Public Storage
Annual Report 2006

Plain-text annual report

PUBLIC STORAGE, INC. 2 0 0 6 A N N U A L R E P O R T P U B L I C S T O R A G E , I N C . A N N U A L R E P O R T 2 0 0 6 PUBLIC STORAGE, INC. 701 Western Avenue, Glendale, California 91201-2349 (818) 244-8080 • www.publicstorage.com (SKU 002CS13720) WA 91 OR 38 MN 44 WI 16 IMII 43 CO 60 NV 22 UT 7 AZ 37 CA 368 HIHH 77 NE 1 KS 22 OK 8 TX 235 IL 123 IN 31 TN 33 AL 22 MS 1 MO 38 LA 9 OH 30 KY 7 HHNHH 2 NY 61 MA RI CT 19 2 14 NJ DE MD 56 5 55 PA 28 VA 78 NC 69 SC 40 GA 90 FL 191 SWEDENENN N 25 DENMARKKK NMANMANNMANNM 88 UNITED UNITED UUNITED KINGDOM KINGDOM KINGDOM 19 NETHERLAN ERREREHHE LRLANDS RRLLLLA RLAND 3323222 BELBELGBELGELGIU ELGIULLELEL UMIU 2111111 GERMANNYN 11 FRANCE 50 P RO PE RT I E S (as of December 31, 2006) Location Number of Properties(1) Net Rentable Square Feet Location Number of Properties(1) Net Rentable Square Feet UNITED STATES Alabama Arizona California Colorado Connecticut Delaware Florida Georgia Hawaii Illinois Indiana Kansas Kentucky Louisiana Maryland Massachusetts Michigan Minnesota Mississippi Missouri Nebraska Nevada New Hampshire New Jersey New York North Carolina 22 37 368 60 14 5 191 90 7 123 31 22 7 9 55 19 43 44 1 38 1 22 2 56 61 69 890,000 2,259,000 23,244,000 3,810,000 869,000 288,000 12,452,000 5,835,000 475,000 7,800,000 1,880,000 1,310,000 330,000 608,000 3,085,000 1,179,000 2,755,000 2,990,000 63,000 2,144,000 46,000 1,404,000 132,000 3,492,000 3,921,000 4,775,000 UNITED STATES (cont.) Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina Tennessee Texas Utah Virginia Washington Wisconsin 30 8 38 28 2 40 33 235 7 78 91 16 1,860,000 428,000 1,955,000 1,867,000 64,000 2,131,000 1,883,000 15,375,000 440,000 4,407,000 5,954,000 1,030,000 Totals 2,003 125,430,000 EUROPE Belgium Denmark France Germany Netherlands Sweden United Kingdom Totals Grand Totals 21 8 50 11 32 25 19 166 2,169 1,219,000 410,000 2,606,000 550,000 1,664,000 1,335,000 905,000 8,689,000 134,119,000 (1) Storage and properties combining self-storage and commercial space. CO R P O R AT E D ATA (as of March 23, 2007) Partner, Osler, Hoskin & Harcourt LLP and Secretary Directors B. Wayne Hughes (1980) Chairman of the Board Ronald L. Havner, Jr. (2002) Vice-Chairman of the Board, Chief Executive Officer and President Harvey Lenkin (1991) Retired President and Chief Operating Officer Dann V. Angeloff (1980) President of The Angeloff Company William C. Baker (1991) Principal, Baker & Associates John T. Evans (2003) Uri P. Harkham (1993) President and Chief Executive Officer Harkham Industries B. Wayne Hughes, Jr. (1998) Vice President of American Commercial Equities, LLC Gary E. Pruitt (2006) Chief Executive Officer of Univar N.V. Daniel C. Staton (1999) Chairman of Staton Capital Executive Officers Ronald L. Havner, Jr. Vice-Chairman of the Board, Chief Executive Officer and President John Reyes Officer John E. Graul Senior Vice President John S. Baumann Senior Vice President and Chief Legal Officer David F. Doll Senior Vice President Candace N. Krol Senior Vice President, Human Resources Corporate Officers Self-Storage Operations Drew J. Adams Vice President and Director of Taxes Todd Andrews Vice President and Controller Mark B. Bilfield Senior Vice President—Marketing John E. Graul President Brian J. Devlin Kim DeRuyter Senior Vice President and Divisional Manager Senior Vice President and Divisional Manager Capri L. Haga Harvey A. Grindeland Senior Vice President—Risk Management Senior Vice President and Divisional Manager James D. Hartung Kenneth H. Morrison Senior Vice President—Chief Marketing Officer Senior Vice President and Divisional Manager Stephanie G. Heim Vice President, Corporate Counsel Ken A. Kederian Vice President of Internal Audit A. Ammar Kharouf Vice President and Litigation Counsel Brent C. Peterson Senior Vice President and Chief Information Officer A. Timothy Scott Vice President and Tax Counsel Clemente Teng Real Estate Group David F. Doll President David W. Marzocchi Senior Vice President—Development and Michael K. McGowan Senior Vice President—Acquisitions and Development James F. Fitzpatrick Senior Vice President—Entitlements Peter G. Panos Senior Vice President and Divisional Manager David D. Young Senior Vice President and Divisional Manager Alan Grossman Senior Vice President and Chief Financial Officer Ancillary Businesses Thomas Miller President—PS Orangeco Obren B. Gerich President—PS Insurance Steven De Tollenaere President John M. Sambuco Vice President—Operations Frank J.E. Boot Marketing Director Wim E.M. Van Beveren Vice President—Development Jean L.H. Kreusch Chief Financial Officer Kris S.A. Van Mieghem General Counsel David L. Coupez Vice President—Information Systems ( ) = date director was elected to the Board Vice President of Investor Services Shurgard Self Storage S.C.A. (Europe) Senior Vice President and Chief Financial Construction Professional Services Certifications Stock Exchange Listing Additional Information Sources The Company’s common stock trades under ticker The Company’s website, www.publicstorage.com, contains financial information of interest to symbol PSA on the New