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Public Storage
2015 Annual Report WA 92/3
OR MN NH 39 47 NY WI 2 MA 25 15 MI 65 RI 3 CT 15 43 PA NV NE 29 NJ OH 57 27 UT 1 IL IN DE 5 CA CO 31 31 7 126 VA MD 61/6 KS MO 421/47 66 KY 90/17 21 38 7 NC TN 85 AZ OK 27 44 8 SC 53 HI MS AL GA SWEDEN 11 1 22 107 30 TX LA DENMARK 270/23 11 10 FL UNITED NETHERLANDS 274/3 KINGDOM 61 24 BELGIUM
21 GERMANY 16 FRANCE 55
PROPERTIES (as of December 31, 2015)
Number Net Rentable Number Net Rentable of Properties Square Feet of Properties Square Feet
Public Storage Public Storage (cont.) Alabama 22 890,000 Tennessee 27 1,528,000 Arizona 44 2,816,000 Texas 270 18,182,000 California 421 28,357,000 Utah 7 440,000 Colorado 66 4,240,000 Virginia 90 5,468,000 Connecticut 15 966,000 Washington 92 6,179,000 Delaware 5 324,000 Wisconsin 15 968,000 Florida 274 18,353,000 Georgia 107 7,029,000 2,277 148,052,000 Hawaii 11 801,000 Shurgard Europe Illinois 126 7,952,000 Indiana 31 1,926,000 Belgium 21 1,263,000 Kansas 21 1,268,000 Denmark 10 572,000 Kentucky 7 330,000 France 55 2,879,000 Louisiana 11 777,000 Germany 16 889,000 Maryland 61 3,699,000 Netherlands 61 3,110,000 Massachusetts 25 1,691,000 Sweden 30 1,640,000 Michigan 43 2,755,000 United Kingdom 24 1,259,000 Minnesota 47 3,313,000 217 11,612,000 Mississippi 1 63,000 Missouri 38 2,236,000 Self-storage totals 2,494 159,664,000 Nebraska 1 46,000 Nevada 27 1,818,000 PS Business Parks, Inc. New Hampshire 2 132,000 California 47 11,233,000 New Jersey 57 3,630,000 Florida 3 3,866,000 New York 65 4,527,000 Maryland 6 2,352,000 North Carolina 85 5,894,000 Texas 23 5,088,000 Ohio 31 1,922,000 Oklahoma 8 428,000 Virginia 17 4,040,000 Oregon 39 2,040,000 Washington 3 1,390,000 Pennsylvania 29 1,993,000 99 27,969,000 Rhode Island 3 155,000 Grand Totals 2,593 187,663,000 South Carolina 53 2,916,000 SELECTED FINANCIAL HIGHLIGHTS
For the year ended December 31, 2015 2014 2013 2012 2011 (Amounts in thousands, except share and per share data)
Operating Revenue $ 2,381,696 $ 2,177,296 $ 1,964,942 $ 1,826,186 $ 1,718,818
Operating Expenses: Cost of operations 635,502 613,324 559,759 550,805 554,814 Depreciation and amortization 426,008 437,114 387,402 357,781 357,969 General and administrative 88,177 71,459 66,679 56,837 52,410 Asset impairment charges — — — — 2,186 1,149,687 1,121,897 1,013,840 965,423 967,379 Operating income 1,232,009 1,055,399 951,102 860,763 751,439 Interest and other income 16,544 17,638 33,979 33,293 43,708 Interest expense (610) (6,781) (6,444) (19,813) (24,222) Equity in earnings of unconsolidated real estate entities 50,937 88,267 57,579 45,586 58,704 Foreign currency exchange gain (loss) 306 (7,047) 17,082 8,876 (7,287) Gain on real estate sales and debt retirement 18,503 2,479 4,233 1,456 10,801 Income from continuing operations 1,317,689 1,149,955 1,057,531 930,161 833,143 Discontinued operations — — — 12,874 3,316 Net income 1,317,689 1,149,955 1,057,531 943,035 836,459 Net income allocated to noncontrolling equity interests (6,445) (5,751) (5,078) (3,777) (12,617) Net income allocable to Public Storage shareholders $ 1,311,244 $ 1,144,204 $ 1,052,453 $ 939,258 $ 823,842
Per Common Share: Distributions $ 6.50 $ 5.60 $ 5.15 $ 4.40 $ 3.65 Net income - diluted $ 6.07 $ 5.25 $ 4.89 $ 3.90 $ 3.29 Weighted average common shares - diluted 173,510 173,138 172,688 171,664 170,750
Balance Sheet Data: Total assets $ 9,778,232 $ 9,818,676 $ 9,876,266 $ 8,793,403 $ 8,932,562 Total debt $ 319,016 $ 64,364 $ 839,053 $ 468,828 $ 398,314 Total preferred equity $ 4,055,000 $ 4,325,000 $ 3,562,500 $ 2,837,500 $ 3,111,271 Public Storage shareholders’ equity $ 9,170,641 $ 9,480,796 $ 8,791,730 $ 8,093,756 $ 8,288,209 Permanent noncontrolling interests’ equity $ 26,997 $ 26,375 $ 27,125 $ 29,108 $ 22,718
Cash Flow Information: Net cash provided by operating activities $ 1,732,601 $ 1,592,093 $ 1,430,339 $ 1,285,659 $ 1,203,452 Net cash used in investing activities $ (440,105) $ (198,331) $ (1,412,393) $ (290,465) $ (81,355) Net cash used in financing activities $ (1,375,605) $ (1,225,415) $ (16,160) $ (1,117,305) $ (1,438,546)
1 To the Shareholders of Public Storage:
Public Storage’s businesses generated improved operating results in 2015. Our management teams produced excellent results for shareholders and our competitive position and financial strength improved. We are well positioned for 2016. Here are the key figures for our businesses. They are presented as if Public Storage owned 100% of each to better understand the business results.
