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," "should," "estimates" and similar expressions. 

These forward-looking statements involve known and unknown 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 future results and performance include, but are not limited to, those described in Part 1, Item 1A, "Risk Factors" and in our other filings with the Securities and Exchange Commission (the “SEC”) including:

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 where expressly 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”, “we”, “us”, or “our”), a Maryland REIT, was organized in 1980.

At December 31, 201 6 , our principal business activities were as follows:

We also manage approximately 28 self-storage facilities for third parties, own 1.0 million net rentable square feet of commercial space which is managed primarily by PSB, and have equity interests in and manage 12  additional self-storage facilities.  

For all periods presented herein, we have elected to be treated as a REIT, as defined in the 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 (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.   

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.  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 our customers generally store their goods within a five mile radius of their home or business .  Our facilities compete with nearby self-storage facilities owned by other operators using marketing channels similar to ours , including Internet advertising, signage, and banners and offer services similar to ours .  A s a result, competition is significant and affects the occupancy levels, rental rates, rental income and operating expenses of our facilities.

Ownership and operation of self- storage facilities is highly fragmented.  As the largest owner of self-storage facilities, we believe that we own approximately 6% of the self-storage square footage in the U.S. and that collectively the five largest self-storage owners in the U.S. own approximately 1 3 %, with the remaining 8 7 % owned by numerous regional and local operators. 

We generally focus our ownership of facilities in major markets.  We believe that we have significant market share and concentration in major metropolitan centers, with approximately 72 % of our 201 6 same-store revenues generated in the 20 Metropolitan Statistical Areas (each, an “MSA”, as defined by the U.S. Census Bureau) with the highest population levels.  We believe this is a competitive advantage relative to other self-storage operators, which do not have our geographic concentration and market share. 

Industry 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 a s well as analyze customer data and quickly change each of our individual properties’ pricing and promotion s   on an automated basis. 

Convenient shopping experience: Customers can conveniently shop for available storage space, reviewing attributes such as facility location, size, amenities such as climate-control, as well as pricing, through the following marketing channels: 

Economies of scale: 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. 

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 o range 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 well - established and valuable brand in Europe.  We believe that the awareness of our brand name results in a high percentage of potential storage custo mers considering our facilities relative to other operators. 

Marketing and advertising efficiencies : Our major-market concentration relative to the fragmented ownership and operation of the rest of the industry, combined with our 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.  The large number of facilities we have in major metropolitan centers   enables us to efficiently use television advertising.     Our competitors do not use television advertising because they lack the scale in major metropolitan centers . 

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 adding more self-storage space to existing facilities, (iv) participating in the growth of our investment in PSB, and (v) participating in the growth of our investment in 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 a s the relative attractiveness of available 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 and promotional activities and rental rates charged to new and existing customers ,   (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, information technology , our

convenient shopping options for the customer, our economies of scale, and our Internet marketing and advertising programs will continue to enhance our ability to meet these goals. 

Acquire properties owned 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 provide s 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 consideration s.  Our aggressiveness in bidd ing for particular marketed facilities depends upon many factors including 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 2016, 2015   and 201 4 , we acquired 55 , 17 and 44 facilities, respectively, from third parties for approximately $ 429 million, $1 69   mi llion and $431 million, respectively, primarily through one to five property portfolio acquisitions.  We will continue to seek to acquire properties in 201 7 ; however, there is significant competition to acquire existing facilities.  As a result, 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 201 3 , 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 developi ng new facilities.  At December  31, 201 6 , we had a development pipeline to develop new self-storage facilities and, to a lesser extent, expand existing self-storage facilitie s, which will add approximately 5.3 million net rentable s quare feet of self-storage space, at a total cost of $ 66 0 . 2 million .  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, challenges in obtaining building permits for self-storage activities in certain municipalities , as well as challenges in sourcing quality construction materials, labor, and design elements. 

Participate in the growth of 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 .  As of December 31, 2016 , we have a 42% equity interest in PSB.

PSB seeks to grow its a sset base in favorable markets as well as increase the cash flows from its existing portfolio.  From 2010 through 201 6 , PSB has acquired an aggregate total of 11. 5 million rentable square feet in key markets for an aggregate purchase price of approximately $1.1 billion, and has disposed of an aggregate of 2.7  million rentable square feet in markets deemed non-strategic for an aggregate of $282 million in net proceeds.  As of December 31, 201 6 , PSB owned and operated approximately 28. 1  million rentable square feet of commercial space, and had an enterprise value of approximately $ 5.1  billion (based upon the trading price of PSB’s common stock combined with the liquidation value of its preferred stock as of December 31, 201 6 ). 

Participate in the growth of Shurgard Europe:  We believe S hurgard Europe is the largest self-storage company in Western Europe .  It owns and operates 21 8 self-storage facilities with approximately 12 millio n 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, w ith 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 potential increased demand through the development of new facilities or, to a lesser extent, acquiring existing facilities.  In 2014 , 2015 and 2016 , Shu rgard Europe acquired 27 facilities with 1.3 million net rentable square feet in Germany , the Netherlands , and the United Kingdom for an aggregate purchase price of approximately $2 50.5 million .  In addition, during 2015

and 201 6 Shurgard Europe opened four development properties in the United Kingdom containing 314,000 net rentable square feet at a cost of $ 52.3 million .

Financing of the Company’s Growth Strategies

Overview of financing strategy and sources of capital :  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. 

Our financial profile is characterized by strong credit metrics, including low leverage relative to our total capitalization and operating cash flows.  We are one of the highest rated REITs, as rated by major rating agencies Moody’s and Standard & Poor’s.  Our senior debt has an “A” credit rating by Standard & Poor’s and “A2” by Moody’s.  Our credit ratings on each of our series of preferred shares are “A3” by Moody’s and “BBB+” by Standard & Poor’s.  Our credit profile and ratings enables us to effectively access both the public and private capital markets to raise capital.

Sources of capital available to us include retained cash flow, the issuance of preferred and common securities, the issuance of medium and long-term debt, joint venture financing, and the sale of properties.  We view our line of credit, as well as short-term bank loans, as bridge financing.  

Historically, we have financed our cash investment activities primarily with retained operating cash flow and the issuance of preferred securities.  While we have issued common shares, such issuances have been minimal, because preferred securities have had a more attractive cost of capital.  In 2015 and 2016, we issued euro-denominated medium-term debt primarily as a hedge to our euro-denominated investment in Shurgard Europe.  We expect to continue to use these same sources of capital, supplemented potentially by the issuance of long-term debt.   While we may increase the level of debt in our capital structure, we expect to continue to remain conservatively capitalized and not subject ourselves to significant refinancing risk.

We do not expect to use joint venture financing or the sale of properties as sources of capital; however, there can be no assurance that we will not.

We select among the sources of capital available to us based upon relative cost, availability, the desire for leverage, as well as intangibles such as covenants in the case of debt.      

Retained operating cash flow :  Although we are required to generally distribute 100% of our taxable income to our shareholders , we are nonetheless able to retain cash flow to the extent that our tax depreciation exceeds our maintenance capital expenditures.  In recent years, we have retained approximately $300 million per year in cash flow ,   and we expect to retain $250 million in 2017.    

Preferred equity:  As noted above, w e view preferred equity as an important source of capital over the long term.  However, rates and market conditions for the issuance of preferred securities can be volatile or inefficient from time to time, particularly so in the last few years.  Since 2013, we have issued preferred securities at fixed rates ranging from 4.900% to 6.375%.  Most recently, in October 2016, we issued $350 million of preferred securities at a fixed rate of 4.900%.  We believe that the market coupon rate of our preferred securities is influenced by long-term interest rates, as well as demand specifically from retail investors.  Institutional investors are generally not buyers of our preferred securities.  Currently, we believe that the cost to issue preferred sec urities would be approximately 5. 875%.  At December 31, 2016, we have approximately $4.4 billion in preferred securities outstanding with an average coupon rate of 5.5% and an average market yield of 5.9%.    

Medium or long-term debt:  We have broad powers to issue debt to fund our business.  These powers are subject to a limitation on unsecured borrowings in our Bylaws described in “Limitations on Debt” below. Our corporate credit ratings are “A” by Standard & Poor’s and “A2” by Moody’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. 