York shareholders, brokers, etc. Stock Exchange. Transfer Agent Computershare Trust Company, N.A. P.O. Box 43078 Providence, RI 02940-3078 (781) 575-3120 www.computershare.com Independent Registered Public Accounting Firm Ernst & Young LLP Los Angeles, California The most recent certifications by our Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes- Oxley Act of 2002 are filed as exhibits to our Form 10-K. Our Chief Executive Officer's most recent annual certifica- tion to the New York Stock Exchange was submitted on May 15, 2006. Public Storage, Inc. is a member and active supporter of the National Association of Real Estate Investment Trusts. SELECTED FINANCIAL HIGHLIGHTS For the year ended December 31, 2006(1) 2005(1) 2004(1) 2003(1) 2002(1) (Amounts in thousands, except per share data) Revenues: Rental income and ancillary operations Interest and other income Total Revenues $ 1,349,856 31,799 31,799 1,381,655 1,381,655 $ 1,043,600 $ 952,766 $ 890,350 $ 845,273 5,210 850,483 16,447 1,060,047 2,537 892,887 5,391 958,157 Expenses: Cost of operations Depreciation and amortization General and administrative Interest expense Income from continuing operations before equity in earnings of real estate entities, minority interest in income and other Equity in earnings of real estate entities Other Minority interest in income Income from continuing operations Cumulative effect of change in accounting principle Discontinued operations (2) Net income Net income allocable to common shareholders Per Common Share: Distributions Net income - diluted Weighted average common shares - diluted $ $ $ $ $ $ $ 500,560 500,560 437,984 437,984 84,661 84,661 33,062 33,062 1,056,267 325,388 11,895 11,895 6,439 6,439 (31,883) (31,883) 311,839 311,839 378,301 196,232 21,115 8,216 603,864 456,183 24,883 1,182 (32,651) 449,597 361,944 182,890 18,813 760 564,407 393,750 22,564 67 (49,913) 366,468 340,871 183,863 17,127 1,121 542,982 309,491 175,524 15,619 3,809 504,443 349,905 24,966 1,007 (43,703) 332,175 346,040 29,888 (2,541) (44,087) 329,300 — 578 578 1,609 (10,562) 1,609 314,026 314,026 $ 456,393 $ 366,213 $ 336,653 $ 318,738 — 4,478 — 6,796 — (255) 46,891 $ 254,395 $ 178,063 $ 161,836 $ 141,423 2.00 $ 2.00 0.33 0.33 $ 143,715 143,715 1.90 $ 1.97 $ 1.80 $ 1.38 $ 1.80 $ 1.28 $ 128,819 128,681 126,517 1.80 1.14 124,571 Balance Sheet Data: $ 11,198,473 $ 11,198,473 $ 5,552,486 $ 5,204,790 $ 4,968,069 $4,843,662 Total assets $ 1,848,542 $ 1,848,542 $ 149,647 $ 145,614 $ 76,030 $ 115,867 Total debt 181,030 $ Minority interest (other partnership interests) 118,903 $ 141,137 $ 154,499 $ Minority interest (preferred partnership interests) $ 325,000 $ 225,000 $ 310,000 $ 285,000 $ 285,000 $ 8,208,045 $ 8,208,045 $ 4,817,009 $ 4,429,967 $ 4,219,799 $4,158,969 Shareholders’ equity 28,970 $ Other Data: Net cash provided by operating activities Net cash used in investing activities Net cash used in financing activities $ $ $ $ $ $ 791,700 $ 692,048 $ 616,664 $ 571,387 $ 591,283 791,700 (487,496) (487,496) $ (443,656) $ (157,638) $ (205,133) $ (325,786) (244,395) (244,395) $ (121,146) $ (297,604) $ (264,545) $ (211,720) (1) During 2006, 2005, 2004, 2003 and 2002, we completed several significant asset acquisitions, business combinations and equity transactions. See our consolidated financial statements and notes thereto. (2) Commencing January 1, 2002, we adopted and modified a business plan that included the closure or consolidation of certain non- strategic containerized storage facilities. We sold two commercial properties—one in 2002, the other in 2004. During 2003, we sold five self-storage facilities. The historical operations of these facilities are classified as discontinued operations, with the rental income, cost of operations, depreciation expense and gain or loss on disposition of these facilities for current and prior periods included in the line item “Discontinued Operations” on the consolidated income statement. TO OUR SHAREHOLDERS O of our business segments. ur net income declined in 2006 as compared to 2005, principally as a result of our merger with Shurgard Storage Centers, Inc. (“Shurgard”). Our intrinsic or business value, however, did just the opposite and increased, also as a result of the merger and improvements in all First let’s review the merger. Shurgard Merger After nearly a decade of trying to combine the two companies, on August 23 we consummated the merger with Shurgard. This was just over a year after announcing our “unsolicited offer” to merge. Shurgard, like Public Storage, started in 1972 and grew in a similar fashion. Both companies raised capital in the 1980’s through limited partnerships and continued to expand in the 1990’s as Real Estate Investment Trusts (REITs). We competed for many of the same development sites and acquisition properties and created what was considered by many to be the two best franchises in the self-storage industry. While both companies thought they had the “best brand, best properties and best people,” both organizations respected and mimicked each other and considered the other “number two.” When we approached Shurgard about merging, we identified three