PUBLIC STORAGE
2 0 0 8
A N N U A L
R E P O R T
WA
91
WA
91
OR
39
OR
38
CO
60
CO
60
NV
24
NV
22
UT
7
UT
7
AZ
37
AZ
37
CA
374
CA
368
HI
8
HI
7
MN
44
MN
44
WI
16
WI
16
IL
123
IL
123
MS
1
MS
1
MI
43
MI
43
IN
31
IN
31
TN
27
TN
33
AL
22
AL
22
OH
30
OH
30
KY
7
KY
7
GA
92
GA
90
MO
38
MO
38
LA
9
LA
9
NE
1
NE
1
KS
22
KS
22
OK
8
OK
8
TX
236
TX
235
PA
28
PA
28
VA
78
VA
78
NC
69
NC
69
SC
40
SC
40
FL
191
FL
191
NH
2
NH
2
NY
62
NY
61
MA
RI
MA
CT
RI
CT
NJ
NJ
DE
MD
DE
MD
19
2
19
14
2
14
56
5
56
5
56
55
SWEDEN
27
DENMARK
10
UNITED
KINGDOM
20
NETHERLANDS
37
BELGIUM
21
GERMANY
11
FRANCE
55
P RO PE RT I E S (as of December 31, 2008)
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
374
60
14
5
191
92
8
123
31
22
7
9
56
19
43
44
1
38
1
24
2
56
62
69
890,000
2,259,000
24,129,000
3,810,000
869,000
306,000
12,511,000
5,964,000
555,000
7,800,000
1,926,000
1,310,000
330,000
608,000
3,290,000
1,179,000
2,755,000
2,990,000
63,000
2,144,000
46,000
1,561,000
132,000
3,524,000
3,997,000
4,775,000
UNITED STATES (cont.)
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
Tennessee
Texas
Utah
Virginia
Washington
Wisconsin
30
8
39
28
2
40
27
236
7
78
91
16
1,860,000
428,000
2,006,000
1,867,000
64,000
2,155,000
1,528,000
15,493,000
440,000
4,453,000
6,028,000
1,030,000
Totals
2,012
127,075,000
EUROPE
Belgium
Denmark
France
Germany
Netherlands
Sweden
United Kingdom
Totals
Grand Totals
21
10
55
11
37
27
20
181
2,193
1,254,000
502,000
2,901,000
552,000
1,977,000
1,437,000
970,000
9,593,000
136,668,000
(1) Storage and properties combining self-storage and commercial space.
SELECTED FINANCIAL HIGHLIGHTS
Revenues:
Rental income and ancillary operations
Interest and other income
Total revenues
Expenses:
Cost of operations
Depreciation and amortization
General and administrative
Interest expense
For the year ended December 31,
2008 (1)
2007 (1)
2006 (1)
2005
2004
(Amounts in thousands, except per share data)
$ 1,709,452 $ 1,803,082 $ 1,347,267 $ 1,041,528 $ 950,600
5,391
955,991
11,417
1,814,499
31,799
1,379,066
16,447
1,057,975
36,155
1,745,607
580,577
414,188
62,809
43,944
1,101,518
657,743
622,400
59,749
63,671
1,403,563
496,257
437,555
84,661
33,062
1,051,535
376,526
195,824
21,115
8,216
601,681
360,256
182,663
18,813
760
562,492
Income from continuing operations before
equity in earnings of real estate entities,
gain on disposition of an interest in
Shurgard Europe, gain (loss) on disposition
of real estate investments and casualty gain
or loss, foreign currency exchange (loss) gain
and minority interest in income
Equity in earnings of real estate entities
Gain of disposition of an interest in
Shurgard Europe
Gain (loss) on disposition of real estate
investments and casualty gain or loss, net
Foreign currency exchange (loss) gain
Minority interest in income
Income from continuing operations
Discontinued operations and cumulative
effect of change in accounting principle
Net income
Per Common Share:
Distributions:
Regular
Special
Net income - basic
Net income - diluted
Weighted average common shares - basic
Weighted average common shares - diluted
$
$
$
$
$
644,089
20,391
344,685
(8,665)
(25,362)
(38,696)
936,442
(1,266)
935,176 $
410,936
12,738
327,531
11,895
456,294
24,883
393,499
22,564
—
—
—
—
5,212
58,444
