Public Storage
Annual Report 2014

Plain-text annual report

® PUBLIC STORAGE 2 0 1 4 A N N U A L R E P O R T WA 91/3 OR 39/1 MN 47 WI 15 MI 43 NV 27 CA 419/49 UT 7 CO 63 AZ 43/1 HI 11 NE 1 KS 22 OK 8 MO 38 TX 257/23 LA 10 OH IL IN 126 31 31 KY 7 TN 27 AL 22 GA 107 MS 1 NH 2 NY 65 PA 29 VA 90/17 NC 84 SC 53 FL 268/3 UNITED KINGDOM 21 MA RI CT 25 3 15 NJ DE MD 57 5 61/6 SWEDEN 30 DENMARK 10 NETHERLANDS 40 BELGIUM 21 GERMANY 16 P R O P E RT I E S (as of December 31, 2014) Number of Properties Net Rentable Square Feet Number of Properties Net Rentable Square Feet FRANCE 55 Public Storage 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 Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina 22 43 419 63 15 5 268 107 11 126 31 22 7 10 61 25 43 47 1 38 1 27 2 57 65 84 31 8 39 29 3 53 890,000 2,737,000 28,010,000 3,954,000 966,000 324,000 17,944,000 7,049,000 801,000 7,952,000 1,926,000 1,310,000 330,000 703,000 3,699,000 1,691,000 2,755,000 3,313,000 63,000 2,236,000 46,000 1,818,000 132,000 3,630,000 4,527,000 5,802,000 1,922,000 428,000 2,040,000 1,993,000 155,000 2,916,000 Public Storage (cont.) Tennessee Texas Utah Virginia Washington Wisconsin 27 257 7 90 91 15 1,528,000 17,004,000 440,000 5,440,000 6,122,000 968,000 2,250 145,564,000 Shurgard Europe Belgium Denmark France Germany Netherlands Sweden United Kingdom Self-storage totals 21 10 55 16 40 30 21 193 2,443 PS Business Parks, Inc. Arizona California Florida Maryland Oregon Texas Virginia Washington 1 49 3 6 1 23 17 3 Grand Totals 103 2,546 1,270,000 571,000 2,886,000 892,000 2,180,000 1,623,000 1,025,000 10,447,000 156,011,000 23,000 11,600,000 3,866,000 2,352,000 102,000 5,088,000 4,040,000 1,479,000 28,550,000 184,561,000 SELECTED FINANCIAL HIGHLIGHTS For the year ended December 31, 2014 2013 2012 2011 2010 (Amounts in thousands, except per share data) Operating Revenue $ 2,195,404 $ 1,981,746 $ 1,842,504 $ 1,735,888 $ 1,631,294 Operating Expenses: Cost of operations Depreciation and amortization General and administrative Asset impairment charges Operating income Interest and other income Interest expense Equity in earnings of unconsolidated real estate entities Foreign currency exchange (loss) gain Gain on real estate sales and debt retirement Income from continuing operations Discontinued operations Net income Allocation to noncontrolling 618,720 437,114 71,459 — 565,161 387,402 66,679 555,904 357,781 56,837 — — 560,509 357,969 52,410 2,186 1,127,293 1,019,242 970,522 973,074 545,921 353,245 38,487 994 938,647 1,068,111 4,926 (6,781) 962,504 22,577 (6,444) 871,982 22,074 (19,813) 762,814 32,333 (24,222) 692,647 29,017 (30,225) 88,267 (7,047) 2,479 1,149,955 — 1,149,955 57,579 17,082 4,233 45,586 8,876 1,456 1,057,531 — 1,057,531 930,161 12,874 943,035 58,704 (7,287) 10,801 833,143 3,316 836,459 38,352 (42,264) 827 688,354 7,760 696,114 equity interests (5,751) (5,078) (3,777) (12,617) (24,076) Net income allocable to Public Storage shareholders $ 1,144,204 $ 1,052,453 $ 939,258 $ 823,842 $ 672,038 Per Common Share: Distributions Net income - diluted Weighted average common shares - diluted Balance Sheet Data: Total assets Total debt Total preferred equity Public Storage shareholders’ equity Permanent noncontrolling equity interests Cash Flow Information: Net cash provided by operating activities Net cash used in investing activities Net cash used in financing activities $ $ 5.60 $ 5.25 $ 173,138 5.15 $ 4.89 $ 172,688 4.40 $ 3.90 $ 171,664 3.65 $ 3.29 $ 170,750 3.05 2.35 169,772 64,364 $ 839,053 $ 468,828 $ $ 9,818,676 $ 9,876,266 $ 8,793,403 $ 8,932,562 $ 9,495,333 $ 568,417 $ 4,325,000 $ 3,562,500 $ 2,837,500 $ 3,111,271 $ 3,396,027 $ 9,480,796 $ 8,791,730 $ 8,093,756 $ 8,288,209 $ 8,676,598 32,336 $ 398,314 $ 26,375 $ 29,108 $ 27,125 $ 22,718 $ $ 1,606,758 $ 1,430,339 $ 1,285,659 $ 1,203,452 $ 1,093,221 $ (266,605) (16,160) $ (1,117,305) $ (1,438,546) $ (1,132,709) $ (1,225,415) $ (212,996) $ (1,412,393) $ (290,465) $ (81,355) $ 1 PUBLIC STORAGE To the Shareholders of Public Storage: We had an excellent year in 2014. Robust industry conditions and solid execution by our management teams enabled us to improve our competitive position and drive shareholder value. Key highlights for the year include: • The U.S. self-storage business generated strong organic growth for the fourth consecutive year. Same store revenue and net operating income1 (“NOI”) growth were 5.4% and 6.7%, respectively. In addition, our newer facilities continued to generate strong revenue growth and occupancy gains. • We strengthened our market position by acquiring and developing 50 properties. We also expanded our development pipeline to approximately $410 million at the end of 2014. • Our ancillary businesses, which complement our U.S. self-storage business, continued to produce solid results due to increased customer volume and solid execution. • Shurgard Europe, which we own 49%, continued to improve its operating results, with the first year-over-year increase in occupancy in seven years. Shurgard Europe’s management team executed its first unsecured term financing and, as a result, lowered its cost of capital and enabled it to fund several acquisitions and begin developing three new properties. • PS Business Parks, Inc. (“PSB”), which we own approximately 42%, improved its market focus and sold $210 million of properties, exiting the Portland and Phoenix markets. Gain from the sales resulted in a special dividend to us of approximately $40 million. PSB’s operating results were solid and should continue to improve in 2015. • We further strengthened our fortress balance sheet by issuing $763 million of perpetual preferred securities and retiring $770 million of debt. Debt to EBITDA, a common leverage metric, is now .04 to 1, the lowest in our industry and in our history. There is no doubt an improving economy helped our operating results. Overall, our combined revenues increased to $2.8 billion from $2.6 billion. Most of this revenue increase dropped to the bottom line, resulting in higher NOI and increased free cash flow1 per share. The key figures for our businesses are presented below as if we owned 100% of each. U.S. self-storage European self-storage Commercial properties Ancillary businesses Total Revenues1 (Amounts in millions) 2014 2013 2012 $ 2,050 224 393 159 $ 2,826 $ 1,850 218 374 146 $ 2,588 $ 1,719 223 361 139 $ 2,442 (1) See accompanying schedule “Supplemental Non-GAAP Disclosures.” 1  U.S. self-storage European self-storage Commercial properties Ancillary businesses Total Public Storage’s share Free cash flow per share Dividends per share Net Operating Income (Amounts in millions, except per share) 2014 2013 2012 $ 1,483 129 262 112 $ 1,986 $ 1,326 125 250 105 $ 1,806 $ 1,201 129 241 100 $ 1,671 $ 1,762 $ 1,590 $ 1,457 $ $ 7.73 5.60 $ $ 7.18 5.15 $ $ 6.41 4.40 As noted in previous letters, our goal is to grow free cash flow per share on a long-term, sustainable basis. I believe this is the best metric to calculate our intrinsic business value. It is also key to measuring long-term managerial performance. It does not, however, capture other key attributes of our company such as brand, scale and the quality of our properties and people that will, over time, enhance our intrinsic value. In 2014, our 8% increase in free cash flow per share was lower than the ten year average of 11%. A couple of reasons drove this decline, several of which we expect will persist in the near term. First, Shurgard Europe repaid our 9% loan which had been generating a preferential return to us of about $18 million per year. Second, we have continued to deleverage the Company. Given our strong organic growth, we would need to “leverage up” by about $1 billion per year to remain “leverage neutral.” In the current environment (as discussed below) we are not able to invest $1 billion with adequate returns to justify additional borrowings. Third, we have rapidly expanded our development program. Development of self-storage properties is dilutive in the short term to free cash flow for a couple of reasons. First, a good portion of the cost of personnel and their related activities involved in this program (about $3 million in 2014) are expensed instead of capitalized into the cost of the new projects. Second, self-storage properties generally require eight to twelve months to develop and once opened operate at a loss during the first six to twelve months. They do not achieve their targeted level of cash flow for two to three years. In addition, development costs must be funded with capital for which the funding costs are being expensed. We factor this dilution into our development return analysis and believe our development program will add to our intrinsic value. Our free cash flow, dividends, net income and core funds from operations1 per share continue to grow nicely, although at different rates in the short term. Long term, as demonstrated in our ten year growth rate, they tend to converge. Free cash flow Dividends Net income Core funds from operations 2014 2009 2004 Five-year Ten-year growth rate growth rate $ 7.73 $ 5.60 $ 5.25 $ 8.09 $ 4.75 $ 2.20 $ 3.47 $ 5.03 $ 2.77 $ 1.80 $ 1.38 $ 3.11 10% 21% 9% 10% 11% 12% 14% 10% (1) See accompanying schedule “Supplemental Non-GAAP Disclosures.” 2 U.S. Self-Storage In 2014 our U.S. self-storage business, which generates 93% of revenues and 84% of net operating income, continued to benefit from an improving economy and solid execution. In addition, new supply of self-storage properties continues to be nominal relative to the estimated base of 2.3 billion square feet of self-storage space nationally, producing ideal conditions for higher occupancies, better rental rates and lower customer acquisition costs. When combined with our scale and low operating cost structure, we were able to produce an almost 7% same store NOI growth. Our field and revenue management teams, led by Shawn Weidmann and John Reyes, did an exceptional job in 2014 managing and pricing the one million spaces and customers in this 125 million square feet group of properties. Same Store Properties (Amounts in millions, except sq. ft. occupancy and revenue per available foot) Revenues Costs of operations Net operating income Sq. ft. occupancy Revenue per available foot (“REVPAF”) 2014 2013 2012 $ 1,837 499 $ 1,338 93.9% $ 13.94 $ 1,743 489 $ 1,254 93.3% $ 13.21 $ 1,653 496 $ 1,157 91.9% $ 12.52 Our group of “Other” self-storage properties consist of recent acquisitions, newly developed and redeveloped properties. This group of properties has more than tripled in the last two years and will be a source of continued growth. Last year, this group generated nearly half of the $150 million growth in NOI from our U.S. self-storage portfolio. Other Self-Storage Properties (Amounts in millions, except sq. ft. occupancy and REVPAF) Revenues Costs of operations Net operating income Sq. ft. Sq. ft. occupancy REVPAF 2014 2013 2012 $ $ 213 68 145 $ $ 107 35 72 $ $ 66 22 44 19.4 88.2% $ 12.25 14.9 85.6% $ 12.12 6.2 85.1% $ 12.88 A key risk to our business, like most other businesses, is a significant increase in competition, i.e., new supply of self-storage space. Although there are no reliable industry statistics on new self-storage construction, current estimates indicate approximately 100 new properties were built in 2014 with an additional 300 to 500 projected for 2015. This compares to the estimated 49,000 current facilities, containing approximately 2.3 billion square feet or about seven square feet per person. Assuming the U.S. population grows at 1.1% per year, annual increases of 25 million square feet of new self-storage space (about 500 properties) would be needed to maintain the current per capita ratio. As you would expect, strong revenue and NOI growth and low cap rates precipitate new competition (basic laws of economics apply to the self-storage business). 3 There are a couple of key operating metrics that reflect the overall strength of the self-storage business. One is customer acquisition costs, which is the sum of all expenditures and promotional discounts used to attract customers. When measured against revenues, it is fairly indicative of customer demand. In 2014, our customer acquisition costs as a percent of revenues decreased to 5.9% from 9.2% in 2011. Another key metric is the percentage of customers who have stored with us longer than one year. This metric indicates the “stickiness” of our customer base, how well we are servicing it and managing our churn through annual rate increases. Managing customer duration is critical to achieve and sustain high occupancies and revenue growth. Over the last three years, the percentage of customers storing with us for longer than one year (in our same store group of properties) increased by 5.3% to a record 56.7%. Public Storage and the Self-Storage Industry We sometimes meet with investors who don’t know much about Public Storage or the industry. John Reyes, our CFO, has put together a great presentation explaining our company and the self-storage business, which is summarized as follows: Size On an equity basis (shares outstanding multiplied by the year-end market price) we are the third largest public real estate company in the world and the third largest REIT. We are almost twice as large as our four public competitors (U-Haul, Extra Space, Cube Smart and Uncle Bob’s) COMBINED. We own about 5% of the entire U.S. self-storage industry (about 49,000 properties containing 2.3 billion square feet) and dominate the largest and fastest growing MSAs. Financing Unlike most real estate companies, which are generally 40% leveraged with debt, we don’t use much debt or leverage. This hurts our results, i.e., we would grow cash flow faster with more leverage. Our businesses generate fairly stable and predictable cash flows which can be easily leveraged or monetized, providing us an important source of liquidity. In addition, we have no significant short term cash requirements. The mood on Wall Street periodically changes and it is usually fast and dramatic. Accordingly, we have sought to immunize our company from the vicissitudes in the capital markets. Product Demand and Customers Demand for our product comes primarily from recurring life events we call the four D’s: death, divorce, downsizing and dislocation (job change, marriage, college or natural disaster), along with business expansions and contractions. Most customers initially think they will rent a storage space for a short time, but those life events frequently dictate a much longer stay. Approximately 56.7% of our total customers have been with us longer than a year, and on average, our tenant base averages about 36 months. Our customers want convenience and easy access to their possessions and view their storage space as an extension of their residence. As a result, most of our customers reside within a three-to-five mile radius to the property where they are renting. 4 Economics Our business has excellent economics. Our properties generally break-even (revenues equaling expenses) at about 30% occupancy and we operate them above 90%. There are nominal marginal costs required in improving occupancies (see earlier comment on customer acquisition costs), which means most of the incremental revenue is profit. Our overall operating margins are above 70%, in part because of our brand and market focus/scale. Our business requires little maintenance capital expenditures, about half as much as other types of real estate. In addition, we are able to grow our revenues a little better than apartment rents (the government doesn’t provide capital to our industry) and almost double other types of real estate ( generally 4% versus 2%), as we benefit from increased population, population density and higher incomes and are relatively immune to changes in general business conditions (technology, patents, business cycle, oil prices, etc.). We also have ancillary businesses that generate significant additional income but require little capital. As a result of exceptional economic characteristics, we generate a tremendous amount of free cash flow that can either be re-invested or distributed. Over the last 20 years, our cash flow and dividends per share have each grown at about 9% per year. Few companies grow cash flow per share as much while also distributing most of their earnings. Brand and People We have the BEST brand in the industry and one of the few brands in the real estate business. Our brand consistently lands at the top of the Google search page. Because of our market scale, we pay much less than our competitors on a “cost per click.” Our brand helps us to consistently operate at higher occupancies and achieve greater rents and cash flow per foot than our competitors. Our brand is protected and enhanced by our 5,000 plus employees. Candy Krol, who leads our human resources group, devotes tremendous time and resources to hiring, training and developing our people. We have many employees who have been with us for over ten years, some as long as 30 years. Over 2,000 live “on-site” at our properties. They treat our customers like family and we work hard to treat our employees the same way. Shareholder Attitude Nearly all of our managers own stock in our company in one form or another. We think this helps create an environment of “ownership,” longer-term thinking and customer-focused behavior. Our incentive plans and culture are focused on generating long-term growth in cash flow per share. We rarely issue common shares and when we do, we negotiate to obtain at least as much value as we give up. We prefer paying cash versus issuing shares in most cases. In summary, we have a phenomenal business with exceptional economics. We work hard to avoid what Warren Buffett calls the ABCs of business decay: arrogance, bureaucracy and complacency. If we remain disciplined in the allocation of capital (see below), continue to drive operational excellence and avoid the ABCs, our company will continue to generate prodigious free cash flow. European Self-Storage Shurgard Europe had an excellent 2014. Lead by Marc Oursin, Shurgard Europe’s CEO, the company achieved the first year-over-year increase in same store occupancies in seven years, moving from 82.3% to 87.8%–an incredible performance! This growth was achieved by lower rental rates and higher promotional discounts, resulting in 2.9% of revenue growth in the same store pool of properties. 5 A breakdown of operating results follows: Net Operating Income (Amounts in millions) Same Store Acquired/developed properties Total Public Storage’s share Total assets (before depreciation reserves) 2014 2013 2012 $ $ $ $ $ 120 9 129 $ 63 1,603 $ $ 117 8 125 61 1,709 $ $ $ $ 121 8 129 63 1,643 Since 2008, most of the operating cash flow at Shurgard Europe has been used to pay down debt. In 2014, Shurgard Europe had reduced its leverage to a level enabling it to obtain very favorable financing, seven to twelve year term at a blended rate of 3%, which repaid most of the loan from Public Storage and provided capital to again grow. Shurgard Europe’s portfolio had not increased much over the past six years. But in 2014 it resumed expansion, acquiring five properties in Germany and beginning development of three properties in London. In 2015 we anticipate Marc and Jean Kreusch, Shurgard Europe’s very capable CFO, will grow the company in three ways: improving occupancies and revenues at the same store properties; developing and acquiring new properties; and expanding its capital base, either with an IPO or a debt financing. I am very excited about our prospects in Europe. Commercial Properties Our commercial properties, primarily our investment in PSB, performed well in 2014 as the improving economy led to greater demand and better pricing for commercial space, which we expect will accelerate in 2015. Low interest rates and numerous third-party purchasers posed challenges to PSB’s acquisition program. Joe Russell, PSB’s CEO, and his team took advantage of these conditions and exited the Portland, Oregon and Phoenix, Arizona markets. Given the environment, PSB was not able to deploy all of the sales proceeds and a portion of the gain was distributed to shareholders. Our share was $40 million. A breakdown of operating results follows: Net Operating Income (Amounts in millions) PSB’s Same Park operations PSB’s acquired/developed properties Public Storage’s owned commercial properties Total Public Storage’s share Total assets (before depreciation reserves) 2014 2013 2012 $ $ $ $ 226 26 10 262 117 3,133 $ $ $ $ 222 19 9 250 110 3,284 $ $ $ $ 217 15 9 241 105 3,131 The improving economy should enhance PSB’s ability to drive rental rates and reduce capital (tenant improvements and broker commissions) required to re-lease properties in 2015. 6 Ancillary Businesses We have four ancillary businesses: (1) merchandise (principally locks and boxes) sold at our U.S. self-storage properties; (2) tenant reinsurance, in which we reinsure policies purchased by our self-storage customers from a third-party insurance company; (3) property management, which we manage self-storage properties we don’t own; and (4) European ancillary businesses run by Shurgard Europe, consisting of merchandise and insurance commissions. These businesses complement our self-storage business, generate respectable revenue and cash flow and require little capital. While modest in relative size, each ancillary business meaningfully contributes to Public Storage’s overall profitability. John Reyes and Capri Haga manage the tenant reinsurance business and Pete Panos manages our merchandise business. A breakdown of operating results follows: Net Operating Income (Amounts in millions) Third party management Merchandise Tenant reinsurance European ancillary businesses Total Public Storage’s share Total assets 2014 2013 2012 $ $ $ $ 2 12 73 25 112 99 10 $ $ $ $ 2 12 68 23 105 93 10 $ $ $ $ 2 11 64 23 100 88 10 The true financial results of these ancillary businesses are somewhat obfuscated since much of the cost to operate them are borne by our self-storage business with its in-place employee and customer base. We are looking for additional businesses that complement our self-storage product and require nominal capital and can optimize our employee and customer base. Acquisitions and Developments Last year we invested $530 million to acquire and develop 50 properties containing approximately 4.4 million square feet of space. We have under development another 36 properties with 3.5 million square feet at an estimated cost of $410 million. David Doll, President of the Real Estate Group, and his team did an excellent job of adding to our intrinsic value, both deploying capital at attractive returns and increasing our presence in key markets. This builds upon their tremendous achievements in 2013. Going forward, we expect an increase in development activity and a possible reduction in acquisition activity, for reasons noted below. As a result of our increased focus on development, we have greatly expanded David’s team, adding 20 people over the last two years. When to Invest A few years back, Howard Marks, the Chairman and CEO of Oaktree Capital, a large, distressed bond investor, wrote a book titled “The Most Important Thing.” He reviews a number of topics critical for successful investing. Howard frequently cites Warren Buffett and the importance of understanding market conditions (he uses cycles) and price. One of Public Storage senior management’s most important jobs is determining when, where 7 and at what price to invest capital (how to fund investments is different). Since market conditions for investing in real estate have changed dramatically in the last four years, it is worthwhile to reflect on our approach and a recent transaction. In 2010, we acquired a 35-property portfolio. It was the first large (over $50 million) self-storage portfolio acquisition by us or anyone in the industry after the 2008 financial crisis. The portfolio consisted of 2.3 million square feet at an average cost of about $90 per foot. We projected a stabilized return on our investment of about 8% per year, excluding income from tenant insurance and merchandise sales and after the cost of “redevelopment/rebranding.” We expected to achieve this 8% yield after about two years or sometime in 2012. In 2014, our annualized yield was 11% and growing. Why was this transaction so successful? • In 2010, the real estate market was capital constrained and there were few, if any, other potential buyers. • The operating environment had been challenging for several years. In 2009, our same store NOI growth was negative 2%. • The properties were undermanaged, poorly marketed to customers and not well maintained. • Our underwriting was conservative (like it is today) and we purchased well below replacement cost. In summary, 2010’s investing environment was pessimistic, risk adverse and skeptical. Let’s contrast 2010 to today. Capital is now plentiful, interest rates are at historic lows and many investors want to own real estate. In addition, operating results have been very strong for the past three years (same store NOI growth at 7% plus). In 2010, industry participants did not consider new development because it was cheaper to buy than to build. Today, most established operators undertake new development because it is now much cheaper to build than to buy. In 2010, we were purchasing properties at about 50% of replacement cost. Today, we are building at replacement cost and buying, on average, at about 125% of replacement cost. Soon it will not make sense to purchase stabilized properties. In summary, today’s investing environment is optimistic, risk taking and confident. Investment markets swing like a pendulum: between celebrating positive results and obsessing over negative trends; and between overpriced and underpriced. Abundance or paucity of capital exacerbate these swings. During the investing cycle prices start low with high initial yields because of skepticism and low expectations for growth. As growth accelerates, in part due to an improving economy and lack of new supply, skepticism moderates and prices rise and yields drop. As this process continues, prices continue to rise to the point where new supply is again justified. Increasing amounts of leverage are used as it becomes abundant and cheap. As prices continue to rise, supply accelerates and eventually starts to impact growth. At some point, there is a “trigger event”–usually something in the financial markets that impacts expected growth rates. Suddenly, expected and actual growth rates decline and property prices drop precipitously. Instead of aggressive buying, there is panic selling. This continues until there are no more sellers–forced or otherwise–and then the pendulum begins to swing back. Currently, stabilized yields on acquisitions generate about a 4.5% initial return. This looks excellent next to ten-year treasuries at 2%, but contrast terribly to 2010’s 8% property yields. Assuming a compounded annual growth rate of 4%, it will take about 15 years for 2014 acquisitions to achieve an 8% yield. Over the long-run, we will generate above average returns if we are cautious during periods of optimism and aggressive during periods of skepticism. We will be challenged to generate above average performance when fundamentals are great, capital cheap and plentiful and optimism reigns. If we are to deliver superior long-term returns, we need to buy or develop at the right points in the cycle. 8 Financing John Reyes, our extremely capable CFO, was busy in 2014 remixing the balance sheet: • Shurgard Europe repaid our inter-company loan with the third-party financing previously mentioned. • We repaid almost all our debt. • We raised an additional $763 million of preferred capital. • We acquired or developed $530 million of properties. We start 2015 with a stronger than ever fortress balance sheet. With interest rates at record low levels, in the U.S. and Europe, we may issue debt. Stay tuned. Conclusion We had a solid 2014 and are well positioned for 2015. The favorable operating environment and our exceptional teams should enable us to produce another year of positive results for all of our businesses. Ronald L. Havner, Jr. Chairman and CEO February 27, 2015 9 CUMULATIVE TOTAL RETURN Public Storage, S&P 500 Index and NAREIT Equity Index December 31, 2009 - December 31, 2014 $275 $ 250 $225 $ 200 $ 175 $ 150 $ 125 $ 100 Public Storage S&P 500 Index NAREIT Equity Index 12/31/09 12/31/10 12/31/11 12/31/12 12/31/13 12/31/14 Public Storage S&P 500 Index 12/31/09 12/31/10 12/31/11 12/31/12 12/31/13 12/31/14 $ 100.00 $ 128.54 $ 175.78 $ 195.64 $ 210.13 $ 266.52 $ 100.00 $ 115.06 $ 117.49 $ 136.30 $ 180.44 $ 205.14 NAREIT Equity Index $ 100.00 $ 127.95 $ 138.55 $ 165.84 $ 170.58 $ 218.38 The graph set forth above compares the yearly change in the Company’s cumulative total shareholder return on its Common Shares for the five-year period ended December 31, 2014 to the cumulative total return of the Standard & Poor’s 500 Stock Index (“S&P 500 Index”) and the National Association of Real Estate Investment Trusts Equity Index (“NAREIT Equity Index”) for the same period (total shareholder return equals price appreciation plus dividends). The stock price performance graph assumes that the value of the investment in the Company’s Common Shares and each index was $100 on December 31, 2009 and that all dividends were reinvested. The share price performance shown in the graph is not necessarily indicative of future price performance. Supplemental Non-GAAP Disclosures (unaudited) Core funds from operations per share (“Core FFO”) represents diluted net income per share (“EPS”) before the impact of i) depreciation expense and disposition gains or losses and ii) foreign currency gains and losses, the application of EITF D-42, and certain other items. Free cash flow per share (“Free Cash Flow”) represents Core FFO, less per share capital expenditures and non-cash stock based compensation expense. Core FFO and Free Cash Flow are not substitutes for EPS and may not be comparable with other REITs due to calculation differences; however, we believe they are helpful measures for investors and REIT analysts to understand our performance. Net Operating Income (“NOI”) represents revenues less pre-depreciation cost of operations earned directly at our properties, and we believe is a useful performance measure that we and the investment community use to evaluate performance and real estate values. Each of these non-GAAP measures exclude the impact of depreciation, which is based upon historical cost and assumes the value of buildings diminish ratably over time, while we believe that real estate values fluctuate due to market conditions. We also present supplemental measures of our revenues and NOI including PSB and Shurgard Europe as if we owned them, to provide a measure of the performance of all the businesses we have a significant interest in. However, the inclusion of these entities in these supplemental measures does not substitute for “equity in earnings of unconsolidated real estate entities” on our income statement. Reconciliation of Core FFO and Free Cash Flow per Share EPS Eliminate noncore items (including our equity share): Depreciation expense Real estate gains Foreign currency, EITF D-42, and other noncore items Core FFO per share For the year ended December 31, 2014 2013 2012 2009 2004 1994 $ 5.25 $ 4.89 $ 3.90 $ 3.47 $ 1.38 $ 1.05 2.96 2.66 (0.23) (0.02) (0.09) 0.11 2.50 (0.09) 0.37 2.38 (0.19) (0.63) 1.61 (0.07) 0.19 0.52 — — $ 8.09 $ 7.44 $ 6.68 $ 5.03 $ 3.11 $ 1.57 Deduct capital expenditures and exclude non-cash comp (0.36) (0.26) (0.27) (0.28) (0.34) (0.22) Free Cash Flow per share $ 7.73 $ 7.18 $ 6.41 $ 4.75 $ 2.77 $ 1.35 Reconciliation of Revenues including PSB and Shurgard Europe (Amounts in millions) For the year ended December 31, 2013 2012 2014 Consolidated revenues PSB’s revenues Shurgard Europe’s revenues $ 2,195 $ 1,982 $ 1,843 377 254 360 246 347 252 Revenues as if we owned PSB and Shurgard Europe $ 2,826 $ 2,588 $ 2,442 Reconciliation of NOI (Amounts in millions) For the year ended December 31, 2013 2012 2014 Operating income on our income statement $ 1,068 $ 963 $ 872 Eliminate depreciation and G&A expense Add - PSB and Shurgard Europe NOI Total net operating income 510 408 454 389 415 384 1,986 1,806 1,671 Less - NOI of Shurgard Europe and PSB allocable to others (224) (216) (214) Public Storage’s share of NOI $ 1,762 $ 1,590 $ 1,457  UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FORM 10-K For the fiscal year ended December 31, 2014. or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to . Commission File Number: 001-33519 PUBLIC STORAGE (Exact name of Registrant as specified in its charter) Maryland ( State or other jurisdiction of incorporation or organization) 95-3551121 (I.R.S. Employer Identification Number) 701 Western Avenue, Glendale, California 91201-2349 (Address of principal executive offices) (Zip Code) (818) 244-8080 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Depositary Shares Each Representing 1/1,000 of a 6.875% Cumulative Preferred Share, Series O $.01 par value ........................................................................................................... New York Stock Exchange Depositary Shares Each Representing 1/1,000 of a 6.500% Cumulative Preferred Share, Series P $.01 par value .......................................................................................................... New York Stock Exchange Depositary Shares Each Representing 1/1,000 of a 6.500% Cumulative Preferred Share, Series Q $.01 par value ........................................................................................................... New York Stock Exchange Depositary Shares Each Representing 1/1,000 of a 6.350% Cumulative Preferred Share, Series R $.01 par value ........................................................................................................... New York Stock Exchange Depositary Shares Each Representing 1/1,000 of a 5.900% Cumulative Preferred Share, Series S $.01 par value .......................................................................................................... New York Stock Exchange Depositary Shares Each Representing 1/1,000 of a 5.750% Cumulative Preferred Share, Series T $.01 par value ........................................................................................................... New York Stock Exchange Depositary Shares Each Representing 1/1,000 of a 5.625% Cumulative Preferred Share, Series U $.01 par value ........................................................................................................... New York Stock Exchange Depositary Shares Each Representing 1/1,000 of a 5.375% Cumulative Preferred Share, Series V $.01 par value ........................................................................................................... New York Stock Exchange 1 Depositary Shares Each Representing 1/1,000 of a 5.200% Cumulative Preferred Share, Series W $.01 par value .......................................................................................................... New York Stock Exchange Depositary Shares Each Representing 1/1,000 of a 5.200% Cumulative Preferred Share, Series X $.01 par value ........................................................................................................... New York Stock Exchange Depositary Shares Each Representing 1/1,000 of a 6.375% Cumulative Preferred Share, Series Y $.01 par value ........................................................................................................... New York Stock Exchange Depositary Shares Each Representing 1/1,000 of a 6.000% Cumulative Preferred Share, Series Z $.01 par value ........................................................................................................... New York Stock Exchange Depositary Shares Each Representing 1/1,000 of a 5.875% Cumulative Preferred Share, Series A $.01 par value ........................................................................................................... New York Stock Exchange Common Shares, $.10 par value .......................................................................................... New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None (Title of class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [ ] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer [X] Accelerated Filer [ ] Non-accelerated Filer [ ] Smaller Reporting Company [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] 2 The aggregate market value of the voting and non-voting common shares held by non-affiliates of the Registrant as of June 30, 2014: Common Shares, $0.10 Par Value Per Share – $24,958,344,000 (computed on the basis of $171.35 per share, which was the reported closing sale price of the Company's Common Shares on the New York Stock Exchange (the “NYSE”) on June 30, 2014). As of February 19, 2015, there were 172,808,464 outstanding Common Shares, $.10 par value per share. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement to be filed in connection with the Annual Meeting of Shareholders to be held in 2015 are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent described therein. 3 PART I ITEM 1. Business Forward Looking Statements This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements in this document, other than statements of historical fact, are forward-looking statements which may be identified by the use of the words "expects," "believes," "anticipates," "plans," "would," "should," "may," "estimates" and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which may cause our actual results and performance to be materially different from those expressed or implied in the forward-looking statements. Factors and risks that may impact our future results and performance include, but are not limited to, those described in Item 1A, "Risk Factors" and in our other filings with the Securities and Exchange Commission (the “SEC”) including: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) general risks associated with the ownership and operation of real estate, including changes in demand, risks related to development of self-storage facilities, potential liability for environmental contamination, natural disasters and adverse changes in laws and regulations governing property tax, real estate and zoning; risks associated with downturns in the national and local economies in the markets in which we operate, including risks related to current economic conditions and the economic health of our customers; the impact of competition from new and existing self-storage and commercial facilities and other storage alternatives; difficulties in our ability to successfully evaluate, finance, integrate into our existing operations, and manage acquired and developed properties; risks associated with international operations including, but not limited to, unfavorable foreign currency rate fluctuations and local and global economic uncertainty that could adversely affect our earnings and cash flows; risks related to our participation in joint ventures; the impact of the regulatory environment as well as national, state, and local laws and regulations including, without limitation, those governing environmental, taxes and tenant insurance matters and real estate investment trusts (“REITs”), and risks related to the impact of new laws and regulations; risk of increased tax expense associated either with a possible failure by us to qualify as a REIT, or with challenges to intercompany transactions with our taxable REIT subsidiaries; changes in federal or state tax laws related to the taxation of REITs, which could impact our status as a REIT; disruptions or shutdowns of our automated processes, systems and the Internet or breaches of our data security; 4 (cid:120) (cid:120) (cid:120) risks associated with the self-insurance of certain business risks, including property and casualty insurance, employee health insurance and workers compensation liabilities; difficulties in raising capital at a reasonable cost; and economic uncertainty due to the impact of terrorism or war. These forward looking statements speak only as of the date of this report or as of the dates indicated in the statements. All of our forward-looking statements, including those in this report, are qualified in their entirety by this statement. We expressly disclaim any obligation to update publicly or otherwise revise any forward-looking statements, whether as a result of new information, new estimates, or other factors, events or circumstances after the date of these forward looking statements, except as required by law. Given these risks and uncertainties, you should not rely on any forward-looking statements in this report, or which management may make orally or in writing from time to time, as predictions of future events nor guarantees of future performance. General Public Storage (referred to herein as “the Company”, “the Trust”, “we”, “us”, or “our”), a Maryland REIT, was organized in 1980. At December 31, 2014, our principal business activities were as follows: (i) Domestic Self-Storage: We acquire, develop, own, and operate self-storage facilities which offer storage spaces for lease on a month-to-month basis, for personal and business use. We are the largest owner and operator of self-storage facilities in the United States (the “U.S.”). We have direct and indirect equity interests in 2,250 self-storage facilities (146 million net rentable square feet of space) located in 38 states within the U.S. operating under the “Public Storage” brand name. (ii) European Self-Storage: We have a 49% equity interest in Shurgard Self Storage Europe Limited (“Shurgard Europe”) which owns 192 self-storage facilities (ten million net rentable square feet) located in seven countries in Western Europe operated under the “Shurgard” brand name. We believe Shurgard Europe is the largest owner and operator of self-storage facilities in Western Europe. We also wholly own one self-storage facility in the United Kingdom which is managed by Shurgard Europe. (iii) Commercial: We have a 42% equity interest in PS Business Parks, Inc. (“PSB”), a publicly held REIT which owns and operates 28.6 million net rentable square feet of commercial space. We also wholly-own 1.3 million net rentable square feet of commercial space, substantially all of which is managed by PSB. In addition, we reinsure policies against losses to goods stored by customers in our self-storage facilities, sell merchandise at our self-storage facilities and manage self-storage facilities owned by third- party owners. For all periods presented herein, we have elected to be treated as a REIT, as defined in the Internal Revenue Code. As a REIT, we do not incur federal income tax on our REIT taxable income (generally, net rents and gains from real property, dividends, and interest) that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules. We believe we met these requirements in all periods presented herein, and we expect to continue to elect and qualify as a REIT. 5 We report annually to the SEC on Form 10-K, which includes financial statements certified by our independent registered public accountants. We also report quarterly to the SEC on Form 10-Q, which includes unaudited financial statements with such filings. We expect to continue such reporting. On our website, www.publicstorage.com, we make available, free of charge, our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after the reports and amendments are electronically filed with or furnished to the SEC. Competition We believe that storage customers generally store their goods within a five mile radius of their home or business. Most of our facilities compete with other nearby self-storage facilities that use the same marketing channels we use, including Internet advertising, signage, and banners, and offer the same service we do. As a result, competition is significant and affects the occupancy levels, rental rates, rental income and operating expenses of our facilities. While competition is significant, the self-storage industry remains fragmented in the U.S. We believe that we own approximately 6% of the aggregate self-storage square footage in the U.S., and that collectively the five largest self-storage operators in the U.S. own approximately 13%, with all other self- storage space owned by numerous private regional and local operators. We believe this market fragmentation enhances the advantage of our brand name, as well as the economies of scale we enjoy with approximately 71% of our 2014 same-store revenues in the 20 Metropolitan Statistical Areas (each, an “MSA”, as defined by the U.S. Census Bureau) with the highest population levels. Such fragmentation also provides opportunities for us to acquire additional facilities; however, we compete with a wide variety of institutions and other investors who also view self-storage facilities as attractive investments. The amount of capital available for real estate investments greatly influences the competition for ownership interests in facilities and, by extension, the yields that we can achieve on newly acquired investments. Business Attributes We believe that we possess several primary business attributes that permit us to compete effectively: Centralized information networks: Our centralized reporting and information network enables us to identify changing market conditions and operating trends as well as analyze customer data and quickly change each of our individual properties’ pricing and promotions on an automated basis. Convenient shopping experience: Customers can conveniently shop the space available at our facilities, reviewing attributes such as facility location, size, amenities such as climate-control, as well as pricing, and learn about ancillary businesses through the following marketing channels: (cid:120) Our Desktop and Mobile Websites: The online marketing channel continues to grow in prominence, with approximately 60% of our move-ins in 2014 sourced through our websites, as compared to 36% in 2010. In addition, we believe that many of our customers who directly call our call center, or who move-in to a facility on a walk-in basis, have already reviewed our pricing and space availability through our websites. We invest extensively in advertising on the Internet to attract potential customers, primarily through the use of search engines, and we regularly update and improve our websites to enhance their productivity. (cid:120) Our Call Center: Our call center is staffed by skilled sales specialists. Customers reach our call center by calling our advertised toll-free telephone referral number, (800) 44- 6 STORE, or telephone numbers provided on the Internet. We believe giving customers the option to interact with a call center agent, despite the higher marginal cost relative to an internet reservation, enhances our ability to close sales with potential customers. (cid:120) Our Properties: Customers can also shop at any one of our facilities. Property managers access the same information that is available on our website and to our call center agents, and can inform the customer of storage alternatives at that site or our other nearby storage facilities. Property managers are extensively trained to maximize the conversion of such “walk in” shoppers into customers. Economies of scale: We are the largest provider of self-storage space in the U.S. As of December 31, 2014, we operated 2,250 self-storage facilities with 1.4 million self-storage spaces. These facilities are generally located in major markets within 38 states in the U.S. The size and scope of our operations have enabled us to achieve high operating margins and a low level of administrative costs relative to revenues through the centralization of many functions, such as facility maintenance, employee compensation and benefits programs, revenue management, as well as the development and documentation of standardized operating procedures. We also believe that our major market concentration provides managerial efficiencies stemming from having a large percentage of our facilities in close proximity to each other. We believe that we have significant market share and concentration in major metropolitan centers, which increase the cost effectiveness of our promotional programs relative to our competitors. Our large market share in major metropolitan markets and well-recognized brand name improves our prominence in unpaid search results for self-storage on major online search engines, and enhances the efficiency of our bidding for paid multiple-keyword advertising. We can use television advertising in many markets, while most of our competitors cannot do so cost-effectively. Brand name recognition: We believe that the “Public Storage” brand name is the most recognized and established name in the self-storage industry in the U.S, due to our national reach in major markets in 38 states, our highly visible facilities, and our facilities’ distinct orange colored doors and signage. We believe the “Public Storage” name is one of the most frequently used search terms used by customers using Internet search engines for self-storage. We believe that the “Shurgard” brand, used by Shurgard Europe, is a similarly established and valuable brand in Europe. We believe that the awareness of our brand name results in a high percentage of potential storage customers considering our facilities, relative to other operators. Growth and Investment Strategies Our growth strategies consist of: (i) improving the operating performance of our existing self- storage facilities, (ii) acquiring more facilities, (iii) developing new facilities and by adding more self- storage space to existing facilities, (iv) participating in the growth of the commercial operations we have an interest in, primarily our investment in PSB, and (v) participating in the growth of Shurgard Europe. While our long-term strategy includes each of these elements, in the short run the level of growth in our asset base in any period is dependent upon the cost and availability of capital, as well as the relative attractiveness of investment alternatives. Improve the operating performance of existing facilities: We seek to increase the net cash flow of our existing self-storage facilities by (i) regularly analyzing our call volume, reservation activity, Internet activity, move-in/move-out rates and other market supply and demand factors and responding by adjusting our marketing activities and rental rates, (ii) attempting to maximize revenues through evaluating the appropriate balance between occupancy, rental rates, and promotional discounting and (iii) controlling operating costs. We believe that our property management personnel, systems, our convenient shopping options for the customer, our economies of scale, and our advertising programs will continue to enhance our ability to meet these goals. 7 Acquire properties owned or operated by others in the U.S.: We seek to capitalize on the fragmentation of the self-storage business through acquiring attractively priced, well-located existing self- storage facilities. We believe our presence in and knowledge of substantially all of the major markets in the U.S. enhances our ability to identify attractive acquisition opportunities. Data on the rental rates and occupancy levels of our existing facilities provides us an advantage in evaluating the potential of acquisition opportunities. Self-storage owners decide whether to market their facilities for sale based upon many factors, including potential reinvestment returns, expectations of future growth, estimated value, the cost of debt financing, as well as personal considerations. Our aggressiveness in competing for particular marketed facilities depends upon many factors including our opinion as to the potential for future growth, the quality of construction and location, the cash flow we expect from the facility when operated on our platform, how well the facility fits into our current geographic footprint, as well as our yield expectations. During 2014, 2013 and 2012, we acquired 44, 121 and 24 facilities, respectively, from third parties for approximately $431 million, $1.2 billion and $226 million, respectively, primarily through large portfolio acquisitions. We will continue to seek to acquire properties in 2015; however, there is significant competition to acquire existing facilities and there can be no assurance as to the level of facilities we may acquire. Develop new self-storage facilities and expansion of existing facilities: The development of new self-storage locations and the expansion of existing facilities has been an important source of growth. Since the beginning of 2013, we have expanded our development efforts due in part to the significant increase in prices being paid for existing facilities, in many cases well above the cost of developing new facilities. At December 31, 2014, we had a development pipeline to develop new self-storage facilities and, to a lesser extent, expand existing self-storage facilities, which will add approximately 3.5 million net rentable square feet of self-storage space. The aggregate cost of these projects is estimated at $411 million, of which $105 million had been incurred at December 31, 2014, and the remaining costs will be incurred primarily in 2015. Some of these projects are subject to significant contingencies such as entitlement approval. We expect to continue to seek additional development projects; however, the level of future development may be limited due to various constraints such as difficulty in finding projects that meet our risk-adjusted yield expectations and challenges in obtaining building permits for self-storage activities in certain municipalities. Participate in the growth of commercial facilities primarily through our ownership in PS Business Parks, Inc.: Our investment in PSB provides diversification into another asset type. PSB is a stand-alone public company traded on the NYSE. During 2013, we increased our investment in PSB by acquiring 1,356,748 shares of PSB common stock in open-market transactions and directly from PSB, for an aggregate cost of $105.0 million. As of December 31, 2014, we have a 42% equity interest in PSB. PSB seeks to grow its asset base in favorable markets as well as increase the cash flows from its existing portfolio. From 2010 through 2014, PSB has acquired an aggregate total of 11.3 million rentable square feet in key markets for an aggregate purchase price of approximately $1.1 billion. In 2014, PSB disposed of certain nonstrategic assets with an aggregate of 1.9 million rentable square feet in Arizona and Oregon, receiving net proceeds aggregating $212.2 million. As of December 31, 2014, PSB owned and operated approximately 28.6 million net rentable square feet of commercial space, and had an enterprise value of approximately $4.0 billion (based upon the trading price of PSB’s common stock combined with the liquidation value of its debt and preferred stock as of December 31, 2014). Participate in the growth of European self-storage through ownership in Shurgard Europe: We believe Shurgard Europe is the largest self-storage company in Western Europe. It owns and operates 192 facilities with approximately ten million net rentable square feet in: France (principally Paris), Sweden (principally Stockholm), the United Kingdom (principally London), the Netherlands, Denmark (principally Copenhagen), Belgium and Germany. We own 49% of Shurgard Europe, with the other 51% owned by a large U.S. institutional investor. Customer awareness and availability of self-storage is significantly lower in Europe than in the U.S. However, with more awareness and product supply, we believe there is potential for increased demand for storage space in Europe. In the long run, we believe Shurgard Europe could capitalize on 8 potential increased demand through the development of new facilities or, to a lesser extent, acquiring existing facilities. Financing of the Company’s Growth Strategies Overview of financing strategy: As a REIT, we generally distribute 100% of our taxable income to our shareholders, which relative to a taxable C corporation, limits the amount of cash flow from operations that we can retain for investments. As a result, in order to grow our asset base, access to capital is important. Historically we have primarily financed our investment activities with retained operating cash flow and net proceeds from the issuance of preferred and common securities. Occasionally we use short- term bank debt as bridge financing when capital market conditions are not favorable to issue either preferred or common securities. We are evaluating raising additional capital through the issuance of medium or long-term debt instruments, and may do so over the next twelve months. Permanent capital: We have generally been able to raise capital through the issuance of preferred securities at an attractive cost of capital relative to the issuance of our common shares and, as a result, issuances of common shares have been minimal over the past several years. However, rates and market conditions for the issuance of preferred securities can be volatile or inefficient from time to time, and the market coupon rate of our preferred securities is influenced by long-term interest rates. During the early part of 2013, we issued preferred securities with coupon rates of 5.2%, but later in 2013, rates increased and market conditions for the issuance of common and preferred capital worsened. As a result, in December 2013 we borrowed $750.1 million from banks to bridge finance our acquisition activities during that timeframe. Subsequently, preferred share coupon rates and market conditions steadily improved, and by September 2014, we repaid our bridge financing, in part, from the issuance of preferred securities. During 2014, we issued an aggregate of $762.5 million in preferred securities, with an average coupon rate of 6.11%. Notwithstanding the recent market turbulence, we continue to view preferred capital as an important source of capital over the long-term. Bridge financing: We have in the past used our $300 million revolving line of credit as temporary “bridge” financing and repaid such borrowings with permanent capital. At December 31, 2013, we had approximately $50.1 million outstanding on our line of credit and $700 million due to Wells Fargo pursuant to a term loan which was used to fund our acquisitions of self-storage facilities in the fourth quarter of 2013. We repaid the $750.1 million of bridge financing by September 30, 2014, in part, through the issuance of preferred securities. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for more information. Borrowing through mortgage loans or senior debt: Even though preferred securities have a higher coupon rate than long-term debt, we have generally not issued conventional debt due to refinancing risk associated with debt and other benefits of preferred securities described in more detail in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.” We have broad powers to borrow in furtherance of our objectives without a vote of our shareholders. These powers are subject to a limitation on unsecured borrowings in our Bylaws described in “Limitations on Debt” below. Our senior debt has an “A” credit rating by Standard and Poor’s. We believe this high rating, combined with our low level of debt, could allow us to issue a significant amount of unsecured debt at lower interest rates than the coupon rates on preferred securities if we chose to. Given the current low interest rate environment combined with having minimal debt outstanding at December 31, 2014, we may seek to raise capital through the issuance of a modest amount of medium to long-term debt. Assumption of Debt: Substantially all of our mortgage debt outstanding was assumed in connection with real estate acquisitions. When we have assumed debt in the past, we did so because the nature of the loan terms did not allow prepayment, or a prepayment penalty made it economically disadvantageous to prepay. Issuance of securities in exchange for property: We have issued both our common and preferred securities in exchange for real estate and other investments in the past. Future issuances will be dependent 9 upon our financing needs and capital market conditions at the time, including the market prices of our equity securities. Joint Venture financing: We have used joint ventures with institutional investors and we may form additional joint ventures in the future, primarily to buy or develop self-storage facilities. Disposition of properties: Generally, we have disposed of self-storage facilities only when compelled to do so through condemnation proceedings. We do not presently intend to sell any significant number of self-storage facilities in the future, though there can be no assurance that we will not. Investments in Real Estate and Unconsolidated Real Estate Entities Investment Policies and Practices with respect to our investments: Following are our investment practices and policies which, though we do not anticipate any significant alteration, can be changed by our board of trustees (the “Board”) without a shareholder vote: (cid:120) Our investments primarily consist of direct ownership of self-storage facilities (the nature of our self-storage facilities is described in Item 2, “Properties”), as well as partial interests in entities that own self-storage facilities. (cid:120) Our partial ownership interests primarily reflect general and limited partnership interests in entities that own self-storage facilities that are managed by us under the “Public Storage” brand name in the U.S., as well as storage facilities managed in Europe under the “Shurgard” brand name which are owned by Shurgard Europe. (cid:120) Additional acquired interests in real estate (other than the acquisition of properties from third parties) will include common equity interests in entities in which we already have an interest. (cid:120) To a lesser extent, we have interests in existing commercial properties (described in Item 2, “Properties”), containing commercial and industrial rental space, primarily through our investment in PSB. Facilities Owned by Subsidiaries In addition to our direct ownership of 2,223 self-storage facilities in the U.S. and one self-storage facility in London, England at December 31, 2014, we have controlling indirect interests in entities that own 14 self-storage facilities in the U.S. Due to our controlling interest in each of these entities, we consolidate the assets, liabilities, and results of operations of these entities in our financial statements. Facilities Owned by Unconsolidated Real Estate Entities At December 31, 2014, we also had ownership interests in entities that we do not control or consolidate. These entities include PSB, Shurgard Europe (each discussed above), and various limited partnerships that own an aggregate of 13 self-storage facilities. These entities are referred to collectively as the “Unconsolidated Real Estate Entities.” PSB, which files financial statements with the SEC, and Shurgard Europe, have debt and other obligations that we do not consolidate in our financial statements. None of the other Unconsolidated Real Estate Entities have significant amounts of debt or other obligations. See Note 4 to our December 31, 2014 financial statements for further disclosure regarding the assets, liabilities and operating results of the Unconsolidated Real Estate Entities. 10 Limitations on Debt Without the consent of holders of the various series of Preferred Shares, we may not take any action that would result in our “Debt Ratio” exceeding 50%. “Debt Ratio”, as defined in the related governing documents, represents generally the ratio of debt to total assets before accumulated depreciation and amortization on our balance sheet, in accordance with U.S. generally accepted accounting principles. As of December 31, 2014, the Debt Ratio was approximately 0.5%. Our bank and senior unsecured debt agreements contain various customary financial covenants, including limitations on the level of indebtedness and the prohibition of the payment of dividends upon the occurrence of defined events of default. We believe we were in compliance with each of these covenants as of December 31, 2014. Employees We had approximately 5,300 employees in the U.S. at December 31, 2014 which are engaged primarily in property operations. Seasonality We experience minor seasonal fluctuations in the demand for self-storage space, with demand and rates generally higher in the summer months than in the winter months. We believe that these fluctuations result in part from increased moving activity during the summer months. Insurance We have historically carried customary property, earthquake, general liability, employee medical insurance and workers compensation coverage through internationally recognized insurance carriers, subject to customary levels of deductibles. The aggregate limits on these policies of approximately $75 million for property losses and $102 million for general liability losses are higher than estimates of maximum probable losses that could occur from individual catastrophic events determined in recent engineering and actuarial studies; however, in case of multiple catastrophic events, these limits could be exhausted. We reinsure a program that provides insurance to our customers from an independent third-party insurer. This program covers tenant claims for losses to goods stored at our facilities as a result of specific named perils (earthquakes are not covered by this program), up to a maximum limit of $5,000 per storage unit. We reinsure all risks in this program, but purchase insurance from an independent third party insurance company for aggregate claims between $5.0 million and $15.0 million per occurrence. We are subject to licensing requirements and regulations in several states. At December 31, 2014, there were approximately 823,000 certificates held by our self-storage customers, representing aggregate coverage of approximately $2.2 billion. 11 ITEM 1A. Risk Factors In addition to the other information in our Annual Report on Form 10-K, you should consider the risks described below that we believe may be material to investors in evaluating the Company. This section contains forward-looking statements, and in considering these statements, you should refer to the qualifications and limitations on our forward-looking statements that are described in Forward Looking Statements at the beginning of Item 1. We have significant exposure to real estate risk. Since our business consists primarily of acquiring and operating real estate, we are subject to the risks related to the ownership and operation of real estate that can adversely impact our business and financial condition. These risks include the following: Natural disasters or terrorist attacks could cause damage to our facilities, resulting in increased costs and reduced revenues. Natural disasters, such as earthquakes, hurricanes and floods, or terrorist attacks could cause significant damage and require significant repair costs, and make facilities temporarily uninhabitable, reducing our revenues. Damage and business interruption losses could exceed the aggregate limits of our insurance coverage. In addition, because we self-insure a portion of our risks, losses below a certain level may not be covered by insurance. See Note 13 to our December 31, 2014 financial statements for a description of the risks of losses that are not covered by third-party insurance contracts. We may not have sufficient insurance coverage for losses caused by a terrorist attack, or such insurance may not be maintained, available or cost-effective. In addition, significant natural disasters, terrorist attacks, threats of future terrorist attacks, or resulting wider armed conflicts could have negative impacts on the U.S. economy, reducing storage demand and impairing our operating results. Operating costs could increase. We could be subject to increases in insurance premiums, increased or new property tax assessments or other taxes, repair and maintenance costs, payroll, utility costs, workers compensation, and other operating expenses due to various factors such as inflation, labor shortages, commodity and energy price increases, weather, as well as governmental actions. The acquisition of existing properties is subject to risks that may adversely affect our growth and financial results. We have acquired self-storage facilities from third parties in the past, and we expect to continue to do so in the future. We face significant competition for suitable acquisition properties from other real estate investors. As a result, we may be unable to acquire additional properties we desire or the purchase price for desirable properties may be significantly increased. Failures or unexpected circumstances in integrating newly acquired properties into our operations or circumstances we did not detect during due diligence, such as environmental matters, needed repairs or deferred maintenance, or the effects of increased property tax following reassessment of a newly-acquired property, as well as the general risks of real estate investment, could jeopardize realization of the anticipated earnings from an acquisition. Development of self-storage facilities can subject us to risks. At December 31, 2014, we have a pipeline of development projects totaling $411 million (subject to contingencies), and we expect to continue to seek additional development projects. There are significant risks involved in developing self- storage facilities, such as delays or cost increases due to changes in or failure to meet government or regulatory requirements, weather issues, unforeseen site conditions, or personnel problems. Self-storage space is generally not pre-leased, and rent-up of newly developed space can be delayed or ongoing cash flow yields can be reduced due to competition, reductions in storage demand, or other factors. There is significant competition among self-storage from other storage alternatives. Our self-storage facilities generate most of our revenue and earnings. Competition in the local market areas in which many of our properties are located is significant and has affected our occupancy levels, rental rates and operating expenses. If development of self-storage facilities by other operators were to increase, due to increases in availability of funds for investment or other reasons, competition with our facilities could intensify. facilities and 12 liabilities We may incur significant from environmental contamination or moisture infiltration. Existing or future laws impose or may impose liability on us to clean up environmental contamination on or around properties that we currently or previously owned or operated, even if we were not responsible for or aware of the environmental contamination or even if such environmental contamination occurred prior to our involvement with the property. We have conducted preliminary environmental assessments on most of our properties, which have not identified material liabilities. These assessments, commonly referred to as “Phase 1 Environmental Assessments,” include an investigation (excluding soil or groundwater sampling or analysis) and a review of publicly available information regarding the site and other nearby properties. We are also subject to potential liability relating to moisture infiltration, which can result in mold or other damage to our or our customers’ property, as well as potential health concerns. When we receive a complaint or otherwise become aware that an air quality concern exists, we implement corrective measures and seek to work proactively with our customers to resolve issues, subject to our contractual limitations on liability for such claims. We are not aware of any environmental contamination or moisture infiltration related liabilities that could be material to our overall business, financial condition, or results of operation. However, we may not have detected all material liabilities, we could acquire properties with material undetected liabilities, or new conditions could arise or develop in the future. Settling any such liabilities could negatively impact our earnings and cash available for distribution to shareholders, and could also adversely affect our ability to sell, lease, operate, or encumber affected facilities. We incur liability from tenant and employment-related claims. From time to time we have to make monetary settlements or defend actions or arbitration (including class actions) to resolve tenant or employment-related claims and disputes. Economic conditions can adversely affect our business, financial condition, growth and access to capital. Our revenues and operating cash flow can be negatively impacted by reductions in employment and population levels, household and disposable income, and other general economic factors that lead to a reduction in demand for rental space in each of the markets in which we operate. Our ability to raise capital to fund our activities may be adversely affected by challenging market conditions. If we were unable to issue preferred shares or borrow at reasonable rates, prospective earnings growth through expanding our asset base could be limited. We have exposure to European operations through our ownership in Shurgard Europe. We own a 49% equity interest in Shurgard Europe, with our investment having a $395 million book value at December 31, 2014. As a result, we are exposed to additional risks related to international operations that may adversely impact our business and financial results, including the following: (cid:120) Currency risks: Currency fluctuations can impact the fair value of our equity investment in Shurgard Europe, as well as future repatriation of cash. (cid:120) Legislative, tax, and regulatory risks: We are subject to complex foreign laws and regulations related to permitting and land use, the environment, labor, and other areas, as well as income, property, sales, value added and employment tax laws. These laws can be difficult to apply or interpret and can vary in each country or locality, and are subject to unexpected changes in their form and application due to regional, national, or local political uncertainty and other factors. Such changes, or Shurgard’s failure to comply with these laws, could subject it to penalties or other sanctions, adverse changes in business processes, as well as potentially adverse income tax, property tax, or other tax burdens. 