areas of opportunity. First, significant general and administrative costs could be eliminated as a result of combining corporate and executive functions and migrating Shurgard’s domestic portfolio onto Public Storage’s centralized operating system, WebChamp. Second, there was an opportunity to eliminate redundant property operating costs such as duplicate Yellow Pages, back office support functions and call centers. There was also an opportunity to use Public Storage’s marketing and pricing programs to achieve higher revenues in Shurgard’s domestic portfolio, which had historically operated at about 500 to 600 basis points lower occupancy than Public Storage’s properties. Third, Public Storage had the financial strength to consummate the merger, retire a significant amount of Shurgard’s debt, absorb the operating losses from Europe and provide capital to grow both the domestic and European platforms. The Shurgard directors recognized the benefits of the merger and in March 2006 we signed a definitive merger agreement which was approved by both companies’ shareholders in August. From signing until closing, the Shurgard and Public Storage management teams worked hard to make sure the merger integration went as smoothly as possible. At closing, Public Storage paid about $5.3 billion for the “second best” domestic portfolio and by far the best portfolio and operating organization in Europe. We issued 39 million shares of common stock and assumed $2 billion of debt. In the U.S., we acquired 487 properties consisting of 32 million net rentable square feet. We are now larger than our next four largest competitors COMBINED! In Europe, we are also the largest owner and operator with 103 properties consisting of 5.6 million net rentable square feet and joint venture interest with another 63 properties, with 3.1 million net rentable square feet. Intrinsic Value In undertaking and structuring a merger, it is as important to understand what you are buying as what you are giving up. In the case of an all cash transaction, it is easy to understand what you are paying. But in the case of a stock merger, such as with Shurgard, we in effect “sold” part of our company, about 23%, to the Shurgard shareholders in return for 100% of their company and the assumption of debt. Accordingly, we needed to understand our intrinsic or enterprise value and make some assessments of Shurgard’s intrinsic value. This is exactly what we did. To understand intrinsic value, there is no better source than Warren Buffett. His definition goes something like this: “Intrinsic value is the discounted value of the cash that can be taken out of a business during its lifetime. Calculating intrinsic value is typically highly subjective that varies both as estimates of future cash flows are revised and as interest rates move. Intrinsic value is the only logical way to evaluate the relative attractiveness of investments and businesses. Understanding intrinsic value is as important for managers as it is for owners. When managers make capital allocation decisions, such as a merger or acquisition, it is vital that decisions are made to increase intrinsic value rather than destroy it. Many managers tend to focus on whether a transaction is immediately dilutive or anti-dilutive to earnings per share rather than evaluate its impact on intrinsic value. Over time, the skill with which managers allocate capital will have an enormous impact on a company’s intrinsic value.” In assessing a merger with Shurgard, we evaluated the cash flows of both businesses. Here is a snapshot of both companies at the end of 2005 using Funds from Operation (see below for explanation): Comparison of FFO per Common Share in 2005 (Amounts in millions, except per share) Shurgard Public Storage SHU reported FFO Merger costs Real estate development costs G&A costs European losses FFO after adjustments Shares issued $ 68 14 13 35 18 $ 148 PSA reported FFO Hurricane casualty losses Gain on sale of non-real estate assets EITF D-42 charges $ 465 3 (1) 9 FFO per share after adjustments $ 3.79 FFO per share after adjustments FFO after adjustments 39 Shares outstanding $ 476 129 $3.69 So adjusting for special charges, one time items or costs that we did not think would be recurring, the transaction was immediately FFO positive for Public Storage shareholders. However, we would not have pursued the merger for a few cents of earnings accretion. The real value lies in the opportunity to achieve lower costs and higher revenues in Shurgard’s domestic and European properties and lower the operating costs of Public Storage’s domestic portfolio (through economies of scale). The three “Same Store” portfolios performed like this during 2005: Public Storage Shurgard - U.S. Shugard - Europe Realized rent per avg sq. ft. Average occupancy Gross profit margin $ 11.61 91% 66.8% $ 12.13 86% 59.5% $ 22.19 78% 44.2% What should be clear is that the Shurgard properties have significant “upside” both in terms of occupancies and operating margins. So often these “potential benefits” are paid to the seller in mergers through premiums above “intrinsic value.” As you can see, the benefits will be shared 23% to the former Shurgard shareholders who are now Public Storage shareholders and 77% to the Public Storage shareholders. Let’s review how we are achieving these “potential benefits” and improving our intrinsic value. Domestic Operations With respect to our domestic operations, we had four objectives at the time the merger closed. First, combine our corporate offices and reduce G&A costs. Shurgard’s corporate staff has been reduced from about 150 at the time of the merger to about 20 today. The remaining corporate staff is expected to terminate by April 30th. We expect to add less than ten people to the Public Storage corporate staff as a result of the merger. Overall, we should have well over $30 million in annual savings. Second, we wanted to rebrand and migrate the Shurgard properties onto our operating platform. Immediately after consummating the merger in late August, the Shurgard properties were converted to our centralized operating system, WebChamp. We promptly started selling space through our three distribution channels and using our pricing and media programs to improve occupancies. Public Storage signage has been installed at all but a handful of Shurgard properties. We will continue to improve “Public Storage branding” at all facilities in 2007. The third objective was to reduce operating costs and eliminate redundancies. Although we hired about 1,100 Shurgard field employees, over the last five months approximately 600 have left the company. We were prepared for this turnover and quickly accelerated our recruiting efforts, hiring new employees at our lower wage rates. We also implemented a single compensation and benefit plan for all field personnel, effective January 1. We expect annual savings in employee costs in excess of $5 million. By combining Yellow Page advertising and terminating Shurgard’s marketing programs, we expect to save $5 million per year in our marketing costs, exclusive of media and internet advertising. The fourth objective was to drive Shurgard property occupancies to the 91% level historically experienced by Public Storage’s properties. Our marketing and pricing programs have begun to have a positive effect of improving the occupancy of Shurgard Same Store properties. Since the close of the merger in August, occupancy and rental rates have both improved. The combined domestic operations present a significant opportunity. During the fourth quarter, our combined domestic business generated about $1.5 billion in annualized revenues with an average occupancy of about 87%. This is well below our historical level of 91% annual occupancy. However, revenue growth will take longer to realize than the expense reductions. Generally, when we are trying to accelerate customer volumes, we are aggressive with pricing, promotional discounts and marketing. In the short term, it is often difficult to see the benefits of these programs as promotional discounts and marketing expense adversely affect earnings in the month the customer moves in. In addition, since about 30% of our customers move in and out within 90 days, it takes time to achieve a stabilized customer base. My best guess is that it will take us most of the 2007 rental season to achieve a stabilized customer base in the U.S. European Operations Our objectives with the European Operations were to bring the cost structure in line with the current size of the operating platform and to drive occupancy and revenue growth by sharing the marketing and pricing strategies used in our domestic business. The European support staff, which consists of all operations management and support functions, real estate and corporate staff, has been reduced from about 185 at the beginning of 2006 to about 135 today. We have also eliminated or modified certain property level incentive plans, resulting in lower property level payroll. Marketing costs are expected to be lower as a result of centralization of all programs and the elimination of ineffective projects. In addition, media purchasing has been centralized with the same vendor that we use for our domestic programs. In aggregate, we expect the annual savings from these programs will be in the $4 to $6 million range. With respect to revenues, European Same Store property occupancies were 89% during the fourth quarter, the highest in their history. Going into 2007, occupancies are 8% higher than last year with just over 4% higher in place rents. Europe has achieved this with modest promotional discounts and better marketing and pricing programs. In summary, the “integration” is nearly complete, and we believe we are well on our way to realizing the potential benefits from the merger. This was not a “free lunch.” We incurred “transaction costs” (primarily severence, attorneys, investment bankers and others) of about $48 million which have been allocated to the costs of assets acquired. We have also incurred “integration costs” of $56 million, which have been expensed in our 2006 financial results. Financial Results in 2006 The merger had a profound impact on our reported operating results. For 2006, revenues grew by over 30%, or $300 million, to about $1.4 billion. About $200 