10-K 1 ps10k_20111231.htm PUBLIC STORAGE 10K 12/31/11 ps10k_20111231.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-K
 
 
[X]  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the fiscal year ended December 31, 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)
 
 
(818) 244-8080
 
 
 
(Registrant's telephone number, including area code)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of each class
Name of each exchange
on which registered
Depositary Shares Each Representing 1/1,000 of a 6.500% Cumulative Preferred Share, Series W $.01 par value
 
New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a 6.450% Cumulative Preferred Share, Series X $.01 par value
 
New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a 6.250% Cumulative Preferred Share, Series Z $.01 par value
 
New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a 6.125% Cumulative Preferred Share, Series A $.01 par value
 
New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a 6.600% Cumulative Preferred Share, Series C $.01 par value
 
New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a 6.180% Cumulative Preferred Share, Series D $.01 par value
 
New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a 6.450% Cumulative Preferred Share, Series F $.01 par value
 
New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a 6.625% Cumulative Preferred Share, Series M $.01 par value
 
New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a 7.000% Cumulative Preferred Share, Series N $.01 par value
 
New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a 6.875% Cumulative Preferred Share, Series O $.01 par value
 
New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a 6.500% Cumulative Preferred Share, Series P $.01 par value
 
New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a 6.500% Cumulative Preferred Share, Series Q $.01 par value
 
New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a 6.350% Cumulative Preferred Share, Series R $.01 par value
 
New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a 5.900% Cumulative Preferred Share, Series S $.01 par value
 
New York Stock Exchange
 
 
 
1

 
 
 
Common Shares, $.10 par value                                                                                                
New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act: None (Title of class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 
Yes [X]
No [   ]
                    
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
 
 
Yes [  ]
No [X]
               
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
 
Yes [X]
No [   ]
  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
 
Yes [X]
No [   ]
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [X]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer [X]                                                              Accelerated Filer [   ]                                              Non-accelerated Filer [   ]         Smaller Reporting Company [   ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
 
Yes [  ]
No [X]
 
The aggregate market value of the voting and non-voting common shares held by non-affiliates of the Registrant as of June 30, 2011:
 
Common Shares, $0.10 Par Value – $16,077,731,000 (computed on the basis of $114.01 per share which was the reported closing sale price of the Company's Common Shares on the New York Stock Exchange on June 30, 2011).
 
As of February 22, 2012, there were 171,286,803 outstanding Common Shares, $.10 par value.
 

 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the definitive proxy statement to be filed in connection with the Annual Meeting of Shareholders to be held in 2012 are incorporated by reference into Part III of this Annual Report on Form 10-K.
 

 
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PART I
 
ITEM 1.
Business
 
Forward Looking Statements
 
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. All statements in this document, other than statements of historical fact, are forward-looking statements which may be identified by the use of the words "expects,"   "believes,"   "anticipates,"  "plans," "would," "should," "may," "estimates" and similar expressions.  These forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results and performance to be materially different from those expressed or implied in the forward-looking statements.  As a result, you should not rely on any forward-looking statements in this report, or which management may make orally or in writing from time to time, as predictions of future events nor guarantees of future performance.  We caution you not to place undue reliance on forward-looking statements, which speak only as of the date of this report or as of the dates indicated in the statements.  All of our forward-looking statements, including those in this report, are qualified in their entirety by this statement.
 
Factors and risks that may impact our future results and performance include, but are not limited to, those described in Item 1A, "Risk Factors" and in our other filings with the Securities and Exchange Commission (“SEC”) and the following:
 
·  
general risks associated with the ownership and operation of real estate including changes in demand, potential liability for environmental contamination, natural disasters, and adverse changes in laws and regulations governing property tax, real estate and zoning;
 
·  
risks associated with downturns in the national and local economies in the markets in which we operate, including risks related to current economic conditions and the economic health of our tenants;
 
·  
the impact of competition from new and existing self-storage and commercial facilities and other storage alternatives;
 
·  
difficulties in our ability to successfully evaluate, finance, integrate into our existing operations, and manage acquired and developed properties;
 
·  
risks associated with international operations including, but not limited to, unfavorable foreign currency rate fluctuations and local and global economic uncertainty that could adversely affect our earnings and cash flows;
 
·  
risks related to our participation in joint ventures;
 
·  
the impact of the regulatory environment as well as national, state, and local laws and regulations including, without limitation, those governing environmental, tax and tenant insurance matters and real estate investment trusts (“REITs”), and risks related to the impact of new laws and regulations;
 
·  
risk of increased tax expense associated either with a possible failure by us to qualify as a REIT, or with challenges to intercompany transactions with our taxable REIT subsidiaries;
 
·  
disruptions or shutdowns of our automated processes and systems or breaches of our data security;
 
·  
difficulties in raising capital at a reasonable cost; and
 

 
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·  
economic uncertainty due to the impact of war or terrorism. 
 
We expressly disclaim any obligation to update publicly or otherwise revise any forward-looking statements, whether as a result of new information, new estimates, or other factors, events or circumstances after the date of this document, except where required by law.  Accordingly, you should use caution in relying on past forward-looking statements to anticipate future results.
 
General
 
Public Storage was organized in 1980.  Effective June 1, 2007, we reorganized Public Storage, Inc. into Public Storage (referred to herein as “the Company”, “the Trust”, “we”, “us”, or “our”), a Maryland real estate investment trust (“REIT”).  Our principal business activities include the acquisition, development, ownership and operation of self-storage facilities which offer storage spaces for lease, generally on a month-to-month basis, for personal and business use, and we also have equity interests in commercial facilities.
 
At December 31, 2011, our operating segments are comprised of the following:
 
(i)  
Domestic Self-Storage: This segment comprises our direct and indirect equity interests in 2,058 self-storage facilities (131 million net rentable square feet of space) located in 38 states within the United States (“U.S.”) operating under the “Public Storage” brand name.  We are the largest owner and operator of self-storage facilities in the U.S.
 
(ii)  
European Self-Storage:  This segment comprises our 49% equity interest in Shurgard Europe, a private company that we believe is the largest owner and operator of self-storage facilities in Western Europe.  Shurgard Europe owns 188 self-storage facilities (10 million net rentable square feet of space) located in seven countries in Western Europe which operate under the “Shurgard” brand name manages one facility located in the United Kingdom that is wholly-owned by Public Storage.
 
(iii)  
Commercial:  This segment is primarily composed of our 42% equity interest in PS Business Parks, Inc. (“PSB”), (see Note 4 to our December 31, 2011 financial statements for more information regarding our ownership interest).  PSB’s business activities primarily include the ownership and operation of 27 million net rentable square feet of commercial space.  We also wholly-own one million net rentable square feet of commercial space that is managed by PSB.
 
We conduct certain other activities that are not allocated to any segment, due to their relatively insignificant scale and dissimilarity in operating characteristics to our existing segments, including:  (i) the reinsurance of policies against losses to goods stored by tenants in our self-storage facilities, (ii) the sale of merchandise at our self-storage facilities and (iii) management of self-storage facilities owned by third-party owners and entities that we have an ownership interest in but are not consolidated.
 
For all taxable years subsequent to 1980, we qualified and intend to continue to qualify as a REIT, as defined in Section 856 of the Internal Revenue Code.  As a REIT, we do not incur federal or significant state tax on that portion of our taxable income which is distributed to our shareholders, provided that we meet certain tests.  To the extent that we continue to qualify as a REIT, we will not be subject to tax, with certain limited exceptions, on the taxable income that is distributed to our shareholders.
 
We report annually to the SEC on Form 10-K, which includes financial statements certified by our independent registered public accountants.  We have also reported quarterly to the SEC on Form 10-Q, which includes unaudited financial statements with such filings.  We expect to continue such reporting.
 
On our website, www.publicstorage.com, we make available, free of charge, our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after the reports and amendments are electronically filed with or furnished to the SEC.
 
 
 
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Competition
 
Self-storage facilities generally draw customers located within a three to five mile radius.  Many of our facilities operate within three to five miles of well-located and well-managed competitors who utilize many of the same marketing channels we use, including yellow page and Internet advertising, as well as signage and banners.  As a result, competition is significant and affects the occupancy levels, rental rates, rental income and operating expenses of our facilities.
 
While competition is significant, the self-storage industry remains fragmented in the U.S.  We believe that we own approximately 5% of the aggregate self-storage square footage in the U.S., and that collectively the five largest self-storage operators in the U.S. own approximately 10% of the aggregate self-storage space in the U.S., with the remaining 90% owned by numerous private regional and local operators.  This market fragmentation enhances the advantage of our economies of scale and our brand relative to other operators, and provides an opportunity for growth through acquisitions over the long term.
 
In seeking investments, we compete with a wide variety of institutions and other investors who also view self-storage facilities as attractive investments.  The amount of capital available for real estate investments greatly influences the competition for ownership interests in facilities and, by extension, the yields that we can achieve on newly acquired investments.
 
Business Attributes
 
We believe that we possess several primary business attributes that permit us to compete effectively:
 
Centralized information networks: Our facilities are part of a comprehensive centralized reporting and information network which enables our management team to identify changing market conditions and operating trends as well as analyze customer data, and quickly change our properties’ pricing and promotional discounting on an automated basis.
 
National Telephone Reservation System:  Customers calling either the toll-free telephone referral system, (800) 44-STORE, or a particular storage facility, are directed to our centralized telephone reservation system.  The sales representatives in the call center are sales specialists.  These sales representatives discuss space requirements, location preferences, and price constraints with the prospective customer, and seek to meet those requirements with all our available space in the area, as well as other products and services we provide, in more consistent and comprehensive manner than an on-site property manager.  We believe the centralized telephone reservation system provides added customer service and helps to maximize utilization of available self-storage space relative to using the self-storage property managers to process our incoming sales inquiries.
 
On-line reservation and marketing system: We also provide customers the ability to review space availability, pricing, and make reservations online through our website, www.publicstorage.com.  We invest extensively in advertising on the Internet, primarily through the use of search engines, and we regularly update and improve our web site to enhance its productivity.
 
Economies of scale: We are the largest provider of self-storage space in the U.S.  As of December 31, 2011, we operated 2,058 self-storage facilities in which we had an interest with over one million self-storage spaces rented.   These facilities are generally located in major markets within 38 states in the U.S.  The size and scope of our operations have enabled us to achieve high operating margins and a low level of administrative costs relative to revenues through the centralization of many functions with specialists, such as facility maintenance, employee compensation and benefits programs, revenue management, as well as the development and documentation of standardized operating procedures.  We also believe that our major market concentration provides managerial efficiencies stemming from having a large number of facilities in close proximity to each other.
 

 
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Our market share and concentration in major metropolitan centers makes various promotional and media programs more cost-beneficial for us than for our competitors.  We can economically purchase large, prominent, well-placed yellow page ads that allow us to reach the consumer more effectively than smaller operators.  Our large market share and well-recognized brand name increases the likelihood that our facilities will appear prominently in unpaid search results in Google and other search engines, and enhances the efficiency of our bidding for paid multiple-keyword advertising.  We can use television advertising in many markets, while most of our competitors cannot do so cost-effectively.
 
Brand name recognition: We believe that the “Public Storage” brand name is the most recognized and established name in the self-storage industry in the U.S, due to our national reach in major markets in 38 states, and our highly visible facilities, with their orange colored doors and signage, that are located principally in heavily populated areas.  We believe that the “Shurgard” brand, used by Shurgard Europe, is a similarly established and valuable brand in Europe.
 
Complementary ancillary operations: We also sell retail items associated with self-storage such as locks, cardboard boxes, and packing supplies, and we reinsure policies issued to our tenants against lost or damaged goods stored by our tenants.  We believe these activities supplement our existing self-storage business by further meeting the needs of our customers.
 
Growth and Investment Strategies
 
Our growth strategies consist of: (i) improving the operating performance of our existing self-storage facilities, (ii) acquiring more facilities, (iii) developing or redeveloping existing real estate facilities, (iv) participating in the growth of commercial facilities, primarily through our investment in PSB, and (v) participating in the growth of Shurgard Europe.  While our long-term strategy includes each of these elements, in the short run the level of growth in our asset base in any period is dependent upon the cost and availability of capital, as well as the relative attractiveness of investment alternatives.
 
Improve the operating performance of existing facilities: We seek to increase the net cash flow generated by our existing self-storage facilities by a) regularly evaluating our call volume, reservation activity, and move-in/move-out rates for each of our facilities relative to our marketing activities, b) evaluating market supply and demand factors and, based upon these analyses, adjusting our marketing activities and rental rates, c) attempting to maximize revenues through evaluating the appropriate balance between occupancy, rental rates, and promotional discounting and d) controlling operating costs.  We believe that our property management personnel and systems, combined with our national telephone reservation system and media advertising programs, will continue to enhance our ability to meet these goals.
 
Acquire properties owned or operated by others in the U.S.: We seek to capitalize on the fragmentation of the self-storage business through acquiring attractively priced, well-located existing self-storage facilities.  We believe our presence in and knowledge of substantially all of the major markets in the U.S. enhances our ability to identify attractive acquisition opportunities.  Data on the rental rates and occupancy levels of our existing facilities provide us an advantage in evaluating the potential of acquisition opportunities.  Since January 1, 2007, we have acquired 64 facilities from third parties (4.4 million net rentable square feet) for approximately $434.7 million, including 11 facilities (0.9 million net rentable square feet) for approximately $80.4 million in 2011.  The level of third-party acquisition opportunities available to us depends upon many factors, including the motivation of potential sellers to liquidate their investments and the ability of leveraged owners to economically refinance existing mortgage debt.  We decide whether to pursue any such acquisition opportunities based upon many factors including our opinion as to the potential for future growth, the quality of construction and location, and our yield expectations.
 
Development of real estate facilities: We believe that in the long-run, development of new storage locations and expansion of our existing self-storage facilities represent an important part of our growth strategy. New locations can be developed to meet customer needs and expand our market penetration.  In addition, existing facilities can be expanded or enhanced to provide additional amenities such as climate control, or to better capitalize on increased population density in certain facilities’ local market area.    We have developed a significant number of new self-storage locations, and expanded existing self-storage facilities, in our history.  However, due to the challenging operating environment, we substantially curtailed our development activities beginning in 2008.  We continue to have a nominal development pipeline at December 31, 2011.  Shurgard Europe has similarly reduced its development activities (see “Capitalize on the Potential for Growth in Europe” below).
 
 
 
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Participate in the growth of commercial facilities primarily through our ownership in PS Business Parks, Inc.:  Our investment in PSB provides us some diversification into another asset type, and we have no plans of disposing of our investment in PSB.  During 2010 and 2011, the challenging economic trends in commercial real estate resulted in year over year decreases in rental income for PSB’s “same park” facilities.  It is uncertain what impact these trends will have on PSB’s future occupancy levels and rental income.
 
Over the past two years, PSB has been able to grow its portfolio through acquisitions.  In 2010, PSB acquired a total of 2.3 million net rentable square feet of commercial space for an aggregate purchase price of approximately $301.7 million, and in 2011, PSB acquired a total of 5.6 million net rentable square feet of commercial space for an aggregate purchase price of approximately $553.5 million.  PSB is a stand-alone public company traded on the New York Stock Exchange.  As of December 31, 2011, it owned and operated approximately 27.2 million net rentable square feet of commercial space, and had an enterprise value of approximately $3.0 billion (based upon the trading price of PSB’s common shares combined with the liquidiation value of its debt and preferred stock, as of December 31, 2011).
 
Participate in the growth of European self-storage through ownership in Shurgard Europe:  Our investment in Shurgard Europe provides us with some diversification from U.S. self-storage.  Shurgard Europe is the largest self-storage company in Western Europe and owns and operates approximately 10 million net rentable square feet in seven countries:  France (principally Paris), Sweden (principally Stockholm), the United Kingdom (principally London), the Netherlands, Denmark (principally Copenhagen), Belgium and Germany.
 
In contrast to the U.S., the European self-storage industry is relatively immature.  In each of the markets that Shurgard Europe operates in, customer awareness of the product, and availability of product, is low relative to the U.S.  Although many European consumers are not yet aware of the self-storage concept, they tend to live in more densely populated areas in smaller living spaces (as compared to the U.S.) that, we believe, should make self-storage an attractive product.  Most Europeans are familiar with the concept of storage only as an ancillary service provided by moving companies, and more consumer familiarity, combined with more available self-storage space, could result in a significant increase in the utilization of the self-storage product in the long term.  In the longer term, we believe that there is significant potential for Shurgard Europe to expand the number of self-storage facilities it owns in Europe, either through development of new facilities or acquisition of existing facilities from private or publicly-held owners.
 
We own 49% of Shurgard Europe and one wholly-owned property in London.  The other 51% is owned by a large U.S. pension fund.  We have no plans of disposing of our investment in Shurgard Europe.  During 2011, we and our joint venture partner made a pro-rata equity contribution to fund Shurgard Europe’s acquisition of the 80% equity interests it did not own in two legacy joint ventures owning 72 self-storage facilities for an aggregate of $237.9 million (€172.0 million).  As a result, Shurgard Europe now wholly-owns 188 facilities.
 
In November 2011, Shurgard Europe obtained a €215.0 million term loan from Wells Fargo which matures in November 2014 (the “Wells Fargo Loan”).  The proceeds from the Wells Fargo Loan were used to repay debt (€183.0 million) secured by the 72 facilities held by the joint ventures, as well as repay €32.0 million of the debt Shurgard Europe owes to Public Storage which totaled $402.7 million (€311.0 million) at December 31, 2011.
 
The Wells Fargo Loan requires Shurgard Europe to utilize a significant amount of its operating cash flow to reduce the outstanding principal.  As a result, and in the absence of additional capital contributions by either us or our joint venture partner, Shurgard Europe’s ability to finance growth will be very limited until the Wells Fargo Loan has been repaid.
 

 
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Financing of the Company’s Growth Strategies
 
Overview of financing strategy:  Over the past three years we funded the cash portion of our acquisition and development activities with permanent capital (predominantly retained cash flow and the net proceeds from the issuance of preferred securities).  We have elected to use preferred securities as a form of leverage despite the fact that the dividend rates of our preferred securities exceed the prevailing market interest rates on conventional debt, because of certain benefits described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.’’  Our present intention is to continue to finance substantially all our growth with internally generated cash flows and permanent capital.
 
Issuance of preferred and common securities:   We believe that we are not dependent upon raising capital to fund our existing operations or meet our obligations, due to our low levels of debt and significant cash from operations available for principal payments on debt and reinvestment (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources” below).  However, access to capital is important to growing our asset base.  When growth capital is needed, we select either common or preferred securities based upon the relative cost of capital.  For at least the last ten years, we have raised cash proceeds for growth and other corporate purposes primarily through the issuance of preferred securities, while we have issued common stock only in connection with mergers and the acquisition of interests in real estate entities.  During periods of favorable market conditions, we have generally been able to raise capital at attractive costs; however, we are dependent upon capital market conditions and there can be no assurance that future market conditions will be favorable.  During the years ended December 31, 2011 and 2010, we issued approximately $862.5 million and $270.0 million, respectively, of preferred securities, and on January 12, 2012, we issued another $460.0 million of preferred securities.
 
Borrowing: We have in the past used our $300 million revolving line of credit as temporary “bridge” financing, and repaid those amounts with permanent capital.  When we have assumed debt in the past, we have generally prepaid such amounts except in cases where the nature of the loan terms did not allow such prepayment, or where a prepayment penalty made it economically disadvantageous to prepay.  Our current debt outstanding was assumed either in connection with property acquisitions or in connection with the merger with Shurgard in 2006.  While it is not our present intention to issue additional debt as a long-term financing strategy, we have broad powers to borrow in furtherance of our objectives without a vote of our shareholders.  These powers are subject to a limitation on unsecured borrowings in our Bylaws described in “Limitations on Debt” below.
 
Our senior debt has an “A” credit rating by Standard and Poor’s.  Notwithstanding our desire is to continue to meet our capital needs with preferred and common equity, this high rating, combined with our low level of debt, could allow us to issue a significant amount of unsecured debt in the current markets if we were to choose to do so.
 
Issuance of securities in exchange for property: We have issued both our common and preferred securities in exchange for real estate and other investments in the past.  Future issuances will be dependent upon our financing needs and capital market conditions at the time, including the market prices of our equity securities.
 
Joint Venture financing: We have formed and may form additional joint ventures to facilitate the funding of future developments or acquisitions.  However, we can generally issue preferred securities on more favorable terms than joint venture financing.
 
Disposition of properties: Disposition of properties to raise capital has not been one of our strategies. Generally, we have disposed of self-storage facilities only because of condemnation proceedings, which compel us to sell.  We do not presently intend to sell any significant number of self-storage facilities in the future, though there can be no assurance that we will not.
 

 
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Investments in Real Estate and Unconsolidated Real Estate Entities
 
Investment Policies and Practices with respect to our investments: Following are our investment practices and policies which, though we do not anticipate any significant alteration, can be changed by our Board of Trustees without a shareholder vote:
 
·  
Our investments primarily consist of direct ownership of self-storage facilities (the nature of our self-storage facilities is described in Item 2, “Properties”), as well as partial interests in entities that own self-storage facilities.
 
·  
Our partial ownership interests primarily reflect general and limited partnership interests in entities that own self-storage facilities that are managed by us under the “Public Storage” brand name in the U.S., as well as storage facilities managed in Europe under the “Shurgard” brand name which are owned by Shurgard Europe.
 
·  
Additional acquired interests in real estate (other than the acquisition of properties from third parties) will include common equity interests in entities in which we already have an interest.
 
·  
To a lesser extent, we have interests in existing commercial properties (described in Item 2, “Properties”), containing commercial and industrial rental space, primarily through our investment in PSB.
 
Facilities Owned by Subsidiaries
 
In addition to our direct ownership of 2,015 self-storage facilities in the U.S. and one self-storage facility in London, England at December 31, 2011, we have controlling indirect interests in entities that own 26 self-storage facilities in the U.S. with approximately two million net rentable square feet.  Due to our controlling interest in each of these entities, we consolidate the assets, liabilities, and results of operations of these entities in our financial statements.
 
Facilities Owned by Unconsolidated Real Estate Entities
 
At December 31, 2011, we had ownership interests in entities that we do not control or consolidate, comprised of PSB, Shurgard Europe, and various limited partnerships that own an aggregate of 17 self-storage facilities with approximately one million net rentable square feet of storage space.  These entities are referred to collectively as the “Unconsolidated Real Estate Entities.”
 
PSB, which files financial statements with the SEC, and Shurgard Europe, have debt and other obligations that we do not consolidate in our financial statements.  All of the other Unconsolidated Real Estate Entities have no significant amounts of debt or other obligations.  See Note 4 to our December 31, 2011 financial statements for further disclosure regarding the assets, liabilities and operating results of the Unconsolidated Real Estate Entities.
 
Limitations on Debt
 
Without the consent of holders of the various series of Senior Preferred Shares, we may not take any action that would result in our “Debt Ratio” exceeding 50%.  “Debt Ratio”, as defined in the related governing documents, represents generally the ratio of debt to total assets before accumulated depreciation and amortization on our balance sheet, in accordance with U.S. generally accepted accounting principles.  As of December 31, 2011, the Debt Ratio was approximately 3%.
 
Our bank and senior unsecured debt agreements contain various customary financial covenants, including limitations on the level of indebtedness and the prohibition of the payment of dividends upon the occurrence of defined events of default.  We believe we have met each of these covenants as of December 31, 2011.
 

 
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Employees
 
We have approximately 5,000 employees in the U.S. at December 31, 2011 who render services on behalf of the Company, primarily personnel engaged in property operations.
 
Seasonality
 
We experience minor seasonal fluctuations in the occupancy levels of self-storage facilities with occupancies generally higher in the summer months than in the winter months.  We believe that these fluctuations result in part from increased moving activity during the summer months.
 
Insurance
 
We have historically carried customary property, earthquake, general liability and workers compensation coverage through internationally recognized insurance carriers, subject to customary levels of deductibles.  The aggregate limits on these policies of $75 million for property losses and $102 million for general liability losses are higher than estimates of maximum probable loss that could occur from individual catastrophic events determined in recent engineering and actuarial studies; however, in case of multiple catastrophic events, these limits could be exhausted.
 
Our tenant insurance program reinsures a program that provides insurance to certificate holders against claims for property losses due to specific named perils (earthquakes are not covered by these policies) to goods stored by tenants at our self-storage facilities for individual limits up to a maximum of $5,000.  We have third-party insurance coverage for claims paid exceeding $1.0 million resulting from any one individual event, to a limit of $25.0 million.  Effective December 1, 2011, these coverage amounts were changed to $5.0 million and $15.0 million, respectively.  At December 31, 2011, there were approximately 0.7 million certificate holders held by our self-storage tenants participating in this program, representing aggregate coverage of approximately $1.5 billion.  We rely on a third-party insurance company to provide the insurance and are subject to licensing requirements and regulations in several states.
 

