Public Storage 1996 Annual Report Download - page 31

P UBLIC S TORAGE , I NC . 1996 A NNUAL R EPORT
29
The comparative increases in the Company’s self-storage operations from 1994 through 1996 are principally due to the acquisition of additional
facilities as indicated in the above table. For the consistent group of facilities owned throughout each of the three fiscal years, year-over-year
improvements in rental income of 4.2% in 1996 and 3.4% in 1995 are principally the result of increased realized rent per square foot and, with
respect to fiscal 1996, increased weighted average occupancy levels.
Commencing in early 1996, the Company began to experiment with a national telephone reservation system designed to provide added customer
service. Customers calling either the Company’s toll-free telephone referral system, (800) 44-STORE, or a local Public Storage facility, are directed
to the national reservation system where a trained representative discusses with the customer space requirements, price and location preferences
and also informs the customer of other products and services provided by the Company. The national telephone reservation system, which is no
longer experimental, was not fully operational for most of the Company’s facilities until the fourth quarter of 1996 and is currently handling in
excess of 100,000 calls per month. As of December 31, 1996, the national telephone reservation system was supporting rental activity at all of the
Company’s properties, with the exception of one major market, which was included in March 1997.
In connection with the national telephone reservation system, the Company experimented with pricing and promotional discounts designed to
increase rental activity. As a result, promotional discounts increased significantly. Rental income for the Company’s self-storage facilities is net of
promotional discounts totaling $4,031,000 and $303,000 for the years ended December 31, 1996 and 1995, respectively. The Company believes that
the use of the national telephone reservation system combined with rental discounts has resulted in increased weighted average occupancies.
In the second half of 1996, the Company began to increase its scheduled rents charged to new customers (prior to promotional discounts) and
to existing tenants where warranted. As a result, for fiscal 1996, both realized and scheduled rents per square foot increased compared to 1995.
This trend was also applicable throughout the portfolio of self-storage facilities in which the Company has an ownership interest and manages (see
“Supplemental Property Data” below).
With the exception of property management fees, most of the self-storage operating costs (i.e. payroll, property taxes, repairs and maintenance,
etc.) are generally fixed. As a result of becoming self-managed in connection with the PSMI Merger, the Company no longer incurs property man-
agement fees. Cost of operations for 1996 decreased compared to 1995 principally as a result of the elimination of property management fees for
1996. Included in cost of operation for 1995 and 1994 were management fees totaling $9,421,000 and $7,587,000, respectively ($5,966,000 in 1995
and $6,737,000 in 1994 with respect to the consistent group of facilities). However, offsetting the decrease in property management fees in 1996
are expenses with respect to the national telephone reservation system totaling $1,257,000.
Development of self-storage facilities: Commencing in 1995, the Company began to construct self-storage facilities. Through December 31, 1996,
the Company constructed and opened for operation five facilities, one of which began operations in August 1995 and four in 1996. At December 31,
1996, the Company had eleven self-storage facilities (approximately 707,000 square feet) under construction with an aggregate cost incurred to date
of approximately $33.5 million and total additional estimated cost to complete of $22.5 million. Generally the construction period takes 9 to 12
months followed by an 18- to 24-month fill-up process until the newly constructed facility reaches a stabilized occupancy level of approximately
90%. Due to the timing of the employment of the capital to construct the facilities and the relatively long “fill-up” period until the facilities reach a
stabilized occupancy level, the Company believes that its development plans may create earnings dilution in the short-term. However, the Company
has reached an agreement in principle to develop approximately $220 million of self-storage facilities with a joint venture partner (see
“Liquidity
and Capital Resources – Development activities”
) and expects that the joint development of self-storage facilities will mitigate this earnings
dilution to the extent of the joint venturer’s interest.