million relates to the acquired Shurgard properties for the period we owned them. Next year’s revenues should exceed $1.6 billion attributable primarily to owning the Shurgard properties for a full year. Net income to common shareholders declined by 82% to $47 million. As a result, earnings per share decreased by 83% to $0.33 per share, from $1.97 per share in 2005. Earnings were impacted by two major items associated with the Shurgard merger: amortization of acquired intangible assets (the ascribed value to the customers occupying units at the close of the merger) and integration costs. The amortization was $176 million in 2006 and will be about $243 million in 2007 and $71 million in 2008. The merger integration costs were $56 million and consisted of severance and additional compensation associated with the merger, as well as terminating a significant number of development projects that were in the “planning” stage. Merger integration costs should be less than $5 million in 2007. The amortization of intangible assets has no impact on another measure that we typically report, funds from operations, which is basically net income before depreciation and amortization, excluding gains on sales of real estate. FFO is not reduced by the ongoing “capital investment” required to maintain the competitive nature of our properties. For Public Storage, this is approximately $40 million per year or about $0.30 per rentable square foot. Our FFO per share declined by 1.1% to $3.57 in 2006 from $3.61 in 2005. Excluding the items associated with the Shurgard merger integration costs and other non cash charges, we had a pretty good year, with per share amounts increasing by 13% to $4.17 per share in 2006 from $3.69 per share in 2005. These comparisons are reflected in the table: FFO per common share prior to adjustments for the following items Shurgard merger integration costs Termination of contract and development projects EITF Topic D-42 charges Other FFO per common share, as reported Year ended December 31, 2006 $ 4.17 (0.30) (0.09) (0.23) 0.02 $ 3.57 2005 $ 3.69 — — (0.07) (0.01) $ 3.61 The 13% growth can be primarily attributed to the continued growth in our domestic Same Store operations along with improvement in our newly developed and acquired properties. Excluding “integration costs,” the Shurgard portfolio had very little impact on our 2006 operating results. Let’s review how each aspect of our business performed in 2006. Net Operating Income by Category (Dollar amounts in thousands) Same Store properties Development properties Expansion properties Acquisition properties Shurgard’s U.S. properties Shurgard’s European properties Net operating income before depreciation Depreciation and amortization expense 2006 $575,152 25,739 48,921 39,798 80,769 29,279 799,658 (434,646) 2005 $ 547,048 19,620 41,202 22,911 — — 630,781 (191,102) 2004 $ 508,998 11,336 37,877 3,099 — — 561,310 (176,230) Total earnings from self-storage $ 365,012 $ 439,679 $ 385,080 Same Store Operations The “Same Store” portfolio comprises 1,266 properties and represents about 56% of the net rentable square feet of our entire portfolio. Net operating income (before depreciation) generated from this group increased by 5% in 2006 to $575 million. Revenues rose by 5.1% driven primarily by higher rental rates and administrative fees offset by a 5% growth in operating expenses. Operating margins remained about the same for both 2006 and 2005. During 2006, rental rates grew by 5.3% and occupancy levels remained stable at 91%. Revenue per available square feet, or “REVPAF,” which takes into account rental rates, promotional discounts and occupancy, grew by 5%. Our December 2006 in place rents are approximately 3.6% higher than December 2005. Cost of operations for the Same Store properties increased by 5%, or approximately $13 million in 2006 as compared to 2005. Payroll expense, our largest expense category, increased 5%, or about $4 million in 2006 compared to 2005. The higher expenses were due principally to higher wage rates required for some of our job classifications and a lower amount of workers compensation benefit compared to last year. Advertising and promotion is comprised principally of media (television and radio), Yellow Pages and internet advertising. Advertising and promotion costs increased 5.6%, or approximately $1.3 million to $25 million in 2006 compared to 2005. We significantly expanded our media programs to improve incremental move-in volumes throughout the entire domestic portfolio, principally due to the Shurgard acquisition. Development and Expansion Properties Our recently developed and expanded properties continued to lease-up with higher revenues generating improving yields. During 2006, this group of 123 facilities (10.5 million net rentable square feet of space) generated $75 million of net operating income (before depreciation of $28 million). These facilities should continue to produce above average income growth as they reach stabilized occupancy levels and attain greater pricing power. During 2006, we completed five new development properties at a total cost of $115 million, adding 440,000 net rentable