Public Storage (PSA) Q2 2013 Earnings Report, Transcript and Summary

Good afternoon. My name is Jackie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Public Storage Second Quarter 2013 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Clem Teng. Mr. Teng, please go ahead.

Good morning. Thank you, Jackie. Thank you, all, for joining us this morning for our second quarter earnings call. Here with me today are Ron Havner and John Reyes. As a reminder, all statements other than statements of historical facts included in this conference call are forward-looking statements, subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected in these statements. These risks and other factors that could adversely affect our business and future results are described in today's earnings press release and in our reports filed with the SEC. All forward-looking statements speak only as of August 2, 2013, and we assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A reconciliation to GAAP of the non-GAAP financial measures we are providing on this call is included in our earnings press release. You can find our press release, SEC reports and audio webcast replay of this conference call on our website at www.publicstorage.com. I'll turn the call over to Ron.

Thank you, Clem. We put out our press release last night. I think we had a pretty good quarter. So we're just going to open it up for questions right away here. So operator, let's tee up the first question.

[Operator Instructions] Our first question comes from the line of Christy McElroy with UBS.

John, on last quarter's call, you talked at length about the difficulty of achieving occupancy above the 93% level at -- within the portfolio because of the 7% churn per month that causes frictional vacancy of 6% to 7%. Here, you sit 3 months later at 95% occupancy. You also changed up your strategy through the winter where you offered some different promotions like the 50% off rent deals that you could boost occupancy in the seasonally slow quarters, and then -- so I actually have 2 questions about all of that. Have you changed your views around frictional occupancy for your portfolio? And then the second question is have you tried to jack up the rents back to market on those 50% off customers? And how did that impact move-outs in Q2?

I guess, first, Christy, I was wrong in what I had said about frictional occupancy and our difficulties getting beyond the 93% occupancy because, obviously, we did that. So I stand corrected. We're able to do that. It was mostly done because demand was exceptionally strong, notwithstanding the fact that we kept our rent -- rates were a little bit higher but not much higher, but we significantly reduced our discounting during the second quarter. But fortunately, for us, demand continued to press into the system, and we continued to gain occupancy throughout the quarter. So -- but I do think though that over the course of a full year, I would not expect us to maintain occupancy levels of 95% through the remainder of the year. That, I think, is just not, not likely. In terms of churn and the promotional -- the 50% off thing promotions that we were doing. We have done those, as you've mentioned. We did it during the winter. We also did it during -- around the Memorial Day timeframe, which does help boost demand for our product and occupancy. We like doing that because it -- notwithstanding the fact that you're giving away 50% of the rent, we make -- more than make up with -- for it with improved demand coming into the system. Not only is that demand sufficient to offset the reduction in the rate, but that demand is also customers that typically stay here longer because they're not -- their rates are low. They're not -- and we also turn off the dollar for those folks, and they typically stay here longer, which gives us another pool of customers who eventually increase their rates in the future because, remember, it's month-to-month lease, and we're just giving 50% off. It's not 50% off for a year. It's not 50% off for a month. It's 50% off until we decide to raise their rents.

Just to follow-up on that. Can you quantify the year-over-year change in discounts? You mentioned they were down significantly, and then also, if you can talk about the...

In terms of percentage, year-over-year percentage change, they were down about 13% during the quarter.

And do you also have the year-over-year percentage change in move-ins and move-outs just to get a sense for traffic?

Yes, move-ins were about flat, with -- and I'll tell you what the move-in rates were. The move-in rates were roughly about 1.5% higher. Move-outs were down about 0.7%.

Christy, I would just add that John and his team did the pricing and marketing strategies, but our field operations people did a great job this quarter executing. So you don't get to 95% without great execution in the field.

Your next question comes from the line of Jordan Sadler with KeyBanc.

A couple of questions, a similar line on the occupancy. What percent are now considered your long-term customers, and is that one of the drivers here?

