10-Q 1 ps10q_1q11.htm PUBLIC STORAGE - 10Q MARCH 31, 2011 ps10q_1q11.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-Q
 
[X]         Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended March 31, 2011
 
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)
 
Registrant’s telephone number, including area code:  (818) 244-8080.
 
 
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 at least the past 90 days.
 
[X]  Yes  [   ]  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).

[X]  Yes  [   ]  No

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  [X]  No
 
Indicate the number of the registrant’s outstanding common shares of beneficial interest, as of May 4, 2011:
 
Common Shares of beneficial interest, $.10 par value per share – 170,633,705 shares
 

 

 
 

 



PUBLIC STORAGE
     
INDEX
     
     
PART I
FINANCIAL INFORMATION
Pages
     
Item 1.
Financial Statements (Unaudited)
 
     
 
Condensed Consolidated Balance Sheets at
March 31, 2011 and December 31, 2010
1
     
 
Condensed Consolidated Statements of Income for the
Three Months Ended March 31, 2011 and 2010
2
     
 
Condensed Consolidated Statement of Equity
for the Three Months Ended March 31, 2011
3
     
 
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2011 and 2010
4 - 5
     
 
Notes to Condensed Consolidated Financial Statements
6 - 30
     
Item 2.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
31 – 56
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
57
     
Item 4.
Controls and Procedures
58
     
PART II
OTHER INFORMATION (Items 3 and 5 are not applicable)
 
     
Item 1.
Legal Proceedings
59
     
Item 1A.
Risk Factors
59
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
59
     
Item 4.
(Removed and reserved)
59
     
Item 6.
Exhibits
59
     
 
 

 
 

 

PUBLIC STORAGE
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Amounts in thousands, except share data)
 

 
   
March 31,
2011
   
December 31,
2010
 
ASSETS
 
(Unaudited)
       
             
Cash and cash equivalents                                                                                             
  $ 145,105     $ 456,252  
Marketable securities                                                                                             
    -       102,279  
Real estate facilities, at cost:
               
Land                                                                                          
    2,793,494       2,789,227  
Buildings                                                                                          
    7,835,179       7,798,120  
      10,628,673       10,587,347  
Accumulated depreciation                                                                                          
    (3,142,304 )     (3,061,459 )
      7,486,369       7,525,888  
Construction in process                                                                                          
    7,278       6,928  
      7,493,647       7,532,816  
                 
Investment in real estate entities                                                                                             
    617,026       601,569  
Goodwill, net                                                                                             
    174,634       174,634  
Intangible assets, net                                                                                             
    35,866       42,091  
Loans receivable from real estate entities                                                                                             
    871,777       495,229  
Other assets                                                                                             
    97,466       90,463  
Total assets                                                                             
  $ 9,435,521     $ 9,495,333  
                 
LIABILITIES AND EQUITY
               
                 
Notes payable                                                                                             
  $ 461,882     $ 568,417  
Accrued and other liabilities                                                                                             
    210,769       205,769  
Total liabilities                                                                                   
    672,651       774,186  
                 
Redeemable noncontrolling interests in subsidiaries
    12,292       12,213  
                 
Commitments and contingencies (Note 11)
               
                 
Equity:
               
Public Storage shareholders’ equity:
               
Cumulative Preferred Shares of beneficial interest, $0.01 par value, 100,000,000 shares authorized, 486,390 shares issued (in series) and outstanding, (486,390 at December 31, 2010) at liquidation preference
      3,396,027         3,396,027  
Common Shares of beneficial interest, $0.10 par value, 650,000,000 shares
authorized, 169,470,524 shares issued and outstanding (169,252,819 at December 31, 2010)
      16,949         16,927  
Paid-in capital
    5,529,227       5,515,827  
Accumulated deficit
    (223,960 )     (236,410 )
Accumulated other comprehensive loss
    (678 )     (15,773 )
Total Public Storage shareholders’ equity                                                                                  
    8,717,565       8,676,598  
Equity of permanent noncontrolling interests in subsidiaries
    33,013       32,336  
Total equity
    8,750,578       8,708,934  
Total liabilities and equity                                                                             
  $ 9,435,521     $ 9,495,333  

See accompanying notes.
1
 
 

 

PUBLIC STORAGE
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
(Unaudited)



   
Three Months Ended
March 31,
 
   
2011
   
2010
 
             
Revenues:
           
Self-storage facilities
  $ 385,135     $ 364,073  
Ancillary operations
    26,915       25,158  
Interest and other income
    7,768       8,216  
      419,818       397,447  
Expenses:
               
Cost of operations:
               
Self-storage facilities
    135,386       132,340  
Ancillary operations
    8,914       8,430  
Depreciation and amortization
    88,542       84,717  
General and administrative
    14,235       10,077  
Interest expense
    6,984       7,339  
      254,061       242,903  
Income from continuing operations before equity in earnings of real estate entities, foreign currency exchange gain (loss), gains on disposition of real estate investments and asset impairment charges
        165,757           154,544  
Equity in earnings of real estate entities
    13,716       9,961  
Foreign currency exchange gain (loss)
    31,252       (34,843 )
Gains on disposition of real estate investments
    198       333  
Asset impairment charges
    -       (611 )
Income from continuing operations
    210,923       129,384  
Discontinued operations
    (355 )     533  
Net income
    210,568       129,917  
Net income allocated to noncontrolling interests in subsidiaries:
               
Based upon income of the subsidiaries
    (4,460 )     (5,956 )
Net income allocable to Public Storage shareholders
  $ 206,108     $ 123,961  
Allocation of net income to Public Storage shareholders:
               
Preferred shareholders based on distributions paid
  $ 57,617     $ 58,108  
Equity Shares, Series A
    -       5,131  
Equity Shares, Series A based on redemptions
    -       25,746  
Restricted share units
    432       238  
Common shareholders
    148,059       34,738  
    $ 206,108     $ 123,961  
Net income per common share – basic
               
Continuing operations
  $ 0.87     $ 0.21  
Discontinued operations
    -       -  
    $ 0.87     $ 0.21  
Net income per common share – diluted
               
Continuing operations
  $ 0.87     $ 0.21  
Discontinued operations
    -       -  
    $ 0.87     $ 0.21  
Basic weighted average common shares outstanding
    169,315       168,477  
Diluted weighted average common shares outstanding
    170,382       169,310  


See accompanying notes.
2
 
 

 
PUBLIC STORAGE
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(Amounts in thousands, except share data)
(Unaudited)


   
 
 
 
Cumulative Preferred Shares
   
 
 
 
Common Shares
   
 
 
 
 
Paid-in Capital
   
 
 
 
Accumulated
Deficit
   
 
Accumulated Other Comprehensive Loss
   
 
Total
Public Storage Shareholders’ Equity
   
Equity of Permanent Noncontrolling Interests
In Subsidiaries
   
 
 
 
 
Total Equity
 
Balance at December 31, 2010
  $ 3,396,027     $ 16,927     $ 5,515,827     $ (236,410 )   $ (15,773 )   $ 8,676,598     $ 32,336     $ 8,708,934  
Issuance of common shares in connection with share-based compensation (217,705 shares) (Note 9)
    -       22       11,351       -       -       11,373       -       11,373  
Share-based compensation expense, net of cash compensation in lieu of common shares (Note 9)
    -       -       2,049       -       -       2,049       -       2,049  
Adjustments of redeemable noncontrolling interests in subsidiaries to liquidation value (Note 6)
    -       -       -       (153 )     -       (153 )     -       (153 )
Net income
    -       -       -       210,568       -       210,568       -       210,568  
Net income allocated to (Note 6):
                                                               
Redeemable noncontrolling interests in subsidiaries
    -       -       -       (220 )     -       (220 )     -       (220 )
Permanent noncontrolling equity interests
    -       -       -       (4,240 )     -       (4,240 )     4,240       -  
Distributions to equity holders:
                                                               
Cumulative preferred shares (Note 7)
    -       -       -       (57,617 )     -       (57,617 )     -       (57,617 )
Permanent noncontrolling interests in subsidiaries
    -       -       -       -       -       -       (3,563 )     (3,563 )
Holders of unvested restricted share units
    -       -       -       (381 )     -       (381 )     -       (381 )
Common shares ($0.80 per share)
    -       -       -       (135,507 )     -       (135,507 )     -       (135,507 )
Other comprehensive income (Note 2)
    -       -       -       -       15,095       15,095       -       15,095  
                                                                 
Balance at March 31, 2011
  $ 3,396,027     $ 16,949     $ 5,529,227     $ (223,960 )   $ (678 )   $ 8,717,565     $ 33,013     $ 8,750,578  



 

See accompanying notes.
3
 
 

 
PUBLIC STORAGE
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)


