1 billion in the first half on its own share and guides $4.5 to $5.5 billion for the full year. Roughly three-quarters of Q2 starts were build-to-suit, meaning a tenant had already signed. Most logistics REITs live on stabilised rent alone; Prologis layers a development profit on top of it.

In August 2026 Prologis agreed terms to buy SEGRO, the largest listed European industrial landlord, in a deal valuing SEGRO at about $18.8 billion. The consideration is mostly Prologis shares, with a partial cash alternative capped near £3.5 billion, and Prologis raised about $2.1 billion in new equity days later. The deal has been recommended by SEGRO's board but is not yet completed, so the figures on this page describe Prologis as it stands today. It would be the company's largest acquisition since Duke Realty in 2022, and it would move the European weighting up sharply.

How the Economics Work

Take a single project. Prologis buys land in a market where logistics space is scarce, builds a warehouse (often pre-let to a retailer, a parcel carrier or a third-party logistics operator), and delivers it at a 7.2% yield on cost. So $100 million of spend produces $7.2 million of annual NOI. An investor buying that finished, let building would pay a cap rate near 5.5%, and $7.2 million capitalised at 5.5% is $131 million. Prologis has turned $100 million of cash into $131 million of asset, a 31% margin, which is close to the 32.3% it booked on Q2 2026 starts. The whole business sits in that gap between the yield you build at and the yield the market buys at. Widen the exit cap rate to 6% and the same building is worth $120 million, so the margin falls to 20%.

Scale turns it into a real earnings stream. Guided starts of $4.5 to $5.5 billion at a 31% margin imply $1.4 to $1.7 billion of value created in a year, spread over roughly 970 million shares and partnership units. That is about $1.45 to $1.75 per share added to NAV annually, before any rent growth at all. Treat it as an estimate rather than cash, because the margin is struck at groundbreaking on a building that will not be let for two years. What actually completed in Q2 2026 came in at a 6.3% yield and a 13.8% margin, well short of the number booked on new starts.

The rent roll does the rest. Prologis reported same-store NOI growth of 6.4% on a net effective basis and 8.5% on a cash basis in Q2 2026, and guides 5.25% to 5.75% net effective for the full year. That growth reaches FFO, which funds the dividend and part of the next round of development.

Prologis also invests alongside institutions rather than only on its own balance sheet. Total assets under management are about $240 billion, of which roughly $68 billion belongs to third parties such as the Singaporean sovereign fund GIC, which formed a $1.6 billion US build-to-suit joint venture with Prologis in March 2026. Prologis earns management fees on that outside money, plus promotes (a performance fee paid when a fund clears a return hurdle). Strategic capital revenue is guided at $660 to $680 million for 2026 and recurring fee earnings run near $274 million annualised, so this is a low single-digit share of group earnings rather than a second business. Its real value is access to capital: Prologis can originate more deals than its own balance sheet would fund, and keep a fee on the ones it hands over.

What to Watch in the Financials

Same-store NOI growth is the gauge of pricing power. Prologis posted 6.4% net effective growth in Q2 2026 and guides 5.25% to 5.75% for the full year, with cash growth running higher again at 8.5%. If net effective growth drops below 3%, demand is weakening faster than expected. Watch the quarterly trend, not just the annual number.

Development starts versus completions tells you whether the pipeline is growing or contracting. Prologis started $3.1 billion in the first half of 2026 against full-year guidance of $4.5 to $5.5 billion, with data centres targeted at around 40% of that pipeline against roughly 10% of 2025 starts. If starts fall sharply relative to completions, either customer demand is softening or the development spread has narrowed to the point where new builds do not pay.

Build-to-suit percentage is an underappreciated signal. A build-to-suit is pre-let before the ground is broken, so a high share (about three-quarters of Q2 2026 starts) means little leasing risk. If speculative starts rise as a share of the pipeline, Prologis is betting on demand that has not signed yet. That is a reasonable bet in a tight market and an expensive one in a loose market.

Occupancy by geography reveals where stress is forming. Period-end occupancy was 95.5% in Q2 2026, average 95.0%, and the company guides 95.25% to 95.75% for the year. Against a national warehouse vacancy of 6.5%, that is about two points of outperformance. If European or Asian occupancy rolls over while the US holds, that is a regional issue. If US occupancy breaks below 94%, pay attention.

Rent change on rollover, cash basis versus net effective, deserves separate scrutiny. The two figures for Q2 2026 were 22.3% and 36.9% on the same leases. Net effective averages the whole lease, including the contractual annual increases and net of any rent-free period, so it is the better measure of what a lease is worth. Cash rent change compares the first year's rent to the last year's rent on the old lease, so it is what arrives in the bank next quarter. The cash number is the one that turns into FFO soonest; the net effective number tells you what the lease is worth over its life. Both narrowing at once is the demand warning, and it usually shows before occupancy moves.

Strategic capital fees and promotes are volatile. A promote is only paid when a fund clears its return hurdle, so a poor year for values can remove the line entirely: 2026 guidance assumes net promote income of zero. Recurring management fees are the part worth capitalising.

Peer Context

Prologis trades at a premium to nearly every logistics REIT, and the peers show why the premium is mostly about diversification rather than asset quality. Rexford Industrial (REXR) owns about 50 million square feet, almost all of it Southern California infill, where new supply is close to impossible. Same-property occupancy was 95.1% at mid-2026, in line with Prologis. What separates them is the market: Southern California rents have been correcting from their 2022 peak, and Rexford's same-property NOI fell 0.5% in Q2 2026 while Prologis's rose 6.4%. Scarce land does not protect rents when the demand in that one metro turns, and one excellent market is still one market.

Terreno Realty (TRNO) buys the same sort of coastal infill property at a fraction of the size, about 20.6 million square feet, and runs it very full at 97.6% occupancy. It has no meaningful development or fund-management arm, so what you own is the property and the rent, nothing else.

Duke Realty was a Midwest-heavy industrial REIT until Prologis absorbed it in October 2022 for roughly $23 billion, adding scale in Indianapolis, Chicago and other inland logistics markets. It is fully integrated.

Comparing Prologis to these names is closer to comparing a universal bank to a regional lender. The property overlaps; the earnings do not. Prologis collects rent, books a development margin and charges fees on other people's capital, and the peers mostly do the first only. That is the case for the higher multiple. It holds only for as long as the development margin and the fee base keep growing.

Valuation Framework

The standard approach is Net Asset Value per share. Value the stabilised portfolio at a blended cap rate, with prime gateway assets near 4.5% and older secondary sheds nearer 6.5%. Discount the development pipeline for execution risk and the lag to lease-up. Subtract net debt. Divide by roughly 970 million shares and partnership units. Remember what a cap rate is while you do it: it is the price a buyer pays for a stream of NOI, not the return the owner earns.

Cap rates went the other way from the story most people remember. They compressed hard into 2021, then widened by something like 100 to 150 basis points for industrial as the 10-year Treasury moved from 1.5% to 4%, and they have stayed near those wider levels. Nareit put the implied cap rate on listed industrial REITs at 5.2% in Q1 2026. That still makes industrial the tightest major property type, so the sensitivity cuts both ways: a further 50 basis point widening on a portfolio this size takes a large bite out of NAV, and it does so faster than rent growth can fill in. That is the tail risk in any NAV built from cap rates.

For the development pipeline, run the same spread. Take each cohort of starts at a yield on cost a little below the 7.2% target, to allow for cost overruns and slow lease-up, then value the finished asset at prevailing cap rates. The present value of that gap is the pipeline's contribution to NAV, currently something like $1.45 to $1.75 per share a year. It is recurring, but only for as long as the company can keep finding land at those yields.

On the multiple, Prologis trades near 24x its 2025 core FFO of $5.81 per share and about 22x the $6.22 to $6.30 the company now guides for 2026. Industrial REITs generally trade in the high teens to low twenties on FFO, and Prologis sits at the top of that range. It has done so consistently. Whether it continues turns on the development margin, same-store growth and the data-centre build.

