10-Q 1 ps10q_3q11.htm PUBLIC STORAGE FORM 10Q PERIOD ENDED SEPTEMBER 30, 2011 ps10q_3q11.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 September 30, 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 November 2, 2011:
 
Common Shares of beneficial interest, $.10 par value per share – 171,059,012 shares
 

 

 
 

 



PUBLIC STORAGE
     
INDEX
     
     
PART I
FINANCIAL INFORMATION
Pages
     
Item 1.
Financial Statements (Unaudited)
 
     
 
Condensed Consolidated Balance Sheets at
September 30, 2011 and December 31, 2010
1
     
 
Condensed Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 2011 and 2010
2
     
 
Condensed Consolidated Statement of Equity
for the Nine Months Ended September 30, 2011
3
     
 
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2011 and 2010
4 - 5
     
 
Notes to Condensed Consolidated Financial Statements
6 - 32
     
Item 2.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
33 – 60
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
61
     
Item 4.
Controls and Procedures
62
     
PART II
OTHER INFORMATION (Items 3, 4 and 5 are not applicable)
 
     
Item 1.
Legal Proceedings
63
     
Item 1A.
Risk Factors
63
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
63 – 64
     
Item 6.
Exhibits
64
     



 
 

 

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

 
   
September 30,
2011
   
December 31,
2010
 
ASSETS
 
(Unaudited)
       
             
Cash and cash equivalents                                                                                             
  $ 160,733     $ 456,252  
Marketable securities                                                                                             
    -       102,279  
Real estate facilities, at cost:
               
Land                                                                                          
    2,809,340       2,789,227  
Buildings                                                                                          
    7,936,926       7,798,120  
      10,746,266       10,587,347  
Accumulated depreciation                                                                                          
    (3,312,971 )     (3,061,459 )
      7,433,295       7,525,888  
Construction in process                                                                                          
    4,018       6,928  
      7,437,313       7,532,816  
                 
Investment in real estate entities                                                                                             
    716,587       601,569  
Goodwill and other intangible assets, net                                                                                             
    211,425       216,725  
Loans receivable from real estate entities                                                                                             
    466,349       495,229  
Other assets                                                                                             
    93,136       90,463  
Total assets                                                                             
  $ 9,085,543     $ 9,495,333  
                 
LIABILITIES AND EQUITY
               
                 
Notes payable                                                                                             
  $ 418,851     $ 568,417  
Accrued and other liabilities                                                                                             
    244,462       205,769  
Total liabilities                                                                                   
    663,313       774,186  
                 
Redeemable noncontrolling interests
    12,316       12,213  
                 
Commitments and contingencies (Note 12)
               
                 
Equity:
               
Public Storage shareholders:
               
Cumulative Preferred Shares of beneficial interest, $0.01 par value, 100,000,000 shares authorized, 479,200 shares issued (in series) and outstanding, (486,390 at December 31, 2010) at liquidation preference
      3,216,271         3,396,027  
Common Shares of beneficial interest, $0.10 par value, 650,000,000 shares authorized, 170,036,247 shares issued and outstanding (169,252,819 at December 31, 2010)
      17,003         16,927  
Paid-in capital
    5,432,932       5,515,827  
Accumulated deficit
    (265,226 )     (236,410 )
Accumulated other comprehensive loss
    (15,218 )     (15,773 )
Total Public Storage shareholders’ equity                                                                                  
    8,385,762       8,676,598  
Permanent noncontrolling interests                                                                                          
    24,152       32,336  
Total equity
    8,409,914       8,708,934  
Total liabilities and equity                                                                             
  $ 9,085,543     $ 9,495,333  

 
See accompanying notes.
 
1

 

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


   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                   
Revenues:
                 
Self-storage facilities
  $ 416,104     $ 388,932     $ 1,196,352     $ 1,126,285  
Ancillary operations
    30,011       26,588       85,817       78,823  
Interest and other income
    6,875       6,775       25,218       22,023  
      452,990       422,295       1,307,387       1,227,131  
Expenses:
                               
Cost of operations:
                               
Self-storage facilities
    128,976       127,423       394,030       387,328  
Ancillary operations
    9,793       7,091       28,304       25,060  
Depreciation and amortization
    90,935       92,583       268,601       262,135  
General and administrative
    14,116       8,910       40,944       29,068  
Interest expense
    5,862       7,838       18,779       22,455  
      249,682       243,845       750,658       726,046  
Income from continuing operations before equity in earnings of real estate entities, foreign currency exchange (loss) gain, gain on real estate sales and debt retirement, net and asset impairment charges
        203,308           178,450           556,729           501,085  
Equity in earnings of real estate entities
    15,269       9,043       41,755       27,792  
Foreign currency exchange (loss) gain
    (28,253 )     55,455       13,495       (28,592 )
Gain on real estate sales and debt retirement, net 
    4,983       -       5,111       679  
Asset impairment charges
    (2,186 )     -       (2,186 )     (1,949 )
Income from continuing operations
    193,121       242,948       614,904       499,015  
Discontinued operations
    1,392       2,863       1,118       7,889  
Net income
    194,513       245,811       616,022       506,904  
Net income allocated to noncontrolling interests
    (3,374 )     (6,457 )     (12,331 )     (18,551 )
Net income allocable to Public Storage shareholders
  $ 191,139     $ 239,354     $ 603,691     $ 488,353  
Allocation of net income to Public Storage shareholders:
                               
Preferred shareholders based on distributions paid
  $ 56,670     $ 57,522     $ 172,926     $ 174,509  
Preferred shareholders based on redemptions
    16,178       (800 )     32,077       4,263  
Equity Shares, Series A
    -       -       -       5,131  
Equity Shares, Series A based on redemptions
    -       -       -       25,746  
Restricted share units
    341       426       1,164       923  
Common shareholders
    117,950       182,206       397,524       277,781  
    $ 191,139     $ 239,354     $ 603,691     $ 488,353  
Net income per common share – basic
                               
Continuing operations
  $ 0.68     $ 1.06     $ 2.34     $ 1.60  
Discontinued operations
    0.01       0.02       0.01       0.05  
    $ 0.69     $ 1.08     $ 2.35     $ 1.65  
Net income per common share – diluted
                               
Continuing operations
  $ 0.68     $ 1.05     $ 2.32     $ 1.59  
Discontinued operations
    0.01       0.02       0.01       0.05  
    $ 0.69     $ 1.07     $ 2.33     $ 1.64  
Basic weighted average common shares outstanding
    169,728       169,014       169,512       168,766  
Diluted weighted average common shares outstanding
    170,830       169,977       170,538       169,640  

 
 

 
See accompanying notes.
 
2

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


   
 
 
Cumulative Preferred Shares
   
 
 
Common Shares
   
 
 
 
Paid-in Capital
   
 
 
Accumulated
Deficit
   
 
Accumulated Other Comprehensive (Loss) Income
   
Total
Public Storage Shareholders’ Equity
   
Equity of Permanent Noncontrolling Interests
   
 
 
 
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 cumulative preferred shares (34,500,000 shares) (Note 8)
    862,500       -       (26,873 )     -       -       835,627       -       835,627  
Redemption of cumulative preferred shares (41,690,000 shares) (Note 8)
    (1,042,256 )     -       -       -       -       (1,042,256 )     -       (1,042,256 )
Issuance of common shares in connection with share-based compensation (305,500 shares) (Note 10)
    -       28       15,700       -       -       15,728       -       15,728  
Issuance of common shares in connection with acquisition of noncontrolling interests (477,928 shares) (Note 7)
      -         48         57,060         -         -         57,108         -         57,108  
Share-based compensation expense, net of cash compensation in lieu of common shares (Note 10)
    -       -       14,344       -       -       14,344       -       14,344  
Adjustments of redeemable noncontrolling interests to liquidation value
    -       -       -       (259 )     -       (259 )     -       (259 )
Increase (decrease) in permanent noncontrolling interests in connection with:
                                                               
Consolidation of partially-owned entities (Note 4)
    -       -       -       -       -       -       17,663       17,663  
Acquisition of interests in Subsidiaries (Note 7)
    -       -       (143,126 )     -       -       (143,126 )     (26,097 )     (169,223 )
Net income allocated to:
                                                               
Public Storage Shareholders
    -       -       -       616,022       -       616,022       -       616,022  
Redeemable noncontrolling interests
    -       -       -       (706 )     -       (706 )     -       (706 )
Permanent noncontrolling interests
    -       -       -       (11,625 )     -       (11,625 )     11,625       -  
Distributions to equity holders:
                                                               
Cumulative preferred shares (Note 8)
    -       -       -       (172,926 )     -       (172,926 )     -       (172,926 )
Permanent noncontrolling interests
    -       -       -       -       -       -       (11,375 )     (11,375 )
Common shares and restricted share units ($2.70 per share)
    -       -       -       (459,322 )     -       (459,322 )     -       (459,322 )
Other comprehensive income (Note 2)
    -       -       -       -       555       555       -       555  
                                                                 
Balance at September 30, 2011
  $ 3,216,271     $ 17,003     $ 5,432,932     $ (265,226 )   $ (15,218 )   $ 8,385,762     $ 24,152     $ 8,409,914  



 

 
 
See accompanying notes.
3

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


   
For the Nine Months Ended
September 30,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net income
  $ 616,022     $ 506,904  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Gain on real estate sales and debt retirement, including amounts in discontinued operations
    (5,799 )     (8,473 )
Asset impairment charges, including amounts in discontinued operations
    2,186       2,544  
Depreciation and amortization, including amounts in discontinued operations
    268,695       262,739  
Distributions received from real estate entities in excess of equity in earnings of real estate entities
    97       9,585  
Foreign currency exchange (gain) loss
    (13,495 )     28,592  
Other
    41,087       19,823  
Total adjustments
    292,771       314,810  
Net cash provided by operating activities
    908,793       821,714  
Cash flows from investing activities:
               
Capital improvements to real estate facilities
    (57,026 )     (68,628 )
Construction in process
    (16,743 )     (11,859 )
Acquisition of real estate facilities and property intangibles (Note 3)
    (60,888 )     (93,660 )
Proceeds from sales of other real estate investments
    4,753       15,442  
Loans to real estate entities
    (358,877 )     -  
Proceeds from repayments of loans receivable from real estate entities
    163,663       18,919  
Proceeds from disposition of loan receivable from real estate entities (Note 5)
    121,317       -  
Acquisition of investments in real estate entities
    (1,274 )     -  
Net sales (purchases) of marketable securities
    102,279       (104,828 )
Other investing activities
    537       4,572  
Net cash used in investing activities
    (102,259 )     (240,042 )
Cash flows from financing activities:
               
Principal payments on notes payable
    (154,411 )     (57,575 )
Net proceeds from the issuance of common shares
    15,728       36,602  
Issuance of cumulative preferred shares
    835,627       140,216  
Redemption of cumulative preferred shares
    (1,042,256 )     (164,200 )
Redemption of Equity Shares, Series A
    -       (205,366 )
Acquisition of permanent noncontrolling interests
    (112,115 )     -  
Distributions paid to Public Storage shareholders
    (632,248 )     (560,743 )
Distributions paid to noncontrolling interests
    (12,237 )     (18,654 )
Net cash used in financing activities
    (1,101,912 )     (829,720 )
Net decrease in cash and cash equivalents
    (295,378 )     (248,048 )
Net effect of foreign exchange translation on cash
    (141 )     (2,262 )
Cash and cash equivalents at the beginning of the period
    456,252       763,789  
Cash and cash equivalents at the end of the period
  $ 160,733     $ 513,479  

 

 

 
 
See accompanying notes.
4

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


(Continued)
 
   
For the Nine Months Ended
September 30,
 
   
2011
   
2010
 
Supplemental schedule of non cash investing and financing activities:
           
             
Foreign currency translation adjustment:
           
Real estate facilities, net of accumulated depreciation
  $ (139 )   $ 129  
Investment in real estate entities
    (269 )     (4,326 )
Loan receivable from real estate entities
    (13,783 )     27,405  
Accumulated other comprehensive loss
    14,050       (25,470 )
                 
Noncontrolling interests in subsidiaries acquired in exchange for the issuance of common shares (Note 7)
               
Additional paid in capital (noncontrolling interests acquired)
    (57,108 )     -  
Common shares
    48       -  
Additional paid in capital (common shares issued)
    57,060          
                 
Adjustments of redeemable noncontrolling interests to fair values:
               
Accumulated deficit
    (259 )     (194 )
Redeemable noncontrolling interests                                                                                  
    259       194  
                 
Conversion of note receivable from Shurgard Europe to investment (Note 5)
               
Loan receivable from real estate entities
    116,560       -  
Investment in real estate entities                                                                                  
    (116,560 )     -  
                 
Real estate acquired in connection with elimination of intangible assets
    (4,738 )     -  
Intangible assets eliminated in connection with acquisition of real estate
    4,738       -  
                 
Real estate acquired in exchange for assumption of note payable
    (9,679 )     (131,698 )
Note payable assumed in connection with acquisition of real estate
    9,679       131,698  
                 
Consolidation of entities previously accounted for under the equity method of accounting (Note 4)
               
Real estate facilities
    (19,415 )     -  
Existing investment in real estate entities
    6,126       -  
Intangible assets, net
    (3,985 )     -  
Permanent noncontrolling interests in subsidiaries
    17,663       -  

 

 

 

 
See accompanying notes.
 
5

 
PUBLIC STORAGE
CONDENSED NOTES TO FINANCIAL STATEMENTS
September 30, 2011
(Unaudited)


1.  
Description of the Business
 
 
Public Storage (referred to herein as “the Company”, “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.
 
At September 30, 2011, we had direct and indirect equity interests in 2,056 self-storage facilities (with approximately 130.5 million net rentable square feet) located in 38 states in the U.S. 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 owns 188 self-storage facilities (with approximately 10.1 million net rentable square feet) located in seven Western European countries, 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 interim 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 disclosures required by GAAP for complete financial statements.  We believe that all adjustments (consisting of normal and recurring adjustments) necessary for a fair presentation have been reflected in these unaudited interim financial statements.  Operating results for the three and nine months ended September 30, 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 interim financial statements should be read together with the audited 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 September 30, 2010 financial statements have been reclassified to conform to the September 30, 2011 presentation, as a result of discontinued operations.
 
Consolidation and Equity Method of Accounting
 
The Codification stipulates generally that entities with insufficient equity to finance their activities without additional subordinated financial support provided by other parties, or where the equity holders as a group do not have a controlling financial interest, are considered Variable Interest Entities (“VIE”).  We have determined that we have no investments in any VIEs.
 
 
6

 
PUBLIC STORAGE
CONDENSED NOTES TO FINANCIAL STATEMENTS
September 30, 2011
(Unaudited)

 
 
We consolidate all entities that we control (these entities, for the period in which the reference applies, are referred to collectively as the “Subsidiaries”), and we eliminate intercompany transactions and balances.  We account for our investment in entities that we do not control, but we have significant influence over, using the equity method of accounting (these entities, for the periods in which the reference applies, are referred to collectively as the “Unconsolidated Entities” or the “Real Estate Entities”).  When we obtain control of entities in which we already own a partial equity interest, we record a gain representing the differential between the book value and fair value of our preexisting partial equity interest.  We then commence consolidating the assets, liabilities, and any noncontrolling interests of the entity as described under “Other Investments” in Note 4 “Investments in Real Estate Entities”.  All such changes in consolidation status are reflected prospectively.
 