13 (cid:120) Impediments to capital repatriation could negatively impact the realization of our investment in Shurgard Europe: Laws in Europe and the U.S. may create, impede or increase our cost to repatriate capital or earnings from Shurgard Europe. (cid:120) Risks of collective bargaining and intellectual property: Collective bargaining, which is prevalent in certain areas in Europe, could negatively impact Shurgard Europe’s labor costs or operations. Many of Shurgard Europe’s employees participate in various national unions. (cid:120) Potential operating and individual country risks: Economic slowdowns or extraordinary political or social change in the countries in which it operates have posed, and could continue to pose, challenges or result in future reductions of Shurgard Europe’s operating cash flows. (cid:120) Impediments of Shurgard Europe’s joint venture structure: Shurgard Europe’s significant decisions, involving activities such as borrowing money, capital contributions, raising capital from third parties, as well as selling or acquiring significant assets, require the consent of our joint venture partner. As a result, Shurgard Europe may be precluded from taking advantage of opportunities that we would find attractive. In addition, we could be unable to separately pursue such opportunities due to certain market exclusivity provisions of the Shurgard Europe joint venture agreement, and our 49% equity investment may not be easily sold or readily accepted as collateral by potential lenders to Public Storage due to the joint venture structure. (cid:120) Risks related to Shurgard Europe’s Debt: Shurgard Europe has a total of €407.5 million in debt outstanding at December 31, 2014, of which €35.0 million is due annually in each of 2015, 2016 and 2017 and €100.0 million is due annually in each of 2021, 2024 and 2025. If Shurgard Europe is not able to refinance its debt when due or otherwise service its debt obligations due to a constrained credit market, negative operating trends or other reasons, our equity investment in Shurgard Europe could be negatively impacted. The Hughes Family could control us and take actions adverse to other shareholders. At December 31, 2014, B. Wayne Hughes, our former Chairman, and his family (together, the “Hughes Family”), which includes two members of the Board, owned approximately 15.5% of our aggregate outstanding common shares. Our declaration of trust permits the Hughes Family to own up to 35.66% of our outstanding common shares while it generally restricts the ownership by other persons and entities to 3% of our outstanding common shares. Consequently, the Hughes Family may significantly influence matters submitted to a vote of our shareholders, including electing trustees, amending our organizational documents, dissolving and approving other extraordinary transactions, such as a takeover attempt, resulting in an outcome that may not be favorable to other shareholders. Takeover attempts or changes in control could be thwarted, even if beneficial to shareholders. In certain circumstances, shareholders might desire a change of control or acquisition of us, in order to realize a premium over the then-prevailing market price of our shares or for other reasons. However, the following could prevent, deter, or delay such a transaction: (cid:120) Provisions of Maryland law may impose limitations that may make it more difficult for a third party to negotiate or effect a business combination transaction or control share acquisition with Public Storage. Currently, the Board has opted not to subject the Company to these provisions of Maryland law, but it could choose to do so in the future without shareholder approval. (cid:120) To protect against the loss of our REIT status due to concentration of ownership levels, our declaration of trust generally limits the ability of a person, other than the Hughes Family or “designated investment entities” (each as defined in our declaration of trust), to own, actually or constructively, more than 3% of our outstanding common shares or 9.9% 14 of the outstanding shares of any class or series of preferred or equity shares, in either case unless a specific exemption is granted by our Board. These limits could discourage, delay or prevent a transaction involving a change in control of our company not approved by our Board. (cid:120) Similarly, current provisions of our declaration of trust and powers of our Board could have the same effect, including (1) limitations on removal of trustees in our declaration of trust, (2) restrictions on the acquisition of our shares of beneficial interest, (3) the power to issue additional common shares, preferred shares or equity shares on terms approved by the Board without obtaining shareholder approval, (4) the advance notice provisions of our bylaws and (5) the Board’s ability under Maryland law, without obtaining shareholder approval, to implement takeover defenses that we may not yet have and to take, or refrain from taking, other actions that could have the effect of delaying, deterring or preventing a transaction or a change in control. If we failed to qualify as a REIT, we would have to pay substantial income taxes. REITs are subject to a range of complex organizational and operational requirements. A qualifying REIT does not generally incur federal income tax on its net income that is distributed to its shareholders. Our REIT status is also dependent upon the ongoing REIT qualification of PSB as a result of our substantial ownership interest in it. We believe that we are organized and have operated as a REIT and we intend to continue to operate to maintain our REIT status. There can be no assurance that we qualify or will continue to qualify as a REIT. The highly technical nature of the REIT rules, the ongoing importance of factual determinations, the possibility of unidentified issues in prior periods or changes in our circumstances, all could adversely affect our ability to comply. For any taxable year that we fail to qualify as a REIT and statutory relief provisions did not apply, we would be taxed at the regular federal corporate rates on all of our taxable income and we also could be subject to penalties and interest. We would generally not be eligible to seek REIT status again until the fifth taxable year after the first year of our failure to qualify. Any taxes, interest and penalties incurred would reduce the amount of cash available for distribution to our shareholders or for reinvestment and would adversely affect our earnings, which could have a material adverse effect. We may pay some taxes, reducing cash available for shareholders. Even if we qualify as a REIT for federal income tax purposes, we may be subject to some federal, foreign, state and local taxes on our income and property. Since January 1, 2001, certain corporate subsidiaries of the Company have elected to be treated as “taxable REIT subsidiaries” for federal income tax purposes, and are taxable as regular corporations and subject to certain limitations on intercompany transactions. If tax authorities determine that amounts paid by our taxable REIT subsidiaries to us are not reasonable compared to similar arrangements among unrelated parties, we could be subject to a 100% penalty tax on the excess payments, and ongoing intercompany arrangements could have to change, resulting in higher ongoing tax payments. To the extent the Company is required to pay federal, foreign, state or local taxes or federal penalty taxes due to existing laws or changes thereto, we will have less cash available for distribution to shareholders. In addition, certain local and state governments have imposed a tax on self-storage rent which, while in most cases is paid by our customers, increases the cost of self- storage rental to our customers and can negatively impact our revenues. Other local and state governments may impose a self-storage rent tax in the future. We are exposed to ongoing litigation and other legal and regulatory actions, which may divert management’s time and attention, require us to pay damages and expenses or restrict the operation of our business. We are subject to the risk of legal claims and proceedings and regulatory enforcement actions in the ordinary course of our business and otherwise, and we could incur significant liabilities and substantial 15 legal fees as a result of these actions. Resolution of these claims and actions may divert time and attention by our management and could involve payment of damages or expenses by us, all of which may be significant. In addition, any such resolution could involve our agreement to terms that restrict the operation of our business. The results of legal proceedings cannot be predicted with certainty. We cannot guarantee losses incurred in connection with any current or future legal or regulatory proceedings or actions will not exceed any provisions we may have set aside in respect of such proceedings or actions or will not exceed any available insurance coverage. The occurrence of any of these events could have a material adverse effect on us. We are heavily dependent on computer systems, telecommunications and the Internet to process transactions, summarize results and manage our business and security breaches or a failure of such networks, systems or technology could adversely impact our business, customer, and employee relationships. We are heavily dependent upon automated information technology and Internet commerce, with more than half of our new customers coming from the telephone or over the Internet, and the nature of our business involves the receipt and retention of personal information about our customers. We also maintain personally identifiable information about our employees. We centrally manage significant components of our operations with our computer systems, including our financial information, and we also rely extensively on third-party vendors to retain data, process transactions and provide other systems services. These systems are subject from power outages, computer and telecommunications failures, computer worms, viruses and other destructive or disruptive security breaches and catastrophic events. to damage or interruption As a result, our operations could be severely impacted by a natural disaster, terrorist attack or other circumstance that resulted in a significant outage at our systems or those of our third party providers, despite our use of back up and redundancy measures. Further, viruses and other related risks could negatively impact our information technology processes. Our or our customers’ or employees’ confidential information could be compromised or misappropriated, due to a breach of our network security. Such cybersecurity and data security breaches as well as system disruptions and shutdowns could result in additional costs to repair or replace such networks or information systems and possible legal liability, including government enforcement actions and private litigation. In addition, our customers could lose confidence in our ability to protect their personal information, which could cause them to discontinue leasing our self-storage facilities. Such events could lead to lost future revenues and adversely affect our results of operations and could result in remedial and other costs, fines or lawsuits, which could be in excess of any available insurance that we have procured. We have no ownership interest in Canadian self-storage facilities owned or operated by the Hughes Family. At December 31, 2014, the Hughes Family had ownership interests in, and operated, 54 self- storage facilities in Canada (the “Canadian Self-Storage Facilities”). These facilities are operated under the “Public Storage” tradename, which we license to the Hughes Family for use in Canada on a royalty-free, non-exclusive basis. We have a right of first refusal, subject to limitations, to acquire the stock or assets of the corporation engaged in the operation of the Canadian Self-Storage Facilities if the Hughes Family or the corporation agrees to sell them. However, we do not benefit from profits or potential appreciation in value of the Canadian Self-Storage Facilities because we have no ownership interest in these facilities. We do not currently operate in the Canadian self-storage market. If we choose to do so without acquiring the Hughes Family interests in the Canadian Self-Storage Facilities, we may have to share the use of the “Public Storage” name in Canada with the Hughes Family, unless we are able to terminate the license agreement. Through our subsidiaries, we reinsure risks relating to loss of goods stored by customers in the Canadian Self-Storage Facilities. During the years ended December 31, 2014, 2013 and 2012, we received $0.5 million, $0.5 million and $0.6 million, respectively, in reinsurance premiums attributable to the 16 Canadian Self-Storage Facilities. Because our right to earn these premiums may be qualified, there is no assurance that these premiums will continue. We are subject to laws and governmental regulations and actions that require us to incur compliance costs affecting our operating results and financial condition. Our business is subject to regulation under a wide variety of U.S. federal, state and local laws, regulations and policies including those imposed by the SEC, the Sarbanes-Oxley Act of 2002, the Dodd- Frank Wall Street Reform and Consumer Protection Act and NYSE, as well as applicable labor laws. Although we have policies and procedures designed to comply with applicable laws and regulations, failure to comply with the various laws and regulations may result in civil and criminal liability, fines and penalties, increased costs of compliance, restatement of our financial statements and could also affect the marketability of our real estate facilities. In response to current economic conditions or the current political environment or otherwise, laws and regulations could be implemented or changed in ways that adversely affect our operating results and financial condition, such as legislation that could facilitate union activity or that would otherwise increase operating costs. All of our properties must comply with the Americans with Disabilities Act and with related regulations and similar state law requirements, as well as various real estate and zoning laws and regulations, which are subject to change and could become more costly to comply with in the future. Compliance with these requirements can require us to incur significant expenditures, which would reduce cash otherwise available for distribution to shareholders. A failure to comply with these laws could lead to fines or possible awards of damages to individuals affected by the non-compliance. Failure to comply with these requirements could also affect the marketability of our real estate facilities. Our tenant reinsurance business is subject to governmental regulation which could reduce our profitability or limit our growth. We hold Limited Lines Self-Service Storage Insurance Agent licenses from a number of individual state Departments of Insurance and are subject to state governmental regulation and supervision. Our continued ability to maintain these Limited Lines Self-Service Storage Insurance Agent licenses in the jurisdictions in which we are licensed depends on our compliance with related rules and regulations. The regulatory authorities in each jurisdiction generally have broad discretion to grant, renew and revoke licenses and approvals, to promulgate, interpret, and implement regulations, and to evaluate compliance with regulations through periodic examinations, audits and investigations of the affairs of insurance agents. As a result of regulatory or private action in any jurisdiction, we may be temporarily or permanently suspended from continuing some or all of our reinsurance activities, or otherwise fined or penalized or suffer an adverse judgment, which could reduce our net income. ITEM 1B. Unresolved Staff Comments None. 17 ITEM 2. Properties At December 31, 2014, we had direct and indirect ownership interests in 2,250 self-storage facilities located in 38 states within the U.S. and 193 storage facilities located in seven Western European nations: At December 31, 2014 Number of Storage Facilities (a) Net Rentable Square Feet (in thousand) U.S.: California Southern Northern Florida Texas Illinois Washington Georgia North Carolina Virginia New York Colorado Maryland New Jersey Minnesota Michigan Arizona South Carolina Missouri Oregon Pennsylvania Indiana Ohio Nevada Tennessee Kansas Massachusetts Wisconsin Other states (12 states) Total - U.S. Europe (b): France Netherlands Sweden Belgium UK Germany Denmark Total - Europe Grand Total 245 174 268 257 126 107 91 84 90 65 63 61 57 47 53 43 43 38 39 29 31 31 27 25 27 22 15 92 17,348 10,662 17,944 17,004 7,952 7,049 6,122 5,802 5,440 4,527 3,954 3,699 3,630 3,313 2,916 2,755 2,737 2,236 2,040 1,993 1,926 1,922 1,818 1,691 1,528 1,310 968 5,278 2,250 145,564 55 40 30 21 21 16 10 193 2,443 2,886 2,180 1,623 1,270 1,025 892 571 10,447 156,011 18 (a) See Schedule III: Real Estate and Accumulated Depreciation in the Company’s 2014 financials, for a complete list of properties consolidated by the Company. (b) The facilities located in Europe include one facility in the United Kingdom that we wholly own, as well as the facilities owned by Shurgard Europe. We seek to maximize our facilities’ cash flow through the regular review and adjustment of rents charged and promotions granted to our existing and new incoming customers, and controlling expenses. For the year ended December 31, 2014, the weighted average occupancy level and the average realized rent per occupied square foot for our self-storage facilities were approximately 93.0% and $14.81, respectively, in the U.S. and 85.0% and $25.92, respectively, in Europe. At December 31, 2014, 34 of our U.S. facilities with a net book value of $161 million were encumbered by an aggregate of $64 million in secured notes payable. We have no specific policy as to the maximum size of any one particular self-storage facility. However, none of our facilities involves, or is expected to involve, 1% or more of our total assets, gross revenues or net income. Description of Self-Storage Facilities: Self-storage facilities, which comprise the majority of our investments, offer accessible storage space for personal and business use at a relatively low cost. A user rents a fully enclosed space, securing the space with their lock, which is for the user's exclusive use and to which only the user has access. On-site operation is the responsibility of property managers who are supervised by district managers. Some self-storage facilities also include rentable uncovered parking areas for vehicle storage. Space is rented on a month-to-month basis and rental rates vary according to the location of the property, the size of the storage space and other characteristics that affect the relative attractiveness of each particular space, such as whether the space has “drive-up” access, its proximity to elevators, or if the space is climate controlled. All of our self-storage facilities in the U.S. are operated under the "Public Storage" brand name, while our facilities in Europe are operated under the “Shurgard” brand name. Users include individuals from virtually all demographic groups, as well as businesses. Individuals usually store furniture, household appliances, personal belongings, motor vehicles, boats, campers, motorcycles and other household goods. Businesses normally store excess inventory, business records, seasonal goods, equipment and fixtures. Our self-storage facilities generally consist of between 350 to 750 storage spaces. Most spaces have between 25 and 400 square feet and an interior height of approximately eight to 12 feet. We experience minor seasonal fluctuations in the occupancy levels of self-storage facilities with occupancies generally higher in the summer months than in the winter months. We believe that these fluctuations result in part from increased demand from moving activity during the summer months and incremental demand from college students. Our self-storage facilities are geographically diversified and are located primarily in or near major metropolitan markets in 38 states in the U.S. Generally our self-storage facilities are located in heavily populated areas and close to concentrations of apartment complexes, single family residences and commercial developments. Competition from other self-storage facilities is significant and affects the occupancy levels, rental rates, rental income and operating expenses of our facilities. We believe levels of approximately 90%, have attractive characteristics consisting of high profit margins, a broad tenant base and low levels of capital expenditures to maintain their condition and appearance. Historically, upon that self-storage facilities, upon achieving stabilized occupancy 19 reaching stabilization, our U.S. self-storage facilities have generally shown a high degree of stability in generating cash flows. Description of Commercial Properties: We have an interest in PSB, which, as of December 31, 2014, owns and operates approximately 28.6 million net rentable square feet of commercial space in eight states. At December 31, 2014, the $412.1 million book value and $1.2 billion market value, respectively, of our investment in PSB represents approximately 4% and 12%, respectively, of our total assets. We also directly own 1.3 million net rentable square feet of commercial space managed primarily by PSB. The commercial properties owned by PSB consist primarily of flex, multi-tenant office and industrial space. Flex space is defined as buildings that are configured with a combination of office and warehouse space and can be designed to fit a wide variety of uses (including office, assembly, showroom, laboratory, light manufacturing and warehouse space). Environmental Matters: We accrue environmental assessments and estimated remediation cost when it is probable that such efforts will be required and the related costs can be reasonably estimated. Our current practice is to conduct environmental investigations in connection with property acquisitions. Although there can be no assurance, we are not aware of any environmental contamination of any of our facilities, which individually or in the aggregate would be material to our overall business, financial condition, or results of operations. ITEM 3. Legal Proceedings We are a party to various legal proceedings and subject to various claims and complaints; however, we believe that the likelihood of these contingencies resulting in a material loss to the Company, either individually or in the aggregate, is remote. ITEM 4. Mine Safety Disclosures Not applicable. 20 PART II ITEM 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities a. Market Information of the Registrant’s Common Equity: Our Common Shares of beneficial interest (the “Common Shares”) NYSE: PSA) have been listed on the NYSE since October 19, 1984. The following table sets forth the high and low sales prices of our Common Shares on the NYSE composite tapes for the applicable periods. Year 2013 2014 Quarter 1st 2nd 3rd 4th 1st 2nd 3rd 4th Range High Low $157.95 168.66 168.30 176.68 172.11 176.72 178.26 190.19 $144.35 145.04 149.46 147.14 148.04 167.41 162.34 165.05 As of February 20, 2015, there were approximately 15,154 holders of record of our Common Shares. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. b. Dividends We have paid quarterly distributions to our shareholders since 1981, our first full year of operations. During 2014 we paid distributions to our common shareholders of $1.40 per common share for each of the quarters ended March 31, June 30, September 30 and December 31, representing an aggregate of $964.6 million or $5.60 per share. During 2013 we paid distributions to our common shareholders of $1.25 per common share for each of the quarters ended March 31, June 30, September 30 and $1.40 per common share for the quarter ended December 31, representing an aggregate of $884.2 million or $5.15 per share. During 2012 we paid distributions to our common shareholders of $1.10 per common share for each of the quarters ended March 31, June 30, September 30 and December 31, representing an aggregate of $751.2 million or $4.40 per share. Holders of common shares are entitled to receive distributions when and if declared by our Board out of any funds legally available for that purpose. As a REIT, we do not incur federal income tax on our REIT taxable income (generally, net rents and gains from real property, dividends, and interest) that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules. We believe we have met these requirements in all periods presented herein, and we expect to continue to elect and qualify as a REIT. For Federal income tax purposes, distributions to shareholders are treated as ordinary income, capital gains, return of capital or a combination thereof. For 2014, the dividends paid on common shares and preferred shares were classified as follows: 21 1st Quarter 2nd Quarter 3rd Quarter Ordinary Income ................ Long-term Capital Gain ...... Total ................................... 100.0000% 0.0000% 100.0000% 99.7805% 0.2195% 100.0000% 100.0000% 0.0000% 100.0000% 4th Quarter 91.2039% 8.7961% 100.0000% For 2013, the dividends paid on common shares and preferred shares were classified as follows: 1st Quarter 2nd Quarter 3rd Quarter Ordinary Income ................ Long-term Capital Gain ...... Total ................................... 100.0000% 0.0000% 100.0000% 100.0000% 0.0000% 100.0000% 99.8273% 0.1727% 100.0000% 4th Quarter 99.9543% 0.0457% 100.0000% c. Equity Shares We are authorized to issue 100,000,000 equity shares from time to time in one or more series and our Board has broad authority to fix the dividend and distribution rights, conversion and voting rights, redemption provisions and liquidation rights of each series of equity shares. We had no equity shares outstanding for any period in the years ended December 31, 2014 and 2013. d. Common Share Repurchases Our Board has authorized management to repurchase up to 35,000,000 of our common shares on the open market or in privately negotiated transactions. From the inception of the repurchase program through February 24, 2015, we have repurchased a total of 23,721,916 common shares (all purchased prior to 2010) at an aggregate cost of approximately $679.1 million. Our common share repurchase program does not have an expiration date and there are 11,278,084 common shares that may yet be repurchased under our repurchase program as of December 31, 2014. We have no current plans to repurchase shares; however, future levels of common share repurchases will be dependent upon our available capital, investment alternatives, and the trading price of our common shares. e. Preferred Share Redemptions We had no preferred redemptions during the year ended December 31, 2014. 22 ITEM 6. Selected Financial Data 2014 For the year ended December 31, 2012 2013 2011 2010 Revenues Expenses: Cost of operations Depreciation and amortization General and administrative Asset impairment charges Operating income Interest and other income Interest expense Equity in earnings of unconsolidated real estate entities Foreign currency exchange (loss) gain Gain on real estate sales and debt retirement Income from continuing operations Discontinued operations Net income Net income allocated to noncontrolling equity interests Net income allocable to Public Storage shareholders Per Common Share: Distributions Net income – Basic Net income – Diluted Weighted average common shares – Basic Weighted average common shares – Diluted Balance Sheet Data: Total assets Total debt Total preferred equity Public Storage shareholders’ equity Permanent noncontrolling interests’ equity Net cash flow: Provided by operating activities Used in investing activities Used in financing activities $ 2,195,404 $ 1,981,746 $ 1,842,504 $ 1,735,888 $ 1,631,294 618,720 437,114 71,459 - 1,127,293 1,068,111 4,926 (6,781) 565,161 387,402 66,679 - 1,019,242 962,504 22,577 (6,444) 555,904 357,781 56,837 - 970,522 871,982 22,074 (19,813) 560,509 357,969 52,410 2,186 973,074 762,814 32,333 (24,222) 545,921 353,245 38,487 994 938,647 692,647 29,017 (30,225) 88,267 (7,047) 57,579 17,082 45,586 8,876 58,704 (7,287) 38,352 (42,264) 2,479 1,149,955 - 1,149,955 4,233 1,057,531 - 1,057,531 1,456 930,161 12,874 943,035 10,801 833,143 3,316 836,459 827 688,354 7,760 696,114 (5,751) (5,078) (3,777) (12,617) (24,076) $ 1,144,204 $ 1,052,453 $ 939,258 $ 823,842 $ 672,038 $5.60 $5.27 $5.25 $5.15 $4.92 $4.89 $4.40 $3.93 $3.90 $3.65 $3.31 $3.29 $3.05 $2.36 $2.35 172,251 171,640 170,562 169,657 168,877 173,138 172,688 171,664 170,750 169,772 64,364 $ $ 9,818,676 $ 9,876,266 $ 8,793,403 $ 8,932,562 $ 9,495,333 $ 568,417 $ 4,325,000 $ 3,562,500 $ 2,837,500 $ 3,111,271 $ 3,396,027 $ 9,480,796 $ 8,791,730 $ 8,093,756 $ 8,288,209 $ 8,676,598 398,314 $ 839,053 $ 468,828 $ $ 26,375 $ 27,125 $ 29,108 $ 22,718 $ 32,336 $ 1,606,758 $ 1,430,339 $ 1,285,659 $ 1,203,452 $ 1,093,221 $ (266,605) (16,160) $ (1,117,305) $ (1,438,546) $ (1,132,709) $ (1,225,415) $ (212,996) $ (1,412,393) $ (290,465) $ (81,355) $ 23 ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our financial statements and notes thereto. Critical Accounting Policies Our MD&A discusses our financial statements, which have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”). Our financial statements are affected by our judgments, assumptions and estimates. The notes to our December 31, 2014 financial statements, primarily Note 2, summarize our significant accounting policies. We believe the following are our critical accounting policies, because they have a material impact on the portrayal of our financial condition and results, and they require us to make judgments and estimates about matters that are inherently uncertain. Income Tax Expense: We have elected to be treated as a real estate investment trust (“REIT”), as defined in the Internal Revenue Code. As a REIT, we do not incur federal income tax on our REIT taxable income (generally, net rents and gains from real property, dividends, and interest) that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules. We believe we have met these REIT requirements for all periods presented herein. Accordingly, we have recorded no federal income tax expense related to our REIT taxable income. Our evaluation that we have met the REIT requirements could be incorrect, because compliance with the tax rules requires factual determinations, and circumstances we have not identified could result in noncompliance with the tax requirements in current or prior years. For any taxable year that we fail to qualify as a REIT and for which applicable statutory relief provisions did not apply, we would be taxed at the regular corporate rates on all of our taxable income for at least that year and the ensuing four years, we could be subject to penalties and interest, and our net income would be materially different from the amounts estimated in our financial statements. In addition, our taxable REIT subsidiaries are taxable as regular corporations. To the extent that amounts paid to us by our taxable REIT subsidiaries are determined by the taxing authorities to not be reasonable when compared to similar arrangements among unrelated parties, we could be subject to a 100% penalty tax on the excess payments. Such a penalty tax could have a material adverse impact on our net income. Impairment of Long-Lived Assets: The analysis of impairment of our long-lived assets involves identification of indicators of impairment, projections of future operating cash flows, and estimates of fair values, all of which require significant judgment and subjectivity. Others could come to materially different conclusions. In addition, we may not have identified all current facts and circumstances that may affect impairment. Any unidentified impairment loss, or change in conclusions, could have a material adverse impact on our net income. Accrual for Uncertain and Contingent Liabilities: We accrue for certain contingent and other liabilities that have significant uncertain elements, such as property taxes, workers compensation claims, tenant reinsurance claims, as well as other legal claims and disputes involving customers, employees, governmental agencies and other third parties. Such liabilities we are aware of are estimated based upon many factors such as assumptions of past and future trends and our evaluation of likely outcomes. However, the estimates of known liabilities could be incorrect or we may not be aware of all such liabilities, in which case our accrued liabilities and net income could be misstated. 