   
For the Three Months Ended
March 31,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net income
  $ 210,568     $ 129,917  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Loss (gain) on disposition of real estate investments, including amounts in discontinued operations
    55       (770 )
Asset impairment charges, including amounts in discontinued operations
    -       1,008  
Depreciation and amortization, including amounts in discontinued operations
    88,553       84,886  
Distributions received from real estate entities (less than) in excess of equity in earnings of real estate entities
    (820 )     2,745  
Foreign currency exchange (gain) loss
    (31,252 )     34,843  
Other
    (2,285 )     (19,507 )
Total adjustments
    54,251       103,205  
Net cash provided by operating activities
    264,819       233,122  
Cash flows from investing activities:
               
Capital improvements to real estate facilities
    (11,874 )     (4,812 )
Construction in process
    (4,087 )     (4,854 )
Acquisition of real estate facilities and property intangibles (Note 3)
    (26,196 )     -  
Proceeds from sales of other real estate investments
    451       932  
Loan to PS Business Parks
    (121,000 )     -  
Loan to Shurgard Europe
    (237,877 )     -  
Proceeds from repayments of loan receivable from Shurgard Europe
    13,430       -  
Net sales (purchases) of marketable securities
    102,230       (95,248 )
Other investing activities
    396       (2,221 )
Net cash used in investing activities
    (284,527 )     (106,203 )
Cash flows from financing activities:
               
Principal payments on notes payable
    (105,535 )     (1,965 )
Net proceeds from the issuance of common shares
    11,373       11,822  
Distributions paid to Public Storage shareholders
    (193,505 )     (173,135 )
Distributions paid to redeemable noncontrolling interests
    (294 )     (304 )
Distributions paid to permanent noncontrolling interests
    (3,563 )     (6,279 )
Net cash used in financing activities
    (291,524 )     (169,861 )
Net decrease in cash and cash equivalents
    (311,232 )     (42,942 )
Net effect of foreign exchange translation on cash
    85       (865 )
Cash and cash equivalents at the beginning of the period
    456,252       763,789  
Cash and cash equivalents at the end of the period
  $ 145,105     $ 719,982  

 

 

See accompanying notes.
4
 
 

 
PUBLIC STORAGE
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)


(Continued)
 
   
For the Three Months Ended
March 31,
 
   
2011
   
2010
 
Supplemental schedule of non cash investing and financing activities:
           
             
Foreign currency translation adjustment:
           
Real estate facilities, net of accumulated depreciation
  $ (524 )   $ 828  
Investment in real estate entities
    (14,637 )     8,467  
Loan receivable from real estate entities
    (31,101 )     34,460  
Accumulated other comprehensive loss
    46,347       (44,620 )
                 
Adjustments of redeemable noncontrolling interests to fair values:
               
Accumulated deficit
    (153 )     (65 )
Redeemable noncontrolling interests                                                                                  
    153       65  
                 
Real estate acquired in connection with elimination of intangible assets
    (4,738 )     -  
Intangible assets eliminated in connection with acquisition of real estate
    4,738       -  
                 
Equity Shares, Series A called for redemption:
               
Paid-in capital                                                                                  
    -       (205,366 )
Equity Shares, Series A called for redemption                                                                                  
    -       205,366  
                 
                 
                 

 

 

 

See accompanying notes.
5
 
 

 
PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)


1.  
Description of the Business
 
 
Public Storage (referred to herein as “the Company”, “the Trust”, “we”, “us”, or “our”), a Maryland real estate investment trust, was organized in 1980.  Our principal business activities include the acquisition, development, ownership and operation of self-storage facilities which offer storage spaces for lease, generally on a month-to-month basis, for personal and business use.  Our self-storage facilities are located primarily in the United States (“U.S.”).  We also have interests in self-storage facilities located in seven Western European countries.
 
At March 31, 2011, we had direct and indirect equity interests in 2,052 self-storage facilities (with approximately 130.0 million net rentable square feet) located in 38 states operating under the “Public Storage” name.  In Europe, we own one facility in London, England and we have a 49% interest in Shurgard Europe, which has an ownership interest in 188 self-storage facilities (with approximately 10.1 million net rentable square feet), all operating under the “Shurgard” name.  We also have direct and indirect equity interests in approximately 23.5 million net rentable square feet of commercial space located in 11 states in the U.S. primarily operated by PS Business Parks, Inc. (“PSB”) under the “PS Business Parks” name.
 
 
Any reference to the number of properties, square footage, number of tenant reinsurance policies outstanding and the aggregate coverage of such reinsurance policies are unaudited and outside the scope of our independent registered public accounting firm’s audit of our financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).
 
2.  
Summary of Significant Accounting Policies
 
Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) as defined in the Financial Accounting Standards Board Accounting Standards Codification (the “Codification”), including the related guidance with respect to interim financial information, and in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair presentation have been reflected in these unaudited condensed consolidated financial statements.  Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011 due to seasonality and other factors.  The accompanying unaudited condensed consolidated financial statements should be read together with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
 
Certain amounts previously reported in our December 31, 2010 and March 31, 2010 financial statements have been reclassified to conform to the March 31, 2011 presentation, as a result of discontinued operations.
 
Codification Section 810-10-15-14 stipulates that generally any entity with a) insufficient equity to finance its activities without additional subordinated financial support provided by any parties, or b) equity holders that, as a group, lack the characteristics specified in the Codification which evidence a controlling financial interest, is considered a Variable Interest Entity (“VIE”).
 
 
 
6

PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
 
 
When we are the general partner, we are presumed to control the partnership unless the limited partners possess either a) the substantive ability to dissolve the partnership or otherwise remove us as general partner without cause (commonly referred to as “kick-out rights”), or b) the right to participate in substantive operating and financial decisions of the limited partnership that are expected to be made in the course of the partnership’s business.
 
The accounts of entities we control that are not VIE’s, and VIE’s that we have a controlling financial interest in, are included in our condensed consolidated financial statements, and all intercompany balances and transactions are eliminated.  We account for our investment in entities that we do not consolidate using the equity method of accounting or, if we do not have the ability to exercise significant influence over an investee, the cost method of accounting.  Changes in consolidation status are reflected effective the date the change of control or determination of primary beneficiary status occurred, and previously reported periods are not restated.  The entities that we consolidate, for the periods in which the reference applies, are referred to hereinafter as the “Subsidiaries.”  The entities that we have an interest in but do not consolidate, for the periods in which the reference applies, are referred to hereinafter as the “Unconsolidated Entities” or the “Real Estate Entities."
 
Collectively, at March 31, 2011, the Company and its Subsidiaries own a total of 2,041 real estate facilities included in continuing operations, consisting of 2,033 self-storage facilities in the U.S., one self-storage facility in London, England and seven commercial facilities in the U.S.
 
At March 31, 2011, the Unconsolidated Entities are comprised of PSB, Shurgard Europe, and various limited and joint venture partnerships (the partnerships referred to as the “Other Investments”).  At March 31, 2011, the Other Investments own in aggregate 19 self-storage facilities with 1.1 million net rentable square feet in the U.S.
 
Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes.  Actual results could differ from those estimates.
 
Income Taxes

For all taxable years subsequent to 1980, the Company has qualified and intends to continue to qualify as a real estate investment trust (“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.  We believe we have met these tests during 2010, for the quarter ended March 31, 2011, and we expect to meet these tests for the rest of 2011 and, accordingly, no provision for federal income taxes has been made in the accompanying condensed consolidated financial statements on income produced and distributed on real estate rental operations.  We have business operations in taxable REIT subsidiaries that are subject to regular corporate tax on their taxable income, and such corporate taxes attributable to these operations are presented in ancillary cost of operations in our accompanying condensed consolidated statements of income.  We also are subject to certain state taxes, which are presented in general and administrative expense in our accompanying condensed consolidated statements of income.  We have concluded that there are no significant uncertain tax positions requiring recognition in our financial statements with respect to all tax periods which remain subject to examination by major tax jurisdictions as of March 31, 2011.
 
 
 
7

PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
 
 
Real Estate Facilities
 
Real estate facilities are recorded at cost.  Costs associated with the development, construction, renovation and improvement of properties are capitalized.  Interest, property taxes and other costs associated with development incurred during the construction period are capitalized as building cost.  Legal services, due diligence, transfer taxes, and other internal and external transaction costs associated with acquisitions are expensed as incurred.  Costs associated with the sale of real estate facilities or interests in real estate investments are expensed as incurred.  Expenditures for repairs and maintenance are expensed when incurred.  Depreciation expense is computed using the straight-line method over the estimated useful lives of the buildings and improvements, which generally range from 5 to 25 years.
 
Acquisitions of operating self-storage facilities are accounted for under the provisions of Codification Section 805, “Business Combinations.”  The net acquisition cost includes cash paid to the seller as well as the fair value of any mortgage debt assumed.  In the case of multiple facilities acquired in a single transaction, the aggregate acquisition cost is allocated to each facility based upon the relative estimated fair value of each facility.  Any difference between the acquisition cost and the fair value of the real estate facilities is recorded as goodwill.  The acquisition cost of each facility is allocated based upon the relative estimated fair values of the underlying land, buildings, and intangibles such as the self-storage tenants in place.  Significant judgment is used to estimate fair values in recording our business combinations, and the valuation process utilizes significant unobservable inputs, which are “Level 3” inputs as the term is defined in FASB Codification Section 820-10-35-52.
 
Other Assets

Other assets primarily consist of prepaid expenses, accounts receivable, interest receivable, and restricted cash.  During the three months ended March 31, 2010, we recorded impairment charges with respect to other assets totaling $611,000.  These amounts are included in “asset impairment charges” on our condensed consolidated statement of income for the three months ended March 31, 2010.

Accrued and Other Liabilities

Accrued and other liabilities consist primarily of trade payables, property tax accruals, tenant prepayments of rents, accrued interest payable, accrued payroll, contingent casualty and other losses which are accrued when probable and to the extent they are estimable, and estimated losses we expect to pay related to our tenant reinsurance activities.  When it is at least reasonably possible that a significant unaccrued contingent loss has occurred, we disclose the nature of that potential loss under “Legal Matters” in Note 11 “Commitments and Contingencies”.
 
Financial Instruments

We have estimated the fair value of our financial instruments using available market information and generally accepted valuation methodologies.  Considerable judgment is required in interpreting market data to develop estimates of market value.  Accordingly, estimated fair values are not necessarily indicative of the amounts that could be realized in current market exchanges.

For purposes of financial statement presentation, we consider all highly liquid financial instruments such as short-term treasury securities, money market funds with daily liquidity and a rating of at least AAA by Standard and Poor’s, or investment grade (rated A1 by Standard and Poor’s) short-term commercial paper with remaining maturities of three months or less at the date of acquisition to be cash equivalents.  Any such cash and cash equivalents which are restricted from general corporate use due to insurance or other regulations, or based upon contractual requirements, are included in other assets.
 
 
8

PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 

 
Marketable securities consist of short-term investments in high-grade corporate securities rated A1 by Standard and Poor’s.  Because we have the positive intent and ability to hold these securities to maturity, the securities are stated at amortized cost and the related unrecognized gains and losses are excluded from earnings and other comprehensive income.  The difference between interest income that is imputed using the effective interest method and the actual note interest collected is recorded as an adjustment to the marketable security balance; our marketable securities were decreased $49,000 and $70,000 during the three months ended March 31, 2011 and 2010, respectively, in applying the effective interest method.  The amortized cost, gross unrecognized holding losses, and fair value of our marketable securities were $102,279,000, ($41,000) and $102,238,000, respectively, at December 31, 2010.  The characteristics of the marketable securities and comparative metrics utilized in our evaluation represent significant observable inputs, which are “Level 2” inputs as the term is defined in FASB Codification Section 820-10-35-47.  We periodically assess our marketable securities for other-than-temporary impairment.  Any such other-than-temporary impairment from credit loss is recognized as a realized loss and measured as the excess of carrying value over fair value at the time the assessment is made.  During each of the three months ended March 31, 2011 and 2010, we had no other-than-temporary impairment losses.  All of our marketable securities held as of December 31, 2010 matured during the three months ended March 31, 2011.  As of March 31, 2011, we held no marketable securities.

Due to the short maturity and the underlying characteristics of our cash and cash equivalents, other assets, and accrued and other liabilities, we believe the carrying values as presented on the condensed consolidated balance sheets are reasonable estimates of fair value.

Financial assets that are exposed to credit risk consist primarily of cash and cash equivalents, accounts receivable, the loan receivable from PSB, the loans receivable from Shurgard Europe, and restricted cash.  Cash and cash equivalents and restricted cash are only invested in instruments with an investment grade rating.  See “Loans Receivable from Shurgard Europe” below for information regarding our fair value measurement of this instrument.

At March 31, 2011, due primarily to our investment in and loans receivable from Shurgard Europe, our operations and our financial position are affected by fluctuations in currency exchange rates between the Euro, and to a lesser extent, other European currencies, against the U.S. Dollar.

We estimate the fair value of our notes payable to be $467,250,000 at March 31, 2011, based primarily upon discounting the future cash flows under each respective note at an interest rate that approximates loans with similar credit quality and term to maturity.  The characteristics of the notes payable and comparative metrics utilized in our evaluation represent significant observable inputs, which are “Level 2” inputs as the term is utilized in FASB Codification Section 820-10-35-47.

We have estimated the fair value of our financial instruments using available market information and appropriate valuation methodologies.  Considerable judgment is required in interpreting market data to develop estimates of market value.  Accordingly, estimated fair values are not necessarily indicative of the amounts that could be realized in current market exchanges.

Goodwill
 
Goodwill represents the excess of acquisition cost over the fair value of net tangible and identifiable intangible assets acquired in business combinations, and has an indeterminate life.  Each business combination from which our goodwill arose was for the acquisition of single businesses and accordingly, the allocation of our goodwill to our business segments is based directly on such acquisitions. Our goodwill balance of $174,634,000 is reported net of accumulated amortization of $85,085,000 as of March 31, 2011 and December 31, 2010.
 
 
 
9

PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
 
 
Intangible Assets
 
Our intangible assets primarily represent the unamortized portion of the estimated acquisition-date fair values of the tenants in place and, to a lesser extent, leasehold interests in land (collectively, the “Property Intangibles”).  Property Intangibles are finite-lived and are amortized relative to the benefit of the tenants in place or the land lease expense to each period.  Accumulated amortization reflects those individual real estate facilities where the related Property Intangibles had not been fully amortized at each applicable date.
 
At March 31, 2011, our Property Intangibles have a net book value of $17,042,000 ($23,267,000 at December 31, 2010).  Accumulated amortization totaled $23,257,000 at March 31, 2011 ($21,844,000 at December 31, 2010), and amortization expense of $3,511,000 and $906,000 was recorded for the three months ended March 31, 2011 and 2010, respectively.  During the three months ended March 31, 2011, our Property Intangibles were increased by $2,024,000 in connection with the acquisition of five self-storage facilities and the leasehold interest in the land of one of our existing self-storage facilities (Note 3).  The acquisition of this leasehold interest resulted in the reclassification of Property Intangibles totaling $4,738,000 to real estate facilities, during the three months ended March 31, 2011.
 
In addition to the Property Intangibles, we also have an intangible asset representing the estimated acquisition-date fair value of the “Shurgard” trade name, which is used by Shurgard Europe pursuant to a licensing agreement, with a book value of $18,824,000 at March 31, 2011 and December 31, 2010.  The Shurgard trade name has an indefinite life and, accordingly, we do not amortize this asset but instead analyze it on an annual basis for impairment.  No impairments have been noted from any of our annual evaluations.
 
Evaluation of Asset Impairment
 
We evaluate our real estate, Property Intangibles, and other long-lived assets for impairment on a quarterly basis.  We first evaluate these assets for indicators of impairment, and if any indicators of impairment are noted, we determine whether the carrying value of such assets is in excess of the future estimated undiscounted cash flows attributable to these assets.  If there is excess carrying value over such future undiscounted cash flows, an impairment charge is recorded for the excess of carrying value over the assets’ estimated fair value.  Any long-lived assets which we expect to sell or otherwise dispose of prior to their estimated useful life are stated at the lower of their estimated net realizable value (estimated fair value less cost to sell) or their carrying value.  During the three months ended March 31, 2010, we recorded an impairment charge totaling $1,008,000, comprised of $611,000 in other assets and $397,000 in real estate facilities (Note 3).  No additional impairments were identified from our evaluations in any periods presented in the accompanying condensed consolidated financial statements, except as noted above.
 
We evaluate impairment of goodwill annually by reporting unit.  No impairment of our goodwill was identified in our annual evaluation at December 31, 2010, nor were there any indicators of impairment at March 31, 2011.
 
Revenue and Expense Recognition
 
Rental income, which is generally earned pursuant to month-to-month leases for storage space, as well as late charges and administrative fees, are recognized as earned.  Promotional discounts are recognized as a reduction to rental income over the promotional period, which is generally during the first month of occupancy.  Ancillary revenues and interest and other income are recognized when earned.  Equity in earnings of real estate entities is recognized based on our ownership interest in the earnings of each of the Unconsolidated Entities.
 
 
 
10

PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
 
 
We accrue for property tax expense based upon actual amounts billed for the related time periods and, in some circumstances due to taxing authority assessment and billing timing and disputes of assessed amounts, estimates and historical trends.  If these estimates are incorrect, the timing and amount of expense recognition could be affected.  Cost of operations, general and administrative expense, interest expense, as well as television, yellow page, and other advertising expenditures are expensed as incurred.
 
Foreign Currency Exchange Translation
 
The local currency is the functional currency for the foreign operations we have an interest in.  Assets and liabilities included on our consolidated balance sheets, including our equity investment in, and our loan receivable from, Shurgard Europe, are translated at end-of-period exchange rates, while revenues, expenses, and equity in earnings in the related real estate entities, are translated at the average exchange rates in effect during the period.  The Euro, which represents the functional currency used by a majority of the foreign operations we have an interest in, was translated at an end-of-period exchange rate of approximately 1.410 U.S. Dollars per Euro at March 31, 2011 (1.325 at December 31, 2010), and average exchange rates of 1.400 and 1.384 for the three months ended March 31, 2011 and 2010, respectively.  Equity is translated at historical rates and the resulting cumulative translation adjustments, to the extent not included in net income, are included as a component of accumulated other comprehensive income (loss) until the translation adjustments are realized.  See “Other Comprehensive Income” below for further information regarding our foreign currency translation gains and losses.
 
