10-K 1 ps10k_123110.htm PUBLIC STORAGE - 10K ps10k_123110.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-K
 
 
[X]  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the fiscal year ended December 31, 2010.
 
 
 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
95-3551121
( State or other jurisdiction of incorporation or organization)
(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 6.500% Cumulative Preferred Share, Series W $.01 par value
New York Stock Exchange
 
Depositary Shares Each Representing 1/1,000 of a 6.450% Cumulative Preferred Share, Series X $.01 par value
New York Stock Exchange
 
Depositary Shares Each Representing 1/1,000 of a 6.250% Cumulative Preferred Share, Series Z $.01 par value
New York Stock Exchange
 
Depositary Shares Each Representing 1/1,000 of a 6.125% Cumulative Preferred Share, Series A $.01 par value
New York Stock Exchange
 
Depositary Shares Each Representing 1/1,000 of a 6.600% Cumulative Preferred Share, Series C $.01 par value
New York Stock Exchange
 
Depositary Shares Each Representing 1/1,000 of a 6.180% Cumulative Preferred Share, Series D $.01 par value
New York Stock Exchange
 
Depositary Shares Each Representing 1/1,000 of a 6.750% Cumulative Preferred Share, Series E $.01 par value
New York Stock Exchange
 
Depositary Shares Each Representing 1/1,000 of a 6.450% Cumulative Preferred Share, Series F $.01 par value
New York Stock Exchange
 
Depositary Shares Each Representing 1/1,000 of a 7.000% Cumulative Preferred Share, Series G $.01 par value
New York Stock Exchange
 
Depositary Shares Each Representing 1/1,000 of a 6.950% Cumulative Preferred Share, Series H $.01 par value
New York Stock Exchange
 
Depositary Shares Each Representing 1/1,000 of a 7.250% Cumulative Preferred Share, Series I $.01 par value
New York Stock Exchange
 
Depositary Shares Each Representing 1/1,000 of a 7.250% Cumulative Preferred Share, Series K $.01 par value
New York Stock Exchange
 
Depositary Shares Each Representing 1/1,000 of a 6.750% Cumulative Preferred Share, Series L $.01 par value
New York Stock Exchange
 
Depositary Shares Each Representing 1/1,000 of a 6.625% Cumulative Preferred Share, Series M $.01 par value
New York Stock Exchange
 
 
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Depositary Shares Each Representing 1/1,000 of a 7.000% Cumulative Preferred Share, Series N $.01 par value
New York Stock Exchange
 
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
 
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]
 
The aggregate market value of the voting and non-voting common shares held by non-affiliates of the Registrant as of June 30, 2010:
 
Common Shares, $0.10 Par Value - $12,341,151,000 (computed on the basis of $87.91 per share which was the reported closing sale price of the Company's Common Shares on the New York Stock Exchange on June 30, 2010).
 
As of February 24, 2011, there were 170,435,633 outstanding Common Shares, $.10 par value.
 
 
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 2011 are incorporated by reference into Part III of this Annual Report on Form 10-K.
 

 
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PART I
 
ITEM 1.
Business
 
Forward Looking Statements
 
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. 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 involve known and unknown risks and uncertainties, which may cause Public Storage's actual results and performance to be materially different from those expressed or implied in the forward-looking statements.  As a result, 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.  We caution you not to place undue reliance on forward-looking statements, which 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.
 
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 (“SEC”) and the following:
 
·  
general risks associated with the ownership and operation of real estate including changes in demand, potential liability for environmental contamination, adverse changes in tax, including property tax, real estate and zoning laws and regulations, and the impact of natural disasters;
 
·  
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 tenants;
 
·  
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, 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, tax and tenant insurance matters and real estate investment trusts (“REITs”), and risks related to the impact of new laws and regulations;
 
·  
risks associated with a possible failure by us to qualify as a REIT under the Internal Revenue Code of 1986, as amended;
 
·  
disruptions or shutdowns of our automated processes and systems or breaches of our data security;
 
·  
difficulties in raising capital at a reasonable cost; and
 
·  
economic uncertainty due to the impact of war or terrorism. 
 
 
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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 this document, except where required by law.  Accordingly, you should use caution in relying on past forward-looking statements to anticipate future results.
 
General
 
Public Storage was organized in 1980.  Effective June 1, 2007, we reorganized Public Storage, Inc. into Public Storage (referred to herein as “the Company”, “the Trust”, “we”, “us”, or “our”), a Maryland real estate investment trust (“REIT”).  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.  We are the largest owner and operator of self-storage facilities in the United States (“U.S.”). We also have equity interests in Shurgard Europe, a private company that we believe is the largest owner and operator of self-storage facilities in Western Europe, and in PS Business Parks, Inc., a public company whose business activities primarily include the ownership and operations of commercial properties.
 
At December 31, 2010, we operate within three reportable segments:
 
(i)  
Domestic Self-Storage segment which includes our direct and indirect equity interests in 2,048 self-storage facilities (130 million net rentable square feet of space) located in 38 states within the U.S. operating under the “Public Storage” brand name.
 
(ii)  
Europe Self-Storage segment which comprises (a) our 49% equity interest in Shurgard Europe which has direct and indirect equity interests in 188 self-storage facilities (10 million net rentable square feet of space) located in seven countries in Western Europe which operate under the “Shurgard” brand name and (b) one facility located in the United Kingdom that we wholly own.
 
(iii)  
Commercial segment which includes our direct and indirect equity interests in approximately 24 million net rentable square feet of commercial space located in 11 states in the U.S., including our 41% ownership interest in PS Business Parks, Inc. (“PSB”), a publicly traded REIT whose common stock trades on the New York Stock Exchange under the symbol “PSB”.  This commercial space is primarily operated under the “PS Business Parks” brand name.
 
See Note 11 to our December 31, 2010 consolidated financial statements for further discussion with respect to our reportable segments.
 
Certain other activities, due to their insignificant scale and dissimilarity in operating characteristics to our existing segments, are not allocated to any segment.  These activities include (i) the reinsurance of policies against losses to goods stored by tenants in our self-storage facilities, (ii) the sale of merchandise at our self-storage facilities and (iii) management of self-storage facilities owned by third-party owners and entities that we have an ownership interest in but are not consolidated.
 
For all taxable years subsequent to 1980, we qualified and intend to continue to qualify as a REIT, as defined in Section 856 of the Internal Revenue Code.  As a REIT, we do not incur federal or significant state tax on that portion of our taxable income which is distributed to our shareholders, provided that we meet certain tests.  To the extent that we continue to qualify as a REIT, we will not be subject to tax, with certain limited exceptions, on the taxable income that is distributed to our shareholders.
 
We have reported annually to the SEC on Form 10-K, which includes financial statements certified by our independent registered public accountants.  We have also reported 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, and 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.
 
 
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The Impact of Current Economic Factors
 
Our business has been negatively affected by the recessionary environment experienced in 2008 through 2010.  Occupancies, rental rates and overall rental income at our facilities came under pressure as demand for self-storage space softened.  We responded by reducing rental rates, increasing promotional discounts, and increasing our marketing activities to stimulate additional demand for our storage space and increase our market share.  Revenues generated by our Same Store facilities decreased from $1.468 billion in 2008 to $1.423 billion in 2009, representing a reduction of 3.1%.  Our operating metrics began to stabilize in the latter part of 2009 and started to improve as we moved into the second half of 2010.  Revenues generated by our Same Store facilities stabilized in 2010 at $1.428 billion, flat as compared to 2009.
 
See “Growth and Investment Strategies” and “Financing of the Company’s Growth Strategies” below for more information regarding our long-term strategy to grow the cash flows and equity values of the Company.
 
Competition
 
Self-storage facilities generally draw customers who either reside or have their businesses located within a three to five mile radius.  Many of our facilities operate within three to five miles of well-located and well-managed competitors that seek the same group of customers. Many of our competitors utilize the same marketing channels we use, including yellow page advertising, Internet advertising, as well as signage and banners.  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 5% 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 10% of the aggregate self-storage space in the U.S., with the remaining 90% owned by numerous private regional and local operators.  This market fragmentation enhances the advantage of our economies of scale and our brand relative to other operators (see “Business Attributes – Economies of Scale” below), and provides an opportunity for growth through acquisitions over the long term.
 
In seeking investments, we compete with a wide variety of institutions and other investors.  The amount of funds 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 facilities are part of comprehensive centralized reporting and information networks which enable the management team to identify changing market conditions and operating trends as well as analyze customer data, and quickly change our properties’ pricing and promotional mix on an automated basis.
 
National Telephone Reservation System:  We operate a centralized telephone reservation system, which provides added customer service and helps to maximize utilization of available self-storage space.  Customers calling either the toll-free telephone referral system, (800) 44-STORE, or a storage facility, are directed to the national reservation system.  A representative discusses with the customer space requirements, price and location preferences and also informs the customer of other products and services provided by the Company and its subsidiaries.  We believe that the centralized telephone reservation system enhances our ability to market storage space in the U.S. relative to handling these calls at individual properties, because it allows us to more effectively offer all spaces at all facilities in the vicinity of a customer and to provide higher-quality selling efforts through dedicated sales specialists.
 
 
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On-line reservation and marketing system: We also provide customers the ability to review space availability, pricing, and make reservations online through our website, www.publicstorage.com.  We invest extensively in advertising on the Internet, primarily through the use of search engines.
 
Economies of scale: We are the largest provider of self-storage space in the U.S.  As of December 31, 2010, we operated 2,048 self-storage facilities in which we had an interest with over one million self-storage spaces rented.   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 with specialists, such as facility maintenance, employee compensation and benefits programs, pricing of our product, 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 number of facilities in close proximity to each other.
 
The concentration of most of our properties in major metropolitan centers makes various promotional and media programs, such as yellow pages, Internet keyword bidding, and television advertising, more economical for us than for our competitors.  We can economically purchase large, prominent, well-placed yellow page ads that allow us to reach the consumer more effectively than smaller operators.  Our large market share relative to our competitors, along with our well-recognized brand name, increases the likelihood that our facilities will appear in response to queries in search engines such as Google, and allows us to bid aggressively and efficiently for multiple-keyword advertising.  In addition, we are able to market efficiently using television as a media source.
 
Brand name recognition: Our operations in the U.S. are conducted under the “Public Storage” brand name, which we believe is the most recognized and established name in the self-storage industry in the U.S.  Our storage operations within the U.S. are conducted in major markets in 38 states, giving us national recognition and prominence.  Our facilities tend to be highly visible and located in heavily populated areas, improving the local awareness of our brand.  We believe that the “Shurgard” brand, used by Shurgard Europe, is a similarly established and valuable brand.
 
Complementary ancillary operations: We also sell retail items associated with the storage business (locks, cardboard boxes and packing supplies) and reinsure policies issued to our tenants against lost or damaged goods stored by our tenants.  We believe these activities supplement our existing self-storage business by further meeting the needs of our customers.
 
Growth and Investment Strategies
 
Our growth strategies consist of: (i) improving the operating performance of our existing self-storage facilities, (ii) acquiring facilities, (iii) developing or redeveloping existing real estate facilities, (iv) participating in the growth of commercial facilities, primarily through our investment in PSB, and (v) participate 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 generated by our existing self-storage facilities by a) regularly evaluating our call volume, reservation activity, and move-in/move-out rates for each of our facilities relative to our marketing activities, b) evaluating market supply and demand factors and, based upon these analyses, adjusting our marketing activities and rental rates, c) attempting to maximize revenues through evaluating the appropriate balance between occupancy, rental rates, and promotional discounting and d) controlling operating costs.  We believe that our property management personnel and systems, combined with our national telephone reservation system and media advertising programs will continue to enhance our ability to meet these goals.  See Item 7. “Management’s Discussion and Analysis” below for further information regarding our expectation in the short-run with respect to our operating results.
 
 
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Acquire properties owned or operated by others in the U.S.: We seek to expand our portfolio by acquiring well-located facilities, at generally attractive pricing.  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 and capitalize on the overall fragmentation in the self-storage industry.  Data on the rental rates and occupancy levels of our existing facilities, which are often located in proximity to potential acquisition candidates, provide us an advantage in evaluating the potential of acquisition opportunities. During 2008 and 2009, there were few acquisition opportunities.  We have increased our acquisitions of self-storage facilities in 2010 as more opportunities became available.  During 2010, we acquired 42 facilities (2.7 million net rentable square feet) for approximately $239.6 million.  While there can be no assurance, we believe that additional acquisition opportunities may materialize in 2011.  In January 2011, we acquired five facilities (386,000 net rentable square feet) in Nevada for approximately $19.5 million.
 
Development of real estate facilities: We believe that in the long-run, development of new storage locations and expansion of our existing self-storage facilities represent an important part of our growth strategy.  New locations can be developed to meet customer needs and expand our geographic reach, generally within our existing markets.  In addition, existing facilities can be expanded or enhanced to provide additional amenities such as climate control, to better capitalize on increased population density in certain facilities’ local market area.    However, due to the challenging operating environment, we substantially curtailed our development activities beginning in 2008.  We continue to have a nominal development pipeline at December 31, 2010.  Shurgard Europe has similarly reduced its development activities (see “Capitalize on the Potential for Growth in Europe” below).
 
Participate in the growth of commercial facilities primarily through our ownership in PS Business Parks, Inc.: At December 31, 2010, we had a 41% interest in PSB and its operating partnership which consisted of 5,801,606 shares of common stock and 7,305,355 limited partnership units in the operating partnership.  The limited partnership units are convertible at our option, subject to certain conditions, on a one-for-one basis into PSB common stock.  At December 31, 2010, PSB owned and operated approximately 21.8 million net rentable square feet of commercial space located in eight states in the U.S.  During 2008 through 2010, the recession in the U.S. impacted PSB, resulting in a decrease in rental income for PSB’s “same park” facilities.  It is uncertain what impact the current recessionary trends will have on PSB’s future occupancy levels and rental rents.  Due to capital market dislocations and other factors, PSB did not acquire any new commercial space in 2009 and 2008; however, in 2010, PSB acquired a total of 2.4 million net rentable square feet of commercial space for an aggregate cost of approximately $301.7 million.  On February 9, 2011, we loaned PSB $121 million which PSB used to re-pay borrowings against their credit facility and repurchase preferred stock.  The loan has a six-month term, no prepayment penalties, and bears interest at a rate of three-month LIBOR plus 0.85%.
 
Capitalize on the potential for growth in Europe:  On March 31, 2008, we entered into a transaction with an institutional investor whereby the investor acquired a 51% interest in Shurgard Europe.  Shurgard Europe held substantially all of our operations in Europe.  Since March 31, 2008, we own the remaining 49% interest and are the managing member of Shurgard European Holdings LLC, a joint venture formed to own Shurgard Europe’s operations.
 
We believe that Shurgard Europe is the largest owner and operator of self-storage facilities in Western Europe.  At December 31, 2010, Shurgard Europe’s operations comprise 188 facilities with an aggregate of approximately 10 million net rentable square feet.  The portfolio consists of 116 wholly owned facilities and 72 facilities owned by two joint venture partnerships, in which Shurgard Europe has a 20% equity interest.
 
Shurgard Europe operates in seven markets in Western Europe:  the French market (principally Paris), the Swedish market (principally Stockholm), the United Kingdom market (principally London), the Dutch market, the Belgian market, the Danish market (principally Copenhagen) and the German market.
 
In contrast to the U.S., the European self-storage industry is relatively immature.  In each of the markets that Shurgard Europe operates, customer awareness of the product is relatively low and ownership of self-storage facilities remains fragmented.  Although many European consumers are not yet aware of the self-storage concept, they tend to live in more densely populated areas in smaller living spaces (as compared to the U.S.) that, we believe, should make self-storage an attractive option as product knowledge and availability of additional self-storage facilities grows.  Most Europeans are familiar with the concept of storage only as an ancillary service provided by moving companies, and more consumer familiarity could result in a significant increase in demand in the long-term.
 
 
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In the longer term, we believe that there is significant growth potential in Europe to expand the number of facilities owned either through development, acquisition, and consolidation, even if the density of self-storage in Europe does not ultimately approach the levels in the U.S.  Capitalizing on this opportunity will require a significant amount of capital and currently Shurgard Europe’s ability to raise capital at attractive rates from the European public debt and equity markets, as well as from banks, is constrained.  In addition, Shurgard Europe faces refinancing risk, as approximately $125.2 million (€94.5 million) and $147.5 million (€111.3 million) of debt owed by joint ventures matures in May 2011, with a right to extend one year, and July 2013, respectively, and approximately $495.2 million (€373.7 million) in a loan payable to us becomes due in March 2013.  Due to these capital constraints and refinancing risks, Shurgard Europe has interrupted its development and growth plans.  At such time that public market capital or bank debt becomes available to Shurgard Europe at attractive rates, and economic trends improve, development and growth may recommence; however, there can be no assurance that such development and growth will ultimately recommence and at what levels.
 
Financing of the Company’s Growth Strategies
 
Overview of financing strategy:  Over the past three years we funded the cash portion of our acquisition and development activities with permanent capital (predominantly retained cash flow and the net proceeds from the issuance of preferred securities).  We have elected to use preferred securities 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, because of certain benefits described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.’’  Our present intention is to continue to finance substantially all our growth with cash and marketable securities on hand ($558.5 million at December 31, 2010), internally generated cash flows and permanent capital.
 
Impact of Current Capital Markets: Our ability to raise additional capital by issuing our common or preferred securities is dependent upon capital market conditions.  Capital markets in the U.S. have improved from the severe stress experienced in late 2008 and early 2009, and we have recently issued preferred shares at favorable rates (in April and May, 2010, we issued cumulative preferred shares at a rate of 6.875% for gross proceeds of $145 million, and in October 2010 we issued cumulative preferred shares at a rate of 6.500% for gross proceeds of $125 million).  Despite our recent issuances of preferred equity, there can be no assurance that market conditions will continue to permit preferred security issuances at amounts and at rates that we will find attractive.
 
Borrowing: We have in the past used our $300 million revolving line of credit as temporary “bridge” financing, and repaid those amounts with permanent capital.  Our debt outstanding currently represents debt that was assumed either in connection with property acquisitions or in connection with the merger with Shurgard in 2006.  When we have assumed such debt in the past, we have generally prepaid such amounts except in cases where the nature of the loan terms did not allow such prepayment, or where a prepayment penalty made it economically disadvantageous to prepay.  While it is not our present intention to issue additional debt as a long-term financing strategy, 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 was recently upgraded to an “A” credit rating by Standard and Poor’s.  Notwithstanding our desire is to continue to meet our capital needs with preferred and common equity, this high rating, combined with our low level of debt, could allow us to issue a significant amount of unsecured debt in the current markets if we were to choose to do so.
 
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 upon our financing needs and capital market conditions at the time, including the market prices of our equity securities.
 
Joint Venture financing: We have formed and may form additional joint ventures to facilitate the funding of future developments or acquisitions.
 
 
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Disposition of properties: Disposition of properties to raise capital has not been one of our strategies. Generally, we have disposed of self-storage facilities only because of condemnation proceedings, which compel us to sell.  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 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 without a shareholder vote:
 
·  
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.
 
·  
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.
 
·  
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.
 
·  
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 1,922 self-storage facilities in the U.S. and one self-storage facility in London, England at December 31, 2010, we have controlling indirect interests in entities that own 107 self-storage facilities in the U.S. with approximately 6 million net rentable square feet.  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 Entities
 
At December 31, 2010, we had ownership interests in (i) PSB, which owned approximately 21.8 million net rentable square feet of commercial space at December 31, 2010, (ii) Shurgard Europe, which had ownership interests in 188 facilities with approximately 10 million net rentable square feet of storage space, and (iii) various affiliated limited partnerships that own an aggregate of 19 self-storage facilities with approximately 1 million net rentable square feet of storage space.  Collectively these entities are referred to as the “Unconsolidated Entities.”
 
PSB, which files financial statements with the SEC, and Shurgard Europe, have debt and other obligations that are not included in our consolidated financial statements.  The limited partnerships have no significant amounts of debt or other obligations.  See Note 5 to our December 31, 2010 consolidated financial statements for further disclosure regarding the assets, liabilities and operating results of the Unconsolidated Entities.
 
Limitations on Debt
 
Without the consent of holders of the various series of Senior Preferred Shares, we may not take any action that would result in a ratio of ''Debt'' to ''Assets'' (the ''Debt Ratio'') in excess of 50%.  As of December 31, 2010, the Debt Ratio was approximately 4%.  ''Debt'' means the liabilities (other than ''accrued and other liabilities'' and “redeemable noncontrolling interests'') that should, in accordance with U.S. generally accepted accounting principles, be reflected on our consolidated balance sheet at the time of determination.  ''Assets'' means our total assets before a reduction for accumulated depreciation and amortization that should, in accordance with U.S. generally accepted accounting principles, be reflected on the consolidated balance sheet at the time of determination.
 
 
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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.
 
Employees
 
We have approximately 4,900 employees in the U.S. at December 31, 2010 who render services on behalf of the Company, primarily personnel engaged in property operations.
 
Seasonality
 
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 moving activity during the summer months.
 
Insurance
 
We have historically carried customary property, earthquake, general liability and workers compensation coverage through internationally recognized insurance carriers, subject to customary levels of deductibles.  The aggregate limits on these policies of $75 million for property coverage and $102 million for general liability are higher than estimates of maximum probable loss 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.
 
Our tenant insurance program reinsures a program that provides insurance to certificate holders against claims for property losses due to specific named perils (earthquakes and floods are not covered by these policies) to goods stored by tenants at our self-storage facilities for individual limits up to a maximum of $5,000.  We have third-party insurance coverage for claims paid exceeding $1,000,000 resulting from any one individual event, to a limit of $25,000,000.  At December 31, 2010, there were approximately 621,000 certificate holders held by our tenants participating in this program, representing aggregate coverage of approximately $1.4 billion.  Because each certificate represents insurance of goods held by a tenant at our self-storage facilities, the geographic concentration of this $1.4 billion in coverage is dispersed throughout all of our U.S. facilities.  We rely on a third-party insurance company to provide the insurance and are subject to licensing requirements and regulations in several states.
 

 
10

 
 
 
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.
 
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.
 
The value of our investments may be reduced by general risks of real estate ownership.    Since we derive substantially all of our income from real estate operations, we are subject to the general risks of acquiring and owning real estate-related assets, including:  
 
•  
lack of demand for rental spaces or units in a locale;  
 
•  
changes in general economic or local conditions;  
 
•  
natural disasters, such as earthquakes, hurricanes and floods; which could exceed the aggregate limits of our insurance coverage; 
 
•  
potential terrorist attacks;  
 
•  
changes in supply of or demand for similar or competing facilities in an area;  
 
•  
the impact of environmental protection laws;  
 
•  
changes in interest rates and availability of permanent mortgage funds which may render the sale of a nonstrategic property difficult or unattractive including the impact of the current turmoil in the credit markets;  
 
•  
increases in insurance premiums, property tax assessments and other operating and maintenance expenses;
 
•  
transactional costs and liabilities, including transfer taxes;
 
•  
adverse changes in tax, real estate and zoning laws and regulations; and  
 
•  
tenant and employment-related claims.  
 
In addition, we self-insure certain of our property loss, liability, and workers compensation risks for which other real estate companies may use third-party insurers.  This results in a higher risk of losses that are not covered by third-party insurance contracts, as described in Note 13 under “Insurance and Loss Exposure” to our December 31, 2010 consolidated financial statements.
 
There is significant competition among self-storage facilities and from other storage alternatives.    Most of our properties are self-storage facilities, which generated most of our revenue for the year ended December 31, 2010.  Local market conditions play a significant part in how competition will affect us. Competition in the market areas in which many of our properties are located is significant and has affected our occupancy levels, rental rates and operating expenses.  Any increase in availability of funds for investment in real estate may accelerate competition.  Further development of self-storage facilities may intensify competition among operators of self-storage facilities in the market areas in which we operate.
 
 
11

 
 
 
We may incur significant environmental costs and liabilities.    As an owner and operator of real properties, under various federal, state and local environmental laws, we are required to clean up spills or other releases of hazardous or toxic substances on or from our properties.  Certain environmental laws impose liability whether or not the owner knew of, or was responsible for, the presence of the hazardous or toxic substances.  In some cases, liability may not be limited to the value of the property.  The presence of these substances, or the failure to properly remediate any resulting contamination, whether from environmental or microbial issues, also may adversely affect the owner’s or operator’s ability to sell, lease or operate its property or to borrow using its property as collateral.
 
We have conducted preliminary environmental assessments of most of our properties (and conduct these assessments in connection with property acquisitions) to evaluate the environmental condition of, and potential environmental liabilities associated with, our properties.  These assessments generally consist of an investigation of environmental conditions at the property (not including soil or groundwater sampling or analysis), as well as a review of available information regarding the site and publicly available data regarding conditions at other sites in the vicinity.  In connection with these property assessments, our operations and recent property acquisitions, we have become aware that prior operations or activities at some facilities or from nearby locations have or may have resulted in contamination to the soil or groundwater at these facilities.   In circumstances where our environmental assessments disclose potential or actual contamination, we may attempt to obtain purchase price adjustments or indemnifications and, in appropriate circumstances, we obtain limited environmental insurance in connection with the properties acquired, but we cannot assure you that such protections will be sufficient to cover actual future liabilities nor that our assessments have identified all such risks. Although we cannot provide any assurance, based on the preliminary environmental assessments, we are not aware of any environmental contamination of our facilities material to our overall business, financial condition or results of operations.
 
There has been an increasing number of claims and litigation against owners and managers of rental properties relating to moisture infiltration, which can result in mold or other property damage.  When we receive a complaint concerning moisture infiltration, condensation or mold problems and/or become aware that an air quality concern exists, we implement corrective measures in accordance with guidelines and protocols we have developed with the assistance of outside experts.  We seek to work proactively with our tenants to resolve moisture infiltration and mold-related issues, subject to our contractual limitations on liability for such claims.  However, we can give no assurance that material legal claims relating to moisture infiltration and the presence of, or exposure to, mold will not arise in the future.
 
Delays in development and fill-up of our properties would reduce our profitability.    From January 1, 2006, through December 31, 2010, we invested $106 million in development costs with respect to 11 new facilities.  Shurgard Europe has developed and opened 41 facilities since January 1, 2006 at a cost of approximately $317 million.  Development and fill-up of these storage facilities is subject to significant contingencies such as obtaining appropriate governmental approvals.  If we or Shurgard Europe were to commence significant development of facilities, construction delays due to weather, unforeseen site conditions, the need to obtain governmental approvals, personnel problems, and other factors, as well as cost overruns, would adversely affect our profitability.  Delays in the rent-up of newly developed storage space as a result of competition, reductions in storage demand, or other factors, would adversely affect our profitability.
 
Property taxes can increase and cause a decline in yields on investments.    Each of our properties is subject to real property taxes.  These real property taxes may increase in the future as property tax rates change and as our properties are assessed or reassessed by tax authorities.  Recent local government shortfalls in tax revenue may cause pressure to increase tax rates or assessment levels or impose new taxes.  Such increases could adversely impact our profitability.
 
We must comply with the Americans with Disabilities Act and fire and safety regulations, which can require significant expenditures.    All our properties must comply with the Americans with Disabilities Act and with related regulations (the “ADA”).  The ADA has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to persons with disabilities.  Various state laws impose similar requirements.  A failure to comply with the ADA or similar state laws could lead to government imposed fines on us and/or litigation, which could also involve an award of damages to individuals affected by the non-compliance.  In addition, we must operate our properties in compliance with numerous local fire and safety regulations, building codes, and other land use regulations.  Compliance with these requirements can require us to spend substantial amounts of money, which would reduce cash otherwise available for distribution to shareholders.  Failure to comply with these requirements could also affect the marketability of our real estate facilities.
 
 
12

 
 
 
We incur liability from tenant and employment-related claims.    From time to time we must resolve tenant claims and employment-related claims by corporate level and field personnel.
 
Global economic conditions adversely affect our business, financial condition, growth and access to capital.
 
There continues to be global economic uncertainty, elevated levels of unemployment, reduced levels of economic activity, and it is uncertain as to when economic conditions will improve.  These negative economic conditions in the markets where we operate facilities, and other events or factors that adversely affect disposable incomes, have and are likely to continue to adversely affect our business.
 
Although conditions in financial and credit markets improved during 2010, our ability to issue preferred shares or borrow at reasonable rates has been in the past, and may in the future be adversely affected by challenging credit market conditions.  The issuance of perpetual preferred securities historically has been a significant source of capital to grow our business.  While we currently believe that we have sufficient working capital and capacity under our credit facilities and our retained cash flow from operations to continue to operate our business as usual, turbulence in the credit markets and in the national economy could adversely affect our access to capital and adversely impact earnings growth that might otherwise result from the acquisition and development of real estate facilities.
 
The acquisition of existing properties is a significant component of our long-term growth strategy, and  acquisitions of existing properties are subject to risks that may adversely affect our growth and financial results.
 
We acquire existing properties, either in individual transactions or as part of the acquisition of other storage operators.  In addition to the general risks related to real estate described above which may also adversely impact operations at acquired properties, we are also subject to the following risks in connection with property acquisitions and the integration of acquired properties into our operations.
 
Any failure to manage acquisitions and other significant transactions and to successfully integrate acquired operations into our existing business could negatively impact our financial results.  If acquired facilities are not properly integrated into our system, our financial results may suffer.
 
To fully realize any anticipated benefits from an acquisition, we must successfully integrate the property into our operating platform that permits cost savings to be realized and targeted revenue levels to be achieved.  It is possible that failures or unexpected circumstances in the integration process could result in a decline in occupancy and/or rental rates at the acquired facilities or our existing properties.  In addition, the integration process generally results in changes to the processes, standards, procedures,  practices, policies and compensation arrangements in the facilities acquired, which can  adversely affect our ability to maintain the existing relationships with tenants and employees. These risks are more pronounced with larger acquisitions.
 
Acquired properties are subject to property tax reappraisals which may increase our property tax expense. Facilities that we acquire are subject to property tax reappraisal.   The reappraisal process is subject to judgment of governmental agencies regarding estimated real estate values and other factors, and as a result there is a significant degree of uncertainty in estimating the property tax expense of an acquired property.  Reappraisal can result in substantial increases to the ongoing property tax payments as compared to the amounts paid by the seller.  In future or recent acquisitions of properties, if actual property tax expenses following reappraisal exceed what we expected in making the acquisition decision, our operating results could be negatively impacted.
 
 
13

 
 
 
As a result of our ownership of 49% of the international operations of Shurgard Europe with a book value of $264.7 million at December 31, 2010, and our loan to Shurgard Europe aggregating $495.2 million at December 31, 2010, we are exposed to additional risks related to international businesses that may adversely impact our business and financial results.
 
We have limited experience in European operations, which may adversely impact our ability to operate profitably in Europe.  In addition, European operations have specific inherent risks, including without limitation the following:
 
·  
currency risks, including currency fluctuations, which can impact the fair value of our $264.7 million book value equity investment in Shurgard Europe, as well as interest payments and the net proceeds to be received upon repayment of our loan to Shurgard Europe; 
 
·  
unexpected changes in legislative and regulatory requirements,  
 
·  
potentially adverse tax burdens;  
 
·  
burdens of complying with different permitting standards, environmental and labor laws and a wide variety of foreign laws;
 
·  
the potential impact of collective bargaining;
 
·  
obstacles to the repatriation of earnings and cash;  
 
·  
regional, national and local political uncertainty;  
 
·  
economic slowdown and/or downturn in foreign markets;  
 
·  
difficulties in staffing and managing international operations;  
 
·  
reduced protection for intellectual property in some countries;  
 
·  
inability to effectively control less than wholly-owned partnerships and joint ventures; and
 
·  
the importance of local senior management and the potential negative ramifications of the departure of key executives.
 
      Based upon current market conditions and recent operating result trends of Shurgard Europe, the following specific risks apply with respect to our investment in, and loan to, Shurgard Europe:
 
·  
Joint ventures that Shurgard Europe has a 20% interest in have significant refinancing requirements.  Shurgard Europe’s two joint ventures collectively had approximately €206 million ($273 million) of outstanding debt payable to third parties at December 31, 2010.  These loans are secured by the joint ventures’ respective facilities, and are not guaranteed by Public Storage, Shurgard Europe, or any third party.  One of the joint venture loans, totaling €95 million ($126 million), is due May 2011, with a right to extend one year, and the other joint venture loan, totaling €111 million ($147 million), is due in July 2013.
 
If Shurgard Europe’s joint ventures were unable to refinance or otherwise repay these loans when due, it is our expectation that the loans would be repaid with each joint venture partner contributing their pro rata share towards repayment.  Shurgard Europe’s pro rata share, in the aggregate, would be approximately €41 million ($55 million), which Shurgard Europe would be required to fund either from available cash on hand or equity contributions from Public Storage and our joint venture partner.  Further, it is also possible that Shurgard Europe’s joint venture partner would be unable to contribute its pro rata share to repay the loans and may trigger, through its rights under the related partnership documents, the liquidation of the partnership, which could result in Shurgard Europe’s acquisition of its joint venture partner’s interest or the sale of the properties to third parties, with potential loss or reduction to our investment if the liquidation proceeds were not sufficient.
 
 
14

 
 
 
·  
Shurgard Europe’s ability to refinance its $495.2 million loan from us, which is due in March 2013, may be limited due to market conditions.  Shurgard Europe owes us €373.7 million ($495.2 million at December 31, 2010), and this loan is due in March 2013.  If Shurgard Europe is unable to obtain financing to raise funds to repay our loan due to a constrained equity or credit environment or other factors, we may have to negotiate an equity or debt contribution by our joint venture partner to Shurgard Europe, extend the loan, or otherwise exercise our lender rights.
 
·  
Shurgard Europe’s Same Store operating trends were recently negative.  While Shurgard Europe had a 1.7% increase in revenue in the year ended December 31, 2010, Shurgard Europe had negative revenue growth in 2009.  Shurgard Europe could have reductions in Same Store revenues in the future, which would adversely impact their operating results and, as a result, the value of our investment in Shurgard Europe.  Such reductions may negatively impact Shurgard Europe’s liquidity and ability to repay its debt, including the debt owed to Public Storage, due to declining interest coverage ratios and other similar metrics upon which potential lenders typically base their lending decisions.
 
We are subject to risks related to our ownership of assets in joint venture structures.
 
We have interests in several joint ventures that may present additional risks, including without limitation, the following:
 
·  
risks related to the financial strength, common business goals and strategies and cooperation of the venture partner;
 
·  
the inability to take some actions with respect to the joint venture activities that we may believe are favorable, if our joint venture partner does not agree;
 
·  
the risk that we could lose our REIT status based upon actions of the joint ventures if we are unable to effectively control these indirect investments;
 
·  
the risk that we may not control the legal entity that has title to the real estate;
 
·  
the risk that our investments in these entities may not be easily sold or readily accepted as collateral by our lenders, or that lenders may view assets held in joint ventures as less favorable as collateral;
 
·  
the risk that the joint ventures could take actions which may negatively impact our preferred shares and debt ratings, to the extent that we could not prevent these actions;
 
·  
the risk that we may be constrained from certain activities of our own that we would otherwise deem favorable, due to non-compete clauses in our joint venture arrangements; and
 
·  
the risk that we will be unable to resolve disputes with our joint venture partners.
 

 
15

 


The Hughes Family could control us and take actions adverse to other shareholders.
 
At December 31, 2010, B. Wayne Hughes, Chairman of the Board of Trustees and his family (the “Hughes Family”) owned approximately 16.7% of our aggregate outstanding common shares.  Our declaration of trust permits the Hughes Family to own up to 47.66% of our outstanding common shares and also allows for cumulative voting in the election of trustees.  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, even though such actions may not be favorable to other shareholders.
 