Yes, Jordan, our customers greater than a year. Here, let's see, they were -- the pool of those was up 5,000 for year-over-year. So we're at just about 60% -- 55%, 55% in the pool greater than a year. Not much changed in the percentage, but the number of customers has gone up because the overall occupancy of the portfolio has gone up.

Okay, okay, you maintained the ratio. In terms of customer acquisition costs, I think last quarter, you mentioned $2 versus $31 in 1Q, did that actually go negative this quarter or what happened?

Yes, actually, net-net, Jordan, between initial rate and all that, we actually went positive. So our net acquisition cost was $28 positive per customer, and that's due to -- we were able to reduce our acquisition cost by about $7 million, and hold volumes constant or up slightly, as John mentioned earlier. Hold rate, up about 1%, 1.2%. Net-net, we actually went positive, which is the first time I've only got like the last 3, 4 years of data, but that's the first time in the last 4 years we've been positive.

Do you happen to know what it was 2Q of '12?

Q2 of 2012, yes, it was negative 24%.

24%? Okay. Last question is just on the acquisition pipe, you've got quite a bit teed up here. I'm just curious about what's driving sort of the activity, is it a portfolio, pricing?

Yes, I think I've said a couple of times this year the sellers' market, there's lots of capital, lots of financing, and what we're seeing is higher quality portfolios come to the market as a result of that.

Where are these relative to replacement cost?

It varies by transaction, some are above, some are at, some are below.

Your next question comes from the line of with Ki Bin Kim with SunTrust Robinson.

Going back here, occupancy of 95%, did you change -- besides changing discounts, which you guys do frequently, did you change anything about the way you advertise in the Internet or how you acquire customers fundamentally to drive that 95%? And with the occupancy being so high, do you plan to change at all the amount of -- or level of frequency of existing rate customer increases or increasing the customers?

Okay, I'll let John talk about Internet strategy. For the last 2 years though, our customer acquisition costs have been going down. Jordan just kind of touched on that. So if you look at Q2 this year, we spent about $5.5 million on Internet and media, and that compares to $8.3 million last year. So we're spending less on Internet and media, and we basically extricated ourselves from the Yellow Pages combined with lower promotional discounts, meaning, lower upfront dollar specials, and yet we're able to hold move-in volume relatively constant year-over-year. With respect to Internet strategies...

Yes, here, Internet strategy, I would tell you this, I mean, really hasn't changed other than we've cut back the spend because we simply don't need as much volume coming to our website as we used to, given our occupancy levels. So what that's enabled us to do is basically cut back on our positioning and our bid so that we don't view it necessary to necessarily be in the #1 position on certain keyword searches so we're not bidding as aggressively as we used to, and again, it's simply because we don't really need as much volume coming to the website. The volume that's coming to the website is more than sufficient to maintain the move-in levels that we need to maintain our occupancy levels and grow the occupancy levels.

Well, so it seems like you're spending less, yet maintaining or increasing your success rate. Have you shifted the dollars to maybe more mobile versus just generic Google searches that you find more success in? Does that explain any of it at all?

Well, we are spending more on mobile just because mobile is gaining in popularity, and we're getting more traffic through the mobile. So that's naturally coming, causing us to spend more in mobile, but it's more of a shift from the desktop to the mobile and overall -- then if you look at overall, the overall cost is actually coming down. But yes, we are spending more in mobile, but it's been more than offset by the decrease that we're spending on the desktop.

Your next question comes from the line of Neil Malkin with RBC Capital Markets.

Just 2 questions. One, I guess going back to the whole occupancy and business model strategy, I mean, with occupancy at record levels, are you kind of looking at it differently whereas just because street rates can be so volatile and the cost can be higher just having a higher occupancy reducing volatility throughout the year and just hitting people with those larger renewal increases, and then if the incremental renter does come in, you can give less discounting and that will also help with expenses as well if you're not marketing as many people. I mean, is that something, I guess, rhetorically you're thinking about or is it just a function of the demand for the quarter?