 
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ITEM 1A.  Risk Factors
 
In addition to the other information in our Annual Report on Form 10-K, you should consider the risks described below that we believe may be material to investors in evaluating the Company.  This section contains forward-looking statements, and in considering these statements, you should refer to the qualifications and limitations on our forward-looking statements that are described in Forward Looking Statements at the beginning of Item 1.
 
Since our business consists primarily of acquiring and operating real estate, we are subject to the risks related to the ownership and operation of real estate that can adversely impact our business and financial condition.
 
The value of our investments may be reduced by general risks of real estate ownership.    Since we derive substantially all of our income from real estate operations, we are subject to the general risks of acquiring and owning real estate-related assets, including:  
 
•  
lack of demand for rental spaces or units in a locale;  
 
•  
changes in general economic or local conditions;  
 
•  
natural disasters, such as earthquakes, hurricanes and floods; which could exceed the aggregate limits of our insurance coverage; 
 
•  
potential terrorist attacks;  
 
•  
changes in supply of or demand for similar or competing facilities in an area;  
 
•  
the impact of environmental protection laws;  
 
•  
changes in interest rates and availability of permanent mortgage funds which may render the sale of a nonstrategic property difficult or unattractive including the impact of the current turmoil in the credit markets;  
 
•  
increases in insurance premiums, property tax assessments and other operating and maintenance expenses;
 
•  
transactional costs and liabilities, including transfer taxes;
 
•  
adverse changes in tax, real estate and zoning laws and regulations; and  
 
•  
tenant and employment-related claims.  
 
In addition, we self-insure certain of our property loss, liability, and workers compensation risks for which other real estate companies may use third-party insurers.  This results in a higher risk of losses that are not covered by third-party insurance contracts, as described in Note 13 under “Insurance and Loss Exposure” to our December 31, 2011 financial statements.
 
There is significant competition among self-storage facilities and from other storage alternatives.    Most of our properties are self-storage facilities, which generated most of our revenue for the year ended December 31, 2011.  Local market conditions play a significant part in how competition will affect us. Competition in the market areas in which many of our properties are located is significant and has affected our occupancy levels, rental rates and operating expenses.  Any increase in availability of funds for investment in real estate may accelerate competition.  Further development of self-storage facilities may intensify competition among operators of self-storage facilities in the market areas in which we operate.
 

 
11

 
 
 
We may incur significant environmental costs and liabilities.    As an owner and operator of real properties, we may be required by law to clean up hazardous substances at our properties.  Certain laws impose liability whether or not the owner knew of, or was responsible for, the presence of the hazardous substances.  Liability is usually not limited to the value of the property.  The presence of these substances, or the failure to properly remediate any resulting contamination, also may adversely affect our ability to sell, lease, operate, or encumber affected facilities.
 
We have evaluated the environmental condition of, and potential liabilities associated with, most of our properties by conducting preliminary environmental assessments.  These assessments generally consist of an investigation of environmental conditions at the property (not including soil or groundwater sampling or analysis), as well as a review of publicly available information regarding the site and other properties in the vicinity.  As a result, we have become aware that prior activities at some facilities (or migration from nearby properties) have or may have resulted in contamination to the soil or groundwater at these facilities.  When purchasing new properties, if we become aware of potential or actual contamination, we may attempt to obtain purchase price adjustments, indemnifications or environmental insurance coverage.  We cannot assure you that such protections, if obtained, will always be sufficient to cover actual future liabilities nor that our assessments have identified all such risks.  Although we cannot provide any assurance, we are not aware of any environmental contamination of our facilities material to our overall business, financial condition or results of operations.
 
There has been an increasing number of claims and litigation against owners and managers of rental properties relating to moisture infiltration, which can result in mold or other property damage.  When we receive a complaint or otherwise become aware that an air quality concern exists, we implement corrective measures and seek to work proactively with our tenants to resolve issues, subject to our contractual limitations on liability for such claims.  However, we can give no assurance that material legal claims relating to moisture infiltration and the presence of, or exposure to, mold will not arise in the future.
 
Delays in development and fill-up of our properties would reduce our profitability.    Development of self-storage facilities is subject to significant risks.  Construction and opening of these facilities can be delayed or increase in cost due to changes in or failure to meet government or regulatory requirements, weather issues, unforeseen site conditions, personnel problems, and other factors.  Once newly developed facilities are opened, rent-up of the newly developed space can be delayed or ongoing cash flow yields can be reduced due to competition, reductions in storage demand, or other factors.  While we or Shurgard Europe are not currently planning to develop additional facilities in the short-run, if we or Shurgard Europe were to commence significant development of facilities, our exposure to development and fill-up risks would increase.
 
Property taxes can increase and cause a decline in yields on investments.    Each of our properties is subject to real property taxes, which could increase in the future as property tax rates change and as our properties are assessed or reassessed by tax authorities.  Recent local government shortfalls in tax revenue may cause pressure to increase tax rates or assessment levels or impose new taxes.  Such increases could adversely impact our profitability.
 
We must comply with the Americans with Disabilities Act and fire and safety regulations, which can require significant expenditures.    All our properties must comply with the Americans with Disabilities Act and with related regulations (the “ADA”) and similar state law requirements.  A failure to comply with the ADA or similar state laws could lead to government imposed fines on us and/or litigation, which could also involve an award of damages to individuals affected by the non-compliance.  In addition, we must operate our properties in compliance with numerous local fire and safety regulations, building codes, and other land use regulations.  Compliance with these requirements can require us to spend substantial amounts of money, which would reduce cash otherwise available for distribution to shareholders.  Failure to comply with these requirements could also affect the marketability of our real estate facilities.
 
We incur liability from tenant and employment-related claims.    From time to time we have to make monetary settlements or defend actions or arbitration (including class actions) to resolve tenant or employment-related claims and disputes.
 

 
12

 
 
 
Global economic conditions adversely affect our business, financial condition, growth and access to capital.
 
There continues to be global economic uncertainty, elevated levels of unemployment, reduced levels of economic activity, and it is uncertain as to when economic conditions will improve.  These negative economic conditions in the markets where we operate facilities, and other events or factors that adversely affect demand for storage space, could continue to adversely affect our business.
 
Our ability to issue preferred shares or other sources of capital, such has borrowing, has been in the past, and may in the future, be adversely affected by challenging credit market conditions.  The issuance of perpetual preferred securities historically has been a significant source of capital to grow our business.  We believe that we have sufficient working capital and capacity under our credit facilities and our retained cash flow from operations to continue to operate our business as usual and meet our current obligations.  However, if we were unable to issue preferred shares or borrow at reasonable rates, that could limit the earnings growth that might otherwise result from the acquisition and development of real estate facilities.
 
The acquisition of existing properties is a significant component of our long-term growth strategy, and  acquisitions of existing properties are subject to risks that may adversely affect our growth and financial results.
 
We acquire existing properties, either in individual transactions or as part of the acquisition of other storage operators.  In addition to the general risks related to real estate described above, we are also subject to the following risks which may jeopardize our realization of benefits from acquisitions.
 
Any failure to manage acquisitions and other significant transactions and to successfully integrate acquired operations into our existing business could negatively impact our financial results.   To fully realize anticipated earnings from an acquisition, we must successfully integrate the property into our operating platform. Failures or unexpected circumstances in the integration process, such as a failure to maintain existing relationships with tenants and employees due to changes in processes, standards, or compensation arrangements, or circumstances we did not detect during due diligence, could jeopardize realization of the anticipated earnings.
 
Acquired properties are subject to property tax reappraisals which may increase our property tax expense. Facilities that we acquire are subject to property tax reappraisal which can result in substantial increases to the ongoing property taxes paid by the seller.   The reappraisal process is subject to judgment of governmental agencies regarding estimated real estate values and other factors, and as a result there is a significant degree of uncertainty in estimating the property tax expense of an acquired property.  In connection with future or recent acquisitions of properties, if our estimates of property taxes following reappraisal are too low, we may not realize anticipated earnings from an acquisition.
 

 
13

 

 
As a result of our ownership of 49% of the international operations of Shurgard Europe with a book value of $375.5 million at December 31, 2011, and our loan to Shurgard Europe aggregating $402.7 million at December 31, 2011, we are exposed to additional risks related to international businesses that may adversely impact our business and financial results.
 
We have limited experience in European operations, which may adversely impact our ability to operate profitably in Europe.  In addition, European operations have inherent risks, including without limitation the following:
 
·  
currency risks, including currency fluctuations, which can impact the fair value of our equity investment in Shurgard Europe, as well as interest payments and the net proceeds to be received upon repayment of our loan to Shurgard Europe;
 
·  
unexpected changes in legislative and regulatory requirements,
 
·  
potentially adverse tax burdens;
 
·  
burdens of complying with different permitting standards, environmental and labor laws and a wide variety of foreign laws;
 
·  
the potential impact of collective bargaining;
 
·  
obstacles to the repatriation of earnings and cash;
 
·  
regional, national and local political uncertainty;
 
·  
economic slowdown and/or downturn in foreign markets;
 
·  
difficulties in staffing and managing international operations;
 
·  
reduced protection for intellectual property in some countries;
 
·  
inability to effectively control less than wholly-owned partnerships and joint ventures; and
 
·  
the importance of local senior management and the potential negative ramifications of the departure of key executives.
 
The following additional specific risks apply with respect to our interest in and loan to Shurgard Europe:
 
·  
Shurgard Europe has debt outstanding that will be repaid before our loan:   Shurgard Europe has a loan outstanding to Wells Fargo totaling $274.4 million (€211.9 million) at December 31, 2011.  While our loan participates pari passu with the Wells Fargo loan in a liquidation of Shurgard Europe, the Wells Fargo loan is due on November 2014, while our loan to Shurgard Europe matures in February 2015.  In addition, Shurgard Europe is obligated to utilize most of its available cash flow to make principal payments on the Wells Fargo loan, which limits the principal payments that could otherwise be made on our loan.  As a result, the Wells Fargo Loan will be repaid prior to our loan.
 
 
 
14

 
 
 
·  
Shurgard Europe’s ability to repay its loan from us and Wells Fargo may be limited due to market conditions.  If Shurgard Europe’s available cash flow significantly declines and it is unable to obtain financing at a reasonable cost of capital due to a constrained equity or credit environment, negative operating trends, or other factors, it may not be able to repay either the Wells Fargo loan, or our loan.  In such a circumstance, we may have to pursue less advantageous options, such as an additional equity contribution or loan, extending the maturity date of our loan, or exercising our lender rights.  We have in the past extended the maturity date of our loan to Shurgard Europe, most recently to February 2015 from March 2013.
 
·  
Shurgard Europe’s Same Store revenues have decreased in the past, and have recently exhibited negative trends.   While Shurgard Europe had positive Same Store revenue growth in 2010 and 2011, the growth in Same Store revenue decreased to 1.3% in 2011 from 3.0% in 2010, and it had negative revenue growth in 2009 and could have reductions in revenue in the future.  Such reductions may negatively impact Shurgard Europe’s liquidity and ability to repay its debts (including the debt owed to us), due to declining interest coverage ratios and other metrics which affect the availability and cost of capital, as well as reduce the value of our investment in Shurgard Europe.
 
We are subject to risks related to our ownership of assets in joint venture structures, most notably our investment in Shurgard Europe:
 
Ownership of assets in joint ventures may present additional risks, including without limitation, the following:
 
·  
risks related to the financial strength, common business goals and strategies and cooperation of the venture partner;
 
·  
the inability to take some actions with respect to the joint venture activities that we may believe are favorable, if our joint venture partner does not agree;
 
·  
the risk that we could lose our REIT status based upon actions of the joint ventures if we are unable to effectively control these indirect investments;
 
·  
the risk that we may not control the legal entity that has title to the real estate;
 
·  
the risk that our investments in these entities may not be easily sold or readily accepted as collateral by our lenders, or that lenders may view assets held in joint ventures as less favorable as collateral;
 
·  
the risk that the joint ventures could take actions which may negatively impact our preferred shares and debt ratings, to the extent that we could not prevent these actions;
 
·  
the risk that we may be constrained from certain activities of our own that we would otherwise deem favorable, due to non-compete clauses in our joint venture arrangements; and
 
·  
the risk that we will be unable to resolve disputes with our joint venture partners.
 
The Hughes Family could control us and take actions adverse to other shareholders.
 
At December 31, 2011, B. Wayne Hughes, former Chairman and current member of the Board of Trustees and his family (the “Hughes Family”) owned approximately 16.7% of our aggregate outstanding common shares.  Our declaration of trust permits the Hughes Family to own up to 47.66% of our outstanding common shares.  Consequently, the Hughes Family may significantly influence matters submitted to a vote of our shareholders, including electing trustees, amending our organizational documents, dissolving and approving other extraordinary transactions, such as a takeover attempt, even though such actions may not be favorable to other shareholders.
 
 
 
15

 
 
 
Certain provisions of Maryland law and in our declaration of trust and bylaws may prevent changes in control or otherwise discourage takeover attempts beneficial to shareholders.
 
Certain provisions of Maryland law may have the effect of deterring a third party from making a proposal to acquire us or of impeding a change in control under circumstances that otherwise could provide the holders of our shares with the opportunity to realize a premium over the then-prevailing market price of our shares.  Currently, the Board has opted not to subject the Company to the statutory limitations of either the business combination provisions or the control share acquisitions provisions of Maryland law, but the Board may change this option as to either statute in the future.  If the Board chooses to make them applicable to us, these provisions could delay, deter or prevent a transaction or change of control that might involve a premium price for holders of common shares or might otherwise be in their best interest.  Similarly, (1) limitations on removal of trustees in our declaration of trust, (2) restrictions on the acquisition of our shares of beneficial interest, (3) the power to issue additional common shares, preferred shares or equity shares, (4)  the advance notice provisions of our bylaws and (5) the Board’s ability under Maryland law, without obtaining shareholder approval, to implement takeover defenses that we may not yet have and to take, or refrain from taking, other actions without those decisions being subject to any heightened standard of conduct or standard of review, could have the same effect of delaying, deterring or preventing a transaction or a change in control that might involve a premium price for holders of the common shares or might otherwise be in common shareholders’ best interest.
 
To preserve our status as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), our declaration of trust contains limitations on the number and value of shares of beneficial interest that any person may own.  These ownership limitations generally limit the ability of a person, other than the Hughes Family (as defined in our declaration of trust) and other than “designated investment entities” (as defined in our declaration of trust), to own more than 3% of our outstanding common shares or 9.9% of the outstanding shares of any class or series of preferred or equity shares, in each case, in value or number of shares, whichever is more restrictive, unless an exemption is granted by our board of trustees.  These limitations could discourage, delay or prevent a transaction involving a change in control of our company not approved by our board of trustees.
 
If we failed to qualify as a REIT for income tax purposes, we would be taxed as a corporation, which would substantially reduce funds available for payment of dividends.
 
Investors are subject to the risk that we may not qualify as a REIT for income tax purposes. REITs are subject to a range of complex organizational and operational requirements.  As a REIT, we must distribute at least 90% of our REIT taxable income to our shareholders.  Other restrictions apply to our income and assets.  Our REIT status is also dependent upon the ongoing qualification of our affiliate, PSB, as a REIT, as a result of our substantial ownership interest in that company.
 
For any taxable year that we fail to qualify as a REIT and are unable to avail ourselves of relief provisions set forth in the Code, we would be subject to federal income tax at the regular corporate rates on all of our taxable income, whether or not we make any distributions to our shareholders.  Those taxes would reduce the amount of cash available for distribution to our shareholders or for reinvestment and would adversely affect our earnings.  As a result, our failure to qualify as a REIT during any taxable year could have a material adverse effect upon us and our shareholders.  Furthermore, unless certain relief provisions apply, we would not be eligible to elect REIT status again until the fifth taxable year that begins after the first year for which we fail to qualify.
 
We may pay some taxes, reducing cash available for shareholders.
 
Even if we qualify as a REIT for federal income tax purposes, we are required to pay some federal, foreign, state and local taxes on our income and property.  Since January 1, 2001, certain corporate subsidiaries of the Company have elected to be treated as “taxable REIT subsidiaries” of the Company for federal income tax purposes. A taxable REIT subsidiary is taxable as a regular corporation and may be limited in its ability to deduct interest payments made to us in excess of a certain amount.  In addition, to the extent that amounts paid to us by our taxable REIT subsidiaries are in excess of amounts that would be paid under similar arrangements among unrelated parties, we could be subject to a 100% penalty tax on the excess payments.  To the extent that the Company is required to pay federal, foreign, state or local taxes or federal penalty taxes, we will have less cash available for distribution to shareholders.
 

 
16

 

 
We have become increasingly dependent upon automated processes, telecommunications, and the Internet and are faced with system security and system failure risks.
 
We have become increasingly centralized and dependent upon automated information technology processes, and certain critical components of our operating systems are dependent upon third party providers.  As a result, we could be severely impacted by a catastrophic occurrence, such as a natural disaster or a terrorist attack, or a circumstance that disrupted operations at our third party providers.  Even though we believe we utilize appropriate duplication and back-up procedures, a significant outage in our third party providers could negatively impact our operations.  In addition, an increasing  portion of our business operations are conducted over the Internet, increasing the risk of viruses and other related risks that could cause system failures and disruptions of operations.  Experienced computer programmers may be able to undertake a “cyber-attack” and penetrate our network security and misappropriate our confidential information, create system disruptions or cause shutdowns, which could result in additional costs or legal liability to us.  Nearly half of our new tenants come from sales channels dependent upon telecommunications (telephone or Internet).
 
We have no ownership interest in Canadian self-storage facilities owned or operated by the Hughes Family.
 
At December 31, 2011, the Hughes Family had ownership interests in, and operated, 53 self-storage facilities in Canada under the name “Public Storage”, which name we license to the Hughes Family for use in Canada on a royalty-free, non-exclusive basis.  We currently do not own any interests in these facilities nor do we own any facilities in Canada.  We have a right of first refusal to acquire the stock or assets of the corporation engaged in the operation of the self-storage facilities in Canada if the Hughes Family or the corporation agrees to sell them.  However, we have no ownership interest in the operations of this corporation, have no right to acquire their stock or assets unless the Hughes family decides to sell, and receive no benefit from the profits and increases in value of the Canadian self-storage facilities.  Although we have no current plans to enter the Canadian self-storage market, if we choose to do so without acquiring the Hughes Family interests in their Canadian self-storage properties, our right to use the Public Storage name in Canada may be shared with the Hughes Family unless we are able to terminate the license agreement.
 
Through our subsidiaries, we continue to reinsure risks relating to loss of goods stored by tenants in the self-storage facilities in Canada in which the Hughes Family has ownership interests.  We acquired the tenant insurance business on December 31, 2001 through our acquisition of PS Insurance Company, or PSICH.  During each of the three years ended December 31, 2011, we received $0.6 million, respectively, in reinsurance premiums attributable to the Canadian facilities.  Since PSICH’s right to provide tenant reinsurance to the Canadian Facilities may be qualified, there is no assurance that these premiums will continue.
 
We are subject to laws and governmental regulations and actions that affect our operating results and financial condition.
 
Our business is subject to regulation under a wide variety of U.S. federal, state and local laws, regulations and policies including those imposed by the SEC, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act and New York Stock Exchange, as well as applicable labor laws. Although we have policies and procedures designed to comply with applicable laws and regulations, failure to comply with the various laws and regulations may result in civil and criminal liability, fines and penalties, increased costs of compliance and restatement of our financial statements.
 
There can also be no assurance that, in response to current economic conditions or the current political environment or otherwise, laws and regulations will not be implemented or changed in ways that adversely affect our operating results and financial condition, such as recently adopted legislation that expands health care coverage costs or facilitates union activity or federal legislative proposals to otherwise increase operating costs.
 

 
17

 
 
 
Our tenant insurance business is subject to governmental regulation which could reduce our profitability or limit our growth.
 
We hold Limited Lines Self-Service Storage Insurance Agent licenses from a number of individual state Departments of Insurance and are subject to state governmental regulation and supervision.  Our continued ability to maintain these Limited Lines Self-Service Storage Insurance Agent licenses in the jurisdictions in which we are licensed depends on our compliance with related rules and regulations.  The regulatory authorities in each jurisdiction generally have broad discretion to grant, renew and revoke licenses and approvals, to promulgate, interpret, and implement regulations, and to evaluate compliance with regulations through periodic examinations, audits and investigations of the affairs of insurance agents.  As a result of regulatory or private action in any jurisdiction, we may be precluded or temporarily suspended from carrying on some or all of our reinsurance activities, including those activities we have conducted in the past, or otherwise fined or penalized or suffer an adverse judgment in a given jurisdiction.  For the year ended December 31, 2011, revenues from our tenant reinsurance business represented approximately 4% of our revenues.
 
Terrorist attacks and the possibility of wider armed conflict may have an adverse impact on our business and operating results and could decrease the value of our assets.
 
There is the risk of terrorist attacks and other acts of violence or war against the U.S., the European Community, or their businesses or interests, which could have a material adverse impact on our business and operating results.  Attacks or armed conflicts that directly impact one or more of our properties could significantly affect our ability to operate those properties and thereby impair our operating results.  Further, we may not have insurance coverage for losses caused by a terrorist attack.  Such insurance may not be available, or if it is available and we decide to obtain such terrorist coverage, the cost for the insurance may be significant in relationship to the risk overall.  In addition, the adverse effects that such violent acts and threats of future attacks could have on the U.S. economy could similarly have a material adverse effect on our business and results of operations.  Finally, further terrorist acts could cause the U.S. to enter into a wider armed conflict, which could further impact our business and operating results.
 
Developments in California may have an adverse impact on our business and financial results.
 
We are headquartered in, and approximately one-fifth of our properties in the U.S. are located in, California, which like many other state and local jurisdictions is facing severe budgetary problems and deficits.  Action that may be taken in response to these problems, such as increases in property taxes, changes to sales taxes, adoption of a proposed “Business Net Receipts Tax” or other governmental efforts to raise revenues could adversely impact our business and results of operations.
 

 
18

 

 
ITEM 1B.       Unresolved Staff Comments
 
Not applicable.
 

 
19

 

 
ITEM 2.                      Properties
 
At December 31, 2011, we had direct and indirect ownership interests in 2,058 self-storage facilities located in 38 states within the U.S. and 189 storage facilities located in seven Western European nations:
 


   
At December 31, 2011
 
   
Number of Storage Facilities (a)
   
Net Rentable Square Feet (in thousands)
 
United States:
           
California:
           
Southern                             
    236       16,584  
Northern                             
    172       10,024  
Texas                                  
    236       15,493  
Florida                                  
    194       12,746  
Illinois                                  
    126       7,904  
Washington                                  
    91       6,028  
Georgia                                  
    93       6,039  
North Carolina                                  
    69       4,775  
Virginia                                  
    78       4,453  
New York                                  
    63       4,221  
Colorado                                  
    59       3,713  
New Jersey                                  
    54       3,417  
Maryland                                  
    57       3,404  
Minnesota                                  
    43       2,931  
Michigan                                  
    43       2,755  
Arizona                                  
    37       2,259  
South Carolina                                  
    40       2,155  
Missouri                                  
    37       2,136  
Oregon                                  
    39       2,006  
Nevada                                  
    29       1,947  
Indiana                                  
    31       1,926  
Ohio                                  
    31       1,922  
Pennsylvania                                  
    28       1,867  
Tennessee                                  
    27       1,528  
Kansas                                  
    22       1,310  
Massachusetts                                  
    19       1,179  
Wisconsin                                  
    15       968  
Other states (12 states)
    89       4,980  
Total – U.S.                             
    2,058       130,670  
                 
Europe (b):
               
France
    56       2,949  
Netherlands
    40       2,182  
Sweden
    30       1,629  
Belgium
    21       1,265  
United Kingdom
    21       1,026  
Germany
    11       553  
Denmark
    10       562  
Total - Europe                             
    189       10,166  
                 
Grand Total                             
    2,247       140,836  

(a) See Schedule III:  Real Estate and Accumulated Depreciation in the Company’s 2011 financials, for a complete list of properties consolidated by the Company.
 
 
(b) The facilities located in Europe include one facility in the United Kingdom that we wholly own, as well as the facilities owned by Shurgard Europe.
 

 
20

 
 
 
Our facilities are generally operated to maximize cash flow through the regular review and adjustment of rents charged to our tenants, and controlling expenses.  For the year ended December 31, 2011, the weighted average occupancy level and the average realized rent per occupied square foot for our self-storage facilities were approximately 90.7% and $12.99, respectively, in the U.S. and 81.9% and $27.27, respectively, in Europe.
 
At December 31, 2011, 76 of our U.S. facilities were encumbered by an aggregate of $212 million in secured notes payable.  These facilities had a net book value of $490 million at December 31, 2011.
 
We have no specific policy as to the maximum size of any one particular self-storage facility.  However, none of our facilities involves, or is expected to involve, 1% or more of our total assets, gross revenues or net income.
 
Description of Self-Storage Facilities: Self-storage facilities, which comprise the majority of our investments, are designed to offer accessible storage space for personal and business use at a relatively low cost.  A user rents a fully enclosed space, securing the space with their lock, which is for the user's exclusive use and to which only the user has access on an unrestricted basis during business hours.  On-site operation is the responsibility of property managers who are supervised by district managers.  Some self-storage facilities also include rentable uncovered parking areas for vehicle storage.  Storage facility spaces are rented on a month-to-month basis.  Rental rates vary according to the location of the property, the size of the storage space, and other characteristics that affect the relative attractiveness of each particular space, such as whether the space has “drive-up” access or its proximity to elevators.  All of our self-storage facilities in the U.S. are operated under the "Public Storage" brand name, while our facilities in Europe are operated under the “Shurgard” brand name.
 
Users include individuals from virtually all demographic groups, as well as businesses.  Individuals usually obtain this space for storage of furniture, household appliances, personal belongings, motor vehicles, boats, campers, motorcycles and other household goods.  Businesses normally employ this space for storage of excess inventory, business records, seasonal goods, equipment and fixtures.
 
Our self-storage facilities generally consist of three to seven buildings containing an aggregate of between 350 to 750 storage spaces, most of which have between 25 and 400 square feet and an interior height of approximately eight to 12 feet.
 
We experience minor seasonal fluctuations in the occupancy levels of self-storage facilities with occupancies generally higher in the summer months than in the winter months.  We believe that these fluctuations result in part from increased moving activity during the summer months and incremental demand from college students.
 
Our self-storage facilities are geographically diversified and are located primarily in or near major metropolitan markets in 38 states in the U.S.  Generally our self-storage facilities are located in heavily populated areas and close to concentrations of apartment complexes, single family residences and commercial developments.
 
Competition from other self-storage facilities is significant and impacts the occupancy levels and rental rates for many of our properties.
 
We believe that self-storage facilities, upon achieving stabilized occupancy levels of approximately 90%, have attractive characteristics consisting of high profit margins, a broad tenant base and low levels of capital expenditures to maintain their condition and appearance.  Historically, upon stabilization after an initial fill-up period, our U.S. self-storage facilities have generally shown a high degree of stability in generating cash flows.
 
Commercial Properties: In addition to our interests in 2,247 self-storage facilities, we have an interest in PSB, which, as of December 31, 2011, owns and operates approximately 27.2 million net rentable square feet of commercial space in eight states.  At December 31, 2011, the $329 million book value and $727 million market value, respectively, of our investment in PSB represents approximately 4% and 8%, respectively of our total assets.  We also directly own 1.6 million net rentable square feet of commercial space managed primarily by PSB, primarily representing individual retail locations at our existing self-storage locations.
 
 
 
21

 
 
 
The commercial properties owned by PSB consist primarily of flex, multi-tenant office and industrial space.  Flex space is defined as buildings that are configured with a combination of office and warehouse space and can be designed to fit a wide variety of uses (including office, assembly, showroom, laboratory, light manufacturing and warehouse space).
 
Environmental Matters: Our policy is to accrue environmental assessments and estimated remediation cost when it is probable that such efforts will be required and the related costs can be reasonably estimated.  Our current practice is to conduct environmental investigations in connection with property acquisitions.  Although there can be no assurance, we are not aware of any environmental contamination of any of our facilities, which individually or in the aggregate would be material to our overall business, financial condition, or results of operations.
 
ITEM 3.   Legal Proceedings
 
We are a party to various other legal proceedings and subject to various claims and complaints that have arisen in the normal course of business.  We believe that the likelihood of these pending legal matters and other contingencies resulting in a material loss to the Company, either individually or in the aggregate, is remote.
 
ITEM 4.   Mine Safety Disclosures
 
Not applicable.
 

 
22

 

 
PART II
 
ITEM 5.  Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
 
a.  
Market Information of the Registrant’s Common Equity:
 
Our Common Shares (NYSE: PSA), including those of Public Storage, Inc. prior to our reorganization in June 2007, have been listed on the New York Stock Exchange since October 19, 1984.  Our Depositary Shares each representing 1/1,000 of an Equity Share, Series A (NYSE:PSAA) (see section c. below), including those of Public Storage, Inc. prior to our reorganization in June 2007 were listed on the New York Stock Exchange beginning February 14, 2000 until their redemption by us in April 2010.
 
The following table sets forth the high and low sales prices of our Common Shares on the New York Stock Exchange composite tapes for the applicable periods.
 
     
Range
 
Year
Quarter
 
High
   
Low
 
2010
1st
  $ 94.20     $ 74.74  
 
2nd
    100.58       85.04  
 
3rd
    104.35       85.04  
 
4th
    106.12       94.60  
                   
2011
1st
    113.36       99.96  
 
2nd
    120.00       107.21  
 
3rd
    124.81       101.77  
 
4th
    136.67       103.42  
 
As of February 15, 2012, there were approximately 17,985 holders of record of our Common Shares.
 
b.  
Dividends
 
We have paid quarterly distributions to our shareholders since 1981, our first full year of operations.  During 2011 we paid distributions to our common shareholders of $0.80 per common share for the quarter ended March 31 and $0.95 per common share for each of the quarters ended June 30 and September 30, and ended December 31.  Total distributions on common shares for 2011 amounted to $619.7 million or $3.65 per share.  During 2010 we paid distributions to our common shareholders of $0.65 per common share for the quarter ended March 31 and $0.80 per common share for each of the quarters ended June 30 and September 30, and ended December 31.  Total distributions on common shares for 2010 amounted to $515.3 million or $3.05 per share.  During 2009, we paid distributions to our common shareholders of $0.55 per common share for each of the quarters ended March 31, June 30, September 30 and December 31.  Total distributions on common shares for 2009 amounted to $370.4 million or $2.20 per share.
 
Holders of common shares are entitled to receive distributions when and if declared by our Board of Trustees out of any funds legally available for that purpose.  In order to maintain our REIT status for federal income tax purposes, we are generally required to pay dividends at least equal to 90% of our real estate investment trust taxable income for the taxable year (for this purpose, certain dividends paid in the subsequent year may be taken into account).  We intend to continue to pay distributions sufficient to permit us to maintain our REIT status.
 

 
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For Federal income tax purposes, distributions to shareholders are treated as ordinary income, capital gains, return of capital or a combination thereof.  For 2011, the dividends paid on common shares ($3.65 per share), on all the various classes of preferred shares were classified as follows:
 
   
1st Quarter
   
2nd Quarter
   
3rd Quarter
   
4th Quarter
 
Ordinary Income                               
    99.9406 %     100.0000 %     100.0000 %     96.6553 %
Long-term Capital Gain
    0.0594 %     0.0000 %     0.0000 %     3.3447 %
Total                               
    100.0000 %     100.0000 %     100.0000 %     100.0000 %
 
For 2010, the dividends paid on common shares ($3.05 per share), on all the various classes of preferred shares, and on our Equity Shares, Series A were classified as follows:
 
   
1st Quarter
   
2nd Quarter
   
3rd Quarter
   
4th Quarter
 
Ordinary Income                               
    100.0000 %     100.0000 %     100.0000 %     100.0000 %
Long-term Capital Gain
    0.0000 %     0.0000 %     0.0000 %     0.0000 %
Total                               
    100.0000 %     100.0000 %     100.0000 %     100.0000 %
 
c.  
Equity Shares
 
The Company is authorized to issue 100,000,000 equity shares.  Our declaration of trust provides that the equity shares may be issued from time to time in one or more series and gives the Board of Trustees broad authority to fix the dividend and distribution rights, conversion and voting rights, redemption provisions and liquidation rights of each series of equity shares.
 
At December 31, 2009, we had 4,289,544 Equity Shares, Series A outstanding.  On March 12, 2010, we called for redemption all of our outstanding shares of Equity Shares, Series A.  The redemption occurred on April 15, 2010 at $24.50 per share for aggregate redemption amount of $205.4 million.
 
During each of the three months ended March 31, 2010 and 2009, June 30, 2009, September 30, 2009 and December 31, 2009, we allocated income and paid quarterly distributions to the holders of the Equity Shares, Series A totaling $5.1 million ($0.6125 per share) based on 8,377,193 weighted average depositary shares outstanding.  Net income allocated to the Equity Shares, Series A for the year ended December 31, 2010 also includes $25.7 million ($3.07 per share), representing the excess of cash paid to redeem the securities over the original issuance proceeds.  As a result of the redemption on April 15, 2010, no further distributions were paid subsequent to March 31, 2010.
 
At December 31, 2009, we had 4,289,544 Equity Shares, Series AAA (“Equity Shares AAA”) outstanding with a carrying value of $100,000,000, all of which were held by one of our wholly-owned subsidiaries throughout all periods presented, and were eliminated in consolidation.  On August 31, 2010, we retired all Equity Shares AAA outstanding.  During the years ended December 31, 2010 and 2009, we paid quarterly distributions to the holder of the Equity Shares, Series AAA of $0.5391 per share for each of the quarters ended March 31 and June 30.  During the year ended December 31, 2009, we also paid distributions of $0.5391 per share for each of the quarters ended September 30 and December 31.  As a result of the retirement on August 31, 2010, no further distributions were paid subsequent to June 30, 2010.
 
d.  
Common Share Repurchases
 
Our Board of Trustees has authorized the repurchase from time to time of up to 35,000,000 of our common shares on the open market or in privately negotiated transactions.  During 2009, 2010 and 2011, we did not repurchase any of our common shares.  From the inception of the repurchase program through February 24, 2012, we have repurchased a total of 23,721,916 common shares at an aggregate cost of approximately $679.1 million.  Our common share repurchase program does not have an expiration date and there are 11,278,084 common shares that may yet be repurchased under our repurchase program as of December 31, 2011.  During the year ended December 31, 2011, we did not repurchase any of our common shares outside our publicly announced repurchase program.  Future levels of common share repurchases will be dependent upon our available capital, investment alternatives, and the trading price of our common shares.
 
 
 
24

 
 
 
e.  
Preferred Share Redemptions
 
During May and June, 2011, we redeemed all 20.7 million of our outstanding Cumulative Preferred Shares, Series I with a liquidation amount of $517.5 million for an aggregate of $522.8 million in cash (inclusive of accrued dividends).
 
During August 2011, we redeemed all 17.0 million of our outstanding Cumulative Preferred Shares, Series K with a liquidation amount of $424.8 million for an aggregate of $429.2 million in cash (inclusive of accrued dividends).
 
During September 2011, we redeemed all 4.0 million of our outstanding Cumulative Preferred Shares, Series G with a liquidation amount of $100.0 million for an aggregate of $101.8 million in cash (inclusive of accrued dividends).
 
During November 2011, we redeemed all 4.2 million of our outstanding Cumulative Preferred Shares, Series H with a liquidation amount of $105.0 million for an aggregate of $106.2 million in cash (inclusive of accrued dividends).
 
The following table presents monthly information related to our redemption of all of our outstanding Cumulative Preferred Shares, Series I, Series K, Series G and Series H during the year ended December 31, 2011:
 

 
25

 
 
Period Covered
 
 
Total Number of Shares/Units Repurchased
   
Average Price Paid per Share/Unit
 
 
January 1, 2011 – January 31, 2011
    -       -  
 
February 1, 2011 – February 28, 2011
    -       -  
 
March 1, 2011 – March 31, 2011
    -       -  
 
April 1, 2011 – April 30, 2011
    -       -  
 
May 1, 2011 – May 31, 2011
               
 
Preferred Shares - Series I
    14,000,000     $ 25.00  
 
June 1, 2011 – June 30, 2011
               
 
Preferred Shares - Series I
    6,700,000     $ 25.00  
 
July 1, 2011 – July 31, 2011
    -       -  
 
August 1, 2011  – August  31, 2011
               
 
Preferred Shares - Series K
    16,990,000     $ 25.00  
 
September 1, 2011 – September 30, 2011
               
 
Preferred Shares - Series G
    4,000,000     $ 25.00  
 
October 1, 2011 – October 31, 2010
    -       -  
 
November 1, 2011  – November 30, 2011
               
 
Preferred Shares - Series H
    4,200,000     $ 25.00  
 
December 1, 2011 – December 31, 2011
    -       -  
 
Total
    45,890,000     $ 25.00  
 
 
 
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ITEM 6.                      Selected Financial Data
 
   
For the year ended December 31,
 
   
2011
   
2010
   
2009
   
2008 (1)
   
2007
 
   
(Amounts in thousands, except per share data)
 
Revenues:
                             
Rental income and ancillary operations
  $ 1,719,769     $ 1,615,894     $ 1,593,107     $ 1,682,582     $ 1,771,096  
Interest and other income
    32,333       29,017       29,813       36,155       11,417  
      1,752,102       1,644,911       1,622,920       1,718,737       1,782,513  
Expenses:
                                       
Cost of operations
    543,029       529,195       520,912       553,487       629,116  
Depreciation and amortization
    358,431       353,718       339,445       407,840       618,772  
General and administrative
    52,410       38,487       35,735       62,809       59,749  
Interest expense
    24,222       30,225       29,916       43,944       63,671  
      978,092       951,625       926,008       1,068,080       1,371,308  
Income from continuing operations before equity in earnings of unconsolidated real estate entities, foreign currency exchange (loss) gain, gain (loss) on disposition of real estate investments, early retirement of debt and asset impairment charges - net
            774,010               693,286               696,912               650,657               411,205  
Equity in earnings of unconsolidated real estate entities
    58,704       38,352       53,244       20,391       12,738  
Foreign currency exchange (loss) gain
    (7,287 )     (42,264 )     9,662       (25,362 )     58,444  
Gain (loss) on disposition of real estate investments, early retirement of debt, and asset impairment charges, net
      8,615       (167 )       37,540         336,020         5,212  
Income from continuing operations
    834,042       689,207       797,358       981,706       487,599  
Discontinued operations
    2,417       6,907       (6,902 )     (7,834 )     (521 )
Net income
    836,459       696,114       790,456       973,872       487,078  
Net income allocated (to) from noncontrolling equity interests
    (12,617 )     (24,076 )     44,165       (38,696 )     (29,543 )
Net income allocable to Public Storage shareholders
  $ 823,842     $ 672,038     $ 834,621     $ 935,176     $ 457,535  
                                         
Per Common Share:
                                       
Distributions                                                         
  $ 3.65     $ 3.05     $ 2.20     $ 2.80     $ 2.00  
Net income – Basic
  $ 3.31     $ 2.36     $ 3.48     $ 4.19     $ 1.18  
Net income – Diluted
  $ 3.29     $ 2.35     $ 3.47     $ 4.18     $ 1.17  
                                         
Weighted average common shares – Basic
    169,657       168,877       168,358       168,250       169,342  
Weighted average common shares – Diluted
    170,750       169,772       168,768       168,675       169,850  
                                         
Balance Sheet Data:
                                       
Total assets
  $ 8,932,562     $ 9,495,333     $ 9,805,645     $ 9,936,045     $ 10,643,102  
Total debt
  $ 398,314     $ 568,417     $ 518,889     $ 643,811     $ 1,069,928  
Public Storage shareholders’ equity
  $ 8,288,209     $ 8,676,598     $ 8,928,407     $ 8,708,995     $ 8,763,129  
Permanent noncontrolling interests’ equity
  $ 22,718     $ 32,336     $ 132,974     $ 358,109     $ 500,127  
                                         
Other Data:
                                       
Net cash provided by operating activities
  $ 1,203,452     $ 1,093,221     $ 1,112,857     $ 1,076,971     $ 1,047,652  
Net cash provided by (used in) investing activities
  $ (81,355 )   $ (266,605 )   $ (91,409 )   $ 340,018     $ (261,876 )
Net cash used in financing activities
  $ (1,438,546 )   $ (1,132,709 )   $ (938,401 )   $ (984,076 )   $ (1,081,504 )
 
(1)  
The decreases in our revenues, cost of operations, and depreciation and amortization in 2008 is due primarily to our disposition of an interest in Shurgard Europe on March 31, 2008.
 

 
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ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis should be read in conjunction with our financial statements and notes thereto.
 
Critical Accounting Policies
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our financial statements, which have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”).  The preparation of our financial statements and related disclosures in conformity with GAAP and our discussion and analysis of our financial condition and results of operations requires management to make judgments, assumptions and estimates that affect the amounts reported in our financial statements and accompanying notes.  The notes to our December 31, 2011 financial statements, primarily Note 2, summarize the significant accounting policies and methods used in the preparation of our financial statements and related disclosures.
 
We believe the following are our critical accounting policies, because they have a material impact on the portrayal of our financial condition and results, and they require us to make judgments and estimates about matters that are inherently uncertain.
 
Income Tax Expense:  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 have met these REIT requirements in 2011 and for all other periods presented herein.  Accordingly, we have recorded no federal income tax expense related to our REIT taxable income.
 
Our assumption that we have met the REIT requirements could be incorrect, because the REIT requirements are complex, require ongoing factual determinations, and there could be future unanticipated changes in our circumstances, or circumstances in previous years that we did not identify could affect our compliance.  For any taxable year that we fail or have failed to qualify as a REIT and for which applicable statutory relief provisions did not apply, we would be taxed at the regular corporate rates on all of our taxable income and could be subject to penalties and interest, and our net income would be materially different from our current estimates.
 
In addition, our taxable REIT subsidiaries are taxable as a regular corporation.  To the extent that amounts paid to us by our taxable REIT subsidiaries are in excess of amounts that would be paid under similar arrangements among unrelated parties, we could be subject to a 100% penalty tax on the excess payments.  If we became subject to such a penalty tax, our net income could be materially overstated from our current estimates. 
 
Impairment of Long-Lived Assets:  Substantially all of our assets, consisting primarily of real estate, are long-lived assets.  The evaluation of long-lived assets for impairment involves identification of indicators of impairment, projections of future operating cash flows, and determining fair values, all of which require significant judgment and subjectivity.  Others could come to materially different conclusions than we did regarding impairment.  In addition, we may not have identified all current facts and circumstances that may affect impairment.  Any unidentified impairment loss, or change in assumptions as to cash flows or fair values, could have a material adverse impact on our financial condition and results of operations.
 
Accruals for Operating Expenses:  Certain of our expenses are estimated based upon assumptions regarding past and future trends, such as losses for workers compensation, employee health plans, and estimated claims for our tenant reinsurance program.  Our property tax expense represents one of our largest operating expenses and has significant estimated components.  Most notably, in certain jurisdictions we do not receive tax bills for the current fiscal year until after our earnings are finalized, and as a result, we must estimate tax expense based upon anticipated implementation of regulations and trends.  If these estimates and assumptions with respect to these operating expenses were incorrect, our expenses could be misstated.
 

 
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Accruals for Contingencies: We are exposed to business and legal liability risks with respect to events that have occurred, but in accordance with GAAP, we have not accrued for certain potential liabilities because the loss is either not probable or not reasonably estimable or because we are not aware of the event.  Future events and the results of further investigation or litigation could result in such potential losses becoming probable and reasonably estimable, which could have a material adverse impact on our financial condition or results of operations.
 
Valuation of real estate and intangible assets acquired: In reporting the acquisition of operating self-storage facilities in our financial statements, we must estimate the fair value of the land, buildings, and intangible assets acquired in these transactions.   These estimates are based upon many assumptions, subject to a significant degree of judgment, including estimating discount rates, replacement costs of land and buildings, future cash flows from the tenant base in place at the time of the acquisition, and future revenues to be earned and expenses to be incurred with respect to acquired properties.  We believe that the assumptions we used were reasonable, however, others could come to materially different conclusions as to the estimated values, which would result in different depreciation and amortization expense, gains and losses on sale of real estate assets, as well as the amounts included on our balance sheets for real estate  and intangible assets.
 
Overview of Management’s Discussion and Analysis of Operations
 
Our principal business activities include the acquisition, development, ownership and operation of self-storage facilities which offer storage spaces for lease, generally on a month-to-month basis, for personal and business use.  We are the largest owner of self-storage facilities in the U.S., which represents our Domestic Self-Storage segment.  A large portion of management time is focused on maximizing revenues and managing expenses at our self-storage facilities, which is the primary driver of growth in our net income and cash flow from operations and contributed 92% of our revenues for the year ended December 31, 2011.
 
The remainder of our operations is comprised of our European Self-Storage segment through our investment in Shurgard Europe, our Commercial segment through our investment in PS Business Parks, Inc. (“PSB”), and the operations not allocated to any segment, each of which is described in Note 11 to our December 31, 2011 financial statements.
 
The self-storage industry is subject to general economic conditions, particularly conditions that affect the spending habits of consumers and moving trends.  Due to the recessionary pressures in the U.S., rental income was negatively impacted in 2009.  Demand began to improve in 2010 and, as a result, rental income trends improved each quarter in 2010 and 2011, trending positive on a year-over-year basis since the third quarter of 2010.  While trends have been improving, there can be no assurance that these trends will continue.
 
Our ability to effectively deploy capital to expand our asset base is an important component of our long-term growth.  During the year ended December 31, 2010, we acquired 42 self-storage facilities for $239.6 million.  During the year ended December 31, 2011, we acquired 11 self-storage facilities for $80.4 million, noncontrolling interests in subsidiaries owning self-storage facilities for $175.5 million, and we invested $116.6 million in Shurgard Europe to fund its acquisition of the remaining interests it did not own in 72 self-storage facilities.
 
We believe that there may be opportunities to acquire additional self-storage facilities from third parties in 2012, because we continue to see self-storage facilities come to market.  However, there is significant competition for facilities marketed in many of the geographic locations we find attractive.  As a result, there can be no assurance that we will be able to acquire facilities on terms we find attractive.
 
Due to the challenging operating environment, we have substantially curtailed our development activities.  We continue to have a nominal development pipeline at December 31, 2011.
 
Other investments we have made in the past, and may make in the future, include i) further investment in Shurgard Europe to allow it to develop or acquire facilities, ii) further investment in PSB, and iii) the early retirement of debt or redemption of preferred securities.  There can be no assurance that these other investment alternatives will be attractive in the long-term, or will be even be available as investment alternatives.
 

 
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We believe that we are not dependent upon raising capital to fund our operations or meet our obligations, due to our low levels of debt and significant cash from operations available for principal payments on debt and reinvestment (see “Liquidity and Capital Resources” below).  However, access to capital is important to growing our asset base.  We choose between the issuance of common and preferred securities based upon the relative cost of capital.  For at least the last ten years, we have raised cash proceeds for growth and other corporate purposes primarily through the issuance of preferred securities, while we have issued common stock only in connection with mergers and the acquisition of interests in real estate entities.  Our ability to raise capital at favorable costs is dependent upon capital market conditions.  When market conditions were favorable, we have generally been able to raise capital as necessary; however, there can be no assurance that future market conditions will permit us to raise capital at favorable costs.  During the years ended December 31, 2011 and 2010, we issued approximately $862.5 million and $270.0 million, respectively, of preferred securities, and on January 12, 2012, we issued another $460.0 million of preferred securities.
 
At December 31, 2011, we had approximately $139.0 million of cash and we have access to a $300 million line of credit which expires March 27, 2012 and is expected to be extended, subject to agreeing to satisfactory renewal terms.  At December 31, 2011, we have no significant commitments until 2013, when $264.9 million of existing debt comes due.  On January 12, 2012 we received net proceeds of $446.2 million in connection with the issuance of our Series S Cumulative Preferred Shares.  On February 9, 2012, we paid $206.7 million (excluding accrued dividends) to redeem our Series L Cumulative Preferred Shares.  On February 21, 2012, we paid $141.3 million (excluding accrued dividends) to redeem our Series E Cumulative Preferred Shares.  On March 19, 2012, we will pay $8.8 million (excluding accrued dividends) to redeem our Series Y Cumulative Preferred Shares.  As of February 24, 2012, we are under contract to acquire a portfolio of six self-storage properties, located in California, Florida (two), Massachusetts, New Jersey and Pennsylvania, for an aggregate purchase price of $42 million, cash.  We expect the pending acquisition of these properties will close in the first quarter of 2012.  The pending acquisition is subject to various conditions and contingencies and there can be no assurance that it will be completed.
 
Results of Operations                                                                           

Operating results for 2011 as compared to 2010: For the year ended December 31, 2011, net income allocable to our common shareholders was $561.7 million or $3.29 per diluted common share, compared to $399.2 million or $2.35 per diluted common share for the same period in 2010, representing an increase of $162.5 million or $0.94 per diluted common share.  This increase is due to (i) improved property operations, (ii) decreased foreign currency exchange loss of $7.3 million during the year ended December 31, 2011 as compared to $42.3 million for the same period in 2010, (iii) increased equity in earnings and interest and other income from Shurgard Europe, due primarily to Shurgard Europe’s acquisition of its joint venture partner’s interests on March 2, 2011, and (iv) reduced income allocations to our Equity Shares, Series A.
 