(29,543)
457,787
2,177
4,262
(31,883)
313,982
1,182
—
(32,651)
449,708
67
—
(49,913)
366,217
(252)
(4)
457,535 $ 314,026 $ 456,393 $ 366,213
6,685
44
2.20 $
.60 $
4.21 $
4.19 $
2.00 $
— $
1.18 $
1.17 $
2.00 $
— $
0.33 $
0.33 $
1.90 $
— $
1.98 $
1.97 $
168,250
168,883
169,342
170,147
142,760
143,715
128,159
128,819
1.80
—
1.39
1.38
127,836
128,681
Balance Sheet Data:
Total assets
Total debt
Minority interest
Shareholders’ equity
$ 9,936,045 $ 10,643,102 $11,198,473 $ 5,552,486 $ 5,204,790
643,811 $ 1,069,928 $ 1,848,542 $ 149,647 $ 145,614
$
$
506,688 $ 506,030 $ 253,970 $ 428,903
364,417 $
$ 8,715,464 $ 8,763,129 $ 8,208,045 $ 4,817,009 $ 4,429,967
Cash Flow Information:
Net cash provided by operating activities
Net cash provided by (used in) investing
activities
Net cash used in financing activities
$ 1,059,225 $ 1,027,605 $ 753,140 $ 673,150 $ 593,743
340,013 $
(261,876) $ (473,630) $ (452,425) $ (156,066)
$
$ (966,360) $ (1,061,457) $ (228,095) $ (102,969) $ (276,255)
(1) The significant increase in our revenues, cost of operations, depreciation and amortization, and interest expense in 2006 and 2007, and the
significant increase in total assets, total debt and shareholders’ equity in 2006, is due to our acquisition of Shurgard Storage Centers in August
2006. The significant decrease in our revenues, cost of operations, depreciation and amortization, and interest expense in 2008, and the
significant decrease in total assets, total debt and shareholders’ equity in 2008, is due to our disposition of an interest in, and deconsolidation
of, Shurgard Europe on March 31, 2008. See Note 3 to our December 31, 2008 consolidated financial statements for further information.
TO OUR SHAREHOLDERS
D
espite the challenging economic conditions and the tremendous dislocations in the financial
markets, our company continued to grow in 2008. Net income per share increased from $1.17
to $4.19 and funds from operations (FFO)(1) per share increased from $4.97 to $5.07. Most
important, our intrinsic (2) or franchise value per share continued to improve. We measure our progress per
share, since changes in absolute size mean little unless translated into additional value per share. Our growth
this year was achieved even though we reduced our financial leverage. As important, we are well positioned
going into 2009 to take advantage of opportunities resulting from the turbulent credit markets and to
withstand the challenges they present.
Below I will expand on each of these points in greater detail, but in summary:
• Our U.S. self-storage operations grew revenues and net operating income (NOI) by 4% and 5%,
respectively. Same Store revenue and NOI growth was about 3%. These growth rates are down from
prior years and will be lower in 2009.
• Our European self-storage operations grew revenues and NOI by 9% and 15%, respectively. Same
Store revenues and NOI increased by 2% and 6%, respectively, down substantially from last year’s
growth of 9% for revenues and 21% for NOI. Europe’s growth has declined much faster than the U.S.
and will be lower in 2009.
• Our U.S. commercial property operations grew revenues and NOI by just over 2%. This is about the
same as last year and we expect they will be lower in 2009.
