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PSA News Public Storage, Inc. Reports Results for the Fourth Quarter and Year Ended December 31, 2006

GLENDALE, Calif.--(BUSINESS WIRE)--Public Storage, Inc. (NYSE:PSA) announced today operating results for the fourth quarter and year ended December 31, 2006.

Operating Results for the Quarter Ended December 31, 2006:

Net loss for the three months ended December 31, 2006 was $10,233,000 compared to net income of $123,372,000 for the same period in 2005, representing a decrease of $133,605,000. This decrease is primarily due to the temporary impact of certain items related to our merger with Shurgard Storage Centers, Inc. (“Shurgard”). During the three months ended December 31, 2006, we incurred amortization expense totaling $125 million due to the amortization of certain intangible assets acquired in the merger and approximately $24 million in merger integration expenses.

The negative impacts to our net income from the above mentioned items were partially offset by improved operations from our Same Store group of facilities, continued growth in operations from our newly developed and recently expanded facilities, as well as continued growth in our recently acquired self-storage facilities including the facilities acquired in the merger with Shurgard.

Our Same Store net operating income, before depreciation expense, increased by approximately $4,201,000 to $146,600,000, or 3.0%, as a result of a 3.4% improvement in revenues partially offset by a 4.3% increase in cost of operations. In order to increase the overall domestic portfolio occupancy, which included the facilities acquired in the merger with Shurgard, up to levels we have consistently achieved over the last couple of years, we significantly expanded our media programs and we were aggressive with our pricing and promotional discount programs. Aggregate net operating income for our newly developed and recently expanded and acquired facilities (other than the Shurgard facilities) increased by approximately $5,743,000 to $30,468,000. This increase was largely due to the impact of facilities acquired in 2005 and 2006, combined with continued fill-up of our newly developed and expansion facilities. For those facilities that were acquired in the Shurgard merger in August 2006, net operating income was approximately $74,685,000 for the quarter ended December 31, 2006.

For the three months ended December 31, 2006, we had a net loss allocable to our common shareholders (after allocating net income to our preferred and equity shareholders) of $80,401,000 or $0.48 per common share on a diluted basis compared to net income allocable to common shareholders of $65,651,000 or $0.51 per common share on a diluted basis for the same period in 2005, representing a decrease of $146,052,000 or $0.99 per diluted common share. The decreases in net income allocable to common shareholders on an aggregate and per-share basis are due primarily to the impact of the factors described above, combined with an increase in income allocated to preferred shareholders, as described below.

For the three months ended December 31, 2006 and 2005, we allocated $54,964,000 and $46,731,000 of our net income, respectively, to our preferred shareholders based on distributions paid. The year-over-year increase is due to the issuance of additional preferred securities, partially offset by the redemption of preferred securities that had higher dividend rates than the newly issued preferred securities. In connection with the redemption of preferred securities, we also allocated additional income to our preferred shareholders with respect to the application of EITF Topic D-42 totaling $9,850,000 (or $0.06 per diluted common share) for the three months ended December 31, 2006, and $5,634,000 (or $0.04 per diluted common share) for the same period in 2005.

Weighted average diluted shares increased to 169,063,000 for the three months ended December 31, 2006 from 128,743,000 for the three months ended December 31, 2005. The increase in weighted average diluted shares is due primarily to the issuance of approximately 38.9 million shares in the merger with Shurgard, which are included in our weighted average shares from August 22, 2006 through December 31, 2006.

Operating Results for the Year Ended December 31, 2006:

Net income for the year ended December 31, 2006 was $314,026,000 compared to $456,393,000 for the same period in 2005, representing a decrease of $142,367,000, or 31%. This decrease is primarily due to the temporary impact of certain items related to our merger with Shurgard. During the year ended December 31, 2006, we incurred amortization expense totaling $176 million due to the amortization of certain intangible assets acquired in the merger and approximately $44 million in merger integration expenses.

These items were partially offset by improved operations from our Same Store, newly developed and acquired self-storage facilities (including the facilities acquired from Shurgard), reduced minority interest in income and higher interest income.

Same Store net operating income, before depreciation expense, increased by $28,104,000 to $575,152,000, or 5.1%, as a result of a 5.1% improvement in revenues partially offset by a 4.9% increase in cost of operations. Aggregate net operating income for our newly developed, acquired and expansion self-storage facilities (excluding the Shurgard facilities) increased by approximately $30,725,000 to $114,458,000 largely due to the impact of facilities acquired in 2005 and 2006, combined with continued fill-up of our newly developed and expansion facilities. We earned an aggregate of $110,048,000 in net operating income with respect to the facilities acquired from Shurgard, reflecting their operating results from the date of the merger August 22, 2006, through December 31, 2006. Minority interest in income declined due to the acquisition of minority interests that occurred in 2005. Interest income increased in the year ended December 31, 2006 as a result of earning higher interest rates on invested cash balances, combined with higher average cash balances invested in interest-bearing accounts as compared to the same period in 2005.