Operating results for 2010 as compared to 2009: For the year ended December 31, 2010, net income allocable to our common shareholders was $399.2 million or $2.35 per diluted common share, compared to $586.0 million or $3.47 per diluted common share for the same period in 2009, representing a decrease of $186.8 million or $1.12 per diluted common share.  This decrease is primarily due to (i) a foreign currency exchange loss of $42.3 million during the year ended December 31, 2010 compared to a gain of $9.7 million during the same period in 2009, (ii) an aggregate $35.8 million increase in income allocated to the shareholders of redeemed securities, (including our equity share of PSB’s redemptions) in applying EITF D-42 to the redemption of securities in the year ended December 31, 2010, as compared to a $94.5 million decrease in income allocated to shareholders of redeemed securities (including our equity share of PSB’s redemptions), in applying EITF D-42 to the redemption of securities in the same period in 2009 and (iii) a gain on disposition of real estate assets of $30.3 million related to an equity offering by PSB recorded in the year ended December 31, 2009.
 

 
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Funds from Operations
 
For the year ended December 31, 2011, funds from operations (“FFO”) was $5.67 per common share on a diluted basis as compared to $4.72 per diluted common share for the same period in 2010, representing an increase of $0.95 per diluted common share.
 
For the year ended December 31, 2011, FFO was impacted by a foreign currency exchange loss of $7.3 million (compared to a $42.3 million loss for the same period in 2010) and a $32.6 million net charge related to our redemptions of equity securities, including our equity share from PSB, in applying EITF D-42 (compared to $35.8 million for the same period in 2010).
 
For the year ended December 31, 2010, FFO was $4.72 per common share on a diluted basis as compared to $5.61 per diluted common share on a diluted basis for the same period in 2009, representing a decrease of $0.89 per diluted common share.
 
For the year ended December 31, 2010, FFO was impacted by a $35.8 million reduction in applying EITF D-42 to the redemption of preferred shares and our Equity Shares, Series A, including our equity share of PSB’s redemptions (compared to an aggregate $94.5 million increase recorded for our redemptions, and our equity share of PSB’s redemptions, of preferred equity in the same period in 2009) and a foreign currency exchange loss totaling $42.3 million (compared to a gain of $9.7 million for the same period in 2009).
 
Our FFO for each period was also impacted by various items such as impairment charges, acquisition due diligence costs, changes in accounting estimates, gains and losses on early redemption of debt (including our equity share from PSB and Shurgard Europe), impairment charges, as well as our equity share of PSB’s lease termination fees received from tenants.  The net impact of these items reduced FFO by $0.03, $0.04 and $0.04 per diluted common share for the years ended December 31, 2011, 2010 and 2009, respectively.
 
The following table provides a summary of the per-share impact of the items noted above:
 
   
Year Ended December 31,
 
   
 
2011
   
 
2010
   
Percentage
Change
   
 
2010
   
 
2009
   
Percentage
Change
 
FFO per diluted common share prior to adjustments for the following items
  $ 5.93     $ 5.22       13.6 %   $ 5.22     $ 5.03       3.8 %
 
Foreign currency exchange (loss) gain
    (0.04 )     (0.25 )             (0.25 )     0.06          
Application of EITF D-42 to the redemption of our securities and our equity share from PSB
    (0.19 )     (0.21 )             (0.21 )     0.56          
Other items, net
    (0.03 )     (0.04 )             (0.04 )     (0.04 )        
FFO per diluted common share, as reported
  $ 5.67     $ 4.72       20.1 %   $ 4.72     $ 5.61       (15.9 )%
 
FFO is a term defined by the National Association of Real Estate Investment Trusts (“NAREIT”), is a non-GAAP financial measure.  It is generally defined as net income before depreciation with respect to real estate assets and gains and losses on real estate assets.  FFO is presented because management and many analysts consider FFO to be one measure of the performance of real estate companies.  In addition, we believe that FFO is helpful to investors as an additional measure of the performance of a REIT, because net income includes the impact of depreciation, which assumes that the value of real estate diminishes predictably over time, while we believe that the value of real estate fluctuates due to market conditions and in response to inflation.  FFO computations do not consider scheduled principal payments on debt, capital improvements, distributions and other obligations of the Company.  FFO is not a substitute for our cash flow or net income as a measure of our liquidity or operating performance or our ability to pay dividends.  Other REITs may not compute FFO in the same manner; accordingly, FFO may not be comparable among REITs.  The following table reconciles from our net income to funds from operations, and sets forth the calculations of FFO per share.
 

 
31

 
 

   
Year Ended December 31,
 
   
2011
   
2010
   
2009
 
   
(Amounts in thousands, except per share data)
 
Computation of Funds from Operations (“FFO”) allocable to Common Shares:
                 
Net income                                                                                      
  $ 836,459     $ 696,114     $ 790,456  
Add back – depreciation and amortization
    358,431       353,718       339,445  
Add back – depreciation from unconsolidated real estate investments
    64,677       61,110       62,471  
Add back – depreciation and amortization included in Discontinued Operations
    94       668       2,682  
Eliminate – depreciation with respect to non-real estate assets
    -       -       (160 )
Eliminate – gain on sale of real estate investments
    (8,953 )     (396 )     (33,426 )
Eliminate – gain on sale of real estate included in Discontinued Operations
    (2,737 )     (7,794 )     (6,018 )
Eliminate – our share of PSB’s gain on sale of real estate
    (1,107 )     (2,112 )     (675 )
FFO allocable to our equity holders
    1,246,864       1,101,308       1,154,775  
Less: allocations of FFO (to) from noncontrolling equity interests:
                       
Preferred unitholders, based upon distributions paid
    -       (5,930 )     (9,455 )
Preferred unitholders, based upon redemptions
    -       (400 )     72,000  
Other noncontrolling equity interests in subsidiaries
    (15,539 )     (19,585 )     (20,231 )
FFO allocable to Public Storage shareholders                                                                                 
    1,231,325       1,075,393       1,197,089  
Less: allocations of FFO to:
                       
Preferred shareholders, based upon distributions paid
    (224,877 )     (232,745 )     (232,431 )
Preferred shareholders, based on redemptions
    (35,585 )     (7,889 )     6,218  
Restricted share unitholders                                                                                 
    (2,817 )     (2,645 )     (3,285 )
Equity Shares, Series A, based upon distributions paid
    -       (5,131 )     (20,524 )
Equity Shares, Series A, based on redemptions                                                                                 
    -       (25,746 )     -  
Remaining FFO allocable to Common Shares
  $ 968,046     $ 801,237     $ 947,067  
Diluted weighted average common shares outstanding
    170,750       169,772       168,768  
FFO per diluted common share
  $ 5.67     $ 4.72     $ 5.61  
                         


 
32

 

 
Real Estate Operations                                                                           
 
Self-Storage Operations: Our self-storage operations are by far the largest component of our operating activities, representing more than 91% of our revenues for the years ended December 31, 2011, 2010 and 2009, respectively.
 
Management analyzes the results of the Company’s consolidated self-storage operations in two-groups: (i) the Same Store facilities, representing the facilities in the Domestic Self-Storage Segment that we have owned and have been operating on a stabilized basis since January 1, 2009, and (ii) all other facilities in the Domestic Self-Storage Segment, which are primarily those consolidated facilities that we have not owned and operated at a stabilized basis since January 1, 2009 such as newly acquired, newly developed, or recently expanded facilities.
 
Self-Storage Operations
Summary
 
Year Ended December 31,
   
Year Ended December 31,
 
   
2011
   
2010
   
Percentage
Change
   
2010
   
2009
   
Percentage
Change
 
   
(Dollar amounts in thousands)
 
Revenues:
                                   
Same Store Facilities
  $ 1,507,051     $ 1,441,214       4.6 %   $ 1,441,214     $ 1,435,336       0.4 %
Non Same Store Facilities
    98,629       70,299       40.3 %     70,299       50,174       40.1 %
Total rental income                                
    1,605,680       1,511,513       6.2 %     1,511,513       1,485,510       1.8 %
Cost of operations:
                                               
Same Store Facilities
    473,495       471,622       0.4 %     471,622       467,972       0.8 %
Non Same Store Facilities
    32,138       23,884       34.6 %     23,884       16,929       41.1 %
Total cost of operations
    505,633       495,506       2.0 %     495,506       484,901       2.2 %
Net operating income (a):
                                               
Same Store Facilities
    1,033,556       969,592       6.6 %     969,592       967,364       0.2 %
Non Same Store Facilities
    66,491       46,415       43.3 %     46,415       33,245       39.6 %
Total net operating income
    1,100,047       1,016,007       8.3 %     1,016,007       1,000,609       1.5 %
Total depreciation and amortization expense:
                                               
Same Store Facilities
    (311,122 )     (316,749 )     (1.8 )%     (316,749 )     (323,148 )     (2.0 )%
Non Same Store Facilities
    (44,655 )     (34,349 )     30.0 %     (34,349 )     (13,339 )     157.5 %
Total depreciation and amortization expense
    (355,777 )     (351,098 )     1.3 %     (351,098 )     (336,487 )     4.3 %
                                                 
Total net income                                  
  $ 744,270     $ 664,909       11.9 %   $ 664,909     $ 664,122       0.1 %
                                                 
                                                 
Number of facilities at period end:
                                               
Same Store Facilities
    1,931       1,931       -       1,931       1,931       -  
Non Same Store Facilities
    111       97       14.4 %     97       55       76.4 %
Net rentable square footage at period end (in thousands):
                                               
Same Store Facilities
    121,582       121,582       -       121,582       121,582       -  
Non Same Store Facilities
    8,173       6,860       19.1 %     6,860       3,982       72.3 %
 
 
(a)
See “Net Operating Income or NOI” below.
 
Net income with respect to our self-storage operations increased by $79.4 million or 11.9% during the year ended December 31, 2011, when compared to the same period in 2010.  This was due to a 6.6% increase in net operating income with respect to our Same Store Facilities due to increased revenues driven by higher occupancy and higher realized rents per occupied square foot, and a 43.3% increase in net operating income with respect to the Non Same Store Facilities, due primarily to the impact of the properties acquired in 2010 and 2011.  This was partially offset by a $4.7 million increase in depreciation and amortization, due primarily to increased depreciation with respect to the facilities acquired in 2011 and 2010.  Net income with respect to our self-storage operations increased by $0.8 million or 0.1% during the year ended December 31, 2010, when compared to the same period in 2009.  This was due to a 0.2% increase in net operating income with respect to our Same Store Facilities due to increased revenues driven by higher occupancy partially offset by lower realized rents per occupied square foot, and a 39.6% increase in net operating income with respect to the Non Same Store Facilities, due primarily to the impact of the 42 facilities acquired in 2010.  This was partially offset by a $14.6 million increase in depreciation and amortization, due primarily to increased amortization of tenant intangible assets with respect to the facilities acquired in 2010.
 
 
 
33

 
 
 
Same Store Facilities
 
The “Same Store Facilities” represents those 1,931 facilities that are stabilized and owned since January 1, 2009 and therefore provide meaningful comparisons for 2009, 2010, and 2011.  The following table summarizes the historical operating results of these 1,931 facilities (121.6 million net rentable square feet) that represent approximately 94% of the aggregate net rentable square feet of our U.S. consolidated self-storage portfolio at December 31, 2011.
 