24 Accounting for acquired real estate facilities: We estimate the fair values of the land, buildings and intangible assets acquired, for purposes of allocating the purchase price of facilities acquired. Such estimates are based upon many assumptions and judgments, including (i) expected rates of return and capitalization rates on real estate assets, (ii) estimated costs to replace acquired buildings and equipment, (iii) comparisons of the acquired underlying land parcels to recent land transactions, and (iv) future cash flows from the real estate and the existing tenant base. Others could come to materially different conclusions as to the estimated fair values, which would result in different depreciation and amortization expense, gains and losses on sale of real estate assets, and real estate and intangible assets. MD&A Overview Our domestic self-storage facilities generated approximately 93% of our revenues for the year ended December 31, 2014, and also generated most of our net income and cash flow from operations. A significant portion of management’s time is devoted to maximizing cash flows from our existing self- storage facilities, as well as seeking additional investments in self-storage facilities. Most of our facilities compete with other well-managed and well-located competitors and we are subject to general economic conditions, particularly those that affect the spending habits of consumers and moving trends. We believe that our centralized information networks, national telephone and online reservation system, the brand name “Public Storage,” and our economies of scale enable us to meet such challenges effectively. During 2014, 2013 and 2012, we acquired 44, 121 and 24 facilities, respectively, from third parties for approximately $431 million, $1.2 billion and $226 million, respectively, primarily through large portfolio acquisitions. We will continue to seek to acquire properties in 2015; however, there is significant competition to acquire existing facilities and there can be no assurance as to the level of facilities we may acquire. As of December 31, 2014, we had development and expansion projects which will add approximately 3.5 million net rentable square feet of storage space at a total cost of approximately $411 million. A total of $105 million in costs were incurred through December 31, 2014 with respect to these projects, with the remaining costs expected to be incurred primarily in 2015. We expect to continue to seek additional development projects; however, the level of future development may be limited due to various constraints such as difficulty in finding available sites that meet our risk-adjusted yield expectations, as well as challenges in obtaining building permits for self-storage activities in certain municipalities. We believe that our real estate development activities are beneficial to our business operations over the long run. However, in the short run, due to the three to four year period that it takes to fill up newly developed storage space and reach a stabilized level of cash flows, our earnings will be diluted to the extent that earnings from those newly developed facilities are less than the cost of the capital that was required in order to fund the development cost. We believe that this negative impact will grow in 2015 and beyond due to the resulting level of growth of unstabilized facilities in our portfolio. We also have equity investments in Shurgard Europe and PS Business Parks, Inc. (“PSB”). We may invest further in these entities in the future. As of December 31, 2014, our capital resources totaled approximately $774 million, consisting of $188 million in cash, approximately $286 million of available borrowing capacity on our line of credit, and $300 million of expected retained operating cash flow for 2015. Retained operating cash flow represents our expected cash flow provided by operating activities, after deducting estimated distributions to our shareholders and estimated maintenance capital expenditure requirements for 2015. At December 31, 2014, we had capital commitments totaling approximately $356 million, consisting of $306 million of remaining spend on our development pipeline, $32 million in property 25 acquisitions, and approximately $18 million in maturities on notes payable. In addition, we expect that our capital commitments will continue to grow during 2015 as we continue to seek additional development and acquisition opportunities. See Liquidity and Capital Resources for further information regarding our capital requirements and anticipated sources of capital to fund such requirements. Results of Operations Operating results for 2014 as compared to 2013 For the year ended December 31, 2014, net income allocable to our common shareholders was $908.2 million or $5.25 per diluted common share, compared to $844.7 million or $4.89 per diluted common share for the same period in 2013, representing an increase of $63.5 million or $0.36 per diluted common share. This increase is due primarily to (i) a $157.2 million increase in self-storage net operating income and (ii) our $36.5 million equity share of PSB’s gain on sale of real estate included in our equity in earnings of real estate entities, offset partially by (iii) a $49.7 million increase in depreciation and amortization expense associated with acquired facilities, (iv) a $24.1 million reduction associated with foreign currency exchange gains and losses, (v) an $28.3 million increase in earnings allocated to preferred shareholders due to the issuance of additional preferred shares, and (vi) a $17.7 million decrease in interest and other income due primarily to the disposition of 51% of our loan receivable from Shurgard Europe. Operating results for 2013 as compared to 2012 For the year ended December 31, 2013, net income allocable to our common shareholders was $844.7 million or $4.89 per diluted common share, compared to $669.7 million or $3.90 per diluted common share for the same period in 2012, representing an increase of $175.0 million or $0.99 per diluted common share. This increase is due primarily to (i) a $124.6 million increase in self-storage net operating income, (ii) a $68.9 million reduction in income allocated to preferred shareholders due to redemptions, including our equity share of PSB, (iii) an $8.2 million increase from foreign currency exchange gains, offset partially by (iv) a $29.6 million increase in depreciation and amortization associated with acquired real estate facilities. Funds from Operations and Core Funds from Operations Funds from Operations (“FFO”) and FFO per share are non-GAAP (generally accepted accounting principles) measures defined by the National Association of Real Estate Investment Trusts and are considered helpful measures of REIT performance by REITs and many REIT analysts. FFO represents net income before real estate depreciation, gains and losses, and impairment charges, which are excluded because they are based upon historical real estate costs and assume that building values diminish ratable over time, while we believe that real estate values fluctuate due to market conditions. FFO and FFO per share are not a substitute for net income or earnings per share. FFO is not a substitute for GAAP net cash flow in evaluating our liquidity or ability to pay dividends, because it excludes financing activities presented on our statements of cash flows. In addition, other REITs may compute these measures differently, so comparisons among REITs may not be helpful. For the year ended December 31, 2014, FFO was $7.98 per diluted common share, as compared to $7.53 for the same period in 2013, representing an increase of 6.0%, or $0.45 per diluted common share. For the year ended December 31, 2013, FFO was $7.53 per diluted common share, as compared to $6.31 for the same period in 2012, representing an increase of 19.3%, or $1.22 per diluted common share. The following tables reconcile diluted earnings per share to FFO per share, and sets forth the computation of FFO per share: 26 Year Ended December 31, 2013 2012 2014 Reconciliation of Diluted Earnings per Share to FFO per Share: Diluted Earnings per Share $ 5.25 $ 4.89 $ 3.90 Eliminate amounts per share excluded from FFO: Depreciation and amortization, including amounts from investments and excluding amounts allocated to noncontrolling interests and restricted share unitholders Gains on sale of real estate investments, including our equity share from investments, and other FFO per share Computation of FFO per Share: 2.96 2.66 2.50 $ (0.23) 7.98 $ (0.02) 7.53 $ (0.09) 6.31 Net income allocable to common shareholders $ 908,176 $ 844,731 $ 669,694 Eliminate items excluded from FFO: Depreciation and amortization Depreciation from unconsolidated real estate investments Depreciation allocated to noncontrolling interests and restricted share unitholders Gains on sale of real estate investments, including our equity share from investments, and other FFO allocable to common shares Diluted weighted average common shares FFO per share 437,114 387,402 358,103 79,413 75,458 75,648 (3,638) (3,976) (4,730) (39,083) 1,381,982 173,138 7.98 $ $ (4,104) 1,299,511 172,688 7.53 $ $ (14,719) 1,083,996 171,664 6.31 $ $ We also present “Core FFO per share,” a non-GAAP measure that represents FFO per share excluding the impact of (i) foreign currency exchange gains and losses, (ii) certain other items such as legal settlements, recognition of deferred tax assets, costs associated with the acquisition of real estate facilities, and facility closure charges. We believe Core FFO per share is a helpful measure used by investors and REIT analysts to understand our performance. However, Core FFO per share is not a substitute for net income per share. Because other REITs may not compute Core FFO per share in the same manner as we do, may not use the same terminology, or may not present such a measure, Core FFO per share may not be comparable among REITs. The following table reconciles FFO per share to Core FFO per share: 27 Year Ended December 31, Year Ended December 31, 2014 2013 Percentage Change 2013 2012 Percentage Change $ 7.98 $ 7.53 6.0% $ 7.53 $ 6.31 19.3% (0.10) 0.04 - - 0.07 0.01 8.09 $ 7.44 $ (0.10) - 0.01 7.44 $ (0.05) 0.40 0.02 6.68 8.7% $ 11.4% FFO per share Eliminate the per share impact of items excluded from Core FFO: Foreign currency exchange loss (gain) Application of EITF D-42 Other items Core FFO per share Real Estate Operations Self-Storage Operations: Our self-storage operations are analyzed in two groups: (i) the Same Store Facilities, representing the facilities that we have owned and operated on a stabilized basis since January 1, 2012, and (ii) all other facilities, which are newly acquired, newly developed, or recently expanded facilities (the “Non Same Store Facilities”). 28 Self-Storage Operations Summary Revenues: Year Ended December 31, Year Ended December 31, 2014 2013 Percentage Change 2013 2012 Percentage Change (Dollar amounts in thousands) Same Store Facilities Non Same Store Facilities Total rental income $ 1,836,676 $ 1,743,182 106,701 2,049,882 1,849,883 213,206 5.4% $ 1,743,182 $ 1,653,145 65,720 106,701 99.8% 10.8% 1,849,883 1,718,865 5.4% 62.4% 7.6% Cost of operations: Same Store Facilities Non Same Store Facilities Total cost of operations 498,640 68,258 566,898 489,177 34,909 524,086 1.9% 95.5% 8.2% 489,177 34,909 524,086 496,217 21,424 517,641 (1.4)% 62.9% 1.2% Net operating income (a): Same Store Facilities Non Same Store Facilities 1,338,036 1,254,005 71,792 144,948 6.7% 1,254,005 1,156,928 44,296 71,792 101.9% 8.4% 62.1% Total net operating income 1,482,984 1,325,797 11.9% 1,325,797 1,201,224 10.4% Total depreciation and amortization expense: (312,995) (121,074) (316,178) (68,445) (1.0)% 76.9% (316,178) (68,445) (326,258) (28,713) (3.1)% 138.4% (434,069) $ 1,048,915 $ (384,623) 941,174 12.9% 11.4% $ (384,623) 941,174 $ (354,971) 846,253 8.4% 11.2% Same Store Facilities Non Same Store Facilities Total depreciation and amortization expense Total net income Number of facilities at period end: Same Store Facilities Non Same Store Facilities 1,982 256 1,982 205 - 24.9% 1,982 205 1,982 83 - 147.0% Net rentable square footage at period end (in thousands): Same Store Facilities Non Same Store Facilities 125,435 19,439 125,435 14,852 - 30.9% 125,435 14,852 125,435 6,202 - 139.5% (a) See “Net Operating Income” below for further information regarding this non-GAAP measure. Net income from our Self-Storage operations has increased 11.4% in 2014 as compared to 2013 and 11.2% in 2013 as compared to 2012. These increases are due to improvements in our Same Store Facilities, as well as the acquisitions of new facilities and the fill-up of unstabilized facilities. Same Store Facilities The Same Store Facilities represent those facilities that have been owned and operated on a stabilized basis since January 1, 2012 and therefore provide meaningful comparisons for 2012, 2013 and 2014. The following table summarizes the historical operating results of these 1,982 facilities (125.4 million net rentable square feet) that represent approximately 87% of the aggregate net rentable square feet of our U.S. consolidated self-storage portfolio at December 31, 2014. 29 Selected Operating Data for the Same Store Facilities (1,982 facilities) Revenues: Rental income Late charges and administrative fees Total revenues (a) Cost of operations: Property taxes On-site property manager payroll Supervisory payroll Repairs and maintenance Utilities Advertising and selling expense Other direct property costs Allocated overhead Total cost of operations (a) Net operating income (b) Depreciation and amortization expense Net income Year Ended December 31, Year Ended December 31, 2014 2013 Percentage Change 2013 2012 Percentage Change (Dollar amounts in thousands, except weighted average amounts) $ 1,748,211 $ 1,657,412 5.5% $ 1,657,412 $ 1,571,022 5.5% 88,465 85,770 1,836,676 1,743,182 3.1% 82,123 85,770 5.4% 1,743,182 1,653,145 4.4% 5.4% 168,297 162,903 3.3% 162,903 155,403 4.8% 98,260 33,986 43,398 38,927 99,980 34,491 40,140 37,365 (1.7)% (1.5)% 8.1% 4.2% 99,980 34,491 40,140 37,365 100,669 33,952 40,959 37,355 (0.7)% 1.6% (2.0)% 0.0% 26,684 51,409 37,679 498,640 27,783 50,386 36,129 489,177 1,338,036 1,254,005 (4.0)% 39,920 2.0% 51,402 4.3% 36,557 496,217 1.9% 6.7% 1,254,005 1,156,928 27,783 50,386 36,129 489,177 (30.4)% (2.0)% (1.2)% (1.4)% 8.4% (312,995) $ 1,025,041 $ (316,178) 937,827 (1.0)% 9.3% $ 937,827 $ (316,178) (326,258) 830,670 (3.1)% 12.9% Gross margin (before depreciation and amortization) Weighted average for the period: 72.9% 71.9% 1.4% 71.9% 70.0% 2.7% Square foot occupancy 93.9% 93.3% 0.6% 93.3% 91.9% 1.5% Realized annual rental income per (c): Occupied square foot Available square foot (“REVPAF”) $ $ 14.84 $ 14.16 4.8% $ 14.16 $ 13.63 3.9% 13.94 $ 13.21 5.5% $ 13.21 $ 12.52 5.5% At December 31: Square foot occupancy Annual contract rent per occupied square foot (d) 92.5% 91.8% 0.8% 91.8% 91.4% 0.4% $ 15.79 $ 15.05 4.9% $ 15.05 $ 14.47 4.0% (a) Revenues and cost of operations do not include ancillary revenues and expenses generated at the facilities with respect to tenant reinsurance and retail sales. (b) See “Net Operating Income” below for a reconciliation of this non-GAAP measure to our operating income in our income statements. (c) Realized annual rent per occupied square foot is computed by dividing rental income, before late charges and administrative fees, by the weighted average occupied square feet for the period. Realized annual rent per available square foot (“REVPAF”) is computed by dividing rental income, before late charges and administrative 30 fees, by the total available net rentable square feet for the period. These measures exclude late charges and administrative fees in order to provide a better measure of our ongoing level of revenue. Late charges are dependent upon the level of delinquency, and administrative fees are dependent upon the level of move-ins. In addition, the rates charged for late charges and administrative fees can vary independently from rental rates. These measures take into consideration promotional discounts, which reduce rental income. (d) Annual contract rent represents the applicable annualized contractual monthly rent charged to our tenants, excluding the impact of promotional discounts, late charges and administrative fees. Analysis of Same Store Revenue Revenues generated by our Same Store Facilities increased by 5.4% in 2014 as compared to the 2013 due primarily to a 4.8% increase in realized rent per occupied square foot and a 0.6% increase in average occupancy. Revenues generated by our Same Store Facilities increased by 5.4% in 2013 as compared to 2012 due primarily to a 3.9% increase in realized rent per occupied square foot and a 1.5% increase in average occupancy. The increases in realized rent per occupied square foot was due primarily to annual rent increases given to tenants that have been renting with us longer than one year, and to a lesser extent, increased move-in rates in 2014 as compared to 2013, and reduced promotional discounts given to new tenants in 2013 as compared to 2012. Same Store average occupancy increased from 93.3% in 2013 to 93.9% in 2014, representing an increase of 0.6%. Same Store average occupancy increased from 91.9% in 2012 to 93.3% in 2013, representing an increase of 1.5%. At December 31, 2014, the year-over-year occupancy gap was 0.8%. Notwithstanding this increase, we expect the year over year occupancy gap to narrow because we believe we are reaching limitations to occupancy levels inherent with approximately 5% to 7% of our tenant base vacating each month without notice. We believe that high occupancies help maximize our rental revenue. We seek to maintain an average occupancy level of at least 90%, by regularly adjusting the rental rates and promotions offered to attract new tenants as well as adjusting our marketing efforts on both television and the Internet in order to generate sufficient move-in volume to replace tenants that vacate. Demand fluctuates due to various local and regional factors, including the overall economy. Demand is higher in the summer months than in the winter months and, as a result, rental rates charged to new tenants are typically higher in the summer months than in the winter months. We believe rental growth in 2015 will need to come from a combination of the following; (i) continued annual rent increases to tenants, (ii) higher rental rates charged to new tenants, and (iii) lower promotional discounts. Our future rental growth will also be dependent upon many factors for each market that we operate in, including demand for self-storage space, the level of competitor supply of self- storage space, and the average length of stay of our tenants. Increasing rental rates to existing tenants, generally on an annual basis, is a key component of our revenue growth. We determine the level of rental increases based upon our expectations regarding the impact of existing tenant rate increases on incremental move-outs. We expect to continue to pass similar rent increases to long-term tenants in 2015, as we did in 2014. During 2014, 2013 and 2012, the average annualized contractual rates per occupied square foot for tenants that moved in were $13.63, $13.02 and $12.81, respectively, and for tenants that vacated were $14.34, $13.81 and $13.58, respectively. Notwithstanding the negative impact of vacate rates exceeding move in rates in each of the past three years, we have continue to grow realized annual rental income per square foot during each of 2014 and 2013, as noted in the table above. The growth in realized annual rental income per square foot was primarily due to (i) annual rate increases to tenants, (ii) improved length of stay, (iii) for 2014, improved net positive move ins (move in volume less move out volume) versus 2013, and (iv) reduced levels of promotional discounts. Promotional discounts were approximately $81.4 million in 2014, $81.2 million in 2013, and $90.2 million in 2012. Promotional discounts have declined due to higher occupancy. 31 We believe that the current trends in move-in, move-out, in place contractual rents and occupancy levels are consistent with our expectation of continued revenue growth in 2015. However, such trends, when viewed in the short-run, are volatile and not necessarily predictive of our revenues going forward because they are subject to many short-term factors. Such factors include initial move-in rates, seasonal factors, the unit size and geographical mix of the specific tenants moving in or moving out, the length of stay of the tenants moving in or moving out, changes in our pricing strategies, and the degree and timing of rate increases previously passed to existing tenants. Analysis of Same Store Cost of Operations Cost of operations (excluding depreciation and amortization) increased 1.9% in 2014 as compared to 2013 and decreased 1.4% in 2013 as compared to 2012. The increase in 2014 was due primarily to increased repairs and maintenance, primarily snow removal expense, as well as increased property tax expense. The decrease in 2013 was due primarily to reduced advertising and selling expense, offset partially by increased property taxes. Property tax expense increased 3.3% in 2014 as compared to 2013 and 4.8% in 2013 as compared to 2012. The increases in 2014 and 2013 were due primarily to higher assessed values and tax rates. We expect property tax expense growth of approximately 4% to 5% in 2015. On-site property manager payroll expense decreased 1.7% in 2014 as compared to 2013 and 0.7% in 2013 as compared to 2012. The decrease in 2014 was due primarily to efficiencies which resulted in fewer hours worked, combined with reduced workers’ compensation expenses. The decrease in 2013 was due primarily to reductions in incentive compensation, offset partially by higher employee health plan expenses. We expect on-site property manager payroll expense to increase modestly in 2015 due to inflationary wage increases. Supervisory payroll expense, which represents compensation paid to the management personnel who directly and indirectly supervise the on-site property managers, decreased 1.5% in 2014 as compared to 2013 and increased 1.6% in 2013 as compared to 2012. The decrease in 2014 was due primarily to reduced headcount, while the increase in 2013 was due primarily to increases in compensation rates. We expect inflationary increases in compensation rates and increased headcount in 2015. Repairs and maintenance expense increased 8.1% in 2014 as compared to 2013, and decreased 2.0% in 2013 as compared to 2012. Repair and maintenance costs include snow removal expense totaling $7.9 million, $5.3 million and $2.8 million in 2014, 2013 and 2012, respectively. Excluding snow removal costs, repairs and maintenance increased 1.9% in 2014 as compared to 2013 and decreased 8.9% in 2013 as compared to 2012. Repairs and maintenance expense levels are dependent upon many factors such as weather conditions, which can impact repair and maintenance needs including snow removal, inflation in material and labor costs, and random events. We expect inflationary increases in repairs and maintenance expense in 2015, excluding snow removal expense, which is primarily weather dependent and not predictable. Our utility expenses are comprised primarily of electricity costs, which are dependent upon energy prices and usage levels. Changes in usage levels are driven primarily by weather and temperature. Utility expense increased 4.2% in 2014 and was flat in 2013 as compared to 2012. It is difficult to estimate future utility costs, because weather, temperature, and energy prices are volatile and not predictable. However, based upon current trends and expectations regarding commercial electricity rates, we expect inflationary increases in rates. Advertising and selling expense is comprised principally of Internet advertising, media advertising and the operating costs of our telephone reservation center. Advertising and selling expense varies based upon demand, occupancy levels, and other factors; media and Internet advertising, in particular, can increase or decrease significantly in the short run in response to these factors. Advertising and selling expenses declined 4.0% in 2014 as compared to 2013, and 30.4% in 2013 as compared to 2012. The 32 significant decrease in 2013 is due to the phase-out of our yellow page advertising program as of December 31, 2012, as well as reduced television advertising and Internet search costs as a result of high occupancies. Based upon current trends in move-ins, move-outs, and occupancies, we expect advertising and selling expense to be approximately flat in 2015. Other direct property costs include administrative expenses incurred at the self-storage facilities, such as property insurance, business license costs, bank charges related to processing the properties’ cash receipts, credit card fees, and the cost of operating each property’s rental office including supplies and telephone data communication lines. These costs increased 2.0% in 2014 as compared to 2013 and decreased 2.0% in 2013 as compared to 2012. The increase in 2014 is due primarily to higher credit card fees, offset partially by lower property insurance costs. The decrease in 2013 is due to lower property insurance costs and certain administrative cost-saving efforts, offset partially by an increase in credit card fees. Credit card fees increased in both periods due to a higher proportion of collections being received from credit cards. We expect moderate increases in other direct property costs in 2015. Allocated overhead represents administrative expenses for shared general corporate functions, which are allocated to self-storage property operations to the extent their efforts are devoted to self-storage operations. Such functions include data processing, human resources, operational accounting and finance, marketing, and costs of senior executives (other than the Chief Executive Officer and Chief Financial Officer, which are included in general and administrative expense). Allocated overhead increased 4.3% in 2014 as compared to 2013, and decreased 1.2% in 2013 as compared to 2012. We expect inflationary growth in allocated overhead in 2015 as compared to 2014. The following table summarizes selected quarterly financial data with respect to the Same Store Facilities: 33 For the Quarter Ended March 31 June 30 September 30 December 31 Entire Year (Amounts in thousands, except for per square foot amount) Total revenues: 2014 2013 2012 $ $ $ 440,404 $ 452,571 $ 475,973 $ 467,728 $ 1,836,676 419,094 $ 429,958 $ 451,300 $ 442,830 $ 1,743,182 397,132 $ 408,636 $ 427,492 $ 419,885 $ 1,653,145 Total cost of operations: 2014 2013 2012 Property taxes: 2014 2013 2012 $ $ $ $ $ $ 139,460 $ 126,722 $ 128,745 $ 103,713 $ 134,144 $ 125,279 $ 127,691 $ 102,063 $ 137,298 $ 127,789 $ 125,742 $ 105,388 $ 47,583 $ 46,967 $ 46,069 $ 27,678 $ 45,613 $ 44,953 $ 44,572 $ 27,765 $ 43,956 $ 42,910 $ 41,568 $ 26,969 $ Repairs and maintenance: 2014 2013 2012 $ $ $ 14,734 $ 11,022 $ 9,432 $ 9,278 $ 12,513 $ 10,672 $ 9,900 $ 9,862 $ 8,656 $ 9,332 $ 9,978 $ 9,118 $ Advertising and selling expense: 2014 2013 2012 REVPAF: 2014 2013 2012 $ $ $ $ $ $ 6,481 $ 7,655 $ 6,043 $ 6,577 $ 7,772 $ 8,596 $ 10,805 $ 10,883 $ 10,499 $ 6,388 $ 4,955 $ 7,733 $ 13.34 $ 12.69 $ 12.02 $ 13.75 $ 13.05 $ 12.39 $ 14.44 $ 13.67 $ 12.94 $ 14.22 $ 13.44 $ 12.75 $ Weighted average realized annual rent per occupied square foot: 2014 2013 2012 $ $ $ 14.40 $ 13.81 $ 13.32 $ 14.52 $ 13.88 $ 13.42 $ 15.25 $ 14.48 $ 13.93 $ 15.20 $ 14.45 $ 13.86 $ Weighted average occupancy levels for the period: 2014 2013 2012 92.6% 91.9% 90.2% 94.7% 94.0% 92.3% 94.7% 94.4% 92.9% 93.5% 93.0% 92.0% 498,640 489,177 496,217 168,297 162,903 155,403 43,398 40,140 40,959 26,684 27,783 39,920 13.94 13.21 12.52 14.84 14.16 13.63 93.9% 93.3% 91.9% 34 Analysis of Market Trends The following table sets forth selected market trends in our Same Store Facilities: Same Store Facilities Operating Trends by Market Revenues: Los Angeles (197 facilities) $ San Francisco (128 facilities) New York (79 facilities) Chicago (129 facilities) Washington DC (74 facilities) Seattle-Tacoma (85 facilities) Miami (61 facilities) Dallas-Ft. Worth (98 facilities) Houston (80 facilities) Atlanta (89 facilities) Philadelphia (55 facilities) Denver (47 facilities) Minneapolis-St Paul (41 facilities) Portland (43 facilities) Orlando-Daytona (45 facilities) All other markets (731 facilities) Total revenues Net operating income: Los Angeles San Francisco New York Chicago Washington DC Seattle-Tacoma Miami Dallas-Ft. Worth Houston Atlanta Philadelphia Denver Minneapolis-St. Paul Portland Orlando-Daytona All other markets Total net operating income Year Ended December 31, Year Ended December 31, 2014 2013 Change 2013 2012 Change (Amounts in thousands, except for weighted average data) 270,531 $ 155,918 117,591 113,870 86,836 87,607 77,604 72,295 67,259 63,173 46,886 43,075 257,062 5.2% $ 145,995 6.8% 114,024 3.1% 108,754 4.7% 85,013 2.1% 82,111 6.7% 72,842 6.5% 67,920 6.4% 62,348 7.9% 59,589 6.0% 44,783 4.7% 39,808 8.2% 257,062 $ 145,995 114,024 108,754 85,013 82,111 72,842 67,920 62,348 59,589 44,783 39,808 243,442 5.6% 137,431 6.2% 106,623 6.9% 103,578 5.0% 82,349 3.2% 77,251 6.3% 69,088 5.4% 63,836 6.4% 57,787 7.9% 57,293 4.0% 43,532 2.9% 36,921 7.8% 35,947 33,594 33,863 6.2% 31,287 7.4% 33,863 31,287 31,369 8.0% 29,703 5.3% 30,546 29,259 4.4% 29,259 28,083 4.2% 533,944 484,859 4.9% $ 1,836,676 $ 1,743,182 5.4% $ 1,743,182 $ 1,653,145 5.4% 508,524 5.0% 508,524 $ 218,173 $ 123,741 84,092 65,521 66,368 68,052 58,987 50,524 45,098 45,279 31,930 31,679 23,933 25,129 21,522 378,008 188,292 8.4% 104,466 9.2% 71,787 11.7% 61,001 4.4% 62,250 4.5% 57,092 9.2% 50,124 8.6% 41,765 11.0% 37,481 9.2% 38,966 8.3% 28,775 4.8% 25,769 11.4% 19,920 10.3% 8.7% 21,451 6.2% 18,980 328,809 8.4% $ 1,338,036 $ 1,254,005 6.7% $ 1,254,005 $ 1,156,928 8.4% 204,154 6.9% $ 114,097 8.5% 80,173 4.9% 63,680 2.9% 65,022 2.1% 62,354 9.1% 54,430 8.4% 46,377 8.9% 40,933 10.2% 42,189 7.3% 30,154 5.9% 28,707 10.4% 21,979 8.9% 7.8% 23,311 6.8% 20,155 356,290 6.1% 204,154 $ 114,097 80,173 63,680 65,022 62,354 54,430 46,377 40,933 42,189 30,154 28,707 21,979 23,311 20,155 356,290 35 Same Store Facilities Operating Trends by Market (Continued) Weighted average square foot occupancy: Los Angeles San Francisco New York Chicago Washington DC Seattle-Tacoma Miami Dallas-Ft. Worth Houston Atlanta Philadelphia Denver Minneapolis-St. Paul Portland Orlando-Daytona All other markets Total weighted average occupancy Realized annual rent per occupied square foot: Los Angeles San Francisco New York Chicago Washington DC Seattle-Tacoma Miami Dallas-Ft. Worth Houston Atlanta Philadelphia Denver Minneapolis-St. Paul Portland Orlando-Daytona All other markets Year Ended December 31, Year Ended December 31, 2014 2013 Change 2013 2012 Change 94.3% 95.2% 94.0% 93.4% 92.5% 94.0% 94.6% 94.2% 94.2% 93.6% 93.7% 95.0% 93.2% 95.0% 93.8% 93.6% 93.5% 0.9% 94.6% 0.6% 94.6% (0.6)% 93.5% (0.1)% 93.0% (0.5)% 93.0% 1.1% 93.9% 0.7% 93.5% 0.7% 93.8% 0.4% 92.0% 1.7% 93.1% 0.6% 94.8% 0.2% 93.2% 0.0% 94.1% 1.0% 93.1% 0.8% 92.9% 0.8% 93.5% 94.6% 94.6% 93.5% 93.0% 93.0% 93.9% 93.5% 93.8% 92.0% 93.1% 94.8% 93.2% 94.1% 93.1% 92.9% 92.2% 1.4% 93.1% 1.6% 92.9% 1.8% 92.2% 1.4% 91.9% 1.2% 91.1% 2.1% 92.4% 1.6% 91.7% 2.0% 91.8% 2.2% 90.6% 1.5% 91.6% 1.6% 94.1% 0.7% 91.8% 1.5% 92.8% 1.4% 91.8% 1.4% 91.4% 1.6% 93.9% 93.3% 0.6% 93.3% 91.9% 1.5% $ 20.39 $ 21.41 22.65 14.34 20.75 15.98 17.99 11.66 12.22 10.81 13.94 14.35 13.05 15.08 11.39 11.93 19.51 4.5% $ 20.14 6.3% 21.75 4.1% 13.68 4.8% 20.31 2.2% 15.12 5.7% 17.01 5.8% 11.01 5.9% 11.37 7.5% 10.35 4.4% 13.38 4.2% 13.22 8.5% 12.26 6.4% 14.19 6.3% 10.96 3.9% 11.44 4.3% 19.51 $ 20.14 21.75 13.68 20.31 15.12 17.01 11.01 11.37 10.35 13.38 13.22 12.26 14.19 10.96 11.44 18.76 4.0% 19.26 4.6% 20.73 4.9% 13.17 3.9% 19.88 2.2% 14.52 4.1% 16.35 4.0% 10.56 4.3% 10.79 5.4% 10.06 2.9% 13.20 1.4% 12.35 7.0% 11.50 6.6% 13.66 3.9% 10.65 2.9% 11.07 3.3% Total realized rent per square foot $ 14.84 $ 14.16 4.8% $ 14.16 $ 13.63 3.9% 36 Same Store Facilities Operating Trends by Market (Continued) $ REVPAF: Los Angeles San Francisco New York Chicago Washington DC Seattle-Tacoma Miami Dallas-Ft. Worth Houston Atlanta Philadelphia Denver Minneapolis-St. Paul Portland Orlando-Daytona All other markets Total REVPAF $ Year Ended December 31, Year Ended December 31, 2014 2013 Change 2013 2012 Change 19.23 $ 20.39 21.28 13.40 19.20 15.03 17.03 11.00 11.52 10.15 13.07 13.67 12.16 14.32 10.70 11.16 13.94 $ 18.24 5.4% $ 19.04 7.1% 20.57 3.5% 12.78 4.9% 18.88 1.7% 14.06 6.9% 15.97 6.6% 10.30 6.8% 10.66 8.1% 9.52 6.6% 12.45 5.0% 12.54 9.0% 11.43 6.4% 13.36 7.2% 10.21 4.8% 10.62 5.1% 13.21 5.5% $ 18.24 $ 19.04 20.57 12.78 18.88 14.06 15.97 10.30 10.66 9.52 12.45 12.54 11.43 13.36 10.21 10.62 13.21 $ 17.30 5.4% 17.93 6.2% 19.26 6.8% 12.14 5.3% 18.27 3.3% 13.23 6.3% 15.10 5.8% 9.68 6.4% 9.90 7.7% 9.12 4.4% 12.09 3.0% 11.61 8.0% 10.56 8.2% 12.67 5.4% 9.78 4.4% 10.12 4.9% 5.5% 12.52 We believe that our geographic diversification and scale provide some insulation from localized economic effects and add to the stability of our cash flows. It is difficult to predict localized trends in short-term self-storage demand and operating results. Over the long run, we believe that markets that experience population growth, high employment, and otherwise exhibit economic strength and consistency will outperform markets that do not exhibit these characteristics. Non Same Store Facilities The Non Same Store Facilities at December 31, 2014 represent 256 facilities that were not stabilized with respect to occupancies or rental rates since January 1, 2012, or that we did not own as of January 1, 2012. As a result of the stabilization process and timing of when the facilities were acquired, year-over-year changes can be significant. The following table summarizes operating data with respect to the Non Same Store Facilities: 37 NON SAME STORE FACILITIES Rental income: 2014 third party acquisitions 2013 third party acquisitions 2012 third party acquisitions Other facilities Total rental income $ Cost of operations before depreciation and amortization expense: Year Ended December 31, 2014 Change 2013 2013 (Dollar amounts in thousands, except square foot amounts) Year Ended December 31, 2012 Change - $ 15,347 $ - $ 15,347 $ 96,947 28,275 72,637 19,309 22,452 64,940 213,206 106,701 106,505 106,701 19,309 22,452 64,940 77,638 5,823 7,697 - $ - 7,791 57,929 65,720 - 19,309 14,661 7,011 40,981 2014 third party acquisitions 2013 third party acquisitions 2012 third party acquisitions Other facilities Total cost of operations Net operating income: 2014 third party acquisitions 2013 third party acquisitions 2012 third party acquisitions Other facilities Total net operating income (a) Depreciation and amortization expense Net income At December 31: Square foot occupancy: 2014 third party acquisitions 2013 third party acquisitions 2012 third party acquisitions Other facilities Annual contract rent per occupied square foot: 2014 third party acquisitions 2013 third party acquisitions 2012 third party acquisitions Other facilities Number of facilities: 2014 third party acquisitions 2013 third party acquisitions 2012 third party acquisitions Other facilities Net rentable square feet (in thousands): 2014 third party acquisitions 2013 third party acquisitions 2012 third party acquisitions Other facilities 4,566 32,917 9,591 21,184 68,258 - 7,574 8,562 18,773 34,909 4,566 25,343 1,029 2,411 33,349 - 7,574 8,562 18,773 34,909 - - 3,206 18,218 21,424 - 7,574 5,356 555 13,485 10,781 64,030 18,684 51,453 144,948 - 11,735 13,890 46,167 71,792 10,781 52,295 4,794 5,286 73,156 - 11,735 13,890 46,167 71,792 - - 4,585 39,711 44,296 - 11,735 9,305 6,456 27,496 (121,074) (68,445) (52,629) (68,445) (28,713) (39,732) 3,347 $ 15,583 $ (12,236) $ 3,347 $ 20,527 $ 23,874 $ 89.9% 90.4% 92.5% 82.2% 88.1% - 82.6% 86.5% 85.2% 84.0% - 9.4% 6.9% (3.5)% 4.9% - 82.6% 86.5% 85.2% 84.0% - - 75.2% 88.6% 84.4% - - 15.0% (3.8)% (0.5)% $ $ 12.15 $ 13.99 15.40 16.33 14.45 $ - 13.56 13.76 16.17 14.40 - $ 3.2% 11.9% 1.0% 0.3% $ - $ 13.56 13.76 16.17 14.40 $ - - 13.66 15.79 15.20 - - 0.7% 2.4% (5.3)% 44 121 24 67 256 - 121 24 60 205 44 - - 7 51 - 121 24 60 205 - - 24 59 83 - 121 - 1 122 3,442 8,056 2,117 5,824 19,439 - 8,036 2,117 4,699 14,852 3,442 20 - 1,125 4,587 - 8,036 2,117 4,699 14,852 - - 1,908 4,294 6,202 - 8,036 209 405 8,650 38 (a) See “Net Operating Income” below for a reconciliation of this non-GAAP measure to our net income in our statements of income for the years ended December 31, 2014, 2013 and 2012. During 2014, we acquired 44 operating self-storage facilities (3,442,000 net rentable square feet of storage space) for approximately $430.7 million. During 2013, we acquired 121 operating self-storage facilities (8,036,000 net rentable square feet of storage space) for approximately $1.16 billion. During 2012, we acquired 24 operating self-storage facilities (1,908,000 net rentable square feet of storage space and unfinished space that was converted to 209,000 net rentable square feet of self-storage space in 2013 for $20.3 million in additional development cost) for $225.5 million in cash. For 2014, the weighted average annualized yield for the facilities acquired in 2013 and 2012, respectively, was 5.5% and 7.6%. The yields for the facilities acquired in 2014 were not meaningful due to our limited ownership period. During 2014, we completed expansions to various facilities adding 614,000 net rentable square feet of self-storage space, for an aggregate cost of $48 million and we opened six newly developed facilities for an aggregate cost of $50 million with 531,000 net rentable square feet of self-storage space. In addition, during 2014, we gained possession of a self-storage facility due to termination by a tenant who had ground leased the facility from us. These facilities are included in “Other facilities” in the table above. Subsequent to December 31, 2014, we acquired four self-storage facilities (one each in Florida, North Carolina, Washington and Texas), with an aggregate of 265,000 net rentable square feet, for approximately $32 million in cash. We expect to increase the number of Non Same Store Facilities over at least the next 18 months through development of new self-storage facilities, expansions to existing facilities and acquisitions of facilities. As of December 31, 2014, we had development and expansion projects which will add approximately 3.5 million net rentable square feet of storage space at a total cost of approximately $411 million. A total of $105 million of these costs were incurred through December 31, 2014, with the remaining costs expected to be incurred primarily in 2015. Some of these projects are subject to significant contingencies such as entitlement approval. We expect to continue to seek additional development projects; however, the level of future development may be limited due to various constraints such as difficulty in finding projects that meet our risk-adjusted yield expectations and challenges in obtaining building permits for self-storage activities in certain municipalities. There is significant competition to acquire existing facilities and there can be no assurance that we will be able to acquire additional facilities at prices we will find attractive. We believe that our management and operating infrastructure will result in newly acquired facilities stabilizing at a higher level of net operating income than was achieved by the previous owners. However, it can take 24 or more months for these newly acquired facilities to reach stabilization, and the ultimate levels of net operating income to be achieved can be affected by changes in general economic conditions. As a result, there can be no assurance that our expectations with respect to these facilities will be achieved. However, we expect the Non Same Store Facilities to continue to provide earnings growth during 2015 as these facilities approach stabilized occupancy levels and the earnings of the 2014 acquisitions are reflected in our operations for a longer period in 2015 as compared to 2014. Equity in earnings of unconsolidated real estate entities At December 31, 2014, we have equity investments in PSB, Shurgard Europe and various limited partnerships. We account for such investments using the equity method. Equity in earnings of unconsolidated real estate entities for 2014, 2013 and 2012 consists of our pro-rata share of the net income of these unconsolidated real estate entities for each period. The following table sets forth the significant components of equity in earnings of unconsolidated real estate entities. 39 Historical summary: Equity in earnings: PSB Shurgard Europe Other Investments $ Total equity in earnings $ Year Ended December 31, 2013 2014 Year Ended December 31, 2012 Change Change (Amounts in thousands) 2013 56,280 $ 29,900 2,087 88,267 $ 23,199 $ 32,694 1,686 57,579 $ 33,081 $ (2,794) 401 30,688 $ 23,199 $ 32,694 1,686 57,579 $ 10,638 $ 33,223 1,725 45,586 $ 12,561 (529) (39) 11,993 Investment in PSB: At December 31, 2014 and 2013, we had approximately a 42% common equity interest in PSB, comprised of our ownership of 7,158,354 shares of PSB’s common stock and 7,305,355 limited partnership units in an operating partnership controlled by PSB. The limited partnership units are convertible at our option, subject to certain conditions, on a one-for-one basis into PSB common stock. During the last six months of 2013, we acquired an aggregate of 1,356,748 shares of PSB common stock at an average cost of $77.42 per share in open market transactions as well as directly from PSB. At December 31, 2014, PSB owned and operated 28.6 million rentable square feet of commercial space located in eight states. PSB also manages commercial space that we own pursuant to property management agreements. Equity in earnings from PSB increased to $56.3 million for 2014 as compared to $23.2 million for 2013, due primarily to our $36.5 million equity share of PSB’s gain on sale of real estate in 2014. Equity in earnings from PSB increased to $23.2 million for 2013 as compared to $10.6 million in 2012, due primarily to the impact of PSB’s 2012 redemptions of preferred securities which reduced our equity earnings by $7.2 million in 2012, combined with improved property operations from newly acquired and same park facilities. See Note 4 to our December 31, 2014 financial statements for selected financial information on PSB, as well as PSB’s filings and selected financial information that can be accessed through the SEC, and on PSB’s website, www.psbusinessparks.com. Investment in Shurgard Europe: Equity in earnings of Shurgard Europe represents our 49% equity share of Shurgard Europe’s net income. At December 31, 2014, Shurgard Europe’s operations are comprised of 192 wholly-owned facilities with ten million net rentable square feet. Selected financial data for Shurgard Europe for 2014, 2013 and 2012 is included in Note 4 to our December 31, 2014 financial statements. As described in more detail in Note 4, we receive trademark license fees from Shurgard Europe and, for certain periods, we received interest income from Shurgard Europe on a note payable to us. In July 2014, Shurgard Europe completed the following financing transactions: (i) amended its bank term loan to, among other things, expand the outstanding borrowings from €82.9 million to €125.0 million, set the interest rate at Euribor plus 1.8%, and extend the maturity to January 2018, (ii) issued €300.0 million (issued in three equal tranches of 7, 10 and 12 year maturities) of unsecured senior notes with an average interest rate of 3.0%, and (iii) fully repaid its €311.0 million shareholder loan. As a result, we received a total of $204.9 million for our 49% share of the shareholder loan. In December 2014, Shurgard Europe amended its bank term loan to provide for the addition of a €40 million revolving line of credit. On December 31, 2014, Shurgard Europe acquired five facilities in Germany, with an aggregate of 327,000 net rentable square feet, for $82 million (€66 million) payable in March 2015 and during the three months ended December 31, 2014, they acquired a building and ground lease on a self-storage property located in the United Kingdom for $11 million cash. The property, which is currently leased to a third party, is currently managed by Shurgard Europe and contains 83,000 square feet. The acquisition costs are to be funded with cash on hand combined with borrowings on the revolving credit facility. Our equity in earnings from Shurgard Europe decreased to $29.9 million for 2014 as compared to $32.7 million for 2013. The decrease is due primarily to our equity share of increased interest expense 40 incurred in connection with Shurgard Europe’s refinancing activities completed in July 2014, costs associated with the facilities acquired in 2014, and a contingent loss incurred in 2014, offset partially by improved property operations. Equity in earnings from Shurgard Europe decreased to $32.7 million for 2013 from $33.2 million for the same period in 2012. For purposes of recording our equity in earnings from Shurgard Europe, the Euro was translated into U.S. Dollars based upon average exchange rates of 1.329 for 2014, 1.328 for 2013 and 1.285 for 2012. At least in the short-term, our future earnings from Shurgard Europe will be affected primarily by the operating results of its existing facilities, as well as the exchange rate between the U.S. Dollar and currencies in the countries Shurgard Europe conducts its business, principally the Euro. During the fourth quarter of 2014 and the early part of 2015, the value of the U.S. Dollar has increased substantially relative to the Euro. At February 20, 2015, the exchange rate was 1.14 U.S. Dollars per Euro. If the exchange rate remained constant throughout 2015 at the rate of 1.14 U.S. Dollars per Euro, our equity in earnings would decrease approximately 14% ($4.7 million) in 2015, all other things being equal. Shurgard Europe’s Same Store Facilities: The Shurgard Europe’s Same Store facilities represents the 174 facilities (9.2 million net rentable square feet, representing 89% of the aggregate net rentable square feet of Shurgard Europe’s self-storage portfolio) that have been consolidated and operated by Shurgard Europe on a stabilized basis since January 1, 2012 and therefore provide meaningful comparisons for 2012, 2013 and 2014. We evaluate the performance of these facilities because Shurgard Europe’s ability to effectively manage stabilized facilities represents an important measure of its ability to grow its earnings over the long-term. The following table reflects 100% of the operating results of those 174 facilities. For comparison purposes, the 2013 and 2012 results are presented in U.S. Dollars using the same historical exchange rate for 2014. However, only our pro rata share of the operating results for these facilities, based upon the actual exchange rates for each period, is included in “equity in earnings of unconsolidated real estate entities” on our statements of income. In Note 4 to our December 31, 2014 financial statements, we disclose Shurgard Europe’s consolidated operating results for the years ended December 31, 2014, 2013 and 2012. Shurgard Europe’s consolidated operating results include 18 additional facilities that are not Same Store Facilities, and are based upon historical exchange rates rather than constant exchange rates for each of the respective periods. 41 Selected Operating Data for the Shurgard Europe Same Store Pool (174 facilities): Year Ended December 31, Year Ended December 31, Percentage Change 2013 2014 (Dollar amounts in thousands, except weighted average data, utilizing constant exchange rates) (a) 2012 2013 Percentage Change Revenues (including late charges and administrative fees) Less: Cost of operations (excluding depreciation and amortization expenses) Net operating income (b) $ 209,035 $ 203,230 88,618 86,255 $ 120,417 $ 116,975 2.9% $ 203,230 $ 206,284 (1.5)% 86,255 85,786 2.7% 2.9% $ 116,975 $ 120,498 0.5% (2.9)% Gross margin 57.6% 57.6% 0.0% 57.6% 58.4% (1.4)% Weighted average for the period: Square foot occupancy Realized annual rent, prior to late charges and administrative fees, per (c): 85.9% 80.9% 6.2% 80.9% 82.3% (1.7)% $ Occupied square foot Available square foot (“REVPAF”) $ 25.84 $ 22.20 $ 26.69 21.59 (3.2)% $ 2.8% $ 26.69 $ 21.59 $ 26.66 21.94 0.1% (1.6)% At December 31: Square foot occupancy Annual contract rent per occupied square foot (d) Total net rentable square feet (in thousands) Average Euro to the U.S. Dollar for the period (a): 87.8% 82.3% 6.7% 82.3% 80.4% 2.4% $ 26.35 $ 27.84 (5.4)% $ 27.84 $ 27.70 0.5% 9,244 9,244 - 9,244 9,244 - Constant exchange rates used herein Actual historical exchange rates 1.329 1.329 1.329 1.328 - 0.1% 1.329 1.328 1.329 1.285 - 3.3% (a) In order to isolate changes in the underlying operations from the impact of exchange rates, the amounts in this table are presented on a constant exchange rate basis. The amounts for years ended December 31, 2013 and 2012 have been restated using the actual exchange rates for the year ended December 31, 2014. (b) We present Shurgard Europe’s same-store net operating income or “NOI,” which is a non-GAAP financial measure that excludes the impact of depreciation and amortization expense. We believe that NOI is a meaningful measure of operating performance, because we utilize NOI in making decisions with respect to capital allocations, in determining current property values, in evaluating property performance and in comparing period-to-period and market-to-market property operating results. In addition, we believe the investment community utilizes NOI in determining operating performance and real estate values, and does not consider depreciation expense because it is based upon historical cost. NOI is not a substitute for net income, net operating cash flow, or other related GAAP financial measures, in evaluating Shurgard Europe’s operating results. (c) Realized annual rent per occupied square foot is computed by dividing annualized rental income, before late charges and administrative fees, by the weighted average occupied square feet for the period. Realized annual rent per available square foot (“REVPAF”) is computed by dividing annualized rental income, before late charges and administrative fees, by the total available net rentable square feet for the period. These measures exclude late charges and administrative fees in order to provide a better measure of our ongoing level of revenue. Late charges are dependent upon the level of delinquency, and administrative fees are dependent upon the level of move-ins. In addition, the rates charged for late charges and administrative fees can vary independently from rental rates. These measures take into consideration promotional discounts, which reduce rental income. 42 (d) Contract rent represents the applicable contractual monthly rent charged to tenants, excluding the impact of promotional discounts, late charges and administrative fees. NOI increased 2.9% in 2014 as compared to 2013, principally due to an increase of 2.9% in revenue, partially offset by an increase of 2.7% in cost of operations. NOI decreased 2.9% in 2013 as compared to 2012, principally due to a decrease of 1.5% in revenue and an increase of 0.5% in cost of operations. Due to the limited number of facilities in this portfolio and lack of geographic concentration, as well as recent volatile economic conditions in Western Europe, it is difficult to estimate revenue growth. However, based upon current trends, it appears that revenue should increase modestly in the first quarter of 2015. Other Investments: The “Other Investments” at December 31, 2014 are comprised primarily of our equity in earnings from various limited partnerships that own an aggregate of 13 self-storage facilities (750,000 net rentable square feet). Our future earnings with respect to the Other Investments will be dependent upon the operating results of the facilities these entities own. Ancillary Operations Ancillary revenues and expenses include amounts associated with (i) the reinsurance of policies against losses to goods stored by tenants in our self-storage facilities in the U.S., (ii) merchandise sales, (iii) commercial property operations, and (iv) management of 41 self-storage facilities owned by third parties and the Unconsolidated Real Estate Entities. Commercial property operations are included in our commercial segment and all other ancillary revenues and costs of operations are not allocated to any segment. See Note 11 to our December 31, 2014 financial statements for further information regarding our segments and for a reconciliation of these ancillary revenues and cost of operations to our net income. The following table sets forth our ancillary operations as presented on our income statements: Year Ended December 31, Year Ended December 31, 2014 2013 Change (Amounts in thousands) 2013 2012 Change Ancillary Revenues: Tenant reinsurance premiums Commercial Merchandise and other Total revenues Ancillary Cost of Operations: Tenant reinsurance Commercial Merchandise and other Total cost of operations $ 95,056 $ 15,720 34,746 145,522 84,904 $ 10,152 $ 1,210 14,510 2,297 32,449 131,863 13,659 84,904 $ 14,510 32,449 131,863 77,977 $ 6,927 439 14,071 858 31,591 8,224 123,639 25,600 5,247 20,975 51,822 17,067 8,533 5,228 19 2,195 18,780 41,075 10,747 17,067 5,228 18,780 41,075 14,429 2,638 320 (146) 2,812 4,908 18,926 38,263 Commercial depreciation 3,045 2,779 266 2,779 2,810 (31) Ancillary net income: Tenant reinsurance Commercial Merchandise and other 69,456 7,428 13,771 67,837 6,503 13,669 1,619 925 102 67,837 6,503 13,669 63,548 6,353 12,665 4,289 150 1,004 Total ancillary net income $ 90,655 $ 88,009 $ 2,646 $ 88,009 $ 82,566 $ 5,443 43 Tenant reinsurance operations: We reinsure policies offered through a non-affiliated insurance company against losses to goods stored by tenants in the domestic self-storage facilities we operate. The level of tenant reinsurance revenues is largely dependent upon the number of tenants that participate in the insurance program and the average premium rates charged. Cost of operations primarily includes claims paid that are not covered by our outside third-party insurers, as well as claims adjustment expenses. Tenant reinsurance cost of operations for 2014 includes a $7.8 million accrual related to a legal settlement and a $4.1 million reduction associated with the recognition of a deferred tax asset. The increase of $4.9 million in ongoing cost of operations for 2014 as compared to 2013 is due primarily to an increase in exposure associated with more insured tenants and, to a lesser extent, claims resulting from extreme weather conditions in early 2014. Tenant reinsurance revenue at our Same Store Facilities increased from $73.1 million in 2012, to $78.4 million in 2013, and to $83.8 million in 2014, due to more insured tenants as a result of increased occupancies and a higher proportion of tenants having insurance and, to a lesser extent, higher average premium rates charged. The remaining increases in tenant reinsurance revenues are due primarily to the acquisition of 189 self-storage facilities from third parties since January 1, 2012. We expect continued increases in tenant insurance revenues in 2015 as the tenant insurance revenues with respect to the facilities we acquired in 2014 are reflected for a full year, combined with the acquisition of additional facilities in 2015. Commercial operations: We also own and operate commercial facilities, primarily the leasing of small retail storefronts and office space located on or near our existing self-storage facilities. We do not expect any significant changes in revenues or profitability from our commercial operations. Merchandise sales and other: We sell locks, boxes, and packing supplies at our self-storage facilities, and the level of sales of these items is primarily impacted by the level of move-ins and other customer traffic at our self-storage facilities. These amounts include, to a much lesser extent, the results of our management of 41 self-storage facilities in the U.S. for third party owners and other partnerships that we account for on the equity method. We do not expect any significant changes in revenues or profitability from our merchandise sales and other in 2015. Other Income and Expense Items Interest and other income: Interest and other income was $4.9 million in 2014, $22.6 million in 2013 and $22.1 million in 2012, which included $1.5 million, $19.3 million and $18.7 million, respectively, in interest received on a loan receivable from Shurgard Europe which was extinguished in 2014, as described more fully in Note 5 to our December 31, 2014 financial statements. The remainder of our interest and other income is comprised primarily of interest earned on cash balances, trademark license fees from Shurgard Europe, as well as sundry other income items that are received from time to time in varying amounts. Interest income on cash balances has been minimal, because rates have been at historic lows of 0.1% or less, and we expect this trend to continue in the foreseeable future. Future earnings from sundry other income items are not predictable. Depreciation and amortization: Depreciation and amortization increased to $437.1 million for 2014 as compared to $387.4 million for 2013 and $357.8 million for 2012, due principally to the 189 facilities acquired from third parties since January 1, 2012. Included in depreciation and amortization is amortization expense of tenant intangibles for facilities acquired from third parties, which is being amortized relative to the expected future benefit of the customers in place for each period. Such amortization expense totaled $48.4 million, $24.1 million and $10.5 million in 2014, 2013 and 2012, respectively. Based upon the facilities we own at December 31, 2014, amortization expense with respect to such intangibles is estimated at $22.3 million in 2015. The level of future depreciation and amortization will primarily depend upon the level of acquisitions of facilities and the level of capital expenditures we incur on our facilities. 44 General and administrative expense: The following table sets forth our general and administrative expense: Year Ended December 31, 2013 2014 Year Ended December 31, 2012 Change Change (Amounts in thousands) 2013 Share-based compensation expense $ 29,541 $ 28,413 $ 1,128 $ 28,413 $ 24,312 $ Costs of senior executives Development and acquisition costs Tax compliance costs and taxes paid Legal costs Public company costs Other costs 5,309 10,475 4,704 3,550 3,069 11,159 4,736 6,355 4,775 3,653 2,937 10,069 5,309 10,475 4,704 3,550 3,069 11,159 5,558 10,614 4,858 5,080 3,465 12,343 249 139 154 1,530 396 1,184 Total $ 71,459 $ 66,679 $ 4,780 $ 66,679 $ 56,837 $ 4,101 573 4,120 (71) (103) 132 1,090 9,842 Share-based compensation expense includes the amortization of restricted share units and stock options granted to employees, as well as related employer taxes. The level of share-based compensation expense varies based upon the level of grants and forfeitures as well as the Company’s stock price on the date of grant. We expect share-based compensation expense to increase in 2015 as compared to 2014. See Note 10 to our December 31, 2014 financial statements for further information on our share-based compensation. Costs of senior executives represent the cash compensation paid to our chief executive officer and chief financial officer. The increases in 2014 as compared to 2013 and in 2013 as compared to 2012 are due to increases in incentive compensation. Development and acquisition costs represent internal and external expenses related to our acquisition and development activities and varies primarily based upon the level of development and acquisition activities undertaken. Incremental legal, transfer tax, and other related costs of approximately $3.4 million, $5.0 million and $1.8 million were incurred in connection with the acquisition of real estate facilities in 2014, 2013 and 2012, respectively. The level of such costs to be incurred in 2015 will depend upon the level of acquisition activities, which is not determinable. The remaining increase in each period is due to the expansion of our real estate development activities in recent years, and such expenses are expected to increase modestly in 2015. Tax compliance costs and taxes paid include taxes paid to various state and local authorities, the internal and external costs of filing tax returns, costs associated with complying with federal and state tax laws, and maintaining our compliance with Internal Revenue Service REIT rules. Such costs vary primarily based upon the tax rates of the various states in which we do business. Legal costs include internal personnel as well as fees paid to legal firms and other third parties with respect to general corporate legal matters and risk management, and varies based upon the level of litigation. Given our current legal matters, we believe our legal costs could potentially be higher in 2015, the amount of which is not determinable. Public company costs represent the incremental costs of operating as a publicly-traded company, such as internal and external investor relations expenses, stock listing and transfer agent fees, board of trustees’ costs, and costs associated with maintaining compliance with applicable laws and regulations, including the Dodd-Frank Act and Sarbanes-Oxley Act. Other costs represent professional and consulting fees, payroll and overhead that are not directly attributable to our property operations. Such costs vary depending upon the level of corporate activities and initiatives, as such, are not predictable. 45 Our future general and administrative expenses are difficult to estimate, due to their dependence upon many factors, including those noted above. Interest expense: Interest expense was $6.8 million, $6.4 million, and $19.8 million in 2014, 2013 and 2012, respectively. The decrease in 2013 as compared to 2012 is due primarily to the repayment of our senior unsecured notes in 2013, along with principal repayments on our secured mortgage debt. During 2014 and 2013, we incurred $4.7 million and $1.2 million, respectively, in interest expense on short-term borrowings, all of which were repaid in 2014. During 2014, 2013 and 2012, we capitalized interest of $1.6 million, $2.9 million and $0.4 million, respectively, associated with our development activities. See Note 6 to our December 31, 2014 financial statements for a schedule of our notes payable balances, principal repayment requirements and average interest rates. The level of interest expense that we incur in 2015 will be dependent upon our level of debt. Foreign Exchange Gain (Loss): We recorded a foreign currency translation loss of $7.0 million in 2014, and foreign currency translation gains $17.1 million and $8.9 million for 2013 and 2012, respectively, representing primarily the change in the U.S. Dollar equivalent of our Euro-based loan receivable from Shurgard Europe due to fluctuations in exchange rates. This loan receivable was repaid in 2014 and, as a result, no further material foreign exchange gains or losses are expected. Net Income Allocable to Preferred Shareholders: Allocations of net income to our preferred shareholders generally consists of allocations (i) based on distributions and (ii) in applying EITF D-42 when we redeem preferred shares. Net income allocable to preferred shareholders associated with distributions increased during 2014 as compared to 2013 due primarily to higher average outstanding preferred shares, and decreased during 2013 as compared to 2012, due primarily to lower average dividend rates and lower average outstanding preferred shares. During 2012, we redeemed certain existing series of preferred shares and issued additional preferred shares at lower coupon rates. Net income allocable to preferred shareholders in applying EITF D-42 totaled $61.7 million in 2012 (there were no redemptions of preferred securities and as a result, no EITF D-42 allocations in 2013 and 2014). Based upon our preferred shares outstanding at December 31, 2014, our quarterly distribution to our preferred shareholders is expected to be approximately $63.6 million. Net Operating Income In our discussions above, we refer to net operating income or “NOI,” which is a non-GAAP financial measure that excludes the impact of depreciation and amortization expense. We believe that NOI is a meaningful measure of operating performance, because we utilize NOI in making decisions with respect to capital allocations, in determining current property values, in evaluating property performance and in comparing period-to-period and market-to-market property operating results. In addition, we believe the investment community utilizes NOI in determining operating performance and real estate values, and does not consider depreciation expense because it is based upon historical cost. NOI is not a substitute for net income, net operating cash flow, or other related GAAP financial measures, in evaluating our operating results. The following table reconciles NOI generated by our self-storage facilities to our operating income: 46 Self-storage net operating income: Same Store Facilities Non Same Store Facilities Self-storage depreciation expense: Same Store Facilities Non Same Store Facilities Self-storage net income: Same Store Facilities Non Same Store Facilities Total net income from self-storage Ancillary operating revenue Ancillary cost of operations Commercial depreciation and amortization General and administrative expenses Operating income $ 2014 Year Ended December 31, 2013 (Amounts in thousands) 2012 $ 1,338,036 $ 144,948 1,482,984 1,254,005 $ 71,792 1,325,797 1,156,928 44,296 1,201,224 (312,995) (121,074) (434,069) (316,178) (68,445) (384,623) (326,258) (28,713) (354,971) 1,025,041 23,874 1,048,915 145,522 (51,822) 937,827 3,347 941,174 131,863 (41,075) (3,045) (71,459) 1,068,111 $ (2,779) (66,679) 962,504 $ 830,670 15,583 846,253 123,639 (38,263) (2,810) (56,837) 871,982 47 Liquidity and Capital Resources Financial Strategy: Our financial profile is characterized by a low level of debt-to-total- capitalization. In general, we seek to finance our investment activities and debt obligations with retained operating cash flow, and when not sufficient, the net proceeds from the issuance of preferred and common securities. When market conditions are not favorable to issue either preferred or common securities, we will use bank debt as bridge financing. Given the low interest rate environment coupled with having only $64.4 million of debt outstanding at December 31, 2014, we may seek to issue a modest amount of medium or long-term debt. In that regard, we anticipate that we may seek to expand the borrowing capacity of our bank credit facility and utilize the facility as a bridge to the issuance of longer term debt. Unlike most REITs, we have elected to use predominantly preferred securities in our capital structure as a form of leverage despite the fact that the dividend rates of our preferred securities exceed the prevailing market interest rates on conventional debt. We have chosen this method of financing for the following reasons: (i) under the REIT structure, a significant amount of operating cash flow needs to be distributed to our shareholders, making it difficult, relative to a traditional taxable corporation, to repay debt with operating cash flow alone, (ii) our perpetual preferred shares have no sinking fund requirement or maturity date and do not require redemption, all of which eliminate future refinancing risks, (iii) after the end of a non-call period, we have the option to redeem the preferred shares at any time, which enables us to refinance higher coupon preferred shares with new preferred shares at lower rates if appropriate, (iv) preferred shares do not subject us to covenants, thus allowing us to maintain significant financial flexibility, and (v) dividends on the preferred shares can be applied to satisfy our REIT distribution requirements. We have generally been able to raise capital through the issuance of preferred securities at an attractive cost of capital relative to the issuance of our common shares and, as a result, issuances of common shares have been minimal over the past several years. During the early part of 2013, we issued preferred securities with coupon rates at 5.2%, but later in 2013, rates increased and market conditions for the issuance of common and preferred capital worsened. As a result, in December 2013 we borrowed $750.1 million from banks to bridge finance our acquisition activities during that timeframe. Subsequently, preferred share coupon rates and market conditions steadily improved, and by September 2014, we repaid our bridge financing, in part, from the issuance of preferred securities. During 2014, we issued an aggregate of $762.5 million in preferred securities, with an average coupon rate of 6.11%. We continue to view preferred capital as an important source of capital over the long-term. Notwithstanding the recent improvement in the preferred markets, rate spreads between a new issuance for us and U.S. treasuries have remained relatively wide as compared to historical levels. As a result of an inefficient preferred market, combined with only $64.4 million of debt as of December 31, 2014, we may seek to raise capital in 2015 through the issuance of debt securities. Our credit ratings on each of our series of preferred shares are “A3” by Moody’s, “BBB+” by Standard & Poor’s and “A” by Fitch Ratings. In recent years, we have been one of the largest and most frequent issuers of preferred equity in the U.S. Liquidity and Capital Resource Analysis: We believe that our net cash provided by our operating activities will continue to be sufficient to enable us to meet our ongoing requirements for operating expenses, capital improvements and distributions to our shareholders for the foreseeable future. As of December 31, 2014, our capital resources totaled approximately $774 million, consisting of $188 million in cash, approximately $286 million of available borrowing capacity on our bank credit facility, and $300 million of expected retained operating cash flow for 2015. Retained operating cash flow represents our expected cash flow provided by operating activities, after deducting estimated distributions to our shareholders and estimated capital expenditure requirements for 2015. At December 31, 2014, we had capital commitments totaling approximately $356 million, consisting of $306 million of remaining spend on our development pipeline, $32 million in property acquisitions, and approximately $18 million in maturities on notes payable. In addition, we expect that our 48 capital commitments will continue to grow during 2015 as we continue to seek additional development and acquisition opportunities. We may also redeem outstanding preferred securities in 2015 totaling $270 million. We believe we have a variety of possibilities to raise additional capital, including the issuance of common or preferred securities, issuing debt, expanding the borrowing capacity of our bank credit facility, or entering into joint venture arrangements to acquire or develop facilities. At February 24, 2015, we have no outstanding borrowings on our bank credit facility. Debt Service Requirements: As of December 31, 2014, our outstanding debt totaled approximately $64.4 million. Approximate principal maturities of our outstanding debt are as follows (amounts in thousands): 2015 2016 2017 2018 2019 Thereafter $ $ 17,822 20,613 9,263 11,168 1,217 4,281 64,364 The remaining maturities on our notes payable are nominal compared to our annual cash from operations. Capital Expenditure Requirements: Capital expenditures include major repairs or replacements to elements of our facilities, which keep the facilities in good operating condition and maintain their visual appeal to the customer, which totaled $79.8 million in, 2014. Capital expenditures do not include costs relating to the development of new facilities or the expansion of net rentable square footage of existing facilities. For 2015, we expect to incur approximately $80 million for capital expenditures and to fund such amounts with cash provided by operating activities. For the last four years, such capital expenditures have ranged between approximately $0.55 and $0.60 per net rentable square foot per year. Requirement to Pay Distributions: For all periods presented herein, we have elected to be treated as a REIT, as defined in the Internal Revenue Code. As a REIT, we do not incur federal income tax on our REIT taxable income (generally, net rents and gains from real property, dividends, and interest) that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules. We believe we have met these requirements in all periods presented herein, and we expect to continue to elect and qualify as a REIT. Distributions paid during 2014 totaled $1.2 billion, consisting of $232.6 million to preferred shareholders and $967.9 million to common shareholders and restricted share unitholders. All of these distributions were REIT qualifying distributions. We estimate the annual distribution requirements with respect to our Preferred Shares outstanding at December 31, 2014 to be approximately $254.2 million per year. On February 19, 2015, our Board declared a regular common quarterly dividend of $1.40 per common share. Our consistent, long-term dividend policy has been to distribute only our taxable income. Future quarterly distributions with respect to the common shares will continue to be determined based upon our REIT distribution requirements after taking into consideration distributions to the preferred shareholders and will be funded with cash provided by operating activities. 49 We are obligated to pay distributions to noncontrolling interests in our consolidated subsidiaries based upon the cash provided by operating activities of the respective subsidiary. Such distributions are estimated at approximately $7.0 million in 2015, with respect to such noncontrolling interests outstanding at December 31, 2014. Real Estate Investment Activities: Subsequent to December 31, 2014, we acquired four self- storage facilities with an aggregate of 265,000 net rentable square feet for approximately $32 million in cash. During 2015, we will continue to seek to acquire other self-storage facilities from third parties; however, it is difficult to estimate the amount of third party acquisitions we will undertake. As of December 31, 2014, we had development and expansion projects which will add approximately 3.5 million net rentable square feet of storage space at a total cost of approximately $411 million. A total of $105 million in costs were incurred through December 31, 2014 with respect to these projects, with the remaining costs expected to be incurred primarily in 2015. Some of these projects are subject to significant contingencies such as entitlement approval. We expect to continue to seek additional development projects; however, the level of future development may be limited due to various constraints such as difficulty in finding available sites for building that meet our risk-adjusted yield expectations, as well as the challenges in obtaining building permits for self-storage activities in certain municipalities. Shurgard Europe: At December 31, 2014, Shurgard Europe has a bank term loan outstanding with a balance of approximately €107.5 million maturing in January 2018, and €300.0 million of unsecured senior notes maturing in equal amounts in 7, 10 and 12 years. In December 2014, Shurgard Europe obtained a €40 million bank revolving credit facility which expires in January 2018. There were no amounts outstanding on this facility at December 31, 2014. On December 31, 2014, Shurgard Europe acquired five facilities located in Germany for a cash purchase price of approximately €65.5 million. The cash purchase price was payable in the first quarter of 2015. Shurgard Europe will use borrowings on its bank revolving credit facility combined with cash on hand to fund the purchase price. Redemption of Preferred Securities: We have two series of preferred securities redeemable, at our option, in 2015. Our 6.875% Series O Preferred Shares, with $145 million outstanding becomes redeemable in April 2015, and our 6.5% Series P Preferred Shares, with $125 million outstanding, which are redeemable in October 2015. The timing of redemption of these series of preferred shares will depend upon many factors including whether we can issue capital at a lower cost of capital than the shares that would be redeemed. None of our preferred securities are redeemable at the option of the holders. Repurchases of Company’s Common Shares: Our Board has authorized management to repurchase up to 35,000,000 of our common shares on the open market or in privately negotiated transactions. During 2014, we did not repurchase any of our common shares. From the inception of the repurchase program through February 24, 2015, we have repurchased a total of 23,721,916 common shares at an aggregate cost of approximately $679.1 million. We have no current plans to repurchase additional common shares; however, future levels of common share repurchases will be dependent upon our available capital, investment alternatives and the trading price of our common shares. Contractual Obligations Our significant contractual obligations at December 31, 2014 and their impact on our cash flows and liquidity are summarized below for the years ending December 31 (amounts in thousands): 50 Total 2015 2016 2017 2018 2019 Thereafter Long-term debt (1) $ 71,526 $ 20,652 $ 22,659 $ 10,065 $ 11,797 $ 1,513 $ 4,840 Operating leases (2) 79,374 4,175 4,086 2,897 2,634 2,574 63,008 Construction commitments (3) 50,135 40,108 10,027 - - - - Total $ 201,035 $ 64,935 $ 36,772 $ 12,962 $ 14,431 $ 4,087 $ 67,848 (1) Amounts include principal and interest payments (all of which are fixed-rate) on our notes payable based on their contractual terms. See Note 6 to our December 31, 2014 financial statements for additional information on our notes payable. (2) We lease land, equipment and office space under various operating leases. Certain leases are cancelable; however, significant penalties would be incurred upon cancellation. Amounts reflected above consider continuance of the lease without cancellation. (3) Amounts exclude an additional $256.4 million in future expected development spending that was not under contract at December 31, 2014. We estimate the annual distribution requirements with respect to our Preferred Shares outstanding at December 31, 2014, to be approximately $254.2 million per year. Dividends are paid when and if declared by our Board and accumulate if not paid. Off-Balance Sheet Arrangements: At December 31, 2014, we had no material off-balance sheet arrangements as defined under Regulation S-K 303(a)(4) and the instructions thereto. 51 ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk To limit our exposure to market risk, we are capitalized primarily with preferred and common equity. Our preferred shares are redeemable at our option generally five years after issuance, but the holder has no redemption option. Our debt is our only market-risk sensitive portion of our capital structure, which totals $64.4 million and represents 0.1% of the book value of our equity at December 31, 2014. We have foreign currency exposure related to our investment in Shurgard Europe, which has a book value of $394.8 million at December 31, 2014. The fair value of our fixed rate debt at December 31, 2014 approximates book value. The table below summarizes the annual maturities of our fixed rate debt, which had a weighted average fixed rate of 4.0% at December 31, 2014. See Note 6 to our December 31, 2014 financial statements for further information regarding our fixed rate debt (amounts in thousands). 2015 2016 2017 2018 2019 Thereafter Total Fixed rate debt $ 17,822 $ 20,613 $ 9,263 $ 11,168 $ 1,217 $ 4,281 $ 64,364 52 ITEM 9A. Controls and Procedures Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports we file and submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in accordance with SEC guidelines and that such information is communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure based on the definition of "disclosure controls and procedures" in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures in reaching that level of reasonable assurance. We also have investments in certain unconsolidated real estate entities and because we do not control these entities, our disclosure controls and procedures with respect to such entities are substantially more limited than those we maintain with respect to our consolidated subsidiaries. As of December 31, 2014, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2014, at a reasonable assurance level. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee on Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on our evaluation under the framework in Internal Control-Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2014. The effectiveness of internal control over financial reporting as of December 31, 2014, has been audited by Ernst & Young LLP, an independent registered public accounting firm. Ernst & Young LLP’s report on our internal control over financial reporting appears below. Changes in Internal Control Over Financial Reporting There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2014 to which this report relates that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting. 53 Report of Independent Registered Public Accounting Firm The Board of Trustees and Shareholders of Public Storage We have audited Public Storage’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Public Storage’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and trustees of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Public Storage maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Public Storage as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2014 and our report dated February 24, 2015 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Los Angeles, California February 24, 2015 54 ITEM 9B. Other Information None. 55 ITEM 10. Trustees, Executive Officers and Corporate Governance PART III The following is a biographical summary of the current executive officers of the Company: Ronald L. Havner, Jr., age 57, has been Chairman and Chief Executive Officer of Public Storage since August 2011 and November 2002, respectively. Mr. Havner joined Public Storage in 1986 and has held a variety of senior management positions. Mr. Havner has been Chairman of the Board of Public Storage’s affiliate, PS Business Parks, Inc. (“PSB”) since March 1998. Mr. Havner also serves as a director of AvalonBay Communities, Inc. and California Resources Corp. Mr. Havner is past Chairman of the Board of Governors of the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”). John Reyes, age 54, has served as Senior Vice President and Chief Financial Officer of Public Storage since 1996. David F. Doll, age 56, became Senior Vice President and President, Real Estate Group, in February 2005, with responsibility for the real estate activities of Public Storage, including property acquisitions, developments, repackagings, and capital improvements. Lily Y. Hughes, age 52, became Senior Vice President, Chief Legal Officer and Corporate Secretary in January 2015. Prior to joining Public Storage, Ms. Hughes was Vice President and Associate General Counsel- Corporate, M&A and Finance at Ingram Micro Inc., a Fortune 100 NYSE company with operations in 39 countries, which she joined in 1997. Before joining Ingram Micro, Ms. Hughes was a partner of Manatt, Phelps and Phillips. Candace N. Krol, age 53, has served as Chief Human Resources Officer of Public Storage since February 2015 and has served as Senior Vice President of Human Resources since September 2005. Shawn Weidmann, 51, Chief Operating Officer in August 2011. Prior to joining Public Storage, Mr. Weidmann was employed at Teleflora LLC, the world’s leading floral wire service, where he served as President since 2006. Other information required by this item is hereby incorporated by reference to the material appearing in the Notice and Proxy Statement for the 2015 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A under the Exchange Act. ITEM 11. Executive Compensation The information required by this item is hereby incorporated by reference to the material appearing in the Notice and Proxy Statement for the 2015 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A under the Exchange Act. 56 ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters The following table sets forth information as of December 31, 2014 on the Company’s equity compensation plans: Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans 2,836,592 (b) $82.32 1,140,322 - - - Equity compensation plans approved by security holders (a) .................. Equity compensation plans not approved by security holders (c)... a) b) c) The Company’s stock option and stock incentive plans are described more fully in Note 10 to the December 31, 2014 financial statements. All plans were approved by the Company’s shareholders. Includes 751,048 restricted share units that, if and when vested, will be settled in common shares of the Company on a one for one basis. There are no securities available for future issuance or currently outstanding under plans not approved by the Company’s shareholders as of December 31, 2014. Other information required by this item is hereby incorporated by reference to the material appearing in the Notice and Proxy Statement for the 2015 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A under the Exchange Act. ITEM 13. Certain Relationships and Related Transactions and Trustee Independence The information required by this item is hereby incorporated by reference to the material appearing in the Notice and Proxy Statement for the 2015 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A under the Exchange Act. ITEM 14. Principal Accountant Fees and Services The information required by this item is hereby incorporated by reference to the material appearing in the Notice and Proxy Statement for the 2015 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A under the Exchange Act of 1934. 57 ITEM 15. Exhibits and Financial Statement Schedules a. 1. Financial Statements PART IV The financial statements listed in the accompanying Index to Financial Statements and Schedules hereof are filed as part of this report. 2. Financial Statement Schedules The financial statements schedules listed in the accompanying Index to Financial Statements and Schedules are filed as part of this report. 3. Exhibits See Index to Exhibits contained herein. b. Exhibits: See Index to Exhibits contained herein. c. Financial Statement Schedules Not applicable. 58 PUBLIC STORAGE INDEX TO EXHIBITS (1) (Items 15(a)(3) and 15(c)) 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12 3.13 3.14 3.15 Articles of Amendment and Restatement of Declaration of Trust of Public Storage, a Maryland real estate investment trust. Filed with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009 and incorporated by reference herein. Bylaws of Public Storage, a Maryland real estate investment trust. Filed with the Registrant’s Current Report on Form 8-K dated May 11, 2010 and incorporated by reference herein. Articles Supplementary for Public Storage 6.875% Cumulative Preferred Shares, Series O. Filed with the Registrant’s Current Report on Form 8-K dated April 8, 2010 and incorporated by reference herein. Articles Supplementary for Public Storage 6.500% Cumulative Preferred Shares, Series P. Filed with the Registrant’s Current Report on Form 8-K dated October 6, 2010 and incorporated by reference herein. Articles Supplementary for Public Storage 6.5% Cumulative Preferred Shares, Series Q. Filed with the Registrant’s Current Report on Form 8-K dated May 2, 2011 and incorporated by reference herein. Articles Supplementary for Public Storage 6.35% Cumulative Preferred Shares, Series R. Filed with the Registrant’s Current Report on Form 8-K dated July 20, 2011 and incorporated by reference herein. Articles Supplementary for Public Storage 5.900% Cumulative Preferred Shares, Series S. Filed with the Registrant’s Current Report on Form 8-K dated January 9, 2012 and incorporated by reference herein. Articles Supplementary for Public Storage 5.750% Cumulative Preferred Shares, Series T. Filed with the Registrant’s Current Report on Form 8-K dated March 7, 2012 and incorporated by reference herein. Articles Supplementary for Public Storage 5.625% Cumulative Preferred Shares, Series U. Filed with the Registrant’s Current Report on Form 8-K dated June 6, 2012 and incorporated by reference herein. Articles Supplementary for Public Storage 5.375% Cumulative Preferred Shares, Series V. Filed with the Registrant’s Current Report on Form 8-K dated September 11, 2012 and incorporated by reference herein. Articles Supplementary for Public Storage 5.20% Cumulative Preferred Shares, Series W. Filed with the Registrant’s Current Report on Form 8-K dated January 8, 2013 and incorporated by reference herein. Articles Supplementary for Public Storage 5.20% Cumulative Preferred Shares, Series X. Filed with the Registrant’s Current Report on Form 8-K dated March 5, 2013 and incorporated by reference herein. Articles Supplementary for Public Storage 6.375% Cumulative Preferred Shares, Series Y. Filed with the Registrant’s Current Report on Form 8-K dated March 11, 2014 and incorporated by reference herein. Articles Supplementary for Public Storage 6.375% Cumulative Preferred Shares, Series Y. Filed with the Registrant’s Current Report on Form 8-K dated April 9, 2014 and incorporated by reference herein. Articles Supplementary for Public Storage 6.00% Cumulative Preferred Shares, Series Z. Filed with the Registrant’s Current Report on Form 8-K dated May 29, 2014 and incorporated by reference herein. 59 3.16 4.1 10.1 10.2 10.3 10.4 10.5 10.5.1 10.6* 10.7* 10.8* 10.9* 10.10* 10.11* Articles Supplementary for Public Storage 5.875% Cumulative Preferred Shares, Series A. Filed with the Registrant’s Current Report on Form 8-K/A dated November 24, 2014 and incorporated by reference herein. Master Deposit Agreement, dated as of May 31, 2007. Filed with the Registrant’s Current Report on Form 8-K dated June 6, 2007 and incorporated by reference herein. Amended Management Agreement between Registrant and Public Storage Commercial Properties Group, Inc. dated as of February 21, 1995. Filed with Public Storage Inc.’s (“PSI”) Annual Report on Form 10-K for the year ended December 31, 1994 (SEC File No. 001-0839) and incorporated herein by reference. Second Amended and Restated Management Agreement by and among Registrant and the entities listed therein dated as of November 16, 1995. Filed with PS Partners, Ltd.’s Annual Report on Form 10-K for the year ended December 31, 1996 (SEC File No. 001-11186) and incorporated herein by reference. Agreement of Limited Partnership of PS Business Parks, L.P. Filed with PS Business Parks, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998 (SEC File No. 001-10709) and incorporated herein by reference. Amended and Restated Agreement of Limited Partnership of Storage Trust Properties, L.P. (March 12, 1999). Filed with PSI’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999 (SEC File No. 001-0839) and incorporated herein by reference. Amended and Restated Credit Agreement by and among Registrant, Wells Fargo Securities, LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated as joint lead arrangers, Wells Fargo Bank, National Association, as administrative agent, and the other financial institutions party thereto, dated as of March 21, 2012. Filed with PSI’s Current Report on Form 8-K on March 27, 2012 (SEC File No. 001- 0839) and incorporated herein by reference. Second Amendment to Amended and Restated Credit Agreement, dated as of July 17, 2013, by and among Public Storage, the Lenders party thereto and Wells Fargo Bank, National Association. Filed with the Registrant’s Current Report on Form 8-K on July 18, 2013 and incorporated herein by reference. Shurgard Storage Centers, Inc. 2004 Long Term Incentive Compensation Plan. Filed as Appendix A of Definitive Proxy Statement dated June 7, 2004 filed by Shurgard (SEC File No. 001-11455) and incorporated herein by reference. Public Storage, Inc. 2001 Stock Option and Incentive Plan (the “2001 Plan”). Filed with PSI’s Registration Statement on Form S-8 (SEC File No. 333-59218) and incorporated herein by reference. Form of 2001 Plan Non-qualified Stock Option Agreement. Filed with PSI’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004 (SEC File No. 001-0839) and incorporated herein by reference. Form of 2001 Plan Restricted Share Unit Agreement. Filed with PSI’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004 (SEC File No. 001-0839) and incorporated herein by reference. Form of 2001 Plan Non-Qualified Outside Director Stock Option Agreement. Filed with PSI’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004 (SEC File No. 001-0839) and incorporated herein by reference. Form of 2007 Plan Restricted Stock Unit Agreement. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 and incorporated herein by reference. 60 10.12* 10.13* 10.15* 10.16 10.17* 10.18* 10.19* 12 23 31.1 31.2 32 Form of 2007 Plan Stock Option Agreement. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 and incorporated herein by reference. Form of Indemnity Agreement. Filed with Registrant’s Amendment No. 1 to Registration Statement on Form S-4 (SEC File No. 333-141448) and incorporated herein by reference. Revised Form of Trustee Stock Option Agreement. Filed as Exhibit 10.31 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010 and incorporated herein by reference. Term Loan Agreement, by and among Public Storage, Wells Fargo Securities, LLC as Lead Arranger and Wells Fargo National Bank N.A. as Administrative Agent, dated as of December 2, 2013. Filed with Registrant’s Current Report on Form 8-K dated December 2, 2013 and incorporated herein by reference. Employment Agreement and General Release dated as of February 19, 2014 between Registrant and Steven M. Glick. Filed with the Registrant’s Current Report on Form 8-K dated February 24, 2014 and incorporated herein by reference. First Amendment to Employment Agreement and General Release dated December 22, 2014 between Registrant and Steven M. Glick. Filed as Exhibit 10.18 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014 and incorporated herein by reference. Public Storage 2007 Equity and Performance-Based Incentive Compensation Plan, as Amended. Filed with Registrant’s Current Report on Form 8-K dated May 1, 2014 and incorporated herein by reference. Statement Re: Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends. Filed herewith. Consent of Ernst & Young LLP. Filed herewith. Rule 13a – 14(a) Certification. Filed herewith. Rule 13a – 14(a) Certification. Filed herewith. Section 1350 Certifications. Filed herewith. 101 .INS XBRL Instance Document. Filed herewith. 101 .SCH XBRL Taxonomy Extension Schema. Filed herewith. 101 .CAL XBRL Taxonomy Extension Calculation Linkbase. Filed herewith. 101 .DEF XBRL Taxonomy Extension Definition Linkbase. Filed herewith. 101 .LAB XBRL Taxonomy Extension Label Linkbase. Filed herewith. 101 .PRE XBRL Taxonomy Extension Presentation Link. Filed herewith. _ (1) SEC File No. 001-33519 unless otherwise indicated. * Denotes management compensatory plan agreement or arrangement. 61 PUBLIC STORAGE INDEX TO FINANCIAL STATEMENTS (Item 15 (a)) Report of Independent Registered Public Accounting Firm ............................................................... Balance sheets as of December 31, 2014 and 2013 ............................................................................ For the years ended December 31, 2014, 2013 and 2012: Statements of income ......................................................................................................................... Statements of comprehensive income ................................................................................................ Page References F-1 F-2 F-3 F-4 Statements of equity .......................................................................................................................... F-5 – F-6 Statements of cash flows .................................................................................................................... F-7 – F-8 Notes to financial statements .............................................................................................................. F-9 – F-33 All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements or notes thereto. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Trustees and Shareholders of Public Storage We have audited the accompanying consolidated balance sheets of Public Storage as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Public Storage at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Public Storage’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated February 24, 2015 expressed an unqualified opinion thereon. Los Angeles, California February 24, 2015 /s/ ERNST & YOUNG LLP F-1 PUBLIC STORAGE BALANCE SHEETS (Amounts in thousands, except share data) ASSETS Cash and cash equivalents Real estate facilities, at cost: Land Buildings Accumulated depreciation Construction in process Investments in unconsolidated real estate entities Goodwill and other intangible assets, net Loan receivable from Shurgard Europe Other assets Total assets LIABILITIES AND EQUITY Borrowings on bank credit facility Term loan Notes payable Accrued and other liabilities Total liabilities Commitments and contingencies (Note 13) Equity: Public Storage shareholders’ equity: December 31, 2014 December 31, 2013 $ 187,712 $ 19,169 3,476,883 9,386,352 12,863,235 (4,482,520) 8,380,715 104,573 8,485,288 813,740 228,632 - 103,304 9,818,676 - - 64,364 247,141 311,505 $ $ 3,321,236 8,965,020 12,286,256 (4,098,814) 8,187,442 52,336 8,239,778 856,182 246,854 428,139 86,144 9,876,266 50,100 700,000 88,953 218,358 1,057,411 $ $ Preferred Shares, $0.01 par value, 100,000,000 shares authorized, 173,000 shares issued (in series) and outstanding, (142,500 at December 31, 2013), at liquidation preference Common Shares, $0.10 par value, 650,000,000 shares authorized, 172,445,554 shares issued and outstanding (171,776,291 shares at December 31, 2013) Paid-in capital Accumulated deficit Accumulated other comprehensive loss Total Public Storage shareholders’ equity Noncontrolling interests Total equity Total liabilities and equity $ 4,325,000 3,562,500 17,245 5,561,530 (374,823) (48,156) 9,480,796 26,375 9,507,171 9,818,676 $ 17,178 5,531,034 (318,482) (500) 8,791,730 27,125 8,818,855 9,876,266 See accompanying notes. F-2 PUBLIC STORAGE STATEMENTS OF INCOME (Amounts in thousands, except per share amounts) Revenues: Self-storage facilities Ancillary operations Expenses: Self-storage cost of operations Ancillary cost of operations Depreciation and amortization General and administrative Operating income Interest and other income Interest expense Equity in earnings of unconsolidated real estate entities Foreign currency exchange (loss) gain Gain on real estate sales Income from continuing operations Discontinued operations Net income Allocation to noncontrolling interests Net income allocable to Public Storage shareholders Allocation of net income to: Preferred shareholders Preferred shareholders - redemptions Restricted share units Net income allocable to common shareholders Net income per common share – basic Continuing operations Discontinued operations Net income per common share – diluted Continuing operations Discontinued operations Basic weighted average common shares outstanding Diluted weighted average common shares outstanding For the Years Ended December 31, 2012 2013 2014 $ 2,049,882 $ 145,522 2,195,404 1,849,883 $ 131,863 1,981,746 1,718,865 123,639 1,842,504 566,898 51,822 437,114 71,459 1,127,293 524,086 41,075 387,402 66,679 1,019,242 1,068,111 4,926 (6,781) 88,267 (7,047) 2,479 1,149,955 - 1,149,955 (5,751) 1,144,204 962,504 22,577 (6,444) 57,579 17,082 4,233 1,057,531 - 1,057,531 (5,078) 1,052,453 517,641 38,263 357,781 56,837 970,522 871,982 22,074 (19,813) 45,586 8,876 1,456 930,161 12,874 943,035 (3,777) 939,258 $ $ $ $ $ (232,636) - (3,392) (204,312) - (3,410) (205,241) (61,696) (2,627) 908,176 $ 844,731 $ 669,694 5.27 $ - 5.27 $ 5.25 $ - 5.25 $ 4.92 $ - 4.92 $ 4.89 $ - 4.89 $ 3.85 0.08 3.93 3.83 0.07 3.90 172,251 171,640 170,562 173,138 172,688 171,664 See accompanying notes. F-3 PUBLIC STORAGE STATEMENTS OF COMPREHENSIVE INCOME (Amounts in thousands) For the Years Ended December 31, 2013 2012 2014 Net income Other comprehensive income (loss): $ 1,149,955 $ 1,057,531 $ 943,035 Aggregate foreign currency exchange (loss) gain (54,703) 17,587 30,885 Adjust for foreign currency exchange loss (gain) included in net income Other comprehensive (loss) income Total comprehensive income Allocation to noncontrolling interests Comprehensive income allocable to Public Storage shareholders 7,047 (47,656) (17,082) 505 1,102,299 1,058,036 (5,751) (5,078) (8,876) 22,009 965,044 (3,777) $ 1,096,548 $ 1,052,958 $ 961,267 See accompanying notes. F-4 l a t o T d e t a l u m u c c A l a t o T y t i u q E g n i l l o r t n o c n o N s t s e r e t n I e g a r o t S c i l b u P ’ s r e d l o h e r a h S y t i u q E r e h t O e v i s n e h e r p m o C d e t a l u m u c c A s s o L t i c i f e D n i - d i a P l a t i p a C n o m m o C s e r a h S e v i t a l u m u C d e r r e f e r P s e r a h S 7 2 9 , 0 1 3 , 8 $ 8 1 7 , 2 2 $ 9 0 2 , 8 8 2 , 8 $ ) 4 1 0 , 3 2 ( $ ) 8 7 5 , 9 5 2 ( $ 6 0 5 , 2 4 4 , 5 $ 4 2 0 , 7 1 $ 1 7 2 , 1 1 1 , 3 $ E G A R O T S C I L B U P Y T I U Q E F O S T N E M E T A T S ) s t n u o m a e r a h s r e p d n a e r a h s t p e c x e , s d n a s u o h t n i s t n u o m A ( ) 1 7 7 , 8 7 9 , 1 ( 6 5 4 , 1 5 6 , 1 7 4 4 , 4 2 1 6 0 6 , 5 1 ) 4 5 9 , 7 ( - - - - - 4 2 2 , 8 ) 5 2 4 , 1 ( 5 3 0 , 3 4 9 - ) 6 3 2 ( ) 0 0 3 , 5 ( ) 1 4 2 , 5 0 2 ( 9 0 0 , 2 2 ) 3 1 9 , 3 5 7 ( 7 8 6 , 1 0 7 4 6 8 , 2 2 1 , 8 1 1 1 , 1 2 0 2 3 , 9 1 ) 8 4 2 , 6 ( - - ) 5 7 ( 4 2 2 , 8 1 4 5 , 3 - ) 0 0 3 , 5 ( - - 8 0 1 , 9 2 - - - ) 7 0 6 ( ) 1 7 7 , 8 7 9 , 1 ( 6 5 4 , 1 5 6 , 1 7 4 4 , 4 2 1 6 0 6 , 5 1 ) 4 5 9 , 7 ( - ) 0 5 3 , 1 ( 5 3 0 , 3 4 9 ) 6 3 2 ( ) 1 4 5 , 3 ( - ) 1 4 2 , 5 0 2 ( 9 0 0 , 2 2 ) 3 1 9 , 3 5 7 ( 7 8 6 , 1 0 7 6 5 7 , 3 9 0 , 8 1 1 1 , 1 2 0 2 3 , 9 1 ) 1 4 6 , 5 ( - - - - - - - - - - - - - - - - - 9 0 0 , 2 2 ) 5 0 0 , 1 ( - - - - - - - 5 3 0 , 3 4 9 ) 6 3 2 ( ) 1 4 5 , 3 ( - ) 1 4 2 , 5 0 2 ( - ) 3 1 9 , 3 5 7 ( ) 4 7 4 , 9 7 2 ( - - - - - ) 4 4 5 , 3 5 ( - - ) 1 7 7 , 8 7 9 , 1 ( 0 0 0 , 5 0 7 , 1 6 0 6 , 5 1 ) 4 5 9 , 7 ( - ) 0 5 3 , 1 ( - - - - - - - - - - - - - - - - - - 2 3 3 , 4 2 1 5 1 1 - - - - - - - - - - - - 0 2 3 , 9 1 ) 1 4 6 , 5 ( - - 2 7 0 , 1 2 9 3 - - - ) 3 1 3 , 3 2 ( 6 9 5 , 9 1 5 , 5 - 9 3 1 , 7 1 0 0 0 , 5 2 7 0 0 5 , 7 3 8 , 2 . s e t o n g n i y n a p m o c c a e e S 5 - F s t s e r e t n i g n i l l o r t n o c n o n e l b a m e e d e r f o n o i t i s i u q c A g n i l l o r t n o c n o n t n e n a m r e p n i ) e s a e r c e d ( e s a e r c n I h s a c f o t e n , e s n e p x e n o i t a s n e p m o c d e s a b - e r a h S ) 0 1 e t o N ( s e r a h s n o m m o c f o u e i l n i d i a p s e i t i t n e d e n w o - y l l a i t r a p f o n o i t a d i l o s n o C : h t i w n o i t c e n n o c n i s t s e r e t n i ) s e r a h s 1 8 4 , 9 4 1 , 1 ( s e r a h s n o m m o c f o e c n a u s s I ) 8 e t o N ( s e r a h s d e r r e f e r p 0 0 2 , 8 6 f o e c n a u s s I ) 0 1 e t o N ( ) 7 e t o N ( s e i r a i d i s b u S n i s t s e r e t n i f o n o i t i s i u q c A ) 4 e t o N ( d e r r e f e r p 3 3 8 , 0 5 1 , 9 7 f o n o i t p m e d e R 1 1 0 2 , 1 3 r e b m e c e D t a s e c n a l a B ) 8 e t o N ( s e r a h s s t i n u e r a h s d e t c i r t s e r d n a s e r a h s n o m m o C ) 2 e t o N ( e m o c n i e v i s n e h e r p m o c r e h t O ) e r a h s r e p 0 4 . 4 $ ( h t i w n o i t c e n n o c n i s e r a h s n o m m o c f o e c n a u s s I ) 8 e t o N ( s e r a h s d e r r e f e r p 0 0 0 , 9 2 f o e c n a u s s I ) s e r a h s 5 0 0 , 8 8 3 ( n o i t a s n e p m o c d e s a b - e r a h s 2 1 0 2 , 1 3 r e b m e c e D t a s e c n a l a B ) 0 1 e t o N ( h s a c f o t e n , e s n e p x e n o i t a s n e p m o c d e s a b - e r a h S ) 0 1 e t o N ( s e r a h s n o m m o c f o u e i l n i d i a p s t s e r e t n i g n i l l o r t n o c n o n f o n o i t i s i u q c A s t s e r e t n i g n i l l o r t n o c n o n e l b a m e e d e R s t s e r e t n i g n i l l o r t n o c n o n t n e n a m r e P : s r e d l o h y t i u q e o t s n o i t u b i r t s i D ) 8 e t o N ( s e r a h s d e r r e f e r P s t s e r e t n i g n i l l o r t n o c n o N : o t d e t a c o l l a e m o c n i t e N e m o c n i t e N l a t o T d e t a l u m u c c A l a t o T y t i u q E g n i l l o r t n o c n o N s t s e r e t n I e g a r o t S c i l b u P ’ s r e d l o h e r a h S y t i u q E r e h t O e v i s n e h e r p m o C d e t a l u m u c c A s s o L t i c i f e D n i - d i a P l a t i p a C n o m m o C s e r a h S e v i t a l u m u C d e r r e f e r P s e r a h S E G A R O T S C I L B U P Y T I U Q E F O S T N E M E T A T S ) s t n u o m a e r a h s r e p d n a e r a h s t p e c x e , s d n a s u o h t n i s t n u o m A ( - 1 3 5 , 7 5 0 , 1 ) 4 5 4 , 6 ( ) 2 1 3 , 4 0 2 ( 5 0 5 ) 9 4 1 , 7 8 8 ( - 8 7 0 , 5 - ) 4 5 4 , 6 ( - - ) 8 7 0 , 5 ( 1 3 5 , 7 5 0 , 1 - ) 2 1 3 , 4 0 2 ( 5 0 5 ) 9 4 1 , 7 8 8 ( - - - - - 5 0 5 ) 8 7 0 , 5 ( 1 3 5 , 7 5 0 , 1 - ) 2 1 3 , 4 0 2 ( - ) 9 4 1 , 7 8 8 ( - - - - - - - - - - - - - - - - - - 5 5 8 , 8 1 8 , 8 $ 5 2 1 , 7 2 $ 0 3 7 , 1 9 7 , 8 $ ) 0 0 5 ( $ ) 2 8 4 , 8 1 3 ( $ 4 3 0 , 1 3 5 , 5 $ 8 7 1 , 7 1 $ 0 0 5 , 2 6 5 , 3 $ s t s e r e t n i g n i l l o r t n o c n o n o t d e t a c o l l a e m o c n i t e N e m o c n i t e N s t i n u e r a h s d e t c i r t s e r d n a s e r a h s n o m m o C ) 2 e t o N ( e m o c n i e v i s n e h e r p m o c r e h t O 3 1 0 2 , 1 3 r e b m e c e D t a s e c n a l a B ) e r a h s r e p 5 1 . 5 $ ( : s r e d l o h y t i u q e o t s n o i t u b i r t s i D ) 8 e t o N ( s e r a h s d e r r e f e r P s t s e r e t n i g n i l l o r t n o c n o N ) 6 4 5 , 3 2 ( - 0 0 5 , 2 6 7 ) 8 e t o N ( s e r a h s d e r r e f e r p 0 0 5 , 0 3 f o e c n a u s s I 4 5 9 , 8 3 7 2 7 8 , 7 3 - ) 1 2 7 ( 6 2 9 , 6 1 5 5 9 , 9 4 1 , 1 ) 9 6 4 , 6 ( ) 6 3 6 , 2 3 2 ( ) 6 5 6 , 7 4 ( ) 9 0 9 , 7 6 9 ( - - - - ) 2 3 ( 1 5 7 , 5 - ) 9 6 4 , 6 ( - - 4 5 9 , 8 3 7 2 7 8 , 7 3 ) 9 8 6 ( 6 2 9 , 6 1 ) 1 5 7 , 5 ( 5 5 9 , 9 4 1 , 1 - ) 6 3 6 , 2 3 2 ( ) 6 5 6 , 7 4 ( ) 9 0 9 , 7 6 9 ( - - - - - - - - - - - - - ) 1 5 7 , 5 ( 5 5 9 , 9 4 1 , 1 - ) 6 3 6 , 2 3 2 ( ) 9 0 9 , 7 6 9 ( ) 6 5 6 , 7 4 ( - - - - - - - ) 9 8 6 ( 6 2 9 , 6 1 - - - - - - - - 5 0 8 , 7 3 7 6 - - - - - - - - - 1 7 1 , 7 0 5 , 9 $ 5 7 3 , 6 2 $ 6 9 7 , 0 8 4 , 9 $ ) 6 5 1 , 8 4 ( $ ) 3 2 8 , 4 7 3 ( $ 0 3 5 , 1 6 5 , 5 $ 5 4 2 , 7 1 $ 0 0 0 , 5 2 3 , 4 $ . s e t o n g n i y n a p m o c c a e e S 6 - F h t i w n o i t c e n n o c n i s e r a h s n o m m o c f o e c n a u s s I ) s e r a h s 3 6 2 , 9 6 6 ( n o i t a s n e p m o c d e s a b - e r a h s ) 0 1 e t o N ( h s a c f o t e n , e s n e p x e n o i t a s n e p m o c d e s a b - e r a h S ) 0 1 e t o N ( s e r a h s n o m m o c f o u e i l n i d i a p s t s e r e t n i g n i l l o r t n o c n o n f o n o i t i s i u q c A e m o c n i t e N s t s e r e t n i g n i l l o r t n o c n o n o t d e t a c o l l a e m o c n i t e N s t i n u e r a h s d e t c i r t s e r d n a s e r a h s n o m m o C ) 2 e t o N ( s s o l e v i s n e h e r p m o c r e h t O 4 1 0 2 , 1 3 r e b m e c e D t a s e c n a l a B ) e r a h s r e p 0 6 . 5 $ ( : s r e d l o h y t i u q e o t s n o i t u b i r t s i D ) 8 e t o N ( s e r a h s d e r r e f e r P s t s e r e t n i g n i l l o r t n o c n o N PUBLIC STORAGE STATEMENTS OF CASH FLOWS (Amounts in thousands) For the Years Ended December 31, 2013 2012 2014 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Gain on real estate sales, including amounts in discontinued operations Depreciation and amortization, including amounts in discontinued operations Distributions received from unconsolidated real estate entities less than equity in earnings Foreign currency exchange loss (gain) Other Total adjustments Net cash provided by operating activities Cash flows from investing activities: Capital expenditures to maintain real estate facilities Construction in process Acquisition of real estate facilities and intangibles Investment in unconsolidated real estate entities Proceeds from sale of real estate investments Disposition of portion of loan receivable from Shurgard Europe Repayments of loan receivable from Shurgard Europe Other Net cash used in investing activities Cash flows from financing activities: Repayments on bank credit facility Repayments on term loan Repayments on notes payable Issuance of common shares Issuance of preferred shares Redemption of preferred shares Acquisition of noncontrolling interests Distributions paid to Public Storage shareholders Distributions paid to noncontrolling interests Net cash used in financing activities Net increase (decrease) in cash and cash equivalents Net effect of foreign exchange translation on cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period $ 1,149,955 $ 1,057,531 $ 943,035 (2,479) (4,233) (13,591) 437,114 387,402 358,103 (4,809) 7,047 19,930 456,803 1,606,758 (79,784) (150,399) (410,210) - 2,581 216,217 204,947 3,652 (212,996) (50,100) (700,000) (44,406) 37,872 738,954 - (721) (1,200,545) (6,469) (1,225,415) 168,347 196 19,169 $ 187,712 $ (11,709) (17,082) 18,430 372,808 1,430,339 (71,270) (101,376) (1,150,943) (105,040) 257 - - 15,979 (1,412,393) (82,900) 700,000 (251,895) 21,111 701,687 - (6,248) (1,091,461) (6,454) (16,160) 1,786 (904) (8,876) 7,892 342,624 1,285,659 (67,737) (10,688) (225,515) - 20,021 - - (6,546) (290,465) 133,000 - (61,013) 124,447 1,651,456 (1,978,771) (21,325) (959,154) (5,945) (1,117,305) (122,111) 144 17,239 19,169 $ 342 139,008 17,239 See accompanying notes. F-7 PUBLIC STORAGE STATEMENTS OF CASH FLOWS (Amounts in thousands) For the Years Ended December 31, 2013 2012 2014 Supplemental schedule of non-cash investing and financing activities: Foreign currency translation adjustment: Real estate facilities, net of accumulated depreciation $ Investments in unconsolidated real estate entities Intangible assets Loan receivable from Shurgard Europe Accumulated other comprehensive (loss) income 673 $ 47,251 - 6,975 (54,703) (254) $ (45) - (17,144) 17,587 (646) (21,600) 5 (8,302) 30,885 Real estate acquired in exchange for assumption of notes payable Notes payable assumed in connection with acquisition of real estate Consolidation of entities previously accounted for under the equity method of accounting: Real estate facilities Investments in unconsolidated real estate entities Intangible assets Noncontrolling interests (20,460) (6,071) 20,460 6,071 - - - - - - - - - - (10,403) 3,072 (949) 8,224 See accompanying notes. F-8 PUBLIC STORAGE NOTES TO FINANCIAL STATEMENTS December 31, 2014 1. Description of the Business Public Storage (referred to herein as “the Company”, “we”, “us”, or “our”), a Maryland real estate investment trust, was organized in 1980. Our principal business activities include the acquisition, development, ownership and operation of self-storage facilities which offer storage spaces for lease, generally on a month-to- month basis, for personal and business use. At December 31, 2014, we have direct and indirect equity interests in 2,250 self-storage facilities (with approximately 146 million net rentable square feet) located in 38 states in the United States (“U.S.”) operating under the “Public Storage” name. We also own one self-storage facility in London, England and we have a 49% interest in Shurgard Europe, which owns 192 self-storage facilities (with approximately 10 million net rentable square feet) located in seven Western European countries, all operating under the “Shurgard” name. We also have direct and indirect equity interests in approximately 30 million net rentable square feet of commercial space located in 11 states in the U.S. primarily owned and operated by PS Business Parks, Inc. (“PSB”) under the “PS Business Parks” name. At December 31, 2014, we have an approximate 42% common equity interest in PSB. Disclosures of the number and square footage of properties, as well as the number and coverage of tenant reinsurance policies are unaudited and outside the scope of our independent registered public accounting firm’s review of our financial statements in accordance with the standards of the Public Company Accounting Oversight Board (U.S.). 2. Summary of Significant Accounting Policies Basis of Presentation The financial statements are presented on an accrual basis in accordance with U.S. generally accepted accounting principles (“GAAP”) as defined in the Financial Accounting Standards Board Accounting Standards Codification (the “Codification”). Consolidation and Equity Method of Accounting We consider entities to be Variable Interest Entities (“VIEs”) when they have insufficient equity to finance their activities without additional subordinated financial support provided by other parties, or where the equity holders as a group do not have a controlling financial interest. We have no investments or other involvement in any VIEs. We consolidate all entities that we control (these entities, for the period in which the reference applies, are referred to collectively as the “Subsidiaries”), and we eliminate intercompany transactions and balances. We account for our investments in entities that we have significant influence over, but do not control, using the equity method of accounting (these entities, for the periods in which the reference applies, are referred to collectively as the “Unconsolidated Real Estate Entities”), eliminating intra-entity profits and losses and amortizing any differences between the cost of our investment and the underlying equity in net assets against equity in earnings as if the Unconsolidated Real Estate Entity were a consolidated subsidiary. When we obtain control of an Unconsolidated Real Estate Entity, we commence consolidating the entity and record a gain representing the differential between the book value and fair value of our preexisting equity interest. All changes in consolidation status are reflected prospectively. F-9 PUBLIC STORAGE NOTES TO FINANCIAL STATEMENTS December 31, 2014 When we are general partner, we control the partnership unless the third-party limited partners can dissolve the partnership or otherwise remove us as general partner without cause, or if the limited partners have the right to participate in substantive decisions of the partnership. Collectively, at December 31, 2014, the Company and the Subsidiaries own 2,237 self-storage facilities in the U.S., one self-storage facility in London, England and five commercial facilities in the U.S. At December 31, 2014, the Unconsolidated Real Estate Entities are comprised of PSB, Shurgard Europe, as well as limited partnerships that own an aggregate of 13 self-storage facilities in the U.S. (these limited partnerships, for the periods in which the reference applies, are referred to as the “Other Investments”). Use of Estimates The financial statements and accompanying notes reflect our estimates and assumptions. Actual results could differ from those estimates and assumptions. Income Taxes We have elected to be treated as a real estate investment trust (“REIT”), as defined in the Internal Revenue Code. As a REIT, we do not incur federal income tax if we distribute 100% of our REIT taxable income (generally, net rents and gains from real property, dividends, and interest) each year, and if we meet certain organizational and operational rules. We believe we will meet these REIT requirements in 2014, and that we have met them for all other periods presented herein. Accordingly, we have recorded no federal income tax expense related to our REIT taxable income. Our merchandise and tenant reinsurance operations are subject to corporate income tax and such taxes are included in ancillary cost of operations. We also incur income and other taxes in certain states, which are included in general and administrative expense. We recognize tax benefits of uncertain income tax positions that are subject to audit only if we believe it is more likely than not that the position would ultimately be sustained assuming the relevant taxing authorities had full knowledge of the relevant facts and circumstances of our positions. As of December 31, 2014, we had no tax benefits that were not recognized. Real Estate Facilities Real estate facilities are recorded at cost. We capitalize all costs incurred to develop, construct, renovate and improve properties, including interest and property taxes incurred during the construction period. We expense internal and external transaction costs associated with acquisitions or dispositions of real estate, as well as repairs and maintenance costs, as incurred. We depreciate buildings and improvements on a straight- line basis over estimated useful lives ranging generally between 5 to 25 years. We allocate the net acquisition cost of acquired operating self-storage facilities to the underlying land, buildings, identified intangible assets, and remaining noncontrolling interests based upon their respective individual estimated fair values. Any difference between the net acquisition cost and the estimated fair value of the net tangible and intangible assets acquired is recorded as goodwill. F-10 PUBLIC STORAGE NOTES TO FINANCIAL STATEMENTS December 31, 2014 Other Assets Other assets primarily consist of prepaid expenses, accounts receivable and restricted cash. Accrued and Other Liabilities Accrued and other liabilities consist primarily of trade payables, property tax accruals, tenant prepayments of rents, accrued interest payable, accrued payroll, accrued tenant reinsurance losses, casualty losses, and contingent loss accruals which are accrued when probable and estimable. We disclose the nature of significant unaccrued losses that are reasonably possible of occurring and, if estimable, a range of exposure. Cash Equivalents, Marketable Securities and Other Financial Instruments Cash equivalents represent highly liquid financial instruments such as money market funds with daily liquidity or short-term commercial paper or treasury securities maturing within three months of acquisition. Cash and cash equivalents which are restricted from general corporate use are included in other assets. Commercial paper not maturing within three months of acquisition, which we intend and have the capacity to hold until maturity, are included in marketable securities and accounted for using the effective interest method. Transfers of financial assets are recorded as sales when the asset is put presumptively beyond our and our creditors’ reach, there is no impediment to the transferee’s right to pledge or exchange the asset, we have surrendered effective control of the asset, we have no actual or effective right or requirement to repurchase the asset and, in the case of a transfer of a participating interest, there is no impediment to our right to pledge or exchange the participating interest we retain. Fair Value Accounting As used herein, the term “fair value” is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. We prioritize the inputs used in measuring fair value based upon a three-tier hierarchy described in Codification Section 820-10-35. We believe that, during all periods presented, the carrying values approximate the fair values of our cash and cash equivalents, marketable securities, other assets, and accrued and other liabilities, based upon our evaluation of the underlying characteristics, market data, and short maturity of these financial instruments, which involved considerable judgment. The estimated fair values are not necessarily indicative of the amounts that could be realized in current market exchanges. The characteristics of these financial instruments, market data, and other comparative metrics utilized in determining these fair values are “Level 2” inputs as the term is defined in Codification Section 820-10-35-47. We use significant judgment to estimate fair values in recording our business combinations, to evaluate real estate, investments in unconsolidated real estate entities, goodwill, and other intangible assets for impairment, and to determine the fair values of notes payable and receivable. In estimating fair values, we consider significant unobservable inputs such as market prices of land, market capitalization rates and earnings multiples for real estate facilities, projected levels of earnings, costs of construction, functional depreciation, and market interest rates for debt securities with a similar time to maturity and credit quality, which are “Level 3” inputs as the term is defined in Codification Section 820-10-35-52. F-11 PUBLIC STORAGE NOTES TO FINANCIAL STATEMENTS December 31, 2014 Currency and Credit Risk Financial assets that are exposed to credit risk consist primarily of cash and cash equivalents, accounts receivable, loans receivable, and restricted cash. Cash equivalents and marketable securities we invest in are either money market funds with a rating of at least AAA by Standard and Poor’s, commercial paper that is rated A1 by Standard and Poor’s or deposits with highly rated commercial banks. At December 31, 2014, due primarily to our investment in Shurgard Europe, our operating results and financial position are affected by fluctuations in currency exchange rates between the Euro, and to a lesser extent, other European currencies, against the U.S. Dollar. Goodwill and Other Intangible Assets Intangible assets are comprised of goodwill, the “Shurgard” trade name, acquired customers in place, and leasehold interests in land. Goodwill totaled $174.6 million at December 31, 2014 and 2013. The “Shurgard” trade name, which is used by Shurgard Europe pursuant to a fee-based licensing agreement, has a book value of $18.8 million at December 31, 2014 and 2013. Goodwill and the “Shurgard” trade name have indefinite lives and are not amortized. Acquired customers in place and leasehold interests in land are finite-lived and are amortized relative to the benefit of the customers in place or the benefit to land lease expense to each period. At December 31, 2014, these intangibles had a net book value of $35.2 million ($53.4 million at December 31, 2013). Accumulated amortization totaled $69.3 million at December 31, 2014 ($35.1 million at December 31, 2013), and amortization expense of $48.4 million, $24.1 million and $10.5 million was recorded in 2014, 2013 and 2012, respectively. The estimated future amortization expense for our finite-lived intangible assets at December 31, 2014 is $22.3 million in 2015, $5.6 million in 2016 and $7.3 million thereafter. During 2014, 2013 and 2012, intangibles were increased $30.2 million, $61.5 million and $9.1 million, respectively, in connection with the acquisition of self-storage facilities and leasehold interests (Note 3), and in 2012, $0.9 million, in connection with the consolidation of facilities previously accounted for under the equity method (Note 4). Evaluation of Asset Impairment We evaluate our real estate, finite-lived intangible assets, investments in unconsolidated real estate entities, and loans receivable for impairment on a quarterly basis. We evaluate indefinite-lived assets (including goodwill) for impairment on an annual basis, or more often if there are indicators of impairment. In evaluating our real estate assets and finite-lived intangible assets for impairment, if there are indicators of impairment, and we determine that the asset is not recoverable from future undiscounted cash flows, an impairment charge is recorded for any excess of the carrying amount over the asset’s estimated fair value. For long-lived assets that we expect to dispose of prior to the end of their estimated useful lives, we record an impairment charge for any excess of the carrying value of the asset over the expected net proceeds from disposal. Prior to January 1, 2013, we evaluated the “Shurgard” trade name for impairment through a quantitative analysis, and we would record impairment charges to the extent quantitatively estimated fair value was less than the carrying amount. Beginning January 1, 2013, if we determine, based upon the relevant events and circumstances and other such qualitative factors, that it is more likely than not that the “Shurgard” trade F-12 PUBLIC STORAGE NOTES TO FINANCIAL STATEMENTS December 31, 2014 name is unimpaired, we do not record an impairment charge and no further analysis is performed. Otherwise, we record an impairment charge for any excess of carrying amount over quantitatively assessed fair value. In evaluating goodwill for impairment, we first evaluate, based upon the relevant events and circumstances and other such qualitative factors, whether the fair value of the reporting unit that the goodwill pertains to is greater than its aggregate carrying amount. If based upon this evaluation it is more likely than not that the fair value of the reporting unit is in excess of its aggregate carrying amount, no impairment charge is recorded and no further analysis is performed. Otherwise, we estimate the goodwill’s implied fair value based upon what would be allocated to goodwill if the reporting unit were acquired at estimated fair value in a transaction accounted for as a business combination, and record an impairment charge for any excess of book value over the goodwill’s implied fair value. For our investments in unconsolidated real estate entities, if we determine that a decline in the estimated fair value of the investments below carrying amount is other than temporary, we record an impairment charge for any excess of carrying amount over the estimated fair value. For our loan receivable, if we determine that it is probable we will be unable to collect all amounts due based on the terms of the loan agreement, we record an impairment charge for any excess of book value over the present value of expected future cash flows. No impairments were recorded in any of our evaluations for any period presented herein. Revenue and Expense Recognition Rental income, which is generally earned pursuant to month-to-month leases for storage space, as well as late charges and administrative fees, are recognized as earned. Promotional discounts reduce rental income over the promotional period. Ancillary revenues and interest and other income are recognized when earned. Equity in earnings of unconsolidated real estate entities represents our pro-rata share of the earnings of the Unconsolidated Real Estate Entities. We accrue for property tax expense based upon actual amounts billed and, in some circumstances, estimates and historical trends when bills or assessments have not been received from the taxing authorities or such bills and assessments are in dispute. If these estimates are incorrect, the timing and amount of expense recognition could be incorrect. Cost of operations, general and administrative expense, interest expense, as well as television and other advertising expenditures are expensed as incurred. Foreign Currency Exchange Translation The local currency (primarily the Euro) is the functional currency for our interests in foreign operations. The related balance sheet amounts are translated into U.S. Dollars at the exchange rates at the respective financial statement date, while amounts on our statements of income are translated at the average exchange rates during the respective period. The Euro was translated at exchange rates of approximately 1.216 U.S. Dollars per Euro at December 31, 2014 (1.377 at December 31, 2013), and average exchange rates of 1.329, 1.328 and 1.285 for the years ended December 31, 2014, 2013 and 2012, respectively. Cumulative translation adjustments, to the extent not included in cumulative net income, are included in equity as a component of accumulated other comprehensive income (loss). F-13 PUBLIC STORAGE NOTES TO FINANCIAL STATEMENTS December 31, 2014 Comprehensive Income Total comprehensive income represents net income, adjusted for changes in other comprehensive income (loss) for the applicable period. The aggregate foreign currency exchange gains and losses reflected on our statements of comprehensive income are comprised primarily of foreign currency exchange gains and losses on our investment in, and loan receivable from, Shurgard Europe. Discontinued Operations Effective January 1, 2014, we present as discontinued operations only those facility disposals that represent a strategic shift and have a major impact upon operations. Previously, all facility disposals were presented as discontinued operations. Discontinued operations totaling $12.9 million in 2012 primarily represents a gain on disposal of self-storage facilities. No other discontinued operations are presented for any other periods. Net Income per Common Share Net income is allocated to (i) noncontrolling interests based upon their share of the net income of the Subsidiaries, (ii) preferred shareholders, to the extent redemption cost exceeds the related original net issuance proceeds (an “EITF D-42 allocation”), and (iii) the remaining net income allocated to each of our equity securities based upon the dividends declared or accumulated during the period, combined with participation rights in undistributed earnings. Basic net income per share, basic net income from discontinued operations per share, and basic net income from continuing operations per share are computed using the weighted average common shares outstanding. Diluted net income per share, diluted net income from discontinued operations per share, and diluted net income from continuing operations per share are computed using the weighted average common shares outstanding, adjusted for the impact, if dilutive, of stock options outstanding (Note 10). The following table reflects net income allocable to common shareholders and the weighted average common shares and equivalents outstanding, as used in our calculations of basic and diluted net income per share, basic and diluted net income from discontinued operations per share, and basic and diluted net income from continuing operations per share: For the Years Ended December 31, 2013 2014 2012 (Amounts in thousands) Net income allocable to common shareholders from continuing operations and discontinued operations: Net income allocable to common shareholders Eliminate: Discontinued operations allocable to common shareholders Net income from continuing operations allocable to common shareholders $ 908,176 $ 844,731 $ 669,694 - - (12,874) $ 908,176 $ 844,731 $ 656,820 Weighted average common shares and equivalents outstanding: Basic weighted average common shares outstanding Net effect of dilutive stock options - based on treasury stock method Diluted weighted average common shares outstanding 172,251 171,640 170,562 887 173,138 1,048 172,688 1,102 171,664 F-14 PUBLIC STORAGE NOTES TO FINANCIAL STATEMENTS December 31, 2014 3. Real Estate Facilities Activity in real estate facilities during 2014, 2013 and 2012 is as follows: Operating facilities, at cost: Beginning balance Capital expenditures to maintain real estate facilities Acquisitions Dispositions Newly developed facilities opened for operation Impact of foreign exchange rate changes Ending balance Accumulated depreciation: Beginning balance Depreciation expense Dispositions Impact of foreign exchange rate changes Ending balance Construction in process: Beginning balance Current development Acquisitions Newly developed facilities opened for operation Ending balance Total real estate facilities at December 31, $ 2014 2013 2012 (Amounts in thousands) $ 12,286,256 $ 11,033,819 $ 10,773,277 79,784 400,514 (112) 98,162 (1,369) 12,863,235 (4,098,814) (384,412) 10 696 (4,482,520) 52,336 150,399 - 71,270 1,095,477 (89) 85,283 496 12,286,256 (3,738,130) (360,442) - (242) (4,098,814) 36,243 101,376 - 67,737 198,316 (13,792) 7,244 1,037 11,033,819 (3,398,379) (345,459) 6,099 (391) (3,738,130) 4,299 10,688 28,500 (98,162) 104,573 8,485,288 $ (85,283) 52,336 8,239,778 $ (7,244) 36,243 7,331,932 During 2014, we acquired 44 self-storage facilities (3,442,000 net rentable square feet), for a total cost of $430.7 million, consisting of $410.2 million in cash and the assumption of $20.5 million in mortgage debt. Approximately $30.2 million of the total cost was allocated to intangible assets. We completed expansion and development activities during 2014, adding 1,145,000 net rentable square feet of self-storage space, at an aggregate cost of $98.2 million. Construction in process at December 31, 2014 consists of projects to develop new self-storage facilities and expand existing self-storage facilities, which would add a total of 3.5 million net rentable square feet of storage space, for an aggregate estimated cost of approximately $411.0 million. We received approximately $2.6 million in disposition proceeds during 2014. During 2013, we acquired 121 operating self-storage facilities from third parties (8,036,000 net rentable square feet of storage space) for $1.151 billion in cash and assumed mortgage debt with a fair value of $6 million. We allocated approximately $1.095 billion to real estate facilities and $62 million to intangible assets. We completed expansion and development activities during 2013, adding 614,000 net rentable square feet of self-storage space, at an aggregate cost of $85.3 million. We disposed of real estate for an aggregate of $0.2 million in cash, recording a gain of approximately $0.1 million in connection with partial condemnations. During 2012, we acquired 24 operating self-storage facilities from third parties (1,908,000 net rentable square feet of storage space) and unfinished space which was subsequently developed into self-storage space for F-15 PUBLIC STORAGE NOTES TO FINANCIAL STATEMENTS December 31, 2014 an aggregate of $225.5 million in cash, with $187.9 million allocated to real estate facilities, $9.1 million allocated to intangible assets and $28.5 million allocated to construction in process. During 2012, we began to consolidate a limited partnership owning three self-storage facilities (183,000 net rentable square feet) that we gained control of, and recorded a gain of $1.3 million representing the differences between the aggregate fair values of our existing investments and their book values. The fair values of our existing investments in 2012 was allocated to real estate facilities ($10.4 million), intangible assets ($0.9 million), and noncontrolling interests ($8.2 million). We also completed various expansion activities to our existing facilities for an aggregate cost of approximately $7.2 million. During 2012, we also disposed of four operating self-storage facilities and portions of other facilities in connection with eminent domain proceedings. We received aggregate proceeds totaling $20.0 million and recorded gains totaling of $12.3 million, of which $12.1 million was included in discontinued operations and $0.2 million was included in gain on real estate sales in our statement of income for the year ended December 31, 2012. At December 31, 2014, the adjusted basis of real estate facilities for federal tax purposes was approximately $8.9 billion (unaudited). 4. Investments in Unconsolidated Real Estate Entities The following table sets forth our investments in, and equity earnings of, the Unconsolidated Real Estate Entities (amounts in thousands): Investments in Unconsolidated Real Estate Entities at December 31, 2014 2013 Equity in Earnings of Unconsolidated Real Estate Entities for the Year Ended December 31, 2012 2013 2014 $ PSB Shurgard Europe Other Investments (A) Total $ 412,115 394,842 6,783 813,740 $ $ 424,538 424,095 7,549 856,182 $ $ 56,280 29,900 2,087 88,267 $ $ 23,199 32,694 1,686 57,579 $ $ 10,638 33,223 1,725 45,586 (A) At December 31, 2014, the “Other Investments” include an average common equity ownership of approximately 26% in various limited partnerships that collectively own 13 self-storage facilities (14 at December 31, 2013). During 2014, 2013 and 2012, we received cash distributions from our investments in the Unconsolidated Real Estate Entities totaling $83.5 million, $45.9 million and $44.7 million, respectively. At December 31, 2014, the cost of our investment in the Unconsolidated Real Estate Entities exceeds our pro rata share of the underlying equity by approximately $68 million ($79 million at December 31, 2013). This differential is being amortized as a reduction in equity in earnings of the Unconsolidated Real Estate Entities based upon allocations to the underlying net assets. Such amortization was approximately $4.4 million during 2014 (none in 2013 or 2012), of which $2.5 million related to PSB’s disposition of assets. Investment in PSB PSB is a REIT traded on the New York Stock Exchange. We have an approximate 42% common equity interest in PSB as of December 31, 2014 and 2013, comprised of our ownership of 7,158,354 shares of PSB’s common stock and 7,305,355 limited partnership units (“LP Units”) in an operating partnership controlled by PSB. The LP Units are convertible at our option, subject to certain conditions, on a one-for-one F-16 PUBLIC STORAGE NOTES TO FINANCIAL STATEMENTS December 31, 2014 basis into PSB common stock. Based upon the closing price at December 31, 2014 ($79.54 per share of PSB common stock), the shares and units we owned had a market value of approximately $1.2 billion. During 2014, PSB recognized gains on the sale of real estate totaling $92.4 million. Our equity share of such gains totaled $36.5 million, which is included in our equity in earnings of unconsolidated real estate entities on our income statement for 2014. During 2013, we purchased 406,748 shares of PSB common stock in open-market transactions at an average cost of $73.15 per share. Subsequently, on November 7, 2013, PSB completed a public offering of 1,495,000 shares of its common stock for $79.25 per share. Concurrent with the public offering, we purchased an additional 950,000 shares of PSB common stock from PSB at the same price per share as the public offering for a total cost of $75.3 million. In connection with PSB’s common share issuance, we recognized a gain on sale of real estate totaling $4.1 million as if we had sold a proportionate share of our investment in PSB. The following table sets forth selected financial information of PSB. The amounts represent all of PSB’s balances and not our pro-rata share. For the year ended December 31, Total revenue Costs of operations Depreciation and amortization General and administrative Other items Gain on sale of facilities Net income Allocations to preferred shareholders and restricted share unitholders Net income allocated to common shareholders and LP Unitholders 2014 2013 (Amounts in thousands) 2012 $ 376,915 $ (127,371) (110,357) (13,639) (13,221) 92,373 204,700 $ 359,885 (114,831) (108,917) (5,312) (14,681) - 116,144 347,197 (114,108) (109,398) (8,919) (19,400) - 95,372 (60,817) (59,341) (69,597) $ 143,883 $ 56,803 $ 25,775 As of December 31, Total assets (primarily real estate) Debt Other liabilities Equity: Preferred stock Common equity and units Investment in Shurgard Europe 2014 2013 (Amounts in thousands) $ $ 2,227,114 250,000 68,905 995,000 913,209 2,238,559 250,000 73,919 995,000 919,640 For all periods presented, we had a 49% equity investment in Shurgard Europe and our joint venture partner owns the remaining 51% interest. In addition, Shurgard Europe pays a license fee to us for the use of the “Shurgard” trademark, and through July 2014, paid us interest on a shareholder loan which was repaid at that time (see Note 5). F-17 PUBLIC STORAGE NOTES TO FINANCIAL STATEMENTS December 31, 2014 Changes in foreign currency exchange rates caused our investment in Shurgard Europe to decrease by approximately $47.3 million in 2014 and to increase our investment by $45.0 thousand in 2013 and $21.6 million in 2012. The following table sets forth selected consolidated financial information of Shurgard Europe based upon all of Shurgard Europe’s balances for all periods, rather than our pro rata share. Such amounts are based upon our historical acquired book basis. As of December 31, Total assets (primarily self-storage facilities) Total debt to third parties Total shareholder loan Other liabilities Equity $ 2014 2013 (Amounts in thousands) $ 1,404,246 500,767 - 180,546 722,933 1,468,155 154,119 428,139 107,550 778,347 Exchange rate of Euro to U.S. Dollar 1.216 1.377 2014 2013 (Amounts in thousands) 2012 For the year ended December 31, Self-storage and ancillary revenues Self-storage and ancillary cost of operations Depreciation and amortization General and administrative Interest expense on third party debt Trademark license fee payable to Public Storage Interest expense on shareholder loan Lease termination (charge) benefit and other (a) $ 254,136 $ (100,177) (61,796) (14,964) (9,607) (2,544) (21,761) (6,573) 246,615 $ (98,222) (60,029) (13,651) (5,082) (2,468) (37,838) (2,909) Net income Average exchange rates Euro to the U.S. Dollar $ 36,714 $ 26,416 $ 1.329 1.328 243,687 (96,341) (60,404) (13,327) (7,689) (2,439) (36,710) 1,876 28,653 1.285 (a) Amounts for the years ended December 31, 2014 and 2013, include a $1.5 million lease termination benefit and a $2.9 million lease termination charge, respectively, associated with a closed facility. Amounts for the year ended December 31, 2014 include $4.3 million in costs associated with the acquisition of self-storage facilities, and a $4.4 million contingent loss. As reflected in the table above, Shurgard Europe’s net income has been reduced by expenses it pays to its shareholders, including a trademark license fee and interest expense on the shareholder loan. The following table set forth the calculation of our equity in earnings in Shurgard Europe: F-18 PUBLIC STORAGE NOTES TO FINANCIAL STATEMENTS December 31, 2014 For the year ended December 31, Calculation of equity in earnings of Shurgard Europe: Our 49% share of Shurgard Europe’s net income $ Adjustments: 49% of trademark license fees 49% of interest on shareholder loan 2014 2013 (Amounts in thousands) 2012 17,990 $ 12,944 $ 14,040 1,247 10,663 1,209 18,541 1,195 17,988 33,223 Total equity in earnings of Shurgard Europe $ 29,900 $ 32,694 $ As indicated in the table above, 49% of the trademark license fees and interest paid by Shurgard Europe to its shareholders is included in our equity in earnings of Shurgard Europe and any remaining amount paid to us is included in “interest and other income” on our income statements. See Note 5 for further information. 5. Loan Receivable from Unconsolidated Real Estate Entity At December 31, 2013, we owned 100% of the shareholder loan due from Shurgard Europe, which had a balance of €311.0 million ($428.1 million) and bore interest at 9.0% per annum. On January 28, 2014, our joint venture partner in Shurgard Europe acquired a 51% interest in the loan at face value for €158.6 million ($216.2 million) in cash. In July 2014, Shurgard Europe fully repaid its €311.0 million shareholder loan accordingly, we received a total of €152.4 million ($204.9 million), representing our 49% share of the loan. For 2014, 2013 and 2012, we recorded interest income with respect to this loan of approximately $1.5 million, $19.3 million and $18.7 million, respectively. The reduction in amounts classified as interest and other income during 2014, as compared to 2013 and 2012 is due to the sale, on January 28, 2014 of 51% of the shareholder loan to our joint venture partner, who collected 51% of the loan interest following the sale. Based upon our continued expectation of repayment of the loan in the foreseeable future, we reflected changes in the U.S. Dollar equivalent of the amount due us, as a result of changes in foreign exchange rates as “foreign currency exchange gain (loss)” on our income statement until repayment of the loan in full in July 2014. We believed that the interest rate on the loan approximated the market rate for loans with similar terms, conditions, subordination features, and tenor, and that the fair value of the loan approximated book value. In our evaluation of market rates and fair value, we considered that Shurgard Europe had sufficient operating cash flow, liquidity and collateral, and we have sufficient creditor rights such that credit risk was mitigated. 