Net income allocable to our common shareholders (after allocating net income to our preferred and equity shareholders) was $46,891,000 or $0.33 per common share on a diluted basis for the year ended December 31, 2006 compared to $254,395,000 or $1.97 per common share on a diluted basis for the same period in 2005, representing a decrease of $1.64 per common share, or a decrease of 83%. The decreases in net income allocable to common shareholders and earnings per common diluted share are due primarily to the impact of the factors described above, in addition to increased income allocated to preferred shareholders, described below.

For the year ended December 31, 2006 and 2005, we allocated $214,218,000 and $173,017,000 of our net income, respectively, to our preferred shareholders based on distributions paid. The year-over-year increase is due to the issuance of additional preferred securities, partially offset by the redemption of preferred securities that had higher dividend rates than the newly issued preferred securities. In connection with the redemption of preferred securities, we also recorded allocations of income to our preferred shareholders with respect to the application of EITF Topic D-42 totaling $31,493,000 (or $0.22 per diluted common share) and $7,538,000 (or $0.06 per diluted common share) for the years ended December 31, 2006 and 2005, respectively.

Weighted average diluted shares increased to 143,715,000 for year ended December 31, 2006 from 128,819,000 for the year ended December 31, 2005. The increase in weighted average diluted shares is due primarily to the issuance of approximately 38.9 million shares in the merger with Shurgard, which are included in our weighted average shares from August 22, 2006 through December 31, 2006.

Funds from Operations:

For the three months ended December 31, 2006, funds from operations (“FFO”) decreased to $0.89 per common share on a diluted basis as compared to $0.96 per common share for the same period in 2005, representing a decrease of $0.07 per common share, or 7.3%. For the year ended December 31, 2006, FFO decreased to $3.57 per common share on a diluted basis as compared to $3.61 per common share for 2005, representing a decrease of $0.04 per common share, or 1.1%.

For the three months and year ended December 31, 2006 and 2005, FFO has been impacted as a result of (i) costs and expenses incurred in connection with the merger with Shurgard totaling approximately $24 million and $44 million for the three months and year ended December 31, 2006, respectively, (ii) net income from derivative instruments and foreign exchange gains aggregating approximately $4 million for the three months and year ended December 31, 2006, (iii) development costs that were expensed with respect to terminated projects totaling $1 million and $10 million for the three months and year ended December 31, 2006, respectively, (iv) contract termination fees of $2 million for year ended December 31, 2006, (v) losses incurred in our tenant reinsurance business and property casualty losses as a result of the impact from hurricanes totaling $2 million and $3 million for the three months and year ended December 31, 2005, (vi) the impact of a gain on the sale, in the year ended December 31, 2005, of non-real estate assets previously used by our containerized storage business totaling $1.1 million, (vii) the impact of a $1.0 million impairment charge on a discontinued self-storage facility recorded during the three months ended December 31, 2006 and (viii) the application of EITF Topic D-42 in connection with the redemption of our preferred securities and our pro-rata share of EITF Topic D-42 for PS Business Parks, Inc. ($10.6 million and $5.6 million for the three months ended December 31, 2006 and 2005, respectively and $33.6 million and $8.5 million for the year ended December 31, 2006 and 2005, respectively).

The following table provides a summary of the impact of these items that have occurred during the three months and year ended December 31, 2006 and 2005:

FFO is a term defined by the National Association of Real Estate Investment Trusts (“NAREIT”). It is generally defined as net income before depreciation with respect to real estate assets and gains and losses on real estate assets. FFO is presented because management and many analysts consider FFO to be one measure of the performance of real estate companies. In addition, we believe that FFO is helpful to investors as an additional measure of the performance of a REIT, because net income includes the impact of depreciation, which assumes that the value of real estate diminishes predictably over time, while we believe that the value of real estate fluctuates due to market conditions and in response to inflation. FFO computations do not consider scheduled principal payments on debt, capital improvements, distribution and other obligations of the Company. FFO is not a substitute for our cash flow or net income as a measure of our liquidity or operating performance or our ability to pay dividends. Other REITs may not compute FFO in the same manner; accordingly, FFO may not be comparable among REITs. See the attached reconciliation of net income to funds from operations included in the selected financial data attached to this press release.

Property Operations-Same Store Facilities:

We derive substantially all of our revenues from the ownership and management of self-storage facilities. In order to evaluate the performance of our overall self-storage portfolio, we analyze the operating performance of our stabilized self-storage facilities.

As of December 31, 2006, our “Same Store” portfolio consists of 1,266 facilities, which represents the facilities that we have consolidated in our financial statements and have been operating at a stabilized basis throughout 2004, 2005 and 2006.

The Same Store facilities contain approximately 73.9 million net rentable square feet, representing approximately 59% of the aggregate net rentable square feet in the United States of our consolidated self-storage portfolio at December 31, 2006. The following table summarizes the pre-depreciation historical operating results of the Same Store facilities: