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PSA News Public Storage, Inc. Reports Results for the Third Quarter Ended September 30, 2006

GLENDALE, Calif.--(BUSINESS WIRE)--Public Storage, Inc. (NYSE:PSA) announced today operating results for the third quarter ended September 30, 2006.

Operating Results for the Quarter Ended September 30, 2006:

Net income for the three months ended September 30, 2006 was $81,181,000 compared to $128,344,000 for the same period in 2005, representing a decrease of $47,163,000, or 36.7%. This decrease is primarily due to significant increases in depreciation and amortization expense, general and administrative expense and interest expense. Depreciation and amortization increased by approximately $65.6 million due primarily to the addition of real estate facilities and intangible assets acquired in the merger with Shurgard Storage Centers, Inc. (“Shurgard”) and the corresponding depreciation and amortization related to such assets. General and administrative expense increased by approximately $30.6 million principally as a result of integration expenses related to the Shurgard merger, development costs that were expensed with respect to terminated projects and contract termination fees; these costs in aggregate totaled $29.6 million. In connection with the merger, we assumed $1.3 billion in debt, and, as a result, interest expense increased by approximately $6.9 million.

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, continued growth in our recently acquired self-storage facilities including the facilities acquired in the merger with Shurgard, as well as higher interest income.

Our Same Store net operating income, before depreciation expense, increased by approximately $9,256,000, or 6.6%, as a result of a 6.1% improvement in revenues partially offset by a 5.0% increase in cost of operations. Aggregate net operating income for our newly developed and recently expanded and acquired facilities (other than the Shurgard facilities) increased by approximately $8,815,000. 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 merger, net operating income was approximately $35,363,000, reflecting the results from the date of the merger, August 22, 2006, through September 30, 2006. Interest income increased as a result of earning higher interest rates on invested cash balances combined with significantly higher average cash balances invested in interest-bearing accounts as compared to the same period in 2005. Higher invested cash balances were primarily due to gross proceeds received from the issuance of Preferred Stock and Preferred Partnership Units in the second and third quarters of 2006. Substantially all of this cash was subsequently used to fund the cash requirements with respect to the Shurgard merger.

We had a net loss allocable to our common shareholders (after allocating net income to our preferred and equity shareholders) of $6,083,000 or $0.04 per common share on a diluted basis for the three months ended September 30, 2006 compared to income allocable to common shareholders of $79,262,000 or $0.62 per common share on a diluted basis for the same period in 2005, representing a decrease of $85,345,000 or $0.66 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 September 30, 2006 and 2005, we allocated $60,265,000 and $43,726,000 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. We also recorded allocations of income to our preferred shareholders with respect to the application of EITF Topic D-42, and recorded our equity share of such charges, totaling $21,643,000 (or $0.15 per diluted common share) for the three months ended September 30, 2006 in connection with the redemption of preferred securities.

Weighted average diluted shares increased to 145,387,000 for the three months ended September 30, 2006 from 128,742,000 for the three months ended September 30, 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 September 30, 2006.

Operating Results for the Nine Months Ended September 30, 2006:

Net income for the nine months ended September 30, 2006 was $324,259,000 compared to $333,021,000 for the same period in 2005, representing a decrease of $8,762,000, or 2.6%. This decrease is primarily reflective of the third-quarter impacts described above with respect to depreciation and amortization, general and administrative expense and interest expense. 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 $23,903,000, or 5.9%, as a result of a 5.6% improvement in revenues partially offset by a 5.1% 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 $24,895,000 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 $35,363,000 in net operating income in the third quarter with respect to the facilities acquired from Shurgard, reflecting their operating results from the date of the merger, August 22, 2006, through September 30, 2006. Minority interest in income declined due to the acquisition of minority interests that occurred in 2005. Interest income increased 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 $127,292,000 or $0.94 per common share on a diluted basis for the nine months ended September 30, 2006 compared to $188,744,000 or $1.46 per common share on a diluted basis for the same period in 2005, representing a decrease of $0.52 per common share, or a decrease of 36%. 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 nine months ended September 30, 2006 and 2005, we allocated $159,256,000 and $126,286,000 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. We also recorded allocations of income to our preferred shareholders with respect to the application of EITF Topic D-42 totaling $21,643,000 (or $0.16 per diluted common share) and $1,904,000 (or $0.01 per diluted common share), for the nine months ended September 30, 2006 and 2005, respectively.

Weighted average diluted shares increased to 134,851,000 for the nine months ended September 30, 2006 from 128,844,000 for the nine months ended September 30, 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 averages shares from August 22, 2006 through September 30, 2006.

Funds from Operations:

For the three months ended September 30, 2006, funds from operations (“FFO”) decreased to $0.77 per common share on a diluted basis as compared to $0.97 per common share for the same period in 2005, representing a decrease of $0.20 per common share, or 21%. For the nine months ended September 30, 2006, FFO increased to $2.68 per common share on a diluted basis as compared to $2.66 per common share for the same period in 2005, representing an increase of $0.02 per common share, or 0.8%.

For the nine months ended September 30, 2006 and 2005, FFO has been negatively impacted as a result of (i) costs and expenses incurred in connection with the merger with Shurgard totaling approximately $18.1 million and $20.5 million for the three and nine months ended September 30, 2006, respectively, (ii) development costs that were expensed with respect to terminated projects totaling $9.3 million for the three and nine months ended September 30, 2006, (iii) contract termination fees of $2.2 million for the three and nine months ended September 30, 2006, (iv) losses incurred in our tenant reinsurance business and property casualty losses as a result of the impact from hurricanes for the three and nine months ended September 30, 2005, (v) the impact of a gain on the sale, in the nine months ended September 30, 2005, of non-real estate assets previously used by our containerized storage business totaling $1.1 million and (vi) 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. ($22,972,000 and $2,909,000 for the nine months ended September 30, 2006 and 2005, respectively).

The following table provides a summary of the impact of these items that have occurred during the three and nine months ended September 30, 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 September 30, 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 the first nine months of 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 September 30, 2006. The following table summarizes the pre-depreciation historical operating results of the Same Store facilities: