Public Storage 2003 Annual Report Download - page 46

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The increase in the occupancy level during 2003 also came at a significant cost. Promotional discounts
totaled $46,562,000 for 2003 as compared to $18,423,000 for 2002, resulting in a significant negative impact to our
rental income. In addition, television advertising cost for 2003 was $8,343,000 as compared to $7,788,000 in 2002.
As indicated in the table above, rental income for our Consistent Group increased 2.1% in 2003 as
compared to 2002. This increase was primarily due to a 4.6% increase in the weighted average occupancy in 2003
compared to 2002 combined with increased late charge and administrative fees, partially offset by a decrease in
realized annualized rent per square foot of 3.1%.
By the end of 2003, we had attained our goal of reestablishing our occupancy levels to historical levels. In
addition, the improvement in occupancy levels enabled us to begin to increase rent rates that we charge to new
tenants, which as of December 31, 2003 were 5.9% higher than at the same time in 2002. More importantly,
throughout 2003 we experienced positive year-over-year trends in the growth of our quarterly REVPAR, resulting in
improvements in the growth trends of our rental income. For the Consistent Group during 2003, rental income for
the first quarter decreased 2.6%, for the second quarter - increased 2.0%, for the third quarter - increased 3.0% and
for the fourth quarter -increased 6.1%, all compared to the same periods in 2002.
The growth in rental income during 2004 will depend on various factors, among which are our ability to
stabilize and maintain high occupancy levels, rental rates charged to new and existing tenants, and the level of
promotional discounts given to new tenants.
Despite our occupancy gains, our expectations are significantly moderated by our experience that on
average approximately 25% to 30% of our new customers will move out within the first 60 to 90 days. Our current
occupancy levels have been achieved in large part by the elevated move-in activity experienced over the past three
quarters. Our elevated level of move-outs has made it more important to continue to generate a high level of move-
ins in order to maintain occupancy levels. We have not been able to demonstrate that we can generate the high level
of move-ins necessary to sustain high occupancy levels without the use of media and/or promotional discounts.
Accordingly, we expect to remain aggressive with promotional and media programs at least through the first half of
2004 and, as a result, the up front costs of these marketing activities, and the increases in promotional discounts, are
expected to continue to adversely impact our rental income .
We are working towards a goal of a high level of sustainable occupancy, characterized by a less volatile
tenant base that is not as heavily weighted towards recent move-ins, thereby mitigating the level of move-outs. If
we can achieve this goal, it will allow for fewer promotional discounts and a reduction in advertising and other
customer acquisition costs. In furtherance of these goals, we are continuously evaluating our call volume,
reservation activity, and move-in/move-out rates for each of our markets relative to our marketing activities and
rental rates. In addition, we are evaluating market supply and demand factors and based upon these analyses we are
continuing to adjust our marketing activities. There can be no assurance that we will achieve our goals.
Total operating expenses for the Consistent Group increased 10.6% for the year ended December 31, 2003
as compared to the same period in 2002. This increase was primarily due to increases in payroll, advertising and
promotion, property tax, repairs and maintenance costs and property insurance. Direct property payroll increased
12.8% due primarily to increased incentives paid to and hours worked by property operating personnel. Advertising
and promotion increased 7.3% primarily due to an increase in television advertising from $7.8 million during 2002
to $8.3 million in 2003. Repairs and maintenance have increased 17.6% during 2003 as compared to 2002 due to
costs to remedy mold issues in several facilities in Southern states, increased snow removal expenses, as well as a
general increase in costs to address deferred maintenance at our facilities. Property insurance increased due to an
increase in the Companys self-insured portion of its risk.
With respect to our Consistent Group, we expect that the increase in repairs and maintenance expense
experienced in 2003 will continue in 2004, as we continue to address maintenance at our facilities and improve their
rent ready condition and curb appeal. Payroll and property management costs will also continue to increase in
2004, though not at the same growth rate experienced in 2003 due to higher staffing levels and higher compensation.
We also expect that property taxes will increase approximately 4%-5% in 2004 as compared to 2003.