(Amounts in millions) Revenues1 2015 2014 2013 U.S. self-storage $ 2,236 $ 2,050 $ 1,850 European self-storage 210 189 183 Commercial properties 388 393 374 Ancillary businesses 175 154 141 Total $ 3,009 $ 2,786 $ 2,548
Net Operating Income (NOI)1
2015 2014 2013 U.S. self-storage $ 1,649 $ 1,483 $ 1,326 European self-storage 121 109 105 Commercial properties 264 262 250 Ancillary businesses 121 108 102 Total $ 2,155 $ 1,962 $ 1,783 Public Storage’s share $ 1,936 $ 1,750 $ 1,579
Overall, our combined revenues increased to $3.0 billion from $2.8 billion. Most of this incremental revenue flowed to the bottom line resulting in a higher NOI of $193 million and free cash flow per 1 share of $8.66, up 12% from $7.73 in 2014.
Key 2015 Highlights U.S. self-storage s 3TRONG ORGANIC GROWTH FOR THE FIFTH CONSECUTIVE YEAR 3AME STORE REVENUE AND PROPERTY ./) INCOME grew by 6.5% and 8.5%, respectively, compared with last year’s revenue and NOI growth of 5.5% and 6.9%, respectively.
s )NVESTED MILLION IN NEW DEVELOPMENTS AND EXISTING PROPERTIES CONTAINING A COMBINED three million net rentable square feet. We ended 2015 with 32 properties under development with an estimated investment of $500 million.
(1) See accompanying schedule “Supplemental Non-GAAP Disclosures.”
1 European self-storage s 0RIMARILY FROM HIGHER OCCUPANCIES 3HURGARDS SAME STORE REVENUE AND ./) INCREASED BY and 5.5%, respectively, compared with last year’s revenue and NOI growth of 3.2% and 3.5%, respectively. s 3HURGARD ACQUIRED PROPERTIES IN THE .ETHERLANDS AND 'ERMANY AND DEVELOPED THREE NEW properties in London, increasing its net square footage by 11% to 11.6 million. Commercial properties s 03 "USINESS 0ARKS )NC 03" ENJOYED SAME PARK REVENUE AND ./) GROWTH OF AND respectively, compared with last year’s revenue and NOI growth of 3.2% and 3.0%, respectively.
s 03" HAS NOW STARTED RAISING RENTAL RATES AND REDUCING LEASE CONCESSIONS Ancillary businesses s 3OLID RESULTS FROM OUR ANCILLARY BUSINESSES WERE DUE TO INCREASED CUSTOMER VOLUMES AND EXCELLENT execution. Revenues and NOI from the tenant reinsurance segment were $110 million and $84 million, respectively, up 16% and 15%, respectively, over last year. This is exceptional given the unusually large claims we paid due to flooding in Texas and South Carolina. Financing and dividends s 0UBLIC 3TORAGE ISSUED Ñ MILLION MILLION IN TEN YEAR UNSECURED SENIOR DEBT AT AN ANNUAL RATE of 2.175%. s 0UBLIC 3TORAGE PAID ITS TH CONSECUTIVE QUARTERLY COMMON DIVIDEND WHICH WAS INCREASED TO AN annualized rate of $6.80 per share. s 3HURGARD ISSUED Ñ MILLION OF UNSECURED SENIOR DEBT AT AN AVERAGE ANNUAL RATE OF s 03" PAID ITS ST CONSECUTIVE QUARTERLY COMMON DIVIDEND WHICH WAS INCREASED TO AN ANNUALIZED RATE of $2.40 per share. s 0UBLIC 3TORAGE AND 03" REDEEMED MILLION OF PREFERRED SECURITIES AT A WEIGHTED AVERAGE ANNUAL coupon of 6.7%.