At December 31, 2016, we have approximately €342 million of Euro-denominated senior unsecured notes (collectively, the “Senior Notes”) outstanding , which were issued to institutional investors in 2015 and 2016.  

Common equity:  Except in connection with mergers, most notably a merger in 2006 with Shurgard Storage Centers, we have not raised capital through the issuance of common equity, because lower cost alternatives have been available.  However, we believe that the market for our common equity is liquid and , as a result , common equity is a significant potential source of capital.        

Bridge f inancing :  We have a $500.0 million revolving line of credit which we occasionally use as temporary “bridge” financing , along with short-term bank loans, un til we are able to raise longer- term capital.  As of December 31, 2016, there we no borrowings outstanding on our revolving line of credit and no short-term bank loans .  

Unlikely capital alternatives:     We have issued both our common and preferred securities in exchange for real estate and other investm ents in the past.  We do not expect such issuances to be a material source of capital in the future, though there can be no assurance. 

We have participated in joint ventures with institutional investors in the past to acquire, develop, and operate self-storage facilities, most notably Shurgard Europe, in which we own a 49% interest and an institutional i nvestor owns the remaining 51%.  We do not expect joint venture financing to be a material sou rce of capital in  the future because we have other sources of c apital that are less expensive and because of potential constraints resulting from joint management .  However, there can be no assurance that we will not. 

Generally, we have disposed of self-storage facilities only when compelled to do so through condemnation proceedings.  Because we believe that we are an optimal operator of self-storage facilities, we have generally found that we cannot obtain sufficient value in selling properties.  As a result, we do not expect to raise significant capital selling self-storage facilities; however, 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 b oard of t rustees (the “Board”) without a shareholder vote:

Facilities Owned by Unconsolidated Real Estate Entities

At December 31, 201 6 , we 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 12 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.  Such debt or other obligations have no recourse to us .  None of the other Unconsolidated Real Estate Entities have significant amounts of debt or other obligations.  See Note 4 to our December 31, 201 6 financial statements for further disclosure regarding the assets, liabilities and operating results of PSB and Shurgard Europe.

Canadian self-storage facilities owned by Former Chairman and Member of Board of Trustees  

At December 31, 201 6 , B. Wayne Hughes, our former Chairman and his daughter, Tamara Hughes Gustavson, a member of our Board of Trustees, owned and controlled 5 7 self-storage facilities in Canada.  These facilities operate under the “Public Storage” tradename, which we license to the owners of these facilities for use in Canada on a royalty-free, non-exclusive basis.  Our subsidiaries reinsure risks relating to loss of goods stored by customers in these facilities, and have received approximately and $848 ,000, $562,000 and $480,000 for the years ended December 31, 2016, 2015 and 2014 , respectively .   Our right to continue receiving these premiums may be qualified.

We have no ownership interest in these facilities and we do not own or operate any facilities in Canada.  If we chose to acquire or develop our own facilities in Canada, we would have to share the use of the “Public Storage” name in Canada with the facilities’ owners.  We have a right of first refusal, subject to limitations, to acquire the stock or assets of the corporation engaged in the operation of these facilities if their owners agree to sell them.

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 (“GAAP”) .  As of December 31, 201 6 , the Debt Ratio was approximately 3 %. 

Our revolving credit facility 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, 201 6 .

Employees

We ha d   approximately 5, 5 00 employees in the U.S. at December 31, 201 6 who are engaged primarily in property operations.    

Seasonality

We experience minor seasonal fluctuations in the demand for self-storage space, with demand and rental 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 property, earthquake, general liability, employee medical insurance and workers compensation coverage through internationally recognized insurance carriers, subject to deductibles.  Deductibles for property and general liability are $25.0 million and $2.0 million, respectively, per occurrence.  The aggregate limits on these policies of $75.0 million for property losses and $102.0 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 exceeded.

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.  We are subject to licensing requirements and regulations in several states.  At December 31, 2016, there were approximately 894 ,000 certificates held by our self-storage customers, representing aggregate coverage of approximately $2.7  billion.