That's kind of what's been going on. I think that's what's historically you've been seeing is that with the high occupancies, we've been able to cut back on marketing spend because we don't need the volume coming into the system. So you're seeing our expense structure in marketing, as Ron mentioned, coming down. With high occupancies, we're able to now start turning down the discounting that we're getting -- we're giving away, excuse me, which is a good thing because, obviously, it drops to the revenue. It helps the revenue line, and it's also a good thing because you start filtering out those customers who are simply coming for 1 month because you're giving $1, and they're churning on you constantly. So that's good, too, because we're not experiencing as much churn as we used to experience, and you're getting a better length of stay from the customer base, which again all of that stuff is just good stuff.

Yes, sure. I mean that makes sense. And then on the acquisition front, you guys have a pretty sizable acquisition lined up relative to what you've done in the last several quarters. I mean, the rationale for that is you're just seeing, I guess, first of all, Cap rates, are they looking more attractive to you, even though the market has a lot more competition just because of the fundamentals? Is it pressure from various investors or sell-side analysts, which I doubt? But -- and then also on the one that extra space has, did you look at that at all? Were you bidding on them on that one against them?

Well, let me just comment on the acquisition market, and I touched on this earlier. I think Jordan asked this question. At the sellers market, there's lots of capital out there, whether it's the public REITs, private capital. There's plenty of financing, especially on stabilized properties. Unstabilized properties are properties that fill up a little more challenging for people to get financing. We have found that typically to be the better opportunities, but it is a sellers' market generally, and I think that's bringing out -- for the right sellers, that's bringing out higher quality portfolios than we've seen in some time, and so we're actively looking at those and obviously acquiring some of them.

Okay, but so then, I guess, going forward, would you look at more the value like the lease-up type of thing or core?

We're flexible. We buy properties that are 0% occupied and fill up. We're buying stabilized properties. We're buying properties that have been under-managed. So it's across the board, as well as deploying capital in redevelopments and our development program. So it's really -- we're almost market agnostic. If the right opportunity's there, we will undertake it, the right pricing, and we're not really concerned about, okay, what does it do for next quarter's earnings. We're really trying to create value here long term.

Okay, can you say what the cap rate was or is going to be on that transaction?

They're all over the board. We've got stuff from 0 cap rate because one property's still being built to 7% or 8% on a stabilized property. It's all over the board.

Your next question comes on the line of Tayo Okusanya with Jefferies.

Just wanted to focus on Europe a little bit if you could just kind of give us some commentary about why same-store NOIs got worse and kind of what operating trends look like there, and then which particular markets you're seeing kind of a worsening outlook?

Well, Tayo, it's really the same 2 culprits. Holland continues to decline in occupancy and rate, and its NOI for the quarter was down 16%. The other market was the U.K., where the -- that was implemented last October 1, and we effectively took down the existing customer base by 20%. So new customers are rolling in at higher rates when rent roll-up in that market, but it's going to take time for that to roll up. So our U.K. top-line revenue was down 11% this quarter, and NOI in the U.K. market was down 18%. So those are the 2 big drivers for the negative performance in Europe, and I would expect another challenging quarter in Q3. Where it comes in at, I don't know, but I don't think Q3's going to be much better. When we get to Q4, at least in the U.K., recall we implemented the VAT roll_down October 1. So hopefully, we'll be positive comping in the U.K. in Q4, whether that's enough to offset Holland, I don't know, but Q4 U.K. should be positive.

Got it. Just about the U.K. real quick. I mean, were you the only ones in that market that implemented a VAT roll-down or do you think generally across the industry that happened?

Different operators did different things. One operator already had been passing through the VAT. So it was basically a non-event for them. I think Big Yellow, who's the other large operator, did a half roll-down. So they took a 10% roll-down, and they have, I think, I don't know the exact percentage, but I think Big Yellow has a higher percentage of commercial customers than we do. So it impacted them a little less. I think it varies by operator.

Your next question comes from the line of Michael Knott with Green Street Advisors.

I'm going to ask you about acquisitions one more time. Just curious if this is a sign that you've got your foot on the gas now on this part of your business or was this sort of a compilation of one-off type transactions?

Michael, I know we've disappointed you in terms of our acquisition volume, but really not much has changed. As I said, we see better product coming to market. Pricing is aggressive. It's a sellers' market. So I don't think substantively much has changed here. There's just more flow, more seller flow into the market.

[indiscernible] on potential new supply across your markets?

Michael, the first part of whatever you're saying, could you repeat what you said?

Sure, sorry. I was asking about your perspective on potential new supply in your markets and whether that's going to degrade the operating environment anytime soon.

You know what? We're seeing across the market, we don't see a lot of development. Dave Doll's here with me. We don't see much development in the latest data sources that we've seen that it's pretty nascent. I would say in terms of just dollar value, probably, the New York, the burroughs, is probably the biggest market in the U.S. where development is going on. But relative to the densities there versus the amount of product, that's still somewhat of an underserved market.

[Operator Instructions] Your next question comes from the line of Michael Bilerman with Citigroup.

I'm just curious just in terms of July sort of where did occupancies trend, and where you were sending out renewals?

Yes, Michael, in terms of the end of July, we ended at 94.4% versus 93.1% last year, and in-place rents were up a couple of cents a foot in July versus last year.

Was there anything noticeable as you sort of went through July in terms of the length of stay from your existing customers? It didn't sound like there was much change, move-in, move-out, in the second quarter. Did that shift at all as you've been pushing rate and getting more people in?

No. Our move-outs year-over-year changed, I think, by -- yes, less than 1%.

And then just lastly, just on the $374 million of acquisitions, and I think you're getting a lot of questions just because you've done $570 million over the last 3.5 years. So to do $370 million in 1 quarter, certainly, a lot of lightbulbs went off, and so -- and I know you've talked about it being a sluggish market. Can you please breakdown the $374 million, if there was any major transactions in there or any big pieces? And then maybe just in aggregate, I'm assuming you have the numbers, right, $1.63 a foot is the average price. Do you have sort of the average in-place rents, the average occupancy, the average margin, so we get a sense of that $374 million once it comes in and then work the PSA magic on them to getting them up to par.

Well, Michael, we've got everything from stabilized properties. We've got a mixed-use property in West L.A. That's 90-plus percent full, and it's got a 10-year triple-net lease in it that's, I don't know, trailing 6, 6.5 to a property that's still under construction that we won't buy until September, October. So it's all over the board. I would assume that on a go-forward basis, we will attempt to work our magic, actually not attempt, we will work our magic, and we'll use the pricing strategy that John's talked about, and our field will execute. So I don't think you should expect much material difference in kind of the returns we're going to get in historical. Are they as good as the 2010 acquisitions? No, but they're really good properties, and we're really happy with them.

And once you draw down all your cash, because this will chew up both your cash, should we expect effective preferred raise in the fourth quarter to boost up that cash or you'll wait till you see the opportunities come in?

John's pretty good about being opportunistic in terms of the capital markets. So we've got plenty of capacity to do whatever we need to do, and we'll just wait for the right time in terms of the capital markets.

Your next question comes from the line of Michael Mueller with JPMorgan. Michael W. Mueller - JP Morgan Chase & Co, Research Division: Yes, for the non-Same Store portfolio, can you talk about what was the occupancy at June 30 for that?

Non-Same Store, hold on, Mike. We'll get that here for you.

Mike, it was about 90.2%. That was an average for the quarter. Michael W. Mueller - JP Morgan Chase & Co, Research Division: Got it.

Actually, I'm sorry, Mike. That was 90.2% at June 30, not an average for the quarter. Michael W. Mueller - JP Morgan Chase & Co, Research Division: Okay, great. And then just going back to the $374 million again, Ron, understanding that there's property in development. There's something that's a little bit more of not a self-storage property, and can you ballpark the average occupancy for the 29 properties or 28, 27 of them then, I mean, is it in the 80s or...

Mike, I don't have that here in front of me. So if you want me to give you that offline, I could.

Your next question comes from the line of Jordan Sadler with KeyBanc.

Not trying to beat a dead horse here on the acquisition, but I did want to follow up. You said it's a little bit more of a sellers' market, which traditionally would not be a time when PSA would be hitting the bids in the market based on your historical discipline. And so, I guess, Michael Bilerman used the word lightbulbs going off. I mean, where, I think, I'm a little curious about why now, why all this is sort of coming together, and obviously, product is coming to market given the bid, I understand, but historically, you've been a little less inclined. So I'm curious, why are you -- why do you appear to be more inclined to make acquisitions today?

Yes, Jordan, I can't elaborate any more than there is more product coming to market, and there is much better product coming to market. And one of the things that we've commented on in the past is the quality of assets in terms of -- that we've seen coming to market has been stuff that, for the most part, we have not been interested in. We've lost some transactions that we would have liked the portfolios, but a number of them, we weren't even bidders or we weren't interested. So the stuff that we've got under contract today we think is pretty high-quality product, and it's a sellers' market. So people that have high-quality portfolios are bringing them to market. We're getting more of that than we've had in the last couple of years.

So no -- I mean, any change in your underwriting, whatsoever? Are you a little less-sensitive to cap rate today, given sort of the amount of capital you have available?

Well, as I've said before, we're not on a day 1 a cap rate buyer. And I mean, that's evident in the fact that we're buying properties that are newly developed or still underdeveloped. What we look at is, okay, when this thing is stabilized, what kind of return are we going to get? What are the barriers to entry in that market? What does it looks like relative to replacement cost? A variety of factors and so in a market with very high barrier to entry, that's going to get a different cap rate than a market where there's a lot of competition and low barrier to entries, and it varies by property and these $390 million of property are across the board in terms of high barrier, low barrier, stabilized, non-stabilized properties.

So when you look at the pipeline, do you think we could continue to see some good volume here on the investment side?

Jordan, we're not big commentators on transactions that haven't been consummated. So again, I think it's a sellers' market. So my guess is the back half of the year, we'll see continued product flow, and at least I hope there is, and so we hope to be an active participant.

Your next question comes from the line of Paula Poskon with Robert W. Baird. Paula J. Poskon - Robert W. Baird & Co. Incorporated, Research Division: So I'm going to try and ask the acquisition topic in a slightly different way. And obviously, hindsight's always 20-20, Ron, but just looking back over the last 3 years among your competitors in the public realm, Extra Space stock is up 180%. CubeSmart's up 103%. Sovereign's up a little over 90%, and Public Storage is up 64%, and yet Cube and Extra Space have done in that 2010 to 2012 timeframe about $1 billion each, Sovereign slightly less than PSA in terms of acquisition volume. So 2 questions there. In retrospect, given the relative strength of PSA's balance sheet coming out of the credit crisis, do you wish you had been more aggressive during that time period? And secondly, is there something different about either the way your underwriting or perhaps the brokers that you're dealing with that you're seeing different product? Is there something different that you're doing now that you wish you would have done 3 years ago?

Well, Paula, I don't know how to answer that other than how I responded to Jordan and Michael Knott. So you can go back, and I'm not going to repeat myself. But I will say this though that, as I just mentioned, are there transactions that over this period of time we would have liked to have gotten? Yes. But there's a lot that we're, I mean, we're fine, we weren't interested in them, and we weren't interested in the quality of the product or the markets where they were located, given the competition or low barriers to entry. So overall, I think we've done a pretty good job, and we've got some pretty good assets. And if you look at the returns on the stuff that we've done, it's pretty darn good. So I don't have much more to comment than that.

