Public Storage, Inc. Business Information, Profile, and History

Company Perspectives:

Our primary business is storage. We provide storage solutions to a diverse America. We focus on storage and our moving service has emerged as a key complementary enterprise. Recent tax law changes relating to real estate investment trusts have enabled us to acquire and expand ancillary business activities connected to our storage business, namely reinsurance covering tenant goods, moving services, consumer truck rentals, storage containers and selling moving and storage supplies from retail stores at our properties. Our seasoned property management system, in conjunction with our national reservation center, enables our ancillary businesses to generate additional consumer contact and to cross-market goods and services in greater volume. We believe our ancillary businesses help us rent more space at higher rates.

History of Public Storage, Inc.

Public Storage, Inc. is the largest operator of self-storage centers in the United States. The company maintains direct or indirect equity investments in 1,384 self-storage facilities in 80 U.S. and Canadian cities, preferring to locate its miniwarehouses in large metropolitan areas. Public Storage also has an investment in an affiliate organization, PS Business Parks, Inc., which owns or manages 16.1 million square feet of industrial, office, and retail properties located in 11 states. Public Storage is led by its founder, Bradley Wayne Hughes, who serves as chairman and chief executive officer.

Origins

A native of Oklahoma, Bradley Wayne Hughes built a career around real estate. After receiving his undergraduate degree from the University of Southern California, Hughes worked as a real estate developer in southern California, but his rise to the top of the business world did not begin until he was in his 40s, and not until he took a road trip to Texas. During the early 1970s, Hughes was driving in Texas when he passed a self-storage warehouse erected by the side of the road. Self-storage facilities were rare at the time, prompting Hughes to park his car and pretend to be a customer. Hughes was told he could put his name on a waiting list; all the available space was already occupied. Hughes needed no further incentive to enter the business himself when he returned home.

Hughes was spurred to enter the self-storage business for two reasons. First, he believed there was a potentially large demand for self-storage space in southern California, home to a particularly itinerant population. If the self-storage business foundered, Hughes reasoned, he could always raze the miniwarehouses and build apartments or office buildings in their place. The important asset was the land; building self-storage centers, at the least, offered the chance to collect a return on the real estate investment until it could be developed into a more lucrative property.

With $50,000 and a partner, Kenneth Volk, Jr., Hughes entered the self-storage fray. It took roughly one year for the two partners to build their facility, due to time spent researching, buying land, obtaining zoning approval, and ultimately constructing the facility. When the first self-storage center was completed, built alongside a busy freeway in El Cajon, California, in 1972, Hughes hoped to experience the success he had witnessed in Texas. He hung up a sign that read, "Private Storage Spaces," and was quickly disappointed. For a frustratingly long time, no customers showed up, until finally one person arrived and asked if storage was available to the general public. Hughes realized his error and changed the sign to read: "Public Storage."

Any fears Hughes had that the self-storage business might not deliver the most profitable results for the land were quickly assuaged. Bulldozers would not be needed. The first miniwarehouse broke even with only a 35 percent occupancy rate, achieved within three months. Further, construction costs for the facilities in the early 1970s were 35 percent to 40 percent lower than the construction costs for apartment buildings, yet storage rates per square foot were the same as for apartments. The financial opportunities excited Hughes and Volk, prompting the pair to open 20 miniwarehouses within the next two years. More expansion followed, occurring at an especially frenetic pace during the 1980s. The company's early and aggressive entry into the market determined its success to a large extent, but of equal importance was the manner in which the physical expansion was financed.

Triggering Growth Through First Real Estate Limited Partnership in 1977

Hughes loathed debt. He refused to borrow to fuel Public Storage's expansion, preferring instead to solicit investors to pay for real estate and construction. In return, the investors received a percentage of Public Storage's business. Hughes turned to the rapidly growing real estate limited partnership market for his supply of cash, forming his first partnership in 1977. It took approximately a year for the partnership to raise $3 million, but, not long afterward, the money came pouring in, willingly offered by investors who had heard of the fortunes to be made in allying with Hughes.

Like Hughes, investors perceived great value in the land occupied by Public Storage's miniwarehouses. During the late 1970s and early 1980s, the southern California land purchased by Hughes exploded in value, which greatly enriched Public Storage's investors. They saw their investments quadruple in value, creating a stir within the investment community that enabled Hughes to raise cash for expansion nearly at will. During the mid-1980s, Hughes was collecting between $200 million and $300 million a year from institutional and individual investors, providing sufficient resources for him to launch a national expansion campaign. Hughes targeted the 39 largest cities in the nation and began opening up as many as 100 new self-storage centers a year. Between 1978 and 1989, more than 200,000 investors heeded Hughes's calls for cash, enabling him to raise an estimated $3 billion for expansion. With the investments, Hughes was able to thoroughly dominate the self-storage industry by building an empire of 1,000 miniwarehouses. His preeminence was impressive. "We're bigger than our nine next-largest competitors put together," Hughes remarked in a February 5, 1990 interview with the Los Angeles Business Journal. "Consider them the McDonald's of the ministorage business," an analyst said in the November 28, 1989 issue of Financial World.

Although Hughes held a commanding lead in the industry, Public Storage was not alone in its bid to populate the landscape with self-storage units. In 1979, there were 3,500 miniwarehouses in operation in the United States. By the late 1980s, there were 18,000 self-storage outlets in the country, offering more than 900 million square feet of storage space and generating estimated annual revenues of $4 billion. In one four-year period during the 1980s, capacity in the industry doubled, threatening to glut the market. Hughes's facilities, though far outnumbering the properties operated by his rivals, felt the sting of a crowded market. Occupancy rates at many Public Storage facilities stalled at 85 percent, and rental rates stopped rising. Further, as more developers jumped into the self-storage business, the cost of land increased, taking some of the financial luster off Hughes's deals. The effect of these external factors was compounded by internal pressures and several tactical errors.

Developing into a national chain was proving more difficult than expected, causing expansion to slow. The company was growing at such a frenetic pace that finding skilled managers was becoming difficult, as was contending with weather conditions and labor markets that differed from southern California's. "What once took us seven months was now taking us 11, 12, and 13 months," recalled Harvey Lenkin, Public Storage's president, in a November 28, 1989 interview with Financial World. Adding to the difficulties were several mistakes made by Hughes. He began including office parks into the deals forged in his numerous partnership agreements. Office parks, which Public Storage had difficulty in managing, suffered from severe overcapacity problems, leading to sizable losses. The financial drag of the office parks, which sometimes accounted for as much as 35 percent of the deal brokered by Hughes, dramatically affected the return earned by investors, who were dismayed to learn that they had not earned nearly as much as Public Storage's early investors had earned. Two other glaring miscues by Hughes stood out: In 1985, he purchased a broker-dealer network called Christopher Weil & Co. to orchestrate Public Storage's partnership deals; in 1986, he and a group of executives purchased a pizza chain. By 1988, both businesses had collapsed after recording substantial losses.

The problems were there, but as Robert Wrubel, a Financial World reporter, noted in the magazine's November 28, 1989 issue, "that Hughes is still around to tell the tale reflects well on him." Indeed, it was Hughes's own strengths that enabled him to overcome his foibles, particularly his criteria and method for expansion. Hughes's refusal to take on debt as a means to finance expansion enabled Public Storage to withstand economic cycles that halted the expansion of his rivals. In turn, his ability to raise vast sums of capital allowed Public Storage to grow quickly and decisively outdistance competitors before they had an opportunity to mount a serious challenge. Hughes further disabled competitors by adhering to his strategy of targeting the 39 largest cities and then saturating the markets within the city by opening four to six self-storage centers at a time. By employing his saturation strategy, Hughes could rely on a single development office for each city, which reduced construction and operating costs and, of particular importance, allowed Hughes to justify the expense of advertising on television, something few of his rivals could afford. "There are a lot of benefits that come from concentrating properties in the major markets where we could have 15, 20, 60, 70, 90, 100 properties in a metropolitan area as opposed to having three," Lenkin explained in a November 1998 interview with National Real Estate Investor.

