PUBLIC STORAGE, INC.
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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
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PUBLIC STORAGE, INC.
701 Western Avenue, Glendale, California 91201-2349
(818) 244-8080 • www.publicstorage.com
(SKU 002CS13720)