Businesses
In last year’s report I described each of our businesses. Nothing much changed in 2008 other than the sale
of an equity interest in Shurgard Europe to the New York Common Retirement Fund (NYCRF). The details
of this transaction are in the notes to the financial statements, but I will summarize here. We sold 51% of
Shurgard Europe for $600 million, resulting in a large “book gain” of about $350 million. Post transaction,
Public Storage and NYCRF jointly oversee the business and participate in major decisions, just like a board
of directors, but the local management team continues to run the day-to-day operations. There are no
preferred returns or incentive fees to either of us. Both Public Storage and NYCRF own equity interests with
the same economic characteristics. We do receive a “licensing fee” of 1% of all revenues for use of the
Shurgard name and interest of 7.5% per year on our 400 million euro loan. We are essentially partners. Our
long-term goal is to take Shurgard Europe public and maintain our equity interest. Just as PS Business Parks
constitutes our investment in U.S. office and industrial properties, Shurgard Europe is our investment in
European self-storage. Our loan is not a long-term investment, has a maturity date of March 2010 and is
denominated in euros. We reflect changes in the exchange rate between euros and dollars in our income
statement for the loan.
Summary of Financial Results
In 2008, total revenues were essentially flat at $1.75 billion and net income increased to $708 million.
Both were impacted by the sale of an interest in Shurgard Europe. In addition, we incurred a foreign
currency loss of $25 million on our loan to Shurgard Europe compared to a $58 million currency gain in
2007.
(1) See accompanying schedule “Computation of Funds from Operations” for a definition.
(2) See Public Storage, Inc. 2006 Annual Report letter to shareholders for a discussion of “intrinsic value.”
Our funds from operations per share increased from $4.97 in 2007 to $5.07 in 2008. Excluding items
associated with foreign currency gain, Shurgard integration costs and other non-cash charges, the per share
amounts increased by 10% from $4.73 in 2007 to $5.18 in 2008. These comparisons are reflected in the
table below.
Funds From Operations (FFO)
FFO per common share prior to adjustments for
the following items
Foreign currency exchange gain (loss)
Shurgard acquisition integration costs
Cost associated with the sale of Shurgard Europe
Termination of contract and development projects
EITF Topic D-42 gains/(charges)
Other
Year ended December 31,
2008
2007
$ 5.18
(0.15)
—
(0.17)
(0.02)
0.21
0.02
$ 4.73
0.34
(0.03)
—
(0.01)
—
(0.06)
FFO per common share, as reported
$ 5.07
$ 4.97
Operating earnings were $1.2 billion for 2008 about the same as 2007 due to the sale of 51% of Shurgard
Europe, and are broken down as follows.
Operating Earnings(1)
Amounts in millions
U.S. self-storage operations
European self-storage operations (2)
Commercial properties (3)
Ancillary operations
Operating earnings
2008
$1,031
62
69
59
$1,221
2007
$ 980
102
63
55
$1,200
(1) Operating earnings exclude the impact of other items which reduced net income approximately $286 million and $743
million in 2008 and 2007, respectively, in reconciling from operating earnings to our net income. Such items are comprised
of interest income, depreciation and amortization expense, general and administrative expense, interest expense, equity in
earnings of real estate entities (except for our pro rata share of PS Business Parks’ and Shurgard Europe’s pre-depreciation
net income, which is included in operating earnings), casualty gains and losses, gains on disposition, foreign currency gains
and losses, minority interest in income, cumulative effect adjustments and discontinued operations.
(2) Reflects pro rata share of Shurgard Europe’s operations; a 51% interest was sold in March 2008.
(3) Reflects pro rata share of PS Business Parks and wholly owned Public Storage commercial properties.
Self-Storage Operations
When evaluating our store operations, we bifurcate our domestic properties into two groups—“Same
Store” and other.
The Same Store operations consist of those properties operated by the Company for the last three years that have
achieved a stabilized occupancy level. Properties that are either under redevelopment, recently acquired or
developed are in “other properties.” We consider the measurement of Same Store operations as a key barometer
of both the fundamental strength of our business and the efficacy of our personnel and operating strategies.
We use certain metrics to evaluate our performance, the most important being revenue per available square
feet, or “REVPAF,” and gross profit margin. REVPAF measures how much revenue is generated per foot we
have to lease. We manage growth in REVPAF, balancing increased pricing with higher customer volumes
(occupancy). Also impacting REVPAF are product quality, customer sales and service and local competition.
Gross profit margin reflects how capable we are at generating more revenue while controlling expenses. Both
REVPAF and gross profit margin increased across all portfolios last year, resulting in higher net operating
income.
U.S. Same Store
Europe Same Store (1)
Other properties–U.S.
U.S. Same Store
Europe Same Store (1)
Other properties–U.S.
U.S. Same Store
Europe Same Store (1)
Other properties–U.S.
Amounts in millions
U.S. Same Store
Europe Same Store (1)
Other properties–U.S.
REVPAF
(Per sq. ft.)
Weighted Average Occupancy
Gross Profit Margin
Net Operating Income
(Before depreciation)
2008
$11.72
$25.34
$11.31
2008
89.5%
86.5%
84.4%
2008
67.9%
61.9%
65.4%
2008
$909
$ 84
$122
2007
$11.45
$24.95
$10.83
2007
89.5%
89.8%
80.0%
2007
67.4%
59.7%
61.9%
2007
$880
$ 80
$101
(1) Amounts with respect to Europe are on a constant exchange rate basis using the 2008 exchange ratios. The 2008 Europe data
represents historical data; a 51% interest was sold in March 2008.
Overall, the domestic portfolio performed reasonably well in 2008, as we achieved higher REVPAF through
rental rates, offset in part by higher promotional discounting. Same Store expenses were modestly higher
at 1% as higher property taxes and property payroll expenses were offset by lower media advertising costs.
The acquired Shurgard properties continued to benefit from our pricing and promotional strategies;
however, we do not expect any further merger benefits in 2009. Our recently acquired, developed and
redeveloped properties continue to lease up, generating higher revenues. In Europe, our operating team
continued to implement best practices, improving operating efficiency and operating margins. Similar to
the U.S., year-end occupancies and “asking” rents were below prior year. This sets the stage for a very
challenging 2009.
Commercial Properties
Our investment in commercial properties consists of our 46% equity interest in PS Business Parks
(PSB) and our wholly owned properties, which are generally contiguous to our self-storage properties.
We own one million square feet directly and another nine million square feet indirectly through our
investment in PSB.
The Same Store performance metrics used for self-storage are applicable to commercial properties.
Operating performance for the commercial properties was solid in 2008. Fortunately, we haven’t grown the
portfolio much the past two years due to the underwriting discipline of Joe Russell, PSB’s CEO.
REVPAF / Gross Profit Margin / Occupancy(1)
REVPAF
Gross profit margin
Weighted average occupancy
(1) Reflects pro rata share of PS Business Parks and wholly owned Public Storage properties.
Commercial Property
Net Operating Income
Amounts in millions
PS Business Parks(1)
Public Storage
Net operating income before depreciation
Maintenance capital expenditures(2)
Operating cash flow
2008
2007
$13.82
68.8%
92.4%
$13.47
68.1%
93.3%
2008
$60
9
69
(15)
$54
2007
$ 54
9
63
(17)
$ 46
(1) Reflects Public Storage’s pro rata share of PS Business Parks’ funds from operations.
(2) Reflects Public Storage’s pro rata share of PS Business Parks’ recurring capital improvements, tenant improvements and
lease commissions.
We expect a challenging commercial property market in 2009 as a result of lower “asking” rents, increased
concessions and more customer failures. We have the management team to deal with these challanges and to
improve our competitive position.
Summary of Operating Results
Overall, our operating results were satisfying in 2008 across all portfolios. We continued to refine our
marketing, pricing and operating strategies, as well as our personnel. As with most good companies, we
continually try to “raise the bar,” so there are always opportunities. We have a solid operating
management team, but I think we can improve over the course of 2009. Despite the challenging
economic environment, we are stepping up our investment in technology, operating systems and people
in 2009. We hope to expand upon our competitive advantages while some of our competitors are
struggling.
Capital Markets
In prior letters I have explained our rationale for “leveraging” our company with perpetual preferred
stock instead of debt. I have also explained its principal attributes: a permanent fixed rate
structure, we can call it after five years without penalty and no financial covenants. Like debt,
preferred stock has a fixed return, but no recourse against the Company’s assets and no maturity
date. Accordingly, for purchasers of preferred stock it is riskier than debt and they demand a higher
return (coupon rate) than if they purchased debt.
Let’s assess the wisdom of this financial strategy in the context of the dramatic changes in the global
capital markets this year. To understand the turbulent change in the cost of capital, it is important to
put things in context. In the first quarter of 2007, by any measure, the real estate industry reached a
zenith. Our Company’s stock traded above $110 per share, while the newspapers headlined Blackstone
Group’s $30 billion acquisition of Equity Office Properties (the largest REIT in America at the time)
at record high prices with Blackstone’s concurrent re-sale of some properties at even higher prices.
Real estate in the public and private markets was “selling” at sub 4% yields, while ten-year U.S.
Treasuries were yielding about 5%. What was happening in the housing market—buy today, finance
100% with easy terms and low rates, sell tomorrow at a profit—was happening in the commercial real
estate market.
Commercial mortgage debt could be issued at 40 to 50 basis points over ten-year swap treasuries,
historical lows. Convertible debt, a funding source not typically utilized by REITs, was issued at
rates of 1%-2%. Logically, companies took advantage of the abundant supply of inexpensive
capital. They in turn deployed this cheap capital into an already over-heated commercial real estate
market, bidding prices ever higher with each deal. For the really aggressive, they deployed capital into
property development and large “land banks,” double leveraging their investments with joint
venture equity and additional leverage inside the joint venture, i.e., turbo leverage. Similar to
private equity sponsors, various fees were charged to these structures, which rolled into income
statements and earnings guidance, incentivizing management teams to raise even more turbo
leverage. Hundreds of billions of dollars were raised in a period of just two years.
Like the “dot com” bubble, investors thought that “it is different this time” and that they could always
sell out to the “greater fool.” But the bubble burst. Equity investors, joint venture partners and lenders
are now asking, “What was I thinking?”
Similar to other bubbles that have burst, capital quickly becomes scarce and expensive. Everyone heads
to the fire escape at the same time. Now there is a dearth of capital for commercial real estate, and what
is available is very expensive with much more onerous terms. Secured mortgage debt, rated AAA, now
trades at 15%+ yields. The convertible debt for some issuers is trading at over 20% yields. Sales
transactions are down over 80% from last year. As bad as it is in the U.S., it is worse in Europe, directly
impacting Shurgard Europe’s ability to grow. For those who participated, the destruction of
shareholder value is immense. Some will not recover and those that survive will need years, if not
decades, to restore lost value. A simple analysis highlights the problem facing many management
teams of public companies (this applies to private equity investors as well).
Assume Company A acquired a property in 2006 generating $100 of net income at a 6% income
capitalization rate (cash flow yield) and financed 70% of the purchase with 5% interest only debt. They
pay $1,667 for the property, invest cash of $500 and borrow the balance. Their cash-on-cash return on
the equity is 8% which is not bad in a 5%-6% interest rate world (18 months ago). Investors, observing
this financial alchemy, gladly pay 20 times earnings or $833 for the incremental cash flow, resulting in
a 67% increase in the company’s equity value.
Fast forward to today when the debt comes due. The property will probably only generate $90 of net
income (lower due to the recession) and the income capitalization rate used for a new loan to refinance
the old loan is 10%, loan to value is reduced to 60% and the interest rate is increased to 8%. Company
A now needs $627 to pay down its loan in order to get it refinanced. Now the invested equity capital is
$1,127 and the cash-on-cash return is 4%. This is terrible in today’s 15%-20% equity return
environment. Where does the company get $627 for the loan pay down? Sell unencumbered assets at
a 30%-40% discount from where they were purchased two to three years ago, borrow money on onerous
rates and terms, sell common stock at distressed prices? These are exactly the issues facing many real
estate management teams today and investors know that. Uncertainties regarding both the ability to
obtain this $627 additional capital and the cost and terms of the capital have driven share prices down
70%-90% for some companies.
We have not escaped collateral damage. We issued our last series of preferred stock in July 2007 at a
7% coupon. Today our various preferred issuances trade at 9%-11% yields. PS Business Parks'
preferreds trade at 10%-12% yields. We probably can’t issue any new preferred stock today, regardless
of rate. As noted earlier, when someone yells “fire,” everyone heads for the exit at the same time and
our common and preferred shares have been caught up in the mad dash. Operating from a position
of a “fortress balance sheet,” we are seizing this opportunity and repurchasing our preferred stock at
significant discounts to issue price and, unlike repurchasing debt at a discount, without generating
taxable income.
We have operated for the last 16 years (since 1992) as if the capital markets might close the next day, as
it did for all real estate companies during the savings and loan crisis (remember the Resolution Trust
Corporation or RTC). The lessons of that period caused us to seek a different form of “leverage” than
traditional debt. Our first preferred stock issuance carried a coupon of 10% and we were happy to get
the money. It allowed us to pay off most of our debt and we haven’t looked back since. During the past
16 years, we paid a much higher coupon rate for the preferred stock compared with the rate we would
have paid to issue short-term debt, probably an additional 2% per year. I estimate we probably paid
$600-$700 million more in preferred dividends over the 16 years than if we had used traditional debt or
about $4 per share. We consider this a small price to pay for peace of mind. Were the capital markets
to remain closed for the next ten years, we could operate our business and pay off what debt we do have.
Our financial position also has intangible benefits. We are able to hire and retain better people, focus
our attention and energy on our businesses and gain market share, while enjoying an outstanding and
long-standing relationship with our primary bank, Wells Fargo. There is a further silver lining to the
“premium” we paid all these years. Real estate prices are coming down dramatically, and we should have
abundant opportunities to deploy significant capital in a value enhancing manner. I am fairly confident
that over the next couple of years we will be able to more than make up the $4 per share. Having taken
the road less traveled by others, we are a better company.
Leverage–Why?
The long discussion of preferred stock leads to an obvious question—why does Public Storage or any
company use leverage? The benefit of leverage to an owner depends upon its terms and amount
relative to the owner’s equity. While some argue that high leverage adds significantly to owner returns
because of the tax benefits and lower commitment of “owner capital” to fund the business, they
generally overlook the “risks” associated with leverage. A dollar of operating cash flow in a company
with no leverage is worth far more than the same dollar of operating earnings “trapped” inside a
company with 90% leverage. In the latter, earnings have to be sufficient, year in and year out, to
service the interest or preferred dividend requirement to those providing the leverage. While it is
usually easy to “leverage up” and grow without additional owner equity in a benign economic
environment, leverage often proves to be a “dagger in the heart” for many companies during an
economic downturn. In today’s economic climate, with over 8% unemployment and virtually no
access to capital except for those companies highly rated, leverage may prove fatal for many.
At Public Storage, we seek to maximize the benefits of leverage and mimimize its risks by using “low
risk” leverage in the form of preferred stock. We treat our preferred stock shareholders as partners in
a priority position, working hard to make sure we generate more than enough operating earnings to
pay their preferred returns. However, should we fail, their dividends will “accrue but not be paid”
and they will appoint two Trustees to our Board. We won’t go into bankruptcy or have our properties
foreclosed upon. This provides us a margin of safety in case of unforseen events. We try to immunize
our company from the vagaries of the capital markets.
Shurgard Europe
Last year I outlined the significant growth opportunities for self-storage in Europe and how we would
participate through our equity investment in Shurgard Europe. At that time, we were concluding our
transaction with NYCRF and our business plan was:
• Continue to drive Same Store revenue and operating income.
• Continue to integrate U.S. best practices into the European operations.
• Continue to grow the platform, primarily through development of new properties.
•
•
Acquire our joint venture partner’s interest in about 80 properties.
Secure a new bank credit facility to fund these activities and refinance the intercompany loan (total
of about one billion dollars).
We approached each aspect of our plan with great zeal; however, by August it became clear that the debt
markets were changing dramatically in Europe and that we should terminate all development activity.
During the balance of this year, we terminated projects and reduced staffing. In 2009, we will complete
the balance of properties under development and work to either refinance or pay off the debt related to
our joint venture interests. As always, we will work hard to create value from our 200-store platform. By
early 2010, we plan to refinance the 400 million euro intercompany loan (market conditions permitting).
Unlike the U.S., in Europe there has never been an established market for preferred stock, especially for real
estate companies. Accordingly, Shurgard Europe will depend on the debt markets (just bank debt at this
time, but eventually public debt) for capital. Regardless, we expect it will be conservatively structured.
We expect a challenging operating environment in 2009. Like in the U.S., customers are extremely price
sensitive, moving/relocation activity is much lower and customer awareness of our product is still low.
Growth in Europe will occur at a much slower pace than prior years. Steven De Tollenaere and his
management team have made some tough decisions over the past year in view of the changing economic
climate, especially the termination of further property development. They have created significant value
for Public Storage shareholders since we acquired Shurgard and they have positioned the business well
for today’s environment.
Executive Compensation
We paid over $30 million in executive compensation in 2008–a record. This is big time money for us
and so some explanation is warranted.
Our goal is long-term wealth creation both for you the owners and the management team. The
management team participates in the value created for owners. We are fortunate to have a Board of
Trustees that has significant equity ownership, understands the business and doesn’t need a consultant to
help them think.
We measure changes in shareholder value by sustainable improvements in free cash flow per share
and our competitive position, not short-term changes in our share price. These are generally
accomplished by hiring and motivating excellent people, making wise capital allocation decisions,
maintaining financial strength and constant risk management.
In 2008, we achieved the final big goal of our 2006 acquisition of Shurgard, which was to monetize 51%
of our interest in Shurgard Europe on price, terms and structure that realized significant value for the
shareholders. It was a “home run” from the Trustees’ perspective and they awarded management
commensurately.
Conclusion
Last year I ended my letter to you with “. . . Demand for your product is not directly dictated by the
general economy but by recurring lifestyle changes . . . . ” I was wrong. While our business may well
be recession-resistant, it is certainly not recession-proof. Our customers are susceptible to severe
economic downturns. On average, given our geographic diversity, most “normal” economic
downturns don’t severely impact our results. Generally, at any point in time, some part of the country
is “slow.” Today, the entire country is slow. Like most companies, we haven’t experienced this kind
of economic climate. However, as shareholders, you should probably not lose sleep. Our financial
profile is designed for these kinds of economic headwinds and I think when they pass, we will have
improved our competitive position.
My view on the real estate industry is far more jaundiced. There are two major headwinds facing the real
estate industry—poor operating fundamentals and “closed” capital markets. You couldn’t pick two bigger
Achilles’ heels. Many companies are turning into what Warren Buffett would call “cigar butt” investments,
i.e., they are cheap but there are only one or two puffs remaining. Many real estate companies will need to
be recapitalized. In the meantime, these headwinds will continue to weigh on share prices, including ours.
Ronald L. Havner, Jr.
President and Chief Executive Officer
February 28, 2009
CUMULATIVE TOTAL RETURN
Public Storage, S&P 500 Index and NAREIT Equity Index
December 31, 2003 - December 31, 2008
$300
$250
$200
$150
$100
$ 50
$
0
Public Storage
S&P 500 Index
NAREIT Equity Index
12/31/03
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
12/31/03
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
Public Storage
S&P 500 Index
$100.00
$133.21
$166.69
$245.71
$189.67
$212.25
$100.00
$110.88
$116.33
$134.70
$142.10
$89.53
NAREIT Equity Index
$100.00
$131.58
$147.59
$199.33
$168.05
$104.65
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, 2008 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, 2003 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 non-GAAP financial measure. FFO is generally defined as net income
before depreciation with respect to real estate assets and gains and losses on real estate assets. FFO is
presented because management and many analysts consider FFO to be one measure of the performance
of real estate companies. In addition, we believe that FFO is helpful to investors as an additional
measure of the performance of a REIT, because net income includes the impact of depreciation, which
assumes that the value of real estate diminishes predictably over time, while we believe that the value of
real estate fluctuates due to market conditions and in response to inflation. FFO computations do not
consider scheduled principal payments on debt, capital improvements, distributions 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.
For the year ended December 31,
(Amounts in thousands, except per share amounts)
2008
2007
2006
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 investments and assets
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 shareholders:
Senior Preferred
Equity Shares, Series A
$ 935,176 $ 457,535
622,400
414,188
$ 314,026
437,555
13
(253)
74,918
(336,545)
38,696
494
(406)
45,307
(6,883)
29,543
663
(225)
38,890
(5,594)
31,883
1,126,193
(21,904)
(21,612)
1,147,990
(21,989)
(21,612)
817,198
(17,312)
(19,055)
1,082,677
1,104,389
780,831
(205,870)
(21,199)
(236,757)
(21,424)
(245,711)
(21,424)
FFO allocable to our common shareholders
$ 855,608 $ 846,208
$ 513,696
Weighted average shares outstanding:
Common shares
Stock-based compensation dilution
168,250
633
169,342
805
142,760
955
Weighted average common shares for purposes of
computing fully-diluted FFO per common share
168,883
170,147
143,715
FFO per common share
$
5.07 $
4.97
$
3.57
CO R P O R AT E D ATA (as of February 28, 2009)
Trustees
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
Tamara Hughes Gustavson (2008)
Private Investor
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 trustee 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
Mark C. Good
Senior Vice President and Chief Operating Officer
David F. Doll
Senior Vice President
Brian J. Fields
Senior Vice President and Chief Legal Officer
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
John M. Sambuco
Executive Vice President
David D. Young
Executive Vice President
Mark B. Bilfield
Senior Vice President and Marketing Officer
Kim DeRuyter
Senior Vice President and Divisional Manager
Capri L. Haga
Senior Vice President—Risk Management
Brian J. Devlin
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
Robbie E. Williams
National Facilities Director
Christopher J. Grenier
Senior Vice President and Divisional Manager
Harvey A. Grindeland
Senior Vice President and Divisional Manager
John S. Hiatt
Senior Vice President and Divisional Manager
Kenneth H. Morrison
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
Chief Executive Officer
Peter G. Panos
Chief Operating Officer
Frank J.E. Boot
Vice President—Marketing
A. Stefan Nilsson
Senior Vice President—Development
Jean L.H. Kreusch
Chief Financial Officer
Evelyn Depasse
General Counsel
David L. Coupez
Chief Information Officer
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 27, 2008.
The Company’s Common
Shares trade 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 and others.
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
(818) 244-8080 • www.publicstorage.com
(SKU 002CS-18235)