Your next question comes from the line of Christy McElroy with UBS.

It's Ross Nussbaum here with Christy. So, Ron, when I popped in the area and suggested that on the next earnings call, you say good quarter, any questions, I wasn't actually expecting you to take me so literally with that suggestion, but I do love it. Here's the question I have for you. I have always thought about Public Storage. When I think about, I'm driving down the street looking at one of your properties and I think about who your neighbors are, and whether it's a McDonald's or a Jiffy Lube or -- and I think about the slowdown in consumer spending, it appears to have taken a bit of hold this summer, whether it's temporary or not. How are you viewing consumer spending right now? And how are you thinking about the pricing power in your business now that your occupancy is at record levels relative to how you're seeing pricing power and Same Store sales growth at the McDonald's and the Starbucks and the Jiffy Lubes of the world?

Okay, Ross, I'll try to start answering that question, and let John Reyes finish up since he's in charge of pricing. If you look at our business, and it's really across the platform, we've had pretty robust demand. We've been able to dial down the marketing spend here for the last 2 years. I went through the customer acquisition cost. They continue to decline. In fact, they went positive this quarter. Move-in volumes, despite reduction and television reduction in Internet spend and reduction in dollar specials, move-in volume held steady, and rates were up. So for our product type, we're feeling pretty good about the robustness of demand. We don't monitor our pricing versus McDonald's or Starbucks or any of those guys. I think in part, the uptick in the economy, the consumers, whether their incomes are up, but the activity in the economy's positive, homebuilding's positive and that activity's a good thing for our business combined with the absence of new supply. We're fortunate that there's not a lot of construction going on. I touched on that earlier, and what we're seeing across the country. We don't see a lot of development going on. And for the most part, on our development sites, we're not seeing a lot of competition on the stuff that we're doing today. Those are all positive things in terms of continued absence of supply. I was at the self-storage association a couple of weeks ago. And if you take the U.S. population at, I don't know, 320 million, 330 million people and add 1%, 1.5% population growth and then you apply 7 square feet per person, I think there's plenty of capacity or plenty net new demand from that population growth, and yet it's not being met with new supply. So overall, our business is pretty good. You're seeing it across the public competitors, and demand is fairly robust. In terms of pricing?

I would say this, Ross, when we send out increases to our existing tenant base, I mean, we just don't haphazardly do it. We do it on a basis of understanding the -- each and every property's demographic, and we put that into the mix when we decide Joe Schmo at this property is going to get a 7% and somebody else at a different property may get a 5% and somebody else at a third property may get a 10%. And it's really, I'd like to say it scientific, maybe it's more of an art than science, I don't know, but we do look at demographic. We monitor demographic. We monitor what happens. We know what these customers do. So we get -- we're pretty comfortable when we send out these increases and understanding what the reaction to the customers going to be when we do these things. So yes, it's a little more scientific than just throwing darts at the wall.

Sure, appreciate that. Last question, Europe given the improvement in the capital markets that appears to be a bit of a steady improvement of late, how does that influence how you strategically think about Shurgard, whether it's from a financing perspective, whether it's from a financing perspective in terms of do you ever revisit the IPO, thoughts there at some point; so can you just give us sort of some updated thoughts on that?

Sure. I think the capital markets in Europe are a little more buoyant than they were a couple of years ago. But before we undertook anything like an IPO, we would definitely need some positive Same Store growth. Undertaking an IPO when we posted negative 7% for the quarter probably wouldn't get the value that we perceived in Europe today with those kind of numbers. So we need some positive momentum in Europe and some good year-over-year comps before we entertain something like that.

Your next question comes from the line of Michael Knott with Green Street Advisors.

