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Public Storage Inc.

Public Storage Inc. cashes in on storing your stash If it ain't broke, don't fix it. That's a pretty sound philosophy when your company owns three times more facilities than its closest competitor, and you're one of the top 10 real estate investment trusts in the country. With that in mind, Glendale, Calif.-based Public Storage Inc. doesn't plan to "fix" a thing.

As a self-administered, self-managed real estate investment trust, Public Storage acquires, develops, owns and operates self-service miniwarehouse facilities. With more than $2 billion in assets, Public Storage operates 1,200 facilities throughout 38 states, which is very unusual in the miniwarehouse business, according to Harvey Lenkin, president.

"[The ministorage business] is an industry where the owners/operators are primarily individual entrepreneurs, and Public Storage and the other publicly owned companies only operate about 15% of the business," Lenkin says. "So about 85% of the business is owned by individual owners/entrepreneurs who have an average of three properties."

Leading the miniwarehouse REITs, Public Storage's 1,200 facilities encompass 635,000 spaces, representing approximately 65 million sq. ft. of space. Its largest competitor, Storage USA, owns 360 facilities, totaling 24.8 million sq. ft.

"There are four publicly traded companies that have miniwarehouses as their primary real estate assets," says Lenkin. "We've got 1,200 properties; the largest one there, I think, has 350 or 400. They're not really major competitors of ours."

Of course, one of the reasons the company has managed to become so much larger than its closest competitors is because it has been around since 1972. That and the fact that the company has had a strong capability for raising capital through the years have brought the company to where it is today.

"As the organization went into the 1990s, and it was very difficult to operate in real estate-based business activities, we were able to consolidate our activities, primarily because we had built our company without the use of debt capital," adds Lenkin. "We never borrowed money to grow the company and still don't to this day."

In 1995, Public Storage purchased a publicly traded company by the name of Storage Equities, for which it acted as property manager and tenant adviser, and merged it into Public Storage the private company, creating a self-advised, self-managed public REIT. This merger also doubled the size of the company by putting all the private companies' real estate assets into the public company, says Lenkin.

And just this year, Public Storage finalized the consolidation of all its operations when Public Storage Properties XX (PSP20) merged into Public Storage Inc.

A number of years ago Public Storage formed several large public partnerships, including PSP20, which were in turn reorganized in the early '90s into corporations submitted to trading on the American Stock Exchange. Public Storage owned substantial interest in each of those corporations, says Lenkin, and over time, each one of those corporations has merged into Public Storage. PSP20 was the last of these to do so.

Just a few months prior to PSP20's merge into Public Storage, one of the reorganized corporations, Public Storage Properties XI, merged into an affiliated company called American Office Park Properties to create PS Business Parks. The new entity owns multitenant industrial parks instead of public warehouses, but Public Storage still owns 40% of that company.

"That's a very nice company," says Lenkin. "It has assets of about $800 million and has the same philosophy of raising capital as we do - meaning no debt, using permanent capital only."

As part of its operating philosophy, Public Storage Inc. concentrates its activities in major cities as opposed to smaller communities. "We go to places like Los Angeles, San Francisco, San Diego, Dallas, Houston, Miami, but not in Sioux Falls, Iowa, and not in North and South Dakota or Idaho, places where there are more cows than people," says Lenkin. "The demand drivers of storage are events that occur in people's lives - lifestyle changes such as births and deaths and marriages and divorces and business expansion and business contraction - these are events that create storage problems and they occur with greater frequency in large cities, where there is kind of a controlled chaos."

Second, Public Storage works with large city markets because a large population base is needed in order to have a large number of properties, "and it was important to us to have large numbers of properties in a given geographic area so that we could efficiently afford to supervise them," Lenkin adds. This also helps with marketing its product because the more product you have in a general geographic area, the more it will be known to the consumer. "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 says.

And, Lenkin expects that the demand for miniwarehouses will continue to grow along with normal population growth and as the business becomes better known; it is still a relatively young industry, he adds. And like other warehouse-related sectors of commercial real estate, it is a stable asset to have in your portfolio.

"It's also an industry that can flourish even during economic recession," Lenkin adds. "We've been around long enough to have experienced them to know that our business does well even during recessionary times. So it is good defensive real estate to own."

But the steadiness of the miniwarehouse business is as far as the industrial comparison goes, says Lenkin. "We are in the consumer service business, and we are almost like an apartment house for things," he adds. "It is a kind of business that costs less for us to put a ministorage facility in place than it does to put an investment-grade apartment, and yet we generate higher yields because our rents are higher and expenses are lower."

Not to mention, branding a product like miniwarehouses is just as important to a company like Public Storage as it is branding an apartment complex for say a Post Properties. As you well know, consistency can make or break any product. "It has to do with our signage and our colors and the consistency in all of our advertising and marketing across the United States, be it on electronic media such as television or radio or print," Lenkin says. "The consistency and the time in which the registered trademark has been in the public realm adds to the strength of our brand name just like that of any consumer product."

Others in the industry have recognized the power of Public Storage's branding. For example Canada's largest operator of ministorage facilities operates under the Public Storage tradename. Those assets, however, are not owned by the public company Public Storage, but rather are owned by Canadian partnerships.

With the success of the Public Storage brand in Canada, it seems a natural step to continue its growth in international markets, but this is not the plan thus far because, once again, you don't fix what isn't broken.

Lenkin contends that Public Storage will remain on the same path it has since 1972. "We will continue to grow the company in the same manner that we have in the last 10 years," he adds. "That is continuing to build new miniwarehouses, to buy well-located miniwarehouses in our marketplaces from unaffiliated third-parties, and to concentrate on improving our same-store operations, meaning driving more cashflow out of our existing properties than we are right now."

That philosophy seems to be working well for Public Storage. Revenues from the three months ended June 30, 1998, increased to approximately $141.04 million, compared to $109.35 million for the same period in 1997, representing an increase of 29%. Net income for the same period for 1998 was up to approximately $57.2 million from 1997's $44.25 million, representing an increase of 29.3%.

With this kind of growth occurring, where will Public Storage be in five years from now? "I suspect still in the storage business and be every bit as successful as we are today," says Lenkin. "We don't have any plans to do anything differently."

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