SAME STORE FACILITIES
 
Year Ended December 31,
   
Year Ended December 31,
 
   
2011
   
2010
   
Percentage
Change
   
2010
   
2009
   
Percentage
Change
 
Revenues:
 
(Dollar amounts in thousands, except weighted average amounts)
 
Rental income
  $ 1,428,295     $ 1,370,398       4.2 %   $ 1,370,398     $ 1,368,460       0.1 %
Late charges and administrative fees
    78,756       70,816       11.2 %     70,816       66,876       5.9 %
Total revenues (a)
    1,507,051       1,441,214       4.6 %     1,441,214       1,435,336       0.4 %
                                                 
Cost of operations:
                                               
Property taxes
    146,271       143,337       2.0 %     143,337       144,761       (1.0 )%
Direct property payroll
    100,264       99,257       1.0 %     99,257       97,124       2.2 %
Media advertising
    10,356       14,852       (30.3 )%     14,852       20,332       (27.0 )%
Other advertising and promotion
    23,521       22,077       6.5 %     22,077       20,611       7.1 %
Utilities
    37,394       35,972       4.0 %     35,972       36,264       (0.8 )%
Repairs and maintenance
    45,062       45,939       (1.9 )%     45,939       39,437       16.5 %
Telephone reservation center
    9,705       11,352       (14.5 )%     11,352       11,430       (0.7 )%
Property insurance
    9,478       9,739       (2.7 )%     9,739       10,064       (3.2 )%
Other cost of management
    91,444       89,097       2.6 %     89,097       87,949       1.3 %
Total cost of operations (a)
    473,495       471,622       0.4 %     471,622       467,972       0.8 %
Net operating income (b)
    1,033,556       969,592       6.6 %     969,592       967,364       0.2 %
Depreciation and amortization expense
    (311,122 )     (316,749 )     (1.8 )%     (316,749 )     (323,148 )     (2.0 )%
Net income
  $ 722,434     $ 652,843       10.7 %   $ 652,843     $ 644,216       1.3 %
Gross margin (before depreciation and amortization expense)
    68.6 %     67.3 %     1.9 %     67.3 %     67.4 %     (0.1 )%
                                                 
Weighted average for the period:
                                               
Square foot occupancy (c)
    91.1 %     89.8 %     1.4 %     89.8 %     88.7 %     1.2 %
Realized annual rent per occupied square foot (d)(e)
  $ 12.90     $ 12.55       2.8 %   $ 12.55     $ 12.69       (1.1 )%
REVPAF (e)(f)
  $ 11.75     $ 11.27       4.3 %   $ 11.27     $ 11.26       0.1 %
Weighted average at December 31:
                                               
Square foot occupancy
    89.6 %     88.6 %     1.1 %     88.6 %     87.1 %     1.7 %
In place annual rent per occupied square foot (g)
  $ 13.97     $ 13.63       2.5 %   $ 13.63     $ 13.45       1.3 %
Total net rentable square feet (in thousands)
    121,582       121,582       -       121,582       121,582       -  
Number of facilities
    1,931       1,931       -       1,931       1,931       -  
                                                 
 
a)  
Revenues and cost of operations do not include ancillary revenues and expenses generated at the facilities with respect to tenant reinsurance, retail sales and truck rentals.  “Other costs of management” included in cost of operations principally represents all the indirect costs incurred in the operations of the facilities.  Indirect costs principally include supervisory costs and corporate overhead cost incurred to support the operating activities of the facilities.
 
 
 
34

 
 
 
b)  
See “Net Operating Income” below for a reconciliation of this non-GAAP measure to our net income in our statements of income for the years ended December 31, 2011, 2010 and 2009.
 
c)  
Square foot occupancies represent weighted average occupancy levels over the entire period.
 
d)  
Realized annual rent per occupied square foot is computed by annualizing the result of dividing rental income (which excludes late charges and administrative fees) by the weighted average occupied square feet for the period.  Realized annual rent per occupied square foot takes into consideration promotional discounts that reduce rental income from the contractual amounts due.
 
e)  
Late charges and administrative fees are excluded from the computation of realized annual rent per occupied square foot and REVPAF.  Exclusion of these amounts provides a better measure of our ongoing level of revenue, by excluding the volatility of late charges, which are dependent principally upon the level of tenant delinquency, and administrative fees, which are charged upon move-in volumes and are therefore dependent principally upon the absolute level of move-ins for a period.
 
f)  
Realized annual rent per available foot or “REVPAF” is computed by dividing rental income (which excludes late charges and administrative fees) by the total available net rentable square feet for the period.
 
g)  
In place annual rent per occupied square foot represents annualized contractual rents per occupied square foot without reductions for promotional discounts and excludes late charges and administrative fees.
 
Revenues generated by our Same Store Facilities increased by 4.6% for the year ended December 31, 2011, as compared to the same period in 2010.  The increase was due primarily to a 1.4% increase in weighted average square foot occupancy and a 2.8% increase in realized rent per occupied square foot, as well as an 11.2% increase in late charges and administrative fees due primarily to increases in the fee levels charged for late payments.  The increase in realized annual  rent per occupied square foot includes the impact of aggressive increases in rates charged to our existing tenants in the last two quarters of 2011.
 
Revenues generated by our Same Store Facilities increased by 0.4% for the year ended December 31, 2010, as compared to the same period in 2009.  The increase was due primarily to a 5.9% increase in late charges and administrative fees due primarily to increases in the fee levels charged for late payments.  Rental income was flat on a year-over-year basis as average occupancy was 1.2% higher, offset by a 1.1% reduction in realized annual rent per occupied square foot.
 
Our operating strategy is to maintain occupancy levels for our Same Store Facilities at an average of approximately 90% for the full year.  In order to achieve this strategy, we evaluate changes in traffic patterns of new tenants renting space and the volume of existing tenants vacating, and in response we increase or decrease rental rates, promotional discounts offered to new tenants, and the frequency of television advertising.  We experience seasonal fluctuations in the occupancy levels with occupancies generally higher in the summer months than in the winter months.  Consequently, rates charged to new tenants are typically higher in the summer months than in the winter months.
 
Our self-storage revenues suffered negative operating trends in late 2008 and 2009 due to recessionary pressures, including increased unemployment, reduced housing sales, and reduced moving activity, in the major markets in which we operate.  However, trends in occupancy and realized rent per square foot have steadily improved in our Same Store Facilities in 2010 and 2011, and we have had more pricing power, resulting in rental income increases on a year-over-year basis beginning in the third quarter of 2010.  Our rent growth accelerated in the last two quarters of 2011, due primarily to rate increases to existing tenants.
 
Notwithstanding improved occupancy levels in 2010 and 2011, we will continue to be competitive in our pricing and discounting in order to compete with other operators to attract new incoming tenants.  We expect positive year-over-year growth in rental income to continue in the year ending December 31, 2012.
 
Cost of operations (excluding depreciation and amortization) increased by 0.4% in 2011, as compared to 2010.  Increases in property taxes, other advertising and promotion, other costs of management, and utilities were partially offset by decreases in media advertising and telephone reservation center costs in 2011, as compared to 2010.  Cost of operations (excluding depreciation and amortization) increased by 0.8% in 2010, as compared to 2009.  This increase was due primarily to increases in repairs and maintenance and direct property payroll, offset by a reduction in media advertising and lower property tax expense.
 
 
 
35

 
 
 
Property tax expense increased 2.0% in 2011, as compared to 2010, due primarily to higher tax rates.  Property tax expense decreased 1.0% in 2010, as compared to 2009 due to reduced assessments of property values combined with an increase in refunds associated with appeals for prior years’ tax liabilities that were experienced in Texas, Illinois, New York, Virginia and Florida.  We expect property tax expense growth of approximately 4.5% in 2012.
 
Direct property payroll expense increased 1.0% in 2011, as compared to 2010, and increased by 2.2% in 2010, as compared to 2009.  These increases were due primarily to higher incentives and wage rates paid to property personnel.  We expect moderate growth in payroll expense in 2012.
 
Media advertising decreased 30.3% in 2011, as compared to 2010, and 27.0% in 2010, as compared to 2009.  These decreases are due primarily to reductions in television advertising costs as we continued to decrease the number of markets in which we advertised.  Media advertising primarily includes the cost of advertising on television, and spending levels can vary considerably depending on a number of factors, including our occupancy levels, the demand for storage space, and the relative cost and availability of television advertising spots.
 
Other advertising and promotion is comprised principally of yellow page and Internet advertising, which increased 6.5% in 2011, as compared to 2010, and 7.1% in 2010, as compared to 2009.  These increases are due primarily to higher Internet advertising expenditures as we continue to invest and improve our positioning on major Internet search engines by bidding more aggressively on keywords related to our business.  These increases were offset in 2010 by decreased yellow page spending compared to 2009 due to revised compensation fee arrangements with yellow page providers to better reflect the reduced effectiveness of this media.
 
Our future spending on yellow page, media, and Internet advertising expenditures will be driven in part by demand for our self-storage spaces, our occupancy levels, and the relative cost and efficacy of each type of advertising.  Media advertising costs in particular can be volatile and increase or decrease significantly in the short-term.
 
Utility expenses increased 4.0% in 2011, as compared to 2010.  The increase is due to increased usage caused by extreme temperatures and, to a lesser extent, increased energy prices.  Utility expenses decreased 0.8% in 2010, as compared to 2009.  The decrease was due primarily to reduced year-over-year energy prices.  It is difficult to estimate future utility cost levels because utility costs are primarily dependent upon changes in demand driven by weather and temperature, as well as fuel prices, each of which are volatile and not predictable.
 
Repairs and maintenance expenditures decreased 1.9% in 2011, as compared to 2010, and increased 16.5% in 2010, as compared to 2009.  The decrease in 2011 is due primarily to a $1.7 million reduction in snow removal expenses, due to severe weather in 2010, which increased snow removal expenses $1.9 million, as compared to 2009.  Repairs and maintenance expenditures are dependent upon several factors, such as weather, the timing of periodic needs throughout our portfolio, inflation in material and labor costs, and random events and accordingly can vary considerably from year to year and are difficult to project.
 
Telephone reservation center costs decreased 14.5% in 2011, as compared to 2010, and 0.7% in 2010, as compared to 2009.  The reductions were primarily due to improved staffing management in our call centers.  We expect telephone reservation center cost to grow moderately in 2012.
 
Insurance expense decreased 2.7% in 2011, as compared to 2010, and 3.2% in 2010, as compared to 2009.  We expect insurance expense in 2012 to grow moderately compared to 2011.
 
 
 
36

 

 
The following table summarizes selected quarterly financial data with respect to the Same Store Facilities:
 
   
For the Quarter Ended
       
   
March 31
   
June 30
   
September 30
   
December 31
   
Entire Year
 
(Amounts in thousands, except for per square foot amount)
 
Total revenues:
                         
2011
  $ 362,937     $ 371,853     $ 390,001     $ 382,260     $ 1,507,051  
2010
  $ 350,914     $ 357,637     $ 368,589     $ 364,074     $ 1,441,214  
2009
  $ 358,317     $ 358,136     $ 363,860     $ 355,023     $ 1,435,336  
                                         
Total cost of operations:
                         
2011
  $ 127,425     $ 121,958     $ 120,525     $ 103,587     $ 473,495  
2010
  $ 127,461     $ 122,283     $ 120,461     $ 101,417     $ 471,622  
2009
  $ 128,337     $ 119,626     $ 116,557     $ 103,452     $ 467,972  
                                         
Property tax expense:
                                 
2011
  $ 41,252     $ 40,054     $ 39,384     $ 25,581     $ 146,271  
2010
  $ 40,232     $ 39,075     $ 38,954     $ 25,076     $ 143,337  
2009
  $ 38,798     $ 37,779     $ 38,304     $ 29,880     $ 144,761  
                                         
Media advertising expense:
                         
2011
  $ 3,998     $ 3,291     $ 2,110     $ 957     $ 10,356  
2010
  $ 5,305     $ 6,463     $ 3,084     $ -     $ 14,852  
2009
  $ 8,372     $ 7,412     $ 3,547     $ 1,001     $ 20,332  
                                         
Other advertising and promotion expense:
                         
2011
  $ 5,706     $ 6,738     $ 5,712     $ 5,365     $ 23,521  
2010
  $ 5,049     $ 6,568     $ 5,542     $ 4,918     $ 22,077  
2009
  $ 4,757     $ 6,090     $ 5,077     $ 4,687     $ 20,611  
                                         
REVPAF:
                                 
2011
  $ 11.33     $ 11.61     $ 12.13     $ 11.93     $ 11.75  
2010
  $ 10.99     $ 11.20     $ 11.51     $ 11.38     $ 11.27  
2009
  $ 11.26     $ 11.24     $ 11.39     $ 11.14     $ 11.26  
                                         
Weighted average realized annual rent per occupied square foot:
         
2011
  $ 12.62     $ 12.58     $ 13.15     $ 13.22     $ 12.90  
2010
  $ 12.45     $ 12.31     $ 12.65     $ 12.79     $ 12.55  
2009
  $ 12.82     $ 12.49     $ 12.71     $ 12.74     $ 12.69  
                                         
Weighted average occupancy levels for the period:
                 
2011
    89.8 %     92.3 %     92.2 %     90.2 %     91.1 %
2010
    88.3 %     91.0 %     91.0 %     89.0 %     89.8 %
2009
    87.8 %     90.0 %     89.6 %     87.4 %     88.7 %
                                         

 

 
37

 
 
 
Analysis of Regional Trends
 
The following table sets forth selected regional trends in our Same Store Facilities:
 
   
Year Ended December 31,
   
Year Ended December 31,