When we are the general partner of a partnership, we believe we control the partnership, unless the limited partners can dissolve the partnership or otherwise remove us as general partner without cause (commonly referred to as “kick-out rights”), or if the limited partners have the right to participate in substantive decisions that are expected to be made in the course of the partnership’s business.
 
Collectively, at September 30, 2011, the Company and its Subsidiaries own 2,039 self-storage facilities in the U.S., one self-storage facility in London, England and six commercial facilities in the U.S.  At September 30, 2011, the Unconsolidated Entities are comprised of PSB, Shurgard Europe, as well as various limited and joint venture partnerships (the “Other Investments”).  At September 30, 2011, the Other Investments own in aggregate 17 self-storage facilities with 1.0 million net rentable square feet in the U.S.
 
Use of Estimates

The financial statements and accompanying notes reflect our estimates and assumptions.  Actual results could differ from those estimates.
 
Income Taxes

We have elected to be treated as a real estate investment trust (“REIT”), as defined in the Internal Revenue Code.  As a REIT, we do not incur federal income tax if we distribute 100% of our REIT taxable income (generally, net rents and gains from real property, dividends, and interest) each year, and if we meet certain organizational and operational rules.  We believe we will meet these REIT requirements in 2011, and that we have met them for all other periods presented herein.  Accordingly, we have recorded no federal income tax expense related to our REIT taxable income.
 
Our merchandise and tenant reinsurance operations are subject to corporate income tax, and such taxes incurred are included in ancillary cost of operations.  We also incur income and other taxes in certain states, which are included in general and administrative expense.
 
We recognize tax benefits of income tax positions that are subject to audit only if we believe it is more likely than not that the position would be sustained (including the impact of appeals, as applicable), assuming the relevant taxing authorities had full knowledge of the relevant facts and circumstances of our positions.  As of September 30, 2011, we had no tax benefits that were not recognized.
 
Real Estate Facilities

Real estate facilities are recorded at cost.  Costs associated with the development, construction, renovation and improvement of properties, including interest and property taxes incurred during the construction period, are capitalized.  Internal and external transaction costs associated with acquisitions or dispositions of real estate and equity interests in real estate are expensed as incurred.  Expenditures for repairs and maintenance are expensed as incurred.  Buildings and improvements are depreciated on a straight-line basis over estimated useful lives ranging generally between 5 to 25 years.
 
 
7

 
PUBLIC STORAGE
CONDENSED NOTES TO FINANCIAL STATEMENTS
September 30, 2011
(Unaudited)

 
Acquisitions of interests in operating self-storage facilities, including the acquisition of a controlling interest in facilities we have a partial interest in, are accounted for under the provisions of Codification Section 805, “Business Combinations.”  The net acquisition cost, consisting of cash paid to third parties for their interests, the fair value of our existing investment, the fair value of any liabilities assumed, and the fair value of remaining noncontrolling interests, is allocated to the underlying land, buildings, and identified intangible assets based upon the relative individual estimated fair values.  Any difference between the net acquisition cost and the fair value of the net tangible and intangible assets acquired is recorded as goodwill.
 
Other Assets

Other assets primarily consist of prepaid expenses, accounts receivable, interest receivable, and restricted cash.  During the nine months ended September 30, 2011 and 2010, we recorded asset impairment charges with respect to other assets totaling $1,889,000 and $611,000, respectively.

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, accrued tenant reinsurance losses, casualty losses, and contingent loss accruals which are accrued when probable and estimable.  When it reasonably possible (but not probable) that a significant contingent loss has occurred, we disclose the nature of the potential loss and a range of exposure (if estimable).
 
Cash Equivalents and Marketable Securities

We classify as cash equivalents all highly liquid financial instruments such as 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 or treasury securities with remaining maturities of three months or less at the date of acquisition.  Cash and cash equivalents which are restricted from general corporate use, due to contractual agreement or regulatory requirement, are included in other assets.

Commercial paper with a remaining maturity of more than three months when acquired is presented on our balance sheet as marketable securities.  When at acquisition we have the positive intent and ability to hold these securities to maturity (investments that are “Held to Maturity”), the securities are stated at amortized cost and interest is recorded using the effective interest method.  Our marketable securities at December 31, 2010 consisted of Held to Maturity investments in corporate securities rated A1 by Standard and Poor’s, which matured in February 2011.

Fair Value Accounting

As used herein, the term “fair value” is the price 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 Codification Section 820-10-35.
 
We believe that, during all periods presented, the carrying values approximate the fair values of our cash and cash equivalents, marketable securities, other assets, and accrued and other liabilities, based upon our evaluation of the underlying characteristics, market data, and short maturity of these financial instruments, which involved considerable judgment.  The estimated fair values are not necessarily indicative of the amounts that could be realized in current market exchanges.  The characteristics of these financial instruments, market data, and other comparative metrics utilized in determining these fair values are “Level 2” inputs as the term is defined in Codification Section 820-10-35-47.

 
8

 
PUBLIC STORAGE
CONDENSED NOTES TO FINANCIAL STATEMENTS
September 30, 2011
(Unaudited)

 
 
Significant judgment is used to estimate fair values in recording our business combinations, in evaluating real estate, goodwill, and other intangible assets for impairment, and determining fair values of our notes payable and noncontrolling interests in subsidiaries.  In estimating fair values, we consider significant unobservable inputs such as market prices of land, capitalization rates for real estate facilities, earnings multiples, projected levels of earnings, costs of construction, functional depreciation, and estimated market interest rates for debt securities with a similar time to maturity and credit quality, which are “Level 3” inputs as the term is defined in Codification Section 820-10-35-52.
 
Currency and Credit Risk

Financial assets that are exposed to credit risk consist primarily of cash and cash equivalents, accounts receivable, loans receivable from real estate entities, and restricted cash.  At September 30, 2011, due primarily to our investment in and loan 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.

Goodwill and Other Intangible Assets
 
Our intangible assets are comprised of goodwill, intangibles associated with individual self-storage facilities (“Property Intangibles”), and an intangible asset related to the “Shurgard” tradename.
 
Our goodwill balance of $174,634,000 at September 30, 2011 and December 31, 2010 is reported net of accumulated amortization of $85,085,000.  Goodwill has an indeterminate life and is not amortized.
 
Our Property Intangibles represent acquired tenants in place and, to a lesser extent, leasehold interests in land.  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 as of each applicable date.  At September 30, 2011, our Property Intangibles have a net book value of $17,967,000 ($23,267,000 at December 31, 2010).  Accumulated amortization totaled $26,303,000 at September 30, 2011 ($21,844,000 at December 31, 2010), and amortization expense of $3,078,000 and $5,764,000 was recorded for the three months ended September 30, 2011 and 2010, respectively, and $9,225,000 and $9,078,000 was recorded for the nine months ended September 30, 2011 and 2010, respectively.  In the nine months ended September 30, 2010, we recorded an asset impairment charge related to a land lease totaling $198,000.  During the nine months ended September 30, 2011, our Property Intangibles were increased by $3,925,000 in connection with the acquisition of nine self-storage facilities, the leasehold interest in the land of one of our existing self-storage facilities, and the consolidation of two entities (Note 3).
 
Our intangible asset representing the “Shurgard” trade name, which is used by Shurgard Europe pursuant to a licensing agreement, has a book value of $18,824,000 at September 30, 2011 and December 31, 2010.  This asset has an indefinite life and, accordingly, is not amortized.
 