Consolidation in the 1990s

Hughes exited the 1980s pursuing a goal of reaching 2,000 self-storage centers by 1994, an objective that called for the company to double in size. Economic conditions during the early 1990s, however, proved more conducive to consolidation than expansion. The primary source of Public Storage's cash for the previous two decades, the real estate limited partnership market, had nearly disappeared as Hughes celebrated his 20th year in the self-storage industry. In response, Hughes began organizing his properties into real estate investment trusts (REITs), an enticing financial arrangement for investors. Under the terms of a REIT, investors started collecting a 10 percent yield within the first year of the REIT's operation, rather than having to wait three years as was often the case in a limited partnership. Further, a REIT was forced to distribute at least 90 percent of its income to shareholders, thereby freeing itself from having to pay corporate taxes.

By 1995, Hughes's self-storage empire was organized into 17 REITs, including 21.3 percent of Storage Equities, Inc., the largest portion that was publicly traded. In the final move of the consolidation process, Public Storage acquired Storage Equities in 1995, creating the fourth largest publicly traded REIT in the United States, with $1.4 billion in market capitalization. Prior to the merger, Public Storage, as a private company, had served as a property manager and tenant adviser for Storage Equities. The merger doubled Public Storage's size, putting all of Hughes's private real estate assets into a public company, the new Public Storage.

By the end of the 1990s, Public Storage consisted of 1,200 self-storage centers with 635,000 spaces. Aside from expanding through internal means, Hughes expanded through acquisition, targeting several of his largest rivals. In 1998, Public Storage acquired a stake in Storage Trust Realty, then offered to buy the company. Storage Trust rejected the offer, but later agreed to the deal, forced to concede after relenting to shareholder pressure. In February 2000, Public Storage began investing heavily in Shurgard Storage Centers, the third largest self-storage operator, spending roughly $50 million to become the company's largest shareholder by early April. Shurgard's leader, Chuck Barbo, presumably anticipated Public Storage's intent--"We knew somebody was buying our stock and assumed it was them," he said in a March 3, 2000 interview with the Seattle Times. In mid-April 2000, Public Storage representatives flew to Seattle and initiated talks with Shurgard officials about combining the two companies. Shurgard management rejected the offer, to the chagrin of some of the company's shareholders, and withstood the unsolicited advances of its larger rival. Public Storage decided against a hostile takeover, and several weeks later reduced its stake in Shurgard.

As Hughes approached his 70s and Public Storage celebrated its 30th anniversary, both the man and the company maintained a firm hold on the industry. Public Storage towered over its rivals, operating nearly 1,400 self-storage sites. As the company prepared for the future, with continued expansion on the agenda, it promised to maintain its impressive lead for years to come.

Principal Subsidiaries: PS Business Parks, Inc. (24%); Connecticut Storage Fund; Diversified Storage Venture Fund; PS Co-Investment Partners; PS Insurance Company, Ltd. (Bermuda); PS Orangeco Holdings, Inc.; PS Orangeco, Inc.; PS Partners IV, Ltd.; PS Partners V, Ltd.; PS Partners VI, Ltd.; PS Partners VIII, Ltd.; PS Partners, Ltd.; PSA Institutional Partners, L.P.; PSAC Development Partners, L.P.; Public Storage Institutional Fund; Public Storage Institutional Fund II; Public Storage Institutional Fund III; Public Storage Institutional Fund IV; Public Storage Pickup & Delivery, L.P.; Storage Trust Properties, L.P.

Principal Competitors: AMERCO; Shurgard Storage Centers, Inc.; Storage USA, Inc.

Chronology

• Key Dates:
• 1972: The first Public Storage miniwarehouse opens in El Cajon, California.
• 1977: Bradley Wayne Hughes forms his first real estate limited partnership.
• 1986: PS Business Parks is organized as a division.
• 1995: Public Storage merges with Storage Equities, Inc.
• 1998: Storage Trust Realty is acquired.
• 2000: The company fails in its bid to acquire Shurgard Storage Centers.