square feet, and 17 expansion projects at a total cost of $46 million, adding 520,000 net rentable square feet to our portfolio. Our future development and expansion activities should continue to provide growth. At year end 2006, we had 48 projects which could add approximately 2.3 million net rentable square feet over the next couple of years at an estimated cost of $188 million. Acquisition Properties While our activity this year was slowed due to the Shurgard merger, we continue to look for third-party owned properties with the potential to provide attractive long-term returns on invested capital and complement our existing franchise. Since 2004, we have invested $618 million to acquire 89 facilities with approximately 6.4 million net rentable square feet. During 2006, these facilities generated $40 million of net operating income (before depreciation) for a yield of 6.3%. As with our development properties, we expect these returns to improve as we are able to increase rental rates from promotional lease-up rates and achieve stabilized occupancies. Ancillary Business Operations Our ancillary businesses – including tenant reinsurance, merchandise sales (locks and boxes), consumer truck rental (both our own and as an agent of Penske), commercial property and third-party property management operations – collectively continue to contribute to our operating results. In 2006, net operating income of our ancillary businesses improved by $7 million to $37 million, benefiting from a larger group of properties. The earnings contribution from these businesses is expected to increase as the number of self-storage facilities we operate continues to grow and we have a full year’s ownership of the Shurgard properties. (Dollar amounts in thousands) 2006 2005 Revenues $ 93,453 $ 75,733 Operating expenses 56,030 44,826 Net $ 37,423 $ 30,907 Percentage Change 23% 25% 21% Financing During 2006, we raised a total of $1.4 billion in capital from four series of preferred stock and a preferred partnership unit security at a blended annual rate of 7.1%. The net proceeds from this activity along with cash on hand were used to redeem five series of preferred stock totaling $1.1 billion, with a blended annual rate of 8%, along with funding the cash requirements of the Shurgard merger. Immediately upon the close of the Shurgard merger, we repaid Shurgard’s outstanding borrowings on its bank credit facility and certain variable rate mortgage notes totaling $671 million. In addition, all Shurgard’s outstanding preferred stock was redeemed. Overall, the total $3.2 billion of preferred securities outstanding at year end 2006 has an average annual rate of 6.9%, 120 basis points lower than in 2003. (Dollar amounts in millions) 2006 2005 2004 2003 Outstanding preferred securities(1) $ 3,180 $ 2,723 $2,412 $ 2,152 Weighted average cost of preferred at period end 6.9% 7.1% 7.4% 8.1% (1) Excludes amounts called for redemption prior to December 31 but not redeemed until the following year. We also repaid all of the notes, $433 million (325 million euros) that encumbered 102 of our wholly- owned European facilities in January 2007. To fund the repayment of these notes, we borrowed $360 million under our domestic credit facilities. In connection with the repayment of the debt, we also terminated the related European currency and interest rate hedges. We own a 20% interest in two consolidated joint ventures which collectively own 63 European properties with 3.1 million net rentable square feet. The two ventures collectively had approximately $290 million of outstanding debt at December 31, 2006, which is included in our consolidated financial statements. In January 2007, we submitted to arbitration our notice to terminate the joint ventures after being unable to reach a satisfactory resolution with our joint venture partner for their dissolution. In early January 2007, we raised $500 million in capital through the issuance of preferred stock at an annual rate of 6.625%. We used the proceeds to redeem two series of preferred securities and paydown the domestic credit facilities. For the remainder of 2007, we have an opportunity to redeem one preferred issue of approximately $173 million, with an annual rate of 7.5%. During 2006, we received an upgrade in our credit rating from Moody’s, to an A3 on our senior unsecured debt. With our Standard and Poor’s rating of A-, we are the only REIT with this level of dual rating. Few real estate companies or businesses have the financial strength of Public Storage. We have the lowest debt relative to size and the highest retained cash levels of any REIT in the U.S. We are prepared for the “unexpected” to take advantage of “unexpected opportunities.” Investment in PS Business Parks At year end, PS Business Parks’ (PSB) equity market capitalization was over $2 billion and our 44% investment in PSB was valued at approximately $900 million. More importantly, PSB performed well relative to its competition and was able to grow its “Same Park” portfolio net operating income by 2.9%. The customer environment for PSB improved dramatically in 2006, and the outlook for 2007 is even better. The higher