6. Credit Facility, Term Loan and Notes Payable We have a $300 million revolving line of credit (the “Credit Facility”) that expires on March 21, 2017. Amounts drawn on the Credit Facility bear annual interest at rates ranging from LIBOR plus 0.900% to LIBOR plus 1.500% depending upon the ratio of our Total Indebtedness to Gross Asset Value (as defined in the Credit Facility) (LIBOR plus 0.900% at December 31, 2014). In addition, we are required to pay a quarterly facility fee ranging from 0.125% per annum to 0.300% per annum depending upon the ratio of our Total Indebtedness to our Gross Asset Value (0.125% per annum at December 31, 2014). At December 31, 2014 and February 20, 2015, we had no outstanding borrowings under this Credit Facility ($50.1 million at December 31, 2013). We had undrawn standby letters of credit, which reduce our borrowing capacity, totaling $13.9 million at F-19 PUBLIC STORAGE NOTES TO FINANCIAL STATEMENTS December 31, 2014 December 31, 2014 and $15.1 million at December 31, 2013. The Credit Facility has various customary restrictive covenants, all of which we were in compliance with at December 31, 2014. On December 2, 2013, we entered into a one year $700 million unsecured term loan (the “Term Loan”) with Wells Fargo Bank, with an interest rate and covenants the same as for the Credit Facility. The Term Loan was repaid in 2014. We incurred origination costs of $1.9 million for the Term Loan which were amortized using the effective interest method through the date of extinguishment. The carrying amounts of our notes payable at December 31, 2014 and 2013, totaled $64.4 million and $89.0 million, respectively, with unamortized premium totaling $0.6 million and $0.5 million, respectively. These notes were assumed or issued in connection with acquisitions of real estate facilities and recorded at fair value with any premium or discount over the stated note balance amortized using the effective interest method. At December 31, 2014, the notes are secured by 34 real estate facilities with a net book value of approximately $161 million, have contractual interest rates between 2.9% and 7.1%, and mature between March 2015 and September 2028. During 2014 and 2013, we assumed mortgage debt with estimated fair values of $20.5 million and $6.1 million, respectively, market rates of 3.6% and 3.7%, respectively, (contractual balances of $19.8 million and $5.7 million, respectively, and contractual interest rates of 5.2% and 6.2%, respectively,) in connection with the acquisition of real estate facilities. On October 1, 2013, we borrowed $100.0 million from PSB under a term loan which was repaid in full on October 18, 2013. The loan bore interest at 1.388%. At December 31, 2014, approximate principal maturities of our notes payable are as follows (amounts in thousands): 2015 2016 2017 2018 2019 Thereafter Weighted average effective rate $ $ 17,822 20,613 9,263 11,168 1,217 4,281 64,364 4.0% Cash paid for interest totaled $9.0 million, $10.4 million and $21.7 million for 2014, 2013 and 2012, respectively. Interest capitalized as real estate totaled $1.6 million, $2.9 million and $0.4 million in 2014, 2013 and 2012, respectively. 7. Noncontrolling Interests At December 31, 2014, the noncontrolling interests represent (i) third-party equity interests in subsidiaries owning 14 self-storage facilities and (ii) 231,978 partnership units held by third-parties in a subsidiary that are convertible on a one-for-one basis (subject to certain limitations) into common shares of the Company at the option of the unitholder (collectively, the “Noncontrolling Interests”). At December 31, 2014, the Noncontrolling Interests cannot require us to redeem their interests, other than pursuant to a liquidation of the subsidiary. During 2014, 2013 and 2012, we allocated a total of $5.8 million, $5.1 million and $3.7 million, F-20 PUBLIC STORAGE NOTES TO FINANCIAL STATEMENTS December 31, 2014 respectively, to these interests; and we paid $6.5 million, $6.5 million and $5.9 million, respectively, in distributions to these interests. During 2014 and 2013, we acquired Noncontrolling Interests for $0.7 million and $6.2 million, respectively, in cash, substantially all of which was allocated to paid-in-capital. During 2012, we acquired Noncontrolling Interests for $21.3 million in cash, including $19.9 million for interests that were redeemable at the option of the holder, of which $0.1 million was recorded as a reduction to permanent noncontrolling interests, $11.9 million was recorded as a reduction to redeemable noncontrolling interests, and $9.3 million was recorded as a reduction to paid-in capital. 8. Shareholders’ Equity Preferred Shares At December 31, 2014 and 2013, we had the following series of Cumulative Preferred Shares (“Preferred Shares”) outstanding: F-21 PUBLIC STORAGE NOTES TO FINANCIAL STATEMENTS December 31, 2014 Earliest Redemption Date Series Series O Series P Series Q Series R Series S Series T Series U Series V Series W Series X Series Y Series Z Series A 4/15/2015 10/7/2015 4/14/2016 7/26/2016 1/12/2017 3/13/2017 6/15/2017 9/20/2017 1/16/2018 3/13/2018 3/17/2019 6/4/2019 12/2/2019 At December 31, 2014 At December 31, 2013 Dividend Rate Shares Outstanding Shares Liquidation Preference Outstanding (Dollar amounts in thousands) Liquidation Preference 6.875% 6.500% 6.500% 6.350% 5.900% 5.750% 5.625% 5.375% 5.200% 5.200% 6.375% 6.000% 5.875% 5,800 $ 145,000 5,800 $ 145,000 5,000 15,000 19,500 18,400 18,500 11,500 19,800 20,000 9,000 11,400 11,500 7,600 125,000 375,000 487,500 460,000 462,500 287,500 495,000 500,000 225,000 285,000 287,500 190,000 5,000 15,000 19,500 18,400 18,500 11,500 19,800 20,000 9,000 - - - 125,000 375,000 487,500 460,000 462,500 287,500 495,000 500,000 225,000 - - - Total Preferred Shares 173,000 $ 4,325,000 142,500 $ 3,562,500 The holders of our Preferred Shares have general preference rights with respect to liquidation, quarterly distributions and any accumulated unpaid distributions. Except under certain conditions and as noted below, holders of the Preferred Shares will not be entitled to vote on most matters. In the event of a cumulative arrearage equal to six quarterly dividends, holders of all outstanding series of preferred shares (voting as a single class without regard to series) will have the right to elect two additional members to serve on our board of trustees (the “Board”) until the arrearage has been cured. At December 31, 2014, there were no dividends in arrears. Except under certain conditions relating to the Company’s qualification as a REIT, the Preferred Shares are not redeemable prior to the dates indicated on the table above. On or after the respective dates, each of the series of Preferred Shares is redeemable at our option, in whole or in part, at $25.00 per depositary share, plus accrued and unpaid dividends. Holders of the Preferred Shares cannot require us to redeem such shares. Upon issuance of our Preferred Shares, we classify the liquidation value as preferred equity on our balance sheet with any issuance costs recorded as a reduction to paid-in capital. During 2014, we issued an aggregate 30.5 million depositary shares, each representing 1/1,000 of a share of our Series Y, Series Z, and Series A Preferred Shares, at an issuance price of $25.00 per depositary share, for a total of $762.5 million in gross proceeds, and we incurred $23.5 million in issuance costs. During 2013, we issued an aggregate 29.0 million depositary shares, each representing 1/1,000 of a share of our Series W and Series X Preferred Shares, at an issuance price of $25.00 per depositary share, for a total of $725.0 million in gross proceeds, and we incurred $23.3 million in issuance costs. F-22 PUBLIC STORAGE NOTES TO FINANCIAL STATEMENTS December 31, 2014 During 2012, we issued an aggregate 68.2 million depositary shares, each representing 1/1,000 of a share of our Series S, Series T, Series U, and Series V Preferred Shares, at an issuance price of $25.00 per depositary share, for a total of $1.7 billion in gross proceeds, and we incurred $53.5 million in issuance costs. In 2012, we redeemed our Series A, Series C, Series D, Series E, Series F, Series L, Series M, Series N, Series W, Series X, Series Y and Series Z Preferred Shares, at par. The aggregate redemption amount, before payment of accrued dividends, was $2.0 billion. We recorded $61.7 million in EITF D-42 allocations of income from our common shareholders to the holders of our Preferred Shares in 2012 in connection with these redemptions. Common Shares During 2014, 2013 and 2012, activity with respect to the issuance or repurchase of our common shares was as follows (amounts in thousands): Employee stock-based compensation and exercise of stock options (Note 10) Issuance of commons shares for cash 2014 2013 2012 Shares Amount Shares Amount Shares Amount 669,263 $ - 37,872 - 388,005 $ - 21,111 - 437,081 $ 712,400 23,185 101,262 669,263 $ 37,872 388,005 $ 21,111 1,149,481 $ 124,447 Our Board previously authorized the repurchase from time to time of up to 35.0 million of our common shares on the open market or in privately negotiated transactions. Through December 31, 2014, we repurchased approximately 23.7 million shares pursuant to this authorization; none of which were repurchased during the three years ended December 31, 2014. In December 2012, we sold 712,400 of our common shares for aggregate proceeds of approximately $101.3 million in cash. At December 31, 2014 and 2013, we had 2,836,592 and 2,810,540 respectively, of common shares reserved in connection with our share-based incentive plans (see Note 10), and 231,978 shares reserved for the conversion of partnership units owned by Noncontrolling Interests. The unaudited characterization of dividends for Federal income tax purposes is made based upon earnings and profits of the Company, as defined by the Internal Revenue Code. Common share dividends including amounts paid to our restricted share unitholders totaled $967.9 million ($5.60 per share), $887.1 million ($5.15 per share) and $753.9 million ($4.40 per share), for the years ended December 31, 2014, 2013 and 2012, respectively. Preferred share dividends totaled $232.6 million, $204.3 million and $205.2 million for the years ended December 31, 2014, 2013 and 2012, respectively. For the tax year ended December 31, 2014, distributions for the common shares and all the various series of preferred shares were classified as follows: F-23 PUBLIC STORAGE NOTES TO FINANCIAL STATEMENTS December 31, 2014 Ordinary Income Long-Term Capital Gain Total 2014 (unaudited) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 100.00% 0.00% 100.00% 99.78% 0.22% 100.00% 100.00 % 0.00 % 100.00 % 91.20% 8.80% 100.00% The ordinary income dividends distributed for the tax year ended December 31, 2014 do not constitute qualified dividend income. 9. Related Party Transactions The Hughes Family owns approximately 15.5% of our common shares outstanding at December 31, 2014. The Hughes Family has ownership interests in, and operates, approximately 54 self-storage facilities in Canada (“PS Canada”) using the “Public Storage” brand name pursuant to a non-exclusive, royalty-free trademark license agreement with the Company. We currently do not own any interests in these facilities. We have a right of first refusal to acquire the stock or assets of the corporation that manages the 54 self-storage facilities in Canada, if the Hughes Family or the corporation agrees to sell them. We reinsure risks relating to loss of goods stored by customers in these facilities. During the years ended December 31, 2014, 2013 and 2012, we received $0.5 million, $0.5 million and $0.6 million, respectively, in reinsurance premiums attributed to these facilities. There is no assurance that these premiums will continue, as our rights to reinsure these risks may be qualified. At December 31, 2012, PS Canada and PSB held approximately a 2.2% and 4.0%, respectively, interest in STOR-Re Mutual Insurance Company, Inc. (“STOR-Re”), a Subsidiary that provided liability and casualty insurance for PS Canada, PSB, the Company, and certain affiliates of the Company for occurrences prior to April 1, 2004. During 2013, we acquired PS Canada’s 2.2% interest and PSB’s 4.0% interest in STOR- Re for $0.6 million and $1.1 million, respectively, in cash. On October 1, 2013, we borrowed $100.0 million from PSB under a term loan which was repaid in full on October 18, 2013. The loan bore interest at 1.388% per annum and interest paid to PSB totaled $0.1 million. 10. Share-Based Compensation Under various share-based compensation plans and under terms established by a committee of our Board, the Company grants non-qualified options to purchase the Company’s common shares, as well as restricted share units (“RSUs”), to trustees, officers, service providers and key employees. Stock options and RSUs are considered “granted” and “outstanding” as the terms are used herein, when (i) the Company and the recipient reach a mutual understanding of the key terms of the award, (ii) the award has been authorized, (iii) the recipient is affected by changes in the market price of our stock, and (iv) it is probable that any performance and service conditions will be met. We amortize the grant-date fair value of awards (net of anticipated forfeitures) as compensation expense over the service period. The service period begins on the grant date and ends on the vesting date. For awards that are earned solely upon the passage of time and continued service, the entire cost of the award is F-24 PUBLIC STORAGE NOTES TO FINANCIAL STATEMENTS December 31, 2014 amortized on a straight-line basis over the service period. For awards with performance conditions, the individual cost of each vesting is amortized separately over each individual service period (the “accelerated attribution” method). Stock Options Stock options vest over a three to five-year period, expire ten years after the grant date, and the exercise price is equal to the closing trading price of our common shares on the grant date. Employees cannot require the Company to settle their award in cash. We use the Black-Scholes option valuation model to estimate the fair value of our stock options. Outstanding stock option grants are included on a one-for-one basis in our diluted weighted average shares, to the extent dilutive, after applying the treasury stock method (based upon the average common share price during the period) to assumed exercise proceeds and measured but unrecognized compensation. The stock options outstanding at December 31, 2014 have an aggregate intrinsic value (the excess, if any, of each option’s market value over the exercise price) of approximately $152.0 million and remaining average contractual lives of approximately six years. Other than stock options granted in 2014, all stock options outstanding at December 31, 2014 have exercise prices of $165 or less. The aggregate intrinsic value of exercisable stock options at December 31, 2014 amounted to approximately $135.3 million. Additional information with respect to stock options during 2014, 2013 and 2012 is as follows: 2014 2013 2012 Weighted Average Number Exercise Number Exercise Number Exercise Weighted Average Weighted Average of Price of Price of Options per Share Options per Share Options Price per Share Options outstanding January 1, Granted Exercised Cancelled 2,174,211 $ 485,000 (570,417) (3,250) 85.49 176.74 66.39 63.76 2,253,510 $ 235,000 (286,299) (28,000) 76.14 153.89 71.06 55.25 2,591,066 $ 35,000 (341,156) (31,400) Options outstanding December 31, 2,085,544 $ 111.96 2,174,211 $ 85.49 2,253,510 $ Options exercisable at December 31, 1,321,537 $ 82.46 1,581,954 $ 76.29 1,401,883 $ 74.30 144.97 68.26 55.54 76.14 76.23 F-25 PUBLIC STORAGE NOTES TO FINANCIAL STATEMENTS December 31, 2014 2014 2013 2012 Stock option expense for the year (in 000's) $ 3,216 $ 3,468 $ 3,036 Aggregate exercise date intrinsic value of options exercised during the year (in 000's) $ Average assumptions used in valuing options with the Black-Scholes method: Expected life of options in years, based upon historical experience Risk-free interest rate Expected volatility, based upon historical volatility Expected dividend yield 59,322 $ 23,337 $ 23,948 5 1.6% 16.8% 3.2% 5 0.8% 25.8% 3.3% 5 0.8% 24.5% 3.1% Average estimated value of options granted during the year Restricted Share Units $ 17.66 $ 23.83 $ 20.71 RSUs generally vest ratably over a three to eight-year period from the grant date. The grantee receives dividends for each outstanding RSU equal to the per-share dividends received by our common shareholders. We expense any dividends previously paid upon forfeiture of the related RSU. Upon vesting, the grantee receives common shares equal to the number of vested RSUs, less common shares withheld in exchange for tax deposits made by the Company to satisfy the grantee’s statutory tax liabilities arising from the vesting. The fair value of our RSUs is determined based upon the applicable closing trading price of our common shares. The fair value of our RSUs outstanding at December 31, 2014 was approximately $138.8 million. Remaining compensation expense related to RSUs outstanding at December 31, 2014 totals approximately $68.9 million (which is net of expected forfeitures) and is expected to be recognized as compensation expense over the next three years on average. The following tables set forth relevant information with respect to restricted shares (dollar amounts in thousands): F-26 PUBLIC STORAGE NOTES TO FINANCIAL STATEMENTS December 31, 2014 2014 2013 Number of Grant Date Number of Grant Date Number of Grant Date Restricted Aggregate Restricted Aggregate Restricted Aggregate Share Units Fair Value Share Units Fair Value Share Units Fair Value 2012 Restricted share units outstanding January 1, Granted Vested Forfeited Restricted share units outstanding December 31, 636,329 $ 339,607 (166,905) (57,983) 77,284 59,009 (18,456) (6,963) 642,647 $ 197,675 (154,535) (49,458) 67,473 30,774 (15,657) (5,306) 701,499 $ 159,133 (151,775) (66,210) 66,514 21,721 (14,507) (6,255) 751,048 $ 110,874 636,329 $ 77,284 642,647 $ 67,473 2014 2013 2012 Amounts for the year (in 000's, except number of shares): Fair value of vested shares on vesting date Cash paid upon vesting lieu of common shares issued Common shares issued upon vesting Restricted share unit expense $ 27,591 $ 23,551 $ 20,783 $ $ 11,449 98,846 25,159 $ $ 8,067 101,706 23,919 $ $ 7,657 95,925 20,227 See also “net income per common share” in Note 2 for further discussion regarding the impact of RSUs and stock options on our net income per common and income allocated to common shareholders. 11. Segment Information Our reportable segments reflect the significant components of our operations that are evaluated separately by our chief operating decision maker (“CODM”) and have discrete financial information available. We organize our segments based primarily upon the nature of the underlying products and services, and whether the operation is located in the U.S. or outside the U.S. In making resource allocation decisions, our CODM considers the net income from continuing operations of each reportable segment included in the tables below, excluding the impact of depreciation and amortization, gains or losses on disposition of real estate facilities, and asset impairment charges. The amounts for each reportable segment included in the tables below are in conformity with GAAP and our significant accounting policies as denoted in Note 2. Ancillary revenues and expenses, interest and other income (other than from Shurgard Europe), interest expense, general and administrative expense and gains and losses on the early repayment of debt are not allocable to any of our reportable segments. Our CODM does not consider the book value of assets in making resource allocation decisions. Following is the description of and basis for presentation for each of our segments. Domestic Self-Storage Segment The Domestic Self-Storage Segment includes the operations of the 2,238 self-storage facilities owned by the Company and the Subsidiaries, as well as our equity share of the Other Investments. For all periods presented, substantially all of our real estate facilities, goodwill and other intangible assets, other assets, and accrued and other liabilities are associated with the Domestic Self-Storage Segment. F-27 PUBLIC STORAGE NOTES TO FINANCIAL STATEMENTS December 31, 2014 European Self-Storage Segment The European Self-Storage segment comprises our interest in Shurgard Europe, which has a separate management team reporting directly to our CODM and our joint venture partner. The European Self-Storage segment includes our equity share of Shurgard Europe’s operations, the interest and other income received from Shurgard Europe, and foreign currency exchange gains and losses that are attributable to Shurgard Europe. Our balance sheet includes an investment in Shurgard Europe (Note 4) and a loan receivable from Shurgard Europe (Note 5). Commercial Segment The Commercial segment comprises our investment in PSB, a publicly-traded REIT with a separate management team that makes its financing, capital allocation and other significant decisions. The Commercial segment also includes our direct interest in certain commercial facilities, substantially all of which are managed by PSB. The Commercial segment presentation includes our equity earnings from PSB, as well as the revenues and expenses of our commercial facilities. At December 31, 2014, the assets of the Commercial segment are comprised principally of our investment in PSB (Note 4). Presentation of Segment Information The following tables reconcile the performance of each segment, in terms of segment income, to our net income (amounts in thousands): F-28 PUBLIC STORAGE NOTES TO FINANCIAL STATEMENTS December 31, 2014 Year ended December 31, 2014 Domestic Self-Storage European Self-Storage Commercial Other Items Not Allocated to Segments Total (Amounts in thousands) Revenues: Self-storage facilities Ancillary operations $ $ 2,049,882 - 2,049,882 566,898 - 434,069 - 1,000,967 1,048,915 Expenses: Self-storage cost of operations Ancillary cost of operations Depreciation and amortization General and administrative Operating income Interest and other income Interest expense Equity in earnings of unconsolidated real estate entities Foreign currency exchange loss Gain on real estate sales Net income - - - - - - - - - $ $ - 15,720 15,720 - 129,802 129,802 $ 2,049,882 145,522 2,195,404 - 5,247 3,045 - 8,292 - 46,575 - 71,459 118,034 566,898 51,822 437,114 71,459 1,127,293 7,428 11,768 1,068,111 - - 2,835 - - - 2,091 (6,781) 4,926 (6,781) 2,087 - 2,479 $ 1,053,481 $ 29,900 (7,047) - 25,688 $ 56,280 - - 63,708 $ - - - 7,078 88,267 (7,047) 2,479 $ 1,149,955 F-29 PUBLIC STORAGE NOTES TO FINANCIAL STATEMENTS December 31, 2014 Year ended December 31, 2013 Domestic Self-Storage European Self-Storage Commercial (Amounts in thousands) Other Items Not Allocated to Segments Total Revenues: Self-storage facilities Ancillary operations $ $ 1,849,883 - 1,849,883 Expenses: Self-storage cost of operations Ancillary cost of operations Depreciation and amortization General and administrative Operating income Interest and other income Interest expense Equity in earnings of unconsolidated real estate entities Foreign currency exchange gain Gain on real estate sales Net income 524,086 - 384,623 - 908,709 941,174 - - 1,686 - 168 943,028 $ $ - - - - - - - - - 20,556 - 32,694 17,082 - 70,332 $ $ - 14,510 14,510 - 117,353 117,353 $ 1,849,883 131,863 1,981,746 - 5,228 2,779 - 8,007 6,503 - - - 35,847 - 66,679 102,526 524,086 41,075 387,402 66,679 1,019,242 14,827 962,504 2,021 (6,444) 22,577 (6,444) 23,199 - 4,065 33,767 $ - - - 10,404 57,579 17,082 4,233 $ 1,057,531 $ F-30 PUBLIC STORAGE NOTES TO FINANCIAL STATEMENTS December 31, 2014 Year ended December 31, 2012 Domestic Self-Storage European Self-Storage Commercial (Amounts in thousands) Other Items Not Allocated to Segments Total Revenues: Self-storage facilities Ancillary operations $ $ 1,718,865 - 1,718,865 $ $ - 14,071 14,071 - 109,568 109,568 $ 1,718,865 123,639 1,842,504 Expenses: Self-storage cost of operations Ancillary cost of operations Depreciation and amortization General and administrative Operating income Interest and other income Interest expense Equity in earnings of unconsolidated real estate entities Foreign currency exchange gain Gain on real estate sales Income from continuing operations Discontinued operations Net income $ 517,641 - 354,971 - 872,612 846,253 - - 1,725 - 1,456 849,434 12,874 862,308 19,966 - 33,223 8,876 - 62,065 - 62,065 $ $ - 4,908 2,810 - 7,718 6,353 - 33,355 - 56,837 90,192 517,641 38,263 357,781 56,837 970,522 19,376 871,982 - - 2,108 (19,813) 22,074 (19,813) 10,638 - - 16,991 - 16,991 $ - - - 1,671 - 1,671 $ 45,586 8,876 1,456 930,161 12,874 943,035 - - - - - - - - - 12. Recent Accounting Pronouncements and Guidance In April 2014, the Financial Accounting Standards Board (“FASB”) revised standards to limit the presentation as discontinued operations only to those facility disposals that represent a strategic shift and have a major impact upon operations, rather than to all facility disposals under previous standards. This change applies to disposals occurring after our early adoption date (as encouraged by the standard) of January 1, 2014. This change has no material impact on our financial statements. In May 2014, the FASB issued an accounting standard (ASU No. 2014-09), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU No. 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. The new standard is effective for us on January 1, 2017. Early adoption is not permitted. We have not yet selected a transition method. We do not believe the adoption of ASU No. 2014-09 will have a material impact on our results of operations or financial condition. F-31 PUBLIC STORAGE NOTES TO FINANCIAL STATEMENTS December 31, 2014 13. Commitments and Contingencies Contingent Losses We are a party to various legal proceedings and subject to various claims and complaints; however, we believe that the likelihood of these contingencies resulting in a material loss to the Company, either individually or in the aggregate, is remote. Insurance and Loss Exposure We have historically carried customary property, earthquake, general liability, employee medical insurance and workers compensation coverage through internationally recognized insurance carriers, subject to customary levels of deductibles. The aggregate limits on these policies of approximately $75 million for property losses and $102 million for general liability losses are higher than estimates of maximum probable losses that could occur from individual catastrophic events determined in recent engineering and actuarial studies; however, in case of multiple catastrophic events, these limits could be exhausted. We reinsure a program that provides insurance to our customers from an independent third-party insurer. This program covers tenant claims for losses to goods stored at our facilities as a result of specific named perils (earthquakes are not covered by this program), up to a maximum limit of $5,000 per storage unit. We reinsure all risks in this program, but purchase insurance from an independent third party insurance company for aggregate claims between $5.0 million and $15.0 million per occurrence. We are subject to licensing requirements and regulations in several states. At December 31, 2014, there were approximately 823,000 certificates held by our self-storage customers, representing aggregate coverage of approximately $2.2 billion. 14. Supplementary Quarterly Financial Data (unaudited) Three Months Ended March 31, 2014 June 30, 2014 September 30, December 31, 2014 2014 (Amounts in thousands, except per share data) Self-storage and ancillary revenues $ 519,624 $ 538,037 $ 571,596 $ 566,147 Self-storage and ancillary cost of operations $ 174,519 $ 150,554 $ 159,993 $ 133,654 Depreciation and amortization $ 109,021 $ 106,443 $ 111,077 $ 110,573 Income from continuing operations $ 228,273 $ 278,279 $ 294,977 $ 348,426 Net Income $ 228,273 $ 278,279 $ 294,977 $ 348,426 Per Common Share Net income - Basic $ 1.01 $ 1.27 $ 1.34 $ 1.65 Net income - Diluted $ 1.01 $ 1.26 $ 1.34 $ 1.64 F-32 PUBLIC STORAGE NOTES TO FINANCIAL STATEMENTS December 31, 2014 Three Months Ended March 31, 2013 June 30, 2013 September 30, December 31, 2013 2013 (Amounts in thousands, except per share data) Self-storage and ancillary revenues $ 470,900 $ 485,378 $ 511,957 $ 513,511 Self-storage and ancillary cost of operations $ 150,389 $ 142,571 $ 147,803 $ 124,398 Depreciation and amortization $ 91,001 $ 90,937 $ 96,537 $ 108,927 Income from continuing operations $ 212,247 $ 261,679 $ 285,628 $ 297,977 Net Income $ 212,247 $ 261,679 $ 285,628 $ 297,977 Per Common Share Net income - Basic $ 0.94 $ 1.21 $ 1.35 $ 1.42 Net income - Diluted $ 0.94 $ 1.20 $ 1.34 $ 1.41 15. Subsequent Events Subsequent to December 31, 2014, we acquired four self-storage facilities (one each in Florida, North Carolina, Washington and Texas), with an aggregate of 265,000 net rentable square feet, for approximately $32 million in cash. F-33 E G A R O T S C I L B U P S E G R A H C D E X I F O T S G N I N R A E F O O I T A R F O N O I T A T U P M O C : E R T N E M E T A T S – 2 1 T I B I H X E 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 4 1 0 2 , 1 3 r e b m e c e D d e d n E r a e Y 4 5 3 , 8 8 6 $ 3 4 1 , 3 3 8 $ 1 6 1 , 0 3 9 $ 1 3 5 , 7 5 0 , 1 $ 5 5 9 , 9 4 1 , 1 $ s n o i t a r e p o g n i u n i t n o c m o r f e m o c n I ) 1 6 5 , 6 1 ( ) 3 9 9 , 1 1 ( ) 5 0 5 , 3 ( ) 3 8 8 , 4 ( ) 2 3 4 , 5 ( 6 3 5 , 1 1 5 2 2 , 0 3 4 5 5 , 3 1 7 0 1 6 , 0 3 0 3 9 , 5 9 8 2 , 8 5 4 7 , 2 3 2 4 6 9 , 6 4 2 4 7 5 , 7 7 2 x 1 3 . 3 2 $ $ $ $ $ ) 7 9 1 , 5 ( 2 2 2 , 4 2 5 7 1 , 0 4 8 6 8 5 , 4 2 - 7 7 8 , 4 2 2 5 8 5 , 5 3 2 6 4 , 0 6 2 8 4 0 , 5 8 2 x 7 1 . 4 3 $ $ $ $ $ ) 4 0 9 ( 3 1 8 , 9 1 5 6 5 , 5 4 9 0 1 2 , 0 2 - 1 4 2 , 5 0 2 6 9 6 , 1 6 7 3 9 , 6 6 2 7 4 1 , 7 8 2 x 9 7 . 6 4 $ $ $ $ $ 4 4 4 , 6 ) 9 0 7 , 1 1 ( 3 8 3 , 7 4 0 , 1 - - 9 3 3 , 9 2 1 3 , 4 0 2 2 1 3 , 4 0 2 1 5 6 , 3 1 2 x 5 1 . 2 1 1 $ $ $ $ $ ) 9 0 8 , 4 ( 1 8 7 , 6 5 9 4 , 6 4 1 , 1 - - 0 4 3 , 8 6 3 6 , 2 3 2 6 3 6 , 2 3 2 6 7 9 , 0 4 2 x 7 4 . 7 3 1 $ $ $ $ $ x 7 5 . 2 x 5 9 . 2 x 9 2 . 3 x 0 9 . 4 x 6 7 . 4 t o n o d h c i h w s t s e r e t n i g n i l l o r t n o c n o n o t d e t a c o l l a e m o c n I : s s e L s e g r a h c d e x i f e v a h h s a c n a h t s s e l ) r e t a e r g ( s t n e m t s e v n i f o s g n i n r a e n i y t i u q E d e z i l a t i p a c g n i d u l c n i ( e s n e p x e t s e r e t n i - s e g r a h c d e x i f l a t o T s e g r a h c d e x i f r e v o c o t e l b a l i a v a s g n i n r a e l a t o T ) t s e r e t n i t n e m t s e v n i m o r f s n o i t u b i r t s i d e s n e p x e t s e r e t n i : k c a b d d A e m o c n i e r a h s d e r r e f e r p d n a s e g r a h c d e x i f o t s g n i n r a e f o o i t a R s n o i t a c o l l a e m o c n i e r a h s d e r r e f e r p d n a s e g r a h c d e x i f d e n i b m o c l a t o T s e g r a h c d e x i f o t s g n i n r a e f o o i t a R s n o i t a c o l l a s n o i t u b i r t s i d h s a c t i n u p i h s r e n t r a p d e r r e f e r P s d n e d i v i d h s a c e r a h s d e r r e f e r p e v i t a l u m u C 2 4 - D c i p o T F T I E o t t n a u s r u p s n o i t a c o l l A s n o i t u b i r t s i d d e r r e f e r p l a t o T Exhibit 23 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the following Registration Statements: (1) (2) (3) (4) (5) Registration Statement on Form S-3ASR (No. 333-189100) and related prospectus, Registration Statement on Form S-3ASR (No. 333-185000) and related prospectus, Registration Statement on Form S-8 (No. 333-195646) and related prospectus of Public Storage for the registration of common shares of beneficial interest pertaining to the Public Storage 2007 Equity and Performance-Based Incentive Compensation Plan as Amended, Registration Statement on Form S-8 (No.333-144907) and related prospectus of Public Storage for the registration of common shares of beneficial interest pertaining to the Public Storage 2007 Equity and Performance-Based Incentive Compensation Plan as Amended, and Post-effective Amendment No. 1 on Form S-8 to Form S-4 Registration Statement (No. 333- 141448) for the registration of common shares of beneficial interest pertaining to the Public Storage, Inc. 2001 Stock Option and Incentive Plan, Public Storage, Inc. 2001 Non- Executive/Non-Director Stock Option and Incentive Plan, Public Storage, Inc. 2000 Non- Executive/Non-Director Stock Option and Incentive Plan, Public Storage, Inc. 1996 Stock Option and Incentive Plan, PS 401(k) Profit Sharing Plan, Shurgard Storage Centers, Inc. 2004 Long Term Incentive Plan, Shurgard Storage Centers, Inc. 2000 Long Term Incentive Plan, Shurgard Storage Centers, Inc. 1995 Long Term Incentive Compensation Plan; of our reports dated February 24, 2015, with respect to the consolidated financial statements and schedule of Public Storage and the effectiveness of internal control over financial reporting of Public Storage included in this Annual Report (Form 10-K) of Public Storage for the year ended December 31, 2014. /s/ ERNST & YOUNG LLP February 24, 2015 Los Angeles, California RULE 13A – 14(a) CERTIFICATION I, Ronald L. Havner, Jr., certify that: 1. I have reviewed this Annual Report on Form 10-K of Public Storage; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Ronald L. Havner, Jr. Name: Ronald L. Havner, Jr. Title: Chairman, Chief Executive Officer & President Date: February 24, 2015 Exhibit 31.1 RULE 13A – 14(a) CERTIFICATION I, John Reyes, certify that: 1. I have reviewed this Annual Report on Form 10-K of Public Storage; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ John Reyes Name: John Reyes Title: Chief Financial Officer Date: February 24, 2015 Exhibit 31.2 SECTION 1350 CERTIFICATION In connection with the Annual Report on Form 10-K of Public Storage (the “Company”) for the year ended December 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Ronald L. Havner, Jr., as Chairman, Chief Executive Officer and President of the Company and John Reyes, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Ronald L. Havner, Jr. Name: Ronald L. Havner, Jr. Title: Chairman, Chief Executive Officer & President Date: February 24, 2015 /s/ John Reyes Name: John Reyes Title: Chief Financial Officer Date: February 24, 2015 This certification accompanies the Report pursuant to §906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of §18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by §906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company, and will be retained and furnished to the SEC or its staff upon request. Exhibit 32 C O R P O R AT E D ATA (as of February 27, 2015) Trustees Executive Officers Ronald L. Havner, Jr. (2002) Chairman of the Board, Chief Executive Officer and President Ronald L. Havner, Jr. Chairman of the Board, Chief Executive Officer and President Tamara Hughes Gustavson (2008) Private Investor John Reyes Senior Vice President and Chief Financial Officer Uri P. Harkham (1993) Chief Executive Officer, Harkham Family Enterprises Shawn L. Weidmann Senior Vice President and Chief Operating Officer Corporate Headquarters 701 Western Avenue Glendale, CA 91201-2349 Investor Relations Additional information contact Clemente Teng Vice President of Investor Services (818) 244-8080 B. Wayne Hughes, Jr. (1998) Founder, American Commercial Equities, LLC Avedick B. Poladian (2010) Executive Vice President and Chief Operating Officer of Lowe Enterprises, Inc. Gary E. Pruitt (2006) Retired Chairman of Univar N.V. Ronald P. Spogli (2010) Co-Founder, Freeman Spogli & Co. Daniel C. Staton (1999) Chairman of Staton Capital ( ) = date trustee was elected to the Board Founder and Chairman Emeritus B. Wayne Hughes David F. Doll Senior Vice President and President, Real Estate Group Lily Y. Hughes Senior Vice President, Chief Legal Officer and Corporate Secretary Candace N. Krol Senior Vice President, Chief Human Resources Officer PS Insurance Capri L. Haga President Shurgard Self Storage S.C.A. (Europe) Marc Oursin Chief Executive Officer PS Business Parks, Inc. Joseph D. Russell, Jr. President and Chief Executive Officer Transfer Agent Computershare Trust Company, N.A. P.O. Box 30170 College Station, TX 77842-3170 (781) 575-3120 Shareholder website: http://www.computershare.com/investor Shareholder online inquiries: https://www-us.computershare.com/investor/contact Independent Registered Public Accounting Firm Ernst & Young LLP Los Angeles, CA Annual Meeting of Shareholders The Annual Meeting of Shareholders of Public Storage will be held on April 30, 2015 at 1:00 p.m. at the Westin Pasadena, 191 North Los Robles, Pasadena, CA. Certifications 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 certi- fication to the New York Stock Exchange was submitted on May 30, 2014. Stock Exchange Listing The Company’s Common Shares trade under ticker symbol PSA on the New York Stock Exchange. Additional Information Sources 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 (cid:8)(cid:24)(cid:17)(cid:24)(cid:9)(cid:0)(cid:18)(cid:20)(cid:20)(cid:13)(cid:24)(cid:16)(cid:24)(cid:16)(cid:0)(cid:0)(cid:115)(cid:0)(cid:0)(cid:87)(cid:87)(cid:87)(cid:14)(cid:80)(cid:85)(cid:66)(cid:76)(cid:73)(cid:67)(cid:83)(cid:84)(cid:79)(cid:82)(cid:65)(cid:71)(cid:69)(cid:14)(cid:67)(cid:79)(cid:77) (SKU 002CSN4AF0) 

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