Prologis (PLD) has begun realizing value through the development and conversion of dry warehouses into data centers, including the $735 million sale of a 32-megawatt turnkey data center to HMC, UBS Securities said in a note emailed on Thursday.

The firm estimates the development cost at $320 million to $384 million, resulting in a value creation margin range of between 90% to 130% that far exceeds the margin typically seen in traditional warehouse development.

The company plans to develop 3 gigawatts of data center capacity over the next five years and a long-term vision of converting over 100 warehouses into data centers for a total capacity of 10 gigawatts, UBS added.

The firm expects that higher interest rates and fewer development completions are likely to narrow Prologis' spread between net operating income and funds from operations growth, and occupancy levels may also face pressure.

The brokerage has a buy rating on Prologis' stock with a price target of $138.

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