Evaluation of Asset Impairment
 
Goodwill impairment is evaluated by reporting unit.  No impairment of goodwill or the Shurgard trade name was identified in our annual evaluation at December 31, 2010, nor were there any indicators of impairment at September 30, 2011.
 
 
9

 
 
PUBLIC STORAGE
CONDENSED NOTES TO FINANCIAL STATEMENTS
September 30, 2011
(Unaudited)

 
 
We evaluate our real estate and Property Intangibles for impairment on a quarterly basis.  If any indicators of impairment are noted, we estimate future undiscounted cash flows to be received from the use of the asset and, if such future undiscounted cash flows are less than carrying value, an impairment charge is recorded for the excess of carrying value over the assets’ estimated fair value.  Long-lived assets which we expect to sell or otherwise dispose of prior to the end of their estimated useful lives are stated at the lower of their net realizable value (estimated fair value less cost to sell) or their carrying value.
 
Impairment charges with respect to continuing operations are included under “asset impairment charges” on our statements of income, and any such charges with respect to discontinued operations are included under “discontinued operations” on our statements of income.
 
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 reduce 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.
 
We accrue for property tax expense based upon actual amounts billed and, in some circumstances, estimates and historical trends when bills or assessments have not been received from the taxing authorities or such bills and assessments are in dispute.  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 related to foreign operations are translated from the functional currency into U.S. Dollars at the exchange rates at the respective financial statement date, while revenues, expenses, and equity in earnings are translated at the average exchange rates during the respective period.  The Euro, which is the functional currency of a majority of the foreign operations we have an interest in, was translated at exchange rates of approximately 1.360 U.S. Dollars per Euro at September 30, 2011 (1.325 at December 31, 2010), and average exchange rates of 1.415 and 1.289 for the three months ended September 30, 2011 and 2010, respectively, and 1.406 and 1.316 for the nine months ended September 30, 2011 and 2010, respectively.  Cumulative translation adjustments, to the extent not included in cumulative net income, are included in equity as a component of accumulated other comprehensive income (loss).
 
Comprehensive Income
 
Total comprehensive income for a period represents net income, adjusted for changes in other comprehensive income (loss) for the applicable period, as set forth in the following table:
 
 
10

 
PUBLIC STORAGE
CONDENSED NOTES TO FINANCIAL STATEMENTS
September 30, 2011
(Unaudited)


 
 
   
For the Three Months Ended
September 30,
   
For the Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Amounts in thousands)
 
Net income
  $ 194,513     $ 245,811     $ 616,022     $ 506,904  
Other comprehensive (loss) income:
                               
Aggregate foreign currency translation adjustments for the period
    (45,137 )     78,826       14,050       (25,470 )
Adjust for foreign currency translation adjustments recognized during the period:
                               
Foreign currency loss (gain) (a)
    28,253       (55,455 )     (13,495 )     28,592  
Other comprehensive (loss) income for the period
    (16,884 )     23,371       555       3,122  
Total comprehensive income
  $ 177,629     $ 269,182     $ 616,577     $ 510,026  

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

Discontinued Operations
 
The net income of real estate facilities that have been sold or otherwise disposed of, or that we expect to sell or dispose of within the next year based upon a committed plan of disposal, are reclassified and presented on our income statement for all periods as “discontinued operations.”  In addition to the revenues and expenses of disposed self-storage facilities, discontinued operations includes a $380,000 loss on lease termination for the three and nine months ended September 30, 2011, $1,701,000 and $1,448,000 in net gains on disposition of real estate facilities for the three and nine months ended September 30, 2011, respectively, $2,707,000 and $7,794,000 in gains on disposition of real estate facilities for the three and nine months ended September 30, 2010, respectively, and a $595,000 asset impairment charge in the nine months ended September 30, 2010.

Net Income per Common Share
 
Net income is first allocated to each of our noncontrolling interests based upon their respective share of the net income of the subsidiaries, and to our cumulative preferred shares based upon the dividends declared (or accumulated).

When we call our cumulative preferred shares, preferred partnership units (Note 7), or Equity Shares, Series A for redemption, additional income is allocated to (from) the redeemed security to the extent the redemption cost is greater (less) than the related original net issuance proceeds.  Such redemption-related allocations are referred to hereinafter as “EITF D-42” allocations.  The remaining net income is allocated to our common shares, our Equity Shares, Series A and our restricted share units based upon the dividends declared (or accumulated), combined with participation rights in undistributed earnings.

Net income allocated to our common shares from continuing operations is computed by eliminating the net income or loss from discontinued operations allocable to our common shares, from net income allocated to our common shares.
 
 
11

 
PUBLIC STORAGE
CONDENSED NOTES TO FINANCIAL STATEMENTS
September 30, 2011
(Unaudited)

 
 
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 10).
 
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 statements of income:
 
   
For the Three Months Ended
September 30,
   
For the Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Amounts in thousands)
 
                         
Net income allocable to common shareholders from continuing operations and discontinued operations:
                       
                         
Net income allocable to common shareholders
  $ 117,950     $ 182,206     $ 397,524     $ 277,781  
                                 
Eliminate: Discontinued operations allocable to common shareholders
    (1,392 )     (2,863 )     (1,118 )     (7,889 )
Net income from continuing operations allocable to common shareholders
  $ 116,558     $ 179,343     $ 396,406     $ 269,892  
                                 
Weighted average common shares and equivalents outstanding:
                               
Basic weighted average common shares outstanding
    169,728       169,014       169,512       168,766  
Net effect of dilutive stock options - based on treasury stock method
    1,102       963       1,026       874  
Diluted weighted average common shares outstanding
    170,830       169,977       170,538       169,640  

 
Recent Accounting Pronouncements and Guidance
 
In June 2011, the Financial Accounting Standards Board  (“FASB”) issued Accounting Standards Update 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” (“ASU No. 2011-05”).  ASU 2011-05 does not change the items that must be reported in other comprehensive income, however it eliminates the option to present other comprehensive income on the statement of shareholders’ equity and instead requires either (i) a continuous statement of comprehensive income which would replace the current statement of operations, or (ii) an additional statement of other comprehensive income, which would immediately follow the statement of operations, and would report the components of other comprehensive income.  ASU 2011-05 is effective for the first interim or annual period beginning after December 15, 2011, and should be applied retrospectively to all periods reported after the effective date.  The adoption of ASU 2011-05 is not expected to have a material impact on our financial statements.

 
 
12

 
PUBLIC STORAGE
CONDENSED NOTES TO FINANCIAL STATEMENTS
September 30, 2011
(Unaudited)

 
 
3.
Real Estate Facilities
 
Activity in real estate facilities is as follows:
 
   
Nine Months Ended
September 30, 2011
 
   
(Amounts in thousands)
 
Operating facilities, at cost:
     
Beginning balance                                                                   
  $ 10,587,347  
Capital improvements                                                                   
    57,026  
Acquisition of real estate facilities                                                                   
    90,431  
Newly developed facilities opened for operations
    19,653  
Disposition of real estate facilities                                                                   
    (7,962 )
Impairment due to casualty loss                                                                   
    (453 )
Impact of foreign exchange rate changes                                                                   
    224  
Ending balance                                                                   
    10,746,266  
Accumulated depreciation:
       
Beginning balance                                                                   
    (3,061,459 )
Depreciation expense                                                                   
    (255,985 )
Disposition of real estate facilities                                                                   
    4,402  
Impairment due to casualty loss                                                                   
    156  
Impact of foreign exchange rate changes                                                                   
    (85 )
Ending balance                                                                   
    (3,312,971 )
Construction in process:
       
Beginning balance                                                                   
    6,928  
Current development                                                                   
    16,743  
Newly developed facilities opened for operations
    (19,653 )
Ending balance                                                                   
    4,018  
Total real estate facilities at September 30, 2011
  $ 7,437,313  

 
During the nine months ended September 30, 2011, we acquired five operating self-storage facilities in Nevada and one each in New York, Florida, California and Maryland (741,000 net rentable square feet) and the leasehold interest in the land of one of our existing self-storage facilities for $61,277,000 of cash and the assumption of mortgage debt with a fair value of $9,679,000.  The aggregate cost of $70,956,000, 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 $71,016,000 to real estate facilities and $4,678,000 to intangible assets.
 