Key Risks Specific to Prologis

E-commerce deceleration is the macro risk. Logistics demand surged after 2020 as retailers built out fulfilment networks. If online penetration plateaus, or retailers decide they overbuilt, new leasing slows. Retention was 72.7% in Q2 2026, down from 75.8% the quarter before, and retention can fall quickly once tenants start handing space back. Third-party logistics operators, who lease space to serve someone else's contract, are usually first to cut.

New supply in non-infill markets is the local risk. Prologis's infill locations are protected by the cost and difficulty of building near a city. Secondary markets are not. When developers flooded Phoenix, Dallas and the Inland Empire after 2021, rents in those submarkets fell, and Prologis owns space in all of them. National vacancy has been improving (6.5% in Q2 2026, the first quarterly fall since 2022) because starts collapsed, but a new construction wave would show up in market rents before it showed up in Prologis's occupancy.

Interest rates hit the development pipeline through the exit, not the debt. Prologis breaks ground at a 7.2% target yield and sells or holds the finished building against whatever cap rate the market is paying two years later. If cap rates widen from 5.5% to 6% over the build, the margin on a $100 million project falls from 31% to 20%, and across a $4.5 to $5.5 billion pipeline that is roughly half a billion dollars of value that never appears. The balance sheet itself is in good shape: debt to adjusted EBITDA of 4.7x, a 3.3% weighted average interest rate, 7.9 years of average maturity and 95.7% of debt at fixed rates. It is the development margin, not the interest bill, that rates threaten.

The data centre push is execution risk of a different kind. Prologis has 5.8 gigawatts of power secured or in procurement and intends around 40% of 2026 starts to be data centres, up from roughly 10% in 2025. Warehouses and data centres share land and power access and little else: different customers, different construction, far more capital per square foot, and a tenant base concentrated in a handful of hyperscalers. If that demand moves or power costs jump, those projects will not repeat logistics margins.

The SEGRO acquisition adds deal risk on top. It is recommended but not completed, it is being paid for mostly in Prologis shares, and it makes Europe a much larger part of a business that currently earns 84% of its NOI in the US.

Multiple compression is the last risk and the one that hurts a holder fastest. At about 22x guided 2026 FFO, Prologis is priced at the top of its sector. That holds only while the development margin, same-store growth and the data-centre build all deliver. A same-store print below the 5.25% guidance floor would be enough to start the argument.

What the Screening Shows

Against the REIT Sector Primer thresholds:

• Occupancy: 95.5% period-end at Q2 2026, 95.0% average, guided to 95.25-95.75% for the year. Pass, and about two points better than the national warehouse market.
• Same-store NOI growth: Q2 2026 net effective +6.4%, cash +8.5%. Guided at 5.25-5.75% net effective for the year. Pass.
• Payout ratio: the $1.07 quarterly dividend annualises to $4.28 against guided 2026 core FFO of $6.26 at the midpoint, a payout of about 68%. There is no standard definition of AFFO, so this is measured on core FFO, which flatters it a little by ignoring recurring capital spend. Comfortable either way.
• Debt/EBITDA: 4.7x at Q2 2026, with a 3.3% weighted average rate, 7.9 years of average maturity and 95.7% fixed. Below the 5.0x screen, and very little of it reprices soon.
• P/FFO multiple: about 22x guided 2026 core FFO. Industrial trades in the high teens to low twenties and Prologis sits at the top of it. The premium is the development margin and the fee platform. This is the one line on the list that is a judgement rather than a test.

Every operating test clears, and the numbers improved through 2026 rather than drifting. What has not improved is the price: the multiple already assumes the development engine keeps running at these margins and the data-centre build works. If same-store growth comes in below the 5.25% floor, or the SEGRO deal proves harder to digest than the market expects, the argument shifts from growth to what you paid for it.