Certain provisions of Maryland law and in our declaration of trust and bylaws may prevent changes in control or otherwise discourage takeover attempts beneficial to shareholders.
 
Certain provisions of Maryland law may have the effect of deterring a third party from making a proposal to acquire us or of impeding a change in control under circumstances that otherwise could provide the holders of our shares with the opportunity to realize a premium over the then-prevailing market price of our shares.  Currently, the Board has opted not to subject the Company to the statutory limitations of either the business combination provisions or the control share acquisitions provisions of Maryland law, but the Board may change this option as to either statute in the future.  If the Board chooses to make them applicable to us, these provisions could delay, deter or prevent a transaction or change of control that might involve a premium price for holders of common shares or might otherwise be in their best interest.  Similarly, (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, (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 without those decisions being subject to any heightened standard of conduct or standard of review, could have the same effect of delaying, deterring or preventing a transaction or a change in control that might involve a premium price for holders of the common shares or might otherwise be in common shareholders’ best interest.
 
To preserve our status as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), our declaration of trust contains limitations on the number and value of shares of beneficial interest that any person may own.  These ownership limitations generally limit the ability of a person, other than the Hughes Family (as defined in our declaration of trust) and other than “designated investment entities” (as defined in our declaration of trust), to own more than 3% of our outstanding common shares or 9.9% of the outstanding shares of any class or series of preferred or equity shares, in each case, in value or number of shares, whichever is more restrictive, unless an exemption is granted by our board of trustees.  These limitations could discourage, delay or prevent a transaction involving a change in control of our company not approved by our board of trustees.
 
If we failed to qualify as a REIT for income tax purposes, we would be taxed as a corporation, which would substantially reduce funds available for payment of dividends.
 
Investors are subject to the risk that we may not qualify as a REIT for income tax purposes. REITs are subject to a range of complex organizational and operational requirements.  As a REIT, we must distribute with respect to each year at least 90% of our REIT taxable income to our shareholders (which may take into account certain dividends paid in the subsequent year).  Other restrictions apply to our income and assets.  Our REIT status is also dependent upon the ongoing qualification of our affiliate, PSB, as a REIT, as a result of our substantial ownership interest in that company.
 
For any taxable year that we fail to qualify as a REIT and are unable to avail ourselves of relief provisions set forth in the Code, we would be subject to federal income tax at the regular corporate rates on all of our taxable income, whether or not we make any distributions to our shareholders.  Those taxes would reduce the amount of cash available for distribution to our shareholders or for reinvestment and would adversely affect our earnings.  As a result, our failure to qualify as a REIT during any taxable year could have a material adverse effect upon us and our shareholders.  Furthermore, unless certain relief provisions apply, we would not be eligible to elect REIT status again until the fifth taxable year that begins after the first year for which we fail to qualify.
 
 
16

 
 
 
We may pay some taxes, reducing cash available for shareholders.
 
Even if we qualify as a REIT for federal income tax purposes, we are required to pay 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” of the Company for federal income tax purposes. A taxable REIT subsidiary is taxable as a regular corporation and may be limited in its ability to deduct interest payments made to us in excess of a certain amount.  In addition, if we receive or accrue certain amounts and the underlying economic arrangements among our taxable REIT subsidiaries and us are not comparable to similar arrangements among unrelated parties, we could be subject to a 100% penalty tax on those payments in excess of amounts the Internal Revenue Service deems reasonable between unrelated parties.  To the extent that the Company is required to pay federal, foreign, state or local taxes, we will have less cash available for distribution to shareholders.
 
We have become increasingly dependent upon automated processes, telecommunications, and the Internet and are faced with system security and system failure risks.
 
We have become increasingly centralized and dependent upon automated information technology processes, and certain critical components of our operating systems are dependent upon third party providers.  As a result, we could be severely impacted by a catastrophic occurrence, such as a natural disaster or a terrorist attack, or a circumstance that disrupted operations at our third party providers.  Even though we believe we utilize appropriate duplication and back-up procedures, a significant outage in our third party providers could negatively impact our operations.  In addition, a portion of our business operations are conducted over the Internet, increasing the risk of viruses that could cause system failures and disruptions of operations.  Experienced computer programmers may be able to penetrate our network security and misappropriate our confidential information, create system disruptions or cause shutdowns.  Nearly half of our new tenants come from sales channels dependent upon telecommunications (telephone or Internet).
 
We have no ownership interest in Canadian self-storage facilities owned or operated by the Hughes Family.
 
At December 31, 2010, the Hughes Family had ownership interests in, and operated, 52 self-storage facilities in Canada under the name “Public Storage”, which name we license to the Hughes Family for use in Canada on a royalty-free, non-exclusive basis.  We currently do not own any interests in these facilities nor do we own any facilities in Canada.  We have a right of first refusal to acquire the stock or assets of the corporation engaged in the operation of the self-storage facilities in Canada if the Hughes Family or the corporation agrees to sell them.  However, we have no ownership interest in the operations of this corporation, have no right to acquire their stock or assets unless the Hughes family decides to sell, and receive no benefit from the profits and increases in value of the Canadian self-storage facilities.  Although we have no current plans to enter the Canadian self-storage market, if we choose to do so without acquiring the Hughes Family interests in their Canadian self-storage properties, our right to use the Public Storage name in Canada may be shared with the Hughes Family unless we are able to terminate the license agreement.
 
Through our subsidiaries, we continue to reinsure risks relating to loss of goods stored by tenants in the self-storage facilities in Canada in which the Hughes Family has ownership interests.  We acquired the tenant insurance business on December 31, 2001 through our acquisition of PS Insurance Company, or PSICH.  During the years ended December 31, 2010, 2009 and 2008, we received $605,000, $642,000 and $768,000 (based upon historical exchange rates between the U.S. Dollar and Canadian Dollar in effect as the revenues were earned), respectively, in reinsurance premiums attributable to the Canadian facilities.  Since PSICH’s right to provide tenant reinsurance to the Canadian Facilities may be qualified, there is no assurance that these premiums will continue.
 
We are subject to laws and governmental regulations and actions that affect 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 New York Stock Exchange, 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 and restatement of our financial statements.
 
 
17

 
 
 
There can also be no assurance that, in response to current economic conditions or the current political environment or otherwise, laws and regulations will not be implemented or changed in ways that adversely affect our operating results and financial condition, such as recently adopted legislation that expands health care coverage costs or facilitates union activity or federal legislative proposals to otherwise increase operating costs.
 
Our tenant insurance business is subject to governmental regulation which could reduce our profitability or limit our growth.
 
We hold Limited Lines Self Storage Insurance Agent licenses from a number of individual state Departments of Insurance and are subject to state governmental regulation and supervision.  This state governmental supervision could reduce our profitability or limit our growth by increasing the costs of regulatory compliance, limiting or restricting the products or services we provide or the methods by which we provide products and services, or subjecting our businesses to the possibility of regulatory actions or proceedings.  Our continued ability to maintain these Limited Lines Self Storage Insurance Agent licenses in the jurisdictions in which we are licensed depends on our compliance with the rules and regulations promulgated from time to time by the regulatory authorities in each of these jurisdictions.  Furthermore, state insurance departments conduct periodic examinations, audits and investigations of the affairs of insurance agents.
 
In all jurisdictions, the applicable laws and regulations are subject to amendment or interpretation by regulatory authorities.  Generally, such authorities are vested with relatively broad discretion to grant, renew and revoke licenses and approvals and to implement regulations.  Accordingly, we may be precluded or temporarily suspended from carrying on some or all of our activities or otherwise fined or penalized in a given jurisdiction.  No assurances can be given that our businesses can continue to be conducted in any given jurisdiction as it has been conducted in the past.  For the year ended December 31, 2010, revenues from our tenant reinsurance business represented approximately 4% of our revenues.
 
Terrorist attacks and the possibility of wider armed conflict may have an adverse impact on our business and operating results and could decrease the value of our assets.
 
Terrorist attacks and other acts of violence or war could have a material adverse impact on our business and operating results.  There can be no assurance that there will not be further terrorist attacks against the U.S., the European Community, or their businesses or interests.  Attacks or armed conflicts that directly impact one or more of our properties could significantly affect our ability to operate those properties and thereby impair our operating results.  Further, we may not have insurance coverage for losses caused by a terrorist attack.  Such insurance may not be available, or if it is available and we decide to obtain such terrorist coverage, the cost for the insurance may be significant in relationship to the risk overall.  In addition, the adverse effects that such violent acts and threats of future attacks could have on the U.S. economy could similarly have a material adverse effect on our business and results of operations.  Finally, further terrorist acts could cause the U.S. to enter into a wider armed conflict, which could further impact our business and operating results.
 
Developments in California may have an adverse impact on our business and financial results.
 
We are headquartered in, and approximately one-fifth of our properties in the U.S. are located in, California, which like many other state and local jurisdictions is facing severe budgetary problems and deficits.  Action that may be taken in response to these problems, such as increases in property taxes, changes to sales taxes, adoption of a proposed “Business Net Receipts Tax” or other governmental efforts to raise revenues could adversely impact our business and results of operations.

 
18

 
 
 
ITEM 1B.                      Unresolved Staff Comments
 
Not applicable.
 

 
19

 

 
ITEM 2.                      Properties
 
At December 31, 2010, we had direct and indirect ownership interests in 2,048 self-storage facilities located in 38 states within the U.S. and 189 storage facilities located in seven Western European nations:
 
   
At December 31, 2010
 
   
Number of Storage Facilities (a)
   
Net Rentable Square Feet (in thousands)
 
United States:
           
California:
           
Southern                             
    233       16,136  
Northern                             
    172       10,024  
Texas                                  
    235       15,424  
Florida                                  
    193       12,690  
Illinois                                  
    126       7,955  
Washington                                  
    91       6,028  
Georgia                                  
    93       6,039  
North Carolina                                  
    69       4,775  
Virginia                                  
    78       4,453  
New York                                  
    62       4,015  
Colorado                                  
    59       3,713  
New Jersey                                  
    55       3,491  
Maryland                                  
    56       3,337  
Minnesota                                  
    44       2,990  
Michigan                                  
    43       2,755  
Arizona                                  
    37       2,259  
South Carolina                                  
    40       2,155  
Missouri                                  
    37       2,136  
Oregon                                  
    39       2,006  
Tennessee                                  
    27       1,528  
Indiana                                  
    31       1,926  
Pennsylvania                                  
    28       1,867  
Ohio                                  
    31       1,922  
Nevada                                  
    24       1,561  
Kansas                                  
    22       1,310  
Massachusetts                                  
    19       1,179  
Wisconsin                                  
    15       968  
Other states (12 states)
    89       4,980  
Total – U.S.                             
    2,048       129,622  
                 
Europe (b):
               
France
    56       2,951  
Netherlands
    40       2,180  
Sweden
    30       1,614  
Belgium
    21       1,252  
United Kingdom
    21       1,030  
Germany
    11       553  
Denmark
    10       559  
Total - Europe                             
    189       10,139  
                 
Grand Total                             
    2,237       139,761  
 
(a) See Schedule III:  Real Estate and Accumulated Depreciation in the Company’s 2010 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 in which Shurgard Europe has an ownership interest.
 
 
20

 
 
Our facilities are generally operated to maximize cash flow through the regular review and adjustment of rents charged to our tenants.  For the year ended December 31, 2010, the weighted average occupancy level and the average realized rent per occupied square foot for our self-storage facilities were approximately 89.5% and $12.65, respectively, in the U.S. and 80% and $25.61, respectively, in Europe.
 
At December 31, 2010, 97 of our U.S. facilities were encumbered by an aggregate of $278 million in secured notes payable.  These facilities had a net book value of $595 million at December 31, 2010.
 
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, are designed to 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 own lock, which is for the user's exclusive use and to which only the user has access on an unrestricted basis during business hours.  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.  Storage facility spaces are rented on a month-to-month basis.  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 or its proximity to elevators.  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 of space in self-storage facilities include individuals from virtually all demographic groups, as well as businesses.  Individuals usually obtain this space for storage of furniture, household appliances, personal belongings, motor vehicles, boats, campers, motorcycles and other household goods.  Businesses normally employ this space for storage of excess inventory, business records, seasonal goods, equipment and fixtures.
 
Our self-storage facilities generally consist of three to seven buildings containing an aggregate of between 350 to 750 storage spaces, most of which 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 moving activity during the summer months.
 
Our self-storage facilities are geographically diversified and are located primarily in or near major metropolitan markets in 38 states in the U.S. and seven Western European nations.  Generally our self-storage facilities are located in heavily populated areas and close to concentrations of apartment complexes, single family residences and commercial developments.  However, there may be circumstances in which it may be appropriate to own a property in a less populated area, for example, in an area that is highly visible from a major thoroughfare and close to, although not in, a heavily populated area.  Moreover, in certain population centers, land costs and zoning restrictions may create a demand for space in nearby, less populated, areas.
 
Competition from other self-storage facilities as well as other forms of storage in the market areas in which most of our properties are located in the U.S., and certain of our properties in Western Europe, is significant and has affected the occupancy levels, rental rates, and operating expenses of many of our properties.
 
Since our investments are primarily self-storage facilities, our ability to preserve our investments and achieve our objectives is dependent in large part upon success in this field.  We believe that self-storage facilities, upon stabilization, 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 stabilization after an initial fill-up period, the U.S. self-storage facilities we have an interest in have generally shown a high degree of consistency in generating cash flows.
 
 
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Commercial Properties: In addition to our interests in 2,237 self-storage facilities, we have an interest in PSB, which, as of December 31, 2010, owns and operates approximately 21.8 million net rentable square feet of commercial space in eight states.  At December 31, 2010, the $324 million book value of our investment in PSB represents approximately 3% of our total assets.  The $730 million market value of our investment in PSB at December 31, 2010 represents approximately 8% of the book value of our total assets.  We also directly own 1.6 million net rentable square feet of commercial space, primarily located at our existing self-storage locations, comprised primarily of individual retail locations.  This space is managed for us 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: Our policy is to 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 claims, complaints, and other legal actions that have arisen in the normal course of business from time to time.  We believe that it is unlikely that the outcome of these pending legal proceedings including employment and tenant claims, in the aggregate, will have a material adverse impact upon the results of our operations or financial position.
 
ITEM 4.  (Removed and reserved)
 
 
 
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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 (NYSE: PSA), including those of Public Storage, Inc. prior to our reorganization in June 2007, have been listed on the New York Stock Exchange since October 19, 1984.  Our Depositary Shares each representing 1/1,000 of an Equity Share, Series A (NYSE:PSAA) (see section c. below), including those of Public Storage, Inc. prior to our reorganization in June 2007 were listed on the New York Stock Exchange beginning February 14, 2000 until their redemption by us in April 2010.
 
The following table sets forth the high and low sales prices of our Common Shares on the New York Stock Exchange composite tapes for the applicable periods.
 
     
Range
 
Year
Quarter
 
High
   
Low
 
2009
1st
  $ 79.88     $ 45.35  
 
2nd
    68.97       53.32  
 
3rd
    79.47       61.35  
 
4th
    85.10       70.76  
                   
2010
1st
    94.20       74.74  
 
2nd
    100.58       85.04  
 
3rd
    104.35       85.04  
 
4th
    106.12       94.60  
 
As of February 15, 2011, there were approximately 17,560 holders of record of our Common Shares.
 
b.  
Dividends
 
We have paid quarterly distributions to our shareholders since 1981, our first full year of operations.  During 2010 we paid distributions to our common shareholders of $0.65 per common share for the quarter ended March 31 and $0.80 per common share for each of the quarters ended June 30 and September 30, and ended December 31.  Total distributions on common shares for 2010 amounted to $515.3 million or $3.05 per share.  During 2009, we paid distributions to our common shareholders of $0.55 per common share for each of the quarters ended March 31, June 30, September 30 and December 31.  Total distributions on common shares for 2009 amounted to $370.4 million or $2.20 per share.  During 2008, we paid distributions to our common shareholders of $0.55 per common share for each of the quarters ended March 31, June 30 and September 30, and a distribution of $1.15 per common share (including a $0.60 per share special dividend) for the quarter ended December 31.  Total distributions on common shares for 2008 amounted to $470.8 million or $2.80 per share.  Included in these amounts are $101.0 million or $0.60 per common share with respect to a special cash dividend paid in December 2008.
 
Holders of common shares are entitled to receive distributions when and if declared by our Board of Trustees out of any funds legally available for that purpose.  In order to maintain our REIT status for federal income tax purposes, we are generally required to pay dividends at least equal to 90% of our real estate investment trust taxable income for the taxable year (for this purpose, certain dividends paid in the subsequent year may be taken into account).  We intend to continue to pay distributions sufficient to permit us to maintain our REIT status.
 
 
 
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For Federal income tax purposes, distributions to shareholders are treated as ordinary income, capital gains, return of capital or a combination thereof.  For 2010, the dividends paid on common shares ($3.05 per share), on all the various classes of preferred shares, and on our Equity Shares, Series A were classified as follows:
   
   
1st Quarter
   
2nd Quarter
   
3rd Quarter
   
4th Quarter
 
Ordinary Income                               
    100.0000 %     100.0000 %     100.0000 %     100.0000 %
Long-term Capital Gain
    0.0000 %     0.0000 %     0.0000 %     0.0000 %
Total                               
    100.0000 %     100.0000 %     100.0000 %     100.0000 %
 

For 2009, the dividends paid on common shares ($2.20 per share), on all the various classes of preferred shares, and on our Equity Shares, Series A were classified as follows:
   
   
1st Quarter
   
2nd Quarter
   
3rd Quarter
   
4th Quarter
 
Ordinary Income                               
    100.0000 %     100.0000 %     98.5716 %     100.0000 %
Long-term Capital Gain
    0.0000 %     0.0000 %     1.4284 %     0.0000 %
Total                               
    100.0000 %     100.0000 %     100.0000 %     100.0000 %
 
c.  
Equity Shares
 
The Company is authorized to issue 100,000,000 equity shares.  Our declaration of trust provides that the equity shares may be issued from time to time in one or more series and gives the Board of Trustees broad authority to fix the dividend and distribution rights, conversion and voting rights, redemption provisions and liquidation rights of each series of equity shares.
 
At December 31, 2009, we had 4,289,544 Equity Shares, Series A outstanding.  On March 12, 2010, we called for redemption all of our outstanding shares of Equity Shares, Series A.  The redemption occurred on April 15, 2010 at $24.50 per share for aggregate redemption amount of $205.4 million.
 
During each of the three months ended March 31, 2010, 2009 and 2008, June 30, 2009 and 2008, September 30, 2009 and 2008 and December 31, 2009 and 2008, we allocated income and paid quarterly distributions to the holders of the Equity Shares, Series A totaling $5.1 million ($0.6125 per share) based on 8,377,193 weighted average depositary shares outstanding.  Net income allocated to the Equity Shares, Series A for the year ended December 31, 2010 also includes $25.7 million ($3.07 per share), representing the excess of cash paid to redeem the securities over the original issuance proceeds.  As a result of the redemption on April 15, 2010, no further distributions will be paid for the period subsequent to March 31, 2010.
 
In November 1999, we sold $100,000,000 (4,289,544 shares) of Equity Shares, Series AAA (“Equity Shares AAA”) to a newly formed joint venture.  At December 31, 2009, we had 4,289,544 Equity Shares AAA outstanding with a carrying value of $100,000,000.  On August 31, 2010, we retired all outstanding shares of Equity Shares, Series AAA (“Equity Shares AAA”) outstanding.  The Equity Shares AAA ranked on parity with our common shares and junior to our Senior Preferred Shares with respect to general preference rights, and had a liquidation amount equal to 120% of the amount distributed to each common share.  During the years ended December 31, 2010, 2009 and 2008, we paid quarterly distributions to the holder of the Equity Shares, Series AAA of $0.5391 per share for each of the quarters ended March 31 and June 30.  During the years ended December 31, 2009 and 2008, we also paid distributions of $0.5391 per share for each of the quarters ended September 30 and December 31.  As a result of the retirement on August 31, 2010, no further distributions will be paid for the period subsequent to June 30, 2010.  For all periods presented, the Equity Shares, Series AAA and related dividends are eliminated in consolidation as the shares were held by one of our wholly-owned subsidiaries.
 
 
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d.  
Common Share Repurchases
 
Our Board of Trustees has authorized the repurchase from time to time of up to 35,000,000 of our common shares on the open market or in privately negotiated transactions.  During 2008, we repurchased 1,520,196 common shares for approximately $111.9 million.  During 2009 and 2010, we did not repurchase any of our common shares.  From the inception of the repurchase program through February 28, 2011, we have repurchased a total of 23,721,916 common shares 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, 2010.  During the year ended December 31, 2010, we did not repurchase any of our common shares outside our publicly announced repurchase program.  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 and Equity Share Repurchases
 
During April, 2010, we redeemed all 8,377,193 of our outstanding Equity Shares, Series A for an aggregate of $205.4 million in cash (including redemption fees).
 
During June, 2010, we redeemed all 6,200,000 of our remaining 7.500% Cumulative Preferred Shares Series V with a liquidation amount of $155.0 million for an aggregate of $156.5 million in cash (inclusive of accrued dividends).
 
During August, 2010, we repurchased 400,000 of our 6.850% Cumulative Preferred Shares Series Y with a carrying value of $10.0 million for an aggregate of $9.2 million in cash (inclusive of accrued dividends).
 
During October, 2010, we repurchased all 4,000,000 of our 7.250% Series J Preferred Partnership Units with a carrying value of $100.0 million for an aggregate of $100.9 million in cash (inclusive of accrued dividends).
 
During November, 2010, we redeemed all 4,350,000 of our 7.125% Cumulative Preferred Shares Series B with a liquidation amount of $108.8 million for an aggregate of $109.5 million in cash (inclusive of accrued dividends).
 

 
25

 
 
 
The following table presents monthly information related to our repurchases of all of our outstanding Equity Shares, Series A, certain of our Cumulative Preferred Shares and all of our Series J Preferred Partnership Units during the year ended December 31, 2010:
 
Period Covered
 
 
Total Number of Shares/Units Repurchased
   
Average Price Paid per Share/Unit
 
January 1, 2010 – January 31, 2010
    -       -  
 
February 1, 2010 – February 28, 2010
    -       -  
 
March 1, 2010 – March 31, 2010
    -       -  
 
April 1, 2010 – April 30, 2010
 
               
Equity Shares - Series A
    8,377,193     $ 24.50  
 
May 1, 2010 – May 31, 2010
    -       -  
 
June 1, 2010 – June 30, 2010
 
               
Preferred Shares - Series V
    6,200,000     $ 25.00  
 
July 1, 2010 – July 31, 2010
    -       -  
 
August 1, 2010  – August  31, 2010
 
               
Preferred Shares - Series Y
    400,000     $ 23.00  
 
September 1, 2010 – September 30, 2010
    -       -  
 
October 1, 2010 – October 31, 2010
 
               
Preferred Partnership Units - Series J
    4,000,000     $ 25.10  
 
November 1, 2010  – November 30, 2010
 
               
Preferred Shares - Series B
    4,350,000     $ 25.00  
 
December 1, 2010 – December 31, 2010
    -       -  
 
Total
    23,327,193     $ 24.80  

 
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ITEM 6.               Selected Financial Data
 
   
For the year ended December 31,
 
   
2010
   
2009
   
2008 (1)
   
2007 (1)
   
2006
 
   
(Amounts in thousands, except per share data)
 
Revenues:
                             
Rental income and ancillary operations
  $ 1,617,705     $ 1,594,892     $ 1,684,333     $ 1,772,788     $ 1,314,969  
Interest and other income                                                       
    29,017       29,813       36,155       11,417       31,799  
      1,646,722       1,624,705       1,720,488       1,784,205       1,346,768  
Expenses:
                                       
Cost of operations                                                       
    529,991       521,706       554,280       629,873       470,503  
Depreciation and amortization                                                       
    354,006       339,766       408,983       619,102       434,978  
General and administrative                                                       
    38,487       35,735       62,809       59,749       84,661  
Interest expense                                                       
    30,225       29,916       43,944       63,671       33,062  
      952,709       927,123       1,070,016       1,372,395       1,023,204  
Income from continuing operations before equity in earnings of real estate entities, foreign currency exchange gain (loss), gain (loss) on disposition of real estate investments, gain on early retirement of debt and asset impairment charges - net
          694,013             697,582             650,472             411,810             323,564  
Equity in earnings of real estate entities
    38,352       53,244       20,391       12,738       11,895  
Foreign currency exchange gain (loss)
    (42,264 )     9,662       (25,362 )     58,444       4,262  
Gain (loss) on disposition of real estate investments, early retirement of debt, asset impairment charges and casualty gain
    (1,505 )       37,540         336,020         5,212         2,177  
Income from continuing operations
    688,596       798,028       981,521       488,204       341,898  
Discontinued operations and cumulative effect of change in accounting principle
    7,518       (7,572 )     (7,649 )     (1,126 )     4,011  
Net income
    696,114       790,456       973,872       487,078       345,909  
Net income allocated (to) from noncontrolling equity interests
    (24,076 )     44,165       (38,696 )     (29,543 )     (31,883 )
Net income allocable to Public Storage shareholders
  $ 672,038     $ 834,621     $ 935,176     $ 457,535     $ 314,026  
                                         
Per Common Share:
                                       
Distributions
  $ 3.05     $ 2.20     $ 2.80     $ 2.00     $ 2.00  
Net income – Basic                                                          
  $ 2.36     $ 3.48     $ 4.19     $ 1.18     $ 0.33  
Net income – Diluted                                                          
  $ 2.35     $ 3.47     $ 4.18     $ 1.17     $ 0.33  
                                         
Weighted average common shares – Basic
    168,877       168,358       168,250       169,342       142,760  
Weighted average common shares – Diluted
    169,772       168,768       168,675       169,850       143,344  
                                         
Balance Sheet Data:
                                       
Total assets                                                         
  $ 9,495,333     $ 9,805,645     $ 9,936,045     $ 10,643,102     $ 11,198,473  
Total debt                                                         
  $ 568,417     $ 518,889     $ 643,811     $ 1,069,928     $ 1,848,542  
Public Storage shareholders’ equity
  $ 8,676,598     $ 8,928,407     $ 8,708,995     $ 8,763,129     $ 8,208,045  
Permanent noncontrolling interests’ equity
  $ 32,336     $ 132,974     $ 358,109     $ 500,127     $ 499,178  
                                         
Other Data:
                                       
Net cash provided by operating activities
  $ 1,093,221     $ 1,112,857     $ 1,076,971     $ 1,047,652     $ 769,440  
Net cash provided by (used in) investing activities
  $ (266,605 )   $ (91,409 )   $ 340,018     $ (261,876 )   $ (473,630 )
Net cash used in financing activities
  $ (1,132,709 )   $ (938,401 )   $ (984,076 )   $ (1,081,504 )   $ (244,395 )
 
(1)  
The significant increase in our revenues, cost of operations, depreciation and amortization, and interest expense in 2007 is due to our acquisition of Shurgard Storage Centers in August 2006, with the operations of the facilities acquired being included in our operations for a full year in 2007 as compared to the period following the acquisition in 2006.  The decreases in our revenues, cost of operations, and depreciation and amortization in 2008 is due primarily to our disposition of an interest in Shurgard Europe on March 31, 2008.  See Note 3 to our December 31, 2010 consolidated financial statements for further information.
 

 
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ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto.
 
Critical Accounting Policies
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”).  The preparation of our financial statements and related disclosures in conformity with GAAP and our discussion and analysis of our financial condition and results of operations requires management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes.  The notes to our December 31, 2010 consolidated financial statements, primarily Note 2, summarize the significant accounting policies and methods used in the preparation of our consolidated financial statements and related disclosures.
 
Management believes the following are critical accounting policies, the application of which has a material impact on our financial presentation.  That is, they are both important to the portrayal of our financial condition and results, and they require management to make judgments and estimates about matters that are inherently uncertain.
 
Qualification as a REIT – Income Tax Expense:  We believe that we have been organized and operated, and we intend to continue to operate, as a qualifying REIT under the Internal Revenue Code and applicable state laws.  A REIT generally does not pay corporate level federal income taxes on its REIT taxable income that is distributed to its shareholders, and accordingly, we do not pay federal income tax on the share of our REIT taxable income that is distributed to our shareholders.
 
We therefore do not estimate or accrue any federal income tax expense for income earned and distributed related to REIT operations.  This estimate could be incorrect, because due to the complex nature of the REIT qualification requirements, the ongoing importance of factual determinations and the possibility of future changes in our circumstances, we cannot be assured that we actually have satisfied or will satisfy the requirements for taxation as a REIT for any particular taxable year.  For any taxable year that we fail or have failed to qualify as a REIT and for which applicable relief provisions did not apply, we would be taxed at the regular corporate rates on all of our taxable income, whether or not we made or make any distributions to our shareholders.  Any resulting requirement to pay corporate income tax, including any applicable penalties or interest, would have a material adverse impact on our financial condition and results of operations.  Unless entitled to relief under specific statutory provisions, we also would not be eligible to elect REIT status for any taxable year prior to the fifth taxable year which begins after the first taxable year for which REIT status was terminated.  There can be no assurance that we would be entitled to any statutory relief.
 
Impairment of Long-Lived Assets:  Substantially all of our assets, consisting primarily of real estate, are long-lived assets.  The evaluation of our long-lived assets for impairment includes determining whether indicators of impairment exist, which is a subjective process.  When any indicators of impairment are found, the evaluation of such long-lived assets then entails projections of future operating cash flows, which also involves significant judgment.  Future events, or facts and circumstances that currently exist, that we have not yet identified, could cause us to conclude in the future that our long-lived assets are impaired.  Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.
 
Estimated Useful Lives of Long-Lived Assets: Substantially all of our assets consist of depreciable or amortizable long-lived assets.  We record depreciation and amortization expense with respect to these assets based upon their estimated useful lives.  Any change in the estimated useful lives of those assets, caused by functional or economic obsolescence or other factors, could have a material adverse impact on our financial condition or results of operations.
 
 
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Accruals for Contingencies: We are exposed to business and legal liability risks with respect to events that have occurred, but in accordance with GAAP, we have not accrued for certain potential liabilities because the loss is either not probable or not estimable or because we are not aware of the event.  Future events and the results of pending litigation could result in such potential losses becoming probable and estimable, which could have a material adverse impact on our financial condition or results of operations.  Significant unaccrued losses that we have determined are at least reasonably possible are described in Note 13 to our December 31, 2010 consolidated financial statements.
 
Accruals for Operating Expenses:  Certain of our expenses are estimated based upon assumptions regarding past and future trends, such as losses for workers compensation and employee health plans, and estimated claims for our tenant reinsurance program.  Our property tax expense represents one of our largest operating expenses totaling approximately $153 million in the year ended December 31, 2010, has significant estimated components.  Most notably, in certain jurisdictions we do not receive tax bills for the current fiscal year until after our earnings are finalized, and as a result, we must estimate tax expense based upon anticipated implementation of regulations and trends.  If these estimates and assumptions were incorrect, our expenses could be misstated.
 
Valuation of real estate and intangible assets acquired: In reporting the acquisition of operating self-storage facilities in our financial statements, we must estimate the fair value of the land, buildings, and intangible assets acquired in these transactions.   These estimates are based upon many assumptions, subject to a significant degree of judgment, including estimating discount rates, replacement costs of land and buildings, and estimating future cash flows from the tenant base in place at the time of the acquisition.  We believe that the assumptions we used were reasonable, however, others could come to materially different conclusions as to the estimated values, which would result in different depreciation and amortization expense, gains and losses on sale of real estate assets, as well as the amounts included on our consolidated balance sheets for real estate  and intangible assets.
 
Overview of Management’s Discussion and Analysis of Operations
 
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.  We are the largest owner of self-storage facilities in the U.S., which represents our Domestic Self-Storage segment.  A large portion of management time is focused on maximizing revenues and effectively managing expenses at our self-storage facilities, as the Domestic Self-Storage segment contributes 92% of our revenues for the year ended December 31, 2010, and is the primary driver of growth in our net income and cash flow from operations.
 
The remainder of our operations are comprised of our Europe Self-Storage segment, our Commercial segment, and the operations not allocated to any segment, each of which is described in Note 11 to our December 31, 2010 consolidated financial statements.
 
The self-storage industry is subject to general economic conditions, particularly those that affect the disposable income and spending of consumers, as well as those that affect moving trends.  Due to the recessionary pressures in the U.S., demand for self-storage space has been negatively impacted since the fourth quarter of 2008.  As a result, rental income in our same store self-storage facilities declined on a year-over-year basis in each quarter of 2009, with a peak decline of 5.1% in the quarter ended September 30, 2009.  Rental income trends improved each quarter since the quarter ended September 30, 2009, with reduced levels of year-over-year rental income declines, and in the most recent quarter ended December 31, 2010 rental income increased 2.0%.  While trends have been improving, there can be no assurance that this will continue.
 
Another important component of our long-term growth is our access to capital and deployment of that capital.  Acquisitions of self-storage facilities were minimal during 2008 and 2009.  During the year ended December 31, 2010, we acquired 42 self-storage facilities for $239.6 million.  During January 2011, we acquired five additional facilities for $19.5 million.  In February 2011, we acquired the leasehold interest in the land for one of our self-storage facilities for approximately $6.6 million.  We believe that there may be opportunities to acquire additional facilities in 2011, because we have seen more facilities come to market and an increase in transaction volume.  However, there can be no assurance that the facilities that come to market will be those that we might be interested in acquiring at the prices asked.
 
 
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Other investments we have made in the past, and may make in the future include i) the development and redevelopment of self-storage facilities in the U.S., ii) further investment in Shurgard Europe to allow it to develop or acquire facilities, iii) further investment in PS Business Parks, and iv) the early retirement of debt or redemption of preferred securities.  There can be no assurance that these other investment alternatives will be attractive in the long-term, or will be even be available as investment alternatives.
 
At December 31, 2010, we had approximately $456.2 million of cash and $102.3 million of short-term investments in high-grade corporate securities.  We also have access to our $300 million line of credit which does not expire until March 27, 2012.  Our capital commitments during the year ended December 31, 2011 of approximately $159.9 million include (i) $133.8 million in principal payments on debt and (ii) $26.1 million for the aforementioned acquisition of facilities and land described above.  We have no further significant commitments until 2013, when $265.6 million of existing debt comes due.  On February 9, 2011, we loaned PSB $121.0 million which PSB used to re-pay borrowings against their credit facility and repurchase preferred stock.  The loan has a six-month term, no prepayment penalties, and bears interest at a rate of three-month LIBOR plus 0.85%.
 
Our ability to raise additional capital by issuing our common or preferred securities is dependent upon capital market conditions.  Capital markets have improved from the severe stress in late 2008 and early 2009.  In October 2010 we issued in aggregate $125 million (face amount) of Series P Cumulative Preferred Shares at a rate of 6.500%.  In April and May 2010, we issued in aggregate $145 million (face amount) of Series O Cumulative Preferred Shares at a rate of 6.875%.  There can be no assurance that market conditions will continue to permit preferred security issuances at amounts and at rates that we will find reasonable.  We do not believe, however, that we are dependent on raising capital to fund our operations or meet our obligations.
 
Results of Operations 


Operating results for 2010 as compared to 2009: For the year ended December 31, 2010, net income allocable to our common shareholders was $399.2 million or $2.35 per diluted common share, compared to $586.0 million or $3.47 per diluted common share for the same period in 2009, representing a decrease of $186.8 million or $1.12 per diluted common share.  This decrease is primarily due to (i) a foreign currency exchange loss of $42.3 million during the year ended December 31, 2010 compared to a $9.7 million gain during the same period in 2009, (ii) an aggregate $35.8 million increase in income allocated to the shareholders of redeemed securities, (including our equity share of PS Business Park’s (“PSB”) redemptions) in applying EITF D-42 to the redemption of securities in the year ended December 31, 2010, as compared to a $94.5 million decrease in income allocated to shareholders of redeemed securities (including our equity share of PSB’s redemptions), in applying EITF D-42 to the redemption of securities in the same period in 2009 and (iii) a gain on disposition of real estate assets of $30.3 million related to an equity offering by PSB recorded in the year ended December 31, 2009.
 
Operating results for 2009 as compared to 2008: Net income for the year ended December 31, 2009 was $790.5 million compared to $973.9 million for the same period in 2008, representing a decrease of $183.4 million.  This decrease is primarily due to (i) a gain of $344.7 million in the year ended December 31, 2008 related to our disposition of an interest in Shurgard Europe, (ii) a $36.4 million reduction in net operating income with respect to our Same Store Facilities described below, and (iii) an impairment charge included in discontinued operations with respect to intangible assets totaling $8.2 million in the year ended December 31, 2009, partially offset by (iv) a $49.9 million reduction in depreciation and amortization related to our domestic assets, primarily representing reduced intangible amortization, (v) a foreign exchange gain of $9.7 million during the year ended December 31, 2009, as compared to a loss of $25.4 million during the same period in 2008, (vi) a gain on disposition of $30.3 million recorded in the year ended December 31, 2009 related to an equity offering by PSB, and (vii) a reduction in general and administrative expenses due to $27.9 million in incentive compensation incurred in the year ended December 31, 2008 related to our disposition of an interest in Shurgard Europe.
 

 
30

 

Real Estate Operations 


Self-Storage Operations: Our self-storage operations are by far the largest component of our operating activities, representing more than 90% of our revenues for the years ended December 31, 2010, 2009 and 2008, respectively.
 
To enhance year-over-year comparisons, the table that follows summarizes, and the ensuing discussion describes, the operating results of three groups of facilities that management analyzes: (i) the Same Store facilities, representing the facilities in the Domestic Self-Storage Segment that we have owned and have been operating on a stabilized basis since January 1, 2008,  (ii) all other facilities in the Domestic Self-Storage Segment, which are primarily those consolidated facilities that we have not owned and operated at a stabilized basis since January 1, 2008 such as newly acquired, newly developed, or recently expanded facilities, and (iii), the Shurgard Europe facilities, which we deconsolidated effective March 31, 2008 in connection with the sale of a 51% interest in Shurgard Europe to an institutional investor (the “Europe Transaction”).
 
Self-Storage Operations
Summary
 
Year Ended December 31,
   
Year Ended December 31,
 
   
2010
   
2009
   
Percentage
Change
   
2009
   
2008
   
Percentage
Change
 
   
(Dollar amounts in thousands)
 
Revenues:
                                   
Same Store Facilities
  $ 1,427,716     $ 1,423,338       0.3 %   $ 1,423,338     $ 1,468,485       (3.1 )%
Other Facilities
    85,608       63,957       33.9 %     63,957       52,705       21.3 %
Shurgard Europe Facilities (a)
    -       -       -       -       54,722       (100.0 )%
Total rental income                                
    1,513,324       1,487,295       1.8 %     1,487,295       1,575,912       (5.6 )%
Cost of operations:
                                               
Same Store Facilities
    467,430       464,041       0.7 %     464,041       472,803       (1.9 )%
Other Facilities
    28,872       21,654       33.3 %     21,654       20,295       6.7 %
Shurgard Europe Facilities (a)
    -       -       -       -       24,654       (100.0 )%
Total cost of operations
    496,302       485,695       2.2 %     485,695       517,752       (6.2 )%
Net operating income (b):
                                               
Same Store Facilities
    960,286       959,297       0.1 %     959,297       995,682       (3.7 )%
Other Facilities
    56,736       42,303       34.1 %     42,303       32,410       30.5 %
Shurgard Europe Facilities (a)
    -       -       -       -       30,068       (100.0 )%
Total net operating income
    1,017,022       1,001,600       1.5 %     1,001,600       1,058,160       (5.3 )%
Total depreciation and amortization expense:
                                               
Same Store Facilities
    (303,175 )     (304,008 )     (0.3 )%     (304,008 )     (351,611 )     (13.5 )%
Other Facilities
    (48,211 )     (32,800 )     47.0 %     (32,800 )     (32,601 )     0.6 %
Shurgard Europe Facilities (a)
    -       -       -       -       (21,871 )     (100.0 )%
Total depreciation and amortization expense
    (351,386 )     (336,808 )     4.3 %     (336,808 )     (406,083 )     (17.1 )%
                                                 
Total net income
  $ 665,636     $ 664,792       0.1 %   $ 664,792     $ 652,077       1.9 %
                                                 
                                                 
Number of facilities at period end:
                                               
Same Store Facilities
    1,925       1,925       -       1,925       1,925       -  
Other Facilities
    105       63       66.7 %     63       62       1.6 %
Net rentable square footage at period end (in thousands):
                                               
Same Store Facilities
    120,328       120,328       -       120,328       120,328       -  
Other Facilities
    8,247       5,369       53.6 %     5,369       5,229       2.7 %

 
(a)
Represents the results with respect to Shurgard Europe’s facilities for the periods consolidated in our financial statements.  As described in Note 3 to our December 31, 2010 consolidated financial statements, effective March 31, 2008, we deconsolidated Shurgard Europe.  See also “Equity in Earnings of Real Estate Entities – Investment in Shurgard Europe” for further analysis of the historical same store property operations of Shurgard Europe.
 
 
31

 
 
 
 
(b)
See “Net Operating Income or NOI” below.
 
Net income with respect to our self-storage operations increased by $0.8 million during the year ended December 31, 2010, when compared to the same period in 2009.  This was due to a $21.7 million increase in revenues with respect to the Other Facilities due primarily to the acquisition of 42 facilities during 2010, partially offset by increased amortization of tenant intangible assets at these 42 facilities.  Net income with respect to our self-storage operations increased by $12.7 million during the year ended December 31, 2009, when compared to the same period in 2008.  This was due to a) declining amortization of tenant intangible assets acquired in the merger with Shurgard in 2006, b) a 1.9% reduction in cost of operations for the Same Store facilities, and c) a $11.3 million increase in revenues with respect to the Other Facilities, offset by d) a 3.1% decrease in revenues for our Same Store facilities and e) the deconsolidation of the facilities owned by Shurgard Europe effective April 1, 2008.
 
 
 
Net Operating Income
 
We refer herein to net operating income (“NOI”) of our self-storage facilities, which is a non-GAAP financial measure that excludes the impact of depreciation and amortization expense.  Although depreciation and amortization are a component of GAAP net income, we believe that NOI is a meaningful measure of operating performance, because we utilize NOI in making decisions with respect to capital allocations, property performance, and 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 as it is based upon historical cost.  NOI is not a substitute for net operating income after depreciation and amortization or net income in evaluating our operating results.  The following reconciles NOI generated by our self-storage segment to our consolidated net income in our December 31, 2010 consolidated financial statements.
 

 
32

 


 
   
Year Ended December 31,
 
   
2010
   
2009
   
2008
 
   
(Amounts in thousands)
 
Net operating income:
                 
Same Store Facilities                                                      
  $ 960,286     $ 959,297     $ 995,682  
Other Facilities                                                      
    56,736       42,303       32,410  
Shurgard Europe Facilities                                                      
    -       -       30,068  
Total net operating income from self-storage
    1,017,022       1,001,600       1,058,160  
                         
Depreciation and amortization expense:
                       
Same Store Facilities                                                      
    (303,175 )     (304,008 )     (351,611 )
Other Facilities                                                      
    (48,211 )     (32,800 )     (32,601 )
Shurgard Europe Facilities                                                      
    -       -       (21,871 )
Total depreciation and amortization expense from self-storage
    (351,386 )     (336,808 )     (406,083 )
                         
Net income (loss):
                       
Same Store Facilities                                                      
    657,111       655,289       644,071  
Other Facilities                                                      
    8,525       9,503       (191 )
Shurgard Europe Facilities                                                      
    -       -       8,197  
Total net income from self-storage
    665,636       664,792       652,077  
                         
Ancillary operating revenue
    104,381       107,597       108,421  
Interest and other income
    29,017       29,813       36,155  
Ancillary cost of operations
    (33,689 )     (36,011 )     (36,528 )
Depreciation and amortization, commercial
    (2,620 )     (2,958 )     (2,900 )
General and administrative expense
    (38,487 )     (35,735 )     (62,809 )
Interest expense
    (30,225 )     (29,916 )     (43,944 )
Equity in earnings of real estate entities
    38,352       53,244       20,391  
Foreign currency exchange (loss) gain
    (42,264 )     9,662       (25,362 )
Gains on disposition of real estate investments
    396       33,426       336,545  
Gain on early debt retirement
    431       4,114       -  
Asset impairment charges
    (2,332 )     -       (525 )
Discontinued operations
    7,518       (7,572 )     (7,649 )
Net income of the Company
  $ 696,114     $ 790,456     $ 973,872  

 

 
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Same Store Facilities
 
The “Same Store Facilities” represents those 1,925 facilities that are stabilized and owned since January 1, 2008 and therefore provide meaningful comparisons for 2008, 2009, and 2010.  The following table summarizes the historical operating results of these 1,925 facilities (120.3 million net rentable square feet) that represent approximately 94% of the aggregate net rentable square feet of our U.S. consolidated self-storage portfolio at December 31, 2010.
 
SAME STORE FACILITIES
 
Year Ended December 31,
   
Year Ended December 31,
 
   
2010
   
2009
   
Percentage
Change
   
2009
   
2008
   
Percentage
Change
 
Revenues:
 
(Dollar amounts in thousands, except weighted average amounts)
 
Rental income
  $ 1,357,579     $ 1,357,045       0.0 %   $ 1,357,045     $ 1,406,812       (3.5 )%
Late charges and administrative fees
    70,137       66,293       5.8 %     66,293       61,673       7.5 %
Total revenues (a)
    1,427,716       1,423,338       0.3 %     1,423,338       1,468,485       (3.1 )%
                                                 
Cost of operations:
                                               
Property taxes
    141,619       143,261       (1.1 )%     143,261       139,483       2.7 %
Direct property payroll
    98,455       96,406       2.1 %     96,406       96,365       0.0 %
Media advertising
    14,702       20,178       (27.1 )%     20,178       20,387       (1.0 )%
Other advertising and promotion
    21,899       20,465       7.0 %     20,465       18,567       10.2 %
Utilities
    35,368       35,630       (0.7 )%     35,630       37,514       (5.0 )%
Repairs and maintenance
    45,650       39,188       16.5 %     39,188       43,647       (10.2 )%
Telephone reservation center
    11,234       11,313       (0.7 )%     11,313       12,896       (12.3 )%
Property insurance
    9,656       9,987       (3.3 )%     9,987       11,656       (14.3 )%
Other cost of management
    88,847       87,613       1.4 %     87,613       92,288       (5.1 )%
Total cost of operations (a)
    467,430       464,041       0.7 %     464,041       472,803       (1.9 )%
Net operating income (b)
    960,286       959,297       0.1 %     959,297       995,682       (3.7 )%
Depreciation and amortization expense
    (303,175 )     (304,008 )     (0.3 )%     (304,008 )     (351,611 )     (13.5 )%
Net income
  $ 657,111     $ 655,289       0.3 %   $ 655,289     $ 644,071       1.7 %
                                                 
Gross margin (before depreciation and amortization expense)
    67.3 %     67.4 %     (0.1 )%     67.4 %     67.8 %     (0.6 )%
                                                 
Weighted average for the period:
                                               
Square foot occupancy (c)
    89.8 %     88.7 %     1.2 %     88.7 %     89.5 %     (0.9 )%
Realized annual rent per occupied square foot (d)(e)
  $ 12.56     $ 12.71       (1.2 )%   $ 12.71     $ 13.06       (2.7 )%
REVPAF (e)(f)
  $ 11.28     $ 11.28       0.0 %   $ 11.28     $ 11.69       (3.5 )%
                                                 
Weighted average at December 31:
                                               
Square foot occupancy
    88.6 %     87.1 %     1.7 %     87.1 %     87.1 %     0.0 %
In place annual rent per occupied square foot (g)
  $ 13.63     $ 13.47       1.2 %   $ 13.47     $ 14.01       (3.9 )%
Total net rentable square feet (in thousands)
    120,328       120,328       -       120,328       120,328       -  
Number of facilities
    1,925       1,925       -       1,925       1,925       -  
                                                 
 
a)  
Revenues and cost of operations do not include ancillary revenues and expenses generated at the facilities with respect to tenant reinsurance, retail sales and truck rentals.  “Other costs of management” included in cost of operations principally represents all the indirect costs incurred in the operations of the facilities.  Indirect costs principally include supervisory costs and corporate overhead cost incurred to support the operating activities of the facilities.
 
b)  
See “Net Operating Income” above for a reconciliation of this non-GAAP measure to our net income in our consolidated statements of income for the years ended December 31, 2010, 2009 and 2008.
 
c)  
Square foot occupancies represent weighted average occupancy levels over the entire period.
 
d)  
Realized annual rent per occupied square foot is computed by annualizing the result of dividing rental income (which excludes late charges and administrative fees) by the weighted average occupied square feet for the period.  Realized annual rent per occupied square foot takes into consideration promotional discounts and other items that reduce rental income from the contractual amounts due.
 
e)  
Late charges and administrative fees are excluded from the computation of realized annual rent per occupied square foot and REVPAF.  Exclusion of these amounts provides a better measure of our ongoing level of revenue, by excluding the volatility of late charges, which are dependent principally upon the level of tenant delinquency, and administrative fees, which are charged upon move-in volumes and are therefore dependent principally upon the absolute level of move-ins for a period.
 
 
34

 
 
 
f)  
Realized annual rent per available foot or “REVPAF” is computed by dividing rental income (which excludes late charges and administrative fees) by the total available net rentable square feet for the period.
 
g)  
In place annual rent per occupied square foot represents annualized contractual rents per occupied square foot without reductions for promotional discounts and excludes late charges and administrative fees.
 
Revenues generated by our Same Store facilities increased by 0.3% for the year ended December 31, 2010, as compared to the same period in 2009.  The increase was due primarily to increased late payment charges and administrative fees charged to new tenants. Rental income was flat on a year-over-year basis as average occupancy was 1.2% higher, offset by a 1.2% reduction in average realized annual rental rates per occupied square foot.
 
Revenues generated by our Same Store facilities decreased approximately 3.1% for the year ended December 31, 2009, as compared to the same period in 2008.  This decrease was caused by a 3.5% reduction in rental income, partially offset by a 7.5% increase in late charges and administrative fees.  Rental income decreased due to a combination of (i) a 2.7% reduction in average realized annual rental rates per occupied square foot and (ii) 0.9% reduction in average occupancy levels.
 
Our operating strategy is to maintain occupancy levels for our Same Store facilities at approximately 89% to 90% throughout the year.  In order to achieve this strategy, we adjust rental rates and promotional discounts offered to new tenants as well as the frequency of television advertising, increasing or decreasing each, depending on traffic patterns of new tenants renting space offset by existing tenants vacating.  We experience seasonal fluctuations in the occupancy levels with occupancies generally higher in the summer months than in the winter months.  Consequently, rates charged to new tenants are typically higher in the summer months than in the winter months.
 
We believe overall demand for self-storage space in virtually all of the markets in which we operate has been negatively impacted since late 2008 due to recessionary pressures, including increased unemployment, reduced housing sales, and reduced moving activity, in the major markets in which we operate.  Occupancy levels dropped abnormally in the fourth quarter of 2008.  We immediately reduced rental rates and increased promotional discounts to stimulate move-in activity and regain occupancy.  These actions continued throughout 2009 and helped stabilized our occupancy levels, however, monthly occupancy levels throughout 2009 remained below comparable periods in 2008.  In 2010, occupancy levels began to improve.  Throughout 2010, monthly occupancy levels exceeded those experienced in 2009 and beginning in April 2010, exceeded those experienced in 2008.  Although our occupancy has been higher in 2010 compared to 2009, reduced rental rates and increased promotional discounts offset the effect of these improved occupancy levels on our revenue.  As a result, our rental income has decreased on a year-over-year basis in each quarter in 2009 and in the first two quarters of 2010.  Beginning in the second quarter of 2010, our occupancies exceeded the occupancy levels of 2008.  These decreases peaked in the quarter ended September 30, 2009 at 5.1%, however the decreases have abated progressively each quarter since then, and rental income increased 2.0% in the quarter ended December 31, 2010.
 
The following chart sets forth our rental income, occupancy, and realized rent per square foot trends in our same-store facilities in 2009 and 2010:

 
35

 

 
   
Same Store Year-over-Year Change
 
 
 
Three Months Ended:
 
Rental
income
   
Realized rent
per occupied
square foot
   
Square foot occupancy
 
                   
March 31, 2009
    (1.0 )%     (0.2 )%     (0.8 )%
June 30, 2009
    (3.9 )%     (2.9 )%     (1.0 )%
September 30, 2009
    (5.1 )%     (4.1 )%     (1.0 )%
December 31, 2009
    (4.1 )%     (3.8 )%     (0.3 )%
For entire year: 2009
    (3.5 )%     (2.7 )%     (0.9 )%
                         
March 31, 2010
    (2.4 )%     (3.0 )%     0.6 %
June 30, 2010
    (0.5 )%     (1.5 )%     1.1 %
September 30, 2010
    1.0 %     (0.5 )%     1.6 %
December 31, 2010
    2.0 %     0.3 %     1.7 %
For entire year: 2010
    0.0 %     (1.2 )%     1.2 %
                         
                         
Notwithstanding our increases in occupancy in 2010, we will continue to be competitive in our pricing and discounting in order to compete with other operators to attract new incoming tenants.  We expect to be more aggressive in increasing rental rates to existing tenants in 2011 as compared to 2010.  We expect the improved operating trends that have been experienced in the last year to continue in the quarter ending March 31, 2011.
 
From a geographic standpoint, we experienced the greatest year-over-year revenue declines in our Southeast markets, located in North and South Carolina, Georgia, and Florida, as well as the West Coast, which includes Washington, Oregon and California.  See Analysis of Regional Trends table that follows.
 
Cost of operations (excluding depreciation and amortization) increased by 0.7% in 2010, as compared to 2009.  This increase was due primarily to increases in repairs and maintenance and direct property payroll, offset by a reduction in media advertising and lower property tax expense.  Cost of operations (excluding depreciation and amortization) decreased by 1.9% in 2009 as compared to 2008.  This decrease was due to reduced utilities, repairs and maintenance, telephone reservation center, and property insurance which were offset in part by increases in property taxes and other advertising and promotion expenses.
 
Property tax expense decreased 1.1% in 2010 as compared to 2009 due to reduced assessments of property values combined with an increase in refunds associated with appeals for prior years’ tax liabilities that were experienced in Texas, Illinois, New York, Virginia and Florida.   Property tax expense increased 2.7% in 2009 as compared to 2008 primarily due to increases in tax rates combined with increases in assessments of property values.  We expect property tax expense growth of approximately 3.0% in 2011.
 
Direct property payroll expense increased by 2.1% in 2010, as compared to 2009, and was flat in 2009 as compared to 2008.  The increase in 2010 reflects higher incentive costs for our property personnel.  For 2011, we expect moderate growth in direct property payroll.
 
Media advertising for the Same Store Facilities decreased by 27.1% in 2010, as compared to the same period in 2009, and decreased by 1.0% in 2009 as compared to 2008.  The decrease in 2010 was due primarily to a reduction in television advertising costs as we decreased the number of markets in which we advertised.  Media advertising primarily includes the cost of advertising on television and varies depending on a number of factors, including our occupancy levels and demand for storage space.
 
 
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Other advertising and promotion is comprised principally of yellow page and Internet advertising, which increased 7.0% in 2010 as compared to 2009, and 10.2% during 2009 as compared to 2008.  These increases are due primarily to higher Internet advertising expenditures offset partially by lower yellow page advertising.  During 2010, we invested extensively to improve our positioning on major Internet search engines by bidding more aggressively on keywords related to our business.  As a result, new tenants sourced through our website increased substantially.   Although yellow page advertising continues to become less effective at sourcing new tenants due to the use of the Internet, we still source a significant percentage of new tenants via this channel.  During 2010, we revised our compensation fee arrangements with yellow page providers to better reflect the reduced effectiveness of this media, resulting in reduced fees as compared to 2009.
 
Our future spending on yellow page, media, and Internet advertising expenditures will be driven in part by demand for our self-storage spaces, our current occupancy levels, and the relative efficacy of each type of advertising.  Media advertising in particular can be volatile and increase or decrease significantly in the short-term.
 
Utility expenses decreased 0.7% in 2010 as compared to 2009, and 5.0% in 2009 as compared to 2008.  The decreases are due primarily to reduced year-over-year energy prices.  It is difficult to estimate future utility cost levels because utility costs are primarily dependent upon changes in demand driven by weather and temperature, as well as fuel prices, each of which are volatile and not predictable.
 
Repairs and maintenance expenditures increased 16.5% in 2010 as compared to 2009, and decreased 10.2% in 2009 as compared to 2008   Repairs and maintenance expenditures are dependent upon several factors, such as weather, the timing of periodic needs throughout our portfolio, inflation, and random events and accordingly are difficult to project from year to year.  Due to severe weather, snow removal expenses were $2.0 million higher in 2010 as compared to 2009.  We expect overall repairs and maintenance expenditures to grow moderately in 2011.
 
Telephone reservation center costs decreased 0.7% in 2010 as compared to 2009, and decreased 12.3% in 2009 as compared to 2008.  The reductions were primarily due to lower call volumes, resulting in less staffing hours, as well as a shift from our California to our Arizona call center, resulting in lower average compensation rates.  We expect telephone reservation center cost to grow moderately in 2011.
 
Insurance expense decreased 3.3% in 2010 as compared to 2009 and 14.3% in 2009 as compared to 2008.  These declines reflect softer insurance markets as lack of hurricane activity and additional competition from insurance providers has benefited us.  We expect insurance expense in 2011 to be slightly down compared to 2010.
 

 

 
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The following table summarizes selected quarterly financial data with respect to the Same Store Facilities:
 
   
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:
                         
2010
  $ 347,833     $ 354,386     $ 365,090     $ 360,407     $ 1,427,716  
2009
  $ 355,489     $ 355,179     $ 360,747     $ 351,923     $ 1,423,338  
2008
  $ 357,556     $ 367,586     $ 377,632     $ 365,711     $ 1,468,485  
                                         
Total cost of operations:
                         
2010
  $ 126,537     $ 121,409     $ 119,422     $ 100,062     $ 467,430  
2009
  $ 127,412     $ 118,772     $ 115,678     $ 102,179     $ 464,041  
2008
  $ 126,372     $ 122,994     $ 116,340     $ 107,097     $ 472,803  
                                         
Property tax expense:
                                 
2010
  $ 39,955     $ 38,748     $ 38,599     $ 24,317     $ 141,619  
2009
  $ 38,582     $ 37,498     $ 38,007     $ 29,174     $ 143,261  
2008
  $ 37,148     $ 35,969     $ 37,009     $ 29,357     $ 139,483  
                                         
Media advertising expense:
                         
2010
  $ 5,249     $ 6,408     $ 3,045     $ -     $ 14,702  
2009
  $ 8,308     $ 7,351     $ 3,532     $ 987     $ 20,178  
2008
  $ 7,208     $ 10,040     $ 2,193     $ 946     $ 20,387  
                                         
Other advertising and promotion expense:
                         
2010
  $ 5,004     $ 6,521     $ 5,497     $ 4,877     $ 21,899  
2009
  $ 4,713     $ 6,060     $ 5,042     $ 4,650     $ 20,465  
2008
  $ 4,514     $ 5,105     $ 4,733     $ 4,215     $ 18,567  
                                         
REVPAF:
                                 
2010
  $ 11.01     $ 11.21     $ 11.52     $ 11.38     $