During the three months ended September 30, 2011, we began to consolidate two limited partnerships that we had previously accounted for using the equity method (see Note 4).  The two self-storage facilities (143,000 net rentable square feet) owned by these entities, having an aggregate fair market value of $19,415,000, have been added to our operating facilities.
 
During the three and nine months ended September 30, 2011, we incurred an asset impairment charge totaling $297,000.  During the nine months ended September 30, 2010, we incurred asset impairment charges related to real estate facilities totaling $1,735,000.
 
 
13

 
PUBLIC STORAGE
CONDENSED NOTES TO FINANCIAL STATEMENTS
September 30, 2011
(Unaudited)

 
 
During the nine months ended September 30, 2011, we completed four expansion projects to existing facilities at an aggregate cost of $19,653,000.  During the nine months ended September 30, 2011, net proceeds with respect to the condemnation of real estate totaled $4,753,000 and we recorded a gain of $1,193,000 (comprised of a $125,000 gain included in “gains on disposition of real estate facilities, net” and a gain of $1,068,000 included in discontinued operations).
 
4.
Investments in Real Estate Entities
 
The following table sets forth our investments in the Real Estate Entities at September 30, 2011 and December 31, 2010, and our equity in earnings of real estate entities for the three and nine months ended September 30, 2011 and 2010:
 
   
Investments in Real Estate Entities at
 
   
September 30, 2011
   
December 31, 2010
 
   
(Amounts in thousands)
 
PSB
  $ 329,476     $ 323,795  
Shurgard Europe
    376,348       264,681  
Other Investments
    10,763       13,093  
Total
  $ 716,587     $ 601,569  
                 

   
Equity in Earnings of Real Estate Entities
 
   
For the Three Months Ended
September 30,
   
For the Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Amounts in thousands)
 
PSB
  $ 8,117     $ 5,091     $ 22,982     $ 16,279  
Shurgard Europe
    6,702       3,485       17,471       10,254  
Other Investments
    450       467       1,302       1,259  
Total                                 
  $ 15,269     $ 9,043     $ 41,755     $ 27,792  

 
During the nine months ended September 30, 2011 and 2010, we received cash distributions from our investments in real estate entities totaling $41,852,000 and $37,377,000, respectively.
 
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 42% common equity interest in PSB as of September 30, 2011 (41% at 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 September 30, 2011 ($49.54 per share of PSB common stock), the shares and units we owned had a market value of approximately $649.3 million, as compared to our carrying value of $329.5 million.
 
The following table sets forth selected financial information of PSB; the amounts represent 100% of PSB’s balances and not our pro-rata share.
 
 
14

 
PUBLIC STORAGE
CONDENSED NOTES TO FINANCIAL STATEMENTS
September 30, 2011
(Unaudited)

 
 
   
2011
   
2010
 
   
(Amounts in thousands)
 
For the nine months ended September 30,
           
Total revenue
  $ 223,644     $ 206,354  
Costs of operations
    (74,805 )     (66,960 )
Depreciation and amortization
    (63,200 )     (57,731 )
General and administrative
    (4,683 )     (6,980 )
Other items
    (350 )     3,207  
Net income
  $ 80,606     $ 77,890  
                 
   
At September 30, 2011
   
At December 31, 2010
 
   
(Amounts in thousands)
 
                 
Total assets (primarily real estate)
  $ 1,611,697     $ 1,621,057  
Debt
    193,850       144,511  
Other liabilities
    55,630       53,421  
Preferred stock and units
    604,129       651,964  
Common equity and units
    758,088       771,161  
                 

Investment in Shurgard Europe

At September 30, 2011 and December 31, 2010, we had a 49% equity investment in Shurgard Europe. 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 to Shurgard Europe totaling $237.9 million.  This loan was extinguished in June 2011 (Note 5).
 
During the three and nine months ended September 30, 2011,  our investment in Shurgard Europe increased by approximately $116,560,000 due to the effective exchange of a loan receivable from Shurgard Europe for an equity interest in Shurgard Europe.  During the nine months ended September 30, 2011 and 2010, our investment in Shurgard Europe increased by approximately $269,000 and $4,326,000, respectively, due to the impact of changes in foreign currency exchange rates.
 
For the three and nine months ended September 30, 2011, we also received interest on the loans due from Shurgard Europe, and trademark license fees.  For financial statement purposes, 49% of the interest and license fees have been classified as equity in earnings, and the remaining 51% as interest and other income, as set forth in the following table:
 
 
15

 
PUBLIC STORAGE
CONDENSED NOTES TO FINANCIAL STATEMENTS
September 30, 2011
(Unaudited)

 
 
   
For the Three Months Ended
September 30,
   
For the Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Amounts in thousands)
 
                         
Our 49% equity share of Shurgard Europe’s net income (loss)
  $ 735     $ (2,435 )   $ (2,874 )   $ (7,843 )
 
Add our 49% equity share of amounts received from Shurgard Europe:
                               
Interest on loans due from Shurgard Europe
    5,635       5,712       19,441       17,495  
Trademark license fee
    332       208       904       602  
                                 
Total equity in earnings of Shurgard Europe
  $ 6,702     $ 3,485     $ 17,471     $ 10,254  

The following table sets forth selected consolidated financial information of Shurgard Europe.  These amounts are based upon 100% of Shurgard Europe’s balances for all periods (including the consolidated operations of 72 self-storage facilities formerly owned by the joint ventures), rather than our pro rata share, and are based upon our historical acquired book basis.
 
   
For the Three Months Ended
September 30,
   
For the Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Amounts in thousands)
 
                         
Self-storage and ancillary revenues
  $ 67,732     $ 59,079     $ 196,004     $ 173,146  
Interest and other income (expense)
    89       66       292       (145 )
Self-storage and ancillary cost of operations
    (28,089 )     (25,020 )     (82,051 )     (73,732 )
Trademark license fee payable to Public Storage
    (678 )     (423 )     (1,844 )     (1,228 )
Depreciation and amortization
    (17,954 )     (17,880 )     (54,655 )     (54,019 )
General and administrative
    (3,571 )     (2,247 )     (9,191 )     (5,903 )
Interest expense on third party debt
    (3,728 )     (3,245 )     (11,020 )     (8,696 )
Interest expense on debt due to Public Storage
    (11,499 )     (11,659 )     (39,675 )     (35,704 )
Expenses from foreign currency exchange
    (803 )     (415 )     (909 )     (845 )
Net income (loss)                                                              
  $ 1,499     $ (1,744 )   $ (3,049 )   $ (7,126 )
                                 
Net  income allocated to permanent noncontrolling equity interests
    -       (3,225 )     (2,816 )     (8,880 )
Net income (loss) allocated to Shurgard Europe
  $ 1,499     $ (4,969 )   $ (5,865 )   $ (16,006 )
 
 
16

 
PUBLIC STORAGE
CONDENSED NOTES TO FINANCIAL STATEMENTS
September 30, 2011
(Unaudited)

 
 
   
September 30,
   
December 31,
 
   
2011
   
2010
 
   
(Amounts in thousands)
 
             
Total assets (primarily self-storage facilities)
  $ 1,470,085     $ 1,503,961  
Total debt to third parties
    260,276       279,174  
Total debt to Public Storage
    466,349       495,229  
Other liabilities
    90,884       73,027  
Equity
    652,576       656,531  
                 
 
Other Investments
 
At September 30, 2011, the “Other Investments” include an aggregate common equity ownership of approximately 26% in entities that collectively own 17 self-storage facilities, and have no debt.
 