Fair Value Accounting
 
As the term is used in our financial statements, “fair value” is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  We prioritize the inputs used in measuring fair value based upon a three-tier fair value hierarchy described in the FASB Codification Section 820-10-35.  See “Loan Receivable from Shurgard Europe” below, and “Financial Instruments” and “Real Estate Facilities” above, as well as “Redeemable Noncontrolling Interests in Subsidiaries” and “Other Permanent Noncontrolling Interests in Subsidiaries” in Note 6 for information regarding our fair value measurements.
 
Loan Receivable from PSB
 
On February 9, 2011, we loaned PSB $121.0 million.  The loan has a six-month term, no prepayment penalties, and bears interest at a rate of three-month LIBOR plus 0.85% (1.16% per annum at March 31, 2011).  For the three months ended March 31, 2011, we recorded interest income of approximately $195,000 related to the loan.  As of March 31, 2011, the loan totaled $121.0 million, and is included on our condensed consolidated balance sheet under “Loans receivable from real estate entities.”
 
Loans Receivable from Shurgard Europe
 
As of March 31, 2011, we had a €363.8 million loan receivable from Shurgard Europe totaling $512.9 million (€373.7 million totaling $495.2 million at December 31, 2010), which bears interest at a fixed rate of 9.0% per annum and matures March 31, 2013.  This loan is denominated in Euros and is translated to U.S. Dollars for financial statement purposes.  During each applicable period, because we expect repayment of this Euro-denominated loan within two years of each respective balance sheet date, we recognize foreign exchange rate gains or losses in income as a result of changes in exchange rates between the Euro and the U.S. Dollar, totaling a gain of $31,101,000 and a loss of $34,460,000 in three months ended March 31, 2011 and 2010, respectively.  Loan fees collected from Shurgard Europe are amortized on a straight-line basis as interest income over the applicable term to which the fee applies.  We received $13,430,000 (€9,900,000) in principal repayments on this loan during the three months ended March 31, 2011 and €18.2 million ($24.5 million) in the year ended December 31, 2010.
 
 
 
11

PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
 
 
On February 28, 2011, we loaned Shurgard Europe an additional $237.9 million which was used by Shurgard Europe on March 2, 2011 to acquire the 80% interests it did not already own in two joint ventures that own a total of 72 self-storage facilities (3.6 million square feet of storage space).  This loan bears interest at a fixed rate of 7.0% per annum, matures May 31, 2011, and is denominated in U.S. Dollars.  As of March 31, 2011, this loan totaled $237.9 million.  We expect our joint venture partner in Shurgard Europe to acquire 51%, representing their pro rata ownership of Shurgard Europe, of the loan by May 31, 2011.  Following our joint venture partner’s funding of its pro rata share, the loan will be restructured, and we do not expect repayment of this loan in the short-term.
 
For the three months ended March 31, 2011 and 2010, we recorded interest income of approximately $6,545,000 and $6,430,000, respectively, related to the loans to Shurgard Europe.  These amounts reflect 51% of the aggregate interest on the loans to Shurgard Europe, with the other 49%, reflecting our ownership interest in Shurgard Europe, classified as equity in earnings of real estate entities on our condensed consolidated statements of income.
 
Loans to Shurgard Europe are included on our condensed consolidated balance sheets under “Loans receivable from real estate entities.”
 
Although there can be no assurance, we believe that Shurgard Europe has sufficient liquidity and collateral, and we have sufficient creditor rights, such that credit risk relating to the loans to Shurgard Europe is minimal.  In addition, we believe the interest rates on the loans to Shurgard Europe approximate the market rate for loans with similar credit characteristics and tenor, and that the carrying values of the loans to Shurgard Europe approximate fair value.  The characteristics of the loans to Shurgard Europe and comparative metrics utilized in our evaluation represent significant unobservable inputs, which are “Level 3” inputs as the term is utilized in FASB Codification Section 820-10-35-52.
 
Other Comprehensive Income
 
Other comprehensive income consists primarily of foreign currency translation adjustments to the extent not recognized on our condensed consolidated statements of income.  Other comprehensive income is reflected as an adjustment to “Accumulated Other Comprehensive Income” in the equity section of our condensed consolidated balance sheet, and is added to our net income in determining total comprehensive income for the period as reflected in the following table:
 
 
 
12

PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
 
 
   
For the Three Months Ended March 31,
 
   
2011
   
2010
 
   
(Amounts in thousands)
 
Net income
  $ 210,568     $ 129,917  
Other comprehensive income (loss):
               
Aggregate foreign currency translation adjustments for the period (a)
    46,347       (44,620 )
Adjust for foreign currency translation adjustments recognized during the period:
               
 Foreign currency (gain) loss (b)
    (31,252 )     34,843  
Other comprehensive income (loss) income for the period
    15,095       (9,777 )
Total comprehensive income
  $ 225,663     $ 120,140  

(a)  
Included in the foreign currency gain for the three months ended March 31, 2011 is a realized gain of $0.4 million in connection with €9.9 million of principal repayments during that period.  This gain represents the difference between the spot rates on the date the amounts were initially funded by us (1.32 U.S. Dollars per Euro) and the repayment dates (average rate of 1.36 U.S. Dollars per Euro).

(b)  
The foreign currency exchange gains and losses reflected on our condensed consolidated statements of income are comprised primarily of foreign currency exchange gains and losses on the Euro-denominated loan to Shurgard Europe.

Discontinued Operations
 
The revenues and expenses of operating units (including individual real estate facilities) that can be segregated from the other operations of the Company, and either i) have been eliminated from the ongoing operations of the Company or ii) are expected to be eliminated from the ongoing operations of the Company within the next year pursuant to a committed plan of disposal, are reclassified and presented for all periods as “discontinued operations” on our condensed consolidated statements of income. 

Included in discontinued operations are the historical operations of (i) a land-leased facility that was disposed of in the three months ended March 31, 2011 and another land-leased facility that was disposed of in the year ended December 31, 2010 when the respective land leases expired, and (ii) two self-storage facilities that were disposed of in 2010.  In addition to revenues and expenses of these operating units, discontinued operations is comprised primarily of a $253,000 loss on disposition of a land-leased facility where the landlord did not renew the lease, for the three months ended March 31, 2011, a $437,000 gain on disposition of a real estate facility for the three months ended March 31, 2010 and a $397,000 impairment charge on real estate incurred in the three months ended March 31, 2010.
 
Net Income per Common Share
 
We first allocate net income to our noncontrolling interests in subsidiaries (Note 6) and preferred shareholders to arrive at net income allocable to our common shareholders and Equity Shares, Series A.  Net income allocated to preferred shareholders or noncontrolling interests in subsidiaries includes any excess of the cash required to redeem any preferred securities in the period over the net proceeds from the original issuance of the securities (or, if securities are redeemed for less than the original issuance proceeds, income allocated to the holders of the redeemed securities is reduced).
 
 
 
13

PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 

 
The remaining net income is allocated among our regular common shares, restricted share units, and our Equity Shares, Series A based upon the dividends declared (or accumulated) for each security in the period, combined with each security’s participation rights in undistributed earnings.  Net income allocated to the Equity Shares, Series A for the three months ended March 31, 2010 also includes $25.7 million, representing the excess of cash paid to redeem the securities over the original issuance proceeds.  We redeemed these securities on April 15, 2010.
 
Net income allocated to our regular common shares from continuing operations is computed by eliminating the net income or loss from discontinued operations allocable to our regular common shares, from net income allocated to our regular common shares.
 
Basic net income per share, basic net income (loss) from discontinued operations per share, and basic net income from continuing operations per share are computed using the weighted average common shares outstanding.  Diluted net income per share, diluted net income (loss) from discontinued operations per share, and diluted net income from continuing operations per share are computed using the weighted average common shares outstanding, adjusted for the impact, if dilutive, of stock options outstanding (Note 9).
 
The following table reflects the components of the calculations of our basic and diluted net income per share, basic and diluted net income (loss) from discontinued operations per share, and basic and diluted net income from continuing operations per share which are not already otherwise set forth on the face of our condensed consolidated statements of income:
 

   
For the Three Months Ended March 31,
 
   
2011
   
2010
 
   
(Amounts in thousands)
 
             
Net income allocable to common shareholders from continuing operations and discontinued operations:
           
             
Net income allocable to common shareholders
  $ 148,059     $ 34,738  
Eliminate: Discontinued operations allocable to common shareholders
    355       (533 )
Net income from continuing operations allocable to common shareholders
  $ 148,414     $ 34,205  
                 
Weighted average common shares and equivalents outstanding:
               
Basic weighted average common shares outstanding
    169,315       168,477  
Net effect of dilutive stock options - based on treasury stock method using average market price
    1,067       833  
Diluted weighted average common shares outstanding
    170,382       169,310  
 
 
 
14

PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
 
 
3.     Real Estate Facilities
 
Activity in real estate facilities is as follows:
 
   
Three Months Ended
March 31, 2011
 
   
(Amounts in thousands)
 
Operating facilities, at cost:
     
Beginning balance                                                                   
  $ 10,587,347  
Capital improvements                                                                   
    11,874  
Acquisition of real estate facilities                                                                   
    28,910  
Newly developed facilities opened for operations
    3,737  
Disposition of real estate facilities                                                                   
    (3,993 )
Impact of foreign exchange rate changes                                                                   
    798  
Ending balance                                                                   
    10,628,673  
Accumulated depreciation:
       
Beginning balance                                                                   
    (3,061,459 )
Depreciation expense                                                                   
    (84,058 )
Disposition of real estate facilities                                                                   
    3,487  
Impact of foreign exchange rate changes                                                                   
    (274 )
Ending balance                                                                   
    (3,142,304 )
Construction in process:
       
Beginning balance                                                                   
    6,928  
Current development                                                                   
    4,087  
Newly developed facilities opened for operations
    (3,737 )
Ending balance                                                                   
    7,278  
Total real estate facilities at March 31, 2011
  $ 7,493,647  

 
During the three months ended March 31, 2011, we acquired five operating self-storage facilities in Nevada (386,000 net rentable square feet) and the leasehold interest in the land of one of our existing self-storage facilities from third parties for $26,196,000 in cash.  The $26,196,000 paid to third parties, combined with the elimination of the $4,738,000 book value of a land lease intangible asset related to the acquired leasehold interest was allocated $28,910,000 to real estate facilities and $2,024,000 to intangible assets.
 
During the three months ended March 31, 2011, we completed one expansion project to an existing facility at an aggregate cost of $3,737,000.  During three months ended March 31, 2011, net proceeds with respect to dispositions totaled $451,000 and we recorded a net loss of $55,000 ($198,000 included in “gains on disposition of real estate facilities, net” and a loss of $253,000 included in discontinued operations).
 
4.
Investments in Real Estate Entities
 
The following table sets forth our investments in the Real Estate Entities at March 31, 2011 and December 31, 2010, and our equity in earnings of real estate entities for the three months ended March 31, 2011 and 2010 (amounts in thousands):
 
 
15

PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 

 
   
 
Investments in Real Estate Entities at
 
   
March 31,  2011
   
December 31, 2010
 
PSB
  $ 326,812     $ 323,795  
Shurgard Europe
    277,309       264,681  
Other Investments
    12,905       13,093  
Total
  $ 617,026     $ 601,569  
                 


       
   
Equity in Earnings
of Real Estate Entities
 
   
For the Three Months Ended March 31,
 
   
2011
   
2010
 
PSB
  $ 8,784     $ 6,274  
Shurgard Europe
    4,527       3,310  
Other Investments
    405       377  
Total
  $ 13,716     $ 9,961  

 
Included in equity in earnings of real estate entities for the three months ended March 31, 2011 is $3,017,000, representing our share of the earnings allocated from PSB’s preferred shareholders as a result of PSB’s repurchases of preferred units for amounts that were less than the related book value.
 
During the three months ended March 31, 2011 and 2010, we received cash distributions from our investment in real estate entities totaling $12,896,000 and $12,706,000, respectively.
 
During the three months ended March 31, 2011 and 2010, our investment in Shurgard Europe increased by approximately $14,637,000 and decreased by $8,467,000, respectively, due to the impact of changes in foreign currency exchange rates.
 
Investment in PSB
 
PSB is a REIT traded on the New York Stock Exchange, which controls an operating partnership (collectively, the REIT and the operating partnership are referred to as “PSB”).  We have a 41% common equity interest in PSB as of March 31, 2011 and December 31, 2010, comprised of our ownership of 5,801,606 shares of PSB’s 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.  Based upon the closing price at March 31, 2011 ($57.94 per share of PSB common stock), the shares and units we owned had a market value of approximately $759.4 million as compared to our book value of $326.8 million.  We account for our investment in PSB using the equity method.
 
The following table sets forth selected financial information of PSB; the amounts represent 100% of PSB’s balances and not our pro-rata share.
 
 
16

PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 

 
   
2011
   
2010
 
   
(Amounts in thousands)
 
For the three months ended March 31,
           
Total revenue
  $ 74,124     $ 67,305  
Costs of operations
    (25,901 )     (22,966 )
Depreciation and amortization
    (20,859 )     (18,190 )
General and administrative
    (1,570 )     (2,749 )
Other items
    (1,121 )     4,441  
Net income                                                              
  $ 24,673     $ 27,841  
                 
   
At March 31,
2011
   
At December 31, 2010
 
   
(Amounts in thousands)
 
                 
Total assets (primarily real estate)
  $ 1,606,226     $ 1,621,057  
Debt (a)
    169,512       144,511  
Other liabilities
    51,773       53,421  
Preferred stock and units
    604,129       651,964  
Common equity and units
    780,812       771,161  
                 
(a)  
$121 million of the debt at March 31, 2011 is payable to us.

Investment in Shurgard Europe

At March 31, 2011 and December 31, 2010, we had a 49% equity investment in Shurgard Europe, which we account for using the equity method.  At December 31, 2010, Shurgard Europe owned 116 facilities directly and had a 20% interest in 72 self-storage facilities located in Europe which operate under the “Shurgard” name.  On March 2, 2011, Shurgard Europe acquired the 80% interests in the joint ventures it did not own for €172.0 million, and as a result, wholly-owns all 188 facilities.  We provided the funding for this acquisition through a loan (See Note 2).
 
Our equity in earnings of Shurgard Europe includes our 49% equity share of Shurgard Europe’s operations.  For the three months ended March 31, 2011 and 2010, we also received from Shurgard Europe $12,835,000 and $12,609,000, respectively, of interest on the loans provided to Shurgard Europe and $505,000 and $415,000, respectively, of trademark license fees.  For financial statement purposes, 49% of the interest and license fees have been classified as equity in earnings (see table below), and the remaining 51% as interest and other income.
 
   
2011
   
2010
 
   
(Amounts in thousands)
 
For the three months ended March 31,
           
Our 49% equity share of Shurgard Europe’s net loss
  $ (2,009 )   $ (3,072 )
Add our 49% equity share of amounts received from Shurgard Europe:
               
Interest on Shurgard Loans
    6,289       6,180  
Trademark license fee
    247       202  
                 
Total equity in earnings of Shurgard Europe
  $ 4,527     $ 3,310  
 
 
 
17

PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 

 
The following table sets forth selected financial information of Shurgard Europe.  These amounts are based upon 100% of Shurgard Europe’s balances (on a consolidated basis, including the operations of the joint ventures’ 72 self-storage facilities), rather than our pro rata share, and are based upon our historical acquired book basis.
 
 
   
2011
   
2010
 
   
(Amounts in thousands)
 
For the three months ended March 31,
           
Self-storage and ancillary revenues
  $ 62,248     $ 58,408  
Interest and other income
    117       76  
Self-storage and ancillary cost of operations
    (26,275 )     (25,459 )
Trademark license fee payable to Public Storage
    (505 )     (415 )
Depreciation and amortization
    (18,465 )     (18,739 )
General and administrative
    (2,696 )     (1,912 )
Interest expense on third party debt
    (3,516 )     (2,777 )
Interest expense on debt due to Public Storage
    (12,835 )     (12,609 )
Income (expenses) from foreign currency exchange
    643       (193 )
Net loss                                                              
  $ (1,284 )   $ (3,620 )
                 
Net  income allocated to permanent noncontrolling equity interests in subsidiaries (a)
    2,816       2,649  
Net loss allocated to Shurgard Europe
  $ (4,100 )   $ (6,269 )
                 
                 
   
March 31,
   
December 31,
 
      2011       2010  
   
(Amounts in thousands)
 
                 
Total assets (primarily self-storage facilities)
  $ 1,581,559     $ 1,503,961  
Total debt to third parties
    287,098       279,174  
Total debt to Public Storage
    750,777       495,229  
Other liabilities
    87,249       73,027  
Equity
    456,435       656,531  
                 
(a)  
Includes depreciation expense allocated to the permanent noncontrolling equity interests in subsidiaries totaling $2,062,000 and $3,145,000 in the three months ended March 31, 2011 and 2010, respectively.
 
Other Investments
 
At March 31, 2011, the “Other Investments” include an aggregate common equity ownership of approximately 24% in entities that collectively own 19 self-storage facilities.  We account for our investments in these entities using the equity method.
 
The following table sets forth certain condensed financial information (representing 100% of these entities’ balances and not our pro-rata share) with respect to the Other Investments’ 19 facilities:
 
 
 
18

PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
 
 
   
2011
   
2010
 
   
(Amounts in thousands)
 
For the three months ended March 31,
           
Total revenue
  $ 4,220     $ 4,098  
Cost of operations and other expenses
    (1,692 )     (1,711 )
Depreciation and amortization
    (656 )     (610 )
Net income
  $ 1,872     $ 1,777  
                 
                 
   
March 31,
   
December 31,
 
      2011       2010  
   
(Amounts in thousands)
 
Total assets (primarily self-storage facilities)
  $ 35,751     $ 35,353  
Total accrued and other liabilities
    1,742       884  
Total Partners’ equity
    34,009       34,469  


5.
Line of Credit and Notes Payable
 
 
At March 31, 2011, we have a revolving credit agreement (the “Credit Agreement”) which expires on March 27, 2012, with an aggregate limit with respect to borrowings and letters of credit of $300 million.  Amounts drawn on the Credit Agreement bear an annual interest rate ranging from the London Interbank Offered Rate (“LIBOR”) plus 0.35% to LIBOR plus 1.00% depending on our credit ratings (LIBOR plus 0.35% at March 31, 2011).  In addition, we are required to pay a quarterly facility fee ranging from 0.10% per annum to 0.25% per annum depending on our credit ratings (0.10% per annum at March 31, 2011).  We had no outstanding borrowings on our Credit Agreement at March 31, 2011 or at May 6, 2011.  At March 31, 2011, we had undrawn standby letters of credit, which reduce our borrowing capacity with respect to our line of credit by the amount of the letters of credit, totaling $17,482,000 ($17,777,000 at December 31, 2010).
 
The carrying amounts of our notes payable at March 31, 2011 and December 31, 2010 consist of the following (dollar amounts in thousands):
 
 
 
19

PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
 
 
   
March 31,
2011
   
December 31, 2010
 
Unsecured Notes Payable:
           
             
5.875% effective and stated note rate, interest only and payable semi-annually, matures in March 2013
  $ 186,460     $ 186,460  
5.7% effective rate, 7.75% stated note rate, interest only and payable semi-annually, matured in February 2011 (carrying amount includes $215  of unamortized premium at December 31, 2010)
      -         103,532  
 
               
Secured Notes Payable:
               
                 
4.9% average effective rate fixed rate mortgage notes payable, secured by 97 real estate facilities with a net book value of approximately $590 million at March 31, 2011 and stated note rates between 4.95% and 7.80%, maturing at varying dates between April 2011 and September 2028 (carrying amount includes $5,352 of unamortized premium at March 31, 2011 and $6,137 at December 31, 2010)
            275,422               278,425  
                 
Total notes payable
  $ 461,882     $ 568,417  

Substantially all of our debt was acquired in connection with a property or other acquisition, and in such cases an initial premium or discount is established for any difference between the stated note balance and estimated fair value of the note.  This initial premium or discount is amortized over the remaining term of the notes using the effective interest method.  Estimated fair values are based upon discounting the future cash flows under each respective note at an interest rate that approximates those of loans with similar credit characteristics and term to maturity.  These inputs for fair value represent significant unobservable inputs, which are “Level 3” inputs as the term is defined in the Codification.

Our notes payable and our Credit Agreement each have various customary restrictive covenants, all of which we were in compliance with at March 31, 2011.

At March 31, 2011, approximate principal maturities of our notes payable are as follows (amounts in thousands):
 
   
Unsecured
Notes Payable
   
Secured Notes Payable
   
Total
 
2011 (remainder)                                   
  $ -     $ 27,568     $ 27,568  
2012                                   
    -       70,761       70,761  
2013                                   
    186,460       79,123       265,583  
2014                                   
    -       49,111       49,111  
2015                                   
    -       29,133       29,133  
Thereafter                                   
    -       19,726       19,726  
    $ 186,460     $ 275,422     $ 461,882  
Weighted average effective rate
    5.9 %     5.0 %     5.3 %
                         
 
We incurred interest expense (including interest capitalized as real estate totaling $80,000 and $72,000, respectively for the three months ended March 31, 2011 and 2010) with respect to our notes payable, capital leases and line of credit aggregating $7,064,000 and $7,411,000 for the three months ended March 31, 2011 and 2010, respectively.  These amounts were comprised of $8,064,000 and $8,203,000 in cash paid for the three months ended March 31, 2011 and 2010, respectively, less $1,000,000 and $792,000 in amortization of premium, respectively.
 
 
20

PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
 
 
6.
Noncontrolling Interests in Subsidiaries
 
In consolidation, we classify ownership interests in the net assets of each of the Subsidiaries, other than our own, as “noncontrolling interests in subsidiaries.”  Interests that have the ability to require us, except in an entity liquidation, to redeem the underlying securities for cash, assets, or other securities that would not also be classified as equity are presented on our balance sheet outside of equity.  At the end of each reporting period, if the book value is less than the estimated amount to be paid upon a redemption occurring on the related balance sheet date, these interests are increased to adjust to their estimated liquidation value (which approximates fair value), with the offset against retained earnings.  All other noncontrolling interests in subsidiaries are presented as a component of equity, “permanent noncontrolling interests in subsidiaries.”
 
Redeemable Noncontrolling Interests in Subsidiaries
 
At March 31, 2011, the Redeemable Noncontrolling Interests in Subsidiaries represent equity interests in three entities that own in aggregate 14 self-storage facilities, and are presented at estimated liquidation value (which approximates fair value).  We estimate the liquidation value by applying the related provisions of the governing documents to our estimate of the fair value of the underlying net assets (principally real estate assets).  During the three months ended March 31, 2011 and 2010, these interests were increased by $153,000 and $65,000, respectively, to adjust to their estimated liquidation value.  During the three months ended March 31, 2011 and 2010, we allocated a total of $220,000 and $223,000, respectively, of income to these interests.  During the three months ended March 31, 2011 and 2010, we paid distributions to these interests totaling $294,000 and $304,000, respectively.
 
Permanent Noncontrolling Interests in Subsidiaries
 
The Permanent Noncontrolling Interests in Subsidiaries represent equity interests in 28 entities that own an aggregate of 93 self-storage facilities.  These interests are presented as equity because the holders of the interests do not have the ability to require us to redeem them for cash or other assets, or other securities that would not also be classified as equity.  The total carrying amount of the Other Permanent Noncontrolling Interests in Subsidiaries was $33,013,000 at March 31, 2011 ($32,336,000 at December 31, 2010).  During the three months ended March 31, 2011 and 2010, we allocated a total of $4,240,000 and $3,921,000, respectively, in income to these interests.  During the three months ended March 31, 2011 and 2010, we paid distributions to these interests totaling $3,563,000 and $4,467,000, respectively.
 
Preferred Partnership Interests

On October 25, 2010, we repurchased all of our 7.25% Series J Preferred Partnership units, representing all of our preferred partnership interests that were outstanding on that date, for an aggregate of $100,400,000 ($100,000,000 par value) plus accrued and unpaid dividends.  During the three months ended March 31, 2010, we allocated a total of $1,812,000 in income to these interests based upon distributions paid.   At March 31, 2011 and December 31, 2010, we had no preferred partnership interests outstanding.

7.
Public Storage Shareholders’ Equity
 
Cumulative Preferred Shares
 
At March 31, 2011 and December 31, 2010, we had the following series of Cumulative Preferred Shares of beneficial interest outstanding:
 
 
21

PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 

 
           
At March 31, 2011
   
At December 31, 2010
 
Series
Earliest Redemption
Date
 
Dividend Rate
   
Shares Outstanding
   
Liquidation Preference
   
Shares Outstanding
   
Liquidation Preference
 
           
(Dollar amounts in thousands)
 
Series W
10/6/08
    6.500 %     5,300     $ 132,500       5,300     $ 132,500  
Series X
11/13/08
    6.450 %     4,800       120,000       4,800       120,000  
Series Y
1/2/09
    6.850 %     350,900       8,772       350,900       8,772  
Series Z
3/5/09
    6.250 %     4,500       112,500       4,500       112,500  
Series A
3/31/09
    6.125 %     4,600       115,000       4,600       115,000  
Series C
9/13/09
    6.600 %     4,425       110,625       4,425       110,625  
Series D
2/28/10
    6.180 %     5,400       135,000       5,400       135,000  
Series E
4/27/10
    6.750 %     5,650       141,250       5,650       141,250  
Series F
8/23/10
    6.450 %     9,893       247,325       9,893       247,325  
Series G
12/12/10
    7.000 %     4,000       100,000       4,000       100,000  
Series H
1/19/11
    6.950 %     4,200       105,000       4,200       105,000  
Series I
5/3/11
    7.250 %     20,700       517,500       20,700       517,500  
Series K
8/8/11
    7.250 %     16,990       424,756       16,990       424,756  
Series L
10/20/11
    6.750 %     8,267       206,665       8,267       206,665  
Series M
1/9/12
    6.625 %     19,065       476,634       19,065       476,634  
Series N
7/2/12
    7.000 %     6,900       172,500       6,900       172,500  
Series O
4/15/15
    6.875 %     5,800       145,000       5,800       145,000  
Series P
10/7/15
    6.500 %     5,000       125,000       5,000       125,000  
Total Cumulative Preferred Shares
            486,390     $ 3,396,027       486,390     $ 3,396,027  

The holders of our Cumulative Preferred Shares have general preference rights with respect to liquidation and quarterly distributions.  Holders of the preferred shares, except under certain conditions and as noted below, will not be entitled to vote on most matters.  In the event of a cumulative arrearage equal to six quarterly dividends, holders of all outstanding series of preferred shares (voting as a single class without regard to series) will have the right to elect two additional members to serve on our Board of Trustees until events of default have been cured.  At March 31, 2011, there were no dividends in arrears.
 
Except under certain conditions relating to the Company’s qualification as a REIT, the Cumulative Preferred Shares are not redeemable prior the dates indicated on the table above.  On or after the respective dates, each of the series of Cumulative Preferred Shares will be redeemable, at the option of the Company, in whole or in part, at $25.00 per share (or depositary share as the case may be), plus accrued and unpaid dividends.  Holders of the Cumulative Preferred Shares do not have the right to require the Company to redeem such shares.
 
Upon issuance of our Cumulative Preferred Shares of beneficial interest, we classify the liquidation value as preferred equity on our consolidated balance sheet with any issuance costs recorded as a reduction to paid-in capital.
 
See Note 12 “Subsequent Events” for further discussion regarding our Cumulative Preferred Shares.
 
 
22

PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
 
 
Equity Shares, Series A
 
On April 15, 2010, we redeemed all of our outstanding shares of Equity Shares, Series A at $24.50 per share for aggregate redemption amount of $205.4 million.
 
During the three months ended March 31, 2010, 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.
 
Equity Shares, Series AAA
 
On August 31, 2010, we retired all 4,289,544 outstanding shares of Equity Shares, Series AAA (“Equity Shares AAA”). During the three months ended March 31, 2010, we paid quarterly distributions to the holder of the Equity Shares, Series AAA of $0.5391 per share.  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 are held by one of our wholly-owned subsidiaries.

Dividends

The unaudited characterization of dividends for Federal income tax purposes is made based upon earnings and profits of the Company, as defined by the Internal Revenue Code.  Common share dividends, including amounts paid to our restricted share unitholders, totaled $135.9 million ($0.80 per share) and $109.9 million ($0.65 per share), for the three months ended March 31, 2011 and 2010, respectively.  Equity Shares, Series A dividends totaled $5.1 million ($0.6125 per share) for the three months ended March 31, 2010 (none in 2011).  Preferred share dividends totaled $57.6 million and $58.1 million for the three months ended March 31, 2011 and 2010, respectively.
 
8.
Related Party Transactions
 
Mr. Hughes, the Company’s Chairman of the Board of Trustees, and his family (collectively the “Hughes Family”) have ownership interests in, and operate approximately 52 self-storage facilities in Canada (“PS Canada”) using the “Public Storage” brand name pursuant to a royalty-free trademark license agreement with the Company.  We currently do not own any interests in these facilities nor do we own any facilities in Canada.  The Hughes Family owns approximately 16.7% of our common shares outstanding at March 31, 2011.  We have a right of first refusal to acquire the stock or assets of the corporation that manages the 52 self-storage facilities in Canada, if the Hughes Family or the corporation agrees to sell them.  However, we have no interest in the operations of this corporation, we have no right to acquire this stock or assets unless the Hughes Family decides to sell and we receive no benefit from the profits and increases in value of the Canadian self-storage facilities.
 
We reinsure risks relating to loss of goods stored by tenants in the self-storage facilities in Canada.  During the three months ended March 31, 2011 and 2010, we received $142,000 and $159,000 (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 our right to provide tenant reinsurance to the Canadian facilities may be qualified, there is no assurance that these premiums will continue.
 
 
 
23

PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
 
 
The Hughes Family owns 47.9% of the voting stock and the Company holds 46% of the voting and 100% of the nonvoting stock (representing substantially all the economic interest) of a private REIT.  The private REIT owns limited partnership interests in five affiliated partnerships.  The Hughes Family also owns limited partnership interests in all of these partnerships, and, together with the Company, Mr. Hughes is a co-general partner in three of these partnerships and in 15 other limited partnerships.  The Company and the Hughes Family receive distributions from these entities in accordance with the terms of the partnership agreements or other organizational documents.  The Hughes Family also owns shares of common stock in PSB. 
 
PS Canada holds approximately a 2.2% interest in Stor-RE, a consolidated entity that provides liability and casualty insurance for PS Canada, the Company and certain affiliates of the Company for occurrences prior to April 1, 2004 as described below. 

9.      Share-Based Compensation
 
Stock Options
 
We have various stock option plans (collectively referred to as the “PS Plans”).  Under the PS Plans, the Company has granted non-qualified options to certain trustees, officers and key employees to purchase the Company’s common shares at a price equal to the fair market value of the common shares at the date of grant.  Options granted after December 31, 2002 vest generally over a five-year period and expire between eight years and ten years after the date they became exercisable.  The PS Plans also provide for the grant of restricted share units (see below) to officers, key employees and service providers on terms determined by an authorized committee of our Board.
 
We recognize compensation expense for stock options based upon their estimated fair value on the date of grant amortized over the applicable vesting period (the “Fair Value Method”), net of estimates for future forfeitures.  We estimate the fair value of our stock options based upon the Black-Scholes option valuation model.
 
For the three months ended March 31, 2011 and 2010, we recorded $703,000 and $600,000, respectively, in stock option compensation expense related to options granted after January 1, 2002.
 
No stock options were granted during the three months ended March 31, 2011, 174,912 options were exercised, and 16,000 options were forfeited.  A total of 2,759,980 stock options were outstanding at March 31, 2011 (2,950,892 at December 31, 2010).
 
Outstanding stock options are included on a one-for-one basis in our diluted weighted average shares, less a reduction for the treasury stock method applied to a) the average cumulative measured but unrecognized compensation expense during the period and b) the strike price proceeds expected from the employee upon exercise.
 
Restricted Share Units
 
Outstanding restricted share units vest ratably over a five or eight-year period from the date of grant.  The employee receives additional compensation equal to the per-share dividends received by common shareholders with respect to restricted share units outstanding.  Such compensation is accounted for as dividends paid.  Any dividends paid on units which are subsequently forfeited are expensed.  Upon vesting, the employee receives common shares equal to the number of vested restricted share units in exchange for the units.
 
The total value of each restricted share unit grant is amortized over the service period, net of estimates for future forfeitures, as compensation expense.  Restricted share unit grants that are subject to service conditions (other than the passage of time) are amortized using the accelerated attribution method, with each vesting of a share grant amortized separately.  We have elected to use the straight-line attribution method with respect to restricted share grants that are not subject to service conditions (other than the passage of time).  The related employer portion of payroll taxes is expensed as incurred.
 
 
24

PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
 
 
During the three months ended March 31, 2011, 78,725 restricted share units were granted, 23,715 restricted share units were forfeited and 66,539 restricted share units vested.  This vesting resulted in the issuance of 42,793 common shares.  In addition, cash compensation totaling $2,699,000 was paid to employees in lieu of 23,746 common shares based upon the market value of the shares at the date of vesting is used to settle the employees’ tax liability generated by the vesting and is charged against paid in capital.
 
At March 31, 2011, approximately 472,866 restricted share units were outstanding (484,395 at December 31, 2010).  A total of $4,367,000 and $2,032,000 in restricted share unit expense was recorded for the three months ended March 31, 2011 and 2010, respectively.  Restricted share unit expense includes amortization of the grant-date fair value of the units reflected as an increase to paid-in capital, and $322,000 and $164,000 in related payroll taxes we incurred in the three months ended March 31, 2011 and 2010, respectively.
 
During the three months ended March 31, 2011, the Company entered into a performance-based restricted share unit program with selected employees of the Company.  Under the program, the Company established a targeted restricted share unit award for selected employees, which would be earned only if the Company achieved same-store revenue growth in 2011 of at least 2% over 2010.  Depending upon the extent to which same-store revenue met or exceeded the 2% minimum target, restricted share unit awards would range from 50% to 200% of the target restricted share unit award.  To achieve 100% of the targeted award level, 2011 same-store growth over 2010 was set at 3%, and to achieve 200% of the targeted award level, 2011 same-store growth was set at 4%.  Up to approximately 266,000 restricted share units would be granted assuming achievement of the 4% same-store revenue growth target.  If awarded, 20% of the restricted share units would vest on the date of the award and an additional 20% would vest over each of the next four anniversary dates of the award, assuming continued employment with Public Storage through the vesting dates.  Based upon the expected performance of the Company for the year ending December 31, 2011 relative to the performance target, we expect that 200,000 restricted share units will be granted during the three months ending March 31, 2012.  Included in restricted share unit expense is $2,269,000 related to this performance-based restricted share unit program during the three months ended March 31, 2011.
 
 See also “net income per common share” in Note 2 for further discussion regarding the impact of restricted share units on our net income per common and income allocated to common shareholders.
 
10.      Segment Information
 
Our reportable segments reflect significant operating activities that are evaluated separately by management, and are organized based upon their operating characteristics.  Each of our segments is evaluated by management based upon net segment income.  Net segment income represents net income in conformity with GAAP and our significant accounting policies as denoted in Note 2.  We have adjusted the classification of the “Presentation of Segment Information” below with respect to the three months ended March 31, 2010 to be consistent with our current segment definition.
 
Following is the description of and basis for presentation for each of our segments.
 
Domestic Self-Storage Segment

The Domestic Self-Storage Segment comprises our domestic self-storage rental operations, and is our predominant segment.  It includes the operations of the 2,034 self storage facilities owned by the Company and the Subsidiaries, as well as our equity share of the 19 self-storage facilities that we account for on the equity method.  None of our interest and other income, interest expense or the related debt, general and administrative expense, or gains and losses on the sale of self-storage facilities is allocated to our Domestic Self-Storage segment because management does not consider these items in evaluating the results of operations of the Domestic Self-Storage segment.  At March 31, 2011, the assets of the Domestic Self-Storage segment are comprised principally of our self-storage facilities with a book value of $7.5 billion ($7.5 billion at December 31, 2010), Property Intangibles with a book value of approximately $17.0 million ($23.3 million at December 31, 2010), and the Other Investments with a net book value of $12.9 million ($13.1 million at December 31, 2010).  Substantially all of our other assets totaling $97.5 million, and our accrued and other liabilities totaling $210.8 million, ($90.5 million and $205.8 million, respectively, at December 31, 2010) are directly associated with the Domestic Self-Storage segment.
 
 
25

PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
 
 
Europe Self-Storage Segment
 
The Europe Self-Storage segment comprises our interest in Shurgard Europe, which has a separate management team that, under the direction of Public Storage and the institutional investor which owns a 51% equity interest in Shurgard Europe, makes the financing, capital allocation, and other significant decisions for this operation.  The Europe Self-Storage segment presentation includes our equity share of Shurgard Europe’s operations, the interest and other income received from Shurgard Europe, as well as specific general and administrative expense, disposition gains, and foreign currency exchange gains and losses that management considers in evaluating our investment in Shurgard Europe.  At March 31, 2011, our condensed consolidated balance sheet includes an investment in Shurgard Europe with a book value of $277.3 million ($264.7 million at December 31, 2010) and loans receivable from Shurgard Europe totaling $750.8 million ($495.2 million at December 31, 2010).
 
Commercial Segment
 
The Commercial segment comprises our investment in PSB, a publicly-traded REIT with a separate management team that makes its financing, capital allocation and other significant decisions.  The Commercial segment also includes our direct interest in certain commercial facilities, substantially all of which are managed by PSB.  The Commercial segment presentation includes our equity income from PSB, as well as the revenues and expenses of our commercial facilities.  At March 31, 2011, the assets of the Commercial segment are comprised principally of our investment in PSB which has a book value of $326.8 million ($323.8 million at December 31, 2010) and a loan receivable from PSB totaling $121.0 million (nil at December 31, 2010).
 
Presentation of Segment Information
 
The following tables reconcile the performance of each segment, in terms of segment income, to our consolidated net income (amounts in thousands):
 
 
26

PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
 
 
 
For the three months ended March 31, 2011
 
   
Domestic
Self-Storage
   
Europe
Self-Storage
   
 
Commercial
   
Other Items Not Allocated to Segments
   
Total Consolidated
 
   
(Amounts in thousands)
 
Revenues:
                             
Self-storage facilities
  $ 385,135     $ -     $ -     $ -     $ 385,135  
Ancillary operations
    -       -       3,800       23,115       26,915  
Interest and other income
    -       6,803       195       770       7,768  
      385,135       6,803       3,995       23,885       419,818  
                                         
Expenses:
                                       
Cost of operations:
                                       
Self-storage facilities
    135,386       -       -       -       135,386  
Ancillary operations
    -       -       1,514       7,400       8,914  
Depreciation and amortization
    87,869       -       673       -       88,542  
General and administrative
    -       -       -       14,235       14,235  
Interest expense
    -       -       -       6,984       6,984  
      223,255       -       2,187       28,619       254,061  
                                         
Income (loss) from continuing operations before equity in earnings of real estate entities, foreign currency exchange gain and gains on disposition of other real estate investments
        161,880           6,803           1,808       (4,734 )         165,757  
                                         
Equity in earnings of real estate entities
    405       4,527       8,784       -       13,716  
Foreign currency exchange gain
    -       31,252       -       -       31,252  
Gains on disposition of other real estate investments
    -       -       -       198       198  
Income (loss) from continuing operations
    162,285       42,582       10,592       (4,536 )     210,923  
Discontinued operations
    -       -       -       (355 )     (355 )
Net income (loss)
  $ 162,285     $ 42,582     $ 10,592     $ (4,891 )   $ 210,568  
 

 
 
27

PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
 
 
 
For the three months ended March 31, 2010
 
   
Domestic
Self-Storage
   
Europe
Self-Storage
   
 
Commercial
   
Other Items Not Allocated to Segments
   
Total Consolidated
 
   
(Amounts in thousands)
 
Revenues:
                             
Self-storage facilities
  $ 364,073     $ -     $ -     $ -     $ 364,073  
Ancillary operations
    -       -       3,697       21,461       25,158  
Interest and other income
    -       6,642       -       1,574       8,216  
      364,073       6,642       3,697       23,035       397,447  
                                         
Expenses:
                                       
Cost of operations:
                                       
Self-storage facilities
    132,340       -       -       -       132,340  
Ancillary operations
    -       -       1,437       6,993       8,430  
Depreciation and amortization
    84,062       -       655       -       84,717  
General and administrative
    -       -       -       10,077       10,077  
Interest expense
    -       -       -       7,339       7,339  
      216,402       -       2,092       24,409       242,903  
                                         
Income (loss) from continuing operations before equity in earnings of real estate entities, foreign currency exchange loss, gains on disposition of other real estate investments, net and asset impairment charges
          147,671             6,642             1,605       (1,374 )           154,544  
                                         
Equity in earnings of real estate entities
    377       3,310       6,274       -       9,961  
Foreign currency exchange loss
    -       (34,843 )     -       -       (34,843 )
Gains on disposition of other real estate investments, net
    -       -       -       333       333  
Asset impairment charges
    (611 )     -       -       -       (611 )
Income (loss) from continuing operations
    147,437       (24,891 )     7,879       (1,041 )     129,384  
Discontinued operations
    -       -       -       533       533  
Net income (loss)
  $ 147,437     $ (24,891 )   $ 7,879     $ (508 )   $ 129,917  
 

 
 
28

PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
 
 
11.      Commitments and Contingencies
 
Legal Matters
 
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, individually or in the aggregate, will have a material adverse impact upon the results of our operations or financial position.
 
Insurance and Loss Exposure
 
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 March 31, 2011, there were approximately 651,000 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.
 
Operating Lease Obligations

We lease land, equipment and office space under various operating leases.  At March 31, 2011, the approximate future minimum rental payments required under our operating leases for each calendar year is as follows: $4 million for the remainder of 2011, $4 million per year in 2012 through 2014, $5 million in 2015 and an aggregate of $49 million in payments thereafter.
 
Expenses under operating leases were approximately $1.3 million and $1.8 million for the three months ended March 31, 2011 and 2010, respectively.
 
12.      Subsequent Events
 
We are currently under contract to acquire two properties for approximately $28.0 million.  One property is in New York and the other property is in California.  We expect the acquisitions of these properties will close in the second quarter of 2011.  The acquisitions of these facilities are subject to customary closing conditions, and there can be no assurance that we will be able to complete these acquisitions.
 
During April 2011, we sold 15,000,000 depositary shares (including the exercise, in part, of the underwriters’ over-allotment option) at $25.00 per depositary share, with each depositary share representing 1/1,000 of a 6.5% Cumulative Preferred Share of Beneficial Interest, Series I, resulting in gross proceeds of $375 million.
 
 
 
29

PUBLIC STORAGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
 
 
 
On April 6, 2011, we called for redemption 14,000,000 of our outstanding 20,700,000 depositary shares each representing 1/1,000 of a 7.250% Cumulative Preferred Share of Beneficial Interest, Series I at par.  The aggregate redemption amount, before payment of accrued dividends, to be paid on May 9, 2011, is $350,000,000.  In applying EITF D-42 to this redemption, we will allocate approximately $11 million of income from our common shareholders to the holders of our Preferred Shares, representing the excess of the amount paid over the initial issuance proceeds, in the quarter ending June 30, 2011.

 
 
30

 


Item 2.              Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and notes thereto.
 
Forward Looking Statements:  This Quarterly Report on Form 10-Q 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 Part I, Item 1A, "Risk Factors" in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 28, 2011 and in our other filings with the 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. 
 
 
 
31

 
 
 
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.

Critical Accounting Policies
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed 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 condensed consolidated financial statements and accompanying notes.  The notes to our March 31, 2011 condensed consolidated finan