Same Park net operating income was driven by a 3.7% increase in revenues primarily due to a 2.5% increase in annual realized rents to $14.09 per square foot. Operating margin and occupancy remained stable at 70% and 93%, respectively. PSB took advantage of the favorable interest rate environment and completed two preferred issuances totaling $239 million at a blended rate of 7%. Overall, the total $799 million of preferred stock outstanding at year end has a blended annual rate of 7.2%, 60 basis points lower than in 2004. (Dollar amounts in thousands) 2006(1) 2005 2004 Outstanding preferred securities $ 799,000 $ 729,100 $ 638,600 Weighted average cost of preferred at period end 7.2% 7.7% 7.8% (1) Includes the issuance of $144 million of Series P and the redemption of $50 million of Series F, both in January 2007 PSB’s operations should continue to improve in 2007 as its cost of capital declines and occupancies and Improving market conditions should drive higher rental rate growth return to historical levels. occupancies and revenue per square foot. Conclusion and Outlook 2006 was a challenging year. Our 5,000 employees worked hard to produce solid results in all our businesses and successfully integrate Shurgard. The results of our hard work in 2006 should become more transparent in 2007. We will continue to relentlessly focus on the three drivers of our business — People, Product and Pricing. In the long run, if we continue to improve upon our competitive advantages, lower our costs of capital and deploy incremental capital at reasonable rates of return, our owners should benefit from sustained growth in intrinsic value. Ronald L. Havner, Jr. President and Chief Executive Officer March 23, 2007 CUMULATIVE TOTAL RETURN Public Storage, Inc., S&P 500 Index and NAREIT Equity Index December 31, 2001 - December 31, 2006 $400 $350 $300 $250 $200 $150 $100 $ 50 $ 0 Public Storage, Inc. S&P 500 Index NAREIT Equity Index 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 Public Storage, Inc. $100.00 $101.90 $143.81 $191.56 $239.72 $353.40 S&P 500 Index $100.00 $ 77.90 $100.25 $111.15 $116.61 $135.03 NAREIT Equity Index $100.00 $103.82 $142.37 $187.33 $210.12 $283.79 The graph set forth above compares the yearly change in the Company’s cumulative total shareholder return on its Common Stock for the five-year period ended December 31, 2006 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 Stock and each index was $100 on December 31, 2001 and that all dividends were reinvested. The stock price performance shown in the graph is not necessarily indicative of future price performance. Computation of Funds from Operations (unaudited) Funds from operations (“FFO”) is a term defined by the National Association of Real Estate Investment Trusts (“NAREIT”). FFO is a supplemental non-GAAP financial disclosure, and it is generally defined as net income before depreciation 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 and because we believe that FFO is helpful to investors as an additional measure of the performance of a REIT. 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. (Amounts in thousands, except per share amounts) Net income: Depreciation and amortization Depreciation and amortization included in discontinued operations Less - depreciation with respect to non-real estate assets Depreciation from unconsolidated real estate investments Gain on sale of real estate assets Less - our share of gain on sale of real estate included in equity of earnings of real estate entities Minority interest share of income Net cash provided by operating activities FFO to minority interest - common FFO to minority interest - preferred Funds from operations Less: allocations to preferred and equity stock shareholders: Senior Preferred Equity Stock, Series A For the year ended December 31, 2006 2005 2004 $314,026 437,984 $456,393 196,232 $366,213 183,063 234 (225) 38,890 (4,547) (1,047) 31,883 817,198 (17,312) (19,055) 253 (1,789) 35,425 (8,279) (7,858) 32,651 703,028 (18,782) (17,021) 1,282 (4,252) 33,720 (2,288) (6,715) 49,913 620,936 (23,473) (32,486) 780,831 667,225 564,977 (245,711) (21,424) (180,555) (21,443) (166,649) (21,501) FFO allocable to our common shareholders $513,696 $465,227 $376,827 Weighted average shares outstanding: Common shares Stock option dilution 142,760 955 128,159 660 127,836 845 Weighted average common shares for purposes of computing fully-diluted FFO per common share 143,715 128,819 128,681 FFO per common share $ 3.57 $ 3.61 $ 2.93 WA 91 OR 38 NV 22 CA 368 HIHH 77 CO 60 UT 7 AZ 37 HHNHH 2 NY 61 MA RI CT 19 2 14 NJ DE MD 56 5 55 MN 44 WI 16 IMII 43 OH 30 KY 7 IL 123 IN 31 TN 33 AL 22 MS 1 PA 28 VA 78 NC 69 SC 40 GA 90 FL 191 MO 38 LA 9 NE 1 KS 22 TX 235 OK 8 SWEDENENN N 25 DENMARKKK NMANMANNMANNM 88 UNITED UUNITED UNITED KINGDOM KINGDOM KINGDOM 19 NETHERLAN ERREREHHE LRLANDS RLAND RRLLLLA 3323222 BELBELGBELGELGIU ELGIULLELEL UMIU 2111111 GERMANNYN 11 FRANCE 50 P RO PE RT I E S (as of December 31, 2006) Location of Properties(1) Location of Properties(1) Square Feet Number Net Rentable Square Feet Number Net Rentable UNITED STATES UNITED STATES (cont.) Alabama Arizona