Public Storage 2003 Annual Report Download - page 53

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Unlike many other forms of real estate, we are unable to pre-lease our newly developed facilities due to the
nature of our tenants. Accordingly, at the time a newly developed facility first opens for operation the facility is
entirely vacant generating no rental income. Historically, we estimated that on average it takes approximately 36
months for a newly developed facility to fill up and reach a targeted occupancy level of approximately 90%.
We believe that the newly developed self-storage facilities have been affected by the operating trends in
occupancy and realized rents noted above with respect to the Consistent Group of facilities. In addition, move-in
discounts, which increased significantly in 2002 and 2003, have had a more pronounced effect upon realized rates
for the newly developed facilities, because such facilities tend to have a higher ratio of newer tenants. During 2003,
the Developed Self-Storage Facilities had a weighted average occupancy level of approximately 64.2%, as
compared to 52.3% in 2002 and 46.7% in 2001.
Property operating expenses are substantially fixed, consisting primarily of payroll, property taxes, utilities,
and marketing costs. The rental revenue of a newly developed facility will generally not cover its property operating
expenses (excluding depreciation) until the facility has reach an occupancy level of approximately 30% to 34%.
However, at that occupancy level, the rental revenues from the facility are still not sufficient to cover related
depreciation expense and cost of capital with respect to the facilitys development cost. During construction of the
self-storage facility, we capitalize interest costs and include such cost as part of the overall development cost of the
facility. Once the facility is opened for operations interest is no longer capitalized.
Due to the relationship between the generation of rental income and immediate recognition of expenses
upon opening of a facility, our development activities have had a negative impact on our net income. The yield on
cost for these facilities for the year ended December 31, 2003, based on net operating income before depreciation,
was approximately 3.9%, which is lower than our ultimate yield expectations. We expect these yields to increase as
these facilities fill up. This yield increase on fill-up will be a source of earnings growth in future years. We
continue to develop facilities, despite the short-term earnings dilution experienced during the fill-up period, because
we believe that the ultimate returns on developed facilities are favorable. In addition, we believe that it is
advantageous for us to continue to expand our asset base and benefit from the resulting increased critical mass, with
facilities that will improve our portfolios overall average construction and location quality.
We expect that over at least the next 12 months, the Developed Self-Storage Facilities will continue to have
a negative impact to our earnings. Furthermore, the 38 expansion and newly developed facilities in our development
pipeline described in Liquidity and Capital Resources  Acquisition and Development of Facilities that will be
opened for operation over the next 12  24 months will also negatively impact our earnings until they reach a
stabilized occupancy level.
Commercial Property Operations: Commercial property operations included in our consolidated financial
statements include commercial space owned by the Company and entities consolidated by the Company. We have a
much larger interest in commercial properties through our ownership interest in PSB. Our investment in PSB is
accounted for on the equity method of accounting, and accordingly our share of PSBs earnings is reflected as
Equity in earnings of real estate entities, see below.
Our commercial operations are comprised of 1,187,000 net rentable commercial space operated at certain
of the self-storage facilities and three stand-alone commercial facilities having a total of 204,000 net rentable square
feet.
The following table sets forth the historical commercial property amounts included in the financial statements:
Commercial Property Operations
(excluding discontinued operations):
Year Ended December 31, Year Ended December 31,
2003 2002 Change 2002 2001 Change
(Amounts in thousands)
Rental income ........................... $11,442 $11,781 $(339) $11,781 $12,070 $(289)
Cost of operations ....................... 4,688 4,462 226 4,462 3,861 601