No questions on acquisitions this time. I did want to ask about just your philosophy on the revenue maximization trade-off between occupancy and rent growth. Just looking at the realized rent growth, I think, was in the mid-3-s this quarter. And then when I look at the end place at the end of the quarter versus last year, I think it's a little over 2. Just curious if you're leaning even more toward the occupancy side of this in terms of actualizing revenues, and if so, why?

Michael, no, we're not leaning more towards the occupancy. It just happened to end up that way. Given the high occupancy levels, we obviously have to really put more focus on the rate side of the equation, which is what we spend a lot of time doing internally. What you're seeing, that 2.2, keep in mind that is at a point in time when the calendar flips to the next day, a lot of rent increases become effective on July 1 so that 2.2 immediately, I could tell you, popped up a little bit more than 2.2 on July 1.

[indiscernible] curiosity, the 3.4 for the quarter, is it possible to [indiscernible].

Michael, you're breaking up.

Oh, sorry about that. Just curious on the 3.4 realized rents for the quarter, is it possible to decompose that between lower discounts, existing customers and street rents? Is that something you have?

I don't have it calculated by per square foot, but let me give you the numbers, the discounts, then you can do the math on your own. I can tell you the discount part of the equation. I don't have the other components with me, but discounts for the quarter this quarter 2013 was about $19.4 million versus $22.3 million for the same quarter last year. So it was about a 13% reduction or about $2.9 million reduction.

[indiscernible] selling opportunities with Wayne Single-Family Housing Company?

What was the first part, Michael, of your question? I'm sorry you keep...

I apologize for my phone. I was asking have you thought about any cross-selling opportunities with Wayne Single-Family Housing Company? Is there anything that can benefit you there?

Well, I don't know if there is, but we haven't thought about it.

Our next question comes from the line of Michael Bilerman with Citigroup.

Yes, just on the development and expansion pipeline, the $200 million, it's up $30 million sequentially from the first quarter. How should we think about how much of that $200 million is ground-up new development? How much of that is expansions? So you're adding about 1 million -- 1.4 million square feet, and then how should we think about what the sort of forward pipe may increase to? How aggressively are you going to seek to add to that as another driver of potential growth over the next little while as you put out capital?

Yes. The -- in terms of the pipeline, let's see, expansions are 14 of the projects, $96 million. Ground-up development is 2 properties as of June 30, about $17 million and conversions of existing structures, 3 properties, about $85 million, and those are new acquisitions so -- and those, like the Gerard property that we're doing in the Bronx, that's a conversion, that's in, like I said, the conversion bucket. We've got a couple other industrial buildings that we bought that we're also going to convert to self-storage. So I kind of think of those as almost developments, although it's not bare land. We're just taking the existing building and decking it out or whatever and turning it into self-storage.

And then how quickly will you add to this pipeline in terms of acceleration rate. So if it went up $30 million this quarter, should we expect that pace to continue? Or I mean, could you see having, once this $200 million delivers but another $200 million pipeline next year, how much is in the hopper?

Yes. Michael, we have probably a couple hundred million, and what we would refer to as our shadow pipeline stuff we're looking at, trying to figure out the zoning, see if it makes sense, and that's both on the development and the redevelopment side. As we get close to that, we go through approval process, it makes sense to us, then it goes into what you're seeing as the development pipeline, which is still subject to some contingencies in terms of making that happen. I can't tell you what it's going to be next quarter or the quarter after, per se, but our target is to get to a $300 million-plus kind of run rate on the development side so -- and that's going to take us a couple of years probably to get to a total run rate where we're putting $300 million to $350 million into the ground each year, and that means there's another couple of hundred million in the development pipeline at any one time.

That was our final question. I'd like to turn the floor back over to Clem Teng for any closing comments.

Appreciate everybody attending this morning on our call, and we look forward to talking to you in the next quarter. Thank you.

Thank you. This concludes today's conference call. You may now disconnect.