As noted in previous letters, our goal is to grow free cash flow per share on a long-term, sustainable basis. I believe this is the best metric to calculate our intrinsic business value and is also key to measuring LONG TERM MANAGEMENT PERFORMANCE &OR THE LAST TWO YEARS DESPITE 03"S PROPERTY SALES OF MILLION in 2014 and 2015 and the devaluation of the Euro from $1.33 to $1.11, free cash flow per share and consolidated NOI both increased about 10%, slightly above our long-term average. Higher revenues and improved operating margins drove this improvement. "ELOW ARE THE TRENDS FOR THE LAST FIVE AND TEN YEARS Annual Amounts per share growth rates 2015 2010 2005 Five-year Ten-year Free cash flow $ 8.66 $ 4.81 $ 3.51 12% 9% Dividends $ 6.50 $ 3.05 $ 1.90 16% 13% Net income $ 6.07 $ 2.35 $ 1.97 21% 12% Core funds from operations1 $ 8.90 $ 5.22 $ 3.69 11% 9%
(1) See accompanying schedule “Supplemental Non-GAAP Disclosures.”
2 So how does Public Storage stack up against other S&P 500 companies? Over the past ten years, S&P 500 companies increased earnings per share on average 3.5% per year2 and dividends by 5.1% per year.3 Dividends increased faster than earnings in part due to share repurchases, which were almost $4 trillion4 over this period. Share repurchases have averaged around 3% of the S&P 500 companies’ market value each year so ten years of repurchases equates to over 20% of the index. Over the past decade, Public Storage has deleveraged its balance sheet while earnings (core funds from operations) and dividends have grown at compounded rates of 9.2% and 13.1% per year, respectively. Total return to Public Storage shareholders has been about 17% per year compared with 7% for the S&P 500 Index.
U.S. Self-Storage Our U.S. self-storage business generated 94% of reported consolidated revenues and 85% of our net operating income. With 2,300 properties, we are larger than our top three competitors combined. We operate under the Public Storage brand, the most well-known and only “brand” in the industry. While WE REPRESENT ONLY ABOUT OF THE SELF STORAGE INDUSTRY WE HAVE A COMMANDING MARKET SHARE IN THE MAJOR metropolitan centers where most of our properties are located.
Public Storage’s Market Share Estimates by selected Metropolitan Statistical Areas (MSA) Next largest Annual Percentage of competitor’s population growth MSA 2015 NOI Market share5 share 2010-2015 Los Angeles 14.4% 21.0% 6.6% 1.1% Miami 6.9% 24.7% 7.2% 1.2% New York 6.2% 10.9% 7.3% 1.0% San Francisco 5.9% 22.8% 5.2% 1.0% Washington DC 4.9% 21.0% 9.5% 1.6% Seattle 4.6% 18.8% 1.2% 1.3% Dallas-Ft.Worth 3.6% 12.2% 6.1% 1.5% Houston 3.6% 13.0% 6.7% 1.5% Atlanta 3.5% 15.6% 6.7% 1.3% San Jose 2.8% 28.1% 5.2% 1.4% Denver 2.3% 20.9% 7.2% 1.3% Minneapolis 1.8% 20.9% 0.4% 1.1% Charlotte 1.8% 18.0% 2.6% 1.4% Orlando 1.7% 21.9% 4.1% 1.4% Austin 1.3% 11.3% 6.0% 1.7% We continue to invest in the larger, faster growing MSAs. Our business requires people and activity, so MSAs with population inflows, greater density and better incomes generally have higher growth rates. Greater market share creates better product/brand awareness and improves our operating efficiencies.
(2) “S&P 500 Earnings by Year,” www.multpl.com/s-p-500-earnings/table (3) “S&P 500 Dividend by Year,” www.multpl.com/s-p-500-dividend/table h30 "UYBACKS 0OST )NCREASE v WWWPRNEWSWIRECOMNEWS RELEASESSP BUYBACKS POST INCREASE HTML (5) Public Storage’s wholly-owned properties as a percentage of total properties in the MSA using data sourced from Nielson
3 When evaluating our U.S. self-storage operations, we bifurcate results into two groups–same stores and non-same stores. Our same stores are properties we have owned and stabilized for over three years. Our non-same stores consist of recently acquired, newly developed or redeveloped properties. Our same stores reflect organic growth, while the non-same stores benefit from fill-up as the properties attain a stabilized level of occupancy and rental rates. As noted above, we had an excellent 2015. Our field operations group, led by our experienced executives, #HARLIE "ARR 0ETE 0ANOS AND *OHN 3AMBUCO ACHIEVED RECORD OCCUPANCIES HIGHER RENTAL RATES AND ONE OF our best NOI growth rates ever. Same Store Properties (Amounts in millions, except sq. ft. occupancy and revenue per available foot) 2015 2014 2013 Revenues $ 1,973 $ 1,852 $ 1,756 Costs of operations 510 503 493 Net operating income $ 1,463 $ 1,349 $ 1,263 Sq. ft. occupancy 94.5% 93.9% 93.3% Revenue per available foot (REVPAF) $ 14.89 $ 13.95 $ 13.21 NOI growth rate 8.5% 6.9% 8.4%
Our operating results continue to benefit from an improving economy, a modest increase in new supply and solid execution, which led to record high occupancies, higher rates to new and existing customers and modest expense growth. In 2016, we expect continued improvement in rates, nominal improvement in occupancy and a return to more normalized expense growth. We do expect an increase in the supply of newly built self-storage properties (our best guess is about 1,000 for 2016), which will eventually impact our pricing power. However, we have the best brand, dominant market share and an incredibly talented marketing and pricing team led by John Reyes and supported by Richard Craig, David Collins and John Kim. As I have often said, “The big dog EATS lRST v AND IN MOST MARKETS WE ARE THE "IG $OG Income from non-same stores has almost tripled in the last two years as we continue to acquire and develop additional properties and integrate them into our operating platform.
Non-Same Stores (Amounts in millions, except sq. ft. occupancy and REVPAF) 2015 2014 2013 Revenues $ 263 $ 198 $ 94 Costs of operations 77 64 31 Net operating income $ 186 $ 134 $ 63 Sq. ft. 21.0 18.5 13.9 Sq. ft. occupancy 90.6% 87.9% 85.5% REVPAF $ 12.91 $ 12.09 $ 12.15
4 This group of properties, to which more will be added in 2016, will generate above average growth for several years as the properties continue to stabilize. In summary, we continue to improve the value of each new customer. In 2015, our customer acquisition costs (promotional discounts, marketing and phone center costs) were $110 million or $119 per new customer, as compared to our initial rental rate and fees of $151 per new customer. In 2009, the last time our same store revenues declined, our costs were $156 per new customer compared with the initial rental rate and fees of $130 per new customer. In addition, our customers are staying longer. These two factors, combined with solid execution and cost controls, are responsible for the significant NOI growth.
European Self-Storage Our European self-storage business operates under the “Shurgard” brand. Like Public Storage, it is the leading owner and operator of self-storage in Western Europe. Self-storage is a much smaller business in Western Europe with less than 2,000 properties, nearly half of which are in the United Kingdom. Shurgard is a leading provider of self-storage in many markets where it operates. Shurgard delivered excellent results in 2015. Led by Marc Oursin, Shurgard’s CEO, the Company achieved its second consecutive year-over-year increase in same store occupancies and improved NOI. A breakdown of operating results on a constant exchange rate basis is as follows.
Net Operating Income (Amounts in millions, except sq. ft. occupancy and REVPAF) 2015 2014 2013 Same store $ 111 $ 105 $ 102 Acquired/developed properties 10 4 3 Total $ 121 $ 109 $ 105 Public Storage’s share $ 60 $ 53 $ 51 Total assets (before depreciation reserves) $ 1,632 $ 1,438 $ 1,354 Same store: Sq. ft. occupancy 89.8% 85.3% 79.9% REVPAF $ 19.41 $ 18.56 $ 17.99
In 2015, Shurgard grew its portfolio by: s !CQUIRING lVE PROPERTIES IN 'ERMANY CONTAINING NET RENTABLE SQUARE FEET FOR MILLION s !CQUIRING PROPERTIES IN THE .ETHERLANDS FOR MILLION INCREASING OUR PRESENCE IN THE COUNTRY TO over 60 properties with three million net rentable square feet. s #OMPLETING THREE DEVELOPMENTS IN ,ONDON CONTAINING NET RENTABLE SQUARE FEET FOR MILLION
3HURGARD ISSUED AN ADDITIONAL Ñ MILLION OF UNSECURED SENIOR DEBT AT A BLENDED RATE OF USING THE proceeds to fund acquisition and development activities and repay all credit facility borrowings. We anticipate Shurgard will grow in three ways: (1) organically by improving occupancies and revenues at the same store properties, (2) through new developments and (3) driving higher occupancies and rental rates in the recently acquired and developed properties.
5 Commercial Properties /UR COMMERCIAL PROPERTIES BUSINESS CONSISTS OF A EQUITY INTEREST IN 03" AND DIRECT OWNERSHIP OF ONE MILLION SQUARE FEET WHICH IS MANAGED PRIMARILY BY 03" 5NLIKE 0UBLIC 3TORAGE AND 3HURGARD 03" DOES not have a commanding market share, leading brand nor significant scale in any of the markets where it operates. Instead, it has a “niche,” focusing on small to mid-size businesses, and an intensive and nimble property operation. The key to shareholder returns in this business are bargain purchases (acquiring properties well below replacement costs) and aggressively managing them through nimble leasing, tight expense control and good capital management (broker commissions and tenant improvements). This business is also more economically sensitive than self-storage. If done correctly, this business can PRODUCE REASONABLE RETURNS 3INCE WE STARTED 03" IN OUR ORIGINAL INVESTMENT AT PER SHARE HAS grown to over $90 per share, in addition to a growing dividend stream. 3OLID EXECUTION AND AN IMPROVING ECONOMY ENABLED 03" TO ACHIEVE SAME PARK ./) GROWTH COMPARED WITH IN 03" CONTINUES TO FACE A CHALLENGING ENVIRONMENT IN WHICH TO DEPLOY CAPITAL LOW INTEREST RATES AND TREMENDOUS INVESTOR CAPITAL SEEKING TO ACQUIRE COMMERCIAL PROPERTIES )N 03" WILL RETIRE ITS ONLY DEBT A MILLION MORTGAGE *OE 2USSELL 03"S #%/ AND HIS TEAM WILL CONTINUE TO drive future growth from its well-located portfolio on the West Coast, Texas, Washington DC and Florida markets.
Net Operating Income (Amounts in millions) 2015 2014 2013 03"S SAME PARK OPERATIONS 03"S ACQUIREDDEVELOPED PROPERTIES Public Storage’s owned commercial properties 10 10 9 Total $ 264 $ 262 $ 250 Public Storage’s share $ 117 $ 117 $ 110
Total assets (before depreciation reserves) $ 3,097 $ 3,136 $ 3,284
Ancillary Businesses
We have four ancillary businesses: merchandise (mainly locks and boxes sold to self-storage customers), tenant reinsurance (reinsurance of policies sold to our self-storage customers by a third-party insurance company), third-party property management (fees we received for managing other owners’ properties) and European ancillary businesses (sales of merchandise and insurance commissions received by Shurgard). These businesses complement our self-storage business and each generates respectable revenue and cash flow with no significant capital investment.
While modest in relative size, each ancillary business meaningfully contributes to Public Storage’s overall PROlTABILITY "Y FAR THE LARGEST OF THESE BUSINESSES IS TENANT REINSURANCE MANAGED BY *OHN 2EYES AND #APRI Haga. Once again this business had an exceptional year as revenues increased by 16% in 2015, following 12% and 9% increases in 2014 and 2013, respectively.
6 Net Operating Income (Amounts in millions) 2015 2014 2013 Third party management $ 2 $ 2 $ 2 Merchandise 13 12 12 Tenant reinsurance 84 73 68 European ancillary businesses 22 21 20 Total $ 121 $ 108 $ 102 Public Storage’s share $ 110 $ 97 $ 92 Total assets $ 10 $ 10 $ 10
We continue to explore other ancillary businesses that complement our self-storage business and require nominal capital.
Acquisitions and Developments–U.S. Self-Storage In 2015, we invested $300 million to acquire or develop 30 properties containing three million net rentable square feet. We have under development, at an estimated investment of $500 million, another 32 properties CONTAINING MILLION SQUARE FEET "UILDING UPON THEIR TREMENDOUS SUCCESS OVER THE PAST THREE YEARS $AVID $OLL 0RESIDENT OF THE 2EAL %STATE 'ROUP AND HIS TEAM DID AN EXCELLENT JOB OF ADDING TO OUR INTRINSIC VALUE BY both deploying capital at attractive returns and increasing our presence in key markets. While we are not aware of development activity by our public competitors, they are purchasing what has become known as “C of O deals” (properties under construction by local developers that are pre-sold SUBJECT TO OBTAINING CERTIFICATES OF OCCUPANCY #OMPETITION FOR THESE DEALS IS AS INTENSE AS FOR ACQUISITIONS of mature properties. As described below, our development program has certain risk and requires “investment.” In time, however, it should be a competitive advantage. Returns on our invested capital are expected to be better than traditional acquisitions and we will add product in targeted submarkets that complements our existing operation and offers our customers a superior product. While our competitive advantage may not be apparent for several years, preliminary results are encouraging. In the short-term, development activity is dilutive to free cash flow for several reasons. First, a significant portion of the cost of personnel and their related activities (about $3 million in 2015) are expensed instead of capitalized INTO THE COST OF THE NEW PROJECTS 3ECOND SELF STORAGE PROPERTIES GENERALLY REQUIRE EIGHT TO MONTHS TO DEVELOP once opened operate at a loss during the first six to 12 months and do not achieve their targeted level of cash flow for two to three years. Third, development costs are funded with capital, the cost of which is expensed. These factors tend to lower our free cash flow per share as the development program ramps up to a stabilized level, which we estimate at $400 to $500 million per year.
With respect to acquisitions, we had modest success in 2015 and we expect even less success in 2016 despite the incredible skills of Mike McGowan, our SVP of acquisitions and his team. In 2015, commercial real estate transaction volume hit a 15-year high, prices exceeded the peak of 2007 and cap rates hit new lows for self-storage. All forms of capital, i.e., institutional, private equity, local operators and especially our public company competitors, are aggressively acquiring existing properties. As I stated at a recent industry convention, we are witnessing a “pie-eating contest.” We find ourselves out of sync with the current environment, not understanding others’ investment criteria. We will remain disciplined and patient, knowing that all markets usually swing from greed to fear (see last year’s shareholder letter).
7 People, Product and Pricing In the 2003 Annual Report, I outlined three key ingredients to achieving operating excellence to enable us to compete effectively and prosper.
People: Hire, train and retain outstanding personnel who are customer focused with knowledge of our product and motivated to provide exceptional service.
Product: Acquire, develop and redevelop quality facilities that add to our franchise and improve upon our market presence and customer awareness. Our facilities have appropriate amenities and are retail oriented, well maintained and convey a sense of security.
Pricing: Use pricing, promotional discounts, our call center, website and internet marketing to attract and retain customers.
(OW DO WE MEASURE OPERATING EXCELLENCE "ESIDES OUR IMPROVED PROlTABILITY WE NOW RECEIVE REAL TIME CUSTOMER feedback. The internet and social media allow us to solicit customer reviews and advertise them. The chart below summarizes Google customer feedback and scores (1 to 5 with 5 being high). Since 2012, 172,000 reviews on Public Storage have averaged 4.9.
Google Reviews
Cumulative number of reviews Average Rating 250,000 5
200,000 4 150,000 3 100,000 Average Rating Average 2 50,000 Cumulative number of reviews Cumulative 0 1 20122013 2014 2015
Our operations team deserves a lot of credit. They are supported by a solid human resources team (led by Candy Krol), facilities management (led by Robbie Williams) and customer service support (led by Debra Wright).
Financing We have modified our long standing policy of avoiding corporate debt. Why? In simple terms, the deep high grade bond market (especially “A” credits, which we are) offers us much greater flexibility than relying solely UPON ISSUING PREFERRED STOCK 4HIS HAS ALWAYS BEEN TRUE 4HE BOND MARKET IS OVER TRILLION AND THE PREFERRED market is around $200 billion; it should offer greater flexibility. What has really changed is the preferred market has become much less liquid as banks, especially large money center banks, no longer issue the kind of preferred securities we do (they tend to issue $1,000 par preferred, which has a fixed-rate to floating-rate feature targeted to institutional investors). Accordingly, we have observed extended periods of time when it was either not
8 feasible or not economical to issue preferred securities. This limits our financial flexibility and has the potential to impede us from consummating large transactions. We think of issuing debt as adding another “tool” to our “tool kit,” giving us greater financial flexibility. 7E ISSUED Ñ MILLION TEN YEAR NOTE TO A LARGE INSURANCE COMPANY THIS YEAR "ESIDES THE attractive rate and term, the issuance has the additional benefit of being denominated in Euros which acts as a currency hedge against our Euro denominated equity investment in Shurgard. What has not changed is our proclivity toward permanent capital, which includes common equity, preferred securities and retained earnings. Accordingly, while we expect to issue debt, we expect it to remain a modest part of our capital structure and we will continue to issue preferred securities. In January 2016, we issued $300 million of 5.4% preferred securities.
Conclusion We are well positioned going into 2016. All of our businesses should continue to improve and take advantage of the current favorable operating environment.
Ronald L. Havner, Jr. #HAIRMAN OF THE "OARD AND #HIEF %XECUTIVE /FlCER February 29, 2016
9 CUMULATIVE TOTAL RETURN
Public Storage, S&P 500 Index and NAREIT Equity Index December 31, 2010 - December 31, 2015
$300
$275
$ 250
$225 Public Storage $ 200 S&P 500 Index NAREIT Equity Index $ 175
$ 150
$ 125
$ 100 12/31/10 12/31/11 12/31/12 12/31/13 12/31/14 12/31/15
12/31/10 12/31/11 12/31/12 12/31/13 12/31/14 12/31/15 Public Storage $ 100.00 $ 136.75 $ 152.20 $ 163.48 $ 207.35 $ 286.84 S&P 500 Index $ 100.00 $ 102.11 $ 118.45 $ 156.82 $ 178.28 $ 180.75 NAREIT Equity Index $ 100.00 $ 108.28 $ 129.62 $ 133.32 $ 170.68 $ 175.51
The graph set forth above compares the yearly change in the Company’s cumulative total shareholder return on its Common Shares for the five-year period ended December 31, 2015 to the cumulative total return of the Standard & Poor’s 500 Stock Index (“S&P 500 Index”) and the National Association of Real Estate Investment Trusts Equity Index (“NAREIT Equity Index”) for the same period (total shareholder return equals price appreciation plus dividends). The stock price performance graph assumes that the value of the investment in the Company’s Common Shares and each index was $100 on December 31, 2010 and that all dividends were reinvested. The share price performance shown in the graph is not necessarily indicative of future price performance. Supplemental Non-GAAP Disclosures (unaudited) Core funds from operations per share (“Core FFO”) represents diluted net income per share (“EPS”) before the impact of i) depreciation expense and disposition gains or losses and ii) foreign currency gains and losses, the application of EITF D-42, and certain other items. Free cash flow per share (“Free Cash Flow”) represents Core FFO, less per share capital expenditures and non-cash stock based compensation expense. Core FFO and Free Cash Flow are not substitutes for EPS and may not be comparable with other REITs due to calculation differences; however, we believe they are helpful measures for investors and REIT analysts to understand our performance. Net Operating Income (“NOI”) represents revenues less pre-depreciation cost of operations earned directly at our properties, and we believe is a useful performance measure that we and the investment community use to evaluate performance and real estate values. Each of these non-GAAP measures exclude the impact of depreciation, which is based upon historical cost and assumes the value of buildings diminish ratably over time, while we believe that real estate values fluctuate due TO MARKET CONDITIONS 7E ALSO PRESENT SUPPLEMENTAL MEASURES OF OUR REVENUES AND ./) INCLUDING 03" AND 3HURGARD Europe as if we owned them, to provide a measure of the performance of all the businesses we have a significant interest in. However, the inclusion of these entities in these supplemental measures does not substitute for “equity in earnings of unconsolidated real estate entities” on our income statement.
Reconciliation of Core FFO and Free Cash Flow per Share For the year ended December 31, 2015 2014 2013 2010 2005
EPS $ 6.07 $ 5.25 $ 4.89 $ 2.35 $ 1.97 Eliminate noncore items (including our equity share): Depreciation expense 2.89 2.96 2.66 2.44 1.79 Real estate gains (0.17) (0.23) (0.02) (0.06) (0.13) Foreign currency, EITF D-42, and other noncore items 0.11 0.11 (0.09) 0.49 0.06 Core FFO per share $ 8.90 $ 8.09 $ 7.44 $ 5.22 $ 3.69 Deduct capital expenditures and exclude non-cash comp (0.24) (0.36) (0.26) (0.41) (0.18)
Free Cash Flow per share $ 8.66 $ 7.73 $ 7.18 $ 4.81 $ 3.51
Reconciliation of Revenues including PSB and Shurgard Europe (Amounts in millions) For the year ended December 31, 2015 2014 2013 Consolidated revenues $ 2,382 $ 2,177 $ 1,965 Commercial and property management included in interest and other income 16 18 16 03"S REVENUES Shurgard Europe’s revenues 237 214 207 2EVENUES AS IF WE OWNED 03" AND 3HURGARD %UROPE
Reconciliation of NOI (Amounts in millions) For the year ended December 31, 2015 2014 2013 Operating income on our income statement $ 1,232 $ 1,055 $ 951 Commercial and property management included in interest and other income 12 13 12 Eliminate depreciation and G&A expense 514 510 454 Add - 03" AND 3HURGARD %UROPE ./) Total net operating income 2,155 1,962 1,783 ,ESS ./) OF 3HURGARD %UROPE AND 03" ALLOCABLE TO OTHERS Public Storage’s share of NOI $ 1,936 $ 1,750 $ 1,579
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2015. RU [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to . Commission File Number: 001-33519
PUBLIC STORAGE Exact name of Registrant as specified in its charter)
Maryland 95-3551121 State or other jurisdiction of incorporation or organization I.R.S. Employer Identification Number 701 Western Avenue, Glendale, California 91201-2349 Address of principal executive offices Zip Code Registrant's telephone number, including area code)
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impact the realization of our investment in Shurgard Europe: /DZVLQ(XURSHDQGWKH86PD\FUHDWHLPSHGHRULQFUHDVHRXUFRVWWR UHSDWULDWHFDSLWDORUHDUQLQJVIURP6KXUJDUG(XURSH x Risks of collective bargaining and intellectual property: &ROOHFWLYH EDUJDLQLQJ ZKLFK LV SUHYDOHQWLQFHUWDLQDUHDVLQ(XURSHFRXOGQHJDWLYHO\LPSDFW6KXUJDUG(XURSH¶VODERUFRVWVRU RSHUDWLRQV0DQ\RI6KXUJDUG(XURSH¶VHPSOR\HHVSDUWLFLSDWHLQYDULRXVQDWLRQDOXQLRQV x Potential operating and individual country risks: (FRQRPLF VORZGRZQV RU H[WUDRUGLQDU\ SROLWLFDORUVRFLDOFKDQJHLQWKHFRXQWULHVLQZKLFKLWRSHUDWHVKDYHSRVHGDQGFRXOGFRQWLQXH WRSRVHFKDOOHQJHVRUUHVXOWLQIXWXUHUHGXFWLRQVRI6KXUJDUG(XURSH¶VRSHUDWLQJFDVKIORZV x Impediments of Shurgard Europe’s joint venture structure: 6KXUJDUG (XURSH¶V VLJQLILFDQW GHFLVLRQVLQYROYLQJDFWLYLWLHVVXFKDVERUURZLQJPRQH\FDSLWDOFRQWULEXWLRQVUDLVLQJFDSLWDO IURPWKLUGSDUWLHVDVZHOODVVHOOLQJRUDFTXLULQJVLJQLILFDQWDVVHWVUHTXLUHWKHFRQVHQWRIRXU MRLQWYHQWXUHSDUWQHU$VDUHVXOW6KXUJDUG(XURSHPD\EHSUHFOXGHGIURPWDNLQJDGYDQWDJHRI 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V-RKQ5H\HV 1DPH -RKQ5H\HV 7LWOH &KLHI)LQDQFLDO2IILFHU 'DWH )HEUXDU\ ([KLELW SECTION 1350 CERTIFICATION In connection with the Annual Report on Form 10-K of Public Storage (the “Company”) for the year ended December 31, 2015, as filed with the Securities and Exchange Commission (the “SEC”) on the date hereof (the “Report”), Ronald L. Havner, Jr., as Chairman, Chief Executive Officer and President of the Company and John Reyes, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), that: 7KH 5HSRUW IXOO\ FRPSOLHV ZLWK WKH UHTXLUHPHQWV RI 6HFWLRQ D RI WKH 6HFXULWLHV ([FKDQJH $FW RI DV DPHQGHG WKH³([FKDQJH$FW´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as of February 29, 2016) Trustees Executive Officers Corporate Headquarters 701 Western Avenue Ronald L. Havner, Jr. (2002) Ronald L. Havner, Jr. Glendale, CA 91201-2349 Chairman of the Board, Chief Executive Chairman of the Board, Chief Executive Officer and President Officer and President Investor Relations Tamara Hughes Gustavson (2008) John Reyes Additional information contact Private Investor Senior Vice President and Chief Financial Officer Clemente Teng Vice President of Investor Services Uri P. Harkham (1993) David F. Doll (818) 244-8080 Chief Executive Officer, Harkham Family Senior Vice President and President, Enterprises Real Estate Group Transfer Agent B. Wayne Hughes, Jr. (1998) Lily Hughes Computershare Trust Company, N.A. Founder, American Commercial Senior Vice President, Chief Legal Officer and P.O. Box 30170 Equities, LLC Corporate Secretary College Station, TX 77842-3170 (781) 575-3120 Shareholder website: Avedick B. Poladian (2010) Candace N. Krol http://www.computershare.com/investor Executive Vice President and Chief Operating Senior Vice President and Chief Human Resources Shareholder online inquiries: Officer, Lowe Enterprises, Inc. Officer https://www-us.computershare.com/investor/contact Gary E. Pruitt (2006) PS Insurance Retired Chairman and Chief Executive Capri L. Haga Officer, Univar N.V. President Independent Registered Public Accounting Firm Ernst & Young LLP Ronald P. Spogli (2010) Shurgard Self Storage S.C.A. (Europe) Co-Founder, Freeman Spogli & Co. Los Angeles, CA Marc Oursin Chief Executive Officer Daniel C. Staton (1999) Chairman and Managing Director, Annual Meeting of Shareholders Staton Capital PS Business Parks, Inc. The Annual Meeting of Shareholders of Public Storage will be held on April 25, 2016 Joseph D. Russell, Jr. ( ) = Year trustee was elected to the Board at 11:00 a.m. at the Westin Pasadena, Chief Executive Officer 191 North Los Robles, Pasadena, CA. Maria R. Hawthorne Founder and Chairman Emeritus President B. Wayne Hughes Certifications Stock Exchange Listing Additional Information Sources The most recent certifications by our Chief The Company’s Common Shares trade under The Company’s website, www.publicstorage.com, Executive Officer and Chief Financial ticker symbol PSA on the New York Stock contains financial information of interest to Officer pursuant to Sections 302 and 906 of Exchange. shareholders, brokers and others. the Sarbanes-Oxley Act of 2002 are filed as exhibits to our Form 10-K. Our Chief Executive Officer’s most recent annual certi- fication to the New York Stock Exchange was submitted on May 26, 2015. Public Storage is a member and active supporter of the National Association of Real Estate Investment Trusts. ® Public Storage 701 Western Avenue, Glendale, California 91201-2349 s WWWPUBLICSTORAGECOM (SKU 002CSN5FC3)