On June 30, 2011, we acquired interests owned by Mr. Hughes (the Company’s then Chairman of the Board of Trustees), and his family and entities that are wholly owned or controlled by them (collectively, the “Hughes Family”), in three limited partnerships for approximately $1,274,000 in cash.
 
During the three months ended September 30, 2011, we began to consolidate two of the aforementioned limited partnerships due to a change of control.  As a result, we recorded a gain of $3,138,000 on the disposition of our existing investments, representing the difference between the aggregate fair values of the investments ($6,126,000) and the aggregate book values ($2,988,000).
 
The acquisition cost in consolidating these investments totaled $5,737,000, representing the $6,126,000 fair value of our existing investment less $389,000 in cash held by these limited partnerships, and was allocated to real estate facilities ($19,415,000), intangible assets ($3,985,000), and permanent noncontrolling interests ($17,663,000).
 
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’ 17 facilities:
 
   
2011
   
2010
 
   
(Amounts in thousands)
 
For the nine months ended September 30,
           
Total revenue
  $ 11,041     $ 10,643  
Cost of operations and other expenses
    (4,381 )     (4,336 )
Depreciation and amortization
    (1,782 )     (1,713 )
Net income
  $ 4,878     $ 4,594  
                 
                 
   
September 30,
   
December 31,
 
      2011       2010  
   
(Amounts in thousands)
 
Total assets (primarily self-storage facilities)
  $ 32,090     $ 32,371  
Total accrued and other liabilities
    2,216       787  
Total Partners’ equity
    29,874       31,584  


 
17

 
PUBLIC STORAGE
CONDENSED NOTES TO FINANCIAL STATEMENTS
September 30, 2011
(Unaudited)

 
 
5.
Loans Receivable from Real Estate Entities
 
On February 9, 2011, we loaned PSB $121.0 million.  The loan had a six-month term, no prepayment penalties, and bore interest at a rate of three-month LIBOR plus 0.85% (1.13% per annum for the term of the loan).  For the three and nine months ended September 30, 2011, we recorded interest income of approximately $141,000 and $664,000, respectively, related to the loan.  We received $5,000,000 in principal repayments on this loan during the three months ended June 30, 2011.  On August 9, 2011, PSB repaid the remaining principal balance of $116,000,000.
 
As of September 30, 2011, we had a €343.0 million Euro-denominated loan receivable from Shurgard Europe totaling $466.3 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.  For all periods presented, because we expect repayment of this Euro-denominated loan within two years of each respective balance sheet date, foreign exchange rate gains or losses due to changes in exchange rates between the Euro and the U.S. Dollar are recognized in income, under “foreign currency gain (loss).”  We received €30.7 million ($42.7 million) in principal repayments on this loan during the nine months ended September 30, 2011.
 
On February 28, 2011, we provided bridge financing to Shurgard Europe totaling $237.9 million, which it used to acquire its partner’s 80% interests in two affiliated joint ventures on March 2, 2011.  This loan bore interest at a fixed rate of 7.0% per annum and was denominated in U.S. Dollars.  On June 15, 2011, our joint venture partner in Shurgard Europe effectively purchased 51% (representing its equity ownership in Shurgard Europe) of the $237.9 million loan from us for $121.3 million and then the entire loan balance was effectively exchanged for an equity interest in Shurgard Europe.
 
For the three and nine months ended September 30, 2011 we recorded interest income of approximately $5,864,000 and $20,234,000, respectively, as compared to $5,946,000 and $18,209,000 for the same periods in 2010, related to the loans to Shurgard Europe.  These amounts reflect 51% of the aggregate interest on the loans, with the other 49%, reflecting our ownership interest in Shurgard Europe, classified as equity in earnings of real estate entities.
 
We also received $1,462,000 from our joint venture partner for funding its 51% pro rata share of Shurgard’s cost to acquire the interests for the period of time from March 2, 2011 until June 15, 2011, and recorded this amount as interest and other income for the nine months ended September 30, 2011.
 
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 loan to Shurgard Europe is mitigated.  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 Codification Section 820-10-35-52.
 
6.
Line of Credit and Notes Payable
 
At September 30, 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 September 30, 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 September 30, 2011).  We had no outstanding borrowings on our Credit Agreement at September 30, 2011 or at November 4, 2011.  At September 30, 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 $18,477,000 ($17,777,000 at December 31, 2010).
 
 
18

 
PUBLIC STORAGE
CONDENSED NOTES TO FINANCIAL STATEMENTS
September 30, 2011
(Unaudited)

 
 
The carrying amounts (which approximate the fair values) of our notes payable at September 30, 2011 and December 31, 2010 consist of the following (dollar amounts in thousands):
 

   
September 30,
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 mortgage notes payable, secured by 87 real estate facilities with a net book value of approximately $539 million at September 30, 2011 and stated fixed rates between 4.95% and 7.70%, maturing at varying dates between January 2012 and September 2028 (carrying amount includes $3,308 of unamortized premium at September 30, 2011 and $6,137 at December 31, 2010)
            232,391               278,425  
                 
Total notes payable
  $ 418,851     $ 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.

During the nine months ended September 30, 2011, we assumed mortgage debt in connection with the acquisition of a real estate facility.  This debt was recorded at its estimated fair value of approximately $9,679,000 with an estimated market rate of approximately 2.9% as compared to the actual assumed note balance of $8,776,000 with a stated interest rate of 5.5%, representing an initial premium of $903,000.

During the nine months ended September 30, 2011, we prepaid mortgage debt with a carrying amount of $27,865,000 and a face amount of $26,904,000 for a total of $26,017,000 in cash and recorded a gain on prepayment of debt totaling approximately $1,848,000.

The notes payable and Credit Agreement have various customary restrictive covenants, all of which we were in compliance with at September 30, 2011.

At September 30, 2011, approximate principal maturities of our notes payable are as follows (amounts in thousands):
 
 
19

 
PUBLIC STORAGE
CONDENSED NOTES TO FINANCIAL STATEMENTS
September 30, 2011
(Unaudited)

 
 
   
Unsecured
Notes Payable
   
Secured Notes Payable
   
Total
2011 (remainder)                                   
  $ -     $ 2,634     $ 2,634  
2012                                   
    -       70,115       70,115  
2013                                   
    186,460       78,404       264,864  
2014                                   
    -       35,164       35,164  
2015                                   
    -       30,089       30,089  
Thereafter                                   
    -       15,985       15,985  
    $ 186,460     $ 232,391     $ 418,851  
Weighted average effective rate
    5.9 %     4.9 %     5.3 %
                         
 
Cash paid for interest totaled $21,485,000 and $25,986,000 for the nine months ended September 30, 2011 and 2010, respectively.  Interest capitalized as real estate totaled $316,000 and $320,000 for the nine months ended September 30, 2011 and 2010, respectively.
 
7.
Noncontrolling Interests
 
Interests in the net assets of the Subsidiaries, other than our own, that have the ability to require us to redeem their interests, other than pursuant to a liquidation of the subsidiary, are presented at fair value on our balance sheets as “Redeemable Noncontrolling Interests.”  We estimate fair value by applying the related liquidation provisions of the governing documents to our estimate of the fair value of the underlying net assets (principally real estate assets).  Any adjustments recorded due to changes in the fair value of these interests are recorded against retained earnings.  All other noncontrolling interests are presented on our balance sheets as a component of equity, “Equity of Permanent Noncontrolling Interests.”
 
Redeemable Noncontrolling Interests
 
At September 30, 2011, the Redeemable Noncontrolling Interests represent ownership interests in subsidiaries that own 14 self-storage facilities.  During the three and nine months ended September 30, 2011, we allocated a total of $245,000 and $706,000, respectively, of income to these interests.  During the same periods in 2010, we allocated a total of $238,000 and $695,000, respectively, of income to these interests.  During the nine months ended September 30, 2011 and 2010, we paid distributions to these interests totaling $862,000 and $884,000, respectively.
 
Permanent Noncontrolling Interests
 
At September 30, 2011, the Permanent Noncontrolling Interests have ownership interests in subsidiaries that own 14 self-storage facilities.  During the three and nine months ended September 30, 2011, we allocated a total of $3,129,000 and $11,625,000, respectively, in income to the Permanent Noncontrolling Interests.  During the same periods in 2010, we allocated a total of $4,406,000 and $12,418,000, respectively, in income to these interests.  During the nine months ended September 30, 2011 and 2010, we paid distributions to these interests totaling $11,375,000 and $12,332,000, respectively.
 
During the nine months ended September 30, 2011, we acquired noncontrolling interests in Subsidiaries, representing primarily all the remaining interests we did not own in 17 Subsidiaries, which includes five Subsidiaries representing public limited partnerships pursuant to mergers described in Note 9.  The noncontrolling interests were acquired for an aggregate cost of approximately $169,223,000, consisting of $112,115,000 in cash and 477,928 shares of our common stock with an estimated fair value of approximately $57,108,000.  Permanent Noncontrolling Interests were reduced by $26,097,000, representing the aggregate underlying book value of the interests acquired and the excess cost over the underlying book value of $143,126,000 was recorded as a reduction to paid-in capital.
 
 
20

 
PUBLIC STORAGE
CONDENSED NOTES TO FINANCIAL STATEMENTS
September 30, 2011
(Unaudited)

 
 
As described more fully in Note 4, we increased Permanent Noncontrolling Interests during the nine months ended September 30, 2011 a total of $17,663,000 in connection with consolidating two partnerships.
 
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 and nine months ended September 30, 2010, we allocated a total of $1,813,000 and $5,438,000, respectively, in income to these interests based upon distributions paid.  At September 30, 2011 and December 31, 2010, we had no preferred partnership interests outstanding.

8.
Public Storage Shareholders’ Equity
 
Cumulative Preferred Shares
 
At September 30, 2011 and December 31, 2010, we had the following series of Cumulative Preferred Shares outstanding:
 
 
21

 
PUBLIC STORAGE
CONDENSED NOTES TO FINANCIAL STATEMENTS
September 30, 2011
(Unaudited)

 
 
           
At September 30, 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  
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  
Series K
8/8/11
    7.250 %     -       -       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  
Series Q
4/14/16
    6.500 %     15,000       375,000       -       -  
Series R
7/26/16
    6.350 %     19,500       487,500       -       -  
Total Cumulative Preferred Shares
            479,200     $ 3,216,271       486,390     $ 3,396,027  

The holders of our Cumulative Preferred Shares have general preference rights with respect to liquidation and quarterly distributions.  Except under certain conditions and as noted below, holders of the Cumulative Preferred Shares 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 the arrearage has been cured.  At September 30, 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 to 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.
 
In April and May 2011, we issued 15,000,000 depositary shares each representing 1/1,000 of our 6.500% Cumulative Preferred Shares, Series Q for gross proceeds of $375,000,000, and we incurred $11,336,000 in issuance costs.
 
 
22

PUBLIC STORAGE
CONDENSED NOTES TO FINANCIAL STATEMENTS
September 30, 2011
(Unaudited)

 
In May and June 2011, we redeemed our Series I Cumulative Preferred Shares, at par.  The aggregate redemption amount, before payment of accrued dividends, was $517,500,000.  In applying EITF D-42 to this redemption, we allocated $15,899,000 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 nine months ended September 30, 2011.
 
In July 2011, we issued 19,500,000 depositary shares each representing 1/1,000 of our 6.350% Cumulative Preferred Shares, Series R for gross proceeds of $487,500,000, and we incurred $15,537,000 in issuance costs.
 
In August 2011, we redeemed our Series K Cumulative Preferred Shares, at par.  The aggregate redemption amount, before payment of accrued dividends, was $424,756,100.  In applying EITF D-42 to this redemption, we allocated $13,064,000 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 three and nine months ended September 30, 2011.
 
On September 30, 2011, we redeemed our Series G Cumulative Preferred Shares, at par.  The aggregate redemption amount, before payment of accrued dividends, was $100,000,000.  In applying EITF D-42 to this redemption, we allocated $3,114,000 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 three and nine months ended September 30, 2011.
 
On April 13, 2010, we issued 5,800,000 depositary shares each representing 1/1,000 of our 6.875% Cumulative Preferred Shares, Series O for gross proceeds of $145,000,000.
 
On May 18, 2010, we redeemed our remaining Series V Cumulative Preferred Shares at par value plus accrued dividends.  In applying EITF D-42 to this redemption, we allocated $5,063,000 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 nine months ended September 30, 2010.
 
On August 3, 2010, we repurchased 400,000 shares of our 6.850% Cumulative Preferred Shares Series Y.  The carrying value of the shares repurchased totaled $10 million and exceeded the aggregate repurchase cost of $9.2 million by $0.8 million.  For purposes of determining net income per share, income allocated to our preferred shareholders was reduced by the $0.8 million for the three and nine months ended September 30, 2010.
 
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.  As a result of the redemption on April 15, 2010, no distributions will be paid for the period beginning with the three months ended June 30, 2010.  Net income allocated to the Equity Shares, Series A for the nine months ended September 30, 2010 also includes $25.7 million ($3.07 per share) pursuant to EITF D-42.
 
 
23

 
PUBLIC STORAGE
CONDENSED NOTES TO FINANCIAL STATEMENTS
September 30, 2011
(Unaudited)

 
 
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 six months ended June 30, 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 were 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 $162.0 million ($0.95 per share) and $135.7 million ($0.80 per share), for the three months ended September 30, 2011 and 2010, respectively, and $459.3 million ($2.70 per share) and $381.1 million ($2.25 per share), for the nine months ended September 30, 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 $56.7 million and $57.5 million for the three months ended September 30, 2011 and 2010, respectively, and $172.9 million and $174.5 million for the nine months ended September 30, 2011 and 2010, respectively.
 
9.           Related Party Transactions

The Hughes Family owns approximately 16.7% of our common shares outstanding at September 30, 2011.
 
The Hughes Family has ownership interests in, and operates approximately 53 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.  We have a right of first refusal to acquire the stock or assets of the corporation that manages the 53 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 nine months ended September 30, 2011 and 2010, we received $447,000 and $460,000 (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.
 
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. 

On August 23, 2011, we completed mergers to acquire all of the units of limited partnership interest and general partnership interests we did not currently own in each of five affiliated partnerships.  For three of these partnerships, Mr. Hughes was a co-general partner along with the Company.  These mergers were approved by Public Storage and the Hughes Family, who together own a majority of the limited partnership units outstanding and therefore could approve the mergers without the vote of the other limited partners.  The merger consideration was based upon independent appraisals, dated April 5, 2011 from a nationally recognized appraisal firm, with allocation of the net asset value based upon the liquidation provisions of the relevant partnership documents.  Under the merger agreements, the Hughes Family sold all of its general and limited partnership interests in these five Partnerships for approximately $54,599,000, reflecting the same pricing and terms as the public limited partners (see “Permanent Noncontrolling Interests” in Note 7 “Noncontrolling Interests”).  In addition, on August 23, 2011, the Hughes Family’s interests in a private REIT owned by the Company and the Hughes Family were acquired for $238,000, based upon the merger value of the interests in these five partnerships owned by the private REIT.  Our board of trustees appointed a special committee of independent trustees to review the terms of these acquisitions.  The special committee unanimously determined that the transactions were advisable and fair to and in the respective best interests of Public Storage and its shareholders not affiliated with the Hughes Family.  The Company also engaged an investment banking firm who concluded that the consideration received in the mergers by the unaffiliated limited partners was fair to them, from a financial point of view.  As a trustee, Mr. Hughes is indemnified for any litigation arising from this transaction pursuant to the indemnification agreements we have with each Public Storage trustee.

 
24

 
PUBLIC STORAGE
CONDENSED NOTES TO FINANCIAL STATEMENTS
September 30, 2011
(Unaudited)

 
 
The Hughes Family also had interests in 18 additional limited partnerships that we acquired on June 30, 2011.  The acquisition price was based upon independent appraisals of the partnerships’ facilities, dated April 5, 2011 from a nationally recognized appraisal firm, with allocation of the net asset value based upon the liquidation provisions of the relevant partnership documents.  We paid the Hughes Family $13,300,000 for their interests.  The special committee of our board of trustees also reviewed the terms of each of these purchases and unanimously determined that the purchases were fair to and in the respective best interests of Public Storage and its shareholders not affiliated with the Hughes Family.  As of November 4, 2011, Mr. Hughes has withdrawn as general partner in all but one of these 18 partnerships, where his withdrawal is pending receipt of the required consent of a limited partner.

10.      Share-Based Compensation
 
Under various share-based compensation plans, the Company can grant non-qualified options to purchase the Company’s common shares, as well as restricted share units (“RSU’s”), to trustees, officers, service providers, and key employees.  The terms of these grants are established by an authorized committee of our Board of Trustees.
 
Stock Options
 
Stock option exercise prices are equal to the closing trading price of our common shares on the date of grant, vest generally over a five-year period, and expire ten years after the grant date.  We use the Black-Scholes option valuation model to estimate the grant-date fair value of our stock options, and recognize these amounts, net of estimated forfeitures, as compensation expense over the applicable vesting period.
 
Outstanding stock option grants are included on a one-for-one basis in our diluted weighted average shares, to the extent dilutive, after applying the treasury stock method (based upon the average common share price during the period) to assumed exercise proceeds and measured but unrecognized compensation.
 
For the three and nine months ended September 30, 2011, we recorded $785,000 and $2,284,000, respectively, in compensation expense related to stock options, as compared to $825,000 and $2,250,000 for the same periods in 2010.
 
During the nine months ended September 30, 2011, 135,000 stock options were granted, 249,587 options were exercised, and 32,500 options were forfeited.  A total of 2,803,805 stock options were outstanding at September 30, 2011 (2,950,892 at December 31, 2010).
 
 
25

 
PUBLIC STORAGE
CONDENSED NOTES TO FINANCIAL STATEMENTS
September 30, 2011
(Unaudited)

 
 
Restricted Share Units
 
RSU’s vest ratably over a five or eight-year period from the date of grant.  The grantee receives additional compensation equal to the per-share dividends received by common shareholders for each outstanding RSU.  Such compensation is classified as dividends paid.  When RSU’s are forfeited, any dividends previously paid on such forfeited RSU’s are expensed.  When RSU’s vest, the grantee receives common shares equal to the number of vested restricted share units, less common shares withheld for employee statutory tax liabilities.
 
We recognize the estimated grant-date fair value of RSU’s as compensation expense over the applicable vesting period, net of estimates for future forfeitures.  Fair value is determined based upon the closing trading price of our common shares on the grant date.  The employer portion of payroll taxes is expensed as incurred.  We have elected to use the straight-line attribution method with respect to restricted share grants that are earned solely based upon the passage of time and continued employment.  Performance–based RSU grants are amortized using the accelerated attribution method, with each vesting amortized separately over the individual vesting period.
 
During the nine months ended September 30, 2011, 103,225 restricted share units were granted, 49,216 restricted share units were forfeited and 87,077 restricted share units vested.  This vesting resulted in the issuance of 55,913 common shares.  In addition, cash compensation totaling $3,140,000 was paid to employees in lieu of 31,164 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 September 30, 2011, approximately 451,327 restricted share units were outstanding (484,395 at December 31, 2010).  A total of $5,362,000 and $15,684,000 in restricted share unit expense was recorded for the three and nine months ended September 30, 2011, respectively, as compared to $2,274,000 and $6,652,000 in restricted share unit expense was recorded for the same periods in 2010.
 
At the beginning of 2011, the Company entered into a performance-based restricted share unit program with selected employees.  Under the program, the Company established a targeted restricted share unit award for each selected employee, 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 of at least 3% was required, and to achieve 200% of the targeted award level, 2011 same-store growth of at least 4% was required.  Up to approximately 267,000 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 267,000 restricted share units will be granted during the three months ending March 31, 2012.  Included in restricted share unit expense is $2,817,000 and $8,483,000 related to this performance-based restricted share unit program during the three and nine months ended September 30, 2011, respectively.
 
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.
 
11.      Segment Information
 
Our reportable segments reflect significant operating activities that are evaluated separately by management, and are organized based upon differences in the nature of their products and services.  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.  Interest income (other than from Loans Receivable from Real Estate Entities), interest expense, general and administrative expense not incremental to any particular segment, gains or losses on disposition of real estate facilities, and real estate impairment charges are not allocated to segments, because management does not consider these items in evaluating the results of its segments.
 
 
26

 
PUBLIC STORAGE
CONDENSED NOTES TO FINANCIAL STATEMENTS
September 30, 2011
(Unaudited)

 
 
Following is the description of and basis for presentation for each of our segments.
 
Domestic Self-Storage Segment

The Domestic Self-Storage Segment includes the operations of the 2,040 self storage facilities owned by the Company and the Subsidiaries, as well as our equity share of the Other Investments.  At September 30, 2011, the assets of the Domestic Self-Storage segment are comprised principally of our self-storage facilities with a book value of $7.4 billion ($7.5 billion at December 31, 2010), Property Intangibles with a book value of approximately $18.0 million ($23.3 million at December 31, 2010), and the Other Investments with a net book value of $10.8 million ($13.1 million at December 31, 2010).  Substantially all of our other assets totaling $93.1 million, and our accrued and other liabilities totaling $244.5 million, ($90.5 million and $205.8 million, respectively, at December 31, 2010) are directly associated with the Domestic Self-Storage segment.
 
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 its joint venture partner which owns a 51% equity interest in Shurgard Europe, determines the strategic direction for this segment.  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 general and administrative expense and foreign currency exchange gains and losses that are attributable to Shurgard Europe.  At September 30, 2011, our balance sheet includes an investment in Shurgard Europe with a book value of $376.3 million ($264.7 million at December 31, 2010) and a loan receivable from Shurgard Europe totaling $466.3 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 earnings and interest income from PSB, as well as the revenues and expenses of our commercial facilities.  At September 30, 2011, the assets of the Commercial segment are comprised principally of our investment in PSB which has a book value of $329.5 million ($323.8 million 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):

 
 
27

 
PUBLIC STORAGE
CONDENSED NOTES TO FINANCIAL STATEMENTS
September 30, 2011
(Unaudited)

 
 
 
For the three months ended September 30, 2011
 
   
Domestic
Self-Storage
   
Europe
Self-Storage
   
 
Commercial
   
Other Items Not Allocated to Segments
   
Total Consolidated
 
   
(Amounts in thousands)
 
Revenues:
                             
Self-storage facilities
  $ 416,104     $ -     $ -     $ -     $ 416,104  
Ancillary operations
    -       -       3,590       26,421       30,011  
Interest and other income