California Colorado Connecticut Delaware Florida Georgia Hawaii Illinois Indiana Kansas Kentucky Louisiana Maryland Massachusetts Michigan Minnesota Mississippi Missouri Nebraska Nevada New Hampshire New Jersey New York North Carolina 22 37 368 191 123 60 14 5 90 7 31 22 7 9 55 19 43 44 1 38 1 22 2 56 61 69 890,000 2,259,000 23,244,000 3,810,000 869,000 288,000 12,452,000 5,835,000 475,000 7,800,000 1,880,000 1,310,000 330,000 608,000 3,085,000 1,179,000 2,755,000 2,990,000 63,000 2,144,000 46,000 1,404,000 132,000 3,492,000 3,921,000 4,775,000 Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina Tennessee Texas Utah Virginia Washington Wisconsin Totals EUROPE Belgium Denmark France Germany Netherlands Sweden 235 30 8 38 28 2 40 33 7 78 91 16 21 8 50 11 32 25 19 United Kingdom Totals Grand Totals 166 2,169 1,860,000 428,000 1,955,000 1,867,000 64,000 2,131,000 1,883,000 15,375,000 440,000 4,407,000 5,954,000 1,030,000 1,219,000 410,000 2,606,000 550,000 1,664,000 1,335,000 905,000 8,689,000 134,119,000 2,003 125,430,000 (1) Storage and properties combining self-storage and commercial space. CO R P O R AT E D ATA (as of March 23, 2007) Directors B. Wayne Hughes (1980) Chairman of the Board Ronald L. Havner, Jr. (2002) Vice-Chairman of the Board, Chief Executive Officer and President Harvey Lenkin (1991) Retired President and Chief Operating Officer Dann V. Angeloff (1980) President of The Angeloff Company William C. Baker (1991) Principal, Baker & Associates John T. Evans (2003) Partner, Osler, Hoskin & Harcourt LLP Uri P. Harkham (1993) President and Chief Executive Officer Harkham Industries B. Wayne Hughes, Jr. (1998) Vice President of American Commercial Equities, LLC Gary E. Pruitt (2006) Chief Executive Officer of Univar N.V. Daniel C. Staton (1999) Chairman of Staton Capital ( ) = date director was elected to the Board Executive Officers Ronald L. Havner, Jr. Vice-Chairman of the Board, Chief Executive Officer and President John Reyes Senior Vice President and Chief Financial Officer John E. Graul Senior Vice President John S. Baumann Senior Vice President and Chief Legal Officer David F. Doll Senior Vice President Candace N. Krol Senior Vice President, Human Resources Corporate Officers Self-Storage Operations Drew J. Adams Vice President and Director of Taxes Todd Andrews Vice President and Controller Mark B. Bilfield Senior Vice President—Marketing John E. Graul President Brian J. Devlin Senior Vice President and Divisional Manager Kim DeRuyter Senior Vice President and Divisional Manager Capri L. Haga Senior Vice President—Risk Management Harvey A. Grindeland Senior Vice President and Divisional Manager James D. Hartung Senior Vice President—Chief Marketing Officer Kenneth H. Morrison Senior Vice President and Divisional Manager Stephanie G. Heim Vice President, Corporate Counsel and Secretary Ken A. Kederian Vice President of Internal Audit A. Ammar Kharouf Vice President and Litigation Counsel Brent C. Peterson Senior Vice President and Chief Information Officer A. Timothy Scott Vice President and Tax Counsel Clemente Teng Vice President of Investor Services Real Estate Group David F. Doll President David W. Marzocchi Senior Vice President—Development and Construction Michael K. McGowan Senior Vice President—Acquisitions and Development James F. Fitzpatrick Senior Vice President—Entitlements Peter G. Panos Senior Vice President and Divisional Manager David D. Young Senior Vice President and Divisional Manager Alan Grossman Senior Vice President and Chief Financial Officer Ancillary Businesses Thomas Miller President—PS Orangeco Obren B. Gerich President—PS Insurance Shurgard Self Storage S.C.A. (Europe) Steven De Tollenaere President John M. Sambuco Vice President—Operations Frank J.E. Boot Marketing Director Wim E.M. Van Beveren Vice President—Development Jean L.H. Kreusch Chief Financial Officer Kris S.A. Van Mieghem General Counsel David L. Coupez Vice President—Information Systems Professional Services Certifications Stock Exchange Listing Additional Information Sources Transfer Agent Computershare Trust Company, N.A. P.O. Box 43078 Providence, RI 02940-3078 (781) 575-3120 www.computershare.com Independent Registered Public Accounting Firm Ernst & Young LLP Los Angeles, California The most recent certifications by our Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes- Oxley Act of 2002 are filed as exhibits to our Form 10-K. Our Chief Executive Officer's most recent annual certifica- tion to the New York Stock Exchange was submitted on May 15, 2006. The Company’s common stock trades under ticker symbol PSA on the New York Stock Exchange. The Company’s website, www.publicstorage.com, contains financial information of interest to shareholders, brokers, etc. Public Storage, Inc. is a member and active supporter of the National Association of Real Estate Investment Trusts. PUBLIC STORAGE, INC. 2 0 0 6 A N N U A L R E P O R T P U B L I C S T O R A G E , I N C . A N N U A L R E P O R T 2 0 0 6 PUBLIC STORAGE, INC. 701 Western Avenue, Glendale, California 91201-2349 (818) 244-8080 • www.publicstorage.com (SKU 002CS13720) 

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